Supreme Court of Canada allows indirect purchasers of products to sue for damages

Katherine Kay, Danielle Royal, Mark Walli, James S.F. Wilson and Alexandra Urbanski -

The Supreme Court delivered its long-awaited rulings on October 31 in proposed class actions involving claims for damages for alleged competition law violations brought by “indirect purchasers” of products (Pro-Sys v. Microsoft, Sun-Rype v. Archer Daniels Midland and Infineon Technologies AG c. Option Consommateurs). Indirect purchasers are purchasers of a product (or of another product containing the initial product) who seek recovery for overcharges that are alleged to have been “passed on” to them through the chain of distribution for the initial product. The primary issue in each case was whether indirect purchasers have a legal cause of action allowing them to sue for damages (which typically happens by way of a class action). The Supreme Court held that they do.

In Microsoft, the plaintiffs brought a class action on behalf of indirect purchasers who alleged that the corporation had conspired with manufacturers (among others) to raise the price of its operating systems and software, and that these overcharges were passed on to purchasers of computers. The Sun-Rype case was brought on behalf of a proposed class which consisted of direct and indirect purchasers of high fructose corn syrup (“HFCS”) or products containing HFCS, who similarly alleged that manufacturers had conspired to fix the price of HFCS and that the unlawful overcharges were passed on to class members. Both of the actions were certified as class proceedings in the Supreme Court of British Columbia, but those certifications were reversed by the Court of Appeal in 2011, on the basis that indirect purchasers have no cause of action recognized in law.

On October 31, 2013, the Supreme Court overturned the British Columbia Court of Appeal and ruled that the injury suffered by indirect purchasers is recognized at law, as is their right to bring actions to recover for those losses. Microsoft was treated as the “lead case”. Justice Rothstein, writing for the Court, affirmed that defendants in these kinds of actions could not escape liability for unlawfully increasing prices because the increases were passed on to other consumers; in other words, passing on is not a defence available to a defendant to avoid liability in respect of price increases paid by direct purchasers. Nonetheless, indirect purchasers could seek to recover losses that had been passed on to them. Answering the various objections to this conclusion that have been raised in the case law, Rothstein J. held that: (1) the risks of multiple recovery and the concerns of complexity and remoteness that arise in these situations are insufficient bases for precluding indirect purchasers from bringing actions to recover overcharges that may have been passed on to them; (2) the deterrence function of the competition law in Canada is not likely to be impaired by indirect purchaser actions (indeed, sometimes an indirect purchaser action will be the only means by which overcharges are claimed and deterrence is promoted); (3) allowing these kinds of actions promotes restitutionary principles; that is, the principle of allowing parties who have suffered a harm to be compensated for that harm; (4) persuasive authorities for the contrary view (in particular, longstanding holdings in the U.S.) have come under criticism; and (5) the doctrinal commentary has come to favour the SCC’s conclusion.  Regarding the potential for over-recovery of damages, the Court acknowledged that absent a claim by indirect purchasers, direct purchasers would recover 100% of overcharges; however, that entitlement would be altered when indirect purchasers were included in an action. The Court stated that courts can deny or reduce awards to indirect purchasers where the defendants show that double recovery would occur because of settlements or awards in parallel (foreign) proceedings.

In considering the applicable evidentiary standard, the Court emphasized that the class action certification test is not a merits test. The class representative must show some basis in fact for each of the certification requirements set out in the provincial class action legislation, other than the requirement that the pleadings disclose a cause of action. The Court also stressed that while evidence has a role to play in the certification process, the standard of proof does not require evidence on a balance of probabilities. Rather, there must be sufficient facts to satisfy the judge hearing the certification application that the conditions for certification have been met to a degree that should allow the matter to proceed on a class basis without foundering at the merits stage. The Court acknowledged that the most contentious question involving the use of expert evidence is how strong the evidence must be at the certification stage to satisfy the court that there is a method by which impact can be proved on a class-wide basis. The Court held that the expert methodology must be “sufficiently credible or plausible” to establish some basis in fact for the commonality requirement. This means that the methodology must offer a “realistic” prospect of establishing loss on a class-wide basis. The methodology cannot be purely theoretical or hypothetical, but must be grounded in the facts of the particular case in question; there must be some evidence of the availability of the data to which the methodology is to be applied.

The Supreme Court applied these holdings to Sun-Rype but, in that case, declined to certify the indirect purchaser class because the plaintiff had failed to meet one element of the certification test: the requirement that there be an identifiable class. The respondents’ evidence was that HFCS and liquid sugar were used interchangeably by direct purchasers during the class period and that a generic label could be used for either type of sweetener. As a result, a consumer who purchased an output product (like a soft drink) could not know whether it actually contained HFCS. The majority of the Court found that the plaintiff had adduced no evidence that could help to overcome the identification problem; indeed, on the evidence presented, it appeared to be impossible to determine class membership. Justices Cromwell and Karakatsanis, in dissent, held that this was setting the evidentiary standard too high.

Notably, in both of these cases, the Supreme Court struck the plaintiffs’ claims based on the doctrine of constructive trust because they disclosed no cause of action. In Microsoft, for example, the plaintiffs claimed, as a remedy for the alleged unjust enrichment of the defendants at class members’ expense, a “constructive trust” over an amount equal to the overcharges; in other words, they asked the court to declare that, as a matter of equity, the defendants were holding the amount of the overcharge in trust for the class members. In previous cases, the Supreme Court had characterized the constructive trust mechanism as a broad and flexible equitable tool used to determine beneficial entitlement to property when a monetary award was inappropriate or insufficient; for example, where a plaintiff had contributed to the development of a specific property and was entitled to a share of it. Here, because the plaintiffs had neither explained why a monetary award was inappropriate or insufficient in the circumstances of the case, nor demonstrated a link between their claim and specific property, they could not satisfy the conditions necessary to ground a claim for a constructive trust. The Court reached the same conclusion in Sun-Rype.

The policy rationale for allowing indirect purchasers to assert passing on as a cause of action was also relevant to Infineon, a case decided under the law of Quebec, and which also raised issues of jurisdiction and the test for certification of a class action in Quebec. That case involved manufacturers of dynamic random-access memory or DRAM, a microchip component of electronic devices, who had acknowledged in other international proceedings having participated in a conspiracy to fix prices. The proposed class in the case included direct as well as indirect purchasers of DRAM. The petitioner was a resident of Quebec who purchased a computer online; it was alleged that the manufacturers had breached the Competition Act and therefore committed a fault giving rise to civil liability under the Civil Code of Quebec. The Supreme Court was satisfied that the facts as alleged demonstrated that damage had been suffered in Quebec, satisfying the jurisdictional requirements of the Civil Code. With respect to authorization (the Quebec analogue to certification), the Court affirmed that the standard is relatively low under the Quebec Code of Civil Procedure: the petitioner need only demonstrate an “arguable” case, by means of allegations and some supporting evidence, that the facts as alleged seem to justify the conclusions sought; in light of that standard a petitioner was neither expected nor required to adduce expert testimony and advance a sophisticated methodology at the certification stage. In the result, for policy reasons, the passing on of price increases could ground a class action (evidentiary concerns, such as the risk of double-recovery, could be assessed on a case-by-case basis). If the petitioner were unable to demonstrate at trial how the loss was passed on and how it was to be calculated, the action would fail at that stage.

While these decisions have been described by some as a “landscape change”, a more temperate assessment is that they represent the latest expression from an appellate court of the unwillingness of Canadian courts to perform a merits assessment of a proposed class action at the certification stage. The Court has affirmed the right of indirect purchasers to sue, which is a right that seemed apparent on the legislative language. Beyond that, the Court indicated that a plaintiff has to do something more than simply say “we can do it”; a methodology grounded in fact and anchored in available data is required.  The Court also recognized the potential for double-recovery and the need to guard against that result, and its suggestions for avoiding double-recovery raise interesting complexities and challenges of proof for both sides.  There is much to digest in the decisions, and much to explore as these competition class actions make their way through the certification process and beyond.
 

Competition Bureau introduces criminal cartel whistleblowing initiative

In remarks delivered to the Canadian Bar Association, Commissioner of Competition John Pecman (then interim Commissioner) announced a new whistleblowing program developed by the Competition Bureau’s Criminal Matters Branch. The Criminal Cartel Whistleblowing Initiative will encourage members of the public to provide information to the Competition Bureau regarding possible violations of sections 45 to 49 of the Competition Act, i.e., the criminal cartel provisions which prohibit, among other things, agreements or arrangements among competitors to fix prices, allocate markets, restrict output or rig bids.

The Competition Act and the Criminal Code already provide for a variety of protections to whistleblowers. The Competition Act provides that any person who has reasonable grounds to believe that a person has committed (or intends to commit) an offence under the Act may notify the Commissioner of the particulars of the matter and may request that his or her identity be kept confidential with respect to the notification. The Competition Act also bars retaliation by employers against whistleblowers who act in good faith and on the basis of reasonable belief. The Criminal Code contains broader protections for whistleblowers who provide (or intend to provide) information to anyone responsible for law enforcement with respect to any kind of offence (under any federal or provincial act or regulation) committed by someone in their organization (including directors and officers and other employees).

The Competition Bureau’s new whistleblowing initiative augments these provisions by highlighting the Bureau’s particular interest in receiving information about possible violations of the criminal cartel provisions of the Competition Act, and by introducing a toll-free telephone number for the Bureau’s Information Centre for that purpose (tel.: 1-800-348-5358; TDD for the hearing impaired: 1-800-642-3844; fax: 1-819-997-0324).

In describing the program, the Bureau notes how information that is reported can be used by the Bureau, explaining (for example) that it may be communicated to a Canadian law enforcement agency and may also be communicated for the purposes of administration or enforcement of the Act – with the caveat that the Bureau will ensure that any information provided by a whistleblower that is communicated in these circumstances does not reveal the identity of the whistleblower. The Bureau also notes that, depending on the circumstances, a whistleblower may be asked (but will not be required) to testify in court. (Issues regarding the interplay between the assurances provided by the Bureau and the Charter rights of an accused are not addressed in the program.)

Finally, the Bureau stresses that how much personal information the whistleblower provides is a matter of his or her own discretion, while noting that it may be impossible for the Bureau to act on the information provided (or in some situations, to protect the whistleblower’s identity) unless sufficient personal information is offered with the complaint.

In recent years, the Bureau has emphasized the effectiveness of its Immunity and Leniency programs, although some commentators have questioned whether the Bureau can develop stronger incentives to companies to self-report. The Commissioner has framed the new whistleblowing initiative in similar terms. In announcing the program, the Commissioner characterized it as an effort to “support increased reporting of anti-competitive behaviour, while ensuring the protection of individuals who come forward with such information”.

Criminal charges laid in Canadian chocolate cartel

On Thursday, June 06, 2013, the Competition Bureau laid criminal charges against three corporations and three individuals for their roles in allegedly fixing the price of chocolate confectionery products in Canada.

The alleged price-fixing occurred before the 2010 amendments to the Competition Act, and the accused have been charged under the criminal cartel provision in the old section 45. Under that provision, the Bureau must prove not only that there was an agreement between competitors to fix prices but also that the agreement had or was likely to unduly lessen competition in a market. If convicted, the accused face fines of up to $10 million and/or a prison term of up to five years.

The three corporations charged are Nestlé Canada Inc.; Mars Canada Inc.; and ITWAL Limited, an independent wholesale distribution network. The three individuals charged are Robert Leonidas, former President of Nestlé; Sandra Martinez, former President of Confectionery for Nestlé; and David Glenn Stevens, current President and CEO of ITWAL. Reports indicate the accused intend to defend the charges.

The Bureau learned of the alleged price-fixing through its Immunity Program. Under the Program, the Public Prosecution Service of Canada (PPSC) may grant immunity or leniency to the first party who discloses an undetected conspiracy or to provide evidence leading to a referral of evidence to the PPSC. Hershey Canada Inc. cooperated with the Bureau throughout its investigation and the Bureau has recommended to the PPSC that Hershey receive lenient treatment. Hershey is expected to plead guilty on June 21, 2013 for its role in the chocolate price-fixing conspiracy.

House arrest off the table for cartels and bid-rigging

Mark Walli and Graeme Deuchars-

On November 20, 2012, amendments to the Criminal Code of Canada under the Safe Streets and Communities Act (the SCCA) came into force, restricting the availability of conditional sentences for individuals convicted of certain offences, including conspiracy to fix prices and bid-rigging under the Competition Act. Conditional sentences are non-custodial punishments, such as house arrest, that may only be assessed where the judge determines the offender is not a danger to the community. While these amendments were not specifically directed at Competition Act offences, the result of the legislative changes is to eliminate the discretion to allow for serving custodial sentences for serious Competition Act offences in the community.

The SCCA, introduced in 2011, included a slate of amendments to the Criminal Code and other legislation which the Department of Justice stated were intended to “combat crime and terrorism”. Among other things, the SCCA provides that conditional sentences are unavailable for all offences for which the law prescribes a maximum term of imprisonment of 14 years or more – this includes cartel agreements among competitors, bid-rigging and willful or deceitful misleading advertising under the Competition Act.

The sentencing changes now in effect under the SCCA follow upon sweeping amendments to the Competition Act in March 2009, which, among other changes, created a per se cartel offence (in effect since March 2010, which prohibits agreements among competitors to fix prices, allocate markets or limit production, whether or not such an agreement had an impact on competition in a relevant market) and increased the maximum punishment for offences such as price-fixing, bid-rigging and willful or deceitful false advertising from five to 14 years.

The new sentencing regime should also be considered in light of the dissatisfaction recently expressed by the Federal Court with joint sentencing recommendations for fines as part of agreements to plead guilty with respect to criminal offences under the Competition Act. In R. v Maxzone Auto Parts (Canada) Corp., a case involving a charge of criminal conspiracy under section 46 of the Competition Act (implementation of a foreign directed cartel), Chief Justice Crampton of the Federal Court observed that “… achieving effective general and specific deterrence requires that individuals face a very real prospect of serving time in prison if they are convicted for having engaged in such conduct”. Finding that past practice gave rise to “understandable expectations” regarding sentencing, the Chief Justice “reluctantly” imposed the jointly recommended sentence of a substantial fine in that case.

