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 Steve Gilchrist (Scarborough East / -Est PC)
Mr Tony Martin (Sault Ste Marie ND)
Mr John O'Toole (Durham PC)
Mr Richard Patten (Ottawa Centre / -Centre L)
Clerk / Greffière
Ms Anne Stokes
Staff / Personnel
Ms Susan Swift, research officer,
Research and Information Services
The committee met at 0936 in the Delta Ottawa
Hotel, Ottawa.
FRANCHISE DISCLOSURE ACT, 1999 / LOI DE 1999 SUR LA
DIVULGATION
RELATIVE AUX FRANCHISES
Consideration of Bill 33, An
Act to require fair dealing between parties to franchise
agreements, to ensure that franchisees have the right to
associate and to impose disclosure obligations on
franchisors / Projet de loi 33, Loi obligeant les parties
aux contrats de franchisage à agir équitablement,
garantissant le droit d'association aux franchisés et
imposant des obligations en matière de divulgation aux
franchiseurs.
The Vice-Chair (Mr
Garfield Dunlop): Good morning, everyone. Welcome to
Ottawa.
I have a couple of quick
announcements.
For committee members, on
this piece of technology on our desks, turn to channel 1 if you
want the English translation and channel 2 for the French
translation. I want to point out that we will be recessing for
the lunch break at 11:40, and that will give you about 20 minutes
to check out of your rooms if you haven't already. There is a 12
o'clock deadline here.
This agenda differs somewhat.
We have moved a couple of people around. So committee members
have a different agenda than some people in the audience may
have.
GILLIAN HADFIELD
The
Vice-Chair: I'd like to start the meeting with Dr
Gillian Hadfield. We have until 10:20 for your presentation, Dr
Hadfield, and that includes any questions the committee may have.
If you want to take the full time for your presentation, there
will be no time for questions. If you give us a few minutes, we
can have an opportunity to ask you a few questions. The floor is
yours.
Dr Gillian
Hadfield: Thank you very much. I'm going to try to keep
it as brief as possible so we do have lots of time for questions.
I have prepared some overhead slides, which Les Stewart is going
to help me with, so that we can get through this.
I'm delighted for this
opportunity to address the committee, and commend the committee
for its attention to this issue. I started studying franchising
15 years ago, and often find it's a good way to bring a halt to a
conversation to say that I'm interested in franchising, because
it doesn't sound like something terribly exciting to study. But
it's actually quite a complex, interesting and very important
relationship in our economy.
I'm here today to talk to you
as an economist. I am on the faculty of law at the University of
Toronto. I'm currently on leave, on sabbatical at Stanford
University, but my permanent position is with the University of
Toronto. I have a law degree and a PhD in economics. I'll tell
you a bit about my background in just a moment.
I am the current president of
the Canadian Law and Economics Association and former director of
the American Law and Economics Association. I am a Canadian. I
did my bachelor of arts in economics at Queen's University, where
I was awarded the medal in economics. As I said, I went to
Stanford for my PhD and my law degree. My PhD was in economics.
My thesis topic is predictably long and obscure, but I thought
I'd mention it to you, so you can see how franchising connects to
the broadest set of interests I have continued to work on to the
present time. The title was "Long-term Relationships and
Commitment and the Design of Long-term Relationships,
Applications and Limitations of Contracting."
My interests generally are:
What does it take to make a long-term economic relationship a
valuable one, what is the role of contracting, and where are the
points at which contracting needs additional support from legal
rules? I have written a number of articles on franchising, some
of which have "franchising" in the title and some of which do
not, because I view franchising as an example of a more general
set of issues related to overcoming problems of commitment and
productivity in long-term relationships.
I teach contracts at the
University of Toronto, and teach an advanced contracts class in
which franchising is a dominant part. I have continued to work on
related issues, as they arise, in design of legal institutions
and consumer protection. Enough about me. Let's talk about
franchising.
My plan for this presentation
is to speak to you as an economist and to try to bring out what,
in my work, I have identified as the important things to pay
attention to about franchising. There are fairly simple things
you can know about franchising that give a lot of guidance to
thinking through the problem of what you do about franchising. Do
you leave it alone completely, or is there any role for
legislation?
Franchising, as you may already have discovered, is
a term that has a lot of different meanings. The type of
franchising most of us are interested in, and are focusing on
here, could more specifically be called "business format
franchising." That is a type of franchising where a franchisor is
selling a small business package to somebody who wants to operate
a small business. Franchisees are individuals who are buyers of
that package. They can be characterized as people who respond to
an advertising pitch. Franchisees, in fact, will go out and
identify themselves as: "I'm interested in buying a franchise.
What are my options? What are my possibilities?" They respond to
the pitch: "Own your own business. Follow our rules and you'll
succeed." It's very important to keep in mind that that's who
franchisees are and that is the nature of how this relationship
gets started. There's nothing wrong with that; that's what is
being sold.
I want to emphasize that the
industry is franchising and not hamburgers. Franchising is
sometimes described as a method of distribution, but it's not. It
does distribute products, but it's an industry in and of itself,
where the product is the small business package for somebody who
wants to operate their business. In order to be successful a
franchisor has to figure out that if they haven't established
internally the structures for serving franchisees and providing
them with the kinds of support they need to be successful,
they're not going to survive as franchisees. This hard lesson was
learned, for example, by the founder of Domino's. When Domino's
Pizza decided to go into franchising, they failed quite
dramatically because they hadn't realized they were no longer
selling pizzas but were now selling franchises. That's one of the
things you look for in identifying a sophisticated franchisor.
They have figured that out.
To give you a sense of this
as an industry, I went on to the Web site www.franchising.com,
which is a Web site to which anyone could go who is looking to
buy a franchise or looking to advertise a franchise. It's billed
as a worldwide directory of franchising. You can enter, "I'd like
to know by country or I'd like to know by investment level what
my options are," and it will spit those out. I just pulled out a
fraction of the "H's" to give you some sense of this as a market
for franchises and also to give you a sense of the wide range of
areas in which franchising occurs.
Franchising is not just
McDonald's and Domino's and Hampton Inns, but is also Hair Club
for Men, Hakky Instant Shoe Repair, Hammerle-I don't even know
what that is-H20 Plus, a lot of different areas. It's now a very
large fraction of the retail market. People who are going into
franchising look for something they might be interested in doing,
but they are not coming to it and saying, "Look, I'm an
experienced motel operator, and I'd like to operate one of your
motels." They're looking for an investment opportunity, they're
looking to be their own boss and they're looking for a good
package.
If you look at this Web site,
some of them have more specific information. For example,
Häagen-Dazs, in their pitch to prospective franchisees,
provides information about how long they have been franchising,
ie, giving some indication of how sophisticated they are and
whether they know what franchising involves in terms of
supporting franchisees; what the investment levels are; how many
units they have; how many company-owned units they have, which is
important information for a franchisee to know both in terms of
what ground-level information does the company have, but also,
are they coming in and buying up the franchisees.
Häagen-Dazs here is showing they've been this since 1974 and
their number of company-owned units is two. That indicates there
is probably not a situation where they're buying up their
franchisees who are successful, which is something that happens
in some systems.
The franchise relationship
has a very distinctive structure, and if you can get a handle on
this structure, it's an excellent key to figuring out how to
think about what we do with franchising in terms of legislation.
Franchising is characterized by a separation of ownership and
control over the assets in the business. Franchisees own the
assets; the franchisors control them. That is something we see in
lots of places in the economy. We see that in securities markets.
We see that in corporations. Shareholders own the assets, own the
company; managers and directors control those assets. That
separation of ownership and control is something, in all of these
settings, that is a source of great value. I may have the assets,
own them, but not be the best person or organization to determine
what to do with them. So you give your money to a stockbroker and
ask them to invest it on your behalf, or the fund manager. Invest
in a company and have the managers make the business decisions
and the corporation purchase the assets of a franchise and have a
franchisor determine what is the best way to deploy those assets.
That is a source of value and that's why franchising is
valuable.
That separation of ownership
and control, however, also creates vulnerability. The fact that
somebody else is controlling your assets means that you've got to
be a little bit worried about whether they're going to be putting
them to the best use for you, or whether they're going to be
taking advantage of them.
The types of risks that you
face up front when you separate out ownership and control-and we
can see this in franchising as well-is a problem of
misrepresentation, misrepresentation as to what the individual or
organization that has control over the assets is going to do with
them. Some of them are fairly standard things: fraud, misleading
advertising or where you're paying for nothing. This is not
something that is special to the franchise industry. This is
something that arises throughout the economy in lots of different
places. Telemarketing is another example where we can see that,
and the fly-by-night stocks are another example, where you invest
in a company that actually doesn't have the capitalization that
it may represent. You can be defrauded by scam operations. I want
to draw that comparison.
The previous slide was about
risks at the outset of a franchise relationship. The risks I want
to emphasize in franchising have to do with ongoing risks.
Ongoing risks arise because of something that economists have
labelled opportunism. Opportunism is formally the extracting of
the value of the sunk investment that somebody has made in a
relationship, taking advantage of the fact that someone is locked
in to a certain extent. I'm going to give you an example of it in
just a minute to make it quite clear, because this is the source
of the vulnerability, the way in which the vulnerability in
franchising arises.
It's hard sometimes for
people to understand how it could be that franchisors would ever
take advantage of franchisees, because it appears at first glance
that they must have the same interests: everybody wants this
business to succeed. To some extent that's true, but there are
ways in which their interests diverge.
0950
One of the most important
ones is in terms of where their returns from the franchise are
coming from. Franchisees at the end of the day are collecting the
profits from the franchise. They've got their revenues, they take
off all their costs, they take off their royalties to the
franchisor, and what's left over are their profits. Franchisors
collect their money from a franchise from an upfront franchise
fee, if there is one, and generally from royalties. Royalties are
collected on the basis of revenues before any costs are taken
off. So if all those revenues are there, the franchisee is paying
attention to the level of costs because he wants to know what's
left over at the end of the day. But his costs are not of the
same concern to the franchisor unless they're impinging on
revenues or the ability to sell other franchises. So there's a
way in which their interests can diverge. A franchisor can be
interested in generating volume and not too concerned about
costs; franchisees are concerned about what is left over at the
end of the day.
Because of the separation of
ownership and control, franchisors are making outlet decisions
when they're deciding where to open up other outlets, whether to
go ahead with the renovation of an outlet or a change in a
marketing approach, whether or not to introduce new menu items or
put on a promotional plan. All the decisions that the franchisor
is making, which, remember, are the reasons that a franchise is
valuable-it is not a bad thing that franchisors are making
decisions about how to run this outlet. This is precisely why
people want to be franchisees, because they want franchisors
making those decisions and not themselves. But they're making
those decisions with the franchisees' money. So the question is,
to what extent are they taking into account, when they're making
those decisions, that it's not their money at risk but the
franchisees' money at risk?
This risk is not something
special or unusual in terms of franchising. I go back to the
analogy to the securities market or a corporation. We know that
in our corporate law, if we have investors handing their money
over to the managers of corporations, there's a risk of
self-dealing; that is to say, the managers directing the assets
of a company to ventures or suppliers that are owned or
controlled by the managers and making profits from the fact that
they're in the position of management. We know there's a risk of
insider trading, taking advantage of the fact that they have the
information before the investors, the owners, have it and trading
on it. We know that we can't have a productive, vibrant economy
with a productive, vibrant securities market or corporate
structure without protections against self-dealing and insider
trading, and that's what we do have in those areas. The things
I'm talking about in franchising are just exactly the same.
I wanted to give you a
specific example of what I mean by opportunism, just to make it a
little bit more graphic for you. Suppose you had a $100,000
investment in a franchise, and within a year that franchise
generated $200,000 in revenue. Remember, that's where the
franchisor's royalties come from, off that $200,000. Just suppose
the costs of operating the franchise outlet were $120,000 and
that the franchisee paid himself a salary of $50,000, which I
just want you to assume. I'm an economist; we're making a lot of
assumptions here. That $50,000 is what that franchisee was making
and could make if they gave up the franchise and went back into
whatever their employment was before they became a
franchisee.
Those numbers-$200,000 minus
$120,000 minus $50,000-gosh, I think I added wrong. We have a
return of $30,000. Sorry. This is actually good. You know people
are paying attention.
To correct the record-I'm a
theorist; I was never any good at the numbers-the return on the
investment is $30,000. That's an even better return on the
investment than I was anticipating here in this franchise. That
looks pretty good, right? You put your $100,000 down, you make
the same salary you made in the non-franchise setting and you're
making a $30,000 return-I'm just assuming this is in one year-on
that $100,000 investment. This is not a representation of what is
going to happen to you if you open a franchise, by the way.
So there's that $30,000
sitting there. Suppose the franchisor comes in in the second year
and says: "You know what, we've decided we need to overhaul the
outlet. We've just discovered that the aisles are too narrow and
we need a different marketing approach. We need to make certain
kinds of changes." The franchisor can increase the cost of
operating that outlet by as much as $30,000 a year before you're
going to say, "You know what, I'm out of here, I'm done."
Here's what I mean. That
could be through legitimate decisions about needing to change the
outlet because that's what we need to do to maintain
competitiveness. It could be that if we don't pay that $30,000,
next year those revenues are not going to be $200,000; they're
going to be $100,000 or lower. But it could also be that that
money is sitting there and the franchisor has opportunities to
extract that value: They could raise royalties, they could make
investments they would not make themselves if those were their
own assets at risk. So the point here is the notion of
opportunism and the vulnerability of that $30,000 sitting there.
The franchisee is going to stay in business even if that is gone.
If that $30,000 is pulled out by the franchisor, the franchisee now faces
these two choices: "I can stay in the business, I've made my
$100,000 investment, but if that's a sunk cost, if that is gone,
I can't recoup that. I get $50,000 a year in salary if I stay, I
get $50,000 a year in salary if I leave. I've lost my $30,000
return on my $100,000 investment but there's nothing I can do
about that." That's what makes a franchisee vulnerable.
You can look at that risk of
opportunism and you can think a lot of things about it, like it's
unfair and shouldn't be allowed, it's outrageous, whatever you
want to think in terms of that risk. I'm going to focus on why we
should be concerned about it, what is the public interest in
doing something about the risk of opportunism, which I should say
is a standard risk in many long-term relationships. The reason we
have contract law is to deal with the problem of opportunism.
I want to talk a bit about
what the efficiency considerations are with respect to doing
something about opportunism and those risks. Franchising is what
modern retailing looks like. From varying statistics, I think
it's about 45% of the retail market in Canada and it has the
potential to become even more so. The reason that franchising is
the way of the future, the way it has been for some time now as
well, is because franchising takes the value you get from having
a large-scale operation, the returns to scale of bulk buying, of
collecting information, of being able to manage inventories, of
large-scale advertising, it takes all of those benefits that are
available to a large-scale operation and parcels them out to
small-scale operations. That's also why you want to be in a
franchise, because the franchisor can do the marketing studies
and do the research and analyze the data and come up with the
fancy advertising campaigns that a single operator can't. This is
going to be especially true in our brave new world of the digital
age where information has become terribly important in retail in
particular.
The reason we have the large,
big-box stores is because the large stores can aggregate massive
amounts of information they collect from those UPC codes that are
flashing through the checkout machine. They're keeping track of
the inventories, they're keeping track of how demand is shifting
on a daily basis and they're moving product around in ways that
dramatically reduce costs and respond much more quickly than has
ever been true in the past to shifts in demand.
1000
That's a value that comes
with large scale, and that's where franchising comes in. That
benefit of large scale, aggregating all that information, can
then be parcelled out to small operators who can't compete
otherwise. The days in which you could open up the local store
and not have access to that information and not be able to
respond in the same ways are very, very quickly disappearing.
That's also true, of course, with Internet sales.
The risks that franchisees
face, the risks I enumerated earlier, the risk of
misrepresentation and the risk of opportunism, are costly for the
economy. When franchisees end up getting into a franchise that
doesn't deliver on its promises and invests those funds, and
those funds then disappear, that's wasted investment funds in the
economy. That's not a good thing. That's one of the reasons we
don't want that in the stock market. We don't want people taking
their investments and putting them into fly-by-night stocks. We'd
rather have those investments in legitimate businesses and
operations that are going to be around. We want people to be able
to make wise investment decisions. This is really emphasized by
one study. Francine La Fontaine, another Canadian, although she's
at a US university now, demonstrated there was a 77% failure rate
for franchisors over a five-year period in the United States;
that is to say 77% of the franchise operations systems that came
into existence disappeared within five years. Now, of course that
means the franchisees' investments went with them.
The risks of franchising are
also costly because even though it's at 45% of the economy now,
we may be looking at too little franchising in the economy. If
franchising is risky and potential franchisees understand those
risks, they understand the risks of misrepresentation, but more
importantly they understand the risk of opportunism, that they're
going to be vulnerable, that $30,000 is going to be vulnerable,
they can be kind of over the barrel-"Well, what can I say? I
can't walk away from this thing even if that amount is being
extracted by decisions the franchisor is making"-then some people
are going to decide not to become franchisees, not to get into
this relationship. That can mean, from the point of view of the
economy, we don't have enough of it going on. By "enough," the
technical way of thinking about it would be, we don't have the
efficient scale. The volume of franchising can be too low because
we don't have enough people going into it because they don't get
enough protection against the risks and they know they can't
protect themselves through their contracts.
It may also be that we're not
getting the right mix of people in franchising, we're not getting
the best potential franchisees, which is to say we're getting
people who have few opportunities on the outside but not the
people who have better opportunities on the outside who
nonetheless may be the most productive people as franchisees.
And, in fact, you hear franchisors speak frequently about the
difficulty that they feel they face in identifying good
franchisees.
One of the things I talk
quite a bit about in my work in a lot of different areas is-and
this is one of the main lessons of this combined field of law and
economics that I'm in-it's frequently the case that people see
law and free markets as being opposed to one another, that
introducing law into markets disturbs free markets. It's
important to really focus on the fact that free markets require a
legal structure. This is the mistake that has caused a lot of
problems in eastern Europe and Russia, to sort of say, "OK, let's
open up to free markets," but there wasn't the legal structure in
place to support those free markets and they haven't taken
off.
You need legal structure to support free markets.
You need contract law, you need property law, and as I've been
drawing the analogy, with securities, regulation and corporate
law. In securities you need a way of protecting owners and
investors from the abuse of their funds by managers and brokers
through their control. By doing that, that's what makes that free
market start to work. The New York Stock Exchange promulgates a
thick book of rules and regulations privately, overseen by the
securities commission, but privately generates those rules
because they know that those rules are what will attract
investment and that's how you get the efficient scale.
Corporate law establishes
that there are fiduciary duties on the part of managers and
directors so that when managers and directors are handling those
funds of the stockholders, they're under an obligation to manage
those funds in the interests of the stockholders. That's law that
generates and supports an efficient market. In the sort of
comparative work these days, one of the reasons it is thought
that the US and North American markets are doing so well is
because the securities regulation and corporate law have
developed in much better paths than in Europe, for example, and
it's the legal structures that are supporting the growth in these
areas in North America.
I've mentioned the types of
risk that are out there in franchising, emphasizing the
opportunism problem. There are a variety of places in which you
can come in and regulate, structure the market, the various types
of things you can do to support these relationships. One is basic
contract law. Obviously, you need basic contract law. The second
one is disclosure law, like we have in Bill 33, which I think is
an essential and very important component of that proposal. This
is also what you see in the Federal Trade Commission rules in the
United States-that's federal law-in California and in Alberta.
California disclosure law has been there since 1971. You can then
move on to registration law, where you require franchisors to
register with an agency of the government. That has been true in
California since 1971 as well, and is an aspect of Tony Martin's
Bill 35.
You can then take another
step down, or up, and introduce substantive relationship law, by
which I mean rules and regulations about behaviour within this
relationship once it has started so we can deal with the
misrepresentation problem at the outset through disclosure law.
Registration law also addresses that kind of problem.
But then we've got this
relationship that's now supposed to last for 15 or 20 years. What
do we do about the opportunism problem? That's where we start
looking at substantive relationship law. That's where you start
looking at putting in provisions that govern or can impinge on
termination and non-renewal decisions, such as requiring that
there be termination or non-renewal only for good cause. That's
where you can find legal provisions requiring that there be
notice of a potential default under the franchise agreement and
an opportunity for the franchisee to cure that default. This is
where you find phrases or obligations set in terms such as "good
faith and fair dealing."
Substantive relationship law
has been around in the US in the auto and petroleum marketing
area since 1956. The Automobile Dealers Day in Court Act was 1956
in the US. In California it has been around since 1981. Again, it
is an aspect of Tony Martin's bill, which actually contains a lot
of the best features of what you can find in North America in
terms of thinking about how to handle franchising.
Good faith and fair dealing
terms are in all US contracts. It's an implied term in any
contract in the United States, in any industry, no matter where
you are. There's an implied duty of good faith and fair dealing.
So it's nothing special. You don't need it in a piece of
legislation; it's always there. In fact, when I started doing
research on franchising back in 1986 or 1987, what I was doing at
the time was reading thousands of franchising cases and looking
at how the term "good faith and fair dealing" was being
interpreted in those settings, and to what extent was it
addressing the problems of opportunism, to what extent did the
courts understand what was happening in a franchise relationship,
and therefore what "good faith and fair dealing" might mean in
that context.
1010
The
Vice-Chair: You have about 10 or 11 minutes left.
Dr Hadfield:
Yes, OK. You have the modes of enforcement in the handout there,
so I'm just going to move on to the next one so that I can talk
specifically about what I think is necessary here.
Interjection.
Dr Hadfield:
There should be one that says, "What's necessary?" It's missing
from the pile. That's too bad. This is the one I think is most
important.
There are different ways in
which you can achieve the goal of getting the kind of commitment
you need in franchising. One of them is through reputation, and
for a lot of people who feel that there's not a need for any kind
of regulation here that's what there's an appeal to: "We don't
need to worry about franchising because franchisors won't treat
their franchisees badly because it's bad for business to treat
their franchisees badly." To some extent, that's true. What that
requires is that the information about what franchisors are doing
to franchisees has to be free-flowing, available and
low-cost.
When I put on my last slide
here, which you can look at in the handout, there are two main
things I think it would be a good idea to focus on in terms of
what might be added to Bill 33 to better achieve the goal of
supporting franchising as an economic activity. This isn't
exhaustive. These are just the two I've chosen to focus on here
that I think are most important.
One is this term of "good
faith and fair dealing," a substantive obligation as to how the
franchisor can exercise discretion. You can call it whatever you
want. Currently, we have the term "fair dealing" in Bill 33. You
can call it "good faith and fair dealing." You can call it "commercial
reasonableness," as has been suggested by some other people who
testified before you.
What's important here is not
what you call it but what you understand it to mean and what
eventually courts or other enforcers understand it to mean,
including what franchisors understand it to mean. What I'm going
to suggest to you is that what it needs to be understood to mean
is that franchisors are explicitly obligated to exercise their
discretion as if it were their own assets at risk. Because if
they're not, that means they're taking advantage of the fact that
there is a separation of ownership and control and making a
decision that, if they were the ones who had to renovate the
outlet, would not be a good business decision. Sometimes it will
be, but how do you decide if it's a good business decision or if
it's advantage-taking? You ask, "Would the franchisor have done
it with their own outlet?"
The second thing I think you
need to focus on is low-cost enforcement because all the legal
rules in the world are not going to make a difference unless
there's an ability to make use of those. I've suggested a few
ways here in which you can achieve low-cost enforcement. One is
to give associations a class standing in civil litigation. That's
a feature of Tony Martin's bill which I think is important to
look at in terms of making it possible to hold the franchisors to
that obligation. Again, why do you want to hold the franchisors
to the obligation? Because that's how you generate efficient
volume of franchising. That's how you get people in
franchising.
