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

All transactions involving an operating business in Canada which exceed certain thresholds are subject to mandatory pre-merger notification under the Act, and the parties are not permitted to close the transaction until the expiry or early termination of a 30-day waiting period following pre-notification.  That waiting period can be extended, however, if the Commissioner of Competition requires additional information to complete her review of the likely competitive impact of the transaction and issues a SIR.  Where a SIR is issued within the first 30 days following notification, the waiting period does not expire until 30 days following compliance with the SIR.

The most significant changes in the revised Guidelines include:

• Hostile Transactions: A new section of the Guidelines deals with the merger review process in the context of hostile transactions. This new section is largely repetitive of the Bureau’s second enforcement guideline regarding hostile transactions and notes that, in the context of a hostile transaction, a target is not able to affect (e.g., delay) the commencement of the relevant waiting periods by delaying its pre-notification filing or its response to a SIR. The section also notes that, to ensure that it receives SIR responses from targets on a timely basis, the Bureau will typically issue a SIR in combination with a timing agreement (to certify compliance on or before a specified date) and/or a court order obtained pursuant to section 11 of the Act, which compels the target to provide information to the Bureau.
   
• Pre- and Post- Issuance Dialogue: The revised Guidelines provide more detail about the dialogue between the Bureau and the parties before and after the issuance of a SIR. In particular, pre-issuance dialogue can serve to narrow the scope of a SIR and identify technological barriers to production, while post-issuance dialogue can help to prioritize information to be supplied and specify the custodians and search terms to be used in collecting data. The Bureau typically expects parties to use best efforts to respond to a SIR in a timely manner and on a rolling basis.
   
• Updated Search Periods: The revised Guidelines provide that, when a SIR is issued, the default search period for hard copy and electronic records will generally be the year-to-date period immediately preceding the date of issuance of the SIR and the previous two full calendar years. For data requests, the time period will generally be limited to the year-to-date immediately preceding the SIR issuance and the previous three full calendar years. However, these default search periods may vary depending on the facts of a particular case.
   
• Requirement to Refresh: The revised Guidelines note that the Bureau will require parties to produce “refreshed” information where the period between the date of issuance of a SIR and the date of certification of a complete response exceeds (typically) 90 days. In such cases, the Bureau will require responsive records to be current to within 30 days of the certification of a party’s response.
   
• Timing Agreements: A revised section on “timing agreements” provides more detail about the situations in which the Bureau will consider using a timing agreement as an alternative means of obtaining additional information about a proposed transaction, as opposed to issuing a SIR. The revised section also notes that, in the context of a hostile transaction, the Bureau may request that a bidder provide a timing commitment (not to certify compliance before a specified date) to ensure that the Bureau has sufficient time to obtain and analyze information from all parties.
   
• Sample SIR Instructions: The revised Guidelines contain sample SIR instructions, which set out the logistical procedures that parties must follow in complying with the SIR. The instructions include the relevant search periods, the means by which documents must be provided, and an acceptable manner in which to certify that a party has fully complied with a SIR.

The Bureau’s press release indicates that the MEGs will not undergo a “full rewrite” but rather will address specific areas where the current MEGs do not fully reflect Bureau practice and current economic and legal thinking. The Bureau’s announcement identifies a non-exhaustive list of seven areas in which the Bureau is considering revisions. These are: 1) providing additional guidance on monopsony issues; 2) explaining the Bureau’s approach to minority interests and interlocking directorships; 3) providing additional guidance on the Bureau’s approach to unilateral effects, in light of current economic thinking; 4) clarifying the framework for assessing coordinated effects; 5) providing more accurate guidance on vertical issues, focussing on foreclosure effects; 6) incorporating the Efficiencies Bulletin into the MEGs; and 7) clarifying that merger review is not a “linear process” that must start with market definition but is rather an iterative process where market concentration is considered together with other evidence of competitive effects. This last area is understood to refer to economic tools such as the “upward pricing pressure test” articulated by the economists Joseph Farrell and Carl Shapiro in 2008. The degree to which such tools find their way into the new MEGs is sure to be a matter of considerable interest and debate. 

The Bureau intends to publish revised draft MEGs in the second quarter of 2011 and will be seeking public feedback prior to finalizing the revised MEGs in the fall of 2011.

Background

The merger process amendments were first formally proposed in the Gover Report, issued to the Commissioner of Competition on June 19, 2008, but only publicly released for broad distribution on August 12, 2008. Following an unfavourable Federal Court decision calling the Commissioner to task for seeking, on an ex parte basis, overbroad and duplicative document production in the Labatt/Lakeport merger³, Mr. Gover had been given a mandate by the Minister of Industry to investigate the Bureau's use of its investigative powers under section 11. Gover's recommendation, based on a limited consultation, was to implement a U.S.-style "second request" merger regime - thus allowing the Bureau unilaterally to issue wide-ranging document production subpoenas, without any judicial oversight at all. This recommendation was somewhat surprising - its implication being that the appropriate legislative response to the Federal Court's concerns over abuse of the Commissioner's powers was to eliminate the possibility for oversight of the Commissioner by the Federal Court.

