Competition Tribunal renders a decision in the Toronto Real Estate Board case

Ashley Piotrowski

After five years of back and forth at various levels of court, the Competition Tribunal has rendered a decision in the Toronto Real Estate Board case, partially granting the application brought by the Commissioner of Competition pursuant the abuse of dominance provision (section 79) of the Competition Act.    

As mentioned in our earlier blog posts, the Commissioner’s application involves a challenge by the Commissioner against TREB for allegedly abusing its dominance under section 79 of the Competition Act in relation to membership rules governing the use by members of certain of the board’s multiple listing service® (MLS®) listing data. In particular, the Commissioner alleged that TREB’s rules restricted the manner in which real estate brokers and salespersons may display and use certain MLS® data.

 While the decision has yet to be made public, the Tribunal has released a short summary of its decision that offers some insight into how the Tribunal concluded that TREB’s conduct, on a balance of probabilities, satisfied all three elements of the abuse of dominance provision:

  • The Tribunal determined that TREB substantially or completely controls the supply of MLS®-based residential real estate brokerage services in the GTA.
  • The Tribunal found that TREB has engaged in, and continues to engage in, a practice of anti-competitive acts through the enactment and maintenance of certain restrictive aspects of the rules and policy that TREB has adopted regarding the virtual office websites (VOW) of its real estate brokers and salespersons.
  • The Tribunal concluded that these VOW restrictions have had, are having and are likely to have the effect of preventing competition substantially in a market. 

The Tribunal reached this conclusion after finding that the VOW restrictions have substantially reduced the degree of non-price competition in the supply of MLS®-based residential real estate brokerage services in the GTA, including a considerable adverse impact on innovation, quality and the range of residential real estate brokerage services that likely would be offered in the GTA absent the VOW restrictions. 

The next step will be for the parties to provide written submissions and have an opportunity to make oral submissions to the Tribunal on the issue of remedies, after which the Tribunal will make its final order.    

Supreme Court of Canada declines Toronto Real Estate Board appeal

Marisa Muchnik -

The Supreme Court of Canada recently dismissed the application by the Toronto Real Estate Board (TREB) for leave to appeal the Federal Court of Appeal’s judgment overruling a decision of the Competition Tribunal that had dismissed the challenge of the Commissioner of Competition (the Commissioner) to certain restrictions by TREB on the manner in which its member real estate agents can disseminate information from TREB’s multiple listing service. The Commissioner’s application will therefore proceed to a hearing on the merits before the Competition Tribunal.

Background

The proceedings date back to May 2011, when the Commissioner brought an abuse of dominance application under subsection 79(1) of the Competition Act (Canada) (the Act) against TREB, an incorporated trade association. TREB is the largest real estate board in Canada with approximately 39,000 members. TREB is said to control a multiple listing service, which contains data about sale prices, historical house prices, and the amount of time a property has been on the market. The Commissioner alleged that TREB had abused its dominance by denying its members the ability to introduce new web-based real estate brokerage services by limiting the use members are allowed to make of the listings and related data.

Tribunal Decision

The Tribunal held that the abuse of dominance provisions did not apply because TREB, as an association, does not compete with its own members (or otherwise) in the market for real estate brokerage services. As such, the Commissioner could not demonstrate that the three requisite elements of abuse of dominance in Canada had been met, i.e., (i) dominance of a market, (ii)a practice of anti-competitive acts, resulting in (iii) a substantial prevention or lessening of competition.

Federal Court of Appeal (FCA) Decision

On appeal, the FCA concluded that the Act’s abuse of dominance provisions do not require that a dominant party be a competitor in the allegedly affected relevant market or that its conduct be targeted at competitors. Accordingly, the FCA concluded that the Tribunal had erred in dismissing the abuse of dominance application brought by the Commissioner against TREB.

Supreme Court of Canada Decision

TREB filed an application to the Supreme Court of Canada for leave to appeal the decision of the FCA. In July 2014, the Supreme Court of Canada dismissed TREB’s application for leave to appeal. The application will now proceed before the Competition Tribunal.

Implications

The FCA has taken an expansive view of the scope of abuse of dominance in Canada, one which potentially gives the Commissioner greater scope to bring proceedings against trade associations. The Commissioner’s application may provide the Competition Tribunal with an opportunity to clarify how the law will treat trade association rules or policies that impact the manner in which members of trade associations compete.

Federal Court of Appeal sends Toronto Real Estate Board case back to Competition Tribunal

Susan M. Hutton and Shannon Kack -

On February 3, 2014, Canada's Federal Court of Appeal (FCA) overturned the Competition Tribunal’s decision to dismiss the Competition Bureau’s abuse of dominance application against the Toronto Real Estate Board (TREB), sending the application back to the Tribunal for reconsideration on its merits.

As mentioned in our earlier blog post, the Competition Bureau’s application involves a challenge by the Bureau against TREB for allegedly abusing its dominance under section 79 of the Competition Act in relation to membership rules governing the use by members of the board’s multiple listing service (MLS®) listing data.

The Tribunal had dismissed the Bureau’s application without considering the merits, on the basis that TREB, as an incorporated trade association, does not compete with its own members in the real estate brokerage market and therefore cannot be found to have contravened the abuse of dominance provision. Specifically, the Tribunal had interpreted the 2006 Canada Pipe decision as authority for the proposition that, for conduct to be anti-competitive under section 79, the conduct must have had a negative effect (“predatory, exclusionary or disciplinary”) on a competitor of the person who is the target of the Commissioner's abuse allegations.

In overturning the decision, the FCA concluded that the Tribunal had misinterpreted Canada Pipe and consequently, misinterpreted the abuse of dominance provisions of the Act. In Justice Sharlow’s view, paragraph 78(1)(f) – one of the enumerated examples of “anti-competitive acts” listed in the Act, which pertains to the stockpiling of products in order to prevent price erosion – does not necessarily negatively impact a competitor (indeed, logically, it should assist competitors who will also benefit from increased prices). The presence of this example indicates that Parliament did not intend to limit the scope of subsection 79(1) in such a way that it could not possibly apply to a trade association such as TREB. The FCA went on to say that Canada Pipe would be manifestly wrong if the Court had intended to narrow the scope of subsection 79(1) in the manner alleged by the Tribunal.

Instead, the FCA validated the Commissioner's broadened approach to the interpretation of the abuse of dominance provisions of the Act, in holding that a subsection 79(1) order can be made against a person who controls a market otherwise than as a competitor if that person has committed an anti-competitive act against a competitor in that market. In terms of the manner in which such control may be exercised, the Court states that this could occur "by controlling a significant input to competitors in the market, or by making rules that effectively control the business conduct of those competitors".

The FCA further concluded that the Tribunal erred in finding support for its position in the Bureau’s Abuse of Dominance Guidelines (the Guidelines). In Justice Sharlow’s view, the Guidelines provide no useful guidance to the Court in interpreting subsection 79(1). Rather, the Guidelines indicate, at most, that the Commissioner’s understanding of the scope of subsection 79(1) has changed over time.

Similarly, the FCA saw no reason to infer from subsection 79(4) (which directs the Tribunal to consider, among other things, whether the alleged anti-competitive effect is a result of superior competitive performance) that as a matter of law, a subsection 79(1) order cannot be made against a respondent simply because it does not compete with its members.

Competition Tribunal dismisses Competition Bureau's Abuse of Dominance Application against the Toronto Real Estate Board

Sultana L. Bennett -

On April 15, 2013, the Competition Tribunal dismissed the Competition Bureau’s application (the Application) against Canada’s largest real estate board, the Toronto Real Estate Board (TREB). The Tribunal found that the abuse of dominance provision under section 79 of the Competition Act (the Act) did not apply to the facts of the case, which pertained to TREB’s membership rules governing the use of its Multiple Listing Service (MLS) data.

The Bureau’s May 27, 2011 application requested that TREB eliminate rules allegedly denying its real estate agent members the ability to introduce Internet-based real estate brokerage services by limiting the use the members could make of the MLS listings and related data.

The Tribunal, stating that the determinative issue was the fundamental question of whether the Application met the requirements of section 79, disposed of the matter on that basis and did not address the other issues raised in the Application. The Tribunal’s primary holding pertained to the fact that TREB did not compete with its members in the market - a fact undisputed by TREB, the Commissioner and the Canadian Real Estate Association (CREA) (CREA sought and was granted intervenor standing at the Tribunal proceeding). As set out in the Federal Court of Appeal’s Canada Pipe decision, for anti-competitive conduct to be caught by section 79, the conduct must have had a negative effect on a competitor that is predatory, exclusionary or disciplinary.

The Tribunal did not accept the Bureau’s proposition that based on the language of section 78, which sets out a non-exhaustive enumerated list of anti-competitive acts, section 79 could cover abusive conduct by entities other than competitors. In the Tribunal’s view, section 78 was a “powerful indicator” that the rule in Canada Pipe was the correct approach, given the “strong theme” present in the examples of anti-competitive acts set out therein.

This decision may also have consequences for the Bureau’s recently amended Abuse of Dominance Guidelines (the Guidelines), which, while acknowledging the application of Canada Pipe, state that “certain acts not specifically directed at competitors could still be considered to have an anti-competitive purpose.” The Tribunal observed as “interesting” that the Commissioner in the Guidelines did not “clearly state that the dominant party need not compete in the market”; accordingly, the Application sought not only to extend the reach of section 79 beyond Canada Pipe, but also beyond the Guidelines.

For the reasons set out above, the Tribunal dismissed the Application. However, the Tribunal observed (without intending to suggest such an application would necessarily succeed) that section 90.1 of the Act might provide a means for the Commissioner to re-apply to the Tribunal, in which application the Commissioner could potentially seek an order prohibiting the members of TREB’s board of directors – who are competitors in the market – from enforcing the challenged TREB rules.

The Bureau stated in an announcement that it was disappointed by the Tribunal’s dismissal of its Application, and would be reviewing the decision to determine next steps.

CRTC reaffirms competitiveness of mobile wireless industry, even as it plans new wireless consumer code

David Elder -

The Canadian Radio-television and Telecommunications Commission (CRTC) has denied requests by consumers, consumer groups and some new entrants to re-regulate retail and wholesale wireless services generally, finding that competition in the mobile wireless market continues to be sufficient to protect the interests of users with respect to rates and choice of competitive service provider.

The finding, in Telecom Decision CRTC 2012-556, followed a public proceeding to consider whether the conditions of forbearance in the Canadian wireless market had changed sufficiently to warrant CRTC intervention with respect to retail mobile wireless data and voice services. That proceeding was triggered by an application by consumer groups to prohibit certain billing practices by wireless service providers, as well as an application by wireless service providers for the Commission to establish a uniform national consumer code for wireless services.

In its decision, the CRTC indicated that it would establish such a national consumer code, initiating another public proceeding to determine the content, application and enforcement of such a code; however, it would continue to forbear from regulating mobile wireless service rates or competitiveness in the mobile wireless market generally, despite concerns raised by some interveners about the competitiveness of the Canadian wireless market, including issues related to choice of provider and pricing.

In a series of decisions commencing shortly after it received the forbearance power in 1993, with the enactment of the Telecommunications Act, the CRTC has determined that wireless services in Canada are subject to sufficient competition to protect the interests of users, and that it would allow market forces to guide the mobile wireless industry’s growth.   Accordingly, it has consistently forborne from exercising many of its powers under that Act, including the requirement for prior approval of rates, and the determination that rates be just and reasonable.

In its most recent decision, the Commission has maintained this approach, noting that there is no evidence that the conditions for forbearance have changed sufficiently to warrant regulatory intervention with respect to mobile wireless service rates or competitiveness in the mobile wireless market. 

In fact, the Commission noted that market indicators, including those included in its recently published 2012 Communications Monitoring Report, continue to demonstrate that consumers have a choice of service providers and a range of rates and payment options for wireless services. In addition, the average monthly cost for mobile services has remained relatively stable. Meanwhile, new entrants in the mobile wireless market continue to increase their market share and coverage and companies continue to invest in new infrastructure to bring new innovative services to more Canadians. 

Canada releases new Enforcement Guidelines on Abuse of Dominance; minimal change from draft guidelines

Susan M. Hutton and Edwin Mok -

On September 20, 2012, Canada’s Competition Bureau (the Bureau) published the final version of its long-awaited Enforcement Guidelines on the abuse of dominance provisions (sections 78 and 79) of the Competition Act (the Final Guidelines). The Guidelines have been more than three years in the making. An initial draft released in January of 2009 was the subject of considerable public comment, but was never finalized. The Bureau released a draft version of substantially revised guidelines for public consultation on March 22, 2012 (the Draft Guidelines). After receiving and reviewing submissions from interested parties, the Bureau has now released the final version, which replaces all of the Bureau’s previous publications on the abuse of dominance provisions.

In general, the Final Guidelines are substantively similar to the Draft Guidelines. There are no significant changes in the Final Guidelines as compared to the Draft Guidelines.

In some areas, the Final Guidelines provide less guidance than did the Draft Guidelines. The Final Guidelines omit a four-part analysis that the Bureau would use to determine whether firms appear to be holding market power as a group that was present in the Draft Guidelines.

A frequent comment on the Draft Guidelines was that they did not provide specific and practical examples of various business practices that would amount to abuse of dominance. Such examples had been part of the prior draft guidelines on abuse of dominance, which as noted were published on January 16, 2009 but never finalized. There was considerable feedback on the Draft Guidelines requesting at least the reinstatement of such examples, if not their expansion. The Final Guidelines do not contain any such guidance.

Notably, the Bureau was also asked to provide guidance regarding when the Bureau would likely seek administrative monetary penalties and how the level of the penalties would be assessed. The Final Guidelines shed no insight on this issue.

Competition Bureau releases new draft guidelines on abuse of dominance

D. Jeffrey Brown & Robert Mysicka -

The Competition Bureau announced yesterday that it has released its long-awaited revised draft Abuse of Dominance Guidelines outlining the Bureau’s approach to reviewable matters under sections 78 and 79 of the Competition Act. The newly released Guidelines are intended to replace the draft guidelines released in January, 2009, which was the first time the Bureau had updated its enforcement approach to abuse of dominance since 2001.

Abuse of dominance occurs when a dominant firm (or group of firms) in a market engage in a practice of anti-competitive acts that result, or are likely to result, in a substantial prevention or lessening of competition. Sections 78 and 79 of the Competition Act allow the Competition Tribunal, on application by the Commissioner of Competition, to prohibit dominant firms from engaging in anti-competitive practices, or to order such further remedial action as is reasonable and necessary to restore competition in the market.

To prove abuse of dominance, three principal elements must be established:

1. one or more persons substantially or completely controls, throughout Canada, a class or species of business;

2. the person or persons have engaged in a practice of anti-competitive acts; and

3. the practice has had, is having, or is likely to have the effect of preventing or lessening competition substantially in a market.

As regards the Bureau’s approach to these basic elements, the 2009 Guidelines did not represent a fundamental shift. Rather, they merely updated some of the Bureau’s practice in light of recent jurisprudence, most notably, the Canada Pipe case, which provided the first opportunity for the Federal Court to consider the application of the abuse of dominance provisions in sections 78 and 79 of the Act.

The new Guidelines, which replace the previous publications on abuse of dominance, are considerably shorter and more concise.  Highlights include the following:

  • The new Guidelines state explicitly that, unlike certain other jurisdictions that prohibit supra-competitive pricing by dominant firms, “charging higher prices to customers, or offering lower levels of service than would otherwise be expected in a more competitive market, will not alone constitute abuse of a dominant position.”
     
  • The new Guidelines reiterate the view that market share is one of the most important determinants of potential market power. They also expand in several ways upon the Bureau’s approach to market shares in assessing whether market power exists.
     
  • While reiterating that a market share of less than 35 percent will generally not prompt further examination, the Bureau’s approach where a market share above 35 percent exists is now more nuanced. In the 2009 Guidelines, the Bureau said that where market share is above 35 percent it “will normally continue its investigation.” The new Guidelines state that a market share between 35 and 50 percent will not give rise to a “presumption” of dominance “but may be examined by the Bureau depending on the circumstances,” while a market share of 50 percent or more will generally prompt further examination.   Such an approach appears to suggest an acceptance that dominance at shares less than 50 percent will be a relatively uncommon occurrence.
     
  • The new Guidelines state that, in addition to an individual firm’s market share, distribution of the remaining market among competitors is relevant: while greater market share is likely to increase a single firm’s ability to sustain a price increase, such an exercise of market power also increases with the disparity between its market share and those of its competitors. The Bureau will also look at the durability of a firm’s market share. If shares have fluctuated significantly among competitors over time (e.g., as a result of the intermittent exploitation of new technology that allows firms to “leapfrog” their rivals), a higher current market share may be less relevant to establishing market power.
     
  • The new Guidelines state that, although “anti–competitive act,” as described in section 78 of the Act, is defined in relation to its purpose—an intended negative effect on a competitor – the Federal Court of Appeal and the Competition Tribunal have acknowledged that paragraph 78(1)(f) (which deals with buying up of products to prevent the erosion of existing price levels) is “one” exception to the requirement that an anti-competitive act be directed at a competitor. Whether use of the word “one” is intended to indicate that the Bureau believes there may be other exceptions is unclear.
     
  • In assessing whether a particular act is likely to be anti-competitive, the new Guidelines reiterate that the Bureau generally views conduct described in section 78 of the Act as falling into two broad categories: (i) exclusionary conduct; and (ii) predatory conduct. Unlike the 2009 Guidelines, however, details regarding the Bureau’s approach with respect to specific anti-competitive acts have been removed, including raising rivals’ costs, exclusive dealing, tying, bundling, bundled rebates and denial of access to a facility or service. What this means about the Bureau’s current thinking on these acts is unclear, the effect of which is to diminish rather than enhance understanding of the Bureau’s approach to the enforcement of section 79.
     
  • As with the 2009 Guidelines, the Bureau notes the inherent difficulty of distinguishing between predatory and competitive pricing. In the new Guidelines it states that one of the methods it will use to overcome some of these difficulties is an examination of whether the alleged predatory price can be matched by competitors without incurring loss, and whether the alleged predatory price is merely “meeting competition” in the sense that it is a reaction to match a competitor’s pricing strategy. How the Bureau’s consideration of whether a price can be matched by competitors without incurring a loss relates to the other requirements of predatory pricing, such as sale by the alleged predator below some level of cost and recoupment, is unclear.
     
