In times of actual or threatened disputes, a franchise system’s franchisees may attempt to create consolidated bargaining power against the franchisor by forming a franchisee association. More of these associations are developing in Canada, and many have long been established in the United States. When faced with a potential or existing franchisee association, there are a number of issues that a franchisor may wish to consider when deciding whether and/or how to deal with the franchisee association.
The right of franchisees to associate
Franchisors must be aware that franchisees have a statutory right to associate. The franchise specific legislation in each of the regulated provinces in Canada (i.e., Alberta, Ontario, Prince Edward Island, New Brunswick, Manitoba and British Columbia) contains an express provision giving franchisees this right. Generally, the legislation provides that a franchisee may associate with other franchisees and may form or join an organization of franchisees. The legislation also prohibits a franchisor from interfering, prohibiting or restricting, by contract or otherwise, a franchisee from forming or joining an organization of franchisees or from associating with other franchisees. Further, a franchisor must not, directly or indirectly, penalize, attempt to penalize or threaten to penalize a franchisee for exercising the franchisee’s right to associate. If a franchisor contravenes a franchisee’s right to associate, the franchisee has a right of action for damages.
Although franchisors must not interfere with the right of franchisees to associate, the law does not require franchisors to recognize franchisee associations. Nor does the law require franchisors to deal with franchisee associations. Courts have confirmed that the right to associate does not impose such positive obligations on the franchisor. For example, in the recent Ontario case Trillium Motor World Ltd v General Motors of Canada Ltd (2015 ONSC 3824), the court emphasized that the plain and ordinary meaning of the relevant statutory provision could not be read as requiring franchisors to facilitate or encourage association, or to do anything beyond refraining from activities that inhibit association.
Circumstances leading to the formation of a franchisee association
In practice, a franchisor’s approach to dealing with a franchisee association will likely depend on more than meeting the franchisor’s strict legal obligations. In particular, the approach may also depend on who is behind the franchisee association, the reasons for which it was formed and what its agenda and purpose is.
As noted above, franchisee associations are typically formed in times of actual or threatened disputes in order to try to consolidate bargaining power against the franchisor. A common basis for the creation of an association is a belief by franchisees that their viewpoints are being ignored by the franchisor. To the extent that improving communication between the franchisor and franchisees is a valid goal in the circumstances, the franchisor may view a franchisee association as an opportunity to create an effective two-way communication channel. Indeed, some franchisors have developed close working relationships with franchise associations. Where the system can foster cooperative dialogue and consultation with a franchisee association, franchisors may benefit from insight into concerns and opposition before they lead to significant disputes. Franchisors may also be able to work with franchisee associations to develop system-wide solutions for any number of issues, from implementing changes to an advertising strategy to assisting with ongoing training.
However, a cooperative relationship may not always be viable. Where members of a potential or actual franchisee association are combative and there is a significant amount of distrust, a franchisor may want to avoid legitimizing that association. For example, the franchisor may want to
- avoid acknowledging, commenting on, referring to or discussing the potential or actual formation of a franchisee association
- refrain from facilitating the franchisee association (e.g., refrain from providing contact information for existing franchisees)
Franchisee associations and franchisee advisory councils
When deciding whether and how to deal with a franchisee association, franchisors may also wish to consider the option of creating a franchisee advisory council (FAC). Unlike franchisee associations which are completely independent, franchisors may appoint the FAC to act as an intermediary and provide franchisee input. An FAC could be useful either as a way to avoid or neutralize a combative franchisee association, or as a better alternative to any franchisee association. In any event, to be effective, an FAC must be a credible and meaningful voice for franchisees and not just a hollow vehicle controlled by the franchisor. To achieve this, the franchisor may want to consider the following:
- ensuring that franchisees can have items of discussion added to the FAC meeting agendas
- ensuring that items added to the FAC meeting agendas by franchisees are discussed and meaningfully considered by the FAC and franchisor
- promptly and consistently circulating the minutes of FAC meetings to all franchisees and/or posting the minutes on a franchisee portal
- ensuring an appropriate frequency of FAC meetings
In many cases, dealing with an FAC instead of a franchisee association will be preferable. Franchisors have more control over the way the FAC operates and can therefore ensure that its function reflects the interests of the franchise system as a whole.
Interference with the right to associate
Regardless of whether a franchisor decides to engage with a franchisee association or to set up an FAC, they should take every effort to ensure that their management, field representatives and other employees are clearly aware of the right of franchisees to associate and the restrictions in franchise legislation prohibiting interference with that right. Failure to do this could result in legal action and damages resulting from the prohibited activity. Franchisors may want to avoid some of the following actions:
- engaging in hostile discussions with franchisees involved in pursuing any group activity including a class action
- including a provision in any agreement or policy restricting franchisees from participating in group activities
- attempting any prohibitory or punitive action against franchisees by reason of their threatened participation in a franchisee association
- taking a capricious, arbitrary or self-interested approach to the enforcement of the franchise agreement against franchisees by reason of their threatened or actual participation in a franchisee association
- taking a more favourable approach to the enforcement of the franchise agreement against franchisees that have not threatened participation in a franchisee association or have indicated an aversion to such association
That being said, threatened or actual participation in a franchisee association does not give a franchisee free license to disregard the terms of its franchise agreement. A franchisor does not need to avoid issuing notices of default and/or termination in circumstances where it is warranted. Furthermore, if the activities of a franchise association result in activities which could be libellous or slanderous, or if communications from a franchise association include misrepresentations or defamatory statements, a franchisor is entitled to communicate its disagreement with such activities or statements and, in an appropriate case, to threaten or institute legal action to curtail the activity.
Ultimately, the fundamental principle of the franchise relationship is that it is based on the terms and provisions of the franchise agreement entered into between the franchisor and an individual independent franchisee. Franchise agreements are not entered into between the franchisor and its franchisees on a collective basis. However, there may be compelling reasons for franchisors to engage with franchisees in a wider, more systematic way. Careful consideration should therefore be given to all of the circumstances – both legal and practical – in order to determine the best approach to dealing with franchisee associations.