Franchise Disclosure
Act, 1999, Bill 33, Mr Runciman /Loi
de 1999 sur la divulgation
relative aux franchises, projet de loi 33, M.
Runciman
Statement by the
ministry and responses
Mr John O'Toole, parliamentary assistant, MCCR
M Joseph Hoffman, director, policy and agencies relations branch,
MCCR
Mr Tony Martin, MPP
Mr Mike Colle, MPP
American Franchisee
Association
Ms Susan Kezios
Mr John
Sotos
Mr Ned
Levitt
Canadian Council of
Grocery Distributors
Mr David Wilkes
Mr Justin Sherwood
Mr Kevin Ryan
Mr Tony
McCartney
Mr Neil
Davies
Former Pizza Pizza
Franchisee Association
Mr Dave Michael
Ontario Franchisee
Coalition
Mr David Sterns
Canadian Federation
of Independent Business
Ms Judith Andrew
Mr Ed
Barge
Canadian Bar
Association-Ontario
Mr Frank Zaid
STANDING COMMITTEE ON
REGULATIONS AND PRIVATE BILLS
Chair /
Présidente
Ms Frances Lankin (Beaches-East York ND)
Mr Gilles Bisson (Timmins-James Bay / -Timmins-Baie James
ND)
Mrs Claudette Boyer (Ottawa-Vanier L)
Mr Brian Coburn (Carleton-Gloucester PC)
Mr Garfield Dunlop (Simcoe North / -Nord PC)
Mr Raminder Gill (Bramalea-Gore-Malton-Springdale PC)
Ms Frances Lankin (Beaches-East York ND)
Mr Pat Hoy (Chatham-Kent Essex L)
Mr David Young (Willowdale PC)
Substitutions / Membres remplaçants
Mr Ted Chudleigh (Halton PC)
Mr Steve Gilchrist (Scarborough East / -Est PC)
Mr Tony Martin (Sault Ste Marie ND)
Ms Marilyn Mushinski (Scarborough Centre / -Centre PC)
Mr John O'Toole (Durham PC)
Mr George Smitherman (Toronto Centre-Rosedale /
Toronto-Centre-Rosedale L)
Clerk / Greffière
Ms Anne Stokes
Staff / Personnel
Ms Susan Swift, research officer,
Research and Information Services
The committee met at
0856 in room 151.
Clerk of the
Committee (Ms Anne Stokes): Honourable members, it is my
duty to call upon you to elect an Acting Chair. Are there any
nominations?
Mr John O'Toole
(Durham): I would submit Mr Smitherman to sit in as
Chair.
Clerk of the
Committee: Mr Smitherman is nominated. Are there any
other nominations? There being no further nominations, I declare
Mr Smitherman Acting Chair.
SUBCOMMITTEE REPORT
The Acting Chair (Mr
George Smitherman): Good morning. It's my pleasure to
welcome you to this important consideration of Bill 33. I'd like
to start by asking for a report of the subcommittee.
Mrs Claudette Boyer
(Ottawa-Vanier): I would like to move the report of the
subcommittee.
Mr Tony Martin (Sault
Ste Marie): I'd like to move an amendment to the report
to say that the ministerial briefing be shortened by 20 minutes
and that Mr Ned Levitt appear before the committee following Mr
Sotos before lunch, and that the committee would pick up the
reasonable expenses for Gillian Hadfield, who will appear before
us in Ottawa.
The Acting
Chair: Any comment on the amendment moved by the member
for Sault Ste Marie? All those in favour of the amendment? Any
comment on the subcommittee report?
All those in favour of the
subcommittee report, as amended? Is that carried? Carried.
FRANCHISE DISCLOSURE ACT, 1999 / LOI DE 1999 SUR LA
DIVULGATION RELATIVE AUX FRANCHISES
Consideration of Bill 33, An
Act to require fair dealing between parties to franchise
agreements, to ensure that franchisees have the right to
associate and to impose disclosure obligations on
franchisors / Projet de loi 33, Loi obligeant les parties
aux contrats de franchisage à agir équitablement,
garantissant le droit d'association aux franchisés et
imposant des obligations en matière de divulgation aux
franchiseurs.
MINISTRY OF CONSUMER AND COMMERCIAL RELATIONS
The Acting
Chair: We're going to proceed with the ministerial
briefing, and I'll pass the floor to Mr O'Toole.
Mr O'Toole:
Thank you very much, Mr Chair. It's a pleasure to be here. I'd
like to invite the ministry staff to attend at the table and also
to introduce themselves for the record, please.
Mr Joseph
Hoffman: Good morning, Mr Chair, committee members.
Joseph Hoffman; I'm the director of policy and agency relations
at the Ministry of Consumer and Commercial Relations.
Mr O'Toole:
With that, on behalf of the minister, it's my privilege to make
opening remarks, and then I'll turn it over to Mr Hoffman, if he
has any technical comments or input.
Before I begin, I know
members of the committee who are not currently in attendance are
en route, and we certainly will be looking forward to their
attendance.
It's an important opportunity
to be here on behalf of Minister Runciman to start the hearings
on the Franchise Disclosure Act. Although regular data are not
collected by any government in this area, industry estimates
suggest franchises in Ontario account for an estimated $45
billion to $50 billion in annual sales. That's 40 cents out of
every retail dollar spent in the province.
Franchising is a powerful
engine for economic growth and the creation of jobs. Moreover,
many men and women in this province see the purchase of a
franchise business as a way to reach their dreams of a better
tomorrow. It is important that individuals and companies doing
business continue to see Ontario as a good place to do business.
They need to see Ontario as the place that promotes, and indeed
encourages and rewards, entrepreneurship.
The Franchise Disclosure Act
fulfills the government's throne speech commitment to introduce
franchise disclosure legislation to foster an even stronger and
more competitive marketplace. The government believes this bill
is an important facet of a fair, safe and informed marketplace
that supports a competitive economy in the province of Ontario.
This is the first governing party in Ontario to follow through on
its commitment to introduce franchise legislation. Both
opposition parties had the opportunity to do so and chose to
treat franchise problems as a lower priority.
This bill reflects the government's desire to find
the right balance between distinct needs. There is a need for
marketplace fairness. Potential investors in franchises need more
information and transparency to make wise business decisions. On
the other hand, there is an equally compelling need to avoid
unnecessary or cumbersome regulations and respect the rights of
private parties to freely conduct business and contract with one
another.
To find this balance,
Minister Runciman and the consumer and commercial relations staff
conducted extensive consultations with business groups and
individuals. These consultations included the Franchise Sector
Working Team, a group of franchisees, franchisors and franchise
legal experts who have literally committed years of effort to
improving franchising in this province. While each member had a
different idea of what a perfect franchise bill should contain,
the entire team expressed support for the balance struck in this
bill.
Extensive consultations were
held with business associations and the franchise community. A
consultation document was developed and sent to more than 300
organizations. The ministry asked for comments, and more than 95%
of those responding said they support this approach.
We know that some people
would like the bill to be different. Some would like the
government to legislate business relationships, constraining the
ability of private parties to freely contract things such as
termination clauses. Some would argue for no legislation at all,
allowing the market alone to deal with the issues, as it does in
all but one other province in Canada.
The government chose a
balanced approach between these views. This bill will achieve its
goal. The government believes this legislation will encourage a
fair, open and competitive marketplace. It will encourage more
investment opportunities for both franchisees and franchisors. It
will set standards for the disclosure of information by
franchisors. It will require fair dealing between the parties to
a franchise agreement. And it will ensure that franchisees have a
right to associate, reflecting a fundamental principle that goes
beyond the franchising industry itself.
The Mike Harris government,
supported by many people in the franchise industry, believes this
legislation will reduce the kind of problems that have arisen in
the past. This proposed legislation is consistent with the
approach taken by Alberta, the only other jurisdiction in Canada
with franchise legislation. It also reflects the best practices
in the marketplace today. It will raise some franchises to this
standard and compel those unwilling to act fairly to leave the
marketplace. Moreover, this bill will bring us closer to
harmonizing legislation across the country.
I now want to hand the
microphone to Mr Hoffman, the director of MCCR's policy and
agency relations branch, who will take us through the bill. Thank
you.
Mr Hoffman:
Thank you, Mr O'Toole. I thought I would be of most assistance to
the committee this morning if I explained what the objectives
behind the bill were and tried to accomplish three things. The
first would be the highlights of the legislation itself, and the
second would be to illustrate or highlight those issues which
will be dealt with under regulations under the act. This is an
extremely important piece of legislation. Many of the substantive
disclosure requirements, for example, or things that will be set
out in the regulations, are not in the legislation, and it's
important that all members have the benefit of an understanding
of what types of issues will be in the regulations and what the
ministry has been on public record in terms of the various
regulatory proposals.
The last thing I thought I
could do is to respond to any questions that committee members
may have from the perspective of a government expert who has
worked in this area now under three different governments. If
that's acceptable, then I will proceed.
First I would like to
emphasize that many of the comments I'll make in terms of
describing what the legislation does and does not do should be
looked at in contrast to what exists today, which is essentially
nothing. That is an important point, that almost every aspect of
the bill needs to be compared to the current environment in order
to put it in its proper context.
At the highest level, what
the legislation in front of this committee will do is define
franchise arrangements that will be covered by the disclosure
requirements and those that may not be covered. I'll come back to
that point, as I will to these other points, in more detail.
It will set out very
explicitly the disclosure requirements, as well as the
consequences for the failure to disclose.
It will create a statutory
obligation to disclose all material facts relevant to a franchise
offer, not simply those material facts that are prescribed in the
regulations. There is a definition of "material facts." It is
very broad and provides a very high standard of disclosure.
The bill will also create a
statutory duty of fair dealing on each party to a franchise
agreement. This is one aspect of the legislation that will apply,
in effect, retroactively. It will apply to all franchise
agreements currently in existence today.
It will also create statutory
rights of franchisees to associate. This is another aspect of the
legislation which can be described as retroactive in the sense
that where there are existing franchise agreements that create
constraints or prohibitions on the right to associate, the
legislation, when passed, will nullify and make void such
contractual obligations.
I would like to come back to
each of these points, in effect, in succession.
First, what does this
legislation apply to? There really are two areas of franchise
arrangements that are set out in the legislation. The first is a
traditional franchise, and these are the common business format
or product distribution arrangements. In order to be affected by
the legislation each of the following three aspects would have to
apply:
There would need to be the use of a trademark
involved, where the franchisor provides a right to distribute
goods or services that are substantially associated with the
franchisor's trademark or their trade name, advertising or
commercial symbols.
In addition to that, there
would need to be significant control or assistance where the
franchisor exercises significant control over or offers
significant assistance to the franchisee in terms of the method
of operation of the business. Control or assistance could
include, but not be limited to, things like building design,
furnishings, locations, training, marketing techniques and so on,
so it's really a substantive element of control.
Lastly, the other aspect that
would need to apply is payment, where the franchisee is required
to make payment to the franchisor or a commitment to make payment
as a condition of obtaining the franchise or commencing
operations.
That is the first category of
franchise arrangements that will be captured by the proposed
legislation. I think I can say that in the universe of franchise
arrangements, that would occupy the lion's share.
0910
The second category of
franchise arrangements that would be captured by this are what
are known as business opportunities types of arrangements. Again
there are three criteria and each of them would apply; the first
is representational or distribution rights. This is different
from the first category in that no trademark may be involved. The
franchisor may simply provide the right to sell a good or service
that's supplied by the franchisor or a supplier which the
franchisor requires the franchise to use. The second area would
again be location assistance as a more narrowly defined aspect of
control, where the franchisor will secure a retail outlet or
accounts for the goods or services to be sold or secure locations
or sites. For example, vending machines could come under this
category, depending on the magnitude of the business, or display
racks, or providing the franchisee with the services of someone
to do those things. The third category is the requirement for
payment, which is essentially identical to the one I described
before.
In any franchise arrangement,
other than those that are clarified or accepted or excluded from
the act-and I'll come back to those in a moment-in any of those
two franchise arrangements, the disclosure requirements of this
legislation would apply. The point of the disclosure requirements
is to provide prospective franchisees with clear and sufficient
business information upon which to make an informed investment
decision. Every franchisor would be required to provide
prospective franchisees with a single disclosure document at
least 14 days prior to the signing of any agreement or any
financial transaction, and that would include a deposit. The
franchisor's obligation would include notifying the prospective
franchisee of any material change that has occurred in relation
to the information provided prior to the signing of the contract
or the financial arrangement. That means that if the franchise
disclosure document is provided but there is some material change
in the information that has transpired subsequent to the
provision of the document, there's a statutory obligation on the
franchisor to disclose that material change.
Franchisors would be required
to disclose all material facts, including material facts related
to the matters that are specified in the regulations. I would
like to emphasize that this is, in effect, a dual statutory
requirement. Material facts, as set out in this legislation, are
not limited simply to those things that are prescribed. Material
facts other than those things that are prescribed in the
regulations are facts that would reasonably be expected to have a
significant effect on the price of a franchise or a decision to
buy one. The disclosure requirements set out in the regulations
would include two baskets, if you will, of information:
information on the franchisor, the business or the entity that is
offering the franchise; and information on the offer itself, the
specific details of the offer.
All the information in the
disclosure document under the statute would be required to be
accurately, clearly and concisely set out and delivered in a
single document at one time. That would eliminate the possibility
of piecemeal disclosure or complicated, cumbersome documents that
are multi-levelled, where financial information is provided in
one document and something else is provided in another
document.
This aspect of the
legislation, the disclosure requirement, will apply to all
franchise agreements that are entered into on or after the
legislation comes into force if the franchisee's business is to
be operated partly or wholly in Ontario. In fact, the legislation
includes two references that are extremely important; first of
all, that if there is any attempt in the contract that would
affect the jurisdiction of the agreement, then that aspect of the
contract would be considered void under the legislation. Also,
the legislation is explicit that any of the rights that are
provided in this legislation cannot be waived; they cannot be
released by a party through a contractual arrangement.
In terms of the detailed
disclosure requirements-and here is where my comments will shift
out of the legislation itself and more into what the government
and the ministry have put on public record as the types of
disclosure requirements that would be in the regulations. These
are things provided for in the act to be set out in
regulations.
The first category, as I
mentioned, the first basket, is information about the franchisor.
The disclosure document requirements that will be set out in the
regulations would include:
Business background of
franchisor, directors, general partners, the officers of the
franchisor, including ownership, prior experience, the length of
time the franchisor has conducted the type of business to be
operated by the franchisee;
Litigation history involving
the franchisor, the associates or any directors, general partners
or officers of the franchisor, and this litigation history would
include convictions or pending charges involving fraud, any
violation of franchise
law, business practice legislation or unfair or deceptive
practices law, any injunctive or restrictive orders that are
imposed by or pending administrative actions to be heard before a
public agency of any jurisdiction, and liabilities in civil
action or any pending actions involving the franchise
relationship or involving misrepresentation, unfair or deceptive
practices. We've tried to keep the scope of this type of proposal
broad so that the type of litigation history that would be
relevant to a business relationship is clearly captured.
Another category that would
be set out is bankruptcy or insolvency information.
The next category is
financial history, and there would be an obligation to provide
either audited financial statements or statements that are
prepared in accordance with generally accepted accounting
principles and with standards applicable to what are known as
review engagements set out in the Canadian Institute of Chartered
Accountants handbook; and, in addition to that, a statement
advising franchisees of the availability of commercial credit
reports from private credit reporting companies and informing
them that these reports may provide information useful in making
an informed investment decision.
If I could add a comment
here, this is an extremely important aspect of the proposal
because of the existence of these commercial credit reports which
do not require the consent of the franchisor to have access to
them. They are available literally by telephone and fax for
payment of essentially a fairly minor fee and contain all kinds
of useful information about the financial affairs and the history
and the business conduct of the franchisor. The last aspect of
financial history would be that all financial information must be
consolidated and presented in one section of the disclosure
documents, so all the financials have to be visible in one
spot.
Lastly, in terms of the
information about the franchisor, a statement describing any
internal or external dispute resolution process that's utilized
by the franchisor and a brief description of the circumstances
under which that process is utilized.
In terms of information on
the franchise offer, the disclosure document requirements that
are set out in the regulations would include costs; for example,
the initial deposit or the franchise fee or whether or not this
is refundable, the costs for initial inventory-signs, equipment,
leases, rentals-and copies of all proposed franchise agreements.
The agreement itself must be part of the disclosure document.
Restrictions: for example,
any limitations on the choice of supplier of goods or the goods
or services to be offered for sale, or the sales territory.
The policy regarding what are
known as volume rebates where there are requirements to buy from
a specific supplier and the franchisor receives a rebate in
relation to the volume of goods or services, so the policy
regarding volume rebates would be included in the disclosure
requirements and would include specific information on the
franchisee's buying or inventory obligations, the restrictions,
the terms etc.
Territory: for example,
policies regarding the exclusivity of the territory or the
proximity in which a new franchise may be established and
information on what are known as multi-lines or multi-brands that
are offered by the franchisor. For example, if a franchisor has
one system called ABC Donuts and another system called XYZ Donuts
and he's selling ABC Donuts to a prospective investor, he must
also disclose the territorial issues related to his second line,
even though the contractual obligation is with the first.
0920
Conditions of termination,
renewal or transfer of franchises; training or other assistance
programs; how the advertising fund, if there is one, is dealt
with-for example, the portion of the fund that's spent on
administrative costs or on national campaigns versus local
advertising. Other obligations would include the current and
former franchisees, a list of the current and former franchisees,
as well as a statement encouraging the prospective franchisee to
seek legal or other advice and to freely contact other
franchisees prior to acceptance of the offer.
Last, earnings potential:
There is no obligation to describe earnings potential in relation
to the franchise offer. That's optional, but if the franchisor
chooses to provide earnings information, the information must
include a reasonable basis for making that claim, the material
assumptions that are involved and a notice of where the
substantiating information is available for inspection by
franchisees.
What happens if there is
non-disclosure or inadequate disclosure under the statute?
Failure to comply with the disclosure requirements carries some
very meaningful consequences. They would include, first and
foremost, a rescission right. This is unprecedented in terms of a
shift in the current environment. The franchisee is able to
determine whether or not to exercise these rights. They would not
need to go to a court in order to exercise a rescission
right.
If the disclosure document
has not been provided within at least 14 days prior to the
signing of the agreement, the franchisee may rescind the
agreement without penalty or obligation no longer than 60 days
after receiving the document. So a 60-day clock begins once the
documents are received.
If no disclosure document has
been provided at all, if the franchisor has not provided a
disclosure document of any kind whatsoever, then those rescission
rights extend without penalty or obligation no later than two
years after entering into the franchise agreement.
If the franchisee decides
that there has not been disclosure of the material facts or about
a material change and elects to exercise the rescission right
within 60 days of receiving notice of rescission from the
franchisee, the franchisor must refund any money received from or
on behalf of the franchisee other than money for inventory
supplies and equipment; buy back at the purchase price any
inventory remaining at the date of rescission which has been sold in accordance with
the agreement; buy back at the purchase price any supplies and
equipment that has been sold to the franchisee in accordance with
the agreement; and compensate the franchisee for any losses that
the franchisee incurred in acquiring, setting up and operating
the business. The burden of proof under the statute is on the
franchisor to go to court and demonstrate that disclosure has
been carried out in accordance with the act, otherwise these
obligations are in effect.
In addition to the rescission
rights, there are rights of action for damages available under
the statute. Franchisees who have suffered a loss as a result of
the franchisor's failure to comply with the disclosure
requirement or because of a misrepresentation contained in the
disclosure document or statement of material change would have
the right of action for damages against the franchisor or against
the franchisor's associate-this is someone who would control or
is controlled by the franchisor and who is directly involved.
They must be directly involved in the sale of the franchise or
exercising significant operational control over the franchisee.
The intention of this is to prevent situations where a franchisor
can evade disclosure responsibilities by creating a shell
company, for example. In addition, the right of action for
damages exists against every person who signed the disclosure
document or statement of material change.
Duty of fair dealing: Under
the act, a standard of conduct would be set up and a duty of fair
dealing is created that is identical to Alberta's legislation.
Every franchise agreement imposes on each party a duty of fair
dealing in its performance and enforcement. The duty would be
enforceable through civil action and it applies to all current
franchise agreements.
The right to associate: This
ensures that franchisees may freely associate without penalty or
threat of penalty. The legislation would prohibit contractual or
other interference in this right, override any existing
contractual provisions that may exist in this regard and provide
franchisees with a right of action for damages against any
franchisor attempting to penalize or threatening to penalize a
franchisee for exercising this right. Again, this would apply to
all current franchise agreements.
There are several exclusions
from the proposed legislation. Because franchise arrangements
take a wide variety of forms, and in order to avoid confusion,
there are a number of commercial relationships which, while on
the face of it they may look like a franchise agreement, are
intended to be excluded from the legislation. These would include
employer-employee relationships or business partnership
arrangements; memberships in a bona fide co-operative
association-that would have to be set out in the regulations;
agreements with a certification or testing service that
authorizes the use of a certification mark like a CSA standard,
for example; agreements between a licensor and a single licensee
to license just a trademark, like the use of a logo on a coffee
cup or T-shirt; leased departments, relationships in which a
franchisee leases space inside the premises of another retailer
and is not required or advised to buy goods or services it sells
from that retailer or an affiliate of that retailer; oral
agreements; and crown entities, service contracts or
franchise-like arrangements between crown entities and other
parties which are typically subject to public tendering or
procurement guidelines, freedom-of-information legislation or
other statutory provisions which do not apply to franchise
arrangements between private parties.
There are exemptions from the
disclosure requirements that are set out in the legislation, and
some that will be spelled out in the regulations. These would
include things like transfers, the sale of an existing franchise
by a franchisee that is not effected through the franchisor; a
master franchise arrangement, where the rights to sell a
franchise throughout an entire region or province are involved;
the sale of a franchise to an officer or director of the
franchisor, if that person has been in the position for at least
six months; the sale of an additional franchise to an existing
franchisee if it is substantially the same as the existing
franchise; sales or transfers in a bankruptcy situation where an
executor, administrator, sheriff and so on is involved; a renewal
or extension of an existing franchise where there has been no
interruption in the operation of the business and no material
change has occurred since the franchise agreement was reached. It
would also include fractional franchises, which refers to where
the franchise arrangements may involve a product or service
operated within another business at a very low volume. An example
might be a little franchise kiosk selling coffee inside a large
retail complex.
There are minimum investment
thresholds that will be set out under the exemption requirements.
This is intended to ensure that a lot of the small or one-year
types of arrangements aren't captured, so if the total annual
investment to acquire and operate the franchise doesn't exceed a
prescribed amount-that amount has yet to be set in the regs-or if
the franchise contract is no longer than a year in length and
does not involve payment or any non-refundable fee or there is a
multi-level marketing contract, for example, in direct selling
arrangements that is covered under the Competition Act or a
specific section of the Competition Act.
Last are what are known as
"sophisticated investor" franchise exemptions, where the
franchise investment is above a threshold and the parties to the
agreement can be considered reasonably sophisticated business
entities. The amount that is expected to apply there is around
the $5-million mark.
There is also in the
legislation what is known as a "mature franchisor" exemption.
This is an exemption only from the requirements to disclose the
audited financial statements; it is not an exemption from all the
disclosure requirements. So a franchisor may be exempted by
regulation from the requirement to disclose financial statements
if that franchisor meets the criteria prescribed by regulation.
These criteria will require that a franchisor have a net worth of
at least $5 million, have at least 25 franchisees conducting business at all
times during the five-year period immediately preceding the date
of the disclosure document, and have conducted business for at
least five years in the province immediately preceding the date
of the disclosure document. Those three conditions are
essentially identical to those in the Alberta statute. Then there
is a fourth one that will exist in Ontario, and that is that the
franchisor not be the subject of any judgment related to any
disclosure requirements under this act during the five-year
period. Obviously that aspect can't be applied until the act has
been in place for five years, so as a transitional measure the
minister will be able to, by regulation, exempt any franchise
from providing financial statements based on an application from
a franchisor if the franchisor meets criteria prescribed by
regulation, which would be essentially similar to this. The
regulation power itself in this area and this specific ability to
grant these ministerial exemptions would sunset after five years
as this last aspect of the mature franchisor exemption kicks in.
Franchisors who are eligible for the mature franchisor exemption
would remain obligated to meet all other disclosure requirements
and would also remain subject to all other provisions of the
legislation, including the duty of fair dealing and the right to
associate.
That, I believe, covers the
landscape in terms of the act itself and how it interacts with
the regulations. At this point, if there are any technical
questions I can respond to, I'll leave it at that.
0930
The Acting
Chair: Are there any questions from members of the
committee?
Mr Martin: I
want to thank you for taking the time to come and share with us
the details of the act as it is proposed. I understand the effort
that went into making sure there was a fairly comprehensive
disclosure requirement in franchise dealing in Ontario.
One of the questions I have
is around how that would actually happen and what vehicle will be
put in place by the government to make sure the disclosure
statement is actually prepared and delivered, that it meets the
requirements, and that the franchisee isn't left out on his own
trying to decide whether he has got what he needs or what he is
supposed to have under legislation.
Mr Hoffman:
The best way I can answer that question would be to compare it
with other important areas where disclosure requirements are
typically dealt with in legislation and there is a reliance, once
the disclosure requirements clarify the obligations of parties,
on any problems in relation to that disclosure being dealt with
through the marketplace, through the identification of an
inadequacy in the disclosure and then dealt with between private
parties.
Cost-of-credit disclosure is
a good example in this regard, where there is legislation in
every province, including Ontario, which basically sets out how
financial institutions or automobile leasing companies, for
example, must calculate the cost of credit and how that
information must be presented to consumers. There have been
recent amendments proposed in Ontario that would include leasing
arrangements in that regard. There is not, associated with that,
a filing obligation or a mechanism which some government
department somewhere reviews pro forma for every credit card
company's calculation method etc, or a review of all lease
agreements or filing requirement. But as a mechanism, over the
years it has proven to be extremely useful, and there has not
been any evidence that there has been abuse of the legislation or
any kind of comprehensive or systemic problem in terms of the
marketplace providing the types of disclosure anticipated by the
bill.
That said, there is no
question that anyone who is of fraudulent intent may choose to
try to sell a bogus franchise or may make assertions around
credit arrangements that are essentially fictitious in an effort
to get money. Those are dealt with, essentially, through Criminal
Code enforcement.
Mr Martin:
All of that excepted, there is certainly a provision also,
though, in Ontario legislation that, for example, when securities
that are traded on the market are presented there is some effort
to make sure they are correct, and that piece of legislation
continues to evolve and unfold. We're talking somebody like
myself or Mr Gilchrist buying stocks worth maybe $1,000 or
$2,000; somebody else may be buying stocks worth $1 million.
In franchising, typically a
person is investing some, let's say, bottom line, $50,000 to
maybe $200,000 worth of their life's savings. Why wouldn't you
see that as a serious enough investment when you consider some of
what has gone on, particularly when you look at some of the
stories and you hear some of the details, to have something a bit
more concrete that the government would have some control over to
make sure these exchanges of information are happening and that
they are correct and that people aren't exposed any more than
they have to be to the fraud artists who are out there and only
too willing to take advantage of some poor soul who has
absolutely no experience whatsoever in business, which is so
often the case where franchising is concerned?
Mr
Hoffman: Frankly, I think the policy intention of the
bill clearly recognizes the importance of disclosure and ensuring
that the right information is in the right individual's hands in
a timely fashion in order for them to make an informed investment
decision.
I suppose one can argue
whether or not having the same information reviewed by a third
party is useful, and indeed that's contemplated. The disclosure
requirements would include quite a strong statement advising the
person to, in effect, take the disclosure requirement and the
contract itself and use a good third party to help guide a
prospective investor in making a decision.
Certainly the trend in
Canada, given that there are only two provinces that are
legislating in this area, has been away from requirements to
basically have on file in a government office somewhere the same
information that would be statutorily provided to the franchisee.
There was certainly a policy intention to try to have Ontario's
legislation and Alberta's legislation broadly comparable so that a company that is
complying with the requirements in one province is, broadly
speaking, complying with the requirements of the other.
Mr Martin:
But those who have some knowledge of what's unfolding in Alberta
will tell you that in fact that system isn't working, in some
instances precisely because there is no vehicle in place to make
sure it is going to work.
I have an article here from
the Globe and Mail of Thursday, October 22, 1998, where a Mr
Stainton is stating that the act is being ignored because there
is no third party from the government overseeing and checking
this out. He says: "Under the old system, franchisors had to file
disclosure documents with the Alberta Securities Commission;
today, there's no such requirement." It goes on to say that he
sees "`many cases' of companies selling franchises without
providing investors with suitable disclosure documents." That's
under legislation that is similar to the legislation you are
asking us to accept as is here today.
