Volkswagen and Audi settled environmental marketing claim with $15 million penalty

Vanessa Leung

On December 19, 2016, Volkswagen Group Canada Inc. (VW) and Audi Canada Inc. (Audi) entered into a consent agreement with the Commissioner of Competition to resolve the Commissioner’s concerns that VW and Audi had made false or misleading environmental marketing claims about certain of its 2.0 litre diesel vehicles. The consent agreement is one component of a broader Canadian settlement relating to VW’s and Audi’s allegedly misleading environmental claims.

The Bureau alleged that software installed in the affected VW and Audi vehicles could detect a test being conducted and alter the operation of the vehicle during the test to reduce nitrogen oxide emissions. The Bureau also alleged, however, that during normal use, the nitrogen oxide emissions would exceed the amounts at which the vehicle had been certified. The Bureau concluded that the statements, warranties and/or guaranties made about the performance or efficacy of these vehicles were false and misleading in a material respect, and were not based on adequate and proper testing, contrary to the Competition Act

In addition to its independent consent agreement, the Bureau participated in a proposed class action settlement that Volkswagen reached with consumers of certain affected vehicles. If approved by the courts, the settlement will provide total buyback and restitution payments totalling up to C$2.1 billion. The Bureau’s consent agreement provides for an additional, C$7.5 million administrative monetary penalty for each of VW and Audi, and provides that the parties will compensate the Bureau for C$200,000 toward its investigative costs. In the consent agreement, the Bureau also acknowledged an “Owner Credit Package” program, established voluntarily by VW and Audi, that provides certain benefits for affected owners and lessees.

As part of the consent agreement, VW and Audi agreed not to create a false or misleading general impression that: (a) their vehicles’ emissions are “clean”; (b) their vehicles produce lower emissions than other vehicles; (c) their vehicles are less polluting than other vehicles; (d) their vehicles are “green”, or less harmful to the environment than other vehicles; and/or (e) their vehicles are environmentally friendly. VW and Audi further agreed that, unless adequate and proper testing was performed, they would not make any representations that: (a) their vehicles’ emissions are cleaner than gasoline; (b) their vehicles produce less sooty emissions than older diesel engines; and/or (c) their vehicles produce fewer emissions than other vehicles.

VW and Audi also agreed to use their best efforts to stop selling or leasing affected vehicles, unless the emissions system of the vehicles was first modified to reduce nitrogen oxide emissions. VW and Audi will also enhance and maintain a corporate compliance program to ensure compliance with the Competition Act.

The Bureau noted that it had agreed to more favourable terms in the consent agreement due to VW and Audi’s cooperation with its inquiry. The Bureau also noted that the consent agreement does not resolve its ongoing inquiry with respect to certain vehicles equipped with 3.0 litre diesel engines. The consent agreement is part of a broader, global investigation into VW’s and Audi’s environmental marketing claims, and demonstrates the Bureau’s active role in such broader, industry investigations, both as a participant in the private class action process and as an independent law enforcement agency to enforce the provisions of the Competition Act.

Competition Tribunal maintains interim supply order despite third party objections in Used Car Dealers case

Michael Laskey -

On March 16, the Competition Tribunal rejected a motion by the Insurance Bureau of Canada for the rescission of an interim supply agreement in its ongoing dispute with the Used Car Dealers Association of Ontario despite objections from one of IBC’s members, holding that the industry association had also bound its members when it agreed to the interim supply agreement. The decision, which has the effect of maintaining a mandatory supply order despite the objections of an IBC member which had directed IBC not to supply its confidential information, has important implications for industry associations and their members.

UCDA is a not-for-profit trade association representing motor vehicle dealers in Ontario. Among other services, it provides a service called “Auto Check”, which allows dealers to verify accident history information about vehicles they intend to sell. IBC, which collects and provides the data for the Auto Check service, is a not-for-profit corporation made up of 139 member insurance companies. On June 17, 2011, IBC terminated UCDA’s access to its insurance data, and UCDA was forced to suspend its Auto Check service. The reasons for the termination, and UCDA’s allegations that the termination constituted a “refusal to deal” contrary to section 75 of the Competition Act, are described in our earlier article. Meanwhile, the parties agreed to an interim supply agreement pursuant to which IBC would continue to supply UCDA with claims data while the case was before the Tribunal, and the agreement was formalized by an order of the Tribunal.

Two weeks after the interim supply order was issued, State Farm (a member of IBC) directed IBC not to supply its data to UCDA. State Farm claimed in a letter that, as a matter of business policy, it had chosen not to make claims information available to third-party commercial operations. IBC thereafter sought to rescind the interim supply order on the grounds that, because of technological limitations, the only way it could implement State Farm’s direction would be to remove UCDA’s access entirely (and thereby breach the interim supply order) or remove State Farm’s data from its service, diminishing the service’s effectiveness for all users.

The Tribunal first considered whether there were “changed circumstances” which justified reconsidering the supply order. The Tribunal noted that State Farm had been made aware of UCDA’s application for an interim supply order, and found that State Farm knew or ought to have known about the proceedings; nonetheless, State Farm took no steps to object and did not intervene or participate in the present motion. It further found that IBC had known about the technical limitations of its system and nevertheless agreed to the interim supply order; IBC was therefore the “maker of its own mischief”. Moreover, the Tribunal noted that State Farm had provided no evidence of its corporate policy, and in fact continued to supply data to another third party commercial enterprise, Carproof (a competitor of UCDA’s Auto Check service), purportedly in violation of such a policy. In denying IBC’s motion for rescission of the order, the Tribunal found that State Farm’s “new-found” objection was “unduly convenient in frustrating the Interim Supply Order” and that, in the circumstances, “a change of mind is not a change of circumstances.”

The Tribunal further found that even if State Farm’s instructions to IBC had been enough to constitute a “change of circumstances”, the circumstances did not meet the tripartite test for injunctive relief established in RJR-MacDonald v. A.G. Canada. The Tribunal found that UCDA would suffer irreparable harm if its Auto Check service had to be discontinued, while IBC would lose only some goodwill in its relationship with State Farm.

The Tribunal’s decision has important implications for industry associations (such as IBC) and their members. The Tribunal explicitly made clear that “where an industry association purports to act on behalf of and to bind itself and, as a consequence, its members,” the Tribunal’s orders are as binding on the association’s members as they are on the association itself. In this case, because State Farm had at least constructive knowledge of the dispute among IBC and UCDA and because it failed to object at the time the interim supply order was made, it is effectively compelled to continue to provide its insurance data to IBC and UCDA even though it is not a party to the proceedings among them and even though it apparently maintains a corporate policy of not supplying such data to third party commercial operations. Trade associations should take heed of the risks inherent in purporting to act on behalf of their members. Members should take heed as well, lest they be subject to court orders demanding more than they bargained for.

Used Car Dealers Association accuses Insurance Bureau of refusal to deal

Michael Laskey -

On September 9, 2011, the Competition Tribunal released a decision granting leave to the Used Car Dealers Association of Ontario (UCDA) to bring an application against the Insurance Bureau of Canada (IBC) seeking redress under the “refusal to deal” provisions contained in section 75 of the Competition Act. UCDA claims that IBC stopped supplying it with data on vehicle accident and claims history, which the IBC compiles from its member insurers. According to UCDA, it relies on being able to purchase this data to supply vehicle accident history reports to its members.  The Tribunal has granted the UCDA's application for leave to file an application under section 75, and such an application has in fact been filed.

UCDA alleges that one of its competitors in the accident history report market, CarProof, has a significant business relationship with IBC. CarProof provides its claims check service to the public at a price of $34.95 per search, while UCDA’s Auto Check service is available only to UCDA members and costs $7 per search (but includes less information than a CarProof report). UCDA alleges that IBC refuses to supply it with insurance data because of UCDA’s low pricing policy.

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.

Federal Court of Appeal dismisses Refusal to Deal appeal

Susan M. Hutton & Marisa Berswick

On June 2, 2011, the Federal Court of Appeal (FCA) released its decision in Nadeau Poultry Farm Limited v. Groupe Westco Inc et al., in which it upheld the decision of the Competition Tribunal to dismiss the appellant’s complaint under s. 75 of the Competition Act (refusal to deal). While the appellant was ultimately unsuccessful, both decisions shed light on the limited scope of s. 75, particularly in regulated industries where supply is statutorily restricted.

