The Competitor : Canada Competition / Antitrust Blog by Stikeman Elliott Lawyers & Attorneys

The registered consent agreement contemplates that Novartis will have an initial sale period within which to complete the divestiture of the products in question, failing which a divestiture trustee will be empowered to complete the divestiture.  It also contemplates that the relevant Miochol-E assets and associated licenses will be divested to Bausch & Lomb Incorporated, pursuant to an asset purchase agreement signed in July 2010.  The consent agreement does not contain an explicit “hold separate” obligation but does contain detailed asset preservation obligations, together with the appointment of a monitor.
The transaction had been announced on January 4, 2010, suggesting a relatively long review period by the Bureau.  The remedy is somewhat notable in that Novartis already owned an approximate 25% interest in Alcon, which it acquired in 2008.  It is not publicly known whether the Bureau reviewed the initial 2008 acquisition of the 25% interest, or how its analysis differed in respect of the 2010 transaction.
This transaction represents the fifth occasion to date in 2010 for which the Bureau has required a merger remedy (along with Ticketmaster/Live Nation,  BFI Canada/Waste Services, Nufarm/AH Marks, and Teva/ratiopharm).

Both the Bureau and the FTC press releases refer to extensive international cooperation between the Bureau, the FTC, UK and Australian competition authorities, including specific reference to close cooperation between the Bureau and FTC that resulted in a coordinated remedy addressing the Canadian and US markets.

The remedy is notable in that it was obtained in respect of a merger that had been consummated over two years ago.  The size of the AH Marks business at the time of the acquisition (a reported purchase price of approximately £75 million, and reported global annual revenues of approximately £62 million) was such that the transaction may not have triggered pre-merger notification requirements.  It is always important to assess the substantive competition issues raised by a transaction, even where the transaction does not trigger mandatory filings.

Ticketmaster, a worldwide provider of ticketing services, and Live Nation, a promoter of live events globally, announced their intention to merge on February 10, 2009. Following a detailed review of the transaction, the Bureau concluded that the proposed merger would likely prevent competition substantially in respect of primary ticketing services for large live entertainment events in Canada. To address the Bureau's concerns and move forward with the proposed merger, Ticketmaster and Live Nation agreed to implement certain divestitures and comply with certain behavioural commitments, including principally:

• Divestiture of Ticketmaster's subsidiary, Paciolan, Inc., which provides ticketing services to venues or other organizations, to a buyer approved by the Commissioner of Competition. Pending completion of the divestiture, the parties must hold Paciolan separate and apart from their other operations.
• Licensing of Ticketmaster's primary ticketing software to Anschutz Entertainment Group, Inc. (AEG), a competing promoter of live events, and provision of private label ticketing services to AEG for a period of no more than 5 years. At AEG's option, AEG may acquire a non-exclusive, perpetual, fully paid-up licence to the Ticketmaster software used by Ticketmaster to sell primary tickets in Canada.
• Non-retaliation, including anti-competitive bundling, in respect of any venue owner in Canada that chooses to use another company's primary ticketing services or another company's live event promotional services, for a period of 10 years after closing of the merger.

The divestitures and behavioural commitments in the consent agreement are substantially similar to those contained in the proposed U.S. Final Judgment addressing competition concerns in the United States. The consent agreement has been registered with, and is enforceable as an order of, the Competition Tribunal. Ticketmaster was represented in Canada by Stikeman Elliott LLP.

• On October 29, 2009, the Competition Bureau approved the acquisition of Schering-Plough by Merck, subject to Merck's divestiture of its interest in the animal health company, Merial, to its joint venture partner, Sanofi-Aventis, as well as the divestiture by Schering-Plough of its new anti-nausea and anti-vomiting product (used in the treatment of post-chemotherapy and post-operative side effects), Rolapitant, to Opko Health in both Canada and the United States.
   
• On October 14, 2009, agreement was also reached with Pfizer Inc. and Wyeth as to the divestiture of several animal pharmaceutical and vaccine products to Boehringer Ingelheim Vetmedica, Inc., in both Canada and the United States. In Canada only, Pfizer also amended the terms of its existing arrangement with Paladin Labs Inc. governing the distribution and sale of Pfizer's human hormone replacement therapy product, Estring. (Members of the Stikeman Elliott competition group represented Wyeth in that transaction.)
   
