Grange Report

The Grange Report is a comprehensive inquiry into the franchise industry in the province of Ontario, Canada.

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Department of Financial and Commercial Affairs
June 1, 1971

Grange Report
S. G. M. Grange, Q.C.

Report of The Minister’s Committee on Franchising

June 1, 1971

THIS IS AN ABRIDGED TEXT OF THE FULL REPORT.
This is the original report minus the sections on Referral Sales and Multi-Level or Pyramid Sales.

June 1st, 1971

The Honourable Arthur Wishart, W.C., M.P.P.,
Minister of Financial and Consumer Affairs.
Parliament Buildings,
Toronto 2, Ontario

Dear Sir:

We now submit the final report of the Minister’s committee on Franchises dealing with referral sales, multi-level or pyramid sales, and franchises.

Yours respectfully

S. G. M. Grange, Q.C.,

Mrs. J. R. A. Turner
Watson W. Evans, C.A.

INDEX

INTRODUCTION 1

CONDUCT OF THE INQUIRY 2
Division between subjects 2
Materials 2
Hearings 3
Interim Report 4

REFERRAL SALES 5
Complaints and Evils of the System 5
(i) Inflated price 5
(ii) Misrepresentation by salesmen 6
(iii) Irresponsibility of the principal seller 7
Mathematics 7
Solutions 8
(i) Abolition 8
(ii) Education 12
(iii) Control and Recommendations 13

MULTI-LEVEL OR PYRAMID SALES 21
Operation of the schemes 21
Unacceptable characteristics 22
(i) Sale of distributorships 22
(ii) Lack of training 22
(iii) Promotion 23
(iv) Contractual inequality 23
(v) Fees 24
(vi) Mathematics 24
Solutions 25
(i) Criminal Code, section 179 (1)(e) 25
(ii) The Securities Act 26
(iii) Recommendations 26

FRANCHISES 36
Definition 36
General Problems 38
(i) Contractual inequality and collective bargaining 38
(ii) Termination and assignment 40
(iii) Coercion and secret profit 41
(iv) Completion and discrimination 42
(v) Inducement and advertising 43
(vi) Financial irresponsibility of franchisors 43

Particular Problems
(i) The oil industry 44
(ii) The automobile industry 44
(iii) The fast food industry 46
(iv) Small investor franchises 48
(v) The Becker Problem 49

Legislative approach 52
(i) Legislation or not? 52
(ii) Generic or single industry 52
(iii) Contractual or equitable 53
(iv) Administrative control 55
(v) Recommendations 56

SUMMARY OF RECOMMENDATIONS 66
Referral sales 66
Multi-level or pyramid sales 66
Franchises 67
General 68

APPENDICES 69

- PAGE 1 -

“REPORT OF THE MINISTER’S COMMITTEE ON REFERRAL SALES, MULTI-LEVEL SALES AND FRANCHISES

INTRODUCTION
This Committee was formed by The Honourable Bert Lawrence, M.C., Q.C., in August of 1970, and was continued by The Honourable Arthur Wishart, Q.C., Ministers of Financial and Commercial Affairs, to review and report upon referral, pyramiding or multi-level sales practice, and franchises. The precise terms of reference are as follows:

“To review and report upon what are commonly described as ‘referral’, ‘pyramiding’ or ‘multi-level sales practices, arrangements and franchises, and to consider all aspects of the relationship of franchisors and franchisees and the implications of these arrangements to the consume and the investor, and generally to recommend what, if any, changes in the law are desirable.

Since our appointment, we have been engaged in these enquiries with the able assistance of our Counsel and Research Director, Professor W. A. W. Neilson of Osgood Hall Law School, York University, and our Secretary, Mrs. D. A. Stafl, Economist for the Department. We have now reached our conclusions and are ready to submit our report.

CONDUCT OF THE INQUIRY

Division between subjects
For the convenience of the witnesses and ourselves, we endeavored to keep the study of the three subjects separate wherever possible, and in the actual public and private hearings, we heard first, witnesses dealing with referrals or multi-level sales, and latterly witnesses dealing with franchises, but it must be emphasized that the arrangement was one of convenience only. In many respects, the subjects are inter-related, and, indeed, in many respects all three subjects are related to the larger subjects of consumer sales and investments generally. While we deal only with the three subjects and divide them into somewhat arbitrary categories, we fully appreciate that the Minister and his advisors may wish to relate the subjects more closely and many wish to apply some of our recommendations to larger fields.

One of the difficulties in this fragmentary approach, however, is that we have occasionally reach slightly different recommendations upon the different subject mattes, when we could just as conveniently have made them identical. We have attempted to co-ordinate these recommendations to some degree, and in our Summary of Recommendations, we have listed those which are common to two or more fields. We hope, therefore, that this difficulty has been partly overcome.

Material
Professor Neilson supplied us voluminously with material on the subjects as follows:

Referral Sales:
(a) the results of interview with a wide range of officials in business, government and consumer groups in Canada and the United States.
(b) Provincial, Federal and United States legislation.
(c) Pertinent judicial and administrative rulings in Canada and the United States.
(d) A comprehensive survey of the structure and procedures of the referral selling industry.

