Alex Konigsberg Public Hearing Testimony

I've asked that my CV be distributed to you, not to tell you how brilliant I am but to tell you that I probably have more experience in dealing with franchise legislation throughout the world than probably any other person…I listened to the learned professor [Gillian Hadfield] and, frankly, she and I are in different worlds…Mr Konigsberg: Well, I very much appreciate it.

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Legislative Assembly of Ontario
March 8, 2000

Public Hearing Testimony
Ottawa, Ontario, Canada
Mr. Alex Konigsberg, Lawyer

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

ALEX KONIGSBERG

The Vice-Chair: We will now go on to our next witness, Mr Alex Konigsberg. I'm trying to stick to a 20-minute schedule, Mr Konigsberg, for presentation and questions. You may start whenever you want.

Mr Alex Konigsberg: My name is Alex Konigsberg. I'm an attorney practising in Montreal. I've asked that my CV be distributed to you, not to tell you how brilliant I am but to tell you that I probably have more experience in dealing with franchise legislation throughout the world than probably any other person. I have been consulted by most governments dealing with legislation. I have been consulted by most franchise associations dealing with legislation. I have been the only non-American to be invited to appear before the Congress of the United States on their franchise legislation. I think I've been the only non-American to be invited to appear before the Federal Trade Commission on the FTC franchise rule. I have been invited to go to Australia to meet with industry and to meet with government, to Mexico. Frankly, I think I've been invited by nearly every country of the world that deals with franchise legislation, other than the province of Ontario.

I would also like to talk at length, but later on in my conversation, about the efforts that are being undertaken by Unidroit, which is an organization in Rome in which Canada, as a country, is a very prominent member. I think it would be very important that this group understand what is going on in Unidroit as it pertains to franchise legislation.

Although I've spent most of my life representing franchisors, I'm not here to speak on behalf of franchisors, I'm not here to speak on behalf of the franchise associations; I'm hear to speak on behalf of franchising. I also want to underline the fact that I've appeared as an expert witness in Ontario courts on behalf of franchisees in the leading litigation cases that have come about in the last number of years before the courts of Ontario. I underline the words "I've appeared on behalf of franchisees" in these litigation cases.

I would also like to say to you categorically, because I've studied this at length for 35 years, that there's absolutely no correlation of any nature whatsoever between the existence of franchise legislation in a particular country and the number of bankruptcies or the amount of fraudulent activities on behalf of franchisors. Frankly, the country that has more lousy franchise practices, that has more bankruptcies, that has more fraudulent activities, is the United States of America, which is by far and above the most regulated country, when it comes to franchising, in the world. There is no reason whatsoever to conclude, based on the experience of any country that has adapted franchise legislation, specifically, that the enactment of such legislation will result in less fraudulent practices or better franchise practices. There is absolutely no correlation.

There's a tremendous amount of misinformation that is spread. I came in a few minutes early and I listened to the learned professor and, frankly, she and I are in different worlds. My experiences are totally different, and on many issues I would challenge some of the statements that were made if I'm given the opportunity. They're just not the case.

Notwithstanding that, I am a proponent of disclosure legislation. I believe that we should have disclosure legislation. I would also caution that the disclosure must be meaningful because, if it's not meaningful, it's a waste of time. It must serve to make the relationship between the franchisor and the franchisee more transparent and it must be simple. If it's not simple, no one is going to read it. That's one of the problems with the Australian legislation. The franchisor is literally required to repeat every provision of the franchise agreement and then explain it. You end up with a document the franchisees do not read.

I would like to mention one issue, because I am here to plead on behalf of franchising and to plead on behalf of a better community of franchising. There is one issue that I think a disclosure document should deal with, and deal with at length, apart from the obvious, apart from the reputation of the franchisor, apart from his experience, apart from the litigation, apart from any of the classical things that, frankly, are contained in Bill 33. But there is one particular issue that impacts on the franchise relationship that is causing a lot of problems to franchisees, and that deals with the supply of goods and services by the franchisor to the franchisee. This is the lightning rod. To the extent that there are a lot of problems going on within this industry, I would venture to say that most of these problems trace back to this particular issue.

I would strongly urge this committee that, in their regulations dealing with disclosure, this issue be dealt with up front. What is the policy of the franchisor vis-à-vis prices or products or services if he or a related corporation is the supplier of the product and service? If they're designated suppliers, what is the policy? If the franchisor is allowed to charge for goods and services, if he has no policy, then let him disclose that he has no policy. Let the franchisee beware that there is no policy, that the franchisor is free to charge what he wants. If it's cost plus 10%, then what is the definition of cost? If it is the retail selling price less a certain percentage, what is that? If it's a designated supplier, does the franchisor take commissions? Does he take volume rebates?

