Victor Martin Public Hearing Testimony

I don't know why a franchisee would sign an agreement with clauses that could be used against him by the franchisor.

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Legislative Assembly of Ontario
March 9, 2000

Public Hearing Testimony
London, Ontario, Canada
Mr. Victor Martin, franchisor

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

PARTY LAND CENTRAL/EASTERN CANADA

THE VICE-CHAIR(Mr Garfield Dunlop): Is Victor Martin from Party Land here? You have a 20-minute allocation.

MR VICTOR MARTIN: By way of background, we are new people on the block. We don't have any franchisees yet. We should be opening one within a month and hope to have several hundred, but I'll be gone by that time.

This is basically my son's business. He's an MBA out of Western's Ivey school and was looking for something. He was in a large corporation that was going to be taken over. As you know, when they downsize they dump anyone and everyone. He wanted to have control over his future, so I said I'd back him financially.

We are the franchisors under the US agreement. The major franchisor is in Philadelphia. We are the largest franchise operation in the world. We're in 17 countries. Why they just started here is beyond me. They have been in foreign countries and everything. Actually, we found them. They were looking for someone in Canada, and we went to Philadelphia after we had read a lot of franchise books and found them and got the Canadian rights.

By way of background, I am a retired chartered accountant from a national and international accounting and consulting firm. I intended to stay retired until my son asked me if I would help him out in this venture.

I read Bill 33. As I say later on, I haven't seen the regs. Maybe there are regulations out now. If there are, I wasn't able to get hold of them. I have some serious concerns about the bill. Throughout my career every act I dealt with was always dealing with so-called public protection, and I have always wondered why there isn't any protection for the other side. I'm talking about all the equity, wage equity and everything I've dealt with in 40 years of accounting practice. I understand why it has to be there to help some of the public, so-called. I have no question or worry about that. I wonder why we wouldn't add, even in a heading, that franchisors have the right to impose operating obligations on franchisees to ensure uniform operations. The bill starts with the main heading that this is purely to protect the franchisee. If any agreement or contract we deal with is to work, it has to work two ways. Otherwise, you get confrontations between the two parties and there's no reason for that.

I looked at the bill in this way: I analyzed it as I would if I were on a consulting job. What bothered me initially was this right to organize. It almost seems like this is a union bill coming from the NDP government. I understand that. I did audits for unions, and I understand their position. I'm just saying that's what it looked like to me. Franchisees already have the right to organize and associate under common law, and I wonder why we give them special rights here.

I'm going to interject, in addition to what I've written here. The type of franchisees we are looking for are entrepreneurs. They can come to us with all kinds of money and everything, but we will not take them on unless they meet our criteria. In the party business they have to be outgoing, they have to be willing to manage the business themselves and they have to have a certain amount of business acumen to run it. If you mention unionization or organization, the type of people we want to see, and the people I've dealt with all my life, see red. There's nothing wrong with them organizing informally or whatever they want. We would encourage that, because we want their feedback. But to give them a right in the act to organize seems to me to be right out of sight.

Those items all are with respect to the right to associate, as I see those sections of the act.

The disclosure document, I think, has to be done right if this act is coming in. I think the material facts you are talking about have to be clearly enunciated, because this is the most important part of the bill. If you are going to have damages or have something wrong, you have to know what it is. It can't be a grey area covering every scope of business. You have to know out front what it is. If that is done, I'm sure that franchisors are going to be very careful about what they put in the disclosure document. They're not going to put in anything that isn't correct. I guess there are always people who will do something against the law or against a statute, but I think it's important to know what we're dealing with.

In 5(3)(b), you talk about the disclosure document. What financial statements? It's important to know who that is. Is this the franchisor, which in this case is the Philadelphia head office? Is it the master franchisor, which would be us here? Is it the existing franchisees who are under your umbrella? What are these statements and what are they going to do? We have to know that, and it has to be clearly set out.

