Tuesday 7 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

City of Sault Ste Marie
Mr Stephen Butland

Canadian Alliance of Franchise Operators
Mr Les Stewart

Algoma Federation of Agriculture
Ms Cathy Bonnett
Mr Ryan Connolly

Tim Hortons
Mr Nick Javor

Farquhar Dairies Ltd
Mr Don Farquhar

Wishart and Partners
Mr Gerald Nori

Sault Ste Marie Chamber of Commerce
Mr Ben Pascuzzi

Lock City Dairies
Mr Vic Fremlin

Mr Jim Fitzpatrick

Ferme Avicole Robert Ltée
Mr Brian Brownlee
Mr René Robert

Sault Ste Marie Economic Development Corp
Mr Duane Buchanan

Mrs Jersey's Dairy
Mr Peter Gass


Chair / Présidente
Ms Frances Lankin (Beaches-East York ND)

Vice-Chair / Vice-Président

Mr Garfield Dunlop (Simcoe North / -Nord PC)

Mr Gilles Bisson (Timmins-James Bay / -Timmins-Baie James ND)
Mrs Claudette Boyer (Ottawa-Vanier L)
Mr Brian Coburn (Carleton-Gloucester PC)
Mr Garfield Dunlop (Simcoe North / -Nord PC)
Mr Raminder Gill (Bramalea-Gore-Malton-Springdale PC)
Ms Frances Lankin (Beaches-East York ND)
Mr Pat Hoy (Chatham-Kent Essex L)
Mr David Young (Willowdale PC)

Substitutions / Membres remplaçants

Mr Ted Chudleigh (Halton PC)
Mr Michael A. Brown (Algoma-Manitoulin L)

Clerk / Greffière

Ms Anne Stokes

Staff / Personnel

Ms Susan Swift, research officer, Research and Information Services

The committee met at 1001 in the Holiday Inn, Sault Ste Marie.

Clerk of the Committee (Ms Anne Stokes): Good morning. It is my duty to call upon you to elect an Acting Chair. Are there any nominations?

Mr Michael A. Brown (Algoma-Manitoulin): I nominate Mr Chudleigh to be the Acting Chair.

Clerk of the Committee: Mr Chudleigh is nominated Acting Chair. Are there any other nominations? There are no other nominations. I declare Mr Chudleigh Acting Chair.


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 Acting Chair (Mr Ted Chudleigh): I call the meeting to order. Welcome, all, to Sault Ste Marie. Having a very benevolent winter, we can only hope we get some snow for next weekend's festivities. We are here to accept deputations to Bill 33, an act to require fair dealing between parties to franchise agreements.


The Acting Chair: Our first guest is Stephen Butland, mayor of the city of Sault Ste Marie. Your Worship, would you come forward, please. We have 20 minutes to spend together. You may use as much of that time in your presentation as you wish, and we will fill the remaining time with questions. Thank you very much for coming forward.

Mr Stephen Butland: I don't believe I will take my allotment of 20 minutes' time. I hope you don't ask me difficult questions, because I don't think I'll have the right answers.

The Acting Chair: Did you study last night?

Mr Butland: Yes I did. Actually I was at this at 7 o'clock this morning.

First of all, it's appropriate to welcome the committee to Sault Ste Marie. I think I have met all the faces before in Sault Ste Marie. Thanks for coming. Please come more often. We're far away and we're quite expensive to get to. I think you're all aware of that. Gas prices are outrageous and airfares are more outrageous. It probably cost you over $800 return per person to get here, and that's difficult. But we're not here to talk about the price of fuel; we're here to talk about Bill 33.

I would like to acknowledge the government for this franchise legislation. I need to acknowledge Tony Martin's efforts. He has renewed the efforts of a revered former MPP from Sault Ste Marie, and a member of the Conservative Party at that time and Ontario's Attorney General. He capsulized his rationale as: Legislation was needed to deal with the evils of franchising. Then MPP Jim Wiseman also brought legislation forward and it died on the order paper. I believe this legislation's time has now come. Its intent is to offer a level playing field. That may be a euphemism for the real issue at hand, that is, to protect the little person against the big person.

The dictionary meaning of "franchise" suggests that it's a right or a privilege to hold a franchise. It makes no reference to franchisor or franchisee. So I suggest it's a right and a privilege for both. It connotes working together in the interests of both parties. But also, more significantly, one would hope it works to the benefit of the consumer, who should be paramount in your discussions.

I offer little expertise in this area. I have not done a great deal of research into this. So I'm sure I will not say anything you have not already heard or read about. Nevertheless, I would like to proffer some opinion.

I know that legislation such as that tabled can, if implemented, impact tens of thousands of lives in our great province. There are volumes of anecdotal tragedies and it hits home on all fronts. Locally, I make reference to some large grocery chains. We lost three franchisees in our community in the last five years. It may be a personal opinion, but it's shared by many, that really they were driven from the grocery retail business. Two of those three people no longer live in our community.

In a previous political life I was involved with some of these franchisees at the federal level and quickly found out that there was no protection at any level of government. These people were scurrying at that time, right across Ontario, to come together and attempt to speak as one voice. That was nigh on impossible for them to do, and the only recourse they had was to hire legal counsel at great expense. So I have seen it at the federal level, you people are dealing with the provincial level, and there has been impact in the municipalities.

The people we lost were really good corporate citizens, and it was a loss to our community. I suspect that Mr Martin and others have recounted some of the very harsh realities as to why they left our community.

I don't want to be completely parochial, but it was, if nothing else, coincidental but also fortuitous that just last month, on February 10, we read, "Franchisor Leaves Travel Agents Stranded." I'm not here to implicate any of the major grocery chains, but in this one a couple of individuals opened a travel counter in a grocery outlet. The hierarchy is grocery chain, franchisor, franchisee. The chain did not pick the appropriate franchisor. The franchisor went bankrupt. The people in the travel agency at the grocery outlet were left in limbo. Each of them lost a $60,000 investment.

It goes on: "The `corporate solution,' however, turned out to be an agreement with another franchisor ... ," and I'm not going to name names here, "which immediately demanded a new round of franchise payments and higher royalty fees from the tapped out ... " previous "franchisees."

The individual had a record of less than sound financial wherewithal. The only obvious victims of the failure were the franchisees.

"`It is not our job to monitor franchise agreements,'" says head office. "`People should go into such deals knowing that if the franchisor messes up, the subordinate franchisees automatically suffer.'" So it's almost a matter of fact. "If this happens, it's too bad. You're fresh out of luck," said the franchisee. "My mistake was to believe" blank "would be careful in its choice of franchisor and would not write us off." But indeed, they were written off.


"Franchisees should recognize that most franchise agreements give them `no say whatsoever' in the main aspects of the business." Again, I don't want to be completely parochial. It's at the provincial level and I'm sure you're well aware of these stories.

The bill itself-and I need to thank Susan Swift for providing this individual at least, and I suspect others, a comparison chart that's very easily read and understandable. I just want to highlight a few of the items I want to note.

I think the concept of incorporating minimum standards is good. I suspect that Mr Martin's bill is more restrictive, more onerous, if you will, and I read into it, for the most part, that it's good. One thing I really endorse is this dispute settlement mechanism. I would encourage you to support that-I guess in the way of an amendment, would it be, Tony? OK. I would hope the franchisor and the franchisee could go to mediation first before they go to court, because that's a very costly exercise. I suspect it would be complex, but again I remember very well under the free trade agreement and NAFTA that there is a much-ballyhooed dispute settlement mechanism. So if something as complex as those agreements could have a dispute mechanism, I suspect this kind of legislation could as well.

I'm looking at the government bill and, as I say, I would endorse this and I think Mr Martin has gone on just a little bit more and added-is it flexibility or is it onerous restrictions? That's for you to decide. They don't seem that onerous to me, but then I'm not involved.

Under fair dealings and standards of conduct, it sets out minimum standards of conduct: good-faith dealing, enforcing only reasonable performance standards, exercising rights in a commercially reasonable manner, non-encroachment on territory, and it goes on. I suspect this should be described as flexible as opposed to restrictive.

The right to associate: I go back to the franchisees in Sault Ste Marie and right across the province at that time. They had no association. It was difficult to assemble them. There was no designated leadership and there was no unified front. I think Mr Martin is looking to deal with that in a more formal manner.

The bottom line is that the legislation, I believe, should be looked on as a positive piece of legislation. Who knows? Franchisors and franchisees may develop a healthy and a profitable relationship rather than one that seems to be built, from everything we read, on anxiety and fear.

I certainly thank you for the opportunity to make this presentation to you.

The Acting Chair: Thank you very much. That leaves us with about eight minutes of questions, and we'll start the first round with the Liberal caucus.

Mr Brown: Thank you, Mr Chair, and thank you, Your Worship. Some of us have looked at this legislation and wondered how we could make the golden rule work a little better, ie, he who's got the gold makes the rules.

It appears that this is a good step. Back in the 1990-95 Parliament, my former colleague Mr Mahoney, who has strong links to Sault Ste Marie, also offered franchise legislation. He is now in the federal Parliament, as you might know. But this is a problem here.

In Sault Ste Marie, of course, one of the interesting topics of great conversation is in terms of access to shelf space in independent groceries, for example. For the committee members who aren't from here, we have two competing dairies, which is a good thing, both attempting to have their product offered for sale in various retail outlets. I wonder if you could indicate, from the city's point of view, how that is impacting on the consumer. When it all comes down to it, this is really about consumers, at the end of the day.

Mr Butland: Thanks for that question, and please give my regards to Mr Mahoney. I wasn't aware that he also had tabled legislation on franchising.

The dairy issue in our community has met with some concern from some individuals that we are promoting one dairy over another, and we are not doing that whatsoever. We are just looking for that level playing field. If shelf space is available to one, the other, or the three or four of them, should have an equitable share of that shelf space and not be restricted.

The specific example is that the totally local dairy had, I think, about 10% of shelf space and was selling a full 40% to 50% of the dairy product off that limited shelf space. That is probably good from the operator's perspective, but the store operator was saying, "We have to fill the shelves every half hour, and it has to be delivered to the store on a regular basis." So it's a major inconvenience to the operator, to the grocery retailer and to the consumer who is going into the store saying, "I want to buy this product." Yes, the consumer is of primary concern. Again, we are not looking to pit one against the other, but just to make it a level playing field.

Mr Tony Martin (Sault Ste Marie): Thank you for coming today, Steve. It's certainly good that another voice tells the Sault Ste Marie story for this concern. That is where I started to be concerned about franchising and regulating that industry. You make the point about three franchisees. We had three very dramatically public debacles as far as franchisees are concerned. I would guess there were probably hundreds of others in that five or six years who have struggled in one way or another. Some are gone; some struggle on. And who knows their stories as they try to do business, as they try to be good business people and good corporate citizens in this community? I am told that 75% of new franchisors die as the system evolves, and with them their franchisees, because one is tied to the other-you talked about the story in the paper.

What I want to get to today is an issue that I think will be a bit of a theme, which Mike has already introduced, which is the question of sourcing, of franchisees' ability to not be tied to buying from the parent company but to source product where they can get it at a competitive price and in that way help themselves in terms of their profitability and success and also help out local economies. In the north, local economies are getting killed at the moment, and I think part of the problem is that most of the deals are cut someplace else and most of the supply comes from someplace else, and that doesn't leave much room for our small local producers to get their materials on the shelves.

I have a number of articles-I was doing this all day yesterday-some more research that Susan Swift has done for me on just that issue. There is quite a bit of information out there. One is an article by Joseph Thompson on sourcing and pricing, "Anti-Trust Developments in Franchising." I'll give everybody a copy. Another is a summary of an article on purchasing supplies by franchisees, with some interesting commentary as well, most of them raising the same issue: Why can't the local franchisee source-supply where he can get it at a competitive price and help out local economies, because if a local economy is healthy, chances are they'll be more successful?

I've got about three or four different pieces of information here that I will give to the committee and leave on the table over here for anybody else who wants copies. But maybe you could talk a little bit, Steve, to us today. We'll have three dairies in particular coming before us. I'm not sure if you know the story about My-T-Fresh Eggs, but they no longer exist. Maybe you could share with the committee that story and how it impacts the local economy here, because you were the MP when Beatrice left town.


The Acting Chair: We're coming rapidly to the end of our time. A brief comment, please.

Mr Butland: The corporate giants in the dairy field we've all read about recently, one perhaps controlling 50% of the world's distribution in dairy products. The bigger they get, the more difficult it is for the local to survive in that marketplace. I guess what Mr Martin is getting to is the theme that if we can't support our own local industry-because we in northern Ontario are very much interdependent and look to support one another. It's not much of a comment, Tony, but thank you.

Mr John O'Toole (Durham): Thank you, Your Worship. It's wonderful to be in your great community and good weather.

I suspect that the important thing for us is to, in a general sense as people looking after the welfare of your citizens-and I think it's the same responsibility of this government, and I think that's the intent. I respect the fact that, whether it was Mr Mahoney or Wiseman or Martin, there have been attempts by previous governments to examine this rather faulty area for doing business. Are you convinced, just with a quick look at Bill 33, that the three fundamental goals or objectives of disclosure, fair dealing and the right to associate are a very good first step to ensure some sort of fairness in the marketplace for new people in business? Disclosure is an important part of the whole thing, and the right to associate, the experience of others who are more experienced, can avoid a lot of pitfalls, I think.

Mr Butland: The answer is yes.

The Acting Chair: I appreciate that. I think a background as a federal MP I appreciate even more. Did you have a very brief comment or question?

Mr Raminder Gill (Bramalea-Gore-Malton-Springdale): No. My question has been covered by Mr O'Toole.

The Acting Chair: Your Worship, thank you very much for joining us this morning. We certainly look forward to spending the day in your marvellous community.


The Acting Chair: The next witness will be the Canadian Alliance of Franchise Operators, Mr Les Stewart. Mr Stewart is an expert witness. Welcome to the committee, Mr Stewart. We have a period of time to spend together here, 45 minutes.

Mr Les Stewart: Thank you, Your Worship, Madam MPP and gentlemen.

The Acting Chair: He's the Worship; I'm the gentleman. But I appreciate the respect, because I don't get a lot of it.

Mr Stewart: I'm sure it's more than earned.

My name is Les Stewart. I've come to speak to you in the manner that I think one of the witnesses yesterday, David Michael, spoke to you. As you recall, David was with the Pizza Pizza franchise system. I hope to be able to go through a good deal of information and leave lots of time so that I can fill in the blanks.

I am first and foremost a business person. I have had training in business. I have an operating business in the Barrie area. I have 780 customers who seem to like what I'm doing in the lawn care business.

Please excuse me for being nervous, but it has been quite a few years. If I might go through a bit of personal history, I received my BA and MBA at the University of Western Ontario in London. I have extensive McDonald's restaurant experience, starting when I was 13 years old as a crew member and culminating in 1980, when I was first assistant manager in the Orillia McDonald's. At that time, I was employed by a franchisee who owned the Barrie, Midland and Orillia McDonald's. At that time, the ownership changed from that franchisee to McDonald's Canada Corp. That happened at the same time the Midland McDonald's was being certified as a union. From there I went back to finish my BA at Western. For three summers during the time at school I was a painting contractor; I ran a painting contractor business in Barrie. I worked also during the summer of my business program as a real estate researcher for a fellow who owned 28 Harvey's and Swiss Chalets out of Sarnia. We were successful in developing the real estate work to get five new stores going within the year.

I was also a medical audit coordinator at St Thomas Psychiatric Hospital after school. I learned that if you are going to start looking at medical records and dealing with physicians, psychiatrists, psychologists, you'd better have their trust. As a president of the only franchisee association in Canada, that is all I have: the trust of the people who have experienced franchising. The sound that you hear is the sound-the silence-of all of the successful franchisees in this country who are saying: "Mr Stewart, the message you are bringing here today is wrong. There's nothing wrong with franchising." I am not contradicted in my assertions by operating business people who have extensive knowledge of franchising.

What prevents them from communicating are a number of things that we will go through, but the only thing I have-CAFO, the Canadian Alliance of Franchise Operators, is my hobby. I have subsidized this for two and a half years from the operation of my business, and to anyone who thinks this is a money-making endeavour, I have the net worth to prove it.

I was a financial analyst for three years at Victoria Hospital in London, which is a large teaching hospital with an operating budget of $350 million a year, so I have some experience in financial matters. I was laid off from that position in March 1992. I conducted a traditional job search for nine months in an outplacement program at Price Waterhouse in London. I signed a franchise agreement after what has been deemed at trial to be the most extensive due diligence the judge has ever seen. I signed that franchise agreement one week before my unemployment insurance benefits ran out.

So what happened to me in my franchise? I operated it for four and a half years. The first two years I lost $130,000. I achieved less than 25% of my pro forma income statement revenue. I am a fourth-level CMA, certified management accountant, and I have seen, in the four and a half years of the system that I was involved in, 17 ownership changes in the 24 markets that are served in Ontario by this lawn care franchise.

If it were just me, I would never be here today. But in the process of trying to find out what the devil happened, because first I had to explain to myself and then I had to explain to my wife and mother why she needed to mortgage the house after having it mortgage-free for 20 years, I needed to understand why. That is just all this is, an inquiry into understanding of, why the devil does this happen? Why do hard-working, bright, competent people get themselves into a situation where it seems that there is almost a system to strip life savings away from you?


After four and a half years in a small business, cash is king. Working capital is the only thing you can't borrow. You have to either put it in in equity, or through the profitable operations of a business you increase your working capital. The cash ran out. Their solution was, "Just get your mother to put in another $50,000." I said, "No, this is enough after four and a half years." They said, "Well, I guess you've got to sell."

I tried to sell it for nine months. I received an offer for $35,000 two days before the injunction hearing. That was for a business that was listed and worth-and the franchisor agreed-$171,000. When I represented myself in the Barrie courthouse for the request by the franchisor to stop me in the lawn care business, the judge said, "Mr Stewart, isn't half a loaf better than nothing?" I said, "Absolutely, and if I had an offer that was anywhere close, I would have gone." The judge looked at it and said: "You owe them some money for product. Pay them, and let's let the lawsuit carry on." I have been engaged since February 1998 in a legal battle with a $350-million-a-year company. They control the trademarks of six franchise systems and at last count, when I checked their Web site, they have 1,600 franchisees. I am an example. It's not about money; it's all about control. I'm the one who just wouldn't go away.

I started the Canadian Alliance of Franchise Operators simply because I was trying to figure out what to do with myself. I tried to gain some assistance. I did everything by the book. Some people have characterized me as a bit of a Boy Scout, and that's probably true. I am a product of central Ontario, of a small community. I have gone on and received an education to become a productive member of this society. I have been involved with a system that has destroyed me financially and will probably win. As my wife and I started to gain understanding of this-when I say "my wife and I," I want to make this very clear: These are family businesses. Anybody who wants to elevate this to the level of Time Warner and AOL is trying to sell you something. What they're trying to sell you is that it's OK. The gentleman to my right in the back of the room will tell you: "It's OK. What's the problem?"

The stories I was hearing from the guys-my bookkeeper lost $50,000 in a gas tank franchise system. My largest customer lost $60,000 in an asphalt paving franchise. When you start looking at these things, and you've gone to school, you start saying: "What's going on here? Does everybody have to deal with this in this way?"

I went through the injunction in Barrie. I represented myself, the most frightening thing I've ever done.

I've run a McDonald's effectively: a 35% sales increase, an AAA rating, the highest McDonald's can give. I have gone through an MBA program at Western, and I know pressure. This is nothing compared to this. If you control a man's economic life, you control his will.

My wife and I made one decision and that is, we will not lie to take the short-term, easy solution. What I have done here, working with Tony and a small group of people, is simply because I believe it's true, and I can prove it. As I'm sitting here, if it weren't true, the avalanche of statements of claim from this industry would just crush me, because I am a vocal advocate for billions of dollars of franchisee investment. But they have had their tongues cut out by the perversion of civil law. There's nothing civil about this law. It's being used and twisted to extract the last nickel from a dying man.

Some of the truths that I've come to understand: Franchises are bought and sold as a consumer good; they are not a business-to-business relationship. I've brought a couple of examples of the trade magazines. When you start talking to people about their dreams and "the freedom to be what you can be," you are not talking to Sam Bronfman; you are not talking to skilled people. You are talking to people who got laid off from Molson's and are looking, this fall, at having a $200,000 payout after 20 years in a brewery. If you don't think the blood's in the water and that inexperienced people are going to have that problem solved for them in that they've got too much money, then I think-it's a word that I've gotten to use because I hang around way too many lawyers. It's called "disingenuous."

Where I come from, when you know something, you have responsibility for it. If I tell you something, you have responsibility. It seems that there is not much responsibility in this industry over a period of time. There is a pre-sale veneer of free enterprise and competition, market-driven. That is a veneer. As soon as you sign a franchise agreement, you're in a monopoly situation. Franchisees need protection at the time when they can afford it the least, and that's no coincidence, by the way.

