A RoAd MAp to FRAnchising in cAnAdA - Cassels · PDF fileA Road Map to Franchising in Canada 1 ... Canada has the “.ca” top-level domain name in ... Under an area development agreement,

A RoAd MAp to

FRAnchising in cAnAdA

YoUR LAWYERs in cAnAdA

Cassels Brock & Blackwell LLPA Road Map to Canadian FranchisingAugust 2014

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

tAbLE oF contEnts

Cassels Brock & Blackwell LLPA Road Map to Canadian FranchisingAugust 2014 1

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 know-

how 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.

A RoAd MAp to FRAnchising in cAnAdA

ovERviEW


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

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 wide-

reaching 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.

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 Québec4 (“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.

JURisdiction ovER FRAnchising

FEdERAL LEgisLAtion

pRovinciAL LEgisLAtion

coMMon LAW And thE civiL codE

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-14.1. 4 S.Q. 1991, c. 64.


pRotEcting intELLEctUAL pRopERtY

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.

tRAdEMARks


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 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.

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.

pAssing oFF

5 See supra note 3, s. 10.6 Ciba-Geigy Can. Ltd. v. Apotex Inc., [1992] 44 C.P.R. (3d) 289, 296-99 (SCC).7 R.S.C., ch. C-42 (1985), s. 3.

copYRight

pAtEnts


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.

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 first-

come, first-served basis. It is advisable for franchisors to protect their

principal names through early registration of domain names.

tRAdE sEcREts: conFidEntiAL inFoRMAtion

REgistERing doMAin nAMEs

8 Lac Minerals Ltd. v. Apotex Inc., [1992] 44 C.P.R. (3d) 289, 296-99 (SCC).


choosing A stRUctURE

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.

singLE Unit FRAnchising, MAstER FRAnchising, AREA dEvELopMEnt And AREA REpREsEntAtivEs


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.

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.

Joint vEntURE FRAnchising


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.

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.

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.

FRAnchisoR/FRAnchisEE RELAtionships

QUALiFicAtion As A FRAnchisE RELAtionship: contRActs & stAtUtEs

good FAith REQUiREMEnt

EMpLoYMEnt RELAtionship


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.

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

discLosURE REQUiREMEnts

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).

QUébEc


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.


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.

LEAsing oF pREMisEs

othER issUEs


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.


oUR cLiEnts

intERnAtionAL opERAtions

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 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.

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.


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


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

oUR pRActicE


ovERviEW oF cAssELs bRock

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.

Creative. Approachable. Business-focused.

• 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

Documents

A RoAd MAp to FRAnchising in cAnAdA - Cassels · PDF fileA Road Map to Franchising in Canada 1 ... Canada has the “.ca” top-level domain name in ... Under an area development agreement,