Mr
Hoffman: I can't comment on the assertions of this
individual, whether they're in the media or not. I know that in
providing the policy advice to the government on the bill, one of
the things we tried to do was to communicate very directly with
our counterparts in the Alberta government and indeed outside
Canada. There is no information that was ever presented to us,
and we specifically asked for it, that suggested there was any
systematic ignoring or violation of the disclosure legislation in
the province. We certainly sought examples of litigation or
information around what may be going on in the courts in this
regard.
0940
The Acting
Chair: We're going to need to stop questioning due to
the time. I think there will be lots of opportunities through the
week to follow up on those.
Just before we move on to
opposition statements, I'll ask for a brief closing comment.
Mr
O'Toole: Thank you very much, Mr Hoffman, for a broad
overview of the intents of this legislation. Also, I just want to
reassure members of the committee that there will be ministry
policy staff in attendance throughout the hearings to answer the
more technical questions.
The Acting
Chair: I'd like to now call on Tony Martin for the
opposition statement.
Mr Martin:
I want to start out by saying how happy I am that we're here
today considering this piece of legislation. You're right, it has
taken far too long. Other governments, including my own, didn't
do the right thing when they had the opportunity to move
aggressively forward to put in place legislation that would have
covered this area. Perhaps today, had they done that, we would be
looking at further legislation, having had some experience under
our belt of how the legislation that is being proposed today may
not actually have done the job. So I'm appreciative of the effort
of the government and of the work that has been done by previous
governments.
In fact, there has been a
lot of work done by a lot of people over quite a period of time
who recognized that there are some difficulties in this area of
business dealings in the province. The initial concern raised and
studied, entered into, goes back as far as the late 1960s, early
1970s and perhaps further. That's where I picked up a piece when
I got into this, and I'll talk in a few minutes about my actually
getting into this piece of work and how it evolved out of some
difficulties that some of the small business folks in my own town
of Sault Ste Marie got into.
Back in the late 1960s and
early 1970s, under the leadership of the government of the day, a
predecessor of the present government, one Arthur Wishart, a
Conservative MPP for Sault Ste Marie, who was the Minister of
Financial and Commercial Relations, commissioned a report, and it
came back and was named the Grange report. In it there was
reference to doing some things by way of legislation to deal with
the evils of franchising. I suggest to you that many of those
same evils continue to exist today because no regulation has been
put in place and because the industry, or the franchise sector of
industry, in Ontario has grown so substantially since then. So,
for me, it goes back quite a bit further than either the effort
made by the Bob Rae government and Marilyn Churley between 1990
and 1995 and then the work that was carried out subsequent to
that, from 1995 to now by the present government, initially Mr
Sterling, then Mr Tsubouchi and now Mr Runciman.
Having said all that, I'm
just very happy that we're here today and actually have the
opportunity to look at a piece of legislation that has been
proposed and presented and to hear from folks who have had direct
experience in franchising across this province, to hear from
folks who have acted on behalf of franchisees and franchisors and
to hear from some people who don't have a vested interest but who
simply are coming to share with us some of the work they've done
in studying this very important relationship over a period of
time now. I'm hopeful, as we move on, that the co-operative
nature of the discussion to date with Mme Boyer, Mr
O'Toole, the minister and others whom I've had the privilege to
interact with over this legislation will continue, that we will
work together to find a way to do what is best for the industry,
and I would suggest particularly for franchisees, who tend to be
struggling at this point in time, no matter how you look at it,
under some duress, and who are looking for some relief and some
vehicle they could use to redress some of the issues that they
see challenging them as they try to be the best they can be and
to contribute in a constructive and positive way to the economy
of the local area in which they operate.
So I guess my hope, to all
of the members of the committee, is that we will continue to work
co-operatively to find a way to do at this particular junction
what is necessary, recognizing that there has been some
experience that we can look at.
We can certainly look at
the Alberta legislation, and I referenced it a few minutes ago.
It's very similar to the legislation that's being proposed here
today by the government. Many who have watched that and
participated in Alberta
in franchising will tell you that it really hasn't changed the
lay of the land that significantly. We still see significant
numbers of franchisees going before the courts to have disputes
resolved, and any effort at mediation before getting to the
courts has not been successful. It is in fact costing some of
these small business entrepreneurs, who in many instances have
already lost their investment and are already in debt up to here.
They are now having to come up with money they don't have in
order to pay lawyers and to pay for court proceedings that at the
end of the day in most instances don't turn out in their favour
anyway, because they can't outlast the deep pockets of the
franchisor systems and really can't in the end afford the cost of
the kind of lawyer in many instances it would take to take on the
battery of lawyers that often face the franchisor when he shows
up in court, sometimes by himself or herself but most often with
a lawyer he can't afford.
There is also a wealth of
information that we can look at and we'll hear about in the US
experience. There aren't any jurisdictions left, I don't believe,
in the US experience that aren't covered by some regulation or
other. We will hear this morning from Ms Susan Kezios, who has a
tremendous wealth of knowledge and understanding of what's going
on in the US and those jurisdictions re best practices, what
legislation is in place. They've had legislation in place
actually for 30 years. We're only playing catch-up now. My
concern, having listened to the policy analyst from the ministry,
is that we will put in place legislation that will be akin to
what the US put in place 30 years ago and that it will only be 30
years down the line that we will come back again to perhaps
revisit this issue and actually do then what we had the
opportunity collectively to do now for a very important sector of
business in our communities across the province.
I don't think anyone will
deny that we have a problem, that we have a situation akin to, in
my view, and this is probably fairly biased, David and Goliath,
where you have franchisees going up against franchise systems
that have not lived up to, in any way, shape or form, that which
was presented to them in what I term the courting period before
they actually signed the agreement that they signed to do
business together. It's my understanding that when two people go
into business together it should be a relationship where each has
an opportunity to realize the potential to make a living-a good
living-if they work hard, if they bring their intelligence and
their brain to the job, if they do all the due diligence that's
required and keep up with the best practices in the business;
that in fact they will be successful, and that if a franchisee is
successful it makes sense, then, that the franchisor would also
be successful.
0950
But we see too often today
in Ontario as we read the reports that are coming out in some of
the newspapers-and you'll have to look to the news outlets for
that kind of information, because I had our research people at
Queen's Park do some work for me in preparing for today's
hearings, and they tell me that a lot of the information I would
have needed in order to make the kind of case that's required to
call on the government to introduce legislation that goes a lot
further than what's being proposed doesn't exist. Even the
Ministry of Consumer and Commercial Relations, who should be
keeping track of complaints by franchises to the ministry, has
not been doing that. That information isn't available, or, if it
is available, there would be a fairly long-drawn-out piece of
work to do in order to get that information. It isn't
available.
I share with the
committee-we'll circulate this later-a note that I got from a
research officer of the Legislature here to indicate that the
kind of information I required, that I wanted, so that we could
take a look at exactly what the nature of the complaint is and
what we could do by way of this legislation to resolve some of
those complaints, is just not available. There will be a document
circulated later that you will get that will speak to that.
It's also obvious to us
from inquiries that we made to banks, that happen to be another
of the major partners in this piece of work that's going on, that
banks tend to be, at the end of the day, one of the institutions
that gain very generously from some of the dealings between
franchisors and franchisees in that most franchisees have to go
at some point to the bank for a loan to top up or even, in some
instances, to get the money in the first place in order to enter
into the agreement that franchisees want to enter into so they
can participate in this business. Banks, at the end of the day,
also happen to be one of those players when it comes to a default
or a bankruptcy or a failure of a franchise system, so where in
many instances the franchisee ends up in some pretty dire straits
at the end of the day, it's normally the franchisor and the bank
who do everything in their power, with the power and resources
they have, to make sure that their interests are protected.
We went to the banks as
well to see if we could get some information on this, what
statistics there are as to how many franchisees went under and
failed and what impact that had on them, and that information
wasn't forthcoming either. They either didn't have it or they
weren't willing to share that information with us. I suggest to
you that certainly in my experience banks have information on
everything. There isn't a thing I do in my life that my bank
doesn't know about. In conversation with those institutions as a
person trying to get a loan to buy a car or whatever, I soon find
out to what degree of detail they have information on record
about me, so I find it strange, in a circumstance where you have
significantly more at stake and significantly more generous
financial dealings and relationships than perhaps I would enter
into, that there isn't that kind of information available.
I will be sharing with the
committee as well today some information that was gathered from
the banks, some of the questions we asked, and then some of the
answers we got, which were primarily: "We don't have any answers.
We don't keep those kinds of statistics, and that kind of detailed and specific
information isn't readily available." That makes it difficult for
us to do this job and to make the case we need to make here that
in fact there are some problems in the industry of a significant
financial nature. I'll be circulating that to you all in a little
while as well, so that you can have that at your disposal.
Having said all that, not
being able to get the information from those sources, it was
incumbent on me to do the job that I think is required of me in
this instance. I've been working at this legislation now for some
five years, brought into it by some experience in my own
community where now we have at least three very successful, very
important, very good corporate citizens in my community who are
no longer doing business because the parent company decided they
wanted to do something different and those particular franchisees
didn't fit into the plan.
We could have a long
conversation about why the corporation didn't feel they fit into
the plan, or my perspective on why they thought they didn't fit
into the plan, but the long and the short of it is those people
are no longer in the business that they wanted to be in, that
they had invested life's savings in, that they had borrowed money
to be in, that they were actually very successful in. In the
instance I'm sharing with you, of franchisees in my own community
being damaged by the unilateral decision of franchisors, we had
three people who had started out in the grocery business,
stocking shelves, carrying out bags of groceries and had worked
their way up to become the best they could be in the business.
They loved the business.
As a matter of fact, I was
talking to one of them just a couple of weeks ago and she was
indicating to me, even though she has gone on to do something
else now, that she misses terribly the work that she used to do.
Some of the missing that she was doing wasn't quite as tangible
as others, but she loved the work that she did and was very good
at it. She took a business that was doing under $1 million
worth of trade in a year to well into the millions of dollars of
trade, but was at the end of the day deemed by the franchisor as
not successful enough, as not fitting into the corporate image
that they wanted to project and not sophisticated enough, perhaps
because she comes from a town not quite as big as Toronto, Sault
Ste Marie. We tend to think we're fairly sophisticated up there,
but in the eyes of this particular chain that wasn't the case. So
she's not in that business any more.
If somebody, though, was
looking for information on any one of those three circumstances,
you would not find it in the files of the Ministry of Consumer
and Commercial Relations. You probably would not get that kind of
information even from the banks they dealt with. You probably
would get it if you went to their lawyers-you certainly wouldn't
get it from them today, because each one of them has signed the
infamous gag order. That is something we'll talk about,
hopefully, here over the next few days as well. They cannot speak
to us. Some of them will appear before us this week, some of them
incognito, in camera, because they are still afraid even though
we have immunity here-anybody who participates formally and
officially at a standing committee of the Legislature has
immunity, the same as we do, to ask questions as we feel free and
to say what we like. They're still not comfortable in coming
forward, because they know one way or another they can be got at
and their life can be affected by doing that. We wouldn't be able
to get that information from them even by going to them and
asking them specifically to share with us what happened and what
went on, because they are under the threat of legal action if
they share that with us.
So we had to go to the
press and in fact some of you may be aware of an organization
called the Canadian Alliance of Franchise Operators and Les
Stewart, who was himself a victim of a system and continues to be
one of the most effective advocates that I've come across in my
dealings in this area. He and I have put together a couple of
documents, two of them, an A and a B here, that I'm going to be
sharing with all of you. This is a compilation of the stories
that have appeared in the media over the last five to seven years
in Ontario. It's massive and if you look at the front pages of
both documents, there are some interesting trends as to the ups
and downs in the business.
1000
Interestingly enough, there
was a real flurry of activity around the 1993-94 period, when the
Pizza Pizza battle was brewing. All kinds of material and
information was being written and reported on. Then a suit was
launched, and one of the people writing the articles,
particularly for the Toronto Star, was chilled out and no longer
wrote on this business any more. So the number of articles that
appeared was significantly reduced, which indicates to you the
kind of pressure tactics and intimidation that go on and are
going on out there when somebody actually has the temerity or the
intestinal fortitude to bring something forward and challenge the
system and even go public with it.
These two documents speak
of the terrible experiences of some 4,600 families in this
province who have been damaged by their relationship in
franchising. I suggest to you that it's only the tip of the
iceberg, because only a small number actually come to the surface
and get the exposure that some of the folks in here have had.
Some 5,000 franchisees are before the courts in Ontario every
year. That should say something to all of us here as to the
seriousness of the work we do and the challenge in front of us to
go much further than what is proposed in the bill that has been
tabled, even though I believe it is a very serious and good start
to the conversation.
We need to get beyond just
the requirement to disclose; we need to get into actually
regulating the relationship once it begins to unfold. We need to
define more clearly the issue of fair dealing. I suggest to you
that if we don't define it, it will be defined in the courts at
the expense of the franchisees, who will end up carrying the
freight and paying for it, because it is in their best interests
to have that definition honed and in place. It won't be the franchisors who
will bring that forward and pay the freight to have that
done.
So there is a lot of work
that we need to have done. I'm happy and excited that we are here
today actually taking that next step to have that done. My hope
is that all of us who have worked so co-operatively to this point
to get it to where it is, including the minister, take it around
the province-Sault Ste Marie, Ottawa, London-so we can hear from
folks on their home turf, where they are most comfortable, their
stories and what they might suggest we could do to make this
legislation better. I look forward to participating actively in
that exercise.
I have a lot of material
that I need to share with folks, and I'll be asking the
legislative research folks to help me with that, so we can all be
as informed as we possibly can. I urge you to read some of it,
because it is really telling and informative, and it will be
important at the end of the day if we are going to do the right
thing here and make sure that 30 years down the road we are not
coming back and looking at putting in place some of the things
you are going to hear from Susan Kezios this morning, which are
already in place in many US jurisdictions. Thank you very
much.
The Acting
Chair: Thank you very much, Mr Martin. We will resume
opposition statements with Mike Colle.
Mr Mike Colle
(Eglinton-Lawrence): Thank you, Mr Chair and members of
the committee, for being here today. I know you all have a great
interest in this new legislation, as have a lot of stakeholders.
I think it is an opportunity, really, to do the right thing. I
look at this piece of legislation as an opportunity, in essence,
to set down a set of rules that will govern this growing, I might
call it, industry, and I hope we take this opportunity to do it
right. We may not be able to visit it again, and that is why I
think we have to look at all possible aspects of the new
legislation to ensure, obviously, that it protects both
parties.
As you know, one trend that
is most disturbing is the amount of litigation that takes place.
I don't think that either side, the franchisee or the franchisor,
wants to make the franchise industry essentially a pension or
annuity plan for lawyers. I think they can do well without the
franchisee or franchisor contributing to their pension funds.
That is why it is important to look at this legislation and try
to find ways to avoid litigation as much as possible. If we can
do that, we're going to save literally tens of millions of
dollars in legal fees, not to mention the personal and family,
and in some cases corporate, agony that takes place as a result
of the litigation that seems to be the growing trend in resolving
disputes. That's why this is an opportunity.
I know there have been a
number of recommendations. Basically the legislation puts down
some precepts which are quite sound. What we have to do, though,
is to ensure that it is strengthened, that both sides are
protected. Especially in this case, as we know, the most
vulnerable are obviously the franchisees, because we're dealing
with immense corporate clout in some cases and an individual who
puts their life's savings into a small business and tries to make
a living. We as legislators need to make sure we protect the
franchisee from undue costs that would result in some kind of
dispute.
I wonder whether the
dispute resolution mechanisms in this bill are strong enough. The
one recommendation that I would hope to see come out of this, if
possible-I think it would solve a lot of problems-is perhaps
having a franchise ombudsman. A person could be in place to
handle these disputes at a certain level, with a time frame where
resolutions could at least be brought to this ombudsman and he or
she could be of assistance to avoid immediately going into
litigation. That would really help in putting forth some
protections in this bill. At this point in time, the dispute
resolution mechanism seems to be not sufficient to avoid costly
litigation.
I've been talking to people
who have franchises, and some of them are quite happy, they're
doing quite well financially. I know of one case in particular, a
family friend who has done quite well with his franchise. I've
been checking with him. He's a young person who is doing quite
well. He's very satisfied with the company he's dealing with.
On the other hand, in this
last month there was a documentary on television about a couple
of cases of franchisees. In one case, they were in the coffee
business. They had a very successful business and were doing
quite well. The franchisor, who in the small print of the
contract was responsible for the leasing agreement, made the
decision that the landlord wanted too high a price for the lease.
Therefore, where the franchisee would have gone ahead and signed
the agreement with the landlord and thought he could still do
well, the franchisor decided it was basically too expensive,
despite the financial projections which showed he could probably
handle the increased rent. Subsequently the operation was shut
down, because it made the agreement null and void. That
individual who was running a successful franchise operation had
to close down. The operation was gone, and the years that he
spent growing the business were gone, flushed down the toilet. He
lost that business opportunity, and it wasn't because he was
negligent. By the way, within months of closing that operation a
new franchisor came in and signed a leasing agreement with
another coffee company and opened up in the same location.
1010
Obviously there is a lot of
onus on the prospective franchisee to read the fine print. The
cooling-off period helps in that regard but, as you know, the
tendency is for small business persons to be so anxious to start
this business that sometimes they overlook the potential pitfalls
in the agreement they sign. I don't know what we can do as
legislators to try and protect people from their own anxiety
about getting into something they feel has great prospects. It's
very difficult to control that, but there should almost be a
warning label on every agreement signed "caveat emptor." There is
this great urge, because one of the successes of franchising has
been based on this whole concept of branding. People want to buy
the brand so they're
willing to expend obviously what are extra dollars to buy into
the brand. There was a book just published by Naomi Klein here in
Toronto talking about the power and influence of branding. The
prospective franchisees are so anxious to be part of this brand
that they sometimes overlook the financial obligations, the
long-term implications of what they're getting into.
In that same documentary on
television they talked about a doughnut operation. I don't know
if this legislation-I have to look again through the fine print
of the legislation-will protect operators. In this case the
person bought a doughnut operation, very successful, doing quite
well, and I think he bought a second one. But then the franchisor
added their own doughnut operation in close proximity to the
existing two, and the franchisee's revenue began to go down, so
there was basically infringement upon his territory.
Legally, the franchisor was
protected. It's very clear in the agreement signed between the
franchisor and the franchisee that they can open up an operation
within so many kilometres, or feet or whatever it is, of the
operation. What they do have is a clause which says, "You have
the right to buy out or to purchase the new outlet in the
vicinity." That's your protection. But if you already own two
doughnut shops, why would you now all of a sudden try to buy a
third one which is going to compete with the two existing ones
you have in that neighbourhood? What happened in that area was
that there ended up being about eight doughnut shops by the same
franchisor, to the point where the gentleman who did quite well
with the first two doughnut shops had to close the doors and walk
away from those two shops.
What started off as a very
successful entrepreneurial exercise ended up being a disaster for
this individual through no fault of their own. The franchisor was
also protected, because it was stated categorically in the
agreement that you had the option to buy out a new franchise in
your territory. That was the protection that person had. But I
don't think that's realistic protection, considering there are
just so many dollars to be made selling doughnuts in a
territory-no joke about dollars to doughnuts or whatever it
is.
To me, these are very
concrete examples of some of the realities that exist in this
industry called franchising. There is no doubt it's going to
continue to grow, because it seems to be easy to piggyback on a
brand, if you've got a good brand and a good product, and the
franchisor has obviously invested in it at that point where
they've done quite well because they have a good product, and
they deserve recognition for that. But the budding franchisee who
sees the success and jumps on the bandwagon doesn't realize, and
sometimes doesn't have the protections in place, whether it be
through legislation or through their own due diligence, to find
out what they have to be aware of and whether they can afford
legal counsel.
Certainly the franchise
lawyers are experts, there's no doubt, in drawing up contracts.
I'm sure the contracts cover every potential loophole etc. I just
wonder whether the franchisee can afford that kind of legal
expertise on the other side, because those contracts can't be
altered. I'm sure it's a cookie-cutter contract that goes to
every franchisee; they're very similar.
The onus is on us perhaps
to try and find ways to protect the franchisee because it's
probably not going to be done in the contract signed by the
franchisor. That's human nature. It's the marketplace, the way it
works. If you have a very successful company, they're going to
try and ensure that these franchise operations are profitable.
That's their right, and they should proceed to do that. That's
why the onus falls back on us to try and find ways in this
legislation to strengthen it so that there is a process which is
transparent, which, as I said, avoids costly disputes that
involve third or fourth parties and years of litigation.
In many cases, from my
reading on this industry for the last two or three years, there
are people who essentially have a little nest egg they're looking
at for a possible retirement. They may be changing occupations in
middle age and they legitimately have put all their
family-usually it's family-or individual savings into this
employment possibility. In essence, it's a very good way for
people maybe to make a living. They can be their own boss, as
they say. They can control their own destiny by working hard.
Most of them, it seems, who own franchises have a history of
being very dedicated to their business, and the franchisors would
agree in most cases that is the case, that they put in long
hours, seven days a week. It's not a part-time job, it's not a
nine-to-five job; you have to put your blood, sweat and tears
into this investment. It's not like putting money into NASDAQ or
whatever. You have to in essence be there to ensure that the
business is successful.
I have a lot of sympathy
for franchisees because they put in their life's savings, they
work hard and they are the people I would like to protect as much
as possible. If we can find ways in the bill to make it fair, to
make it as much as possible immune to an ongoing litany of legal
disputes, if we can do that and ensure there's a process where we
almost obligate perhaps-we almost have to do that-the franchisee
to read and go over and have perhaps another party go over the
contract to ensure that they understand the implications of that
contract, it is so important. I wonder how many of them-sure,
they go over the main points of the contract-have done enough. I
don't know how you do that, and it's very difficult to oblige
franchisees to protect themselves. No doubt that's probably a big
problem that's on their own shoulders and no fault of the
franchisor or of the industry itself. It's just the nature, the
chemistry of franchising, and I think it's going to continue to
be a growing business.
If we put certain
protections in, if we listen to suggestions made by some of the
individuals or groups, maybe we in Ontario can have a piece of
legislation that can be very cost-effective and forward-looking.
So this again to me is an opportunity that is really quite
extraordinary for us, because these pieces of legislation
sometimes will never get looked at for another 20 years. We have
this opportunity to do
it right. Certainly my party believes in trying to do what we can
to put forth suggestions, and I hope the government is open to
suggestions, because I think it's in everyone's best
interests.
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As I said, it's an economic
and entrepreneurial activity that is sound. Franchising has a lot
of good aspects to it, there's no doubt about it, but it does
have some serious pitfalls that can be very detrimental to the
individual who puts their life's savings in. There's a variety of
different franchises, and some of them really have very few
litigation problems. I've talked to people in the grocery
business etc who say, "I'm doing very well financially, and I
have no problems with the company I'm working with," or the small
operator who's selling pet food, whatever it is. Some of them are
doing quite well and they have no problems.
I'm worried about people
who enter into a business arrangement who essentially have no
protections. The way to ensure we don't have everybody who has a
gripe with their franchisor ending up going to the ombudsman here
in Ontario, saying, "I don't like it," and their business is
doing poorly and they're not putting in the time and the
effort-obviously, we don't want that to happen. We're looking to
protect the legitimate person who has put their life's savings
into a business, the legitimate person who has done everything
possible to protect themselves and to make their business
prosper. Those are the people who somehow I would like to
protect, because I think they deserve protection, and I think
even the franchisors would agree. They're trying to support those
individuals, the legitimate person who makes that legitimate
investment, and both sides end up doing quite well.
I appreciate your listening
to my comments, and I look forward to doing something that I
think will avoid a lot of agony and anxiety for years to come. I
certainly offer my party's support to try to work with all
parties, all stakeholders and the government to essentially do
well by this great opportunity here. Thank you for listening.
AMERICAN FRANCHISEE ASSOCIATION
The Acting
Chair: I'd like to call upon the first expert witness,
Susan Kezios from the American Franchisee Association. Welcome to
Toronto, Chicago's sister city.
Ms Susan
Kezios: Thank you, Mr Chairman and members of the
committee. My name is Susan Kezios. I am president of the
American Franchisee Association. We're based in Chicago,
Illinois. We are the largest trade association in the United
States, representing the interests of small business franchisees.
We have 16,000 members, by the way, who own over 30,000 outlets
in about 65 different industries all over the United States.
I should tell you that I am
a former franchisee. I was an employee in a franchise. I worked
under two franchisees. I thought that the reason the franchise
was having problems was because the franchisees didn't know what
they were doing. I eventually bought the franchise from the
second set of operators. I became the third franchisee in about
four years and realized it was because the franchisor didn't know
what they were doing at the time, which is why we were having
such problems.
I worked with our fellow
franchisees around the country. We formed our own franchisee
association. We started training ourselves. In conjunction with
the franchisor, we developed advanced programs that the
franchisor hadn't been developing. The franchisor hired me as
vice-president of marketing, so I went and worked for the
franchisor.
I have had an interesting
career track in franchising: employee in a franchise, franchisee,
vice-president of marketing for the franchisor, and in that
capacity I was the franchisor's liaison to the franchisors' trade
association in the United States, which is now our opposition on
legislation of this type in the United States. I served on
several of their women and minorities in franchising
committees.
That is a little bit about
my background. I also have my own business, called Women in
Franchising. We encourage women and minorities in the States to
get involved as entrepreneurs through franchising. You have to
understand that early on I was concerned that women would sign
bad contracts with franchisors. I realized as years went on that
it was all white men in the United States who were also signing
bad contracts with the franchisors. I should tell you that I am
not a lawyer. I will probably offend somebody here today-I will
probably offend a lot of people here today-but I'm known in the
United States for speaking rather bluntly and candidly about the
problems that franchisees face, having gone through many of those
problems myself.
I thank you for the
opportunity to be here and to present some testimony. The two
things that I can possibly share are the American experience and
how you might restore a level of honesty and reduce further
opportunities for deception in franchising here in Canada. To
summarize where I'm going in my remarks, Bill 33 doesn't go far
enough; it doesn't go to the heart of the problems that current
franchisees face. We have 30 years of disclosure legislative
history in the United States, and disclosure alone doesn't work.
The third point is that the duty of good faith that is offered in
Bill 33 is not enforceable; it's not strong enough.
I can portray for you where
the United States is and what we consider to be the state of the
art. The United States Congress is right now looking at and
discussing very strongly current franchisee problems, because
they realize the current scheme has not worked for 30 years.
Actually, the American Franchisee Association has maintained in
the United States that the potential franchisee investor would be
better off without disclosure, just to know that there is no
protection, because in the States there is an appearance of
government oversight with no actual teeth. Unfortunately, when I
read Bill 33, that is what I am reading as well: the appearance
of government oversight but with no real teeth for
enforcement.
Part of the problem is that once you sign a
franchise contract you're not in pre-sale any longer. Disclosure
has to do with pre-sale, what happens before you become a
franchisee. The significant problems for current franchisees are
involved post-sale. In the States, we call that "relationship
legislation." You have elements of relationship legislation in
Bill 33, the freedom to associate and the duty of good faith,
but, as I said, the duty of good faith seems to be very weak.
The main thrust of
franchise disclosure laws in the United States are all pre-sale
to deter fraud and misrepresentation in the pre-sale process. The
current disclosure scheme in the US, and it seems to me what Bill
33 is modelled after, was enacted in the 1970s based on a 1960s
marketplace. Times have changed. You need to jumpstart yourself
maybe a little bit by looking at the US experience and get
yourself to a newer position. You are wise, and I was very
pleased to see freedom of association and an attempt at duty of
good faith in Bill 33, because you need to incorporate elements
of relationship legislation right out front.
I'll talk a little bit more
about US disclosure laws. California was the first state to enact
a disclosure law, in 1971. Now there are a total of 14 states
that have disclosure laws where a prospectus, an offering
circular, has to be provided to the potential franchisee at least
10 business days before they sign the contract or give any money
to buy the franchise. In 1979 the US Federal Trade Commission
promulgated the regulation. It's called "Disclosure requirements
and prohibitions concerning franchising and business opportunity
ventures." We call the FTC franchise rule "the rule." I might
refer to it in any number of those manners.
The FTC requires
pre-disclosure of 23 items of information. There is no central
repository for the documents; no one reviews the documents.
Supposedly franchisors are providing complete, accurate and
truthful information. Only in those 14 states that require some
kind of review and registration of the documents is somebody
actually reading the documents. In the other 30-odd states
there's nobody looking over the shoulder of the franchisors,
reading to see if these documents are in fact true, accurate and
correct.
