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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Required Closure Dates

Generally, the Ontario Retail Business Holidays Act (the “Act”) requires retail businesses to close on the following nine public holidays every year:

1. New Year’s Day,
2. Good Friday,
3. Victoria Day,
4. Canada Day,
5. Labour Day,
6. Thanksgiving Day,
7. Christmas Day,
8. Easter Sunday, and
9. Any other public holiday declared by proclamation of the Lieutenant Governor to be a holiday for the purposes of this Act.

However, some exceptions may apply depending on the type and size of the retail store, what the store sells, the number of employees normally working, as well as other criteria.

Tourism Exemption By-Law 

If your store is not already included in an exemption under the Act, it may be beneficial to apply for a tourism exemption, through the council of the municipality where your business is located.

To be eligible under the Regulations to the Act (the “Regulations”), your retail business must be located within two kilometres of a tourist attraction and be directly associated with the tourist attraction or rely on tourists visiting the attraction for business on a holiday. The requirements may not be as onerous as they first appear:

•  The two-kilometre restriction may not apply to retail businesses located in more rural areas. The Regulations provide that the 2 kilometre requirement does not apply to a local municipality located in a district or regional municipality (or the County of Oxford) having a population of less than 50,000.
• A “tourist attraction” is defined quite broadly, as a natural attraction or outdoor recreational attraction, historical attraction, cultural, multi-cultural or educational attraction.  Successful applications have referred to outlet malls, hiking trails, natural parks, recreational and cultural centres and local wineries as potential tourist sites warranting the tourist exemption.

In terms of establishing an association with a given attraction, that can be as simple as establishing to the council’s satisfaction that the tourists who visit the attraction account for a considerable amount of the grocery store’s sales. Grocery stores often provide a wide range of products that are popular among tourists. For example, tourists to a nearby attraction often stop at the nearest grocery store for pre-packaged meals, snacks, beverages, pharmacy services, general merchandise such as sunscreen or insect repellent and first aid equipment. Tourists coming to the store to obtain these items can be sufficient to show a direct association.

Separate from and in addition to the exemption set out above, retail business establishments in a municipality may be exempted for up to five holidays a year during which a fair, festival or other special event is being held in that municipality (other than parades). If your location is close to fairgrounds or the sites of other holiday festivities, it may be worth applying for an exemption on those grounds.

It is important to note that each municipality may limit the application of the Act to establishments located in their municipality and define their own requirements for holiday closures and exemptions if they pass a by-law providing that the Act does not apply to their municipality. Toronto’s Bylaw, outlined below, is an example of this practice. You should review or request that your counsel reviews the Bylaws of your particular municipality to ensure the Act applies to your establishment.

Toronto tourism exemption

Tourism exemptions from mandatory closures on public holidays in Toronto are unique. Toronto is exempt from the requirements of the Act and instead determines its own requirements under its Holiday Shopping By-Law. The designated holidays are largely the same, but requirements for the tourism exemption may vary.

Currently, Toronto has made certain areas designated tourist areas where retailers may remain open without making an individual application. Specifically, businesses located in the following tourist areas are exempt from Toronto’s Holiday Shopping By-Law:

• Queens Quay West;
• Toronto Eaton Centre and the Hudson’s Bay Company (Yonge & Queen location);
• Downtown Yonge Street Business Improvement Area;
• Bloor-Yorkville Business Improvement Area; and
• Distillery Historic District.

Exemption application 

An application for a tourist exemption under the Regulations must include the following:

1. a description of the area or the retail business establishment for which the exemption is sought;
2. the justification, in relation to the seasonal nature, if any, of the tourist attraction for the time period sought in the exemption; and
3. information establishing that the tourism criteria set out in the Regulation are met.

The base fees required to submit applications are determined by the individual municipalities and can vary between municipalities. Refunds from the municipality for a portion of the application fee may be available for unsuccessful applications. Due to required statutory notice periods, an application will take a minimum of 4 months to process.

Enforcement of mandatory closures if a store opens improperly

Failure to comply with the Act may lead to fines, so obtaining a valid tourist exemption is recommended for grocery retailers who wish to serve customers on statutory holidays.  The minimum fines for retailers who open businesses on prohibited days are $500 for the first offence, $2,000 for a second offence and $5,000 for a third or subsequent offence. However, these are minimums only.  The Act states that retail outlets may be fined up to $50,000 or the total amount of gross sales for the holiday, whichever is greater.

At Sotos LLP, we have decades of experience advising clients on retail grocery issues. Here are three ways that Sotos can help retail grocery businesses:

1. Assistance in obtaining a tourism exemption: Sotos can provide guidance on the criteria for obtaining a tourism exemption and help retail grocery businesses prepare a successful application.
2. Compliance with the Act: Sotos can advise retail grocery businesses on the requirements of the Act and help them ensure that they are compliant to avoid fines.
3. Review of municipal bylaws: Sotos can review the bylaws of your particular municipality to ensure compliance with its requirements for holiday closures and exemptions.

