Don’t let your next injunction go to pot | Global Franchise
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Tuesday 4th October, 2022

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Don’t let your next injunction go to pot

Insight

Don’t let your next injunction go to pot

A recent case in which an Ontario court declined to grant an injunction motion against a rebranded store shows there are no guarantees when it comes to franchise injunctions

The issue of noncompetition injunctions is always a contentious point for retail licensors and franchisors. The protection of a franchise brand’s intellectual property and confidentiality is key to its success, but its enforcement can become a controversial legal issue, often reliant on the unique facts and evidence of each dispute.

Lightbox Enterprises Ltd. v. 2708227 Ontario Inc provides some interesting insights relating to injunctions at the budding intersection of franchising and retail cannabis.

The facts of the case are straightforward. The license holder, 270, entered into agreements with Lightbox for the operation of two retail cannabis stores under the Dutch Love brand. Under the agreements, Lightbox was required to operate both stores on a day-to-day basis. 270 was never involved in the operation or direct management of the stores.

In December 2021, 270 delivered two notices of rescission to Lightbox pursuant to the Wishart Act. 270 took the position that it was a franchisee of the Dutch Love franchise system, and it did not receive the required disclosure. Lightbox disputed that the businesses were franchises.

Upon delivering the notices of rescission, 270 jointly rebranded both stores. It stopped using the Dutch Love brand, and began operations under its own brand, Roll N Rock Cannabis.

Lightbox started a lawsuit against 270 and brought a motion for an injunction. It sought to prevent 270 from “owning and/or operating a Roll N Rock Cannabis retail store or any other cannabis retail store, other than a Dutch Love branded store.”

Lightbox also sought to prevent 270 from using the marks and “operating methods” associated with the Dutch Love brand. This included a long list of prohibitions, including requiring 270 to no longer use the services of certain third-party suppliers (such as the global HR software company ADP) and not displaying certain items instore, including “potted plants.”

The party seeking an injunction must meet a three-part test, as follows:

  1. Is there a serious issue to be tried?
  2. Would the party seeking the injunction suffer “irreparable harm” if the injunction were not granted?
  3. Is the balance of convenience in favor of granting the injunction or denying it?

In this case, the Court was able to decide the case after a preliminary assessment of the evidence, and did not even need to consider the above three-part test.

First, the Court found no right capable of enforcement. The Court noted that there was a “significant gap” in the evidence put forward by Lightbox with respect to any right to restrict 270 from operating a cannabis store. The Court confirmed that it will not allow a party to attempt to create and enforce “rights in the air”that the parties did not include in their agreement. The Court found there was “no evidence whatsoever of any agreement between the parties that 270 would refrain from the ownership or operation of another cannabis retail brand at either of the store locations in question or at all.”

In fact, the Court noted that the order Lightbox wanted it to make would be contrary to certain express terms of the agreements, which allowed 270 to transition its operations to another cannabis brand.

The Court rejected Lightbox’s argument that 270 had not rebranded the two locations. As outlined in the decision, 270 took extensive steps to rebrand the two locations as thoroughly and as quickly as possible. This involved removal of all Dutch Love materials, the replacement of all Dutch Love signage, remodeling of the interior of the locations, and the opening of new accounts with third-party vendors. 270 made best efforts to rebrand the stores as quickly as possible after the delivery of the notices of rescission, but acknowledged that the rebranding effort did require some time to be fully completed.

Second, the Court found Lightbox had failed to lead any evidence to support its claim that 270 had misused any confidential information or operating methods. In fact, one of Lightbox’s affiants bluntly admitted that many of the resources needed to understand the cannabis business can be found publicly online. The Court found that Lightbox had failed to demonstrate that 270 was misusing any confidential information. In addition, the Court noted that Lightbox had failed to adequately identify the purported “confidentia” information or operating methods that it said were being misused.

The following lessons can be learned from this case:

1. An injunction remains an extraordinary remedy that must be grounded in preexisting contractual rights. The Court will not enforce rights for which the parties never bargained. The Court will not find that a restrictive covenant is an”implied”term in the parties’ agreements, particularly where that implied term would contradict the express terms of the contract.

2. Allegations must be supported by adequate evidence. Evidence in support of injunctive relief must be clear, cogent, and detailed. Any proprietary information or methods must be clearly identified, and the existence of such interests and methods must be established by the evidentiary record. Vague allegations will not be sufficient to support a claim for injunctive relief.

3. Whether the injunction is mandatory or prohibitive may be determined by evaluating the result of the proposed order. Lightbox argued on the motion that the injunction sought was “prohibitive” (meaning that it sought to prevent 270 from doing something). 270 agreed that while the order was phrased as a prohibition, its practical effect was that 270 had no choice but to perform its positive obligations under the agreements (meaning that 270 had to take positive steps). Essentially, that 270 would have to operate as a Dutch Love or cease operations entirely. The Court agreed with 270. It concluded that because the result of the order would be to restore the status quo, the relief sought was “mandatory” in nature. Had the Court been required to consider the three-part test for an injunction, Lightbox would have had to meet the more demanding “strong prima face case” standard, which is a more difficult legal test to meet.

4. An “ill-conceived”motion is not sufficient grounds for an elevated costs award. The Court agreed with 270 that Lightbox’s motion was “ill-conceived and as well unsupported by a proper evidentiary record relating to the relief sought.” It also found that Lightbox’s original motion materials sought relief that was not available to it. However, despite these findings, the Court ruled that these factors were not a sufficient basis to increase the costs awarded to 270 on the motion. 270 was accordingly awarded partial indemnity costs, payable within 30 days.

The author

Adrienne Boudreau is a partner at Sotos LLP. She has been repeatedly recognized for her franchise work, most recently in Canadian Legal LEXPERT Directory – Franchise and Best Lawyers in Canada. Lauren Baker is an associate at Sotos LLP. Her practice focuses on providing litigation counsel to businesses in the franchising, licensing and distribution industry

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