No Lapdogs, Franchisees Bite Back
Bark and Fitz, a Canadian based luxury dog products franchisor, is in a legal battle with its franchisees.They "allege the company founder violated the terms of contracts they signed when joining the franchise, by essentially forcing them to carry volumes and styles of products they feel interfere with their bottom line" and "also allege the founder misused a pool of advertising funds they paid into and marked up products without telling them and making them difficult to sell."
The franchisees are trying to separate themselves from the franchisor and still tend to their clientele. Last May, the franchisees formed an association and, after talks broke down with the franchisor, they decided to halt all royalty payments.
"According to documents from an Ontario Superior Court proceeding in March, a judge found “evidence that the franchisor acted for its own financial benefit and to the financial detriment of the franchisees and thus breached its duty of good faith and fair dealing.” " - Canada's The Star
While this case is awaiting trial, the judge's "good faith and fair dealing" findings could potentially have significant ramifications for franchisors in the future. Could the Canadian Courts find that forcing franchisees to purchase marked up products and interfering with profitability be grounds for severing ties to a franchisor?
Bark & Fitz
Gen. Patton:
I don't know much but a few things I found collectible:
- the franchisee's law firm is listed as practicing only on the franchisor side in the recent Franchise Times 2010 Legal Eagles article (slow quarter?),
- withholding royalty payments is a very, very, very risky strategy (most judges don't go for "two wrongs making one right" and punish the franchisees in a very nasty manner),
- with only 20 stores, How hard could it be just to re-brand and say Good-bye? (DIY brand reputation via a weblog)
At least that way they could force the franchisor to move from a Tier 2 attorney..
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What tha
While this case is awaiting trial, the judge’s “good faith and fair dealing" findings could potentially have significant ramifications for franchisors in the future. Could the Canadian Courts find that forcing franchisees to purchase marked up products and interfering with profitability be grounds for severing ties to a franchisor?
Hang on; I thought that was how franchising was supposed to work?
DIY franchisees are so rare these days.
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Good Faith
Sorry, I missed this. Les has covered some of the ground, but let me be more explicit.
This is a terrible decision for the franchisees and the franchisor. It solves nothing, was costly, and now there is little hope of solving essentially a business problem until a lot more litigation dollars are spent. This was a missed opportunity to do a deal instead of disputing.
Counsel to the franchisee association knew this would be the result from the Court, but I am sure the he would not have counseled the franchisees to stop paying royalties.
Les, is also correct: Franchisee counsel is well known as a franchisor counsel. His firm would not be one I would ever recommend to franchisee associations precisely because of this franchisor side record - which is no mark against his experience or talent.
This looks like a relatively lucrative market, which both sides are messing up.
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Re: Good Faith
Michael, is this a bad decision in the long run for franchisees? If the Canadian courts rule franchisors cannot cause franchisees to be overcharged and impede profitability (I apologize for oversimplifying the actual legal restrictions) of franchisees, could this not have major implications going forward for all franchisors that require using only certain distributors to purchase specific goods/products for the business. Quiznos comes to mind about overpriced food.
It seems apparent this is not the final decision and will probably be appealed should franchisors be saddled with this ruling so, as you said, this could be a very expensive legal battle for this franchise system but it sounds like it could be a huge positive ruling for franchisees. I am interested in hearing your response.
Lastly, IF I am correct (and that is a big IF) and this is a potential major ruling in favor of franchisees, wouldn't the IAFD and other franchisee friendly organizations want to help out these franchisees with the legal costs given its possible implications?
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Ordinary Decision, but Bad Lawyering
Oldsword;
1. This is not a bad decision, it is a standard decision.
2. The courts have made no decision about whether the franchisor was wrong or right - the Court simply reverted the situation to the status quo before a court trial could determine whether the franchisor was wrong or right. It will never get to trial because of the cost.
3. Many franchise systems have poorly thought out distribution networks. But, instead of litigating this problem, it should be mediated. This system may not survive litigation.
4. Amicus briefs or assistance with litigation costs for franchisee associations is always something that the IAFD would get behind.
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Michael and Les
Michael and Les, does this case have any chance with regard to the good faith and fair dealing issue? Would this equate to other franchisors such as UPS or Quiznos?
Wondering if you guys know anything about this.