I D E N T I F Y I N G A N D M A N A G I N G F R A N C H I S E L A W R I S K

December 3 , 2019

Larry Weinberg

Accidental Franchises

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Outline of Presentation

• Overview of the franchise law regime in Canada

• Definition of a “franchise” under law

• Obligations if a relationship is a franchise

• Ramifications of non compliance

• Fact situations and cases

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Don’t Be Afraid of the “F” Word...

But… these laws have broader application than you likely realize

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Overview of Franchise Laws in Canada

• 6 out of 10 Canadian provinces now have a franchise law

• Alberta – 1995 (in current form)

• Ontario – 2001

• Prince Edward Island – 2007

• New Brunswick – 2011

• Manitoba – 2012

• British Columbia – 2017

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Overview of Franchise Laws in Canada

• Other provinces (Quebec, Saskatchewan, Nova Scotia and Newfoundland) – No franchise laws, and no discussion of such laws

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What is a “Franchise”?

• Definition of a “franchise” is broad

• Traditional “business format” franchise requires that the 4 following conditions all be met:

1. The grant of rights to carry on a business

2. That payments be made

3. Use or association with a trademark

4. Significant control or assistance by the licensor in franchisee’s methods of operation

• A second part of the test that covers “business opportunities”

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What is a “Franchise”?

“Franchise” means a right to engage in a business where the franchisee is required by contract or otherwise to make a payment or continuing payments, whether direct or indirect, or a commitment to make such payment or payments, to the franchisor, or the franchisor’s associate, in the course of operating the business or as a condition of acquiring the franchise or commencing operations and,

in which,

i. The franchisor grants the franchisee the right to sell, offer for sale or distribute goods or services that are substantially associated with the franchisor’s, or the franchisor’s associate’s, trademark, service mark, trade name, logo or advertising or other commercial symbol, and

ii. The franchisor or the franchisor’s associate exercises significant control over, or offers significant assistance in, the franchisee’s method of operation, including building design and furnishings, locations, business organization, marketing techniques or training.

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What is a “Franchise”?

• What is a “payment”?

• Initial franchise fees

• Royalties

• Ongoing payments of any kind, nominal or otherwise.

• Bottom line: any payment or consideration at any time

• Exclusions for bona fide wholesale prices = allows pure distribution models to avoid law, but not in Ontario

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What is a “Franchise”?

• What is “significant control”?

• method of operation = building design and furnishings, locations, business organization, marketing techniques or training.

• Product, service and inventory controls

• “Look and feel” and trade dress

• Consistency = hallmark of franchising

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Features of Franchise Law

• Main features of Canadian franchise law

• Pre-sale disclosure by franchisor to prospective franchisee

• Statutory duty of fair dealing

• Franchisees right to associate

• Relationship provisions (i.e., governing law and venue, and non-waiver provisions)

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Application of Laws

• “Partly or wholly” operated in a regulated province

• Alberta adds residency requirement

• Designation of law of regulated province into contractual relationship

• Non-application provisions

• Employment

• Single trademark license

• Co-ops

• Oral agreements

• Agreements with crown

• Others

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Application of Laws

• Disclosure exemptions

• Resale

• Transfer

• Sophisticated purchaser

• Insolvency / bankruptcy

• Additional franchise

• Others

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Disclosure

• Formalities of disclosure

• Must deliver the complete FDD not less than 14 days before earlier of:

• Signing any agreement; and/or

• Taking any money

• Ontario

• No agreements, not even NDA or binding term sheet

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Consequences of Non-Compliance

• Complete Failure to Disclose

• Franchisee has right to rescind within 2 years of signing franchise agreement

• Improper Disclosure

• Franchisee has 60 days to rescind after receipt of disclosure document if not provided in time or no material change statement provided or deficient

• Case law has been favourable to franchisee claims

• When does improper disclosure amount to no disclosure?

• Material deficiencies = no disclosure = 2 year rescission

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Consequences of Non-Compliance

• In either case franchisee has absolute right to a refund of monies paid, franchisor must buy equipment and inventory, etc., and compensate for losses

• Also, right to sue for misrepresentation in FDD, or for failure to comply

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Accidental Franchises?

• Examples of relationships that may or may not be franchises…

• Licensing, including in association with some form of business format

• Distribution

• Agency or brokering

• Dealers and salespersons

• Service systems or programs

• Software as a service

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Accidental Franchises?

• Examples of industry types where franchising is used…

• Food and beverage

• Hotels

• Car and vehicle dealerships

• Gas stations

• Service-based systems

• Clothing and consumer goods

• Fitness and personal services

• More…

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Accidental Franchise?

• What constitutes a franchise for statutory disclosure obligations?