A move toward custodial sentences for criminal convictions under the Competition Act may have far-reaching implications for the Competition Bureau's enforcement regime, including participation in its Leniency Program, whereby an accused agrees to cooperate with an investigation in exchange for a prosecutorial recommendation of more lenient treatment. The removal of conditional sentences (and judicial discontent over fines instead of prison terms) may well discourage participation in the program, as accused persons weigh the risks of what "leniency" may entail. Indeed, if jail time is seen as the likely result of criminal conviction for competition offences, there may well be less cooperation, fewer guilty pleas and more contested trials on the horizon in Canada.
 

Competition Bureau disputes public statement by RBS Group

Michael Laskey -

On November 14, the Competition Bureau published a news release disputing a statement made by the Royal Bank of Scotland Group (RBS) related to the Bureau’s ongoing investigation of alleged collusive conduct in the setting of the LIBOR benchmark rate. In its third-quarter Interim Management Statement, RBS stated that it was “co-operating fully” with investigations by the Bureau and other regulators. The Bureau’s news release argued that this statement was false, in light of the fact that RBS had not applied to its leniency or immunity programs and that RBS had challenged a court order obliging it to produce documents in connection with the Bureau’s investigation.

In its reply, RBS emphasized that it did want to cooperate with the Bureau, but that the production of documents requested by the Bureau would violate privacy laws in the United Kingdom. RBS stated that it had offered a number of alternative mechanisms, but that the Bureau had refused such offers.

This is not the first time the Bureau has intervened when it believed a public statement by a company was inaccurate. In September 2011, the Bureau required Beiersdorf Canada Inc. to correct an allegedly inaccurate public statement the company made in relation to a settlement it had reached with the Bureau. Businesses should take note that the Bureau is active in monitoring comments they make in the press and in public disclosure filings.

Bureau's investigation into aftermarket auto parts industry results in $1.5 million fine for price-fixing

Susan M. Hutton and Robert Mysicka -

On May 4, 2012 the Competition Bureau announced that Maxzone Auto Parts (Canada) pleaded guilty to price-fixing for its participation in an international cartel involving aftermarket replacement automotive lights.  Maxzone was fined C$1.5 million under subsection 45(2) of the Competition Act which provides for imprisonment and/or a maximum fine of C$25 million for the offence of conspiracy to fix prices between competitors.The products that were the subject matter of the conspiracy consisted primarily of headlights and tail lights purchased by auto parts supply companies in Canada for use as replacement parts in automobiles.

Maxzone admitted to implementing an agreement with its competitors that fixed the price of aftermarket automotive lights in Canada from January 2004 to September 2008. The products that were the subject matter of the conspiracy consisted primarily of headlights and tail lights purchased by auto parts supply companies in Canada for use as replacement parts in automobiles.

The Bureau’s investigation in this case benefited from cooperation under its Immunity and Leniency Programs. The Immunity Program allows for the first party to disclose to the Bureau the existence of an offence that has not yet been detected or to provide evidence leading to the filing of charges may receive immunity from prosecution from the Director of Public Prosecutions of Canada (DPP) as long as the party co-operates with the Bureau in its investigation. Under the Leniency Program, the Bureau may recommend to the DPP that cooperating persons who have breached the cartel provisions under the Competition Act, who are not eligible for a grant of immunity, nevertheless be considered for lenient treatment in sentencing.

Quebec construction companies plead guilty to bid-rigging in Chicoutimi hospital expansion project

Susan Hutton and Robert Mysicka -

On February 17, the Competition Bureau announced that three construction companies—Construction G.T.R.L. (1990) Inc., Acoustique JCG Inc., and Entreprises de Construction OPC Inc.—have pled guilty to charges of bid-rigging in a construction project involving the expansion of the Chicoutimi hospital. The case comes less than half a year after a similar bid-rigging scheme involving ventilation companies in Montreal was uncovered and prosecuted, resulting in the imposition of a substantial fine and a prohibition order.

The companies involved in the Chicoutimi hospital bid-rigging scheme were handed down the following fines by the Quebec Superior Court of Justice:

  • Construction G.T.R.L. was ordered to pay a CDN $ 50,000 fine.
     
  • Acoustique JCG Inc. and Entreprises de Construction: were each ordered to pay a CDN $ 25,000 fine.

In addition to the foregoing, the companies will be subject to a court order for 10 years following the date of conviction.

Bid-rigging, which is defined in section 47 of the Competition Act, prohibits bidders from entering into an agreement not to submit bids or to submit pre-arranged bids when responding to a bid or tender call. The criminal sanction under section 47 applies if the person calling for the bids is not made aware of the agreement at or before the time when the bid or tender is submitted or withdrawn. In this case, the Bureau’s investigation revealed that the parties entered into an agreement that pre-determined the winner of the contracts for the expansion of the emergency room at the Chicoutimi hospital in 2003.

The Commissioner of Competition, Melanie Aitken, commented on the harmful effects of bid-rigging, saying “in this case, the bid-rigging scheme ultimately harmed the Chicoutimi Hospital and Saguenay residents, by preventing the hospital from obtaining a competitive price for its renovation.”

We will continue to monitor civil and criminal enforcement actions under the Competition Act as they arise. For more information on Canada's Competition Act and Investment Canada Act, see our primer here.

Qu├ębec Court of Appeal authorizes price-fixing class action involving indirect purchasers

Sultana L. Bennett -

On November 16, 2011, the Québec Court of Appeal issued a judgment unanimously reversing the 2008 Québec Superior Court decision in Option Consommateurs v. Infineon Technologies AG dismissing the motion for authorization to institute class action proceedings. Significantly, the class includes both direct and indirect purchasers, and the Quebec decision thus follows the dissent in the 2011 British Columbia Court of Appeal decision in Sun-Rype Products Ltd. v. Archer Daniels Midland Company, holding that the defendants would not face an unfair risk of double recovery because the plaintiffs alleged a single, aggregate loss notwithstanding the mix of direct and indirect purchasers in the class.

Background and Decision in the Superior Court

The defendants were manufacturers of dynamic random access memory or “DRAM,” a semiconductor memory product used in electronic devices, each of whom had admitted participation in a price-fixing conspiracy between 1999 and 2002 and all but one of whom had pleaded guilty to Sherman Antitrust Act violations arising from that conduct in the United States.

In its motion to institute the proceedings in Québec Superior Court, Option Consommateurs, a consumer advocacy organization, alleged that the defendants failed to respect statutory obligations under the Competition Act, and breached the general extracontractual duties imposed upon them by the Civil Code of Québec. Claudette Cloutier, a Montreal resident, sought status as the designated representative in the proceedings on behalf of direct and indirect purchasers of DRAM in Québec. In October 2001, Cloutier had purchased a computer containing DRAM online from Dell Computer Corporation’s website, and claimed to have paid an artificially inflated price for the computer as the result of the defendants’ price-fixing activity.

Justice Mongeau of the Superior Court denied the motion to authorize proceedings on two grounds: first, that Québec did not have proper territorial jurisdiction to hear the class action, but that even if it had, the allegations did not meet the test for authorization under Québec class proceedings law. Option Consommateurs and Cloutier appealed the ruling to the Court of Appeal.

The Québec Court of Appeal’s Ruling

In rendering its judgment reversing the decision of the Superior Court, the Court addressed three major issues: (i) the source in law of the claims made by the putative class members; (ii) jurisdiction over the alleged losses of the class members; and (iii) and the authorization of the class action under Québec class proceeding law.

As a threshold matter, the Court held that the direct and indirect purchasers of DRAM within the class both essentially alleged a single extracontractual fault as the basis for their causes of action: the conspiracy to inflate artificially the price of DRAM, a conspiracy that would have if not for the passing of the statute of limitations given rise to a civil remedy pursuant to section 36 of the Competition Act. Accordingly, the Court found that there would be no impediment to the authorization of the class action based on a different source of liability between direct and indirect purchasers.

The Court’s ruling on Québec’s territorial jurisdiction over the proceedings suggests an expansive view of the extraterritorial application of Canadian antitrust laws upon foreign defendants. While Justice Mongeau had held that Cloutier’s financial loss was connected to Québec only by reason of her domicile being there — a fact which could not by itself establish financial loss suffered in Québec and provide a basis for the exercise of jurisdiction — the Court of Appeal, while agreeing that the question of jurisdiction was one appropriate for decision on an authorization motion, came to the opposite conclusion. Despite the fact that the defendants were not domiciled in Québec and had no place of business there, and the alleged conspiracy was not alleged to have taken place in Québec, the Court concluded that the damage Cloutier claimed to have suffered in Québec arising from her online computer purchase justified the exercise of jurisdiction.

The Court of Appeal went on to find that the class action was authorized pursuant to articles 1002 and 1003 C.C.P. Rejecting the defendants’ position that the motion did not clearly set out an undue restraint of competition resulting from their anti-competitive activities outside of Canada, the Court held that while the plaintiff was “far from having established its case on the merits,” the extent of the conspiracies as set out in the plea agreements were sufficient to support the allegations of undue restraint of trade. Furthermore, while acknowledging the “unhelpful lack of detail” in the allegations relating to the class members’ loss, the Court of Appeal found that there had been alleged sufficient facts to establish the loss and to constitute a prima facie demonstration of loss under article 1003(b) C.C.P.

The Court then addressed the defendants’ argument that the alleged losses suffered by indirect purchasers were not compensable because of the indirect purchasers’ lack of standing. Referring to the British Columbia Court of Appeal’s decisions in Sun-Rype Products Ltd. v. Archer Daniels Midland Company (Sun-Rype) and Pro-Sys Consultants Ltd. v. Microsoft Corporation (Microsoft), which concluded that indirect purchasers of allegedly price-fixed products have no cause of action recognized in law, the Court was not persuaded that double recovery could result from the recognition of indirect purchasers’ claims. Instead, concurring with the reasons of the dissenting justice, Donald J.A., in Sun-Rype, the Court held that the defendants would not face an unfair risk of double recovery because the motion alleged a single, aggregate loss notwithstanding the mix of direct and indirect purchasers in the class. Significantly, the complexity of proving the passing-on of losses to the indirect purchasers was acknowledged by the Court, but deemed merely an evidentiary concern that should be properly addressed as part of the burden of proof resting upon the plaintiffs once the case proceeded to trial.

Conclusion

The rulings in this decision are reminders of the relatively low threshold for authorization of class actions in Québec. The Court of Appeal, even while noting the lack of specificity in the motion pertaining to loss and causation (including the fact that Cloutier had not alleged that the DRAM in her computer was sold to her directly or indirectly by the defendants or any them) and acknowledging the evidentiary challenges awaiting the plaintiff upon trial, ultimately held the allegations sufficient to meet the test for authorization under Québec law.

The timing of the decision is also notable.  The Supreme Court of Canada is expected to rule on the leave applications in Sun-Rype and Microsoft in the near future.

Criminal charges laid in alleged Montreal sewer services cartel

Michael Laskey -

On November 22, 2011, the Competition Bureau announced that criminal charges had been laid against six companies and five individuals accused of rigging bids for municipal and provincial sewer services contracts in the greater Montreal area. Bid-rigging, in which two or more bidders agree among themselves on whether or how to submit bids, without informing the person calling for the bids, is a criminal offence under section 47 of the Competition Act.

The Crown alleges that the accused companies and individuals conspired to pre-determine the winners of 37 municipal and provincial calls for tender in 2008 and 2009 related to the cleaning and maintenance of sewers, with a total value of C$3.3 million. The bidders who were not pre-determined to win allegedly submitted inflated, token bids in order to mislead tendering authorities into believing that the processes were competitive. Because the alleged conduct took place prior to the 2009 amendments to the Competition Act which increased the maximum penalties available under section 47, the accused face maximum penalties of up to five years in prison and/or a fine in the discretion of the court.

The Bureau also noted that its investigation benefitted from cooperation under its immunity and leniency programs, which provide incentives for parties involved in criminal conduct to self-report the conduct to the Bureau.

Quebec ventilation contractor fined for bid-rigging

Susan M. Hutton and Robert Mysicka -

Les Entreprises Promécanic Ltée (Promécanic), a ventilation company based in Laval, Québec, has pleaded guilty to three criminal charges of bid-rigging for tenders issued by its contractors in 2004 and 2005. On July 19, 2011, Promécanic was fined C$425,000 by the Superior Court of Québec for participating in agreements to fix the outcome of bids for the installation of residential ventilation systems in Montreal.

In December, 2010, the Competition Bureau’s investigation of eight ventilation systems companies culminated in the laying of criminal charges for bid-rigging against Promécanic and seven others. Bid-rigging, which is defined in section 47 of the Competition Act, prohibits bidders from entering into an agreement not to submit bids or to submit pre-arranged bids when responding to a bid or tender call. The criminal sanction under section 47 applies if the person calling for the bids is not made aware of the agreement at or before the time when the bid or tender is submitted or withdrawn. In this case, the Bureau’s investigation found evidence of collusion among the eight ventilation companies in five separate competitive bidding processes valued at approximately C$8 million. The maximum penalties for bid-rigging include a fine that is at the discretion of the court and/or a prison term not exceeding 14 years.

Promécanic admitted to secretly arranging with its competitors to fix the price of the winning bids for ventilation systems contracts in the Montreal region. In addition to fining Promécanic C$425,000, the Quebec court issued a 10 year prohibition order against the company’s estimator, Joël Perreault, preventing him from engaging in acts that could lead to further contraventions of section 47.  Mr. Perreault was charged in 2006 with obstructing the Bureau’s investigation of Promécanic by destroying documents during the execution of a search warrant.  In exchange for his subsequent cooperation in the Bureau’s prosecution of the other seven defendants, the obstruction charges against Mr. Perreault were dropped.

