Franchisee dissatisfaction: What is counsel’s game plan?

It is important for franchisors to understand what happens when one of its franchisee’s concerns relating to the franchised business arrives at franchisee’s counsel’s desk.

Whether a franchisee is complaining about such things as:

1. lack of support,
2. potential encroachment,
3. renewal or transfer issues,
4. accounting matters,
5. a perception that the franchisee is being treated differently from others,

experienced franchisee counsel tend to approach the initial communication with the franchisee through seven lines of inquiry.

Firstly, counsel will want to know if the franchise agreement is less than 2 years old and will want to see the disclosure document provided to the franchisee if the business being operated is in one of the five Canadian provinces that have franchise legislation.

Secondly, counsel will want to know how many other franchisees share the complaints.

Thirdly, counsel will want to know if there is an effective franchisee association or advisory council.

Fourthly, counsel will want to examine the franchise agreement to know whether there is a specified dispute resolution process.

Fifthly, counsel will want to try to assess if the franchisee is simply in the wrong business.

Sixly, counsel will need to assess the franchisee’s ability to fund counsel.

Only then, and seventhly, will franchisee counsel necessarily examine the merits of the dispute.

The first line of inquiry is intended to determine if the franchisee may have a right to rescind or cancel the franchise agreement under provincial law. This remedy, if available due to the franchisor’s failure to comply with its disclosure obligations, provides the franchisee and its counsel with significant options and leverage in dealing with the franchisee’s concerns.

The second layer of inquiry is intended to determine if there is more than one potential “complainant”. Most franchisees are not financially able to pursue franchise disputes on their own. Litigation is costly and can take years to be resolved. Since most franchisee complaints are systemic in nature, a franchisee’s complaints can give rise to group or even class action possibilities as well as group or even class negotiation possibilities.

The third layer of inquiry is for counsel to assess whether the franchisee and perhaps like- minded others ought to be raising the complaints through internal systems. Effective franchisee associations and advisory councils are intended to be places and means for franchisees to communicate issues to the franchisor and provide suggestions for potential solutions. Franchisors often need to hear the complaint expressed through an association executive or advisory council to better understand or appreciate the issue and consider potential solutions.

The fourth layer of inquiry is a necessary starting point in strategizing the approach to be taken to potentially having the dispute determined by a third party. Franchise agreements often contain arbitration provisions which will typically be upheld by the courts. They may also contain pre- conditions to litigation or arbitration such as mandatory pre-action/arbitration mediation. They may contain notice requirements where the franchisee must first submit the matter of the dispute to the franchisor in writing for the franchisor’s consideration and response. Again, courts tend to uphold these pre-conditions. Although often seen as a means by which the franchisor can delay the resolution of the problem, provisions of this sort also provide means and process for early discussion and negotiation.

Franchisee counsel may well be able to determine that the franchisee is actually ill-suited for the business. Franchisees’ expectations for what they are getting from their franchisors to allow them to operate the business successfully are often misguided. Initial training may not expose a franchisee’s inherent weakness as an operator or lack of true intent in doing the things that are necessary to successfully operate the business. Franchisees can themselves be one of the contributors to the dispute including the way in which they communicate their concerns, deal with head office personnel or focus on the wrong issues. Assessing whether the particular relationship is not salvageable or is not worth salvaging is an important role for franchisee counsel. This realization can factor greatly into the setting of goals and strategies on behalf of the franchisee.

Fundamentally, therefore, the consideration of a franchisee’s issues must occur in the context of understanding that:

1. the relationship and the formation of the contract giving rise to the relationship are subject to provincial franchise legislation in many Canadian jurisdictions;
2. the parties are governed by contractual rights and obligations;
3. the dispute often arises in the context of an ongoing and potentially long term business relationship which presents its own opportunities and special considerations;
4. there is often a great discrepancy in the information and resources available to the franchisee and its franchisor; and
5. many franchisee complaints are systemic. Given the systemic nature of franchising, this is to be expected. Systemic problems present unique opportunities for their consideration and resolution.

With this understanding, franchisors are well-advised to take every complaint being raised by a franchisee seriously and make all reasonable efforts to try to address the complaints through good and proper communications, involvement of the association or council and a bigger picture assessment of what the concern being raised is and what it could lead to. As importantly, franchisors should regularly be taking the pulse of the system to assess to what extent there may be issues and concerns, who is raising them, how and where they are being raised and what approach should be taken to allow the concerns to be contained, addressed and resolved.