Court File and Parties

COURT FILE NO.: CV-21-665331 MOTION HEARD: 20230501 SUPERIOR COURT OF JUSTICE - ONTARIO

RE: Tripsetter Inc., Plaintiff AND: 2161907 Alberta Ltd., Canopy Growth Corporation and Justin Farbstein, Defendants

BEFORE: Associate Justice Jolley

COUNSEL: Adrienne Boudreau and Maria Robles (student at law), counsel for the moving party plaintiff Peter Smiley, counsel for the responding parties, 2161907 Alberta Ltd. and Justin Farbstein

HEARD: 1 May 2023

Reasons for Decision

[1] The parties are engaged in a dispute over the nature of their former business relationship. The plaintiff operated a retail cannabis store under the Tokyo Smoke banner from July 2019 to 1 June 2021 when it served the defendant 2161907 Alberta Ltd. (“216”) with a Notice of Rescission and rebranded as Purple Moose Cannabis.

[2] In this action, the plaintiff claims that it was a franchisee of 216 and has sought rescission and damages under the Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000, c.3 (the “Wishart Act”) as a result of the defendants’ failure to provide it with mandated statutory disclosure. The defendants take the position that 216’s relationship with the plaintiff was one of licensor/licensee. They argue that the plaintiff breached the License Agreement which they entered into on 7 June 2019 and have counterclaimed for damages.

[3] The plaintiff brings this motion seeking an order that 216 produce a further and better affidavit of documents and answer two undertakings and one refusal.

Further and Better Affidavit of Documents

[4] The plaintiff argues that 216 has failed to produce all relevant documents in its possession, control or power. It notes that the court can be satisfied by “any evidence” pursuant to rule 30.06 of the Rules of Civil Procedure that documents have been omitted and order a party to produce a further and better affidavit of documents.

[5] The plaintiff asks the court to find that documents must be missing from its productions for three reasons. First, it points to the disparity in the volume of productions between it and 216. Second, it notes that it provided a list of relevant documents that 216 failed to produce before its most recent supplementary affidavit of documents, to support its argument that 216 must have used insufficient search parameters when making its initial search. After its received this list, 216 then produced an additional one hundred or so documents. Third, it argues that it is unlikely that 216 does not have any internal documents on key issues and a further search should be made.

[6] In addition to the general request for a further and better affidavit of documents, the plaintiff argues that two key documents are missing from 216’s affidavit of documents: a franchise disclosure document and a financial projections document.

The Franchise Disclosure Document

[7] The parties agree that this document exists and that it includes “all mandated legal disclosures and all material facts relevant to the development and operation of a Tokyo Smoke retail cannabis franchise”. The plaintiff argues that such a document would contain a list of costs assumptions and costs associated with the establishment of a franchise and that that information is relevant both to the characterization of the relationship and to the defendants’ disclosure exemption argument.

[8] 216 argues that the Franchise Disclosure Document cannot be relevant for three reasons. First, it was created in or about April 2020 and, as such, cannot speak to the relevant costs of the plaintiff or the nature of their relationship, which they entered into in June 2019. Second, the costs to establish the store are known to the plaintiff because it spent them. A post-dated estimate created for a new franchisee is not relevant to the plaintiff’s costs. Third, the costs of establishing a franchise are not comparative to a licensee’s costs.

[9] 216 pleads in paragraph 76 of its amended statement of defence and counterclaim that, even if the plaintiff were a franchisee, 216 was exempt from the requirement to provide it with a disclosure document because 216 was investing $5,000,000 or more in the acquisition and operation of the franchise over a one year period. It alternatively pleads in paragraph 78(a) that it was exempt from the disclosure obligation because the plaintiff’s total franchise investment did not exceed $15,000, as whatever it paid was offset by the branding fee that 216 paid the plaintiff. The quantum of the plaintiff’s investment in the operation is clearly an issue in the proceedings. (The parties use both $5,000 and $15,000 in their motion records and facta as the minimum threshold. I have used $15,000 but which number is correct is not material for the purpose of this motion or the defendants’ companion motion.)

[10] The plaintiff argues that the scope of the costs of “establishing” a franchise are not limited to what it actually spent. It is also informed by the types of items that the alleged franchisor purports to include in its calculation of those costs. For instance, whether 216 considered the ongoing cost of purchasing inventory as part of the cost of establishing the franchise store will be relevant to the defendants’ argument that it was exempt from providing the plaintiff with a Disclosure Document. When addressing of disclosure exemptions, the Wishart Act Regulation 581/00 speaks in terms of a “total initial investment” that is “determined by all of the franchisee’s costs associated with the establishment of the franchise” and references “costs or estimates of costs associated with the establishment of the franchise”.

