Marco D’Angelo Public Hearing Testimony

Going back to the comment that nothing is forever, if you're someone who saved a bit from your paycheque for years and you invest in this business and you open it up, and because of the scheme set up by your franchisor you are forced into bankruptcy and you do lose your savings, that's something that is forever, unfortunately. The business may not be forever, but going bankrupt, losing your life savings, losing your home and your RRSPs is something that I think does last forever.

LegislativeAssemblyofOntarioCostofArms.jpg

Legislative Assembly of Ontario
March 8, 2000

Public Hearing Testimony
Ottawa, Ontario, Canada
Mr. Marco D’Angelo, student

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

MARCO D'ANGELO

The Vice-Chair: Our next presentation is from Mr D'Angelo. Mr D'Angelo, we have about 20 minutes.

Mr Marco D'Angelo: Good afternoon, Chair and committee members. I'm here today to discuss some of my concerns with 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.

Franchise business accounts for billions of dollars of Canadian retail sales annually, something in the neighbourhood of 40 cents of every retail dollar spent. I am here as a concerned citizen who is a former employee of a franchised store, and also as someone who knows many franchisees who are not able to speak here for fear of legal reprisals from their franchisor.

I have lived in the west end of the community of Ottawa for a number of years now and I must say that in that time many businesses have opened and closed their doors. I have known several families who spent years saving a little money each paycheque so that one day they could leave their jobs and be their own boss. What happens to many of these families is that they are presented by franchisors with something called a turnkey operation, which I am sure the committee has heard about already. These turnkey operations are presented as an "instant, just add water" type of business. They are told that all they need to succeed is to simply work hard. Unfortunately for many of these working families, it is far more difficult to achieve that.

The franchisees often sign contracts hundreds of pages in length. This is how long a franchise contract can be. Can you imagine being presented with a contract like this for a small business? It's impossible to expect franchisees to read, let alone comprehend, all of the details and fine print in this contract. They often do not question many of the details in the agreement because they trust that the franchisor wants them to succeed. The franchisors often say: "We want you to do well. If you don't do well, we won't do well. We want you to operate that business. We wouldn't put you in a position where you would fail because if you fail, we too will fail."

After a few years of tough times most small businesses do ultimately fail, not because of a lack of work or commitment, but because they are forced out by their franchisor. There are many ways that franchisees are forced out of their businesses. The first reason for failure occurs if the franchisee does not understand the type of franchisor he or she is taking on.

Bill 33 calls on franchisors to provide their clients with a disclosure document that contains the company's financial statements. Where Bill 33 falls short is where it fails to recognize that there is more to a franchisor than their financial statements. Bill 33 should include details pertaining to the business experience of the franchisor's management personnel, litigation history, and insolvency records if applicable. Franchisees have a right to know what they will be dealing with before they sign on the dotted line. They have a right to know the rate of failure or success of the franchise. They have a right to know if nearby franchises are thriving or barely surviving. For the franchisee, the disclosure of this information can protect their family from potentially losing their life savings.

In order to visualize the kind of relationship that I'm describing, I've decided to personalize some of the examples. Throughout the presentation I'll be referring to a franchisee named Brenda who has entered into a contract with a grocery franchisor named FoodMart. After Brenda's family decides to agree to act as a franchisee, their problems begin to become apparent. In most franchise agreements, there is usually a provision for forced buying. Through forced buying, FoodMart is the exclusive supplier of all necessary products to Brenda's business. She now finds herself forced to purchase products from the franchisor which are marked up or can be of lower quality than products that are available locally.

This example was played out in a grocery store in my community. This grocery store wished to purchase produce from local growers after customers had lobbied the franchisee to do so. The franchisor threatened the franchisee with the loss of their franchise if they persisted in doing this, despite the franchisee finding a local producer who offered a better quality of produce at a lower price.

Bill 33 on the surface wants to promote fair dealings, but there is nothing fair about forcing franchisees to buy supplies at unnecessarily high prices. In my community, successful small businesses have helped to build a strong community. Bill 33 needs to offer an option to opt out of these purchasing deals so that franchises can support other local small businesses rather than allowing franchisors to continue to drain money out of our communities.

