Over the last forty years, Canada has increasingly become a chosen expansion site for American franchise systems. U.S. franchises have thrived in Canada, a location often viewed as a natural extension of the American domestic marketplace. There are several reasons why Canada is an attractive expansion site for American franchisors. Canada is geographically near the United States and has a highly skilled, educated workforce with consumer behaviors similar to those of Americans. It is considered a safe place to live, and the vast majority of the population lives close to the U.S. border.1 Canada also presents unique opportunities given its size, natural resources, transportation infrastructure, and vacant land available for development. Generally, business practices and legislative developments in Canada tend to follow those in the United States, although Canadians have traditionally been less prone to litigation. The 2010 KPMG Competitive Alternatives Study found that business in Canada costs 5 percent less than the United States in terms of the after-tax cost of start-up and operations across seventeen industries.2 This standing placed Canada as the cost leader among the nine established, industrialized countries in the study. Further, Toronto, Montreal, and Vancouver, the three largest Canadian cities, were found to have lower business costs than every large U.S. city.3
It is important for franchise systems hoping to expand into Canada to note the differences in the Canadian market in order to strategize better a more effective and efficient entry. There are likely a significant number of American franchisors that end up in Canada without any kind of proactive strategy. Oftentimes, American franchisors are pulled into Canada by interested prospective single-unit franchisees, area developers, or master franchisees. The regulation of franchise sales in four of Canada's ten provinces has served to discourage this kind of passive entry, although this reason for entry into the Canadian market is still often cited as key. Nevertheless, most franchise professionals agree that a strategic and purposeful entrance plan is the most likely to succeed. This article seeks to provide American franchisors with a better understanding of the Canadian franchise market in order to enable and encourage such well-strategized entrance plans.
The Canadian Legal System
The Canadian legal system is based on federal and provincial legislation as well as the common law. The common law is a body of jurisprudence built on the historical and continuing judgments of Canadian courts. Unlike the rest of Canada, Quebec is and has been governed by civil law since French North America became subject to British rule in the eighteenth century. Civil law in Quebec has taken the form of a broad system of codified principles entitled Civil Code of Quebec.4 Doing business in Quebec requires a strong understanding of its civil code, and American franchisors should consider this fact when selecting target areas in Canada.
International Influences
With Canada's trend toward American-style legislation, U.S. law will likely only become increasingly relevant to entities conducting business (including franchises) in Canada. Nonetheless, Canada remains rooted in the legal system of the United Kingdom, from which independence began as a gradual process in 1867. Canadian courts still weight English cases more heavily than American jurisprudence.
Provincial Versus Federal Jurisdiction
Canada divides its governmental powers provincially and federally, pursuant to sections 91 and 92 of the Constitution Act, 1867.5 Although the federal government has jurisdiction to legislate over areas such as trade and commerce, bankruptcy and insolvency, and intellectual property, the provincial governments have jurisdiction over areas such as property, civil rights,6 and the administration of justice in the province.7
Although it may have been possible for the federal government to exercise jurisdiction over franchising as an area involving the licensing of trademarks, the federal government has to date expressed no interest in doing so, leaving the provincial governments room to govern given their jurisdiction over contracts. As a result, Alberta, Ontario, New Brunswick, and Prince Edward Island have enacted franchise legislation. Manitoba has most recently joined suit: its Franchises Act is expected to come into force in the fall of 2012. The remaining five Canadian provinces have yet to express an intention to legislate in the area of franchising. The provincial franchise legislation that is in force in the four (soon to be five) provinces is relatively similar; however, there are differences that franchisors should carefully note in developing their entrance strategies.
Taxation
The federal government governs income tax under the Income Tax Act.8 Franchisors should be aware that corporations in Canada pay a combined income tax rate of 20 percent to 31 percent, depending on the province.9 These corporate tax rates are currently lower than in the United States and are projected to stay that way. Accordingly, generating taxable income in Canada and not repatriating these funds to the United States can sometimes be an effective strategy for taxplanning purposes.
Competition
As a matter of federal jurisdiction, Canadian competition law is governed by the federal Competition Act.10 This legislation was enacted to sustain and protect competition in Canada to ensure that the Canadian economy remains efficient, adaptable, and conducive to competitive processes and product choices for consumers.11 Franchisors should be mindful of the Competition Tribunal's reviewable activities such as price fixing, mergers, abuse of dominant position, tied selling, refusal to deal, exclusive dealing, market restriction, delivered pricing, and certain misleading advertising practices.
Despite a history of differences, Canadian and American law currently take a similar approach to price maintenance. For many years, price maintenance was a per se criminal offense in Canada. In 2009, amendments were made to the Canadian Competition Act that decriminalized price maintenance, thereby making it possible for franchisors to dictate maximum and minimum pricing to their franchisees. Although Canada's position on price maintenance has been changed by statute, the U.S. position rests on case law, namely, the U.S. Supreme Court's historic 2007 decision in Leegin Creative Leather Products., Inc. v. PSKS, Inc.,12 which overturned the per se rule against minimum price maintenance. However, various state laws still provide that minimum price maintenance is per se illegal, so the situation in the United States appears to be less clear than in Canada.