  • The Bureau has reaffirmed that, in considering whether an impugned act prevents or lessens competition substantially, the question is not whether the absolute level of competition in a market is substantial or sufficient. Rather, the Bureau considers the relative level of competitiveness in the presence and absence of the impugned practice such that it can satisfactorily determine ‘but for’ the practice at issue, would there likely be greater competition in the market?

As noted in a previous post, section 79 of the Act was amended in 2009 to include administrative monetary penalties (AMPs). In cases where it finds that an abuse of dominance has occurred, the Competition Tribunal may impose a maximum AMP of C$10 million for a first infraction and C$15 million for subsequent infractions. While AMPs were introduced after the publication of the 2009 draft guidelines, it is unfortunate that the new guidelines are silent on how the Bureau will incorporate AMPs into its section 79 enforcement approach. Indeed, the new Guidelines provide no guidance on remedies at all.

The new Guidelines are open for comment by interested parties until May 22, 2012.

CRTC's vertical integration decision in broadcasting proposes controls on vertically-integrated broadcasters

Michael Laskey -

On February 1, 2011, the Competition Bureau issued a statement in respect of the proposed acquisition of CTVglobemedia Inc. by BCE Inc. The statement noted that the Bureau was “cognizant of the growing trend toward vertical integration in the broadcasting industry” and that it was reviewing issues of vertical foreclosure. The statement also noted that the Commissioner of Competition would “closely monitor” the CRTC’s vertical integration hearings and subsequent regulatory developments in that same regard.

On September 21, 2011, the CRTC released its decision, Broadcasting Regulatory Policy CRTC 2011-601, setting out a regulatory framework for vertical integration among broadcasting and programming companies. In its decision, the CRTC imposes a number of restrictions on the activities of “vertically integrated” companies, which for the purposes of the decision it defines as companies that control both programming services (such as conventional television stations) and distribution services (such as cable or satellite systems). More specifically, some of the restrictions imposed by the decision include:

  • Restriction on Exclusivity: In proposed amendments to the Exemption order for new media broadcasting undertakings1,  to be published later this year, no person operating under that order will be allowed to offer programming designed primarily for conventional television on an exclusive (or otherwise preferential) basis in a manner that is dependent on a consumer’s subscription to a specific mobile or retail internet service. However, to encourage innovation in programming, exclusivity may be offered for programs created specifically for new media platforms (e.g., content designed specifically for mobile phones). A notice of consultation will be published, calling for comments on the draft regulations.
     
  • Programming Services Must Be Independently Available: Before the end of 2011, the CRTC will issue a notice of consultation containing draft regulatory amendments that will include a provision that all programming services must be made available to independent broadcasting distribution undertakings (BDUs) on a stand-alone basis. Therefore, vertically integrated firms will not be allowed to use their most popular programming services to encourage sales of less valuable programming.
     
  • ”No Head Start” Rule: Before the end of 2011, the CRTC will issue a notice of consultation containing draft regulatory amendments stating that, whenever a programming undertaking is ready to launch a new pay or specialty service, it will be obligated to make that service available to all BDUs. If a commercial agreement between the parties cannot be reached, the CRTC will be able to manage the dispute and impose rates. The “no head start” rule will also apply to television programming distributed on new media distribution platforms (including mobile phones and retail internet).
     
  • “Code of Conduct” for Commercial Interactions: The CRTC concluded that there was a potential for abuse of market power by vertically integrated entities, and imposed a code of conduct to ensure no party “uses its market power to engage in anti-competitive behaviour”. The code of conduct, which establishes the guidelines for commercial arrangements between BDUs, programming undertakings and new media exempt undertakings, is attached as Appendix 1 to the CRTC’s decision. The CRTC noted that it would refer to the principles in the Code of Conduct when making determinations on complaints or other applications.
     
  • Penalties for Non-Compliance: In “appropriate case[s]”, the CRTC said that it would impose financial remedies on non-compliant entities in the form of orders to pay amounts into a fund for the “benefit of the Canadian broadcasting system”.

As noted above, several of the new restrictions will be implemented though regulatory amendments, and will be subject to further consultation before they are set out in their final form. The Competition Bureau has not commented on the CRTC’s decision.


1. This order applies to, among others, Bell, Rogers, Shaw, and Quebecor Media.

Toronto Real Estate Board charged with Abuse of Dominance

Susan Hutton -

Canada's Competition Bureau announced on May 27, 2011 that the Commissioner of Competition had filed an application with the Competition Tribunal alleging an abuse of dominance by the Toronto Real Estate Board in the market for residential real estate brokerage services. According to the Commissioner's application, TREB member brokers have access to detailed information about properties listed on the TREB multiple listing service (which lists almost all properties for sale in the Greater Toronto Area or GTA), such as historical prices, comparables, etc. Members of the TREB, however, are not permitted to provide their customers with direct access to the complete TREB MLS, nor to disseminate the more detailed information to their customers via searchable websites. The Commissioner alleges that such rules effectively prevent on-line brokerages from competing in the GTA as they do in the United States and Nova Scotia, for example. The allegations in the Commissioner's application are unproven, and no response has been filed.

Canadian Competition Bureau updates handbook for binding written opinions

Susan M. Hutton and Edwin Mok -

On May 18, 2011, the Competition Bureau released a new Fee and Service Standards Handbook for Written Opinions with updated guidance on required information, service times, and fees for binding written opinions. Section 124.1 of Canada’s Competition Act, which was added in 2002, gives the Commissioner the ability to issue a written opinion as to whether particular provisions of the Act would apply to the facts described in the application.  These opinions are binding upon the Commissioner provided that all material facts have been disclosed.

The Bureau’s new Handbook aims to assist applicants in determining what material facts need to be disclosed.  It provides non-exhaustive lists of required information for some of the most frequently reviewed provisions, including: s. 76 (price maintenance), ss. 77 to 79 (other civil reviewable practices including abuse of dominance), s. 90.1 (non-criminal agreements with competitors that substantially lessen or prevent competition), s. 45 (cartels, i.e., criminal competitor agreements), s.52 (misleading advertising), s. 52.1 (deceptive telemarketing), s. 53 (deceptive notice of winning a prize), and ss. 74.01 to 74.06 (civil deceptive marketing practices). The new Handbook reflects some recent changes to the Act, such as the addition of s. 90.1 and the corresponding “per se” nature of the cartel offence.  It also makes some changes to the information required for certain provisions.  For example, requests for written opinion for s. 45 and ss. 77 to 79 now require the submission of “any relevant agreement(s)”, a requirement not stipulated in the previous Handbook.

The new Handbook also outlines the “service standard” periods, i.e., the timeframes within which the Competition Bureau attempts to provide the requested opinions, which vary depending on the subject matter and the complexity of the issues raised in the application.  The Bureau will classify the application as either “complex” or “non-complex” with 5 business days (of receipt of sufficient information to make such a determination).  As in the previous Handbook, a written opinion for the more legally complicated sections dealing with competitor agreements, bid-rigging, or abuse of dominance will typically be processed within 6 weeks, but may take up to 10 weeks if the application is classified as “complex”.  The new guidelines also clarify when a “complex” designation will be assigned: submissions that are “not straightforward” may be deemed complex, and if the applicability of more than one provision is being considered, the Handbook clarifies that “the longest service standard period will apply”.  Significantly, written opinions for provisions in Part IX of the Act (dealing with merger notification questions), which previously enjoyed a shorter service standard period (2 weeks for non-complex, 4 weeks for complex), now fall under the general service standards (4 weeks for non-complex; 8 weeks for complex).  Service standards will be paused if at any time if the Bureau requests more information from the applicant.

Finally, the Handbook updates the fee schedule for written opinions. The general pricing structure has not changed: an opinion for ss. 45 to 49, s. 79, or s. 90.1 will cost $15,000, the “fair business practices” provisions cost $1,000, and all other provisions cost $5,000, plus applicable tax (e.g., HST where adopted – taxes vary by province). 
See the press release for the new Handbook here. For more information on written opinions, please contact a member of the Stikeman Elliott Competition Group.
 

Canadian Competition Tribunal to review real estate rules

Katherine L. Kay and Danielle Royal

In February 2010, the Commissioner of Competition commenced an application against The Canadian Real Estate Association (CREA)1 alleging that CREA violated the abuse of dominance provisions of the Competition Act. CREA is a trade association comprised of over 100 local real estate boards and 98,000 real estate brokers and agents. CREA owns the MLS® trademarks, which it licenses to local real estate boards and associations across Canada who use those trademarks in the operation of local MLS® systems.

The Commissioner alleges that CREA has imposed certain rules on the use of MLS® trademarks which substantially lessen or prevent competition in the market for the supply of residential real estate brokerage services to homesellers. In particular, the Commissioner alleges that CREA's MLS® rules reduce the variety of brokerage service packages available to homesellers and leave consumers with only the option of using a so-called full-service real estate broker if they want to sell their home using the MLS® system.

On March 25, 2010, CREA delivered its response to the application, opposing the application as being "fundamentally misconceived". CREA disputed the Commissioner's suggestion that consumers only have one option if they want to sell their house using a board's MLS® system, noting that CREA's member real estate brokers and agents offer a wide range of business models including "discounted" commission rates, flat-fee arrangements and various fee-for-service arrangements. CREA also rejected the Commissioner's suggestion that it has market power in the market for residential real estate brokerage services. As a trade association, CREA does not supply residential real estate brokerage services. Rather, its various broker members compete with one another for the business of homesellers and buyers across Canada.

CREA also disputed the Commissioner's allegation that its rules constitute a practice of anti-competitive acts, stating that under the rules, there has been vibrant competition amongst real estate brokers. In any event, the rules highlighted by the Commissioner as being of particular concern were recently amended by CREA's members in response to the issues raised by the Competition Bureau in order to clarify the way the rules operate. CREA also opposed the application on the basis that CREA's rules have not resulted in a substantial prevention or lessening of competition given the competition amongst real estate brokers, including from discount and fee-for-service real estate brokerage providers.

The Commissioner's application against CREA will be the first contested abuse of dominance case heard by the Competition Tribunal since Canada Pipe was decided in 2005.


1 Stikeman Elliott LLP is counsel to CREA.

No Profits for Interac: Commissioner will not agree that payments association can become for-profit corporation

Shawn C.D. Neylan

On February 12, 2010, Canada's Commissioner of Competition announced that she would not agree to changes to a fourteen-year old Competition Tribunal order which, among other things, prohibits the Interac Association from operating on a for-profit basis. Interac is the organization that develops and operates a national payment network allowing Canadians to access their money through automated banking machines and point-of-sale terminals. Surprisingly, the Commissioner appears to favour a dated and cumbersome regulated structure over evolution to a market-based entity. The press release issued by the Commissioner did not explain the analysis that lies behind her decision and raises a number of questions as to why she would not support a move by a regulated entity towards a more market-based structure.
 

In 1996, on the application of the Commissioner, the Competition Tribunal issued an Order on consent against Interac and the leading Canadian banks who were its founding members under the abuse of dominance provision of the Competition Act. The detailed Order was intended to remedy an alleged joint abuse of dominance by the respondents. In brief, the structure and rules regarding membership and services, which had been established when massive and risky investment to develop technology was required, were by 1996 alleged to be inhibiting competition in financial services and payments innovation.

The Order required, among other things, that Interac be maintained as a business corporation and managed on a not-for-profit basis. Any fees or charges Interac imposed for the use of the inter-member banking network could only recover costs, which apparently could include cost of capital, but not returns on risk capital.

The Competition Tribunal issued reasons in 1996 when the Order was made. The Tribunal noted that the Commissioner of the day described the measures in the order that relate to the structure of the board of directors as providing for a more competitive environment within Interac, which would lead to enhanced innovation in services offered over the Interac network. Innovation was thus recognized as something to be encouraged. The requirement that Interac operate as a non-profit organization was apparently intended to preclude the charter members of Interac from exploiting their control of the network for their own gain.

In 2009, approximately thirteen years after the Order was issued, Interac (which has continued to develop and now has an increased and diversified membership) requested that the Commissioner consent to vary the Order to allow Interac to restructure to a for-profit model. The Competition Bureau conducted a comprehensive assessment of Interac's request and obtained extensive information from Interac and other market participants, as well as consulting with a number of experts.

The Commissioner's press release states:  

Based on currently available information, including Interac's current dominant position in the market, the Bureau cannot support changing or removing the safeguards in the Consent Order, which are effective in protecting consumers from potentially anti-competitive activity. In particular, the Bureau does not agree that the removal of the restriction against for-profit activities by Interac would be pro-competitive, or is necessary to allow Interac to remain competitive..To provide Interac with greater flexibility to respond to any material entry in the future by a competitor, the Bureau also evaluated other changes to the governance structure and corporate status of Interac. Those changes would allow Interac to continue as a not-for-profit corporation with independent directors. The Bureau has concluded that such changes would be acceptable, as they would maintain the necessary safeguards against anti-competitive activity that are contained in the Order.

The Commissioner is thus prepared to accept some changes to the board structure, but is not willing to agree to a for-profit model. This is curious because the Commissioner would normally be expected to recognize that profit is the best (and a completely acceptable) incentive for innovation, and that profit-motivated market forces are generally more effective in delivering the benefits of a competitive marketplace than are regulated market structures. It is, therefore, unexpected and puzzling that the Commissioner would reject a proposal for Interac to evolve into a more market-based model without providing an explanation as to why this deviation is appropriate in the circumstances (beyond merely alleging a dominant position).

European law recognizes the setting of an excessive price as an exploitive abuse of dominant position. In Canada, however, it is generally accepted that the mere setting of a high price or the earning of significant profits are not in themselves anti-competitive acts. The Commissioner's rejection of a proposal to earn profits raises the question as to whether the underlying concern is related to pricing. This is a dangerous area for any competition law enforcement agency, given the considerable difficulty of determining what constitutes an excessive price. Indeed, the Bureau's usual preference for market forces over regulated industries is understood to be due in part to skepticism about the ability of regulatory authorities to act in place of normal market pricing signals to determine an appropriate price. Hopefully, the Commissioner's decision with respect to Interac is restricted to the unique facts and does not presage a shift towards a more interventionist European approach to pricing. Perhaps future developments in the Interac matter will shed more light on the Commissioner's views on the roles of profit and pricing decisions in the marketplace.

Primer on amendments to Canada's Competition Act and Investment Canada Act

Susan M. Hutton and Kevin Rushton

On March 12, 2009, the Canadian government enacted the most significant amendments in over 20 years to Canada's competition and foreign investment regimes, as part of Bill C-10, the Budget Implementation Act, 2009. The amendments to the Competition Act result in fundamental changes to the way that business operates in Canada, and provide the Competition Bureau with unprecedented enforcement tools and/or penalties in all areas. Fewer foreign investments in Canada will meet the increased thresholds for Ministerial review and approval under the changed Investment Canada Act, but all such investments will face potential scrutiny under a new "national security" test. The most significant amendments to both these laws are discussed below.

Competition Act Amendments
Two-tracks for dealing with agreements between competitors

The amendment of section 45 of the Act creates a "per se" criminal conspiracy offence with respect to agreements or arrangements ("agreements") between competitors (which includes potential competitors) to:  fix prices; allocate sales, customers or markets; or fix or control production or supply of a product.A new counterpart civil provision permits the Commissioner to deal with anti-competitive agreements that are not "hard core" (see below). A defence to criminal prosecution exists if the accused can establish on a balance of probabilities that the alleged conspiracy is "ancillary" to a broader or separate agreement between the same parties that does not itself contravene the provision and is "directly related to, and reasonably necessary" for giving effect to the objective of the broader agreement ("ancillary restraint defence"). The amendments expressly preserve the application of the common law "regulated conduct" doctrine (which exempts actions which are authorized or required pursuant to legislation).Agreements relating solely to exports are still exempt. Penalties under the new offence have more than doubled from the former maximum 5 years imprisonment and/or C$10 million fine, to a maximum of 14 years and/or C$25 million - still far lower in terms of potential fines than in the U.S. or the EU. The new conspiracy offence has a delayed effective date of one year after March 12, 2009, during which time businesses can seek an advisory opinion on the legality of existing or proposed agreements (but may not be granted immunity against violations of the existing law unless they otherwise qualify under the immunity program).

  • In contrast to the old conspiracy provision, which required the prosecution to establish an "undue" prevention or lessening of competition, the amended offence, albeit narrower in terms of the type of conduct it encompasses, does not on its face require market power or any impact on competition for conviction.  Rather, it requires only that the parties to the impugned agreement be competitors or potential competitors, which will necessarily raise issues around the definition of the "market" for the product. In consultations on language similar to that in the Bill C-10, many parties criticized the ancillary restraint defence as being too narrow and potentially subjecting many widely-accepted agreements (e.g., franchise or exclusive distribution arrangements) to criminal prosecution.  We will have to see whether the "rule of reason" analysis followed by US courts will become relevant in Canada, as our courts struggle to interpret the new defence.

The "second track" of the new approach to cartels creates a new civilly reviewable matter in respect of existing or proposed agreements between persons, two or more of whom are "competitors", which prevent or lessen competition substantially.  The factors to be considered in undertaking this assessment are effectively the same as the existing merger review provisions. On application by the Commissioner of Competition, the Competition Tribunal may prohibit any person, whether or not a party to the agreement, from doing anything under the agreement or, subject to a person's consent, may order the person to take any other action.  In terms identical to the existing merger review provisions, an efficiencies defence applies if the agreement brings about "gains in efficiency that will be greater than, and will offset, the effects of any prevention or lessening of competition" and the efficiency gains would not be attained if a prohibition order were issued.  Like the amendments to section 45, the new "civil conspiracy" provision has a delayed effective date of one year after March 12, 2009.

  • In contrast to the per se criminal conspiracy offence, the new civil conspiracy provision applies to agreements between competitors to do anything (not simply to fix prices, for example) but only if the agreement substantially lessens or prevents competition.  While the civil conspiracy provision only applies to agreements between "competitors", the provision, in contrast to the proposed criminal conspiracy offence, omits the requirement that the parties be competitors in respect of the product that is the subject of the agreement. Moreover, empowering the Competition Tribunal to make a prohibition order against a person who is not a party to the agreement potentially raises issues of procedural fairness.
De-criminalized pricing practices

De-criminalization of price discrimination, predatory pricing and disproportionate promotional allowances.

