At a franchise convention I attended in Quebec in May, I spoke to a colleague who practices franchise law in the United States. It's very normal for Canadian franchise lawyers to attend franchise conventions in the U.S., but it's not that usual to see American franchise lawyers attending one up here.
I was curious as to why he was participating in a conference north of the border, and we ended up having a long talk about the franchise landscape in the U.S.
The U.S., he said, was "overbuilt" with franchises. And the financial crisis/recession that started in 2008, changed the industry in the U.S. Existing franchisees were having problems making money because consumers weren't spending as much on discretionary items as they used to. Many franchise systems were losing franchisees (and locations) to the recession. Other franchisors were having trouble selling franchises because Americans couldn't easily borrow on the equity of their homes to finance a franchise acquisition anymore (there being no equity in the home to borrow on, or no home). Some franchisors were even declaring bankruptcy.
From his perspective, Canada wasn't hit as hard by the recession as the U.S. was, and was therefore where many U.S based Franchisors would be looking to expand. The real estate industry was still relatively strong here. The banks were still lending. And Canadians were still spending. He told me to get used to seeing more American franchise systems I might never have heard before, expanding here.
In terms of franchising between Canada and the U.S., many U.S. franchisors have the same attitude as Al Capone, who famously uttered that he "didn't know what street Canada was on". With head offices in Florida, Texas or Nevada, Canada is "up there" somewhere. We use 'funny money' (although it isn't so funny anymore). We tell the temperature and measure distance the wrong way. We pronounce the last letter of the alphabet "zed" and the Queen runs Canada. And everyone speaks French. Other than that, a franchise is a franchise. Right?
Well yes, but when some U.S. based franchisors expand north, they don't realize they aren't in Kansas anymore. They don't adapt their contracts and disclosure documentation to reflect the fact that they're doing business in another country.
Yes, of course, many of the mid-sized and all the large, sophisticated "name brand" U.S. franchisors will engage Canadian Counsel to adapt their agreements and disclosure documents to satisfy Canadian laws. But some of the smaller, "start-up" franchisors in the U.S. don't change their contracts, assuming that their U.S. disclosure documentation will work here.
So if we're going to be seeing more U.S. franchise systems come to Canada in the next few years, lets discuss a few things you'll need to take note of if you're dealing with a U.S. (or other non Canadian) Franchisor in the next few columns:
How are your legal needs dealt with?
I don't get my trousers in a knot if a U.S. franchise agreement spells "colour" the wrong way, (or even if they say "state" instead of "Province" in a few places), but if the Agreement makes reference to U.S. statutes like the "Lanham Act," "RICO," "Patriot Act, or other statutes, laws or legal terms that really have no bearing in Canada, its clear the franchisor hasn't taken the time and trouble to retain Canadian counsel to adapt their U.S. agreements for Canada. If they don't see the need to hire Canadian lawyers to adjust their documentation, what does that say about how they'll deal with you when you're a franchisee?
Don't take trademarks for granted
Remember to check to see if they've applied for (or preferably, registered) their trademark in Canada. You can check at the Canadian Intellectual Property Office's website. And remember, just because an application has been submitted, the risk remains that it might be denied. There may have been a prior user in Canada with exclusive rights. In that case, there may be an indemnity or some other compensation owed to you by Franchisor should it be unable to get the trademark it promised you.
Consider efficiency issues in a cross-border supply chain
It's usual in franchising for the franchisee to purchase all of its products and supplies either from the Franchisor, or from the Franchisor's authorized suppliers. This provides for consistency in the types of products used or sold by the franchisees. It can lead to volume purchase discounts for franchisees, keeping prices lower. Franchisors might also receive a rebate from the suppliers, which they can either keep themselves or pass on to franchisees.
However, if you're dealing with a non-Canadian franchisor requiring you to buy from suppliers across the border, all sorts of questions arise. Can those products and supplies even be imported into Canada under Canadian law? Is there a duty or tariff on them that the Franchisor hasn't contemplated in its pricing? Have the parties figured out how GST/PST and HST will apply to the importation of these products across the border? Has the Franchisor made arrangements for bilingual packaging and labeling? Have they factored in the price of freight? Is it cheaper to get a local (that is, a Canadian) supplier of these products because in some cases, they can be purchased at a cheaper cost and with less administrative hassle?
What about currency fluctuations? The Canadian dollar is high now, but it could be low again, making it more expensive for Canadian franchisees to buy from U.S. suppliers. And what currency is the franchisor being paid in anyway, if the Franchisees' income is always in Canadian dollars?
Again, the big guys (and even most of the mid-sized guys) understand all this. It's really the small, regional start-up franchisors who sometimes don't.
Your Province matters
The laws of Ontario, Alberta and PEI require the Franchisor to give out a Franchise Disclosure Document (FDD) to prospective franchisees before the franchise agreement is entered or money paid. Failure to do so (or failure to disclose all material facts in the disclosure document in the required manner) can lead to legal action against the franchisor on behalf of the franchisee.
Have you been given an FDD for use in the U.S. and been told it's the normal Disclosure Document the Franchisor gives out? In places like BC this won't matter, as there are no franchise disclosure laws, but in Alberta, Ontario and PEI, a U.S. FDD won't fulfill a franchisor's legal obligations.
Next column, we'll discuss some other cross-border issues, including the issue of Withholdings Tax, whereby Royalties paid across the border are taxed, something some franchisors (and franchisees) don't always realize until Canada Revenue Agency comes knocking.
Special to the Globe and Mail
Vancouver franchise lawyer Tony Wilson is the author of Buying A Franchise In Canada – Understanding and Negotiating Your Franchise Agreement and he is ranked as a leading Canadian franchise lawyer by LEXPERT. He is head of the Franchise Law Group at Boughton Law Corp. in Vancouver and acts for both franchisors and franchisees across Canada, many of whom are in the food services and hospitality industry. He is a registered Trademark Agent, an Adjunct Professor at Simon Fraser University and he also writes for Bartalk and Canadian Lawyer magazines.