• Previously, on August 27, 2009, Ultramar Ltd. had been approved as the acquirer of terminal storage and distribution capacity required to be provided by Suncor Energy Inc. as part of a remedy addressing competition concerns raised by the Bureau over the merger of Suncor and Petro-Canada. The sale process for the 104 retail gas stations required to be divested in southern Ontario is still ongoing.

• sell 104 retail gas stations in southern Ontario;  
• sell approximately 1.1 billion litres of terminal storage and distribution capacity, annually, to be used for wholesale distribution during a 10-year period at their terminals located in the Greater Toronto Area; and
• supply 98 million litres of gasoline each year for a 10 year period, to independent gasoline marketers.

Both the Bureau and the parties to the merger have expressed satisfaction with the agreement. Melanie Aitken, Interim Commissioner of Competition commented that "requiring the companies to sell retail outlets will lead to increased competition by independent retailers who can expand their market presence [and] .the parties' commitment to sell terminal space in the Greater Toronto Area is important to promoting a competitive dynamic in that market." Rick George, the current president and CEO of Suncor, who will assume the same role in the merged company, said that "we are satisfied that the resulting terms will preserve the expected benefits of the merger and maintain a competitive refined products market in Ontario."

The SDP is a loyalty program under which Canada Pipe offers rebates and discounts to distributors that purchase all of their requirements for cast-iron pipe, cast-iron fittings and mechanical joint couplings (collectively known as cast-iron "drain, waste and vent" or DWV products) exclusively from Canada Pipe. Under the terms of the consent agreement, Canada Pipe will implement and offer a modified rebate program to distributors in Canada as an alternative to the SDP, which Canada Pipe may continue to offer. The modified rebate program will provide rebates and multiplier discounts to distributors meeting a minimum purchase requirement, but will not be conditional on exclusive purchases of DWV products from Canada Pipe. Significantly, total rebates and discounts under the SDP (or any other rebate program) are not to exceed those available under the modified rebate program, although Canada Pipe retains the right to offer additional price concessions or discounts "on an as-needed basis in order to match what Canada Pipe believes to be legitimate competing offers." The consent agreement therefore effectively nullifies Canada Pipe's SDP during the five-year term of the agreement.

The Bureau began its challenge of the SDP in 2002, with an application to the Tribunal seeking an order for its elimination as a contravention of the Act's civil exclusive dealing (s. 77) and abuse of dominance (s. 79) provisions. The Tribunal rejected the Commissioner's application in February 2005, finding that while Canada Pipe was dominant in relevant markets, its conduct did not amount to an "anti-competitive act" and did not prevent or lessen competition substantially.

On appeal, the Federal Court of Appeal ordered a re-determination of the case in June 2006, finding that the Tribunal erred by applying the incorrect legal tests under s. 79. With respect to the test for a "substantial lessening or prevention of competition," rather than focusing on whether a substantial level of competition continued to exist (evidenced by new entry and switching by distributors), the Court held that the Tribunal should have asked whether relevant markets would have been substantially more competitive "but for" the impugned practice of anti-competitive acts. The Court also held that the Tribunal erred in requiring a link between the impugned conduct and a negative impact on competition for a "practice of anti-competitive acts" to exist. Instead, the Court held that an anti-competitive act is identified by having as its purpose (based on the overall character of the act, including its reasonably foreseeable or expected effects, any business justification and evidence of subjective intent) an intended predatory, exclusionary or disciplinary effect on a competitor. Effects of the practice on competition are examined in determining the existence of a substantial lessening of competition. Finally, the Court held that for a valid business justification to exist, an impugned practice must have a credible efficiency or pro-competitive explanation; enhanced consumer welfare is on its own being insufficient.

Prior to filing of the consent agreement, the Tribunal was scheduled to hold a re-determination hearing on the case in February 2008. The Commissioner, in her arguments on the re-determination, raised several interesting issues concerning the proper legal approach under s. 79, the resolution of which has unfortunately been pre-empted by the settlement.

