Canadian COMPETITION & ANTITRUST LAW

Overview

New criminal conspiracy provisions recently came into force in Canada, in March, 2010, as a result of sweeping amendments to the Competition Act (the “Act”) last year.

Some of the principal rationales for amending Canada’s conspiracy law included to align Canada’s rules with other major jurisdictions (notably the United States), that a single (i.e., the former) criminal cartel provision was potentially too inclusive and risked chilling non-hard-core agreements and arrangements and that the burden to establish a criminal cartel under the existing rules was too high.  All of these stated rationales had been the subject of significant debate by competition lawyers and enforcement officials for some years.

As of March 12, 2010, Canada now has a dual-track criminal conspiracy regime with “per se” criminal offences for “hard core” criminal agreements (i.e., price fixing, market division/allocation and supply restriction agreements) and a second civil track for non-hard core agreements that may prevent or lessen competition substantially in one or more relevant markets (and which may apply to, for example, a number of types of vertical agreements, such as joint venture, franchise, licensing and dual distribution agreements).  While the burden to establish a criminal offence under the former will be significantly lower (while at the same time with increased penalties), the burden under the latter will be higher requiring a higher degree of economic analysis akin to Canada’s existing substantive merger control regime.

The amendments to Canada’s conspiracy provisions are part of broader overall sweeping changes to the Act that included:

Mergers.  The adoption of a new U.S.-style two-stage merger notification and review regime, together with increased Competition Bureau (the “Bureau”) powers to request additional information from merging parties, increased filing requirements and amplified penalties for non-compliance.

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 $750,000 for individuals and $10 million for corporations.

Criminal Pricing Provisions.  The repeal of key criminal pricing provisions, including the criminal predatory pricing and price maintenance provisions (and the replacement of the former criminal price maintenance provision with a new civil provision).

Abuse of Dominance.  The introduction for the first time in Canada of significant civil fines for abuse of dominance of up to $10 million ($15 million for subsequent orders).

The changes to Canada’s conspiracy law is a landmark change from the former regime that made it an indictable criminal offence to conspire or otherwise agree with another person to (among other things) prevent or lessen competition “unduly” in providing goods or services in Canada (i.e., a single track with a reasonably significant competitive effects test).

Prior to the amendments, Canada had a “partial rule of reason” standard, which meant that no agreements were per se illegal and that some consideration of the purpose(s) and potential effects of an agreement were taken into consideration.  This was in contrast to the United States, which has for  more than a century had a two-track cartel regime under the Sherman Act – a per se track for “hard core” agreements (sometimes referred to as “naked restraints”) and a second “rule of reason” track which requires that the potential pro- and anti-competitive effects of a challenged agreement be considered.

Canadian cartel cases in the past few years have involved a wide variety of suppliers including in relation to gasoline, air cargo services, rubber and chemicals, polychloroprene rubber, roofing contracting services, hydrogen peroxide, graphite electrodes and isostatic graphite among others.

Several of the key impacts of these fundamental changes to Canada’s criminal conspiracy regime include increasing the risk to smaller market players (i.e., as a result of eliminating the competitive effects test for three types of hard core anti-competitive agreements), increasing the risk of engaging in “hard core” anti-competitive conduct generally (e.g., bare price fixing, market allocation agreements or supply restriction agreements), lowering the bar for the Bureau and private plaintiffs to establish the elements of section 45 and altering the analytical framework for the review of some common forms of commercial agreements (e.g., franchise, license, dual distribution and joint venture agreements).

New Hard Core Criminal Cartel Offences (section 45)

As a result of the recent amendments, three categories of agreements are now “per se” criminal offences under section 45 – that is, the act of certain forms of anti-competitive agreements will be presumed to be illegal without any requirement to prove any anti-competitive effects on a relevant market (or markets).  All other forms of agreements among competitors will potentially be subject to review under a second and separate non-criminal reviewable matters provision.

