Government Releases much-awaited National Security Review Guidelines

Michael Kilby - 

On December 19, 2016, the Minister of Innovation, Science and Economic Development issued Guidelines on the National Security Review of Investments under the Investment Canada Act (ICA).

Overview of the Guidelines

Most significantly, the Guidelines list factors that will be taken into account by the government in determining whether foreign investments into Canada could be injurious to national security. These factors are:

  1. The potential effects of the investment on Canada's defence capabilities and interests;
  2. The potential effects of the investment on the transfer of sensitive technology or know-how outside of Canada;
  3. Involvement in the research, manufacture or sale of goods/technology relating to certain controlled goods noted in the Defence Production Act, including firearms, military training equipment, certain types of aircraft, weaponry and defence systems, etc.;
  4. The potential impact of the investment on the security of Canada's critical infrastructure. Critical infrastructure refers to processes, systems, facilities, technologies, networks, assets and services essential to the health, safety, security or economic well-being of Canadians and the effective functioning of government;
  5. The potential impact of the investment on the supply of critical goods and services to Canadians, or the supply of goods and services to the Government of Canada;
  6. The potential of the investment to enable foreign surveillance or espionage;
  7. The potential of the investment to hinder current or future intelligence or law enforcement operations;
  8. The potential impact of the investment on Canada's international interests, including foreign relationships; and,
  9. The potential of the investment to involve or facilitate the activities of illicit actors, such as terrorists, terrorist organizations or organized crime.

The Guidelines represent the first time any such disclosure has been made since the ICA was amended in 2009 to provide for a national security review process. It also represents the second time in 2016 that the government has provided eagerly sought-after details regarding the national security review process, signaling significantly enhanced transparency in relation to the administration of the national security review process. (Earlier in 2016, the government for the first time published certain statistics on the frequency and outcomes of national security reviews.)

Insights from the Guidelines

The Guidelines are notable in at least three respects.

First, they set out nine factors that will be considered in assessing the national security implications of a foreign investment. While these factors are not intended to be exhaustive, and while some of them are capable of broad interpretation, others are more precise and provide meaningful information to investors contemplating investment into Canada. It is certainly true that some of these factors may already have been, broadly-speaking, self-evident to foreign investors and their counsel; nevertheless, the specifics identified in the guidelines are useful, particularly as this type of disclosure was previously non-existent. Most notably, the factors reveal a core focus on defence, technology and intelligence-related concerns.

Second, the Guidelines recommend that foreign investors file their ICA notifications “early” and prior to the deadlines set out by statute. By way of context, the ICA sets out that the only filing requirement in respect of the vast majority of foreign “control” investments into Canada (i.e., 95%+) is to file a form known as a notification, which may be filed up to 30 days after closing. However, where an investor desires certainty regarding the application of the national security provisions to its investment, it may voluntarily file this notification early, prior to closing, and, if 45 days elapse following the filing of such notification, with no action being taken, the investor can proceed with closing knowing that the period within which a national security review could be ordered has expired.

The Guidelines encourage investors to file their notifications early – even though this is not required by law – particularly in cases where the assessment factors described above may be present. In the past, we believe it would have been accurate to characterize the government as largely indifferent as to when a foreign investor filed its notification – certainly the statute itself is formally indifferent. We believe that recent, complicated situations in which the government has sought post-closing divestitures of Canadian businesses on national security grounds have led the government to conclude that it is far easier to manage national security concerns on a pre-closing basis, before ownership has transferred, and hence to formalize the recommendation to file early.

Third, the Guidelines set out that Investment Review Division officials are ready to meet with and engage in consultations with foreign investors in relation to their transactions with a view to facilitating national security assessments and clarifying information requirements, “at the earliest stages of the development of their investment projects”. While it has always been open to foreign investors to engage with the Investment Review Division, the Guidelines go further in actively encouraging early engagement. Foreign investors and the Canadian businesses in which they propose to invest may previously have been reluctant in some cases to engage in this manner with governmental authorities; the Guidelines may on balance lead to earlier and more involved engagement. 

Moose Knuckles resolves misleading "Made in Canada" representations

Vanessa Leung - 

On December 7, 2016, Moose International Inc. (Moose Knuckles) reached a consent agreement with the Commissioner of Competition. The consent agreement resolves the Commissioner’s concerns about deceptive marketing practices in respect of the “Made in Canada” claims on certain Moose Knuckles parkas.

According to the Bureau, Moose Knuckles claimed that its parkas are “Made in Canada” (both on its website, and on the interior of the parkas themselves). The Bureau alleged that, in fact, the parkas were imported from Vietnam and Asia in a nearly finished form. The Bureau concluded that Moose Knuckles’ advertising was therefore inconsistent with its (non-binding) “Made in Canada” guidelines, which have three key requirements:

  1.  That the “last substantial transformation” of a product occur in Canada. (In fact, the Bureau alleged that the last substantial transformation of Moose Knuckles’ parkas occurred outside Canada.)
  2. That at least 51% of the total direct costs of producing or manufacturing the product be incurred in Canada. (The Bureau alleged that this requirement was also not satisfied.)
  3. That the “Made in Canada” claim is accompanied by an appropriate qualifying statement, such as “Made in Canada with imported parts” or “Made in Canada with domestic and imported parts.” (The Bureau alleged that Moose Knuckles’ qualifying statement – “Made in Canada with imported textiles” – was included only on the care labels in a sleeve, and therefore did not change the misleading general impression of the claims.)

Under the consent agreement, Moose Knuckles agreed to cease making representations that create the general impression that its parkas are made exclusively with Canadian components (in any advertising medium, including its website, print publications and social media). Moose Knuckles also agreed to either: a) add a “Made in Canada with Canadian and imported components” hang tag to the “Made in Canada” label on the parkas’ collars, with equal or greater prominence; or b) remove the “Made in Canada” label on the parkas’ collars. A corrective notice will also be posted on Moose Knuckles’ website’s product information page for one year, and a corporate compliance program will be implemented to ensure compliance with the Competition Act. Lastly, Moose Knuckles will donate $750,000 over five years to charities that support children in need in Canada.

However, no fines (or administrative monetary penalties) were imposed, nor was Moose Knuckles required to reimburse the Bureau’s investigative costs. Such financial penalties are common in consent agreements involving alleged misleading advertising. It is not immediately clear why no monetary penalties were imposed.

This is the second case where a consent agreement has been reached by mediation, and the Bureau welcomed this method as another tool to resolve concerns efficiently.

Competition Bureau questions: Why don't we see more health care advertising?

William Wu and Vanessa Leung - 

Due to regulations by provincial governments and self-regulating professional bodies, Canadian health care professionals face significant restrictions on how they are permitted to advertise their services in the marketplace. For example, price advertising, where professionals advertise the prices they will charge for particular services, is often limited; comparison advertising, where a professional compares his or her services and skills to those of another professional, is generally prohibited.

On October 4, 2016, the Competition Bureau published a report assessing the effect of advertising restrictions on the health care marketplace. The report suggests that advertising restrictions, while well-intentioned, may result in unnecessarily high prices for consumers, and calls on regulatory bodies to begin collecting data to conduct further empirical studies on the effect of advertising restrictions.

The report acknowledges the policy justification for advertising restrictions in health care professions: to prevent a “race to the bottom” in service quality. There is significant information asymmetry in the health care market, where service providers know significantly more about treatments and procedures than their patients do. With consumers unable to adequately discern service quality in the health care market, price can be seen as the primary difference between service providers, which may prompt providers to undercut one another in prices, to a point where they could not maintain high quality services. Unregulated advertising in regulated professions is thought to increase the risk of a “race to the bottom”. Regulators seek to ensure high quality services by enforcing standards of education and practice, and therefore, advertising restrictions for health care professionals are intended to protect consumers.

The report reviews a number of academic studies on the impact of advertising restrictions. Two studies cited by the report found that, where advertising is restricted, consumers tend to stick with established, well-known products, which makes it difficult for new products to become established as effective alternatives. As a result, advertising restrictions may insulate established products from competition and innovation, which could ultimately result in higher prices for consumers. The report cites two additional studies on optometric services, which found that advertising results in lower prices for optometric services without an associated reduction in quality (i.e., that the feared “race to the bottom” does not in fact occur when advertising is not restricted).

Based on its review of the economic literature, the report suggests that there is a risk that advertising restrictions may cause consumers to pay unnecessarily high prices for health care services in Canada. The Bureau recognized that it does not have easy access to the data necessary to empirically study the actual impact of advertising restrictions in Canada. The Report calls on governments and self‑regulatory bodies to begin collecting and compiling information on marketplace outcomes in Canada’s health care markets, and to move toward greater emphasis on empirical evidence in decision-making.

The publication of the report is a part of the Bureau’s larger advocacy effort directed at governments and decision‑makers, emphasizing the need to consider the effects that regulations have on competition. In the most recent issue of Competition Advocacy, published by the Bureau on the same day as the report, the Bureau outlined four internationally-recognized principles that can help regulators to minimize any negative or unintended effects on competition:

  1. Regulation should only address legitimate policy concerns;
     
  2. Regulation should be based on the best available evidence;
     
  3. Regulation should be proportionate to the associated harm; and
     
  4. Regulation should be regularly reviewed to reflect market conditions.

As the Bureau has previously done in a study of the Canadian taxi industry, the report calls on regulators to reassess advertising restrictions with a greater emphasis of empirical evidence and with additional consideration for their effects on competition.

Template consent agreement for better transparency and predictability in merger remedy

Vanessa Leung and William Wu - 

On September 29, 2016, the Competition Bureau released a template for merger consent agreements.

As part of its enforcement mandate, the Bureau reviews certain proposed transactions to determine whether they will likely result in a substantial lessening or prevention of competition in a market. If the Bureau determines that the proposed transaction is likely to result in substantial anti-competitive effects, the Commissioner of Competition has the option to challenge the proposed transaction before the Competition Tribunal or negotiate appropriate remedial measures with the merging parties to address the proposed transaction’s likely anti-competitive effects. Such negotiated remedial measures are typically implemented by way of a consent agreement. Once registered with the Tribunal, the consent agreement has the force and effect of a court order. The Bureau, as well as merging parties, generally prefers to pursue negotiated consent agreements rather than formal litigation before the Tribunal, as Tribunal litigation is more costly, time-consuming and uncertain for both the Bureau and the merging parties.

Merger remedies can be generally categorized into two types: divestiture of assets (i.e., structural remedies) and requirements prohibiting or mandating certain conduct (i.e., behavioural remedies). The template consent agreement published by the Bureau contains key provisions that may be expected to appear in a consent agreement, with a focus on structural remedies:

  • Obligations to complete divestitures of certain assets within prescribed time periods;
  • Prescribed divestiture trustee sale process;
  • Requirement for Commissioner’s approval of divestitures;
  • Requirement to hold certain assets of a merger separate pending divestiture;
  • Requirement to preserve divestiture assets pending divestiture;
  • Ongoing behavioural commitments and transitional support obligations;
  • Relationship with employees of divested businesses;
  • Consequences for failure to complete a divestiture;
  • Appointment of a monitor to ensure compliance with the consent agreement;
  • Ongoing compliance and reporting obligations.

The precise nature and terms of the negotiated remedial measures will differ depending on the nature of the transaction at issue and the nature of the Bureau’s concerns in respect of the transaction. Not all of the above provisions will appear in every consent agreement.

According to the Bureau’s press release, its publication of the template consent agreement is intended to “provide Canadian legal and business community with better insight into the Bureau’s expectations” in merger remedy negotiations and the Bureau will continue to “adjust the consent agreement template over time, based on its ongoing experience with negotiated merger consent agreements.” While recognizing the benefit of increased transparency and predictability, the published template consent agreement may serve to rigidly limit the scope for merging parties to negotiate remedies that may fall outside of the standard terms of the template consent agreement. Based on a number of consent agreements resolving allegations of deceptive marketing practices in recent years, it could be argued that the Bureau may have a tendency to rigidly follow a template without adequately taking into account the different prevailing market practices in different industries.

Competition Bureau completes update of Intellectual Property Enforcement Guidelines

Jeff Brown and Margaret Kim - 

On March 31, 2016, the Competition Bureau (the Bureau) released the anticipated final version of its updated Intellectual Property Enforcement  Guidelines (2016 IPEGs), seven months after the public consultation of the Phase II draft revision (Draft Phase II IPEGs) concluded in August 2015. The 2016 IPEGs further clarify, and provide practical guidance on, the Bureau’s enforcement approach to several important issues at the interface between competition and intellectual property (IP) laws, namely (1) patent litigation settlements between brand and generic pharmaceutical companies, (2) product switching (also known as product hopping), (3) patent assertion entities (PAEs) and (4) collaborative standard setting and standard essential patents (SEPs). 

 Overview

The IPEGs set out the general approach of the Commissioner of Competition (the Commissioner) and the Bureau to the administration and enforcement of the Competition Act (the Act) with respect to potentially anti-competitive practices involving IP.  Changes in the 2016 IPEGs reflect past Bureau enforcement experience, Canadian case law, and guidance documents released in other jurisdictions. In producing the 2016 IPEGs, which were preceded most recently by the Draft Phase II IPEGs, the Bureau addressed concerns expressed by domestic and international stakeholders, including the Competition Law Section of the Canadian Bar Association, the Antitrust Law Section of the American Bar Association, industry associations, major technology firms and competition law scholars.

The 2016 IPEGs conclude a more than two-year process of updating the Bureau’s IPEGs, which were first published in 2000 (the 2000 IPEGs). The update process was undertaken in two phases, beginning in April 2014 with publication of a revised “phase I” consultation draft (the Draft Phase I IPEGs), followed by a final phase I IPEGs in September 2014 (the Revised Phase I IPEGs). Also in September 2014, the Bureau published a white paper entitled Patent Litigation Settlement Agreements: A Canadian Perspective (White Paper), which set out the Bureau’s proposed approach to patent litigation settlements between brand and generic pharmaceutical companies. The Bureau’s “phase II” consultation draft IPEGs followed in June 2016 (the Draft Phase II IPEGs), followed finally with publication of the 2016 IPEGs on March 31, 2016. 

For more information of how the IPEGs have evolved over time, see our previous post

Summary of Major Changes in the 2016 IPEGs

As noted previously, the 2016 IPEGs clarify, and provide practical guidance on, the Bureau’s enforcement approach with respect to patent litigation settlements between brand and generic pharmaceutical companies, product switching, PAEs and standard setting.  The following briefly discusses the Bureau’s enforcement approach in each of these areas, as set out in the 2016 IPEGs.

(a)   Pharmaceutical Patent Litigation Settlements

The 2016 IPEGs update the Bureau’s enforcement approach in respect of settlements of proceedings between brand and generic pharmaceutical companies under the Patented Medicines Notice of Compliance (PMNOC) Regulations. The Bureau’s approach to such settlements was first proposed in the White Paper, as a precursor to its inclusion (in revised form) in the Draft Phase II IPEGs. The 2016 IPEGs further refine the Bureau’s analytical framework for reviewing pharmaceutical patent settlements in a number of ways. 

The 2016 IPEGs confirm that, other than in certain defined circumstances, the Bureau will review pharmaceutical patent settlements under the Act’s civil reviewable practice provisions (section 90.1, for competitor collaborations, or section 79, for abuse of dominance). The circumstances in which the Bureau will review settlements under the Act’s criminal cartel provision (section 45) are limited to settlements in which the settlement:

  • extends beyond the exclusionary potential of the patent by delaying generic entry past the patent expiry date;
  • extends beyond the exclusionary potential of the patent by restricting competition for products unrelated to the patent subject to the PMNOC proceeding; or
  • is a “sham”.

The Bureau recognizes that certain features of Canada’s PMNOC Regulations that govern generic entry prior to patent expiry differ from the features of counterpart regimes in other jurisdictions, including in particular the United States. The Bureau acknowledges that these differences may affect the relative incentives of parties to reach settlements, as well as the potential terms of settlements in Canada, as compared to under regimes in the United States. These differences, and their potential impacts, include:

  • First generic filer exclusivity: In Canada, there is no exclusivity period following patent expiration for the first generic challenger, which, relative to the United States (which has such exclusivity), reduces the incentives for the first generic filer to enter into settlements with the brand.  
  • Section 8 damages: The prospect of a brand firm’s liability under section 8 of the PMNOC Regulations, which has no counterpart in the United States, is a relevant consideration when evaluating the magnitude of a brand firm’s payment to the generic firm in a settlement agreement.
  • Dual litigation / double jeopardy: The PMNOC Regulations create a system of legal double jeopardy, insofar as a generic firm can face an infringement action even if it successfully defends a PMNOC proceeding, and a brand firm can face patent impeachment proceedings even though its prohibition application was successful.  The potential follow-on litigation, which again has no counterpart in the United States, is a relevant consideration when assessing the magnitude of how much a brand firm paid the generic firm in a settlement agreement.

Based on the 2016 IPEGs, the Bureau differentiates its enforcement approach to patent settlements based on whether a settlement is an “entry-split” settlement (see Example 12 of the 2016 IPEGs) or a settlement with a “payment” (see Example 13 of the 2016 IPEGs). If a settlement does not involve the brand firm providing consideration to the generic firm other than allowing the generic to enter the market “on or before” patent expiry (an “entry-split” settlement), it will not raise competition issues under the Act. On the other hand, if a settlement includes the brand firm providing a payment (whether monetary or otherwise) in addition to allowing the generic firm to enter the market before patent expiry, the Bureau will likely review the settlement under the Act’s competitor collaboration provision (section 90.1) to assess whether it will have the effect of delaying generic entry and, as a result, substantially lessen or prevent competition.  In this regard, the Bureau will focus on the actual anti-competitive effects of a settlement, rather than its purpose, considering factors such as (i) the fair market value of any goods or services provided by the generic firm, (ii) the magnitude of the brand firm’s section 8 damages exposure under the PMNOC Regulations and (iii) the brand firm’s expected remaining litigation costs absent settlement.