This article was initially published in Canadian Grocer.

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To find the right franchisee and safeguard your brand, it’s critical that, as a franchisor, you have a strategy that you can put into practice to help you identify your future franchisee partners.  This article will help you identify the right franchisees for your specific system, and provides practical advice about how to assess if a prospective franchisee has what it takes to succeed in your system.

1. Business experience. Franchisees are essentially small business owners.  Prior experience operating a business, even if it’s a business type different than the franchise business they may operate, will help to set a franchisee up for success.  Remember, your new franchisee is going to have a lot of learning to do when they are onboarded to the system:  learning your system standards, understanding your brand values and how those are expressed in your daily operations, and any specific or special skills that may be necessary to operate their franchise business.  A franchisee with an understanding of small business fundamentals, such as basic accounting, budgeting, cash flow management, reporting, sales, marketing and hiring and management of employees is already one step ahead.  Franchisees with no business experience may be completely overwhelmed if, at the same time they are completing their system training, and also have to learn everything about operating a business.

2. Alignment with brand values, mission, and culture. “Fit” is going to mean something different to every franchise system, but it’s one of the most important things that franchisors need to consider in evaluating potential franchisees.  A prospective franchisee who otherwise “ticks all the boxes” but has a fundamentally different view of your brand, or of the system and its overall goals and direction is, at best, unlikely to succeed and, at worst, may create significant problems for you and the system, in general.  What’s the best way to identify the elusive “right fit?”  Here are some practical tips:

• Your initial screening and application processes should include at least some questions that directly address your brand’s values and mission. For example, ask some questions about why they are interested in your brand, in particular, and why they think they are right for the system.
• In interviewing a franchisee candidate, ask historical, behaviour-based questions that will help to reveal their personal characteristics and qualities. For instance, if one of your brand values is customer satisfaction, ask them to give you a specific example of a time in their past when a customer satisfaction issue arose, what it was, how they handled the situation, and what the result was.  These types of questions and answers will likely be very helpful to you in assessing whether the franchisee candidate is the person you’re looking for.  Past experience is often the best indicator of future performance.
• You may want to hold a discovery day or other workshop where the prospective franchisee can learn about your brand and also interact with existing franchisees. Not only will the franchisee learn about whether your system is right for them, but you can observe the candidate and assess whether you think they are right for the brand.  For instance, do they seem excited about your brand?  Do they seem engaged?  Do they get along with existing franchisees?  Are they asking good questions?  Your existing franchisees may also be able to provide you with insight on whether the candidate is compatible with your brand.
• You may wish to conduct reference checks. You might speak to previous employers, business partners or colleagues to gain insights into the candidate’s abilities and alignment with your brand values.  Another good idea is to check publicly available sources (a “Google” search, social media feeds, etc.) to see whether the franchisee candidate has a public presence and, if so, whether it reveals anything about them that is in conflict with your brand.
• You may wish to employ good profiling technology and related services. There are services available that will identify the qualities and characteristics of the most successful franchisees currently in your system, and then analyze franchisee candidates to determine whether or not they possess these same qualities.

3. Sufficient financial resources. No matter how much business experience a candidate may have, or how much they seem to fit into your brand’s culture, that franchisee is virtually certain to fail if the franchisee doesn’t have sufficient financial resources to operate.  A new unit that opens and then rapidly closes may harm the reputation of the brand, as may a unit that opens and then has to cut hours or reduce staff to stay afloat.  Franchisors should set clear financial criteria for prospective franchisees.  In particular, franchisors should ensure that prospective franchisees have a sufficient amount of unencumbered liquid assets to meet initial capital expenses, and sufficient initial operating capital to sustain the business until it is able to generate adequate profit.  The creditworthiness of the franchisee’s principal should also be explored.

4. Ambition and dedication. What are the franchisee’s expectations around business ownership and operation?  Do they intend to personally devote their full time and attention to the franchise business?  Do they understand that opening a new business, even a franchise business with excellent franchisor support, can be hard work?  Or do they think that, because the business is a franchise business, it will essentially “run itself”?  Do they believe they can just “hire a manager” to perform all business functions?  It’s important to assess a candidate’s expectations around these important issues.  Most franchise systems require franchisees to devote their full time and attention to the franchise business.  Individuals who understand this from the outset, and are keen to work hard to build a great business, are best placed to achieve success.

5. Understanding of the franchise relationship. While many franchisees are ambitious, want to be “their own boss”, and often have an entrepreneurial spirit, it’s very important for a prospective franchisee to understand the role of a franchisee within a franchise system.  A franchisor should assess whether a candidate understands that a franchisee will need to carefully follow the franchisor’s standards, methods of operation, management techniques, and business practices.  Success as a franchisee depends on the successful execution of these existing practices and standards.  The reputation of the system also depends, in part, on franchisee compliance with system standards.  For example, while it may be that restaurant franchisees can source individual items for prices lower than those offered by a franchisor’s approved suppliers, buying supplies only from approved suppliers is important to ensure consistency across the brand, manage health risks from food-borne illnesses, and achieve overall lower supply costs that are the result of volume discounts and product bundling.  Those candidates looking to “innovate” or “improve” upon the system need to understand, from the beginning, that their aspirations may not be compatible with the role of a franchisee.  It’s important for franchisors to explain to franchisee candidates the role of the franchisor, the role of the franchisee, and how their different functions work together to create the conditions for system success.