On June 26, 2008, the Competition Policy Review Panel (the "Wilson Panel") issued its final report, Compete to Win, and similarly recommended adoption of a U.S.-style merger regime, despite the facts that its terms of reference did not include consideration of the merger review process, and that none of the approximately 155 written submissions made prior to the submission deadline, including the Commissioner of Competition's submission, had advocated or even suggested the possibility of adopting a U.S.-style merger regime. Subsequent written submissions by the Commissioner and oral submissions by invited experts to meetings of the Wilson Panel did address the merits of a U.S.-style merger regime and, as noted above, it had been promoted in the Gover Report issued to the Commissioner prior to issuance of the Wilson Panel report - but the nature of the process leading to both of those reports ensured the proposal remained largely under wraps until included in a blue-ribbon panel report whose broad-ranging recommendations to improve Canada's competitiveness were quickly adopted by the government of the day.

Given the lack of public debate about the merits of the amendments, little was known about the Bureau's approach to issuance of and compliance with SIRs. Moreover, questions were raised about how the new procedure would interface with unique, and well-regarded, features of the Canadian regime, including the ability of the Bureau (exercised in the vast majority of cases, which do not raise competition issues) to clear a transaction well within the thirty-day waiting period on the basis of a request for an "advance ruling certificate" (ARC) or no-action letter, rather than on the basis of formal notification.

The Guidelines

In that regard, the Guidelines do confirm that the best features of current practice regarding non-problematic transactions will remain in place. They also indicate, in our view, a more formalistic approach to compliance with documentary production requests than had necessarily been the case with the old section 11 order process.

• The Bureau's practice of reviewing "non-complex" transactions within a maximum two-week timeframe (after receipt of sufficient information regarding the likely competitive impact), and of issuing ARCs where appropriate, remains unchanged. Such an approach maintains the widely acknowledged efficiency with which the Bureau reviews transactions that do not raise potential competition issues.
   
• The Guidelines discuss the class of transactions falling within the Bureau's "complex" designation, which the Bureau endeavours to review within a maximum ten-week, non-statutory period, a period that is obviously longer than the initial thirty-day statutory waiting period. The Guidelines state that for some "complex" transactions, the Bureau will be willing to refrain from issuing a SIR, allowing the waiting period to lapse on the understanding that the parties will not close the transaction for an agreed-upon period and will cooperate with the Bureau's information requests on a voluntary basis. It should be noted, however, that based on limited experience to date, a "very complex" transaction will likely be subject to a SIR, and the Bureau appears likely to ask for a timing agreement in place of a SIR for a "complex" transaction - in practice, the waiting period will be extended (voluntarily or otherwise) for "complex" and "very complex" transactions.
   
• The Guidelines note that before issuing a SIR, the Bureau will generally engage in limited "pre-issuance dialogue" with the merging parties, including providing a draft SIR to the parties. In this manner, parties may be able to identify issues related to how certain information is requested or is to be provided. The Bureau is open to the possibility that pre-issuance dialogue may lead to a reduction in the potential burden of the SIR - provided such dialogue is concluded quickly (i.e., a few business days, at most).
   
• The Guidelines explain that the Bureau will engage in post-issuance dialogue with the merging parties regarding the scope of the SIR, and set out certain post-issuance practices and procedures. Most notably, a custodian maximum limit of thirty individuals (not including records contained in central files) will generally apply, in all but exceptional cases, where the parties cooperate in providing the Bureau with detailed information about their personnel structures, including specific discussions about individual roles and responsibilities.⁴
   
• The Guidelines contemplate that in some circumstances (such as where there are no competition issues unique to Canada) it may be possible to limit custodians to the same custodians agreed upon for purposes of a U.S. second request. In certain circumstances, the Bureau may accept records provided to foreign competition agencies as being responsive to the Canadian SIR.
   
• The Bureau will generally limit document production to year-to-date records plus the previous two calendar years. The Bureau will generally limit data requests to year-to-date data plus the previous three calendar years. The Bureau will generally not require parties to resort to producing records contained on back-up media if the Bureau can obtain sufficient records through less onerous means. The Bureau recommends that parties provide it with access to members of technical staff to discuss archival systems.
   
• The Bureau is open to entering into timing agreements (wherein the parties agree not to fully comply with the SIRs before a specified date or event), which can include provisions respecting when the parties and the Bureau expect to reach certain milestones in the review of the transaction.