As a responsible father, as a responsible husband, I did everything I possibly could do, and I probably invested too much money in a system that wasn't particularly predatory, when you compare it to everybody else. It was just incompetent. They didn't know what they were doing. But it doesn't matter. It doesn't matter if you're predatory or you're incompetent in the behaviour that you exhibit, because it's not your money. It's other people's money.

Franchising in a business administration sense is just-Wal-Mart is not franchised. They own all of those stores and they seem to have done pretty well. Franchising is just a way of raising capital, that's all. It's a way of raising capital and expanding the system quickly, and it also avoids all the security laws.

When people say franchising is extremely successful, I say: "Yes, you're right. That's true. But it's the distribution of that success, it's the allocation within the chain, between the franchisor and franchisee." That's the issue: It's the relationship. It is what happens, where you find yourself, the decisions you have to make. Control tactics are used within the relationship, the greatest being fear and divide and conquer.


People buy franchises because they're afraid. They're afraid that they won't be able to feed their family. They've been laid off, they are out of school, they don't have experience. People look for a solution. Within the relationship, it's fear of losing everything you've put in, your sunk costs, being trapped by your own decisions. Afterwards, it's fear of being prosecuted by some of the gentleman you saw yesterday. It's the fear of the letterhead from the law firm in downtown Toronto. It's the fear that "we are going to bury you alive."

I have seen good people, very good people, not be able to speak. How can you deny a part of your life? It's like not being able to speak of a death or not being able to associate with people to understand that you're not alone.

The people I deal with are at my kitchen table. They're invited into my home, because that's where the truth about franchising comes out. Only franchisees add value to the economy. Everybody else is overhead or parasitic. Lawyers are parasitic, the industry is parasitic, salesmen are parasitic. It's the capital. In an economic sense, we are the ones who add or subtract from the economy. When you are in a relationship and you are afraid, you don't invest any more money in that relationship, in that activity. I am a specialist in fertilizing and the control of pests and weeds. When I was a franchisee, I withheld any money I possibly could because I knew it could be stripped away from me. It is not good economics, and Gillian Hadfield will talk about that tomorrow.

The fundamental thing in franchising: franchisees provide the money; franchisors control the money. That's the fundamental issue in franchising and that's where the opportunity for abuse comes in. Not that every relationship is abusive; it's the opportunity to strip that away. Not everybody robs banks, but we have laws against bank robbery.

Lawyers are more of a hindrance than a help and the reason for that is because 95% of all the legal work in this industry is bought and paid for by the franchisor. It's their contracts, it's their loopholes to close up. They are the ones who spend money; they're the ones who have repeat business. I'll never buy a franchise again. My lawyer will only see me once, but if he were predominantly a corporate lawyer-he has a referral business, a reputation. He knows how to get these guys. He knows how to write the tough contracts, the 85-page contracts. He knows how to write those letters. That's his job. That's the franchisor's job, to write those letters and, in a sense, act as the goons.

What I've seen would absolutely chill you. I don't think it's an overstatement to say most motorcycle gangs have better internal discipline than some of the systems that I have seen. They have discipline only because they know they've got to keep it out of the newspapers.

The only thing I have ever had is the protection of the law-and a very unusual lawyer-and the free press, because if it's true and I can prove it, I am safe. But all of us around this table know that only goes so far. I have my telephone swept and I get the threats on the phone and I hear about people getting physical threats. This is an extremely good model for making money-brilliant. There are some brilliant minds at work.

The important thing in this industry is image-the only thing. I've sold things a bit in my life and I suggest everyone around this table has too. What I'm selling is an idea, but what you need to do is to say: "Look, do I trust him? Does he seem credible?" If you're doing to accept my idea, that's the first obstacle. If I can't overcome that, then we can't do business.

The selling image of this industry is extremely well managed. They dislike any kind of questioning of their success rates. They dislike doubt. When you're selling someone and their life savings are on the line, and they know it, believe me, salesmen who are on commission at trade shows do not like the message I bring. It's not because I bring the message that franchising is all bad, but what I bring is that fundamentally there's an imbalance. Right now, people may be making good money in a franchise and all I want them to do is to say: "Can you please put it in writing that you can guarantee me that it's going to make good money next year, the year after and the year after that?"-because you've put $3 million into your grocery chain. Can you guarantee me that or could any franchisor guarantee it?

The markets change. I'm aware of that. I love competition. I love beating the brains out of the Weedman, taking their customers, and I do that by offering superior service and quality. I do that by supporting my community. I don't do it by holding my customers hostage and forcing them to be my customers.

Lawyers: Franchisees are rotten customers for lawyers. We're chippy. We don't like lawyers. They're expensive.

Franchise systems: The gentlemen you heard yesterday, with the exception of a couple, represent franchise systems. What I would like to know is, where are the principals of the major franchise systems? Why aren't they here? They've sent the gentlemen behind me. But if they're such free-enterprise, market-driven people-you know, "Let the buyer beware and let's go. We want to be able to do this, a level playing field." If that is true, then why are they in Toronto waiting for the phone calls that are going to happen when we have a break here? Why aren't they here? Because they don't like scrutiny. They don't like independent questions. They don't engage in games that aren't fixed.

As far as dispute resolution, the way it's resolved is that franchisees go broke. That's how it's resolved. You can't afford it any more. An injunction costs you $10,000 to $15,000. A trial is going to cost you $30,000 to $50,000, if you're lucky. To be able to say, "You have the private right of action," when you have no money is just like saying, "You have the right to be a millionaire as long as you're not bankrupt."

The bankers always get paid. That's a bit of a truism, but certainly small business loans are primarily what are used to finance franchise leasehold improvements and assets. I was told to my face in a meeting with a director of one of the very large banks in Canada that franchising is the most lucrative form of commercial lending. When I asked him, "Why is that?" he smiled, and I said, "Could it be because the franchisor always guarantees that your debts are covered when he transfers it to the new owner?"

This is extremely lucrative, and you can really tell by looking in the trade magazines. Just look at the back page. The people who are paying $5,000, $10,000, are the banks and the banks know all about this. You ask any regional bank manager in this province if he's had horror stories with franchisees and you'll get an honest answer, but you don't get the same kind of answer on Bay Street.


In franchising, a fraction of a law is worse than no law. Let me explain that. In the US there is an FTC rule and it says that a franchisor can disclose, "We take all the rebates and the discounts; they belong to us." If you sign the agreement with that disclosure document, then if you're being charged, say, 500% above the market rate for your products from the franchisor, or you're getting rebates, when you take that to court, the judge generally says, "You said here that he gets all the rebates and discounts."

What I'm afraid of is that there we're going to create a law that gives the illusion of a solution so that the salesman at the trade show can say: "Ah, see this law? We can't do that any more. We can't be unfair. You have the right." I'm not sure if the salesman is going to also say, "But you'll have to have $50,000 to take it to court to prove it yourself." The onus in Bill 33, in large measure, is on the franchisee to prove damage. The franchisee is in no economic position, in most cases, to do that.

When I talk about this I differentiate between the single unit franchisee-the normal guy-and the multi-unit, larger economic interest. Most franchises are sold as a consumer good to consumers, people who have never been in business before. They are the ones who are going to have to shoulder the great amount of weight of enforcement of Bill 33 if it were to go without any amendments.

When I talk about what we should be looking at in franchising, there are six elements:

We would be looking at how open or transparent the process would be, like an ongoing relationship.

That it's accessible to people, that it's sort of auditable in an accounting sense. It's not behind closed doors, like the deals aren't done in the back room.

That's it's flexible, that we can deal with things in the future.

That it's reciprocal. I don't think franchisees are asking for any more rights than the franchisors already benefit from. The rights should be reciprocal in a partnership.

That they should be portable. We're signatories to international trade agreements, and I think we should learn from other constituencies, other jurisdictions, internationally.

It should be measurable. I've learned in business and at school that if you want a result, an outcome, then you'd better measure for it. If you don't measure for it, you'll never get it. If you're not looking for a profitable business, then you will lose money. You have to measure things.

I have before you a schematic called the Franchise Life Cycle. What I've attempted to do is show you the actual elements that occur before and during the relationship of franchising. This is based on my experience and the experience of hundreds of franchisees I've talked to. I've vetted this with most of the experts on the franchisee side. It's a bit of a working document.

Once you've signed the agreement you have entered into a hidden world, a world that is certainly never disclosed to you. If you have a positive response, then that's terrific. You sign the next franchise agreement and the franchise agreement after. If you have difficulty, though, your alternatives-and sometimes you can control this and sometimes a franchisor controls it-the three alternatives are to abandon your business, to transfer it, or to go independent. Those are the only three ways out.

Everything is geared for you to transfer. Very few franchise businesses go bankrupt. It's in everyone's interest to keep the store going because of the high cost of litigation, the threats of the new money you would put in. What I have done makes no economic sense whatsoever. In the situation I was in, I should have transferred to the next owner, taken the $35,000 and walked away with $80,000 worth of debt. That would have been the best economic alternative when I was faced with it.

The next sheet is a number of references.

The reason we are here is that I believe we have been successful, to a degree, in being able to gain access to the media. That chart, Published Franchising Articles, gives you an indication of what has happened. These volumes certainly aren't complete. This is my best effort to document the 4,629 franchise families whose stories have been so egregious that they've been able to reach the pages of the Toronto Star, the Globe and Mail and the Report on Business.

I believe we have an industry that is sadly in need of a new image, and the image is this law. I believe the franchise industry is coming to Queen's Park, coming to our democratic system, and what they want to do is use elected officials to save, to paper over, a deeply troubled industry.

I believe that if there are no problems, then what's the problem? If there are no problems-am I an unreasonable gentleman? I'm a business person. I make no money from doing this work. As Dave Michael says, "This has been put on me." I tried to do the best I could as a business person. It's not the result I expected, but that's what happens in business. But if you are playing a game of cards, shouldn't it be a full deck?

All I can do is provide you and Tony the information and put it in your lap and say, "Here's the information that I understand to be true." It is your responsibility to act on the information presented to you and to formulate public policy. I hope we can move towards that in a collegial manner, because I believe there are overarching needs here, pressing needs.

I'm not interested in history. I'm interested in the future, in what I can do and what I can bring back to the 40,000 people who are in this quandary right now. Those are the people, the $6 billion worth of investment, the 40,000 families, the 600,000 employees-they're franchisee employees; they're not franchisor employees. I write the cheques. I always look to see where the money comes from, who is writing the cheques, who is opening the doors in the morning. It's guys like me. It's not guys in downtown Toronto.

The Acting Chair: Thank you very much. That leaves us about eight minutes, about two and a half minutes per party. We'll start with the NDP.

Mr Martin: Thank you very much for coming today, Les. I think it's important to put on the record right off the bat, so there's no misunderstanding, that I've worked with Les for about two years now, with the present government, preparing for the series of hearings we are having this week, so that the story could be told and, at the end of the day, we could do something helpful for Les and others like him in franchising who simply want to be good business people, as he has shared with us is possible if there is a level and fair playing field.

Les, this package you put together, which represents, as you said, some 4,600 families, is actually just the tip of the iceberg of stories of franchisees who have been damaged in this province alone, over only some five or seven years. In it, you have been quoted in a couple of articles that have been written. One of them is from the Globe and Mail on June 16, 1998, on page B14, if anybody has been able to lug them along on this trip. You say: "This legislation is a 10% solution. If they think this is going to clean up the industry, they're wrong." Could you elaborate?


Mr Stewart: The information provided to you before you actually sign is carefully crafted. The salesman explained very clearly what you can and can't tell a candidate. Yesterday Susan Kezios explained that 30 years of disclosure regulation in the US doesn't work, and the reason is that the salesmen are very good. They are good salesmen. As Mr Levitt said yesterday, they can sell around a disclosure document.

What will happen is, through your best efforts you will provide what in good conscience you feel will be a solution or recommendations for it after first reading. That will be immediately gamed by the industry, "How do we get this?" That's what the industry trade associations are for, to figure out how to get around it.

The Acting Chair: Parliamentary assistant.

Mr O'Toole: Thank you very much, Les. I was looking forward to your presentation. I'm sorry I had to move out a bit, but I'm quite taken with your commitment to this thing.

You say it is a 10% solution-and these are more statements than anything in response to your position. I can assure you that I believe we are trying to find some balance. A 10% solution might be a bit critical. I don't want to refer to you in the Boy Scout mode, like the world is ideal. Forget it; it isn't. Sorry for that awakening here, but the judge said the same thing to you. He said half a loaf is better than no loaf at all. I'm not trying to be harsh on you. You have to realize that the only thing that's perfect is that one plus one is two, and beyond that it's a bit of a binary situation.

Can you suggest one thing within the framework we've defined that would improve-not totally correct; we've passed that, we're not astronauts-but one thing we could do that would make a real impact on these 40,000 victims, self-imposed victims in some cases? What could we do?

Mr Stewart: Outlaw gag orders. Outlaw gag orders.

Mr O'Toole: Wouldn't the right to associate-you now have an association, and you could probably be the president of it, where these people can all get together and say, "These are the do's and the don'ts of buying a business." Actually it's buying a job; it's not buying a business.

Mr Stewart: If it's buying a job, then there should be labour laws, Mr O'Toole.

Mr O'Toole: For the employer.

Mr Stewart: The employee, too.

Mr O'Toole: Well, agreed. I don't disagree with that. But I'm saying they are buying that. That's what their investment is trying to do.

I guess I'm trying to say: Do you think the right to associate would in some way help that or at least be the first good step in that direction-for instance, the experience you could share with them as a seminar leader. You could be a guest speaker at some of these workshops.

Mr Stewart: I'd love to be able to do that.

Mr O'Toole: I'm sure you would.

Mr Stewart: And do you know how many would be able to show? Exactly none. There's an article in here that appeared in the Toronto Star and it said, "Les Stewart loses." That was faxed. In your first in camera session you heard from a system and the lawyer just before that-that was faxed to those people. That was a message: "Do not touch Mr Stewart. Do not get close to him. If you get close to him, I'll set up a retail outlet right next to you and charge half the price, because I have that right." This is about power, plain and simple.

Mr Brown: Thank you, Mr Stewart. One thing you make very clear is the inequity or the inability of legal systems to deal with these questions, in a way. Obviously, he who has the gold can afford the lawyers. In the American experience-and I'm not very familiar with that-often many of these things can go on contingency, which isn't permitted in Ontario. Has that, in the American experience, assisted franchisees in any way in dealing with the franchisors?

Mr Stewart: I certainly think the issues of contingency help in the US system. Also, there are a lot more jury trials with franchisees, and the courts will issue punitive damages as opposed to-it's like they want to send a message to the franchise community, so they will say, "Yes, you've had $150,000 in damages, but you get $500,000 in punitive damages," as a message to the industry to stop doing that. That's done through a jury trial. That's why franchisors in the US don't like juries. In Canada, it's almost impossible to get a jury trial.

Mr Brown: Due to the expense of getting the case that far?

Mr Stewart: In Canada, the courts have generally been a great deal less willing to understand franchising, the unique relationship, because it is not employer-employee and it's not independent contractor. It's a hybrid, in the middle. The courts understand what's written on the piece of paper, the four corners of the contract. Gillian will talk about that tomorrow. If it's not on the piece of paper, it doesn't exist, in most courts' interpretations.

The Acting Chair: Thank you very much for appearing in front of the committee. We appreciate it.


The Acting Chair: Our next witness is the Algoma Federation of Agriculture, Mr Connolly and Ms Bonnett. Welcome to the committee. We have 20 minutes together. You can use that time as you see fit in presentations. We'll fill in the remaining time with questions.

Ms Cathy Bonnett: Good morning. We are here this morning representing the Algoma Federation of Agriculture. Thank you for the opportunity to address the hearings on behalf of our area agricultural producers. We understand that these hearings are primarily concentrating on the business relationship between franchise partners, but there are aspects of modern marketing relationships that have an impact on primary producers and need to be identified and addressed. Our comments relate to the issue of market access in large chain stores.

The Algoma Federation of Agriculture represents the farming community surrounding the area of Sault Ste Marie. Our principal focus is to help producers by trying to ensure that economic and social issues affecting their farming operations are dealt with. On the economic side, Algoma farmers, like their counterparts in many parts of the country, are fighting to cover operating costs. Over the last several years, prices paid to farmers for their raw product have been stable or declining. Farmers have been involved in further processing of their goods as an attempt to try and increase economic returns.

Government policies and programs have been developed to assist farmers in these endeavours. These attempts at diversification into the processing side of the industry have benefits for the rural community and to local farmers. The Algoma Federation of Agriculture is currently undertaking an economic impact study. These studies are designed by University of Guelph researcher Dr Harry Cummings. They're an attempt to quantify the economic activity generated by agricultural production.

An interesting fact to come out of the recently completed studies is the amazing multiplier effect that primary agriculture has in an area. In most cases, for every job created on the farm, four off-farm jobs are created. Job creation, increased municipal tax base and economic stability for rural communities have been side effects to the diversification initiative.

What does all this have to do with franchising? Modern retail relationships such as franchising are based on the premise that joint purchasing, marketing and distribution systems lead to savings for the consumer. The retail sector has been competition-driven, with participants attempting to find any edge over their competitors. One tool used to increase competitiveness has been centralized purchasing.

Local suppliers feel shut out of the process, either because they cannot supply the volume of product required or because of the exclusionary stocking arrangements that have been signed with large distributors. The reality of modern retailing is that if your product is not in the large chains, you do not have adequate access to the market. Local processors who do not have merchandise on the shelves of the large chains have a very difficult time creating consumer exposure for their product. Franchise operations have become expert at marketing, advertising and product placement. As a result, consumers are more apt to seek these venues rather than the traditional independently owned operations.


Properly worded franchise agreements could help alleviate the problems that many small rural businesses are facing. If local producers and processors could place their product in the large chains, they would gain market access. This would enhance consumer choice. This exposure could lead to increased sales for local producers and processors.

The main point that we feel should be considered within the context of a franchise agreement is the issue of retailer independence. Retailers should not be tied strictly to purchasing from the main distributor. A certain amount of flexibility to source products locally and independently must be part of a franchise arrangement. It would allow local entrepreneurs to take advantage of the good points of franchising, those being excellence in advertising, exposure to high consumer traffic, marketing advice and brand recognition.

There is an opportunity for franchise operations to develop a "buy local" campaign. Dedicated retail space could be set aside for local products. Naturally, there would have to be criteria established; for example, what is a local product? Minimum amounts of product turnover would be required. A campaign of this nature would not only provide area entrepreneurs with an outlet for their goods but would also demonstrate the commitment of the franchise to the community. This can happen if the language in the franchise legislation encourages managers to capitalize on local marketing opportunities.

As mentioned, the Algoma Federation of Agriculture is concerned about what is happening in our rural communities. Our children are leaving for jobs in other areas, our municipalities are crying out for tax revenue and farm family incomes are below provincial averages. Adding value to farm product creates an opportunity to alleviate some of these concerns. A few small changes in the way large chains source their product and stock their shelves could make a huge difference to rural businesses. Thank you.

The Acting Chair: Thank you very much. That leaves us with about four minutes per caucus. Mr Gilchrist.

Mr Steve Gilchrist (Scarborough East): Thank you very much for your presentation here this morning. I bring to these hearings a 25-year experience with a particular franchise, Canadian Tire. We had similar experiences. The dealers would find locally sourced products that were less expensive than what head office had supplied. But there is a conundrum faced by a national chain in particular, and I guess I would invite your feedback. There were certain things that were very freight-intensive, not unlike milk and other dairy products, low cube but high weight, and ultimately Canadian Tire did allow things like salt or fertilizer or windshield washer fluid, so that if there was a factory closer than the one supplying head office in Toronto, you could go to them. They certainly put in place quality standards but they were not unreasonable in allowing dealers to go out.

But for something that isn't freight-intensive, you've got the trade-off that while it may, on the surface, look cheaper to buy locally, you then can't have a national promotion. How can I advertise Black and Decker drills in a flyer that's going to every household in Canada if you decided that Makita drills were a better deal because the local distributor offered you a rebate or a discount? How does a national chain confront the problem that if you're trying to find efficiencies on one level, say, advertising, and have a compelling message to bring people into the store, then you've got to have a brand name on that flyer? How do you reconcile that with the message you're bringing to us here today?

Mr Ryan Connolly: Well, you could have a local brand name. The fact that it is Algoma, I agree, you couldn't advertise nationally, but you could advertise within the area that you're selling into. Possibly that would make more money than the national product you are trying to sell.

