As a litigation lawyer, I would estimate that 70% of the franchise work I do is for franchisees that are experiencing problems in operating a franchise or are experiencing problems with the franchisor’s demands. The tragedy is that clients often come to see me after they have already purchased the franchise and often after their life savings have been depleted trying to operate the franchise. Many of the problems experienced by franchisees that I typically encounter could have been avoided, or could have been spotted with a little due diligence by the franchisee, prior to paying money over to the franchisor.

Below I set out some things to consider and some words of advice for the prospective franchisee.

TIP 1: READ YOUR DISCLOSURE DOCUMENT

The franchise legislation in Ontario places onerous requirements on a franchisor prior to accepting any payment of money from a franchisee. Specifically, before accepting any money the franchisor must provide a franchisee with a disclosure document which must include certain information. The legislation requires the franchisor to disclose:

1. all material facts, including material facts as prescribed;
2. financial statements as prescribed;
3. copies of all proposed franchise agreements and other agreements relating to the franchise to be signed by the prospective franchisee;
4. statements as prescribed for the purposes of assisting the prospective franchisee in making informed investment decisions; and
5. other information and copies of documents as prescribed.

The franchisor must give the prospective franchisee at least fourteen (14) days to review this documentation, prior to accepting any money from the franchisee.

Clearly, the first step would be to read the franchise documents, the lease documents and the personal guarantee documents which are standard in most franchise systems. If there are any specific questions or concerns then it would be wise to retain a lawyer to help explain the obligations imposed on both parties under the agreement. An experienced franchise lawyer can often review the documentation and explain the terms of the agreement for a couple of thousand dollars. When you consider that the cost of opening a franchise can range from $200,000.00 to $500,000.00, the investment in having a lawyer review the franchise documentation and explain its terms is relatively insignificant.

TIP 2: DUE DILIGENCE – USE THE DISCLSOURE INFORMATION

In addition to the inclusion of the standard documents (franchise agreement, lease, etc.), the disclosure document is also required to include important information which can reveal to the prospective franchise, potential problems with the franchise system. Among the most important information that must be disclosed are the following:

1. a list of the current franchisees;
2. a list of the franchises that have closed; and
3. a list of any ongoing litigation that alleges that the franchisor, the franchisor’s associate, or a director have been found liable or are involved in a civil lawsuit alleging misrepresentation, unfair or deceptive business practices or of violating a law that regulates a franchise business.

Tragically many franchisees do not take the time to use this information to help them make an informed decision about the franchise system that they are purchasing. From experience, I know that consumers will spend hours on the internet researching a car or a digital camera, before deciding which one to purchase; incredibly franchisees will not spend the same amount of time in researching a franchise system, before investing their lives savings.

By calling and visiting existing franchisees a prospective franchisee will learn a tremendous amount of information about how the system operates, whether there are any pressing problems from the perspective of the franchisee, and how a franchisor reacts to concerns raised by the franchisee. Without question, this is the most important information that you will need prior to making an important investment.

If the franchise system is involved in ongoing litigation alleging misrepresentation, unfair or deceptive business practices or of violating a law that regulates franchises, then it would be money well spent to hire a lawyer to order copies of the lawsuits, to contact the other franchisees in order to give you a better picture of what has been going on in the franchise system.

TIP 3: UNDERSTAND and SPOT ENTIRE AGREEMENT CLAUSES

If for whatever reason you decide that you do not want to hire a lawyer to help you negotiate the franchise agreement and you proceed to perform your own negotiations, the most important tip I can give you is to carry out your negotiations in writing. If you meet with a franchisor and they promise you certain things (for example how much the franchisee makes per year, or projected level of sales) then confirm that in an email or in a letter. You should also keep track of what has been promised because you may want to include it as a schedule to the eventual agreement that you execute.

Having confirmed all the representations and promises by email, the next most important step is to beware of the entire agreement clause. Typically a franchise agreement will contain a clause that says that the entire agreement is contained in the franchise agreement and that there were no oral or other representations made other than those set out in the agreement. If you see that in the franchise agreement then you should go see a lawyer and discuss amending the agreement to include the representations which have been made to you into the agreement.

The reality is that most good franchisors will not make promises that they cannot keep and most will not guarantee minimum sales, etc. The only thing that most franchisors can promise is that they will provide you a reasonable level of support, that they own or have a license to use the intellectual property (signs, logos, recipes, etc). Since you are opening a business most franchisors realize that, as with any business, there is the possibility that the business will fail and that its success will depend on a number of factors which are often times beyond the control of the franchisor. For this reason, you will seldom see a good franchisor make promises about the viability of the franchise system.

Finally, I would close by saying that an “ounce of prevention is worth a pound of cure”. What this means is that quite often spending a few thousand dollars on a lawyer up front will save you from spending tens of thousands of dollars in the future. By getting advice early you can ensure that you start your franchise business on a solid footing.

An Ontario court has ordered an applicant to pay damages for trespass and full indemnity costs for executing Anton Piller Order on the wrong party and at the wrong address.

In October 2008, Justice Hoy of the Ontario Superior Court of Justice in Multimedia Global Management v. Soroudi, [2008] O.J. No. 4383, ordered an applicant to pay damages for trespass and to pay full indemnity costs to an innocent third party. After obtaining an Anton Piller Order (APO), the applicant executed the APO on a gentleman who happened to have the same name as the target respondent (the innocent man was 65 years old, while the target respondent was 35 years old). The APO was also executed at the wrong address and the applicant seized documents outside the scope of the APO

On a motion for Judgment, Justice Hoy refused the applicant’s request that the matter proceed to trial. Instead Justice Hoy stated:

… I am satisfied that the information that I require to assess damages for trespass, in a situation where the Anton Piller Order was obtained, based on incorrect information put before the court as a result of inadequate investigation, and executed against a non-party — and the wrong party — at a residence and documents outside of the scope of the Order were seized is before me.