6. The right attitude and realistic expectations. It’s critical that the franchisee candidate has the right mindset.  Misalignments between expectations and reality is a recipe for unhappy franchisees and negative brand publicity.  A candidate should have genuine enthusiasm and passion for being a franchisee in your system, and understand what they can achieve with a franchise business.  It’s important that the franchisee candidate have a realistic understanding of the potential profitability of the franchise business.  In particular, it may be a red flag if a franchisee seems interested only in how much money they can make.  Franchisors who elect to directly provide financial information to franchisees must be very careful to do so in accordance with relevant franchise legislation.  Providing earnings claims or historical financial information in the wrong way may lead to significant claims against franchisors in future.

At Sotos LLP, we assist restaurateurs in determining whether to franchise their systems and guide them through the various stages of development and maturity. We also assist franchisors in every aspect of their sales processes. The author can be reached at aboudreau@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.

Overview of Canada’s Single-use Plastic Prohibition Regulations:

Effective December 20, 2022, the Government of Canada has banned the manufacture and import for sale of single-use plastics (“SUP”), including plastic grocery bags, cutlery, stir sticks, and straws through the Single-use Plastics Prohibition Regulations (“Regulations”)[1]. In addition to the items mentioned above, foodservice wares made from hard-to-recycle plastics are also banned effective December 22, 2022, while a ban on the manufacture and import of plastic ring carriers (think six-packs of your favourite beverages) will come into effect in June, 2023.[2]

The Regulations come in advance of Canada welcoming the world to the 15^th Conference of the Parties (COP15) to the United Nations Convention on Biological Diversity, and are a step in the Canadian Government reaffirming its steadfast commitment to addressing plastic pollution and protecting biodiversity in Canada, and around the world. According to the Government, “Over the next decade, this world-leading ban on harmful single-use plastics will result in the estimated elimination of over 1.3 million tonnes of hard-to-recycle plastic waste and more than 22,000 tonnes of plastic pollution, which is equivalent to over one million full garbage bags.”[3] These measures will put Canada among the world’s leaders in the fight against plastic pollution and will help them to meet their commitments to the Ocean Plastics Charter.

Franchised and non-franchised businesses in the retail, grocery and restaurant industry sectors will be required to adjust their customer offerings to adhere to the ban, including by switching to more natural, biodegradable and/or reusable alternatives, such as paper or reusable shopping bags, wooden utensils, paper straws, and fully-recyclable or biodegradable food packaging materials.

Exceptions to the Ban:

Exceptions to the Regulations allow flexible SUP to remain available for people in Canada who require it for medical or accessibility reasons.[4] This includes for use at home, in social settings, or in healthcare settings, such as hospitals and long-term care facilities. SUP items that are not flexible will be prohibited in all circumstances.

More specifically:[5]

• The manufacture and import of SUP flexible straws is allowed;
• Retailers can sell SUP flexible straws in packages of 20 or more, as long as they are not on public display and are only provided if requested;
• Individuals can give SUP flexible straws to others in a family or social setting;
• Care institutions can provide SUP flexible straws to their patients or residents; and
• A business may sell SUP flexible straws in packages of 20 or more to another business.

Additional exceptions are available for waste and bags for containing waste, as well as “products in transit.” Whether a SUP product is considered “in transit” is determined based on the final shipping destination of the product.

Ban will be effective in December 2023

Bans on both the sale and the  manufacture, import, and sale for export of SUP will not begin until December 20^th , 2023. This gives manufacturers and retailers alike time to adjust their offerings and processes. However the government is not currently planning to offer subsidies or other financial assistance to offset the costs of changing from SUP like plastic cutlery to wooden cutlery or even new materials starting to enter the market, like edible cutlery made of cereals.

Stores may also still sell their existing SUP until December of 2023, but that does not mean stores should not start planning for the future now.[6] For example, in 2021, McDonalds eliminated plastic stir sticks, straws and cutlery in more than 1,400 restaurants across Canada, replacing them with wooden alternatives, which saved an estimated 840 tonnes of plastic from landfills annually. Additionally, Sobeys eliminated SUP bags at its checkout counters in 2020, and Walmart followed suit in April, 2022. Finally, Loblaws recently announced it will ban plastic bags by spring 2023.[7]

Store owners need to begin the transition away from SUP by, firstly, assessing how much SUP they currently have stocked, and then evaluating the best way to proceed; whether that be by continuing to normally sell the products until the end of 2023, exporting the products to a jurisdiction where they are not banned, or deciding they can fit into one of the government exceptions. In conjunction with this exercise, plans to gain access to new, approved products will also need to be implemented. Oliver Bourbeau, the vice-president of federal affairs at Restaurants Canada, said there are already supply chain issues at play, mentioning that one restaurant chain with dozens of restaurants in Ontario and Quebec is so far only receiving half of its orders for non-plastic takeout containers.[8]

Due to such supply chain issues, and the substantial expected operational changes that compliance with the Regulations will entail, the costs will likely be high for stores to adopt compliant product policies. In the franchise context, this means that franchisors and franchisees will need to come to an agreement on who will actually bear the costs of changing supply policies in order to maintain viable unit-level economics.

