David Sterns, PEI Public Hearing Testimony

Franchising is a pyramid relationship…if the franchisor is losing money on that because they’re not getting their kickbacks from the suppliers and they’re not charging their exorbitant market, then I say, deal with it on the front end. Put in your royalty. Increase your royalty to 25 per cent and then see if you can sell a franchise. Increase your royalties and get it lawfully and transparently and tell people every dollar you get, we get 25 cents and if they want to sign on, then no court in the world should help them because that is the deal that they signed.

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Legislative Assembly of Prince Edward Island
October 25, 2001

Public Hearings on draft franchise legislation
Charlottetown, PEI, Canada
David Sterns, attorney

Standing Committee on Community Affairs & Economic Development
Session 2/61

ONTARIO FRANCHISEE COALITION
DAVID STERNS, attorney

DAVID STERNS: Madam Chair, Honourable Members, Ladies and Gentlemen, thank you. My name is David Sterns and I’m here on behalf of the Ontario Franchisee Coalition. I should say at the start that I am from Toronto. I am a lawyer but I’m a Maritimer by marriage.

BETH MacKENZIE (PC) CHAIR: By marriage, was that?

DAVID STERNS: Pardon me?

BETH MacKENZIE (PC) CHAIR: You said a Maritimer by?

DAVID STERNS: Marriage.

BETH MacKENZIE (PC) CHAIR: Oh, trying all strings.

DAVID STERNS: Pardon me?

BETH MacKENZIE (PC) CHAIR: You’re trying all strings.

DAVID STERNS: It occurred to me that one of the differences between being in Prince Edward Island and being in Toronto, in case you didn’t notice the other differences, is that when somebody gives you the wrong directions they actually run back and tell you that’s what happened to me this morning and it occurred to me that that was a very genuine and gentlemanly thing to have done. It probably wouldn’t even have crossed my mind in Toronto.

The organization that I’m here on behalf of is the Ontario Franchisee Coalition that represents a network of franchisee associations in many industries, including fast food, automotive repair, private education, grocery, photo finishing. It occurred to me that the best presentation I could make is to say that I take everything that everybody has said up until now, the good and the bad, and say that I agree with it. I agree with the good and I agree with the bad. What you’ve heard already is a representation not unlike what we heard in the Ontario Franchise Committee that studied the Ontario Franchise Legislation last year of which we were a party and we made a submission.

But the stories are the same, the people are different and you will hear this afternoon from very able representatives of the franchisor lobby trying to tell you some common themes from the franchisors and you’ll know them when you hear them and their very compelling arguments but they will tell you that there are disgruntled franchisees out there, there are bad apple franchisees. Indeed there are and that franchising is ultimately about a contract and what can be unfair about a contract because a contract is an agreement and it’s the evidence of an agreement and therefore somebody doesn’t like what they agreed to. And that, I think we’ve heard the rebuttal to that in a very eloquent way this morning as to why that doesn’t answer the problem and why it is that franchising continues to come before legislatures in Canada and in the United States and has done so over the past years with great regularity.

I’m going to give you a bit of a background. You may know, well you wouldn’t know but I’m involved in franchise litigation and franchise disputes about eighty percent of my time. I do litigation, arbitration and try to settle things of course whenever possible. We get in front courts whenever we’re required to do so. We act for franchisors and we act for franchisees and we don’t see any conflict in that because franchising ultimately when it works well is a partnership and both sides make money. It’s not about opportunism, it’s not about exploitation on either side and of course the legislation that comes before the House here has to take that into consideration.

But the balanced side of it has to be fair but there should be no mistaking that the legislation is needed to protect franchisees. The balance comes by saying to the franchisee you have to be fair too. You have to deal in good faith and you have to show fairness to your franchisor. So that is the answer to the unfairness and to the, you know, sort of regulation argument; is to say well the franchisee has to act fairly too. They can’t play games. They can’t withhold royalties. They can’t go outside the system if the system ultimately is a fair and profitable one.

We heard from Mr. MacPhee about what franchising used to be like and we heard that franchise agreements used to be very simple affairs; sometimes as little as three pages long. And that’s because as he said there was a lot of good faith and understanding between the parties. What we have today is a very different story. We have monstrous agreements; agreements which have grown with every court decision granting a right to a franchisee, the next generation, the next mutation of franchise agreement contract out of that particular problem for the franchisor. That’s how these agreements come to be 45 pages long. We have one case that involves a shoe repair franchise with a 45-page agreement with a sub-lease that ties the franchisee into the property. And the way it works is this, and don’t be afraid to ask a question. Every time I go to court on a franchise matter I always start with the premise of who the franchisor is and who the franchisee is because we see this out there all the time. We go, eat lunch in franchises every day but we don’t have a good idea of the mechanisms at play. So please ask questions if you require clarification.