The investigation and prosecution of cartels and related bid-rigging offences under Part VI of the Competition Act is a top priority for the Commissioner of Competition, Melanie Aitken. “The Competition Bureau will continue to vigorously seek prosecution against those who thwart the forces of competition” Aitken said. “Homeowners in the Montreal region were defrauded by this illegal scheme”, she commented, adding that “bid-rigging deprives Canadians of the benefits of a competitive market, including lower prices and product choice”.  The other seven companies facing charges in the Bureau’s bid-rigging investigation include Groupe SCV Inc., Les Entreprises de Ventilation Climasol Inc., Lys Air Mécanic Inc., Guaranteed Industries Ltd., Ventilation G.R., Kolostat Inc., and Ventilex Inc. More information can be found here

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.
 

Court of Appeal for British Columbia bars indirect purchaser suits

Katherine L. Kay and Mark Walli

On April 15, 2011, the Court of Appeal for British Columbia released judgments in two competition class actions which concluded for the first time in Canada that indirect purchasers of allegedly price-fixed products “have no cause of action recognized in law.”  Pro-Sys Consultants Ltd. v. Microsoft (Microsoft) and Sun-Rype Products Ltd. v. Archer Daniels Midland Company (Sun-Rype) were appeals heard one after the other by the same panel of three judges. Both cases were decided by a two to one majority and overturned chambers judgments certifying class actions (see  Microsoft and Sun-Rype respectively) .

The majority judgments found that the issue of whether indirect purchasers could sue to recover a price-fixing overcharge passed on to them by the defendants’ customers (or other intermediaries in the product distribution chain) was a “pure question of law” capable of being resolved at the pleadings or class certification stage of the case, and that it was “plain and obvious” that indirect purchasers had no such claims.

The judgments in Microsoft and Sun-Rype depart from a clear recent trend in favour of certifying competition class actions in Canada, exemplified by the B.C. appeal court’s late-2009 decision in Pro-Sys Consultants Ltd. v. Infineon Technologies AG , in which large and diverse classes of direct and indirect purchasers have been certified and courts have generally held that questions of the legal sufficiency of claims should be left for the “laboratory of the trial court” and decided on a full factual record rather than on the certification motion.

The judgments significantly alter the competition class action landscape in British Columbia, and potentially throughout Canada.

The Microsoft and Sun-Rype Cases

Microsoft was brought on behalf of a proposed class of all B.C. residents who on or after January 1, 1994 purchased, indirectly, certain Microsoft applications software or operating systems software as part of their computers. The plaintiffs alleged that Microsoft conspired with original equipment manufacturers (OEMs) (among others) to raise the price of the Microsoft operating systems and applications software installed by the OEMs, and that such overcharges were passed on to the plaintiffs as purchasers of the computers.  The plaintiffs sought to recover damages for breach of the Competition Act and common law tort, or in the alternative sought disgorgement/restitution of Microsoft’s unlawful gains on behalf of the proposed class. The chambers judge granted the plaintiffs’ motion for class certification in March 2010.

Sun-Rype was brought on behalf of a proposed class of all B.C. residents who purchased high fructose corn syrup (HFCS) or products which contained HFCS from January 1, 1988 to June 30, 1995. The proposed class consisted of direct purchasers such as Sun-Rype, which purchased HFCS from defendants for use in soft drinks it manufactured, and of indirect purchasers who bought various food and beverage products containing HFCS as a sweetener. The plaintiffs alleged that the defendant manufacturers had conspired to fix the prices of HFCS during the proposed class period and that direct and indirect purchasers had paid an unlawful overcharge as a result of the alleged conspiracy. The chambers judge granted the plaintiffs’ motion for class certification in June 2010.

The defendants’ appeals from the certification orders in Microsoft and Sun-Rype were heard consecutively by the Court of Appeal for British Columbia in the fall of 2010.

The Majority Judgments

Writing the majority judgments in Microsoft and Sun-Rype, Lowry J.A. found that there was no basis for the certification orders insofar as they related to indirect purchasers of the allegedly price-fixed products, because the indirect purchasers had no cause of action as a matter of law.

The majority began its analysis with the decision of the Supreme Court of Canada in Kingstreet Investment Ltd. v. New Brunswick (Finance). In Kingstreet, a nightclub sought the return of user taxes on alcohol purchases it had paid to the province of New Brunswick, on the grounds that the taxes were constitutionally invalid. The government defended the claim in part on the basis that the nightclub had suffered no loss from the tax, because it had passed on the charges to its own customers. The Supreme Court in Kingstreet rejected “the passing on defence in its entirety”, finding that it was inconsistent with the premise of restitution law, economically misconceived, and that it created serious difficulties of proof of damages.

Turning to the allegations of unlawful price-fixing in Microsoft and Sun-Rype, Lowry J.A. found that Kingstreet made it “clear beyond question” that “[i]n responding to a claim brought by a [direct purchaser] alone, it would be no answer for the defendants to say the [direct purchasers] suffered less than they were overcharged because they passed some of the overcharge on to the [indirect purchasers]. Rather, the direct purchasers’ “loss was complete at the time the overcharge” was paid, and the direct purchasers “are in law entitled to recover the whole of the amount of the overcharge for which they may establish the defendants are liable to them, regardless of how much of it had been passed on”.

With respect to the potential claims of indirect purchasers, the majority reasoned that if there is no recognized defence of passing on, it must “follow that even though an overcharge may in fact have been passed on … the law does not recognize it: as a matter of law the overcharge or the loss for which the wrongdoer is liable is sustained when the overcharge is paid at first instance”.  Accordingly, indirect purchasers “who would seek to recover an overcharge that has been passed on are effectively claiming a loss that in law is not recognized”, and “[f]or that, there can be no cause of action.”

Lowry J.A. noted that if defendants were precluded from raising the passing on defence against direct purchasers, but indirect purchasers were permitted to sue to recover the amount of an overcharge paid by them, the defendants would face the prospect of paying the same loss twice to different plaintiffs. The majority found that “our law will not sanction” such double recovery.  It stated that its position was consistent with “American federal law” after the U.S. Supreme Court decision in Illinois Brick Co. v. Illinois, which held that “passing on cannot be used offensively to recover overcharges in an anti-trust action where it cannot also be relied on as a defence.”

In Microsoft the Court of Appeal set aside the certification order and dismissed the action altogether because the case had been brought only on behalf of indirect purchasers.

In Sun-Rype, the class consisted of both direct and indirect purchasers of HFCS. The Court of Appeal set aside the certification order and remitted the certification application back to the chambers judge for further consideration.

The Dissent

Donald J.A. dissented in Microsoft and Sun-Rype, disagreeing with the majority’s conclusion that it was “plain and obvious” indirect purchasers had no cause of action. The dissent agreed with the majority’s view that “the pass-through defence is dead”. However, Donald J.A. found that the “corollary proposition barring a pass-through claim is by no means a logical or legal necessity.”

While recognizing the validity of the “bedrock principle” against double recovery, the dissenting judge wrote that “the double recovery rule should not in the abstract bar a claim in real life cases where double recovery can be avoided.”  Donald J.A. noted that in Sun-Rype “the remedies sought are either aggregate damages or a constructive trust in restitution – one amount for the entire class” of direct and indirect purchasers, and that there was “no realistic possibility of double recovery with a single all-encompassing assessment.” The dissent also noted that “class proceedings are flexible enough to create ways and means of avoiding overrecovery.”

Donald J.A. found that denying indirect purchasers a cause of action could undermine the goals of class proceedings legislation, which include increasing access to justice and behaviour modification. He reasoned that without the participation of indirect purchasers, the “case may not be economically viable and the alleged wrongdoers will retain most of their ill-gotten gains with the result that the class action goals of deterrence and behaviour modification will be lost”.  The dissent further noted that in Microsoft, the direct purchasers were alleged co-conspirators with the defendants who would be unlikely to sue in their own right.

The dissent found that the U.S. federal rule barring indirect purchaser antitrust suits has been the subject of considerable public policy debate in the U.S. and that many states have enacted “Illinois Brick repealer” statutes which give indirect purchasers the right to bring claims in state courts. Donald J.A. found that courts in the U.S. “repealer” states have expressed the view that the “complexity” of proving damages in indirect purchaser cases, relied upon by the U.S. Supreme Court to bar such suits, was in fact manageable and the damages issues capable of resolution. 

Donald J.A. identified the prior “judicial reluctance in Canada to strike [indirect purchaser] claims prior to a full trial on the issue” as a reason favouring the rejection of “the defendants’ attack on the pleading” at the certification stage of the case.

Implications of the Judgments

The judgments can be expected to have a significant impact on the competition class action landscape in Canada.  For example, it would appear open to defendants in certified class actions involving claims by indirect purchaser plaintiffs to seek summary dismissal of the indirect purchaser claims and modification of the certification order on the basis of the Microsoft and Sun-Rype judgments. (The judgments would not be expected to have much impact on certified cases involving only direct purchaser classes, such as Steele v. Toyota Canada Inc.)

While not binding in Ontario, the judgments may lead to judicial reconsideration of the view that indirect purchasers may plead a cause of action predicated on price-fixing. More than a decade ago, the certification judge in Chadha v. Bayer found that it was not “plain and obvious” that indirect purchasers had no cause of action, and rejected the Illinois Brick rule as inapplicable in Ontario.  Although the order granting certification in Chadha was reversed on appeal, the Ontario appellate courts reversed the decision on the basis that the indirect purchaser plaintiffs had not presented a sufficient evidentiary record to support certification. The Court of Appeal for Ontario expressly left open the possibility that a sufficient showing could be made by indirect purchaser plaintiffs in future cases. However, Chadha predates the Supreme Court’s decision in Kingstreet, and the judgments in Microsoft and Sun-Rype provide a basis on which defendants may renew arguments that indirect purchaser claims are barred as a matter of law.

The exclusion of indirect purchaser plaintiffs could cause fundamental changes to the nature of competition class actions in Canada. The proposed classes in most competition class actions consist largely (if not overwhelmingly) of indirect purchasers. In many price-fixing class actions, the direct sales of defendants into Canada are miniscule in comparison to their sales in foreign jurisdictions, and the vast majority of direct purchasers of the allegedly price-fixed product are located outside of Canada (and thus are not members of the proposed class). The exclusion of indirect purchasers from the proposed class would thereby result in significantly smaller classes and claims in these actions.

On the other hand, one of the principal arguments against class certification raised by defendants in many competition class actions in Canada is that proving proposed class members have paid an overcharge raises individual rather than common issues for class members, and that the need to resolve those “proof of loss” issues to establish the defendants’ liability to the class renders the proposed class proceeding unmanageable. The difficulties proving loss are particularly acute where the proposed class is large and consists primarily of indirect purchasers who may be multiple steps down multiple product distribution chains from the defendants. Removing the “pass-on defence” and indirect purchaser plaintiffs from these cases as a matter of law would eliminate the need to consider the layers of distribution below the direct purchasers, and make proof of loss for the proposed class a less complex inquiry. In a direct-purchaser only regime, class certification might well become easier to achieve.

The plaintiffs have stated that they will seek leave to appeal to the Supreme Court of Canada

Credit cards face class action in Canada

A class action was commenced on March 28, 2011 against VISA™ and MasterCard™ and the major Canadian banks, in British Columbia, Canada. Mary Watson, owner of a furniture store in Vancouver, is the representative plaintiff. 

The suit alleges that, contrary to s. 45 of the Competition Act, the defendants fixed, maintained, and controlled the Merchant Discount Fees charged to merchants who accept credit cards as payment, monitored adherence to the Fees, and also controlled the supply of credit card network services. Section 36 of the Competition Act permits private parties to bring actions for damages suffered as a result of criminal (but not civil) violations of the Act. According to the plaintiffs, merchants in Canada paid $5 billion dollars in Merchant Discount Fees in 2009.

This class action follows on the heels of related cases in Canada and the United States and Europe. In December 2010, the Competition Bureau filed an application with the Canadian Competition Tribunal against VISA and MasterCard under s. 76 of the Competition Act, a civil provision enabling the Tribunal to prohibit anti-competitive resale price maintenance (being civil in nature, the case will not permit private parties to bring actions for damages suffered, even if the Commissioner’s case succeeds). The Bureau alleges that each of VISA and Mastercard require banks to impose rules which, among other things, prevent merchants from encouraging the use of cards with lower discount fees, thereby lessening competition between and among the credit card networks. Each of VISA and Mastercard dispute the Commissioner’s claims. The Department of Justice in the United States had previously brought a similar case in the United States against each of VISA, Mastercard and American Express (VISA and Mastercard agreed to a settlement in late 2010, while the case against American Express is ongoing), as has the European Commission.

Court upholds certification of class action in price-fixing case

Shawn Neylan and Sharon Seung

In a judgment rendered June 8, 2010, the Ontario Superior Court dismissed a motion by FMC Corporation and FMC of Canada, Ltd. (collectively, FMC) for leave to appeal a September 28, 2009 decision certifying a class action. The motion was supported by Arkema Inc., Arkema Canada Inc. and Arkema S.A. (collectively, Arkema). Both FMC and Arkema were among the defendants in the class action proceeding.

The class action was brought on behalf of all persons in Canada who purchased hydrogen peroxide products between 1994 and 2005. The plaintiffs alleged that the defendants, manufacturers and sellers of hydrogen peroxide, conspired to and did fix the prices for hydrogen peroxide. According to the Ontario Superior Court, the main issue on the certification motion was the extent to which the causes of action required proof of individual loss or damage.

In the class action proceeding, the plaintiffs and the defendants had presented expert evidence to address the question of whether damages could be estimated on a class-wide basis. The methodology proposed by the plaintiffs’ expert was heavily criticized by the defendants. In considering the motion for leave to appeal, the Superior Court stated that it was not the certification judge’s obligation to determine the merits of these opinions, but rather to decide whether the evidence demonstrated the existence of a viable methodology for proving loss on a class-wide basis. The Court reiterated that the purpose of the certification stage of a class action was to determine whether the requirements under section 5(1) of the Class Proceedings Act, 1992 were met and if so, to define the issues to be tried.