Key Takeaways:

There are a few key takeaways and steps franchised and non-franchised store owners need to take or keep in mind regarding the ban of SUP by the Government of Canada:

1. All store owners should carefully read the Government of Canada’s technical guidelines on what counts as SUP and what falls under the above exceptions. The guidelines can be found here: https://www.canada.ca/en/environment-climate-change/services/managing-reducing-waste/reduce-plastic-waste/single-use-plastic-technical-guidance.html
2. An assessment of inventory should be done, to ascertain compliance of current inventory with the future rules, to give owners an idea of how much SUP inventory they have to sell, export, etc., and to determine how extensive and expensive the changes will be.
3. Retailers should create a workable plan for December, 2023 now. This means speaking with potential suppliers, assessing costs, and in the franchise context, coming to an arrangement with franchisees on how new, potentially large costs will be shared.

If you have any questions about the new prohibitions ore any other regulatory matters affecting your business, please contact Peter Viitre at pviitre@sotos.ca. At Sotos LLP, our lawyers advise businesses in the restaurant and hospitality industry and we look forward to being of assistance to you.

[1] Single-use Plastics Prohibition Regulations 2022-138. Online: https://laws-lois.justice.gc.ca/PDF/SOR-2022-138.pdf
[2] “Change is here: Canada’s ban on certain harmful single-use plastics starts to take effect this month” Government of Canada. December 17, 2022.  Online: https://www.canada.ca/en/environment-climate-change/news/2022/12/change-is-here-canadas-ban-on-certain-harmful-single-use-plastics-starts-to-take-effect-this-month.html
[3] Ibid
[4] “Fact sheet: Exceptions for single- use plastic flexible straws” Government of Canada. Online: https://www.canada.ca/en/environment-climate-change/services/managing-reducing-waste/reduce-plastic-waste/exceptions-flexible-straws-factsheet.html
[5] Ibid.
[6] Supra, note 2.
[7] Mia Rabson, “Government will ban some single-use plastics over the next 18 months” The Canadian Press June 20^th 2022. Online: https://www.cbc.ca/news/politics/plastics-ban-countdown-1.6494379
[8] Ibid.

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Since the regulatory framework in Ontario places the OCS in the middle of the supply chain, the Program cannot fully circumvent the OCS or be structured as a direct pass-through from LP to Retailer.  However, the Program does allow Retailers and Licensed Producers to develop relationships and interact directly. The Program will also allow some Retailers to carry unique product offerings, as compared to their competitors, and will also allow LPs to provide branded products that feature the Retailer’s brand.  LPs will have to work with the OCS to ensure that any obligations they have to Retailers are met, determine the product quantity needed, and ensure that the proper inventory method is used.

In connection with the introduction of the Program, the Alcohol and Gaming Commission of Ontario (the “AGCO”) has updated its standards regarding the provision of inducements from LPs to Retailers. A guidance document, Inducement Rules for Licensed Cannabis Retailers, was released to clarify the changes to the AGCO’s Registrar’s Standards for Cannabis Retail.[2] The changes detail the continued general rule against material inducements, but also highlight new exceptions to this rule. This article will review these new exceptions including with regard to the practice of “white labelling.”

Rule Against Material Inducements

The Registrar’s Standards for Cannabis Retail (the “Standards”) prohibit Retailers from entering into agreements with LPs and their representatives for items, benefits, payments, or services in exchange for the promotion or increased sale of a particular product by the Retailer or its employees.[3] In other words, LPs are prohibited from approaching Retailers and offering them any incentives to promote that LP’s product over other products sold by the Retailer. An example of this would be a Retailer entering into an agreement with an LP whereby the Retailer agrees to promote and increase sales of that LP’s product in exchange for exclusive product features. The provision of exclusive product features would be considered a material inducement by the AGCO and, as such, would be prohibited.

Other prohibited activities or inducements include: the sale of in-store or online advertising space; the provision of cannabis samples for sensory display purposes; the provision of fixtures or physical assets; the provision of items essential to the operation of the business; sales incentives; cash or rebates; travel or accommodation for education or training; and monetary compensation for education or training.[4]

The Exceptions to the Rule:

While the AGCO’s general rule prohibits the provision of material inducements by LPs to Retailers, a few important exceptions do exist, the most important of those being (1) the allowance of items, benefits, or services of nominal value, and (2) the allowance of “white-labelling”.

