September 7, 2022
By Jennifer Zhang, Jones & Co.
On June 23, 2022, the Canadian government introduced significant amendments to the Competition Act (referred to as the “Act”), by way of passing the Budget Implementation Act, 2022.
With the amendment coming into force, it is a criminal offence for employers to conspire with other employers to fix, maintain, decrease or control wages and other terms of employment (“wage-fixing agreements”) and to refrain from hiring or trying to hire one another’s employees (“no-poach agreements”). Following the path of our neighbour on the south of the border, these provisions are now added into the existing criminal conspiracy provisions, and are subject to the discretionary court-imposed fines and administrative monetary penalties.
Existing Dual-Track Approach to Agreements Between Competitors
In Canada, agreements between competitors can be reviewed under Section 45 or Section 90.1 of the Act.
Section 45 is a criminal provision that is reserved for horizontal agreements (meaning agreements between enterprises which operate in the same market and are competitors on the market) between competitors to fix prices, allocate markets or restrict output that constitute “naked restraints” on competition. In other words, just as they are in the United States, such agreements are considered per se illegal (meaning the conduct is illegal without extrinsic proof of any surrounding circumstances, such as likely anti-competitive effect).
In contrast, other types of horizontal competitor collaborations, such as strategic alliance and joint ventures, may be reviewed under Section 90.1 of the Act, which is a civil provision that prohibits agreements only where they are likely to substantially prevent or lessen competition. Section 90.1 involves a full rule of reason analysis, including, for example, consideration of market shares, barriers to entry, the extent of remaining competition and the likely pro-competitive benefits arising from the agreement.
In Latifi v The TDL Group Corp. (Latifi), 2021 BCSC 2183 (CanLII)[1], the British Columbia Supreme Court struck portions of a proposed class action claim alleging that a no-hire clause in the standard Tim Hortons franchise agreements violates section 45 of the Competition Act by unlawfully suppressing wages. The court in Latifi finally determined that the objective of the provision was focused on the price-fixing of products, rather than the wage-fixing of employees. The court reasoned that buy-side agreements between competitors, including no-poach and wage-fixing agreements between competing purchaser of labor, would not be per se illegal under Section 45. They would be subject to a review pursuant to Section 90.1.
With the amendment patching “no-poach and wage-fixing agreement” into Section 45, Latifi is no longer good law.
The Saving Grace? Ancillary Restraints Defence and other exceptions
Section 45 includes certain defences, the main one being the ancillary restraints defence (“ARD”), which provides that no person shall be convicted of an offence if that person can demonstrate that the agreement in question:
- is ancillary to a broader or separate agreement that includes the same parties and that is not itself criminal; and
- is directly related to, and reasonably necessary for giving effect to, the objective of that broader or separate agreement.
The Competition Bureau published “Competitor Collaboration Guidelines” (last updated on May 6 2021)[2], stating that it will generally not assess the following types of ancillary restraints under the criminal provision in section 45 of the Act, although these restraints may be subject to Section 90.1 review:
- A non-compete clause found in an agreement for the sale of assets or shares between parties;
- An agreement among competitors to charge a common price in a blanket license agreement for artistic works;
- An agreement to abstain from making material changes to a business pending the consummation of a merger; and
- A non-compete obligation between the parent undertakings and a joint venture where such obligations correspond only to the products, services and territories covered by the joint venture agreement.
Whether ARD can be invoked to agreement between franchisees in the same franchise system and/or within a reasonable geographic area is yet to be tested. It involves more circumstantial analysis of the franchise system to see if such restraint is “reasonably necessary” to give effect to the broader agreement, which is usually to license trademark, know-how and other rights to a licensee to operate business within certain territory.
In addition to the ancillary restraints defence, a number of other defences or exceptions are provided in the Act. One exception is for agreements entered into between companies that are affiliated. This means, if no-poaching, wage-fixing agreement is only imposed on company-owned stores, it is not an offence.
It is worth noting that for the exception to apply, all of the parties to the agreement must be affiliated; accordingly, an agreement between affiliated and unaffiliated entities or individuals may be prosecuted under subsection 45(1).
Where the risk lies
Like all other criminal charges, the Crown bears the onus of establishing beyond a reasonable doubt that the restraint(s) in issue contravenes the prohibitions in subsection 45. Some people are of the view that success rate of prosecution in the United States is poor and the situation could be similar in Canada.
In July, McDonald’s obtained a judgment on the pleadings, ending the antitrust litigation challenging the legality of the no-hire restraint in its franchise agreements. McDonald’s convinced the court that its previous inclusion of no-hire clauses within its franchise agreements did not violate Section 1 of the Sherman Act. Ultimately, the court’s decision turned on the application of the rule of reason, as opposed to “per se” treatment, which the plaintiffs argued were the proper standard to apply to the no-hire clauses.
That said, a real concern is that the amendments could open the door to potential class actions against parties alleged to have violated the new prohibitions in section 45, regardless whether the Competition Bureau takes successful enforcement action or not. Section 36 of the Act allows private plaintiffs to sue for civil damages in relation to alleged criminal conduct regardless of whether the Competition Bureau has commenced its own enforcement proceedings.
What Should Franchisors Do?
Franchisors should take proactive compliance efforts to avoid prosecution. Franchisors should examine their franchise agreement and other documents related to non-compete restrictions and employment policies. If there is an existing no-poaching, no-hire, or wage-fixing clause in the franchise agreement, make sure to consult legal advisers to determine whether or not it is within the scope of the new prohibition, and if so, whether it could be possibly saved by the ancillary restraints defence and other exceptions.
Businesses have one year to do this, as the new wage-fixing and no-poach provision comes into force on June 23, 2023.
On a practical front, franchisors should avoid the complications of getting into a franchisee-franchisee dispute. Franchisees may turn to the franchisor complaining of a loss of trained employees. Franchisors can remind franchisees of the importance of entering into employment agreement having confidentiality and non-compete provisions with their key employees, unless prohibited by applicable law. (Ontario prohibits non-compete clause in employment agreement with a few exceptions, such as when the employee is an executive of the company).
ABOUT THE AUTHOR
Jiahui (Jennifer) Zhang is a lawyer at Jones & Co, based in Toronto.
She graduated from University of Toronto, Faculty of Law. Jennifer serves Canadian and International clients, drafts master franchise agreement, unit franchise agreement, and franchise disclosure document for use in Canada. She also advises on corporate and trademark matters.
Prior to being called to the Ontario Bar, Jennifer worked in other jurisdictions on international investment transactions.
[1] 2021 BCSC 2183 (CanLII) | Latifi v The TDL Group Corp. | CanLII
[2] Government of Canada webpage, May 6, 2021, Competitor Collaboration Guidelines – Competition Bureau Canada