By the way, the
franchisors' trade association in the US lobbied for 10 years
prior to the promulgation of the FTC franchise rule in 1979,
saying: "You don't need disclosure. The industry is fine."
However, presale problems were so acute that the federal
government in the US said, "Hey, we're going to enact disclosure
legislation." Today, the same people, the franchisors' trade
association, who lobbied against presale disclosure are saying:
"That's all we need. Disclosure is fine." In fact, they continue
to lobby against any promulgation of any new kind of standards of
conduct.
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To most members of our
association, probably 90% of them, the FTC rule borders on
irrelevancy because, again, it's a pre-sale. The majority of our
members, and we've surveyed our members, have been in business
for longer than 9-point-something years, so these are people
who've gotten to break-even and profitability. They've been
around for a while. They are what we'd consider successful
franchisees, mature franchisees. They feel the FTC rule does not
help them because they signed the contract and now their problems
are post-sale. In fact, the Federal Trade Commission has told me
four times in public hearings: "Ms Kezios, we will never get to
all the issues your members consider substantive. We just don't
have the time; we don't have the resources. We can't possibly
deal with them."
As a matter of fact, the
United States Senate asked, in 1993, for an accounting of the
FTC's enforcement of the franchise rule, and the General
Accounting Office found that the Federal Trade Commission acted
on fewer than 6% of all franchise complaints brought to it and
took to federal court only 2% of those. I have attached to my
written statement a copy of that report so that you can in fact
see what was reported to the United States Senate.
The important thing that
you have under your Bill 33 that we don't have under the FTC rule
is a private right of action. In the states that do not regulate
and register franchise documents, those franchisees have a
private right of action if they find out that their franchisor
may have violated the FTC rule. In the other 30-odd states, the
franchisees are supposed to go to the FTC and ask the government
to get redress on their behalf. Now you're seeing why our members
feel the FTC rule is irrelevant. We have actually called for it
to be abolished, because it would be better that the investor
knows that there is no government oversight. Don't give the
appearance of government oversight without any real enforcement,
any teeth.
There is also under the FTC
rule no obligation for franchisors to disclosure historical
financial performance information. That's what I heard this
morning that was also not required in Bill 33. That is inherently
misleading to an investor by omission. Why else do you buy a
franchise? It's like buying a car without having an engine in it.
You buy a franchise because supposedly you can make a living, a
good living. All franchisors are selling a proven business
system. They supposedly have a proven operating prototype that
they are selling to someone. They have historical financial data,
they have royalty reports from the franchisees, they certainly
know how much those units are doing, and they certainly should be
mandated to disclose that information.
In the States, it's a
voluntary disclosure, and since 1979, 85% of franchisors have
volunteered not to disclosure that information. They don't say
that to you when you're buying a franchise. This, in fact, may be
what will happen in Canada. They don't say, "We can give this
information on how well some of our units have done." They say:
"Ah, the government; we're prohibited by law from giving you this
information." They are actually twisting the truth to a couple,
perhaps, who have a severance package, retirement money, who are
not wise in the artful terminology of what is going on in
franchising that the franchise lawyers have written. So they
believe that the federal
government prohibits giving you any financial information. So
that is actually a very serious omission in both the FTC rule and
in Bill 33.
Let me talk a little bit
about relationship legislation in the United States. Again, this
is different from pre-sale. Relationship laws actually started
springing up in the States in 1972. In 1971, California enacts
the first disclosure law and right away there are relationship
laws starting to be enacted. Why? To adjust the imbalance in the
ongoing relationship between franchisor and franchisee. This is
all post-sale.
As franchising has grown in
the United States, another 20 states have enacted some kind of
franchise relationship. So you've got the 20 states with
franchise relationship laws; you've got the 14 states with
disclosure laws. Many of them overlap, but 24 of the 50 states
have some kind of franchise laws. In the States, it is often not
a consequence of the franchise chain you are buying as to how
fair or how protected you are; it depends on what state you're in
and the law changes. Usually the franchisor contract, the venue,
will be the home state of the franchisor because they know how
important home court advantage is in a legal sense.
You could be a California
franchisee who bought a franchise from a franchisor based in
Connecticut, which is on the east coast. In order to take up any
kind of dispute, mediation, arbitration or litigation, you have
to go to the home court of the franchisor. How many franchisees
in California do you think are actually going to do that? They'll
say: "Forget it. I've lost my $150,000. I'll go get a job. I'll
close the place down and I'll go on with my life." That in fact
is often what happens.
The state legislatures have
recognized over the years that franchisees are only governed
often by lengthy and totally one-sided contracts drafted by
franchisor attorneys that are basically non-negotiable. A
franchisee relies on the trust they place in the franchise
salesperson rather than on what to a first-time investor is
impenetrable legal documentation.
The most recent example of
a relationship statute to all business format franchisees in the
States is the Iowa Franchise Act, which is the most recent one.
The Iowa Franchise Act, enacted in 1992, has a duty of good faith
in it. Actually, the state of Washington has had duty of good
faith since 1972. So there are thousands of franchisors doing
business in both of those states with an enforceable duty of good
faith. There is not one reported appellate case in either of
those states-there's no litigation is what I'm saying-under an
enforceable duty-of-good-faith provision. What I would propose to
you is that an enforceable duty of good faith would cause
franchisors to be more reasonable and factual and fair before
they take some actions post-sale because they would know in fact
that there is a statute that they can be brought into court with.
That seems to be the only market force that franchisors in the
States truly fear, the fact that there is a statute and they can
be brought into court.
I don't think it will
increase litigation. I think something like that will actually
deter litigation, because the rules of the game will be better
defined. It's like speed limit signs. You have a speed limit sign
up and surveys in the States are that 90% of people stay within
the speed limit, but the 10% of those who don't, when they get
caught, there is a problem. In fact, I think that's what you may
be trying to do here; that is, to set up a speed limit sign-rules
of the game.
In the US, we visualize it
as kind of a patchwork quilt of a federal rule requiring
disclosure but no registration or review of the documents. Then
you've got all these different states with different
requirements, either disclosure pre-sale or relationship
post-sale requirements, yet the problems between franchisors and
franchisees continue to escalate in the States.
What are some of the issues
that franchisees face in the States and they're facing here? I've
seen enough of the press coverage. I've heard enough here in
Canada. I could walk into any meeting with franchisees
blindfolded and probably talk about eight out of 10 of the
problems they are facing. I don't care what brand names they're
from, where they're based; they all have essentially similar
problems.
One is encroachment, which
Mr Colle talked a little bit about. We call that encroachment in
the States. You talked about the doughnut franchise. We call it
cannibalization with some chains because there is such a
proliferation of the same-there are eight doughnut shops. There's
a proliferation of the shops. It is patently unfair and it is no
deal that you get the first right of refusal to say, "I'll take
that second or third one." Why would you want to do that? What
franchisees will say to me, "Susan, either I do that, I take the
second or third location, and cannibalize my own gross revenue
and net revenue or they're going to put somebody else in there
and they'll cannibalize my sales"?
Why would that be a benefit
to the franchisor? It's quite simple. In franchising, the
franchisor makes their money off the top. They are getting a
percentage of the royalties, of the gross sales. Franchisees are
worried about the bottom line. There's a distinct conflict of
interest here. Now we're way beyond the pre-sale courtship of:
"We're going to be a family. We're going to be a partnership."
No, now we're into: "I want more money off the top and you're
looking for more money off the bottom. I don't care. The contract
says you're going to pay me my royalty fee whether I provide
services to you and whether you make money or not."
1040
In the case of multiple
units, I have a successful unit here. It took me two or three
years to get to break-even. The franchisor knows when I'm getting
to break-even. He knows when I'm really profitable, because the
franchisor has my financial statements, and if he doesn't have my
financial statements, he has my royalty reports. He knows what
I'm paying off the top. The franchisor determines that that unit
or that marketplace could certainly sustain another unit. If this
unit is doing $1 million and the second until comes in and
this unit does $750,000, but this unit's doing $750,000, the
franchisor is still
making out because the franchisor's money is coming off the $1.5
million gross, not the single $1 million. Are you following
me, there? All right. So that's the benefit to cannibalization,
or encroachment, as we call it in the United States.
Sole-sourcing requirements
is another problem. Many franchise systems require that
franchisees purchase products solely from the franchisor or from
the franchisor's designated suppliers. No allowance is given to
purchase from alternative sources of supply, even if the
franchisee can get a better deal. Initially, when you're a
first-time investor, you're thinking: "This is kind of good. I
won't have to worry about where I'm going to buy my products
from. I've got enough to worry about. I'm opening the store. I've
got the carpenters coming in. I have leasehold improvements. I've
got to hire employees. So that's good, I'll buy from their
suppliers." What you don't realize and you don't learn until way
after the statutes of limitations are up and gone is that, guess
what, you could buy the same products locally, the exact same
quality locally, cheaper, but you've tied yourself into a 10-,
15- or 20-year contract saying you would always buy from the
franchisor or from their designated suppliers. That's where a lot
of problems start.
In the States, there are
certain states-Indiana has had a prohibition against requiring
franchisees to purchase from designated suppliers since 1985, and
Iowa has had that prohibition since 1992. There is no mass exodus
of franchisors running out of Indiana into Illinois, because we
don't have that prohibition. There's no mass exodus of
franchisors running out of Iowa into Nebraska or Minnesota.
There's no evidence whatsoever that franchisors will not come to
the province of Ontario if you dare put that kind of legislation
in place. They just have no evidence. It will not happen. They
want to sell franchises and they want their brand names out
there.
Franchisors, when they talk
about the sourcing of supply issue, say, "We must ensure the same
level of product and service from all our outlets, so we have to
have control over the products and services that the franchisees
buy and then deliver to the consuming public." That's total
baloney. They want to have control because that's where they get
their kickbacks, their rebates, their commissions from, because
they are extorting money often from the suppliers. They can set
the characteristics and standards of the products or services
that are delivered to the consuming public, but they should not
have the right to restrain trade and to tell a local business
owner they cannot buy from another local business owner, that
they must buy from certain suppliers only. This protects
consumers and the franchisees. The only thing the franchisors are
trying to protect is the status quo. They're not interested in
being pro-competitive. They're interested in protecting their
exclusionary practices, which they have already written into the
franchise documents, which Mr and Mrs Smith, who just got a
severance amount of money, are not going to be thinking about
when they're signing a 15-year contract to buy a franchise.
They're thinking that the franchisor is going to make their life
easier as a first-time new business owner.
Other issues that are
problems with current franchisees and how you have to attack them
in disclosure-you'll get some ideas now of why I'm saying that
Bill 33 doesn't go far enough-relative to encroachment: We've
proposed this in the States to the Federal Trade Commission. They
haven't bought it. We didn't think they would, which is why we
are seeking legislative solutions in the States. But relative to
encroachment, because most franchisors know when they are going
to encroach, we have suggested that on the front cover page they
list as a risk factor and make a statement something like the
following: "It has been our practice in the past that after your
unit has been opened two to three years"-you fill in the
blank-"we will come in and put another unit so close to you that
it may in fact diminish your growth and therefore your net
revenue." That is true and complete disclosure, and you can
imagine what the franchisor lawyers in the States are saying
about that kind of disclosure.
Regarding the restrictions
on sourcing of supplies and products, in the States many
franchisors will say: "We have our approved vendor list but we
have an approval process. If you find another local product,
bring it to us and, as long as it has the same characteristics,
we'll put it through the approval process and it will probably be
approved." That's disclosed; that is put in the disclosure
document. But they don't tell you that they've been known to take
more than one or two years to approve a vendor. "We've been known
to change the specifications so your vendor can't possibly create
the proper specifications." We have suggested to the Federal
Trade Commission: This is true disclosure. Put that in the
disclosure documents.
Assistance from the
franchisor: What they promise and what they deliver is often two
different things. We have suggested that language in the
disclosure documents ought to be required that says, "Your
franchisor, regardless of what it has told you, reserves the
right to receive whatever the percentage of royalty payment while
providing you with absolutely no franchise services," because
that is what often happens in the United States, and I would
assume it happens here in Canada.
A big problem comes up-I
don't know how mature the franchisees are in Canada and if
they're coming up to the end of their contractual terms, because
a franchise contract is for a specified period of time, 10, 15 or
sometimes 20 years. When you are buying the franchise and you
sign the contract, you say, "What happens at the end of my
initial term?" and the franchisor sales representative says,
"Don't worry, we'll renew you." What they don't tell you is that
you're not going to be renewed on exactly the same contract. They
say, "You will sign"-this is important: Today, when I'm buying
the franchise, I am signing that when my initial term ends, I
will sign the then current contract. As long as I'm not in
default, I will be able to sign the then current contract. You
don't know what that contract is going to be. The franchisor
doesn't even know what that contract is going to be. The
franchisor may have been
acquired by somebody else by that time and someone totally new
will be writing the contract. So you are agreeing today to sign
something 10 or 15 years hence that is a moving target.
This is when franchisees
start to realize: "You know what? I don't get the feeling I'm
owning my own business. This is more like renting an apartment,
because at the end of my 10 or 15 years the landlord is going to
put a new lease down in front of me and he is going to say,
`Press hard, there are three copies, if you want to continue as
a-fill in the blank-franchisee.'"
We have suggested that the
terms be called "rewrite, relicense." I'm going to get
"rewritten" in the contract, and "relicensed." Someone who is a
first-time investor doesn't understand what that means; again,
it's an artful term: "Renew." We have suggested that in the
disclosure documents it be written: "You do not own your own
business. You are leasing the rights to sell our goods or
services to the public under our trade name. At the end of your
initial 10-year term, your current contract will expire or
terminate. You will have the choice of signing a new contract
with us at the time of expiration or termination. The new
contract will be written by us, with no input from you, and will
contain materially different financial and operational terms."
That needs to be put in Bill 33 to warn people about what will
happen at the end of the current term.
Part of the problem is, as
was mentioned, the unilateral and arbitrary decisions that can be
made by franchisors without the input of franchisees. There are a
lot of things in the franchise contracts that franchisors have
total discretion over. Initially, when you're buying a franchise,
you're thinking: "That's great. I'm glad because I can't possibly
know everything about business and that's why I'm buying a
franchise. I'm investing a lot of money for someone to teach me
to be an entrepreneur." Once you become an entrepreneur, you
start realizing that the deal you signed was not so good.
1050
You have to understand that
none of the franchisees in the States is trying to get out of
their current contracts. They understand what they signed. The
franchisees who are part of our organization are successful
operators. The United States Congress is realizing that it is the
most successful operators, from chain to chain and from coast to
coast, who understand that rules of the game need to be put in
place. Whatever legislation is enacted in the States will not
apply to current contracts. It will apply to any contracts
entered into, amended or extended/renewed after the effective
date of the legislation. I wanted to make that important
point.
We hear in the States, and
you may hear it here, that the stories regarding problems with
franchising are "merely anecdotal; they are not widespread; it's
a few disgruntled people who couldn't run a business anyway;
they're just whiny-butts; they don't know what they're talking
about." Well, we surveyed our members, and I have a copy of the
survey for each of you. Forty per cent of our members felt they
had unsuccessful relationships with their franchisors. Close to
half of them, over 46%, felt that discounting and promotional
activities forced on them by their franchisors had caused an
average 10% decline in profits. A majority of them, almost 60%,
felt they purchased goods and services from the franchisors that
were inflated in price-going back to having to buy from approved
suppliers. Two thirds, 68% of the franchisees, felt they were not
getting full value from the advertising fees they paid to the
franchisors. Sixty-one per cent felt that the support services
were inadequate. Fifty-five per cent of the franchisees who
responded to our survey said they would not advise others to join
their franchise system currently. Forty per cent of them felt
they had been encroached upon in some way and, of those, 90.5%
felt their profits had suffered as a result. So the problems with
franchising that we relate to you here and to the United States
Congress are not anecdotal. They are widely documented.
Let me conclude. Why has
franchising evolved to where legislation is necessary? Two
reasons: When it started in the United States in the 1950s, it
was often a handshake. It was a two- or three-page agreement, a
pretty easy contractual relationship. But franchise agreements
have evolved today to the point where, except for the provisions
relating to the use of the trademark, the use of the proprietary
information and payment of fees, almost every other provision has
some element of controlling, trapping or defeating the
franchisee.
Franchisees, you have to
understand, are governed by these totally one-sided contracts
that are drafted by the franchisors' attorneys. There is unequal
bargaining power from the beginning. If somebody is inexperienced
in business to begin with, and you have somebody who knows
everything there is to know about the pizza, doughnut or hotel
business, there is unequal bargaining power right from the
beginning, and the franchisor has arbitrarily decided on the
rules by which the two parties are going to conduct their
business after they sign the contract. Those rules are
incorporated into the franchise agreement, which the franchisor
prepares unilaterally for the frachisee to sign. What is even
worse is that franchisors justify their own abuses, post-sale, by
claiming that pre-sale disclosure in these lengthy,
unintelligible legal prospectuses makes any abusive trade
practice they do after sale totally legal.
The second reason these
abuses continue to occur is that there are no existing baseline
standards of conduct for franchisors and franchisees to abide by
after the sale. In addition to the duty of good faith, in the
United States our franchisees are looking for a duty of due care,
meaning that the franchisor must have the level of knowledge and
skill they purport to have when they sell the franchise. They can
buy that level of knowledge of skill or care from an outsider, a
consultant, but they must disclose that they have purchased it
from someone else, or they could disclaim that they have such
level of skill or ability. But again, this goes to the point that
when you buy a franchise you are told, "We have a proven business
system." The implication is that you will be able to make
a living, not that you
are going to be an indentured servant for a period of time.
Another duty we are looking
for in the States is a limited fiduciary duty when the franchisor
handles bookkeeping or accounting and payroll functions for the
franchisees. In a legal sense, a fiduciary duty is the highest
standard of care. Your banker has a fiduciary duty with you, your
lawyer has a fiduciary duty with you and, indeed, in the States,
business partners have a fiduciary duty: If either party is going
to take an action, they must do it with the highest standard of
care for the other party. The current scheme in the US-the
federal rule, which has been there since 1979, the state
disclosure laws and the various state relationship laws-is just a
hodgepodge which only goes to fuel, as someone has said here this
morning, the lawyers' pension funds. They are the only ones who
benefit from this entire mishmash. That's why members of both
parties in the United States Congress are considering what's
called House Bill 3308, which I thought was kind of interesting
because you were considering Bill 33. It's called the Small
Business Franchise Act in the States, and the absence of any kind
of standards of conduct for a multi-billion-dollar industry,
almost trillion-dollar industry, is becoming a big concern to the
United States Congress.
Again, my summary remarks:
Bill 33 by itself doesn't go far enough. Based on our experience,
30 years of disclosure alone is not good enough. You need an
enforceable duty of good faith, and I think I've given you some
ideas about what the state of the art might be right now. You
certainly shouldn't enact something that the States did 30 years
ago because you'll probably be where we are 30 years hence.
Thank you very much. I'm
able to answer questions at this time.
The Acting
Chair: Are there questions?
Mr Martin:
I don't want to be one to hog the time here. Divvy it up and make
sure everybody gets a chance.
The Acting
Chair: We've got about 12 minutes for questions so I'm
interested to know what interest there is.
Mr Martin:
I really appreciate your taking the time out of what I know is a
busy schedule to come and be with us today. Your presentation was
very enlightening and challenging and thoughtful. You raised a
number of issues that I think are important and that I didn't
actually get time to raise in my own opening comments, that I
just want to touch on very quickly.
First is the issue that
many franchisees are first-time investors-maybe that will be a
question for you-people who get a severance package. In Ontario
today we have a lot of workplaces restructuring, so a lot of
people are given severance packages and they are looking for
someplace to invest it that will guarantee them some income and,
hopefully, a pension. They're not experienced business folk, and
so they probably stand to be victimized more than, say, somebody
who has experience. Do you want to comment on that?
Ms Kezios:
I agree with you. Unfortunately, those people when they have been
victimized, as you put it, go out of business, and they want
nothing more than to leave their shameful franchise experience
behind. Those are not often the kinds of people who will show up
in these kinds of hearings to talk about it. They've gone on with
their lives. What we're finding is that the successful operators
are the ones who realize, when their contracts are coming up for
renewal, that they don't want to not have a choice at that point.
I agree with you that there are unsophisticated investors. If
they read the disclosure document in the States, they don't
understand what they've read. They take it to a lawyer-99% of the
lawyers who are involved in franchising in the States are
franchisor lawyers.
Most of the lawyers in the
States do real estate law, they write the wills, and they do
other kinds of business transactions. They'd look at the contract
and say to this couple with the severance package: "Well, you
know, I wouldn't sign it. This is a contract of adhesion." Other
lawyers call franchise contracts in the States contracts of
adhesion. You're tied to these terms. I think Mr Colle brought it
up that, what do you do? Ensure that these men and women have a
lawyer read the document? Oftentimes the lawyer doesn't know
enough about franchise law. The lawyer is not where I see the
franchise lawyers teaching each other to write these documents.
In the States, it's the American Bar Association that's the forum
on franchising. The first time I went, I was appalled. I said to
myself, Mr and Mrs Smith don't have a chance, because the lawyers
were teaching each other how to avoid making certain disclosures
and how to get around whatever the current disclosure or
relationship laws happen to be, so that this unsophisticated
buyer-
Mr Martin:
It seems to me then, in a jurisdiction such as ours where there
is a lot of shifting and restructuring, we as government have a
responsibility to make sure that it's fair at least, if nothing
else.
1100
You also talked about an
issue that I hope we'll all look at, which is the issue of
sole-sourcing of product and how that's a huge bone of contention
and concern. In my own community we have a number of local, small
producers who can't get their product onto the shelves of some of
the bigger grocery chains because the shelf space is sold
someplace else. Many of them are basically being put out of
business. They get into business because they love doing what
they do. They're good at it, as I said before. They invest the
money and they do the work. At the end of the day, through no
fault of their own but simply because they can't access the shelf
space, they can't sell their product. I know that plays out
negatively for the franchisee who might see that as an
opportunity for them to make some money and also participate in
the local economy that they need to keep healthy if they're going
to succeed.
I have a number of pieces
of research that I have done on the whole sole-sourcing issue
because it affects my local area so much. How big an issue is
that in the US and what do you suggest re our legislation
here?
Ms Kezios: It is a big problem
in the US. Encroachment is probably the number one problem, but
sole-sourcing seems to be another. I will tell you something:
Franchisees in the US have sued for the right to buy supplies
from their own suppliers since the mid-1970s. The Dunkin' Donuts
franchisees in 1971 sued for the right to buy from their own
suppliers. They won that right in 1971, but every year since then
there is some other chain in the States that is suing for the
very same right, which is the problem if you have no ability to
buy locally.
The fact that you cannot
buy locally and that you cannot buy the same quality of product
or service at a competitive price leaves your gross margins
totally in the hands of the franchisors, and that is a big
problem following closely behind encroachment in the States. Many
of the franchisees are mature chains. They've been around 25 or
30 years in the States, and these franchisees are putting
together their own purchasing co-operatives and they're doing
their own buying of products. I don't know the situation enough
in your particular area to understand or even comment
appropriately on how those franchisees might deal with that
situation.
Mr Ted Chudleigh
(Halton): Thank you very much for joining us today. I
think you mentioned that there are 14 states with legislation.
Does the legislation in any of those states deal with the lease,
as to whether it's appropriate for the franchisee to be the
holder of the lease or anything that prevents the franchisor from
holding the lease?
Ms Kezios:
I don't believe so-that prevents the franchisor from holding the
lease? No. McDonald's is in the real estate business all over the
world. Subway holds the leases. Subway does that for a variety of
reasons; one is that it's easier to evict a franchisee than to
terminate their contract. There's nothing prohibiting that in the
States. Is that a concern here?
Mr
Chudleigh: It is for me. A lot of the problems that I've
run into with franchisors are based on the fact that they are the
leaseholder, and it makes the franchisee very much more of a pawn
in the process.
Ms Kezios:
Absolutely.
Mr
Chudleigh: They lack total control when that happens. To
your knowledge, that hasn't been talked about in legislation?
Ms Kezios:
No, not to legislate in the States. It's not being considered in
Bill 3308 pending now.
Mr Steve Gilchrist
(Scarborough East): Thank you very much for your
presentation. It's very informative. As somebody who spent 25
years in a franchise that did in fact start with that one-page
contract and a handshake and is one of Canada's more successful
franchises, I certainly have seen the evolution that you talked
about, where now it's far more legalese and less trust that seems
to be embodied in many of these agreements.
We have tended to follow a
path these last four years of less overt regulation and greater
support for the private sector, and that really is at the heart
of the full disclosure. Would you agree with me that if in fact,
as outrageous as you may have been in trying to craft those
phrases for possible inclusion in a contract-the upfront notice,
for example, that at the end of your first term you have
absolutely no say and no control on any renewal terms-if that
were done, if that were part of the full disclosure that we're
talking about, because we've said "all material facts," would you
agree with us that there's no need to go further in
legislation?
Ms Kezios:
No. But if you're going to do disclosure, you have to-
Mr
Gilchrist: No, you don't agree, or no, there's no
further need for legislation?
Ms Kezios:
You need to go further.
Mr
Gilchrist: Why is that?
Ms Kezios:
First of all on disclosure, I wish we could throw the entire
prospectus out in the States for the reasons that you and I have
already cited. If you're going to have disclosure, you have to
use some of those outrageous statements that I am making because
that's the only way a layperson will understand what is
happening. These are not lawyers who are buying these
franchises.
But post-sale, what is the
problem with having a duty of good faith imposed on both parties?
In the States our duty of good faith is going to be reciprocal.
Neither party to the franchise can do anything that would deprive
the other party of the expected benefits of the contract. What is
wrong with that? Why wouldn't franchisors and why wouldn't the
government be willing to put that in there and maybe run the
unethical performers out of business? What's wrong with it? Who
is against a duty of good faith?
Mr
Gilchrist: I guess, without going down that road, you
raised the issue of full disclosure and how that was somewhat
suspect in many of the prospectuses. If it were in plain English,
if there really were an opportunity, before you'd written a
cheque, to know absolutely everything that possibly could happen
to you down the road, every business practice of the franchisor,
where's the role of the due diligence that the purchaser is
supposed to be putting in, if it were crafted in plain language
and all material facts were disclosed? Would you not agree with
me that that's the very fundamental of contract law, that each
party has a responsibility to at least be aware of what they're
getting into?
Ms Kezios:
Yes, but no lawyer can write in plain English, so let's just
start with that.
Mr
Gilchrist: I wouldn't disagree, and maybe that's where
government has a role, then.
Ms Kezios:
Plain English to a lawyer is something totally different than
plain English to Susan. All right?
Mr
Gilchrist: Fair enough.
Ms Kezios:
So that's how I would answer you.
Mr
Gilchrist: Thank you.
The Acting
Chair: To Mike Colle for four minutes, please.
Mr Colle:
If they wrote in plain English, they wouldn't have as much work,
so I think that's why they don't write in plain English.
Obviously it's employment opportunities.
The question I have is that if you need these
protections post-sale-and I think that's basically what you're
saying, that whatever you put in up front is almost meaningless,
it seems; in other words, that full disclosure doesn't really
amount to much-what do we need in the post-sale provisions that
would offer some protections?
Ms Kezios:
You need an enforceable duty of good faith and perhaps one that's
reciprocal. You need duty of due care, that I've mentioned,
perhaps even as limited fiduciary duty. A number of the
issues-and I've looked at Bill 35, which seems to be going
towards the way of our HR3308 in the States-those are all
relationship issues: what happens after the sale, the sourcing of
supply issue, the encroachment. If they're going to encroach, if
they're going to take away some of your gross and therefore net
revenue, they should make reparations to you. That's what a
business partner would do if you harmed the other partner. That's
common sense to a layperson. So you can put something relative to
encroachment, proximity, after. There's a whole laundry list of
issues.
The Acting
Chair: This will be the final question.
Mr Colle:
Essentially you see this bill that you've looked at as not the
solution. It's going to be basically further litigation, no
protection really in place, so you don't see this bill in any
way, shape or form as solving anything?
Ms Kezios:
No. You will still have the majority of the problems that current
franchisees are experiencing.
The Acting
Chair: Thank you for your presentation. Safe trip
home.
Ms Kezios:
Thank you, especially with all the franchisors out there,
right?
1110
JOHN SOTOS
The Acting
Chair: I'd like to call our next expert witness, Mr John
Sotos.