Under the new criminal provisions, the following three types of agreements will be per se illegal: (a) agreements to fix, maintain, increase or control the price for the supply of a product (price fixing agreements); (b) agreements to allocate sales, territories, customers or markets for the production or supply of a product (market allocation agreements); and (c) agreements to fix, maintain, control, prevent, lessen or eliminate the production or supply of a product (supply restriction agreements).  Interestingly, the new criminal conspiracy provisions omit any express reference to group boycotts which, together with bid rigging, has traditionally completed the traditionally core group of “hard core” anti-competitive forms of agreements (though the language of the new supply restriction offence is broad enough to theoretically cover concerted refusals to deal in some instances).

“Competitor” is defined broadly to include both actual and potential competitors (i.e., “a person who it is reasonable to believe would be likely to compete with respect to a product in the absence of a conspiracy, agreement or arrangement”).  As such, agreements and arrangements between parties that are not actual competitors may also potentially be caught in some cases.

It is also worth noting that while the previous conspiracy provisions applied to both vertical and horizontal agreements (e.g., supplier-distributor-consumer and competitor-competitor agreements), the new criminal provisions are restricted to horizontal agreements between competitors (and potential competitors).  In this regard, the ambit of the new conspiracy provisions has been narrowed.  Moreover, based both on the language of the new provisions as well as the Bureau’s new enforcement guidelines, it appears that in most instances allegedly anti-competitive vertical arrangements and agreements will be more likely to be reviewable under the new (section 90.1) and existing civil provisions of the Act (e.g., the abuse of dominance provisions) and not under the new section 45.

While the impact of the new two-track regime is relatively clear in some cases (e.g., for hard core anti-competitive conduct), the potential implications for a variety of commercial agreements and arrangements is less clear at this point.  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 (discussed in more detail below), the Bureau’s guidelines are not law and not binding and, as such, there is no assurance that Canadian courts or private plaintiffs in competition law private actions will necessarily follow the same approach.

New Civil Provision (Section 90.1)

Under the recently amended Act, agreements among competitors that are not caught by the three new hard-core criminal offences will potentially be subject to review under a new civil reviewable matters provision (i.e., non-hard core agreements which may, nevertheless, have the effect of preventing or lessening competition substantially in one or more relevant markets).

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 and commercialization, information sharing, franchise, licensing and dual distribution agreements.

Under this recently enacted provision, which is the second part of the new two-track conspiracy regime, the Competition Tribunal will have the power, on application by the Commissioner of Competition (the “Commissioner”), to make remedial orders where it is established that an 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 for anti-competitive agreements will be more akin to substantive merger review under the Act’s existing pre-merger notification provisions.  Unlike the new criminal provisions, however, no monetary penalties may be imposed and private parties will not have any private right of action.  As such, the potential exposure for organizations under the new civil provisions will be lower.

Defences

As a result of the recent amendments, a new ancillary restraints defence has been created as a defence to the new criminal offences.  This defence will apply where it can be shown that: (i) the agreement is ancillary to a broader or separate agreement that includes the same parties; (ii) the agreement is directly related to, and reasonably necessary for giving effect to, the objective of the broader or separate agreement; and (iii) the broader or separate agreement does not itself constitute an offence under section 45.

In addition, as part of the enactment of the new civil section 90.1, a new efficiencies defense has been introduced that will apply where an agreement has resulted in (or is likely to result in) efficiency gains that are greater than, and will offset, the adverse effects of an impugned agreement (i.e., any prevention or lessening of competition that will result or is likely to result from the agreement).  In this regard, the new civil provision dealing with non-criminal anti-competitive agreements will be more closely aligned with the existing merger provisions of the Act, which already contains an efficiencies defense.

Certain pre-existing defenses that will remain unchanged include the affiliate defense, a defense for specialization agreements and for agreements relating only to the export of products.

Penalties & Enforcement

The penalties for contravention of the criminal conspiracy provisions have now been significantly increased with fines of up to $25 million (per count) and/or imprisonment for up to 14 years (increased from the previous $10 million and/or five years imprisonment).

