Q: As a franchisee, do I have to participate in all of the franchisor’s promotions? What if I don’t?

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We all know that marketing is a very important part of franchise systems. It is equally important to fran­chisees and franchisors. As a new franchisee joining an established system, you will want to be aware of what pro­motional programs your system has and consider their impact on your bottom line, because, like it or not, you are probably required to take part in all of them. You should take steps to inform yourself about your franchise’s pro­motional programs by reviewing the disclosure document and talking to existing franchisees.

But what if you don’t participate? First, there is the reputational risk and potential loss of goodwill. Even if a campaign notifies the public that it is available at “par­ticipating locations only”, consumers generally assume that what they hear on the radio, see on television, and read in their social networking feeds is available at their favourite location. Customers will be disappointed if they don’t receive the advertised offers.

Second, there is a potential breach of your franchise agreement. Most franchise agreements make it very clear that all franchisees must actively participate and cooperate with the franchisor’s national, regional, and local advertising and sales promotion campaigns. The agreements may also provide more detailed information about what that includes such as offering any discounts, including free products or services, that are advertised as part of those campaigns, and who bears the cost of providing such discounts or promotions. Refusing to honour promotional campaigns when required to do so is a breach of your franchise agreement, and could lead to default and termination. Third, there are laws that are aimed at preventing misleading advertising. Also, this isn’t just an issue for the franchise as not honouring advertised offers (e.g., a buy-one-get-one offer) or try­ing to make some extra money by charging for a service that has been advertised as complimentary can create liability for the both the franchisee and the franchisor. The penalties – both monetary and reputational – can be severe.

The federal Competition Act makes it a crime to know­ingly or recklessly make (or permitting the making of), a representation to the public that is “false or misleading in a material respect”. It states that the general impres­sion conveyed by a representation, as well as its literal meaning, must be taken into account when determining whether or not the representation is false or misleading in a material respect. The penalties for breaching this provision can be significant.

There are also civil prohibitions under the Competi­tion Act that establish remedies against anyone who makes (or permits the making of) a representation to the public that is false or misleading in a material respect. Like the criminal provision, a breach of this section can be established by the general impression conveyed by a representation, as well as its literal meaning, when determining whether or not the representation is false or misleading in a material respect. If a court finds that a person breached this part of the Competition Act it may order the person not to engage in the conduct, to publish a corrective notice, to pay an administrative monetary penalty and/or to pay restitution to purchasers. Again, the penalties can be significant.

There is also potential exposure under the various provincial consumer protection acts. Under the Ontario consumer protection regime it is an “unfair practice” to make a false, misleading or deceptive representa­tion. This includes making a representation that a spe­cific price advantage exists where there isn’t one. If an unfair practice has occurred the consumer is entitled to have their agreement rescinded and may be entitled to damages and other remedies. If, because of the type of transaction (such as a service that has already been per­formed), rescinding the agreement is not possible, the consumer is entitled to recover the amount they over­paid or to recover damages, or both.

Franchise systems are built around brands, and they only really thrive when brand recognition is strong and – of course – favourable. The value of your advertising dollars can be lost very quickly if the promises made in these promotions are not honoured. Franchisees should be aware that if they don’t follow the letter and the spirit of the promotions they may expose themselves to con­tractual and statutory sanctions.

Paul Kotschorek
Counsel
Osler, Hoskin & Harcourt LLP
PKotschorek@osler.com
416-862-5990