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Civil liability still at stake in price maintenance schemes

While price maintenance is no longer an indictable offence, franchisors must still be aware of restrictions under the Competition Act that could lead to civil liability, says Calgary franchise lawyer Sam Khajeei.

“Franchisors are subject to a regime that is more clearly defined,” says Khajeei, an associate with Nerland Lindsey LLP. “Previously, the Act was worded broadly, leading some to worry about how they would enact their policies related to pricing.”

Khajeei tells AdvocateDaily.com that changes to the Act in 2010 provide a more “narrow way of defining anti-competitive practices, which allows more comfort and guidance for franchisors.”

The law is particularly relevant to franchises because consistency in pricing is essential to the way these businesses work, he says.

“The goal is to have uniformity in the system. If franchisors allow their franchisees to sell for any price they want, they wouldn’t have that uniformity and consistency,” Khajeei says. “Not only would it look bad on the brand, it could lead to another franchisee undercutting their prices.”

Although the changes that nixed potential jail time for violators came into effect eight years ago, he says they remain on the radar of his clients.

The decriminalization came as part of Bill C-10, the 2009 Budget Implementation Act, which also included a broader economic stimulus package, according to the Competition Bureau.

Over a period of two decades, a number of standing committees recommended decriminalizing price maintenance, according to a 2013 decision.

But Khajeei says decriminalization doesn’t allow for complete freedom when it comes to pricing, and that it’s important for businesses to understand there are still rules that must be followed in setting prices for franchisees.

Under the more recent civil provisions, someone can be ordered to stop engaging in price maintenance — or preventing a customer from selling a product below a price by means of threat, promise or agreement — if the practice is likely to have an adverse effect on market competition.

“Abuse of dominance,” or when a leading firm engages in anti-competitive conduct meant to eliminate competition, is also prohibited under the Act.

Khajeei says as long as franchisors are aware of and comply with the relevant sections of the Act, including Sections 76, 78 and 79, the concern of civil liability may be mitigated. Any complaints would also need to stand up before a tribunal.

“To be found liable for non-compliance with the Act, an applicant must successfully bring an application to the Competition Tribunal which will be considered on the facts, on a case-by-case basis and meet the threshold for the alleged offence,” he says.

“Even if a franchisor engages in these types of practices, the tribunal must be satisfied the conduct had an adverse effect on the market.”

Franchisors should be aware that the criminal penalties were removed and were replaced with monetary penalties and powers to prohibit anti-competitive practices in the case of price maintenance and abuse of dominance offences, he says.

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