The Decision at the Tribunal

As discussed in our post of November 19, 2009, this case concerns a dispute between the appellant, Nadeau Poultry Farm, the operator of the only chicken slaughtering plant in New Brunswick, and the main respondent, Group Westco Inc., a chicken producer that, along with its subsidiaries, owns or controls just over half of the chicken production in New Brunswick. In 2007, Westco offered to buy or invest in the Nadeau plant, but negotiations between the parties broke down. Westco made it clear that if Nadeau was not willing to sell its plant, Westco would construct its own slaughtering plant in partnership with Nadeau’s main competitor and thereby deprive Nadeau of 50% of its supply. Eventually, Westco gave written notice that it would stop supplying chickens to Nadeau and the other respondents followed soon after, leading to the commencement of a private action before the Competition Tribunal for an order for resumed supply. On June 8, 2009, the Tribunal dismissed the application based on Nadeau’s inability to satisfy the five conditions required by s. 75, which require that:

  • a customer is substantially affected in its business or is precluded from carrying on business because it is unable to obtain adequate supplies of a product anywhere in a market on usual trade terms; 
  • this occurs as a result of insufficient competition among suppliers; 
  • the customer is willing and able to meet usual trade terms;
  • the product is in ample supply; and 
  • the refusal to deal is having or is likely to have an adverse affect on competition in a market.

While Nadeau did succeed in satisfying the first and third elements of the test, the Tribunal ultimately determined that Nadeau did not adequately demonstrate that insufficient competition among chicken producers was the limiting factor on supply, that the product was in ample supply or that the refusal to supply was having or would have an adverse effect on competition. Nadeau subsequently appealed the Tribunal’s decision to the FCA.

The Decision at the FCA

On appeal, Nadeau raised the following three arguments:

Insufficient Competition”: The first issue on appeal was whether the Tribunal erred in finding that “insufficient competition” among chicken producers was not the cause of Nadeau’s inability to obtain supply. On this point, the FCA found that the Tribunal’s decision regarding the limit on aggregate supply resulting from the supply management system was a finding of fact, and as a result, this ground of appeal failed. The Applicant’s other arguments related to this point were also unsuccessful.

Ample Supply”: The second issue on appeal centered on the question of whether live chickens were available in “ample supply”, as required by the s. 75 test. While the FCA found that the Tribunal did not err in defining “ample supply”, it rearticulated the definition in positive terms. Specifically, a product would be considered to be in “ample supply” when producers had the capacity to increase production on a timely basis to keep up with increased demand for the product. Under the applicable poultry supply management system, however, producers are unable to increase production to meet new demand. According to the FCA, “[a] market in which increased demand for a product can only be accommodated by diverting supplies from one customer to another is not a market in which the relevant product is in ample supply.”

Adverse Effect on Competition”: The third issue refers to whether the refusal to deal had an “adverse effect” on competition. The Tribunal had concluded that, for a refusal to deal to have an adverse effect on the market, remaining market participants would have to be placed in a position of “created, enhanced or preserved market power” due to the refusal. On this point, the FCA found that the Tribunal did not err in limiting the relevant market to the downstream market. Specifically, the FCA rejected Nadeau’s argument that the market to be considered should include all markets, including the market in which the Applicant buys chickens. On the contrary, the FCA found that it would be redundant for the Act to require that a complainant demonstrate a “further distortion of the upstream market for live chickens.” Rather, the statutory reference to “a” market “is a reference to any relevant product or geographic market into which the complainant sells.”

As such, the FCA upheld the Tribunal’s decision on the three issues above and dismissed the appeal. 

Credit cards face class action in Canada

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

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

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

Eli Lilly-Apotex patent litigation comes to an end

Jeffrey Brown

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

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

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

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

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

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

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

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

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

New legislation to improve protection and efficiency in electronic commerce

Ashley M. Weber

On December 1, 2009, Bill C-27, also known as the Electronic Commerce Protection Act, passed through first reading in the Senate. Its objective is to regulate certain activities that discourage reliance on electronic means of carrying out commercial activities, such as spam, spyware and internet fraud, in order to promote efficiency and adaptability in the Canadian economy. More specifically, it will prohibit the sending of commercial electronic messages without the prior consent of the recipient, as well as provide rules governing the sending of those types of messages and a mechanism for withdrawing consent. It will also prohibit practices relating to the alteration of data transmission and the unauthorized installation of computer programs. When implemented, Bill C-27 will amend the Canadian Radio-television and Telecommunications Commission Act, the Competition Act, the Personal Information Protection and Electronic Documents Act and the Telecommunications Act.

The Electronic Commerce Protection Act defines both express and implied consent for receipt of electronic messages. Where express consent is required, commercial communications may not take place unless the person or corporation in question "opt-in" to being contacted. Conversely, implied consent is acceptable under circumstances where it can be deemed that that the person or corporation might be interested; however, the recipient must be given the ability to "opt-out" of the communications. Under the new legislation, implied consent will be assumed in cases where there is an existing business or non-business relationship that meets specified criteria. In the absence of such an existing relationship, the sender must obtain express consent to send unsolicited commercial electronic messages.

Amendments to the Competition Act include the addition of new criminal and reviewable conduction provisions under sections 52 and 74, which broaden the scope of misleading representations and telemarketing to better address online activity. Through these changes, it will become an offence to promote, directly or indirectly, any business interest or the supply or use of a product, whether knowingly or recklessly, that includes a false or misleading representation in the sender or subject matter information, the electronic message or the locator. Noteworthy is the distinction made for the electronic message itself, which states that only "material" false or misleading representations will be caught by the criminal and reviewable provisions of the Competition Act. There is no similar materiality threshold for the sender or subject matter information, or the locator. As with the other provisions in the Competition Act on misleading advertising, proof that a person was misled by the representations is not required to constitute an offence. The proposed legislation also introduces a mechanism for the Commissioner to conduct investigations and share information with foreign states in order to assist in their investigations of misleading advertising.

The proposed amendments will also change the standard of review for the issuance of temporary orders under section 74 of the Competition Act. The current standard to be met is a strong prima facie case that a person is engaging in reviewable conduct. Under these amendments, the standard of review will be reduced to the mere appearance to the court of reviewable conduct.

With regard to penalties, under the Electronic Commerce Protection Act, a new private right of action will be created with a three-year limitation period, granting affected individuals the right to apply to the court for an order of compensation in an amount equal to the actual loss or damages suffered. Under section 74 of the Competition Act, the amendments grant a court the ability to issue: (a) a compensatory order and (b) a fine (or administrative monetary penalty) of as much as $200 per contravention up to a maximum $1,000,000 per day, even if the application by the private person did not allege a violation under the new provision.

The Government believes that the new legislation and related amendments will boost Canadians' confidence in online commerce by cracking down on internet fraud, spam, spyware and other related threats.

Tribunal cries "fowl": Rejects "refusal to deal" application in chicken case

Eliot N. Kolers

The Competition Tribunal (the "Tribunal") released a decision in Nadeau Poultry Farm Limited v. Westco Inc., et al (2009 Comp Trib 6), in which it made several valuable clarifications in its interpretation of the "refusal to deal" provision contained in section 75 of the Competition Act (the "Act"). Under this provision, a supplier of a product can be ordered to sell its product to a particular customer if certain criteria are met. This case, which came before the Tribunal through the private access provisions allowing private parties to bring cases before the Tribunal, sheds light on the Tribunal's interpretation of the concepts of "ample supply", "as a result of insufficient competition", "usual trade terms", and "adverse impact on competition", all in the context of a supply-managed industry.
 

Background

The applicant, Nadeau Poultry Farm, operates the only chicken processing plant in New Brunswick. The main respondent, Groupe Westco Inc., is a chicken producer which, itself or through its subsidiaries, owns or controls just over half of the chicken production in New Brunswick. Together with the other respondents, this share increases to almost 75%. Westco has a strong interest in vertical "egg-to-plate" integration of its operations and, prior to this case, was already involved in all aspects of chicken production except processing and distribution.

In furtherance of this integration, Westco offered to buy or invest in the Nadeau plant in January 2007. The applicant did not wish to sell and proposed alternative arrangements, but the parties were unable to reach an agreement. In March 2007, Westco approached Olymel L.P., Nadeau's main competitor in Québec and the eastern provinces, to develop a partnership that could either purchase the Nadeau plant or construct its own. In August 2007, Westco made it clear to the applicant that if it was not willing to sell the Nadeau plant, Westco would begin constructing its own processing plant in partnership with Olymel and that during construction, it would divert all of its chickens to be processed by Olymel in Québec. Negotiations for the sale of the plant were unsuccessful, and in January 2008 Westco gave written notice that it would stop supplying chickens effective July 20, 2008. The other respondents followed soon after.

The applicant sought leave from the Tribunal to apply for an order under s. 75 of the Competition Act; leave was granted on May 12, 2008. The application was heard in November and December 2008. On August 7, 2009, the Tribunal released its decision dismissing the application.

The legislation

Subsection 75(1) of the Act provides that where

  • a customer is substantially affected in its business or its precluded from carrying on a business because it is unable to obtain adequate supplies of a product anywhere in a market on usual trade terms,
  • this occurs as a result of insufficient competition among suppliers,
  • the product is in ample supply,
  • the customer is willing and able to meet usual trade terms, and
  • the refusal to deal is having or is likely to have an adverse affect on competition in a market,

the Tribunal may order one or more suppliers in the market to supply the customer with the product within a specified time and on usual trade terms. All five criteria must be satisfied before the order will issue. An application for such an order may be made by the Commissioner of Competition, or, as here, by a person granted leave under s. 103.1 of the Act.

