Thursday 9 March 2000

Franchise Disclosure Act, 1999, Bill 33, Mr Runciman / Loi de 1999 sur la divulgation relative aux franchises, projet de loi 33, M. Runciman

Mr John Lessif

Franchise Sector Working Team
Mr Bob Krupp

Ms Sue Ricketts

Ms Diane Meeuse

March Group Inc
Mr Hal March

Mr Lewis Sovereign

Canadian Federation of Independent Grocers
Mr John Scott
Mr Gary Sands
Mr Peter Knipfel

Cameron's Food Market
Mr Bill Cameron
Mr Bob Uhrig

Mr Brian Davy

Party Land Central/Eastern Canada
Mr Victor Martin

Mr Peter Dillon

Mr Howard Rosenberg


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 Bruce Crozier (Essex L)
Mr Steve Gilchrist (Scarborough East / -Est PC)
Mr Tony Martin (Sault Ste Marie ND)
Mr John O'Toole (Durham PC)
Mr Bob Wood (London West / -Ouest PC)

Clerk / Greffière

Ms Anne Stokes

Staff / Personnel

Ms Susan Swift, research officer,
Research and Information Services

The committee met at 0923 in the Hilton London Ontario, London, following a closed session.


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.


The Vice-Chair (Mr Garfield Dunlop): Good morning. We are ready to start. We have 20-minute presentations, and that includes the question period. We like to ask at least one question from each party. I'll just notify you at the five-minute interval.

Mr John Lessif: I'll do my best to allow some time.

The Vice-Chair: If you can. If we don't get time to answer questions, that's one thing, but I just wanted to let you know that that is part of the 20 minutes. You can proceed.

Mr Lessif: Good morning, everyone. My name is John Lessif, and I am the owner-operator of four McDonald's restaurants, located in the communities of Ingersoll, Tillsonburg and Woodstock. I'm also a member of the Franchise Sector Working Team, which has been involved in the development of Bill 33. I have been an active member of the FSWT since it was first established in 1995.

I am pleased to have this opportunity to offer my opinions to the committee on Bill 33. My views are based on my experience as an independent owner-operator in a franchise system and reflect my opinions as a member of the Franchise Sector Working Team.

By way of background, I have been a franchisee in the Canadian McDonald's system for 20 years, and I'm proud to say that in that time my business has evolved into a family operation involving my two children. When I chose to enter a franchise system, as opposed to starting my own business, it was because franchising offered me a readily identifiable brand, a proven operating system and the appropriate support and training.

Like me, my fellow McDonald's franchisees are independent, small business owners, and collectively we represent 70% of the system's 1,100-plus outlets across Canada. In Ontario, there are 99 franchisees who own and operate 287 McDonald's restaurants. Like any small business owner, we have invested substantial savings and have dedicated ourselves to operating viable and successful businesses.

As a McDonald's owner-operator, I pride myself on the very significant contributions my business allows me to make to my community. Not only am I highly involved in local community and charitable activities, but my business makes a considerable economic impact as well. I employ a total of 240 employees across the three communities in which I have restaurants, ranging from 60 to 100 employees per location. Perhaps most importantly, the majority of these employees are young people, high school and post-secondary students, who need that first-time employment opportunity and on-the-job training to gain a foothold in the job market. To sum up, operating a thriving business puts me in a position to make a meaningful contribution to the local economy and my community.

I'd like to talk about the issues that are in the bill. Let me begin by expressing my support for the introduction of Bill 33. I would like to take the next few minutes to comment on certain elements in the bill, as well as a number of issues that continue to be raised in the context of what is absent from the bill.

The first element is excessive regulation. At the outset, I would like to say that any legislation affecting the franchise industry must strike an appropriate balance in providing certain protections for franchisees without driving up the costs of entering the industry. There are many responsible and successful franchise systems operating in Ontario today. Legislation designed to protect the prospective or established franchisee must not be so onerous or restrictive that it penalizes responsible franchisors, either financially or administratively, resulting in excessive costs to the system.

Legislation that over-regulates the industry will only result in higher costs of doing business for both the franchisor and the franchisees like myself. On the broadest level, increasingly prohibitive costs will have a dampening effect on industry growth, to the detriment of existing systems, new franchise opportunities and associated employment growth. At a micro level, this can indirectly impact small-town owner-operators like myself, who, in the face of rising system costs, will be challenged to maintain and grow our support of the local economies, both through employment opportunities and community involvement. I believe Bill 33 balances the needs of all parties without imposing undue or costly restrictions on the franchise industry.

On disclosure: As a franchisee in a mature and successful system, I strongly believe that disclosure, one of the cornerstone principles of the draft legislation, is a critically important element in determining the viability of any business undertaking. The disclosure requirements in the bill will ensure that those interested in investing in a franchise opportunity have access to key information needed to make a fully informed decision before signing a franchise agreement.

It is also important to acknowledge that disclosure can only enable a potential franchisee to make a fact-based decision based on the actual state of a franchise system at a certain point in time. It is simply not possible through disclosure to legislate for any number of unanticipated changes that may develop over time. I believe the disclosure requirements set out in the bill are fair and reasonable and will provide the appropriate level of insight into a franchise system's financial status and operating practices.


I want to emphasize, however, that even the highest level of disclosure does not relieve the prospective investor from the obligation to undertake due diligence in evaluating the information they obtain. A prospective franchisee, like any prudent investor, must properly assess this information in conjunction with input from the appropriate advisers and independent research. In my opinion, it is incumbent on the potential franchisee to not only consult with legal and financial advisers, but to go beyond this and research local market conditions through discussions with local economic development officers and local chambers of commerce.

In summary, legislated disclosure requirements are not a guarantee for success. They are of no real value to the prospective franchisee who chooses to proceed without a proper evaluation of all the facts. Simply put, common sense cannot be legislated into the business process.

On the right to associate, there are several franchisee forums in my system that facilitate franchisee discussion on relational and business issues. For example, the McDonald's system employs franchisee strategy teams, national and regional advertising boards and a national licensee council which deals specifically with relationship issues. Further, McDonald's places no restrictions on me from associating with any organizations outside of the McDonald's system.

With regard to the right to designate suppliers, McDonald's employs a central buying system to negotiate product purchases based on its system-wide needs for both corporate and franchised restaurants. This high-volume approach results in significant economies which translate into lower costs for the Canadian system and, ultimately, our customers. As a franchisee, I also rely on the quality assurance, product specifications and product development that come with the company's involvement in procurement.

McDonald's does not use the vertical integration approach to purchasing, but rather all goods, services and products are purchased from arm's length, third-party suppliers. In addition, all corporate dealings with suppliers are transparent in that all product and distribution costs across the Canadian system are fully disclosed. Any cost savings and rebates are passed on to the whole system. Bill 33's disclosure requirements will ensure that a franchisor's policy regarding supplier rebates and discounts is known to the prospective franchisee.

While I and many of my fellow franchisees do source some products locally, I understand and accept that the strength of the centralized system and the collective benefits it provides would be undermined by any great degree of independent sourcing by those in our system.

With respect to dispute resolution, at present all disputing parties may voluntarily agree to submit to mediation. Further, it is my understanding that the recently implemented court-mandated mediation program will encompass franchisee disputes. Therefore, I question the need for a separate process to be mandated under Bill 33, particularly when no better resolution would be guaranteed. Would not a separately legislated process conflict with a court-mandated program? Again, creating a separate dispute resolution mechanism, with its associated costs, will only contribute to increased costs of doing business in the industry.

The McDonald's system supports the concept of mediation as an alternative dispute resolution mechanism and employs it on a voluntary basis. By its very nature, mediation must be voluntary to be effective.

On encroachment, I agree that, through pre-sale disclosure, a potential franchisee should be made aware that at some point in the future the franchisor may build additional outlets in a defined proximity of the subject site. It should also be clear through disclosure whether the franchisee will have the right of first refusal on any new outlets and whether the franchisor has a policy regarding encroachment. I would like to point out, however, that it may not always be in the best interests of the franchisee to assume a new site. For example, I would be making an ill-founded business decision to assume another outlet if I believe that the site is not a good one, if I do not have sufficient capital for the additional investment or if I am experiencing challenges in managing my existing business.

Encroachment is not an issue in the McDonald's system. Where a franchisee's existing business is impacted negatively by a new location, whether it be corporate or franchised, the issue is always discussed in order to reach a mutually satisfactory resolution.

On relationship standards, it is my belief that relationship standards cannot be legislated. How can trust, respect and openness be measured and interpreted in an objective way? In my view, trust, openness and respect between the franchisee and franchisor can only be established over time. The imposition of relationship standards could have a detrimental effect on the highly productive relationship that currently exists between me and my franchisor. Regulation of the franchisee-franchisor relationship would force my franchisor to work to meet an imprecisely defined standard that may be inconsistent with the culture of co-operation, consensus and collaboration that McDonald's has cultivated.

In respect to sales projections, I recognize that there have been cases where sales projections have been used loosely in the pre-sale process. I suggest that sales projections should be supplemented with two additional pieces of information: first, industry sales data that would provide the potential franchisee with a benchmark on generally how the industry is performing; and second, historic sales figures on comparable existing sites in the system. Both of these would provide the potential franchisee with more information than they might have access to otherwise.

In conclusion, from my perspective, the majority of franchisees in Ontario are involved in sound franchise systems and operate successful businesses. It's my observation that for this reason a large proportion of franchisees who fully support the bill may not take the opportunity to participate in the public hearings because they are either too busy running their businesses or simply have no issues to raise.

In closing, I support the introduction of the bill and believe that it embodies a number of key principles important to strengthening the franchise industry, to the benefit of both franchisees and franchisors. I look forward to my continued involvement in the legislative process for the bill as a member of the Franchise Sector Working Team.

I must apologize for this, because in doing a little bit of homework this morning when I got up, I realized that on Monday when I sat in at Queen's Park and listened to the presentations and in reviewing my presentation this morning, I perhaps missed communicating these points in my presentation, so I don't have anything written on this. I'm just going to give this verbally.

The Franchise Sector Working Team met a week ago and talked about five proposed amendments that the committee might consider putting into the bill. I don't have that in writing, so I'm going to give these verbally to you. After discussion at our meeting a week ago, the consensus from the team was that we should propose these to the committee today to consider in making amendments to the bill in future.

(1) To expand the right of action for misrepresentation to include agents and brokers. Currently, agents and brokers are not mentioned at all in the bill.

(2) To permit electronic disclosure. This was touched on, I know, on Monday; I don't know about in Ottawa or Sault Ste Marie. But we're recommending that you consider adding that to the regulations.

(3) To require disclosure for the sale of an additional franchise to a franchisee if a material change has occurred. That point is that when a sale is made, it currently reads that those are exempt. We don't feel that they should be exempt, so we'd like you to consider making that change.

(4) To require disclosure for renewal of pre-existing franchise agreements. Currently, pre-existing agreements do not apply in the bill, so we'd ask you to consider adding that or making the change to that.

(5) The term "payment" in the definition of the franchise; to clean up the wording on that. As it now states, there are franchisors out there which do not ask for a prepayment. These franchisors should be included. Canadian Tire, for example, when you buy that franchise you're not asked to put up a fee in advance. So, those franchisors which don't ask for prepayment should be included in the wording of the bill.

That concludes my presentation this morning. If you have any questions, I would be happy to try to answer them.

The Vice-Chair: We've got about six minutes. First, the PC caucus, have you got any comments?

Mr John O'Toole (Durham): Yes. Thank you, Mr Lessif, I appreciate that, and I'd like to thank you for your work on the franchise working group. I think they've worked very hard to come up with some sort of balance, and I appreciate that. Just to reinforce a couple of points, I appreciate the amendments as well. This is an ongoing thing. There's always a state of reviewing excellence, and that's what it's about. It's in a continual state of review. In a regulatory sense, probably the easiest way to legislate this is to provide a legislative framework with regulations that can be ongoing and updated.


There are just a couple of points I'd like to re-emphasize. You mentioned, after your 20 years of experience in a successful operation, the due diligence that's incumbent on the franchisee. Would you like to see incorporated some strengthening of those duties so that they're actually signing off? We've had this mentioned on two or three occasions, having independent legal advice rather than just rushing in and opening that store and getting going. A lot of the enthusiasm for new business operations is such that they want to get going; they may not take the due diligence. So how about the independent legal advice and the independent financial advice? You have mentioned that, but perhaps you'd like to address it.

Mr Lessif: If I understand your question, you're suggesting that it be put in a regulation for the franchisee to sign off on?

Mr O'Toole: Yes.

Mr Lessif: I think that's an excellent suggestion, by all means, because what happens when you start a new business is that the adrenalin gets flowing and sometimes your heart rather than your head makes some of your decisions for you. That's an excellent suggestion.

Mr Bruce Crozier (Essex): We don't have much time and I thank you for your presentation. In your conclusion you said from your perspective the majority of franchisees in Ontario are involved in sound franchise systems. What is your perspective, to back up that statement?

Mr Lessif: My perspective is just my knowledge of the franchise industry for me as an independent person involved in our chambers of commerce in three communities in southwestern Ontario, that experience that I have.

Mr Crozier: Do you have some knowledge across Ontario, to make that statement?

Mr Lessif: Only in respect to the fact that I'm involved in many of the organizations that McDonald's has from a franchisee standpoint, so I get exposed to a lot of Ontario, other communities.

Mr Crozier: OK. Thank you.

Mr Tony Martin (Sault Ste Marie): We've heard some pretty sad stories over the last two or three days in front of this committee, both in camera and in public, of particularly franchisees who find themselves caught up in bad systems that act unilaterally, have agreements that are stacked in their favour and they have no compunction about using that.

You present your case as a man with a family who's been in this business for 20 years, and I suspect that you hope to be there for a good long time to come-

Mr Lessif: God willing.

Mr Tony Martin: -and perhaps even pass some of these entities on to your children to run.

We had a number of people before us yesterday in particular who were hoping to do the same thing. I wouldn't characterize them as young, woolly-eyed, heart-pounding, excited entrepreneurs. Some of them have been in the business for a long time. Some of them learned the business from their fathers and their mothers. At this point in their history they're under threat of losing that business and don't see for them a bill that focuses almost solely on disclosure of information on the sale or buying of a franchise as in any way going the distance to protect their interests or to give them a fair shake at protecting their interests.

What do you have to say to them this morning that might give them some comfort re this legislation that we're considering?

Mr Lessif: I'd like to respond to that wearing two hats, one as an independent owner-operator and the other as a member of the Franchise Sector Working Team.

Over the last five years the team put our best thinking together, which you people have in front of you there, for the wording of the meat of the bill, and there was give and take in that. It's not a perfect scenario. There was give from franchisors and there was give from the franchisee's point of view.

What this bill does, I think, is present a fair and equitable situation to look after all franchise scenarios. I can't speak to an individual who has had a franchise for a number of years and for whatever reasons is faltering. You are asking me to answer a somewhat speculative question, and I don't think I can answer that.

Mr Tony Martin: I suggest to you that the bill we have in front of us continues a regime where it's all take on the part of the franchisor and all give on the part of the franchisee. If at this point in our history we don't have the intestinal fortitude to do what is right on behalf of the many very hard-working, sincere, intelligent small business people across this province, who have been represented to some small degree over the last two or three days, telling us their stories, then this will continue. And people like you and I, who I suggest know better, will have to live with that.

The Vice-Chair: You have about a minute left to respond.

Mr Lessif: I guess my comment on that is that the Franchise Sector Working Team put this bill together to submit to this committee to amend or add to. In our best judgement, this is a fair bill that answers to the points you made. That would be my response to that and my comment on that.

The Vice-Chair: Thank you, Mr Lessif. I appreciate that very much, and thank you for bringing those proposed amendments for us today too.


The Vice-Chair: Our next presenter is Mr Bob Krupp of Krupp's Food Market. Welcome. We are on a 20-minute schedule, so please free to start right now.

Mr Bob Krupp: Thank you and good morning. First, my apologies. I have "Madam Chair" on this. Is the Chair still ill?

I'm just going to read from this, but I would like to make one comment on the heels of John's comments with regard to the bill that was put forward. We were all part of that on the Franchise Sector Working Team. However, the basics of fair dealing are still at issue as far as I'm concerned, in that, yes, fair dealing is mentioned but it's not defined. You will see that that runs through here and may sound like a conflict between John and me. I think the fact that fair dealing is there is important. But having said that, I believe there is more to be done.

My name is Bob Krupp. I am from Kincardine, Ontario. I am addressing you today from my perspective as a past franchisee and with very limited experience as a franchisor. I am also currently an acting member of the Franchise Sector Working Team.

During my working career I have experienced some of the strengths and weaknesses of the franchise sector from both perspectives. From 1968 to 1979 I was employed by an independent grocery wholesaler, Knechtel Wholesale Grocers, from Kitchener. During my tenure with Knechtel, after three years in the wholesale division, I managed and supervised corporate supermarkets in the Kitchener area for Knechtel.

Subsequently I purchased a small grocery store business in Kincardine, Ontario, from Knechtel Wholesale and operated it as a Knechtel associate store, a franchisee, until 1995.

Although there was no upfront franchise fee associated with this purchase, it was mutually agreed that Knechtel would be the primary supplier of goods and that the associate store would comply with certain standards of customer service, advertising and operations. It was more or less a buying agreement.

The implied and practised objective was for Knechtel to assist the franchisee to achieve operational success and profitability, thereby increasing revenues and profitability for the distributor-franchisor.

During the 1979-95 time frame, with the assistance of the franchisor, my company assembled appropriate property and developed, constructed and operated a larger, full-service supermarket in Kincardine.

Concurrently, my company redeveloped the former grocery store location into a mini-mall in order to offset obligations of the lease that had several years remaining. One of these retail outlets was a convenience store, which I developed in a similar fashion to a franchise.


Ultimately, because my focus was on the supermarket, I adjusted the business format of the convenience store to that of a partnership, with the ultimate objective of selling the business outright to the franchisee. I felt that unless my company was prepared to contribute continuing expertise and assistance to the franchisee, the drivers would not be substantial enough to promote a high level of commitment by the franchisee.

I would like to state up front that I believe franchising to be an excellent vehicle for supplying high-quality goods and services to consumers in an efficient manner. If the goals and objectives of both the franchisor and the franchisee are met, the chances of success are very high.

Often an individual has many qualifications required to achieve success in retailing; however, they sometimes perhaps lack the capital resources or a commercially viable business idea. With the assistance of a franchisor having developed a successful business format, the franchisee, through sweat equity, may be able to secure financial stability as well as build equity in the franchise business.

There are several examples of very successful franchise systems that have provided financial success for many individuals. However, given the large number of failures in this growing sector, I think it is fair to say that there are good franchise opportunities as well as those which have been developed simply to attract the hard-earned after-tax dollars of unsuspecting individuals.

In a perfect world, the need for legislation would not be an issue. Experience demonstrates that it is because of the self-serving franchise systems that inequities exist, and therefore some mechanism must be sought to level the playing field to ensure fair dealing.

I will attempt to be brief in my comments because the committee has previously had the benefit of several expert witnesses regarding the goals and objectives of the Franchise Sector Working Team.

The Franchise Sector Working Team, as you are aware, consists of representatives from the Canadian Franchise Association, franchisees from a variety of Ontario franchise operations and Ministry of Consumer and Commercial Relations staff. Additionally, experts representing the views of franchisors and franchisees are present to provide professional perspectives on franchising.

The Franchise Sector Working Team was formed in late 1994 to work together in order to establish a framework by which the franchise sector could address mutual interests as well as to determine the need for legislation. From the outset, it was evident that franchisor representatives wished to have less regulation and disclosure, while franchisee representatives preferred more disclosure together with a method for dispute resolution. Several important areas of concern were discussed at length, at times generating heated dialogue as to what should be included in legislation and regulation. Some pertinent issues discussed were: self-regulation; good-faith standards, or fair dealing; power imbalance; alternate dispute resolution; code of ethics or conduct; disclosure and misrepresentation; territory or market exclusivity; and arbitrary termination of the franchise.

Prior to speaking to specific issues of concern, I would like to state for the record that I am in agreement with several minor amendments being advanced to the committee by MCCR staff, which are: to permit electronic disclosure; to expand the right of action to agents or brokers; that upon granting an additional franchise to an existing franchisee, disclosure would be required only if there had been a material change; that franchisees pre-existing before legislation would be subject to a disclosure document upon renewal or immediately in the case of a material change, as suggested above; and within the definition of "payment" include the terms "direct" or "indirect" payment. That alludes to what John was saying with regard to franchise fees that are built into the operational and purchasing of goods and products.

In the interests of brevity, I will confine the remainder of my comments to two specific areas of the proposed legislation put forward by the ministry that fall short of my expectations.

Fair dealing: Although the fundamentals of the proposed legislation were reached by consensus, the "fair dealing" clause, as proposed, will not achieve the result sought by franchisee representatives. Franchisee representatives proposed that a code of ethics or conduct be developed to define the terms under which a franchise would operate. However, agreement could not be reached with regard to enforceability. It was agreed that a "fair dealing" clause would be necessary to ensure that the imbalance of power inevitably present in this business format was addressed with regard to dispute resolution. In the absence of a mechanism for statutory remedy, a code of ethics or good faith standard is virtually meaningless.

