Abuse Of Dominance: Canada Pipe Wins Contested Abuse Of Dominance Case Involving Loyalty Rebate Programme

The Competition Tribunal recently released its long-awaited decision in the contested abuse of dominance and exclusive dealing case brought by the Commissioner of Competition against Canada Pipe Co Ltd, a Canadian manufacturer of cast iron drain, waste and vent ("DWV") products. The Tribunal found in favour of Canada Pipe and dismissed the Commissioner’s case in its entirety.

In Canada Pipe, the Commissioner had alleged that the loyalty-based rebate programme operated by Canada Pipe’s Bibby Ste-Croix division (referred to as the "stocking distributor program" or "SDP") contravened the abuse of dominance and exclusive dealing provisions found in sections 79 and 77 of the Competition Act ("the Act").

The SDP offers distributors point-of-purchase discounts as well as quarterly and annual rebates if they buy all their cast iron DWV product needs from Canada Pipe. The Commissioner had also alleged that Canada Pipe abused its dominant position by acquiring competitors or their inventory. In her notice of application, the Commissioner sought an order from the Tribunal requiring Canada Pipe to abandon its SDP and preventing Canada Pipe from completing any acquisitions in the Canadian cast iron DWV industry for a period of three years.

The Tribunal refused to order any of the requested relief on the basis that the Commissioner failed to show that:

1. the practices in question were anticompetitive, and
2. the practices had resulted in a substantial prevention or lessening of competition.

The Tribunal’s effects-driven analysis in Canada Pipe highlights the differences in both the legislative and the judicial approaches to abuse of dominance and loyalty rebates in Canada and the EU. This article provides an overview of the Tribunal’s decision and briefly contrasts its analysis with the approach to loyalty rebates adopted by the European Commission and entrenched in the case law of the European Court of Justice and Court of First Instance.

Under section 79 of the Act, the Commissioner may apply to the Tribunal for injunctive-style relief where she can demonstrate that a respondent:

1. enjoys a dominant market position (i.e. possesses market power) and
2. has engaged in a practice of anticompetitive acts,
3. resulting in a substantial lessening or prevention of competition.

The third arm of the test under section 79 clearly distinguishes Canadian abuse of dominance legislation from its EU counterpart. Whereas article 82 EC contains no explicit effects test, section 79 requires the anticompetitive acts in question to have the effect of substantially preventing or lessening competition.

Thus, in the Canada Pipe case, there were three main questions to be decided by the Tribunal:

• Does Canada Pipe have market power?
• Did Canada Pipe’s SDP and/or acquisitions in the DWV industry constitute a practice of anticompetitive acts?
• Did the alleged anticompetitive acts result in a substantial lessening or prevention of competition?

The Commissioner failed to produce sufficient evidence on the second and third issues. While the Tribunal concluded that Canada Pipe has market power, neither the SDP nor Canada Pipe’s acquisitions were held to constitute a practice of anticompetitive acts or to result in a substantial lessening or prevention of competition.

One of the most notable aspects of this case was the Commissioner’s novel approach to assessing market power. In contrast to the approach followed by the Tribunal in previous abuse of dominance cases, as well as by the Competition Bureau in its own Abuse of Dominance Guidelines, the Commissioner argued that "direct evidence" of Canada Pipe’s alleged market power made it unnecessary to define the relevant market.

The Commissioner’s "direct evidence" of market power included margin and pricing analysis provided by its economic expert, who argued that Canada Pipe’s "high" margins and "supra-competitive" prices in certain regions of Canada relative to others were indicative of Canada Pipe’s market power.

(i) Market definition: Canada Pipe argued that the relevant product market should include DWV products made from all materials, including plastic, copper, asbestos-cement and cast iron.

Interestingly, the Commissioner argued that the direct evidence of Canada Pipe’s market power with respect to its cast iron products obviated the need to conduct a separate market definition analysis. The Commissioner nevertheless argued that the evidence was indicative of a product market limited to cast iron DWV products, with pipe, fittings and couplings each representing a separate market.

In its reasons, the Tribunal followed the approach taken in all previous Canadian abuse of dominance cases and began by defining the relevant product and geographic markets.

The key market definition issue to be decided by the Tribunal was whether the relevant product market included DWV products made from materials other than cast iron. In this regard, the Tribunal acknowledged that Canada Pipe competes with DWV products manufactured from plastic and other materials and that "plastic may eventually replace cast iron."

Nonetheless, the Tribunal concluded that, because cast iron DWV products have distinct physical characteristics and are preferred in certain DWV applications, these products form a separate product market. The Tribunal also referred to evidence suggesting that some industry participants considered cast iron DWV products to be distinct products.

