Canada is an attractive but highly regulated market for foreign vehicle original equipment manufacturers (“OEMs”). Canada has a safe and stable economy and adheres to the rule of law, making it an attractive destination for OEMs looking to introduce their products into new foreign markets. While the Canadian marketplace often appears similar to the United States at first glance, dealer regulation, franchise protections, different legal systems, tariffs, environmental law requirements, data privacy laws, consumer protection laws, and countless other regimes create a very distinct legal and commercial environment. Careful dealer network structuring at the outset is critical to avoiding regulatory friction, dealer disputes, and costly restructuring later.

This article outlines certain principal considerations non-Canadian OEMs should review when expanding into the Canadian marketplace and designing a Canadian dealer network.

1. Choosing the Right Market Entry Structure

Many OEMs enter Canada by establishing a wholly-owned Canadian subsidiary entity, which contracts directly with dealers and manages national distribution, marketing, and compliance. This structure offers simplicity regarding certain tax, employment, regulatory, and other matters, while also providing liability containment.

Alternative models, such as appointing an independent importer and distributor, may offer speed to market, but may also result in reduced brand control and imaging and increased difficulty transitioning to a direct manufacturer-dealer relationship later. Once dealers are entrenched under a third-party distributor, re-alignment can be highly contentious and expensive.

Regardless of the model an OEM ultimately adopts, early cross-border tax planning is essential. Canada’s corporate tax, sales taxes, transfer pricing, and withholding tax regimes, among other considerations, can materially affect OEM and dealer economics, pricing, and overall profitability if not considered and addressed upfront. Misalignment between legal structure and tax planning can result in compliance exposure and costly retroactive restructuring.

2. Dealer Network Architecture and Coverage Strategy

Canada’s geography, population distribution, and climate materially affect the planning and breadth of any proposed dealer network. While Canada is geographically vast, its population is highly concentrated in a small number of urban corridors, namely southern Ontario, Québec’s St. Lawrence corridor, and pockets of British Columbia and Alberta. This leaves a number of regions with low population density and long travel distances between service points. This uneven distribution complicates dealer placement, service coverage, and vehicle and parts logistics.  Moreover, with the country’s latest emphasis on increased immigration, the country’s population has grown significantly over the last five years.

In the seven provinces in Canada that have (or will soon have) franchise disclosure and relationship laws, including Ontario, British Columbia, and Alberta, OEMs should be aware that automotive dealerships generally constitute “franchises” under such laws (regardless of how the contract attempts to define each party and their relationship). As a result, a franchise relationship will often exist between the OEM and each dealer, even if one is not intended, imposing additional franchise disclosure and relationship obligations on the OEM.  Failing to recognize and comply with these obligations will have significant monetary and reputational impacts on OEMs, and may serve to severely impact an OEM’s entry into the Canadian marketplace.

Moreover, certain OEMs have been moving away from the traditional franchisee dealer model to an agency or direct-to-consumer (D2C) model, where dealers are no longer directly responsible for owning and selling each vehicle, but instead fill certain other primary functions, such as vehicle delivery, test drive and customer touchpoints, service, and used vehicles sales. The reasons for this transition include OEMs making an effort to establish stronger ties with purchasers and reducing floor plan requirements for its dealers, all the while capturing a greater share of the profits to be made from selling new vehicles.

For this and other reasons, and together with the increasing prevalence of direct to consumer and/or hybrid agency models for vehicle sales, certain key considerations for any dealer network include:

• Whether to adopt a traditional franchise dealer model, an agency (D2C) model, or a hybrid between the two models, and whether to apply the chosen model(s) to all of the OEM’s vehicle lines or only to a select line(s).
• How to ensure adequate national and regional coverage, including rural and remote markets, if such markets are to be included in a proposed network.
• Whether dealers may operate single-brand or multi-brand rooftops, including whether existing dealers of other OEMs would be considered to further adopt a new entry OEM.

Manufacturers should expect scrutiny from dealers around network density, point allocation and closures, the opening of additional locations—particularly in growing urban markets, and facility requirements. Dealers currently operating dealerships of other OEMs may also face restrictions in their ability to take on new OEM banners.

3. Dealer Agreement Design and Termination Risk

Dealer agreements in Canada must balance brand control with enforceability and commercial realities. As dealer relationships may last for years, or even decades, such agreements need to be thorough, well-drafted, and as forward looking as possible. Moreover, dealer agreements must provide dealers with a reasonable opportunity to recoup their investment in the dealership. As discussed above, dealer agreements typically constitute “franchise agreements” under applicable franchise disclosure and relationship laws.

Critical drafting considerations include, but are not limited to:

• Term length, renewal rights (if any), and clearly defined performance criteria;
• Facility, branding, staffing, training, and equipment standards;
• Floorplan requirements;
• Sales performance and operational criteria;
• Export restrictions (to avoid grey-marketing);
• Ownership, assignment, and change of control provisions;
• Termination rights and notice periods; and
• Many other legal and business considerations.

4. Provincial and Federal Legal and Regulatory Considerations

Canada’s federal system has a material and often underestimated impact on foreign OEMs and other businesses expanding into the Canadian marketplace. Legislative authority is divided between the federal government and Canada’s ten provinces and three territories, resulting in multiple overlapping regimes across varying laws, regulations, and industries. While matters such as competition law, customs, and certain safety standards are in the federal domain, provinces regulate (among other things) dealer licensing, consumer protection, franchise and disclosure laws, employment standards, and aspects of sales tax and environmental compliance.

With respect specifically to dealer regulations and licensing (such as Ontario’s OMVIC framework), such matters are provincial in nature. As a result, OEMs may need to juggle and maintain compliance with multiple provincial frameworks at any given time. OEMs should also be mindful of laws and regulations, whether at the federal or provincial level, of:

• Advertising and marketing laws, including signage.
• Franchise disclosure laws.
• Competition laws.
• Consumer protection laws.
• Language laws, including in the province of Quebec.
• Environmental laws and mandated emission standards.

Successful expansion into or further into Canada therefore requires a coordinated national strategy that is deliberately adapted to provincial realities, rather than a one-size-fits-all approach.

5. Data, Digital Retail, and Customer Ownership

Data is becoming an ever-important tool and asset for businesses of all types, including OEMs. The nature of the products and services sold by OEMs and their dealers allows manufacturers to be especially-well positioned to capitalize on the ability to collect and employ significant data, including data about its customers.

That being said, OEMs should be acutely aware of the large number of rules and regulations governing data collection, use, disclosure, storage, and destruction in Canada. At the federal level, the Personal Information Protection and Electronic Documents Act (PIPEDA) governs the collection, use, disclosure, storage, and destruction of personal information in commercial activities, while several provinces have enacted enhanced private-sector privacy regimes that impose even stricter requirements.

For OEMs, these laws directly affect digital retail platforms, dealer CRM systems, marketing programs, connected-vehicle and telematics data, and cross-border data transfers. PIPEDA and other legislation places significant emphasis on meaningful consent, purpose limitation, and accountability across the entire data lifecycle. As a result, OEMs expanding into Canada must carefully align their data architecture, dealer agreements, and customer engagement strategies to ensure compliance across multiple jurisdictions’ laws, rules, and regulations – even when all interaction is between the customer and the dealer.

6. Dispute Resolution

To mitigate litigation risk with dealers, OEMs should carefully consider the provisions of their dealer agreements, with mechanisms existing to manage disagreements or issues before and after they escalate into formal conflicts and litigation. This can be achieved through provisions such as:

• Dealer advisory councils created and maintained by the OEM;
• Escalation and remediation frameworks; and
• Tiered dispute resolution clauses (such as mediation and arbitration).

In parallel, most OEMs selling vehicles in Canada participate in the National Automobile Dealer Arbitration Program (often referred to as NADAP), an industry-funded mediation and arbitration program that provides binding dispute resolution for disputes between OEMs and their dealers. Although NADAP is not mandatory for OEMs, most OEMs operating in Canada have adopted it as it provides a more efficient and confidential process than dealing with disputes through the courts, and by having disputes mediated and arbitrated by individuals with specific automotive knowledge and experience.  Foreign OEMs should carefully assess whether their vehicles, distribution model, and market entry plans necessitate participation in NADAP and ensure that their agreements and internal escalation processes are aligned accordingly.

Finally, since Canadian provincial franchise legislation expressly permits franchisees to associate amongst themselves, it should be noted that dealer associations are quite common in Canada and may, depending on the situation, either simplify or complicate the dispute resolution process.

Conclusion

Canada is a stable, sophisticated, and attractive market with significant automotive history and expertise for OEMs, but it is not a “plug-and-play” extension of other jurisdictions. Manufacturers that invest early in thoughtful dealer network structuring, compliance, and balanced dealer economics are far better positioned for sustainable growth and brand stability.

Being informed of all of the various issues impacting OEMs and making sound business decisions will be essential for an OEM to successfully expand into Canada.  This includes carefully considering the operational, contractual, and legal elements of a proposed expansion into Canada.  If you have any questions about expanding into Canada, Sotos LLP can help. Sotos LLP has extensive automotive experience in advising new and established OEMs in all facets of their business.

Please contact Jason Brisebois at 416.572.7323 or jbrisebois@sotos.ca , John Yiokaris at 416.977.3998 or jyiokaris@sotos.ca, or Peter Viitre at 416.977.7754 or pviitre@sotos.ca,  to discuss your automotive industry related inquiries.

