In addition to a high level of sustained enforcement activity, Canada 's competition regime continues to undergo a great deal of change and re-examination, including:
- the appointment of a new Commissioner of Competition (the "Commissioner");
- the introduction of legislation to amend the Competition Act (the "Act");
- a new public consultation process on efficiencies;
- the release of new Merger Enforcement Guidelines (the "Revised Merger Guidelines"); and
- a new cooperation arrangement between the United States and Canada on competition matters.
Background: The Legislative Scheme
The Act is federal legislation governing business conduct in Canada and is administered and enforced by the Competition Bureau (the "Bureau"), a federal investigative body headed by the Commissioner. The Act establishes (i) criminal offences and (ii) reviewable matters, which are civil in nature.
Criminal offences under the Act include price-fixing conspiracies, bid rigging, price discrimination, predatory pricing, certain misleading advertising and deceptive telemarketing practices, pyramid selling and price maintenance. These offences carry with them fines and/or imprisonment. The Bureau investigates and the Attorney General prosecutes criminal offences under the Act. Third-party civil actions are permitted where an injured party can demonstrate: (i) conduct contrary to a criminal offence provision under the Act or failure to comply with an order made under the Act; and (ii) that the injured party has suffered loss or damages. Increasingly, claims are the subject of class action proceedings, which substantially increase exposure to damages and legal expenses for conduct contrary to the criminal provisions of the Act.
Reviewable matters, such as mergers, abuse of dominance, tied selling, exclusive dealing and market restriction, are business practices that are not inherently illegal or improper. In some cases, however, reviewable matters may be found to be anti-competitive, and a specialized Competition Tribunal (the "Tribunal"), upon application by the Commissioner, may prevent a merger, order anti-competitive practices to cease or order certain structural or behavioural remedies. In addition, private parties now have the right to apply to the Tribunal in respect of certain practices, including refusals to deal, exclusive dealing, tied selling and market restriction. No damages are available before the Tribunal, and third parties are limited to injunctive relief.
Recent Developments
A New Commissioner of Competition
On January 12, 2004, a new Commissioner, Sheridan Scott, was appointed. Ms. Scott has a legal background in the telecommunications industry, both in government and in the private sector. The first six months of the new Commissioner's tenure were relatively quiet, with little in the way of policy signals. More recently, however, the government has introduced new legislation to amend the Act, and the Commissioner has released Revised Merger Guidelines as well as a number of other significant initiatives. The Revised Merger Guidelines suggest continued support for greater international cooperation with other competition law jurisdictions, particularly the U.S., as well as a desire to take stock of the current state of the law, to properly position competition policy alongside other regulatory regimes, and to assess previous amendment initiatives. The Commissioner has also made it clear in a presentation to the Senate that she supports the adoption of what was Bill C-249 (discussed below), a private member's bill that would have reduced the importance of efficiencies under Canadian merger law.
Proposed Amendments Debate and the Introduction of New Legislation
In June 2003 the Government of Canada released a discussion paper entitled Options for Amending the Competition Act : Fostering a Competitive Marketplace, which proposed significant changes to the Act. Shortly thereafter, interested parties were invited to comment on the following set of proposals:
• strengthening the civil provisions (such as abuse of domi-nance, tied selling, exclusive dealing, refusal to supply, etc.) with administrative monetary penalties ("AMPs"), private damage claims and restitution (in the case of misleading representations);
• creating a dual civil/criminal track regime for conspiracy, including the addition of a per se criminal provision for hardcore cartel conduct;
• decriminalizing predatory pricing, price discrimination and promotional allowances; and
• allowing for inquiries into the state of competition at the request of the Commissioner.
On April 8, 2004, the Public Policy Forum, an independent non-profit organization charged with steering the consultation process, released its final report summarizing the public comment on the proposed amendments. From the final report it is clear that there is very little consensus, except in the case of the proposal to decriminalize the pricing provisions, which has widespread support.
On November 2, 2004, the Canadian Minister of Industry tabled Bill C-19, which includes several of the amendments proposed in the June 2003 discussion paper. Bill C-19 received first reading the same day but has yet to be passed by the House of Commons. The key proposals include:
• introducing AMPs for abuse of dominant position of up to $10 million for first offences and $15 million for subsequent offences;
• increasing the AMPs for non-criminal deceptive market-ing practices up to $10 million for first offences and $15 million for subsequent offences in the case of corporations, and $750,000 for first offences and $1 million for subsequent offences in the case of individuals;
• expanding the power of the court to award restitution to consumers affected by false or misleading representations;
• decriminalizing price discrimination, geographic price dis-crimination, predatory pricing and promotional allowances and dealing with these types of conduct under the abuse of dominance provisions (with potential remedial relief including injunctive orders and AMPs); and
• repealing the provisions of the Act dealing with anti-com-petitive conduct by airlines.
Importantly, a number of controversial amendments that were recommended in the government's June 2003 discussion paper are not included in the proposed legislation. Specifically, Bill C-19 does not replace the current conspiracy provisions, which require market effects for conviction, with a per se offence. Bill C-19 also does not include a civil review process for strategic alliances between competitors or give the Commissioner the power to initiate inquiries into the state of competition in a particular industry or market. Further, the legislation does not propose amendments to the efficiencies defence applicable to mergers, the future of which is the subject of a government Consultation Paper entitled "Treatment of Efficiencies in the Competition Act " (the "Consultation Paper"), and a public consultation process (discussed below).
National Consultation on Efficiencies
On September 24, 2004, the Bureau launched a national consultation process on the role of efficiencies under the Competition Act , which included the issuance of a Consultation Paper. In respect of merger efficiencies, the Consultation Paper seeks input on the merits of various proposals, including:
• maintaining the status quo;
• maintaining the current efficiency defence, with the addition of an explicit exception that would prohibit the application of the defence when a merger creates a monopoly or near-monopoly;
• reviewing efficiencies as part of the overall assessment of a merger (factor approach);
• allowing an assessment, post-merger, of whether the predicted claims of efficiencies were achieved (merger outcomes); and
• allowing for the consideration of efficiencies in specialization agreements, joint ventures and strategic alliances.
The Bureau will conduct national consultations based on the Consultation Paper. The Commissioner will also consider the results of an international roundtable discussion that coincided with a meeting of the OECD in October 2004 and the findings of an advisory panel of experts with backgrounds in business and international trade. The final report will be delivered in April 2005.
The Consultation Paper includes consideration of a proposal very similar to Bill C-249. As noted above, Bill C-249, a private member's bill, had been passed by the House of Commons but was stalled and severely criticized before the Senate. It failed to win Senate approval and died when Parliament was prorogued on May 23, 2004. The government, however, will likely wait for the release of the final report in 2005 before proposing any changes to the merger efficiencies defence.
Revised Merger Enforcement Guidelines
On September 21, 2004, the Bureau released its highly anticipated Revised Merger Guidelines, which explain the Bureau's approach to analyzing mergers.
The Revised Merger Guidelines reflect the Bureau's case-handling experience and developments in jurisprudence and economic thinking since 1991. The Revised Merger Guidelines further suggest a substantial convergence with the 1992 U.S. merger guidelines and recently amended European guidelines, including new references to the potential use of the Herfindahl-Hirschman index ("HHI"), which is used in the U.S. in some aspects of merger analysis. Parties to multi-jurisdictional mergers should benefit from this move toward convergence to the extent that it signals a more consistent analytical approach across jurisdictions. The key changes in the Revised Merger Guidelines are highlighted below:
• Less Safety in Safe Harbours. The Revised Merger Guide-lines retain the same safe harbours: (i) unilateral exercise of market power-35%; and (ii) coordinated exercise of market power-four-firm concentration ratio of 65% or merged entity share of less than 10%. However, the 1991 merger guidelines provided that high market share or concentration is a "necessary condition" to finding that a merger is likely to prevent or lessen competition substantially. This qualification has been removed from the Revised Merger Guidelines providing less comfort regarding the safety of mergers below the safe harbours. The Revised Merger Guidelines also open the door to the use of HHI calculations, noting that, "the Bureau may examine changes in the HHI to observe the relative change in concentration before and after a merger." It is made clear, however, that HHI levels will not be used as a safe harbour threshold.
