John Sotos Expert Public Hearing Testimony

MARTIN: Would it be better to have no legislation than to put a piece of legislation in that gives people a false sense of security, given some of the statistics? SOTOS: That obviously is a no-brainer. The purpose of legislation is remedial, it's to correct a problem. If the legislation doesn't achieve that, then I think it's misplaced.

LegislativeAssemblyofOntarioCostofArms.jpg

Legislative Assembly of Ontario
March 6, 2000

Public Hearing Testimony
Toronto, Ontario, Canada
Mr. John Sotos, Expert Witness

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

JOHN SOTOS

The Acting Chair: I'd like to call our next expert witness, Mr John Sotos.

Mr John Sotos: Good morning. Mr Chair, honourable members, ladies and gentlemen, I have prepared a written submission, which is with the clerk. I don't intend to read the submission. It's more for background to provide information as to how the industry got to where it is today. I'll make short references to it as I'm going along where appropriate.

I'm a lawyer in private practice and I've been practising since 1980. My involvement in franchising dates back to that date. I am a partner at a boutique law firm, Sotos Associates, and my firm does franchise work almost exclusively, representing franchisors, franchisees and many of the franchisee associations that exist all across the country.

The nexus of what might otherwise appear to be a conflicting client base is our belief, which is shared by our clients, that successful franchising must be a win-win proposition for both the franchisor and the franchisee.

In my opinion, it's a mistake to polarize the franchisor-franchisee relationship, the us-and-them situation that is occurring. Unfortunately, that's exactly what is happening. It has been happening in franchising in this province for the last couple of decades, and since everybody is taking cracks at lawyers, I will as well. It's largely because lawyers tend to draft very unfair, very onerous, one-sided franchise agreements.

When I went to law school I learned that you listen to your client, you understand what the deal is and you reflect the deal accurately in the franchise agreement. If you read franchise agreements today, in many cases you would think that the franchisor is suffering from cognitive dissonance, because the franchisor says one thing and the agreement contradicts it in every respect or in most major respects. I submit to you that's a root problem in franchising today.

As part of my practice, I have in the past and I continue to actively manage a wide range of litigation for both franchisors and franchisees. We've also been involved in some of the precedent-setting litigation in this province that has obviously brought some of the franchise issues to the fore.

My submission to you is shaped by my experience. I hope that the often harsh reality has not impeded my ability to provide a balanced view to this inquiry. I might add that I'm a strong proponent of fair and ethical franchising. I believe that properly structured franchising provides a template permitting ordinary people to achieve extraordinary success. At the same time, the lack of minimum standards of conduct results in untold and totally unnecessary economic as well as social loss.

Because of, or despite, my views I was invited six or seven years ago to sit on the Franchise Sector Working Team, which is an initiative by this very ministry to bring players representing various sectors of franchising together to seek some consensus on the formal regulation of franchising. I cover that experience more directly in my submission. I won't refer to it here. I will try to limit my remarks to no more than 20 minutes, so that way there is an opportunity for questions.

As a long-time proponent of the need for responsible regulation, I applaud the government's initiative in introducing Bill 33, which is a piece of legislation that may have enjoyed the longest gestation period in history, going back to the Grange report of 1971. I hope the work that these deliberations will result in will do justice to that gestation period. I also understand that some minor amendments will be brought forward. We've discussed them with the ministry and I'm supportive of those amendments as well.

I view the purpose of my testimony here today as helpful or as an attempt to assist the committee in improving the draft legislation that's currently before us. If I focus my comments on suggested changes and the reasons why, that's not to take anything away from my support for the bill, which I think is long overdue and would certainly do a great deal to protect franchisees who are newly purchasing franchises.

The problems facing franchising, however, are not all pre-sale, as you heard from the previous speaker. You have the problems that arise before the contract is signed and the problems that arise after the contract is executed. Maybe I can take an opportunity to add my comments to the question Mr Gilchrist asked earlier of the previous speaker. The answer to the question of whether disclosure alone will do the trick to protect the marketplace is negative because, before you enter the franchise relationship and you get the full disclosure, what is disclosed to you may be absolutely truthful, accurate and correct; it's what happens after the franchise agreement has been entered into-the franchisor changes, somebody else acquires the company that you currently run, or the franchisor changes direction for whatever reasons. It's those changes that are implemented and cannot be foreseen. If you ask the franchisor at the point you're getting the disclosure as to what their intended conduct is going to be with respect to encroachment, for example, you may get a very clear answer: "We do not encroach." However, the agreement will provide for just that right. Five or 10 years down the road or three years later, if somebody else acquires the franchisor, they may very well do that. The contract provides for it and disclosure cannot protect a franchisee from prospective conduct.