Alternate dispute resolution: Again, in the absence of a suitable dispute resolution mechanism, fair dealing must have a definition and state the remedy available to the franchisee. Stating the terms of fair dealing, if in fact franchisors intend to participate in an active, expanding market in the long term, would not disadvantage any legitimate franchisor. Considerable discussion ensued with regard to the appointment of an ombudsman to assess the validity of a dispute between a franchisee and a franchisor. It was felt that a third party review by someone familiar with franchise sector issues could resolve disputes, avoiding costly litigation. The imbalance of power between franchisees and franchisors renders litigation irrelevant due to cost.

In conclusion, there are, of course, many additional areas of concern that in my view should be strengthened in the proposed legislation. As an example, the issue of balance of power with regard to additional franchisees in a particular market is not addressed. However, I feel it is important to move forward with at least a basic framework that provides some elements of fairness. I believe that if fair dealing and commercial reasonableness were defined, with substantial consequences in the case of a breach, this legislation would be a good first step. However, if this is not addressed as a minimum, in my opinion the Franchise Sector Working Team has achieved very little.

Thank you for your time and attention. If you have any questions, I'm here.

The Vice-Chair: Thank you, Mr Krupp. I'd like to start out with the Liberal caucus.

Mrs Claudette Boyer (Ottawa-Vanier): Thank you for your presentation. It was quite useful; good comments, good recommendations. Along the way, you said you were in agreement with several minor amendments that were advanced. I would like you to elaborate on where you say "within the definition of payment, include the terms `direct' or `indirect' payment."

Mr Krupp: I think where the ministry is coming from on that one is that with my franchise, as an example, there was no fee per se. The fee was involved in the purchase of goods, in advertising and other charges that were attributed to the franchisee but not called a franchise fee per se. Lots of franchise fees today, certainly in fast food and others, have a fee that you pay up front and then maybe an ongoing one year after year. I think the ministry felt that if it was missed, then that would be construed to mean that if you didn't pay an upfront fee, there was in fact no franchise fee. So "indirect" would, I think, clarify that there are franchise fees included in the cost of goods or other charges.

Mr Tony Martin: I want to thank you for coming forward and sharing with us your thoughts, and I also want to thank you for your honest assessment of the bill as it now exists. We're trying really hard here to get a handle on the truth in this issue and at times it's difficult because there are competing interests in this, as you know. You expressed and shared with us very clearly your experience of the working team, where there were lots of areas of discussion and disagreement.

You list in your presentation the points that were discussed. There are about eight, and there were actually only two out of that eight that you really got to in the bill. One was the good faith standards and fair dealing and the other was the disclosure and misrepresentation. You then go on in your presentation to actually say that even those really don't work.

Well, the disclosure will work for new people coming in, but for those already in, there's nothing in there for them. And the stories we've heard over the last three days were primarily about them, some very well-meaning and hard-working individuals, entrepreneurs and small businesses, in my own community and across the province, who are under duress at the moment because there is no place they can go. In fact, the amendments that have been proposed by the working team don't deal with this either. They're technical in nature and they capture the dealers and the brokers, but they don't deal with this.


I guess my question for you is this. You're saying in your conclusion that in fact the team has really achieved very little. I'm not going to put words in your mouth, but I would go a little further to suggest that if we move forward with Bill 33 and do nothing to it, we are giving out a false sense of security to an industrial sector that may think: "I'm protected. There's legislation, there's regulation." And some of those people who are anxious to get into the business, who do the due diligence now and bring in lawyers and accountants to check it out, may be lulled into a sense of not having to worry about that so much any more if we adopt Bill 33.

You've suggested a further defining of "fair dealing" and I agree with you there. What in your view would be some of the specifics of that that we could do? I guess two questions: One, do you agree with me that that's a possibility, that we could lull people into a false sense of security?

Mr Krupp: Yes, I'd be glad to elaborate on that.

What has happened in our discussions-and the reason I didn't want to bring up all these issues that we've talked about is that they were discussed ad nauseam and in a lot of cases just couldn't go any further-it would seem that the bill needed to get a start. We needed to start somewhere. There are too many dichotomies of interest. In the efforts of getting something put forward, we've agreed to disagree on some of these issues, so the bill went forward.

What concerns me is exactly what you said, that it looks like there's something, but "fair dealing" being stated in a clause just as two words without definition and without clarity on what it is and what it means, I can't take that anywhere. If I'm treated unfairly, in my view, unless there's some description of what that means, it's pretty hard to take that to litigation or even to a third party mediator if it's not defined. It's in the eye of the beholder. So I think there needs to be some description around that term if there's going to be commercial reasonableness practised in a franchise situation.

With regard to disclosure, I didn't address that issue, because I thought that we came a long way with disclosure. There are several areas now that will be required. I think Mr O'Toole made a good point though, that disclosure without somebody having advice is a little bit redundant because, again, as John said, the heart rather than the head sometimes makes these decisions.

I wish my cousin had had more disclosure at his disposal. When I was advising him not to go into the franchise he went into-of course, he'd already decided he was going to go in-when I asked him what I thought were important questions that he should know with regard to pro forma, where the numbers came from and how they were going to back that up, if at all, he said, "Oh, well, he said it would be this and it would be that." I'd ask him another question and he said, "Oh, he said...," and then tomorrow, "What does he say?" It wasn't documented, so it wasn't something I could use as ammunition.

I think disclosure is one piece of it. Then that allows a person to go for financial and/or legal advice. The difficulty with that is that the individual who wants to get into business is usually already hooked, already sold on the notion, so it's probably way more important that there is some way to make sure that there's fairness throughout the contract. Not after the signing; the signing is one thing. You can ask all the questions you want and you can get all the disclosure. But once you're in business, it's: "How are you going to react? How is the franchise going to do?" And there are lots of really good ones out there, so I don't meant to beat up the system.

The Vice-Chair: Mr O'Toole has a question.

Mr O'Toole: I appreciate your input this morning. Just a couple of things we may want to get to: You mentioned in a subtle way that you had a brother or a relation who didn't take your advice and went with their heart instead of their mind. Do you think-very briefly, because I have a couple of real questions-that that is substantively the way a lot of the decisions are made by new franchisees?

Mr Krupp: Yes.

Mr O'Toole: I think it is important to really rigidly require certain due diligence provisions-do you know what I mean?-a cooling-off period, whatever. Otherwise, they're just going to say, "Where's the store, where's the key?" I sense it because of some personal experience as well.

I want to respond to a couple of things. You were in the grocery business. We heard repeatedly that the supply issue was a substantive problem in the grocery business, in the disclosure saying, "Thou shalt buy `everything' from me." It becomes a really serious problem even if it's in disclosure.

Mr Krupp: That's right.

Mr O'Toole: I'm not sure if you have any suggestions there, but it does come back to fair dealing as well. I'm kind of rolling all of this in. It's our understanding that the fair dealing provision is being referenced to the Alberta model, which really hasn't played itself out in the courts just yet. I think there's some sympathy with the "commercial reasonableness" definition, in my mind anyway. I can't speak on anything more, after listening for a number of days.

You've got the fair dealing and the commercial reasonableness, you've got disclosure and association. Now when you look at where you were-and no perfect world-do you think we've moved tremendously forward from the dilemma we found ourselves in in the early 1990s, when the then government had the ability to make decisions and found a way of avoiding it by finding some kind of working group to deal with the Loeb situation in Ottawa, which is the same business, and did nothing? Do you understand what I'm saying?

Mr Krupp: Yes.

Mr O'Toole: It's difficult to find that balance and move forward. Really, the question is, do you feel there's enough strength, with a few minor amendments, to really make this a win-win for both sectors?

Mr Krupp: If "fair dealing" and "commercial reasonableness" are defined and there are significant consequences if they're found to contravene those rules, then it gives an opportunity, once you're in the deal-with respect to disclosure again, that's fine, and I counselled this fellow quite strongly. I'm pretty aware of business, and I gave him as good a shot as I could. I've taken my spouse often to a lawyer because I'm doing a business deal, and she gets outside advice. He tells her not to sign it, and then of course we sign it. That can sometimes be a false sense of assistance too.

With regard to the grocery industry, the compression is a problem. In my days, the franchise was not that restrictive. But they're tightening the screws, and you're going to hear more stories about it. They are really tightening down. To buy all your product all the time from one supplier is not commercially reasonable in a lot of instances, because they're not that good at what they say they do. Having said that, there are other people with real examples of that.

The Vice-Chair: Thank you so much for your time, Mr Krupp. It has been a pleasure.

Mr Tony Martin: On a point of order, Chair: There is some material you might have some interest in reading that talks a bit about this business of what agreements say and what they don't say and what in fact they really mean. The article I'm referring to is called Avoiding the Traps: Boilerplate That Fights the Ten Most Dangerous Contract Terms. I'll give you a copy of the summary our researcher has done so that you can take a look at it and in further discussions you have with the working team perhaps you can bring it up.

Mr Krupp: The notion is to use that as a guideline for improving?

Mr Tony Martin: Yes.



The Vice-Chair: Is Sue Ricketts here? Good morning, Ms Ricketts. You can start whenever you wish. You have 20 minutes.

Ms Sue Ricketts: Thank you very much for giving me a chance to speak my opinions. I can't speak for any organization; I can only tell you what happened in my particular case.

I was brought up with the belief that Canada was the land of milk and honey, the golden place. My father chose to come here as an orphan and brought his two sisters with him because of his belief that this was a good place to be and well governed and well controlled and safe.

Until June 1998, I always held that thought in the back of my mind. That's where I come from. I never wanted to leave here. I never had any reason to question. I believed that when things go wrong, as they do at times, this country has laws and courts and mediation systems where wronged parties could present their side and an agreement could be found. I'm not talking about theft, murder, robbery or anything like that; I mean business dealings between two people, two companies, two entities. That's definitely not true regarding franchising. The contract is one way, and no changes are allowed or you're just not a franchisee.

When I look back on it, I can't believe I fell for the scheme. It went like this: "We have a wonderful idea. You put up lots of money, you provision a store, you pay us a fee to use our name, and we'll co-sign all the borrowing you have to do and make a deal with your landlord by co-signing your lease. In exchange, we'll be the sole provider of your inventory, your procedures, your prices and conditions of operation. We'll also mandate when you must do store refurbishing, which contractors you can use, and all the conditions of operation must meet our standards. We'll give you time to try to find out about us, but we won't let you change any of our conditions. We'll tell you what the average franchise should earn. Of course, the statements we give you contain no debt and thus give a wrong picture of the true operating profits."

What all that really means is that they control everything, and when they want to get rid of you, they can and will, without prior notice. They'll take everything and make sure that you can't afford to take them to court. They'll have discouraged and not permitted their franchisees to belong to any group which might insist on mediation or arbitration or some other form of handling disputes. The laws of Ontario let them take away your source of earning without any recompense for past work, for efforts in building them a business, and of course there is no formula for even a partial return of your investment. Thanks for the set-up, franchisor, and thanks for your protection.

Shortly after I lost my franchise, I wrote a statement which speaks to my feelings at that time, and you're welcome to read it. Without any prior notice, my franchise was taken over. In seven and a half hours, I went from owning two locations, with 16 employees, to having nothing except my home, which had been pledged to the bank as security to obtain operating credit. Nice feeling.

Shortly after writing that statement, I received a settlement agreement through my lawyer from the franchisor's lawyer. To a non-lawyer it's pretty intimidating and frightening, and that is its main purpose and intent. I am aware that other franchisees in my situation have received this and signed it, and then of course they can't speak out.

Following a page of legalese, clause 1 says that I agree never to take them to court. Clause 2 says that if they can find fraud, wilful misconduct or misrepresentation by me, or my husband, who was never involved in the business, they can do whatever they want to, and they want me to agree that I'll pay them $10,000 for every instance they can find of my damaging them or their franchise in any way. Clause 3 says that we, and all our descendants, give up any right to seek redress. Clause 4 says that they admit no liabilities or obligations and we agree with them. Clause 5 says that we will not speak about the terms of this agreement to anyone unless the law requires us to. Clause 6 says that we agree not to talk to anyone connected with them or any potential franchisees in any way that might be construed as negative. Clause 7 says that we all agree not to hinder them in realizing as much from their actions as they can. Clause 8 says that even though they have thrown me out without a thing, the franchise agreement is still in force. So they still have control over me. Clause 9 indicates that the laws of Quebec prevail and that if I want to fight I must go to court there, although my business was not in Quebec, it was always in Ontario.

Needless to say, I didn't sign the agreement that they sent. So we sit, almost two years later, and I have never heard from them since. I never received a penny. I'm now being harassed by a couple of collection agencies over bills which they didn't pay and retail sales tax is holding $18,000 which they won't release because they can't find out which of their departments cashed my PST cheque in February 1997. There's also a fax that I sent to my local member of Parliament making some recommendations. Even though it's too late for me, it's my aim and my sole intention to prevent this from happening to anyone else.

I've read that since 1993 there have been 170-some articles printed regarding failed franchises. These articles mention 4,600 people directly losing their businesses and their investments. That's a huge number of families being devastated. I'm sure they all had employees who were immediately affected by the business closure or upheaval. You have it in your power to stop this from happening again. Please make sure that you speak for those who need you to do so. Thank you for your time.

Mr Tony Martin: I want to thank you for coming forward and telling your story. I know that it takes a lot of courage and effort to come and do this. This is exactly what we were hoping would happen as we crossed the province these last few days to hear from people who have had an experience in franchising that in some instances was positive, in many instances was not, so that we could get a handle on just exactly what the situation was and how it was that people were suffering and what things came into play or did not come into play that resulted in this situation as it now exists.

You paint a very worrying picture here with the description of the document that you received and the various things in it, which really speak to what's in it for them and nothing-actually, what's in it for them that they will get from you, more than anything.

I guess there are two questions. Are you aware of others who have experienced the same circumstance? What would you recommend by way of changes to this bill that would have been helpful to you or might even be helpful to you as you continue to struggle with trying to get justice?

Ms Ricketts: My problem with justice is that I can't afford it. They took all my money; they took everything. How do I go to court? I was told by my lawyer that because of the size of the franchisor, they would just put in an appeal no matter what happened, and I haven't got a war chest to fight them. I believe that it's very important that it be mandated by law that there is some form of dispute mechanism which all parties can afford. It doesn't matter who's right, whether it's the franchisor or the franchisee, you should still have the right to mediation. The courts are not really affordable, and they want payment beforehand; they don't want payment when you win. It doesn't work that way.

Just something you might want to know: My businesses weren't exactly that small. I had sales of $2.6 million a year. However, you'll see my profits were minuscule. They were controlled by the franchisor directly. If there is national advertising that says the price is this much, I'm not going to find a customer who is going to pay me any more. That's part of the problem.

There were a number of systems in place that made sure that your profits were in the hands of your franchisor. We had a credit note system. We had to take all product that was on sale, and the deal was that we kept it for 90 days and if we didn't sell it we could return it. That means I get to pay the freight two ways, in effect. But because of the system, we had to pay for product in 30 days. So I've already paid for it. Then they issue a credit note maybe two months after I've returned the product, which is only good against buying more inventory. It doesn't pay my staff, doesn't pay my landlord, doesn't help me keep the business going, and so I have to go to the bank to get interim financing. That's the way this franchise works.

How do you get out of it? You don't. You keep struggling and working and trying your best to make a profit.


Mr Tony Martin: You mentioned the question of a dispute resolution mechanism, and I couldn't agree with you more that there needs to be something put in place. What has been suggested over the last three days by some folks is that the new provision in law that cases go to mediation before they actually go to court might do the trick. But what we were told yesterday morning by Professor Gillian Hadfield is that that may, on the surface, look like a good thing and that it may work, but in fact before you get to that mediation process you actually have to have already developed a case and have had legal advice, and you're into the adversarial legal system already.

What I think you're suggesting, and what I certainly am suggesting-maybe you can comment on this-is a system where there is a third party arbitrator and where, before you get into those very detailed and complicated and expensive legal wranglings, maybe something could be done.

Ms Ricketts: Absolutely. I believe that's the most important part of it. It's my understanding that car dealerships, for one, have that type of agreement. They pay a regular fee, both franchisor and franchisee, to provide funds for a mediation service, if needed. You know that you have the ability to at least argue your case yourself with your franchisor and have it fairly looked at.

I just feel very frustrated because I have no option. I'm just going to have to learn to get over it and get on with life. However, I don't think that's a reasonable way of dealing. I don't think it's fair to say to people: "You've done your due diligence, you've got your job, you've built a business, you've worked very hard, but they can take it away. It's OK." If I were an employee, I would at least get a week's wages for every year that I spent. If you're a franchisee, it's: "Thanks for the business. Bye."

Mr O'Toole: Thank you very much, Ms Ricketts, for a very personal story. Your victim's statement really is a lot more an emotional plea to level the playing field, and I certainly can assure you that I have heard that and it's important.

I look at you, and I've heard a number of stories that were similar, and to put a real face on it is extremely important, outside of this whole legal babble that's in some of this legislation, or any legislation, I suppose. But I want to broaden it out a bit. It's not just this community here, arguably not even just this province.

Ms Ricketts: Certainly not.

Mr O'Toole: The only other province that has any legislation is Alberta.

Ms Ricketts: And even that is not much help; it's 60 days. You don't really know an organization in 60 days of dealing with them.

Mr O'Toole: I guess I'm trying to make a point here, and I don't want it to sound anything more than an incredible lack of leadership federally. Because the very definition of "franchisor and franchisee" under the Competition Act could be described, I'm sure, as an abusive-dominant position. The person with all the gold has all the rules. The golden rule?

There's no question in my view that it's-buyer beware, extremely aware. If nothing else comes out of these hearings, it's certainly important to take a sober second thought, exercise due diligence. You can tell people that until you fall down on the road, but when it's clear legally that you couldn't possibly take on the giant, whoever that is-

Ms Ricketts: Yes.

Mr O'Toole: -not that they're bad but to have your day in court, as you've described it.

I call on the Competition Act to renew the reviewable trade practices under the Competition Act. I think that's critical. Any province trying to, helter-skelter, do this commercial thing isn't really helping the people of Canada. Ontario, certainly by this act, is doing more than nothing and more than the two previous governments, ever since the Grange report has moved forward significantly. Is it perfect? No. But I think if you look at the three fundamental purposes-and this isn't a lecture; it's more or less bringing you up to date on where we are, through what you've lived through and lost, a lot of your life.

Disclosure: I'm sure if we can make that stronger, we will listen to you and others to make it stronger. The whole attitude of fair dealing and commercial reasonableness may even find its way in there and this right to associate, thereby educate your peers. Do you not agree that those are substantively important moves that may help? That's why you're here this morning.

Ms Ricketts: That's why I'm here. When I signed my agreement in 1989, the franchisor assured me and showed me that their franchise agreement met every one of Alberta's rules, was the best legislation in this country. Needless to say, it didn't go too far.

Mr Tony Martin: On a point of order, Mr Chair: Is the parliamentary assistant tabling some amendments here on further strengthening the disclosure piece and also suggesting that maybe we would consider adding commercial reasonableness to the fair dealings?

The Vice-Chair: I don't think he has tabled anything at this point.

Mr Tony Martin: OK. I just thought maybe he was.

The Vice-Chair: We've only got a couple of minutes. I'd like to make sure that the Liberal caucus has a chance to comment on this. Mr Crozier.

Mr Crozier: That's kind of you, Vice-Chair. Would you consider your problem, Ms Ricketts, one of competition or one of simply dealing with an unfair franchisor?

Ms Ricketts: Part of it is competition in that the industry that I was in tends to have an average net sale value of between 13% and 18%, very small.

Mr Crozier: So the franchise you had was in competition with other businesses or other franchises of a similar nature?

Ms Ricketts: Absolutely.

Mr Crozier: Do you mind telling us what the business was?

Ms Ricketts: Computers, hardware and software.

Mr Crozier: Ah, OK.

Ms Ricketts: But what really put a strain on relations was that after eight years of operating, my lease had to be renewed with the mall. The mall insisted that I move my location to a space which was double the size that I had, and the franchisor made all the arrangements. Then after everything was put in place and signed, I went to the bank and the franchisor had forgotten to tell me that small business development loans don't apply to the second store.

Mr Crozier: Conveniently forgotten to tell you.

Ms Ricketts: Yes. Scramble, you know, panic. This after having very minuscule returns. You'll find them there.

Mr Crozier: Is the franchisor you dealt with a solely Canadian corporation?

Ms Ricketts: Absolutely.

The Vice-Chair: Ms Ricketts, thank you very much for taking the time this morning. We appreciate hearing of your personal experience. Thanks again.

Ms Ricketts: Thank you for the chance.



The Vice-Chair: I'd like Diane Meeuse to come forward. How are you this morning?

Ms Diane Meeuse: Fine, thank you.

The Vice-Chair: You have around 20 minutes, Ms Meeuse. We can ask some questions in that period of time.

Ms Meeuse: First of all, I'd like to thank you all for giving me the opportunity to provide you with this letter which outlines my concerns regarding your investigation into formulating badly needed franchise legislation. Would you like a minute to read this outline? Like it says, I had a franchise for 10 years, and when the lease expired, all I got was a handshake, and that was it, even though they gave me a bad location and they admitted it. They said, "We're all in this together, so thank you very much."

