1The plaintiffs move to certify this proceeding as a class action on behalf of franchisees of the Tim Hortons restaurant chain, pursuant to the Class Proceedings Act, 1992, S.O. 1992, c. 6 (the “C.P.A.”). The defendants oppose that motion and bring a motion for summary judgment dismissing the plaintiffs’ claims.

I. OVERVIEW

2The plaintiffs are Tim Hortons franchisees.¹ They complain that they are required to buy some of the ingredients that they use in their products at unreasonably high prices, thereby eroding their profits. Their complaints target two aspects of their operations: the cost of donuts and the cost of ingredients for soups and sandwiches, referred to as the “Lunch Menu”. I will begin with a short summary of their complaints and of Tim Hortons’ response.

3For the reasons that follow, I have concluded that the defendants’ motion should be granted and that the plaintiffs’ individual claims should be dismissed. I will nevertheless set out my conclusion on the certification motion, in the event there is an appeal from this decision or in the event the plaintiffs seek leave to substitute another representative plaintiff.

A. The “Always Fresh” Conversion

4The first claim, the cost of donuts, stems from the “Always Fresh” Conversion. Until 2002, most baked goods sold in Tim Hortons stores were baked on the premises “from scratch”, by skilled bakers, using donut mixes and other ingredients supplied by Tim Hortons. Between 2002 and 2004, Tim Hortons replaced scratch baking of donuts, timbits, cookies and muffins with a system called “Always Fresh”, in which the dough was partially baked and flash frozen (referred to as “par baking”) at a centralized facility and delivered frozen to the franchisees’ stores, where the baking would be completed, when needed, in specially-designed ovens. The par baked donuts that franchisees were required to buy were supplied by a joint venture, in which Tim Hortons had an interest.

5The plaintiffs plead that, contrary to representations made to franchisees before the Always Fresh Conversion, the cost to produce donuts and other baked goods has increased, cutting into their profits.

6They claim that Tim Hortons makes enormous profits on the sale of the par baked donuts, at the franchisees’ expense, and that it ignored their requests for sale price hikes to offset the increased costs. They say that Tim Hortons breached express terms of their franchise agreements by implementing the Always Fresh Conversion, which was not for their financial benefit, and that it breached an implied term of those agreements that ingredients would be sold to franchisees at lower prices than they could obtain in the marketplace.

7The plaintiffs’ second complaint relates to the “Lunch Menu”. The Lunch Menu includes soups, sandwiches and similar items, which are sold in most stores twenty-four hours a day. The plaintiffs say that Tim Hortons requires franchisees to sell Lunch Menu items at either break-even prices or at a loss. They say that while they are selling these items at a loss, Tim Hortons is making a profit through rent, royalties and advertising payments, all of which are calculated based on franchisees’ sales. They say that this was also a breach of an implied term of their contracts that ingredients would be sold to them at lower prices than they could obtain in the marketplace.

C. Causes of Action

8The plaintiffs say that Tim Hortons’ conduct relating to the Always Fresh Conversion and the Lunch Menu breached their contracts, breached the franchisor’s common law obligation of good faith and breached the statutory duty of good faith and fair dealing under the Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000, c. 3 (the “Arthur Wishart Act”) and similar legislation in other provinces.² They also say that Tim Hortons has committed the offences of price maintenance and conspiracy under the Competition Act, R.S.C. 1985, c. C-34, giving rise to civil causes of action under s. 36 of that statute. Finally, the plaintiffs say that Tim Hortons’ conduct has resulted in unjust enrichment and that they are entitled to equitable and restitutionary remedies. The plaintiffs have abandoned a claim for damages for alleged negligent misrepresentation by Tim Hortons concerning the price at which the par baked donuts would be sold to franchisees. The misrepresentation allegations nevertheless remain relevant to the other causes of action.

D. Tim Hortons’ Response to the Plaintiffs’ Complaints

9Tim Hortons’ answer to these claims is that it has a contractual right to determine the price at which franchisees purchase ingredients, that it exercised its contractual rights reasonably and in good faith and that, overall, the plaintiffs and all franchisees enjoy an exceptional rate of return on their investments.

10Tim Hortons denies that the Always Fresh donut is significantly more expensive than the one produced by scratch baking. It says that franchisees benefitted from the Always Fresh Conversion, because it eliminated many of the difficulties associated with scratch baking, resulted in a better product, increased efficiency in the stores and made each franchisee’s life much easier. While there was an initial increase in the cost of raw materials, that cost has been offset over time by increased retail prices for donuts and by other savings. Tim Hortons says that in the long run, had scratch baking continued, the cost of a scratch baked donut today would have substantially exceeded the cost of a par baked donut.

11Tim Hortons says that a Lunch Menu has been a part of its system since 1986, when soups, sandwiches and chili were first introduced. It says that offering such products permits its franchisees to attract customers around the clock and makes them competitive with other fast food outlets. It denies that Lunch Menu items are sold at a loss.

12Tim Hortons says that the Always Fresh Conversion and the Lunch Menu are permitted by the franchise agreements and that franchisees have no right to acquire any particular product or product line at a particular price. They say that the plaintiffs’ claims are so plainly unmeritorious and have no chance of success that they should be dismissed at this stage, on summary judgment.

13Against this background, I will turn to a more detailed examination of the facts, beginning with an overview of the Tim Hortons franchise system. I will then describe the circumstances of the plaintiffs. Finally, I will discuss the matters at issue in this action in more detail and will then address the certification and summary judgment motions.

II. THE FACTS

A. Tim Hortons’ History

14The Tim Hortons franchise operation is perceived by many to be a Canadian success story. The first Tim Hortons store was opened in May, 1964 by Tim Horton, a famous NHL defenseman. In 1967, Horton entered into partnership with Ron Joyce, a former Hamilton police officer and the operator of three Tim Hortons shops. They opened thirty-seven restaurants over the next seven years. At that time, their operation was more or less coffee and donuts. As we shall see, Tim Hortons franchisees now offer their customers an extensive and constantly changing array of foods and beverages.

15Joyce continued to expand the chain after Horton’s death in 1974, buying out his widow and becoming the sole owner of the business in 1975. In the early 1990s, Tim Hortons and Wendy’s International Inc. became partners in real estate development and constructed combination restaurant sites containing Wendy’s and Tim Hortons restaurants under the same roof. In 1995, Wendy’s acquired Joyce’s interest in Tim Hortons and the company was merged with Wendy’s. By that time, there were over 1,000 stores in the Canada-wide chain. By 2008, Tim Hortons was the fourth largest publicly traded quick-service restaurant (“QSR”) chain in North America. By the end of 2009, there were approximately 3,000 stores in Canada, owned by just under 1,000 franchisees. Some franchisees owned only one store and others owned multiple stores.

16In 2006, Tim Hortons sold 18% of its outstanding common stock in an initial public offering on both the New York and Toronto Stock Exchanges. Later that year, Wendy’s distributed its remaining 82% interest to its stockholders of record. Since then, Tim Hortons Inc. (“THI”) has operated as a stand-alone public company.

17THI is incorporated under the Canada Business Corporations Act, R.S.C. 1985, c. C-44, as amended, and carries on business in Canada through its subsidiary, the defendant, TDL Group Corp. (“TDL”). Except where it is necessary to distinguish between the two corporations, I will refer THI and TDL collectively as “Tim Hortons”.

18I will discuss the Tim Hortons system in more detail below, but it is quite apparent that the face of the franchise has evolved over the years. It quickly moved from just coffee and donuts to a menu that included soups, chili and sandwiches. The menu has continued to develop over time, driven by changing customer demands and hot competition in the QSR business. Tim Hortons stores now offer such exotic choices as hot and iced cappuccinos, specialty teas, breakfast sandwiches, fajita wraps, yoghurts and gourmet cookies.

19Part of the challenge of running a national QSR franchise operation such as Tim Hortons is keeping ahead of powerful and aggressive competition, including coffee operations, such as Starbucks, Second Cup and Dunkin’ Donuts, and restaurant chains, such as McDonalds and Subway. Tim Hortons has a large marketing department, which is constantly evaluating its own menu offerings and monitoring what the competition is doing, in order to stay competitive in the face of changing customer demands and stiff competition for customer loyalty.

20There is one aspect of the Tim Hortons franchise that the plaintiffs don’t complain about – coffee.

21Coffee is what Tim Hortons has been about since the very first day. It remains so today. Tim Hortons owns the coffee brand. It owns the trademark. The franchisee acquires the right to use the trademark. To sell the brand. Tim Hortons calls its coffee “legendary” and describes it on its website at “[T]he chain’s biggest calling card.”

22A large cup of coffee sells, at least in Toronto, for $1.57. It is, not surprisingly, extremely profitable. The ingredient cost is very low. The cost of the labour involved in making the pot and pouring a cup is also very low. The evidence establishes that the sale of coffee is an enormous source of revenue for every Tim Hortons franchisee.

B. The Tim Hortons Business Model

23Tim Hortons’ basic business model is simple. It identifies suitable restaurant locations, develops restaurants on the sites, and leases the restaurants to approved franchisees, with which it signs revenue-generating franchise agreements. The model has been enormously successful.

24Later in these reasons, I will discuss some of the benefits of owning a franchise. Two of the most important of these are the opportunities to sell a nationally-recognized brand and to use a proven and profitable business system. There is a waiting list of over 3,000 candidates hoping to acquire the right to use the Tim Hortons system and to sell its brand.

25The majority of Tim Hortons stores are run by franchisees and by operators of corporate-owned stores. Franchisees pay a non-refundable licence fee for the privilege of acquiring the franchise. The initial fee can be several hundred thousand dollars.

26In addition to the franchise fee, franchisees pay the following:

(a) rent, based on 10% of monthly sales, to cover rental of the land, generally owned by Tim Hortons, on which the stores are located;

(b) a royalty, usually based on 3% of sales, as compensation for Tim Hortons’ ongoing support, know-how, and efforts to maintain and increase the brand; and

(c) an advertising levy of 3.5% of monthly sales (the amount actually stated in the contract is 4%, but Tim Hortons had reduced this amount on a voluntary and temporary basis).

27Tim Hortons also makes money through the distribution and sale of food ingredients, paper, dry goods and other commodities to its franchisees. It owns a coffee roasting plant and an interest in a bakery, to which reference will be made below.

28In consideration for the payments described above, franchisees are licensed to use the “Tim Hortons System”. I will describe that system in more detail when I discuss the contractual provisions at issue, but in essence – like most franchise operations – the franchisee is required to abide by a set of rules and procedures, to purchase all supplies and ingredients from Tim Hortons or from its designated suppliers, and to offer for sale only products that have been approved by Tim Hortons. As one might expect, the franchise agreement provides that the franchisee must adhere to rigourous standards designed to protect and enhance the Tim Hortons brand.

29The franchise agreements are typically for ten year terms. A franchisee has no right to territorial exclusivity. Most franchisees are required to keep their stores open 24 hours a day.

30There is a formal system in place for consultation with franchisees, consisting of an Advisory Board composed of seventeen franchisees, elected by franchisees across Canada and the United States. There are representatives on the Advisory Board from every region in Canada. Advisory Board members are expected to liaise with and report to franchisees in their own region. The board meets three times a year for a day and a half or two days. Senior management of Tim Hortons is typically present at these meetings and minutes are kept and made available to all franchisees. At the meetings, Tim Hortons provides information to Advisory Board members concerning the state of the business and new products or initiatives. The franchisee members raise issues of concern to franchisees. The discussions are frequently detailed.

31In addition to the Advisory Board meetings, Tim Hortons meets annually with all franchisees at spring and fall regional meetings and occasionally at a larger national convention. These meetings are used to discuss topics of particular importance, including subjects such as new products or initiatives, new methods or techniques, and questions and complaints from franchisees.

32Franchisees have a say in the pricing of products. The proposed price of new product offerings is discussed at the Advisory Board before the product comes on the market. The franchise agreements provide that Tim Hortons may set a maximum retail price for any product, but franchisees are free to sell at a lower price, if they wish. Before there can be an increase in the price of a product, the franchisees in each region must vote on whether to approve the proposed increase, which only becomes effective if approved by majority vote.

C. The Plaintiffs and Mr. Garland

33The Plaintiff Brule Foods Ltd. (“Brule”) is an Ontario company. Archibald Jollymore is the principal of Brule. He is a cousin of Ron Joyce, the former owner of Tim Hortons. He began his association with Tim Hortons in 1977 as a member of the senior management team. When he left management in 1994, to start up his own franchises, he held the position of Executive Vice President.

34Brule is a Tim Hortons franchisee operating two stores in Burlington, Ontario. One of those stores, store #750, is a franchised location, which has been operated by Mr. Jollymore continuously since 1994. The franchise agreement was renewed in 2004 for a term ending in January 2014. The renewal was documented in 2006, some considerable time after the store had converted to the “Always Fresh” baking method in October, 2002. At the time of the renewal, Mr. Jollymore and Brule executed general releases in favour of Tim Hortons of all claims under the franchise agreement. Mr. Jollymore also acknowledged receipt of a disclosure statement, provided by Tim Hortons under the Arthur Wishart Act. The disclosure statement contained the regulatory mandated statement that “[t]he cost of goods and services acquired under the franchise agreement may not correspond to the lowest cost of the goods and services available in the marketplace.” The disclosure statement also confirmed that the franchisee was required to purchase supplies from Tim Hortons or from its designated suppliers and that Tim Hortons was entitled to receive rebates and other benefits from the designated suppliers.

35The other store operated by Brule, store #2267, is a corporate-owned store, operated under what is referred to as an “80/20 operating agreement”, signed in 2002, under which the franchisee pays a flat royalty of 20% of sales plus an advertising charge and receives 80% of the revenue. Prior to entering into this agreement, Brule received the Ontario disclosure statement, confirming that the price at which products were supplied by the franchisor was not necessarily the lowest price available. It also confirmed that the franchisee was not guaranteed any particular return on its investment.