The Tribunal's analysis

The Tribunal analyzed each of the five criteria listed in s. 75(1). In the course of its decision, it ruled on or confirmed several important points.

"Substantially Affected": In its analysis of paragraph 75(1)(a), the Tribunal confirmed earlier decisions to the effect that the test of "substantially affected" will be met if the applicant is "affected in an important or significant way." In particular, the Tribunal rejected the respondent's argument that the phrase "precluded from carrying on business" modifies or has an affect on the meaning of "substantially affected," so as to elevate the requirement almost to the point of the applicant being unable to carry on business.

"As a Result of Insufficient Competition": The applicant argued that the supply-management system, which imposed quotas on chicken producers, meant that there was a lack of competition among chicken producers and that this was the reason why Nadeau was unable to obtain adequate supply. The Tribunal disagreed, saying that the quota system - not insufficient competition - was the reason for the inadequate supply.

"Usual Trade Terms": The Tribunal made two rulings on the meaning of this phrase. First, it held that the "usual trade terms" to be considered are not those that are usual between the specific parties, but those that are usual from the perspective of suppliers and customers generally in the relevant market, at roughly the time when the respondents refused to supply to the applicant.

Second, s. 75(4) states that "trade terms" means "terms in respect of payment, units of purchase and reasonable technical and servicing requirements." The Tribunal clarified that "terms in respect of payment" means not only repayment terms such as credit and grace periods, but also the actual price paid for the product.

"Ample Supply": The Tribunal considered the meaning of "ample" in contrast to "adequate" and found that an "ample" supply "means more than a sufficient or adequate supply". It means supply available "in abundance or to the point that it is considered to be excessive." A product is in "ample supply" when "its availability is not in issue when a supplier considers whether to develop its business by seeking new customers and/or new distribution channels". A product is not in ample supply when limits on supply (e.g., the chicken quota system in place in this case) inhibit suppliers from growing or changing the nature of their business, or when they are forced to ration supply between existing and potential new customers.

"Adverse Effect on Competition": The Tribunal agreed with and adopted the approach from the B-Filer case to the meaning of "adverse effect on competition." According to this approach, the analytical process to be used in determining if the refusal has had an "adverse effect" on competition is the same as that used in assessing whether there has been a "substantial lessening or prevention of competition," which is mentioned elsewhere in the Act. An "adverse effect" is simply smaller than a "substantial lessening or prevention of competition." This means that, "the remaining market participants must be placed in a position, as result of the refusal, of created, enhanced or preserved market power."

The Tribunal's conclusions

The Applicant succeeded on the first element of the test because the marketing board/quota system would have precluded it from obtaining chickens from other sources without paying a substantial premium, and this would have a substantial negative effect on its business. (Quantitative details of the effects on Nadeau are confidential, but subsequent to the ruling Nadeau announced that it would be cutting 175 jobs at the plant, which is roughly half of its workforce.)

The Applicant had argued that the quota system, which limited the overall supply of chickens, satisfied the requirement that "insufficient competition" be the reason for its inability to obtain supply on usual trade terms. It failed on this element of the case. The Tribunal found that, even though the respondents accounted for 75% of the available supply in the market, there was no evidence of collusion among them. Moreover, the remaining 25% of the available supply in the market was comprised of several different producers, all of whom were prepared to sell chickens to the highest bidder - which in the supply-managed context meant at a substantial premium. Perhaps somewhat cryptically, but understandable in light of the Tribunal's ultimate ruling in the case, the Tribunal found that the quota system - and not insufficient competition - was the reason for Nadeau's inability to obtain supply.

The Applicant succeeded on the third element because it easily established that it had always met, and remained willing and able to meet, the usual trade terms (including paying prices at or near prevailing levels).

The Applicant failed on the fourth element because the Tribunal found that chickens were not in "ample supply". The quota system restricts the ability of chicken suppliers to meet new demands, and prevents chickens from being available on a timely basis to individuals wishing to expand or develop their businesses. To rule otherwise, the Tribunal noted, would imply that in a supply-managed industry, suppliers would be precluded from changing customers or from vertically integrating - as the principal respondent in this case had done.

The Applicant also failed on the fifth element because its evidence did not establish an adverse effect on competition. That is, it failed to establish through economic evidence that the refusal to supply Nadeau would create, enhance or reinforce market power among chicken processors in the relevant market. In reaching its decision on this element, the Tribunal considered indicators of market power among chicken processors (market share and market concentration, barriers to entry, and impact on prices), as well as the effect of the refusal on rival processors' costs, quality and variety of the product, possible foreclosure of supply to other processors in the market, and possible elimination of an efficient processor.

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

Jeffrey Brown and Alexandra Stockwell

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

Background

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

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

Laboratoires Servier v. Apotex Inc.

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

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

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

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

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

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



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

 

Appeal underway in travel industry misleading advertising case

Kim D.G. Alexander-Cook

The parties in Maritime Travel Inc. v. Go Travel Direct.com Inc.,1 a misleading advertising private action decided earlier this year, have recently filed their initial appeal and cross-appeal submissions.2

At trial, Maritime Travel, an established Canadian east-coast travel agency, alleged that upstart tour operator Go Travel Direct.com Inc. ran materially misleading newspaper advertisements. Maritime Travel claimed damages based on section 36 of the Competition Act, which provides a civil remedy for damages suffered as a result of a breach of a criminal provision of the Act. In this case, Maritime Travel alleged that Go Travel had knowingly or recklessly made representations to the public that were false or misleading in a material respect, contrary to section 52 of the Act. Developments in the law around sections 36 and 52 of the Act are important, because these sections provide the only basis for private damages for misleading advertising under the Act.

Go Travel was found liable at trial for one price comparison ad. Go Travel had lowered its price on a travel package for up to a four-day period and had advertised on one of those days both a price comparison with the Maritime Travel posted price on the same package, and a claim that ". Go Travel offers vacations for less by eliminating the travel agent middleman .".  There was no question that the posted price of Maritime Travel had been higher than the advertised price of Go Travel during the period, and Go Travel had made it clear that the price comparison was made only for a particular date (albeit in small print). But the evidence also showed that, at some point prior to advertising, Go Travel had become aware that Maritime Travel agents had the discretion to match Go Travel's prices.

The trial judge was not prepared to conclude that the ad was false, because the single-day price comparison was not incorrect as regards posted prices and because it was not clear that Maritime Travel always matched Go Travel prices. However, in the judge's view, the ad was misleading because it left the reader with the "overall impression" that Maritime Travel was always more expensive that Go Travel Direct, because commissions increased the Maritime Travel package price. The judge also concluded that Go Travel had "knowingly" created the misleading impression, due to its prior knowledge of discretionary price matching by its competitor.

In its appeal, Go Travel argues that the trial judge erred in finding that the overall impression was misleading when the specific price comparison was technically correct.  It further argues that even if its ad was misleading, Go Travel did not make the misrepresentation "knowingly or recklessly," and also that Maritime Travel did not prove any damages.

Of particular importance for Canadian jurisprudence will be the appeal court's determination as to whether Go Travel knowingly created a false overall impression, apparently without direct evidence of actual intent in this regard.

The question of just what the plaintiff must show in terms of damages is also a significant question in this case. In connection with an ad that ran for a single day, the trial judge was willing to award estimated lost profits for a period of weeks, based on an estimate of lost sales which was itself based on a year-over-year comparison of broad market data.

If the trial judge's decision is upheld on appeal, it could establish a relatively low threshold for plaintiffs to obtain significant damages in respect of misleading advertising under the Competition Act.


12008 NSSC 163

2Nova Scotia Court of Appeal, 2008, C.A. No. 297729.

3The Competition Act also contains civil prohibitions against misleading advertising, but private parties can only sue for damages incurred as a result of allegedly criminal violations of the Act.  Unless the misrepresentations are made knowingly or recklessly, therefore, private parties harmed by a competitor's misleading advertising have no access to damages.

SCC divided on key issues of copyright law and policy: Grey marketer prevails

Justine Whitehead, D. Jeffrey Brown

On July 26, 2007, the Supreme Court of Canada (SCC) issued its decision in the case of Kraft Canada Inc. v. Euro Excellence Inc. The SCC allowed the appeal of Euro Excellence, thereby disallowing Kraft Canada's claim of secondary infringement of copyright against Euro Excellence.

While the SCC's decision to allow the appeal was made by a margin of seven to two, a deeply divided SCC produced four sets of reasons in reversing the decisions of both the Federal Court of Appeal (2005 FCA 427) and Federal Court (2004 FC 652). The decision raises interesting questions about the interface of intellectual property and competition law, in particular the extent to which copyright law can and should be used to limit competition from grey-market imports.

