How Much Competition is Enough? Commissioner Files Factum in Canada Pipe Appeal
The Commissioner of Competition (the Commissioner) has filed a Memorandum of Fact and Law (the factum) in connection with the appeal of the Competition Tribunal's February 3, 2005 dismissal of her abuse of dominance and exclusive dealing case against Canada Pipe.1 The factum makes interesting reading.2 The Commissioner raises some important questions regarding the proper legal analysis of the abuse of dominance and exclusive dealing provisions of the Competition Act (the Act). In addition, certain of her arguments seem to favour turning business practices such as exclusivity discounts and loyalty programs into per se illegal behaviour for dominant firms. Therefore, the ultimate decision of the Federal Court of Appeal will be of significant interest not only to Canada Pipe, but also to competition law practitioners in Canada and elsewhere. Moreover, should Bill C-19 become law, giving the Tribunal the power to issue fines in respect of abuse of dominance, the Federal Court's decision in this case will only increase in importance.
Overview of the Canada Pipe Case
In 2000, the Commissioner began a formal investigation into the Stocking Distributor Program (SDP) of Canada Pipe's Bibby Ste-Croix Division. The SDP is a loyalty program comprised of rebates and discounts to distributors who agree to stock only Canada Pipe's cast-iron drain, waste and vent (DWV) products. In an application filed with the Tribunal in October 2002, the Commissioner alleged that Canada Pipe was dominant in the relevant Canadian markets for the sale and supply of DWV products3 and that Canada Pipe was engaged in a practice of anti-competitive acts (primarily thorough the SDP)4that had the effect of preventing or lessening competition substantially in the relevant markets, contrary to section 79 of the Act, which deals with so-called "abuse of dominance".5
In its February 3, 2005 decision, the Tribunal dismissed the Commissioner's application. While the Tribunal accepted that Canada Pipe had market power (defined as the ability to set prices above a competitive level for a considerable period of time) in the relevant DWV product markets in Canada, it found that the SDP had not substantially lessened or prevented competition and did not, therefore, constitute a practice of anti-competitive acts.
For a more fulsome discussion of the Tribunal's decision, see Kim Alexander-Cook, "Canada Pipe Prevails in Abuse of Dominance Case" in the March 2005 edition of The Competitor.
The Commissioner's Appeal
Three criteria must be satisfied for the Tribunal to issue an order under section 79: (i) the exercise of "control" or "market power" in a relevant antitrust market; (ii) a practice of anti-competitive acts; and (iii) the practice must have had, be having or be likely to have the effect of preventing or lessening competition substantially in a relevant market.
In finding that the SDP was not anti-competitive, the Tribunal had come to this conclusion largely, it would seem, on the basis that the evidence did not show that the program had substantially lessened or prevented competition or was likely to do so. In the factum, the Commissioner argues that the Tribunal's approach "conflates the distinct statutory tests" for a practice of anti-competitive acts and a substantial lessening or prevention of competition. She also argues, based in part on European jurisprudence,6 that there are "special rules" for dominant firms, and that programs such as the SDP that make it more difficult for a competitor to sell to the dominant firm's customers (and are not justified by efficiencies) are, by definition, anti-competitive when undertaken by dominant firms. The Commissioner argues that actions are anti-competitive when undertaken by a dominant firm if their purpose is "predatory, exclusionary or disciplinary", and that in this case there is no need for a detailed examination of the SDP and its effects in order to determine that its purpose is "anti-competitive". The program is said to be"exclusionary on its face".
As to the proper legal test for a "substantial lessening or prevention of competition" (SLC), the Commissioner argues that the Tribunal failed to ask itself the correct question in this case. According to the Commissioner, the Tribunal adopted a "narrow and unsupported test for the anti-competitive effects of the SDP, holding that the SDP does not have an anti-competitive effect, because it has not prevented entry and does not prevent distributors from switching and competing suppliers from offering a 'better bargain'." The Commissioner argues that "prevention of entry" should not be the "sole yardstick" by which the Tribunal measures whether competition in the presence of the SDP was substantially less than that which would otherwise have prevailed, and that "if the Tribunal's approach in its Reasons and Order is correct, then it would not seem possible for the Commissioner to pursue section 77 or 79 cases in the absence of a monopolist or, even in the presence of a monopolist, where the effect of the conduct is to sell more product or increase profitability."
