Who will mind the franchise henhouse?

Letting the courts decide when the rules have been broken has the attraction of low maintenance – no bureaucracy, no fees. But it offers a low level of protection for franchisees. That’s because most don’t have the money to go to court. By the time they have a beef, they’re usually in tough financial straits already. And that’s before they begin the years of waiting for a judgment…the rules must be developed with everyone’s input. Then they must be mandatory. And enforcement must come from a neutral source with real, though not necessarily judicial, powers. Anything less would be lame.

The Globe and Mail
April 29, 1996

Who will mind the franchise henhouse?
John Southerst

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Don Schafer, chairman of the Canadian Franchise Association and head of a franchisor whose chains include Grabbajabba coffee shops, says his group isn't convinced of the need for a full-time, independent body to regulate the industry.

JUST about everyone seems to agree franchising needs some basic rules.

In the United States, franchisors must provide uniform offering circulars so that prospective franchisees can see what’s really being offered. Individual states further regulate the franchisor-franchisee relationship.

But in Canada, only Alberta regulates franchisors. In Ontario, a working paper prepared by both sides of the industry, recommended a system similar to Alberta’s. But so far, the provincial government has not acted on the suggestions, submitted in August.

One reason may be the unresolved question of who should monitor compliance and mete out justice.

  • Should it be left to franchisees to decide whether they’ve been wronged and take it to the civil courts, as in Alberta?
  • Should there be a franchising ombudsman – and accompanying bureaucracy?
  • Or, should the industry be permitted to regulate itself, perhaps by setting voluntary standards and conferring a “seal of approval” on franchisors who meet them?

Letting the courts decide when the rules have been broken has the attraction of low maintenance – no bureaucracy, no fees. But it offers a low level of protection for franchisees.

That’s because most don’t have the money to go to court. By the time they have a beef, they’re usually in tough financial straits already. And that’s before they begin the years of waiting for a judgment.

It’s worth noting that the Alberta Franchises Act allows the government to create an independent regulatory body, although so far this has not been done.

The idea of an ombudsman comes from Toronto franchise lawyer Ned Levitt in a letter accompanying the Ontario working paper. Mr. Levitt, special counsel to the Canadian Franchise Association, says an ombudsman would provide embattled franchisees with a neutral third party.

As a potential facilitator in disputes, the ombudsman could also be armed with the power to investigate and disclose findings. “With the power to publicize, you better believe there would be an incentive to co-operate,” Mr. Levitt says.

The ombudsman would be paid for by an annual levy on franchisors – who would reap the benefits of an improved reputation for franchising – and on franchisees – who would enjoy a quicker, less expensive, more effective way of resolving disputes.

Franchisee groups seem to prefer the protection of the arm’s-length ombudsman to civil remedies or voluntary measures. “The concept of regulation is only effective if there’s a mandatory piece of legislation that affects everyone,” says Bill Davis, director of government relations for the Ontario and Toronto Automobile Dealers’ Associations and a contributor to the franchise sector team.

Moreover, he says, the rules need a hammer to back them up. “There has to be discipline behind it that could result in the franchisor – or franchisee – not being able to do business in the province.”

Which makes the voluntary standards the least palatable option. Australia took this route in 1993. The idea was to line up financial institutions and publishers to agree to do business only with franchisors who registered and adopted the industry code of practice. There were no sanctions for breaching the code.

It hasn’t worked. Only slightly more than half of Australian’s franchisors signed up. And a government-sponsored study released last year forecasts no more than 70 per cent ever will. Unregistered franchisors continued to evade adequate disclosure, conduct high-pressure sales and otherwise misbehave.

“The problem with a voluntary system is that it only works among those who don’t need regulating anyway,” says Toronto franchise lawyer John Sotos, who represents the Ontario Franchise Coalition, an alliance of about 4,000 franchisees from 10 chains. “My view is that you need legislative underpinnings.”

In Canada, the Canadian Franchise Association appears to be easing itself into position as regulator – if a regulator there must be. It now requires members to comply with a code of ethics and meet some mild disclosure requirements, which it is planning to strengthen.

But since the CFA is an organization of franchisors, this arrangement evokes images of foxes defending henhouses. However, it is a recognition that some franchisors have abused the lack of regulation and that something needs to be done.

Nevertheless, the CFA isn’t making this a crusade. “We’re just not convinced there needs to be a full-time independent body,” says CFA chairman Don Schafer, who is also president of Comac Food Group Inc. of Calgary, a franchisor whose chains include Grabbajabba coffee shops.

Mr. Schafer says franchise regulation is “a huge, huge undertaking” and the CFA wants to gather statistics before admitting there’s enough of a problem to warrant regulation.

And if regulation is the answer, he says the CFA plans to “be there to make sure there’s the best possible legislation.” Translation: We’ll protect our members from anything too restrictive.

That’s not to say the CFA doesn’t have an interest in promoting ethical franchising. Mr. Schafer says the CFA is not a proponent of legislation, but he adds it is committed to “help police and manage our industry.”

If franchise regulation is deemed necessary, the rules must be developed with everyone’s input. Then they must be mandatory. And enforcement must come from a neutral source with real, though not necessarily judicial, powers. Anything less would be lame.

John Southerst is a Toronto business writer who can be reached by E-mail at moc.eriw-eht|htuosj#moc.eriw-eht|htuosj


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