Damages in trespass were assessed at $15,000.00 and the applicant was ordered to pay $22,000.00 in legal costs, on a full indemnity basis. On the cost issue, Justice Hoy concluded:

In fixing this amount, I have considered that, as I advised the Appellants at the hearing, JZ shall be entitled to costs on a substantial indemnity scale — indeed a full indemnity scale. An innocent third party mistakenly subjected to a wrongful search of his residence under an Anton Piller Order — a civil search warrant should, in my view, except in the rarest of circumstances, be entitled to full indemnity costs.

Finally, in order to ensure that the respondent received his costs and damages, Justice Hoy ordered that the funds be withdrawn from the $100,000.00 security posted by the applicant when they obtained the APO.

More recently, Justice Morawetz of the Ontario Superior Court of Justice, in the very same case, had occasion to deal with the quantum of legal costs that should be awarded against an applicant who has had an APO dismissed. In his reasons, released on February 3, 2009, Justice Morawetz ordered the applicant to pay $175,000.00 to one respondent and $20,000.00 to another respondent.

In total, the error in the execution of the APO will has cost the applicant $232,000.00.

Both cases provide significant lessons for counsel who deal with APO’s. For lawyers seeking an APO, the decision reinforces that counsel must conduct a proper and comprehensive investigation before seeking such an extraordinary remedy. For lawyers defending APO’s, the decision stresses the importance of ensuring that the Court orders the applicant to post security prior to issuing the Order and the importance of going through the Order to ensure that the applicant has strictly complied with the Order.

For copies of the Justice Morawetz decision go to:
http://www.canlii.org/en/on/onsc/doc/2009/2009canlii3784/2009canlii3784.html

http://www.canlii.org/en/ca/fca/doc/2008/2008fca256/2008fca256.html

August 20, 2008

http://www.canlii.org/en/ca/fct/doc/2008/2008fc959/2008fc959.html

August 12, 2008

http://www.competitionbureau.gc.ca/epic/site/cb-bc.nsf/en/02709e.html

July 22, 2008

http://www.cipo.ic.gc.ca/epic/site/cipointernet-internetopic.nsf/en/wr01221e.html

In its fight against piracy Microsoft may win a battle, but it still remains to be seen whether it will win the war.

That is how a couple of industry insiders are reacting to Microsoft Canada Co.’s latest lawsuits against six Ontario system builders for allegedly selling unlicensed copies of their software on computers.

If you ask me whether targeting only six people is just, when hundreds and thousands are doing similar things, I would say no, but targeting people who are engaging in piracy is right.

“If you ask me whether targeting only six people is just, when hundreds and thousands are doing similar things, I would say no, but targeting people who are engaging in piracy is right,” said Michelle Warren, analyst at Toronto-based company Evans Research Corporation (ERC). “Microsoft is doing a commendable job” she said. ERC conducts research on topics that interest the IT industry.

Warren was reacting to Microsoft Canada Co.’s latest onslaught against piracy. This week the Mississauga-based corporation filed lawsuits in the federal court against the six system builders who, it claimed, were loading Microsoft software onto PCs and selling them without the CD-ROMs. Microsoft has alleged copyright and trade-mark infringement against the six builders.

“As part of Microsoft’s larger anti-piracy strategy, it is important that system builders understand the legal ramifications of distributing unlicensed or pirated software to consumers and businesses,” said Susan Harper, license compliance manager at Microsoft Canada Co. “By taking legal action, we hope system builders understand this is a serious matter that will be pursued to the full extent of the law.”

Warren conceded that the system builders market is a competitive one with more supply than demand of computer products. “So the option of providing pirated software would look profitable. But within organizations there is usually a struggle as to which way to follow — the right one or the wrong one.” She said the Ontario builders obviously made their choice. “That is why the laws are in place.”

Amongst other things, Microsoft has sought damages ranging from $20,000 to $160,000.

According to legal experts, the lawsuit would be an expensive one for both the parties. “It could cost Microsoft anything from a hundred thousand to-millions of dollars,” said Glen Perinot, litigation and intellectual property lawyer at Toronto-based law firm Heydary, Garfin and Hamilton.

Perinot expects Microsoft to move ahead with the trial that he predicted would come at least after two years. “It is obvious that Microsoft wants to send a message to other infringers that they are willing to go right till the end,” he said.

Perinot said it is obvious that both the parties are in for a long haul. He explained before trial, they would have to draft pleadings. Microsoft Canada would have to explain why it is going after the six infringers. Next, a defense would be filed by the other party. Both the parties would swap their documents before reaching the next stage of discovery. Then the case would reach the trial stage before which there would be an option of going for mediation.

Perinot said the advantage Microsoft has over other companies as the plaintiff is that it can afford to enforce its intellectual property rights. “Smaller companies would not be able to afford it.”

This is not the first time that Microsoft has taken such a step. In Canada, as well as the US it has been consistently launching law suits against system builders. In December 2005, Microsoft launched a similar suit against seven system builders in GTA area.

Warren lauded Microsoft for its fight against piracy. “There is a growing acceptance in society for fake stuff whether it may be software or consumer products like Gucci or Prada,” she said. Corporations such as Microsoft are trying to combat this by educating us on the value of the product.”

Original Article: http://www.theglobeandmail.com/news/technology/article823474.ece