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.
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.
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