(b)   Product Switching

The Bureau’s enforcement approach to product switching (or product hopping) was first set out in the Revised Phase I IPEGs in September 2014.  The 2016 IPEGs introduce the distinction between a “hard” switch (e.g., removal of a branded incumbent product (Product A) prior to generic entry in order to effect the switch of consumers to a follow-on product, Product B) and a “soft” switch (e.g., attempting to encourage or persuade patients and doctors to switch to a follow-on Product B by such means as offering rebates and other discounts, without removing an incumbent Product A from the market).  In Example 9A of the 2016 IPEGs, the Bureau suggests that a “hard” switch will likely be reviewed as a potential abuse of dominance under section 79 of the Act if the Bureau finds that the conduct could be for the purpose of excluding or impeding generic entry. Conversely, Example 9B of the 2016 IPEGs suggests that a “soft” switch is not likely to raise competition concerns provided that it did not anti-competitively undermine the prescription base of the incumbent product, for example through the use of false or misleading representations about the product.

Related to the Bureau’s enforcement approach to product switching is the definition of “mere exercise” of an IP right, and in particular whether the mere exercise of an IP right (which can be addressed using the special remedy in section 32 of the Act but not under the Act’s so-called “general provisions”) includes the “non-use” of an IP right. The 2000 IPEGs defined the “mere exercise” of an IP right as the “exercise of the owner’s right to unilaterally exclude others from using the IP”, as well as “the use or non-use” of IP by the owner.  In the Draft Phase I IPEGs, “non-use” was removed from the definition, presumably to allow the Bureau to enforce the Act in respect of the “non-use” of a patent right associated with product switching (which the Bureau had recently considered in the context of an inquiry involving Alcon Canada Inc.).  The Bureau’s removal of “non-use” from the definition of “mere exercise” of an IP right drew some criticism, and the Bureau responded by re-inserting “non-use” into the definition in the 2016 IPEGs.  Notwithstanding reversion to the prior definition, the Bureau has kept open the possibility of examining non-use of an IP right under the Act’s general provisions: in a footnote to Example 9A of the 2016 IPEGs, the Bureau notes that “there may be limited circumstances where non-use of an IP right may been viewed as something more than the ‘mere exercise’ and therefore could potentially raise issues under the general provisions of the Act”.    

(c)    PAEs

The Bureau first addressed conduct of PAEs in the Draft Phase II IPEGs. The Bureau’s initial guidance was limited to the use of potentially misleading representations by PAEs to support the assertion of IP rights. Absent from the Bureau’s initial guidance was how it would address the acquisition of IP rights by PAEs. The 2016 IPEGs fill this gap, addressing both types of conduct by PAEs.

The 2016 IPEGs clarify the Bureau’s position with respect to PAEs sending notice letters to firms that are allegedly infringing its patented technologies. Example 10 illustrates a scenario in which a company sending notice letters would be found to violate the misleading advertising and deceptive marketing practices provisions in sections 74.01(1)(a) (civilly reviewable practice) or 52 (criminal) of the Act. The Bureau will focus on whether “the notices included representations that were false or misleading in a material respect”, including the “general impression created by the notice, as well as its literal meaning.” If the Bureau’s examination reveals that the firm’s claims were untrue (e.g., false representations that other businesses have paid a licensing fee or that a PAE intends of commencing legal proceedings), then the representations could be found to be false or misleading. The Bureau would find that representations would be considered “material” if they “would affect the likelihood of the recipients taking some significant action in response to the claims, up to and including acceding to the demand.”

The Bureau has also added Example 11, in which it states that assignment by a firm of its patents to a PAE for the sole purpose of more effective enforcement is, on its own, unlikely to raise issues under the Act. Rather, it appears that such assignments will be treated in a similar manner to assignments to any other purchaser, with the focus being on the extent to which the assignment would create or enhance market power as a result of the PAE’s pre-existing portfolio including IP the competes with the assigned IP rights.  While the Bureau acknowledges concerns expressed by some about PAEs owing to the different incentives that they have with respect to enforcement of IP relative to companies that use IP to manufacture products,  the Bureau also recognizes the benefits of PAEs, such as assisting innovators in maximizing their returns from their research efforts and incentivizing further research.

(d)   Standard Setting and SEPs

In the 2016 IPEGs, the Bureau refines its view of Standards Development Organizations (SDOs), in particular with respect to what is permissible and impermissible in the context of SDO arrangements. The Bureau recognizes that the development of standards through SDOs can provide many procompetitive benefits, such as lowering production costs, increasing efficiency and consumer choice, reducing barriers to entry and fostering interoperability and innovation.

The Bureau confirms that it will review the joint conduct involving SDO participants under the Act’s civil competitor collaboration provision (section 90.1) according to the analytical framework described in the Competitor Collaboration Guidelines, provided there is no evidence that such conduct was for the purpose of facilitating an agreement prohibited under the Act’s criminal cartel provision (section 45).  

The 2016 IPEGs also state that the Bureau is likely to review patent hold-ups (also known as patent ambush) under the Act’s civil abuse of dominance provision (section 79). Patent hold-up occurs where the owner of a patent participating in the standardization process, in violation of SDO rules, fails to disclose its patent to an SDO then later asserts the patent when access to its patented technology is required to implement the standard.

The Bureau identifies a number of steps that SDOs and/or patent owners can take to reduce the potential for patent hold-up:

  • Adopt an IP policy that requires participants to disclose their patents that are essential to the standard that the SDO selects;
  • Ask participants to identify their most restrictive licensing terms and conditions, including the maximum royalty rate that they would demand if access to their patents becomes necessary to implement the standard;
  • Facilitate negotiations between participants who are potential licensees of the standard and IP owners of rival technologies; and
  • Avoid reneging on a licensing commitment by making an ex ante licensing commitments (e.g., an explicit maximum royalty rate) by encouraging its technology to be incorporated into a standard and then later, if successful, abandoning that commitment (e.g., charging a royalty higher than the maximum royalty it promised to charge).

The 2016 IPEGs also address the potential anticompetitive use of injunctions by SEP owners who have made commitments to license IP on fair, reasonable and non-discriminatory (FRAND) terms. The 2016 IPEGs expressly state that the Bureau does not view a FRAND commitment as a commitment to license on a “royalty-free basis” and that firms are “entitled to seek royalties to recover the value of their investment.” Recognizing that potential licensees may seek to take advantage of FRAND commitments by “holding out” for a particular royalty or by refusing to undertake licensing negotiations in good faith, the Bureau identifies circumstances in which a firm that has made a FRAND licencing commitment can seek an injunction against the infringing party. Previously, in the Draft Phase II IPEGs, the Bureau identified the following as appropriate circumstances for a licensor to seek an injunction:

(i) where a prospective licensee has refused to pay a royalty that has been determined to be FRAND by a court or arbitrator; and
(ii) when a prospective licensee refuses to engage in licensing negotiations.

The 2016 IPEGs identify two additional circumstances:

(iii) when a prospective licensee constructively refuses to negotiate (e.g., by insisting on terms clearly outside the FRAND terms); and
(iv) when a prospective licensee has no ability to pay damages (e.g., a firm is in bankruptcy).

Finally, while the 2016 IPEGs make it clear that there are circumstances where patent hold-up may be addressed under the Act, they also note that the Bureau will exercise enforcement discretion in determining whether the Act should be used to address conduct involving SEPs.  The 2016 IPEGs state, for example, that the Bureau is not a “price regulator”, and will therefore leave the determination of royalty rates to negotiations between parties or the courts, absent a clear breach of a licensing commitment (e.g., asking a royalty greater than a previously agreed commitment). The Bureau also notes that patent hold-up could be addressed as a matter of contract law “and will consider this possibility when exercising its enforcement discretion in a given case”.

Conclusion

The 2016 IPEGs, which complete a more than two-year exercise at updating the Bureau’s guidance in relation to its enforcement approach in relation to the competition / IP interface, offer more robust and practical guidance on the Bureau’s enforcement approach in relation to IP. In addition to providing more predictability to businesses that rely heavily (and often increasingly) on IP, the 2016 IPEGs reflect the Bureau’s openness to updating its thinking in an area that is constantly evolving. In this regard, the Bureau has indicated it will review the IPEGs annually, and  revise them as needed, based on its ongoing enforcement experience, changing circumstances and decisions of the Tribunal and the courts.  

Telus agrees to pay $7.34 million in customer rebates to resolve false and misleading advertising allegations

Jeff Brown and Margaret Kim - 

On December 30, 2015, the Competition Bureau announced that it had reached a consent agreement with Telus Communications Inc., one of Canada’s “Big Three” wireless carriers, over allegations of false or misleading advertisements for premium text messaging and rich content services, such as trivia, daily horoscopes, and ring tones. 

As part of the consent agreement, Telus will issue rebates in an aggregate amount up to $7.34 million to certain current and former wireless customers, who the Bureau alleged were unknowingly charged extra for the text message services. The Bureau noted that the amount for consumer rebates made available under the consent agreement is the most obtained by it under any consent agreement to date.  In March 2015,  Rogers Communications Inc. settled with the Bureau, agreeing to pay $5.42 million in refunds to customers for the same fees as part of the same investigation. Similar proceedings against Bell Canada and the Canadian Wireless Telecommunications Association are ongoing.

 Background

Section 74.01(1)(a) of the Competition Act (the Act) addresses materially false or misleading representations to the public.  Under this provision, engaging in such activity for the purpose of promoting, directly or indirectly, the supply or use of a product or for the purpose of promoting, directly or indirectly, any business interest, is a civilly reviewable matter.  

In September 2012, following a five-month investigation, the Bureau commenced legal proceedings against Rogers, Telus, Bell and the CWTA in the Ontario Superior Court.  The Bureau alleged that that the carriers and the CWTA made, or permitted to be made, false or misleading representations to customers in advertisements for premium text messages appearing in pop-up ads, apps and social media. The Bureau also alleged that the carriers permitted charges to be made by two third-party companies, Jesta and MMS, for texting services, such as trivia questions and ringtones, that wireless customers did not intend to purchase and for which they had not agreed to pay.  

In her statement, then-Commissioner Melanie Aiken stated that the Bureau’s investigation had revealed that “consumers were under the false impression that certain texts and apps were free”, and that “unfortunately, in far too many cases, consumers only became aware of unexpected and unauthorized charges on their mobile phone bills.” 

In the Bureau’s investigation, a tool known as a “common short code” was at the heart of the issue.  Text messages and digital content are delivered through this common short code, which is a number assigned by the CWTA’s Short Code Council. The CWTA then leases out the assigned number to a third party for the sale and delivery of digital content.   While such text messages and digital content can be made available for free to a wireless customer or billed at standard text messaging rates, these codes can also be used to charge higher rates to customers.  According to the Bureau, its investigation revealed that premium-rate digital content could cost up to $10 per transaction, and up to $40 for a monthly subscription. The digital content at issue was offered through advertisements in popular free apps on wireless devices, and also online. According to the Bureau, consumers were led to believe that such products were free but then later incurred charges. The Bureau also alleged that “the disclosure to customers had been wholly inadequate,” and the carriers “profited from these charges, at their customers’ expense”.

The Bureau’s sought remedies including full customer refunds and administrative monetary penalties of $10 million from each of Rogers, Telus and Bell, and $1 million from the CWTA. 

Overview of the Settlement

The rebates will apply to Telus, Telus Mobility and Koodo customers who incurred charges for certain premium text messaging services between January 1, 2011 and August 16, 2013.  The current affected customers will automatically receive a rebate as credits, while former affected customers will be notified with details on how to obtain their rebates by email or a letter with 120 days to make a claim.

In addition to the rebates, the consent agreement stipulates that Telus will publish a notice to all affected customers and establish a consumer awareness campaign to educate consumers on how to avoid unwanted wireless charges.  Telus will also create a corporate compliance program with a specific focus on its “billing on behalf of” practices and the Competition Act generally. The consent agreement requires that the compliance program be framed in a manner consistent with the Bureau’s “Corporate Compliance Programs Bulletin,” which was updated in June 2015.

Telus will also donate a total of $250,000 to the Ryerson University Privacy and Big Data Institute;  Éducaloi, an NGO dedicated to helping the public understand their rights and responsibilities under the law; and the Centre de recherche en droit public de l'Université de Montréal. The donations are earmarked for research on issues such as:

  • Citizen’s rights and consumer education regarding how wireless service providers use personal information and data collected from customers;
     
  • How wireless carriers could make more transparent to Canadian consumers what personal information the carriers are collecting and how that personal information will be used; and
     
  • The role that the law currently plays and could play in ensuring that consumers receive accurate information

Going forward: Bureau consumer protection efforts  likely to continue to be an enforcement priority

Going forward, it can be expected that the Bureau will continue to make enforcement of the Act’s false and misleading representation provisions an  enforcement priority.  The Bureau recently updated its Deceptive Marketing Practices Digest Bulletin, which focuses on the importance of truthful and accurate marketing practices in the digital economy.  The Bulletin also reflects Canada’s recently enacted Anti-Spam Legislation, which applies to the sending of electronic messages, as well as recent growth of online marketing through adoption of digital technology, in particular, mobile devices such as smartphones.

To this end, Matthew Boswell, Senior Deputy Commissioner of Competition, stated, “consumers expect and deserve truth in advertising. Allowing a third party to take advantage of consumers through misleading advertising is a violation of the Competition Act,” and indicated that the Bureau would continue enforcing misleading advertising “to ensure that consumers benefit from accurate information in the digital economy.”

Competition Bureau bulks up Electronic Production Guidelines

Mike Laskey and Susan M. Hutton - 

On September 8, the Canadian Competition Bureau released updated instructions for the production of electronic records by merging parties responding to supplementary information requests, or “SIRs” as they are known. SIRs are thorough requests for data, e-mails and other documentation and information that are issued in connection with complex competition merger reviews, and are commonly viewed as the Canadian equivalent of US Second Requests. The updated instructions set out detailed parameters that the Bureau expects merging parties to follow when responding to SIRs, and put an increased focus on large document productions exported from specialized litigation support software. The updated instructions are similar to the US Federal Trade Commission’s Bureau of Competition Production Guide.

The updated instructions contemplate two options for document productions: (a) productions from computer systems without sophisticated litigation export capabilities; and (b) productions from specialized litigation software. The instructions associated with the former type are straightforward, and similar to the previous instructions: parties may simply produce documents in their “native” format (e.g., Word, Excel, etc.). The instructions associated with the latter type are largely new, and much more complex: parties are expected to produce documents in a specific and detailed manner, with a large amount of “metadata” (e.g., author, date created, date modified, etc.) set out in a separate index.

The precise nature of the updated instructions will help to avoid technical issues (e.g., incompatibility) when submitting large document productions to the Bureau. At the same time, however, the “requirements” imposed by the instructions present a number of issues for merging parties and counsel to consider. For example:

  • The instructions strongly suggest that the Bureau expects that parties’ responses to SIRs will include a large volume of documents, similar to US Second Requests. However, unlike its US counterparts, the Bureau continues to expect parties to code and index documents according to the precise question to which each document is responsive.

    This “specification coding” is often a highly manual process that typically requires lawyers to review each document and assign question-specific coding. It is impractical and extremely costly when reviewing tens or hundreds of thousands of documents, and frustrates parties’ ability to use technological tools such as predictive coding to assist in the review process. It is also an increasingly anachronistic requirement, as the technical sophistication of modern litigation software allows both merging parties and the Bureau to quickly and easily search the entire database of electronically produced documents to identify relevant documents.
     
  • The instructions purport to set out “requirements” that are not, in fact, required by law. For example, before “de-duplicating” documents (i.e., using software to eliminate duplicate copies of e-mails and other documents, to minimize the costs associated with processing and review), the instructions suggest that merging parties must provide the Bureau with a written description of the proposed process to be used and receive confirmation from the Bureau that the “deployment of such processes permits the Company to fully comply with [the] SIR.” The Competition Act, however, merely requires that parties certify that their SIR responses are, to the best of their knowledge and belief, correct and complete in all material respects. Standard de-duplicating methods are well understood by experienced counsel and technology support vendors and as a practical matter are routinely accepted by the Bureau.

Overall, we expect that the requirements of the SIR process will continue to evolve rapidly as technology improves. Merging parties should consult with competition counsel well in advance of complex merger reviews, so as to understand and consider the implications of receiving a SIR.

Competition Bureau releases "Phase II" Draft Revision of the Intellectual Property Enforcement Guidelines

 D. Jeffrey Brown and Jessica Rutledge - 

On June 16, 2015, the Competition Bureau released an updated draft version of the Intellectual Enforcement Property Guidelines (IPEGs), which set out its approach to enforcing the Competition Act  against potentially anti-competitive practices involving intellectual property. The draft updates concentrate on the Bureau’s enforcement approach in three areas, namely (a) patent litigation settlements, (b) standard-essential patents and (c) patent assertion entities. The most significant changes include the creation of a “safe harbour” for settlements of patent infringement litigation between branded and generic drug manufacturers that do not involve a reverse payment (i.e., a payment from the branded manufacturer to the alleged infringer). The draft IPEGs also signal a narrow scope of litigation settlements that may be subject to enforcement under the criminal cartel provisions of the Act.

Background

The IPEGs set out the Bureau’s enforcement approach with respect to the Competition Act and potentially anti-competitive practices involving intellectual property. 

The first IPEGs were released by the Bureau in 2000, and in 2013, the Commissioner of Competition, John Pecman, announced the Bureau’s plan to undertake a two-phase update of the IPEGs. The first phase revision began with publication of a revised draft of the IPEGs in April 2014, and ended with the publication of revised IPEGs on September 18, 2014. Phase I changes to the IPEGs were primarily technical in nature, focusing on updates relating to statutory amendments since 2000. The second phase is a more substantive update, addressing the Bureau’s enforcement approach to key issues that have arisen in the IP/competition interface in recent years, namely settlement of patent litigation between branded and generic pharmaceutical companies under the Patented Medicines Notice of Compliance (PMNOC) regulations, standard essential patents (SEPs) and patent assertion entities (PAEs).

