For Sobeys, no more going to court

Word has it that Sobeys and its Price Chopper franchisees have finally settled their lawsuit.
12/20/2013

Canada’s grocery industry moles were all abuzz this fall when they learned that the lawsuit between Sobeys Inc. and seven Ontario Price Chopper franchised stores had been settled.

Details, however, were not made public because the case was settled out of court. All litigants have been sworn to secrecy. But the moles say both sides are relatively pleased with the outcome.

Almost two years ago, I wrote that I thought the end result of the lawsuit would be that Sobeys would simply buy out the Price Chopper franchisees.

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But that premise became moot when all of the franchise agreements expired. So, what exactly would be a pleasing outcome for the former Price Chopper franchisees? Some money? Of course. Payment of their legal fees as well?

Yes, please.

Also, what result would please Sobeys? First up, to finally put an end to this pesky lawsuit. And second, to reach a settlement at a reasonable cost without any blame assigned.

You could go through hundreds of pages of tedium on the Ontario Superior Court of Justice website, as I have done.

But if you will permit my summary, you may recall the Price Chopper franchisees sued Sobeys alleging that Sobeys misused its discretion over pricing, rebates and expenses to prevent the retailers from realizing a “reasonable” gross margin.

The retailers said they were forced to suffer paper losses every year, despite having excellent sales. Each sought $3 million from Sobeys.

Sobeys counter-sued, asking for $10 million plus some other amounts.

Sobeys alleged the franchisees used money from their store accounts to launch their lawsuit, which was a breach of their contract. (Sobeys had advanced monies for inventory and equipment of between $400,000 and $800,000 per store.)

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From the start, Sobeys argued that the franchisees had all been aware of the terms of the franchise agreements they signed. The company denied it was in any breach of trust or contract.

For their part, the Price Chopper franchisees also sued on the grounds that Sobeys’ accounting method for the stores was misused in favour of Sobeys.

They said that the contracts they signed were breached because their margins were so reduced by Sobeys, that they could not make any money or increase equity in their Price Chopper stores.

The contract the franchisees signed, the Low Equity Program, was, according to Sobeys, designed to ensure that franchisees could earn up to $50,000 in equity per year to pay down their inventory loans, if they complied with their pro-forma budgets.

The LEP was structured so that franchisees with gross sales between $175,000 and $300,000 per week (all of the plaintiffs fell within that range) would realize pre-tax earnings of $25,000 per year, and have the potential to realize pre-tax earnings up to a maximum of $50,000 per year.

Franchisees were to pay back their inventory loans over time from their pre-tax earnings. As the inventory loan was reduced, the franchisee owned an increasing proportion of his inventory, and thus would build up equity.

My perusal of the court’s website shows this matter went back and forth over two years as various motions were made.

Sobeys wanted to break the suit into parts for summary judgment. It also wanted to terminate the franchises early in the suit.

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Judges denied both motions. There was even one judgment that ordered Sobeys to pay some funds to the franchisees.

The last court document I found was a summary of everything that had taken place in the lawsuit to date, plus a decision to set a trial date.

That apparently got Sobeys and the franchisees talking about an out-of-court settlement, which was finally agreed upon a few months ago.

As I said from the beginning, we don’t know what that settlement was, or how much money was involved, and we will likely never know because of the confidentiality agreement.

But if both sides were happy with the settlement, then the former franchise holders and their families must have benefitted in some way.

And Sobeys gets rid of the lawsuit once and for all.

George Condon is Canadian Grocer's consulting editor

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