Tim Hortons Franchisees Must Be Content With Profits from Coffee, Not Food

Tim Hortons franchisees have lost their challenge to Tim Hortons’ “Always Fresh” model that allegedly reduced the profitability of donuts, TimBits, and other food items. In Fairview Donut Inc. v. The TDL Group Corp., the Ontario Court of Appeal upheld a lengthy lower court decision that on the one hand certified a class action against Tim Hortons, but on the other hand granted summary judgment in its favour and dismissed the action.

At issue was the requirement for Tim Hortons franchisees to purchase par-baked donuts and lunch menu items directly from Tim Hortons rather than making those items in store as had been the case. The franchisees argued that the requirement to purchase items directly from Tim Hortons had a negative impact on their profitability as the items were more expensive than in-store scratch-baked items such as donuts.

The Court of Appeal accepted the motion judge’s opinion that it was not the profitability of individual items that was important in determining whether Tim Hortons had breached its contract with the franchisees, but rather the profitability and prosperity of the Tim Hortons system as a whole.

For example, the evidence on the motion was that the expression “Tim Horton System” was used some twenty-five times in the course of the franchise agreement, including a body of knowledge, trademarks, procedures and products, “all of which may be improved, further developed or otherwise modified from time to time”. As part of that agreement, the franchisees agreed to follow the procedures specified by that system and to sell the products that are part of the system. [para. 427 of Superior Court of Justice decision]

The plaintiffs also argued that Tim Hortons was not acting in good faith towards its franchisees as required by the Arthur Wishart Act (Franchise Disclosure) or at common law by centralising production of food items. On this point, the Court of Appeal again agreed with the motion judge, Strathy J., that there was ample evidence led that scratch-baking was unsustainable in the long run and that the move to centralized baking was beneficial for franchisees.

Unhelpful to the plaintiff franchisees was the evidence of eleven other franchisees, which was uniformly positive about the benefits of the Always Fresh centralized baking. They gave evidence that the Always Fresh method permitted them to bake as required throughout the day, allowing them to respond more effectively to customer demand and reducing the amount of “throws”. They acknowledged that there had been an increase in food cost for the Always Fresh par-baked products, but said that this was offset by lower labour costs, reduced wastage, improved product quality and a much easier baking method. It was their overwhelming evidence that the conversion to Always Fresh was beneficial to the franchisees and had been an improvement in the Tim Hortons system. [para. 50 of Superior Court of Justice decision]

The plaintiffs had also amended their pleading to force a competition law theory onto their case. They alleged that Tim Hortons had, through the Always Fresh model and its distribution system, violated sections 45 (conspiracy) and 61 (price maintenance) of the Competition Act by using agreements and promises to fix, maintain or unreasonably enhance the prices of Always Fresh baked goods, thereby raising the prices significantly above market prices and reducing the profits of the franchisees. Strathy J. rejected both claims.

Strathy J. observed in his decision on the motion that “there is nothing civilly or criminally wrong with a franchisor selling a product to its franchisee at a price that results in a profit – even a substantial profit – to the franchisor.” [para. 574 of Superior Court of Justice decision]

Strathy J. dismissed the plaintiffs allegations of retail price maintenance under s. 61 of the Competition Act. This provision, which has since been repealed, did not prohibit a supplier from making a large profit on product it sells, nor from raising its own prices. There was no evidence that Tim Hortons was trying to influence the prices at which its franchisees sold donuts (apart from a stipulated maximum price).

Similarly, the old section 45 did not prohibit the taking of excessive profits, Strathy J. observed. He found that there was no evidence of an anti-competitive effect from the prices charged to franchisees.

Finally, the plaintiffs’ Competition Act claims were filed too late, since the latest that the plaintiffs could reasonably have discovered the alleged breaches of the Competition Act was more than two years before the claims were added. [para. 647 of Superior Court of Justice decision]

The costs of the appeal were fixed at $125,000.

The Court of Appeal decision can be found at: http://canlii.ca/t/fv39k

The Superior Court of Justice decision can be found at: http://canlii.ca/t/fq8sb

Update: Michael Binetti’s article Tim Hortons Franchisees Must Be Content With Profits from Coffee, Not Food has been selected as the feature article in OnPoint Legal Research’s January 2013 Ontario Take Five (PDF) newsletter.