Seven lawyers from Sotos LLP have once again been ranked among the foremost Franchise lawyers. Congratulations to Allan Dick, Jean-Marc Leclerc, John Sotos, David Sterns, Peter Viitre, John Yiokaris, and Arthur Trebilcock.

The rankings can be found here:

http://www.lexpert.ca/directory/practice-areas/ranking/franchise-law-F3/

The post Sotos LLP is “Most Frequently Recommended” in Franchise law appeared first on Sotos LLP.

Background

David and Elizabeth planned to go skiing at resorts north of Toronto. When they were purchasing their tickets, they signed the ski resorts’ respective waivers of liability for injuries they might suffer at the resorts. They went skiing but both had accidents. They sued the ski resorts for their damages.

The question became whether the waivers of liability that David and Elizabeth had signed were valid.

Two competing pieces of legislation applied to their circumstances. David and Elizabeth were consumers as defined under Ontario’s Consumer Protection Act (“CPA”). They were also persons entering the resort premises for which the ski resorts were responsible. Therefore, Ontario’s Occupiers’ Liability Act (“OLA”) also applied.

The Court of Appeal’s Decision

The two statutes could not be reconciled: the CPA states generally that waivers of liability or warranty are void with respect to consumers. The OLA permits waivers of liability with respect to certain premises onto which other persons enter.

The Court of Appeal decided that because the language used in the OLA was more specific than the CPA, the OLA should govern. Therefore, the waivers of liability were valid under the OLA and not void under the CPA.

In making its decision, the Court of Appeal considered the original legislative intent underlying the waivers provision in the OLA. The goal was to encourage private landowners to make their properties available to others for recreational use without allowing the fear of liability to get in the way. On the other hand, the Court found no intent in the history of the CPA to show that the legislature intended to ban a waiver of the duty of care towards visitors of premises that are captured by the OLA.

Significance of the Decision

The Court’s decision will have significance for many businesses especially those offering play, sports, and recreational services. If properly drafted and presented, waivers that are given by the consumers of such activities will provide a defence to owners or operators of such businesses. Lawyers at Sotos LLP regularly advise business operators in the restaurant and hospitality industry as well as sports and recreational enterprises on all aspects of their liability towards their customers and staff.

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In particular, PIPEDA requires compliance with the ten key privacy principles of the Model Code for the Protection of Personal Information developed by the Canadian Standards Association.  One of the fundamental principles is openness and requires organizations to provide information to the public about policies and practices relating to the management of personal information. The openness principal requires businesses to include information on who is accountable for the organization’s policies and practices and to whom complaints can be forwarded. Details on gaining access to personal information, a description of the type of personal information held by the organization, and disclosure of personal information made available to related organizations, must also be provided.

While establishing a privacy policy is an obligation under PIPEDA, it is also key to building trust with consumers. A company’s approach to privacy can either build or hamper consumer confidence in a company. In fact, various studies have established a link between a company’s privacy policy and consumer trust. Yet, many businesses do not dedicate sufficient resources or time to developing an effective privacy policy.

In 2013, the Office of the Privacy Commissioner of Canada (OPC), the mandated guardian of privacy in Canada responsible for enforcing PIPEDA, participated in an international privacy sweep which involved assessing the online privacy policies of Canadian businesses. The sweep found major shortcomings in the privacy policies of Canadian businesses, ranging from no privacy policy at all to lengthy and overly legalistic policies. Five years later, businesses’ privacy policies remain a key area of concern in the minds of stakeholders and from the perspective of the OPC.

Finding information on a business’s privacy practices usually involves scrolling to the bottom of the business’s website homepage and clicking on a link that takes you to the business’s privacy policy. Oftentimes, consumers skip over online privacy policies due to their length and complexity. Yet, privacy laws require consumers to understand what they are consenting to and online privacy policies are often a key (and only) mechanism for obtaining informed consent.

When privacy policies are overly technical, legalistic, or lengthy, they hinder the intention behind establishing a privacy policy in the first place. By the same token, when privacy policies are a few sentences in length, they cannot possibly provide a consumer with sufficient information to make a meaningful decision regarding consent. There is an obvious balancing act between establishing a clear, user-friendly privacy policy and ensuring that sufficient information about the collection, use, and disclosure of information is provided.

In finding the appropriate balance between user-friendliness and providing sufficient information, practical guidance can be gleaned from reviewing the published summaries of investigations conducted by the OPC on businesses’ privacy practices. For instance, in one investigation, a web-based company learned that it must identify specific retention periods and the reasons for such retention periods (for instance, disclosing the fact that contact information is retained for 7 years to comply with the Income Tax Act). In another investigation, an airline company learned that it must inform customers through its privacy policy that it may provide personal information to third parties contracted to perform functions on its behalf (in the case of the airline company, information was shared with a third party to conduct surveys on behalf of the airline). Such lessons can be useful for businesses trying to determine what information to include and what level of detail is required in their privacy policies.