Prior to Phase II, the Bureau released a white paper (the White Paper) setting out its proposed approach to enforcement of the Act to PMNOC litigation settlements (see our earlier comments on the White Paper). The White Paper’s proposed enforcement approach to reviewing such settlements was controversial, with a particular concern expressed being the suggestion in the White Paper of an openness on the part of the Bureau to reviewing such settlements under the Act’s per se criminal cartel provision. The potential application of these provisions to legitimate settlements of patent litigation was criticized for reasons including the risk of a potential chilling effect on the settlement of complex pharmaceutical patent litigation.

Summary of Proposed Changes

The Phase II draft IPEGs were released for public comment on June 9, 2015, with a comment period running through to August 10, 2015. As noted previously, changes in the Phase II draft focus largely on the Bureau’s enforcement approach in respect of PMNOC litigation settlements, SEPs and PAEs.

(a) Pharmaceutical Patent Settlements

The Bureau expressly acknowledges that parties may wish to settle PMNOC proceedings rather than run the risk of an adverse outcome from fully litigated proceedings, and that society also benefits from the settlement of litigation. At the same time, the Phase II draft states that settlement of PMNOC proceedings may “pose competition risks if the agreement of the parties goes beyond what is reasonably necessary to reach a settlement and delays the benefits of generic competition.”

For the purposes of determining the Bureau’s enforcement approach to PMNOC litigation settlements, the Phase II draft divides such settlements into three categories.

  1. The first category of settlements is for “entry-split” agreements, whereby a generic company agrees to delay its entry into the market to some point prior to the patent term expiry in exchange for not challenging the patent’s validity. If such an agreement does not include consideration (whether monetary or otherwise) from the brand-name company to the generic firm, the Phase II draft states that the Bureau will not review the settlement under the Act. As the Bureau, in the White Paper, had stated previously that both entry-split settlements and “pay-for-delay” settlements could be subject to review under the Act, the Phase II draft’s treatment of entry-split settlements creates a new “safe harbour” that will help parties assess the risk of potential Bureau scrutiny of settlements.
     
  2. Settlements that go beyond delaying generic market to some point prior to the patent term expiry to include some form of consideration (whether monetary or otherwise) from the brand to the generic comprise the second category of settlements. According to the Phase II draft, such settlements, which involve “reverse payments” and are referred to as “pay-for-delay” settlements, would be reviewed under the Act’s competitor collaboration provision, section 90.1 of the Act, although “[i]n certain circumstances” the Bureau “may also choose to review a settlement [as a potential abuse of dominance] under section 79 of the Act.” In either case, the Bureau will seek to determine whether the settlement results, or is likely to result, in a substantial prevention or lessening of competition, in which case the Commissioner may seek a remedial order from the Tribunal. In making this determination, the Bureau will consider “whether the magnitude of the payment was so large that it was probably for the purpose of delaying generic entry” (taking into account, for example, the brand’s exposure to damages under section 8 of the PMNOC regulations, the brand’s expected litigation cost savings and litigation costs incurred by the generic up to the date of settlement) and “the likely price difference that would have prevailed between the branded version of the pharmaceutical drug and the competing generic drug” (taking into account, among other things, potential entry by other generics). Even if it is expected that such reviews will normally be conducted under section 90.1 of the Act, for which the principal available remedy would be an order prohibiting implementation of the settlement, the potential applicability of section 79 raises the potential additional risk of substantial administrative monetary penalties in an amount up to $10 million.
     
  3. The final category of settlements consists of settlements that are reviewable under the Act’s per se criminal cartel provision, section 45. Whereas the White Paper was criticized for its overbroad approach to section 45’s application to patent litigation settlements, the Phase II draft states that a PMNOC litigation settlement “may be reviewed under section 45 only where the intent of the payment was to fix prices, allocate markets or restrict output,” which “[t]he Bureau anticipates … would occur on a limited basis.” Two specific examples identified by the Bureau as likely to offend section 45 of the Act are pay-for-delay agreements where the market entry is after the expiry of the patent, or settlements where there is direct evidence that the intent of the parties was to fix prices, allocate markets or restrict output.

(b) Standard Essential Patents

SEPs are patents that are required for a product or technology to comply with a technical standard. In the Phase II draft, the Bureau recognizes that the development of such standards, whether through formal Standard Development Organization (SDO) or other means, can have pro-competitive benefits, including ensuring product interoperability, lowering production costs, increasing efficiency and consumer choice, and fostering innovation. However, the Bureau also notes that standards can have anti-competitive effects, as a result of such conduct as patent ambush, reneging on licence commitments or seeking injunctions in respect of SEPs, and due to the fact that SDOs involve competitors or potential competitors in discussions regarding licensing terms and conditions and royalty rates in the context of setting an industry standard.

Patent ambush arises where a patent holder fails to disclose patents to an SDO during a standard-setting process and then, after the standard is set, uses the fact that firms are locked into the standard (for instance by high investment costs) to increase its market power beyond what was inherent in its patents. According to the Phase II draft, the Bureau will review patent ambush as a potential abuse of dominance under section 79 of the Act, to determine whether the conduct results, or is likely to result, in a substantial prevention or lessening of competition, in which case the Commissioner may seek a remedial order from the Tribunal.

The Phase II draft sets out a similar approach with respect to a patent holder reneging on commitments (e.g., with regard to licensing terms and royalties) made in the course of a standard-setting process, or seeking injunctions against firms that are “locked-in” to a standard and face prohibitive costs to switch to alternative technologies. In this latter regard, the Bureau “accepts that in certain circumstances it may be appropriate for a firm that has made a FRAND [fair, reasonable and non-discriminatory] licensing commitment to seek an injunction against an infringing party,” such as where the potential licensee is unwilling to enter into negotiations or to pay a FRAND rate. 

The Phase II draft also sets out the Bureau’s approach to reviewing policies of SDOs with regard to disclosure of IP rights, licensing commitments and conduct of members in relation to joint negotiation or discussion of licensing terms. The Phase II draft gives the example of an SDO that adopts a disclosure policy requiring members to disclose all existing or pending patent rights relating to the possible standard, and to agree to license such rights on FRAND terms to all prospective licensees, with additional encouragement on the part of the SDO for members to specify the most restrictive licensing terms and conditions (including the maximum royalty) that they would require to license their patented technology. Recognizing that its members would include entities that compete with one another, the SDO’s policy also prohibits the joint negotiation or discussion of licensing terms among members. In such a scenario, the Phase II draft states that “if the Bureau determined the SDO arrangement was only to set a standard for … interoperability [of the subject products] and there were no joint discussions of licensing terms and conditions, it would likely conclude that the SDO was not an agreement that constituted a ‘naked restraint’ on competition”, with the result that it would review the arrangement under section 90.1 of the Act, according to the framework outlined in the Bureau’s Competitor Collaboration Guidelines.

(c) Patent Assertion Entities

The Phase II draft sets out the Bureau’s approach to PAEs, albeit in the limited context of a hypothetical involving a PAE that makes false or misleading claims in the course of asserting its patent rights. In the Bureau’s example, a PAE that acquires certain patents and then sends “thousands of notices to various businesses stating that it had proof that the recipient was infringing one or more of these patents, and demanding that each recipient pay a licensing fee to avoid litigation,” may contravene the Act’s provisions relating to false and misleading representations. Focusing on the narrow issue of whether the PAE had any basis for its alleged proof of patent violation, the Phase II draft states that the Bureau would review such conduct under paragraph 74.01(1)(a) of the Act, which prohibits representations to the public that are false or misleading in a material respect, or criminally, under subsection 52(1) of the Act, if the representations were made knowingly or recklessly.

Absent from the Phase II draft is guidance on the Bureau’s approach to other types of conduct, including the acquisition of patents by PAEs.

The Bureau has invited comments on the Phase II draft by August 10, 2015.

Competition Bureau contemplating pre-notification regime for competitor collaborations

Michael Laskey -

The Competition Bureau is contemplating a new pre-notification regime, similar to the regime that currently exists for mergers, whereby businesses will be permitted (or, potentially, obliged) to seek advance clearance from the Bureau before entering into agreements with their competitors. Speaking on a panel at an American Bar Association conference on March 27, Commissioner of Competition John Pecman noted that the plan is in its “early days”, and that the Bureau has not decided whether a regime should be implemented (and if so, whether it should be voluntary or mandatory), but that it is something the Bureau is considering. Such a regime could apply to a variety of types of “normal-course” agreements, such as joint purchasing and selling agreements, buying groups, information sharing agreements, R&D agreements, joint production agreements, non-competition clauses and even joint venture agreements.

The motivation for such a regime may stem from the Competition Act’s dual-track approach to competitor collaborations. In Canada, two provisions of the Act govern agreements among competitors. A criminal provision, intended to capture “naked” price fixing (as well as output restrictions and market allocation), carries significant fines and jail terms. A second, civil provision captures only agreements which adversely affect competition, and carries no such penalties. Although these provisions are intended to serve different purposes, it is up to the Bureau to decide which route it wishes to take when investigating (or prosecuting) any particular agreement. The Bureau has released a guidance document which outlines the types of situations in which it will choose to use the criminal and civil provisions, but this guidance is not binding. So, a pre-clearance regime may give businesses additional certainty in knowing that their joint purchasing agreement or non-compete clause will not be challenged (at least, under the criminal provision).

It is not clear whether the regime would apply to joint ventures. Many joint ventures, because of their structure, are currently subject to mandatory pre-merger notification, but an existing exception exempts certain types of joint ventures from pre-notification (namely, where a limited joint venture agreement exists and where no change in control to any party would result).

The Act already contains a provision which allows any person to apply to the Commissioner for a binding, written opinion on the applicability of any provision of the Act to any conduct or practice that she proposes to engage in. However, this provision is very rarely used for a number of reasons. First, the Commissioner is under no obligation to provide an opinion. Second, the Commissioner may simply reply that the Act “may” apply to the practice in question. Third, the written opinion process may be protracted. Fourth, requesting a written opinion may cause the Bureau to concern itself with an agreement that would not otherwise have come to its attention.

The introduction of a mandatory regime would certainly require legislative amendments to the Competition Act. A voluntary regime may not. In his remarks to the ABA, the Commissioner pointed to New Zealand as an example of a jurisdiction with an effective pre-clearance regime. There, the Commerce Act includes a section permitting (but not requiring) parties to request authorization to enter into contracts whose purpose (or likely effect) may be to substantially lessen competition; the Competition Commission may (but is not required to) grant authorization if certain criteria are met. Amendments to the Act would create a similar, voluntary pre-clearance process for “cartel provisions” in collaborative agreements. As currently drafted, the amendments would oblige the Commission to give clearance if it was satisfied that the agreement containing the “cartel provision” is necessary for a collaborative activity which will not, itself, be likely to substantially lessen or prevent competition. The Bureau may use New Zealand as a model if it proposes its own regime.

Competition Bureau introduces criminal cartel whistleblowing initiative

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

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

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

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

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

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

Interim Commissioner emphasizes importance of trust and enhanced collaboration'

Michael Laskey -

Interim Commissioner of Competition John Pecman and Senior Deputy Commissioner of Mergers Kelley McKinnon recently attended a breakfast seminar at Stikeman Elliott, to speak to an overflow crowd of clients and to answer questions related to their visions for the future of the Competition Bureau.


 

Both Commissioner Pecman’s and Deputy Commissioner McKinnon’s remarks focused primarily on the importance of enhanced trust and collaboration between the Competition Bureau and its stakeholders, both domestic and international. Mr. Pecman emphasized that the Bureau must move to a “collaborative, horizontal approach” in engaging with the business and legal communities and with Canadian consumers. Ms. McKinnon noted the Bureau’s commitment to maintaining an open dialogue with businesses when it reviews proposed mergers, and giving parties clarity as to the issues it has raised, the concerns it has identified and the additional information it requires.

Interim Commissioner Pecman highlighted the importance of collaboration with domestic and international governments as a key tenet of the Bureau’s enhanced focus on trust and collaboration. He cited, for example, collaboration between the Bureau and various police and enforcement authorities related to enforcement of the conspiracy and bid-rigging provisions of the Act; collaboration on training and enforcement with Public Works and Government Services Canada (the main procurement arm of the Canadian government); joint efforts with Canada’s Anti-Fraud Centre; collaboration with the CRTC and Transport Canada regarding multi-agency merger reviews; and collaboration with international governments and organizations (including, most notably, the U.S. Department of Justice and Federal Trade Commission) on criminal, civil and merger matters.

A second focus of both Mr. Pecman’s and Ms. McKinnon’s remarks was the importance of transparency, certainty and predictability, with respect to how the Bureau reviews mergers, how it develops, communicates and applies its policies and how it enforces the Competition Act in general. To this end, Interim Commissioner Pecman noted that the Bureau was reviewing its Leniency and Immunity programs (part of the Bureau’s criminal enforcement arsenal) and the associated guidance documents, along with other issues related to investigative procedures and e-evidence.

Overall, the remarks from Canada’s top competition law enforcers were welcome news for Canadian businesses. When Competition Bureau approval is necessary for a contemplated merger, or where a desirable business practice raises potential concerns under the Competition Act, the disposition of the Competition Bureau can be a source of significant uncertainty for businesses, particularly in light of the lack of jurisprudence under many of the provisions of the Competition Act. The Bureau’s enhanced focus on trust, collaboration, transparency and predictability will help to reassure businesses that the Bureau is a positive and engaged participant in the Canadian business community, and should help to reduce transaction costs for merging parties and improve the efficiency of the Canadian economy.

Canada's Commissioner of Competition toughens stance

Susan M. Hutton and Robert Mysicka -

Recent remarks by Canada’s Interim Commissioner, John Pecman, reinforce the view that the Bureau is pursuing all avenues available to it under the Competition Act to fulfill its mandate of investigating and challenging civil and/or criminal anti-competitive practices. In this respect, the interim Commissioner noted three of the Bureau’s priorities going forward:

  • focused enforcement and strategic regulatory interventions designed to benefit Canadians;
  • applying Canada's competition laws in a transparent and predictable manner; and
  • developing trust through enhanced collaboration

In addition to these priorities, Mr. Pecman noted that the Bureau would assist in providing clarification on the Act’s price maintenance provisions, issues that have arisen in the context of electronic document production, the Bureau’s leniency program for those that cooperate in criminal investigations, and investigative procedures.

The Use of Section 11 Investigative Orders

In his speech, Mr. Pecman emphasized that the Bureau will use “all of the tools that Parliament has given to us in the Competition Act to deliver on our mandate”. In terms of investigations under formal inquiry, including non-merger, civil matters, the Commissioner indicated that the Bureau will not refrain from using the powers available to it through section 11 of the Act. This provision allows the Commissioner to compel attendance of a person who has, or is likely to have, information that is relevant to an inquiry, so that they may be examined on oath or solemn affirmation, or to compel production of records or a written return.

While the Bureau has the power to utilize section 11 in respect of both civil and criminal matters under inquiry the Commissioner noted that in some recent investigations it has opted to use Voluntary Information Requests (VIRs) in place of court orders. However, Mr. Pecman expressed concern that parties may be using the VIR process for strategic, uncooperative purposes, resulting in unnecessary delays in the Bureau’s investigations. In order to combat what the Bureau views as “inefficient, incomplete and untimely” responses associated with VIRs, Commissioner Pecman declared that, “going forward, the Bureau's first course of action in obtaining information from the target of a formal inquiry in non-merger cases will be, for all but exceptional cases, obtaining a legally binding section 11 order from the Court.”

The Commissioner clarified that the use of section 11 orders is not meant to be punitive, but rather is designed to aid investigations by providing a clear framework, timelines and set of rules that benefit both parties in the investigation.

Transparency

In addition to commenting on section 11 orders, the Commissioner expressed a commitment to transparency designed to provide the legal community, consumers and businesses with greater certainty in their dealings with the Bureau. Practically speaking, this means continued publication of guidance material, and, in respect of merger review, position statements for complex deals. Such statements will continue to be published where there is a high level of complexity and importance of the issues raised, a strong interest in the case, or where the review utilized new analytical tools, findings or outcomes. The online mergers register, which lists completed merger reviews updated on a monthly basis, will see its first year of operation this February. 

Recent Enforcement Measures

The Commissioner commented on some of the Bureau’s recent enforcement measures, stating that he was particularly proud of the investigation into the retail gas sector in Quebec, which was one of the largest in the agency’s history. The investigation resulted in criminal price-fixing charges being laid against 39 individuals and 15 companies, with total fines exceeding CDN $3 million and terms of imprisonment totaling 54 months. The Commissioner also stated that he expects a decision from the Competition Tribunal soon on the civil case alleging anti-competitive price maintenance practices by Visa and Mastercard.

Partnerships

In terms of non-legislative enforcement measures, Commissioner Pecman highlighted the Bureau’s collaboration with its law enforcement partners in Quebec, specifically the Unité Permanente Anticorruption or UPAC. Collaboration between the Bureau and UPAC was integral to uncovering a complex collusion scheme involving contracts for infrastructure projects in the Saint-Jean-sur-Richelieu region in June, 2012. This joint operation resulted in 77 charges being laid against 11 individuals and 9 companies in the construction industry.

Vertical pork mergers pass mustard with Competition Bureau

Michael Laskey -

On December 17, the Competition Bureau released a position statement summarizing the approach it had taken in analyzing two proposed vertical mergers (i.e., mergers between firms at different levels of a supply chain) in the pork industry. Both proposed mergers involve the acquisition of a large Western Canadian hog producer by a company that sells finished food products (pork cuts) to consumers: Olymel L.P. plans to acquire Big Sky Farms Inc. and Maple Leaf Foods Inc. plans to acquire Puratone Corporation. The Bureau decided not to challenge either merger.