The second reason there can't be protection in the disclosure document is precisely because of the kind of contract franchise agreements are. They are contracts that leave a lot of discretion-and I'll talk about that a little bit later in my presentation-to the franchisor to do all kinds of things to manage the system. So even though he may be selling widget A today, in three or five years he may be selling widget B or something else or even a different line of products, which may have different margins, which may have different labour requirements, space requirements and so on. So these are the kinds of things that cannot be predicted and disclosure cannot address. If it's helpful, that's my take on the question that was asked previously.

Coming back to Bill 33 and what it provides for, which is primarily for advanced pre-sale disclosure, I think the pre-sale disclosure provisions in the bill will go a long way towards addressing the major problems stemming from matters that arise before the execution of the franchise agreement. Misleading or fraudulent claims in order to induce the making of a contract should be significantly reduced if not eliminated following the enactment of this piece of legislation.

Similarly, the practice of collecting fees or even payments for the construction of a store that is never delivered or is delivered mortgaged or partly built will also likely diminish with the passage of this bill; if it doesn't, and if some franchisors don't temper their conduct accordingly, the bill provides, as Mr Hoffman indicated, some fairly effective remedies. Rescission is a fairly significant right that the bill bestows on franchisees who are basically defrauded. So that's a significant move in the right direction.

Similarly, Bill 33 introduces a statutory right for franchisees to associate without interference from the franchisor. Should franchisors interfere with this right, Bill 33 provides a reasonable remedy to deter such conduct. The right to associate freely is expected to provide franchisees with the ability to legally meet and exchange information, particularly at times of crisis.

The right to associate offers franchisees a cost-effective way to deal with problems, to commission reports no individual franchisee could afford, to retain counsel collectively to advise them, again things that, especially for some of the smaller systems, it would be prohibitive for individual franchisees to do.

I know that some of our friends in the grocery industry, the car industry or some of the larger franchises may have the means and the ability to individually do all these things, but for the vast majority of franchisees in the smaller systems this is a very significant right, and again I applaud the inclusion of this provision in the draft legislation. I caution, however, that the right to associate should not be seen as the total solution to the problems which arise after the franchise agreement is entered into.

The overwhelming problems in franchising occur, as you've heard previously, after the signing of the contract, and as long ago as 1971 were identified in the Grange report as follows: arbitrary termination of the franchisee-that's still going on today; arbitrary refusal of assignments or renewals of the franchise-that's there today; arbitrary refusal of permission to dispose of a franchise upon death or incapacity of the franchisee-the same; the obligation to purchase materials or other products for the operation of the business from a particular source and without an obligation that it be done so on a competitive basis. I would say that's probably the number one problem in Ontario today. In the US, it seems that encroachment has taken that honour, but my experience tells me in Ontario that's still the number one problem.

Also, arbitrary forfeiture of deposits and fees: I can't tell you how many times people have come in and they've paid $25,000 or $50,000, and the franchisor is nowhere to be found.

Competitive practices of a franchisor are detrimental to the welfare of a franchisee. This is encroachment. Encroachment, I would say, is probably the number two problem facing the franchise industry, particularly in the mature industries such as the grocery sector and the car industry, where you're having consolidations, you're having a reduction of the number of-in the car industry, at least-dealer points, as they call it. In the grocery industry, you have competition of two sorts: You have franchisors supplying-with the consolidation, especially in eastern Canada, of two major players, you have basically the appearance of competition, but four, five or six brands are really owned by one supplier. I'll talk about some of the problems that raises in a bit.

I'll also give you a bit of my experience, some of the other problems not in the Grange report that I've seen in my career.

