Legal news and trends for Canadian in-house counsel and c-suite executives
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require franchise companies to provide an "educational document" that, he says, could dissuade the purchase of a franchise. It's a "horrendous piece of legislation. It's basically telling franchi- sees, 'Don't buy a franchise.'" Kornhauser referenced federal legis- lative changes that will also affect fran- chise companies, including those to the Competition Act as well as proposed changes to the Consumer Protection Act and Personal Information Protection and Electronic Documents Act. Regarding amendments to the Canadian Payments Association's pre- authorized debit rules, he noted in his accompanying paper: "It is standard practice for franchisors to require fran- chisees to execute, contemporaneously, with the execution of the franchise agreement, agreements allowing the franchisor to debit a franchisee's bank account for amounts payable by the franchisee for royalties, advertising contributions, etc." Kornhauser added, "Significant amendments to the Canadian Payments Association rules that came into force on Feb. 28, 2010, will require fran- chisors to update their pre-authorized debit agreements to comply with the rules. The rule applies to all PADs which are entered into after Feb. 28, 2010, failing which they may be unable to collect these amounts." Under the Competition Act, the implications for franchisees are poten- tially even more onerous. "Effective March 12, 2010, agreements between competitors (including potential com- petitors) to fix prices, allocate sales cus- tomers or markets, or to fix or control production or supply of a product will be illegal," he wrote. "Penalties include fines of up to $25 million and impris- onment for up to 14 years." However, as a result of the issuance of the new "competitor collaboration guidelines," franchise agreements will not be subject to criminal prosecu- tion as long as the agreement is truly limited to the franchisor/franchisee in question and does not mask a broader conspiracy among the parties. In addition, there have been a sig- nificant number of class action lawsuits initiated against franchise companies in Canada by franchisees, although most are in the very preliminary stages and have not had any judicial determi- nation that could serve as guidance for further similar cases, says Kornhauser. Daniel Vukovich, in-house counsel for M&M Meat Shops Ltd. and a for- mer Pizza Pizza Ltd. legal department lawyer, says it is important for in-house counsel to educate staff at each respec- tive franchise headquarters about the Franchisee self-evaluation criteria under proposed changes in Ontario U nder the proposed amendments to Ontario's Arthur Wishart Act, franchise companies will have to provide prospective franchise owners with self-evalua- tion criteria to allow the prospective franchisee to assess, among other things: • whether the prospective franchisee has the required capital, the necessary management skills, education or work experience, and is fully aware of the work involved and can work in the limits of the franchise system; • what would be the best franchise for the prospective franchisee, based on the lines of busi- ness that are successful and are expected to continue to succeed and the lines of business which the prospective franchisee is interested in; and • whether the franchise is the only means of success in the type of business in which the pro- spective franchisee is interested. INHOUSE DECEMBER 2010/JANUARY 2011 • 25 nuances regarding any dealings with franchisees to avoid litigation or a prospective breach of provincial laws, which he acknowledges have become, relatively speaking, more onerous over recent years. Vukovich, who spoke at the same OBA event, emphasized the impor- tance of bringing in a lawyer from a private law firm to assist in-house lawyers with implementing an annual review process to look at the franchise's business, policies, financial records, and any communications that could have an adverse effect on franchise owners with respect to provincial laws and possible litigation. He also affirmed the importance of retaining all documentation so the franchise can have easy and ready access to any records it needs pertain- ing to its franchise owners. "Given that all of our departments have communi- cations with the franchisees, you need to be able to get your hands on any relevant documents," he says. He said many in-house lawyers can typically be relied on to provide any and all legal advice for the company, although in many circumstances it can be very helpful to seek advice from outside lawyers when possible. Vukovich says many lawyers who work for franchise companies were