Moreover, the enforcement of the criminal conspiracy provisions remain a top enforcement priority for the Bureau and over the past fifteen years there have been more than eighty convictions for cartel offences in Canada with total fines imposed of more than $250 million (though such fines are relatively modest in comparison to other major jurisdictions, notably in relation to recent European cartel cases).

Recent penalties imposed against single corporate parties have ranged from several hundred thousand dollars to more than $40 million in one notable case.  In one case (the international bulk vitamins cartel) total fines were imposed on twelve companies and several individuals of more than $95 million.  Recent penalties imposed against individuals have ranged from $10,000 to $250,000.  In one recent case, involving a Quebec gasoline cartel, six companies and ten individuals pleaded guilty with fines totaling over $2.7 million, with six individuals being sentenced to a total of 54 months imprisonment.

The pre-existing director and officer liability and other potential penalties remain unchanged.  For example, Canadian courts may also issue so-called “prohibition orders” against companies or individuals prohibiting the continuation or repetition of an offence or ordering that steps be taken to avoid future offences and comply with the law (e.g., ordering the implementation of corporate compliance programs).

As a practical matter, however, contested criminal conspiracy proceedings are uncommon in Canada and most penalties arise as a result of plea negotiations between the Bureau and accused.  Moreover, while the imposition of prison sentences for parties that have engaged in cartel conduct has similarly been relatively rare, the Bureau is showing an increased disposition to seeking imprisonment for defendants in cartel cases.  For example, in the recent Quebec gasoline cartel case, six individuals were sentenced to a total of 54 months imprisonment.

With respect to sentencing, the Bureau has recently issued a Revised Draft Information Bulletin on Sentencing and Leniency in Cartel Cases that sets out its guidelines for determining what penalties to recommend for conspiracy offences.

Enforcement & New Enforcement Guidelines

Enforcement Overview

The Bureau has wide enforcement powers under the Act.  These include the power to obtain search warrants (including computer searches and electronic records), compulsory production orders, orders compelling written returns and oral testimony and in some cases the ability to obtain wiretaps.  Moreover, as discussed above, cartels, and in particular currently domestic cartels, remain a top enforcement priority for the Bureau.

In Canada, the investigation of criminal conspiracies is the responsibility of the Bureau, while prosecutions are the responsibility of the Public Prosecution Service of Canada (the “PPSC”) that is headed by the DPP.  Where there is sufficient evidence of an offence, the Bureau may refer the matter to the DPP, which has the sole authority to determine whether to commence criminal proceedings.

Private Actions & Class Actions

Overview

Private parties may commence three different types of proceedings under the Act: (i) private damages actions for violations of the criminal provisions of the Act (e.g., criminal conspiracy); (ii) private actions for breaches of court or Tribunal orders made under the Act; and (iii) “private access” proceedings, whereby private parties have a limited right to make applications to the Tribunal for remedial orders in relation to certain civil reviewable matters (e.g., orders to cease or modify conduct).

Private Damages Actions

Under section 36 of the Act, any person that has suffered actual loss or damage as a result of a contravention of the criminal provisions of the Act  may commence a private damages action.  Class actions are also possible for violations of the criminal provisions of the Act and have been commenced in relation to a wide variety of products.

Private competition law actions in Canada have typically been commenced in the following contexts: (i) consumers alleging damages as a result of a conspiracy between suppliers, many of which in the past have involved international price fixing conspiracies (e.g., a price fixing conspiracy relating to a product or key input in violation of section 45 of the Act); (ii) consumers alleging damages as a result of misleading advertising claims (e.g., false or misleading claims in relation to a product, investment, other business opportunity, etc.); and (iii) competitors alleging damages based on misleading claims made by a competitor or alleged conspiracy entered into among other competitors.

Private parties do not have a right to commence private actions for breaches of the civil “reviewable matters” provisions of the Act, which include the merger, abuse of dominance, price maintenance and civil misleading advertising sections.

