Today in Canada, more than ever before, companies and individual executives are relying on competition lawyers and in-house counsel for guidance in an increasingly complex world of regulatory compliance. This is in large part due to the fact that the costs of non compliance are increasing as consumers are becoming more proactive, the Competition Bureau (the "Bureau") is enforcing Canadian competition laws with more vigour,1 enforcement agencies are sharing information across borders, record penalties are being imposed2 and proposed administrative monetary penalties are nearing punitive heights. The same forces at play that make the role of competition lawyers and compliance managers more important are the same forces that make it more complex. These forces also create an impetus for modern effective competition law.
In November 2004, the call for a more modern and effective competition law regime led to the tabling in the House of Commons of proposed amendments to the Competition Act 3 (Bill C-19 or the "Proposed Amendments").4 However, the Proposed Amendments do not have broad base support and have been criticized as being over-reaching, unnecessary and otherwise flawed.5 This paper provides an overview of the key issues and developments facing competition lawyers and in-house counsel in Canada today.
Canada's Competition Laws
Section 1.1 of the Act provides:
"The purpose of this Act is to maintain and encourage competition in Canada in order to promote the efficiency and adaptability of the Canadian economy, in order to expand opportunities for Canadian participation in world markets while at the same time recognizing the role of foreign competition in Canada, in order to ensure that small and medium-sized enterprises have an equitable opportunity to participate in the Canadian economy and in order to provide consumers with competitive prices and product choices."
In summary, the four main objectives of the Act are to promote: (i) the efficiency of the Canadian economy; (ii) Canadian participation in world markets; (iii) equal opportunity for small and medium sized businesses; and (iv) consumer protection. These objectives, while complementary in many respects, can pull in opposite directions. Canadian participation in world markets may, at times, come at the expense of small and medium sized businesses while the promotion of efficiencies may compromise the product choices available to consumers. To ensure that these distinct objectives complement rather than contradict each other, the Act was originally drafted to achieve balance. It is in the hands of the enforcers of the Act, the Bureau, the Competition Tribunal (the "Tribunal") and the courts, to interpret and enforce the Act in such a way so as to maintain the overarching balance necessary to encourage competition in Canada by promoting efficiency, encouraging Canadian participation in world markets, ensuring equal opportunity for small and medium sized businesses and providing the consumer with competitive prices and product choices. Parliament must also ensure that amendments to the Act reflect and maintain that balance rather than just promote the objectives of certain interest groups.
The Act contains both criminal offences in relation to competition and matters reviewable by the Tribunal. The principal criminal offences under the Act are conspiracies, bid-rigging, various pricing offences (price maintenance/price discrimination/predatory pricing) and misleading advertising. The Act's criminal offences are prosecuted by the Attorney General of Canada in the criminal court system and can lead to penalties such as fines (against both corporations and individuals), jail terms, and prohibition orders.6
The Act's civil "reviewable practices" relate to abuse of dominance, refusal to deal, exclusive dealing, tied selling, market restrictions and deceptive marketing practices. The civil reviewable practices provisions of the Act do not carry with them the threat of imprisonment or, except in limited circumstances, monetary penalties. Administrative monetary penalties ("AMPs") may be imposed for deceptive marketing practices and for abuse of dominance by a domestic airline service. Applications with respect to reviewable practices are adjudicated by the Tribunal, a specialized administrative body consisting of judges and lay experts (although the Act's civil "deceptive marketing practices" may also be dealt with by the courts). Applications may be commenced by the Commissioner or, in certain cases, by private parties. Currently, a finding that a company has engaged in a reviewable practice could lead to a variety of intrusive behavioural or even structural orders. In the case of abuse of dominance, for example, the Tribunal may issue an order prohibiting the continuation of activity found to be anti-competitive where that conduct prevents or lessens competition substantially. The Tribunal may also order a person to take such additional actions, including the divestiture of assets or shares, as required to overcome the effects of the anti-competitive conduct. The Proposed Amendments, discussed in more detail below, broaden the possible remedies in respect of these civil provisions, including expanding the scope for imposing monetary penalties.7
In April 2002, the House of Commons Standing Committee on Industry, Science and Technology (the "Industry Committee") released a report entitled A Plan to Modernize Canada's Competition Regime.8 In response to the Industry Committee's report, in June 2003, the Bureau launched a public consultation on proposed legislative changes to the Act with the release of a discussion paper entitled Options for Amending the Competition Act: Fostering a Competitive Marketplace (the "Discussion Paper"). On November 2, 2004, Bill C-19 was tabled proposing amendments to the Act based in part on some of the recommendations made in the Industry Committee report and in the consultations conducted by the Bureau.9 The Proposed Amendments are said to be intended to strengthen Canada's competition framework in a global economy to the benefit of both consumers and businesses.
The key proposals include: the repeal of the criminal pricing provisions; the introduction of AMPs as a remedy in abuse of dominance cases; the increase in the maximum level of AMPs for the contravention of the deceptive marketing practices provision of the Act; and the introduction of a restitution remedy.
Bill C-19 proposes to repeal the criminal prohibitions against price discrimination, predatory pricing, geographic price discrimination, and promotional allowances with the result that these will now be dealt with under the Act's existing civil abuse of dominance provision. A repeal of the Act's criminal pricing provisions has long been advocated in recognition of the fact that these practices can be pro-competitive and would be a welcome development in the modernization of Canada's competition laws. That said, should all of the Proposed Amendments be enacted, a party found to have engaged in one of these practices in a manner that is contrary to the Act's abuse of dominance provisions will face the prospect of substantial financial penalties in the form of AMPs, which as argued below may have a chilling effect in and of itself given the magnitude of the proposed penalties. In fact, it is arguable that the imposition of civil sanctions in the form of AMPs is tantamount to criminal prosecution without the corresponding due process and constitutes a step backwards rather than a step towards modernization.