  • These "unfair" pricing practices were previously liable to criminal prosecution and punishable by imprisonment for up to 2 years. Stakeholders on all sides have long recognized the criminal sanctions to be inconsistent with modern economics.  With the repeal of section 50 of the Competition Act, low prices that undercut the competition or the provision of different prices to different customers can only be sanctioned civilly as part of a "practice of anti-competitive acts" under the abuse of dominance provisions - and only if they substantially lessen or prevent competition.  The liberalization of Canada's pricing laws will bring welcome relief to many Canadian businesses and will enhance competition to the extent the old law was chilling pro-competitive price competition.
Price Maintenance - Replacement of criminal provision with civil provision

The previous criminal prohibitions against attempting to induce another person to raise or refrain from lowering their prices, and against discriminating against a customer because of its low pricing policy, have been replaced by a new civil provision.  On application by the Commissioner of Competition or by a private party to whom leave has been granted, the Competition Tribunal may prohibit the conduct or require a person to accept another person as a customer if the conduct has had, is having or is likely to have an "adverse effect on competition in a market."

  • While the amendment effectively limits the provision to resale situations (the previous provision did not), the choice of "adverse effect on competition" as the relevant competitive effects test, which is currently used under the civil "refusal to deal" provision, suggests that a lower impact on competition may be required than is the case in respect of other civil matters (such as abuse of dominance and mergers) where a "substantial" prevention or lessening of competition must be shown.  At the same time, the threshold for a private party to obtain leave to bring an application in respect of price maintenance is lower than in refusal to deal cases, since the amendments require only that the applicant be "directly affected" by the conduct, not that the applicant also be "directly and substantially affected", as in respect of refusal to deal and exclusive dealing cases. That said, civil review is thought by many to be more appropriate than the old criminal prohibition, which subjected Canadian businesses to greater restrictions than were imposed on their US counterparts.
Deceptive marketing practices/obstruction of justice

Increased penalties for the criminal offences of:  misleading advertising, deceptive telemarketing, and deceptive notice of winning a prize (in each case, to a maximum 14 years imprisonment and/or a fine in the discretion of the court); obstruction (to a maximum 10 years imprisonment and/or a fine in the discretion of the court, if convicted on indictment, or if on summary conviction, a maximum of 2 years imprisonment and/or a maximum C$100,000 fine); and failure to comply with search warrants and court orders to provide information (to a maximum 2 years imprisonment and/or a fine in the discretion of the court, if convicted on indictment, or if on summary conviction, a maximum of 2 years imprisonment and/or a C$100,000 fine).

Increased penalties for (non-criminal) misleading advertising

Introduction of a restitution remedy in respect of the civilly reviewable practice of making materially false or misleading representations to the public for the purpose of promoting a business interest.  Subject to a due diligence defence, restitution, in any manner ordered by a court or the Competition Tribunal, will be capped at the total amount paid for affected products and be payable to persons who purchased the products, "except wholesalers, retailers or other distributors, to the extent that they have resold or distributed the products".  A court or the Competition Tribunal may issue an interim injunction prohibiting disposing or dealing with assets so as to frustrate a restitution remedy.

  • As worded, the new restitution remedy has the potential to raise complicated issues regarding, among other things, passing-on (or indirect effects) with respect to the apportionment of overcharges at various levels of the distribution chain.  It does not apply to criminal deceptive marketing practices.

Increased administrative monetary penalties for all civilly-reviewable deceptive marketing practices (including inaccurate "ordinary price" claims).  In the case of individuals, the maximum penalty increased to C$750,000 for a first infraction and C$1 million for each subsequent infraction, with corresponding increases for corporations to C$10 million and C$15 million, respectively.

  • Previously, penalties for individuals were capped at C$50,000 for a first infraction and C$100,000 for each subsequent infraction, while penalties for corporations were limited to C$100,000 and C$200,000 for first and subsequent infractions, respectively.
Fines for abuse of dominance/repeal of "airline" provisions

Introduction of "administrative monetary penalties" for abuse of dominance (so-called to negate the constitutional argument that their imposition by the Competition Tribunal pursuant to its civil procedures would amount to the imposition of criminal sanction without due process).  Where ordered by the Competition Tribunal, the maximum fine is C$10 million for a first infraction and C$15 million for each subsequent infraction.

  • Administrative monetary penalties were previously only available under the abuse of dominance provision against domestic airlines, which have now been repealed. Both their utility and their legality have been questioned by some commentators.
Merger review procedures

Increase in the "size-of-transaction" threshold for transactions requiring pre-merger notification.  For the remainder of 2009, the target, together with its affiliates, must either have assets in Canada that exceed C$70 million or annual gross revenues from sales in or from Canada generated from those assets that exceed C$70 million.  In the case of corporate amalgamations, the revised C$70 million threshold must be exceeded by each of at least two of the amalgamating corporations, together with its affiliates.  The C$70 million threshold will be indexed annually to GDP, unless and until a different amount is prescribed by regulation.

  • The size-of-transaction threshold previously was C$50 million in assets in Canada or annual gross revenues from sales in or from Canada generated from those assets.  It was not indexed, nor in the case of corporate amalgamations did it need to be met be each of two parties to the transaction.
     

Introduction of a U.S.-style two-stage merger review process for transactions subject to pre-merger notification.  An initial 30-day waiting period applies following the submission of certain prescribed information and could be reset for an additional 30 days following compliance with a second request by the Commissioner of Competition for additional information.

  • Previously, parties to a notifiable transaction had the option of submitting either a "short-form" notification, which carried with it a 14-day waiting period, or a "long-form" notification, which carried with it a 42-day waiting period (if a short-form notification was filed, the Commissioner could request a long-form notification during the 14-day waiting period, in which case the 42-day waiting period began only once the long-form notification was filed).  In either case, the waiting period was finite, and could not be extended.  The Commissioner's powers to obtain information beyond that contained in a notification were limited to voluntary information requests and court orders.
     
  • The new procedure increases the waiting period for all transactions (more than 90% of which are reviewed by the Bureau within 14 days of receipt of a request for an Advance Ruling Certificate (ARC) or similar competitive analysis), to a minimum of 30 days unless terminated earlier by the issuance of an ARC or a no-action letter.
     
  • For complicated transactions, however, the new provisions will effectively mean there is no determinable end to the waiting period, as it will depend on how long it takes for the parties to comply with the "second request" for additional information that is relevant to the Commissioner's assessment of the proposed transaction.  As with the U.S. system, this may provide an incentive for the Commissioner to request as much information as possible within the 30-day initial waiting period, when detailed analysis has typically yet to begin in very complex transactions.  It remains to be seen whether this will result in an "everything and the kitchen sink" approach by the Bureau to second requests. 
     
  • In the face of the Federal Court's criticism of the Commissioner for issuing overly broad requests for information in the Labatt/Lakeport case last year, however, it seems that the Government is responding, some would say perversely, by removing the express provision for judicial oversight of the process.

Introduction of injunctive relief to enforce compliance with waiting periods.  If a person has completed or is likely to complete a proposed transaction before expiry of the applicable waiting period, a court or the Competition Tribunal, on application by the Commissioner of Competition, can issue an interim injunction prohibiting implementation of the transaction or requiring its dissolution and, in the case of a completed transaction, can impose administrative monetary penalties of up to C$10,000 for each day of non-compliance with the waiting period.

  • Failure to comply with the statutory waiting period was previously a criminal offence punishable by a maximum fine of C$50,000.

Decrease to one year the period of time within which the Commissioner of Competition may challenge a merger following its substantial completion.

Investment Canada Act amendments

Bill C-10 also made significant amendments to the review of foreign investments under Canada's Investment Canada Act:

  • Increase in the minimum threshold for Ministerial review and approval of direct acquisitions of control of Canadian businesses by WTO-member based investors.  The threshold will be C$600 million in the  "enterprise value" of the assets of the Canadian business for investments made within two years after the federal Cabinet proclaims the thresholds in force, C$800 million for the subsequent two years, C$1 billion for the subsequent year and the portion of the year thereafter that ends on December 31, and thereafter indexed to GDP.  Please note:  these new thresholds have not yet been proclaimed in force.

    • The threshold for review of direct acquisitions by WTO investors in 2009 is currently C$312 million and this amount is indexed annually to GDP.  It will increase to C$600 on an as-yet-unknown date when the new thresholds are proclaimed in force.
    • Indirect investments by WTO investors will remain exempt from review, unless they fall within certain "sensitive" sectors, the scope of which is to be narrowed to only "cultural businesses", see below.
       

    Elimination of the lower C$5 million review threshold for direct acquisitions (and the C$50 million threshold for review of indirect acquisitions of control) of Canadian businesses engaged in the "sensitive sector" activities of financial services, transportation services and uranium production, leaving only "cultural businesses" subject to this threshold and to review and approval by the Minister of Canadian Heritage.

    Retroactive creation of a "national security" test for every investment in or establishment of a business with assets, employees, agets o offices in Canada, regardless of the value of the business or its assets, which the Minister of Industry has "reasonable grounds" to believe "could be injurious to national security".  Ultimately, if the Minister of Industry, after consultation with the Minister of Public Safety and Emergency Preparedness and representations from the investor, is satisfied that the investment would be "injurious to national security", the federal Cabinet may "take any measures" it "considers advisable to protect national security", including ordering the investment not to be implemented or to be implemented subject to conditions or written undertakings, and if the investment has been implemented, requiring divestiture of the Canadian business.
     

    • "National security" is not defined in Bill C-10, nor do the amendments specify factors that are to be considered in determining whether an investment is "injurious" to national security.  Time periods for the national security review provisions would be prescribed by regulation.
       
    • The national security test is applicable to all transactions that have closed since February 6, 2009 (the day the Bill was announced).
       

 

Bill C-10 Competition Act and Investment Canada Act amendments enacted

Jeffrey Brown and Kevin Rushton

On March 12, 2009, the most significant amendments to Canada's competition and foreign investment regimes in more than 20 years were enacted when Bill C-10, the Budget Implementation Act, 2009, received Royal Assent. The amendments were described in detail in the February 20, 2009 edition of The Competitor.
 

With the exception of the new hybrid/"dual-track" conspiracy provisions, all of the Competition Act amendments enter into force immediately. These include

  • a new U.S.-style "two-stage" merger regime;
     
  • an increase in the "size-of-transaction" threshold for pre-merger notification;
     
  • de-criminalization of predatory pricing, price discrimination and promotional allowances;
     
  • conversion of resale price maintenance from a per se criminal offence to a civilly reviewable practice;
     
  • substantial increases in the penalties for deceptive marketing practices and misleading advertising; and
     
  • introduction of substantial administrative monetary penalties for abuse of dominance.

A delayed one-year implementation date applies to the new "dual-track" conspiracy provisions, which create a per se criminal offence for agreements between competitors to fix prices, allocate sales, customers or markets, or fix or control production or supply of a product, and subject other types of agreements between competitors to civil review if they prevent or lessen competition substantially.

All of the Investment Canada Act amendments are also now in force (indeed, most changes are retroactive to February 6, 2009), with the exception of increased thresholds for review of direct investments by WTO investors, which will come into force on a day fixed by order of the Governor in Council (the federal Cabinet). Provision is also made for Cabinet to prescribe regulations in respect of certain of the amendments. The Competition Bureau and the Investment Review Division of Industry Canada have yet to issue guidelines specifying how the new provisions will be enforced.

Massive amendments to Competition Act and Investment Canada Act tabled today

Susan M. Hutton

The Canadian Competition Bureau will be pleased today, as significant and far-reaching amendments to the Competition Act and the Investment Canada Act were included in the Budget Implementation, 2009 bill (C-10), which was tabled today in the House of Commons by the Canadian government (see Parts XII and XIII).

The proposed amendments to the Competition Act include provisions to strengthen the hand of enforcers in just about every area of the law:

  • the creation of a "per se" criminal conspiracy offence (Canada's conspiracy provision, unchanged since the 1890s, had required the Crown to show an "undue lessening or prevention of competition" and no such competitive impact need now be shown for certain kinds of agreements such as cartels to fix prices, allocate markets, etc.),
  • an increase of the penalties for criminal conspiracies to up to 14 years in jail and/or $25 million in fines,
  • removal of the criminal predatory pricing, price discrimination, promotional allowance and price maintenance provisions (the latter replaced by a provision allowing for civil review of price maintenance),
  • significant increases to penalties for misleading advertising,
  • extending bid-rigging to include not only undisclosed submission of bids arrived at by agreement or arrangement but to withdrawal of bids as well,
  • introduction of administrative monetary penalties (fines) for abuse of dominance of up to $10 million for a first offence and $15 million for subsequent offences,
  • deletion of the "abuse of dominance" provisions that had been applicable only to domestic airlines,
  • creation of a new provision for civil review of anti-competitive agreements between competitors that are not "per se" criminal but are nonetheless anti-competitive,
  • raising the "size of the target" threshold for advance merger notification to more than $70 million (Cdn) in assets in Canada or gross revenues from sales in or from Canada (to be indexed for inflation, unless otherwise specified), and
  • the introduction of a US-style two-stage merger review process, complete with a 30-day initial waiting period and a provision that "stops the clock" on the expiry of that waiting period until 30 days after the parties have complied with a second request for information (which can now be issued without judicial oversight).  Fines for non-compliance with the waiting periods have also been significantly enhanced.


The Investment Canada Act is also to be significantly amended, with the threshold for review of direct acquisitions of control by WTO-member based investors increasing to C$600 million, based on the "enterprise value" of the Canadian business (as opposed to the current threshold based on book value), for the next two years after the bill enters into force, to C$800 million for the two years following, and to C$1 billion for another two years, to be indexed according to inflation thereafter.  More importantly, a new "national security test" has been created, allowing the federal Cabinet to block investments on the basis that they threaten national security (with no minimum threshold for the size of investments potentially subject to such review), and the so-called "sensitive sectors" subject to lower review thresholds have been eliminated (other than "cultural businesses").

These proposed reforms represent the most significant overhaul of Canadian competition laws since the introduction of the modern statute in 1986.  They provide the Commissioner of Competition with unprecedented new enforcement tools in all areas of antitrust law, from the prosecution of cartels, to penalizing firms that abuse dominant positions or engage in misleading advertising, to impeding those wishing to close mergers that raise antitrust issues.  With these amendments, the Government has signaled a desire to get very serious about competition law enforcement in Canada.  In light of its new powers, the Bureau will be under pressure to demonstrate stepped-up enforcement of the cartel and abuse of dominance provisions, and businesses should expect to see lengthier and more burdensome merger reviews for difficult cases.

With the creation of a CFIUS-style national security test for investments within the Investment Canada Act, the government's ability to block foreign investments on national security grounds is clarified and strengthened, even as the number of transactions subject to review for ensuring they will be of "net benefit" to Canada has decreased.

While the Bill has just been introduced to the House of Commons, and must still pass through several stages before it becomes law, by including these amendments within the budget implementation bill, the Government has potentially forestalled serious debate.  Of course, anything is possible in a minority Parliament, as the events of the past few months have shown, and time will tell whether all of these amendments will be enacted.  As unprecedented as the scope of the amendments, however, has been the Government's failure to publicly consult with stakeholders with respect to some of the proposed changes. 

Canada's Competition Bureau seeks comments on revised Abuse of Dominance Guidelines

On January 16, 2009, Canada's Competition Bureau (the Bureau) released draft revised Abuse of Dominance Guidelines (the Updated Guidelines), which are intended eventually to replace the original guidelines released in 2001.

Abuse of dominance occurs when a dominant firm (or group of firms) in a market engage in a practice of anti-competitive acts with the result that competition is prevented or lessened substantially in a market. Sections 78 and 79 of the Competition Act set out the powers of the Competition Bureau to prohibit a dominant firm (or group of firms) from engaging in anti-competitive practices, or to require other remedial action if necessary to restore competition. At present, no damages or fines for abuse of dominance are provided for under the Act, although amendments to introduce fines have been proposed by the Government. To prove abuse of dominance, three principal elements must be established:

  1. one or more persons substantially or completely controls, throughout Canada, a class or species of business;
  2. the person or persons have engaged in a practice of anti-competitive acts; and
  3. the practice has had, is having, or is likely to have the effect of preventing or lessening competition substantially.

The Updated Guidelines do not represent a fundamental shift in the Bureau's enforcement policy, but rather expand upon the original guidelines and revise them in light of recent jurisprudence and developments in economic thinking. Most notable among these is the decision of the Federal Court of Appeal in the Canada Pipe case, which provided the first opportunity for the Federal Court to consider the application of the abuse of dominance provisions in sections 78 and 79 of the Act. Other relevant events include the publication of two separate bulletins clarifying the Bureau's approach to the abuse of dominance provisions in the context of the retail grocery and telecommunications industries, respectively.

Notable changes from the original guidelines include:

  • An updated explanation of how the Bureau will assess market power, including the application of the "hypothetical monopolist" test in defining the relevant market.
  • An updated approach to joint dominance. According to the Updated Guidelines, the Bureau will consider joint dominance where the firms appear to collectively hold market power based on their combined share of the market, and are engaged in similar alleged anti-competitive practices. In determining issues of joint dominance, the Bureau will also address, among other factors, barriers to entry or expansion in the affected market. The Updated Guidelines do not seem to require any co-ordinated conduct between the firms and emphasize that the mere exercise of market power on a collective basis does not in and of itself raise any issue under the abuse of dominance provisions.
  • An outline of the Bureau's approach to anti-competitive intent and legitimate business justifications in light of the FCA's decision in the Canada Pipe case. The Updated Guidelines indicate that the Bureau may consider valid business justifications for conduct that is allegedly anti-competitive, where it can be demonstrated that the anti-competitive effects were not the predominant purpose of the conduct. However, the Bureau will also consider the necessity of the conduct and whether there is an equally effective manner in which the cost savings could be achieved other than through the conduct in question.
  • Expanded discussion of specific forms of anti-competitive conduct, including: exclusive dealing; tying, bundling and bundled rebates; and denial of access to a facility or service.
  • Acknowledgement by the Bureau that it may consider a regulated conduct defence in its assessment.

The Updated Guidelines remain in draft form and are open to public comment until April 20, 2009. 

Throne speech promises big changes to Canada's competition and foreign investment regimes

Susan M. Hutton

Canada's 40th Parliament opened on Wednesday, November 19, 2008 with the traditional Speech from the Throne, outlining the government's legislative priorities. In keeping with the turbulent economic times and with calls for greater supervision of business, the throne speech promised to "proceed with legislation to modernize our competition and investment laws, implementing many of the recommendations of the Competition Policy Review Panel."

Given the apparent trend toward the significant strengthening of competition law enforcement in Canada, as well as the loosening of the foreign investment review regime (while at the same time, in all likelihood, empowering the government to reject foreign investments on "national security" grounds), the business and legal communities in Canada and abroad will be keenly interested in future legislative announcements.

