Recent amendments to Canada’s Competition Act have decriminalized the price maintenance provisions. As a result, franchisors may have more flexibility to influence franchisee pricing. In particular, except where doing so could have an “adverse effect on competition”, franchisors will be better able to influence the price at which their franchisees sell, offer to sell or advertise products.
Prior to the amendments, it was per se illegal (meaning that the effect of the conduct on competition was irrelevant) to:
- by agreement, threat, promise or any like means, attempt to:
- influence upward, or discourage the reduction of, the price at which a person supplied, offered to supply or advertised a product within Canada; or
- induce a supplier as a condition of doing business, to refuse to supply a product to a particular person or class of person, because of their low pricing policy; or
- refuse to supply a product to, or otherwise discriminate against, a person because of their low pricing policy.
Price maintenance is now a civil reviewable practice, rather than a criminal offense, meaning that it is presumptively lawful unless and until it is proven to have an adverse effect on competition.
The Competition Bureau or an affected person may attempt to prove to the Competition Tribunal that the relevant price maintenance conduct has had, is having, or is likely to have an adverse effect on competition. If the Competition Tribunal agrees, its remedy powers are limited to granting an order to cease and desist the price maintenance conduct and/or to cause the supplier to supply the product within a specified time to those persons to whom it had previously refused to supply. There will be no fine, jail sentence, administrative monetary penalty or damages award.
This is not to say that franchisors have nothing to lose by engaging in price maintenance, as defending a challenge may entail considerable expense and adverse publicity, even if the franchisor is ultimately successful in the proceedings. However, franchisors who are prepared to accept these risks now have more flexibility to influence franchisee pricing than they did prior to the amendments.
As of January 2010, there is no case law or Competition Bureau guidelines to assist in determining how the amended provisions will be administered and enforced. However, if the Competition Tribunal considers the same factors that U.S. courts have considered in deciding recent price maintenance cases under U.S. law (and we believe that it likely will, at least to some degree), then it will take into consideration the following:
- Whether the manufacturer/supplier/franchisor or a dealer/retailer/franchisee have market power (over 35% market share). If a manufacturer/supplier/franchisor lacks market power, then it is less likely that a price maintenance policy implemented by that manufacturer/supplier/franchisor will have an adverse effect on competition;
- Whether price maintenance policies are commonly used in the industry. Price maintenance policies will generally be more carefully scrutinized if many competing manufacturers/suppliers/franchisors engage in price maintenance; and
- Whether the price maintenance policy originates with the manufacturer/supplier/franchisor or with the dealer/retailer/franchisee. An adverse effect on competition is more likely to be found in situations where a price maintenance policy results from pressure applied by dealers/retailers/franchisees.
Franchisors are strongly encouraged to consult legal counsel before implementing a price maintenance policy. Among other things, caution needs to be taken to ensure that a price maintenance policy does not contravene the criminal provisions of the Competition Act relating to horizontal agreements between competitors, amendments to which come into force on March 12, 2010.