Franchise Lawyers - Article 1

How is a Franchisor to Deal with a Franchisee Association?
By Javad Heydary


Many franchisors may become unnerved upon learning that their franchisees have decided to form an Independent Franchisee Association (“IFA”). Indeed, as a franchisor, your first impression may be that it is a new threat to your franchise system. IFAs are self-governing organizations created and managed by franchisees. By definition, IFAs are formed to serve only the franchisee’s interest and, as a result, they are usually perceived as being at odds with the franchisor’s interests.
Many jurisdictions such as Ontario prohibit a franchisor from interfering with the formation or operation of an IFA. However, you do not have a legal obligation to deal with an IFA. As such, y our first inclination may also be to just ignore the IFA.
Nevertheless, it is prudent to avoid adopting a negative or apathetic attitude towards an IFA. Disgruntled and united franchisees may resort to actions such as royalty strikes or group litigation that are detrimental to the interests of the franchisor. To protect your franchise system, here are some practical recommendations for franchisors when an IFA appears on the horizon.
Understand your franchisees
Your franchisees have invested time, money, and efforts together to set up the IFA. As such there must be compelling reasons as to why they felt the need to expend such resources to form the IFA. Thus, the first step you should take is to understand your franchisees’ motivations for forming an IFA.
One common motivation driving the formation of an IFA is the lack of adequate communication between the franchisor and the franchisees. Another typical reason may be that franchisees believe they have different interests than those of the franchisor and can only protect their interests if they act in concert as part of an IFA. In either case, the sooner you understand the specific reason(s) motivating the franchisees in forming the IFA, the more likely that you will be able to effectively deal with any potential threats posed to the system.
Use a franchisee association as a communication tool
The IFA as a communication tool is not only important for franchisees, but also a good way for you as the franchisor to receive feedback from franchisees and to communicate system concerns to franchisees. For example, as long as franchisees believe they have an effective way to communicate with you, chances are they will not rush to take potential disputes to court.
The IFA is also a good vehicle to identify, discuss and resolve system-wide problems. In IFA meetings, you can learn of important system-wide concerns from a franchisee prospective and address them in collective manner as opposed to dealing with individual franchisees one at the one time which approach is time consuming and which can also lead to unfounded suspicions by the franchisees and claims of preferential treatment from disgruntled franchisees.
Finally, an IFA can be utilized by a prudent franchisor as a tool to instill the feeling of empowerment in the franchisees. Franchisees that feel their franchisor is taking a positive approach to their IFA are more likely to feel that they are participating in the success of the system as partners with the franchisor, as opposed to believing that that interests are adverse to that of the franchisor.
A franchisee association is opportunity to make lemonade
Once an IFA is formed in your system, your initial thoughts might be to view it as a negative development. However, in most cases, this is simply not the case in that an astute franchisor will view the formation of an IFA as an opportunity to improve the system. At first brush, an IFA, like lemon, tastes sour to a franchisor but it can become a refreshing drink in the hands of a smart franchisor.


Franchising Related Publications:
How is a Franchisor to Deal with a Franchisee AssociationFranchise Canada Magazine, January 2009 Javad Heydary
Ontario's Franchise Law The Business Exchange, February 2004 David Alderson
Legal Aspects of Purchasing a Franchise The Commercial Investor, March 2004 Javad Heydary & David Alderson
Buying a Business: Selected Due Diligence Issues The Business Exchange, July 2003 Robert J. Hamilton & Javad Heydary
Private Equity Funding: Securities Law Considerations Robert J. Hamilton & Javad Heydary The Business Exchange, February 2003
Fundamentals of Corporate Law The Business Exchange, March 2004 Javad Heydary
Introduction to Retail Lease Agreements The Business Exchange, December 2003 David Alderson

Selected Canadian Franchise Court Decisions:
1017933 Ontario Ltd. v. Robin's Foods Inc.
1490664 Ontario Ltd. v. Dig This Garden Ltd.
1518628 Ontario Inc. v. Tutor Time Learning
475878 Alberta Ltd. v. Help-U-Sell Inc.
Ahmed v. 3 for 1 Pizza & Wings (Canada) Inc.
Ali v. Triple 3 Holdings Inc.
Andersson v. Second Cup Ltd.
Bawitko Investments Ltd. v. Kernels Popcorn Ltd.
Ellis v. Subway Franchise Systems of Canada Ltd.
Izzetpanah v. 1 for 1 Pizza Ltd.
Jumbo Systems Inc. v. Short
Khachikian v. Williams
Khagen Investments Ltd. v. 710497 Ontario Ltd.
Machias v. Mr. Submarine Ltd.
Majdpour v. M & B Acquisition Corp.
Merv's Catering Restaurant & Bakery Ltd. v. Boileau
More Than Meats (Forest City) Inc. v. 1058335 Ontario Inc.
Mr. Submarine Ltd. v. Sowdaey
Parks West Mall Ltd. v. Jennett
Payne Environmental v. Lord and Partners
Pointts v. 754974 Ontario Inc.
Shelanu Inc. v. Print Three Franchising Corp.
Synergism Arithmetically Compounded Inc. v. Parkwood Hills Foodland Inc.
Tierney v. Coffee Time Donuts Inc.
Tobmar Newstands Inc. v. 1191767 Ontario Inc.
Waldens v. 887985 Alberta Ltd.
Franchise Laws:
Ontario
Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000, Chapter 3
Ontario Regulation 581/00 (amended to O. Reg. 199/05)
Alberta
Franchise Act, R.S.A. 2000, c. F-23
Franchises Regulation, Alta. Reg. 240/1995
Franchises Act Exemption Regulation, Alta. Reg. 312/2000


Heydary Hamilton PC: Franchise Lawyers