Franchise law faces overhaul

“Some of the food chains really gouge their guys,” says Mr. Stewart. “They set up the deal, take a kickback from the producers and force the product down the franchisees’ throat.” Mr. Sotos says that tied buying is a major problem, pointing out that there are more than two dozen different rebates in the grocery industry alone. “Up to a third of the retail price of a product is made up of rebates of one sort or another,” he says.

The Ottawa Citizen
March 9, 2000

Franchise law faces overhaul
New legislation aims to improve rights for franchisees
Gina Gillespie

It’s been 30 years since public hearings were last held regarding the franchise industry in Ontario.

Yesterday, public hearings were held in Ottawa into new provincial legislation that aims to strengthen franchisee rights. Bob Runciman, the minister of consumer and commercial relations, is seeking public input into the Franchise Disclosure Act.

If Bill 33 becomes law, it will ensure that franchisees have access to information about their parent company franchisor – including business background, litigation history, franchise costs and policies on territorial exclusivity.

The bill also ensures franchisees have the right to associate and includes a duty of fair dealing by both parties. In Canada, 45 per cent of retail sales come from franchise businesses. There are 40,000 franchise operations in Ontario – and 5,000 new franchise lawsuits each year.

Gag orders, one-sided contracts and broken promises have traditionally plagued the industry, with disputes often solved when the franchisee gives up and walks away, unable to compete against million-dollar corporations.

One problem is that franchise contracts tend to be made by the franchisor, and can be 80 pages or more in length. “You’d have to be a franchise lawyer to understand all this, and you’d have to be an idiot to sign one,” says Les Stewart, president of the Canadian Alliance of Franchise Operators. Despite having an MBA, taking six months to evaluate his franchise opportunity and having the contract reviewed by a non-specialist lawyer, he still found himself in a court battle against Nutrilawn International Inc., a $350-million-a-year lawn-care business.

Franchise lawyer John Sotos fights for franchisees from his Toronto law office. He compares the relationship between franchisor and franchisee to a marriage 400 years ago, with the franchisee playing the role of the female.

“Even though somebody may be wealthier than you, if you decide that you love them and trust them, you believe they’re going to treat you fairly. And they usually do, until the trust is gone, or they find new affection. Then they discard the weaker party. That’s really the problem.”

Like a marriage, the franchise relationship begins with both parties hopeful for a bright and prosperous future. But problems often surface at contract renewal time, when a drastic change in terms can affect the business. A sudden increase in franchise fees or advertising costs, and the honeymoon’s over.

Then there are competition issues, with a parent company sometimes setting up competing companies – good for the parent, but harmful to the small businessman.

Sometimes market strategies over which the franchisee has no control arise from competition between his franchisor and others in the same market. Refusal to follow orders brings the threat of contract termination.

But perhaps the biggest source of conflict comes from “tied buying,” where the business must buy his supplies from the parent company.

“Some of the food chains really gouge their guys,” says Mr. Stewart. “They set up the deal, take a kickback from the producers and force the product down the franchisees’ throat.”

Mr. Sotos says that tied buying is a major problem, pointing out that there are more than two dozen different rebates in the grocery industry alone. “Up to a third of the retail price of a product is made up of rebates of one sort or another,” he says.

In fact, Mr. Sotos recently launched the first class-action lawsuit certified in franchising in Canada, on behalf of 57 “Bulk Barn” franchisees. The main issue in that lawsuit is tied buying.

Five years ago, NDP MPP Tony Martin became aware of franchising problems during a five-month dispute between the Loeb Inc. grocery chain and its franchise operators. Grocers sued Loeb, charging that corporate marketing practices were enriching Loeb and impoverishing their stores.

Since that time, Mr. Martin has tabled three private member’s bills, including on in December, dealing with franchise issues.

“In response to my tabling my bill, the government developed its own bill (Bill 33), which…doesn’t go the full 100 yards to resolve some of the issues that we see as problematic in the relationship between franchisor and franchisee,” he says.

He believes the most important omission from the government bill is the provision for a dispute resolution mechanism. He says a third-party arbitration, or mediatory type system is necessary to deal with disputes quickly, and minimize costs.

Mr. Stewart also believes Bill 33 as drafted doesn’t have enough teeth. He’d like to see an industry database, and a document repository.

“Isn’t it fair that people investing their life savings should have access to accurate, unbiased and comparable information?” he asks.

He also sees a need for a franchise industry council containing an ombudman, complaint process, data handling, academic research and future policy recommendations

But trying to legislate an industry that encompasses 1,200 franchise systems ranging from lawn-spaying companies to million-dollar hotel chains is problematic.

According to Toronto franchise lawyer Frank Zaid, the more government tries to enter the field of private contracting, the more disputes will arise. While he believes franchise disclosure legislation is long overdue in the province, he sees no need to go beyond what is proposed in Bill 33.

“Franchisors don’t need legislation to deal with franchisees who are in breach or in default of their agreement by not paying or hiding sales or buying off the program, or whatever,” he says “Those are issues that are dealt with by common law, in the courts if necessary. There’s no need for legislative foundation because they’re too subjective. They differ from system to system.”


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Risks: Greenwashing: insincerely claiming to be environmentally friendly, Alpha Male attorney, Political champions, Must buy only through franchisor (tied buying), Termination threats, Gouging on supplies, Secret kickbacks and rebates, Listing fees and inside money, Tony Martin, Lawsuits, class-action, Affordable, early and non-legal dispute resolution mechanism, Register franchisees and franchisors, National Franchise Council of Canada, Ombudsman, Power to publish offenders name, Grange Report, 5,000 new lawsuits per year in Ontario, Canada, Gag orders (confidentiality agreements), Abandonment, Canadian Alliance of Franchise Operators, CAFO, Corporate stores competing with franchisees, Renewing contract much tougher, Canada, 20000309 Franchise law

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