Lack of franchise laws ‘a crying shame’

Sotos, one of a handful of Ontario lawyers who specializes in franchise disputes, says he sees the legacy of “broken relationships, ruined lives and alienated children,” in his office everyday.

The St. Catharines Standard
December 21, 1993

Lack of franchise laws ‘a crying shame’
Investors’ lives often left in ruin
Carol Alaimo

Susanne Cox can’t help but be a little puzzled by the provincial government’s priorities.

In Ontario, she’d get more government protection buying a used car than she did before sinking her entire life savings into a franchise deal that turned sour.

Under a new law, used-car purchasers must be told up front about a vehicle’s history – yet there’s no law requiring a franchising firm to reveal its past to buyers of business deals that cost far more than a second-hand sedan.

“I had no idea all the difficulty they were in,” says Cox, of St. Thomas, Ont., who bought a bookkeeping franchise last year from Leadley, Gunning and Culp International, a St. Catharines-based accounting chain. In the year Cox bought her franchise, about 40 franchisees left the chain. LGC is also facing millions of dollars in lawsuits launched by unhappy franchisees.

“My whole family has suffered because of this,” says Cox, who says she left LGC a few weeks ago, $50,000 poorer and on the verge of bankruptcy.

The lack of franchise laws in Ontario has wreaked havoc on many families who invest in franchise deals but don’t see the prosperity they expected, says Toronto lawyer John Sotos, an expert in franchising issues.

And the problem appears to be on the rise as more people left unemployed by the recession turn to franchises to try to support their families, he says.

“Unfortunately we’re going to be seeing more of this sort of thing as companies continue to downsize,” he says.

“The number of families in Ontario affected by (the lack of legislation) is in the thousands and it’s a crying shame,” says Sotos, whose clients include franchisees lobbying the government to put such laws in place.

Sotos, one of a handful of Ontario lawyers who specializes in franchise disputes, says he sees the legacy of “broken relationships, ruined lives and alienated children,” in his office everyday.

The lack of advance disclosure of a franchisor’s track record “is one of the main problems” complained of by franchisees, said Sotos, who represents dozens of Pizza Pizza franchisees currently suing the giant pizza chain for $7.8 million in damages.

In Canada, only the province of Alberta has laws in place which make it mandatory for a franchisor to reveal its past to purchasers.

Alberta law, similar to that in many U.S. states, requires franchising firms to register with the government and provide updated information each year, including data about their financial position, bankruptcy history or relevant criminal records of officers and directors, and a list of any past and current lawsuits involving allegations of fraudulent, misleading or deceptive business practices.

Alberta also requires a franchisor to annually provide two lists: one of all current franchisees, and another with the names of all the people who left the previous year.

Those lists are key to consumer protection because they allow potential recruits to investigate the satisfaction rate of people who came before them, says Jim Turner, head of franchise registration for the Alberta Securities Commission.

In Ontario, franchise legislation has been “on the back burner” for the past two decades, says Nye Thomas, a policy spokesman for Consumer and Commercial Relations Minister Marilyn Churley.

Discussions tend to heat up whenever major franchising disputes hit the headlines, he said, but even then, there’s little that franchisors and franchisees can agree on.

The government also fears legislation might be costly to implement, Thomas said.

Sotos says that’s a “fiction” being promoted by franchising organizations that don’t want to see government rules put in place in Ontario.

Turner says in Alberta, the franchise law is administered by two full-and two part-time staff who manage to get the job done for a net cost of about $75,000 a year.

Thomas said the most likely first step in Ontario will see the industry policing itself through regulations and standards applied to members by a group like the Canadian Franchise Association.

“If it (self-regulation) doesn’t work then the government might step in.”

LGC is currently defending almost $7 million in lawsuits and countersuits launched by ex-franchisees who say the company made fraudulent, negligent or misleading representations to entice them to join, then didn’t provide the services they were promised.

LGC says no one was misled and that people got what they paid for. The firm has launched millions of dollars in countersuits claiming that former franchisees are trying to get out of their financial obligations to LGC.

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