Competition Act Reforms:

The throne speech was short on specifics, but as previously reported in this newsletter, the Competition Policy Review Panel's report, Compete to Win, recommended several important amendments to the Competition Act, including:

Criminal Matters
  • Replacing the conspiracy (cartel) provisions with a per se criminal offence for so-called "hard core" cartels such as price-fixing and market-sharing agreements, with no need to show anti-competitive effects (and subjecting them to increased maximum fines); as well as introducing a second, civil track for review by the Competition Tribunal of other anti-competitive agreements between competitors;
  • Repealing the criminal price discrimination, promotional allowance and predatory pricing provisions (leaving such practices to be dealt with, as potential aspects of a civil "abuse of dominance" case); and
  • De-criminalizing resale price maintenance (currently a per se criminal offence in Canada), and permitting private parties as well as the Commissioner of Competition to bring actions before the Competition Tribunal in respect of price maintenance with substantial anti-competitive effects.
Civil Matters
  • Empowering the Competition Tribunal to impose administrative monetary penalties (i.e., fines) of up to $5 million for abuses of a dominant position (currently, a civilly reviewable practice that is not liable to fines, damages or enforcement proceedings other than by the Commissioner of Competition).
Mergers
  • Harmonizing Canada's merger review procedures with those of the United States under the Hart-Scott-Rodino Antitrust Improvement Act of 1976 (HSR), with an initial review period of 30 days (most non-controversial mergers are currently cleared by the Competition Bureau in 14 days or less) and the discretion, on the part of the Commissioner of Competition, to initiate an indeterminate "second stage" review period that would end 30 days after the merging parties comply with a "second request" for documents and information (merging parties are currently free to close even problematic transactions as early as 42 days after filing long-form notification materials); and
  • Increasing the financial thresholds for merger notification.

Legislation to create a per se offence for hard core cartels (without requiring the Crown to prove an anti-competitive effect) has been widely expected, but remains controversial. Similarly, giving the Tribunal the power to issue fines for abuse of dominance has been opposed by some, but was the subject of several bills in the past few years, and has been popular among all major political parties. Combined with the proposed indeterminate second-stage review procedure for difficult mergers, and the removal of the Federal Court from its role as the gatekeeper of Competition Bureau information demands in the merger review process, the Panel's intention to strengthen the Competition Bureau's hand in all aspects of competition law enforcement was evident.

The precise timing and scope of amendments is unclear, but draft legislation seems imminent, and opposition parties are likely to seek only to further strengthen government legislation.  Of note, the Conservative party platform mentioned reforms to the cartel provisions as well as fines for abuse of dominance, but made no mention of the Panel's proposal to adopt US-style merger review procedures.

Investment Canada Act Reforms:

The Competition Policy Review Panel report also recommended several important changes to Canada's foreign investment review regime, some of which were also mentioned in the Conservative party election platform:

  • Increasing the minimum threshold for Ministerial review and approval of foreign acquisitions of control of Canadian businesses (to C$1 billion based on the as-yet-undefined "enterprise value" of the business, from the current C$295 million test based on book value of assets);
  • Shifting the onus to the Minister to find that the proposed investment would be "contrary to Canada's national interest" (the current onus is on the purchaser to satisfy the Minister that the acquisition will be of "net benefit" to Canada);
  • Eliminating the lower review thresholds for the "sensitive" sectors of financial services, transportation services and uranium mining (currently, virtually all such businesses will meet the C$5 million asset threshold for direct acquisitions), leaving only "cultural businesses" subject to such low thresholds and to special review by Heritage Canada; and
  • Eliminating the requirement to notify the government of non-reviewable foreign acquisitions of Canadian businesses.

Of note, the federal government already issued guidelines (in December, 2007) regarding the review of investments by foreign state-owned enterprises (SOEs), but has yet to implement a national security test for foreign review (Canada's answer to the review implemented in the United States under the aegis of the Committee on Foreign Investment in the United States, or CFIUS, post-9/11). But the throne speech did mention the need to "safeguard. national security" in the same breath as the need to "expand the opportunities for Canadian firms to benefit from foreign investment", and a national security test is widely anticipated in any upcoming legislation.

Other nuggets from the throne speech:

The throne speech also hinted at other noteworthy changes to several of Canada's regulatory regimes. Highlights include:

  • "Ensuring freedom of choice for grain marketing in Western Canada" (this could mean significant changes for the Canadian Wheat Board);
  • Modernizing Canada's copyright laws and ensuring stronger protection for intellectual property (somewhat controversial amendments to the Copyright Act, including measures to protect digital rights management, were before Parliament when the election was called);
  • "The reduction of regulatory and other barriers" to extending Canada's natural gas pipeline network in the North, and support for new nuclear power initiatives;
  • Working with the provinces to remove barriers to internal trade, investment and labour mobility by 2010 (Canadian provinces often have higher trade barriers between each other than Canada has with other countries);
  • Working to develop a North American cap and trade system for greenhouse gas emissions.

To quote Bob Dylan (1963): "The Times They Are a-Changin".

Bureau publishes new Predatory Pricing Enforcement Guidelines

Susan M. Hutton

On July 21, 2008, the Competition Bureau (Bureau) published its new Predatory Pricing Enforcement Guidelines (New Guidelines), following the issuance of draft guidelines in October, 2007 and a period of public consultation.1 The New Guidelines supersede all previous statements of the Bureau and the Commissioner of Competition on the subject.

By way of background, the Bureau first released guidelines on predatory pricing - the practice of pricing goods or services below their cost, so as to eliminate or discipline or deter entry by a competitor - in 1992. A 2002 attempt to revise those guidelines was met with controversy, and that draft was ultimately withdrawn. Draft guidelines reappeared in October, 2007, and these have now been finalized in the form of the New Guidelines. The New Guidelines do not depart significantly from the draft version of October, 2007.

The New Guidelines confirm three policy changes in terms of the Bureau's enforcement approach to predatory pricing.

First, the Bureau will, at first instance, examine allegations of predatory pricing under the civil "abuse of dominance" provisions of the Competition Act (Act), which are contained in sections 78 and 79 (and which include a "substantial lessening or prevention of competition" test). Generally, it is only in the case of egregious conduct (such as predation as a disciplinary measure in furtherance of a cartel, or where the person or firm has a history of non-compliance with the Act) that the Bureau will seek to have a firm prosecuted under the Act's relevant criminal provision in paragraph 50(1)(c).2

Second, the Bureau establishes "average avoidable costs" as the yardstick it will use to gauge when prices are "unreasonably low." In theory, these include all costs, including opportunity costs, which could have been avoided by not selling the products in question during the period of time for which low prices prevailed. In addition to variable costs of production (which generally include ongoing expenses such as labour, materials, rent and utility costs, use-related plant depreciation, and promotional allowances), avoidable costs include some fixed costs (those that are not product-specific), but do not include sunk costs. The longer the period of time for which the low prices are in effect, the greater the proportion of costs that will become "avoidable." According to the New Guidelines, the Bureau will take a default position that a firm is pricing predatorily if it is selling products below average avoidable costs.

Third, the New Guidelines clarify that the presumption that a firm selling products below average avoidable costs is selling at unreasonably low prices can be overturned by a reasonable business justification, including, among others, the need to meet the competition's prices, the quick sale of perishable goods, and introductory sales.

Both the abuse of dominance and the criminal provisions require consideration of whether substantial harm to competition results, or is likely to result, from the alleged predation.4 In the context of predatory pricing, the New Guidelines take the view that a substantial lessening or prevention of competition takes place when a firm increases its market power to the point where it can recoup its losses - including through cross-subsidization - once the desired anti-competitive effect has been achieved. In the case of the criminal provision, despite the fact that it contemplates the elimination of a competitor (as opposed to a substantial lessening of competition) as a basis for criminal liability, the New Guidelines provide that, in general, the mere elimination of a competitor is not a sufficient basis for the Bureau to pursue predatory pricing under the criminal provisions.

The Commissioner has stated previously that she supports proposals to repeal the criminal prohibition and to rely solely on abuse of dominance to control predatory pricing. Such potential repeal is not mentioned in the New Guidelines. However, Bill C-454, a private member's bill to amend the Act by, among other things, repealing the criminal predatory pricing provision, has received second reading and will be reviewed by a Parliamentary committee this fall.

While the standard of "avoidable costs" has not been endorsed by Canadian courts, and is of questionable utility to business people who make pricing decisions without benefit of the economic experts necessary to calculate such costs, the other revisions to the Guidelines provide welcome clarification to the Canadian business community. The New Guidelines will hopefully alleviate the "chilling effect" currently flowing from the antiquated criminal predatory pricing provisions. Low prices are, after all, what competition is all about.


1Competition Bureau, "Predatory Pricing Enforcement Guidelines," July 21, 2008. 

2Paragraph 50(1)(c) of the Act stipulates that "[e]veryone engaged in a business who... engages in a policy of selling products at prices unreasonably low, having the effect or tendency of substantially lessening competition or eliminating a competitor, or designed to have that effect, is guilty of an indictable offence and liable to imprisonment for a term not exceeding two years."

3The criminal provision in paragraph 50(1)(c) is in fact broader, needing the Crown to prove that the accused "engages in a policy of selling products at prices unreasonably low, having the effect or tendency of substantially lessening competition or eliminating a competitor, or designed to have that effect.."

Competition Policy Review Panel urges Competition Act, Investment Canada Act reforms

On June 26, the blue-ribbon Competition Policy Review Panel issued its report to the federal Industry Minister on how to raise Canada's standard of living through greater competition and productivity, calling for urgent action to improve Canada's competitive position.

The report, "Compete to Win," is wide-ranging and thought-provoking, canvassing issues ranging from education, immigration, taxation, and securities regulation to specific proposals to amend Canada's competition and foreign investment review laws.  Implementation of all, or even many, of the Panel's sixty-five recommendations would result in fundamental changes to the way business operates in Canada.

The Competition Act

The Panel concluded that "a number of provisions of the Competition Act are either ineffective or obsolete" and noted that "[t]hese deficiencies are particularly evident in respect of the conspiracy and pricing provisions." While satisfied that the Competition Act's substantive merger provisions are "modern" and that there is "no compelling need" to change the existing efficiencies defence, the Panel concluded that the Competition Bureau should not limit its assessment of efficiencies to mergers that it determines likely to prevent or lessen competition, but should consider efficiencies from the outset of its assessment of a merger. The Panel also recommended that the Bureau provide more guidance on the criteria the Commissioner of Competition applies in issuing advance ruling certificates in respect of mergers.  Notably, the Panel also concluded that the Competition Bureau should focus on its core mandate of enforcing and promoting compliance with the Competition Act and limit its "advocacy" efforts to interventions before federal and provincial boards and tribunals. General competition advocacy (e.g., market studies) should be left to the Panel's proposed (independent) "Canadian Competitiveness Council," whose general mandate would be "to examine and report on, advocate for measures to improve, and ensure sustained progress on, Canadian competitiveness."

The Panel's principal recommendations for amendments to the Competition Act include:

Criminal Matters

  • replacing the current conspiracy (cartel) provisions with a per se criminal offence for hard core cartels and civil review by the Competition Tribunal for all other agreements that are demonstrated to have or be likely to have significant anti-competitive effects;
  • repealing the price discrimination, promotional allowance, and predatory pricing provisions;

Reviewable Practices (other than Mergers)

  • repealing the existing criminal price maintenance provision and replacing it with civil review by the Competition Tribunal of price maintenance that is demonstrated to have or be likely to have significant anti-competitive effects, at the behest of  either the Competition Bureau or private parties (private access);
  • empowering the Competition Tribunal to impose an administrative monetary penalty of up to $5 million for abuse of a dominant position;

Mergers

  • harmonizing merger review procedures with the United States' Hart-Scott-Rodino (HSR) procedures, with an initial review period of thirty days and a discretion, on the part of the Commissioner of Competition, to initiate a "second stage" review period that would end thirty days after compliance with a "second request" for information by the Commissioner;
  • reducing the period within which the Commissioner can challenge a completed merger from three years to one year; and
  • reviewing (with a view to increasing) the financial thresholds for merger notification requirements.

The Panel also recommended that the Bureau strive to improve the timeliness of its decisions, advice and rulings, including the issuance of informal "advance rulings," to ensure that compliance with the Act can be achieved in a timely manner.

Discussion

The Panel's recommended introduction of an HSR-like merger review process could - depending on how similar it is to the U.S. process - substantially increase the information demands on merging parties and the time period during which a transaction raising significant competition law issues could not close. It would also diminish the importance of the Federal Court as a gatekeeper in respect of Bureau information demands by replacing the current, judicially-supervised section 11 process with, if it follows the U.S. approach, an onerous second request by the Bureau.  Some Canadian stakeholders have expressed surprise at the Panel's advocacy of a U.S.-style system in these regards.

The Panel's recommendations for reform in the areas of conspiracy, pricing and abuse of dominance are consistent with the recommendations of the Commissioner (and, in respect of the repeal of the criminal pricing provisions, the private bar) in years past.  Of note, the Panel's recommendations with respect to the pricing provisions and abuse of dominance are at least directionally in line with proposed amendments to the Act contained in Bill C-454, currently before Parliament and discussed in the May 2008 issue of The Competitor.

The Investment Canada Act

While the Panel rejected the OECD's assessment that Canada has the most restrictive barriers to foreign direct investment among industrialized countries (suggesting instead that Canada's foreign investment review process is simply more explicit and visible than in most countries), the Panel proposed significant amendments to the Investment Canada Act (the ICA) on the basis that there has been no policy review of the ICA in more than twenty years and to rectify the perception that Canada does not fully welcome foreign investment.  Chief among the recommended amendments to the ICA are the following:

  • raising the threshold for review of direct foreign acquisitions of Canadian businesses from $295 million in book value of assets of the Canadian target to $1 billion in the "enterprise value" of the business, and extending the higher threshold to investors from all countries (not just those that are members of the World Trade Organization);
  • eliminating the very low threshold ($5 million in book value of assets) currently applicable to targets with activities in the so-called "sensitive sectors" of uranium production, financial services and transportation services (but not cultural activities, which would continue to be subject to possible review by Heritage Canada);
  • shifting the onus from investors to the Minister by permitting the Minister to reject a transaction on the grounds that it would be "contrary to Canada's national interest" (currently, investors must show that the transaction is likely to be of "net benefit" to Canada);
  • eliminating the requirement to notify Industry Canada of transactions that fall below the review threshold;
  • requiring the responsible Ministers (Industry and Heritage Canada) to produce an annual report that would give reasons for the disallowance of any investment, disclose new policies or guidelines, and describe undertakings offered by investors (while respecting confidentiality concerns); and
  • increasing the use of guidelines and other advisory communications to clarify the review process and interpretations of the ICA.

Application of ICA to Cultural Activities

With respect to acquisitions of Canadian businesses with "cultural" activities, the Panel was critical of numerous aspects of the current review process undertaken by Heritage Canada: the overreach of the current review process to activities and transactions of minimal (if any) cultural significance; a lack of clarity as to the meaning of "cultural" products; and adverse incentives and impacts on the ability to raise capital and enhance competition in cultural sectors.  The Panel doubted that a review should be required where the cultural activities are only an ancillary part of the target's business, and recommended a de minimis exemption based on revenues from the cultural activities of the target business. It stated that Heritage Canada should distinguish between cultural products that involve creation and distribution and those activities that are incidental to commercial activities. Concluding that it did not have sufficient evidence before it to recommend a new review threshold, the Panel recommended that the Minister of Heritage conduct a review of its cultural policies, including foreign investment restrictions, every five years, with the first such review in 2008.

"Hollowing-Out of Corporate Canada"

The Panel acknowledged the debate over the "hollowing out" of corporate Canada and expressed its own concern over foreign takeovers of notable Canadian companies.  The Panel concluded that overall the "data indicate that the share of assets in Canada's non-financial industries under foreign control has not changed noticeably in recent years."  Moreover, while recognizing the loss of a number of leading companies, the Panel also noted a number of "growing Canadian champions" and rejected interfering with "the natural rhythm of creative destruction and renewal."   That said, the Panel was critical of securities regulations, which it says have ham-strung Canadian directors' ability to defend against hostile takeover bids as compared to their U.S. counterparts, and called on the Ontario Securities Commission to lead reform.

National Security and State-Owned Enterprises

Although the Panel's revised mandate did not include consideration of a national security test for foreign investment review, the Panel indicated its support for the Minister of Industry's intention to consider the establishment of a new review requirement for transactions that raise national security concerns and suggested a process similar to that used by the U.S. government, wherein such transactions must be approved by the Committee on Foreign Investment in the United States (CFIUS).  Similarly, the Panel also welcomed the Government's recently issued guidelines on the application of the ICA to state-owned enterprises (see the December 2007 issue of The Competitor for details).

Proposals on sectoral investment restrictions

The Panel reviewed current restrictions on foreign investment in air transport, uranium mining, telecommunications, broadcasting and financial services in order to assess their impact on, among other things, competition.   In general, the Panel was supportive of liberalizing foreign investment in these sectors, in some cases with the proviso that market access should be conditional on reciprocal liberalization.  The Panel's principal recommendations in this area were:

  • conducting periodic Ministerial reviews (every five years) of the regulatory regime in these sectors with a view to minimizing impediments to competition;
  • increasing the limit on foreign ownership of airlines to 49% of voting equity on a reciprocal basis through bilateral negotiations, and completing open-skies negotiations with the European Union "as quickly as possible";
  • liberalizing the non-resident ownership policy for uranium mining, subject to any new national security legislation and certain reciprocal benefits from other countries;
  • amending the Telecommunications Act to allow foreign companies to establish a new telecommunications business in Canada or to acquire an existing business having up to a 10% share of the Canadian market-and subsequently liberalizing foreign investment restrictions in the telecommunications and broadcasting industries in a competitively-neutral manner; and
  • removing the de facto prohibition on bank, insurance, and cross-pillar mergers of large financial institutions, subject to regulatory safeguards.
Conclusion

Whether and when the Panel's legislative recommendations will materialize remains to be seen.  Some of its key recommendations, including narrowing the focus of foreign investment review and liberalizing foreign investment in telecoms and airline transportation, will no doubt require further public debate before a consensus can be reached. Nevertheless, the Panel recommends a number of policy changes (such as greater transparency in the foreign investment review process) that could be implemented quickly. In addition, support from opposition parties can be expected with respect to many of the recommended amendments to the Competition Act such that these amendments could proceed, on their own or as amendments to Bill C-454 (an opposition private member's bill, which has passed second reading and is currently before a Parliamentary Committee) notwithstanding the minority status of the current Government.  Whatever the Government's ultimate response to the Panel's report, it will offer a fertile source of recommendations for Canada's economic agenda over the coming months.