Intellectual Property
The federal government in Canada has exclusive jurisdiction over intellectual property. There are minor exceptions to this rule, such as the provincial control over assumed name and corporate name registrations as part of a province's jurisdiction over business corporations and other legal entities operating in the province. It is imperative for franchisors to be aware that trademarks are governed exclusively by the federal Trade- Marks Act13 and that copyright and patents are governed by the federal Copyright Act14 and Patent Act,15 respectively.
Franchise Legislation in Canada
Franchise legislation has evolved gradually in Canada. As soon as Manitoba's legislation comes into force sometime this fall, there will be five provinces with franchise legislation. Alberta paved the path for franchise legislation with Canada's first franchise statute, Franchises Act,16 which came into force in 1971. Ontario's franchise legislation, the Arthur Wishart Act (Franchise Disclosure) (Wishart Act),17 followed in 2000; Prince Edward Island's Franchises Act18 was enacted in 2006, and New Brunswick's Franchises Act19 was enacted in 2011. Although Prince Edward Island, New Brunswick, and Manitoba made the effort to legislate consistently with Ontario, there are still differences among provincial franchise laws that might make it seem difficult for U.S.-based franchisors to conceptualize legal compliance across Canada.
In terms of their application, the Ontario, Manitoba, Prince Edward Island, and New Brunswick statutes are more wide reaching in that they apply to any franchise to be operated in whole or in part in the province regardless of where the prospective franchisee or franchisor is located. In contrast, the Alberta statute will only apply if the prospective franchisee has some preexisting connection to Alberta, such as residency.
Definition of Franchise
There is a difference in how certain provinces define franchise. The Ontario Wishart Act defines franchise to include both the traditional "business format" franchise and the "product distribution" franchise. Central elements of the business format franchise are the following: (1) the franchisor grants the franchisee the right to engage in a business; (2) the franchisee is required by contract or otherwise to make an up-front or ongoing payment or payments, whether direct or indirect, to the franchisor or the franchisor's associate; (3) "the franchisor grants the franchisee the right to sell, offer for sale or distribute goods or services that are substantially associated with the franchisor's or the franchisor's associate's" trademarks, logos, or advertising; and (4) "the franchisor or the franchisor's associate exercises 'significant control' over, or offers significant assistance in, the franchisee's method of operation, including building design and furnishings, locations, business organization, marketing techniques or training."20 Given that three parts of this test are easily met, franchisors should evaluate whether the support and assistance provided constitutes significant control. Such control must surpass the mere granting of rights or training.21 The definitions of franchise under the Prince Edward Island, New Brunswick, and not-yet-inforce Manitoba statutes are essentially the same, though the Manitoba Act necessitates control over the franchisee by the franchisor "under a business plan."22 It is possible for an arrangement to be considered a franchise in Ontario, Prince Edward Island, New Brunswick, soon Manitoba, but not Alberta. The Alberta Franchises Act23 incorporates the concept of a franchise fee; and, perhaps most importantly, it specifically exempts the purchase of goods or services at reasonable, bona fide wholesale prices from the payment element of the definition.
Although similar to the definition in the United States, the business format franchise definition is broad. Practitioners should be cautious in providing advice in this regard given the broad nature of the franchise definition, the relatively short life so far of the legislation, and the little case law to date. It is quite possible for a relationship to exist among parties that, unbeknown to them, qualifies as a franchise.24 The finding that a relationship is a franchise is, of course, significant in that it could place the franchisor in violation of its legal obligations, such as the mandatory presale disclosure obligations, if it fails to comply.
Although the definition of franchise might cause some confusion across provinces, the disclosure obligations are sufficiently similar across the provinces; and, as a result, singleform disclosure documents are becoming more common. This allows franchisors to avoid creating different disclosure documents for each province and allows them to meet the growing demand for disclosure documents among prospective franchisees in unregulated provinces.
Considerations for Expanding into Quebec
As mentioned throughout this article, special consideration should be made when expanding a franchise system into Quebec. One of the most practical considerations is the fact that Quebec's French language heritage is protected by its Charter of the French Language.25 As a result, business affairs are largely conducted in French. A franchisor that is hesitant about its own expertise in Quebec culture and language could consider using a master franchisee or area developer to cover Quebec operations.
In addition, franchisors should be mindful of adhesion contracts, and the special treatment that they are afforded under the Quebec Civil Code. Such contracts are found when one of the contracting parties stipulates nonnegotiable, essential terms of the agreement. Once a contract is considered to be an adhesion contract, the court may nullify or change provisions that a reasonable person would find incomprehensible or unreadable, consider abusive, or consider as "external clauses."
