Owners sue Grand & Toy

The decision not to renew the agreements…"We just decided that this business model no longer works for us," Ward said. "It is certainly no reflection on the hard work the licensees have brought to Grand & Toy." Ward also specifically denied the "unacceptable ethnics" allegation, calling it "absolutely unfounded. It is untrue and unfounded."

The Hamilton Spectator
November 6, 2001

Owners sue Grand & Toy
Steve Arnold

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FRANCHISE DISPUTE -Twenty-one franchise owners and 22 companies operating under the Grand & Toy name are suing the parent company for damages after it announced it would not renew their franchise agreements, putting them out of business. Janis Snyder's world was shattered in a single moment.

She started her day as a reasonably prosperous business owner, operating two franchised stores for Grand & Toy, the office products chain. She wasn't going to get rich, but business was good enough to provide a decent life for her two daughters.

By the end of that day, she was staring at a bleak future after company president Peter Vanexan perfunctorily announced none of the existing franchise agreements would be renewed when they expire, all but two at the end of this year.

Only the night before, June 12, Vanexan had handed out awards to the top performing franchisees. Now he was telling them they were losing their livelihoods and the company wasn't going to buy back all of the inventory the store operators had been required to purchase from the company, potentially leaving them with operating loans and no way to repay them.

There would also be no compensation for the eight years of "sweat equity" they had poured into their businesses.

Hamilton Mountain MPP Marie Bountrogianni used Snyder's case to argue in the provincial legislature recently that the government's new franchising law should be strengthened to protect people like Snyder from such arbitrary actions.

"This government was aware that franchise agreements are one-sided, lengthy, non-negotiable contracts drafted by the franchisor," she said.

The protection available to franchisees is an important issue because the franchise industry accounts for almost half of Ontario's retail economy.

"I'm just sick about it, this has been devastating to my whole family," Snyder said of Grand & Toy's decision. "They just shouldn't be able to take away a store like this and say goodbye."

Snyder, who operates Grand & Toy locations in Kitchener and at Hamilton's Lime Ridge Mall, is one of 21 soon-to-be-former franchise owners and 22 companies which have launched a $24-million suit against the retail giant, claiming they're owed something more than empty good wishes.

She's in a slightly better position than most because, while the franchise agreement on her Kitchener store expires at the end of this year, the Hamilton deal runs until 2003.

Also joining the suit are Burlington store owner Pat Masson and Tony Pizzacolla, operator of the downtown Hamilton location.

Between the three of them, they've served Grand & Toy for 63 years, working as store managers before agreeing to take on franchises in 1993.

Masson had worked for the company for 20 years and was the manager the firm asked to test out the franchise concept in 1992. Eventually he moved his family from Brampton to Burlington, increasing sales by 100 per cent and employment by 75 per cent in eight years. Now he's 45 and, with his wife, is facing the loss of a job without even the prospect of unemployment insurance to cushion the blow.

"When they first asked me to do this, I thought, if it's the wave of the future, then I'd better get in on the ground floor," he said. "Now they've put me in a real predicament."

Pizzacolla, with 27 years of service, faces perhaps the hardest situation. He's 50 now and knows the chances of another job are slim.

"I thought I was building up something for the future here so we made a lot of sacrifices," he said. "It was just starting to pay off, and now they throw this in our laps? I've given 27 years of my life to this company and now I'm going to take a real hit."

In their statement of claim, the franchisees seek damages of $1 million per store, or wrongful dismissal damages of $12 million for those who were formerly employed by Grand & Toy. Another $5 million is sought for punitive and exemplary damages in addition to an injunction preventing the company from ending the agreements, plus costs and interest.

Franchised operations included stores in Oshawa, Pickering, Orillia, Brantford, Mississauga, Ottawa, Kingston, Toronto, Orleans, Bramalea, Barrie, Thornhill, Kitchener, Burlington and two in Hamilton. Defendants named in the suit include the company, president Peter Vanexan and other executives.

The allegations in the statement of claim remain to be proven in court. Grand & Toy has not yet filed a statement of defence.

The statement of claim alleges that employees who were approached about taking on franchises were pointedly reminded they'd lose their jobs if they didn't take the deal. They were not given severance pay when they stopped being employees of the company and were required to buy all the inventory in the stores they took over, as well as keep all existing staff.

The deals were renewed in 1994 and 1998, but "each of the three agreements became commercially more onerous, with the effect of Grand & Toy making substantially more money from the operation of the franchise stores, without any risk, and having the inventory financed by the Corporate Plaintiffs," the statement of claim says.

Under the deal, the franchise owners say they pay Grand & Toy 50 per cent of the profits from their stores plus royalty fees. They are required to purchase all their stock from the company and must sell at prices fixed by the company. They were prohibited from marketing over the Internet and any commercial accounts they developed were appropriated by head office without compensation.

Throughout the arrangement, the franchisees claim, Grand & Toy "operated the franchise arrangement as if it was their personal empire, making unilateral changes to the arrangements … as it suited them, and entirely in their perceived best financial interest."

The operators also allege they were repeatedly told the company was ending its deals so it wouldn't have to make financial disclosures required under Ontario's new franchise law and that "the defendants disclosed that their franchise program was receiving applications only from unacceptable ethnics, and that Grand & Toy was not prepared to extend agreements to such persons."

Lawyer Evert Van Woudenberg, acting for the Grand & Toy Licensees Association, said the company's action amounts to expropriation without compensation.

