Edward Levitt, PEI Public Hearing Testimony

…this is my first visit to your beautiful province, which I love, if only for the fact that I have the same name. I leave it to others to prove that the franchise scene here is so different from Alberta and Ontario that a unique legislative approach is necessary. I will, however, hazard a guess that there are not so such differences.

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Legislative Assembly of Prince Edward Island
October 25, 2001

Public Hearings on draft franchise legislation
Charlottetown, PEI, Canada
Edward Levitt, attorney

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

EDWARD LEVITT

BETH MacKENZIE (PC) CHAIR: Good afternoon and welcome.

EDWARD LEVITT: Thank you very much. I’d like to thank you for giving me the opportunity to present my views today on the future of franchise legislation in the Province of Prince Edward Island.

My name is Edward N. Levitt, but my friends call me, Ned. I have been practicing franchise law in Toronto for more than 25 years. In my early years, I acted primarily for franchisees, in part because for a young lawyer, it was easier to acquire franchisee clients than franchisor clients. Over most of my career, I have acted for both franchisors and franchisees in equal percentage. In recent years, however, my practice has shifted more towards franchisor clients. My professional biography is enclosed in that package.

You will note that I was a member of the Franchise Sector working Team which was a committee brought together to advise the Ontario government on the need and content of franchise legislation in Ontario. For the past two years, I have served as General Counsel to the Canadian Franchise Association, in addition to running my franchise practice. I have recently published a service for Buttersworth Canada titled, “Canadian Franchise Legislation”. A brochure for that publication is enclosed with my material.

As you can imagine, from what I have told you about the evolution of my practice, I have acted for many, many franchisees. I have also acted for many groups of franchisees who have come together to improve their systems, combat an oppressive franchisor or deal with the remains of a bankrupt franchisor. For the vast majority of my years in practice, I have tried to help my franchisee clients in an unregulated franchise environment. I not always emerged victorious, but I have had some considerable success in achieving results for franchisees that they can live with and move on with to better their lives. You see, in reality, for franchisees, winning in court is not usually the objective. You can win a court case and lose a business.

You will hear from some people today of the horror stories and abuses endured by franchisees at the hands of unscrupulous franchisors. They are right. The stories are true. I know this for a fact. However, what I don’t know and neither do they, is how widespread these abuses are. I do not believe, as some would have you believe, that there is a crisis in franchising in Canada today. Simply, nobody has the statistics to prove or disprove the existence of such a crisis. While anecdotal evidence is useful in any debate over the need for franchise legislation, it is very, very dangerous to pass legislation that restricts the freedom to contract, without the benefit of statistical evidence as to the nature and extent of the harm that such legislation is intended to address.

Franchise legislation falls into one of three categories, relationship, registration and disclosure. Of course, any particular piece of legislation can incorporate elements from any or all of these categories. In brief, very brief, relationship legislation in franchising regulates how the franchisor and the franchise deal with each other once the franchise agreement is signed. Registration legislation requires the franchisor t o have a prospectus-like document approved by and filed with a public authority. And disclosure legislation requires that a franchisor provide prospective franchisees with vital information about the franchise investment prior to becoming contractually committed.

Prior to my appearance before your committee, I was presented with a draft franchise statute for PEI prepared, as I understand it, for the Fair Franchise Law Group for Islanders. I was struck by the amount and severity of the relationship provisions in the draft. It seemed to me that the statute was drafted by a litigation lawyer, and not a commercial lawyer. It is primarily relationship legislation and, from my point of view, is intended to set the stage for franchisees to obtain remedies through the courts.

I think this approach is ill conceived and not in keeping with the trends elsewhere where legislators, like yourselves, have had to wrestle with the question of when and how to regulate franchising in their jurisdictions. It may surprise you to learn how many powerful remedies already exist in common law. It is rare for me to have stood at the doorstep of a court wishing I had more remedies for my franchisee client. On the other hand, many franchisee clients could not afford the cost of litigation. And I note the section of the draft statute that proposes mandatory mediation or arbitration.

Unfortunately, and I’m a great proponent of mediation, and I do mediate as a mediator and for clients, mediation is essentially assisted negotiation and you can’t compel people to negotiate. As to arbitration, if the parties cooperate, is often cheaper and quicker than litigation. But if they don’t cooperate, it’s just as lengthy and just as expensive.

I’ve enclosed a memorandum of my comments I prepared on the draft statute. But I should add to you that while I have looked at the statute, I have not had the opportunity that time that ones need, even as a practitioner of law, to study it and consider it. And in fact, I’ve learned many things here today, I would have liked to have amended my memorandum to include. So all you’re seeing there is a very rough, first cut by me of the major things that jumped out at me from the statute.

