U.S. franchisors need to 'Canadianize' disclosure documents

By Kirsten McMahon, Managing Editor

Although Canada is often viewed by Americans as an extension of the United States, there are important differences with the country's franchise disclosure regimes and with other laws that should be considered before a company expands here, Toronto franchise lawyer Joseph Adler tells

Adler, a partner with Hoffer Adler LLP who frequently helps U.S. franchisors to expand their franchise systems into Canada, says one of the first things he tells these clients is to protect any trademarks.

“The first step is to protect your brand,” he says. “Make sure you have a Canadian trademark, copyright and/or patent applications in play because if you don't do it, somebody else may attempt to usurp your property and rights. It’s also important to register a .ca domain for the company’s web presence.”

When it comes to providing a franchise disclosure document — basically giving a prospective franchisee certain statutorily required disclosures and all material facts in order to make an informed investment decision — Adler says there are distinct technical differences between U.S. and Canadian franchise disclosure laws that, if ignored, could result in significant consequences for a U.S. franchisor.

“In the U.S., franchisors are subject to federal and state franchise related laws. While the U.S. Federal Trade Commission Rule requires certain pre-sale disclosure, some U.S. states require even more, i.e., they require the registration of the Franchise Disclosure Document before the offer or sale of a franchise — so there are more regulatory hoops in those jurisdictions. It's a patchwork of legislation in the U.S. that makes franchising even more complicated than it is here,” he says.

“Canada has franchise laws and regulations in six provinces — Alberta, British Columbia, Manitoba, Manitoba, New Brunswick and Prince Edward Island — where you need to provide a prospective franchisee with a disclosure document in accordance with the rules,” Adler says.

He notes that if the requirements are not met, it may provide a franchisee with a two-year, money-back guarantee.

“It’s crucial to highlight those requirements to U.S. franchisors at the very beginning, so they understand that it’s different in Canada,” Adler says. “A failure to provide the proper disclosure documentation can not only result in providing a franchisee with a right to rescind the contract, but it could also, in some cases, expose some of the franchisor’s personnel to personal liability.”

“When we work with U.S. franchisors looking to expand north of the border, we review their existing franchise agreements and disclosure documents and Canadianize them,” Adler says. “We also advise them as to the differences in how the disclosure document is delivered as there are technical details that, if not met, will also give a franchisee a rescission claim and other powerful remedies.

“For example, there's a certificate of disclosure that at least two directors, two officers or an officer and director need to sign in order to certify that the contents are true and correct,” he explains. “Currently there's no such equivalent requirement in the U.S.

"Initially, the bulk of our work is preparing the disclosure document and franchise agreement for use in Canada and helping clients protect their brand and intellectual property," Adler says. “But it is also important to raise the question of whether or not the U.S. franchisor has done its due diligence and homework on the Canadian marketplace so that it can amend and tailor the disclosure document accordingly.”

Stay tuned for part three where Adler will delve into the economic and other business-related considerations when expanding a franchise system to Canada.

To read part one, click here.

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