Bill C-19 proposes an increase of the maximum level of AMPs for contraventions of the Act's deceptive marketing practices provisions to $750,000 for individuals, increasing to $1 million for each subsequent order, and $10 million for corporations increasing to $15 million for each subsequent order. This is a substantial increase from the existing thresholds of $50,000 and $100,000 respectively for individuals and corporations. Bill C-19 also introduces AMPs as a potential remedy in cases of abuse of dominance, imposing a maximum penalty of $10 million, increasing to $15 million for each subsequent order. The belief is that AMPs will deter businesses from engaging in anti-competitive practices. Amendments that would authorize the Commissioner to seek orders against parties found to have made false or misleading representations requiring restitution or payment to consumers who purchased the relevant products were also proposed. The implications of AMPs and the restitution remedy will be discussed in more detail below.
The key proposals contained in Bill C-19 would, if implemented in their current form, introduce significant changes to and dramatically alter the existing balance in the Act. For businesses, the Proposed Amendments introduce the possibility of significant monetary repercussions which may have a chilling effect on the vitality with which firms choose to compete, thereby dampening otherwise vigorous, innovative and healthy competition in the marketplace. In attempting to make the Act more effective and efficient, the Proposed Amendments have upset the balanced approach to enforcement in the current Act and may go so far as to take the wind out of the sales of healthy competition in Canada.
(a) Administrative Monetary Penalties – Tantamount to Criminal Prosecution?
There has been substantial negative reception in many quarters to the proposed new maximum AMPs for deceptive marketing practices and the proposals to introduce AMPs as a remedy for abuse of dominance.
The intention behind the proposed AMPs is said to be to promote compliance with the Act and not to punish the business or individual who contravened the Act. However, considering that reviewable conduct is lawful until and unless held to be unlawful by the Tribunal, the AMPs proposed at the maximum levels are disproportionately high and may discourage risk-taking and innovative behaviour that may be pro-competitive and place companies on the defensive through overexposure to financial liability. The civil provisions of the Act, whether abuse of dominance, marketing practices or the proposed civil pricing provisions, govern conduct that is not inherently anti-competitive and is prohibited only after the Tribunal determines that the conduct is anti-competitive. There is a clear distinction between conduct considered morally reprehensible such as offences like fraudulent telemarketing and otherwise legal activity which may be examined under the abuse of dominance provisions. Bill C-19 fails to recognize this distinction.
At present, section 79 of the Act allows the Tribunal to make an order prohibiting a person or company that has abused its dominant position from engaging in the anti-competitive practice or directing the company to take positive actions to remedy the abuse such as the divestiture of assets or shares. In recommending the imposition of AMPs in situations of abuse of dominance, the belief of the Industry Committee was that under the existing law there is little incentive for businesses to comply with the Act and that "an award of damages and fines would rebalance the incentive structure to better deter such behaviour when anticompetitive opportunities present themselves".10 There is no broad based support of that belief. The current regime provides a sufficient deterrent effect, especially given the significant costs of responding to information requests or section 11 orders in the context of Bureau inquiries and the costs involved in litigating such matters. If the Commissioner believes that there are incidents of abuse of dominance in the marketplace that are not being addressed, the first priority should be to bring more cases rather than seek changes to the legislation. (The decision in Canada Pipe was the first fully contested decision in over seven years.)
Under the existing Act, the Tribunal has the power to award AMPs if an individual or firm is found to have engaged in deceptive marketing practices pursued under the civil track. The existing AMPs for violation of the deceptive marketing practices provisions of the Act are $50,000 for individuals and $100,000 for corporations.11 However much larger penalties have been imposed on consent. For example, the consent agreements filed in Suzy Shier12 and Sport Chek/Sport Mart13 imposed monetary penalties of $1 million and $1.2 million, respectively. Clearly, statutory limits have not impeded strong enforcement. The Commissioner can also elect to institute criminal proceedings for false and misleading representations under section 52 of the Act. Under the criminal misleading representations provisions, parties are currently subject to a maximum fine of $200,000 on summary conviction and to a fine in the discretion of the court for an indictable offence.14 The Bureau has indicated that its policy is to pursue most deceptive marketing matters under the civil track unless there is a clear and compelling evidence suggesting that the accused knowingly or recklessly made a false or misleading representation to the public and the Bureau is satisfied that a criminal prosecution would be in the public interest. The Bureau has issued an Information Bulletin setting out its policy in choosing whether to pursue the civil or criminal track to address deceptive marketing practices.15
The proposed AMPs for companies or individuals who engage in deceptive marketing practices resulted from the thinking that "the (current) maximum AMP is too low, when considering the potential magnitude of profits that can result from deceptive practices and the negative impact that misleading information can have on consumers' confidence in the marketplace".16 However, raising AMP levels under the civil track to an amount that is fifty times greater than the maximum fine for summary convictions under the criminal track is paradoxical and suggests that the proposal is designed to yield the results of criminal prosecution without adhering to the stricter evidentiary and due process rules associated with the criminal misleading advertising provisions of the Act. Indeed it is hard to imagine a deceptive marketing practice that would warrant the imposition of a $10 million "corrective" monetary penalty that should not otherwise have been pursued under the criminal track. The ability to impose AMPs that are undeniably penal in nature in respect of reviewable matters will undoubtedly raise significant constitutionality issues. The presumption of innocence and the right to a fair hearing before an independent and impartial tribunal guaranteed by subsection 11(d) have been held to be available to persons prosecuted for regulatory offences involving punitive sanctions. As discussed below, the issue of constitutionality becomes even more problematic considering that the Competition Tribunal Rules do not require the level of disclosure by the Commissioner that is normally associated with penal provisions.