Another way of getting some
low-cost enforcement, and take the emphasis off "enforcement"
there, is to put in place dispute resolutions that are low-cost,
like mediation, non-adversarial approaches, to say, "Wait a
second. I don't really understand why you're asking me to
renovate like this," or "This is high-cost," or "Maybe you don't
understand how this is going to impact on the outlet."
Third, and I want to
emphasize this one in particular, government can do something
important in supporting the private mechanisms that are out there
to give franchisees the kind of commitment from franchisors that
they need, and that franchisors want as a whole in order to
generate interest in franchising. They can support the reputation
mechanisms and can do that by supporting the flows of
information, by allowing information to flow. It's important for
the stories about what franchisors have done and what franchisees
have experienced to be out there and available at low cost to
potential franchisees, so that they can make judgments about what
to do, because that's what provides the check on franchisor
behaviour that will in the end probably be most effective. That's
really what makes the reputation mechanism that says, "Look, a
franchisor's not going to cheat their franchisees because they
won't be able to sell franchises." For that to work, that
information has to be flowing. That's what you want franchisors
to be doing, is paying attention to that.
For example, I think there
should be a real push for the government to make sure that
information is flowing, that it's not made confidential by
confidentiality agreements, that franchisees are protected
against lawsuits in the event they talk about what's happened to
them as franchisees.
I'm not going to go into
detail because of the time, but there are ways in which the
government could play a role in structuring these mechanisms; for
example, by mandating participation in an Internet Web site that
publicizes information about the experience of franchisees with
particular franchisors, that prospective franchisees could then
access in order to assess, just as they're assessing investment
levels and how you've been in this, so that the information is
there. At the end of the day, I think that's one of the most
effective things we can do. Thank you.
The
Vice-Chair: Thank you very much, Dr Hadfield. We've got
about five minutes for questions here. First of all, the Liberal
caucus.
Mr Richard Patten
(Ottawa Centre): First of all, welcome to Ottawa Centre.
I gather you've had a good trip flying down from Sault Ste Marie.
I guess you're ready to-
Mr Tony Martin (Sault
Ste Marie): Another fine city.
Mr Patten:
Another fine city.
Thank you for that
presentation. I thought that was excellent. I'd like to come back
to one thing you mentioned, and that was that one of your
colleagues pointed out the 77% failure rate for US franchisors.
(1) I wonder if you have any more recent information on what the
situation is in the Canadian context and (2) could you elaborate
on your comment that perhaps there's "too little franchising" in
Canada?
Dr Hadfield:
I don't think there's more recent information in Canada. This is
not an industry that's been studied very extensively at all in
Canada, so that data has just not been collected.
In terms of there being too
little franchising, the only way we could know what the amount of
franchising could be is to say, "Theoretically, have we made this
as attractive as it could be?" We know that in any industry, in
any economic relationship, if there's a risk of opportunism, of
being taken advantage of, then one of the things that's going to
happen is fewer people will go into it. Saying that there could
be too little franchising is to say that to the extent that there
are unaddressed problems of opportunism and it's risky, people
will stay out of it.
Anecdotally, you can know
that because, for example, I would say that I wouldn't go into it
because the risks are there. It wouldn't be that I would worry
that I was getting in with a fly-by-night operator. I just know
there's no protection against the exercise of that control power
in those ways. It's just not there, and you can't write it into
the contract. It's not going to work to write it into the
contract. So that's where the prediction comes from.
Mr Martin:
We do have a couple of articles written by Professor Hadfield
that we'll make available to the committee and to the people who
are here today. One is Problematic Relations: Franchising and the Law of
Incomplete Contracts; the other is The Price of Law: How the
Market for Lawyers Distorts the Justice System. There are a
couple of pieces of research that I've had done-Richard, I've
been handing this stuff out as we've gone along-by Susan in
legislative research. It's a summary of an article on franchise
contract terms, like what it says and what it doesn't say, and
another article that was put together by the American Franchisee
Association, Avoiding the Traps-Boilerplate that Bites: The 10
Most Dangerous Contract Terms. I'll be handing those out in a few
minutes.
I wanted to ask Professor
Hadfield to maybe expand a little bit on the issue of mediation
and dispute resolution mechanisms. There's been the suggestion
that what's already in place in Ontario that forces people into
mediation before they go to the courts would catch this and deal
with it. What's your view on that?
Dr Hadfield:
The problem with mandatory mediation as it's now structured-and
this is happening throughout; there's nothing special about
franchising here-is that it is done in the context of lawsuits
that have already been filed and an adversarial structure that's
already been put in place. You've hired lawyers. You've filed a
complaint or made an application; you've had an answer. So the
positions have generally been hardened at that point, and most
franchisees are probably not taking that step until things have
gotten to an extreme point, like they've been terminated.
1020
The idea of a low-cost form
of resolution that supports this relationship would be a
mediation mechanism that would kick in at a point at which the
relationship can still be saved, at which we can deal with
problems at an early stage so that the mediation would be
low-cost and would not involve lawyers and legal suits. It might
involve calling up, for example, the mediation arm of a private
organization and saying, "I've just received this letter that
says I have to make these changes to my outlet or the royalty
rate is going up 2% next year, and I don't like this," doing
nothing ahead of time other than getting that information out and
then having a structured way in which you can talk with the other
side.
As a way of comparison in a
very different setting, in family law, the less legal structure
that you have up front, the more likely it is that the mediation
is going to be effective, because the positions haven't been
hardened. You want to keep this out of that adversarial approach,
really, to think about doing something quite different, very
problem-solving oriented rather than litigation oriented, which
is the way mandatory mediation is structured right now.
The
Vice-Chair: We have a quick question by Mr O'Toole.
Mr John O'Toole
(Durham): Thank you very much for your expert
presentation. We've heard from a couple of people slightly
different interpretations of some of this stuff. I think we all
understand that there are sort of dominant-subordinate roles with
the franchisor and the franchisee. Some have clearly described it
as, "One takes the money out of the top and the other takes the
money out of the bottom, if there is any." It's an unusual,
rather risky position to be in.
I'm more interested in having
you explain the way we've described fair dealing. That is
something I'm interested in. I'm surprised that you would say
that it's implied, so why put it in there? In most contracts,
people would want to be going in with unencumbered integrity, so
there's an implied element to it. The presenters on previous days
asked us to strengthen it. One of them suggested putting
"commercial reasonableness" in its place and said it's very much
defined in case law. It's not a case that it's ambiguous or
untested in court. You've said quite the opposite. You say that
not only is it not necessary-it's implied-but it's no stronger
than "commercial reasonableness."
I'm not in a position
academically to question you, but I want that clarified. If we
moved at all to improve it, I would suspect that might be one
thing, to clarify fair dealing and not end up with a whole book
of regulations of what fair dealing is and wait for the courts to
define it. They said "commercial reasonableness" has gone through
the discipline of being defined in property matters and other
issues.
Just one other thing, and
this isn't related to what I've just said. The right to
associate-
The
Vice-Chair: Where has that one-minute question gone?
Mr
O'Toole: She's an expert. We've got to hear from them
more importantly than the others, perhaps.
If you looked at the
Internet and you had these associations-and just think of what's
actually going on today at the academic level. You can get your
PhD on-line. Do you understand? It's emerging as one way of
chatting around the world about McDonald's. You don't have to be
too brilliant to figure out that whole exposure will be part of
the right to associate. They'll say: "This is my horror story,"
and "This is my success story." You figure it out. I would think
that would be automatic and implied. The right to associate would
imply the technology association as well. But I think more
important is the commercial reasonableness question.
Dr
Hadfield: Let me clarify what I meant when I said it's
implied. In the United States, it's part of contract law that
it's implied. That is not part of Canadian contract law, so it is
not implied in Canada. I don't mean to say that it would not be a
good move, if that's where you're going. To strengthen the
language to put in commercial reasonableness would be better than
just saying "fair dealing." These are terms that have some legal
meaning.
My point was to say that if
what you're hoping to accomplish by putting language like that in
there and then potentially strengthening that language-if your
goal is to deal with this problem of opportunism, because that is
what is costly, that's the risk that we need to address in
franchising-then "commercial reasonableness," all of these terms,
when they get interpreted by the courts-I remember what I did
when I did this work 15 years ago. I would go and look at, what does
"good faith" mean in the franchising context? Even if you've seen
it in other areas, it ends up having an industry-specific
meaning.
In the US cases, for
example, what "good faith" and "fair dealing" came to mean was
that the franchisor could exercise business judgment. That is to
say, the franchisor could make the decisions without taking into
account the impact on the franchisee, and the reason for that was
the courts did not understand the nature of this relationship.
They saw it like an employment relationship. They said: "Look,
the franchisor is the one in charge. They're the company. They're
the one that makes the decision about whether to change the
number of lines of automobiles in this dealership or whether or
not to discontinue this branch of the business." They were
missing the opportunism problem. They were missing the essential
feature of the franchising relationship.
My concern would be that
you could strengthen the language, certainly, from "fair dealing"
to "good faith" to "commercial reasonableness," but what's going
to happen in the courts is the term of "commercial
reasonableness" will be defined in the franchising industry, in
the franchising context. That is not currently there in the law;
there isn't an established meaning for that. My suggestion to you
is that the best thing to do to deal with this problem would be
to make explicit what that means in this setting, and what it
means in this setting is the franchisor should be making
decisions with respect to those assets as if they were their own;
that is, to take into account-you can fill in that, whatever
language seems to work from that point of view.
To be clear, I would say,
yes, "commercially reasonable" would be a better term, would give
the courts a little bit more to work with in accomplishing this.
But again, if you don't want to just leave it up to the courts
and then 10 or 20 years from now say, "What have they done with
that term?"-they could take that term and it could end up being
exactly the same as it is now, with that problem having not been
addressed.
The
Vice-Chair: Thank you very much, Dr Hadfield. It's a
pleasure to have you here with us this morning.
ALEX KONIGSBERG
The
Vice-Chair: We will now go on to our next witness, Mr
Alex Konigsberg. I'm trying to stick to a 20-minute schedule, Mr
Konigsberg, for presentation and questions. You may start
whenever you want.
Mr Alex
Konigsberg: My name is Alex Konigsberg. I'm an attorney
practising in Montreal. I've asked that my CV be distributed to
you, not to tell you how brilliant I am but to tell you that I
probably have more experience in dealing with franchise
legislation throughout the world than probably any other person.
I have been consulted by most governments dealing with
legislation. I have been consulted by most franchise associations
dealing with legislation. I have been the only non-American to be
invited to appear before the Congress of the United States on
their franchise legislation. I think I've been the only
non-American to be invited to appear before the Federal Trade
Commission on the FTC franchise rule. I have been invited to go
to Australia to meet with industry and to meet with government,
to Mexico. Frankly, I think I've been invited by nearly every
country of the world that deals with franchise legislation, other
than the province of Ontario.
I would also like to talk
at length, but later on in my conversation, about the efforts
that are being undertaken by Unidroit, which is an organization
in Rome in which Canada, as a country, is a very prominent
member. I think it would be very important that this group
understand what is going on in Unidroit as it pertains to
franchise legislation.
1030
Although I've spent most of
my life representing franchisors, I'm not here to speak on behalf
of franchisors, I'm not here to speak on behalf of the franchise
associations; I'm hear to speak on behalf of franchising. I also
want to underline the fact that I've appeared as an expert
witness in Ontario courts on behalf of franchisees in the leading
litigation cases that have come about in the last number of years
before the courts of Ontario. I underline the words "I've
appeared on behalf of franchisees" in these litigation cases.
I would also like to say to
you categorically, because I've studied this at length for 35
years, that there's absolutely no correlation of any nature
whatsoever between the existence of franchise legislation in a
particular country and the number of bankruptcies or the amount
of fraudulent activities on behalf of franchisors. Frankly, the
country that has more lousy franchise practices, that has more
bankruptcies, that has more fraudulent activities, is the United
States of America, which is by far and above the most regulated
country, when it comes to franchising, in the world. There is no
reason whatsoever to conclude, based on the experience of any
country that has adapted franchise legislation, specifically,
that the enactment of such legislation will result in less
fraudulent practices or better franchise practices. There is
absolutely no correlation.
There's a tremendous amount
of misinformation that is spread. I came in a few minutes early
and I listened to the learned professor and, frankly, she and I
are in different worlds. My experiences are totally different,
and on many issues I would challenge some of the statements that
were made if I'm given the opportunity. They're just not the
case.
Notwithstanding that, I am
a proponent of disclosure legislation. I believe that we should
have disclosure legislation. I would also caution that the
disclosure must be meaningful because, if it's not meaningful,
it's a waste of time. It must serve to make the relationship
between the franchisor and the franchisee more transparent and it
must be simple. If it's not simple, no one is going to read it.
That's one of the problems with the Australian legislation. The
franchisor is literally required to repeat every provision of the
franchise agreement and then explain it. You end up with a
document the franchisees do not read.
I would like to mention one issue, because I am
here to plead on behalf of franchising and to plead on behalf of
a better community of franchising. There is one issue that I
think a disclosure document should deal with, and deal with at
length, apart from the obvious, apart from the reputation of the
franchisor, apart from his experience, apart from the litigation,
apart from any of the classical things that, frankly, are
contained in Bill 33. But there is one particular issue that
impacts on the franchise relationship that is causing a lot of
problems to franchisees, and that deals with the supply of goods
and services by the franchisor to the franchisee. This is the
lightning rod. To the extent that there are a lot of problems
going on within this industry, I would venture to say that most
of these problems trace back to this particular issue.
I would strongly urge this
committee that, in their regulations dealing with disclosure,
this issue be dealt with up front. What is the policy of the
franchisor vis-à-vis prices or products or services if he or
a related corporation is the supplier of the product and service?
If they're designated suppliers, what is the policy? If the
franchisor is allowed to charge for goods and services, if he has
no policy, then let him disclose that he has no policy. Let the
franchisee beware that there is no policy, that the franchisor is
free to charge what he wants. If it's cost plus 10%, then what is
the definition of cost? If it is the retail selling price less a
certain percentage, what is that? If it's a designated supplier,
does the franchisor take commissions? Does he take volume
rebates?
I am not suggesting that
the amount of these volume rebates be disclosed. I don't think
it's important that it be disclosed. It's the principle that must
be disclosed. This is the one area that I would suggest, because
to me this is the lightning rod of problems the franchise
industry is facing: If things are disclosed up front in the
disclosure document, then the franchisee has a very fair idea of
what he's involved in.
I would very strongly urge
this Legislature not to get involved in relationship issues. The
United States of America, including California, has relationship
issues, and all that they have is more litigation and more
litigation and more litigation. I challenge anyone to bring forth
any type of information that there are fewer fraudulent
practices, few bankruptcies and fewer bad franchisors in the
state of California than anywhere else.
I am concerned with the
amount of misinformation that is being put before this group.
Someone sent me an e-mail recently in which they talked about
Iowa. They asked that empirical evidence be given as to what is
happening in the state of Iowa. There's a bill presently pending
before the state of Iowa to repeal much of their legislation. All
that it has done is hurt franchising.
Most countries of the world
today that have adopted legislation, whether it be Mexico,
Brazil, Spain or France, have adopted disclosure legislation.
They have not adopted relationship legislation. The one glaring
exception is Australia, and Australia is paying the price. There
has been a study that recently came out in Australia, pointing
out that since the adoption of their law, this has damaged
franchising severely.
Frankly, I don't believe
it. I don't think it has damaged franchising severely. But what
it has done is increase the legal costs dramatically. You read
the Australian legislation and you will see that they have
relationship issues dealing with termination. It works for 90% of
the franchise systems. It doesn't work for 10%. If you try to
adopt relationship law you will solve nothing other than, to put
it bluntly, to fatten the pocketbook of many lawyers practising
in this field.
I have seen material go out
that talks about Europe. The only countries in Europe that have
legislation are Spain and France. The block exemption regulation
on franchising which is issued by the European Community does not
regulate franchising. It does not regulate disclosure. It does
not regulate relationships. It deals with competition issues
because of the particular intricacies of the Treaty of Rome.
There are problems facing
this industry; there are very significant problems facing this
industry. I have two suggestions, but before that I want to deal
with one other statistic. I've heard a statistic thrown around-I
hope I'm wrong-of a 70% failure rate of franchisees in the
States. That was put on the table and has been debunked on
numerous occasions. I've also heard that 80% of all franchisees
are successful. That too is extremely misleading. It's a very
misleading statistic even though it may be true. At one level,
where you have serious, mature franchisors-McDonald's or Tim
Hortons or whatever it may be-the failure rate is incredibly
small; it may be 1%, it may be 2%. At the other level, with
start-up franchisors, the failure rate may be 50% or 60%. To
extrapolate from that the industry decision that 80% of all
franchisees are successful is misleading too. It may be 95% for
mature franchisors; it may be 50% for start-up franchisors.
People have to be aware of this.
1040
There are two things-and I
have given this a tremendous amount of thought over the years
because it's something that has intrigued me. On the few
occasions when I represent franchisees, they bring their
agreement to me. I put it aside and say to them, "I will not
agree to take you on as a client and I will not read your
franchise agreement until you get into your car or get on a train
or a plane and go and talk to other franchisees." One of the
beauties of franchising is that the information is public. The
best information possible that a prospective franchisee can get
is to go and talk to other franchisees in the same system. They
don't do it. They don't read their disclosure document, and most
of the time they don't understand their disclosure document.
Every franchise association
around the world puts out a publication, "Investigate Before
Investing." There is no other industry, no other category of law
where that information is out. I have yet to see one case
anywhere in the world where a franchisee was prosecuted or sued
because they had a conversation with a prospective franchisee.
Franchisees are more than willing to talk. They're more than willing to give the truth
of whether the franchisor is good, whether he's competent,
whether he's not competent, and anything can be done. Because
just having a disclosure document, if nobody reads it, is not
going to help the situation. I know the franchise associations
have tried their best, but prospective franchisees do not do it.
If they did, they would be able to sort out very quickly who are
the good franchisors, who are the competent franchisors and who
are the reasonable franchisors.
The second one is even more
insidious. Most prospective franchisees, and most lawyers and
most consultants, for some reason believe that if you buy a
franchise from a start-up franchisor, somehow you are getting in
on the bottom floor and are getting a better deal. The reality is
the opposite. Most start-up franchisors charge a higher royalty
than most mature franchisors. The fees are generally higher, and
they just can't supply. They don't have the infrastructure, they
don't have the training facilities, they don't have the
advertising clout and they don't have the purchasing clout.
I'm generalizing. I'm aware
of several start-up franchisors who have all those things,
because they have made it their business to become serious
franchisors. But many of them don't. If a person who is going to
buy a franchise goes into the relationship understanding what is
going on, there's no other industry like it where this
information is available. It comes down to educating potential
franchisees. You cannot legislate competence. There are a lot of
incompetent franchisors, a lot of incompetent lawyers, a lot of
incompetent doctors and a lot of incompetent business people. You
cannot legislate it.
On the issue of good faith
and fair dealing, it is now accepted by the jurisprudence in the
United States that good faith and fair dealing cannot overrule
the specific terms of any agreement. That has been litigated to
death in the United States, but I think it is now accepted that
good faith and fair dealing will not overrule the specific terms
of an agreement.
On the issue that
franchisors, in exercising their discretion, should treat the
franchisee as if it was their business, that is an open
invitation to unmitigated disaster. I am not suggesting to you
that a franchisor shouldn't do what is good for his business. But
if you understand the franchise relationship, the duty on the
franchisor should be what is good for the franchise network. What
may be good for a franchisee might be a disaster for the network.
It is very important that you understand this distinction.
A franchise agreement is a
one-sided agreement, and there's a reason for that. There are
really three parties to a franchise agreement, not just the
franchisor and franchisee. There's the entire network of
franchisees, and somebody has to protect the integrity of the
franchise system. It's either the franchisor or the franchisees,
and I think even franchisees will tell you that they have to
leave this to the franchisor. But in exercising his discretion,
it should not be to protect a franchisee or to protect himself.
It should be for the protection of the entire franchise
system.
I'd like to spend two
minutes, if I may, on Unidroit.
The
Vice-Chair: That's all you have left anyway.
Mr
Konigsberg: Unidroit was an offshoot of the League of
Nations, which was disbanded with the League of Nations. Then in
the 1940s, by multilateral agreement, a number of countries put
Unidroit back together. About 65 countries in the world are now
members of Unidroit and have agreed to be bound by the terms of
Unidroit. Unidroit stands for the International Institute for
Unification of Private Law. What Unidroit has been charged with
is harmonizing private law around the world. Unidroit, in the
last number of years, has taken an extremely close look at
franchising. About 18 months ago they appointed a four-member
committee to prepare draft legislation on franchising. The
committee met in Rome approximately one year ago and came up with
a draft model law that deals with disclosure only. It does not
deal with relationship issues. This was discussed ad nauseam by
some of the finest practitioners, judges and professors, and
after examining legislation from around the world, they came to
the conclusion that disclosure legislation was something that
would be supported by Unidroit.
The draft model law that
has been put out by Unidroit was substantially based on Bill
33-Bill 33 of the province of Alberta, la loi Doubin in France,
Australia. These countries were carefully analyzed and they have
come up with a draft model law. It is not yet public. In the
model law a decision was made after a great deal of discussion
that good faith and fair dealing would not be dealt with because
that deals with a relationship. If you were going to do a model
disclosure law, it would be advisable not to deal with
relationship issues. Australia has tried to define fair dealing
by being negative, by talking about unconscionable conduct, and
they've gone into a very long definition of what constitutes
unconscionable conduct. Any lawyer could just pick it to
pieces.
I repeat in my last few
words: A lot of misinformation is being brought before this
organization. I heartily support franchise legislation that is
limited to disclosure. If it goes beyond, into relationship
issues, all you will do is damage the franchise industry.
1050
Mr
O'Toole: Mr Chair, on a point of order, if I could, for
the members of the committee: You mentioned a model disclosure
law. If you could file that with the committee that would be very
helpful.
Mr
Konigsberg: I'm sorry?
Mr
O'Toole: You mentioned in your presentations that
Unidroit has developed a draft model disclosure. If you could
leave that with the committee, I would appreciate it.
Mr
Konigsberg: Yes. It has not yet been made public. I will
seek permission.
Mr
O'Toole: Seek approval for that?
Mr
Konigsberg: Yes.
Mr O'Toole: It would be
helpful.
Mr
Konigsberg: Yes, I have a copy actually of the original
one that I worked on myself. That is available, but there have
been many amendments made since then and that has not yet been
finalized. I might add that Canada is a very active member and
once the country approves it-for example, the United Nations
convention on the sale of goods; Canada has approved that-that
becomes a governing law. That takes precedence to any provincial
legislation dealing with sale of goods internationally.
Mr Martin:
On another point of order, Mr Chair, if I might: I just find it
unfortunate that the obviously experienced and learned gentleman
didn't leave a minute or two for some of us to challenge some of
the statements that he's made and ask some questions about some
of the aspersions-
Mr
Konigsberg: Well, I very much appreciate it.
Mr Martin:
-that he cast on some of the presenters who have come before us
over the last few days. They came in good faith, told their
stories, told their truth as they knew it. To be dismissed in
such a curt way this morning is, in my view, very
unfortunate.
The
Vice-Chair: Thanks for your time this morning. I
appreciate that very much.
TONY VANIKIOTIS
The
Vice-Chair: Our next presenter will be from Country
Style Donuts, Mr Tony Vanikiotis. We have 20 minutes for your
presentation, and that includes any questions. So if you wish to
have any questions, and the committee does like to ask a few,
we'd like to have a few minutes there at the end at least after
your presentation.
Mr Tony
Vanikiotis: I sat down and put basically in letter form
my presentation today so that I can touch on as many things as I
can in as short a period of time as possible. Hopefully, there'll
be time for a few questions afterwards. I'll read my letter to
the committee.