36Brule had operated a third store, store #737, under a franchise agreement that it signed in 1994. That agreement was renewed by Mr. Jollymore in 2004 for an additional ten year term. In 2007, Mr. Jollymore sold the balance of the term of the agreement to Tim Hortons for $65,000. At that time, he and Brule executed a general release in favour of Tim Hortons and its affiliates of all claims in connection with the franchise agreement.

37The Plaintiff Fairview Donut Inc. (“Fairview”) is an Ontario company owned by Mr. Jollymore’s wife, Anne Jollymore. Fairview has been a Tim Hortons franchisee since 1988, when Mrs. Jollymore and her former husband acquired a franchise for store #368. Mr. and Mrs. Jollymore married in 1994.The franchise licence for store #368 was renewed for a further 10 year term in 1998. Mrs. Jollymore later acquired store #593, which was also located in Burlington, pursuant to a franchise agreement signed in 1992. The licence agreement for that store was terminated in April 2001 and at the same time Fairview signed a new agreement for a new store #593, which was established at a new location on Brant Street in Burlington. In 2008, Tim Hortons decided not to renew Fairview’s franchise agreement for store #368. Fairview continues to operate store #593.

38It is fair to say that, by virtue of their experience as franchisees, Mr. and Mrs. Jollymore are sophisticated and knowledgeable business people who are very familiar with the QSR business in general and with the operation of the Tim Hortons System in particular. This is especially true for Mr. Jollymore, who had experience in the corporate office of Tim Hortons at a very senior level.

39It is also fair to say that Mr. and Mrs. Jollymore have earned very significant income from their stores. In the case of Fairview’s store #593, over the three years 2008 to 2010, sales averaged almost $2 million per year. Average income was almost $325,000 per year. In the case of store #368, which Fairview also operated, its sales in the last three years of its operation, 2005 to 2007, were in excess of $1 million per year, with net income around $100,000 per year.

40In the case of store #750, operated by Brule, the sales averaged close to $2.3 million per year for the years 2008 to 2010. Net income averaged around $235,000 for the same period. Mr. Jollymore’s figures for store # 2267 for the last three years of its operation, 2006 to 2008, were averaging sales of $1.6 million and net income of about $100,000 per year.

41The financial information produced by both parties indicates that the plaintiffs have received a reasonable return on their investments over the years. In spite of their complaints about the Always Fresh Conversion and the Lunch Menu, the plaintiffs have continued to operate their stores and have renewed their franchise agreements or have signed new agreements. Their real complaint is not that they don’t make a reasonable profit as Tim Hortons franchisees − but rather that they don’t make more profit. −

42A third important individual in this saga, and a witness on behalf of the plaintiffs, is Cyril Garland. Mr. Garland was a former member of Tim Hortons senior management. He held the position of Vice-President, Finance when he left the company in 1998 to become a franchisee. Mr. Garland is the principal of 1301541 Ontario Inc., which, until November 2010, was a Tim Hortons franchisee operating store #385, and of a Tim Hortons kiosk in an Esso station, store #1957. Mr. Garland’s company also operated store #1536 from 1998 to January 2009. Mr. Garland is also the principal of 1549402 Ontario Inc., which was the franchisee of store #2402 until November 2002.

43Mr. Garland had commenced a separate lawsuit alleging some of the same claims as the Plaintiffs in this action with respect to the Always Fresh Conversion. As part of a settlement of that proceeding, Tim Hortons purchased Mr. Garland’s stores and he released all claims against it, except his potential claim as a class member in this action.

44I will now expand on the source of the plaintiffs’ complaints, the Always Fresh Conversion and the Lunch Menu.

D. The Always Fresh Conversion

45The evidence establishes that by the 1990s Tim Hortons’ business model, which required the franchisee to bake most products, including donuts, timbits and muffins in their own stores “from scratch”, had become a source of aggravation to franchisees. As one franchisee described it, “donuts under scratch baking were 10% of sales but 90% of the problems.”

46Bagels, which had been introduced in approximately 1996, had always been supplied in a par baked form and were prepared in the store as needed in a convection oven.

47By the late 1990s, only donuts, timbits, cookies, muffins, croissants and cakes were being baked from scratch in the stores. These products made up between approximately 10% and 15% of franchisees’ sales.

48Tim Hortons has adduced affidavit evidence from eleven franchisees, who have been referred to as the “Affiant Franchisees”. Some of these were members of the “Concerned Franchisees Group”, which had sought and was denied status as an intervenor at an early stage of this proceeding: see Fairview Donut Inc. v. TDL Group Corp., 2008 60983 (ON SC), [2008] O.J. No. 4720 (S.C.J.). That group was made up of 436 franchisees, operating over 1300 stores, who opposed the commencement of this proposed class action. The group represented franchisees from every region of the country and included owners who operated only one store and others who operated multiple stores.

49The problems identified by Tim Hortons concerning scratch baking, and confirmed by the evidence of the Affiant Franchisees, included:

the need to employ expensive skilled bakers;
logistical problems with and costs of hiring, training and retaining skilled bakers;
inconsistency in product quality;
wastage of product caused by the need to bake relatively large quantities in advance, twice a day (unable to accurately anticipate demand, the bakers sometimes prepared too many donuts, resulting in wastage or “throws,” and sometimes baked too little, resulting in disappointed customers and lost sales);
maintenance and cleaning costs; and
disruption and inconvenience for the franchisee when the baker was sick, late, unavailable or quit.

50I will describe the transition to Always Fresh baking shortly, but I will note here that the evidence of the Affiant Franchisees was uniformly positive about its benefits. They gave evidence that the Always Fresh method permitted them to bake as required throughout the day, allowing them to respond more effectively to customer demand and reducing the amount of “throws”. They acknowledged that there had been an increase in food cost for the Always Fresh par baked products, but said that this was offset by lower labour costs, reduced wastage, improved product quality and a much easier baking method. It was their overwhelming evidence that the Always Fresh Conversion was beneficial to the franchisees and had been an improvement in the Tim Hortons system.

51A number of the Affiant Franchisees spoke of the stress and aggravation associated with reliance on experienced bakers, including bakers calling in sick or not showing up for work, requiring the franchisee himself or herself to get up in the middle of the night to bake. The evidence of Mr. Oliver is typical:

Knowing what I know today, including the costs of producing donuts, I still would have voted in favour of the Always Fresh Conversion. Always Fresh has substantially increased my quality of life as a franchisee and has reduced the level of stress associated with operating my stores. It has eliminated my reliance on bakers. I am able to train employees on the Always Fresh process in two to three days and baking expertise is no longer required in order to produce donuts. I am able to produce donuts in a matter of five minutes and therefore the donuts in my stores are consistently fresher than under the scratch baking system. As I can bake donuts on demand, I am able to control my donut inventory and reduce waste. I can ensure that my displays are consistently stocked with fresh product. I am able to bake donuts in all my stores, regardless of store size, and am no longer required to transport donuts from one store to another. Given that the donuts are of a uniform size, the lack of product uniformity across Tim Hortons store [sic] has been eliminated.

In order to appreciate the benefit of the change it is also important to note that donuts represent a relatively small percentage of our revenue, but with scratch baking it used up considerable energy and management resources.

52Other franchisees shared Mr. Oliver’s observations and observed that while donuts were a relatively small part of overall store sales, issues related to donut preparation took an inordinate part of their time.

53Several Affiant Franchises indicated that they had been informed by Tim Hortons, prior to the Always Fresh Conversion, that their product costs would increase but that, over time, their labour costs would reduce and would offset the increase in costs and said that this had, in fact, been their experience. For example, Susan Marshall deposed in her affidavit:

Prior to the Always Fresh Conversion in 2002, TDL engaged in a transparent consultation process with Tim Hortons franchisees. Many meetings were held in which franchisees were encouraged to ask questions about the new system. While I do not recall any specific representations by TDL, I recall that TDL was clear that the conversion would be costly, the product would cost more and there would be changes to how owners did business. It was emphasized by TDL, however, and widely understood by franchisees that any increase in product cost would be compensated by savings in labour costs and other efficiencies. TDL’s explanation of the Always Fresh Conversion was measured and cautious. It was also stressed to franchisees, that positive results from the Always Fresh conversion would be impacted by the level of effort franchisees put into the new system to ensure its success at their stores.

There was a decrease in profitability of my stores immediately following the conversion due in part to baking too much product, resulting in a higher amount of “throws”; as well as labour shortages in Alberta causing increased labour costs…

However, profitability at the Edmonton stores returned to, and exceeded, pre-Always Fresh levels. My stores are now on average 3% more profitable than they were prior to Always Fresh.

54Of particular interest is the evidence of one franchisee, Mr. Gilson, who was examined by the plaintiffs under Rule 39.03 of the Rules of Civil Procedure, R.R.O. 1990, reg. 194. Mr. Gilson had been a Tim Hortons franchisee in Ottawa since 1991. He operated a number of stores. He was a member of the Advisory Board, representing Eastern Ontario, between 1996 and the fall of 2001. I will examine other aspects of Mr. Gilson’s evidence in due course, but for the moment, it is interesting to note his enthusiastic support for the Always Fresh Conversion.

55On cross-examination by Tim Hortons’ counsel, Mr. Gilson admitted that the conversion “absolutely” simplified operations for the franchisee, that the product was easier to work with and that the consistency was not dependent on the baker. He agreed that under scratch baking there had been problems with waste, because it was difficult to estimate the amount of product that would be required on a given day, which he described as “hit and miss”.

56Mr. Gilson was clear that the Always Fresh Conversion was a huge benefit for his operation and said that it would be a decidedly retrograde step to revert to the scratch baking system. The following exchange is particularly interesting:

Q. So you would agree with me that many of the complications and difficulties that were associated with scratch baking ---

A. I agree wholeheartedly. I would never want to go back to scratch baking. That’s not something I would ever try to say that I would – I was in favour of it coming and I’m still in favour of it today.

Q. And overall it was a good thing for the business?

A. Overall, in my world, it was the best thing that happened to the business.

Q. I think you will also agree with me that store sales have increased since the conversion?

A. They have.

Q. In your particular stores, sales have increased since the “Always Fresh” conversion?

A. They have. Sales have increased. Some of it is due to pricing. A lot of it I think is just due to normal growth, and we can handle that growth now. In the days prior to, you couldn’t always – it wasn’t that you couldn’t handle it, but you couldn’t handle it as well, because you don’t have the recovery time. This system helped us. It really has. I’m not against this system in the least. It’s a great system.

57Although the plaintiffs downplay the problems associated with scratch baking, there is substantial evidence from Tim Hortons, including the evidence of the eleven Affiant Franchisees and Mr. Gilson, that these problems were widespread and significant.

58At some point in the 1990s, Tim Hortons began to explore alternatives to scratch baking. After investigating several technologies, it began to focus on the par baking method. Mr. David Clanachan, a Vice President of Tim Hortons, led a team tasked with investigating par baking, which visited a number of manufacturing facilities in Europe, England and Ireland.

59After conducting this due diligence and examining the application of the par baking technology in Europe, Mr. Clanachan decided that the optimal business strategy would be to joint venture with an Irish company, IAWS Group plc (“IAWS”), for the construction of a donut manufacturing and par baking facility in Canada. This facility was ultimately located in Brantford, Ontario and is referred to as “Maidstone Bakeries”. It was an indirect subsidiary of CillRyan’s Bakery Group (“CillRyan”), which was owned by the joint venture partners until Tim Hortons sold its interest in the joint venture to Arytza AG in 2010.

60Before committing to this project, Tim Hortons demonstrated the par baking method to franchisees at a convention held in Ottawa in July, 2000. A display was set up where par baked donuts were actually baked on site and could be sampled by franchisees. The response was enthusiastic. Neither Mr. nor Mrs. Jollymore nor Mr. Garland attended this convention.

61In August 2000, the Wendy’s board authorized senior management of Tim Hortons to proceed with the negotiation of a joint venture with IAWS for the construction of the par baking facility at an estimated capital cost of US$94 million. There were legitimate business and strategic reasons for this project, including those already mentioned. As well, Tim Hortons’ potential for growth in the United States market was constrained by the need to bake in-store and the overall growth of the business in North America was being impaired by difficulties in finding and retaining trained bakers. The Always Fresh baking method was perceived by Tim Hortons management as an opportunity to re-vitalize and expand the donut business. It would produce donuts of consistent size and quality. The competition was selling hot donuts and the fast in-store baking process would allow fresh batches of donuts to be made as needed.

62The evidence of Mr. Clanachan makes it clear that in deciding to move to a central donut production facility, Tim Hortons was looking to the long-term success of its brand. As he put it, “[T]he view of TDL management was that if TDL did not adopt this technology in some fashion, we were going to be a dinosaur and the scratch-baking part of the business was not likely to survive.”

63A joint venture agreement was ultimately signed by Tim Hortons and its affiliated companies with IAWS and others. It was publicly announced in March of 2001. As I will discuss below, the price at which the par baked donuts would be sold to franchisees was a matter of vital concern to both joint venture partners as it would affect the financial viability of the project and would determine whether their capital investment could be justified by the return on investment. The evidence, which I will discuss below, establishes that Tim Hortons wanted to ensure that the price of the par baked donut was reasonable from the franchisees’ perspective and that it was approximately the same price as the combined food and labour cost of the scratch baked donut.

64At regional meetings with franchisees in the spring of 2001, Tim Hortons discussed plans for the conversion of all stores to the Always Fresh methodology beginning in 2002. This would require franchisees to replace their scratch baking equipment with new freezers and specialized ovens purchased from Tim Hortons.

