Canada: Abuse Of Dominance In Canada: What Lies Ahead?

Abuse of dominance continues to be a focus of debate and attention in Canada (as it is throughout the international competition law community). In June 2006, the Federal Court of Appeal ("FCA") issued its decision requiring the Competition Tribunal (the "Tribunal") to re-determine 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. ("Canada Pipe"). Davies acts for Canada Pipe in this matter. In September 2006, in preparation for its increased role in the regulation of the telecommunications industry, the Competition Bureau (the "Bureau") released a draft information bulletin concerning abuse of dominance in the telecommunications sector. Finally, in a related move, the Minister of Industry tabled proposed amendments to the Competition Act in December 2006 that would authorize the Tribunal to order telecommunications providers to pay an administrative monetary penalty ("AMP") of up to $15 million for abusing a dominant position. These developments and the resulting implications are discussed in greater detail below.

The Canada Pipe Case

Tribunal Decision

In 2002, the Commissioner brought an application which alleged that the rebate-based loyalty program operated by Canada Pipe (referred to as the Stocking Distributor Program or "SDP") contravened the abuse of dominance and exclusive dealing provisions of the Competition Act. The SDP offers distributors quarterly and annual rebates, as well as significant point of purchase discounts, should they purchase all of their cast iron drain, waste and vent ("DWV") product needs from Canada Pipe.

The Commissioner's application was dismissed by the Tribunal in 2005. The Tribunal concluded that Canada Pipe was dominant in respect of cast iron DWV products in Canada but held that the SDP did not constitute an anti-competitive act and that its presence had not resulted in a substantial lessening or prevention of competition. The Tribunal found that the SDP had not deterred entry, that the SDP's structure allowed customers to leave the program without incurring significant switching costs, and that there was significant evidence of competitive pricing from both domestic suppliers and importers. The Tribunal also accepted Canada Pipe's business justification for the SDP, namely that it allowed Canada Pipe to support the manufacture and sale of low-volume cast iron DWV products which would not otherwise have been made available to customers.

The Federal Court Has Its Say

In June 2006, the FCA granted the Commissioner's appeal, holding that the Tribunal did not apply the correct legal tests for the "anti-competitive act" and "substantial lessening or prevention of competition" elements of the abuse of dominance provisions. The FCA also questioned the validity of Canada Pipe's business justification for the SDP. The FCA ordered the matter returned to the Tribunal for reconsideration in light of its re-articulation of the legal tests. A majority of the FCA also dismissed Canada Pipe's appeal of the Tribunal's finding that it "controlled" markets for cast iron DWV products in Canada.

The FCA's decision in Canada Pipe represents the first time that the courts have considered the Competition Act's abuse of dominance provisions. On the positive side, the FCA confirmed that an alleged anti-competitive act contravenes the abuse of dominance provisions only if it has a negative effect on competition; unlike certain other jurisdictions, such as Europe, a loyalty rebate program will not be unlawful in Canada simply because it is offered by a dominant party.

Unfortunately, the positive aspects of the FCA's decision are outweighed by the uncertainty it creates with respect to key elements of the abuse of dominance provisions.

For example, with respect to the test for "anti-competitive acts", the FCA held that the Tribunal had improperly focussed its attention on whether the SDP was linked to a negative effect on competition. The FCA repeatedly stressed that the proper analysis at this stage only requires a finding that an act has an intended negative effect on competitors, not on competition in the market as a whole.

The FCA's focus on individual competitors raises the question of how to distinguish between "anti-competitive acts" and legitimate competition, given that every business-related act a company takes could be said to have an intended negative effect on another competitor. For example, is merely lowering one's prices in response to competitive pressures "anti-competitive" based on these grounds?

As to the "substantial lessening of competition" element, the FCA held that the Tribunal had erred by focussing its analysis on whether a substantial level of competition continued to exist in the market rather than on whether even more competition would have existed in the absence of the SDP (e.g., even more entry or even lower prices). The FCA characterized the appropriate test as a "but for" test, i.e., 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 also suggested that the Tribunal could adopt a different test in different circumstances if that seemed more appropriate.

As a practical matter, it is unclear whether the FCA's "but for" test is workable, since it requires proving that an already competitive market would have been even more competitive in different circumstances. The FCA's reasoning is particularly questionable in the context of Canada Pipe, considering that the Tribunal had determined that the SDP does not act as a barrier to entry. How then could its absence result in even more competitive conditions? In addition, the FCA's comment that the "but for" test is not necessarily the only appropriate test is also unhelpful, since the FCA did not provide any guidance as to when it might be appropriate to use another standard for determining a substantial lessening of competition or what those alternative tests might be.

Finally, the FCA's comments on the business justification issue also lack clarity. The FCA held that a business justification is invalid if it is based only on improving consumer welfare since the justification must be of direct benefit to the dominant party. The FCA seems to be saying that a dominant party should be penalized if the objective of its conduct is purely to benefit its customers. This is clearly at odds with a basic purpose of the Act, which is to promote competitive markets precisely because they offer consumers lower prices and greater product choices.

Canada Pipe has applied for leave to appeal the FCA's decision to the Supreme Court of Canada. A decision on the application is expected later this year. Hopefully, the Court will decide to hear the case and bring much needed clarity to this important area of Canadian competition law.

Abuse of Dominance in Telecom

Bureau Guidelines

In September 2006, the Bureau issued a draft information bulletin to provide guidance on the application of the abuse of dominance provisions to the telecom sector. The impetus for the release of the draft bulletin is the CRTC's anticipated withdrawal from aspects of its regulation of this sector, leading to greater scope for the application of the Competition Act. The Bureau is currently in the midst of a consultative process with respect to the draft bulletin. Initial comments on the bulletin suggest that more detailed and specific guidance must be provided by the Bureau in order for the bulletin to be useful.

AMPs on the Horizon?

Interestingly, the draft information bulletin did not refer to any proposal to grant the Tribunal the authority to issue AMPs for abuse of dominance in the telecom sector. Instead, the Minister of Industry tabled the proposed changes to the Competition Act several months later.

The proposal to introduce AMPs for abuse of dominance is not a new one. In 2004, the Bureau sought amendments to the Competition Act that would have provided the Tribunal with the general authority to impose AMPs of up to $15 million for an abuse of dominance, regardless of the industry involved. This proposal was met with widespread criticism on the grounds that it sought to impose criminal-type penalties for non-criminal conduct. Concerns were also raised about the proposal's constitutionality. The proposal eventually died on the Order Paper with the subsequent dissolution of Parliament.

According to the government's backgrounder regarding the current proposed amendments, "certain characteristics of the telecommunications industry" warrant having AMPs available as a potential sanction for abuses of dominance affecting that industry. It is not entirely clear what these "certain characteristics" are. More to the point, it appears that the proposal to introduce AMPs for the telecom industry is linked to the government's recent initiative to expedite deregulation of the former local telephone monopolies. That said, this still leaves unresolved the broader question of whether it is appropriate for the Act to contain industry-specific provisions given its status as generally applicable "framework legislation".

What Lies Ahead?

2007 promises to be an important year for the enforcement of abuse of dominance law in Canada. A decision from the Supreme Court of Canada regarding Canada Pipe's application for leave to appeal is expected within the next few months. If leave is granted, the Court will have the opportunity to weigh in on issues that academics, courts and competition lawyers have been grappling with all over the world – how to distinguish between aggressive competition on the merits and anticompetitive conduct and how far can dominant parties go in that regard. In addition, the fate of the Bureau's proposal to introduce AMPs for abuse of dominance in the telecom sector may well determine whether a further expansion of the scope of AMPs in this area is likely.

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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