The Guidelines contain several elements of potential concern:

• The Guidelines contemplate that where records provided "appear to be substantially incomplete," the Bureau could revisit the issue of custodians, including designating additional custodians to be searched. As a practical matter, requiring additional searches once the parties have fully complied with the SIR would delay the commencement of the second thirty-day waiting period by several weeks and, as discussed below, calls into question the legal grounds upon which the Commissioner can challenge the sufficiency of SIR compliance once the affidavit is filed.
   
• The Guidelines' approach to potential challenges to SIR compliance is especially troubling. The Guidelines state that the Bureau must receive each party's response to its respective SIR before it can properly assess whether any information remains outstanding, and that the Bureau reserves the right to request additional information if production is deemed to be insufficient, and will do so "as soon as reasonably possible." This approach appears to ignore, however, 116(3) of the Act. Subsection 116(3) permits the Commissioner seven days within which to notify a party that it is required to submit information excluded on the grounds of subsection 116(2) (lack of relevance to the Commissioner's inquiry), or (2.1) (information previously supplied) - seven days commencing when the party submits the affidavit (without regard to whether the other party has also complied). More importantly, there is no express provision for the Commissioner to second-guess a party's sworn claim under subsection 116(1) that information cannot reasonably be obtained, is subject to solicitor-client privilege, or would breach a confidentiality requirement established by law. Absent challenge under subsection 116(3) within seven days of the filing of a party's affidavit, the Commissioner arguably has no power unilaterally to require the production of additional information or to delay commencement of the second waiting period.⁵
   
• The Guidelines set out internal appeal procedures should the parties seek to contest the scope of the SIR, or should the Bureau contest the completeness of the SIR response. Under these processes, a senior Bureau official (including, potentially, an official not involved in merger review) is charged with resolving disputes between another senior Bureau official and the parties. The effectiveness and fairness of such internal review mechanisms - as compared to the potential for court supervision under the old section 11 regime - remain unclear.

Conclusion

As of mid-September, 2009, after six months of experience with SIRs, senior Bureau officials revealed that SIRs had been issued in respect of five proposed transactions. The Guidelines claim that the SIR process allows the Bureau to obtain records and data "through a more efficient and less formal information-gathering process than that associated with obtaining orders under section 11 of the Act." Time will tell, but experience to date suggests that the information-gathering process has become more, not less, formal with the new procedures - at least from the point of view of the merging parties. Moreover, the Guidelines' approach to questioning the sufficiency of SIR compliance may well prove contentious.

¹ Members of Stikeman Elliott LLP's Competition Group, including the authors, have been counsel to parties that have received SIRs from the Competition Bureau under the new regime.
² The old system, with a choice between a short and a long-form notification, had finite waiting periods, which the Commissioner could not extend without obtaining an injunction from the Tribunal to delay closing - thus putting power to delay closing beyond the waiting periods in the hands of the Tribunal, not the Commissioner. It also featured a requirement for the Commissioner to obtain a court order, albeit available on an ex parte basis, if she required further documents and information beyond that contained in notifications or provided voluntarily by the parties. The new regime eliminates, for practical purposes, court and Tribunal oversight for at least a period of several months, while parties must comply with detailed "supplementary information requests" issued by the Commissioner, before being in a position to bring the waiting period to a close.
³ See "Substantial disclosure obligations for production orders: Federal Court rebukes Commissioner in Labatt/Lakeport merger" (The Competitor, February 2008).
⁴ Of note, the Bureau also reserves the right to require additional custodians to be searched, depending on its view of the sufficiency of production it receives once both parties have complied. Moreover, given the time and expense of document review for each custodian (outside technology firms are typically engaged to assist with retrieval of years of archived e-mails and documents, and small armies of lawyers are required to review the documents for relevance and privilege), the proportionality of even thirty custodians compared to the probative value of additional documents received must surely be questionable, at best, in many cases.
⁵ In this regard, in the case of a disputed subsection 116(1) claim that information is "not reasonably obtainable," privileged or would breach a legal requirement of confidentiality, the Commissioner would appear to have to use the new section 123.1 of the Act, pursuant to which the Commissioner may seek a court order enjoining completion of a transaction in violation of the waiting period (or, among other things, imposing a $10,000-per-day fine in respect of closed transactions), and/or requiring a person to submit information required under subsection 114(2) of the Act (the SIR provision). Arguably, by operation of subsection 116(1), however, information that the affiant believes in good faith to be subject to the 116(1) exceptions is not required under subsection 114(2) of the Act. Time will no doubt tell how courts will view the interplay between these provisions, but the exclusion of subsection 116(1) from the ability of the Commissioner unilaterally to challenge SIR compliance, and the limitation of the Commissioner's ability to request additional information to seven days after filing of the affidavit, are surely significant.
 

