Franchise Law in Canada

Transcription

1 A Road Map to Franchising in Canada YOUR LAWYERS IN CANADA

2 Table Of Contents A Road Map to Franchising in Canada 1 Jurisdiction Over Franchising 2 Protecting Intellectual Property 3 Choosing a Structure 6 Franchisor/Franchisee Relationships 8 Moving Forward 12 Our Franchise Law Group 13 Overview of Cassels Brock 16 August 2014 A Road Map to Canadian Franchising Cassels Brock & Blackwell LLP

3 A Road Map to Franchising in Canada Overview A franchise involves the grant of a form of license, whereby intellectual property (usually a name and trademark) and a body of knowledge (the know-how ) are licensed from the owner (the licensor or franchisor) to the licensee/franchisee, so that the franchisee can use this licensed property (or franchise system as it is often called) for a limited time to replicate the licensor s business model. When it works well, it can work very well, as seen in the many nationwide and international chains that have used franchising as a method of expanding their business. Historically it was seen as a way to grow a business with the benefits of having owner/operators at the operational level, and through use of another s capital. While certain structures now veer away to some degree from the need for owner/operators, the essential principle of a limited time license (that can last years, if not decades) remains true. The Canadian legal framework for franchising is continually evolving. Any prospective franchisor needs to be aware of this framework, as the principal revenue producing assets of a franchisor s business are the franchise agreements that license the trademarks and knowhow to the franchisee in exchange for payment. Like any machine that produces something for revenue generation, when developing a franchise program with franchise agreements a franchisor needs to ensure that the foundation and working parts are well-planned and executed. Consideration of elements such as legal context, structure, intellectual property protection and relationship governance are essential to successful franchising ventures. The following is a closer look at the legal basis upon which franchisors can build their operations in Canada. August 2014 A Road Map to Canadian Franchising Cassels Brock & Blackwell LLP 1

4 Jurisdiction Over Franchising Federal Legislation Canada s federalist system divides powers between the federal and provincial levels of government. Although the Canadian government has expressed no interest in regulating franchising, there is federal legislation related to franchising about which franchisors should be mindful. 1 For instance, franchisors should be aware of federal legislation regarding intellectual property since a franchise relationship is essentially one where the franchisee licenses its intellectual property. Federal regulation of competition is also relevant to various activities in franchising including price fixing, mergers, abuse of dominant position, tied selling, refusal to deal, exclusive dealing, market restriction, delivered pricing, and advertising practices. 2 Provincial Legislation Given that contracts fall within provincial jurisdiction, as of the date of writing, five provinces Alberta, Ontario, New Brunswick, Prince Edward Island, and Manitoba have enacted franchise legislation. 3 The Ontario, Manitoba, Prince Edward Island, and New Brunswick statutes are widereaching and apply to any franchise operating in whole or in part in their respective provinces. In Alberta, a franchisee must have some connection to the province, such as residency, in order to fall within the purview of the Alberta legislation. Common Law and the Civil Code It is important for franchisors to note that the legal systems of all provinces in Canada, with the exception of Québec, are based on a common law system. The common law is a system based on precedents created by historical and ongoing judgments of the courts which are used, for instance, to determine the rules relating to the creation and operation of contracts. Québec has maintained a civil law tradition, using the Civil Code of Québec 4 ( Civil Code ) to apply broad codified principles to particular situations. There is no specific franchise statute in Québec, but the Civil Code does apply to all contracts (including franchise agreements) in general. 1 See: Trade-Marks Act R.S.C., ch. T-13 (1985), Copyright Act R.S.C., ch. C-42 (1985), and Patent Act R.S.C., ch. P-4 (1985). 2 Competition Act R.S.C., ch. C-34 (1985). 3 See: Franchises Act, RSA 2000, c. F-23; Arthur Wishart Act (Franchise Disclosure) S.O. 2000, c. 3; Franchises Act, SNB 2007, c. F- 23.5; Franchises Act, RSPEI 1988, c. F S.Q. 1991, c. 64. August 2014 A Road Map to Canadian Franchising Cassels Brock & Blackwell LLP 2

