Canada: Manufacturing, Sales & Distribution Law @ Gowlings: October 16, 2012 - Volume 1, Number 2

Edited by Debi M. Sutin

Problematic Trends in Automotive Dealer Advertising

Ontario Motor Vehicle Industry Council (OMVIC), the regulatory body for Ontario car dealers and dealer advertising associations, has issued a number of bulletins covering "problematic trends in dealer advertising".  Importantly OMVIC now considers vertical legal disclaimers to be unacceptable (because they don't provide clear, comprehensible and prominent disclosure of important information).  The OMVIC bulletins also deal with the requirement that the model shown match the model advertised.  OMVIC is paying close attention to dealer price advertising.  Prices must be "all inclusive" and include freight, dealer administration fees, other dealer charges, the OMVIC fee and everything except taxes.  The increased level of scrutiny from OMVIC is not necessarily a bad thing.  It creates a level playing field for dealers and may keep provincial and federal regulators at bay.

Share the Wealth and the Costs

Manufacturers are increasingly expanding their manufacturing facilities or distribution operations into other countries.  When expansion into another country involves a related company, the company will need to consider how to price intercompany transactions, i.e. transfer pricing.  Governments around the world are extremely concerned about the erosion of their tax base and have become vigilant in their examination of cross-border transactions.

Many manufacturers will supply related entities with technical expertise such as patents, secret formulas or know-how.  The transfer pricing rules relied upon by most countries are founded on the arms length principle and the guidelines established by the OECD.  Other transactions which can result in transfer pricing issues include the provision of services between companies and the exchange of tangible goods.  While certain services may be easy to price, in many cases the price of goods and intangibles are difficult to determine and require complex economic considerations. 

Manufacturers would be wise to consider transfer pricing issues before facing a government audit to ensure that both profits and costs have been properly allocated between the companies (and countries) involved.

Two Recent Court Decisions have caused a Stir in the Franchise Community

Tim Horton's Defeats Class Action on Motion for Summary Judgment

In February, 2012, a class action against Tim Horton's was dismissed on a motion for summary judgment.  Franchisees had complained that Tim Horton's conversion from in-store baking to a central baking/distribution system called "Always Fresh" increased costs to franchisees.  They also complained that the cost of goods used to prepare the Lunch Menu were too high with the result that they only broke even or lost money on the Lunch Menu.  They sought damages of $1B.

 Tim Horton's defended the claim arguing that the Always Fresh Conversion and Lunch Menu were permitted by the franchise agreement and that the franchisees had no right to obtain products at a particular price. It argued that it acted in good faith throughout the relationship.

Some franchisees did not support the class action.  They gave evidence that the conversion to the Always Fresh system improved their quality of life, allowed them to control inventory better, made them less reliant on bakers, allowed them to train staff quickly to bake donuts and reduced waste.  While there was an upfront cost to converting to the Always Fresh system, there were labour cost savings.  Tim Horton's communicated the changes to be made to its franchisees over a three-year period ending in 2004.  The Court found that, while the cost of donuts increased under the Always Fresh system (from 7 cents to 18-20 cents), there was evidence that had the change not been made, costs of in-store baking would have risen resulting in a cost of 30 cents per donut, due to increased labour and ingredient costs.  Retail prices for donuts also increased over time off-setting some of the cost increase of the Always Fresh system.

 With respect to the Lunch Menu, Tim Horton's and its Advisory Board of franchisees spent considerable time considering the Lunch Menu in general and menu items in particular.  They were alive to competitive threats in the market and the need to introduce new menu items only after careful consideration of the justification for a particular item, the cost of ingredients and the price at which it was to be sold. Considerable research was conducted with respect to demands for a particular product before decisions were made to introduce it or to replace some items with others.  Lunch Menu items were also used to cross-sell other items, such as coffee, and were important to maintaining customer flow.