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.
 

The Guidelines define consumer rebate promotions to include any type of promotion that involves a partial refund or discount from a manufacturer or retailer to consumers upon purchase, and make a distinction between "instant" rebates and "mail-in" rebates, the latter of which include any rebate obtained other than immediately at the time of purchase. The Bureau does not consider gift cards and other forms of credit on future purchases to be "rebates" for the purposes of the Guidelines, apparently taking the view that most consumers are likely to associate the term "rebate" specifically with the return of a portion of the price paid for the article or service in question.

The Guidelines review the issue of who bears responsibility for making false or misleading representations in connection with consumer rebates. As a general principle, liability for a representation attaches only to the person(s) who cause the representation to be made. The Guidelines make it clear that, pursuant to statute, the Bureau will generally view both the manufacturer and the retailer to be liable for misleading consumer rebate representations on or accompanying a product, unless the manufacturer is outside Canada, in which case the Bureau will view the importer and the retailer to be liable.

The heart of the Guidelines describes, with examples, the following five consumer rebate promotion practices that, in the Bureau's view, could comprise false or misleading representations, and in each case advises how to avoid problematic representations:

• Inadequate Disclosure of Rebate Conditions, Limitations and Exclusions - avoided by clear and conspicuous disclosure of all information that may be material to a consumer's purchase decision (a list is provided);
   
• Rebates Disguised as the Sale Price or Regular Price - avoided by refraining from the use of "sale" in reference to a consumer rebate;
   
• Mail-in Rebates Disguised as Instant Rebates - avoided by prominent disclosure of the type of rebate offered;
   
• Discounts on Future Purchases Disguised as Rebates - avoided by excluding any gift card or other future-purchase discount from representations as to the "price" of a product or as a "rebate";
   
• Mail-in Rebates that are not Fulfilled - avoided by taking measures to ensure fulfillment houses and other service providers are performing in accordance with the rebate terms and conditions. The Guidelines go on to provide hypothetical examples of best practices with respect to instant and mail-in rebate offers.

The Guidelines reaffirm the Bureau's view that a case-by-case application of the false and misleading representations prohibitions under the legislation it administers is most appropriate for a wide variety of marketing practices, including consumer rebate promotions. However, the Guidelines also signal that the Bureau will firmly apply certain rules, at least presumptively, as it enforces these prohibitions. In particular, the Bureau clearly opposes the framing of any "in kind" payments to consumers (e.g., gift cards) as "rebates," and the characterization of a "rebate" as a type of "sale." In view of this, marketers will do well to ensure that any use of "rebate" or "sale" is accompanied "clear and conspicuous disclosure" to consumers of just what is meant by these terms as used in the representations in question.

Among other things, the proposed amendments to the Notifiable Transactions Regulations set out the new uniform merger filing requirements, which essentially will mandate the filing of a "short form" notification plus documents in all cases. A "short-form" notification currently requires, along with certain basic information about the parties and the transaction, lists of the top twenty customers and suppliers for the principal products of each party and its affiliates with significant business in or with Canada. After coming into force (likely in summer 2009), the amended Regulation will also require the filing of two categories of documents:

1. legal documents that are to be used to implement the proposed transaction (or the most recent drafts thereof); and
2. studies, surveys, analyses and reports prepared or received by a senior officer for the purpose of evaluating or analysing the proposed transaction with respect to "market shares, competition, competitors, markets, potential for sales growth or expansion into new products or geographic regions."

The latter requirement is virtually identical to specification 4(c) of the merger notification form used in the United States³.These types of documents were previously required to be filed in Canada only as part of a long-form notification, but will now be required in all cases where formal notification is made. How many transactions this will affect remains to be seen, however, as the vast majority of notifiable transactions in Canada do not raise any serious competition issues and have in the past been the subject of requests for advance ruling certificates (ARCs) rather than formal notifications. It is not yet known whether the Bureau will now expect the so-called "4(c)" documents to accompany ARC requests - even in cases involving no or trivial competitive overlap. Doing so would significantly increase the regulatory compliance burden for the majority of notifiable transactions in Canada, arguably with little or no benefit to those reviewing such routine transactions.

The more controversial of the two draft documents, however, is likely to be the draft Guidelines for the The Revised Merger Review Process. The Guidelines seek to outline the Bureau's approach to the new two-stage merger review process generally, and to "supplementary information requests" in particular. As described in the Guidelines, the Act now provides for an initial 30-day waiting period, during which the majority of mergers will be reviewed (and during which the transaction may not be completed). For transactions where further review is required, the Act authorizes the Bureau to issue a "supplementary information request" which extends the waiting period for an additional 30 days from the date the requested information is supplied.