5 Protecting Intellectual Property Trademarks A trademark is most often a word or words, slogan, design, logo, or other commercial symbol (a mark ) used in connection with products and services. The mark serves to denote one business from another, and to identify the source of the products and services. Marks can be powerful tools in the marketplace and often gain a significant value all of their own. They can be part of the overall look and feel of a business and create what is called protectable trade dress. Registration is the best way to protect trademarks, under the federal Trade-Marks Act, that provides cross Canada protection by virtue of a federal registration. Franchisors should file an application in Canada as early as possible to preclude another party from registering or using those marks. An application may be filed on the basis of pre-existing use, an intent to use, or if the trademark is used and registered in a country that is a treaty partner with Canada. Canada is a relatively inexpensive country when it comes to protection of trademarks, and the cost is certainly minimal compared to the costs of recovering a trademark that has fallen into adverse hands. Franchisors, like all trademark owners, need to be vigilant in protecting their assets. They should ensure that franchisees only use trademarks by the terms of the license given and that no trademark is used by any unlicensed third party. August 2014 A Road Map to Canadian Franchising Cassels Brock & Blackwell LLP 3

6 Passing Off A common law cause of action for passing off may be available to protect a trade name, trade dress, or other trademark-like rights, even where the trademark owner has not registered the mark. 5 To succeed, the plaintiff must demonstrate that the public identifies the wares or services with the plaintiff s wares or services, that use of the material by the defendant is likely to create confusion, and that such use is likely to harm the plaintiff. 6 An important limitation is that one can only enforce common law rights through a passing off action in the geographic area where one has become known. So, it is usually not enforceable on a national basis, making a federally registered trademark all the more valuable. Copyright Copyright can subsist in works such as advertising materials, operating manuals, computer software, graphics and design marks. Under the federal Canadian Copyright Act, the owner of an original literary, dramatic, musical or artistic work is given exclusive rights of production, reproduction, performance, and transmission, among others of that work. 7 Registration to protect these rights is not necessarily required in Canada, but should not be discouraged if and when the copyrightable material is unique and valuable. Patents Although not a common issue in franchising, registration of inventions can provide a statutory monopoly over any new and useful inventions. Franchisors should be mindful of the fact that these protections vary across countries. 5 See supra note 3, s Ciba-Geigy Can. Ltd. v. Apotex Inc., [1992] 44 C.P.R. (3d) 289, (SCC). 7 R.S.C., ch. C-42 (1985), s. 3. August 2014 A Road Map to Canadian Franchising Cassels Brock & Blackwell LLP 4

7 Trade Secrets: Confidential Information Franchisors should ensure that techniques, formulas, recipes, processes and compilations of technical information are not revealed to competitors. The common law protects trade secrets if the information disclosed implies confidentiality. For example, if it was disclosed under circumstances where the recipient knew or ought to have known that the information was disclosed for a limited purpose and was used for a purpose other than that for which it was disclosed. 8 Generally, confidentiality provisions are essential terms in any franchise agreement. Registering Domain Names Aside from.com, Canada has the.ca top-level domain name in extensive use. These domain names must be registered with the Canadian Internet Registration Authority and are handled on a firstcome, first-served basis. It is advisable for franchisors to protect their principal names through early registration of domain names. 8 Lac Minerals Ltd. v. Apotex Inc., [1992] 44 C.P.R. (3d) 289, (SCC). August 2014 A Road Map to Canadian Franchising Cassels Brock & Blackwell LLP 5

8 Choosing a Structure Single Unit Franchising, Master Franchising, Area Development and Area Representatives When someone first embarks on a franchise expansion program it is almost always through a single unit license strategy, where business units are added one at a time through the grant of individual franchises to owner/operators who use their own capital to develop the business being licensed. Common examples of more sophisticated multi-unit franchise expansion methods include master franchising, area development, area representatives and hybrid arrangements. These are most often used later in a franchisor s growth cycle to expand to new markets or even new countries, and typically only once they have launched a successful single unit franchise program. Under a master franchise agreement, a franchisor grants a master franchisee a territory within which to sub-franchise to third parties. This structure might result in a certain loss of control for a franchisor, and it adds an additional party with whom profits and royalties must be shared; however, it is beneficial to a franchisor because the master franchisee can act as a local, self-sufficient party who organizes franchise recruitment, site selection, construction and operational support. This can often give the franchisor more time and opportunity to attend to other markets. Under an area development agreement, a franchisor grants a franchisee the right to open a number of franchises within a defined territory over a fixed period of time. Generally, these agreements do not allow for the franchisee to sub-franchise to third parties. However, they allow the area developer to operate units and fulfill some franchisor functions. Franchisors should carefully select this franchisee to ensure successful completion of these important functions. A single or multi unit franchise agreement is often a franchisor s most important revenue producing asset. So it would be a mistake for someone to believe they are all the same. The best and most reliable of these kinds of revenue producing agreements are those carefully tailored to the client s business, and based on the most experienced legal advice. August 2014 A Road Map to Canadian Franchising Cassels Brock & Blackwell LLP 6

