Franchise woes on front burner

“While there are many reputable and successful franchise chains, there are also too many that are unethical, incompetent or both. Many franchisees have lost their life savings as a result of poor advice or shady dealings.”…Falkenberg said the 52,000 people she represents urgently need protection from sudden termination. She said big auto companies sometimes turf a dealer for no good reason.

The Toronto Star
November 27, 1994

Franchise woes on front burner
Ontario poised to regulate turbulent industry
Kevin Donovan


The Ontario government is poised to clean up the trouble-plagued franchise industry after passing the buck for a quarter century.

One proposal being considered by the consumer ministry is a form of self-regulation similar to the way lawyers are governed and disciplined by law societies.

That would mean anyone selling franchises in Ontario would have to belong to a government-mandated “Franchise Institute,” which would set standards and have the clout to punish, or even shut down, wayward members.

Consumer Minister Marilyn Churley is putting together a working committee of franchisees and franchisors to come up with “workable solutions,” said ministry official Eleanor Friedland. Work will begin Dec. 15, with a plan drafted by March, according to those involved in the discussions.

“If we do not have something in 60 days we will never have it,” said John Sotos, a Toronto lawyer who has been at the ministry meetings. Sotos also represents a group of 50 franchisees battling the giant Pizza Pizza franchise in court. “The industry needs attention yesterday. It is urgent.”

This comes in the wake of the high-profile Pizza Pizza dispute and other wars in the turbulent, multi-billion dollar industry often called the Wild West of the business world.

Typically, franchisees involved with various companies have complained of mismanagement, misrepresentation, sudden termination and harassment by franchisors, the large companies that own the chains. Stories abound of families, many of them new immigrants, losing life savings due to unscrupulous franchisors.

Franchising is big business in Ontario, a way for a franchisor to expand quickly, and for an individual to start a small business using an established concept.

Forty cents of every retail dollar in the province passes through franchises, which include fast food, car dealerships, cleaners, coffee shops, clothing stores and a myriad of other products and services.

As far back as 1971, an Ontario government committee called for legislation after hearing industry horror stories.

Nothing was done.

Documents obtained this week by The Star under the Freedom of Information and Protection of Privacy Act show the issue has been studied to death.

Complaints have poured in over the years. For example, one franchisee wrote: “We have reached the point where we have become tired of all the dishonesty, intimidation and unfair business practices that have gone on for too long.”

Other complaints in government files talk of “kick-backs,” “slick operators,” and franchisors who paint a rosy picture, sign them up, and then rip them off.

Studies were planned, scrapped, and planned again. Bureaucrats from various ministries and government ministers from all sides of the political fence bandied around the idea of legislation. Voluminous files of paper were kept. Bureaucrats looked to the U.S., to Alberta, and to Australia for advice. Over, and over again.

But with no result.

According to one report released to The Star, the NDP’s own small business committee tackled the issue early in 1993 and recommended full disclosure laws and the establishment of a government agency to oversee the industry.

The NDP committee wrote: “While there are many reputable and successful franchise chains, there are also too many that are unethical, incompetent or both. Many franchisees have lost their life savings as a result of poor advice or shady dealings.”

Again, nothing was done.

In May of 1993, The Star published a series of stories documenting complaints by Pizza Pizza franchisees who claimed in a lawsuit that their company was mismanaging their money; refusing to provide an accounting of monies held in trust; and was engaging in unfair business practices. The stories also revealed Pizza Pizza was being run by a convicted American racketeer with a string of personal and corporate bankruptcies in his past.

In the U.S., where many states have franchise legislation, franchisors are required to provide full disclosure of company finances and information on key executives, including criminal records and bankruptcies. This gives people investing the opportunity to see who they are getting into bed with.

Pizza Pizza has vigorously denied all allegations filed against it and its executives maintain the company has done nothing wrong. A secret decision has been rendered by an arbitrator after a year of confidential hearings. Both the arbitrator and a Toronto judge who originally heard the case have issued orders that say the decision must remain confidential between the parties.

Pizza Pizza does not want the decision released.

Here’s what a 1993 ministry briefing note had to say about the Pizza Pizza dispute: “The Pizza Pizza conflict is an extreme example of the ‘Love-Hate’ relationship that often characterizes franchising. The franchisor and franchisee have a symbiotic relationship that can lead to mutual advancement or mutual destruction.”

After the Pizza Pizza dispute went public, the government renewed its efforts to study the problem, continuing what amounted to a 25-year study session. But the minister, Marilyn Churley, said she was not interested in legislation.

However, according to a briefing memo, the government has often used the idea of legislation ”as a threat to franchisors by telling them through speeches and meetings that, if they don’t clean up their act, legislation will be introduced.”

Three weeks ago, an NDP backbencher, Jim Wiseman, became fed up with his own government’s delay. He introduced legislation through a private member’s bill. Private member’s bills are rarely passed into law.

But, according to sources close to the ongoing discussions, that lit a fire in the consumer ministry, which was embarrassed that a government politician acted before the government minister responsible.

“Jim Wiseman shamed them into doing something,” one source said.

It is likely that a big voice on the committee will be the Canadian Franchise Association, which represents franchsors. Richard Cunningham, the president, said they are not against legislation.

“What we are looking for is working in partnership with the government and the franchisees…to come up with some way of policing the industry,” said Cunningham.

The 218-member association has its own voluntary code of ethics. Earlier this year, they kicked Pizza Pizza out, based on a survey of store owners not involved in the lawsuit. With no legislation forcing a franchisor to be registered with his group, removing Pizza Pizza from the association meant the company no longer had to abide by the code.

The committee will consider self-regulation and other options to ensure such things as full disclosure and a code of ethics. But those involved from the franchisee side say that, whatever is decided, it must be given teeth though a legislative base.

“We need some rules written in stone,” said Sonja Falkenberg, legal director for the Canadian Automobile Dealers Association, which represents dealers who have franchise contracts with the big car companies.

Falkenberg said the 52,000 people she represents urgently need protection from sudden termination. She said big auto companies sometimes turf a dealer for no good reason.

Consumer ministry official Friedland said the franchise committee is “not another study.”

“We have been given instructions to get something done.”

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