The Court concluded that the certification judge had properly considered all of the evidence in order to find some basis in fact for each of the class action certification requirements, despite the fact that she had interpreted key case law in a different way, and that there was no reason to doubt the correctness of the certification order. Although the Court accepted that the requirement of public importance was met on the leave motion, it dismissed the motion for leave to appeal.

Absolute discharge for price-fixing upheld

Shawn Neylan and Sharon Seung

On March 19, 2010, the Quebec Court of Appeal upheld a decision rendered by the Quebec Superior Court, unconditionally absolving Mr. Daniel Drouin, the accused, of a price-fixing charge. The Court of Appeal dismissed the Crown’s application for leave to appeal on the basis that the lower court judge had not made a reviewable error which would merit judicial review.

In the original Superior Court decision, the court had ordered an absolute discharge. The accused had pleaded guilty to a charge brought against him for fixing the price of gas in the city of Victoriaville in 2005, when he was the supervisor of Les Pétroles Cadrin Inc. In his capacity as supervisor, the accused was responsible for setting the price of gas sold by the service station. The price-fixing charge was brought against the accused following an investigation by the Competition Bureau.
 

The Superior Court considered several factors: the accused had not benefitted from the crime, he was not the instigator, his involvement was over a short period of time compared to his co-accused, he regretted his actions, and a criminal charge would have a negative impact on his career. Furthermore, he had made a $10,000 donation to a non-profit organization in the hope of obtaining an absolute discharge. According to the Court, it would be superfluous and inappropriate to impose a fine since his donation had achieved the objective of deterrence. The Court concluded that an absolute discharge would not be contrary to the public interest.

The Crown’s appeal was based on the intervention of counsel for the accused during the lower court judge's deliberation. The intervention consisted of a letter from counsel for the accused advising the Court of the $10,000 donation. The Court determined that although the method followed by counsel of the accused did not conform to rules of procedure (as he should have asked for a reopening of the hearing), the integrity of the hearing was not compromised.

With respect to the sentence, the Court of Appeal stated that its power of intervention was limited. The Crown argued that the absolute discharge was not available in the circumstances because it did not take into account the principle of parity and the objectives of denunciation and deterrence. The Court of Appeal cited earlier authority to the effect that the principle of parity does not preclude disparity where warranted by the circumstances.

The Court of Appeal therefore dismissed the Crown’s application for leave to appeal.

More retail gasoline price fixing charges

The Competition Bureau today announced new criminal charges against 25 individuals and three companies with respect to alleged price fixing in Québec and stated that other investigations with respect to alleged price fixing in retail gasoline outside of Québec were ongoing.  Among other things, the bureau used wiretaps in its investigation.

The bureau stated in a backgrounder that: “[w]hile some of the accused operated under the name or "banner" of a major oil company, it was the local operators of the gas stations who were responsible for setting the final price at the pump. There is no evidence that the three major national oil companies' corporate offices were involved in these offences.”

The bureau acknowledged that: “[s]imilar gasoline prices, or similar changes in the price of gasoline, do not necessarily indicate price-fixing. High prices are a concern under the Competition Act only when they are the result of anti-competitive conduct, such as price-fixing.”

The accused are presumed to be innocent and are entitled to all of the rights and defences provided by law including a fair and public hearing before an independent and impartial tribunal.
 

Commissioner paints bright fence around cartel conduct

In the text of a May 4, 2010 speech that was released by the Competition Bureau on June 7, 2010, the Commissioner of Competition, Melanie Aitken, has affirmed the guidance in the Competitor Collaboration Guidelines regarding the care with which she will proceed under the cartel provision (section 45 of the Competition Act).  The Commissioner said:     “[l]et me be crystal clear: if an agreement among competitors does not constitute a naked agreement to fix prices, allocate markets, or restrict output, that agreement will be subject to – at most, and only – a separate, civil review requiring proof of economic harm.” 

The Commissioner also confirmed the written guidance that certain types of agreements will not be the subject of cartel prosecutions: “we have explicitly removed whole categories of agreements from the scope of criminal enforcement action, such as dual distribution agreements, franchise agreements and non–competes, unless, of course, the agreement is just a sham. We are doing our best to put a fence around the conduct we would consider investigating as criminal, and to paint that fence in bright, bold colours.”

These unequivocal statements of the Commissioner will be welcomed by businesses who are considering legitimate collaborative conduct which may raise issues under the new and potentially very broad cartel law.   Still, it must be noted that the Commissioner’s guidance is not binding and will not remove the risk of private actions in which cartel conduct is alleged.

The Commissioner also discussed merger review issues and her case against the Canadian Real Estate Association in the May 4, 2010 speech.

Supreme Court of Canada declines to hear DRAM certification appeal

On June 3, 2010, the Supreme Court of Canada declined to hear an appeal by DRAM manufacturers of a decision of the British Columbia Court of Appeal that certified a class in a civil action alleging price-fixing with respect to dynamic random access memory. As is customary when leave to appeal is declined, the Supreme Court did not give reasons for its decision.

Joint venture cartel exemption of the United States to apply in Canada?

Canada’s recent move to a stricter cartel law that does not require proof of market effect is considered to be a shift towards American cartel law, where hard core cartels receive per se treatment. The new Canadian law can raise complicated issues with respect to joint venture activities. It defines criminal cartels as agreements between “competitors” to engage in the activities of fixing price, allocating markets or controlling supply. These activities may also arise in the context of what would otherwise be considered legitimate joint ventures. Although the Commissioner’s Competitor Collaboration Guidelines indicate that the new parallel reviewable matter provision for agreements that substantially lessen or prevent competition is the preferred approach for the assessment of legitimate joint venture agreements, she nonetheless has the discretion to recommend that such agreements be subject to criminal prosecution. Private litigants may also bring private actions in respect of joint venture activities that they allege contravene the cartel provision.

The Supreme Court of the United States has recently decided American Needle, Inc v. National Football League et al, in which the court affirmed a line of authority that rejects formalistic distinctions based on the mechanics of how competitor collaborations are structured, in favour of a functional analysis as to whether the collaboration is effectively a separate economic enterprise controlled by a single center of decision-making and therefore not subject to cartel liability. Whether the Commissioner of Competition, and, ultimately, Canadian courts will be receptive to this approach under Canada’s new cartel law remains to be seen. However, to the extent that the changes to the Canadian cartel law were intended to move towards the United States system, it follows that decades of consideration of joint venture treatment ought to be considered when developing Canadian law.  In particular, United States law may provide some guidance when considering whether firms engaging in legitimate joint venture activities are “competitors” under the new cartel law or whether the better view is that particular joint venture activities amount to a separate economic enterprise and are therefore outside the scope of the law. American law may also be relevant to the application of the new ancillary restraints defence.

Solvay Chemicals fined $2.5 Million for price-fixing

The Competition Bureau announced today that Solvay Chemicals Inc. has been fined $2.5 million by the Federal Court after the company pleaded guilty to criminal charges for fixing the price of hydrogen peroxide sold in Canada. Solvay Chemicals Inc. is the second party to plead guilty in this alleged price-fixing conspiracy. The Bureau's investigation of other companies alleged to be participants in the conspiracy is ongoing.

Certification of competition class actions: The tide turns against defendants

Katherine L. Kay and Danielle Royal

Until recently, Canadian courts were generally reluctant to certify class actions alleging violations of competition law, principally on the basis that plaintiffs failed to put forward a workable class-wide method for determining the existence of harm for each class member.

In 2009, however, two significant decisions in Ontario and British Columbia - Irving Paper Ltd. v. Atofina Chemicals Inc.1 in the Ontario Superior Court of Justice and Pro-Sys Consultants Ltd. v. Infineon Technologies AG et al. in the Court of Appeal for British Columbia - signaled a new openness to such claims.

A third example of this trend is the recent 2010 British Columbia Supreme Court ruling in Pro-Sys Consultants v. Microsoft Corporation et al.,in which the plaintiff alleges that Microsoft engaged in anti-competitive behaviour that allowed it to charge higher prices for all of its operating systems and some of its application software. The plaintiff seeks damages for the tort of intentional interference with economic interests and common law conspiracy and also pursues civil remedies for breach of sections 45 (conspiracy) and 52 (misleading advertising) of the Competition Act, as well as relief for unjust enrichment and waiver of tort.

The proposed class in Microsoft consists of British Columbia residents who, on or after January 1, 1994, indirectly acquired a license for Microsoft Operating Systems and/or Microsoft Applications Software for their own use and not for purposes of further selling or leasing, including those who purchased new computers pre-installed with Microsoft's software. The key issue to be determined on the motion was whether the plaintiffs had put forward "a credible or plausible methodology" for establishing an overcharge and pass-through to this indirect purchaser class.

It is clear from Justice Myers' decision in Microsoft that he felt constrained in his approach by the appellate decision of the B.C. Court of Appeal in Infineon. Justice Myers held that Infineon stands for the following propositions with respect to certification:

  • A plaintiff need only show a "credible or plausible methodology" for proving class-wide issues. Because the threshold is low, conflicting expert evidence is not to be given the level of scrutiny to which it would be subject at trial.
  • Until the issue of waiver of tort has been determined substantively, a waiver of tort claim may be certified on the assumption that it will be sufficient at trial to show wrongful conduct by and resulting gain to the defendant without proof of any loss to the plaintiff.
  • In a claim for damages for tortious economic loss, it is not necessary to propose a methodology that can demonstrate harm to all class members. Instead, it is sufficient if harm can be shown to some of the class members. In addition, the aggregate damages section of the B.C. Class Proceedings Act allows for harm to be shown in the aggregate to the class as a whole.

Given these extremely low thresholds, it is not surprising that the chambers judge in Microsoft was satisfied that the proceeding met the test for certification as a class action.

The plaintiff in Microsoft used economic and econometric analyses employed by plaintiffs' experts in similar U.S. actions against Microsoft to persuade the chambers judge that they did indeed have a "credible or plausible methodology" for establishing that the price overcharge was passed on through each level in the distribution channel to the class members. The fact that one of the economic models was based solely on American data did not detract from its status as a "credible or plausible methodology", in the chambers judge's view. Nor was he persuaded by Microsoft's argument that the plaintiffs had failed to satisfy section 4(2) of the B.C. Class Proceedings Act, which provides that the court must consider as a factor whether "a significant number of the members of the class have a valid interest in individually controlling the prosecution of separate actions." Microsoft argued that volume purchasers of its software would have a valid interest in separate actions, pointing specifically to purchasers with at least 250 desktop computers. Having noted that the possibility that certain class members might opt out does not preclude certification, the chambers judge added that the fact that an entity is a volume user does not automatically support the inference that it would have an interest in pursuing a separate action, particularly considering the costs of doing so. Finally, to the extent that volume purchasers are differently situated, the chambers judge felt that difference could be addressed by the formation of sub-classes.

Given the low level of judicial scrutiny applied in Infineon, Irving and now Microsoft, there appears to be a risk that the certification of price-fixing and other competition class actions (including classes comprised solely of indirect purchasers) will become the "new normal" in Canada. The Infineon case is the subject of a pending application for leave to appeal to the Supreme Court of Canada. If leave is granted, the highest court in Canada will weigh in on these challenging issues. For defendants, the hope is that appellate intervention will reverse the recent turning of the tide.


1 [2009] O.J. No. 4021 (S.C.J.) (QL).

Eli Lilly-Apotex patent litigation comes to an end

Jeffrey Brown

While the Court in this case addressed numerous issues, the scope of this article is limited to the issue of the intellectual property-competition interface.On October 1, 2009, the Federal Court of Canada, in Eli Lilly and Company v. Apotex Inc.,rejected a counterclaim by Apotex, a generic pharmaceutical manufacturer, in which it had sought damages pursuant to section 36 of the Competition Act (the "Act") against two brand name pharmaceutical manufacturers in connection with a patent assignment. The decision follows the November 2005 judgment in which the Federal Court of Appeal characterized the assignment of a patent as including "evidence of something more than the mere exercise of patent rights" and, as such, not beyond the application of the Act's conspiracy provision(See "Canada's Federal Court of Appeal Rules on Competition Law/Patent Law Interface," Intellectual Property Update (January 18, 2006).)

The Federal Court's most recent decision is part of a lengthy litigation that began in 1997, when Eli Lilly brought a patent infringement action against Apotex in respect of eight patents related to intermediate compounds and processes for the manufacture of the antibiotic "cefaclor." While four of the eight patents had been continuously owned by Eli Lilly, the other four patents (the "Shionogi Patents") had been assigned to Eli Lilly in 1995 by Shionogi & Co. Ltd., a Japanese pharmaceutical company. In 2001, Apotex brought a counterclaim against Eli Lilly and Shionogi, alleging that the assignment constituted an illegal conspiracy under section 45 of the Act, thereby entitling Apotex to damages under section 36 of the Act.

Before examining the merits of the counterclaim, the Federal Court addressed the nature of section 36 of the Act, which entitles any person who has suffered loss or damage as a result of conduct that is contrary to the criminal provisions of Part VI of the Act, including section 45, to sue for and recover an amount equal to the loss or damage proved to have been suffered by the plaintiff. The Court characterized this right of action as a "special remedy," noting that the Commissioner of Competition is the principal enforcer of the Act. Not surprisingly given this characterization, the Court appeared sceptical about the validity of Apotex's counterclaim since the Commissioner had not launched an inquiry into the conduct at issue. The purpose of section 36, the Court said, is to offer a means of compensation to those who suffer loss as a result of anti-competitive conduct - not to encourage persons to take the place of the Commissioner in provoking inquiries into the conduct of others.

The Court then proceeded to consider whether the counterclaim was time-barred. Subparagraph 36(4)(a)(i) of the Act states that, in the case of conduct contrary to Part VI of the Act (including section 45), no action may be brought under section 36 more than two years after the date of the impugned conduct. Keeping in mind that Apotex filed its counterclaim in 2001, approximately six years after the assignment at issue, Apotex argued that the assignment gave rise to an ongoing conspiracy that continued as long Eli Lilly asserted its assigned patent rights. The Court rejected this argument, noting that, in this case, behaviour subsequent to the assignment was irrelevant to establishing whether an offence had taken place. The Court found that Apotex had failed to allege any actions on Shionogi's part following the assignment that could support an allegation of conspiracy. Rather, once Shionogi assigned the patents to Apotex, Shionogi had ceased to play any role in connection with those patents. Effectively, the Court ruled that the conspiracy began and ended with the assignment in 1995.