There was a coffee shop franchisor which required its franchisees to source all the products from the franchisor, particularly coffee, and in a coffee shop you would assume that's a major part of the business, and it was. This particular franchisor viewed this tying of supplies as a particularly great way to raise money for itself and in addition to the royalties charged the franchisees 60% more than competitors charged for the same product to their stores, which led to the absurd result that the higher the sales the store achieved, the more money it lost. That franchisor didn't survive for a long period of time, but in the four or five years that they were kicking around, they probably sold, in total, 150-plus franchises with a total investment probably in the $150,000 to $200,000 range. The whole thing was basically an outright scam.

I've seen a franchisor whose system was set up to fail. Their business was to be reselling stores and keep getting the upfront fees as well as the resale value. One store was sold four times in 18 months with of course no disclosure of the prior history of that particular location.

Some of these issues would be captured and addressed by the disclosure provisions of the new bill.

We've seen franchisors using the advertising funds contributed by the franchisees to acquire terminated franchisees. So the franchisor used the advertising funds to acquire terminated franchisees, but when they re-sold them, the funds went not to the advertising fund but to the franchisor's coffers.

We've seen advertising funds misused in many ways. I wouldn't describe it as the number one problem but it's certainly one that is quite prevalent. Franchisors use the advertising fund for personal entertainment or vehicles, or they charge a disproportionate amount of operating overhead to the advertising fund. The advertising fund may occupy 1,000 square feet of a franchisor's space but they pay 60% of the rent, those types of things.

We've seen companies purchase a franchisor company for the purpose of eliminating competition. They cut off all services but they continue to collect royalties. They sell defective supplies; it puts franchisees out of business very quickly with no compensation.

We've seen a franchisor selling a single product-to franchisees developing a franchise system-and two years later deciding that there's more money to be made in the wholesale distribution of this product. They started distributing it through other channels of distribution at a retail price cheaper than franchisees can buy it wholesale. You can predict what has happened to that franchise system.

We've seen a franchisor whose system included the sale of basically a single product collecting money from franchisees for the purchase of the product. He used it for other corporate purposes. He didn't pay the suppliers. That supply of product dried up; stores had nothing to sell. In that system, more than 150 franchisees lost hundreds of thousands of dollars. Franchisors that sell to corporate or competing stores at lower prices than they sell to franchisees is a huge problem today, closely tied to the supply issue.

I won't bore you with any more examples. The list can go on forever.

These practices have been engaged in not only by small, home-grown franchise systems but by national as well as global companies, and that's important. It's important in that it's not true that, if you manage or you regulate the bottom-feeders for the smaller players in the industry, you're going to eliminate the problems. The problem is prevalent at all levels, and that has to be understood. I'm a bit concerned when I hear about exemptions for this, that and the other thing. Being large doesn't necessarily mean that one is operating any more ethically than somebody who is not so large.

Part of the reason why post-sale conduct cannot be captured by advance disclosure is because of the kind of permissive language that's contained in the franchise agreements. I'll give you a very brief definition of what a franchise program is, and you can name the franchisor that has this language, but it's fairly generic.

"'Franchise program' is defined to include anything and everything prepared by or on behalf of the franchisor that is designed for the franchise program, as may be added to, changed, modified, withdrawn or otherwise revised by the franchisor in its sole discretion from time to time… ."

"The franchise agreement may be terminated immediately upon written notice having been provided to the franchisee, if the franchisee does not comply with any standard (objective or subjective) established by the franchisor if such breach is not cured to the subjective satisfaction of the franchisor." This agreement is basically terminable at will.

The question legitimately arises, why would anybody sign such an agreement? I'll tell you why people sign those agreements: because in many cases they've had long-standing relationships with their franchisors, going back decades. They trust. They don't look at these agreements with the belief that anybody would enforce these kinds of provisions, but they are being enforced. They're drafted, put in place, and they're being enforced.

There are other agreements which provide that the franchisee can have his agreement terminated if the franchisee receives any publicity passively. If the franchisor receives any publicity that the franchisor in their subjective judgment deems to be unfavourable, then the franchisee can be terminated.

Franchisors have the right to change your trademark. You've been ABC franchise for 35 years and all of a sudden you're going to become XYZ franchise. You have no choice. The goodwill that you've built up may dissipate or disappear, but you're at the mercy of the franchisor in that particular case.

