David Sterns Ontario Public Hearing Testimony

…I am testifying today under the expectation that there is immunity. I have been threatened three times with a lawsuit by someone in this room for speaking about franchising….This is a system which is the lowest of the low. It is the most opportunistic, it is rapacious, it preys on political and economic refugees, on people who can't speak English, on people who can barely write their names.

LAO.jpg

Legislative Assembly of Ontario
March 6, 2000

Public Hearing Testimony
Toronto, Ontario, Canada
Mr. David Sterns, Ontario Franchisee Coalition

Standing Committee on Regulations and Private Bills
1st session, 37th Parliament

FRANCHISE DISCLOSURE ACT, 1999
Consideration of Bill 33, An Act to require fair dealing between parties to franchise agreements, to ensure that franchisees have the right to associate and to impose disclosure obligations on franchisors

ONTARIO FRANCHISEE COALITION

The Acting Chair (Mr George Smitherman): The next presenter is David Sterns from the Ontario Franchisee Coalition. Welcome to the committee, sir.

Mr David Sterns: Mr Chair and honourable members, I am testifying today under the expectation that there is immunity. I have been threatened three times with a lawsuit by someone in this room for speaking about franchising. I would like to state for the record that that is my expectation. I have been informed that there is immunity but that it has never been tested, and I prefer it not to be.

The Acting Chair: I am pleased, on behalf of the committee, to repeat that assurance and to remind everyone that witnesses before committees enjoy the parliamentary privilege of freedom of speech. It is not restricted to members. It is afforded to you as a presenter as well.

Mr Sterns: Thank you.

My name is David Sterns. I am speaking on behalf of the Ontario Franchisee Coalition. I'd like to thank you for asking us to come and speak to you today and to continue the OFC's role in this important process of enacting a franchise fairness law for small businesses in Ontario. The law is certain to affect the lives of thousands of business people across the province and their employees. If the required changes are made, I think it's safe to say that the law will go a long way towards restoring credibility to franchising as a method of doing business and as a means of raising capital in Ontario.

The Ontario Franchisee Coalition represents a network of franchisee associations in many industries, including of course fast food, automotive repair, private education, grocery, photo finishing etc, and the OFC has participated in the Franchise Sector Working Team, which was largely responsible for the bill that is before you today.

I am a litigation lawyer in practice with Sotos Associates. John Sotos is the main partner in the firm. I am here on behalf of the Ontario Franchisee Coalition, although, as you will see from my submission, I share his ultimate conclusion about what is right and what is wrong with this bill, and come to that conclusion with the membership for the reasons I will go through. Approximately 80% of my practice involves franchise litigation and dispute resolution. I am proud to say that I represent franchisors and franchisees. It is not, as some would make it, an all-or-nothing or us-versus-them game.

Before speaking to you about what is good about the law and what can be improved on, I would like to tell you how I personally became a partisan of franchise fairness. I should tell you that franchising, as you may have noted from my first question, is not an industry that encourages dissenting views. I can say from personal experience that professionals who speak about what is wrong in franchising are labelled as pro-franchisee and anti-franchisor. Much the same happens with franchisees who speak about the problems in a particular system. They are branded as losers, ne'er-do-wells, troublemakers, and you will probably hear, if franchisors are being honest, the word "disgruntled" used many times—disgruntled franchisees, former franchisees, unhappy franchisees. Usually the word "disgruntled" is there. I tried to find the antonym for "disgruntled." I thought it might be "gruntled," but I think it's just "complacent." If that makes me a disgruntled franchise lawyer, so be it.

My personal experience is born of a couple of events. One of them came when we were consulted by a number of franchisees. It wasn't Pizza Pizza-I came into the firm after that-it was 3 for 1 Pizza. This is a system which is the lowest of the low. It is the most opportunistic, it is rapacious, it preys on political and economic refugees, on people who can't speak English, on people who can barely write their names. What shocked me, from that experience, was the way the people who came to us had this notion that they were somehow protected, that Ontario would not allow this to happen, that surely they just didn't understand the law and we were going to show them the way. We had the displeasure of having to tell them that there was no law. The only law was the law they signed, which was the law that was written by the franchisor.

These were people who were living three, four to a house or to an apartment, working in squalid conditions, borrowing from family members to raise money for their franchises and working in conditions which were indistinguishable from slavery of 200 years ago. Those are the disgruntled franchisees I hope you hear from, although I suspect that you won't because many of these people simply will go off into the night.

