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Franchise Law

Franchise Law e-COMMUNIQUÉ – October 2011

Published: 10/17/2011

By Stefanie Baldassarra, Rebecca Hamovitch, Frank Robinson, Derek Ronde, Geoffrey B. Shaw, Larry M. Weinberg

In This Issue

1. Ontario Court of Appeal Upholds Dismissal of a Proposed Class Action Involving Franchise Disclosure
2. Recent Decision of the Manitoba Appeal Commission Is a Disturbing Precedent for Franchisors Being Viewed as Employers for the Purposes of Worker’s Compensation
3. Cassels Brock at the Forefront of Franchise Education – Restaurant Finance & Development Conference (Las Vegas) and Franchising for Dummies Seminars at Cassels Brock (Toronto)
4. Ontario Superior Court of Justice Balances Franchisor and Franchisee Interests in Denying an Injunction
5. Are You Ready? Customer Service Accessibility Standards Become Effective on January 1, 2012
6. What We're Up To (Fall 2011)

Ontario Court of Appeal Upholds Dismissal of a Proposed Class Action Involving Franchise Disclosure

By Derek Ronde

In Cassels Brock’s February 2011 Franchise Law e-communiqué, we mentioned a decision of the Ontario Superior Court of Justice in which a franchisor ("Suncor") was able to obtain summary judgment in respect of a proposed class action brought on behalf of 241 franchisees alleging the franchisor’s failure to deliver franchise disclosure documents. The case, TA & K Enterprises Inc. v. Suncor Energy Products Inc., [2010] O.J. No. 5532 (S.C.J.), was a helpful interpretation and reminder of the limits and exemptions to the franchise disclosure requirements of the Arthur Wishart Act (Franchise Disclosure),2000 (the “Act”) in the province of Ontario. This case was recently appealed to the Ontario Court of Appeal, which upheld the Ontario Superior Court of Justice decision.

In this case, the franchisees operated retail stores selling gas and other products under the Sunoco brand name. Suncor and the proposed class member franchisees entered into franchise agreements for one-year terms. No franchise disclosure documents were given to the franchisees, because Suncor relied on two disclosure exemptions under the Act: section 5(7)(g)(ii) of the Act, which provided that disclosure was not required if the franchise agreement was not valid for longer than one year and did not involve the payment of a non-refundable franchise fee, and section 5(7)(f), which provided that no disclosure was required where there was a renewal or extension of a franchise agreement and there had been no material change since the last renewal or extension.

The Ontario Superior Court of Justice rejected the franchisees’ contention that the new agreements entered into by the franchisees were entirely new agreements rather than renewals or extensions. Further, the court declined to characterize royalty fees and other amounts paid by the franchisees to Suncor as “non-refundable franchise fees,” concluding that Suncor could rely on the legislative exemption concerning disclosure.

The franchisees also argued that since they had signed franchise agreements a few days before the one-year term of the agreements, the effective date of the agreement was the date of signing and thus the franchise agreements were for longer than one year, thereby depriving Suncor of its disclosure exemption. The court rejected this argument as well, stating that if an agreement is signed before it becomes operational, this does not preclude the availability of the s. 5(7)(g)(ii) exception under the Act.

On appeal, the Ontario Court of Appeal dismissed the franchisees’ appeal, once again rejecting the franchisees’ arguments that the franchise agreements were for longer than one year and that royalties could be characterized as “non-refundable franchisees fees” under the Act. Now that this case has withstood the scrutiny of an appellate court, franchisors should take comfort in this decision as evidence that courts will uphold carefully-crafted franchise agreements that are deliberately structured to take advantage of the disclosure exemptions available under the Act. 

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Recent Decision of the Manitoba Appeal Commission Is a Disturbing Precedent for Franchisors Being Viewed as Employers for the Purposes of Worker’s Compensation

By Stefanie Baldassarra

Franchisors in Canada should pay close attention to a recent decision from Manitoba’s Appeal Commission, which determined that a franchisor had to pay assessment premiums for individuals with whom they have entered into franchise agreements. 

Decision 99/2011 involved a firm which began business operations in Manitoba selling janitorial franchise licenses to independent operators of cleaning businesses. The Workers Compensation Board of Manitoba ("WCB") considered whether the firm’s franchisees were entitled to register as a separate business with the WCB. The Board ultimately found that they were not. This assessment was upheld on appeal to the Appeal Commission, based on a review of the franchise agreement that established a substantial degree of control exercised by the franchisor over the franchisee.