65Tim Hortons expected and explained to its franchisees that the costs of raw materials – donuts, timbits, muffins and cookies – would increase, but that their labour costs would be reduced over time. Exactly what franchisees were told is a matter of some controversy, as will be discussed below.

66There is no question, however, that from the spring of 2001 until the roll-out of par baking was completed in 2004, there was extensive communication between Tim Hortons and its franchisees concerning the Always Fresh system, what it would cost and how it would work. It was anticipated that it would cost each franchisee between $30,000-35,000 to convert a store for par baking. There was extensive discussion of the subject at Advisory Board meetings and there was considerable investment by Tim Hortons in training and in the production of a conversion kit and a training manual to equip its franchisees for Always Fresh production.

67The plaintiffs say that the Always Fresh Conversion increased their food cost for donuts from around 7 cents under scratch baking to 18 to 20 cents under Always Fresh and that their margins eroded as a result. Tim Hortons disputes this.

68The plaintiffs claim that the Maidstone Bakeries joint venture marks up the price of the frozen donut from its actual production cost of 12 cents to 16 cents. They call this the “CillRyan markup.” They say that this markup is not commercially reasonable and that Tim Hortons has used the franchisees’ “captive” position to extract a “monopoly premium”. In their factum, they use the following language to describe it:

It is a monopoly premium unnecessary to provide the [Joint Venture] partners with a reasonable rate of return on their capital invested in the initiative, without value to the franchisees, and extracted from the franchisees solely by virtue of the Defendants’ decision to exploit for their own profit the captive supply provisions in the Licence Agreement contrary to the usual commercial purposes for which franchisees accept them.

In the circumstances at issue in this case, the effect of the captive supply provisions in the Licence Agreements binding on all franchisees was to insulate the Defendants (and their JV partner) from the usual competitive forces in the marketplace. In this vacuum, the Defendants had free rein to exploit those provisions to extract from the franchisees a monopoly premium over the commercially reasonable cost to manufacture par-baked donuts and Timbits.

But for the captive supply provisions of the Licence Agreement, franchisees unhappy with the high food cost of the Maidstone AF donuts and Timbits could have looked elsewhere in the market to source those products, individually or in groups. Given the existence of those provisions, however, the only limit on the cost of the Maidstone donuts and Timbits was the Defendants’ own view of the highest price their market – i.e., the franchisees – could be compelled to “sustain”. The Plaintiffs submit that the Defendants conduct amounts to a perversion of the purpose for which franchisees accepted the captive supply provisions and (as will be argued below) a breach of the Competition Act.

69Stripping away the rhetoric, the plaintiffs are saying that but for their franchise agreements, which require that they buy ingredients from suppliers designated by Tim Hortons and at prices set by Tim Hortons, they could have sourced lower prices for their inputs in the market.

70It is worth noting that, had par baking not been introduced, the price of producing a scratch baked donut today would have been as high as 30 cents, due to increased labour and ingredients costs in the intervening years. In contrast, the price of a par baked donut to the franchisee has kept relatively constant since the Always Fresh Conversion at about 18 to 20 cents. It is also worth noting that there have been retail price increases in donuts since the conversion, from 70 cents per donut to the current price of 90 cents per donut, although these numbers do not reflect the fact that donuts are frequently sold in boxes of six or twelve, which the plaintiffs say brings the average selling price of a donut down to between 56 and 57 cents.

Distribution Systems

71I will discuss Tim Hortons’ product distribution system in somewhat more detail when I discuss the plaintiffs’ claims under the Competition Act. In overview, however, TDL has entered into distribution agreements for the delivery of supplies, including frozen donuts, to the franchisees. The typical arrangement is based on cost plus a mark-up. The product is sold to the distributor, which is entitled to charge a mark-up to the franchisees. Tim Hortons negotiates the maximum mark-up that can be charged by the distributor. Distributors are, however, entitled to charge a lower mark-up and there are no provisions in their agreements that prevent them from doing so.

72In addition to using third party distributors, Tim Hortons also distributes some products, such as dry goods, directly to its franchisees. In 2006, Tim Hortons built a distribution facility in Guelph, which it uses to distribute refrigerated and frozen products to franchisees in most of Ontario. It charges a distribution mark-up on those products that is the same as the mark-up charged by the third party distributors.

E. Alleged Misrepresentation of Cost of Donuts under Always Fresh

73The Statement of Claim originally included a claim for negligent misrepresentation. That claim was withdrawn shortly before the hearing. Allegations of misrepresentation remain as part of the claims for breach of contract and breach of the duty of good faith and fair dealing.

74The plaintiffs assert that Tim Hortons misled the franchisees about the benefits of the Always Fresh Conversion. They say that Tim Hortons misrepresented the cost at which the frozen donuts and other baked goods would be supplied to their stores and misrepresented the benefits that would be obtained from Always Fresh. They argue that the franchisees were required to spend tens of thousands of dollars to replace their scratch baking equipment with the new freezers and ovens needed for the Always Fresh baking method, but that they did so relying on these representations. They say that only after the conversion did franchisees discover the truth and experience significantly eroded margins on baked goods. They say that Tim Hortons got the franchisees to buy into the Always Fresh baking method by misrepresenting the costs.

75The Statement of Claim pleads that, prior to the Always Fresh Conversion, the following representations were made to the plaintiffs and other class members:

par baking would cause quality to improve, thereby increasing sales;
the cost to franchisees of producing a donut using the par baking system would increase modestly from 8 or 9 cents to 12 cents per donut;
the increased cost of production under the par baking system would be offset by reductions in labour costs and wastage; and
the franchisees’ lives would be less stressful.

76The plaintiffs allege that these representations were made by Paul House, then President and CEO of Tim Hortons, and by Mr. Clanachan, at a regional meeting held in Toronto at the Harbour Castle Hotel on November 27 and 28, 2001. At this meeting, franchisees were given a demonstration of the new oven and sampled the new Always Fresh donut produced by the par baking method. The plaintiffs allege that, contrary to these representations, there was an increase in the production cost of donuts (up to 20 cents) and other baked goods. They allege that Tim Hortons knew the effect that the Always Fresh Conversion would have on franchisees’ revenues and failed to disclose it to them.

77The pleading alleges that, in engaging in this conduct, Tim Hortons breached the common law and statutory duty “that franchisors are to act fairly, in good faith and in a commercially reasonable manner towards franchisees.”

78The plaintiffs’ proposed common issues ask whether Tim Hortons breached the franchise agreement or breached the duty under the Arthur Wishart Act or other provincial statutes “to act fairly, in good faith and in a commercially reasonable manner”:

in representing to the franchisees through Advisory Board members that they could deliver the frozen Always Fresh donut to the franchisees’ stores for 11 to 12 cents; or
in representing that the increased food cost of the Always Fresh products would be offset by savings in labour, waste and other operational expenses.

79The plaintiffs claim that Tim Hortons knew from at least September of 2000, or possibly earlier, that the price of the Always Fresh donut leaving Maidstone Bakeries would be 16 cents and that there would be a further mark-up for distribution, but that they got the franchisees to “buy into” the concept by misrepresenting the price and misrepresenting the benefits of the conversion.

80I will begin by examining the evidence with respect to the alleged representation.

Mr. Jollymore

81Mr. Jollymore deposed that in conversations with “various members” of the Advisory Board prior to November 2001, he was told that members of the Board had expressed an interest to Mr. House that TDL should investigate the possibility of implementing a par baking system if the unit cost of the donut increased to 11 or 12 cents. He said that he therefore assumed that the increase would be only 4 or 5 cents more than the existing cost. He says that in the spring of 2002, at regional meetings, franchisees were told that the cost of the frozen, unfinished donut would be approximately 19 cents. He says that Mr. Clanachan explained that this was consistent with the pre-Always Fresh food cost of 7 cents and a labour cost of 13 cents.

82I pause here to note three things. First, Mr. Jollymore’s evidence is not consistent with the pleading that the alleged misrepresentation was made at a regional meeting in Toronto in late November 2001. Second, the representation was not based on anything that Tim Hortons executives had said to the Advisory Board, but rather on something the Advisory Board had allegedly communicated to Tim Hortons management, which was of course not obliged to follow the wishes of the Advisory Board. Third, whatever the “representation” may have been, the true facts – that is, the real price of the Always Fresh donut – were made known to franchisees in the spring of 2002.

83Mr. Jollymore stated that he had been informed by Mr. Gilson, who, as mentioned earlier, was a former member of the Advisory Board, that at the Eastern Ontario regional meeting in the spring of 2002, Mr. Gilson questioned Mr. House about why the cost of the Always Fresh frozen donut was going to be 19 cents, when he had informed the Advisory Board that the cost would be between 11 and 12 cents. Mr. House apparently responded that he had no recollection of ever stating that the cost of the par baked donut would be 12 cents. Mr. Jollymore says that Advisory Board members Gilson and Joe Zoccolli told him that they had been surprised and angry about the announced food costs, because Mr. House had told the Advisory Board “at the time TDL was considering implementing a par bake system that the food cost of a donut would be $0.11 or $0.12.”

84Mr. Jollymore swore that Tim Hortons executives also represented that, as a result of the Always Fresh Conversion, quality would improve, operating costs would decrease, wastage or “throws” would be reduced and the new system would be “cost neutral”.

85As I will mention in connection with the summary judgment motion, it is significant that in spite of his complaint about the “misrepresentation” of the cost of the Always Fresh donut, Mr. Jollymore signed an operating agreement for Brule’s store #2267 in June 2002, after he was aware of the actual cost of the Always Fresh donut. By that time, he had also received Tim Hortons’ statutory disclosure package and certified that he was not relying on any representations made by any employee of Tim Hortons concerning the costs of operating a Tim Hortons restaurant or the potential earnings of the restaurant.

Mr. Garland

86In an affidavit sworn May 22, 2009 and included in the plaintiffs’ initial motion record for certification, Mr. Garland swore that he attended the Ontario regional meeting of franchisees in late November 2001 at the Westin Harbour Castle Hotel when the Always Fresh system was presented to franchisees. He swore that at this meeting Tim Hortons did not advise franchisees of the costs of the Always Fresh product. Again, Mr. Garland’s evidence is inconsistent with the alleged misrepresentation being made at this meeting. Mr. Garland deposed that franchisees were told that the product would be fresher, more consistently sized and that there would be cost reductions due to the elimination of the highly-paid bakers. He says that franchisees were told that donut sales would increase because the product would be baked throughout the day and would therefore be fresher.

87Mr. Garland stated that, after he learned of the Always Fresh Conversion at that meeting, “I persistently questioned TDL executives, including David Clanachan (Executive Vice President) and Tom McNeally (Vice President, Finance), about the cost of the frozen product, but they would not give me an answer.” Again, this is inconsistent with the plaintiffs’ assertion that Tim Hortons was actively misrepresenting the cost as 12 cents.

88Mr. Garland says that he ultimately found out that Tim Hortons estimated the cost of an Always Fresh donut to be about 20 cents in a conversation in a bar with Mr. McNeally in the fall of 2001. He said that Mr. McNeally had suggested that this cost was the same as the pre-Always Fresh donut, based on raw material costs of 7 cents and additional store production costs of 13 cents. Mr. Garland’s opinion is that this analysis was not correct, because it ignored the additional labour costs that would be incurred by franchisees in processing the par baked donuts and getting them onto their store shelves.

89Mr. Garland testified on cross examination that he first heard the 20 cent cost number from Mr. House at the spring meeting of franchisees in 2002.

90Mr. Garland also stated that he had been told by Mr. Zoccolli “that TDL had stated a per donut cost of $0.12 when the possibility of a par baked system was first presented to the Advisory Board. The Advisory Board had agreed that TDL should investigate the possibility of implementing a par baked system if the per donut cost would be $0.12.”

91Like Mr. Jollymore’s evidence, Mr. Garland’s evidence is not consistent with Tim Hortons having made a broad-based representation to franchisees concerning the cost of the Always Fresh donut. Nor is it consistent with the plaintiff’s claim that Tim Hortons was attempting to pull the wool over the franchisees’ eyes by getting them to buy in to the Always Fresh concept in the fall of 2001 based on a 12 cents donut, only to reveal the truth the following spring. In fact, the upshot of Mr. Garland’s evidence is that 20 cents was the only number he ever heard from Tim Hortons management prior to the Always Fresh Conversion.

Mrs. Jollymore

92Mrs. Jollymore swore that she signed a new agreement for her store #593 (which was executed in July, 2001) and proceeded with the Always Fresh Conversion of store #368 in reliance upon Tim Hortons’ representation that:

… the cost of the Always Fresh donut would be in the range of $0.11 or $0.12, information that was known to me at the time based upon Arch’s discussions with members of the Advisory Board. To the best of my knowledge, this information had circulated widely to all of the franchisees in my area at that time. By the time the actual price of the unfinished Always Fresh donut was disclosed to franchisees in the Spring of 2002 (at close to $0.20), my store #593 had already been built and opened without the fryers and other equipment required for Full-Baking. I proceeded at that time in reliance upon TDL’s representation that the high cost of the frozen Always Fresh donut would be offset by cost reductions in labour, waste and other operating expenses.

93With knowledge of the actual cost of the Always Fresh donut, Mrs. Jollymore converted her stores #593 and #368 to the Always Fresh method in October 2002.

Mr. Gilson

94Mr. Gilson was, as I have mentioned, a former member of the Advisory Board. He described his recollection of the discussion of the Always Fresh pricing at the Advisory Board meetings – he could not recall the exact dates - in the following terms:

They felt that – from what I understand, and I believe I heard it on more than one occasion, is that they felt they could bring the product to the store for somewhere between 11 to 12 cents.

