Ontario court orders Tokyo Smoke to produce franchise documents in rescission claim

Key facts

The plaintiff licensee, Tripsetter, operated a retail cannabis store under the brand “Tokyo Smoke” from July 2019 to about June 2021. In June 2021, Tripsetter served a franchise Notice of Rescission on the licensor, 216, and rebranded the store as “Purple Moose Cannabis”.

This court decision addressed discovery-related disagreements between the parties about various refusals by each side to produce allegedly relevant information. To analyze the relevancy of the information that each party was seeking, it is necessary to understand the underlying case in dispute.

The overall dispute is about whether Tripsetter’s operation constituted a franchise under the Arthur Wishart Act (Franchise Disclosure), 2000. Tripsetter alleges that it was a franchisee and that it was entitled to rescind the licence agreement because it never received a franchise disclosure document. The Tokyo Smoke defendants allege that the licence was not a franchise.  Among other things, they rely on the fact that cannabis franchises were prohibited by legislation at the time.

Tokyo Smoke also alleges that, if the licence constituted a franchise, they were entitled to rely on the significant-investment exemption to the disclosure obligation in the Wishart Act, since Tripsetter’s investment purportedly exceeded the threshold level prescribed by the regulation to the Wishart Act, hence exempting Tokyo Smoke from the obligation to provide a franchise disclosure document. Alternatively, Tokyo Smoke alleges that they were entitled to rely on the minimum-investment exemption, on the basis that Tripsetter’s investment was offset by the branding fee that the licensor, 216, paid to Tripsetter.

After attending examinations for discovery, each side brought a court motion seeking to compel the other side to produce information that they refused to answer during the examinations.

Tripsetter’s motion for further documents

Tripsetter took the position that Tokyo Smoke was required to produce its franchise disclosure document and financial projections document that it had prepared for the store.

Tripsetter argued that the disclosure document was relevant since the cost estimates contained in it were relevant to whether the exemptions applied. It also claimed that the disclosure document was relevant to the Tokyo Smoke defence that the licence was not a franchise.

Tokyo Smoke took the position that the disclosure document was irrelevant, given that it did not exist at the time that it granted the licence to Tripsetter. It also argued that any costs estimate contained in the disclosure document was not relevant since Tripsetter had already spent the costs, and that a costs estimate for franchisees was in irrelevant to a costs estimate for licensees.

The court held that it was open for Tripsetter to argue at trial that the costs estimate was relevant to the issue of whether the statutory significant-investment exemption applied in this case. The court held that there was uncertainty about whether expected costs or actual costs applied to this statutory exemption. It also held that the document was relevant to whether the licence was a franchise, for the reasons that Tripsetter argued. The court therefore ordered Tokyo Smoke to produce its franchise disclosure document.

With respect to the financial projections, this was a document that was prepared by one of the Tokyo Smoke principals for Tripsetter’s location. The court agreed with Tripsetter that it was relevant for the same reasons that the franchise disclosure document was relevant.

As to the balance of Tripsetter’s request for a further and better affidavit of documents, the court declined the motion, holding that there was no evidence that Tokyo Smoke had further documents other than the franchise disclosure document and the projections, particularly since Tokyo Smoke had provided a supplementary affidavit of documents. The court also dismissed Tripsetter’s other requested information about alleged continued use of the Tokyo Smoke marks and alleged failure to return property – which the defendants had already answered that they had no information about.

Tokyo Smoke’s refusals motion

Tokyo Smoke brought their own motion to require Tripsetter to answer various refusals that it made during examinations for discovery. The court dismissed the Tokyo Smoke motion.

Among other things, the court agreed that Tripsetter was not required to answer questions about Tripsetter’s negotiations with other licensors before signing a licence agreement with Tokyo Smoke. Tokyo Smoke argued that this information was relevant to whether Tripsetter knew that cannabis franchises were prohibited. The court held that Tripsetter’s subjective knowledge about whether cannabis franchises were prohibited was irrelevant to whether the Tokyo Smoke licence constitutes a franchise under the Wishart Act.

Tokyo Smoke also sought information about whether Tripsetter was receiving bulk discounts from its suppliers. They argued that this would be a windfall and ought to be offset against any rescission damages. The court held that this information was irrelevant since it was not part of the damages scheme under the Wishart Act.

The court also held that information about how much money Tripsetter had in its bank account at the outset of the licence agreement was irrelevant. Tokyo Smoke argued that this was relevant to whether the statutory exemptions to disclosure applied. The court held that this information would not assist in determining whether Tripsetter paid those amounts from its own funds or from the branding fee.

Summary

Discovery motions can play an important role to obtain the necessary evidence in a party’s possession or control in franchise disputes. The results of some franchise disputes can turn on the evidence. In this case, the plaintiff licensee obtained an order for Tokyo Smoke to produce evidence that can damage its key defence about disclosure obligations and entitlement to statutory exemptions. The franchise disclosure document and the financial projection can potentially show what Tokyo Smoke anticipated about the costs of setting up the store – this can be relevant to its alleged investment threshold exemption defence.