At the other end of the spectrum there is the more sophisticated franchisor, the one who retains extremely sophisticated counsel, the one who knows enough to join the Canadian Franchise Association to get the Good Housekeeping seal of approval. These are the ones who go after people with some more money, maybe people who are educated or people who have come into an inheritance, people who have got a government pension or something like that. These are the ones who use the franchise agreement as a tool of oppression and of stifling dissent.

In one particular instance the conduct was so beyond the pale, there really wasn't a way of going to court. This conduct evades description. It's impossible to capture the kinds of treatment that you see going on. The out-and-out lies, the out-and-out fraud, the out-and-out misrepresentation, that's all well and good and the law will go a long way towards covering that, but we're talking about conduct which goes on a continuum. Where do you draw the line, and so forth? That is I think the ultimate mandate of this law: to somehow try to have a circle around which the franchisor must operate in order to adhere to some minimal standards.

In any event, back to this franchisor. After numerous appeals to reason by their counsel, we'd had to go to the Canadian Franchise Association and make a complaint. They have a code of ethics which contains language similar to what you'll see in Bill 33. The code of ethics says, "Fairness shall characterize all dealings between a franchisor and a franchisee." Nobody I could speak to or I could find, whether it was a neighbour or a family member, could make out a case where this conduct that we were complaining of could possibly be considered fair.

In any event, the complaint was bounced back to us four times. We were told, for very technical reasons, it couldn't be received. One of them was that it came from the law firm, not the client. The other reasons were that there was litigation involved, which was true. Litigation, however, had absolutely nothing to do with the complaints or with the reasons for bringing the complaints. In any event we formed another conclusion, and that is that franchisors are not a body that looks after itself particularly well. They're extremely good when it comes to writing agreements that fence in the franchisees, so you have 60- or 70-page agreements. You don't see that kind of detail because people are talking in very laconic or general statements. They regulate things with great precision. However, when it comes to their own conduct, they're content to talk in terms of fairness and so on and so forth.

So before we get to the law, I think we have to talk about how we got here today. In its origins, franchising was never a complicated way of doing business. It was very simple. The idea was that the franchisor lent its name to the franchisee and gave a certain know-how, a certain way of doing business. In exchange for that, the franchisee paid royalties. At the beginning, you had agreements three or four pages long that captured the essence of the agreement. The rest was built around the trust and understanding and the ongoing back and forth that characterized this living, breathing relationship, which is the franchise relationship.

The Acting Chair: Pardon me. I have just been given some new information and, for the full benefit of your protection, I want to read something into the record. It is further information to what we provided a couple of minutes ago on the issue of parliamentary privileges, and it reads as follows: "While members enjoy parliamentary privileges and certain protections pursuant to the Legislative Assembly Act, it is unclear whether or not these privileges and protections extend to witnesses who appear before committees."

For example, it may very well be that the testimony you have given or are about to give could be used against you in a legal proceeding, and I caution you to take this into consideration when making your comments. That's new information. I apologize; it wasn't available to me earlier. But be guided by that, please.

Mr Sterns: Thanks.

Mr Martin: On a point of order: I just want it on the record that that concerns me deeply. We have told a whole number of deputants to this committee that they did in fact enjoy the same parliamentary privilege that we enjoy. I wonder if that requires any further discussion here and decision-making by this group or communication plan to make sure that people—this is shocking, actually, as far as I'm concerned.

I wonder what we can do at this point in time to protect both those people who have already appeared and said some things on the record here today and those who might appear this afternoon or across the province over the next three or four days. As you must have gathered by now, this is pretty litigious stuff that we're into here. There are a number of dynamics at play that are reasons we are dealing with this piece of business. It requires some further clarification.

The Acting Chair: I share your concern. The table has been monitoring coverage of this and called in to indicate that that should be read into the record. It's their view that—

Mr Martin: Who provided that statement for you?

The Acting Chair: Perhaps I could ask the clerk to speak to this.

Clerk of the Committee: It's a document prepared internally within the committees branch. It has been prepared with reference to other witness situations, and sometimes it's when witnesses are compelled under oath or called as opposed to volunteering to come forward.

The committee had discussed it and agreed that one of the protections we could afford is that when people requested it, the committee was willing to consider such things as going in camera and hearing witnesses in camera. But as the statement reads, my understanding is that parliamentary privilege has been extended to witnesses in committees, but again it's something that hasn't been tested in court and that's why the caution has been advised to be read out.

Mr Martin: Are you OK with that?

Mr Sterns: I'm content to keep my submission going, with that caveat in mind.