The Tribunal concluded that the relationship between the prices of cast iron and plastic DWV products is an important indicator of market definition. On this point, the Tribunal stated that Canada Pipe had not led evidence to suggest that the prices of plastic DWV products had disciplined the prices of the cast iron products.

The Tribunal’s reasoning on this point is noteworthy for two reasons. First, it may suggest that, where there is evidence of a divergence in the price of alternative products, a respondent bears the burden of proving the wider product market and that pricing evidence will be afforded more weight than anecdotal evidence of competition when considering whether two products are in the same product market.

Second, the Tribunal’s approach appears to imply that products must be substitutable across the full range of end uses in order to be within the same product market. However, in the absence of an ability to price-discriminate against customers buying for such specialised applications, such a position would appear to be inconsistent with previous Canadian and US case law on this point.

With respect to the relevant geographic market, the Tribunal relied heavily on the variations in prices between different regions across Canada to find that there were six separate geographic markets within Canada. These six geographic regions were drawn directly from Canada Pipe’s pricing lists as Canada Pipe maintained six different pricing "zones." Despite acknowledging the significant presence of imports from Asia, the Tribunal concluded that these imports were not sufficient to expand the geographic market beyond Canada.

(ii) Tribunal’s findings on market power: In its analysis of market power, the Tribunal considered indirect indicators, such as market share and barriers to entry, as well as the Commissioner’s arguments concerning direct evidence of alleged market power, i.e. the margin and pricing analysis supplied by the Commissioner’s economic expert.

As part of its indirect analysis of market power, the Tribunal considered Canada Pipe’s market shares and the barriers to entry in the cast iron DWV industry as a whole. Having found that the relevant product market includes DWV products made only from cast iron, the Tribunal held that Canada Pipe’s market shares in the various regions were between 80% and 90%.

On the topic of barriers to entry, the Tribunal held that the evidence was insufficient for it to draw any conclusions. However, the Tribunal specifically rejected the Commissioner’s argument that the SDP is itself a barrier to entry, noting that actual entry in the cast iron DWV market provided a "powerful counter-argument to [the Commissioner’s expert] Dr Ross’s contention that barriers to entry are preventing new entry."

Despite an acknowledgment of significant entry into cast iron DWV products, including the first domestic manufacturer in more than 30 years, the Tribunal appeared to fall back on Canada Pipe’s market shares as somehow indicative of barriers to entry. As part of its conclusions, the Tribunal stated that "entry is limited as shown by Canada Pipe maintaining a considerable market share."

It is surprising to see the Tribunal fall back on market shares as indicative of some form of barrier to entry and, implicitly, market power, especially given the widely acknowledged principle that market power requires the presence of barriers to entry and not simply high market shares. Furthermore, given that the cast iron industry was acknowledged to be declining, the limited entry referred to by the Tribunal may be unrelated to the presence of barriers to entry.

With respect to the Commissioner’s "direct evidence" of alleged market power, the Tribunal noted that the Commissioner’s expert analysis was incomplete on certain critical points. For instance, the Tribunal noted that the Commissioner had failed to offer a competitive benchmark for its allegations of "high" prices and margins, and rejected the Commissioner’s contention that the price of imported cast iron products should be such a benchmark.

Despite noting these shortcomings in the direct market power analysis, the Tribunal nonetheless accepted the Commissioner’s argument that Canada Pipe’s ability to lower its prices in response to competition is indicative of supracompetitive pricing. On the basis of this evidence of supracompetitive pricing, together with Canada Pipe’s market shares, the Tribunal concluded that Canada Pipe possesses market power in all the relevant markets.

(i) "Stocking distributor program": The focus of the Bureau’s case against Canada Pipe was its loyalty-based rebate programme, the SDP. Similar to the argument made in many EU abuse of dominance cases, the Commissioner alleged that the SDP is anticompetitive because it "locks in" distributors, and thus forecloses distribution channels to Canada Pipe’s competitors.

In evaluating whether the SDP constitutes a practice of anticompetitive acts, the Tribunal considered the specific terms of the SDP, its business justification, its impact on Canada Pipe’s competitors and the costs to customers of leaving the SDP.

