Canada: Federal Court Of Appeal Orders Re-Determination In Canada Pipe Abuse Of Dominance Case

On June 23, 2006, the Federal Court of Appeal (the FCA or the Court) issued its decisions and reasons in the appeal by the Commissioner of Competition (the Commissioner) and the cross-appeal by Canada Pipe Company Ltd. (Canada Pipe) from an earlier ruling by the Competition Tribunal (the Tribunal). At issue was the Tribunal’s dismissal, in February 2005, of the Commissioner’s abuse of dominance and exclusive dealing case against Canada Pipe.¹ This appeal represents the first time the FCA has been asked to consider the application of the abuse of dominance (section 79) and exclusive dealing (section 77) provisions under Canada’s Competition Act (the Act). In allowing the Commissioner’s appeal and, rejecting Canada Pipe’s cross-appeal, the Court considered in detail each of the specific elements the Commissioner must address in bringing an application under sections 77 and 79 of the Act. The case has been sent back to the Tribunal for re-determination.

While the Court found errors of law in the way the Tribunal had framed and conducted its analysis under both sections 77 and 79, it is far from obvious that the result on re-determination by the Tribunal will be any different than at first instance.

In 2000, the Commissioner began a formal investigation into the Stocking Distributor Program (SDP) of Canada Pipe’s Bibby Ste-Croix Division. The SDP is a loyalty program comprised of rebates and discounts to distributors who agree to stock only Canada Pipe’s cast-iron drain, waste and vent (DWV) products. In an application filed with the Tribunal in October 2002, the Commissioner alleged that Canada Pipe was dominant in the relevant Canadian markets for the sale and supply of DWV products, and that Canada Pipe was engaged in a practice of anti-competitive acts (primarily thorough the SDP) that had the effect of preventing or lessening competition substantially in the relevant markets, contrary to section 79 of the Act, which deals with so-called "abuse of dominance." Under section 79 of the Act, the Commissioner is required to show that the dominant competitor has engaged in a "practice of anti-competitive acts" that has resulted in, or is likely to result in, a substantial prevention or lessening of competition. The main allegation of the Commissioner was that the SDP "locked in" distributors, foreclosing competitors from distribution in each of the relevant markets. The Commissioner alleged that use of the SDP also comprised reviewable "exclusive dealing" under section 77 of the Act, as Canada Pipe’s conduct was widespread in the relevant markets, impeded entry and/or expansion in those markets, and, as a result, had or was likely to substantially lessen competition.

In its February, 2005 decision, the Tribunal had dismissed the Commissioner’s application. While the Tribunal accepted that Canada Pipe had market power (defined as the ability to set prices above a competitive level for a considerable period of time) in the eighteen relevant DWV markets (three products markets in each of six geographic markets),² it found that the SDP did not constitute a practice of anti-competitive acts and had not substantially lessened or prevented competition in any market. On essentially the same basis, the Tribunal rejected the Commissioner’s application in respect of exclusive dealing under section 77 of the Act. The Commissioner appealed to the FCA in respect of both of the Tribunal’s latter findings, and Canada Pipe cross-appealed in respect of the Tribunal’s finding of market power.

The Court addressed first the question of whether the Tribunal erred in reaching its conclusion that the SDP does not have the effect of preventing or lessening competition substantially. The Court accepted the Commissioner’s argument that the correct legal test for this element of the abuse of dominance provisions is a "but for" test. That is, the question to be asked is whether a market would be substantially more competitive "but for" the impugned practice of anti-competitive acts. Canada Pipe argued that the Commissioner’s formulation of a "but for" test was novel and inappropriately raised at this late stage of the litigation. The Court found that while the words "but for" may not previously have been applied, they were essentially a restatement of the test that the Tribunal had applied in previous cases.

The Court agreed with the Commissioner that the Tribunal, by focussing its analysis on whether a substantial level of competition continued to exist in the market (i.e., focussing on the fact that entry and switching of suppliers continued to occur in the market), had applied the incorrect legal test. The mere fact that the absolute level of competition is substantial does not address the question of whether an impugned practice has resulted (or will likely result) in a substantial prevention or lessening of competition. For example, even though a new manufacturer and several importers entered some of the relevant markets to add to competition while the SDP was in place, perhaps competition would have been substantially greater in the absence of the SDP. In the Court’s view, the Tribunal should have compared the level of competitiveness in the presence of the SDP against the level of competitiveness that would otherwise have existed in the absence of the SDP. In particular, the Court found that the Tribunal should have considered whether even more switching, or even more entry, or even lower prices, would have occurred in the absence of the SDP.