Multi-level sales:
(a) Canadian and United States proceedings against various companies in the field.
(b) Informative releases from Canadian and U.S. Departments of government dealing with consumer affairs and from independent organizations.
(c) Literature from some of the companies involved directed to their salesmen and recruitment officers

Franchises:
(a) Articles and texts on franchising.
(b) U.S. and other foreign legislation and proceedings of legislative and administrative hearings.
(c) Canadian studies both public and private and both general and particular
(d) The results of questionnaires sent to selected franchisors and franchisees in Ontario.

Hearings
We decided to seek such further assistance as we could from the public, and accordingly, advertised in September for written communications and oral testimony in relation to referrals and multi-level sales, and in December for the same with reference to franchises. We are listing in the appendices the briefs and other communications received and the persons making oral reports at the public hearings. Because of the delicacy of the position of some of the potential witnesses, we decided to hold private hearings as well, and the witness himself would generally determine whether he could be heard publicly or privately A list of the dates upon which private hearings were heard is also to be found in the appendices. We do not, or course, wish to reveal the names of the witnesses because in many instances it might jeopardize the position of that witness, but it is remarkable how often the private hearings were resorted to by large corporations or organizations enjoying complete security in their business operations. We can only assume that the fear of media distortion or publicity in general militates against participation in open hearing.”

Interim Reports
After the public hearings in October and the private hearings in and about that period, we felt that we were in a position to make interim reports, and accordingly an interim report on referral sales, signed December 8th, 1970, and one on multi-level sales, signed January 5th, 1971, were submitted to the Minister. The substance of these reports is incorporated in this final report. Some minor changes have been made in the recommendations of the interim reports, and some co-ordination has been made in the administrative controls to bring them into line and sympathy with the recommendations in the part of this report dealing with franchises.

FRANCHISES

Definition
It became immediately apparent to us when we began our researches, and it has remained pressing throughout the hearings, that one of our most difficult problems is that of definition. The word “franchise” originally meant royal or public grant of rights or privileges, e.g. a right to operate a railway or a right to vote. The expansion of the word to relate to dealings between citizens is relatively new. It became obvious to us that the word had been used to describe the relationship between the parties in varying situations without too much concern as to whether the use was appropriate. Possible this lack of concern arose naturally from a lack of legislation governing the relationship, but as soon as it became apparent that legislation was contemplated, the semantics of the problem became more interesting. Predictably those granting the privilege tended to deny that existence of a franchise relationship, and those in receipt of the grant tended to assert it.

In our view, a franchise is essentially the grant of a right to operate a business, which business involves the use of the grantor’s trademark or trade operation of the business by the grantor. Without the trademark or trade name, there can be no franchise at all, and it is the element of control that distinguishes, in our view, a franchise from either a bare licence or an employment contract. In a bare licence there is little or no control, and in an employment contract, there is almost complete control.

Other jurisdictions have struggled with the definition. An example from the proposed Massachusetts Statute is as follows:

“’Franchise’ shall mean an oral or written agreement for a definite or indefinite period, in which a person grants to another person a licence to use a trade name, service mark or a related characteristic, and in which there is a community of interest in the marketing of goods and services at wholesale, retail, leasing or otherwise.”

The California Franchise Investment Act contains a definition as follows:

“’Franchise’ means a contract or agreement, either express or implied, whether oral or written, between two or more persons by which

(a) the franchisee is granted the right to engage in the business of offering, selling or distributing goods or services under a marketing plan or system prescribed in substantial part by the franchisor; and

(b) the operation of the franchisee’s business pursuant to such plan or system is substantially associated with the franchiser’s trade name, logotype advertising or other commercial symbol designating the franchisor or its affiliate; and

(c) the franchisee is required to pay, directly or indirectly, a franchise fee.”

Other jurisdictions in the United States have attempted to resolve the problem by more elaborate definitions, obviously designed to ensure that particular offenders will not escape the legislative net. As our report was in its final stages of preparation, a franchise act was introduced into and passed by the Legislative Assembly of Alberta, and in that Act, a definition similar to the California definition was adopted. In our view, the Massachusetts Act is too broad, encompassing as it may, any relationships which are not franchises in the accepted sense, an the California and Alberta definitions are better, except that we disapprove of clause © of the California definition (copied into the Alberta Statute) rendering a fee an essential of the relationship. In our view, the fee is not essential, and to make it so would not only exclude many existing relationships where great control is exercised by the franchisor over the franchisee, but would also create a temptation to present franchisors to exempt themselves from the legislation by the simple expedient of eliminating that fee. Certainly some reward must accrue to the franchisor from the relationship. We cannot conceive of a situation where there will be no such reward, and it is not important whether that reward is in the form of a cash deposit at the time of obtaining the franchise, or is in some other form throughout the relationship.

We might just add that there are other aspects of the California and Alberta legislation (such as exemptions for companies holding large assets or having many franchisees) that did not appeal to us, and we are not recommending the adoption of that legislation. We hare merely approving of the definition in part. In our view there is good reason not to exempt large corporations. Many of the complaints that came to our attention concerned these very companies, and the California and Alberta Acts, relying as they do mainly on full disclosure, serve only to regulate the smaller companies where the chief evils are deceptive selling practices and financial irresponsibility. A very major problem, however, in our view, is that involving contractual inequality, and in that respect the large corporations are by their very nature the chief offenders.

