Franchise And Distribution @ Gowlings - January 13, 2010

Edited by Debi Sutin and Peter Snell

Contents

• Food Labelling and Trans Fat Restrictions Proposed for Restaurant Operations
• Price Maintenance Provisions of Competition Act Decriminalized
• Who, What, Where and When

Food Labelling and Trans Fat Restrictions Proposed for Restaurant Operations
By: Adrian Visheau

A private member's bill which would make significant changes to nutrition regulation in Ontario is currently before the provincial Standing Committee on Social Policy. Bill 156, also known as the Healthy Decisions for Healthy Eating Act, has passed first and second reading in the Legislative Assembly. The bill's aim is twofold: to ensure that consumers are able to make well-informed decisions when purchasing food in restaurants and to restrict the amount of trans fats in restaurant menu items.

Specifically, the proposed new law would require restaurant operators to post detailed calorie information for all food and beverage items sold from the restaurant's premises. This information would be required to be posted either on the menu, or on a display board adjacent to the price, or on a tag attached to the individual item. This calorie information can not be in a font size smaller than the font size used for the price.

Regarding the proposed restrictions on trans fats, two standards are to be applied depending upon the presence of certain ingredients in the food items. For foods, sauces, spreads, garnishes, or condiments, the trans fat content is to be restricted to 2% of the total fat content. Essentially, this means that restaurants will have to ensure that any margarine, oil or shortening used in preparing these items has a trans fat content of 2% or less. For foods, drinks or other items containing partially hydrogenated oils, the trans fat content is to be restricted to 5% of the total fat content. Foods which contain trans fats only from "naturally occurring sources" will be exempt from these restrictions.

The bill applies to all "food service premises" where food is sold for immediate consumption, and which have a gross annual revenue of over $5 million, either directly or through a franchise system. This means that many franchised restaurant operations will be impacted by the requirements under the proposed new law.

Not surprisingly, the bill has already generated a considerable amount of controversy. The most vocal criticism has come from the restaurant industry, particularly through the Canadian Restaurant and Foodservices Association ("CFRA") which has called the bill a "huge step backwards". It has emphasized that restaurant owners – and restaurant chains in particular – have already taken major steps to better inform their customers about the nutritional content of food items, and that the industry as a whole has been striving to reduce the amount of trans fats voluntarily. Furthermore, the CFRA has suggested that federal, rather than provincial, regulation governing trans fats would be more appropriate to permit greater control over the entire food supply chain.

There appears to be significant broad based support for the bill among health practitioners and the scientific community. The Ontario Public Health Association argues that Bill 156 will benefit both consumers and businesses insofar as it "creates a climate for healthy business competition among service providers by engaging them in providing healthier options for consumers and increasing consumer confidence in the industry". As well, the Center for Science in the Public Interest has come out in strong support of the bill, noting that it represents a "sound, cost effective proposal to improve the health and economic productivity of Ontarians, protect the financial sustainability of the Ontario Health Insurance Plan, and facilitate informed consumer choice and health-protection using tried and true policies."

As of mid-November, the Standing Committee on Social Policy had not yet issued a report and no transcripts of committee debates regarding this bill had been released. Accordingly, it is too early to speculate if the bill will be passed, and if it is passed, when it would be proclaimed into law. Members of Gowlings' Franchise and Distribution Law Practice Group will be following the committee's activities on this bill and can be contacted for updates on the status of the proposed new law.

Price Maintenance Provisions of Competition Act Decriminalized
By: Ian Macdonald

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:

• 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.

If you would like further information on these recent amendments, please contact any member of Gowlings Franchise and Distribution Law Practice Group.

Who, What, Where and When

• Len Polsky, Ned Levitt, Debi Sutin and Peter Snell will be attending the International Franchise Association's Annual Convention February 5-8, 2010 in San Antonio Texas.
• Ned Levitt and Len Polsky have both been selected to facilitate Business Solution Roundtables at the IFA Convention.
• Peter Snell's article on Social Media and IP Risks will be published in an upcoming issue of the Franchise and Distribution Law Journal
• Debi Sutin has joined the Convention Program Committee for the 2010 Canadian Franchise Association National Convention, to be held in Mont Tremblant, Québec, May 2 – 4. 2010
• Ned Levitt's article "What Does the Franchise Agreement Reveal About the Franchisor" will be published in the December issue of Canadian Opportunities Magazine

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.