Beyond information contained in OPC investigations, the OPC has published a wealth of information, including guidelines on establishing an effective privacy policy as well as a helpful privacy toolkit for businesses.  Most recently, consultations wrapped up on OPC guidelines for obtaining meaningful online consent. In its draft guidelines, the OPC has developed seven key guiding principles for online consent, which include:

(1) emphasizing key elements about the collection, use, and disclosure of personal information;

(2) allowing individuals to control the level of detail regarding information practices by presenting information in a layered format;

(3) providing consumers with a clear option to say “yes” or “no”;

(4) being innovative (i.e. no one-size-fits all approach);

(5) considering the consumer’s perspective by making the information user-friendly;

(6) ensuring the effectiveness of consent processes, and

(7) making consent an ongoing process.

The development of these guidelines stem from recognition that establishing privacy policies and obtaining meaningful consent from consumers is becoming increasingly challenging in this digital age.

While determining how to present information on privacy practices may be somewhat challenging and, at times, unclear, what is clear is that a business’s privacy policy should not be a standard, one-size-fits-all document lacking real substance. A privacy policy should reflect a business’s actual practices, mechanisms, and measures put in place on the collection, use, and disclosure of customer information.

An important component and starting point for businesses integral to the development of a privacy policy is the appointment of a privacy officer. Businesses governed by PIPEDA are required to appoint an individual responsible for privacy management – this is an element of the accountability principal contained in the Model Code for the Protection of Personal Information. A privacy officer should not simply be a title without substance or integrity. Instead, a privacy officer’s role is vital to establishing accountability within an organization. Developing a privacy program involves training employees and ensuring that procedures are in place to protect personal information and respond to complaints. In turn, a business’s privacy policy is its declaration to consumers that it has implemented an effective privacy program and has carefully considered the manner in which personal information will be handled.  Accountability, as established through the development of a privacy program, goes hand in hand with openness, achieved through the availability of a company’s privacy policy.

When accountability and openness related to privacy practices are not built into the fabric of an organization, the risk of a privacy breach and related erosion of consumer confidence, is high. Privacy breaches and the ineffective response to a privacy breach can destroy consumer confidence and cause serious damage to a brand. Take, for instance, the recent example of the Uber 2016 data hack involving the personal information of millions of users across the globe, which was only disclosed in late 2017 after an initial cover-up by the company.  Uber’s failure to disclose the data breach has led to government investigations, lawsuits, and the erosion of consumer trust.

Growing concerns over the handling of Canadians’ information have led to OPC recommendations to strengthen enforcement mechanisms, including disclosure of breaches and fines for non-compliance.  While such measures, if introduced, may persuade more businesses to ensure they are compliant with privacy laws, the biggest incentive for business should be their long-term viability which depends, in large part, on consumer trust. Businesses depend on consumer confidence to forge ongoing loyalty to a brand.  One poorly handled data breach can destroy a brand.

Given the importance of privacy in an increasingly digital world, companies ought to carefully consider their privacy policies. Establishing an effective privacy policy that is backed up by meaningful internal procedures and practices makes sense from a business perspective. Developing a clear privacy policy is a mechanism for building trust with consumers; it is an opportunity for a business to show that it values, and understands the importance of, the privacy of its consumers.

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Canada has one of the most robust privacy regimes in the world. Recent amendments to its anti-spam legislation (CASL) demonstrate the strict approach taken towards the safeguarding of personal information and individual privacy – key considerations for any e-commerce strategy. The CASL amendments have strengthened the law around the sending of unsolicited e-mail and other communications (i.e. SPAM) by requiring that recipients provide their consent to being contacted. Canada’s federal privacy statute, the Personal Information Protection and Electronic Documents Act (PIPEDA), which regulates the collection, use and dissemination of personal information, requires e-commerce participants to have privacy policies in place, and to appoint privacy officers to address consumer complaints. Gone are the days of companies collecting vast amounts of personal data and freely using it to market and promote to consumers. In order to do business online, however, retailers must collect personal information, such as names, addresses, e-mails, phone numbers, financial information, and the like. The limited use and safeguarding of that sensitive data is a key consideration for any online business. Grocers are just the latest example of industry participants competing for market share via e-commerce, and in doing so, should ensure they have adequate legal strategies in place to address the implications of transacting online.