While the Court concluded that Apotex's counterclaim was time-barred, it nevertheless proceeded to consider the substance thereof. To succeed in a damages claim, the Court said that Apotex had to prove on a balance of probabilities that, "but for" the assignment of the Shionogi Patents to Eli Lilly, it would have avoided the claimed losses. To this end, Apotex had outlined six possible scenarios in a "but for world," which the Court interpreted as "indicative of the degree of speculation required to find that Apotex has been harmed by the assignment."

According to Apotex, the two most likely scenarios were that it would have been licensed by either Shionogi or Eli Lilly. The Court disagreed, citing a number of reasons why Shionogi would not have licensed the patents to Apotex, including:

  • Shionogi had no history of licensing generic drug manufacturers, or of licensing anyone for the use of its patented process to manufacture bulk cefaclor;
  • Shionogi has never directly carried out business outside of Japan;
  • Shionogi would not have wished to jeopardize a longstanding relationship with Eli Lilly for the sake of licensing its process patents;
  • Shionogi believed that it was already bound by an exclusive licence agreement with Eli Lilly; and
  • Apotex was not in the habit of seeking to obtain a lawful source of supply of bulk cefaclor because, among other reasons, it did not select its suppliers based on whether or not they had a licence. In fact, the Court stated that, for Apotex, obtaining a licence for bulk cefaclor was "an option of last resort."

Instead, the Court concluded that the most likely "but for world" scenarios involved Apotex practising both the Shionogi and Eli Lilly processes, just as it did in reality, and being sued for infringement by both companies. The Court therefore concluded that Apotex did not suffer any damage that could have been avoided "but for" the patent assignment. Rather, the only difference between the actual events and the likely "but for world" was that Shionogi also would have been a party to the action for infringement.

In summary, the Federal Court's decision is noteworthy in a number of respects. It will be interesting to see, for example, if future courts follow the Court's characterization of private enforcement under section 36 of the Act as secondary to enforcement by the Commissioner. The case also highlights the practical difficulties of pursuing section 36 claims with respect to assignments of intellectual property, including framing a claim within the two-year limitation period and the complexity of establishing damages suffered as a result of such an assignment.

Canada's tougher cartel law into force March 12, 2010

Susan M. Hutton

The one-year delay before Canada's new, tougher, cartel law comes into force expires this month. Starting March 12, 2010, prohibited agreements between competitors will be criminally illegal in Canada, regardless of their impact on competition. The amendments result in the creation of a new category of "per se" criminal offences (so-called because the outlawed categories of agreement are "per se" illegal without proof of economic effect). Penalties under the new offence will also increase: from the former maximum five years imprisonment and/or C$10 million fine, to a maximum of 14 years and/or C$25 million.

The prohibited categories of agreement include agreements with existing or potential competitors to fix prices, allocate sales, customers, or markets, and to limit or control production or supply of a product. Such agreements are a criminal violation of Canadian competition law, unless the defence can show that they are both "ancillary and necessary" to a broader or different agreement, the purpose of which is not also prohibited (e.g., customer allocation could be necessary, in some circumstances, to a distribution agreement).

The amendments removed the requirement, which had existed in Canadian law since 1890, for the Crown to prove that the impugned agreement had led or was likely to lead to an "undue lessening of competition" - thus facilitating the prosecution of "hardcore" cartels.

As noted in the January 2010 edition of this newsletter, the Competition Bureau has issued Competitor Collaboration Guidelines outlining its intended approach to the enforcement both of the stricter section 45 prohibition against cartels, and of the accompanying civil provision under the new section 90.1 of the Competition Act, which enables the Competition Tribunal, on application by the Commissioner of Competition (head of the Bureau), to prohibit agreements which - although not criminally illegal - nonetheless have led or are likely to lead to a substantial lessening or prevention of competition.

While the Commissioner and the Guidelines have gone out of their way to attempt to reassure the Canadian business community that the new powers will be used responsibly, the fact remains that many agreements which were previously regarded as legal under Canadian law, due to their lack of economic impact, need to be reassessed under the new law.
 

Canada's Competitor Collaboration Guidelines issued in final form

Susan M. Hutton and Jeffrey Brown

The Canadian Competition Bureau published the promised Competitor Collaboration Guidelines on December 23, 2009, less than three months before the coming into force of the new, stricter, criminal cartel provisions and their companion civil provisions applicable to non-criminal, but anti-competitive, competitor agreements. The Guidelines, which were preceded by an earlier consultation draft, published in May 2009, answer several questions raised by the new sections 45 and 90.1 of the Competition Act, but (unavoidably) leave many more to be clarified by the courts. Anyone doing business in Canada will wish to take stock of their dealings with competitors prior to the implementation of the new law on March 12, 2010. Seemingly innocuous agreements that did not appear to have a significant adverse effect on competition may now attract criminal (and civil) liability.

As described in previous issues of this newsletter1, starting March 12, 2010, agreements between competitors (which the new provisions define to include potential competitors) to fix prices, to allocate sales customers or markets, or to fix or control production or supply of a product will be illegal - full stop. No longer will the Crown be required to prove the anti-competitive effect of such agreements in order to obtain a conviction in so-called "hardcore" cartel cases.

The new provisions will nevertheless recognize that not every agreement or arrangement containing such restraints constitutes a hardcore cartel. An "ancillary restraints" defence will be available if the parties to the impugned agreement can show that the restraint in question is ancillary to a broader or different agreement, that such main agreement is not itself illegal under section 45, and that the restraint on prices, sales, markets, customers, output or supply is directly related to, and reasonably necessary for, giving effect to the broader objective of the main agreement.2

Along with the per se criminal prohibition against hardcore cartel activity also come increased penalties: fines of up to $25 million for all accused (up from a previous maximum of $10 million), and prison sentences of up to fourteen years for individuals (previously, a maximum of five years).

The more stringent approach to competitor agreements reflected in the new section 45 is accompanied by an alternative, civil track for non-hardcore cartels: agreements between competitors that are not appropriate for criminal prosecution but may nonetheless have anti-competitive effects. The new section 90.1 of the Competition Act, which will also come into effect on March 12, 2010, creates a civilly reviewable matter in respect of existing or proposed agreements between persons, two or more of whom are "competitors," that prevent or lessen competition substantially (or are likely to do so). The factors to be considered by the Competition Tribunal in undertaking this assessment are effectively the same as those applicable to the existing merger review provisions (i.e., effective remaining competition, barriers to entry, change and innovation, etc). In terms identical to the existing merger review provisions, an efficiencies defence will apply 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 if the efficiency gains would not be attained if a prohibition order were issued. In contrast to section 45, available remedies under section 90.1 are purely injunctive in nature, and no private actions for damages are available for alleged "breaches" of section 90.1.

One concern expressed in relation to the dual-track approach to cartels was that it could permit the Bureau to delay choosing between the criminal and civil tracks, and use the threat of criminal prosecution to encourage civil settlements. To address this concern, the Guidelines state that "at no time will the Bureau use the threat of criminal prosecution to induce settlement in cases proceeding by way of the civil track."3 The Guidelines also state that "the Bureau will make every effort to arrive at a timely decision on the appropriate section to be applied in evaluating an agreement." This leaves the door open to alternative settlements for potentially criminal cases, but only prior to the laying of charges - the Guidelines make it clear that after the laying of charges only the Director of Public Prosecutions (who is responsible for the conduct of federal public prosecutions, including under the Competition Act) is permitted to engage in plea and sentencing discussions.

As to the oft-discussed question of "what is an agreement?"-the Guidelines take the position that both explicit and tacit agreements can violate the criminal prohibition against price-fixing and other hardcore cartel behaviour. Accordingly, while so-called conscious parallelism (each of a few competitors independently deciding, for example, not to compete on the basis of price since to do so would only incite a price war) is recognized not to be illegal, the Guidelines state that conscious parallelism plus facilitating practices, such as sharing sensitive pricing information, could be enough to prove the existence of an agreement between the parties.

A positive aspect of the Guidelines is the explicit recognition that the Bureau will not view market restriction elements of dual-distribution agreements4 or franchise agreements as potentially subject to criminal prosecution under section 45 (provided, of course, that such agreements are truly limited to the supplier/distributor or franchisor/franchisee in question, and do not mask a broader conspiracy among suppliers, distributors, franchisors or franchisees). Gone from the draft Guidelines, however, is similar recognition (included in the consultation draft) that a trademark license confining use of the mark to a limited territory should likewise be exempt from criminal prosecution.

The Guidelines also contain a useful discussion of potential pitfalls involving certain common types of agreements, such as joint ventures, and circumstances under which they may raise issues under the new civil agreement provisions of section 90.1: commercialization and joint selling agreements, information-sharing agreements (benchmarking), research-and-development agreements, joint production agreements, and joint purchasing agreements and buying groups are all discussed in some detail.

A consistent theme throughout the Guidelines is that the Bureau regards section 45 as applying only to so-called "naked restraints" on competition, which it describes as "restraints that are not implemented in furtherance of a legitimate collaboration, strategic alliance or joint venture." Such an enforcement approach is welcome, and is reflected in the hypothetical examples included in the Guidelines. Unfortunately, however, these hypothetical examples avoid some of the more difficult questions involving the application of the new provisions to such agreements. For example, the Guidelines address a situation where parties establish a joint venture to develop a product and then set a common price for a product unrelated to the joint venture. The Bureau's view that such a restraint, absent evidence that it is reasonably necessary to give effect to the joint venture agreement, would not fall within the scope of the ancillary restraints defence is not surprising. More interesting, we would have thought, might have been a discussion of the Bureau's approach to the parties setting a common price for the product developed by the joint venture.

The Competition Bureau has said that, although it intends to use its new powers to act against hardcore cartel activity, it is nonetheless looking for test cases to clarify the extent of the new law. In addition, it is important to note that the Guidelines reflect the enforcement approach of the Bureau, and are not binding on private litigants or, indeed, the courts, which will have the ultimate say on the meaning of the new competitor agreement provisions. Contact any member of the Stikeman Elliott Competition Group for assistance5


1 See Hutton and Rushton, "Primer on amendments to Canada's Competition Act and Investment Canada Act," March, 2009
2 Traditional defenses to allegations of anti-competitive agreements between competitors also remain. Specifically, the new section 45 remains subject to exemptions for agreements between affiliates, for agreements between federal financial institutions to which subsection 49(1) of the Competition Act applies, and for agreements that relate only to the export of products from Canada (so long as they do not reduce the real value of exports, restrict anyone from entering into or expanding the business of exporting products from Canada, or relate only to the supply of services that facilitate exports from Canada). The amended section 45 also explicitly recognizes the existence of the regulated conduct doctrine, and its potential application to shield competitor agreements from criminal prosecution if such conduct is regulated by another federal, provincial or municipal law or legislative regime, despite the deletion of the word "unduly" from the provision (the word had been held to be determinative to the application of the doctrine in Garland v. Consumers Gas Co., [2004] 1 S.C.R. 629).
3 This statement did not appear in the first draft of the Guidelines, issued in May, 2009.
4 The term "dual-distribution agreement" refers to an agreement between a supplier and a distributor, where the supplier also sells directly to certain customers. The distribution agreement therefore commonly restricts the distributor from selling to certain customers or markets, which are reserved for the supplier or for other distributors. The Guidelines state that this would not be viewed as an agreement between competitors (the logic being that the supplier and the distributor would not be competitors but for the distribution agreement in question - alternatively, even if viewed as an agreement between competitors, the ancillary restraints defence would apply).
5 Up until March 12, 2010, when the new provisions come into force, businesses can seek free advisory opinions from the Competition Bureau on the legality of existing agreements entered into prior to March 12, 2009 (the day the bill enacting the amendments received Royal Assent). Parties are also free, for a fee, to request an advisory opinion in respect of proposed agreements (after March 12, 2010, advisory opinions will only be available in respect of proposed agreements).
 

Proof of loss by proof of gain: B.C. Court of Appeal reversal certifies DRAM price-fixing class action

Katherine L. Kay and Kevin Rushton


On November 12, 2009, the British Columbia Court of Appeal unanimously allowed an appeal from the dismissal of a class certification motion in an action alleging price-fixing against certain manufacturers of DRAM (dynamic random access memory) chips, which are found in a wide variety of electronics products. The B.C. Court of Appeal certified a class of direct and indirect purchasers of DRAM and products containing DRAM.1

As reported in the May 2008 issue of The Competitor,2 the motion judge had denied certification largely on the grounds that the plaintiff had not proposed a workable class-wide method for determining the existence or fact of harm to members of the proposed class, consisting almost exclusively of indirect purchasers of DRAM. Such a methodology would require an examination of whether and in what amount any alleged overcharges from the alleged price-fixing agreement were passed by DRAM manufacturers through the chains of distribution to class members. The lower court found that the plaintiff had not satisfied its burden of "establish[ing] that the proposed methodology has been developed with some rigour and will be sufficiently robust to accomplish the stated task." In particular, the court rejected the use of statistical sampling or averaging methodologies, holding that "the plaintiff cannot circumvent the need to prove harm on a class-wide basis by resorting to the aggregation principles in the [Class Proceedings Act], which would be available only after such a pass-through was already established on a class-wide basis." In the absence of a class-wide means of proving liability, the motion judge held that a class proceeding would be unmanageable and was not the "preferable procedure" for resolution of the plaintiff's claims.

