The year 2006 marked the 20th anniversary of Canada's Competition Act (the "Act"). The adoption of the Act in 1986 saw Canada's previously ineffectual criminal monopolization and merger laws replaced with new civil provisions and the establishment of the Competition Tribunal to adjudicate them. The goal was to infuse the new "abuse of dominance" and merger provisions with a marketoriented focus and to shift the remedial approach from punishing "illegal" conduct to correcting market distortions.
The 1986 amendments did not affect the criminal prohibition against unlawful conspiracies, which had been a pillar of competition law enforcement in Canada since the country's first competition legislation was enacted in 1898. The Competition Bureau continues to make the prosecution of conspiracies a top priority, but - as with the criminal merger and monopoly provisions in 1986 - regards the conspiracy provisions as requiring change in order to make them more effective.
Another issue that also was not addressed in 1986 is the role that competition law enforcement should have in regulated markets. In the early part of the 20th century, Canadian courts developed the so-called "regulated conduct doctrine", which stipulated that competition law would not apply to conduct directed or authorized by otherwise validly enacted legislation, even if the conduct were anti-competitive in effect. However, the Burea has always chafed at these restrictions, particularly as the role of regulation in the Canadian economy increased massively.
The past year saw important developments in each of these pivotal areas of Canadian competition law - abuse of dominance; mergers; conspiracies; and regulated conduct - with implications going forward in 2007 and beyond. The highlights are summarized below.
Abuse of Dominance - The Canada Pipe Case
The key development in 2006 relating to the Act's abuse of dominance provisions was the release by the Federal Court of Appeal (the "Court") of its judgment in the Canada Pipe matter.1 The decision represents the first time that the Court has considered the Act's abuse of dominance provisions.
The Canada Pipe case involves a form of "loyalty rebate" offered to customers by Canada Pipe Company Ltd., a manufacturer of cast iron drain, waste and vent ("DWV") products. The Competition Bureau applied to the Tribunal in 2002 for an order requiring that Canada Pipe's loyalty program (known as the "Stocking Distributor Program" or "SDP") be discontinued. Following a lengthy hearing, the Tribunal dismissed the Bureau's application in February 2005. Although the Tribunal concluded that Canada Pipe was indeed the "dominant" supplier of cast iron DWV products across Canada, it held that Canada Pipe had not "abused" this dominance because (i) the SDP did not constitute an "anti-competitive act" and (ii) the SDP had not resulted in an actual or likely "substantial lessening or prevention of competition" (the other two elements required to be proved).
Among other things, the Tribunal found that the SDP had not prevented other manufacturers from entering the market and competing successfully against Canada Pipe. In fact, since the implementation of the SDP in 1998, imports of cast iron DWV products into Canada had increased and the first new domestic manufacturer of these products in 30 years had been established. There also was significant evidence of competitive pricing. The Tribunal also accepted that the SDP was necessary for Canada Pipe to maintain a full line of inventory, including smaller, less profitable items that were nonetheless important for its customers' businesses.
On appeal, the Court reversed the Tribunal's decision and ordered the matter back for re-determination based on the new legal standards articulated in its judgment.
With respect to the "anti-competitive act" element, the Court held that the Tribunal had erred by assessing whether the SDP had a negative impact on the general state of competition in the market, e.g., by considering if there had been a detrimental effect on pricing or competitive entry. The Court stated that the Tribunal should only have considered at this stage whether there was an intended negative effect on competitors; the impact on competition is properly addressed only at the final stage of the analysis, when determining whether there has been a substantial prevention or lessening of competition.
As to that latter element, the Court held that the correct legal test for identifying a "substantial prevention or lessening of competition" is whether "the relevant markets - in the past, present or future - [would] be substantially more competitive but for the impugned practice of anti-competitive acts" (emphasis added). The Court stated that the Tribunal had erred by focussing on the fact of successful entry by competitors without asking whether there would have been "significantly more" competitive entry "but for" the establishment of the SDP.
Canada Pipe has applied for leave to appeal the Federal Court of Appeal's decision to the Supreme Court of Canada. This application is not expected to be decided until later in 2007, whereupon the matter will proceed to appeal or be returned to the Tribunal for redetermination. Either way, the case will have important ramifications for the future application of the abuse of dominance provisions in Canada.
The Competition Bureau rarely seeks to prohibit mergers outright. To the extent that issues are raised, they are usually resolved by means of a negotiated remedies package. As such, providing for an orderly and effective remedies process is an important objective of Canada's merger control system.
To that end, the Bureau released an Information Bulletin on merger remedies in September 2006.2 This is the first time that the Bureau has systematically set out its position on merger remedies.
For the most part, the Bulletin summarizes established Bureau practices and policies. For example, the Bulletin re-iterates the Bureau's stated preference for structural over behavioural remedies, i.e., divestiture of assets rather than restrictions governing conduct. The Bureau is of the view that divestitures are a more clear-cut way of dealing with the anti-competitive effects of mergers and also avoid the ongoing monitoring that is sometimes required with behavioural-type remedies.
In other instances, however, the Bulletin signals a hardening of Bureau positions. For example, the Bulletin states that the acquiring party will be given only 3-6 months to accomplish an agreed-upon divestiture, following which the process will become the responsibility of a trustee appointed by the Bureau, who will not be bound by any "minimum" price in effecting a sale. This is a shorter "initial sale" period than has typically been the case in the past. The clear intention is to compel parties to sell as quickly as possible or risk losing control of the divestiture process.
The last several years have witnessed a debate in Canada centering around the provision in the Act which allows parties to claim "efficiencies" as a defence to the allegation that a merger would substantially prevent or lessen competition. Because of the Competition Bureau's defeat in a contested merger case on these grounds, the previous Commissioner of Competition, Konrad von Finckenstein, became somewhat preoccupied with the efficiencies issue. As a result, the Bureau first supported proposed amendments to the Act that would have eliminated the defence entirely. When that effort stalled, the Bureau then commissioned an advisory panel to study the appropriate treatment of efficiencies in merger review. The Bureau also indicated that it would refer any serious claims of efficiencies to the Competition Tribunal rather than deal with the issue internally.
The current Commissioner, Sheridan Scott, offered her own views on the efficiencies debate in a speech delivered to the Canadian Bar Association in September 2006.3 Recognizing that efficiencies are rarely a decisive issue in Canadian merger law (the case referred to above was the sole disputed case turning on the efficiencies defence in the last 20 years), the Commissioner has announced that the Bureau no longer considers it desirable or advisable to seek amendments to the law. She also has urged parties to make "robust and thoughtful" submissions to the Bureau on efficiencies when considered appropriate. The Bureau will not regard these submissions as an admission of anti-competitive concern or necessarily require recourse to the Tribunal.
It is a positive development to see the Commissioner restoring some much needed perspective in this area, even though in some respects, such as encouraging efficiency submissions, her comments largely reflect the Bureau's current practice. In particular, efficiencies may influence the Bureau's decision-making process in borderline cases where it is not clear whether enforcement action is necessary.
Focus on Domestic Cartels
Prosecuting cartels, particularly domestic cartels, remains one of the Competition Bureau's chief enforcement priorities. In support of that objective, the Bureau's budget for cartel investigations has been increased by approximately 50% over the last three years and the investigative capacities of the Bureau's regional offices have been strengthened. The Commissioner also has publicly confirmed that the Bureau is currently investigating alleged domestic cartels involving tour operators and service station operators in Québec.
The Bureau's anti-cartel efforts in 2006 began with three distributors pleading guilty in January to a conspiracy involving the distribution of carbonless sheets in Ontario and Québec.4 As part of the plea agreement with the Bureau, the parties were to pay fines totalling $37.5 million, the largest fines to date for a domestic cartel. The parties also were obliged to remove certain key personnel from their positions. This reflects the Bureau's continuing commitment to hold accountable individuals who are involved in cartel activity.