General Problems
(i.) Contractual inequality and collective bargaining
We doubt very much if any legislation would be necessary, or, indeed, if any consideration to the legal problems of the relationship would ever have been given if the parties had been able to bargain from positions of equal or relatively equal strength. The truth is that franchisors grant the franchises on contracts drawn for and in the interests of the franchisor and as a result, the inequalities described below take place. This does not mean, of course, that there are not many happy franchisees, just as in the feudal days there were many happy serfs, and there were many happy tenants prior to the enactment of Part IV of The Landlord and Tenant Act. But the inequality of bargaining power does produce inequitable contracts almost inevitably, and even where honest attempts have been made to redress the balance between the parties, there remain too many opportunities for repression that would not exist if the franchisee could freely contract his own bargain. It is probably impractical for a franchisor to grant concessions to one franchisee that he does not grant to all, and he cannot repose in all of them the same trust as he might in on or two. Most franchisors discourage collective bargaining, and the dealers’ organizations which do exist are not effective to resolve this problem. We have considered some form of collective bargaining legislation, but we realize that it goes against the grain of the whole course of labour legislation in this province, which is limited to the rights of employees and has never been extended to the rights of more or less independent businessmen. We could, of course, recommend that no franchise contract should discourage collective bargaining, but we doubt if any such recommendation would be effective. The discouragement permeates the whole relationship and not just the contract, and we doubt if dealers’ organizations could do the job required of them short of, at least, some legislation in the nature of compulsory bargaining. It raises a whole host of problems and it is our hope that the recommendations we are making will better resolve the problem.

(ii.) Termination and assignment
Throughout the evidence it was a recurring complaint that the franchisee is constantly plagued with the threat of termination of the franchise. Almost all franchise contracts give to the franchisor either an unfettered right to terminate or a right to terminate upon breach of the agreement, and it is all too easy for the franchisee to be in such breach. Whether there is a franchise fee or not, the franchisee has invariably invested time and money, and he knows that he will lose it all if the franchise comes to an end. Naturally, he is prepared to be servile, and if not, he is generally not long for the franchise family. We fully appreciate that the franchisor has much to lose in permitting the continued operation of the franchise, where the franchisee is adversely affecting the value of the trademark or trade name. We know also that there are many instances of franchisees who should not be permitted to continue the operation of the franchise in any circumstances and that speed in their removal may be essential. We also appreciate that it is of vital concern to the franchisor who succeeds to the operation of the franchise. At the same time, it is essential to the franchisee that he can reasonably transfer his interest and thus recoup his investment, and that his estate’s rights on death or incompetency be protected. These conflicting interests we have attempted to resolve in our recommendations. In short, we have placed no limitation upon the rights of the franchisor to terminate, but have given a remedy to the franchisee if such termination should be unjust.

(iii.) Coercion and secret profits
Linked with the threat of termination is the forcing of franchisees into marketing schemes not of their own making. Often a franchisee is subjected to unreasonable and arbitrary sales and “share of market” goals or victimized by marketing strategy over which he has no control, which arises out of competition between his franchisor and others in the same market. While it would seem reasonable that a franchisor should be able to control the general franchise market for the welfare of all the franchises, nevertheless, the result sometimes is very detrimental to a particular franchisee, and he has no alternative but to follow the franchisor’s instructions under the threat of termination.

Also, in many instances the profit of the franchisor largely runs from the sale to the franchisee of ingredients or raw material or supplies and equipment for the operation of the franchise. To the extent that these products are essential to that operation, there can be no complaint, but in many instances there seems to be no particular merit in the product required, and there also appear to be large profits in the form of secret rewards granted to the franchisor by the vendor of the product. The a problem is one that is before the Courts in the Jirna v. Mister Donut case, and it may or may not be that franchisors will be required in law to disgorge any secret profits so obtained. In the State of Indiana, the proposed law would resolve the problem in favour of a mutual fiduciary relationship described as follows:

“Between the franchisor and the franchisee there exist mutual fiduciary obligations, as though the parties had a relationship of mutual agency. This relationship requires, but is not confined by (this act) and any material changes disclosed under (this act)”.

The Courts of this province and country may, of course, eventually resolve the problem in a manner akin to the proposed Indiana legislation, but it is our view in any event that there is an element of unfairness in requiring a franchisee to purchase from a particular source where there is no distinction in the product. We also believe that there may be an element of unfairness in the profits accruing to the franchisor from such forces sales. Our recommendations are designed to help resolve these problems.

(iv.) Competition and discrimination
There was much complaint on the part of franchisees concerning the tendency of franchisors to operate competing businesses, directly or indirectly, or to discriminate between franchisees with regard to price, etc. In large part this is, of course, a federal jurisdictional problem and should be governed by The Combines Investigation Act or amendments thereto. It may, however, have some relevance to provincial legislation and to our recommendations, in that it might be unfair for a franchisor to terminate a franchise on the basis of failure of the franchisee to achieve prescribed sales when his failure is due to the competitive or discriminatory practices of the franchisor. The problem is aggravated often by assurances given by the franchisor to the franchisee at the time of the making of the contract that there will be no competition to the franchisee in the distribution of the product. The assurance is not carried into the contract and is often not honoured in practice.