The way the franchise is structured is that the overriding agreement, overarching agreement is the franchise agreement and on top of that is the franchisor and on the bottom of that is the franchisee. There may be somebody in the middle, sort of like a sub-landlord who would have a lease. But generally speaking it’s franchisor and franchisee. And I won’t condescend by saying big guy, little guy because that’s not always the case. There are actually some very powerful and successful franchisees out there but contractually it is the franchisor that holds the cards. It is the franchisor, which drafts the agreement, and it is the franchisee that signs the agreement. And no, there’s not much negotiation at all. If that’s where it gets it does divert from the standard contract.

The argument that the franchise is an agreement; it is a bit watered down these days because you take it or you leave it and the argument presented by the franchisors, we have to have uniformity, there’s some truth to that but then how can you say that this is the product of the consensus between the parties? Can’t have it both ways. If you say it’s a standard form agreement to franchisees, and that is what they’re saying, they can’t turn around and say well this is the product of consensus. It’s not. It’s a product of a very effective marketing campaign, a very good thing. Do you want to be your own boss? Do you want to work for the man or do you want to work for yourself? It’s all very persuasive. We’ve all thought about it at various times. And the end result is you sign the franchise agreement or you go out there and you’re eaten by the wolves, so they say. There’s a big debate about whether or not being a franchisee actually improves your chances of success but I won’t get into that. Franchising does have its rewards and has its problems as well.

The way the franchisor should make its money is through royalties; it’s through the percentage of the franchisee’s sales that is paid to the franchisor for the use of the system and the use of the name and the support and so forth. The way it works in many cases is that the franchisor truly makes its money by selling product, sometimes-generic product, to franchisees at a wild mark up no rational consumer would ever pay if they didn’t have to by contract. They’re selling flour, sugar, baking products which have no distinctive value to the franchisee at a wild mark up and using the threat of termination to enforce that monopoly and that’s how they get rich and get rich they do. It’s not on the royalties. The royalty is transparent; the royalty is 5%, 7%, 10%. That is clearly put to the franchisee and the franchisee knows it. It’s the invisible opportunism. That’s what we’re talking about. When I get to the legislation that’s the kind of things that this committee have to be on the lookout for.

Disclosure is the franchisor’s answer in the United States, in Ontario and in Alberta. There are only two provinces that have legislation, Alberta and Ontario and the franchisors have been very effective in tailoring the legislation always to deal with disclosure. And that’s because they’re afraid of this fairer dealing aspect that Mr. MacPhee talked about and they shouldn’t be because some of them are actually good franchisors who practice it; but there’s a fear. Franchising is a system that has grown up without a constitution. It is power and power corrupts and absolute power corrupts absolutely. And that’s what’s been going on. So there’s a lot of fear out there but it’s misplaced.

If you think about disclosure what you do is you’re telling people, like the speaker we heard before and previous speakers, about a lot of fine print and using more fine print or large print to explain the fine print. But it means nothing to most people. They sign it, even certain circumstances that we’ve been told about, this is all true, I hear it every day. I’m sympathetic with it but not 100% sympathetic with it. There is an onus on the franchisee to look at it. There is an onus on a lawyer who’s consulted to be careful and not say go ahead and sign it, it’s a bad deal which we hear of far too often. There isn’t a great deal of sophistication in Ontario when it comes to assessing franchise agreements. I wouldn’t think you’d see it in a smaller jurisdiction like this. There are a few places that deal with this stuff all the time. But even the more sophisticated law firms, can do very little for a franchisee in terms of negotiation. But disclosure is adding more paperwork and a lot of the time none of it is read; through the fault of the franchisee perhaps but in certain circumstances we could all understand.

If you think about disclosure remember the cigarette companies back in the ‘50s and ‘60s. Do you think they were afraid of the warnings on the cigarette packages that said the cigarettes may cause cancer. They weren’t, they were the ones who recommended it. It was their idea. It was the idea of the cigarette companies lobby to put the warning on cigarette packages so that the cigarette smoker would know and would have notice of what was unhealthy about the product that he or she was consuming an that has been a stroke of genius and has helped them in all of their law suits. Because the cigarette companies lawyers stand up an say can’t you read these four words on the package and of course that’s in front of juries for decades. So that’s how I liken franchise disclosure legislation.

I spoke in front of the Ontario Legislature and I said disclosure, great, nobody can argue against it but couple that with fairness provision and I even said call it the Franchise Fairness Act. Who could be against fairness? And guess what? That was shot down. They called it the Franchise Disclosure Act and in brackets (The Arthur Wishart Act) which is a kind of a nice tip of the hat to Mr. Wishart. Who is Mr. Wishart? Mr. Wishart was a member of the Ontario Legislature in the 1960s under John Robarts who appointed a committee to study franchising in the 1960s because of the abuses and the problems already existing in franchising at the time. The report, which was made by Samuel Grange who later became Mr. Justice Grange in the Ontario Court of Appeals, was shelved. It was a beautiful report and it was shelved for 30 years until, guess what? Franchisees literally started marching the streets in front of Queens Park shutting down traffic saying something’s got to give here. We’re investing our life savings, we’re having rapacious franchisors of which there is a minority of them but who are wreaking havoc in franchising and the franchisor lobby caught between the bad franchisors, who were nevertheless voting members, and the good franchisors who were afraid of fairness and in effect paralysed not wanting the legislation because they didn’t want to open up a Pandora’s box but finally the word got out and the government started looking at the legislation again and now we have the Franchise Disclosure Act in Ontario passed last year and brought in effect this year.