The need to have flexible rights to change the system is not questioned-it's necessary-but that flexibility that discretion, has to be tempered so that you have equitable results, the results that the parties expected at the time they entered into that contract.

I'll just give you another example to show you how absurd some of these agreements are. One agreement provides that the royalty and other fees are fixed for a very short period of time and can be unilaterally changed by the franchisor thereafter, from year to year, at their discretion—different fees for different stores even, under the same banner. These provisions are excessive, and this is where I take issue with some of my colleagues.

Bill 33 provides for a duty of fair dealing in the performance and enforcement of the franchise agreement. It does not, however, define "fair dealing" nor does it provide for any remedy other than the generic common law. Fair dealing in common law doesn't really mean very much. It's such a high standard. It's the unconscionable standard. You'd have to be a fraudster who's committing all kinds of fairly obvious sins in order to be caught by this kind of conduct.

In my respectful view, section 3 doesn't really accomplish very much, and I think you run the risk of lulling people into a false sense of security. If the Legislature intends to give meaning and substance to section 3, it must define the duty of fair dealing and it must support its reach by some specified remedies.

Traditionally, fair dealing has been defined in one of two ways, either generally or specifically. An example of a general definition of fair dealing can be found in some of the American jurisdictions-Arkansas is an example-which basically makes it an offence for any franchisor to refuse to deal with the franchisee in a commercially reasonable manner and in good faith. A specific definition of fair dealing is what was in the Grange report back in 1971, where it stipulates that it is unfair conduct for a franchisor to terminate an agreement arbitrarily, to arbitrarily refuse to assign, to mandate the purchase of supplies from a single source without providing for competitive pricing. That's a specific type of regulation. The Arkansas provision is a much more generic one. Australia has enacted some fairly franchise-specific legislation in the past couple of years, and they've adopted the specific form, the chapter and verse type of regulation.

For a whole host of reasons, I prefer the general approach to the definition of fair dealing as opposed to the very specific. I believe it would provide a small improvement to the bill without changing its overall character. Bill 33 already provides for a duty of fair dealing. My recommendation would be that the fair dealing provisions in section 3 be redrafted to say, "Fair dealing means honesty in fact, and where the franchisor has the right to adversely affect the franchisee's investment, he must exercise such right in a commercially reasonable manner," and, "If the franchise or its associate breaches this section, then the franchisee has a right of action for damages."

I believe that a general definition of fair dealing that is statutorily enforceable provides a number of distinct advantages. First, it's fair. This is what all franchisors say they do now in any event. Second, it establishes a standard that is less than the best practices standards established by industry leaders. I'll read to you a couple of quotations from prominent brands that you would recognize. One is from the president of CARA, the franchisor of Harvey's and Swiss Chalet. He has described successful franchising as "an equitable sharing of accountabilities, responsibilities, expectations and finances … it boils down to an equitable outcome, a healthy balance, a win-win situation …. The most successful relationships are true partnerships …. We look at our franchisees as operating partners."

Similarly, the CEO of McDonald's US said, "We believe the fundamental premise for a successful franchise organization is partnership … with shared vision, shared goals and shared responsibility."

The good faith or fair dealing definition that I'm proposing doesn't even reach that standard. A standard of commercial reasonableness is already embodied in other commercial legislation in this province and in other provinces in this country, so it's nothing new. A defined and enforceable fair dealing standard requiring commercial reasonableness in the exercise of discretion would have the effect of imposing a level of inquiry and assessment of intended action which doesn't exist now.

A sober second thought: If you're going to send a notice of termination to a franchisee because the french fries were under the heating lamp 30 seconds longer than they should have been, well, you won't be able to do that any more; you have to stop and think and say, "Is the action we're contemplating appropriate in relationship to the offence that we're trying to cure?"

A general definition of fairness as proposed would provide the necessary flexibility to deal with particular circumstances. When you provide specific fair dealing legislation, you more or less have to deal with everybody in the same way. When you say, "Thou shall not open another location" within a certain territory and you define the territory, that places the franchisor in a bit of a straitjacket. If you're talking-and I know my friends from Hortons are here-about Tim Hortons and you provide a three-mile radius in the legislation, they'll have to close half their locations down. On the other hand, if you're talking about a new franchise that's just starting up, three miles may be a legitimate non-compete territory. So, if you've got a generic provision of fair dealing, you're able to provide the parties with the flexibility, you're going to deal with them as they are, as opposed to putting everybody in a straitjacket, which is very difficult to justify from an economic and business perspective.

