Canada: Contemplating Competitor Collaborations

Last Updated: September 23 2013
Article by Mark C. Katz

Joint ventures are very popular business arrangements, as they offer participants a variety of benefits, including the potential to share the risks in developing and commercializing new products, facilitating expansion into new markets and generating synergies in production and distribution. In the mining industry, for example, joint venture arrangements can involve arrangements between parties to pool capital and skills in order to share the significant financial and operating risks in exploring and developing mining properties.

However, joint venture arrangements can raise serious competition issues – and potentially lead to costly problems – when the collaborations are between industry competitors. It is critical, therefore, that any prospective joint venture involving competing entities be vetted for potential antitrust concerns as part of the planning and development process.

Joint ventures between competitors may produce anti-competitive results if, for example, they reduce the ability or incentive of the joint venture partners to compete against each other outside of the arrangement, or involve information exchanges and other practices that could facilitate price-fixing and other types of collusion. For example, consider a joint production/processing arrangement that also involves restrictions about the territories or customers to which the parties can market their output.

Since competitor collaborations can be either pro-competitive or anti-competitive (or sometimes both), they present especially thorny challenges for antitrust enforcement authorities and the courts. If too lenient an approach is taken by authorities, the joint venture could restrain competition in the relevant industry; if the approach is too strict, a beneficial economic arrangement may be stifled or chilled.

A recent U.S. case, In re Sulfuric Acid Antitrust Litigation, is a perfect illustration of the conundrum represented by competitor collaborations.

Two Canadian mining companies that produce sulphuric acid as a by-product of their operations entered into an arrangement with several U.S. producers of sulfuric acid whereby the U.S. companies would stop producing and selling their own sulfuric acid in the United States and instead serve as the exclusive U.S. distributors of the Canadian companies' sulfuric acid.

A group of industrial customers in the United States sued the parties, alleging that their "shutdown agreements" would eliminate competition between the Canadian mining companies and U.S. producers, reduce the total amount of sulfuric acid available in the United States and drive up the U.S. market price for sulfuric acid. The Canadian and U.S. companies countered that the arrangement would actually reduce prices for U.S. customers, because it would allow the parties to take advantage of the Canadian mining companies' lower production costs and the U.S. producers' distribution networks in the United States.

Much of the case revolved around the appropriate legal standard against which the plaintiffs' and defendants' competing claims should be judged. In the end, what is important is that the judges in the case – both at first instance and on appeal – agreed that there was at least a plausible argument that the arrangement would "increase competition" and promote "enterprise and productivity". Indeed, the judge who wrote the appeals opinion observed that the law should not be used to discourage new and innovative ways of doing business.

Although some slight differences exist, the situation in Canada is very similar to the United States. Under Canada's Competition Act, joint ventures between competitors can be prosecuted as criminal offences if they involve conduct such as price-fixing or market allocation. Plaintiffs also have the right to sue parties for damages. On the other hand, Canadian law also recognizes the potential benefit of joint ventures, and thus provides for an alternative civil review process where there is scope to defend these arrangements, if challenged, on the basis of their pro-competitive effects. As in the United States, the difficult issue in Canada is where to draw the line between illegal and pro-competitive arrangements.

Because of the serious risks involved, it is very important that prospective joint venture partners carefully evaluate any potential competition issues before proceeding with an arrangement.

The first questions that should be asked in making this assessment are: what is the purpose of the joint venture and what are the business justifications for any restraint on competition it may involve? This is a key threshold consideration, and coming up with a superficial explanation for what otherwise would appear to be anti-competitive conduct will not suffice. Care should also be taken to reflect the legitimate and pro-competitive justifications in internal company documents so as not to undercut the positive defence you may have to make.

Other relevant factors to consider at the outset are: what level of continuing involvement will the joint venture parties have in the arrangement (i.e., will they be passive investors or exercise control over the joint venture's business activities); will the arrangement involve the exchange of competitively-sensitive information between the parties; what is the parties' collective market position in the business area(s) subject to the arrangement; is there any agreement with respect to other areas of the parties' businesses; and, very importantly, what is the risk of anyone complaining to the Competition Bureau or bringing a lawsuit based on alleged anticompetitive effects?

There are many business reasons to enter into joint venture arrangements, including arrangements that involve collaborations with competitors. But these arrangements are not without risk. Taking the time to address competition issues up front can help avoid potential – and costly – problems down the road for your joint venture or other collaborative arrangement.

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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