Background

The case arose as an attempt to prevent grey market activity in CÔTE D'OR and TOBLERONE chocolate. In this case, Euro Excellence had purchased genuine CÔTE D'OR and TOBLERONE chocolate outside of Canada, and then imported into Canada and sold the chocolate, against the wishes of Kraft Canada, which was the exclusive Canadian distributor of the CÔTE D'OR and TOBLERONE products.

To address the grey marketing, Kraft Foods Belgium S.A. (Kraft Belgium) and Kraft Foods Schweiz AG (Kraft Switzerland), the producers of CÔTE D'OR and TOBLERONE chocolates, respectively, registered copyrights in Canada in the artistic category covering various aspects of the brands' packaging. Two exclusive licence agreements were registered the same day, granting Kraft Canada the exclusive right to produce, reproduce, and adapt the copyrighted material for the purpose of manufacturing, distributing or selling the products in Canada.

Relying on these copyrights, Kraft Canada asked Euro Excellence to cease and desist from distributing the grey market products in Canada. Euro Excellence refused, which led to Kraft's lawsuit.

The Reasoning of the Court

The principal reasons for judgment were written by Rothstein J. (Binnie J. and Deschamps J. concurring), with a very brief concurring judgment written by Fish J. As discussed in greater detail below, Bastarache J. (writing for himself, Charron J. and LeBel J.), concurred in the result, but did so using an approach that differed markedly from that of Rothstein J.

In the view of Rothstein J., the case turned on a straightforward application of the provisions governing secondary infringement, which are set out in s. 27(2)(e)1 of the Copyright Act. Rothstein held that the purpose of that provision was to ensure that Canadian copyright holders receive their "just rewards," even where they do not hold the copyright abroad. The statute protects Canadian copyright holders against parallel importation by deeming, in certain circumstances, that there is an infringement of copyright in Canada even where the imported works did not infringe copyright laws in the country in which they were made. Without this protection, a foreign copyright holder who could cheaply manufacture the relevant work abroad could flood the Canadian market with the work, thereby significantly devaluing the Canadian copyrights.

However, for Kraft Canada to succeed in its claim for secondary infringement, it had to show that Euro Excellence imported works that would have infringed copyright if they had been made in Canada by the persons who actually made them. In the present case, it was the copyright owners (Kraft Belgium and Kraft Switzerland) that had made the works which were subsequently imported into Canada by Euro. It was therefore necessary to establish that Kraft Belgium and Kraft Switzerland (which were the licensors/owners of the copyright in the chocolate-bar logos) would have infringed the copyrights of their licensee (Kraft Canada), if the chocolate-bar wrappers had been made by Kraft Belgium and Kraft Switzerland in Canada.

Rothstein J. held that Kraft Canada could not succeed in its claim for secondary infringement because it was impossible for the owner of a Canadian copyright (even though it had contractually agreed not to exercise that right) to infringe its own copyright. Although Kraft Canada, as an exclusive licensee, has a property interest in the copyright that enables it to sue third parties for infringement, the Kraft parent companies retain a residual ownership interest in the copyright that prevents an exclusive licensee from suing them for infringement. Thus, even if Kraft Belgium or Kraft Switzerland had violated the terms of its exclusive licensing agreement with Kraft Canada, and produced the chocolate-bar wrappers in Canada, Kraft Canada's recourse against the Kraft parent companies could not include an action for copyright infringement: Kraft Canada's only remedies would lie in an action for breach of contract.

Fish J. agreed with the reasons of Justice Rothstein, but drafted his own brief concurring reasons expressing (without deciding) "grave doubt whether the law governing the protection of intellectual property rights in Canada can be transformed [in the way that Kraft Canada urged] into an instrument of trade control not contemplated by the Copyright Act."

The reasons of Bastarache J. share little with the reasons of Rothstein J. except concurrence in respect of the disposition of the appeal. Bastarache J. expands on Fish J.'s "grave doubt" about the use of intellectual property rights as an instrument of trade control. Bastarache J. held that the Copyright Act should not be interpreted as protecting all economic benefits from all types of labour, and, in particular, the protection offered by copyright cannot be leveraged to include economic interests that are only tangentially related to the copyrighted work.

Accordingly, Bastarache J. refused to find that the sale of a chocolate bar with a copyrighted logo on its wrapper is equivalent to the sale of that copyrighted work. "Simply put, . [t]he work, qua work, is merely incidental to the consumer good, and thus the sale of the latter cannot be said in any real sense to be a sale of the former. While it is true that a logo affixed to a package can play an essential role in the sale of that package, that is the role of the logo as a trade-mark, not as a copyright."

While recognizing the difficulties in determining whether a work is merely incidental to a consumer good, Bastarache J. stated that his interpretation was necessary to protect the essential balance that lies at the heart of copyright law, and to ensure that copyright protection is not allowed to extend beyond the legitimate interests of copyright holders. Bastarache J. suggested some factors that could be useful in determining when a work is merely incidental to a consumer good, such as the nature of the product, the nature of the protected work and the relationship of the work to the product. In short, "if a reasonable consumer undertaking a commercial transaction does not think that the copyrighted work is what she is buying or dealing with, it is likely that the work is merely incidental to the consumer good."

On this reading of the Copyright Act, the sale of a chocolate bar with a copyrighted logo would not found a claim for secondary copyright infringement, as any transactions related to the chocolate bar would not be considered to be transactions in respect of the copyrighted work. Therefore, Kraft's claim for secondary infringement fails, regardless of whether or not an exclusive licensee has standing to sue the owner/licensor for copyright infringement. In obiter, however, Bastarache J. expressed his opinion that the language of the Copyright Act made it perfectly clear that an exclusive licensee given the sole and exclusive right to a copyright can enforce such rights against the owner in a claim of copyright infringement, rather than simply as a claim for breach of contract.

The differences in reasoning between the two main judgments allowing the appeal are all the more interesting because both Rothstein J. and Bastarache J. claim to be adopting the same approach to statutory interpretation, namely that "the words of an Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament".

Despite starting from the same principle of statutory interpretation, the two end up in very different places. Rothstein J. argues that Bastarache J. has substituted his own policy preference for that of Parliament. For Rothstein J., once every party admitted that the logos resulted from the exercise of skill and judgment, and are therefore legitimate subjects of copyright, then limits to the protection of copyright must be prescribed by Parliament. Noting that the incidental approach advocated by Bastarache J. is similar to the Australian approach, Rothstein J. also noted that the Australian approach was prescribed by statute, and not by judges.

Finally, Rothstein J. noted that the Copyright Act expressly permits a single work to be the subject of both copyright and trade-mark protection. Thus, as Parliament has authorized concurrent copyright and trade-mark protection for labels, until it provides otherwise, the courts are bound to conclude that a logo on a chocolate bar wrapper can receive concurrent trade-mark and copyright protection.

The dissenting reasons of McLachlin C.J. and Abella J. were delivered by Abella J. The dissent clearly identified the two main issues before the Court as being (1) whether a copyrighted work, where it is printed on the wrapper of a consumer product, is being sold or distributed; and (2) whether an exclusive licensee in Canada is afforded protection, by the Copyright Act, where the infringing material is produced by the owner/licensor of the copyright.

On the first issue, Abella J. agreed with Rothstein J. that there is nothing in the Act to endorse a restrictive definition of the word "sell." "When a product is sold, title to its wrapper is also transferred to the purchaser. The Act is indifferent as to whether the sale of the wrapper is important to the consumer." Abella J. expressed her discomfort with inviting a case-by-case judicial exploration of whether a logo is incidental to a product or not, and agreed with Rothstein J. that there is no scope for a judicially created limit to the protection of a copyright holder based on what might or might not be a legitimate economic interest.

However, on the question of whether an exclusive licensee can claim protection against secondary infringement when the copyrighted work was produced by the owner/licensor, she disagrees with Rothstein J., noting "an exclusive license which would not prevent others, including the owner-licensor, from performing the acts addressed in the licensing agreement, would no longer be exclusive. It would also render meaningless the statutory definition found in s. 2.7 of the Copyright Act of an exclusive licensee as the holder of rights "to the exclusion of all others including the copyright owner."

It is interesting to note that it appears that Kraft had actually managed to persuade a majority of the Supreme Court justices both that the Copyright Act could support a claim for infringement in relation to the sale of chocolate bars that have a copyrighted logo on its wrapper, and that an exclusive licensee can sue the owner of the copyright for copyright infringement. Yet it still lost the case because it could not get the same majority of judges aligned on each of the issues.

At the Intersection of Intellectual Property and Competition Laws

The significant splits in reasoning in this case (and the strange alignment of reasoning on the two key issues) make it difficult to clearly characterize the state of the law following this decision. Nevertheless, the case is interesting for the fact that it is the second case in recent years in which the SCC discussed the scope of intellectual property protection, and in particular the extension of intellectual property rights beyond their statutory limit to allegedly control market behaviour, in each case without reference to the Competition Act or the principles that underlie its application.

