The Franchise Memorandum

In a far-reaching decision with important implications for franchisors operating in Canada, the Ontario Superior Court of Justice last month dismissed a $2 billion action brought against franchisor Tim Hortons by a putative class of Canadian franchisees. Fairview Donut Inc. v. The TDL Group Corp., 2012 ONSC 1252 (Can LII). The decision addresses the pricing of products within a franchise system and the competitive impacts of vertical pricing and distribution under Canadian law. The court also provided the first guidance on a number of recent amendments to Canada’s Competition Act.

The lawsuit challenged major changes to the Tim Hortons franchise system. First, the plaintiffs alleged that a new baking method increased their costs. A second allegation was that Tim Hortons required franchisees to sell lunch menu items at a loss or at break-even prices while the franchisor profited from rent, royalties, and advertising payments based on franchisee sales. The court granted summary judgment for Tim Hortons on each claim, which were pleaded as breach of express and implied terms of the franchise agreements, breach of the duty of good faith and fair dealing, and breach of the price maintenance and conspiracy provisions of the Competition Act (including the 2010 amendment adding a per se conspiracy offense). Of particular interest is the court’s treatment of the plaintiffs’ Competition Act claims based on the allegation that Tim Hortons’ pricing and supply arrangements were not “commercially reasonable.” Specifically, the court’s decision confirmed that parliament’s amendments to the Act narrowed its application in the context of franchise disputes, which the court found to be simply commercial disputes that do involve anti-competitive conduct.