Online retailers also face new challenges in digital advertising and marketing. In light of the global reach of online communications, traditional legal considerations for in-store advertising are no longer sufficient. The cornerstone of advertising law is a prohibition on false, deceptive, and misleading ads. In retail, consumer complaints often centre on misleading pricing or promotions. In the online realm, ask yourself whether it is misleading to advertise US dollar prices to Canadian consumers. Must a website be viewed in Canada for a consumer to be considered “Canadian”? Must advertised pricing cater to the location of the viewer? These are some of the complex questions facing traditional retailers looking to establish a foothold in e-commerce.

Last year, the Ministry of Health and Long-Term Care launched its “Healthy Eating” strategy, which includes proposed restrictions on advertising certain foods and beverages to children.  It might, however, prove difficult for authorities to determine whether an ad is targeting children. In the past, ads appearing on weekend morning television were relatively easy to identify as targeting children, while those appearing on late-night television or in the newspaper were often deemed to be adult-oriented. In the online era where people of all ages have access to internet content, identifying the target audience has become increasingly complex, thereby making it difficult for advertisers to comply with applicable laws.

The regulation of e-commerce happens at two levels: the federal government primarily handles aspects relating to privacy and the internet, while the provinces are responsible for local commerce and consumer protection.  This multi-layered governance structure combined with the unique issues facing online retailers requires a thoughtful legal approach and carefully planned out e-commerce strategy for grocers – the latest example of a traditional industry looking to do business online.

The post A New Era For Retail: E-Commerce Comes To Grocery appeared first on Sotos LLP.

Registering a trademark gives you the exclusive right to use that trademark in association with the goods and/or services described in your registration across Canada, even in regions of the country where your mark is not currently being used. It also puts everyone in Canada on notice that you are the owner of that trademark. For these reasons and more, it is generally advisable to register a trademark when you are using or are planning on using one.

There are many different types of trademarks that can be registered, and a person can easily find themselves at a loss for what type of application to file. The basic approach, however, is simple: think about what you want to protect, and file accordingly. How do people identify your goods and services?

The Canadian Intellectual Property Office currently allows words, designs, sounds, and three dimensional objects to be registered as trade-marks.  In addition, trademark laws will soon be amended to allow for the registration of holograms, motion marks, and trademarks applied in a particular position on a three-dimensional object.

There is also a curious beast known as the “distinguishing guise.” A distinguishing guise is essentially a shaping of goods or their containers, or a mode of wrapping or packaging goods. Examples are the distinctive shape of a bottle of Heinz ketchup (UCA001117) or the triangular shape of a Toblerone bar (TMA562648). These too can sometimes be registered as trademarks.

Business and product names are easy. Suppose you decided to name your new brand of running shoes “Nike”. To protect this name you would simply register a trademark for the word NIKE. That would protect you from imitators marking their shoes with the word “Nike” as well. (For those interested, Nike International, Ltd.’s real trademark is TMA205933 in Canada.)

Logos can be straightforward too. Suppose the logo for your new shoe brand was a “swoosh” symbol like the following:

This swoosh symbol appears on the sides of all of your running shoes. In that case, you would simply register a trademark for the swoosh design, i.e. a design mark. That registration would prevent imitators from putting swoosh-like logos on their shoes. (Again, the swoosh logo is of course a registered trademark of Nike International, Ltd. TMA657404).

Things get complex when logos have words in them. Consider, for example, registered trademark TMDA010433 which is owned by Coca-Cola Ltd.:

Remember, this is a design mark, not a word mark. The trademark above does not protect the name “Coca-Cola.” Rather, it protects the style of text the designer used. It would, for example, prevent Pepsi from writing the words “Pepsi-Cola” in the same iconic typeface as the Coca-Cola logo.

To protect the name “Coca-Cola,” Coca-Cola Ltd. would need to register a second trademark for the words COCA-COLA. Otherwise, they leave open the possibility of someone using words similar to COCA-COLA and simply changing the design. Registering both the name and the logo precludes the possibility of imitators stealing either the typeface design or the underlying words. (Coca-Cola Co. does in fact own a registered trademark for the words COCA-COLA: TMDA055268).

Our advice for most of our clients is that if they have a distinctive name for their business or product, and it is otherwise registrable, then they should register it as a word mark. Additionally, if their logo has any sort of distinctive or interesting design element to it, then they should register their logo as a design mark as well.

If a logo is simply a name written out in text without any particularly distinctive design elements to it, then it probably is not registrable as a design mark. On the other hand, if the lettering is distinctive somehow, like the Coca-Cola trade-mark above, it may be worth registering. Or, if their name is not registrable for whatever reason as a word trademark, then it may be advisable to register the text as a logo just to get some level of protection.