Franchising is a pyramid relationship. As we’ve heard before the franchisor takes his money from royalties which is the gross sales of the store; it doesn’t matter whether the store is profitable or not, and the franchisee takes his money from the bottom. That’s a very big difference when you’re on the ground. There are a number of conflicting interests which crop up in franchising and which can only really, I think, be effectively addressed through legislation under the general rubric of fair dealing. If you try to legislate every problem in franchising you’re going to have legislation as long as some of these franchise agreements and it will never work. You’ve got to deal in the general but give the courts enough guidance to know that the legislature has spoken and it means business.

What we would recommend on behalf of the Ontario Franchisee Coalition is to take the Ontario Act…see what happened in Alberta was pretty much strictly disclosure, the fair dealing aspect was watered down, far too watered down because of a very strong franchisor lobby. Ontario beefed up to some degree the fairness provision but I’ll tell you how the courts have already dealt with that in the two cases which have come to analyse it. What Prince Edward Island must do is it must work from the Ontario legislation and beef it up and make it, give it some teeth, give it some power, tell the judges what we’ve heard today. The only way the Legislature can speak and it has to speak in generalities, but it can provide enough guidance so that when the people we’ve heard speak, the courts know that the Legislature has spoken.

Courts made a hash of this, by the way, since the beginning. Franchising, it evolved because it was so based on trust the courts were treating it as though it was a bargain between equals. There was a case of, one of the very first franchise cases ever to come in front of the courts in Ontario, went up to the Supreme Court and it’s the first and last franchise case ever to have gone there and it was a time far to young in franchising development and it was a case called Jirna v. Mr. Donut and Mr. Donut I don’t think exists anymore. The Supreme Court said that this is a commercial contract between equals in effect and that there was no special overriding duty of the franchisor to act fairly. In that case the franchisee was accusing the franchisor of pocketing rebates and kickbacks and so on and so forth. And that has been the paradigm of franchising ever since 1974 when that decision came down. And we could be a case talking about arbitration in Connecticut and the franchisor sure enough will have Jirna and Mr. Donut there to remind the courts to leave franchising alone because that’s what the Supreme Court said.

The Supreme Court’s never revisited that issue. It should and some day it will. To climb up to the Supreme Court you’re talking about the $200 to $300 thousand range in fees, not the kind of thing that is within the grasp of your average franchisee. So Ontario has passed this legislation with watered down fair dealing provisions and how the courts dealt with it. Well, the first case was rather unfortunate. A very good judge, but he made some comments that were untrue. He said the legislature had spoken but what the legislature said is nothing other than what the courts have always been saying. Well, why would you pass a law if it weren’t to correct what the courts have been doing? So that kind of got off to the wrong start there and I think what happened was the legislation was just too broad. It simply said you’ve got to be fair and the courts like to think that they’re always fair so the courts are saying well the legislature is just telling us we’re doing a good job. Well, in fact that wasn’t the case at all. At the hearings we heard the courts weren’t doing a good job and that’s why the law was passed. PEI has to tell the courts a little more bluntly what it means to be fair and when does that duty of fairness override the generally unfair provisions of the franchise agreement.

You can start from the premise that the franchise agreement is not a balanced representation of the agreement of the parties and what the law should do through a strongly worded good faith and fair dealing process is to restore the true deal between the parties and that is that both parties will treat each other with respect and respect the investment of the franchisee. So the law and the duty of good faith and fair dealing have to kick in when there are the traditional areas of dispute and conflict in confrontation that arise within the relationship. Where do the conflicts arise? They arise in dealing with renewals of agreements. Here’s an example. You’ve got Mr. MacPhee, well, he’s a bad example because he’s got a very much perpetual franchise agreement but you’ve got somebody who’s got an agreement which comes to an end after ten years and they’ve put in a half million dollars into the store and it’s really only he last few years that he starts to recoup his investment. So the franchisor says, well we’ll renew your agreement but we’re going to make you do a $500 thousand renovation and by the way you’re going to use our appointed contractors who are very skilled at putting up, you know, cardboard walls and so forth at a very high mark up of which, of course, we get a portion but the franchisee will never know. And the franchisee is presented with a situation where he wants to renew because he wants to start to recoup his investment but (INDISTINCT) the franchisor imposing, was in effect a hidden tax, a hidden cost. Is it fair? I don’t think it is fair at all.