Entrance Strategies
There are several ways in which American franchisors can enter the Canadian market. Franchisors can directly franchise from the United States into Canada or use a joint venture structure, in either case using an existing or a new U.S. entity. Franchisors are also increasingly considering use of a Canadian affiliate or subsidiary to then grant rights to a single-unit franchisee, master franchisee, area developer, and/or area representative.
Direct Franchising to Single-Unit Canadian Franchisees
It used to be quite common for American franchisors to expand into Canada through a single-unit franchise model. Franchisors have since reconsidered their entrance plans, mostly due to the realistic costs of expansion. Franchisors became wary of making such a large expenditure for only a few single-unit franchisees.
Costs come from various sources, including the nonresident withholding taxes that might be applied to U.S. resident franchisors. Specifically, the nonresident withholding tax requires Canadian franchisees to pay a percentage26 of the U.S. resident franchisor's royalty payment and initial franchise fee to Canadian income tax authorities in order to ensure that the nonresident franchisor's income in Canada has been appropriately taxed.
There are ways in which such withholding taxes have and may be reduced. First, franchisors have attempted to compensate for this tax by "grossing up" or increasing the payment from the Canadian franchisee. This is not commonly done in cross-border deals between Canada and the United States for various reasons, including the fact that Canadian franchisees are critical of this method as an ineffective way for American franchisors to organize their affairs. In addition, the Convention Between the United States of America and Canada with Respect to Taxes on Income and on Capital has reduced the withholding tax rate from 25 percent to 10 percent.27 Whereas previously there was no reduction in the withholding tax rate if the franchisor was an American limited liability company (LLC), the Fifth Protocol to the Canada-U.S. Income Tax Convention has very recently made it possible for LLCs to get reduced withholding tax rates as long as they meet certain eligibility requirements.28 Overall, if the American franchisor's affairs are organized most efficiently and effectively, such withholding taxes could be a credit against its taxes payable in the United States.
Joint Venture
Although not commonly done, a franchisor could enter Canada by setting up a joint venture franchise. Joint ventures are essentially contractual relationships whereby entities that remain independent in their own business activities make contributions for a single, identified, and common purpose.29 In a joint venture between a U.S.-based franchisor and a local Canadian entity, the franchisor would grant certain rights to the Canadian entity. Although this may alleviate some responsibilities from a physically distant franchisor, it also might result in the franchisor being too far removed to diligently oversee the business.
Canadian-Based Subsidiary or Affiliate
Using a Canadian subsidiary or affiliate is sometimes seen as the most desirable and tax-efficient expansion strategy. Typically, this subsidiary or affiliate executes master franchise, area development, or single-unit agreements within Canada. However, using a Canadian-based entity is most effective if and when the franchisor's plans include having staff or an office in Canada. Although this may not be the plan at the outset, success in the market may make it inevitable.
Incorporation of such a subsidiary or affiliate may occur at the federal or provincial level. There are a number of different types of entities that can be considered, including "regular" business corporations or even a special-purpose "flow-through" entity called an unlimited liability corporation (ULC). ULCs can only be formed in Alberta, British Columbia, and Nova Scotia, although any business corporation or ULC can carry on business throughout Canada. In either case, some provinces require 25 percent of a corporation's directors to be resident in Canada, while other provincial business corporation laws have no such residency requirements.30 The decision on where to incorporate often turns on this issue alone.
Where a U.S. franchisor sets up a Canadian subsidiary or affiliate, it will also need to enter into a written license agreement with its Canadian entity and provide for a fair market value payment for use of the franchise system and trademarks. That is necessary in order to satisfy the transfer pricing requirements of the government tax authorities on both sides of the border.
Master Franchising
With the increase in sophisticated expansion strategies, master franchising, area development, area representatives, and hybrid arrangements have become more common, if not the norm. Foreign franchisors can use master franchise agreements to select master franchisees and provide them with a certain territory within which they may subfranchise to thirdparty franchisees that enter agreements with the master franchisees instead of the foreign franchisors. Master franchising is useful in that it allows U.S.-based franchisors to delegate functions to an entity of their choice, with local expertise. Master franchisees typically assume many of the functions normally handled by the franchisor, such as recruitment, site selection, construction, and operational support. Although these arrangements can be beneficial, franchisors should be mindful that they come at the cost of decreased control and further fractioned royalties and payments.
Area Development
U.S.-based franchisors might use an area development agreement whereby the franchisee is granted an often-exclusive right to open franchises for its own account within a certain territory over a determined period of time. There are limits placed on the franchisee's rights; for example, the franchisee would not be permitted to subfranchise to a third party. Area development agreements also often allow franchisors to delegate functions to the area developer. However, the most crucial element is usually selecting the right area developer candidate, one that is capable of becoming a multiple-unit franchise owner and operator.