95Mr. Gilson said that this information was conveyed by Mr. House. It was not memorialized or reduced to writing or recorded in any of the minutes of the Advisory Board. In cross-examination, Mr. Gilson acknowledged that the statement was not made in the context of a formal presentation. “It was a discussion around the table”. Later in his examination, in response to a question asked by plaintiffs’ counsel, Mr. Gilson described the 11 to 12 cents number as the cost to manufacture the product at Maidstone Bakeries. This is not the same as the cost to the franchisee.

96Mr. Gilson stated that he shared this information with other franchisees in the area and that, although it was more than their current cost, they felt that the convenience of the new system, coupled with the labour savings, would offset the additional 3 to 4 cents in costs. He says at the time, franchisees were scratch baking donuts at around 8 to 9 cents each.

97Mr. Gilson says that he did not learn of the price of the “Always Fresh” product until “[P]retty much when it arrived at my store”, which would have been in late December 2002. The price was close to 18 cents. He said that his reaction at the time was “we had hoped that we would be able to offset [the higher price].” The evidence in fact indicates that Mr. Gilson was present at a meeting of the Advisory Board in September 2002 at which time the 18 cent cost was discussed.

98It was Mr. Gilson’s evidence that at the regional meeting in Kingston, he asked Mr. House, who was on the stage with Mr. Walton, Mr. Clanachan and Mr. Moir, why the price of donuts had come out at 18 cents when the Advisory Board had been told that it would be 11 or 12 cents. He said that Mr. House replied that he did not recall ever having talked about the 11 to 12 cent donut. Mr. Gilson did not feel he could take the matter further with Tim Hortons management. He said that following this incident, a member of TDL management, Mr. Javor, met with him and was critical of him asking the President of the company a question that put him on the spot.

99As I have mentioned earlier, Mr. Gilson testified on cross examination, in glowing terms, concerning the benefit of the Always Fresh Conversion, saying that it was the best thing to have happened to his business. He admitted that although his food cost had increased, there had been price increases in the stores to offset this. He also acknowledged that Tim Hortons had done a good job with the Always Fresh product.

100It is of some interest to know that Mr. Gilson renewed the franchise agreements for two of his stores after he became aware of the actual price of the Always Fresh donut, presumably in recognition of the fact that he would be able to make a fair and commercial rate of return on his business. His daughter also acquired a franchise with full knowledge of the real price.

101One of the interesting observations made by Mr. Gilson on his examination was with respect to coffee. He acknowledged that coffee was the most profitable item in the store: “We’re fairly blatant that coffee is our big money. That’s what brings most of the money in the store, we need that.” He acknowledged that coffee is the easiest product to handle, the lowest in food cost and that the margins on coffee are “significantly higher” than the margins on other products.

Mr. Loiello

102Mr. Loiello was a franchisee in Quebec who ultimately filed for bankruptcy. He was examined by the plaintiffs pursuant to Rule 39.03. It was his evidence that at a regional meeting in Montreal in 2001, Mr. House gave a slide presentation that showed the price of an Always Fresh donut at 12 cents. He claims that Mr. Clanachan, Mr. Moier and Mr. Walton were also present at the regional meeting, but he was unable to say whether they were all in the room at the same time. It was his evidence that he did not find out the actual price of the Always Fresh donut until he received his first delivery of the new donuts.

Mr. House

103Mr. House denied making any statement at the November 2001 Toronto regional meeting concerning the anticipated cost of the Always Fresh donut and says that he would not have made the statement because, as of that date, Tim Hortons was in the process of determining its estimated costs. He would not have been prepared to put forward an estimate unless the back-up work had been done. The evidence of Mr. Clanachan is to the same effect. He confirmed that there is no reference to any such statement in the slide presentation that was used to explain the “Always Fresh” system to franchisees across the country.

Mr. Walton

104Mr. Walton testified that he never heard Mr. House tell the Advisory Board that the Always Fresh donut would cost 11 to 12 cents.

The Affiant Franchisees

105Mr. Archibald was one of the “Affiant Franchisees”. He swore, in response to the plaintiffs’ allegations of misrepresentation, that Tim Hortons informed franchisees “at the outset” that food costs would increase as a result of the conversion. He said that he anticipated this increase and that it has been offset by lower labour costs and reduced wastage.

106The evidence of Danny Murphy was similar. Mr. Murphy swore that Tim Hortons explained that food costs would increase, but also stressed savings in labour costs. He says that his stores in Prince Edward Island experienced a “slight decline” in profitability after the conversion but there was a return to the previous profit margins within 6 to 8 months. He expressed the opinion that the implementation of Always Fresh baking was beneficial to franchisees and said that he would not want to return to the old method of scratch baking.

107Neither Mr. Archibald nor Mr. Murphy was cross-examined.

108The evidence of franchisee Susan Marshall, quoted earlier, was that, Tim Hortons was transparent about the increased product costs in the consultation process leading up to the Always Fresh Conversion, but said that they would be offset by lowered labour costs.

109Like Mr. Murphy, Ms. Marshall observed a decrease in profitability in her stores in Edmonton immediately following the conversion. Profitability ultimately returned, however, and her stores were on average, 3% more profitable than they were prior to Always Fresh. She observed:

As a Tim Hortons franchisee, I personally welcomed the Always Fresh Conversion. In light of my problems under scratch-baking, I knew that the old system was no longer sustainable in the Edmonton stores. I saw the conversion as an opportunity to increase the profitability of my stores.

110On cross-examination, Ms. Marshall was not challenged on her evidence concerning the “representations” that Tim Hortons made concerning the effect of the Always Fresh Conversion. Nor was it suggested to her that there was any representation as to a “12 cent donut”.

111Mr. Cardella was a member of the Advisory Board at the time when Tim Hortons is alleged to have made the representation concerning the “12 cent donut”. On cross-examination, it was pointed out that he was at a meeting of the Advisory Board in February 2000 at which Always Fresh was discussed. The minutes recorded a discussion to the effect that one benefit of the program would be reduced labour, but that the primary objective would be to produce a better product, namely a warmer and fresher donut that would increase sales. He acknowledged that, in his view, that was part and parcel of the objective of controlling costs by reducing labour, making less donuts more frequently and increasing sales.

112Significantly, the alleged representation of the “12 cent donut” was not put to Mr. Cardella by counsel for the plaintiffs. Nor was it put to Mr. Angelini, another Affiant Franchisee and a member of the Advisory Board at the material time. Mr. Shaw, the third Affiant Franchisee who was a member of the Advisory Board at the material time, was not even cross-examined.

Peter Madden

113Mr. Madden swore two affidavits, which were part of the evidence adduced by Tim Hortons on the summary judgment motion. He was an employee of IAWS and of its subsidiary Cuisine de France and was actively involved in the negotiation of the joint venture between IAWS and Tim Hortons. It was his evidence that in negotiations with Tim Hortons, including with Mr. House, Mr. McNeely and Mr. Clanachan, the Tim Hortons personnel were insistent that “one of the things that was critical to the success of the project was that the joint venture had to be in the best interest of the franchisees and that the pricing mechanisms agreed by the joint venture had to be consistent with this objective.” It was his evidence that the price of 16 cents for every kind of par baked donut was agreed to after three months of analysis and intense negotiation. He also deposed that the price was acceptable to Tim Hortons because it was roughly equal to the true cost of on-site scratch baking, while at the same time provided the joint venture with an acceptable return on capital. It was Mr. Madden’s evidence that his goal in negotiations was to achieve the highest possible product price in order to maximize his company’s return on the venture and that the negotiated price was lower than what he had expected it to be. I will set out Mr. Madden’s evidence on this point, in full, later in these reasons.

114Mr. Madden’s evidence substantially confirms the evidence of Mr. Clanachan concerning Tim Hortons’ desire to achieve a single price for all varieties of donuts that was roughly comparable to the combined labour and food costs of the scratch-baked donut.

115Mr. Madden was not cross-examined on his affidavit, although the plaintiffs had initially requested an opportunity to do so. They withdrew their request after Mr. Madden produced his notes of the negotiations.

Conclusion Regarding Misrepresentation

116As mentioned above, this action originally included a claim for negligent misrepresentation of the cost of the Always Fresh donut. This claim was only abandoned by the plaintiffs two weeks before the certification and summary judgment motions. It generated an inordinate amount of affidavit evidence and cross-examinations. It is not surprising that the claim was abandoned, given the disparate nature of the evidence concerning the alleged misrepresentation and the case law concerning the difficulties in certifying a misrepresentation claim: see McKenna v. Gammon Gold Inc., 2010 ONSC 1591, [2010] O.J. No. 1057 (S.C.J.) at paras. 135-136, varied, [2011] ONSC 3782; [2011] O.J. No. 3240 (Div. Ct.).

117Although the claim for misrepresentation has fallen by the wayside as a cause of action, it remains relevant to the plaintiffs’ allegation that Tim Hortons breached its contractual duties under the franchise agreement to maintain an advisory relationship with franchisees and to develop new products compatible with the Tim Horton System. It also remains relevant to the plaintiffs’ claim for breach of the duty of good faith and fair dealing.

118Taken at its highest, however, the plaintiffs’ evidence does not support any common class-wide representation having been made to franchisees concerning the cost of the Always Fresh donut, other than a representation, which Tim Hortons admits, that food costs would initially increase, but that labour costs and waste would come down.

119The plaintiffs initially pleaded that Tim Hortons breached their contracts by requiring them to sell Lunch Menu items. That allegation has now been abandoned and it is acknowledged that the franchise agreement permits Tim Hortons to require franchisees to sell the Lunch Menu. The plaintiffs continue to allege that Tim Hortons breached their contracts concerning the Lunch Menu and breached the duty of good faith and fair dealing, by requiring them to buy Lunch Menu ingredients at prices that were higher than the market price.

120The plaintiffs argue that they are at Tim Hortons’ mercy when it comes to the Lunch Menu, because Tim Hortons controls the products they must sell, the suppliers and distributors they must use, the ingredients they must buy and the prices they must charge. They say that they lose money on Lunch Menu items due to high ingredient costs, the high labour cost and the low retail pricing of Lunch Menu items. Lunch Menu items are frequently sold as part of a “combo” with other items, such as a drink, donut or cookie, further discounting the retail price.

121The plaintiffs say that their franchise agreements have been breached, because they are not able to earn a profit from selling Lunch Menu items. They say that the changes in the Lunch Menu are not a “benefit” or improvement and that Tim Hortons has breached the franchise agreement by failing to use reasonable efforts to develop new products and by failing to engage in meaningful consultation with franchisees.

122The sale of Lunch Menu items appears to make up 15% or less of the sales of most franchisees. Mr. Jollymore says that Lunch Menu items represent approximately 7% of the total sales of his stores. He says that the margin on these items results in losses and that Tim Hortons has failed to adjust either the input costs or the selling prices of these items to prevent the erosion of the franchisees’ margins. Mr. Garland claims that the sale of Lunch Menu items had been fairly constant at 6% of sales in his store, but the food costs for Lunch menu items increased from about 44% of sales in 2003 to 54% in 2008, with the result that he sold Lunch Menu items at a loss. He claims that he discussed his complaints about the price of Lunch Menu items with Tim Hortons executives but they refused to accept his accounting methodology and failed to address the problem.

123The evidence of the plaintiffs’ expert, Mr. Fisher, is that the food costs for Lunch Menu items in 2008 ranged from about 51% to about 54% of sales and that, when combined with paper costs and operating costs, these items yielded a negative contribution to operating costs. That is, Mr. Fisher opined that franchisees lose money on the sale of Lunch Menu items. Mr. Garland’s view is the same. He noted that, at the same time, Tim Hortons makes a profit on franchisees’ sale of the Lunch Menu, because it is paid a royalty on sales regardless of whether the particular item is sold at a profit by the franchisee.

124Mr. Fisher’s evidence is also that the sale of Lunch Menu items does not cause a significant increase in the sale of higher margin items, such as coffee.

125Mr. Fisher advances the theory of what he calls “category cost analysis”, which he says requires an examination of each menu category – of which “Lunch” would be one – and says that a rational approach to pricing is to ensure that each menu “category” makes a profit.

126As I mentioned earlier, soup, sandwiches and chili have been part of the Tim Hortons business model since the mid-1980s. Tim Hortons’ evidence is that most stores are required to be 24-hour-a-day operations and the sale of such items takes place at all hours of the day and night and not simply at the traditional “lunch hour”. Its view is that the Lunch Menu brings customers into the franchisees’ shops at times other than traditional “coffee time” in the morning and that having the Lunch Menu helps to cross-sell other profitable items such as coffee and other drinks. Moreover, the Lunch Menu is a way to sell “combos”. Thus, the loss of the sale of the sandwich at a low price would be off-set by the sale of the other profitable items.

127The sales statistics support the conclusion that the Lunch Menu probably attracts customers to stores at times other than the traditional lunch hours. The evidence of Mr. O’Rourke, Tim Hortons’ Director, Financial Analysis, Franchise Operations, was that an average of only 18% of franchisees’ sales of all items were between 11 a.m. and 2 p.m. Approximately 40% to 44% of sales occur in the morning hours between 5:30 a.m. and 11 a.m. This leaves about 38% to 42% of sales in the afternoon, evening and night time period. It is probable that, during these off-lunch periods, the Lunch Menu attracts some people who would not otherwise come to the store.

128Tim Hortons’ evidence is that the Lunch Menu also helps to build customer loyalty. It helps the franchisee to compete with the aggressive marketing of other QSR chains, such as McDonalds, Subway and Mr. Submarine, that are vying for the loyalties of the lunchtime crowd and even catering to the needs of the caffeine addicts. Without low-priced, healthy and attractive lunch offerings, Tim Hortons risks losing some of its customer base to the competition.