Second requests issued by the Bureau's counterparts in the United States are infamous for the time, money and managerial resources that must be expended in order to comply, and for the exhaustive scope of the information required. The American Bar Association revealed in 2007 that for 23 transactions for which information had been gathered, the total cost of complying with a second request had averaged over US$5 million (median US$3.3 million) and that agency review had taken about seven months (both average and median) to complete⁴. Competition Bureau Officials in Canada have sought to allay fears over the potential adoption of a comparable approach in Canada. That said, the draft Guidelines seem implicitly to confirm the Bureau's intention to adopt the basic premise of U.S. second requests, which is that before allowing the waiting period to expire, the agencies will require the production of e-mails and other documents generated or received over a two- to three-year period by those in positions of authority concerning the overlap products - whether probative or not.

The Canadians propose to limit the search to a maximum of 30 custodians in most cases (the ABA letter referred to above revealed that an average of 126 custodians and a median of 94 were required to be searched in the sample of second requests surveyed), and to engage in pre- and post-issuance dialogue in order to avoid, or at least narrow, the scope of a Canadian second request. The draft Guidelines also discuss internal controls on the scope and issuance of second requests, and outline internal "appeal" procedures parties may follow if they object to the scope of a second request.

Implicit throughout the Guidelines, however, is the assumption that - within 30 days of being notified of a proposed transaction that raises serious competition issues - the Bureau will demand production not only of the  information most relevant to its analysis (as was previously its practice with the issuance of relatively targeted information requests or court orders, typically much later in the process), but of all information that could potentially be relevant in any way to eventual litigation of the case. As such, it would appear that despite limiting the scope of second requests as compared to its U.S. counterparts, the burden that the Competition Bureau will place on parties to transactions that raise complex competition issues in Canada (and who wish eventually to see the waiting period expire) is about to undergo a quantum leap.

The Guidelines also indicate that, consistent with the practice in the United States, the Bureau will be open to identifying the most important information it requires on key issues, and to working through the issues and potentially clearing the transaction before the full scope of the information requested in the second request is actually produced. While parties may in some cases have their transactions cleared without fully complying with a second request, not all parties will be able easily to reach agreement with the Bureau on required remedies. For such transactions, the cost of reaching the position where the Bureau must go to the Competition Tribunal and prove a prima facie case in order to further delay the transaction may now be very high indeed.

As noted above, comments are requested in respect of the draft Guidelines by May 29, 2009, and in respect of the draft amendments to the Regulations by June 3, 2009.

¹Canada Gazette Part I, April 4, 2006.
²Bill C-10, The Budget Implementation Act, 2009, received Royal Assent on March 12, 2009. In addition to measures designed to stimulate the Canadian economy, Bill C-10 included sweeping reforms to the Competition Act and the Investment Canada Act. Please see the March, 2009 issue of The Competitor for details.
³The language in Item 4(c) of the Hart Scott Rodino Antitrust Improvements Act of 1976 reads "all studies, surveys, analyses and reports which were prepared by or for any officer(s) or director(s) (or, in the case of unincorporated entities, individuals exercising similar functions) for the purpose of evaluating or analyzing the acquisition with respect to market shares, competition, competitors, markets, potential for sales growth or expansion into product or geographic markets. . ."
⁴Letter to the Antitrust Modernization Commission dated February 22, 2007 from the Section of Antitrust Law of the American Bar Association re: Data Regarding the Burden of Responding to HSR Second Request Investigations (available on-line).

The Updated Guidelines do not represent a fundamental shift in the Bureau's enforcement policy, but rather expand upon the original guidelines and revise them in light of recent jurisprudence and developments in economic thinking. Most notable among these is the decision of the Federal Court of Appeal in the Canada Pipe³ case, which provided the first opportunity for the Federal Court to consider the application of the abuse of dominance provisions in sections 78 and 79 of the Act. Other relevant events include the publication of two separate bulletins clarifying the Bureau's approach to the abuse of dominance provisions in the context of the retail grocery and telecommunications industries, respectively.⁴

Notable changes from the original guidelines include:

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

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

¹ http://www.competitionbureau.gc.ca/eic/site/cb-bc.nsf/eng/02942.html.
² R.S.C. 1985, c. C-34, as amended.
³ Commissioner of Competition v. Canada Pipe Company Ltd., (2006) FCA 236.
⁴ The Interpretation Bulletin on the Abuse of Dominance Provisions as Applied to the Retail Grocery Industry was released in 2002 and the Information Bulletin on the Abuse of Dominance Provisions as Applied to the Telecommunications Industry was released in 2008.
 

Merger Review under the Canada Transportation Act

For all transactions "involving" a federal transportation undertaking, Section 53.1 of the CTA, enacted in June, 2007, provides that a copy of the Competition Act merger notification must be sent to the Minister of Transport at the same time it is filed with the Competition Bureau.