There is no evidence that the existence of fair dealing legislation in a number of the US jurisdictions and Australia has impeded the growth of franchising. You'll find as many franchise businesses in the regulated states as you will in the non-regulated states.

Finally, and this is very important, fair dealing will provide protection for probably the 30,000 to 40,000 franchisees that are already in locked relationships. Disclosure will help the-I don't know how many-1,000 or 2,000 franchisees buying a franchise every year, but an enforceable, defined duty of fair dealing will help the 30,000 to 40,000 franchise relationships that are in place that can't be changed.

You can give disclosure to a grocer and say, "From now on, your royalties are doubling" before they sign the new agreement on renewal, but what's he going to do with the $3 million or $4 million he has invested in his real estate? You've no choice. You provide no realistic option other than to sign, because a sunk investment has already been made. With a defined and enforceable duty of fair dealing, you'll offer protection to those people out there who will see nothing from the disclosure.

In my view, Bill 33 is a good bill; it's much needed. But in taking the next step-it already speaks to fair dealing-define it, make it enforceable. I think it's going to improve the economic and business marketplace of Ontario as well as the life of franchisees, and franchisors, ultimately, in this province.

Those are all the remarks. I'd be pleased to entertain questions.

The Acting Chair: We have about five minutes for each party. To maintain the rotation established earlier, I'll give Tony the first shot at it.

Questions

Mr Martin: Thank you very much, Mr Sotos. I detected just a slight tinge of restraint in your suggestions and comments to us this morning. You speak of some small improvement to the bill. I'm reading into that that there is actually some significant improvement that could be done to the bill that would be even more helpful.

You're coming from the working group, and there was somewhat of a saw-off compromise that came out of it that the ministry picked up and has hobbled together re Bill 33. I wasn't part of the group. I would like to have been invited to be part of it, but I wasn't. The sense I had was that it was half franchisee, half franchisor, a little bit like putting together a group consisting of drunk drivers and Mothers Against Drunk Driving to come up with a resolution to the issue of drunk driving. I suggest that it wouldn't be a bill with much teeth if it was compromise you were looking for and that, to some degree, is what you have here. It's compromise, in my view, that leans heavily towards not making franchisors too upset in case some of them might leave or this might not be attractive.

I say this, Mr Sotos, in light of your very active and aggressive involvement with some of the franchisees who have been done wrong by across the province, the very excellent work you've done in some instances and some of the comments you've made over the last few years where franchising was concerned, even comments you made when we were government that were quite critical of us as not moving fast enough. At one point you mentioned in a Toronto Star article-I's in A-43 for anybody who is interested in looking at the comment in the package I gave you-"If we do not have something in 60 days we will never have it…. The industry needs attention yesterday." I read into that a sense of urgency. That was six years ago, and here we are still looking at this and still looking at a watered-down piece of legislation.

You also talked about the legislation in Alberta. In an article in the Financial Post-it's A-55, for anybody who's interested, in the package I gave you-you say, "Alberta is basically what franchisees call the 10% approach….

"Alberta's approach as it currently stands is going to assist only a small number of franchisees and resolve only a small number of problems because it only addresses (the issue of) disclosure….

"The industry cannot manage itself, that is absolutely clear."

It's my view, and this is a bit out there I think, that it's better no legislation than legislation that presents to prospective franchisees or entrepreneurs in this province a sense of security that in fact isn't there.

You've I think taken a look at my bill, Bill 35, that I've tabled. What do we need to do to actually protect the industry and to do the kinds of things that are reflected in some of the previous comments you have made, and would the government's adopting all or part of Bill 35 do the trick?

Mr Sotos: Thank you, Mr Martin. I'll try to answer what I understood your question to be. In the recommendation that I'm making, I'm being sincere in stating that the inclusion of a defined and enforceable standard of fair dealing, in a generic way, will go a long way towards providing a level of protection that is not there today for existing franchisees, and in a way that is not as intrusive as some of the more specific legislation, as is found in Bill 35 and some of the other legislation in the US and Australia.

