15 minute read
ASK THE EXPERTS
QASK A LEGAL EXPERT What do franchisees need to know about cybersecurity and data protection risk mitigation?
ACYBERSECURITY RISKS HAVE INCREASED in a variety of industries due to the diffuse, remote working conditions introduced by COVID-19 that have added additional security concerns that did not previously exist. Additional IT endpoints without sufficient security oversight have permitted an increased number of cybersecurity incidents to occur.
Franchised businesses, which were already vulnerable to cybersecurity incidents due to their own inherently diffuse nature, have proven to be no exception to this trend. Franchisees must be aware of their cybersecurity and data protection risks to maintain compliance with their franchise agreements and to decrease their potential liability for providing access to the franchise system’s larger IT infrastructure in the event of a cybersecurity breach.
Sources of cybersecurity and data protection compliance requirements
Cybersecurity and data protection compliance requirements for franchisees are mandated by two equally important sources: legislatively, as provided under the Personal Information Protection and Electronic Documents Act, S.C. 2000, c. 5 (“PIPEDA”), and contractually, pursuant to the confidentiality and/or data protection provisions of their applicable franchise agreement.
Section 7 of PIPEDA requires a business that receives, processes, or uses personally identifiable information to use commercially reasonable methods to safeguard such data from loss, theft, or unauthorized use in a manner that is commensurate to its sensitivity. However, PIPEDA does not prescribe the safeguards required to comply with the business’ mandate to protect the personally identifiable information.
Similarly, in most instances the confidentiality and/ or data protection provisions that are contained in a franchise agreement do not specify the safeguards that are required, only stating that “commercially reasonable measures” must be used by the franchisee.
Significant ambiguity occurs where a franchisee must determine whether their systems are providing adequate protection to meet their legislative and contractual commitments. Despite this, there are several solutions that can be used to enhance a franchisee’s cybersecurity infrastructure in a cost-effective manner.
Two-factor authentication
Two-factor authentication is one of the simplest ways to safeguard IT systems. It can be easily enabled through many operating systems without investing significant time or expense. By ensuring that a login attempt is verified through a secondary device, possession of the principal device is confirmed, and hackers can be prevented from accessing the IT system even if they have a single, stolen password.
Password policies
Complicated password policies are a simple, free, and effective way of adding additional security measures to an IT system. By mandating that passwords are sufficiently complicated (for instance, a minimum of eight characters including lowercase letters, uppercase letters, numbers, and special characters), coupled with a maximum number of login attempts prior to locking a user account, brute force attempts to guess passwords can be effectively thwarted. In addition, a reasonable schedule for updating passwords should be instituted to complement the password complexity policy. The password reconfiguration schedule should balance the need to update stale passwords with the need for employees to remember the updated password without writing it down or forgetting it.
Data protection agreements
Often, franchisees can be lured into entering contracts for IT services by the lowest bidder. The lowest price for ostensibly similar services can often be a wise business decision. However, significant care must be taken when using IT service providers and the back-end services they provide for cybersecurity and data protection. The lowest prices for IT services are routinely given by contractors without the highest level of sophistication in cybersecurity.
It is also common to see low-cost IT service providers impose the responsibility of remediating data breaches onto the client. It is very important to have any IT service contract reviewed by a lawyer with experience in both franchising and IT to ensure that a data protection provision is included. It also ensures the franchisee is not unintentionally underwriting the risk of cyber breaches for their IT service provider or the whole franchise system.
Andrew Johnson, Lawyer (Franchise, Technology, and Privacy Law)
McKenzie Lake Lawyers LLP
andrew.johnson@mckenzielake.com
Cybersecurity insurance
Cybersecurity insurance is an increasingly affordable product. It can assist the policy holder in remediating data breaches, offsetting business disruption costs, and completing regular privacy audits. Many cybersecurity insurers will also provide clients with free training materials for employees that address emerging threats in a timely manner. Cybersecurity insurance products should be negotiated by a knowledgeable insurance broker to ensure that current risks are specifically insured against. This is particularly important for franchisees due to the insurance obligations that are routinely imposed by their franchisors.
While complying with cybersecurity and data protection requirements can seem overwhelming, there are several simple steps that can be leveraged to enhance your cybersecurity environment, including those outlined above. Experienced counsel can also assist with additional strategies and a determination of what your business needs to be compliant with the legislation and its applicable franchise agreement.
QASK A FRANCHISE EXPERT How do I determine if a franchise location is right for me?
AWHEN IT’S TIME TO SELECT A SITE for your new franchise location, the journey to owning a business suddenly becomes very real! Picking a great spot for your business has always been touted as one of the most important decisions franchisees make. That is more true now than ever before, as the retail environment remains uncertain and customer behaviours continue to evolve.
For established franchise businesses with hundreds to thousands of existing locations, you can expect to receive ample support from the franchisor when it comes to site selection. You should take advantage of the resources, as these businesses have years of experience in spotting the right locations. They likely have a calculated, proven formula for success to put in the context of your unique concept and what kind of market it might thrive in. Regardless of the level of support you anticipate, there are several tried-and-true tenets to follow and intimately understand.