The key concerns considered by the Bureau, and its conclusions about each, were:

  1. that Olymel or Maple Leaf may have the ability and incentive to refuse to supply its hogs to other competing sellers of pork cuts, and thereby foreclose their access to a necessary input. The Bureau determined that this ability and incentive would indeed exist, but concluded that no substantial lessening or prevention of competition would result because sufficient effective competition would remain among suppliers of pork cuts (including competition between Olymel and Maple Leaf); and
     
  2. that Olymel and/or Maple Leaf may harm other hog producers by foreclosing their access to a sufficient customer base. In particular, the Bureau was concerned that both Olymel and Maple Leaf would control a significant amount of slaughterhouse capacity in Western Canada, and may be able to harm other hog producers by refusing to purchase hogs from external suppliers, leaving the rival hog producers with no local slaughterhouse to which to sell their hogs. The Bureau concluded that each of Olymel and Maple Leaf would indeed have this ability, but that the costs of refusing to purchase hogs from external suppliers would outweigh any associated benefits, and they therefore lacked an incentive to do so.

The position statement provides insight into how the Bureau analyzes vertical mergers. Consistent with the guidance provided in the Merger Enforcement Guidelines, the position statement suggests that the Bureau’s principal concerns about such mergers will likely relate to input foreclosure (i.e., a refusal by the merged entity to supply an input to a downstream competitor) and customer foreclosure (i.e., a refusal by the merged entity to purchase inputs from upstream competitors). The statement also demonstrates that the Bureau will approach these issues carefully: although it concluded that both input foreclosure and customer foreclosure were possible in the case of these pork mergers, it also found that neither was likely to lead to a substantial lessening or prevention of competition.

John Godfrey Saxe (or, perhaps, Otto von Bismarck) once stated that “[l]aws, like sausages, cease to inspire respect in proportion as we know how they are made.” With respect to pork mergers, at least, the opposite appears to be true.

Canada's new interim Commissioner of Competition emphasizes compliance programs

Robert Mysicka and Marty McKendry -

In his first published remarks as Interim Commissioner of Competition, John Pecman discussed a number of competition-related issues, underscoring the importance of compliance programs, the competition risks associated with participation in trade associations, and the Bureau’s key enforcement priorities going forward.

Mr. Pecman, who was appointed Interim Commissioner on September 26, noted the increasing international prevalence and cooperative enforcement of competition law. He also emphasized the seriousness of cartel activity, referring to Chief Justice Crampton’s remarks in the case against Maxzone Auto Parts, where Mr. Justice Crampton likened cartel agreements to fraud and approved incarceration as an effective deterrent.

For much of his speech, the Interim Commissioner focused on the importance of effective corporate compliance programs. In his view, compliance programs reduce the risk of criminal or civil liability, increase awareness of competition issues amongst market participants, and aid transgressing parties in their dealings with the Bureau (especially with respect to the Bureau’s Leniency Program).

Mr. Pecman indicated that the mere existence of a compliance program on paper does little to ensure actual compliance with the Competition Act. Rather, in his view, “the issue is internal enforcement[.]” He explained that a credible and effective corporate compliance program includes five elements: (1) senior management’s involvement and support; (2) legally and commercially up-to-date compliance policies and procedures; (3) ongoing and meaningful employee education and training; (4) monitoring, auditing, and reporting mechanisms that maintain program integrity; and (5) consistent disciplinary procedures and incentive components (e.g. incentives for whistleblowers).

Of particular note was Mr. Pecman’s discussion of compliance concerns related to trade associations. Highlighting several of the Bureau’s recent investigations into trade association activities, Mr. Pecman observed that, by their very nature, these organizations face “unique compliance issues.” In his words, “[Trade associations] are naturally exposed to greater risks of anti-competitive behavior because they provide a forum that may encourage competitors to collaborate.”

Mr. Pecman identified three types of conduct by trade associations that are likely to raise concerns and attract the Bureau’s scrutiny. First, the Bureau is concerned with restrictions on professional service offerings (for example, the imposition of limits on office location or size) because such restrictions can deter or limit expansion by competitors. Second, a trade association should not limit the number or range of its members or inhibit their ability to compete (for example, by imposing fee schedules). Such rules prevent entry and restrict the emergence of alternate service models to the detriment of consumers. Third, the Bureau is concerned with conduct that reduces incentives to compete vigorously, such as agreements to share sensitive information. For those interested in more information regarding Competition Act compliance in respect of trade associations, counsel at Stikeman Elliott provides regular compliance seminars on the topic. 

The new Interim Commissioner announced that the Bureau’s general priorities remain the same under his leadership: (1) achieving results for Canadians through active, targeted and principled enforcement; (2) applying Canadian competition law in a progressive and transparent way to keep pace with the dynamic marketplace; and (3) cultivating a strong and agile enforcement capacity. The Interim Commissioner also clarified that in deciding whether to pursue a case, the Bureau evaluates the harm to competition; the potential for deterrence; the Bureau’s resources and priorities; and whether the case raises issues that have an effect on average Canadians.

CRTC guidance on check-boxes for e-marketing likely to tick off business community

David Elder -

Although the date on which Canada’s Anti-Spam Legislation (CASL) may come into force is uncertain, the CRTC has issued two bulletins that provide guidance as to how to comply with the new law, once proclaimed in force.

But while some of the new guidance is helpful, other provisions will likely create significant operational concerns for businesses.

The Commission is the body charged with oversight and enforcement of most provisions of the new law, including the core provisions respecting commercial electronic messages (CEMs), alteration of transmission data and the installation of computer programs.  In addition, the CRTC has the power to make regulations under the Act with respect to certain matters.

As we noted previously, the CRTC registered its Electronic Commerce Protection Regulations (CRTC) in March of 2012, providing additional clarification of these new regulations in a subsequent Regulatory Policy.

The first of the new Compliance and Enforcement Bulletins provides further, and in some cases helpful, guidance on the interpretation of these Regulations, such as providing details on acceptable unsubscribe mechanisms for each of email and SMS messages, including visual mock-ups of acceptable approaches.

However, the Bulletin also indicates that the Commission considers that, where included in general terms and conditions of use or sale of a product or service, requests to send commercial electronic messages, alter transmission data or download computer programs must be obtained through separate positive affirmations of the user, such as the proactive checking of a tick-box to signify consent to each of these actions, in addition to the acceptance of other contractual terms or an organization’s privacy policy. 

Most problematically, in a second Compliance and Enforcement Bulletin, the CRTC seems to be ruling out default settings that favour consent, even where the user can uncheck a box to exercise their choice (a process that the Commission refers to as “toggling”) and where the user does provide a positive affirmation to a set of terms or an agreement.  The following example, included in the Bulletin, shows that even where the pre-checked box and related consent is featured prominently, and is adjacent to a button that the user must pressed to signify agreement to a contract, the CRTC will not consider this to be valid consent to the receipt of CEMs under the anti-spam law.

Another area of likely concern for businesses relates to CRTC guidelines respecting the collection of oral consent, a form of consent which is explicitly authorized by the Electronic Commerce Protection Regulations (CRTC).  The Bulletin suggests that in order to be able to discharge the onus of proving that it obtained oral consent, a business would have to have that consent verified by an independent third party or retain a complete and unedited audio recording of the consent.

We would note that, while these methods may work where consent is collected by telephone, through a call centre, they would create significant operational problems where consent is collected during a face-to-face interaction, such as might commonly occur at point of sale.

While the Bulletins do not have the force of law, they do provide a clear indication of how the CRTC will interpret the law and regulations that is charged to enforce.

 

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

Susan M. Hutton and Edwin Mok -

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

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

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

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

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

Competition Bureau conducts performance review of its mergers branch

Susan M. Hutton and Robert Mysicka

The Competition Bureau has released an updated Merger Review Performance Report (Report) tracking the activities of its Mergers Branch since the last report published in May, 2010 and discussed in our previous post.

Since 2010, the Bureau has published a series of revised guidelines as part of its ongoing efforts to realign its merger review procedures following the 2009 amendments to the Competition Act and the Notifiable Transactions Regulations. The updated guidelines include:

New Service Standards for Merger Review

Interpretation Guidelines

In addition to these customized service standards and interpretation instruments, the Bureau has released more general guidelines outlining its merger review process including the Merger Enforcement Guidelines, a Mergers Remedy Study, and Merger Review Process Guidelines.

Finally, as part of its effort to enhance communication and transparency in the process of merger review, the Bureau has committed, where possible, to publicly communicate the results of certain merger reviews through the issuance of Position Statements that briefly describe the Bureau’s analysis of a particular transaction. The following position statements have been published by the Bureau since the release of the 2010 Report:

The Bureau’s transparency initiative also includes the publication of a Merger Register used to disclose completed mergers on a monthly basis—including those that have not been made public. The Bureau’s Merger Register is the most controversial of its transparency initiatives, as some critics have argued that it will lead to the disclosure of confidential commercial information which has traditionally been afforded protection under section 29 of the Competition Act.   

Bureau Workload and Resources

The Bureau’s caseload in the FY 2010-11 increased slightly since FY 2009-10 from 216 matters to 236. Complete statistics for FY 2011-12 were not available at the time of the Report’s publication.

As noted in its 2010 Report, the Bureau’s workload and resources have continued to be strained by an influx of highly complex transactions that have raised competition concerns.  Examples of highly complex reviews since the 2010 Report include:

  • BHP’s hostile bid to acquire Potash Corp. of Saskatchewan which was ultimately blocked by the Minister of Industry under the Investment Canada Act 
     
  • London Stock Exchange’s proposed merger with the Toronto Stock Exchange (“TMX”) which was unsuccessful due to a competing bid to acquire the TMX by Maple Group
     
  • Google’s acquisition of Motorola which involved the competitive effects of patents in the wireless industry
     
  • BCE and Rogers’ proposed acquisition of Maple Leaf Sports Entertainment which the Bureau is currently reviewing

Since the 2010 Report, the Bureau has issued 13 SIRs and four consent agreements have been registered with the Competition Tribunal.

In litigation before the Competition Tribunal, the Bureau has been very active on the front of unresolved merger matters. In January, 2011 it challenged CCS Corp’s acquisition of Complete Environmental Inc. which was the owner of a proposed hazardous waste landfill in British Columbia. This application represented the Bureau’s first challenge of a merger since 2005. In June, 2011 the Bureau filed an application with the Tribunal seeking to prohibit a proposed joint venture between Air Canada and United Continental Holdings Inc.

Non-Notifiable Transactions

The 2009 amendments to the Competition Act raised the threshold for notifiable transactions from $ 50 million to $ 70 million. Pursuant to an annual indexing formula set out in the Act, the threshold has now increased to $ 77 million. The practical effect of these revisions is that fewer transactions are now subject to mandatory notification, which in the Bureau’s view potentially increases the likelihood of non-notifiable mergers raising substantive competition issues.

Accordingly, the Bureau has embarked on a new initiative to actively monitor transactions in the Canadian marketplace. This monitoring involves scanning various media sources and mergers acquisition databases, as well as reviewing complaints from relevant stakeholders in the marketplace.

While year-to-year fluctuations exist within each notification subset (e.g. pre-merger notifications, ARCs, pre-merger notifications and ARCs, and other) the Bureau found that the proportional distribution of merger reviews by matter type has remained relatively consistent for an extended period of time.

Complexity Designations

The data compiled in the Report supports the Bureau’s view that its mergers workload is becoming increasingly complex. The table below, reproduced from the Bureau’s Report, indicates that over the three quarters of FY 2011-2012 the percentage of matters designated as ‘complex’ increased by approximately 7% over the previous fiscal year:



Since the 2010 Report, the Bureau has found that the average time required to review a non-complex matter increased by approximately 1.3 days, though the average time required to a review complex matter decreased by approximately 7 days which follows from the implementation of a considerably shorter service standard for complex reviews, introduced through the Merger Fee Policy and revised Merger Handbook in November, 2010.  The Report concludes that the Bureau has been able to meet the service standard in more than 90% of its reviews, regardless of complexity.

Competition Bureau releases additional Pre-Merger Interpretation Guideline for consultation

Susan M. Hutton & Kim Lawton -

Competition Bureau (the Bureau) has published a draft new Pre-Merger Interpretation Guideline for public consultation (Guideline #15), providing details as to how the Bureau calculates the value of “assets in Canada” and “gross revenues from sales” for purposes of the merger notification thresholds.  It will be open for comment from interested parties until June 13, 2012.

The purpose of the guideline is to assist parties and their counsel in interpreting and applying the provisions of theCompetition Act (the Act) relating to notifiable transactions. This guideline sets out the general approach taken by the Bureau and may assist businesses in determining whether the parties-size and transaction-size thresholds under sections 109 and 110 of the Act are exceeded.

As previously covered on this blog, on March 23, 2012 the Bureau announced the publication of two other new Pre-Merger Notification Interpretation Guidelines for public consultation. Those publications were Guideline #12: "Requirement to Submit a New Pre-Merger Notification and/or ARC Request Where a Proposed Transaction is Subsequently Amended" and Guideline #14: "Duplication Arising From Transactions Between Affiliates".

What's in Guideline #15?
Guideline #15  focuses on three key areas of inquiry:

  1. what is an asset "in" Canada?;
  2.  what are gross revenues from sales “in, from or into” Canada; and
  3. what revenues are considered to be “generated from those assets”?

The Bureau notes that the audited financial statements are the starting point for analysis, but cautions that "it is incumbent on parties to look beyond these segmented results to ensure that threshold calculations are consistent with the requirements of the Act and the Notifiable Transactions Regulations."

(1) Assets “In” Canada
Unless an exception applies, all assets on the audited financial statements of a Canadian entity (e.g., incorporated in Canada or formed pursuant to a Canadian statute) are assets “in” Canada. For tangible assets, the determination typically turns on where the asset is physically located. For an intangible asset (e.g., intellectual property rights), location is usually determined by the statute conferring the legal rights and privileges associated with the asset. Similarly, the location of a financial asset is usually determined by the statute conferring the legal rights and privileges associated with that asset.

(2) Gross Revenues From Sales “In, From or Into” Canada
Guideline #15 notes that merging parties should consider whether the audited financial statements provide a reasonable approximation of the value of revenues “in”, “from” and/or “into” Canada before relying on them. For example, some financial statements reflect both sales “in” Canada and sales “into” Canada, but exclude sales “from” Canada. [Author’s note: this reflects the European idea of turnover.]. Therefore, the Bureau states, it may be necessary to consult working papers or other records to determine the total value of all three categories of sales. Since only sales “in or from Canada generated by” the assets in Canada are relevant to the “size of target” threshold, whereas sales “in, from or into” Canada generated by assets anywhere in the world are relevant to the “size of parties” threshold, the distinction is important.

Whether gross revenues from sales are considered to be “in, from or into” Canada depends on the location of the seller and/or purchaser. The Guideline states that whether gross revenues are from sales “in, from or into” Canada can often be determined as follows:

  • gross revenues from sales “in” Canada: "revenues from sales to a purchaser located in Canada that are booked in the audited financial statements of a Canadian party or Canadian affiliate of a party";
  • gross revenues from sales “from” Canada: "revenues from sales to a purchaser not located in Canada that are booked in the audited financial statements of a Canadian party or Canadian affiliate of a party"; and
  • gross revenues from sales “into” Canada: "revenues from sales to a purchaser located in Canada that are booked in the audited financial statements of a foreign party or foreign affiliate of a party".

Guideline #15 cautions that where the jurisdiction of incorporation of the seller is not the origin of the sale, the general principles set out above may not apply.

(3) “Generated From Those Assets”
Under Guideline #15, revenues are considered to be generated from assets in Canada if "any of the revenue-generating assets of the target business are located in Canada”. "Revenue-generating assets” is defined to include assets that "contribute in any way and at any stage" to the sale of the asset. This typically consists of things like manufacturing or sales, but omits ancillary functions like human resources.

Guideline #15 notes that merging parties should consider whether the audited financial statements provide a reasonable approximation of the value of revenues "generated from those assets" before relying on them. For example, if the audited financial statements of a party to the proposed transaction have to be adjusted (as a result of certain assets being considered either “in” or “not in” Canada), then similarly, the entries in the financial statements that correspond to gross revenues generated from those assets, may also have to be adjusted.

Commentary:

The draft Guideline #15 provides some hypothetical examples to illustrate the finer points made regarding some of the issues raised. Not all of the interpretations will be without controversy. For example, if a physical revenue-generating asset (such as a cruise ship) is located in Canada at any time during the year, the Bureau will apparently count all of the revenues generated by that asset as having been earned “in” Canada, even if the asset is foreign-registered and was physically located outside of Canada for the majority of the period in question.

The Interpretation Guidelines are not legally binding, but in the absence of court decisions interpreting the Notifiable Transactions Regulations, provide guidance as to the Bureau’s interpretation.
 

Competition Bureau releases new draft guidelines on abuse of dominance

D. Jeffrey Brown & Robert Mysicka -

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

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

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

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

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

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

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

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

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

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

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

Canada's Competition Bureau releases revised Merger Review Process Guidelines

Susan M. Hutton and Michael Laskey -

On January 11, 2012, Canada’s Competition Bureau published revised Merger Review Process Guidelines, updating the Bureau’s approach to the administration of the merger review process under the Competition Act in light of experience gained since the implementation of the two-stage U.S.-style notification process in 2009. 

In particular, the Guidelines discuss: (i) the statutory waiting periods which apply to mergers that exceed certain thresholds set out in the Act; (ii) the two-stage notification process including the use of Supplementary Information Requests (SIRs), similar to the “second request” process in the United States; (iii) the use of timing agreements as an alternative means of obtaining information about a transaction and (iv) provide the Bureau’s view of how parties should conduct their searches for documents and information when responding to a SIR, in the form of sample search instructions.

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.

Prime Minister says free market principles will be tempered by reality

Shawn Neylan -

Bloomberg News reported yesterday that in an interview given on September 21, Canada's Prime Minister Harper confirmed that capital from China and other countries is welcome provided that acquisitions of Canadian businesses are “economic in nature and don’t have other strategic or political objectives”.  Bloomberg quoted the Prime Minister as saying "[a]s much of an advocate as I am of free markets, I don’t think that governments realistically can just make the assumption that everybody else is operating on a market basis."