Mr John
Sotos: Good morning. Mr Chair, honourable members,
ladies and gentlemen, I have prepared a written submission, which
is with the clerk. I don't intend to read the submission. It's
more for background to provide information as to how the industry
got to where it is today. I'll make short references to it as I'm
going along where appropriate.
I'm a lawyer in private
practice and I've been practising since 1980. My involvement in
franchising dates back to that date. I am a partner at a boutique
law firm, Sotos Associates, and my firm does franchise work
almost exclusively, representing franchisors, franchisees and
many of the franchisee associations that exist all across the
country.
The nexus of what might
otherwise appear to be a conflicting client base is our belief,
which is shared by our clients, that successful franchising must
be a win-win proposition for both the franchisor and the
franchisee.
In my opinion, it's a
mistake to polarize the franchisor-franchisee relationship, the
us-and-them situation that is occurring. Unfortunately, that's
exactly what is happening. It has been happening in franchising
in this province for the last couple of decades, and since
everybody is taking cracks at lawyers, I will as well. It's
largely because lawyers tend to draft very unfair, very onerous,
one-sided franchise agreements.
When I went to law school I
learned that you listen to your client, you understand what the
deal is and you reflect the deal accurately in the franchise
agreement. If you read franchise agreements today, in many cases
you would think that the franchisor is suffering from cognitive
dissonance, because the franchisor says one thing and the
agreement contradicts it in every respect or in most major
respects. I submit to you that's a root problem in franchising
today.
As part of my practice, I
have in the past and I continue to actively manage a wide range
of litigation for both franchisors and franchisees. We've also
been involved in some of the precedent-setting litigation in this
province that has obviously brought some of the franchise issues
to the fore.
My submission to you is
shaped by my experience. I hope that the often harsh reality has
not impeded my ability to provide a balanced view to this
inquiry. I might add that I'm a strong proponent of fair and
ethical franchising. I believe that properly structured
franchising provides a template permitting ordinary people to
achieve extraordinary success. At the same time, the lack of
minimum standards of conduct results in untold and totally
unnecessary economic as well as social loss.
Because of, or despite, my
views I was invited six or seven years ago to sit on the
Franchise Sector Working Team, which is an initiative by this
very ministry to bring players representing various sectors of
franchising together to seek some consensus on the formal
regulation of franchising. I cover that experience more directly
in my submission. I won't refer to it here. I will try to limit
my remarks to no more than 20 minutes, so that way there is an
opportunity for questions.
As a long-time proponent of
the need for responsible regulation, I applaud the government's
initiative in introducing Bill 33, which is a piece of
legislation that may have enjoyed the longest gestation period in
history, going back to the Grange report of 1971. I hope the work
that these deliberations will result in will do justice to that
gestation period. I also understand that some minor amendments
will be brought forward. We've discussed them with the ministry
and I'm supportive of those amendments as well.
I view the purpose of my
testimony here today as helpful or as an attempt to assist the
committee in improving the draft legislation that's currently
before us. If I focus my comments on suggested changes and the
reasons why, that's not to take anything away from my support for
the bill, which I think is long overdue and would certainly do a
great deal to protect franchisees who are newly purchasing
franchises.
The problems facing
franchising, however, are not all pre-sale, as you heard from the
previous speaker. You have the problems that arise before the
contract is signed and the problems that arise after the contract
is executed. Maybe I can take an opportunity to add my comments
to the question Mr Gilchrist asked earlier of the previous
speaker. The answer to the question of whether disclosure alone
will do the trick to protect the marketplace is negative because,
before you enter the franchise relationship and you get the full
disclosure, what is disclosed to you may be absolutely truthful,
accurate and correct; it's what happens after the franchise
agreement has been entered into-the franchisor changes, somebody
else acquires the company that you currently run, or the
franchisor changes direction for whatever reasons. It's those
changes that are implemented and cannot be foreseen. If you ask
the franchisor at the point you're getting the disclosure as to
what their intended conduct is going to be with respect to
encroachment, for example, you may get a very clear answer: "We
do not encroach." However, the agreement will provide for just
that right. Five or 10 years down the road or three years later,
if somebody else acquires the franchisor, they may very well do
that. The contract provides for it and disclosure cannot protect
a franchisee from prospective conduct.
The second reason there
can't be protection in the disclosure document is precisely
because of the kind of contract franchise agreements are. They
are contracts that leave a lot of discretion-and I'll talk about
that a little bit later in my presentation-to the franchisor to
do all kinds of things to manage the system. So even though he
may be selling widget A today, in three or five years he may be
selling widget B or something else or even a different line of
products, which may have different margins, which may have
different labour requirements, space requirements and so on. So
these are the kinds of things that cannot be predicted and
disclosure cannot address. If it's helpful, that's my take on the
question that was asked previously.
Coming back to Bill 33 and
what it provides for, which is primarily for advanced pre-sale
disclosure, I think the pre-sale disclosure provisions in the
bill will go a long way towards addressing the major problems
stemming from matters that arise before the execution of the
franchise agreement. Misleading or fraudulent claims in order to
induce the making of a contract should be significantly reduced
if not eliminated following the enactment of this piece of
legislation.
Similarly, the practice of
collecting fees or even payments for the construction of a store
that is never delivered or is delivered mortgaged or partly built
will also likely diminish with the passage of this bill; if it
doesn't, and if some franchisors don't temper their conduct
accordingly, the bill provides, as Mr Hoffman indicated, some
fairly effective remedies. Rescission is a fairly significant
right that the bill bestows on franchisees who are basically
defrauded. So that's a significant move in the right
direction.
Similarly, Bill 33
introduces a statutory right for franchisees to associate without
interference from the franchisor. Should franchisors interfere
with this right, Bill 33 provides a reasonable remedy to
deter such conduct. The right to associate freely is expected to
provide franchisees with the ability to legally meet and exchange
information, particularly at times of crisis.
The right to associate
offers franchisees a cost-effective way to deal with problems, to
commission reports no individual franchisee could afford, to
retain counsel collectively to advise them, again things that,
especially for some of the smaller systems, it would be
prohibitive for individual franchisees to do.
1120
I know that some of our
friends in the grocery industry, the car industry or some of the
larger franchises may have the means and the ability to
individually do all these things, but for the vast majority of
franchisees in the smaller systems this is a very significant
right, and again I applaud the inclusion of this provision in the
draft legislation. I caution, however, that the right to
associate should not be seen as the total solution to the
problems which arise after the franchise agreement is entered
into.
The overwhelming problems
in franchising occur, as you've heard previously, after the
signing of the contract, and as long ago as 1971 were identified
in the Grange report as follows: arbitrary termination of the
franchisee-that's still going on today; arbitrary refusal of
assignments or renewals of the franchise-that's there today;
arbitrary refusal of permission to dispose of a franchise upon
death or incapacity of the franchisee-the same; the obligation to
purchase materials or other products for the operation of the
business from a particular source and without an obligation that
it be done so on a competitive basis. I would say that's probably
the number one problem in Ontario today. In the US, it seems that
encroachment has taken that honour, but my experience tells me in
Ontario that's still the number one problem.
Also, arbitrary forfeiture
of deposits and fees: I can't tell you how many times people have
come in and they've paid $25,000 or $50,000, and the franchisor
is nowhere to be found.
Competitive practices of a
franchisor are detrimental to the welfare of a franchisee. This
is encroachment. Encroachment, I would say, is probably the
number two problem facing the franchise industry, particularly in
the mature industries such as the grocery sector and the car
industry, where you're having consolidations, you're having a
reduction of the number of-in the car industry, at least-dealer
points, as they call it. In the grocery industry, you have
competition of two sorts: You have franchisors supplying-with the
consolidation, especially in eastern Canada, of two major
players, you have basically the appearance of competition, but
four, five or six brands are really owned by one supplier. I'll
talk about some of the problems that raises in a bit.
I'll also give you a bit of
my experience, some of the other problems not in the Grange
report that I've seen in my career.
There was a coffee shop
franchisor which required its franchisees to source all the
products from the franchisor, particularly coffee, and in a coffee shop you
would assume that's a major part of the business, and it was.
This particular franchisor viewed this tying of supplies as a
particularly great way to raise money for itself and in addition
to the royalties charged the franchisees 60% more than
competitors charged for the same product to their stores, which
led to the absurd result that the higher the sales the store
achieved, the more money it lost. That franchisor didn't survive
for a long period of time, but in the four or five years that
they were kicking around, they probably sold, in total, 150-plus
franchises with a total investment probably in the $150,000 to
$200,000 range. The whole thing was basically an outright
scam.
I've seen a franchisor
whose system was set up to fail. Their business was to be
reselling stores and keep getting the upfront fees as well as the
resale value. One store was sold four times in 18 months with of
course no disclosure of the prior history of that particular
location.
Some of these issues would
be captured and addressed by the disclosure provisions of the new
bill.
We've seen franchisors
using the advertising funds contributed by the franchisees to
acquire terminated franchisees. So the franchisor used the
advertising funds to acquire terminated franchisees, but when
they re-sold them, the funds went not to the advertising fund but
to the franchisor's coffers.
We've seen advertising
funds misused in many ways. I wouldn't describe it as the number
one problem but it's certainly one that is quite prevalent.
Franchisors use the advertising fund for personal entertainment
or vehicles, or they charge a disproportionate amount of
operating overhead to the advertising fund. The advertising fund
may occupy 1,000 square feet of a franchisor's space but they pay
60% of the rent, those types of things.
We've seen companies
purchase a franchisor company for the purpose of eliminating
competition. They cut off all services but they continue to
collect royalties. They sell defective supplies; it puts
franchisees out of business very quickly with no
compensation.
We've seen a franchisor
selling a single product-two franchisees developing a franchise
system-and two years later deciding that there's more money to be
made in the wholesale distribution of this product. They started
distributing it through other channels of distribution at a
retail price cheaper than franchisees can buy it wholesale. You
can predict what has happened to that franchise system.
We've seen a franchisor
whose system included the sale of basically a single product
collecting money from franchisees for the purchase of the
product. He used it for other corporate purposes. He didn't pay
the suppliers. That supply of product dried up; stores had
nothing to sell. In that system, more than 150 franchisees lost
hundreds of thousands of dollars. Franchisors that sell to
corporate or competing stores at lower prices than they sell to
franchisees is a huge problem today, closely tied to the supply
issue.
I won't bore you with any
more examples. The list can go on forever.
These practices have been
engaged in not only by small, home-grown franchise systems but by
national as well as global companies, and that's important. It's
important in that it's not true that, if you manage or you
regulate the bottom-feeders for the smaller players in the
industry, you're going to eliminate the problems. The problem is
prevalent at all levels, and that has to be understood. I'm a bit
concerned when I hear about exemptions for this, that and the
other thing. Being large doesn't necessarily mean that one is
operating any more ethically than somebody who is not so
large.
Part of the reason why
post-sale conduct cannot be captured by advance disclosure is
because of the kind of permissive language that's contained in
the franchise agreements. I'll give you a very brief definition
of what a franchise program is, and you can name the franchisor
that has this language, but it's fairly generic.
"`Franchise program' is
defined to include anything and everything prepared by or on
behalf of the franchisor that is designed for the franchise
program, as may be added to, changed, modified, withdrawn or
otherwise revised by the franchisor in its sole discretion from
time to time... ."
"The franchise agreement
may be terminated immediately upon written notice having been
provided to the franchisee, if the franchisee does not comply
with any standard (objective or subjective) established by the
franchisor if such breach is not cured to the subjective
satisfaction of the franchisor." This agreement is basically
terminable at will.
The question legitimately
arises, why would anybody sign such an agreement? I'll tell you
why people sign those agreements: because in many cases they've
had long-standing relationships with their franchisors, going
back decades. They trust. They don't look at these agreements
with the belief that anybody would enforce these kinds of
provisions, but they are being enforced. They're drafted, put in
place, and they're being enforced.
1130
There are other agreements
which provide that the franchisee can have his agreement
terminated if the franchisee receives any publicity passively. If
the franchisor receives any publicity that the franchisor in
their subjective judgment deems to be unfavourable, then the
franchisee can be terminated.
Franchisors have the right
to change your trademark. You've been ABC franchise for 35 years
and all of a sudden you're going to become XYZ franchise. You
have no choice. The goodwill that you've built up may dissipate
or disappear, but you're at the mercy of the franchisor in that
particular case.
The need to have flexible
rights to change the system is not questioned-it's necessary-but
that flexibility, that discretion, has to be tempered so that you
have equitable results, the results that the parties expected at
the time they entered into that contract.
I'll just give you another
example to show you how absurd some of these agreements are. One
agreement provides that the royalty and other fees are fixed for
a very short period of
time and can be unilaterally changed by the franchisor
thereafter, from year to year, at their discretion-different fees
for different stores even, under the same banner. These
provisions are excessive, and this is where I take issue with
some of my colleagues.
Bill 33 provides for a duty
of fair dealing in the performance and enforcement of the
franchise agreement. It does not, however, define "fair dealing"
nor does it provide for any remedy other than the generic common
law. Fair dealing in common law doesn't really mean very much.
It's such a high standard. It's the unconscionable standard.
You'd have to be a fraudster who's committing all kinds of fairly
obvious sins in order to be caught by this kind of conduct.
In my respectful view,
section 3 doesn't really accomplish very much, and I think you
run the risk of lulling people into a false sense of security. If
the Legislature intends to give meaning and substance to section
3, it must define the duty of fair dealing and it must support
its reach by some specified remedies.
Traditionally, fair dealing
has been defined in one of two ways, either generally or
specifically. An example of a general definition of fair dealing
can be found in some of the American jurisdictions-Arkansas is an
example-which basically makes it an offence for any franchisor to
refuse to deal with the franchisee in a commercially reasonable
manner and in good faith. A specific definition of fair dealing
is what was in the Grange report back in 1971, where it
stipulates that it is unfair conduct for a franchisor to
terminate an agreement arbitrarily, to arbitrarily refuse to
assign, to mandate the purchase of supplies from a single source
without providing for competitive pricing. That's a specific type
of regulation. The Arkansas provision is a much more generic one.
Australia has enacted some fairly franchise-specific legislation
in the past couple of years, and they've adopted the specific
form, the chapter and verse type of regulation.
For a whole host of
reasons, I prefer the general approach to the definition of fair
dealing as opposed to the very specific. I believe it would
provide a small improvement to the bill without changing its
overall character. Bill 33 already provides for a duty of fair
dealing. My recommendation would be that the fair dealing
provisions in section 3 be redrafted to say, "Fair dealing means
honesty in fact, and where the franchisor has the right to
adversely affect the franchisee's investment, he must exercise
such right in a commercially reasonable manner," and, "If the
franchise or its associate breaches this section, then the
franchisee has a right of action for damages."
I believe that a general
definition of fair dealing that is statutorily enforceable
provides a number of distinct advantages. First, it's fair. This
is what all franchisors say they do now in any event. Second, it
establishes a standard that is less than the best practices
standards established by industry leaders. I'll read to you a
couple of quotations from prominent brands that you would
recognize. One is from the president of CARA, the franchisor of
Harvey's and Swiss Chalet. He has described successful
franchising as "an equitable sharing of accountabilities,
responsibilities, expectations and finances ... it boils down to
an equitable outcome, a healthy balance, a win-win situation ....
The most successful relationships are true partnerships .... We
look at our franchisees as operating partners."
Similarly, the CEO of
McDonald's US said, "We believe the fundamental premise for a
successful franchise organization is partnership ... with shared
vision, shared goals and shared responsibility."
The good faith or fair
dealing definition that I'm proposing doesn't even reach that
standard. A standard of commercial reasonableness is already
embodied in other commercial legislation in this province and in
other provinces in this country, so it's nothing new. A defined
and enforceable fair dealing standard requiring commercial
reasonableness in the exercise of discretion would have the
effect of imposing a level of inquiry and assessment of intended
action which doesn't exist now.
A sober second thought: If
you're going to send a notice of termination to a franchisee
because the french fries were under the heating lamp 30 seconds
longer than they should have been, well, you won't be able to do
that any more; you have to stop and think and say, "Is the action
we're contemplating appropriate in relationship to the offence
that we're trying to cure?"
A general definition of
fairness as proposed would provide the necessary flexibility to
deal with particular circumstances. When you provide specific
fair dealing legislation, you more or less have to deal with
everybody in the same way. When you say, "Thou shall not open
another location" within a certain territory and you define the
territory, that places the franchisor in a bit of a straitjacket.
If you're talking-and I know my friends from Hortons are
here-about Tim Hortons and you provide a three-mile radius in the
legislation, they'll have to close half their locations down. On
the other hand, if you're talking about a new franchise that's
just starting up, three miles may be a legitimate non-compete
territory. So, if you've got a generic provision of fair dealing,
you're able to provide the parties with the flexibility, you're
going to deal with them as they are, as opposed to putting
everybody in a straitjacket, which is very difficult to justify
from an economic and business perspective.
There is no evidence that
the existence of fair dealing legislation in a number of the US
jurisdictions and Australia has impeded the growth of
franchising. You'll find as many franchise businesses in the
regulated states as you will in the non-regulated states.
Finally, and this is very
important, fair dealing will provide protection for probably the
30,000 to 40,000 franchisees that are already in locked
relationships. Disclosure will help the-I don't know how
many-1,000 or 2,000 franchisees buying a franchise every year,
but an enforceable, defined duty of fair dealing will help the
30,000 to 40,000 franchise relationships that are in place that
can't be changed.
You can give disclosure to a grocer and say,
"From now on, your royalties are doubling" before they sign the
new agreement on renewal, but what's he going to do with the $3
million or $4 million he has invested in his real estate? You've
no choice. You provide no realistic option other than to sign,
because a sunk investment has already been made. With a defined
and enforceable duty of fair dealing, you'll offer protection to
those people out there who will see nothing from the
disclosure.
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In my view, Bill 33 is a
good bill; it's much needed. But in taking the next step-it
already speaks to fair dealing-define it, make it enforceable. I
think it's going to improve the economic and business marketplace
of Ontario as well as the life of franchisees, and franchisors,
ultimately, in this province.
Those are all the remarks.
I'd be pleased to entertain questions.
The Acting
Chair: We have about five minutes for each party. To
maintain the rotation established earlier, I'll give Tony the
first shot at it.
Mr Martin:
Thank you very much, Mr Sotos. I detected just a slight tinge of
restraint in your suggestions and comments to us this morning.
You speak of some small improvement to the bill. I'm reading into
that that there is actually some significant improvement that
could be done to the bill that would be even more helpful.
You're coming from the
working group, and there was somewhat of a saw-off compromise
that came out of it that the ministry picked up and has hobbled
together re Bill 33. I wasn't part of the group. I would like to
have been invited to be part of it, but I wasn't. The sense I had
was that it was half franchisee, half franchisor, a little bit
like putting together a group consisting of drunk drivers and
Mothers Against Drunk Driving to come up with a resolution to the
issue of drunk driving. I suggest that it wouldn't be a bill with
much teeth if it was compromise you were looking for and that, to
some degree, is what you have here. It's compromise, in my view,
that leans heavily towards not making franchisors too upset in
case some of them might leave or this might not be
attractive.
I say this, Mr Sotos, in
light of your very active and aggressive involvement with some of
the franchisees who have been done wrong by across the province,
the very excellent work you've done in some instances and some of
the comments you've made over the last few years where
franchising was concerned, even comments you made when we were
government that were quite critical of us as not moving fast
enough. At one point you mentioned in a Toronto Star article-it's
in A-43 for anybody who is interested in looking at the comment
in the package I gave you-"If we do not have something in 60 days
we will never have it.... The industry needs attention
yesterday." I read into that a sense of urgency. That was six
years ago, and here we are still looking at this and still
looking at a watered-down piece of legislation.
You also talked about the
legislation in Alberta. In an article in the Financial Post-it's
A-55, for anybody who's interested, in the package I gave you-you
say, "Alberta is basically what franchisees call the 10%
approach....
"Alberta's approach as it
currently stands is going to assist only a small number of
franchisees and resolve only a small number of problems because
it only addresses (the issue of) disclosure....
"The industry cannot manage
itself, that is absolutely clear."
It's my view, and this is a
bit out there I think, that it's better no legislation than
legislation that presents to prospective franchisees or
entrepreneurs in this province a sense of security that in fact
isn't there.
You've I think taken a look
at my bill, Bill 35, that I've tabled. What do we need to do to
actually protect the industry and to do the kinds of things that
are reflected in some of the previous comments you have made, and
would the government's adopting all or part of Bill 35 do the
trick?
Mr Sotos:
Thank you, Mr Martin. I'll try to answer what I understood your
question to be. In the recommendation that I'm making, I'm being
sincere in stating that the inclusion of a defined and
enforceable standard of fair dealing, in a generic way, will go a
long way towards providing a level of protection that is not
there today for existing franchisees, and in a way that is not as
intrusive as some of the more specific legislation, as is found
in Bill 35 and some of the other legislation in the US and
Australia.
I say this for two reasons.
This is my 21st year of practice in this area. I certainly have
recognized the need for some regulation for probably 18 of those
21 years, and nothing has happened. I certainly have been
advocating for it, based on my experiences, for a good 12 or 15
years, and this is the first concrete piece of legislation we
have had before us. Clearly, I am cognizant of the
interests-largely misguided, I think-that view any form of
fairness regulation as negative and anti-business. I am not
anti-business. My clients are all business people. I strongly
support a healthy business marketplace. I view an enforceable
general standard of fair dealing to be pro-business.
I concur with the previous
speaker, who said that a fair dealing provision will
significantly diminish litigation. But more importantly, it will
diminish the incidence of expropriation without compensation, and
that is important. For every case that makes it to court or a
legal claim is filed, there are probably dozens that never go
that far. From what I know and from my experiences, a general,
enforceable standard of fair dealing, which is already in part
provided for in the legislation-it says it wants that. I'm just
saying, let's define it and let's make it properly enforceable. I
believe that would certainly be adequate for the next while, if
it were to be the committee's wish to recommend that to the
Legislature.
The Acting
Chair: Thank you. For the government party, I think the
parliamentary secretary would like to lead.
Mr
O'Toole: I refer to Mr Hoffman's opening remarks that we
are using the same reference points in the bill as the Alberta model. I wonder if you
could comment specifically. On page 14 of your notes, you refer
to a "commercially reasonable manner" as the definition of fair
dealing. What precisely would be the difference? Once you get
into defining something, you could get caught with, "We didn't go
far enough." What's your intention here? You still have to define
"commercially reasonable manner," or is that already established
in case law?
Mr Sotos:
There is already other legislation in this province that provides
for a standard of commercial reasonableness. For example, under
the Personal Property Security Act, if you seize somebody's
assets and dispose of them, you have a duty to dispose of them in
a commercially reasonable manner. You can't just sell them to
your friend for 10 cents on the dollar or whatever. That's a
defined and recognized standard.
The Acting
Chair: Mr Gill.
Mr Raminder Gill
(Bramalea-Gore-Malton-Springdale): This morning we have
heard a fair bit of gloom and doom, as if there are a lot of
problems. I suppose there are. But at the same time, we
understand that people are trying to follow the North American
dream of having their own businesses. As I understand-correct me
if I'm wrong-people are falling over each other trying to get
good franchises.
With your 25 years'
experience dealing in this business-I'm trying to compare the
ratio of franchise-type business versus independent business.
Ratio-wise, how many people fail in franchise businesses versus
independent businesses-new start-ups?
Mr Sotos:
Excuse me, Mr Gill. To my knowledge, there are no Canadian
studies that actually document the area you have asked me about,
but some studies have been done in the US and I understand some
in the UK as well. The best evidence appears to be that franchise
start-ups within five years have a higher failure rate than
independent non-franchised business start-ups.
1150
This is in answer to the
wrong perception the public has that buying a franchise business
ensures a better rate of success. That is true if you're buying a
franchise from a well-established, mature franchisor. For
example, in that US study, they counted the franchisors that
started business in 1983 until 1994, and in those 11 years there
were something like-and I'm going from memory-1,200 franchisors
who entered the marketplace in total; 850 of them had disappeared
by the last year of the study. So franchisors fail as well as
franchisees.
Mr Gill:
But you don't have any comparison with independent business, how
many of those failed within-
Mr Sotos:
Of the studies that exist?
Mr Gill:
Yes.
Mr Sotos:
More franchisees fail than independent businesses during the
first five years. That's the evidence that exists, but it's only
American. There's nothing in Canada, to my knowledge.
Mr Gill:
In your mind, is the reason that it is a matter of not enough due
diligence or people's expectations being higher than what they
really should be?
Mr Sotos:
Why is the failure rate higher?
Mr Gill:
Yes.
Mr Sotos:
I think it is because the investment in a franchise is higher
than the investment in an independent business. You've got more
debt load to repay, because you have your initial franchise fees.
You typically get a better store, a better office, a better
business in the sense of what kind of equipment you get. Some
franchisors charge markups on repairing the business for the
franchisee. So your cost of getting a branded coffee shop, for
example, might be materially greater than if you were starting
your own independent shop. The costs are higher, therefore that
would explain why the failure rate would be higher.
The Acting
Chair: We've got about three minutes left. Are there any
other questions?
Mr
Chudleigh: Just a very short one. In your experience in
the Ontario area, is there a particular area in which most of the
problems reside, whether it be food-related, automobile,
motel-hotel chains, or are the problems that franchisees have
with franchisors or vice versa fairly well spread throughout?
Mr Sotos:
I would say that they are well distributed. The mature systems,
where there has been a lot of consolidation, are having a whole
host of problems. Certainly the grocery industry, for example, is
experiencing and has been experiencing a lot of difficulties for
the last decade. You will recall the Loeb franchise
situation.
Mr
Chudleigh: Yes.
Mr Sotos:
That's a case in point, and there are many others that are in the
same situation.
Mr
Chudleigh: Mostly involving around encroachment?
Mr Sotos:
Not only encroachment; the sourcing of supplies and the price at
which supplies are being provided, the requirement to invest in a
store very substantial sums of money and then the franchisor
coming in with the discount concept down the street or converting
an existing to a discount and all of a sudden your business is
taken away from you and the franchisor is making more money
because they are selling more groceries, in this case. They're
getting the profit from the product and they're also getting the
royalties. So you are there with a sunk investment. Your sales
are going away, and your margins are declining or disappearing.
You've got this building you can't do anything else with, you owe
the bank $1 million and, you know, the usual, you've got
employees who've been with you for 20 or 30 years and all those
other issues. But those problems are everywhere-fast food. Hotels
is probably the only area where I have not seen much disputation,
if that helps.
The Acting
Chair: For our last question, Mr Martin. A short one,
please.
Mr Martin:
Mr Sotos, I was listening to your answer on the question of
survival patterns among franchise and non-franchise firms. There is a study that has
been done that I had research-Susan Swift-look at, and I have a
paper that I'll make available to the committee. It's an article,
Survival Patterns Among Franchise and Non-franchise Firms started
in 1986 and 1987. Very briefly, it suggests: "Generally speaking,
the results of the study contradict the assumption of relatively
lower risks for franchises when compared with independent small
businesses. Measures of profitability and survival rates in this
study support the opposite proposition, namely that franchisees
are often at greater risk." I'll share that with you so you can
have a look at it. Having said that, and the question I asked you
earlier, better no legislation than legislation that
misleads?
Mr Sotos:
I'm sorry. What was the question?
Mr Martin:
Would it be better to have no legislation than to put a piece of
legislation in that gives people a false sense of security, given
some of the statistics?
Mr Sotos:
That obviously is a no-brainer. The purpose of legislation is
remedial, it's to correct a problem. If the legislation doesn't
achieve that, then I think it's misplaced.
Mr Martin:
Without your amendment, Bill 33?
Mr Sotos:
Bill 33 will address the issue of pre-sale disclosure relatively
well. It will also address the right-to-associate issue quite
well. So as far as those matters are concerned, I can't say that
it's not helpful; it's doing that job. It's the fair dealing that
I think needs to be enhanced a little bit in order to make this
bill a very legitimate and helpful piece of legislation for an
industry that apparently accounts for something like $50 billion
or $90 billion in Ontario alone-I don't know the numbers. It's a
significant industry.
The point I make in my
submission is that there isn't an industry that, as it reaches a
certain level of complexity and maturity, isn't specifically
regulated. Franchising is there now and has been there for quite
some time. I think the initiative that's before you, together
with some slight enhancements-I know the ministry has some other
small amendments that they wish to make as well just to pick up
some issues-should make for a very helpful piece of
legislation.
The Acting
Chair: That concludes your appearance?
Mr Sotos:
Yes.
The Acting
Chair: Thank you very much for coming before the
committee.
NED LEVITT
The Acting
Chair: I'd like to call on the last presenter before
lunch, Ned Levitt. Welcome to the committee, sir. You have 20
minutes.
