Canada: The Regulated Conduct Defence

The Canadian Competition Bureau is now looking at responses to its recent draft technical bulletin on the regulated conduct defence.

With the trend in many jurisdictions towards continued deregulation and the development or strengthening of competition laws, the appropriate scope for competition law immunity accorded to regulated conduct has come up for renewed debate. The importance and multijurisdictional nature of this debate is reflected, for example, in studies conducted by the OECD and, more recently, the International Competition Network into the limits and constraints on antitrust enforcement in regulated sectors.

The interface between competition law and regulation in Canada is governed by what is known as the regulated conduct defence (RCD). The RCD is a common law doctrine that provides a form of immunity from enforcement action under the Competition Act (the Act) to persons engaged in conduct that is directed or authorised by other validly enacted legislation. The RCD has been relied upon by parties to argue that the activities of various industries, trades and professions subject to government regulation are exempt from review under the Act.

As reported initially in CLI 9 August 2005, the scope and applicability of the RCD is the subject of renewed discussion in Canada, with the Bureau having earlier this year revoked its 2003 information bulletin on the topic. The Bureau has now released a draft technical bulletin on the RCD – available on the Bureau's website at http://www.competitionbureau.gc.ca – which is intended to replace the 2003 information bulletin and restate the Bureau's position on the RCD's application.

The draft bulletin

The Bureau's draft technical bulletin is a complete rewrite of the 2003 information bulletin on the RCD, which was criticised for ignoring the body of case law that forms the basis for the RCD.

For example, the Bureau said in the 2003 information bulletin that the RCD should only apply in the limited circumstances when there is a clear "operational conflict" between the Act and the regulatory regime in question. This was a novel formulation that appeared to be inconsistent with the traditional rationale underlying the RCD, namely that a provincial legislative scheme should be given its proper scope precisely because there can be no conflict between the Act and other validly enacted legislation operating in the public interest.

Another discrepancy between the cases and the 2003 information bulletin was the Bureau's view that the conduct of regulated parties (or "regulatees") should be protected only if the conduct was mandated or required by the regulator, rather than simply authorised. This was at odds with the case law in two respects. First, a number of cases (including the leading Supreme Court of Canada decision) had held that the RCD applies to conduct that is merely authorised, not required, by the applicable regulatory regime. Second, the courts have never singled out regulatees for special (and more restrictive) treatment under the RCD.

The draft technical bulletin clearly represents an attempt by the Bureau to address these criticisms. For one, the operational conflict concept has been eliminated. That said, the draft technical bulletin continues to share a common perspective with the 2003 information bulletin, namely that the RCD should be restricted in its operation. The Bureau also expresses the view that "the RCD case law is underdeveloped" and indicates that it will "explore the potential for a legislative resolution of this long-standing issue".

Major points in the new bulletin

Key points in the draft bulletin include the following:

• Generally speaking, when dealing with claims that the RCD applies, the Bureau will carefully consider the purposes of the Act and the other applicable law, the interests sought to be protected by both laws, the impugned conduct, the relevant provisions, the parties involved and the applicable principles of statutory interpretation.

• Where a provincial regulatory scheme is involved, the Bureau will follow existing case law and consider whether the scheme is validly enacted and whether the legislation authorises (expressly or impliedly) or requires the impugned conduct.

• In the case of federal legislation, the Bureau will apply the ordinary principles of statutory interpretation to determine whether the Canadian parliament intended the legislation to prevail over the Act. As a general rule, the Bureau will not pursue a matter where the Canadian parliament has articulated an intention to displace competition law enforcement by establishing a comprehensive regulatory regime that (1) gives an accountable regulator the authority to take action inconsistent with the Act, and (2) the regulator has exercised this mandate. Where the regulator has forborne from regulation, the Bureau will continue to apply the Act to such unregulated conduct.

• In accordance with a recent Supreme Court of Canada judgment, the Bureau will more readily accept the RCD's application in cases that potentially involve those criminal provisions of the Act that contain some sort of market impact test. For example, the Bureau is more likely to refrain from investigating/prosecuting agreements under the conspiracy provisions of the Act in appropriate circumstances because the offence only arises if there is an "undue" prevention or lessening of competition. The same leeway will not be granted, however, when the conduct in question involves criminal provisions of the Act that create per se offences (eg price maintenance).

• Because the applicable case law is "extremely limited", the Bureau will be very cautious before applying the RCD to oust application of the Act's civil "reviewable practices" provisions (eg abuse of dominance).

• The Bureau will still be less enthusiastic about applying the RCD when the conduct involved is that of regulatees rather than regulators. The Bureau acknowledges, however, that no court has expressly held that the RCD should be applied differently as between the two.

• Even if the Bureau decides that the RCD does not apply, it will consider the public interest in pursuing the matter. For example, it may exercise its discretion not to proceed if the impugned conduct was undertaken in good faith reliance on a law, or if the regulatory scheme already constrains the exercise of market power.

Implications

The Bureau's limited view of the RCD is consistent with the relatively restrictive interpretation given by other antitrust authorities to analogous doctrinal immunities from competition law. For instance, the US Federal Trade Commission's state action task force released a lengthy report in September 2003 in which it criticised the broad approach to the state action doctrine taken by some lower courts as "potentially endanger[ing] national competition goals".

The task force took issue with the approach taken by some courts whereby any anticompetitive effects flowing from conduct that is broadly authorised by a state (eg through a general regulatory scheme for an industry) are deemed to have been contemplated by the state and thus are part of a deliberate state policy. According to the task force, the state action doctrine ought only to be applied where it can be demonstrated that the state deliberately intended to displace competition with the conduct in question. The task force also suggested that courts ought to identify and strictly apply clearer criteria for finding that the conduct at issue is subject to the degree of active supervision necessary to trigger the state action doctrine.

The consultation period for the draft technical bulletin ended on 3 February 2006. It will be interesting to monitor the results of this process in the light of similar efforts elsewhere. Whatever the outcome, the status of the RCD is, in the short term anyway, likely to remain uncertain. To that extent, individuals and entities operating in regulated industries in Canada should be aware of the need to assess their conduct very carefully before deciding that it might benefit from the RCD's protection.

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