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

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

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

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

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

Having set out the general rule, the Tribunal considered whether any of TD’s redactions could fit within the “exceptional circumstances” exception. The Tribunal concluded that there were no special circumstances to justify the redaction of the names of merchants with whom TD interacted. TD maintained that the names could not be disclosed on the basis of its contractual confidentiality obligations, but the Tribunal found that the relevant contracts permitted disclosure in the context of litigation.

The Tribunal similarly found a lack of supporting evidence to justify the redaction of profit and loss statements and certain government relations documents to exclude information about business lines other than credit cards. Even had it found such an evidentiary foundation, the Tribunal suggested that it might have rejected the redactions nevertheless given that the documents enjoyed the protections of a Tribunal-granted confidentiality order.

The Tribunal also ordered TD to disclose documents showing the content of its pre-contractual negotiations with Visa and Mastercard. The contracts themselves had already been disclosed, and TD argued that pre-contractual documents were not relevant. The Tribunal disagreed, finding that the documents were “clearly relevant” on the basis that TD had been granted leave to intervene on the issue of its “interactions” with the two credit card companies.

IBC replied that UCDA had failed to provide sufficient credible evidence that it was “substantially affected” in its business by the alleged refusal to deal. The Tribunal rejected this argument, however, finding UCDA’s evidence that its Auto Check service represented more than 50% of its net income to be sufficient to show a direct and substantial effect. IBC also argued that UCDA had not satisfied the requirements to seek leave to file an application under section 75 because it had failed to provide evidence that it was unable to obtain supplies of substitutable data (including from its competitor, CarProof), that it was willing and able to meet IBC’s usual trade terms, and that the elimination of its Auto Check product would have an adverse effect on competition in a market. 

The Tribunal rejected these arguments as well, finding that the Competition Act does not require UCDA to purchase the data it needs from its competitors. The Tribunal also found that it could potentially conclude – on a full hearing under section 75 – that there was insufficient competition in the market for the necessary data (with IBC as the sole supplier of suitable data), that UCDA was willing and able to meet the usual trade terms for the data, that the data was in ample supply (based on IBC’s continued ability to supply the data prior to its termination of UCDA as a customer), and that the refusal to deal would likely have an adverse effect on competition in UCDA’s market.

UCDA had also requested leave to bring an application under the now-civil resale price maintenance provision (s. 76 of the Competition Act), but the Tribunal found that there was insufficient evidence to show the possibility that IBC’s termination of UCDA as a customer was due to Auto Check’s low pricing policy, and did not grant leave to proceed with that claim.

One of the most interesting issues raised by UCDA’s application is whether the Tribunal will use it as an opportunity to revisit its 1997 finding, in The Director of Investigation and Research v. Warner Music Canada Ltd., that “[copyright] licences are not a product as that term is used in section 75 of the Act.” While recognizing that copyright licenses can be considered “products” for the purposes of other sections of the Act, the Tribunal, in Warner, noted that section 75 requires that a product be in an “ample supply,” a concept that the Tribunal found to be inapplicable to a copyright licence.

Some commentators have said that Warner presents an insurmountable roadblock to bringing refusal to deal cases in respect of intellectual property. Some also have suggested that the case was wrongly decided, or at least that its conclusion was drafted more broadly than was necessary, perhaps in reaction to an overly aggressive position taken by the Director (the predecessor title of the Commissioner of Competition) in that case.

UCDA is very much aware of this issue, and addressed it head on in its pleadings. UCDA denied that the data supplied to it by IBC was in the nature of a “license”, and argued further that even if intellectual property were involved it should be granted leave to bring its application on the basis of its view that the subsequent Federal Court of Appeal decision in Eli Lilly and Co. v. Apotex Inc. calls into question the Tribunal’s broad conclusion in Warner. More specifically, UCDA pleads that Warner “may have been decided incorrectly and it would be unfair to make a negative leave determination which would preclude reconsideration of the reasoning in Warner in a proceeding where the parties have the full opportunity to develop the facts and arguments related to each element of section 75.”

By arguing that it will be unable to compete in the vehicle accident history report market if IBC refuses to supply it with the necessary data, UCDA also can be viewed as invoking what has sometimes been referred to as the “essential facilities doctrine.” This doctrine, which has never been formally accepted in Canada, refers to a situation in which a monopolist controls a facility that a competitor is unable reasonably to duplicate, and the monopolist refuses to provide access to the competitor although it could feasibly do so, thereby rendering the competitor unable to compete. The essential facilities doctrine has had mixed success in other jurisdictions, faring better in the European Union (including a recent Microsoft decision, in which the Court of First Instance found that Microsoft’s failure to disclose interoperability information about its workgroup server operating system violated the European Union’s abuse of dominance law) than in the United States (where, in Verizon v. Trinko, the Supreme Court stated that it had “never recognized such a doctrine,” and, while expressly refusing to recognize or repudiate such a doctrine, expressed strong reservations about creating a new exception to the proposition that there is no duty to aid competitors).