In particular, the Commissioner argued in her factum that, with respect to anti-competitive acts, "[t]he evidence of [Canada Pipe's] subjective intent unequivocally establishes that the SDP is an act that has its purpose an intended negative exclusionary effect on competitors and therefore, is an anti-competitive act within the meaning of paragraph 79(1)(b) of the Act."¹ The Commissioner argued that "[i]n light of the evidence regarding the subjective intent of [Canada Pipe], it is not necessary to consider the reasonably foreseeable consequences of the SDP."² Contrary to the Commissioner's submissions, however, the Federal Court of Appeal had held that "evidence of subjective intent is neither required nor determinative" in establishing an anti-competitive act, but rather is one of the "[r]elevant factors to be weighed to determine [the] overarching 'purpose', or 'overall character' of the conduct", along with the reasonably foreseeable or expected objective effects of the act and any business justification.³

With respect to the test for establishing a substantial prevention or lessening of competition, the Commissioner cited a prior decision of the Tribunal in arguing that "[w]here a respondent has significant market power, even a small effect on competition qualifies as substantial."⁴ The Federal Court of Appeal did not comment on this issue in its decision. However, as Canada Pipe argues in response, "to suggest that a de minimis impact upon competitors would be sufficient to meet the "substantiality" threshold in section 79(1)(c) would be to read this threshold out in all cases where it has been established that a firm has market power. Given that market power is a precondition under section 79(1)(a), this would effectively mean the elimination of the substantiality component under section 79(1)(c) in all abuse of dominance cases."⁵

Clearly, despite the Federal Court's decision in the case, significant issues remain to be resolved with respect to the enforcement of Canada's laws regarding abuse of a dominant position. With the settlement of the case, however, these issues remain to be heard another day.

¹Commissioner of Competition v. Canada Pipe Company Ltd., CT-2002-006, Memorandum of Argument of the Commissioner of Competition (Re-determination Proceeding), at para. 90 ("Commissioner's Factum").
²Id., at para. 91.
³Commissioner of Competition v. Canada Pipe Company Ltd., 2006 FCA 233, at paras. 73 and 67..
⁴Commissioner's Factum, supra, at para. 167. See also paras. 18, 161 and 170.
⁵Commissioner of Competition v. Canada Pipe Company Ltd., CT-2002-006, Memorandum of Argument of Canada Pipe Company Ltd. (Re-determination Proceeding), at para. 235.

Commissioner strips Lululemon of clothing claims

The Bureau announced on November 16, 2007 that Vancouver-based Lululemon Athletica Inc. has agreed to remove all claims alleging therapeutic benefits from its "VitaSea" line of clothing products, marketed in its forty retail stores across Canada. The popular yoga- and exercise-wear chain has agreed to remove from clothing tags all therapeutic claims regarding the VitaSea technology (claimed to, for example, moisturize), remove from its Web site and in-store advertising all references to the VitaSea technology, inform its employees that they should not provide information on the impugned claims to customers, and undertake a review of all Lululemon promotional and marketing materials to ensure compliance with relevant legal requirements.  In describing this enforcement action, the Bureau noted that it is closely watching an increasing trend in the marketplace in claims about the use and attributes of sustainable fibres.

Health and environmental claims an ongoing bureau focus

Investigations and enforcement actions over marketing and advertising claims related to health products and services have been a significant part of the Bureau's recent fair-business-practices work. In addition to the steps taken against Lululemon described above, in the past three years the Bureau has announced numerous specific actions relating to misleading health claims, including in connection with UV protective clothing, "light" and "mild" cigarettes, nutrition information software, diabetes "cures," tanning-studio health claims, fitness club services, diet patches, herbal products, weight-loss programs and bogus cancer-therapy clinics.

The Bureau's focus on false or misleading health claims extends also to claims related to the environment.  According to a recent survey of environmental claims undertaken by a Canadian environmental marketing firm (which information has also caught the eye of the Bureau), the use of environmental claims is now pervasive across product categories.  The majority (57%) of the environmental claims examined in the survey reportedly failed to disclose attributes of the product relevant to (potentially negative) environmental effects; 26% of claims could not be substantiated by accessible information or third-party certification; 11% were deemed by the survey authors to be vague (e.g., claims of "all-natural"); and 5% were judged irrelevant (e.g. "CFC-free" oven cleaner, when CFCs are banned) and/or meant to distract from a more significant (negative) product feature (e.g., "organic" cigarettes).

