Committee Transcript 2000-Mar-06 | Legislative Assembly of Ontario

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)

Vice-Chair / Vice-Président
Mr Garfield Dunlop (Simcoe North / -Nord PC)

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.

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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.

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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.

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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.

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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 M^me 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.

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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.

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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.

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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."

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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.

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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.

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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?

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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."

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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?

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.