129The minutes of meetings of the Advisory Board show that extensive and granular discussion takes place at these meetings concerning the Lunch Menu in general and the introduction and pricing of particular Lunch Menu items. It is clear from these minutes that Tim Hortons and the Advisory Board members are alive to the competitive threats in this market and the opportunities for Tim Hortons and its franchisees. It is also clear that the introduction of new menu items takes place only after careful consideration of the justification for a particular item, the cost of the ingredients and the price at which it is to be sold. Considerable research and investigation is carried out by Tim Hortons with respect to demands for particular Lunch Menu items, costing of such items, pricing of such items and marketing. A great deal of thought goes into removal of some products and replacement with others.

130The evidence of some of the Affiant Franchisees supports the value of the Lunch Menu as a way of cross-selling other products, bringing customers into the store throughout the day and remaining competitive.

131The evidence of Brian Archibald is reasonably representative:

My stores have offered lunch items such as sandwiches, soups and chili since 1988. Lunch menu items have increased as a percentage of my overall sales and have made my stores competitive in the local lunch market in Terrace (and Prince Rupert when I operated that franchise). The lunch program is an important part of my business accounting for a range of 12-14% of sales in my stores over the course of the last few years.

I would strongly oppose any reduction or termination of the lunch menu. The higher associated food costs for lunch menu items are more than offset by the price of lunch items and overall increased sales. In particular, I believe that by offering a quality and competitive lunch menu in my stores, I am able to increase sales of other items such as coffee and baked goods by offering these items together with the lunch menu products. The expanded lunch menu attracts customers throughout the day as opposed to in the past, when sales were concentrated only in the peak early morning period.

132Some of the Affiant Franchisees acknowledged that the profit margins on Lunch Menu items were lower than other items, such as coffee, due to higher product and labour costs, but said that they were still able to make a profit on these items. They said that Lunch Menu revenues were an important part of their business. The evidence of franchisee Dale Reinke spoke to the value of the Lunch Menu in bringing customers into the store during off-peak hours:

The main advantage of the lunch menu is its essential role in maintaining day-time, and in particular mid-day, customer flow. The increased lunch-hour customer volume has augmented our traditional early morning peak period, and the lunch items have proven popular with customers who work night shifts as well.

133Graham Oliver made similar observations:

When I first became a Tim Hortons franchisee twelve years ago, the lunch menu at my store consisted of sandwiches, soups and chili. Since that time, the lunch menu has been consistently expanded to include a variety of sandwiches, soups, bagels and combos while still keeping chili. The profit margins on lunch menu items are inevitably lower than on other items, such as coffee, due to higher product and labour costs. However, franchisees are still able to make profits on lunch as luncheon items are sold at higher prices.

The expansion of the lunch menu has ensured that Tim Hortons remained competitive. Unlike some of our competitors who have limited their menu to coffee and donuts, Tim Hortons has become regarded as a food option for every meal of the day. Prior to the expansion of the lunch menu (beginning in the late 1980's), traffic at stores was very slow after 11 a.m. The business was essentially a morning coffee and snack operation. However, after 11 a.m., the stores were still incurring overhead costs while not making any significant sales. Today, the lunch time slot is one of the busiest times of the day in my stores. The expanded lunch menu has helped to create a consistent flow of traffic throughout the day.

In addition to the profits that franchisees receive from sale of lunch menu items, franchisees are also profiting from the increased goodwill that is generated from satisfied customers at lunch and from other items, such as coffee, that are purchased during those lunch hours.

I verily believe that all franchisees would agree that we are still making profits on lunch, and that the expanded lunch menu has allowed us to become the competitive business that we are today.

134There has been a debate between the parties concerning the pricing of Lunch Menu items. The plaintiffs maintain that due to high ingredient costs, they are required to sell Lunch Menu items at a loss. The plaintiffs’ expert, Mr. Fisher, disputes the contention that the sale of Lunch Menu items promotes the sale of other, more profitable, foods and beverages.

135Tim Hortons says that the plaintiffs’ accounting methodology is flawed and that, in any event, the plaintiffs do not properly account for complimentarity of demand – a customer who buys a sandwich with a small margin or even a negative margin may also purchase a coffee or soft drink with a high margin, with the result that the sandwich makes a positive contribution to profits. It also says that the accounting approach followed by Mr. Garland is flawed, because he allocates all the discount of “combo” prices to the food items and fails to apply it to the drink items as well. Tim Hortons says that this approach tends to make the food items appear unprofitable whereas, when allocated across all the items in the “combo”, the franchisee makes a profit. Even the plaintiffs’ own expert, Mr. Rosen, acknowledges that the incremental sales of donuts, beverages and other items that are included in lunch “combos” should be considered in determining whether the Lunch menu is profitable.

136It is not necessary for me to resolve the debate about whether the Lunch Menu is profitable for the plaintiffs or for every franchisee. For the reasons set out below, it is my conclusion that Tim Hortons has the contractual right to require all franchisees to sell the Lunch Menu, just as it has the right to require franchisees to sell every other menu item. Franchisees are not entitled to pick and choose between menu offerings and to sell only the most profitable ones.

137It is also my conclusion that no franchisee has a contractual right to sell every one of the numerous items on its menu at a profit. If it loses money on the Lunch Menu, it makes it up on the sale of other items, such as breakfast sandwiches or the “Bagel BELT.” It also makes it up on the sale of coffee, tea and other beverages.

138I also conclude that the Lunch Menu has been developed by Tim Hortons for perfectly rational business reasons, having regard to its own interests and the interests of its franchisees, with due consideration of the opinions of franchisees through the Advisory Board in the selection and pricing of Lunch Menu items. While Mr. Garland, Mr. Jollymore and Mr. Fisher may disagree with Tim Hortons’ Lunch Menu model, and with the pricing of specific items, those matters are within the reasonable business discretion of the franchisor. It is quite apparent from the evidence of the Affiant Franchisees that many of them agree with Tim Hortons’ rationale and are reasonably content with their rate of return. Although Mr. Garland did not share this view, Tim Hortons gave reasonable consideration to his opinions, but in the end simply did not agree with him.

139I will now summarize the key conclusions of the expert witnesses called by both sides. I will begin with the plaintiffs’ expert evidence, starting with Mr. Fisher.

G. The Plaintiffs’ Expert Evidence

1. Evidence of Douglas Fisher – Defendants’ Motion to Strike

140The plaintiffs seek to introduce expert evidence from Mr. Douglas Fisher, the principal of a food service and franchise management consulting firm. Mr. Fisher’s initial expert affidavit was 187 pages long and ran to 618 paragraphs. The defendants move to strike the affidavit on the ground that Mr. Fisher has exceeded the bounds of proper expert evidence because he has:

engaged in the interpretation of the franchise agreement;
expressed opinions for which there is no factual foundation;
purported to make findings of fact on contested matters;
engaged in impermissible advocacy; and
expressed opinions on matters for which he has no expertise.

141The key conclusions expressed by Mr. Fisher, for the purposes of the motions before me, are:

(a) the cost of an unfinished donut to the plaintiffs and the class members tripled as a result of the Always Fresh Conversion, from about 6 cents per donut to nearly 18 cents per donut and this increased cost was not offset by reductions in labour, waste and other operating expenses and failed to reflect the economies of scale that should have been created by Maidstone Bakeries;

(b) contrary to reasonable commercial practices, Tim Hortons entered into the joint venture agreement to build the Maidstone Bakeries without a clear analysis of the impact of the cost of donuts on franchisees or was indifferent as to what the cost was going to be;

(c) Tim Hortons’ communications with franchisees in connection with the Always Fresh Conversion were inconsistent with reasonable commercial practices and the financial numbers used to project the savings to franchisees were wrong;

(d) the plaintiffs’ food costs for Lunch Menu items were in the range of 51.5% to 54.6% in 2008, and when combined with paper and other operating costs associated with preparing and selling the Lunch Menu, resulted in a negative contribution to the plaintiffs’ operating profits, while at the same time benefitting Tim Hortons through royalty payments on sales and mark-ups on ingredient sales;

(e) as a result of his examination of the stores operated by Mr. Garland and the plaintiffs, Mr. Fisher concluded that the Lunch Menu does not significantly increase the sales of higher profit items and does not offset the losses that are incurred by franchisees as a result of selling the Lunch Menu;

(f) it is commercially unreasonable for Tim Hortons to require that franchisees sell the entire category of Lunch Menu items at an operating loss; and

(g) the Always Fresh Conversion and the low price of the Lunch Menu eliminated profits to the plaintiffs and to class members and caused economic harm to them.

142Mr. Fisher also calculated that, examining the sale of baked goods as a category, the plaintiffs experienced a negative contribution to operating profit of - 4% (negative four percent) in 2005 and, in the same time period, the Affiant Franchisees whose records he examined came close to breaking even on the sale of baked goods at -0.08% (negative zero point zero eight percent). He calculated that the situation had improved somewhat by 2008, in that the plaintiffs were basically breaking even on the sale of baked goods (zero contribution to operating profit) and the Affiant Franchisees made a nominal profit of 1.1%.

143He also concluded that the lunch prices charged by Tim Hortons are significantly lower than those charged by its competition for similar products. It was his opinion that Tim Hortons offered an excellent quality sandwich at a very low price and that the price/value relationship of the Tim Hortons sandwich was better than its major competitors. It was his opinion that if franchisees were able to charge higher prices for Lunch Menu items, they would make a better profit. He concluded as well that the sale of Lunch Menu items did not promote sales of other, more profitable, menu items.

144One of the most significant conclusions that Mr. Fisher makes in his report, in my view, is in response to a sworn statement by Mr. O’Rourke of Tim Hortons that Tim Hortons believes that its franchisees receive “a return on investment for our store owners that is unmatched in the quick service restaurant industry.” Mr. Fisher did not contest this statement. On the contrary, he acknowledged that Tim Hortons franchisees receive a reasonable margin, on average. He stated:

… [Tim Hortons] provides a reasonable margin to its franchisees on average, but that is not a reason to have the franchisees work a Lunch Menu without any benefit for themselves or to serve donuts, where both significantly profit [Tim Hortons], while providing the franchisee with significantly less profit than was once available to the franchisees in the case of donuts and no profit in the case of lunch.

145This acknowledgment is significant. Mr. Fisher acknowledged that Tim Hortons franchisees receive, on average, a reasonable level of profit and a reasonable return on investment. His argument – and I use that term intentionally – is that Tim Hortons should have shared more of the profits with its franchisees.

146At the same time as making this acknowledgment, however, Mr. Fisher could not resist assuming the role of advocate, something that occurs throughout his affidavit. This is perhaps not surprising, as the evidence shows that soon after this action was commenced, Mr. Fisher contacted Tim Hortons, unsolicited, and attempted to obtain a retainer, suggesting that he could assist in “stifling this matter early on”. I agree with the submission of Tim Hortons that this sort of conduct by a putative expert should lead the court to approach his opinion with some degree of skepticism.

147One of the key areas where Mr. Fisher, and Mr. Garland differ from Tim Hortons is with respect to what Mr. Fisher calls “product and product category analysis”. Tim Hortons takes the view that the franchisee’s profit margin should be analyzed based on its overall food costs from all products. As expressed by Mr. O’Rourke, Tim Hortons Director, Financial Analysis, Franchise Operations, the rationale is simple: you cannot tell whether a customer who bought a donut and a coffee would have bought the donut if coffee was not available and vice versa. What matters to Tim Hortons, and what Mr. O’Rourke says really matters to franchisees, is the profit on the sale of both items. In Mr. O’Rourke’s words:

What Tim Hortons looks at is the margin based on the overall food cost from all products. This is for a simple reason. It is impossible to know whether you would have sold the coffee or donut that you did at Lunch if you didn’t also sell the soup or chili that the customer came to the store to buy. A reasonable conclusion is that if you did not offer the soup and sandwich, the customer likely would not have come to the store but would have gone somewhere else and so you would not have sold the coffee, tea, other beverage or accompanying donut. There are any number of variations of this theme as, for example, in the morning would you have sold the coffee if you didn’t have the donut or vice versa and also the same question arises as to the breakfast sandwich.

148Mr. Fisher does not agree with Tim Hortons’ accounting methodology or its conclusions. It is his evidence that all restaurants should be concerned about the contribution margin of each item served and that all major restaurants track their sales and profit margins by item (such as a donut, a bagel, a coffee or a sandwich), by category (such as lunch or breakfast) and by the overall menu. He says that:

Smart restaurant operators try to sell those items that have the highest contribution to overall profit and reduce the amount of items that have a lower contribution to sales. This is managed through suggestive selling techniques, menu placement techniques and advertising. Certainly few, if any, restaurants promote items that provide a minimal contribution or have a negative impact on operating profit.

149Mr. Fisher says that Tim Hortons should be doing his form of menu analysis, which would show that franchisees rely heavily on coffee and other drinks as their most significant source of profit. If it took his approach, it would presumably increase the retail price of Lunch Menu items to allow the franchisee to make more money, discontinue the sale of unprofitable menu items, and either reduce the price at which franchisees buy the par baked donuts or increase the sale price of donuts or discontinue the sale of donuts.

150The defendants say that Mr. Fisher’s affidavit should be struck. In Williams v. Canon Canada Inc., 2011 ONSC 6571, [2011] O.J. No. 5049 (S.C.J.), I dealt with a similar motion and set out the principles applicable to expert evidence generally and on a certification motion in particular, at paras. 65 – 76. I adopt those observations for the purposes of this proceeding.

