When leaders view things differently

This subtle but unmistakable difference is especially noteworthy in light of the overwhelming similarity in the views of U.S. and Canadian franchise leaders on most issues of policy and practice.

Franchise Times
August 1, 2001

When leaders view things differently
Our neighbor to the north
Philip F. Zeidman

Dateline: Banff, Canada – Readers of this column are aware that developments in Canada have been covered periodically (“A breeze from the North,” March 1999; “Franchising in North America: Another step toward regulation,” August 2000; and “Just across the border,” January 2001). It requires more sustained exposure to the Canadian franchising scene, though, to require a bit more perspective. A recent visit provided the opportunity.

The occasion was a joint meeting of the Board of Directors of the International Franchise Association and the Canadian Franchise Association, the first in the history of the two associations. It may be useful to place the meeting in the context of what’s happening in Canadian franchising. Herewith, a few facts (or, it is always prudent to note, assertions): Franchising generates $90 billion (Canadian) in sales each year, accounting for 12 per cent of its gross national product; there are 1,300 franchise brands in Canada (85,000 franchised outlets), with one franchise outlet for every 450 citizens – per capita, Canada leads all other nations by this measure; one out of every 10 to 14 workers in Canada’s work force is directly employed in the franchising sector, which has outperformed the Canadian economy in growth each year in the past decade.

Against this background it is interesting to note a somewhat different Canadian approach to the issue of governmental regulation of franchising. In the United States (and, where invited or allowed to comment, in other countries where franchise legislation has been proposed), the IFA’s position has been steadfast: It encourages full and fair disclosure by franchisors to prospective franchisees; it favors self-regulatory approaches, including mediation and its recent venture in to the use of an ombudsman; and it believes that relationship legislation is unwarranted because of the widespread availability of adequate remedies under both common and civil law. When confronted with proposals for disclosure and registration legislation, it has urged legislators to consider whether there has been any demonstration of need; and, at a minimum, it has been staunchly opposed to any form of registration obligation.

Historically, the Canadian attitude has been quite similar; and, until recently, the legislative requirements have been rather benign. Of all the Canadian provinces, only Alberta has enacted franchise legislation, and that statute was quite tolerable, being somewhat less burdensome than the requirements of the Federal Trade Commission or the typical U.S. state. Recently, Ontario enacted at once more demanding and more comprehensive legislation. Among the differences from the U.S. pattern:

  • A private right of action for violations or for misrepresentations
  • Liability for “associates” of the franchisor, including agents and brokers
  • More burdensome updating requirements
  • A right of rescission by franchisees
  • Greater obligations to disclose judgments in civil action
  • More explicit disclosure regarding purchasing practices.

Far more significant is the presence of provisions affecting the conduct of the parties, wholly absent from the FTC Rule and from most U.S. states (even some in which disclosure laws are in effect). Chief among those features is a statutory duty of fair dealing for both the franchisor and the franchisee.

The most intriguing distinctions between the approaches in the two countries may not be the statutes themselves but the reactions to them by the nations’ organized franchise associations. The Canadian Franchise Association did not actively oppose the legislation, but rather ultimately supported it; indeed, we were told, the Association’s “policy is to promote disclosure legislation.” It was heavily involved in the process which led to the formulation and adoption of the Ontario law, and explains its position in part on the basis of history (its Code of Ethics mandates a disclosure document by its members), in part by its view that the Alberta statute is adequately similar. It is considerably more exercised about the regulations, which it views as badly and hastily drafted (and which, one suspects, are especially offensive because the Association was not consulted to any significant degree).

This subtle but unmistakable difference is especially noteworthy in light of the overwhelming similarity in the views of U.S. and Canadian franchise leaders on most issues of policy and practice. What explains the difference? In the final analysis it may not be one of the usual (and usually excessively facile) explanations (the U.S. culture of opposition to governmental intrusion, etc.). Rather, the explanation may lie in the quite different “demographics” of the franchisee populations in the two countries. In the United States, in foodservice alone (i.e., not including such sectors as hotels, auto rentals, etc., where large franchisees are common), there are 200 franchisees with annual revenues in excess of $10 million – more than the number of franchisors in all industries which have such revenues. Franchisees of that size, with their presumably greater capacity to initiate and maintain litigation, make franchisors nervous – and that nervousness is frequently reflected in an instinctive suspicion of all forms of franchise legislation.

In Canada, by contrast, most franchisees are individuals with a single unit or at the most a very small number of units. Taken together with the generally less litigation-oriented nature of Canadian society, the result has been a much lower level of litigation activity involving franchisors. And, it seems, the result has also been much less concern about legislation. The reaction seems to be, “Our franchisees don’t sue their franchisors. So what’s the big deal about a private right of action?”

One can argue that the reactions in both countries are perverse (i.e., that in a society where there is great potential for litigation some form of legislation could, if properly drafted, provide greater security through predictability; conversely, that where litigation is less likely there should be both less pressure for, and less reason to, acquiesce to legislation). Neither argument has attracted many adherents. And thus we are left to ponder: Can the presence or absence of franchise litigation in a country be a product, not of the relative “need” for it, but rather of the perceived characteristics of the interested parties?

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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