Competition Law and Franchising

• Author: Frank Zaid
• Profession: Senior Partner Osler, Hoskin & Harcourt LLP
• Pages: 131-169

CHAPTER 4

COMPETITION LAW

AND FRANCHISING

A. INTRODUCTION

The Competition Act1 (Act) regulates private business activity in order

to maintain and encourage competit ion in the economy of Canada. The

Act affects franchising in many ways and its application can be broken

down into two categories. The f‌irst consists of criminal offences that

are regulated by direct prosecution under the criminal law of Canada.

The other consists of trade pract ices that are rev iewable by the Compe-

tition Tribunal (Tribunal). Criminal offences of particular signif‌icance

to franchising include price discrimination, promotional allowances,

price maintenance, pyramid selling, conspiracy, deceptive telemarket-

ing, and misleading advertising.2 Relevant reviewable pract ices include

refusal to deal, exclusive dealing, market restriction, tied selling, abuse

of dominant position, mergers, delivered pricing, as well as deceptive

marketing, promotional contests, and bargain pricing.

Administration of the Act is vested in the Commissioner of Com-

petition (Commissioner), who functions with a staff allocated to the

Competition Bureau (Bureau), which is part of Industry Canada. In

1R.S.C. 1985, c. C-34.

2Amendments to t he Competition Act in 1999, Bill C-20, created a new civil

regime for mislea ding advertising to complement t he criminal provi sions. The

Commissione r can opt for either the crimi nal or civil route, but not both. Ibid.,

ss. 52(7) and 74.16.

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fra nchise law132

general, the Commissioner investigates and either recommends pros-

ecution by the Attorney General of Canada for criminal offences or

pursues administrative remedies at the Tribunal for reviewable or civil

matters. The Commissioner investigates, pursuant to section 10 of the

Act, whenever the Commissioner has reason to believe that a person

has contravened an order made under the Act, that grounds exist for

making such an order or th at an offence has been or is about to be com-

mitted, or whenever the Commissioner is directed by the Minister of

Industry Can ada to make an inquiry. In practice, most inquiries by t he

Commissioner are the resu lt of informal complai nts and other informa-

tion brought to the attention of the Commissioner by private parties.

The Commissioner must also investigate pursuant to section 9 when-

ever six persons resident in Canada apply to the Commissioner with a

solemn or statutory declar ation stating t hat they are of the opinion that

a person has contravened an order made under the Act, that grounds

exist for making such an order, or that an offence has been or is about

to be committed.

The Act contains “whistleblower” protections for informants in

sections 66.1 and 66.2. If employees wish to report an offence th at they

reasonably believe ha s been committed, or will be committed, they can

request conf‌identiality for their identit y. Employees may also report any

obstacles they face while attempting to do something that is required

by the Act. Penalties exist for any employer who harasses, dismiss-

es, or penalizes in any way an employee who has reported an offence.

Furthermore, the Act forbids an employer from punish ing an employee

for refusing to commit an offence or for doing something required by

the Act. The def‌inition of “employee” in the Act3 for the whistleblower

protection includes independent contractors. It may therefore be pos-

sible for a franchisee to benef‌it from the expanded def‌inition of em-

ployee and to seek protection from the Act if the franchisee reports an

offence being committed or about to be committed by a franchisor.

If an inquiry under the Act is commenced, the Commissioner’s in-

vestigatory powers are broad. The Commissioner can make an ex parte

application to a judge of a superior or county court for an order that a

person named in the application attend for examination under oath or

solemn aff‌irmation, or produce records or written returns, including

full disclosure and production of all contracts or agreements that he or

she may have entered into at any time with any other person.4 Further-

more, the Commissioner can make an ex parte application to a judge

3Ibid., s. 66.2(3).

4Ibid., s. 11.

Competition La w and Franchising133

of a superior or county court for a warrant to enter into premises and

to examine and take documents or records considered relevant to the

inquiry.5 Any order for the production of documents or for the search

and seizure of documents must respect solicitor-client privilege.

In addition to the Commissioner’s power of investigation, private

parties have specif‌ic rights to seek redress directly. Private parties can

sue and recover damages, from a person convicted of a crimina l offence

or who has violated an order of the Tribunal made on a reviewable mat-

ter.6 Section 36 does not provide damages for a practice t hat simply con-

stitutes a reviewable matter. Private pa rties can, however, apply for leave

of the Tribun al7 to bring an application for the reviewable matters found

in sections 75 and 77 (refusal to deal; and exclusive dealing, tied selling,

and market restriction, respectively). Those who might use this private

access regime include competitors seeking supply, terminated dealers

and franchise es, and competitors alleging they are unable to compete or

enter the market because of tied selling or exclusive dealing.

Private access under s ection 103.1 was introduced as part of amend-

ments to the Act in 2002. At the time, there was concern that competi-

tors might use this procedure to engage in strategic litigation in order

to gain an advantage over their competitors. Accordingly, the following

safeguards were put in place: applicants must apply for leave of the

Tribunal; respondents can m ake representations to the Tribunal withi n

f‌ifteen days after receiving notice; applicants will not be granted leave

if the matter is or has been the subject of an inquiry by the Commis-

sioner; damages cannot be awarded to aggrieved parties; full costs can

be awarded against any party in accordance with the Federal Court

Rules; applications must be made no more th an one year after the prac-

tice that is the subject of the application has ceased; and an economic

test was added to the refusal to deal provision contained in section 75

that requires the applicant to prove an adverse effect on competition.

Despite these safeguards, the possibility of strategic litigation re-

mains. Although the Tribunal acts as a “gatekeeper” in granting leave,

it need only have “reason to believe” that the applicant is “directly and

substantially affected.” Second, the time for the respondent to submit

representations to the Tribunal i s only f‌ifteen days, a nd the respondent

needs to act quickly or risks being involved in potentially disruptive

and expensive proceedings. Finally, there is no right for the respond-

5Ibid., s. 15.

6Ibid., s. 36.

7Ibid., s. 103.1.