After reviewing all these factors, the Tribunal held that the Commissioner had "failed to establish that the SDP is a practice of anticompetitive acts." The following are the key aspects of this finding:

• The Tribunal concluded that the "most striking argument" against the alleged anticompetitive effect of the SDP is the fact that it has not prevented entry or competition in certain regions. The Tribunal pointed to the fact that, since the implementation of the SDP in 1998, there have been increased imports as well as the establishment of the first new domestic manufacturer of cast iron DWV products in 30 years.
• The Tribunal also found that the SDP’s terms are transparent and well known, distributors are not contractually bound to stay on the SDP for any length of time, and the greatest savings to distributors come from the discounts applied at the point-of-purchase rather than from the quarterly or annual rebates. The Tribunal also pointed to the fact that distributors are free to terminate their participation in the SDP without losing any rebates at the beginning of the calendar year, and can review their participation at the beginning of any quarter, without jeopardising accrued quarterly rebates or point-of-sale discounts. Annual rebates, by contrast, are relatively small.
• With respect to the business justification for the SDP, the Tribunal accepted Canada Pipe’s explanation that the SDP is necessary to maintain a sufficient manufacturing volume of a full line of DWV products, thus allowing Canada Pipe "to maintain in inventory smaller, less profitable but nevertheless important products." The Tribunal recognised that maintaining these less popular items ultimately benefits consumers.
• The Tribunal accepted the analysis provided by Canada Pipe’s economic expert, Dr Roger Ware, on the key topic of switching costs. Dr Ware’s evidence showed that the costs incurred by customers wishing to leave the SDP are zero at the end of each calendar year and remain low throughout the rest of the year. These low switching costs allow Canada Pipe’s competitors to entice Canada Pipe’s customers to leave the SDP.

It is clear from these findings that the Tribunal’s analysis of whether the SDP was an anticompetitive act focused largely on the effect of the SDP on Canada Pipe’s customers rather than its competitors. While the Tribunal did not dismiss the importance of considering the impact of the SDP on competitors, it did not find the competitor complaints in this case to be credible. In contrast, perhaps because the programmes reviewed have involved significantly more onerous contracts, and thus higher associated switching costs, recent EU cases have focused on the impact on competitors rather than the effect on customers of such programmes.

(ii) Acquisitions and covenants: The Commissioner also alleged that the "pattern" of acquisitions by Canada Pipe and its use of restrictive covenants are anticompetitive and part of a strategy to eliminate competition. The Commissioner took this position despite the fact that:

1. all the acquisitions in question were completed more than three years before the filing of the Commissioner’s application, and
2. the Bureau reviewed two of the acquisitions at the time that they were completed.

However, the Tribunal rejected the Commissioner’s arguments on three grounds.

First, it held that the three-year limitation period in section 79(6) of the Act applied and prevented any further review of these acquisitions. The Tribunal thereby rejected the Commissioner’s arguments that the limitation period would not begin to run until all the restrictive covenants had expired. Second, it stated that the acquisitions "can be seen as a rational move" and are indicative of the consolidation that occurs in a "harvest market" in a mature industry, such as the cast iron DWV industry. Finally, the Tribunal held that Canada Pipe’s non-compete covenants are a normal part of business and were not shown to be unreasonable.

Once the Tribunal had concluded that the SDP did not constitute a practice of anticompetitive acts, it did not need to consider the third branch of the test under section 79. However, in the event that it had erred in its assessment concerning anticompetitive acts, the Tribunal went on to consider whether the SDP had resulted in a substantial lessening or prevention of competition.

On this point, the Tribunal found that the Commissioner had failed to discharge her burden of establishing that there had been a substantial lessening or prevention of competition in any of the 18 separate markets (i.e. six geographic markets and three product markets).

In dismissing the Commissioner’s arguments on this aspect of the case, the Tribunal once again considered the actual impact of the SDP on the marketplace. The Tribunal pointed to the "significant evidence of competitive pricing, notwithstanding the SDP" and noted the effective entry by domestic suppliers and importers of cast iron DWV products.

The Tribunal also noted that the Commissioner did not present any historical data that would have allowed it to measure the state of competition before and after the SDP came into effect. Thus, the Tribunal concluded that there was insufficient evidence to find that the SDP was responsible for any potential substantial lessening or prevention of competition.

It is in this third requirement to demonstrate the effects of the anticompetitive acts in question that Canadian law diverges from EU law on abuse of dominance. Under EU legislation, this third element is not required.

In our view, the requirement for the practice in question to have had an effect on competition is an important element of abuse of dominance. Without it, there is a significant risk that aggressive but legitimate competition will be unnecessarily curtailed.

The Tribunal concluded that the SDP should be considered de facto exclusive dealing because it provided an inducement to exclusivity, even though it did not require exclusivity as a condition of supply.

Nonetheless, the Tribunal rejected the Commissioner’s arguments on the exclusive dealing provisions on the same reasoning provided in its analysis of the abuse of dominance allegations. The Tribunal concluded that the Commissioner had failed to establish that the SDP had substantially lessened competition. It dismissed the Commissioner’s application under this section.