With respect to the BHP-Potash transaction that was rejected under the Investment Canada Act the Prime Minister stated: "If it had been in Australia, to put the shoe on the other foot, I don’t believe that takeover would have been approved. ... I think the objectives of BHP, in fairness, probably were beyond merely what we would consider good business in a market sense, but probably more an issue of strategic positioning, and that strategic positioning was obviously not in the interest of the Canadian economy.”

While it is reasonable to expect that most transactions will not involve strategic or political objectives that may raise issues under the Investment Canada Act, the Prime Minister's comments underline the importance of an early assessment of the potential for planned transactions to attract the heightened scrutiny of the Canadian government. This has been understood at least since the China Minmetals - Noranda transaction discussions in 2004 and was confirmed in the State Owned Enterprise Guidelines issued by Industry Canada in 2007. The SOE Guidelines make specific reference to the Canadian government's need to be satisfied that Canadian businesses that are acquired by non-Canadians will continue to operate on a commercial basis. The Prime Minister's comments in relation to BHP suggests that strategic actions by non-state owned enterprises may also attract government scrutiny, underlining the need for assessment and planning to satisfactorily resolve such issues and successfully complete acquisitions of significant Canadian businesses.
 

Canada's Merger Control and Foreign Investment Regimes - selected recent developments

Shawn C.D. Neylan and Michael Kilby -

In March 2009, significant amendments to Canada’s Competition Act and Investment Canada Act were passed, with important implications for the regulatory review of mergers and acquisitions. 

Merger Control – Competition Act

Following the amendments of March 2009, Canada now has a “two-stage” merger review process. The merits and demerits of this new regime were never thoroughly debated among competition law practitioners or in Parliament, because the amendments were included in a budget implementation bill drafted in response to the global economic crisis of 2008. The bill moved through the legislative process in a matter of weeks, with the clear focus of parliamentary debate being on economic stimulus measures, rather than amendments to the Competition Act and other statutes. In any event, the new merger review process shares many similarities with the US process under the Hart-Scott-Rodino Act1. More particularly, the submission of the required notification filings by the purchaser and the target company triggers a 30 calendar day waiting period during which the transaction may not proceed, unless the Commissioner of Competition (the Commissioner) issues a positive clearance for the transaction and/or terminates the waiting period. If the 30 calendar day waiting period expires without the issuance by the Commissioner of a supplementary information request (a SIR), then there is no legal impediment to the parties closing the transaction. However, if the Commissioner issues a SIR within the 30 calendar day waiting period, the transaction may not close until 30 days after the parties have complied with the SIR, unless the Commissioner issues a positive clearance for the transaction and/or terminates the waiting period.

To those familiar with US antitrust law, the above-outlined structure of the new Canadian regime clearly bears a close resemblance to the structure of US merger control law under the Hart-Scott-Rodino Act. However, two key differences between the Canadian and US regimes are that: a) it is possible in Canada, and even common, for parties to seek and obtain clearance for substantively simple transactions via an “advance ruling certificate” process, removing the need to make formal notification filings in the first place; and b) the expiry of the 30 calendar day waiting period in Canada does not amount to substantive comfort that the Commissioner has concluded that a transaction does not raise competition issues.

Since the new law came into force in March 2009, the rate at which the Commissioner and the Competition Bureau (the Bureau) have obtained negotiated remedies has increased dramatically in 2009 and 2010, as compared to historical levels. Indeed, between July 2009 and September 2010, (a 14 month period), the Bureau obtained Canadian competition law remedies in approximately 10 transactions, including numerous international transactions. Whether this is due to an increased number of strategic transactions or the new law is open to debate. Although it is impossible to say whether the Bureau could have obtained divestitures in respect of this number of transactions under the previous merger control regime, it is clear that this rate is considerably higher than in recent years where there were typically two or three merger remedies per year.2

Looking more closely at the transactions for which divestitures have been required, they vary greatly in terms of their Canadian elements. Some (Suncor/Petrocan, Clean Harbours /Everready and IESI-BFC/Waste Services) exclusively, or almost exclusively, raised competition issues in Canada and not in any foreign jurisdictions. In these situations, the Bureau obtained divestitures entirely independently from any foreign competition law regulators. Others (Pfizer/Wyeth, Merck/Schering Plough, Novartis/Alcon) were very much international mergers with relatively small Canadian components, and where international cooperation would have been significant in arriving at conclusions. Others still were international majors, but with relatively large Canadian components (e.g.,Agrium / CF Industries) with international cooperation again likely being significant. However, even where international cooperation was an important component of the Bureau’s review, the divestitures obtained have frequently had Canada-specific elements, demonstrating that Canadian remedies are not merely an exact re-iteration of any foreign remedies.

Prior to the March 2009 amendments, merging parties had the ability to force the Commissioner to litigate to prevent closing on the expiry of the 42 day period after pre-notification filings were submitted. Although such litigation was, in practice, a rare occurrence because parties wanted to obtain positive clearance from the Commissioner, the bargaining dynamic that existed between the Commissioner and the parties was nevertheless generally more favourable to the parties than is the case today. More particularly, for transactions the review of which lasted longer than 42 days, which captures the significant majority of mergers that are substantively complicated from a competition law perspective, the Commissioner had an incentive to negotiate to avoid litigation. 

Under the new regime, this dynamic is often not present, as the Commissioner’s review of substantively complicated transactions occurs largely, or even exclusively, during a period in which the parties are not able to close. Parties can only put themselves in a legal position to close by complying with a SIR (or the terms of a timing agreement), but the very act of complying with a SIR is a time-consuming, resource-intensive process, and results in the parties providing, under oath, the internal data and documents that the Commissioner would use to support a merger challenge. Parties can and do agree to pull and refile their merger filing such that the waiting period recommences and the Commissioner need not issue a SIR to prevent closing.

While information regarding the timing of parties’ compliance with SIRs (or timing agreements) for specific transactions is not publicly available, it is very likely that at least some of the recent divestitures contained in consent agreements obtained by the Commissioner were negotiated in situations where the parties were not in a legal position to close. This was never or virtually never the case under the old regime, where the parties would often be in a legal position to close during the negotiation of any remedy. One of the implications of the new regime for merging businesses where there is some competitive overlap is that if a relatively short interim period between signing and closing is contemplated, the parties will very likely arrive at their intended closing date in a situation where they require positive clearance from the Commissioner to close, meaning that their bargaining position in negotiating a consent agreement may be relatively weak.

Finally, it is notable that although the Commissioner has obtained merger remedies at an unprecedented rate since the implementation of the March 2009 amendments, the Commissioner has only brought a single formal merger challenge at the Competition Tribunal, continuing a trend that dates back a number of years.   Furthermore, the merger in question was “non-notifiable,” in the sense that it was not large enough to trigger a mandatory Competition Act filing. The new SIR process and the enhanced leverage of the Commissioner would therefore have been an irrelevant consideration in the review of this merger. 

It is unclear whether there will be much in the way of contested merger proceedings in the future. On the one hand, the enhanced information gathering powers of the Commissioner, which operate to extend the waiting period, suggest that the Commissioner may be in a better position than before to prepare for a contested merger challenge. On the other hand, parties to a transaction, recognizing the enhanced power of the Commissioner, may be more inclined to arrive at a negotiated settlement by way of consent agreement relating to the problematic portions of the transaction, in order to permit a relatively expeditious closing. It may take several years before the impact of the March 2009 amendments on merger investigation and litigation in Canada is fully understood. It would seem, however, that consent agreements will continue to occupy a significant position in the Canadian competition law landscape at least so long as the current strategic merger activity continues and that, consequently, case law under the Competition Act’s substantive merger review provisions will remain sparse.

Foreign Investment Review – Investment Canada Act

The ICA provides for the pre-closing review and Ministerial approval of certain investments in Canadian businesses, with such approval granted where the Minister determines that an investment is of “net benefit to Canada.” Prior to March 2009, the ICA did not contain any explicit “national security” review mechanism. We provide below a brief overview of Canada’s new “national security” review regime under the ICA. Certain other technical amendments to the ICAwere made in March 2009, but are not discussed in any detail herein. 

  • National Security - Overview

A national security review may be launched where the Government regards a foreign investment as potentially “injurious to national security”. If it concludes that there is a potential threat, the Government can prohibit or attach conditions to a foreign investment, whether an investment in an existing Canadian business or the establishment of a new Canadian business. If the investment is already completed, the Government’s powers include the ability to order the divestiture of a Canadian business. It is important to note that this mechanism for national security review is separate from the existing economic review process.

The national security amendments to the ICA raise a number of issues, including the following.

  • National Security is Undefined

The ICA does not define “national security”. The Government has not provided any meaningful guidance on the factors it will consider when determining whether there is a national security issue. The concern that national security could be interpreted expansively (beyond obvious defence-related concerns) is heightened by the large and varied group of governmental departments and agencies listed in the National Security Review of Investments Regulations (the National Security Regulations), including the Department of Canadian Heritage, the Department of Natural Resources, the Department of Transport, the Canada Revenue Agency, the Department of Public Works and Governmental Services and the Department of Finance, in addition to the more obvious agencies such as the Department of National Defence and the Canadian Security Intelligence Service.

  • Small Transactions and Other Investments are Subject to the New Law

Unlike the case in economic reviews under the ICA, the new national security review law applies to minority investments. Also, under the new law, the government may order a review if the business in question carries on any part of its operations in Canada and has any of: a place of operations in Canada; one or more individuals who are employed or self-employed in connection with the operations; or assets in Canada used in carrying on the operations. There is no minimum asset or transaction size threshold, with the result that a national security review is possible even with respect to small transactions.

  • No Process for Voluntary Pre-Clearance

The ICA does not provide a pre-clearance process for national security issues. However, in some cases the National Security Regulations provide for a statutory limitation on the Minister’s ability to act after a certain date. In some cases it may be possible to have the limitation period expire before closing. If this is not possible, there will be some (in most cases minimal) risk of a post-closing national security review.

  • State-Owned Enterprises (SOEs)

It is generally thought that the genesis of the national security law was the proposed acquisition of Canadian nickel miner Noranda Inc. by China Minmetals in 2004. Although that transaction did not proceed, it did generate debate about the role of national security considerations under the ICA.

In December 2007, the government issued guidelines on how it would apply the “net benefit to Canada” test to investments by SOEs that were being reviewed under the economic review provisions of the ICA (as opposed to the new national security law, which was not then in force). In addition to the factors that the Minister of Industry typically considers in deciding whether to approve reviewable investments, the SOE Guidelines indicate that the governance and commercial orientation of SOEs will be considered.

With respect to governance, the SOE Guidelines state that the SOE’s adherence to Canadian standards of corporate governance will be assessed, including any commitments to transparency and disclosure, independent directors, audit committees and equitable treatment of shareholders, as well as compliance with Canadian laws and practices. The Minister will also consider how and to what extent the investor is controlled by a state.

With respect to the commercial orientation, the SOE Guidelines state that the following will be relevant: (i) destinations of exports from Canada; (ii) whether processing will occur in Canada or elsewhere; (iii) the extent of participation of Canadians in Canadian and foreign operations; (iv) the support of on-going innovation, research and development; and (v) planned capital expenditures in Canada.

Finally, the SOE Guidelines outline the types of binding commitments or undertakings an SOE may be required to provide to pass the “net benefit” test. While many of these include commitments required by any foreign purchaser, of particular interest is the potential for a requirement to list the shares of the acquiring company or the target Canadian business on a Canadian stock exchange.

Mitigating Considerations

Despite the uncertainty generated by the introduction of the national security review process in Canada, foreign investors should in most cases not be overly concerned for a number of reasons.

  • Experience with National Security Reviews to Date

As at the date of writing, there has apparently only been a single national security notice (not a full review) since the new law came into force a year ago. Moreover, as at the date of writing, even under the “net benefit to Canada” test that is applicable to economic reviews, there have only been two non-cultural investments rejected in the quarter century since the ICA came into force (the ATK - MDA aerospace transaction, and the BHP Billiton – PotashCorp transaction, both described below).

  • Canada has an Open Economy

Canada’s economy has historically been open to foreign investment. In 2009 (not a particularly active year for global foreign investment), 22 transactions were approved by the Minister of Industry under the economic review provisions of the ICA,including three significant investments by SOEs: (i) China National Petroleum Corporation’s acquisition of control of Athabasca Oil Sands Corp, (ii) Korea National Oil Corporation’s acquisition of Harvest Energy Trust and (iii) Abu Dubai’s International Petroleum Investment Co’s acquisition of NOVA Chemicals Corporation. Also, China Investment Corporation’s acquisition of a 17% interest in Teck Resources Limited was successfully completed in 2009, and, in 2010, Sinopec’s acquisition of an interest in Syncrude received approval under theICA. To date, no SOE transactions have been formally rejected.

Investment Canada Act Developments in Recent Months

The most significant ICA development in recent months was the rejection of BHP Billiton’s proposed acquisition of Potash Corporation of Saskatchewan (PotashCorp) in November 2010. This rejection, combined with other foreign investment controversies, has drawn considerable attention to the ICA and has generated widespread debate within the Canadian foreign investment bar, corporate Canada, policymakers and academia as to the appropriate role of government in screening, imposing conditions on and approving foreign investment in Canada. Most recently, parliamentary hearings regarding further potential changes to the foreign investment review regime have been commenced. The outcome of such hearings, in terms of further amendments to theICA, is uncertain. A brief summary of the PotashCorp situation follows.

BHP’s hostile takeover bid for Saskatchewan’s PotashCorp, an iconic world-class producer of a key Canadian natural resource, attracted massive political and media attention from the moment of its launch in mid-August 2010.3

The Premier of the Province of Saskatchewan vigorously argued that the federal government should refuse the proposed bid, concerned among other things, about potentially significant negative tax consequences for the Province of Saskatchewan and the loss of a public company Canadian head office.

On November 3, 2010, the Minister issued a preliminary decision rejecting BHP’s bid on the basis that it failed to satisfy the “net benefit to Canada” test. Although the law provided BHP with a 30-day period within which further submissions could be made to try to change the Minister’s view, BHP apparently chose not to proceed, officially withdrawing its application on November 14, 2010. BHP issued a detailed press release following the failure of the bid, outlining numerous specific commitments it had been prepared to make.  Undertakings would apparently have included a five-year commitment to remain in a Canadian potash export group, significant spending on infrastructure, increased investment in BHP’s already planned Jansen mine (also located in Saskatchewan), commitments to forgo certain tax benefits and to apply for a listing on the Toronto Stock Exchange. Other proposed undertakings apparently related to employment increases, spending on community and education programs and an unprecedented US$250 million performance bond to ensure that the company fulfilled its undertakings.

Following the decision, some commentators noted suggestions by Minister of Agriculture Gerry Ritz that BHP’s bid had been refused because potash is a “strategic resource” for Canada. This is not an explicit factor for consideration under the ICA. However, other countries have, in the context of foreign investment review, taken measures to protect their most valuable resources or companies.4

The ICA certainly provides the Minister with significant discretion and the PotashCorp decision has led to calls for clarification of Canada’s foreign investment rules from businesspeople, investors and politicians across the political spectrum. Critics have cited a lack of transparency and a lack of predictability as factors affecting the efficacy of foreign investment review. While the current approach gives the Minister significant flexibility to assess proposed investments on a case-by-case basis, it is also true that perceived unpredictability might complicate the risk assessments undertaken by foreign acquirers and, conceivably, deter investment in Canada. Nevertheless, the PotashCorp decision had numerous unique features, including the opposition to the transaction from the Premier of Saskatchewan, suggesting that it would be incorrect to draw any broader conclusions regarding Canada’s approach to foreign investment from this apparently unique transaction.


[1] There had been no groundswell of support in Canada for the adoption of a US-style merger review process. The recommendation was included in the final June 2008 report of the Competition Policy Review Panel, a panel formed in July 2007 with a mandate to review Canada's competition and foreign investment policies, and make recommendations to the federal government for making Canada more globally competitive. This recommendation was somewhat surprising given that none of more than 100 written submissions to the panel called for the adoption of US-style process, and indeed such a recommendation seemed beyond the terms of reference of the panel. Furthermore, the recommendation was also contained in the final report of Brian Gover, following his review of the exercise of the Commissioner’s powers under section 11 of the Competition Act

[2] The final months of 2010 and first few months of 2011 were a relatively quieter period for the Competition Bureau in terms of merger remedies. Although numerous remedy sale processes were completed, these related to remedies that had been previously announced. Notable transactions cleared during this timeframe included Shaw / Canwest, BCE / CTVglobemedia and XM Canada / Sirius Canada. The Bureau did, however, bring a merger challenge in January, 2011 in respect of a closed merger.

[3] Stikeman Elliott LLP acted as counsel to PotashCorp.

[4] In fact, Australia itself has been known to protect key industries and, at the same time that BHP was making a bid for PotashCorp, Australian authorities were engaged in a detailed review of the takeover bid for the Australian Stock Exchange by Singapore Exchange Ltd. Indeed, the very existence of BHP and the other Australian mining supermajor, Rio Tinto, as Australian companies, is due, in no small part, to the existence of stringent Australian foreign investment rules that played a major role in previous transactions involving BHP and Rio Tinto. 

Reprinted with permission from The Canadian Legal Lexpert® Directory 2011
© Thomson Reuters Canada Limited

 

 

 

 

 

Industry Minister moots removal of foreign ownership limits for telecoms

The Minister of Industry, Tony Clement, today announced the launch of a public consultation on foreign investment restrictions in the telecommunications sector. The Minister issued a consultation paper that calls for consideration of three options:

  • Increasing the limit for direct foreign investment in broadcasting and telecommunications common carriers to 49 percent;
  • Lifting restrictions on telecommunications common carriers with a 10-percent market share or less, by revenue; or
  • Removing telecommunications restrictions completely.