Real estate site criteria
Looking at a brick-and-mortar site can offer a lot of clear tells as to whether or not it will be right for your concept. For most brands, considering what kind of visibility the space has, the frontage, the accessibility, parking spaces, and signage will all be important. There are also secondary criteria depending on your industry, such as if you need a loading dock, a drive-thru, and so on.
A creative approach to leasing
Beyond what’s visibly evident about the real estate, you should understand what kind of creative leasing solutions you might be able to collaborate on with the landlord. Throughout 2020 and into 2021, countless retailers have had to shift the delivery mode of their products from purely in-store to alternative means such as curbside pickup or taking over sidewalks. For example, if you’re a restaurant, would there be an opportunity to extend your outdoor seating area into the parking lot?
Long-term growth dynamics
A new franchisee’s goal is to have a sustainably viable business for years to come. That means when you consider a location, you need to think about what the location might look like in the present day, as well as three, five, or 10 years from now. Are there nearby developments that will be put into place that can boost potential market size? What is the schedule of those developments and will construction impact sales once you’ve begun operating?
Trade area shopper behaviour and profiles
Other “invisible” characteristics to understand when picking a location are the behaviours, personality, and demographics of a market. Are the people residing nearby a more mature population, students, or young
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Sarah Steiner
Chief Product Officer
PiinPoint
sarah@piinpoint.com
TUTORIAL 23: THE FUNDAMENTALS OF FRANCHISING
INTRODUCTION TO DISPUTE RESOLUTION
DESPITE BEST EFFORTS, there may come a time during a franchise partnership where a franchisee and franchisor disagree. This is a reality in any relationship. Maybe you disagree with how national advertising dollars are being spent, or think new menu items being introduced will not sell well in your market. Many franchisors have a franchisee advisory council where issues can be dealt with as a group.
Another approach is to simply talk to the franchisor. Many issues can be resolved by open communication between the parties with mutual respect for each other’s viewpoint. Set up a face-to-face meeting and present your case, but at the same time keep an open mind and listen. You may not have heard the research and logic behind the decision. Similarly, the franchisor may not have fully taken into account the franchisees’ firsthand experience.
If agreement still cannot be reached, there are options. The Canadian Franchise Association (CFA) has an Ombudsman program, a free program available to all franchisees and franchisors in Canada. The Ombudsman will listen to one or both sides and try to facilitate communication. All discussions are completely confidential and done informally by phone. Contact the CFA Ombudsman at 866-443-8255.
A franchise agreement will typically address dispute resolution. The agreement may make reference to both parties being required to go to mediation to resolve differences. Mediation is an effective way to resolve disputes that’s quicker and often less costly than going to court. The costs of mediation are shared by both the franchisee and franchisor and will vary depending upon the complexity of the disagreement. The process is formal and involves both parties meeting face-to-face with a neutral third party facilitating discussions to reach an acceptable agreement. Mediation is voluntary and nonbinding. It’s important to find a neutral mediator that both the franchisee and franchisor agree upon.
If an agreement can’t be reached through mediation, then arbitration becomes the next step to resolving the differences. Whereas mediation is non-binding, arbitration is binding and may result in a decision that’s not acceptable to one party. It’s a quicker and more efficient process than going through the courts and often less costly. By going to arbitration, the parties agree to give up their rights to pursue the dispute in court.
The arbitration must be agreed to by both parties. The arbitrator is ideally someone who understands law and franchising, often a lawyer or judge. The franchisee and franchisor typically must agree on an arbitrator. If an agreement can’t be reached, then often the franchisee and franchisor will each pick an arbitrator and the two arbitrators then pick a third. The arbitration process is then conducted before a panel of three arbitrators. This will result in the costs, shared equally by the franchisee and franchisor, being as much as three times more as that of a single arbitrator. The arbitrator(s) listen to both sides and review all evidence. This may take several days or several weeks. Once all material is reviewed, the arbitrator(s) deliberate before making a final decision. The entire process may take several months.
The last method of dispute resolution is going to court. In some cases, this may be the only way to find a solution, although it’s the most costly and can take years to resolve. This method is one that both franchisees and franchisors should look to as a last resort.
Disputes are often a part of any long-term relationship. Good franchisors are sensitive to individual circumstances but make decisions for the system as a whole. Communication and discussions often resolve many issues. If not, it’s prudent to understand the resolution alternatives.
Watch the Franchise Tutorials video on Dispute Resolution
TUTORIAL 24: THE FUNDAMENTALS OF FRANCHISING
AT SOME POINT DURING THE FRANCHISE relationship, there may come a time where a decision is made to bring the franchise partnership to an end. The franchise licence term may simply come to an end and you may decide not to renew, or there could be other reasons why an end of the franchise agreement would take place.
All franchise agreements make reference to defaults. This is where you’re in breach of the franchise agreement. The franchise agreement has obligations that you must meet, and failing to meet these obligations will cause financial loss to the franchisor or cause damage to the franchise brand.