On appeal, the Court of Appeal held that the motion judge "erred in concluding that the aggregate monetary claim could not be tried as a common issue" and in concluding that a class action was not the "preferable procedure". With respect to common issues, the Court of Appeal concluded that the plaintiff's restitutionary claims of unjust enrichment, constructive trust and waiver of tort "can be established at trial by proof of unlawful gain without individual proof of loss by class members." The Court held that the B.C. Class Proceedings Act "authorizes the use of statistical evidence to assess an aggregate monetary award", and that "[i]t was common ground that statistical regression analysis is in theory capable of providing reasonable estimates of gain or aggregate harm and the extent of pass-through in price-fixing cases." The Court further held that while "[t]he burden is on the plaintiff to show 'some basis in fact' for each of the certification requirements, [.] in conformity with the liberal and purposive approach to certification, the evidentiary burden is not an onerous one" and the plaintiff's expert economic evidence "met the low threshold".

Remarkably, the B.C. Court of Appeal stated that the "total unlawful gain by the respondents from sales of DRAM to class members", calculated for purposes of the plaintiff's restitutionary claims, "would necessarily reflect the total loss suffered by the class." Contrary to the trial judge who held that "the invocation of the doctrine of waiver of tort or constructive trust by unjust enrichment does not enable the plaintiff to avoid the 'common issues' requirement to demonstrate a methodology that will establish the pass through effect to Class Members on a class-wide basis", the Court of Appeal reached the opposite conclusion:

[S]ince the gain obtained by the respondents will be the mirror image of the total loss suffered by the class, any legal objection to the use of the aggregation provisions of the [Class Proceedings Act] to assess aggregate damages in the conspiracy actions at common law and pursuant to the Competition Act would be of no practical importance. The common issues trial will have determined the respondents' wrongful conduct as common issues and, as a practical matter, will have determined the aggregate amount of the loss suffered by the class. [.] In any case, the participation of the respondents would not be required beyond the common issues trial.

Having concluded that proof of damage could be established as a common issue on a class-wide basis, the B.C. Court of Appeal held that a class action would be the "preferable procedure". The Court held that the trial judge "overlooked that the goal of behaviour modification also considers other potential wrongdoers" and "discounted the importance of access to justice". In this case, the Court stated that "the only apparent alternative to a class action is no action at all", and to the extent "potential difficulties of proof [arise] out of the complexities involved", these can be dealt with at trial. The Court remarked that if "it should turn out that a common issues trial is unmanageable", the motion judge can always decertify the action.

The DRAM decision from the B.C. Court of Appeal is a marked departure from the longstanding decision of the Court of Appeal for Ontario in Chadha v. Bayer3, which had been followed in several other decisions in Ontario and elsewhere, including with respect to the nature of the scrutiny of expert evidence to be performed by the judge hearing the certification motion and the preferable procedure analysis. The defendants note the complete absence in the record of any evidence to support the Court of Appeal's statement that ". the gain obtained by the respondents will be the mirror image of the total loss suffered by the class."; indeed, the evidentiary record establishes that the loss to the class is not capable of determination on a class-wide basis, and it certainly would not be the "mirror image" of any alleged gain to the defendants. The defendants are considering an application for leave to appeal to the Supreme Court of Canada.


1 Pro-Sys Consultants Ltd. v. Infineon Technologies AG, 2009 BCCA 503. Stikeman Elliott LLP represents Infineon Technologies AG and Infineon Technologies North America Corp. in Canadian class actions commenced in British Columbia, Quebec and Ontario, with a team that includes Katherine Kay, Eliot Kolers, Yves Martineau and Mark Walli.
2 See the May 9, 2008 issue of The Competitor.
3 [2003] O.J. 27

 

Patent settlement agreements: Federal Court of Appeal keeps door open for Competition Act challenges in Canada

Jeffrey Brown and Alexandra Stockwell

In June 2009, the Federal Court of Appeal (FCA) upheld the Federal Court of Canada's decision in Laboratoires Servier v. Apotex Inc.1, a patent infringement case. In its decision, the trial Court had dismissed a counterclaim by the defendant, Apotex, alleging that the settlement agreement leading to the patent's issuance constituted a conspiracy to lessen competition and an offence under Canada's Competition Act. While the trial Court held that the defendant had failed to support its allegations with sufficient evidence, it nevertheless allowed that a patent settlement agreement could amount to a conspiracy under the Competition Act in some circumstances. The FCA agreed.

Background

The Canadian Competition Bureau (Bureau), has taken the position that the general provisions of the Competition Act, which consist of criminal (e.g. conspiracy and bid-rigging) and civilly reviewable conduct (e.g., abuse of dominance, tied selling, market restriction, exclusive dealing, resale price maintenance and refusal to deal), apply to conduct that involves "something more" than the "mere exercise" of an intellectual property right (IPR). The Bureau defines the "mere exercise" of an IPR as the "exercise of the owner's right to unilaterally exclude others from using the IP, as well as the use or non-use of IP by the owner." Once conduct ceases to be unilateral, including for example the assignment or licensing of IPRs, the Bureau's view is that the Competition Act's general provisions may apply.

The FCA took a similar approach in an earlier decision, namely Eli Lilly v. Apotex.2 In that case, the FCA reinstated a counterclaim by Apotex that had been previously struck by the Federal Court of Canada. In doing so, the FCA characterized the facts at issue (i.e., an assignment of patent rights alleged by Apotex to result in an undue lessening of competition contrary to the Competition Act's conspiracy provision (s. 45)) as including "evidence of something more than the mere exercise of patent rights" and, as such, not beyond the application of the Competition Act's conspiracy provision. In a separate decision later in the same case, the FCA again concluded that "the assignment of a patent may, as a matter of law, unduly lessen competition" and confirmed the correctness of the Bureau's approach.3

Laboratoires Servier v. Apotex Inc.

In Laboratoires Servier v. Apotex Inc., the plaintiffs ADIR and Servier Canada Inc. brought an action for patent infringement against Apotex. As part of its defence and counterclaim, Apotex alleged that a settlement agreement that had led to the issuance of the patent in question violated the conspiracy provision in the Competition Act.

The patent was issued following lengthy conflict proceedings involving patent applications filed by ADIR, Schering Corporation (Schering) and Hoechst Aktiengesellschaft (Hoechst). These parties became involved in Federal Court proceedings in which they were granted the right to contest any aspect of the Commissioner of Patents' determinations regarding their respective rights in relation to the subject matter of the conflict claims. Following examinations for discovery, the parties entered into Minutes of Settlement resolving the actions and a Federal Court order was issued on consent allocating the claims among ADIR, Schering and Hoechst. The result of the claims awarded to ADIR was the patent that Apotex allegedly infringed.

Apotex argued that the settlement agreement was unlawful as being anticompetitive on the basis that, according to Apotex, ADIR entered into the agreement to avoid the result that either no claims would issue to it or that overlapping claims to multiple parties would issue. It argued that, had the conflict proceedings been decided by the Court rather than settled, ADIR may never have obtained any exclusive patent rights, giving rise to a "probability", in Apotex's view, that the settlement resulted in ADIR being granted greater market power than it would otherwise have had.

In the first instance, the Federal Court of Canada rejected Apotex's counterclaim in a decision dated July 2, 2008.4 In doing so, the Federal Court noted that it was agreed by counsel that there must be "something more" beyond the mere assertion of patent rights for a violation of s. 45 of the Competition Act to occur, and it went on to conclude that, in this case, ADIR had done nothing more than exercise its rights under the Patent Act and the Federal Court Rules in reaching the settlement agreement with Schering and Hoechst. However, the Federal Court also distinguished the case from prior jurisprudence, which had held that an assignment of patent rights that added to a party's existing ownership of patent rights could be "something more" than the mere exercise of patent rights. In this case, the Federal Court noted, the settlement agreement preceded the grant of patents to ADIR, and "[u]ntil and unless the patents issued, there could be no market power held by ADIR and no impairment of competition."5

The FCA subsequently rejected Apotex's appeal of the Federal Court decision. The FCA concluded that Apotex had not provided any evidence of the alleged probability that the settlement agreement resulted in greater market power than would otherwise have existed and noted that the Federal Court could have awarded the claims in issue precisely as they were allocated in the settlement agreement. Moreover, noting again that all parties before the Federal Court had "agreed that the proposition emanating from the jurisprudence is that there must be 'something more' beyond the mere assertion of patent rights to sustain a finding of contravention of section 45 of the Competition Act", the FCA reiterated the Federal Court's finding that every step of the process leading to the settlement -the applications of each of the parties, the settlement process, the order allocating the claims and the issuance of ADIR's patent-was in accordance with ADIR's rights under the Patent Act and the Federal Courts Rules. The FCA had "some difficulty conceptualizing that an agreement effecting a remedy that was open to the court to grant and was placed before the court for its approval could constitute an offence under the Competition Act."

At the same time, the FCA was careful to keep the door for potential Competition Act challenges to settlement agreements involving IPRs open, saying there could be "circumstances where a settlement agreement could constitute the 'something more' contemplated in the Eli Lilly cases." The FCA left it to future courts, however, to consider what these circumstances might be.



1 Laboratoires Servier v. Apotex Inc. [2008] F.C.J. No. 1094, 67 C.P.R. (4th) 241 (F.C.), aff'd [2009] F.C.J. No. 821, 2009 FCA 222.
2 [2004] F.C.J. No. 1049, 2004 FCA 232.
3 Apotex Inc. v. Eli Lilly & Co., [2005] F.C.J. No. 1818, 2005 FCA 361, at para. 14.
4 [2008], F.C.J. No. 1094.
5 Id., at para. 475.

 

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. 

Akzo Nobel fined $3.15 million for price fixing

Canada's Competition Bureau announced on November 21, 2008 that Akzo Nobel Chemicals International BV had pled guilty to criminal charges for fixing the price of hydrogen peroxide sold in Canada between 1998 and 2001, and agreed to pay a C$3.15 million fine.

Sales of the product in Canada during that period were approximately C$470 million, and Akzo Nobel accounted for approximately 5% of Canadian sales. The Bureau's release revealed that the company had cooperated in the investigation, and that the Bureau's investigation of the international conspiracy is ongoing.

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 issues draft information bulletin on sentencing, leniency in cartel cases

Danielle Royal

The Competition Bureau also recently issued a Draft Information Bulletin on Sentencing and Leniency in Cartel Cases for public consultation.1 The Bulletin sets out the factors that the Commissioner of Competition and the Bureau will consider in making recommendations to the Director of Public Prosecutions (DPP) that those accused of criminal cartel and bid-rigging offences under the Competition Act2should be treated leniently in sentencing.

The Bureau's goal is to establish a transparent and predictable Leniency Program to complement the Bureau's existing Immunity Program. Under the Immunity Program, full immunity from prosecution is available, subject to certain conditions, to the first business organization or individual that comes forward to assist the Bureau with an investigation into the activities of a cartel or bid-rigging scheme - in other words, full immunity is available to the "first in."

In the past parties who co-operated with the Bureau's investigations in a timely and valuable way have also qualified for lenient treatment in sentencing. The formal Leniency Program clarifies the terms on which leniency will be made available in the future, on the expectation that parties will then be more likely to come forward and cooperate with investigations.

The Bulletin is divided into three parts. The introduction provides an overview of how the Bureau, the Act and the cartel provisions operate, and the respective roles of the Commissioner of Competition, the DPP and the Courts in enforcing the Act.  The second part of the Bulletin sets out the general principles of sentencing that the Courts will consider, and which the Bureau therefore considers in the course of making sentencing recommendations. The third part of the Bulletin describes the more specific terms on which the Bureau will recommend a reduced sentence for participants in the Leniency Program as a result of cooperation and assistance during the investigation.  This article focuses on the second and third parts of the Bulletin.

Sentencing principles: economic harm, aggravating factors, mitigating factors

The economic harm associated with cartel and bid-rigging activities serves as a starting point for a recommended fine. It has a quantitative dimension (higher prices for consumers) as well as a qualitative dimension (the stifling of competition and innovation in the economy as a whole). Because economic harm is difficult to quantify, however, the Bureau uses a proxy: the "volume of commerce" related to the cartel activities multiplied by an "overcharge" factor. The "volume of commerce" is the aggregate value of sales of the product in question, in Canada, over the term of the offence. The overcharge is the amount of money paid by victims of the cartel above what they would have paid if the cartel was not in effect. To calculate the overcharge, the Bureau uses a proxy of 20 per cent of the volume of commerce. (While numerous studies estimate that the likely overcharge is closer to ten per cent of the volume of commerce, the Bulletin suggests that the lesser figure would not capture the qualitative effects of the harm caused, nor produce an adequate deterrent.)

Once the Bureau has established an estimate of the economic harm caused, it will adjust its recommended sentence to reflect the aggravating or mitigating circumstances of the case. Aggravating factors such as whether the party instigated or managed the cartel, or coerced others into furthering its activities will weigh in favour of a harsher sentence.

The Bulletin also highlights the Bureau's view that a significant deterrent in cartel cases is the exposure to criminal prosecution for the individuals involved. Individuals accused are liable to fines or imprisonment (to a maximum of five years) or both. The factors that may be weighed in the Bureau's sentencing recommendations with respect to individuals include the degree to which an individual has profited from the cartel's activities, whether that person has been involved in similar activities in the past, and whether he or she is being punished in other ways (for example, through loss of employment).

The Leniency Program

The overarching principle of the Leniency Program is that leniency in sentencing should be directly proportionate to the contribution a party makes to the Bureau's investigations. The following basic conditions apply:

  • the DPP must not have filed charges against the party;
  • the party must have terminated its participation in the illegal activity;
  • the party must cooperate fully with the Bureau's investigation and any subsequent prosecution by the DPP; and
  • the party must admit that it has engaged in anti-competitive conduct which may constitute an offence under the Act, and agrees, if charged, to plead guilty and to be sentenced for its participation in the illegal activity.

The Bureau prioritizes both the timeliness and value of cooperation. This is evaluated according to the utility of the evidence that a party can provide, and the quality of that cooperation including how quickly a party fully cooperates. A party seeking leniency must satisfy the Bureau that it has taken all appropriate steps to locate and produce relevant evidence, including full disclosure if it is suspected that individuals have hidden or destroyed evidence.

