Canada: Superior Propane: When Efficiencies Prevail But Overwhelm the System

Last Updated: February 24 2003
Article by William P Rosenfeld

When Superior Propane Inc. sought to merge with ICG Propane Inc. the Commissioner of the Competition Bureau sought to prevent that merger and took the matter to the Competition Tribunal. The Tribunal allowed the merger, relying on the efficiencies which the merger produced. The Commissioner appealed the Tribunal’s judgment to the Court of Appeal, which returned the matter to the Tribunal for rehearing. When the Tribunal again allowed the merger, the Commissioner again appealed. A most unusual chain of events. The case has turned on one fascinating provision of the Competition Act which has given rise to unending discussion among lawyers and economists. S.96(1) of the Act elevates efficiencies derived from a merger to the point that if gains in efficiency "will be greater than, and will offset, the effects of any prevention or lessening of competition that will result" from a merger, then the merger must be allowed.

The history of the provision is dense, marking as it does an obvious departure from accepted standards in the United States where efficiency has long been treated as a minor factor in merger analysis. Nor is it easily understood, for there are real difficulties in determining what the arithmetic manifestation of the provisions might be. Initially it would appear necessary to quantify the efficiencies involved. Then s.96(1) would require the determination with precision, of the arithmetic sum of the "effects of any prevention or lessening of competition". Finally, the statute requires that an assessment be made of whether the gains in efficiency "will be greater than, and will offset" the anti-competitive effects of the merger. Somewhere in the process, qualitative concerns will inevitably arise.

A feast for experts and economists, but very hard material for mere mortals to digest. Even if efficiencies can be identified with some accuracy, the determination of the financial impact must be made prospectively. Corporate managements have been known to make claims for efficiencies in mergers which prove difficult to attain. The quantification of the effects of the prevention or lessening of competition is also far from easily achieved. Add to this rather daunting combination the need to determine whether the gains in efficiency will "be greater than, and will offset" the negative effects on competition. It might appear that a gain is "greater" when it is arithmetically larger, but that in order to "offset" a negative effect it might have to undergo qualitative analysis.

The Competition Bureau bravely approached these matters in its Merger Enforcement Guidelines. While these are no longer followed, they were the relevant guidance in the transaction under review. Not surprisingly, the Guidelines state that "The calculation of the likely anti-competitive effects of mergers is generally very difficult to make." But in grappling with the difficulty, the Guidelines suggested that efficiencies should be measured by the "total surplus standard" and that "when a dollar is transferred from a buyer to a seller, it cannot be determined a priori who is more deserving, or in whose hands it has a greater value".

When Superior sought to merge with ICG to form an essentially monopolistic position in propane distribution in Canada, the issues became far from academic. The Commissioner, in reviewing his position and in opposing the merger, wished to reconsider the Merger Enforcement Guidelines’ preference for the total surplus standard. Indeed, that question became central to the initial determination by the Competition Tribunal.

Following the original hearing, the Competition Tribunal determined, in August 2000, that the merger of Superior and ICG would substantially prevent and lessen competition but that the merger was saved from divestiture by reason of the efficiencies resulting from the merger. Section 96 of the Competition Act received extensive consideration and the total surplus standard was adopted by the Tribunal as the appropriate measure of efficiencies.

Notwithstanding monopolistic elements of the merger, and in the face of significant costs to consumers, the projected efficiencies thus rescued the merger. Not surprisingly, the Commissioner appealed the determination of the Competition Tribunal to the Federal Court of Appeal. That Court set aside the decision of the Tribunal and remitted the matter to the Tribunal for re-determination. Central to the judgement of the Court of Appeal was its conclusion that the Tribunal had erred in law by adopting the "total surplus standard" and by failing to ensure that all of the objectives of the Act were considered in balancing the interests of producers and consumers.

It is the re-determination by the Tribunal, in which reasons for judgement were delivered on April 4, 2002, that one finds the unusual current situation. Effectively the Tribunal adamantly and persistently refused to accept the direction of the Court of Appeal to abandon the total surplus standard and, in so doing, the Tribunal confirmed its original judgement.

The Court of Appeal had directed the Tribunal to balance competing objectives in order to determine where the public interest lies in a given case and, in doing so, to exercise its discretion. The Tribunal simply refused to accept that it had a responsibility to be involved in any public interest consideration.

The Court of Appeal had further very clearly stated that the Tribunal ought to take a broad view in defining the effects to be considered:

"[92] Thus, although section 96 requires the approval of an anti-competitive merger where the efficiencies generated are greater than, and offset, its anti-competitive effects, the ultimate preference for the objective of efficiency in no way restricts the countervailing "effects" to deadweight loss. Instead, the word, "effects" should be interpreted to include all the anti-competitive effects to which a merger found to fall within section 92 in fact gives rise, having regard to all of the statutory purposes set out in section 1.1."