In November 2005, the SCC held in Kirkbi AG v. Ritvik Holdings Inc. (2005 SCC 65) that the maker of LEGO brand interlocking bricks could not use "the law of passing off and of trade-marks . to perpetuate monopoly rights enjoyed under now-expired patents." With its LEGO patents expired, and faced with competition from new entrants with "similar if not identical products," including Mega Bloks Inc. (Mega Bloks, formerly Ritvik Holdings Inc.), Kirkbi AG (Kirkbi) had sought to prevent competition from third parties selling similar bricks by asserting trade-mark rights over the pattern of studs on the bricks. Having failed to succeed in registering such trade-mark rights in Canada, it asserted unregistered rights, raising the question as to whether the sale by Mega Bloks of its competing product caused confusion with Kirkbi's unregistered mark.

In framing the issue, LeBel J., writing for the Court, warned of the risk that "the search [by intellectual property rights holders] for continuing protection of what they view as their rightful property" could lead to "discarding basic and necessary distinctions between different forms of intellectual property and their legal and economic functions." While recognizing that "[t]he operation of the market relies extensively on brands" and that the "[t]he goodwill associated with [brands] is considered to be a most valuable form of property," LeBel J. stated that "a mark must not be confused with the product - it is something else, a symbol of a connection between a source of a product and the product itself." As applied to trade-mark and patent law, the "basic and necessary" distinction is safeguarded by the "doctrine of functionality," the root of which LeBel J. described as "a concern to avoid overextending monopoly rights on the products themselves and impeding competition, in respect of wares sharing the same technical characteristics."

While the specific issues before the Court in the Kraft case differed from those in Kirkbi, common to both cases was an attempt to use intellectual property rights to protect against competition in a manner that allegedly exceeded the proper limits of the intellectual property in question. In Kirkbi, the Court as a whole concluded that Kirkbi's attempted use of trade-mark law did in fact exceed these limits. Only a minority of the Court took a similar view in Kraft, led by Bastarache J. (with LeBel and Charron JJ concurring), whose finding that the "incidental presence of . copyrighted works on the wrappers of chocolate bars does not bring the chocolate bars within the protections offered by the Copyright Act" would appear to stem from the same desire to protect the "basic and necessary distinction" between different forms of intellectual property rights as was expressed by the Court in Kirkbi. "If trade-mark law does not protect market share in a particular situation," Bastarache J. noted, "the law of copyright should not be used to provide that protection, if that requires contorting copyright outside its normal sphere of operation. The protection offered by copyright cannot be leveraged to include protection of economic interests that are only tangentially related to the copyrighted work."

Notwithstanding the fact that both Kirkbi and Kraft involved allegations of using intellectual property for anti-competitive purposes, the Competition Act was pleaded in neither case and the Court made no reference in either case to the Competition Act or to competition law principles. To the extent that the issues before the Court are properly addressed within the narrow confines of the applicable intellectual property statutes, this is not - from a legal perspective - problematic. However, to the extent that the Court's approach to these statutes reflects, consciously or otherwise, an attempt to manage the intersection of intellectual property and competition laws, such an oversight could lead to inconsistencies insofar as a purely intellectual-property-based approach may lead to different results than would an analysis involving the application of competition law principles. As applied to the Kraft case, for example, a competition-law-based analysis of whether the requirement by Kraft that its exclusive licensees sell only in their respective territories ("market restriction" as defined in section 77 of the Competition Act) was substantially lessening or preventing competition would have included the definition of relevant product and geographic markets, and whether the conduct resulted in injury to competition within the relevant market for the chocolate bars, and not just injury to a single competitor. Attempts to "protect" competition that do not adhere to such a framework could have the unintentional result of impeding rather than protecting competition, for example by encouraging intra-brand competition without regard to possible adverse effects on incentives for inter-brand competition.


1Section 27(2)(e) provides: "It is an infringement of copyright for any person to (a) sell or rent out, (b) distribute to such an extent as to affect prejudicially the owner of the copyright, (c) by way of trade distribute, expose or offer for sale or rental, or exhibit to the public, (d) possess for the purpose of doing anything referred to in paragraphs (a) to (c), or (e) import into Canada for the purpose of doing anything referred to in paragraphs (a) to (c), a copy of a work.that the person knows or should have known infringes copyright or would infringe copyright if it had been made in Canada by the person who made it."

Canada and the EU: Continued Cooperation and Convergence?

An extract from The European Antitrust Review 2008, a Global Competition Review special report.

Susan Hutton

Any discussion of the enforcement cooperation activities of the Canadian Competition Bureau (the Bureau) and the Directorate General for Competition of the European Commission (the Commission) must at this stage focus not only on communications between them but also on results. It would appear that after years of working together in both bilateral and multilateral fora on the development of competition law enforcement policies and practices, and of cooperationin the investigation of individual cases, different results are still sometimes apparent. That said, the ultimate goal of consistency and convergence among the agencies can only be achieved through continued such dialogue and cooperation, and overall the glass should likely still be viewed as half full.

The new "refusal to deal": Tribunal rejects GPAY claim

Susan M. Hutton and Ian Disend

Section 75 of the Competition Act addresses the reviewable practice of "refusal to deal." In June of 2002, the Act was amended so as to allow private parties to bring actions under this section before the Competition Tribunal (the Tribunal), where leave has been granted by the Tribunal pursuant to s. 103.1 of the Act. Prior to the 2002 amendments, s. 75(1) had required four conditions to be met before relief could be granted. Pursuant to those amendments, however, a fifth condition was added; namely, that the refusal to deal must have caused or be likely to cause an "adverse effect" on competition in a market.

The GPAY case: maiden voyage for the redesigned s. 75

The case B-Filer Inc. et al. v. The Bank of Nova Scotia1 (often known as the "GPAY case") represents the first time that the Tribunal has made a ruling under s. 75 since the 2002 amendments2. The applicants, B-Filer (which operated under the name GPAY) and NPAY Inc., were Alberta-based companies with the same controlling shareholder, carrying on a joint venture with UseMyBank Services, Inc. The business, known as UseMyBank Service, consisted of processing on-line payments, primarily on behalf of customers of Internet gaming sites. The applicants handled the interface with banks, while UseMyBank took care of marketing. When making a purchase from an on-line merchant that supported the service, a customer could choose UseMyBank Service as a payment option, and would then be transferred to the UseMyBank website, whereupon he or she would be asked to provide his or her confidential bank identification number and password. The applicants would then use that information to access the customer's account directly, and effect a transfer of funds to themselves, either directly as a bill payee-if granted bill-payee status by the customer's bank-or otherwise by way of an e-mail money transfer (EMT), and would then pay the merchant on behalf of the customer. ScotiaBank EMTs for small business accounts were limited to $1,000 sent or $10,000 received per day, however, making bill-payee status the more flexible method of processing. ScotiaBank terminated the applicants' bank accounts in 2005, denying it access to these two services.

GPAY and NPAY brought a private proceeding before the Tribunal in an effort to compel ScotiaBank to reinstate them as customers with bill-payee status, as well as to permit the receipt of unlimited EMT services. The Tribunal found that the applicants did not prove that the necessary conditions under s. 75 existed, and relief was therefore denied. Even had the conditions been met, the Tribunal noted that it would have exercised its discretion to deny the applicants' claim in this case, on the basis that there were reasonable business justifications for the termination.

The published reasons are somewhat fragmented due to edits made in order to preserve confidentiality, but a few interesting points can nevertheless be discerned. The five conditions for discretionary relief under s. 75(1) are as follows:

  1. a person is substantially affected in his business or is precluded from carrying on business due to his inability to obtain adequate supplies of a product anywhere in a market on usual trade terms,
  2. the person referred to in paragraph (a) is unable to obtain adequate supplies of the product because of insufficient competition among suppliers of the product in the market,
  3. the person referred to in paragraph (a) is willing and able to meet the usual trade terms of the supplier or suppliers of the product,
  4. the product is in ample supply, and
  5. the refusal to deal is having or is likely to have an adverse effect on competition in a market.

The Tribunal made no determinations under paragraphs (c) or (d), finding no need to do so in light of its other findings. Paragraph (b), which requires that insufficient competition be the reason for inadequate supply in a market, invited a relatively uncomplicated analysis as well. The Tribunal found that the bank had had objectively justifiable, non-competition-related business reasons for severing ties with its clients, given UseMyBank's requirement that customers disclose their electronic banking ID and password, and its inability to conform to money laundering and terrorism safeguards. The Tribunal's most interesting findings concern paragraphs (a) and (e).

Section 75(1)(a) - was rethinking required?