In this case, the Appeal Commission found that franchisees are more akin to employees and therefore entitled to WCB coverage, as opposed to independent contractors responsible for their own WCB coverage. The Commission acknowledged that the franchise agreement creates a unique relationship which does not fall squarely in either the category of a worker or that of an independent contractor. For this reason, the Commission relied heavily on the actual terms and levels of control found in the franchise agreement in order to come to its determination. The Commission found that the ongoing relationship between two equal bargaining parties, which is expected in an independent contractor relationship, is not present between a franchisor and its franchisee.

The distinction between workers and independent contractors in the franchise context has also been addressed by the Ontario Workplace Safety and Insurance Appeals Tribunal ("WSIAT"). In determining how a person should be characterized under the Workers’ Compensation Act ("WCA") for the purpose of determining entitlement to coverage, the assessment by WSIAT tends to be broader in scope than that of the WCB. While tribunals will look to a franchise agreement in order to assess the intention of the parties, other factors, such as the ownership of equipment, length of the relationship and degree of control are also considered in order to determine whether a claimant can be categorized as a worker or independent contractor under the WCA. 

Most decisions uphold the traditional view that franchisees are considered independent contractors. However, this view is coming under attack in a number of jurisdictions, with findings like that of Manitoba’s Appeal Commission becoming too frequent from the perspective of franchisors. Going forward, franchisors must be mindful of both the terms of the franchise agreement and the other business aspects governing their relationship, the joint consideration of which will determine the exposure risk to the franchisor and the business independence of the franchisee. The issues arising out of WCB’s decision are significant to the franchise industry as a whole, as it may be foreshadowing of the view taken by other tribunals in future determinations regarding the business independence of franchisees.

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Cassels Brock at the Forefront of Franchise Education – Restaurant Finance & Development Conference (Las Vegas) and Franchising for Dummies Seminars at Cassels Brock (Toronto)

Restaurant Finance & Development Conference (Las Vegas)

Cassels Brock has been selected as the exclusive host of the Canadian Opportunities Forum at the 22nd Annual Restaurant Finance and Development Conference taking place in Las Vegas, November 7 – 9, 2011. This will be the first Canada-focussed forum in the conference’s 22 year history and it highlights the trend that more US and international restaurant chains are looking to expand their operations into Canada, both corporately and through franchising.

The Canadian forum, "Doing Business Profitably in Canada" features a reception and seminar entitled ”Expanding to Canada, Is Now the Time?” that will include remarks from industry specialists, including Cassels Brock partners Larry Weinberg (Franchise) and Andrew Reback (Corporate and Tax).

Click here to download a copy of the brochure.
 

Franchising for Dummies™ Seminars at Cassels Brock (Toronto)

Cassels Brock is honoured to have been chosen as the exclusive Canadian partner with Franchising for Dummies™ to bring you two franchising seminars: (a) Is Now the Time to Franchise Your Business?; and (b) Are You an Existing Franchisor Considering Expanding to the US?


(a) Is Now the Time to Franchise Your Business?

Wednesday November 30, 2011, 9:00 a.m. - 4:30 p.m. at the Cassels Brock offices in Toronto, Ontario

Many companies sit on the sidelines as their competitors grow into regional or national chains through franchising. Manufacturers, retailers, restaurant owners and service providers may minimize their expansion opportunities by failing to consider franchising as a means of achieving more effective distribution of their product or service.

Learn how franchising can work for your business. Three of the industry's leading authorities in franchising are presenting a daylong session on becoming a successful franchisor. This session will discuss:

• What is franchising and what are the risks and rewards?
   
• How do you evaluate whether or not a business is ready to become a franchisor?
   
• How complicated is franchise regulation and what are the legal requirements in Canada and the US to establish a franchise network?
   
• What are the strategic issues to consider in becoming a franchisor?
   
• What tactical elements need to be developed, including manuals, training programs, franchisee recruitment and retention strategies?
   
• How do you answer the important questions necessary for franchising, including fees, territorial rights, supply chain revenue opportunities, franchise relations, vicarious liability and financing?  

If franchising is something you have considered but did not know where to begin, this is an educational opportunity that you must attend.

Who should attend? Every business, from start up entrepreneurs to multi-national public companies considering a new growth strategy.

Speakers:

Michael H. Seid, Managing Partner, MSA Worldwide, co-author with the late Dave Thomas of Franchising for Dummies and a leading expert on franchising.

Larry Weinberg, Partner,
Cassels Brock & Blackwell LLP, co-editor of Fundamentals of Franchising–Canada, and Vice-Chair of Ontario Bar Association Franchise Law Section.

Special Lunchtime Presentation

Tips from the Top:   Lorraine McLachlan, President and Chief Executive Officer, Canadian Franchise Association

Register here. (A registration fee of $295.00 applies.)

(b) Are You an Existing Franchisor Considering Expanding to the US?

