Our friend and colleague Marius Adomnica (Gratl & Company) has written this good case note on the recent Tim Hortons class action case in Ontario:
The Ontario Superior Court of Justice recently released its reasons striking the Plaintiffs’ claim in Fairview Donut Inc. v. The TDL Group Corp., 2012 ONSC 1252, a widely reported Ontario class action arising out of a conflict over how the donuts in Tim Hortons stores are prepared.
Among the claims dismissed were claims the Plaintiffs had brought under the Competition Act.
While Tim Hortons donuts were traditionally baked from scratch in each individual store, in 2002 Tim Hortons partnered with an Irish company to establish a manufacturing plant that makes frozen, pre-cooked donuts and sells them to individual franchises, eliminating the need for the donuts to be baked from scratch at each store.
A number of dissatisfied franchise owners brought a lawsuit against Tim Hortons over this change, arguing essentially that the price they were required to pay for these donuts under their franchise agreements unfairly cut into their profits. Among other claims, the Plaintiffs argued that the company’ actions violated sections 61 (Price Maintenance) and 45 (Conspiracy) of the Competition Act.
The former criminal section 61 of the Competition Act, which has since been repealed and replaced with a new reviewable practices provision, prohibited a supplier from using an “agreement, promise, threat or like means” to attempt to increase or “influence upward” the price at which another business, usually a retailer further down the supply chain, sells a product. The Plaintiffs in this case alleged that the agreements between Tim Hortons and individual franchise owners, which stipulated that the new pre-made donuts must be purchased at a specific price from Tim Hortons or its distributors, had the effect of maintaining an unreasonably high price for these donuts, and had thus violated section 61.
The court rejected this argument, finding that the existence of such agreements was not in and of itself sufficient to make out the offence of price maintenance. The court stated:
“In my view, to be guilty of the criminal offence of price maintenance, a party must do something more than “influence upward” the price of its own product by making a profit on a product that it sells to a second party for sale to a third party. It must be shown that the first party has taken other measures to influence upward or discourage the reduction of the price at which the second party sells the product. If an ordinary commercial agreement between the first party and the second party could be an “agreement, threat, promise or any like means”, the section would criminalize routine commercial conduct, which could hardly have been the intent.
… [as a result of their Franchise agreements] Franchisees may be stuck with one price [for pre-made donuts] which is, for practical purposes, non-negotiable. That is not, however, the result of conduct of Tim Hortons that is directed towards the reduction of competition. It is the result of a bargain made between Tim Hortons and its franchisees whereby franchisees give up the autonomy they would have as independent business people and agree to buy their products from suppliers and at prices specified by Tim Hortons.”
The court added that, in any event, allegations that section 61 was breached were better levied at the company Tim Hortons and its Irish partner had established to manufacture and sell the donuts, not Tim Hortons itself. The court thus and struck the Plaintiffs’ claim under section 61 of the Competition Act as having no reasonable chance of success at trial.
The Plaintiffs also brought a claim under section 45 of the Competition Act (criminal conspiracy agreements). The former section 45 of the Act made it a criminal offence, among other things, for persons, usually competitors, to conspire (i.e., agree or arrange) to prevent or lessen competition “unduly”. Section 45 underwent significant amendments in 2009 (which came into force in 2010). The Plaintiffs brought their claim under both the current and previous versions of section 45.
In addressing the Plaintiffs’ claim under the previous version of section 45, the court found that a reasonable person in Tim Horton’s situation would not be aware that the franchise agreements that the company was party to, which compelled franchises to purchase frozen donuts at set prices, worked to substantially lessen competition, as individual stores remained able to set their own prices.
Thus, the court found that the ‘intent’ or ‘mens rea’ component of the offence was not made out. Further, the court took issue with the lack of market data provided by the Plaintiffs, and found that there was no evidence that the agreements served to in fact unduly lessen competition. The court thus dismissed the Plaintiffs’ claim under the previous version of section 45.
The Plaintiffs’ claim under the current version of section 45 was also unsuccessful. Unlike its predecessor, the current version of section 45 applies only to a party that enters into an agreement with a ‘competitor.’
While the Plaintiffs alleged that Tim Hortons’ Irish business partner was a competitor for the purpose of section 45, and their agreement to manufacture and sell the donuts between the two parties thus breached the section, the court found that there was no evidence that the two companies had ever actually competed in the Canadian market, or that, in the absence of its’ agreement with Tim Hortons, the company’s Irish partner would even have produced pre-made donuts in Canada.
Thus, the court found that the two companies were not ‘competitors’ for the purpose of this section and dismissed the Plaintiff’s claim under the ‘new’ version of section 45 of the Act.
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