Many franchisors are confronted, often unexpectedly, with the prospect of the formation of an independent franchise association by their franchisees. More often than not franchisors consider the prospect of having to deal with a franchise association as an undesirable and confrontational exercise which they do not feel will lead to productive results. Franchise associations have frequently been analogized to labour unions and franchisors consider that acknowledging and negotiating with franchise associations is akin to acknowledging and negotiating with a labour union.
In addition, many experienced franchisors have created advisory councils which serve as a focal point for communications and discussions between the franchisor and the franchisees. These advisory councils are frequently composed of franchisees who are elected by their fellow franchisees on a geographically representative basis, with the responsibility of or receiving input from and communicating to their franchisees in respect of system matters of benefit or concern to all franchisees. Therefore, when a franchisor accustomed to operating through an advisory council learns of the formation of a franchise association, the franchisor will frequently consider the association to be counter-productive to the activities of an advisory council.
In these situations franchisors frequently ask what their legal rights and restrictions are in connection with franchise associations.
Every franchise statute in Canada (i.e. Alberta, Ontario, Prince Edward Island, New Brunswick and Manitoba) contains a section dealing with the right of franchisees to associate. Generally, these statutes provide that a franchisee may associate with other franchisees and may form or join an organization of franchisees. Further, franchisors may not interfere, prohibit or restrict, by contract or otherwise, a franchisee from forming or joining an organization of franchisees or from associating with other franchisees. Finally, a franchisor may not, directly or indirectly, penalize, attempt to penalize or threaten to penalize a franchisee for exercising the franchisee’s right to associate. If a provision in a franchise agreement or any other agreement relating to the franchise interferes with, prohibits or restricts a franchisee from exercising its right to associate, such provision is void. If a franchisor contravenes any of these provisions, the franchisee has a right of action for damages.
The right of franchisees to associate has been the subject of judicial consideration in a number of actions in the Ontario. In two leading class actions franchisors were severely chastised by the courts for their activities. In one case, the franchisor engaged in hostile discussions with franchisees involved in pursuing a class action, and in the other case a provision in an agreement restricting franchisees from participating in a class action was declared void as being contrary to the right of franchisees to associate.
In other cases individual franchisees have alleged that they were unfairly dealt with by their franchisors because they were instrumental in organizing a franchise association.
Franchisors must 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, and the possibility of legal action and damages resulting from such prohibited activity.
If a franchisor learns of the existence of a franchise association, there are a number of cardinal rules which the franchisor must follow if it does not wish to recognize the association. Obviously under no circumstances should the franchisor attempt any prohibitory or punitive action against franchisees by reason of their participation in the association.
However, there are some other principles which both franchisors and franchisees must respect when the issue of recognition of a franchise association surfaces. Nothing in Canadian franchise legislation requires a franchisor to recognize the existence of or to deal with a franchise association. 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. Therefore, there is nothing in a standard franchise agreement or in franchise legislation which requires the franchisor to acknowledge the existence of a franchise association. Further, if the activities of a franchise association result in activities which could be libellous or slanderous, or if communications from a franchise association include statements which could be misrepresentative or defamatory, a franchisor is certainly 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.
Some franchisors, however, have acknowledged the existence of independent franchise associations, and have developed close working relationships with such associations. In fact, although not common, a few franchisors require in their franchise agreements that each franchisee join or become a member of an independent franchise association.
Many well established franchisors have ongoing dialogue, meetings and negotiations with their franchise associations, with the intent of being able to achieve consensus amongst the entire franchise body on matters of importance to the franchise system. For example, franchise associations have participated in detailed negotiations with franchisors to resolve new forms of franchise agreements, significant capital expenditures from advertising funds, policies on renewals, additional franchises and encroachment, and changes in royalty or advertising fees.
Whether a franchisor wishes to deny the existence of a franchise association, or prefers to deal with a franchise association on an ongoing basis, in either case the franchisor must act diligently, in accordance with its contractual and legal rights and restrictions, and with a view to preserving and enhancing the franchise system in a manner it considers most appropriate.