Area Representatives
Franchisors who are expanding internationally are beginning to use local area representatives to recruit and assist franchisees with local matters. Franchise agreements are still signed by the franchisor and each respective franchisee; however, the area representative will be designated tasks such as overseeing or administering many of the functions that a franchisor would perform in the local market. This allows the franchisor to maintain full control over the franchisees while delegating tasks that might be better accomplished locally to an area representative in exchange for a commission usually based on a percentage of royalties paid by franchisees.
Protection of Intellectual Property
Trademarks
Trademarks are valuable to any franchise system to the extent that they demonstrate the unique nature of the goods and services of the owner of the trademark. Trademarks can include names, symbols, logos, trade dress, trade names, and so forth. Canadian law recognizes the value in trademarks and allows franchisors to ensure that only licensed third parties, such as franchisees, make sanctioned use of the franchisor's trademarks. Specifically, section 50 of the Trade-marks Act provides that if the trademark owner grants or authorizes the grant of a trademark license and has, under the license, direct or indirect control of the character or quality of the licensee's goods or services, the use of the trademark by the licensee is deemed to be use by the owner.31
Canadian law protects trade names, trade dress, and other trademark-like rights. In addition to statutory protection, the common law tort of passing off is also available to protect such trademark-like rights. A plaintiff must show that the public identifies copied material with its goods or services and that the use of such copied material will likely cause confusion and harm to the plaintiff.32 Passing off is useful in addition to other trademark claims, and it is especially useful when there are deficiencies in a trademark registration.
Registration
Given the value of a trademark, it is universally recognized that there is tremendous value in protecting a franchisor's principal trademarks from any potential threats. Much like the United States, Canadian law provides avenues to maximize a trademark's value through protective legal mechanisms like registration. Registering a trademark in Canada requires the franchisor to file an application. As in the United States, a trademark application may be filed based on intent to use. In these cases, registration occurs only after actual use begins, and it can take years before such actual use must be demonstrated. Alternatively, a trademark registration may be obtained in Canada if such trademark is registered in a country that is a treaty partner to Canada, such as the United States.
Generally, registration should be pursued as soon as possible in order to minimize the risk that an individual who has observed the value of the trademark or franchise abroad will seek to register first. Franchisors should not easily dismiss this risk because the Canadian public is exposed to and well versed in American brand names through wide cross-border media exposure. American brand names will likely be recognized in Canada, and it is certainly possible for an opportunistic Canadian to register and attempt to capture some value of a franchise's trademarks. Further, it is also possible that a franchisor will not be able to register a trademark in Canada that is already in use in the United States. This might occur when a business in Canada uses a name or logo similar to that of an American franchisor looking to register later in Canada. By investigating such registrations as early as possible, the American franchisor will be better equipped either to avoid this situation or plan proactively to modify the intellectual property that it plans to use in Canada.
Additionally, franchisors entering the Canadian market should be aware that Canada is not yet a party to the Madrid Protocol. This protocol is a treaty that allows a franchisor to register its trademarks in one or more countries that are party to the treaty by filing an application to register the trademark in its home country and then designating additional countries through an international application. Because Canada is not a party to the treaty, franchisors entering the Canadian market must file individual trademark applications in Canada. Franchisors are encouraged to consult Canadian counsel in filing such applications even though this may result in increased costs.
Both Canadian-based and U.S.-based franchisors might refrain from registration abroad because they are hesitant to allocate funds to foreign trademark applications. However, given the benefits of registration and its relatively affordable cost, American franchisors are encouraged to spend this money up front, even before considering entry into Canada. The alternative is often more costly. Instead of paying a fee for registration, the hesitant franchisor might be forced to buy the third party's registration or, worse, to settle a dispute over the name. This is a very practical, yet important, piece of an effective entrance strategy that every franchisor should consider regardless of whether it has begun to contemplate seriously cross-border expansion.
Trade Secrets
Franchisors often attempt to keep certain elements of their business confidential in order to protect any competitive advantages. Confidential information and trade secrets can be found in certain techniques, recipes, processes, and compilations of technical information not released to the competition or the public. A delicate balance must be reached between providing the necessary amount of confidential information to franchisees and simultaneously protecting that confidential information.