An old axiom of intellectual property law is “if it’s worth copying, it’s worth protecting.” Consider which elements of your name, logo, packaging, etc. are worth copying. It may guide you towards what types of trademarks you should register.

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Criteria for Finding that Franchisees are Dependent Contractors

Canada Bread franchisees (the “Drivers”) each drove a route to deliver Canada Bread products to grocery stores and other retailers.  The franchise relationship between Canada Bread, as franchisor-manufacturer, and each Driver was a “typical” franchise relationship in many ways, including Canada Bread’s adherence to the disclosure obligation under Ontario’s franchise legislation, the Arthur Wishart Act (Franchise Disclosure), 2000, each Driver being a separate, incorporated entity, and each Driver being responsible for the day-to-day operations of its business.  However, the OLRB found that the following criteria made the Drivers “dependent contractors” of Canada Bread:

• Selling services: Canada Bread was the exclusive supplier and designated the customers to whom Drivers could sell, maintained sole and unfettered discretion to modify such routes and set the prices at which products could be sold;
• Economic freedom: Although a Driver was permitted to increase its customer base, in effect, market constraints effectively limited any access to new markets. Also, the value of a Driver’s business is based on a formula that considers the number and size of customers on the Driver’s route, where the route is determined by Canada Bread. In other words, Canada Bread controls the value of the Driver’s business;
• Freedom to set prices: Canada Bread set the wholesale prices for products purchased by Drivers, and the prices at which Drivers could sell to retailers were also set by Canada Bread. In addition to controlling prices, Canada Bread also effectively controlled Drivers’ inventory volumes;
• Integration of businesses: The Drivers were only permitted to service Canada Bread customers and the Drivers made up the entirety of Canada Bread’s distribution system;
• The degree of specialization: While the Drivers’ work was hard, there was no particular skill or ability for “entrepreneurship” in performing their obligations;
• Rendering of services: If Drivers were employees of Canada Bread, there would be little change in the Drivers’ working conditions or the performance of their duties.

In finding that the Drivers were dependent contractor employees of Canada Bread, the OLRB opened the door for Drivers to unionize and assert rights under the LRA.

Employers Cannot be Dependent Contractors

There are unique and important circumstances in this case.  Just as many franchisees employ employees to expand their franchises’ business opportunities, some of the Drivers also hired “helpers”. In hiring a helper, a Driver could not be the helper’s employer and at the same time be a “dependent contractor” employee of Canada Bread, which would exclude the Driver from the certification finding. However, since these Drivers’ helpers were only used to help the Drivers “make ends meet”, the OLRB found that the Drivers were still dependent contractors.

The Take-Away

Canada Bread has requested a reconsideration of the decision, and written submissions are in the process of being exchanged as of mid-November 2017. (It may be some time before we have a final ruling on this case, as the OLRB does not overturn its decisions very often and we may expect Canada Bread to seek a formal judicial review.) This decision stands as an important warning to franchisors that exert a significant degree of control over aspects of a franchisee’s business. While control is a necessary to a franchisor, certain levels of controls could result in a franchisee meeting the criteria of a “dependent contractor” for labour relations purposes.

At Sotos LLP, we regularly assist franchisors by advising them on the design of their systems to maximize appropriate controls while minimizing unintended consequences that such controls can bring.

The post The Ontario Labour Relations Board: Canada Bread Franchisees Can Unionize appeared first on Sotos LLP.

When approached with preparedness, renewal negotiations can offer the opportunity to retain a great franchisee and adapt the terms of the parties’ agreement to reflect evolving priorities and changing industry conditions, or, if the arrangement is no longer fruitful, amicably conclude the business relationship.

Conversely, when a franchisor pursues a renewal in an ad hoc manner, the experience can become stormy, whereby the franchisor is unable to steer negotiations towards a beneficial conclusion, resulting in missed opportunities and, at worst, exposure to potential legal liability.

In practice, the renewal process invokes a confluence of often competing “heads” of consideration which can—and should—be contemplated during system design, when the architecture of the franchise agreement, head lease, and other ancillary documents affecting the tenor of any eventual renewal is being conceived. By drafting at this stage with an eye towards process, and in particular through fashioning terms that fit together in chronological lock-step, all while paying due attention to statutory obligations, a franchisor will be adequately prepared to effectively navigate the sometimes uncertain waters of renewal negotiations.

While it is beyond the scope of this article to thoroughly examine any particular head of consideration, or discuss at length the substantial interconnection between each head, the following will provide a high-level map of the significant issues that should be settled as a franchisor seeks to renew, or not renew, a franchise agreement.