151The objections made by the defendants are as follows:

(a) large portions of Mr. Fisher’s affidavit are unnecessary, because they fall within the experience of the trier of fact and do not require evidence of an expert;

(b) the evidence of Mr. Fisher includes advocacy dressed up as opinion;

(c) the evidence contains legal conclusions, including conclusions as to the interpretation of the franchise agreements that are at issue in this proceeding;

(d) the witness has engaged in fact-finding – rather than proceeding from assumptions, as an expert should, Mr. Fisher has set out on a broad-ranging fact-finding expedition and purports to come to expert opinions based on his personal observations of the facts;

(e) he has expressed opinions that are not based on underlying proven facts; and

(f) he gives opinions based on financial and accounting issues that are not within his expertise.

152There is considerable merit to the defendants’ objections to Mr. Fisher’s evidence. Without in any way being exhaustive, the following are some examples:

he conducted his own investigation into customer complaint “web chat pages” on the internet to refute the suggestion of Tim Hortons that the Always Fresh baking method resulted in improved product quality;
he frequently stated his own factual observations based on his personal inspections or experiences of Tim Horton’s stores;
he made observations to the effect that Tim Hortons’ conduct was not consistent with “reasonable commercial standards” without stating what those standards are, whose standards they are, whether they are observed by others and, if so, how they are observed, and why they are reasonable – it became apparent that Mr. Fisher’s use of the term “reasonable commercial standards” simply meant his opinion about what reasonable commercial standards are, or should be;
he engaged in frequent advocacy, critiquing the evidence of Tim Hortons and its experts;
he resisted no opportunity to challenge an assertion made by Tim Hortons – for example, in responding to Tim Hortons’ evidence about the difficulties in retaining skilled bakers, he stated: “I do not believe that one would need a ‘trained baker’ to work at a Tim Hortons but rather someone willing to ‘bake’ who would be called a ‘baker’ and would be responsible for the baking process” – he follows this statement with a recitation of information provided to him by his wife concerning bakers’ wages; and
he frequently expressed opinions without giving any foundation for his opinion.

153Mr. Fisher’s opinion is prolix in the extreme, largely because he does not confine himself to expressions of opinion based on assumed facts or facts clearly established by other evidence. Instead, he undertakes his own fact-finding mission, relying on facts that have not been proven. His affidavit also includes improper legal analysis and contract interpretation and improper advocacy.

154In the final analysis, I find Mr. Fisher’s evidence of little value on the motions before me. Whatever Mr. Fisher’s opinion may be about how the Tim Horton System should be run, it is Tim Horton’s right to determine how that system will be run. Tim Hortons must conduct itself in accordance with its contractual undertakings under the franchise agreement and with its other legal obligations, including its duty of good faith and fair dealing in the performance of the agreement; Mr. Fisher’s opinion about how Tim Hortons should manage its menu, price its products, conduct its accounting, and split its profits with franchisees is interesting but irrelevant.

155I will discuss below the duty of a franchisor to act in good faith and in accordance with reasonable commercial standards in the performance of the franchise agreement. I do not accept Mr. Fisher’s evidence, however, that it is “commercially unreasonable” for Tim Hortons to consider the franchisees’ overall profit picture, as opposed to his approach using “category cost analysis”. The latter approach may be appropriate for a single restaurant or even for a chain, but that does not mean that it is unreasonable for a franchisor to focus on the big picture. If the franchisor reasonably believes that an economically-priced lunch selection is a good way of attracting customers in off-peak hours, helps to cross-sell other profitable products, and builds customer loyalty, then, subject to the terms of its contracts with its franchisees, it is entitled to price the ingredients as it sees fit, having regard to the franchisees’ operations as a whole, and the return on investment they receive.

156In summary, although I do not propose to strike Mr. Fisher’s affidavit, I give his evidence little weight.

2. Evidence of Howard Rosen

157The plaintiffs have adduced expert evidence of Mr. Howard Rosen, C.A., of FTI Consulting Canada ULC, a chartered business valuator. In summary, it was Mr. Rosen’s opinion, based on a preliminary assessment of the available evidence, that the plaintiffs had suffered an economic loss as a result of the Always Fresh Conversion, that the losses were capable of being analyzed as a common issue, and that the gains realized by Tim Hortons as a result could be calculated on an aggregate basis. With respect to the Competition Act claims, Mr. Rosen opined that the plaintiffs had suffered an economic loss due to the mark-ups they paid on Always Fresh products, that damages were capable of being calculated on an aggregate basis and that the gains of Tim Hortons could be analyzed as a common issue and calculated on an aggregate basis.

158With respect to the Always Fresh Conversion, it was Mr. Rosen’s opinion that the cost of a finished donut to a franchisee prior to the conversion was in the range of from four and a half cents to eight and a half cents each. By his calculation, after the conversion there was an increase between 140% and 330% to just over nineteen cents. He concluded that the financial information provided by Tim Hortons did not establish that these increased costs had been offset by savings in labour and other costs.

159Mr. Rosen also concluded that class members had suffered an economic loss as a result of the mark-up of the price of donuts and timbits from Maidstone Bakeries. He concluded that the total costs of producing a donut at the Maidstone facility was approximately 10 cents on average. Maidstone then charged CillRyan a price of between 11 cents and 12 cents during the period 2003 to 2009, which Mr. Rosen accepts as a reasonable arm’s length price. After paying Maidstone for the donut, CillRyan then invoiced the distributor at a different price, to which the distributor added its own mark-up to the franchisee.

160Mr. Rosen concluded that CillRyan charged distributors 15.8 cents per donut in 2003 and this was increased to 16.3 cents in 2003 and 2009. The price initially paid by franchisees to the distributors from 2003 to March 2007 was 17.9 cents per donut. From March 2007 onward, it was 18.3 cents.

161It was Mr. Rosen’s opinion that the mark-up by CillRyan of the donut and timbit price did not reflect any significant value added to the product, was in excess of fair value, and was therefore excessive and a detriment to franchisees, causing them economic loss. He concluded that Tim Hortons made an extraordinary return on its investment in CillRyan and it made a further return, in some cases, in its capacity as a distributor of par baked products in Ontario.

162It was also Mr. Rosen’s preliminary opinion that there was evidence to establish that the Lunch Menu resulted in negative earnings for that category, even when the sale of incidental beverages was taken into account, and that the loss from the Lunch Menu could be determined on a common and aggregate basis.

3. Evidence of Andy Baziliauskas

163Mr. Baziliauskas is a consulting economist, employed by Charles River Associates, specializing in competition issues. He expressed the opinion that there was a workable methodology for determining, on a class-wide basis, whether class members suffered economic loss as a result of Tim Hortons’ alleged breaches of the Competition Act. Essentially, it was his opinion that a “but for” price could be determined for donuts and timbits – namely, the price that franchisees would have paid “but for” the alleged price maintenance and price fixing by Tim Hortons. This price could then be compared to the actual price paid by franchisees.

164Mr. Baziliauskas was asked to assume that Maidstone sold the products to CillRyan at an average price of 12 cents and that CillRyan then sold the products to distributors (including Tim Hortons, after 2006, for distribution in Ontario) at a price of about 16 cents each, which he refers to at the “CillRyan Mark-up” or the “TDL Rebate”. He also assumed that donuts were sold by the distributors to franchisees at a price of between 17.9 cents and 18.3 cents from 2002 to the present. He further assumed that Tim Hortons controls or influences the supply and distribution chain and the prices at which the products are sold by:

its control over the specifications of the products and their prices;
its ability to require the franchisees to purchase the products from designated suppliers and distributors;
its control of the price, including the price at which Maidstone sells the products to CillRyan, the price at which CillRyan sells to distributors, the rebates its receives from suppliers and distributors, and the prices charged by distributors to franchisees; and
the practical inability of franchisees to negotiate discounts in prices paid for the products and their inability to purchase the products from other sources.

165Mr. Baziliauskas opined that the actual prices paid by franchisees, the “but-for” prices and the resulting overcharges could be determined on a class-wide basis. The “but-for” price would be determined by deducting from the actual price the amount of the CillRyan mark-up that was found to be unreasonable and the amount of any rebates to TDL that were found to be unreasonable.

H. Tim Hortons’ Expert Evidence

1. Evidence of Roger Ware

166The defendants have tendered affidavit evidence from an expert economist, Professor Roger Ware of Queen’s University. Professor Ware gives evidence concerning the economic principles of franchising, noting that as the creator of the “brand”, the franchisor obtains returns on its innovation that are not necessarily shared with the franchisees. It was his opinion that Tim Hortons, as a prudent franchisor, would make production and pricing decisions to enhance the long-term value of its brand and that the success of individual franchisees would be integral to the long-term success of the brand. Accordingly, he describes the relationship between the franchisor and franchisee as symbiotic, in that the success of one depends on the success of the other.

167In general, he viewed the Always Fresh baking method and the Lunch Menu as appropriate business innovations in the development of the Tim Horton system and as positive developments for franchisees. It was his opinion that as the “innovator” of the Always Fresh baking method, Tim Hortons was entitled to receive a return from the innovation.

168Professor Ware opined that the alleged “harm” to franchisees as a result of these innovations could not be calculated on a common basis because financial performance could only be determined on an individual basis.

169Professor Ware also expressed opinions concerning the Competition Act claims. With respect to the price maintenance claim, he thought that the setting of wholesale prices for the products supplied by Maidstone is simply part and parcel of normal business behaviour of every supplier in a vertical chain and is not an anticompetitive act. The determination of Maidstone’s price is not an attempt to influence the “price at which any other person … supplies or offers to supply the product”.

170Professor Ware’s opinion, as well, is that Tim Hortons’ contractual arrangements with its distributors, such as Gordon Food Service (“GFS”), and the royalties it receives from distributors, are not price maintenance. Tim Hortons’ agreements with its distributors put a ceiling on the mark-up that the distributors can charge to franchisees.

171In a reply affidavit, Professor Ware disputes the evidence of the plaintiffs’ expert, Mr. Fisher, to the effect that the Always Fresh Conversion has eroded franchisees’ profits. He also challenges the evidence of both FTI and Dr. Baziliauskas, noting that their calculations of the “but-for” prices charged for the Always Fresh donuts and timbits do not properly account for the fact that Tim Hortons is entitled to make a return on its innovation.

2. Evidence of KPMG

172The defendants engaged KPMG Forensic Inc. (“KPMG”) to review and critique the report of Mr. Fisher. In summary, KPMG points out that Fisher has no professional accounting expertise. It says that his calculation of donut costs, both before and after the Always Fresh Conversion, and his calculations of the costs of Lunch Menu items are “fundamentally flawed”. It also challenged Mr. Fisher’s conclusion that the results of his analysis could be extrapolated to all class members.

173In addition, KPMG commented on the FTI report tendered by the plaintiffs, specifically on FTI’s conclusion that the price charged to franchisees for the donuts between 2003 and 2009 was excessive. KPMG was of the opinion that FTI’s analysis failed to account for the significant risks undertaken by CillRyan, the functions it performed and its ownership of and access to intangible assets, including know-how and the right to produce the par baked goods, including the recipes for the products.

174In particular, KPMG disagreed with FTI’s conclusion that the “mark-up” charged by CillRyan to distributors was excessive. It noted that CillRyan was entitled to compensation for functions that it performed and risks it assumed. The functions it performed included: taking orders, forecasting, pricing, accounts receivable, marketing, purchasing and distribution, research and development, information technology, financing, and the development, acquisition and protection of intellectual property. Although some of these functions may have been outsourced to Tim Hortons, the latter was paid for the services and the responsibility for them remained with CillRyan.

175The risks assumed by CillRyan included the market risk associated with the forecasting and pricing of the products produced at Maidstone, including risks related to changes in consumer tastes and demands. This is not an insignificant risk in view of trends towards healthy eating. As well, there are foreign exchange risks, credit risks and product liability risks.

176In summary, KPMG concludes that considering the functions performed by CillRyan and the risks it assumed, it was entitled to make a profit on the price that was charged to distributors.

177In a further report, dated June 10, 2011, KPMG commented on FTI’s report dated May 4, 2011. It expressed the opinion that the economic effect of the Always Fresh Conversion and the Lunch Menu on franchisees would be extremely difficult, if not impossible, to determine on a common basis due to the wide variety of factors affecting the financial performance of individual stores.

III. THE FRANCHISE AGREEMENT

178As described in Frank Zaid, Franchise Law (Toronto: Irwin Law Inc., 2005) at p. 15, a franchise agreement has certain core features:

Franchising is fundamentally a form of business investment and ownership governing the distribution and sale of goods or services. In a franchise, the franchisor typically develops a business system, in association with a trade-mark, and licenses the use of that system to a franchisee, for a period of time. The franchisee is required to conform to the standards of the system and to pay consideration to the franchisor, usually as a combination of an initial fee and ongoing payments in the nature of royalties based on gross sales of the products and services associated with the franchise system.

179The acquisition of a franchise can provide an independent business person with a number of benefits. These include:

(a) access to a well-recognized brand that immediately brings customers into the store due to goodwill associated with the brand;

(b) a comprehensive business system with a proven track record;

(d) a high quality, consistent and dependable product;

(e) the ability to provide customers with affordable prices in a highly competitive industry;

(f) extensive market research, which enables franchisees to remain competitive in a constantly changing market;

(g) national marketing, which promotes new products; and

(h) access to ongoing support and assistance from the franchisor.

180There are, of course, disadvantages to a franchise operation. The initial purchase of a franchise can be expensive and there are ongoing royalty expenses paid to the franchisor that would not be incurred by an independent business person.

181One of the greatest disadvantages of operating a franchise is loss of control. The franchisee loses the freedom of choice that is the hallmark of the independent business person. This loss of control is a necessary aspect of a franchised operation. Products, prices, menu offerings, store set-up, hours and methods of operation are strictly controlled to create the uniformity that is so vital to the success of the franchise as a whole.