About the Authors

Jason Brisebois, Sotos LLP

Jason Brisebois is a partner at Sotos LLP. His practice focuses on corporate, commercial, and franchise law, with a particular emphasis on the automotive sector.

Jason was awarded the Lexology 2024 Client Choice Award, is listed as “Ones to Watch” in Best Lawyers in Canada, and is recognised as “Recommended” in Lexology Index: Canada. He has also been named a “Legal Eagle” by Franchise Times Magazine.

John Yiokaris, Sotos LLP

John Yiokaris is a partner at Sotos LLP and serves as co-managing partner of the firm. He has extensive experience acting as lead counsel for major automotive manufacturers and dealers. John is also head of the firm’s Trademark practice and advises on intellectual property matters, including the registration and licensing of trademarks.

John was awarded the Lexology 2019 Client Choice Award, is ranked by Chambers Canada, and has been consistently listed in Best Lawyers in Canada. He is also recognised in the Best Lawyers Global Business Edition, listed in the Canadian Legal LEXPERT Directory, and recognised in Lexology Index: Canada. John was inducted into the Franchise Times “Hall of Fame” in 2022.

Peter Viitre, Sotos LLP

Peter Viitre is a partner at Sotos LLP and head of the Corporate and Commercial practice. He regularly advises domestic and international clients, including in the automotive sector, on market entry, dealer and franchise network structuring, regulatory compliance, and risk management across Canada.

Peter is ranked in Band 1 by Chambers Canada, has been consistently listed in Best Lawyers in Canada, and has been named “Lawyer of the Year” by Best Lawyers in Canada in 2015 and 2018. He is also recognised in the Best Lawyers Global Business Edition, listed as “Most Frequently Recommended” in the Canadian Legal LEXPERT Directory, and recognised as “Recommended” in Lexology Index: Canada. Peter has further been recognised as “Most Highly Regarded” and as a “Global Elite Thought Leader” by Lexology Index, and was inducted into the Franchise Times “Hall of Fame” in 2022.

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In a prior blog, we discussed the initial steps that the Competition Bureau (the “Bureau”) was taking to challenge anti-competitive practices in the grocery industry, including in regards to property controls in commercial leases. On June 4, 2025, the Bureau released an update to their enforcement guidelines, in an attempt to clarify how businesses can comply with the Competition Act (the “Act”) and how the Bureau will approach anti-competitive controls in commercial leases.

This blog briefly summarizes certain of the main updates to the enforcement guidelines.

Justified Property Controls

In their updated enforcement guidelines, the Bureau has identified certain situations where property controls may be justified. These are limited to situations where the property control in question increases competition and consumer choice, including situations where “no retailer would otherwise make the necessary investments to become a key tenant in a new shopping plaza. Without the exclusivity clause there may be no retailers of a particular type in the shopping plaza, and so the clause increased competition”.

When assessing whether a property control is justified or otherwise anti-competitive, the Bureau has clarified that they will consider three factors:

1. Timeframe – Competitor property control should only last as long as necessary to protect incentives for entry or investment.
2. Geographic area – Competitor property controls should cover the smallest geographic area necessary.
3. Products and services – Competitor property controls should not limit competitors more than necessary in the products or services that they cover.

With respect to all of these criteria, the broader the scope imposed as part of a property control, the less likely the property control is to be justified or defensible under Bureau scrutiny.

Effect of Property Controls

When assessing how a property control will impact competition, including with respect to the criterion above, the Bureau will consider whether the property controls gives one firm in the market too much power or whether it would make it easier for such firm to consolidate its power. The Bureau will consider the following questions:

• Are there other competitors already in the market?
• How effective are competitors?
• Are there other feasible options for commercial real estate available to competitors?
• Would competitors be less effective if they used other commercial real estate?
• Does a competitor need to establish several stores in an area to be effective?
• Are there other barriers to entry or expansion that already exist, that may compound the effects of the competitor property control?

Enforcement Under Abuse of Dominance

As part of the update, the enforcement guidelines include an overview of how the abuse of dominance provisions in the Act will apply to competitor property controls.
In assessing whether a firm is deemed “dominant” for the purposes of enforcement, the Bureau will consider the following factors:

• The ability to restrict competitors or competition;
• The presence of effective competitors, which may be heavily weighed based on market share;
• Barriers to entry in the market, including barriers to entry created by the competitor property control;
• The position of the firm in the broader industry; and
• Evidence of bargaining leverage, including the ability to seek the competitor property control.

In certain instances, the property control itself can create dominance, especially when there are not already strong competitors in the market and the restriction makes it even more difficult for others to enter.

It is expected that the Bureau’s first course of action in situations where a dominant firm implements a property control would be for the Bureau to seek an order prohibiting its use or enforcement. However, if the restriction is both an anti-competitive practice and demonstrably harms competition, the Bureau may take further steps that include seeking administrative monetary penalties.

Enforcement Under Anti-Competitive Collaboration Provisions

In their enforcement guidelines, the Bureau also spoke to how competitor property controls can be reviewed under Section 90.1 (anti-competitive collaborations) of the Act. Section 90.1 applies to agreements that either (a) involve at least two competitors, or (b) do not involve competitors if a significant purpose of any part of the agreement is to prevent or lessen competition in the market.

For a property control to raise concerns under Section 90.1, it must have the effect of substantially harming competition.

While the Bureau acknowledges that competitor property controls are usually not formed between competitors, Section 90.1 can still apply if (a) a significant purpose of any part of the agreement is to harm competition in a market, and (b) the agreement has the actual effect of harming competition.

It is also worth noting that the Bureau has made it clear that:

“When assessing an agreement that contains a competitor property controls, we focus on if the agreement has the effect of harming competition. If so, we expect that the agreement will raise issues under section 90.1. This is because if the agreement has the effect of harming competition it will likely also have a significant purpose to do so.”

The remedies that the Bureau may seek when a property control raises issues under Section 90.1 include:

• Prohibiting the terms of the competitor property control and their enforcement;
• Requiring other measures to restore competition where necessary; or
• Seeking administrative monetary penalties.

Conclusion and Key Considerations

With its updated enforcement guidelines, the Bureau appears to be taking a more flexible stance on competitor property controls, acknowledging the need for a case-by-case approach. At the same time, the Bureau’s recent update and continued investigation into Loblaw shows their continued commitment to eliminating property controls in Canada, with a special focus on the grocery industry.

Looking to the future, enforcement in this area will likely remain highly fact-specific. Whether a particular property control clause violates the Act will depend on the market context, the intent and effect of the restriction, and any underlying justification.

If you have any questions or concerns relating to property controls, Sotos LLP can assist. Please contact Jason Brisebois at 416.572.7323 or jbrisebois@sotos.ca or Bailee Kleinhandler at 416.572.7311 or bkleinhandler@sotos.ca to discuss your grocery sector needs.

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With the imposition of the new U.S. administration’s tariffs on imported materials and goods, more Canadians are choosing to support local products and producers. Businesses often attempt to make this choice easier for consumers by including wording such as “Made in Canada” or “Product of Canada” (collectively referred to as “Canadian Origin Claims”) on their labels. Although this can be a powerful marketing tool, there are strict regulations concerning their use and serious legal consequences for incorrectly or deceptively marketing a product using these claims.

Understanding Canadian Origin Claims

In Canada, there is no obligation to make “Made in Canada” or “Product of Canada” claims in regards to a product; rather these claims are voluntary. However, if a business chooses to make such a claim, it must be accurate and comply with all applicable regulations.

Canadian Origin Claims are primarily enforced by the Competition Bureau (the “Bureau”), through the Competition Act, R.S.C, 1985, c. C-34, which directly prohibits false or misleading representations (including Section 52 and Section 74.01). The Consumer Packaging and Labelling Act, R.S.C., 1985, c. C-38 (Section 7) and the Textile Labelling Act, R.S.C., 1985, c. T-10 (Section 5), also contain provisions which prohibit false or misleading representations regarding specific product types.

With respect to food-products, the Canadian Food Inspection Agency (the “CFIA”) is responsible for enforcing the rules under the Food and Drugs Act and the Safe Food for Canadians Act, S.C. 2012, c. 24.

What are the key difference between “Made in Canada” and “Product of Canada”?

The primary difference between these two claims is primarily the amount of Canadian content a product contains.

“Product of Canada”

“Product of Canada” claims require at least 98% of the total direct costs of production to have been incurred in Canada. This means that all, or virtually all of the direct costs were incurred in Canada.

“Made in Canada”

The “Made in Canada” claim has a lower threshold than the “Product of Canada” claim, meaning that only at least 51% of direct costs must have been spent in Canada. If you choose to use a “Made in Canada” claim, you must determine whether a qualifying statement is required to ensure clarity and precision. If it is required, the qualifying statement must be tailored to accurately reflect the specific details of the content that is imported. For example, “Made in Canada with imported parts” or “Made in Canada from domestic and imported ingredients”.

While businesses are encouraged by the Bureau to include clear and specific qualifying details, businesses should be cautious of using broad terms like “produced” or “manufactured” without necessary precision as these terms may be interpreted by consumers as equivalent to a “Made in Canada” claim.

Direct costs refer to the expenses that are directly incurred in producing or manufacturing goods. According to the Bureau’s guidance, these costs include:

1. expenditures on materials incurred by the producer/manufacturer in the production or manufacturing of the goods; and
2. expenditures on labour incurred by the producer/manufacturer that relate to the production or manufacturing of the goods and can reasonably be allocated to the production or manufacturing of the goods.

