Acting for the Canadian Franchisee

• Author: Joseph Adler and Peter Viitre
• Pages: 375-405

Acting for the Canadian Franchisee

CHAPTER 8

Joseph Adler, Hoffer Adler LLP

Peter Viitre, Sotos LLP*

Contents

375

* The authors wish to acknowledge with gratitude Stephanie Chong of Hoffer Adler

LLP who assisted in preparing the intellectual property related segments of the chapter.

I. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 377

A. Possible Structures and the Respective Roles of the Parties

in Each . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3 78

B. Due Diligence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 379

II. Additional Risks and Benefits to Purchasing a Franchise from

a Non-Canadian Franchisor vs. Buying into a Canadian-Based

System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3 82

A. How Well Does the Brand or Concept “Work” in Canada? . . . . . . 382

B. How Well Does the Business Model “Work” on This Side

of the Border? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 384

C. Legal Concerns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 385

1. Protection of Franchisor’s IP . . . . . . . . . . . . . . . . . . . . . . . . . . . .3 85

2. Trademarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3 85

3. Patents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 386

4. Trade Secrets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 387

5. Copyright . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3 87

6. Regulatory or Other Legal Barriers . . . . . . . . . . . . . . . . . . . . . . . 388

7. “Canadianization” and Translation of FDD and Operations

Manual . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 389

D. The Impact of the Master on These Issues and Its Role in

Managing or Supporting Them . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3 90

III. Common Relationship Flashpoints and Red Flags Arising Out of a

Disclosure Document Review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 391

A. Franchisor Commitment to the Territory—Don’t Become an Orphan391

B. Marketing Funds and Other Pooled Resources . . . . . . . . . . . . . . . . . 392

C. How to Deal with Disclosure Deficiencies . . . . . . . . . . . . . . . . . . . . . 39 3

376 Chapter 8

IV. Negotiating Key Provisions of or Amendments to a Franchise

or Multi-Unit Development Agreement . . . . . . . . . . . . . . . . . . . . . . . . . .3 95

A. Territory and Expansion Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 395

B. Development Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 396

C. Withholding Tax Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3 96

D. Conversion of Funds and Currency . . . . . . . . . . . . . . . . . . . . . . . . . .3 97

E. Personal Liability: Guarantees and Indemnification . . . . . . . . . . . . . 398

F. Restrictive Covenants: Non-competition and Non-solicitation . . . . 39 9

1. Non-competition Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .399

2. Non-solicitation Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 401

V. Dispute Resolution and Enforcement Issues . . . . . . . . . . . . . . . . . . . . . . .4 02

A. Statutory Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 402

B. Enforcement Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4 03