Franchising in North America: Another step toward regulation

Consequences of violation: Among the more interesting: the right to rescind within 60 days if complete or timely disclosure is not provided, or for up to two years if no disclosure document is ever provided.

Franchise Times
August 1, 2000

Franchising in North America: Another step toward regulation
Philip F. Zeidman

Until 1971, no regulation of franchising existed in the United States…or indeed, anywhere in the world. In that year, California adopted the first of the state laws governing franchising. The next decade saw the passage of the bulk of the state laws with which most readers of Franchise Times are familiar, of both the “disclosure” and the “relationship” variety.

At the federal level, although there had been Congressional hearings on whether franchise legislation was warranted as far back as the mid-1960s, no laws were adopted by Congress in response to the sporadic introduction of proposals, nor have there been until this day.

Federal regulation can be effected without franchise-specific legislation, however, and the type of general authorizing legislation (in this case, the Federal Trade Commission Act) was the basis for the FTC’s action in adopting the disclosure requirement of the FTC “Franchise Rule” (originally proposed in the early 1970s and formally adopted in 1979).

In the last 20 years, the only other legislative actions regulating franchising were in Europe (France, Spain, Russia); Australia; or Asia (in a number of countries), with three exceptions: the Province of Alberta in Canada; Mexico, and Brazil. Until now.

In May, a long-running set of proposals and hearings came to an unexpectedly sudden conclusion, when the Canadian Province of Ontario adopted the first franchising legislation in many years in this part of the world. While various portions of the new law will come into effect at different times, it’s worth looking at the new law now, for two principal reasons:

This most populous and most economically active area of Canada is at once both the target for most U.S. franchisors considering expanding to Canada and the likeliest source of Canadian franchisors penetrating the U.S. marketplace.

It requires us once again to inquire as to whether this is an isolated circumstance or the precursor of more legislation elsewhere in the world.

Against that background, here’s a thumbnail sketch of the new law:

What kind of arrangements are covered?
The law follows the approach of the FTC Rule, rather than that of the Alberta legislation. It thus covers business opportunities as well as traditional franchises (a pattern which the FTC now proposes to change by regulating business opportunities separately).

When? Where?
The disclosure portion of the law applies prospectively only, not retroactively, i.e., it covers any agreement (or extension or renewal) after the effective date. The “relationship” aspects are not so limited, however, and will apply to agreements already in effect. The law applies if the business is to be operated “partly or wholly in Ontario.”

Is anyone exempt?
Yes. Many of the provisions are similar to those in the United States. Perhaps the most interesting possibility is a suggestion that a “sophisticated” or “mature” franchisor may be exempt from at least certain disclosure obligations; one of the criteria may be that a franchisor has had no judgment against it for a period of time. While the implementing regulations have not yet been issued, they will be well worth watching; I am aware of no precedent for this approach elsewhere.

What kinds of disclosures will be required?
U.S. franchisors will find the provisions generally familiar. Some unusual features, however, include a greater focus on alternative dispute resolution processes; notice to the prospective franchisee that the cost of goods and services may be lower elsewhere in the marketplace; and advising of the availability, and potential usefulness, of private credit reports.

Consequences of violation
Among the more interesting: the right to rescind within 60 days if complete or timely disclosure is not provided, or for up to two years if no disclosure document is ever provided.

“Relationship” provisions
A right of free association; a private right of action; and a duty of fair dealing…imposed on both franchisees and franchisors.

There is plenty here to chew on, for franchisees as well as franchisors, and for their lawyers. The more far-reaching question, of course, is whether we are likely to see more franchise legislation; where; whether it will follow this pattern; and whether and how these questions fit into the continuing exploration by supranational organizations of “model” or “uniform” franchise legislation. Future columns in this space will address those questions.

Philip F. Zeidman is a senior partner in the Washington, D.C. office of Piper Marbury Rudnick & Wolfe, where he heads the Franchise and Distribution Law Group practice. He is general counsel to the International Franchise Association.

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