Canada: Businesses Take Note: Competition Bureau Seeks To Withdraw Detailed Guidance On Abuse Of Dominance And Signals Expansive Enforcement Approach

On March 22, 2012, more than three years after it first circulated draft proposed revisions to its 2001 Guidelines on the Abuse of Dominance Provisions (2001 Guidelines), the Competition Bureau (Bureau) issued revised draft Guidelines (Revised Draft Guidelines) for public consultation, which are intended to replace all previous guidance regarding its administration and enforcement of the abuse of dominance provisions of the Competition Act (Act). The Revised Draft Guidelines differ significantly in both tone and substance from the prior draft issued in January 2009 (2009 Draft).1 In particular, while the 2009 Draft attempted to provide detailed (and sometimes controversial) guidance on the application of the abuse provisions to common business practices, and for the first time set out the Bureau's approach to assessing bundled rebates, the Revised Draft Guidelines contain a surprising lack of detail. The Revised Draft Guidelines merely recite a list of exclusionary acts set out in the Act without providing guidance on when these practices, which are often features of robust competition, might constitute an anti-competitive act.

Rather than focussing on the issues that are front and centre for firms with significant market shares – such as determining when exclusivity, product bundling and loyalty rebates raise concerns – the Revised Draft Guidelines focus largely on the general legal and economic framework for abuse of dominance enforcement. While many elements of this general framework are not controversial, the Revised Draft Guidelines also depart from the established case law and accepted economic framework in certain key respects and signal an intention to take a broad view of the potential application of the abuse of dominance provisions. In particular, the Revised Draft Guidelines:

  • take a very broad approach to the issue of joint dominance, raising the prospect that smaller firms that merely follow competitive initiatives in a market might become targets in an abuse of dominance case;
  • deviate from appellate case law on the issue of what constitutes an anti-competitive act by indicating that it is not necessary that an anti-competitive act be directed at a competitor;
  • eliminate the detailed discussion found in the 2009 Draft respecting the role of legitimate business justifications in determining whether an act is anti-competitive, suggesting a narrow view of justifiable conduct that may harm competition;
  • suggest that the costs and financial position of weaker competitors will be an important factor in assessing whether a price is predatory, but provide no further guidance on when or how this will be taken into account; and
  • indicate that conduct by a firm without market power may nevertheless be scrutinized under the abuse of dominance provisions where that firm may attain market power in the future as a result of its conduct.

The Revised Draft Guidelines also contain only a single footnote that mentions the remedies for abuse of dominance. This omission of a more detailed discussion is significant, given that the Competition Tribunal (Tribunal) was given the power to impose administrative monetary penalties of up to $10 million as a result of the March 2009 amendments to the Act.

On a positive note, the Revised Draft Guidelines also contain some welcome changes. In particular, the Revised Draft Guidelines:

  • appear to give greater weight to evidence of rapid technological change (for example, technology that allows a competitor to "leapfrog" over a dominant firm) as a factor that may negate or erode market power;
  • acknowledge that dominance itself is not a concern: intervention is warranted only where there is an anti-competitive act that has an impact on competition;
  • raise the market share safe harbours for dominance, although these remain well below the levels at which the Bureau has taken enforcement action in the past;
  • provide some additional guidance on how the Bureau will determine the benchmark "competitive price" for use in defining markets in an abuse case – the Revised Draft Guidelines indicate that the Bureau may have reference to the price prior to commencement of the alleged anti-competitive act, or may look to prices in other geographic regions; and
  • acknowledge the relevance of responses by competitive suppliers who are not currently in the market (supply responses) in assessing market shares.

Background

The abuse of dominance provisions in sections 78 and 79 of the Competition Act allow the Tribunal to impose remedies where a dominant firm or group of firms engages in a "practice of anti-competitive acts" resulting in a substantial lessening or prevention of competition. Contrary to one of the statements made in the Revised Draft Guidelines, sections 78 and 79 do not create an "offence." Rather, sections 78 and 79 are "reviewable provisions," which authorize the Tribunal to review otherwise lawful conduct. Dominance, which equates to market power (defined as the ability to profitably maintain prices above the competitive level for a significant period of time), is not in and of itself sufficient to warrant intervention under the Act. It is only when there is a practice of anti-competitive acts (defined as conduct which is predatory, exclusionary or disciplinary vis à vis a competitor) that the Tribunal may impose remedies for abuse of dominance.

The Bureau's 2001 Guidelines were largely focussed on the general legal and economic framework for abuse of dominance cases. As a result of subsequent case law, most notably the 2006 judgments of the Federal Court of Appeal in Canada Pipe,2 this framework required updating.

