The Competition Tribunal has been directed to reconsider key aspects of the Canada Pipe loyalty rebate case.
On 23 June 2006, the Federal Court of Appeal (FCA) issued a decision requiring the Competition Tribunal (the Tribunal) to redetermine aspects of the abuse of dominance and exclusive dealing application brought in October 2002 by the Commissioner of Competition (the Commissioner) against Canada Pipe Company Ltd.
The FCA’s decision is the first judicial consideration of the legal tests applicable in an abuse of dominance case (the exclusive dealing allegation was a secondary aspect of the Commissioner’s application and was dealt with summarily in the FCA’s decision). Although the FCA disagreed with the Tribunal’s analysis in part, the legal tests articulated by the FCA in its decision continue to underscore that loyalty rebates will only be found to contravene abuse of dominance law in Canada if they are demonstrated to lessen substantially or to prevent competition.
Canada Pipe manufactures cast iron drain, waste and vent (DWV) products. The Commissioner had alleged that Canada Pipe’s loyalty discount and rebate programme, known as the "stocking distributor program" or "SDP", contravened the abuse of dominance and exclusive dealing provisions of the Competition Act (the Act). The SDP offers distributors quarterly and annual rebates, as well as significant point-ofpurchase discounts, should they decide to purchase all of their cast iron DWV products from Canada Pipe.
After hearing from 27 industry witnesses and three experts over 30 days of testimony, the Tribunal dismissed the Commissioner’s application. Although it held that Canada Pipe was the dominant supplier in cast iron DWV markets across Canada, the Tribunal concluded that the SDP did not constitute a practice of "anticompetitive acts" and had not resulted in an actual or likely "substantial lessening or prevention of competition".
The Commissioner appealed against the Tribunal’s decision, arguing that the Tribunal had erred in law by applying the wrong tests to determine whether the SDP constituted an "anticompetitive act" and resulted in a "substantial lessening or prevention of competition" under the Act’s abuse of dominance provisions. Canada Pipe cross-appealed on the Tribunal’s definition of the relevant product market – Canada Pipe said it should not be limited to cast iron DWV products – and on the Tribunal’s finding that Canada Pipe had market power in the Canadian DWV industry (something that Canada Pipe denied).
The FCA’s Decision On The Commissioner’s Appeal
The FCA upheld the Commissioner’s appeal, agreeing with her position that the Tribunal had not applied the correct legal tests in assessing the "anticompetitive act" and "substantial lessening or prevention of competition" elements of abuse of dominance. It ordered that the case be reheard by the Tribunal on the basis of the tests articulated in its decision.
In accordance with its previous case law, the Tribunal stated that conduct is anticompetitive if it has "an intended negative effect on a competitor that is predatory, exclusionary or disciplinary". Following this approach, whether or not an act is anticompetitive is determined by reference to its "purpose" or "overall character". This requires a consideration of all relevant factors, including the reasonably foreseeable effects of the act, any business justification and any evidence of subjective intent.
While acknowledging that the Tribunal had correctly identified the legal test for what constitutes an anticompetitive act, the FCA decided that the Tribunal’s subsequent analysis of the specific features of the test was "a cause for concern". According to the FCA, the Tribunal erred by assessing whether the SDP had a negative impact on the general state of competition in the market – for example, by considering if there had been a detrimental effect on consumers. The FCA held that the focus of the anticompetitive requirement should be exclusively on whether there is an intended negative effect on competitors; the impact on competition is properly addressed only at the final stage of the abuse of dominance analysis, when determining whether there has been a substantial lessening or prevention of competition. The FCA stressed that the structure of the abuse of dominance provisions requires that "each statutory element must give rise to a distinct legal test".
The FCA also questioned the Tribunal’s approach to Canada Pipe’s business justification for the SDP. The Tribunal had accepted Canada Pipe’s rationale for the SDP as a valid means of achieving the scale efficiencies necessary to maintain in inventory a full line of DWV products, which benefited distributors and consumers alike. According to the FCA, however, "improved consumer welfare is on its own insufficient to establish a valid business justification". In the FCA’s view, the Tribunal’s reasons had not established the "requisite efficiency-related link between the SDP and [Canada Pipe]", apparently because improved consumer welfare was not an objective that directly concerns Canada Pipe itself. The FCA did not elaborate further on what types of business justification might pass muster according to its new standard. However, by negative implication, the FCA’s reasons suggest that scale efficiencies and the competitive advantages they may bring – Canada Pipe is the only full line supplier of DWV products in Canada – cannot amount to a credible efficiency or procompetitive explanation for a particular course of conduct. In the circumstances, it is difficult to imagine a business justification that could satisfy the FCA’s test.