Franchisors should pay specific attention to the nondisclosure and confidentiality provisions in franchise agreements as this information is not protected by statute but only by contract. If appropriately addressed in the contract, Canadian law will provide some recourse regarding a franchisor's confidential information in specific circumstances. For instance, confidential information is protected as long as the information has the necessary level of confidence and was disclosed in a situation where the recipient of the information knew or should have known that the disclosure was for a limited purpose and that the information was used for a purpose other than that for which it was disclosed.33
Copyright
Under the 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.34 In the franchise context, copyright can and does subsist in works such as advertising materials, operating manuals, computer software, graphics, and design marks. Canadian law protects works once they are created, with no requirement for registration. Further, unregistered works created in the United States receive protection in Canada even without registration.35 Although registration is not required, it still might provide the owner with evidentiary benefits. This is the result of Canada's adherence to the Berne Convention for the Protection of Literary and Artistic Works.36 Registration is likely more prevalent in the United States given the benefits for copyright holders, such as the right to enhanced damage awards. Such additional benefits do not exist in Canada, and, as such, the benefits of registration are often limited.
Patents
As of yet, patents are not a common issue in franchise agreements. Unlike copyright, the Canadian Patent Act allows for a statutory monopoly over new Canadian inventions as long as the original inventor registers such inventions.37 An invention that is patented or capable of being patented in one country may simply not be capable of protection in the other. It is important to note that the law in Canada concerning the patentability of business methods and other intangible processes is nascent and has yet to develop fully. As recently as December 2011, the Canadian Commissioner of Patents issued a Notice of Allowance for Amazon.com's one-click Canadian business methods patent application, reversing his earlier decision to refuse that application. The Commissioner of Patents' change of heart occurred as a result of the determination of the Federal Court of Canada and the Federal Court of Appeal in Amazon.com, Inc. v. Attorney General of Canada & Commissioner of Patents38 that the Commissioner of Patents should revisit the claims in that patent application, keeping an open mind to the fact that in appropriate circumstances business methods and other intangible processes might very well be legitimate patentable subject matter. However, because the Commissioner of Patents has not published its rationale on reconsideration of the Amazon.com application, further developments in the case law and Patent Office examination publications will be necessary before the line separating acceptable patent subject matter from unpatentable art in the realm of business methods and other intangible processes can be ascertained with any certainty. Franchisors should consider filing patent applications for unique business methods, such as a distinctive delivery system, thereby taking advantage of the first-to-file regime in Canada while the law in this area develops.
Domain Names
Aside from the well-known domain names, including .com, the .ca top-level domain name is in widespread use across Canada. Franchisors can register a desired domain name with the Canadian Internet Registration Authority (CIRA), where registrations are handled on a first-come, first-served basis. In registering a .ca domain name, franchisors should ensure that they satisfy the eligibility requirement of applicants being Canadian or the owner of a trademark registered in Canada that is included in the proposed domain name.
Franchisors should be mindful that the applicant is responsible for ensuring that the registration or use of the name does not violate third-party intellectual property rights. CIRA will not consider whether a franchisor has a legitimate interest in the proposed domain name or whether trademark rights for that name belong to another entity.
Canadian law provides recourse in cases of domain name infringement. Infringement occurs when the complainant demonstrates that the .ca domain name is confusingly similar to a trademark, official mark, or trade name in which the complainant has rights in Canada. The complainant must also demonstrate that the registrant has no legitimate interest in the domain name and that the registration was made in bad faith.39
Franchisor-Franchisee Relationships
The Crux of the Relationship
The basis of any franchisor-franchisee relationship in Canada is largely contractual. This agreement provides the franchisee with a license to market a product or service through the use of a business method, including use of a trademark and business name, the methods of doing business, the overall look of the business, and access to certain benefits.
The franchise legislation in the four (soon to be five) provinces has had some impact as well on Canadian franchise agreements. For instance, provincial franchise laws impose, to a greater or lesser degree, the governing law of the contract by applying that jurisdiction's laws on the terms of the franchise agreement. Those provisions of the franchise laws may not be waived and so affect any U.S. franchisor's franchise agreement in Canada. However, unlike relationship laws in the United States, Canadian franchise laws do not impose any "good cause" standard with regard to the franchisor's discretion to renew, transfer, or terminate the agreement. Instead, the Canadian franchise laws, and common law, impose on each party to the franchise agreement the statutory and common law duty of fair dealing, which will be discussed later in this article. Overall, U.S. franchisors should consult Canadian counsel on how best to optimize Canadian opportunities within the drafting of their franchise agreements. This often requires that the franchise agreement be "Canadianized."
Employment Versus Independent Contractor Relationships
An essential component of a franchise arrangement is that the franchisor and the franchisee are independent contractors. Over time, several attempts have been made to find an employer-employee relationship between a franchisor and a franchisee. The consequences of this designation are significant. If the franchisor is considered an employer, the termination of a franchise agreement could lead to a counterclaim of wrongful dismissal. Further, as an employer, a franchisor would be obliged to comply with laws relating to payroll taxes and source deductions. The consequences of finding an employment relationship are slightly more significant in Canada as opposed to the United States because Canadian law tends to be more generous to employees in termination disputes. The courts have taken this position in a few relatively older cases where the franchisor imposed overly restrictive standards in the franchise agreement.40 Interestingly, a recent decision of the Workers Compensation Board of Manitoba (WCB) found that certain franchisees were not entitled to register as a separate business for the purposes of obtaining workers' compensation coverage.41 On appeal, the WCB decision was upheld, and the Appeals Commission found that given the nature of the particular franchise agreement, the franchisees were more akin to employees of the franchisor; thus, the franchisor was required to pay certain premiums for the franchisees.42
Disclosure
A stated purpose of franchise legislation has been to promote a balance of power between the franchisor and its franchisees.43 Of critical importance to this objective is presale disclosure and transparency. Every Canadian province with franchise legislation mandates a certain level of disclosure from franchisors to their respective franchisees. This concept will be well known to American franchisors as they, too, are required to deliver a franchise disclosure document.
