Class-action lawsuits poised to make franchisors eat humble pie

January 20, 2011

Ontario justices are sending a strong message to franchisors to play nice when sharing profits.

Pet Valu, Midas, Shoppers Drug Mart, Quiznos, Tim Hortons, Bulk Barn, Sunoco…just the first.

The cases often revolve around how the franchisor uses its power to set the prices – both the prices that franchisees must pay for the products they sell, and how much they can sell them for.

“It’s about dividing up the profit pie. And the person who has the pie cutter is the franchisor. And so, they cut themselves the biggest piece,” Mr. Sterns said. “But on the other hand, the franchisees are the ones who put a lot of investment into making the pie.”

Mr. Shaw is absolutely right and absolutely wrong:

  1. The technology for organizing pre-trial franchisee groups is improving (daily) but
  2. This is just the tip of the iceberg.

I guarantee that.

[see Revolt of the Franchisee: Behind some of the biggest brands - Midas, Quiznos, Tim Hortons - the messy class-action battles or The Globe and Mail]


Sterns’ warning: Don’t do a half-assed job on disclosure reviews

April 9, 2010

Ontario’s 35,000 lawyers should consider themselves warned.

This is not just outstanding peer-to-peer legal advice (which it is: both carrot and stick) but it’s also crucial information for all current Canadian franchise investors.

The benefit of collective franchisee action has never been more justified.

David Sterns of Toronto’s Sotos LLP writes in March’s Canadian Lawyer magazine an article called: Advising the purchaser of a franchise business.

Sterns’ bottom-line advice to lawyers? (especially general attorneys):

The harsh reality is that some franchises have a failure rate as high as or even higher than non-franchised businesses. When the franchised business fails, the results are often catastrophic for the franchisee. The legal advice provided by the reviewing lawyer will come under close scrutiny, particularly if the franchisee misses the rescission window because it was unaware of its rights…

Lawyers should allocate sufficient time and charge a sufficient fee to permit a proper document review and reporting to the client. Otherwise, they should decline the retainer.

Lots of implications for the general and franchise Ontario bar.

But, hey, huge importance for the 40,000 ON investors in a current franchise relationships who are organized. Disclosure requirements are not just for the entering but whenever a material change happens to the relationship (ie. during, at renewal: any time a material or “significant” franchisor decision is made).

Did you get proper disclosure documents the last time your franchisor decided to change the rules in the middle of the game?

These are the business risks I assigned and that appear in the WikidFranchise entry:

  1. Arthur Wishart Act (Franchise Disclosure), 2000, Canada,
  2. Buying an existing outlet even riskier than from scratch,
  3. Courts extremely picky about shoddy disclosure practices,
  4. Disclosure documents are deficient,
  5. Disclosure document: one, bound and delivered at the same time,
  6. Disclosure document certificate,
  7. Disclosure document must disclose all material facts,
  8. Disclosure document must include third party contracts (suppliers),
  9. Disclosure documents never given,
  10. Disclosure documents not given within proper timeframe,
  11. Duty of care,
  12. Franchise law being ignored,
  13. Independent businesses survive longer than franchised ones,
  14. Independent businesses much higher profit than franchised ones,
  15. Lawyer alert: advise only prospects with adequate legal due diligence budgets or risk being sued,
  16. Lawyers being threatened with lawsuits for speaking out,
  17. Material facts were not disclosed,
  18. Outstanding advice,
  19. Professional negligence,
  20. Refuses to take client,
  21. Rescission,
  22. Sue the lawyer,
  23. Unintentional or hidden franchises

This is an important article that I will visit again.


Reza Solhi and 3 for 1 Pizza & Wings

December 22, 2008

3for1pizza11

Sean over at FranchisePick asked me if I knew of Mr. Solhi’s work.

Please note the first 6 articles that the Information Sharing Project would return if it were alive on the internet (searched for tradename). Download the entire article if you like.

  1. Frustrated franchisees call for legislation, The Globe and Mail, December 3, 1998 Excerpt from article: Jesu Dasan figures he lost $180,000 in the 20 months he operated a fast-food franchise in Scarborough, He alleges the franchisor changed the terms of the contract, which drastically reduced the number of homes his business was allowed to service. [download pdf]
  2. Ontario introduces bill to protect franchisees, The Toronto Star, December 4, 1998 Excerpt from article: “Everything goes to (the chain) … These people cheat us and we’ve lost everything.”…Vahdati said she and her husband spent $100,000 on legal costs in a fruitless court fight against the pizza-chain owner. [download pdf]
  3. New franchising  law called sales job: Ignores ongoing illicit practices, operator rep say, The Toronto Star, December 5, 1998 Excerpt from article: “This is the wooliest thing I’ve ever seen,”…Commercial Relations Minister Dave Tsubouchi “is just like one of the franchise hustlers,” said Stewart. “He’s selling an idea and there’s nothing in it.” [download pdf]
  4. Franchise laws welcome, The Toronto Sun, December 8, 1998 Excerpt from article: “What a disappointment.”…“This law is worse than what exists now, which is nothing,” snapped Les Stewart, founder of the Canadian Alliance of Franchise Operators. “It will only lull potential entrepreneurs into a false sense of security.” [download pdf]
  5. A declaration of war: breaking into the business, The desperation tactic of gaining entry to a locked business, known as ‘self-help’, is seen as an occasionally useful skill when relations hit a sour note., The Globe and Mail, January 13, 1999 Excerpt from article: Gaining entry to a locked business under cover of darkness isn’t taught in franchise manuals, but it’s a skill that both franchisees and franchisors occasionally find useful. [download pdf]
  6. The great franchise trap, The Indo-Canadian Voice, January 15-27, 1999 Excerpt from article: The family lost $150,000 and sadly, the man who put his life’s savings on this scheme, is today on welfare…“These people need to be protected. It is mostly the new immigrants who fall victims to such schemes. And in Ontario, there is very little by way of laws that can protect them in times of dispute.” [download pdf]

Anyone know what happened to these franchisees who were mentioned in the articles?

  • Wasim Ansari,
  • Tarek Fatah,
  • Rayappu Jesudasan [Jesu Dasan],
  • Ali Mahmoudzadeh,
  • Nhan Van Nguyen,
  • Fereshteh Vahdati, or
  • Ali Mehmood Zadeh

Or the other  people?

Richard Cunningham, John Deverell, Peter Macrae Dillon, Howard Hampton, Mike Harris, Murray Katzman, Linda Leatherdale, Ned Levitt, Tony Martin, Reza Solhi, John Southerst, David Sterns, David Tsubouchi, Dawn Walton

And these organizations?

Ministry of Consumer and Commercial Relations, Canadian Alliance of Franchise Operators, Canadian Franchise Association, 3 For 1 Pizza and Wings, McDonald’s, Tim Hortons, Golden Griddle,  Siskinds, Cromarty, Ivey & Dowler, Canadian Tire, 3 for 3 Pizza Ltd., Canada Post, Ontario New Democratic Party

The sympathetic Toronto lawyers are there to manage your anger. That’s their job for the industry: a soft landing, breeding passivity.

A franchisee white knight (the appearance of franchisee advocacy while acting to weaken franchisees’ rights; a traitor) lawyer:

  • to ensure that learned helplessness infects the immigrant leaders by raising then dashing your hopes for justice.

No Canadian lawyer can survive financially by representing only franchisees. It is impossible. They HAVE to have to behave in an acceptable manner (don’t rock the boat) or the industry elite will not allow them to exist.

  1. The appearance of an opposing position provides the pretense of industry balance to outsiders.
  2. You are NOT protected by a lawyer’s theoretical fiduciary duty to a client when you talk to them initially. That protection is ONLY when you are in a solicitor:client relationship (a contract: agreement, money exchanged, etc.). Do NOT rely on his advice at this stage: He maybe protecting the industry’s interests (not yours).
  3. Because law services are a credence good, you never know exactly how or when your interests were sold down the river.

The antidote to compromised legal representation is a knowledgeable second opinion (ie. a consultant who does not make his living from the industry). They’re rare but if you know where to look for them, they’re out there.

But I’m the most special of all:

I seldom charge anything for my advice to franchisees.

It’s my way of giving back to an industry that has given so much to me and my family over the last 10 years. Call today 1-705-737-4635 and let’s discuss if the lawyers or I was more accurate in predicting Ontario’s franchise industry’s degeneration from 1998 to 2008.


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