Mr Ned
Levitt: First of all, thank you very much to the
committee for allowing me to come here and make a presentation
this morning.
My name is Ned Levitt, and
I'm a partner in the Toronto law firm of Levitt, Beber. I've been
practising for 25 years in this area. During that time, I have
acted for both franchisees and franchisors, essentially balanced
between the two. During that time, I have witnessed the amazing
growth of franchising in Ontario in an unregulated environment. I
have acted for many franchisees in dispute matters and organized
many ad hoc franchisee associations to deal in troubled franchise
systems. Currently I am general counsel to the Canadian Franchise
Association, and I had the good fortune to be a member of the
Franchise Sector Working Team, so I've had more than a little bit
of input on Bill 33. Today I am appearing in my personal capacity
and what I have to say are my personal views.
Bill 33 is a product of
many hours of work and debate among various parties and from
various perspectives. Certainly we debated the bill and initially
our report at the Franchise Sector Working Team extensively. The
bill does not contain everything everybody who is a member of the
Franchise Sector Working Team wants to see and in fact it
contains some things that members don't want to see, but it is
acknowledged as a workable consensus among the various interests
that were represented at the Franchise Sector Working Team.
1200
I believe that Bill 33 is
long overdue and should not be delayed any more. I'm essentially
in favour of Bill 33 as a disclosure document. I am open to
suggestions of certain amendments and I will discuss in a moment
some issues that I have.
You have heard this morning
that there is a crisis in franchising. You've heard many stories
about problems and abuses by franchisors. They are true. I could
add to them. I could walk you down the halls in my office and
show you filing cabinets dripping with blood from disputes. They
exist. However, these are anecdotes.
I've struggled very hard
with this. I hunger for good statistics about the franchise
industry. Everybody does. I've heard this morning that there are
two studies, one done in the media. I haven't seen studies like
that before and I'm interested to look at that. I've been
involved in a number of media stories and I know what goes on
behind the writing of reports. I've also heard from Ms Kezios
this morning that her organization has done a study and I'm very
interested to see that one. Having hated statistics when I took
it at university, I nonetheless survived and I know there are
issues around studies, the questions you ask and how you compile
and analyze the data. What we need for franchising, of course, is
disinterested, third-party studies that we can all rely on to
make our decisions.
I have been successful in
obtaining remedies for franchisees individually and as groups,
using the existing common law in Ontario. I've often done it
quietly, found business solutions and done business negotiations
as well as concluded litigation. I haven't been able to achieve a
satisfactory result for every one of my clients. I wish I could
have but I couldn't, for a variety of reasons. But I'm satisfied
that there is a fair chance in this province for franchisees to
receive justice. If the statistics show that we need stronger
franchise legislation, relationship legislation, I'll be the
first one screaming for it, I assure you of that. Certainly, I have my eye on a
chalet in Switzerland that I want to buy with the fees I'll be
earning from the added litigation.
But seriously, I've again
had to struggle with, do I want to see it now in Ontario? I've
come to the conclusion that no, I want to see a bill that does
what Bill 33 does, essentially, to provide disclosure, which will
allow franchisees to make an informed decision before they invest
their dollars.
What about the franchise
community? There's a lot of rhetoric floating around, and
rhetoric bothers me. I like reasoned arguments and I like facts
to support assertions. Perhaps I can help the committee
understand a little bit more about franchising. First of all,
franchise fraud in this province is not our biggest problem in
franchising. In fact, out and out frauds are a very small
percentage of the problems that I've seen in 25 years. Franchise
negligence is a much bigger problem. Franchisors starting
franchise systems without the right resources, knowledge,
experience and commitment to make a success of it are the ones
who create the vast majority of the problems. I was interested to
hear Ms Kezios this morning talk about her proposal that there be
a duty of competence in a piece of legislation. I'm not sure
about that.
I also want to tell you
that everybody tries to paint franchising with a broad brush, but
it is very multi-faceted. Franchisors come in all shapes and
sizes. When you're talking about large, well-established
franchisors, they want to see a healthy, fair, honest franchise
market as much as anyone else. I think you'd be hearing a hue and
cry from the larger franchisors if there was a serious problem of
abuse and a crisis in franchising.
We've matured a lot in
these last 25 years of franchising. That has brought with it a
much greater understanding of franchising among franchisors,
those who advise franchisors and those who advise franchisees.
There are many more lawyers today than was the case when I
started in the area who understand franchising both from the
legal as well as the business point of view, because often the
lawyer and/or the accountant are the professionals franchisees
seek initially, not just for their professional advice but for
their business judgment. There's also the growth of the Canadian
Franchise Association in its influence and its efforts to educate
not only franchisors about how to franchise better, but to
educate franchisees about how to make a better investment
decision.
I would like now to make a
couple of comments about specific issues on the draft bill. It
has been argued that there isn't a mechanism for dispute
resolution, and I'm a very big proponent of mediation in
franchising. For me, arbitration is just another court. It cannot
necessarily deliver the cost-effective results that franchisees
who have difficulties are seeking. It can be as expensive and as
lengthy as court proceedings, and I think everyone who knows
agrees that it is really mediation that is the preferred ADR form
for franchising. But we now in Ontario have court-annexed
mediation which will capture all disputes, including franchise
disputes. As well, we have many more initiatives, both driven by
the Canadian Franchise Association and from other quarters, to
increase the amount of mediation that goes on in franchising. For
mediation to be successful, the parties have to want to do it.
They have to approach that process on a voluntary basis. I can't,
for myself, imagine that you can legislate someone to work
co-operatively in a mediation.
It has been talked about
for industry self-management. Again, this is relationship
legislation-not that I'm against relationship legislation; I'd
need to know more before I could support relationship
legislation.
I have some difficulty with
one definition in the act, and that is the definition of the
franchisor's associate. In extreme examples, that could create
liability for a shareholder, albeit a controlling shareholder, of
a franchisor, and I think that's just about unprecedented in our
judicial system where shareholders can be liable for the acts of
their company.
A small matter, but the
inability of a franchisor to take a fully refundable deposit,
which is permissible in Alberta, denies franchisors an
opportunity which I believe they use often and appropriately to
take a fully refundable deposit in the process of selling their
franchise.
One comment about the
financial disclosure: Providing franchisees with full financial
statements may not be as effective as providing franchisees with
specific financial information certified to be true by a
franchisor. Certainly, franchisees can take financial statements
to accountants and have them analyzed but, unfortunately, a lot
don't do that. For them, it is basically language they don't
understand.
In conclusion, and then
I'll take questions, Bill 33 represents a huge change in the
franchise marketplace in Ontario but a necessary one. If we go
further with stringent relationship provisions before we let the
new act have an effect on the marketplace, and before we gather a
more accurate picture of the true extent of problems in
franchising generally, we will be making a mistake. Franchising
is an integral part of Ontario's commerce today. It provides
opportunities to many, and we should not run the risk of stifling
its growth with unnecessarily restrictive legislation. Thank you
very much.
The Acting
Chair: We have six or seven minutes for questions. Is
there interest in questions?
Mr
O'Toole: Thank you very much, Mr Levitt. I appreciate
your presentation here this morning. Just a couple of
clarification points, if you will, as I gather that being part of
the working group, you're supportive of the need for
legislation?
Mr Levitt:
Absolutely, yes.
Mr
O'Toole: With that, I suppose you're supporting, and I'm
just trying to pick up on one piece, the disclosure piece which
of course is a central piece to the bill as I see it. I'm just
wondering how you deal with things like a substantive change. I
of course don't know anything more than the paper I've been given
to read about it, but I think of someone in a business that is,
in a technology sense, changing dramatically. This is something I
was thinking as you
were presenting here. Take a photo business, where the whole
technology is changing. So I've got a disclosure statement that
tells me some things about running this, and I've got financial
statements about how much business I'll probably do, and all of a
sudden we have a market that changes because of digital
technology and people don't use the typical. Don't you think I'd
be tying a franchisor, perhaps unnecessarily, to a conditional
arrangement where they weren't able to adapt their business plans
to reflect the changing needs in the marketplace? Do you
understand? The whole thing could change. The recipe for success
could change, so the franchisor-how do you think these disclosure
documents will tie? Both parties have a responsibility to prepare
for those kinds of change I've just described.
Mr Levitt:
We can't eliminate risk in business.
Mr
O'Toole: That's right.
Mr Levitt:
Franchisors cannot eliminate risk for franchisees, and one of the
risks that everyone takes in the piece is something that changes
the market as a whole, such as technology. I'm starting to see
now the emergence of franchises in dealing with Internet
businesses. They scare me greatly. It's changing so rapidly. How
can anyone be selling something that says there's a proven
formula here when the formula's maybe a day or two old? There are
industries that are changing more rapidly than others.
Mr
O'Toole: It's the whole fair dealing debate, not just
disclosure. But who's to say who is responsible for adapting to
the market?
Mr Levitt:
Again, we come back to the fact that the franchisor is selling
something. They're representing that they have a level of
knowledge or something about their industry that has to be true.
That's why I emphasize so much the disclosure, and I want it to
be a full and comprehensive disclosure that brings these risks to
the attention of the investor. If the franchisee investor can't
comprehend them, then hopefully they'll find their way to
professionals who will help them comprehend and understand that
before they make the decision.
Mr
O'Toole: If I have time for one more-
The Acting
Chair: You have time for one very brief question.
Mr
O'Toole: In some respects I sort of picked up that less
is a better approach. I'm not summarizing what you said, but I
gather less intrusion is better than intrusion. I think Mr Martin
was always asking the question, is it better to do nothing than
do this?
Mr Levitt:
Unfortunately, we talk about the unethical franchisor, but
believe it or not, there is the concept of an unethical
franchisee. Lots of franchisors have problems with franchisees,
but I have no grasp on the extent of the problem. No, I am for
full-blown relationship legislation when the case can be made out
that we need it. If we start having that type of legislation
before it's proven that we have the need, I think we're making a
mistake.
Honestly, from my
perspective, I don't think we need it in Ontario right now, but I
don't know. I sit in my ivory tower doing what I do every day,
and I deal with this all the time, but I don't take surveys; I
don't cover the entire ground. I have difficulty when people say
in a forum like this or any other forum that they have the Holy
Grail, that they have the statistics, when, to my satisfaction,
the studies have not been done. But if it's proven, I want to see
tougher legislation.
Mr Martin:
I find it interesting that you're coming today, supporting
disclosure legislation as being enough. In an article in the
Report on Business in December 1998 you're quoted as saying that
in fact a good salesperson can sell around a disclosure document.
How do you reconcile those two realities?
Mr Levitt:
Having put myself through school direct-selling, I know how
that's possible, that you can sell around it, but it doesn't-
Mr Martin:
How do you protect anybody then?
Mr Levitt:
No, no, no, but it doesn't change the liability for the parties
in the piece, and that's what disclosure legislation really does.
When a franchisee comes into my office and they've got a
disclosure document that said one thing and then the conduct of
the franchisor was another, whether the salesman sold around it
or not, I'm going to have something to base my strategy and my
case on. In fact, the franchisee certainly had the ability to
come to someone like myself ahead of time so that I could
question what the salesman is doing in selling around the
disclosure document.
The Acting
Chair: We have about one minute, if there are any final
questions. Seeing none, we will recess until 1:10.
I'd like to remind
particularly members of the committee who are leaving after this
afternoon's session for Sault Ste Marie that we're going to need
to run crisply and that if you have your luggage packed, it will
be helpful if you could bring that with you.
Mr Martin:
Just on a point of order to say that I've been talking about a
number of pieces of research that I had done in preparation for
these hearings. I will at the noon hour try to distribute those
and leave any extra copies of that that I have on the table over
there so that if you want to access them, they will be there for
you so you can have a look at them.
The Acting
Chair: Thank you. We're in recess till 1:10.
The committee recessed
from 1215 to 1310.
The Acting
Chair: We will get rolling again. I'd like to thank
everybody for coming back pretty close to the appointed hour.
Just a reminder that many members of the committee will be
travelling after the hearing this afternoon so we need to keep
things moving as quickly as we can.
CANADIAN COUNCIL OF GROCERY DISTRIBUTORS
The Acting
Chair: I'd like to present the next group, the Canadian
Council of Grocery Distributors. You have 20 minutes, and I'd ask
you to introduce yourselves individually.
Mr David Wilkes: Thank you very
much, Mr Chairperson, and members of the committee. I apologize;
I have a cold. This is not my regular voice.
My name is Dave Wilkes, and
I'm the vice-president of the Ontario region and trade relations
with the Canadian Council of Grocery Distributors, or CCGD. I'm
joined today by Kevin Ryan, who is an executive vice-president
and a representative of one of our member companies, and who has
worked with the franchise working committee; as well as Justin
Sherwood, who is a director of our association.
The Canadian Council of
Grocery Distributors is a not-for-profit national trade
association representing the food distribution industry across
Canada. Among its members are small and large grocery wholesalers
and retail operations. The council's membership represents
approximately 85% of the $54 billion of total sales volume of
grocery products distributed in Canada. In Ontario, our
distributors are responsible for in excess of $19 billion in
grocery sales and employment of over 150,000 individuals.
We provided the clerk of
the committee with a summary of our members and some of the
activities that they undertake. As well, we provided the clerk
with a summary of the opening comments that Justin is going to
offer that provide our perspective on the bill that we have
before us today.
In Ontario, CCGD represents
A&P/Dominion, ADL, Canada Safeway, Knob Hill Farms,
Lanzarotta Wholesale Grocers, Loblaw Company Ltd, Metro Inc,
Sobeys and subsidiaries of all those various companies.
What we'd like to do, if it
serves the pleasure of the committee, is ask Mr Sherwood to
outline our position and then allow Mr Ryan to provide a member's
perspective and his perspective on the bill that we have before
us. If that suits your purposes, we'd like to proceed.
Mr Justin
Sherwood: The Canadian Council of Grocery Distributors
supports Bill 33 as a positive step in protecting the rights of
franchisees.
When reviewing the proposed
franchise legislation, CCGD would like to impress upon the
committee the significant differences that exist within franchise
operations. While some franchise operations are small, require
small capital investments and employ only two or three people,
others are large, employ as many as 200 or 300 employees and
require extensive capital investments.
In the case of the grocery
industry, the latter is the case, with typical grocery franchise
arrangements where a franchisor can investment up to several
million dollars in building or renovating a retail location that
will employ several hundred people, with the franchisee investing
a relatively low percentage to enter into a franchise agreement
to operate that location. At present, our members have over 690
franchise locations in Ontario, which employ approximately 50,000
employees in full- and part-time employment. This does not
include the secondary employment that is generated by these
locations. This represents a considerable capital investment in
franchising as a mode of operation for CCGD members and has a
significant impact on the Ontario economy.
CCGD and its membership
provided input to the franchise sector working group through the
participation of Kevin Ryan, who joins us today and will be
providing his perspective after my comments.
CCGD believes that Bill 33
will provide much-needed clarity to franchise arrangements and
supports the bill for the following reasons:
The Franchise Sector
Working Team, composed of large and small franchisors and
franchisees, provided detailed industry input into Bill 33. This
committee participated in hearings, reviewed legislation and
provided consultation to the government during the development of
Bill 33. While the result does not reflect all the wishes of
every member of the franchise sector working group, the proposed
legislation represents a compromise position of all stakeholders.
The proposed legislation strikes a balance between protecting
prospective franchisees without creating an environment burdened
with red tape, which would negatively impact the existing
franchise relationships. Should franchise legislation be made too
cumbersome and onerous, companies that presently use franchising
as a means of operation may shift their priorities to operation
of corporate stores, negatively impacting the existing system and
its participants.
Since CCGD members operate
in more than one provincial jurisdiction, consistency in
legislation governing business activities is of utmost
importance. Given that Bill 33 and its provisions mirror the
Alberta franchise legislation, there will be consistency in
application across the two provinces that have franchise
legislation.
Finally, CCGD views the
provisions outlined in Bill 33 as a positive step in providing a
good level of legal protection to franchisees. By ensuring that
the franchisee receives comprehensive, accurate and clear
disclosure documents, Bill 33 will permit the franchisee to make
an informed business decision before entering into a franchise
agreement. The right of action for franchisees outlined in the
proposed legislation will ensure the accuracy of the disclosure
document by providing a course of action against anyone who has
knowingly made a false statement. Bill 33 will ensure that
franchisees receive the franchise disclosure document 14 days
prior to signing any franchise agreement, permitting the
franchisee an adequate time period to review the material prior
to arriving at a decision.
Finally, the provision of a
60-day cooling period after signing a franchise agreement permits
a franchisee to exit a signed franchise agreement, should they
have second thoughts.
CCGD and its membership
believe that it is impossible through legislation to protect any
individual from the inherent risks of business. Factors such as
economic conditions, poor choice of location, market saturation,
competition and poor business decisions are beyond the control of
any legislation to minimize. Bill 33 represents a positive step
for the franchise sector by ensuring that the franchisee has the
right information to make the proper decision and by placing obligations on
the franchisor to provide the information, with penalties for
failure to do so.
As we have indicated, Bill
33 strikes a balance between the rights of the franchisee and the
franchisor. To go beyond the provisions outlined in the bill will
burden the existing franchise system and will impact on the
health of the existing system. We urge the committee to support
Bill 33 and to ensure speedy passage of the bill.
I will now pass over to
Kevin Ryan, who will provide input to the committee from a
member's perspective.
Mr Kevin
Ryan: In the interests of time, I've chosen to present
with CCGD and not burden the committee with a separate
presentation. I would like to make mention of the fact that I've
spent my entire career of over 25 years in the franchise grocery
business and solely in the franchise grocery business. As a
member of the Franchise Sector Working Team, I continue to
support fully and our company continues to support fully this
legislation.
As you are aware, this was
a group of franchisees and franchisors, and I can assure you that
there was a great deal of input from both groups prior to our
arriving at our unanimous recommendation. I believe this provides
an informed basis for franchisees to make decisions about their
prospective business opportunity. I would also suggest that the
liability of officers should provide a great deal of comfort to
franchisees, the liability that officers would have if they sign
a document which they do not put the proper diligence behind or
if they knowingly sign a false document. I think this should be
very comforting to franchisees.
We believe it strikes a
balance between what a franchisee needs to know to make an
informed decision and the need for the franchisor to continue to
manage the franchise for the benefit of the entire franchise
group. It also allows the franchisor to continue to make
significant investment, which in the grocery industry would be in
the hundreds of millions of dollars, in their systems and ensure
that they have a level of control to allow them to continue to
manage that system. For these reasons, we urge the committee to
support Bill 33.
The Acting
Chair: Thank you, gentlemen. We have about 10 minutes
left for questions. We'll start with Mr Gilchrist.
Mr
Gilchrist: I appreciate your presentation and the fact
that you speak for so many franchisees and their employees all
across this province. There's no doubt that we've come a long way
in the work of the franchisors and the franchisees on the working
committee. Certainly Mr Martin and previous governments had taken
us well down the road we're continuing to travel on here, and
we're encouraged when we hear the kind of support we've heard not
just from presenters but from Mr Martin and members of the
official opposition. But there's no doubt we'll continue to hear
suggestions and some other changes.
1320
I wonder if I could get
your feedback on a couple that we have heard so far. I certainly
sympathize if you don't want to make a decision sitting here on
the fly, but one of those would be the ability to permit
electronic disclosure, whether this would be something that you
would see as a useful addition to the act, given today's
technology.
Mr Wilkes:
Without consulting our membership fully, obviously I think
electronic communications is not unique to this particular thing.
With the ability to reserve final judgment on it, I don't think
that would be a problem. I think it's just another means of
providing information.
Mr
Gilchrist: Another perhaps more significant change, and
we've heard it here this morning, is that sometimes, after the
first term of a franchise agreement has expired, the franchisee
will want to renew. Even if it was a 20-year term, they may still
have an interest in maintaining that business. But the terms and
conditions that would apply to a new franchisee may have changed
considerably in that time period. The act, as it's written right
now, doesn't speak to the need to have full disclosure if a
franchisor wanted to simply renew. Would that be something that
you think would bring even greater fairness to the franchising
relationship, if you had to go through the whole process again in
terms of talking about the franchisor's range of business,
whether any material change has taken place in that 10 or 20
years since you'd originally signed?
Mr Ryan:
Just to be certain, when a franchise is being renewed by both
parties, should the disclosure document be provided to the
franchisee? Is that the question?
Mr
Gilchrist: Yes, an up-to-date disclosure.
Mr Ryan: I
see no reason why any credible franchisor would have any issue
with that.
Mr
Gilchrist: I appreciate that, because that's certainly
something in the original drafting that I don't think is as
explicit as it should be.
Mr Ryan:
That does assume that it is being renewed, obviously.
Mr
Gilchrist: Yes, I appreciate that. Those are my
questions.
Mrs Boyer:
Thank you for your precision and all the details that you have in
your presentation.
Going a bit like Mr
Gilchrist, this morning we did have experts. Although they said
they were in favour of Bill 33 and that this bill was long
overdue, they said they thought that the bill was not going far
enough, was not strong enough. Although you're saying the bill
represents a positive step for the franchise sector and it's good
for the franchisee and the franchisor and that you want to ensure
speedy passage of the bill, would there be something you would
like to add on since you prepared this?
Mr Wilkes:
I think the document that you have in front of you reflects the
current thinking of the Canadian Council of Grocery Distributors
membership. I also think what Kevin said and what Justin
indicated in our opening comments is important, that we strike
that balance. You don't want to create a bias in the system that
will allow companies
that have an option not to support fully franchise operations
versus corporate stores. I think the perspective that we bring
here is that the legislation does provide a fair balance. It
provides a framework in which a responsible business relationship
can occur.
But we really want to
caution the committee against tipping that balance one way or the
other, because it will make decisions for the companies that have
options perhaps more difficult to support franchise arrangements.
I think that's a real concern that we can't diminish.
I'm not sure, Kevin, if
there are additional comments, but that balance is very key.
Mr Ryan: I
think as a franchisor and as a franchisee it is absolutely
critical that investment continues in that particular program.
All stores have a life cycle, all retail companies have a life
cycle and their units have a life cycle. Changes in demographics
and road networks and those types of things make certain sites
become obsolete, and it is critical that there be reinvestment in
new sites to maintain the health of the total structure.
There is a real concern on
the part of franchisors that if we end up in a situation where
the legislation is costly and onerous, it will result in a burden
that franchisees have to bear that their corporate competitors
don't, which is critical. Second, if reinvestment in the system
does not occur, while we'll have done a great job of protecting
those who are coming into the system, we will have left those who
are in the system in a vulnerable position. That's the balance
that we are recommending that the committee recognize.
Mr Martin:
Some of you will know, Mr Ryan in particular, a rather sorry
piece of small business history in Sault Ste Marie that was
played out over the last five or six years where we lost three of
our best corporate citizens who were grocers, two of them because
the parent company changed hands. Provigo bought Loeb and brought
in a new plan, so two families who were very good at what they
do, very good in the community and known for a tremendous
reputation, had to actually camp out in their stores for a couple
of weeks just to stop the parent company from coming in and
changing the locks. It was not that these people were losing
money or doing anything untoward, but simply because the company
was sold and the new company had a different plan.
We also had, Mr Ryan, in
your instance, a Ms Carlucci, who ran a very successful,
excellent store in Sault Ste Marie, again another very worthy
corporate citizen in our community.
All of these people are no
longer in the grocery business and it has nothing to do with
disclosure before they entered into their agreement. They brought
all due diligence, they had lawyers and accountants advise them.
It was relationship problems that cropped up that killed them and
their ability to participate in the business that they loved any
more.
The bill that's on the
table would have done nothing for them and will do nothing for, I
suggest, a whole lot of other grocers out there today who are
probably anxious because they've seen what happened to others.
These others have gag orders on them, ultimately, after the
agreements are done, that do not allow them to speak to us or
talk to anybody about what happened. Doesn't that call for more
in this bill than what we're presently entertaining?
Mr Ryan: I
can't speak with any level of expertise to the Loeb situations
because at that particular time, you're correct, they were part
of the Provigo distribution network. So I don't have any intimate
knowledge of that particular situation.
All I can tell you is that
with respect to the situation that I'm familiar with, as with any
dispute-first of all, the type of person who is most interested
in a franchise is usually a very aggressive person. I don't think
any legislation will ever prevent some conflict taking place,
because by their very nature they're people who are
entrepreneurial in nature. So I don't think any type of
legislation will prevent conflict from occurring.
I can tell you, though,
from my personal knowledge that in the case of Mrs Carlucci, all
of the facts are not known.
Mr Martin:
I would suggest to you that perhaps all of the facts are not
known because gag orders were put on everybody after the deal was
done. Mrs Carlucci didn't have a clue. She was brought into a
hotel on the premise that there was going to be a marketing
meeting, and the locks were changed on her store. Is that a
proper and appropriate way to deal with problems in such a
reputable business sector?
Mr Ryan: I
believe the legislation does provide for dispute resolution.
We're talking about some form of dispute resolution. There has
been a lot of talk about finding a way to deal with that. Again,
Mr Martin, all the facts are not known, and it would be
inappropriate in this forum for me to get into that.
1330
Mr Martin:
I regret that we're again casting aspersions without allowing the
person who is being indirectly bespoken here-
Just to move on, in Sault
Ste Marie we also have another issue, which is some local
producers who can't get their product onto the shelves. One of
them is still struggling along out there, Lock City Dairies. You
probably know of them. They've been at your door trying to get
their product onto the shelf in a more equitable fashion at
Rome's Independent Grocer. They've been shut out of the Food
Basics and, if this keeps up, we will lose again another of our
very important local corporate citizens.
The Acting
Chair: I need you to form a question, Mr Martin. We're
almost out of time.
Mr Martin:
OK. We've lost a company already. Mighty Fresh Eggs is gone
because they couldn't get shelf space. Again, my bill, Bill 35,
addresses this. It speaks about freeing franchisees up to source
product where they can find it at a competitive level as long
it's not the trademark issue. Are you favour of that or against
that?
Mr Ryan: Absolutely, we could
not support such a suggestion. First of all, it flies in the face
of the reason that a franchisor would franchise. Second, I am
familiar with the Lock City situation. We carry the Lock City
product in our store in Sault Ste Marie. I'm sure you're aware of
that. But we also have to be mindful of the supply to all of our
other franchisees, and we cannot prejudice the supply to the
balance of our franchisees at a competitive price because of a
situation in one particular town. This situation is replicated in
other towns, and we try to adapt to the local situation as best
we can. But we have stores that we have to supply in Hearst, in
Kapuskasing, in Cochrane, in many other towns where we are
relying on a supplier who can supply the entire north.
Mr
Sherwood: If I could add to that.
The Acting
Chair: Very briefly, please.
Mr
Sherwood: In discussion with our members on this very
issue, they have also indicated that sourcing of local product or
product mix is done on a one-to-one relationship and there is
flexibility for that type of thing to happen in most
instances.
The Acting
Chair: Thank you very much for your presentation.
Mr Martin:
Mr Chair, while they're leaving and the next group comes, I've
got some more research that I've done on this issue because I
think it's an important piece of this whole discussion: the
question of the freedom to source product and put it on your
shelf and the impact that has on local economies. I'll distribute
that while folks are moving back and forth.
TONY MCCARTNEY
The Acting
Chair: I'd like to call on the next presenter, Mr Tony
McCartney, from the Color Your World Dealer Association. Welcome
to the committee, sir.
Mr Tony
McCartney: Thank you. Mr Chair, honourable members,
ladies and gentlemen, good afternoon. My name is Tony McCartney
and I'm from Niagara Falls. I'm a franchisee in the paint and
wallpaper industry. My experience in this field goes back some 36
years in three countries: England, the United States, and now
Canada. This is my 17th year operating a franchise in Niagara
Falls.
I am also a member of the
Franchise Sector Working Team and have been since its inception.
My franchisor is Color Your World, a division of ICI Canada, who
service and operate over 200 stores across Canada, coast to
coast. This, in turn, is a subsidiary of Imperial Chemical
Industries of Great Britain, the largest manufacturer of paint
throughout the world.
Color Your World St Clair
Wallpaper was purchased by ICI in 1997, following bankruptcy.
Less than one year prior to that, Color Your World, again in a
bankruptcy acquisition, was purchased by St Clair Wallpaper.
During the five years preceding this, the Color Your World
company was traded three times. During these troubled years, I
served as president of the Color Your World Dealer Association
for two separate terms. The first period was for two and a half
years and then more recently for one year. Initially I
represented 108 franchise locations coast to coast. Today we
number 40.
I congratulate the
government for introducing this legislation at this time. Since
the Grange report in 1971, this has been long overdue.