(v.) Inducement and advertising
The element of high-pressure salesmanship is not so obvious here as in referrals and multilevel sales, but it exists nevertheless, and it is our view that control should be exercised over the advertising programmes and over the sales pitches of the franchisor. We have seen many questionable enterprises advertised in very respected publications. In our view, the matter can best be handled by the prospectus approach and by the advertising regulations we recommend.

(vi.) Financial irresponsibility of franchisors
Again, this problem is not so common as in multi-level sales, but there have been instances of large franchise fees being paid in anticipation of services to be rendered by the franchisors in setting up the franchise business and of default on the part of the franchisors. Obviously this should be avoided if possible, and it can be avoided, in our view, by the same prospectus approach and an escrow of fees or bonding of franchisors. Indeed, this would appear to be the main object of much of the other legislation we have reviewed. While we concede that it is serious problem, we consider that it is only one of many problems to be solved.

Particular problems
(i.) The Oil Industry
The oil industry is perhaps the most investigated of all franchise industries, and despite these investigations the complaints keep coming, and formed a large part of our hearings.

There have been at least eight reports of The Restrictive Trade Practices Commission under the authority of The Combines Investigation Act and at least four provincial enquiries involving British Columbia, Alberta, Nova Scotia and New Brunswick. The most comprehensive of these provincial reports was the Alberta Gasoline Marketing report of December, 1968, under the Chairmanship of Kenneth A. Mackenzie, Q.C. This report recommended a form of Bill of Rights for gasoline dealers, including the following:

(a) Security of tenure and freedom from arbitrary termination or increase in rent
(b) The right to collective bargaining to determine hours of sale, etc.
(c) The right to buy, and display or advertise, accessories of their choice.
(d) The right to prepay or pay out in full any debt owing to the company
(e) The right to receive any tickets or prizes from the company which are part of a provincial or national sales campaign, free of charge
(f) The right to buy and sell any gasoline he chooses.

The report also contained many prohibitions and restrictions upon the oil companies, mainly to ensue the rights of the dealers, but the Report was never acted upon, in part because the Provincial Government deemed it to be a Federal concern.

The brief and evidence of the Ontario Retail Gasoline and Automotive Service Association, in addition to supporting the adoption of the recommendations in the Alberta report, laid a great emphasis upon alleged competitive and discriminatory practices, and recommended the abolition of the sales gimmicks, e.g. “Power Players” of Esso, medallions of Shell, etc. as was proposed for enactment in Nova Scotia, but which Bill is now withdrawn. These competitive practices are justified by the oil companies upon the basis that customers require different types of services, some being dependent upon the security of brand name gasoline and service, and others being less dependent and more concerned with the economics of the service. In other words, some customers seek a brand name for its gasoline and service and are willing to pay more, and other customers are not so concerned, and want to pay less. Consequently, the oil companies have set up subsidiaries of their own licenced outlets. The difficulty with the whole argument is that the gasoline supplied appears to be the same or substantially the same in all of the outlets, and as this becomes known to the public, the dealers must inevitably suffer. O.R.G.A. takes the position that the whole problem could be largely solved by permitting dealers to market competitive brands. This would obviously be anathema to the oil companies, it might well be suicidal to the dealers themselves, and is probably impractical. In any event, its effect on the consumer is not clear. We doubt if there would be much adverse effect so far as quality is concerned, because most gasoline and ancillary products are similar. The control, however, by one company of a chain of outlets, and the desire of that company of a chain of outlets, and the desire of that company to preserve its good name, may result in better service.

Some of the problems of this industry may be resolved by our recommendations, but we cannot pretend that they will solve all the problems. Many of them are problems that can be dealt with only by federal legislation and it may be that in addition to the general recommendations of this report, some special consideration should be given in Ontario to this particular industry. It is interesting that the Alberta legislation effectively excludes any regulation of the oil industry by exempting large corporate franchisors. We are firmly of the view that the oil industry should not be exempted from the legislation.

(ii.) The Automotive Industry
It is interesting that the first nationally prominent franchise legislation in the United States was the Automobile Dealers Day in Court Act, which was designed to alleviate the plight of the automobile dealers only, and the Massachusetts legislation so far enacted, which is perhaps the most comprehensive franchise legislation in the world, is devoted solely to the interests of the automotive industry. In our hearings, the automobile dealers requested legislation precisely similar t the Massachusetts Act and dealing with them alone, and the automobile manufacturers generally argued that their franchises are unlike ordinary franchises and required no legislation at all.

We cannot recommend that the Massachusetts legislation be incorporated as an Ontario statute, partly because there are constitutional difficulties, but more because, as will be seen, we do not believe in the single industry approach, and we do not believe that the motor car dealers require particular legislation. In the United States, the automobile dealers are perhaps more vocal than any other franchisee organization, and in addition to the Massachusetts Act, there are acts in more than a dozen states of the United States specifically dealing with the problems of this industry. The franchise relationship is well-developed in Ontario and yet the problems of the motor car dealers do not loom so large.