• Items, Benefits, or Services of Nominal Value:

Retailers may enter into agreements with LPs or their representatives for items, benefits, or services of nominal value. Nominal value items are defined as those of inconsequential value (unlike the prohibited financial and material inducements). The AGCO has not prescribed a specific monetary value above which an item would not be considered “nominal”.  Instead, the AGCO has advised that it will consider the following factors in determining whether the benefit or item would be considered nominal;

• Would a licensee be likely to change their behaviour toward an LP or the LP’s product after receiving the item, benefit, or service?
• Are the items, benefits, or services valued at an amount that would defray the Retailer’s operational costs?
• How many items, benefits, or services have been provided over what period of time? [5]

Retailers should consider these questions when entering into any type of agreement with an LP to ensure that they are not receiving inducements that might be considered material and would, therefore, be prohibited by the Regulations.

• Items, Benefits, and Services Related to Education or Training:

Retailers may accept items, benefits, or services from LPs that are related to education or training. This may include education or training sessions or materials, meals and refreshments during the education or training, and cannabis product samples directly related to education or training. [6]

• Ownership Interest and Franchise Agreements:

Retailers and LPs are permitted to enter into financing, leasing, and franchise agreements. A copy of any such agreement must be disclosed to and approved by the AGCO.  All agreements must comply with the Cannabis License Act, 2018 (CLA)[7] and the Standards. Note that the AGCO will not provide any commentary or explanation regarding its decision to accept or reject a proposed agreement.  As such, it is important that Retailers familiarize themselves with the Standards.

• Store Brand Cannabis Products (White Labelling)

Agreements between Retailers and LPs for store-branded cannabis products (also known as white labels, private labels, and in-house/house brands) are also permitted (“White Label Agreements”).  White Label Agreements allow Retailers to partner with LPs to develop products that include that Retailer’s specific brand. This involves Retailers entering into contractual agreements with LPs for the manufacture and sale of products that are specifically branded for that retail store.[8]  These types of agreements are subject to the same review process by the AGCO as mentioned above.  Retailers should be aware that any branded products will remain available for any other retailer to purchase on the OCS’ “flow-through catalogue,” provided they are part of the Program.

While these agreements are permitted, the AGCO does place certain constraints on their contents.  Retailers and LPs should be cognizant of these rules before entering into any such agreement and seeking AGCO approval.  In particular, White Label Agreements must not:

• Define the amount of product from the LP or its affiliates that must be offered for sale by the Retailer;
• Require a defined amount of display space at the retail space to be dedicated to products from the LP or its affiliates;
• Provide merchandising, marketing, or promotional activities to the LP or its affiliates; or
• Restrict the LP’s ability to have its products sold at other retail stores, or the Retailer’s ability to sell products produced by other LPs (or their affiliates). [9]

White Label Agreements and the Program are intended to benefit smaller LPs and Retailers, as they will enable the OCS to offer more products to Retailers, including products that have a short shelf life or are slower-moving.  It is important that Retailers and LPs monitor how the industry reacts to these changes. White Label Agreements also allow Retailers to further differentiate themselves from their competitors and to build brand loyalty and awareness.

Key Takeaways:

Given the rapid evolution of the cannabis industry, Retailers and LPs alike need to ensure they are familiar with and current on industry developments. The introduction of the OCS’s flow-through program and subsequent changes to the relevant regulations regarding material inducements are two such developments.  Both provide additional growth opportunities for LPs and Retailers but also present a minefield of potential pitfalls if the rules are not properly understood.  Becoming well-versed in the OCS’s Program and the AGCO’s rules regarding material inducements is crucial for Retailers and LPs who want to be able to avail themselves of these new opportunities without costly hiccups.

Anna Thompson-Amadei, Sotos LLP

Anna is an associate with Sotos LLP in Toronto, Canada’s largest franchise law firm. She is the head of the firm’s cannabis practice area. Please contact Anna at 416.572.7322 or athompson-amadei@sotos.ca if you would like to discuss this or any other topic relating to the operation of your business.

Don Houston, Sotos LLP

Don is one of our articling students for the 2022-2023 term.

[1] Brown, David. “Ontario’s New Flow-Through Model and Product Call Timeline, Comes with Pros and Cons, Says Producers and Retailers.” Stratcann September 1, 2021. https://stratcann.com/insight/ontarios-new-flow-through-model-and-product-call-timeline-comes-with-pros-and-cons-say-producers-and-retailers/
[2] Brown, David. “Ontario Chamber of Commerce Concerned with Province’s Plan to Ban In-House Cannabis Brands and Products” Stratcann March 4, 2022 https://stratcann.com/news/ontario-chamber-of-commerce-concerned-with-provinces-plan-to-ban-in-house-cannabis-brands-and-products/
[3] “Cannabis Retail Regulation Guide” Alcohol and Gaming Commission of Ontario https://www.agco.ca/book/export/html/19736
[4] “ Guidance Document- Inducements Rules for Licensed Cannabis Retailers” Alcohol and Gaming Commission of Ontario https://www.agco.ca/guidance-document-inducements-rules-licensed-cannabis-retailers
[5] Ibid
[6] Ibid
[7] Cannabis Licence Act, 2018, S.O 2018, C.12, SCHED 2.
[8] Maurer, Matt, “The “Return” of White-Labelling is a win-win-win for LPs, Retailers, and Consumers” Grow Opportunity. June 1, 2012.      https://growthopportunity,ca/legal-matters-2/?utm_source=rss&utm_medium=rss&utm_campagin=legal-matters-2
[9] Supra, note 4