I say this for two reasons. This is my 21st year of practice in this area. I certainly have recognized the need for some regulation for probably 18 of those 21 years, and nothing has happened. I certainly have been advocating for it, based on my experiences, for a good 12 or 15 years, and this is the first concrete piece of legislation we have had before us. Clearly, I am cognizant of the interests-largely misguided, I think-that view any form of fairness regulation as negative and anti-business. I am not anti-business. My clients are all business people. I strongly support a healthy business marketplace. I view an enforceable general standard of fair dealing to be pro-business.

I concur with the previous speaker, who said that a fair dealing provision will significantly diminish litigation. But more importantly, it will diminish the incidence of expropriation without compensation, and that is important. For every case that makes it to court or a legal claim is filed, there are probably dozens that never go that far. From what I know and from my experiences, a general, enforceable standard of fair dealing, which is already in part provided for in the legislation-it says it wants that. I'm just saying, let's define it and let's make it properly enforceable. I believe that would certainly be adequate for the next while, if it were to be the committee's wish to recommend that to the Legislature.

The Acting Chair: Thank you. For the government party, I think the parliamentary secretary would like to lead.

Mr O'Toole: I refer to Mr Hoffman's opening remarks that we are using the same reference points in the bill as the Alberta model. I wonder if you could comment specifically. On page 14 of your notes, you refer to a "commercially reasonable manner" as the definition of fair dealing. What precisely would be the difference? Once you get into defining something, you could get caught with, "We didn't go far enough." What's your intention here? You still have to define "commercially reasonable manner," or is that already established in case law?

Mr Sotos: There is already other legislation in this province that provides for a standard of commercial reasonableness. For example, under the Personal Property Security Act, if you seize somebody's assets and dispose of them, you have a duty to dispose of them in a commercially reasonable manner. You can't just sell them to your friend for 10 cents on the dollar or whatever. That's a defined and recognized standard.

The Acting Chair: Mr Gill.

Mr Raminder Gill (Bramalea-Gore-Malton-Springdale): This morning we have heard a fair bit of gloom and doom, as if there are a lot of problems. I suppose there are. But at the same time, we understand that people are trying to follow the North American dream of having their own businesses. As I understand-correct me if I'm wrong-people are falling over each other trying to get good franchises.

With your 25 years' experience dealing in this business-I'm trying to compare the ratio of franchise-type business versus independent business. Ratio-wise, how many people fail in franchise businesses versus independent businesses-new start-ups?

Mr Sotos: Excuse me, Mr Gill. To my knowledge, there are no Canadian studies that actually document the area you have asked me about, but some studies have been done in the US and I understand some in the UK as well. The best evidence appears to be that franchise start-ups within five years have a higher failure rate than independent non-franchised business start-ups.

This is in answer to the wrong perception the public has that buying a franchise business ensures a better rate of success. That is true if you're buying a franchise from a well-established, mature franchisor. For example, in that US study, they counted the franchisors that started business in 1983 until 1994, and in those 11 years there were something like-and I'm going from memory-1,200 franchisors who entered the marketplace in total; 850 of them had disappeared by the last year of the study. So franchisors fail as well as franchisees.

Mr Gill: But you don't have any comparison with independent business, how many of those failed within-

Mr Sotos: Of the studies that exist?

Mr Gill: Yes.

Mr Sotos: More franchisees fail than independent businesses during the first five years. That's the evidence that exists, but it's only American. There's nothing in Canada, to my knowledge.

Mr Gill: In your mind, is the reason that it is a matter of not enough due diligence or people's expectations being higher than what they really should be?

Mr Sotos: Why is the failure rate higher?

Mr Gill: Yes.

Mr Sotos: I think it is because the investment in a franchise is higher than the investment in an independent business. You've got more debt load to repay, because you have your initial franchise fees. You typically get a better store, a better office, a better business in the sense of what kind of equipment you get. Some franchisors charge markups on repairing the business for the franchisee. So your cost of getting a branded coffee shop, for example, might be materially greater than if you were starting your own independent shop. The costs are higher, therefore that would explain why the failure rate would be higher.

The Acting Chair: We've got about three minutes left. Are there any other questions?

Mr Chudleigh: Just a very short one. In your experience in the Ontario area, is there a particular area in which most of the problems reside, whether it be food-related, automobile, motel-hotel chains, or are the problems that franchisees have with franchisors or vice versa fairly well spread throughout?