Mr Gilchrist: The problem is when Canadian Tire goes to Quebecor or whatever company is printing the flyer right now, there is one flyer. Literally there is one run of millions of pieces of literature. It really becomes a brand new flyer if you change the picture or the name on any one section. It's not that I'm not sensitive to the message; it's sort of the trade-off. If in fact the national chains aren't giving you access but you can supply it for a lower cost because they're paying the freight to bring it from, let's say, a dairy in Toronto, doesn't that suggest that there may be some smaller stores in the area that, if they stocked the local product, would have a price advantage? And in time that's how small stores become big stores, by offering something their competitors can't offer.

Mr Connolly: And I think we're at that point. We do put our products into the small stores, into the local butcher shops and into some of the independent stores, but we're completely cut out of the large chain stores.

Mr Gilchrist: Why is that? Is it price?

Mr Connolly: When I approached them to sell my product in there, they simply had no system of purchasing it and paying you. The purchasing was done centrally and it was simply a "no."

Mr Gilchrist: Do you have the support of the local retailers up here? Did they help to carry that message to whichever company's head office you were going to?

Mr Connolly: No.

Mr Gilchrist: Because you hadn't approached them?

Mr Connolly: When I approached them, it wasn't possible to do it and that was the end of the deal.

Mr Gilchrist: So they feel constrained by pressure from head office to not side with you.

Mr Connolly: I assume that.

Ms Bonnett: Can I also add that a lot of the times in the flyers I receive in my home they will advertise, for example, that pork chops are on sale this week. It doesn't say Maple Leaf pork chops, it doesn't say Canada Packers pork chops; it just says pork chops. They could be my pork chops.

Mr Gilchrist: That's true. If a chain wanted to make it generic, that is an option.

Ms Bonnett: Exactly, and a lot of the flyers are that way. So the national advertising campaign would not impact at all because they're just saying it's pork chops.

Mr Gilchrist: I would be genuinely astounded if a retailer was not going to the lowest possible price. That is so contrary to the most fundamental rules of business. If there's something buried with rebates and advertising discounts and volume discounts being offered by Beatrice or some of the national chains and they really are cheaper, even after you've paid the freight, that's one thing. But if it's just the top-line price, I've got to believe that with something as weight-intensive as milk you would be much more competitive if it was locally produced.

Ms Bonnett: There are a lot more products involved in this, though, than strictly milk. Milk is one. But we're representing all producers so we're talking meat, we're talking vegetables, we're talking value-added products in that respect as well. It has been our understanding, and our producers have told us, that they simply cannot access space on the shelves because of the franchising agreements. That's why we were pushing for the wording to be such that a certain amount of the shelf space would be at the option of the local owner-operator versus if you have 12 feet of space, all 12 feet have to be displaying brands that the store sells.

Mr Gilchrist: I think I've used my time. Thank you.

Mr O'Toole: I'd just encourage you to encourage the Ontario Federation of Agriculture to make that an issue, because that's the higher-level order of-it's the same issue Steve is talking about, the one-ofs across the province. Your federation has a policy position on this and it should be articulating that now on behalf of all farmers of Ontario.

Ms Bonnett: Actually, they are, in London.

Mr Brown: I'm sure Cathy knows somebody on the executive of the Ontario Federation of Agriculture who can do that quite well.

This is an ongoing problem. First, the Algoma Federation of Agriculture and its members have been diversifying their product range quite dramatically, at least over the last few years. I actually had a young woman maybe in her early twenties going into the garlic business coming to see me. She can sell all her product without even marketing it; it's great.

But my real point is that we know that in fresh fruits and vegetables and the horticultural industry, which is starting to blossom-sorry-and many others, access to retail markets is the issue. Although we're talking about franchises here, some of these stores are directly owned, some of the large chains, where we have problems getting the access in. I go back to Jim McGuigan, who was the member for Essex some time ago, who had great problems getting his tomatoes to market. I'm sure that's something that's going on here. So you think there needs to be written into the legislation a guarantee of some sort? I'm trying to figure out how we do that.

Ms Bonnett: I don't know that it has to be a guarantee of shelf space or that sort of thing. I think the wording has to be such that there is a certain amount of discretion for sourcing product given to the owner, operator, manager, whatever term you want to use for the franchise manager. Otherwise, if they have to stay to the letter of the agreement, they're limiting themselves. There are a lot of opportunities out there, not the least of which is being a good community citizen. In a lot of areas that's really important-in every area that's important. People tend to be very cynical about large corporations, and this is a good opportunity for the corporations to become part of the citizenry of the area.


Mr Brown: My friend Mr Gilchrist made a good point, and I don't really know how to quantify this, but there are all kinds of issues. It's not just the price you pay that's important here; there is a huge number of commercial issues that impact on the price of product on the shelf. Just because the price is the same doesn't mean the value to the retailer is the same.

I'm wondering about some kind of system where the price is known and those other factors are taken into account in some way, the value of the promotion, the value of the mass marketing. If you can compete, why shouldn't you be in there? That sort of thing needs to be looked at, I believe. I'm not quite sure how to do it, but I guess that's why we're here.

Mr Martin: We've heard a lot about price here in the last couple of minutes, and the other piece that I'd like to enter into the mix is, what about consumer choice? I want locally grown stuff because it doesn't have chemicals and all those kinds of things, and I may be willing to pay a premium for that, but if it's not on the shelf, I can't buy it, which is part of the issue that you're bringing here today. This is having a terrible effect on the local economy. I've been looking at this for about five years now. I remember 10 years ago when Beatrice moved their processing someplace else and the stories that were told at that time of the effect that would have on local dairy farmers. I think either you or your brother was one at the time; I'm not sure which one.

Then we have the story of My-T-Fresh Eggs, which is now out of business. That was a small producer in the Iron Bridge area that hired people, paid taxes, was a good corporate citizen, and they're now gone. The local economy is being killed because of the distribution systems that are in place and all the things that you have laid on the table here today.

I'd like to hear from you a bit further on the effect of some of this, not just on the specific farmer but on the local economy in general. How many dairy farmers are still in business in Algoma today as compared to, say, 10 years ago when Beatrice was processing here?

Mr Connolly: I'm no longer a dairy farmer myself, but I think there are 17 dairy farms left. When I started 20 years ago there were 50, so it has decreased, but it has decreased over the whole province too. How much more effect there is here than there was elsewhere, I'm not sure about that, but it has had an effect. It changes the economy. It changes what happens with our local co-op, how much feed is put through there, and it dramatically changed down the line all the way.

On the other end of it, some of the other industries have picked up, the sheep industry and the beef industry. Those products could move from our farms into the Soo, and a certain amount do. We have the system in place of trucking the product or getting the product processed and getting it moved to the Soo, but the problem is that we're limited in the number of retailers in the Soo that will take our product and sell it for us-only the independents or the small butcher shops on the meat end of it. There are only a few places you can put your product into. I put my product into three places every week in the Soo, but all the other places are selling the same product, and it is a generic product, it's meat, as long as it's of the same quality. I'm sure our pricing is very competitive, because we live in a competitive market, but you just can't get in the door.

Mr Martin: When I challenged Kevin Ryan yesterday, from National Grocers, who came before us to tell us of their concern and approach to this, they actually like the way things are, because they're in control. They're saying to us that in order for them to get their product into Kapuskasing, for example, they have to have in place these larger purchasing efforts and distribution efforts or else they won't be able to get it there.

Mr Connolly: We ship with their transport. They come to the packers and pick it up, and it's loaded on there and it's shipped just the same way as it would be shipped if they were purchasing from anywhere in Ontario.

Mr Martin: So that argument doesn't hold any water.

Mr Connolly: I would say not.

The Acting Chair: Thank you both for coming before the committee. We appreciate it very much.


The Acting Chair: Our next witness is Mr Javor from Tim Hortons. Welcome to the committee, Mr Javor. We have 20 minutes to spend together.

Mr Nick Javor: Just for the committee's knowledge, I'll be forwarding a copy of my prepared text in the next day or two for everyone to have for your review later on.

Good morning, Chair, and committee members. Thanks for the invitation to speak with you today. My name is Nick Javor. I have been involved in franchising since 1987. For six years I was president of a medium-sized franchisor in the automotive sector, Mr Lube. When I left in 1994 we had 90 outlets, 50% corporate and 50% franchised. We had system sales of $65 million.

I have been with Tim Hortons for some five nears now. My current capacity is regional vice-president of southwestern Ontario operations. I have 375 stores in my region, operated by 160 franchisees. Tim Hortons as a whole had some 1,840 locations at year-end 1999, with chain-wide sales of $1.5 billion.

I also want to point out that I have been an active member of the Canadian Franchise Association since 1987. I served on the board as a director for 10 years and served a term as chairman. I also represented Canada at the first World Summit on Franchising in Mexico City in 1992. I was the first Canadian to receive the certified franchise executive designation from the International Franchise Association, also in 1992.

I have also been very committed to the process of bringing franchise legislation to Ontario, having served on the Franchise Sector Working Team since its inception in December 1994.

I come here today on behalf of my organization to offer our support for the proposed Bill 33. We applaud the efforts of the Franchise Sector Working Team and the ministry in bringing legislation to this province. I echo many of the comments we heard yesterday at the committee meeting in Toronto, namely that disclosure-based regulation is long overdue and is a very important first step and, may I add, a huge first step, for a province that has been unregulated in this area.

This industry team has worked very hard to discuss and debate the issues. Under the leadership of Joseph Hoffman and the ministry staff, we reached consensus on the direction of the proposed legislation. Our team should be very proud of our efforts and the impact we have had to date in helping shape the bill. I am delighted also that the ministry has committed to involving this same working team when the time comes to discuss the regulations.

My remarks today will not be a total repeat of what you have already heard from the other presenters supporting this bill; I have a few additional points to make. The consistent message we heard yesterday from those who supported the bill was that the three key elements are included in the proposed legislation and that they must remain: first, disclosure of those material facts that are pertinent and necessary to allow someone to make a good investment decision in a particular franchise; the right of association for franchisees-I have not heard of any objection to this aspect of the bill to date; and third, duty of fair dealing. I will speak to this in a bit more detail in a few minutes.

My remarks instead will be a commentary on some of the broad-brush statements made yesterday by those who are not fully supportive of the bill in its proposed state. At times we heard strong views that franchising in Canada is some 30 years behind the US and that every franchise agreement should come wrapped with a warning label. We heard franchise lawyers say that franchisors can't be trusted, and one lawyer in particular stated that perhaps Tim Hortons should close some of its units to satisfy a three-mile-radius clause.

I quite frankly take exception to these general and brand-specific points, especially to the often biased portrayal of the franchisor side of the franchise relationship.

I want to deal first with this one-sided portrayal of the franchise relationship, namely that franchisors are to blame for the woes of franchising. There were calls for relationship legislation to be included in the bill so as to protect the investment of the franchisee, because the post-sale relationship is at the heart of the problems in franchising today. We heard that yesterday. We also heard that franchisees do lose their life savings, they cannot afford to hire lawyers, and are terrified to speak and be heard. I also heard that franchise start-ups are not as successful as small business start-ups in general and that there are some 5,000 lawsuits a year in Ontario.


I also heard that the Pizza Pizza affair was the lightning rod that changed the franchise landscape forever in Ontario. Quite frankly, on a personal note, I'm sick and tired of the Pizza Pizza situation. No one can argue that it was a very unfortunate example of the franchise relationship having gone sour and what can happen when industry best practices do not occur. I feel this is an extreme case and that those who are against Bill 33 are using it as the failure standard and barometer against which to try and create legislation that will prevent it from happening again. Legislation cannot prevent fraudulent behaviour. You cannot force, through legislation, the promise of a 100% money-back guarantee and the need to protect totally the unsophisticated investor. There is risk in any business, whether it's franchised or not.

The answer partly lies in the following point: The CFA coined a phrase a few years ago, "Before you invest, investigate." This to me is the single most powerful piece of advice that any person should be given regarding starting their own business, again whether it's franchised or not. The use of a disclosure document absolutely speaks to this point.

Let me comment on the issue of pre-sale disclosure, duty of fair dealing and the post-sale relationship management. First off, mandatory disclosure required by law is a terrific way to ensure that the franchisee prospect gets meaningful information. This is a big step and will have the most impact on improving the quality of franchising in Ontario. Because of Bill 33, there is a civil right of action available by franchisees against franchisors for the misrepresentation of disclosure information. Don't you think this will serve as a disincentive and deterrent to those bad apple franchisors? The bill even has full accountability for those who sign the disclosure document. We heard yesterday from the president of the American Association of Franchisees that US legislation does not even provide such a remedy for violations of a FTC order.

Everyone is also aware that Ontario law now requires mediation prior to going to trial to settle civil disputes. This too is a terrific new development that can only help franchising in this province.

We also heard yesterday in the remarks of the Canadian Federation of Independent Business that their member research in February 1995 noted that 48% of respondents felt that franchise agreements are private business deals and governments should not have the right to interfere. Consultation with legal and other advisers prior to the signing of the franchise contract provides effective protection for the franchisee.

The Canadian Bar Association of Ontario has also confirmed their position against relationship standard legislation. They cite the reason of complexities of types of franchise offers, from the small investments like home services to the large real estate investments made by institutional players. No specific industry standard or definition can apply uniformly to this broad scope of franchise types. They also commented that the level of sophistication of franchisors and franchisees is widespread. What's best for the less sophisticated franchisee's prospects are education programs from franchisors, the government and trade associations such as the CFA and the CFIB. They need to be given financial and legal advice.

My experience in the Tim Hortons system is that our franchisee candidates today are more prepared than they have ever been. They come to interviews demonstrating an incredible amount of due diligence. In this day and age, unlike perhaps during the early 1980s, we do not see folks paying $10,000 on the spot at a trade show to secure a territory or franchise.

With respect to the duty of fair dealing issue, I think a major point has not been emphasized enough in the commentary so far. Bill 33 does address fair dealing. Fair dealing is a statutory requirement for the entire franchise process. Section 3 states clearly, "Every franchise agreement imposes on each party a duty of fair dealing in its performance and enforcement." It is not limited only to the pre-sale disclosure stage, as some presenters tried to position yesterday.

I do not agree with other commentators that the definition of fair dealing must include the component of commercial reasonableness. This already exists in contract law and is adequately covered there. I too agree with the CBAO in thinking that increased litigation will result because of interpretation difficulties, thus increasing the burden on the judicial system.

Governments everywhere in this day and age are looking at streamlining and reducing red tape and bureaucracy. There must continue to be an incentive for those small, emerging franchisors who are going to generate jobs and create opportunities as they expand.

Back to statistics for a moment. The notion that there are 5,000 civil cases filed every year in Ontario has not been substantiated. The notion that franchising is 85% more successful than independent start-ups has not been substantiated either. I encourage the ministry to carry on with their discussions with the CFA and the sector working team on how best to obtain statistics. No one can, with any degree of confidence, discuss the extent of the franchising woes in Ontario, because data are not available. We cannot continue to rely on anecdotal evidence, and we surely cannot expect those who draft legislation to rely solely on this type of evidence either. It would not be fair to craft legislation to deal with a marketplace perception situation versus marketplace reality.

The Franchise Sector Working Team members are aware that a research methodology was being discussed in the spring of 1999, but was put on hold due to the calling of the summer election. In my opinion, it should be a priority of the ministry to deal with this critical issue of lack of data on the franchising sector.

I would also like to comment on two other areas of franchising that have been cast in a very negative light: the fact that franchise agreements are not written in plain language and are often 80 pages long. Some have said that they have to be this long so as to capture all the one-sided rules that franchisors must have. I agree that the language must be made simpler and more user-friendly. I also agree with the comment made yesterday that franchising should not be the major contributor to the retirement fund for lawyers. However, I take exception to the statement that franchise agreements are all one-sided and intentionally crafted that way.

One of the major, fundamental cornerstones of franchising in my experience has been the need for system-wide standards and consistent application of these standards. When franchisees sign up for the Tim Hortons system, they absolutely expect us, as their franchisor, to have a rule book that requires standards for quality, service, cleanliness and value. If and when a franchisee decides to behave out of the box and does not buy into the QSCV formula, they threaten the other franchisees' investments, they erode the value of the brand and jeopardize the relationship with the customer. Those critics who say that franchisors always put forward this argument to justify their heavy-handedness, quite frankly, in my opinion, do not understand this is a cornerstone of franchising.

Protecting the integrity of the brand is paramount in franchising. Franchisees enter into a long-term relationship with the franchisor for the purpose of accessing the brand and the ongoing support that the owners of the trademark provide. Part of this ongoing support is the national buying power that it can provide. Bulk buying is a positive element of franchising when managed well. In Tim Hortons, our franchisees clearly enjoy this benefit. Bill 33 will obligate franchisors to disclose how they treat their volume discounts and what policy they have in place to handle this area. This will be addressed in regulations. The same goes for ad fund treatment.

Let me conclude that, based on my experience in franchising, the best way to help increase the positive impact that franchising can have on Ontario commerce is to introduce Bill 33. Over the past 10 years, because of the efforts of the CFA, government agencies and educational institutions, the investing public is getting better at making the right franchise decision. Numerous franchise specialists and experts can be turned to for advice. The Internet, as we all know, is becoming an incredibly valuable tool to provide instant access to franchise company information.

At the risk of self-promotion, I wish that all franchisors, regardless of size and maturity, could embrace the same philosophy of franchising and demonstrate the respectful and franchisee-first attitude that Tim Hortons has shown over the years. We have been in business since 1964. Our founder and chairman has been awarded the Order of Canada. He was the 1999 Canadian entrepreneur of the year. He has been inducted into the Canadian Business Hall of Fame. We have four, soon to be five, Children's Foundation camps that send thousands of monetarily underprivileged kids to camp each year. Marketplace success and a family of dedicated franchise owners allows us to do this and be recognized for it.

We have copied other successful franchisors over the years. We have marketing managers in the field, as well as operations managers. They call on our franchisees for the purpose of helping them be more successful, following our national franchise standards. We have a national advisory board and a joint operations committee. They meet three times a year. We have regional chain-wide meetings in the spring and fall across the country. Our ad funds are audited each year by an independent third party. Our founder's philosophy has always been that "the franchisee's success will help make the franchisor successful." He has always said we will turn down a deal if it can't make the franchisee a buck in the long term.

We are not perfect; we do have disputes from time to time. We have asked franchisees to leave our system. But we go to incredible lengths to do everything in our power to deal with those challenging situations and to help operators operate their businesses in a more successful way. As a brand, we treasure the special place we occupy in the hearts of Canadian consumers-consumers who are incredibly loyal, I might add.


In conclusion, Bill 33 in its current form is all that the Ontario franchise community can embrace and implement at this time. Hopefully, we can also get organized to collect statistics to demonstrate that we are headed in the right direction for franchising.

I honestly feel that if we do not move forward with the bill at this time, we will have missed a great opportunity. The people of Ontario have given the government of the day the mandate to enhance the standard of living of its citizens by creating jobs and opportunities. Franchising is a proven vehicle for doing this.

I would be pleased to answer any questions the committee may have.

The Acting Chair: Thank you, Mr Javor. Two minutes each, and we'll start with the Liberal caucus.

Mrs Claudette Boyer (Ottawa-Vanier): I commend you for giving the good things in Bill 33. You say you support it. The disclosure is important as far as you're concerned, and fair dealing. Since you were at the hearings yesterday and heard about it, we were told by this American presenter that she thought it didn't have enough teeth and that it should go further, that it doesn't go far enough. You said when you were resuming your presentation that it was time the government did implement this. Do you think we should try, before implementing Bill 33, to go further? I know you did give a couple of things that we should add, but do you feel it is strong enough as it is now?

Mr Javor: I do. I feel that we have a window of opportunity to move forward with the bill in its current form. Again, I have been involved with this process for five years to get this far. I know how hard the FSWT has worked to try to balance the needs and wishes of all the stakeholders. It was not easy. It was a lot of hard work to get this far. Yes, there's always a better mousetrap somewhere and yes, you can always hold off on key decisions that can impact folks by waiting for the next best answer. I'm always a proponent, and I always have been, in my personal business life that you go with the 80-20 formula, that if you have 80% of what you need, that can perhaps get you down the road to where you want to go long-term. Then you should show leadership and move forward in that regard.

Mr Martin: I don't think there's anybody who's suggesting that there aren't good franchise systems around, and certainly Tim Hortons presents at this time as one of those good systems, for all the reasons you've laid on the table here today. What you have we want for all the systems, because when a system goes sour, as you suggest in the Pizza Pizza case, you're all painted with the same brush. That's unfortunate. It affects a good business relationship and ultimately probably affects the franchisee the most because they're the most exposed and vulnerable.

My concern is when good systems get sold, and that's happening. There's a trend today where the bigger guy eats up the smaller guy and the relationship changes. We had that experience here in Sault Ste Marie where Provigo bought out Loeb and wiped out two of our best corporate citizens overnight. They slept in their stores for two weeks to protect their interests. That's how difficult that was.