I think we should have something to protect us. I was sort of a beggar for punishment. I didn't just buy one; I bought three. I only listed one here, but I bought two more, because at the beginning it looked like it was a good deal and sales were creeping up. I thought: "I'll give it five years. It should come up." Then they said they were bad locations. The one I mention here had a 10-year lease; the other ones had six. One was in Ottawa, and the other one was here in London.

Mr Crozier: Just one second. Chair, is there something written from the deputant? We don't have a copy.

Ms Meeuse: Sorry, I gave out at least 25 or 30 copies.

The Vice-Chair: Has everyone got a copy now? OK. Go ahead, Ms Meeuse.

Ms Meeuse: I also bought my franchise in 1989. It seems like it was a popular year for franchising. I asked them verbally when it expired. I knew it had a 10-year expiration date. They said: "Don't worry. Even if you die, it's going to go to your kids. You can't lose with us. You're a family member."

For the first couple of years, they seemed like normal, nice people to do business with. I was winning awards for getting the sales up and I was a wonderful person. But near the end they said: "We're not renewing the lease with this mall. It's nice knowing you. You are getting a little bit older; maybe you should retire. You have grandkids." I said: "I'm not ready to retire. Isn't there any way you guys can help me? Give me another location or something?" They said: "No, you need another-now the fee is not $210,000, it's $300,000. If you have this, maybe, but maybe you should look after the grandkids. Thank you very much." That was it. I lost a lot of money.

The Vice-Chair: Three stores, did you say?

Ms Meeuse: I had one here in London that had a 10-year lease. Then I bought another one that had a six-year lease. A total of three, yes. One in Ottawa.

The Vice-Chair: In Ottawa, London and where?

Ms Meeuse: One in Ottawa and two in London. So you're looking at a big investment and nothing to show for it at the end of 10 years of hard work. They said one was a bad location. The second one, they said: "The mall is being emptied now. A lot of stores are pulling out." Actually, it's the one across here, the Galleria. I had my daughter running the one in Ottawa because she lives in Ottawa. She said, "Aren't you going to renew?" They said, "You might have another baby and you won't have enough time to look after the store, so perhaps you should just stay home with your baby," basically. So we lost that investment too. They bought her store for just the equipment, used equipment. What is it worth? Practically nothing. They sold it to another franchisee who was new, because they could bully him and tell him what to do and he would do whatever. They like that. They like new people.

In the location I had, the rent was 40% of sales. In any business you can't make money if the rent is that high. I said to them, "Perhaps you should talk to the landlord and get the rent reduced." They said, "Oh, we can't do that." But that's OK. I understand that. Business is business. You sign up for a certain amount of rent, and the landlord expects that. When a mall is being vacated and there are a lot of empty stores, a lot of times the landlord will reduce the rent for you. But they weren't one bit interested, because I was paying the rent and they weren't. They only do things to help themselves, but when it comes to helping the franchisees, they're not too generous.

I don't know; I don't really have a solution for the way they treat franchisees, but I'm not the only one who was treated like that by this company. More than 50% of the franchisees are not happy. But no one wants to say anything, because the minute you voice your opinion, you're treated awful, and they don't want that. I told them that since I'm out, I'm going to come out and say the way we are treated.

The Vice-Chair: We appreciate that. We probably have some questions here for you. Is that OK?

Ms Meeuse: Sure.

Mr O'Toole: Again, Ms Meeuse, I appreciate the story, the real dilemma of the individual franchisee. It's important to make sure there is a framework of fairness. That's ultimately what you're aiming for. Would you say, though, that you were-and I'm not trying to say that you weren't-adequately prepared or advised to make that investment decision, or were you anxious to get into the business?

Ms Meeuse: No, I wasn't really anxious to get into it. But they promised me a pretty good return on my investment and they said: "We'll help you in any way. You don't have to worry about it. All our stores make money." After I was in it, I talked to a lot of franchisees when we were at meetings and found out that hardly anyone made money.

Mr O'Toole: That wouldn't be fair dealing, perhaps.

Ms Meeuse: No.

Mr O'Toole: Did you actually have the $210,000, or did you have to borrow it?

Ms Meeuse: I had the $210,000, but I borrowed the rest from my father-in-law.

Mr O'Toole: I'm not sure if you're familiar with the three provisions that currently exist in this proposed legislation. One is disclosure, which says, "This is the business plan; these are the rules." Then there's the whole issue of fair dealing, which I suspect some judge would say means what it says, for both parties. Then there's the right to associate. In that, you could check the Web site-electronic disclosure-and you could do a lot of individual and collective research in asking other people, "How are you making out?"

Ms Meeuse: Yes. I asked them.

Mr O'Toole: What did they say?

Ms Meeuse: Before I got I into the system, they were so afraid to say anything against the system that they all said, "We're doing just fine." But now that I think about it, they didn't actually say: "Yes, we're making money. We're very happy." They just said, "We're doing good."

Mr O'Toole: "Come join us."

Ms Meeuse: "We have fun with the customers." They just changed it.

Mr O'Toole: They changed the subject.

Ms Meeuse: Yes.

Mr O'Toole: Thank you for putting a real face on this.

Mr Crozier: Did you actually have a franchise agreement that was signed?

Ms Meeuse: Yes.

Mr Crozier: So when Second Cup came along and suggested that your daughter go home and raise children and that they would cease the franchise, did you have advice that they were able to do this so flippantly, to simply tell you to go home?

Ms Meeuse: I didn't think they could do that. But when we asked the lawyer about suing them, he said: "You don't want to go up against a big company like that. They have a lot of money to fight it." We lost a lot of money. We don't have a lot of money to back us up right now.


Mr Crozier: But your advice was that what wasn't in the agreement would allow this company to simply get away with that?

Ms Meeuse: It does say that they don't really have to renew after the time is up.

Mr Crozier: OK, so it was at renewal time that this issue came up.

Ms Meeuse: Yes. But verbally they don't say that. They say that even if you die, your family gets it. They tell you that verbally: "Your money is as sound as anything with us. Just come on board and you'll make money." They give you financial projections that show how much money you are going to make. Even in the worst-case scenario it makes money.

Mr Crozier: You spoke about the location, that their reason was the location was no good. Who chose the location at the outset?

Ms Meeuse: They do.

Mr Crozier: They do. So they come along after they have chosen a location and tell you that your location isn't any good, so for that reason they are simply going to take the franchise away and don't offer you an alternative.

Ms Meeuse: Yes.

Mr Crozier: That's unfortunate. This is one of those times when we are all trying to work towards a solution to prevent the kind of experience you have had from happening to others. Are you totally out of the business with Second Cup?

Ms Meeuse: Yes.

Mrs Boyer: Thank you. Just a comment. You talk about input, that you hope the input you bring to us will guide us in drafting good legislation. My colleague Mr O'Toole talked about disclosure, fair dealing and the right to associate. Do you have anything else that you would like to bring as a recommendation to this bill, or do the three main points in the legislation satisfy you and we can work on them?

Ms Meeuse: Basically, they want the franchisee to take the responsibility. But since they claim we are in this together, like a family, shouldn't they have some of the responsibility? They chose the wrong location and they got my money, so aren't we in this together? Shouldn't they give me another location?

Mr Tony Martin: Thank you very much. I recognize the nervousness-

Ms Meeuse: No, I'm not nervous.

Mr Tony Martin: I could understand it completely if you were.

Ms Meeuse: I got over it.

Mr Tony Martin: Good.

The Vice-Chair: You can really open up now.

Mr Tony Martin: Your story presents to me like a case of legalized extortion.

Ms Meeuse: Yes.

Mr Tony Martin: They see you with $210,000 and they want to get it out of you, so they will tell you anything you want to hear. Then as soon as you sign the agreement and get into the business, it's game over, end of story. Were you here for the presenter before?

Ms Meeuse: No.

Mr Tony Martin: She ended up in a bad situation too. She thought she was part of the family. As a matter of fact, she probably thought she was one of the favoured ones. You probably did too.

Ms Meeuse: So did I. I won a lot of awards.

Mr Tony Martin: Yes. You were the favoured one. Then when they decide that they've got as much out of you as they possibly can and they perhaps see another victim, they sort of leave you aside and then they send you a document.

Just let me read you a couple of the clauses in Ms Rickett's statement from the firm. Clause 1 says that she agrees never to take them to court. That is giving up fundamental rights. Can you imagine receiving a document from somebody that says, "I agree never to take you to court"?

Another one says that she and all her descendants give up any right to seek redress against them. How could you ask somebody to sign something like that?

Ms Meeuse: I wouldn't sign that.

Mr Tony Martin: It's unbelievable. It's legalized extortion.

Ms Meeuse: It is.

Mr Tony Martin: And we have here a bill that in my view simply puts a false face on a system that will be no more regulated after we put it in place than it was before. I think that would be doing the industry more of a disservice than just not doing anything. We are suggesting, by way of legislation that I have introduced, Bill 35, that among a lot of other things there should be some dispute resolution mechanism, someplace you could go and present your case, and the franchisor would have to come and present their case, and some third party arbitrator with no vested interest would deem who was right and who was wrong; if they want you out, at least recognize some of the investment that you made and the contribution that you made.

Ms Meeuse: If I were a bad franchisee, why would they sell me three stores? They weren't all sold at once. The second one was four years later, and the other one was five years later. Why would you give three stores to this lousy franchisee? It doesn't make sense.

Mr Tony Martin: I have a document here that I shared with a gentleman earlier that talks about some of the agreements that people sign. It says here:

"Franchisees should not assume that what is said by the franchisor during negotiations"-during the courting period for a franchisee-"will be reflected in the franchise agreement. Almost all franchise agreements include an integration and/or no representations clause. These clauses, ie, the `I didn't say that' and the `this is it' clause, appear to be routine but actually relieve the franchisor of any obligation to fulfil agreements made during the negotiations or to even acknowledge that any agreements were made other than those written in the franchise agreement."

This is the industry that we're looking at today. This is the industry that you were caught up in. We read the advertisements to come on and invest your money and this is turn-key and no problem, you don't have to have any experience, we'll teach you and all that kind of thing. At the end of the day, what we end up with, for the most part, are more and more people like yourself who have been victimized.

Ms Meeuse: Yes.

Mr Tony Martin: So thanks for coming today.

Ms Meeuse: There's one more thing I'd like to say. After I bought the second location, later on the mall was kind of getting empty and they said, "We don't think we'll renew this lease with you, because the mall is not very busy, so we don't think it's a good location." But they went and signed with the mall for another four years after I left. One day I said to the leasing gentleman: "Why did you do that? You know it's a bad location. You wouldn't let me run it." He said: "You're from London and you know London. We're going to get somebody out of town to lease that. They won't know any different."

Mr Tony Martin: I rest my case.

Ms Meeuse: I thought, "My gosh, this is worse than extortion, what you're talking about."

The Vice-Chair: Diane, we really appreciate your time this morning and thanks for being so honest and up front with us.



The Vice-Chair: To the committee, there has been a little bit of a problem, and Mr March is going to go on here now instead of Mr Sovereign. They've agreed to trade places. So, Mr March, if you could take 20 minutes, please.

Mr Hal March: I don't have any handouts here. My name is Hal March. I'm part of a national franchise system. I have six locations. My problems are a little bit different than what you've been hearing so far, because I'm an ongoing operation. But I've learned some things the hard way, so I just thought I would give you a few comments about my situation.

One of the things I am concerned about is saying anything that could hurt my business or come back on me, so if we don't need to name my franchise, I'd rather not. We'll just call it March Group, which is my incorporated company.

One of the things I've learned very quickly is that if you don't go along then you can end up in some very serious fights with the franchisor, where they can make things very difficult for you or try to force you out of the system. I think you really need to have something in your new legislation that will allow franchisees to get together without any kind of repercussions from the franchisor. I've been involved with this particular system for over six years, and we have experienced some really bad times where it was important for us to get together as franchisees. I've been accused of being an organizer. At one point, they asked me to leave the system, and that was the reason cited: I'm an organizer, trying to get the franchisees together so that we could resolve common problems that we have. Our feeling has been that they want to keep everybody separate, a sort of divide-and-conquer attitude about things, because if you get them together, then you have a stronger voice and it's harder for them to fight a group, but they can certainly fight individuals.

When I was listening earlier about people trying to avoid going to court, that's exactly what I did. When they asked me to leave the system, I avoided going to court because there's no way. I don't have the deep pockets of this major corporation, which at the time was owned by probably one of the largest corporations in the world, at least they'd rank in the top 50. How can you fight someone like that when you're just a private business individual? I managed to sort out my particular problems. I guess you find ways to get around them and continue.

But I think you should force the franchisors to facilitate a licensee group or a franchisee group so that they can meet on their own without feeling the pressure of the franchisor and try to help solve problems and make presentations together. That's really important. I think they have to be forced to encourage that. It's really hard. A lot of people like myself-what I ended up buying myself was really a job. I invested a bunch of money. I make less money than I made before when I worked for a company, but you learn those things and accept them as you go along. You don't have a lot of money in a lot of cases. A franchise system, I think they control it in such a way that you-they want you to make money, of course they do. They want you to be successful. But if they can control it so that they're always guaranteed to make money and you're just satisfied and can continue, I think that's what they do.

The next point I wanted to make was that I found, when I got into this, they had a 19-page franchise agreement with really fine print. I said: "I want to change this. I don't agree with that, I don't agree with this." They said: "No, if you change anything, then that's it. We just won't accept this. Everybody signs it." So I reviewed it with my lawyer, and he said, "If you want to get into business, you have to have a certain amount of trust, and I guess if everybody else in the entire system signs this, then go ahead." I signed my agreement and then I found out afterwards that in fact is not the case. There are different deals for different people across the country and who knows who, and when the companies changed hands certain special deals were made and that kind of thing.

I think you should obligate the franchisor to disclose those kinds of differences. If they're saying there's a standard contract, then tell everybody what is not standard in the system, that company A has a special deal because of this and company B has another special deal because of this and you are lumped in with everybody else and you pay on a different basis because of these reasons. I think that should be disclosed. It really hurts you if there are no negotiations and you're told that's the way it is. You have to have some confidence in the company that you're dealing with, that they're telling you the truth and that things are in fact fair and equal across everybody. But when someone else has an advantage, then it destroys the whole system.

The other thing, and I think it was mentioned again this morning too, is that there should be some way to resolve conflicts. We've tried in our franchisee organization to get them to help solve conflicts. I guess one of the biggest conflicts we had was when they asked me to leave the system. I called all the franchisees I knew who had any kind of influence with the company and said, "Here's what they've said." We more or less got a petition together, saying: "Are you nuts? Here's a guy you said has been your top franchise for the last five of six years, and you want him to leave the system? What's that about?" It had to do with the organizing, that's why. It was only because of getting that petition together that they felt, "OK, we've got the rest of the franchisee body here behind this guy; let's make this problem go away." So I came back in the system and we solved our problems.

But there is nothing in place today to resolve any conflicts. Any time there is a conflict, they separate you and treat you as a one-on-one situation, and then when you start talking to other franchisees you find that your problems are common. I mean, you're running a similar system. It's a franchise system, and they're supposed to be the same. But there's nothing there to resolve those conflicts. So I think that's really, really important, and it has to be controlled by some outside party so that there's no undue influence by the franchisor.

The last point I want to make is about contracts. Mine wasn't quite as bad as the previous one, which said you couldn't take them to court. But mine basically says that all conflicts etc and/or interpretations are left up to the franchisor. So if there's an interpretation to be made on our contract, their decision is final. By the way, they can change the contract at any time, and you have to agree to it and live with it. So it's basically a contract that says, "We'll tell you what to do, and if you don't like it, tough." I think that's a very unfair kind of contract, because you don't know what's going to happen in the future.

I think the franchise agreement should have a lot more give and take, so that it's not one-sided and is there to protect the franchisor and the franchisee. A one-sided agreement doesn't work very well. You don't find out how well these things work or not until you have a conflict or that kind of thing.

One example I would like to cite about this area where things may not be fair is that I pay 8% of my gross revenue back to them just to have this name in place. They say that part of that money is for administration, which I understand-they have to provide for overhead-and part of it is for advertising. That's fine. Let's just say there is this lump of money that is supposed to be spent for advertising, so that you get the benefit of that back in your marketplace.

Well, in our system, many of the locations are still owned by the corporation. It's their choice. They've decided to run them and that's the way they want to run this. It tends to be the very large cities that they want to own. They take all the advertising money and spend it all in their cities. Back in the cities where I run my locations, we don't get anything. I have questioned them about it, and so have other franchisees, and they say: "Well, we do spend the money. In fact, we spend more money than we have." When it comes time to question, "What goes into that advertising fund?" they won't give us the details.

We've had some meetings when we've had questions periods. We questioned our president about where the money comes from and where it goes. We have found out that they end up paying salaries to their own sales reps for their specific areas, those kinds of things, out of our advertising fund. If something is set up and the intent is for it to be used for advertising, then the money should be dealt out in such a way that it's fair for everybody. I think there needs to be something in there to make sure the franchisees are protected in those instances as well. Maybe you can settle it through conflict resolution or through making sure that certain clauses and phrases are in the franchise agreement. But it's just frustrating when you have to try to fight a corporate giant to get back money you have already paid them.

That is pretty much what I had to say this morning. I'm sorry I don't have any formal handout or anything.

The Vice-Chair: That's fine, Mr March. Do people from the Liberal caucus have any questions for Mr March?

Mr Crozier: Yes. Thanks for coming, in spite of the fact that you're concerned that someone, or your franchisor, would know you are here. I think the mere fact that you are reluctant to name your franchise goes a long way in speaking to why we need this kind of legislation. Some would believe that in this country you should never be afraid to come forward. Thanks very much for doing so.

In view of that, the one part of the bill that you mentioned that's interesting to me is the right of association. Again, I think any reasonable person would think you should never have any doubt about the right of association in this country. It's a little scary that you have to bring that forward. Again, it speaks to the need for this kind of legislation and, in my view, the need to make the legislation binding on the franchisor or, more important to the franchisee, because it brings the franchisor to the table, because in many instances they are large corporations. I appreciate the fact that you would take these steps under those circumstances.

I think you also mentioned conflict resolution. That would appear to be important to a franchisee, because oftentimes, in fact in many instances, you are small, independent business people. I have some understanding about what you're saying. Although I wasn't involved in a purely franchise operation, I operated a retail business where there was a marketing agreement. It was an independently owned business, but the type of marketing, the advertising and the style of the store were under a marketing agreement. So I have some appreciation of what you are saying, and I want to thank you for coming forward, notwithstanding the fact that there was some concern about naming your franchisor.


The Vice-Chair: Thank you, Mr Crozier. Mr Martin.

Mr Tony Martin: I also want to do the same. I know we have had a number of people, very courageous entrepreneurs, come before us over the last two or three days pleading a case and asking for some relief in terms of some circumstance they had already experienced or were in. They weren't looking for undue advantage. They weren't looking for a playing field that was slanted in their favour. They were looking for some fairness, some access to justice and some return on the investment and work they put into a particular operation. I don't think that's a lot to ask.

To a person, franchisees have called for some kind of dispute resolution mechanism. We need to work with that little bit. Exactly what should that look like? There is some concern that we will introduce into the industry something that will be onerous and expensive and take away from a person's or a system's ability to actually do the thing they are good at, which is sell a product or service. We need to find some way of balancing that. I suggest there are ways, if people of good faith sit down around a table and try to come up with something.

Have you given much thought to the details or specifics of a dispute resolution mechanism that you think would work perhaps in your circumstance?

Mr March: It could be made up of the people involved in the process, as long as it has some way for people to vote on the outcome and is balanced. Maybe it's four people, two company representatives and two franchisee representatives, and they vote on issues, or something along those lines. It doesn't have to be terribly complicated or expensive.

Mr Tony Martin: I get the feeling from what you just said too, and this is another important point: the sense of balance and equity of power.

Mr March: There has to be. No one is going to agree to things if it's going to be one-sided. It doesn't make sense. It has to be win-win. If you're with a franchise system, you have to do things that are going to support that system too. Your investment is in that name, not just in your own franchise outlet but also in the entire name. So you want to make sure that whatever works is going to work for everybody and is beneficial. There's no sense in doing things that are going to make the franchisor go bankrupt.

Mr Tony Martin: There's some sense that this new piece that's tagged onto the court system now, which calls for mediation, would be a vehicle, although Professor Hadfield said to us yesterday that that's the first step into the legal system. So before you got to mediation, you would have to have had legal advice, put together a case and the adversarial system would already have begun. I suggest that as much as possible we would want to try to stay away from that and try to come up with solutions that, as you say, benefit both parties.