Just to recap where I was before, the relationship was built on trust. The agreements were minimal. Everything went just fine. That was back in the salad days of franchising when you couldn't get somebody to sign a 60-page agreement with an unknown quantity. However, as the relationships progressed, the agreements became extremely complicated. Franchisors started realizing the magic of the franchise to them, which is that it's a very flat pyramid. The power and the money flow to the top. The risk, all the ventured capital, goes to the bottom, to the franchisees. While the perfect franchise system is a partnership, as you may have heard by now, in reality what you see again and again are the conflicting interests, the conflicting positions. This all feeds into the problem with Bill 33: How does it address the inherent conflicts in the relationship?

The first conflict you will have heard about is, of course, the drafting of the rules of the game. The franchisor desires control and absolute profitability. These things are really the antithesis of what a franchisee often wants. He wants to be independent, to have the benefits of the franchise name but nevertheless to exercise some control.

Everyone says there's no law of franchising. There is a law of franchising. It's the law of the contract, a 60- or 70-page agreement supplemented by a general security agreement, supplemented by a sublease, supplemented by trademark agreements and so on and so forth. So there is plenty of law. The problem is it's all written by one side; it's all written by the franchisor. Yes, it's a contract. Yes, the franchisee signs it. Sometimes some negotiation takes place back and forth, but in essence the agreements are presented as done deals. The true heart of the agreement is rarely open for negotiation unless the system happens to be very green, trying to bring people in. The argument you often hear on the side of the franchisor is: "We have to have consistency across the system. We can't give this to you without giving it to this person, and the next thing you know, I lose my system." That's how we get into these ridiculous agreements, which are getting more and more ridiculous by the day.

The second inherent conflict you will probably hear about is the supply of inventory. The company store in the mining town is how these things are set up. You can only buy your flour from Pizza Pizza. You can only buy your walnuts from Bulk Barn. There is nothing distinctive about the products that many of these franchisors are selling, and yet they are maintaining an absolute monopoly over the sale of the products. They are charging monopolistic markups on these products, which is how you get into the situation where you sell millions of dollars of product a year and lose money with every doughnut you sell or what have you. Of course the less money you have at the end, the less you can afford a lawyer to fight. So there is that consistency.

The third inherent conflict is encroachment, again a conflict of interest. The franchisor wants to maximize its presence and often has very good business reasons for wanting to do so. But the franchisee wants to maintain a certain radius of protected territory, and that's often not afforded to them. So you see these guys setting up across the street from each other.

Have the courts resolved the conflicts? Unfortunately, the opportunity to do what this act is doing came before the Supreme Court in 1973. You've had a chance to look at the Grange report, which your predecessors wrote. There was reference to this case called Jirna. Jirna was going to be the case that was going to decide how things were going to go with franchising. It was going to go before the Supreme Court. The lawyer for the franchisee in that case, Marvin Catzman, testified before the Grange committee. He said, "Hey, we might win this case, in which case the Supreme Court will say that franchisors owe this fiduciary duty" and all this great stuff. I'll give you the conclusion of that case. The franchisee lost, and in a big way. Unfortunately, the Supreme Court said that a franchise agreement is really no different from any other kind of agreement. It's a commercial contract; the parties are at arm's length; the parties are sophisticated; why else would they be signing these agreements? Therefore, no special duty is owed, no special duty of care, no fiduciary duty, nothing. Basically it's dog eat dog, except that the Supreme Court forgot to say that it's really dog eat goldfish. That's been the paradigm of franchising since Jirna and since the Grange report.

I’d like to talk right now about Bill 33 and what it does to address that.

I agree with what John Sotos is saying, that two of the three goals this act set out to achieve are met. Freedom of association: Who can argue against that in March 2000? Disclosure: Again I think that's a bit of a given. You tell people honestly what they're getting into. Don't sell them a bill of goods.

But the very first thing that the long title—I keep calling it the Franchise Fairness Act. It's a bit of wishful thinking on my part. I'd hope that this committee would hear that and say: "That makes sense. That's a nice sound. Why not call it the Franchise Fairness Act?"

If you look at the long title, the three goals, fairness, assembly and disclosure, what comes first? Fairness. Everything flows from the fairness obligation, that the franchisors are to be fair; fair in terms of allowing the franchisees to assemble, fair in terms of the disclosure. It should be called the Franchise Fairness Act. Nobody should be afraid of that.