We've heard that 241 Pizza has just bought out Robins Donuts. What happens if tomorrow Pizza Pizza buys out Tim Hortons? Do you have anything in your agreement with your franchisees that protects them in that instance?

Mr Javor: That's a very good question, Mr Martin, because this is the day of mergers and acquisitions. This is the business strategy of a lot of folks. I would answer your question with perhaps a description of our franchisee relationship. I think successful franchisors and chains and brands get successful not by accident but because of the hard work and everybody's focused on a mutual goal. The mutual goal in our organization, and other franchisors who have been privileged to be as successful as us, is clear: to deliver customer service and realize that the way we get excellent customer service is by having franchisees who are committed to that. We have a strong culture of excellence and commitment. I think it would be very difficult for a new ownership group to come in and absolutely take away what's taken us 30 years to earn and to grow together with our franchisee ownership.

The fact that we involve our owners a lot in our business at the advisory board level and committee level that I mentioned earlier I guess is a testament to the strength of that commitment we have to ourselves in the marketplace, and that is bigger than the contract. It takes many years to change cultures at corporations. Those of us here who have been in private business over the years understand that. Truly, yes, the top of the house or the CEO and president help set the tone-that's well-documented research-but also when you have a strong commitment at the grassroots level in your community, where your franchisees are absolutely actively involved in supporting your community, because they know where they're bread is buttered. It's not downtown Toronto, it's all the communities where we have stores in our particular chain across the country.

I honestly think that when a merger and acquisition comes along the strength of the brand will come through based on these types of commitments and relationships.

Mr Gill: Thank you very much for your presentation. There has been a lot of discussion about local sourcing. Do you want to shed more light on that, local sourcing in terms of purchasing? I know you touched on that saying that it might not be economical. Can you shed some more light? Let me give you a scenario: Sometimes the distribution chains do build warehouses in different places where they pick up the merchandise locally and then they deliver it locally. Could a similar situation not fit into your systems?

Mr Javor: We have that. We have regional distribution centres across the country that are located strategically to deliver our branded product and items to our operators who have a contractual commitment to sell certain branded Tim Hortons items, obviously. We have proprietary flour mixes and baking mixes, that kind of thing. But we do allow local flexibility for items that, quite frankly-and I heard earlier presentations and I know the agenda today has a strong voice from the dairy group. It's important to our type of business that there be the ability to source that locally, quickly, in case of runouts. You can't wait for the truck to come three days later from Kingston or wherever the plant happens to be.

We have strategically looked at those items and products where it makes sense to have a flexibility locally, like dairies in our particular case, where we have the ability, through good planning, through good logistics management, through correct buying power, to have our key suppliers of record deliver to our distribution centres. Where we can handpick and then deliver the order as per our franchisee's request, we will do that, realizing that this is an economics-driven arena in terms of logistics management. But we also balance that with what will help the store operators run their business, because when you're out of 18% cream in our stores, customers get real upset.

Mr O'Toole: Just a quick one: You're well recognized at Tim Hortons, the branding name, and understand all of the vertical, top-down directions. It works, why not? I'm just wondering, as products change and people decide they like tea better than coffee-heaven forbid-how does Timothy's fit into this new marketing strategy? Is that owned by Tim Hortons?

Mr Javor: No.

Mr O'Toole: It isn't? I hope I'm not-

Mr Javor: If you want to start a rumour that Timothy's is for sale-it's separate ownership. It's a different category in the coffee arena, if you will, in terms of the gourmet players. They are two separate companies. They were clever enough to name themselves after us to a point.

The Acting Chair: Thank you very much, Mr Javor, for satisfying the curiosity of the parliamentary assistant.

Mr Javor: We will improve our decaf, I promise.


The Acting Chair: I'd like to now call Mr Don Farquhar of Farquhar Dairies. Welcome to the committee, sir. We have 20 minutes to spend together.

Mr Don Farquhar: Good morning. I have reviewed Bill 33 and it seems fine as far as it goes. I'm not a franchisee or franchisor, but it does seem to be some useful legislation. However, if you're going to introduce a bill, why not get to the root of a problem that a lot of these franchisees have, which is restrictions that franchisors put on them on where they can source products and services?

We are Farquhar Dairies Ltd, an independently owned fluid milk processor and distributor that was founded in 1935. We employ 40 full-time employees and have processing plants in Espanola and Mindemoya. Our historical trading area has been from Manitoulin Island to the south, Espanola to the east, Blind River and Elliot Lake to the west, and all communities in between.


In June 1997, the provincial government opened competition throughout northern Ontario in the fluid milk business, including our area. This was done "to allow for the licensing of additional fluid milk processors and/or distributors and to enhance consumer choice of products." I'll be getting back to enhancing consumer choice of products. That quote was taken from the Ontario Farm Products Marketing Commission memorandum dated May 29, 1996.

Since June 1997, Farquhar Dairies have expanded our area throughout northern Ontario. We have been fortunate that many independent retailers and consumers have thus far found our products to be of high quality and we have been somewhat successful moving into these new markets. However, we have had almost no success getting our products on to the shelves of any major food stores or franchises outside our historical trading area.

We have had many discussions with various franchisees who wished to purchase our products for a variety of reasons. In some cases our pricing or service was better in their minds. In some cases the franchisees simply wished to purchase products from someone they perceived as local. Whatever the reason for wanting to purchase our products, in almost every case the franchisee or store owner was stopped from doing so by their respective head office because of national agreements between the franchisor and corporate dairies such as Parmalat, Natrel, Dairyworld or what have you-bigger dairies.

A couple of examples of this would be that there are several Country Style Donuts franchisees in our immediate areas. I have relationships with the owners. Because of the volume that we have, we buy some products from other dairies and resell them in our own market. We are able to offer the same product that these Country Style Donuts were presently purchasing from Natrel, 10-litre 18% cream, at a 10% discount, a greater volume of delivery. These franchisees were very interested, only to have the franchise head office stop them from buying from anyone but Natrel. This not only removed potential customers from me, but also made those particular Country Style franchisees less profitable.

Another example would be that recently we made a proposal to an owner of a Loeb grocery store here in northern Ontario. We proceeded to sell various fluid milk products to him-butter, ice cream-for the week of February 10 to 17. That Loeb store's customers seemed to enjoy the choice, as previously there were only Parmalat products available in that store. The store owner expressed that he was very pleased with the turnover that the Farquhar products had on his shelf. It was then relayed to us that a Parmalat representative complained to the Loeb store head office, which is ADL Foods in Rouyn-Noranda, Quebec, which subsequently had us removed from the store. The consumer wants our product, the store owner wants our product, and we're very happy to service that store, and yet we can't. There is something fundamentally wrong with that.

These are only two instances out of hundreds where store owners, managers or franchisees were interested in, in the very least, having us quote on their business, only to be informed by their respective head offices that Farquhar products would not be allowed on their shelves at any price, no matter what the consumer demand.

Our repeated proposals to various head offices are ignored. For the most part, our phone calls and inquiries go unanswered. So while I applaud the Minister of Consumer and Commercial Relations in his attempt to protect some of the rights of franchisees, in my opinion this bill does not go nearly far enough. We cannot continue to allow large conglomerates with deep pockets to pay off all corporate head offices and franchisors, thereby eliminating competition.

Smaller regional companies like mine pay taxes and we employ people in communities where these grocery chains and franchisors operate. All we're asking for is a fair opportunity to bring our goods and services to market.

I recommend that this bill and the fair competition legislation be re-examined in an effort to make it possible for smaller regional companies to compete with larger national companies on an even playing field. We can no longer allow corporate dairies to buy shelf space at head office levels, making it impossible for individual store owners or franchisees to access products that their customers want.

I'm certain that this government, through the Ontario Farm Products Marketing Commission, did not intend to enhance consumer choice of products by allowing corporate dairies to pay head offices to eliminate competition. That is what is happening today. If these anti-competitive policies are allowed to continue, regional suppliers such as ourselves simply will cease to exist. I don't think anyone wants to see the dairy food industry completely dominated by any single supplier. I think politicians must ensure that fair competition exists for the franchisees and owners, for the suppliers, and, most importantly, for the consumer.

That's all I had prepared. But in listening to some of the other discussions this morning, I think it's important to note that when the gentleman was talking about franchisees not being able to make a living, it's been my experience that the real problem franchisees have is when a large dairy-not necessarily dairy; I'm talking dairy because that's the industry I come from, but it could be pop or chips or bread or what have you-goes to the corporate head office and buys shelf space in all the stores across the country. They have to get that money back somehow, so they increase the price going to that individual franchisee. I can go into a franchisee tomorrow and give them a quote that's generally cheaper than what they're getting from their preferred supplier. The franchisees cannot remain competitive when they are losing money in the process. The franchise head offices are doing very well. They've received the cheque already.

The Acting Chair: Thank you very much. That leaves us about three minutes per caucus, and we'll start with the NDP.

Mr Martin: Thank you very much. Right off the top, I wanted to-I know you said it, but I want you to say it again, if you would. You and others like you, small local producers-we had the agriculture association here and you heard them earlier-are not looking for a special or privileged opportunity. You're just looking for an equal opportunity, a chance to get your product on the shelf so that consumers can have a choice and perhaps buy yours for whatever reason. Is that correct?

Mr Farquhar: That's absolutely correct. When I go and approach a store and quote them a price, I don't want the whole shelf space. I want a portion of the shelf space. Generally, our pricing and our service and our quality are as good as or better than the competition, yet we have absolutely no access to their shelf space.

Mr Martin: Yesterday in Toronto, Kevin Ryan with National Grocers suggested that it was a distribution challenge that was causing this to happen, that in order for them to deliver on-time, quality product to every community that they have a store in across Canada, they need to do this kind of Bay Street dealing that is hurting your particular business. You're suggesting today that it's not, that it's about money.

Mr Farquhar: I would suggest to Mr Ryan that if he would open a channel of communications with my company, I'm sure we could show him that it's easier to deliver product to Kap or Timmins or what have you from Espanola than it is from Quebec or Toronto. I'm sure I could do it as cheaply or cheaper than their present suppliers.

Mr Martin: I just wanted to say quickly, if I might, on your last comment about who actually was making money in these transactions, that it's certainly not the franchisee and it's certainly not you.

Mr Farquhar: That's correct. And, I might add, it's not the consumer.

Mr Gilchrist: Thank you for your presentation. It's kind of interesting. On the one hand, we're hearing the message that all the shelf space is going to these national chains, but then you use terms such as "but they're not competitive." If Beatrice is my only choice and they're giving the same shelf space allowance to Loeb that they're giving to Dominion stores that they're giving to everyone else, presumably they are competitive. It's at a higher price. Perhaps what you meant to say is the consumer is not benefiting from any perceived competition out there.

Mr Farquhar: The pricing at the store level would probably be the same throughout the community, whether it's a chain store or not, but they control all the sales. The consumer has one choice of what product he's going to buy.

Mr Gilchrist: Right. So it's a question of choice.

Let me ask you this. In this bill, we're proposing to make it mandatory that there be far more complete disclosure than there's ever been before. If you were a prospective franchisee and I was required to disclose to you that I'm going to keep all the volume rebates, I am going to effectively have a price to you that's 10% higher than you could supply locally, and marry that with the ability, the absolute guaranteed right to associate. So now all of the Loeb stores can get together.

Is it not likely that putting those two things together, the information and the power to negotiate as a more equal partner, without the government coming out with a law to say, "You must have 5% or 10% or 20%," and would it not make sense that the nature of that business relationship would change if we gave these powers to the franchisees?


Mr Farquhar: It could very well change. Why not just give the franchisee the right to purchase product from whomever he pleases?

Mr Gilchrist: I guess because I hearken back to my Canadian Tire days. I don't want to suggest that's the be-all and end-all, but there were many comparable examples, where it didn't make sense to ship a bag of salt for $2 that was going to take $5 in freight from Goderich all the way to Thunder Bay. They would let the dealer in Thunder Bay buy it. If there was somebody packaging salt that was more competitive for northern customers, they could do that. On the other hand, sending a package of screws doesn't really cost an awful lot. So Canadian Tire went to the Orient and bought millions of packages of screws. Sure, I know that somebody could have a clearout on a different brand name for this week and could have come in and offered me a better deal, but it would have made no sense to change your national marketing for something like that. Do you not recognize that it's almost impossible for the government to micromanage which products should have greater local exposure and which shouldn't?

Mr Farquhar: I agree. I think it should be up to the company. Using your example, if they can buy packages of screws in the Orient for a cheap price, if there's a screw company in that community, even if their prices are somewhat higher, should they not be available to the consumer in that location?

Mr Gilchrist: I guess my question comes back to you: Where do you do the trade-off where you lose the ability to send a national message? When you walk into a Canadian Tire store, they want you to know not only that you'll find the same products, but they actually put them in exactly the same spot in every store. They want that common marketing vision to be part and parcel of what you know to be Canadian Tire. So I guess there's a trade-off there. If I went into a Canadian Tire store in one community and I found one brand of drills, and I wanted to buy parts or accessories for it and I couldn't find it in the next store over, that's far more confusion than there is strength.

Mr Farquhar: I suppose you could have both types of drills, if there is some local affinity for that one product that particular store owner wants to have. Shouldn't it be up to the store owner to have a choice to put that product in his store if the consumer demands it?

Mr O'Toole: Would there be any difference dealing with a Loblaws corporate store or a franchise store? In both cases you'd be isolated because of the corporate-

Mr Farquhar: Basically, if it's a corporate store owned by the company, you have absolutely no choice. The managers are very strict. They will follow the guidelines of their head office. I hate to say they're a glorified stock boy, but they do not make a lot of decisions for themselves. If you go into an owned store, a Loeb store, a Tim Hortons store, something like that, the manager will at least talk to you, possibly run it up the ladder to their corporate head office. Nine times out of 10, the head office will call him back, even though his pricing may be better or service may be better, and say: "No, we have corporate contracts in place with other suppliers. You are not allowed to buy off that supplier."

Mr O'Toole: The future ability to associate may improve that, though.

Mr Farquhar: It may. I really don't know.

Mr Brown: Thank you for appearing this morning, Don. For those on the committee who don't know, you should try Farquhar's ice cream. Farquhar is are a major employer in the constituency of Algoma-Manitoulin, particularly in the eastern part of the constituency, and have been an important family business and family in politics in the area.

I'm interested in the payoff for shelf space and other corporate payoffs that may be made. Do you have the opportunity to make those? Can you go into the independent grocer and say, "Listen, Bud, I'll pay you the equivalent for shelf space in your particular store"? Can you do that?

Mr Farquhar: If I had that kind of money I probably wouldn't be in the dairy business; I'd be golfing in Florida right now.

No. In my own area we're dealing with a limited number of stores. A company like Parmalat or Natrel-and I'm certainly not knocking their products or anything like that-simply has the opportunity to go into a head office like National Grocers and say, "We're going to bid on your entire chain of stores throughout Canada, and for the ability to service all those stores, here's the cheque." They have to make that money back somehow. So when they go into that individual store, their prices to that individual store owner are inflated. I can easily go into that store owner and beat their price, very simply, and most of those store owners would like to buy my product. The price is better, generally the service is at least as good, and the consumer knows our products-we're are a local company-and they would like to buy from us. They can't do it. That fundamentally is the problem I am here to talk about today.

Mr Brown: Essentially what is happening here is that there would be a hidden commission, and it goes to the franchisor and not the franchisee. So the consumer, the franchisee and local distributors all lose.

Mr Farquhar: That's right.

Mr Brown: In fluid milk, though, we are in a rather unique situation in northern Ontario. I don't believe there are many, if any, independent dairies left in southern Ontario, are there?

Mr Farquhar: There are not too many in southern Ontario and there are not too many in northern Ontario. We have had a couple close in the last couple of years. It's a very competitive market. We believe that at Farquhar's we run a fairly tight ship. There is a Beatrice plant in Sudbury. If you put us against them, that plant against our plant, we would probably come out very close in cost to put out a litre of milk. We simply don't have the resources to buy shelf space and make national contracts.

If it continues like that, I suppose there will be only one or two national dairies left. When all the dairies go, and there is no processing in northern Ontario, farms will be next. If all the processing is done in southern Ontario, I think it's very likely that they will be shipping milk on a daily basis from northern Ontario to southern Ontario for processing. It's a snowball effect, you see.

Mr Brown: We just learned from the Algoma federation that the number of dairy farms is down dramatically. I have an estimate that the amount of quota is down by about a third in the Algoma district, so your point is well taken.

The Acting Chair: Thank you very much, Mr Farquhar. We appreciate your coming to the committee and sharing your views.

The committee stands recessed until 1:30 pm.

The committee recessed from 1208 to 1333.

The Acting Chair: I'll bring the committee back to order. I trust we all had a chance to take part in that beautiful day out there. There was some suggestion we should move the entire hearing out there.

Interjection: So moved.

The Acting Chair: We won't put that to a vote.


The Acting Chair: Our next participant is Wishart and Partners, Mr Gerald Nori. Gerald, welcome to the committee. We have 20 minutes to spend together.

Mr Gerald Nori: Thank you very much, Mr Chairman. The reason for my appearance before the committee is I guess partly nostalgic in the sense that you may have recognized the name of the firm, which is Wishart and Partners. Arthur Wishart was a member of the Legislature from this city for many years and also became Attorney General and was Minister of Commercial and Financial Affairs at the time the Grange report was introduced. So we felt it was appropriate that we should appear, in his memory at least, to make some comments in connection with something that Arthur held very dear in terms of wanting to bring in some legislation to correct what he saw were very definite requirements for legislation in this field.

I am appearing basically in support of both Bills 33 and 35 and, as I unfold my comments, I think you'll see where I do deviate from 33 in support of 35.

It's a little bit difficult to understand how this very important segment of commercial endeavour that has the potential of touching and affecting so many people has escaped any type of control over the years.

We recently acted on behalf of a franchisee in a matter that happened in the city of Sault Ste Marie that brought home to us the necessity for some type of action in this field. The nature of the relationship was such that the franchisee was kept primarily in a state of indebtedness throughout the relationship by virtue of the fact that the franchisor was able to control the wholesale price at which goods were sold.

As a result of that, of course, the franchisee never made any money and was constantly indebted to the franchisor and at one point, for reasons that still aren't very clear to us, the franchisor decided it was time to maybe end the relationship, at which time the franchisee was called to a meeting at which the franchisee thought they were going to be talking about a marketing plan for the future. The meeting was held at a local hotel. During the course of the meeting, which was off premises, the franchisor moved a crew of people into the franchise premises and locked the doors and took over the cash receipts etc, so that the franchisee within about an hour found that they were dispossessed. That resulted in a fairly significant lawsuit, which quite frankly the franchisee could ill afford under the circumstance, because there is a huge inequality that takes place in these circumstances.

Normally, what you have is a relatively unsophisticated, underfinanced and probably marginally educated franchisee, in terms of management, fighting against a very large corporation, well financed, well managed, and it's not exactly an equal playing field-unless that franchisee can find the means to fight, and that's difficult because going to court these days, even though I'm a lawyer I don't mind telling you, is an extremely expensive and frustrating experience and should be avoided if at all possible.

In any event, that certainly brought home to us the fact that there was nothing out there to protect this particular person under these circumstances and quite frankly made us a bit of an ally, although I personally espouse being a free enterpriser. I don't think I'm totally laissez-faire, and I do believe that there are circumstances in our economy when an interjection of some kind is warranted.

You've probably heard everything that there is to say on this subject and I don't intend to bore you, and I will leave with you a printed version of my remarks, but there are a few things that I'd like to really emphasize and feel that if you are going to bring in some legislation, which I hope you will, you should at least take these things into consideration.

The upfront disclosure is extremely important for the prospective franchisee to know what they're getting into. It's interesting to look at that comparative that I think the employees of the committee prepared, which I thought was very helpful. It was interesting to note that the most extensive disclosure statement is enforced in the United States, that great bastion of free enterprise to the south, and it's a very comprehensive document that I felt sets out at least the minimum of what should be disclosed. Disclosure up front is extremely important, because there is a lot of information that comes to the franchisee, but I don't think it's the kind of information that they're necessarily responsible for. A disclosure statement made within the framework of legislation would be a totally different animal.

There has to be investor protection. It's quite evident from the material that I saw in connection with the committee's work. I think I saw a figure of something like $45 billion to $50 billion in annual sales in this industry and something like 500 franchisors and 40,000 franchisees. If we stop and think about this a little bit, we've set up the Ontario Securities Commission for the purpose of protecting investors in this province. There is protection in the marketplace from the point of view of forcing prospective vendors of shares to make a complete disclosure and to have their prospectuses vetted by the Ontario Securities Commission.