Thank you for affording me
the opportunity and privilege of addressing your committee with
regard to my personal experiences as a previously licensed
franchisee in the province of Ontario, and more specifically in
Ottawa. The franchisor in question in my case was Country Style
Donuts-I'll refer to them as CSD from now on-a division of Maple
Leaf Mills.
Prior to expressing an
interest in acquiring this franchise, I had been a nine-year
restaurateur in Ottawa, having owned and operated a l40-seat
licensed LLBO establishment in downtown Ottawa. I had been
looking for a new challenge after a two-year hiatus from the food
service industry and was quickly sold on the idea of a CSD
franchise that was available in Ottawa on Prince of Wales Drive.
It was known to CSD as store number 143.
After several meetings with
CSD management, I was chosen as the successful applicant. I was
led to believe that my application was selected from among a
number of others and that CSD felt I was the right fit for this
store. I later found out that I was the only applicant and that
the store had been on the market for some time since the previous
franchisee had walked out.
The franchise was being
marketed at $225,000 as a resale store, which meant that it was
being operated by CSD head office until it could be sold. We
settled on a purchase price of $140,000 with $50,000 down and the
balance financed, as arranged by CSD through the Bank of Montreal
on my behalf. I passed the bank's financial requirements and
secured a small business loan using my home and my personal
guarantee as collateral. I also had a working capital fund of
$20,000, which was both a bank and a CSD requirement to complete
the transaction.
Of course, there were all
the fancy brochures and financial projections provided me by CSD
based on sales figures that were obviously inflated and profit
margins on sales that later proved to be not only unrealistic but
also definitely unattainable. It was quite the sales pitch and I
fell for it hook, line, and sinker.
Next came the prerequisite
three-week training program at CSD commissary headquarters in
Richmond Hill. There, it was drilled into us about CSD bulk
buying power, and the virtues of CSD-authorized product and
suppliers only in order to ensure the best possible price on the
best possible product, thereby maintaining the integrity of the
CSD chain and quality. I, like many others, bought into the CSD
program almost like buying into a cult following. I was later to
discover first-hand that the only integrity to be maintained was
to be that of lining the CSD coffers at the expense of their
franchisees, a practice which I am sure continues to this
day.
When I got to my store and
took control, profit margins were much lower than previously
presented by CSD, and sales drastically lower than those shown to
me for store 143. In less than three months, I had lost my
$20,000 reserve and found myself scrambling to find new working
capital. My father loaned me $20,000. By this time it was
Christmas, which was a very slow period. By March, I knew I was
in trouble again. The money my father had loaned me was now gone
and I was at a loss as to what to do.
I asked CSD for assistance.
Their solution: Run the store in the morning alone with one
helper-my peak busy time-get rid of my weekend baker and do the
bakes myself. In other words: "Instead of working 80 hours per
week, work 96. In short, drop dead so we can take over the store
and resell it yet again." That is when I looked to save some
money by using my previous connections to local food suppliers
and investigate some pricing on the same authorized product that
was available locally.
These same products were
available in Ottawa for between l5% and 30% less than what CSD
was selling to us through their own out-of-town authorized
suppliers through supposedly bulk buying power. What an
eye-opener. Everything from Sunpac bottled juices to Dough
Delight frozen croissants and bagels, to Chef Francisco frozen
soups, to boxed Sultana raisins and walnuts. I think you get the
picture.
I wrote a letter to Mr Gary
MacDonald, the president of CSD, thinking he might want to know.
Of course, he already
did know and wanted nothing to do with my complaint. From that
point on I was branded. My store was frequently visited by
operations managers who sought to eliminate these items from my
fridges and freezers, at one point even threatening to put
product not bought from CSD into the dumpster outside. It was the
same authorized product bought cheaper from local suppliers.
Simply put, CSD was not milking me any more.
In my 20 months as a CSD
franchisee, we switched authorized suppliers three times and
authorized product too many times to remember. Obviously, CSD got
better deals from new suppliers. Whatever happened to the company
line during training on consistency of product and price?
Eventually, CSD also boxed and labelled their own line of
products, so a claim could now be made that anything non-CSD
labelled was a non-authorized product. We then no longer had the
ability to shop for price with local suppliers. We in fact were
now boxed in as franchisees as to where we could buy legal
products.
But there is more. Country
Style unilaterally decided to eliminate the small size coffee
cups both for take-out and drink-in. That was fine except that we
would now sell the medium for small pricing, large for medium,
and a new extra large for large pricing. It was an effort, they
said, to compete with market forces such as Tim Hortons. Only one
slight problem: Our cost had now gone up by almost 30%, but of
course there was no price break afforded us by CSD head office.
In effect, our one money-maker was now profit reduced by the same
30%, and we were forced to buy new ceramic mugs at over $12 each
for the new in-house large. Our existing stock of both ceramic
and paper cups and lids was now obsolete, and we had little or no
notice other than an in-house memo delivered to us with our order
from CSD warehouse.
By this time I had seen
enough. A legal battle ensued, and I eventually gave over
peaceful possession of store 143 back to CSD. I was tired of
fighting. I was plain tired, period. I had lost my $50,000
original investment, my $20,000 working capital and my father's
$20,000 loan. I almost lost my home and everything I had worked
for all my life. When CSD took over the store, I owed them
$70,000 in back rent, supplies, franchise fees and advertising
percentages on sales. All other creditors were paid. I even
arranged to pay back the Bank of Montreal over time.
In the over nine years I
have been away from CSD, my store is now on its fourth owner. All
previous franchisees after me have come and gone. One I know
personally lost everything. In between franchisees, CSD head
office runs the stores. Do they lose? Certainly not. They are not
in the business to help franchisees succeed; in fact, they want
them to fail. During the short period that owners like myself
last, CSD makes buckets full of money from subleasing to us,
while they hold the head lease with the landlord, from supplies
we do buy from them and from the original cash investment given
them in order to acquire the franchise. But the ultimate reward
to them: They resell the franchise to some other poor,
unsuspecting soul for another $140,000-plus.
They help put you in
business, set you up to fail, and then, when reacquiring the
franchise after you have failed, they palm it off again. This is
where franchisors truly make their money: by reselling franchises
that franchisees have left behind. Nice business practice, isn't
it?
1100
You are forced to buy into
their CSD insurance program-for fire, theft, liability etc-that
benefits no one but head office. A case in point was Mr Kuldeep
Singh, the past franchisee of the Ottawa Russell Road store. His
store had a fire and was gutted inside. It needed to be rebuilt.
Of course CSD did the work, but installed used equipment and
fixtures that had been removed from stores that were being
renovated in other parts of Ontario to the newer, more modern CSD
style. Shortly after Mr Singh reopened for business, he was told
that he now had to renovate to the new style, of course at his
own cost. I'm sure you get the idea of what I am saying. Needless
to say, Mr Singh closed down for good, as did at least one other
area franchisee. These stores remain closed to this day, with no
visible CSD signage. There were no further franchisees to
bilk.
In short, let me recap my
presentation: glitzy brochures, along with unrealistic sales and
profit projections on sales, in order to hook prospective
franchisees; inflated pricing on authorized products supplied
only by authorized suppliers or CSD themselves; reselling of
franchise stores after inevitable failure of previous franchisee;
insurance scams and forced renovations to comply with new CSD
criteria; inflated rents on subleases as CSD holds head lease
with property owners.
My story is not fiction but
fact. I am to this day still paying back my debts in the form of
a second mortgage on my home. I stiffed no one other than CSD,
which stiffed me much worse. For this I feel no remorse. They
ruined my financial health for 10 years. They did not suffer
financially but in fact have made their money many times over
from the same store. If you can help to stop this from happening
to even one more person by way of enacting some form of
legislation controlling franchisors, then my appearance before
you today will have been very gratifying.
Please keep in mind that I
stand to gain nothing from my appearance here today. I hope that
by attending and making my views felt I can do my small part to
stop franchisors like Country Style Donuts from taking advantage
of people like myself for whom there is presently little or no
protection.
In closing, I would like to
thank Mr Ronald Dagenais, my lawyer and personal friend, and Mr
Charles Gibson, who assisted me greatly as my legal counsel
during my battle with CSD, and who I understand played a large
role in the establishment of this committee. They are with
Vincent Gour Gibson and Associates here in Ottawa. Without their
tireless efforts on my behalf, at a fraction of what I should
have paid in legal fees, I would have been bankrupted and CSD would have won without a
battle.
You can help to make a
difference, should you so choose. Thank you for listening. I just
care to add that I am out of the foodservice industry, I do not
have the resources to get back into the foodservice industry and
I am not here as somebody who is planning to get back into the
foodservice industry. I'm here to present my case, let you know
how I feel, what happened to me personally, and hopefully that
will have some effect on the decision you take as a
committee.
The
Vice-Chair: Thank you very much. We have about 10
minutes for questions on this one.
I want to make it clear
that when I introduced you at the beginning I thought you were
representing Country Style Donuts, and actually you're a past
franchisee. I want to make sure that's clear for the record.
Tony, your turn.
Mr Martin:
First of all, I want to thank you for coming and telling your
story because this is exactly what this exercise is about:
hearing the truth, the reality, of what's going on out there and
listening to some of the people who have become victims of, I
would suggest, bad systems. They're not all bad systems, there
are good ones out there, but certainly your story presents a
picture that is quite troubling and presents some challenges to
us here.
It takes quite a bit of
courage to do this. One doesn't just wake up one morning and
decide to come and speak publicly, as you did. The unfortunate
circumstance in many instances is that people have signed
confidentiality clauses when they've gotten out of their
agreements and they've moved on to other things, so they can't
come and tell their stories because legally they feel they're
under threat or exposed.
I have a question for you.
The speaker before suggested that the problem was, if I might put
it crudely, that franchisees are just too stupid and can't read
or don't read the material that they're given before they get
into the agreement, and if they did we wouldn't have the problems
we have. What's your response to that?
Mr
Vanikiotis: I certainly am not a stupid man. I ran a
business for a number of years. I have a college education. I
think I can read. I know I can write. I had legal advice. It's
the way that the franchise opportunity is presented to the
prospective franchisee, at least in my case. When you are
presented sales figures that are a little over 50% of actual
figures, when you move into the store and start operating it's
very difficult. You assume the figures they're giving you are
warranted and that the figures they're giving you are correct.
You assume the profit margins are correct. You assume that
pricing is correct as has been described to you. You assume
you're getting what you paid for and you're going to be getting
what was promised to you.
There are probably a number
of franchisees out there who may not have the capability to
understand the English language as well as I do or as well as
many others. They are probably few and far between. I think most
franchisees are very aware of what's going on around them. I just
think they fall victim to circumstance, like I did. I didn't hear
the previous gentleman's full speech, but I did hear that
particular comment and I can't disagree more.
Mr Martin:
Given your experience and the fact that you had disclosed to you
probably as much material as you could get your hands on and had
explained to you by your legal adviser and accountant, would a
dispute resolution mechanism of some sort, a table that you could
have gone to that would have had a third party, an arbitrator or
a mediator, have been helpful to you in resolving some of these
issues early on that so that you might have been more successful,
or was the franchisor in this instance just so devious that even
that would have been somehow ignored or used to their
advantage?
Mr
Vanikiotis: Let me explain to you that I can only speak
for the Ottawa market. I'm born and raised in Ottawa. I've lived
here all my life. There were four or five, maybe six Country
Style Donuts stores here in Ottawa. Every single Country Style
Donuts operation, every single Country Style Donuts franchisee in
the city of Ottawa has gone through what I've gone through. Every
single Country Style Donuts store in the city of Ottawa, in
Nepean and in the region of Ottawa-Carleton has gone through the
same thing. They have gone through a number of owners. They have
had owners turn their stores back. They have had Country Style
Donuts turn down prospective buyers in order that they themselves
could take over the store and resell it. That's happened to at
least two people I'm aware of.
I don't believe a dispute
resolution process would serve any purpose. I believe the best
thing is the fact that you people are looking at putting in some
type of legislation to make it very clear up front what the
conditions are and what both parties' responsibilities are.
Bottom line: If you would
like to go into business, they will not change one word in that
particular franchise agreement to your benefit. It's take it or
leave it. If you like the business opportunity as is presented to
you, you will take it. That's the trap I fell into and that's the
trap that I believe many others fell into.
Mr Steve Gilchrist
(Scarborough East): Thank you very much, Tony, for
coming in today. It's certainly a very painful story that you've
recounted to us here, and I do appreciate your taking the time
and displaying the courage.
I find it more than passing
strange the complete apathy of the media in dealing with not just
these hearings but this issue. I guess they get their advertising
dollars from Country Style Donuts so perhaps they don't see the
merits in talking about the failures.
Let me explore a little
further. I appreciate your last comment, and I think you were
very candid with Mr Martin. If in fact at the outset you had been
given, for example, a price sheet, a cost sheet of all of the
supplies, something you could have gone to the Price Club,
National Grocers or any of the other food wholesalers in Ottawa
with and been able to compare costs, you would have discovered, presumably even
before you'd signed on the dotted line, the markup that your
supplier had got. If you had received quotes for the mandatory
insurance costs, you'd have been able to call and get competitive
quotes out there. If you'd been given a complete history of the
site and of all other franchisees specifically of that site, the
real history, and if the data that they had told you represented
the honest sales figures were made part of the contract and
therefore would be seen as misrepresentation if in fact they
proved to be untrue, would that have changed your perspective
before you signed on the dotted line? Would you have bought that
franchise knowing those sorts of details?
Mr
Vanikiotis: Knowing what I know today, based on what
I've detailed in my presentation to you, no, I most certainly
would not have.
1110
Mr
Gilchrist: But back then, if you'd been able to go and
very quickly see that, "Wait a minute, by going through their
supply, I'm going to pay 30% more," would you intuitively have
thought, "This is something I should at least try and tack down
during the negotiations to see if I can get it changed"?
Mr
Vanikiotis: Very honestly, I wouldn't even have tried to
tack it down. I would have walked away. It's that simple. As a
businessman and as a person making a business decision based on
an investment that I was making, I simply would have walked
away.
Mr
Gilchrist: So in a nutshell, if all the material details
about running that business-not just the glitzy brochure-if all
of the meat and potatoes had been available for you, it's your
considered opinion that you would not have suffered that loss and
you would not have bought that-
Mr
Vanikiotis: It's not even an opinion. I would have
walked away. It's that simple.
Mr
Gilchrist: I absolutely am committed, and I can assure
you for all three parties, that our goal in this is to build a
bill that has that sort of protection in there. How anybody could
disagree with disclosure-just an honest, upfront presentation of
the facts-is beyond me. So I really think your time has been well
spent in coming here today, and I appreciate those comments.
Mr
Vanikiotis: There's one thing you have to consider in
disclosure. Disclosure is all fine and dandy, and yes, it will
definitely help because some people like myself will probably
walk away. The problem with disclosure and with anything else is
that when you as an individual need to get into a battle at some
point in time with a company like Country Style Donuts or Maple
Leaf Mills or whoever the franchisor may be, you will lose. You
cannot afford to fight companies like that as a franchisee. They
know that all of their franchisees, myself included, have limited
financial capabilities. They do not have limited financial
capabilities. They have lawyers on staff; they have people on
call. They don't have any problem taking you to the wall and they
will take you to the wall, and they will either make you walk
away or they will break you financially for the rest of your
life. It's that simple.
Mr
Gilchrist: Scary prospect. Thank you.
The
Vice-Chair: One final question. Mr Patten.
Mr Patten:
Thank you very much for coming here today. It sounds to me like
the legal framework provided the franchisor with the ability to
make ongoing decisions that were a disadvantage to you. Did you
consult with a lawyer-obviously, I guess you did, when you signed
on the dotted line. But what information were you able to get
about the company, the franchisor?
Mr
Vanikiotis: We got their full franchise package. There
were a couple of things that my lawyer cautioned against. Country
Style wouldn't change a word in the franchise agreement. It was
that simple. Looking at the franchise agreement and looking at
the opportunity there based on the figures and things I had been
made aware of-profit margins, that type of thing-with the
potential that I thought was possible for that particular store,
I didn't see a problem.
Mr Patten:
It sounds to me like you had a case, a legal case, but you had
run out of the resources in order to carry it out and go to
court.
Mr
Vanikiotis: There's no doubt about it. Mr Dagenais has
been my personal lawyer and friend since 1980, when I got into
the restaurant business. He has done many deals for me from a
business standpoint. He made himself available to me at three
different phone numbers, and this is a gentleman who has been in
the legal profession for 30-plus years in the city of Ottawa. He
made himself available to me basically 24 hours a day and put me
on to Mr Gibson. Without their help, and without their help at
very minimal costs, I wouldn't have been able to even walk away.
I'm certain I would have lost my home and everything else; I
guarantee it.
Mr Patten:
My last question, just quickly. It seems to me that it might have
been helpful if you had had some kind of registry that gave a
profile, like you call the Better Business Bureau. People do
credit checks on you. Why should that not also be available for
companies in terms of their reputation or in terms of particular
sites if it's not a new operation?
Mr
Vanikiotis: I also think possibly a list of past
franchisees for the particular area locations in this region, for
example, so that if there is nothing to hide and they are
marketing something that's a legitimate business that people can
make a legitimate living from, then why cannot we, as prospective
franchisees, contact previous franchisees to find out what
happened? Did they leave? Were they forced out? Did they sell?
What happened?
The
Vice-Chair: Thank you so much for your time this
morning, Tony. It was a pleasure to have you here.
MARK CONNOLLY
The
Vice-Chair: Our next witness will be Mr Mark Connolly.
You have 20 minutes, Mr Connolly, including questions. The floor
is yours.
Mr Mark
Connolly: I most certainly won't take 20 minutes. I have
to get back to work. We're in the process of training somebody
new.
I am Mark Connolly. I am a two-franchise store
owner for Mail Boxes Etc here in the Ottawa area. We just took
over our second store on January 13. I have to say that when I
started in Mail Boxes Etc-it was five years ago-they had just
opened up in Quebec. I'm originally from Montreal. I walked into
one of their stores and I was blown away by the service I got and
the whole atmosphere.
When I started
investigating the franchise of Mail Boxes Etc, it carried on. I
was blown away by the way I was treated. I was very impressed
with the amount of information I was forwarded about the decision
that I wanted to get into of buying a Mail Boxes Etc store. I
made that decision five years ago this week. I had a store open
within three months and the rest is history. I've bought my
second store. I think franchising is great. I think full
disclosure is a necessity. I had everything disclosed to me.
Hearing the last gentleman,
I can believe the horror stories that are out there. I have heard
some horror stories. In our own system we have a few horror
stories as well. I would like to attribute these not to the
franchisor but to the individual franchisee. Franchising is not
for everybody. Owning a store is not for everybody. If you're not
a people person, you won't succeed. That's not to take away from
the previous gentleman.
That's about it. I think
full disclosure is a necessity and I think that Bill 33 is an
excellent bill.
The
Vice-Chair: Questions first of all from the PC
caucus.
Mr Raminder Gill
(Bramalea-Gore-Malton-Springdale): Mark, thank you for
coming here. I just want to find out: In this original experience
you had five years ago, was there anything negative in the
disclosure documents they gave you-marketing documents, whatever
you want to call them? Was there anything you might have been
alarmed about but you said it's OK, you still wanted to make that
decision, or was it all glorified and you still-
Mr
Connolly: It was certainly all glorified. The presenter
we had at the initial franchising seminar that I went to-the
fellow's name was Ron Weston, a very dynamic speaker, a
tremendous man-cut to the chase, saying: "This is what our
franchise is about. If you're interested, pursue it. If serving
the public and serving business people is not for you, leave the
room now. Don't get involved."
In the secondary material
that was given to us after we had initially said, "Yes, we are
interested in Mail Boxes Etc," there was a pro forma statement
given to us with regard to sales per year. That was all open. I
have to admit that my own store went above and beyond those
figures.
I've been in retail ever
since I graduated from university. I am a people person. I'll be
handing out my business cards afterwards, so you're all welcome
to come to visit me.
Yes, it was glorified, of
course. It has to be glorified, I think, to sell franchises.
Mr Gill:
You said that in your system some people have failed.
Mr
Connolly: Yes.
Mr Gill:
In your original presentation, did they mention that?
Mr
Connolly: Yes, they did. They mentioned I believe a 2%
failure rate, either 2% or 5%. It goes back five years ago. Since
then, we've more than doubled the number of stores we have in
Canada. Mail Boxes Etc is a worldwide chain, and I'd like to
believe a very reputable worldwide chain. That's my stand.
The
Vice-Chair: Madame Boyer.
Mrs Claudette Boyer
(Ottawa-Vanier): Thank you for your presentation. You
knew what you were coming to say. I guess you were coming to tell
us that you are in favour of Bill 33.
Mr
Connolly: Yes, most certainly.
Mrs Boyer:
But you think that disclosure is a very important issue in this
bill. If you've read or heard about Bill 33, is there any other
fact that you would like to bring in? Do you think that it goes
far enough? Do you think it should be stronger in the statements
that we make in the bill?
Mr
Connolly: With regard to being able to network among
franchise owners, associating with franchise owners, we've always
had that. In our franchise agreement we must belong to an
advertising association of our peers. So on a monthly basis we're
getting together, discussing not only advertising but our sales,
the good things about the franchise, the bad things about the
franchise, how we can collectively get together to improve the
franchise. We've always had that, so I don't know the other side
of the coin. I've always had it, and that's why I feel that any
franchise that is not offering that, it's as though they're not
only holding back information; they're holding back their
franchisees from being successful. You've got to have a peer
group, and to hold somebody back from joining a peer group,
there's something wrong with that. So yes, we should be able to
associate with our peers.
1120
Mrs Boyer:
I understand the point. What you're doing is good. But do you
find that Bill 33, the legislation that will be coming up, and
that's why we're doing these hearings, is going far enough as far
as protection both for the franchisee and the franchisor?
Mr
Connolly: Can you define "far enough"?
Mrs Boyer:
Have you read Bill 33?
Mr
Connolly: No, I haven't read it. I was just told about
the hearings.
Mrs Boyer:
So you were just coming here to say that disclosure was very
important.
Mr
Connolly: Most certainly.
Mrs Boyer:
And then, yes, protection is important.
Mr
Connolly: It should be paramount.
Mrs Boyer:
You're in favour of saying that the protection should be both for
franchisees and franchisors, for both parties?
Mr Connolly: For both parties,
yes. I think if there's full disclosure, it would protect both.
My situation has been a very positive situation with my
franchisor, so I don't know what some of the other stories are. I
don't see how a franchisor could be damaged by a franchisee,
however, short of them selling off their stores.
Mrs Boyer:
Thank you.
The
Vice-Chair: Mr Martin.
Mr Martin:
I must say up front that I'm happy for you, that your story has
been successful and hopefully will continue to be.
Mr
Connolly: Let's hope, store number two. We hope to get
store number three eventually.
Mr Martin:
That hasn't been the case for a whole lot of people, including
the presenter before you. The Canadian Alliance of Franchise
Operators and myself have documented two tomes of stories that
have appeared in the press over the last seven years in Ontario
alone, 4,600 families who have been damaged by a franchise
relationship.
In fact, one that I'll
point to involves Mail Box Etc, if any of you brought your stuff
with you. I know it's heavy to carry around. But it's tab B-31,
and it's the story of a Peter Thomas, who actually sat in on the
hearings in Toronto on Monday. He didn't get on the list because
the list was too long. He lost his business. He claims it was
primarily because he was sold a location that had no parking for
him and it turned out to be a failure because of that. He wasn't
told that before he got into the business. That little piece of
information would have made all the difference for him. He lost
$170,000 and now he's struggling with cancer, he's on
chemotherapy, and some of that is driven by the stress of this
whole circumstance. He's been threatened. He was threatened
particularly when he went to the press with his story, over the
phone. His life was threatened, and it's just not a pretty
picture.