Although there is no registration requirement in Canada, all existing franchise statutes provide (1) broad but time-limited rights of rescission in the event that presale disclosure is not provided at all or is provided improperly or out of time and (2) statutory rights of action for misrepresentations contained in a disclosure document. For instance, in situations where disclosure is not provided at all or is deficient to the extent that it is deemed not to be disclosure, each provincial franchise law permits the franchisee to rescind the franchise agreement for up to two years after entering into it. This is in contrast to the sixty-day right of rescission where the disclosure document is deficient in some less material way or where the franchisor does not comply with the mandatory fourteenday waiting period from delivery of the disclosure document.
Materiality
U.S.-based franchisors should be aware that the requirements in Canada are not sufficiently similar to those of the United States to allow for the use of U.S. disclosure documents in Canada. The provincial franchise laws each require that franchisors disclose "all material facts," which include a list of prescribed issues or topics that must be addressed in a compliant disclosure document. Statutes, like the Ontario Wishart Act, have provided definitions of materiality: "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."44 The ability to interpret materiality is unfortunately limited given the dearth of judicial guidance. Thus, Canadian counsel should be consulted to establish what constitutes materiality as this determination will likely take the franchisor's disclosure beyond the list of prescribed issues and questions and has been found to even require that the disclosure document be customized to address the circumstances of a particular situation.
Procedure and Form
In provinces with franchise legislation, franchisors are required to deliver disclosure documents at least fourteen days before the earlier of (1) the party's entry into any agreement related to the franchise (with some very limited exceptions in certain provinces) and (2) the payment by the franchisee of any consideration.45
There are many specific requirements that should be considered prior to disclosure. For example, aside from Manitoba's pending legislation, Canadian franchise statutes require delivery of the disclosure document as one document at one time. Once in force, Manitoba's statute will allow for disclosure documents to be delivered in parts, subject to several requirements.46
Exemptions
All provincial franchise legislation exempts franchisors from the obligation to disclose in certain circumstances. These circumstances include sale by a franchisee if it is at arm's length from the franchisor; sale to an insider (officer or director of the franchisor); sale by a franchisor of an additional franchise to an existing franchisee if the additional franchise is substantially the same as the existing franchise; sale by the estate of the franchisee or by a receiver or trustee in bankruptcy or similar agreement; certain franchise agreement renewals or extensions; particularly small arrangements and multilevel marketing; and, in Ontario only, a sophisticated franchise exemption of more than $5 million over a one-year period, as invested by the franchisee.
Wraparounds
It may be tempting for a U.S. franchisor to utilize a wraparound franchise disclosure document by supplementing its existing U.S. disclosure document with a wraparound document that meets provincial requirements. However, the majority of Ontario's lawyers would advise against this practice as Ontario's franchise law does not explicitly permit a wraparound, and it mandates an order to the presentation of the mandatory issues that must be addressed in the disclosure document. Further, although Alberta, Manitoba, New Brunswick, and Prince Edward Island explicitly permit wraparound disclosure documents, preparing a disclosure document that meets the Ontario standards in order to have one single compliant national disclosure document would be so challenging that it would likely never or rarely be used. Thus, it is likely as costly and far less risky to simply create a new disclosure document.
Obligation of Good Faith
Franchise legislation in the regulated provinces requires both the franchisor and the franchisee to abide by the duty of fair dealing. With the exception of Alberta, all of the provincial statutes provide that this duty of fair dealing includes a duty to act in good faith and in accordance with reasonable commercial standards. Canadian courts have reaffirmed that this statutory duty is essentially a codification of the common law position on good faith in franchising,47 as first described by the Ontario Court of Appeal in Shelanu Inc. v. Print Three Franchising Corp.48 This decision confirmed that there is no fiduciary relationship in a franchise arrangement. It elaborated that franchisors must act promptly, honestly, fairly, and reasonably but are permitted to act in their self-interest as long as they take into account the legitimate interests of their franchisees.
Courts have also found that the duty of good faith can extend equally to the individual operator of a franchise or the corporation under which the operator carries on its business as a franchisee.49 That is, the franchisee also has a corresponding duty of good faith toward the franchisor in respect of performance or enforcement of the franchise agreement.
