Federal Court of Appeal allows propane merger to proceed
On January 31, 2003 the Federal Court released its reasons for judgment in The Commissioner of Competition v. Superior Propane Inc. and ICG Propane Inc.
Background
The case began in 1998, when the Commissioner challenged the acquisition of ICG by Superior. In 2000, the Competition Tribunal allowed the merger, even though it found that it would likely substantially lessen and prevent competition. The Tribunal's decision was based on the so-called "efficiency defence," i.e. that the efficiencies generated by the transaction would outweigh its anti-competitive effects. Subsequently, the Federal Court of Appeal ordered the Tribunal to rehear the case, taking into account other effects of lessened competition beyond those addressed in its original efficiency analysis, which used a "total surplus standard" approach.
Under the total surplus standard approach, the Tribunal had considered two anti-competitive effects: (i) deadweight loss (resulting from buyers switching to products other than propane due to a presumed higher price for propane following the merger) and (ii) qualitative effects (such as reduced quality of service from the merged company). The Court indicated that the Tribunal could use the Commissioner's "balancing weights" approach when reconsidering the case, and instructed the Tribunal to decide whether some or all of the wealth transfer resulting from higher prices charged to customers who would not switch to other products ought to be included in the effects of the merger. In 2002, the Tribunal concluded that only the wealth transfer from the poorest 20% of retail customers should be included. The Tribunal found that the value of efficiencies still greatly exceeded that of anti-competitive effects, and again allowed the acquisition of ICG Propane. A further appeal by the Commissioner of this 2002 judgement resulted in the most recent Federal Court of Appeal decision.
Latest Federal Court of Appeal Decision
The Court summarized its earlier decision as saying that: (i) effects considered under the efficiency defence cannot in all cases be limited to deadweight loss (as required by the total surplus standard); (ii) to assess additional effects, the Tribunal should identify and employ a methodology that is sufficiently flexible to fully measure the facts before it; (iii) the "balancing weights" approach proposed by the Commissioner's expert is, with elaboration and refinement, an acceptable methodology and requires the Tribunal to determine whether the relative magnitudes of anti-competitive effects and efficiencies are reasonable in light of societal interests; and (iv) the burden of proving the extent of the anti-competitive effects is on the Commissioner, whereas the burden of proving the efficiency gains, and that those gains outweigh the effects, is on the merging parties.
The Court found that the Tribunal had properly followed the Court's directions, as set out in its earlier decision, and that the Tribunal's consideration of producer gains and consumer losses was sufficient, as was the value judgement process by which the Tribunal considered any disparity between the incomes of the relevant consumers and shareholders of the merged entity. Since fresh evidence was not introduced at the re-hearing, the evidence pertaining to anti-competitive effects and societal interests was not as developed as it might have been. Therefore, the only socially adverse effects identified were those related to low-income households that use propane for essential purposes and have no good alternatives. The Court did not fault the Tribunal for not engaging in a full balancing-weights analysis, however, given that the efficiencies of $29.2 million substantially outweighed all identified effects of $11.2 million.
The Court also considered whether the Tribunal had erred by refusing to consider the creation of a monopoly in certain local markets as an anti-competitive effect. The Court, with one dissent, stated that it did not interpret its previous decision as requiring that a monopoly per se be treated by the Tribunal as an anti-competitive effect in itself, observing that it was merely a description of a market condition, and only the effects-not the mere existence-of the monopoly were to be addressed by the Tribunal. The Court noted that the Tribunal had already taken into account a number of the effects of the merger and that it should not have to double-count them simply because they arose from a monopoly condition.
Finally, in light of comments by the Tribunal criticizing the Court's rejection of the Tribunal's adoption of a total surplus standard for the purpose of the Act's efficiency defence, the Court considered whether the Tribunal had failed to respect the principle of stare decisis. The Court, again with one dissenting opinion, concluded that it had not. According to the Court, while "[t]here is no question that the Tribunal was critical of [its] findings on a number of points . there is a difference between criticism of a higher court's decision and a refusal to follow the decision . [s]uch criticism does not amount to an error of law unless combined with defiance of the Court's directions. The sole issue is whether the Tribunal failed or refused to follow the directions of this Court. For the reasons I have already given, it did not." The Court, therefore, concluded that the Tribunal had not merely paid "lip service" to the Court's direction, but had adopted a methodology and analysis within the discretion conferred upon it by the Court.
The Commissioner has sixty days to decide whether to seek leave to appeal from the Supreme Court of Canada.
Implications for Future Transactions
Despite the Court's confirmation of the Tribunal's most recent decision, considerable uncertainty remains regarding the application of the efficiency defence to a merger challenge. This uncertainty arises from the first appeal decision, in which the Court departed from the total surplus standard and required the Tribunal to address social justice issues. The difficulty facing parties trying to determine in advance whether a transaction could be justified on the basis of such an efficiency defence is that, as the Court has made clear in its most recent decision, in different cases, different effects may be relevant and therefore different standards may be applicable. Predicting which standard the Tribunal may apply in any given case is therefore problematic.
It is similarly difficult, if not impossible, to anticipate the views of the Tribunal on social justice issues in any particular case. In essence, with respect to the efficiency defence, the Tribunal now appears to be less an adjudicative body than a regulator or social arbiter. Social justice matters do not lend themselves to resolution by litigation, and are usually determined by Parliament and implemented through various government programs. Nonetheless, as a result of the Federal Court of Appeal's interpretation of the Act's efficiency defence, application of the defence requires a very flexible analysis that includes issues of social justice.