In its leave decision, the Tribunal has not dealt with these arguments directly. It merely found that there was no evidence to suggest that IBC had ever characterized its arrangements with the UCDA as a license. Whether the Tribunal will rest on this distinction when it hears UCDA’s application on its merits, and whether it will use this case as an opportunity to critically assess the reasoning of its Warner decision, remain to be seen.

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

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

The motions judge had dismissed the certification motion in its entirety, finding that the plaintiffs had shown neither that the existence of common issues would materially advance the litigation, nor that a class proceeding was the preferable procedure for resolving their claims.² In particular, the court below found that the plaintiffs had not established that injury from the alleged price maintenance (higher food prices) - an element of liability for the Competition Act and civil conspiracy claims - was a common issue for the proposed class. The motions judge found this failure to be "an avalanche that buries the proposed common issues with an absence of commonality and a proliferation of individual issues".  In reaching that conclusion, the motions judge considered the plaintiffs' expert economic evidence on the issue, but found that the expert's opinion was "based on so many assumptions that it becomes speculative and unreliable" and did not provide "feasible" methodologies for establishing injury on a class-wide basis.The motions judge also found that the quality and quantity of the individual issues overwhelmed any common issues and stood "in the way of satisfying the preferable procedure criterion of the prerequisites for certification".

In reversing the decision, the majority of the Divisional Court held that the court below had erred in its approach to the proposed common issues, in its consideration of the expert evidence, and in its analysis of the preferable procedure requirement. Justice Swinton wrote a forceful dissenting opinion, disagreeing with the majority on virtually all issues.

The majority held that failure to establish all elements of liability, including proof of the existence of injury, is not the end of the inquiry into commonality, and that the motions judge had "erred in principle" by focusing on the existence of harm and failing to consider and identify other potential common issues. Finding that "the conduct that could give rise to liability is systemic" and that "[e]very franchisee is subject to the same contract, pricing structure and distribution system", the majority concluded that the alleged "breach" of section 61 of the Competition Act by the Quizno's Defendants and their allegedly "unlawful agreement" with GFS raised common issues for the proposed class, whether or not proof of loss was a common issue.  The majority further held that consideration of "whether one of the proposed common issues is overwhelmed or buried by the individual issues is part of the analysis for the preferable procedure criterion."

The majority of the Divisional Court also found that the court below had erred in principle in its consideration of the expert evidence and in its conclusion that proof of loss from the impugned conduct was not shown to be a common issue.  Finding that conflicting expert economic evidence had been submitted by the parties on the certification motion, the majority wrote:

It is neither necessary nor desirable to engage in a weighing of this conflicting evidence on the certification motion.  The plaintiffs on a certification motion will meet the test of providing some basis in fact for the issue of determination of loss to the extent they present a proposed methodology by a qualified person whose assumptions stand up to the lay reader.

Moreover, the majority also noted that other evidence in the record provided "some basis in fact" for finding that proof of loss was a common issue for the class, based again on the "systemic nature of claims of the Quizno's franchisees. The majority stated that "[i]t is setting the bar too high to require that evidence be led to support the factual foundation of the proposed methodology."

Turning to the preferable procedure requirement, the majority found that "the motions judge erred in principle by concluding his assessment with his finding that the individual issues in this case overwhelm any common issues" and by "failing to consider the objectives of the CPA."³ The majority held that the plaintiffs' submissions that they would not be able to pursue claims individually, and their accusations of "aggressive, divisive, harsh and retaliatory conduct" by the Quizno's Defendants, established that the goals of access to justice and behaviour modification favoured class certification in this case.  Moreover, the majority's identification of common issues, including proof of loss, that would materially advance the claims in the litigation, led it to conclude that "a class proceeding would be an efficient and manageable process."

Justice Swinton wrote a dissenting opinion which would have dismissed the appeal. In so doing, she noted that "with all due respect, the majority is reweighing the evidence and coming to its own findings based on the evidence.  That is not the role of this Court on appeal."

Justice Swinton found that "while there may be elements of the claims of breach of the [Competition Act], conspiracy and breach of contract that are common to the class members, they are not a substantial part of the litigation." Rather, "the real work on this case is on the damages side." Moreover, the dissent noted that the motion judge's consideration of the reliability of the plaintiffs' expert evidence was consistent with the approach taken by the Court of Appeal in Chadha v. Bayer,⁴ and that the court below was entitled to find that the lay evidence did not provide a basis in fact to show that class-wide harm from the alleged price maintenance was capable of common proof.