Foreign franchisors may also be subject to domestic regulations such as the US Securities and Exchange Commission which require or prevent certain disclosures. In talking to Philadelphia, they are under the Securities and Exchange Commission and they can do certain things. I guess we would have to have some kind of reciprocal law here that would allow disclosure in Canada similar to what it is in the States and not offend the States if in fact you're asking the American head office to give some disclosure. It has to be consistent with the Securities and Exchange Commission. This isn't unlike any other prospectus that's put out worldwide. We have to know what we're talking about here.

As a master franchisor, we don't own any stores and our financials will not provide any useful data to potential franchisees, since our operations are promotionally oriented. All we do as a franchisor is promote. We've spent a pile of money already—all our own money, so we have no debt. As I say later on, we're not asking anybody to put money into our company. I don't want to issue a prospectus. I will if it's necessary, but why would I do it? I'm not asking for anything.

Our lawyers also advise us that we may not have the right to disclose franchisees' confidential information. They will be submitting information to us on a quarterly basis under our contracts so that we can keep track of what they are doing and be helpful to them. But do we have a right to disclose their private and confidential information? Is the act going to ask for that? I think that is a question we have to ask legal advice on.

There should be provision for providing information at a level of detail which would not reveal to competitors important competitive secrets such as the cost of goods sold percentage. In addition there should be provision in the bill that the potential franchisee must disclosethis is for our protectionif they have any association or relationship with another company or franchisor in the same industry, prior to receiving the disclosure document. Why can't we be protected in this bill? Why would we want to disclose information to a potential franchisee who really is acting as a front person to get information from us, who is really representing another franchisor or something like that? We have to know that they're solid people and have our interests and their interests at heart.

My final paragraph under that section is, with respect to new franchisors, which might be different—I heard M&M. They have a whole bunch of stores; they have a history. We don't have any, so how do we disclose a financial history if there is a disclosure statement? Just put a big "0" and send that in? I don't think that's satisfactory. We have to tell you something and I'd like to know what that would be so that we can do it.

Under subsection 5(5), the disclosure document, this bothers me too when I read it. If a disclosure document is only filed once a year, how can a material change be set out? It's material changes that you're looking for, I believe, in this bill, to find out if there's a problem. Does a new disclosure statement have to be issued every time a new franchisee is contacted? There may be material changes between the last one that was issued and this one. I'm not sure what they do; I think Alberta is the only other one that has such a disclosure in Canada. From my research, that's what I found out.

I'm not sure whether they file this just once, or do they file it every year? I think it's important for this committee to determine this so that you're not giving one person one disclosure statement and another person another one six months later that has different facts in it because things have changed. I'd say this is very expensive if we have to do it every six months or annually. It may not be practical.

Subsection 6(2): This gives more trouble than anything I've seen in the whole act. Rescission for no disclosure: Two years to rescind any agreement is too long and would hurt all parties, given the uncertainty it would introduce. A better option would be to have a requirement that a franchisee may waive the disclosure document at the time of the signing, at their own risk, or make any franchise agreement void without being preceded by the disclosure document to prevent the situation from ever occurring in the first place. This raises the issue that there should be a phase-in period to allow franchisors or master franchisors to prepare the disclosure documents and to review their documentation so that it does not impede ongoing negotiations with potential franchisees at the time this bill is passed.

Every time in my history of 40 years in practice that a new bill comes out there are usually clauses, grandfathering and current, to allow the bill to work, because everybody's in a different position at the time the bill is passed. There are existing franchisees, there are present ones who are signing now and there are current ones, and you've got to catch them all in some kind of a broad wording that will be effective for them.

Subsection 6(6): As I say, if we change subsection 6(2), the two-year problem, this subsection wouldn't be necessary. In any event, 6(6) is totally impractical as it would be impossible to trace, quantify and unwind all the transactions. I can't tell you, ladies and gentlemen, how serious this is to the franchisee and franchisor. After two years in business, you can imagine the number of transactions. You can imagine the influence of economics and other influences from the outside that neither the franchisor nor the franchisee had any control over; totally out of their control, and would unwind after this type of period. I say it couldn't work.

For example, clause 6(6)(d) requires compensation for operating "losses." Boy, that's quite a word. What are "losses"? Huge losses could occur due to incompetent management where unreasonable wages were paid and other significant operating errors were made etc. Most store leases are for five to 10 years. If an irresponsible franchisee had signed a lease for 20 years at $150,000 per year, you know you've got to have $1.5 million. It may or not be brought to bear upon the franchisor, but that's a huge item, whereas the franchisor had nothing to do with signing the lease.