I don't see any difference between a franchisor out hustling and selling franchises and somebody out in the marketplace selling shares in some marginal mining or manufacturing adventure. I don't see the difference. We've already got the infrastructure there. I don't know why we can't force a franchisor, who intends to sell to the public, to file a prospectus and have it approved by the securities commission under similar circumstances to the guy who wants to go and develop some moose pasture.

It's interesting that in the Grange report there was a recommendation that they set up an entirely new infrastructure. I forget what they were going to call it, but I think it was the bureau of franchise or something. I don't believe that's necessary, under the circumstances. You've already got the infrastructure. You've got the securities commission and you've got staff. It might mean a bit of additional workload, but basically the infrastructure is there, the expertise is there, the know-how is there, and it would just add another layer for them to become involved in. I think that's an extremely important protection for investors in our province, and I believe that all of you believe, probably strongly, that the reputation of Ontario as a place to do business and a place where investors will be protected, is an important feature. It's interesting to note that Bill 35, which I believe is being sponsored by Tony Martin, our local member, contains a provision for upfront vetting of the sale of franchises.

Another item I would emphasize is fairness in dealing. This is pretty big stuff. As I said to you a little earlier, you really have a very uneven playing field here, and I think that fairness in dealings is extremely important. In our experience, we've found that what happens is that the franchisee comes into our office and he or she has stars in their eyes. They've been out there, they've been sold on the concept or have seen it operate elsewhere. Trying to get them to concentrate on the documentation-because when the documentation arrives, it's usually a stack about eight inches thick with lots of legalese and totally loaded in favour of the franchisor. To get that franchisee to sit down and talk about those documents is very difficult, almost impossible. They just want to get on with business as soon as possible, and they don't want to pay the legal fees inherent in getting to the bottom of their relationship.

I think it's interesting that in that circumstance the Grange report does a reverse of onus. It says there has to be fair dealing, and if there isn't fair dealing, then it's up to the franchisor to show, and I quote, "that the contract between the parties was fair." In other words, the onus shifts, not from the franchisee to prove they were treated unfairly but to the franchisor to prove that franchisor dealt with this individual fairly. I think that's an extremely important concept. It goes on to say that the franchisor's conduct was "equitable in the circumstance." So you have this onus on the franchisor, at that point, to prove they dealt with this person fairly.

I think that would lead to this: If there was a provision in the statute that called for an ILA-anybody who is a lawyer will understand what an ILA is; it's a certificate of independent legal advice. That would mean the franchisor would get a certain protection as well, because the franchisee would have to go a lawyer and would have to have that lawyer read those documents and would have to sit down and understand what those documents meant, because that lawyer would then have to sign a certificate that that person in fact read the documents and understood them. So there is some protection as well for the franchisor. I think the reversal of onus plus an ILA might go a long way to getting to the point where the franchisee actually understands what they're doing. I'm convinced that most of them really don't, because of the fact that they've got stars in their eyes.

I think a method of dispute resolution is extremely important. I'm going to say this, and I'm probably going to be taken to task for it, but it's very difficult and expensive to find justice in the courts these days. You've probably all experienced the fact that unless you're in small claims court, going to court is a very tiring, time-consuming and expensive proposition, which frankly should be taken into consideration in these circumstances. I think you would be well advised-Tony has put what I think he calls mediation in his bill, and I believe that that's an extremely important factor. There should be mediation. There should be the ability to call in a mediator to try to resolve a difficulty that has arisen. If mediation doesn't work, then it should be arbitration rather than court proceedings, because court proceedings in the uneven playing field you are involved in here are going to murder the franchisee. He or she is never going to make it, because they will outlast them and out-sophisticate them. If we can get dispute resolutions out of the courts, I think it will help the franchisees immensely.

The other area that I think is extremely important is to provide an exit strategy. What I mean by that is that under certain circumstances there should be the ability for a franchisee to get out of the relationship. Whether it's as a result of the arbitrary termination of the franchise by the franchisor-the example I just gave you-whether it's arbitrary refusal of assignment or renewal of the franchisee by the franchisor, or the death or incompetency of the franchisee, under those circumstances it wouldn't be difficult to provide that the exit and the terms of the exit have to be determined by arbitration rather than in the courts. I think that would give the franchisee some modicum of protection from being overwhelmed in this relationship.

The other thing you should really give some thought to is that there's a problem with control of pricing. I know of franchises where it's not only a question of controlling the product that is going out the door-the coffee or the doughnuts or the hamburgers-it's everything that goes into that franchise. The meat counters, the ovens, the refrigerators-everything has to be bought. Even though the franchisee might be able to source those goods within his or her own community at prices that are superior to what the franchisor is selling them for, they are prevented from doing that. What that does is put the franchisor in a superior position, relative to the pricing, at the cost of the franchisee.

Those are really my only comments. I hope I've been of some help. I think you have heard all these things before, but I thought it might be worthwhile, at least for the memory of Arthur, that I come forward and let them be known. I'm frankly very appreciative of the effort Tony has put into this. He's been an important factor, and I'd definitely like to support his position. I see Bill 35 as going a bit further than Bill 33, and I think that's important.

The Acting Chair: Thank you very much. We appreciate the historical context of your visit as well. Certainly the Grange report was one of the first times this came forward. That was an excellent report on the subject.

Mr Nori: Actually, I was surprised.

The Acting Chair: We have about one minute left for each caucus, if that works.

Mr O'Toole: Thank you, Mr Nori. I really do commend the history and significance, and we did have a familiarization with the Grange report and with the background of what I would classify as sort of party indecision. Nobody has had the courage to really find the balance. I don't mean that critically.

Mr Nori: No, no. It's true. I think that is what has happened.

Mr O'Toole: We're in the same boat, trying to find a balance that protects the consumer, be it the consumer of hamburger or the franchisee. They're actually both consumers.

One suggestion I recall is the abuse of power position. You call it the reverse onus position. Does that not just exacerbate the civil litigant issue? To establish the reverse onus issue, then you have a corporate, perhaps American, senior in this thing-

Mr Nori: I would see it as just the opposite. I would see it as the big guy now having to come into court with all the resources and proving that the treatment was fair under the circumstances. That's a tremendous onus for the little guy to prove. The other thing is that the documentation is never there. The documentation is always in head office, and you never know whether you're getting the whole story. So I think that's an extremely important concept.

When I spotted that in the Grange report, I thought, "Boy, there's something that really would have some meaning in this legislation to equalize the playing field," because it is tremendously unequal.


Mr O'Toole: I just wonder, if I may, Chair-

The Acting Chair: No, you may not. Mr Brown.

Mr O'Toole: Very abusive.

Mr Nori: You should file a complaint.

Mr Brown: Thank you for appearing. The other side of this, of course, is the entrepreneurship of actually becoming the franchisor. I guess we sit here and think about McDonald's and some of the huge franchisors, but certainly business people in northern Ontario have gone on to franchise their products. Usually that's not where they started at in their heads. They started a business and it worked and they found that the franchisor might be the way to go through the franchise system.

With what you've just told me, do you think that would inhibit the Vic Fremlins of the world over here to franchise his Lock City Dairy throughout Ontario?

Mr Nori: Vic Fremlin? That wouldn't even slow him down to a walk, Mike. If you look at the number of mining ventures that have started in northern Ontario, I don't really believe that would be a big inhibitor. I think we have to keep our eye on the ball and make sure there's a balance between protecting the public and leaving the marketplace open for the entrepreneur.

Mr Martin: Thank you very much, Gerry. That was an excellent presentation and, having worked on the bill, I couldn't have done the defence of it any better.

But I just wanted some comment from you on an issue that you didn't mention, and I think it's important that we deal with it at this time. It's the whole issue of gag orders. You know and I know that the person you referred to in your opening comments was gagged. I asked the-

Mr Nori: I would appreciate it if you didn't take that implication from that, Tony.

Mr Martin: OK, sorry. Anyway, we know that gag orders exist and they are out there. Maybe I shouldn't go there, but-

Mr Nori: I'd prefer that you didn't.

Mr Martin: OK. You can refuse to answer, but I'm going to lay it on the table anyway.

The Acting Chair: The questioner is immune from it, but I'm afraid your position may not be just quite as clear as that.

Mr Nori: May not be as immune-they're very sensitive to that, Mr Chairman.

The Acting Chair: But I think you've made your point.

Mr Martin: You can refuse to answer, but the question actually is your view on gag orders.

Mr Nori: I guess I wouldn't have a view because gag orders are used not only in these circumstances but in many other circumstances as well. They're a very valid legal tool and they do lead to settlement, Tony, in circumstances where there might not be otherwise the opportunity to settle. So I would not attack gag orders as such as a settlement tool in a court case.

The circumstances in the story, I'm told-it sometimes does lead to a favourable settlement for the litigant or the claimant, and I don't think I would attack the gag orders as such. I don't think it would be a good idea, quite frankly, to include it in the legislation.

The Acting Chair: Thank you very much for appearing. We certainly appreciate your presence.

Mr Nori: You're quite welcome. It was a pleasure.

The Acting Chair: I liked your suggestion on the SAC. That was great.


The Acting Chair: We now have the Sault Ste Marie Chamber of Commerce, Mr Pascuzzi. Welcome to the committee. We have 20 minutes together.

Mr Ben Pascuzzi: Thank you. I would also like to thank the committee in advance for allowing us to appear before you today.

My name is Ben Pascuzzi. For the record, I am also a lawyer at Wishart and Partners law firm. However, I am not speaking today on behalf of any particular client or my involvement as a lawyer. I think my colleague Gerry Nori, with his vast years of experience compared to my youth, canvassed that far more completely than I ever could hope to do. However, I do sit on the board of directors of the Sault Ste Marie Chamber of Commerce and act as their legal adviser, and it's in that capacity that I'm speaking to you today.

The Sault Ste Marie Chamber of Commerce considers itself the recognized voice of business here in Sault Ste Marie and considers any proposed legislation or regulations that govern franchises to be of keen importance and interest to the members of our chamber.

The relationship, however, is more complex than simply that between the franchisor and the franchisee, and that is especially so in a small city like Sault Ste Marie, which is relatively isolated in the north. I'm sure you'll find this if you travel to other places in the north. There is a real interdependence and interrelationship between the businesses. In other words, when the local franchisee uses local products and local companies for services and goods, it's those same people and their employees who turn around and go to the franchisee to buy the hamburgers and doughnuts and whatever else might be involved. Certainly we see here in the Soo an economic impact on the community by the franchisees through direct employment and direct involvement in the community, as well as through their spending of dollars in the city.

Some of the things I'm going to be outlining to you are based on my discussions and consultations with the various members of our local chamber of commerce. We have over 850 members currently in our chamber. Some of the things I'm going to say you probably have already heard from past speakers. In fact, I would imagine some of your past speakers are probably members of our chamber. Some of the issues my colleague has already touched on as well. I don't think it hurts for points of emphasis to touch on some of them again.

Basically, in talking to the various franchisees, it's interesting that no matter what type of industry I was talking to and what type of product or service they were involved with, you start to see common themes or problems come up with the various franchisees, both those that are still currently in business and those that are unfortunately no longer in business.

The first issue of concern that was raised with me was the issue of full disclosure and material misrepresentation. What I mean by that, as my colleague and the last speaker touched on earlier, is that it's very important to have full disclosure up front. As lawyers, one of our jobs is to sit down with a client and review all of the documentation and financial statements, to be in contact with the accountant and any other person who can provide assistance so that the franchisee can understand exactly what they're buying into. This is true any time someone is looking to purchase a small business.

However, the feeling I got from speaking to various people is that it goes beyond the written documentation. The impact I got from various people I spoke to is that often what is said verbally or what is implied is different from what turns out to be in the written agreement. Granted, as Gerry Nori already outlined to you, it is the franchisee's responsibility to sit there and go through the documents. However, let's face it: We have to be practical. As was outlined to you already, people are getting into a new business; they're excited, everything smells like roses at the beginning. There's a tremendous amount of detail to do with a countless array of issues. So what the franchisor says to the franchisee in a verbal sense and leads him to believe is very important. The message I got from our local businesses that are franchisees is that often what they thought would happen in the event of a particular situation arising isn't necessarily the case.

Another issue that came up that I think it probably serves to just touch on again is the complexity of the franchise agreement. As a lawyer, we like legalese because it gives us a chance to explain it to our clients and it's partly what keeps us working. But putting aside my lawyer's hat and looking at it from an individual's perspective, certainly there are times when I don't understand what the agreement is saying. With my skill and training, quite frankly, if I can't understand what the agreement says, there's probably a serious concern whether the people signing the contract can understand it.


The next issue that came up again was the issue of fair dealings and standards of conduct. I think the previous speaker outlined to you a situation that arose with a particular franchisee. I made some notes here of different situations that have arisen. One example-and of course again I can't use any names or places-there was a franchisee who was basically taking over the franchise from another franchisee and ran into serious problems with regard to the lease. It turned out that the franchisor had always indicated to them, "We'll step in; we will lead you through the way." That didn't happen. The lease situation was rectified, but at the end of the day the franchisee was left with quite a large legal bill and really felt let down by the franchisor, not necessarily in terms of saying, "We're going to fly up our lawyers from Toronto," or Vancouver or wherever, but just in the fact of moral support and financial support at the front end, the idea that this is a team effort between the franchisee and the franchisor. However, it seems that sometimes when things start to go sour, the team only has one player on it, and that's the franchisee.

Another major issue, and one that I know you'll hear about from future speakers or have heard already from past speakers, is the ability to source local product. That's not only goods; that also includes services. Again, looking at the two bills, I believe that Bill 35, Tony Martin's bill, strikes a reasonable compromise. That is, unless there's an issue of trademark or patent involved, if the particular product does the job and the franchisee wishes to carry that product or use that local product, whether it's for direct resale or if there's a question of supplies-ie, cleaning supplies, food supplies-they should be allowed to do that. Any restriction, even in a written contract that has been agreed to between the franchisee and the franchisor, really is a restraint on trade and a restraint that the courts have in the past struck down.

The issue of services as well is important. Everybody can understand that from the franchisor's perspective, there are certain specifications that have to be met when you're designing, for instance, a store. However, let's take a very simple example. If a local franchisee requires a plumber to come in and do some plumbing in the store, as long as that work meets the specifications of the franchisor, and of course the general standards of any regulatory body, ie, a municipality, there doesn't seem any reason to me, from the chamber's perspective, why local services can't be used, for two reasons: the reason I already touched on at the beginning, that it's that local plumber and his or her employees who are the people who, if they're working, support the local franchisees and the businesses, and number two, from the franchisee's perspective, that often what I've been told by franchisees is that the cost of the franchisor bringing in someone from out of town is inhibitive. In other words, the franchisee really gets a double whammy. One, they're told they can't use a local contractor in a particular situation, and two, "You're going to have to use the contractor we send up," from, say, Toronto, "and you pay for all of it." In one example I was told a local quote was in the neighbourhood of $5,000 to $10,000 and the bill from the contractor in Toronto was $30,000. I know the cost of living in Toronto is significantly higher than in Sault Ste Marie, but that's awfully hard to justify to the local franchisee.

The next issue that came up and that again was touched on by the previous speaker is the whole issue of dispute resolution. Looking at Bill 35, Tony Martin's bill, there is a provision in there for mandatory mediation. I would reiterate the comments made earlier that the committee should at least look at the issue of mandatory arbitration as opposed to the courts as an ultimate remedy, for the obvious reasons already stated-they are less costly, they are less time-consuming-and, quite frankly, I think if you spoke to both corporations and unions in the labour relations setting, even corporations would admit that in many cases they'd probably get better decisions than they might get in the courts, because the arbitrator or the arbitration panel over a number of years develops a certain level of expertise in that area. There's certainly at least some argument to be made that you would get better decisions in the long run.

Looking at the labour relations model, I think it's a good comparison to make. Generally in contract law, two parties enter into a contract. If there's a dispute, you turn to the civil courts. However, we have recognized, as in the case of a unionized setting, that there are unique circumstances where the general or fallback way of resolving disputes doesn't fit the circumstances and may require a different way of settling a dispute.

I really think it ties into what we see happening in society generally. Certainly, when we as corporate lawyers draft a shareholders' agreement, we now put in mandatory arbitration clauses almost all the time, that the shareholders to the agreement agree to be bound by the rules of arbitration as set out by the Arbitrations Act etc. The reason we do that is we know, despite all the good intentions, that sometimes shareholders in small companies have fights. If there is a dispute, we're really doing them a favour up front by calling for mandatory arbitration as opposed to looking to the courts if that clause were not there.

Some solutions were presented to me from various franchisees I spoke to, to address some of the issues and concerns I have highlighted. The first solution is the reason we are all here today. Clearly, some sort of legislation is required. Again, I too consider myself a free-market person who likes to leave business people to their own dealings. We've seen many times that when the government gets involved, it can make a bad situation worse. However, the chamber, and people generally, recognize that there are unique situations in contract law where the positions of bargaining power are so unequal that some sort of legislative framework is required to set out the rules of the game.

I think an obvious comparison in the provincial setting would be landlord-tenant legislation. We don't say: "You're an individual. If you want to rent a premises from a landlord, you make a contract and the terms of that contract govern and that's it." No, we have legislation in place because we recognize, especially in the case of residential tenancies, that the bargaining position and the level of sophistication between the tenant and the landlord are so great and the gap is so wide that some sort of legislative framework is needed.

Again, governments have tried to strike a balance between the two sides. However, there probably aren't too many people who would argue we could do away with that type of legislation altogether. I would say that in the case of franchises a similar situation applies, where the differences between the positions of bargaining power and the level of sophistication and access to resources are so great that some sort of legislative framework is required.

The things, which I call front-end solutions, are some of the things I have already touched on, that is, full disclosure up front, as I outlined before. Also, something came up about a cooling-off period. Quite frankly, based on my experience, which is limited compared to Gerry Nori's, I don't know how often a cooling-off period is built into an agreement. By that I mean something built into the legislation where after the contract is signed and everything is done, there is some sort of period, whether it be 60 days or 90 days, when a party can sit back and decide, "I've given this a second thought, I've looked into it further and I've changed my mind."

Normally, when you enter into a contract and sign it, you're bound by it. If you want out, you're probably going to get sued if you break that contract, unless there is some reason or cause. So a cooling-off period would probably seem appropriate, considering the circumstances in which we know these agreements are often entered into.

Third, what is important to the franchisees I spoke to is a right to associate. The fact of the matter is that some franchisees I spoke to aren't here today because they're afraid. They're afraid of repercussions from the franchisor if they were to come and speak publicly. Along those lines, they have similar fears about entering into any type of association with other franchisees, whether it be a general association or an association of franchisees within one company.

On the exit strategy, we have already touched on some of the things that should be looked at; that is, mandatory mediation and the possibility of mandatory arbitration.


There is one other point I want to make here-and like a typical lawyer I have papers all over the place, but I was looking for one sheet.

Earlier I mentioned the restraint on trade. I know there are probably members of the committee who are hesitant in this age when we are trying to roll back government to some degree and eliminate bureaucracy and red tape which, when unnecessary and unwarranted, I don't think serves anybody's interests: franchisor, franchisee or consumer.

However, franchise agreements, even when entered into with minimal standards of voluntariness-that is, someone has to be mentally competent and be of the age of majority etc. To say, "Well, they signed the contract, that's sufficient," that if it's a really bad deal and a one-sided deal, "Too bad, you signed it"-the courts, in general contract law, not specifically dealing with franchises, have said, "No, that isn't necessarily the case." In fact, there are cases striking down agreements in restraint of trade that generally give the reason for intervention the public interest and protecting free trade. The criterion of validity is that an agreement should be reasonable as between the parties, and there is little doubt that the courts mean by this that they will exercise control over unconscionable agreements.

What I'm referring to here in restraint to trade is the idea of sourcing local goods and services, of being able to buy local products. The franchise agreements, for the most part, restrict that. However, the fact that they agreed to it doesn't necessarily mean this shouldn't be covered off in legislation, that there shouldn't be some sort of legislative protection. Even if you take a free-market view of it and say, "We're looking at this from the point of view of letting the parties negotiate as they want," you could argue that if you are truly in favour of a free market, then anything that's a restraint on trade goes against that. I think you will find that in the United States, in the legislation at the state level and in the proposed federal legislation, they look at this issue as well.

In conclusion, I would sum up by saying that on behalf of the Sault Ste Marie Chamber of Commerce, I'd like to thank our local member, Tony Martin, for pushing and sticking with this issue over the years he has served as a member. It's an important issue to our members. A great deal of new small business in Sault Ste Marie, as elsewhere, is in the form of franchises. It is a situation that simply is not like any other contract relationship and requires some sort of legislative framework to be in place.

The chamber of commerce, in consulting its members, has been given a loud and clear message that they want something in place, that they have concerns, that they need solutions, and that too often, even when the franchisee has a legitimate complaint or concern, they simply can't get it sufficiently addressed due to expense and time and all the other things that have been talked about.

