International Law

Franchise Fraud - The Myth of the Proven System

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In a typical misrepresententation about the franchise industry, the Canadian Franchise Association claims that franchises are replicating proven systems:

The Canadian Franchising Association (CFA) has taken its show on the road. On Nov. 15, a Discovery Days show was held in Sudbury for the first time.

Two years ago, the association added eight Discovery Days to its traditional biannual shows in Toronto and other major centres such as Vancouver and Montreal. This year 16 shows are planned.

"The Discovery Days seem to be most effective when the franchisor has locations or territories in that area they are specifically looking to find someone for," said Lorraine McLachlan, president and CEO of the CFA.

Canadian Franchise Association is a trade association and the national voice of Canadian franchising.

"A franchise is broadly defined as a company that has a system that is exactly replicable and there is ongoing support offered by the franchisor, and there are usually royalty fees," McLachlan said.

McLachlan said that a recent study released by BMO indicated that nearly four times as many franchises succeed compared to independent small business.

"When you go into an established system, which is the hallmark of a franchise, the probability of success is obviously incrementally increased," McLachlan said.

"The fact that there are more than a couple of locations currently operating using that brand, using that system, suggests that it's not a flash in the pan and that there is some history that it will succeed."

There are no credible studies which show that franchises are safer than independent business operators. But more importantly, in the United States the strong presumption is against their being a duty of competence by a franchisor.  

Consider what the franchisor consultant Michael Seid testified as an expert witness in a recent franchise case.

"Michael Seid states in his documents that he knows of "no legal or industry requirement that a franchise opportunity must be tested in any particular manner,or that a franchisor cannot sell afranchise opportunity until it has been proven by prior franchisees." 

He writes that the Federal Trade Commission and state regulators have not established a franchisor "Duty of Competence." 

Instead, he states, they require franchisors to disclose accurately their experienceand history, whatever that maybe."

Whatever that might be.

Full post as published by Misleading Advertising Law on December 01, 2008 (boomark / email).