In my conversations with some franchisees where I live, I asked why they stayed in these agreements when they clearly did not benefit them. The answer was that the franchisor often uses equal parts of fear and intimidation to keep many franchisees in their system. Brenda's family, seeking an opportunity for success, has invested her savings, her RRSPs, and mortgaged her home in order to start up her FoodMart store. Franchisees, by virtue of investing most of their financial worth into their business, become tied to its success or failure. Franchisors use this dependence to achieve greater power over their franchisees. When faced with the prospect of losing her life savings or her home, Brenda will fear the actions of the larger, more powerful FoodMart organization. When she attempts to question the actions of FoodMart in areas such as increasing royalties, she will be reminded in no uncertain terms that FoodMart controls her store, not her.

When Brenda wants to inform other FoodMart franchisees of her situation, threats of legal action by FoodMart soon follow, thanks to confidentiality agreements that she was forced to sign prior to being awarded her franchise. These so-called gag orders act as legal muzzles over franchisees. Brenda is prevented from disclosing the misdeeds of FoodMart to other franchisees and, worse, cannot inform potential new franchisees who are about to sink their money into a FoodMart operation. The removal of these gag orders is something Bill 33 does not address.

Even worse, Bill 33 does not include regulated standards of conduct. Prohibiting the inclusion of gag orders in franchise contracts, termination of a franchise contract without cause, and allowance for the use of independent suppliers should be included in this bill. Simply putting the words "fair dealing" in the title of Bill 33 will not ensure that dealings between franchisees and franchisors will be any fairer than they are today.

If this committee wants to look for examples of how to incorporate substantive measures that would ensure fair dealings, they would need to look no further than Bill 35, a bill introduced by your colleague Tony Martin. Bill 35 outlines minimum standards of conduct and protects the rights of the franchisee. If the intent of Bill 33 is to protect franchises, then it should contain strong mechanisms for enforcement. While Bill 33 does extend the right of action to sue franchisors if they misrepresent themselves or do not allow franchisees to associate, the only means for the franchisee to enforce these provisions is to sue for damages. This sort of legal action is expensive. It can financially ruin the franchisee's business.

If Brenda, whose life savings and investment are at stake, refuses to accept FoodMart's conditions, she has a choice, for lack of a better word. She can walk away with nothing or, if she attempts civil legal action, she is faced with the prospect of walking away with less than nothing, that being the loss of her business and some huge legal bills.

Many franchisors have the means and are content to stall cases in the courts until the franchisee can no longer afford the cost of justice. In order to protect the over 5,000 franchisees who take civil action against their franchisor each year in Canada, an alternative form of arbitration needs to be proposed. The most accessible and equitable way to do this is through a dispute resolution process. Bill 33 is silent on this vital point. However, details on dispute resolution can be found in sections 28 and 29 of Bill 35.

That dispute resolution process establishes a mandatory process of mediation where both sides are able to express their differing opinions to an impartial mediator who will be able to provide constructive ideas for resolving the dispute. This forum would provide an affordable alternative to lengthy and expensive civil court proceedings.

An argument put forward against this is that the dispute resolution process would act as a layer of red tape, an imposition of bureaucracy on small business. Nothing could be further from the truth. This is about protecting and encouraging independent franchisees and improving their chances for success.

In order for any new law to have meaning, there needs to be a reward for compliance or a penalty for non-compliance. A contravention of Bill 33 is not considered an offence. To protect franchisees from potentially unscrupulous franchisors, I suggest that a breach of this act be a public offence. Positive examples of some measures of consequence can be found in sections 57 through 60 of Bill 35. Offences such as willful misrepresentation, interference in an investigation or selling pyramid schemes should be against the law. These sorts of offences deserve more than a civil judgment, because they are very serious.

Only the threat of heavy fines will dissuade franchisors from being able to financially afford ignoring this law. If we want to seriously consider protecting franchisees, we also need to consider enacting penalties that will tell franchisors that taking advantage of working families and their life savings is not a civil action or a business tactic but a crime.