Those are my comments. Thank you again for allowing me to speak to you today.

The Acting Chair: Thank you very much. Your time has been used up, so we won't have time for questions. But we do appreciate your attendance.


The Acting Chair: Next is Lock City Dairies, Mr Vic Fremlin. Welcome to the committee, sir. We have 20 minutes together.

Mr Vic Fremlin: I'd like to thank everybody for letting me speak today. I'm here to represent Lock City Dairies. I'm going to talk a little about our company. We are a grassroots company. We produce the raw product from our farms. We started as a third-generation dairy farmer in 1991, when the company that was selling our milk here in town left. We decided we'd try to build ourselves a dairy. We never did that before, so it was quite an attempt. We started from nothing and worked our way up the ladder.

I have no problem starting businesses. This is the third business I've started, but with this one, trying to access chain stores becomes a nightmare. You can get right in the community, be part of the community and spend your money in the community, but that doesn't necessarily mean you're going to get your product on the shelf. What happens is you have a store owner, a franchisee. If he wants to buy the product he's not authorized; he doesn't buy the product. From that standpoint, you have a lot of problems with being able to create more jobs, build, go on and on from there, and make your whole picture turn out right, because at the time, when it goes to go in there, you think you're going to end up going in there-like, say, the Loeb stores. They got bought out by another franchise. I'd say I was in there at 70% shelf space. It ends up it goes back to, say, 10% shelf space. There are a lot of problem with the franchises and the franchisor when they have a lot of customer demand for that product.

In our area in Sault Ste Marie-I don't know if you people know about the Soo-it ends up that there's a lot of unemployment here. We need jobs here, and building local businesses in this area helps us quite a bit.

Basically, my biggest complaint is you never know from one day to the next whether you're in or out. It's kind of a situation of whoever makes the best deal down there, and it's not the small guy. The small guy never gets into the picture at all. You can phone down and try to get a meeting going with them, and the first thing that will happen is, "Well, the contract's already signed," and maybe "Good luck next time." So you wait, say, a year and a half and you phone again, "Well, you phoned too early."

"OK. When should I phone?" "Well, you've got to phone in another six months." You phone in six months and they'll tell you, "Well, you're too late." Then you say, "OK, I'll get you next time." You phone next time, say in another two years when the contract comes up, and they'll say, "That guy you were dealing with is no longer here." They change the guys.

You'll say: "OK, I better change my tactic. I'll come down there." So you end up going down there and when you're down there they don't see you. You think: "That's no good, so I'll try something different. I'll try and arrange for somebody else to make an appointment with you." That doesn't work.

Then all of a sudden, say, the company is sold out to another company, "That contract's no longer valid so you're not eligible to get in there." And then when you do get in there and you're doing very well, all of a sudden that company sells out and another guy takes it over. Then another big corporation comes along and they sign another contract, and you're out of there again.

It's an ongoing problem here. If you want to talk about investing in northern Ontario, this business is a very tough business and we can compete at it. We've proven that. We started with not one bag of milk and now we're close to half the volume. That didn't come easily. It came by local support. In these franchise agreements, the store owners, or supposedly store franchisors, whatever they are, cannot make a decision. They want to make a decision, but they can't make it. The consumer wants to have a choice. In Sault Ste Marie, say it's 30-some years we've been able to buy one product in an A&P store up here. Thirty years is a long time to eat corn flakes, if you think about it. If you ate corn flakes for 30 years, you'd like to have choice, you know?

The book that I brought out today breaks it down in detail. A store that I dealt with, one store individually-I detailed it all so you can see exactly what you've got to go through to penetrate these stores.


There are letters down and there are reply letters. Some of the replies are quite amusing. It ends up that my product is still not on that shelf. It was in there twice and it was taken out twice. The first time it was taken out because of a breach of contract after three months. The second time it was brought in and was taken back out, but it's supposed to go back in again.

That type of thing goes on in these franchise agreements. It hurts a local business like Lock City Dairies, and it goes down the ladder. It hurts not only my business but anybody who's dealing with me locally. I feel that I've provided enough information. If you go through all that I've given you, there's nine years worth of public involvement, support from the community, recognition for winning awards for business in northern Ontario. I find that these agreements with the franchisees and the franchisor are only one-sided. They've got to look more into fairness and respect.

I also have a franchise. It's a John Deere dealership, a Kubota dealership. I know what these guys are up against. I'm in support of making Bill 35 add in there so we can have a fair ballgame for the guys who are out there trying to make a living, for the community. I feel for those people.

The Acting Chair: That leaves us about three minutes per caucus for questions. We'll start with the Liberal caucus.

Mr Brown: Obviously it is a problem. We heard from Farquhar's this morning. We've known about this issue in terms of sourcing and providing consumer choice to the residents not just of Sault Ste Marie but all of Algoma and all of northern Ontario. I think in some ways this is a more particular issue to northern Ontario because of the distances between the major communities.

What you're telling me is that the franchisee, ie, the store operator, doesn't have the opportunity to buy your product even though your price quite often is at least competitive and probably lower.

Mr Fremlin: It's competitive.

Mr Brown: That's likely because, at the senior levels of the corporation, they have made deals with the major dairy companies for shelf space and other considerations that go beyond just the actual delivery price to the door.

Mr Fremlin: These decisions are all made in Toronto. The guys who make the decisions aren't in our community. They don't know the demand for their product. Put it this way: I really don't care who puts their dairy products on the shelf as long as I can have mine on there for my company to be able to have a choice. Just make it fair, that's all. I don't want 90% or 80%. If I had a store offering me 90%, I'd say that 50% is fine.

Mr Brown: You just want the ability to compete on an even footing with the other corporations, and that doesn't happen because corporate headquarters deals are cut that you are frozen out of?

Mr Fremlin: Yes. If I do get on the shelf, it's in the corner at the bottom. I wouldn't do that to anybody. It's not fair.

Mr Martin: Thanks for coming today, Mr Fremlin. This is an issue that should concern all of us because it's about how we do business in northern Ontario. Your situation is an excellent example of how decisions that are made other places, how relationships that are sort of above and beyond us and out of our control, affect directly our ability to have a healthy economy going. There was a suggestion made this morning that local farmers and producers could put their product into the non-franchise stores. I know you've been doing that. You got your product into some of the gas stations locally, and it wasn't long after that that the franchisee discovered that people would actually buy milk at a gas station because you opened it up for people, and before you know it a deal is cut at the top level and you're out of there too. If this keeps up, there won't be very many venues left for you to go into. If we don't do something by way of this bill to give you some relief, how long can you hang in?

Mr Fremlin: Well, I like to fight a little bit too. This type of stuff gets on your nerves after a while. I think this committee that's sitting here today-I couldn't believe that I made it this far to talk about it. It needs to be addressed or eventually the big guy will always win. He'll do something. If he gets away with this, he'll win, but it depends on the committee here, what you're going to do. They'll always win, the big guy. He'll just keep at it until he's worn you out or he's done something. We're talking about gas stations; I put my milk in the gas station and everybody thought it was a big joke. All of a sudden the other company comes along and they took it out of the gas stations and put their milk in. Holy Jeez, I develop a market and then they figure it out so they go and get it in the gas station, and all of a sudden a guy from Toronto tells the gas station owner, "Put in such-and-such a product." "I want to keep the local product in here." "Oh no, you can't do that. You're out of a job." Basically that's what he's saying. Most of these guys that run these franchises won't come and sit up here because they're scared for their jobs, they're scared for their houses, they're scared of all this stuff. I don't care, I'll say it. That's what happens.

Mr Martin: Can you briefly give us the My-T-Fresh Eggs story?

Mr Fremlin: My-T-Fresh Eggs was in this area for, say, a total of 30 to 35 years. They were the only egg supplier here and up until the last five years he and I used to travel to a few stores and state our case because I had milk and he had eggs. Matter of fact, he trucked milk for me for a while. All of a sudden he ended up selling his business. I couldn't believe it. He was telling me the problems he was having: He had 90% of the shelf space and then he had 50% of the shelf space and then he was down to 25% of the shelf space, and at the time he was at 25% he was telling me he had to truck his eggs in a 300-mile radius because he had to get rid of them. He said, "It's costing me too much," and finally it came down right to the end, he had only 25% of the total take of the shelf. He ended up selling out to a larger company and taking the hens and all the cages out. He's out of business. Now you've only got one choice of eggs in Sault Ste Marie and everybody knows what that is.

Mr O'Toole: Thank you very much, Mr Fremlin. I first want to extend my congratulations, along with the Premier and Minister Hodgson, for being the 1998 entrepreneur of the year. Looking at the CV here, you've really done a remarkable job of marketing. Mine is really more of a comment and I'll share my time with Mr Gilchrist. I mean it quite sincerely that you're quite entrepreneurial; that's evident. You're in competition with Farquhar, I guess?

Mr Fremlin: No.

Mr O'Toole: Not to be smart, are you in the same kind of deal?

Mr Fremlin: I produce the raw product, OK? It is controlled by the Ontario Milk Marketing Board, but I have my milk picked up by the trucks that I own, along with other farmers, and we truck it down to Farquhar's and they process it. But at the present time I have built a dairy in Sault Ste Marie minus my processing equipment. The main reason for that is, if you look, you'll see the building going up there-

Mr O'Toole: Yes, I see that here.

Mr Fremlin: -but I do not have the processing equipment. I have everything but-

Mr O'Toole: But you're going there.

Mr Fremlin: -what happened was when these chain stores flipped around, I ended up going from 90% shelf space down to 10% shelf space, and in some cases none. At that time that hurt my project, so now I've had to go and fight for my market back. It ends up that I'm only short like my processing equipment. I've already spent millions of dollars. You're talking maybe $300,000 to $400,000, depending on how I do it.


Mr Gilchrist: I do applaud you for the thoroughness with which you're applying yourself to this project. The one thing missing from this brochure-I certainly agree with the destinations you've suggested people should be addressing their concerns to, except there's nothing on there listing the head offices of the various food companies. If I might offer a suggestion, one of the most powerful things you could have done is if all of these letters had in fact been received not just by the local manager-who hopefully forwarded those, but I don't think we should make that assumption, to the head offices of Loblaws and A&P down in Toronto. At the end of the day I've got to believe if they thought it was compromising their ability to sell more product in Sault Ste Marie they would have to seriously consider this. If they're bound in a certain contract, that's fine; maybe at the end of that contract things will change. But in the meantime, they were creative enough to get themselves into their current situation; presumably they could be creative enough to find a way around their Beatrice or Parmalat contracts. I strongly encourage you to make sure that the people who hear your message loudest are those who stand to lose the dollars from the customers who move elsewhere. But otherwise I congratulate you on what you're doing.

Mr Fremlin: Thank you. The book has some letters sent to head offices. That brochure you have there is old and I've created something else. There have been a lot of letters sent. One thing is, you'll never get a reply to what's going on.

Mr Gilchrist: Buy five shares and go to the shareholder meeting.

Mr Fremlin: Yes?

Mr Gilchrist: Seriously. Go to the shareholder meeting, stand up as a shareholder and ask why the sales in their stores in Sault Ste Marie are suffering because they have made a decision that may very well be profiting a buyer-I mean, we haven't mentioned around this table in the first two days that one of the other things suppliers do is golf trips for the purchasing buyers to exotic locations at this time of year, all sorts of incentives to do business with them. If that is truly prejudicing their ability to sell more product in Sault Ste Marie, I think the other shareholders deserve to hear that.

The Acting Chair: Thank you very much, Mr Fremlin, for coming and presenting to the committee. We appreciate it very much.


The Acting Chair: Our next witness is Country Style Donuts, Mr Jim Fitzpatrick. Mr Fitzpatrick, welcome to the committee. I was wondering if it was the Jim Fitzpatrick I used to work with, and it's not.

Mr Jim Fitzpatrick: Not the same guy. There are a few around though.

The Acting Chair: Yes, it's not an uncommon name. Please proceed.

Mr Fitzpatrick: I've been a Country Style franchisee since 1984, for the past 16 years. One of the things that I was interested in presenting is from that perspective as it applies to what I perceive to be the fairness or the unfairness of relationships within the franchise system, specifically in terms of Country Style, its limiting in terms of what you can do. The entrepreneurial component of a business is not the franchisee's responsibility but the franchisor's responsibility. So I've always been a problem to them because I'm just on the other side of the coin; I'm more of an entrepreneur than I am a franchisee per se. I operate another business completely in the manufacturing sector, so I don't have a day-to-day activity within the store component.

The limitation is that your supply side is controlled. At the outset it wasn't because they didn't have a commissary and central distribution system, but as those elements were brought into play that became a mandated requirement over and above the language within the documents of the contract. From an unfair point of view, I think the fact that they can add to the agreement as they deem appropriate, without any recourse to the franchisee-the franchisee must conform to whatever the franchisor projects as being in the interests of the global franchise and everyone involved.

There is not a poll or survey taken among the franchisees. It's something that's determined by the franchisor, and that's the long and the short of it. Those changes or requirements are not tested to identify that they are profitable or appropriate or market-driven vis-à-vis the cross section of Ontario, where you have very different market circumstances from the north, from the metro areas, from the Ottawa area and the Thunder Bay area and so on. Those are all quite distinct markets, yet the franchisor applies his regulations on a broad-based set of rules that they develop. That to me seems to be the most onerous of responsibilities, because whether you can afford it, whether it's profitable for you or not, they just apply that.

I also think it's not reasonable that a franchisor should be able to give you a set of figures that are representative of what you can expect to do in a store without that having been proven. They can develop a set of figures that don't necessarily have to do with reality. It's their hypothetical assessment of what will happen that is the basis on which they develop the numbers. You have really no recourse after you've gotten involved in the project and find that those figures are not accurate and don't represent what your circumstances are. You're hung out to dry, because there isn't a 120-day guarantee once you find out what the problems are, and even though they are represented, you can't do anything about it. You really can't do anything about it because of the financial commitment you would have to make in order to legally try and disrupt the issue, and, if you did, the kinds of consequences you would have in the ongoing dealings with the franchisor. Once you get in, your hands are tied. You have no room to manoeuvre in there whatsoever. Whatever the document says is what it's going to be.

There are the supplementary issues of the document vis-à-vis inspections or new elements that are introduced into the system that you must incorporate into your operation at your cost, and whether it's appropriate and works or not doesn't have anything to do with the reality of what you must do under the guise of it all being the same, that if someone walks into a facility in Toronto or North Bay or Sault Ste Marie or wherever, they're always going to be the same. I can appreciate and I buy into that idea as it would apply in terms of the décor and those kinds of things, but there are certainly definite issues around menu offerings and things of that sort that although you're mandated to do and you're inspected upon that-and the issue comes up where if you aren't doing what they've specified, you have 15 days to correct it or you're in violation of your franchise. So you can be on the outside looking in pretty fast if you decide it's not appropriate or you can't do it. It isn't very often that they bring the hammer down on the basis of a 15-day turnaround time, but they are certainly evaluating you on that premise.


For example, there's a system within the organization that establishes the levels of stores and the proficiencies and so forth, and if you don't conform to all of the mandated offerings, for example, you're going to be de-rated without a doubt. Again, you have the responsibility to make it up right away and correct whatever the deficiencies are.

It's certainly a "buyer beware" circumstance. I don't think government or anybody else can hold our hand unreasonably or give us the kinds of safeguards that one would like to have in a perfect world. But by the same token, I think there should be certain disclosure elements that are absolute: that you cannot represent yourself to be providing a service in terms of a franchise agreement without having case study history of your situation under these circumstances and being required to present those facts to a prospective purchaser so that they really have the correct story and not, "Well, this would be nice." You look at these numbers and say, "This would be great," and many times people are overenthusiastic about those numbers and what they can do.

As a little sidebar, in terms of a typical person wanting to get into business for themselves, you can point out a whole series of deficiencies and problems they are going to encounter, but they'll believe they can change that, that it's not going to happen to them. It happened to somebody else but it won't happen to them because they're going to do it differently. It doesn't get to be different; it gets to be the same.

But that would be my concern: that information that is presented is factual, from actual experience. That's my pitch today. Thank you.

The Acting Chair: Thank you very much. That leaves us about three minutes per caucus, and we will start with the NDP.

Mr Martin: Thanks for taking time today. I know your schedule is busy. I've tried to find you a few times. As Vic often says, it tires me out. Watching you tires me out.

Most of what I hear you speaking of today is, it seems to me, in the area of relationship. Bill 33 calls for disclosure. It doesn't require, though, what Gerry Nori suggested, some kind of a securities commission that would vet that to make sure it's true. That's not called for here. There is disclosure, and if you misrepresent yourself, you can go to court; you can be charged. The bill also has a piece in it about-and I think it's an important piece; I'm not diminishing it for a second-the right to associate. But would simple disclosure, without it being vetted, and the right to associate resolve some of the issues you've raised here today, or would we need to go further?

Mr Fitzpatrick: Very definitely, I think the franchisor would behave differently under the knowledge that the likelihood of somebody taking him to task in today's environment is much higher than it would have been 10 or 20 years ago. Therefore, if they're misrepresenting something and you find out that it's a misrepresentation after you're in-because that's when it's going to develop-if you have some recourse under the law, then you should be able to get satisfaction. The fact that you can do that, it seems to me, would inhibit an inappropriate behaviour in the first place, but with the fact that there isn't any, there's no consequence. The little guy doesn't have pockets deep enough to take them on. Not only do you have a bad relationship as you go down the road, but you're going to have to take a pot of money along with you to go and do battle. But if there is law that you can turn to in terms of, "It's wrong," and therefore you can initiate an action that is much more likely to succeed at a cost that you can deal with, that would remedy the problem.

Mr Martin: Would you support the contention of the two previous speakers that some office needs to vet the disclosure document and that there needs to be in place some kind of dispute resolution mechanism?

Mr Fitzpatrick: I'd like to see a dispute resolution mechanism, but I don't think there is any public body that could be constructed that would have the expertise and the speciality to be able to vet the cross-section of things that a franchisor might develop, or the broad cross-section of franchises. I don't think it would be reasonable to expect a board to be able to review that in any kind of a timely fashion or with the necessary expertise to really say, "No, this is wrong." If it's there, and once the franchisee is in place, knowing that is available to him, that the representations that are being made need to be fulfilled, then if they aren't fulfilled, he in turn can go to his counsel and determine: "Do we have a case? Do we have a situation here or don't we? If we do, there's a vehicle or an avenue to do it with." But to require the franchisor to present it to an independent board, which is going to determine the reality and the truth of what they're saying, I don't think they have that kind of expertise.

Mr O'Toole: Thank you very much, Mr Fitzpatrick. I think I have a Fitzpatrick in my riding who has a doughnut franchise as well. I'll put you in touch.

Mr Fitzpatrick: I hope he's doing well also.

Mr O'Toole: It's Fitzpatrick's Donuts.

Mr Nori, a previous presenter, touched on a very important consideration, and that's the Ontario Securities Commission looking at vetting the document or the prospectus. What's your view on that? That is some kind of existing authority that would look at a disclosure document and see if it was somewhat reasonable. I'm sure would be; it would be written by a lawyer. Probably that's not true, either. It would meet the existing laws. Quite seriously, what do you think of having an independent body that looks at it like a prospectus? As you say, it is "buyer beware." There's a due diligence requirement on the part of the franchisee.

Mr Fitzpatrick: Yes.

Mr O'Toole: You can't just, like you say, hold them from cradle to grave, that kind of thing.

Mr Fitzpatrick: No.

Mr O'Toole: And charge a fee, but require that as part of it, having an independent opinion and also some accounting assessment. Like you said, they give you a prospectus saying, "This is your market, this is how many doughnuts and coffees you're going to sell," and it turns out that it's about 30% right. What do you do then?

Mr Fitzpatrick: From a prospectus point of view, it seems to me that it would be difficult. I think that if the corporation is going to sell the shares of that corporation on the public market, obviously the securities commission would have a responsibility to review and identify the appropriateness and the truthfulness and so on of that information. But when it comes down to a store situation and a site selection, there are so many variables that can come into the picture that the due diligence, I'm afraid, falls more heavily on the part of the prospective franchisee. Rather than assuming that reputation does it for you, ie, assuming that the franchisor has vetted the site, assessed it, done all the proper studies to determine that site is a good site for that product's distribution-you have to rely on them, without a question. But I don't know who could tell you that they've made the right decision or that they haven't made the right decision.

Mr O'Toole: It's difficult. I understand.

Mr Fitzpatrick: It is really difficult to be subjective to the point where you would approve or disapprove. From a corporation point of view, in terms of if they do it according to some rules divulging information that it be accurate, I think if those two issues are made mandatory before they can negotiate anything, then the person has an opportunity and is made aware, "Be careful here because there's some information that you'd better rely on yourself to determine."


