Archive for November, 2013

What Happens When a Franchise Agreement Ends, Part 1: Restrictive Covenants

A “Pet Valu” franchisee in Ontario claimed that sales were declining, so she terminated the Franchise Agreement. After termination of the agreement, her husband established a competing “Pet Stuff” business nearby. When a franchise location fails as it did in this case, what happens with the “restrictive covenants” in the agreement? Can these provisions be circumvented by the use of a separate company, or by using a friend or family member?

If you are in the franchise business, either as a franchisor or a franchisee, you will undoubtedly have to deal with “restrictive covenants”. These are the provisions in the Franchise Agreement that control what the franchisee can do after the termination of the agreement. Most franchise agreements contain clauses prohibiting the franchisee from establishing a competing business, soliciting customers, or using confidential information of the franchise.

The recent decision in Pet Valu Canada Inc. v. 1381114 Ontario Limited, 2013 ONSC 5361, dealt with an ex-franchisee who established a competing business through her husband’s numbered company within a few blocks of an existing Pet Valu location. Pet Valu, the franchisor, applied to the court for an injunction to compel the ex-franchisee to stop this competition. Pet Value sued both the franchisee and her husband, and each of their companies. Pet Valu argued that the actions of the ex-franchisee breached the terms of the franchise agreement which prohibited:

  • the operation of a competing business for a period of 2 years after the end of the franchise agreement within a 20 km radius of any other Pet Valu Store,
  • the hiring of any employee of a Pet Valu franchise for 1 year after the end of the Franchise Agreement; and
  • the use of customer lists, confidential information and all Pet Valu branded signs, labels and price tags after the termination of the agreement.

The court in this case had no trouble looking behind this “transparent effort” on the part of the ex-franchisee to establish a competing “Pet Stuff” business. The “Pet Stuff” business also hired away one of the store managers who had worked at the Pet Valu franchise, and even made use of shelving and inventory with distinctive labels, price tags and product codes from the old Pet Valu franchise. The court issued an interim injunction against the ex-franchisee and her husband.

Related Reading: Richard Stobbe was recently interviewed by Alberta Venture magazine for the article Is buying a franchise the opportunity of a lifetime, or the worst mistake you’ll ever make?

Calgary – 07:00 MST

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Another Update: Combating Counterfeit Products Act

As an update to my previous post in August (click here), this bill (Bill C-8) has been re-introduced in Canadian Parliament, and is currently in second reading. Bill C-8 amends the Copyright Act and the Trade-marks Act to add new civil and criminal remedies and new border measures designed to curtail the importation of knock-off products.

Stay tuned, this bill is expected to get through the Parliamentary process and could be law in 2014.

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Alberta Privacy Law Update: PIPA Declared Invalid

In the case of Alberta (Information and Privacy Commissioner) v. United Food and Commercial Workers, Local 401, 2013 SCC 62, released last Friday, the Supreme Court of Canada has declared the Alberta Personal Information Protection Act (PIPA) invalid in its entirety.

This case pits constitutional rights against privacy rights. The court reviewed a claim of privacy rights infringement arising from a long strike during which both the Union and the employer recorded and photographed individuals crossing the picketline. Some of those who were photographed crossing the picketline filed privacy complaints when the Union posted those pictures online.

As a consent-based privacy law, PIPA establishes a general requirement to obtain consent for any collection, use or disclosure of personal information. According to the court: “The central issue is whether PIPA achieves a constitutionally acceptable balance between the interests of individuals in controlling the collection, use and disclosure of their personal information and a union’s freedom of expression. PIPA does not include any mechanisms by which a union’s constitutional right to freedom of expression may be balanced with the interests protected by the legislation.” Thus, in the end, the entire Act has been declared constitutionally invalid, and in a unique way of avoiding a gap in the law, the court’s declaration has been suspended for 1 year, to allow the Alberta legislature to fix the law.

Stay tuned.

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App Developer Wins in SCRABBLE Battle

01-players-required-for-scramble-with-friends-large.PNGZynga, the world’s largest app-developer has scored a win against the owner of the SCRABBLE brand. This case brings up several interesting points about international trade-mark protection in the era of apps.

The well known SCRABBLE® brand is a registered trade-mark owned by different owners in different parts of the world. Hasbro Inc. owns the intellectual property rights in the U.S.A and Canada. In the rest of the world, the brand is owned by J.W. Spear & Sons Limited, a subsidiary of Mattel Inc. Mattel is not affiliated with Hasbro – in fact, the two companies are long-time rivals.

In JW Spear v. Zynga, a UK court has decided that the use of the SCRAMBLE brand by Zynga for its word-based app game does not infringe the SCRABBLE trade-mark in the UK, nor does it constitute passing-off. However, the court did consider Zynga’s SCRAMBLE logo design (above left) to constitute an infringement, since the stylized M appears at first glance to resemble a letter B. A few interesting points on this long-running battle:

  • As we’ve seen in other IP disputes covered by ipblog, this litigation is part of a wider dispute in multiple jurisdictions, including France and Germany.
  • Mattel was chastised by the court for its delay in responding to Zynga’s earlier use of the SCRAMBLE mark, in late 2007. This delay influenced the court’s conclusion that Mattel did not truly perceive SCRAMBLE to be a threat to the SCRABBLE mark. This in turn influenced the court’s opinion that the public would not be confused by the use of the 2 marks.
  • Mattel’s delay was likely caused by the efforts of the parties to negotiate a license agreement to produce a physical board-game version of the SCRAMBLE app.  The litigation followed a break-down in negotiations, when Zynga concluded a deal with Mattel’s rival Hasbro.

Calgary – 07:00 MST

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