The Federal Court of Appeal (the "Court") discussed the appropriate standards for identifying exclusionary conduct and evaluating the conduct of dominant firms on June 23, 2006. The Court issued its decision in Commissioner of Competition v. Canada Pipe Company Ltd. to set aside the decision of the Competition Tribunal on the basis that it had applied the incorrect legal tests for determining what constitutes an "anticompetitive act" and a "substantial lessening or prevention of competition" ("SLPC"). The Court also issued a decision regarding Canada Pipe's cross appeal on the proper market definition and market power. In a 2-1 decision, the Court dismissed Canada Pipe's cross-appeal.
In 2002, the Commissioner brought an application which alleged that the loyalty rebate program operated by Canada Pipe, referred to as the Stocking Distributor Program or "SDP", contravened the abuse of dominance and exclusive dealing provisions of Canada's Competition Act. On February 3, 2005, the Competition Tribunal found that Canada Pipe was dominant, but dismissed the Commissioner’s application on the basis that for a practice to be anti-competitive, "it must have a negative effect on competition. The Tribunal reasoned that the SDP was not an anti-competitive act because it did not impose significant switching costs on distributors, thus did not raise entry barriers, and in fact there was some evidence of entry and competition from imports in the record. To be guilty of abuse of dominance, a dominant firm must have engaged in a practice of anti-competitive acts and these acts must have resulted, or be likely to result, in a substantial prevention or lessening of competition in contravention of Section 79(1)(c) of the Competition Act.
Affect on Competition
The Court, agreed with the Commissioner that the Tribunal had erred by focusing its analysis on whether a substantial level of competition continued to exist in the market rather than whether competition would have been substantially greater in the absence of the SDP. The Court characterized the appropriate test as a "but for" test that asks whether "the relevant markets – in the past, present or future – [would] be substantially more competitive but for the impugned practice of anti-competitive acts". The Court held that the "but for" test is not the only correct approach, but nonetheless is one that must be at least considered in all cases.
The "but for" methodology will probably not lead to a different outcome by the Tribunal on remand as the Court restricted the Tribunal’s future analysis to "a redetermination in accordance with these reasons and on the basis of the evidence currently on record." It is doubtful that any sophisticated "but for" econometric evidence is currently on the record. This underscores another strange aspect of the case. The Tribunal finds support for the "but for" methodology in Concord Boat Corporation v. Brunswick Corporation, where the U.S. Court of Appeal for the Eighth Circuit emphasized the difficulty in operationalizing the "but for" test. Perhaps, of even more concern going forward is the explicit link between the "but for" test and the multi-faceted "purpose clause" of the Competition Act which contains elements that are not strictly focused on consumer welfare. Linking the Purpose Clause to the merger efficiencies trade-off analysis has led to some bizarre twists and turns in Canadian competition law, and one wonders what the proposed link between that clause and the "but for" analysis to exclusionary abuse cases will lead to.
In assessing whether competition has been, or is likely to be, prevented or lessened substantially, the Court suggested that an evaluation be made of "whether entry or expansion might be substantially faster, more frequent or more significant without the SDP; whether switching between products and suppliers might be substantially more frequent; whether prices might be substantially lower; and whether the quality of products might be substantially greater". Some have raised concerns that the Court has moved the SLPC test away from concerns with "market power" and effects on prices to consumers, and thus marks a turn towards European-style enforcement of abuse of dominance in the context of loyalty rebates. This concern is probably over-stated as it is axiomatic that market power in U.S. antitrust addresses both the power to control prices or to exclude competition, and ignores the recent tumult in various Circuit Courts of Appeal in the United States focusing on the exclusionary effects of loyalty rebates. The reason for that is that exclusion of competition can have an adverse effect on prices over time.
One odd aspect of the separate appeal and cross-appeal is reconciling Pelletier J.A.’s dissent in the cross-appeal suggesting that Canada Pipe did not have market power with his joining the majority with respect to the determination of the SLPC.
The Tribunal had determined that the SDP did not constitute an anti-competitive act primarily because it did not have a negative effect on competition. The Court held that the Tribunal had incorrectly required a causal link between the act and a decrease in competition. The Court repeatedly stressed that an anti-competitive act is identified by reference to its purpose and that the proper analysis in decideing whether an act is anti-competitive for Section 79(1)(b) only requires a finding that an act has an intended negative effect on "competitors", not on "competition". The Court stated that except for consideration in connection with the proffered business justification, evidence of the effect on the consumer "is largely irrelevant for the purposes" of determining whether there is an anti-competitive act. The Court held that a proffered business justification "is properly relevant only insofar as it is pertinent and probative in relation to the determination … as to whether the purpose for which the act was performed was a predatory, exclusionary or disciplinary negative effect on a competitor" and that "improved consumer welfare is on its own insufficient to establish a valid business justification".
The Court, indicated that to the extent that "efficiency" concerns are relevant to the abuse of dominance analysis, they are relevant in the context of Section 79(1)(b) such that "a business justification must be a credible efficiency or pro-competitive rationale for the conduct in question, attributable to the respondent, which relates to and counterbalances the anti-competitive effects and/or subjective intent of the acts." The Court did not mention Section 79(4) that requires the Tribunal to consider whether a practice arose as "a result of superior economic performance" when determining whether the practice would result in a SLPC. We should also point out that given that the Federal Court of Appeal and the Tribunal have tended to look at SLPC in a similar fashion under the various provisions of the Competition Act that have an SLPC requirement, we can't ignore the potential implications for the merger and other provisions.
The Court sent the case back to the Tribunal for a redetermination of the SLPC issue (and the issue of whether Canada Pipe had engaged in a practice of anti-competitive acts, as discussed below). Canada Pipe will be seeking leave to appeal to the Supreme Court, and it is expected that the leave application will be determined early next year. Given that the Court’s decision represents the first time that a court in Canada has considered the abuse of dominance provisions and the decision could have significant implications for other areas of competition law, this matter may be one which the Supreme Court will decide to hear.
Administrative Law Question
To some the most troubling aspect of the case relates to the deference owed by a reviewing court to a specialized administrative tribunal. This is the second time in the past 3 years that the Court has over-ruled the Tribunal on questions of law. The Tribunal was created as a specialized body to apply the expertise of lay members and judicial members on economic matters. However, the fundamental flaw of the Tribunal since it was introduced in 1986 is that too few reviewable practices are referred to it, and there are too few decided cases on substantive as opposed to procedural grounds. The Tribunal's supposedly expert "economic" analysis has clearly not kept pace with developments in the U.S. or the EU, and as a consequence, the Court has stepped into this vacuum, but not in a decisive way. So in Superior Propane - a merger to monopoly case - the Tribunal defied the Court, and the Court backed down. It will be interesting to see if the Tribunal on remand in Canada Pipe once again thumbs its nose at the Court, and if it does, how will the Court react this time. Early signs are not promising because it is very hard to see how a sophisticated econometric "but for" analysis can proceed if it was not in the record already before the Tribunal, which may suggest that the Court may need to reconsider its approach to instructing the Tribunal to act on remand.
Mark A. A. Warner is Counsel in the Antitrust/Competition & Marketing Group at Fasken Martineau DuMoulin LLP, and is a Member of the Bars of New York and Ontario. John Campion is Partner at Fasken Martineau DuMoulin LLP, and was Counsel to the Commissioner of Competition in the original Canada Pipe case before the Tribunal.
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