182This loss of control can impact the costs of the operation. The franchisor generally tells the franchisee what products it must buy, from whom it must buy them, and at what price. This affects the franchisee’s cost of sales, a key component of the franchisee’s profitability. The fact that the franchisee might be able to buy exactly the same product from another source at a cheaper price is irrelevant. The law recognizes that the franchisor is not required to sell products to its franchisees at the lowest price available in the market. In Ontario Regulation 581/00 under the Arthur Wishart Act provides that the franchisor must disclose to a prospective franchisee that “[T]he cost of goods and services acquired under the franchise agreement may not correspond to the lowest cost of the goods and services available in the marketplace.”

183Most Tim Hortons stores are operated by franchisees as “owners” of their own stores or by “operators” of corporately-owned stores. As mentioned earlier, the store “owners” pay an initial non-refundable franchise fee, rent, which is typically 10% of monthly sales, a service fee of 3% of sales, an advertising and marketing fee (4% stated, but in fact 3.5%). Those who “operate” corporate stores are also required to sign a franchise agreement, but instead of a franchisee fee they pay a royalty of 20% to Tim Hortons, as well as the advertising fee.

184Under the typical franchise agreement, Tim Hortons grants the franchisee a licence to operate a Tim Horton Shop for a term of ten years and to use the Tim Horton trademarks and the Tim Horton System. The franchisee agrees to devote 100% of its efforts to the business. It acknowledges the importance of uniform standards of quality and service and the need to operate in accordance with the system to increase the demand for Tim Hortons’ products and to protect and enhance the reputation and goodwill of Tim Hortons. Tim Hortons undertakes to maintain a continuing consultative relationship with the franchisee, to develop and improve its system over time and to ensure the integrity of the system as a whole.

185The recitals to the franchise agreement describe and define the “Tim Horton System”, confirm Tim Hortons’ development and ownership of that system, and acknowledge the franchisee’s agreement to operate in accordance with that system:

WHEREAS the Licensor, as the result of the expenditure of time, effort and money, has acquired experience and skill in the development, opening and operating of shops involving the production, merchandising and sale of donuts, muffins, tarts, cakes, pies, cookies, coffee and other related products utilizing a specially designed building with specified equipment, equipment layouts, interior and exterior accessories, identification schemes, products, management programs, standards, specifications and procedures and propriety trademarks and tradenames, all of which may be improved, further developed or otherwise modified from time to time and all of which are referred to in this Agreement as the "TIM HORTON SYSTEM".

AND WHEREAS the Licensor owns all rights to, interest in and goodwill of, and uses, promotes and licenses the trademarks and/or tradenames 'TIM HORTONS" and "TIMBITS" and such other trademarks and tradenames as are now designated as a part of (and which may hereafter be designated in the Confidential Operating Manual or otherwise in writing as part of) the "TIM HORTON SYSTEM" (hereinafter called the "Licensor's Trademarks''), all of which the Licensor has adopted and used to identify Tim Horton Shop services operated pursuant to the "TIM HORTON SYSTEM" and of the food, beverage and other products sold or used therein, and which the Licensor continues to develop and use and control the usage of, for the benefit and use of itself and its licensees in order to identify for the public by the association of the Licensor's Trademarks the source of goods and services marketed thereunder and to represent to the public the high and uniform standards of quality, cleanliness, appearance and service available at a Tim Horton Shop;

AND WHEREAS the Licensee understands and acknowledges the importance of Licensor's high and uniform standards of quality, cleanliness, appearance and service, the value of the “TIM HORTON SYSTEM" and the necessity of opening and operating the Licensee's Tim Horton Shop in conformity with the "TIM HORTON SYSTEM" and in accordance with the Licensor's standards and specifications, which form part of such System;

186I turn now to Article 3 of the franchise agreement, which is one of the provisions relied upon by the plaintiffs. It speaks, among other things, to the franchisor’s advisory relationship with the franchisee, the provision of information concerning Tim Hortons’ procedures, techniques and products, and the need to develop and improve these over time. It is quite obvious that in buying a franchise, one of the most important things that the franchisee acquires is the right to use the franchisor’s carefully developed systems and products, the result of the franchisor’s know-how, which have been successfully used by other franchisees over the years.

187Article 3 speaks to these issues under the heading “Initial and Continuing Services Furnished by the Licensor”:

During the term of this license, the Licensor shall provide the following services to the Licensee:

(f) to maintain a continuing advisory relationship with the Licensee, including consultation in the areas of marketing, merchandising and general business operations;

(g) to provide a Confidential Operating Manual which contains the standards, specifications, procedures and techniques of the "TIM HORTON SYSTEM" and to revise, from time to time, the content of the manuals to incorporate new developments regarding standards, specifications, procedures and techniques;

(h) to use its best efforts to maintain high and uniform standards of quality, cleanliness and appearance at all Tim Horton Shops, thus protecting and enhancing the reputation of the Licensor and the demand for the products of the “TIM HORTON SYSTEM" and, to that end, shall conduct periodic inspections of the Tim Horton Shop licensed herein and periodic evaluations of the products sold and used therein

(i) to use reasonable efforts to develop new products compatible with the “TIM HORTON SYSTEM"; to review and approve any and all proposed advertising and promotional materials prepared by the Licensee for use in local advertising …

188These are important provisions for both franchisor and franchisee. The franchisee is assured that it will receive advice and support from the franchisor, that it will receive an operating manual that will be modified from time to time, and that the franchisor will maintain high standards for the benefit of all franchisees and will develop new products compatible with the system. By doing so, the franchisor strengthens not only the individual franchisee, but the operation of the franchise system as a whole.

189Article 5, entitled “Duties of the Licensee”, confirms the duty of the franchisee to comply with the Tim Horton System. It also acknowledges the need for uniformity in quality, appearance and techniques. This is important, of course, to the franchisor, but it is also important to every other franchisee who participates in the system. It provides in part:

The Licensee understands and acknowledges that every detail of the "TIM HORTON SYSTEM" is important to the Licensor, to the Licensee, and to other licensees in order to develop and maintain high and uniform standards of quality, cleanliness, appearance, service, facilities, and techniques to increase the demand for Tim Horton products and to protect and enhance the reputation and goodwill of the Licensor. The Licensee accordingly covenants as follows:

190Section 5.04, entitled “Supply of Product by Licensor”, is of particular importance, in the submission of Tim Hortons. It obliges the franchisee to purchase all supplies from either the franchisor or from manufacturers designated by the franchisor. The evidence establishes that this is the case with all ingredients purchased by Tim Hortons franchisees, other than milk. The section acknowledges that Tim Hortons may make a profit or receive a commission or rebate as a result of such purchases and the franchisee expressly renounces any entitlement to it. It provides:

The Licensee shall purchase its supplies as follows:

a. the Licensee agrees that all containers, cartons, bags, napkins, spoons and other utensils shall be purchased from the Licensor or manufacturers as designated by the Licensor from time to time and shall comply with the specifications provided by the Licensor from time to time. The Licensee further agrees that any and all of the ingredients and commodities which may form any part of the products or the whole product of any food or beverage made, sold or consumed on the Premises and, without limiting the generality of the foregoing, including donut flours, toppings, fillings, frostings, flavourings, coffee, tea, chocolate, dairy products, vegetable oil, soft drinks and vending machines, shall be purchased from the Licensor or manufacturers as designated by the Licensor from time to time. Payment for all of the aforementioned ingredients, commodities and supplies shall be made on delivery or within fifteen (15) days of delivery as specified by the Licensor from time to time in the Licensor's sole and absolute discretion during the currency of this Agreement. It is hereby acknowledged by the Licensee that in purchasing such products or supplies from the Licensor or manufacturers designated by it, the Licensor will make a profit or receive a commission or rebate on the price of goods sold to the Licensee and the Licensee agrees that such profits, commissions or rebates shall be the sole and absolute property of the Licensor and the-Licensee shall have no claim to them in law or in equity … [emphasis added]

191Section 5.06 returns to the obligation of the franchisee to conduct its operations and its store in conformity with standards established by Tim Hortons. This includes the obligation to use all ingredients, supplies and methods of production specified by the franchisor and to offer for sale all products prescribed by the franchisor. In other words, the franchisee has no right to pick and chose which of the franchisor’s products it will offer in its shop. Were this not so, the franchisee might simply chose to offer the most profitable products, such as coffee, and refuse to offer less profitable products, such as, to pick an example that may not be apt, a ham and cheese sandwich. A Tim Hortons customer in Bracebridge who loves a ham and cheese sandwich for lunch is entitled to expect, when she goes to Toronto, that she will find her favourite ham and cheese sandwich on the menu and that it will taste just the same as it does in the store at home.

192Section 5.06 provides:

Section 5.06 - Operation of Tim Horton Shop

The Licensee shall operate the Tim Horton Shop in conformity with such uniform methods, standards and specifications as the Licensor may from time to time prescribe in the Confidential Operating Manual or otherwise in writing to insure that the highest degree of quality and service is uniformly maintained, to refrain from any deviation therefrom and from otherwise operating in any manner which reflects adversely on the Licensor's name and goodwill or on the Licensor's Trademarks associated with the "TIM HORTON SYSTEM" and in connection therewith:

(a) to use all materials, ingredients, supplies, paper goods, uniforms, fixtures, furnishings, signs, equipment, methods of exterior and interior design and construction and methods of product preparation prescribed by or which conform with the Licensor's standards and specifications;

(b) to refrain from using or selling any products, materials, ingredients, supplies, paper goods, uniforms, fixtures, furnishings, signs, equipment and methods of product preparation which do not meet the Licensor's standards and specifications;

(c) to offer for sale only such products as shall be expressly approved for sale in writing by the Licensor and to offer for sale all products that have been designated as approved by the Licensor;

(d) to maintain at all times a sufficient supply of approved products for sale to the public.

193Article 6.00 deals with the “Licensor’s Trademarks” and contains extensive provisions with respect to the use of the “Tim Horton” trademarks by the franchisee. This is not surprising, given the iconic nature of the “Tim Horton” name and coffee brand in Canada and the goodwill attached to them. Section 6.06, entitled “Tim Horton System”, returns to the importance of the system not only to the franchisor but to the franchisee and to other members of the franchise chain. It provides:

The Licensee acknowledges that every detail of the “TIM HORTON SYSTEM" is important to itself, the Licensor and other licensees in order to develop and maintain high and uniform standards of quality and service, and hence to protect the reputation of Tim Horton Shops. Accordingly, the Licensee covenants: …

194There follow various undertakings with respect to the use by the franchisee of the “Tim Hortons” name and trademarks.

195Article 7 deals with the Confidential Operating Manual. Section 7.00 provides:

In General:

In order to protect the reputation and goodwill of the "TIM HORTON SYSTEM" and to maintain uniform standards of operation under the Licensor's Trade Marks, the Licensee shall conduct the Tim Horton Shop business in accordance with the Licensor's Confidential Operating Manual which consists of a set of manuals and guides, as they may exist from time to time (herein collectively called the "Confidential Operating Manual"), and the Licensor hereby lends to the Licensee such Confidential Operating Manual for the term of the license, receipt of one (1) set of which is hereby acknowledged by the Licensee.

196Section 7.03 in particular is relied upon by the plaintiffs. It is entitled “Changes in Confidential Operating Manual”:

7.03(a) In order that the Licensee may benefit from new knowledge gained by the Licensor as to improved methods, procedures and techniques in the preparation, merchandising and sale of donuts and other food items, and in the operation of the Tim Hortons Shop, the Licensor may from time to time revise the contents of the Confidential Operating Manual and such other manuals and materials, if any, as it may develop and the Licensee covenants to forthwith comply with all changes to the contents of the Confidential Operating Manual and such other manuals and materials, if any, as the Licensor may develop, made by the Licensor from time to time during the term of this License Agreement provided that such changes shall not unreasonably alter the Licensee's rights or obligations under this Agreement. [underlined wording does not appear in all agreements]

197I will return to this provision shortly. It contemplates that the franchisor will revise its system, as embodied in the Confidential Operating Manual, from time to time, to give effect to new knowledge and improvements in the business. Some, but not all of the franchise agreements in use at the material time, contained the underlined words at the end of the section, “provided that such changes shall not unreasonably alter the Licensee's rights or obligations under this Agreement.” It appears that these words were added to licence agreements executed on or after October 1995.

198The plaintiffs rely in particular on the words: “In order that the Licensee benefit from new knowledge gained by the Licensor as to improved methods, procedures and techniques …”. They submit that any new methods, procedures or techniques introduced by the franchisor, and any changes to the Confidential Operating Manual, must be improvements that have a benefit to the franchisee. At certain points in the argument, the plaintiffs contended that “benefit” means a financial benefit. I will return to this submission.

199The franchise agreement contains, as might be expected, many provisions that are standard in a commercial agreement, including an “Entire Agreement” clause, section 16.02:

This Agreement, the documents referred to herein, and the exhibits attached hereto, if any, constitute the entire, full and complete agreement between the Licensor and Licensee concerning the subject matter hereof, and supersede all prior agreements written or oral. The Licensee acknowledges and agrees that it has not been induced to enter into this Agreement in reliance upon, nor as a result of, any statements, representations, warranties, promises or inducements whatsoever, whether written or oral and whether directly related to the contents hereof or collateral thereto, given or made by the Licensor, its officers, directors, agents, employees and contractors. No amendment, change or variance from this Agreement shall be binding on either party unless mutually agreed to by the parties and executed in writing.

