BUSINESS & TECHNOLOGY FRANCHISE LAW

Manufacturers, suppliers, and other trademark owners typically overlook a possible franchise connection when they enter into relationships with independent third parties to sell their branded products or services. Embedded in these distribution arrangements is a de facto trademark license. While not every trademark license creates a franchise, every franchise contains a trademark license. Given the prevalence of franchising and the interstate, national, and even international scope of so many franchise networks today, parties to a deal need to know about potentially applicable federal, provincial, and foreign franchise laws.   

Franchise sales in Canada are subject to dual regulation at the federal and provincial level (Alberta, Manitoba, New Brunswick, Ontario, PEI), depending on where the parties reside or do business. Sorting franchise from non-franchise licenses can be a highly uncertain process. The quality controls that trademark owners must retain over a licensee's trademark use closely resemble the marketing controls that are characteristic of a franchise. Yet, from a regulatory viewpoint, non-franchise and franchise licenses are as different as day and night. Non-franchise licenses are unregulated private consensual arrangements. Franchises, by contrast, are highly regulated. Franchise sellers must obey elaborate federal and provincial presale disclosure and registration laws; non-franchise licensors do not.

Provincial laws restrict the conditions under which a franchise may be terminated or not renewed and dictate substantive terms for the franchise relationship. A franchisee cannot waive the statutory protections of franchise laws even if it wants to. A terminable-at-will contract clause cannot be enforced in a jurisdiction that requires good cause to terminate a franchise agreement – even if the franchisee's lawyer actively negotiated the contract. Franchise law violations carry significant penalties even if the inadvertent franchisor neither knew about the law nor had any intent to violate it. Not only is it a felony to sell a franchise without complying with a franchise sales law, but federal and provincial franchise agencies have broad powers to punish franchise law violators and may freeze assets, order restitution, issue cease and desist orders, ban violators from selling franchises, and recover substantial penalties.

Franchisees have private remedies for provincial franchise law violations. Besides compensatory damages and lawyers’ fees, an injured franchisee may (1) rescind a franchise agreement for disclosure and registration violations, including fraud in connection with a franchise sale; (2) obtain an injunction to enjoin a wrongful termination or non-renewal of a franchise; and/or (3) recover damages or restitution. Furthermore, provincial franchise laws impose personal, joint, and several liability on the franchisor's management and owners even when the franchisor is a legal entity.

In the long run, the costs associated with franchise avoidance, be they added business risks or extra legal expenses, may be more painful than franchise law compliance. Companies are short-sighted if their overwhelming desire to avoid legal regulation as a franchise drives their business decisions and strategic objectives.