Canada: Mind the Gap: Commissioner Of Competition To Scrutinize Cross-Border Pricing Policies

On December 9, 2014, the Minister of Industry introduced Bill C-49, the Price Transparency Act (the PTA), a controversial bill to amend the Competition Act. The PTA is intended to implement the federal government's promise to "end geographic price discrimination against Canadians," or more specifically, a higher price being charged in Canada than that charged for a similar product in the United States. Even though the PTA does not create any new criminal offence or reviewable practice provision that would make engaging in cross-border differential pricing unlawful or any new remedial powers or sanctions, it would nevertheless give the Commissioner of Competition (the Commissioner) expansive tools to investigate companies that charge different prices in Canada and the United States and publicly denounce their lawful pricing practices. The Bill raises important questions about procedural fairness, confidentiality and, more broadly, whether the Commissioner's mandate should include subjecting companies doing business in Canada (and their foreign affiliates) to expensive and intrusive investigations where there is no evidence of a contravention of the Competition Act.

Background

The Canadian government commenced its formal study of the so-called "Canada-U.S. price gap" in 2011. At that time, the Competition Bureau (the Bureau) testified before the Standing Senate Committee on National Finance that "high prices in themselves do not mean that a particular market is uncompetitive." The Bureau explained that "the Competition Bureau is not a price regulator and that Canadian businesses are free to set their own prices at whatever levels the market will bear, provided that the high prices are not the result of anti-competitive conduct such as price-fixing or abusing a dominant position."

In February 2013, the Standing Senate Committee on National Finance's final report concluded that "[e]ach product was found to have many factors influencing its pricing, and, although some products share some factors,...the Committee cannot offer an explanation as definitive as it would have liked for the price discrepancies for products between Canada and the United States."

Despite the equivocal findings of the Senate Committee's final report, the Canadian government's 2013 Throne Speech announced that the government would take "further action to end geographic price discrimination against Canadians." By November 2013, the Commissioner had adopted a supportive position, in contrast to the Bureau's prior testimony to the Senate Committee, stating that he was "pleased to see the government move forward [with a plan to end price disparity]." Shortly thereafter, the 2014 Federal Budget indicated that the government planned to introduce legislation to address "country pricing strategies – this is, when companies use their market power to charge higher prices in Canada that are not reflective of legitimate higher costs....and to empower the Commissioner of Competition to enforce the new framework."

Notably, criminal provisions of the Competition Act addressing price discrimination (including geographic price discrimination) were repealed in 2009 as part of the effort to modernize the Competition Act, and therefore the plan to re-introduce price discrimination legislation was an unexpected and significant reversal. Not surprisingly, the federal government's announcement was met with significant criticism (refer to our Osler Update: 2014 Federal Budget: Announcing a New Foray into Price Regulation for the Commissioner of Competition?).

This is not the first attempt to empower the Commissioner to initiate an investigation where there is no evidence of potentially anti-competitive or unlawful conduct. The former Combines Investigation Act included an industry sector competition law inquiry power, which was abandoned in 1986 when it was replaced by the Competition Act following a history of lengthy and costly inquiries that produced voluminous reports but little tangible benefit. In 2009, Bill C-452 proposed to amend the Competition Act to require the Commissioner to cause an inquiry to be made "whenever the Commissioner has reason to believe that...grounds exist for the making of an inquiry into an entire industry sector." Bill C-452 attracted criticism as being inconsistent with Canada's approach to competition law enforcement and unnecessary in light of the Commissioner's existing investigatory powers. Bill C-452 died on the order paper when Parliament was prorogued on March 25, 2011, and was not reintroduced.

Summary of the PTA

The PTA, if enacted, will introduce new provisions to the Competition Act to expand the Commissioner's investigative role and introduce a corresponding reporting framework:

  • Section 10(1.1) – If the Commissioner has reason to believe that the selling price of a product or class of products (which could include both goods and services) is higher in Canada than that in the United States for the same or similar product or class of products, the Commissioner may commence an inquiry to determine the facts (including the extent of and reasons for the differential pricing);
  • Section 23.1(1) – The Commissioner must prepare a publicly available written report describing the inquiry's conclusions (unless the Commissioner discontinued the inquiry or referred the matter to the Attorney General of Canada); and
  • Section 23.1(2) – The Commissioner must take all reasonable steps to complete the report within one year of receiving the information that the Commissioner considers sufficient for the inquiry.

The Commissioner may seek court orders compelling production of documents and testimony from companies doing business in Canada and their foreign affiliates (while these production provisions of the Competition Act are not new, they have been redrafted). The PTA requires that the operation of s. 10(1.1) and s. 23.1 be reviewed by Parliament within five years of coming into force.

The PTA also makes a number of housekeeping amendments to numerous provisions of the Competition Act that largely address inconsistencies that result from the current definition of "affiliate", thereby broadening the scope of entities that are subject to the Competition Act.

Commentary

Investigating Lawful Conduct

Minister Moore took care to explicitly state that the PTA "will not set or regulate prices in Canada." The Commissioner has no authority under the Competition Act to regulate prices, or to seek a remedial order from the Competition Tribunal (Tribunal) that would do so.

While not creating a new criminal offence or reviewable practice, the PTA expands the Commissioner's investigatory role beyond investigating actual or potential breaches of the Competition Act to investigating otherwise lawful conduct and, therefore, potentially exposes companies that are complying with the Competition Act to intrusive and costly investigations and a public shaming for simply charging what the market will bear for their goods.

The mere existence of a price difference between Canada and the United States would be a sufficient basis for an inquiry, pursuant to which the Commissioner could obtain court orders to require production of documents and information, including information held by a foreign affiliate, and to compel witnesses for examination. Interestingly, the PTA does not propose to amend section 9 of the Competition Act, which means the procedure by which individuals may compel the Commissioner to commence an inquiry into potential violations of the Competition Act would not be extended to the commencement of an inquiry into Canada-U.S. price differences under s. 10(1.1).