One problem, however, did concern us, and that was relating to the settlement of disputes. Thee seems to be no effective provision for the settlement of disputes between dealer and manufacturer in Canada. Some very involved procedures have been set up in the United States by the major companies, including in one case at least the provision of independent arbitrators. But similar arrangements have not been worked out here. It is stated by the manufactures that this is because of a paucity of disputes, and that may be so, but the result is that high-level disputes must go to Detroit to be resolved. In our view this cannot be healthy for the development of the motor car industry in this country, and certainly our recommendations will go some distance to eradicate the custom.

There are many problems indigenous to the automobile industry that will not be solved by our legislation, and some of these problems can be readily seen by examining the details of the Massachusetts legislation. We believe, however, that our proposals will assist in resolving some of the greater problems.

(iii.) The Fast Food Industry
While we had remarkably little representation from franchisees of this industry either in the open or closed hearings, nevertheless, the questionnaires submitted indicated considerable disappointment, and many of the briefs received were in the same vein. It is undoubtedly the common public view that most of the commercial franchises are in this industry, but, in fact, we have found that many of the best-known fast food enterprises are, in fact, company owned, or in the hands of a single Ontario franchisee. Obviously for these no problem exist, and for the others we are content to suggest that the general provisions we are recommending will help to resolve their problems.

(iv.) Small Investor Franchisees
There are a great variety of small investor schemes involving in many cases the sale of equipment as part of a marketing plan. They are designed for the franchisee without experience, making a small investment in the hope of earning additional income in his spare time. Examples of these are vending machines, pizza and sandwich enterprises and coat check concessions and janitorial services. The main difficulty with these schemes is that where merchandise is involved it is often over-priced, unproductive and of unmerchantable quality, and often the franchisors are financially irresponsible. The recommendations dealing with disclosure and advertising will assist to resolve the problems of these franchises.

(v.) The Becker Problem
Much time in our hearings was devoted to hearing complaints by former managers of the Becker Milk Company of mistreatment or alleged mistreatment by the company. Some considerable time, also was spent in hearing from present satisfied Beckers managers. The Becker company itself did not give evidence, but submitted a brief to us in which, inter ala, it claimed that Beckers was not a franchisor and the problems of its managers should not be considered by our Committee.

So far as the Becker franchise argument is concerned, we are inclined to agree. The arrangement between the company and the managers is that the manager puts down a deposit (for good performance) and then is permitted to operate the store. He operates it as his own enterprise to the extent that he hires staff, makes the purchases and is responsible for any shortages, but it is nevertheless a Beckers store, and the profit or loss (other than inventory shortages) is the profit or loss of Beckers. There may be an argument that the relationship is one of franchise, and certainly Beckers at one time advertised on a basis akin to the disposition of a franchise, but in our view the relationship is no more than an employment contract with a deposit for good behaviour and provisions for the forfeiture of that deposit in certain circumstances.

Regardless, however, of the nature of the relationship, the operation of the deposit and its forfeiture gives us some cause for alarm. The evidence was replete with stories of inventory checkers employed by Beckers descending upon the store at odd hours, taking inventory and finding shortages whereupon the company would forfeit the deposit, and also sometimes set off the salary owed to the manager against the alleged deficiency. We realize that an employer must have a right to terminate the engagement of a dishonest employee, but we seriously doubt that nay of the instances before us had anything to do with dishonesty. The trouble was that there was no check on the adequacy of the accounting, and the manager’s only remedy would be to take the matter to Court if he hoped to recover any part of his deposit and arrears of wages. In our view, deposits of this nature should not be subject to arbitrary and unilateral forfeiture. We believe that the deposit should be held in escrow to protect against the defaulting manager, but that the burden should be upon the store to show that there has been, in fact, default or loss suffered, and the manager should be entitled to at least the benefit of an independent auditor before suffering that forfeiture.

One suggestion to deal with the matter would be to amend The Employment Standards Act to place such deposits in a statutorily created trust, permitting the employer to forfeit the deposits only upon the following conditions,

1. Service of a Notice of Intention of Forfeiture with reasons therefor upon the employee and also the Director under the Act.

2. The failure either of the Director or the employee to contest successfully the proposed forfeiture in the Courts (Provision will have to be made permitting such application either by the Director or the employee and prescribing time limits, etc.)

3. Wherever such forfeiture is by reason of an alleged shortage, the filing of an affidavit of accuracy or an auditor’s certificate relating to such shortage.

We would suggest in any event that the employee’s deposit should be recoverable in priority to any other creditor, and that any rights of the employee at law should be preserved. It may be also that such regulations should apply only to deposits of a substantial amount, say over $50.

In short, we do not believe in the circumstances that the Becker problem comes within terms of reference. Indeed, we doubt if it comes within the terms of reference of the Department to which we report. Nevertheless, we respectfully suggest that legislation be considered to deal with it.