Thursday December 1, 2011, 8:00 a.m. - 9:30 a.m. at the Cassels Brock offices in Toronto, Ontario

International franchising is one of the most popular entry modes for companies looking to break into new markets. It is a viable and valuable way to expand an already solid brand and leverage industry expertise beyond the borders of Canada. With almost one million franchised businesses operating in the US today, and upwards of 350 million people, there are enormous growth opportunities for Canadian businesses.

If you are considering expanding your business into the US or other international markets, join us for this exclusive session, hosted by our partner, Larry Weinberg, with world renowned franchise expert Michael Seid (co-author of Franchising for Dummies™) as he discusses how to determine if your franchise is truly ready to expand as well as other considerations such as how to maximize the advantages of experience, scale economies, product differentiation, capital requirements and location. These are all important considerations of international franchise expansion which must be considered prior to launching any expansion plan.

Speaker:
 
Michael H. Seid, Managing Partner, MSA Worldwide, co-author with the late Dave Thomas of Franchising for Dummies and a leading expert on franchising.

Moderator:

Larry Weinberg, Partner, Cassels
Brock & Blackwell LLP, co-editor of Fundamentals of Franchising–Canada, and Vice-Chair of Ontario Bar Association Franchise Law Section.

Register here. (This breakfast seminar is complimentary.)
 

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Ontario Superior Court of Justice Balances Franchisor and Franchisee Interests in Denying an Injunction

By Rebecca Hamovitch

In a recent decision of the Ontario Superior Court of Justice, a franchisee was unsuccessful in a motion seeking to continue an interim interlocutory injunction enjoining its franchisor from revising the franchisee’s market area and from appointing an additional dealer in the same area. In dismissing the motion, the Court focused on the fact that the restoration of competitive parity between the franchisee and the additional dealer would not cause irreparable harm to the franchisee.

In the case, Paul Sadlon Motors Inc. v. General Motors of Canada Ltd., 2011 ONSC 4432, Sadlon Motors, a franchisee, sought an injunction to prevent General Motors (“GM”), the franchisor, from revising Sadlon Motors’ market area in Barrie, Ontario and from appointing Georgian Pontiac Buick GMC Inc. (“Georgian”) as an additional dealer to sell Chevrolet vehicles in the Barrie marketplace.

The Ontario Superior Court of Justice dismissed the motion and dissolved the interim interlocutory injunction granted previously. There were several matters that were particularly pertinent to the decision. Specifically, Sadlon Motors sells Chevrolet and Cadillac vehicles and had been the only Chevrolet dealer in Barrie for nearly 40 years. Georgian, on the other hand, sells Buick vehicles. In the past, it had also sold Pontiac, but that brand and product line was discontinued by GM in 2009. Additionally, until Georgian lost the Pontiac brand, Georgian and Sadlon Motors had competitive parity in the products they sold. In this motion, Georgian contended that its loss of Pontiac destroyed that historic equality.

In reaching his decision, the Court noted that the purpose of an interlocutory injunction is to preserve the status quo until the legal right asserted by the plaintiff can be dealt with by a trial court. All parties to the motion agreed that in order to obtain such relief, Sadlon Motors had to satisfy the traditional tests for the granting of an injunction: (1) a serious question to be tried, (2) that it would suffer irreparable harm if the injunction was not granted, and (3) that the balance of convenience favoured granting the injunction. The Court determined that there were serious issues to be tried with respect to certain provisions of the Dealership Agreement between Sadlon Motors and GM, and with respect to whether GM breached its duty of good faith and fair dealing. As such, Sadlon Motors satisfied the first condition for an interlocutory injunction.

On the question of irreparable harm, the Court found that Sadlon Motors would suffer harm if the injunction was not granted, but that the harm would not be irreparable. Specifically, if an injunction was not granted, Sadlon Motors would suffer the loss of the competitive advantage of an excluded competitor, but that would not lead to an irreparable or permanent loss of market share or goodwill given that Sadlon Motors’ market area would be unchanged and it would still be entitled to compete for sales in the market. Sadlon Motors would continue to be able to advertise and market its dealership and the sale of new Chevrolet and Cadillac vehicles to the entire Barrie market area, and to promote its business appropriately. In contrast, if an interlocutory injunction was granted, Georgian would not be able to compete at all for a business it once had, namely selling lower priced, fuel-efficient, non-luxury vehicles. Because Georgian would be excluded from the marketplace of lower priced vehicles, its loss of business from returning customers would be irreparable. Finally, GM would also suffer irreparable harm if an injunction was granted enjoining its plans to have two dealers of Chevrolet. Further, that irreparable harm would be intensified by the interference with GM’s rights under the Dealership Agreement to shape its dealership network. Accordingly, the Court found that the balance of convenience favoured not granting an interlocutory injunction.