• Chavdarova v The Staffing Exchange – 2016 case that found that the agreement between the parties was a franchise agreement despite being labeled a licensing agreement. Since the plaintiff did not receive an FDD, they were entitled to rescind the agreement

• Chavdarova – The court confirmed three criteria in determining if a franchise relationship exists: (i) Payment of money as a condition of commencing operations, or in the course of operating the business; (ii) The right to offer goods or services associated with a trademark or trade name; and (iii) The exercise of significant control over, or offering of significant assistance in, the business

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Accidental Franchise?

• Significant Control/Assistance or Marketing Plan

• Di Stefano v Energy Automated Systems Inc. – 2009 case with Tennessee based manufacturer

• Distributor of equipment not a franchisee as 5 days of training was not enough assistance to qualify

• “First, the five day training program is a condition precedent to obtaining an EASI dealership. It is not ongoing assistance during the pendency of the agreement. The statute… does not refer to a one time training program undertaken and completed in the past.”

• “Second, the offer of assistance must relate to the business’ “method of operation.”

• “Third, the statute sets out six examples of what it means by “method of operation” — building design, furnishings, locations, business organization, marketing techniques and training. The first five are clearly inapplicable and the “training” offered does not, in its real substance, relate to ‘method of operation.’”

• “Finally, the result of the Plaintiffs’ submission, if correct, would be that any company selling a sophisticated product, and offering advance training about that product to its nascent distributors, would in law be a “franchisor.” It is unlikely the Legislature intended this result.”

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Accidental Franchise?

• Valley Equipment Ltd. v John Deere Ltd. – 2000 case where farm equipment dealer not a franchise as the level of control was not enough to be a franchise

• “…In the case of a business format franchise the franchiser exercises a great degree of control over the franchisee. For example, in the case of a fast food restaurant, manuals are provided to the franchisee by the franchisor detailing the exact preparation of the product which the franchisee must follow to the letter. In the case of a manufacturer-dealer relationship there is supposed to be less control. The dealer is supposed to be independent.”

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Accidental Franchise?

• Motor Vehicle dealers – different facts, different result...

• Butera v Mitsubishi Motors Corp. – 2012 case where dealer sued under franchise law, and court held relationship was not a franchise as there were no obligations to make payments

• ”The Dealer Agreement did not require that Niagara Mitsubishi make a payment or continuing payments to MMSCAN. For that reason, I am of the opinion that the act can have no application.”

But GM class action found car dealers were franchisees

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Accidental Franchise?

• What you call the agreement does not matter…

• Elliott v Trane Canada Inc. – 2008 case where Elliot entered into a “franchise agreement” to sell Trane HVAC equipment – despite label court found it was a sales agency agreement and not a franchise

• “I would agree with this characterization of the agreement, namely as a sales agency agreement or what is described in many cases as a distributorship agreement. It is not a true franchise agreement even though it is so labeled. A true franchise agreement usually requires the payment of a franchise fee on a one-time basis and subsequently a payment of a percentage of sales on a continuing basis.”

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Accidental Franchise?

• What you call the agreement does not matter…

• Ahmed v 3 for 1 Pizza & Wings (Canada) Ltd. – 2004 case where “Management Agreement” was found to be franchise

• “The evidence before the court establishes that, pursuant to the Agreement, A and K were required to make a payment or continuing payments to 157 for the right to carry on the business at the Brampton premises, that the products offered for sale at the premises were products that were substantially associated with the trademarks owned by 3 for 1 and licensed to 157 and that 157 exercises significant control over the method of operation of the business. The Agreement would, therefore, appear to qualify as a franchise agreement as an agreement relating to a franchise.”

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• 1706228 Ontario Ltd. v Grill It Up Holdings Inc. – 2011 case where the parties intended to sign a franchise agreement, but completed the transaction without one. Was still a franchise agreement. Didn’t matter that the plaintiff refused to sign the draft agreement.

• “The relationship between the parties qualifies as a “franchise” under either definition, even though the draft franchise agreement was rejected by the plaintiffs. Grill It Up granted the plaintiffs the right to sell and offer for sale food that was “substantially associated with” the Grill It Up name and trademarks, that is, grilled foods, offered with special sauces, in a fast food restaurant setting. The defendants did not exercise control over the plaintiffs, but did “offer significant assistance” respecting the store construction, design, equipment, location, menu, training and branding.”

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Accidental Franchise?

• MGDC Management Group v. Marilyn Monroe Estate – a 2014 case where the parties entered into a Licensing Agreement allowing the respondents to use the trademarked name Marilyn Monroe in their restaurants

• The court found that the Act does not apply to the arrangement because it was a single licensing arrangement

• By determining that the Act does not apply, the Court also found that the forum selection and choice of law clauses in the License Agreement were enforceable. These clauses provided that New York law applied and that the dispute was to be litigated in New York State

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© 2019 Cassels Brock & Blackwell LLP. All rights reserved.

This document and the information in it is for illustration only and does not constitute legal advice. The information is subject to changes in the law and the interpretation thereof. This document is not a substitute for legal or other professional advice. Users should consult legal counsel for advice regarding the matters discussed herein.