9 Area representative arrangements are increasingly being used. In these cases, the franchisor will enter into contracts directly with the franchisee, but enlist more involvement and assistance from local area representatives or franchisees who act in a broker or agent capacity. This method is beneficial to the franchisor because it can retain control while shifting responsibility (for example, in franchise recruitment and marketing efforts) to the area representative in exchange for a percentage of royalties payable by the unit franchisees. Multi-unit development strategies are frequently a hybrid of one or more of the above, as these contracts are often individually tailored to the local market situation. Joint Venture Franchising A joint venture franchise is a contractual structure where each venturer, usually the franchisor and the local partner, makes a contribution for a single common purpose, usually a local entity that is then granted a franchise, master franchise or the like. August 2014 A Road Map to Canadian Franchising Cassels Brock & Blackwell LLP 7

10 Franchisor/Franchisee Relationships Qualification as a Franchise Relationship: Contracts & Statutes In Canada, the franchise relationship is a contractual one where the agreement between the parties determines their rights and obligations. Legislation informs what is considered to qualify as a franchise relationship. Based on the expansive definition of a franchise under the various provincial statutes, there are likely many existing relationships that, unbeknownst to the parties, fall within the definition of a franchise. Good Faith Requirement All provincial franchise statutes provide for a statutory duty of good faith and fair dealing by both the franchisor and the franchisee and, except for Alberta, state that the duty includes a duty to act in good faith and in accordance with reasonable commercial standards. The common law has confirmed these good faith obligations but clarified that a franchise relationship is not a fiduciary one, and therefore franchisors are not required to act selflessly and with undivided loyalty on the interest of their franchisees. Overall, franchisors must act promptly, honestly, fairly and reasonably. As long as they have regard for the legitimate interests of their franchisees, franchisors can act in their own self-interest. Employment Relationship Canadian law is generous in terms of severance and notice requirements, and franchisors should enlist legal advice on whether their franchise relationships could be considered an employment relationship (as opposed to what they usually intend, namely an independent contractor relationship), thereby placing severance and notice requirements on the franchisor at contract termination. Historically, some franchisors have been overreaching in the maintenance of controls over the franchisee in the franchise agreement, leading a few courts to conclude that they truly were an employment relationship, despite the label used by the parties in their contracts. August 2014 A Road Map to Canadian Franchising Cassels Brock & Blackwell LLP 8

11 Québec Special consideration must be given to franchising in Québec, in part because of the Civil Code. First, the Civil Code includes the duty of good faith between parties to all contracts. Franchisors should therefore exercise a degree of restraint in competing with their franchisees, so that the benefits and advantages of the franchisee are not denied. 9 Second, a franchise agreement might be classified as an adhesion contract, where essential, non-negotiable provisions are imposed by one of the parties. If any provisions of this agreement are incomprehensible or unreadable for a reasonable person, abusive, or considered to be external clauses, they may be nullified or changed by a court. Lastly, business dealings in Québec are mainly in French. If this is problematic, franchisors could make use of master franchising or area developers. Disclosure Requirements All provinces with a franchise law require franchisors to provide the prospective franchisee with a franchise disclosure document before granting the franchise. The disclosure document must be delivered at least 14 days prior to the earlier of the parties entry into any agreement relating to the franchise or the prospective franchisee s payment of any consideration. 10 Canadian statutes require disclosure of material facts. There is little judicial guidance, but the Ontario Franchise Act defines material facts as any information about the business, operations, capital or control of the franchisor or franchisor s associate, or about the franchise system, that would reasonably be expected to have a significant impact on the value or price of the franchise to be granted or the decision to acquire the franchise. 11 Each statute then provides a mandatory minimum list of what needs to be disclosed in the disclosure document, including information relating to: the background of the franchisor and the franchisor s directors and officers; the projected cost to develop the franchise; the contents of the franchise agreement and the relationship of the franchisor and franchisee (such 9 Provigo Distribution Inc. v. Supermarché A.R.G. Inc. [1995] R.D.J. 472 (A.Q.). 10 Arthur Wishart Act (Franchise Disclosure) S.O. 2000, Ch. 3, 5(1); Franchises Act, RSA 2000, ch. F-23, 4(2). 11 Arthur Wishart Act (Franchise Disclosure) S.O. 2000, Ch. 3, 1(1). August 2014 A Road Map to Canadian Franchising Cassels Brock & Blackwell LLP 9