In the first phase of review, the Minister, after receiving a notification, forms an opinion as to whether the proposed transaction raises issues with respect to the public interest as it relates to national transportation.  If the Minister is of the opinion that such public interest issues are raised, a second phase of review commences. If not, the process ends. If a second phase of review is ordered, the Minister will direct the Canada Transportation Agency (the Agency) or any other person to examine and report on any national transportation-related public interest issues that are raised. Such reports, along with a report from, and consultation with, the Commissioner of Competition,³  are meant to inform the Minister's eventual recommendation to the Governor in Council (the Cabinet) for or against Cabinet approval of the proposed transaction, with or without terms and conditions.⁴

The Transport M&A Guidelines

The CTA contains explicit provision for Ministerial guidelines, elaborated in consultation with the Competition Bureau, that (1) specify the information parties must provide to the Minister and Agency when giving notice of a proposed transaction, and (2) include factors that may be considered to determine whether the transaction raises public interest issues in respect of national transportation.⁵

Public Interest Factors

The Transport M&A Guidelines enumerate five categories of public interest factors to be considered in assessing whether a transaction involving a federal transportation undertaking raises issues with respect to the public interest as it relates to national transportation.⁶The five categories (Economic, Environmental, Safety, Security and Social) and the numerous potential factors set out under these headings can be summarized as follows:

Economic Outcomes: Factors potentially impacting economic outcomes are listed under five sub-headings:

1. Impacts on Users of the Transportation System: The prime interest here is any impact on prices, service levels and access to services by users.
2. Impacts on Communities: Included are impacts on the location of a non-transportation industry (e.g., tourism), on labour and employment, and on service availability/affordability in low-density areas.
3. Impacts on Other Transportation Undertakings: This includes impacts on intermodal connections and vertical and horizontal competitive effects.
4. Impacts on Canada: Impacts on Canadian competitiveness, leadership, management/workforce expertise, harmonization and productivity improvements, trade, gateways and corridors, innovation, technology and R&D, taxation and government expenditure are all mentioned.
5. Impacts on the Undertakings Involved: Mentioned here are the viability of the resulting entity and the cost/revenue impacts on the undertakings.

Environmental Outcomes: Improvement of the quality of life and the environment by reducing congestion and pollution will be a positive public interest factor.

Safety Outcomes: Where relevant, the potential to improve safety in the workplace and communities will be considered.

Security Outcomes: Transactions are not to have an adverse impact on the capacity to protect citizens and to respond to any threat, and the reliability of new owners where there is a change of control of a "key undertaking" could be relevant.

Social Outcomes: Impacts on low-income workers and families, on persons with disabilities, on public- and private-sector accountability and transparency, on culture and on Canadian sovereignty are identified as potential factors.

Information Requirements for a Notice of a Proposed Transaction

The Transport M&A Guidelines specify that a notice of a proposed transaction should include: (1) information required to be filed under the Competition Act; and (2) a Public Interest Impact Assessment.

As regards (1), it is already a requirement under the CTA that a notice to the Minister/Agency contain a copy of the information required to be filed in a statutory notification under the Competition Act. However, the Transport M&A Guidelines go on to indicate that the notice to the Minister is also to include information supplied to the Competition Bureau in support of a request for an advance ruling certificate (an ARC) under the Competition Act. This is not uncontroversial, however, because receipt of an ARC exempts a transaction from notification under the Competition Act, and thus also, on the face of the legislation, from any requirement to give notice under the CTA.⁷ 

As regards the Public Interest Impact Assessment, the Transport M&A Guidelines provide that this submission should include, along with any other information the parties may wish to include:

• a description of the transaction and its objectives, the transportation undertaking(s) involved and the objectives with respect to the undertaking(s), and of any proposed changes to the business or strategic plans in respect of such undertaking(s);
• an assessment of relevant public interest impacts, information with respect to these impacts and a description of any proposed mitigation or remediation for any adverse impacts;
• identification of major stakeholders who may be interested in the transaction and a description of any consultations with them;
• identification of other government approvals required and their status; and
• supporting evidence for the statements made in the submission.

Conclusion

The draft Transport M&A Guidelines are open for comment, as noted above, until September 30, 2008. While they add clarity to the form that filings with Transport Canada will take, stakeholders may well take issue with the view that transactions that have been the subject of an ARC, and are thus exempt from notification under the Competition Act (and, on the face of it, the CTA merger review provisions), must file under the CTA if they meet the financial thresholds.  Another area where clarification would be useful is the definition of a "transportation undertaking."

