Allan D.J. Dick and David Gray
Published on March 5, 2011
Posted in: Blog
Franchise systems, by their very nature, are evolutionary and subject to change. Change can include a whole variety of modifications; from changes to the colour scheme of your “house” signage and trade-mark to the implementation of major system changes. This article considers the legal implications of making changes.
You first need to consider the governing contract, namely the franchise agreement. You should also be reviewing: (i) your operations manuals, which may also require compliance with franchise system changes; and (ii) various store leases, which may or may not permit a change in the name or permitted use. In almost all cases, however, brand refresh changes are contemplated by the franchise agreement. In a well drafted franchise agreement, a “system change” clause would provide the necessary mechanisms for a franchisor to implement the changes being considered. A “system change” provision essentially provides that a franchisor, in its sole discretion, may, upon notice and acting reasonably, change the system, including the adaptation and use of new or modified marks, etc., and that the franchisee will implement the changes at its sole cost. Particular agreements may have specific notice periods that the franchisor has to give or may provide caps on the cost to the franchisee of any system changes.
The legal analysis does not stop there even if the franchise agreement contains a clear and comprehensive system change provision. Evolving case law and franchise specific legislation, particularly in the area of fair dealing, will have an impact on the legality and enforceability of proposed changes. In general, the case law provides that a franchisor must have regard to the reasonable commercial expectations of its franchisees before implementing re- branding measures. Recent case law (see MBEC Communications Inc. v. Douglas Gavel et al, as an example) lends strong support to the conclusion that franchisors who introduce a new trade- mark as an effort at re-branding cannot merely rely on a black letter contractual right to change the appearance of an existing mark. The franchisor must consider the message and meaning conveyed by the change.
Whenever a franchisor exercises discretion which it has reserved for itself in a franchise agreement, such as where it has the discretion to implement system changes, it must act fairly and in good faith. If a franchisor is in fact considering changes that would identify the franchise as something entirely different from that which it authorized its current franchisees to operate, such a change may be deemed far beyond the reasonable expectations of the parties when they entered into the franchise agreement and not be permissible as being unfair.
How does a franchisor act fairly in refreshing its brand? Here are a few tips:
- Work with a well known and qualified market research company to ensure that all the appropriate studies (including focus groups) have been undertaken that would suggest that the changes will have a positive impact on the franchisees.
- Make sure that the changes have been tested in existing stores, preferably a corporate location, well before being mandated as system changes.
- Make sure the franchise advisory council (marketing committee) is involved as early in the process as is reasonable while maintaining confidentiality for obvious reasons
- Prepare a marketing plan that illustrates and delineates the proposed change. • Encourage debate among the franchise advisory council and with key members of the franchisee association, if one exists, in order to get feedback, and buy-in, from the franchisees.
- Do not earn a profit or rebate on the construction costs to implement the changes. • Communicate, communicate, communicate. Give proper notice of changes and make sure that each franchisee understands and appreciates the rationale for changes.
- If the franchise agreement does not contain a system change clause then a franchisor will have to negotiate with its franchisees and come to an agreement on the system changes. In the provinces with franchise legislation, the franchisor in this situation may be required to deliver a disclosure document before such an agreement is signed.
Therefore, careful legal analysis needs to be given of the desired changes and implementation strategy to be adopted to ensure the changes have the best chance of being accepted as permissible Also keep in mind that once a franchisor is giving serious consideration to possible system changes, that may be a material fact requiring disclosure by that franchisor in those provinces with franchise disclosure legislation.