Franchising is a way of expanding a brand. It’s a way of financing expansion and expanding to better penetrate numerous markets simultaneously and in ways that can’t be done if one only works with its own capital. It also drives more motivated owners into adopting the brand.
Franchise Agreements are designed to control the proprietary information, system, and trade secrets so that if we share that information, system, and trade secrets with somebody else, they will be protected. Franchise Agreements are very strictly drafted to protect the franchisor’s know-how, trade secrets, and brand. Franchise agreements also work as a license of the trademarks.
What makes a license a franchise is that not only is there a license of the trademark in the system, but there’s a lot of control exerted by the franchisor and a lot of assistance offered by the franchisor. In addition, the franchisee is required to pay royalties and other payments to the franchisor.
Franchise Law Jurisdictions In Canada
Franchise law involves the need to comply with franchise disclosure legislation in 6 disclosure jurisdictions across Canada. These 6 jurisdictions are Ontario, Alberta, British Columbia, Prince Edward Island, New Brunswick, and Manitoba. Each of these jurisdictions has franchise statutes and regulations that control the franchise relationship in specific ways.
Three Obligations Imposed by Statutes under Franchise Legislation
There are three basic obligations imposed by these statutes, which are as follows:
1. The Disclosure Obligation:
Each will require a disclosure document by a franchisor to a franchisee. The disclosure document should contain all the information that a prospective franchisee will need in order to make an informed business decision. It also should set out all the information required by regulation to be disclosed, and anything else that might be called a material fact.
A material fact is defined as anything that could impact the value or price of the franchise or the decision of the prospective franchisee to buy the franchise.
If no disclosure document is given at all, then the franchisee has a two-year right of rescission from the date of signing the franchise agreement.
Suppose a disclosure document is given, but it’s slightly deficient. In that case, it has 60 days from the date of delivery of the disclosure document. Even where a disclosure document is given, the courts have held that where the information is so deficient or there’s some material misrepresentations or omissions, then that itself could also warrant a rescission claim.
A rescission claim is very serious because it basically means that the franchisee could demand everything that is invested in the franchise, back from the franchisor. It’s not just the initial franchise fee but anything else that it has invested, and it would also cover its losses. This disclosure obligation is therefore a very serious one.
2. The Duty of Good Faith & Fair Dealing:
The franchise statutes also require that both parties to a franchise relationship exercise a duty of good faith and fair dealing. It basically means that you should act fairly with each other and without discrimination, without cheating, or lying, or treating the other party in an unfair or unreasonable way.
3. The Right of Association:
Franchisees have a right of association. That is, franchisees have a right to associate with each other without interference from the franchisor.
Role of a Franchise Law Attorney
The disclosure obligation is key; it’s a very detailed-oriented obligation in the sense that it’s very much like a securities offering, and any technical deficiency could invalidate the validity of the disclosure document. So it needs to be drafted by a franchise lawyer who is an expert in the field. Otherwise, and as noted above, the franchisor runs the risk of being sued for rescission.
A franchise lawyer representing the franchisor would make sure that the disclosure document is prepared and disclosed properly, and the lawyer would professionally guide the franchisor through this process.
However, suppose you’re a prospective franchisee looking to buy a franchise. In that case, a franchise lawyer can also help review the disclosure document and identify any concerns in the disclosure document to help the prospective franchisee conduct its due diligence and otherwise help the prospective franchisee through purchasing a franchise.
In addition, a franchise lawyer would help a franchisor to protect the trademarks by filing trademark applications and prosecuting those applications until they’re registered. A franchise lawyer can also help franchisors by preparing all kinds of documents and agreements with franchisees, suppliers, etc.