The consultation period will end on July 30, 2010.
 

Bureau revises corporate compliance bulletin

Jennifer MacArthur

Canada's Competition Bureau has published a revised Information Bulletin on Corporate Compliance Programs, in conjunction with the publication of a draft bulletin on trade associations, described in the preceding article.

The original information bulletin was issued by the Bureau in 1997, and the updated version largely elaborates on the principles set out in the original, but with some notable changes.  In particular, the revised bulletin has been expanded to include a template compliance program, a template "certification letter" for execution by employees following training, and a "due diligence checklist" for senior management. Although the revised bulletin has no legal effect and is not binding on the Bureau, it provides businesses with guidance as to the elements of a credible and effective corporate compliance program - which could prove important in the Bureau's consideration of a recommendation for leniency or alternative resolutions, should prosecution under the Competition Act nonetheless become a possibility.

Like the original, the revised bulletin sets out five essential components of any corporate compliance program:

  1. senior management involvement and support;
  2. corporate compliance policies and procedures;
  3. training and education;
  4. monitoring, auditing and reporting mechanisms; and
  5. consistent disciplinary procedures and incentives.

The template compliance program framework contained in the revised bulletin, as well as the employee certification letter and the due diligence checklist for management may be used as illustrative guides, but they should not be viewed as prescriptive. These tools must be tailored to the user's particular situation and resources. Businesses are encouraged to obtain independent legal advice when developing a compliance program in order to ensure that it is effective and to address compliance issues specific to their business activities and industry.

As the revised bulletin notes, having a credible and effective corporate compliance program can reduce the risk of contravening the law and can also provide early warning of potentially anti-competitive conduct. In respect of certain offences, a business that has a credible and effective corporate compliance program in place may be able to demonstrate that it took reasonable steps to avoid non-compliance and to support a due diligence defence.

Interestingly, trade associations are singled out in the revised bulletin as being particularly able to benefit from the implementation of a compliance policy, as they may be exposed to greater risks of anti-competitive conduct by their members. The revised bulletin advises that more information regarding trade associations can be found in the Bureau's draft Information Bulletin on Trade Associations, which was released for public comment the same day.

New Canadian standards for industry and advertisers: Bureau releases Environmental Claims Guide

Kim D.G. Alexander-Cook

On June 25, 2008 Canada's Competition Bureau (Bureau) released Environmental Claims: A guide for industry and advertisers (Environmental Claims Guide or Guide), its new environmental claims guidance document produced in partnership with the Canadian Standards Association (CSA).

The Environmental Claims Guide is meant to provide industry and advertisers with best-practices guidance for compliance with the prohibitions against false or misleading advertising in Canada's Competition Act, Consumer Packaging and Labelling Act and Textile Labelling Act, in addition to providing industry with a guide to the application of the CAN/CSA-ISO 14021, Environmental labels and declarations - Self-declared environmental claims (Type 11 environmental labelling) regulations.1

In the Environmental Claims Guide, the Bureau states that although businesses are free to adopt any practice concerning self-declared environmental claims, as long as those claims are not false or misleading, the Bureau will use the Guide as a reference for evaluating environmental claims. The Bureau further indicates that while the examples provided in the Guide are not binding statements of how its discretion will be exercised in any particular situation, environmental claims made in compliance with the Guide are unlikely to raise any concerns under the statutes administered by the Bureau.

Scope of Guidance

The Environmental Claims Guide is meant to cover any statement or symbol that refers to or creates the general impression that it reflects the environmental aspects of any product or service, including any statements, symbols or graphics on a product or package labels, or in product literature, technical bulletins, advertising, publicity, telemarketing and digital or electronic media. The Guide is organized largely around the 18 specific requirements of CAN/CSA-ISO 14021, which include, among others, that self-declared environmental claims: shall be accurate and not misleading or exaggerated; shall be substantiated and verified; shall be relevant to the product and used in appropriate context; shall be specific; shall be made only if the environmental aspect to the claim exists or will be realized during the life of the product; and shall be presented in a manner that clearly indicates that any claim and explanatory statement(s) should be read together. For each of the 18 requirements, both an explanation and one or more examples are provided.

In addition, the Environmental Claims Guide explains the standards to be met and provides numerous examples regarding: vague or non-specific claims; claims of ". free"; sustainability claims; explanatory statements; symbols; evaluations and claim verification; comparative claims; and certain common claims (each of which receives detailed consideration) including "compostable", "designed for disassembly", "extended life product", "recovered energy", "recyclable", "recycled", "reduced resource use", "reusable and refillable" and "waste reduction".

Substantive Implications for Industry and Advertisers

The Environmental Claims Guide is intended by the Bureau to press industry and advertisers to observe higher standards and to increase the consistency of environmental claims in Canada. A few of the examples provided under the new guidance illustrate the point:

  • Claims of "... free" are to be made only where both (i) the material in question is present in no more than trace contaminant levels, and (ii) previously, such products had commonly featured the material in question in greater than trace contaminant levels;
  • Claims of sustainability are not to be made at all;
  • Claims without explanatory statements are to be made only if the claim is valid in all foreseeable circumstances without qualifications;
  • Claims must be verifiable, but will not be considered to be verifiable if verification cannot be made without access to confidential business information;
  • Claims qualifiers such as "... where facilities exist", in connection with, for example, recyclable or compostable claims, are not adequate; more detailed information about availability is required. For an unqualified claim, the claim should be verified to apply to a majority of the purchasers, potential purchasers and users of the product.

Although many businesses may comply or believe that they comply with many of the standards set out in the Environmental Claims Guide, a key change is the Bureau's clear intention to now require that businesses be able to provide the Bureau and consumers with substantiation and verification in connection with any environmental claim. Indeed, the Bureau identifies "the core principle . to be that businesses should only make claims that are substantiated and verified."

With the foregoing in mind, the Bureau has also indicated that it expects that companies may wish to reassess their advertising and labelling in light of the Environmental Claims Guide. It is allowing a one-year transition period for businesses to move into full compliance (excluding particularly egregious cases of false or misleading environmental advertising), following which Canadian advertisers can presumably expect a crack-down on unsubstantiated or unverified environmental claims.


1The Environmental Claims Guide represents a revision of a draft version that was issued for public review and comment in March, 2007.

Bureau issues draft information bulletin on sentencing, leniency in cartel cases

Danielle Royal

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

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

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

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

Sentencing principles: economic harm, aggravating factors, mitigating factors

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

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

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

The Leniency Program

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

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

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

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

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

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

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

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

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


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

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

Canadian Bureau bulletin on search and seizure practices

The Competition Bureau recently published its Information Bulletin on Sections 15 and 16 of the Competition Act, which sets out the Bureau's practices and policies under the Competition Act's search warrant provisions and related powers for the search of computer systems. The Bulletin sets out what persons or businesses should expect from the Bureau during a search and with respect to the handling of any "records or other things" seized as a result of the search.

Although unable to provide for all eventualities, in our view the Bulletin provides general insight into the Bureau's approach to section 15 search warrants and the related use of computer systems. The Bulletin does not, however, reveal any material changes in the search procedures utilized by the Bureau in recent years.

The Search Warrant Provisions

Section 15 of the Act allows the Bureau to apply to a judge for a search warrant authorizing a search of identified premises, and to copy or seize certain records or other things.  The Bureau indicates that it will make such an application ex parte, that is, without notice to the persons subject to the order. The Bulletin confirms that a section 15 search warrant is the Bureau's "tool of choice" for investigations such as cartels and mass marketing fraud, where the element of surprise is deemed important.

Section 16 of the Act provides that a person authorized to search premises pursuant to section 15 may use any computer system on the premises to search any data contained in or available to the computer system in order to search for records described in the search warrant. Notably, data obtained via the computer system can be searched even if it is not located on the premises or, for that matter, in Canada.

Obtaining the Search Warrant

In order to grant a search warrant, a judge must be satisfied that there are reasonable grounds to believe: (1) that a person has contravened an order made pursuant to the Act, an offence has been or is about to be committed, or grounds exist for the making of an order under the reviewable practice provisions of the Act; and (2) that there are, on the premises to be searched, records that will afford evidence relating to one of the situations denoted in (1).

Warrantless searches are also possible where exigent circumstances, such as a risk that evidence will be destroyed, would make obtaining a search warrant impracticable; these are, in the competition law context, rare events.

Executing Search Warrants

The Bulletin explains that, generally, a minimum of two staff members will execute a search. The "team leader" will generally present the warrant, communicate with corporate representatives and/or counsel, and manage the operation. All questions regarding conduct of the search should be directed to the team leader.

According to the Bulletin, searches will typically be conducted during normal business hours, although the Act does permit warrants to be executed between 6am and 9pm, and outside of those times with judicial authorization. Circumstances will exist, for example, where databases are being imaged or downloaded, when searches will extend beyond business hours.

The Bulletin indicates that most searches will proceed as follows: the search team will arrive; the team leader will enter the premises and present the warrant to the person in control; an explanation of the search will be provided and the team leader will advise the person that they may contact legal counsel; the team leader will outline the search before beginning; a tour may be requested and arrangements may be made for a work area for the search team. While the Bulletin states that searching may occur immediately, it also suggests that requests for a delay may be granted in order to allow for the arrival of senior corporate officials and/or counsel.

The Bulletin describes some of the steps that a search team will undertake to secure the premises, including sealing filing cabinets and shredders with tamper-proof seals and restricting access to computer systems. The Bulletin states, however, that the Bureau will attempt to interfere as little as possible with business functions.

The Bulletin also outlines how the review of records will be undertaken: the search team will conduct the initial selection of paper records, and subsequent review and culling will be performed by the team leader, who may then return some of the records. Copies of seized documents may be requested by the person or business being searched, and depending on the time required to do so and the facilities available, such requests may be granted. Requests for copies of essential working records will normally be granted.

Electronic records may be searched by electronic evidence officers.These officers may obtain evidence through a variety of means, including the production of an image of a computer hard-drive for examination off-site and even the seizure of a computer system for examination off-site (although, experience indicates that seizure of entire computer systems very rarely, if ever, occurs).

Photographs and videos may be taken as a form of note-taking or as a means of gathering evidence.

Solicitor-Client Privilege

Where there is a claim or potential claim of solicitor-client privilege relating to records, the records will be packaged and sealed and put in the custody of a specified individual. Legal counsel for the target of the search will also generally be provided with a reasonable opportunity to review the documents and assert any claim of privilege, although such claims should be asserted at the earliest opportunity. While the "privileged" status may ultimately be decided by a judge, the Bulletin indicates that most often the determination will be made informally through negotiation. The Bulletin repeatedly refers to determinations with respect to privileged documents being made under a "mutually agreeable process"; while this is consistent with experience, it is only "mutually agreeable" to a point.

According to the Bulletin, privilege claims in relation to electronic records may take place following seizure due to the potential volume of such records.

Questioning Individuals

Individuals may be questioned during a search for purposes of facilitating the search or gathering evidence. Where a person is considered a target of an inquiry, that person will be informed by the search team of his or her rights, including the right not to answer, and will be informed that any answers may be used as evidence.  Experience indicates, however, that employees will not - without legal advice -appreciate their right not to speak with Bureau officers on matters unrelated to the facilitation of the search.

Plain View

If records indicating evidence of a new violation of the law are found in plain view during a search, the Bulletin states that Bureau staff will seize those records.

Failure to Comply with a Search Warrant

A peace officer may accompany the Bureau on a search where the Bureau believes, on reasonable grounds, that access may be denied. Any attempt to impede or prevent the execution of a search warrant or to remove or destroy records constitutes a criminal offence and carries with it significant penalties, as detailed in the Act. The Bulletin outlines several of these offences and concomitant punishments as well as the possibility that obstruction of justice charges under the Criminal Code may be laid.

Confidentiality and Retention of Records

In accordance with statutory requirements, the Bulletin states that the Bureau will generally not comment publicly on the existence of an inquiry, or communicate information obtained through a search warrant, unless such information has been made public by other means.

CRTC issues new policies on cross-media, television and BDU ownership

D. Jeffrey Brown and T. Gregory Kane, Q.C.

On January 15, 2008, Canada's broadcasting and telecommunications regulator, the Canadian Radio-television and Telecommunications Commission (CRTC), issued new policies respecting cross-media, television and broadcast distribution undertaking (BDU, e.g., a cable or satellite TV provider) ownership 1. Under these policies, as a general rule:

  • a person will be permitted to control undertakings in only two of three types of media (radio, conventional "over-the-air" television and newspapers) serving the same (local) market (cross-media ownership policy);
  • the CRTC will not approve applications for transfers of effective control that would result in common ownership of television undertakings (conventional, specialty and pay) with a total national audience share (across all types) greater than 45%, will carefully examine applications that would result in a share between 35% and 45%, and will expeditiously review applications resulting in a share less than 35% (television ownership policy); and
  • the CRTC will not approve applications for transfers of effective control of BDUs that would allow one person to control all BDUs in any given market (BDU ownership policy).

The stated purpose of the new policies is to preserve the "diversity of voices" in the Canadian broadcasting system, including the diversity of editorial voices at the local level and the diversity of programming at the local, regional and national levels.  According to the CRTC, the new policies were driven by public concerns raised by recent consolidation in the media sector. Although stating that a diversity of voices continues to exist in the current Canadian broadcasting system, the CRTC justified the new policies as necessary to address the potential effects of the further consolidation that is expected to occur in response to audience fragmentation.

At the same time as it adopted the new policies, the CRTC reaffirmed its existing policies respecting conventional television and commercial radio ownership 2.

The new policies raise a number of questions.  Are they actually necessary? What impact will they have on the interface between the CRTC's regulation of the Canadian broadcasting system and the application of the Competition Act to the sector, in particular in relation to broadcasting mergers?  Will they lead the CRTC to block potentially beneficial licence applications or mergers?

Are the new policies necessary?

Despite what the CRTC described as a "wave of consolidation in the Canadian broadcasting industry," the CRTC acknowledged that a diversity of voices continues to exist in the Canadian broadcasting system.  Rather than addressing an existing problem, therefore, the CRTC based its new policies on the potential impact of future consolidation, which it expects in response to audience fragmentation. Indeed, the CRTC expressly recognized that none of the transactions reviewed by it during the recent "wave" would have raised concerns under its new policies.

Setting aside the question of whether concerns about this potential future impact are justified, there is nothing in the new policies that the CRTC could not have done pursuant to its broad regulatory powers. The CRTC's powers to issue licences, approve licence transfers and set licence terms (including in the context of renewal proceedings) provide it with ample tools to preserve a diversity of voices in Canada's broadcasting system.  By formally extending the CRTC's consideration to newspapers, the new policies also raise questions about whether the CRTC may be exceeding its jurisdiction, which is limited to the broadcasting system.

Even if the new policies do not add to the CRTC's powers, they do arguably promote transparency and predictability, both of which are widely accepted as highly desirable regulatory objectives. There is a risk, however, that these objectives could be achieved at the expense of the CRTC's flexibility to make appropriate licensing determinations on a case-by-case basis. The CRTC could avoid this risk by allowing exceptions where their application is either not necessary to achieve a diversity of voices or would otherwise not be in the best interests of the Canadian broadcasting system. Whether the CRTC will take such an approach is unclear, given the rigid language used to describe the policies, including a statement that "[a]s a result [of the new cross-media ownership policy], a person or entity will only be permitted to control two of the following types of media that serve the same market: a local radio station, a local television station or a local newspaper." 3

How will the new policies affect the interface between the CRTC's regulation of the Canadian broadcasting system and the application of the Competition Act?

While the CRTC's new policies with respect to diversity of voices apply only to the CRTC, their effects may extend to the relationship between the CRTC and other regulatory regimes, such as the Competition Act

The Competition Act requires prior notification of mergers that exceed certain monetary and shareholding thresholds and also allows the Commissioner of Competition, who heads the Competition Bureau and is Canada's primary competition enforcement official, to challenge mergers that substantially prevent or lessen competition, whether or not they exceed the thresholds for pre-merger notification.(For ease of reference, the Commissioner of Competition and the Competition Bureau are referred to simply as "the Bureau.") To the extent that the CRTC reviews and approves a broadcasting merger, however, parties may challenge the Bureau's jurisdiction pursuant to the so-called "regulated conduct doctrine," which has been used by courts in certain cases to oust the Competition Act's application to conduct that was required or authorized pursuant to other legislation.

The stated position of both the CRTC and the Bureau is that they have concurrent jurisdiction over broadcasting mergers.4 However, as the body charged with the regulation and supervision of "all aspects" of the Canadian broadcasting system, the CRTC enjoys a broad jurisdiction over broadcasting matters, including mergers.  Indeed, the broad scope of the CRTC's jurisdiction has prompted litigation as to whether its jurisdiction over broadcasting mergers is exclusive, thereby precluding the application of the Competition Act.5 Owing to a settlement between the parties, no decision was rendered by the court in that case, leaving unanswered the question of the whether the CRTC's jurisdiction over broadcasting mergers is exclusive.  The CRTC has recently called for a clarification of its role and the role of the Bureau in "communications" mergers, and advocated that it have "ultimate responsibility" for approving such mergers.6

The jurisdictional question is important, owing to the different analytical approaches followed by the CRTC and the Bureau.  In contrast to the CRTC, the Bureau's reviews of media mergers focus on their economic aspects, such as advertising.  However, as the CRTC itself has recognized, 7 concentration of economic aspects is not wholly divorced from the question of diversity of voices, insofar as common to each is the question of who ultimately controls the media undertakings. Thus there would appear to be some potential for overlap (possibly significant overlap) between the CRTC's and the Bureau's reviews of a broadcasting merger.