The imposition of higher AMPs compounded by the costs of litigation runs the risk of "chilling" pro-competitive behaviour. Companies may become risk averse and be less likely to engage in aggressive but lawful competition out of fear that someone may make an unmeritorious complaint with the Bureau which, even if ultimately rejected, will trigger an expensive investigative process. Furthermore, the increased leverage the Commissioner would have in any negotiations could lead companies to settle claims and abandon conduct even in cases where the Tribunal may not have been persuaded that the conduct was anti-competitive.
(b) Restitution – Remedy or Penalty?
The Proposed Amendments provide for a further remedy for consumers by empowering the Tribunal or court to order firms or individuals who engage in deceptive marketing practices to provide restitution to consumers in an amount that will not exceed the amount paid by all consumers for the products. The Proposed Amendments also introduce a complementary measure intended to be used in situations where there is a risk that the assets necessary to repay consumers will disappear which enables the Tribunal or court to make temporary freezing orders where the "articles" are likely to be depleted.
Providing for restitution once again upsets the delicate balance that our competition law is trying to obtain by shifting the emphasis of the law away from competitive processes as a whole and toward the protection of individual consumers. The proposal in Bill C-19 to base restitution amounts on the amount paid by all consumers – regardless of whether they are aggrieved or not, goes well beyond the principle of restitution which is to restore something to its original state. The recent decision in Sears, in which Justice Dawson on behalf of the Tribunal ruled that consumer harm is not relevant to a consideration of the materiality of any misrepresentation and hence not relevant to the existence of the reviewable practice lends support to the argument that "restitution" is an inappropriate remedy and suggests that its purpose is penal rather than compensatory.17 Moreover, the proposal in Bill C-19 to enable the court to designate a not-for-profit organization to receive any or all of the unclaimed or undistributed restitution payment goes beyond the principle of restitution as compensation and amounts to a "tax" on business and raises constitutional issues surrounding federal encroachment into provincial jurisdiction.
Under the current law, there is sufficient flexibility in enforcement to permit the Commissioner to impose a restitution remedy. For example, in a recent price maintenance case, John Deere Limited agreed to a voluntary 5% cash rebate per customer totalling $1.91 million, to address the Commissioner's concerns that John Deere Limited had been discouraging its dealers from selling tractors below the suggested prices. In its press release, the Bureau reported, "[t]his landmark resolution is the first time a price maintenance investigation has resulted in direct restitution to consumers" suggesting that restitution may be a more frequent remedy in appropriate circumstances in the future.18
(a) Recent Enforcement Activities at the Bureau
On January 24, 2005, two and a half years after the Commissioner commenced a proceeding against Sears Canada Inc. ("Sears") under the Act's civil misleading advertising provisions, alleging that Sears advertised five brands of tires at artificially high "regular" prices, the Tribunal released a decision finding against Sears.19 Sears represents the first contested proceeding under the civil "ordinary selling price" ("OSP") provisions of the Act.20
Under the OSP provisions, the Tribunal may issue a remedial order where a supplier makes a representation for a business purpose as to its ordinary selling price of a product (usually compared to a sale price) where that supplier has not satisfied either (i) a "volume test" of selling a substantial volume of the product at that price or higher within a reasonable time before or after making the representation or (ii) a "time test" of offering the product at that price or higher, in good faith, for a substantial period of time recently before or immediately after the making of the representation. The absence of actual consumer harm or the fact that many consumers may be satisfied with their purchase is not relevant to the consideration of whether the representations are material.
In Sears, the Tribunal found that: (i) Sears failed to meet the volume test (conceded by Sears) with respect to the sale of all five of the lines of tires at issue; (ii) Sears' purported "regular" tire prices were not offered in "good faith" as required under the "time test"; (iii) Sears did not meet the "substantial period of time" requirement in the "time test" for four of the five lines of tires; and; (iv) Sears failed to establish the defence that its OSP representations were not false or misleading in a material respect. Ultimately Sears agreed to pay a $100,000 AMP, currently the maximum penalty that the Tribunal can impose on a corporation following an initial finding of reviewable conduct, as well as $387,000 towards the Bureau's legal costs.21
An overriding theme emerging from the Sears decision is that the Tribunal's approach to the "good faith" element of the time test in section 74.01 of the Act would appear to merge the time test into the volume test insofar as the Tribunal looked for a significant volume of sales and an expectation that the regular price was competitive with others in the marketplace as criteria for demonstrating that the regular price was offered in "good faith" for a substantial period of time.
The Tribunal found that the "good faith" test is a subjective one, although objective factors such as volume of sales and competitors' prices are relevant to that assessment. "Good faith" is to be determined by asking whether the supplier truly believed that its regular prices were genuine and bona fide, i.e., set with the expectation that the market would validate those regular prices. Consistent with the Bureau's OSP guidelines,22 the Tribunal found that the following evidence supported the finding that Sears did not truly believe that its regular prices were genuine and bona fide: (i) Sears' internal documents did not track sales at the "regular" price and estimated a low level of sales (5-10%) at the "regular" price; (ii) the single tire "regular" price was not relevant to 90 to 95% of tire purchasers who were not in the market for a single tire and who would automatically receive a lower per tire price for purchasing two or more tires; and (iii) actual sales at the "regular" price were below 5%.
An unanswered question that remains after the Tribunal's decision in Sears is what percentage of a product has to be sold at the regular price to constitute that regular price being offered in "good faith". The Sears decision does not shed much light on the "volume test", except that it would appear that 6% of the volume at the regular price is not sufficient.