Franchising has its roots in the United States. The Americans have debated this subject again and again and we can learn much from their experiments and their experiences. Your research should reveal that the State of Michigan repealed its strict relationship franchise statute in the ‘70s, when it became apparent that franchisors were very deliberately avoiding that state in their expansion plans. The State of Iowa had a similar experience in the early ‘90s.

In Canada, since the early 70s, Alberta was the only province in Canada with franchise specific legislation. The Alberta Franchises Act was primarily a registration statute. Franchsiors experienced long waits for approvals, the consumption of vast amounts of executive time and big bills from professionals to get their franchise prospectuses approved. It was commonplace for franchisors to avoid expansion in Alberta for as long as possible, because of the existence of the statute. In 1995, following a study at Laurentian University that concluded that such legislation was of marginal value for franchisees, franchisors and stakeholders. The end result is the current Alberta Franchises Act, which is primarily a disclosure statute, with a modicum of relationship provisions.

Ontario followed the Alberta model very closely when it passed the Arthur Wishart Act. However, there are a number of technical problems with this statute, primarily involving the regulations under it which I believe, will be addressed eventually and which I would be pleased to discuss with you, if you wish.

The beauty of disclosure legislation is that it avoids unnecessary government expenditures and arms the prospective franchisee with information upon which to make an informed decision about the franchise investment. In Ontario and Alberta, the franchisee that does not rectify the required disclosure has the incredibly powerful remedy of rescission. Coupled with the increased education about franchise investing, we have the basis for some optimism that the problems that do exist in franchising will be reduced.

I did not come here today with any knowledge of the franchise marketplace in PEI. In fact, regrettably, this is my first visit to your beautiful province, which I love, if only for the fact that I have the same name. I leave it to others to prove that the franchise scene here is so different from Alberta and Ontario that a unique legislative approach is necessary. I will, however, hazard a guess that there are not so such differences.

In fact, the stated goal of many who have looked at the subject of franchising and franchise legislation in Canada is consistency. They hope to avoid the tattered experiences in the US where franchisors have historically been faced with a patchwork of state franchise legislation, which have increased the costs of doing business and slowed economic growth. In my opinion, the strength and depth of the American marketplace are the only things that have saved franchising there. We are not the Untied States and we can ill-afford inconsistent regulation or franchising across Canada.

In conclusion, I did not come here today to be an apologist for franchisors, nor a champion for franchisees. I want to see the right kind of franchise legislation across Canada, because the only one protected in an entirely unregulated franchise marketplace is the unscrupulous franchisor. At the same time, the only one protected with intrusive franchise relationship regulation is the uncooperative and weak franchisee who ruins it for all the rest.

I believe the Alberta/Ontario model is right for now. Over time, we may see that it doesn’t work and needs to be expanded, but we need to give it time. I would rather err on the side of less regulation than more, until we know with greater certainty what problems are and how they need to be addressed.

The debate about franchising is not about right and wrong, but about doing it right for all concerned. It is not about winning and losing, but about working together to build a better and more prosperous franchise marketplace. Thank you very much for listening to me today and I’ll take some questions, if you wish.

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

WES MacALEER (PC): The Alberta legislation creates a number of exemptions, companies that are exempted.

EDWARD LEVITT: Under the Alberta and the Ontario as well.

WES MacALEER (PC): Why was that necessary?

EDWARD LEVITT: Well, you have to look at each one and say why it was done, and we debated this, I was on the Franchise Sector Working Team. We debated for five years, the proposed legislation in Ontario. And Ontario has some exemptions actually, that Alberta doesn’t have. But you have exemptions, for example, for small business ventures, anything under $5,000. There was a need to do that. They felt because they didn’t want to overly burden small businesses. You have an exemption for it in Ontario, at least, not in Alberta, for the very largest of franchise investments. It’s got to be over five million dollars. It was felt that anyone who could buy a hotel, or perhaps an automobile franchise, were sophisticated enough to care for themselves.

You have no sectorial exemptions and those were fought strenuously in Alberta, and just as strenuously in Ontario. So you have no sector that was exempt. So it’s everything. The automotive industry tried in Alberta to get the Minister to give them, there is a ministerial power, to grant an exemption for a sector in Alberta, and the automotive industry tried to get that because they have a dispute resolution policy implemented for their industry, voluntarily but it has wide acceptance, and the Minister said, no. So there’s no sector that’s exempted.

Besides that, I failed to pack my copy of the statutes, but you have to look at each one and there is a logical reason for it. And hopefully, there’s no harm done by any of those exemptions.

BETH MacKENZIE (PC) CHAIR: Thank you very much, and I hope you get to enjoy some of our Island, not just fly out tonight. Tim Hortons.

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


Ned Levitt

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