The New "Refusal To Deal": Tribunal Rejects GPAY Claim

Section 75 of the Competition Act addresses the reviewable practice of "refusal to deal." In June of 2002, the Act was amended so as to allow private parties to bring actions under this section before the Competition Tribunal (the Tribunal), where leave has been granted by the Tribunal pursuant to s. 103.1 of the Act. Prior to the 2002 amendments, s. 75(1) had required four conditions to be met before relief could be granted. Pursuant to those amendments, however, a fifth condition was added; namely, that the refusal to deal must have caused or be likely to cause an "adverse effect" on competition in a market.

The case B-Filer Inc. et al. v. The Bank of Nova Scotia¹ (often known as the "GPAY case") represents the first time that the Tribunal has made a ruling under s. 75 since the 2002 amendments.² The applicants, B-Filer (which operated under the name GPAY) and NPAY Inc., were Alberta-based companies with the same controlling shareholder, carrying on a joint venture with UseMyBank Services, Inc. The business, known as UseMyBank Service, consisted of processing on-line payments, primarily on behalf of customers of Internet gaming sites. The applicants handled the interface with banks, while UseMyBank took care of marketing. When making a purchase from an on-line merchant that supported the service, a customer could choose UseMyBank Service as a payment option, and would then be transferred to the UseMyBank website, whereupon he or she would be asked to provide his or her confidential bank identification number and password. The applicants would then use that information to access the customer’s account directly, and effect a transfer of funds to themselves, either directly as a bill payee—if granted bill-payee status by the customer’s bank—or otherwise by way of an e-mail money transfer (EMT), and would then pay the merchant on behalf of the customer. ScotiaBank EMTs for small business accounts were limited to $1,000 sent or $10,000 received per day, however, making bill-payee status the more flexible method of processing. ScotiaBank terminated the applicants’ bank accounts in 2005, denying it access to these two services.

GPAY and NPAY brought a private proceeding before the Tribunal in an effort to compel ScotiaBank to reinstate them as customers with bill-payee status, as well as to permit the receipt of unlimited EMT services. The Tribunal found that the applicants did not prove that the necessary conditions under s. 75 existed, and relief was therefore denied. Even had the conditions been met, the Tribunal noted that it would have exercised its discretion to deny the applicants’ claim in this case, on the basis that there were reasonable business justifications for the termination.

The published reasons are somewhat fragmented due to edits made in order to preserve confidentiality, but a few interesting points can nevertheless be discerned. The five conditions for discretionary relief under s. 75(1) are as follows:

1. a person is substantially affected in his business or is precluded from carrying on business due to his inability to obtain adequate supplies of a product anywhere in a market on usual trade terms,
2. the person referred to in paragraph (a) is unable to obtain adequate supplies of the product because of insufficient competition among suppliers of the product in the market,
3. the person referred to in paragraph (a) is willing and able to meet the usual trade terms of the supplier or suppliers of the product,
4. the product is in ample supply, and
5. the refusal to deal is having or is likely to have an adverse effect on competition in a market.

The Tribunal made no determinations under paragraphs (c) or (d), finding no need to do so in light of its other findings. Paragraph (b), which requires that insufficient competition be the reason for inadequate supply in a market, invited a relatively uncomplicated analysis as well. The Tribunal found that the bank had had objectively justifiable, non-competition-related business reasons for severing ties with its clients, given UseMyBank’s requirement that customers disclose their electronic banking ID and password, and its inability to conform to money laundering and terrorism safeguards. The Tribunal’s most interesting findings concern paragraphs (a) and (e).

As noted above, paragraph 75(1)(a) requires an applicant to show that it has been "substantially affected" in its business, or precluded from carrying on that business due to the inability to obtain adequate supplies anywhere in a market on usual trade terms. In defining the market for the purposes of paragraph 75(1)(a), the Tribunal considered whether the 2002 addition of a requirement that the refusal have an adverse effect on competition should alter its approach to determining if the applicant was unable to obtain adequate supply "anywhere in a market" on usual trade terms. The Tribunal’s approach to the latter had previously been outlined in Canada (Director of Investigation and Research) v. Chrysler Canada Ltd.³ The potential need to reconsider stemmed from a pronouncement in Canada (Director of Investigation and Research) v. Xerox Canada Inc. that "the question of the ‘relevant’ market for the purposes of section 75 depends largely on the construction of section 75 and the identification of its objectives within the context of the Competition Act as a whole."⁴

Ultimately, the amendment was found not to have altered the central focus of paragraph 75(1)(a), meaning that the test from Chrysler still applies: products that can be substituted for each other without substantially affecting a person’s business are in the same market. This test was also preferred over the hypothetical monopolist test (used by the Competition Bureau in merger control) since paragraph (a) deals with past events and a particular applicant, making hypotheticals less helpful. At the end of the day, however, the Tribunal found that the applicants’ evidence fell short of proving that the refusal to deal had had a substantial effect on their business (among other things, it found that overall revenues had increased significantly since the termination), and therefore the requirements of paragraph 75(1)(a) were not met. The consideration of the appropriate market, accordingly, is obiter dictum but nonetheless instructive for future cases.

The GPAY case also marks the first consideration by the Tribunal of the new requirement in paragraph 75(1)(e) that the applicant demonstrate actual or likely harm to competition .

In light of the paragraph’s close similarity to the requirement of a "substantial lessening or prevention of competition" in paragraph 79(1)(c) of the Act (abuse of dominance), the Tribunal considered case law surrounding the latter provision, especially Canada (Commissioner of Competition) v. Canada Pipe Corporation Ltd.⁵ It determined that paragraph 75(1)(e) similarly "demands a relative and comparative assessment of the market with the refusal to deal and that same market without the refusal to deal,"⁶ with the difference that paragraph 75(1)(e) demands only an "adverse," rather than a "substantial" effect on competition. An adverse effect on the market due to a refusal to deal necessarily entails that "the remaining market participants must be placed in a position, as result [sic] of the refusal, of created, enhanced or preserved market power."⁷

In defining the market for this inquiry, the Tribunal stated unequivocally that the relevant market in assessing competitive impact was not the same as the market referred to in paragraphs (a) or (b) of the section. The relevant market for assessing competitive effect is "the market in which the applicants participate."⁸

In this case, however, the Tribunal determined that the boundaries of the market under paragraph (e) did not need to be determined. The Tribunal found that the only salient question in defining the market was whether Interac Online (a competing on-line debit service offered by Interac association members, including ScotiaBank) and UseMyBank were, or were likely to be, competing in the same market. Where the two services did not, and were not likely to compete, the refusal to deal could not have any competitive effect. At the end of the day the Tribunal’s discussion on this point is academic, given its findings that the applicants had not been substantially affected in their business.

Experts for both parties were in agreement that the services of UseMyBank and Interac Online were not close substitutes for one another, due largely to a lack of overlap in their respective customer bases. Interac Online canvassed merchants with higher-value transactions (often exceeding $1,000 at a time), whereas there was no evidence of attempts by the applicants to attract these clients since losing bill-payee status at other financial institutions in December 2003. Meanwhile, UseMyBank’s ability to process amounts less than $1,000 had remained unaffected. As a result of these findings, the Tribunal found that the applicants could not show that competition had been adversely affected in the market in which it participates.

The applicants have since filed a notice of appeal in the Federal Court.

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