Although the Tribunal’s decision is lengthy (104 pages) and a great deal of discussion was devoted to the issue of the constitutionality of section 74.01(3), the Tribunal did not seem to devote as much attention to the critical concepts of the relevant time period and what constitutes a substantial period of time in the application of the "time test". The Tribunal appeared to give significant weight to Sears' own internal documents which recommended a six-month period as the appropriate reference period for this purpose as opposed to the 12-month period suggested by Sears. Similarly, despite the fact that the Tribunal spent numerous paragraphs in the beginning of its judgement examining the variety of tests used in other jurisdictions, the Tribunal devoted only two brief paragraphs and applied a bright line threshold in determining what constitutes a "substantial period". The Tribunal held that the regular price is not in effect for a "substantial period" of time unless it is in effect for more than 50% of the relevant time period. It was not enough that the regular price of a given brand of tire was in effect for 45% or 46% of the last six months, although one line of tires for which the regular price was in effect for 60% of the time was held to be offered at the regular price for a substantial period.23 Even where one brand of tire was offered at the regular price for 60% of the relevant time period, the Tribunal did not consider this price to have been offered in good faith as only 1.21% of sales during the relevant period were made at that price, and the reasonable expectation was that no more than 6% of the sales would have been made at that regular price.
It can be expected that this decision will embolden the Bureau to continue its aggressive enforcement approach in this area.
(ii) Canada Pipe
The Tribunal's decision in Canada Pipe provides important insight into how the Tribunal can be expected to analyze dominant firm conduct going forward.24 The decision is also useful in understanding how the truncated disclosure obligations introduced in 2002 may affect future abuse of dominance litigation.25
After almost seven years of investigation, procedural disputes and litigation the Tribunal released its decision in Canada Pipe in February 2005.26 The Commissioner alleged that the loyalty program operated by Canada Pipe's Bibby Ste-Croix division (referred to as the "Stocking Distributor Program" or "SDP") contravened the Act's abuse of dominance and exclusive dealing provisions. The SDP offers distributors quarterly and annual rebates, as well as point of purchase discounts should they purchase all of their cast iron drain, waste and vent ("DWV") product needs from Canada Pipe. The Commissioner also alleged that Canada Pipe's acquisitions of competitors or their inventory and the non-compete agreements obtained in connection with the acquisitions amounted to anti-competitive conduct. The Commissioner asked that Canada Pipe be required to abandon its SDP and that Canada Pipe be prevented from completing any acquisitions in the Canadian cast iron DWV industry for the next three years.
To obtain a remedy for abuse of dominance pursuant to section 79 of the Act, the Tribunal must be satisfied that a person or persons substantially or completely control a class or species of business in Canada (dominance), that that person is engaged in a practice of anti-competitive acts, and that the practice is having or is likely to have the effect of substantially preventing or lessening competition in a market.
The Tribunal rejected the Commissioner's allegations on the basis that the Commissioner failed to show that the practices in question were anti-competitive and had resulted in a substantial prevention or lessening of competition. The Tribunal concluded that the SDP was not itself anti-competitive as its presence had not deterred entry. 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 jeopardizing accrued quarterly rebates or point of sale discounts. Annual rebates, by contrast, were relatively small.
The Tribunal considered the following characteristics of the SDP as part of its determination that the SDP is not anti-competitive: (i) its terms are transparent and well known; (ii) the greatest discount was a point of purchase discount immediately available to all SDP participants; quarterly rebate component of the SDP was more significant than the small annual rebate component; and (iii) distributors were not contractually bound to stay on the SDP for any length of time. Equally important was that 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", which ultimately benefits consumers.27
The Commissioner has appealed the Tribunal's decision stating that "this decision raises key legal issues related to the Bureau's mandate to pursue dominant firms that engage in anti-competitive behaviour". "Clarity of the law with respect to loyalty programs such as Canada Pipe's Stocking Distributor Program is of fundamental importance to our enforcement of the exclusive dealing and abuse of dominance provisions of the Competition Act."28
Canada Pipe was the first abuse of dominance case to be litigated under the new truncated disclosure obligations.29 Based on the experience from Canada Pipe, the reliance standard of disclosure in the Revised Rules has undeniably shifted the landscape of litigation before the Tribunal in favour of the Commissioner with potentially serious adverse consequences for a respondent's ability to mount a complete and effective defence to the Commissioner's case.30
The lengthy procedural disputes in Canada Pipe suggest that the lower level of disclosure afforded by the Revised Rules almost inevitably leads to arguments between the parties over the appropriate level of disclosure. 31 Dealing with such arguments is time-consuming and detracts from the efficient functioning of the Tribunal. With the proposed introduction of significant AMPs through Bill C-19, the likelihood of future procedural disputes concerning the appropriate levels of disclosure in contested abuse of dominance proceedings is virtually guaranteed.32
(b) Are You the Bureau's Next Target and How to Protect Yourself
Over the last six months, the Bureau has aggressively enforced the deceptive marketing provisions of the Act.33 The Sears decision will likely embolden the Bureau to continue its aggressive enforcement approach in this area. The Bureau has also continued to crack down on cartels in Canada34 and has restated its commitment in this area.35 The Bureau has also identified anti-competitive conduct by dominant players as an enforcement policy for the coming year.
The Bureau's record over the past twelve years demonstrates Canada's commitment to prevent and deter cartels both international and domestic. Since 1992, there have been more than 40 convictions, all as a result of guilty pleas, entered against corporations and individuals in relation to cartels involving a variety of products, including vitamins, food and feed additives, other chemical products and graphite electrodes.
