If you own a business, this is one of those stories that should be taped to your fridge, especially if you bought your fridge from troubled retailer Sears Canada Inc..
On Mar. 17, the CBC reported on an elderly British Columbia couple who needed to replace their roof and used Sears Home Services for the work. The trouble was, Sears Canada had sold its long-standing home services division to a third-party in 2012, and that third-party subsequently went into receivership, owing more than $8.9-million to nearly 600 suppliers and contractors in Canada.
Even though the elderly couple paid $11,000 using their Sears Credit Card, Sears Home Services never paid the company that supplied the materials and contractor who performed the work. So liens were placed on the elderly couple’s house, which by law, the unpaid contractor and supplier were entitled to do.
CBC reported that other contractors and building supply companies are owed hundreds of thousands of dollars by Sears Home Services and there are at least 50 other liens placed on houses in B.C. where Sears Home Services was actually paid by the consumer, but the contractors who performed the work (or the suppliers that provided materials) were left unpaid.
When Sears Canada divested itself of its home services division in 2012, it didn’t sell the trademark “Sears”. Despite its financial trouble at the retail level, the Sears brand still has immense value in the marketplace. Sears Canada sold the assets of its home improvement division to a company called SHS Services Management Inc. It also entered into a “Branded Concession Agreement” with SHS, which contained extensive provisions governing the use the Sears trademark under an exclusive license. The Agreement prescribed how SHS would use physical premises within Sears stores; that Sears would be used for repair and servicing of products; that purchases by consumers would be payable through Sears credit cards; that Sears gift cards would be honoured, and a host of other obligations which, when you read the contracts, are very similar to terms contained in franchise agreements and commercial leases. Arguably, the sale of the assets and the licensing of the brand to SHS looked so seamless, most customers would expect that they were still dealing with Sears Canada. But that may well have been the intention from a branding perspective. These contracts are available online through Price Waterhouse Coopers website, here, and yes, the circumstances are more complicated than how I’ve summarized them here.
Does Sears Canada owe these unfortunate customers any money under contract law principles? I wouldn’t think so. Despite the far-reaching control that Sears had over SHS under its Branded Concession and other agreements, SHS is a separate and distinct corporation from Sears Canada Inc. The contracts clearly specify that the parties are independent contractors, each responsible for their own respective debts and liabilities. A legal decision to the contrary would have far reaching consequences for other contractual arrangements, especially franchises. Mind you, when consumers go into a Sears store, see a “Sears Home Services” sign and pay for their home repairs with their Sears card, the optics are bad when Sears Canada effectively says to consumers: “Oh…you were never dealing with us. Didn’t you know you were dealing with that other company”?
Should Sears Canada pay the contractors to discharge these liens or otherwise make the consumers whole? Absolutely.
Notwithstanding any legal argument Sears Canada might make that it is not the party who these consumers contracted with, in some circumstances, protecting the brand is more important than protecting one’s legal position. The media is filled with examples of disaffected customers making their case on social media platforms like YouTube for millions of people to see.
Perhaps the most famous example is Halifax musician Dave Carroll, of Sons of Maxwell, who saw United Airlines baggage handlers mishandle and drop his $3,500 Taylor guitar while he was looking out of his window. When he made numerous complaints about the extensive damage to his guitar to United Airlines, he was finally told to stop sending e-mails because he wasn’t going to get any compensation.
So he recorded and uploaded a song to YouTube called “United Breaks Guitars” about his poor customer experience with United Airlines and his failure to get any compensation for the damaged instrument. A link to the song is here. It’s been seen on YouTube 13,816,805 times. According to the Times of London, “...within four days of the song going online, the gathering thunderclouds of bad PR caused United Airlines’ stock price to suffer a mid-flight stall, and it plunged by 10 per cent, costing shareholders $180-million. Which, incidentally, would have bought Carroll more than 51,000 replacement guitars.”
There are some indications that Sears Canada is aware of the brand damage and is trying to make things right with customers. In a letter posted to a CBC website about the elderly B.C. couple who have the liens on their house, a Sears Canada representative stated: “I understand that Mr. and Mrs. Porta have expressed interest in selling their home, and this situation in and of itself should not prevent them from proceeding. Sears Canada will work with them to ensure they are relieved of covering the lien on their home should they accept an offer.”
There are a few morals to this story. First, if you are licensing or franchising your well-known brand to an independent third party, you’re going to have legal and PR problems if the licensee/franchisee does something that harms the brand (such as becoming insolvent and leaving valued customers in the lurch). So choose your licensees and franchisees wisely. Sears made its deal with SHS and now has to “wear it”, as they say.
Second, businesses can’t always sit by and rely on their legal rights when their brand is being degraded by their licensees or franchisees. Relying on one’s strict contractual rights in circumstances such as this may be correct at law, but how long will you be adhering to your legal position when your customers start leaving you in droves and treating you like a pariah because your “brand” has developed a reputation for hanging pensioners out to dry and not paying suppliers? If the suppliers and customers of SHS aren’t made whole, how long will it be before they start singing songs about Sears on YouTube?
Hmm...what rhymes with Sears, anyway?
Tony Wilson is a franchising, licensing and intellectual property lawyer at Boughton Law Corp. in Vancouver, he is an adjunct professor at Simon Fraser University (SFU), and he is the author of two books: Manage Your Online Reputation, and Buying a Franchise in Canada. His opinions do not reflect those of the Law Society of British Columbia, SFU or any other organization.