You have the situation of the franchisor charging unreasonable profits and markups. No one’s going to disclose to a franchisee that he’s going to pay 50% above market prices to generic foods because no one would buy. The deal is other than what’s in the franchise agreement. The law has to restore the original deal and that is that the franchisor will sell at competitive prices when dealing in generic products. It only makes sense when the franchise agreement says that the franchisee has to buy all of his or her products from the franchisor’s warehouse in Mississauga because the franchisor gets all kinds of kickbacks and rebates and the franchisee want to buy local potatoes, he wants to buy local produce. What’s wrong with that? There’s absolutely no control, there’s no quality concern with that. Everybody on Prince Edward Island buys local, why can’t a franchise buy local? There’s no health concerns whatsoever. We’re not talking about the Colonel’s secret recipe here. So that’s where the fair dealing element has to be explicit, not airy fairy and mealy mouth.

The issue of arbitration clauses is a very real concern. I would think it would be a tremendous concern in the province of Prince Edward Island and I’ll give you one story about how that works because I’ve heard all theses stories and I’ve lived them myself. We had a franchisee, a Subway franchisee whose business probably at the end was worth $50 thousand. Subway wanted to terminate her. They required arbitration and I think it was Bridgeport, Connecticut. We said that, we went to court and unlike a previous witness we went to court and said…before the arbitration took place…and said this has got to be unconscionable. We have tabled a proposed bill of costs and what it would cost this franchisee to actually go down and obtain counsel and fight this arbitration and as the previous person said it was very close to the actual value of the store. And we said how can this ever have been contemplated by the parties and isn’t this unconscionable because the franchisee couldn’t afford to oppose it. The franchisee lost the business.

It may have happened anyway. We might have had arbitration in Ontario with rules of play and rules of procedure and so forth and the franchisee might still have lost. But how can you be satisfied that a just result was achieved when the cost of fighting it was so prohibitive the franchisee couldn’t afford to show up. That obviously has to be put into the legislation. It was put into the Ontario legislation so that the case with Subway wouldn’t necessarily arise now. I would like though to point out that the Ontario legislation as it’s been worded would not have actually helped our Subway franchisee because she had signed before the law had come in. I would put in a clause saying the arbitration should be in Prince Edward Island. Nobody should argue with that and that it should apply to all existing franchise agreements whenever signed and that would protect people from the kind of situations that we’ve been hearing.

I want to leave some time for questions because it’s an interesting and it’s a ripe area for legislation and I’d like to be able to provide any guidance that I can to this committee.

BETH MacKENZIE (PC) CHAIR: Thank you very much for your presentation. Gentlemen? Wes?

WES MacALEER (PC): What you’re saying here is the golden rule applies: He who has the gold makes the rules. Is that what you’re saying?

DAVID STERNS: There’s an element of that. Certainly in terms of the signing of the agreement and the writing of the agreement, I don’t think anyone would ever dispute that there’s really no negotiation that goes on.

WES MacALEER (PC): Okay. So in the interest of creating a balance that you’re advocating here between the parties, how far do you go in drafting standards that have to be me by each of the parties which in fact are business decisions that may impact, be impacted upon by supply and demand, by all the economic factors of the market place? Are you advocating that legislation would get involved in describing pricing or protecting territory or developing a description of what can be bought and where it can be bought? Are you indicating that that would be government’s role?

DAVID STERNS: No, absolutely not. Absolutely not. But we have a draft bill as well that builds on the Ontario Act but improves on the Ontario Act and does what the Ontario Act wanted to do but didn’t. What I would say is that the act should comprise disclosure, enhance fair dealing and then sundry items, for example; arbitration, or litigation on Prince Edward Island, various definitions and so and so forth. It’s going to the fair dealing aspect of it. I think that’s the answer to your question. If you try to legislate every single occurrence and every contingency you’d have a horrendously complicated and contested bill. If you say that there’s a duty of fair dealing as the Ontario legislature said and you say that the duty of fair dealing in good faith applies in the performance of the franchise agreement by both sides; although obviously it’s a bit theoretical on the side of the franchisee, the transfer, renewal or termination of a franchise agreement I think you’ve covered off the main areas of contest and you’ve got to leave it to the courts to some degree to address the individual circumstances. What may be totally unfair in one case is fair in the other but it’s the requirement…see where Ontario went wrong was in limiting fairness. And it said that there’s only a duty to be fair in the performance of the franchise agreement and the enforcement of the franchise agreement. And that led to the ironic situation in a second case that I didn’t tell you about where the very duty of fairness, which is at its most critical at he end of the franchise agreement, coming up towards the last year or so, didn’t apply because the court said it doesn’t apply to the termination or the renewal of the franchise agreement. It only applies to the enforcement and the performance of the agreement. So that would take your situation where you’ve got to put in this ridiculous renovation which has no justification and you foist that on the franchisee to get them out really. That’s what you want to do. And the courts in Ontario would have to look at it and say, well, you know, the franchise agreement says they can impose renovations on the franchisee and the franchisee lawyer says yes, but you’ve got to be fair and reasonable and the courts say, where does it say that? Because the courts says you have to be fair and reasonable in the performance and enforcement but this is really an issue dealing with renewal. They’re putting a condition on the renewal. So I would extend it. Who can argue against fairness? I mean this is the irony of all of these hearings. Ask the representatives of the franchisor lobby what is wrong with extending the duty of fairness to include transfers, renewals and terminations and hear what they have to say because I’ve never, I just don’t know how you can articulate a good reason against that. You’re not regulating them, you’re not tying them up with a bunch of red tape, you’re not imposing it. You’re putting a government body onto it and there is going unfortunately have to be a little bit of private enforcement in this because it’s a private contract.