However, the Bureau's record in contested cases at trial under section 45 of the Act, which have all been domestic, has been less impressive: only 3 convictions out of 22 contested cases 36 between 1980 and 2004. There have been no completed contested section 45 cases since 2000. Accordingly, the Bureau is taking steps to improve its ability to detect, investigate and prosecute companies by reviewing the current conspiracy provision with a view to modernizing it, clarifying its Immunity Program and deepening cooperation with other enforcement agencies around the world.
In its report, A Plan to Modernize Canada's Competition Regime, the Industry Committee noted that the language of the conspiracy provisions of the Act raises concerns on two grounds. First, deterrence of anti-competitive conduct is impaired by requiring proof of economic effects to convict the members of a price–fixing cartel. Second, efficient economic activity is suppressed by exposing the members of legitimate joint ventures to criminal prosecution. The Industry Committee recommended that the Act be amended to create a "two-track" approach for agreements between competitors.
The Bureau's subsequent Discussion Paper proposed to amend the Act to create a two-track conspiracy provision consisting of a per se criminal offence to address "hard-core" anti-competitive conduct (such as price fixing and market allocation) and a civil strategic alliances provision to address all other agreements among competitors that could substantially lessen competition.37 The proposals set forth in the Discussion Paper were the subject of much discussion and public consultation which yielded no consensus among interested parties on the necessity or wisdom of departing from the current regime to create a two-track system. Given the significant concerns raised about the proposals contained in the Bureau's Discussion Paper, the Bureau has committed to undertake further analysis and consultation in this area.
The Bureau has also identified a number of issues that require clarification with respect to both the implementation and interpretation of the Immunity Program which has proven instrumental to prosecuting companies participating in a cartel. The Commissioner has indicated her intention to issue a discussion paper on immunity programs in the summer of 2005.38 For example, the Bureau intends to clarify the timing of the proffer to avoid delays in the process, recognizing that the exact period of time afforded to a company for perfecting its application will vary depending on the circumstances. 39 The type and quality of the information that should be provided at the proffer stage also requires clarification. Finally, the circumstances under which personal immunity will be revoked will be clarified.
In the interim, the Bureau will continue to investigate and prosecute cartels. As early detection is key to ensuring compliance with the Act, it is important that compliance managers be sensitive to the conditions that can lead to a cartel and be aware of the signs and patterns of collusion that may point to a company's potential involvement in a cartel.
Conditions that facilitate cartel behaviour are often evident in industries where expertise or knowledge is concentrated and corporate insider knowledge is circulated through lateral movement. Social networks play an instrumental role in the creation of a cartel. Trade associations also facilitate cartel behaviour and while they may operate for perfectly legitimate purposes, corporations should always be cognizant of their use and purpose and aware of the information that is exchanged and derived from them.
Signs and patterns of behaviour that may raise suspicion in the Bureau include situations where suppliers begin covering geographic areas that would not normally be part of their territory, where one company wins a client's business from another company that consistently bids but never seems to get the contract and where the market changes overnight with no clear explanation for the shift.40
Corporations ought also be made aware that Canadian subsidiaries can be convicted of the offence of conspiracy under the Act even where the executives of the Canadian affiliate were not aware of the illegal agreement entered into by its parent corporation. Section 46 of the Act prohibits a corporation that carries on business in Canada from implementing a directive or instruction from a person outside Canada in order to give effect to a conspiracy that was entered into outside of Canada that if entered into in Canada would be a criminal offence under section 45 of the Act.
In July 2004, Morganite Canada Corporation pleaded guilty and was fined $450,000 for its role in implementing an international conspiracy in Canada relating to carbon brushes. The executives of Morganite Canada were not aware of any illegal agreement. Rather, Morganite Canada simply implemented pricing directives issued to it by its affiliate Morganite Electrical Carbon Corporation of Wales ("MECC"), which had been arrived at by agreement between MECC and some of its competitors. Nonetheless, this was sufficient to establish guilt under section 46.
Justice Chapnik, the presiding judge in this case, heeded the following advice to multinational corporations carrying on business in Canada:
"In this age of globalization, I do not know whether a subsidiary company implementing such directives, that is, acting as a conduit for pricing directives, has or should have a duty to make inquiries in such a situation or if it would have borne fruit in this case in any event, but it appears at the very least that this section of the [Competition Act] is one which multinational corporations ought to be aware of in developing their compliance programmes."
(ii) Fraudulent Mass Marketing and Information Asymmetry
Over the past year, the range of deceptive marketing practices which the Bureau has pursued (under the civil or criminal track) have included allegations principally related to false and misleading representations about a product's performance, failure to comply with the ordinary price provisions under the Act, misrepresentation about a promotional contest or failure to comply with the requirements for a promotional contest, false and misleading representations communicated through telemarketing, pyramid selling and deceptive mailings concerning the winning of a prize or containing a false "invoice". The Bureau has yet again identified fraudulent mass marketing and information asymmetry (accurate information in the marketplace) as enforcement priorities for the coming year. According to the Bureau, the landmark decision in Sears "sends a loud signal to the business community" and "represents an important milestone in the Competition Bureau's efforts to ensure that consumers get honest and accurate pricing information from retailers".41 Thus, firms can expect a continued vigor on the part of the Bureau in cracking down on companies engaged in deceptive marketing practices. Faced with marketing practices becoming the subject of greater scrutiny not only by the Bureau but also by customers and competitors, combined with the potential personal exposure of key officers and employees and the prospect of even greater penalties, a company that fails to pay attention to the deceptive marketing provisions of the Act may find itself facing serious financial repercussions.
(iii) Abuse of Dominance
While the Tribunal's decision in Canada Pipe may provide some comfort to firms that have a dominant position in the marketplace, the Bureau seems intent on pursuing dominant firms that engage in anti-competitive behaviour and is unlikely to be dissuaded by its loss in this case.