In my practice, I would have several people in the same area, the same city or same locale running the same operation, one doing very well and one doing very badly. What are the reasons? That's a good question. What are the reasons for that? I was a trustee for 15 years during my career. The trustee is required to report why the bankruptcy occurred. Over 95% of them are mismanagement. The same sweet operation, with somebody who doesn't pay attention to the business, will be run down in six months, and yet the business is a viable business. It's management that did it. As I say, they could take out $100,000 in wages; the other person took $25,000 for a while to build up the business. I could name you 100 factors that are going to enter into this, and yet the word says "losses." Does a franchisor have to cover losses if a fellow took out way too much money, paid his wife, paid his children and entered into improper leases, has no ability to run the store? It's going to be very difficult to determine the underlying cause of the problem. I don't know how we can define it. That gives me nothing but trouble.

So we get into 7(1)(c), "Damages for Misrepresentation." This, again, I don't understand. I'm sure we have lawyers on this committee or you get advice, but I don't understand why an officer of a corporation would sign a document knowing that he might be liable. I would never have advised my clients to do this and I know the lawyers I work closely with wouldn't either. It pierces the corporate veil and no corporate officer would risk exposing himself to such liability. If the bill is enacted it has to go after the corporation, it can't go after the signing officer. If you told a vice-president of marketing to sign this contract, if the president did or CEO, he either signs it or he may not have a job. If the CEO knows something that the vice-president signing doesn't know about disclosure and he wants the vice-president to take the knock, here's the remedy. There shouldn't be any remedy for an officer signing in good faith. There should be a remedy against the corporation only.

Again, when the rights cannot be waived, this seems to violate common law and the basic rights of the individual. If the franchisee feels they are being coerced by the franchisor or master franchisor into waiving a right they would prefer to keep, they should refuse to sign the agreement and look for another franchisor or seek legal advice. We are going to encourage our first franchisee to seek legal advice on the whole contract. If they're not happy with it, we might change it. If we're unable to change the wording or don't want to, we would suggest they don't sign up as a franchisee. We don't want them. What we want are entrepreneurs who are going to run a business and run it well.

What's the difference, if I could put it this way, between independent stores today running their operation and a franchise operation? There's no protection other than common law for any store or any business that's being run today by an individual. So what is the difference between a franchisee and this other party down the street who is running a party store against us? Our advantage and why people will come to us is our purchasing power. There are only a couple of things: our system and our purchasing power. Our purchasing power more than compensates for the royalty. Our franchisee should be able to be very competitive with the fellow down on the corner who is operating the same way, the same business. If he doesn't, if he wants to withdraw, there are escape clauses. He can get out of our contract.

THE VICE-CHAIR: You've just got a couple more minutes.

MR VICTOR MARTIN: I'm at the end.

The exemption: Again, like the other regs I was mentioning, they should be published and available for review. I haven't seen them; maybe they are available. But here again, I'm reading a bill and I haven't seen any of the regs. The regs are an integral part of the bill. I don't know what they're going to be.

In summary, if you feel there's need to protect franchisees, so be it. I think we have to protect some people. But the franchisee should be a true entrepreneur, should want to run a business, and if there are clauses in an agreement that prevent him from doing so, I think he has a right of damages under common law. I don't know why a franchisee would sign an agreement with clauses that could be used against him by the franchisor.

I also know there are always people who will do things against a franchisee. A large corporation possibly has some ulterior motives. I understand that's there. I'm not naive; I've been around a long time.

That's my presentation. I didn't mean it in a confrontational manner. I just meant to give you exactly how I feel about it as a franchisee. I would not want to be a member.

THE VICE-CHAIR: We've all got a copy of it. We appreciate that. Thank you very much for your time.

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=2000-03-09&ParlCommID=1&BillID=&Business=Bill+33%2C+Franchise+Disclosure+Act%2C+1999&DocumentID=19723#P546_175874

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Office of the Legislative Assembly of Ontario
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