With regard to preferable procedure, the dissent found that, even if there were considerations of access to justice and behaviour modification that favoured certification, the motions judge did not err in principle in refusing to certify.In Justice Swinton's words, "just because the franchisees are a vulnerable group does not mean every class action brought by them should be certified." Justice Swinton was of the view that the conclusion of the motions judge that the proposed class proceeding would be unmanageable was entitled to substantial deference. Moreover, in her opinion it was also consistent with the conclusions reached in a number of other cases in which courts have refused to certify price maintenance, price fixing and civil conspiracy claims where they were not satisfied that the existence of harm could be proven on a class-wide basis (Chadha; Harmegnies c. Toyota⁵; Steele v. Toyota Canada Inc.⁶; Pro-Sys Consultants v. Infineon Technologies AG⁷; Price v. Panasonic Canada Inc.⁸).

Leave to appeal to the Ontario Court of Appeal has been sought by the defendants.

 ¹ 2038724 Ontario Ltd. et al. v. Quizno's Canada Restaurant Corporation, et al., Court File No. DC 149/08. ² See the March 24, 2008 issue of The Competitor for more detail: "Competition Act class action fails class certification test".  Stikeman Elliott LLP represents a group of defendants in these proceedings.
³ Class Proceedings Act 1992, S.O. 1992, c. 6.
⁴ (2003) O.R. (3d) 22, leave to appeal to S.C.C. refused, [2003] S.C.C.A. No. 106. ⁵ [2008] J.Q. No. 1446 (Que. C.A.), leave to appeal to S.C.C. refused, [2008] S.C.C.A. No. 173.
 ⁶ 2008 BCSC 1063. ⁷ 2008 BCSC 575. ⁸ (2002), 22 C.P.C. (5th) 379 (Ont. S.C.J.).

Competition Act Amendments

Two-tracks for dealing with agreements between competitors

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

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

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

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

De-criminalized pricing practices

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

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

Price Maintenance - Replacement of criminal provision with civil provision

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

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

Deceptive marketing practices/obstruction of justice

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

Increased penalties for (non-criminal) misleading advertising

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

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

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

• Previously, penalties for individuals were capped at C$50,000 for a first infraction and C$100,000 for each subsequent infraction, while penalties for corporations were limited to C$100,000 and C$200,000 for first and subsequent infractions, respectively.

Fines for abuse of dominance/repeal of "airline" provisions

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

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

Merger review procedures

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

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

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

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

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

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

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

Investment Canada Act amendments

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

• Increase in the minimum threshold for Ministerial review and approval of direct acquisitions of control of Canadian businesses by WTO-member based investors.  The threshold will be C$600 million in the  "enterprise value" of the assets of the Canadian business for investments made within two years after the federal Cabinet proclaims the thresholds in force, C$800 million for the subsequent two years, C$1 billion for the subsequent year and the portion of the year thereafter that ends on December 31, and thereafter indexed to GDP.  Please note:  these new thresholds have not yet been proclaimed in force.
  
  
  • The threshold for review of direct acquisitions by WTO investors in 2009 is currently C$312 million and this amount is indexed annually to GDP.  It will increase to C$600 on an as-yet-unknown date when the new thresholds are proclaimed in force.
  • Indirect investments by WTO investors will remain exempt from review, unless they fall within certain "sensitive" sectors, the scope of which is to be narrowed to only "cultural businesses", see below.
     

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Competition Act Reforms:

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

Criminal Matters

• Replacing the conspiracy (cartel) provisions with a per se criminal offence for so-called "hard core" cartels such as price-fixing and market-sharing agreements, with no need to show anti-competitive effects (and subjecting them to increased maximum fines); as well as introducing a second, civil track for review by the Competition Tribunal of other anti-competitive agreements between competitors;
• Repealing the criminal price discrimination, promotional allowance and predatory pricing provisions (leaving such practices to be dealt with, as potential aspects of a civil "abuse of dominance" case); and
• De-criminalizing resale price maintenance (currently a per se criminal offence in Canada), and permitting private parties as well as the Commissioner of Competition to bring actions before the Competition Tribunal in respect of price maintenance with substantial anti-competitive effects.

Civil Matters

• Empowering the Competition Tribunal to impose administrative monetary penalties (i.e., fines) of up to $5 million for abuses of a dominant position (currently, a civilly reviewable practice that is not liable to fines, damages or enforcement proceedings other than by the Commissioner of Competition).

Mergers

• Harmonizing Canada's merger review procedures with those of the United States under the Hart-Scott-Rodino Antitrust Improvement Act of 1976 (HSR), with an initial review period of 30 days (most non-controversial mergers are currently cleared by the Competition Bureau in 14 days or less) and the discretion, on the part of the Commissioner of Competition, to initiate an indeterminate "second stage" review period that would end 30 days after the merging parties comply with a "second request" for documents and information (merging parties are currently free to close even problematic transactions as early as 42 days after filing long-form notification materials); and
• Increasing the financial thresholds for merger notification.