WES MacALEER (PC): The issue of where the agreement would be adjudicated in the case of a dispute seems to be important. A number of speakers have brought that up. How does the Ontario legislation deal with that? I’m thinking about franchises that maybe required to be signed in the United States, for example. Does the legislation clearly define that issue?

DAVID STERNS: It overrides the contract in respect of the forum for adjudication. It says it’s got to be in Ontario, but the thinking is that it really only applies to new franchise agreements and that’s where our client would have gotten caught. Even if the legislation had been passed in time, it wouldn’t have affected her because her agreement had been signed prior to it coming into effect of the legislation. That has to be in any franchise legislation because what you’re doing…and the franchisors know this, I mean, Subway is notorious for this.

The Subway franchisee on Grafton and Queen Street in Charlottetown has to go, unless they’ve changed the agreement which I don’t think they have, because they’re very proud of it, has to go to Connecticut and arbitrate in Connecticut. And I believe that the franchisee in Buenos Aires has to do that too. Most of the states or a lot of the states in the United States and Ontario have said, that’s ridiculous. If you have a right without a remedy, what good is it, and a dispute resolution in the jurisdiction. It makes only good sense. It’s not convenient for franchisors but since when was litigation ever convenient for anybody?

WES MacALEER (PC): If, for example, you made this retroactive that all franchises currently existing had to be adjudicated in the jurisdiction in which the franchisee exists. Are you advocating that that would, in fact, not have an impact on the agreement?

DAVID STERNS: Well, it completely overrides the agreement and that’s a prerogative of the Legislature. And that’s also got to be explicit in the law that the provisions dealing with good faith and fair dealing and arbitration and disclosure cannot be contracted out. If you could get out of the law by contracting out of it, it would be worthless. There are so many exemptions and waivers in a franchise agreement. You could take all the Statutes of Prince Edward Island and agree to contract out of them, if that was a franchise agreement. The franchisee would sign it. The franchisors think sometimes that maybe they’ve pushed the envelope too far in terms of giving themselves rights and taking rights away. The end of the envelope has not yet been found because largely you’re dealing with people who are very worked up about the idea of being their own boss and they are convinced of the success of this system and are prepared to sign just about anything. It’s not a good situation.

Everybody should be told to be careful but this is what’s been going on for so long and we have to figure there’s something in human nature that make people to sign things that are unproven but it’s in all of us because it keeps going on. And I’ll tell you something, it’s not, there’s no segment of the population that’s more vulnerable to it than others. It’s blue collar, white collar, government people, people who have been laid off, people who have inherited money, people of business degrees, law degrees, I’ve seen it all. There is nobody who’s immune from it.

WES MacALEER (PC): I’ve got one more, but let somebody else…

HON. RONALD MacKINLEY (L): Well, I think you’re right there. When Debbie was up there, in my 16 years in government, I’ve seen all people from all different walks of life and it’s just not because you can’t say, well, I don’t know because I mean people should know, still go ahead and sign it.

The question I have for you, let’s use Mr. MacPhee. In Mr. MacPhee’s situation, they’ve been in business down there for years. Now if I was in the food business, I think I’d want them to run my store. I think because if they’ve been in business all these years with all these large stores coming in and they’re still in business. Something like Bobby Clow’s, if you go to Bobby Clow’s Clover Farm, it wouldn’t matter to me if it was IGA or if it was Sobeys or (INDISTINCT), you get good meat. You know the people there and the same with Mr. MacPhee. I’m not in the Souris area, but I think it would be the same thing.

Co-op stores were losing here in PEI, the large major ones. They came out with that quality beef and being a farmer, there’s nothing worse than having somebody come for supper and you go in and buy some beef and it’s tough. When you know if you go to say, Sobey’s or if you go to Bobby Clow’s or Atlantic Superstore, you get good beef. Now you know if you go to Co-op Atlantic, they got it there too, so you’re inclined to move in there too. But he mentioned Tide, for instance, he could buy it cheaper. But then like there’s two sides to this and I’m taking the other side now.

So all right, you can buy your local produce there. I see it happen here. I saw the major stores here stop buying US potatoes. They didn’t have to sell them in the store the time the blockade was against us. They didn’t have to do that because there is a market for those new potatoes, that early in the market. But they didn’t have to, so there’s goodwill there on large stores by doing it. And also, I can go around to almost any store and I can see stuff that’s manufactured, let’s say, Johnson’s Homestyle. It probably is in different stores, maybe they shouldn’t be in some of them but they’re there and nobody seems to take them off the market. They’re a local company and they do well.

