Canada serves up a surprise for U.S. fast-food franchises

Popeyes Louisiana Kitchen is hardly a household name in Canada, unlike U.S. fast-food franchise royalty such as McDonald’s Corp.  or Burger King Corp. But the mid-sized U.S. restaurant chain and others like it have their sights set on expansion to the north.

Andrew Skehan, international chief operating officer for Atlanta-based Popeyes, said his chain now has 63 locations in Ontario, most of them clustered in the Greater Toronto Area. New outlets, including one in downtown Toronto’s east end that opened recently, keep cropping up.

“Canada is certainly one of our growth markets. Our business is very healthy up there,” Mr. Skehan said in an interview. “Compared with the U.S., your economy has weathered the recession much better.”

While Mr. Skehan says Popeyes’ U.S. business is still thriving despite the tough times, many franchise companies seeing slower growth in the United States are now looking to Canada. Lawyers and industry observers say the move is driven by Canada’s healthier banks, which are more likely to lend prospective franchisees money, and its healthier economy, which means consumers may have more money to spend on guilty pleasures such as fried chicken.

However, some U.S. brands expanding into Canada for the first time could be in for a surprise, lawyers who represent franchisors here say. Relatively new laws in several provinces impose different, and some times more complex, rules on companies seeking franchisees to open branches of the business.

The laws are designed to protect mom-and-pop franchisees from being exploited by their more powerful corporate franchisor partners. It has resulted in court challenges involving some of the most popular fast-food brands, including the iconic Tim Hortons, from franchisees who allege their corporate parents of unfairly squeezing them for profits.

In many recent cases, lawyers who practise in this area say, judges have favoured franchisees.

Despite this, U.S. chains are increasingly interested in moving into Canada, said Larry Weinberg, a lawyer with Cassels Brock & Blackwell LLP in Toronto who acts for franchisors, including Popeyes. In the past few months, he said, he has attended conferences in Baltimore and Las Vegas where scores of U.S. brands expressed interest.

Other clients of his that are planning moves into Canada include Qdoba Mexican Grill, which has 700 U.S. locations; and Famous Dave’s of America Inc., a barbecue chain based in Minnetonka, Minn., that recently signed a deal to open its first Canadian restaurant in Winnipeg.

Mr. Weinberg said the stronger dollar and the relatively health economy have made Canada attractive for U.S. chains. But he and other lawyers who work for franchisors warn that the legal climate in Canada around franchising could end up scaring away investment.

Ontario, Alberta, PEI, and New Brunswick all have franchise laws that force franchisors to produce disclosure documents, which resemble mini-prospectuses, to prospective franchisees. Soon, Manitoba will have a similar law.

Although such laws are common in the U.S., the requirements in Canadian provinces are different. Mr. Weinberg said that if the costs of redrafting the U.S. disclosure documents to meet various standards across Canada are too high, some U.S. brands might not want to make the effort to expand here.

“They are creating more of a hurdle or a barrier to entry,” he said of the various provincial laws. “And if they make it too complicated, you’re liable to find that big brands, either from Canada or from the U.S., are going to say, ‘Why bother? I’m not going to go there.’ ”

Jennifer Dolman, a Toronto litigator with Osler Hoskin & Harcourt LLP who acts for franchisors, said recent “harsh” rulings have seen judges favour franchisees in disputes.

“A lot of U.S. companies want to come here, because they do the research and they understand that there’s the market and large customer base,” Ms. Dolman said. “But they get very nervous about our laws. Very nervous.”

Another concern for U.S. franchisors is their trademark, she said. If another restaurant in Canada is already using a name similar to a U.S. chain, expansion could involve expensive litigation. For example, Minneapolis-based Buffalo Wild Wings Inc., which recently expanded into the Toronto area, has faced litigation over its name in a battle with Wild Wings, of Aurora, Ont.

Despite potential pitfalls, the flow north continues.

Andraya Frith, Ms. Dolman’s colleague in Osler’s franchise law group, said business from U.S. franchisors has picked up dramatically after going into “pens-down mode” during the 2008-2009 financial crisis.

“Certainly in the last 12 to 18 months it started to [move] up again in a big way,” Ms. Frith said. “I chalk it up to them recognizing that the Canadian economy is stronger.”

Mr. Weinberg agreed that concerns about regulations and litigation aren’t deterring his U.S. clients: “People are still coming. ... Franchising thrives, nowhere more so than in the U.S.”