Something old, something new: Private member's Bill moves forward with potential for big changes to Canada's Competition Act

Susan M. Hutton

Nearly six years after the Standing Committee on Industry, Science and Technology released its report "A Plan to Modernize Canada's Competition Act," and more than two years after the death of Bill C-19 on the parliamentary order paper, Parliament is once again considering a proposal to make significant amendments to the Competition Act.

A private member's bill, introduced by Bloc Québécois MP Roger Gaudet last October, has received second reading in Parliament, and will now move to Committee for debate. If passed in its current form, it would entail such significant - and controversial - changes as:

  • enabling the Commissioner to commence an inquiry into an entire industry sector whenever she "has reason to believe.that grounds exist" for doing so1;
  • removing the word "unduly" from section 45 (thus turning agreements with any negative impact on the named aspects of commerce or competition into per se criminal offences) but introducing a reverse onus defence if the accused can establish that the agreement is "reasonably necessary to attain gains in efficiency or encourage innovation";
  • increasing the maximum fine under section 45 from $10 million to $25 million;
  • deleting the criminal prohibitions against price discrimination and predatory pricing (thus making them amenable of redress only under the civil abuse-of-dominance provision);
  • adding a general definition of "anti-competitive act" to section 78 (abuse of dominance): "abusive exploitation of a dominant position in the market";
  • deleting the airline-specific definitions of anti-competitive act from section 78, as well as section 4.1 in its entirety2;
  • giving the Competition Tribunal the ability to impose not only large fines for abuse of dominance (up to $10 million for a first offence, and as much as $15 million for each subsequent order, or greater amounts so long as they are not more than the gross revenues earned as a result of the practice of anti-competitive acts), but also to award damages to private complainants in abuse cases (section 79)3
  • giving the Tribunal the ability to award damages to a private party in "refusal to supply" (section 75), and "vertical restraint" cases (exclusive dealing, tied selling and market restriction, section 77);
  • increasing fines for civil deceptive-marketing practices by 10 times or more for individuals (e.g., from a maximum of $50,000 for a first offence to $750,000) and by 100 times or more for corporations (e.g., from a maximum of $100,000 for a first offence to $10 million) while leaving criminal fines at existing levels (in the discretion of the court for conviction on indictment, but a maximum of $200,000 for conviction on summary conviction);
  • further toughening the civil misleading-advertising provisions to permit courts to order restitution to ultimate purchasers of the purchase price for the articles in question in civil deceptive-marketing cases, and to issue preserving orders to prevent the disposition of assets in order to frustrate attempts to satisfy an order for damages;
  • reducing the notification threshold, under the merger control provisions, of amalgamations involving one or more Canadian businesses to $50 million from $70 million for the combined size of the Canadian assets or revenues of the amalgamating businesses (while failing to update the thresholds for the assets and revenues of the target in a share or asset acquisition, which have since been updated by Regulation and are thus incorrect as they appear on the face of the statute).

Clearly, Bill C-454 as written would elicit some support, and much opposition, from many stakeholders. For example, the repeal of the criminal predatory-pricing and price-discrimination provisions has long been supported by many parliamentarians and members of the competition bar, as has the repeal of the airline-specific provisions. Giving the Tribunal the ability to impose fines for abuse of dominance is certainly not uncontroversial, and was included in Bill C-19, the previous government's attempt to amend the Act, and it had all-party support before it died on the order paper with the calling of a federal election. Similarly, Bill C-19 also proposed to significantly increase maximum fines for civil misleading advertising.That said, Bill C-19 did not propose that private parties be permitted to bring abuse cases before the Tribunal, much less that the Tribunal be empowered to award them damages in addition to imposing fines.

Also bound to be controversial would be the proposed deletion of the word "unduly" from section 45, thus criminalizing all agreements with any negative impact on competition. The new Bill proposes to add in an efficiency defence of sorts, but without the caveat found in the existing efficiency defence to mergers  that the efficiencies must be "greater than and offset" the anti-competitive effects of the merger and not otherwise attainable. Given the Commissioner's ongoing review of section 45 with a view to creating a criminal per se prohibition of "hard-core" cartel behaviour, as well as a companion civil provision to cover otherwise anti-competitive agreements, not to mention the work of the Competition Policy Review Panel (due to report in June), it is difficult to imagine that such a proposal will survive review in Committee.

Bill C-19 would also have given the Commissioner the ability to launch industry-wide investigations, without grounds to believe that an order should issue from the Tribunal or that an offence had been committed. Again, however, that aspect was not uncontroversial, as many in the petroleum industry in particular remember the thirteen-year investigation by the Restrictive Trade Practices Commission into price-fixing in that industry in the 1970s and 80s, which failed to uncover any illegal behaviour.Concerns include the high public and private cost of such studies, the lack of necessity for such powers of investigation, the need for procedural safeguards and the risk that such inquiries would become "politically charged"-not to mention the practical problem that such investigations would require additional resources that the Bureau simply does not have.

Because Bill C-454 is a private member's bill, its chances of becoming law in its current form are inherently slim - but anything can happen with a minority government.  The bill has received support from Members of all three opposition parties, and its progress in Committee deserves to be followed closely in the months ahead. Hearings before the House Standing Committee on Industry, Science and Technology have not yet been scheduled.


1No specification of the circumstances that would give rise to such grounds are given, and presumably it would not be necessary to believe that an offence has been committed or that grounds exist for an order under the civil provisions.

2Section 4.1 exempts collective bargaining over commissions by travel agents with a dominant domestic air carrier (at least 60% of revenue passenger-kilometres from domestic services in a given year) from the prohibitions against conspiracy and price maintenance under sections 45 and 61, respectively.

3Currently, only the Commissioner can bring an abuse-of-dominance case before the Tribunal.  Private parties have no right to do so, although they can bring an application based on refusal to supply (s.75), exclusive dealing, tied selling or market restriction (s.77) before the Tribunal, with leave of the Tribunal.  Moreover, the Tribunal is not currently empowered either to issue fines or to award damages to any party.

No hockey for Hamilton: NHL restrictions on franchise relocation not anti-competitive

Susan M. Hutton
 

On March 31, 2008 Canada's Competition Bureau announced the conclusion of its investigation into the policies of the National Hockey League (the NHL) for the approval of transfers of ownership and relocations of franchises.  The Bureau concluded they were not in violation of the civil "abuse of dominance" provisions (s. 79) of the Competition Act.  The inquiry had been commenced by the Bureau in June 2007, following media reports that James Balsillie, co-CEO of Research In Motion (makers of the BlackberryT personal communications device), had been foiled in his latest attempt to buy an NHL franchise and move it to southern Ontario (either Hamilton or Kitchener-Waterloo) when the NHL refused to consider the relocation of the Nashville franchise.

The NHL had defended its right to refuse to consider relocation of a team prior to the conclusion of the seven-year non-relocation covenant entered into between new owners and the NHL.

Following similar rulings by U.S. courts in professional sports cases over the years,1 the Bureau cited the NHL's "properly circumscribed restrictions" on the relocation of sports franchises and the legitimate business interests they promote, such as preserving rivalries between teams, attracting a broader audience, providing new franchises with an opportunity to succeed, and encouraging investment in sports facilities and related infrastructure by local municipalities.  In particular, the Bureau found that since at least 1993, no incumbent team had exercised a veto to protect its local territory from entry by a competing franchise, and that NHL rules required only a majority vote.  The Bureau went on to say, however, that it "may have concerns" about a single team being entitled to exercise a veto to prevent a franchise from entering its local region within Canada.


1Levin v. NBA, 385 F. Supp. 149 (1974), San Francisco Seals v. NHL, 379 F. Supp. 966 (C.D. Ca. 1974), Los Angeles Memorial Coliseum Commission v. NFL, 791 F.2d 1356 (9th Cir. 1986), NBA v. SDC Basketball Club and Los Angeles Memorial Coliseum, 815 F.2d 562 (9th Cir. 1987) and VKK Corporation v. NFL, 244 F.3d 114 (2nd Cir. 2001).

Bureau releases new draft Predatory Pricing Enforcement Guidelines

Ian Disend and Susan M. Hutton

On October 9, 2007, the Competition Bureau (the Bureau) released new draft Predatory Pricing Enforcement Guidelines (the Guidelines)."1Public comment is requested before January 18, 2008.

The Bureau first released guidelines on predatory pricing - the practice of pricing goods or services below their cost, so as to eliminate or discipline a competitor - in 1992. An attempt in 2002 to revise the Guidelines met with controversy, and that draft was ultimately withdrawn. The latest draft Guidelines go further than previous Guidelines in confirming the treatment of predatory pricing by the Bureau, at the first instance, as a civil matter under the "abuse of dominance" provisions, and thus subject to a competitive impact test (the actual legal provision being criminal and being capable of enforcement if a competitor is likely to be eliminated, even if there is no substantial lessening of competition). The new draft Guidelines also fully adopt the "avoidable cost" standard for the determination of unreasonably low prices.

According to the Guidelines, the Bureau's default approach to allegations of predatory pricing will be to examine the conduct under the civil "abuse of dominance" provisions of the Competition Act, which are contained in sections 78 and 79 (and subject to a substantial lessening or prevention of competition test). It is only in the case of particularly egregious conduct (such as predation as a disciplinary measure in furtherance of a cartel, or in contravention of a Tribunal order) that the Bureau will seek to have a firm prosecuted under the Act's relevant criminal provision in paragraph 50(1)(c).2

In the Guidelines, the Bureau establishes "average avoidable costs" as the yardstick it will use to gauge when prices are "unreasonably low." In theory, these include all costs, including opportunity costs, which could have been avoided by not selling the products in question during the period for which low prices prevailed.  In addition to variable costs of production, avoidable costs may include, depending on the time period in question, use-related depreciation, "quasi-fixed costs," and incremental fixed and sunk costs linked to sales during the period of alleged predation.

According to the draft Guidelines, the Bureau will take a default position that a firm is pricing predatorily if it is selling products below average avoidable costs. This presumption can be overturned by a reasonable business justification, which includes meeting the competition's prices, the quick sale of perishable goods, introductory sales, etc.

Both the abuse of dominance and the criminal provisions require consideration of whether substantial harm to competition results, or is likely to result, from the alleged predation.3.In the context of predatory pricing, the Bulletin takes the view that a substantial lessening or prevention of competition takes place when a firm increases its market power to the point where it can recoup its losses - including through cross-subsidization - once the desired anti-competitive effect has been achieved. In the case of the criminal provision, the potential or actual elimination of a competitor can also be the basis for sanction even without substantial anti-competitive effect, and this includes preventing a competitor from entering a market. The Commissioner has stated previously that she supports proposals to repeal the criminal prohibition and to rely solely on abuse of dominance to control predatory pricing. Such potential repeal is not, however, mentioned in the draft Guidelines.


1Competition Bureau, "Competition Bureau Seeks Comments on Predatory Pricing Enforcement Guidelines," October 9, 2007, http://www.competitionbureau.gc.ca/internet/index.cfm?itemID=2486&lg=e.

2Paragraph 50(1)(c) stipulates that "[e]veryone engaged in a business who . engages in a policy of selling products at prices unreasonably low, having the effect or tendency of substantially lessening competition or eliminating a competitor, or designed to have that effect, is guilty of an indictable offence and liable to imprisonment for a term not exceeding two years."

3The criminal provision in paragraph 50(1)(c) is in fact broader, needing the Crown to prove that the accused "engages in a policy of selling products at prices unreasonably low, having the effect or tendency of substantially lessening competition or   eliminating a competitor, or designed to have that effect.."

 

Canada Pipe case remanded back to Tribunal

On May 10, 2007, Canada's Supreme Court denied leave to appeal the Federal Court of Appeal's decision in The Commissioner v. Canada Pipe et al., the first and only appellate decision in respect of the abuse of dominance and exclusive dealing provisions of Canada's Competition Act.

As a result of the Supreme Court's decision, the case will be remanded back to the Competition Tribunal for decision in accordance with the legal tests established by the Federal Court of Appeal. The Commissioner of Competition has, in previous statements, confirmed that the Federal Court of Appeal's decision will not alter the Bureau's approach to enforcement of these provisions, as detailed in its Abuse of Dominance Guidelines.

Stikeman Elliott successfully represented the Commissioner of Competition as lead counsel before the Federal Court of Appeal and the Supreme Court of Canada in this matter, during his tenure as Special Counsel to the Commissioner of Competition during 2005 and 2006.

Bureau consults on abuse of dominance provisions as applied to telecommunications industry

D. Jeffrey Brown and Kevin Rushton

On September 26, 2006, the Competition Bureau released its Draft Information Bulletin on the Abuse of Dominance Provisions as Applied to the Telecommunications Industry (the "Draft Bulletin"). The Draft Bulletin sets out the Bureau's approach to reviewing complaints under sections 78 and 79 of the Competition Act (the Act) - the abuse of dominance provisions - in respect of conduct that is not regulated by the Canadian Radio-television and Telecommunications Commission (the CRTC). Stakeholder comments on the Draft Bulletin must be submitted to the Bureau by December 29, 2006.

The Abuse of Dominance Provisions

In order for the Competition Tribunal to find under section 79 of the Act that a firm (or group of firms) has abused its dominant position, the Commissioner of Competition must establish three elements: (1) the person(s) substantially or completely controls a class or species of business (i.e., has market power); (2) that person(s) has engaged in or is engaging in a practice of anti-competitive acts; and (3) the practice has had, is having or is likely to have the effect of substantially lessening or preventing competition in a market. Section 78 lists several "anti-competitive acts" for the purposes of section 79, however the list is not exhaustive and other conduct the purpose of which is exclusionary, predatory or disciplinary may also be "anti-competitive".

The Draft Bulletin reviews the Bureau's enforcement approach to section 79 as set out in its Enforcement Guidelines on the Abuse of Dominance Provisions, highlighting considerations specific to the telecommunications industry. While the Bureau continues to regard a "sector-specific" focus as "the exception rather than the rule,"1 the Bureau believes that the Draft Bulletin will assist with the telecommunications sector's transition from sector-specific regulation to greater reliance on market factors, including greater reliance on the Act. In this regard, the Bureau states that "[g]iven the complex relationships that exist within the industry and the history of competitive disputes which the CRTC has considered, the Bureau may receive a significant number of complaints within the sector." "Nothing in the [Draft] Bulletin," however, "deviates from the enforcement approach outlined in the [Bureau's more general] Enforcement Guidelines on the Abuse of Dominance Provisions."

Dominance (Market Power)

A product and geographic market generally must be defined in order to assess whether a firm possesses market power. The principles underlying relevant product and geographic definition do not differ when applied to the telecommunications sector. The Draft Bulletin does, however, highlight certain features of the telecommunications sector that, while not unique to it, may be relevant to the question of market definition in the telecommunications sector.

The Draft Bulletin states, for example, that a bundle of telecommunications services may constitute a separate product market if consumers would not purchase the services on a stand-alone basis in the face of a small but significant and non-transitory price increase. This is only true, however, if all competitors can offer a comparable bundle, otherwise the bundle may not be a distinct product market. With respect to geographic market definition, "the Bureau would define the relevant geographic market based on a specific location if subscribers to services provided at that location were not willing to substitute to services supplied at a different location." Thus, "[i]n essence, a household or place of business theoretically could be defined as a relevant geographic market." That said, the Draft Bulletin states that "the Bureau would aggregate all locations that have the same competitive alternatives . into a single geographic market", such that "a geographic market can be defined around the network of a dominant firm based on its overlapping footprint with competing networks that provide the relevant telecommunications services".

The Draft Bulletin also highlights "other" market characteristics that can be important features of the sector and are relevant to the question of whether market power exists. In addition to market share and barriers to entry, the Draft Bulletin identifies "countervailing power, and technological change and innovation" as "particularly important to the assessment of telecommunications markets." Moreover, with respect to market share, the Draft Bulletin, noting that the provision of telecommunications services is "tied to a location and [that] the number of competitive alternatives that are available to consumers can differ depending on where they live or carry on business," suggests that capacity, rather than market shares, represents an important measure of market power in the telecommunications sector. The Draft Bulletin states: "When substantial excess capacity remains in a market, allowing firms to easily increase supply in response to an increase in price, the ability to raise price[s] above competitive levels may be considerably lower than what a simple concentration measure might suggest."

Practice of Anti-Competitive Acts

The Draft Bulletin notes that "[c]ertain types of anti-competitive acts may be more common in, or perhaps even unique to, the telecommunications industry." Actual or constructive denial of access to an "essential" facility, for example, may be anti-competitive, according to the Draft Bulletin, if (i) the firm that controls the facility is dominant in the upstream (wholesale) market for the facility and also the downstream (retail) market in which the facility is an input, and (ii) the denial of access is for the purpose of excluding competitors from entering or expanding in the downstream market (i.e., because it is "difficult or impossible" for the competitor to "practically or reasonably duplicate the facility").

The Draft Bulletin states that predatory pricing can also be an anti-competitive act if (i) "the alleged predatory price is below the average avoidable costs of the firm that is alleged being driven from the market", (ii) the alleged predatory price is below the alleged predator's avoidable costs, and (iii) the alleged predator will likely be able to recoup its losses by charging prices above competitive levels. That said, the Draft Bulletin states that "[a]s a general principle, where a dominant telecommunications service provider's response to competition consists only of reducing prices to levels which match, but do not undercut those of a competitor ("meeting the competition"), the Bureau will not take enforcement action when considering allegations of predation."

With respect to "targeted pricing" - the "practice of offering certain customers a significantly better price than charged previously, or that deviates from what it usually charges other customers in the market" - the Draft Bulletin notes "the inherent difficulty in establishing objective criteria that can distinguish between targeted pricing that is harmful and that which is beneficial competitive conduct." The Bureau will require "considerable ancillary evidence" in support of a claim where the targeted price exceeds avoidable costs. Bundling could constitute an anti-competitive act if it meets the Act's definition of tied selling or amounts to predation.

Substantial Lessening or Prevention of Competition

The Draft Bulletin confirms that the Bureau will apply its "but for" approach2 to assessing anti-competitive effects in the telecommunications industry. More particularly, the Bureau will ask: "'but for the practice in question, would there be substantially greater competition in the relevant market, in the past, present or future?"

In addition to being of special interest to those in the telecommunications industry, the Draft Bulletin will no doubt serve to stimulate continued discourse on the Act's abuse of dominance provisions more generally.