Private damages actions may be commenced in provincial superior courts or the Federal Court.  As the Federal Court has limited jurisdiction, plaintiffs that wish to rely on causes of action in addition to those under the Act – for example, common law causes of action – must commence their proceedings in provincial superior court.

To determine whether a Canadian court has jurisdiction in cases involving alleged international conduct, such as international price fixing conspiracies, Canadian courts have generally employed the “real and substantial connection test”.  Under this test, if a conspiracy has anti-competitive effects in Canada, a Canadian court likely will have jurisdiction, even where a conspiracy is formed abroad.

The limitation period during which plaintiffs must commence a private action under the Act is two years from the later of: (i) the day on which the relevant anti-competitive conduct was engaged in or (ii) the day when any criminal proceedings were “finally disposed of”.

To succeed in a private damages action, a private plaintiff must establish the elements of the alleged criminal offence and actual damages as a result of the defendant’s conduct.   [I’ve taken this out – while this was true in the past, I just did some work on a contracts file where I looked at a SCC case that held that there is now only one civil burden – on balance, period.  So this older authority may not be right.]

The absence of a prior criminal conviction does not act as a bar to parties commencing private actions.  Evidence of a prior criminal conviction, unless rebutted, is proof that the defendant engaged in the impugned conduct.

Private damages actions also may be brought on a class basis in those provinces that have passed class action legislation. The test for certification of a class action in most provinces is as follows: (a) the pleadings of notice of application disclose a cause of action, (b) there is an identifiable class of two or more persons, (c) the claim of the class members raises common issues, (d) a class proceeding is the preferable  procedure for the resolution of the common issues and (e) there is a representative plaintiff that: (i) would fairly and adequately represent the class, (ii) has produced a workable plan for advancing the proceedings on behalf of the class and of notifying class members of the proceeding and (iii) with respect to the common issues, does not have interests that may conflict with other members of the class.

Private parties do not have a right to commence private actions for breaches of the civil “reviewable matters” provisions of the Act, which include the merger, abuse of dominance, price maintenance and civil misleading advertising sections.

Private parties may, however, bring a private action for breaches of a court or Tribunal order made under the Act.

“Private Access” Proceedings

Private parties also have a limited right to make applications to the Tribunal (not the courts) for remedial orders in relation to the refusal to deal, exclusive dealing, tied selling, market restriction, and recently enacted civil price maintenance provisions of the Act.  The application may be brought only with leave.  The leave application must be brought within one year following the end of the conduct.

These private access rights were introduced in 2002 to allow small and medium sized firms to challenge allegedly harmful conduct to their businesses under provisions which have not historically been enforcement priorities for the Bureau.  Since the private access provisions were introduced, approximately eleven leave applications have been commenced, the majority of these applications have been commenced under the refusal to deal provisions of the Act in relation to terminations of supply (i.e., distributors seeking re-supply for terminated supply, which can be an alternative remedy in addition to any available contractual remedies).

To grant leave in a private access application, the Tribunal must have “reason to believe that the applicant is directly and substantially affected by any practice [under the refusal to deal, exclusive dealing, tied selling, market restriction or price maintenance provisions] that could be subject of a [Tribunal order]”.

Under the private access provisions of the Act, the available remedy is a Tribunal remedial order (e.g., for a supplier to commence supply on “usual trade terms” in the case of a refusal to deal).  Private parties are not entitled to seek damages and costs may only be awarded in the discretion of the Tribunal.

In addition, private parties that have been granted leave from the Tribunal to commence private access applications may also file consent agreements with the Tribunal.  Once filed with the Tribunal, consent agreements have the force of a Tribunal order.