I also appreciated your comment on the right to associate, which is in this bill. I commend the government for that. I think it's a good move. But, again, how far does it go if the franchisor isn't willing to recognize your right? You can associate as much as you want, but if the franchisor isn't willing to negotiate with you or sit down with you across a table and deal with the association, if they still continue to want to deal with individuals, then what's the point, as in situations like your own? I know there is at least some generic value in the right to associate-to get together, share, come up with some commons solutions and move forward. But it seems to me that we need to be looking at something in the legislation that forces the franchisor to actually recognize the association, otherwise-

Mr March: Yes, I see that point now. And you want to make sure that things are happening. I don't know how you would follow that up. I guess it wouldn't be an easy thing to do. I don't know if you would force them, so that in order to carry on a licence as a franchisor, or something along those lines, they're forced to sit down and have meetings with representatives from the franchise committee and the franchisor and send the minutes on to the government body, or whatever. I don't have an easy answer for that, but I see what you're getting at. It's a bit of a problem.

Mr Bob Wood (London West): Do you have any sense of what return on investment the franchisees in your system might be getting?

Mr March: I've been doing this for six years and this is the first year we've had any significant numbers of people who have been profitable. The return on investment is probably well under one tenth of 1%. Our business is fairly capital-intensive. That has some influence on it. Yes, it's pretty ridiculous.

Mr Wood: Do these people have to put in capital money up front?

Mr March: There are a couple of ways you can do it. Because it's so asset-intensive-you have to pay a franchise fee up front, yes. But that's not the most significant thing. In order to acquire the assets, you can lease the assets that are needed to make this work, but everybody in our system who is leasing assets is still continuing to lose money. They lease the assets from the franchisor. The others that have the financial ability to borrow the money to acquire those assets are probably making less than a tenth of a per cent return on investment.

Mr Wood: What sort of return did you expect when you went into it?

Mr March: That's funny. I got a pro forma made up which showed that I would probably make about a 15% return. I didn't draw a salary for the first 18 months I was in business. After that I've taken a modest salary, only at a mid-manager level, not someone who's invested a lot of money in a business. From that standpoint, it's a little bit frustrating. My business might be unique because of the amount of capital required to run it, but in a lot of cases what you're finding is that people are investing a big chunk of money in franchises and buying themselves jobs, and not high-paying jobs. Most people who are in their own business tend to work long hours. There should be some protection against that kind of thing. I don't know how you deal with that. You have the same problem even with a cab driver. He spends all his money for his licence and his car and that kind of thing, but he's still making a little over minimum wage. I don't know how you get around that. There are other businesses with similar problems.

Mr Wood: I gather the return has fallen well below your business plan's expectations.

Mr March: Yes. We keep thinking it's around the corner, because it has been cyclical. That's the other thing they tell you: The business has been cyclical. They were making those kinds of returns in the 1980s, but it hasn't been here for the 1990s. Hopefully the new millennium will be a bit better for us. I realize I'm leaving you a little bit in the dark here by not telling you my franchise name.

The Vice-Chair: That's perfectly fine.

Mr March, we appreciate your taking the time to come and make a presentation to us today. Sorry about the mix-up in the time that happened.


The Vice-Chair: Our next presenter is Mr Lewis Sovereign.

Mr Lewis Sovereign: Thank you, folks. It's been an interesting morning. I just wanted to comment that my purpose for being here is that I am currently a franchise sales representative for a US company. In reading the article on this committee in the London Free Press, it's something that affects my livelihood so I thought it was my duty to come and make a positive contribution, if I could.

As far as the bill stands right now, the very limited scope that it's in right now, there is some boilerplate disclosure stuff that's very good. I see a bit of an interest here as to whether government should take some action. Maybe Mr Martin has the opinion that if we do, it somehow endorses franchising in general. There could be times when it would be interpreted that way and it could have an effect, so I suspect we do need to be careful as to what we do.


As far as disclosure and association, I believe that good franchisors welcome it. The one I currently work for encourages both. We use a disclosure document currently given to all Canadian prospects 14 days ahead. We encourage an association and in fact provide incentive. The difference is, what we need to look at are some of the fundamentals of the industry, of the buyer and the seller.

I made two recommendations here that were not related to disclosure or association. One of the recommendations was that people starting up in the franchise business be required to post some sort of bond, especially when there are tangibles involved, like equipment and delivery of goods. How this helps is that it can provide some recourse and it puts some of the research into the franchisor. It puts the onus on a person selling them a bond to do business.

Franchisors typically have an evolution in that they start out with a great idea and a concept, and maybe a guy has proven a great idea and like Henry Singer did in the 1800s, says, "Hey, the best way to get this out there quicker and faster is to franchise it."

In the beginning, a franchisor will be primarily capitalized by franchise fees. There is a curve, and sooner or later the return from his royalty or the retail sale of his product and idea starts to exceed his franchise fee. It's during that curve period that a franchisor needs to be scrutinized a little more in a bond process or some sort of-you saw these individuals who are up here who didn't have the ability to do their due diligence in the beginning. I did it myself. I sent US$4,500 across the border for a satellite dish franchise eight years ago, and the next month when I called them, they were out of business. So I know the experience of being stung.

This idea of a probationary period for new franchisors in our marketplace is valid, given the scope and size of the Ontario marketplace to franchise in.

The next recommendation was that a portion of fees allocated to tangible goods be held in trust. If you look at what's happening in the courts-and this is what concerned me-a newspaper article in the London Free Press said that there are 5,000 court cases related to franchising in Ontario. To somebody considering buying a franchise at the time, that might be an astonishing number. The unfair thing about that statement is that it didn't go on to say that there were probably 17,000 cases before the courts involving independent business people on the same types of issues.

I think some of the concern today is more related to the entrepreneurial spirit in North America, the increase in independent business people, and not specifically franchising related. But there certainly are some things that we can do to address and make this particular industry more viable, because the statistics are that the franchise structure in the business community in North America today is a valid structure and actually increases the chance of success of an independent business person. You wouldn't think that, sitting here listening to people this morning.

Disclosure documents and disclosure in general is not the be-all and end-all. I realize we're just starting here. The problem with the disclosure issue is this: This is currently the disclosure document that we give out to people considering a franchise. Franchise buyers are typically in a transitional period in their lives. I give it to people for 14 days. I ask them for a receipt for it. I phone them up and say, "Did you read it and understand it?" The first person who says yes to me, 90% of the time I know right away it's impossible. I've read it five times in three years, and I don't understand it.

So there needs to be some system in place-and I don't believe government involvement. I believe a mistake they make a lot of the time is that they take it to their lawyer or accountant, and perhaps that individual specializes in a specific field, and he's not particularly qualified, but we tend to take people's advice in a profession based on our perception of that profession. That's a situation for an independent body to help the person.

The problem with disclosure is that it needs to be reciprocal. By "reciprocal," I mean that we also need to encourage franchisors to have their buyers offer proven disclosure as to their capabilities. It's an unfortunate old salesman's adage that buyers are liars. What happens to us sometimes is that we make a sale and somebody tells us they have a particular net worth or access to funds. Then, when I've taken their deposit and they've made application for the franchise and we start to go into the development process, I find out that they indeed did not have those funds, or access to them. Now, all of a sudden I'm in a tough spot as a franchisor. I've taken a deposit, I bore expense, I've maybe flown them somewhere for training or flown my engineers out to look at their sites and do site calls. Then we say to the person, "Gosh, you told us you had $400,000, or access to it, and now you really only have $250,000." Maybe we need to encourage franchisors to look a little more closely at the qualification of the people involved.

All the laws or things we do or pass are not going to prevent the people who enter the industry with ill intent. They don't care whether the guy is qualified or not. A thing I heard years ago: As long as they pass the mirror test, you could sell them a franchise, or sell them anything; it wasn't particularly franchising. It was that if you held a mirror up to their face and they fogged it up, if they were alive, you could sell. That mentality exists at all levels of the selling profession, in the business community in general. That mentality exists out there. So encouraging franchisors to better qualify their leads can still-again, this isn't disclosure. Disclosure is a benefit. If you're considering giving a large amount of money to someone who cannot get a bond in your business community, based on the delivery of goods or something, do you really want to give that person a lot of money? The primary benefit, to me, of disclosure is that it slows the person down.

People who are buying a franchise, who are in a transitional period in their lives, are making life decisions here. They're changing their whole life. Maybe they're getting the golden handshake from a bank or whatever institution they were involved in before. This is a life decision that should not be susceptible to urgent closing tactics of professional salespeople, or susceptible to just them following their dream. Gosh, I hear it all the time: "My wife and I have been working away at such-and-such jobs all our lives, but we always wanted to be in this industry. So we're going to buy into it. This seems like a shortcut way for us to do it." Of course, in many instances they are qualified, they do have the money in funds.

The other situation is that, like any other product we buy, we sometimes grow tired of a franchise. One of the problems with the franchise structure in that case is that all of a sudden you're an independent business person and you start up on your own and you go out there and take that hard role, and if you succeed, wonderful; if you fail, you take responsibility, and that's it. You did it, you failed, you go on with something else. But if you do that in the same context with a franchisor relationship, then all of a sudden you don't look in the mirror as much any more. You have a big corporation there maybe, that you perceive has deep pockets that you can now have legal recourse against to help you with your losses. Certainly there needs to be some mediation process in place.

I've been hearing Mr Martin say that this is part of the legal process and that you're stepping them into the courts. But I think it's valid to have something in place to prevent half of these scenarios from going to court, primarily because these people are telling us they don't have the resources to go to legal battle. In some cases, we all know they're walking into court, having made commitments and signed documents and put themselves in a position where legally the courts are going to have no recourse but not to find in their favour. By getting to that in-court position, all they are is further in the hole and maybe more deeply hurt by the fact that they went the extra step, prolonging the agony.

I'm always pro prevention in all objections. One of the things I noticed from one of the ladies who was up here prior-I notice in dealing with franchisees that in the beginning, like in any business prospect in the beginning, they have a different mentality and perception than they do after they've had to get into it and roll up their sleeves and go to work. We need to encourage them more to realize what is happening in the beginning and to test them: Do they understand their payment process? Do they understand that they're putting up a $10,000 or $20,000 fee but their capital requirements are $250,000? That's what they're going to have into it over a time period. I've always been amazed at the fact that I've told people that, and they come back and tell me they can do it better. I say, "Gosh, we've had a thousand people do it in the past 35 years and they couldn't do it better, so when you can do it better, please show us how." We need to ingrain in them that this is what it's going to take and then provide some step where the franchisor also has a better chance to look at them. We get them to fill out credit applications sometimes and they're not obligated to fully disclose. We are. We tell them, "Here's who's sued us, here's who's been with us for years, here's who's left." We give them full disclosure. They know everything about us, but sometimes we're at that position where we enter into business relationships with buyers that we don't know as much about as we'd like to.


It all leads to this: What is the committee going to do or what is Bill 33 or 35, or whichever ones we implement, going to do to prevent the franchise buyer-protect the consumer, not hinder business development, because we want global franchisers to come into our marketplace and bring their ideas and create employment, all those things. But there needs to be more depth to the bill than exists in its current state to make it something valid to the consumer and to the business marketplace.

Those are my comments. Any questions?

Mr Tony Martin: I must say, I appreciate your last statement, which is that the bill needs to be deeper and it needs to be developed further. I couldn't agree with you more. Anything that we can put in place today to prevent franchisors and franchisees from taking advantage of each other I think is going to be better in the long run for everybody concerned, particularly for the health of our economy. We've heard stories over the last three days, and some of us have heard them over the last five or six years. Some of us have experienced them ourselves in the lives of friends and neighbours. I came to this piece of work from my own constituents who brought me to a meeting back in 1995 and shared with me what was going on.

There are some things, though, that you've said that cause me to worry a bit. You've basically laid out a new twist on "blame the franchisee." The franchisees somehow, in your view, in some instances-and perhaps it is true-don't disclose everything. They say they've got $350,000 and they only have $250,000. I would suggest to you that anybody who has had to go out and borrow a little to prop up the money that you have yourself, the financial institution that is going to lend you that money is going to find out everything about you. I know in my own experience I've had to go to the bank to borrow. They knew the size of my shorts. It's amazing the things they know about me.

To suggest for a second that there's an imbalance there and that the franchisee is somehow to blame in terms of disclosure or is the cause of their own demise because they didn't disclose, I think is stretching it a bit. Nevertheless, I'm willing to give that in some cases it does happen.

But what I wanted to talk to you about even further is, you sell franchises. American franchises?

Mr Sovereign: We are a Canadian registered company as well, but yes, it was a company that started in the United States.

Mr Tony Martin: It seems to me, from listening over the last few days, that you're selling Canadians the American dream.

Mr Sovereign: OK.

Mr Tony Martin: And some of them have experienced what that's about-and we heard some stories here this morning-without the attendant regulations that many American jurisdictions have developed over some 30 years now. It was 30 years ago that California brought in a fairly comprehensive franchising regulatory regime. Here we are, entering the new millennium, and we're looking at what I would consider a very primitive limited disclosure, right-to-associate piece of legislation. You suggested at the end of your presentation that it needs to be fuller. Could you expand on that a little bit for me?

Mr Sovereign: Again, the disclosure-interesting comment-return on investment, those types of things, more depth as to what people disclose. I realize there are financial statements needed in here. There are some other areas to address.

What I wrote down was that the issues that come before the courts have some common denominators. There are some issues that come up in franchising that are common problems. There's lack of capitalization, lack of management experience, non-delivery of goods. I think non-delivery of goods and people entering into the business and agreements with people they shouldn't be are part of the problem.

I didn't mean to put the onus or do a blame-the-franchisee thing, Mr Martin. I'm just bringing to light that in some instances that is the case. Although you say the financial institutions will find out everything about you, what happens in many instances in franchise structures where it's land- or finance-based, the financial institution also becomes part of the culprit. The reality in life is that the 80-20 ratio exists in all industries and businesses. Franchising in this world didn't change that; 20% of the people produce 80% of the productivity. That's just the way life is.

By expanding on what more needs to be in it, there are other issues and common problems that come up to franchise buyers. In the beginning they don't have the necessary resources to research the franchisor properly. They can't understand these large disclosure documents, or even smaller ones in many instances. I like the fact that there is a clarity requirement in this bill. I don't know who determines it. I found it rather amusing, a government bill that wanted to encourage clarity in the written form, and there are parts of it that were a little confusing to me. That's OK. It's a good thing.

There are common issues. If you look at all the franchising problems that have come before us, association with lease agreements-third party involvement with a franchisor is an issue. In the beginning, some of these people simply need advice to put some "subject to" in their other clauses. If there's a third party lease agreement, make a "subject to": "Should my franchise fail, or if my franchisor goes out of business and folds up and leaves me out of business, I need a `subject to.'" I need an opportunity to get out of here, because this person is now in a jam with the third party. They signed a lease agreement but not a franchise-it's nothing to do with franchising. All kinds of business people in retail and any other thing get involved with lease agreements that sometimes they'd like to break and get out of. They need some better guidance in the very beginning to give themselves some flexibility.

In dealing with franchisees at the end, when they're coming to the end of their term, it always astounds me that these people have been involved with my organization for 20 years, and when I ask: "Have you read the termination clause? Do you know we have first right of refusal? It's 20 years ago that you bought it, so would you take a moment to go and read that?" they say, "Gosh, I didn't understand that." They need business planning in any term agreement. It's almost like estate planning. A person has to be prepared for what can happen at the end. What can happen at the end is that the guy might have designed and wanted the ability to shotgun you out of there, so you need to know that up front. You need a little bit of testing when you go to buy a franchise. We used to give them tests: "Please provide us in handwriting what the payment structure is for our franchise fees." They'd had the disclosure document for months, they had the franchise agreement for months, but they couldn't copy out of it and put it back to me. So they didn't know; they didn't understand it. So you reiterate and try to educate.

The same with the end: "Do you understand what happens at the end of your agreement?" They need to know that up front. They need some clarity and they need some guidance because of the nature of both the franchisor and the franchisee. The typical franchise buyer is a person in a transitional period in their life. I think the longer I've been in the industry and the longer I've been in the sales profession, as with anything in life, you tend to get exposure to more situations and you start to see these things happening. "Gosh, here's a government committee coming to town that's going to do something about franchising in Ontario now." I welcome it and hope that we can make some positive contributions.

The Vice-Chair: A couple of quick questions here from the PC caucus.

Mr Wood: Do you have any sense of the rate of return on investment that your franchisees get?

Mr Sovereign: Yes, a little bit. It's an interesting case. In the particular product that I'm marketing right at this moment, is that what you're referring to?

Mr Wood: Yes.

Mr Sovereign: There are a number of ways to look at return on investment. What we advise people is that typically this particular product will outperform the rate of return on, let's say, a golf course, whether it's a 5%, 6% or 7% return. What we shoot for in one component of our investment, if they're getting into our industry in a particular manner, by converting a property or buying an existing property, is a 20% return on their initial investment, on their down payment.

The problem, Mr Wood, with a land-secured, equity-building lifestyle investment with my particular product is that part of the return on investment is based on equity. If we design their business on a five- to 10-year growth program and they watch it evolve from a particular low-end or start-up operation to a high-end operation, their property becomes more valuable. It's always easy for the salesman to provide a best-case scenario.


Mr Wood: Maybe I should have given you some guidance. You've raised some important considerations. In terms of the money they put in-not what it's worth today-what kind of return would they expect and what kind of return would they get?

Mr Sovereign: It's probably going to run around what some bonds and lower-end investments do, somewhere between 2% and 6%.

Mr Wood: That's 2% and 6% of the money you put in?

Mr Sovereign: On average. Again, that's not a true case of return. If you look at land criteria and what they do-I've got an individual who advised me. He did three of them in 21 years and made a $1 million on every one at the end when he rolled them over, because we instill some land criteria that cause the property investment to increase in value. So, what do you say to an individual up front? The fellow before me said, "Hey, these people buy jobs." Typically, to get involved in a franchise investment, they quite often have to buy a lower-paying job. "We're going to ask you to put up a quarter of a million dollars to make less money than you have for the last 10 years."

Mr Wood: The $1 million comes on land appreciation?

Mr Sovereign: Land and business appreciation. Yes.

Mr Crozier: Thank you for your comments this morning. I think you've made some interesting recommendations in your proposal. The real test of committee hearings is to listen to suggestions and for either the government to accept recommendations and amend their legislation and/or for us in the opposition to propose amendments. I found all three of your suggestions rather interesting. Perhaps you and I can keep an eye on this to see if they make it into the legislation. Thanks for coming today.

The Vice-Chair: Thank you very much. It was a pleasure to have you here.


The Vice-Chair: We have a couple of cancellations, but we have a deputation here that is ready to make a presentation and I've asked them if they would do that. I appreciate the fact that they are: the Canadian Federation of Independent Grocers. If they'd come forward and do their presentation, that would be great. Is Mr Sands here the presenter?

Mr John Scott: He's the coordinator. He coordinated us and got us all here.

My name is John Scott. I'm president of the Canadian Federation of Independent Grocers. I'm past 50, so I have to use these glasses.

With me this morning is Peter Knipfel, chair of the board of directors of CFIG. He also owns and operates the Knechtel grocery store as a franchisee in Chesley. Also with me is Gary Sands, our vice-president of government and industry relations.

We appreciate the opportunity of appearing before you today, particularly since it is in reference to a long-awaited piece of legislation, Bill 33, An Act to require fair dealing between parties to franchise agreements. Ontario now stands poised to become the second province, after Alberta, to enact franchise legislation. Alberta passed its own bill, as you know, also called Bill 33 a few years ago.

The Canadian Federation of Independent Grocers is a national non-profit organization founded in 1962 to further the unique interests of independent and franchised grocers through a progressive partnership with government, industry and the consumer.

From very modest beginnings in the province of Ontario, we now boast a membership of about 2,000 retailers located in every province and through most communities in the country. A board of directors of 18 regionally elected members governs us.

As I indicated previously, CFIG views Bill 33 as long overdue. It is probably safe to say that over the years the issue of providing some form of protection to franchisees has polarized both the industry and successive governments across the country. Indeed, Ontario will become only the second province, after Alberta, to have legislation enacted that governs the relationship between franchisor and franchisee. This is notwithstanding the fact that franchising is one of the most important economic activities in this country, certainly in the province of Ontario, where it accounts for almost half of all retail sales.

CFIG believes that in this committee's deliberations on Bill 33, it is important that legislators always keep in mind the context in which many franchisees operate.

At the outset, the reality of our industry, as you've heard over the last few days, is that it is dominated by big business in the retail, manufacturing and distribution sectors. In this era of acquisitions and mergers, this trend is becoming more pronounced and is of increasing concern. Consequently, this power in the marketplace has created the potential for abusing the franchisor-franchisee relationship. And make no mistake, abuses have occurred. Many of the franchise agreements that exist are one-sided contracts that ultimately devalue the assets and investments of some hard-working franchisees.

In the absence of the ability of the franchise industry to appropriately self-regulate, it becomes the responsibility of government, as the agent of public interest, to provide the legislative framework for regulation. Just as important as protecting the interests of franchisees is recognizing that the $40-billion to $50-billion franchise industry in Ontario, which provides so much economic benefit to so many, is put at risk by the unscrupulous behaviour of a few franchisors.

The greatest difficulty encountered by franchisees with their franchisors usually stems from a lack of desire on the part of some franchisors to act in good faith. This has often led to an untenable situation for some retailers, and in recent years their franchisors have often unfairly forced them out of business.