Federal Court of Appeal Orders Re-determination in Canada Pipe Abuse of Dominance Case

Kim D.G. Alexander-Cook and Michael Kilby

On June 23, 2006, the Federal Court of Appeal (the FCA or the Court) issued its decisions and reasons in the appeal by the Commissioner of Competition (the Commissioner) and the cross-appeal by Canada Pipe Company Ltd. (Canada Pipe) from an earlier ruling by the Competition Tribunal (the Tribunal). At issue was the Tribunal's dismissal, in February 2005, of the Commissioner's abuse of dominance and exclusive dealing case against Canada Pipe.1 This appeal represents the first time the FCA has been asked to consider the application of the abuse of dominance (section 79) and exclusive dealing (section 77) provisions under Canada's Competition Act (the Act). In allowing the Commissioner's appeal and, rejecting Canada Pipe's cross-appeal, the Court considered in detail each of the specific elements the Commissioner must address in bringing an application under sections 77 and 79 of the Act. The case has been sent back to the Tribunal for re-determination.

While the Court found errors of law in the way the Tribunal had framed and conducted its analysis under both sections 77 and 79, it is far from obvious that the result on re-determination by the Tribunal will be any different than at first instance.

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 products, and that Canada Pipe was engaged in a practice of anti-competitive acts (primarily thorough the SDP) that 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." Under section 79 of the Act, the Commissioner is required to show that the dominant competitor has engaged in a "practice of anti-competitive acts" that has resulted in, or is likely to result in, a substantial prevention or lessening of competition. The main allegation of the Commissioner was that the SDP "locked in" distributors, foreclosing competitors from distribution in each of the relevant markets. The Commissioner alleged that use of the SDP also comprised reviewable "exclusive dealing" under section 77 of the Act, as Canada Pipe's conduct was widespread in the relevant markets, impeded entry and/or expansion in those markets, and, as a result, had or was likely to substantially lessen competition.

In its February, 2005 decision, the Tribunal had 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 eighteen relevant DWV markets (three products markets in each of six geographic markets),2 it found that the SDP did not constitute a practice of anti-competitive acts and had not substantially lessened or prevented competition in any market. On essentially the same basis, the Tribunal rejected the Commissioner's application in respect of exclusive dealing under section 77 of the Act. The Commissioner appealed to the FCA in respect of both of the Tribunal's latter findings, and Canada Pipe cross-appealed in respect of the Tribunal's finding of market power.

The Commissioner's Appeal

> Preventing or Lessening Competition Substantially

The Court addressed first the question of whether the Tribunal erred in reaching its conclusion that the SDP does not have the effect of preventing or lessening competition substantially. The Court accepted the Commissioner's argument that the correct legal test for this element of the abuse of dominance provisions is a "but for" test. That is, the question to be asked is whether a market would be substantially more competitive "but for" the impugned practice of anti-competitive acts. Canada Pipe argued that the Commissioner's formulation of a "but for" test was novel and inappropriately raised at this late stage of the litigation. The Court found that while the words "but for" may not previously have been applied, they were essentially a restatement of the test that the Tribunal had applied in previous cases.

The Court agreed with the Commissioner that the Tribunal, by focussing its analysis on whether a substantial level of competition continued to exist in the market (i.e., focussing on the fact that entry and switching of suppliers continued to occur in the market), had applied the incorrect legal test. The mere fact that the absolute level of competition is substantial does not address the question of whether an impugned practice has resulted (or will likely result) in a substantial prevention or lessening of competition. For example, even though a new manufacturer and several importers entered some of the relevant markets to add to competition while the SDP was in place, perhaps competition would have been substantially greater in the absence of the SDP. In the Court's view, the Tribunal should have compared the level of competitiveness in the presence of the SDP against the level of competitiveness that would otherwise have existed in the absence of the SDP. In particular, the Court found that the Tribunal should have considered whether even more switching, or even more entry, or even lower prices, would have occurred in the absence of the SDP.

The Court did not offer specific guidance as to just how the "but for" test should be implemented, and stated that the expert Tribunal is better suited for such a task than is the Court. While acknowledging that it may not be an easy task to find and assess data relevant to this test, the Court indicated that a lack of historical data against which to compare the prevailing state of competition is not a reason to conclude that there is insufficient evidence to find a substantial lessening or prevention of competition. Where there is little or no data to assist in the analysis, the Tribunal must still compare the prevailing state of competition against its likely state in the absence of the impugned practice. The Court added that the application of the "but for" test must be sufficiently flexible to allow a full assessment of "all relevant factors" and that the various purposes set out in section 1.1 of the Act should be reflected in the chosen methodology.3

Somewhat strangely, the Court also noted that the "but for" test it articulated is a correct approach to section 79(1)(c), but not necessarily the only correct approach. That is, the Court appears to have left open the possibility that a different test may be appropriate in a future case (although presumably not the "absolute level" of competition test it found had been used by the Tribunal in the present case).

The Court did not find it necessary to conduct a separate analysis as to whether competition is or is likely to be lessened substantially for the purposes of section 77 of the Act (exclusive dealing), concluding instead that on the facts in this case, the analysis under section 79(1)(c) and section 77 would be essentially the same.

> Practice of Anti-Competitive Acts (s.79(1)(b))

The Court noted that while a list of anti-competitive acts is provided in section 78 of the Act, this list is explicitly non-exhaustive and "anti-competitive acts" are not defined in the Act. The Court then essentially proceeded to define "anti-competitive acts" by adopting the Tribunal's working definition from the Nutrasweet case.4In that case, the Tribunal found that an anti-competitive act is identified by reference to its purpose, and that "the requisite purpose is an intended predatory, exclusionary or disciplinary effect on a competitor." In this context the Court affirmed that "purpose" refers to the overall character of the acts, and not only subjective intent. In fact, subjective intent need not be established, and purpose can be inferred from the reasonably foreseeable effects or expected impacts of the acts. In adopting the Nutrasweet working definition, the Court emphasized repeatedly, but without explanation, that it is the intended effects of the conduct on a competitor, and not on competition in the market, that is relevant to whether conduct comprises a practice of anti-competitive acts under section 79(1)(b). While the Court noted that detriment to the consumer is relevant to the question of substantial lessening or prevention of competition (under section 79(1)(c)), in the Court's view the Tribunal erred in law by concluding that in order for a practice of anti-competitive acts to exist, there must be a link between the impugned practice and a decrease in competition.

The Tribunal had also found that Canada Pipe had a valid business justification for use of the SDP, in that as a result of the program, Canada Pipe could viably maintain an inventory of less profitable products, ensuring that a broad selection of products would be available to customers. In this case, the Court reasoned that, while making products available to the market has benefits for end-customers, "consumer welfare is on its own insufficient to establish a valid business justification." Instead, the Court stated, the impugned practice must have a credible efficiency or pro-competitive explanation. While the Court did not develop its views in this regard, it appears that it does not consider enhanced consumer welfare alone to ground an efficiency or pro-competitive explanation for conduct that otherwise determined to have an anti-competitive character.5

Canada Pipe's Cross-Appeal

In its cross-appeal, Canada Pipe argued that the Tribunal defined the relevant product markets too narrowly, which led it in turn to the erroneous conclusion that Canada Pipe possessed market power. All members of the Court agreed that the question of Canada Pipe's dominance was one of mixed fact and law, and that under the applicable standard of judicial review, the Tribunal's findings would need to be unreasonable before the Court would interfere with those findings. Two of the three members of the Court found that the Tribunal's conclusions as regards Canada Pipe's market power were not unreasonable, and therefore dismissed the cross-appeal. The third panellist, Pelletier J.A., found that while the Tribunal defined the relevant product markets reasonably, its conclusion that Canada Pipe possessed market power (and was therefore dominant) was unreasonable based on all of the record evidence. In particular, Pelletier J.A. found the Tribunal's conclusion that a decrease in prices following the entry of competitors in four of the six geographic markets tended to support the conclusion of no market power in these markets, rather than the opposite conclusion made by the Tribunal.

FOOTNOTES

1] Commissioner of Competition v. Canada Pipe Ltd., 2005  Comp. Trib. 3 (Competition Tribunal).

2]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.

3]Section 1.1 of the Act states that the purposes of the Act include promoting efficiency and adaptability in the Canadian economy, expanding opportunities for Canadian participation in world markets while recognizing the role of foreign competition in Canada, ensuring that small and medium-sized enterprises have an equitable opportunity to participate in the Canadian economy and to provide consumers with competitive prices and product choices.

4]Canada (Director of Investigation and Research) v. Nutrasweet Co. (1991), 32 C.P.R. (3d) 1 (Comp. Trib.).

5]The Court did not find it necessary to conduct a separate analysis as to whether the SDP had impeded or was likely to impede entry or expansion or have any other exclusionary effect for the purposes of evaluating the Commissioner's application with respect to exclusive dealing under section 77 of the Act.  The Tribunal had evidently relied on its finding that the SDP does not constitute a practice of anti-competitive acts under section 79(1)(b) to conclude that the SDP also was not a practice of exclusive dealing with exclusionary effects under section 77.  In a similar manner, the Court rejected the Tribunal's conclusion that the SDP was not a practice of exclusive dealing with exclusionary effects on the same basis as the Court rejected the Tribunal's finding that the SDP does not constitute a practice of anti-competitive acts.

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

Amendments to Canada's Competition Act Could Pass this Spring

Susan M. Hutton and Patricia Martino

As reported in the March, 2005 edition of this newsletter, the House of Commons Standing Committee on Industry, Natural Resources, Science and Technology resumed consideration of Bill C-19 on March 9, 2005, after a hiatus of several months due to political skirmishing between opposition parties and the minority government members of the Committee. Further witnesses appeared on March 23, 2005. Although more witnesses may appear, it is still possible that Bill C-19 may become law this spring. So far, the Bill appears to have general all-party support, despite the opposition of some witnesses to certain aspects of the Bill.

Bill C-19 seeks to implement some long-debated - and in some cases controversial - amendments to Canada's Competition Act (the "Act"). The Commissioner of Competition (the "Commissioner") grouped the proposed amendments into five areas in her appearance before the Committee last Fall:

  1. Providing authority for the Tribunal to order restitution for consumer loss resulting from false or misleading representations under paragraph 74.01(1)(a) of the Act1;
  2. Enabling the Tribunal to issue an "administrative monetary penalty" (AMP), or fine, for abuse of dominance in any industry, to a maximum of $10 million for a first offence and $15 million for subsequent orders;
  3. Repealing the airline-specific provisions of the Act2;
  4. Increasing the level of AMPs for civil deceptive marketing practices (to maximums of $750,000 for a first offence and $1 million for subsequent orders against individuals; and to maximums of $10 million for a first offence and $15 million for subsequent orders against corporations); and
  5. Repealing the criminal pricing provisions in sections 50 and 51, leaving such practices as predatory pricing and price discrimination to be dealt with as instances of (civil) abuse of a dominant position.

As noted, while few of the proposals in Bill C-19 are without controversy, the Bill appears likely to pass - although speculation as to the exact timing of such passage is made interesting by the lack of a majority government in Ottawa.

With respect to restitution for victims of false or misleading representations, the Commissioner has noted that restitution can already be ordered for similar offences in other countries such as the United States and Australia. With both restitution orders and drastically increased fines in her arsenal, the Commissioner will seriously increase her leverage over prospective defendants. Million-dollar-plus penalties and voluntary settlements of the type agreed to by The Forzani Group Ltd. ($1.7 million) and Suzy Shier Inc. ($1 million) could well become the norm, even for civil offences.

One of the more controversial proposals in Bill C-19 is the introduction of fines for companies who have abused their dominant market positions. As noted, the Tribunal will be empowered to issue fines of up to $15 million (for repeat offenders). This exceeds the maximum fine available for criminal price fixing under the domestic conspiracy provision (section 45). With the Commissioner vigorously pursuing abuse cases such as that brought recently against Canada Pipe3this provision clearly raises the stakes for firms with large market shares in Canada.

The introduction of criminal-sized fines for abuse of dominance also significantly affects the impact of the repeal of the criminal predatory pricing, price discrimination and promotional allowance provisions. The repeal of these provisions has been widely supported, as they require no finding of dominance or anti-competitive effect. That said, firms with large market shares arguably will face more vigorous enforcement as a result of the lower civil burden of proof and the prospect of large fines for abuse of dominance.

FOOTNOTES:

1] Fines are currently available for both criminal and civil misleading representations. A private party harmed by the offence can also sue for damages caused by misleading representations that are "knowingly or recklessly made" (the standard of intent for the criminal offence), regardless of whether criminal charges have been laid.

2] Currently, amongst other things, there are airline-only definitions of "anti-competitive acts" under the abuse of dominance provisions, and the Tribunal is able to issue fines in respect of abuse of dominance only to dominant Canadian airlines. See sections 78 and 79 of the Act.

3] Commissioner of Competition v. Canada Pipe Company Ltd., 2005 Comp. Trib. 3 (Competition Tribunal). See the March 2005 edition of The Competitor for a description of the Tribunal's decision, which rejected the notion that the exclusivity rebates in question were anti-competitive. The Commissioner has appealed the decision.


 

Canada Pipe Prevails in Abuse of Dominance Case

Commissioner of Competition to Appeal
Kim Alexander-Cook

On February 14, 2005 the Competition Tribunal released its decision in the abuse of dominance and exclusive dealing case brought by the Commissioner of Competition against Canada Pipe in 2002.1 The main conduct at issue was a loyalty program comprised of rebates and purchase discounts to distributors who offered Canada Pipe's Bibby Ste-Croix division exclusivity in supplying their cast iron drain, waste and vent (DWV) requirements. The Commissioner alleged that this program worked to substantially prevent competitors from gaining access to Canada Pipe's distributors and sought an order that would eliminate the program. The Tribunal accepted that Canada Pipe held a dominant position in the relevant markets, but concluded that Canada Pipe's conduct was not intended to have a negative effect that was predatory, exclusionary or disciplinary on competitors, did not prevent or lessen competition substantially, and was not likely to do so. On March 8, 2005, the Commissioner announced her intention to appeal the Tribunal's decision in the case.

While the Tribunal's decision in Canada Pipe does not significantly alter abuse of dominance or exclusive dealing law in Canada, it does reinforce the evidentiary burden on the Commissioner to demonstrate to the Tribunal that the alleged anti-competitive behaviour has or is likely to have substantial adverse effects on competition in order for the conduct of a dominant competitor to be found to violate the Competition Act (the Act). In Canada, dominance and exclusivity programs alone are not enough to constitute "abuse." The Tribunal's position is consistent with the general approach of U.S. courts in recent cases concerning exclusive dealing and loyalty programs (see, for example, Dentsply2and Virgin Atlantic3. It can be contrasted, perhaps, with the approach taken in some European cases, wherein it has been held that "it is not necessary to demonstrate that the abuse in question had a concrete effect on the markets concerned" but only that it is capable of or likely to do so.4

Markets and Market Power

The Commissioner successfully argued that the markets for cast iron DWV products are distinct from those of plastic DWV products. In this regard, the Tribunal was convinced that there were certain applications in which cast iron products were favoured and enjoyed a significant price advantage, and that price competition between plastic and cast iron products was weak as compared to price competition amongst cast iron products. The Tribunal also found that within the cast iron DWV category there existed three distinct markets - pipe, fittings and MJ couplings. As for geographic markets, the Tribunal concluded that there existed substantial price variations across different regions in Canada, such that six regional markets in Canada were indicated.

The Tribunal came to the conclusion, based on both direct and indirect evidence, that Canada Pipe had market power in all six regions for all three products. The Commissioner provided direct evidence of both relatively high profit margins for two of the three DWV products as well as differential pricing across regions, correlated with the degree of competition in each. As for indirect evidence, the Tribunal found that while the evidence of barriers to entry was not conclusive, Canada Pipe's high market shares of 80-90%, its range of products, its national presence and the limited penetration by competitors in this low-growth market were sufficient to establish that Canada Pipe controlled a substantial part of each market.

Practice of Anti-Competitive Acts

Under s.79 of the Act, the Commissioner is required to show that the dominant competitor has engaged in a "practice of anti-competitive acts" resulting in or likely to result in a substantial lessening of competition. The main allegation of the Commissioner was that the "Stocking Distributor Program" (SDP) of Canada Pipe "locked in" distributors, foreclosing competitors from distribution in each of the relevant markets. The Commissioner also alleged that past acquisitions and associated restrictive covenants had foreclosed competition. The Tribunal dismissed these latter allegations rather summarily. It noted that the last acquisition of Canada Pipe had occurred in 1998 and that new competitors had since entered the market and others had increased their sales. As regards the covenants restricting key individuals from acquisition targets from competing with Canada Pipe, the Tribunal found nothing out of the ordinary or unreasonable about their duration and scope.

The SDP rewarded a stocking distributor with rebates and discounts if it stocked exclusively Canada Pipe DWV products. The discounts varied across products and regions, but could result in a reduction of more than 40% in the price paid by the distributor. Quarterly and annual rebates could amount to more than 15% in some cases. The SDP did not involve a signed contract, but did require a minimum purchase that applied equally to small and large distributors.

The key issues the Tribunal addressed in concluding that the SDP did not comprise a practice of anticompetitive acts were the contractual nature of the SDP, its business justification, its impact on Canada Pipe's competitors and switching costs.

In the Tribunal's view, the SDP did not pose a significant contractual obstacle for distributors that wished to switch suppliers. While remaining or leaving the program would involve a cost-benefit analysis, the terms were transparent and there were no legal repercussions for leaving. The Tribunal also found that Canada Pipe has a bona fide business justification in using the SDP. While the Tribunal rejected as irrelevant Canada Pipe's argument that the SDP encourages competition between distributors (because it does not disadvantage smaller distributors), it accepted that the SDP was instrumental in allowing Canada Pipe to maintain more complete product lines. This meant that certain products were made available to distributors and end-customers through the SDP that might not have been made available without it.

As regards switching costs, which experts from both sides agreed would be the determining factor, the Tribunal found that although the SDP was an attractive program for a distributor, it did not prevent the distributor from considering other options, or from purchasing elsewhere if it were more advantageous to do so. Canada Pipe successfully argued that switching costs were zero at the end of each year of the SDP, and relatively low at the end of each quarter. In addition, the Tribunal found that distributors stayed with Canada Pipe for reasons other than the SDP, such as reliability, and that the size of the market did not warrant searching for another supplier.

