Canada: The Sherman Act Section 1 - Canadian Developments

Originally published in ABA Sherman Act Section 1 Newsletter (Fall 2006/Winter 2007)

Competition Bureau Concludes Examination of Gasoline Prices in Canada Following Hurricane Katrina

Following a thorough examination of the Canadian gasoline industry, the Canadian Competition Bureau (the "Bureau") announced on March 30, 2006 that it had found no evidence to suggest that an unprecedented spike in gasoline prices in Canada following Hurricane Katrina resulted from a conspiracy among North American gasoline refiners. Instead, the Bureau found that the primary reasons for the price shock were uncertainty over supply caused by a lack of data immediately following Hurricane Katrina, the closure of several refineries in the Gulf Coast region, and damage to pipelines that supply oil from the Gulf Coast to other refineries in the United States. In fact, the Energy Information Administration in the United States had previously concluded that 10% to 15% of total U.S. gasoline production was halted as a result of the hurricane.

According to the Bureau: "[t]he supply interruption broke down the normal relationship between crude [which accounts for approximately 75% of the pre-tax price of gasoline] and wholesale prices. With a lack of refined product available to North America, prices increased dramatically even though the cost of crude did not change. Price increases are a normal outcome when supply is reduced and demand remains constant. Market forces increase the price in response to a shortage of gasoline."

In addition, the Bureau noted that "[t]he supply reduction caused a spike in the New York Harbour spot price for gasoline, which Canadian refiners use to determine their wholesale prices. This spike forced wholesale, and ultimately retail prices, to increase in Canada and the United States.

The Bureau has now completed six major investigations of the gasoline industry in Canada since 1990. In each case, the Bureau found no evidence to suggest that periodic price increases resulted from a conspiracy to limit competition in gasoline supply.1

Continued Focus On Cartels

On September 28, 2006, Sheridan Scott the Commissioner of Competition (the "Commissioner"), delivered a speech in which she outlined her priorities and plans for the Bureau. Not surprisingly, the Bureau's top enforcement priority continues to be fighting cartels, particularly domestic cartels. To that end, the Bureau's budget for cartel investigations has been increased by approximately 50 percent over the last three years and the investigative capacities of the Bureau's regional offices have been strengthened.

The Bureau's focus on domestic cartels in 2006 began with three distributors pleading guilty to a conspiracy involving the distribution of carbonless sheets in Ontario and Québec. As part of the plea arrangement with the Bureau, the parties agreed to pay fines totalling Cdn.$37.5 million and to remove certain key personnel from their positions.

The Bureau also executed a number of search warrants as part of its investigation of alleged price fixing between competitors in the retail gasoline industry in local markets in the province of Quebec. Similarly, the Bureau executed a number of search warrants as part of its investigation of alleged anticompetitive practices by certain companies in the tour operators industry in Canada. These investigations are ongoing.

More recently, however, the Bureau had a case dismissed at the preliminary inquiry stage, when it failed to satisfy the presiding judge that the arrangement in question (which involved taxi companies in St. John's, Newfoundland agreeing not to bid on contracts put up for tender) had the effect of unduly preventing or lessening competition.

The Bureau's poor track record in litigating cartel cases in recent years (as exemplified by this most recent setback) led it at one point to support proposed amendments to Canada's conspiracy laws that would have eliminated the requirement to prove an "undue" prevention or lessening of competition. This proposal was shelved because it could not generate sufficient consensus. However, according to the Commissioner, the Bureau is continuing to review possible amendment options and hopes to commence public "technical roundtables" on the topic next year.2

Competition Bureau Concludes Examination of Gasoline Prices in Canada Following Hurricane Katrina

In response to questions from the media, the Commissioner confirmed on June 2, 2006 that the Bureau is investigating alleged price fixing between competitors in the retail gasoline industry in local markets in the Province of Québec. As part of its investigation, the Bureau has obtained search warrants from the Superior Court of Quebec against a number of participants in the gasoline industry on the basis "that there are reasonable grounds to believe that price fixing has occurred".

According to the statement issued by the Commissioner, "[t]here is no conclusion of wrongdoing at this time and no charges have been laid. All evidence will be analyzed and we will refer the case to the Attorney General if appropriate." The Commissioner also stated that "[o]ur enforcement record clearly shows that the Bureau is committed to investigate complaints in the petroleum industry and in all sectors of the Canadian marketplace and to take enforcement action under the criminal provisions of the Competition Act whenever appropriate".3

Recent Developments in Canada's "Regulated Conduct Defence"

The "regulated conduct defence" ("RCD") is a common law doctrine applied in Canada that provides a form of immunity from enforcement action under the Competition Act (Canada) (the "Act") to persons engaged in conduct that is directed or authorized by other validly enacted federal, provincial or municipal legislation. The RCD is analogous to the "state action doctrine" developed by the United States Supreme Court.

The Bureau's Information Bulletin on the RCD, first released in December 2002, was criticized for being inconsistent with existing case law. In October 2004, the Bureau began consultations on the role of the RCD in the application of Canada's competition law. On November 1, 2005, the Bureau released a draft Technical Bulletin on "Regulated Conduct" (the "Draft Bulletin"), which replaced the Bureau's 2002 Information Bulletin on the subject. A revised Technical Bulletin on Regulated Conduct (the "Bulletin") was recently released on June 29, 2006.

The Bulletin, substantially unchanged from the Draft Bulletin, represents an attempt by the Bureau to address the criticisms that the Information Bulletin ignored the body of case law that formed the basis for the RCD.

The key points made in the Bulletin are as follows:

Absent further judicial guidance, cautious application of the RCD is warranted.