Some observers have characterized many of the contracts that exist in the marketplace as feudal in their approach to the franchisor-franchisee relationship. As well, notwithstanding the substantial amount of personal funds invested by a franchisee, there is little or no protection in most cases where a dispute arises by consumer protection, labour or securities legislation.

In that context, there are two fundamental weaknesses in franchise agreements that allow abuses to occur. First, the concept of good faith or fair dealing is not embodied in the agreement. By setting out fair dealing as a concept in Bill 33, hopefully both parties will now recognize the responsibility to observe commercially reasonable standards and act in this manner throughout the franchise relationship.

Secondly, franchise contracts are usually drafted in very broad terms that are one-sided and provide the franchisor with lopsided discretionary powers that are not conducive to the long-term development of a healthy franchise industry. Fairness, not fear, must be the backbone of our franchise industry.

Fear is generated when franchisees are forced to sign restrictive or controlling franchise agreements that limit their ability to manage their businesses as independent operators in the best interests of the consumer, or when retailers who do not sign new agreements receive arbitrary notices of termination or non-renewal in consequence. When franchisors unilaterally increase franchise fees and change pricing programs without either notification or any form of consultation, retailers are forced into new pricing programs that are profitable for the franchisor, but are neither profitable nor sustainable for many franchisees.

Fear occurs when franchisors locate new stores in the same marketplace as the franchisee they supply. Fear of economic retaliation should franchisees associate to discuss commons areas of concern and, therefore, increase their potential bargaining power; fear due to not having been able to obtain disclosure of all material facts before purchasing a franchise; and fear that in order to resolve any dispute, a franchisee must weigh the cost, time and uncertainty of litigation.

That is why we welcome and support Bill 33. We see the major achievements of the bill as the creation of three new rights: most importantly, the right to expect to be dealt with fairly, the right to associate with other franchisees; the right to obtain disclosure of all material facts before purchasing a franchise. The need in the marketplace for such legislation is clear and deserves all-party support.

We do believe the bill could be stronger in defining fair dealing. CFIG has difficulty understanding why the legislation cannot simply say that fair dealing means the observance of commercially reasonable standards and manner throughout the franchise agreement. Given that the burden of any litigation to resolve a dispute falls more heavily on the franchisee, we suggest that a definition that provides more clarity ensures that we provide a better balance between the interests of both franchisor and franchisee.

Society embraces the concept that consumers should be dealt with fairly and, consequently, must be able to understand fully and clearly the details of their transactions with suppliers of goods and services. CFIG sees no reason why the relationship between a franchisor and a franchisee should be exempt from a similar approach.


We wholeheartedly support the other main provisions in the legislation, which provide franchisees with the right to associate with each other and to join or form an organization without restrictions imposed by franchisors, and, most important, the disclosure obligations now imposed on franchisors.

While some have criticized Bill 33 for not going far enough, CFIG believes that having this legislation passed is vastly preferable to indefinitely delaying protective legislation because the industry cannot reach agreement on each and every clause of the bill. On a contentious issue such as this, it is doubtful that any legislation could be drafted that would satisfy everyone in the industry. We also recognize certain political realities. This issue has polarized successive governments and the industry. Asking for substantive amendments at this stage would probably kill the bill outright. It has been said that a journey of a thousand miles begins with a single step. CFIG believes that the passage of Bill 33 in Ontario is an extremely important step in providing some balance between the interests of franchisors and franchisees.

It is also an important strategic step in ensuring franchise legislation is enacted in each and every province across Canada. Two provinces have already indicated to us that, in the interests of interprovincial harmonization, they are awaiting passage of this legislation to determine if other provinces intend to base their legislative frameworks on the current Alberta Franchise Act. Our journey across the country will begin the moment this bill passes into law. We will take the Alberta and Ontario legislation to every provincial government and demand similar protection for their franchisees.

In conclusion, CFIG supports the act before you and we urge, in the strongest terms possible, speedy passage of Bill 33. We commend the government of Ontario for reintroducing this legislation. Thank you.

The Chair: Thank you very much. The government caucus, Mr Gilchrist.

Mr Steve Gilchrist (Scarborough East): Thank you very much, gentlemen, for your presentation. I appreciate the perspective you bring and the fact that you represent such an extensive range of business interests across Ontario. I also appreciate that you recognize that we operate in a bit different framework in the political sphere. I'm very encouraged from what we've heard so far from all three parties in terms of their support for the principles behind the bill and a recognition that there has to be a starting point somewhere. We will continue to have discussions on how big that first step will be.

In that context, I was wondering if you had seen the five or six amendments we have most recently seen discussed by the working group.

Mr Gary Sands: No.

Mr Gilchrist: When you do, perhaps you might want to comment if any of these do or don't pass the test from the grocers' perspective: expand the right of action for misrepresentation to include any agents or brokers involved in the selling of the franchise; permit electronic disclosure, for example, if you wanted to download your disclosure document from the Web; require disclosure for the sale of an additional franchise to a franchisee if a material change had occurred in the relationship or in the franchise agreement since you first signed on; require disclosure for the renewal of a pre-existing franchise agreement-as the act is written now, it wouldn't apply if you are currently a franchisee and your 20-year term has run out; and clarify the term "payment" in the definition of franchise to include indirect payments.

Are those all things you would see as further strengthening this bill and further improving the protection for franchisees, and consumers indirectly.

Mr Sands: We think those would be good amendments. We haven't had a chance to look at them, Steve, and we would like to review them. At first blush, they certainly sound to us like they would strengthen the bill. We would be happy to look at those amendments and formally respond to you when we get back. If I could take a copy of them with me, that would be great.

Mr Gilchrist: We'll make sure you get them.

Mr Sands: They certainly sound like they would strengthen the bill.

The Chair: The Liberal caucus, Mr Crozier.

Mr Crozier: Thank you, gentlemen, for your presentation. I guess you understand, as we all understand, that in a sense there is all-party support for this. It was supported by every party at first reading, and I think all of us have the same objective in mind of the need for this kind of legislation.

I might ask if you'd expand just a little bit because I'm surprised that you have made the suggestion that substantive amendments at this stage would probably kill the bill outright. The whole idea behind committee hearings-we might as well not waste our time, quite frankly, if we're going to ask people to come before us and then not listen to them; in other words, not make amendments. A bill such as this isn't worth the paper it's written on until it's tested, so you might as well try and get it right. Because what you're telling us, I believe-and maybe you can comment on this-is that this isn't as good as it might be but it's OK and that we'll go ahead and pass legislation that's so-so rather than try an amendment. I hope I'm not getting that message. You can clarify that for me.

Mr Sands: I think what we said in our closing is a reflection that we recognize certain realities, that this issue has polarized a number of governments, including the Liberals when they were the government and the NDP when they were the government. We know that within the industry there are various views on this legislation. Some people would not like to see any legislation at all.

As we said in the presentation, we believe this is an important starting point. We have no legislation, even in draft form, in most of the provinces across this country. We want to start somewhere to start building legislative protection across the country. We intend to come back to seek amendments and give this bill a chance to work and see where it goes.

I think John wants to add something.

Mr Scott: Don't lose sight of the fact that the commercially reasonable standards is an amendment that the CFIG, like many others, would very much like to see in this bill. Your concept of fair dealing doesn't have a whole lot of use without that amendment. We'd like to see that happen. Secondly, if you were going to go to a far-reaching bill and they were in power-perhaps Mr Martin's bill encompasses all of the elements that a franchisee would like to see. But in making the statements we have that we'd like sure like to see an amendment on the commercially reasonable standards, we're reflecting what we believe is a political reality in dealing with the government. Again, we commend the government, particularly this government, which has not gone into regulation regarding business, for bringing it forward.

Mr Crozier: Sure. Some would suggest, though, that once legislation is on the books, it's just as difficult to get it amended as it was to get it there in the first place. So my point is the old saying, "When the going gets tough, the tough get going." If it takes time and it's tough to get the right bill in place, let's do it now. That's all.

Mr Scott: We've been after this for seven years. There are people in the audience who are well aware of our activities for seven years.

Mr Crozier: Let's not take something that's half-baked-

Mr Scott: Then make an amendment on commercially reasonable standards and it might be helpful.

Mr Crozier: Good. They're the guys who are going to control this, so as long as they understand that.

Mr Tony Martin: I also thank you for coming forward and making the presentation you have. I understand the anxiety that you hold to get something in place. I am like Mr Crozier, though, just not wanting to put something in place that gives people a sense of security that really isn't there.

You mentioned the fair dealing piece that really doesn't say anything. People think, when they sign on, "There's legislation that protects me; they have to deal with me fairly," and then five or six years down the road, when they end up in trouble, they find out it doesn't mean anything. I don't want to do that to people. I don't want to set people up for failure in that way. That's why I was insistent on this bill going on the road, so we could hear from-the working group was limited in the people it heard from. We needed to hear particularly from the franchisees out there who are experiencing some of the reality of the business world today. And we have, in spades, over the last three or four days, and we will continue to for the rest of this day.

My question to you though is, this is a bill that's gone out to hearings after first reading. It allows for a greater scope. We're not tied to a principle here and we can talk about all kinds of things. I would suggest to the government that maybe some other material be brought to the table, that some other efforts be made to understand the circumstances that people find themselves in out there.


We've heard so far in our deliberations that the grocery industry is in great flux from a number of different perspectives: farmers who can't get their product onto the shelves, small producers who can't their product onto the shelves, grocery stores whose ownership has changed, who now are looking at having to sign new agreements that aren't in keeping with the spirit of the original agreement. I know in my own community we have three grocers, who were some of our best corporate citizens, and they're not in the grocery business any more. I'm not sure where some of them are. One of them is now running a bingo hall. These were people who contributed in very serious and meaningful ways to our community. The fact that small producers can't get their product onto the shelf at some of the major grocery chains is killing the economy of some of the regions of northern Ontario and that's a worry to me.

With that in mind-and I don't know if you've given this any thought or not-what else could we do here? What other information could we bring to the table that will be helpful to us in perhaps resolving some of the issues particular to the grocery industry at this point in time?

Mr Scott: You're right. The grocery industry is in a state of great flux and we're very, very pleased to see the number of franchisees who have come forward, and you're going to hear more today from our particular industry. There is a lot of pressure on a lot of people right now.

I just want to pick up on your last point. I know you've heard from primary producers and people who traditionally sell into grocery stores. I submit to you with great respect, sir, that most of the arguments on that don't come under the franchise situation but rather under the Competition Act and the issues of tied selling, which is something that perhaps this government can't look at, but something you ought to have a look at.

The Vice-Chair: That has been raised this morning by Mr O'Toole.

Mr Scott: Anyway, sorry. Peter, do you want to respond to any of the comments on the industry?

Mr Peter Knipfel: Just from a franchisee's perspective, in our industry this is our primary asset. This is what we've invested our money in to hopefully see us through to retirement. With the consolidation today in the grocery industry and the control that the franchisor has over the franchisee as far as pricing and our profitability is concerned, we need some protection for some fair dealing with our franchisor. That's basically all I have to say, that that's what we'd like to see.

Mr Tony Martin: Do I have time for-

The Vice-Chair: You've got five seconds. That does include your preamble, though-your normal preamble. Go for it.

Mr Tony Martin: I recognize the common commitment around the table to looking at the Competition Act and challenging the federal government, and we'll probably have this discussion further, but our jurisdiction is provincial. That's where we have control. We're dealing with the provincial government. Is there anything we could do to be helpful in that piece? We have a Ministry of Consumer and Commercial Relations.

Mr Scott: On that particular one, on the restrictive selling issues, I believe-in fact I know-that the Ministry of Agriculture, Food and Rural Affairs has discussed it with some of the major grocery chains and has some similar concerns. I do not believe that any representations have been made by this government to Ottawa, but there has certainly been a tremendous amount of representation made by the smaller processors and producers directly to the Competition Bureau on the issue. It is a big concern for our own retailers, as you can imagine, because they're supporting the local economy and all of a sudden they're precluded from that. It's a very difficult situation.

I don't know what else you can do there, because it's federal legislation. But I do know in this situation, as Peter says, doing something on the "commercially reasonable" thing would be huge in this piece of legislation. Huge.

Mr O'Toole: On a point of order, Mr Chairman: If I may, just respectfully to the comments you've made, if you have a position that outlines what you've said, it would be important for that to be on the record, engaging not just the Ministry of Consumer and Commercial Relations but the Ministry of Agriculture, Food and Rural Affairs, as well as the federal government.

Mr Tony Martin: Yes.

Mr Scott I think that would be productive, to recognize that the agricultural sector industries have commodities and supply management issues that are removed from this legislative framework. Your industry has made the supply issue a significant issue in the hearings this week. I appreciate that.

Mr Crozier: On the same point of order and just very briefly, it's interesting that the whole idea of franchising itself goes to the point of competition. If we really got to the very bottom principle of it, franchising would be no more than a name on a store, because you should be able to be free, under competition rules, to buy from anybody, but we know that's not the case with franchisees. McDonald's supplies the patties, I suppose-I don't know. It's an unfair example. But if you really went to the very principle of competition, you wouldn't have franchises, because that in itself restricts a franchisee from doing certain things. That's all.

Mr Scott: Franchising is a big part of our industry, and what you're trying to do is shepherd franchising into the next century in a productive manner. I think that's what we're all trying to do here.

Mr Crozier: I think we all are, for sure.

Mr Scott: I'm not sure, but was I bothering you with my comments?

Mr O'Toole: Oh, no. I think they were very productive comments. I mean that genuinely. If you have a position as the independent association, I would like to see that.

Mr Scott: OK. We'll provide you with that. The various ministries are well aware of our discussions.

Mr O'Toole: I'm sure they are. It's part of the public record here.

The Vice-Chair: Gentlemen, thank you so much for your time this morning, and thanks for moving your time ahead.

If I could have the committee's indulgence for just a moment, the previous speaker, Mr Sovereign, made a statement and he'd like to make a clarification. Would anyone mind if he took a minute to do that? Mr Sovereign, you've got a minute.

Mr Sovereign: I just want to take a brief moment here. I was asked by a committee member as per a specific return on investment, and I'd like the opportunity to retract that statement. I gave you a percentage number based on a recent conversation with someone else involved in the company. A more honest and accurate answer is, I don't know, sir. I don't know what the exact returns on investment are. The proper and ethical thing for a franchise salesperson to do when asked questions specifically pertaining to return on investment is to refer the person asking the question to the uniform offering circular, which I do have a copy of here, and if Mr Chairman would like, I will leave a copy for the committee for copy and distribution, or if Mr Wood would like, I can leave it for him. Is that OK?

The Vice-Chair: That would be fine.

Mr Sovereign: Would you like this, sir?

Mr Wood: Well, just give it to Ms Stokes.

The Vice-Chair: Thanks for that clarification. We'll now adjourn until 12:55. That should get us here by 1.

The committee recessed from 1156 to 1304.


The Vice-Chair: Ladies and gentlemen, I'm pleased to call the meeting back to order. Our first presenter this afternoon is Cameron's Food Market. Mr Cameron, please feel free to start whenever you wish.

Mr Bill Cameron: Mr Chairman, honourable members of the committee, ladies and gentlemen, I would like to thank you for the opportunity to appear before you today to make this presentation regarding Bill 33, a most important and desperately needed piece of legislation.

With me today is Bob Uhrig, a Knechtel franchise store owner and co-chairman of Western Ontario Grocers Alliance. This presentation is not only about my personal experience but echoes the concerns that Western Ontario Grocers Alliance has with franchisor activity in Ontario today.

My name is Bill Cameron and, with my wife Diane, I own and operate an 18,000-square-foot franchised food market in Kincardine, a town on Lake Huron with a population of 6,000. We have owned and operated a Knechtel franchised food market for the past 16 years. We presently employ 17 full-time and 48 part-time employees. The business is operated as Cameron's Food Market, under the Knechtel banner, which is a franchise of Sobeys Capital Inc.

It is important to mention that today our business is very successful, even though we are competing against a larger National Grocers' Zehrs store, which is corporately owned and operated. Each year over the past four years, Cameron's Food Market has been awarded a Canadian Federation of Independent Grocers, CFIG, award of merit, which recognizes outstanding independent grocers in Canada.

I am also the secretary for Western Ontario Grocers Alliance, which is a registered, non-profit corporation created in July 1999 to represent the interests of 64 Knechtel franchise owners in Ontario. This alliance was formed by the Knechtel franchisees to collectively deal with some very restrictive agreements that were being arbitrarily imposed by Sobeys this past spring.

We believe this provincial government needs to be congratulated on their resolve to implement some form of legislative control over the manner in which franchisors carry on business with franchisees. This type of legislation is long overdue and will address some of the pre-sale abuses, especially in the area of pro formas and disclosure. For this government to recognize, through Bill 33, the right of the franchisee to associate and share information and ideas that are of common interest without fear of retaliation is extremely important to the members of Western Ontario Grocers Alliance.

At this time, I would like to relate to you a personal experience regarding my association with our present franchisor. In the beginning, our store was associated with Knechtel Wholesale, a family-owned business operating out of Kitchener. This association flourished, due largely to the common belief that honesty, integrity good principles and fair play were the rules that would ensure the success of both businesses-the retailer and the wholesaler. Our Knechtel franchise in Kincardine, as well as those is many other communities, operated successfully and harmoniously with Knechtel Wholesale, with nothing more than a handshake to consummate their business relationship. In 1993, Oshawa Foods bought Knechtel Wholesale, and it appeared at that time the expected rules of business that the Knechtel associates were accustomed to would, for the most part, be retained.

On April 1, 1996, we executed a business transaction with Oshawa Foods where we signed a trademark and franchise agreement and a sublease for the premises, with an initial term of 11 years, expiring in the year 2007. Also, in return for a substantial loan of $585,000, we signed a general security agreement and loan agreement: $415,000 was used to buy the remaining 25% ownership of the business, and the remaining $170,000 went to a major renovation of the business. Diane and I also signed personal guarantees for all the obligations of the store to our franchisor and to our bank. The term of our loan is 10 years. It would be retired in the year 2006.

The success of our business, due in part to the trusting relationship we had with our wholesaler, enabled us to purchase full ownership of the business. The total price paid was approximately $1.8 million, which was viewed as fair market value. When we first bought the business in 1988, and when we borrowed the money to finish that process in 1996, there was a well-understood but unwritten commitment by Oshawa Foods, and prior to that, Knechtel Wholesale, that they would not compete against their own retailers, who had invested large sums of money in their markets. As a result of this, the value of the stores was significant.

In December 1998, Sobeys purchased Oshawa Foods and in doing so became our franchisor. Sobeys obviously inherited all the agreements we signed and also our outstanding loan. I would also have thought they inherited Oshawa's business deals and the intent under which they had been agreed. However, this was not the case. In November 1999, we invested a further $100,000 in our business for new refrigeration counters. The installation and setup of these counters involved Sobeys's engineer and store support personnel.


On December l, three weeks after the installation was completed, Sobeys announced to us they had secured property within our community and they would be constructing a 35,000-square-foot supermarket under the IGA banner. They also informed us that this store would be a new entity into our market, and that it would not only compete with the existing Zehrs store but would also be a new competitor for our Knechtel franchise. Sobeys's rationale was that if they didn't do this project, our existing competitor would have done it, and they would have hurt us even worse than Sobeys was going to hurt us.

At a meeting with senior executives of Sobeys, I was assured that fair dealing would be the main ingredient in producing a win-win solution to our situation. Needless to say, their subsequent action of offering to buy our business for less than 50% of our initial purchase price did not demonstrate even an attempt at dealing in a fair manner. In the January-February edition of the Canadian Grocer magazine, it was reported that Sobeys's position on competing directly against their own franchisees is: "Sobeys says, in such an unlikely case, it would pay support to protect the independent business. If the business still suffered, Sobeys would buy the business." Obviously my question is, for what price?

These predatory actions of exploiting the weaker position of the franchisee happen only because there is a lack of legislated controls over the franchisor to respect and protect the franchisee's trading area from acts of encroachment. The potential of this encroachment has severe and direct financial costs to the franchisee by drastically impairing their ability to sell their franchise for fair market value.

In many cases, franchisees are left only with the option of having to consider a fire sale price offered from the franchisor. The value of independent retailer stores has declined significantly because of this current policy of the franchisor of expropriation without compensation. Their ridiculous offer to purchase our business is a testimonial to this policy.

Another alternative is for us to stay and try to compete. In our case, however, even the study performed by Sobeys's marketing department showed that our volume of sales would be so negatively impacted by the entry into the market of the new IGA store that we would be losing money if we continued to operate. Even today I struggle with Sobeys's lack of understanding of why we feel so betrayed.

How do I answer the following questions? How will we deal with our lease and loan obligation to our franchisor when we no longer can service them? What about the fair market value for the equity that we have worked so hard for over the years, and were led to believe by our previous franchisors would be realized when it was time to sell? How and why can a franchisor treat their franchisees in this manner without any outside scrutiny?

There are some who say that civil action is another option. However, not many franchisees enjoy the financial position to venture down this lengthy path. Taking on a large franchisor who has unlimited resources of money and legal ability is viewed by many as foolish. One has to remember that by the time the process of civil action is finalized, the encroachment has already happened and the damage has already been done. At this point, the likelihood that the franchisee is already experiencing financial distress or even bankruptcy, unable to present or continue a challenge, is highly probable.