[11] Counsel advised that it is unsettled how the costs exemption in the Wishart Act will be interpreted, and whether it will be based on costs actually spent by a franchisee or will consider costs estimated by the franchisor to establish a franchise. Nor is it clear what items will be permitted to be included in the calculation of those set up costs. It remains open to the plaintiff to argue that the relevant costs should be interpreted on the basis of anticipated costs, such as those contemplated in the Franchise Disclosure Document and I therefore find the Franchise Disclosure Document is relevant.

[12] I find the Franchise Disclosure Document also relevant to the plaintiff’s theory that its relationship was always a franchise, despite the licence and consulting labels that the parties used. It is also relevant, in my view, to the assertion of 216 that the Alcohol and Gaming Commission of Ontario (“AGCO”) prohibited franchise arrangements at least in June 2019 and that, as a result, the plaintiff could not have been a franchisee.

[13] In June 2022, the AGCO amended the Registrar’s Standards for Cannabis Retail Stores and allowed a licensee to enter into a franchise agreement. 216’s Franchise Disclosure Document predates this change by more than two years, at a time when 216 pleads that franchises were not permitted. The plaintiff intends to demonstrate that 216 could and did enter into the very sort of franchise agreements that the plaintiff pleads it had with 216.

[14] The Franchise Disclosure Document may also shed light on 216’s press release of 6 January 2021 in which it announced “the planned opening of 9 brick-and-mortar retail franchised cannabis locations across Ontario over the course of January 2021”. 216 argues that the AGCO had terminated the lottery rules which prohibited franchises in January 2020 and that, during the following time when the AGCO neither prohibited nor expressly permitted franchising, it entered into these new agreements. Until the document is produced, it is not clear whether these were anticipatory agreements contingent on a change in the regulation or whether they were effective before the June 2022 Standards amendment.

[15] The defendants may argue at trial that the listed franchisee’s costs are not applicable to the plaintiff but it would be inappropriate to disallow production of the Franchise Disclosure Document on this basis at this stage.

[16] As the Franchise Disclosure Document is relevant to the core issue of the nature of the parties’ relationship and also relevant to the issue of the costs of establishing a franchise, it is to be produced.

[17] While I understand the defendants’ arguments concerning the confidential nature of this document, it is covered by the deemed undertaking and the parties agreed that, if ordered produced, they would keep it confidential and not file it except on notice to the other side with an opportunity for it to object.

The Financial Projections Document

[18] The plaintiff argues these projections are relevant for the same reasons the Franchise Disclosure Document is relevant – they speak to the initial costs of establishing a Tokyo Smoke franchise and whether the defendants were exempt from providing the plaintiff with the Disclosure Document based on the costs exemptions in the Wishart Act.

[19] In June 2019, the plaintiff sent Mr. Farbstein certain financial projections he had prepared for the proposed store. Mr. Farbstein responded to that email, revising the plaintiff’s draft budget for the store based on revenue and expense estimates and cash flow information he indicated he had from an existing store. It should be open to the plaintiff to argue that those figures should be considered in assessing the defendants’ entitlement to the disclosure exemption defence. Again, it remains open to the defendants to argue that the plaintiff’s numbers would have been entirely different given it was a licensee, but the evidence should at least be available for the plaintiff to make its argument. The Financial Projections Document is to be produced and subject to the same restrictions as set out in paragraph 16, above.

Further and Better Affidavit of Documents

[20] 216 has confirmed that it had produced a number of documents that the plaintiff alleges were not provided. It has also done a further search and provided a supplementary affidavit of documents. Further, it has confirmed that it is not aware of any further correspondence with the plaintiff that has not been produced. Nor does it have any further documents in its possession, power or control related to the counterclaim. For that, it relies entirely on the evidence of the plaintiff.

[21] I am not satisfied that 216 has additional relevant documents that it has not produced, aside from the two specific documents which I have ordered produced above.

Undertakings

(a) Undertaking 1 – Question 932

[22] 216 has pleaded in its amended defence and counterclaim that the plaintiff breached the License Agreement either because it ceased using the 216 Licensed Marks (paragraph 103) or, alternatively, because it did not cease using the Licensed Marks (paragraph 104).