The 2009 Draft updated the general framework but also added a very detailed discussion and appendices addressing many of the specific practices that may raise concerns as an abuse of dominance when engaged in by a dominant firm. These practices include (1) exclusive dealing; (2) tying, bundling and bundled rebates; and (3) denial of access to a facility or service. In the public consultation process that followed the release of the 2009 Draft, the appendices dealing with these practices were at once welcomed as much-needed guidance on where to draw the line between aggressive competition and anti-competitive conduct, and criticized as having drawn the line too far on the side of enforcement.

The stakes for complying with the abuse of dominance provisions were raised substantially only weeks after the Bureau released its 2009 Draft: in March 2009, the Act was amended to permit the Tribunal to order payment of administrative monetary penalties of up to $10 million for a first order and $15 million for a subsequent order. In light of the significant nature of these penalties, there is an even greater need than there was previously for detailed guidance on the Bureau's enforcement approach to abuse of dominance.

Revised Draft Guidelines – Principal Areas of Concern

Meaning of anti-competitive act

A dominant firm may abuse its dominant position by engaging in a "practice of anti-competitive acts", with the result that competition is substantially lessened or prevented. The Revised Draft Guidelines contain a discussion of the meaning of "anti-competitive act" that is based on the ruling of the Federal Court of Appeal in Canada Pipe. There, the Court found that an anti-competitive act is defined by reference to its intended purpose and is one that has "an intended predatory, exclusionary or disciplinary negative effect on a competitor." However, the Revised Draft Guidelines move from this general point to focus on one specific example of anti-competitive act described in section 78(1)(f) (buying up of products to prevent erosion of existing price levels), a (surely rare) practice which the Federal Court of Appeal acknowledged provides an exception to the general definition of anti-competitive act being directed at a competitor. The Revised Draft Guidelines then extrapolate from the discussion of 78(1)(f) to conclude that "[w]hile many types of anti-competitive conduct may be intended to harm competitors, the Bureau considers that certain acts not directed at competitors could still be considered to have an anti-competitive purpose." In our view, except in the narrow case of 78(1)(f), this is an incorrect statement of the applicable law.

Exclusionary conduct

The 2009 Draft contained detailed appendices dealing with the areas where dominant firms commonly seek advice, namely with respect to exclusive dealing, product bundling, bundled or loyalty rebates and denying access to a competitor to a facility or service of the dominant firm. Ten pages of the 2009 Draft were devoted to a discussion of these practices. By contrast, the discussion of exclusionary conduct in the Revised Draft Guidelines is three paragraphs in length. Rather than discussing any of these practices, the Revised Draft Guidelines merely recite a list of anti-competitive acts set out in the Act. As a result, the Revised Draft Guidelines fail to provide any meaningful guidance on these practices. Additionally, the Revised Draft Guidelines repeal the more detailed guidance on specific practices (such as exclusivity, slotting allowances, listing fees, raising rivals' costs, market foreclosure, margin squeezing) that is already in place for the grocery and telecommunications industries.3 Given the amount of work and time that has been spent, both by Bureau staff and by private sector stakeholders, on developing a reasoned approach to exclusionary conduct, it is truly unfortunate that the Revised Draft Guidelines fail to provide a detailed treatment of such conduct.

Predatory conduct

The Revised Draft Guidelines contain a similarly limited discussion of predatory conduct, with only two paragraphs devoted to the issue. This is surprising given that, with the repeal of the criminal predatory pricing provisions in 2009, predatory pricing now falls squarely (and only) under the abuse of dominance provisions. The Bureau had previously released detailed guidance on predatory pricing in 2008 (2008 Predatory Pricing Guidelines), which replaced prior guidance released in 1992 and followed two rounds of public consultation on draft revisions released in 2002 and 2007. The Revised Draft Guidelines regrettably also repeal the 2008 Predatory Pricing Guidelines, which include detailed guidance on the Bureau's two-stage analysis of (i) market power and (ii) price-cost comparison, as well as illustrative hypothetical case examples.

The Revised Draft Guidelines create uncertainty as to the applicable price-cost screen for predation. Although they state that "the Bureau uses a price-cost screen to avoid chilling legitimate price competition", the Revised Draft Guidelines also provide that "[t]he Bureau will also examine whether the alleged predatory price can be matched by competitors without incurring losses." If the Bureau is suggesting that it can be potentially anti-competitive for an efficient firm to offer low but above-cost pricing where one or more competitors cannot profitably match such prices, this appears to be a significant departure from prior enforcement practice (and inconsistent with the relevant case law). Additionally, it is unfortunate that the Revised Draft Guidelines provide no guidance on whether or how the Bureau will apply the price-cost screen in the case of bundled products. In any event, we believe that the analysis of whether a dominant firm's pricing constitutes an anti-competitive act should be focussed on the price-cost screen and, where pricing is below the relevant cost standard (avoidable costs), on the firm's motivations for its pricing practice. A dominant firm cannot be expected to have detailed information about its competitors' costs and financial situation when determining its own prices.

