Canada: CarGurus Case Crashes as Tribunal Refuses Leave

Last Updated: October 21 2016
Article by W. Michael G. Osborne

Used car listing website operator CarGurus Inc.'s attempt to force rival Trader Corporation to supply it with vehicle listing data has encountered a dead end as the Competition Tribunal denied it leave to commence a private application under several provisions of the Competition Act.

This decision highlights the difficulties that private applicants face in attempting to avail themselves of the Competition Act's private application provisions.

Trader refuses to supply listing data to CarGurus

CarGurus operates vehicle listings websites in the US, and, more recently, Canada. It competes in Canada with the well established Autotrader websites operated by Trader.

In addition to operating its own auto listing websites, Trader syndicates vehicle listing information to competing auto listing websites, and offer to syndicate its content to CarGurus after it discovered that CarGurus was using photos that Trader claimed copyright over. CarGurus refused to accept the terms in Trader's standard syndication agreement. Trader sued CarGurus for copyright infringement. CarGurus took the position that the photos do not enjoy copyright protection, but removed over 1 million photos from its website.

CarGurus then sought leave to commence a private application against Trader in the Tribunal under the Competition Act's refusal to deal (s. 75), price maintenance (s. 76), and exclusive dealing (s. 77) provisions. In order to obtain leave, it had to lead evidence establishing a "reason to believe" that the elements of each provision were met, and, in the case of refusal to deal and exclusive dealing, that the conduct had a "direct and substantial" impact on its business. In the case of price maintenance, it only had to show that the impact was direct.

The Tribunal refused leave under all three provisions, for different reasons.

Affected, but not substantially

The Tribunal denied leave under the refusal to deal (s. 75) and exclusive dealing (s. 77) provisions because CarGurus had not demonstrated that there was reason to believe that its business had been substantially affected by the impugned conduct as required by the Competition Act.

CarGurus' evidence about the extent of the impact on its business had a number of flaws, the Tribunal held. Among other things, CarGurus did not show what proportion of its listings it had to delete and that Trader refused to supply. CarGurus relied on projections of revenue in order to support its claim that Trader's refusal to deal would lower its revenues, but it failed to provide a sufficient basis for the projections to satisfy the Tribunal. As well, CarGurus' actual revenue data showed an increase in advertising revenues rather than the projected decrease.

Price maintenance

The price maintenance provisions (s. 76) require private applicants to show only a direct effect on their business, not a substantial one, a much easier standard. They must still establish a reason to believe that all of the substantive elements of the price maintenance provision are met, which, the Tribunal held, CarGurus failed to do.

The Competition Act's price maintenance provisions apply to two distinct behaviours. The first occurs where a supplier controls the resale price of a product, for example, through a minimum resale price policy or a minimum advertised price policy. The second occurs where a supplier cuts off or discriminates against a customer because of that customer's low pricing policy. CarGurus' application engaged the second of these branches of price maintenance. Both branches also require that there be an adverse effect on competition.

The Tribunal examined the three elements that CarGurus had to establish on the "reason to believe" standard:

  1. whether CarGurus had a low pricing policy
  2. whether Trader refused to supply CarGurus "because of" this low pricing policy
  3. whether the refusal to supply could have an adverse effect on competition

No low pricing policy

It is not enough to claim to have a low pricing policy. A private applicant must support its claim to have a low pricing policy with evidence showing, for example, that its prices are below a supplier's suggested prices or are less than other retailers charge for the product, the Tribunal held.

CarGurus failed to do this. While it claimed to have lower prices, evidence filed by the respondent showed that CarGurus' prices were not, in fact, lower.

Belief is not causation

CarGurus also failed to establish the causation, "because of", element.

This was the first time that the Tribunal had to consider what "because of" meant. The same phrase occurs in the refusal to deal provision, which requires that a person be unable to obtain adequate supplies of a product "because of" insufficient competition. That language has been interpreted to mean that the insufficient competition must be the "overriding reason" for the inability to obtain adequate supplies.