Finally, the Tribunal found the "most striking argument" against the Commissioner's allegations to be the fact that the SDP had not prevented competitive entry from occurring in certain regions. In particular, it had not prevented an increase in imports of cast iron DWV products and even the emergence of a new manufacturer of the products. While the Tribunal found that entry might be difficult, the difficulty was not related to the SDP, but to other factors - namely that Canada Pipe is a known manufacturer with a complete product line and that the market for cast iron DWV products is not a growth market. Based on these findings, the Tribunal concluded that the SDP did not constitute a practice of anti-competitive acts, and thus no order was justified.

Substantial Lessening or Prevention of Competition

On the theoretical assumption that the Tribunal had erred in this assessment, it also went on to find that even if the SDP did constitute a practice of anti-competitive acts, it did not substantially lessen or prevent competition in any of the eighteen separate markets. In this regard, the Tribunal identified that there was significant evidence of competitive pricing in some regions due to imports and the emergence of a new manufacturer, and insufficient evidence about competition in other regions to support a conclusion that the SDP had lessened or prevented competition there.

Exclusive Dealing

In addition to abuse of dominance under s.79 of the Act, the Commissioner had alleged a violation of the exclusive dealing provision under s.77 of the Act. The Tribunal found that the SDP indeed constituted a practice of exclusive dealing. However, for the same reasons that it rejected the Commissioner's s.79 allegations, it also found that the Commissioner failed to establish that the exclusive dealing practice impeded entry, was likely to impede entry, or had substantially lessened competition in the relevant markets.

FOOTNOTES

[1] Commissioner of Competition v. Canada Pipe Company Ltd., 2005 Comp. Trib. 3 (Competition Tribunal).

[2] United States v. Dentsply International, Inc., No. 03-4097 (3d Cir. 2005).

[3]  Virgin Atlantic v. British Airways, PLC, 257 F.3d 256 (2d Cir. 2001).

[4] See, for example, British Airways plc v. Commission, T-219/99 [2003] E.C.R. 00000, 2003 E.C.J. CELEX LEXIS 659 (Dec. 17, 2003) at para. 293. This case is currently under appeal.

Bill C-19: Off Again-On Again

On March 9, 2005 The House of Commons Standing Committee on Industry, Science and Technology resumed consideration of Bill C-19, which proposes to amend the Competition Act by creating, among other things, stiff fines for abuse of dominance and misleading advertising practices.

Parliamentary Hearings Suspended on Canada's Competition Act Amendments (Bill C-19)

Susan M. Hutton

In a surprising turn of events, the House of Commons Standing Committee on Industry, Science and Technology voted on December 2, 2004 to suspend further discussion of Bill C-19, An Act to Amend the Competition Act and to Make Consequential Amendments to Other Acts, for an indefinite period. The Committee had only recently commenced hearings concerning Bill C-19, the Government bill proposing important changes to the abuse of dominance, pricing and misleading advertising provisions of the Act, among others (see the November, 2004 issue of The Competitor for details).

The Committee had already heard from several witnesses, including the Commissioner of Competition, Sheridan Scott, as well as representatives from various business and lawyers' groups including the Canadian Council of Chief Executives, the Competition Law Section of the Canadian Bar Association, and the Canadian Chamber of Commerce. Several other witnesses were scheduled to be heard, but their appearance has been postponed, along with further discussion of the bill.

The reason for the suspension actually has little to do with the bill itself ; an NDP Committee member proposed the motion out of frustration with apparent delays on the part of the Government to introduce promised legislation to make corporate fines and "administrative monetary penalties" (such as those proposed in Bill C-19 for abuse of dominance and for civil misleading advertising) non-deductible for income tax purposes. The other opposition MPs voted - for various reasons - with the NDP to pass the motion to suspend consideration of the bill, defeating the Liberal MPs in the process (most of whom then left the hearings).

The upshot is that Committee hearings were suspended a week earlier than they would otherwise have been for the holiday season. The Committee will resume its work in January when Parliament reconvenes, but when it will continue its consideration of Bill C-19 remains to be seen. It is likely only a question of time before deliberations resume, but the events of December 2 showed that with a minority government "anything can happen."

Competition Act Amendments:One Step Closer to Reality with Bill C-19

Kevin Rushton

On November 2, 2004, by tabling Bill C-19, the Canadian government took the first step toward implementing some of the long-debated amendments to Canada's Competition Act (the Act). If Bill C-19 manages to weave its way successfully through Canada's minority Parliament, it will implement the most wide-ranging changes in decades to Canada's competition legislation. Likely the most significant of these is the introduction of the additional remedy of fines ("administrative monetary penalties") for abuse of dominance, which should cause leading Canadian businesses to re-evaluate the way in which they operate.

Background to Bill C-19

Bill C-19 had its genesis in the Government's June 2003 discussion paper, Options for Amending the Competition Act: Fostering a Competitive Marketplace. Very briefly, the discussion paper proposed changes to the Act in four broad areas. The first area - which is the subject of Bill C-19 - was the strengthening of the Act's civil provisions by introducing additional remedies for non-merger offences (i.e., abuse of dominance, exclusive dealing, tied selling, market restriction and refusal to deal). The discussion paper proposed a trio of new sanctions: administrative monetary penalties (fines), restitution in cases of civil misleading advertising and deceptive market practices, and a private right of action for damages (currently confined to damages for behaviour that is criminal under the Act).

Secondly, the discussion paper proposed reforming the Act's criminal conspiracy section, and replacing it with a dual-track provision. A per se criminal provision would apply to anti-competitive agreements, such as those involving price fixing, market allocation and output restrictions. Other agreements between competitors that are generally pro-competitive but have the potential to prevent or lessen competition substantially would be subject to civil review. The amendments proposed in the discussion paper would also have repealed the Act's criminal pricing provisions, instead addressing discriminatory and predatory pricing under the abuse of dominance provision . Finally, the discussion paper proposed allowing the Commissioner to ask an independent and impartial body with economic expertise, such as the Canadian International Trade Tribunal, to inquire into the state of competition in any industry.

In April of 2004, the Public Policy Forum, an independent non-profit organization mandated to conduct public consultations about the proposals put forward in the discussion paper, submitted its final report. Suffice it to say that the consultations revealed sharp divisions amongst stakeholders with respect to most of the proposed amendments, including the proposal to make civil conduct, such as abuse of dominance, subject to administrative monetary penalties.

Bill C-19: An Overview

Bill C-19 deals with the first and third areas listed above: strengthening of the remedies for the civil provisions of the Act, and de-criminalization of the pricing provisions. There are, however, some key differences between Bill C-19 and the discussion paper proposals in these areas.

The most significant amendment - permitting the Competition Tribunal to, in essence, impose civil fines in respect of abuse of dominance - as proposed in Bill C-19, covers only abuse and not the other civil non-merger provisions. Whereas the discussion paper contemplated unlimited fines, Bill C-19 caps them at C$10 million for first offences and C$15 million for each subsequent offence. Secondly, Bill C-19 seeks to increase the maximum amount of AMPs in respect of deceptive marketing practices (already provided for in the Act), in the case of individuals, to $750,000 for a first offence (now $50,000) and $1 million for repeat offences (now $100,000). The maximum "civil" fine for corporations guilty of "civil" deceptive marketing practices will (if Bill C-19 passes in its current form) be increased to C$10 million for a first offence (now $100,000) and C$15 million for repeat offences (now $200,000). If the public comments on the discussion paper proposals are any indication, the imposition of such serious penalties for non-criminal behaviour may well be controversial. Moreover, the "decriminalization" of the pricing provisions (including predatory pricing, price discrimination and promotional allowances in sections 50 and 51 of the Act), might be said to be a question of form over substance if the Tribunal has the power to impose fines at the same level as those available for criminal convictions. Indeed, the lower burden of proof inherent in civil proceedings will facilitate enforcement of these provisions (although, for price discrimination and promotional allowances, the requirement under the abuse of dominance provision that they be proven to substantially lessen or prevent competition may limit the circumstances in which such proceedings might arise).

As indicated in recent Bureau speeches, the creation of a per se criminal conspiracy offence in respect of so-called "hard core" cartels, and a civil track for other anti-competitive agreements, is the subject of continued study. It is our understanding that the Competition Bureau is working on revised draft language and that another round of consultations on such changes will be held. Accordingly, Bill C-19 leaves the conspiracy provisions untouched.

No mention has been made of the proposed "inquiry" procedure put forth in the discussion paper. As comments were generally opposed to such an amendment, however, it is quite possible that this amendment will not be heard of again.

Finally, the Bill does contain a set of new amendments not originally proposed in the discussion paper. Specifically, Bill C-19 will repeal all of the Act's airline-specific provisions, including the expanded definitions of anti-competitive acts for the purposes of abuse of dominance, and the ability of the Commissioner herself to issue injunctive-like cease-and-desist orders against an airline. The latter provision has been held unconstitutional by the Québec Court of Appeal.

Significance of Bill C-19

Given the import of an expanded AMPs regime under Bill C-19, those at the leading edge of Canada's business community will undoubtedly have to re-think the risks involved with being "too" successful. Whether or not Bill C-19 will have the effect of "chilling" vigorous and effective competition, as is feared by so many, remains to be seen.

Bill C-19 passed first reading in the House on November 2, 2004.

For more information about the contents of this newsletter, please contact the author, Kevin Rushton or the editor, Susan Hutton.

Final Submissions Filed with Competition Tribunalin Canada Pipe Abuse of Dominance Proceeding

Kevin Rushton

Following a hearing in the spring of 2004, the Competition Tribunal (the Tribunal) received this past August the final submissions of the Parties in Canada Pipe1.

Market Definition in Dispute

In his 2002 Application, the Commissioner alleged that a "Stocking Distributor Program" (the Program) operated by Canada Pipe's Bibby Ste-Croix Division ("Bibby") was substantially lessening or preventing competition among manufacturers and importers in the markets for cast iron drain, waste and vent (DWV) pipe, fittings and mechanical joint couplings (the "Products"), in six Canadian regions2. During the period from 1998 to 2002, Bibby accounted for more than 85% of total sales of the Products in Canada and for 80% or more of total sales of the Products in each of the six geographic markets. The Program provided preferential discounts and rebates to customers who purchased the Products exclusively from Bibby.

The pleadings reveal that the Commissioner and Canada Pipe disagree fundamentally as to whether cast iron DWV pipe, fittings and couplings constitute markets separate and distinct from those for DWV pipe, fittings and couplings manufactured from other materials. Moreover, the Parties disagree on the process for and, indeed, even the necessity of, defining a relevant product market as an exercise separate from the assessment of power within that market. According to the Commissioner, "[w]here there is direct evidence of market power [eds: e.g., the ability to charge supra-competitive prices for a considerable period of time], a separate analysis of indirect indicators of market power (including the process of market definition) is redundant."3

If the Commissioner is indeed suggesting that the product market need not be defined separately from an assessment of market power, it would arguably mark a change in the method of legal analysis from that which was followed in previous abuse of dominance cases4, and in the Abuse of Dominance Guidelines5. Ultimately, as with so many such issues, the case will be decided on its own unique facts. Given the length of the submissions to date, the Tribunal appears to be amply supplied with those. 

FOOTNOTES

[1] The Commissioner of Competition v. Canada Pipe Company Ltd./Tuyauteries Canada Ltée, CT-2002-006.

[2] The six regions are B.C., Alberta, the Prairies (Saskatchewan and Manitoba), Ontario, Quebec and Atlantic Canada, and correspond to the six different pricing zones established by Bibby.

[3] Canada Pipe, Memorandum of Argument in Reply of the Commissioner, dated August 10, 2004, at para. 79.

[4] See, for example, Director of Investigation and Research v. Tele-Direct (Publications) Inc., CT-1994/003, Reasons and Order dated February 26, 1997, at p. 34:  "A necessary first step in deciding this case is to define the relevant market.  This must be done for purposes of section 79 ."

[5] To view the Enforcement Guidelines on the Abuse of Dominance Provisions, (Ottawa: Industry Canada), section 3.2.1. CLICK HERE

IMS Health: A Review of European and Canadian Approaches to the Interface of Competition and Intellectual Property Law

On April 29, 2004, the European Court of Justice (the ECJ) provided guidance on when, under European law, a company could be considered to be abusing its dominant position when it refuses to grant an intellectual property (IP) licence. This article will review the ECJ's decision in IMS Health GmbH & Co. OHG v. NDC Health GmbH & Co. KG, and then consider whether Canadian competition law can be used to compel an IP owner to license its IP to a third party.

The IMS Health case concerns the rights to IMS Health's proprietary system for collecting and distributing drug sales data. In 1988, an IMS Health director left the company to establish a competing business, which eventually adopted a new database structure resembling that used by IMS Health.

A German court prohibited the competitor from using the IMS Health structure, which the court found was a database protected by copyright. However, the German court also noted that IMS Health would not be permitted to refuse the competitor a licence to use the database structure if such a refusal constituted an abuse of a dominant position under European law. Accordingly, the German court referred several questions to the ECJ regarding the circumstances under which such behaviour could be considered an abuse of a dominant position.

In considering the interface between IP and competition laws, the ECJ started from the premise that a refusal of a licence cannot, in itself, constitute an abuse of a dominant position, except in "exceptional circumstances." Such exceptional circumstances would arise where: (1) the requesting firm intends to offer a product that is not offered by the copyright owner and for which there is potential consumer demand; (2) the refusal to grant the licence is not objectively justifiable; and (3) the refusal would reserve the relevant market to the copyright owner by eliminating all competition in that market.

The ECJ started its analysis from the premise that the mere refusal to license IP generally cannot in itself constitute an abuse of a dominant position. A similar starting point exists in Canadian law, but it does so in a unique legislative context. Under the Canadian Competition Act, acts engaged in pursuant to the exercise of statutory IP rights are not anti-competitive for purposes of the abuse of dominance provision (see ss. 79(5)). Section 32, however, deals specifically with the use of IP rights so as to prevent or lessen competition unduly. Upon application by the Attorney-General, the Federal Court can order a variety of relief, including compulsory licences, expungement, etc.

Canada's Competition Bureau (the Bureau) has addressed the distinction in its Intellectual Property Enforcement Guidelines (IPEGs). The IPEGs state that the owner's right to decide to use (or not to use) the IP and the owner's right to unilaterally exclude others from using the IP are considered to be mere exercises of an IP right. Thus, refusal to license IP is part of the "mere exercise" of an IP right, and is beyond the scope of the general provisions of the Competition Act, including abuse of dominance, "no matter to what degree competition is affected."

In contrast, s.32 may apply even where conduct is limited to the mere exercise of an IP right, but will be used only in certain narrowly defined circumstances. Interestingly, the exception crafted by the ECJ in IMS Health is not dissimilar to the analytical framework used by the Bureau to apply s.32. The Bureau regards enforcement under s.32 as being something that will be required only in "certain narrowly defined circumstances," based on criteria that will be satisfied "only in very rare circumstances."

In determining whether it should recommend enforcement action under s.32, the Bureau undertakes a two-part analysis. First, it determines whether the refusal has adversely affected competition to a substantial degree in a relevant market that is "different or significantly larger than the subject matter of the IP or the products which result directly from the exercise of the IP." According to the IPEGs, such a situation will arise only if (1) the IP owner is dominant in the relevant market; and (2) the IP is an essential input or resource for firms participating in the relevant market, such that the refusal prevents other firms from competing in the relevant market. Second, the Bureau will recommend enforcement action against the IP owner only if it is satisfied that such a remedy would not adversely alter the incentives to invest in research and development.

While s.32 of the Competition Act distinguishes Canadian competition law from its European counterpart, the ultimate analysis under the two regimes is not dissimilar. The first step of the Canadian analysis essentially addresses two of the ECJ's three criteria for finding that refusal of a license constitutes abuse. The ECJ's third requirement, that there be no objective justification for the refusal, has no specific counterpart in the Canadian approach. However, the Bureau's concern that a remedy not reduce the incentives to invest in research and development could serve this function - if, for example, the Bureau were to take the position that such incentives would only be adversely affected if s.32 were used against IP owners whose refusals were not justifiable on reasonable commercial grounds.

PPF Report on Proposed Amendments to Canada's Competition Act

Public Reaction to White Paper is Mixed

As reported in the July 2003 issue of The Competitor, the Government of Canada released a discussion paper on June 23, 2003 entitled Options for Amending the Competition Act: Fostering a Competitive Marketplace (the White Paper), which proposed significant amendments to Canada's Competition Act (the Act).

The White Paper generated significant public comment and debate, and the Public Policy Forum (PPF), an independent non-profit organization, was mandated by the Government to steer a consultation process, which included written submissions and roundtable discussions.

Based on the results of this consultation process, the PPF has released a report that summarizes public comment on the proposed amendments (click to view). Predictably, given the significance of the proposed amendments, the PPF report reveals a wide divergence of views. Although there is some support for each of the amendments, there is also some scepticism about the need for the proposed reforms, as many intervenors felt that the existing Competition Act is sufficiently effective in deterring anti-competitive behaviour and in encouraging competition. Further study of the specific reforms was also strongly advocated.

Briefly, the proposed amendments included:

  • strengthening the civil non-merger provisions of the Competition Act (such as abuse of dominance, tied selling, exclusive dealing, refusal to supply, etc.) through the institution of administrative monetary penalties (fines), private damage claims, and restitution (in cases of misleading representations);
  • creation of a per se criminal conspiracy provision (and a companion civil provision for non-criminal agreements between competitors), coupled with an "ancillary and necessary" defense and binding advisory opinions;
  • de-criminalizing predatory pricing, price discrimination and promotional allowances; and
  • allowing for inquiries into the state of competition in markets in Canada at the request of the Commissioner of Competition ("market references").

A brief overview of public comment on each category of proposed reform:

Strengthening the Civil Provisions

Widely divergent views were presented vis-à-vis the merits of providing additional penalties for the civil non-merger provisions. According to the PPF, while small and medium-sized business representatives and consumer groups generally supported the measures, a majority of respondents felt that the proposed reforms are unnecessary and that they could have a "chilling effect" on pro-competitive behaviour.

Reforming the Criminal Conspiracy Provision

The PPF reports significant concern in respect of the proposal to create a dual-track approach to agreements among competitors (i.e., a per se criminal offence to address "hard-core" cartel behaviour, and a civil provision for other agreements among competitors that may substantially lessen competition). Supporters of the reform cited the need to modernize the conspiracy provision, albeit in a cautious and careful manner. The majority of intervenors, however, were concerned that it would be very difficult to craft a provision that clearly distinguishes hard-core cartel conduct from potentially pro-competitive or competitively benign arrangements. There was also concern that the proposed pre-clearance process would impose undue costs and delays on business.

