A Road Map to
Franchising
in Canada
YOUR LAWYERS IN CANADA
Table Of Contents
A Road Map to Franchising in Canada
Jurisdiction Over Franchising
Protecting Intellectual Property
Choosing a Structure
Franchisor/Franchisee Relationships
Moving Forward
Our Franchise Law Group
Overview of Cassels Brock
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A Road Map to Canadian Franchising
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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.
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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 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.
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).
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.
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S.Q. 1991, c. 64.
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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.
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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.
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See supra note 3, s. 10.
Ciba-Geigy Can. Ltd. v. Apotex Inc., [1992] 44 C.P.R. (3d) 289, 296-99 (SCC).
R.S.C., ch. C-42 (1985), s. 3.
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Trade
Secrets:
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.
Confidential
Information
Registering
Domain Names
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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.
Lac Minerals Ltd. v. Apotex Inc., [1992] 44 C.P.R. (3d) 289, 296-99 (SCC).
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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.
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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
August 2014
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.
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Franchisor/Franchisee
Relationships
Qualification
as a Franchise
Relationship:
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.
Contracts & Statutes
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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
Provigo Distribution Inc. v. Supermarché A.R.G. Inc. [1995] R.D.J. 472 (A.Q.).
Arthur Wishart Act (Franchise Disclosure) S.O. 2000, Ch. 3, § 5(1); Franchises Act, RSA 2000, ch. F-23, § 4(2).
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Arthur Wishart Act (Franchise Disclosure) S.O. 2000, Ch. 3, § 1(1).
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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.
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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.
Leasing of
Premises
Other Issues
August 2014
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.
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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.
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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.
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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
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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
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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.
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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
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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
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