Lexpert US Guides

Litigation 2017

The Lexpert Guides to the Leading US/Canada Cross-Border Corporate and Litigation Lawyers in Canada profiles leading business lawyers and features articles for attorneys and in-house counsel in the US about business law issues in Canada.

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12 | LEXPERT • December 2017 | www.lexpert.ca/usguide-litigation/ rather as a percentage of gross sales that reflected the fair market value of the services provided by Coutu Group. ese services included planning and operating the pharmacy premises; market- ing, human resources and management support services; group purchase arrangements; volume discounts; and reputational benefits arising from the Jean Coutu trade-mark and brand. e upshot was that the payments to the franchisor did not put the pharmacist's professional independence in jeopardy. Monast noted that professionals regularly made payments, like rent, that could be calculated in whole or in part against gross revenue. But that did not make the arrangements profit-sharing in nature, nor did they compromise professional independence. Éric Préfontaine, a partner in Osler, Hoskin & Harcourt LLP's Montréal office, says the expert evidence tendered in Quesnel was critical to the outcome. "e expert evidence was that the royalties charged by Jean Coutu were on the lower end of the reasonable scale," he says. But the saga may not be over quite yet. In mid-2016, before Quesnel was released, Sopropharm, an association of 284 Jean Coutu franchisees, filed a class action seeking to annul two provi- sions in their franchise agreement, including the royalty provision at issue in Quesnel. e group is looking to recover some $252 million in royalties. Sopropharm contends that franchisees were overpaying for certain services provided by the franchisor, including advertis- ing, circulars and branded plastic bags. Préfontaine, however, questions the likelihood of the suit's success. "Apparently the plaintiffs are not renouncing their argument regarding the legal- ity of applying royalties to revenues from the sale of medications," he says. "But given the strong reasons in the thorough 37-page judgment, I'm wondering what will happen to the class action." Meanwhile, Quesnel 's impact could extend well beyond the franchise arena alone. "e case could affect many issues that involve allegations of fee-sharing by professionals like lawyers or doctors," he says. It probably wouldn't take much for the issue to emerge elsewhere in Canada, where fee-sharing is anathema to lawyers and doctors in particular. "e people I talked to in Toronto raised their eyeballs when I mentioned the possibility of a percent- age royalty in the case of professionals," Forest says. — J.M. acknowledge the necessity of operating her business "in strict conformity with [TSE's] standards and specifications." He concluded that if the relationship meets the conditions set out in the definition of the word "franchise" in the Arthur Wishart Act then the relationship between the parties is that of franchisor and franchisee, "no matter what terminology the parties have used to describe the relationship." Chavdarova was awarded a refund, plus damages. Michael Robb, a partner in the class actions group at London, Ont.-based Siskinds LLP, which acted for TSE, says US compa- nies that do business in Canada involving licensed agents, and who want to make sure to avoid getting caught up in the same situation, need to look at "the substance of the relationship rather than the form that you give it." e Wishart Act is broad, he says, so "you have to be really thoughtful about the substance of the agreement or the arrangement." He believes the most obvious way to prevent becoming an inadvertent franchisee is to get legal advice from an experienced Canadian franchise practitioner "and make sure it's truly a licens- ing arrangement and not a franchise arrangement. e takeaway for me is, it doesn't matter what you call your arrangement, the court's going to look at the substance of it and make a determin- ation." — S.R. 3. Quesnel v. Groupe Jean Coutu Prospective franchisors from the US and elsewhere in the pharmacy sector, and perhaps in other professional sectors, should welcome a Québec Superior Court judgment that affirms the legality of royalty clauses in franchise agreements, so long as the royalties bear a reasonable correspondence to the value of services or goods that the franchisor provides. "e position taken by the disciplinary council of the Order of Pharmacists was that the Order's Code of Ethics was a complete bar to paying a royalty based on a pharmacist's gross income when part of the income was derived from the sale of medications," says Réal Forest, a partner in Blake, Cassels & Graydon LLP's Montréal office. Michel Quesnel, a pharmacist and franchisee with the Jean Coutu Group, which boasts 420 franchise stores in Québec, had been the subject of several complaints from the Ordre des Pharmaciens du Québec. e complaints alleged that the royalties he paid to Coutu Group offended the Code of Ethics' prohibition against profit-sharing with non-pharmacists. Aer pleading guilty to the complaints, Quesnel sued Coutu Group. He sought a declaration that the offending provisions in the franchise contract were invalid and claimed repayment of the royalties. Coutu Group, represented by Forest, countered that the provisions were valid. Justice Michèle Monast ruled in Jean Coutu's favor. e arrangement, she concluded, did not amount to profit-sharing. e royalty wasn't calculated as a function of the bottom line, but CROSS-BORDER SIGNIFICANCE Éric Préfontaine Osler, Hoskin & Harcourt LLP "Apparently the plaintiffs [in Coutu] are not renouncing their argument regarding the legality of applying royalties to revenues from the sale of medications. … The case could affect many issues that involve allegations of fee-sharing by professionals like lawyers or doctors."

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