But when you get into Tide now. If you sign an agreement with this company an these major companies are letting all this past, like your local produce, rutabagas whatever it carries, but then when you get into something like Tide or something, when you sign that agreement you should know that you’re going to buy from that Loblaws or Sobeys or whatever and you know what their prices are. So if you start picking out, say I’ll take from them what I want to buy at the best price and then I’ll run in and I’ll pick up, I know some small stores in the country that told me themselves, when some of these specials come on in the major stores, they’ll be the first people in there to get it so they can sell it out at their own store. Because they can buy it cheaper through a store that’s putting on a special or a lost leader then they can buy from the same group for their own little store. And I guess that’s against the…

DAVID STERNS: The franchise agreement, but why should it be? We’re talking about why should it be? We’re talking about Tide. Okay? We’re talking about generic products. By enforcing the monopoly, Loblaws gets to charge whatever it wants to the franchisee. If the franchisee, and they control the levers, they have unbelievable access to your information. You are supposed to be an independent franchise, an independent operator. Every franchise agreement says you are an independent operator. You have the right to use the name, the system and you’re subject to a million controls.

But they want to keep you as an independent operator because they don’t want to be sued if somebody slips and falls in your store. They don’t want to have your stores unionizing and have the whole thing go crazy, but we’re talking about buying Tide. There’s nothing special about it and if the local independent operator wants to buy his Tide from somebody down the street, why should that put him or her at risk of losing an investment?

In the case of the MacPhee’s, something that’s been in the family for generations, it’s perverse and that’s where you go back to this control mechanism I was talking about. There’s a franchisor on the top and a franchisee on the bottom. The franchisor can terminate the franchise agreement and in a perfect world, the franchisee just goes and finds another franchisor and puts up another brand. It doesn’t work that way.

You have in the franchise agreement, generally, a non-competition clause. So that if they terminate you, you can’t operate your business for two years. So your right of manoeuvring is very limited. If you combine that with the fact that the franchisor may hold your lease, the franchisor…but holds your lease and the lease says that if you’re in breach of the franchise agreement, you’re in breach with the lease. So guess what? They’ve confiscated your business. You’re going to buy your Tide from somebody that’s offering it more cheaply, no.

HON. RONALD MacKINLEY (L): No, but what I’m looking at is you want the name. You want this IGA name like the gentleman from down in Montague could open the store up under their own name. I think they’d do quite well myself, because they’ve been in business. They’ve been through all these years and through all these changes and they’ve stayed there. You know, so actually I give them credit. But in order for them today I want to use your name. I want your franchise that I can pick and choose what I want to sell because that’s why they joined these large conglomerates. And then they start breaking so they go to Tide. And the first thing they go to some other dishwashing and the first thing you know, they deal direct with the towels, say that come out of somebody has too many towels on their hand, so they buy there.

It’s like my own business. Like for instance, I’m in the potato business and we ship say, 30 per cent to Cavendish Farms. We have exports in Uruguay, Venezuela, Boston, so right today, my contract to Cavendish is gone. They’re paying the most, I shouldn’t say that, they’re paying the best price on the market right now. I can sell the rest of my crop, lay everybody off, and make a lot more money probably, but I’ve got to keep these markets in Uruguay, Venezuela, because there’s going to be another year come that I make money off so you know, I need the fairness. Like as far as just going in, in so many days and break a lease or whatever. I think there should be a fairness clause there.

But then again, you got to look at a franchise, like say McDonald’s, I don’t know where they get their hamburger, maybe they could get hamburger cheaper here for a month or two or something…

DAVID STERNS: Mr. MacKinley, if I could answer your question and then wrap it up, your arguments are very good if we were dealing with specialized products or unique products or products which carried the trademark or something that affected the uniformity of the system. I would fully agree with you.

If I walk into MacPhee’s store and he’s selling Tide that he bought from somebody locally, not somebody, not from Sobeys or Loblaws in Mississauga, it doesn’t affect his store one bit. We’re not advocating changes that go to the system standards. We’re talking about breaking a monopoly that has profited very few for a very long time. And there’s, their arguments against it are, they don’t quite ring clear when it comes to things like that. When it comes to Big Macs and a special sauce, you’ve got to buy from the house, I agree with you. The Colonel’s secret recipe, you’ve got to buy it from the house.

But there would be nothing wrong with a law which said if the french fries that McDonald’s wants you to buy or the flour that Tim Hortons wants you to buy is identical to the flour that you can get for cheaper locally, then there should be no reason in the world, certainly in terms of franchising which is the area that I deal in, where there would be a good argument against that. Who cares what kind of flour you use if it’s good quality flour? And that’s what we’re saying. And if the franchisor is losing money on that because they’re not getting their kickbacks from the suppliers and they’re not charging their exorbitant market, then I say, deal with it on the front end. Put in your royalty. Increase your royalty to 25 per cent and then see if you can sell a franchise. Increase your royalties and get it lawfully and transparently and tell people every dollar you get, we get 25 cents and if they want to sign on, then no court in the world should help them because that is the deal that they signed.