There are three problems essentially with the way section 3, dealing with fair dealing, is drafted. First, it's vague and uncertain. It has been studied. I don't know if the franchisors who have come before you today have told you that. There has been a lot of ink spilled over this idea of fair dealing, what it means. The consensus is that it's an empty phrase. It's as empty as the CFA's code of ethics, which says that franchisors owe a duty to be fair to their franchisees. That has been easy to get around. It's easy, because if you ask the franchisor, "Are you being fair?" they say, "Yes, of course we're being fair." Fair to whom? That's the question. That's what the law doesn't answer. That's what the courts are going to have to say. If you look at the terms of section 3 right now, there's one thing that jumps out at you: fair dealing. In law, you always hear "good faith and fair dealing." They go back to back. They go together like salt and pepper.

Where is good faith? The Legislature has decided to give only the yin without the yang, and there will be a lot of ink spilled over that. Why didn't the Legislature put in "good faith"? It must mean something. It must mean that they didn't really mean what they were saying. Anyway, it's fraught with difficulty.

The second problem, as I have already alluded to, is the test. Is it fair according to the franchisor or fair according to the reasonable person, the man on the Clapham omnibus, whoever the person is who looks at things and decides whether they're fair or not, the impartial third party?

The smart money is that fair dealing is a subjective test to be decided according to either the franchisor in question or according to the franchisor's peers, the ones who've gotten us into the situation, the ones who have caused this Legislature to have two committees in 30 years to study the abuses in franchising. Are we going to let them decide what's fair and what's not fair? They can't be trusted; they can't do the job. It's for the Legislature to tell the courts how to interpret this, based on this committee, based on what's being said here by all sides in the open. Courts don't allow you to have a royal committee. They are just: "What does the contract say? Did you sign it? Are you 18 years old?" All the rest of it rings hollow in a court. This is the opportunity the franchisees have been waiting for, to say something that's going to resonate with the courts.

Going back to what I'd said at the beginning, the test has to be reasonable, the test has to be objective and there has to be enforcement. The Ontario Franchisee Coalition supports what John Sotos says in terms of the test being commercial reasonableness. That is a term which we're very familiar with in law. It's not an unknown quantity. It's not coming from out of the blue. It's the test you impose on the person who has the ability to affect someone else's property. It's the test that you use.

If your mortgage company takes over your house because you're $10,000 behind in your mortgage, it cannot accept $10,000 for your house; it has to accept fair market value. It has to do what is fair and reasonable in the circumstances. It has to list your property. In other words, without saying that the bank has to do A,B,C,D and E, it just says it has got to act in a commercially reasonable way. It doesn't say the bank has to be fair according to what the bank thinks is fair. That's the test we're advocating here for this law. It's simple, it's elegant, it says what I think the Legislature wants to say. So, sober second thought test, it imposes no red tape, it simply puts the franchisor to the test and says, "Do you really think what you're doing is fair and reasonable?"

In conclusion, we support what John Sotos is saying in terms of the tenor of section 3, how it can be improved. From the franchisee coalition standpoint, the name of the act should be Franchise Fairness Act because everything else flows from that.

Mr Chairman, honourable members, ladies and gentlemen, I'd like to thank you for this opportunity to speak, and I'd certainly be pleased if any of you had any questions.

The Acting Chair: Except that there isn't any time left in the 20 minutes.

Mr Sterns: Oh, I'm sorry. I had a feeling I might have gone over.

The Acting Chair: I did pause during our procedural bit. I'd like to thank you for your presentation and once again apologize for not having read that to you earlier. I apologize for that on behalf of the members of the committee.

This document is a verbatim copy of this witness’ oral testimony. To review the original transcript: http://www.ontla.on.ca/web/committee-proceedings/committee_transcripts_details.do?locale=en&Date=2000-03-06&ParlCommID=1&BillID=740&Business=&DocumentID=19737#P638_238820

Copyright (c) 2000
Office of the Legislative Assembly of Ontario
Toronto, Ontario, Canada


Brought to you by WikidFranchise.org

Risks: Strategic lawsuit against public participation, SLAPP, Monopoly, Must buy only through franchisor (tied buying), Franchise agreements: Masterpieces of deceptive wording and artful omission, Fraud, Love money, Ontario Public Hearings, Canada, 2000, Independent franchisee association, Threats of lawsuits, Opportunism: self-interest with deceit, Immigrants as prey, Code ofethics, refusal to accept complaint, Code of ethics, almost never enforced, Code of ethics, a joke, Sham of self-regulation, Dissident leaders, Unfaithful servants, Disgruntled, Encroachment (too many outlets in area), Libel chill, Parliamentary privilege, Threats against franchisee advocates, Franchise agreements virtually non-negotiable, Lawyers being threatened with lawsuits for speaking out, Canada, 20000306 David Sterns

Unless otherwise stated, the content of this page is licensed under Creative Commons Attribution-ShareAlike 3.0 License