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The six items being banned by the Regulations include: (1) checkout bags, (2) cutlery, (3) foodservice ware made from or containing problematic plastics that are hard to recycle, (4) ring carriers, (5) stir sticks, and (6) straws (with some exceptions, see below).

Business owners should be aware of the following key dates:

• The prohibition on the manufacture and import of checkout bags, cutlery, foodservice ware, straws (not packaged with a beverage container), and stir sticks will come into effect as of December 20, 2022.
• The prohibition on the sale of checkout bags, cutlery, foodservice ware, straws (not packaged with a beverage container), and stir sticks will be effective as of December 20, 2023. This will grant businesses 1 year to deplete existing stock.
• A ban on ring carrier manufacturing and import will be effective as of June 20, 2023.
• A ban on the sale of ring carriers and straws packaged with beverage containers (e.g. juice boxes) will come into effect as of June 20, 2024.
• A ban on the export of all six items by December 20, 2025. Note that banning exports was added to the final regulation, as it was not included in the government’s original proposal.

The Regulations include a number of exceptions to the ban, which exceptions include:

• Single-use straws for accessibility: The Regulations permit hospitals, medical facilities and long-term care facilities to sell single-use plastic flexible straws to patients or residents.
• Waste and bags for containing waste: The Regulations do not apply to plastic manufactured items that are waste, nor to items that are intended to hold waste (and do not meet the definition of single-use checkout bags).
• Products in transit: The Regulations do not apply to plastic manufactured items that are transiting through Canada. Whether a single-use plastic product is considered “in transit” is determined based on the final shipping destination of the product.

The announcement concludes almost 2 years of consultations with provincial and municipal governments, industry and individual Canadians. The public consultation process included a Science Assessment of Plastic Pollution, a discussion paper on an integrated management approach to plastic products, and a draft regulation.

During the press conference announcing the publication of the Regulations, Minister Guilbeault stated that Canada is not opposed to restricting additional items in the future. He also acknowledged that the plastic pollution problem cannot be solved through bans alone and that other actions are necessary to reach the government’s goal of zero plastic waste by 2030.

The Regulations are part of a larger movement, as outlined in Canada’s Zero Plastic Waste Agenda, which includes developing targets, standards and further regulations aimed at eliminating plastic pollution in Canada in the years to come.[2]  Businesses should continue to evolve to meet new requirements and find alternatives to single-use plastics being produced, sold or used in their operations, including researching, testing and comparing alternative products and contacting existing suppliers to determine if they have suitable product offering capabilities.   Lastly, businesses should refer to the government’s guidance document, which is intended to help businesses and organizations adapt to the proposed requirements and outlines important considerations for businesses navigating alternative products or systems. [3]  Business owners should familiarize themselves with this guide to ensure that their business decisions are aligned with the new Regulations and industry best practices.

At Sotos LLP, our team of industry experts has provided strategic advice to business owners in the development of best practices that respond to and address issues arising from the ever-evolving legal landscape for over 40 years.

Anna Thompson-Amadei, Sotos LLP

Anna is an associate with Sotos LLP in Toronto, Canada’s largest franchise law firm. She practices business law with a focus on franchising, licensing, and distribution. Please contact Anna at 416.572.7322 or athompson-amadei@sotosllp.com if you would like to discuss this or any other topic relating to the operation of your business.

Read part I and II of this article. 

[1] https://www.canada.ca/en/environment-climate-change/news/2022/06/government-of-canada-delivers-on-commitment-to-ban-harmful-single-use-plastics.html
[2] https://www.canada.ca/en/environment-climate-change/services/managing-reducing-waste/reduce-plastic-waste/canada-action.html
[3] https://www.canada.ca/en/environment-climate-change/services/managing-reducing-waste/consultations/proposed-single-use-plastics-prohibition-regulations-consultation-document.html

The post Single-Use Plastics Ban – Update III appeared first on Sotos LLP.

Given the significance of this juncture in the evolution of a franchise system, it is crucial that franchisors first have regard to certain fundamental initial considerations before they decide to extend beyond their national borders. With that in mind, the following are five key questions that franchisors should answer when considering international expansion for their brands:

1. Are you pushing or being pulled?

Many franchisors expand internationally as a result of a foreign national experiencing their brand during a trip abroad. The individual loves the franchisor’s concept and believes it can work in their country.

Following an expression of interest, the franchisor, enticed by the prospect of selling into a new country and earning a significant fee from the prospective master franchisee or area developer, decides to franchise their concept in a foreign country.