What factors will the Bureau consider?

When assessing whether a Canadian Origin Claim is accurate or misleading, the Bureau will look at several key factors, including the overall message the claim conveys to consumers, where the product underwent its final “substantial transformation”, and where the majority of direct production costs were incurred.

The term “substantial transformation” has been defined by the CFIA to refer to a significant change in the form, appearance, or nature of a product as a result of processing or manufacturing, such that it becomes a new product with a different identity that is commonly recognized as distinct by consumers.

Ultimately, the Bureau will consider the general impression that is being conveyed by a representation. As described in the Bureau’s enforcement guidelines, this means that the Bureau will consider “the general impression conveyed through a combination of words, visual elements, illustrations and overall layout that may alter the plain meaning of a representation”.

What about food products?

As discussed above, the CFIA is responsible for enforcing claims as they relate to food products sold in Canada. Similar to the guidelines under the Competition Act, a business is not obligated to make a Canadian Origin Claim. However, once they do, they must comply with the Food and Drugs Act (Section 5(1)) and the Safe Food for Canadians Act (Section 6(1)).

“Product of Canada” claims should be used for products where nearly all the contents are Canadian-sourced. While some minor non-Canadian materials can be included (such as spices, minerals, or flavouring), they must be minimal and should make up less than 2% of the total product. Packaging materials sourced from outside of Canada do not affect the eligibility of a “Product of Canada” claim, since the focus is primarily on the origin of the ingredients and manufacturing, not the packaging.

In contrast, food products may still use a “Made in Canada” claim even if most of the ingredients come from other countries, as long as the final “substantial transformation” happens in Canada and the label includes a qualifying statement clearly indicating that the product includes imported content.

What about symbols?

Often times, the packaging of products will contain a symbol of Canadiana, such as the Canadian flag or a maple leaf. The inclusion of these symbols and logos, whether intentional or not, can create the impression that the item was “Made in Canada” or a “Product of Canada” amongst consumers. Including such symbols may result in the Bureau holding the business to those standards.

In order to overcome this, it is important to include a clear qualifying statement, to describe the actual origin of the product. This statement should be placed in close proximity to the logo or symbol being used.

What are the penalties and consequences for non-compliance?

The penalties for a false or misleading Canadian Origin Claim will depend entirely on whether the conduct falls under the civil or criminal provisions of the Competition Act.

Under the civil penalties included in the Competition Act, violations can lead to:

1. For corporations, the penalty for a first time violation is up to the greater of:
   1. $10 million ($15 million for each subsequent violation); and
   2. three times the value of the benefit derives from the deceptive conduct, or if that amount cannot be reasonably determined, 3% of the corporation’s annual worldwide gross revenue.
2. For individuals, the penalty for first time violation is up to the greater of:
   1. $750,000 ($1 million for each subsequent violation); and
   2. three times the value of the benefit derived from the deceptive conduct, if that amount is reasonably determined.

Under the criminal penalties of the Competition Act, an individual found to have made false or misleading claims, on summary conviction, may face a maximum penalty of a fine up to $200,000, imprisonment for a term of one year, or both. On a conviction of indictment, an individual may be subject to a fine at the court’s discretion, imprisonment for a term of up to 14 years, or both.

Conclusion

Ultimately, Canadian Origin Claims can boost consumer trust and brand loyalty, especially during these uncertain times, but only if they are made responsibly. There is no obligation to label your product as “Made in Canada” or as a “Product of Canada”, but once a Canadian Origin Claim is made, it must meet the standards outlined above.

If you have any concerns or questions relating to Canadian Origin Claims, Sotos LLP can assist.

Please contact Jason Brisebois at 416.572.7323 or jbrisebois@sotos.ca, or Bailee Kleinhandler at 416.572.7311 or bkleinhandler@sotos.ca to discuss your Canadian Origin Claims.

1. Government of Canada, Competition Bureau, “Product of Canada and “Made in Canada” Claims (2025) at s 3.1 [Bureau Guideline].
2. Ibid.
3. Ibid at s 3.2.1.
4. Ibid.
5. Bureau Guidelines, supra note 1 at s 3.2.2.
6. Ibid at s 2.1.
7. Government of Canada, Competition Bureau, Origin claims on food labels (2023) [Food labels].
8. Bureau Guidelines, supra note 1 at s 3.1.1.
9. Ibid.
10. Food labels, supra note 7.
11. Ibid.
12. Food labels, supra note 7.
13. Bureau Guidelines, supra note 1 at s 4.
14. Ibid.
15. Ibid.

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The Competition Bureau (the “Bureau”) has taken a significant step to challenge anti-competitive practices in the grocery industry. After an extensive investigation by the Bureau, Empire Company Limited (“Empire”) has agreed with the Bureau to remove a property control clause in a commercial lease that had previously prevented competitors from establishing competing grocery stores in Crowsnest Pass, Alberta only. This action by the Bureau represents one of the first applications of the newly-amended Competition Act (the “Act”) provisions.

What is a property control?

Property controls are negotiated restrictions in commercial lease agreements that limit how commercial real estate spaces may be used (including by other potential tenants), imposing restrictions on landlords as to who they may lease space to. Such provisions often decide what types of businesses may lease space from landlords, preventing certain businesses (namely competition), from establishing operations in violation of the provision.

While the largest commercial landlords in Canada generally enjoy significant bargaining power over potential tenants, the consolidated nature of the grocery industry in Canada, combined with the fact that grocery stores tend to be desirable and traffic-generating anchor tenants that drive potential customers to larger commercial developments, Canada’s large and mid-sized grocery chains have had significant success negotiating property control provisions to their benefit. In the grocery industry specifically, large grocery chains often use property controls to restrict landlords from allowing competing grocery businesses to open on lands owned by the landlord unrelated to the location. As a result, property controls have a direct impact on market competition, making it significantly more difficult to open competing stores in the same commercial plaza, or potentially nearby commercial plazas controlled by the same commercial landlord.

The impact of such provisions are acutely felt in smaller communities with limited commercial real estate, or in areas where commercial real estate is controlled by one or a small number of large commercial landlords.

How does the Competition Act address this issue?

The Act has been recently amended to prohibit companies from forming agreements that significantly restrict or reduce competition. Prior to the above amendments, the Bureau was restricted in its ability to investigate agreements between parties that were not considered competitors, such as supply and lease agreements. For example, agreements between landlords and grocery retailers fell outside the Bureau’s scope because the parties were not classified as “competitors” under the Act. However, the recent changes and specifically the amendments to Section 90.1 of the Act, have expanded the authority of the Competition Bureau. Now, the Competition Bureau can challenge agreements between parties that restrict or lessen competition, even if those agreements do not involve direct competitors.

What happened between the Competition Bureau and Empire?

In 2024, the Bureau began investigating the use of property controls by Empire, the parent company of Sobeys Inc., which operates grocery banners such as “Sobeys”, “IGA”, and “FreshCo”. The investigation was conducted to help “determine whether Sobeys and Loblaw are imposing anti-competitive restrictions on the use of real estate…that impact competition in the retail sale of food products”. During the investigation, the Bureau became aware of a property control restriction that was imposed by Empire on one of its “IGA” brand stores, located in Crowsnest Pass, Alberta, a town of approximately 6,000 people.

This property control provision was imposed by Empire in the region in 2017, and effectively eliminated the ability of other parties to establish competing stores to service Crowsnest Pass. The Bureau found that the provision “protected Empire’s grocery store from competition and ensured that it would continue to be the only grocery store in the area”. While conducting their investigation, the Bureau considered the question of whether the restrictions were anti-competitive in nature.

Following the investigation, Empire agreed to remove the property control. As Commissioner of Competition Matthew Boswell stated:

“Market forces – not property controls – should determine whether and where new grocery stores can open in communities across Canada. The removal of this property control in Crowsnest Pass will allow for more grocery competition to the benefit of its residents. We encourage all businesses that use property controls to review them and ensure that they comply with the law.”

The Bureau’s intervention in Crowsnest Pass raises broader questions about the future of property controls in Canada’s grocery industry.

What does this mean for the grocery industry generally?

Competition is key to affordability and choice for consumers, as it may drive the stores to offer lower prices and a wider selection of products to attract consumer dollars. However, property controls can severely limit this competition, and reduce incentives on retailers to compete for such consumer dollars. Even certain large retailers, such as Walmart, have noted that property controls restrict consumers options, making it more difficult for new players to enter the market. This issue is particularly important in smaller communities, where consumer choice is limited, and the ability to “shop around” may be limited or non existent.

The recent amendments to the Act therefore aim to provide the Bureau the power to challenge restrictive covenants in commercial lease agreements. However, the impact of these changes will likely have a greater impact in smaller towns than in major cities like Toronto. In large cities, consumers have access to numerous competing retailers within a short distance, making it easier to avoid the restrictions imposed by a single lease agreement. In contract, in smaller towns, a restrictive covenant can effectively eliminate all competition, leaving residents with no alternative grocery or retail options, as they are unable to drive to another nearby store.

In larger cities, the general thinking is that competition is easier to come by, as density translates to a larger number of consumers, which in turn drives a great number of commercial real estate for grocers to choose form, as well as an ability of consumers to more easily shop around. In smaller towns like Crowsnest Pass, however, there may only be demand for one or a small number of grocery retailers, which means that anti-competitive practices are significantly more easy to impose, but also for the Bureau to police.

While it remains to be seen whether the Bureau intends to continue to take action against property controls, those who will benefit the most from a sustained effort by the Bureau against these practices are likely to be independent grocers and smaller chains, especially those in smaller and rural communities. Assuming that the Bureau continues to challenge property controls, the end result may reduce the practice by large grocers to insist on property controls, potentially creating new opportunities for smaller chains and speciality stores to open in prime retail spaces, such as the same malls or plazas as larger grocery chains.

Certain large grocery chains have expressed openness to removing these restrictive provisions but have conditioned their willingness on all similarly large grocery chains doing the same. Without a broad, industry-wide change, large grocery retailers that also own shopping centers and retail spaces could still control who operates on their properties. This means that those larger chains will strategically select tenants to maintain their dominance in the market, resulting in restrictive agreements continuing in a different form. Additionally, it remains unclear whether the Bureau intends to take an active role in enforcing these new provisions, leaving questions about how much will actually change in practice.

Final guidelines from the Bureau regarding property controls are expected to be published later this year. These guidelines will be informed by the recent public consultation process, where the Bureau encouraged market participants in the food retail and real estate sectors to share their experiences with this practice. While the Bureau has not yet provided specific guidance on how future investigations will be initiated, it is likely that such investigations will be triggered by complaints, market studies, or the Bureau’s general monitoring of the grocery sector.

Conclusion

The recent amendment to the Act are intended to promote greater competition in the grocery sector, especially in smaller communities. However, for real, industry-wide change, major grocery chains would need to willingly stop using property controls altogether, which is something that remains unlikely in the short term.

It is still too early to determine whether this signals a broader push by the Bureau to actively scrutinize and challenge property controls altogether. The recent ruling in Crowsnest Pass sets a precedent, but how these changes will be applied in larger markets with multiple stores remains uncertain. What works in a small town may not have the same impact in a city where competition is already present and where commercial real estate is controlled by the very corporations that dominate the grocery industry.

If major grocery chains continue to enforce property controls wherever possible, the impact of these amendments could be limited. The real test will be whether the industry as a whole moves toward loosening these restrictions, or whether these changes simply create small victories in select markets without disrupting the status quo.

If you have any questions or concerns relating to the enforcement of property controls, Sotos LLP can assist. Please contact John Sotos at 416.977.9806 or jsotos@sotos.ca or Jason Brisebois at 416.572.7323 or jbrisebois@sotos.ca or Bailee Kleinhandler at 416.572.7311 or bkleinhandler@sotos.ca to discuss your grocery sector needs.

1. Government of Canada, Competition Bureau, Competition Bureau advanced investigations into Sobeys and Loblaw’s use of property controls (2024).
2. Ibid.
3. Government of Canada, Competition Bureau, Competition Bureau takes action to protect competition in the grocery industry in an Alberta community (2025).
4. Rosa Saba, “Walmart Canada axing some property controls amid grocery competition scrutiny” Canadian Grocer (November 22, 2024).
5. Government of Canada, Competition Bureau, Call-out for information about property controls in the Canadian grocery industry (2024).

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On March 3, 2025, the Trump administration confirmed that the United States would proceed with imposing blanket tariffs on imports from Canada and Mexico, and increases to existing tariffs on China, effective March 4, 2025. These tariffs include a 25% tariff on all imports from Canada and Mexico, with the exception of Canadian energy resources and minerals, which face a reduced 10% tariff. The tariffs were initially planned to take effect on February 4, 2025, but were delayed by the Trump administration pursuant to ongoing negotiations with Canada and Mexico. The White House has also announced the imposition of 25% U.S. tariffs on all steel and aluminum imports with an expected effective date for imposition of March 12, 2025.

On March 4, 2025, the Government of Canada announced that, in response to U.S. tariffs, the Government of Canada would move forward with 25% tariffs on $155 billion worth of imported U.S. goods, beginning immediately with a first tranche covering $30 billion worth of goods. The scope of the Canadian counter tariffs will be increased to $155 billion if the current U.S. tariffs are maintained, and may also be increased if new U.S. tariffs are imposed. Beyond the federal government’s response, several Canadian provinces have implemented their own retaliatory measures. These include restricting government procurement opportunities for U.S. suppliers, terminating existing contracts and disqualifying future bids from U.S. companies, and removing American alcoholic products from provincially-controlled liquor stores. Ontario Premier Doug Ford has also indicated that he is considering imposing an export tax on Ontario-produced energy, and even halting energy and certain mineral resource exports altogether.

The implementation of U.S. tariffs and Canadian counter tariffs on imported goods will have widespread effects across various industries, including the franchise sector. Franchisors and franchisees must understand and prepare contingencies on how to navigate the legal and business consequences posed by the rising costs, disrupted supply chains and shifting market dynamics associated with these tariffs.

Supply Chain Analysis: Key Considerations for the Franchisor-Franchisee Relationship

Franchisees that depend on imported goods—whether for equipment, supplies, or inventory—may face substantial cost increases due to tariffs. For instance, tariffs on raw materials, such as steel and aluminum, as well as finished products, will likely drive up operational expenses and delay deliveries, potentially disrupting the system’s supply chain. This will impose increased costs on franchisees, which will necessitate a difficult decision between absorbing such costs, passing them on to customers, or a combination of both. Many franchise agreements also require the use of specific materials and equipment to maintain consistency throughout the system, which may limit (absent franchisor intervention) the ability of franchisees to easily adapt to changing economic circumstances.

Maintaining a strong franchisor-franchisee relationship is key in navigating these changing market conditions. Below are certain key considerations for franchisors in navigating this relationship:

• Initial Investment: Franchisors must consider whether they should make changes to their initial investment expectations and requirements for franchisees. If tariffs increase the cost of equipment, supplies, or inventory, franchisors should consider reviewing and revising the initial investment estimates to reflect these higher costs. Failure to do so may mislead potential franchisees about their expected expenses. Moreover, failing to account for such changes may be setting franchisees up for failure before they even begin operating.
• Ongoing Expenses and Unit Economics: Franchisors should evaluate how tariff-induced cost increases affect their unit economics, including per-location profitability, break-even points, and overall financial sustainability. Clearly presenting this data can help franchisees make informed investment decisions. If tariffs impact ongoing costs, such as supply procurement or vendor agreements, these changes should be disclosed. Franchisees should be made aware of potential cost fluctuations. Franchisors should assess franchisee costs on a market-by-market basis, and prepare to be flexible on procurement where necessary to ensure that franchisees’ unit level economics remain viable in light of this volatility.
• Supply Chain and Sourcing Restrictions: If a franchise system mandates specific suppliers affected by tariffs, these restrictions should be transparently disclosed. Franchisors may also explore whether allowing some flexibility in supplier selection can help mitigate disputes, and actively work with franchisees to assess whether domestic alternatives exist that will (while perhaps not entirely consistent with brand standards applicable in the U.S.) allow the franchisee to continue operating without further hardship than is necessary.
• Financial Performance Representations: Franchisors should monitor profit margins and other financial metrics due to tariff-related cost increases and assess whether tariff-related cost increases are a development that impacts financial performance representations. Providing outdated or overly optimistic projections could expose franchisors to legal claims and otherwise adversely impact the franchisor-franchisee relationship.

Consumer Price Sensitivity

Franchisors should also consider whether to authorize or encourage price increases for goods and services. However, price-sensitive consumers may reduce their spending or seek alternatives, particularly in highly competitive industries such as quick-service restaurants, retail, and hospitality. It is critical that franchisors consider balancing necessary price adjustments with consumer expectations in order to maintain brand reputation and profitability. In light of these challenges, franchisors should consider which obligations currently imposed on franchisees are crucial to maintaining brand standards, and which others may be more flexible.

Adapting to Tariffs for Growth and Expansion

Predictable costs and strong unit economics are the hallmarks of a successful franchise system. While tariffs imposed by the U.S. and Canada’s counter tariffs may create new cost pressures, they also present opportunities for Canadian brands to emphasize domestic production and sourcing, which can resonate with consumers and differentiate them in the market. Similarly, U.S. brands entering Canada may still find opportunities to expand, particularly when the favourable exchange rate helps offset tariff impacts, allowing cost-competitive pricing in the Canadian market. Franchisors and businesses that adapt their supply chains, pricing strategies, and brand positioning to these evolving dynamics can still find opportunities for growth and expansion despite the shifting trade landscape.

Opportunities and Competitive Shifts

While tariffs impose significant challenges for businesses of all stripes, they also provide opportunities for savvy and opportunistic businesses. For example, Canadian franchise systems with predominantly domestic supply chains may reap the benefits of changing consumer preferences towards Canadian-made products, while products previously bound for the U.S. may be sold domestically at the same or lower prices. Franchisors can also re-evaluate global sourcing strategies to mitigate tariff exposure.

To address ongoing challenges, franchisors should consider the following actions:

• Supply Chain Diversification: The tariffs should prompt franchisors to carefully re-evaluate suppliers and explore domestic alternatives where feasible.
• Negotiating Terms: Franchisors and franchisees should also work with suppliers to share or reduce tariff-related cost burdens.
• Efficiency Measures: Franchisors and franchisees should invest in technology or streamline operations to offset increased expenses.
• Franchise Disclosure and Agreement Revisions: It is critical that franchisors assess whether franchise disclosure documents and franchise agreements need adjustments to address unforeseen consequences arising from the tariffs.