An obvious category of exemption from the CTA merger review provisions would be, for example, transactions subject to public interest review by the National Energy Board or, for that matter, foreign investment review (which includes consideration of national transportation policies) under the Investment Canada Act. Given the broad scope of information requested in the draft Transport M&A Guidelines, however, it appears at first blush that Transport Canada contemplates a review that would largely duplicate such processes.

¹The CTA refers simply to a "transportation undertaking". The "federal" qualifier used here reflects the fact that certain transportation undertakings are only intra-provincial in nature and therefore, as a constitutional matter, are not subject to the CTA.

²In the case of a proposed air transportation undertaking, notice must also be given to the Canada Transportation Agency.

³If a public interest review is ordered under the CTA, then the Commissioner's review of the transaction is effectively subsumed as part of the broader CTA public interest review.

⁴Additional details about the process were reported in the July, 2007 issue of The Competitor.

⁵The Transport M&A Guidelines also address certain other features of the review process, including confidentiality, consultations with stakeholders, requests for additional information, assessment timing, and pre-notice consultations with parties.

⁶These categories spring directly from the "goals" for any regulation and strategic public intervention in transportation in Canada enumerated in Canada's National Transportation Policy as set out in the CTA, namely "economic, safety, security, environmental and social outcomes that cannot be achieved satisfactorily by competition and market forces".

⁷The Transport M&A Guidelines also state that parties are required to file the CTA notice of a proposed transaction (including, presumably, the Public Interest Impact Assessment) at the same time as parties either file a request for an ARC or a notification under the Competition Act.

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

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

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

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

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

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

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

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

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

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

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

Section 55 of the Competition Act (the Act) criminally prohibits an operator of or participant in a multi-level marketing (MLM) plan from making representations about compensation under the plan other than those that constitute or include "fair, reasonable and timely" disclosure relating to compensation actually received or likely to be received by "typical participants" in the plan. In addition, section 55 obligates MLM plan operators to ensure that compensation representations made by plan participants to prospective plan participants meet this "fair, reasonable and timely" disclosure standard, subject to a due diligence defence.Section 55.1 of the Act defines when an MLM comprises a "scheme of pyramid selling," and prohibits a person from establishing, operating, advertising or promoting a scheme of pyramid selling. Both sections 55 and 55.1 are criminal provisions featuring a maximum sentence for conviction on indictment of five years in prison and/or a fine in the discretion of the court, and a maximum sentence on summary conviction of one year in prison and/or a fine of $200,000.

The draft Bulletin revises and extends the Bureau's 1996 guidance. However, it does not appear to signal any significant change in the Commissioner's approach to interpreting and enforcing sections 55 and 55.1 of the Act.

Beyond rearranging and refining the contents of the 1996 guidance, the following additional material is included in the draft Bulletin:

• Bureau definitions for "operator," "prospective participant," "non-typical participant" and "operator's or seller's cost";
• a more detailed description of communication that in the Bureau's view comprises a "representation relating to compensation";
• additional examples of conduct that in the Bureau's view comprises or may comprise a "scheme of pyramid selling," in particular related to:
  • prohibited compensation for the recruitment of others to an MLM plan,
  • prohibited purchase requirements as a condition of participation in an MLM plan, and
  • inadequate rights for participants in an MLM plan to return products for substantial reimbursement;
• a list and description of information required in support of a written advisory opinion from the Bureau concerning an MLM plan; and
• a list and description of circumstances under which the Bureau will refuse to provide a written advisory opinion concerning an MLM plan.

The new draft Bulletin undoubtedly improves upon the 1996 Bulletin.  It is more comprehensive and carefully crafted, and the additional examples of suspect conduct are a helpful elaboration on the Bureau's views.  Moreover, the description of information required by the Bureau for an advisory opinion and the description of when such an opinion will not be rendered will be of genuine practical assistance to anyone proposing an MLM plan.

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

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

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

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

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

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

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

The Abuse of Dominance Provisions

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

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

Dominance (Market Power)

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

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

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

Practice of Anti-Competitive Acts

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

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

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

Substantial Lessening or Prevention of Competition

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

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

• 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.

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.