Mr Sotos: I would say that they are well distributed. The mature systems, where there has been a lot of consolidation, are having a whole host of problems. Certainly the grocery industry, for example, is experiencing and has been experiencing a lot of difficulties for the last decade. You will recall the Loeb franchise situation.

Mr Chudleigh: Yes.

Mr Sotos: That's a case in point, and there are many others that are in the same situation.

Mr Chudleigh: Mostly involving around encroachment?

Mr Sotos: Not only encroachment; the sourcing of supplies and the price at which supplies are being provided, the requirement to invest in a store very substantial sums of money and then the franchisor coming in with the discount concept down the street or converting an existing to a discount and all of a sudden your business is taken away from you and the franchisor is making more money because they are selling more groceries, in this case. They're getting the profit from the product and they're also getting the royalties. So you are there with a sunk investment. Your sales are going away, and your margins are declining or disappearing. You've got this building you can't do anything else with, you owe the bank $1 million and, you know, the usual, you've got employees who've been with you for 20 or 30 years and all those other issues. But those problems are everywhere-fast food. Hotels is probably the only area where I have not seen much disputation, if that helps.

The Acting Chair: For our last question, Mr Martin. A short one, please.

Mr Martin: Mr Sotos, I was listening to your answer on the question of survival patterns among franchise and non-franchise firms. There is a study that has been done that I had research—Susan Swift-lok at, and I have a paper that I'll make available to the committee. It's an article, Survival Patterns Among Franchise and Non-franchise Firms started in 1986 and 1987. Very briefly, it suggests: "Generally speaking, the results of the study contradict the assumption of relatively lower risks for franchises when compared with independent small businesses. Measures of profitability and survival rates in this study support the opposite proposition, namely that franchisees are often at greater risk." I'll share that with you so you can have a look at it. Having said that, and the question I asked you earlier, better no legislation than legislation that misleads?

Mr Sotos: I'm sorry. What was the question?

Mr Martin: Would it be better to have no legislation than to put a piece of legislation in that gives people a false sense of security, given some of the statistics?

Mr Sotos: That obviously is a no-brainer. The purpose of legislation is remedial, it's to correct a problem. If the legislation doesn't achieve that, then I think it's misplaced.

Mr Martin: Without your amendment, Bill 33?

Mr Sotos: Bill 33 will address the issue of pre-sale disclosure relatively well. It will also address the right-to-associate issue quite well. So as far as those matters are concerned, I can't say that it's not helpful; it's doing that job. It's the fair dealing that I think needs to be enhanced a little bit in order to make this bill a very legitimate and helpful piece of legislation for an industry that apparently accounts for something like $50 billion or $90 billion in Ontario alone-I don't know the numbers. It's a significant industry.

The point I make in my submission is that there isn't an industry that, as it reaches a certain level of complexity and maturity, isn't specifically regulated. Franchising is there now and has been there for quite some time. I think the initiative that's before you, together with some slight enhancements—I know the ministry has some other small amendments that they wish to make as well just to pick up some issues-should make for a very helpful piece of legislation.

The Acting Chair: That concludes your appearance?

Mr Sotos: Yes.

The Acting Chair: Thank you very much for coming before 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#P259_119068

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Office of the Legislative Assembly of Ontario
Toronto, Ontario, Canada


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Risks: Good faith + fair dealings = false hope, Access to justice, Can’t talk to the media, Sabotage, Advertising fund put into general franchisor's coffers, Must buy only through franchisor (tied buying), Justice only for the rich, Ontario Public Hearings, Canada, 2000, Franchise Sector Working Team, Grange Report, Tony Martin, Encroachment (too many outlets in area), Supply price gouging, Refusal to renew contract, Outright scam, Churning (serial reselling), Short- or forced-shipping, Success rate, Timothy Bates’ study, Variable rate royalty fees, Weak law worse than no law, Franchise agreements: Masterpieces of deceptive wording and artful omission, When the franchisor tanks, so does the franchisee, System designed to fail for franchisees, Life savings gone, Absconds with deposit, Toothless law, Commercially reasonable exercise of discretion, Canada, 20000306 John Sotos

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