Some areas of concern that are not addressed in Bill 33 include the rights of employees of franchisees. Employees of franchises often find themselves in positions that fall woefully short in areas such as wages, benefits and job security. Today's minimum wage of $6.85 an hour is lower than the minimum wages across the United States after the currency exchange. The extension of benefits, even to the very few who find themselves in full-time positions in a franchise, is rare. Franchisees often want to reduce employee turnover and attract better skilled workers. Unfortunately, because of the schemes of royalties and licensing fees, franchisees are being squeezed so tightly that even if they wanted to, they are unable to pay their workers a better wage.

In order for workers to be able to earn better hourly pay, laws governing the organization of employees need to be visited, and perhaps changes to help workers should be incorporated in this bill at a later date. Many franchisees that are forced into bankruptcy often have significant amounts of wages owing to their employees. The possibility of giving employees and local creditors priority over the franchisor should also be looked into as a possible amendment of Bill 33. Provisions forcing the franchisor to guarantee the payroll of franchisees that go under is another possibility.

In summary, the problem that franchisees face is having to deal with a very powerful franchisor. It's a case of small versus big. This bill has a real chance to provide serious changes to protect franchisees and allow them to be independent, as promised, and able to reinvest in their community. In my view, franchisees are in need of protection, which they don't have at the moment. As it stands, Bill 33 does not go far enough to be provide that protection. Only going part way to assist small enterprises is a disappointment to small family businesses.

Please consider some of the ideas I have presented to you today, and hopefully bring forth some amendments that will truly assist franchises in a more meaningful way.

I want to thank the members of the committee for allowing me this time. I look forward to any questions you might have.

The Vice-Chair: Thank you very much, Mr D'Angelo. The first questions will be from Claudette Boyer.

Questions

Mrs Boyer: Thank you for your presentation. I thought that was a different way of going at it with the scenario.

When you started, you said that Bill 33 is well intended and can offer franchisees the protection they need but fails to do so. Do I make out of that that what you say Bill 33 fails to do and should do is the amendments you would like us to potentially look over and bring around to have it more forceful?

Mr D'Angelo: I believe that Bill 33 is a good first step in helping to protect franchisees. I think it's very fortunate for this committee that there is another bill, Bill 35, which addresses many of the concerns I have. Perhaps some of the amendments to Bill 33 can be found in Bill 35, in some of the sections I outlined that pertain to dispute resolution and that sort of thing.

Mrs Boyer: Of course you know this is not our first day of hearings; this is our third day. You did bring up a lot of points that we were reminded of Monday and yesterday in Sault Ste Marie. You bring up the question of community involvement, and I have to let you know that this has been a point, especially with local businesses, that you could encourage. You talked about Bill 35, as far as amendments are concerned, and I think you've mentioned some of these. So yes, we will look into them. I thank you for your presentation.

Mr Martin: Thank you very much, Mr D'Angelo. I thought your presentation was quite thorough. I want to focus my questioning on a new perspective that you put on the table today. Yesterday in Sault Ste Marie we heard of the impact of some of the direction franchising is taking on local economies in the province and the ability of small producers to get their product on the store shelves so they can get it sold and consumers can have a choice.

Today you mentioned the impact of the changing world of franchising on employment. A lot of the service that is now delivered by franchises used to be locally owned, mom-and-pop operations that supported families and provided, in some instances, some full-time work that had fairly decent wages and was fairly stable. We note more and more, and we've heard from some of the people who came before us, that because of the diminishing margins, we now have a lot of part-time employment, and a lot of it, if not minimum wage, fairly close to it.

Are you suggesting that protection of the franchisee would go a distance to improving that circumstance?

Mr D'Angelo: Yes. What has been happening is that a lot of small businesses that are community-oriented and owner-operated, and that do provide some full-time jobs at decent wages, are often being replaced by larger, very corporate-oriented franchises that focus on paying their workers the lowest amount they can and investing not as much into their community as the local businesses sometimes do that are supported by the residents of the neighbourhoods they serve.

Getting back to my point that successful small businesses build successful communities, being able to pay a worker a decent wage ensures that the person who works for you can afford to buy the things you sell in your store and the things that are sold in other stores. It serves the community better to have workers who are well paid, who have job security and who can work full-time as opposed to some of the things offered by franchises, where it's part-time hours, casual work, minimum wage and that sort of thing.

