Canada: Would Steris/Synergy Have Been Blocked In Canada? Prevention Of Competition À La Canadienne

Last Updated: October 12 2015
Article by William Wu

On September 24, 2015, a U.S. District Court in Ohio denied a motion for a preliminary injunction sought by the Federal Trade Commission (FTC) to prevent Steris Corporation from acquiring its alleged potential competitor Synergy Health plc. The FTC sought the injunctive relief under the Clayton Act based on the so-called "actual potential entrant" doctrine, alleging that the acquisition would have prevented Synergy's entry into the contract sterilization market in competition against Steris.

This case provides an interesting comparison to the Canadian "substantial prevention of competition" test clarified by the Supreme Court of Canada earlier this year in the Tervita decision. Although the tests are now substantially similar, in practice Canadian courts have exhibited a greater willingness to find entry to be "likely" despite business plans to the contrary.

FTC v Steris Corp.

Steris and Synergy are the second- and third-largest providers of contract sterilization services in the world, providing services to manufacturers of products such as food packaging and medical devices that require sterilization. There are three primary methods of contract sterilization currently available in the United States: gamma radiation (which penetrates deeply and is therefore most effective for healthcare products), e-beam radiation (which does not penetrate as deeply as gamma sterilization and is therefore more effective for low-density products) and ethylene oxide gas (which uses gas diffusion rather than radiation to sterilize surfaces). Steris is one of only two U.S. providers of contract gamma radiation services (the other, Sterigenics, recently bought Nordion, the Canadian supplier of gamma radiation technology and supplies).1 Synergy, a British company, is the largest provider of e-beam services in the U.S., but operates gamma radiation sterilization facilities only outside the U.S. There is a fourth sterilization technology, x-ray sterilization, which is not currently available in the United States. Synergy operates the only commercial x-ray sterilization facility in the world, located in Switzerland.

The FTC alleged that, prior to the announcement of its proposed acquisition by Steris, Synergy had been planning to enter the U.S. market with an emerging x-ray sterilization technology, which would have challenged the current frontrunners in the U.S. contract sterilization market (i.e., Steris and the largest contract sterilization firm, Sterigenics, which together represent approximately 85% of all U.S. contract sterilization services). The FTC claimed that, if implemented, the proposed acquisition would insulate Steris from Synergy's x-ray competition against its gamma sterilization business.

Under the "actual potential entrant" doctrine, the acquisition of an actual potential competitor violates section 7 of the Clayton Act (the principal U.S. antitrust law governing mergers and acquisitions) if:

  1. the relevant market is highly concentrated,
  2. the competitor "probably" would have entered the market,
  3. its entry would have had pro-competitive effects, and
  4. there are few other firms that can enter effectively.

The court focused on the second element and found that the evidence did not support the FTC's contention that, absent the proposed acquisition, Synergy probably would have entered the U.S. contract sterilization market by building one or more x-ray facilities in that country within a reasonable period of time.

The court found that Synergy's development of x-ray sterilization in the U.S. faced significant obstacles and it was unlikely to enter the market in the near future. In fact, Synergy's board had only approved pursuing x-ray facilities in concept and it had not approved any specific business plans or capital expenditures. Despite of substantial efforts to do so, Synergy had failed to secure the customer commitments needed to support the significant and increasing capital expenditures for x-ray sterilization facilities. The testimony of several customers acknowledged that evaluation of and conversion to x-ray technology would be a long-term process for the customers, requiring significant testing and additional regulatory approvals by the Food and Drug Administration (FDA). Synergy's x-ray equipment manufacturer had also lost confidence that its existing equipment offering would be able to deliver Synergy's required capacity. The x-ray sterilization business model failed every one of the financial metrics Synergy uses to assess capital investments. Moreover, the court found that the negotiation and announcement of the proposed acquisition had no effect on Synergy's efforts to advance the x-ray project as its executives continued working towards obtaining customer support and board approval even after the proposed acquisition was announced. Synergy's decision to terminate the project was ultimately made four months after the announcement of the acquisition.

The Canadian "Substantial Prevention of Competition" Test

The Tervita decision released in January 2015 (see our blog post for more detail) articulated the proper legal test to determine when a merger gives rise to a substantial prevention of competition under section 92(1) of the Canadian Competition Act. After identifying the potential competitor that the merger would prevent from independently entering the market, the Competition Tribunal must examine the "but for" market condition to see if, absent the merger, the potential competitor would have likely entered the market and, if so, whether the entry would likely have a substantial effect on the market in reducing the market power of the acquiring firm (or others). While not separately identified, the Canadian "substantial prevention of competition" test is substantially similar to the key elements of the US "actual potential entrant" doctrine.

The Supreme Court of Canada in the Tervita decision also held that the timeframe of likely entry must be discernible, in that there must be evidence of when the potential competitor is realistically expected to enter the market in the absence of the merger. While confirming that the "lead time" it would likely take a typical new competitor to enter the market is relevant, the Tervita decision also cautioned that the further into the future the Competition Tribunal looks, the more difficult it will be to meet the "likely entry" test on a balance of probabilities. This is especially so in contexts where product development or regulatory approval processes may extend for several years, such that the lead time may be so lengthy that the probability of market entry is largely speculative due to many unknown and unknowable contingencies. The Steris decision in the United States largely took the same approach when it found that Synergy's entry into the U.S. market with x-ray sterilization was effectively conditioned on obtaining equipment with adequate capacity and securing sufficient customer support, which itself was conditioned on lengthy testing of the x-ray technology and regulatory approvals by the FDA.

Interestingly, while the facts of the Tervita and Steris cases are very different, both cases adopted a similar methodology in assessing potential "preventions" of competition, and both cases dealt with highly regulated industries and situations in which the entry of a new competitor could reasonably be viewed as quite speculative. However, the courts reached different results: the U.S. District Court in Steris found that Synergy's entry did not meet the "actual potential entrant" test, while the Supreme Court of Canada in Tervita agreed with the Competition Tribunal that the transaction did satisfy the "substantial prevention of competition" test (though the merger was ultimately cleared on other grounds).  Notably, in the Tervita case, the Tribunal accepted the testimony of the target company's executives to the effect that their business plans did not call for it to enter the same business as the acquirer.  The Tribunal found, however, despite the evidence as to the company's own plans, that the originally intended business would have failed, and that further decisions would likely have been made to enter into competition with the acquirer.

In summary, the Tervita decision by the Supreme Court of Canada and the Steris decision by the U.S. District Court have shown that the "substantial prevention of competition" test and the "actual potential entrant" doctrine provide largely similar analytical frameworks in determining whether a merger or acquisition transaction is likely to substantially prevent competition, though some may argue that, in practice, the Canadian Competition Tribunal is more apt to find that a potential entrant is "likely" to enter the market, having been given permission, in essence, by the Supreme Court of Canada to extrapolate beyond the company's own plans.


1. Stikeman Elliott LLP represented Nordion in that transaction, which also required approval under the Investment Canada Act and a legislative amendment waiving Canadian majority control.

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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