This scenario is an example of a franchise system being “pulled” towards international expansion. While excited to grow internationally, albeit through the initiative of others, franchisors in this situation have done little, if any, research into the details of the expansion into the target country to their own potential detriment.

In contrast to this passive expansion strategy, franchisors should instead be actively considering the prospect of international franchising when they start their growth phases. They should be dedicating time to the prospect of “pushing” their concept into international markets. Among other things, this includes conducting certain critical investigations, such as:

• Who is my competition and who owns my competition?
• What are the local laws?
• In what way will my system need to be adapted to account for local preferences?
• How will my supply chain work?
• Is growing internationally the best use of my available resources?

2. Do you appreciate the potential impact on your intellectual property?

Most franchisors begin franchising with a trademark which they have either registered or have made an application to register with an opinion of its likely registrability.

It is critical to ensure that a franchisor’s trademark is protected in the country they are looking to expand into. That is, if a franchisor gives up the use of its trademark to third parties, for example to a master franchisor or unit franchisees, it needs to understand the chances of that trademark being unrecoverable to them at law or in practice if there is a breach of their intellectual property rights contained in their initial agreements.

In too many cases, franchisors only get one chance to get this right. Practically speaking, the loss of control over their own brand will mean that no second chance will be possible.

3. What is the best way to expand?

Franchisors typically expand internationally through master franchising or area development agreements, though often by way of a new legal franchisor entity to address tax and liability considerations. Each model has its pros and cons for international expansion.

Errors are often made choosing which model to utilize without the franchisor first appreciating the business issues associated with each. For instance, international franchising can be a very “skinny” model for the master franchisee. It must operate an entire franchise system with a fraction of the fees that the master franchisor receives when it operates its own national system.

This model can place a great deal of financial pressure on the master franchisee which can lead to failure. Getting the economic balance right between the franchisor and its international partners is critical for long-term success. Both sides need to win. If either loses, the whole effort is likely to fail.

The vast majority of the largest international franchisors are American-based. There are many resources and dedicated experts in international franchising available which have developed from that market. Moreover, most international practitioners have a tight network of reliable, capable colleagues across the globe that know the ropes and can guide a franchisor focused on international expansion to success. Given this, there is no reason for a franchisor looking to expand internationally to reinvent the wheel.

Picking the right first country to expand into is an important decision to be made. For instance, for Americans, coming to Canada may be a logical first start to international franchising. The reverse however might not be the case.

4. Do you know your partners?

Choosing any foreign partner, whether as a master franchisee, area developer or unit franchisee, is always more challenging than selecting a partner in one’s own country. For example, language and cultural differences can raise obvious concerns. Some franchisors look for their international partners to be the experts in their country that will do all the leg work while the franchisor simply provides the name and the system. Similarly, some franchisors off-load the responsibility of creating local legal agreements to their international partners.

Time must be taken to know your prospective international partner(s), to assess their capabilities, resources and competing interests, and to learn from them and with them. Doing so will naturally increase the likelihood of securing a partner with greater experience, knowledge, local expertise and possession of valuable assets (for example, they may operate a portfolio of brands or control critical real estate).

It is also essential that local legal counsel be engaged to negotiate the transaction and ensure compliance with any local laws affecting the proposed agreement or relationship. Franchisors can use experienced counsel in their own countries to work with external foreign counsel to assist in the process and help the franchisor navigate through the issues.

5. Are you prepared to stay involved?

The commitment to international franchising requires more than the decision to do so and a resulting agreement with an international partner. It is critical for franchisors to remain hands-on in these foreign markets regardless of the expansion model they follow.

For example, most international deals contain quotas and expectations on the local partners in respect of the growth of the brand in their jurisdictions; however, these are frequently not met. It is imperative for a franchisor to stay connected, stay involved, provide support, watch for signs of trouble and know what it is looking for in the market.

It is a commonly stated rule of thumb that it takes five years of focused research and planning to maximize the chances of success in international franchising.

Franchisors can apply many of the lessons they learned when growing locally, regionally and nationally to an expansion beyond their national borders. Fortunately, international franchising is now a well-developed model and there are professionals dedicated to this aspect of the franchising industry.

As Canada’s largest franchising law group, Sotos LLP has assisted many international franchisors in their efforts to come to Canada and in taking Canadian brands international. The firm has developed a large network of local experts in many countries with whom the firm members have worked in helping to guide all manners of international franchising to success.

This article was originally published in the Global Franchise Magazine.

The post The Fundamental Initial Considerations for International Franchising appeared first on Sotos LLP.