Legislative approach
(i.) Legislation or not?
Before even considering the type of legislation, we must determine whether any legislation is necessary. More than one witness beseeched us not to burden their lives further with regulations. They were conducting themselves and their businesses honourably, and for them and their companies, no legislation was necessary. Counsel for another franchisor emphasized that legislation is like cement, and that what may be desirable for some, and at least innocuous for the rest now, may be undesirable and burdensome in the future. We sympathize with and respect both view, but we believe that the evils cry out for some control. It shall be our purpose to recommend controls that are the least burdensome and the most flexible, while at the same time being consistent with the suppression of the evils of the system.

(ii.) Generic or single-industry legislation
As reported earlier, the approach taken in Massachusetts, and under the U.S. Automobile Dealers Day in Court Act is a single industry approach, in each case dealing with the automobile industry. This is an approach often favoured by a particular industry seems more or less in need of regulation. Where the franchisees are more vocal, legislation for that industry is passed; where the franchisors have the stronger voice, that industry is by-passed. To us, this approach is wrong. It is inadequate if all industries are not covered, and it is unnecessary to cover each industry separately. Admittedly there are differences in the present administration of franchises in different industries, and there are problems more pertinent to some. But these problems are transitory and, in our view, the basic problems are common to every industry involved in franchises. In any event, it is our desire to avoid specifics, as will be seen, and we therefore favour the generic approach.

(iii.) Contractual v. equitable approach
Throughout this type of legislation we see two different threads, although sometimes the two threads are tangled and almost indistinguishable. One thread is the compulsory contract or contractual terms approach, whereby certain terms are made compulsory or rendered inoperative. Very simply put, this solution either prohibits certain contractual terms, e.g. arbitrary termination, or requires or reads in certain contractual terms, e.g. rights of renewal, assignment, etc. The defects of this approach are the enormous difficulties in covering all the abuses, the complexity of the legislation if it is to be effective (with the consequent frustration on the part of honest franchisors) and the anticipated ingenuity of the very franchisors we seek to control in devising contractual terms to subvert the intent of the legislation.

The other proposal is the “fair dealing” or “good faith” approach, which is exemplified vaguely in the U.S. Automobile Dealers Day in Court Act of 1956, and more specifically in the Massachusetts Auto Dealers Act of 1970. The latter reinforces the “fair dealing” concept with very extensive examples of unfair practices, and this in effect combines both the fair dealing and contractual approaches. The main difficulty with the “fair dealing” approach is one of definition, with the result that any litigation based upon legislation of that sort is necessarily unpredictable, and litigants and counsel are naturally loath to undertake protracted and expensive litigation without some reasonable assurance of success.

We believe that a compromise solution is possible that will do much to solve the problem without creating new ones. It involves (in addition to administrative control discussed below):

1. Adopting generally the “fair dealing” approach.

2. Providing very limited terms and prohibitions in the dealings between the parties.

3. In these dealings also, placing the burden upon the franchisor to prove,
(a) that the contract is fair; and
(b) that the franchisor’s exercise of his rights under the contract is justified in the
circumstances.

4. Giving in the first instance to a quasi-judicial tribunal (subject to the constitutional problem discussed below) the right to determine the issues in 3, and with power to that tribunal to enlist expert assistance as required.

(iv.) Administrative Control
Franchises run the gamut from the large international corporations to local individual entrepreneurs, and from those involving large investments, either in fees or capital expenditure or both, to those involving little expenditure of time or effort, but in all there is inevitably some expenditure of time or money by the franchisee, and we believe that such investment should be protected at least to the extent that the investor has the opportunity of a complete loss of investment is minimized. In short, we believe in full disclosure, and in control of the franchisee’s investment. To that end, we are recommending a prospectus and an escrow arrangement with regard to franchise fees.

We further believe that a body is necessary to perform that various functions needed, which can be summarized as follows:

(a) To receive and approve the prospectuses.

(b) To protect, where necessary, the franchisee’s investment

(c) To educate investors or franchisees

(d) To process complaints or inequities

(e) To police the operation of franchisors.

(v) Recommendations

We therefore recommend:
1. The formation of a Franchise Bureau with a Franchise Registrar. As indicated in the multi-level considerations, it may be that it would be appropriate to have a Registrar for both multi-level and franchise matters and that there be a separate act dealing with multi-level sales and franchise sales and a Registrar appointed under that act. We should re-emphasize here the importance of the man chosen to fulfill the post. In the franchise field, he will be concerned not only with some very sophisticated contracts, but will also have to deal with some of the largest corporations in the land.

There should also be granted original and/or appellate jurisdiction to the Commercial Registration Appeals Tribunal to deal with disputes between franchisors and franchisees. We have not overlooked the constitutional problem that faces us by reason of section 96 of the British North America Act, and it may be that for that reason our proposal with respect to the Tribunal will be impractical. If it is, then, of course, resort must be had to the Courts. In our view, however, there is merit in using the Tribunal mainly because for franchise problems, a certain amount of expertise will be required, and the Tribunal is so devised that such expert assistance is readily at hand in the members thereof. There should always, of course, be an appeal either to the Divisional Court or the Court of Appeal from the decisions of the Tribunal, but if this is not sufficient to satisfy section 96, the access to the Courts in the first instance will have to be made either alternative or complete.

It may be necessary, in order to implement these recommendations, in addition to the powers given to the Tribunal by paragraphs 8 to 10 below, to expand generally its field of operations as set forth in the Department of Financial and Commercial Affairs Act.

2. There should be a definition of “franchise” in accordance with the principles set out above. We also feel there should be a prohibition against the use of the word in commercial dealings not coming within the definition. The word “franchise” has a sort of independent businessman connotation and, when used indiscriminately in advertising or promotion, tends to deceive the investor to his detriment.

3. There shall be a prohibition of the dealing in franchises without compliance with the provisions below.

4. Every franchisor shall be required as a condition of dealing in franchises to file with the Registrar a prospectus, which prospectus shall include:
(a) The name of the franchisor, the name under which the franchisor is doing or intends to do business, the name of any parent or affiliated company that will engage in business transactions with franchisees.
(b) The franchisor’s principal business address.
(c) The business form of he franchisor whether corporate, partnership or otherwise.
(d) The business experience of the franchisor, including the length of time the franchisor,
(i.) has conducted a business of the type to be operated by the franchisee;
(ii.) has granted franchises for such business;
(iii.) has granted franchises in other lines of business.
(e) The names of persons affiliated with the franchisor, including directors and officers, and such information concerning the identity and business experience of such persons, including past business records, as the Registrar may require or the Regulations prescribed.
(f) A statement as to whether the franchisor or any person identified in the prospectus has been convicted of any criminal offence or has been held liable in any civil action by final judgment involving fraud, or is subject to any currently effective order or ruling of any provincial or dominion or United States state or federal commission or agency.
(g) A recent financial statement of the franchisor, together with a statement of any material changes in the financial condition of the franchisor from the date thereof. The Regulations may prescribe,
(i.) the form and content of financial statements required hereunder;
(ii.) the circumstances under which consolidated financial statements shall be filed; and
(iii.) the circumstances under which financial statements shall be audited.
(h) A copy of the typical franchise contract or agreement proposed for use or in use in Ontario.
(i) A statement of the franchise fee charged, if any, the proposed application of the proceeds of such fee by the franchisor and the formula by which the amount of the fee is determines if the fee is not the same in all cases.
(j) A statement describing any payments or fees other than franchise fees, if any, that the franchisee is required to pay to the franchisor, including royalties, payments or fees which the franchisor collects in whole or in part on behalf of a third party or parties.
(k) A statement of the conditions under which the franchise agreement may be terminated or renewal refused, or re-purchased at the option of the franchisor, together wit ha statement as to the rights of the parties upon the death, incapacity or insolvency of the franchisee, and whether the franchisee may voluntarily terminate, and upon what terms, and whether the franchisee is able to see the franchise, and if so, upon what terms.

(This may seem unnecessary, as the terms will be disclosed in the contract, but it is of such vital importance that we believe it wise to re-emphasize it)

(l) A statement as to whether by the terms of the franchise agreement or by other device or practice, the franchisee is required to purchase from the franchisor or his designate, services, supplies, products, fixtures or other goods relating to the establishment or operation of the franchise business, together with a description thereof.
(m) A statement as to whether the franchisor has either by contract, agreement, arrangement or otherwise, agreed with any third party or parties that the products or services of such third party or parties will be made available to the franchisee or franchisor on a discount or bonus basis, and details thereof.
(n) A statement as to whether by the terms of the franchise agreement or other device or practice, the franchisee is limited in the goods or services which may be offered by him to his customers, ad details thereof.
(o) A statement of the terms and conditions of any financing arrangements relating to the sale of the franchise, when offered directly or indirectly by the franchisor or his agent or affiliate.
(p) A statement of any past or present practice of or any intent of the franchisor to sell, assign or discount to a third party any note, contract or other obligation of the franchisee in whole or in part.
(q) A statement of the number of franchises at present operating and proposed to be sold within the next year after registration.
(r) As statement as to whether the franchisees receive any exclusive rights of territory, and if so, the extent thereof.
(s) A statement of any compensation or other benefit given or promised to a public figure, arising in whole or in part from,
(i) the use of the public figure in the name or symbol of the franchise; or
(ii) the endorsement or recommendation of the franchise by the public figure in advertisements.
(t) A statement as to whether any procedure has been adopted by the franchisor for the settlement of disputes between the franchisor and the franchisee, together with details.
(u) A statement as to whether the franchisor provides continuing assistance in any form to the franchisee and if so, the nature, extent and cost thereof.
(v) A statement of the training responsibilities of the franchisor.
(w) A statement of any competitive activities that have been, are or may be entered into by the franchisor, its agents or affiliates, directly or indirectly, together with details.
(x) A statement of any restrictive covenants on present or future business activities of the franchisee.
(y) A statement of the names and addresses of former franchisees in the province who have assigned, sold, transferred or voluntarily terminated, or have been terminated within the year preceding registration.
(z) Such other information relating to the application as the Registrar may reasonably require or as the franchisor may desire to present.