Joint dominance

Section 79 of the Act includes the concept of joint dominance. This section may apply where "one or more persons substantially or completely control, throughout Canada or any area thereof, a class or species of business." The theory of joint dominance allows the Bureau to invoke the abuse of dominance provisions against firms that are not, individually, dominant. However, the element that transforms a market with a small number of firms competing vigorously into one where those same firms are jointly dominant is not readily apparent. For example, consider a market in which Firm A and Firm B each have a 40% share. Firm A decides to offer a substantial discount to customers for exclusivity. Firm B follows. Firm B is not seeking to exclude or discipline third parties (i.e., an existing or potential competitor): it is simply responding to Firm A's offer. Should the Bureau intervene where companies are merely competing aggressively with each other? Should the law not be encouraging such conduct instead? Also, how will it be established, consistent with Canada Pipe, that "but for" this exclusivity practice, entry would be more likely or prices would be lower? Prices might in fact be higher if exclusivity was discouraged. Is the exclusivity practice in question not simply an efficient outcome in the particular market?

The 2001 Guidelines were very cautious on the issue of joint dominance, stating that "something more than mere conscious parallelism must exist before the Bureau can reach a conclusion that firms are participating in some form of coordinated activities". The 2009 Draft was decidedly more aggressive, stating that "[w]here these firms are each engaging in similar practices alleged to be anti-competitive, and they appear to together hold market power based on their collective share of the market, barriers to entry or expansion...the Bureau will consider these firms to hold a jointly dominant position." However the 2009 Draft failed to address the threshold question of the "linkage" required to determine when firms are acting "jointly" as opposed to individually.

The Revised Draft Guidelines take a somewhat more measured approach to joint dominance than did the 2009 Draft, but they are still far more aggressive than the 2001 Guidelines. The Revised Draft Guidelines state that "[s]imilar or parallel conduct by firms is not sufficient, on its own, for the Bureau to consider them to hold a jointly dominant position", and then enumerate four factors that the Bureau will consider in determining whether firms are jointly dominant. These factors are (1) their collective market share exceeds 65%; (2) presence of barriers to entry or expansion; (3) evidence of a lack of inter-firm competition; and (4) any other relevant factors. Factor (3) purports to provide the "linkage" necessary to transform a competitive market situation into one of joint dominance. However, this factor is nebulous and susceptible to overly broad application. The Revised Draft Guidelines also state that evidence of coordinated behaviour between firms is "potentially probative, although not strictly necessary" to establish joint dominance. In other words, joint dominance may exist absent any coordination among firms.

We believe that this position, which opens the door to a finding of joint dominance – and potentially large financial penalties – against small firms who are simply engaged in leader-follower behaviour, will attract wide criticism in the consultation process.

The Revised Draft Guidelines would benefit significantly from a discussion of the Bureau's position regarding the distinction between anti-competitive jointly dominant behaviour based on conscious parallelism and pro-competitive horizontal conduct involving, for example, "matching" behaviour or "meeting competition" pricing. Such a discussion would be helpful to avoid the chilling of pro-competitive conduct by businesses seeking to comply with the Guidelines, once finalized. We would also encourage the Bureau to elaborate on how it will assess joint dominance in practice and to provide specifics on what types of joint activities it believes may constitute a practice of anti-competitive acts.

Additionally, the Revised Draft Guidelines should confirm that the Bureau will continue to review non-criminal collaborations between competitors under section 90.1 – the civil strategic alliances provision – and not as an abuse of dominance.

Next Steps

Comments on the Revised Draft Guidelines are due on or before May 22, 2012.

Footnotes

1. Osler, Hoskin & Harcourt LLP submitted detailed comments to the Competition Bureau on the 2009 draft.

2 Commissioner of Competition v. Canada Pipe, to read the appeal decision, click here and to read the decision on the cross-appeal by Canada Pipe, visit here.

3 Draft Guidelines were also prepared in 2001 for the airline industry. However, as the airline-specific abuse of dominance provisions that were added to the Competition Act in 2000 were repealed in 2009, these guidelines are primarily of historical interest only.

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.

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