The legal concept of a franchise focuses on two key aspects: there must be a granting of rights by a Franchisor to a Franchisee to operate a business, and there must be a corresponding payment by the Franchisee to the Franchisor for the granting of such rights. Rights that are granted are, amongst other things, usually associated with a trademark, tradename, symbol, or logo that is owned or licenced by the Franchisor. It is at this point that Franchise Law and Intellectual Property (“IP”) Law intersect.

In Ontario, the Arthur Wishart Act (“AWA”)[1] states that a Franchisor has an obligation to provide a franchise disclosure document (“FDD”) that discloses all material facts to the Franchisee in terms of Section 5 of the AWA. Section 1 of the AWA defines material facts as any information about the business, operations or control of the Franchisor, or the franchise system that would be reasonably expected to have a significant effect on the value or price of the franchise to be granted. The franchise system includes the use or association with a trademark, a logo or a trade name.[2]

A general rule of common law that one cannot grant rights they do not own or have the right to grant.[3] It follows therefore, that before a Franchisor can grant any rights to the Franchisee, they must have the legal right to do so. At this point, IP Law, due to its close relation to Trademarks, becomes relevant in assessing whether potential Franchisors actually hold the rights required to grant them to the Franchisee. If the Franchisor has a registered or unregistered a trademark as part of its franchise system and the Franchisor intends to grant such rights as part of the FDD, it is crucial that the registration or recognition of the trademark, symbol, or logo be confirmed and indisputable as understood in the Trademarks Act.[4]

If there is no prior review of the Franchisor’s IP, particularly if it is an unregistered trademark, there are legal and financial risks to the Franchisor:

• If the Franchisor decides to register the tradename or trademark and there are any issues with the Franchisor’s chosen trademark/name or logo in future, this may mean that the Franchisor cannot grant its intended trademark/name to the Franchisee, as this may be regarded as a material change as understood in the AWA. In this event, the Franchisor must provide a written statement of material change to the potential Franchisee as soon as this change occurs, before the FDD is signed or any payment has been made[5].
• If the Franchisor fails to disclose the status of the trademarks/name or provide a written statement of material change, the Franchisee has the right to rescind the franchise agreement for lack of or improper disclosure without any penalty or obligations. The repercussions of rescission are severe on the Franchisor – the Franchisor must refund any money received from the Franchisee, including the Franchise Fee, re-purchase all inventory from the Franchisee, and compensate the Franchisee for any losses incurred.[6]
• If a dispute arises with regard to the IP rights of the Franchisor, the Franchisor has a legal obligation to disclose this dispute to other potential Franchisees in its FDD package – thus eroding the goodwill of the Franchisor’s brand.

It is no coincidence that the IP and Franchise departments in a law firm usually work closely – the two areas of law are, indeed, two complimentary peas in a pod. An IP review of the franchise system prior to the preparation of the FDD is therefore crucial – proceeding without such a review can have adverse consequences on the Franchisor and its business and result in non-compliance with the AWA and financial ruin.

[1] Arthur Wishart Act (Franchise Disclosure), 2000 S.O. 2000, c3.

[2] Section 1 of the AWA.

[3] Nemo dat quod non habet.

[4] Trademarks Act, RSC 1985, c T-13.

[5] Section 5 of the AWA.

[6] Section 6(6) of the AWA.