By Chad Finkelstein
Franchise law is a good thing. While that may seem an obvious and self-serving statement coming from a franchise lawyer, one of the reasons that I take satisfaction from my job has to do with the purpose that (I hope) it serves. And that has a lot to do with why franchise law even exists in the first place.
Franchising is but one of many different available business methods of distribution for goods and services. While it is most often associated with fast-food chains, franchising neither starts nor ends with that singular concept. A franchise relationship is created when one party grants another party the right to conduct business under a trademark, charges some form of fee for that right and exercises significant control or offers significant assistance in respect of the licensee’s methods of operations.
That last element is principally what distinguishes the franchise model from most other forms of licensing since a conventional licence relationship does not include those instances of control and assistance that are so critical to franchising. And the reason that control and assistance are so important is that franchising is really all about disseminating goods and services in a consistent and uniform fashion, so that systems and standards are followed and customer experiences seamlessly recreated at each outlet. Without the franchisor’s exercise of at least a minimum amount of control and assistance, consistency and uniformity are not achieved, and that level of autonomy may not suit the plans of a particular brand owner.
As a result, franchise agreements essentially exist as a list of dos and don’ts for franchisees to abide by in order to maintain their rights to continue operating with the franchise system and under the brand. And in recognition of that incredible power that a franchisor has in that relationship, franchise law essentially exists as a list of dos and don’ts for franchisors to abide by in order to ensure that franchisees are treated fairly. This includes a requirement that franchisors provide franchisees with a prospectus-style pre-contractual franchise disclosure document to assist these prospective purchasers in making informed investment decisions before being contractually and financially bound to them.
As a lawyer to mainly franchisors, it would be easy to think that I might find these laws to be an annoyance as they add roadblocks to my clients’ abilities to sell franchise opportunities and create liabilities for them. But, as I mentioned above, franchise law is a good thing. Yes, it is true that some franchisors out there do not operate with the purest of intentions, viewing their franchisees as royalty streams first and franchise partners second, and laws do need to exist to protect franchisees from those bad examples of franchisors. But, primarily, I believe that the better informed a franchisee is about the nature of the investment, the operating standards and the criteria for compliance, the stronger the relationship will be for both parties.
To that end, I value what franchise law does for the Canadian franchise industry. Though legislation and its enforcement may be imperfect, an informed franchisee is more likely to be someone who wants to be in the system since they understand what it means to be in the system. An informed franchisee has called up the other franchisees listed in the disclosure document to learn about their experiences. An informed franchisee has secured lending for its new business by understanding the costs of the initial investment and ongoing fees. And an informed franchisee understands the differences between operating from a singular playbook and going it alone.
For these reasons, I welcome the recent tabling in British Columbia of a bill incorporating draft franchise legislation. If passed, this would result in B.C. becoming the sixth Canadian province to enact franchise law (following Alberta, Ontario, Prince Edward Island, New Brunswick and Manitoba), and that has to be a good thing for the franchised businesses operating within one of the country’s most populous provinces.
Notably, B.C.’s draft franchise legislation is deliberately consistent with the laws in place in the aforementioned provinces, which will facilitate relatively painless compliance for those franchisors already offering franchises elsewhere in the country. However, as the new law on the block, B.C. also has an opportunity to refine some of the flaws and ambiguities contained in those other provinces’ statutes. This includes allowing disclosure documents to be sent electronically (a flexibility which Ontario’s franchise laws do not permit) and allowing franchisors to collect refundable deposits from prospective franchisees, rather than being outright prohibited to keep sales leads warm until at least 14 days after the prospect has reviewed the disclosure document, as is the requirement in other provinces. Similarly, franchisees in B.C. can be required to sign non-disclosure agreements before the disclosure document review period is up, in order to protect the brand’s proprietary information, which benefits the other franchisees in the system (this agreement is not explicitly permitted to be signed under those circumstances in other provinces).
So yes, this franchise lawyer thinks franchise law is a good thing, which is perhaps not such a novel declaration. I look forward to being a part of the development and evolution of British Columbia’s franchise industry, and the positive changes (as well as the challenges) that it will bring.
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