Canada: Hughes v. Liquor Control Board Of Ontario: Ontario Court Of Appeal Provides Guidance On Breadth Of The Regulated Conduct Defence

On April 17, 2019 the Court of Appeal of Ontario released its decision in Hughes v. Liquor Control Board of Ontario, 2019 ONCA 305 [Hughes]. The Court of Appeal's decision provides guidance to counsel on the scope of the Regulated Conduct Defence (the "RCD").

The RCD is a defence in the Competition Act that can provide immunity from federal competition law in some circumstances where conduct is directed or authorized by statute or regulation. Despite the RCD's long history in Canadian law, crucial aspects of the defence have historically been unsettled, and leading academics have called for the scope of the defence to be clarified.

In Hughes, the Court of Appeal provided much-needed guidance on the breadth of the defence, and signalled that some important components of the RCD will need to be determined in the future.

Overview

The Plaintiffs brought a proposed class action against the Liquor Control Board of Ontario ("LCBO"), Brewers Retail Inc. (the "Beer Store"), and certain brewers (the "Brewers"). The Beer Store is the single distribution system for beer manufactured in Ontario.

The Plaintiffs' claim focused on the now-terminated June 1, 2000 contract between the LCBO and the Beer Store ("Framework"). The Framework prohibited the LCBO from selling beer in packages larger than a 6-pack and from selling to licensees (restaurants, bars, etc.) any beer product sold by the Beer Store (which captured all the most popular brands). The Plaintiffs claimed the Framework was a market allocation conspiracy in contravention of the Competition Act.[i]

The Framework was implemented by contract and not a legislative process, and LCBO's entry into the Framework featured unique circumstances: among other things, there was no written memorandum or direction requiring the LCBO to enter into the Framework, and the Framework was signed by the LCBO following an oral instruction from a provincial Minister. The Plaintiffs asserted that entry into the Framework was not specifically authorized by the Liquor Control Act ("LCA"), and that the Framework was inconsistent with that legislation. They relied heavily on a strain of jurisprudence and other authorities that held the RCD should only be operative where the authorization for impugned conduct was explicit and specific.

After the Plaintiffs' action was initiated, the Ontario legislature enacted amendments to the LCA that purported to exculpate the Defendants from liability for, among other things, their alleged breach of the Competition Act (the "Amendments"). The Plaintiffs challenged the efficacy of the Amendments by arguing, inter alia, that theywere ultra vires and encroached on Parliament's power to legislate competition law.

Relying on the RCD, the Defendants in Hughes moved for summary judgment. In the Ontario Superior Court, Justice Perell dismissed the Plaintiffs' claim and granted the Defendants' motions, finding the RCD to be a defence to the Plaintiffs' Competition Act claim.

The Plaintiffs appealed.

Court of Appeal's Findings

The Court of Appeal dismissed the Plaintiffs' appeal. The Court held that the RCD, which is now codified in section 45(7) of the Competition Act, is a principle of statutory interpretation that can insulate a defendant from criminal liability where the legislation governing the defendant is

1. constitutionally valid;
2. directs or authorizes the defendant to engage in the impugned conduct; and
3. the law providing for criminal liability leaves room for the regulated activity to operate without being criminalized.

The Court of Appeal's decision provides guidance on the scope of the RCD, and details some circumstances in which the defence will be available.

Writing for the Court, Pardu J.A. held that Supreme Court of Canada's decision in A.G. Can v. Law Society of B.C., [1982] 2 S.C.R. 307 [Jabour] was the controlling authority. In that case, a lawyer was disciplined by the Law Society of British Columbia for "conduct unbecoming a member of the Society" after advertising, even though the LSBC's power to govern the legal profession did not specifically authorize it to prohibit advertising. The lawyer claimed the law society's actions violated competition legislation. The Supreme Court of Canada applied the RCD broadly and found that the Law Society's general power to govern the legal profession in the public interest—and to define "conduct unbecoming a member of the Society"—was sufficient authority to insulate the Law Society from a predecessor to the Competition Act.

On the basis of Jabour, the Court in Hughes held that the requirement that legislation "direct or authorize" the impugned conduct should not be restricted to instances were such conduct is expressly authorized, as conduct may be authorized by necessary implication. While Justice Pardu acknowledged Jabour was decided before s. 45(7) codified the RCD, she did not interpret s. 45(7) to narrow the scope of the meaning of "authority" or "authorization" with respect to the applicability of the RCD. The Court held that the version of the LCA in force at the time of the Framework authorized entry into the Framework, and cited specific provisions that authorized the LCBO to allocate beer sales. Thus, the RCD was available to the parties to the Framework.

Even were this not the case, she wrote, the impugned conduct would have been authorized by the Amendments:

The Court of Appeal's decision settles that conduct need not be specifically authorized for the RCD to apply, and reaffirms the expansive vision of RCD set out in Jabour. The Court also accepted that an RCD can be retroactively enacted by a provincial legislature, which was a question that had never been litigated.

Interestingly, the Court of Appeal left open whether (i) more specific authority might be required to provide immunity where only the conduct of a regulated entity, and not also the regulator, is at issue; and (ii) whether the RCD analysis will be altered when a federal regulatory scheme, and not a provincial once, conflicts with the Competition Act. These issues are likely to be the new friction points in litigation involving the RCD. It is also noteworthy that, in contrast to the Framework, recent reforms to Ontario's alcohol retailing system occurred through open and transparent processes, including by legislation.

Footnote

1 The Plaintiffs further claimed: (i) unjust enrichment against the Beer Store and the Brewers as a result of the Beer Store's surcharge on licensees sales, which the Plaintiffs alleged was in violation of a provision in the Liquor Control Act requiring the price of liquor to be the same at all government stores (the "Uniform Price Rule"); and (ii) misconduct by civil authority as against LCBO, based on that entity's entry into the Framework and failure to enforce the Uniform Price Rule.

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