I am not suggesting that the amount of these volume rebates be disclosed. I don't think it's important that it be disclosed. It's the principle that must be disclosed. This is the one area that I would suggest, because to me this is the lightning rod of problems the franchise industry is facing: If things are disclosed up front in the disclosure document, then the franchisee has a very fair idea of what he's involved in.

I would very strongly urge this Legislature not to get involved in relationship issues. The United States of America, including California, has relationship issues, and all that they have is more litigation and more litigation and more litigation. I challenge anyone to bring forth any type of information that there are fewer fraudulent practices, few bankruptcies and fewer bad franchisors in the state of California than anywhere else.

I am concerned with the amount of misinformation that is being put before this group. Someone sent me an e-mail recently in which they talked about Iowa. They asked that empirical evidence be given as to what is happening in the state of Iowa. There's a bill presently pending before the state of Iowa to repeal much of their legislation. All that it has done is hurt franchising.

Most countries of the world today that have adopted legislation, whether it be Mexico, Brazil, Spain or France, have adopted disclosure legislation. They have not adopted relationship legislation. The one glaring exception is Australia, and Australia is paying the price. There has been a study that recently came out in Australia, pointing out that since the adoption of their law, this has damaged franchising severely.

Frankly, I don't believe it. I don't think it has damaged franchising severely. But what it has done is increase the legal costs dramatically. You read the Australian legislation and you will see that they have relationship issues dealing with termination. It works for 90% of the franchise systems. It doesn't work for 10%. If you try to adopt relationship law you will solve nothing other than, to put it bluntly, to fatten the pocketbook of many lawyers practising in this field.

I have seen material go out that talks about Europe. The only countries in Europe that have legislation are Spain and France. The block exemption regulation on franchising which is issued by the European Community does not regulate franchising. It does not regulate disclosure. It does not regulate relationships. It deals with competition issues because of the particular intricacies of the Treaty of Rome.

There are problems facing this industry; there are very significant problems facing this industry. I have two suggestions, but before that I want to deal with one other statistic. I've heard a statistic thrown aroundI hope I'm wrongof a 70% failure rate of franchisees in the States. That was put on the table and has been debunked on numerous occasions. I've also heard that 80% of all franchisees are successful. That too is extremely misleading. It's a very misleading statistic even though it may be true. At one level, where you have serious, mature franchisors — McDonald's or Tim Hortons or whatever it may be— the failure rate is incredibly small; it may be 1%, it may be 2%. At the other level, with start-up franchisors, the failure rate may be 50% or 60%. To extrapolate from that the industry decision that 80% of all franchisees are successful is misleading too. It may be 95% for mature franchisors; it may be 50% for start-up franchisors. People have to be aware of this.

There are two things — and I have given this a tremendous amount of thought over the years because it's something that has intrigued me. On the few occasions when I represent franchisees, they bring their agreement to me. I put it aside and say to them, "I will not agree to take you on as a client and I will not read your franchise agreement until you get into your car or get on a train or a plane and go and talk to other franchisees." One of the beauties of franchising is that the information is public. The best information possible that a prospective franchisee can get is to go and talk to other franchisees in the same system. They don't do it. They don't read their disclosure document, and most of the time they don't understand their disclosure document.

Every franchise association around the world puts out a publication, "Investigate Before Investing." There is no other industry, no other category of law where that information is out. I have yet to see one case anywhere in the world where a franchisee was prosecuted or sued because they had a conversation with a prospective franchisee. Franchisees are more than willing to talk. They're more than willing to give the truth of whether the franchisor is good, whether he's competent, whether he's not competent, and anything can be done. Because just having a disclosure document, if nobody reads it, is not going to help the situation. I know the franchise associations have tried their best, but prospective franchisees do not do it. If they did, they would be able to sort out very quickly who are the good franchisors, who are the competent franchisors and who are the reasonable franchisors.

The second one is even more insidious. Most prospective franchisees, and most lawyers and most consultants, for some reason believe that if you buy a franchise from a start-up franchisor, somehow you are getting in on the bottom floor and are getting a better deal. The reality is the opposite. Most start-up franchisors charge a higher royalty than most mature franchisors. The fees are generally higher, and they just can't supply. They don't have the infrastructure, they don't have the training facilities, they don't have the advertising clout and they don't have the purchasing clout.

I'm generalizing. I'm aware of several start-up franchisors who have all those things, because they have made it their business to become serious franchisors. But many of them don't. If a person who is going to buy a franchise goes into the relationship understanding what is going on, there's no other industry like it where this information is available. It comes down to educating potential franchisees. You cannot legislate competence. There are a lot of incompetent franchisors, a lot of incompetent lawyers, a lot of incompetent doctors and a lot of incompetent business people. You cannot legislate it.