If your company should get
sold, and that's happening every day now-we just heard the other
day that 241 Pizza bought out Robin's Donuts, and I suggested a
scenario to the Tim Hortons gentleman when he was before us in
the Soo yesterday. If Pizza Pizza, for example, which has this
terrible reputation, continues to have a franchisor who was
criminally convicted in Florida and is now continuing to operate
in Ontario, bought out Mail Boxes Etc, is there anything in your
contract to protect you? And is there anything in legislation
that you think we should be doing, in an instance such as that,
to make sure your investment was protected?
Mr
Connolly: I would certainly hope there is some
legislation to protect me. In my own franchise agreement, which
is signed with Mail Boxes Etc Canada, I would have to reread my
franchise agreement to see if I am protected. It was five years
ago that I read that. That's a horrific thought, if somebody came
in and bought us out. Presumably we would still maintain our same
name-
Mr Martin:
I would hope so.
Mr
Connolly: -and carry on the same business. My philosophy
has always been that I am my own boss. I drive my store; I
promote my store; I do everything to get the customer into my
store. I have the backing of Mail Boxes Etc, with the name and
with their nationwide marketing as well. If somebody came in and
bought the name Mail Boxes Etc and started dictating certain
rules and regulations, I am hopeful that my original franchise
agreement would save me, because that is the agreement I
signed.
Mr Martin:
Check it out, because in my own town we had a couple of grocers
who were model corporate citizens, Loeb. You had them here in the
Ottawa area too, and you probably remember the story. It was in
the mid-1990s. Provigo bought out Loeb and they lost their stores
overnight. They literally slept in their stores for about two
weeks while they negotiated an agreement that at least gave them
some return on the investment, the work and effort and goodwill
they had built up over a number of years.
But I'd go back and read my
agreement if I were you, and get some advice on it, because
that's the day in which we live. We're here today considering
some legislation that might protect people like you who are
hard-working, dedicated and committed, and just want to be
successful business people. Thank you very much.
Mr
Connolly: Let's hope all the legislation gets put into
place so we can sleep at night.
The
Vice-Chair: Mr Connolly, we really appreciate your time
this morning. Sorry to have kept you waiting; we were a little
bit behind schedule.
Mr
Connolly: That's fine. I've got another two minutes of
parking left.
The
Vice-Chair: Thank you for your participation.
KELLY WELCH
The
Vice-Chair: I now call on Mr Kelly Welch for our final
presentation of the morning. Mr Welch, the floor is yours for the
next 20 minutes if you wish.
Mr Kelly
Welch: Mr Chair, honourable members, ladies and
gentlemen, my name is Kelly Welch. I and my wife operate a small
IGA in Marmora, Ontario. Marmora is a small town of about 1,600
people situated north of Belleville and east of Peterborough on
Highway 7. My family has operated this business for 29 years. I'm
a second-generation grocer. We are one of the three largest
employers in our town. We employ about 40 people. Our business
does about $5.5 million a year in sales.
We are currently dealing
with Sobeys. Previously we dealt with the Oshawa Group. I don't
know how familiar you are with what's going on there, but
currently we are renegotiating our franchise agreement, which we
signed back in 1980. The gentleman who was before me, who said
that he wasn't sure what would happen if he got into that
situation, would have his eyes opened very wide if he went
through that process now. I'm one of 30 stores out of 140 that
have refused to sign the agreement. I feel very strongly that the
agreement that has been proposed to us is slanted very heavily in
their favour.
As a family business, we're very active in our
community. We spend a lot of money and resources supporting our
community. If there's a hockey team or a ball team or any kind of
sport, we're there supporting it with money. Personally, I coach
hockey. My wife is involved on the library board, committees of
council, volunteer firemen. We feel very strongly that without
this commitment to our community, our business will not grow and
it won't be successful.
Over the past number of
years, starting probably around 1990, we started to notice a
change in the way our franchisor dealt with us. It was very
subtle, but it was definitely a change. Our ability to support
our business and our community started to deteriorate. The reason
was that our franchisor was starting to take advantage of their
very powerful position within our marketplace. At that time there
were actually three wholesalers or franchisors that we could deal
with. There was National, Oshawa Foods, at that time, and
Lumsden. Currently there are only two. If we don't like what's
going on at Sobeys, as an independent grocer I have absolutely
nowhere else to go. They are very aware of that.
In this month's Canadian
Grocer there is an article on the franchise agreement and it says
that the problem is almost over, there are only 30 stores left,
and Doug Stewart, president of the Empire corporation, states
that if you don't want to buy through Sobeys, you shouldn't be in
IGA. Well, if I had an option, I'd certainly be considering it.
But right now, as an independent grocer in our market, Sobeys and
National are controlling a huge portion of the market and aren't
really interested in dealing with independent grocers.
1130
Our relationship with our
franchisor has deteriorated because they have not honoured their
obligations under our current franchise agreement, the old one
we're staying with. In addition, currently they're attempting to
increase their power over us with new agreements that do not
reflect the nature of our ongoing business and ignore some of the
basic business etiquette that requires them to deal with us
fairly as a business partner.
I'm really pleased, and
actually excited, about this legislation that's coming forth. It
couldn't be more timely. I've read the bill. I'm a member of the
Canadian Independent Grocers Alliance, Sobeys stores that have
grouped together. We have talked about this legislation with our
lawyers and what's in it today will really help soften some of
the imbalances that exist today in our marketplace.
This legislation allows
franchisees to associate with each other and exchange
information. It's really funny: around 1991 a group of four IGA
dealers attempted to form an association. Within two to three
years, none of them was in the business any more. So although
maybe no store was ever prosecuted or put under the gun, it was
handled very subtly and very quickly.
The legislation also
requires franchisors to produce information and pro formas that
have some meaning and substance. It's a wonderful thing. It's
hard to make a decision with information that isn't accurate and
substantial, and I really applaud the efforts and I'm quite
excited about it.
One thing that I am
concerned about is the fair dealings, as some of the speakers
I've heard this morning have brought forth. I'm not a lawyer, but
through my view of things the current bill doesn't define the
term "fair dealings." There's no definition given with regard to
its meaning or its intent. Accordingly, there are no consequences
stated for those who overstep those bounds or don't honour their
obligation. I'm concerned that this statement, without proper
definitions or consequences, will have no legal meaning and will
not really help deal with the day-to-day problems that you run
into that are interpreted within the franchise agreement. I'd
like to give you quickly a few examples of some of the things
we've run into over the years.
Fidelity programs: Fidelity
programs require us to buy a certain percentage of our purchases
from the franchise or warehouse, or we will be penalized.
Currently, my old agreement requires us to purchase 100% of our
products through the house. The proposed new agreement offered to
us by Sobeys increases our costs on a sliding scale, depending on
what your fidelity is, ranging from about 80% or 85% up to 95%.
This is beneficial to the franchisor simply because they can
force manufacturers and producers to pay listing fees and other
inside monies. It forces everything through the house and gives
us very little control outside the house. If you would like some
information on that, the standing committee on industry-I think
it's Dan McTeague-has produced a report and there are some real
insights in that paper on the operations of our business, on
inside monies.
This type of system for me,
though, a small-town grocer, ignores the obvious benefits of
dealing locally. We have a local small dairy and there are people
in our community who work at it. I can't support that dairy
because I'd get put into a situation where I'm disadvantaged
price-wise. The same with eggs. We have a local producer of eggs.
There're nothing more I'd like to do than deal with them and we
can't. Fidelity programs put my business at a competitive
disadvantage if I support my community. It goes as far as
equipment-to everything. It covers everything in our
agreement.
Disclosure and pricing: A
portion of our business comes from what we call direct shipments.
Typical products that come direct would be milk, pop and chips,
probably the three largest. Sobeys or wholesalers, whatever,
restrict manufacturers from dealing directly with us on pricing
of these products. We actually order through the manufacturer or
producer and they deliver it to us. Our franchisor never touches
the product. My cost on a bag of milk is $3.48. Rumours on the
street and from talking to my associates-and nobody will ever
come forward because of fear of repercussions-are that the Sobeys
cost of that same bag of milk which they never touch is somewhere
around $3.10. That means that if I'm competing against a
corporate store, a YIG or a No Frills, they're making money
inside the house. I can't; my cost is that much higher.
Other issues are volume rebates and co-op money.
My current franchise agreement requires my franchisor to pass on
all volume rebates and co-op monies in the form of reduced
product costs. Over time, it's amazing the change in the
definitions of what volume rebates and co-op monies are. We've
got published co-op. There's just a whole array and what we were
getting previously has been slowly chipped away at. The problem
with this is that there's no way for me to audit their books to
see if the monies that are owed to me are coming. There's no
disclosure, yet they can come in and audit my books completely to
make sure I'm being true to the program or keeping my fidelity
rate current, which to me just doesn't seem fair.
Subsidies: Stores in
similar competitive markets are being subsidized at different
rates. We have situations where the profits from our programs are
used to subsidize some stores but not others. If a traditional
dealer, like we are, one that owns your property, business etc,
suffers a loss, we suffer a loss. If I lose $100,000, it comes
out of our pocket, out of our business. There are situations
where non-traditional dealers or the new franchise dealers who
make an investment into the business, as we say-and this may be a
little terse, but they buy themselves a job-if they run at a
loss, it's washed out. It just comes back to zero and we start
over again. So it makes it very difficult for us to compete and
to keep our money or to compete with other dealers and other
franchise sort of dealers.
Those are some of the
things that we've run into, conflicts that come up over and over
again. That's why I think Bill 33 should make some sort of
definition of what is meant by fair dealings, that the disclosure
clause should include products and prices and all that kind of
thing. It's good for us. It's fair. It's what the franchisors say
they're doing anyway, and it would help me in my situation keep
more money locally, where it should be spent anyway, because
these are my customers, and keep it out of that large corporate
bank account.
Thank you very much for
letting me have my say. If there are any questions, I'll try to
answer them.
The
Vice-Chair: Thank you very much. Probably we'll have
questions for sure. The Liberal caucus.
Mr Patten:
Could you elaborate on the four stores that slowly went out of
business? What really went on, in your view?
Mr Welch:
This was when we were with Oshawa Foods. Again, a lot of this is
speculation, but it's very interesting. At that time we were not
fighting but there were many, many questions about these direct
shipments, this inside money that was supposed to be being passed
on in the form of volume rebates and that sort of thing. Four
stores got together and decided we wanted to form a dealers'
association, in which we were all to put in I believe it was $500
and have an association that would deal with some of these issues
that were over and above. A lot of different personalities in the
stores, blah, blah, and it had a little trouble getting going,
but it did start. But over time, about a two- to two-and-a-half
year period, these four dealers disappeared. I believe at that
time a new president came in and spoke some truth and it kind of
settled back down.
What I'm trying to speak to
here is the thing of being able to associate. Although they say
they allow it, sometimes, in my mind at least, it gets handled in
a very subtle way, and it's nice to have this legislation that
gives us that right.
1140
Mr Patten:
I thought your comment on not being able to support your own
community was a very powerful statement.
Mr Welch:
We feel, as family and a business, really strongly about that. We
go to extra lengths. Our business will only grow with our
community. Also, just on the other side, I live in that
community, my children grow up in that community, and we need to
be there. It's hard, if the monies aren't available for us to
invest. If I want to renovate my store or whatever, we use all
local, and that type of thing, and that's what that's about.
The
Vice-Chair: Tony, from the NDP caucus.
Mr Martin:
Thanks for coming. We've all heard stories in the grocery
industry. Many of us remember the Loeb situation of the mid-1990s
where Provigo came in and between 20 and 30 franchisees-these
small business people in my community, just first-class corporate
citizens-were gone. We're not going to hear from them because
they signed confidentiality clauses, so we don't know the story.
So it's good that you're here today telling us your story.
Yesterday, we had in Sault
Ste Marie about six local producers, mostly agricultural, such as
dairy and beef, and they talked to us about the challenges that
they're facing. It's killing our local economy.
Mr Welch:
It's certainly hampering the small independent business person,
that's for sure. No question.
Mr Martin:
I hear you asking here for something in the legislation that
defines and gives you some protection as far as the ongoing
relationship is concerned. We've heard that over and over again,
particularly where we've heard individual stories, that there
needs to be something in the legislation that speaks to the
ongoing relationship and regulating that so it's fair. At least
you'd have, if nothing else, a table you could go to, some kind
of an arbitration process where it doesn't cost you an arm and a
leg for lawyers and doesn't get you into the courts, because
that's not where you want to be and you want to work this
out.
I sense some resistance to
that. I would ask the members of the governments to think about
it and consider it, with all due respect. Maybe you could
comment?
Mr Welch:
My only concern with an arbitrator and mediation is typically
what happens-and understand, I don't know a lot about this, but
when I perceive it-the arbitrators and the mediators are probably
dealing with the large franchisor on a more regular basis than
they would be with us. It's very hard for a small-town grocer
like myself or like anybody to come and make a presentation in
front of an arbitrator who probably has dealt with a lawyer from that company on three
or four occasions, and you really have trouble trusting that.
Maybe that's not a reality. I don't know.
You asked me-there seems to
be a bit of hesitation. When they start talking about mediation
and arbitration and whoever the chair happens to be or the
arbitrator, I would want to make they were a third person who
really had no relationship. That would be my personal
concern.
Mr Martin:
That's what I'm suggesting, a third party. Thank you very
much.
The
Vice-Chair: Steve, any questions?
Mr
Gilchrist: Thank you for coming in. I hope it's not a
conflict of interest that I've actually shopped in your
store.
I do appreciate the local
perspective you bring to this. Coming from a Canadian Tire
background, I share some of your perspective on how things
evolved over time because, as good as that franchise was and is,
there was certainly a change in the decades that I was there
between completely trusting-everything done with a handshake-to
something far more disciplined. Maybe that's necessary with the
onslaught of American retailers and what have you, but I think
something has been lost in the relationship.
With the greatest respect
to Tony, I'm a firm believer in giving people all the tools up
front before they make a decision, truly believing that that
would resolve an awful lot of the problems. You talked about
pricing. You talked about access. If all of those details were
known to a prospective IGA dealer today, do you think that would
solve a lot of the problems, of the kind that are reported in the
press, and the kind from that gentleman you may have heard
earlier this morning from Country Style Donuts, if you know you
have a limited range and if you know the volume rebates are going
somewhere else?
Mr Welch:
Yes. Any information helps. It also has to be not just at the
beginning. In our situation, it's an ongoing thing. If a new
merchandising program is introduced-an example we had was signage
a few years ago; they wanted us to re-sign our stores and it was
a very expensive package, ranging anywhere from $10,000 to
$30,000. A year and a half, two years later, "Oh, we've changed
packages."
We had the same with our
computing system: "This is going to be our platform for the
future." I invested in that. Just in hardware, it was over
$20,000. I didn't have to change my tills. We actually tested it
at our stores. At the time, I wasn't thinking; it was supposed to
come already tested and working. I probably spent, with man-hours
etc, double that. It never came through on what was promised, and
we've got a different system now. Those kinds of things are hard
to handle. I think at the time they actually believed they were
doing what was in the best interest, but you get a change of
regime, and all of a sudden everything changes, and we bear the
expense of that.
Sobeys and Oshawa Foods
have been very good to us in the past. Don't misunderstand me.
We've been very successful. My fear is what's coming and what's
happening now. Most of the changes occurred for us around the end
of Ray Wolfe's era. He was sort of the beginning of it. That's
when you started to get into presidents who weren't family. Now
we're into a corporation-style environment and we have no
protection from that.
Mr
Gilchrist: What sort of volume would it take to justify
setting up a third wholesaler again, if those 30 of you who have
said no-
Mr Welch:
To hit critical mass, you would probably need around $1 billion
sales.
Mr
Gilchrist: Outside of your 30, looking at all the others
that are similarly constrained right now-I'm just curious to know
why the marketplace hasn't sorted that out, or even within
subcategories.
Mr Welch:
The problem is that you have two wholesalers, actually vertically
integrated retailers-they're not even wholesalers; there are no
wholesalers any more-who control such a huge percentage of our
market that even if somebody else came in, and I don't know who
that would be, but they'd have to have a ton of capital behind
them; they would probably get purchased if they were allowed to,
and then to amass that many stores. Although there are 30 stores
that haven't signed, there are probably only eight that could
give their 30 days' notice and move. We can do that. My biggest
fear is that they're going to give me my 30 days' notice. I have
nowhere to go. That's why a number of these are probably done in
quiet. I can't do that. I have to sign my name to newspaper
articles.
Mr
Gilchrist: Thanks again, Kelly. I appreciate it.
The
Vice-Chair: Thank you very much, Kelly, for your
presentation. It's a pleasure to have you here this morning. I'd
like to thank the committee for the good work this morning. We'll
adjourn now.
Mr Martin:
I might suggest this just for some thought for Mr Gilchrist, Mr
Gill and all of us. More and more the issue of competition comes
in here; right now we've just heard of two big grocery giants who
control. This might be worth considering, and I don't know how
you do this. This is the first time we've gone to public hearings
after first reading of a bill, and I don't know whether this fits
or not, but we might want to, at some point, make application to
appear before the federal Competition Bureau to ask them
questions or to lay on the table some of what we've heard. I
would suggest that we think about that and find a way to see if
that isn't something that would be helpful to us all in this,
because the two things are sort of integrated, it seems, or have
some connection.
The
Vice-Chair: We can't let the gas-busters look after that
for us, can't we?
Mr
Gilchrist: Tony has raised an interesting point there.
There wouldn't be one consumer in 100,000 who knows that the
evolution of the grocery business out there, the concern that's
out there right now, because the media has decided it's finally
fashionable to talk about it. So all of a sudden it becomes an
issue. But we still have four major gasoline refiners and
distributors.
If we're down to two food
distributors, something that is indispensable-I mean, you don't
have to have a car and
buy gas, but you do have to eat-why has there been no federal
inquiry on that? Why did the Competition Bureau allow that
restraint of trade to take place-all very quietly, to be sure?
But when Lumsden disappeared, that was the last of the
independent, non-vertically integrated wholesales that was
gobbled up.
Tony, at the end of all of
this, depending on the conclusions we come to, one of the things
this committee might very well be advised to do is to make either
a formal representation or to seek standing before that committee
and compel them to answer some of the questions we come up with.
I appreciate your raising it.
The
Vice-Chair: Thanks, committee. We'll adjourn, and we're
back here at 1:30.
The committee recessed
from 1151 to 1334.
CANADIAN FRANCHISE ASSOCIATION
The
Vice-Chair: Ladies and gentlemen, we'll call the meeting
back to order.
Richard Cunningham from the
Canadian Franchise Association.
Mr Richard
Cunningham: Good afternoon, everybody. As you heard, my
name is Richard Cunningham-no Happy Days jokes, please. I'm the
president and CEO of the Canadian Franchise Association. I have
held this position for seven and a half years. I was also one of
the four founding members of the World Franchise Council, and
served as its first chairman. The WFC is an international body,
currently with over 30 country associations working together to
assist the franchise community and promote franchising on a
global basis.
I have also been a member
of the Franchise Sector Working Team since its inception. For the
record, I have not been a franchisee or a franchisor, but I have
owned and operated my own small business, which required
investing my life savings. So I am familiar with many of the
problems, stresses, daily issues and hurdles that a small
business owner faces every day.
I also think I bring a
unique view to this table. Unlike most presenters you have heard
from, who represent one particular group or interest, my position
and exposure to the public brings me calls and meetings with
happy franchisees, franchisees who are upset and have locked
themselves in their stores, excellent franchisors and those I
have to call and tell that I have declined their membership. I am
pleased to be here today to offer our association's and my
personal views and experience on Bill 33 and to answer any
questions you might have.
Let me begin by
congratulating the government on the introduction of this
legislation. As you have heard repeatedly, this is a huge step
forward for franchising in this province. The effects it will
have go beyond Ontario. Most franchise businesses operate
interprovincially. I want to commend you and my fellow members of
the Franchise Sector Working Team for the years of work that have
been done to date and the efforts that have been made to address
the concerns of franchisors, franchisees and, of course, those
who are considering a franchise opportunity.
I'd like to begin by giving
the committee a background of the CFA and the interesting role we
play as a trade association. The CFA was founded in 1967 and is
the national trade association for franchisors and the suppliers
and professionals who are involved in this industry. We are the
second-largest association of this kind in the world, and
although our members consist of most of the larger systems in
Canada, most importantly we count many new and emerging franchise
companies in our numbers as well. We encourage these newer
players to join so that they can learn, network and meet with
other icons in the industry to achieve excellence in
franchising.
The CFA's role is unlike
that of most trade associations. Membership in the CFA is not
automatic. We put all new members through a review process,
similar to the process that we suggest a new franchisee perform.
Memberships are scrutinized by lawyers, bankers, consultants and
franchise peers for eligibility. We provide a 1-800 number
service, accessible from anywhere in North America, to answer
questions and provide information about franchising. We have a
Web site, where those doing research can find the names of
lawyers, bank contacts, seminars and CFA trade shows across
Canada, as well as suggested questions for franchisees to use
when they are checking out a new system. We own and offer two
trade shows in Canada, and those shows are limited to franchisors
only. No business opportunities, vendors, etc are allowed to
participate, and we do not allow closing rooms on site, which
means that we discourage franchisors from trying to take deposits
or take franchisees any closer than an introductory meeting at
our shows.
These shows also have
seminars presented by the pros in the industry on how to buy a
franchise, including presentations, most importantly, from
franchisees who have gone through the process and can talk
first-hand on what they did and how they did it before they made
their decision. Almost all of our print material at the CFA has
been developed to assist potential franchisees. We have
information kits, directories which we produce nationally, and a
list of businesses and stories, again written by professionals,
all in the name of giving good advice.
Our television show, which
airs nationally and has been on the air for seven months, has
segments talking about the process of starting a small business
and the steps people should take before they buy a franchise.
We are the only association
in Canada that offers seminars in five cities in five different
areas of the country on the process of investigating a
process-again, three-hour seminars, three speakers, lawyers,
bankers and again a franchisee. We make them very accessible and
keep the cost down. They virtually run at a break-even for us or
a small loss.
1340
My office and I personally
answer hundreds of calls a week with the aim of trying to assist
the public. Although we can't tell them what to do, we can direct
them to many resources
that will help them make the right decision.
You have heard from
previous presenters that many individuals are excited and make
decisions from their hearts instead of their heads. I see this
every day. For many, the word "franchise" has become a symbol of
large, long-standing companies that seldom have failures. But the
reality is that there is risk, there is failure and the buyer
needs to be aware of that.
I have been asked over the
last couple of days why we are primarily a franchisor
organization and why, as such, we would spend so much time and
effort working with potential franchisees. The answer is simple.
As in industry, one bad player can harm the reputation of the
entire industry. The more we can do to police this industry and
assist buyers in making the right decision, the better it will
prove to be for everybody. But we do have to understand that we
are a trade association and, without any legislative authority,
we only have moral suasion. Anybody who participates in our
events is doing that strictly on a voluntary basis.
We have all heard the
horror stories: the failures, the unfair practices and the losses
suffered by some franchisees. But one thing I have learned in my
seven years with this industry and in getting into the middle of
a lot of these disputes is that there are two sides to every
story.
I would also like to set
the record straight about numbers thrown around this table and
provided to media. No one, including myself, can substantiate any
of the claims about franchising success or failure rates.
Statements made by the CFA about success rates are based on
information provided primarily by the banks. As you've heard, the
banks are very involved in franchise business and their
statements to me are that franchise loans to franchisees are
better performing loans than to independent businesses. It might
be prudent for the committee to consider asking a franchise
specialist from one of the major banks to comment further on this
area.
The study of franchises, by
its nature, is difficult because of the cross-section of sectors.
In fact, franchising crosses 42 sectors of the economy. The stats
you heard earlier in the week from the US, under more careful
examination and review by an economist, were taken on one
industry sector and from the smallest franchisees in that sector.
