Canadian COMPETITION LAW

February 20, 2010

OVERVIEW

Sweeping amendments to Canada’s federal Competition Act (the “Act”) were recently passed that are the most significant changes to Canadian competition law in twenty-five years.  Included are changes to most of the cornerstone provisions of the Act including to the criminal conspiracy, bid rigging, criminal pricing, price maintenance, abuse of dominance, misleading advertising and merger notification provisions.

The final amendments, to the criminal conspiracy provisions of the Act, will come into force on March 12th.

Some of the key changes include:

Conspiracy.  The introduction of a new U.S.-style two-track criminal conspiracy regime with “per se” criminal offences for three types of “hard core” cartel agreements (price fixing, market allocation and output restriction agreements) and a second civil track for other types of non-hard core anti-competitive agreements.

Conspiracy Penalties.  Significantly increased penalties under the criminal conspiracy provisions with fines of up to CDN $25 million (per count) and/or imprisonment for up to 14 years (more than twice the previous penalties).

Private Actions & Enforcement.  Changes to the criminal conspiracy provisions that will make it easier for plaintiffs to commence private civil actions and for the Competition Bureau (the “Bureau”) to prove criminal conspiracy offences.

Bid Rigging.  A new criminal bid rigging offence.

False or Misleading Representations.  Significantly increased penalties for false or misleading representations including “administrative monetary penalties” (essentially civil fines) of up to CDN $750,000 for individuals and CDN $10 million for corporations (more than ten times the previous penalties).

Criminal Pricing Provisions.  The repeal of key criminal pricing provisions, including the criminal predatory pricing and price maintenance provisions.

Abuse of Dominance.  The introduction for the first time in Canada of significant civil fines for abuse of dominance of CDN $10 million ($15 million for repeat contraventions).

Competition Bureau Guidelines.  The Bureau has issued (or is proposing to issue) a number of new enforcement guidelines setting out its new enforcement approach to the new rules (including Competitor Collaboration Guidelines and draft Trade Association Enforcement Guidelines).

Mergers.  The adoption of a new U.S.-style notification and review regime, together with increased Bureau powers to request additional information from merging parties, increased filing requirements and amplified penalties for non-compliance.

These significant changes to Canada’s competition laws, and their impact on Canadian companies and international companies, as well as trade associations and other organizations, are discussed below.

CONSPIRACY – TWO-TRACK CRIMINAL CONSPIRACY REGIME

Among the most significant recent changes to the Act is the introduction for the first time of a U.S.-style two track approach to criminal cartels, consisting of: (i) a criminal track for so-called “per se” hard core cartel agreements (price fixing, market allocation and output restriction agreements) and (ii) a second civil track for non-hard core agreements that may prevent or lessen competition substantially in one or more relevant markets (which may apply to, for example, a number of common types of commercial agreements including joint venture, strategic alliance, franchise, license, R&D, dual distribution, non-compete and information sharing agreements).

New Offences – “Hard Core” Criminal Cartel Agreements

With respect to the new criminal track, criminal conspiracy provisions have been enacted for price fixing, market allocation and output restriction agreements.  In this regard, Canada has now taken a U.S.-style “per se” approach to hard core cartel agreements, which means that as of March, 2010 it will not be necessary to show any adverse market effects to establish a criminal conspiracy under the Act for hard-core cartel agreements.

The practical impact of this change to Canada’s criminal conspiracy law under the Act is that, whereas formerly only large market participants were potentially exposed to criminal liability, smaller players (i.e., companies with small market shares) now also face potential criminal liability for bare price fixing, market allocation and output restriction agreements.

While the impact of these changes are relatively obvious in clear cases (e.g., a hard core price fixing agreement among members of a trade association), the impacts on a variety of commercial agreements and arrangements is less clear.

For example, there is currently debate as to the application of the new hard core provisions to commercial agreements including joint venture, franchise, licensing and dual distribution agreements and, in particular, whether such agreements will be dealt with by the Bureau (and Canadian courts) under the criminal or civil track.  In this regard, while the Bureau has issued enforcement guidelines that indicate that it will deal with such agreements in most cases under the civil track, the Bureau’s guidelines are not law and, as such, there is no assurance that Canadian courts (or private parties commencing civil actions) will follow the same approach.

Another key impact of the recent amendments to Canada’s criminal cartel regime is that it will now be easier for private parties to commence private actions for violations of the criminal conspiracy provisions, given that the former competitive effects test to establish an offence has now been removed.  This is expected to lead to an increase in both private competition law civil actions and class actions in Canada.

Civil Track for Non-hard Core “Anti-competitive Agreements

With respect to the second civil track for anti-competitive agreements, agreements between competitors that are not caught by the new per se criminal provisions (i.e., agreements that do not fall within the three enumerated categories of “hard core” anti-competitive agreements – i.e., bare price fixing, market allocation/division and output restriction agreements) will be potentially reviewable under a new civil section for other types of potentially anti-competitive agreements.  Types of agreements that may be subject to review under the new civil provision may include non-compete, research and development, joint purchasing, joint production, joint selling, franchise, licensing and dual distribution agreements.

Under this recently enacted civil provision, the federal Competition Tribunal (the “Tribunal”) will have the power, on application by the Commissioner of Competition (the “Commissioner”), to make remedial orders where it is established that the agreement prevents or lessens (or is likely to prevent or lessen) competition in one or more relevant markets.  In this regard, the new civil provision will be aligned with the process for substantive merger review under the Act.

