Lunchtime Price Gouging: A Possible Sandwich Conspiracy? Quizno’s v 2038724 Ontario Ltd

This past summer, the Ontario Court of Appeal released their judgment on Quizno’s Canada Restaurant Corporation v 2038724 Ontario Ltd, 2010 ONCA 466, which had a significant importance for those interested in Canadian class action suits. This decision marks the first time the Ontario Court of Appeal has certified a competition class action, and should be closely followed by franchisors with vertical pricing agreements.

As noted by S. Dhawan in  “What is next for antitrust class actions suits after DRAM?,” class actions in Canada have infrequently proceeded to a contested certification motion since they often fail to meet the requirements of the Competition Act, RSC, 1985, c C-34 [Competition Act]. The particularly onerous requirement for would-be class action parties is the stipulation to put forward expert evidence to prove there is a workable methodology for establishing harm or loss on a class-wide basis. Without this, our courts have ruled that it would be too difficult to discern the appropriate loss and therefore could not definitely rule on the extent of liability (see, for instance, Chadha v Bayer Inc, [2003] 63 OR (3d) 22 (ONCA)).

In this case, the court found several issues with sufficient common elements beyond the damages claims to provide the basis for certification. Importantly, it also ruled that damages could be determined on an aggregate basis at trial rather than before the certification motion has been granted. This ruling will help ease the certification standard, which in turn should increase the availability of class action suits.

Background – We All Want a Well-Priced Submarine

This case was an appeal from an order conditionally certifying an action commenced by two former Quizno’s franchisees, in Oakville and Windsor, Ontario, as a class proceeding.

The former franchiesees seek to represent all Quizno’s franchises in their claim that Quizno’s corporate headquarters charged them exorbitant food and supply prices through an affiliated company (Gordon Food Services). They allege that this overcharging constituted price maintenance, contrary to s. 61 of the Competition Act, a breach of contract, and a breach of the statutory duty of fair dealing. They also alleged that the defendants were liable for the tort of conspiracy. Pursuant to these allegations, the plaintiffs brought a motion to certify the action as a class proceeding.

The defendants responded by denying all wrongdoing, and alleging that the plaintiffs did not meet four out of the five requirements for certification of a class proceeding.

The motions judge who first heard the plaintiff’s certification motion concluded that the plaintiffs had not established a methodology for calculating what the prices for the franchisees would have been if there had been no conspiracy or price maintenance.

The only issue on appeal was whether or not the plaintiffs met the following criterion for certification for a class action, per s. 5(1) of Ontario’s Class Proceedings Act, 1992, SO, 1992, c 6:

(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. [Emphasis added]

In certifying the action as a class proceeding, the Divisional Court judge reversed the motions judge by finding the statement of claim disclosed causes of action for breaches of competition and contract law, as well as the tort of civil conspiracy. He found the two representative plaintiffs satisfactory, and ruled that there was a discernible class. The main issue was whether or not damages were a common issue amongst class members. The motions judge found that the refusal to certify the damages portion of the franchisees’ claim meant that all other aspects of the claim had to fail on the basis that common issues were not identified. The Divisional Court found that that fact that damages could not be ascribed to individual franchisees was not fatal to the class certification.

The Court of Appeal judge agreed with the Divisional Court’s decision, affirming the certification of the class action. They found that although a civil claim for damages under the Competition Act requires proof of harm or damage, proving the existence of price maintenance under s. 61 does not require evidence of damage, and can be determined on a class-wide basis.

A Warning to the Sandwich Cartel – The Importance of this Decision

The importance of this decision rests with the idea that the allegation of a competition, contract and tort breach are considered common issues that can proceed through certification without a damages assessment.

The implications of this are far-reaching. First, the Court of Appeal seems to have embraced a lower threshold for class action certification, especially with respect to claims that require proof of harm as an integral part of liability. Now, class action suits involving indirect or direct purchasers in Ontario are more likely to pass the certification stage and get to argue their cases on the merits. This could well lead to a significant increase in the quantity of Canadian class action suits brought and that proceed through to the lengthy and expensive trial process. Some may well see this as a clogging up of our courts, or a decision that helps pave the way for a more litigious Canada. On the other hand, this decision will improve access to justice for plaintiffs and reduce multiplicity of proceedings issues.

Secondly, it looks like this decision will have less-than-obvious implications for franchisors in Ontario. As the June 24 2010 Osler Update speculates, this decision implies that courts hearing franchise class actions are willing, when appropriate, to certify as a common issue whether there has been a breach by the franchisor of a specific provision of a franchise agreement. The Court of Appeal noted that a dispute between a franchisor and their franchisees is exactly the type of case for a class proceeding.

If, in a few years, you notice you are getting more bang for your buck at Quizno’s, thanks should be directed to the Ontario Court of Appeal for allowing more class proceedings to be certified for trial. This could do wonders to avoid price-gouging franchisors and could pave the way for more class action certifications.