Canada: Superior Court Of Québec Confirms Validity Of Percentage Royalties Paid By Pharmacist-Owners To Franchisor

Last Updated: March 9 2017
Article by Claude Marseille, Liviu Kaufman and Réal Forest

The Superior Court of Québec (Court), presided by Justice M. Monast, recently ruled on an important point of contention for franchise pharmacies, by confirming the validity of a percentage royalty clause contained in a contract between a pharmacist-owner and his franchisor. The decision confirms the validity of the business model recommended by a number of franchisors, for both pharmacists and other professionals that exercise their practice within a franchise framework. Blakes represented Groupe Jean-Coutu (PJC) Inc. (GJC) in this matter.

BACKGROUND

This decision dealt with a dispute originating from an ethics complaint lodged by the Quebec Order of Pharmacists (Order) against Michel Quesnel, a pharmacist-franchisee of GJC in 2008. As a franchisee, Mr. Quesnel remitted royalties to GJC representing three to four per cent of his gross sales, including medication sales, in exchange for the rights, services and benefits provided by his franchisor. The Order argued that in paying this royalty, Mr. Quesnel was effectively sharing the fees and profits derived from the sale of medication with his franchisor, in violation of the Code of ethics of pharmacists, (Code). Section 49 of the current version of the Code reads as follows:

Pharmacists may share the profits from the sale of medications or from their fees only with another pharmacist and to the extent that such sharing is consistent with the division of their respective services and responsibilities.

Before the Order's disciplinary committee, Mr. Quesnel pleaded guilty to this count because at the time, he thought he had no valid defence to present. The following day, he instituted an action against GJC in which he alleged that the royalty clause contravened section 49 of the Code, was contrary to public policy and was consequentially void. He also claimed the reimbursement of all royalties paid to GJC in the preceding years.

The Court considered whether "a contractual clause, which creates the obligation for a pharmacist to remit to the franchisor a royalty based on the profits derived from the sale of medication, contravene public order and section 49 of the Code of ethics of pharmacists."

According to the Court, a literal application of this provision would lead to absurd results, given that pharmacists would not be able to use the profits derived from medication sales to pay for expenses related to their pharmacy's operation. The Court emphasized that the provision's objective was to preserve pharmacists' professional independence, to prevent non-pharmacists from becoming pharmacy-owners and to ensure that they would not be able to exert any undue influence on the exercise of the pharmacist profession:

We cannot infer that by using profits derived from medication sales to pay for the operational expenses of a pharmacy, including a royalty for the licences and services received, a pharmacist would be jeopardizing the integrity of their profession or the protection of the public. We also cannot infer that the payment of a royalty threatens the professional integrity of a pharmacist nor their exclusive right of ownership of a pharmacy.

To conclude otherwise would mean that a pharmacist can avoid paying expenses related to the business by simply invoking his or her ethical duties. This interpretation is compatible with that of the Professions Tribunal in the case of Cadrin c. Pharmaciens (Ordre professionnel des).

In this context, the Court reasoned that the fact that a pharmacist uses profits, including profits derived from the sale of medication to pay for franchise royalties, is not contrary to public order, so long as these royalties represented the market value of the services and benefits provided by the franchisor. The Court analyzed the franchise contract between GJC and Mr. Quesnel, as well as the products, services and other benefits that he received in exchange for the royalties. It concluded that the value of this exchange, including the value of the rights of use of the GJC name and trademarks, is reflected in the royalty amount paid by Mr. Quesnel and that the royalty clause, as such, did not contravene section 49 of the Code.

The Court added, as a matter of principle, that the royalty is paid as a percentage of the gross revenue of the franchise, whereas the prohibition contained in section 49 of the Code uses the word "profits" rather than "revenues" — "the English version of this provision uses the word 'profits'. The lawyers for GJC argued that the French version's 'bénéfices' refers to the accounting notion of net earnings, whereas 'profit' corresponds to the accounting notion of net profit."

In the present dispute, the annual royalty which is paid pursuant to the terms of the franchise agreement is calculated based on gross sales. It is thus not a share of revenues or profits, within the juridical and accounting meanings given to these terms. In addition, the evidence submitted before the Court demonstrated that the franchisees of GJC remitted a royalty in consideration of the rights conferred to them and the services provided.

CONCLUSION

This decision confirms that the pharmacist profession can be validly exercised within a franchise network in Quebec, including the payment of a royalty to the franchisor, based on a percentage of gross sales realized by the pharmacist-franchisee, in exchange for the goods, services and benefits received from the franchisor. This decision is also pertinent for other professionals that exercise their profession as a franchisee, in a network that functions on similar terms and effectively puts an end to the controversy surrounding this issue.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Events from this Firm
30 Oct 2019, Other, Toronto, Canada

The materials on the Blakes Business Class website are provided for informational purposes only. Accessing this information does not create a lawyer-client relationship.

 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions