Archive for September, 2009

Competition Law and SMEs

Tuesday, September 22nd, 2009

In the past I have been involved in some very large-scale competition law matters.  The Competition Bureau has gone after some of my former clients in investigations involving the beer industry or the entertainment industry (in that case, the distribution of movies to theatres throughout the country).  The focus, however, has always been in large industries with large players.  The Bureau has not gone after small and medium enterprises (SMEs) to any significant extent.  However, I was reading the latest copy of the Canadian Bar Association’s magazine which suggests that this may change.

Changes to competition laws are coming soon (March 2010 to be exact) that will start to shift the focus from criminal prosecution of violations of competition law to more of a focus on civil litigation and liability.  Moreover, with the shift towards civil liability, then not only can the Bureau take action over breaches of competition law but so can others.  The article gives a couple of examples that are worthwhile taking note of:

1.  Suppose that you and your competitor decide to allocate the market amongst yourselves.  For example, suppose that you sell tires.  You and your competitor are the only ones in town who sell tires.  You agree to only sell “normal” tires and your competitor agrees to only sell “winter tires”.  This gives you a monopoly for half of the year’s tire sales and your competitor has the monopoly for the other half of the year.  Previously, the sales may not have been large enough to catch the attention of the Competition Bureau.  But, now, John Customer can sue the both of you and say that this arrangement forces prices to remain artificially high.

2.  You’ve heard the ads for “if you find a lower price anywhere else, bring in the ad and we’ll beat it by 10%”.  Generally speaking, these are limited time offers.  But, sticking with my tire example above, suppose that you wanted to get rid of your opponent so you offer tires for sale at wholesale prices.  Will you make any money?  No.  Will all of the people in the area come to you instead of going to your opponent?  Of course.  So long as you have enough money in the bank to outlast your opponent, then your opponent will fail financially and you will then be the only place in town to buy tires.  This practice is known as “predatory pricing”.  Previously it was covered only in the criminal provisions, but the Bureau never significantly enforced this provision of the Competition Act.  However, now you could be sued by either your former opponent – who would claim that you acted on purpose to run him out of business – or else you could be the subject of a lawsuit by either one or more customers (perhaps even a class action) who will claim that the result is that they now have to pay more for tires since you’re the only place in town.

3.  There are a series of provisions in the Competition Act that deal with deceptive marketing.  These involve issues of misleading advertising – for example, ads that say “9 out of 10 doctors agree that using my competitor’s toothpaste will make your teeth fall out,” where this is clearly untrue.  As it now stands, the maximum penalties are $100,000 for a first offence and $200,000 for subsequent offences.  As of March, 2010, the penalties will be increased to up to $10 Million for a first offence and $15 Million for subsequent offences.  What are the chances that you’ll be hit with a $100,000 fine right now?  Not huge.  But when the maximum gets raised up to $10 Million this will have two effects on the court: (a) it will show them that Parliament is sending a clear signal that such advertising is not to be permitted; and (b) if the maximum is now $10 Million, even a $100,000 fine is only 1% of the total possible fine, so it’s not seen as harsh as it would be before March 2010, since now a $100,000 fine is a 100% penalty.

Finally, one of the people quoted has suggested that if the Competition Bureau follows the example of the U.S., it will start to go after SMEs – who have more limited resources to fight the Bureau – and use these cases to build up the case law in the Bureau’s favour that would then allow the Bureau to go after the bigger industries or players.

Is this going to be Chicken Little yelling “the sky is falling”?  No.  But the reality is that the Competition Act wasn’t really applied against SMEs in the past.  That may well change and so you might want to spend some time between now and March 2010 having someone review your contracts and business arrangements to ensure that nobody would have any realistic claims they could make against you.

Something to think about.

CALC

Judgments – Can You Get Paid?

Monday, September 21st, 2009

I’m a little surprised that I haven’t written a post on this in the past, so it’s high time that it be mentioned.  I was reading one of the last decisions handed down by the English House of Lords and there was an interesting quote from a prior decision.  The quote addresses the ability to be paid on a judgment once it is awarded to you.  The quote is from an earlier (2003) decision of the House of Lords:

As many a claimant has learned to his cost, it is one thing to recover a favourable judgment; it may prove quite another to enforce it against an unscrupulous defendant. But an unenforceable judgment is at best valueless, at worst a source of additional loss.

As I often tell my clients, you can go all the way through to the end of a trial and the only guarantee that I can give is that if you win you will get a lovely, very impressive piece of paper that says “Judgment” and has a nice big, red seal on it.  If, however, the other side goes bankrupt, or doesn’t have any money to pay on the judgment, then you will get little more than that lovely piece of paper. 

This is not to say that the exercise of pursuing judgment is not a worthwhile endeavour.  Some clients pursue the matter for “the principle of it all” or to ensure that nobody will try to sue them if they are seen as “an easy mark”.  If nothing else, pursuing a matter through to the end and obtaining a judgment that cannot be paid is usually sufficient for the Canada Revenue Agency to accept that the debt (and the legal costs to obtain the judgment) is truly a “bad debt” that can be written off as against future income.  But, it is yet another factor to take into account when deciding whether to pursue litigation (if you are a plaintiff) – are you even comfortably satisfied that you will be paid at the end of it all. 

It’s not quite as easy if you are a defendant since you don’t have the choice of whether this is to be pursued or not.  However, it can help in your determination, for example, of whether you are willing to make a settlement for even a small amount.  To do otherwise could result in you spending thousands of dollars on legal fees for which you will get nothing back.  To use some simple math: which is easier to swallow – making a payment to the other side of $3,000 to settle the case or spending $10,000 in legal fees that you will never see a penny from the other side because they can’t pay the judgment you get dismissing their claim and awarding costs to you?

Something to think about.

CALC

Arbitration Clauses – Appeal Rights

Wednesday, September 16th, 2009

I was chatting with a colleague at Wilson Vukelich the other day and the subject of arbitration clauses came up for a contract he was drafting.  It is now becoming much more “fashionable” to have arbitration clauses in most contracts.  It used to be said that arbitrations were less expensive and time consuming than trials.  That is still arguably the case but if the sides cannot agree on the basic rules, then my experience is that the arbitrators just use the rules of court and the rules of evidence as defaults so that the cost and time for the hearing ends up being the same.  Arbitration’s real strength lies in the ability to choose your arbitrator – as opposed to finding out who your judge is when he/she walks into the courtroom – and the ability to schedule a hearing more quickly (in some instances) than you can get a judge.

What is quite commonplace, again as a default, is that people put into their contracts that there will be an arbitration of any disputes between the parties and it will be conducted in accordance with the Ontario Arbitration Act, 1991.  There is nothing wrong with this.  However, what a lot of people don’t realize is that there are extremely limited appeal rights under Section 45 that Act.  If the arbitrator makes an error of fact or an error of mixed fact and law, then there is no appeal.  So, if all of the witnesses said the meeting took place over breakfast but the arbitrator finds that it took place over lunch (and let’s assume that this is a key fact that affects the arbitrator’s decision), then this is an error of fact from which there is no appeal.  Similarly, if the arbitrator gets the law right but then tries to apply the law to the facts and gets it wrong, it’s a mixed error of fact and law which, again, gives no rights of appeal.  It is only where the arbitrator (a) makes an error of law (ie. gets the law wrong); and (b) the losing side can convince the court that this error was substantial enough that it would have changed the result or the rights of the parties, then, and only then, will the court permit an appeal to be heard.  However, if the arbitration agreement gives express appeal rights – which should be spelled out in full to say that there can be appeals from findings of fact, law or mixed questions of fact and law – then the agreement will override the provisions of the Arbitration Act, 1991 and there can be appeals from any findings by the arbitrator.

My colleague said to me, “Well, OK, but if the parties want a quick, final decision and don’t want to go through several levels of appeal, then there’s no need to put in a provision that includes appeal rights.”  True enough, but my response to him was equally simple:  “OK, but if your client loses the arbitration, do you think he’d want the right to appeal?”

Something to think about when you’re looking over your next commercial contract with a key customer or a supplier.

CALC

“Pure” Admin Fees & Criminal Interest Rate

Tuesday, September 15th, 2009

As those of you who follow the blog know, one of my areas of interest are the cases dealing with the charging of criminal rates of interest.  In particular, the question relates to whether additional “administrative fees”, “late fees”, etc. can be considered to be additional “interest” which, when added to the existing rate of interest, then takes the rate of interest over 60% per year.  This has resulted in numerous class action lawsuits where plaintiffs’ lawyers have become quite creative in their arguments.

The most recent decision came from the Ontario Court of Appeal earlier this month in DeWolf.  In that case, a class action was permitted at trial by all customers of Bell whose accounts were charged an administrative fee by Bell to collect on overdue accounts.  The plaintiff’s lawyers argued that the $25, when added to the amount actually owed, could constitute more than 60% in annual interest.  Based on some of the prior wording in the cases, this was not a necessarily wrong position.  (Minor disclosure time: one of the plaintiff’s lawyers is a friend of mine – although I didn’t know she was working on this case).