I. TERMS OF THE FRANCHISE AGREEMENT

(a) What is the renewal right? As a preliminary step in designing any franchise system, franchisors should contemplate what mechanism for renewal will apply to the parties’ arrangement—an automatic renewal, unconditional or conditional renewal, or one of the numerous other species of renewal. To that end, think of this right like a ship’s hull: It should be the first component designed, it establishes the parameters within which all other renewal terms must fit and, on a practical level, when poorly constructed, it can threaten to sink a prospective deal. Further, at the point of negotiation, and leaving analogies aside, whichever renewal right one chooses will help determine, among other things, whether and to what extent contract terms are negotiable and which party possesses what bargaining leverage.

(b) Notice of intent versus notice of renewal? From a procedural standpoint, franchise agreements typically contain notice provisions, and in particular stipulate rules pertaining to the substance and timing of a notice of renewal required to be delivered by a franchisee. The utility of such terms lies in the commercial certainty they offer by providing confirmation of a franchisee’s agreement to continue the parties’ arrangement into a subsequent term. When drafting such provisions, franchisors should choose their language carefully. All too often, agreements speak instead of a notice of intent in place of a notice of renewal, despite the former being, for practical purposes, procedurally superfluous.

(c) When is compliance assessed? A boilerplate renewal condition found in most franchise agreements requires that the franchisee be in full compliance with the terms of the parties’ agreements. With that in mind, franchisors should investigate when such compliance is assessed—at the time notice of renewal is provided, at the time of the renewal itself, or at some other point? The answer to this question could affect the availability of a franchisee’s right to renew, if default provisions were drafted with foresight, and may provide the franchisor with a useful bargaining chip during the negotiation process.

(d) Conditions or obligations? Franchise agreements regularly contain a host of conditions for renewal that must be satisfied in order for the franchisee to enjoy the benefit of a subsequent term. Some franchisors, however, choose instead to style the same requirements as obligations of the parties’ renewal agreement. The difference between the two approaches is apparent when assessed through the lenses of certainty of performance and enforcement. That is, with respect to conditions, a franchisee has discretion whether and to what extent to fulfill the requirement, but once the parties execute a renewal agreement, the condition is tacitly deemed satisfied. With the latter approach, execution of the renewal agreement confirms the franchisee’s duty to fulfill the obligation, and provides the franchisor with tools to compel performance to a standard to the franchisor’s satisfaction.

(e) Noncompliance or leverage? As touched on above, consider the strategic value of certain procedural or substantive requirements for renewal left unsatisfied by a franchisee. Take, for example, a notice to renew submitted outside the prescribed window—while technically deficient and potentially constituting grounds to disallow renewal, a noncompliant notice can also offer leverage when negotiating an update to the parties’ agreement.

(f) What are the terms on expiry? Given that not all renewal negotiations end up with an inked deal, when drafting post-expiry terms in the initial franchise agreement, there are a myriad of considerations franchisors should pay heed to, for example, whether they anticipate wanting the right to subsequently purchase the franchisee’s assets and how those assets will be valued, as well as the enforceability of restrictive covenants, among other things.

II. TERMS OF THE HEAD LEASE

In certain systems, franchisors require franchisees to contract directly with landlords, thus absolving franchisors of leasing obligations and the headache of coordinating head lease and franchise renewal deals. For the vast majority of franchisors who, for the purposes of having more robust and direct land control, do not follow this practice, there are a number of integral considerations to keep in mind when negotiating a head lease at the outset of system design and at the point of franchise renewal.

For example:

• Will the head lease renewal be conditional upon the franchisor securing a franchisee for a subsequent term? As discussed more fully below under “When to provide disclosure?”, where a head lease renewal is not conditional, due to certain legislative rules regarding the substance and timing of disclosure documents, franchisors may find themselves forced to renew their head lease without the guarantee of a subtenant, risking the possibility of being saddled with vacant premises or an obligation to operate directly if franchise renewal negotiations falter.
• Does the head lease provide for conditions for renewal or obligations upon renewal, and are these requirements similarly styled in the franchise agreement?
• What is the timing and mechanism for setting rent applicable to the new term?

III. STATUTORY OBLIGATIONS

(a) Whether to provide disclosure? Franchisors must pay attention to their statutory obligations in preparing for renewal negotiations. By way of example, Ontario’s provincial franchise legislation requires franchisors to provide a disclosure document to franchisees prior to renewal of the parties’ franchise agreement, subject to a narrow exemption in cases where, among other things, there has been no material change since execution of the franchise agreement or the latest renewal. Where a franchisor fails to meet this exemption yet neglects to provide a disclosure document, the legislation confers on the franchisee an assortment of statutory remedies, including a right of rescission within two years of executing the franchise agreement renewal. The difficulty, of course, is in determining what constitutes a material change.