Obviously the success rate for a new system may not be as good as
that of an older system, and that brings another twist to the
complication.
Let's face it: If the
franchisor-franchisee relationship is marred by excessive fees,
inadequate services and poor support from franchisors, then it is
extremely difficult to explain why, both in the US and Canada,
franchising has continued to expand much more rapidly than the
economy over the past 25 years.
During the 1980s, a
proliferation of franchises were being sold and bought. A lot of
people were downsized, had money in their hands and were out
looking for something to do with it. Franchisees and franchisors
had more locations available to them and were busy selling and
buying without really checking each other out. The CFA did not
have the presence in the public that it has now. We didn't have
the trade shows, the television show and the Web site. Trade
shows were run by privately run companies and had biz ops,
vending machines and a number of other businesses involved at the
same time as trade shows, but the quality wasn't being
watched.
A lot of the problems with
the franchisees that you have heard over the last couple of days,
including the Pizza Pizzas of the world, are a product of that
time frame. You've heard from Mr Javor and others that
franchisees are far more careful today than they were back in
those days, in the 1980s. They do their homework. Our checks and
questions of franchisees have found that they take an average of
six to nine months before they make a decision and actually sign
on the bottom line. Also, because they don't have these packages
and the money and aren't being downsized at the rate they were in
the 1980s, they are giving up a job rather than having left a
job, and that makes the whole process a very different one from
their perspective.
Franchisors are also more
careful. Franchisors are now using systems to evaluate if the
profile of the potential franchisee meets with the successful
franchisee and their system, and they're providing more
information.
Following the introduction
of this legislation, all CFA members were sent a copy of this
bill, asked for their feedback and encouraged to take part in
these public hearings. Our position on these issues has really
not changed since August 1998, when the government introduced the
draft legislation.
This submission combines
the consensus of opinion from our members, the positions we have
historically taken on key issues and the need, in our view, to
provide consistency in Ontario with the existing legislation in
Alberta.
Let me briefly state our
position on Bill 33. First, disclosure legislation is the right
thing for the public and the industry. Our association initiated
disclosure rules four years ago on a voluntary basis and two
years ago on a mandatory basis, and it has proven to help both
franchisors and franchisees.
Second, no legislation is a
substitute for "Buyer beware." Giving new franchisees information
will only help them if they use the information provided to them
by this bill. A level playing field that offers franchisees
certain protections without driving up the price of entering the
business through expensive and excessive over-regulation offers
the best balance.
Third, we feel that
statistics must be gathered in the bill before considering
anything beyond what the Franchise Sector Working Team has
proposed. As many of you know, this area is very important to us,
and something we've been trying to work with ministry officials
to implement. As an organization, we feel that we have the
resources and expertise to perform this function and will
continue to push for this important mechanism.
Fourth, the ministerial
exemption process that is in place needs to be easy and simple,
and must be available to mature franchisors prior to the bill
taking effect.
Finally, we understand that it's necessary, in
order to shorten the length of a bill, that a number of the
elements dealing with the legislation be left to regulation. It's
always difficult to assess the real value of a bill when
important components will be defined later through regulation.
But I'll touch on some key areas that we feel are very important
and should definitely be included in the bill.
The broad disclosure
requirements proposed by Bill 33, as well as the terms and
conditions proposed to ensure timely transmission of the
disclosure documents: We believe the format of disclosure
documents should be harmonized across all Canadian jurisdictions
that currently require or may introduce future requirements for
pre-sale disclosure to potential franchisees. The proposed
disclosure legislation is an appropriate and judicial regulatory
response based on what we accurately know about today's franchise
industry.
The review engagement
letter and/or commercial credit reports, we feel, are the optimum
tools to allow potential franchisees to accurately assess
financial viability of a franchisor system. Audited financials
can be confusing. Commercial credit reports actually provide more
potential franchisee information in plain English.
Exemption from disclosure
should only be given to franchisors who meet criteria which
clearly demonstrate that they are financially and
organizationally able to assure prospective franchisees that they
are stable and that this is a viable investment. Of course, we
strongly support the issue of fair dealing requirements in this
bill and the right to associate.
The CFA looks forward to
continuing our support and involvement in the drafting of those
regulations. We believe that with our experience we have an
important role to play in ensuring that the regulations benefit
both franchisors and franchisees. We're pleased the minister has
already assured us that we will be consulted, and look forward to
working with ministry officials on this in the future.
Disclosure provides an
enormous wealth of information to potential buyers. When
introduced, our members said that the CFA disclosure document was
the best selling tool they ever had, because it started the
relationship in an open and friendly format.
Think about this one
element alone in Bill 33: A list of all franchisees in the system
and those who have left. I have personally called and spoken to
franchisees in a system. We do this as part of our review process
for new members. I can assure you that after a few calls to a
franchisee asking some simple questions like: "How do you enjoy
the system? Were there any hidden costs? Is the training
accurate?" you get a very clear picture very quickly of what that
system is, where its problems are and whether or not it's one you
want to join. If I provided you with a list of Pizza Pizza
franchisees, present and past, and you called David Michael, what
would your decision be regarding that purchase, regardless of the
information you got anywhere else, from anybody else?
1350
This is a good bill. It
takes franchising a long way in one big step. Franchising does
account for $90 billion a year in sales across Canada, 60% of
which are in Ontario. It would be irresponsible for this
government, or anyone, to move away from what the Franchise
Sector Working Team has unanimously agreed upon and proposed and
is supported by virtually everybody you've heard in the last two
and a half days.
On behalf of the members of
the CFA, I would like to take this opportunity to congratulate
you on opening up this process through these public hearings.
You've given franchisors, franchisees and, more important, the
general public the opportunity to study this bill and offer their
comments.
The CFA looks forward to
continuing their work with the government and the officials and
the members of the opposition in ensuring that this legislation
is workable and fair.
The franchise industry is
an exciting one. It has offered profitable business opportunity
to thousands of people. One million people work in franchises
across Canada. We support this industry and the efforts of this
government to make it better.
Thank you.
The
Vice-Chair: Thank you very much. The first questions are
from the NDP caucus.
Mr Martin:
I appreciate the work that was done by the working group in
getting to where we are today, and with myself and others
encouraging the government to move forward and take this out to
public hearings so that we might hear directly from some of the
people who are caught up in the system-some doing well, some
obviously struggling and others badly damaged. We've heard from a
significant number, I think, over the last two or three days, and
you've been with us and you've heard the stories too.
As a franchise association
claiming membership across the country and claiming to have the
best interests of the industry at heart, and in listening to the
stories that are brought before us-and these aren't people who
are looking at getting into a franchise; these are people who
have already been in the franchising industry and have had
certain experiences. Most who have come before us have had some
very difficult experiences. Does that not cry out to you for
something in this bill regulating the relationship after the
contract is signed so that there is recourse for them to solve
some issues before they end up bankrupt or not well from a health
perspective? Does it concern you for them personally, and doesn't
it concern you that this has a bad impact on the industry itself?
If you listened to Professor Hadfield this morning, when the
reputation of the industry isn't good, the efficiencies that
could be had by more people investing are limited.
Mr
Cunningham: I'll answer the first question, which is,
what are my feelings about people who are in the system now and
how can legislation help them? As I understand it, first of all,
legislation is difficult to enact retroactively. For you to put legislation in
place now to go back and try to deal with situations that started
10 years ago or five years ago or whatever, we'll be wading into
a situation that would be complex, difficult and probably, as
we've heard before, a field day for lawyers.
No one wants to see
franchisees in trouble with their franchise. As I said earlier, I
own my own small business and, when you're into that and you're
up to your armpit in alligators, you're always looking for
someone to help you out of the that situation. In this case, as I
would understand it, certainly fair dealing would come into play
immediately, as would the fact that people can associate, have
the right to associate. Those two elements in themselves, aside
from the other issues, I think would be of great benefit to
people already in systems. I think there needs to be more
education so that people who are in systems know where to get
help, not necessarily just from lawyers, but where they could
seek more advice even from each other as franchisees which, as
we've heard in some cases, they can't, especially in bad
systems.
Mr Martin:
How many franchises belong to the Canadian Franchise
Association?
Mr
Cunningham: Directly, none.
Mr Martin:
OK. You're quoted in an article in this tome that I've been
carrying around, and for those who have it with them it's B55:
"By the time [franchisees] have a problem, they're probably out
money, if not out of the store, and they're too far down the
road." These are small business people. These are the people who
are the heart and soul of many communities. By the comment you
just made a few minutes ago that we can't do anything about that,
are you willing, as the spokesperson for the Canadian Franchise
Association, to cast them into the wind?
Mr
Cunningham: No, that's not my intention at all. What has
to be defined here is, of those people, who as you say have lost
their money or are about to lose their store, how many were a
result of the franchisor's doing, the market's doing or the
franchisee's doing? Those are the kinds of statistics we don't
have. You don't have them and I don't have them. If it's a result
of market force, the market played a force on my business too. In
the case of franchisors who are mistreating their franchisees,
one of the options we opened to people when I made that statement
was a mediation service which the association has available
across Canada for members, non-members, anybody who wants to use
it.
Mr Martin:
How many times has it been used?
Mr
Cunningham: It has only been used a couple of times. To
talk to that issue, we feel that the problem with that has been
partly lawyers, because mediation is something which can be done
quickly and for far less money than going to court.
Mr Martin:
Could it possibly be that you don't want to take it on because
the members of your association somehow bring pressure to bear?
I've got a letter here from Bulk Barn franchisees that has been
delivered I think two or three times to your office and has been
refused, I'm told. Is Bulk Barn part of your organization?
Mr
Cunningham: Yes, they are.
Mr Martin:
I'm going to deliver it to you personally here today so that you
will have it and hopefully respond to them, because they're
looking for some resolution to a very difficult circumstance they
find themselves in. I suggest that there are a lot more like Bulk
Barn out there who are going to find themselves in the same
circumstance, particularly if what we've heard these last two or
three days continues and escalates.
It seems to me that what we
need in this bill is some dispute resolution mechanism. I'm not
convinced of what that vehicle could be or should be, but we need
to be taking seriously the need for this. If there's one area
that I would challenge you in, in terms of your presentation here
today, it's in that area. We need something that people who are
aggrieved at this particular point in time, and who will be
aggrieved down the line, whether it's franchisor or franchisee,
can go to without having to get into a very legalistic vortex
with lawyers and the cost that represents. Perhaps we can resolve
some of these things so that the franchise industry, which is
very important in Canada and the US, stops developing the
reputation that seems to be growing here now and creates those
efficiencies that Professor Hadfield talked about this
morning.
The
Vice-Chair: The next speaker is Mr O'Toole.
Mr
O'Toole: Thank you very much for your presentation. I
have just a couple of quick ones, and maybe other members have a
question as well.
I agree with your advice
that getting a bank franchise loan officer to present to the
commission would be helpful. Whether that will happen now or in
the short term, they can always write in a report. If you know of
any, it would be helpful.
We also heard of the
shortage of franchisees. If you want to respond, you can, but I
don't see that as a problem, technically. I just think it's
something we heard from somebody.
There are a couple of other
good pieces of advice I'd like you to comment on. The ILA, the
independent legal advice, was referred to yesterday in Sault Ste
Marie. If I were to sign off, saying that I had done that due
diligence piece-you referred to it as a commercial credit report;
I'd refer to it as an independent financial advice. If those two
requirements were put in here in a sort of regulation and they
sign off on those-I agree with one of the previous presenters
here that most people are so eager to cook that first pizza, they
don't read anything. I honestly feel they get the buyout from the
company they're departing from, $200,000, and they rush right out
and get that urge to be in business. I think there's some due
diligence with that as opposed to me, the taxpayer, being somehow
hooked into this, "Jeez, I got taken advantage of." You could say
that happens every day at the casino or at the racetrack.
1400
I want to refer to
something that you did reply to Mr Martin on. I'm quite
sympathetic to the supply issues that we heard about yesterday.
On some of those there should be some strengthening.
The other thing is the
dispute mechanism, and I'm not convinced. In your report, under
"Alternative dispute resolution (ADR)" on the second-last page,
it says: "It is noteworthy that the discussion paper does not
include a proposal for alternative dispute resolution.
Nevertheless, the CFA recognizes ADR is an important conflict
resolution mechanism, and one which can provide benefits to all
players in the franchise sector." Do you think it should be
included? You've also got some stuff here with respect to your
own code of ethics.
Mr
Cunningham: There are two issues with this. First of
all, it's in our code of ethics, so obviously we encourage our
members to use any other method than litigation. As I understand
it, now it's even built into the civil court system, so mediation
is available there. We've looked at the idea of having a
different type of system than we have now, but the problem with
mediation historically, both in the US and Canada, has been that
there's still a stop-gap for using it, both in the case of not
understanding it and the legal community not willing to
participate in it. As a method of resolving disputes in
franchising it can work; not in all cases, but it can in some.
Again it plays to the issue that both parties must be willing to
participate.
Mr
Gilchrist: I have a couple of points that I wonder if
you could elaborate on. Given that the CFA believes the
commercial credit reports are valuable-and we've heard similar
comments from other groups about getting independent legal
advice-as part of your code of ethics or a pro forma prospectus,
would you support the express statement by a franchisor that they
"recommend," "strongly suggest"-words to that effect-that before
proceeding with the application the prospective franchisee get
both independent legal advice and obtain a commercial credit
report?
Mr
Cunningham: It's currently in.
Mr
Gilchrist: Both of those?
Mr
Cunningham: It is in our code of ethics. We encourage
them to encourage the prospective franchisee to get advice from
professionals. In some cases, not all-and unfortunately not
across the board-to protect themselves franchisors have put in
this clause so that a franchisee would go and sign off that
they've seen a lawyer, an accountant and so on.
Mr
Gilchrist: Many isn't all. Forgive me; I was finishing
up a phone call at the start of your presentation, trying to
listen at the back of the room. Is the code of ethics applied
scrupulously? Can you get close? Can you say, "I chose other
wording," or do you have some kind of review that you would go
through and check off a list, and in this case if they did not
have that as part of their prospectus, what would the
repercussions be?
Mr
Cunningham: If we have a complaint from a franchisee
saying that they were not abiding by any part of our code, we
have a complaint procedure which we put into place and review it.
The only decision we can make, the only option we have as a trade
association, is to rescind their membership.
Mr
Gilchrist: That doesn't sound like too onerous a
penalty.
Mr
Cunningham: In fact it does have quite a bit of effect
to it because we own the trade shows, the directories and a lot
of the marketing tools they have, and they can't be in those. If
they are in the business of selling franchises and they do not
belong to the association any longer, they can't participate in
those vehicles.
Mr
Gilchrist: Forgive me, I may be too picky in my
interpretation of your language. You said "if they weren't
following any of the terms." Does that mean "any one of," or the
only time you would get mad is if they didn't follow-
Mr
Cunningham: Any one of.
Mr
Gilchrist: OK, that's different.
The second is the right to
associate. We can say you have the right to associate. If there's
nothing expressly provided for, I guess the franchisor could say,
"Sure, they have the right to associate and I have the right to
harass." What should we explicitly be stating are the
consequences of saying that we allow a right of association? How
far should we go down the road in the regulations to say, "There
will be extraordinary repercussions if you do any of the
following things," or should we be silent on that?
Mr
Cunningham: It would be unfair for me to answer that at
this point because it was never discussed at the Franchise Sector
Working Team. For me to answer that on my own, and not having had
time to consider it, I don't think I'd be giving justification to
the answer.
Mr
Gilchrist: I appreciate your candour, but does that mean
they embraced the concept but didn't talk about any of the
consequences of putting that clause in there? It was my
understanding that right to associate was part of the
approval.
Mr
Cunningham: That's right. It was part of the
approval.
Mr
Gilchrist: But no one discussed what that meant.
Mr
Cunningham: The focus at the time in those meetings, for
whatever reason, was what would happen if you did not, the
consequences for not disclosing properly, or at all.
Mr
Gilchrist: Again, I don't mean those questions to sound
harsh. You and we have heard over the last couple of days that
disclosure seems to be the key. I must admit that my bias is
giving people as much information up front. I think part and
parcel of that is saying, in a clause that says you have the
right to associate, what that means.
I would encourage you, if
in fact it hasn't been discussed. Recognizing that the next step
for this committee will be at some point after April 3, we've got
a bit of time. If it's possible to seek counsel from any of your
colleagues on that subject, I'd be grateful and would welcome
your input.
Mr
Cunningham: Of course.
Mr Patten: Thank you for your
presentation. I haven't heard all of the presentations in the
different locales, but I'm intrigued by this and the role of your
association. I asked a question this morning about the need for a
better business bureau, perhaps the model that you have here in
that it can have some clout in the sense that it is used as a
cornerstone for people to say: "Has this franchise been a member?
Are they a member? If they were a member, have they had any
complaints against them?" If somebody phoned up and there were
complaints against a particular franchise, would you be free to
disclose, not necessarily the particular-first of all, would you
say, "Yes, there were four complaints in the last two years with
such and such a company"?
Mr
Cunningham: We wouldn't disclose the background on any
of the complaints but we would probably say their membership was
in review. The reason for that is there are sometimes cases where
a franchisee will phone in or file a complaint which has no basis
to it. To give out details of such a thing when we haven't been
able to fully investigate it wouldn't be fair to either
party.
Mr Patten:
Have you taken action to revoke a membership?
Mr
Cunningham: Yes, we have.
Mr Patten:
So someone would be able to know that?
Mr
Cunningham: Yes.
Mr Patten:
Good.
Along the lines of Mr
Gilchrist, but not necessarily on the disclosure issue, which
seems to be almost unanimously agreed to, what I've heard is,
"Well, it's very difficult to get into the relationship between
the franchisor and the franchisee." However, as time goes on
there seems to be significant representation that says the
franchisee continues to get squeezed somewhat. What's your
experience and observation? Is that a general pattern? Does it
vary with poor business practice and from business to business,
or is there a pattern there?
Mr
Cunningham: This is where the problem with statistics
is. When we talked about supply issues, what might be a supply
problem for grocery stores couldn't possibly apply for hamburger
stores. When you talk about, "Where are the problems, are they in
certain sectors and not in others?" you might say that in the
food business, for example, territories become more condensed and
are becoming more of a problem for them than they are for people
who are working in home-based businesses.
The problem with dealing
with an industry, if you can call it that, in so many sectors of
the economy, and dealing with everything from a $20,000 to a
$10-million investment, without proper statistics is that it puts
us all in a situation where we're groping for answers with
nothing to base them on.
In answering your question
as best I can, I don't see any one problem that goes across all
the lines of franchising other than the lack of consistent
information for a potential franchisee before they buy, and this
answers that.
1410
Mr Patten:
My last question: You do periodic checks with franchisors and
franchisees. If you uncover something, what do you do with that?
Let's say no one has initiated a complaint to your association.
However, in doing surveys of satisfaction you discover certain
information. Do you take that back to your executive?
Mr
Cunningham: It goes back to a membership review
committee and they would make recommendations. In some cases we
go back to the franchisor. I call the president of the company
personally and say, "You've got these problems, fix them," or in
some cases we would terminate their membership.
Mr Martin:
I'm following up on the question that Richard asked a few minutes
ago in terms of who you've actually kicked out of the
association. I'm led to believe that, in fact, you've only
revoked the membership of one and that was Pizza Pizza. Is that
correct?
Mr
Cunningham: I'm not at liberty to say, I believe. That
would be privileged information of the association and I don't
think it's appropriate to make any of that public here.
Mr Martin:
You're not going to give me any numbers even?
Mr
Cunningham: No.
Mr Martin:
Then just to query as to the membership in your group and who you
speak for, I'm led to believe that you have 220 out of about
1,300 franchise systems in the country. Is that correct?
Mr
Cunningham: I don't what the date of that paper is, but
our franchise member list is just over 300 right now because some
of our member companies, like CARA, for example, would have eight
brand names.
Mr Martin:
And 80 of your members are lawyers, accountants or
consultants?
Mr
Cunningham: Correct.
Mr Martin:
Also there are some big systems-and we heard from one of them
today-that don't belong to your association. Do you have any auto
dealers?
Mr
Cunningham: No.
Mr Martin:
Do you have any food stores?
Mr
Cunningham: Yes.
Mr Martin:
How many?
Mr
Cunningham: One chain.
Mr Martin:
Petroleum stations?
Mr
Cunningham: Yes, Petrocan.
Mr Martin:
What about hotels and motels?
Mr
Cunningham: Yes, a number of them.
Mr Martin:
You made a statement earlier about the information I shared with
the committee that the perception out there is that there's lower
risk by going into a franchise than the independent small
business route. I have a study that suggests that's not the case,
that the incidence of failure in franchising is greater than in
going the independent route.
Mr
Cunningham: I don't know your study so I can't comment
on it.
Mr Martin:
It's a study called Survival Patterns among Franchisee and
Nonfranchise Firms Started in 1986 and 1987. I can give you a copy of the
report. It was reviewed by Ms Susan Swift from our legislative
research branch, and it's actually quite interesting. It has a
number of findings that I think maybe your association might find
worth looking at because it challenges very seriously the
contention-and I suggest it's something that needs to be perhaps
looked into further. If we're offering franchising in the country
as a more secure way to get into business, particularly in an
environment where there are a lot of people who are being
restructured and walking around with severance packages looking
for someplace to invest them and they are thinking that
franchising is a bit more risk-free than actually setting up an
independent business, then we may be sending them down a road
that will result in stories such as the ones we've heard over the
last two or three days here.
Mr
Cunningham: Can I respond to that?
The
Vice-Chair: Go ahead, sir. We're just about out of time
here now.
Mr
Cunningham: Even if these statistics are out there, and
as people are being told that franchises are more successful than
non-franchises, the disclosure is going to give them the
information and the ability to contact people in the system. If
they call up XYZ system and talk to 10 of the franchisees and
they say, "I'm not allowed to associate," "I'm not making any
money," "I've been in this business five years and I've lost
money," or "I'm not in the system any more because I lost my life
savings," I think that in itself is going to tell those people,
regardless of what any statistics are, not to buy.
Mr Martin:
The problem is, though, that a lot of the people that they should
actually talk to have signed confidentiality agreements and they
can't talk.
Mr
Cunningham: They wouldn't be able to do that, though,
with this disclosure legislation.
The
Vice-Chair: Richard, thank you so much for your time
today and for the presentation you left with us.
NORMAND TREMBLAY
The
Vice-Chair: We'll now go to Mr Normand Tremblay. Mr
Tremblay, we've allotted you 20 minutes, and that includes the
time for some questions.
Mr Normand
Tremblay: Good afternoon, everyone.
My name is Normand
Tremblay. I am a former franchisee of the Loeb grocery chain. I
left the business about three and a half years ago following a
dispute with our franchisor. At the time, Loeb was owned and
controlled by the Provigo corporation in Montreal. Today, as you
probably all know, it is owned and operated by the Loblaws
corporation.
The store I had was the
Loeb St Laurent on St Laurent Boulevard in Gloucester, which is
now part of Ottawa.
My reason for being here
today is to offer my opinion on the proposed Franchise Disclosure
Act, Bill 33, based on my personal experience in a
franchisor/franchisee relationship that went wrong.
The end result of the
dispute was that myself and approximately 18 other franchisees
were bought out by the franchisor as part of a settlement
agreement that was reached following an extensive legal battle.
Part of the settlement also stated that, at the request of the
franchisor, all franchisees were prevented from discussing any
details about the dispute. The only comment permitted was to say
that "our differences were settled on an amicable basis." So I
have to be careful as to what I tell you today on the basis of
what I can say is a gag order following the settlement.
