Franchise And Competition Class Actions: Dismissal Of Tim Hortons Class Action Is Good News For Franchisors

In a sweeping decision with significant implications for franchise and other vertical distribution arrangements, the Ontario Superior Court of Justice has dismissed a $2 billion franchise and competition class action against Tim Hortons on the merits.1 This important decision will have application to cases involving the pricing of products within franchise systems, the franchisor's duty of good faith and fair dealing, and the competitiveness of vertical pricing and distribution arrangements in Canada. The Court also provided significant guidance on the impact of a number of recent amendments to the Competition Act relating to horizontal conspiracies, price maintenance, vertical arrangements as well as strategic joint ventures.

Background

The plaintiffs' claims against Tim Hortons were based on two significant changes to the franchise system: (1) Tim Hortons' conversion to the "par baking" method for baking donuts and other baked goods, known as "Always Fresh"; and (2) the introduction of soups, sandwiches and other "lunch menu" items. The plaintiffs alleged that "Always Fresh" increased their costs to produce baked goods, cutting into their profit margins, and that Tim Hortons required franchisees to sell lunch menu items at a loss or at break-even prices while profiting through rent, royalties and advertising payments based on franchisee sales.

In support of these claims, the plaintiffs advanced various legal theories based on breach of express and implied terms of the franchise agreements, breach of the duty of good faith and fair dealing at common law and under Ontario's Arthur Wishart Act (Franchise Disclosure), 2000 (the Arthur Wishart Act), unjust enrichment, and breach of the price maintenance and conspiracy provisions of the Competition Act, including the new per se conspiracy offence that came into force in March 2010.

The Decision

For procedural reasons specific to this case, Justice G.R. Strathy, an experienced class action judge who has previously certified three franchise class actions,2 heard and decided the plaintiffs' certification motion together with Tim Hortons' motion for summary judgment. As Justice Strathy granted summary judgment dismissing the entire case, it was unnecessary for him to decide the certification motion, but he nonetheless provided reasons on the certification motion, concluding that he would have certified the class action, subject to further submissions on the suitability of the representative plaintiff.

For reasons summarized below, the Court dismissed all of the plaintiffs' claims:

No Breach of Contract - The Court rejected a breach of contract claim based on the plaintiffs' interpretation of the franchise agreement that Tim Hortons was obligated to sell ingredients at either "commercially reasonable" prices or prices lower than Tim Hortons' suppliers' prices. The Court also rejected the existence of an implied term in the franchise agreements that ingredients would be sold to franchisees at "commercially reasonable" prices. No Breach of Duty of Good Faith and Fair Dealing - The Court concluded there was no breach of the common law and statutory duties of good faith and fair dealing principally because the conversion to "Always Fresh" and introduction of lunch menu items were decisions made honestly and reasonably for legitimate business reasons. No Unjust Enrichment - The Court rejected any claim based on unjust enrichment because any enrichment of Tim Hortons was the result of a lawful contract and hence there was a "juristic reason" for any such enrichment. No Retail Price Maintenance – The Court dismissed the claims based on the former price maintenance provision of the Competition Act because, inter alia, the pricing arrangements at issue involve the setting of a wholesale price through a joint venture, and they did not impair the ability of downstream purchasers to sell at any price they chose. No Price Fixing – In dismissing the price-fixing claim under the "old" section 45 of the Competition Act (Old Section 45), the Court found that there was no evidence of any anti-competitive intent on the part of Tim Hortons and no evidence of any undue lessening of competition.3 Furthermore, in dismissing the price-fixing claim under the "new" section 45 of the Competition Act (New Section 45), the Court found that there was no evidence that Tim Hortons was a "competitor" with IAWS, its co-joint venturer in a facility to supply par baked donuts to franchisees. In addition, the Court held that Tim Hortons' agreement with IAWS was a joint venture agreement that should be properly reviewed under the reviewable civil agreements provision under section 90.1 of the Competition Act, as opposed to the criminal provisions of the Act. In any event, the Court also concluded that...