The International Who’s Who of Franchise Lawyers has brought together three of the leading practitioners in the world to discuss key issues facing lawyers today. They discuss the legislative developments in their jurisdictions, the evolution of the franchise bar, difficulties in market activity and the potential conflict of interest created by cross-representation.
Greensfelder Hemker & Gale PC
Osler Hoskin & Harcourt LLP
Toronto Neil Wilkof
Dr Eyal Bressler & Co
CONFLICTS OF INTEREST
Who’s Who Legal: Is it possible to advise both franchisors and franchisees and still serve clients well? Can cross-representation facilitate better relations between the two parties and help avoid litigation?
Neil Wilkof: If the question refers to whether it is possible to simultaneously represent both the franchisor and franchisee, I am highly sceptical. There are simply too many points in a franchise agreement in which the interests of the franchisor and franchisee are far from identical. In such a situation, I prefer that each side receive its own legal representation, with the goal that the parties will ultimately resolve all outstanding points within the context of negotiations (subject to the bargaining power of each of the parties). That said, in Israel, there is a long-standing tradition of a single attorney representing both parties in real estate rental or sale of property transactions, such that having the same lawyer represent both sides of a transaction may be more common than in other jurisdictions.
John Baer: As most employment lawyers would argue, you cannot represent both sides of the street. Most experienced franchise lawyers represent only franchisors or only franchisees, or so they claim. There are always exceptions to the rule, and probably more deviations than most lawyers will admit. If you represent a franchisor, is that much different than representing a master franchisee/subfranchisor? Many of the issues are the same. And representation of a large multi-unit developer presents many challenging operational issues that may benefit from the franchisor lawyer’s experience. The positive of doing at least some work on both sides of the aisle is that it gives the practising lawyer a better perspective on issues and perhaps may result in the drafting of more even-handed contracts and a better understanding of how to handle business disputes between the parties. The negative is taking litigation or other public positions on behalf of the side that you normally do not represent, because that may come back to haunt the lawyer when he or she represents his or her normal base of clients on a similar issue. Should you serve both sides? The answer is probably yes, but with limitations. You do not want to put yourself in a position where you jeopardise your relationships with your core client base. This requires a delicate balancing of your client and your personal interests.
Jennifer Dolman: So long as lawyers are not representing a franchisor and franchisee on the same matter or dispute at the same time (which would be an obvious conflict of interest prohibited by the rules of professional conduct in the Canadian province where the lawyer is licensed), there is nothing per se improper about franchise lawyers acting for both franchisors and franchisees.
My law firm only acts for franchisors, but a number of our colleagues in the Canadian franchise Bar act for both franchisors and franchisees. They suggest that because they have experience on both sides they can better serve their clients. One lawyer I know in a small franchise boutique firm says it helps him promote what is called “fair franchising.”
I appreciate the value of being able to look at a problem from all perspectives, but as a franchise litigator who only represents franchisors I do question how winning a case for a franchisee serves these lawyers’ franchisor clients and vice versa. Sometimes a case is very fact-specific and relates to only a particular franchise system, but on other occasions the decision is broader and may have negative repercussions for all franchisors. For example, an issue in a highly publicised pending national franchise class action involves a determination of whether an amending agreement to an existing franchise agreement constitutes a new franchise for the purpose of disclosure. If decided in favour of the franchisees, franchisor clients of the firm representing the franchisee class are unlikely to be pleased with such a result. Likewise, is a franchisee client going to be happy when its lawyer successfully enforces a non-compete clause in favour of a franchisor? Acting for only franchisors on franchise disputes means I do not run the risk of taking inconsistent positions in court and can focus all my attention on serving my franchisor clients. Even though I do not act for franchisees, I am very familiar with and anticipate the positions their counsel take in court. I am also mindful of and sensitive to the fact there is now a bias in favour of franchisees in our courts and prepare my briefs accordingly.
As for avoiding litigation altogether, I think this has more to do with one’s approach to resolving disputes as opposed to whether or not one acts for both franchisors and franchisees. In Canada, there are significant cost consequences associated with all stages of a lawsuit. Counsel need to be mindful of these consequences, educate their clients about them while discussing the merits of their case, and explore whenever possible opportunities for settlement, including mediation.
Who’s Who Legal: Can you provide a summary for our readers of the legislative and/or regulatory developments that have taken place in the past year in your region? Are there any reforms that you would like to see in the near future?
