What is the current state of Canadian law regarding pricing practices between franchisors and franchisees?
While the practice of price maintenance has been reduced from a criminal offence to a reviewable practice under Canada’s competition/anti-trust laws, any franchisor that is considering setting resale prices or maximum resale prices for its franchisees must undertake a review of the likely anti-competitive effects of the practice before doing so. Otherwise, the franchisor may find itself involved in a hearing before the Competition Tribunal.
Price maintenance was a criminal offence under s. 61 of the Competition Act (the Act) until this provision was repealed in 2009. It is now a reviewable practice under s. 76 of the Act. Either the Commissioner of Competition, or a private party with leave to do so may bring an application to the Competition Tribunal for an order to prohibit the conduct or require the respondent (i.e., the franchisor) to supply on usual trade terms. For such an order to be made, the conduct must be likely to have “an adverse effect on competition in a market.”
Subsection 76(5) of the Act provides that the suggestion of a resale price will not be considered to constitute price maintenance, provided it is made clear to customers (i.e., franchisees) that they are under no obligation to accept the suggested prices and will in no way suffer in their business relations with the franchisor by failing to accept such suggestions. Since it is common for franchisors to suggest resale prices to franchisees, it is the recommended practice for a franchisor issuing a suggested resale price list or otherwise suggesting prices to its franchisees to include the statutory disclaimer language in the franchise agreement, price list or other related material.
However, many franchisors (and franchisees for that matter) now wish to know whether a franchisor can set resale prices or maximum prices.
The short answer is that in many cases a franchisor may, without offending the Act and without being required to include the disclaimer language, set resale prices or maximum prices and deem the franchisee to be in default under the franchise agreement (provided that the agreement deems such non-compliance to be a default) if the franchisee does not sell at such prices or sells above such maximum prices. However, this type of practice must be carefully considered, particularly in circumstances where franchisees do not face material competition from other brands. In addition, serious concerns may arise if a price maintenance program is being used to facilitate price fixing among competitors or potential competitors at any level of the distribution chain. Price maintenance may also raise concerns where it constitutes an anti-competitive act engaged in by a firm with a dominant position. In all cases, careful consideration of the business rationale for price maintenance and a review of the relevant market and the effect of the practice on the market for the product or service being supplied would be required before engaging in the practice.
A franchisor can rarely take action against a franchisee by reason of the franchisee’s low pricing policies without falling within the reviewable price maintenance provisions of the Act. A suggestion of termination, or other threat as against the franchisee, could constitute such a reviewable practice under section 76 of the Act. A franchisor who refuses to supply products or influences suppliers not to supply a franchisee who is discounting or selling at prices below suggested resale prices may also be engaged in the reviewable practice of price maintenance. However, the franchisor can take such action if the franchisee is selling below cost or is engaged in misleading advertising or bait-and-switch selling. Again, a careful and detailed review of the consequences must be undertaken before a franchisor engages in such a practice.
Pricing practices between a franchisor and its franchisees vary and are often complex. The legal consequences depend on many factors, including the possible anti-competitive effects of the practice. Please contact any member of the Osler Franchise Team for advice regarding pricing practices.