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

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

Investment Canada Act Reforms:

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

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

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

Other nuggets from the throne speech:

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

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

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

The Competition Act

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

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

Criminal Matters

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

Reviewable Practices (other than Mergers)

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

Mergers

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

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

Discussion

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

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

The Investment Canada Act

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

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

Application of ICA to Cultural Activities

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

"Hollowing-Out of Corporate Canada"

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

National Security and State-Owned Enterprises

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

Proposals on sectoral investment restrictions

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

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

Conclusion

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

Under the franchise agreements, Quiznos appointed GFS to act as the primary distributor of a wide range of food and other supplies to the Canadian franchisees. GFS distributed these products to franchisees according to geographic region, from distribution centres located in six provinces across the country. Each GFS distribution centre sent monthly product order guides to the franchisees in its territory, and the franchisees paid GFS for the supplies they purchased from it. GFS purchased the majority of the products it distributed to franchisees from Quiznos, or from suppliers designated by Quiznos, at prices negotiated by Quiznos.

In the amended statement of claim, the plaintiffs allege that the Quiznos franchisors, GFS, and unnamed food manufacturers or suppliers entered into "price maintenance agreements" to artificially maintain the prices franchisees paid for supplies at inflated levels. The plaintiffs assert that Quiznos has engaged in unlawful price maintenance, in breach of Section 61 of the Act, by dictating the prices charged by GFS to franchisees. They also assert that, by agreeing to charge the allegedly maintained prices for supplies, GFS aided and abetted the Quiznos price maintenance and unlawfully conspired with it.

On the plaintiffs' motion to certify their action as a class proceeding, Justice Paul Perell recognized "the collective aspiration of the class members to band together to have their day in court to obtain justice for their perceived grievances", but found that the franchisees' claims on the record before it in the case "are a large square peg of law and facts that cannot fit into the large round whole of procedure that is a class proceeding."

Justice Perell held that the plaintiffs had failed to satisfy the criteria required for certification under section 5 of Ontario's Class Proceedings Act 1992, S.O. 1992, c.6. In particular, the court held that the plaintiffs failed to demonstrate they could prove loss (i.e., that they paid higher food prices) from the alleged conduct on a class-wide basis, which they had to do to establish liability as a common issue for the class on the civil conspiracy claim. Justice Perell agreed with the defendants that the expert economic evidence offered by the plaintiffs on this issue was based on a host of unfounded assumptions, which rendered the expert's opinion "speculative" and "unreliable", and his proposed common methodologies for proving harm on a class-wide basis "conceptually unsound" and "not feasible". Absent proof of harm on a class-wide basis, what remains as a proposed class proceeding results in "an avalanche that buries the proposed common issues with an absence of commonality and a proliferation of individual issues." In Justice Perell's view, the resolution of any common issues would not meaningfully advance the litigation and a class proceeding would not be the "preferable procedure" for resolving the franchisees' claims.

In previous cases, Canadian courts have accepted defendants' arguments regarding the difficulties in such a case with seeking to prove the fact of harm on a class-wide basis and have been persuaded that there remains a myriad of individual issues in such cases, even after resolution of any common issues. While the courts have been careful to say that there is no absolute rule against certifying competition law class actions, the decisions to date have made it clear that certifying such cases as class actions does not meet the goals of the class proceedings legislation. Further appellate consideration of this issue is anticipated.

¹2038724 Ontario Ltd. v. Quizno's Canada Restaurant Corporation et. al, 2008 CarswellOnt 1156 (Ont. S.C.J.)

From a civil perspective, the Bureau examined whether GSK's behaviour violated the refusal to supply (section 75) or market restriction (section 77) provisions of the Act. These provisions, the Bureau noted, generally recognize that suppliers may set the terms and conditions of sales, provided that they have a reasonable business justification for doing so. In this regard, the U.S. Food and Drug Administration informed the Bureau that the exports in question contravene U.S. law, which the Bureau regarded as sufficient basis for it to conclude that GSK had a reasonable business justification for blocking the exports while continuing to supply the Canadian market.

From a criminal perspective, the Bureau examined whether GSK's behaviour violated the price maintenance provision (section 61) of the Act and found no evidence to suggest "that a violation had occurred."

Finally, the Bureau concluded that there was "no appreciable impact" on Canadian consumers resulting from the export ban. Given its limited resources, the Bureau considers a variety of factors when determining which cases to pursue. Following a consideration of the facts, the Bureau determined that the complaint against GSK warranted no further attention on its part, although it also noted that private parties can pursue "private legal actions" and that "some complainants have already announced their intention to do so."