Class Action Recourses in Franchising

      November 16th, 2007
Question Corner – Number 5


Question from a group of franchisees (not an association) : We are part of a franchise network that has franchises across Canada.  The majority of the franchisees joined the network over the last three (3) years  The franchisor made representations to all the franchisees and now, most of them are having problems, either with the equipment they purchased, diminishing services, unsubstantial financial projections, etc.  We formed a group of franchisees (95) with the intention of meeting and addressing, in a constructive manner, the issues that have surfaced concerning the franchisor’s concept. An average of 1 franchisee from this network closes its business or declares bankruptcy every month and the franchisor continue to sell franchises.

We sent the franchisor a list of all the issues that we wish to address with him and provided him different dates when the ten (10) representatives from our group were available to meet with him (2 per province). The franchisor categorically refuses to meet with us and the issues continue to remain unresolved.

Given that almost all the franchisees from our group were made the same representations and have the same issues, is it possible to undertake a class action suit against the franchisor?

Answer: First of all, to the best of my knowledge, there has never been a class action suit against a franchisor in Canada.  If someone is aware of one, I would appreciate receiving a copy of the judgement or the names of the parties involved.  I am only aware of one case where an association of franchises (formed under Alberta’s franchise legislation) mandated a law firm to study the possibility of taking a class action suit against a franchisor.

In general, the criteria to undertake a class action suit in Canada are very difficult to meet.  The files of each of the plaintiffs must all be almost identical.

Having said that, I respectfully submit to your group that it may not be at the stage of taking a class action suit against the franchisor.  The courts are an option of last resort.  

On the bases of the facts you have provided, the next step to undertake is to open the channel of communication with the franchisor. Instead of presenting the franchisor with a long list of issues and having the group being represented by ten (10) people, I suggest you prepare a list of the most important issues (3-4 maximum) and limit the number of people that will meet the franchisor to 1 or 2  (meet in a neutral setting, without attorneys present).

Is there a dispute resolution mechanism (“DRM”) in your franchise agreement (ex: mediation, arbitration)?  This could be another option.  If it is not the case, your group could suggest one to the franchisor to open the channel of communication.

Before any meeting with the franchisor, I strongly suggest people from your group discuss the situation with employees of the franchisor, as well as his suppliers and other business partners, if you have access to them.  A credit check would also be useful.

The objective of this exercise is to find out as much as possible about what is happening within the business of the franchisor before meeting him: if he has financial problems, maybe your efforts to meet with him are not the right strategy.

I strongly suggest that you don’t consider the option of stopping payments to the franchisor throughout this process. 

Another option is to suggest to the franchisor to put in place a dispute resolution system (“DRS”) as opposed to a dispute resolution mechanism (“DRM”).  Contrary to a DRM which implies simply inserting a clause in a contract to created forum to settle disputes between a franchisor and a franchisee, a DRS implies instauring inside the company of the franchisor a process to manage disputes which lead, in a systematic and constructive manner, to the resolution of disputes between a franchisor and its business partners (including franchisees) by the use, among other things, of a DRM instead of the courts.  I refer to the Management Services section on my internet site for more details on DRS (www.claudepellan.com).

As I mentioned before, depending on the results of your enquiries into the franchisor, your group may have to start considering other options, like joining another franchisor or contacting manufacturers of the products you sell.  With respect to this option, I strongly suggest you consult your attorney before making the decision.

In summary, your primary objective should be to open a channel of communication with the franchisor as soon as possible to address the important issues your group has encountered.  The steps you undertake should be taken one at a time while considering your other options. If as many as 95 franchisees have formed a group and are considering a class action suit, there is a generalized problem in the franchise network.

If all your attempts to open a channel of communication with the franchisor fail, it may be time to mandate an attorney to study your file as soon as possible to determine all your options and make a decision, including sending a legal letter to the franchisor to remedy the issues you outlined within a prescribed delay, otherwise you will undertake to terminate the franchise agreement and/or join another franchisor or manufacturer (to minimize your damages).  At the same time, the attorney can look into the possibility of taking a class action suit against the franchisor.

N.B.: I have done same research on the franchisor in question and have learned that he has delayed payments to some of his creditors.

Cordialement, Cordially,

Claude J. Pellan, Avocat, Attorney
Droit du Franchisage et Droit des Affaires/Franchise and Business Law