In addressing the issue of
right to associate, I have to record that during the very
difficult time I experienced, the right to associate and
communicate freely within our members and with the company was
approved and encouraged. Unfortunately, this is not the rule of
thumb in some franchise systems today. Again, hopefully this
legislation will address this inequity.
I have concern that the
fair dealing provision as set out does not identify solutions to
an area in which failure or abuse is most common. As mentioned
earlier, three changes in ownership and two bankruptcies resulted
in a trail of disaster for some 60-plus franchisees within my
franchise system. Not only did these operators lose their initial
investment of around $150,000 to $200,000, but many had further
injected capital into their livelihoods through remortgaging
their homes etc, causing more hardship. This left a trail of
personal bankruptcies, family disruption and stress and even
mental breakdowns.
Today debts of these
unfortunates are still being pursued by the company and being
paid off by some franchisees who are still in the system and
others who were unable to continue. Loss of equity and personal
debt varied location by location, but sums of $300,000 to
$400,000 were not uncommon. As a personal example, I emerged as
one of the more fortunate people. My loss in equity ranged
between $80,000 and $100,000.
Fair dealing or
consideration was never evident during these times. The policy
adopted was that the debt was purchased by the company and has to
be repaid. With due respect, I would ask deliberation and
consideration to the area of fair dealing, which may alleviate
repetition of a instance similar to my experience.
In conclusion, I would like
to thank the committee for affording me this opportunity to
present my thoughts today. If I am able, I will answer any
questions you may have. Thank you.
Mr
O'Toole: Thank you very much. It's wonderful to have
real-life experience come before us without some sort of
ultimate, long-term goal here.
There are two provisions,
obviously: The disclosure part, which is central to the whole
piece, would have addressed your case, as you described a company
that had three or more failures and other failures as well, and
the fair dealings part would have addressed it too. If there were
a proper schedule of what should be disclosed, its financial
disclosures and everything else, wouldn't that become part of the
fair dealing provision? Would that have solved your own case that
you described of losing $80,000 to $100,000?
Mr
McCartney: Not really, Mr O'Toole, because now it's part
of history; these bankruptcies and the change of ownership are
part of recent history. I was in the system before that. It's record now, but
for anybody who came before that time-as of now, if they
franchised all that, they would know the history of instances
like this. Their record is placed up front, and you make your
judgment on purchasing from that history. So will those things
change?
When I came into the
system, the franchise was sound. It was a good business to be in.
It wasn't for some seven or eight years after that when all these
things started to fall into place. It was bought and sold, bought
and sold; it was leveraged far too much, and then following
bankruptcy to bankruptcy.
1340
Mr
O'Toole: You experienced it; I'm trying to understand
it. What I mean is, the previous presenters also alluded to the
fact that markets change, conditions change, and what I would
deem to be appropriate disclosure today may turn out to be the
last successful day I had. As situations and interest rates and
other things change, material matters change, the relationship is
a statement of what happens today when you sign on to this
business arrangement. Because of a whole bunch of economic and
other factors, some of which may or may not be in my own control,
our association deteriorates for some reasons.
What I'm trying to say is
that the disclosure initially, when the franchisee decides to
sign on the dotted line, if that is fully accountable that day
that we're talking about and the previous years today-that won't
help you, obviously; that's water under the bridge, so to speak.
But today, would this provision in this legislation help
prospective franchisees from today forward to deal with what you
dealt with?
Mr
McCartney: Definitely, up until the time they make the
decision. It helps them in making the decision. Once the decision
is made, that clause is really put to one side and fair dealing
is there for evermore after that.
Mr
O'Toole: That's reasonable. I appreciate that.
Mr Gill:
This might be a repeat of some of the questions Mr O'Toole might
have asked, but since you're experienced and you were the
president of the association of the franchisees as well, with
this franchise chain, what was the main root cause, in your mind,
of the problem and how would this bill, if it was enacted then,
have alleviated some of these problems?
Mr
McCartney: As Mr O'Toole confirmed, the history of these
transfers of the company, the first three times they were bought
and sold, bought and sold, bought and sold. As I say, the reason
the company went the route it did was because it was leveraged
too much in the end. Yes, this document would state that and then
I, as a prospective franchisee, would see that and then I would
make my decision whether I would go into it or not.
The only thing is, as of
today this company is now under the flag of ICI, which is one of
the most stable companies in the world. The document would relate
that. Even though it may show the history of what has gone on in
the past, that's irrelevant to me because the people in charge at
that time are not in the business now, it's not leveraged
now.
Mr Gill:
You're basically saying it doesn't matter what it says in the
disclosure agreement as long as the backup company is a strong
company. Is that what you're saying?
Mr
McCartney: In my case, yes. I mean, it's very stable and
that would influence my decision.
Mr Martin:
To get back to the questioning that Mr O'Toole was on to, for you
the disclosure part of this legislation really has no-
Mr
McCartney: Has no bearing.
Mr Martin:
No bearing. But there are literally thousands of franchisees out
there across Ontario today who are in need of some further
relationship regulation. You participated, you said, on the
working team.
Mr
McCartney: Right.
Mr Martin:
What was your position when you saw that the government was only
going to do the disclosure piece and they weren't going to go any
further? What was your immediate reaction? What would be, in your
mind, the most important things for us to consider as we go down
this road now and try to, in my view, improve this legislation so
that it does cover the franchisees who are already out there
doing their best? Given the nature of the world we're in, where
companies buy companies and there are mergers and all kinds of
things going on, what would be the things you would see as
important?
Mr
McCartney: This is why I stated that I think it's
important that the fair dealing clause be maybe re-tuned or
fine-tuned or whatever you'd like to call it.
Mr Martin:
Any definition of that?
Mr
McCartney: No specifics. No, it's hard for me to say.
But this would have helped our company, as I say, with these huge
losses by franchisees, which occurred because of supply problems
during those bad times. Supply problems were horrendous.
Consequently, we were unable to obtain materials to sell. Debts
rose. At the end of the day, there's no consideration on those
debts.
Mr Martin:
So you're left holding the bag.
Mr
McCartney: Exactly.
Mr Martin:
Do you want to define the supply problem for me a little bit?
Mr
McCartney: Fairly early on, the suppliers to the
corporation obviously got wind of the financial difficulties the
companies were getting in, so they were a bit hesitant in
supplying raw materials-titanium dioxide etc. Obviously, this
caused a supply problem when it came down to us. I would quote
supply issues as much as 55% to 60% zero on your order each week.
It made it very difficult to carry on business. We asked several
times that we be excluded from buying from them, if we could go
out to outside suppliers, if we could get an outside paint
manufacturer to make product for us. We were denied. We did go
outside unofficially to others, even retail stores. I personally
went out to retail stores nearby, buying product, bringing it
into the store just to satisfy customers. We still paid our fees
on it, but that was the situation.
The Acting Chair: Thank you
very much for your presentation.
NEIL DAVIES
The Acting
Chair: We call on our next presenter, Mr Neil Davies.
Welcome to the committee, sir. You have 20 minutes for your
presentation.
Mr Neil
Davies: Good afternoon. My name is Neil Davies. I am a
small business entrepreneur. I've done many things in my life. In
1996, I was looking for another business after many years being
in the restaurant business, and I found it was sort of a new
society looking for a business; it was one composed of huge
government, large unions, and small businesses were being largely
taken over by franchises. I felt if you can't beat them, join
them. After about six months of searching, I thought I had found
a fabulous franchise.
I have a background in the
restaurant business. I found a beautiful restaurant, not far from
here, in downtown Toronto, five-day week, 15-year lease, and it
was represented to me that it had high sales, as it certainly had
very high expenses. I was shown cash register tapes, which showed
me the sales. Fine. I purchased the restaurant, and immediately
it appeared to me that I had been defrauded.
At the end of the summer,
when the season changed-I purchased this restaurant in the
winter-I knew for certain I had been defrauded. There was no
uptake in sales. Having been relieved of most of my money, I
could not afford to litigate this case, costing about $100,000 to
$200,000. So I went to law school. I learned some law,
litigation. I went on an on-line law library and I'm prosecuting
the three parties involved myself.
This case is about one year
old. Until recently, it went better than expected. I often had
the sympathy of the courts. After fierce resistance by the other
parties, I got hold of those cash register tapes that they had
shown me. I discovered that the figures on these tapes differed
by almost $400,000 from the figures on the tapes that I was shown
and the figures that their agent had given me and figures that
the franchisor had given to me.
Now, when I'm in court the
lawyers for the opposing side no longer deny the fraud. They are
trying to defend their clients and knock me out on
technicalities. I can quote you what one master said when they
asked for costs. He said: "I don't want to hear from you about
costs. You choose your clients."
1350
Recently, these defendants
used rule 56 of the Ontario Rules of Civil Procedure against me,
asking for $350,000 that I'd put up to secure their legal costs
in the event that they should lose. During examination, I refused
to co-operate with them fully and give them all the intimate
details of my present and past financial life, although I did
give them most of the information they wanted. But because I
feared, of course, having another fraud perpetrated on me, and
because I did not co-operate fully, I lost the recent motion. I
have to put up more money than I can afford to guarantee the
other side's costs and therefore I have had to retain a law firm
to handle the appeal.
So we have in Ontario a
group of men who are carrying on a racket. They have an engaging,
smart, ruthless agent who befriends and entices business people,
mostly immigrants, into signing franchise contracts based on
fraudulent misrepresentations and an accountant who arranges
business loans and remains silent to all this. I've garnered
evidence from part of the bank's file that I recently obtained
that the banks don't care because the loans are 75% guaranteed by
the government.
After obtaining possession
of my franchise, my restaurant windows were constantly being
smashed. When I tried to sell, the franchisor would not approve
the sale. Here is a brief excerpt from a conversation that I
taped on September 16, 1998, with their Homelife agent, who is
their close associate. I am now out of the organization and I'm
asking why they gave me so much trouble in approving my sale of
this franchise.
The agent says: "Bill
called me and told me that he should let me go down and take the
business for nothing ... so they can have it for free. Why should
they agree" to its sale?
In ending, these people are
trying to use the courts to shield their criminal activities. I
hope this will change with my appeal. In the present, it is your
duty to pass some strong legislation imposing a high standard of
care on the part of the franchisors in disclosing all relevant
information and with tough enough sanctions to deter those who
may think of not complying.
The Acting
Chair: Thank you very much. Questions?
Mr
O'Toole: Thank you, Mr Davies. You had an interesting
experience. You don't have a written presentation at all, do
you?
Mr Davies:
I can give you a copy of the outlines that I've used.
Mr
O'Toole: Very good. OK. The other thing is, I was
interested; are you a lawyer now?
Mr Davies:
No, I'm not a lawyer.
Mr
O'Toole: You just sort of went to law school.
Mr Davies:
Without the Internet I couldn't have done this. I have an on-line
law library and I get my law from past judges' court decisions. I
am accredited as a law clerk in Ontario in litigation.
Mr
O'Toole: I'm not questioning your legitimacy. I'm just
trying to understand how to explain the lack of success in court.
You had a previous business prior to getting into this?
Mr Davies:
Yes.
Mr
O'Toole: It wasn't a franchise, obviously, of any
sort.
Mr Davies:
No.
Mr
O'Toole: How long were you in business?
Mr Davies:
I've been in many businesses, but I have had a small restaurant
since 1983.
Mr
O'Toole: I qualify myself here as not really having some
of the answers to the questions I'm asking, but you say the
government guarantees the loans?
Mr Davies:
Yes.
Mr O'Toole: Which bank is this?
I want to find where that bank is. I'm serious. What bank is it
that the government underwrites the loan? I'm not sure of
that.
Mr Davies:
This is why we have such an explosion of franchises like Second
Cup, for example, and Coffee Time Donuts, because the government
is underwriting them. When one gets a small business loan, it's
supposed to be based on the equipment in these restaurants. So
far so good. But in the event of default, the government
guarantees 75% of the loan. So the banks don't care.
The proof of this is in
information I got from the Royal Bank file. They wouldn't release
the whole file, because they're nervous. But I was astounded to
discover that the financial statement, which is based on the
whole loan, was entirely suspicious. When I investigated the
statement, I could not authenticate it. In other words, it's my
inference that the statement is forged.
The statement is
immediately suspicious to any experienced businessman, never mind
a loans officer. This statement wasn't signed, it can't be
authenticated, you cannot trace its authors and it has a
disclaimer on it saying that the figures come from the vendor,
the franchisor. No bank would normally give out a loan under such
circumstances. They always want an accountant, preferably a CA,
to verify the figures. The only reason they're doing it is that
they can hardly lose. They have a lien on the equipment of the
restaurant and the government is guaranteeing 75%. It's a no-lose
situation.
Mr
O'Toole: The bank wasn't related to-excuse the humour
here-Minister Stewart, was it? It was the business development
bank, I guess, which would be federal, right?
Mr Davies:
This was not through the business development bank. I got my loan
through the Royal Bank. One can get them through any bank. The
federal government is the entity that guarantees the loan.
Mr
O'Toole: Thank you very much.
The Acting
Chair: There are further questions.
Mr Martin:
Yes. We have more questions for you. Thanks for coming today-a
very interesting story.
You are suggesting very
strongly that we have disclosure legislation. We were told this
morning by a deputant, Mr Levitt, that a good salesman can talk
his way around any disclosure statement. I'm calling for much
more in this legislation. I have tabled my own bill, Bill 35,
which talks about a vehicle, controlled by government, that the
disclosure statement would be registered with so that we could
make sure the information was complete and accurate. We're
talking about a dispute resolution mechanism so you wouldn't have
to go to court. You could go to an arbitrator or a mediator and
have some early resolution that reflected the truth in the
situation. We're calling for a definition of "fair practices"
that would go so far as to allow franchisees or restaurants to
source product wherever they liked.
Have you looked at the
bills, and is there is anything else besides disclosure and
making sure disclosure happens that you want to recommend to the
group here today?
Mr Davies:
I have not looked at the bill, but your suggestions are
excellent. I think it's excellent as far as it goes. Beyond that,
the only remedy would be with other institutions, like the police
when it goes into fraud. However, the police are underfunded and
are shy to get involved in smaller frauds. They like it over $1
million. Beyond what you are proposing, the only other suggestion
I can make is that funding of the police be upgraded or some
reform be made there.
Mr Martin:
Certainly your story is not unique. We have story after story.
Back in the early 1990s there was a flurry of activity around the
question of Pizza Pizza and how they dealt with some of the folks
they dealt with. At that time they were calling for legislation
that not only called for disclosure-because most times it's after
you are into the deal that you find out that what you were told
in the courtship period is not the truth and a fraud has been
perpetrated.
It was also suggested here
this morning that we don't have enough casualties yet, that we
don't have enough bodies piled out there yet or enough families
destroyed in Ontario to warrant anything other than a call for
disclosure. What is your experience, rubbing shoulders with
colleagues in the business and in the business world, around the
question of franchising and the lack of regulation and what is
happening out there?
1400
Mr Davies:
It certainly has not been a happy experience. You mentioned that
we don't have enough bodies yet. I might add that when the time
comes, and one day it might, that coffee becomes overly saturated
or they publish news that coffee causes cancer, brain tumours or
whatever, then you will have enough bodies, because there is a
huge number of franchises and they'll collapse. As I mentioned
earlier, the number of them being created is infinite because the
federal government is financing them.
At the moment, franchises
are not a happy situation to be in. From what I have seen, at
least in the franchise I was involved in, they were selling to a
lot of recent immigrants who not only didn't understand what they
were getting into but were unable to assert their rights. They
have just gone away and said nothing. So certainly some publicity
on this point would be warranted.
Mr Martin:
Just one more question, if I might. There is a suggestion as
well, of course, coming from franchisors in particular and some
of the people in the Canadian Franchise Association and the group
that came before us two groups before you, the Canadian Council
of Grocery Distributors, that in some instances it's the
franchisee who doesn't do the due diligence, who doesn't work
hard enough, who perhaps brings some of their own baggage to the
situation. We don't hear much about that because, as I suggested
to them, there are always gag orders put on as soon as a deal is
cut, and ultimately one is, because franchisees can't go the
distance. At some point they throw up their arms and say, "I
quit," and they usually take whatever lower debt is offered at
that time.
Mr Davies: There are people,
again, who don't know their rights. If there be fraud, then the
gag order can be voided.
Mr Martin:
Is that your experience?
Mr Davies:
That's what the law says. That's what the court decisions
say.
Mr Martin:
The question I had for you is, did you do the due diligence? Did
you work hard? Were you a good businessman? Were you a good
entrepreneur?
Mr Davies:
Yes, I was, and of course what the franchisor does is blame it on
the franchisee. Indeed, in my court case initially-these people
are so corrupt that they weren't even straight with their
lawyers-their lawyers attacked me for being incompetent in my
franchise. However, when I got hold of their tapes, they showed
me to be a better operator than they were. I had higher sales
than they did. So of course, with their tail between their legs,
they dropped those attacks. But that is what franchisors do. They
want to blame it on the franchisee.
Mr
Chudleigh: Thanks for coming, Mr Davies. Very briefly,
in your presentation I think you said that when you purchased
your franchise, you did so from an agent or a broker?
Mr Davies:
I did. The vendor and the broker were in very close
collusion.
Mr
Chudleigh: But the broker was the person you actually
signed the deal with, or he arranged-
Mr Davies:
Initially, the broker. Of course, the contract was with the
franchisor.
Mr
Chudleigh: OK. Thank you very much.
The Acting
Chair: Any further questions?
Thank you very much for
your presentation, Mr Davies.
FORMER PIZZA PIZZA FRANCHISEE ASSOCIATION
The Acting
Chair: I'd like to call Dave Michael of the Former Pizza
Pizza Franchisee Association. Welcome to the committee. You have
20 minutes.
Mr Dave
Michael: Thanks for having me and hearing me out here.
In that 20 minutes, I think I'll give you a brief history of my
experience with Pizza Pizza and franchising and then leave the
rest of the time for questions, which might be the best way to
go. I would need about 20 days to tell you all the stories, and
you wouldn't believe them anyway.
I was a Pizza Pizza
franchisee from about 1982 to 1995. I had a store in Toronto. I
ended up buying a new store in Orillia; I started that from
scratch. As you may well be aware, I ended up in a lawsuit with
Pizza Pizza, with 48 other franchisees. I was the president of
SOPFA, the Southern Ontario Pizza Franchisees Alliance, which was
a grassroots organization made up of those who were involved in
this lawsuit with Pizza Pizza. We ended up in arbitration as
opposed to the courts. All my numbers are very approximate: We
won $3 million from Pizza Pizza, which I think is a fraction of
what it should have been. Most of that went to the lawyers, but I
will add that they fought very hard. There was a lot involved, as
you can well imagine, in a case that size with 48 litigants. I
got nothing out of it. I lost my store in Orillia. I paid
$170,000 for it. Pizza Pizza got it back free and clear.
I won't go into all the
details because there's not enough time. Things I experienced:
Pizza Pizza changed sales figures. We claimed it as fraud through
the arbitrator. We were told it wasn't fraud, but if you ask
anybody on the street, that's fraud. I have all the documentation
to back that up, but for whatever reasons it wasn't viewed that
way. The amounts were very large, and this is something I feel
they got away with even after pursuing it through the courts,
through arbitration.
As far as Bill 33 goes,
it's better than nothing, but I don't think it will protect
people from the people they need protection from. I'm sure there
are franchisors out there who don't even need Bill 33 in place.
However, there are many others. Unfortunately there are a lot of
people, and I imagine you've already heard most of them, who are
new Canadians, not highly educated, not sophisticated business
people but people who are willing to work hard, take a chance on
themselves and usually use their house or everything they have to
take that chance to improve their lives for themselves and their
families. A standing joke among the litigants with me was that
some of them had left a Third World country only to end up in a
Fourth World country, that being the Pizza Pizza franchise
system.
I'm open to questions. I
was very involved with the litigation and such.
The Acting
Chair: The parliamentary assistant.
Mr
O'Toole: Thank you very much, Mr Michael. Certainly to
some extent I would say I had read those issues in the paper when
that was a public concern. Not to be political or anything, but I
think all governments over the last while have looked at this and
for whatever reason have failed to do anything. You're aware that
there are really three particular focuses of this bill: the
disclosure aspect, the fair dealing aspect and the
right-to-associate aspect.
The question I have for you
is, do you feel that this particular piece of legislation in
place today, if you were starting a business, could have helped
to prevent or avoid some of the things that you and your business
associates ran up against? It's not a perfect world.
Mr
Michael: I'm very well aware of that. I don't think it
would have. For example, for disclosure, and the principals or
shareholders and whoever may be involved in running the
company-the directors and such-in my case, if you're aware of the
newspaper articles and such, Lorn Austin was in charge of running
Pizza Pizza for the most part. Lorn Austin did time in US federal
penitentiaries. I think it was the sheriff of Dade county in
Florida who said he was the most prolific blue-collar criminal
he'd ever run into. When Lorn Austin joined Pizza Pizza, I had
already been in the system and was already in my store and
already had my house on the line. If this legislation was in
place, and if they disclosed that this fellow is now going to be
coming into the company and running it, what would I do? I would know, but what
would I do at that point?
Mr
O'Toole: I guess it's a case that there is a process
here where substantive changes occurred within an appropriate
period of time and you would have some recourse. Is that one way
that could be strengthened in this bill? How long would that
take? Administrative directors at all levels could change, and
it's up to the corporate culture to deal with that.
1410
Mr
Michael: Obviously, from the trouble I was into-I'm a
pretty simple guy, and things seem pretty straightforward and
black and white to me. When somebody says they're going to do
something and you know what that is and you both understand that,
that's all that is needed to be said and done.
In just about every
partnership agreement there's a shotgun clause, which is: If they
want to terminate the partnership, I'm sure everybody is very
well aware, somebody makes an offer and the other one can match
it or accept the offer to buy that person out. I don't know why
something like that can't be in place in the franchise system. If
I'm a franchisor and I have to protect my name and all these
things, and somebody has made an investment and they're not happy
with it: "OK, here's your money back; here's your $80,000. Get
lost. I'll sell it to somebody." I made this offer to Pizza
Pizza-I didn't want anything from them, not a lawsuit or money or
anything-to take their signs and I'd just operate my business,
Dave's Pizza, whatever. They wouldn't go for that, nor would they
make me a reasonable offer for what I had invested.
I don't know why something
like that couldn't be in place. You wouldn't need a huge
bureaucratic department or new agency or anything like that. It
would be very simple. It would be like buying a house or when you
bought your store. You wouldn't have a $100,000 legal bill, not
to mention millions of dollars in legal bills. It could be done
very simply, I would imagine, if something like that were put in
place. That keeps everybody honest, I would think.
Mr Martin:
I want to first of all thank you for being the lightning rod at
one point in time in the history of franchising in Ontario that
finally woke somebody up. This whole process of trying to get
legislation and regulation in place began so that people wouldn't
have to suffer the same fate that you suffered. The articles that
were written-and I have one here in the Report on Business. I
think that's you.
Mr
Michael: That's me.
Mr Martin:
You had a moustache back then. That wasn't against the contract
you signed, was it?
Mr
Michael: It may have been.
Mr Martin:
That may sound ludicrous, but I read through some of the articles
that have been written on Pizza Pizza, and in the volume I gave
you this morning, from section A1 to about A56 it's all on Pizza
Pizza. If you want to read their story and understand the crux of
this whole matter, this is it in more than a nutshell. This is it
in detail, the kind of bad dealing, the situation of franchisees
who go into a business in good faith, simply: "You give me this,
I'll give you that. I'll work hard and we'll all make money.
Let's get on with it and be happy." It turns out at the end of
the day that wasn't the story, it wasn't in the cards,
particularly when Mr Austin came in. I believe that your story
was getting good coverage until Mr Austin sued even the Toronto
Star for having the temerity to write the story and expose it in
the public forum.
This may be an extreme case
of what's happening out there, but it is nevertheless a good
example of all the things that can happen if you don't have
regulations in place to protect people. I don't think you were
asking for any favouritism or privileged position in this. All
you were asking for was a chance to make a few bucks and run a
good business and compete.
Mr
Michael: If I could interrupt for a second just to
explain an example of that, I had the store in Orillia and I was
paying something like 1.5% of my sales in cartage. So not only
did I buy food from them at inflated prices, but I paid them to
deliver it to me. These were the same green peppers I could buy
cheaper right next door in Orillia and support the local economy.
I won't get into that. They just unilaterally changed that for
the stores out of town. I think it went to 4.5%. At that time the
store was doing very well. I guess they figured I was making too
much money, a living, and they changed that. I paid more for them
to deliver my food to me than I did for rent on the main street
of downtown Orillia, right up from the docks and all that. My
rent was less than what I paid them for cartage fees, and that
was done just the next day without my say-so or agreement and
totally against what was in the franchise agreement.
Mr Martin:
I'm told as well that you could lose your franchise for your
delivery people not smiling when they deliver the pizzas?
Mr
Michael: I'd fire them if they didn't. I'm joking.
Mr Martin:
Is that true?
Mr
Michael: Yes, they did have a campaign, and they did
have memos out to that effect. I'm almost positive.
Mr Martin:
You were the ones who also had to deliver within 30 minutes or
the pizza was free?
Mr
Michael: Right.
Mr Martin:
At your cost?
Mr
Michael: Absolutely.
Mr Martin:
And that created a problem with people speeding and traffic
tickets?
Mr
Michael: That should be outlawed. Nobody should be able
to hold the public hostage for their benefit. It's ludicrous.
Mr Martin:
So disclosure legislation would not have helped you.
Mr
Michael: There are so many things. No, it's not
enough.
Mr Martin:
Disclosure legislation would not have prevented a guy like Mr
Austin to come in and do what he did?
Mr Michael: We would have known
about it. But, again, as I say, what would I do at that point?
You're already in, and this has changed after the fact.
Mr Martin:
We need more.
The Acting
Chair: Any more questions?
Mr
Chudleigh: I take it that Pizza Pizza held the lease on
your store?
Mr
Michael: Yes, they did.
Mr
Chudleigh: Was that part of the agreement? They had to
hold the lease? It wasn't an option?
Mr
Michael: That's right.
Mr
Chudleigh: If you had owned that building, they would
have leased it and you would have paid rent on it?
Mr
Michael: Yes, and that has happened in other-
Mr
Chudleigh: Even if you owned the building, they still
have the lease?
Mr
Michael: Right.
Mr
Chudleigh: If you had had that lease, you could have
just taken down their sign and operated Dave's Pizza, as you say,
and probably done very well.
Mr
Michael: Unfortunately, once you get into that position
in the relationship, you don't have the money to find out if you
can do something like that. Again, the people aren't
sophisticated business people. The thought did cross my mind, "If
I could buy the building, but there's already a lease in place
and can I get out of that lease and blah, blah?" I don't have the
answers and you need expensive counsel to get them.
Mr
Chudleigh: Thanks very much. Thanks for coming.
The Acting
Chair: We have a couple of minutes left if there are any
additional questions.
Mr Martin:
Yes, if you don't mind.
The Acting
Chair: One short one.
Mr Martin:
There was a suggestion this morning by the counsel for the
Canadian Franchise Association that we don't have enough evidence
yet that there's a problem in the industry and that we need
relationship regulation that goes beyond just simple disclosure.
Would that be your position?
Mr
Michael: It's a good way to stall everything, I think.
When I went to certain hearings and that, during the time of the
lawsuit, and was in places like this, I'd have franchisees from
Golden Griddle and all sorts of places in tears, coming up to us
and asking what they should do. I didn't ask for any of this.
Even when it happened, it was like everybody else stepped back. I
didn't step forward. All the other franchisees just stepped back.
I didn't ask for any of this. People would come up to me in
tears, like I knew something or could do something, people older
than me losing their houses and stuff.
Certainly, whoever said
that is more than well aware of all those situations, plus I'm
sure countless others you haven't heard of and that he hasn't
even heard of.
Mr Martin:
That's what I suggested, that the 4,600 families represented here
and the 5,000 who are before the courts every year in Ontario
fighting their franchise system are just the tip of the iceberg.
There are lots of families who don't go to court, who don't tell
their stories, who simply either walk away or remain indentured
for the rest of their lives.
Mr
Michael: Absolutely.
The Acting
Chair: Final question, Mr Gill.
Mr Gill:
How has the Pizza Pizza franchise system changed since your days?
Has it changed? Can you answer that?
Mr
Michael: I imagine they're more careful not to get
caught.
Mr Gill:
Simple as that.
Mr
Michael: Well, I'm not involved with it. From what I
understand, nothing has really changed. You see the ads on TV,
perhaps. They're very good marketers. They have a very good
product. It's just that they've gone nuts. They've thrown the
baby out with the bathwater in dealing with all their people, all
their franchisees. They've put a special on, if you've seen. For
$9.99 you can order any pizza, any size, with any amount of
toppings and a pop this big, all these things.