12 as mandatory purchasing of equipment, inventory and supplies, the franchisor s practices relating to volume rebates, and the historical use of advertising funds); financial performance representations (if any are to be given); current and past franchisees; and the franchisor s own financial condition. But those are minimum requirements. There are other technical requirements relating to the preparation and delivery of the franchise disclosure document, and these disclosure documents need to be kept up-to-date so that they are current at the time used. The ramifications of not following the franchise laws can be severe, as all of the statutes provide franchisees with the limited time right to end the agreement if no or improper disclosure was given. In addition, a franchisee has the right to sue for damages as a result of a misrepresentation contained in a disclosure document, or the failure to follow the laws. Accordingly, franchisors should obtain legal advice on what constitutes material facts and on the proper preparation of disclosure documents generally. All of the franchise statutes provide for limited exemptions such that disclosure documents are not required in all situations. August 2014 A Road Map to Canadian Franchising Cassels Brock & Blackwell LLP 10

13 Leasing of Premises Other Issues An historically common practice in Canada is for the franchisor to lease premises and then sublease premises to the franchisee, whereby the sublease and royalty payments are deemed to be rent, permitting franchisors to exercise remedies usually available to landlords such as the right of physical re-entry and termination without court sanction in the event of non-payment of rent. However, this also results in contingent liability attached to holding leases. For these reasons Canadians are beginning to follow the US model more often, allowing franchisees to directly lease the premises from the landlord. In that case, a franchisor will want to obtain some right to enter the premises and assume the lease in the case of a default by the franchisee as tenant. There are of course other issues that franchisors need to consider and address when launching a franchise program. Every business decision can have legal ramifications, and may need to result in a change to the franchise agreement and/or franchise disclosure document. In most cases, legal counsel should be seen as a trusted ongoing advisor, to be used as a resource as the system, contracts, and disclosure documents need to evolve and be updated and reflect the realities of an ever changing marketplace. August 2014 A Road Map to Canadian Franchising Cassels Brock & Blackwell LLP 11

14 Moving Forward Overall, franchisors should keep all of the above considerations in mind when franchising in Canada. Franchisors should enlist the necessary legal, accounting and specialized business advice, and develop detailed, strategic business plans in order to maximize their potential for success. August 2014 A Road Map to Canadian Franchising Cassels Brock & Blackwell LLP 12

15 Our Franchise Law Group Franchising has evolved into one of the most important sources of economic growth in Canada and around the world. The franchisor-franchisee relationship is created by contract, sometimes regulated by statute, and often compared to a marriage. When it works well, it can be advantageous to both franchisor and franchisee alike. We assist our clients by making sure the foundation to this relationship is a solid one. If the relationship does not work, we can provide specialized advice so as to avoid, wherever possible, a costly divorce. Our clients Our franchisor clients represent a broad spectrum of businesses, from traditional business format franchises to clients offering services and products through new and unique methods of distribution. The partners, associates and law clerks of our Franchise Law Group ensure our clients understand the legal issues and fundamental aspects of franchising and related distributions models. International Operations Cassels Brock assists franchise clients in matters at the local, national and international levels. We have forged links with leading organizations across the country and internationally, as our clients ventures have often taken us beyond the borders of Toronto, Ontario and Canada. Our well-established network of law firms, financial institutions, consultants and business organizations in Canada and throughout the world ensures we are adding value to each client s enterprise and that our franchise clients can feel comfortable expanding their business locally and around the globe. August 2014 A Road Map to Canadian Franchising Cassels Brock & Blackwell LLP 13