More recently, in Salah v. Timothy's Coffees of the World Inc.,50 the Ontario Court of Appeal furthered the notion of good faith expressed in Shelanu and found that a franchisor's breach of its good faith obligations under the Wishart Act entitled the franchisee to damages, "separate and in addition to any award in compensation of pecuniary losses."51
As in any other area of law, franchisors should be aware of Quebec's unique Civil Code of Quebec. The civil code imposes a good faith obligation on parties to all contracts when an obligation is created, performed, or extinguished.52 One of the first judicial commentaries on good faith generally and its relation to encroachment came from the Quebec Court of Appeal's decision in Provigo Distribution Inc. v. Supermarché A.R.G. Inc.53 In this case, the franchisee took issue with the fact that the franchisor operated a grocery store near the franchise grocery store, as well as the fact that the franchisor controlled all wholesale prices as the franchisee's exclusive inventory distributor. The court found that the franchisor was acting in bad faith because it chose to compete with its franchisee without exercising a degree of restraint or good faith or fulfilling its franchise agreement obligations. As such, in Quebec, the franchisor should not deny its franchisee the benefits of the franchise system bargained for in the franchise agreement. The franchisor should also make efforts to assist the franchisee in dealing with such competition.
Fiduciary Relationship
Fiduciary relationships exist where one party owes special duties to the other party. This situation occurs most commonly between trustees and beneficiaries.
The concept of franchisors as fiduciaries was raised and decided upon as long ago as the seminal 1970 Supreme Court of Canada decision, Jirna Ltd. v. Mr. Donut of Canada Ltd.54 This case found that a franchisor that imposes strict terms to protect its franchise system does not create a fiduciary relationship in doing so. Subsequent decisions have recognized that there is a special relationship between parties in a franchise agreement and that a franchisor must act in utmost good faith toward a franchisee even though the relationship is not a fiduciary one.55 Additionally, implicit in the Ontario Court of Appeal's decision in Shelanu is that it would have been an error of law for the trial judge to hold the franchisor to a fiduciary duty.56 In fact, in one Ontario court decision, the judge stated that "it appears to be settled law that no fiduciary duty exists in law between a franchisor and a franchisee."57
However, it is important for franchisors to note that the law on fiduciaries is still evolving. For example, in 530888 Ontario Ltd. v. Sobey's Inc.,58 the Ontario Court of Justice did not necessarily address whether a fiduciary relationship exists in a franchise arrangement, but the court did state that a commercial relationship is not immune from the imposition of fiduciary duties.
Footnotes
1. Canadian Statistics—Population and Dwell ing Counts, available at "www.statcan.gc.ca/daily-quotidien/120208/dq120208aeng. Htm" (last modified Feb. 8, 2012).
2. KP MG, Competitive Alternatives: KP MG's Guide to International Business Location 2010 Edition (2010), available at www.competitivealternatives.com/download/default.aspx.
3. Id. at 44.
4. R.S.Q., ch. 64.2 (1991).
5. 30 & 31 Vict. Ch. 3 (U.K.), as reprinted in R.S.C., No. 5 (Appendix II 1985).
6. Id. § 91.
7. Id. § 92.
8. R.S.C., ch. 1 (5th Supp. 1985).
9. KP MG, Income Tax Rates for General Corporations 2011– 2012 (current as of Sept. 30, 2011), available at "www.kpmg.com/Ca/ en/IssuesAndInsights/ArticlesPublications/Pages/taxrates.aspx" .
10. R.S.C., ch. C-34 (1985).
11. Id. § 1.1.
12. 127 S. Ct. 2705 (2007).
13. R.S.C., ch. T-13 (1985).
14. R.S.C., ch. C-42 (1985).
15. R.S.C., ch. P-4 (1985).
16. Alberta Act, R.S.A., ch. F-23 (2000).
17. Wishart Act, R.S.O., ch. 3 (2000).
18. R.S.P.E.I., ch. F-14.1 (1988).
19. S.N.B., ch. F-23.5 (2007).
20. The Franchises Act, Bill 15, Legislative Assembly of Manitoba, 4th Sess., 39th Leg. § 1(1) (draft in consultation as of date of publication), available at http://web2.gov.mb.ca/bills/39-4/b015e.php.
21. Di Stefano v. Energy Automated Sys. Inc., [2010] ON. S.C. 493 (CanLII).
22. The Franchises Act, Bill 15, Legislative Assembly of Manitoba, 4th Sess., 39th Leg. (draft in consultation as of date of publication), available at http://web2.gov.mb.ca/bills/39-4/b015e.php.
23. R.S.A., ch. F-17 (1980).
24. For example, the recent Ontario case of 1706228 Ontario Ltd. v. Grill It Up Holdings Inc., [2011] ON. S.C. 2735, saw a court award damages to a prospective franchisee even though negotiations had broken down and no franchise agreement was ever signed.