In particular, the Tribunal will have the power to make orders: (i) prohibiting any person, whether or not a party to the agreement, from doing anything under the agreement or (ii) requiring any person, with consent, to take any other action.  Unlike the criminal “per se” provisions, which carry the potential risk of criminal fines up to $25 million and/or imprisonment for up to 14 years, under the civil sections no monetary penalties will be available and private parties will have no private right of action.

CONSPIRACY – PENALTIES

Significantly increased penalties under the criminal conspiracy provisions have been enacted, with fines of up to CDN $25 million (per count) and/or imprisonment for up to 14 years, effective in March, 2010.  These penalties are significantly increased from the previous CDN $10 million and/or five years imprisonment and signal both the continuing importance to the Bureau of detecting and deterring criminal cartels and as well what may be a more vigorous enforcement approach following the appointment of a new Commissioner last year.

PRIVATE ACTIONS – LOWER BAR TO COMMENCE PRIVATE ACTIONS

As a result of the recent amendments, and in particular based on the repeal of the “undueness” requirement for criminal conspiracies (i.e., removing the necessity of showing anti-competitive effects stemming from an anti-competitive agreement), it will now in theory be easier for private plaintiffs to establish the elements of a criminal conspiracy under section 45.  This change, together with several recent plaintiff favourable price fixing class action cases in British Columbia and Ontario, is expected to result in an increase in competition law private actions.

BID RIGGING – NEW OFFENCE

New criminal bid rigging rules have been enacted, which are relevant to companies involved in competitive tenders.  A new bid rigging offence for agreements to withdraw a bid that has already been made has been introduced.  In addition, the maximum prison sentence for bid-rigging has been increased to fourteen years (from the previous five years).  The previous unlimited fines for bid rigging (i.e., which may be set in the discretion of the court) have remained unchanged.

MISLEADING ADVERTISING – INCREASED PENALTIES

Significantly increased penalties under the civil misleading advertising provisions have been introduced.  These include “administrative monetary penalties” (essentially civil fines) of up to CDN $750,000 for individuals and CDN $10 million for corporations that breach the civil false or misleading representations provisions of the Act.  These new penalties for contravention of the civil misleading advertising provisions are more than ten times the previous fines.

REPEAL OF THE CRIMINAL PRICING PROVISIONS

The former criminal price maintenance, predatory pricing and price discrimination provisions under the Act have been repealed.  These provisions, and in particular the former criminal “per se” price maintenance offence, were criticized as being unsound in relation to current economic thinking.

While predatory pricing and price discrimination will now be dealt with under the civil abuse of dominance provisions, the former criminal price maintenance provision has been replaced with a civil section together with a new right of private access allowing private parties to seek Tribunal orders in relation to, for example, refusals to deal or discriminatory conduct based on a person’s low pricing policy.

ABUSE OF DOMINANCE – CIVIL FINES

Significant “administrative monetary penalties” have been introduced for the first time for contravention of the civil abuse of dominance provisions under the Act of CDN $10 million (CDN $15 million for subsequent contraventions).

The introduction of what are essentially civil fines for abuse of dominance is both controversial and significant – controversial in that abuse of dominance is not conduct that is per se illegal, but rather prohibited only when extensive economic analysis has established that a dominant firm has abused its dominance in one or more relevant markets that has resulted in a substantial prevention or lessening of competition; the change is significant in that dominant firms now potentially face significant penalties for aggressive competitive conduct, whereas previously the most that could be obtained on a successful application to the Tribunal was a remedial order to cease the conduct.

Some of the key impacts of this change include potential chilling some forms of perfectly legitimate competitive conduct, as well as altering the advice given to dominant firms, given that a contravention of the abuse of dominance provisions may now lead to the potential imposition of significant penalties and not merely an order to cease the conduct.

MERGERS – NEW NOTIFICATION REGIME

Fundamental changes have been made to Canada’s merger review and notification regime.
Key changes include: (i) increasing the “size of transaction” threshold for merger notification, which is one of two primary monetary thresholds to determine whether a merger is notifiable in Canada (together with the “size of parties” threshold), to CDN $70 million, (ii) introducing a U.S. style two-phase merger review and notification process with a single initial waiting period, with the potential for second requests, (iii) adding a U.S. “second request” style of supplementary information request, under which the Bureau may request additional information from merging parties in the context of complex transactions, (iv) shortening the post-closing period, during which the Bureau may challenge a completed merger, to one year from the previous three years and (v) introducing a single uniform merger notification form (whereas formerly parties were required to elect whether to file a “short form” or “long form” filing, which in turn depended on the complexity of a transaction).

While the law relating to the substantive analysis of mergers has not changed, the new U.S. style two-phase notification and review regime is expected to introduce additional delay and expense for complex mergers in Canada (i.e., those subject to second requests issued by the Bureau).  At the same time, however, the filing process for notifiable mergers has been simplified and streamlined in a number of key respects.  The new rules also give merging parties a level of increased comfort based on the shortened post-closing challenge period.

Key issues arising as a result of the recent amendments will include how frequently the Bureau will resort to issuing second requests for complex mergers (or mergers that may raise issues), the ability of merging parties to control the timetable and production requirements in second stage reviews and filing strategies to keep the review of notifiable transactions within a first stage review (e.g., whether merging parties adopt U.S.-style filing strategies, such as filing and pulling filings, to keep potentially problematic transactions within a first stage review).

It also remains to be seen whether the Bureau will adhere to its recently issued Merger Review Process Guidelines, which set out its approach to the new two-stage merger review process, and in particular its approach to second requests for information and internal Bureau controls for supplementary information requests.

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