In September, however, the Bureau suffered a setback when it had a conspiracy prosecution dismissed at the preliminary inquiry stage in R. v. Bugdens Taxi et al.5 This case involved charges under the Act's conspiracy provisions against six taxi companies and seven individuals from the St. John's, Newfoundland area. The allegation was that the accused had unlawfully conspired to refrain from tendering on contracts put up for a bid to supply exclusive taxi services to the local airport, hospital, university and hotels. The accused also allegedly deterred others from bidding on the contracts. The goal was apparently to compel the institutions in question to accept a different arrangement that would have been more profitable for the accused.
At a preliminary inquiry (where the prosecution's burden of proof is very low), the judge held that while there was sufficient evidence of an agreement between the accused (indeed, no secret was made of the arrangement), the prosecution had failed to demonstrate that it could establish an "undue" lessening or prevention of competition, another element of the conspiracy offence. In particular, the prosecution had not set forth a clear definition of the relevant market nor adequately explained how the agreement would have an "undue" impact on competition in that market. The judge also was influenced by the fact that the issue had been brought to the attention of the relevant regulatory body, which had declined to intervene.
By its own admission, the Bureau has a poor track record of litigating conspiracy cases at trial, and Bugdens Taxi is a perfect illustration of this trend. Indeed, because of its lack of litigation success in conspiracy cases, the Bureau had supported a proposal made several years ago to eliminate the "undueness" requirement for certain types of cartel activity, such as price fixing and market sharing, and turn these into per se offences. This proposal was considered controversial and opposed by many in the Canadian competition bar. It was thus shelved for further study. In her CBA speech, however, the Commissioner indicated that the Bureau continues to review possible amendment options for the Act's conspiracy provisions and hopes to commence public "technical roundtables" on the topic in early 2007. Given its recent experience in the Bugdens Taxi case, it would not be surprising to see the Bureau again advocating a more "prosecution-friendly" conspiracy offence for Canada.
Every Commissioner eventually develops an enforcement theme for his/her tenure in office. As noted above, the previous Commissioner devoted much time and energy to the issue of merger efficiencies. For her part, the current Commissioner has demonstrated a keen interest in the interaction between competition law and regulated markets. The Commissioner has described the topic as being "near and dear to [her] heart", a natural product of her having worked previously at both the CRTC and Bell Canada.
Markets Under Study
As a result of the Commissioner's interest in regulated markets, at least two industries or categories of businesses will be coming under heightened Bureau scrutiny in the coming year: the pharmaceuticals industry and self-regulated professions.
Regarding pharmaceuticals, the Bureau has developed "a comprehensive work-plan for advocacy in this area". One project will involve a "market study" of the generic pharmaceuticals sector, which will look at questions such as why generic prices tend to be higher in Canada than in other "comparator countries".
As for self-regulated professions, the Bureau has launched a study to determine the extent to which professional bodies use regulatory restrictions to limit access to membership or to control the competitive conduct of their members. The specific professions being studied are accountants, lawyers, optometrists, opticians, pharmacists and real estate agents. According to the Commissioner, the Bureau is investigating selfregulated professions because it considers a competitive service sector to be vital to the future health of the Canadian economy. The Commissioner also has stated that one of the results of the study could be enforcement action against the identified professions.6
Who Has Jurisdiction?
The prospect of greater Bureau enforcement against selfregulated professions increases the likelihood of a clash between the requirements of the Act and the provincial legislation and regulations that apply to these professions. Traditionally, the interface between the Act and provincial laws has been governed by the "regulated conduct defence" (RCD), which provides a form of immunity to persons engaged in conduct that is directed or authorized by other validly enacted legislation. The Commissioner has made it clear, however, that the Bureau will not be deterred by the RCD from using the Act's civil provisions to pursue anti-competitive conduct by self-regulated professions.