• Narrower Approach to Market Definition. The Revised Merger Guidelines now focus explicitly on demand-side substitution to define relevant markets. Supply-side responses are relevant only to determining the participants in, or potential entrants into, a market.
• Express Recognition of Countervailing Buyer Power. The relevance of the countervailing power of buyers to constrain the exercise of market power is now expressly recognized in the Revised Merger Guidelines. However, in a market characterized by price discrimination, countervailing buyer power may not be sufficient to prevent the exercise of market power.
• Non-price Effects. The 1991 merger guidelines primarily focus on the price effects of a merger. The Revised Merger Guidelines put an increased focus on non-price effects such as quality, service and choice.
• Greater Scrutiny of Possible Coordinated Effects. Since the adoption of the 1991 merger guidelines, the Bureau has tended to focus on the possibility that after a deal closes, the merged firm could lessen competition unilaterally. The Revised Merger Guidelines include an expanded discussion of "coordinated effects," which suggests that mergers in highly concentrated markets may receive greater Bureau scrutiny. Thus, issues may arise where a merger might reduce the competitive vigour in a market by, for example, removing or constraining a particularly aggressive competitor (e.g., by raising rivals' costs) or enabling the merged entity to coordinate its behaviour with that of its competitors. However, there are two necessary conditions for a merger to give rise to a substantial lessening or prevention of competition through coordinated effects: (i) market concentration; and (ii) barriers to entry.
• Less Certainty Regarding the Anti-competitive Threshold. The Revised Merger Guidelines clarify the Bureau's test for a substantial lessening of competition: the Bureau will evaluate whether the merger is likely to provide the merged entity (unilaterally or in coordination with others) with an ability to materially influence price. Generally speaking, the Bureau will consider a price increase to be "substantial" where: (i) the price of the relevant product(s) would likely be materially greater in a substantial part of the relevant market than it would be in the absence of the merger; and (ii) the material price increase is not likely to be eliminated by existing or new competitors within two years. The 1991 merger guidelines were widely interpreted to suggest that the Bureau applied a numerical threshold of a 5% price increase as material. The Revised Merger Guidelines clearly state that the Bureau does not apply such a numerical threshold, and looks only to market-specific factors that might have a constraining influence on price following the merger.
• Greater Scrutiny of Mergers That May Prevent Competition. The Revised Merger Guidelines include a more substantive discussion of the circumstances in which a merger may result in a prevention of competition. Several examples are cited, including the acquisition of an increasingly vigorous competitor or potential entrant, a pre-emptive acquisition and an acquisition that prevents the pro-competitive effects of new capacity.
• Efficiencies. The Revised Merger Guidelines reflect the law as laid down in the Superior Propane case. That case permits mergers, even if they are anti-competitive, where the net economic welfare of Canada is improved because the merger generates cost savings. Consistent with Superior Propane, the Revised Merger Guidelines do not require the merging parties to establish that the claimed efficiencies will be passed on to consumers; instead, the Revised Merger Guidelines allow a broad-based inquiry that endeavours to weigh all claimed efficiency gains against all alleged anti-competitive effects. The Revised Merger Guidelines also recognize dynamic efficiencies, which is a significant step forward relative to the static microeconomic approach employed in the prior merger guidelines. The key question, however, will be whether the Bureau will apply the efficiency defence in tough merger cases or whether it will refer such matters to the Tribunal for adjudication. The Revised Merger Guidelines are broad enough to permit the Bureau to apply the defence, but actual enforcement practice remains to be seen.
New Canada-U.S. Positive Comity Agreement
On October 5, 2004, the U.S. and Canada signed an agreement on the application of positive comity principles to the enforcement of their competition laws. Positive comity agreements allow competition law authorities in one country to request that the other country's competition agency investigate and take appropriate law enforcement action against anti-competitive conduct that adversely affects the interests of the country requesting the investigation and violates the laws of the country responding to the request. The new agreement supplements the 1995 agreement between Canada and the U.S., which sets out a framework for notification, coordination and cooperation on enforcement activities, exchange of information, avoidance of conflict and positive comity. The new agreement aims to reduce the likelihood of duplicate enforcement actions in cases where positive comity requests are made, but does not restrict the requesting country's ability to bring its own enforcement action where it believes doing so is necessary in order to protect consumers in its country. Notably, the new agreement does not apply to merger or cartel investigations. Finally, the agreement stipulates that confidential information may be shared only where the source of the information has consented.