A party may also qualify for "Leniency Plus." That is, a party that is not "first in" with respect to a particular offence may still be granted immunity under the Bureau's Immunity Program if it provides evidence of a new offence of which the Bureau was not aware. In these circumstances, the party may qualify for immunity with respect to the new offence, as well as enhanced leniency with respect to the original offence.

The first leniency applicant who meets (and continues to meet) the Bureau's qualifications is eligible for a reduction of up to 50 per cent of the fine that would otherwise be recommended.Where the party is a business organization, the Bureau will also typically recommend that no separate charges be laid against the applicant's directors, officers and employees (subject to exceptions in extreme cases of wrongdoing). Subsequent leniency applicants may qualify for reductions in fines of up to 30 per cent, and up to 50 per cent where their evidence has exceptional value (or in cases where the first leniency applicant fails to satisfy the requirements).

The Bulletin describes five steps for leniency applications, similar to those applicable to immunity:

  • contacting the Bureau;
  • proffering evidence;
  • qualifying for a conditional lenient treatment recommendation;
  • full and frank disclosure; and finally;
  • qualification for a final sentencing recommendation to the DPP.

Contact with the Bureau is usually made by the party's legal representative. The proffer should follow as soon as possible, typically within thirty days. The proffer is usually made on a "without prejudice" basis, and must include a detailed description of the illegal activity and sufficient information for the Bureau to determine whether the party qualifies for the leniency. The Bureau may request (again, on a without prejudice basis) the opportunity to review the documentary evidence and to interview witnesses. If the Bureau is satisfied with the proffer, it will recommend lenient treatment, conditional on the party's ongoing cooperation with its investigation, which will include full and frank disclosure of the party's evidence.

Finally, the Bureau will treat as confidential the identity of the party requesting leniency (and the information provided by the party in furtherance of that request) except where that information is already public, or where disclosure is required by law to a Canadian law enforcement agency for the purposes of the administration of enforcement of the Act, is necessary to prevent the commission of a serious criminal offence, or is authorized by the party.


1Online: Competition Bureau; Stikeman Elliott LLP is participating in the Canadian Bar Association's commentary on the draft Information Bulletin on Sentencing and Leniency in Cartel Cases.

2For the purpose of the Bulletin, cartel offences include conspiracy (set out in section 45 of the Act as well as parts of sections 48 and 49), foreign directives (section 46) and bid-rigging (section 47).

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.

Canadian Bureau releases draft bulletin on trade associations

On October 24, 2008, the Competition Bureau (the Bureau) released its draft Information Bulletin on Trade Associations (the Bulletin) for public comment.  

According to the Bureau, participation in trade associations - particularly those whose members compete - carries with it an inherent risk that the association may be used as a forum for anti-competitive conduct, particularly anti-competitive agreements or collective action that violates the criminal conspiracy (cartel) provision of the Competition Act.  "Association activities that deal with subjects such as pricing, customers, territories, market shares, terms of sales and advertising restrictions" are of particular concern to the Bureau. The draft Bulletin aims to provide guidance to trade associations on how best to ensure compliance with the Competition Act; it calls upon trade associations to "ensure that appropriate safeguards are implemented" to guard against anti-competitive conduct.

After summarizing the provisions of the Competition Act that are of greatest concern in the context of trade associations (anti-competitive conspiracies and bid-rigging, price maintenance, restrictive trade practices that exclude or reduce competition, and misleading advertising), the draft Bulletin highlights the following trade association activities as deserving of particular attention:

  • information collection and sharing
  • recording of meetings (agendas and minutes)
  • membership criteria or restrictions
  • discipline of association members
  • fee guidelines
  • advertising restrictions
  • self-regulation, voluntary codes and standard setting.

The draft Bulletin discusses the Bureau's concerns in these areas and its recommendations for conduct by associations. These recommendations range from the straightforward (e.g., establishing clear and appropriate agendas and recording minutes of meetings) to the more complicated (e.g., six guiding principles for a trade association's development of any regulation, the primary objective of which, according to the Bulletin, "should be to promote open and effective competitive markets").

The draft Bulletin concludes with a list of "Best Practices" for trade associations. The Bureau suggests that associations establish a competition law compliance program for the purposes of informing members about competition law, setting boundaries for permissible conduct, identifying situations where legal advice or the presence of a lawyer is advisable, and encouraging pro-competitive association activities. Detailed guidelines for association conduct, both general in nature and specific to each of the issues listed above, are provided. These include the more obvious Don'ts, such as:

  • discussing current or future prices, costs, output levels, market allocations, business plans or bids; and
  • imposing sanctions aimed at inducing members to follow association recommendations that, if carried out, would have an anti-competitive effect.

Do's include such things as:

  • having clear membership criteria that are not arbitrary and are based on the legitimate objectives of the association; and
  • adhering to clear agendas and record the minutes of the meetings.

The guidelines also include recommendations that may be characterized as either a "gold standard" or as "over the top," depending on your point of view. For example, the guidelines state that associations should not only ensure that legal counsel approve the agenda and minutes of any association meeting, but that legal counsel should actively participate in all association meetings.Generally, however, the guidelines provide workable suggestions for the conduct of trade associations that will go a long way to limit the risk of association activity being off-side competition law and, if an investigation is ever launched, to decrease the likelihood that the Bureau will pursue the prosecution of an association or its executives even if such activities are seen, by the Bureau, to be on the 'margins' of anti-competitive conduct.

The draft Bulletin is a useful addition to the Competition Bureau's many publications, and will serve as an important tool for all Canadian trade associations and their members. Comments on the draft Bulletin are welcomed by the Bureau until January 23, 2009.

Canada levies fines against Bayer Group for role in international cartels

Michael Kilby

On October 30, 2007, the Competition Bureau announced that the Bayer Group pled guilty to three counts under section 45 of the Competition Act in respect of its role in three international price fixing conspiracies in the rubber and chemicals industry. Bayer AG was fined C$2.9 million for its part in a rubber chemicals conspiracy and C$400,000 for its role in a nitrile rubber conspiracy. Bayer Corporation, a wholly owned US subsidiary of Bayer AG, was fined C$345,000 for participation in a conspiracy to fix the price of aliphatic polyester polyols made from adipic acid.  In all, the fines totalled C$3.645 million.  Significant fines have also been levied against several companies in respect of these cartels in the United States and Europe.

Bureau Loses St. John's Taxi Conspiracy Case - At Preliminary Hearing

Susan M. Hutton

In a ruling of the Newfoundland Provincial Court dated September 18, 2006, D. Orr Provincial Court Judge dismissed, after a preliminary hearing, charges laid under Section 45 of the Competition Act (Canada) against six companies and seven individuals in respect of an agreement among them to refuse to bid on certain contracts for exclusive supply rights at the St. John's Airport and other St. John's locations (R. v. Budgens Taxi, [2006] N.J. No. 250). The Judge found that the Crown's economic expert failed to provide any evidence as to the absolute size of the relevant market, therefore making it impossible to determine the impact of the agreement on competition. While stating that the regulated conduct defence could not be considered at the stage of the preliminary inquiry, he also stated that the accused "were acting within the confines of a regulated industry", and had brought the issue to the attention of the appropriate regulatory body, and could not be said to have "unduly" impacted the market.

Canada issues Technical Bulletin on "Regulated" Conduct: Competition Bureau maintains a cautious approach

On June 29, 2006, the Competition Bureau (the Bureau) released the final version of its Technical Bulletin on "Regulated Conduct" (the Bulletin). The Bulletin outlines the Bureau's approach to enforcement of the Competition Act (the Act) in respect of conduct that is authorized or required by a federal, provincial or other law (i.e., the so-called "regulated conduct doctrine", or "RCD"). Given that the RCD operates to immunize certain conduct from the Act, and therefore narrows the Bureau's jurisdiction, it is perhaps not surprising that the Bulletin reflects a strict approach to the RCD's application. That said, the Bulletin notes that even if the RCD is not available in a given case, other defences, such as a lack of mens rea or official inducement of error, may apply to exempt conduct from the Act's application. In short, in cases where the RCD does not apply, the Bureau will still consider, using other tools of statutory interpretation, whether Parliament intended that the impugned conduct be exempt from the relevant provisions of the Act.

The RCD has been the subject of litigation - and indeed considerable controversy - in recent years. This controversy arose in part from a series of cases that appeared to have expanded the doctrine beyond its traditional limits, in particular by applying the RCD to:

  • conduct not strictly mandated under other legislation, but which was authorized in general terms;
  • conduct authorized by other federal as well as provincial legislation; and
  • prevent the application of both the criminal and civil provisions of the Act.

Faced with what one expects the Bureau might perceive as the threat of encroachment on its jurisdiction, and armed with a Supreme Court of Canada decision (albeit with respect to the Criminal Code and not the Act - see Garland, discussed below) espousing a relatively restrictive view of the RCD's application, the Bulletin reflects the Bureau's assertion of jurisdiction to challenge anti-competitive conduct in all but the most clear cases of legislative desire to the contrary.

The Bulletin reflects stakeholder feedback received by the Bureau since its release of a draft version in November, 2005 (the Draft Bulletin). The Draft Bulletin itself constituted a substantial revision of an earlier attempt at setting out the Bureau's views on the RCD in the form of an Information Bulletin on the Regulated Conduct Defence issued in December 2002. The original attempt had met with significant criticism and was subsequently overtaken by the Supreme Court of Canada's statements, albeit in obiter, in Garland.

In setting out the Bureau's approach to the application of the RCD, the Bulletin (understandably) starts from the premise that the Bureau "is obliged to administer and enforce the Act, and that the Act is a framework law of general application". Consistent with the views espoused by the Supreme Court of Canada in Garland, the Bulletin goes on to state that Parliament "is not presumed to depart from the general system of law without expressing its intentions to do so with irresistible clearness." Characterizing the RCD case law as "underdeveloped" and as an "exception" to this rule (and to other rules of statutory interpretation, including the general rule of federal paramountcy), the Bulletin states the Bureau's view that "a cautious application of the RCD is warranted."

An example of the Bureau's "cautious" application of the RCD is its view that the RCD will apply only where a validly enacted provincial law conflicts with the Act in such a way that a party cannot comply with both laws (i.e., so-called "impossibility of dual compliance"). While the Bulletin recognizes that other courts, including the Supreme Court of Canada in Jabour, had previously applied the RCD to conduct that was simply authorized and not compelled by provincial law, and in circumstances in which compliance with both laws would have been possible, it confines Jabour to its facts. The result, it appears, is the recognition that the RCD may apply to allegations of anti-competitive conspiracy arising out of conduct generally authorized by provincial legislation, but the potential imposition - presumably - of liability (barring other defences) for other sections or in respect of federally authorized conduct which was clearly authorized and not required.

In contrast, the Bulletin highlights the Supreme Court of Canada's "most recent pronouncement on the RCD," notwithstanding the fact that Garland was not a competition law case and that its treatment of the RCD was obiter. In Garland, the Bulletin notes, the Supreme Court of Canada "held that the RCD can only immunize conduct from the Criminal Code where the Criminal Code clearly allows for application of the RCD, for example, by 'leeway language' such as "against the interests of the public' or 'unduly [limiting competition]' found in the competition law provisions at issue in previous RCD case law. The Bulletin, therefore, treats the RCD as frozen in time, pinning it to specific language addressed in "previous RCD case law" (i.e., "undueness" language in the Act's criminal conspiracy provisions, which continues to exist through section 45) and excluding similar language contained in more recently enacted provisions of the Act (such as the requirement of a "substantial prevention or lessening of competition" found in the Act's reviewable practices provisions). The Garland approach similarly excludes provisions without leeway language, even though conduct that was the subject of the earlier case law could be challenged as a contravention of the Act's price maintenance provision, which, unlike section 45, is a per se offence without the "leeway language" necessary to allow application of the RCD.

The effect of the Bulletin's approach is significant. In a nutshell, it limits the RCD's potential application to allegations of criminal anti-competitive conspiracy to a single provision of the Act (section 45). It also limits it to conduct that is provincially (not federally) regulated. Therefore, while the Bureau will refrain from investigating conduct as a criminal conspiracy under section 45 of the Act if it was "authorized" or required by valid provincial legislation, it considers itself to have retained jurisdiction to investigate such conduct as a potential violation of any other provision of the Act - even where a direct conflict between the laws exists, provided that it determines that Parliament intended for the Act to apply to the conduct.

Although the Bulletin contains no practical examples, the analytical framework it describes leads logically to the conclusion that even provincial marketing boards (the source of most of the early RCD cases and long thought to lie outside the scope of the Act) could potentially be subject to investigation under the abuse of dominance provisions, or even the criminal prohibition against price maintenance. It is doubtful that the Bureau would actually seek to enforce its jurisdiction in this manner, but, as the Bulletin points out, the case law in the area is underdeveloped and the potential for such enforcement flows from the Bureau's strict reading of (or, in any event, some of) the RCD case law.

While there is no principled reason why the RCD could not extend to conflicts between the Act and other federal laws, the Bulletin points to a relative absence of jurisprudential support for such application of the RCD. It does not follow that the Bureau would necessarily seek to apply the Act in such a case, since the Bulletin makes it clear that other defences or doctrines might apply to achieve the same result. Consistent with the "impossibility of dual compliance" approach to statutory conflict, however, when faced with potentially conflicting federal laws, the Bureau will first determine whether a party may reasonably comply with both laws. If there is a conflict between the Act and another federal law, the Bureau will seek to determine whether Parliament intended that the Act apply to the impugned conduct. If it determines that Parliament has expressly or impliedly articulated an intention to displace competition law enforcement, the Bureau will not pursue the matter further. The Bulletin clarifies the Bureau's position on implied intention, stating that the other federal law is intended to take precedence over the Act where Parliament has enacted specific "provisions to address the conduct in question," or has provided an exhaustive statement of law concerning the matter.

Despite acknowledgement in the Bulletin that the case law does not expressly distinguish between regulators (such as provincial marketing boards) and those they regulate (so-called "regulates"), and despite strong submissions made in response to the Draft Bulletin against drawing such a distinction, the Bulletin maintains the Bureau's position that regulatees (including self-regulatory bodies such as medical associations or law societies) may be subjected to greater scrutiny than regulators.