Franchisors should be encouraged by the court’s decision in this matter, as it demonstrates a willingness to look at the impact of injunctions on parties other than the franchisee seeking relief. The court’s balancing of the interests of other competing franchisees and the franchisor with the interests of the franchisee seeking the injunction is a helpful precedent that appreciates the complex commercial landscape that often exists in franchising.  

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Are You Ready? Customer Service Accessibility Standards Become Effective on January 1, 2012

By Signe Leisk

As of January 1, 2012, all employers in Ontario who provide goods and services to members of the public and have at least one employee in Ontario must comply with the Accessibility Standards for Customer Service (the “Customer Service Standards”), issued under the Accessibility for Ontarians with Disabilities Act (the “Act”). The Customer Service Standards require organizations in Ontario to take proactive steps to make their goods and services more accessible to persons with disabilities. This includes, amongst other specific requirements, the need to implement policies and procedures to govern the provision of goods and services to persons with disabilities that will ensure integrated and equal opportunity to use and benefit from the service, including the use of assistive devices, service animals and support persons.  Employees are also obligated to train staff and volunteers to serve persons with disabilities.  Employers with at least 20 employees in Ontario are also required to prepare documents describing their policies, including the details of their training program and to maintain records of the training provided.  Notice that these documents are available upon request and must be provided to the public by posting a notice on the property, on the employer’s website, or other reasonable method.  Failing to comply with the Customer Service Standards by the January 1, 2012 deadline may result in frequent workplace inspections, compliance orders, administrative fines and/or prosecution in the courts.

It is important to keep in mind, however, that the Customer Service Standards are only the first stage of compliance required under the Act, which intends to identify and remove any barriers that prohibit persons with disabilities from fully participating in all aspects of society in the same way as persons that are not disabled. To achieve this goal, in addition to the Customer Service Standards, the Ontario government has also enacted the Integrated Accessibility Regulation. This Regulation combines accessibility standards in three additional areas: information and communication, employment and transportation. As compliance timelines for these additional standards begin as early as January 1, 2014, now is an important time to determine how these new standards will impact your organization and business.

To learn more about the Act or standards, and how they apply to your specific situation, please contact Signe Leisk at 416-869-5411 or email at sleisk@casselsbrock.com.

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What We're Up To (Fall 2011)

The lawyers in the Cassels Brock Franchise Law team are looking forward to a busy next few months. Here is a sample of their recent and upcoming activities:

1. Larry Weinberg moderated a plenary panel at the International Franchise Association/International Bar Association’s May 17-18, 2011 annual Legal Symposium in Washington, D.C. on the issue of "Vicarious Liability of Franchisors."
    
2. Derek Ronde spoke at the Ontario Bar Association Franchise Law Section Dinner in Toronto, Ontario on June 1, 2011 on the topic of “Live and Undecided: Sub-section 6(6) and Section 7 of the Arthur Wishart Act (Franchise Disclosure), 2000.”
    
3. Derek Ronde’s article, “Franchise Disclosure Damages: The Price Isn’t Always Right” was published in the Summer 2011 edition of “The Franchise Voice”, a publication of the Canadian Franchise Association.
    
4. Larry Weinberg, Geoff Shaw, Derek Ronde, Frank Robinson and Stefanie Baldassarra will be attending the American Bar Association's 34^th Annual Forum on Franchising in Baltimore, Maryland on October 19-21, 2011.
    
5. Cassels Brock is once again proud to be a sponsor of the Canadian Franchise Association’s Franchise Show taking place in Toronto on October 22nd and 23rd. Frank Robinson of Cassels Brock will be offering a seminar there on the legal aspects of purchasing a franchise.
    
6. Larry Weinberg and Geoff Shaw will be speaking at the Ontario Bar Association’s Annual Franchise Law Conference in Toronto, Ontario on November 2, 2011.
    
7. As discussed above, Cassels Brock partners Larry Weinberg and Andrew Reback are hosting and speaking on Expanding to Canada – Is Now the Time? as part of the first ever Doing Business Profitability in Canada: Forum and Reception, at the 22^nd annual Restaurant Finance & Development Conference on November 7-9, 2011 at the Wynn Hotel in Las Vegas, Nevada.
    
8. As discussed above, Cassels Brock is hosting two Franchising for Dummies seminars at its offices in Toronto: “Is Now The Time To Franchise Your Business?” (November 30, 2011) and “Are You an Existing Franchisor Considering Expanding to the US?” (December 1, 2011).
    
9. Larry Weinberg will be co-chairing the Ontario Bar Association Franchise Law Section’s program at the OBA’s Annual Institute of Continuing Legal Education in February 2012.

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