Neil Wilkof: Israel has no statute that explicitly governs franchising. Accordingly, the legal treatment of franchise arrangements continues to be governed mainly by general contract law (with a heavy emphasis on the statutory principle of good faith), intellectual property laws (particularly trademark, copyright and trade secrets law), competition law (see below) and consumer protection laws. While it might be helpful to enact franchise-focused legislation in Israel similar to what is in place in various other jurisdictions, especially with respect to disclosure requirements, we do not anticipate that this is likely to occur in the foreseeable future.
At the level of secondary legislation, the principal set of rules in the franchise area is a form of block exemption, issued under the auspices of the Competition Authority. It is unclear to what extent these provisions have been brought before the Competition Authority Tribunal. They appear to be rarely raised in the context of court proceedings.
Jennifer Dolman: As of October 1, 2012, the province of Manitoba now has franchise legislation. Franchisors granting franchises to be operated partly or wholly in Manitoba are now required to comply with the Franchises Act and Franchises Regulation, including the obligation to prepare and deliver a disclosure document to prospective franchisees. Manitoba is the 5th province in Canada with franchise legislation; the others being Alberta, Ontario, New Brunswick and Prince Edward Island. For the most part, Manitoba’s franchise legislation is consistent with the other provinces’ legislation, although there are some important differences. For example, Manitoba does not require the disclosure document to be delivered as one document at one time. Instead, the Manitoba legislation permits a disclosure document to be delivered in parts, and the 14-day disclosure period begins to run after the franchisee receives the last part of the document.
We have also seen an increased application of many specialised commercial laws to franchising including legislation related to anti-spam (Canada’s new anti-spam law was passed in December 2010 and will enter into force following a Governor in Council order), gift cards, privacy, consumer protection, and Quebec language laws. Our Montreal office advises that L’Office québécois de la langue française (OQLF), the Quebec regulator responsible for the Quebec Charter of French Language, is now asserting that the trademark exception for French language translation on signs does not apply to exterior store signage in Quebec, although the issue is uncertain. If OQLF’s interpretation of the Charter prevails, Quebec retailers’ exterior signs may need to include a generic descriptor in French with their English-only trademarks.
John Baer: In the USA, there have been few legislative or regulatory developments of significance in the franchise area, other than housekeeping changes or proposals to bring some of the states into closer conformity with the FTC franchise rule. But, somewhat surprisingly, there has been some activity in the business opportunity area. For example, Arizona amended its telemarketing solicitations act to add business opportunity disclosure provisions. No one seemed to be paying attention to this development because it resulted in putting a square peg into a round hole – the business opportunity provisions make little sense in the context of that legislation. The reform that we need in the USA, and we are on record with the FTC on this point, is that there should be a federally pre-emptive disclosure rule so that the states do not impose differing requirements on a franchisor, most of which are of little value to a prospective franchisee and expensive and time-consuming to comply with. It will not happen in my lifetime, but it should be done someday.
THE FRANCHISE BAR
Who’s Who Legal: How has the franchise bar in your region changed in the past year? Does the work remain with the established firms and practitioners? What do you foresee for the future of the bar in the next five years, fragmentation or consolidation within the market place?
John Baer: The franchise bar is under enormous fee pressures from clients. It makes it difficult to practise franchise law in a large firm in a major city. If there is a change going on, it is either clients leaving higher-priced firms to go to lesser-priced firms, no matter what the quality of the work they are getting, or lawyers leaving firms with higher billing rates to join firms where they may have a lower billing rate in order to save or maintain their practices. One of the consequences of the billing rate pressures is that many franchise projects these days are being handled by some lawyers with little experience in this specialised area of practice. Established lawyers are often forced to propose alternative fee structures to obtain or maintain business. It is difficult to predict what will happen to the franchise bar in the next five years because of the enormous, almost daily, changes in technology and client attitudes towards lawyers, but we are already seeing considerable fragmentation of which lawyers are doing the franchise work while at the same time seeing some consolidation of work in larger firms in regional cities, and perhaps more work staying with in-house counsel.
Jennifer Dolman: In Canada we have seen an increase in law firms who have an interest in franchise law. These are mostly already established national or strong regional business law firms who are able to provide full-service commercial and litigation support to franchisor clients. There are some more local boutiques, including litigation boutiques, but these are not full-service firms. I don’t expect to see these boutiques being absorbed into the large firms, both for financial modelling and quality reasons. In my experience, enquiries from US and other foreign-based franchisors and franchise law firms typically require the services of national and full-service firms.