(b) When to provide disclosure? The question of when to provide disclosure is affected both by procedural and substantive statutory requirements, and is deeply imbricated with the timeline of any simultaneous head lease renewal negotiations. On the point of statutory procedure, franchise laws ubiquitously require a multi-day “seasoning period” between the time disclosure is provided and when the parties may execute an agreement or transfer any funds. From a substantive perspective, provincial franchise legislation obliges franchisors to include in their disclosure documents a copy of the applicable head lease. Together, these two obligations thus mandate that, in practice, a franchisor must have its head lease locked up before it can include it in the disclosure document, which document must in turn be delivered before the franchisee can sign the renewal agreement. A problem arises, however, in situations where the head lease renewal is not conditional upon securing a franchisee—the franchisor must enter into the new head lease without certainty that the franchisee will agree to renew the parties’ arrangement once it has had a chance to consider the disclosure document. While there are solutions to remedy this timing issue, which are beyond the scope of this article, suffice it to say that with sufficient preparation at the time of system design, this dilemma can be safely managed.

(c) What to disclose? Renewals can be, and are often used as, an excellent time to update franchisees to the current form of franchise agreement. A properly drafted franchise agreement contemplates the availability of this option for implementation at renewal. Note that any proposed updated agreement, however, will need to be the subject of disclosure for further consideration by the franchisee.

(d) How does “fair dealing” apply? Another notable statutory obligation that applies to renewal negotiations—the duty of fair dealing (and the related common law concept of good faith, including where no statute applies)—is particularly relevant in instances where the franchise agreement confers upon the franchisor certain discretionary powers exercisable as a condition or obligation associated with renewal (e.g., the power to oblige a franchisee to renovate its premises). Where these powers are vaguely worded, such that the onerousness of the requirement depends upon the franchisor’s discretion (e.g., the extent of the mandated renovation), this statutory duty is engaged. When the exercise of discretion is done in bad faith, or is made in an unfair or unduly burdensome manner, such conduct may offend the statutory duty.

Generally speaking, the statutory duty of fair dealing, which incorporates the common law duty of good faith, requires franchisors to:

• exercise their powers under the franchise agreement in good faith and with due regard to the interests of the franchisee;
• observe standards of honesty, fairness and reasonableness;
• ensure that they do not substantially nullify the bargained objective or benefit contracted for by the franchisee, or causes significant harm to the franchisee, contrary to the original purpose and expectation of the parties; and
• exercise discretion reasonably and with proper motive, and not in an arbitrary or capricious manner.

Knowing whether a franchisor’s conduct has offended the duty of fair dealing, while difficult to assess, is essential to circumscribing commercial risk, as failure to act in accordance with this duty may result in potential legal liability.

IV. CONCLUSION

Renewals are an inevitable part of every franchisor’s business. It is therefore vital to prepare for the seamless continuation or amicable expiry of a franchise agreement by contemplating the abovementioned heads of consideration at the outset of system design. In doing so, and in seeking further advice about the application of these heads to the facts of their particular circumstance, franchisors will be better prepared to identify and leverage tactical opportunities during negotiations, further equipped to close renewals on favourable terms, and more likely to enjoy smooth sailing over the sometimes uncertain waters of renewal negotiations.

The post Navigating the Uncertain Waters of Franchise Renewal Agreements: An Introductory Map appeared first on Sotos LLP.

Accompanying this movement are questions related to how outsourcing via technology platforms impacts the relationship between franchisors and franchisees. A central component of franchising is brand protection and compliance with system standards.  While outsourcing offers many potential benefits, there are also inherent risks.  Reliance on delivery apps places a restaurant’s reputation in the hands of a third party. That third party, in turn, partners with independent contractors to provide delivery services. The deliverer who hands over Chinese takeout to a restaurant’s customer has no meaningful connection to the restaurant (aside from being entrusted with a bag of dumplings), but becomes its temporary representative, along with many others on any given day.

Given the inherent risks, franchisors should have policies in place around partnerships with third party delivery service providers. First, a franchisor’s policy should address whether restaurant partnerships with such third party providers are permitted in the first place. If partnerships with third parties are permitted, then a franchisor must consider whether any third party providers are permitted or only a select few that have been vetted and approved by the franchisor. A franchisor should not only review franchisees’ restaurant partnership agreements, but it should also require that such agreements first be approved by the franchisor.

As an alternative to permitting franchisees to enter into partnership agreements with third party providers, a franchisor may want to consider entering into a direct agreement with a single provider, as McDonalds has recently done with UberEats. This type of arrangement places more control in the hands of the franchisor, amongst other benefits.