On the issue of good faith and fair dealing, it is now accepted by the jurisprudence in the United States that good faith and fair dealing cannot overrule the specific terms of any agreement. That has been litigated to death in the United States, but I think it is now accepted that good faith and fair dealing will not overrule the specific terms of an agreement.

On the issue that franchisors, in exercising their discretion, should treat the franchisee as if it was their business, that is an open invitation to unmitigated disaster. I am not suggesting to you that a franchisor shouldn't do what is good for his business. But if you understand the franchise relationship, the duty on the franchisor should be what is good for the franchise network. What may be good for a franchisee might be a disaster for the network. It is very important that you understand this distinction.

A franchise agreement is a one-sided agreement, and there's a reason for that. There are really three parties to a franchise agreement, not just the franchisor and franchisee. There's the entire network of franchisees, and somebody has to protect the integrity of the franchise system. It's either the franchisor or the franchisees, and I think even franchisees will tell you that they have to leave this to the franchisor. But in exercising his discretion, it should not be to protect a franchisee or to protect himself. It should be for the protection of the entire franchise system.

I'd like to spend two minutes, if I may, on Unidroit.

The Vice-Chair: That's all you have left anyway.

Mr Konigsberg: Unidroit was an offshoot of the League of Nations, which was disbanded with the League of Nations. Then in the 1940s, by multilateral agreement, a number of countries put Unidroit back together. About 65 countries in the world are now members of Unidroit and have agreed to be bound by the terms of Unidroit. Unidroit stands for the International Institute for Unification of Private Law. What Unidroit has been charged with is harmonizing private law around the world. Unidroit, in the last number of years, has taken an extremely close look at franchising. About 18 months ago they appointed a four-member committee to prepare draft legislation on franchising. The committee met in Rome approximately one year ago and came up with a draft model law that deals with disclosure only. It does not deal with relationship issues. This was discussed ad nauseam by some of the finest practitioners, judges and professors, and after examining legislation from around the world, they came to the conclusion that disclosure legislation was something that would be supported by Unidroit.

The draft model law that has been put out by Unidroit was substantially based on Bill 33 — Bill 33 of the province of Alberta, la loi Doubin in France, Australia. These countries were carefully analyzed and they have come up with a draft model law. It is not yet public. In the model law a decision was made after a great deal of discussion that good faith and fair dealing would not be dealt with because that deals with a relationship. If you were going to do a model disclosure law, it would be advisable not to deal with relationship issues. Australia has tried to define fair dealing by being negative, by talking about unconscionable conduct, and they've gone into a very long definition of what constitutes unconscionable conduct. Any lawyer could just pick it to pieces.

I repeat in my last few words: A lot of misinformation is being brought before this organization. I heartily support franchise legislation that is limited to disclosure. If it goes beyond, into relationship issues, all you will do is damage the franchise industry.

Questions

Mr O'Toole: Mr Chair, on a point of order, if I could, for the members of the committee: You mentioned a model disclosure law. If you could file that with the committee that would be very helpful.

Mr Konigsberg: I'm sorry?

Mr O'Toole: You mentioned in your presentations that Unidroit has developed a draft model disclosure. If you could leave that with the committee, I would appreciate it.

Mr Konigsberg: Yes. It has not yet been made public. I will seek permission.

Mr O'Toole: Seek approval for that?

Mr Konigsberg: Yes.

Mr O'Toole: It would be helpful.

Mr Konigsberg: Yes, I have a copy actually of the original one that I worked on myself. That is available, but there have been many amendments made since then and that has not yet been finalized. I might add that Canada is a very active member and once the country approves it—for example, the United Nations convention on the sale of goods; Canada has approved that—that becomes a governing law. That takes precedence to any provincial legislation dealing with sale of goods internationally.

Mr Martin: On another point of order, Mr Chair, if I might: I just find it unfortunate that the obviously experienced and learned gentleman didn't leave a minute or two for some of us to challenge some of the statements that he's made and ask some questions about some of the aspersions -

Mr Konigsberg: Well, I very much appreciate it.

Mr Martin: - that he cast on some of the presenters who have come before us over the last few days. They came in good faith, told their stories, told their truth as they knew it. To be dismissed in such a curt way this morning is, in my view, very unfortunate.

The Vice-Chair: Thanks for your time this morning. I appreciate that very much.

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=2000-03-08&ParlCommID=1&BillID=&Business=Bill+33%2C+Franchise+Disclosure+Act%2C+1999&DocumentID=19724#P111_47641

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


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