Mr Gill:
Or a $6.99 walk-in special, or whatever.
Mr
Michael: There you go, OK.
Mr Gill:
And they still have the 30-minute guarantee. I think they do; I'm
not sure. Is it 40 now?
The Acting
Chair: It's not that I'm an expert.
1420
Mr
Michael: For example, with these specials and discounts,
the franchisee doesn't get a discount on the food that is being
used and purchased from Pizza Pizza, which he then pays royalties
on and pays rent on and pays advertising charges on-and in my
case, cartage-all these things. None of this is waived or
discounted.
If Pizza Pizza can get
stores to do $20,000 a week, that's $1 million a year. They have
450 stores. They just look at the numbers they can drive those
sales up to and figure out their bottom line. The franchisee's
bottom line is in the negative, it's dwindling, and the more
specials they come out with and the higher the sales go, the more
he is losing. But not Pizza Pizza, because you have to buy
everything from them and it's at full price. So if they can sell
everything at cost by the franchisee, he'll be broke and they'll
make millions and millions of dollars.
When this started, before
the lawsuit, everybody was complaining about it and saying: "What
am I supposed to do? If 60% of my sales are specials, the rest
doesn't even cover the bills and labour and such." They said,
"Well, take your credit card and pay your bills. This is your
business. Take your personal credit card and pay it." People did
it because they didn't want to lose their house, they had nowhere
else to go, and they built up such great debt that they couldn't
get out from under that rock. They were stuck between a rock and
a hard place, all precipitated by them and their profits.
The Acting
Chair: I'm going to have to stop you because of the
time. Thank you very much for your presentation.
ONTARIO FRANCHISEE COALITION
The Acting
Chair: The next presenter is David Sterns from the
Ontario Franchisee Coalition. Welcome to the committee, sir.
Mr David
Sterns: Mr Chair and honourable members, I am testifying
today under the expectation that there is immunity. I have been
threatened three times with a lawsuit by someone in this room for
speaking about franchising. I would like to state for the record
that that is my expectation. I have been informed that there is
immunity but that it has never been tested, and I prefer it not
to be.
The Acting
Chair: I am pleased, on behalf of the committee, to
repeat that assurance and to remind everyone that witnesses
before committees enjoy the parliamentary privilege of freedom of
speech. It is not restricted to members. It is afforded to you as
a presenter as well.
Mr Sterns:
Thank you.
My name is David Sterns. I
am speaking on behalf of the Ontario Franchisee Coalition. I'd
like to thank you for asking us to come and speak to you today
and to continue the OFC's role in this important process of
enacting a franchise fairness law for small businesses in
Ontario. The law is certain to affect the lives of thousands of
business people across the province and their employees. If the
required changes are made, I think it's safe to say that the law
will go a long way towards restoring credibility to franchising
as a method of doing business and as a means of raising capital
in Ontario.
The Ontario Franchisee
Coalition represents a network of franchisee associations in many
industries, including of course fast food, automotive repair,
private education, grocery, photo finishing etc, and the OFC has
participated in the Franchise Sector Working Team, which was
largely responsible for the bill that is before you today.
I am a litigation lawyer in
practice with Sotos Associates. John Sotos is the main partner in
the firm. I am here on behalf of the Ontario Franchisee
Coalition, although, as you will see from my submission, I share
his ultimate conclusion about what is right and what is wrong
with this bill, and come to that conclusion with the membership
for the reasons I will go through. Approximately 80% of my
practice involves franchise litigation and dispute resolution. I
am proud to say that I represent franchisors and franchisees. It
is not, as some would make it, an all-or-nothing or
us-versus-them game.
Before speaking to you
about what is good about the law and what can be improved on, I
would like to tell you how I personally became a partisan of
franchise fairness. I should tell you that franchising, as you
may have noted from my first question, is not an industry that
encourages dissenting views. I can say from personal experience
that professionals who speak about what is wrong in franchising
are labelled as pro-franchisee and anti-franchisor. Much the same
happens with franchisees who speak about the problems in a
particular system. They are branded as losers, ne'er-do-wells,
troublemakers, and you will probably hear, if franchisors are
being honest, the word "disgruntled" used many times-disgruntled
franchisees, former franchisees, unhappy franchisees. Usually the
word "disgruntled" is there. I tried to find the antonym for
"disgruntled." I thought it might be "gruntled," but I think it's
just "complacent." If that makes me a disgruntled franchise
lawyer, so be it.
My personal experience is
born of a couple of events. One of them came when we were
consulted by a number of franchisees. It wasn't Pizza Pizza-I
came into the firm after that-it was 3 for 1 Pizza. This is a
system which is the lowest of the low. It is the most
opportunistic, it is rapacious, it preys on political and
economic refugees, on people who can't speak English, on people
who can barely write their names. What shocked me, from that
experience, was the way the people who came to us had this notion
that they were somehow protected, that Ontario would not allow
this to happen, that surely they just didn't understand the law
and we were going to show them the way. We had the displeasure of
having to tell them that there was no law. The only law was the
law they signed, which was the law that was written by the
franchisor.
These were people who were
living three, four to a house or to an apartment, working in
squalid conditions, borrowing from family members to raise money
for their franchises and working in conditions which were
indistinguishable from slavery of 200 years ago. Those are the
disgruntled franchisees I hope you hear from, although I suspect
that you won't because many of these people simply will go off
into the night.
At the other end of the
spectrum there is the more sophisticated franchisor, the one who
retains extremely sophisticated counsel, the one who knows enough
to join the Canadian Franchise Association to get the Good
Housekeeping seal of approval. These are the ones who go after
people with some more money, maybe people who are educated or
people who have come into an inheritance, people who have got a
government pension or something like that. These are the ones who
use the franchise agreement as a tool of oppression and of
stifling dissent.
In one particular instance
the conduct was so beyond the pale, there really wasn't a way of
going to court. This conduct evades description. It's impossible
to capture the kinds of treatment that you see going on. The
out-and-out lies, the out-and-out fraud, the out-and-out
misrepresentation, that's all well and good and the law will go a
long way towards covering that, but we're talking about conduct
which goes on a continuum. Where do you draw the line, and so
forth? That is I think the ultimate mandate of this law: to
somehow try to have a circle around which the franchisor must
operate in order to adhere to some minimal standards.
In any event, back to this
franchisor. After numerous appeals to reason by their counsel,
we'd had to go to the Canadian Franchise Association and make a
complaint. They have a code of ethics which contains language
similar to what you'll see in Bill 33. The code of ethics
says, "Fairness shall
characterize all dealings between a franchisor and a franchisee."
Nobody I could speak to or I could find, whether it was a
neighbour or a family member, could make out a case where this
conduct that we were complaining of could possibly be considered
fair.
In any event, the complaint
was bounced back to us four times. We were told, for very
technical reasons, it couldn't be received. One of them was that
it came from the law firm, not the client. The other reasons were
that there was litigation involved, which was true. Litigation,
however, had absolutely nothing to do with the complaints or with
the reasons for bringing the complaints. In any event we formed
another conclusion, and that is that franchisors are not a body
that looks after itself particularly well. They're extremely good
when it comes to writing agreements that fence in the
franchisees, so you have 60- or 70-page agreements. You don't see
that kind of detail because people are talking in very laconic or
general statements. They regulate things with great precision.
However, when it comes to their own conduct, they're content to
talk in terms of fairness and so on and so forth.
So before we get to the
law, I think we have to talk about how we got here today. In its
origins, franchising was never a complicated way of doing
business. It was very simple. The idea was that the franchisor
lent its name to the franchisee and gave a certain know-how, a
certain way of doing business. In exchange for that, the
franchisee paid royalties. At the beginning, you had agreements
three or four pages long that captured the essence of the
agreement. The rest was built around the trust and understanding
and the ongoing back and forth that characterized this living,
breathing relationship, which is the franchise relationship.
1430
The Acting
Chair: Pardon me. I have just been given some new
information and, for the full benefit of your protection, I want
to read something into the record. It is further information to
what we provided a couple of minutes ago on the issue of
parliamentary privileges, and it reads as follows: "While members
enjoy parliamentary privileges and certain protections pursuant
to the Legislative Assembly Act, it is unclear whether or not
these privileges and protections extend to witnesses who appear
before committees."
For example, it may very
well be that the testimony you have given or are about to give
could be used against you in a legal proceeding, and I caution
you to take this into consideration when making your comments.
That's new information. I apologize; it wasn't available to me
earlier. But be guided by that, please.
Mr Sterns:
Thanks.
Mr Martin:
On a point of order: I just want it on the record that that
concerns me deeply. We have told a whole number of deputants to
this committee that they did in fact enjoy the same parliamentary
privilege that we enjoy. I wonder if that requires any further
discussion here and decision-making by this group or
communication plan to make sure that people-this is shocking,
actually, as far as I'm concerned.
I wonder what we can do at
this point in time to protect both those people who have already
appeared and said some things on the record here today and those
who might appear this afternoon or across the province over the
next three or four days. As you must have gathered by now, this
is pretty litigious stuff that we're into here. There are a
number of dynamics at play that are reasons we are dealing with
this piece of business. It requires some further
clarification.
The Acting
Chair: I share your concern. The table has been
monitoring coverage of this and called in to indicate that that
should be read into the record. It's their view that-
Mr Martin:
Who provided that statement for you?
The Acting
Chair: Perhaps I could ask the clerk to speak to
this.
Clerk of the
Committee: It's a document prepared internally within
the committees branch. It has been prepared with reference to
other witness situations, and sometimes it's when witnesses are
compelled under oath or called as opposed to volunteering to come
forward.
The committee had discussed
it and agreed that one of the protections we could afford is that
when people requested it, the committee was willing to consider
such things as going in camera and hearing witnesses in camera.
But as the statement reads, my understanding is that
parliamentary privilege has been extended to witnesses in
committees, but again it's something that hasn't been tested in
court and that's why the caution has been advised to be read
out.
Mr Martin:
Are you OK with that?
Mr Sterns:
I'm content to keep my submission going, with that caveat in
mind.
Just to recap where I was
before, the relationship was built on trust. The agreements were
minimal. Everything went just fine. That was back in the salad
days of franchising when you couldn't get somebody to sign a
60-page agreement with an unknown quantity. However, as the
relationships progressed, the agreements became extremely
complicated. Franchisors started realizing the magic of the
franchise to them, which is that it's a very flat pyramid. The
power and the money flow to the top. The risk, all the ventured
capital, goes to the bottom, to the franchisees. While the
perfect franchise system is a partnership, as you may have heard
by now, in reality what you see again and again are the
conflicting interests, the conflicting positions. This all feeds
into the problem with Bill 33: How does it address the inherent
conflicts in the relationship?
The first conflict you will
have heard about is, of course, the drafting of the rules of the
game. The franchisor desires control and absolute profitability.
These things are really the antithesis of what a franchisee often
wants. He wants to be independent, to have the benefits of the
franchise name but nevertheless to exercise some control.
Everyone says there's no law of franchising.
There is a law of franchising. It's the law of the contract, a
60- or 70-page agreement supplemented by a general security
agreement, supplemented by a sublease, supplemented by trademark
agreements and so on and so forth. So there is plenty of law. The
problem is it's all written by one side; it's all written by the
franchisor. Yes, it's a contract. Yes, the franchisee signs it.
Sometimes some negotiation takes place back and forth, but in
essence the agreements are presented as done deals. The true
heart of the agreement is rarely open for negotiation unless the
system happens to be very green, trying to bring people in. The
argument you often hear on the side of the franchisor is: "We
have to have consistency across the system. We can't give this to
you without giving it to this person, and the next thing you
know, I lose my system." That's how we get into these ridiculous
agreements, which are getting more and more ridiculous by the
day.
The second inherent
conflict you will probably hear about is the supply of inventory.
The company store in the mining town is how these things are set
up. You can only buy your flour from Pizza Pizza. You can only
buy your walnuts from Bulk Barn. There is nothing distinctive
about the products that many of these franchisors are selling,
and yet they are maintaining an absolute monopoly over the sale
of the products. They are charging monopolistic markups on these
products, which is how you get into the situation where you sell
millions of dollars of product a year and lose money with every
doughnut you sell or what have you. Of course the less money you
have at the end, the less you can afford a lawyer to fight. So
there is that consistency.
The third inherent conflict
is encroachment, again a conflict of interest. The franchisor
wants to maximize its presence and often has very good business
reasons for wanting to do so. But the franchisee wants to
maintain a certain radius of protected territory, and that's
often not afforded to them. So you see these guys setting up
across the street from each other.
Have the courts resolved
the conflicts? Unfortunately, the opportunity to do what this act
is doing came before the Supreme Court in 1973. You've had a
chance to look at the Grange report, which your predecessors
wrote. There was reference to this case called Jirna. Jirna was
going to be the case that was going to decide how things were
going to go with franchising. It was going to go before the
Supreme Court. The lawyer for the franchisee in that case, Marvin
Catzman, testified before the Grange committee. He said, "Hey, we
might win this case, in which case the Supreme Court will say
that franchisors owe this fiduciary duty" and all this great
stuff. I'll give you the conclusion of that case. The franchisee
lost, and in a big way. Unfortunately, the Supreme Court said
that a franchise agreement is really no different from any other
kind of agreement. It's a commercial contract; the parties are at
arm's length; the parties are sophisticated; why else would they
be signing these agreements? Therefore, no special duty is owed,
no special duty of care, no fiduciary duty, nothing. Basically
it's dog eat dog, except that the Supreme Court forgot to say
that it's really dog eat goldfish. That's been the paradigm of
franchising since Jirna and since the Grange report.
1440
I'd like to talk right now
about Bill 33 and what it does to address that.
I agree with what John
Sotos is saying, that two of the three goals this act set out to
achieve are met. Freedom of association: Who can argue against
that in March 2000? Disclosure: Again I think that's a bit of a
given. You tell people honestly what they're getting into. Don't
sell them a bill of goods.
But the very first thing
that the long title-I keep calling it the Franchise Fairness Act.
It's a bit of wishful thinking on my part. I'd hope that this
committee would hear that and say: "That makes sense. That's a
nice sound. Why not call it the Franchise Fairness Act?"
If you look at the long
title, the three goals, fairness, assembly and disclosure, what
comes first? Fairness. Everything flows from the fairness
obligation, that the franchisors are to be fair; fair in terms of
allowing the franchisees to assemble, fair in terms of the
disclosure. It should be called the Franchise Fairness Act.
Nobody should be afraid of that.
There are three problems
essentially with the way section 3, dealing with fair dealing, is
drafted. First, it's vague and uncertain. It has been studied. I
don't know if the franchisors who have come before you today have
told you that. There has been a lot of ink spilled over this idea
of fair dealing, what it means. The consensus is that it's an
empty phrase. It's as empty as the CFA's code of ethics, which
says that franchisors owe a duty to be fair to their franchisees.
That has been easy to get around. It's easy, because if you ask
the franchisor, "Are you being fair?" they say, "Yes, of course
we're being fair." Fair to whom? That's the question. That's what
the law doesn't answer. That's what the courts are going to have
to say. If you look at the terms of section 3 right now, there's
one thing that jumps out at you: fair dealing. In law, you always
hear "good faith and fair dealing." They go back to back. They go
together like salt and pepper.
Where is good faith? The
Legislature has decided to give only the yin without the yang,
and there will be a lot of ink spilled over that. Why didn't the
Legislature put in "good faith"? It must mean something. It must
mean that they didn't really mean what they were saying. Anyway,
it's fraught with difficulty.
The second problem, as I
have already alluded to, is the test. Is it fair according to the
franchisor or fair according to the reasonable person, the man on
the Clapham omnibus, whoever the person is who looks at things
and decides whether they're fair or not, the impartial third
party?
The smart money is that
fair dealing is a subjective test to be decided according to
either the franchisor in question or according to the
franchisor's peers, the ones who've gotten us into the situation,
the ones who have caused this Legislature to have two committees
in 30 years to study the abuses in franchising. Are we going to
let them decide what's
fair and what's not fair? They can't be trusted; they can't do
the job. It's for the Legislature to tell the courts how to
interpret this, based on this committee, based on what's being
said here by all sides in the open. Courts don't allow you to
have a royal committee. They are just: "What does the contract
say? Did you sign it? Are you 18 years old?" All the rest of it
rings hollow in a court. This is the opportunity the franchisees
have been waiting for, to say something that's going to resonate
with the courts.
Going back to what I'd said
at the beginning, the test has to be reasonable, the test has to
be objective and there has to be enforcement. The Ontario
Franchisee Coalition supports what John Sotos says in terms of
the test being commercial reasonableness. That is a term which
we're very familiar with in law. It's not an unknown quantity.
It's not coming from out of the blue. It's the test you impose on
the person who has the ability to affect someone else's property.
It's the test that you use.
If your mortgage company
takes over your house because you're $10,000 behind in your
mortgage, it cannot accept $10,000 for your house; it has to
accept fair market value. It has to do what is fair and
reasonable in the circumstances. It has to list your property. In
other words, without saying that the bank has to do A,B,C,D and
E, it just says it has got to act in a commercially reasonable
way. It doesn't say the bank has to be fair according to what the
bank thinks is fair. That's the test we're advocating here for
this law. It's simple, it's elegant, it says what I think the
Legislature wants to say. So, sober second thought test, it
imposes no red tape, it simply puts the franchisor to the test
and says, "Do you really think what you're doing is fair and
reasonable?"
In conclusion, we support
what John Sotos is saying in terms of the tenor of section 3, how
it can be improved. From the franchisee coalition standpoint, the
name of the act should be Franchise Fairness Act because
everything else flows from that.
Mr Chairman, honourable
members, ladies and gentlemen, I'd like to thank you for this
opportunity to speak, and I'd certainly be pleased if any of you
had any questions.
The Acting
Chair: Except that there isn't any time left in the 20
minutes.
Mr Sterns:
Oh, I'm sorry. I had a feeling I might have gone over.
The Acting
Chair: I did pause during our procedural bit. I'd like
to thank you for your presentation and once again apologize for
not having read that to you earlier. I apologize for that on
behalf of the members of the committee.
CANADIAN FEDERATION OF INDEPENDENT BUSINESS
The Acting
Chair: I'd like to call on the next presenter, Judith
Andrew from the Canadian Federation of Independent Business.
Welcome to the committee.
Ms Judith
Andrew: I'm Judith Andrew, vice-president in Ontario for
the Canadian Federation of Independent Business. The CFIB, on
behalf of our 40,000 Ontario small and medium-sized member firms,
appreciates the opportunity afforded by the standing committee on
regulations and private bills to comment on the Ontario
government's proposed franchise legislation.
You have kits before you
that contain this statement as well as a number of other pieces
which are the research that we've conducted over the years with
our members on franchise operations.
We are pleased to count
among our Ontario membership some 1,500 independently owned
franchise operations. Our member concerns and issues, which come
to us via letters, calls, e-mails and in person during our
personal visit at the member's place of business, are the basis
for our research on public policy issues. As early as 1981, CFIB
was conducting an in-person survey on the impact of the franchise
phenomenon on our members' businesses. In a 1984 mandate vote-and
this is the vehicle that sets policy for the organization-34% of
our member respondents favoured legislation protecting franchise
dealers, while 57% opposed such legislation. Over a decade later,
in 1995, it remained at one third of members favouring the
Ontario government passing legislation to protect franchisees,
but the opposition was less pronounced, at 48%, with the
remainder undecided or having no interest.
In 1995, we conducted a
survey on retail and service firm issues-it's in your
kits-entitled New Signs on Main Street. Inside the page you'll
see a large section on franchises, which identified the
advantages of franchises, the level of satisfaction with
franchise arrangements among the respondents and also the
problems encountered with franchise contracts.
Among the leading
advantages were: advertising, buying-group discounts and
consulting advice. As at April 1995, 17% of the respondents to
this survey indicated dissatisfaction, including 5% who were very
dissatisfied with their franchise arrangements. The
most-identified problems included the high cost of continued
services, the contract being too one-sided and the lack of
marketing support.
CFIB is pleased to
contribute to the current debate data from our 1999 CFIB Focus on
Ontario survey, and the survey questionnaire is in your kit. This
survey explored small and medium-sized business support for
various possible elements to be included in the Ontario
government's franchise legislation.
Figure 1 in the statement
shows the main results from some 2,700 business respondents
across the province. Also, broken out separately, are results for
the 160 or so franchise operations which responded to this
survey.
1450
It's important that you
note that at this point only one quarter of the respondents
marked "none of the above," which we see as a measure of those
who continue to believe that no legislation is necessary. So
there has been an evolution over time from over half thinking no
legislation is
necessary, now down to just a quarter of small businesses in the
province that think that is the case.
Our Ontario members
indicated strongest support for legislated fair dealing between
franchisors and franchisees; also for advance disclosure of facts
and documents bolstered with heavy penalties for violation of
disclosure rules and for misrepresentation; as well as for the
legal right of franchisees to associate with each other without
penalty.
Among the franchise
respondents, you can see from figure 1, support is even stronger
for the duty to deal fairly and for strong, upfront disclosure
provisions and an ability to freely associate with other
franchisees. Franchise respondents, being more sensitized to the
down-the-road issues, also indicated support for legal blocks to
franchisor termination.
CFIB has learned of
impediments put up by certain large national franchisors to
independent business franchisees associating or speaking out on
issues of major concern in their industry. One tactic is to
centrally control franchisees' payments, preventing independents
from financially supporting associations of their choice.
Another concern which has
come to our attention is where so-called mature fanchisors no
longer need the franchisees to expand their market presence, and
their real agenda is to reduce the number of franchisees or
eliminate them altogether and replace them with their own
corporate operations. Our franchise members also gauge this to be
a problem, according to their 50% support of legal blocks to
franchisor termination of the contract.
Our three
recommendations:
(1) CFIB recommends that
the Ontario government proceed with legislation which includes
the favoured elements of duty of fair dealing, required
disclosure bolstered by penalties and the right of franchisees to
associate.
(2) We oppose any
broad-based exemption provision for franchisors from the terms of
the legislation. There is one exemption provision that is
proposed.
(3) Given concerns about
non-renewal or termination of franchise agreements, CFIB urges
the government to establish in legislation a fair framework to
handle these circumstances-to include such things as a notice
period and fair compensation as well as just cause-and a timely,
low-cost method of resolving those disputes.
That would be an addition
to the legislation as proposed.
We appreciate the
opportunity and would be delighted to attempt to answer your
questions.
The Acting
Chair: We've got quite a bit of time for them. We'll
start with the parliamentary assistant, please.
Mr
O'Toole: I'll share time with Mr Gilchrist.
Thank you very much for
appearing before the committee. I'm very interested in that a
couple of previous presenters indicated there are very few
accumulated statistics on the success or failure of small
business start-ups and/or franchises. You might want to comment
on that.
In figure 1, I was very
pleased that the top four responses there seem to be, at least at
this point, satisfied by Bill 33; that is the fair dealing
aspect, disclosure and the association right.
Would you like to respond?
You think that it's difficult to find a balance, as you've said
here, but in your view and in the view of your membership, is
this a piece of legislation that will satisfy some of the balance
that's required in this growing sector of our economy?
Ms Andrew:
I would say yes. The legislation certainly responds to the four
elements that draw the strongest support from our members in
terms of their views about what ought to be included in it. The
votes we've had over the years, of course, argue on the other
side, that franchise agreements are private business deals and so
forth, and that if there was consultation with legal and other
advisers, some of the problems can be solved.
Yet our members are now
feeling that this is a special category of business. Unlike
another kind of business where you might go and purchase a
business operation without any special protections like this, our
members are now supporting there being legislation directed at
the franchise sector. That is a definite change over the years,
and the four elements are very definitely there.
Some of the horror stories
and the heart-rending stories that have come up suggest perhaps,
in addition, things like termination of contracts without notice
or fair value applied are something worth having a serious look
at.
Mr
O'Toole: Just to conclude, we've heard from three or
four presenters about the imbalance in the relationship from the
starting point, and you would see that. Is there anything in this
that we could provide to level the playing field in some ways,
recognizing that the franchisor obviously has the secret recipe
and the other person is going to be a millionaire in two weeks?
There's an imbalance of expectations. Is there anything we can
do, or does the disclosure portion address most of that?
Ms Andrew:
I think disclosure is a big part of it in making sure that people
are given the hard facts before they sign rather than finding
them out the most difficult way afterwards. Also the right to
associate, if there were associations of franchisees-I was
listening to some of the previous presenters and some of the
heart-rending cases there. One would think, if there were
associations of those people, that they also would be able to
forewarn others and perhaps the kinds of practices we've heard
about wouldn't be a feature of the system.
Mr
Gilchrist: Thank you, Judith. It's good to see you
again. You are a consistent presenter, and I always appreciate
the detail that goes into your submissions. They're anything but
anecdotal.
Along that line, do you
have any thoughts as to why such a small percentage of your
franchisees actually sent in a response? In your handout you say
that 28% of your members are franchisees, but they only supplied
6% of your responses. Should we take that as a good sign, that
they are not troubled and did not think it worthy?
Interjection: Too busy.
Mr Gilchrist: Or are they too
busy? Exactly.
Ms Andrew:
This particular survey which, due to a set of circumstances, went
out in mid-July 1999, was a pretty heavy-duty survey, as you can
see from your kit, and included 17 questions and some fairly
difficult ones on the hard matters of property tax and the
Workplace Safety and Insurance Board and so forth. We did lose
some response because people didn't slog through all of those in
the dog days of July. I suspect that's what happens sometimes. We
get good responses from our members and we check regularly to
make sure it's not the same members responding all the time. To
be honest, independent business people are very busy with their
businesses and often pressed in vacation time, so our timing
wasn't great on this one and that accounts for the smaller
response. But still, 160 franchise operations is a substantial
number.
Mr
Gilchrist: Our biggest conundrum right now is the
distinction you would make between the disclosure-related issues
to allow a purchaser absolute certainty that what they're getting
into is a known commodity, versus those things that would be
considered relationship. I look at your third recommendation and
I would appreciate it if you could elaborate a little bit on just
how far down the road you thought the government should intervene
in things such as termination of contracts. Would it not be more
consistent with traditional contract law to just make sure that
all of the parameters around which a franchisor could ever
terminate your contract are spelled out in advance in
extraordinary detail, including any penalties or any claim the
franchisee might have for frivolous termination? Would that not
be better than the government trying to micromanage a myriad of
different businesses via regulation or legislation?
Ms Andrew:
We weren't really thinking of government micromanaging this.
You've probably noted from the survey that our members don't
favour government registration, nor do the franchise respondents
to the survey favour that kind of heavy-duty legislation. But
there seem to have been enough cases where franchises are
terminated with very little notice, really with not sufficient
provision for the business person to get compensation, or for
reasons which perhaps wouldn't be just cause that we think there
need to be at least some basic rules around that.
1500
Mr
Gilchrist: But again, should the rules be laid out up
front? If before I sign the contract I know the franchisor has
the ability to terminate under the following five conditions, and
that is one of the five conditions they do terminate me on, would
you not agree that is quite consistent with the sort of contract
law that is best left to the courts to enforce and interpret?
Ms Andrew:
This obviously bears more thinking, and it's excellent that the
committee is looking at this bill at first reading stage, because
it does give you some time to consider provisions. But if it were
at least included in the contract that the contracts must address
these things or some minimum parameters around them, perhaps that
would suffice. There are others here who deal with these kinds of
situations probably more frequently than we do, who could give
you very detailed advice on that. But we think there needs to be
something that addresses this. Otherwise, if you are cited for a
minor health violation in the city of Toronto and suddenly that's
a reason for the franchisor to terminate your contract, there
needs to be some protection on that front.
Mr
Gilchrist: Fair enough. Thank you.
Mr Martin:
Thank you for coming. This is indeed an important piece of work
that we are all involved in. You're right: It's opportune that it
is after first reading, so we can look at the bigger context
within which this all unfolds and perhaps do something in the end
that might work better.
We had a presentation this
morning from somebody who is an expert in the American
experience, who talked about some of what is in this bill as what
they introduced 30 years ago. They have evolved since then to
have legislation in place that actually deals with the question
of termination, as you have suggested, and calls, in many
jurisdictions, for some registration of the franchisor/franchisee
and of the disclosure document, so there is some control over the
question: Is it complete, is it correct, and whether, even with
the disclosure, there is still misrepresentation going on.
That gets us to the end
point, where in some instances we have terminations taking place,
or a change in the contract that puts undue pressure on the
franchisee and requires the franchisee to expend even more money
to hire a lawyer, go to court and fight that kind of battle. Many
franchisees just don't have that kind of money available to them.