In March, 2007, the Bureau issued for public comment new draft guidance on environmental claims.  Based on the draft document, the Bureau may be preparing to take a rigid stance on certain types of environmental claims. For example, in the draft document: (i) claims that a product is "free" of a substance may not be made when historically the product has never contained that substance; (ii) verification materials related to environmental claims must be available to both purchasers and potential purchasers, with no qualification related to confidential information; and (iii) consumers are misled if an explanatory statement for an environmental claim on a product is not displayed on the same display panel as the claim itself.

• AU has finally sold off its Port of Vancouver grain-handling terminal (the UGG Terminal) to Alliance Grain Terminal Ltd., pursuant to a consent agreement registered at the Tribunal by UGG on October 17, 2002 (the 2002 Consent Agreement). The divestiture had been ordered in response to UGG's 2001 acquisition of ACL.
• SWP has sold off nine inland grain elevators and a Port of Vancouver terminal elevator to Cargill Ltd. (Cargill). The sale was made pursuant to a consent agreement registered on March 28, 2007 (the 2007 Consent Agreement). The Bureau had determined that even with the divestiture of the UGG Terminal, noted above, the SWP/AU merger would have led to the post-transaction entity controlling 89% of licensed grain storage capacity at the Port of Vancouver. It would also have eliminated competition between the two largest players in the Canadian West Coast Port Terminal grain-handling services market.
• Under the terms of the same consent agreement, SWP has also ended its Vancouver-based joint venture (Pacific Gateway Terminal Ltd.) with Winnipeg-based James Richardson International (JRI), which had been under challenge by Commissioner of Competition Sheridan Scott (the Commissioner).
• JRI itself entered into a consent agreement pursuant to which it will divest two Manitoba-based grain elevators, stemming from its acquisition from SWP of some of AU's inland grain elevators.

The UGG Terminal divestiture process was anything but swift. Following the UGG/ACL merger, the resultant entity, AU, was required to divest primary grain elevators in Alberta and Manitoba, as well as a terminal at the Port of Vancouver. Under the terms of the 2002 Consent Agreement, AU was required to divest six primary grain elevators in the two Prairie provinces in order to assuage competition concerns in certain local markets. If AU was unable to complete the divestiture within an allotted confidential time period, the facilities were to be sold off by a trustee. Five of the six were sold on time, but AU was unable to complete the sixth sale despite numerous deadline extensions granted by the Bureau. The trustee was ultimately employed, and the sixth grain elevator eventually sold.

Similar difficulties were encountered with the Vancouver terminal. Under the 2002 Consent Agreement, AU was given until October 31, 2004 to dispose of one of its two terminals at the port, ultimately choosing the UGG Terminal. However, AU was unable to complete a sale before the deadline, and no fewer than ten extensions were granted by the Bureau in anticipation of an imminent sale.

The Bureau's patience was at an end in August 2005, and it would grant no further extensions. AU applied to the Competition Tribunal requesting that the agreement be rescinded under s. 106 of the Competition Act, due to changed circumstances in light of the amount of uncommitted grain shipped to the Port of Vancouver by independent grain companies. In May of 2006, following a Tribunal decision not to adjourn AU's hearing date, AU officially withdrew its application, and the divestiture was eventually completed over a year later, against the background of the SWP/AU merger.

The structure of the 2007 Consent Agreement appears to be broadly in line with the Information Bulletin on Merger Remedies in Canada issued by the Bureau in September 2006, and designed to avoid further long delays. The 2007 Consent Agreement gave SWP ninety days following its acquisition of AU to make the relevant divestitures to Cargill, laying out a "hold separate" regime over the interim period governing those assets and the employees who worked with them. If the sale could not be completed on time, a divestiture trustee would have been appointed to sell off a different set of assets, although this list would be kept confidential until four months after the trustee was empowered to make the sale. The trustee could be appointed as early as seventy-five days into SWP's sale process.

In the event that the trustee was unable to complete the sale within four months (or after any extensions expired), or even if the Commissioner did not by then feel that a sale was imminent, the agreement empowered her to apply to the Tribunal for an order to facilitate a sale of the "crown jewels," presumably in an attempt to sweeten the package for any prospective buyers. The Commissioner could also request a Tribunal order that SWP divest its entire ownership interest in AU.