As noted above, paragraph 75(1)(a) requires an applicant to show that it has been "substantially affected" in its business, or precluded from carrying on that business due to the inability to obtain adequate supplies anywhere in a market on usual trade terms. In defining the market for the purposes of paragraph 75(1)(a), the Tribunal considered whether the 2002 addition of a requirement that the refusal have an adverse effect on competition should alter its approach to determining if the applicant was unable to obtain adequate supply "anywhere in a market" on usual trade terms. The Tribunal's approach to the latter had previously been outlined in Canada (Director of Investigation and Research) v. Chrysler Canada Ltd3. The potential need to reconsider stemmed from a pronouncement in Canada (Director of Investigation and Research) v. Xerox Canada Inc. that "the question of the 'relevant' market for the purposes of section 75 depends largely on the construction of section 75 and the identification of its objectives within the context of the Competition Act as a whole."4

Ultimately, the amendment was found not to have altered the central focus of paragraph 75(1)(a), meaning that the test from Chrysler still applies: products that can be substituted for each other without substantially affecting a person's business are in the same market. This test was also preferred over the hypothetical monopolist test (used by the Competition Bureau in merger control) since paragraph (a) deals with past events and a particular applicant, making hypotheticals less helpful. At the end of the day, however, the Tribunal found that the applicants' evidence fell short of proving that the refusal to deal had had a substantial effect on their business (among other things, it found that overall revenues had increased significantly since the termination), and therefore the requirements of paragraph 75(1)(a) were not met. The consideration of the appropriate market, accordingly, is obiter dictum but nonetheless instructive for future cases.

Cracking open the new paragraph 75(1)(e): "adverse effect on competition"

The GPAY case also marks the first consideration by the Tribunal of the new requirement in paragraph 75(1)(e) that the applicant demonstrate actual or likely harm to competition .

In light of the paragraph's close similarity to the requirement of a "substantial lessening or prevention of competition" in paragraph 79(1)(c) of the Act (abuse of dominance), the Tribunal considered case law surrounding the latter provision, especially Canada (Commissioner of Competition) v. Canada Pipe Corporation Ltd5. It determined that paragraph 75(1)(e) similarly "demands a relative and comparative assessment of the market with the refusal to deal and that same market without the refusal to deal,"6 with the difference that paragraph 75(1)(e) demands only an "adverse," rather than a "substantial" effect on competition. An adverse effect on the market due to a refusal to deal necessarily entails that "the remaining market participants must be placed in a position, as result [sic] of the refusal, of created, enhanced or preserved market power."7

In defining the market for this inquiry, the Tribunal stated unequivocally that the relevant market in assessing competitive impact was not the same as the market referred to in paragraphs (a) or (b) of the section. The relevant market for assessing competitive effect is "the market in which the applicants participate."8

In this case, however, the Tribunal determined that the boundaries of the market under paragraph (e) did not need to be determined. The Tribunal found that the only salient question in defining the market was whether Interac Online (a competing on-line debit service offered by Interac association members, including ScotiaBank) and UseMyBank were, or were likely to be, competing in the same market. Where the two services did not, and were not likely to compete, the refusal to deal could not have any competitive effect. At the end of the day the Tribunal's discussion on this point is academic, given its findings that the applicants had not been substantially affected in their business.

Experts for both parties were in agreement that the services of UseMyBank and Interac Online were not close substitutes for one another, due largely to a lack of overlap in their respective customer bases. Interac Online canvassed merchants with higher-value transactions (often exceeding $1,000 at a time), whereas there was no evidence of attempts by the applicants to attract these clients since losing bill-payee status at other financial institutions in December 2003. Meanwhile, UseMyBank's ability to process amounts less than $1,000 had remained unaffected. As a result of these findings, the Tribunal found that the applicants could not show that competition had been adversely affected in the market in which it participates.

The applicants have since filed a notice of appeal in the Federal Court.

FOOTNOTES

1 2006 Comp. Trib. 42.

2 Previous applications to bring a case under s. 75 had been refused or stayed. See National Capital News Canada v. Canada (Speaker of the House of Commons) (sub nom. National Capital News Canada v. Milliken) 23 C.P.R. (4th) 77, 2002 Comp. Trib. 41; Barcode Systems Inc. v. Symbol Technologies Canada ULC 29 C.P.R. (4th) 554, 2004 Comp. Trib. 1.

3 (1989), 27 C.P.R. (3d) 1, aff'd (1991) 38 C.P.R. (3d) 25; [I991] F.C.J. No. 943 (QL) (C.A.).

4 (1990), 33 C.P.R. (3d) 83, at page 103.

5 2006 FCA 233, leave to appeal to the Supreme Court of Canada requested.

6 B-Filer Inc. et al. v. The Bank of Nova Scotia., supra, at paragraph 197.

7 Ibid., at paragraph 208.

8 Ibid., at paragraph 213.

Federal Court refuses to intervene in Commissioner's decision to close case: Confirms Commissioner's independence

Jeffrey Brownand Alexandra Stockwell

The Federal Court of Canada has dismissed an application for judicial review of the Commissioner of Competition's decision to discontinue an inquiry into the distribution of motion pictures in Canada. The main issue was whether the Bureau was obliged to provide the complainants with a copy of an external economist's report, which had played a role in the Commissioner's decision to discontinue the inquiry. The complainant claimed that the Bureau's refusal to provide a copy of the report was a breach of its duty to act fairly, and also prevented the applicant from filing a reply to the report, in violation of its right to hear and respond to the case against it.

The Federal Court considered whether the Commissioner's decision to discontinue an inquiry is judicial or quasi-judicial in nature, or purely "administrative" (and thus less amenable to court interference). Based on the facts that the Competition Act does not provide for a hearing, the decision does not affect complainant rights or obligations, and the proceeding is not an adversarial one, the court concluded that the Commissioner's decision is an administrative act. The court referred to the Supreme Court's decision in Baker v. Canada (MCI) [1999] 2 S.C.R. 817 for the guidelines for analysing such discretionary decisions and held that "courts must defer to discretionary decisions in the absence of bad faith on the part of decision-makers, the exercise of discretion for an improper purpose, or the use of irrelevant considerations."

The Court held that there was no evidence of bad faith or the use of irrelevant considerations, and further held that the Bureau was under no obligation to provide a copy of the external economist's report to the complainants. It was sufficient that the essential points and conclusions of the economist's report were contained in the Commissioner's report, which was provided to the complainant. The court pointed out that the complainant was invited to reply to the Commissioner's report, and the applicant did not have a valid reason for not taking that opportunity, since it had no right to more information than what the Commissioner had already disclosed. This decision confirms the Commissioner's very broad discretion in conducting and discontinuing inquiries, and the high threshold for judicial intervention in the Commissioner's decisions in that regard.

New Economy Price Predation Appeal is Dismissed

Culhane v. ATP Aero Training Products
Shawn C.D. Neylan

On April 11, 2005 the Federal Court of Appeal dismissed the appeal in Culhane v. ATP Aero Training Products. The case involved alleged predatory pricing in circumstances in which examination guides, formerly sold in a paper format, were made available at no charge on the Internet as a marketing tool. The trial judge had found that such activities amounted to selling a product at an unreasonably low price, but also found the plaintiff could not prove that it had been harmed by this activity. The Court of Appeal found that the trial judge had not made any palpable or overriding error in finding that proof of loss or damage resulting from the alleged predatory conduct was not made out. It therefore dismissed the appeal on that basis. Consequently, the Federal Court of Appeal did not need to address the issue of whether making the examination guides available on-line at no charge amounted to selling the guides at an unreasonably low price within the meaning of the criminal provision in the Competition Act concerning predatory pricing. Stikeman Elliott was co-counsel for the respondent on the appeal.

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

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

The Decision

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

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

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

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

The Decision Creates Uncertainty Over the IPEGs

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

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

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

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

Recent Competition Tribunal Decisions Muddy the Leave Test for Private Access Applications

Kevin Rushton

On July 13 and August 4, 2004, the Competition Tribunal granted leave to Robinson Motorcycle Limited (Robinson) and Quinlan's of Huntsville Inc. (Quinlans) to bring applications against Fred Deeley Imports Ltd. (FDI) under the refusal-to-deal provisions of the Competition Act1. The two decisions bring to four the number of leave applications granted to private parties since amendments to the Act in June of 2002. Unfortunately, these recent decisions appear to cloud the legal and evidentiary thresholds that will be applied by the Tribunal before granting leave.

As noted in the March 2004 edition of The Competitor, section 103.1 of the Act allows private parties to apply directly to the Tribunal to address alleged breaches of sections 75 (refusal to deal) and 77 (exclusive dealing, tied selling and market restriction). Obtaining leave of the Tribunal is a prerequisite to bringing such applications. To date, a total of nine applications for leave have been filed. Of these, the first was denied, four have been granted and the remaining four await decisions by the Tribunal.