At the same time, there are important differences in the methods used by the CRTC and the Bureau in their analysis of diversity of voices and the economic effects of mergers, respectively. The Bureau carries out a detailed analysis of relevant product and geographic markets in order to assess the likely economic impact of a merger in those defined markets. As compared to the Bureau's approach, the CRTC's approach to assessing "diversity of voices" appears simplistic, as evidenced, for example, by the cross-media ownership policy's focus on mere ownership of particular kinds of media and the television policy's focus on national television audience shares (without, for example, distinguishing between "news and information programming," which the CRTC identified as its primary area of concern, and other programming). The CRTC does purport to borrow aspects of the Bureau's analytical approach (e.g., the "market share" thresholds used to assess concentration under the new television ownership policy, which are adapted from those the Bureau used to preliminarily assess the proposed bank mergers in the late 1990s), although without undertaking the Bureau's detailed market-definition analysis prior to calculating such shares. Given a merger transaction that is reviewed by both the CRTC and the Bureau, therefore, the CRTC's policies would seem to promote rather than discourage a repeat of the 2002 dispute over the Bureau's jurisdiction to review broadcasting mergers.

Will the new policies lead the CRTC to block potentially pro-competitive licence applications or mergers?

Another potential consequence of the blunt nature of the CRTC's approach to diversity of voices is that it could lead the CRTC to block potentially pro-competitive licence applications or mergers. Applying its cross-media policy, for example, the CRTC might block expansion of an entity owning a local television station and a local newspaper into the local radio business, even though such expansion could, in certain circumstances, stimulate greater competition in the local radio market and provide benefits to advertisers and consumers in the process. Similarly, in considering a merger involving BDUs, the CRTC's policy seems to preclude consideration of potential efficiencies, and more specifically the possibility that efficiencies could outweigh any negative effects caused by a reduction in competition by such a merger.  The Competition Act, in contrast, recognizes these potential benefits by allowing otherwise potentially anti-competitive mergers if they are "likely to bring about gains in efficiency that will be greater than, and will offset, the effects of any prevention or lessening of competition."

Conclusion

While helpful to business in terms of shedding light on the CRTC's approach to broadcasting ownership issues, the new policies have also raised new questions that highlight the jurisdictional divide between the CRTC and the Bureau.

1 Broadcasting Public Notice CRTC 2008-4 (BPN CRTC 2008-4), available at http://www.crtc.gc.ca/archive/ENG/Notices/2008/pb2008-4.htm. 2 The CRTC's existing conventional television ownership policy prohibits one person from owning more than one conventional television station of the same language in a given (local) market. Common ownership of commercial radio stations is limited to two AM and two FM stations of the same language for markets with more than eight commercial radio stations of that language and to three stations of the same language, with a maximum of two stations in any one frequency band, for smaller markets. 3CRTC News Release, "CRTC establishes a new approach to media ownership" (15 January 2008). 4CRTC and Competition Bureau, "CRTC/Competition Bureau Interface" (8 October 1999), available at http://www.crtc.gc.ca/eng/publications/reports/crtc_com.htm.
5 In 2002, parties to a radio merger challenged the Bureau's jurisdiction to review the transaction. See Astral Media Inc. v. Le Commissaire de la concurrence et al. and Télémédia Radio inc. v. Le Commissaire de la concurrence et al., Federal Court - Trial Division, Court File Nos. T-2256-01 and T-2256-02.  The CRTC had reviewed and approved the transaction, however the Bureau alleged that the transaction would substantially lessen competition in certain local markets in the province of Quebec.  The parties and the Bureau subsequently entered into a consent agreement resolving the Bureau's concerns with respect to the merger, therefore no decision in the application contesting the Bureau's jurisdiction over the merger was rendered.  Stikeman Elliott LLP acted as counsel to Astral in that case. 6 See, CRTC, "A Competitive Balance for the Communications Industry:  Submission of The Canadian Radio-television and Telecommunications Commission to The Competition Policy Review Panel" (11 January 2008). 7 See BPN CRTC 2008-4, at para. 37 ("With respect to market dominance, . while this concern is largely an economic issue relating to questions of competition, issues of dominance also have social and cultural dimensions.").

Canadian Bureau releases draft bulletin on trade associations

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

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

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

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

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

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

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

Do's include such things as:

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

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

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

State-owned investors face greater scrutiny in Canada

On December 7, Canada's Industry Minister announced that the Government would apply special guidelines (the Guidelines) to the review of Canadian investments by state-owned enterprises (SOEs) under the Investment Canada Act (the ICA), Canada's foreign investment review legislation.  In brief, the Guidelines:

  • Focus on the governance and commercial orientation of SOEs;
  • Outline factors that the Government will use to assess adherence to Canadian standards of corporate governance;
  • Identify considerations for determining whether the SOE will operate the Canadian business according to commercial principles;
  • Offer examples of the types of binding commitments that SOEs may be required to provide.

Canadian treatment of SOEs

In July 2007, following foreign takeovers of Canadian icons such as Alcan and Inco, as well as a few highly controversial acquisitions involving foreign state-owned enterprises (including a 2004 bid for Noranda by China Minmetals Corp., which was abandoned in the face of controversy in the media and Parliament), the Government appointed the Competition Policy Review Panel to review the Competition Act and the ICA, including the treatment of state-owned enterprises and the possibility of a "national security" review clause.  However, on October 9, 2007, the Panel's mandate on the latter two issues was pre-empted by the announcement of imminent guidelines on the scrutiny of SOEs under the ICA (just released) and a proposed national security test (still to come).

New guidelines

The ICA requires that acquisitions of control of Canadian businesses exceeding certain monetary thresholds be reviewed and approved by the Minister of Industry (and/or the Minister of Canadian Heritage, for "cultural" businesses) prior to closing or, in some cases, post-closing. The test for review is whether the transaction will yield, on balance, a "net benefit to Canada." The ICA sets out the factors the Minister will consider in determining whether a reviewable investment will be approved. The new Guidelines focus on factors unique to investments by SOEs.

The Guidelines define an SOE as an "enterprise that is owned or controlled directly or indirectly by a foreign government." Relevant to the review of a proposed SOE investment is the SOE's "governance and commercial orientation."

The Guidelines state that adherence to Canadian standards of corporate governance will be examined, with particular regard to commitments to transparency and disclosure, independent directors, audit committees and equitable treatment of shareholders, as well as to compliance with Canadian laws and practices.  In addition, the Government will consider how and the extent to which the investor is owned or controlled by the state in question.

The SOE's commercial orientation will also be evaluated in relation to the operation of the Canadian business, in particular respecting:

  • where to export;
  • where to process;
  • the participation of Canadians in its operations in Canada and elsewhere;
  • the support of ongoing innovation, research and development; and
  • the appropriate level of capital expenditures to maintain the Canadian business in a globally competitive position.

Finally, the Guidelines outline the types of binding commitments or undertakings that may be required to ensure that SOE investments result in a net benefit to Canada. These include:

  • commitments to appoint Canadians as independent directors;
  • the employment of Canadians in senior management;
  • the incorporation of the target business in Canada; and
  • the listing of shares of the acquiring company or the target Canadian business on a Canadian stock exchange.

Assessment of the SOE Guidelines

While the Guidelines offer insight into the Government's concerns about SOEs, some questions do remain. For instance, how does the Government define a "state"? Is de facto state control sufficient and if so, what criteria would be examined? What if a state holds a "golden share" in the SOE, permitting it to veto certain actions?

Non-commercial objectives

The Guidelines indirectly address possible non-commercial objectives of an SOE by considering such factors as the destination of exports and the location for processing. The first factor highlights a potential concern (voiced in the debate over Noranda) that the SOE may simply wish to funnel Canadian natural resources to its home state, rather than supplying market-based customers. With respect to processing, the Government is likely worried that processing will be moved offshore to increase employment and economic activity in the home state of the SOE.

Lack of transparency

Many commentators have expressed concerns that the lack of transparency and unclear governance of SOEs can lead to volatility in financial or other markets. For example, because of the lack of public disclosure surrounding certain SOEs' investment policies or risk-management strategies, minor comments or rumours could result in instability in the markets.

The Guidelines use Canadian standards for governance as the litmus test for appropriate governance of the SOE.  For example, the requirement for independent directors may be an attempt to ensure that the Canadian business is governed by an entity with directors at arm's length from the SOE's home country.  It is not clear whether this factor is to apply to the SOE itself or merely to the entity directly holding the target business. If the Government is concerned about the former, and the SOE is a vehicle with a large portfolio of investments, a requirement for an independent director would signal a significant departure from existing requirements and could result in a decision by some SOEs not to invest in Canada.

The "equitable treatment of shareholders" factor appears to indicate that the Government will want assurances that private investors in SOEs will be treated equally, relative to the state shareholder. The Guidelines do not provide guidance as to what exactly is being asked of SOEs, although equal disclosure of information about the SOE to all shareholders may be one concern.

Sample undertakings

While the Guidelines' sample undertakings are similar to those applicable to private investors, of particular interest in the SOE context is the undertaking that the target business be listed on a Canadian exchange.  Does this indicate that the Government might require a minority Canadian shareholding in certain instances?  Such a step would again be a material departure from past practice but would ensure that the SOE meets the disclosure requirements of Canadian securities laws, while at the same time giving Canadians the opportunity to remain or become part-owners of the target Canadian business.

Unanswered questions

In summary, while the Guidelines are a start, they leave a number of questions unanswered. Whether the Government will exercise its power to curtail foreign state investment in Canada or merely use it as a lever to extract concessions is a question which only time and experience with the SOE Guidelines can answer.

Bureau releases Abitibi-Bowater technical backgrounder

Ian Disend

On October 30, 2007, the Competition Bureau (the "Bureau") released its technical backgrounder on the approval of the pulp and paper merger involving Montreal-based Abitibi-Consolidated Inc. and South Carolina-based Bowater Incorporated. The merger was originally announced on January 29, 2007, and the Bureau pronounced its intention not to challenge approximately 6 months later, on July 24 of the same year.

The Bureau concluded there were six overlapping product markets as follows: softwood lumber (North America), market pulp (at least North America), wood chips (local or regional), roundwood/logs (local or regional), uncoated groundwood papers ("UGW")(unspecified), and newsprint (Eastern Canada).

For each of the markets with the exception of newsprint, the Bureau easily concluded there were no grounds to challenge the merger. The newsprint market, however, led to a more in-depth analysis, as combined market share surpassed the Bureau's "safe harbour" guideline of 35% in the Eastern Canadian market. This concern was compounded by significant barriers to entry, due to the high capital investment required declining demand, and relatively weak foreign competition. However, on balance the Bureau concluded that competitors' production could be recommitted to Eastern Canada in the event of price increases, and customers had shown a willingness to switch suppliers in the past.

At the end of the day, the Bureau was not without its reservations, but did not find sufficient evidence to challenge the merger. The backgrounder did make mention, however, of the Bureau's right to do so over the next three years.

Canada's new Immunity Program unveiled

Jennifer MacArthur

On October 10, 2007, the Competition Bureau released a revised Information Bulletin on the Immunity Program Under the Competition Act, along with revised Responses to Frequently Asked Questions. The two documents should be read together in order to understand the Bureau's approach to recommending immunity. The new Bulletin and FAQs replace previous versions published in 2000.

The Immunity Program is an important enforcement tool, which encourages disclosure of criminal offences under the Competition Act. It is especially important in cases where the prohibited activity may be difficult to detect, such as participation in cartels. Like immunity programs in other jurisdictions, Canada's Immunity Program provides protection against Competition Act prosecution for the first person to disclose or provide information relating to an offence where the Bureau has been unaware of the offence or where there has been insufficient evidence to refer the matter to the Director of Public Prosecutions.

The Bulletin differs from the original published in 2000 in several respects. Procedurally, the most notable change is the elimination of the provisional guarantee of immunity (the PGI), which reduces the process to a single immunity agreement. Previously, the immunity program involved two agreements: 1) a PGI that would require the applicant to provide full disclosure of information and continuous cooperation, and 2) a final immunity agreement to be entered into when the Bureau was satisfied with the extent of the applicant's cooperation. In practice, however, a PGI was typically the only document issued and was effectively the final agreement. Although the Bulletin eliminates the PGI, the new single immunity agreement is conditional on the applicant's compliance. The single-agreement approach is consistent with immunity programs in other jurisdictions, such as the European Union and the United States.

The most notable substantive change is in respect of eligibility. Under the old program, "the instigator or leader of the illegal activity, [or] the sole beneficiary of the activity in Canada" was ineligible to receive immunity. The Bulletin now replaces the former "instigator/leader" test with a "coercion" test. Under the new coercion test, the Bureau will only disqualify an applicant where there is evidence that the applicant clearly coerced others to be party to the illegal activity. The Bulletin also limits the disqualification of a sole beneficiary to cases where the applicant is the only party involved in the offence (e.g., price maintenance). Thus, in a cartel case, the sole beneficiary test does not apply.

The Bulletin also clarifies confidentiality protection for applicants. While indicating that the Bureau will in most cases keep the identity of the applicant confidential, the Bulletin makes clear that there are circumstances in which the Bureau will disclose the identity of the party. An example of such a circumstance is where it is necessary in order to obtain or maintain the validity of a judicial authorization for the exercise of investigative powers (e.g., in obtaining a search warrant or production order).

Other changes introduced in the new Bulletin and FAQs include, among other things:

  • improved guidance on the Immunity Program process;
  • elimination of the requirement to make restitution;  indication that the failure to disclose other offences will only result in revocation of immunity if the non-disclosure was intentional; and
  • creation of a formal leniency program to provide incentives for other parties to the offence to cooperate with the investigation and prosecution, even if they are not eligible for immunity.

Overall, the Bulletin introduces welcome changes and brings Canada's immunity program into better alignment with similar programs in other jurisdictions.

New Canadian Bulletin on the protection of confidential information

Michael Kilby

On October 10, 2007, following consultations that began in 2005, the Competition Bureau (the Bureau) published a new information bulletin outlining its policies on the communication of confidential information (the New Bulletin). The New Bulletin updates a previous information bulletin on the same subject (published in 1995) in order to provide more practical guidance and to reflect subsequent amendments to the Competition Act (the Act) as well as increasing international cooperation between competition authorities.

Confirming the bulletin issued in 1995, the Bureau states that its general policy is to minimize the extent to which confidential information is communicated outside the Bureau, and that it will be vigilant in avoiding the communication of confidential information unless it is specifically permitted by the Act, and even if it is permitted, will consider whether the disclosure is advisable or necessary.

According to the revised Bulletin, the Bureau's discretion to communicate confidential information is limited to four circumstances: (i) communication to a Canadian law enforcement agency (which the Bureau states is relatively rare and only happens where the receiving agency will respect the confidentiality of the information); (ii) communication for the purposes of administering or enforcing the Act; (iii) communication where the information has otherwise been made public; or (iv) communication authorized by the person who provided the information.

In order to administer and enforce the Act, the Bureau may share information with: international enforcement agencies; market participants such as customers, suppliers and competitors (although care will be taken to refrain from or to minimize the communication of confidential information when framing questions); industry, economic or legal experts retained by the Bureau; courts, when seeking authorization to use formal investigative powers or for the use of wiretaps; and the courts and the Competition Tribunal, when initiating and conducting formal enforcement proceedings.

The New Bulletin emphasizes that if it is necessary to use confidential information before the courts or the Competition Tribunal, efforts will be taken to prevent public disclosure of the information (such as sealing orders, confidentiality orders, confidential schedules and in camera proceedings), so long as this can be done without hindering the enforcement or administration of the Act.

With respect to the communication of confidential information to foreign competition authorities, the New Bulletin notes that the Bureau may initiate communications with a foreign authority or it may be contacted by a foreign authority. The Bureau will seek to maintain the confidentiality of information through formal international instruments (such as cooperation agreements or inter-agency arrangements) or assurances from the foreign authority. The New Bulletin also refers to Mutual Legal Assistance Treaties, which are administered through Canada's Department of Justice, and which allow foreign states to request assistance in obtaining evidence located in Canada.

Most notable in the New Bulletin is the Bureau's emphasis on its policy of resisting legal actions by third parties to obtain access to confidential information in the Bureau's possession. The Bureau will oppose subpoenas for the production of information if compliance with them would potentially interfere with an ongoing examination or inquiry, or would otherwise adversely affect the administration or enforcement of the Act.The Bureau will also notify the parties who have provided information that an application for access to the information has been made.

The New Bulletin also refers to the Bureau's recently issued revised bulletin on the "Immunity Program." A summary of this program is contained elsewhere in this newsletter. In short, the Bureau will not disclose the identity of an immunity applicant unless disclosure is: necessary by law; required to obtain or maintain judicial authorization for the exercise of investigative powers; for the purpose of securing the assistance of a Canadian law enforcement agency; agreed to by the applicant or if the applicant has already made public disclosure; or necessary to prevent the commission of a serious criminal offence. In particular, the New Bulletin states that the Bureau will not disclose the identity of an immunity applicant or any information obtained from the applicant to any foreign law enforcement agency without the consent of the applicant.

Finally, the New Bulletin clarifies that before releasing "technical backgrounders" (which often disclose the Bureau's analysis of a merger in summary format), the Bureau will allow the affected parties to review the document in order to identify any confidential information (and suggest its removal). It also refers to the "whistleblowing" provision of the Act, stating that the Bureau will make "every effort" to protect the confidentiality of the identity of a whistleblower. Lastly, the New Bulletin addresses the circumstances under which confidential information can be shared with the Minister of Finance or the Minister of Transport in furtherance of their sector-specific merger review obligations for the financial service and transportation sectors, respectively (see sections 29.1 and 29.2 of the Act).

Revised rules for Canada's Competition Tribunal

Canada's Competition Tribunal hears and disposes of all matters under the "deceptive marketing practices" and "reviewable matters" provisions of Canada's Competition Act, most notably applications by the Commissioner of Competition to challenge mergers, abuse of dominance, anti-competitive distribution practices and misleading advertising, and private applications related to refusal to deal and anti-competitive distribution or pricing practices.