The phrase "because of" must bear the same meaning in the price maintenance provision as in the refusal to deal provision, the Tribunal held. Thus the low pricing policy must be the "overriding reason" or "principal reason" for the refusal to supply.

This interpretation is consistent with the policy behind the price maintenance provision, which are intended to control restrictions that suppliers place on the ability of resellers to compete on price; they are not intended to control other conduct, even if that conduct raises competition issues:

[136] Section 76 is the price maintenance provision of the Act. Its purpose is to provide relief in respect of refusals to supply or discriminatory practice motivated by a person's low pricing policy. It aims at reducing the restrictions that a supplier can put on the ability of resellers to compete on price, where those restrictions have, or are likely to have, an adverse impact on competition. The provision cannot be resorted to in order to sanction refusals by a supplier which may be driven by other motives. It may be that a supplier refuses to supply a product based on other behavior which could be found to be anti-competitive. It may be that a supplier would refuse to supply or discriminate against a person because of that person's disrupting innovative marketing practices or products. But this is not what section 76 aims to address. Section 76 applies to refusals or discrimination motivated primarily by the low pricing policy of a person. Had Parliament intended, in section 76, to prohibit refusals to supply primarily motivated by a person's innovative practices, it would have said so. It has not. Section 76 is strictly concerned with a low pricing policy. Other provisions of the Act, such as abuse of dominance, can be invoked to challenge an anti-competitive practice aimed at eliminating or disciplining an innovative new entrant. But that cannot constitute a ground to justify a section 76 application.

CarGurus had provided no direct evidence that its low pricing policy was the motive behind the refusal to supply, while Trader filed evidence denying that CarGurus' low pricing policy was its motive for refusing to supply. The Tribunal noted that circumstantial evidence can be used to prove the causation element. But CarGurus offered nothing beyond its belief that the refusal to deal was because of its low pricing policy. CarGurus' belief is not enough, the Tribunal held; there must be evidence.

Moreover, in its evidence, CarGurus alluded both to its low pricing policy and to its superior innovative features. It did not, in other words, support the contention that CarGurus' low pricing policy was the overriding reason for Trader's refusal to deal. This, the Tribunal held, was a fundamental deficiency.

No adverse effect on competition

CarGurus also had to show a reason to believe that Trader's conduct would cause an adverse effect on competition. The Tribunal highlighted the importance of this requirement: it "reflects the fact that the private application provisions of the Act are not there to arbitrate private contractual disputes relating to the supply of a product in circumstances where a refusal to supply does not have a market impact".

CarGurus' evidence did not establish this element. It had not provided an assessement of the likely geographic or product market at stake, nor of the size of the market that it claimed would be affected, the Tribunal noted. The Tribunal also expressed scepticism about CarGurus' estimate that Trader enjoyed a 42.5% market share, since CarGurus had not factored in Kijiji.

What evidence there was established that CarGurus was a new entrant with a small but growing market share, in a market with two major competitors (Trader and Kijiji) and a number of smaller ones. There was no suggestion that CarGurus would have to exit the market; at most, CarGurus' claim was that its expansion would be slowed. Consequently there was no reason to believe that Trader's conduct would adversely affect competition.

A tough standard

The Competition Act's private application provisions are not for the faint of heart. The Tribunal takes its gatekeeper role very seriously, and subjects evidence at the leave stage to intense scrutiny. The CarGurus case is the latest in a long line of cases where applicants have failed to convince the Tribunal to grant leave.

Of the few cases where the Tribunal has granted leave, only two have proceeded to a full hearing. Both of those private applications were ultimately dismissed.

This is as it should be. The Competition Act's reviewable matters provisions allow the Tribunal to second-guess just about any business decision. The Competition Bureau has not been shy in wielding these powers, sometimes successfully (TREB, for example), sometimes not (Visa/MasterCard, for example). But at least the Competition Bureau acts in what it sees as the public interest. By definition, private applicants act in a private interest. While it is important that private applicants should be able to avail themselves of the remedies provided for in the Competition Act, it is equally important that these remedies should be reserved for cases that fit within the purpose and policy underlying the Competition Act.

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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W. Michael G. Osborne
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