Reforming the Pricing Provisions

While there was general support for the proposal to decriminalize the predatory and discriminatory pricing provisions (as well as the related promotional allowances provision), the PPF reports that there were diverse and often diverging reasons for this support. A large majority of commentators agreed that the current provisions can discourage pro-competitive interactions, but debated the merits of addressing these practices under the umbrella of sections 78 and 79 (abuse of dominance). It should be noted, perhaps, that if strengthened in the manner proposed by the Government, dealing with pricing issues under abuse of dominance might result in broader rather than narrower enforcement than is currently the case.

Market References

On the basis that the Government should be better informed about the operation of certain industries and markets generally, there was some support for the proposal that the Commissioner of Competition be granted the power to ask (with the approval of the Minister of Industry) an independent body such as the Canadian International Trade Tribunal (CITT) to initiate inquiries into the state of competition and the functioning of markets in any sector of the Canadian economy. However, both supporters and opponents of this proposal questioned whether the CITT was the appropriate body to conduct such inquiries, and expressed apprehension that these market references could encourage politically or strategically motivated decision-making. The potential high cost for businesses and industry participants of conducting such references was also of concern. Finally, opponents questioned the necessity for this new power, maintaining that the Commissioner currently has all the tools necessary to investigate issues regarding anti-competitive conduct in an industry, and that the Government of Canada and Parliamentary Committees already have the authority to initiate and undertake similar investigations into the state of competition in a number of sectors.

With a federal election imminent and a new Commissioner of Competition, the Competition Bureau's omnibus amendments agenda has been on hold for several months. The new Commissioner appears to be taking a fresh look at the proposed amendments in light of the PPF report.  In that regard, the Commissioner invited a very select group of stakeholders to Ottawa on April 27, 2004 to discuss "technical" aspects of the proposed new remedies for the non-merger civil provisions, as well as de-criminalization of the pricing provisions.  Criminal conspiracy reform was not on the agenda.

 


This article can be found in the following Stikeman Elliott publications:

Reforming Competition Law in Canada: Evolution or Revolution?

An Overview of Proposed Changes to Canada's Competition Act
Paul Collins

On June 23, 2003, the Government of Canada released its much-anticipated discussion paper, entitled Options for Amending the Competition Act: Fostering a Competitive Marketplace (the White Paper).[1] The White Paper sets out potential amendments to the Competition Act (the Act) and reflects the analytical work done by the Competition Bureau over the past year, following the House of Commons Standing Committee on Industry, Science and Technology's April 2002 report, A Plan to Modernize Canada's Competition Regime.

The White Paper raises the prospect of sweeping changes to the Act that, if implemented, will have far-reaching repercussions for the business community.  Indeed, the proposed amendments would be the most significant changes to the Act since its enactment in 1986, and represent a veritable  seismic shift in the Canadian competition law landscape. 

The potential reforms  would affect four main  areas of the Act by:

  • strengthening the Act's civil provisions;
  • reforming the Act's criminal conspiracy provision;
  • reforming the pricing provisions of the Act; and
  • providing for industry inquiries into the state of competition.

A brief overview of the proposed amendments in respect of each of these categories follows.

Strengthening Civil Provisions

In an effort to "encourage businesses to refrain from anti-competitive practices" and to "promote international convergence,"[2] the White Paper identifies three significant potential reforms, each of which represents a dramatic departure from the current provisions of the Act. 

First, the White Paper raises the possibility of introducing administrative monetary penalties (AMPs) for civilly reviewable matters.  This proposal is apparently motivated by the notion that the current regime, in which remedies are limited to obtaining an order from the Competition Tribunal (the Tribunal) to stop anti-competitive conduct and/or restore competition,[3] provides "little incentive for businesses to comply with the Act."[4] The proposed reforms would allow the Tribunal to issue AMPs (the amount of which would be within the Tribunal's discretion,  based on specified criteria) for refusal to deal (section 75), consignment selling (section 76), tied selling (section 77), market restriction (section 77), exclusive dealing (section 77), abuse of dominant position (section 79) and delivered pricing (section 81).  Because of its proposed application to the Act's abuse of dominance provision, which is the broadest civilly reviewable conduct provision in the Act, this reform would be especially far-reaching insofar as it would expose a wide variety of practices to the threat of AMPs. 

The White Paper also  suggests significant amendments to the Act's misleading advertising and deceptive marketing provisions.  In particular, it raises the possibility of amending the Act to empower courts, on application by the Commissioner of Competition (the Commissioner), to order businesses or individuals who contravene the Act's misleading advertising and deceptive marketing provisions to provide restitution to consumers, possibly by the creation of a restitution fund or through an appointed fund administrator.  Restitution would be made available to all those in the class of persons likely to have been reached or affected by the conduct, and could be ordered in addition to any AMP imposed on the advertiser.      

Finally, the White Paper proposes a broadening of section 36, which creates a limited private right of action for persons who suffer damages as a result of breaches of either the Act's criminal provisions or of an order of a court or the Tribunal.  A proposed amendment to section 36 would allow for the recovery of losses or damages resulting from non-criminal conduct in respect of which a court or the Tribinual has made an order.  Thus, in addition to the Tribunal's ability to issue AMPs  for breaches of the Act's civil provisions, courts would also have the power to award compensation to any person (or class of persons) who has suffered loss or damage as a result of such conduct.  If enacted, this reform would expose businesses to the risk of monetary consequences on two fronts, which clearly represents a dramatic change from the current  situation, wherein breaches of most of the Act's civil provisions carry no risk of monetary penalty.

Reforming the Criminal Conspiracy Provision

The White Paper proposes a dual-track conspiracy provision, a notion that has been long debated in competition law circles.  As currently worded, section 45 of the Act makes it a criminal offence for anyone to conspire, combine, agree or arrange with another party to unduly lessen or prevent competition.  However, there is a concern that the criminal provision, as currently drafted, is simultaneously over-inclusive and under-inclusive in the sense that it may discourage pro-competitive strategic alliances yet fail to capture hard-core cartel behaviour.  In an effort to address this concern, the White Paper proposes creating (i) a per se criminal provision to address anti-competitive agreements such as price-fixing, market allocation, customer allocation and output restrictions between competitors or potential competitors, and (ii) a civil provision targeting all other agreements among competitors that, while generally pro-competitive, have the potential to prevent or substantially lessen competition in certain circumstances.  Conviction under the criminal provision would  carry a penalty of five years imprisonment or a fine in an amount determined by the court.  The civil provision would address instances of anti-competitive conduct by way of prohibition orders and AMPs issued by the Tribunal.

The White Paper also proposes a clearance procedure, under which the Commissioner  could provide an assurance to parties, in the form of a certificate, that a proposed course of conduct would not be prosecuted under the criminal conspiracy provisions, or that there would be insufficient grounds for the Commissioner to apply to the Tribunal for an order in respect of such conduct.  Such a procedure would resemble the system that already exists for mergers in the form of advance ruling certificates.  Implementation of a similar approach for the Act's conspiracy provision would, according to the White Paper, provide parties with certainty in respect of proposed strategic alliances, and thereby remove the "chilling effect" on pro-competitive alliances that would result from the threat of criminal sanctions.   

Reforming Pricing Provisions

The Act's pricing provisions deal with price discrimination, predatory pricing and promotional allowances and are subject to criminal sanction.  There is widespread consensus, however, that such practices are better addressed by a civil provision with a competition effects test.   Accordingly, the White Paper proposes that the criminal pricing provisions (sections 50 and 51) be repealed and that discriminatory or predatory pricing conduct be dealt with under the Act's abuse of dominance provision (section 79), and therefore be subject to the requirement that such conduct must have the effect, or likely effect, of substantially lessening or preventing competition before it attracts remedial action under the Act.  If other proposals for reform are implemented, the Tribunal would also have the power to order AMPs and injured parties would continue to have the ability to seek civil damages under section 36  for anti-competitive pricing practices. 

Inquiries into the State of Competition

The final proposed reform set out in the White Paper would allow the Commissioner to ask an independent body, such as the Canadian International Trade Tribunal, to inquire into the state of competition and the functioning of markets in any sector of the Canadian economy.  The Commissioner currently has no such wide-ranging  powers but rather  is restricted in this regard to launching an inquiry to investigate  allegations of anti-competitive conduct in respect of one or more businesses or individuals.   According to the White Paper, the introduction of more broadly based inquiries would "provid[e] thorough and valuable insights into various industry sectors, which would not be available otherwise."[5]

The proposed reforms represent a dramatic departure from the current state of the law in Canada, and signal far-reaching consequences for firms operating in Canada.  Perhaps of greatest significance to the business community is the prospect that penalties and damages would be imposable in a much broader range of circumstances than at present.

The Government is currently accepting comments on the White Paper, which should be submitted to the Public Policy Forum (a public policy research firm retained by the Competition Bureau to coordinate the consultations process).  Given the broad scope of the proposed changes and their potential impact, the White Paper is expected to generate considerable interest  and debate.Comments must be submitted by September 30, 2003.


[1] The full text of the White Paper is available from the Public Policy Forum's website at: http://www.ppforum.com/

[2]White Paper, at 5.

[3] The Act currently  permits civil damage awards  for breaches of its criminal provisions and of orders issued by a court or by the Tribunal.  It also allows the Tribunal to issue monetary penalties in two limited circumstances, namely abuse of dominance by airlines and deceptive marketing practices.

[4] White Paper, at 6.

[5] White Paper, at 22.

Appeal Court Strikes Down Commissioner's Power to Issue Temporary Orders

D. Jeffrey Brown

As a result of a recent decision of the Quebec Court of Appeal, the Commissioner of Competition has lost what he had touted as an essential tool in his arsenal for controlling potential anti-competitive conduct by Air Canada.  In a unanimous judgment dated January 16, 2003, the Court held that section 104.1 of the Competition Act, which empowered the Commissioner to issue "temporary orders" against a dominant air carrier without prior notice to the carrier or prior judicial approval, is inoperative on the basis that it is inconsistent with paragraph 2(e) of the Canadian Bill of Rights.

The Commissioner's Power

Section 104.1 was among a number of amendments made to the Act in 2000 at the urging of the Commissioner in response to Air Canada's acquisition of Canadian Airlines.  It empowered the Commissioner to issue orders prohibiting a dominant carrier "from doing an Act or a thing that could, in the opinion of the Commissioner, constitute an anti-competitive Act or requiring the person to take steps that the Commissioner considers necessary to prevent injury to competition or harm to another person."  Section 104.1 expressly stated that the Commissioner "is not obliged to give notice to or receive representations from any person" before making such an order and, unlike other injunctive powers in the Act, it allowed him to issue orders on his own initiative without the necessity of obtaining prior judicial approval for the order.  Section 104.1 also provided that the orders, once issued, were effective for an initial period of twenty days and extendable, at the Commissioner's option, for one or two periods of thirty days each.

According to the Commissioner, section 104.1 was necessary to allow him to respond in a timely fashion to potentially anti-competitive conduct by Air Canada. The unusual power was supported by some, but it was seen as heavy-handed and unnecessary by others, including the National Competition Law Section of the Canadian Bar Association, which criticized section 104.1 as "an unwarranted interference with due process" that raised "serious questions concerning its legality and constitutionality."

Air Canada's Challenge

In October 2000, following a complaint to the Competition Bureau that Air Canada had engaged in conduct constituting an abuse of dominant position pursuant to section 79 of the Act, the Commissioner issued his first (and only) order under section 104.1 of the Act.

In addition to an unsuccessful attempt by Air Canada to have the Competition Tribunal set aside the order, Air Canada commenced proceedings in the Quebec Superior Court, challenging the validity of section 104.1 itself.  While Air Canada's attempt to invalidate section 104.1 before the court of first instance did not succeed, its successful appeal means that section 104.1 has been declared inoperative on constitutional grounds.

As the Court noted in its decision, Air Canada's challenge relied on paragraph 2(e) of the Canadian Bill of Rights as well as section 96 and the preamble of the Constitution Act, 1867.  The Court, however, focused on the first of these arguments, which it decided in Air Canada's favour.

The Canadian Bill of Rights

Paragraph 2(e) of the Canadian Bill of Rights provides as follows:

2. Every law of Canada shall, unless it is expressly declared by an Act of the Parliament of Canada that it shall operate notwithstanding the Canadian Bill of Rights, be so construed and applied as not to abrogate, abridge or infringe or to authorize the abrogation, abridgement or infringement of any of the rights or freedoms herein recognized and declared, and in particular, no law of Canada shall be construed or applied so as to

(e) deprive a person of the right to a fair hearing in accordance with the principles of fundamental justice for the determination of his rights and obligations.

According to Air Canada, section 104.1 of the Competition Act violated the rights protected by paragraph 2(e) by infringing the principles of natural justice audi alteram partem (the right to be heard) and nemo judex in sua causa (no person can judge a case in which he or she is party).

While Air Canada's arguments seized on the obvious due process deficiencies of section 104.1, the Commissioner and the Attorney General responded by denying that paragraph 2(e) applied at all and by further arguing that, even if it did, section 104.1 did not violate Air Canada's rights of fundamental justice in any event.The Court, as noted below, had little difficulty rejecting the Commissioner's and the Attorney General's arguments.

The Decision

As a preliminary matter, the Court examined the Commissioner's functions more generally under the Act, noting that, as head of the Competition Bureau, he is charged, "d'abord et avant tout" (first and foremost) with conducting inquiries respecting the application of the Act.  To this end, the Commissioner is given a number of powers, including the power, with prior judicial approval, to conduct searches and to compel the production of documents and written returns and the attendance of persons for examination under oath. If, as a result of an inquiry, the Commissioner concludes that enforcement Action is warranted, he may refer the matter to the Attorney General for criminal prosecution or, in the case of civilly reviewable conduct, including abuse of dominance, he may apply to the Competition Tribunal for a remedial order, thereby assuming the role of prosecutor.

Viewed in this context, the Court characterized the Commissioner's section 104.1 power as "inhabituel" (unusual) and his overlapping roles as being ill-suited to the impartiality required of an adjudicator, especially given the "vaste" potential of the provision's reach.The Court underscored the unusual nature of section 104.1 by comparing it to section 103.3 of the Act, which provides for the issuance of similar temporary orders on a general, rather than industry-specific basis.  In contrast to section 104.1, section 103.3, which was added to the Actin June 2002, requires that the Commissioner apply to the Competition Tribunal for such orders and provides that they have effect for an initial period of ten days.

In light of these factors, the Court proceeded to address, and reject, arguments put forward by the Commissioner and Attorney General denying the application of 2(e) of the Canadian Bill of Rights to section 104.1.Among the arguments rejected by the Court were that:

    paragraph 2(e) cannot be used to invalidate a subsequently enacted legislative provision;

  • any rights of Air Canada affected by section 104.1 are economic in nature, which rights are not protected by paragraph 2(e) of the Canadian Bill of Rights;
  • the rules of fundamental justice do not apply in the context of section 104.1, because the Commissioner is an administrative rather than a judicial official; and
  • the rules of fundamental justice do not entitle Air Canada to a hearing prior to the issuance of an order, because such orders are of a temporary, non-final nature.
  • More specifically, the Court rejected these arguments for reasons including:
  • Canadian courts and tribunals, including the Supreme Court of Canada, have consistently recognized, for more than twenty-five years, that the Canadian Bill of Rights, which was enacted by Parliament in 1960 in the form a federal statute, is quasi-constitutional in nature and provides valid authority for declaring inconsistent federal statutes inoperative;
  • The scope of rights protected by paragraph 2(e) is broad, including economic rights;
  • While the Commissioner is an administrator, the power at issue has all of the characteristics of an injunction, affects the rights of several persons, involves the application of rules to specific individuals rather than the application of social and economic policy in the broader sense and provides for such a wide array of remedies, for periods of up to eighty days, that it is reasonable to expect that a person subject to such orders will have a right to be heard by an impartial adjudicator prior to their issuance; and
  • while section 104.1 orders are temporary in the sense that they are for an interim period, such orders are "final" in that they have an immediate and direct impact, possibly of an irreparable nature, on the subject carrier, with the result that the rules of fundamental justice apply to such orders.

Having determined that paragraph 2(e) of the Canadian Bill of Rights applies to section 104.1, the Court then addressed whether section 104.1 offended the rules of natural justice invoked by Air Canada, namely nemo judex in sua causa and audi alteram partem. Again, the Court had little difficulty concluding that it did.  Given the Commissioner's dual role as investigator and prosecutor, the Court concluded that he lacks the requisite impartiality to act in a "judicial manner" in the issuance of section 104.1 orders.  Similarly, it seemed "évident" from section 104.1 that Air Canada could be subject to an order for as much as eighty days without the benefit of a hearing, thereby violating its right to be heard.

Finally, while paragraph 2(e) does not expressly provide for a "saving" mechanism whereby inconsistencies may be sustained on the basis of some reasonable justification, the Court accepted that such a mechanism may exist in exceptional circumstances.  In the case of section 104.1, however, the Court was not satisfied that such exceptional circumstances exist.  The Commissioner and Attorney General had submitted some evidence of urgency in support of the provision, but the Court was not satisfied by the evidence that the urgency (e.g., the potential for harm to a carrier competing with a dominant carrier "in a very short period of time" and depletion of its working capital "in days or weeks, not in months or years") was such as to preclude a court or specialized tribunal from issuing such orders.  Indeed, such entities deal with urgent matters on a daily basis, including the Competition Tribunal, which, as a result of the addition of section 103.3 of the Act, now enjoys a similar power to that contained in section 104.1, thereby evidencing Parliament's view that a specialized tribunal is in fact capable of fulfilling the function conferred upon the Commissioner by section 104.1.

Conclusion

The Quebec Court of Appeal's decision is a significant blow to the Commissioner, given the importance that he has publicly ascribed to section 104.1 following Air Canada's acquisition of Canadian Airlines.  At the same time, the existence of section 103.3 in the Act  means that he continues to have the ability to obtain orders of the sort provided for in section 104.1.  Such orders, however, must be obtained through an impartial adjudicator, namely the Competition Tribunal, and, while available on an ex parte basis, will be effective for an initial period of only ten days and extendable thereafter only on application to the Tribunal with notice to the affected carrier.  In short, the decision replaces the "unusual" power in section 104.1 of the Act with section 103.3 and its more conventional approach to the issue of interim injunctive relief.

To date, the Commissioner and the Attorney General have not indicated whether they intend to seek leave to appeal the decision to the Supreme Court of Canada.

FOOTNOTES


[1] Stikeman Elliott LLP acted as counsel to Air Canada in this proceeding.

[2] The Court also addressed, albeit briefly, section 96 of the Constitution Act, 1867, concluding that it did not apply to section 104.1.