The Court of Appeal has provided some further clarification to the issue.  There are two questions which need to be asked: (1) Whether the fee or amount is charged “for the advancing of credit” to the customer; and (2) if yes, whether the credit is being advanced pursuant to an agreement or arrangement.

In looking at the first issue, the Court held that in most instances where you are dealing with financial institutions (in cases, for example, of fees or penalties for late payment on credit cards), then such fees will be considered to be “for the advancing of credit”.  However, for administrative fees by suppliers such as utility companies there is no such presumption.  In this case, Bell had established at trial that its administration fees were based upon the average cost of chasing down delinquent accounts and, as such, was a pre-estimate of such costs.  That being the case, the Court concluded that the first question had not been answered in the customer’s favour and there was no need to consider the second question.

Previously I had advised that you should be careful of charging administrative or late fees to clients out of a concern that your claim for interest might be disallowed by the courts as being above the criminal rate of interest.  With the decision in DeWolf, small businesses (that are not involved in money lending, pawn shops, mortgage companies, etc.) should be able to breathe a little easier that their administration fees will not create problems.  In the end, I think that this is a reasonable decision.  That said, given the amounts involved in this case, I would not be surprised to see the plaintiffs request leave to appeal to the Supreme Court of Canada (and I don’t know if they will as I haven’t asked my friend).  If this is sought, I’ll let you know how it turns out in a future post.

CALC

Bankruptcy Changes – Unpaid Supplier

Monday, September 14th, 2009

Well, after many months of waiting, changes to the federal Bankruptcy & Insolvency Act are finally coming into force this Friday (September 18).  There are a whole bunch of changes that are being made that will have no immediate or appreciable impact on small businesses, but there is one that I want to bring to your attention.

Currently, section 81.1 of the Act provides that a supplier of goods can have the goods returned, but only if the supplier sends a notice to the trustee in bankruptcy within (a) 10 days after the customer goes bankrupt and (b) for goods sent to the customer within the 30 days immediately before the customer went bankrupt.  So, what can happen is that Supplier A sends a shipment of goods to Customer B who then goes bankrupt.  Either the bankruptcy occurs within 30 days of shipping the goods but Supplier A doesn’t receive notice of the bankruptcy until after the 10 days has passed since the bankruptcy occurred OR the bankruptcy occurs after the 30 days has passed since the goods were shipped.  In either scenario, Supplier A has no ability to repossess its goods (unless the trustee agrees to extend the time) and all it can do is file a proof of claim in the bankruptcy along with all of the other creditors (and if there is no security, as is usually the case, then Supplier A is an unsecured creditor with a very real chance of getting little or no money paid on the debt owed to it).

Under the new changes to section 81.1, the 10 day rule will be extended to 15 days within which the creditor has to give notice to the trustee in bankruptcy.  Moreover, the Court is now given the power to extend the 15 day time period if it determines such a result to be appropriate.  It is not certain yet what criteria will have to be met for the Court to exercise this power, but this extra form of relief will be a welcome change for unpaid suppleirs.

Please note that this change will only apply to situations where the bankruptcy of the customer occurs AFTER this Friday (September 18).

Many small businesses sell goods on a “Net 30 Day” basis where payment is not required until 30 days after delivery.  In these hard economic times where bankruptcies are still quite common, it will be important for small businesses to keep an eye on their receivables and, in particular, for any customers likely to go bankrupt.  The new changes are not going to be a huge benefit – and where a customer has strung along a supplier with partial payments, etc. and then goes bankrupt more than 30 days after the goods are shipped the change will be of no benefit – but a small improvement to the system is better than no improvement at all.

CALC

Buying a Business – “7 Deadly Sins”

Monday, September 14th, 2009

Well, it’s been a really busy Summer for a whole bunch of reasons and yet it’s been fairly slow in terms of anything of real interest for blog postings on small business law.  So, I’m going to turn things around a bit and give you a link to a newsletter I received the other day from one of the business valuation companies I have used in the past for either determining the value of a business on a sale or else for the purposes of litigation (say, in a shareholders’ or partners’ dispute).

This newsletter describes the “Seven Deadly Sins” committed by people when they are buying a new business.  They are:

1. Lack of strategic fit

2. Inadequate analysis

3. Too much emphasis on EBITDA (“Earnings Before Interest, Taxes, Depreciation and Amortization”)

4. Ignoring the balance sheet

5. Overpaying for synergies

6. Focusing only on price

7. Poor integration

If you’re looking at possibly buying a business (either in the form of an existing business or even in the context of purchasing a new franchise), you might want to take a quick look at this article as it may prove to be worthwhile.  The article can be found at this site.

CALC