The government has asked stakeholders, partners, and Canadians to participate in the consultation period, which will run to March 5, 2022.  The plastics ban is slated to be implemented by the end of next year after the government has completed its review and consideration of comments from these consultations.[1]

Environment and Climate Change Minister Steven Guilbeault has said “Smart, clear and collaborative regulations will help drive innovation across the country as reusable and easier-to-recycle items take their place in our economy.” In November 2021, the government announced plans to invest $3.5 million in Montreal-based clean-tech company Polystyvert.[2]

While the ban of single-use plastic manufacturing and import is expected to come into force one year after the proposed regulations are registered, the manufacture and import of single-use plastics for the purposes of subsequent export outside of Canada is not subject to the proposed regulations.  The prohibition on the sale of single-use plastics is expected to come into force two years after the proposed regulations are registered.[3]

The federal government, as well as provincial and municipal governments, are likely to continue to expand and develop future regulations that will result in more plastic products and packaging being banned, or at least restricted.  It is imperative that businesses continue to evolve accordingly and consider alternatives to single-use plastics being produced, sold, or used in their operations.  While these regulations are almost 2 years away from being implemented, businesses can start taking steps to prepare. Namely:

• Consider current product offerings and whether or not they will still be sustainable as a result of the single-use plastics ban.
• Begin researching, testing, and comparing alternative products.
• Contact existing suppliers to determine if they have suitable product offering capabilities and, if not, begin researching alternative suppliers.

Further, the government has developed a guidance document to help businesses and organizations adapt to the proposed requirements.  The document outlines important considerations for businesses navigating alternative products or systems from those single-use plastics that the new legislation will ban.  It also provides a “management framework for single-use plastics”, which outlines the three steps that the government follows in assessing the environmental impact of a single-use plastic item. [4]  Business owners should familiarize themselves with this guide in order to align their business decisions with industry best practices.

At Sotos LLP, our team of industry experts has been helping business owners in the development of best practices that respond to and address issues arising from the ever-evolving legal landscape.

Anna Thompson-Amadei, Sotos LLP

Anna is an associate with Sotos LLP in Toronto, Canada’s largest franchise law firm. She practices business law with a focus on franchising, licensing, and distribution. Please contact Anna at 416.572.7322 or athompson-amadei@sotosllp.com if you would like to discuss this or any other topic relating to the operation of your business.

Read part I and III of this article. 

[1] https://www.canada.ca/en/environment-climate-change/news/2021/12/government-of-canada-moving-forward-with-banning-harmful-single-use-plastics0.html
[2] https://www.canada.ca/en/innovation-science-economic-development/news/2021/11/government-of-canada-supports-leading-edge-company-specializing-in-polystyrene-recycling-that-helps-protect-the-environment.html
[3] https://www.gazette.gc.ca/rp-pr/p1/2021/2021-12-25/html/reg2-eng.html
[4] https://www.canada.ca/en/environment-climate-change/services/managing-reducing-waste/consultations/proposed-single-use-plastics-prohibition-regulations-consultation-document.html

The post Single-Use Plastics – Update II appeared first on Sotos LLP.

The legislation will ban single-use plastic items for which there is evidence that the items are found in the environment, as well as items that have readily available alternatives.  Based on this criteria, the Government proposes to ban the following items:

• plastic checkout bags
• straws
• stir sticks
• six-pack rings
• cutlery
• food ware made from hard-to-recycle plastics

The Government also proposes to establish recycled content requirements in products and packaging.

The ban will be instituted by introducing an order to add “plastic manufactured items” to Schedule 1 of the Canadian Environmental Protection Act, 1999 (“CEPA”).  CEPA is the Government’s principal law for addressing pollution, and includes tools to address plastic pollution at different stages of the lifecycle of plastic manufactured items, such as manufacturing, imports, sale, use and disposal.

While the ongoing COVID-19 pandemic has increased consumer demand for takeout and delivery and, as such, has made the need for single-use items more important than ever before, Environment Minister Jonathan Wilkinson has stated that the federal government will work with grocers and industry leaders to keep more plastic in the economy through recycling.  When asked how small businesses will handle the shift, Wilkinson stated that the government was careful to choose items with environmentally-friendly alternatives that already exist on the market.[2]  In response to the ban, Restaurants Canada has stated that it will continue to advocate for policies that avoid any undue burden on businesses that rely on single-use items to provide takeout and delivery services.[3]

At Sotos LLP, our team of industry experts has been advising food and beverage business owners in the development of best practices that respond to and address issues arising from the ever-evolving legal landscape.

Anna Thompson-Amadei, Sotos LLP

Anna is an associate with Sotos LLP in Toronto, Canada’s largest franchise law firm. She practices business law with a focus on franchising, licensing, and distribution. Please contact Anna at 416.572.7322 or athompson-amadei@sotosllp.com if you would like to discuss this or any other topic relating to the operation of your business.

Read part II and III of this article. 

[1] https://www.canada.ca/en/environment-climate-change/news/2020/10/canada-one-step-closer-to-zero-plastic-waste-by-2030.html

[2] https://www.cbc.ca/news/politics/single-use-plastics-1.5753327

[3] https://www.restaurantscanada.org/industry-news/advocacy-update-single-use-items/#:~:text=As%20part%20of%20a%20plan,Replaceable%20with%20readily%20available%20alternatives

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