Some defaults can be corrected or “cured.” Examples would be non-payment of royalties or fees, noncompliance with standards, or failing to submit reports and financial statements. In these cases, the franchisor will give you a reasonable amount of time to cure these defaults, usually 14 days. If you need more time due to unusual circumstances, let the franchisor know and they will often grant extensions. If you still fail to cure the default, then the franchisor has the right to terminate the agreement. Through your actions, you will decide whether or not the agreement comes to an end.
There will be some instances where the franchisor has the right to terminate the franchise agreement without notice due to your actions. It may be that you have charged a security interest or sold the business without the franchisor’s permission, intentionally provided false or misrepresented financial statements, or you have given away confidential information. It may be that your company has gone bankrupt, into receivership, or simply been abandoned. These circumstances all reflect a failing business. It’s important to remember that a good franchise system will usually minimize your risk, but doesn’t make you immune. The nature of business is that there will always be a chance that the business will fail for a variety of reasons. Ideally, you and the franchisor have been communicating and dealing with the shortfalls of the business long before it gets to this stage.
Know that, in the event that the business is failing, you have choices. One is to sell the business and transfer or assign the franchise licence agreement to a new franchisee. This is a far better choice than letting the business fail, as it allows you to recoup some, if not all, of your investment. You may also choose to transfer the franchise agreement because the business is doing well and you wish to recoup a return on your investment. You may want to retire, there may be a partnership breakup, or you’ve simply decided you want to do something else. Understand that a franchise isn’t a life sentence. Although the term of the franchise agreement may say 10 years, you may choose to sell your business and get out sooner.
When selling your business and assigning the franchise licence, be sure to check with the franchisor to see if they have a resale program. They may be working with qualified buyers who have an interest in your location. A transfer involves several requirements. The franchisor will want to approve any advertising that you do for the business sale. The franchisor must approve the new franchisee, all royalties and fees must be paid, and the franchise must be in good standing. There will typically be a transfer fee to pay to the franchisor, often a percentage of the current franchise agreement and, in some cases, a percentage of the total business sale price. The transfer fee will typically be used to cover the franchisor’s administration and training costs to facilitate the transfer to the new franchisee. Note, in many franchise agreements, there will be a clause where the franchisor has the right of first refusal and may choose to match the purchase price and buy the business themselves.
There are several unique circumstances where a change in ownership takes place. In some cases, you may decide to assign shares to potential investors or even key employees. The franchisor will typically want to approve the new shareholders if it’s a substantial share transfer and will definitely need to approve the assignment of shares if it changes controlling interest in the company. There may be circumstances where you transfer shares to family members. Often franchisors will allow this to take place without a transfer fee. There may be the harsh reality of death or permanent disability. The franchise agreement will often contemplate these situations with terms allowing the estate a reasonable amount of time to transfer the franchise to a new franchisee and recoup the investment. During this time, the business must continue to operate and the franchisor will often step in and manage or arrange the management of the business for a fee.
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When the franchise is terminated, you’ll be required to immediately cease doing business under the brand.
You’ll be required to return the confidential operation manuals and pay all outstanding fees and payments to the franchisor. In some cases, this may include future royalties that the franchisor would have earned if the franchised location had continued. Typically, you won’t be able to operate a competing business within a defined geographical area for a specified period of time.
Franchise relationships will come to an end for a variety of reasons. In many cases, it’s you and your actions that’ll dictate if it will happen and how. In other circumstances, it’ll be events outside of your control. When it’s time to bring the franchise relationship to an end, review your franchise agreement to have a full understanding of what the terms and conditions are for your agreement in these various scenarios. This will allow you to maximize your return on investment, or alternatively, minimize your loss.
Watch the Franchise Tutorials video on Termination, Transfers, and Assignments
STUDY QUESTIONS
TUTORIAL 23
1. The first method of dispute resolution a franchisee or franchisor should explore is:
a) Mediation b) An open discussion c) Legal proceedings
2. The costs involved in mediation, arbitration, or a court case are paid for by:
a) The franchisee b) The franchisor c) Splitting the cost equally between the franchisee and franchisor
3. Mediation is a non-binding process, while the results of arbitration are binding.
True or False?
a) True b) False
4. Going to court is the fastest and cheapest way to resolve franchisee-franchisor disputes.
a) True b) False
TUTORIAL 24
1. A default is:
a) When a franchisee is in breach of a franchise agreement b) Something that all franchise agreements make reference to c) Both a) and b)
2. When selling your business and transferring the licence to a new franchisee:
a) You should advertise and conduct the sale without notifying the franchisor b) You must allow the franchisor to approve the new franchisee c) You will never pay a transfer fee
3. If your franchise agreement is terminated, you can open a competing business next door right away. True or False?
a) True b) False
4. Franchise relationships can come to an end for a variety of reasons. True or False?
a) True b) False
) b4 3) a 2) c ) b1 Answer Key: ) a4 3) b 2) b ) c1 Answer Key:
