Price proposals expose franchisees

“When the franchisor is the sole supplier, you can see the harm that can come to franchisees who the franchisor doesn’t like,” says Toronto franchise lawyer John Sotos. Without the threat of criminal sanctions, he says, franchisors could not only discriminate against agitators, but also make sweetheart deals with corporate-owned stores while charging franchised outlets their regular prices for supplies.

The Globe and Mail
January 25, 1996

JohnSoutherstEnterprise.jpg

Price proposals expose franchisees
John Southerst

LET’S say you have two partners, one of whom supplies you with chicken pies that you and the other partner each put in your shop windows to sell. But you argue with the partner who supplies you, who starts charging you a higher price than the third partner has to pay.

Under your partnership agreement, you can’t go to a less costly chicken pie maker. In fact, you can’t even charge more for chicken pies. Pretty soon, no one buys from you and you go under.

That’s a possible outcome facing franchisees if changes to Canada’s Competition Act go ahead as proposed.

At the moment, there is protection for a partner, or franchisee, caught in this bind. The mean-spirited franchisor in our example would risk a charge of price discrimination, an indictable offence. The Competition Act says suppliers must charge all customers essentially the same price, although some get around it by offering rebates to high-volume purchasers.

Ottawa’s Competition Bureau, which operates under Industry Canada, would investigate and report its finding to the Attorney-General, who would prosecute. The costs of the investigation and prosecution would be covered by taxpayers. If found guilty, a supplier could be imprisoned for up to two years, and the franchisee could also sue to recover costs.

The Competition Bureau wants to change all that. Last June, it began quietly circulating a discussion paper that proposes to drop the criminal sanctions against price discrimination. For small businesses and especially franchisees, it could spell the end of competitiveness.

“When the franchisor is the sole supplier, you can see the harm that can come to franchisees who the franchisor doesn’t like,” says Toronto franchise lawyer John Sotos. Without the threat of criminal sanctions, he says, franchisors could not only discriminate against agitators, but also make sweetheart deals with corporate-owned stores while charging franchised outlets their regular prices for supplies.

Mr. Sotos, who represents the Ontario Franchise Coalition, an alliance of about 4,000 franchisees from 10 chains, says the changes could be detrimental for all small business owners. “There will be more concentration of ownership among those customers who have special relationships – the largest buyers. It’s a very anti-competitive move.”

You might suspect the Competition Bureau is trying to shed a difficult responsibility involving time-consuming prosecutions. But Marcie Girouard, senior commerce officer in the bureau’s amendments unit, says the price discrimination provision is bad for business.

“It leads to rigidity in prices,” Ms. Girouard says. Where one customer provides greater product promotion and availability, the supplier can’t provide a price break unless it can prove the customer buys more.

She says the price discrimination ban has not achieved its objective, because large-volume customers are eligible for rebates. “Manufacturers can already discriminate against smaller customers on the basis that they buy smaller volumes.”

The Competition Bureau believes if it maintains the provision for civil liability, while dropping the criminal sanction, that would be enough to deter unwarranted price discrimination. A franchisee would have to sue a franchisor, and an independent operator would have to sue its supplier, if either believed it was being charged more than other customers.

But Mr. Sotos argues that franchisees and independents couldn’t afford to be dragged through long civil cases, especially while their businesses are under siege. “By the time anyone is aware they’re being discriminated against, they’re out of business and have no money.”

Even if they have money, franchisees and independents wouldn’t have the necessary power. The Competition Bureau is entitled to subpoena witnesses and documents in pursuit of its duty. Citizens are not. “It would be impossible for any civilian without access to private records to prove the case,” Mr. Sotos says. “You’d have a smoking gun, but no way to get through the smoke.”

As for rebates – called promotional allowances – the criminal sanctions against price discrimination have forced suppliers to use them conservatively. For instance, they must offer rebates to smaller customers in the same proportion as those offered large customers, according to their relative share of the supplier’s business.

“The question,” Toronto competition lawyer Wayne McCracken says, “is whether small customers would see any of that money if suppliers weren’t forced to offer it. It will be a chilly day in August when that happens.”

Mr. McCracken is also troubled by the Competition Bureau’s discussion process. He says an advisory committee that’s now writing a report on the issue was put together without representation from small business, the community most likely to suffer if the proposal is adopted.

Price discrimination has been against the law since 1935. Governments are right to give freer rein to the marketplace, but they should think twice before discarding laws that ensure fair competition. Asking franchisees and independents to police the actions of deeper-pocketed companies doesn’t make sense.

John Southerst is a Toronto business writer who can be reached by E-mail at moc.eriw-eht|htuosj#moc.eriw-eht|htuosj.


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Risks: Price maintenance, Gouging on supplies, Secret kickbacks and rebates, Price discrimination, Access to justice, Must buy only through franchisor (tied buying), Corporate stores competing with franchisees, Justice only for the rich, Price fixing, Canada, 19960125 Price proposals

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