Ned Levitt Ontario Public Hearing Testimony

Martin: I find it interesting that you're coming today, supporting disclosure legislation as being enough. In an article in the Report on Business in December 1998 you're quoted as saying that in fact "a good salesperson can sell around a disclosure document". How do you reconcile those two realities? Levitt: Having put myself through school direct-selling, I know how that's possible…

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Legislative Assembly of Ontario
March 6, 2000

Public Hearing Testimony
Toronto, Ontario, Canada
Mr. Ned Levitt, Levitt, Beber

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

NED LEVITT

The Acting Chair (Mr George Smitherman): I'd like to call on the last presenter before lunch, Ned Levitt. Welcome to the committee, sir. You have 20 minutes.

Mr Ned Levitt: First of all, thank you very much to the committee for allowing me to come here and make a presentation this morning.

My name is Ned Levitt, and I'm a partner in the Toronto law firm of Levitt, Beber. I've been practising for 25 years in this area. During that time, I have acted for both franchisees and franchisors, essentially balanced between the two. During that time, I have witnessed the amazing growth of franchising in Ontario in an unregulated environment. I have acted for many franchisees in dispute matters and organized many ad hoc franchisee associations to deal in troubled franchise systems. Currently I am general counsel to the Canadian Franchise Association, and I had the good fortune to be a member of the Franchise Sector Working Team, so I've had more than a little bit of input on Bill 33. Today I am appearing in my personal capacity and what I have to say are my personal views.

Bill 33 is a product of many hours of work and debate among various parties and from various perspectives. Certainly we debated the bill and initially our report at the Franchise Sector Working Team extensively. The bill does not contain everything everybody who is a member of the Franchise Sector Working Team wants to see and in fact it contains some things that members don't want to see, but it is acknowledged as a workable consensus among the various interests that were represented at the Franchise Sector Working Team.

I believe that Bill 33 is long overdue and should not be delayed any more. I'm essentially in favour of Bill 33 as a disclosure document. I am open to suggestions of certain amendments and I will discuss in a moment some issues that I have.

You have heard this morning that there is a crisis in franchising. You've heard many stories about problems and abuses by franchisors. They are true. I could add to them. I could walk you down the halls in my office and show you filing cabinets dripping with blood from disputes. They exist. However, these are anecdotes.

I've struggled very hard with this. I hunger for good statistics about the franchise industry. Everybody does. I've heard this morning that there are two studies, one done in the media. I haven't seen studies like that before and I'm interested to look at that. I've been involved in a number of media stories and I know what goes on behind the writing of reports. I've also heard from Ms Kezios this morning that her organization has done a study and I'm very interested to see that one. Having hated statistics when I took it at university, I nonetheless survived and I know there are issues around studies, the questions you ask and how you compile and analyze the data. What we need for franchising, of course, is disinterested, third-party studies that we can all rely on to make our decisions.

I have been successful in obtaining remedies for franchisees individually and as groups, using the existing common law in Ontario. I've often done it quietly, found business solutions and done business negotiations as well as concluded litigation. I haven't been able to achieve a satisfactory result for every one of my clients. I wish I could have but I couldn't, for a variety of reasons. But I'm satisfied that there is a fair chance in this province for franchisees to receive justice. If the statistics show that we need stronger franchise legislation, relationship legislation, I'll be the first one screaming for it, I assure you of that. Certainly, I have my eye on a chalet in Switzerland that I want to buy with the fees I'll be earning from the added litigation.

But seriously, I've again had to struggle with, do I want to see it now in Ontario? I've come to the conclusion that no, I want to see a bill that does what Bill 33 does, essentially, to provide disclosure, which will allow franchisees to make an informed decision before they invest their dollars.

What about the franchise community? There's a lot of rhetoric floating around, and rhetoric bothers me. I like reasoned arguments and I like facts to support assertions. Perhaps I can help the committee understand a little bit more about franchising. First of all, franchise fraud in this province is not our biggest problem in franchising. In fact, out and out frauds are a very small percentage of the problems that I've seen in 25 years. Franchise negligence is a much bigger problem. Franchisors starting franchise systems without the right resources, knowledge, experience and commitment to make a success of it are the ones who create the vast majority of the problems. I was interested to hear Ms Kezios this morning talk about her proposal that there be a duty of competence in a piece of legislation. I'm not sure about that.

I also want to tell you that everybody tries to paint franchising with a broad brush, but it is very multi-faceted. Franchisors come in all shapes and sizes. When you're talking about large, well-established franchisors, they want to see a healthy, fair, honest franchise market as much as anyone else. I think you'd be hearing a hue and cry from the larger franchisors if there was a serious problem of abuse and a crisis in franchising.

We've matured a lot in these last 25 years of franchising. That has brought with it a much greater understanding of franchising among franchisors, those who advise franchisors and those who advise franchisees. There are many more lawyers today than was the case when I started in the area who understand franchising both from the legal as well as the business point of view, because often the lawyer and/or the accountant are the professionals franchisees seek initially, not just for their professional advice but for their business judgment. There's also the growth of the Canadian Franchise Association in its influence and its efforts to educate not only franchisors about how to franchise better, but to educate franchisees about how to make a better investment decision.

I would like now to make a couple of comments about specific issues on the draft bill. It has been argued that there isn't a mechanism for dispute resolution, and I'm a very big proponent of mediation in franchising. For me, arbitration is just another court. It cannot necessarily deliver the cost-effective results that franchisees who have difficulties are seeking. It can be as expensive and as lengthy as court proceedings, and I think everyone who knows agrees that it is really mediation that is the preferred ADR form for franchising. But we now in Ontario have court-annexed mediation which will capture all disputes, including franchise disputes. As well, we have many more initiatives, both driven by the Canadian Franchise Association and from other quarters, to increase the amount of mediation that goes on in franchising. For mediation to be successful, the parties have to want to do it. They have to approach that process on a voluntary basis. I can't, for myself, imagine that you can legislate someone to work co-operatively in a mediation.

It has been talked about for industry self-management. Again, this is relationship legislation—not that I'm against relationship legislation; I'd need to know more before I could support relationship legislation.

I have some difficulty with one definition in the act, and that is the definition of the franchisor's associate. In extreme examples, that could create liability for a shareholder, albeit a controlling shareholder, of a franchisor, and I think that's just about unprecedented in our judicial system where shareholders can be liable for the acts of their company.

A small matter, but the inability of a franchisor to take a fully refundable deposit, which is permissible in Alberta, denies franchisors an opportunity which I believe they use often and appropriately to take a fully refundable deposit in the process of selling their franchise.

One comment about the financial disclosure: Providing franchisees with full financial statements may not be as effective as providing franchisees with specific financial information certified to be true by a franchisor. Certainly, franchisees can take financial statements to accountants and have them analyzed but, unfortunately, a lot don't do that. For them, it is basically language they don't understand.

In conclusion, and then I'll take questions, Bill 33 represents a huge change in the franchise marketplace in Ontario but a necessary one. If we go further with stringent relationship provisions before we let the new act have an effect on the marketplace, and before we gather a more accurate picture of the true extent of problems in franchising generally, we will be making a mistake. Franchising is an integral part of Ontario's commerce today. It provides opportunities to many, and we should not run the risk of stifling its growth with unnecessarily restrictive legislation. Thank you very much.

The Acting Chair: We have six or seven minutes for questions. Is there interest in questions?

Questions

Mr O'Toole: Thank you very much, Mr Levitt. I appreciate your presentation here this morning. Just a couple of clarification points, if you will, as I gather that being part of the working group, you're supportive of the need for legislation?

Mr Levitt: Absolutely, yes.

Mr O'Toole: With that, I suppose you're supporting, and I'm just trying to pick up on one piece, the disclosure piece which of course is a central piece to the bill as I see it. I'm just wondering how you deal with things like a substantive change. I of course don't know anything more than the paper I've been given to read about it, but I think of someone in a business that is, in a technology sense, changing dramatically. This is something I was thinking as you were presenting here. Take a photo business, where the whole technology is changing. So I've got a disclosure statement that tells me some things about running this, and I've got financial statements about how much business I'll probably do, and all of a sudden we have a market that changes because of digital technology and people don't use the typical. Don't you think I'd be tying a franchisor, perhaps unnecessarily, to a conditional arrangement where they weren't able to adapt their business plans to reflect the changing needs in the marketplace? Do you understand? The whole thing could change. The recipe for success could change, so the franchisor—how do you think these disclosure documents will tie? Both parties have a responsibility to prepare for those kinds of change I've just described.

Mr Levitt: We can't eliminate risk in business.

Mr O'Toole: That's right.

Mr Levitt: Franchisors cannot eliminate risk for franchisees, and one of the risks that everyone takes in the piece is something that changes the market as a whole, such as technology. I'm starting to see now the emergence of franchises in dealing with Internet businesses. They scare me greatly. It's changing so rapidly. How can anyone be selling something that says there's a proven formula here when the formula's maybe a day or two old? There are industries that are changing more rapidly than others.

Mr O'Toole: It's the whole fair dealing debate, not just disclosure. But who's to say who is responsible for adapting to the market?

Mr Levitt: Again, we come back to the fact that the franchisor is selling something. They're representing that they have a level of knowledge or something about their industry that has to be true. That's why I emphasize so much the disclosure, and I want it to be a full and comprehensive disclosure that brings these risks to the attention of the investor. If the franchisee investor can't comprehend them, then hopefully they'll find their way to professionals who will help them comprehend and understand that before they make the decision.

Mr O'Toole: If I have time for one more -

The Acting Chair: You have time for one very brief question.

Mr O'Toole: In some respects I sort of picked up that less is a better approach. I'm not summarizing what you said, but I gather less intrusion is better than intrusion. I think Mr Martin was always asking the question, is it better to do nothing than do this?

Mr Levitt: Unfortunately, we talk about the unethical franchisor, but believe it or not, there is the concept of an unethical franchisee. Lots of franchisors have problems with franchisees, but I have no grasp on the extent of the problem. No, I am for full-blown relationship legislation when the case can be made out that we need it. If we start having that type of legislation before it's proven that we have the need, I think we're making a mistake.

Honestly, from my perspective, I don't think we need it in Ontario right now, but I don't know. I sit in my ivory tower doing what I do every day, and I deal with this all the time, but I don't take surveys; I don't cover the entire ground. I have difficulty when people say in a forum like this or any other forum that they have the Holy Grail, that they have the statistics, when, to my satisfaction, the studies have not been done. But if it's proven, I want to see tougher legislation.

Mr Martin: I find it interesting that you're coming today, supporting disclosure legislation as being enough. In an article in the Report on Business in December 1998 you're quoted as saying that in fact a good salesperson can sell around a disclosure document. How do you reconcile those two realities?

Mr Levitt: Having put myself through school direct-selling, I know how that's possible, that you can sell around it, but it doesn't—

Mr Martin: How do you protect anybody then?

Mr Levitt: No, no, no, but it doesn't change the liability for the parties in the piece, and that's what disclosure legislation really does. When a franchisee comes into my office and they've got a disclosure document that said one thing and then the conduct of the franchisor was another, whether the salesman sold around it or not, I'm going to have something to base my strategy and my case on. In fact, the franchisee certainly had the ability to come to someone like myself ahead of time so that I could question what the salesman is doing in selling around the disclosure document.

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#P364_158527

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


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