The Tribunal was not persuaded. It rejected any suggestion that the merger provisions of the Act be driven by consumer interest. In what might, in another context, be characterized as insubordination, "The Tribunal concludes that adopting an approach that prevents efficiencies — enhancing mergers in all but rare circumstances must be wrong in law." One simply wonders where the Tribunal is provided the mandate to instruct the Court upon points of law.

In a similar vein, the Court cited with approval American commentators who referred positively to the U.S. position which articulates consumer protection as one of the primary objectives of anti-trust law.

Once again, the Tribunal felt it appropriate to instruct the Court on the proper interpretation of law:

"[159] In the Tribunal’s view, the prevailing hostile approach to efficiencies in American antitrust law derives from the primary focus of that regime on consumer protection. The adoption of the American approach to efficiencies under the Act would, without question, introduce the hostility that characterizes that approach. As noted above, the amendments in 1986 to the merger provisions of the Combines Investigation Act were primarily focussed on economic efficiency."

The Tribunal, having firmly determined that it was the correct arbiter of law then proceeded to conclude that the Consumer Surplus Standard, "which requires that the full amount of the transfer be added to the dead weight lose in establishing effects of an anti-competitive merger, is so limiting that its adoption …would be contrary to the conclusion of the Court…and generally makes the efficiency defence unavailable under the Act, and so cannot be correct in law because it vitiates the statutory provision in subsection 96(1)."

Not fully content, the Tribunal proceeded again to castigate the Court of Appeal. This time, the issue is whether the efficiency defence should be available when mergers lead to structural monopolies. The Tribunal states quite simply:

"if, as it appears, Le Tourneau J.A. is suggesting that the efficiency defence should not be available when mergers lead to structural monopolies then, with respect, he must be wrong."

And this was not the last instance in the Tribunal judgement where the direction of the Court of Appeal was not followed. Quite where this approach by the Tribunal may lead is, at best, unclear.

The dissenting opinion of Ms. Lloyd did provide a more focussed light on the standard to observe. In the "fact that the merger will likely result in a transfer estimated at $40.5 million per annum due to Superior’s ability to exercise its market power in the form of higher prices …" and "given the appeal judgement and the language of the purpose clause of the Act" she concluded that the entire transfer of income from shareholders to consumers ought to be included in the trade-off analysis and therefore that efficiencies did not overcome the negative impact of the substantial lessening of competition.

After reading the dizzying recitation of economic doctrine contained in the majority judgement, a further observation of Ms. Lloyd is refreshing. She pointed out that "relying on estimates and calculations to arrive at what appears to be a precise number provides a false sense of security …". She recognized that the Court "accepts that the results derived from any merger analysis may be imprecise and subject to margin of error (but) a quality of analysis and learned judgement is therefore essential."

But Ms. Lloyd’s was a dissenting view. The majority, having confirmed its own earlier position, has invited an agonizing prolongation of the process. In taking exception with the Court of Appeal, which over-ruled its earlier judgement, the Tribunal has also brought into question the effectiveness of the entire relationship between the Tribunal and the Courts.

The Commissioner predictably has again appealed, reciting as grounds of appeal those respects in which the Tribunal has rejected the directions of the Court of Appeal.

The Commissioner (speech of May 9, 2002) has further confirmed the determination with which he will pursue the matter:

"The Competition Bureau is appealing the April 4, 2002 decision because it raises fundamental questions about the purpose of the Competition Act and how it is interpreted by the Competition Tribunal. First, the Federal Court of Appeal stated in its decision that the Tribunal is charged with the responsibility of protecting the public interest, which it does by striking a balance among conflicting interests and objectives in a manner that respects the text and purposes of the legislation. However, in its most recent decision involving the Superior Propane/ICG Propane merger, the Tribunal specifically rejected this view.
Second, we believe that the majority of the Tribunal misinterpreted the Federal Court of Appeal’s direction with respect to the anti-competitive effects of this merger. We cannot accept the Tribunal’s interpretation that efficiencies are the paramount objective of the mergers provisions of the Act. In our view, the Federal Court directed the Tribunal to consider other objectives listed in section 1.1 of the Act. An increase in prices to consumers, for example, is an important, relevant consideration.

A possible implication of the position taken by the Tribunal is that legislation might well be introduced to determine the standard by which efficiencies are, in future, to be gauged. It is obvious that those who might seek to merge to monopoly will, in Canada, meet a determined level of resistance from the Competition Bureau.

The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.

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