200Under the heading “Licensee’s Acknowledgments”, section 16.13 provides that the franchisee acknowledges, among other things, that there are business risks associated with the venture and that no warranties have been given concerning the profits or success of the franchisee’s operation:

(a) The Licensee acknowledges that it has read this Agreement and that it understands and accepts the terms, conditions and covenants contained in this Agreement as being reasonably necessary to maintain the Licensor's high standards of quality and service and the uniformity of those standards at all Tim Horton Shops and thereby to protect and preserve the goodwill of the Licensor's Trademarks.

(b) The Licensee acknowledges that it has conducted an independent investigation of the business venture contemplated by this Agreement and recognizes that it involves business risks and that the success or failure of the venture is largely dependent upon the individual business abilities and efforts of the Licensee and general economic conditions which are beyond the control of the parties to this Agreement.

(c) The Licensee acknowledges that it has read and received a copy of this Agreement and has consulted with its legal and economic advisers prior to the execution of this Agreement.

(d) The Licensor expressly disclaims the making of, and the Licensee acknowledges that it has not received or relied upon, any warranty or guaranty, express or implied, as to the potential revenues, profits or success of the business venture contemplated by this Agreement. The Licensee acknowledges that it has no knowledge of any representations about the license by the Licensor or its officers, directors, shareholders, employees or agents that are contrary to the terms herein and further represents to the Licensor as an inducement to its entry into this Agreement, that the Licensee has made no misrepresentations in obtaining this license.

201The franchise agreements included a provision that permitted Tim Hortons to suggest the prices at which products would be sold by franchisees, but franchisees were permitted to sell at lower prices, provided they did not sell at prices in excess of the maximum price suggested. This was in order to comply with provisions of the Competition Act, discussed below, directed at resale price maintenance. The relevant provision of the franchise agreement was as follows:

The Licensor may from time to time suggest prices for the products sold from or at the Tim Hortons Shop. Except as hereinafter provided, the Licensee shall have the sole right to determine the prices of any and all products sold from or at the Tim Hortons Shop and the Licensee shall not suffer in the Licensee’s business relations with the Licensor or any other person controlled by the Licensor if the price suggestions are not followed. However, notwithstanding the foregoing, the Licensee shall not at any time offer any products for sale at prices in excess of the prices suggested by the Licensor for such products at such time.

202The Franchise Disclosure document provided by Tim Hortons to prospective franchisees, including to the plaintiffs, prior to the renewal of their agreements, provided:

The Licensee shall have the sole right to determine the prices of any and all products sold, subject however, to the fact that the Licensee shall not at any time offer any products for sale at prices in excess of the prices suggested by the Licensor for such products from time to time. Provided the price set by the Licensee does not exceed the suggested price, the Licensee may determine the price of any and all products sold from the Tim Hortons Store and the Licensee shall not suffer in its business relations with he Licensor or any person controlled by the Licensor for so doing.

203The foregoing evidence, and summary of the key contractual terms, provides some background for the plaintiffs’ motion for certification and the defendants’ motion for summary judgment. I will discuss additional evidence, as required, in the context of those motions.

IV. CERTIFICATION

A. Introduction

204The primary goal of the C.P.A. is to facilitate access to justice by making litigation practical for those who would find it difficult to litigate on their own. By permitting the aggregation of claims, a class action promotes judicial economy by avoiding duplication of fact-finding and legal analysis. It can also promote behaviour modification by holding wrongdoers accountable for their conduct, when they might not otherwise be brought to task. It is well-established that the C.P.A. should be given a generous interpretation in order to promote its objects: see Hollick v. Toronto (City), 2001 SCC 68, [2001] 3 S.C.R. 158, S.C.J. No. 67 at paras. 14-16; Cloud v. Canada (Attorney General) (2004), 73 O.R. (3d) 401, [2004] O.J. No. 4924 at paras. 36-38. As Chief Justice McLachlin said in Hollick at para. 16, the question at the certification stage is not whether or not the claim is likely to succeed, but whether the action can be appropriately prosecuted as a class action.

205The intersection of the C.P.A. and the Arthur Wishart Act has provided a fertile ground for the growth of franchise class actions. As I noted in Trillium Motor World Ltd. v. General Motors of Canada Ltd., 2011 ONSC 1300, [2011] O.J. No. 889 at paras. 46-59, there have been a number of class actions in Ontario in the past fifteen years involving claims by franchisees against franchisors. The existence of a group of franchisees, operating under a standard contract, can give rise to common issues of fact or law that are capable of resolution on a class-wide basis. The C.P.A. has proven to be an effective procedural tool to address concerns that individual franchisees are powerless, vulnerable and lack an effective voice.

206In this case, leaving aside the issue of the representative plaintiff, which I shall address shortly, the defendants did not really dispute that if the action survives summary judgment, it would be possible to identify a class and common issues that would make the action appropriate for certification. The defendants say that if the action does proceed as a class action, they might well assert common issues of their own.

207I turn to the test for certification and its application.

B. The Test for Certification

208Section 5 of the C.P.A. provides:

(1) The court shall certify a class proceeding on a motion under section 2, 3 or 4 if,

(a) the pleadings or the notice of application discloses a cause of action;

(b) there is an identifiable class of two or more persons that would be represented by the representative plaintiff or defendant;

(c) the claims or defences of the class members raise common issues;

(d) a class proceeding would be the preferable procedure for the resolution of the common issues; and

(e) there is a representative plaintiff or defendant who,

(i) would fairly and adequately represent the interests of the class,

(ii) has produced a plan for the proceeding that sets out a workable method of advancing the proceeding on behalf of the class and of notifying class members of the proceeding, and

(iii) does not have, on the common issues for the class, an interest in conflict with the interests of other class members.

209The elements of this test are linked. There must be a cause of action, shared by an identifiable class, from which common issues arise that can be resolved in a fair, efficient, and manageable way that will advance the proceeding and achieve access to justice, judicial economy, and the modification of behaviour of wrongdoers: Sauer v. Canada (Attorney General), 2008 43774 (ON SC), [2008] O.J. No. 3419 (S.C.J.) at para. 14, leave to appeal to Div. Ct. refused, 2009 2924 (ON SCDC), [2009] O.J. No. 402 (Div. Ct.). The causes of action, when applied to the circumstances of the representative plaintiff and the class, must give rise to common issues of fact or law that are capable of fair and manageable resolution on a class-wide basis. In the franchise context, as in most cases, the devil will be in the details, which include a precise definition of the class and carefully crafted common issues. Those areas, which in turn impact the preferable procedure requirement, have proven particularly troublesome in this case.

(a) Cause of Action

210The test under s. 5(1)(a) of the C.P.A. is the same as that applied on a motion to strike a pleading under rule 21.01(1)(b) of the Rules, on the ground that it discloses no reasonable cause of action: "assuming that the facts as stated in the Statement of Claim can be proved, is it 'plain and obvious' that the plaintiff's Statement of Claim discloses no reasonable case of action?": see Hunt v. Carey Canada Inc., 1990 90 (SCC), [1990] 2 S.C.R. 959, [1990] S.C.J. No. 93 at para. 33. The principles applicable to this test have been summarized in Trillium Motor World Ltd. v. General Motors of Canada Ltd. at para. 61.

211The defendants acknowledge that any causes of action that survive summary judgment will be appropriate for certification. I find that the plaintiffs have properly pleaded causes of action for breach of contract, breach of the duty of good faith and fair dealing at common law and under the Arthur Wishart Act, breach of the Competition Act, unjust enrichment and waiver of tort. Similar causes of action have been approved in other franchise cases: see for example Landsbridge Auto Corp. v. Midas Canada Inc. (2009)¸ 73 C.P.C. (6th) 10, [2009] O.J. No. 1279 (S.C.J.) (breach of contract, breach of common law and statutory duties of good faith); Trillium Motor World Ltd. v. General Motors of Canada Ltd (claims under Arthur Wishart Act); 2038724 Ontario Ltd. v. Quizno's Canada Restaurant Corp., 2010 ONCA 466, 100 O.R. (3d) 721, aff'g (2009), 2009 23374 (ON SCDC), 96 O.R. (3d) 252, [2009] O.J. No. 1874 (Div. Ct.), rev'g (2008), 2008 8421 (ON SC), 89 O.R. (3d) 252, [2008] O.J. No. 833 (S.C.J.) (“Quizno’s”), (breach of contract, conspiracy, breach of Competition Act); 1250264 Ontario Inc. v. Pet Valu Canada Inc., 2011 ONSC 3371, [2011] O.J. No. 1373 (breach of contract, breach of duty of fair dealing under Arthur Wishart Act, unjust enrichment).

212I will discuss the causes of action in somewhat more detail when I discuss the summary judgment motion. Suffice to say for the moment, applying the “plain and obvious” test, the causes of action pleaded by the plaintiffs meet the requirements of s. 5(1)(a) of the C.P.A.

(b) Identifiable Class

213The class definition in this action has been a moving target. It continued to evolve during the hearing.

214The Statement of Claim alleges that there are currently 500 to 800 potential class members operating approximately 2400 Tim Hortons stores across Canada. The evidence of Mr. Clanchan of Tim Hortons is that, as of the end of 2008, there were nearly 3,000 Tim Hortons stores in Canada, owned by 950 franchisees.

215The plaintiffs propose two classes, broken down between those interested in the Always Fresh issues and those interested in the Lunch Menu issues. Obviously many class members will be interested in both issues.

216Class A will include franchisees who are concerned with the Always Fresh issue. Class A will be divided into two groups: Class A-1 is composed of those who converted from scratch baking to the Always Fresh method (the “Conversion Class”); Class A-2 will be composed of those who became franchisees after their stores were converted and who purchased Always Fresh baked goods. The proposed Class A definitions are as follows:

Class A-1 Members – The conversion class:

“Class A-1 Members”, being all persons, including corporations, carrying on business or who carried on business in Canada as a Tim Hortons store under one or more License Agreement(s) or Operating Agreement(s) with the Defendant, the TDL Group Corp. or any of its predecessors (“TDL”), and who converted one or more stores from the full production model for donuts, Timbits, muffins and cookies to the Always Fresh frozen production model for donuts, Timbits, muffins and cookies including those persons, including corporations whose License Agreement(s) or Operating Agreement(s) with TDL has since ended.

Class A-2 Members – Post-conversion franchisees purchasing AF Baked Goods:

“Class A-2 Members”, being all persons, including corporations, carrying on business or who carried on business in Canada as a Tim Hortons store under one or more License Agreement(s) or Operating Agreement(s) with the Defendant, the TDL Group Corp. or any of its predecessors (“TDL”), and who sold Always Fresh frozen donuts, Timbits, muffins and/or cookies at any time after January 1, 2002 including those persons, including corporations, whose License Agreement(s) or Operating Agreement(s) with TDL has since ended.

217Class B includes all franchisees selling the Lunch Menu. It is defined as follows:

Class B Members – The Lunch Menu

“Class B Members”, being all persons, including corporations, carrying on business in Canada as a Tim Hortons store under one or more License Agreements or Operating Agreements with the Defendant, the TDL Group Corp. or any of its predecessors (“TDL”), who have sold one or more Lunch/Soups and Sandwiches items since January 1, 2002, including those persons whose License Agreement(s) or Operating Agreement(s) with TDL has since ended.

218Some of the proposed common issues relate only to members of one class or sub-class and some relate to all members of both classes.

219There is no particular dispute about the principles applicable to the class definition requirement in s. 5(1)(b) of the C.P.A. As the plaintiffs point out, the purpose of the class definition, is to: (a) identify the persons who have a potential claim for relief against the defendants; (ii) define the parameters of the action so as to identify those persons who will be bound by the settlement or judgment if they do not opt out; and (iii) describe who is entitled to receive notice and relief under the C.P.A.: Bywater v. Toronto Transit Commission (1998), 27 C.P.C. (4th) 172, [199

Fairview Donut Inc. v. The TDL Group Corp., 2012 ONSC 1252

I. OVERVIEW

A. The “Always Fresh” Conversion

B. The “Lunch Menu”

C. Causes of Action

D. Tim Hortons’ Response to the Plaintiffs’ Complaints

II. THE FACTS

A. Tim Hortons’ History

B. The Tim Hortons Business Model

C. The Plaintiffs and Mr. Garland

D. The Always Fresh Conversion

E. Alleged Misrepresentation of Cost of Donuts under Always Fresh

F. The Lunch Menu

G. The Plaintiffs’ Expert Evidence

1. Evidence of Douglas Fisher – Defendants’ Motion to Strike

2. Evidence of Howard Rosen

3. Evidence of Andy Baziliauskas

H. Tim Hortons’ Expert Evidence

1. Evidence of Roger Ware

2. Evidence of KPMG

III. THE FRANCHISE AGREEMENT

IV. CERTIFICATION

A. Introduction

B. The Test for Certification

(a) Cause of Action

(b) Identifiable Class

Fairview Donut Inc. v. The TDL Group Corp., 2012 ONSC 1252

I. OVERVIEW

A. The “Always Fresh” Conversion

B. The “Lunch Menu”

C. Causes of Action

D. Tim Hortons’ Response to the Plaintiffs’ Complaints

II. THE FACTS

A. Tim Hortons’ History

B. The Tim Hortons Business Model

C. The Plaintiffs and Mr. Garland

D. The Always Fresh Conversion

E. Alleged Misrepresentation of Cost of Donuts under Always Fresh

F. The Lunch Menu

G. The Plaintiffs’ Expert Evidence

1. Evidence of Douglas Fisher – Defendants’ Motion to Strike

2. Evidence of Howard Rosen

3. Evidence of Andy Baziliauskas

H. Tim Hortons’ Expert Evidence

1. Evidence of Roger Ware

2. Evidence of KPMG

III. THE FRANCHISE AGREEMENT

IV. CERTIFICATION

A. Introduction

B. The Test for Certification

(a) Cause of Action

(b) Identifiable Class

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