Substantial Prevention Or Lessening Of Competition
At the Tribunal, both parties relied on what had been the accepted test for assessing anticompetitive effects in abuse of dominance matters, namely whether, but for the anticompetitive acts, an effective competitor or group of competitors would emerge within a reasonable amount of time to challenge the dominance of the dominant firm. Based on this standard, the Tribunal concluded that effective competition had emerged to constrain (and in fact lower significantly) Canada Pipe’s pricing of its DWV products. Moreover, this competition had only emerged after Canada Pipe’s adoption of the SDP.
The FCA, however, held that a different "but for" test should be applied – one that asks whether "the relevant markets – in the past, present or future – [would] be substantially more competitive but for the impugned practice of anticompetitive acts". The FCA stated that the Tribunal erred by focusing on the mere fact of entry by competitors without asking whether there would have been significantly more competitive entry had the SDP never been implemented.
In a not overly helpful comment, the FCA stated that while its formulation of the "but for" test "is not necessarily the only correct approach", it is nonetheless "one that the Tribunal must consider in all cases – although it may in future cases choose to consider other appropriate tests as well". The FCA also refrained from setting out the appropriate methodology for applying its "but for" test, observing that this "is a matter for which the Tribunal is better qualified than this court". On the positive side, however, the FCA stressed that it remains the Commissioner’s burden to prove, on a balance of probabilities, that there has been a substantial prevention or lessening of competition, and that "the evidence required to meet this burden can only be determined by the Tribunal on a case-bycase basis".
Canada Pipe’s Cross-Appeal
Canada Pipe argued in its cross-appeal that the Tribunal should have recognised that the relevant product market included DWV products made from a variety of competing materials, including cast iron, plastic, copper and asbestos cement. With the market defined as such, Canada Pipe would have a share of no more than 10%, which would be insufficient to ground a finding of market power. In addition and in the alternative, Canada Pipe argued that the Tribunal had erred in concluding that Canada Pipe exercised market power in respect of the cast iron DWV market accepted by the Tribunal. Among other things, Canada Pipe argued that the Tribunal’s conclusion ran contrary to its clear finding of effective entry and competitive pricing in many markets.
The FCA was divided on Canada Pipe’s cross-appeal. The majority disposed of the cross-appeal summarily on the basis that the Tribunal’s findings as to product market and market power were "reasonable" and therefore immune from appellate intervention by reason of "curial deference".
In contrast, Pelletier JA would have overturned the Tribunal’s finding of market power in four of the six relevant geographic markets. The judge said that it was unreasonable for the Tribunal to conclude that Canada Pipe possessed market power in British Columbia, Alberta, the Prairies and Ontario, because the Tribunal had found that prices for cast iron DWV were competitive in those markets due to effective entry by new competitors. In Pelletier JA’s view, "the fact of reducing prices to respond to the emergence of new competitors" was inconsistent with a finding of market power.
The FCA’s decision marks the first time that a Canadian court has considered the Act’s abuse of dominance provisions. Although the FCA claimed that its decision was largely consistent with the Tribunal’s existing jurisprudence, its analytic departures stand to generate their own difficulties. This is particularly so in respect of the FCA’s standard for establishing legitimate business justifications, which appears to be almost impossible to meet. The FCA also introduced a new measure of uncertainty by stating that the Tribunal must take into account all of the objectives in the Act’s purpose clause when applying the Court’s "but for" analysis of whether a practice of anticompetitive acts has substantially lessened or prevented competition. Unfortunately, the Act’s purpose clause consists of a variety of disparate – and even inconsistent – objectives and the FCA did not elaborate on how the Tribunal is to incorporate (and reconcile) these objectives in its analysis.
The FCA’s decision is notable too for the almost microscopic dissection of the way in which the Tribunal structured its analysis. For example, while there may be some conceptual justification for stressing the need for distinct legal tests at each stage of the abuse of dominance analysis, the inescapable fact (which even the FCA acknowledged) is that the same evidence will be relevant to more than one element of proof. One may ask therefore if the FCA’s decision serves the interests of justice and expedition or if its differences with the Tribunal are merely a question of semantics. Moreover, a more interventionist approach by the FCA could well heighten already existing concerns about the formality, expense and delay of competition litigation in Canada.
Although it upheld the Commissioner's appeal of the Tribunal's legal analysis, the FCA declined to accept the Commissioner's suggestion that it should also decide the case on the merits. Instead, the FCA ordered the matter back to the Tribunal for redetermination based on the legal tests articulated in its decision. That redetermination will have to wait for the moment, however, as Canada Pipe has announced that it will be seeking leave to appeal the FCA's decision to the Supreme Court of Canada. The Court is not expected to rule on this application until 2007.
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.