On May 26, 2007, revised rules of practice for Canada's Competition Tribunal were published for a sixty-day consultation period. The stated objectives of the (extensive) revisions to the rules were to integrate existing Tribunal practice directions, establish a comprehensive case management procedure, adopt a single procedure for all applications to the Tribunal, reinstate the relevance standard for documentary discovery, establish procedures to make the hearings more efficient, and provide a more logical structure for the rules. The Tribunal's revision to its rules was undertaken in cooperation with a committee comprised of Tribunal members and staff, representatives of the Competition Bureau, Justice Canada and the National Competition Law Section of the Canadian Bar Association. Extensive consultations within and among each of these groups of Committee members were undertaken over several drafts of the revised rules. The final draft of the revised rules were presented to, and revised by, the judicial members of the Tribunal.

Generally, the revised rules accomplish the Tribunal's stated objectives. Notably, the revised rules settle a long-standing bone of contention for the practising bar by requiring the Commissioner (or other party) to disclose (subject to privilege claims and confidentiality protections) all documents in the possession, power or control of the Bureau (or other party) that are relevant to the application before the Tribunal. This amends the prior rule that only required parties to disclose documents to be relied upon. This permitted the Commissioner, opponents argued, to ignore possibly exculpatory information in her possession. A return to the "relevance" standard for disclosure, coupled with an express obligation to disclose all relevant documents until the hearing and the requirement, shortly before a hearing, to precisely identify all documents (from those disclosed) upon which each party intends to rely is designed to improve the fairness and efficiency of the Tribunal process, albeit at the cost of increased disclosure for both sides.

Of further note, the revised rules provide for expedited processes and timelines (such as informal motion procedures), for access to and presentation of confidential information in the hearing, for the filing of detailed witness statements and documents to be relied upon for such statements, and, perhaps most importantly, for mandatory case management by a judicial member of the Tribunal.

Among the more novel amendments are the Tribunal's proposals to expressly provide for Tribunal-appointed experts (payment of whom will be determined by the Tribunal) as well as to empower the Tribunal to order witnesses (most likely experts) to testify as panels. While not unheard of, it is rare for federal administrative tribunals to appoint their own experts, and uncommon for such tribunals to direct witnesses to appear as a panel.

On balance, these are seen to be welcome developments that will serve the parties', and the public's, interest in efficient and equitable Tribunal proceedings. More details of the revisions can be found at the Tribunal's web-site at www.ct-tc.gc.ca.

New and Emerging Trends and Developments in Estate Planning

Susan M. Hutton and Michael Kilby

On September 22, 2006, the Competition Bureau published its Information Bulletin on Merger Remedies in Canada (Bulletin). The Bulletin is intended to provide guidance on the general principles applied by the Bureau when it seeks, designs, and implements remedies in merger cases. The Bureau intends to include, as an appendix, an outline of a model consent agreement, which it says will be published "shortly". The final Bulletin was issued just in time for the Canadian Bar Association's Annual Fall Competition Law Conference, almost a year after the initial draft bulletin in November, 2005.

The Bulletin must be read in the context of the merger remedies guidelines issued by Europe and the U.S. as part of the International Competition Network's work on improving international competition enforcement. In cooperating with other enforcement agencies internationally, Canada may rely on foreign remedies if they do not raise any Canada-specific issues.

The recently published Bulletin is substantially the same as the initial draft bulletin (highlights of which were published in the November 2005 edition of The Competitor). Similar to its predecessor, the Bulletin marks an intended tightening of the Bureau's stance toward divestitures, with shortened time-lines for divestitures, an emphasis on "fix-it-first" and "up-front buyer" solutions, and the use of "crown jewels" in the case of trustee divestitures. Noteworthy highlights include:

  • A preference for structural over behavioural remedies.

  • A strong recommendation to merging parties to use a "fix it first" approach, whereby merging parties remedy competition issues before closing the main transaction. "Fix it first" remedies also include signed agreements for a party to divest its assets, to be executed on closing, subject to Bureau approval.

  • If upfront divestiture is not possible, the Bureau indicates that it expects sales processes to be concluded within 3 to 6 month (the precise time period will be kept confidential). This is a shift in the Bureau's approach, which has permitted a 6 to 12 month initial divestiture period in the past.

  • The increased use of "crown jewels" during the trustee sale period.

Bureau permits merger of ID Biomedical and GlaxoSmithKline: No product overlap

Susan Hutton and Alexandra Stockwell

Canada's Competition Bureau recently released a Technical Backgrounder explaining its analysis of GlaxoSmithKline Inc.'s (GSK's) acquisition of ID Biomedical Corporation (IDB), both active in the development and marketing of vaccines. Interestingly, the transaction was classified as "complex," although ultimately the Bureau found that it would have little, if any, competitive impact as there was no product overlap. The Bureau may have treated the transaction with particular care due to its involvement with products essential to public health and safety, and in particular influenza vaccines. IDB supplies 75% of Canada's annual public requirements for influenza vaccines, and will do so until at least 2008, when one of its government contracts expires. The Bureau observed that, although an active producer of other vaccines and involved in vaccine development generally, GSK had never sold influenza vaccines in Canada, and that there will likely be a number of companies capable of bidding for Canadian influenza vaccine requirements when contracts come up for renewal. In addition, the Bureau noted that public health officials did not see the merger as endangering the security of supply of the vaccine for Canadians.

An important element in the Bureau's overall holding was its finding that there is no product overlap in Canada between GSK and IDB. Both companies have pipeline products aimed at certain respiratory ailments, as well as a Meningococcal strain and certain allergies. The Bureau was undeterred by this fact, however, as it said the products in question were years away from commercial viability and other pharmaceutical companies were also developing potential vaccines for the same diseases.

Maytag/Whirlpool merger: House brands deemed competitors to OEMs

Susan Hutton and Alexandra Stockwell

The Canadian Competition Bureau recently released a Technical Backgrounder explaining the reasoning behind its mid-March 2006 clearance of the acquisition of Maytag by Whirlpool. Both parties are manufacturers of household appliances. For the purposes of competitive review, the product market was defined as the five major home appliances: washers and dryers (the "laundry" segment), refrigerators, dishwashers and ranges. Although both Maytag Canada and Whirlpool Canada were viewed as industry leaders, especially in the laundry segment, and post-merger shares in this segment were significant, the Bureau held that effective competition would remain after the acquisition.

In assessing the proposed merger, the Bureau decided that appliances manufactured by Whirlpool or Maytag and sold under a retailer's house brand should not be attributed to the merged entity, but should rather be treated as an independent competitor in the marketplace. In coming to this decision, the Bureau considered that the retailer owns and controls the house brand and makes all decisions regarding pricing and marketing; that the retailer is often responsible for its own warehousing and distribution, and provides its own product warranties and servicing for its house brands; that there are several remaining manufacturers available to compete for house-brand supply contracts; and that retailers can and do switch from one appliance manufacturer to another, if no long-term manufacturing contract is in place.

In effect, this decision recognizes the changing roles of large retailers, which can function simultaneously as distributors for and competitors to the OEMs.

PaperlinX Fine Paper Merger Closes With a Remedy

Shawn C. D. Neylan

On March 1, 2006, following the filing of a consent agreement with the Competition Tribunal, PaperlinX Canada (formerly Coast Paper Ltd.) completed its acquisition of Cascades Fine Paper Group Inc.'s fine paper merchant business known as Cascades Resources. The closing followed PaperlinX Limited's November 17, 2005 announcement from its headquarters in Melbourne, Australia of its intention to acquire the Cascades Resources paper merchant business.

Both Cascades Resources and PaperlinX sell fine paper products in many parts of Canada. Fine paper is used to print a wide variety of products including brochures and books.

Over the course of its lengthy review, the Competition Bureau analysed the transaction's impact on competition in the fine paper industry and consulted with printers, distributors, and office paper users such as businesses, governments and institutions. After the Bureau completed its review, the Commissioner concluded that the transaction would likely result in a substantial lessening and/or prevention of competition in the fine paper industry in British Columbia, Alberta and Saskatchewan.

PaperlinX did not admit to any impact on competition, but chose not to contest the Commissioner's conclusions. In order to address the Commissioner's concerns regarding the impact of the transaction on the fine paper market in Western Canada, PaperlinX agreed to divest the Cascades fine paper merchant business in Alberta (Calgary and Edmonton) and British Columbia (Vancouver) (the "Cascades Resources West business"), while retaining all other locations. The Commissioner is satisfied that this divestiture is sufficient to ensure that no substantial lessening or prevention of competition will result from the transaction. The consent agreement provides that PaperlinX will retain the parts of the Cascades Resources West business that are not involved in fine paper sales such as the graphic arts supply business.

The consent agreement includes standard provisions such as terms requiring that the Cascades Resources West business will be held separate from the other PaperlinX and Cascades Resources businesses, that an independent manager and a monitor will be appointed with respect to the business to be divested, that PaperlinX will have conduct of sale during the initial sale period and that the sale of the business is subject to the approval of the Commissioner. The consent agreement also provides that PaperlinX will continue to arrange for the supply of fine paper to the Cascades Resources West business until divestiture and may provide other managerial, administrative and operational resources. Also, the consent agreement provides that PaperlinX shall not, as a condition of selling graphic arts supplies to customers of the Cascades Resources West business, also require such customers to buy fine paper from PaperlinX or object to or obstruct the supply of fine paper by any fine paper mill to the purchaser of the Cascades Resources West business in BC, Alberta or Saskatchewan.

Stikeman Elliott provided corporate and competition advice to PaperlinX on this matter.

Canada Releases Draft Merger Remedies Bulletin for Comment

Susan M. Hutton and Michael Kilby

In a flurry of announcements this fall, the Canadian Competition Bureau released a draft Information Bulletin on Merger Remedies in Canada. Comments are requested by January 20, 2006. Highlights of the draft Bulletin of note to practitioners include:

  • a preference for structural remedies (such as divestiture) to behavioural remedies (which, in the Bureau's view, may require monitoring and/or risk being ineffective).

  • acceptance of partial divestitures (e.g., selected manufacturing facilities, retail locations, products or product lines, intellectual property or other discrete assets), subject to satisfaction that willing buyers are available. In this regard, the Bureau may seek information from the marketplace to verify the likely viability and effectiveness of the proposed remedy.

  • a strong recommendation to merging parties to use a "fix it first" approach, which means either completion of a divestiture of a party's own assets before the main transaction closes or a signed agreement in this regard, to be executed on closing of the main transaction. Registration of a consent agreement in such circumstances will not normally be required.

  • if up-front divestiture is not possible, the Bureau indicates it expects sales processes to be concluded within between 3 and 6 months after closing (considerably shorter time limits than many prior consent agreements would indicate).

  • the increased use of "crown jewels" during the trustee sale period, to provide the vendor with an incentive to complete the initial divestiture in a timely fashion, and/or to enhance its marketability in the hands of the trustee.

  • the draft Bulletin indicates that certain terms of agreed remedies can initially be kept confidential. Such information as the initial time period for sale before the assets are transferred to a trustee, the fact that there is no minimum price, and the assets forming part of a "crown jewel" package, may be kept confidential. Full disclosure will be the norm, however, if other jurisdictions disclose such information, or in the case of cases that are contested before the Competition Tribunal (in which case the full text of a proposed order will be made public at the time the application is filed).

  • the draft Bulletin also contains an indication that, in cooperating with other competition enforcement agencies internationally, Canada may rely on remedies arrived at in foreign jurisdictions if they raise no Canada-specific issues.

The shortened time limits for initial divestiture, the increased desire for crown jewels, and the emphasis on up-front buyers and other "fix it first" remedies are likely to engender significant comment amongst merger specialists and their clients.

Draft ''Information Bulletin on the Communication and Treatment of Information under the Competition Act'' Released for Comment

Vicky Eatrides

The Competition Bureau (the Bureau) is seeking public comment on a revised "Information Bulletin on the Communication and Treatment of Information under the Competition Act (Draft for Consultation, August 2005)". As the original policy was introduced in 1995, the revised bulletin reflects amendments made to the Competition Act (the Act) in 2002. The Bureau notes, in particular, that section 29 of the Act also protects information provided voluntarily pursuant to the Act, rather than only protecting information obtained using formal powers, as had previously been the case.

 

The revised bulletin also provides examples illustrating when, in the Bureau's view, information can be communicated to third parties under the various exceptions to section 29. It also clarifies the treatment of information when it is communicated to or received from foreign authorities. Finally, the revised bulletin includes a section discussing other matters where the treatment of information is of concern; for example, the Bureau's Immunity Program, the whistle-blowing provisions, binding written opinions, the right of access to records, requests under the Access to Information Act, private actions for damages and private access to the Competition Tribunal.

 

The Bureau will accept comments on the revised bulletin until December 2, 2005

Bureau Approves Beef-Packing Merger

The Competition Bureau released a Technical Backgrounder on August 31, 2005 that outlines the reasoning behind its approval of the acquisition of the Better Beef Group of Companies (Better Beef) by Cargill Limited (Cargill"). Better Beef and Cargill are both integrated beef packers, who slaughter cattle and fabricate, package and market beef products. The Bureau examined in depth the potential upstream impact on competition for Canadian cattle, as well as the downstream impact on Eastern Canadian competition for the sale of case-ready beef (meat cut and packaged suitable for display in retail stores). On the buying side, the Bureau concluded there are separate Western and Eastern cattle markets and minimal actual overlap between the parties. For case-ready beef, despite the large market shares of the parties, the Bureau concluded that the threat of entry by and the countervailing power of retail grocery firms make the merger unlikely to lessen or prevent competition substantially in any relevant market.

Competition Bureau's Clearance of Rogers-Microcell Wireless Merger Explained

Michael Mahoney

Canada's Competition Bureau (the Bureau) has issued a technical backgrounder summarizing the reasoning behind its clearance of the November, 2004 acquisition of #4 positioned Microcell Telecommunications Inc. (Microcell) by #3 positioned Rogers Wireless Communications Inc. (Rogers Wireless). The deal created the largest (by subscriber base) wireless telecoms provider in the country, and reduced the number of principal wireless competitors to three.1 The backgrounder is noteworthy, because it provides guidance as to how the Bureau is applying the revised Merger Enforcement Guidelines (the MEGs)2 with respect to, among other things, market definition in the fast-moving world of telecoms, co-ordinated effects (or "interdependence") analysis, and the influence (or lack thereof) of a "maverick" firm. It also clearly reveals a forward-looking focus to merger analysis. After a hiatus of several years, the Bureau has indicated that, in the interests of transparency (but bearing in mind confidentiality obligations) it will again be issuing backgrounders on selected cases that raise interesting issues.3

In Rogers-Microcell, the Bureau concluded that the relevant product market is mobile wireless (voice and data) telecommunications services, and that the relevant geographic market is provincial in scope. When analyzing the relevant product market, while recognizing that the ability to "bundle" wireless with other telecommunications and broadcasting services provides a competitive advantage, the Bureau found little current substitutability between mobile wireless and other telecommunications services, including wireline. It also found that the different technological platforms in use do not discourage customer switching and that "mobile wireless" forms a single product market, regardless of technology. Variations in provincial prices and competitors, and the lack of demand-side substitution to service providers located elsewhere, meant that geographic markets were no broader than provincial.

The Bureau found that there are very high barriers to facilities-based entry, including high capital costs to construct and run a network, regulatory requirements and foreign ownership restrictions. Barriers to entry for resellers are much lower,4 but the Bureau concluded that their impact on competition would be limited.

The Bureau found that the combined firm would create Canada's largest competitor nationally by subscriber base (#1 in Ontario and #2 elsewhere), but that its major competitors (Bell Mobility and Telus) were mounting aggressive attacks on that subscriber base, and that subscriber retention would continue to be a serious issue post-merger. Moreover, given the history of intense, multi-market competition between Bell, Telus and Rogers - and the fact that Rogers does not compete with Telus or Bell in wireline - vigorous and effective competition would continue to exist in all markets after the merger.

The Bureau also examined the likelihood of coordinated behaviour among the remaining major service providers. It noted that some important and necessary conditions for coordinated behaviour exist, including market concentration among Bell Mobility, Telus and Rogers Wireless, and the high barriers to entry discussed above. However, the Bureau observed that certain market conditions that effectively constrain coordinated behaviour would not be diminished by the merger. These factors include the expected continued rapid growth in mobile wireless penetration in Canada, continuing rapid technological change, and fierce competition among the three remaining principal rivals.

A key factor in the Bureau's decision appears to be its view that Microcell could not have continued in its role as a "maverick" in the mobile telecommunications market. As noted by the Bureau, "a maverick is a firm that may have less to gain from coordination or be less threatened by punishments from rivals because of the kinds of products it sells or its cost structure." Microcell had been considered an industry maverick, largely due to its innovative flat-rate price plans, per-second billing and its City Fido plan in Toronto and Vancouver. However, the Bureau noted that Bell, Telus and Rogers were able to offer service bundles to consumers based on product offerings from other markets that Microcell could not match. Ultimately, the Bureau found that Microcell would have had great difficulty playing the role of maverick in the future, due to its relatively small coverage area, its inability to offer bundled services, and its absence from market segments that would have provided revenue to fund the capital investment required for next-generation mobile service offerings.

Assessing the competitive impact of a merger on a dynamic basis, taking into account likely changes in the competitive landscape is always a challenge for regulators, but this difficulty is perhaps extenuated in telecoms mergers. The Bureau appears to have met the challenge in this case.

FOOTNOTES

[1] In acting for Microcell in connection with this transaction, Stikeman Elliott LLP also provided competition advice.  The Backgrounder is available on-line at www.competitionbureau.gc.ca (see "News Room" under "Technical Backgrounders" (and not under "Backgrounders").

[2] The MEGs were issued by the Bureau in September 2004.

[3] Information Bulletin: "Competition Bureau Implements Policy for Greater Transparency" (April 28, 2005), available at: www.competitionbureau.gc.ca.

[4] The Bureau noted that Virgin Mobile, an established player in several other countries, recently launched a mobile wireless service offering