The franchisor controls the cost of 95% of products purchased by the franchisee, and they control the retail price which the franchisee sells these products for. Ultimately, they control the franchisee's profitability. Independent retailers over the past year have seen a significant decline in their ability to turn a profit, while franchisors have continued to increase the cost of goods sold to them. As a result, the franchisee, with strict expense controls and good store operations, is left to depend only on the franchise program to deliver a marginal but controlled level of success to their business.

When put into a position where the franchisee is losing money under the franchisor's program, what the franchisor says they will do is inconstant with what they really do. They say that they will subsidize the franchisee, but they do this only after the franchisee's equity has been destroyed and they have become totally indebted to the franchisor. This new IGA franchise in Kincardine, according to Sobeys, will be subsidized many hundreds of thousands of dollars per year until the franchise becomes viable. This is done as a matter of policy. However, in our situation of this territory encroachment, no subsidy has been offered to ensure the continued success of our Knechtel franchise. This is a franchisor that is prepared to give preferential treatment and an unfair advantage to one franchisee over another in the same trading area.

When you consider the contents of this presentation, please view it as only the tip of the iceberg. Since Sobeys's acquisition of Oshawa Foods, they have initiated an aggressive corporate expansion policy even against their own retailers. I know of no less than three other Knechtel franchisees that could at this moment be sitting here and giving a similar account of events they are facing in their own communities today.

It is apparent that when a franchisor decides to become aggressive in expansion to maximize their penetration in the marketplace, even if encroachment is a necessary tactic to accomplish their goals and ensure their own success, fair dealing is expendable. As put to me by a senior executive of Sobeys at a recent meeting: "If a franchisee is not prepared to expand or invest what we believe is necessary to secure our market share, they will be run over and discarded." I believe this says it all, and confirms that franchisors have shown an intent on dealing in an unfair manner, and their behaviours are prime examples for the necessity of strengthening Bill 33.

If this process of eliminating the "in" on the word "independent" is allowed to continue, not only the future but the very existence of thousands of small producers across Ontario will be threatened. Because of the outrageous listing fees charged by the wholesalers, which could equal $130,000 per stock-keeping unit, they will be unable to afford to sell their products to the large major supermarket chains. Due to the restrictive agreements to which the franchisors are forcing their franchisees to adhere, the local independent retailers or franchisees will not be allowed to buy from these small producers on a direct basis, even if the costing is better than what is available through the franchisor. In the end, we will have an obstacle to fair competition, and when complete control over the retail market is realized by the major franchisors, who, by the way, are also the major corporate players, higher retail prices for the consumer are a certainty.

I am concerned that under the definition for "fair dealing," the tactics we are facing in Kincardine and other communities would qualify as a breach of Bill 33. If not, then the discretionary powers which are heavily weighted in favour of the franchisor through one-sided franchise agreements will continue to be abused. I and the Western Ontario Grocers Alliance prefer to see a clearer definition of what "fair dealing" really means, with the hope that a clearer definition would include a reference to scrutinize "trade area encroachment."

"Fair dealing" should impose within the act an enforceable legal obligation on wholesalers and franchisors, who are also competitors of independent retailers or franchisees, to act in a "commercially reasonable manner" where they exercise discretion that could affect franchisees adversely. The franchisors say they already do this and that it is only good business to treat the franchisee fairly; therefore, to amend this bill to define "fair dealing" to reflect the franchisors already admitted good treatment of the franchisee is only a modest request.

The Vice-Chair: You've just got a couple of minutes left.

Mr Cameron: If the existence of this law was in place today and addressed meaningful penalties for its breach, I would not be sitting here in front of you on the verge of losing my investment or, even worse, my business.

In conclusion, the franchisee or independent retailer has had no legislative protection; however, Bill 33 provides some and is a basis to build on in the future. We strongly believe it will send a clear message to the franchisor that fair dealing will be a major component in their business relationship with their franchisees. The passage of this legislation with a defined and enforceable "fair dealing" provision is long overdue, and we strongly recommend that this government of Ontario pass Bill 33 into law as quickly as possible.

Mr Chairman, honourable members of the committee, ladies and gentlemen, again we thank you for the opportunity of appearing before you and we look forward to answering any questions.

The Vice-Chair: We've got time for about one quick one. Has anybody got a fast question? Tony?

Mr Tony Martin: Yes. I don't want to in any way diminish the seriousness of your presentation. We've heard this story now several times over the last three or four days. I'm into this piece of work because of similar stories in my own community of Sault Ste Marie. There are three grocers no longer doing business in my community-wonderful corporate citizens, did the whole nine yards and they're out of business now. I believe there's a fuller inquiry called for here into this industry. It seems to me that having two entities control 80% of the distribution of product is problematic, at least in the grocery industry. Would you support such an inquiry?

We're dealing with this bill after first reading, so the scope for us is quite large compared to after second reading, where you have to stick to the principle of the bill and follow that through. We can make recommendations to the minister and the ministry on things we hear that will be helpful to us in the end in putting together a piece of legislation, or developing or crafting a piece of legislation, that would go the full distance. It seems to me there's more to be said, more to be found out and more information to be had around the circumstance of the food industry in Ontario at this particular point in time.


Mr Cameron: Yes, I would support it. However, the Competition Bureau ruled to have 80% of our food distribution controlled by two people. My problem is that at the present time I'm still a very viable and very successful retailer, but I'm on the verge of seeing that go away on me, seeing my investment destroyed on me by an aggressive and dominant wholesaler and franchisor. If this law had a definition for fair dealing, I would have something to be able to fight back with. At this point in time I have nothing other than civil action, and civil action is an extremely lengthy and expensive process.

The Vice-Chair: Thank you very much, Mr Cameron.

Mr Bob Uhrig: Could I have 10 seconds?

The Vice-Chair: Yes.

Mr Uhrig: On behalf of the Western Ontario Grocers Alliance, which was forced to become viable some time ago through our situations with Sobeys, I just wanted to quickly define the environment today. The minister has alluded to it here, that 80% of the distribution is in two people's hands. In the last six months we've seen a tremendous need for fair dealing, in today's environment when everything is controlled by the franchisor. In the changes, as an example, that Sobeys wanted to make with us, there was no fair dealing involved there at all. That's my point.

The Vice-Chair: We appreciate your time. Thank you.

Mr O'Toole: Just on a point of order, Mr Chair: Do they have a written submission?

The Vice-Chair: No, they don't.

Mr O'Toole: You read from a script. I would appreciate getting a copy of that script.

Mr Cameron: OK. I have an extra copy.

Mr Tony Martin: On a point of order, Mr Chair: This is the last day that we have together as a committee. We've been sitting and listening for four days now and we've heard some very valuable information shared. We've heard some very compelling stories, and I'm wondering, given that there was some hope that going to committee after first reading there would be some scope for us to recommend or suggest some things that could be done by ourselves or the ministry or others to help us bring forward for second reading a bill that reflected some of the discussion and the recommendations that we heard, at what point today-because I think we need to do it today-would you suggest that those of us who have some recommendations to bring forward and put on the table actually in fact do that?

The Vice-Chair: Let's see how the schedule goes here, because we've got time constraints with some other things here as well. That wasn't part of the agenda today.

Mr Tony Martin: Although we did, I think when we spoke at subcommittee, suggest that there might be some time at the end of today to talk about where we go from here. There was a suggestion, for example, that we might want another day of hearings when the House comes back.

The Vice-Chair: We could take a couple of minutes at the end, though, and look that over.

Mr Tony Martin: Yes. We've heard some very serious concerns raised, and in the interests of time, for us not to deal with that or at least reflect an interest in dealing with that I think would be unfair. For us not to honour the effort that was made by so many of the presenters, some of them at great risk to themselves to come here by taking time to do that, I think would be a shame.

The Vice-Chair: I don't think it necessarily has to be done today, though. If it's something that's going to take two or three hours today, that's probably not in our agenda.

Mr Tony Martin: I don't think it will take two or three hours, with all respect, Mr Chair. But it seems to me if it's not done today, we don't meet again until the House comes back. Right now it's scheduled to come back on April 3. There will be a lot of things happening when we come back, and when we will get to this-

The Vice-Chair: Let's just get on with the meeting, and we'll see what happens as the rest of the meeting goes on.

Mr Tony Martin: So you're telling me that we're going to try to find some time at the end of today to do it?

The Vice-Chair: Depending on how the schedule goes. I'm trying to keep the meeting to a schedule, as the agenda says.

Mr Tony Martin: We've had a number of people not show up today, so we should have some room, it seems to me, to do this. I become very concerned when I feel like-

The Vice-Chair: Yes, we understand your concerns; you've mentioned them all day.

Mr Tony Martin: I'm concerned that you may not be interested in presiding over a process where we might have a chance to, even ever so briefly, put on the table some of our recommendations at this early stage.

The Vice-Chair: Well, jot your recommendations down, and towards the end of the meeting we'll see how much time we have.


The Vice-Chair: Mr Brian Davy from M&M Meat Shops. Mr Davy, the floor is yours next.

Mr Brian Davy: Mr Chairman, members of the committee, my name is Brian Davy. I am the owner of four M&M Meat Shops franchises in London. I've been with the company since 1983. The chain now has 286 stores in Canada. I've also owned and sold three other franchises in the past 10 years. At one time I had seven, but I've sold three of them. I just recently opened a new store up in northwest London, in Masonville. I was the president for seven years of the marketing council for the chain and also president of the advisory council for M&M Meat Shops.

My relationship with my franchisor is probably a little different from what I've been hearing today and what I've read recently. We've had very little conflict, other than marketing and minor hiccups in the chain as it has grown into a national chain. We believe that our franchise agreement is fair. It also includes a mediation clause, which I believe a lot of others might not have. It has never had to be used up to this time.

Basically looking at Bill 33, as I was asked to read it from a franchisee's perspective, I feel that it was certainly needed to protect the current franchisees, but mainly the new ones coming in. When I got into the system initially, there wasn't the coverage that we have now even in the franchise agreements.

This is going to be a very short presentation on how I felt about the bill, and that's what I was asked to do. I thought my area might be answering questions more than anything else. When we had a national meeting last week of the advisory council and franchisees, we had 450 people there. We read through the bill, discussed it and went through how the majority of franchisees at the meeting felt. The conclusion was that they were all similar in voice.

Mr O'Toole: Thank you very much, Mr Davy. I appreciate that. Just to reinforce for the record, your membership, some 450 as part of this marketing meeting you referred to, if I'm hearing you correctly, endorsed Bill 33.

Mr Davy: That's correct.

Mr O'Toole: The provisions in there, as you know, are certainly to have disclosure. If you want to comment in some detail, we have heard on the disclosure part there is general support. Certainly the intent of it would be widely supported. On the next part, fair dealing, there has been some input with respect to strengthening that provision and the right to associate. It would appear that your organization already has that right to associate. Do you want to comment with respect to those three expected outcomes with this legislation, after several years of consultation, in any specific or general way as to how they apply, not just to M&M Meat Shops but to your business experience since 1983? I'd appreciate it.


Mr Davy: I opened the fifth store in the chain in London in 1983. I opened the 278th store last September. It's hard when you haven't had a lot of problems with a franchisor to pick away at anything that's really not there. We certainly believe that protection is needed. As a chain gets bigger, you certainly get a little bit less voice. We have a national marketing council represented by a big cross-section of franchisees and also an advisory council, which is an elected body from the franchisees within the chain itself, which works very closely with head office and a committee there. They meet probably every six to eight weeks.

Mr O'Toole: One of the bigger things we've heard of concern specifically to the grocery industry was the supplying of goods and/or services. In yours, it's pretty much the same. The only thing is, it's frozen food, I gather. That's part of the whole concept though, isn't it?

Mr Davy: If M&M Meat Shops hadn't branded the name M&M Meat Shops and had tried to live on the Schneider and McCain names, as we did in the early 1980s, I don't think we would be here as a chain now.

Mr O'Toole: You think it's the successful partnering, if you will, and marketplace presence of a strategy and a secret recipe; that you as a franchisee, so to speak, wouldn't exist without the franchisor.

Mr Davy: Basically, they have a very streamlined system in ours. Because it's M&M, we only have one delivery centre, but we have probably 68 to 72 suppliers that will private label M&M Meat Shops products now. I've seen that evolve from the very small factory at the beginning to the fair price structure that they've been able to provide, to give us margins that we enjoy, because as everyone knows-the people in this room in the food business know-it's a tight market to compete with the big chains. But I believe that had we not branded the M&M name like we did, and gone with the suppliers and the quality that we've gone with, we wouldn't have survived.

Mr O'Toole: Thank you very much.

Mr Crozier: Just a brief question. We certainly have an M&M in my hometown. Is it strictly Canadian, M&M, their franchises?

Mr Davy: Yes.

Mr Crozier: I guess other than some of the fast food organizations, we haven't had too much comment on the international part of it. M&M allows you the right to association, I take it? There's nothing to restrict you from belonging to another association of franchisees?

Mr Davy: No, there's not.

Mr Crozier: Do you, by any chance, belong?

Mr Davy: No, we don't.

Mr Crozier: With the testimony you've given, there's probably not any necessity.

Mr Davy: That's right.

Mr Crozier: Well, then my question would be redundant, because it was one of, even if you are allowed to belong to other associations, to what degree does your franchisor listen to the other associations? That's fine, unless my colleague has anything.

The Vice-Chair: OK, thank you. Mr Martin?

Mr Tony Martin: I'm glad you came today, and indeed your story is a good one. I've been carrying around a tome of stories that have been written over the last five or seven years in Ontario about franchise relationships gone wrong. Yours is actually one of the ones where you've done some things that have ensured that they've gone right, and I want to offer my congratulations to you in an atmosphere out there where that's not always the case.

Do you want to share with the group, just ever so briefly, your TSS program and what that's about? There's a story here, and for those of you who are interested, it's in B-51 of the manual here, written March 30, 1999.

Mr Davy: TSS is a program that was introduced probably two years ago to help the stores that weren't doing as well in sales, depending on the market. It's supported by head office. Basically, through extra marketing dollars in after-promotions-so maybe they'd run a major campaign one week and they would support the other stores the second week. Basically that way they try to make every store in the chain profitable and bring the stores up. There's no big trick to it. If you look at the Masonville area and you look at the demographics of London, that store there is going to take me three years, maybe even five years to build up to where we want to be. Just because it's M&M Meat Shops and we open the doors it's still-not that we will get the support, but there are certain stores that do get it through this program that head office implemented.

Mr Tony Martin: Just a question of concern here, or a note of caution. What if somebody comes in tomorrow-for example, Pizza Pizza, which has quite a reputation across the province-and buys M&M? Is there anything in your contract to protect you from their becoming exploitive or whatever? Could that happen?

Mr Davy: We try to keep current and to update the franchise agreements we have. You don't wait till they run out. If something good changes, you can do a new one. I've got 10 years' protection on all the clauses in my agreement if someone were to purchase the company.

Mr Tony Martin: Excellent. Thank you very much.

The Vice-Chair: Mr Davy, thank you very much for your time today. We appreciate very much you taking it.


The Vice-Chair: Is Victor Martin from Party Land here? You have a 20-minute allocation.

Mr Victor Martin: By way of background, we are new people on the block. We don't have any franchisees yet. We should be opening one within a month and hope to have several hundred, but I'll be gone by that time.

This is basically my son's business. He's an MBA out of Western's Ivey school and was looking for something. He was in a large corporation that was going to be taken over. As you know, when they downsize they dump anyone and everyone. He wanted to have control over his future, so I said I'd back him financially.

We are the franchisors under the US agreement. The major franchisor is in Philadelphia. We are the largest franchise operation in the world. We're in 17 countries. Why they just started here is beyond me. They have been in foreign countries and everything. Actually, we found them. They were looking for someone in Canada, and we went to Philadelphia after we had read a lot of franchise books and found them and got the Canadian rights.

By way of background, I am a retired chartered accountant from a national and international accounting and consulting firm. I intended to stay retired until my son asked me if I would help him out in this venture.

I read Bill 33. As I say later on, I haven't seen the regs. Maybe there are regulations out now. If there are, I wasn't able to get hold of them. I have some serious concerns about the bill. Throughout my career every act I dealt with was always dealing with so-called public protection, and I have always wondered why there isn't any protection for the other side. I'm talking about all the equity, wage equity and everything I've dealt with in 40 years of accounting practice. I understand why it has to be there to help some of the public, so-called. I have no question or worry about that. I wonder why we wouldn't add, even in a heading, that franchisors have the right to impose operating obligations on franchisees to ensure uniform operations. The bill starts with the main heading that this is purely to protect the franchisee. If any agreement or contract we deal with is to work, it has to work two ways. Otherwise, you get confrontations between the two parties and there's no reason for that.


I looked at the bill in this way: I analyzed it as I would if I were on a consulting job. What bothered me initially was this right to organize. It almost seems like this is a union bill coming from the NDP government. I understand that. I did audits for unions, and I understand their position. I'm just saying that's what it looked like to me. Franchisees already have the right to organize and associate under common law, and I wonder why we give them special rights here.

I'm going to interject, in addition to what I've written here. The type of franchisees we are looking for are entrepreneurs. They can come to us with all kinds of money and everything, but we will not take them on unless they meet our criteria. In the party business they have to be outgoing, they have to be willing to manage the business themselves and they have to have a certain amount of business acumen to run it. If you mention unionization or organization, the type of people we want to see, and the people I've dealt with all my life, see red. There's nothing wrong with them organizing informally or whatever they want. We would encourage that, because we want their feedback. But to give them a right in the act to organize seems to me to be right out of sight.

Those items all are with respect to the right to associate, as I see those sections of the act.

The disclosure document, I think, has to be done right if this act is coming in. I think the material facts you are talking about have to be clearly enunciated, because this is the most important part of the bill. If you are going to have damages or have something wrong, you have to know what it is. It can't be a grey area covering every scope of business. You have to know out front what it is. If that is done, I'm sure that franchisors are going to be very careful about what they put in the disclosure document. They're not going to put in anything that isn't correct. I guess there are always people who will do something against the law or against a statute, but I think it's important to know what we're dealing with.

In 5(3)(b), you talk about the disclosure document. What financial statements? It's important to know who that is. Is this the franchisor, which in this case is the Philadelphia head office? Is it the master franchisor, which would be us here? Is it the existing franchisees who are under your umbrella? What are these statements and what are they going to do? We have to know that, and it has to be clearly set out.

Foreign franchisors may also be subject to domestic regulations such as the US Securities and Exchange Commission which require or prevent certain disclosures. In talking to Philadelphia, they are under the Securities and Exchange Commission and they can do certain things. I guess we would have to have some kind of reciprocal law here that would allow disclosure in Canada similar to what it is in the States and not offend the States if in fact you're asking the American head office to give some disclosure. It has to be consistent with the Securities and Exchange Commission. This isn't unlike any other prospectus that's put out worldwide. We have to know what we're talking about here.

As a master franchisor, we don't own any stores and our financials will not provide any useful data to potential franchisees, since our operations are promotionally oriented. All we do as a franchisor is promote. We've spent a pile of money already-all our own money, so we have no debt. As I say later on, we're not asking anybody to put money into our company. I don't want to issue a prospectus. I will if it's necessary, but why would I do it? I'm not asking for anything.

Our lawyers also advise us that we may not have the right to disclose franchisees' confidential information. They will be submitting information to us on a quarterly basis under our contracts so that we can keep track of what they are doing and be helpful to them. But do we have a right to disclose their private and confidential information? Is the act going to ask for that? I think that is a question we have to ask legal advice on.

There should be provision for providing information at a level of detail which would not reveal to competitors important competitive secrets such as the cost of goods sold percentage. In addition there should be provision in the bill that the potential franchisee must disclose-this is for our protection-if they have any association or relationship with another company or franchisor in the same industry, prior to receiving the disclosure document. Why can't we be protected in this bill? Why would we want to disclose information to a potential franchisee who really is acting as a front person to get information from us, who is really representing another franchisor or something like that? We have to know that they're solid people and have our interests and their interests at heart.

My final paragraph under that section is, with respect to new franchisors, which might be different-I heard M&M. They have a whole bunch of stores; they have a history. We don't have any, so how do we disclose a financial history if there is a disclosure statement? Just put a big "0" and send that in? I don't think that's satisfactory. We have to tell you something and I'd like to know what that would be so that we can do it.

Under subsection 5(5), the disclosure document, this bothers me too when I read it. If a disclosure document is only filed once a year, how can a material change be set out? It's material changes that you're looking for, I believe, in this bill, to find out if there's a problem. Does a new disclosure statement have to be issued every time a new franchisee is contacted? There may be material changes between the last one that was issued and this one. I'm not sure what they do; I think Alberta is the only other one that has such a disclosure in Canada. From my research, that's what I found out.

I'm not sure whether they file this just once, or do they file it every year? I think it's important for this committee to determine this so that you're not giving one person one disclosure statement and another person another one six months later that has different facts in it because things have changed. I'd say this is very expensive if we have to do it every six months or annually. It may not be practical.