Public Reporting of the Commissioner's Conclusions

The only "remedy" introduced in the PTA is the issuance of a public report of the Commissioner's conclusions (if the Commissioner does not discontinue the inquiry). Of course, if an investigation uncovers evidence of conduct that the Commissioner believes violates the Competition Act, the Commissioner's existing enforcement powers remain available. Although the Competition Act contains confidentiality obligations that require the Bureau to maintain the confidentiality of information it obtains through the use of production orders, if the Commissioner's public reporting obligations are to be meaningful there is a real risk that some confidential information may become public under the exception permitting disclosure of confidential information for purposes of administration and enforcement of the Competition Act. Given that internal company information will be integral to the analysis and conclusions of any price investigation by the Commissioner, striking the right balance between vague public reports that lack meaningful detail and divulging confidential, competitively sensitive information will likely be fraught with difficulty.

The absence of any remedial powers in the PTA suggests that the federal government is relying on the intrusive nature of the potential investigation and the negative consequences of a public report as the means by which it will encourage downward pricing adjustments in Canada. Ultimately, there is no mechanism contemplated in the PTA to require companies that are involved in an investigation to take any action even after the Commissioner issues a report.

The Scope of a Pricing Investigation Remains Uncertain

In the absence of definitions, jurisprudence or meaningful guidance regarding the Bureau's expected process, the PTA raises a number of questions and ambiguities relating to the precise scope and nature of an investigation into price differences.

For example, the PTA introduces the concept of a comparison of the "selling price" in Canada and the United States, a term which is not defined in the Competition Act. Given the complexities of pricing in many industries, it is unclear how a specific "selling price" will be determined for comparison purposes:

  • In some industries, geographic markets may be regional instead of national, in which case different prices may be charged in different local markets throughout Canada and the United States.
  • Even within a local market, legitimate price discrimination may occur without regard to geography. Classic examples of non-geographic price discrimination are seniors' discounts and coupons, and retailers are increasingly providing differentiated pricing to customers through targeted discounts and offers through digital marketing initiatives. A variety of promotional pricing strategies that are intended to respond to local competitive conditions can have differential impacts on pricing at any given time across different geographic markets.
  • It is uncertain how different products sold in Canada and the United States may be considered "similar" for purposes of performing a price comparison, and an investigation may capture numerous suppliers, wholesalers and retailers of a "similar product or class of similar products."  
  • In his announcement of the PTA, Minister Moore highlighted retail consumer products such as shampoo, televisions, aspirin and sneakers, though the PTA does not explicitly limit the scope of investigation to retail pricing or consumer goods. Wholesale price levels also may be relevant in an investigation.
  • It is also unclear how cross-border franchise/license systems will be assessed, where a franchisor may recommend prices (which may include a range of prices across regional markets including different prices in areas of Canada and the United States) but individual locations operated by independent owner/operators are ultimately responsible for setting prices.

As a result, investigations into cross-border pricing comparisons can, at a minimum, be expected to be highly complex endeavours.

Additional Concerns

The PTA raises potential constitutional issues related to due process, as well as practical concerns regarding both the public and private cost of a s. 10(1.1) investigation. For example, an investigation may uncover anti-competitive activity that allegedly violates the criminal provisions of the Competition Act. The availability of such a broad investigatory power that could be used to extract evidence for proceedings outside its intended scope creates the potential for misuse or abuse. If the Commissioner chooses to take enforcement action or refer a matter to the Attorney General for potential prosecution on the basis of information obtained during the course of a section 10(1.1) investigation, due process concerns may arise in relation to the use of evidence collected from a person in the context of a price gap investigation.

A rigorous and thorough investigation will most certainly be resource intensive for both the Bureau and those companies subject to production orders. The Bureau will need to consider a vast array of factors (e.g., input and production costs, transportation and distribution costs, exchange rates, transfer pricing practices, taxes, labour costs, tariffs, etc.) which may vary at any point in time (including during the course of an investigation) as a result of fluctuations in market conditions. As a result, production orders are likely to be onerous, and companies may need to dedicate significant resources to responding to an order. It has been reported that the Bureau's budget will not be expanded in order to accommodate this new role. It remains unclear how the Bureau will manage the costs of such a burdensome exercise within the constraints of its current budget. Accordingly, the number of investigations the Bureau can realistically conduct may fall short of public expectations.

Although limiting the PTA to investigatory powers may have been intended to address some of the concerns that had been raised regarding the legality of geographic price discrimination legislation, questions remain regarding whether the PTA is ultravires the federal government's constitutional head of power, or whether the PTA violates any of Canada's free trade agreements by singling out companies that sell in the United States.

While the federal government's earlier announcements focused on targeting "unjustified" price differences, the PTA does not contain any defences or exceptions, such as a justified cost exception. The PTA also does not contain ade minimis market share threshold or market power screen. Accordingly, all companies that employ differential pricing as between Canada and the United States are potentially subject to investigation, even though the 2014 Federal Budget stated that the anticipated legislation would address price differences resulting from market power.

Conclusion

The PTA does not change the rules of the game for companies doing business in Canada; it will not be anti-competitive, nor will it be a violation of the Competition Act, for a company to charge whatever price the market will bear. However, while a company may not be subjected to fines or other remedial court or Tribunal orders, it may face a very burdensome and costly government investigation that could result in a public denouncement of its otherwise lawful pricing practices. This is a significant departure from Canada's approach to competition law enforcement, and raises broader concerns that the PTA is likely to accomplish little while imposing a high cost on businesses operating in Canada.

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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