It’s the back door renovations with mark ups and dealing with related companies. It’s the purchasing of products that have no distinction from the house just because you get the mark up. That’s where franchisors start to write down. They want to charge it at the front end, and then so be it. In conclusion, I would say…

HON. RONALD MacKINLEY (L): I have one more question for you. I just want to go just one little step farther here. All right, let’s Mr. MacPhee has that store. Is there any law in his agreement saying, let’s say he can get Tide, towels or something that’s cheaper rather than going through the conglomerate, why can’t he just put a piece on a building and call it MacPhee’s, instead of IGA and sell it out of there. Can he do that?

DAVID STERNS: No, no.

HON. RONALD MacKINLEY (L): He can’t? When you have a franchise?

DAVID STERNS: No, because that goes to the heart of the franchise. You can’t have the good and not have to…

HON. RONALD MacKINLEY (L): No, but let’s say let’s say you have a franchise, you signed a franchise with IGA and all of a sudden, you open up a place right next door, you can’t do that?

DAVID STERNS: You can’t do it, nor should you because during the term of the franchise agreement…

HON. RONALD MacKINLEY (L): Does the franchise agreement say you can’t do that?

DAVID STERNS: You can’t compete against a franchisor because otherwise you’d be getting all of their know how and all of their system.

HON. RONALD MacKINLEY (L): But you’re not competing, you’re getting another independent business set up on a company in Prince Edward Island to sell Tide and that. How can the franchisor cancel your lease because there’s an independent business right next door to you?

DAVID STERNS: No, because you’re the same person who knows everything about how to run a Sobeys supermarket and you’re using that information to compete against them. That really guts the franchise agreement.

HON. RONALD MacKINLEY (L): So they could cancel you franchise for that?

DAVID STERNS: Yeah, and they would be a bad faith…

HON. RONALD MacKINLEY (L): Is that in the agreement that they could do that?

DAVID STERNS: Every franchise agreement…

HON. RONALD MacKINLEY (L): Every franchise agreement has that? So let’s say Mr. MacPhee’s father retired and was out of business. He could open that up because he couldn’t come after him for that. I’m just saying, like I could go down there and open a Tide store right next door.

DAVID STERNS: You could.

HON. RONALD MacKINLEY (L): Yes.

DAVID STERNS: But you’re not a franchisee.

HON. RONALD MacKINLEY (L): No, but I’m just saying, you could if you wanted the other two markets.

DAVID STERNS: But the franchisee doesn’t have that option nor should they because they’re really, that would be unfair to the franchisor. You’re taking all the benefit, all the knowledge that you get from running a Sobeys and putting it to use against them and going outside the system. But it shouldn’t have to be that way.

HON. RONALD MacKINLEY (L): Well than if that’s unfair, why is it unfair for the franchise, the people like the Loblaw group that say you got to pay our price for, they’re going to be right in their stores selling it, but they get 4½ per cent of it but they’re not buying from them. What’s the difference? It’s unfair both ways.

DAVID STERNS: Because no one ever, there’s no sacred rule that a franchisor has to make its exorbitant mark ups on selling generic food or beads or whatever. That’s part of franchising that’s grown up through the environment of monopoly and enforcement and control. It was never inherent.

HON. RONALD MacKINLEY (L): All right, another question…

BETH MacKENZIE (PC) CHAIR: Excuse me, Honourable Member.

HON. RONALD MacKINLEY (L): Just one more question.

BETH MacKENZIE (PC) CHAIR: No, I’m sorry. I’m going to have to cut you off. This Honourable Member has a question.

HON. RONALD MacKINLEY (L): Oh, I’ll go back later.

BETH MacKENZIE (PC) CHAIR: No, we’ll be concluding at that point. Go ahead.

HON. RONALD MacKINLEY (L): I have a very important question to ask.

WILFRED ARSENAULT (PC): Mr. Sterns, you stated in your presentation and I’ll quote, “Let’s work from the Ontario legislation and beef it up,” end of quote. What’s your opinion of the legislation that’s in place in the Province of Alberta, let’s say?

DAVID STERNS: Alberta is one step, is behind Ontario in terms of being a proper franchise statute. We’re going in increments here. What we’re doing is we’re starting with, Alberta sort of trail blazed and I think they bore the brunt of the franchisor law and all of the sort of fear that had grown up around the legislation was brought there in Alberta.

In Ontario, we had more evidence and there were more instances and there were more testimonials so that the Legislature knew they had to sort of step up this fairness provision. Since then, we’ve seen that that’s inadequate. So going to Alberta would really be taking a step backwards, and really going against the whole trend of the legislation in the franchise area.