Subsection 6(2): This gives more trouble than anything I've seen in the whole act. Rescission for no disclosure: Two years to rescind any agreement is too long and would hurt all parties, given the uncertainty it would introduce. A better option would be to have a requirement that a franchisee may waive the disclosure document at the time of the signing, at their own risk, or make any franchise agreement void without being preceded by the disclosure document to prevent the situation from ever occurring in the first place. This raises the issue that there should be a phase-in period to allow franchisors or master franchisors to prepare the disclosure documents and to review their documentation so that it does not impede ongoing negotiations with potential franchisees at the time this bill is passed.

Every time in my history of 40 years in practice that a new bill comes out there are usually clauses, grandfathering and current, to allow the bill to work, because everybody's in a different position at the time the bill is passed. There are existing franchisees, there are present ones who are signing now and there are current ones, and you've got to catch them all in some kind of a broad wording that will be effective for them.

Subsection 6(6): As I say, if we change subsection 6(2), the two-year problem, this subsection wouldn't be necessary. In any event, 6(6) is totally impractical as it would be impossible to trace, quantify and unwind all the transactions. I can't tell you, ladies and gentlemen, how serious this is to the franchisee and franchisor. After two years in business, you can imagine the number of transactions. You can imagine the influence of economics and other influences from the outside that neither the franchisor nor the franchisee had any control over; totally out of their control, and would unwind after this type of period. I say it couldn't work.

For example, clause 6(6)(d) requires compensation for operating "losses." Boy, that's quite a word. What are "losses"? Huge losses could occur due to incompetent management where unreasonable wages were paid and other significant operating errors were made etc. Most store leases are for five to 10 years. If an irresponsible franchisee had signed a lease for 20 years at $150,000 per year, you know you've got to have $1.5 million. It may or not be brought to bear upon the franchisor, but that's a huge item, whereas the franchisor had nothing to do with signing the lease.


In my practice, I would have several people in the same area, the same city or same locale running the same operation, one doing very well and one doing very badly. What are the reasons? That's a good question. What are the reasons for that? I was a trustee for 15 years during my career. The trustee is required to report why the bankruptcy occurred. Over 95% of them are mismanagement. The same sweet operation, with somebody who doesn't pay attention to the business, will be run down in six months, and yet the business is a viable business. It's management that did it. As I say, they could take out $100,000 in wages; the other person took $25,000 for a while to build up the business. I could name you 100 factors that are going to enter into this, and yet the word says "losses." Does a franchisor have to cover losses if a fellow took out way too much money, paid his wife, paid his children and entered into improper leases, has no ability to run the store? It's going to be very difficult to determine the underlying cause of the problem. I don't know how we can define it. That gives me nothing but trouble.

So we get into 7(1)(c), "Damages for Misrepresentation." This, again, I don't understand. I'm sure we have lawyers on this committee or you get advice, but I don't understand why an officer of a corporation would sign a document knowing that he might be liable. I would never have advised my clients to do this and I know the lawyers I work closely with wouldn't either. It pierces the corporate veil and no corporate officer would risk exposing himself to such liability. If the bill is enacted it has to go after the corporation, it can't go after the signing officer. If you told a vice-president of marketing to sign this contract, if the president did or CEO, he either signs it or he may not have a job. If the CEO knows something that the vice-president signing doesn't know about disclosure and he wants the vice-president to take the knock, here's the remedy. There shouldn't be any remedy for an officer signing in good faith. There should be a remedy against the corporation only.

Again, when the rights cannot be waived, this seems to violate common law and the basic rights of the individual. If the franchisee feels they are being coerced by the franchisor or master franchisor into waiving a right they would prefer to keep, they should refuse to sign the agreement and look for another franchisor or seek legal advice. We are going to encourage our first franchisee to seek legal advice on the whole contract. If they're not happy with it, we might change it. If we're unable to change the wording or don't want to, we would suggest they don't sign up as a franchisee. We don't want them. What we want are entrepreneurs who are going to run a business and run it well.

What's the difference, if I could put it this way, between independent stores today running their operation and a franchise operation? There's no protection other than common law for any store or any business that's being run today by an individual. So what is the difference between a franchisee and this other party down the street who is running a party store against us? Our advantage and why people will come to us is our purchasing power. There are only a couple of things: our system and our purchasing power. Our purchasing power more than compensates for the royalty. Our franchisee should be able to be very competitive with the fellow down on the corner who is operating the same way, the same business. If he doesn't, if he wants to withdraw, there are escape clauses. He can get out of our contract.

The Vice-Chair: You've just got a couple more minutes.

Mr Victor Martin: I'm at the end.

The exemption: Again, like the other regs I was mentioning, they should be published and available for review. I haven't seen them; maybe they are available. But here again, I'm reading a bill and I haven't seen any of the regs. The regs are an integral part of the bill. I don't know what they're going to be.

In summary, if you feel there's need to protect franchisees, so be it. I think we have to protect some people. But the franchisee should be a true entrepreneur, should want to run a business, and if there are clauses in an agreement that prevent him from doing so, I think he has a right of damages under common law. I don't know why a franchisee would sign an agreement with clauses that could be used against him by the franchisor.

I also know there are always people who will do things against a franchisee. A large corporation possibly has some ulterior motives. I understand that's there. I'm not naive; I've been around a long time.

That's my presentation. I didn't mean it in a confrontational manner. I just meant to give you exactly how I feel about it as a franchisee. I would not want to be a member.

The Vice-Chair: We've all got a copy of it. We appreciate that. Thank you very much for your time.


The Vice-Chair: Mr Peter Dillon. You have 20 minutes, and that includes questions, if we have time for questions. Do you have a handout?

Mr Peter Dillon: No.

Good afternoon, ladies and gentlemen, and welcome to London. My name is Peter Dillon. I'm a partner with the London law firm of Siskind, Cromarty. I have been practising in the area of franchising since 1989. At this point, franchising is all that I do. For the most part I represent Canadian and American franchisors. Other lawyers in our franchise law group represent franchisees, although I have over the years represented dozens of franchisees and continue to do so in the case of long-standing franchisee clients.

I am the only lawyer member of the Canadian Franchise Association in Ontario outside of Metropolitan Toronto. I'm a member of the legal legislative committee of the CFA, a member of the American Bar Association forum on franchising and a member of the International Franchise Association.

In September 1998, Western Legal Publishing published my annotation of the Alberta Franchises Act. I am also the editor of QuickLaw's digest on franchise law in Canada.

My interest in appearing before the committee today is twofold. First, I hope to provide some balance to the committee by providing insights from my 11 years of extensive experience in franchising in Ontario. I think the debate on the subject, from what I have witnessed, currently risks being hijacked by one or more well-intentioned but, I'll go so far as to say, somewhat obsessed individuals, along with Mr Martin and the media, who just love horror stories. That's the phrase I hear bandied about and that's the expression that I've seen used when those individuals are soliciting stories from franchisees who have had bad experiences in franchising.

We Canadians are pretty lackadaisical about getting involved in this kind of process. I can tell you that most of my clients are just too busy trying to make their franchise work, whether they are franchisors or franchisees. As well, for the most part, a lot of them have that naïve Canadian confidence that whether they show up or not, everything is going to work out OK. I have that same confidence, but I wanted to be at least one representative of what I perceive is a very large silent majority.

Second, I wanted to add my voice to those advising the committee to exercise caution in regulating this very important aspect of our economy.

I represent about 20 franchisors ranging in size from no active units, that is, they're just getting started, to systems with 150 franchise units from Newfoundland to Vancouver.

My day consists of advising franchisors on complying with Alberta's franchise legislation, purchasing and selling businesses, negotiating leases for franchise outlets and trying to pry money out of Canadian banks, which is probably one of the toughest jobs I have.


Of course, I draft a lot of franchise agreements during my days as well. If you were to ask me, "Were those agreements well balanced in the sense of two parties being equally represented and with equal negotiating strength?" my answer would be no, and I think there's a good reason for that. One factor that all of us appreciate about franchising is the need for consistency. I think our desire as consumers is to encounter that consistency. Consistency among humans is difficult to attain.

I have one small anecdote. I once acted for a franchisor who had to pull out the franchise agreement in order to convince a franchisee-this was a doughnut chain operation-that the franchisee didn't have the right to sell his wife's chili, and that came as a surprise to the franchisee. It was a source of disappointment to the franchisee because his customers liked his wife's chili. But when you're running a franchise system and your customers expect consistency, there simply are things you can't do and serving your wife's chili in that case was one of them. The unbalanced franchise agreement was the instrument that we employed to ensure that the wife's chili didn't get served.

From time to time, I have to deal with termination of franchisees. My most recent franchise termination was a very interesting one, in part, I see, because a couple of the individuals involved in that termination are appearing before the committee. In that case, the franchisee was represented by David Sterns from the Toronto firm of Sotos Associates, from whom you've heard, and the franchisee who was terminated is also appearing before the committee.

The franchise system in that case was a full-service restaurant. The franchisee in question owned his own small doughnut franchise with a dozen or so franchisees-a little bit unusual here. We've got the franchisee who also happens to be a franchisor. And he owned a franchise from a national burger chain.

My franchisor came to me from another non-franchise lawyer and was pulling his hair out. The franchisee in question was proving to be a very disruptive influence. He wouldn't adhere to advertised specials, he refused to buy from approved suppliers, he refused to staff his restaurant in accordance with recommendations, and his restaurant was filthy. Coincidentally, a week before we'd been retained by this franchisor, my secretary had advised me that she was out for dinner with her husband and her husband had become quite sick after eating a meal at that restaurant.

The franchisee was taking some kind of perverse pleasure in ripping the franchise system apart, flexing his muscles, as it were. He refused to follow any dictates whatsoever. However, he always paid his bills on time. He'd been advised by his lawyer that there was nothing we could do. In fact, we conducted an inspection of the restaurant and found what I can only describe as disgusting conditions: mouldy food, accumulated filth in refrigerators and dishwashers, unsanitary food preparation, improper food storage, and the list goes on and on. We took lots of colour photos and then changed the locks on the doors and terminated the franchise. The franchisor hired steam cleaners and renovators and after about a week of cleaning, the restaurant was ready to open again.

The franchisee, who was far from unsophisticated or without resources, brought an application in London for an order permitting him to regain possession of the premises. Because I find judges tend to give the benefit of the doubt to the little guy, I was surprised when the judge upheld our actions and refused to allow the franchisee back in. I think the colour photographs really tipped the scales in our favour.

Although my client could have continued to fight the franchisee, we settled the matter by rebuying the restaurant from the franchisee. We paid him about half of what he had paid us a year previously. Outrageous, you say? The franchisee's weekly sales had fallen to about half of what they were. Six months later, sales are back to almost where they were, but my secretary and her husband still won't eat at that restaurant. That's the kind of damage that a bad franchisee can create for the goodwill of a franchised system.

A lot of people complain that the government needs to heavily regulate franchising because justice through the courts is too expensive and too time-consuming to obtain. This doesn't make sense to me, for a lot of reasons. First, to the extent that the accusation is true, it's an indictment of our court system, and that's where the government's energies should be directed. Second, I don't see why a franchisee should have special rights as a result of his contractual relationship when, for instance, a tenant under a commercial lease would have no such special rights. Third, I can tell you from first-hand experience that judges have a strong predisposition in favour of franchisees.

In one matter several years ago where I appeared for a franchisee, I introduced myself to the judge as acting for the franchisee, and my friend, Mr. So-and-So was appearing for the franchisor. The judge, who was as sharp as a tack but liked to give the impression of being a country judge, said: "Mr Dillon, franchisee, franchisor, I get so confused with these terms. I'm going to say that you're here for the little guy and Mr. So-and-So is here for the big guy." Of course, I didn't object to that characterization and we went on to win the matter, despite the fact that as far as I was concerned my client didn't have the moral high ground in the case.

We in Canada have some significant barriers to productivity and wealth creation. Our climate can be tough on us. We have a lot of government paperwork to contend with. Our rates of taxation are still brutally high. The availability of capital is a problem in Canada. Our geography is terribly daunting and, I can tell you, from the perspective of a franchisor it's especially so. The prospect of opening and servicing a new franchise in Timmins is daunting enough, let alone Vancouver. In addition to being small, our population is widely dispersed. This results in surprisingly few markets of any significant size across the entire country.

One area of life where I think we stand head and shoulders above our American cousins is our judicial system. The Americans, in their Jeffersonian pursuit of Utopian justice, tend to be highly interventionist. I can tell you that my CCH franchise law service extends to over 15 volumes of 6-point print on my bookshelf. I believe that if we attempt to emulate the American example on franchising, we will suffocate the baby. One need only consider the chilling effect on business that Alberta's predecessor legislation had on franchising in that province. Alberta, I believe, saw the error of its ways and totally repealed its highly interventionist legislation in 1995, as I'm sure you've heard.

The fact is we can't analogize our situation with the American economy. The American economy is so large and so robust, their population densities and demographics are so different that to say, "Well, they have done it, so we can do it," just doesn't hold water. The typical estimate that we provide our clients in terms of the legal costs of starting up a franchise system in the States-this is just the legal cost-is US$100,000 to deal with the 48 continental states. Now, when you're dealing with the potential payoff from the American market, that's a number that you can deal with, but there's no hope of recovering that kind of sunk legal costs from the Canadian market.

The Chair: You've got five minutes, Mr Dillon.

Mr Dillon: I spoke earlier of the phenomenon of courts bending over backwards to help the little guy. I think our common-law tradition has also served us very well. Doctrines of unconscionability, fiduciary duty, good faith, commercial reasonableness and others have been used to protect people from unfair bargains, while at the same time preserving our valuable and deeply entrenched right to contract freely among ourselves.

I believe that Bill 33 in its present form-and there probably aren't too many other people in the province who have read it as closely as I have-is a sound response by the Legislature to the concerns of the franchisor and franchisee communities in Ontario. The extent to which it creates additional expense and burden to franchisors is minimal, especially to the extent that those franchisors are already members of the Canadian Franchise Association and comply with the mandatory disclosure policy of the CFA. It's also reasonable in its imposition of a fair dealing obligation and the rights granted to franchisees to freely associate.


Importantly, Bill 33 is consistent in scope and language with Canada's only existing franchise legislation; namely, the Alberta Franchises Act. As I think I've made it clear, my belief is that a government's role is to facilitate, not hinder, commerce. I believe that any changes to the bill from its current form and content would hinder, not facilitate.

Ladies and gentlemen, franchising is an important part of our economy. It should be fostered and encouraged to play a larger role in our economy. It is a sound method for the delivery of goods and services to the Ontario public. Yes, there are some horror stories out there. Some of them are the result of stupid actions by shortsighted franchisors. Some of them are the result of laziness, poor organization and lack of application on the part of certain franchisees-and I've acted for some of them. A few of them result from unscrupulous fly-by-night franchise organizations, although personally, and fortunately, I have no experience with the last category of horror story.

I encourage you to recommend passage of Bill 33 in its current form, for the benefit of all Ontarians. Thank you for your time.

The Vice-Chair: Thank you, Mr Dillon. We've got a few minutes for questions. Any questions from the Liberal caucus?

Mr Crozier: No, I don't have any questions. I just like the idea that that judge had the right perspective.

Mr Tony Martin: I come to this piece of work not so much by choice as by having been invited in by a number of franchisees in my own community who were being hammered by a new corporation that took over their old franchisor and was just taking their livelihoods away from them. That can be a horror story that we all take advantage of and blow around in the press. Sometimes that's the only option we have to get redress, because a lot of these folks can't afford the legal fees required to fight the bigger companies. I suggest to you that Mr Stewart is on this issue not by choice either but by the circumstance of having been a victim himself, and then because of that and his courage to go public with his story, others phone him and ask for help and advice. Neither of us can sleep at night sometimes for thinking about the families we've heard from over the last three days during these hearings and that we will continue to hear from because we're seen as people who are interested, who care and want to do something. Are you suggesting that we leave those people simply twisting in the wind?

Mr Dillon: First of all, let me say that I've a great deal of respect for Mr Stewart. I know something of his situation, although I have no first-hand knowledge. With respect to one of the evils that this legislation is intended to redress-namely, disclosure-I frankly am not sure that you could have ever improved on Mr Stewart's due diligence. You've got a person of exceptional intelligence, exceptional background, with an MBA, who contacted I think 20 out of 22 existing franchisees, prepared pro forma information etc. The courts have reviewed and found against Mr Stewart. I just don't know what else could have been done to prevent Mr Stewart's unfortunate situation. That's point number one.

Point number two is that some businesses fail despite the fact that no one would have expected them to fail. Let me give you, for example, the recent concept launched by Cara foods. I hope no one from Cara is in the room, but people with-very few people in Canada probably have more experience in franchising than Cara, and it was a disaster and they lost a lot of money in it. Let's not forget that even though we're dealing with a lot of sophisticated franchisors and some big business people, we're still dealing with a fickle public, bad locations, errors in judgment etc. So nothing is going to prevent horror stories, both on the part of franchisors and franchisees.

Third, with respect to franchisors, I think the franchisor you described falls into my first category of stupid franchisor, and I do see that. I can't believe it, sometimes, when I see what is short-sighted behaviour on the part of franchisors. But I think, across the spectrum of the economy, we have to believe that enlightened self-interest is going to motivate franchisors to be fair, to ensure that there is a reasonable return to their franchisees. If that's not the case, they're not going to be in business for very long. I'm not sure we can ever legislate good sense on the part of franchisors.

In terms of people who are abused wrongly and fall into the fly-by-night category, I think the judicial system responds. A great deal has been done by the government in the past few years to expedite proceedings, and things are not as expensive or as slow as they once were, and I think that's the way to continue. The fair dealing obligation in the act will certainly assist franchisees in that regard.

The Vice-Chair: Mr Wood, do you have a comment?

Mr Wood: I have a quick question. What rate of return do you think franchisees might reasonably expect on their investment?

Mr Dillon: The rate of return that will ensure that within the term of the franchise-be it five years, 10 years, 20 years or whatever-their initial investment is returned, plus a reasonable profit.

Mr Wood: What do you think is a reasonable profit?

Mr Dillon: That depends a good deal on the risk involved, but if you ask me, off the top of my head I'd say 10%.

Mr Wood: Do you think they tend to get it?

Mr Dillon: In my experience, yes.

The Vice-Chair: Mr Dillon, we appreciate your time today. It was a good presentation, and we'll take everything under advisement.


The Vice-Chair: Is Mr Rosenberg here?

Mr Howard Rosenberg: Good afternoon, ladies and gentlemen.

The Vice-Chair: Before you start, Mr Rosenberg, just to the committee: Mr Martin had some previous comments about our next steps after this, so after Mr Rosenberg's presentation we'll have about 20 minutes to discuss that. Thank you very much, Mr Rosenberg.

Mr Rosenberg: I don't purport to know as much about Bill 33 as the illustrious fellow before me. However, from the summary I've seen of it, I have to wonder why it even exists. It gives franchisees the right to associate. Is this not a free country? Why do we need a bill to give franchisees the right to discuss their business and other things? I think it's superfluous and redundant. My feeling is the opposite to what the previous speaker said. We need a good, solid set of laws with respect to franchises because any franchise agreement, as the previous speaker also said, is totally one-sided.

When a franchisee enters into an agreement with a franchisor, he has no rights. I've been through it. This is why I'm saying this and it's why I'm here. My solicitor phoned me up and said, "You should come and tell your story." I'm the fellow in the story with that restaurant. I had an operations manager, a regional area manager, who had left the franchisor to come to work for me. Contrary to what you were told, I was told my store was the cleanest one in the system. So if that's the case, then don't eat at Crabby Joe's.

There was one in Welland that the franchisor closed up and reopened. There was in St Catharines that he closed up and reopened. There was one on Wellington Road in London that he closed up and reopened. Talk about fly-by-night. In that particular instance, when you have 10 stores and 40% of your stores are constantly turning over, I think we need to look at the franchisor as opposed to these franchisees.


I agree that there should be some consistency with respect to a franchise system. I've worked for a major franchisor, I've owned my own franchise and I've been a franchisee for two particular people. What I'm trying to tell you is that it's very unfair. I was closed up because the bulk of the information stated that my store was basically dirty etc. I had a health department report a month previous to that, and the London health department said everything was cool. I had been running this operation for about a year and a half. After a year and a half of running it, and the health department comes in and says everything's fine, the franchisor comes along and concocts these stories about how dirty and filthy it was and takes pictures. I have to repeat myself. The area rep, who left the franchisor and worked for me, told me that my store was the most efficient and the cleanest store of any in the chain.

This particular franchisor decided for various reasons-one of them was that I had begun to speak with another of the franchisees. I was in the south end and there was a franchisee in the east end. He came to me and a fellow from Tillsonburg also came to me and said, "There are serious problems here." I didn't start the discussions. When the franchisor got wind of this, the result of what I told you happened. I got locked up. I invested a ton of money in this restaurant. I was locked up without warning. There was no official, formal, legal warning that I was going to be locked up. One Saturday morning somebody knocked on my door and said, "Here, your restaurant is closed." Oh, well, it's only half a million dollars.

This particular franchisor-talk about fly-by-night-was involved in another chain which he converted into this chain. Again, just look at the history: All the stores closed, opened, closed, opened. In most instances he would pinpoint someone who had their life savings put into a store, and he would come along and invent some fictitious reasons for closing them up. These people had no more means to fight, so they had to curl up and die.