The same point is made in the Bureau's "Technical Bulletin" on the RCD, which was issued in June 2006, and which takes the general position that the RCD should be restricted in its application.7 Indeed, it is fair to say that the Commissioner and the Bureau are spoiling for a fight over the RCD, and that they apparently see the potentially anti-competitive conduct of self-regulating professions as a particularly promising casus belli.
In a similar vein, there continues to be an ongoing struggle over the role of competition enforcement in certain federally-regulated industries.
In 2006, the Bureau both won and lost ground in this struggle. On the one hand, recent announcements by the Minister of Industry seem to forecast a greater role for the Competition Bureau in the telecom sector. For example, the Minister has directed the CRTC to expedite deregulation of local telephone services and - as a safeguard against possible future abuses - has proposed to give the Bureau the right to seek financial penalties against telecom companies found to have abused their dominant positions.8 By contrast, draft legislation currently before Parliament would subordinate the Bureau's authority to review mergers in the transportation sector to a broader "public interest" review process and ultimate approval by the Minister of Transport and the federal Cabinet.9
It remains to be seen whether the balance in this struggle will eventually tip in favour of greater competition law enforcement or towards the opposing view that other considerations should take precedence.
1 See http://www.canlii.org/ca/cas/fea/2006/2006fca233.html. Davies represents Canada Pipe Company Ltd. in this matter.
2 Competition Bureau, "Information Bulletin on Merger Remedies In Canada" (September 22, 2006), http://www.competitionbureau.gc.ca/PDFs/Mergers_Remedies_PDF_EN1.pdf. Davies lawyers contributed to an American Bar Association task force that commented on the draft version of the Bulletin.
3 Sheridan Scott, "Address to the Canadian Bar Association Annual Fall Conference on Competition Law" (September 28, 2006), http://www.competitionbureau.gc.ca/PDFs/SpeechFallCBAConference_06-09-28e.pdf.
4 Competition Bureau News Release, "Competition Bureau Investigation Leads to Record Fine in Domestic Conspiracy" (January 9, 2006), http://www.competitionbureau.gc.ca/internet/index.cfm?itemID=2018&lg=e. Davies acted for one of the parties in this matter.
5 See http://www.canlii.org/nl/cas/nlpc/2006/2006nlpc10069.html.
6 Sheridan Scott, "Antitrust in the Self-Regulated Professions: An International Perspective" (Speaking Notes presented at the Canadian Bar Association Annual Fall Competition Law Conference, Gatineau, Québec, September 29, 2006), http://www.competitionbureau.gc.ca/PDFs/Speech_FINAL_CBA_sept29_e.pdf. See also Sheridan Scott, "Competition and Innovation in a Flat World" (Speaking Notes presented at the Insight International Competition Law Conference: Real World Issues and Strategies for Success, Toronto, May 15, 2006), http://www.competitionbureau.gc.ca/PDFs/Speech_Scott_competition_innovation_may06_e.pdf.
7 Competition Bureau, "Technical Bulletin on 'Regulated' Conduct" (June 2006), http://www.competitionbureau.gc.ca/PDFs/final_rcdbulletin_e.pdf.
8 Industry Canada News Release, "Canada's New Government Proposes to Accelerate Deregulation of Local Telephone Service in the Interests of Canadian Consumers" (December 11, 2006), http://www.ic.gc.ca/cmb/welcomeic.nsf/261ce500dfcd7259852564820068dc6d/85256a5d006b9720852572410055c041!OpenDocument.
9 Bill C-11, An Act to amend the Canada Transportation Act and the Railway Safety Act and to make consequential amendments to other Acts, 1st Sess., 39th Parl., 2006, http://www.parl.gc.ca/LEGISINFO/index.asp?Language=E&query=4690&Session=14&List=toc.
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