Both recent cases involve the alleged refusal by FDI, the exclusive Canadian distributor of Harley-Davidson (H-D) motorcycles, parts and accessories, to supply Quinlans and Robinson, two Ontario-based motorcycle dealers, with H-D products. The dealers had obtained H-D products for several years pursuant to successive dealer agreements entered into with FDI. However, in December of 2003 and January of 2004, FDI informed Quinlans and Robinson that it would not offer an extension to their agreements. The dealers alleged that FDI's refusal to deal would force them out of business, adversely affecting competition in their markets.

The Legal Test

The Tribunal found that the Dealers had satisfied the requirements for leave, as set out in subsection 103.1(7) of the Act. National Capital News v. Milliken2 was the first case to consider the leave threshold. Dawson J. held that subsection 103.1(7) creates a two-part test, both parts of which must be satisfied for leave to be granted. Based on the wording of the statute, the Tribunal must have "reason to believe" that (1) the applicant is "directly and substantially affected" in its business by the alleged practice and (2) the practice "could be subject to an order" under section 75. Under part two, Dawson J. held that all five paragraphs of subsection 75(1) must be satisfied, the most notable of which is that the alleged refusal to deal "is having or is likely to have an adverse effect on competition in a market".

Two decisions by Lemieux J. subsequent to National Capital News adopted a lower threshold for granting leave. In Barcode Systems v. Symbol Technologies3, the Tribunal held that the five paragraphs of subsection 75(1) need not be satisfied in order for leave to be granted under section 103.1:

As I read the Act, adverse effect on competition in a market is a necessary element to the Tribunal finding a breach of section 75 and a necessary condition in order that the Tribunal make a remedial order under that section. It is not, however, part of the test for the Tribunal's granting leave or not.

What the Tribunal must have reason to believe is that Barcode is directly and substantially affected in its business by Symbol's refusal to sell. The Tribunal is not required to have reason to believe that Symbol's refusal to deal has or is likely to have an adverse effect on competition in a market at this stage4.

Lemieux J. cited this conclusion with approval in Allan Morgan and Sons v. La-Z-Boy5.

Unfortunately, the Tribunal's single-page decisions in Quinlans and Robinson do not discuss the legal test to be applied on leave applications. However, the decisions are structured to address each of the five paragraphs in subsection 75(1) of the Act, and state that the Tribunal could conclude that the elimination of the Dealers "is likely to have an adverse effect on competition. " The decisions thus appear to diverge from the less onerous leave test adopted in Barcode and La-Z-Boy, instead favouring the two-part test of National Capital News.

The Evidentiary Threshold

In National Capital News, the Tribunal held that for it to have "reason to believe" under section 103.1, the applicant must provide "sufficient credible evidence to give rise to a bona fide belief" that it is directly and substantially affected in its business by a practice that could be subject to an order under section 75 or 77. The Tribunal in Barcode explained that evidence advanced will be sufficient if there is a "reasonable possibility" of a direct and substantial effect. A "reasonable possibility" is a lower threshold than a balance of probabilities, but Lemieux J. held that the evidence must show more than a "mere possibility" of the required effect.

The Tribunal in Barcode further explained that on a leave application, its function is limited to screening the evidence to decide on its sufficiency. More particularly, Lemieux J. held that it is not the Tribunal's function "to make credibility findings based on affidavits which have not been cross-examined." However, the Tribunal did note that situations may arise "where it can be demonstrated that an applicant's evidence is simply not credible without engaging the Tribunal in weighing contested statements."

In granting the leave applications in Quinlans and Robinson, the Tribunal was clearly of the view that sufficient credible evidence had been advanced. It would have been useful, however, for the Tribunal to address arguments by FDI that Quinlans' evidence of substantial effect was not credible on its face, because it failed to include financial statements to substantiate its allegation that H-D sales constituted exactly 64.9999% of its total sales for each of five successive years.

Conclusion

After five Tribunal decisions on section 103.1 leave applications, the legal and evidentiary thresholds that will be applied by the Tribunal before granting leave remain uncertain. This uncertainty should be resolved by the Federal Court of Appeal, as the Tribunal's decisions granting leave in Quinlans, Robinson, La-Z-Boy and Barcode have all been appealed.

FOOTNOTES

[1] Robinson Motorcycle Limited v. Fred Deeley Imports Ltd., 2004 Comp. Trib. 13, and Quinlan's of Huntsville Inc. v. Fred Deeley Imports Ltd., 2004 Comp. Trib. 15

[2] The National Capital News Canada v. The Honourable Peter Milliken, M.P., 2002 Comp. Trib. 41.

[3] Barcode Systems Inc. v. Symbol Technologies Canada ULC, 2004 Comp. Trib. 1.

[4] Barcode, Reasons and Order Regarding Application for Leave to Make an Application Under Section 75 of the Competition Act, dated January 15, 2004, at paras. 10 and 8.

[5] Allan Morgan and Sons Ltd. v. La-Z-Boy Canada Ltd., 2004 Comp. Trib. 4, Reasons and Order Regarding Application for Leave to Make an Application Under Section 75 of the Competition Act, dated February 5, 2004, at para. 14.

IMS Health: A Review of European and Canadian Approaches to the Interface of Competition and Intellectual Property Law

On April 29, 2004, the European Court of Justice (the ECJ) provided guidance on when, under European law, a company could be considered to be abusing its dominant position when it refuses to grant an intellectual property (IP) licence. This article will review the ECJ's decision in IMS Health GmbH & Co. OHG v. NDC Health GmbH & Co. KG, and then consider whether Canadian competition law can be used to compel an IP owner to license its IP to a third party.

The IMS Health case concerns the rights to IMS Health's proprietary system for collecting and distributing drug sales data. In 1988, an IMS Health director left the company to establish a competing business, which eventually adopted a new database structure resembling that used by IMS Health.

A German court prohibited the competitor from using the IMS Health structure, which the court found was a database protected by copyright. However, the German court also noted that IMS Health would not be permitted to refuse the competitor a licence to use the database structure if such a refusal constituted an abuse of a dominant position under European law. Accordingly, the German court referred several questions to the ECJ regarding the circumstances under which such behaviour could be considered an abuse of a dominant position.

In considering the interface between IP and competition laws, the ECJ started from the premise that a refusal of a licence cannot, in itself, constitute an abuse of a dominant position, except in "exceptional circumstances." Such exceptional circumstances would arise where: (1) the requesting firm intends to offer a product that is not offered by the copyright owner and for which there is potential consumer demand; (2) the refusal to grant the licence is not objectively justifiable; and (3) the refusal would reserve the relevant market to the copyright owner by eliminating all competition in that market.

The ECJ started its analysis from the premise that the mere refusal to license IP generally cannot in itself constitute an abuse of a dominant position. A similar starting point exists in Canadian law, but it does so in a unique legislative context. Under the Canadian Competition Act, acts engaged in pursuant to the exercise of statutory IP rights are not anti-competitive for purposes of the abuse of dominance provision (see ss. 79(5)). Section 32, however, deals specifically with the use of IP rights so as to prevent or lessen competition unduly. Upon application by the Attorney-General, the Federal Court can order a variety of relief, including compulsory licences, expungement, etc.

Canada's Competition Bureau (the Bureau) has addressed the distinction in its Intellectual Property Enforcement Guidelines (IPEGs). The IPEGs state that the owner's right to decide to use (or not to use) the IP and the owner's right to unilaterally exclude others from using the IP are considered to be mere exercises of an IP right. Thus, refusal to license IP is part of the "mere exercise" of an IP right, and is beyond the scope of the general provisions of the Competition Act, including abuse of dominance, "no matter to what degree competition is affected."

In contrast, s.32 may apply even where conduct is limited to the mere exercise of an IP right, but will be used only in certain narrowly defined circumstances. Interestingly, the exception crafted by the ECJ in IMS Health is not dissimilar to the analytical framework used by the Bureau to apply s.32. The Bureau regards enforcement under s.32 as being something that will be required only in "certain narrowly defined circumstances," based on criteria that will be satisfied "only in very rare circumstances."

In determining whether it should recommend enforcement action under s.32, the Bureau undertakes a two-part analysis. First, it determines whether the refusal has adversely affected competition to a substantial degree in a relevant market that is "different or significantly larger than the subject matter of the IP or the products which result directly from the exercise of the IP." According to the IPEGs, such a situation will arise only if (1) the IP owner is dominant in the relevant market; and (2) the IP is an essential input or resource for firms participating in the relevant market, such that the refusal prevents other firms from competing in the relevant market. Second, the Bureau will recommend enforcement action against the IP owner only if it is satisfied that such a remedy would not adversely alter the incentives to invest in research and development.

While s.32 of the Competition Act distinguishes Canadian competition law from its European counterpart, the ultimate analysis under the two regimes is not dissimilar. The first step of the Canadian analysis essentially addresses two of the ECJ's three criteria for finding that refusal of a license constitutes abuse. The ECJ's third requirement, that there be no objective justification for the refusal, has no specific counterpart in the Canadian approach. However, the Bureau's concern that a remedy not reduce the incentives to invest in research and development could serve this function - if, for example, the Bureau were to take the position that such incentives would only be adversely affected if s.32 were used against IP owners whose refusals were not justifiable on reasonable commercial grounds.