Advertising Considerations: Made in Canada

While not the primary focus of this article, businesses should keep in mind that promoting products as “Made in Canada” or “Product of Canada”, or highlighting Canadian ownership, can be a valuable strategy for brands seeking to reduce the impact of tariffs between Canada and the United States. However, businesses must ensure that such claims comply with Canadian law, including the Competition Act, the Consumer Packaging and Labelling Act, and the Textile Labelling Act. These acts prohibit false or misleading representations, and restrict how and when such claims can be used. Businesses that choose to make “Made in Canada” or “Product of Canada” claims must ensure their claims meet the appropriate guidelines and thresholds. Our firm works closely with companies to develop compliant, strategic branding approaches that not only highlight Canadian origins, but also help navigate cross-border trade challenges.

Conclusion

U.S. tariffs present significant challenges for the franchise industry, with potential legal and financial implications for franchisors and franchisees alike. If you have any concerns as to how these tariffs will affect your system, and how to navigate these challenges, Sotos LLP can help. At Sotos LLP, we have acted for hundreds of clients in every aspect of the franchising process for over forty years. We have extensive knowledge of the regulatory issues that may arise from the introduction of tariffs and regularly assist with supply chain evaluations, contract revisions, and strategic planning to mitigate risks and seize opportunities in this complex regulatory environment. Our firm can assist in developing tailored strategies to mitigate the impact of tariffs, whether through supply chain restructuring, trade compliance planning, or leveraging available exemptions We can also assist in reviewing disclosure requirements in light of the tariffs.

Please contact Peter Viitre at 416.977.7754 or pviitre@sotos.ca, Jason Brisebois at 416.572.7323 or jbrisebois@sotos.ca, or Nicole Perez at 416.977.3674 or nperez@sotos.ca to see how we can help your franchised business adapt to ever-changing economic conditions.

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On September 23, 2024, the Competition Tribunal ruled in favour of the Competition Bureau and found that Cineplex Inc. (“Cineplex”), the largest cinema chain in Canada, engaged in “drip pricing” by adding an online booking fee ranging from $1.00-$1.50 for tickets purchased online or through the Cineplex app. The fees were collected from June 2022 to December 31, 2023 (when the Competition Bureau initiated its investigation). The Competition Tribunal found that the online booking fee was misleading and contained drip pricing because the existence and the amount of the fee was not initially disclosed when consumers were making their purchases. Instead, it only became visible after the tickets were selected and the purchaser clicked to ‘proceed’ to the next screen.

Cineplex has been ordered to pay a record penalty of $38.5 million, equivalent to the amount it collected from consumers through the aforementioned $1.50 fee. Cineplex says it will appeal the decision to the Federal Court of Appeal.

What is drip pricing?

Drip pricing involves offering what appears to be low prices to attract consumers; but followed by the addition of further mandatory fees so that the original prices are unattainable. The mandatory fees can be for just about anything; including “processing fees”, “booking fees”, “cleaning fees”, “administrative fees”, to name a few. The issue occurs when such fees are not disclosed to the consumer accurately and clearly, including by being excluded from the advertised price and then are incrementally revealed during the purchasing process – i.e. “dripping” into the final price.

This practice is against the Competition Act (the “Act”), unless the additional fixed charges or fees are imposed by the government on purchasers, such as sales tax. Amendments to the Act came into force on June 24, 2022, which explicitly recognize drip pricing as a harmful business practice.

The Takeaway

This ruling marks the first case in which the Competition Tribunal has applied the recently-enacted drip pricing provisions, namely subsection 74.01(1.1) of the Act. It sends a strong message to Canadian businesses that it intends to enforce this new provision and the penalties for contravening it can be sever. To avoid potential drip pricing complaints and penalties, businesses should display their full prices upfront, including all incremental or additional fees.

If you have questions about your current advertising and marketing practices, in relation to drip pricing or any of the other recent additions to the Act, we’re happy to assist.

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The Province of Saskatchewan may soon become the seventh province in Canada to enact franchise disclosure and relationship legislation. The Legislative Assembly of Saskatchewan introduced Bill 149, The Franchise Disclosure Act (the “Act”), for first reading on November 9, 2023.  If the legislature passes the bill, it will be the province’s first comprehensive franchise legislation, and represent a significant step towards uniformity in franchise laws across Canada, as Saskatchewan would join British Columbia, Alberta, Manitoba, Ontario, New Brunswick, and Prince Edward Island in having legislated protections in place for franchisees.

The Act was introduced after public consultation on the need for franchise legislation within the province. The framework of the consultation was based on the Uniform Law Conference of Canada’s Uniform Franchise Act (which Sotos LLP co-chaired). In response, the Canadian Franchise Association and Sotos LLP, among other parties, submitted a number of recommendations, including urging the province to follow the most recently enacted provincial franchise legislation, British Columbia’s Franchises Act, which came into force in 2017.

Having undergone its first and second readings in November 2023, the Act is anticipated to be enacted in 2024. Absent franchise disclosure and relationship legislation having been previously adopted in the province, franchise (and related) agreements are primarily subject to the common law of contracts, in addition to standard consumer protection regulations and rules that may apply.

If enacted, the Act will constitute a major change to the Saskatchewan franchise industry and its dealings, as it will place significant new disclosure obligations on franchisors, and offer new statutory remedies to franchisees that operate in the province.

Contents of the Act

The main features of the proposed Act include, but are not limited to, the following:

1. Duty of Fair Dealing. Every franchise agreement will impose on each party a duty of fair dealing in the performance and enforcement of the franchise agreement. Further, each party will have a right of action for damages should the other party breach the duty of fair dealing.  The duty of fair dealing includes the duty to act in good faith and in accordance with reasonable commercial standards.
2. No waiver of rights under the Act. Franchisees will not be able to waive any rights granted to them under the Act.
3. Franchisee Rights to Associate and Form Associations. Franchisees will be permitted to form or join franchisee organizations and associations.
4. Franchise Disclosure. Franchisors will be required to provide prospective franchisees with a disclosure document (containing certain prescribed information, as well as all material facts). Note that franchisors will need to update their existing disclosure documents to ensure that they can be safely and effectively used in the Province of Saskatchewan, once the legislation is effective. Franchisors should proactively work with legal counsel to ensure that such updates are in place prior to the effective date of the legislation, to ensure that franchise sales are not delayed or affected.
5. Franchisee’s Right of Rescission. A franchisee will have the right to rescind a franchise agreement within 60 days after receiving the disclosure document if the contents of the disclosure document do not meet the requirements of the Act. The bill also provides that a franchisee may rescind the franchise agreement within two years after entering into the franchise agreement if the franchisor fails to provide the disclosure document within those two years.
6. Damages. If a franchisee suffers a loss because of a misrepresentation contained in the disclosure document, the franchisee will have a right of action for damages against the franchisor.

When compared to other existing franchise legislation in Canada, specifically, Ontario’s franchise legislation, the Arthur Wishart Act (Franchise Disclosure) (the “AWA”), there are two notable differences with the Act:

1. The Act provides that a franchisee may rescind the franchise agreement within two years after entering into the franchise agreement if the franchisor fails to provide the disclosure document “within those two years”. The reference to providing a disclosure document “within two years” is not contained in any of the other six existing franchise acts in Canada. This provision seems to suggest that if a disclosure document is not received by a franchisee prior to the execution of a franchise agreement, the franchisor can still meet its disclosure obligations within two years after the franchisee enters into the franchise agreement.

2. One of the criteria to meet the definition of a “franchise” in the AWA is that the franchisor (or franchisor’s associate) has a right to exercise significant control or has a right to provide significant assistance (among other criteria). By contrast, the Act defines “franchise” as circumstances where the franchisor (or franchisor’s associate) exercises significant control over, or provides significant assistance in, the franchisee’s method of operation. As such, the Act requires that the franchisor take actual steps to exert control over the franchisee. Simply having the contractual right to do so does not appear to meet the proposed threshold.

Benefits of the Act

As stated above, should the Province of Saskatchewan proceed to enact franchise legislation, this would align it with the regimes of all western provinces, as well as Ontario, New Brunswick and Prince Edward Island.

In addition to making a positive stride towards uniformity across the provinces, the introduction of franchise legislation would also help protect consumers by allowing them to make informed investment decisions when purchasing a franchised business.

At Sotos LLP, we are committed to guiding franchisors through the evolving franchising landscape. The new Franchise Disclosure Act introduced in Saskatchewan brings substantial changes and new obligations that all involved parties must be aware of. Our team is proficient in both the new legislation and the established franchise laws across Canada. We provide a full range of legal services, including the drafting and reviewing franchise agreements, ensuring compliance with disclosure requirements, and representing clients in franchise-related disputes. Contact us today to align your franchise operations with the latest legal standards and safeguard your business interests in this dynamic sector.

Jason Brisebois, Sotos LLP

Jason Brisebois is a partner in Sotos LLP’s corporate and franchise law groups. He has received multiple legal accolades, including being named in the “Ones to Watch” category by Best Lawyers in Canada. Additionally, he won the Lexology 2024 Client Choice Award for Franchising in Canada and was recognized as a “Legal Eagle” by Franchise Times Magazine. Jason can be reached directly at 416.572.7323 or jbrisebois@sotos.ca.

Anna Thompson-Amadei, Sotos LLP

Anna is an associate with Sotos LLP in Toronto, Canada’s largest franchise law firm. She has been recognized as a “Legal Eagle” by the Franchise Times Magazine. Anna can be reached directly at 416.572.7322 or athompson-amadei@sotos.ca.

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Automotive dealers know all too well, the cost of establishing a new dealership is substantial. The showroom and service area must be constructed, the land must be developed, costly tools and machinery must be purchased, and an initial inventory of vehicles must be acquired. This is in addition to a host of additional costs associated with start-up, including conducting business due diligence, hiring professional advisors, and advertising expenses.

At the same time, manufacturers are under constant pressure to remain relevant in a hyper-competitive automotive market environment. In order to ensure that customers are adequately serviced, manufacturers are constantly re-evaluating key markets to ensure that an adequate number of image-compliant dealerships are available to meet customer needs and expectations. This constant tension between providing the best available standard of service to customers, while ensuring that individual dealerships are able to recoup their substantial investment, is an ongoing concern for dealers and manufacturers alike. Understanding whether the establishment of new dealer points or the relocation of existing dealerships is within the powers of the manufacturer, or otherwise an encroachment on the market area of a dealership, requires a careful consideration of the unique circumstances facing the existing dealership.

What is encroachment?

Put simply, encroachment occurs when a new automotive dealer point is established or an existing dealership is relocated in closer proximity to another existing dealership. This may occur in response to demographic or socioeconomic changes in a market area which has made the establishment of a new dealership point viable, or when an existing dealer has found better premises within its market area to relocate its dealership. Not surprisingly, the establishment of new or relocated nearby dealerships can quickly put existing dealers and their manufacturer into conflict.

Manufacturers will almost always include broad provisions in their dealership agreement reserving their right to manage the overall dealer network, including by establishing new dealer points or relocating existing dealerships. In addition to the terms of the dealership agreement, however, dealers and manufacturers alike should be mindful that a manufacturer’s ability to establish nearby dealerships is also affected by a variety of other requirements and considerations, including the guidelines set out in National Automobile Dealer Arbitration Program (NADAP), if applicable, and the obligation that manufacturers deal with their dealers in good faith.

The National Automobile Dealer Arbitration Program (NADAP)

If the manufacturer and dealers have opted into NADAP, the manufacturer must consider the NADAP rules when considering its right to establish a new dealer point or relocate an existing dealership. Under Rule 6 of the NADAP rules, the manufacturer has the right to determine the size and structure of its dealer body and to create new dealer points, relocate dealerships, appoint new dealers, and fill existing dealer points. The manufacturer is obligated, however, to provide notice to an existing dealership of its intention to create a new dealer point or relocate an existing dealership. Generally, in metropolitan markets, an existing dealer that sells identical vehicle brands as those of the proposed new dealer point or relocated dealership may challenge a new dealership that is established or relocated within 8 km of the existing dealer (20 km for nonmetropolitan markets).

If these distance requirements are not offended, an existing dealer cannot bring its NADAP challenge. However, the distance requirements are not an absolute rule. If the new dealer point or relocating dealership offends the distance requirements, the existing dealer must still prove that it is more likely than not that it will suffer a significant loss of sales and profits as a result of the new dealer point or relocated dealership.When considering whether encroachment has occurred, the arbitrator must balance the dealer’s alleged significant loss of sales and profits with the interests of the manufacturer in creating the new dealership or relocating the existing dealership, as well as the collective interests of the manufacturer and all of its dealers, and the interests of the customers of those dealerships.

The manufacturers’ Duty of Good Faith

Separate and apart from any NADAP rules regarding relocation, pursuant to Canadian law, automotive manufacturers are required to exercise the powers granted to them by a dealership agreement honestly, fairly, and in good faith. Considering that a power imbalance may exist between a local dealership, on the one hand, and an automobile manufacturer on the other, courts are keenly focused on ensuring that neither party, through its conduct, can defeat the very purpose they entered into business together in the first place.

On multiple occasions, the courts have been called upon by aggrieved dealers to rule on whether a manufacturer, through its establishment of a new or relocated dealership, is encroaching upon the territory of an existing dealer, which will, ultimately, harm the existing dealer’s profitability. The courts’ analysis in these cases have provided us two key insights into how such claims will be dealt with.

Firstly, the courts have confirmed that, even if a manufacturer reserves itself broad powers under its dealership agreement, this does not mean it can act without consideration of the interests of existing dealers. Although manufacturers are not required to prioritize the interests of an individual dealership over its own interests or those of the dealership system generally, they are required to consider the interests of that individual dealership when the manufacturer’s decision could have an adverse impact upon it. Manufacturers are well-advised to ensure that prior to taking any such action, proper consultation and studies are conducted to fully consider the impact
on existing dealers.

Moreover, the courts have stressed that each situation involving dealership encroachment is different, and the existing dealer will need to provide substantive evidence that the establishment of a new dealer point or relocated dealership will harm its financial interests before a court will intervene. Dealers challenging the encroachment of a new or relocated dealership should be prepared to provide meaningful evidence that the new or relocated dealership will have a significant impact on its business, including relevant consumer data, customer records, business and market reports, and expert evidence. Conversely, manufacturers should be prepared to prove that they have undertaken their own business and market research, and can demonstrate that their decision will not have a substantial effect on the profitability of the existing dealership and not substantially prejudicial to the dealership in question.

Conclusion
When a dealer is granted an exclusive selling territory or a designated market area, it has a reasonable expectation that the manufacturer will not encroach on its territory. Manufacturers are under an obligation to treat their dealers fairly, and exercise the powers they have reserved for themselves under the dealership agreement in such a manner so as to not unfairly disadvantage their dealers. At the end of the day, a well planned dealership network not only meets the needs of the marketplace, but it provides its dealers with a favourable environment in which to obtain a reasonable return on their investment.

John Yiokaris, Sotos LLP

John Yiokaris is a partner with Sotos LLP in Toronto, Canada’s leading franchise law firm. He has been recognized by Chambers Canada, LEXPERT, Who’s Who Legal, Lexology, and Best Lawyers in Canada as a leading Canadian franchise law practitioner. John can be reached directly at 416.977.3998 or jyiokaris@sotos.ca.

Jason Brisebois, Sotos LLP

Jason Brisebois is a senior associate with Sotos LLP in Toronto, Canada’s leading franchise law firm. He has been recognized by Best Lawyers in Canada in the Ones to Watch category. Jason can be reached directly at 416.572.7323 or jbrisebois@sotos.ca.

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Nearly every franchise system includes a franchise marketing and promotion fund, often referred to as an “ad fund.” Typically, an ad fund operates as follows: individual units are obliged to contribute a specific percentage of their revenue to the ad fund, and the franchisor utilizes these funds for advertising and promotional activities to benefit the overall system and brand.

Ad funds serve as a potent tool for fostering system growth and expansion. They create a pool of funds for promotional endeavours that might otherwise be financially burdensome for either the franchisor or individual franchisees to undertake independently. In addition, initiatives funded by the ad fund contribute to maintaining consistent and brand-aligned messaging, as they are centrally coordinated by the franchisor.

However, ad funds can also become a focal point for discontented and divisive franchisees to unite around. Dissatisfied franchisees may join forces to raise concerns – real or “strategic” – regarding the management or administration of the ad fund. Even if these grievances lack merit, they can consume valuable time and resources for franchisors. Moreover, they can sow discord within the franchise system and among franchisees. In the most extreme scenarios, franchisees may unite and utilize their collective resources to initiate and maintain vexatious lawsuits concerning the ad fund, which can result in significant expenses and protracted legal battles for the franchisor.

This article aims to provide guidance on ad fund best practices and to highlight essential considerations for franchisors in creating and managing their ad funds.  Implementing these practices and thinking about these issues can help franchisors avoid the most common potential ad fund pitfalls.

1. Consider what geographic area the advertising fund will cover, and whether franchisees will have additional local marketing obligations

Prior to establishing its ad fund, a franchisor should think carefully about the geographic area the fund will cover. Should the ad fund be national in scope, and responsible for promoting the brand across the country, or should there be multiple regional funds to account for Canada’s size and the distinctness of its many regions?  Or should there be both a national fund and various regional funds? A franchisor should consider these questions in light of the nature of its brand and operations and the current market conditions. Are there important local or regional differences that the franchisor wants to address in its marketing efforts?  Or is it better to focus on a single advertising strategy Canada-wide?

A franchisor should also determine whether franchisees will be required to invest in a local ad fund geared towards promoting their local markets (over and above their obligation to contribute to the franchisor’s national fund), and/or whether they must individually meet certain self-directed local marketing spend minimums.  Making advertising a joint responsibility, by requiring individual unit spend minimums, can be an effective way to preempt complaints about the franchisor’s advertising strategy and decisions.  As discussed in more detail, below, franchisors that opt to require franchisees to participate in marketing should ensure there is appropriate franchisor oversight over the content of such marketing initiatives.  Franchisors should implement a tracking, approval, and reporting system to ensure that franchisees’ marketing efforts align with system standards, and that individual franchisees achieve minimum marketing spend requirements.

2. Management and reporting considerations: creating a special purpose “ad fund” entity, preserving the right records, and reporting to the franchisees

With very few exceptions, it’s generally advisable that the franchisor set up and manage the ad fund as a separate entity within the franchise system.  A general best practice is to incorporate a separate corporate entity whose sole purpose is to be responsible for all matters relating to the ad fund.  Ad fund contributions should not generally be co-mingled with other funds.  Instead, they should be maintained in a separate account in the name of the special-purpose entity that the franchisor has created for management of the ad fund.  While it is technically not improper to deposit ad fund monies into a mixed purpose account, such practice can create significant practical difficulties relating to tracing funds in the event the franchisor receives a demand to account for its use of ad fund monies.  To that end, any transfers in or out of the ad fund account should be properly memorialized.  Original source documentation relating to ad fund expenditures (for instance, invoices from third party marketing services providers) should be organized and preserved for a reasonable period, in accordance with the franchisor’s document retention policies.

A franchisor should maintain accurate financial records detailing contributions to and expenses drawn from the ad fund.  Such financial records should be distinct from those kept by the franchisor as part of its overall business operations.

A franchisor should consider whether it will provide franchisees with some degree of financial reporting relating to the revenue and expenses of the ad fund.  For example, will the franchisor provide regular financial reports to the franchisees about the ad fund?  Or will such reports be provided only in response to franchisee requests?  In any case, a franchisor should make sure it adheres to whatever reporting requirements it may put in place, as failure to do so can provide a pretext for disgruntled franchisees to stir up trouble.

The franchisor will also want to carefully consider the type of financial information it wants to make available to the franchisees in relation to the ad fund.  Will the franchisor provide financial statements, which may require the franchisor to engage external accountants to prepare?  Or, more commonly, will the franchisor provide only a statement of income and expenses, summarizing the revenue and expenses of the ad fund in a particular fiscal period?  In either case, it is generally recommended that franchisors provide such summary financial information to franchisees, rather than access to all source documents relating to the ad fund (for instance, general ledgers, invoices and other information relating to the financial activities of the ad fund).

3. Consider whether all franchisees will benefit equally from, and contribute equally to, the advertising fund, and specify if that is not the case

As a fundamental matter, a franchisor should carefully consider which entities will contribute to the ad fund, how the quantum of such contributions shall be calculated, and what use may be made of the funds.  For instance, is there any obligation for the franchisor to make ad fund contributions and, if not but the franchisor nonetheless contributes to the ad fund, how will such contributions be accounted for and used?  Will corporate and franchisor-owned stores be required to contribute?  What about stores that operate seasonally, or operate in a format that is different from the majority of stores in the system (kiosks, food trucks, special venue stores, ghost kitchens, etc.)  Will all franchisees contribute equally to the ad fund in accordance with a prescribed formula?

Is it fair for all units to pay the same ad fund fees if some units are only operating for a portion of the year?  The answer to this question is not always clear or straightforward.  Sometimes, units with reduced hours or seasonal units are in a prominent location, for instance, major sporting venues or pop-ups during special events, and have the potential to greatly increase brand awareness and attract new customers to existing units operating in traditional formats in the future.  Are these special location units creating goodwill for other franchisees to enjoy, or are they trading off the goodwill that other franchisees have created?

In addition to these considerations, a franchisor should specifically outline whether rebates, marketing allowances, and other amounts received by the franchisor will be contributed to the ad fund or retained by the franchisor for its own use.

Addressing these matters clearly, in both the franchise disclosure document and in the franchise agreement, can help to ensure that the ad fund is administered in a manner that franchisees perceive as transparent and fair.

4. Clearly define the key terms of the ad fund, including how much franchisees are required to contribute, the mediums and content of advertising that are permissible, whether the ad fund will be administered internally and/or externally, and who will pay for ad fund’s administrative expenses

While franchisors generally have a great deal of discretion as to how ad fund monies should be spent, it is important that the scope of this discretion is clearly communicated to the franchisees to avoid accusations of “unfairness” later.  It’s important to preserve the franchisor’s ability to spend the ad fund as it sees fit.  This might mean applying ad fund monies towards assisting troubled regions, or towards initiatives that seek to have the system enter new markets.

A franchisor should consider how the monies it collects for the ad fund will be apportioned, and whether franchisees can expect the ad fund to devote a proportional amount of the collected funds to specific markets or regions. Many franchisors will explicitly state in their franchise agreement that the ad fund has been created for the benefit of the system as a whole, and that franchisees should not expect that ad fund spend will benefit individual units on a proportionate or equal basis relative to their contributions or other franchisees.

To avoid potential disputes, a franchisor should address in specific detail the following considerations when structuring its ad fund:

• What amounts will franchisees be required to contribute? The franchisor should clearly define the amount that franchisees will be required to pay into the ad fund, the frequency with which they will contribute to the fund, and how the contribution will be paid to the franchisor. A franchisor should consider whether the franchisees will be required to make payments in pre-determined amounts, or whether their ongoing contributions will be determined by way of a formula based on their gross revenues or another metric.
• What media and content may the ad fund employ? A franchisor should ensure it reserves the right to employ any and all types of content and mediums of advertising (including television, radio, online, social media, etc.) for the fund as part of its activities.
• Will the ad fund rely on third-party advertising agencies, an in-house advertising department, or a combination of both to carry out its activities? A franchisor should consider whether the ad fund will be administered internally or externally, or through a combination of both. Expenses incurred by a franchisor in directly administering the fund, including direct expenses such as printing and ad placement, and indirect expenses such as salaries and head office rent, may be properly chargeable to the ad fund. When considering what and how much to charge to the ad fund, a franchisor should make a commonsense determination as to whether there is a nexus between the expenses it has incurred and whether these expenses furthered the objectives of the ad fund. Additionally, the quantum of the allocation should be proportional to the expense incurred by the franchisor and assessed reasonably. For instance, if one quarter of the franchisor’s head office space is dedicated to offices for internal marketing personnel, it may be appropriate to charge one quarter of the franchisor’s head office occupancy costs to the ad fund.
• Will the ad fund be used for purposes other than traditional marketing of the system and brand? There are a variety of promotional-related activities in which franchisors are increasingly required to engage. For instance, increased reliance on social media means that, sometimes, a franchisor must engage in reputational “damage control” or respond to negative comments on social media.  What about the cost of administering customer surveys across all or part of the system?  Franchisors should consider whether the ad fund provisions of their franchise agreements permit them to charge the cost of these activities to the ad fund. Ultimately, the franchisor should thoughtfully consider all uses or potential uses of the ad fund monies.

Finally, a franchisor should reserve the right to change and amend the rules relating to its use of ad fund monies, as necessary, to keep up with new advertising mediums and technologies, and to ensure the best possible use is being made of ad fund dollars.

5. Decide who will manage the fund, who will be responsible for its decision making, and whether there will be a franchisee advisory council.

Prior to forming the ad fund, a franchisor should carefully consider who will operate and administer the fund, and whether an advisory committee should be established to oversee and make suggestions as to the ad fund’s activities. In a majority of cases, the franchisor (or an affiliate of the franchisor) will be responsible for administering the fund and crafting the message and media to be employed in its advertising. Such centralized leadership allows the franchisor to broadcast a consistent message to potential consumers regarding its brand and products.

Some franchisors also establish franchisee advertising and marketing advisory councils, which bring together franchisees to make recommendations as to how the ad fund should carry out its activities. Most such councils are limited to making only non-binding recommendations.  However, engaging franchisees can allow franchisors to tap into franchisees’ valuable on-the-ground knowledge.  In addition, involving franchisees in the operations of the ad fund heightens transparency which can, in turn, preempt potential ad fund disputes.

6. Consider how much leeway individual franchisees will have to undertake their own advertising

One of the key advantages of franchising is establishing a common brand which can provide customers with a consistent experience. In establishing an ad fund, a franchisor can ensure that all advertising it produces is consistent with the brand’s policies, standards and image. A franchisor should carefully consider whether there is a place in its system for individual franchisees to undertake their own advertising at a local level, and whether there should be controls on the form and content of such local advertising. A franchisor should consider whether local advertising directed by individual franchisees would complement or conflict with national and regional advertising undertaken by the system’s ad fund.

A franchisor should be especially wary when it comes to a franchisee’s use of social media to promote its franchised business. Social media content and messages can spread quickly and easily.  A franchisor should be sure to clearly delineate the system’s policies on social media usage and content.  Franchisors should also ensure they have effective mechanisms to step in when and if a franchisee’s advertising is inappropriate or inconsistent with the brand.

7. Consider how the franchisor’s disclosure will be affected by the establishment of, or the reservation of the right to establish, an advertising fund

A franchisor should ensure that its franchise disclosure document fully discloses the material specifics of the ad fund it has established and its use of funds, as required by franchise legislation.

If particular franchisees are required to contribute different amounts to the ad fund, the franchisor should consider how widespread these variations are across its system, and whether knowledge of these variations is information that would be material to a decision by a prospective franchisee to acquire a franchise.

Conclusion

A well-managed ad fund, which pools contributions from franchisees, can be a valuable asset and a competitive advantage for a franchise system. However, the process of developing and administering such a fund can be complex. It is important to engage professional advisors throughout all stages of the ad fund’s lifecycle to ensure legal compliance and alignment with the system’s best interests.

At Sotos LLP, we specialize in assisting both emerging and established franchisors in navigating these complexities. Our expertise includes designing systems that adhere to best practices and crafting agreements and disclosure documents tailored to each franchise system’s unique needs.  We also have substantial experience in defending against ad fund-related claims. No matter the system or the issue, Sotos LLP is here to support and guide franchisors in optimizing their ad funds for success.

Adrienne Boudreau, Sotos LLP

Adrienne is a partner with Sotos LLP in Toronto, Canada’s leading franchise law firm. She has been recognized by Chambers Canada, LEXPERT, Who’s Who Legal, and Best Lawyers in Canada as a leading Canadian franchise law practitioner. Adrienne can be reached directly at 416.572.7321 or aboudreau@sotos.ca.

John Yiokaris, Sotos LLP

John Yiokaris is a partner with Sotos LLP in Toronto, Canada’s leading franchise law firm. He has been recognized by Chambers Canada, LEXPERT, Who’s Who Legal, Lexology, and Best Lawyers in Canada as a leading Canadian franchise law practitioner. John can be reached directly at 416.977.3998 or jyiokaris@sotos.ca.

Jason Brisebois, Sotos LLP

Jason Brisebois is a senior associate with Sotos LLP in Toronto, Canada’s leading franchise law firm. He has been recognized by Best Lawyers in Canada in the Ones to Watch category. Jason can be reached directly at 416.572.7323 or jbrisebois@sotos.ca.

The post Franchise Advertising Funds: A Blueprint for Success and Pitfall Prevention appeared first on Sotos LLP.

A traditional exit option available to dealer principals is selling your dealership to an unrelated third party. Leaving your dealership to the next generation or a family member isn’t always a viable option for principals looking to exit their business. As a result, dealer principals (and dealership groups) should understand the key issues when it comes to selling their dealership.

Preparing for the Sale:

Before beginning the search for a purchaser, principals looking to sell should critically analyze their dealership.  Consider how the dealership has been performing over the previous months and years, whether the dealership has outstanding obligations (facilities upgrades, for instance) that will need to be addressed prior to its sale, what the state and health of the local automotive market are, and what the dealership’s outlook is for the future.  From an early stage, it’s critical to understand your business and the market in which it is operating to properly assess the value of the dealership and what steps will need to be taken to unlock any potential value.

Equally critical upon making the decision to sell is to ensure you’re properly managing your dealership’s inventory levels, both with respect to vehicles and parts.  Potential purchasers will typically not purchase obsolete or unauthorized vehicles and parts inventory that they’ll struggle to resell.  Moreover, old and obsolete inventory adversely affects your cash flow, as you are not able to fully recapture funds tied up in this inventory.  To ensure you maximize your return and avoid costly negotiations, you will need to manage your inventory in the leadup to a sale and begin to sell-off or dispose of any items that a purchaser will not want.

It is critical to involve your business and accounting advisors early in the sale process to help determine a fair asking price and what the potential tax consequences may be for your business and you personally.  It’s crucial to ensure that, well in advance of any sale, your financial and tax records are current and that you’ve discussed the topic of tax planning with your accountant.  In most cases, effective tax planning will help secure more money for yourself once the transaction closes.

It’s equally critical to engage your legal advisors from an early stage to assist you with structuring a potential transaction (as further explored below) and addressing potential roadblocks to closing the sale, including:

• ensuring that your manufacturer is prepared to consent to the proposed sale and what requisitions it may impose on both you and the purchaser as part of any transaction;
• understanding the requirements of your dealership agreement;
• ensuring that the corporation’s legal records are up to date and that contracts necessary to the operation of the dealership can be assigned to the purchaser, if necessary;
• ensuring that the proper consents have been obtained from the landlord and other third parties in order to effect the transaction without risk to the dealership, its operation, or its continued possession of the dealership premises, as applicable;
• managing any potential environmental liabilities that may exist on the premises as a result of the dealership’s operations;
• addressing employment law considerations and minimizing risk arising from potential employee transfers or layoffs at the time of sale;
• addressing any outstanding litigation or potential litigation concerning the dealership and its operations that may impede its sale; and
• tax and estate planning, which is crucial to consider as part of the sale process to proactively manage potential personal tax and legal exposure.

Most of these processes take several months to complete; as a result, it’s crucial to engage your legal advisors as soon as possible after making the decision to sell.

How to Structure the Transaction

The eventual transaction can be structured in two different ways: an asset sale or a share sale.  Both transaction structures have unique advantages and drawbacks (especially with respect to tax planning), and your legal and accounting advisors should be consulted well in advance of any sale to determine which structure is most beneficial for you and your business.

In an asset sale transaction, the buyer purchases your business’ assets (often including equipment, land and building, customer lists, inventory, and goodwill), but does not purchase or take control of your operating corporation.  As a result, you retain the unpurchased assets and all liabilities (including any debt) of your operating corporation.  This structure allows the buyer to pick and choose what assets it would like to purchase, while avoiding any liabilities owed by the seller.  As the seller, you will still be required to address the obligations and liabilities associated with your corporation (including paying down outstanding debt on or before closing), and you may be required to use some of the proceeds payable to you on closing to pay off any existing loans, financing arrangements, etc.  At the end of the day, the purchaser’s lawyer will not permit the transaction to close unless he/she has confirmed that the assets the seller is selling to the buyer are free and clear of any and all liens and encumbrances.

Asset sales are generally less risky for the purchaser, as they won’t be assuming any unforeseen or then-unknown liabilities associated with the operating corporation.  Nonetheless, the purchaser will have to ensure they’re able to transfer all purchased contracts, licenses, and permits into the purchasing corporation’s name and that the new business will be able to secure the approval of the Ontario Motor Vehicle Industry Counsel (or similar bodies).

In a share purchase transaction, the buyer purchases all of the outstanding shares in your operating corporation.  At the culmination of the transaction, total legal ownership of your corporation is transferred to the purchaser, who assumes all assets and liabilities associated with this corporation.  This form of transaction is generally simpler, as there is (generally) no need to effect the transfer of assets, specific licenses, or permits to a new corporation.  Nonetheless, any personal assets of the seller, or any assets the purchaser does not wish to purchase (i.e. obsolete inventory), will need to be flushed out from the seller’s corporation prior to the sale, which may have negative tax implications on the seller.

In a share transaction, keep in mind that the resulting change in control of the operating corporation may nonetheless require consent and approval from other parties relevant to the business, including the manufacturer, landlord, and major suppliers.  Typically, these consents take time to obtain.

Consider the Terms of your Dealership Agreement

In addition to ensuring that the transaction is organized in a manner that won’t prejudice your interests, dealer principals also need to ensure that the sale is not running afoul of the requirements found in their dealership agreement.  In particular, be on the lookout for the following types of provisions:

• Manufacturer’s Consent: Manufacturers will typically require that you seek and obtain (1) their consent to you selling your dealership, and (2) their consent as to the acceptability of the proposed purchaser. Manufacturers will generally reserve broad powers to reject sales or the proposed purchaser should they not deem them to be in the best interests of their brand or dealer network. Be sure to understand what steps must be taken to obtain the manufacturer’s consent and understand that obtaining such consent can take time.
• Right of First Refusal: Consider whether the manufacturer has the right to exercise a right of first refusal (ROFR) to purchase the dealership if you receive an offer for your dealership.  If so, consider if the manufacturer has a history of triggering this ROFR, and ensure the proposed purchaser understands you’re subject to this right. Purchasers may be hesitant to explore a transaction (beyond making an initial offer) if a manufacturer does not first waive its ROFR. It’s crucial to understand what information the seller must provide the manufacturer in light of a ROFR existing, and it’s equally important for both you and the buyer to understand the timelines for dealing with a manufacturer’s ROFR.
• Reimaging and Renovations: Consider whether there are requirements that, upon the sale of the dealership, reimaging or substantial renovations must occur at the dealership.  As a result of such requirements, it may even mean that the manufacturer will require your dealership to relocate to new premises better suited for such reimaging or upgrades.  Such renovations can be extremely costly and complicate the transaction (especially if new premises are required), and it should be verified if the manufacturer will require them as part of any sale to ensure adequate capital can be allotted for this work.
• Leasing and Financing Records: Manufacturers often require that all original records relating to the dealership’s leasing and financing activities are kept at the dealership premises, despite a sale.  You will need to ensure that all such records are, in fact, in existence and readily available to the purchaser on closing.

Each dealership agreement is different, and failing to abide by its provisions as part of a transaction can endanger the transaction and your operation of the dealership itself.  Be sure you understand the obligations placed on you by your dealership agreement, and plan in advance as to how best to comply with them.

Conclusion

Selling a dealership is a complicated matter, and sufficient time should be allotted to carrying out the work associated with preparing and planning for such a transaction, obtaining the necessary consent to undertake the transaction, and coming to terms with the buyer and other interested parties.  Remember that a deal isn’t complete until all of the agreements are fully signed, the conditions of the transaction have been fulfilled, and the purchase price has been made into your bank account.

John Yiokaris, Sotos LLP

John Yiokaris is a partner with Sotos LLP in Toronto, Canada’s largest franchise law firm. He has been recognized by Chambers Canada, LEXPERT, Who’s Who Legal, Lexology, and Best Lawyers in Canada as a leading Canadian franchise law practitioner.

John practices business law with a specific focus on the automotive industry, franchising, and disputes, and he is a trusted counsel to both automotive dealers and manufacturers. John can be reached directly at 416.977.3998 or jyiokaris@sotos.ca.

Jason Brisebois, Sotos LLP

Jason Brisebois is a senior associate with Sotos LLP in Toronto, Canada’s largest franchise law firm. He is head of the firm’s personal services franchise practice area, and practices business law with a focus on franchising, distribution, and licensing. Jason can be reached directly at 416.572.7323 or jbrisebois@sotos.ca.

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