Mr. Justice Strathy held that every product offering did not have to be profitable so long as Tim Horton's considered the "profitability and prosperity of the system as a whole" in making decisions about its menu offerings.

Justice Strathy dismissed the action after explaining that Tim Horton's did what its contract permitted it to do.  He found that the plaintiffs were trying to impose duties on Tim Horton's that did not exist:

The court's responsibility is to give effect to that contract and to require the parties to discharge their contractual obligations fairly, in good faith and in a commercially reasonable manner.  Under the guise of [bad faith] claims, the plaintiffs are really asking the court to re-write their contracts and to require Tim Horton's to perform those re-written contracts in a manner that the plaintiffs or their expert would find commercially reasonable. This is not the court's function.

This decision is under appeal. 

Quebec Superior Court Imposes a Duty on Dunkin' Donuts to Maintain and Enhance its Brand

In June, 2012, Mr. Justice Tingley of the Quebec Superior Court found Dunkin' Donuts liable for $16.4MM in damages to 21 of Dunkin's former franchisees.  The Judge ruled that Dunkin had a contractual obligation to take steps to protect its brand in the face of increased competition from Tim Horton's and that it failed to meet this obligation.  The Dunkin brand went from 212 stores in Quebec to only 115 stores over a ten year period (there are now only 13 stores in Quebec) while Tim Horton's increased the number of stores in Quebec from 60 to 308 over the same period of time.

Justice Tingely described this case as a "sad saga as well of how a once successful franchise operation, a leader in its field – the donut/coffee fast food market in Quebec – fell precipitously from grace in less than a decade; literally, a case study of how industry leaders can become followers in free market economies".

Justice Tingley ruled that Dunkin's franchise agreement "promise[d] to protect and enhance both its reputation and the "demand for the products of the Dunkin Donuts System"; in sum, the brand and that it did neither between 1995 and 2005.

The Judge based his decision on select provisions of the franchise agreement but the sections of the agreement referred to in the decision do not, on their face, impose the obligations on Dunkin' that the court concluded it had. For example, the trial judge took a clause that said that Dunkin' would develop marketing programs with a view to enhancing the brand and elevated them to an obligation to enhance the brand.

Nonetheless, Dunkin' made a number of promises to franchisees that, according to the trial judge, it did not keep. Dunkin' promised to inject $40MM to support the brand (half from franchisees and half from Dunkin').  This investment was never made.  Dunkin' encouraged franchisees to renovate their stores, on a voluntary basis, but sales did not increase for those that renovated.  This decision is under appeal. 


Tim Horton's carefully considered changes to its system to meet (and overtake) its competition.  It also solicited feedback from its franchisees before making those changes.  The case against it was dismissed. Contrast this result with the result in the Dunkin' case.  The court in Quebec concluded that Dunkin' failed its franchisees.  Whether it breached its agreements with its franchisees will now be considered by the Quebec Court of Appeal, but however the case turns out, the optics of the case were bad:  The Dunkin' system in Quebec sustained several years of stagnant sales, narrowing profit margins and then losses.  It was weak and vulnerable to competitive forces. It is unfortunate that Dunkin' did not recognize or respond to these forces,  both for its own sake and for the sake of its franchisees. 

The lessons from these cases for franchisors and brand holders:  Don't make promises that you don't intend to keep, dedicate resources to maintain and enhance your brand, and before implementing system-wide changes consider the impact of those changes on your franchisees.

Iran Threat Reduction and Syria Human Rights Act of 2012

On August 1, the United States passed a new law, the Iran Threat Reduction and Syria Human Rights Act of 2012 (H.R. 1905), which focuses mostly on sanctions against Iran. The Act significantly expands the scope of extraterritorial sanctions imposed on foreign persons and entities that are involved in Iran's exports of petroleum, petroleum products and petrochemicals. Non-US subsidiaries of US companies are now subject to direct prohibitions against dealing with Iran and US parents are also liable for the violations by the foreign companies which they own or control.  

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions