On February 25, 2013, the Federal Court of Appeal ("FCA") released the public version of its decision upholding the Competition Tribunal's order requiring Tervita (formerly known as CCS Corporation) to divest the Babkirk hazardous waste landfill site following its acquisition of Complete Environmental Inc. The case is the first fully contested proceeding under the merger provisions of the Competition Act in over a decade. A summary of the Competition Tribunal's earlier decision is available here.

The FCA considered whether the Tribunal was justified in finding that the merger resulted in a substantial prevention of competition and that the efficiencies claimed by Tervita were not greater than and would not offset the anticompetitive effects of the transaction. Among other things, the decision:

  • endorses the Tribunal's approach to determining whether the merger resulted in a substantial prevention of competition;

  • states that the proper timeframe to consider in determining whether a merger results in a substantial prevention of competition will generally be assessed in relation to the period of time required for a new entrant to enter into the market; and

  • clarifies that the proper methodology for applying the Act's efficiencies defense involves as objective an analysis as is reasonably possible, although this approach may still consider qualitative factors that cannot be quantified.

Background

Tervita, a waste management services company in Western Canada, owned and operated the only two secure landfills for hazardous waste in northeastern British Columbia when it acquired Complete in January 2011. A subsidiary of Complete owned the Babkirk site and a permit from the B.C. Ministry of the Environment to operate a secure landfill at that site, but at the time of the acquisition by Tervita Complete had not begun building a secure landfill at the site.

The Tervita/Complete transaction fell well below the pre-merger notification thresholds in the Act, but was nevertheless challenged by the Commissioner of Competition on the basis that it was likely to result in a substantial prevention of competition in the market for "the disposal of hazardous waste produced largely at oil and gas facilities in northeastern British Columbia". According to the Commissioner, the transaction prevented the entry of a "poised competitor" into the relevant market that would have lowered tipping fees for producers of hazardous waste.

Tervita argued that the merger did not prevent competition because, absent the sale to Tervita, the vendors would have used the Babkirk property for a different service of treating hazardous waste (bioremediation) that would not compete meaningfully with Tervita. As such, Tervita argued that the merger was pro-competitive because it added capacity to the relevant market more quickly than might otherwise occur. Additionally, Tervita asserted that the transaction gave rise to efficiencies that it claimed outweighed any anticompetitive effects of the merger.

The Tribunal found a likely substantial prevention of competition in the relevant market and rejected Tervita's argument that the efficiencies arising from the transaction would outweigh the anticompetitive effects.

The FCA's Decision

1) Prevention of Competition Analysis

In addressing the proper standard of review of the Tribunal's decision, the FCA noted that, in the context of merger analysis, the Tribunal is required to project into the future various events in order to ascertain their potential economic and commercial impacts. It added that this is "a daunting exercise steeped in economic theory and requiring a deep understanding of the economic and commercial factors at issue". As a result, the FCA found that it should defer to the Tribunal's findings on economic and commercial issues, including the inferences it draws from such evidence, provided that the conclusion is not unreasonable.

The FCA concluded that the Tribunal's finding satisfied this test since there was "abundant evidence submitted to the Tribunal" showing that the Babkirk landfill would have competed with Tervita's other secure landfills in northeastern British Columbia, whether operated by the vendors themselves or through sale to a third party operator.

2) Timeframe for Assessing Prevention of Competition

In assessing whether there is a substantial prevention of competition (as opposed a substantial lessening of competition, which is more commonly the basis for the Commissioner to challenge a merger), the Tribunal held that, among other things, it must determine whether the alleged new entry or increased competition to be prevented would likely occur within a "reasonable period of time".

The FCA accepted the Tribunal's approach and provided some guidance on how to assess what constitutes a "reasonable period of time":

  • The timeframe must be discernible. However, this need not be a precisely calibrated determination.

  • Generally speaking, the timeframe for market entry should be a shorter period of time than that required for a new entrant to enter into the market.

In the present case, the Tribunal found that had the merger not occurred, Complete or a third party purchaser would have begun to operate a full service secure landfill in competition with Tervita within 27 months. As this competition was likely to occur within the minimum 30-month period that the Tribunal found that it would take for a new entrant to enter the market, the prevented entry was considered likely to have occurred within a reasonable period of time in the absence of the challenged merger.

The FCA's approach places considerable emphasis on determining (with some precision) the time required to enter the market in prevention cases. However, it is unclear how far distant in the future the Tribunal may be prepared to make a finding of likely entry to support a prevention of competition case.

3) Methodology for Assessing Efficiencies

Where a merger otherwise results in a substantial prevention or lessening of competition, the Act provides that the Tribunal may not make an order where the gains in efficiency resulting from the merger are likely to be greater than and offset its anticompetitive effects.

The FCA clarified that when assessing whether efficiency gains are greater than and offset the anticompetitive effects of a merger, the analysis must be as objective as is reasonably possible, and where an objective determination cannot be made, it must be reasonable. Such an objective analysis means that a quantification of both gains in efficiency and anticompetitive effects must be carried out whenever it is reasonably possible to do so.

The methodology adopted by the FCA provides more certainty than that applied by the Tribunal, which adopted a "subjective balancing" approach that gave weight to (a) the qualitative effects of the merger, and (b) quantitative effects that have not been quantified, but can be given qualitative weight. However, even under the FCA's more "objective" approach, it may still be difficult to predict how the efficiency defense will be applied in any given case. The FCA held that under its "objective" approach it was still appropriate to consider qualitative effects that cannot be quantified. It is unclear how the Tribunal (and parties contemplating a transaction) can objectively balance unquantifiable qualitative impacts on competition against qualitative efficiency gains.

Additionally, although the FCA emphasized the importance of an objective weighing of quantifiable efficiency gains against anticompetitive effects, it was not able to actually engage in this weighing exercise as the Commissioner had not quantified the anticompetitive effects from the transaction. Rather, the FCA found that the gains were "negligible" (amounting to less than the "yearly remuneration of a half-time junior employee") and therefore these gains could not "offset" the anticompetitive effects. In essence, the FCA was not prepared to allow such marginal efficiency gains (which it recognized might not even be merger-specific) to justify preserving a pre-existing monopoly.

Conclusions

The FCA's decision provides additional guidance on the appropriate methodologies for assessing whether a merger results in a substantial prevention of competition and the application of the efficiencies defense. Specifically:

  • In cases involving an alleged prevention of competition the Tribunal must determine, among other things, whether the new entry or increased competition that is alleged by the Commissioner to be prevented would occur within a "reasonable period of time". A "reasonable period of time" must be discernible and, generally speaking, should be a shorter period of time than that required for a new entrant to enter into the market.

  • When assessing whether efficiency gains are greater than and offset the anticompetitive effects of a merger, the analysis must be as objective as is reasonably possible.

  • Under this "objective" approach of analyzing efficiencies it is still appropriate to consider qualitative factors that cannot be quantified.

However, some questions still remain and an assessment of the possible application of the efficiencies defense will require a detailed case specific analysis.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.