In listing the information required for the prospectus, we have borrowed heavily from the California and Alberta legislation. We have, however, amended many, deleted some and added a few of our own. The list is now, in our view, comprehensive enough to disclose every evil that we have discovered in the course of our investigation. It is to be noted that the California and Alberta statutes really go no farther than full disclosure. We believe that further safeguards and remedies should be given, and we offer them in the following paragraphs.

5. The Registrar may accept or refuse to accept the prospectus (subject to appeal to the Tribunal) and if he finds that the applicant has failed to demonstrate that adequate financial arrangements have been made to fulfill the obligations set forth in the prospectus, may order and escrow of fees charged to the franchisee, or the posting of bonds by the franchisor to cover loss.

6. There shall be filed with the Registrar all variations in the prospectus, and annually an audited financial statement and an affidavit with respect to changes, similar to the provisions affecting multi-level schemes – see paragraphs numbered 5 and 6 on pages 31, 32, infra.

7. The Registrar shall have the right to cancel the registration and the right of the franchisor to deal in franchises, similar to section 6 of the amended Consumer Protection Act, and there might be provision for injunctions as suggested in paragraph 10 of the recommendations relating to multi-level sales.

8. Before trading in any franchise, the franchisor shall provide the prospective franchisee, at least 48 hours prior to the execution of the franchise agreement, with a copy of the prospectus, together with a copy of all proposed agreements relating to the sale of the franchise. If such documents are not provided as required, the franchisee may rescind the contract at any time up to the receipt of the documents and 48 hours thereafter.

9. In all dealings between franchisors and franchisees, whether before, during or upon the termination of the franchise, the franchisor shall deal fairly with the franchisee, and it shall be open to the franchisee at any time to apply to the Tribunal (or to the Court or to either – see paragraph 1 under Recommendations, supra) for a determination of the rights between the parties, and upon such hearing, the burden shall be upon the franchisor to show:
a. The contract between the parties was fair; and
b. The franchisor’s conduct was equitable in the circumstances.

10. The Tribunal shall have all powers, both legal and equitable, to excuse the franchisee from performance of any contractual term, with or without the imposition of terms upon the franchisee, and to enjoin the franchisor from the exercise of any of his rights under the contract, and may make interim or ex parte orders pending the hearing.

11. (1.) In determining whether or not the terms of the contract are fair or the conduct of the franchisor is equitable in the circumstances, the tribunal shall have regard in normal circumstances to the elimination of the following practices:
a. arbitrary termination of the franchise;
b. arbitrary refusal of assignments or renewals of the franchise;
c. arbitrary refusal of permission to dispose of franchises upon death or incapacity of the franchisee;
d. the obligation to purchase raw materials or other materials necessary to the operation of the franchise from a particular source;
e. arbitrary forfeiture of deposits or fees;
f. competitive practices of the franchisor detrimental to the welfare of the franchisee;
g. discouragement of collective bargaining practices among franchisees.
(2). The Tribunal shall have power to prohibit any conduct of the franchisor if such conduct is contrary to assurances given at the time of entering into the contract, whether or not such assurances are carried into the contract or contradicted thereby.

12. No franchisor shall publish any advertisement offering a franchise unless a true copy of that advertisement has been filed with the Registrar at least three days prior to publication thereof. Where the Registrar is of the opinion that any advertisement contains false, misleading or deceptive statements, he may order that it be not published or that it immediately cease to be published.

13. No franchisor shall make any statement, representation or prediction with respect to earnings or projected earnings, either by advertising or otherwise, unless he at the same time and in the same manner sets forth the basis of and the method of calculation of such earnings or projected earnings.

14. Wherever by contract the franchisor exacts funds from the franchisee for advertising purposes, he shall be required to make a true accounting of the expenditure of such funds within a reasonable time after their levy.

15. Any condition, stipulation or condition purporting to bind any person acquiring any franchise to waive compliance with any provision of this Act or any regulation thereunder, is void.

SUMMARY OF RECOMMENDATIONS

The following is a brief resume of the major recommendations of this report, without precision or detail.

Franchises
1. Legislation is to apply to all industries and to all franchises within each industry
2. Prohibition against dealing in franchises except as provided
3. Franchisor to file prospectus setting forth detailed information on scheme
4. Franchisee to have compulsory 48-hour cooling-off period before execution of agreement
5. Franchisee to have right to apply to Tribunal or Court to determine,
(a) whether contract is fair; and
(b) whether conduct of franchisor is fair in circumstances
6. Tribunal or Court to discourage following:
(a) arbitrary termination
(b) arbitrary refusal of assignments or renewals
(c) arbitrary forfeiture of deposits
(d) forced purchases and secret profits
(e) competitive and discriminating practices by franchisors

General
1. The formation of a separate branch of division with its own Registrar to administer multi-level and franchise matters.
2. Control of advertising
3. Regular renewal of permission to operate to be required
4. Suspension and cancellation of permission to operate
5. Regular inspection of records
6. Provision for escrow of investments or fees to protect investors and franchisees
7. Application of legislation to leases as well as sales

A summary of The Grange Report is available on WikiFranchise.org here.

The full Grange Report may be ordered from the Archives of Ontario (quote RG49-19 1971/82 (28th Parliament, 4th Session) – Session Papers T.B. 2-142, No 82 Sessional Papers)


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