Companies with significant market share are entitled to engage in aggressive competition. It is perfectly fine to react to competitive pricing, however, pricing becomes problematic when it involves significant undercutting or significant price swings. Dropping prices significantly in reaction to competition could be looked upon as evidence of market power. Therefore, it is best to check aggressive pricing moves with competition counsel. In Canada, in contrast to the situation in the European Union where recent decisions have held that exclusive dealing is per se illegal for dominant firms, exclusive dealing is not automatically unlawful for dominant companies. However, dominant firms should be encouraged to keep a watchful eye on any exclusivity arrangements or volume discount programs they have in place. The following parameters for acceptable exclusive dealing programs set out by the Tribunal in Canada Pipe are a useful guide: there must be transparent terms; incentives must be driven by short reference periods; there must be low switching costs for suppliers/retailers who want to leave the exclusivity arrangement; and there must be a legitimate business reason for the arrangement.
(iv) Education, Prevention, Detection
Faced with the costs of a possible Bureau investigation, increasing financial penalties and the possibility of mounting AMPs and the introduction of restitution payments, combined with the costs associated with identifying affected persons, determining entitlements and administering the restitution payments, companies should be warned about the increasing costs of non compliance and encouraged to be proactive in educating its employees, preventing anti-competitive conduct and detecting possible violations of the Act.
Education and prevention are key. Every company, large or small, should consider implementing a competition compliance program. It is particularly advisable for companies in industries that have been the subject of Bureau investigations, companies in concentrated industries and companies with high market shares.
If the possibility of anti-competitive conduct is raised it should be taken seriously and addressed quickly; early detection can be equally as important. Most problems arise from a failure to respond promptly, a failure to investigate the situation thoroughly and incomplete or half-hearted responses.
A compliance program can help reduce uncertainties and give companies the comfort to pursue competitive strategies more aggressively in certain situations. The fact that a company has an effective compliance program may also, in and of itself, be relevant in determining whether it is entitled to more lenient treatment from the Bureau. As set out in the Bureau's Compliance Bulletin, the simple fact that a company has a compliance program will not preclude enforcement action by the Bureau. However, the Bureau may be more willing to consider alternative forms of case resolution that fall short of fully contested proceedings (criminal or civil), or a reduction in sentence, where an effective compliance program is in place. The Bureau will want to be satisfied that (i) the conduct was not in keeping with corporate policy, (ii) the illegal conduct was terminated as soon as it came to light, and (iii) there was an attempt to remedy the adverse effects of the conduct. An effective compliance program may also help to establish a "due diligence defence" to allegations that a company has engaged in certain deceptive marketing practices under the Act.42
The five elements that the Bureau considers to be fundamental to the success of any competition compliance program, as identified in the Compliance Bulletin, are: (i) the involvement and support of senior management; (ii) the development of relevant policies and procedures; (iii) the ongoing education of management and employees; (iv) monitoring, auditing and reporting mechanisms; and (v) disciplinary procedures.43
By the same token, a compliance program will be of little help, and in fact may work against a company, where (i) senior personnel either participated in or condoned the improper conduct that conflicted with the direction of the program; or (ii) the compliance program is a "sham" used to conceal or deflect liability. The Sears case illustrates how the (allegedly) improper or ineffective implementation of a compliance policy can be used by the Bureau against a party. In Sears, the Bureau claimed that Sears had failed to adhere to, or even apply, an internal pricing policy bulletin that had been issued to employees to explain their obligations under the ordinary pricing provisions.
In an increasingly complex world of regulatory compliance the role of competition lawyers and in-house counsel to educate, prevent and detect remains paramount. While the fate of Bill C-19 and the Proposed Amendments to the Act are uncertain, it is certain that the costs of non compliance with Canada’s competition laws will continue to increase. Consumers will continue to be proactive, the Bureau can be expected to continue to enforce the competition laws with vigour, especially with respect to deceptive marketing practices, cartels and anti-competitive conduct by dominant players in the market and companies can no longer expect to get off with a slap of the hand and a small monetary penalty. Record fines are being imposed, individuals are serving time in federal penitentiaries, restitution is being ordered and costs are being awarded against defendants in favour of the Bureau. In this environment, education, prevention and detection are key.
1 Apart from exposure to financial penalties/remedies, companies must be concerned about the significant costs that will have to be incurred in dealing with proceedings under the Competition Act (the "Act") as well as the Bureau investigations that precede them. The Commissioner of Competition (the "Commissioner") and Bureau staff have a considerable number of investigatory powers at their disposal. For example, the Bureau has the power under the Act to obtain judicial orders authorizing it to conduct searches and seizures, including searches of computer data; require individuals to testify under oath or affirmation; demand the production of documents; and demand written responses to questions under oath or affirmation. These costs (lost management time, legal fees, negative publicity) are not to be underestimated.
2 The penalties imposed in Canada for violations of the Act have escalated in recent years. A record single fine of CDN $50.9 million was imposed against one of the corporations found to have participated in a bulk vitamins cartel. Record penalties also have been imposed against parties in recent years for violating the Act's price maintenance provisions and the deceptive marketing practices provisions. In several cases, jail sentences have been imposed against individuals. For example, in October 2004 two individuals involved in a phoney invoice scam were sentenced to three years in federal penitentiary for violating the false or misleading representations provisions of the Act. Two others involved in the same scam received an 18-month and nine-month conditional jail sentence, including house arrest. In March 2005 the Vice-President of a firm fined under the deceptive marketing practices provisions of the Act pleaded guilty and received a conditional jail sentence of two years. Furthermore, section 36 of the Act permits any person who has suffered losses as a result of conduct that is contrary to any of the Act's criminal provisions to commence a civil action to recover single damages from the person(s) who engaged in that conduct. Potential damages can be substantial. For example, one of the defendants in an action brought against participants in the graphite electrodes cartel settled with the plaintiff steel companies for CDN $19 million, apart from having agreed to pay a criminal fine of CDN $11 million. In the past few years, an unprecedented number of these claims has been initiated under provincial class action legislation.
3 R.S. 1985, c. C-34.
4 Given the tenuous state of the Government, it appears as if Bill C-19 has for the time being been put on the back burner. If Bill C-19 is dropped this will be the second piece of controversial competition legislation in under two years to be dropped from the table due to a change, or the possibility of a change, in government. Bill C-249 which proposed to remove the efficiencies defence from the Act fell off the order table after passing third reading in the House of Commons when Parliament was prorogued on November 12, 2003. The Bureau is currently reconsidering the treatment of efficiencies under the Act.
5 John Bodrug and Calvin Goldman, eds., Competition Law of Canada, Legal Letter No. 19 (December 2003), (Juris Publishing, Inc.) at 4.
6 The maximum fine for the conspiracy offence is $10 million per count; fines for the bid-rigging and price maintenance offences are "in the discretion of the court"; and the price discrimination and predatory pricing provisions set out only maximum jail terms and are silent as to fines. The maximum jail term for the conspiracy offence is 10 years in prison; the maximum term for the bid-rigging and price maintenance offences is five years; and the maximum term for price discrimination and predatory pricing is two years. Prohibition orders are court orders that forbid the continuation or repetition of an offence. Prohibition orders may also include "prescriptive terms", i.e., a requirement that the subject of the order take positive steps to promote compliance with Canadian competition law and prevent future offences. Prohibition orders may be issued in conjunction with a guilty plea or as a means of settling a case on consent without a guilty plea.
7 The Proposed Amendments also propose repealing the airline specific provisions of the Act.
8 House of Commons, Standing Committee on Industry, Science and Technology, A Plan to Modernize Canada's Competition Regime, 1st Session, 37th Parliament, April 2002, available on-line at: httP://www.parl.gc.ca/InfoComDoc/37/1/INST/Studies/Reports/indurp06-e.htm (hereinafter Industry Report).
9 Separate consultations are ongoing with respect to the efficiency defence and reform of the conspiracy provisions of the Act, which were also addressed in the Bureau's Discussion Paper.
10 Industry Report supra note 8, at 13.
11 Act, supra note 3, s. 74.1. In the case of a subsequent order, the maximum amount that can be imposed is increased to $200,000 in the case of a corporation and $100,000 in the case of an individual.
12 Commissioner of Competition v. Suzy Shier Inc. (CT-2003-006) ("Suzy Shier").
13 Commissioner of Competition v. The Forzani Group Ltd. (CT-2004-10) ("Sport Chek/Sport Mart").
14 Competition Act, supra note 3, s. 52(5).
15 "Misleading Representations and Deceptive Marketing Practices: Choice of Civil or Criminal Track under the Competition Act" (http://cb-bc.gc.ca/epic/internet/incb-bc.nsf/en/ct01181e.html).
16 Speaking Notes for Sheridan Scott, Commissioner of Competition, Competition Bureau, Bill C-19, an Act to amend the Competition Act, presented to the Standing Committee on Industry, Natural Resources, Science and Technologies (November 18, 2004).
17 See Sears, infra note 19 at para 303.
18 See Competition Bureau Press Release, "Consumers to be reimbursed by John Deere Limited" (October 19, 2004) (http://strategies.ic.gc.ca/epic/interest/ind-bc.nsf/en/ct02965e.html).
19 Commissioner of Competition v. Sears (CT-2002-004).
20 Competition Act supra note 3, s. 74.01. Four other recent OSP matters brought by the Commissioner were resolved through consent agreements filed with the Tribunal.
21 In this case, the Tribunal declined to order Sears to issue a corrective notice on the basis that there could be no residual mistaken impression about the representations five years after the fact and, as such a corrective notice would be punitive rather than remedial. Yet, in addition to $100,000 in AMPs (the maximum AMP that can be imposed for violation of the ordinary selling price provisions of the Act) the Tribunal agreed to impose costs of $387,000 against Sears. The remedies imposed in this case, which were undeniably punitive, raise the question of the appropriateness of costs being awarded against a defendant in a case that is largely penal in nature.
22 See Competition Bureau Information Bulletin: "Ordinary Price Claims" (http://www.competitionbureau.gc.ca/internet/index.cfm?itemID=122781g=e#intno).
23 The Tribunal relied on the 1971 decision of the Ontario County Court in Regina v. T. Eaton Co. Ltd. (1973), 11 C.C.C. (2d) 74, in establishing a bright line threshold of 50% where in obiter, in the context of a prosecution under the Combines Investigation Act, the Court observed that if a product was on sale 50% of the time, or thereabouts, the product could not be said to be ordinarily sold for a regular, or any other price.
24 Commissioner of Competition v. Canada Pipe Company, 2005 Comp. Trib. 3, available online at http://www,ct-tc.gc.ca/english/CaseDetails.asp?x=2288.CaseID=163#216.
25 In February 2002, the Competition Tribunal Rules (the "Revised Rules") were substantially amended to streamline and expedite civil non-merger proceedings before the Tribunal. Can. Reg. SOR/94-290, as amended. The 2002 reform package was promulgated by SOR/2002-62.