The only reasons we were
able to secure an out-of-court settlement were that, first, there
were 21 of us who had joined forces to fight for our rights and
to cover the legal expenses. Second, we had extremely competent
attorneys who also sincerely believed in our cause. Third, our
customers, the public, the media, local politicians as well as
many provincial politicians were all on our side. Fourth, our
franchisor eventually realized that it had more to lose than to
gain by continuing the legal battle, from both a financial and a
public opinion perspective.
During our fight with our
franchisor, we also lobbied provincial politicians very hard for
some form of legislation to regulate the franchisor/franchisee
relationship. Although we knew at the time that very little could
be done in time to help our own situation, our primary goal was
trying to make sure that what was happening to us would not
happen to other franchisees in the future; that the kind of
misrepresentation and bad faith that we were battling would one
day be prevented by having franchise legislation that would
outlaw such an abusive process in the franchisor/franchisee
relationship.
The things that we were
looking for in the legislation were full disclosure of
information, good-faith bargaining, dispute resolution, and some
protection when it came time to renew our franchise
agreement.
1420
What the proposed Bill 33
is currently offering is the right to associate; full disclosure;
a rescinding right for the franchisee; and finally, damage for
loss due to misrepresentation in disclosure documents.
Although the proposed Bill
33 is a step, in my opinion, in the right direction in trying to
prevent misuse and abuse from franchisors, I personally believe
that it falls short on key issues that always surface in a
franchisor/franchisee relationship. Let me try to cover some of
them here today.
First, the right to
associate: The right to associate was never an issue in our own
dispute with our franchisor. What was the issue rather was the
franchisor's steadfast refusal to (a) recognize our association
as an established entity and (b) hear from or deal with our
association or its duly elected representatives.
Giving the right to
associate is meaningless without providing as well the right of
the association to represent the interests of its members, the
franchisees, before the franchisor. Giving only the right to
associate is like giving employees of any organization only the
right to form a union, but not giving that union the right to the
bargaining process. It
is also as useless as giving someone a brand new car with no
engine; it looks great but you cannot take it anywhere. It is
only good for lamenting in it, just like the association that we
had, with no right to the bargaining or negotiation process. We
had an association, but our franchisor refused to hear from the
association, refused to hear from its representatives, even
refused to acknowledge it. They never opposed the fact that we
had an association, but the association was meaningless.
Second, disclosure
documentation: This is a laudable effort at trying to make sure
that the franchisor puts all its cards on the table before the
franchisee enters into the franchise agreement. This also means,
however, that franchise agreement documents will go from being
two inches thick to four inches thick from now on, and that
instead of one lawyer required to advise the potential
franchisee, you will now need a battery of attorneys to make sure
that all the i's are dotted and that the t's are crossed, plus
you're going to need a battery of accountants to make sure that
everything that is being said in the document is valid for the
franchisee.
Third, a rescinding right:
Although I am not a legal scholar, I believe that, should one
party fail to deliver the information required by that contract
or should such information be different from what was previously
agreed upon, there already exist legal alternatives to rescind
such a contract. As such, Bill 33 does not seem to offer
additional protection or add value in this regard.
Rather than including the
right to rescind, Bill 33 should address the right to renew a
franchise agreement and provide some form of protection to the
franchisee when the time comes to renew the franchise agreement.
More specifically, the following issues need to be addressed in
one form or another.
Option to renew and term or
duration of renewal: An initial franchise agreement must address
a renewal process that recognizes that the franchisee is entering
into a long-term business partnership whose financial success
often takes more than one franchise agreement term. There has to
be some type of protection to prevent the franchisor from
discarding a franchisee at the end of his or her first term,
especially after the franchisee has worked so hard to build the
business and also before he or she has had a chance to make a
profit or build equity in that business. Often we do see that the
franchisors are enlisting new franchisees and, as they become
profitable or before they have a chance to make money, then they
discard the franchisee at the end of the first term. There is no
protection and no guarantee that they will be renewed for another
period of time.
Renewal condition: There
must be some protection from the franchisor making significant
material change to the original agreement at the time of renewal,
especially when those changes are made in an effort to get rid of
the franchisee through the imposition of a financial burden such
as increasing the amount of advertising fee, the percentage rent,
the sign rental, the accounting fee or the franchise fee that the
franchisee has to pay the franchisor, or by making significant
changes to the franchise program that would preclude the
franchisee from a reasonable expectation of making a profit in
the future. From our own experience within our franchisor
organization, we saw time and time again where the franchisor,
before agreeing to renew the franchise agreement, imposed major
expenditures on the franchisee so that even if he was renewed for
another four or five years, his chance of making a profit at the
end of those four or five years was nil. There has to be some
kind of protection that there will not be any significant
material changes in a renewal process.
The next item is goodwill.
The franchise arrangement is a business partnership agreement
where both parties play a key role in the success of the
venture-both parties, not just one. However, most franchisors
claim that the goodwill associated with a franchise operation is
their doing and theirs alone. This belief cannot be further from
the truth. The reason for this claim is that franchisors
historically have refused to concede that the success of the
business had anything to do with the franchisee's efforts, his or
her dedication, the family commitment; hence, no recognition at
all of the goodwill improvement the franchisee has brought to the
franchise business.
Franchisors firmly believe
that their name or sign alone is responsible for the business's
success, which is not entirely true. There has to be a way to
force franchisors to recognize the efforts of the franchisee who
has successfully launched a new franchise location or promoted an
existing location. Imposing some form of requirement for
franchisors to recognize the goodwill contribution of the
franchisee would achieve that.
The next item I want to
speak about is risk and reward ratio. Franchisors have often
claimed that the franchisee has made a minimal financial
investment in the business and therefore bears very little risk
compared to the franchisor. However, from a franchisee's
perspective, this minimal investment may represent everything he
or she has worked for all his or her life. As such, the
franchisee's contribution to the venture is probably much greater
than whatever investment the franchisor may have made, and the
size of the amount at risk bears a much greater significance for
the franchisee than for the franchisor. Furthermore, if the
franchise location fails for whatever reason, the franchisor's
representative, unlike the franchisee, is not suddenly out of
work and does not have to rebuild his or her life.
The next item I'd like to
speak about is acting as a prudent business person. No franchise
agreement or franchisor should be allowed to force franchise
program changes, either during the course of the existing
agreement or as a new requirement at the time of renewal, that
would prevent the franchisee from acting as a prudent business
person. What I refer to here are things such as the franchisor
imposing financially unjustifiable renovation or equipment
changes on the franchisee, and changes that negatively affect the
original profit potential structure of the franchise business,
such as increasing rents or various fees and the like or a reduction in
gross profit margins to promote sales for the franchisor, often
at the expense of the franchisee.
Good-faith bargaining-as I
walked in earlier, I heard about good-faith bargaining. There has
to be a provision in Bill 33 to enforce the requirement for
franchisors to deal in good faith with franchisees, both during
the existing term and at the time of renewal of the franchise
agreement. The franchisor, with the size of its organization, its
bag of experts and its financial strength behind it, is really in
a position of power over the franchisee. There has to be
something in the legislation to bring the negotiations and
bargaining process to a level playing field. Mandating good-faith
bargaining would certainly help achieve this.
Dispute resolution: When
things go sour and the relationship appears to be failing, there
has to be a reasonable recourse that the franchisee can seek in
order to resolve the dispute, outside of an expensive and often
unaffordable court battle. Bill 33 must offer this kind of
protection, otherwise the franchisee has almost no chance of
having his or her side of the story ever heard. Litigation
between a single franchisee and a franchisor is rarely a fair
playing field due to the uneven amount of resources, time and
funding each side can afford to throw into the battle. Mediation
or arbitration certainly are better dispute resolution
alternatives for a franchisee than litigation. However,
franchisors are well aware of that, and they know their chances
of success are better with litigation since they have the people,
the time and the money that the franchisee seldom has.
1430
In summary, the proposed
legislation is a step in the right direction, but unfortunately
it appears to fall very short of addressing the kinds of problems
and issues faced on a day-to-day basis by franchisees across
Ontario. It certainly would not have helped the Loeb franchisees
or myself to resolve our differences with our franchisor, or
prevented our franchisor from pursuing and promoting its personal
interests and objectives at the expense of the franchisees.
If the intention of Bill 33
is to introduce "fair dealing between parties to franchise
agreements," then it must be broadened to include the issues I
have just discussed. Franchisees need protection from abusive
franchisors. Such protection can be provided by addressing:
The right of the franchisee
association to bargain and negotiate with the franchisor on
behalf of its members;
The right of a franchisee
to renew the franchise agreement with equal or better terms than
the original one;
The right of a franchisee
to have a reasonable expectation of profit provided he or she
acts as a prudent business person;
The right of a franchisee
to be allowed to act as a prudent business person in the business
development and operation of his or her franchise operation;
The right of a franchisee
to be treated as a business partner and investor rather than as a
subservient employee whose termination can be justified provided
the franchisor has respected the Employment Standards Act;
The right of a franchisee
to claim goodwill for his or her contribution to the success of
his or her franchise business;
The right of a franchisee
to expect a good-faith relationship with the franchisor,
especially when it comes time to discuss renewal and the future
business prospects of the franchise venture;
The right of a franchisee
to participate equally in the short- and long-term business
development of his or her franchise operation as any prudent
business person should be allowed to do and is obligated to do as
well;
Lastly, the right of a
franchisee to seek an alternative to an expensive and, most of
the time, unaffordable legal battle with the franchisor through
some form of dispute resolution that is fair and affordable to
both parties.
In conclusion, I want to
thank you for giving me the opportunity to express my views on
the proposed legislation, Bill 33.
I am sure many franchisors
will come and tell you there is no need for such legislation and
that the industry should be allowed to regulate itself.
Unfortunately, franchisors of all stripes, with very few
exceptions, have demonstrated time and time again that they have
absolutely no interest in the business success or financial
well-being of their franchisees. If one does not meet their
expectation or challenges their authority, they simply get rid of
him or her through whatever means they have at their disposal.
When there is a dispute, the cards are always stacked in favour
of the franchisor.
The government has an
obligation to protect citizens from being subjected to misuse and
abuse by unscrupulous businesses and corporations, in the very
same way it protects the environment or guarantees health care
and social security to those who need it.
Franchisees in Ontario need
protection from irresponsible franchisors. Let us hope that Bill
33 will deliver the kind of protection it was intended to
deliver. My biggest fear is that if it passes without the changes
discussed above, the franchisors will claim they have been dealt
a serious blow and yet will still be allowed to do as they wish
with their franchisees, provided they disclose their intentions
to do so at least once in the original franchise agreement. Thank
you very much.
The
Vice-Chair: Thank you very much, Mr Tremblay. We don't
have any time for questions right now because you used up the 20
minutes, but could we get a copy of your presentation?
Mr
Tremblay: By all means. I wish I could have made it
faster to take some of your questions, but I had so much I wanted
you to know.
The
Vice-Chair: OK. Thank you very much.
Mr Patten:
Mr Chair, might I suggest that you notify each one, that you give
them a five-minute notice. Some may not be aware that their time
is being fully used.
The
Vice-Chair: OK, I'll do that from now on.
VIJAY KAWATRA
The
Vice-Chair: Mr Kawatra is the next person in our
presentations here. Mr Kawatra, you have a 20-minute time allocation, and I'm going
to tell you at five minutes if you want us to ask you some
questions.
Mr Vijay
Kawatra: First of all, I would like to inform you that
the notice I was given was really not ample for me to a prepare
lengthy commentary like the person who just left has made,
although I tend to concur with many of the observations the
previous speaker has made.
Let me first inform you
that I am honoured to be present here to talk to you today. I
would like to thank you for inviting me and giving me this
opportunity. My special thanks go to Claudette Boyer for making
it possible for me to come and express to you my concerns.
It's an important subject
and I have a lot to say on it. Given the time, however, I would
like to present only a summary of some of my thoughts now and
leave more comprehensive discussions for later, if you so
desire.
May I point out that
although I am speaking as a former franchisee of a system, my
thoughts are based on much wider knowledge and observations than
just my personal experiences with one system. I have held
discussions with other franchisees from other systems and other
regions. Also, I have read the contemporary literature on the
subject. I operated a franchise myself for about seven years.
To summarize some of my
principal thoughts, I've just jotted down some ideas. They are
not really all that I would like to talk about, but just to
express to you some of the things that I have on my mind.
First of all, the proposed
legislation is a very good start and is urgently needed to help
Ontario's franchising industry grow in an orderly fashion. I
would like to take the opportunity to commend you for the
initiative you have taken, but my feeling is that the proposed
legislation in its present form will do little to protect current
or future franchisees who are the main victims of the industry.
For example, the legislation is not directed to post-sale
agreement activities, the area where 90% of the damage is done
and where the main victim is the franchisee and not the
franchisor. The proposed legislation intends to deal with
pre-sale disclosures. It is important, but it will fall very much
short of addressing the issues at hand in any significant
way.
Also, it does not consider
some very crucial areas of concern in the field of fairness,
transparency and justice. The industry is riddled with myths like
"90% success rate" and "recession-proof business opportunities."
However, no conclusive data or empirical evidence is available to
support these kinds of promotional and seductive claims. Often US
industrial observations are circulated to attract franchisees in
Ontario without Canadian references, and you probably know that
the often-quoted US data has not been confirmed yet.
It might come as a surprise
to you that a whole lot of abuse is taking place in some segments
of the Ontario franchise industry. I think something must be done
to address it, because the situation, to my knowledge, is very
serious and it affects a large number of people. It's having an
impact not only on their financial well-being but also the
families are affected because of the financial difficulties that
these franchising businesses are bringing about to those
families.
I don't have the details in
writing. They are of course in my mind, and I have several
examples I could cite if need be. I would be prepared to talk to
people in confidence if they want to discuss specific examples
where I know, from my personal experience and the experiences of
other people in Ontario, that they have not been dealt with
fairly, and it is mostly the franchisor that derives the benefits
of the transaction, not only at the time of consummating the sale
but even throughout the entire life of the franchising agreement.
There are many, many shortcomings in the present system, and I'm
kind of surprised that we have taken so long to actually initiate
the legislation to govern a segment which I believe is very
important to Ontario.
1440
A whole lot of information
is required before we make any sensible remarks, and I think it's
been stated in your own proposed legislation that there is a lot
of research required to be done. I'm not sure how much work has
been done yet. But to cap my information to you, I would say that
it is a good start. It's urgently needed. It does very little in
its present form, and even in the case of pre-sale disclosures I
can think of some points that can enhance its application and
utility. However, it does not really address more than 10% of the
problems associated with the franchising industry, because I
would say 90% of the industrial problems actually take place in
the post-sale area rather than the pre-sale area.
Those are all my
observations at this point in time, and I'll be very happy to
discuss it with you should you like to do that.
The
Vice-Chair: OK, thank you very much, Mr Kawatra. The
questioning this time starts with the PC, then Liberal and
NDP.
Mr
O'Toole: Thank you very much, Mr Kawatra. I have just a
couple of questions. I guess you had short notice, but if you
have written comments you can still submit them to the committee.
That would be accepted.
What franchise did you
operate and for how long? Seven years, you said?
Mr
Kawatra: I operated a franchise in the fast-food
business, and I'm not sure if I would like to disclose the name
at this point in time.
Mr
O'Toole: OK, that's fine. You said it's a good start.
I'm just wondering, do you believe that the disclosure portion,
which is perhaps the strongest portion of it, as we have not got
a template for what that disclosure would require, could deal
with some of the escalating pass-through clauses or with respect
to provisions to address additional costs or royalties? You're
talking about a post-sale agreement. I'd love to have one. In
fact, I won't have one until the year 2003, the next time I get
to review my franchise for my riding. Nothing's for sure, you
know. I was going to say, life is full of-
The
Vice-Chair: You call it a franchise, do you?
Mr
O'Toole: Well, I'm trying to make it into one.
In a more serious tone though, what I mean is
nothing is forever, not even life, unfortunately. The thing is,
if I knew I was going to make on a certain stock I'd retire now
and just get it all. It's interesting. I really don't understand
how that could ever be defended. Do you understand? This is what
exists and then I suspect if there's some association that says,
"This association will review all cost increases through
royalties, whatever," that would be a way to, as a collective,
address it. Do you understand what I'm saying?
Mr
Kawatra: Sort of.
Mr
O'Toole: If we attempt in this legislation to make sure
that people live happily ever after, sort of like Goldilocks,
that ain't happening.
Mr
Kawatra: No.
Mr
O'Toole: It wouldn't matter. We heard one person here
today read off a litany of prescribed rights that people would
have, while we just move to a two-box contract. Do you
understand? So I suspect that's what I'm saying. We should be
realistic here in disclosure, and if you have something to add to
that from real-life experience that would address in some cases
after-sale, pass-through costs, I'd be happy to make sure that
it's fair in the ultimate intent of the legislation here.
Mr
Kawatra: I may have some points, actually, on pre-sale
disclosure that, to me, would help. It's not going to answer
everything you want to answer; however, I think I could come up
with some specific issues that you would like to consider as part
of the pre-sale thing. That's what I can say at this point in
time.
Mr Patten:
Welcome. I have two questions you might want to respond to that
relate somewhat to the gentleman who spoke before you, who is
living under a gag order, he tells us. But if I recall the
situation in those circumstances-and you may have a comment-some
of the franchisees were in competition with franchises that were
owned centrally by the company, and they'd have a sale and put
the squeeze on and the others weren't a part of this particular
promotion, for example, or they'd add other franchises nearby
that would eat into your marketplace without any particular
agreement around what your market really is. Do you have any
comments on both those things?
Mr
Kawatra: From what I remember, I think they are both
plausible and I have seen that happen. There are other issues you
might like to consider in the same bag, where you find that some
of the advantages which rightfully should go to the franchisee as
part of the system are actually siphoned out to the franchisor;
for example, in relocation. It's not unusual. I've seen many
franchisees relocated over a period of time, between five to 10
years. That opens up a whole lot of opportunities for franchisors
to actually carve out the profitable area in terms of location
and place or re-place the existing franchisee in a location which
is not preferred.
On an associated topic, if
I may, I would like to point out that the issue of transparency
that I mentioned earlier could be associated here, and that is
when the landlord requests a relocation. Some landlords are not
too bad, in the sense that they consider the hardship it will
cause to the franchisee and the potential sales changes that
might result from it, and within limits they offer some
compensation, monetary and otherwise, and I have seen franchisors
reap those benefits directed to them and not pass them on to the
franchisee. Those are some issues that you might like to
consider. Others are associated with the suppliers, how often
they change suppliers. One other thing-I don't know if it has
been brought to your attention-is repossession of the store. The
same store is repossessed by the franchisor. Time and again they
kick the franchisees out and they sell the same store a few
times.
Mrs Boyer:
Thank you, Vijay, for your presentation. I know it was short
notice, but at least you got a sense of being heard.
From the very beginning you
said that Bill 33 was a very good start, that it was a bill that
was urgently needed. But then I heard you saying: "Are we really
ready for it? Is it strong enough? Is it ready to go?" Why would
you say that? Do you find that in this form right now the bill is
not ready to be voted on? That's exactly why we are having these
hearings, so that we can take up the recommendations that
different presenters have given us. We hope you will be able to
give us the recommendations you've talked about. You've talked
about transparency and you've also talked about fairness. In this
present form, do you think it's ready to go on as a bill?
Mr
Kawatra: I would like to see a few additions to that.
One is some kind of organization of structure or infrastructure.
It might be the Canadian Franchise Association or some body that
is an independent body of the franchisors and franchisees that
has at least an observation role if not a judicial or mediation
role. I have seen statistics on how many cases go to the courts
from among the industry and franchisors. To my knowledge there
are several that don't go to court, and they are settled not to
their mutual advantage but usually to the unilateral advantage of
the franchisor. There is no recourse available to franchisees for
many reasons.
1450
One, you likely may have
noticed-I don't know if there has been any study done on the
franchisees' profile-many of them are immigrants, like myself.
They are not aware and not strong enough to exercise their legal
rights. Some franchisors have actually gained, if you like,
quasi-judiciary positions vis-à-vis their franchisees and
they've terrorized them. I'm sorry to say that. I'm not
exaggerating. I've seen situations where that continues to go on,
and the franchisees, because they have invested their life
savings, even though they're incurring losses and borrowing and
begging money from other people just to hope that at some time
they will recover, many times they don't. They keep the business
going simply because of the fear of the franchisor and the fear
of losing everything they ever owned.
What I am trying to tell
you is that there is a definite need for another party to be
present, at least. I'm not saying that we want to move from free market
conditions into some highly regulated industry, though many
industries in Canada are regulated and this is not. To me, it's a
big surprise.
However, for the bill to go
ahead to my liking, I would like to see some kind of body that
has an independent point of view of reporting to whomever it
wants to, and observes and takes confidential information and
treats that so and is available for consultation. If you can
incorporate something like that, that will go a long way, in my
judgment.
Mrs Boyer:
Thank you.
Mr Martin:
I certainly hear loud and clear what you're saying, that we need
something after the contract is signed, by way of dispute
resolution mechanism that we can go to, that's third-party, that
won't cost an arm and a leg for lawyers' fees and all that kind
of thing, that will resolve a whole lot of the issues that come
up on a regular basis.
But that's not what I want
to ask you about. I want to go back to some comments by my
colleague Mr O'Toole on this issue of nothing lasts forever. We
have a fundamental philosophic difference of opinion here. I
believe there are some things, if we do them right and we're
careful and we're respectful of each other, that could last
forever-like my marriage; that's a contract that I signed. I hope
he's not saying that won't last forever.
Mr
Kawatra: I'm really glad to know that.
Mr Patten:
Don't go there.
Mr Martin:
I would think that when we make business relationships,
investments, we think they will last forever; that when I build a
home, it'll be there for me and I'll be able to pass it along to
my children or sell it and have a retirement, that when I go into
business and make an investment in a community, all things being
equal, if conditions are relatively normal, it'll be a business
that I will be able to work at and make a living at and perhaps
pass on to my children. But what we're finding more and more in
Ontario-I was brought into this in my own community by about
three families I knew personally who lost all that. They had
worked very hard over a long period of time to build up their
skill and their understanding and knowledge, they made the
investment, they were working hard and overnight the company that
owned them changed and the sand shifted.
What I've heard you and so
many others say over the last two or three days is, "Put
something in place that at least gives us a fighting chance, that
keeps going what we've put our time and energy into so that we
get something out of it," so that it isn't always the big guy
walking away with the bone.
Somebody mentioned the
other day that it was a dog-eat-dog world out there. But in this
instance, where franchising is concerned, it's more like a
dog-eat-goldfish reality, and that's what I'm beginning to hear
and see, so I'll be supporting very much your call for a dispute
resolution mechanism.
Perhaps you want to talk a
little bit about this philosophic "nothing lasts forever"
comment.
Mr
Kawatra: First of all, I am delighted to hear what you
just said: one, the perceived intention of something lasting. I
think philosophically we should not enter into everything in our
lives just from the hope that it's going to last only today,
because that tells a lot about us as a society and the value
system we place in our transactions.
Having said that, if you
ask the franchisee as a party to this negotiation, to my
knowledge, they always come forward with this intention and hope.
Believe me, most of them have put every penny they've earned over
the last 30 years into this thing, so they're not going to accept
anything short of having this last for another 30 years, if not
more. So your point is well taken and I encourage that.
In business, of course, the
risks are there in the globalization of markets, and now
centralization and standardization, and many other things are
acting upon us, which keeps us at the edge. They want new
technology, new skill sets and so on, and many of the people in
the franchisee group, unfortunately, are not necessarily on the
technology edge. The pressure may be-it's not coming out as
clearly but I think that's happening underneath, the
standardization. In other words, the franchisor would like to
have control over the supply system; they would like to have
control over advertising; they would like to have control over
every segment of the thing. The franchisee doesn't have any
control at all.