Mrs Boyer: Thank you for your concerns. I gather by what you were saying that you are in favour of Bill 33-

Mr Fitzpatrick: Yes.

Mrs Boyer: -and you are mostly interested in disclosure. You've mentioned that you would want more factual information, I guess, from the franchisor.

Mr Fitzpatrick: Yes.

Mrs Boyer: Could you elaborate on that? I know you've answered Mr O'Toole on some points, but would you-

Mr Fitzpatrick: For example, if they were required to give you a cross-section of historic data pertaining to the stores they operate-not necessarily corporate operations; that is to say, it's not the corporation running the store but it's the franchisee running the store-if they can give you a cross-section of that, they could give you the corporate store and franchisee stores so that you have some factual information to rely upon, that this has been an actual experience. It's not somebody sitting back at head office trying to put a package of information together that looks good in terms of where your costs are, the percentages and all of those kinds of things as you look down the financial statement that they present to you and you say, "This looks very good."

In my case, when I was going in and was presented with the information, I subsequently discovered that the payroll couldn't be met if I was paying the baker. You can't run a doughnut store without having a baker, but the presumption is that you're the baker. Your money doesn't come out of the payroll; your money comes out of the bottom line, really. Under that circumstance, the projection of what your costs are is not realistic, because you yourself should be paid for the work you do. You don't get $50,000 to bake doughnuts, but you certainly get $10 an hour to bake doughnuts. You know what I mean? Under those circumstances, the effort and work that you are expected to put in ought to be part of what the program demonstrates in terms of its cost factors.

Mrs Boyer: You would want to see much more easily the facts so that you could compare them before you go ahead with that type of contract.

Mr Fitzpatrick: Yes, exactly.

The Acting Chair: Thank you, Mr Fitzpatrick, for taking the time to come in and see us today. We appreciate it very much.


The Acting Chair: Next we have Mr Robert and Mr Brownlee. Welcome to the standing committee, gentlemen.

Mr Brian Brownlee: Thank you, Mr Chairman and members. I'm Brian Brownlee and this is Mr Robert. He's an egg producer in Timiskaming. I was at a TFA meeting. He was there with some concerns about what was going on with his production and he told me about it. I learned about these hearings and I thought this was a really specific example of what is happening to the producers in the north. I had him draft up a letter and got him out here today. I'll read you the letter of his concerns and what has happened in his situation, and he'll be here to answer questions.

As others have stated, the bill is there, and what we're looking for is going further to preventing large companies from disabling local producers from getting on the store shelves.

We would like to introduce ourselves as Ferme Avicole Robert Ltée. On October 1, 1997, we acquired a poultry business producing fresh eggs. We had a grading station and were delivering the eggs to the local market every week around our area in Timiskaming. People were very happy that we were supplying our nearby stores for two reasons: The first one is that they were able to buy locally. Our customers appreciated the fact that they were helping out the local agricultural community. The second and more important reason is the freshness of the eggs. These eggs were made available to the customer the same week they were produced by the chickens.

Personally, we think it makes a lot of sense to us and also to the customers we were supplying. Each week was going by and we were constantly fighting and working hard to keep our customers happy. This turned into a big problem as time went on because bigger companies, for example, Gray Ridge and Son Ltd, kept moving into our territories and cutting our necks in the store and making deals with franchisors to keep us off the shelves. These companies wanted to supply all of northern Ontario, which we think should not be happening. In some cases, they were dropping their price when it came to selling the eggs on the market and it forced us to get out of the grading business.

We went to another store, My-T-Fresh, out of Iron Bridge. We were able to get them to grade our eggs. We were still able to compete. So we decided we would buy graded eggs from Iron Bridge. The deal was working well. We would send our eggs down one week, they would be graded and we would receive them back the following week in our containers, with our name on them, and therefore we would be able to keep our customers happy. However, then Gray Ridge came along and bought up My-T-Fresh, as we heard earlier tonight, closing that grading station down. We were then forced to send our eggs to Gray's grading station in St Mary's. There was no way he could guarantee it would be our eggs that would be returned. To make matters worse, it was only a matter of a couple of months and we were receiving rotten eggs in our containers, which were delivered to the store and sold to our customers. This caused the stores to no longer accept eggs with our label on them.

We are now forced to sell all of our eggs to Gray Ridge at quota price and can no longer approach grocery stores. We find we can no longer make a living off a business on which we once could. We feel we should be able to. What is happening now is not only unfair to us, but also the customers are getting cheated as well. They are forced into purchasing older eggs and, even though they know that, they have no choice. This is why we're writing this letter and getting involved, to make you realize what people are going through in the north.

For solutions to our problems, we need regions in which a producer may be able to sell their eggs. An egg producer would be applied a zone or have a certain area. They would have to fill up the demand in that area and perhaps get more eggs, if needed, or vice versa. This way everyone would be helping each other and everyone would be happy creating a few jobs in the north as well as in the south.

Thank you for being comprehensive and taking the time to listen to these concerns.

The Acting Chair: Thank you very much. That leaves us about four minutes for each caucus for questions.

Mr Gill: I don't have too many questions. This seems to be a basic rule that's happening in the marketplace right now. I'm not trying to see it as a franchisee-franchisor problem. It's more of a big guy-small guy problem. To be honest, I'm not sure how we can try and help you. Perhaps you can lead us on that. We are trying to address Bill 33 in today's agenda. Some of the other members of the committee can perhaps shed more light on it. I think it's a situation which is happening in every business. I know it's terrible from the standpoint of small business being gobbled up by larger business, but to be honest, I'm not sure what we can do in terms of Bill 33. I don't want to hold out hope falsely. I just wanted to make that comment.

Mr O'Toole: If I may pick up from Mr Gill's point, we have heard the concerns with respect to the supply side of this issue. For me, specifically in the agricultural sector, it's very important because my riding has the same issues really: size and also access. You've got the federation of agriculture plus you're a supply-managed business, as were the dairy people. You have some issues internally to look at with respect to the board, the quota, the numbers within the region.

I suspect it's more than appropriate to listen to your producer group, commodity group, and their solution to this. I've heard what you've said here, the regional aspect of it, that it's an appropriate type of activity to regulate. I think there is some motive for the government to consider that; that is, looking at the economic development of Ontario and indeed regions of Ontario is a responsibility, I suspect, to some extent, of the government to facilitate. Mining, pulp and agriculture come into that whole resource sector kind of commodity.

I'd be very happy to entertain how it could be done, because the moment you cap a market you sort of say: "You're the big guy. You've got all the business. So there's two egg producers. Blow away all the little egg producers." Do you understand? It's a very complicated monopoly kind of regulation. You're suggesting that a government that's supposed to facilitate competition is going to end up being responsible. You're going to get everybody coming to you saying, "Give me a little piece of the northern market," or the eastern, whatever. Do you understand? It would be nice to sit down and write a rule and say it's going to keep everybody-it would keep you happy, and the other 19 egg farmers are going, "Well, where's-" you know? Do you understand? I'm prepared to listen, for sure.


Mr Brownlee: You see, what's happening more is that they are going to the store and they are going to the franchisor, and there are lots of stores where you couldn't put eggs.

Mr René Robert: They wouldn't take the eggs.

Mr O'Toole: Poor quality too?

Mr Robert: At one point, but at one time it was fresh eggs from the week.

Mr O'Toole: I understand completely. Thank you.

Mr Robert: But all of a sudden what's going to happen is, they are going to go up the other way. There's another one quitting up there. He's got a grading station, so he's going to service that right up to the north there. The quota from there is going to go to Ottawa, and he is going to service the grading right up to there. One guy is going to service all the north, so suddenly we're going to be out too; I'm going to be out someday. It's going to happen. He's going to throw me out; I'm only a drop in the water. He's got 300,000 birds; I've only got 12,000, so I'm a drop in the water.

Mr Brownlee: And you're saying you can't have individual areas where there are groups, because you're kind of supporting that guy. You're supporting a local farmer here, you're supporting a local farmer in the next area and the next area, and if you don't do that, this is what's happening. One big guy comes and takes the whole area, and then who's to say down the road? Right now he's selling eggs at whatever, but when there's no competition there-

Mr O'Toole: I believe I'd be prepared to listen to the marketing board's solution to this, looking at regions and regionalized outcomes, because it is more than just that the government can't tell the marketing boards, who have made these decisions. I really do appreciate more than ever before the supply-side issues on this particular disclosure requirement. Let's put it that way.

Mr Brown: Someone once said, I think wisely, that the purpose of competition is to eliminate competition. I think in many ways that's what is happening all across this province and perhaps the world. The mechanisms that the government has to deal with that are perhaps becoming more limited. That does not mean we should not be trying.

I think in many ways-I was reflecting on this a while ago-the turn of this century is much like the turn of the last century, in that the turn of last century in North America was focused on anti-trust, breaking up large companies, providing that there was true competition in the marketplace. What we are seeing, unfortunately, with dairy products being frozen out of certain retailers, eggs being frozen out, is that the real competition within the marketplace is gone, which means consumers don't have the choice of price, quality etc, or supporting their local industry, if that is what they choose to do.

I'm perplexed, though, at trying to come to the solution to the questions you've posed. They are real problems.

Mr Brownlee: If I could just say this: There were certain stores he couldn't put his eggs in, but there were stores where he still could. But then in terms of the big guy getting bigger and pushing out more and more-

Mr Brown: And the marketing power of the big guy to promote his particular product, where you are more limited in your ability.

The other thing, and I've had this conversation with some people, is that it may very well be worse before it's better. I'm familiar, and I think most people are, that the major auto companies are now going to Internet auctions to buy the parts for their vehicles. If that is happening in the automobile industry, you can almost guarantee that it will happen in every other industry as it comes along, and for a small guy to compete in that kind of situation is something I think government is going to have to address.

Mrs Boyer: I just had one or two points. I sympathize with your problem, and I can see, like everybody, that it doesn't really pertain to Bill 33, but there's only one question I want to ask. When you talk about Gray Ridge and Son and the other company, My-T-Fresh, were they franchisors?

Mr Robert: They were two grading stations.

Mrs Boyer: Yes, but they were privately owned?

Mr Robert: Yes. But you see, being that I-

Mme Boyer : Vous pouvez parler français, si vous voulez.

M. Robert : Moi, j'envoyais mes oeufs à My-T-Fresh. En envoyant mes oeufs à My-T-Fresh, si lui passe puis achète la grading station à My-T-Fresh-il est sûr qu'ils vendent mes oeufs à My-T-Fresh. En effet, là il y a deux poulailleries. Ils ramassent les deux poulailleries en s'en venant-

Mme Boyer: Ils se mettent ensemble.

M. Robert: Oui, ils entrent ensemble. Là, il s'en va sur l'autre bord, là-bas, et il y a un autre qui lâche au mois de juin. Lui, il va s'en aller là-bas et le quota s'en va dans le bout d'Ottawa. C'est certain qu'il va avoir encore d'autres marchés là. En fait, c'est le gros qui grossit et le petit qui crève. Les autres ont crevé.

Quand on s'en va à des magasins, on n'a pas de chance. Il y en a des magasins qui ne veulent même pas nous donner la chance de seulement mettre notre produit là. Ça fait que, qu'est-ce que tu fais ?

Mme Boyer : Vous auriez peut-être-on vous suggère d'aller à un palier du gouvernement, à un autre comité. Thank you.

Mr Martin: I'm a little bit disappointed that the members of the committee still haven't heard that in part V of Bill 35 there is a provision that calls for allowing franchisees to source product wherever they can get it at a competitive price as long as it's not a trademark issue. That would give these folks what they're looking for.

So I'm going to be tabling, Raminder, an amendment-you can bet on this-at some point in this proceeding that will call for us to move beyond Bill 33 to resolve the issue that we are hearing. We've heard over and over again here today of local producers not being able to get their product onto the shelf of some of the bigger stores in their areas so they can be in the market and customers have some choice. That's all they are asking for. They are not asking for preferential treatment or to enter into an anti-trust legal debate or whatever. Simply put, they want the franchisee to have the freedom, if he or she chooses, to go to you and say: "I want your eggs in my store. I'll buy them from you at a good price and I'll sell them, and we'll both make money," and the economy of the north will be better served when that happens.

I'm hoping that the rest of you, having heard today so intimately and in such an articulate way from the folks who are directly affected, will recognize that we need to do that, because if we don't, there will be a few more-as a matter of fact, I suspect that even before we get to considering the amendment, which will be in April or May sometime, there will be a few more small producers in northern Ontario put out of business. That will be really unfortunate. What I'm saying to you here today is that that is my intention, to table that section as an amendment to Bill 33.

You know that there is discussion about to begin at the federal level regarding the Competition Act which will hopefully have some impact on this, but it's a way down the road. That's going to take a year or two or three to unfold, and who knows what's going to happen at the end? There will be an election in between, and if they elect Reform-that's political, and we won't get into that; this isn't a political forum here-we're done like dinner. But we have an opportunity here at this time to go a distance to resolve your issue if the committee will accept as part of this bill part V of my bill, which says that franchisees, where it's not a trademark issue, should be allowed to purchase product where they can get it at a competitive price.

The Acting Chair: Thank you very much. We appreciate your coming and bringing this issue to the table.


The Acting Chair: The next witness we have is the Sault Ste Marie Economic Development Corp, Duane Buchanan. Mr Buchanan, welcome to the committee. We have 20 minutes together, if you would like to make a presentation, and we will fill the remaining time with questions.

Mr Duane Buchanan: I'll be fairly brief, unlike my usual character.

The Acting Chair: That wouldn't make you a lawyer, would it, just to get that out of the way?

Mr Buchanan: No, it wouldn't make me a lawyer. I'm a director of the Sault Ste Marie Economic Development Corp, commonly referred to as the EDC, and I'm presenting here to this standing committee as a representative of that organization. As you will understand, the EDC has as its main objective the creation of new business and jobs for Sault Ste Marie.


The EDC is concerned that franchise agreements may be an underlying cause preventing locally produced products from having access to local markets through national grocery chains. When any local business is being disadvantaged or excluded from the local marketplace for whatever reason, the EDC is naturally concerned, particularly when these local firms have competitive, equivalent products, produced within the area by local people. This is particularly important where local producers are willing to expand their business locally, to produce value added products and to employ additional people in our community. The EDC is merely seeking equal opportunities or so-called level playing fields for them.

The circumstance of Lock City Dairies is used in this presentation because that story best illustrates the nature of the problem we want to describe. The EDC is not an advocate for any business over another business. Fair and equal access to markets for competitors and eliminating one competitor's ability to banish another from a market, as is occurring here and as you've heard a number of times today, is the objective.

I'm going to refer to the Competition Act in my presentation, recognizing that it is federal legislation and that it's not relevant to your consideration, but I believe it has an implication and I'll show that as I proceed.

The issue: This presentation alleges that a natural element of franchise agreements is to promote exclusivity for products and services. This creates a barrier to marketplace competition, sometimes denying market access to other fully qualified competitors. Bill 33, in dealing only with fairness between franchisor and franchisee and being silent on fairness to the public and to competitors, fails to deal with a systemic problem that these agreements cause.

This presentation uses as an example Lock City Dairies of Sault Ste Marie and its inability to access the market locally through national grocery chains. Its problem is by no means unique, as other presenters have informed and will inform you. What applies for Lock City Dairies applies to many other companies, many of which are not in the dairy business. Lock City Dairies has made a presentation to this standing committee, so many of the details of that situation have been presented.

The implications of franchise agreements are broad-based, extremely diverse in nature, as we've heard, and complex to resolve when one considers the many facets of franchising. However, ensuring that qualified producers have reasonable access to national grocery store supply systems does not seem to be complicated to achieve or unreasonable to expect. Qualified suppliers are those, of course, that would be able to provide required quality and volumes consistently over time at a reasonable price.

Lock City Dairies supports community activities, as does Beatrice Foods. The business is an ever-expanding enterprise, spending capital on buildings and equipment. Through growth, it employs additional local people. Even during recent construction of its plant, it employed local firms and about 200 people for several months. Local people, as in all communities, like to support their own businesses. It works both ways, the community supporting business and business supporting the community.

The EDC appreciates the fact that Beatrice Foods products are widely available and they are good quality, without any doubt. Beatrice has local distributors working as independent contractors to supply its products. It also sponsors local activities and it employs some local people. This presentation would not change that. It only argues for equal access by local producers to local shelf space, and particularly that local producers not be excluded from this space by foreign-owned national firms.

A difference between Beatrice Foods and Lock City Dairies is that Beatrice Foods purchased and closed dairy production in Sault Ste Marie and laid off all of its employees. It now supplies from facilities in other communities where people from those communities are now employed. It distributes its products here through local contractors. That's fair business practice and a choice that Beatrice Foods have made, the best business option for their situation, and it's their choice. Again, Beatrice Foods is an Italian-owned company with national distribution. On the other side, Lock City Dairies, however, is attempting to build a local dairy to process local milk and employ local people in the process. In effect, it is attempting to reverse the process that Beatrice Foods undertook, by building a dairy here. Lock City is owned locally and has strong ties to the community. It pays its taxes locally and spends its money here as well. Sault Ste Marie needs business that employs people and pays taxes.

All milk in Ontario, as you've heard before, is purchased from farmers by a central agency and sold to dairies for processing and packaging, each under its own brand name. Dairies or distributors market their own brand and offer their milk for sale under their own packaging. Each dairy must meet provincial quality, processing and product requirements. Currently in the Sault Ste Marie area, a milk farmers' co-operative collects milk and delivers it to Farquhar Dairies on Manitoulin Island, where it's processed and packaged for Lock City Dairies, which trucks it to the Soo for distribution and sale. This is a temporary situation. They hope to have their own dairy here if they are able to acquire sufficient volume.

In spite of the foregoing, no case should be made that Lock City Dairies should replace Beatrice Foods as the local supplier. That would not be in the spirit of fair competition. But Beatrice Foods should not be allowed to ban local dairy products from local shelves either. It's understood that agreements between Beatrice and national food chains effectively do that. In the interest of consumer choice, there should be a place for competition in this market.

Gaining access: National chain store managers locally are powerless to provide display space for locally produced products. This is a prerogative of their head office or perhaps a function of their franchise agreements, to decide what will be displayed and the amount of access that will be allowed. Mr Fremlin, president of Lock City Dairies, tells us that every attempt at contacting senior executives at A&P and Food Basics has been futile. None will answer letters, none will return phone calls, and none will participate in a meeting to resolve this issue.

When he made his presentation, you'll notice in his document-I've reviewed the document, and in it there is his general presentation, but following that there's a letter to Mr James, a vice-president with Food Basics, which provides a chronology of all of the letter-writing and all of the activities and all the attempts at contacting people at Food Basics and A&P. In the end, it states that if there is any argument with the factual nature or this, would you please respond in writing prior to this date, and to my knowledge they have not responded to that. There are copies of letters following that document. That's the reference that I'd like to make.

It's understood also that with some national grocery stores one must pay fees to secure display space, perhaps more money for better space, but there is no known access to make these arrangements. Mr Fremlin has provided this committee with a record of fruitless attempts at making supply arrangements with A&P and Food Basics, as I've just mentioned. He has also supplied the committee with documentation of unanswered correspondence to Food Basics from our federal member of Parliament, members of the provincial Legislature and the mayor of Sault Ste Marie. A&P and Food Basics executives seemingly have no regard for federal and provincial members of Parliament or the mayor and have hereto declined to respond to them or to consider their requests.

Franchise agreements made between the national food distributors and their suppliers are secret and certainly unavailable to anyone outside the companies. I'm not suggesting there is anything wrong with that; it's just a fact of corporate life. So it's not known what the source of the problem experienced by Lock City Dairies really is based on, only that there seems to be no door on which to knock to participate in the game.

Legal aspects: The following excerpts from the Competition Act suggest that franchise agreements have the effect, when carried to a logical conclusion, of violating terms of the Competition Act.

Competition Act: "An act to provide for the general regulation of trade and commerce in respect of conspiracies, trade practices and mergers affecting competition." Sounds familiar.

"The purpose of this act is to maintain and encourage competition in Canada in order to promote the efficiency and adaptability of the Canadian economy, in order to expand opportunities for Canadian participation in world markets while at the same time recognizing the role of foreign competition in Canada, in order to ensure that small and medium-sized enterprises have an equitable opportunity to participate in the Canadian economy and in order to provide consumers with competitive prices and product choices."


These two articles strike at the heart of the problem, and it seems that producers should be filing a complaint under this act and they would likely be successful. In fact, MP for Sault Ste Marie, Carmen Provenzano, has filed a complaint on behalf of Lock City Dairies and a plan to undertake an investigation has been announced by the Competition Bureau approximately a week ago.

