Canada: Federal Court Of Appeal Confirms Landmark Decision In A "Refusal To Deal" Case

In an important decision rendered on June 2, 2011,1 the Federal Court of Appeal confirmed a June 2009 Competition Tribunal decision2 in a refusal to deal case. The tribunal had dismissed an application by a poultry slaughtering company in New Brunswick, Nadeau Poultry Farm Limited, that would have forced that province's largest group of chicken producers, Groupe Westco inc., to continue selling all of its live-chicken production to Nadeau, despite there being no supply contract between the two parties.

This unanimous decision clarifies the scope of section 75 of the Competition Act, a civil refusal to deal provision that, in certain circumstances, may allow a business to obtain an order requiring a supplier to accept the business as a customer. Since 2002, the Act has permitted private parties, upon having received leave of the tribunal, to bring an application in respect of a refusal to deal directly to the tribunal. The decision is an important one for Canadian businesses as it underscores the fact that even if a customer's business may be substantially affected by a refusal to deal, the tribunal will not make an order forcing a supplier to accept the customer unless the customer demonstrates a causal relationship between the refusal to deal and insufficient competition, the presence of the product in "ample supply" and the adverse effect on competition in a market.

A Norton Rose team represented Westco before both the tribunal and the court.

The facts

Nadeau operates the only poultry slaughterhouse in New Brunswick. At the beginning of 2008, Westco and two other groups of chicken producers informed Nadeau that they would cease supplying the Nadeau slaughterhouse as of July 2008 because they intended to complete the vertical integration of their activities and slaughter the chickens that they raised. Nadeau sought an order from the tribunal requiring the producers to continue supplying Nadeau with live chickens in the numbers previously provided by the producers.

In the main application, the tribunal had to decide whether Nadeau's situation satisfied the five conditions set forth in section 75 of the Act, namely:

  • that Nadeau was substantially affected in its business due to its inability to obtain adequate supplies of live chickens anywhere in a market on usual trade terms;
  • that its inability to obtain adequate supplies was due to insufficient competition among chicken producers in the market;
  • that it was willing and able to meet the usual trade terms of chicken producers;
  • that live chickens are available in ample supply; and
  • that the refusal to deal is having or is likely to have an adverse effect on competition in a market.

The tribunal had determined that Nadeau's situation did not satisfy the second, fourth and fifth criteria. To win its appeal, Nadeau had to convince the court to overturn the findings of the tribunal on each of these three points.

The decision

Under section 13 of the Competition Tribunal Act, Nadeau could appeal the tribunal's decision to the court. However, such an appeal on a question of fact lies only with the leave of the court. As Nadeau did not seek such leave, several of its grounds of appeal were dismissed.

The inability to obtain live chickens due to insufficient competition

The tribunal had found that there was not insufficient competition among chicken producers, and that, in any case, insufficient competition was not the reason for the "substantial effect" anticipated by Nadeau. The tribunal found that Nadeau's inability to obtain live chickens anywhere in a market on usual trade terms did not result from insufficient competition among producers, but rather was the direct consequence of the restrictions imposed by a complex supply management system that sets limits on live-chicken production in Canada and imposes a minimum sale price in each province.

The court ruled that the tribunal's decision concerning the causal relationship between the regulatory scheme for live chickens and Nadeau's inability to obtain supplies of live chicken in the market was a finding of fact that could not be appealed without leave, and that this was sufficient reason to uphold the tribunal's finding that the inability to obtain supplies of live chicken was not due to insufficient competition among producers.

Product available in "ample supply"

The tribunal had also found that live chickens were not a product available in "ample supply" as per the fourth criterion under section 75. The tribunal had determined that the words "ample supply" were meant to deal with situations in which suppliers are not obliged to choose between serving new customers and continuing to supply historic quantities to existing customers.

The court agreed with the tribunal's decision, but redefined the applicable test in positive terms. The court determined that a product is available in "ample supply" when the producers of the product have the capacity to increase their production on a timely basis to respond to increased demand. This is definitely not the case for live chickens as it is prohibited to produce live chickens in Canada without production quotas.

Adverse effect on competition in the processed chicken market

To measure whether a refusal to deal would likely have an adverse effect on competition, the tribunal had determined that it was necessary to consider the market "downstream" from Nadeau's operations – i.e. the processed chicken market. The tribunal had also established that for a refusal to deal to have an adverse effect on the market, it was necessary to demonstrate that a supplier would be placed in a position, as a result of the refusal, of created or enhanced "market power."

On appeal, the court confirmed that the reference in the Act to "a" market cannot pertain to something other than the market where the plaintiff sells its product – i.e. the "downstream" market, as affirmed by the tribunal. According to the court, the relevant market for measuring the adverse effect on competition cannot be the market where the plaintiff obtains supplies as that would result in overlap in the "refusal to deal" criteria contained in section 75 of the Act.

Conclusion

The court therefore confirmed that Westco's decision to cease supplying Nadeau is not a "refusal to deal" under section 75 of the Act. The court pointed out that this section of the Act has a limited scope. It is not there to provide a remedy when the evidence demonstrates that the refusal to supply is caused by a reason other than insufficient competition, nor is it available to businesses when the suppliers of a product do not have excess capacity (existing or potential) to meet demand. The purpose of the refusal to deal provision is to preserve competition in the market in which the complainant sells its products, and not only to protect the private interests of certain participants or to maintain the "status quo."

Footnotes

1. Nadeau Ferme Avicole Limitée c. Groupe Westco Inc. et al., 2011 CAF 188.

2. Nadeau Poultry Farm Limted v. Groupe Westco Inc. et al., 2009 Comp. Trib. 6, CT-2008-004.

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