"That is the practical consequence of what they're doing," he said. "These operators will be out on the street with nothing. Grand & Toy has a good faith obligation here."

The franchisees say they don't want to sue the company, but a civil suit is the only mechanism available to. The franchising law doesn't provide any mechanism to settle disputes.

Van Woudenberg said while there is little case law in Canada covering the franchise relationship, courts have taken a dim view of business deals negotiated in unequal relationships.

"Many of these people had this agreement put to them and told they could either sign it or walk. That's an unequal bargaining situation and the courts will look at that a lot closer than in a case where there is real negotiation," he said.

Brian Ward, vice-president of Grand & Toy's retail operations, disputes all of the franchise operators claims, arguing few of the operators had any significant investment in the business other than inventory they've financed and that's being purchased back by the company.

"This really isn't a franchise, it's really a licensing program," he said. "The maximum investment they would have made is no more than $5,000. It's Grand & Toy that has invested all the money and we've got the brand name and all of the overhead. These people have done very well with almost no investment at all."

Franchisees, in their statement of claim and interviews, dispute the company's claim it will buy back inventory, saying they were told in June the firm would not take back stock it had decided to discontinue.

Ward said the company will purchase "90 to 95 per cent" of inventory at the price paid the franchisee. Discontinued items will be bought back at an undefined reduced price.

Asked about compensation for the eight years of effort the operators put into their store, Ward said they were given more than six months notice their agreements would not be renewed and the company even offered a three-month extension for those who would sign away their right to sue. The firm has also hired most store employees and even offered jobs to some of the former franchisees.

Grand & Toy, once family-owned, experimented with franchising in 1993 when it was owned by Cara Operations, the company that also franchises Swiss Chalet restaurants and other businesses.

The decision not to renew the agreements was made late last year after the franchisees were surveyed about new terms and most said they wanted a more generous financial arrangement.

"We just decided that this business model no longer works for us," Ward said. "It is certainly no reflection on the hard work the licensees have brought to Grand & Toy."

Ward also specifically denied the "unacceptable ethnics" allegation, calling it "absolutely unfounded. It is untrue and unfounded."

The experience of the Grand & Toy franchisees highlights a major weakness in Ontario business law — the lack of protection for franchisees from arbitrary action by franchisors.

The only legal protection provided in Ontario is the Arthur Wishart (Financial Disclosure) Act which took effect in January. It requires franchisors to disclose some financial information to prospective franchisees, requires both sides to deal fairly with each other and allows franchisees to form associations. It is named for a former Ontario Attorney-General who, 30 years ago, accepted a committee report warning of deceptive practices of some franchisors.

The bill was supported by the Canadian Franchise Association, while franchisees bemoaned its lack of a dispute-settling mechanism outside the civil courts.

Bountrogianni, Liberal MPP for Hamilton Mountain, has raised the issue in the provincial legislature twice in recent weeks, urging the government to reopen and strengthen the Wishart act.

"The committee (which reviewed the proposed bill before it was passed) was warned about this several times, even by business-oriented, Tory-loving lawyers, who said more protection for franchisees was needed," she said.

The result of that failure is that people like Snyder now face the loss of everything they thought they were building up, the MPP said.

"She won't have a penny from all of that effort, just eight years of heartache," she said. "This government is supposed to be good for business, so it's contradictory of them not to be doing anything to help these people. To me it smacks of hypocrisy."

Les Stewart, president of the Canadian Alliance of Franchise Operators, said the sheer number of franchise businesses operating in the province makes some form of stronger protection critical today.

According to the Canadian Franchise Association, the industry accounts for almost 50 per cent of Ontario's retail economy with annual sales of $45 billion generated by 500 franchisors with 40,000 outlets selling everything from fast food to auto repairs and cleaning services. Across Canada, franchise business revenues are estimated as high as $100 billion with as much as 40 per cent of all financial transactions passing through the franchises of 1,300 companies.

Leaving the civil courts as the only enforcement method, he said, puts franchisees at a major disadvantage when trying to get satisfaction from multi-million corporations.

"In the Grand & Toy case, 21 people have chipped in to keep a lawsuit going, so they're in good shape, but if you're up against a company yourself, they can drive you into the ground with legal fees."

Stewart said as many as 5,000 such suits are filed every year, a number that points out both problems with the way the franchise relationship is structured under current law and the need for another way of settling disputes.

"In the civil courts, the burden of proof is all on the franchisee and the fact you've sued destroys the relationship with the franchisor," he said.

Stewart said he has tried to arrange a meeting with Minister of Consumer and Business Services Norm Sterling to discuss the Grand & Toy case, but has been repeatedly rebuffed because a lawsuit has been filed.

In Question Period in the legislature two weeks ago, Sterling refused to deal with the specifics of the Grand & Toy case, telling Bountrogianni it would be "somewhat inappropriate" for him to answer her questions because of the lawsuit. Later, he said the dispute was a matter of a private contract and was best left to the courts.

The next court date in the Grand & Toy suit is set for Dec. 6, to deal with procedural points raised by the company. If the company loses those arguments, it will then be required to file a statement of defence dealing with the substance of the franchisees' complaints.

Canadian Franchise Association
www.cfa.ca

Mellon Insurance
www.cafo.com

You can contact Steve Arnold by e-mail at moc.rotatcepsnotlimah|dlonras#moc.rotatcepsnotlimah|dlonras or by telephone at 905-526-3496.


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