Synopsis

Class actions may soon become the preferred means of litigating system-wide grievances in Canada. In this article, David Sterns and John Sotos contrast traditional litigation procedures to class actions procedure and conclude that class actions offer an effective means to remedy systemic problems. While franchisees will be the immediate beneficiaries, the entire industry stands to gain by having a deterrent to improvident practices.

Introduction

The practical challenges of franchise litigation are well known.  Rarely a battle of equals, the franchisor’s superior resources allow it to pursue aggressive defensive strategies while still devoting sufficient resources to its day-to-day business.  Franchisees, for the most part, operate under the dual handicap of little money and little time to devote to the mystifying world of litigation.  Many franchise cases, as a result, simply become wars of attrition, won or lost not on the merits but on who is best equipped financially to withstand the slings and arrows of protracted litigation.

Few in the franchise community would deny that traditional litigation offers little deterrent to the questionable conduct of some myopic franchisors.   The fact that franchisees can rarely afford to seek legal redress means that these strategies can be carried out with impunity.

Class proceedings legislation offers franchisees, for the first time, an effective vehicle for litigating system-wide grievances.  The potency of a class proceeding lies in the fact that its outcome can benefit all franchisees and threaten the very survival of the system.[1] With these stakes, one would expect that the mere spectre of such an action should influence the way in which franchisors respond to system-wide grievances.

This article examines how class proceedings can reverse the power imbalance of traditional franchise litigation.  While the principal beneficiaries are undoubtedly the franchisees, class proceedings legislation may paradoxically reveal a long-term benefit for the franchise industry.  A class proceeding may be used, in extreme cases, as a form of collective bargaining to introduce changes to a defective system.  Franchisors who fail to practice good franchising may be forced to rethink their business strategy rather than face a potentially crippling judgement in a class action suit.  The result may be a more equitable balance of interests and, eventually, a healthier industry.[2]

Increase in Multiparty Challenges

Franchising has seen an upsurge in multiparty challenges in recent years. This has been partly the result of the introduction of new technology which allows  franchisees to share frankly their perceptions of a given system.  Fax machines and the internet permit the instant sharing of legal opinions, forensic studies and management consultant reports about the system.  Open exchange of this type can easily dispel the common franchisor rebuttal that a franchisee’s concerns are an isolated occurrence.

Another contributing factor to franchisee activism is the emergence of a more vocal breed of franchisee.  Armed with business degrees and professional experience, many new investors are willing to take a stand on issues which affect the entire group.  Unfortunately, far too many franchisors view such activism as a threat to the system instead of being an opportunity to learn about possible areas for improvement. These franchisees respond by forming franchisee associations which can provide an organized means for information sharing, instructing counsel and raising funds for litigation challenges.

Franchisee-initiated actions may proceed along a number of different lines.  Each of them presents their own difficulties.  A review of each of the procedural alternatives demonstrates how effective the class proceeding legislation may be in shifting litigation dynamics of favour of franchisees.

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