My lawyer said to me: "You have two choices. You can curl up and die or you can invest a little bit more money in legal fees and we have a shot at it." I had no choice. I couldn't walk away from it because I would have been totally wiped out. Fortunately, after the first day of court, when the injunction was filed, the franchisor's lawyer that afternoon contacted my lawyer wanting to settle. Believe the facts as you may, but if things were weighted so much in this fellow's favour, why would his lawyer contact my lawyer and say, "We want to settle"? The conclusions are yours.

All I'm trying to say is, as the franchisee-put yourself in a franchisee's position-you're investing all this money, whether it's McDonald's, Tim Hortons or anyone. Yes, the franchisor has a system and he's put some money into it etc, but I just don't think it's fair. Let's say you pick a really good franchise like Tim Hortons. That's almost guaranteed, but if Tim Hortons makes a mistake-for example, Tim Hortons is now in the States; I understand they're not doing as well as they are in Canada-I think that the franchisor should have some of the onus on them if a venture fails. Why is it that the franchisee puts all his faith into this franchisor and all his faith into the system, and for whatever reason, whether it's his fault or not-sometimes it's the franchisee's fault. I agree. Some franchisees do not have the experience. In my particular case, I had run a chain of 13 doughnut shops single-handedly, so I had a little bit of experience. One restaurant was not that difficult for me. But why should the franchisee lose all his money and the franchisor lose nothing?

This is what I mean by writing certain things into the legislation. I honestly believe that if it's a partnership, as some of these franchisors say, there should a partnership in the gain and in the loss. So if the franchisor makes a mistake with a location or what have you, or even in picking a franchisee-if the franchisee doesn't work out-I think the franchisor should bear some of the weight, whether it be to give the franchisee some of his money back, or be obligated to maybe purchase the equipment and pay off the bank or what have you. The problem for a franchisee is that has one shot. He has his life's savings in it, and if he loses he's finished. That's a concern for me.

The other thing is: One of the discussions I had when I originally entered discussions with the franchisor was that if I could find the identical product at a different distributor, because I had had some experience working with other distributors, would it be OK if I were to do that. Verbally he said yes, but when push came to shove he denied it. Fortunately I had a partner at the beginning, and he was a witness to our conversation and signed a document proving that I was right.

One of the reasons one buys a franchise is to achieve the volume purchasing power of the franchisor. Obviously, if somebody has 10 stores, he's going to be able to buy better than someone who has one store. In my case, I contacted a distributor and I could buy a case of ribs $5 cheaper through my distributor than I could through the franchisor's "volume purchasing." This is why I could see there was a problem. The industry standard for restaurant food costs is 32% to 33%. When I took over, mine was 40% and was in line with the rest of the franchises in that chain. So someone was making an excessive amount of money at the expense of these poor franchisees, who were investing their life's savings.

Things are fundamentally wrong. There's too much power involved with franchisors, in that they can basically invent things. Once you sign that agreement you're locked in. If you don't buy from him, bang, you're locked up. You're locked up if he doesn't like you because you are talking to other franchisees or what have you. To be honest with you, since my situation was quoted, the problem my franchisor had with me was that he was afraid I would associate with the rest of the franchises, and we were discussing starting a buying group so we could buy things cheaper.

I don't know much about the Competition Act. From what I've read about it I think it's very difficult to enforce, but there are certain clauses in it which legally prevent franchisors from getting into this "You have to buy from my distributor" type of thing. But in discussing that with my lawyer before this even happened to me, he basically said it's very hard to bring the Competition Act into the swing of things here, so just leave it.

My franchisor even set up the terms. I came in; I had credit with distributors I was dealing with. Then I had to buy from his distributor and I had to pay COD. Why? Because there's no risk to him. Secondly, I said to my distributor: "If I'm paying COD, isn't there some sort of arrangement in general business that if you pay cash you get a 2% discount?" "No, we can't give you that. This is the way the pricing structure was set up." I don't think I need to tell everyone where all the money was going: 6% of sales works out to be $6,000 if your average sales are $100,000 a month. I'm not good in math, but without spelling it out, I think you can pretty well do it.

I also find it very strange that when I was a franchisee of the second-biggest burger chain across Canada, when I had reports done by my area rep they came in at the top achievement, my stores were clean, clean health department reports in both places. On the other hand, this other franchise, had a history of life's savings, closing, life's savings, closing, new franchisee, don't buy it back, kick him out. I'm sorry: I'm not as eloquent as the previous fellow, but I'm just trying to get the message across. I didn't really want to come here and say this, but I thought that if I could come here and get this across to you people and prevent what happened to me from happening to someone else, then at least I would have accomplished something. That is really all I have to say.


The Vice-Chair: We have a few minutes for questions. Mr Martin, your turn first.

Mr Tony Martin: If you are worried about the picture that was painted about yourself by the previous presenter, not to worry. You are in an exclusive group of people that he targeted. I happen to think that all of us are probably pretty good folk. I want to thank you for coming here today and for having the courage to share your story and to enlighten us.

It seems to me that the nub of some of your difficulty with your franchisor is this issue of tied buying or sourcing of product. You mention it as volume purchasing, and we've heard this story a few times over the last three or four days. When people who were tied into buying from the franchisor actually went out to see the market value of the product they were being forced to buy from the parent company, it was much cheaper. Had they been allowed to do that, they would have been able to make a bit more profit, support their local economy and help out in terms of generating a bit of a customer base for themselves.

Would it be fair to say that some of the issue your franchisor had with you was his inability to get you to stick to the tied buying arrangement that he would have preferred?

Mr Rosenberg: No. As I said right at the outset, I specifically said to him, face to face, "If I can buy the same product-not similar, but the exact same product-somewhere else, would I be allowed to do that?" He said, "Yes." I didn't have it in writing. That was my mistake; I should have had it from him in writing. Then when I went and did it-if I had not gotten his agreement in advance, I wouldn't have gone to buy elsewhere. I know what the franchise agreement said etc. The problem is that this fellow was making $1 million a year on royalties, rebates, liquor company kickbacks and budgets. He would get a budget of $200,000 for 10 stores and give each store $6,000.

My philosophy is, live and let live. I was in this to make a reasonable living. I see the industry standard of 32% to 33%, and I'm running a tight ship. He always tried to slough it under the rug. I had a program on my computer which gave me my theoretical food costs. He would always say, "You're not controlling things," and I would know exactly where I was out every week. If there was a steak missing or a case of chicken missing or whatever, I could go to the kitchen manager and say, "There's something wrong here." In most cases, when a businessman runs his restaurant, if he does his food costs at the end of the week and is out, he says: "It should have been 34, but it's 35. I don't know why the food costs are out." I knew exactly why. The franchisor was trying to tell me that I wasn't running a proper ship. He didn't know I had this theoretical thing.

In answering your question, my philosophy is, live and let live. This guy is making $1 million, and I'm struggling just to pay off the bank. If everything were equal, that would be fine. But when my food costs are out by 6% and they're going into his pocket, and he's just doing that so that I cannot make any money and eventually close up, that's not fair. Again, it's a matter of being treated fairly.

There has to be some regulation so there's fair treatment between the franchisor and the franchisee. If I can buy things cheaper through my franchisor, which is how it should be, then fine. That's why I'm buying a franchise: to get the volume purchasing power. I should have been able to go out and buy a case of ribs for $5 more, not $5 less. This fellow had 10 stores, and I could buy the exact same product for $5 less.

The literature he gave me originally said, "You're buying this franchise for volume purchasing power, so that you can save money." If I can save money by going out and buying it myself, then there's something fundamentally wrong. Where's the legislation that doesn't allow him to do that? There is no legislation. He can do what he wants. He can come along and say: "Hey, your store is dirty. I don't care what the health department says; I'm closing you down. You're losing all your money."

He offered me $50,000 for the equipment on a $500,000 restaurant. That's why I went to court. I couldn't sit back and-that's why I spoke up and that's why I talked to the other franchisees. I have to have a certain amount of self-respect and I have to be treated fairly, and if I'm not being treated fairly, then I'm not going to lie down and die the way the others are.

Sorry I'm getting all worked up here.

The Vice-Chair: Mr O'Toole has a comment.

Mr O'Toole: I appreciate your presentation this afternoon. It's interesting that we'd have had the attorney here at the same time; it seems a little bit unusual.

The purpose of this committee, of course, is to look at finding some suitable legislation to make sure we have fairness in competition and in the marketplace. It's not a perfect balance, but have you looked at, legislatively, the disclosure provisions within this? I know you haven't perhaps read the bill, as you said at the beginning, but disclosure, meaning making sure that those contracts are disclosing the pertinent information-I don't think too many have disagreed with the intentions there.

Mr Rosenberg: To put it bluntly, what is being disclosed does not prevent what happened to me. That's all I'm saying.

Mr O'Toole: It would clarify, if I may-and I'm not trying to solve your problem here, by the way.

Mr Rosenberg: I don't have a problem any more.

Mr O'Toole: But I think it would clarify these supply specifics within the contract. "You said/he said" isn't really too good for anyone, to say, "You said that I could buy it," or "They said you couldn't." Let's go to the contract and make sure that's in the disclosure document.

Mr Rosenberg: This disclosure document, are you more or less talking about a summary of the franchise agreement?

Mr O'Toole: Yes, and I suspect it could disclose what were the provisions with respect to buying product. As you say, you are buying it for the purpose of getting volume discounts. From the perspective of the franchisor, you're really trying to get into the whole issue of product consistency and predictability; like, you're not going to buy ribs that are inferior. Do you understand? So there's some legitimacy in the franchisor specifying what products you will buy.

Mr Rosenberg: I'm not disputing that, but I'm saying that the products that I purchased were the exact-and I didn't say, "Can I buy something similar?" at the outset; I said, "If I buy the exact same product." Then I shouldn't be able to buy it; there's obviously something fundamentally wrong if I can go out and do that. Maybe there should be some legislation in there that says that if the franchisee is required to buy certain items, then it has to be at the best possible price that anyone can buy. If in fact he can buy things cheaper, then maybe the franchisor has to be penalized. The franchisee, every time he turns around, gets penalized for whatever.

Mr Crozier: If you were in this instance entering into a franchise agreement, what would prompt you to put that on the table, the question to the franchisor, "If I can buy the exact same product cheaper...?" What would prompt you to do that?

Mr Rosenberg: Only that I had my own doughnut chain of 13 stores and I had a lot of connections in the food industry with different distributors, so I thought if I could go to these distributors and save myself money, why not do that? To me, that's the way you run a business. The way I run a business is to try to minimize your labour costs, minimize your food costs to the extent that you still give good service, but if you can buy things cheaper, that's how you make the money. Your hands are tied when you're in a franchise. You can't do anything else, really. You have to do exactly what they say. So I thought if I could go out and-

Mr Crozier: See, that's what I'm trying to get straight in my own mind. What's the advantage to franchising if in fact one or the other can cherry-pick as to what they are going to abide by and what they aren't? I go back to a comment I made earlier today. There may be the instance where the only similarity between you and a franchisee in the next town is the name on the store. There has to be some standard, I guess. Obviously we've all said that it has to be fair.

Mr Rosenberg: You're missing my point, though.

Mr Crozier: You can help me.


Mr Rosenberg: I did not ask the franchisor, "If I can buy a similar type of rib, is that OK?" I asked him if I can buy the identical ribs from the same supplier, from the same manufacturer. If I were the franchisor and I had a clear conscience and I knew I was giving my franchisee the proper purchasing power, I would right off the bat say, "There's no way you will." Sure.

Mr Crozier: So then I could assume the same would apply not only to the ribs, but to the napkins, to the utensils you use, the equipment you use, the advertising you have. If you could go out and get the exact same advertising at a better price, you think you should have the flexibility to do that.

Mr Rosenberg; The exact same advertising?

Mr Crozier: Yes.

Mr Rosenberg: Well, yes. I don't think it should happen. If you've got a franchisor who has 10 franchisees-all I know is this, OK? When I had three doughnut shops and I went to a distributor and I said, "I want a price," it was very different than when I had 15 doughnut shops because of volume purchasing power.

Mr Crozier: And you were acting as franchisor in that case?

Mr Rosenberg: They were independent. They weren't franchised at all. They were just independent and I wasn't acting as franchisor.

Mr Crozier: OK, thank you.

The Vice-Chair: Mr Rosenberg, thank you very much for your time today. We appreciate it very much. You brought some good points out there.

Mr Rosenberg: My pleasure.

The Vice-Chair: Thank you so much.

The next deputation is on at 3 o'clock, the Fauberts. Are they here? We'll wait till 3 anyway, but we've got some time to discuss what Mr Martin was concerned about earlier. Do you want to bring those points up now? We have about 20 minutes here.

Mr Tony Martin: I don't want to be confrontational or adversarial. We've had four pretty extraordinary days here where we've heard from some folks about an issue that I think has some tremendous seriousness attached and ramification for the way that business is done in this province and the effect that has on the economy of the province and in particular regions of the province.

When we were in Sault Ste Marie we heard about supply issues and the fact that tied buying in the franchise industry was in many very specific instances having a tremendously negative effect on the ability of local producers to get their product on the market so that it could be available to consumers and consumers could make a choice.

This was affecting the franchisee, the small business person, because if he or she were allowed to go out and purchase where they could get the product at a competitive price, they could put it on the shelf and improve the potential for them to make a profit and be successful.

It affected the local business community because there were people in that area who were producing milk, for example, who were having an awful time getting their milk into the market and on to the shelves, not because they weren't producing a quality that was of high standard and their prices weren't of a competitive nature, but simply because an arrangement was made at a higher level they couldn't afford to play at, their product is off the shelf.

That's taken its toll on the communities within which those businesses operate and, I suggest, on whole regions of this province, the further you get away from the centre and the Toronto area: northern Ontario, in particular, in my instance.

So I'm putting on the table the possibility of perhaps the ministry, in preparing for second reading of this bill or of a bill that they might consider amending, or a bill they might put out that those of us who have worked hard at this might bring in amendments to, might consider doing an inquiry of some sort on the implications on the economy, on local economies and communities, on small businesses and franchisees of having 80% of the food industry owned and controlled by two major entities and the tied buying that goes with that reality.

I would also, as we mentioned yesterday, recommend that the committee, through the ministry, seek status in front of the federal bureau of competition so that we might present some of the findings that we've gotten here over the last three or four days and encourage them to, with us, do the right thing to protect small business and to protect a spirit of competition in this province, particularly in this instance because those are the people we heard from the most, the grocery industry. That's one piece.

The second is equally as important as far as I'm concerned. It's concerned with the influence that the Canadian Franchise Association has obviously had in the development of Bill 33, and the protected image that's out there that this association speaks for the industry and acts, when requested, on behalf of both franchisor and franchisee to try to settle disputes. I'm concerned that the perception that that in fact is happening has unduly influenced the development of Bill 33, to the point where the government may consider not accepting amendments we might make to this bill for fear of offending that particular organization.

We've seen, over and over again over the last three or four days, members of the Canadian Franchise Association-some of them members of the board of directors, some of them counsel, some of them the president and executive director-speak to us and very clearly indicate that it would not be in the best interests of franchising in the province to go any further than what's in Bill 33. It flies in the face of the evidence that we've seen-anecdotal, however it may be-from some of the folks who have found themselves caught up in that vortex and are now struggling to try to make sense out of it, to try to protect investment that they've already made and that is in jeopardy, and in some instances to put in place something that would be protective of others coming down the road. Not to speak of the need for us to make sure that there is a level playing field, access to justice etc for those who might be considering getting into the franchising business, considering, as I've said before, the economy that we're in that's shifting very rapidly and sometimes leaving people out there with a package of money, sometimes by way of severance, that they're looking to invest. Certainly franchising presents as an easy turnkey possibility that they may be wanting to get into.

I think that as government we have a right and a responsibility to make sure that we have proper regulation in place to protect those folks, as was mentioned to me yesterday evening as we watched some of the media coverage of the now infamous Marty McSorley case in hockey. In business, it's been made clear over the last few days, it's tough and you've got to be good at what you do. You've got to have the fundamentals down, and when you go in the corners you've got to be willing to exchange a few body checks and elbows, but a two-hander to the side of the head is obviously beyond the pale. What we've found here is that in many instances in the franchising industry today, some of the little guys in the business are getting, very clearly, a two-hander to the side of the head.

The criminal justice system has stepped in in the Marty McSorley case. I think that we as government have a responsibility, in this instance, to make sure that we're playing the game according to the rules and that everybody knows what the rules are and that at the end of day, if we do the right thing, we practise hard, we bring our intelligence to the job, we have some chance of at least staying in the game and having some success.

I'm tabling a request to the ministry, through the committee, to explore the relationship between the Canadian Franchise Association and legal counsel to franchisors in legal conflict with their franchisees. Some of you will remember that yesterday I delivered a letter to the president of the Canadian Franchise Association here. A company that is having a dispute-mind you, a legal dispute, a litigated dispute-the franchisees are having a legal dispute with their franchisor. They've tried to deliver a letter of complaint to the association. The association won't receive it. I gave this to the president yesterday on record and later in the day he returned it to me, saying that because this matter was under litigation, he couldn't receive it.


I suggest to you that is only one example of the dismissive attitude of this association to franchisees, which further heightens my concern that we have conflict of interest all over the place here. The Canadian Franchise Association deserves to be looked into to see if in fact they're doing the job that, under the auspices of the Ministry of Consumer and Commercial Relations, they've been licensed to, as I'm sure they are probably a non-profit organization.

Those are the two issues I put on the table here this afternoon.

Mrs Boyer: I think it is a question of order. I understand where Mr Martin is going. As I read the report of the subcommittee, it says that if the time permits on the fourth day of hearings, the committee members may make statements and proposals for the method of proceeding during further consideration and clause-by-clause review. I don't think this is the forum right now to do whatever we want to do. I think we did say that we could have more days. I thought that number 4 was just saying that together today we'd decide when we're going to meet again. Of course, we've got a lot of things to say, and I want to discuss it with the critic of this bill. I have no authority right now to do it. I thought today we were going to decide on a date and a time that we would meet again to go through this bill.

Mr O'Toole: I know there's a certain dynamic around any public forum, and I respect members' rights to express differences in the public forum on the record. I think that's been done. Whether it's appropriate within the approved minutes of the subcommittee is questionable. Nonetheless my own belief is that there is a time and a place. I believe the subcommittee should convene. We have not had the privilege of having the regular full Chair in attendance at any of these public hearings. I think she would need time to review the record and the debate and call a subcommittee meeting after April 3 between the subcommittee members representing all parties.

The intention here is to find that balance between the needs of all parties and the commerce of this province, and I think we're that close to it. I've heard in the discussions a lot of willingness to find a balance that will help us to have a better place to live, to work and to raise a family in this province. That's kind of how I see it. I could be polarized as well, but I'm not. At this point, I'm just digesting what I've heard after four days of public hearings, much of which has been a very valuable insight that can only add to a better piece of legislation.

Mr Gilchrist: There's nothing for me to add save and except to assure Mr Martin that, speaking only for myself, I brought no bias into this. Minister Tsubouchi asked my views going back three or four years ago based on my retail experience. I'd never even met anyone from the CFA until the first day of hearings here.

Again, speaking only for myself with a completely open mind, I think the testimony we heard from both sides, franchisor and franchisee, gives us pause for further consideration. You've heard already that the working group has considered and approved five more amendments that I hope you find favour with. I think you have already expressed that you have, and I'd like to think in that spirit we're going to continue to move forward.

I think we should each be pressuring our respective House leaders to ensure there's no impediment to the committee meeting again very quickly after April 3, the next time we're legally allowed to come back as a group, and to move quickly to do a clause-by-clause that's definitive enough that we can do it once at this stage and preclude the need to come back again after second reading.

I don't think there's anything to be learned beyond what we've already learned today. We'll be able to distill down, all of us, our respective positions when it comes to various amendments. I think if they're brought forward with a good business case, I'm quite confident that we're going to leave that round of clause-by-clause with a pretty harmonious feeling around this table based on how close we are right now. If we do that, our second appeal to the House leader should be a very fast second and third reading.

There is nothing, I would submit to all my colleagues, to be gained by belabouring this. We've heard of issues that are outstanding right now, particularly in the grocery sector, where there are negotiations taking place that might very well be positively impacted the moment this bill is passed. I think to indulge in our traditional propensity for more talk at Queen's Park simply adds an impediment to those people getting the kind of justice and fairness, in both directions, that I would hope is the goal of all the members on this committee.

I'll give you a personal commitment that not only in the appeal to the federal government, I would certainly join with my colleagues opposite in suggesting the Competition Bureau has a big problem that they should be confronting in a far more public way, but also in terms of pressuring our House leader. You certainly have our commitment that we will move expeditiously to reconvene, do clause-by-clause, then debate this bill and hopefully bring it to a mutually agreeable conclusion as quickly as possible.

The Vice-Chair: That sounds good.

Mrs Boyer: No problem with that.

The Vice-Chair: I don't know if the Fauberts are coming or not. We have to wait around for about five minutes in case they do show up. A five-minute recess.

The committee recessed from 1457 to 1510.

Failure of sound system.

The committee adjourned at 1512.