Neil Wilkof: In a small country such as Israel, there are only a handful of practitioners who provide services in the franchise area on more than a one-off basis. This means that there is a core of practitioners with a specialisation in the field, and a sizeable number of practitioners that are providing franchise law service to a select client of the particular office. While there is a franchise trade association in Israel, there is no franchise law group, either under the auspices of the Israel Bar Association or otherwise. I do not anticipate that this situation will materially change in the foreseeable future.
Who’s Who Legal: A number of our contributors spoke of the difficulties in sourcing capital for both new and established franchisors. Has this been the experience in your jurisdiction? Has it affected any particular industry? What does this mean for the sort of demands your clients are making of practitioners?
Neil Wilkof: We are not aware that either new or established franchise operations have encountered special problems in sourcing capital. Indeed, depending upon the particular industry involved, one hears anecdotally that not infrequently a franchise is funded from private sources, rather than from bank funding or public debt. As a general matter, both the Israeli banking industry and public debt markets have not been materially affected by the financial difficulties in other jurisdictions. That said,certain negative recent trends in this regard, particularly the economic difficulties that been encountered by several of the country’s largest conglomerates with a multi-tiered ownership structure, may presage possible funding difficulties in the near future.
John Baer: Sourcing capital for both new and established franchisors, and also franchisees, has been a serious problem since the recession started. On the other hand, there are a number of private equity firms with substantial investment resources that are using the current climate to acquire established franchisors or large franchisees. They are investing cautiously, but they are buying a number of franchisors.
Jennifer Dolman: The lack of available financing continues to be a problem for franchisors in Canada in the same manner as I reported on last year. Franchisors are having difficulty obtaining financing from conventional sources for their own growth and expansion requirements. Canadian banks have demonstrated through the recent recession that they are among the most stable in the world. Most Canadian banks lending to franchisors have increased coverage and security requirements for lending to franchisees and have been reluctant to lend to new franchise systems. For franchisees in market segments with high inventory levels and low capital assets, the banks have effectively stopped lending unless the franchisor provides a guarantee or a comfort letter backed by security with a market value.
Franchisors in need of capital for business expansion have been required to resort to secondary market financing from private institutions, equity capital lenders, venture capitalists and cash rich industrial companies interested in diversification by way of investment in franchise companies. In the latter case lenders are content to leave existing management in place, provided performance results meet designated milestones.
Who’s Who Legal: How have the levels of inbound and outbound franchising work changed in the past 12–18 months in your jurisdiction? What have been the major factors affecting activity levels?
John Baer: For most of my career, US franchisors were expanding internationally and there was little inbound traffic. In recent years, there has been a significant increase in the number of foreign franchisors entering the US market, with mixed degrees of success. Many foreign franchisors do not appreciate the complexity of the US market and often want to franchise here in the same way they do in other smaller countries, such as by using master franchise arrangements. The results are often mixed. It would interesting to compare the success rate of US franchisors expanding internationally with the success rate of foreign franchisors entering the US market.
Neil Wilkof: The majority of franchising activity in Israel continues to be inbound franchising. It is estimated that there are approximately 350 franchise operations in the country, operating nearly 11,000 franchisee sites. Only a handful of Israeli companies have set up franchise operations outside the country. Based on available information, more new franchise operations were opened than were closed in Israel during the last 18 months, despite the worldwide economic climate. As a general trend, the sometimes-lack of success by even the most well-known foreign brands in setting up a franchise operation in Israel is due to failure to understand and compete in the local Israeli market, despite the strength of the franchise and brand internationally. In Israel, it is reported that approximately 50 per cent of the franchise operations are in the food arena, with approximately 30 per cent in branded fashion and 14 per cent providing various services.
Jennifer Dolman: The levels of inbound and outbound franchising work into and from Canada in the past 12 to 18 months have remained fairly constant. The largest portion of inbound work comes from United States-based franchisors, and if there has been any noticeable trend, it is that these franchisors have been shifting towards master franchisor development transactions as opposed to unit franchise sales. Some mature Canadian-based franchisors have been expanding internationally by way of master franchise or development transactions in the Middle East, but have been cautious about expansion into the United States because of a long history of unpredictable setbacks and the myriad of franchise and commercial legal requirements.