The decision in Canada Pipe can be contrasted with many of the decisions dealing with rebate programmes, or "fidelity rebates" in the EU. Clearly, the result in Canada Pipe illustrates the stark difference not only in the underlying legislation in each jurisdiction, but also in the approaches to considering whether rebate programmes are an abuse of dominance or anticompetitive.

In contrast to the effects-driven analysis in Canada Pipe, the case law in the EU has not focused on the actual effects of such programmes. In the EU, the courts have treated loyalty rebate programmes offered by dominant players as virtually per se illegal as they are presumed to foreclose a substantial part of the market to competitors.

As the Court of First Instance said in Michelin II (Case T- 203/01), in order to establish an infringement of article 82 it is sufficient that "the abusive conduct of the undertaking in a dominant position tends to restrict competition or, in other words, that the conduct is capable of having that effect" (para 239).

Thus, the threshold for finding that an act is "anticompetitive" in the EU is lower as there need not be any demonstration of actual harm. It is sufficient that the conduct in question have an anticompetitive intent. As the CFI stated in Michelin II:

In contrast to the decision in Canada Pipe, the EU cases have engaged in very little analysis of the actual harm to competitors. As demonstrated in a number of EU decisions, the harm to competitors from such conduct is implicit.

For example, in Virgin/British Airways, the Commission acknowledged that BA’s competitors had been able to gain market share from BA while the programme in question had been in operation. Nonetheless it stated:

In contrast, in Canada Pipe, the Tribunal looked for evidence to link the difficulties experienced by Canada Pipe’s competitors to the SDP. In the absence of such evidence, the Tribunal declined to hold that the SDP was anticompetitive or had resulted in a substantial lessening of competition.

The EU’s treatment of loyalty rebates by dominant players has been criticised for many reasons. Firstly, it assumes that any potential negative effect on any competitor (including an ineffective competitor) is necessarily anticompetitive. However, such reasoning fails to recognise that even healthy competition can have a negative effect on competitors.

In contrast, the Canadian Competition Tribunal has acknowledged that a detrimental effect on competitors may nonetheless result in a benefit to consumers and may not result in an overall substantial lessening or prevention of competition. In Canada Pipe, the Tribunal recognised that, while Canada Pipe’s SDP has had an effect on competitors and even perhaps on competition, the SDP has not caused a substantial lessening or prevention of competition and, thus, should not be discouraged.

Again, in another contrast to the Canadian approach to loyalty-based rebate programmes, business justifications are not given much consideration in EU case law. In fact, any possible business justification for a rebate programme offered by a dominant firm has been viewed as incapable of curing the overriding harm to consumer choice (e.g. Hoffman-LaRoche & Co v Commission, at para 90). However, in Canada Pipe, the Tribunal recognised that there may, in fact, be a business justification for such programmes that may benefit the buyers themselves and, thus, should not be viewed as anticompetitive.

The Canada Pipe decision also leaves open the possibility that, rather than representing a lack of choice, customers choose to participate in such programmes. Buyers may not see loyalty rebate programmes as an unwarranted restriction on choice, but as a choice that they are free to exercise and, if so, earn the applicable rebates.

The decision in Canada Pipe contributes to the ongoing debate concerning the antitrust treatment of loyalty-based discount programmes by dominant players. As case law internationally continues to develop and evolve in this area, it is not surprising that different jurisdictions will apply different approaches and considerations. These different approaches should perhaps be kept in mind as the EU grapples with revising its approach to the scope and application of article 82 in the near future.

Commissioner of Competition v Canada Pipe Co Ltd, Competition Tribunal, judgment 3 February 2005 www.ct-tc.gc.ca/english/CaseDetails.asp?x=68&CaseID=163

Competition Bureau, Enforcement Guidelines on the Abuse of Dominance Provisions (Ottawa: Competition Bureau, 2001) competition.ic.gc.ca/epic/internet/incb-bc.nsf/en/h-ct01258e.html

Case T-203/01, Michelin v Commission, judgment 30 September 2003 europa.eu.int/jurisp/cgi-bin/gettext.pl?lang=en&num=79969069 T19010203&doc=T&ouvert=T&seance=ARRET&where=()

Case 85/76, Hoffman-La Roche & Co v Commission [1979] ECR 461

Virgin/British Airways, Commission Decision 2000/74/EC of 14 July 1999 (OJ 2000 L30/1)

Effects and inherent effects under article 82: Michelin 2 and Van den Bergh Foods, by Brian Sher and Annukka Ojala, CLI December 2003, p.7