Ontario set to take on franchise law

“If we don’t get franchise disclosure legislation now, it’s a crime,” Mr. Levitt says. “We need it for franchisees, but also for franchisors. Franchisors don’t need any more debacles.”

The Globe and Mail
October 21, 1998

Ontario set to take on franchise law
After 27 years, the province seems to have settled on proposals for regulating the industry that give a little to both franchisors and franchisees.
John Southerst


The compromise regulatory proposals are 'a good step froward to making it a healthier franchise marketplace without being overly intrusive,' says Ned Levitt, left. Minister David Tsubouchi will take a draft law to cabinet and argue to include it in this fall's slate of legislation.

In a two-part series, the Enterprise page looks at the changing state of franchise legislation in Canada. Today: Ontario’s timetable. Tomorrow: the Alberta experience

The Ontario government appears willing to go ahead this fall with draft legislation on franchising, after backing away earlier this year amid a storm of controversy.

After discussions last week with an industry panel, the province seems to have settled on the proposals that give a little to both franchisors and franchisees.

The package reportedly contains a “fair dealing” provision to protect franchisees. Franchisors may have to disclose not only sales statistics but also a breakdown of sources of income such as royalties, volume rebates and franchise resales. This is a major breakthrough for prospective franchisees.

But franchisors will not have to provide audited statements. Round numbers will probably suffice, alleviating company concerns about confidentiality.

Also, minimum franchisee investment levels that help define which enterprises will be regulated by the law will be raised to avoid including organizations such as Avon, whose direct sales agents resell their products. But the government will likely stand firm on its refusal to grant exemptions to large or established franchisors.

Ontario franchise regulation has been 27 years in the making, with various governments promising to tackle the relationships between franchise chains and their investors.

Although the U.S. federal trade commission and all major states have franchising laws, only Alberta regulates franchising in Canada.

These new Ontario proposals follow a consultation paper, released in June, that incited strong objections among both franchisors and franchisees. The division appeared severe in the 35 written comments that the Ministry of Consumer and Commercial Relations received.

To avoid being caught between the two sides, Minister David Tsubouchi cancelled at least two scheduled appearances related to the industry. Consultations set for mid-August with a franchise industry advisory board, which three years ago recommended a more comprehensive law, were postponed.

Franchise observers worried that the legislation was doomed. “What the government wants is a brokered deal,” franchise lawyer Ned Levitt says.

It may now have the beginnings of such a deal. The franchise industry advisory body met with ministry officials last week and was presented with compromise proposals. “It’s a material improvement over the consultation draft,” says Toronto lawyer John Sotos, who has represented many franchisees in disputes.

“It is a good step forward to making it a healthier franchise marketplace without being overly intrusive, “ adds Mr. Levitt, who also sits on the committee.

The franchise group is drafting a letter of endorsement. Mr. Tsubouchi will now take a draft law to cabinet and argue to include it in this fall’s slate of legislation. But ministry officials say the bill’s fate will also be determined by franchise industry players and the opposition parties. Loud objections will probably deflate Ontario’s first attempt at franchising law.

“I think it’s very important for the government at this point in its mandate to have a consensus,” a ministry spokeswoman says. “We have so little time in the legislature that it’s important that the government be able to get the agreement of the opposition parties.”

Mr. Tsubouchi’s earlier avoidance of controversy over franchise legislation was conscious, the officials say. “He didn’t want to get lobbied one way or the other, and he didn’t want to polarize the two positions any further.”

Should the compromise work, the new law will respond to troubled, one-sided relations between franchisors, typically well-financed fast food, automotive and service companies with heavy legal artillery, and franchisees, usually individuals with a significant part of their life savings at stake.

Ontario’s consultation paper, released in June, proposed that franchisors be required to disclose financial statements and litigation history. It also set a 14-day minimum review period before franchisees sign an agreement and intorduced a “right to associate” for franchisees.

But the province at that time argued against an Alberta-style fair dealing clause, saying the meaning is ambiguous. It also failed to propose a dispute resolution mechanism – franchisees would still have to sue their franchisors, a lengthy and expensive process that few can withstand financially.

Franchisee advocates were disappointed because the proposals fell short on fair dealing and enforcement, and declined to set legal parameters on such franchise flashpoints as the opening of nearby outlets or renewal procedures.

Meanwhile, some franchisors objected to the requirement for audited financial statements, and said Ontario should exempt large and established franchisors from all disclosure requirements, as Alberta does.

Now, the proposals seem to respond to both sides.

“Our view is this is disclosure legislation,” says Joseph Hoffman, director of policy at the ministry. “The good players are already doing this sort of disclosure, so it’s hard to see how someone needs relief from it. Certainly, no franchisor who is really motivated to have productive and useful relations with franchisees would find it problematic.”

While the proposals will not completely satisfy everyone, most observers believe the new proposals occupy fair middle ground. On ideological grounds, the government has no intention of interfering with contractual franchise agreements.

“Anyone who feels strongly that the government should legislate the relationship issues and the specific contract provision between two parties is not likely to see the legislation as satisfactory,” Mr. Hoffman says. “But everyone seems to feel that this is a big improvement over the current situation.”

If Ontario were to enact the proposed disclosure legislation, it would give new franchisees the kind of information they need to make an informed investment. Therefore, it may make progress in weeding out some of the worst misrepresentations that occur during the sales process.

That’s positive for an industry that has weathered its share of controversies. “If we don’t get franchise disclosure legislation now, it’s a crime,” Mr. Levitt says. “We need it for franchisees, but also for franchisors. Franchisors don’t need any more debacles.”

Tomorrow: Alberta

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