[23] 216 was asked in what ways and on what dates, or if it is continuing, the information that forms the basis for the allegation that the plaintiff continues to use the Licensed Marks.

[24] 216 first answered that Tripsetter failed to respond to 216’s notice of termination dated 11 June 2021 seeking return of its discontinued use of the Licensed Marks. It provided a further answer that it “does not have knowledge or specifics of the Licensed Marks that Tripsetter continues to use at the Store”. The plaintiff argues that this answer muddied the waters and leaves it open to 216 to argue that it has general, if not specific, information about the plaintiff’s use of the Licensed Marks.

[25] I disagree that the answer is ambiguous. 216 does not have knowledge of the Licensed Marks that it alleges Tripsetter continued to use at the Store. Further, it does not have specifics of the Licensed Marks that it alleges Tripsetter continued to use. In short, it has no information.

[26] Counsel for 216 also advised in its letter of 31 October 2022 to plaintiff’s counsel that “Our client does not have any further documents in its possession, power, and control related to what your client did to cover up his breach. The amendment [to the statement of defence and counterclaim] is entirely based on evidence and admissions made by your client during his examination for discovery and any relevant documents are in the possession, power, and control of Tripsetter, and not 216 Alberta.”

[27] The defendants’ lack of information about any continuing use by the plaintiff is also consistent with the position 216 takes in its amended statement of defence that the plaintiff ceased using the trademarks. 216 pleaded at paragraph 45 that, without any prior notice to 216, Tripsetter stripped the Store of all Tokyo Smoke branding, ceased using the Licensed Marks and began operating under the name "Purple Moose Cannabis" (emphasis added).

[28] I find the undertaking has been answered.

(b) Undertaking 2 – Question 954

[29] 216 has pleaded that the plaintiff breached the License Agreement by “failing to return all property belonging to or received from 216 and failed to transfer, change or cancel any corporate, business, domain or other name or mark which incorporates any of the Licensed Marks or which is confusingly similar to the Licensed Marks”.

[30] The plaintiff requested “a full and complete list of what property Tripsetter is in possession of, and the particulars of the corporate business domain, or other name of the mark, which continues to incorporate the Licensed Marks or which is confusingly similar to the Licensed Marks.”

[31] 216’s answer was similar to that which it provided in answer to Question 952. It relied on the plaintiff’s failure to respond to the notice of termination seeking return of the property and then supplemented that answer by responding that it did not “have knowledge or specifics of the property in Tripsetter’s possession that incorporates the Licensed Marks or its confusingly similar to the Licensed Marks”.

[32] The evidence before me is that 216 has no knowledge about such property in the plaintiff’s possession. Nor does it have specifics about such property. The undertaking has been answered.

(c) Refusal 1 – Question 482

[33] The plaintiff asked 216 to produce communications between it and anyone else relating to store visits. 216 provided three responses. The first simply indicated that it had produced all relevant email and documentation between it and the plaintiff. The second indicated that it “did not communicate with anyone else regarding the store visits other than Tripsetter and Canopy and the relevant communications that 216 Alberta has within its possession, power or control have been produced.” It then answered that “216 Alberta is not aware of any other communications in respect of the Store Visits other than what has been produced by 216 Alberta, Tripsetter, or Canopy in this litigation.”

[34] The plaintiff does not accept this answer, believing it to be not credible. It is common ground that there were site visits. The plaintiff believes there must be documents about those visits and internal emails or emails with third parties who might have offered services or advice to the store, that would touch on the issues of control by and advice from 216 that are central to how the relationship between the parties will be characterized. However, there is no basis before me on which the court could reasonably surmise that there are more documents. Were 216 ordered to answer the question a fourth time, there is no basis on which to believe the answer would be any different. I find the question has been answered.

Costs

[35] The plaintiff seeks $15,942.58 in costs of the motion, including of HST and disbursements. 216 seeks costs of $10,000 on a partial indemnity basis. The plaintiff has some limited success on the motion, with an order for the production of the Financial Disclosure Document and Financial Projections Document but the motion was otherwise dismissed. Considering, the parties’ costs outlines and submissions, the outcome of the motion including that the relief that was granted was on two key points, and the other factors set out in rule 57.01 of the Rules of Civil Procedure, I order 216 to pay the plaintiff its costs of the motion which I fix in the all inclusive amount of $7,500.

Associate Justice Jolley Date: 23 May 2023