Again, I'd like to say this presentation alleges that a natural element of franchise agreements is to promote exclusivity for products and services, which creates a barrier to marketplace competition, sometimes denying market access to other fully qualified competitors. Bill 33, in dealing only with fairness between franchisor and franchisee, and being silent on fairness to the public and to competitors, fails to deal with a systemic problem that these agreements cause.


(1) It follows that the Franchise Disclosure Act, which is intended to control and govern the relationship between franchisor and franchisee, is silent with respect to competitors and interests of the general public which are being harmed by the inevitable outcome of franchise agreements. Bill 33 must be active and consider the interests of customers and qualified competitors in a similar and as important a manner as franchisors and franchisees.

(2) With the creation of new franchise agreements, it's proposed that there be a requirement to file a declaration stating something to this effect: "The parties have read, understand and are in compliance with both the Competition Act and the Franchise Disclosure Act." It should be required that legal personnel drafting the agreement be a signatory as well. This would tend to avoid future systemic contraventions and fix blame for contraventions when they occur.

How they apply the act you can't legislate in this way, but at least this would require that they have a ground zero fair chance.

(3) Through Bill 33, require that franchise agreements which contravene either the Competition Act or the Franchise Disclosure Act be unenforceable in Ontario.

(4) The Competition Act guarantees that customers have the right to be offered alternatives where they are available and be allowed to make choices without interference. It's charged that there is interference in this process and that the Competition Act is likely being violated. Bill 33 is silent on these issues. It should dictate policy with regard to franchise agreements and should provide enforcement options.

That's my presentation.

The Acting Chair: That leaves us about two and a half minutes per caucus. We are starting this time with the Liberal caucus.

Mr Brown: I'm just looking at your recommendations. I think we are fully agreed on the problem and that it needs to be addressed.

Mr Buchanan: I don't pretend to be any sort of expert on this, but I've done a little research and intuitively that seems to be some sort of solution to the problem, or at least partially.

Mr Brown: As a matter of fact, you agree with some of the earlier presentations that we've heard today in terms of how to make sure that the franchisee has an equal footing and is able to make some of these decisions and goes in with his eyes really wide open to the franchise agreement.

We had before us earlier a similar presentation in terms of having lawyers sign off on the agreement. You would be, I take it, in concurrence with what they're saying?

Mr Buchanan: I believe that they should interpret that and determine that it is in fact compliant with the law.

Mr Brown: The problem I have, not with this presentation but with the scope of it, is that we are dealing here with two animals. We are dealing with the franchise part of it. That's our scope and that's what we should be doing. We're also dealing with companies like A&P, which are not franchised operations as I understand it. Am I incorrect in that? They're directly managed by the-

Mr Buchanan: My information is that they keep using their agreement with Beatrice Foods, for example. Whenever Lock City Dairies tries to gain access, they say, "We have an agreement with Beatrice Foods which doesn't allow us to provide access for you." Whether that's formally a franchise agreement, it certainly sounds like one to me.

The Acting Chair: That wouldn't be a franchise agreement.

Mr Buchanan: It wouldn't?

The Acting Chair: No, it would be a business arrangement. It's quite common in the food business.

Mr Brown: Anyway, that's a second problem. But I guess Food Basics is a franchise operation. That's one place where we should be focusing. I commend you on your presentation. I think your recommendations are particularly helpful to the committee.

The Acting Chair: Mr Martin, two and a half minutes.

Mr Martin: You raised, again, what has become a bit of a sub-theme here today in terms of franchising and the impact that franchising arrangements can have on the economy in general. We heard just before you that, in fact, this whole piece of activity is rather even more invasive than I had thought when you consider that the folks from Timiskaming were sending their eggs to Iron Bridge to be graded. Once that grading station got closed down, then they had to send them south and back up again. It just gets more ludicrous as you hear the stories, in my view.

I think you make some excellent recommendations here, ones that we can take a look at very seriously. I just want to know: Did you look at section 5 of Bill 35 at all and the piece that I have in there which calls for franchisees to be free to source product where they can get it competitively as long as it doesn't break a trademark?

Mr Buchanan: I only had access to what was on the Internet, which was the basic bill. I didn't have access to anything else.

Mr Martin: In Bill 35, which is the bill that I have tabled three times now, there is, in part V, a piece that says that. Mr Brown perhaps made a statement that this somehow is set apart from the franchise relationship that we're dealing with. It's not. A franchisee's ability to source product where he can get it improves his potential to make a profit, so that everybody in the end is better served.

I'll try and get you a copy of Bill 35 so you can take a look at that provision, because it will do, certainly to some degree, what you're calling for here. You're right. There needs to be a serious look at this at the federal Competition Bureau level. I'm really happy that Carmen is-

Mr Buchanan: There is an investigation underway, I understand.

Mr Martin: Yes.

Mr Gill: Thank you for the presentation. I think that one of the things that came out loud and clear today is the local sourcing of the materials from two points of view. One is from the supplier's point of view-they want to make sure that they have access to the marketplace-as well as from the franchisee's point of view, because they want to have access to lower cost. One thing we should keep in mind-yesterday it came up in our meetings-is that the franchisor has an interest where they take the top portion of the money up front. The franchisee is more concerned about the bottom line. That came out loud and clear yesterday.

We tend to forget sometimes that the franchisor, in buying centrally or whatever methodology they use to buy these things, has some kind of a mechanism built in where they have kickbacks, whatever you want to call it. That is part of their profitability. If they were to lose that, don't forget that they will add into the original cost of the franchise. We might be defeating the purpose thinking that the local franchisee might be benefiting from local supply. Yes, they will be at a local level, but they might end up paying extra for the franchise operation because the franchisor is looking at their bottom line, so-called.

Mr Buchanan: I have heard a number of references to the fact that people buy their space. I don't know whether that's a private deal that individuals make or whether that's a corporate deal. We keep getting reference to that. For most people who want to get access, it's probably the least expensive way to gain access, if they can in fact gain access. Whether it's an above-board approach, I have no way of knowing.


Mr Gill: I was at some other meetings recently that had something to do with the CNE in Toronto. They are going to have only Coke products and are totally excluding Pepsi products. Those kinds of arrangements are being handled every day.

Of course we'll look at Mr Martin's proposal, part V of his Bill 35, and see if we can somehow open up the marketplace. I'm not sure what can be done, but we'll certainly look at that.

Mr O'Toole: I want to be brief here. I warn the Chair that I have two points I want to make.

We've heard about the supply-side issue. We understand that. It isn't exclusive to the agriculture sector. The supply-side issue may be anything from, "You buy your tickets from us," to "You buy your boxes from us," to "You get your stuff from us," that sort of issue. It's not just milk or eggs; it's a whole Pandora's box.

Mr Buchanan: I understand that.

Mr O'Toole: I would say one thing, though, and I must get this on the record: I do appreciate your four recommendations. It's very important for us to have real information to work with. But if you look specifically at the Competition Act, which you refer to in three of them, there are two or three things that I would encourage those here, as well as Mr Martin, to look at. The Competition Act, of course, is federal and is to ensure there really is competition. There are clauses within that act, which I'm familiar with, that deal with trade practices. It's a legal kind of reference point, but it talks about abuse of dominant position, which is clearly the case here. You've got the big guy that runs the whole thing, called the franchisor-there's obviously an imbalance of power here-imposing certain kinds of what I would call unfair practices, which could get you into the reverse onus case that was talked about earlier.

With respect to those three recommendations, I would like us to take the responsibility of engaging Mr Manley, the federal minister, to look at the Competition Act, because it is up for review. It is no longer providing an appropriate marketplace in many areas for small business, which is important. I just want to acknowledge on the record that you are right on topic here.

The Acting Chair: Thank you very much, Mr Buchanan. We appreciate your coming in.


The Acting Chair: Our final witness is Peter Gass, from Mrs Jersey's Dairy. Welcome to the committee.

Mr Peter Gass: Mr Chairman, ladies and gentlemen, thank you for taking this first step in addressing some of the problems that exist in the food-processing sector here in northern Ontario.

We're a sort of unique situation. We are probably the smallest dairy in Ontario. Before we opened our doors about a year and a half ago, we realized that it was going to be very difficult to even hope to gain any access to supermarkets. What we did with our dairy is that we have an attached retail section in the front of it. We have a full line of products we make as well as other products, usually from smaller, unknown dairies or from other suppliers that have difficulty getting their products into the supermarkets. We really try hard to have locally produced food in our store.

Mrs Jersey's Dairy, located in North Bay, Ontario, has been in operation since August 1998. We receive cow's milk and a small amount of goat's milk from local area dairy farms, and process both types of milk separately at our plant. We have an adjoining retail store. We are a very small operation, less than a million litres of milk per year, as opposed to some of our larger multinational competitors such as Parmalat, processing 100 million litres or more per year.

Like our competitors, we recognize that our profits are in milk by-products such as yogourt, sour cream and ice cream. Our slogan is, "Taste the local freshness." It reflects our belief that the milk produced on dairy farms in the near north, with the availability of the fresh air, grass and water of our region, and processed locally by qualified dairy plant personnel, provides both a top-quality dairy product for the consumer and employment for the people of our region.

We market 80% of our fluid milk, yogourt, sour cream, butter, buttermilk, whipping cream, coffee cream, ice cream and novelties to the public through our own retail outlet. The remaining 20% is distributed through wholesale outlets in and around the immediate area. These small stores come to us directly and pick up their milk themselves. We don't even own a milk delivery truck.

While this arrangement suits us at the present time, we wish to voice our concerns regarding the legislation under review with the Franchise Disclosure Act, since it has been referred to a standing committee. After visiting with the management of each of the eight supermarkets in the city of North Bay, with our population of 57,000, we have a clear understanding of how corporations pay big money in exchange for exclusive rights to supply their products to grocery shelves. Management of these individual franchises told us that these exclusive contracts result in money back on large orders which then can be passed on to the consumer. With consumer demand for lower prices, these large contracts make sense for all concerned.

We do not support increased government regulation of supermarkets. In our opinion, franchises should grant franchisees more flexibility in purchasing agreements so that each franchisee could be sensitive to local consumer demands. If pricing and quality prove to be competitive, it is reasonable to assume that consumers would prefer to support their local employment base by welcoming these products into their area supermarkets. In the North Bay area, all eight supermarkets carry fluid milk and a range of other dairy products that have been shipped in from hundreds and hundreds of kilometres away. Our processing plant receives milk from 30 kilometres away and can have it processed and on the shelves the next day. It just makes common sense that for both health and employment reasons, this is a great deal for the local consumer. It is our hope that marketing locally produced goods will be an option made available to supermarket franchisees in the near future.

One of the nice things about owning a small business is that you get to do all of the jobs. Yesterday I was in the plant processing milk and two weeks ago I was able to go out and visit all of the supermarkets. I would like to just briefly review each of the comments that was made to us as we visited the various supermarkets. I won't mention any names-we weren't thrown out of any supermarkets-but I'd just like to summarize some of the comments.

The first supermarket: If his competitors carried our products, perhaps his head office would consider allowing some space on the shelf for us. Corporations pay big money to have exclusive rights and this is how this particular supermarket operates. I won't mention the brands that they carry. These were comments that were made to us and we recorded them, hopefully in an unbiased fashion.

We visited another supermarket. He called head office right away concerning carrying our yogourt and sour cream, and was told first of all to get a price list from us. Then we asked him what he thought our chances were of getting into their shelves, and his reply was "fair." You don't know until you go through the procedure. We haven't got back yet with the price list; we just wanted to get an idea of what the climate is out there.

We have a particular franchisee who, in his first year of operations, was bound with his contract. He said he'd have more freedom in August 2000. He's happy with the franchise arrangement. Exclusive contracts result in money back on large orders which he can pass on to the consumer.


Another store here: locked into a franchise agreement and no chance of even getting into the door. For this store, controlled by a large supermarket chain in Ontario, the sale of milk is a particularly sensitive issue. There is little if any profit in fluid milk. The profit is in other dairy products. They sell a large volume of yoghurt. Most of their ice cream sales come from an independent ice cream manufacturer. If they had great customer demand for our products, they would approach head office but it would require a great deal of local demand. He felt it was highly unlikely that one of their dairy products suppliers in the store family would agree to giving up any part of its market share to a small, locally owned dairy.

This particular supermarket mentioned that the two suppliers give financial favours in exchange for exclusive carrying privileges. These corporations make their dollars in products other than fluid milk. He doubts that these players would be open to the idea that this store would carry another brand of yoghurt or sour cream. We could make a presentation, submit it to him and he would present it to head office. He did not want to get our hopes up high; he thought our chances were very slim because of deals done in high places.

This particular supermarket, a quick response: "I can't. I'm locked into a franchise agreement, a purchasing agreement with our supplier."

Those are some of the comments just directly talking to managers or assistant managers. This is what the climate is like out there. As you can see from these comments, price or quality have very little do with whether you can get your products into the supermarkets. Deep pockets and connections to supermarket corporate head offices have everything to do with getting your products on to the supermarket shelves.

In conclusion, I would like to address these closing comments to any supermarket representatives who might be here today. If you're not from northern Ontario, you're probably quite amazed at the tremendous space that we have between our communities. You also should be aware that most northern Ontario communities are struggling just to maintain current population levels. Our jobless rate is high. Each day, our brightest and youngest people are leaving for better opportunities in the south.

If you look ahead just five years down the road, I ask you, where will your future customers be coming from? Our small dairy in North Bay has been able to create seven jobs since we opened our doors. Seven families now have income and purchasing power and are remaining in the city of North Bay. They all buy their non-dairy products from our local supermarkets. If we could just get into one supermarket, we probably would hire two more full-time people and there would be two more families shopping at our local supermarkets. I believe without a doubt that it just makes good business sense for our local supermarkets to try to support northern Ontario food processors and allow their products on our supermarket shelves. Thank you.

The Acting Chair: Thank you very much, Mr Gass. That leaves us about three minutes per caucus and we start with the NDP this time.

Mr Martin: I want to thank you for coming. I know from your presentation how difficult it must be for you to get away for a full day like this, given all the jobs that you have to do and the effort that you are obviously putting into making a success of your business. We appreciate that.

You're one of the people who is going to make the economy of northern Ontario work. In my view, if we can help you as a government by creating level playing fields so that you can get into the market, consumers can have a choice and you can make some money and hire some people and do all those things that you've described in the ending of your presentation.

The economy of northern Ontario is quite self-contained and interconnected. Each of us depends on the other. We almost exchange services with each other. Where some outside entity changes that or takes too much of the money out, we're affected in a very serious way. I've suggested already today that this issue is key to any economy we're going to have in northern Ontario. The member from Algoma-Manitoulin correctly says that it's not just franchise stores; it's big corporate stores too, because the same policies are in place. So even though the provision that I'm suggesting in Bill 35, which I have tabled, will be tabled as an amendment to this bill or some variation thereof so that we can solve this problem and will go a ways, there's a lot more that needs to be done.

I commend my colleague Carmen Provenzano at the federal level for taking this to the federal Competition Bureau, because he's absolutely right there. We need to do that.

Have you had a chance to look at all at section 5 of Bill 35 and to consider it?

Mr Gass: You'll have to forgive me. I haven't really had a lot of time to review that. I'm sort of an anti-government-type person.

Mr Brown: So are we.

Mr O'Toole: A lot of us are.

Mr Gass: I believe that if you were to bring the corporate heads of the supermarkets here with our northern food processors, within a day or two we could have this problem corrected. We could do it much more quickly than this committee, probably much more inexpensively. I don't think they're really aware of the problems. I don't think they are aware of the geography that we have up here. We're not their enemies. I sometimes think that food processors are considered to be an enemy of the supermarket, and I don't know why. But we can work together with the supermarket. Instead of saying, "Let me see you undercut Beatrice," why don't they say: "This is what we're paying now. Can you meet this price or can you do better?" Let's work our way backwards, because we can create 10 or 12 jobs in our community. That's what's going to solve the problem, and they don't seem to understand that; I'm not quite sure. But I believe if they were here and aware of the situation, that would be the way of getting this corrected.

The Acting Chair: I spent 35 years in the food business and, believe me, they understand.

Mr Gass: You might need a large stick.

Mr Martin: I'd like to go on the record here this afternoon as being a person who believes in government and believes that government has a role to play, and a very important role to play, in regulating markets and making sure that fairness exists in a marketplace and in communities.

We're here today because the big guys have been beating up on the little guys in the franchising sector of business. We have a couple of books here of stories that have shown up over the last five years in major news outlets across this province, some 4,600 families who have been damaged because the big guys will not play fair ball with the little guys.

I suggest to you, and I say this with all respect, it might be naive to think that you could bring the big guys to the table and convince them they should be doing something different. We're trying that right now in the gasoline industry and it's not working. Even Mr Harris can't get them to the table, and I think he's their friend. So that's an issue.

This is an opportunity now for us to do something, to do the right thing. With your encouragement, having had your presentation, and Mr Gill has suggested he's willing to look at it, we might look at that section of Bill 35 or the recommendation that was made by Mr Buchanan earlier that maybe there's something else we might do. But we need to do something on this issue, or else the economy of northern Ontario is going to be hurt and families who are now doing business will find themselves not able to do it any more.

The Acting Chair: For the government, Mr O'Toole.

Mr O'Toole: I can hardly hold myself back from responding to your being sort of anti-government. I suspect we would all have some response to that, although it's not particularly on topic.

But I do think the agricultural sector, which in my riding of Durham is an important sector as well, are gifted with being entrepreneurial and inventive. We've seen that with many of the presenters here today, much like yourself, from the dairy and egg industries. So I understand that. You don't want government; you want government to get out of the way. I think if you were talking to the Premier, he'd say: "We're not government. We're here to change government."


There's more to it than just that, and that's why this bill, after three successive governments, is actually here being discussed. You will not have it all one way or the other, and we all collectively, including Mr Martin, are trying to find a balance. Many presenters would say that balance is there. I know as a member of this government we will entertain improvements. That's why we're here. So your input is very important. It is a slow process to change the rules of the marketplace.

That's more of a statement in respect to your taking the time today to come and put a face to small business. We've heard a couple of things where I would encourage you, through the Ontario Milk Marketing Board and others, collectively, with the weight of your organization, to engage the supermarkets in dialogues within the regions of this province. The government can't do it on its own.

We've struck out to achieve three things: disclosure, which is bigger than you think. There again, there's due diligence required in that piece, on both parts. I think the right to associate and disclosure together-that is, all of you together, talking to the associations that now have a legal ability to exist, the IGAs or whatever it is, and talk about their common problems of supply-together with the fair dealing provisions which will be strengthened over time is a framework to improve something that we heard from a previous presenter has been around historically from the time of the former member here, who was the founder of the Grange report. It really goes back to the 1970s, talking about reforming the Franchise Act. So here we are. We're going to do it. It's Bill 33. We're listening. We are prepared to make amendments, and your input and that of the others who appeared here today could be germane to dealing with the one issue of the supply aspects of franchise operations.

Thank you. If you want to respond, feel free.

Mr Gass: I believe this is certainly the first step. As I said, I believe we could accomplish a lot with having all parties here today. We could move this along more quickly, I believe. At the end of the day, you have to have a very practical, workable solution to the problem. If you legislate supermarkets to do something, how is it going to work? Is it going to work, or are they going to follow the letter right to the T? At the end of the day, are we going to create a mass of bureaucracy that might take six months to solve a little problem? I'm afraid of that part of it.

Mr Brown: How long ago did you found this business?

Mr Gass: About two years.

Mr Brown: You've made remarkable progress. We're talking about milk distribution, but if we were dealing with breweries, you would probably be able to get your product onto the shelves of the local Brewers Retail, I would guess, even though that's owned by the large beer corporations. You would be, I guess, a brew pub or something in that sort of scheme of things. What you need is, and we've heard it from the other dairies, the assistance of just having a level playing field. I can't help but in my own mind come to the conclusion that the other commercial considerations that are being put forward here, buying shelf space etc, can't be quantified in terms of price per litre, and that you have every opportunity to be just as competitive as the others. I'm not going to make a speech, unlike my other two colleagues.


Mr Brown: That was my own people applauding.

Mrs Boyer: I thank everybody for your comments. I think you sort of wrapped up what I've heard today from about everybody who came in to talk. I can see the northern region is different because of the geography and everything. I think we'll have to look into putting something in this bill that gives the ability and the possibility for buying local products from the people.

Another thing that was common to all presentations was the guarantee of shelf space. That seems to be fair, and that came out of everything. So you're wrapping up with your comments what we've heard today. I'm really anxious to see if you're going to get answers from those head offices of the supermarkets that you've visited. So good luck.

Mr Gass: Thank you.

The Acting Chair: We appreciate, Mr Gass, your coming in to make your presentation. It's a very appropriate one.

The committee will now stand adjourned until Wednesday, March 8, when we will reconvene at 9:35 in the morning in the Delta Inn. I trust that you will all be there on time.

The committee adjourned at 1556.