25. R.S.Q., ch. C-11.
26. See R.S.C., ch. 1, § 212(1)(d) (5th Supp. 1985).
27. Convention Between the United States of America and Canada with Respect to Taxes on Income and on Capital, U.S.-Can., Sept. 26, 1980, as amended by the protocols signed on June 14, 1983; Mar. 28, 1984; Mar. 17, 1995; and July 29, 1997.
28. Protocol Amending the Convention Between Canada and the United States of America with Respect to Taxes on Income and on Capital, U.S.-Can., Sept. 26, 1980, as amended by the protocols signed on June 14, 1983; Mar. 28, 1984; Mar. 17, 1995; and July 29, 1997, available at www.fin.gc.ca/treaties-conventions/USA_1-eng.asp.
29. Bruce McNeely, Carrying on Business in Canada—A Practical Guide for Non-Canadians 2.6, at 3.14 (Cassels Brock 2003).
30. See Business Corporations Act, R.S.O., ch. B-16, s. 118(3) (1990); Corporations Act, C.C.S.M., ch. C225, s. 100(3); Business Corporations Act, R.S.S., ch. B-10, s. 100(3) (1978).
31. Trade-marks Act, R.S.C., ch. T-13, § 50 (1985).
32. Ciba-Geigy Can. Ltd. v. Apotex Inc., [1992] 44 C.P.R. (3d) 289, 296–99 (SCC).
33. Lac Minerals Ltd. v. Int'l Corona Res. Ltd., [1989] 2 S.C.R. 574.
34. Copyright Act, R.S.C., ch. C-42, § 3 (1985).
35. McNeely, supra note 29, at 5.3.
36. Berne Convention for the Protection of Literary and Artistic Works, Sept. 9, 1886, completed at Paris on May 4, 1896, revised at Berlin on Nov. 13, 1908, completed at Berne on Mar. 20, 1914, revised at Rome on June 2, 1928, revised CTS 1948/22.
37. Patent Act, R.S.C., ch. P-4, § 27 (1985).
38. [2010] F.C. 1011.
39. CIRA, available at www.cira.ca.
40. Mac's Milk Ltd. v. Ont. (Workmen's Compensation Bd.), [1977] 76 D.L.R. (3d) 179 (Ont. Div. Ct.); Head v. Inter Tan Can. Ltd., [1991] 5 O.R. (3d) 192 (Ont. Gen. Div.).
41. Manitoba Appeal Commission, Public Decision No. 99/2011 (2011).
42. Id.
43. 779975 Ont. Ltd. v. Mmmuffins Can. Corp., [2009] O.J. No. 2357 (Ont. S.C.J.).
44. Wishart Act, R.S.O., ch. 3, § 1(1) (2000).
45. Id. § 5(1); Alberta Act, R.S.A., ch. F-23, § 4(2) (2000).
46. The Franchises Act, Bill 15, Legislative Assembly of Manitoba, 4th Sess., 39th Leg. (draft in consultation as of date of publication), available at http://web2.gov.mb.ca/bills/39-4/b015e.php.
47. Landsbridge Auto Corp. v. Midas Can. Inc., 73 C.P.C. (6th) 10, 2009 CarswellOnt 1655 (Ont. S.C.J.)
48. Shelanu Inc. v. Print Three Franchising Corp., [2003] O.J. No. 1919 (Ont. C.A.).
49. Salah v Timothy's Coffees of the World Inc., [2010] ON. C.A. 673.
50. Id.
51. Id. ¶ 29.
52. See Civil Code of Quebec, R.S.Q., ch. 64.2, §§ 6, 7, 1375 (1991).
53. Provigo Distrib. Inc. v. Supermarché A.R.G. Inc., [1995] R.D.J. 472 (A.Q.).
54. Jirna Ltd. v. Mr. Donut of Can. Ltd., [1972] 1 O.R. 251 (Ont. C.A.), aff'd, [1975] 1 S.C.R. 2.
55. See Machias v. Mr. Submarine Ltd., [2002] O.J. No. 1261 (Ont. S.C.J.); Country Style Food Servs. Inc. v. 1304271 Ont. Ltd., [2003] O.J. No. 362 (Ont. S.C.J.).
56. Shelanu Inc. v. Print Three Franchising Corp., [2003] O.J. No. 1919, ¶ 70 (Ont. C.A.).
57. 1402066 Ont. Ltd. (c.o.b. Cupps Coffee House) v. Cupps Int'l Inc. (c.o.b. Cupps Coffee House), [2002] O.J. No. 1812 (Ont. S.C.J.).
58. 530888 Ont. Ltd. v. Sobey's Inc., [2001] O.J. No. 318 (Ont. S.C.)
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