The Commissioner states that the appropriate question to ask in assessing whether there has been or will likely be a substantial prevention or lessening of competition is ".would markets-in the past, present or future -be substantially more competitive but for the impugned act(s)? ... The test is not, 'would markets be competitive but for the impugned act(s)?'"
When it comes to applying the advocated legal test for an SLC to the facts in the case, the Commissioner appears to argue that the findings of dominance and the existence of a loyalty program lead naturally to the conclusion that competition must have been substantially lessened or prevented in the relevant markets: "As NutraSweet, and the US and EC decisions make clear, loyalty rebate schemes which impose an all-or-nothing choice on purchasers are exclusionary, impede entry, and injure competition. Moreover, the higher the degree of market power or dominance, the greater the impact on competition."7 Indeed, the Commissioner cites with approval the decision of the European Commission in British Airways, in which the EC assumed that a loyalty program by a dominant firm necessarily has an anti-competitive effect.8
In sum, the Commissioner has raised important questions about the Tribunal's legal analysis in the Canada Pipe case. It would also appear that the Commissioner wishes to take Canadian law on abuse of dominance in the direction of a per se prohibition against such business practices as exclusivity discounts and loyalty programs in the hands of dominant firms.9 With EC-style fines for abuse of dominance in the offing, firms with large market shares will watch this case closely.
FOOTNOTES
[1] Commissioner of Competition v. Canada Pipe Ltd., 2005 Comp. Trib. 3 (Competition Tribunal).
[2] Commissioner of Competition v. Canada Pipe Ltd., Court File A-106-05 (Memorandum of Fact and Law, The Commissioner of Competition on the Appeal), filed July 8, 2005.
[3] The Tribunal found that Canada Pipe had at least an 82% market share in each of the relevant Canadian markets, and that each market had high barriers to entry.
[4] The Commissioner also alleged that Canada Pipe had abused its dominant position through the acquisition of competitors. The Tribunal declined to characterize the acquisitions in question as anti-competitive, and this aspect of its decision has not been challenged.
[5] The Commissioner also styled the application under section 77 of the Act, alleging that the SDP was a practice of exclusive dealing that impeded entry into the relevant markets such that competition was lessened substantially. The analysis under the two sections, however, is very similar and is not discussed further in this article.
[6] The Commissioner cites with approval the European Commission decision in British Airways (Virgin/British Airways, O.J.L. 30/1 of 04-02-2000 (aff'd European Court of Justice (First Chamber), T-219-99 (17 December 2003)), at para. 101): "The Hoffman-La Roche and Michelin cases establish a general principal that a dominant supplier can give discounts that relate to efficiencies, for example discounts for large orders that allow the supplier to produce large batches of product, but cannot give discounts or incentives to encourage loyalty, that is for avoiding purchases from a competitor of the dominant supplier." (Supra, note 2, at para. 57, emphasis supplied).
[7] Ibid, at para. 92. Earlier, at paragraph 81, the Commissioner states that ".it is important to recognize that anti-competitive acts are very likely to be adopted by a dominant firm in response to entry. The anti-competitive act(s) forestalls expansion of the entrant(s) and/or entry by other potential competitor(s) - entry has occurred, so markets may be more competitive than before, but much less competitive than in the absence of the impediments to expansion by the entrant(s) and/or to additional entry, caused by the anti-competitive act(s)." (emphasis supplied)
[8] Ibid, at para. 85. ("Despite the exclusionary commission schemes, competitors of BA have been able to gain market share from BA since the liberalisation of the United Kingdom air transport markets. This cannot indicate that these schemes have had no effect. It can only be assumed that competitors would have had more success in the absence of these abusive commission schemes.": Virgin/British Airways, O.J.L. 30/1 of 04-02-2000 (aff'd European Court of Justice (First Chamber), T-219-99 (17 December 2003)), at para. 107, emphasis supplied in Commissioner's factum.
[9] "The European Commission ("EC") has also recognized the need to prohibit loyalty, or fidelity, rebate schemes implemented by dominant suppliers." (Ibid, at para. 56, emphasis supplied