Alberta’s was the first one out of the block and that was what the franchisor said they’d be happy with in Ontario. And now I think they’ll probably say they’d be happy with Ontario. So don’t go any further. But nobody has left Ontario, if anything, it’s just been watered down a bit by the courts and I think we’ve seen that experience now. By the courts not particularly giving expression to the Legislature’s will.

BETH MacKENZIE (PC) CHAIR: Okay.

WES MacALEER (PC): The preponderance of perspective that we’ve received this morning as well as your own has been that of dealing with the whole issue from the point of view of the franchisee. Maybe that’s fair or it isn’t, but I’ll ask, the question is, is legislation as it is in any of the jurisdictions, Ontario or Alberta, or what we may propose, is the preponderance of the flow from the, in order to achieve this level playing field that of equalizing the franchisee’s position without the franchisor? In other words, the real question is, does legation do anything to protect the interest of the franchisor?

DAVID STERNS: Of the franchisor?

WES MacALEER (PC): Yes.

DAVID STERNS: Oh yeah.

WES MacALEER (PC): Ok, in what perspective?

DAVID STERNS: They’ll never admit it but what they’ll tell you…

WES MacALEER (PC): That’s why I’ve asked the question.

DAVID STERNS: Of course it is. Of course it does and here’s why. Franchising has at least, I’m not sure about he media in this province, but in Ontario, franchising has taken two black eyes because of the acts of a minority of extremely bad and vicious franchisors. And it’s become part of the collective consciousness that franchising is risky business, okay? And the word is starting to spread. So when you sell a franchise now, that’s why they love disclosure legislation because they say we’re a regulated industry. Well no, you’re not. You just disclose your deeds in a document that nobody reads and some people don’t even have the ability to read the English language, perhaps not so much in this province but in Ontario, certainly a lot of the cases. And so it helps the franchisors sell franchises by giving people a sense of comfort that there is a, people thought there was, some people thought there was legislation in place before there ever was any. So they had that naïve sense of comfort.

Now they have a somewhat more legitimized sense of comfort but I think it’s false comfort and that’s why we’re here, that’s what we’re…and when you talk about levelling the playing field, nobody’s trying to put the franchisee on the same plane as the franchisor. There is a subordinate relationship to the franchisee. It’s a question of restoring the original deal. No franchisors selling their store, selling a franchise by telling the franchisee that we have umpteen rights which we could exercise fairly or unfairly as we deem appropriate, for whatever reason.

Mr. MacPhee, he may be exceptional but I wouldn’t want to be in his shoes tomorrow because of the rights of the franchisor has against a franchisee for even speaking out in public. I mean there are provisions in many franchise agreements that prevent franchisees from speaking to the media. They don’t want this kind of stuff to happen so we’re, but nobody’s selling franchise agreements on that premise. They’re selling it on the premise of fairness and a close partnership where if you do your job and we do our job, everybody makes money.

BETH MacKENZIE (PC) CHAIR: And on that note…

HON. RONALD MacKINLEY (L): I’d like to ask my question.

BETH MacKENZIE (PC) CHAIR: Well Honourable Member, with time constraints, we have gone overtime and we must be back here for one o’clock for the afternoon proceedings.

HON. RONALD MacKINLEY (L): It’s very early. You’ve given the members on the other side lots of time to ask his. I’ve got one more question.

BETH MacKENZIE (PC) CHAIR: Sorry, Honourable Member, you’re out of order. Thank you.

HON. RONALD MacKINLEY (L): All right. (INDISTINCT)

BETH MacKENZIE (PC) CHAIR: Thank you very much for your presentation. The committee will re-convene at one o’clock this afternoon. Thank you.

This document is a spelling-corrected copy of the Verbatim Transcript of House Committee Proceedings, Province of Prince Edward Island, Canada.


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Risks: Ontario Franchisee Coalition, Must buy only through franchisor (tied buying), Prince Edward Island Public Hearings, Canada, 2001, Disgruntled, Opportunism (self-interest with deceit), Be your own boss, Termination threats, Gouging on supplies, Secret kickbacks and rebates, Disclosure laws: false sense of security, Grange Report, Arthur Wishart Act (Franchise Disclosure), 2000, Canada, Life savings gone, Protest, rally and demonstration, Toothless law, Tied contracting, Tobacco industry-type defence, No protection from monopoly, Disputes heard on franchisor’s home turf, Justice only for the rich, Non-compete restrictions, Monopoly, Related company transactions, Industry in disrepute, Law protects franchisor not franchisee, Big Tobacco, Costs of scandals, Retaliation, Can’t talk to media, Current franchisees can’t talk freely, Disclosure document: best franchisor selling tool, Evils of the system defined in 1971, Frenzied lobbying, Hidden agenda, Illusion of government oversight, Immigrants as prey, Indemnification provisions, Investor confidence crushed, no trust or buying, Ponzi (pyramid) scheme, Potemkin village, No protection from monopoly, Public perception of sleaze and greed, S. G. M. Grange, Q.C., Siren song, Veil of secrecy, Weak law worse than no law, Lawyer, Canada, 20011025 David Sterns

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