Recent litigation in the United States has examined issues
relating to franchise systems imposing price ceilings on items sold by franchisees,
even when those ceilings mandate that items are sold at a loss. In a notable case, National Franchisee Association v. Burger King Corp., the United
States District Court for the Southern District of Florida in 2010 affirmed the
right of Burger King to impose a $1 price ceiling on its “Buck Double” cheeseburger, even though the cost to
franchisees producing that cheeseburger were higher than $1. Essentially, the court agreed with Burger King’s
argument that enforcing such price ceilings is a reasonable strategy to draw in
other customers in to purchase higher price items, essentially acting as a
“loss leader” to benefit overall store sales.
This legal precedent for allowing franchisors to enforce
maximum, below-cost price ceilings appears to have migrated north of the
border. Recently, an association of Tim
Horton’s franchisees filed a class action against the franchisor requirement
that franchisees sell lunch item menus for less than cost. Echoing the holding in the Burger King case, the Canadian court
embraced Tim Horton’s arguments that the applicable analysis involves the overall
profitability of the franchise store, rather than the individual profitability
of a single item. The court found that
it was commercially reasonable for Tim Horton’s to adopt and enforce a strategy
on its franchisees to use below cost lunch menu item as a loss leader to bring
in customers and create additional profit on other items.
The adoption of the “loss leader” concept in the context of
maximum price ceilings in the Canadian courts may demonstrate a trend towards
greater franchisor control and discretion and the pricing of specified menu
items system-wide.
