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Bulletin

Some Tips To Better Manage Your Network’s Reputational Risk

Fasken
Reading Time 4 minute read
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Franchising Bulletin

One of the negative effects of the ever-increasing presence of social media in our lives is the great speed at which news, whether accurate or not, and comments can spread to a very large number of people, even when they harm a brand, company or network.

The people's court, whose judges consist of everyone who receives such news or comments, is also very quick to make judgments concerning the enterprise in question. This often happens even before the enterprise has had any chance to correct the misinformation or respond to the comment.

For a franchise network, this means that news or negative comments can very quickly have a significant impact on the reputation of both the franchisor and its entire network, affecting sales and their relationships with their current and potential franchisees, suppliers, business partners, etc.

Can reputational risks be reduced through clauses in the franchise agreement?

The answer is yes, but with certain limitations.

For example, you cannot, in a contract, restrict a franchisee's right to express his opinion or to associate with other franchisees to assert his point of view. Doing so would infringe the rights protected, in Quebec, by the Charter of Human Rights and Freedoms and, in the other provinces, with the federal and provincial laws to the same effect. Also, in the six Canadian provinces with franchising legislation, the franchise act includes an article guaranteeing franchisees the right to associate with other franchisees and form a franchisees' association.

However, here are some clauses a franchisor has the right to include in its franchise agreement (as well as in an agreement with a franchisee's shareholders, directors and officers):

  • Strong and comprehensive confidentiality undertakings preventing any unapproved disclosure or use of documents and information concerning the franchisor, its franchisees and its network that are not publicly available;
  • Undertakings limiting, or submitting to specific rules, any on-line posting of any website or any social media page or group that uses a name or trademark of the network or that makes any reference to the franchisor, the network or the franchised business;
  • An undertaking to notify the franchisor before contacting any news media about a topic concerning the franchise network or before responding to any request by a media about such a topic;
  • An undertaking to give the franchisor access to all content (even private content) of any website and any page or group on a social network that uses a name or trademark of the network or that makes any reference to the franchisor, the franchised network or the franchised business;
  • An undertaking to notify the franchisor immediately of any comment, news, photo or video broadcast in a news media or on a social network that concerns the franchisor, the franchise network or the franchised business, and to also provide it with all references and information the franchisor needs to access it quickly;
  • An undertaking not to release or post on-line any news or comment that is prejudicial to the franchisor or the franchise network or likely to lead to dissension within the franchise network.

To give them the importance they deserve, these clauses could also come with specific and relatively severe consequences if they are breached, which could include:

  • Termination of the franchise agreement;
  • Liquidated damages proportionate to the scope of the harm that could be caused to the franchisor and its network;
  • Undertaking to reimburse the franchisor all costs and fees, including lawyers' and experts' fees, incurred to attempt to remedy the situation or minimize any resulting damage.

It is important to realize that the drafting of such clauses is very delicate and should be entrusted to legal experts to ensure these are legal and, especially, effective when needed. These clauses should also be adapted to the reality of each franchisor and to its resources.

On another level, given the importance for a franchisor of adequately protecting its reputation and that of its network, a franchisor must devote enough resources to ensure appropriate strategic monitoring of the news and comments (both in the traditional media and in social media) that involve or could affect its network.

It would also be appropriate for the franchisor to include in its training programs for its employees, franchisees and its franchisees' employees a module on the importance of protecting the network's reputation, on the confidentiality rules to be complied with and on the rules governing the release or posting of any news, information, comment, photo or video about the franchisor, the franchise network or the franchisee.

In its April 15, 2015 judgment in Dunkin' Brands Canada Ltd. v. Bertico inc., the Quebec Court of Appeal recognized that one of the implicit obligations of any franchisor is to take reasonable measures to protect its network in the face of market developments that could cause it harm. Although that judgment does not specifically mention harm to the reputation of a network in news media or social networks, that principle may very well apply in this case.

As a result, it is quite possible that a franchisor who does not take reasonable measures to properly manage the risks - and the consequences - of damage to its network's reputation may be held liable for the resulting damages suffered by its franchisees.

Fasken has all the expertise and the necessary resources to help you draft comprehensive and adequate agreements that will protect your rights while avoiding potential pitfalls.

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