From many of these points
of view, I think to some extent we should try to encourage some
kind of legislative or institutional framework whereby the length
of the transaction can last longer than just two or three years,
certainly five to 10 years, which is the minimum for most
franchisees to recover the return on their investment to
compensate for all the money and the sweat equity they have put
in place. That's one thing.
The other thing, if you
want, I can discuss with you at some point in time. Suffice it to
say that I'm really glad you're here and you're listening to
people like myself. I hope, before you actually announce the
legislation, that you give serious thought to some of the things
you have heard here today and in other proceedings on the
topic.
The
Vice-Chair: Thank you very much, Mr Kawatra. We're over
time now. I had another questioner written down here but I'll get
him later. We appreciate your time.
MARCO D'ANGELO
The
Vice-Chair: Our next presentation is from Mr D'Angelo.
Mr D'Angelo, we have about 20 minutes.
Mr Marco
D'Angelo: Good afternoon, Chair and committee members.
I'm here today to discuss some of my concerns with 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.
Franchise business accounts
for billions of dollars of Canadian retail sales annually,
something in the neighbourhood of 40 cents of every retail dollar
spent. I am here as a concerned citizen who is a former employee
of a franchised store,
and also as someone who knows many franchisees who are not able
to speak here for fear of legal reprisals from their
franchisor.
I have lived in the west
end of the community of Ottawa for a number of years now and I
must say that in that time many businesses have opened and closed
their doors. I have known several families who spent years saving
a little money each paycheque so that one day they could leave
their jobs and be their own boss. What happens to many of these
families is that they are presented by franchisors with something
called a turnkey operation, which I am sure the committee has
heard about already. These turnkey operations are presented as an
"instant, just add water" type of business. They are told that
all they need to succeed is to simply work hard. Unfortunately
for many of these working families, it is far more difficult to
achieve that.
The franchisees often sign
contracts hundreds of pages in length. This is how long a
franchise contract can be. Can you imagine being presented with a
contract like this for a small business? It's impossible to
expect franchisees to read, let alone comprehend, all of the
details and fine print in this contract. They often do not
question many of the details in the agreement because they trust
that the franchisor wants them to succeed. The franchisors often
say: "We want you to do well. If you don't do well, we won't do
well. We want you to operate that business. We wouldn't put you
in a position where you would fail because if you fail, we too
will fail."
After a few years of tough
times most small businesses do ultimately fail, not because of a
lack of work or commitment, but because they are forced out by
their franchisor. There are many ways that franchisees are forced
out of their businesses. The first reason for failure occurs if
the franchisee does not understand the type of franchisor he or
she is taking on.
1500
Bill 33 calls on
franchisors to provide their clients with a disclosure document
that contains the company's financial statements. Where Bill 33
falls short is where it fails to recognize that there is more to
a franchisor than their financial statements. Bill 33 should
include details pertaining to the business experience of the
franchisor's management personnel, litigation history, and
insolvency records if applicable. Franchisees have a right to
know what they will be dealing with before they sign on the
dotted line. They have a right to know the rate of failure or
success of the franchise. They have a right to know if nearby
franchises are thriving or barely surviving. For the franchisee,
the disclosure of this information can protect their family from
potentially losing their life savings.
In order to visualize the
kind of relationship that I'm describing, I've decided to
personalize some of the examples. Throughout the presentation
I'll be referring to a franchisee named Brenda who has entered
into a contract with a grocery franchisor named FoodMart. After
Brenda's family decides to agree to act as a franchisee, their
problems begin to become apparent. In most franchise agreements,
there is usually a provision for forced buying. Through forced
buying, FoodMart is the exclusive supplier of all necessary
products to Brenda's business. She now finds herself forced to
purchase products from the franchisor which are marked up or can
be of lower quality than products that are available locally.
This example was played out
in a grocery store in my community. This grocery store wished to
purchase produce from local growers after customers had lobbied
the franchisee to do so. The franchisor threatened the franchisee
with the loss of their franchise if they persisted in doing this,
despite the franchisee finding a local producer who offered a
better quality of produce at a lower price.
Bill 33 on the surface
wants to promote fair dealings, but there is nothing fair about
forcing franchisees to buy supplies at unnecessarily high prices.
In my community, successful small businesses have helped to build
a strong community. Bill 33 needs to offer an option to opt out
of these purchasing deals so that franchises can support other
local small businesses rather than allowing franchisors to
continue to drain money out of our communities.
In my conversations with
some franchisees where I live, I asked why they stayed in these
agreements when they clearly did not benefit them. The answer was
that the franchisor often uses equal parts of fear and
intimidation to keep many franchisees in their system. Brenda's
family, seeking an opportunity for success, has invested her
savings, her RRSPs, and mortgaged her home in order to start up
her FoodMart store. Franchisees, by virtue of investing most of
their financial worth into their business, become tied to its
success or failure. Franchisors use this dependence to achieve
greater power over their franchisees. When faced with the
prospect of losing her life savings or her home, Brenda will fear
the actions of the larger, more powerful FoodMart organization.
When she attempts to question the actions of FoodMart in areas
such as increasing royalties, she will be reminded in no
uncertain terms that FoodMart controls her store, not her.
When Brenda wants to inform
other FoodMart franchisees of her situation, threats of legal
action by FoodMart soon follow, thanks to confidentiality
agreements that she was forced to sign prior to being awarded her
franchise. These so-called gag orders act as legal muzzles over
franchisees. Brenda is prevented from disclosing the misdeeds of
FoodMart to other franchisees and, worse, cannot inform potential
new franchisees who are about to sink their money into a FoodMart
operation. The removal of these gag orders is something Bill 33
does not address.
Even worse, Bill 33 does
not include regulated standards of conduct. Prohibiting the
inclusion of gag orders in franchise contracts, termination of a
franchise contract without cause, and allowance for the use of
independent suppliers should be included in this bill. Simply
putting the words "fair dealing" in the title of Bill 33 will not
ensure that dealings between franchisees and franchisors will be
any fairer than they are today.
If this committee wants to look for examples of
how to incorporate substantive measures that would ensure fair
dealings, they would need to look no further than Bill 35, a bill
introduced by your colleague Tony Martin. Bill 35 outlines
minimum standards of conduct and protects the rights of the
franchisee. If the intent of Bill 33 is to protect franchises,
then it should contain strong mechanisms for enforcement. While
Bill 33 does extend the right of action to sue franchisors if
they misrepresent themselves or do not allow franchisees to
associate, the only means for the franchisee to enforce these
provisions is to sue for damages. This sort of legal action is
expensive. It can financially ruin the franchisee's business.
If Brenda, whose life
savings and investment are at stake, refuses to accept FoodMart's
conditions, she has a choice, for lack of a better word. She can
walk away with nothing or, if she attempts civil legal action,
she is faced with the prospect of walking away with less than
nothing, that being the loss of her business and some huge legal
bills.
Many franchisors have the
means and are content to stall cases in the courts until the
franchisee can no longer afford the cost of justice. In order to
protect the over 5,000 franchisees who take civil action against
their franchisor each year in Canada, an alternative form of
arbitration needs to be proposed. The most accessible and
equitable way to do this is through a dispute resolution process.
Bill 33 is silent on this vital point. However, details on
dispute resolution can be found in sections 28 and 29 of Bill
35.
That dispute resolution
process establishes a mandatory process of mediation where both
sides are able to express their differing opinions to an
impartial mediator who will be able to provide constructive ideas
for resolving the dispute. This forum would provide an affordable
alternative to lengthy and expensive civil court proceedings.
An argument put forward
against this is that the dispute resolution process would act as
a layer of red tape, an imposition of bureaucracy on small
business. Nothing could be further from the truth. This is about
protecting and encouraging independent franchisees and improving
their chances for success.
In order for any new law to
have meaning, there needs to be a reward for compliance or a
penalty for non-compliance. A contravention of Bill 33 is not
considered an offence. To protect franchisees from potentially
unscrupulous franchisors, I suggest that a breach of this act be
a public offence. Positive examples of some measures of
consequence can be found in sections 57 through 60 of Bill 35.
Offences such as willful misrepresentation, interference in an
investigation or selling pyramid schemes should be against the
law. These sorts of offences deserve more than a civil judgment,
because they are very serious.
Only the threat of heavy
fines will dissuade franchisors from being able to financially
afford ignoring this law. If we want to seriously consider
protecting franchisees, we also need to consider enacting
penalties that will tell franchisors that taking advantage of
working families and their life savings is not a civil action or
a business tactic but a crime.
Some areas of concern that
are not addressed in Bill 33 include the rights of employees of
franchisees. Employees of franchises often find themselves in
positions that fall woefully short in areas such as wages,
benefits and job security. Today's minimum wage of $6.85 an hour
is lower than the minimum wages across the United States after
the currency exchange. The extension of benefits, even to the
very few who find themselves in full-time positions in a
franchise, is rare. Franchisees often want to reduce employee
turnover and attract better skilled workers. Unfortunately,
because of the schemes of royalties and licensing fees,
franchisees are being squeezed so tightly that even if they
wanted to, they are unable to pay their workers a better
wage.
In order for workers to be
able to earn better hourly pay, laws governing the organization
of employees need to be visited, and perhaps changes to help
workers should be incorporated in this bill at a later date. Many
franchisees that are forced into bankruptcy often have
significant amounts of wages owing to their employees. The
possibility of giving employees and local creditors priority over
the franchisor should also be looked into as a possible amendment
of Bill 33. Provisions forcing the franchisor to guarantee the
payroll of franchisees that go under is another possibility.
In summary, the problem
that franchisees face is having to deal with a very powerful
franchisor. It's a case of small versus big. This bill has a real
chance to provide serious changes to protect franchisees and
allow them to be independent, as promised, and able to reinvest
in their community. In my view, franchisees are in need of
protection, which they don't have at the moment. As it stands,
Bill 33 does not go far enough to be provide that protection.
Only going part way to assist small enterprises is a
disappointment to small family businesses.
Please consider some of the
ideas I have presented to you today, and hopefully bring forth
some amendments that will truly assist franchises in a more
meaningful way.
I want to thank the members
of the committee for allowing me this time. I look forward to any
questions you might have.
1510
The
Vice-Chair: Thank you very much, Mr D'Angelo. The first
questions will be from Claudette Boyer.
Mrs Boyer:
Thank you for your presentation. I thought that was a different
way of going at it with the scenario.
When you started, you said
that Bill 33 is well intended and can offer franchisees the
protection they need but fails to do so. Do I make out of that
that what you say Bill 33 fails to do and should do is the
amendments you would like us to potentially look over and bring
around to have it more forceful?
Mr D'Angelo: I believe that
Bill 33 is a good first step in helping to protect franchisees. I
think it's very fortunate for this committee that there is
another bill, Bill 35, which addresses many of the concerns I
have. Perhaps some of the amendments to Bill 33 can be found in
Bill 35, in some of the sections I outlined that pertain to
dispute resolution and that sort of thing.
Mrs Boyer:
Of course you know this is not our first day of hearings; this is
our third day. You did bring up a lot of points that we were
reminded of Monday and yesterday in Sault Ste Marie. You bring up
the question of community involvement, and I have to let you know
that this has been a point, especially with local businesses,
that you could encourage. You talked about Bill 35, as far as
amendments are concerned, and I think you've mentioned some of
these. So yes, we will look into them. I thank you for your
presentation.
Mr Martin:
Thank you very much, Mr D'Angelo. I thought your presentation was
quite thorough. I want to focus my questioning on a new
perspective that you put on the table today. Yesterday in Sault
Ste Marie we heard of the impact of some of the direction
franchising is taking on local economies in the province and the
ability of small producers to get their product on the store
shelves so they can get it sold and consumers can have a
choice.
Today you mentioned the
impact of the changing world of franchising on employment. A lot
of the service that is now delivered by franchises used to be
locally owned, mom-and-pop operations that supported families and
provided, in some instances, some full-time work that had fairly
decent wages and was fairly stable. We note more and more, and
we've heard from some of the people who came before us, that
because of the diminishing margins, we now have a lot of
part-time employment, and a lot of it, if not minimum wage,
fairly close to it.
Are you suggesting that
protection of the franchisee would go a distance to improving
that circumstance?
Mr
D'Angelo: Yes. What has been happening is that a lot of
small businesses that are community-oriented and owner-operated,
and that do provide some full-time jobs at decent wages, are
often being replaced by larger, very corporate-oriented
franchises that focus on paying their workers the lowest amount
they can and investing not as much into their community as the
local businesses sometimes do that are supported by the residents
of the neighbourhoods they serve.
Getting back to my point
that successful small businesses build successful communities,
being able to pay a worker a decent wage ensures that the person
who works for you can afford to buy the things you sell in your
store and the things that are sold in other stores. It serves the
community better to have workers who are well paid, who have job
security and who can work full-time as opposed to some of the
things offered by franchises, where it's part-time hours, casual
work, minimum wage and that sort of thing.
Mr Martin:
Just to follow up on a comment that was made by the previous
speaker on the question of: "Nothing is forever, so what are we
worried about? You make an investment; you take the risk. Some
win; some lose. That's life." We're also told that young people
are OK with that. You're a young person in front of us today,
making a case for franchising. What are your hopes and
aspirations when you get out of school: To get into something
that will be long term or to get into half a dozen things that
may or may not be successful? What are your hopes and
aspirations, and where do you think we're going in the world?
This is a huge question, I guess. But in terms of long-term
security, something you can count on-I think you know what I
mean.
Mr
D'Angelo: It's sort of a philosophical debate about
franchises. It's interesting. Going back to the comment that
nothing is forever, if you're someone who saved a bit from your
paycheque for years and you invest in this business and you open
it up, and because of the scheme set up by your franchisor you
are forced into bankruptcy and you do lose your savings, that's
something that is forever, unfortunately. The business may not be
forever, but going bankrupt, losing your life savings, losing
your home and your RRSPs is something that I think does last
forever.
As someone before you today
in this committee, someone potentially interested in one day
having perhaps a franchise, I think that what this committee has
is an opportunity to really do something to help small businesses
thrive in this province. It's something that we need to look at.
I hope some of the amendments that I presented ideas for are
presented and hopefully passed into the bill.
Mr Gill:
Thank you, Mr D'Angelo, for being here. I have a couple of
questions. Actually, this is our third full day of hearings, and
to be honest, you are the first one who is not related in any
which way to a franchisee or franchisor or somebody related to a
law system or whatever. Just to let you know that you're the
first one. Are you from Ottawa?
Mr
D'Angelo: Yes.
Mr Gill:
Are you related in any way to Brenda?
Mr
D'Angelo: No.
Mr Gill:
How did you hear that these hearings were being held?
Mr
D'Angelo: I heard about these hearings as a business
student. I'm interested in some of the things that go on in
business law, and as someone who has worked for a franchise, I do
know a franchise owner who indicated that there was a bill. I was
referred, too, by your parliamentary channel that invited calls
be made to the clerk of the committee, and the clerk did a lot in
helping to get me here today and giving me the time to be
here.
I find it interesting that
you noted that I was the first person who wasn't related to a
franchisor or a franchisee. That's sort of the position I took in
coming here today, that is, what do I want to see as a person in
the public for small business, because I know that small business
plays a vital role in community building. That's what I'm
interested in,
building a strong community in the west end of Ottawa, where I'm
from.
Mr Gill:
When did you know that Bill 35 was not being discussed? On the
table was Bill 33. Where did this Bill 35 come from?
Mr
D'Angelo: The Legislative Assembly of Ontario Web page
that you have lists the bills that are currently on your order
paper and Bill 33 is on that. It's listed alphabetically,
"Franchises: Bill 33." Right under it was another bill called
Bill 35 that was also about franchises. I had the opportunity to
read both bills and what I found was that Bill 35 provides a
stronger enforcement, a better idea for a dispute resolution
process than some of the things that were offered in Bill 33.
Bill 35 is definitely a stronger bill, and I hope you look into
Bill 35 as perhaps a source for some amendments to Bill 33.
Mr Gill:
You have some good points. In your submission where it says what
Bill 33 fails to do, in fact, if you really dig deep into it,
Bill 33, in the detailed disclosure agreement and the right to
associate, once the regulations are made, will address all those
issues. The only thing it will not address is the gag orders, to
eliminate that. That's the contract you sign when you settle
something. I don't think we can ever eliminate that, if you agree
to sign something. I don't think we'll be able to legislate that.
Do you want to comment on that?
Mr
D'Angelo: I think you can legislate against using the
gag order against someone to keep them from informing another
franchisee about the misdeeds. I personally think that it's
unconscionable to force someone to sign a contract before giving
them a business, to say, "If we put you in a situation where you
have to lose your savings and your home, you don't have recourse
to speak to other potential franchisees who may be considering
investing," and perhaps giving more information of your personal
experience than your franchisor allows you. I don't believe it's
the role of the franchisor to tell the franchisee what they can
say and do.
1520
Mr Gill:
These gag orders are not signed before getting into business;
these are signed after dispute happens, after they get into some
kind of settlement. I think you are incorrect in saying that
these gag orders are imposed upon before signing a contract.
Mr Martin:
Some are.
The
Vice-Chair: We've had quite a bit of discussion on this.
Mr D'Angelo, we really appreciate the time you've taken here in
making your deposition and all the efforts you've put into your
presentation.
CHARLES GIBSON
The
Vice-Chair: The next presenter is Mr Charles Gibson. Mr
Gibson, I understand that you may be willing to give up five
minutes of your time so that we may ask Mr Tremblay some
questions.
Mr Charles
Gibson: Yes. Perhaps we can just see how it goes with
me, and if there are five minutes left, I'd certainly like to
have Mr Tremblay have the occasion.
The
Vice-Chair: That's okay with the committee, so you've
got 20 minutes.
Mr Gibson:
I'm Charles Gibson. I'm a lawyer. I represented Mr Tremblay in
his matter to which he referred during his presentation. I think
I'm going to change my presentation from my original thoughts.
Sitting here listening to the committee, it seems to me that it
dovetails very well with what I was going to present, but I think
I'll change the fashion.
We were talking today about
whether or not something is for life. We've heard whether or not
when someone signs a franchise agreement it should be something
which is a pension plan and provides them something for life. I
think that most persons would agree that it should not be a
pension plan. However, what it should be is a fair chance for the
contracting parties to have a commercially reasonable business
relationship.
I think it's important to
note that in the traditional franchisee-franchisor relationship,
there's a real imbalance of power. You have the little guy and
the big guy. Traditionally in law that's treated by way of a
fiduciary duty. I don't think that in these circumstances in a
commercial contract you necessarily have to have the law impose a
fiduciary duty, but to be able to ensure that during the life of
the commercial contract, which is what it is, both parties have a
chance, if they work hard and if the competition doesn't beat
them, to have a successful business.
What happens traditionally,
in my experience-and I've represented a lot more people than the
Loeb people. I've represented dozens of franchisees. I've
also-don't tell anyone-represented some franchisors.
Traditionally, what happens is that during the course of the
relationship things evolve. In every franchise agreement I've
seen that's been signed in the last 10 years, as it evolves it
gives a discretion to the franchisor. The franchisor then
exercises that discretion, whether it be for lowering or
increasing of fees, whether it be for costs. Most franchise
agreements call for the franchisees to purchase exclusively from
the franchisor. They have to purchase, they have to pay the fees,
etc. When one has an unfettered discretion in a commercial
context, where does that put the person against whom that
discretion is being exercised?
I'll draw back. I obviously
have some confidentiality provisions from the Loeb incident, as
well as that they're my clients who signed the gag orders. This
is not just limited to Loeb, because I've represented many
franchise situations. Traditionally what happens is: "Well, we've
gone for five years. We've paid for the renovations. Now we're
starting to make some money. Now let's exercise the discretion,
either to increase the fees or the costs, or let's get some new
renovations. Let's have them invest more money." Instead of
allowing the individual to have a period where they don't have a
heavy debt load etc and they can earn some money, they exercise
their discretion.
In Bill 33 there's section
3, which deals with the duty to deal fairly. In my review of this
section, in conjunction with section 2, I must admit I came to a
surprising conclusion.
At least a tenable interpretation is that the fair dealing does
not apply for contracts that existed prior to the introduction of
this bill. I see at section 2, which deals with the application
of the law, it states: "This act applies with respect to
franchise agreements entered into on or after the coming into
force of this section, with respect to" etc. I don't know if that
is intentional, but in my opinion, if this franchise legislation
is to have any validity, any power for those who are already in
the franchisor-franchisee relationship-clearly section 3 says,
"Every franchise agreement imposes on each party a duty of fair
dealing in its performance and enforcement...." I respectfully
suggest that should be changed to make it clear, so when you get
lawyers like me reading it, it's clear that it does apply under
those circumstances. That's as an aside. As a lawyer, I saw that
and that flew to me.
But one must now look, in
my opinion, at what happens during the commercial relationship
when the discretion is being exercised. When it's being
exercised, I respectfully submit to you that it should be done in
a commercially reasonable fashion. I think that's the key. Nobody
expects to invest money in a business and have a pension and have
the government say: "OK, we're going to protect you. Nothing that
happens is going to be your fault. You've got this free ride."
However, when you have an imbalance of power I suggest that what
has to happen is that there has to be something which keeps the
more powerful party in line. This is a business. A good example
is when you have a franchisor who has corporate stores and
franchise stores. Traditionally, the franchisor is the wholesaler
as well. So if they're the wholesaler and the retailer, they
don't care where in the chain of sale the profit goes because
it's going in the same pocket.
However, if you're a
franchisor and you have franchisees, you have to look at whether
or not that decision impacts on the front-line retail
profitability. If all your decisions don't take that into account
because two thirds of your stores are corporate stores, then what
happens to the franchise stores? The franchise stores get
squeezed. They make the money at the wholesale and they squeeze
it at the retail.
If you have in Bill 33 a
section which defines fair dealing-as it stands now the common
law provides for fair dealing but it provides for unconscionable
transactions. In other words, if it's an unconscionable
transaction, then the fair dealing comes into play. However,
unconscionable transactions for general purposes means fraud.
It's very, very difficult to prove in a civil context. So if you
have this fair dealing as it stands now in section 3, I
respectfully submit that what you have is a toothless section. It
does nothing more than what already exists.
Do we just want optics? Do
we just want to look politically correct in putting this in
there? I respectfully submit, no, we don't. I only ascribe the
best intentions and I think it's important that the Legislature
and the government not allow themselves to put into law something
that basically does not change the problem for which the law is
being enacted. It's got "fair" in there. Let's ensure that
there's some fairness ensured by what's in there. If we don't,
it'll look good in the name of the law but it will not have any
practical effect.
I could go on and give what
the proper definition of a commercially reasonable transaction
is, but I don't think that's necessary here. You have your
experts who can tell you that. But having that in the law, one
might initially say: "That's going to cause a lot of litigation.
There's Gibson the lawyer. He's going to make more money. That's
great." But that's not really what it will do. It will make
people have a sober second thought, the franchisor before they do
something and the franchisee before they do something. It's
ensconced in our law already. The Personal Property Security Act
has it, and it's defined. There is a lot of jurisprudence about
commercially reasonable transactions and what is and is not
acceptable. I think if the law succeeds in doing one thing, then
that's what it should do. I'm a litigator, so I only get involved
when the problems happen, but in consequence I see what the
problems are with disclosure, with right to associate, and with
the duty to deal fairly. If this law were to succeed in doing one
thing, it should be the fair dealing, because that permeates
throughout, whether it's at the front end or the back end.
1530
The right to disclosure
helps those 1,000 people who go into a franchise every year, but
it doesn't help the 40,000 who are there presently.
The right to associate: Mr
Tremblay was speaking from experience when he said that if the
right to associate is not backed up by a regulation which says
the franchisor as well has to deal with the association when it's
set up-I've dealt in situations where there is an association,
but if the franchisor refuses to recognize it, what does it do?
Again, a toothless section.
I'd just like to conclude
by saying this is a law which is required. In 1997 I was in
Queen's Park. I met with Mr Martin, I met with Mr Patten, I met
with the then minister, Mr Tsubouchi, and we discussed these very
things. It is now some two and a half years later and, to be very
frank, it looks as if there has been some backing up in what is
in the legislation. Your duty, as elected members, is to look at
the best and most efficient way to ensure that all citizens are
protected, franchisors and franchisees. Sometimes a franchise
doesn't work; sometimes a franchise has to be terminated. Not
everybody is a good businessman. It's impossible, in my opinion,
for the Legislature to put in a set of criteria for rights.
If you do it on a
"commercially reasonable" basis, then everybody has got to stop:
"Is this reasonable? Am I putting the screws to this person, or
am I being reasonable?" If they can't deal with a reasonable
commercial transaction, then they shouldn't be in the
business.
Thank you very much for
listening to my remarks.
The
Vice-Chair: Mr Martin, do you have a comment?
Mr Martin:
I sure do.
Mr Gibson:
Whoops.
Mr Martin: I can't not respond
to your comment on, "Is anything forever?" We had a gentleman
before us here today who was second-generation grocery. We had in
the Loeb case in Sault Ste Marie two families-
Mr Gibson:
I represented them.
Mr Martin:
Yes, you did, and one of them left a store in Blind River to his
son. His son lost the store, moved to Sault Ste Marie. He thought
he would have a chance if he worked hard, if he was a good
competitor, a good businessman-and he was all that. He was one of
our best corporate citizens. Anybody you'll talk to in Sault Ste
Marie today is very sad that he's gone, no longer there. He
thought that if he did the right things, if he worked hard and
all the rest of it, he was going to have a store that would take
him into his twilight years and he would be able to pass it on
maybe to another one of his family. Is there anything wrong with
that?
Mr Gibson:
No. And if there's a "commercially reasonable" provision defining
fair dealing-I represented him, so I know what the situation is.
If there had been fair dealing and a definition of fair dealing
in the law at that point in time, it would have been a different
story. And you know something? If there had been a definition of
fair dealing in the law at that time, the problem wouldn't have
arisen.
Mr Martin:
Let me ask you another question, and I know you may have some
problem answering because of the confidentiality agreement that
you had a hand in, although I don't think you signed it; maybe
you had to witness it or something.
Mr Gibson:
No, but I have some-
Mr Martin:
Yes, some other concerns. Anyway, and this isn't in the bill, the
right of franchisees to be consulted on the sale of a system-the
franchisee, from what I gather, puts in the money, and the
franchisor has the power.
Mr Gibson:
Well, that's a simplification, but yes.
Mr Martin:
So the franchisor decides to sell the system, but he doesn't ask
the franchisee. He doesn't share it with him or explain to him
why he's doing this, how this is going to be in everybody's best
interest. He just goes ahead and does it. The franchisee wakes up
in the morning and it's no longer Loeb, it's Provigo. Is there
something that we should be considering there?
There's another part of
that, and maybe you can answer them both at the same time. You've
looked at lots of contracts. How many sections deal with the
rights and powers of franchisees, as opposed to dealing with the
rights and powers of franchisors?
Mr Gibson:
There are lots of rights given to the franchisor, but very few
obligations. There are a lot of obligations given to the
franchisee, but very few rights. I hate to come back to the same
issue, but that can be dealt with in the terms of a reasonable
commercial contract. If it's sold and they don't consult, and the
new franchisor comes in and starts acting unreasonably, then he
has breached the law. It's as simple as that.
The franchising system is
too complicated to say we can break it down into nuts and bolts.
You cannot. There is a myriad of different types of
relationships. There is the mom-and-pop new Internet type of
franchise which takes $20,000 to get in and they give you some
tools and you try. Then there are the ones that are going to cost
you hundreds of thousands of dollars: Canadian Tire, Tim Hortons,
McDonald's etc.
To have one law that's
going to give a specific set of rights for such a wide gambit of
relationships, you're going to hurt by exclusion. You're going to
miss things. You're going to have misapplied things. What might
be applicable for the mom-and-pop might not be applicable for the
McDonald's. But if you look at it and say, "It's got to be
commercially reasonable"-it's the sober second thought, when
someone is doing it, and they say: "A judge may or may not be
looking at this some day. I have to see whether or not I think it
would be acceptable."
Of course, a judge is a
whole other set of problems, because franchisees don't normally
individually have the means to hire a lawyer and have a big
fight. I've heard talk about ADR. I didn't mention it but it
could very well be a very important tool for the
franchisor-franchisee dispute resolution system because it's very
costly to hire lawyers, and it should be something which should
be a last resort as opposed to something which is the only
way.
The
Vice-Chair: Mr Gilchrist and Mr O'Toole both have a
comment.
Mr
Gilchrist: A couple of brief things. I won't indulge in
lawyer-bashing but, for the record, if you had gotten to the
clause between 2 and 3, you would have seen that 2(2) says that
section 3 and others "apply with respect to a franchise agreement
entered into before the coming into force of this section, and
with respect to a business operated under such agreement...."
The act does very
explicitly say that that clause applies to every single existing
franchise agreement that's already in force, so they will have
protection from day one.
The other thing is,
Canadian Tire has no franchise fee-I wanted that on the
record-not hundreds of thousands, not one dollar. It never
has.
I'd like to very quickly
get your opinion in terms of whether the cases you've dealt with,
by and large, would have been materially different if there had
been full disclosure, and let me underline and re-underline the
word "full." Things such as the complete price list of
products-if it's a question of let's say a doughnut shop or a
pizza franchise-so that you could go to your local wholesaler and
compare the price you're being quoted from the franchisor with
what would happen if you walked in off the street; if you knew up
front all of the terms and conditions that would apply at renewal
time; if every material fact-and I appreciate things can change
in the course and you talked about areas where there is
discretionary power, but even there-if it laid out in detail what
those powers could mean, would it not obviate most of the
problems that ever crop up in the term of a franchise agreement?
Or might it even preclude a lot of people from getting into questionable
franchises at the outset?
1540
Mr Gibson:
No, I don't think that it would. It would affect, I'm sure, a
certain percentage of franchises at the front end if there was
total disclosure. But I don't think, when you have normal
franchisees-and again I use "normal," "regular"-being inundated
with all kinds of information and they bring them to me and it's
about-I'm trying to think of one that I haven't dealt with so I
would know nothing about it. If it was about the growing of
flowers in a nursery and they said, "These are the prices," and
these people were not really experts in it and they were relying
on this as being information which showed that it would be
profitable and subsequent to that they found out that it wasn't,
or, more likely, they found out that discretion was exercised, it
won't do that much good to have learned at the outset that those
were the material facts. I'd like to back up one more step and
say I don't know how you could ever disclose all the material
facts.
Mr
Gilchrist: Let me again put on the table something Mr
Konigsberg, a lawyer from Montreal, told us this morning. I
thought it was a very wise comment that he offers to prospective
franchisees who come into his office. He tells them he won't talk
to them until they've either gone out and researched the
marketplace or spoken to past franchisees. Why shouldn't the law
society make that a requirement for every lawyer?
If you're going to be paid
to counsel a prospective franchisee, at the outset, unless they
are very savvy investors, why shouldn't your first words to them
be: "Ignore everything the franchisor has told you in the sales
pitch, everything, because if it isn't in this document, it
doesn't matter. Do you understand me?" If they don't satisfy you
at that point, are you really meeting their needs by allowing
them to go further?
Mr Gibson:
Am I a lawyer or a business adviser?
Mr
Gilchrist: If they've come to you expecting, when they
walk out of that office, to have the comfort level to sign the
deal, if you in fact don't know anything about growing
flowers-and nor do I-I would like to think that the first
responsibility either one of us has would be to say: "I can't
even come close to answering the issues when it comes to pricing.
They've quoted you certain prospective profits. Here's what you
must do to satisfy yourself, because there's nothing I can do in
this office." I would suggest to you that if you don't make that
very express statement explicitly clear to them, then they have
not been well served in that one regard.
Mr Gibson:
When someone comes into a lawyer's office with a bunch of
contracts and says, "Review these contracts and tell me the legal
effect of these contracts," if the lawyer does his job, he'll
tell him the legal effects. You say to your client: "With respect
to the business component, ensure that these numbers are right.
Go see your accountant."
Mr
Gilchrist: Whatever direction you point them in, but you
would agree with me that they should be seeking other counsel on
their business terms.
Mr Gibson:
Certainly.
The
Vice-Chair: Mr O'Toole, a quick comment.
Mr
O'Toole: I think it was clarified that the prior
provision you clarified at the beginning is important. You would
know, if you've been practising in this area-and I'm not trying
to contradict you-but Mr Tsubouchi tried, and there was a working
group that has put together a consensus of views. This process
has been going on basically since the Grange report. Where other
governments have attempted to find the balance and have failed,
clearly this attempt is to find the best first step, not to
absolve us of making a world of perfection; that, it is not. Do
you understand?
Mr Gibson:
Oh, sure.
Mr
O'Toole: It's certainly a warning to the industry, as Mr
Gilchrist said, and the legal community as well, to recognize
that. I wish to strengthen the language under "fair dealing"
myself if there's something that has been defined in law. The
first thing I asked was, "What does `fair dealing' mean to me?"
Somebody said that the provision under the Personal Property
Security Act would prevail. I am more comfortable with something
that's defined; otherwise I'm going to have to pay another
$1 million to find out what "fair dealing" means.
Mr Gibson:
Didn't the Grange report give a definition at one point in
time?
Mr
O'Toole: Yes, that's what I'm referring to. It's back to
the Grange report and it's one of the substantive recommendations
in there. But I've used my time and I appreciated your input.
Mrs Boyer:
I just want to assure you, Chuck, that with all these hearings
we're going back with a lot of recommendations to look into and
to give force to this bill.
Mr Gibson:
When I stated it earlier, I said I don't ascribe any bad faith on
anyone's part. You have a very difficult job to do and obviously
you have many conflicting interest groups that make presentations
to you. Obviously, many of them have good spokespersons and
they're persuasive from all contexts.
Mr
O'Toole: From all their lawyers.
Mr Gibson:
That doesn't necessarily mean that lawyers are good
spokespersons.
Mr O'Toole, with respect to
your comments about it taking so long, I understand why it takes
so long. As I said earlier, there is a myriad of relationships.
You can't define the franchisor-franchisee relationship on a
piece of paper. It's so wide and vast. That's why I get back to
the simple. When I say to define, you're going back to the
simple.
Mr
O'Toole: You go back to established law.
Mr Gibson:
Exactly. You go back to the simple and therefore you're not
giving lawyers a pension plan by putting all these various things
in there that they can attack. You go to one-and that's what
judges do anyway. It doesn't matter what the law says, judges
look at it and say:
"Is this reasonable? Should this person have done this?" If not,
they'll find a way to get around it.
The
Vice-Chair: Did you really think you were going to get
through this in 10 or 15 minutes?
Mr Gibson:
It's like when a judge asks me, "How long are you going to be?"
and I say, "Oh, half an hour." Yes, right, another two days.
The
Vice-Chair: Thank you for your time.
ALGONQUIN TRAVEL CORP
The
Vice-Chair: Our next speaker will be Mr Greenwood from
Algonquin Travel.
Mr Ron
Greenwood: Good afternoon, ladies and gentlemen. Thank
you for providing me with an opportunity to address these
hearings. My name is Ron Greenwood. I'm president of Algonquin
Travel Corp. I'm a graduate of Ryerson Polytechnic Institute's
chemical engineering program and Wilfrid Laurier's business and
economics program.
In 1967, I joined Imperial
Oil Ltd and worked on the Esso service station franchise program.
In 1971, I purchased an E.K. Williams bookkeeping and accounting
franchise as a franchisee. I successfully operated that
franchise, becoming the largest franchisee out of more than 30
franchisees in Canada, and sold that business in 1978. In the
same year I joined Algonquin Travel Corp, and today I'm
responsible for all aspects of the efficient, profitable and
successful operation of Algonquin and its related businesses.
During my tenure in the
travel industry, I've been fortunate to hold numerous positions
serving the travel industry and the franchise communities,
including sitting on the provincial and national boards of the
Association of Canadian Travel Agents. I co-chaired the Ontario
travel industry self-management steering committee, which led to
the formation of the Travel Industry Council of Ontario, or TICO,
and was a member of the first TICO board. Most recently, for the
past two years, I chaired the board of the Canadian Franchise
Association and now remain on that board as past chair. Having
shared that knowledge of me, I will proceed to share with you my
views about the proposed legislation.
My presentation to you
today is as president of Algonquin Travel Corp, an interested and
concerned franchisor doing business in Ontario and that other
regulated province, Alberta. As such, I trust that you'll find my
input on the draft legislation relevant to the committee's
consideration.
Algonquin Travel has about
80 franchised travel agency locations across Canada, of which
about 50%, or 40, are located within the province of Ontario.
With more than 30 years of franchising experience behind me, I am
strongly in favour of the proposed legislation. For the past
eight years, we've provided full disclosure to all of our
prospective franchisees. It was the law in Alberta and, latterly,
a requirement of membership in the Canadian Franchise
Association. Our experience at Algonquin is that full disclosure
provides the prospective franchisee with all of the information
that is required to make an informed decision, including-very
important-a list of all the franchisees; past litigation and
franchisee terminations, if there are any; a detailed description
in lay terms of the franchisee obligations and commitment to the
franchise system; and the financial status of the franchisor.
1550
Additionally, the proposed
legislation proposes fair dealing and the right of all
franchisees to associate and communicate with one another. To go
beyond such disclosure at this time is unfounded and without
justification. Alberta found that more rigorous legislation was
unworkable and unjustified and was subsequently simplified to
today's disclosure style of legislation, in form similar to that
being proposed by the government of Ontario.
As a responsible
franchisor, we absolutely need franchisees to be successful.
We've had failures and the consequences have been very
significant-almost bringing down my chain in the early days.
Franchisees are both an asset and a liability. As an asset they
commit their time, dedication, capital and enthusiasm to help
build our system. On the liability side of the equation, we
entered into significant contracts to support each franchisee. We
have a very significant commitment to each of our franchisees, as
follows.
We head-lease almost all of
our premises. A failed franchisee is a significant liability.
We've lost money on every failed franchisee, in most cases more
than the business was ever worth in the first place.
We have a fiduciary
obligation to our customers and our franchisees to guarantee, to
the best of our ability, that each of the customers receives the
quality and quantity of services contracted for. A failed
franchisee is a significant liability costing us money that is
usually not recoupable.
Most supplier contracts are
in our name and suppliers demand payment if the franchisee cannot
pay. Non-payment will result in a demeaned relationship with that
supplier and degrading the entire Algonquin system.
Our franchise support
centre has significant human and technical resources to meet the
needs of operating franchisees to support the system.
Our bankers require a
"soft" letter of comfort for all Canada Small Business Financing
Act types of loans, stating that in the event of a failed
franchise, all proceeds realized on the resale of the franchise
will be first used to retire bank obligations before any funds
are used to offset indebtedness to our company.
In summary, I reiterate
that we need happy, successful, profitable franchisees. If we
have unsuccessful franchisees, it's very expensive, cumbersome
and time-consuming to get these people out of our system. The
proposed legislation will help to create a fair, informed and
balanced environment for both the franchisee and franchisor.
Legislation can never be a
substitute for doing your homework before you make a decision to
purchase a business.
This legislation sets a solid foundation for any entrepreneur who
is looking to make an educated decision about investing in a
franchise. The government's draft legislation sets out fair and
reasonable disclosure requirements. The legislation will have the
greatest impact on new franchises being sold in Ontario, by
requiring all franchisors from now on to provide the level of
disclosure that the very best franchise systems already disclose.
Disclosing all of the necessary information needed to make an
informed decision before any agreements are signed, combined with
a cooling-off period, will ensure that the franchisees are able
to make sound business decisions in selecting a franchise system.
I urge you to pass this long-overdue legislation.
Perhaps just a couple of
comments because I haven't really heard very much from
franchisors in these hearings, certainly not today.
Some of the examples of
losses: My former partner and I feel that over the last 20 years
we've lost about $2 million in failed franchisee-type
operations. It's not insignificant for a small operation. To put
that into perspective, my total gross revenue in my system today,
not the sales of the system but the revenue coming into my
company, is about $4 million a year. We actually budget right now
more than $100,000 a year for failed franchisees; that's only
one, maybe two, out of a system of 80-plus franchises.
I'll give you some examples
and I'll be right upfront. Cadillac Fairview, Portage Place,
Winnipeg, Manitoba: We lost $150,000 when Cadillac Fairview built
kind of a Taj Mahal, a very deluxe operation akin to the Eaton
Centre in Toronto, the Rideau Centre here in Ottawa. It didn't
work very well. We were on the hook for a 10-year lease. The
franchisee lasted a year and a half or so and ended up relocating
outside of there, and we had to eat that lease because that place
was not rentable. A deluxe facility.
I had another franchisee
that was with me for 11 years, absolutely an impeccable
franchisee. Something went wrong. Two years ago at Christmastime,
he stopped paying some of his suppliers. I found out about it at
the end of January, started taking action in February, and by the
end of March he was into the system for almost $300,000. I ended
up losing $75,000. Never could refranchise that facility; lost it
all.
I had another franchisee,
another one in Manitoba-I don't know; it must be the air out
there-the fellow ran into some marital problems and drinking
problems and they installed one-armed bandits. This fellow was in
a cash-rich business, had been with me for seven or eight years,
was a model franchisee during most of that period of time. He
started taking the cash from this business and it just didn't
make it to the till or the bank. He ended up going out of
business, and we lost $65,000 and could not refranchise that
facility. All the business had been driven away.
I guess the point here is
that each franchisor has a significant investment in each one of
the franchisees; it's not a case where the franchisee pays
everything and the franchisor collects the money. That is
absolutely not the case. In our own operation, we feel that we
have invested at least 50% and perhaps 100% of the money that
each of the franchisees has invested on a per-facility basis. We
have a very significant investment in our operation and we need
those franchisees to be successful.
I could go on. Over the
course of 20 years, we have perhaps 25 or so failed franchises.
We were at 100 at one time; we actually sold off some of ours to
a competitor because they were too small, but maybe 25 failures
out of 100 over the course of 20 years. Each one hurt a lot. I
believe this legislation goes a long way to disclosing adequate
information to all of the prospective franchisees, and I hope it
will add a fair level of integrity to the franchise community
here in the province of Ontario.
The
Vice-Chair: Thank you, Mr Greenwood. The first questions
are from the PC members. Mr Gill.
Mr Gill:
Thank you, Mr Greenwood, for coming here. A couple of times it
was mentioned today that nothing is forever. You did say that you
have a disclosure agreement of some kind when you talk to your
franchisees. In the new one that you supply these days, does it
have any clause about this e-commerce coming in and the Web
tickets and whatever else is going on in your industry?
Mr
Greenwood: Actually, it doesn't, and that's a very good
point. You try to have agreements that encompass everything;
three years ago we really couldn't see much about e-commerce, and
some of our agreements-the initial term is 10 years, renewable
for another five and another five. We're right in the heart of
e-commerce country, and before I came here today, the full three
hours was spent on a new booking engine for our system. We
couldn't have anticipated that three years ago. We have just
rolled out state-of-the-art technology this year at a cost of
about $2.5 million to our small system.
I can tell you, yes, I've
got 20 or 25 franchisees that are very anxious about it. Maybe I
have more that are anxious, but 20 or 25 that are reticent about
committing to this new technology, so much so that they have kind
of steered clear of it so far. It's just a scary environment.
Before we started rolling
this out, we did a lot of homework. We were led by some very
savvy people in the industry, and I think we've got a very
cost-effective, state-of-the-art program that will take our
franchisees into the new millennium. I'll tell you, they'll be
head and shoulders ahead of 95% of the people in the industry.
But still, I've got 25 guys who say, "Don't need it; don't want
it; afraid of it," and my job is to convince them otherwise.
Mr Gill:
Under your system, who holds the actual licence, the retail
licence?
Mr
Greenwood: The franchisee is licensed by the province of
Ontario, and he also holds an IATA licence by the International
Airline Transport Association to issue tickets.
We hold all of the leases.
We hold all the technology contracts. In fact, to get the
technology we were just talking about, I had to co-sign a blank
guarantee with the leasing company such that if any of the
franchisees failed, I
had to pay. Similarly, our technology contract, which is about $7
million over a three-year term, I had to guarantee. It's one
contract for the entire system.
Mr Gill:
In your mind, from what you've just explained to me, you pretty
well are already doing these things that are encompassed in Bill
33.
Mr
Greenwood: Yes.
Mr Gill:
The right to associate, the disclosure agreement-
Mr
Greenwood: Yes.
Mr Gill:
So you support that.
Mr
Greenwood: Yes, I absolutely do. I think what a lot of
people are missing here is that we're still in a commercial
marketplace and if all prospective franchisees have access to or
knowledge of your existing franchisees, it's incumbent upon those
prospects to talk to the existing franchisees to find out what
the relationship is, because no matter how thick that document
is, whether it's one inch, five inches or whatever, you can't
have everything in there and more knowledge is gleaned from
talking to a handful of existing franchisees than we can ever put
in our promotional literature.
Mr Martin:
You talked about the experience of Alberta and how the
legislation there to some degree didn't work, so they backed off.
In the work that I had done to compare various jurisdictions and
the legislation they have in place, under "fair dealings" and
under "enforcement mechanisms" or bodies in Alberta, they
committed in their bill that a self-governing body be appointed
by the Lieutenant Governor in Council to promote fair dealing
among franchisors and franchisees to cover both issues. To date,
no such body has been appointed. Would that have anything to do
with the fact that their legislation isn't working?
Mr
Greenwood: No. In fact, fair dealing is quoted. If you
have any potential litigation or a statement of claim, fair
dealing is mentioned in every single one them, to the best of my
knowledge. So "fair dealing" is an issue in Alberta and, to the
best of my knowledge, it is expected to be abided by, although
there is no definition of "fair dealing."
Mr Martin:
I'm told that in Alberta the number of cases hitting the courts
is still as high, if not higher, than it was back before the
legislation was actually passed.
Mr
Greenwood: I don't have any empirical data to that.
Mr Martin:
OK. Just to make the point that so far that body in Alberta
hasn't been appointed.
Mr
Greenwood: Just in Alberta. Before this reduced
legislation came into effect, we had to charge prospective
franchisees about $10,000 more than we did in Ontario just to
cover the costs. The costs in Alberta were prohibitive.
Mr Martin:
You mentioned also in your deputation that you make available to
prospective franchisees a fairly complete disclosure statement,
including the name of former franchisees. Do you have former
franchisees out there who have a confidentiality clause attached
to any agreements you made with them?
Mr
Greenwood: All of our franchise agreements, of course,
have confidentiality clauses, but nothing that would restrict
them to talk about business in general. They couldn't disclose
trade secrets, the way we do business and that sort of thing, but
general comments and questions about the franchise system are
fair game.
Do you mean whether there
was a settlement of some sort? Of course, if you had some sort of
unique one-off type of thing and you made a settlement, both
parties would sit down and negotiate that and you'd arrive at
some sort of amicable conclusion and you'd sort it out.
Mr Martin:
But that person would be out there, not able to speak to
prospective franchisees about that particular circumstance or
situation.
Mr
Greenwood: Perhaps about the one isolated incident, but
they could talk generally about the franchise system and their
experience within that system, and they do.
Mr Martin:
Does the name Ed Barge mean anything?
Mr
Greenwood: Oh, it sure does. Yes.
Mr Martin:
We had him before us on Monday. Thank you very much.
The
Vice-Chair: Mr Greenwood, thank you very much for your
time today. We appreciate that.
Ladies and gentlemen, that
concludes the open session of the committee meetings here today
and we'd ask if you'd leave the room. We're going into closed
session for a few minutes.
The committee continued
in closed session at 1605.