26 Although the Commissioner filed its application with the Tribunal on October 31, 2002, the investigation of Canada Pipe's SDP began in 1997 when Canada Pipe entered the Canadian DWV manufacturing industry through its purchase of Bibby Ste-Croix. In order to resolve concerns related to the SDP in the context of the Bibby Ste-Croix acquisition, the Commissioner asked Canada Pipe to send a notice to its distributors clarifying the terms to qualify for the SDP and the level of discounts. The Commissioner did not pursue any other remedial action at that time and, as a result, Canada Pipe believed that any issues concerning its SDP had been resolved. However, following a complaint to the Bureau in 2000 by Vandem Industries (a Canadian-based manufacturer of DWV products established in 1999 by two former executives of Bibby Ste-Croix), the Commissioner launched a new investigation into Canada Pipe's SDP.
27 For further details please see: George Addy, Anita Banicevic and Charles Tingley, "Abuse of Dominant Position: Perspectives on Canada Pipe", presented at the Northwind Professional Institute, 2005 Competition Law and Policy Forum (May 4-6, 2005).
28 See Competition Bureau Press Release: Competition Bureau appeals decisions in Canada Pipe case (March 7, 2005) (http://competitionbureau.gc.ca/internet/index.cfm?itemID=19281g=e).
29 The Revised Rules were also applied in the Sears case. However, Canada Pipe is the first test of the Revised Rules under Part VIII of the Act, which is more directly concerned with issues of market competition.
30 The most significant amendment in the Revised Rules involved switching from a relevance-based standard of disclosure, under which parties are required to disclose all relevant documents, to a reliance-based standard of disclosure, under which parties must disclose only those documents upon which they intend to rely. Under the new regime, parties are required to exchange disclosure statements containing a list of the records on which they intend to rely (as opposed to all "relevant documents"), the "will-say" statements of non-expert witnesses and a concise statement of the economic theory in support of their case providing the respondent with little, if any, advance notice of the content of a witness's testimony. Although will-say statements are intended to provide such advance notice, in actual practice, they are often so broadly drafted as to provide virtually no meaningful disclosure of a witness's testimony. While the Tribunal held in Canada Pipe that a witness could not testify to matters which were not covered in his/her corresponding will-say statement, it proceeded to interpret the will-say statements quite broadly.
31 Interestingly, while the Revised Rules permit the Commissioner to limit disclosure to "reliance level" information, nothing prevents more fulsome voluntary disclosure which unfortunately the Commissioner repeatedly refused in this case.
32 In fact, if Bill C-19 proceeds as proposed and significant administrative monetary penalties (up to $10 million for an initial order) are available under section 79, there will undoubtedly be a challenge to the constitutionality of the Revised Rules since section 79 will arguably become a penal provision thereby allowing a respondent to argue that a higher level of disclosure, such as that required in criminal cases under R. v. Stinchcombe,  3 S.C.R. 326, is required under the Charter.
33 For example, see Commissioner of Competition v. Fabutan Sun Tan Studios (CT-2005-003), Commissioner of Competition v. Goodlife Fitness Clubs Inc. (CT-2005-001), Commissioner of Competition v. Performance Marketing (CT-2004-014).
34 For example, see Competition Bureau, News Release, "Crompton Corporation Fined $9 Million For Role in Rubber Chemicals Cartel" (28 May 2004) and Competition Bureau, News Release, "Competition Bureau Charges St. John's Taxi Companies with Conspiracy" (9 July 2004).
35 Randall J. Hofley, Special Counsel to the Commissioner of Competition, "Competition Law Enforcement: 'Creative Dynamism' Inside Outside the Competition Bureau", presented at the Ontario Bar Association Essentials of Competition Law (May 9, 2005).
36 (i.e. no guilty plea.) See Sheridan Scott, Commissioner of Competition, Competition Bureau, "Cartel Enforcement: International and Canadian Development" presented at the Fordham Corporate Law Institute, Conference on International Antitrust Law and Policy (October 7, 2004) at 17.
37 For further information or proposed amendments to the Conspiracy Provisions see, George Addy, Lori Cornwall and Charles Tingley, "Proposed Amendments to the Conspiracy Provisions", presented at Insight Information Conference, January 20, 2004.
38 John Pecman, Acting Deputy Commissioner of Competition, Criminal Matters Branch, Competition Bureau, "Agreements in Restraint of Trade – Conspiracy and Price Fixing", presented at the Ontario Bar Association, Essentials of Competition Law (May 9, 2005).
39 Supra note 35 at 28.
40 "The Fix is in Detecting Cartels in Canada", Speaking Notes for Colette Downie, Assistant Deputy Commissioner of Competition, Criminal Matters Branch, The Australian Competition and Consumer Commission Cracking Cartels Conference (Sydney, Australia) (November 24, 2004).
41 Competition Bureau, News Release, Landmark Competition Act Ruling Against Sears Canada (January 24, 2005) (http://strategies.ic.gc.ca/epic/interest/ind-bc.nsf/en/ct02965e.html).
42 For the Canadian Competition Bureau's view of the benefits of an effective compliance program, see its Information Bulletin entitled Corporate Compliance Programs (June 1997) (the "Compliance Bulletin"), http://competition.ic.gc.ca/epic/internet/incb/bc.nsf/en/ct01079e.html. See also two speeches by John Barker, the Competition Bureau's Assistant Deputy Commissioner for Compliance and Coordination: Corporate Compliance Programs: They Just Make Business Sense, Insight Conference, "Meet the Competition Bureau", Toronto, Canada (May 1999); and Working with the Bureau (September 2004), http://competition.ic.gc.ca/epic/internet/incb-bc.nsf/en/ct02959e.html.
43 For further information on compliance programs see Mark Katz, Lori Cornwall and Simon Lockie, "Competition Compliance in Canada" in Antitrust Compliance: Perspectives and Resources for Corporate Counsellors (2005), Chapter 17 (Section of Antitrust Law, American Bar Association).
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