In addition to the above, a franchisor’s policy should contemplate how to deal with unhappy customers in the event an order is late, incorrect, or there is an otherwise negative customer experience. Determining the chain of events leading to an unhappy customer in such circumstances may be difficult to ascertain: for instance, was it the restaurant that had a long lineup of orders which led to the delayed delivery, or did the deliverer dawdle before reaching the customer’s apartment? Was the order mix-up due to a technical issue with the app, or was it a mistake made by kitchen staff? Having an established procedure for dealing with customer complaints in such instances is important and should be considered in conjunction with a third party provider’s own procedures.

Determining the root cause of customer complaints may be especially important in cases where franchise agreements contain a termination clause allowing a franchisor to terminate if there are a certain number of customer complaints within a set period of time. If a franchisor is not able to meet the evidentiary burden, it may be unable to rectify chronic service issues.

As a matter of course, a franchisor should reserve the right, at any time to revoke the right of franchisees to enter into partnerships with third party delivery service providers and to require franchisees to terminate any existing partnerships on written notice.  This is important for the purposes of brand protection. If there are repeat customer complaints across the system related to the use of third party apps, or one app in particular, it may be in a franchisor’s best interests to reconsider the right to allow the use of these services. In line with this idea, a franchisor should include in its policy the requirement that franchisees submit monthly reports on the use of third party delivery service providers containing customer reviews and comments.  This will allow a franchisor to track customer complaints over time.

Protection of a franchisor’s brand and reputation is central to its continuing success. The introduction of new technology in the restaurant world offers more options to restaurants, but with more options comes a new set of potential risks.  Having a policy in place regarding the use of delivery apps can help to mitigate risk and reduce franchisor-franchisee conflict. We recommend contacting your legal counsel to assist with you with the development of a delivery apps policy.

At Sotos LLP, we represent leading international and national franchisors.  We can assist franchisors in the development of policies that respond to and address issues involving the ever-evolving world of technology.

See: Food Delivery Apps in Restaurant Franchising: How to Deal with Fees?

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Anything driving an increase in top line revenues and from a new customer base would presumably be welcomed by both franchisors and franchisees. However, third party service providers generally levy hefty charges of up to 30% of the cost of each food order, on which some franchisors levy their own suite of fees. The right of a franchisor to collect fees on third party delivery service provider charges has sparked tensions and raised debate. In order to consider this issue in further detail, it is first necessary to review how delivery apps generally work.

When a customer places an order using a delivery app, two transactions take place. The first transaction occurs between the customer and the third party provider.  Ordering and payment is made via the app by the customer to the provider for the full price of the food order plus, in some cases, a delivery fee. The order is then transmitted via the app to the restaurant in order for the restaurant to fill the order.

The second transaction occurs between the third party service provider and the restaurant. In this second transaction, a commission/service fee (often calculated as a percentage of sales) is deducted by the provider on the amount collected from the customer for the food order prior to remitting the remaining revenue to the restaurant. Many third party delivery service providers remit payment to partnering restaurants on a weekly or monthly basis.

Some franchisors have required franchisees to pay royalty and marketing fund fees on the full price charged to a customer who orders via a delivery app, viewing deducted third party service fees as an expense like any other. In other words, even though a franchisee ends up receiving payment for the food order less the provider’s service fee, the franchisee must pay royalty and marketing fees on the full price of the food order. This is complicated by the fact that a franchisee restaurant’s POS system may record the order at the full price, which means that a franchisee is required to reconcile the full price charged to the customer by the provider and the payment actually received by the franchisee from the provider at the end of each week or month.

So, is the practice of collecting franchisor fees on the full order price collected via a third party app appropriate and permitted by the agreement between a franchisor and its franchisee? The answer lies in the franchisor’s rights relating to the collection of royalty and marketing fees. It is common for franchise agreements to stipulate that franchisees pay royalties and ad fund fees as a percentage of “gross sales” or “gross revenue”.  The crux of the issue therefore lies in whether the service fees charged by third party delivery service providers are captured by the definition of gross sales or gross revenue as set out in the applicable franchise agreement.

Definitions of gross sales/gross revenue vary from system to system, but may be generally understood as total proceeds received by a franchisee for goods and services associated with restaurant operations. Some definitions of “gross revenue” are more expansive and open-ended, while other are more restrictive.  Yet, in many cases, it appears that the definition of gross sales or gross revenue may restrict a franchisor’s right to collect fees on the full order price paid by a customer using a delivery app.

A key reason for this relates to the nature of the transactions that take place in connection with a customer’s food order made via a third party app. As described above, the only transaction that directly implicates the franchisee with respect to income is the second, in which the franchisee receives the remitted payment from the provider. The customer transaction does not occur through the franchisee and the full price paid by the customer for the food order is not, at any point, received by the franchisee.