• Definition of a "merger": The MEGs expand the discussion of when a minority interest can constitute a "significant interest" for merger review purposes, and of when a transaction other than an acquisition can also be viewed as a merger.
• Anti-Competitive Threshold:
  Substantial lessening or prevention of competition: The new MEGs include an expanded discussion of the circumstances under which a transaction is likely to substantially "prevent" competition.
  Substantial lessening or prevention of competition: The Bureau will evaluate whether the merger is likely to provide the merged entity (alone or with others) with the ability to materially influence price in a substantial part of a market, regardless of whether the firm will be dominant, and regardless of the size of the price increase in question, so long as it will be sustainable profitably for two years or more.
• Market definition: Product and geographic markets are defined having regard only to demand-side substitution. Supply-side responses are relevant only in determining the participants in, or potential entrants into, a market.
• Coordinated effects: There is a significantly expanded discussion of the issue of coordinated effects (formerly, "interdependence": that is, the exercise of market power that depends upon coordination with rivals for its success). High market concentration and barriers to entry are recognized as two necessary conditions for coordinated anti-competitive effects, but the MEGs list other factors that may, in the Bureau's view, facilitate coordination. The Bureau will analyze the impact of the merger on these factors where the pre-conditions so warrant.
• The Efficiency Defence: In light of the Federal Court rulings in Superior Propane, the MEGs encourage parties relying on the efficiency defence to make submissions as to how the different qualitative and quantitative anti-competitive effects of the transaction (in addition to the dead-weight loss) ought to be balanced against the efficiencies expected to flow from the transaction. Interestingly, the new MEGs contain detailed provisions regarding efficiencies, even as legislative reform is actively being considered.

The format of the MEGs has also changed. Gone is the step-by-step analysis of the statutorily identified "section 93 factors" relevant to the analysis of the competitive impact of a transaction. Rather, the Draft MEGs are now organized thematically. Following chapters on "Definition of Merger", "The Anti-Competitive Threshold", and "Market Definition", the factors relevant to competition are part of the discussion of "Market Share and Concentration", "Anti-Competitive Effects", "Entry", "Countervailing Power", "The Efficiency Exception", "Failing Firm", "Vertical Mergers" and "Conglomerate Mergers".

Comments on the Draft MEGs are due by May 25, 2004, and the final document will be issued in the summer of 2004.

Of particular note, the Draft MEGs contain important new insight into the Bureau's approach to, among other things:

• the definition of a "merger": significantly expanded discussion of when a minority interest can constitute a "significant interest" for merger review purposes, and of when a transaction other than an acquisition can also be viewed as a merger. While the 1991 MEGs focused on the influence of the acquirer over the acquiree through voting shares, the Draft MEGs provide additional guidance on the ways in which influence could be exercised. For example, the guidelines provide that financing arrangements and terms of default relating to such arrangements, long-term contractual arrangements or pre-existing long-term business relationships are examples of arrangements that could enable a party to materially influence management decisions of another business and may constitute a "merger" under section 91.
• the anti-competitive threshold: expanded discussion of the circumstances under which the Bureau would determine that a transaction is likely to substantially "prevent" competition. Referencing recent Competition Tribunal decisions, the Draft MEGs gives examples of mergers that may result in the prevention of competition, such as: an acquisition that prevents a rival's expansion into a new geographic market; an acquisition that precludes the pro-competitive effects of new capacity; and an acquisition that prevents a rival's expansion into new product areas.
• clarification of the test for a substantial lessening of competition: the Bureau evaluates whether the merger is likely to provide the merged entity (alone or in concert with others) with an ability to profitably sustain a material price increase in a substantial part of a market, regardless of whether the firm will be dominant, and even if the price increase in question is less than 5% (so long as it will be sustainable profitably for two years).
• recognition that increased buyer power will result in below-competitive prices when the buyer is prepared to reduce the purchase of inputs.
• market definition: clarification that markets are defined having regard only to demand-side substitution - supply side responses are relevant only to determining the participants in, or potential entrants into, a market.
• product market definition: expanded discussion of differentiated product markets, and possibility that suppliers of non-substitutable products might be in the same product market where buyers value a single source of supply.
• geographic market definition: discussion of spatial competition analysis and the process by which the Bureau delineates the boundaries of local or regional markets, where necessary for its analysis.
• anti-competitive effects: expanded discussion of the issue of coordinated effects (formerly, "interdependence"), a topic of significant interest and debate among competition lawyers and economists. The Draft MEGs include a list of factors that the Bureau will consider in its analysis of coordinated effects. These factors include: product and cost homogeneity; stability of underlying costs; market transparency; many small buyers making frequent purchases; multi-market exposure; inelasticity of demand; limited excess capacity; and a history of collusion/cooperation.
• new chapter on countervailing power, with application to both supplier and buyer power cases.
• of necessity, given the Federal Court rulings in Superior Propane, the Bureau's approach to the efficiencies defence has been substantially revised. In particular, the 1991 MEGs looked only at the deadweight loss to society when evaluating the anti-competitive harm, whereas the Court directed the Bureau to evaluate the anti-competitive effect of the transaction from the perspective of all of the objectives of the Act (not merely allocative efficiency). The result is a multi-faceted, and admittedly subjective, balancing that will be highly case specific. In recognition of this, the Draft MEGs encourage parties relying on the efficiencies defence to make submissions as to how the different qualitative and quantitative effects of the transaction ought to be balanced against the efficiencies expected to flow from the transaction.