Section 106 of the Act allows a consent agreement to be rescinded where "the circumstances that led to the making of the agreement or order have changed and, in the circumstances that exist at the time the application is made, the agreement or order would not have been made or would have been ineffective in achieving its intended purpose." In its submissions to the Tribunal, RONA argued that the consent agreement should be rescinded in light of Home Depot's subsequently confirmed intention to expand into Sherbrooke. The Commissioner opposed the application to rescind the consent agreement.

According to RONA, Sherbrooke was unique among the geographic markets considered by the Competition Bureau (the Bureau) in its 2003 examination of the RONA-Kingfisher transaction, insofar as it was the only market where Home Depot was not present as a competitor. Had it been present, RONA argued, Sherbrooke would have been indistinguishable from other geographic markets, in which case it would not have agreed to divest a store in that market.

The Commissioner submitted that RONA's application should be rejected on the basis that RONA had expected Home Depot to expand into Sherbrooke at some point, with the result that it could not now raise its intended entry as a material change of circumstances. The Commissioner also alleged that RONA had engaged in an abuse of process by deliberately trying to slow the divestiture process, contrary to the spirit of the consent agreement.

Upon evaluating the evidence, the Tribunal accepted RONA's contention that there had indeed been a change of circumstance within the meaning of s. 106 of the Act. According to the Tribunal, in September 2003 Home Depot had had no intention of expanding its operations into Sherbrooke. Therefore, Home Depot's subsequent decision to enter the Sherbrooke market presented a set of circumstances very different from those that led to the registering of the consent agreement.

The Tribunal rejected the Commissioner's argument that RONA could claim no change in circumstances since it had expected that Home Depot would eventually expand into Sherbrooke. The Tribunal distinguished jurisprudence on this point on the basis that the underlying rationale of such jurisprudence has been to prevent parties from failing to reveal facts and then subsequently arguing that they give rise to "new circumstances." The circumstances in this case, the Tribunal pointed out, were very different. Far from trying to hide its view that Home Depot would eventually expand into Sherbrooke, the Tribunal noted that RONA had tried unsuccessfully to convince the Bureau of this fact both before and after signing the consent agreement.

The Tribunal went even further, criticizing the Commissioner's decision to insist that the divestiture take place even after Home Depot's intention to expand into Sherbrooke became clear. The Tribunal went so far as to suggest that the Commissioner has a duty to stay attuned to the changing circumstances regarding the consent agreement, and should have agreed to revise the consent agreement once it had proof of Home Depot's expansion into Sherbrooke. The force and effect of a consent agreement, the Tribunal said, goes beyond merely carrying out its terms, to include ensuring that implementation of the consent agreement continues to make sense in the circumstances.

The Tribunal also rejected the Commissioner's allegation that RONA had engaged in an abuse of process by unnecessarily frustrating the divestiture process. According to the Tribunal, none of RONA's actions throughout the proceedings constituted an abuse of process. Rather, RONA made every effort to divest the Sherbrooke Réno Dépôt store to a buyer who met the criteria outlined in the consent agreement (i.e., "to a buyer wishing to operate the business principally for the retail sale of home improvement products"). Given a limited pool of potential buyers for big-box format stores of this type, RONA was unsuccessful in its attempt to divest the store within the time limits prescribed by the consent agreement, with the result that, as permitted by the consent agreement, the Commissioner appointed a trustee to effect the divestiture.

The Commissioner also alleged that RONA had engaged in an abuse of process by availing itself of certain rights under the consent agreement. However, the Tribunal rejected this allegation as well. The Tribunal noted that the consent agreement was negotiated and signed by both parties, each of whom was represented by competent legal counsel. As such, it could not be an abuse of process for RONA to exercise its rights under the consent agreement (including the right to object to the trustee's divestiture of the Sherbrooke store if the divestiture did not comply with the provisions of the consent agreement).

Stikeman Elliott LLP acted as counsel to Kingfisher in RONA's original 2003 acquisition of the Réno Dépôt and The Building Box stores.

Through an application to rescind a consent agreement registered in December 2004 in connection with the acquisition by West Fraser of Weldwood (both forestry companies active in B.C.), several First Nations groups, including Burns Lake Native Development Corporation, the Council of Lake Babine Nation, the Council of Burns Lake Band and the Council of Nee Tahi Buhn Indian Band (the Applicants), have challenged the consent agreement registration process. Among other things, the Applicants argue that there was no evidentiary basis upon which the Tribunal could have issued any order at all.