As well, of course, it interferes with their ability to carry on
business if they are preoccupied with that kind of thing.
With that in mind I ask
you, would the provision for termination, where you are calling
for some basic rules, be the same thing we are referring to, some
kind of dispute resolution mechanism? There were three small
businesses in my own community of Sault Ste Marie-that's the
reason I'm involved in this-who brought me to the table to share
with me the very difficult circumstances they were facing, and
they ultimately lost their business. They weren't bad business
people; they were actually very successful, good corporate
citizens. But at the end of the day, they are not in their stores
any more. They were saying to me that if there were a table they
could go to where arbitration or mediation could happen, so that
the stories of each side could be told and a judgment made so
that everybody could get on with their life-they were convinced
they were doing all the right things, and they were asking for a
dispute resolution mechanism. Is that in keeping with what you
are thinking about , in this instance, regarding a termination
clause?
Ms Andrew:
Certainly the CFIB has supported the notion of mediation. In
fact, when former Attorney General Charles Harnick brought his
mandatory mediation thrust forward, that was something we did
support for those very reasons: that many small businesses can't
afford the time and
the cost of long-drawn-out court proceedings, and hopefully it
would be better to resolve disputes as early as possible,
possibly through mediation. So we think mediation is a good idea
in a whole variety of areas, probably including this one.
In terms of heavy-duty
provisions in this area, I think the general tenor of these
responses is that our members believe there should be strong,
upfront disclosure. I don't think they are quite ready for a
highly regulated environment with registration. Certainly
registration is not supported. In fact one very thoughtful
respondent answered yes to many of these things and said, "Of
course we will be paying for all this government regulation."
Quite clearly, it is true that the more oversight there is of
these kinds of dealings-you know, more government costs, more tax
dollars and so forth. We are in support of some clear parameters
under which franchises are operated, but at this point we
certainly cannot go for the really heavy-duty kinds of proposals
with a highly regulated system in this province.
Mr Martin:
Could I suggest to you, ever so respectfully, that you might want
to take a look at some of the material Susan Kezios presented
this morning. You may already have read some of the material her
organization is putting out, which suggests that even in the
States, where the regulation is much further developed and
helpful, in the end it's still not enough because you're still
before Congress looking for better legislation to regulate it.
She figures that what is on the table in Ontario is what they put
on the table 30 years ago. I guess I'm saying, should we be
playing catch-up that far behind and should we be, as I suggested
and she suggested this morning, maybe 10 or 20 years from now
looking at what they are looking at right now? Do we always have
to be so far behind, even in this instance, where the US is
concerned and even in the regulation of business-
The Acting
Chair: I think I heard a question there, Mr Martin. I'm
going to need to-
Mr Martin:
Actually you didn't hear a question. I'm going to share with
you-I have been inundating the committee today with all kinds of
research that I have been doing. I think you're right: This
affords us a unique opportunity after first reading to do a
fulsome study of this whole issue.
Gillian Hadfield, who will
appear before us-
The Acting
Chair: Question, please, Mr Martin. It's that plane to
Sault Ste Marie I'm worried about.
Mr Martin:
Yes. Gillian Hadfield will appear before us in Ottawa on Thursday
and will be making some interesting presentations. I suggest you
might want to take a look at that too. Here are two papers she
has put together that I think would be good reading. I'm going to
share them with the rest of the committee. One is Problematic
Relations: Franchising and the Law of Incomplete Contracts, and
the other is in the area of how the market for lawyers distorts
the justice system. Franchisees, in many instances, just cannot
afford the legal fees to fight the battles that they need to
fight.
The Acting
Chair: Ms Andrew, if you heard a question there, you are
welcome to try and respond to it. Otherwise your time has
expired.
Ms Andrew:
Just a quick comment. Franchise operations are, of course, one
way to conduct business in Ontario. There are many other business
people who start businesses, who buy businesses, who put a lot of
effort into researching what they are doing and making sure they
have done their due diligence and so forth. I think it would be
unwise to go for a disproportionate, heavy-duty regulatory
environment around the one way of doing business, that is, the
franchise side of it, because there are many other small business
people in Ontario who put their homes and everything else on the
line in terms of their investment in business. They have to
choose who they deal with carefully, just as you do in a
franchise operation.
The Acting
Chair: Thank you very much for your presentation
today.
1510
ED BARGE
The Acting
Chair: I'd like to call the next witness, Mr Ed Barge.
Welcome to the committee, sir. You have 20 minutes for your
presentation.
Mr Ed
Barge: Good afternoon, ladies and gentlemen. Mr Les
Stewart from the Canadian Alliance of Franchise Operators made
contact with me some two weeks ago and asked me if I could relive
my experience in the franchise world, which occurred in the year
1989-90. At the time I didn't think it was relevant, because I
hoped that things had moved forward, that maybe some of the
problems my particular industry had trouble with back then had
been rectified and perhaps governments had had a look at things
and decided that perhaps there should be changes and there should
be some kind of legislation put in place. Having said all that,
it seems that that hasn't happened and at least Bill 33 seems
like a step in the right direction. What I'd like to do is give
my background to you and take it from the point when I got out of
the franchise business.
Prior to becoming a
franchisee, I had spent a total of 18 years working for a large
supermarket company in the United Kingdom. In this period of
time, I rose from a trainee manager to the position of regional
director. As a regional director, I was responsible for a total
of 50 supermarkets with a total of 1,500 employees. Sales were in
excess of some $250 million per annum.
I left the corporate world
and decided to start my own business. During the next 15 years I
opened and operated five separate and different businesses. My
combined sales were in excess of $25 million. These businesses
were all retail operations, ranging from a supermarket to two
frozen food freezer centres, a wines and spirits operation and a
health and whole food store. All were opened from scratch by
myself and all had managers appointed to run them. A total of 55
staff were employed by my company.
This was also a hands-on operation, which meant
that working long and hard hours was the norm, not the exception.
In 1989, for personal and family reasons, I decided to return to
my native Canada to investigate what opportunities there were for
starting a new business. I sold my five retail outlets as going
concerns and set up home here in Ontario.
The franchise route: I had
always enjoyed travel and decided to examine the travel industry
with the possibility of entering this profession. The main thing
I liked about the travel business was that there was no physical
stock to worry about, as in my previous five retail outlets.
Shrinkage and stock loss was previously a big headache. As I had
no experience whatsoever in the travel business, had limited
computer skills and no idea of the rules and regulations as they
applied to the Canadian travel industry, I decided to go the
franchise route.
The thinking behind my
decision was as follows:
(1) There would be training
and support for my business, (2) there would be brand recognition
by the public, (3) there would be corporate advertising, (4) the
risk factor for failure would be substantially reduced, (5) you
would not be on your own.
I applied and received a
prospectus and a franchise agreement. I took the franchise
agreement to my lawyer for vetting, and I checked and rechecked
the prospectus projections, both the set-up costs and income
forecast. I then visited a total of five existing franchisees to
ascertain how well or otherwise they were doing. The information
at the time seemed positive enough, but much later I found out
why the true state of their franchises was not revealed.
My lawyer advised me that
the agreement was totally loaded/slanted in the franchisor's
favour, and that if I were to fail, there would be no comeback to
the franchisor. There were no guarantees implied or given for the
accuracy of the projections and no recourse if these calculations
proved inaccurate.
As for my business
experience, after checking the projections given by the
franchisor, it was plain that if I was to make a reasonable
living in this industry, I would need to own and operate more
than the one travel agency. I therefore decided to open two to
begin with and reserved a third site for the immediate
future.
This particular franchise
operated on the basis of buying out existing independent travel
agency owners and then having the site refurbished and opened as
a franchise store. The person who was bought out would continue
to work with the new owner for an agreed period of time and would
assist in the operations of the new franchised outlet.
It really did seem like an
ideal set-up, but it quickly became apparent that the so-called
goodwill and customer base you were buying could not be
determined once the sale had been completed. The main assets,
really, were the trained staff, the travel industry licences and
the actual site or location of the agency. The customer base, the
goodwill, the equipment, the furniture, the fixtures and fittings
were all useless, and yet there was a substantial cost to the
franchisee in paying for these useless features.
What you had was this: You
paid for the franchise fee. You paid the owner of the travel
agency you were buying, in order to have the site, the licences,
the goodwill, the trained staff and the customer base, and then
you had to pay for the refurbishing of the site, all the new
computer equipment, the furniture, the stationery supplies and,
finally, the fixtures and fittings necessary to open the new
business.
When you did all this and
paid for all this, you then found out that the customer base and
goodwill that you had purchased did not come anywhere near what
you were led to believe.
The franchise experience-my
own personal experience: The cost overruns of opening my one
travel agency were in excess of some $80,000; the sales
forecasted by the franchisor of the two travel agencies to make a
profit or return on the effort were never achieved; the costs of
operating the two businesses were far higher than were projected
by the franchisor.
In my own experience, you
had a triple whammy to contend with: higher costs to open the
franchise than you were led to believe; higher costs to run the
business than you were led to believe; lower sales and revenues
than you were led to believe. The break-even figure projected by
the franchisor was totally inaccurate.
Please bear in mind that
the average gross profit in the travel business back then was
between 10% and 12% gross, so there was very little margin for
error if your costs were higher than projected or if your gross
profit did not manage to achieve the industry average. It did not
take me long to determine that I needed $1.5 million in sales per
year per agency just to break even and not the $800,000 in sales
volume that was projected by the franchisor. Remember, $1.5
million in sales was to break even, not to move into profit.
Part of the franchise
concept was that you were not alone. Back in 1989-90, it soon
became apparent that all of the franchisees in the greater
Toronto area were in the same boat, and all of our boats were
sinking fast. There was a total of 15 franchisees who were slowly
going under and were in danger of losing everything. There was a
total of two franchisees who were actually making a go of it, but
even those two were not achieving the financial success that
brought them into the franchise world.
A class action lawsuit was
launched on behalf of the franchisees against the franchisor,
citing unrealistic/unobtainable sales and revenue projections and
understated operating costs. Each franchisee eventually settled
on an individual basis with the franchisor. In part, one of the
main planks of the settlement was for the franchisor to find
another victim to purchase the failing business in order for the
franchisee to recoup some of his losses. The cycle then would
continue.
All 15 of the franchisees
went out of business and most, like myself, lost not only one's
life's savings but one's home and ended up without an income or
employment. In my case, my total financial loss exceeded $250,000, not counting the
loss of my home later on in the same year. My business operated
for a total of 17 months before going under and, needless to say,
the third location I had planned to open never occurred.
Lessons to be learned:
(1) You can have all the
business experience in the world but if the site is wrong, the
structure or set-up isn't right, the sales projections are not
right, the operating costs are not right, and the formulae/mix of
the franchisor isn't right, you are going to fail.
(2) The 15 individuals who
failed and lost everything came from a wide spectrum. Some were
recent immigrants, some were business professionals, some were
inexperienced, some were lazy, some worked around the clock, one
was an experienced police officer, one an experienced airline
pilot. The truth is all of them failed.
(3) The franchise agreement
is totally loaded to the benefit of the franchisor. If the
franchisee does not succeed, there are ample reasons the
franchisor can give for this and this failure has nothing to do
with the franchisor. The franchisee is, at the end of the day, on
his own if the operation does not succeed.
(4) If the sales, operating
costs and net profit projections made by the franchisor are
incorrect from the beginning, the chances of overcoming the
problem are slim and next to none. There is no recourse to the
franchisor for his inaccurate projections outside of taking legal
action.
(5) By the time the
franchisee realizes he is doomed to failure, he has used up all
of his financial resources to keep his business afloat and has
nothing left to hire a specialist lawyer to fight the
franchisor.
(6) The concept of buying
out a business in order to have a immediate client base has
proved to be a disaster in the travel business. The franchisee is
far better off finding a good location and opening it from
scratch. The franchisor uses this notion of having an immediate
client base to provide assurances to the franchisee. In practice,
however, this concept is wholly false.
(7) There should be some
recourse available to the franchisee if he or she can prove that
he or she is doing everything that is expected of him or her and
yet cannot succeed in achieving the projections that he or she
has been told are obtainable.
1520
In conclusion, after my
failure in the travel business-my only business failure, I might
add-I have not yet been able to become financially secure. In
fact, I am still paying off debt directly caused by this failure.
Declaring personal or business bankruptcy should be seriously
considered by those franchisees who experience failure. My own
failure resulted in the loss of all of my retirement and
insurance plans, my home, my car, and a strain on my marriage
that is present to this day. In my case, I did not declare
bankruptcy.
I am not bitter about my
situation. But if an experienced, hard-working businessman can
fail, what about the individuals who do not have their eyes wide
open at the beginning?
Of the 15 franchisees who
failed just in the greater Toronto area, I have kept in touch
with two over the years and both have not recovered from their
business failure either. I suspect that the vast majority of the
other 12 find themselves in the same position.
I do not know the answer
for regulating the franchise industry, but I do hope that this
committee can find the right approach to, at the very least, give
the franchisee some protection if he knows that no matter how
hard he works, how many hours he puts in or how much money he
uses to support his business, he isn't going to succeed.
The Acting
Chair: Thank you very much. I see an interest in
questions.
Mr
O'Toole: Yes. Mr Gill and myself have questions. Thank
you very much for bringing your story to the committee. The
purpose of these hearings is to put the real face on the story of
the franchise business. I commend you for sharing sincerely your
experiences. It must be hard, even now, as you review and
revisit. I can only assure you that I know we want to do the
right thing. The lessons to be learned: You listed in number 1
the right site, the right this and the right that, that take some
sense of judgment. The franchisee is at some disadvantage-we've
heard that mentioned a couple of times-a fairly trusting
relationship, while anticipating success. That's a difficult
thing to regulate.
Mr Barge:
I appreciate that.
Mr
O'Toole: What can we do to strengthen the disclosure
portion? I think the most central piece to this whole thing is
disclosure at the time of the agreement. Are there any comments
you have on that?
Mr Barge:
Again, I can't speak for other industries, but the travel
industry is very cyclical. So it depends entirely what time of
the year you would actually get into it. If you went into it in a
quiet period, for argument's sake, then the franchisor could be
justified in saying, "Don't worry, the busier time is just around
the corner," or "It's down the road in two months' time."
I have no idea what time
frame you intend to put on having this whole discovery-but the
ability to go back to the franchisor and say: "Look, you
projected certain figures here. They're not achievable. I'm doing
everything I can do. What are you going to do about it?"
Mr Gill:
Mr Barge, thank you for sharing the information because I'm sure
it's still tough, even after so many years, and many of the
people would have not shared it. Many of the people who have lost
and had this experience would have gone away and paid their
debts. First of all, I want to thank you.
Second, I think the case in
point comes to something Mr O'Toole mentioned earlier. Some of
this business, and I do understand a bit of the travel business,
is changing so quickly, ever since you've been in business, with
the e-commerce and with the airlines cutting back and everything.
I think sometimes when one is getting into it one does not
realize how quickly some of these businesses are changing. I
don't know if any of these laws could protect one against the
changing environment of the new innovations. Any comments?
Mr Barge: You're totally right.
They can't, with the marketplace changing as fast as it is, but
there has to be a situation where you get into it. In other
words, you're taking an established industry. However,
e-commerce, if you decided to go onto the Internet now, you would
be a very brave person to pay a franchise royalty and whatever,
hoping that they're going to have a business that's going to
sustain them five, six, 10 years.
Existing businesses that
have been around for some time-there should really and truly be
some measure of success or otherwise-are not changing directly
overnight. The travel industry has changed, yes, and I dare say
will change more as time goes by. But we were talking really in
terms of buying an existing business that has not only a past but
has got a relative future, no matter what that may be, two years,
three years or 10 years. I still think the operations are based
on. "Here, you pay your fee, you pay your royalty and you've got
a good chance"-it's never guaranteed of course-"of success."
The Acting
Chair: Mr Martin, four minutes.
Mr Martin:
You've heard the proposal that disclosure will be the magic
bullet that will solve all the problems. I don't suggest for a
second that's what any of us here think. Businesses will succeed
and fail no matter what we do. I think what we want to do is
create at least a level playing field, a fair shot, so that if
you work hard and you do the right things, you have at least a
decent chance of making a living and protecting your
investment.
What could we do, here,
now, with the material we have in front us-you've heard some of
the deputations that have gone on here-to make sure there is
fairness in the system and that people have a fighting chance at
making a go of it and actually being successful?
Mr Barge:
Fair question. From my experience and being in business fairly
recently, there has to be some kind of arbitration. There has to
be an independent panel. Don't get me wrong, the franchisor in
most cases is probably a decent operator and a decent company,
but he has to look at the greater picture. The franchisee is
looking at his own little empire and he's obviously quite
concerned about that. The franchisor looks at it and says, "If I
do something here, if I bail this guy out or if I agree to buy
into his company or take one of his two outlets over, whatever,
this leaves the door open and I'll lose my focus."
There's nowhere you could
go, if both sides thought they were doing their level best, to
say, "OK, who's right, who's wrong?" or maybe not even that: "OK,
this is the situation that both of you people are in, the
franchisor and the franchisee. What is most fair? What is an
answer?" How can we put something together that both parties have
something to work with, as opposed to the franchisor taking the
position, "I'm strong, you're weak, and I'll survive and you
won't." Nothing has changed from what I've heard here today.
That's the same basis they're still using.
Mr Martin:
I get the feeling from what you're saying that the focus on
disclosure, as far as it goes, will not do the whole thing.
Mr Barge:
It would set it up to begin with. In other words, you'll know
what you're getting into to begin with, but changes will occur.
Let's say, for argument's sake, there is a change in the
business. Should the franchisor really and truly just say,
"Sorry, chum, your enterprise is no longer viable. Goodbye"? I
don't think so either. There's an element of fairness. If the
franchise fee was paid and he was paying his royalties and he was
doing everything by the book, why should the franchisor just
abandon the franchisee? I don't think that's fair.
The Acting
Chair: Thank you very much.
CANADIAN BAR ASSOCIATION-ONTARIO
The Acting
Chair: Our final public presentation this afternoon is
Frank Zaid from the Canadian Bar Association-Ontario, business
law section. Welcome to the committee, sir. You have 20 minutes,
plus whatever time it takes you to pour a glass of water.
Mr Frank
Zaid: Mr Chairman, honourable members of the committee,
I'm here on behalf of the business law section of the Canadian
Bar Association to speak on Bill 33. I will take a very short
period of time to give you a bit of my own personal background.
I've been in the private practice of law for nearly 30 years,
specializing in franchising, both in Canada and internationally.
I have been the part owner of two franchise companies. I'm the
part owner of three franchisee units. So I've had business as
well as legal experience. I've written, spoken, testified and
given papers on franchising throughout my career.
However, for the Canadian
Bar Association, since July 1971, when the Grange report was
issued, by our calculations there have been at least 11 ministers
or representatives of ministers in various public forums who have
spoken on the subject of franchise legislation. In the written
report that I tabled with the clerk, we went through some of that
history. The fact is that over the past 30 years this subject has
been hotly debated. It has occupied a considerable amount of
public and private debate, time and consideration and has created
a great deal of uncertainty in the Ontario marketplace as to
whether, when and how franchising will ultimately be regulated in
this province.
1530
We believe this debate must
come to an end and come to an end quickly. It has been
demonstrated through every speech or public pronouncement,
commissioned study or survey that disclosure legislation is
highly desirable. It has been further demonstrated, in the same
manner, that registration legislation is contrary to both the
public and private goals of establishing a free marketplace
environment for business-to-business relations. The fact that
Alberta determined in 1995 to repeal its Franchises Act, which
had been in force since the early 1980s, with new legislation
which provided for certain principles of conduct and disclosure
only requirements, further exemplifies that the one province in
this country having had franchise legislation chose to deregulate
the process and to
abandon government registration and review of prospectuses and
agreements.
The Canadian Bar
Association of Ontario supports the introduction of Bill 33 in
its present format on the basis of disclosure-type legislation,
with a legislated standard of fair dealing, freedom of
association for franchisees and delivery on a timely basis of a
prescribed form of disclosure document.
The Canadian Bar
Association of Ontario does not support the introduction of
relationship standard legislation dealing with various
contractual matters typically found in franchise agreements for
the following reasons:
(1) There is no specific
industry standard applicable to all franchise agreements. It is
impossible to determine a set of legal standards which will apply
on a uniform basis to the various types of franchises and
industries involved in these relationships.
(2) The level of
sophistication of franchisors and franchisees is widespread and
varies among franchise industry classifications. Sophisticated
franchisee investors do not need the protection of relationship
standard legislation. Unsophisticated franchisees will benefit
far more from education, government publications and franchise
associations informing them of the need to be properly financed
and advised by legal counsel. Relationship standards will not
cure the typical difficulties encountered by unsophisticated
franchisees.
(3) Relationship
legislation will spur costly and unnecessary litigation. Any time
contractual standards or the like are determined by legislation,
uncertainty prevails and interpretation disputes arise. While the
intent of such legislation may be to assist franchisees
generally, the result will be increased litigation, uncertain
relationships and additional burdens and costs on the legal
system and the province's budget.
(4) Franchising creates
economic activity in the province which will be curtailed by
excessive regulation. As has been demonstrated in the United
States, certain states which have enacted relationship-type
legislation found that the economic thrust of franchising
withdrew from their states. I give you as an example Iowa. States
like Michigan, which introduced very heavy-duty registration-type
legislation, experienced an immediate withdrawal of franchise
activity in the state, and they ultimately repealed that
legislation.
(5) Adequate remedies
already exist. Most franchise disputes are focussed on factual
matters. Issues of negligence, misrepresentation,
non-performance, system standards, unconscionability,
misappropriation, the usual legal jargon, whether alleged against
a franchisee or a franchisor, are already adequately dealt with
by existing common-law, contractual or tort principles and
equitable and legal remedies. There is a body of common law
developing in these areas as they apply to franchising upon which
the legal community may rely in providing advice to franchisors
and franchisees and in seeking remedies. It is not necessary for
government to override these established principles by enacting
legislative standards.
(6) Disclosure legislation
is satisfactory. The CBAO believes, with several drafting
exceptions which I'll try to run through quickly, that Bill 33 is
well drafted and creates little uncertainty for franchisors,
franchisees and their advisers. Of course, this is subject to a
full review and public debate on the regulations which ultimately
will be proposed.
(7) Erroneous assumptions:
The Franchise Sector Working Team report stated that there were
estimated to be 500 franchisors and 40,000 franchisees in this
province. It estimated that there were 5,000 civil cases filed
every year relating to disputes between franchisors and
franchisees. If you apply some of these numbers, you will find
that with 40,000 franchisees in the province and 5,000 civil
suits filed every year, that would mean that one eighth, or
12.5%, of all franchisees in the province are involved in new
civil lawsuits every year. It would also mean, based on 500
franchisors in the province, that every franchise system, on
average, is involved in 10 new lawsuits every year with its
franchisees. We seriously question the veracity and the accuracy
of these numbers.
Based on research which I
personally do every year in giving an annual address on the state
of franchise law in the country, we estimate that there are 25 to
30 reported judicial decisions throughout the country-let's
assume Ontario has half of those, or 15-involving preliminary or
final issues determined by the courts. While it is difficult to
extrapolate how many cases must be filed in order for there to be
15 reported decisions each year in Ontario, it certainly appears
unlikely that 5,000 civil suits are commenced annually to result
in only 15 decisions.
The eighth reason for it
not supporting relationship legislation is a uniformity issue.
Franchising is within the mandate of the provinces under the
Constitution Act. We already have legislation in Alberta. It is
highly desirable that Ontario's legislation be consistent from a
legal perspective with that in Alberta unless there are other
circumstances dictating the contrary.
We recommend that the
regulations which will determine the form and content of the
disclosure document be consistent with that in Alberta in order
to preserve harmony throughout the country, and that any
inconsistencies be minor in nature so that stakeholders may
prepare their documents on a national and consistent basis.
Now I will turn quickly to
some drafting issues we hope to help your committee with.
The definition of
"franchise": In master franchise relationships, the necessary
element that goods or services distributed by a franchisee be
associated with the franchisor or the franchisor's associate's
trademark may not work because in many cases the trademark is of
a third party, ie, the franchisor from another jurisdiction. So
that definition is somewhat flawed.
With respect to the
inclusive portion of clause (a)(ii) of the definition of a
"franchise", when referring to a "franchisee's method of
operation," it is stated to include "building design and
furnishings, locations, business organization, marketing
techniques or training." We wonder what the effect would be on
the definition if one of these elements was not included. Would the
definition fail?
The definition of
"franchisor's associate" is too expansive. Use of the terms
"significant operational control" and "continuing financial
obligation" will create uncertainty as to the scope of exposure
of affiliated companies.
Further, if a franchisor is
incorporated as a private company, which is usually the case,
individual liability may be imposed without it specifically being
provided for by the owner or by the person directing the affairs
of the franchisor simply because of that person's direct
involvement, to use the words of the definition.
In the application of the
bill in section 2, exempting single trademark licence
arrangements only, we suggest that that exemption should not be
limited just to a single trademark licence but to similar such
trademark licences.
In the concept of fair
dealing in section 3, the duty is imposed on each party. Given
our concerns about the application of the various provisions of
the act to associates, we think it should be specifically stated
that the fair dealing standard does not apply to associates.
The right to associate: We
support the right of franchisees to associate. We think, however,
that right should be qualified to the extent that franchisees may
not disclose confidential information concerning their specific
franchise system, as precluded under the terms of their franchise
agreements, to other franchisees from other systems in the course
of such association.
Exemptions to disclosure
obligations: The exemption providing for the grant of a franchise
by a franchisee should not preclude a resale of a franchise where
the franchisor assisted the franchisee in locating a new
franchisee. The qualification, using the words "the grant of a
franchise is not effected by or through the franchisor," is
uncertain.
Electronic commerce: We
suggest that the rescission rights and the effective date of
notice of rescission provide for notice by electronic mail.
Similarly, we suggest that the obligations to disclose also
contemplate disclosure by some form of electronic means with a
written acknowledgement of receipt of the disclosure document.
These are similar to the proposals currently being considered by
the Federal Trade Commission in the United States.
Damages for
misrepresentation: We suggest the deletion of the right of action
against a franchisor's associate.
Financial disclosure
exemption: The CBAO would like to reserve further comments in
connection with any exemption to be prescribed by regulation with
respect to financial disclosure pursuant to section 12 of the
bill.
Last, self-regulation: As
has been provided for in Alberta's act, we suggest that Bill 33
contain a provision allowing for the delegation of
self-regulation to a body considered capable of governing the
persons involved in franchising and promoting fair dealing among
franchisors and franchisees.
In summary, the CBAO
submits the following:
(1) The bill should be
passed substantially in its present form as soon as possible.
(2) The legislation should
not be expanded to include relationship standards.
(3) To the extent possible,
the bill should be made consistent with Alberta's
legislation.
(4) The concept of the
liability of and obligations extending to an associate of a
franchisor should be limited or clarified.
(5) The right of
franchisees to associate should be qualified to the extent that
the right does not include the right to disclose confidential
information concerning a franchisor as agreed to in an
agreement.
(6) The CBAO would like to
be consulted to provide further comments on proposed regulations
to be promulgated under the act.
(7) The government should
consider reserving the right in the bill to allow for delegation
of self-regulation to a body considered capable of governing the
persons involved in franchising and promoting fair dealing among
franchisors and franchisees.
We appreciate the
opportunity to assist in this very important process.
The Acting
Chair: We've got a few minutes left for questions. We'll
start with Tony Martin.
Mr Martin:
Certainly, your presentation flies in the face of some of the
information presented to us, particularly this morning by Susan
Kezios from the American Franchisee Association, who suggests
other than that franchisor systems flee states where there's good
legislation. I suggest that maybe bad franchisors flee, and who
would argue against that?
Were you the counsel for
the Pizza Pizza franchisor?
Mr Zaid: I
was one of the counsels.
Mr Martin:
Were you the counsel in the Bulk Barn case for the
franchisor?
Mr Zaid:
I'm involved in that.
Mr Martin:
You're not the person who sent out the letters of threat to
anybody who would intervene in any way in terms of that
action?
Mr Zaid:
I'm not going to answer that question.
Mr Martin:
OK, thanks.
The Acting
Chair: Further questions? Seeing none, thank you very
much for your presentation.
That concludes the public
element of today's hearings. As was mentioned in the subcommittee
report this morning, two parties sought to speak in camera before
the committee. They have been granted the right to do so. I would
ask everyone who is in the room right now to please exit, save
and except for the two individuals who sought prior approval to
speak in camera.
The committee continued
in closed session at 1543.
