Canada: Tribunal Cries "Fowl": Rejects "Refusal To Deal" Application In Chicken Case

The Competition Tribunal (the "Tribunal") released a decision in Nadeau Poultry Farm Limited v. Westco Inc., et al (2009 Comp Trib 6), in which it made several valuable clarifications in its interpretation of the "refusal to deal" provision contained in section 75 of the Competition Act (the "Act"). Under this provision, a supplier of a product can be ordered to sell its product to a particular customer if certain criteria are met. This case, which came before the Tribunal through the private access provisions allowing private parties to bring cases before the Tribunal, sheds light on the Tribunal's interpretation of the concepts of "ample supply", "as a result of insufficient competition", "usual trade terms", and "adverse impact on competition", all in the context of a supply-managed industry.


The applicant, Nadeau Poultry Farm, operates the only chicken processing plant in New Brunswick. The main respondent, Groupe Westco Inc., is a chicken producer which, itself or through its subsidiaries, owns or controls just over half of the chicken production in New Brunswick. Together with the other respondents, this share increases to almost 75%. Westco has a strong interest in vertical "egg-to-plate" integration of its operations and, prior to this case, was already involved in all aspects of chicken production except processing and distribution.

In furtherance of this integration, Westco offered to buy or invest in the Nadeau plant in January 2007. The applicant did not wish to sell and proposed alternative arrangements, but the parties were unable to reach an agreement. In March 2007, Westco approached Olymel L.P., Nadeau's main competitor in Québec and the eastern provinces, to develop a partnership that could either purchase the Nadeau plant or construct its own. In August 2007, Westco made it clear to the applicant that if it was not willing to sell the Nadeau plant, Westco would begin constructing its own processing plant in partnership with Olymel and that during construction, it would divert all of its chickens to be processed by Olymel in Québec. Negotiations for the sale of the plant were unsuccessful, and in January 2008 Westco gave written notice that it would stop supplying chickens effective July 20, 2008. The other respondents followed soon after.

The applicant sought leave from the Tribunal to apply for an order under s. 75 of the Competition Act; leave was granted on May 12, 2008. The application was heard in November and December 2008. On August 7, 2009, the Tribunal released its decision dismissing the application.

The legislation

Subsection 75(1) of the Act provides that where

  • a customer is substantially affected in its business or its precluded from carrying on a business because it is unable to obtain adequate supplies of a product anywhere in a market on usual trade terms,
  • this occurs as a result of insufficient competition among suppliers,
  • the product is in ample supply,
  • the customer is willing and able to meet usual trade terms, and
  • the refusal to deal is having or is likely to have an adverse affect on competition in a market,

the Tribunal may order one or more suppliers in the market to supply the customer with the product within a specified time and on usual trade terms. All five criteria must be satisfied before the order will issue. An application for such an order may be made by the Commissioner of Competition, or, as here, by a person granted leave under s. 103.1 of the Act.

The Tribunal's analysis

The Tribunal analyzed each of the five criteria listed in s. 75(1). In the course of its decision, it ruled on or confirmed several important points.

"Substantially Affected": In its analysis of paragraph 75(1)(a), the Tribunal confirmed earlier decisions to the effect that the test of "substantially affected" will be met if the applicant is "affected in an important or significant way." In particular, the Tribunal rejected the respondent's argument that the phrase "precluded from carrying on business" modifies or has an affect on the meaning of "substantially affected," so as to elevate the requirement almost to the point of the applicant being unable to carry on business.

"As a Result of Insufficient Competition": The applicant argued that the supply-management system, which imposed quotas on chicken producers, meant that there was a lack of competition among chicken producers and that this was the reason why Nadeau was unable to obtain adequate supply. The Tribunal disagreed, saying that the quota system - not insufficient competition - was the reason for the inadequate supply.

"Usual Trade Terms": The Tribunal made two rulings on the meaning of this phrase. First, it held that the "usual trade terms" to be considered are not those that are usual between the specific parties, but those that are usual from the perspective of suppliers and customers generally in the relevant market, at roughly the time when the respondents refused to supply to the applicant.

Second, s. 75(4) states that "trade terms" means "terms in respect of payment, units of purchase and reasonable technical and servicing requirements." The Tribunal clarified that "terms in respect of payment" means not only repayment terms such as credit and grace periods, but also the actual price paid for the product.

"Ample Supply": The Tribunal considered the meaning of "ample" in contrast to "adequate" and found that an "ample" supply "means more than a sufficient or adequate supply". It means supply available "in abundance or to the point that it is considered to be excessive." A product is in "ample supply" when "its availability is not in issue when a supplier considers whether to develop its business by seeking new customers and/or new distribution channels". A product is not in ample supply when limits on supply (e.g., the chicken quota system in place in this case) inhibit suppliers from growing or changing the nature of their business, or when they are forced to ration supply between existing and potential new customers.

"Adverse Effect on Competition": The Tribunal agreed with and adopted the approach from the B-Filer case to the meaning of "adverse effect on competition." According to this approach, the analytical process to be used in determining if the refusal has had an "adverse effect" on competition is the same as that used in assessing whether there has been a "substantial lessening or prevention of competition," which is mentioned elsewhere in the Act. An "adverse effect" is simply smaller than a "substantial lessening or prevention of competition." This means that, "the remaining market participants must be placed in a position, as result of the refusal, of created, enhanced or preserved market power."

The Tribunal's conclusions

The Applicant succeeded on the first element of the test because the marketing board/quota system would have precluded it from obtaining chickens from other sources without paying a substantial premium, and this would have a substantial negative effect on its business. (Quantitative details of the effects on Nadeau are confidential, but subsequent to the ruling Nadeau announced that it would be cutting 175 jobs at the plant, which is roughly half of its workforce.)

The Applicant had argued that the quota system, which limited the overall supply of chickens, satisfied the requirement that "insufficient competition" be the reason for its inability to obtain supply on usual trade terms. It failed on this element of the case. The Tribunal found that, even though the respondents accounted for 75% of the available supply in the market, there was no evidence of collusion among them. Moreover, the remaining 25% of the available supply in the market was comprised of several different producers, all of whom were prepared to sell chickens to the highest bidder - which in the supply-managed context meant at a substantial premium. Perhaps somewhat cryptically, but understandable in light of the Tribunal's ultimate ruling in the case, the Tribunal found that the quota system - and not insufficient competition - was the reason for Nadeau's inability to obtain supply.

The Applicant succeeded on the third element because it easily established that it had always met, and remained willing and able to meet, the usual trade terms (including paying prices at or near prevailing levels).

The Applicant failed on the fourth element because the Tribunal found that chickens were not in "ample supply". The quota system restricts the ability of chicken suppliers to meet new demands, and prevents chickens from being available on a timely basis to individuals wishing to expand or develop their businesses. To rule otherwise, the Tribunal noted, would imply that in a supply-managed industry, suppliers would be precluded from changing customers or from vertically integrating - as the principal respondent in this case had done.

The Applicant also failed on the fifth element because its evidence did not establish an adverse effect on competition. That is, it failed to establish through economic evidence that the refusal to supply Nadeau would create, enhance or reinforce market power among chicken processors in the relevant market. In reaching its decision on this element, the Tribunal considered indicators of market power among chicken processors (market share and market concentration, barriers to entry, and impact on prices), as well as the effect of the refusal on rival processors' costs, quality and variety of the product, possible foreclosure of supply to other processors in the market, and possible elimination of an efficient processor.

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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