The Court did not offer specific guidance as to just how the "but for" test should be implemented, and stated that the expert Tribunal is better suited for such a task than is the Court. While acknowledging that it may not be an easy task to find and assess data relevant to this test, the Court indicated that a lack of historical data against which to compare the prevailing state of competition is not a reason to conclude that there is insufficient evidence to find a substantial lessening or prevention of competition. Where there is little or no data to assist in the analysis, the Tribunal must still compare the prevailing state of competition against its likely state in the absence of the impugned practice. The Court added that the application of the "but for" test must be sufficiently flexible to allow a full assessment of "all relevant factors" and that the various purposes set out in section 1.1 of the Act should be reflected in the chosen methodology.³

Somewhat strangely, the Court also noted that the "but for" test it articulated is a correct approach to section 79(1)(c), but not necessarily the only correct approach. That is, the Court appears to have left open the possibility that a different test may be appropriate in a future case (although presumably not the "absolute level" of competition test it found had been used by the Tribunal in the present case).

The Court did not find it necessary to conduct a separate analysis as to whether competition is or is likely to be lessened substantially for the purposes of section 77 of the Act (exclusive dealing), concluding instead that on the facts in this case, the analysis under section 79(1)(c) and section 77 would be essentially the same.

• Practice of Anti-Competitive Acts (s.79(1)(b))

The Court noted that while a list of anti-competitive acts is provided in section 78 of the Act, this list is explicitly non-exhaustive and "anti-competitive acts" are not defined in the Act. The Court then essentially proceeded to define "anti-competitive acts" by adopting the Tribunal’s working definition from the Nutrasweet case.⁴ In that case, the Tribunal found that an anti-competitive act is identified by reference to its purpose, and that "the requisite purpose is an intended predatory, exclusionary or disciplinary effect on a competitor." In this context the Court affirmed that "purpose" refers to the overall character of the acts, and not only subjective intent. In fact, subjective intent need not be established, and purpose can be inferred from the reasonably foreseeable effects or expected impacts of the acts. In adopting the Nutrasweet working definition, the Court emphasized repeatedly, but without explanation, that it is the intended effects of the conduct on a competitor, and not on competition in the market, that is relevant to whether conduct comprises a practice of anti-competitive acts under section 79(1)(b). While the Court noted that detriment to the consumer is relevant to the question of substantial lessening or prevention of competition (under section 79(1)(c)), in the Court’s view the Tribunal erred in law by concluding that in order for a practice of anti-competitive acts to exist, there must be a link between the impugned practice and a decrease in competition.

The Tribunal had also found that Canada Pipe had a valid business justification for use of the SDP, in that as a result of the program, Canada Pipe could viably maintain an inventory of less profitable products, ensuring that a broad selection of products would be available to customers. In this case, the Court reasoned that, while making products available to the market has benefits for end-customers, "consumer welfare is on its own insufficient to establish a valid business justification." Instead, the Court stated, the impugned practice must have a credible efficiency or pro-competitive explanation. While the Court did not develop its views in this regard, it appears that it does not consider enhanced consumer welfare alone to ground an efficiency or pro-competitive explanation for conduct that otherwise determined to have an anti-competitive character.⁵

In its cross-appeal, Canada Pipe argued that the Tribunal defined the relevant product markets too narrowly, which led it in turn to the erroneous conclusion that Canada Pipe possessed market power. All members of the Court agreed that the question of Canada Pipe’s dominance was one of mixed fact and law, and that under the applicable standard of judicial review, the Tribunal’s findings would need to be unreasonable before the Court would interfere with those findings. Two of the three members of the Court found that the Tribunal’s conclusions as regards Canada Pipe’s market power were not unreasonable, and therefore dismissed the cross-appeal. The third panellist, Pelletier J.A., found that while the Tribunal defined the relevant product markets reasonably, its conclusion that Canada Pipe possessed market power (and was therefore dominant) was unreasonable based on all of the record evidence. In particular, Pelletier J.A. found the Tribunal’s conclusion that a decrease in prices following the entry of competitors in four of the six geographic markets tended to support the conclusion of no market power in these markets, rather than the opposite conclusion made by the Tribunal.

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