Private Actions: Federal Court Rejects Predatory Pricing Claim

The Federal Court of Canada, in Michael J. Culhane v. ATP Aero Training Products Inc., Reilly James Burke, recently rejected a private-action claim for damages under s.36 of the Competition Act in relation to alleged predatory pricing contrary to s.50(1)(c) of the Act. The alleged conduct involved the defendants making available, on-line and at no charge, certain Canadian aviation exam guides, which according to the plaintiff reduced sales of his competing publications.

In its analysis of the claim, the Court first determined that the defendants, by providing their publications at no cost, were nevertheless engaged in a policy of "selling" products. The Court also concluded that they were doing so at "unreasonably low prices," taking into consideration such factors as the discrepancy between the defendants' costs and the price charged, the "indefinite period" for which the defendants intended to make the publications available at no charge, the offensive (rather than defensive) nature of the price reduction and the absence of evidence that the "free giveaways" had increased sales of the defendants' other products (or would do so in the future). However, the Court was not satisfied that the defendants' conduct had the effect or tendency of substantially lessening competition or that they had intended such an effect or to eliminate the plaintiff as a competitor. With this essential element of the offence absent, the Court rejected the plaintiff's claim.

Torpharm Inc. v. Commissioner of Patents:A Revival of Section 65 of the Patent Act ?

Section 65 of the Patent Act allows Canada's federal Attorney General or "any person interested" to apply to the Commissioner of Patents, at any time after three years from the date a patent is granted, for a remedy in respect of an alleged abuse of a patent. The provision has been so little used in its history that it would be easy to forget about it. However, a recent decision of the Federal Court of Canada serves as a reminder that, so long as a provision remains on the books, it is possible that someone will come along and try to breathe life into it.

In Torpharm Inc. v. Commissioner of Patents, Torpharm made an application to the Commissioner of Patents under s.65 after Merck & Co. refused to grant it a licence to allow it to purchase bulk lisinopril for the purpose of manufacturing tablets in Canada for export to the United States. Without such a licence, this manufacture would have infringed certain Canadian patents owned by Merck, although the corresponding U.S. patents had expired. The Commissioner of Patents concluded that Torpharm's application failed to make a case for relief, and therefore refused to direct a response from Merck. Torpharm appealed to the Federal Court of Canada.

The Federal Court found in favour of Torpharm on most grounds, and remitted the matter back to the Commissioner of Patents for redetermination. Among the Court's numerous findings, two stand out. First, with respect to s.65(2) of the Patent Act, the Court accepted Torpharm's argument that Merck was not meeting, to an adequate extent, demand for bulk-form lisinopril in Canada, even though the only evidence before the Commissioner on this point concerned Torpharm's requirement of bulk-form lisinopril. As Merck pointed out, the Court's approach could result in a situation wherein "any time a licence for a patented article is requested of, and refused by, a patentee, an abuse of patent rights could be deemed to have occurred."

The second significant finding made by the Court was its rejection of Merck's contention, in response to an alleged abuse based on the "exercise of monopoly rights for no bona fide purpose," that the scope of abuses set out in s.65(2)(d) of the Patent Act is to be read in an exhaustive manner. As described by the Court, s.65(2)(d) provides that an abuse of patent rights is "deemed" to exist if "by reason of the refusal of the patentee to grant a licence or licences on reasonable terms, the trade or industry of Canada or the trade or industry of any person or class of persons trading in Canada, or the establishment of any new trade or industry in Canada, is prejudiced, and it is in the public interest that a licence or licences should be granted." According to the Court, s.65(2)(d) is a "deeming" provision, and therefore should be interpreted expansively rather than exhaustively. Nevertheless, the Court noted that there was "[l]ittle evidence of prejudice to Torpharm, or of the public interest affected by the refusal" on this particular ground. In light of the Commissioner's other errors, however, the Court remitted the matter back to the Commissioner of Patents for reconsideration.

Competition Tribunal grants its first leave for private application

Michael Mahoney

On January 15, 2004, the Competition Tribunal (the Tribunal) granted leave to Barcode Systems Inc. (Barcode) to bring an application against Symbol Technologies Canada ULC (Symbol) under the refusal-to-deal provisions of the Competition Act (the Act). The event is noteworthy, because it marks the first time the Tribunal has granted leave to a private party since the Act was changed to permit private applications in June 2002. The decision also provides some clarification regarding the test that will be applied by the Tribunal before granting leave.

Section 103.1 allows private parties to apply directly to the Tribunal to address matters regarding alleged breaches of sections 75 (refusal to deal) and 77 (exclusive dealing, tied selling and market restriction). The necessity of applying for leave is designed to prevent parties from bringing frivolous and vexatious litigation. The only previous application for leave was also brought under section 75 in National Capital News v. Milliken,1 but in that instance leave was denied.

Submissions of Barcode & Symbol
The test for granting leave was outlined by the Tribunal in National Capital News.
The Tribunal must be satisfied that it had "reason to believe" that:

(1) the applicant is directly and substantially affected in the applicant's business by a practice referred to in section 75 or 77 of the Act; and

(2) the alleged practice could be subject to an order under those sections.

The practice that was complained of in this case was Symbol's refusal to supply its barcode scanners to Barcode after Symbol terminated its ten-year supplier relationship with Barcode in March 2003. In its written submission, Barcode alleged that Symbol's refusal to deal caused a substantial loss of revenues, to the point where, if the losses continued, Barcode would be forced out of business. In fact, an interim receiver was appointed on December 19, 2003. Barcode claimed that 50% of its employees had already been laid off as a result of Symbol's actions, and that Symbol's behaviour inhibited its ability to fulfil its maintenance contracts.

In its responding submission, Symbol claimed that it had terminated its relationship with Barcode because, among other things, Barcode had breached the usual trade terms of the contract. Furthermore, Symbol alleged that Barcode had used the Symbol trademark without authorization. Symbol also denied that it had substantially affected Barcode's business, and argued that Barcode's losses could be explained by other factors, including declining market conditions, increased competition from suppliers, exchange rate variations and Barcode's refusal to meet usual trade terms with its current suppliers.

The Tribunal's Analysis
The Tribunal found that Barcode had satisfied the requirements for leave. In its analysis, the Tribunal expanded upon the evidentiary threshold that was established in the National Capital News case. While the Tribunal must find an "adverse effect on competition in a market" before issuing a remedial order for a breach of section 75, this element is not part of the test used when deciding whether to grant leave. Rather, the Tribunal must simply have "reason to believe" that the applicant's business has been directly and substantially affected. This is a lower threshold than that set for evidence in the final application for an order.

The Tribunal went on to explain what is meant by the expression "reason to believe." In the context of the application, Barcode was required to "advance sufficient credible evidence supported by an affidavit to satisfy the Tribunal that there is a reasonable possibility that its business has been directly and substantially affected because of Symbol's refusal to deal" [emphasis added].

A "reasonable possibility" is a lower threshold than a balance of probabilities. However, the Tribunal noted that Barcode was required to show more than a "mere possibility that [its] business had been directly and substantially affected by Symbol" [emphasis added].

The Tribunal also explained the purpose of the leave process. In deciding whether to grant leave, the Tribunal performs a "screening function" by "simply deciding upon the sufficiency of the evidence advanced." However, it is not the function of the Tribunal to "make credibility findings based on affidavits which have not been cross-examined."

The Tribunal noted that in exceptional circumstances parties will be granted a right of reply in leave applications. Barcode had earlier been granted a limited right of reply. As a result, both parties sought to file additional material. However, the Tribunal stated that, in this case, such additional evidence was not required.

Significance
The Tribunal has apparently established a relatively low evidentiary threshold for the leave process under section 103.1. In its role as a gatekeeper, the Tribunal will take the evidence of the would-be applicant at face value, and its analysis will focus on whether the evidence reveals a "reasonable possibility" of an adverse effect on competition, not on the credibility of the evidence.

To date, the Tribunal has rendered two decisions regarding leave to private parties.2Both cases, National Capital News and Barcode's application for leave, involved section 75 of the Act. While the Tribunal's decisions in this regard are informative, it will also be useful to see how the test for leave is applied in matters involving section 77.

Finally, it should be noted that the remedy available to a private litigant under section 103.1 is the same as that available to the Commissioner: an order requiring resumption of supply. An action under section 36 is still the sole means of obtaining private damages under the Act, and such damages are not available for non-criminal behaviour under sections 75 and 77.

FOOTNOTES

1 2002 Comp. Trib. 41 (National Capital News).

2 Another application for leave involving section 75 was recently filed, though a decision has yet to be rendered. See Allan Morgan and Sons v. La-Z-Boy Canada Ltd. (CT-2003/009), filed November 26, 2003 (to be decided).