Keeping franchisees in the loop

Keeping franchisees in the loop
If the Ontario Superior Court’s Feb. 24 ruling of Fairview Donut Inc. v. The TDL Group Corp. taught us one thing, it’s that good communication counts.

In the class action, Tim Hortons’ franchisees claimed it breached their franchise agreement and its duty of good faith and fair dealing by switching from fresh-baked goods to “Always Fresh” partially pre-baked goods. It also required them to introduce a lunch menu, which they claim increased their costs and forced them to sell the products at a loss.

There have been many cases where the franchisees had a leg to stand on because the franchisor made major business decisions without a paper trail proving it considered the franchisees’ interests. This wasn’t one of those cases. It’s clear that Tim Hortons’ communication strategy is one other franchisors can learn from.

“The franchisor engaged in extensive discussion and communication with its franchisees before the Always Fresh conversion and the change was supported by the majority of franchisees,” Justice J. Strathy said in his summary judgement. “The franchisor informed the franchisees that the cost of raw materials would increase under Always Fresh, but that this would be offset by labour savings and other savings and conveniences. The experience of the franchisees over time has confirmed this assertion.”

Although the plaintiffs appealed Strathy’s decision, the Court of Appeal upheld it in December, dismissing the appeal entirely.

Until this case, franchise legislation — which has evolved over the past decade in Alberta, Ontario, Manitoba, New Brunswick, and PEI — has appeared to be fairly one-sided. After years of franchisors having the upper hand, the new legislation was partly designed to even the playing field.

“Because the franchisor/franchisee relationship is such a close one, and it’s one in which the franchisor exerts such strong control of all aspects of the franchisee, the courts have placed it in a separate category,” says Jonathan Lisus, partner with Lax O’Sullivan Scott Lisus LLP. “Because of this extra level of scrutiny, franchisors need to have good communication to protect themselves from disputes with franchisees.”

Good faith and fair dealing
The franchisor/franchisee relationship is different than your traditional business relationship. In many ways, the two parties are joined at the hip — and the franchisor is required to maintain an extremely detailed level of control over all aspects of the business, from trademarks to marketing strategies. This creates plenty of opportunity for things to go awry and for the franchisee to become disgruntled.

“I think franchisors understand that communication is important, but it becomes difficult when there’s unrest,” says Jennifer Dolman, partner with Osler Hoskin & Harcourt LLP. “In slow economic times, people aren’t doing as well and they can become unhappy. Or sometimes just a couple of franchisees realize they got into something they didn’t expect. It’s fair to say that if you’re too entrepreneurial, a franchise system might not be for you.”

The courts understand, given the nature of the relationship, disputes are bound to arise. What they’re primarily looking for is that both parties are living up to their statutory duty of good faith and fair dealing. This is where a strong communication plan can come in handy.

“If the franchisor ever gets into litigation with the franchisee, it’s important to be able to demonstrate there has been reasoned communication,” says Lisus. “When one looks closely at the big cases, there’s a common element to many of them — the franchisor imposing important changes on the system or dealing with important issues in a way the court perceives to be autocratic. Those cases inevitably end badly for franchisors. If you look at the cases where franchisors do very well, it’s when they’re able to demonstrate very clearly that they’ve had robust, well-managed communication with their franchisees.”

So what does a good communication plan entail? Well, it likely starts with a clear, unambiguous disclosure document and franchise agreement — but it goes a lot deeper than that. The key is to create a culture that prioritizes open dialogue and communication, and the rest of the process should naturally fall into place.

“As legal counsel, we have an obligation to make sure agreements are very clear. But, in many ways, a franchise relationship is like a marriage. When was the last time you settled a marital argument by pulling out a legal agreement?” says Liisa Kaarid, vice president, legal counsel, franchising and Ontario operations at Loblaw Companies Limited.  “If you keep an open dialogue, you hopefully never have to look at what the contracts say.”

Walk a mile in their shoes
One of the most important steps a franchisor can take is to ensure there are plenty of representatives in the field to gather ongoing feedback and pass along franchisee concerns. During tough economic times — or if a company is growing rapidly — it can be tempting to either cut field staff or put off hiring them, but this can be detrimental to the business.

“It’s so much faster to send e-mails back and forth, but you have to devote the resources to have people go into the stores,” says Kaarid. “You never really know what the franchisees are talking about until you see it with your own eyes. You need those people in the field who understand what the operators are going through.”

With a good field team in place, operators may also be more likely to talk to them when they have a problem, as opposed to talking to one another. This can potentially prevent the problem from escalating and reaching litigation, if it’s handled effectively. While many franchisee concerns can seem unfounded, it’s important to listen to them to gauge whether or not they have merit. Sometimes an isolated complaint might have broader implications, or future implications, that you hadn’t considered.

“It’s always important to keep the group interests — of both franchisors and franchisees — in mind,” says Kaarid. “That makes it easier to go through complaints. You’re never going to satisfy everyone, but at least they have a voice.”

Creating a paper trail
Of course, when big changes are being rolled out, a formal communication plan has to be in place. While the business side of the franchise may want it rolled out immediately — to beat out the competition or alleviate market pressures — it’s important to note that a few extra weeks of proper planning could save months in litigation.

“Sometimes business and legal folks operate in silos. The most successful franchisor systems have an embedded lawyer in their business decision-making side,” says Kaarid. “The lawyer is better informed as to the business’ needs, and they can shape how things are going to move early on — so legal issues aren’t raised down the road.”

A strong communication plan makes use of typical communication materials — such as informative memoranda, e-mails, and newsletters — but it also relies on two-sided communication. Advisory counsels (made up of independent franchisees), pilot projects, or annual conferences are just a few ways franchisors can communicate business changes and receive franchisee feedback simultaneously.

“What the courts look for is transparency,” says Lisus. “Are the franchisors giving franchisees enough information to understand the economics of the relationship? If a franchisor is going to impose financial changes, it has to explain how and why it’s doing it.”

Lisus recommends paying particular attention to internal communication as well.

“There are instances where franchisor staff engaged in internal e-mails and silly things were said about franchisees,” he says. “These are admissible in court. Franchise systems are very porous and things are often leaked.”

At the end of the day the courts aren’t asking franchisors to divulge everything to the franchisees, or solely act in the best interests of the franchisee without concern for themselves. But the courts are asking franchisors to be fair when making big decisions — and show consideration for the franchisees’ well being.

“The courts will be quite receptive to franchisors just as they will be protective of franchisees,” says Lisus. “They will be equally protective of a franchisor that operates in a competitive environment and who makes every effort to responsibly communicate with the franchisees.”

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