If successful on this ground, the Applicants' challenge to the consent agreement registration process could mean, at a minimum, a return of the requirement to file a statement of grounds and material facts and supporting affidavits along with the consent agreement itself. Some feel that the requirement to file such minimal evidence provided a useful check on the Commissioner's rather considerable power to force concessions from merging parties (or those under investigation for other alleged Part VIII conduct). On the other hand, a requirement to file supporting evidence would also make it tougher to expeditiously conclude merger, abuse of dominance and other civil investigations where the Commissioner has a concern and the parties are prepared to agree to a remedy - and also facilitate further interventions.

The Consent Agreement provided that RONA would have a finite period of time to divest the store, failing which the divestiture would be placed in the hands of a trustee. RONA having been unable to sell the store, a divestiture trustee was appointed. Although at first unsuccessful in finding a buyer, the trustee eventually entered into an agreement with a prospective buyer. RONA, however, exercised certain rights under the Consent Agreement to object to the sale negotiated by the trustee, thereby requiring that the divestiture be approved by the Tribunal. RONA also applied to the Tribunal for rescission of the Consent Agreement, which if successful would free it of the obligation to divest the Sherbrooke store.

RONA's application was made pursuant to s. 106, which allows for rescission of a consent agreement in certain circumstances, including where "the circumstances that led to the making of the agreement . have changed and, in the circumstances that exist at the time the application is made, the agreement . would not have been made or would have been ineffective in achieving its intended purpose." In RONA's submission, substantial evidence that Home Depot intends to open a big-box home improvement store in Sherbrooke constitutes such a material change of circumstances. Sherbrooke, RONA argues, was unique among the geographic markets examined by the Competition Bureau in its 2003 examination of the RONA-Kingfisher transaction, insofar as it was the only market where Home Depot was not present as a competitor. Had it been present, RONA submits that Sherbrooke would have been indistinguishable from other geographic markets, in which case it would not have agreed to divest the RONA store in that market.

As the filing was made without the consent of the Commissioner, it seems likely that the Commissioner will oppose RONA's application.

Stikeman Elliott LLP acted as counsel to Kingfisher in RONA's original 2003 acquisition of the Réno Dépôt and The Building Box stores.

With respect to transit times, CN agreed to chart its performance against the 2003 BC Rail average transit time data, and would face financial penalties if performance benchmarks were not met.  The performance targets applied for the five year period post-closing, with the first year being a penalty-free transition period followed by a four-year period with the penalty regime in place.  The Commissioner of Competition also reserved the right to reinstate the penalty regime for an additional five years if she determined that the transit time covenants had not been respected.
The consent agreement also included safeguards to ensure shippers were not discriminated against with respect to car allocation.

Finally, in order to preserve competition in rates and services for the transportation of grain, certain remedies were introduced that aimed to prevent CN from materially increasing rates and curtailing service levels in the Peace River area.  The consent agreement was registered on July 2, 2004.

In its own statement, La Senza Corp., the then owner of Suzy Shier, stated that Suzy Shier "does not admit any conduct contrary to the Competition Act" but noted that, in recognition of the Bureau's concerns and of the importance of providing accurate information to consumers, Suzy Shier and the Bureau had agreed to file a civil consent agreement with the Competition Tribunal to resolve the matter.

According to the consent agreement, only 12.5% of Suzy Shier sales of the products at issue were made at the "regular" price during the evaluation period and the products were offered for sale at the "regular" price" for only approximately 11% of the time.

The $1 million administrative monetary penalty is the first under the Competition Act's civil "ordinary selling price" provisions, which came into force in 1999. The consent agreement also required Suzy Shier to publish corrective notices in newspapers across Canada and to implement a corporate compliance program to ensure that it meets the requirements of the Competition Act.

The announcement of the settlement was released just a few hours before La Senza Corp. announced that it was selling Suzy Shier to a division of YM Inc. The sale was completed on July 28, 2003. Neither La Senza Corp., nor YM Inc., is bound by the terms of the consent agreement, which applies only to Suzy Shier.