In determining whether the RCD applies, the Bureau will carefully consider: (i) the purposes and relevant provisions of the Act and the applicable federal, provincial or municipal law; (ii) the interests sought to be protected by both laws; (iii) the impugned conduct; (iv) the parties involved; and (v) the applicable principles of statutory interpretation.

In the case of validly enacted federal legislation, the Bureau will apply the Act unless the Bureau can confidently determine that Parliament intended that the other legislation prevail over the Act – either by clear language in the Act or by the other federal law authorizing or requiring the particular conduct or, more generally, providing an exhaustive statement of the law concerning a matter. The Bureau will not pursue a matter where Parliament has articulated an intention to displace competition law enforcement by establishing a comprehensive regulatory regime that: (i) gives a regulator the authority to take action inconsistent with the Act; and (ii) the regulator has exercised its regulatory authority in respect of the conduct in question. Where the regulator has forborne from regulation, the Bureau will continue to apply the Act to such unregulated conduct.

In the case of validly enacted provincial legislation, the Bureau will consider whether a provincial law authorizes (expressly or impliedly) or requires the impugned conduct.

The Bureau will not necessarily approach the application of the reviewable matters provisions of the Act to conduct regulated by provincial law in the same manner as it will approach the application of the criminal provisions of the Act to such conduct. It is unlikely that the Bureau will pursue a case under any criminal provisions of the Act in respect of conduct that is authorized or required by a valid law. However, the Bureau will not refrain from pursuing regulated conduct under the reviewable matters provisions simply because the provincial law may be interpreted as authorizing the conduct or is more specific than the Act.

With respect to the criminal provisions of the Act, the Bureau will follow the Supreme Court of Canada's decision in Garland v. Consumers' Gas Co. in distinguishing between criminal provisions of the Act that contain "leeway language" (such as, "against the interests of the public" or "unduly limiting competition") and those which do not. Accordingly, the Bureau will refrain from investigating/prosecuting conspiracies under section 45 of the Act in appropriate circumstances because conduct authorized or required by provincial legislation cannot be "undue". With respect to other criminal provisions in the Act, the Bureau will attempt to determine whether Parliament intended that the particular provision(s) of the Act apply to the impugned conduct.

With respect to the reviewable matters provisions of the Act, there is simply not enough case law for the Bureau to limit its statutory mandate by the application of the RCD without further judicial guidance.

The Bureau acknowledges that no court has expressly held that the RCD should be applied differently as between regulators and regulatees. However, the Bureau nevertheless provides that greater scrutiny of the activities of regulatees, whether acting in their private capacity or as selfregulators, may be warranted.

Even if the Bureau decides that the RCD does not apply, it will consider the public interest in pursuing the matter.4

Competition Bureau Obtains Prohibition Order Against Sotheby's

On August 28, 2006, the Federal Court of Canada issued a Prohibition Order against the international auction house, Sotheby's, and its Canadian subsidiary, Sotheby's (Canada) Inc. ("Sotheby's Canada") following an investigation by the Bureau into an international pricefixing conspiracy and its effects on auction services supplied to Canadian clients.

The Bureau's inquiry concerned an international conspiracy to suppress and eliminate competition by fixing auction commission rates, and the effects that this conspiracy may have had on Canadian auction sellers between April 1993 and February 2000. In this regard, as a result of its inquiry, the Bureau determined that Canadians may have been induced by Sotheby's and Sotheby's Canada to consign their property to auctions in the U.S. and elsewhere for sales subject to the fixed commission rates set by the illegal cartel. No evidence was uncovered that the conspiracy affected auctions held in Canada.

The Prohibition Order prohibits Sotheby's, headquartered in New York, and Sotheby's Canada, based in Toronto, from committing any offense contrary to the conspiracy and foreign directives provisions of the Act. The Prohibition Order also prohibits Sotheby's and Sotheby's Canada from doing any act or thing directed toward the commission of an offense under such provisions, and directs them to maintain and implement compliance measures that will prevent any such future illegal activities. In addition, Sotheby's is required to post a notice of the Prohibition Order on its Canadian web page, and both companies are required to (a) provide a copy of the Prohibition Order to each of their directors, officers and employees responsible for the distribution, marketing and supply of services to Canadian auction sellers in relation to auctions held outside Canada; (b) provide a written statement to such individuals that it is company policy to require compliance with the Prohibition Order and that failure to comply could result in, among other things, appropriate disciplinary action that may include termination; and (c) pay investigative costs, calculated by the Bureau at just under Cdn.$800,000.

According to the News Release issued by the Bureau, "[t]he Court's Order addresses the Bureau's concerns that Canadian vendors benefit from competitive prices for international auction services. The Bureau's investigation focused on the harm this international conspiracy inflicted on Canadians."5


1 References: Competition Bureau, News Release, "Competition Bureau Concludes Gasoline Pricing Examinations" (30 March 2006); Competition Bureau, Backgrounder, "Competition Bureau Concludes Examination Into Gasoline Price Spike Following Hurricane Katrina" (30 March 2006)

2 Reference: Sheridan Scott, Speaking Notes (Address to the Canadian Bar Association Annual Fall Conference on Competition Law, 28 September 2006).

3 References: Competition Bureau, Statement by Sheridan Scott, Commissioner of Competition (2 June 2006).

4 References: Competition Bureau, Technical Bulletin on "Regulated" Conduct (June 2006).

5 References: Competition Bureau, News Release, "Competition Bureau Obtains Prohibition Order Against Sotheby's and Sotheby's (Canada) Inc." (28 August 2006); R. v. Sotheby's, No. T-1526-06, Statement of Admitted Facts, August 28, 2006 (F.C.T.D.); R. v. Sotheby's, supra, Prohibition Order, August 28, 2006.

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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