There can be no doubt that the Bulletin adopts, as the Bureau puts it, a "cautious approach" to the application of the RCD. However, the Bulletin also leaves the door open for a pragmatic, flexible approach toward actual enforcement activity. While stating that the RCD will not often operate to deprive the Bureau of jurisdiction, Bulletin also states that the Bureau will not necessarily proceed simply because it has the jurisdiction to do so. In each case, the Bureau will consider whether it is "in the public interest to pursue the conduct under the Act in the circumstances." Members of provincial marketing boards presumably need not fear the competition police at their doors just yet.

Recent Group Activities

Members of the Group are participating in the Canadian Bar Association Annual Fall Conference on Competition Law on September 28-29, 2006. Susan Hutton is Chair of this year's conference. Katherine Kay is to speak on "The Real Criminal Procedure: The Art of Obtaining Immunity"; Paul Collins to moderate session on "Multinational Hostile Takeovers in Action"; Jeffrey Brown to moderate session on "Foreign Investment Review in a Globalizing World - U.S. and Canadian Perspectives"; and Shawn Neylan to moderate session on "Swimming in a Sea of Production - Responding to Section 11 Orders, Second Requests, Search Warrants and Inventive Class Action Plaintiffs."

SEE FULL PROGRAMME DETAILS

Susan Hutton and Kevin Rushton acted for Bregal-Birchill in Birchill Energy Limited's $440-million acquisition by Harvest Energy Trust.

Paul Collins acted for ING Real Estate in its $3.3-billion bid for Summit REIT.

Susan Hutton and Kevin Rushton acted for Anadarko Petroleum Corporation in the US$4.24-billion sale of Anadarko Canada Corporation to Canadian Natural Resources Limited.

Canadian Competition Bureau Obtains Record Fines for Conspiracy Conviction

Danielle K. Royal

Following a Competition Bureau investigation, three Canadian carbonless paper sheet manufacturers (Cascades Fine Papers Group Inc., Domtar Inc. and Unisource Canada Inc.) recently pleaded guilty to conspiring to lessen competition in the supply of carbonless paper sheets in Ontario and Quebec contrary to section 45 of the Competition Act.Carbonless paper sheets are used in multiple copy forms. The demand for carbonless paper sheets has been declining for several years as a result of the development of computerized receipts.

Each of the accused was sentenced to pay a fine in the amount of $12,500,000, comprised of a $10,000,000 fine for activity in Ontario and $2,500,000 for activity in Quebec. In addition to the fines, each accused must educate its directors, officers, employees and agents about complying with the Competition Act.

This is the first time the Court has imposed the maximum $10,000,000 fine available under the Competition Act against a domestic company.

Nippon Pleads Guilty

In the latest conviction related to the international conspiracy to fix the price of graphite electrodes used in steel production, Nippon Carbon Company, Ltd. pleaded guilty on December 8, 2005 to aiding and abetting the conspiracy, contrary to section 46 of the Competition Act and section 21(1) of the Criminal Code.  Nippon had agreed, during the 5-year term of the illegal market sharing agreement, not to sell into Canada.  Nippon will pay a fine of C$100,000. It is the 7th party to be convicted in Canada in connection with the graphite electrode conspiracy, and fines in the case now top C$25 million.
 

Uncertainty Continues in Application of Regulated Conduct Defense

Danielle K. Royal

The Competition Bureau (the Bureau) recently released for consultation a revised draft Technical Bulletin on "Regulated" Conduct (the Draft Bulletin) setting out the Commissioner of Competition's approach to enforcement of the Competition Act where the impugned conduct may be regulated by another federal, provincial or municipal law or legislative regime.1A review of the Draft Bulletin indicates that the Bureau has considerably narrowed the scope of the defence - subject to further clarification by the courts. Comments are requested by February 3, 2006.

The Draft Bulletin draws an important distinction between conduct regulated by federal laws as opposed to conduct regulated by provincial laws. With respect to federal laws, it states that in circumstances where a party is unable to reasonably comply with both the Competition Act and another federal law, the Bureau will not pursue a matter under the Competition Act if Parliament has articulated an intention to displace competition law enforcement either explicitly through legislation or implicitly by establishing a comprehensive regulatory regime that authorizes a regulator to act inconsistently with the Competition Act.2 Moreover, the Bureau appears to recognize that in the context of conflicting federal laws, the regulated conduct defence is applicable both to the criminal provisions and the reviewable practice provisions of the Competition Act. However, the Bureau's approach to impugned conduct authorized by provincial regulatory laws is more restrictive and uncertain.

In the context of provincial regulatory laws, while the Bureau recognizes that the regulated conduct defence is a common-law exception to the doctrine of federal paramountcy, it only definitively acknowledges the application of the defence in the context of section 45 conspiracy offences. With respect to other criminal provisions of the Competition Act, the Bureau, citing the Supreme Court's decision in Garland v. Consumers Gas Co.3, suggests that reliance on the regulated conduct defence requires evidence that Parliament intended the application of such a defence. 4 Moreover, the Bureau seriously questions the applicability of the regulated conduct defence to the (civil) reviewable practice provisions when they conflict with provincial statutes, based upon its claim that the "leeway language" referenced in Garland and contained in section 45 of the Competition Act ("undue" lessening) does not appear in the civil provisions (which are largely subject to the "substantial" lessening standard). While the Bureau does not go so far as to reject the applicability of the defence to reviewable practices, it says that in the context of provincial laws the Bureau's approach will merely be informed, but not governed, by the regulated conduct defence jurisprudence.

Finally, the Draft Bulletin openly states the Bureau's intention to develop the case law in this area and suggests that the Bureau will also explore a legislative resolution to the ambiguity surrounding the regulated conduct defence. The Bulletin - even when finalized - will not be the final word on these issues.

FOOTNOTES

[1] The Draft Bulletin is intended to replace the Bureau's 2002 Information Bulletin on regulated conduct, which was withdrawn in August, 2005 following extensive criticism that the Bureau had failed to seek stakeholder input before publication and therefore the Bulletin did not accurately reflect the jurisprudence relating to the regulated conduct defence.

[2] The Bulletin provides no examples, however, of any such alternative regimes. Whether it now considers review of the proposed acquisition of a radio or TV broadcaster by the CRTC on public interest grounds to qualify, as was the subject of recent litigation (see Astral Média Inc. v. Le Commissaire de la concurrence et al. and Télémedia Radio Inc. v. Le Commissaire de la concurrence, Federal Court - Trial Division, Court File Nos. T-2256-01 and T-2256-02), is not clear.

[3] [2004] 1 S.C.R. 629 ( "Garland").

[4] If such Parliamentary intent is absent, the Bureau states that it may nevertheless exercise its discretion not to pursue an inquiry if it is not in the public interest to do so.

Bill C-19 Dies as Canadian Federal Election is Called

With the fall of Canada's Liberal minority government on November 28, 2005, Bill C-19, An Act to Amend the Competition Act and to Make Other Consequential Amendments, died on the order paper. While the outcome of the January 23, 2006 federal election is unclear, re-introduction of the Bill in 2006 seems likely. Meanwhile, on October 6, 2005, the Government had announced amendments that would have increased the criminal fines for anti-competitive conspiracies from a current maximum of CDN$10 million to a maximum of CDN$25 million per indictment. The new proposals would also have provided the Commissioner of Competition with the authority to conduct broad-ranging studies of competition in a market - even when she does not believe there are grounds for an order pursuant to the Competition Act.

Bill C-19 was originally introduced to Parliament in the Fall of 2004, and was under review by the House Standing Committee on Industry, Science and Technology since that time.

The newly introduced amendments were in addition to those initially proposed in Bill C-19, which included, among other things, proposals to:

  • repeal the existing criminal provisions in the Competition Act dealing with price discrimination, predatory pricing and discriminatory promotional allowances; and

  • enable the Competition Tribunal to order the payment of an administrative monetary penalty up to a maximum of CDN$10 million (first order) or CDN $15 million (subsequent orders) under the abuse of dominance provisions of the Competition Act.

 

 

International Food Flavour Cartel Brings $1.675 Million in Fines

The Competition Bureau announced on August 30, 2005 that the Federal Court of Canada imposed fines totaling $1.675 million for a conspiracy to fix prices of nucleotides, a food flavour enhancer, in Canada. Ajinomoto Co. Inc., Japan's largest producer of seasonings, pleaded guilty to violating section 45 of the Competition Act by virtue of its participation in the conspiracy and was fined $1.5 million. CJ Corp. also pleaded guilty and was fined $175,000. In 2001, these same two companies pleaded guilty and paid fines in the United States for participating in this cartel. Katherine Kay of Stikeman Elliott's Competition/Antitrust Group acted for one of the defendants in this matter.

Federal Court Patent Decision May Undercut Competition Act on Intellectual Property Rights

An agreement dealing with patent rights that is specifically authorized by the Patent Act, including the assignment of a patent, involves the "mere exercise" of patent rights such that any resulting lessening of competition is not undue and cannot constitute the criminal offence of conspiracy under section 45 of the Competition Act (the Act). That is the recent finding of the Federal Court of Canada in Eli Lilly and Company v. Apotex Inc., which represents a significant departure from the Competition Bureau's stated approach to the interface between competition policy and intellectual property rights.

The Decision

The Court's decision relates to an action begun in 1997 by Eli Lilly against Apotex for infringement of eight patents related to intermediate compounds and processes for manufacture of the antibiotic "cefaclor." Four of the eight patents had been assigned to Lilly in 1995 by Japan-based Shionogi & Co. Ltd., giving Lilly a monopoly in Canada on known processes for producing the drug. By way of counterclaim, Apotex alleged that these assignments constituted an agreement that resulted in an undue lessening of competition, contrary to section 45 of the Act, thereby entitling it to damages under section 36.

Three motions by Lilly and Shionogi for summary judgment were granted by Hugessen J. in October 2003, on the grounds that the allegations respecting the alleged anti-competitive assignment agreement did not disclose a cause of action under the Act. In so finding, Hugessen J. relied on the Federal Court of Appeal's 1991 decision in Molinlycke AB v. Kimberly-Clark of Canada Ltd., which held that "the impairment of competition inherent in the exercise of rights provided by [the Patent] Act" could never be "undue" for the purposes of section 45 of the Act.

On appeal by Apotex, the Federal Court of Appeal held, in June of 2004, that Molinlycke does not preclude application of the Act whenever evidence exists that competition is affected by the exercise of patent rights. In this respect, the Court pointed to section 32 of the Act, which specifically authorizes the imposition of various special remedies, including compulsory licensing and revocation of patents, where the use of (or refusal to use) an intellectual property right lessens competition unduly. Accordingly, the Court of Appeal found that Hugessen J. erred in law by failing to consider Apotex's argument that the Shionogi assignment, which reduced from two to one the number of companies possessing Canadian patent rights to cefaclor manufacturing processes, constituted "something more than the mere exercise of patent rights," to which section 45 could in fact apply.

Pursuant to instructions of the Federal Court of Appeal, Hugessen J. reconsidered the motions for summary judgment. Hugessen J. held that, while restrictions on competition that are not specifically authorized by the Patent Act are subject to section 45 of the Act, agreements that are authorized by the Patent Act will fall within the "mere exercise" of patent rights and, as such, are exempt from section 45. As a result, the Court recognized that the Shionogi assignments gave Lilly a monopoly in process patents for cefaclor, but nevertheless held that they were beyond the reach of section 45 since assignments of patents are specifically provided for in section 50 of the Patent Act.

The Decision Creates Uncertainty Over the IPEGs

Notwithstanding the Court's assertion that its conclusion is "fully compatible" with the Competition Bureau's Intellectual Property Enforcement Guidelines (IPEGs), the Court's interpretation of what constitutes the "mere exercise" of patent rights is, in our view, clearly at odds with that of the Bureau in the IPEGs. The Bureau defines the "mere exercise of an IP right" as either the owner's unilateral exclusion of others from using the IP or the non-use of the IP by the owner; non-unilateral conduct, including "[a] transfer of IP rights," is clearly stated by the Bureau as being, in its view, "something more than the mere exercise of the IP right.". The Bureau does, however, state that the mere exercise of IP rights does not violate the Act's general provisions (which include the section 45 conspiracy provision), no matter to what degree competition is affected.

Applying the IPEGs to Shionogi's assignment of the cefaclor patents to Lilly, the agreement would be characterized as "something more" than the mere exercise of patent rights. Further, because the assignment reduced the number of competitors with patent rights to the cefaclor manufacturing process, which the Federal Court found increased Lilly's market power, the IPEGs suggest that Lilly and/or Shionogi could have been potentially liable to enforcement proceedings under the Act's general provisions. In the circumstances of this case, the applicable general provisions could have included the section 45 criminal offence, as well as practices that are civilly reviewable, such as abuse of dominance (section 79) and mergers (section 92) However, it should be noted that limitation periods prevent initiation of proceedings under sections 79 and 92 more than three years after the conduct has ceased.

In characterizing the Shionogi assignment as the "mere exercise" of patent rights, the Federal Court appears to have narrowed the circumstances in which the Competition Act will apply to anti-competitive effects stemming from the exercise of IP rights. If a lessening of competition from the assignment of a patent cannot be "undue" under section 45 because assignment is authorized by the Patent Act, it might be argued similarly that any anti-competitive effects arising from the assignment cannot be "substantial," as required under sections 79 and 92, among other sections. The same may equally be said with respect to IP licences, which, like assignments, are authorized by IP legislation.

Eli Lilly thus has the potential to blow open a gaping hole in Canada's competition regime, permitting anti-competitive effects to go unchecked merely because their source, whether an agreement or otherwise, was permitted under an IP statute. Such an exception would also constitute a major departure from other competition regimes, including those in the United States and the European Union, which adopt an approach to the competition/IP interface in relation to IP assignments and licensing that is broadly similar to that set out in the Bureau's IPEGs. Accordingly, the Bureau's response (or lack of response) to the Court's decision will be of great interest and consequence to business and IP and competition/antitrust practitioners.

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.