Given the above, franchisors should carefully review their definition of gross sales or gross revenue to determine whether it needs to be revised in line with the decision to collect royalty and marketing fees on the full purchase price associated with food orders via third party apps. Likewise, franchisees may want to review their franchise agreements to determine whether the franchisor has a right to collect fees on such amounts, in the event such collection is already occurring. Along with revisiting the definition of gross sales or gross revenue, it is recommended that a franchisor review its franchise agreement to determine whether further updates are needed to address changes in the rapidly growing world of technology affecting the restaurant industry.

Determining the scope of a franchisor’s right to collect royalties and other fees involves interpretation of the definition of gross sales or gross revenue.  In some cases, there is not always a clear answer. It is advisable to consult legal counsel to ensure compliance with respective rights, whether as a franchisor or franchisee.

See: Delivery Apps in Restaurant Franchising: How to Deal with Brand Protection?

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The development of a robust and effective compliance program is fundamental to the protection and enforcement of a franchisor’s legal rights and to the maintenance of its business model for the benefit of its entire system.

Franchisors have traditionally monitored franchisee compliance through a combination of basic tools:

1.  secret shoppers – individuals not known to the franchisees who are retained to be a guest of the franchisee’s business and to report on a checklist of operational observations. Inadequate scoring can lead to a requirement for remedial training and potentially a default notice or even termination of a franchise agreement;
2.  compliance personnel – individuals, usually employees of the franchisor, who perform store visits, with or without notice, who similarly monitor compliance and report to franchisor executive using scorecards and/or checklists. Inadequate performance can lead to the same consequences noted above.  Compliance personnel can often also provide on-the-spot training or advice on possible remedial action to be taken.  Too often, however, franchisees see head office compliance personnel as “police”, looking for infractions to report to franchisor executive.

Compliance personnel often must prepare lengthy reports.  If there are inadequacies, default notices may need to be prepared, often by in-house or outside legal counsel.  Disputes over compliance are commonplace.  Sometimes photographs taken by compliance personnel tell a thousand words.  Sometimes they can be more ambiguous than determinative.

Concerns have also surfaced on whether compliance personnel are adequately trained, are present when they say they are and whether they treat franchisees alike.

Compliance visits often lead to follow up visits, including to conduct follow up inspections, which may be the only means to ensure that problems are “cured”.

Fortunately, developments in technology are providing excellent solutions to these problems and have ushered in a new era in compliance.  As a result, costs of compliance are significantly reduced, and the ability to document concerns and ensure timely and effective curing of defaults is greatly enhanced.

A technology-based compliance system should have the following features:

1. allow the parties to upload and share common documents to eliminate disputes over the operative disclosure documents, franchise agreements, amendments, manuals, training aids, leases, subleases, supplier agreements, options and the like;
2. contain standard form interactive checklists;
3. permit the uploading and sharing of photographs and videos;
4. be tablet-based;
5. contain standard form audit reports and dates for cure;
6. contain standard form notices of default and dates for cure;
7. provide a tickler system to both parties on critical dates;
8. act as a GPS to monitor compliance personnel activity;
9. prepare comprehensive score cards;
10. prepare reports on comparative franchisee performance;
11. be easily modified by the franchisor;
12. contain manual/agreement references; and
13. contain training videos and other material.

Of the systems that purport to provide at least some of these advantages, my personal favourite in the restaurant space is the system offered by MeaZureUp.  The support team at MeaZureUp creates a fully interactive customized program which is easy to use by both franchisors and franchisees.  Store visits are efficient, interactive and leave little room for disagreement.  Immediate reports are generated.  Return visits are minimized by the ability of the franchisee to upload proof of compliance.

The integrated program can reduce reliance on secret shoppers and can allow “compliance” personnel to focus on training.  The system also allows franchisees to see compliance as less a matter of “police” work and more a matter of store training.  The fact the system generates comparative reports contributes to franchisees feeling that they are not being singled out and are subject to the same review standards as all other franchisees.

The system is structured to allow franchisors to be charged on a per unit basis.  Assuming proper drafting, this charge can be disclosed and passed on to the franchisee as a matter of ongoing training.

The system is also ideal for the preparation of a package of documents that can be handed (electronically) to counsel in the event enforcement becomes necessary.  The package would contain all franchise documents, notices and evidence which counsel may need.

At Sotos LLP, we represent leading international and national franchisors.  We can assist franchisors in the customization of their compliance programs to ensure their systems are designed optimally to deliver the results which their executive, training, compliance and legal teams want and which benefit their entire franchise networks.

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