Government Enforcement
The Bureau has continued to vigorously prosecute violations of the criminal provisions of the Act, focusing particularly on consumer protection cases. The Bureau remains active in the prosecution of international price-fixing cartels, resale price maintenance and deceptive marketing matters under both the criminal provisions (including telemarketing) and the civil ordinary selling price provisions. In a recent case, several individuals were imprisoned for deceptive marketing matters.
With respect to merger enforcement, the rail and forestry industry witnessed two mergers of competitive significance. In forestry, Canfor Corp. ("Canfor"), already the largest softwood lumber producer in Canada, acquired Slocan Forest Products Ltd. After a thorough review of the proposed transaction, the Bureau concluded it would likely result in a substantial lessening of competition in the Prince George area of British Columbia for log buying, lumber supply to re-manufacturers and the sale and supply of wood chips. On March 31, 2004, the Commissioner filed a consent agreement with the Tribunal after Canfor agreed to divest a sawmill. In the railway sector, the government of British Columbia announced that Canadian National Railway ("CN") was the successful bidder to operate BC Rail. The Bureau concluded that the transaction raised competition issues in two main areas: rail interline transportation of commodities between the BC Rail territory and various markets throughout North America, and rail transportation of grain from the Peace River area. On July 2, 2004, the Bureau filed a consent agreement with the Tribunal after CN agreed to numerous behavioural remedies with respect to freight rates, transit times, car allocation and service levels.
Private Applications
In June 2002, Bill C-23 came into force and amended the Act to allow a private complainant to bring an application to the Tribunal when that applicant's business is directly and substantially affected by the conduct of another party. Private access to the Tribunal is available for conduct reviewable under sections 75 (refusal to deal) and 77 (exclusive dealing, tied selling and market restriction). The Act does not currently permit private enforcement of the abuse of dominance or merger provisions, although a House of Commons standing committee has recommended extending private access to such cases.
The Tribunal has so far ruled on leave applications in a number of private cases, which have all been made pursuant to the section 75 refusal to deal provision. In Barcode, the Tribunal signalled a relatively low leave threshold, holding that the Tribunal need only have "reason to believe" that the applicant's business "may have been directly and substantially affected" by the actions of the respondent. In its most recent decision, however, the Tribunal denied leave to three Canadian pharmacies. In doing so the Tribunal stated that the "applicants must show sufficient credible evidence of a direct and substantial effect" on their business. To be credible the evidence must amount to more than mere projections, and to be substantial the effect on business must be significant. In Barcode, for example, the company was in receivership and 50% of the employees had been laid off because of the refusal. By contrast, the effect on sales of the three Canadian pharmacies was projected to be in the 10% to 20% range, and evidence supporting those projections was weak. The threshold test for leave, therefore, is highly contextual and may be higher than first anticipated.
Looking Ahead
Canadian competition laws have been on the books since 1889. They have been revised, studied and debated in depth by almost each new generation. In some respects they have changed significantly, and yet in others they have remained the same for 115 years. The appointment of a new Commissioner, the introduction of new legislation to amend the Act, the consultation process on efficiencies, new merger guidelines and a new cooperation agreement with the U.S. suggest that Canada is once again entering a period of change, study and debate. A constant tension under-girding the evolution of Canadian competition law is whether Canada should increase convergence with the laws of the U.S. and the EC, adopting their greater focus on consumer protection, or remain on its own path of attempting to achieve multiple goals, including the efficiency and adaptability of a much smaller, open and more geographically diverse Canadian economy.
Robert E. Kwinter • Tel: (416) 863-3283 • Fax: (416) 863-2653 • Email: robert.kwinter@blakes.com
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Brian A. Facey • Tel: (416) 863-4262 • Fax: (416) 863-2653 •Email: brian.facey@blakes.com
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