16 Our Practice In the evolving world of franchise law, our dedicated practice group is recognized across Canada and internationally for its extensive practical experience in all facets of franchising, from local startup to expansion abroad. We offer complete legal strategic advice, across jurisdictions, in the following areas: Set-up of franchise systems locally, nationally and internationally Negotiation, drafting and updating of franchise agreements, including single and multi-unit franchise agreements Franchise disclosure law compliance Purchase and sale of individual franchised units or complete franchise systems Multi-unit expansion, including master franchising, area development and area representative agreements, including joint ventures Strategic advice regarding franchise associations National and international expansion strategies, development and document preparation Accidental franchise avoidance Dispute resolution and litigation Class action defence Dealing with franchise default and termination Private equity and public financing, including securities law Information technology including internet and privacy law issues Protection and licensing of trademarks and other intellectual property rights Corporate tax strategies and personal tax planning Competition law issues Real estate and commercial leasing Human resources issues including employment and independent contractor arrangements Bankruptcy, receiverships and business reorganization Construction law August 2014 A Road Map to Canadian Franchising Cassels Brock & Blackwell LLP 14

17 Our Practice Cassels Brock has one of Canada s largest and most sophisticated franchise law teams. We have a core group of lawyers who are dedicated to the practice of franchise law, and they are supported by colleagues in complementary practice areas such as mergers and acquisitions, advocacy, intellectual property, employment, competition, tax, real estate and financial services. Our franchise lawyers are recognized as leaders in their field. Partner Larry Weinberg was named the one and only 2014 worldwide Lawyer of the Year for franchise law by UK-based Who s Who Legal and we have multiple practitioners deemed Legal Eagles by Franchise Times, a US publication. Moreover, our team is acclaimed by such authorities as Chambers Global: The World s Leading Lawyers for Business (which states that the firm has a strong reputation for work between the US and Canadian markets ); The Best Lawyers in Canada; International Who s Who in Franchise Law and the Canadian Franchise Association. The Canadian Legal Lexpert Directory lists Cassels Brock as one of only two Most Frequently Recommended major full service firms in the area of franchise law. Our core team is committed to remaining at the forefront of issues relevant to franchise clients, and we are active members of the industry through our involvement in various organizations and associations, including: American Bar Association s Forum on Franchising: Members, Former Governing Committee Member, Former International Division Director and Annual Conference Co-Chair Ontario Bar Association Franchise Law Section: Former Chair and Executive Members Ontario Bar Association Annual Franchise Law Conference: Founder, Conference Chair and Frequent Speakers International Franchise Association: Members, Frequent Speakers and Supplier Forum Advisory Board Member Canadian Franchise Association: Members and Frequent Speakers University of Western Ontario Franchise Law Course: Adjunct Professor for Canada s first law school course on Franchise Law ABA s Franchise Law Journal and The Franchise Lawyer: Frequent Contributors August 2014 A Road Map to Canadian Franchising Cassels Brock & Blackwell LLP 15

18 Overview of Cassels Brock Creative. Approachable. Business-focused. These are the qualities clients tell us they value in a law firm, and they re the qualities the lawyers at Cassels Brock possess in abundance. We ve been in business for over 120 years and have more than 200 lawyers committed to providing the very best legal advice to all our clients, whether entrepreneurial start-ups, mid-market enterprises or multinational corporations. Cassels Brock is a full-service firm, organized into practice areas that meet clients wide-ranging needs. While clients may initially come into the firm via one practice area, the full range of our expertise is available to them through their primary lawyer. Aboriginal Asset-Based Lending Charity & Not-For-Profit Class Actions Communications Competition, Antitrust & Foreign Investment Construction Corporate & Commercial Education Employment & Labour Energy & Utilities Entertainment & Copyright Equipment & Asset Financing Financial Institutions Regulation Financial Services Franchise Government Relations Hospitality & Tourism Information Technology Infrastructure Insurance Corporate & Regulatory Intellectual Property Land Development Life Sciences Litigation & Dispute Resolution Mergers & Acquisitions Mining Municipal Planning Payments Industry Privacy Private Equity Product Liability Project Finance Real Estate & Development Real Estate Investment Trusts Restructuring & Insolvency Securities Securities Litigation Securitization & Structured Finance Sports & Entertainment Taxation August 2014 A Road Map to Canadian Franchising Cassels Brock & Blackwell LLP 16