Mr Martin: Just to follow up on a comment that was made by the previous speaker on the question of: "Nothing is forever, so what are we worried about? You make an investment; you take the risk. Some win; some lose. That's life." We're also told that young people are OK with that. You're a young person in front of us today, making a case for franchising. What are your hopes and aspirations when you get out of school: To get into something that will be long term or to get into half a dozen things that may or may not be successful? What are your hopes and aspirations, and where do you think we're going in the world? This is a huge question, I guess. But in terms of long-term security, something you can count on—I think you know what I mean.

Mr D'Angelo: It's sort of a philosophical debate about franchises. It's interesting. Going back to the comment that nothing is forever, if you're someone who saved a bit from your paycheque for years and you invest in this business and you open it up, and because of the scheme set up by your franchisor you are forced into bankruptcy and you do lose your savings, that's something that is forever, unfortunately. The business may not be forever, but going bankrupt, losing your life savings, losing your home and your RRSPs is something that I think does last forever.

As someone before you today in this committee, someone potentially interested in one day having perhaps a franchise, I think that what this committee has is an opportunity to really do something to help small businesses thrive in this province. It's something that we need to look at. I hope some of the amendments that I presented ideas for are presented and hopefully passed into the bill.

Mr Gill: Thank you, Mr D'Angelo, for being here. I have a couple of questions. Actually, this is our third full day of hearings, and to be honest, you are the first one who is not related in any which way to a franchisee or franchisor or somebody related to a law system or whatever. Just to let you know that you're the first one. Are you from Ottawa?

Mr D'Angelo: Yes.

Mr Gill: Are you related in any way to Brenda?

Mr D'Angelo: No.

Mr Gill: How did you hear that these hearings were being held?

Mr D'Angelo: I heard about these hearings as a business student. I'm interested in some of the things that go on in business law, and as someone who has worked for a franchise, I do know a franchise owner who indicated that there was a bill. I was referred, too, by your parliamentary channel that invited calls be made to the clerk of the committee, and the clerk did a lot in helping to get me here today and giving me the time to be here.

I find it interesting that you noted that I was the first person who wasn't related to a franchisor or a franchisee. That's sort of the position I took in coming here today, that is, what do I want to see as a person in the public for small business, because I know that small business plays a vital role in community building. That's what I'm interested in, building a strong community in the west end of Ottawa, where I'm from.

Mr Gill: When did you know that Bill 35 was not being discussed? On the table was Bill 33. Where did this Bill 35 come from?

Mr D'Angelo: The Legislative Assembly of Ontario Web page that you have lists the bills that are currently on your order paper and Bill 33 is on that. It's listed alphabetically, "Franchises: Bill 33." Right under it was another bill called Bill 35 that was also about franchises. I had the opportunity to read both bills and what I found was that Bill 35 provides a stronger enforcement, a better idea for a dispute resolution process than some of the things that were offered in Bill 33. Bill 35 is definitely a stronger bill, and I hope you look into Bill 35 as perhaps a source for some amendments to Bill 33.

Mr Gill: You have some good points. In your submission where it says what Bill 33 fails to do, in fact, if you really dig deep into it, Bill 33, in the detailed disclosure agreement and the right to associate, once the regulations are made, will address all those issues. The only thing it will not address is the gag orders, to eliminate that. That's the contract you sign when you settle something. I don't think we can ever eliminate that, if you agree to sign something. I don't think we'll be able to legislate that. Do you want to comment on that?

Mr D'Angelo: I think you can legislate against using the gag order against someone to keep them from informing another franchisee about the misdeeds. I personally think that it's unconscionable to force someone to sign a contract before giving them a business, to say, "If we put you in a situation where you have to lose your savings and your home, you don't have recourse to speak to other potential franchisees who may be considering investing," and perhaps giving more information of your personal experience than your franchisor allows you. I don't believe it's the role of the franchisor to tell the franchisee what they can say and do.

Mr Gill: These gag orders are not signed before getting into business; these are signed after dispute happens, after they get into some kind of settlement. I think you are incorrect in saying that these gag orders are imposed upon before signing a contract.

Mr Martin: Some are.

The Vice-Chair: We've had quite a bit of discussion on this. Mr D'Angelo, we really appreciate the time you've taken here in making your deposition and all the efforts you've put into your presentation.

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#P543_198858

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


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