Impact of Amendments on Private Actions

The amendments to the Act make it easier for private plaintiffs to succeed because the amendments have removed the anti-competitive effects element of the conspiracy offence.  Prior to the amendments, a private plaintiff asserting a claim based on an alleged agreement to fix prices, for example, would have to establish both an agreement to fix prices and that the alleged agreement prevented or lessened competition “unduly” in one or more relevant markets (i.e., that the agreement had anti-competitive effects on one or more relevant markets).  As a result of the amendments, a private plaintiff now only needs to establish one of the three types of proscribed agreements under section 45 (i.e., a price-fixing, market allocation or supply restriction agreement) between two or more actual or potential competitors, intent and that the conduct has caused actual loss or damage.  There is now no need to show any anti-competitive effects to succeed.

Additionally, recent class action jurisprudence suggests that it may be easier in the future to bring class actions on behalf of larger classes of plaintiffs.  In late 2009, courts in Ontario and British Columbia separately certified classes in cases involving allegations of price fixing.  In each case, the court certified the class despite the inclusion of indirect purchasers (which has historically proved to be a significant barrier to certification).

Impacts of the New Rules on Trade Associations

As a result of the recent amendments, the impact of the criminal conspiracy provisions on Canadian trade associations is also now more significant.  In general, some of the types of association activities that can raise competition law issues include those dealing with pricing, customers, territories, market shares, terms of sale and advertising.  Some of the specific types of trade association activities that may either lead to greater competition law risk (or require alternate analysis under the new criminal conspiracy rules) include: (i) association fee guidelines, (ii) membership restrictions and association discipline, (iii) bylaws and rules relating to key aspects of competition between members and (iv) conduct between members that could result in the formation of price fixing, market allocation or supply restriction agreements (including as a result of exchanges of competitively sensitive information among members).

One of the primary reasons that the activities of trade associations and their members will be impacted is that under the new criminal conspiracy rules, it will be possible to establish a criminal price fixing, market allocation or supply restriction offence without the necessity of showing any anti-competitive effects on a relevant market (i.e., as discussed above, the previous competitive effects test has been removed from the criminal provisions).

At the same time, for agreements and arrangements involving trade associations and their members that do not clearly fall into the three new categories of “hard core” cartel offences, a more sophisticated and economics-oriented analysis will be required in some cases (i.e., to determine whether a particular agreement or arrangement falls within the new ancillary restraints defense or, alternatively, should be reviewed under the new civil section 90.1).

Finally, the Bureau has recently issued draft enforcement guidelines dealing specifically with trade association activities (Draft Information Bulletin on Trade Associations) (the “Association Guidelines”).  According to the Bureau, the new guidelines are “meant to provide information and guidance on how the Act could apply to activities conducted by trade associations and their members that may raise concerns under the Act” and “provides an overview of the key provisions which could apply to these activities, and best practices that trade associations can adopt to avoid contravening the Act.”

While the Association Guidelines set out the Bureau’s position on the application of the Act overall to trade association activities, the application of the criminal conspiracy provisions to trade association activities are a key component of the new guidelines.   In this regard, the Association Guidelines outline the elements to establish an offence under section 45, set out examples of association conduct that can in some instances potentially raise competition law issues under the Act (e.g., information sharing, association meetings, membership restrictions, fee guidelines, etc.) and provide guidelines for trade association compliance programs including illustrative past trade association cases.

While the new draft guidelines provide insight into the Bureau’s enforcement approach to trade association activities, they also signal a more formalized enforcement approach to its application of the Act to association activities.

Conclusion

The recent amendments to the Act are highly significant and change the playing field for Canadian firms and international firms doing business in Canada.  Some of the specific impacts include: (i) increasing the potential liability associated with “hard core” cartel conduct (i.e., price fixing, market allocation and supply restriction agreements) as a result of the lower burden to establish a criminal cartel; (ii) affecting the drafting and review of common types of commercial agreements, including joint venture, strategic alliance, dual distribution, franchise and license agreements; (iii) impacting the activities of Canadian trade associations and their members, particularly activities in relation to pricing, marketing and advertising and membership criteria; (iv) potentially leading to an increase in private actions and class actions under the Act as a result of removing the competitive effects test from section 45; (v) increasing compliance costs for companies as a result both of the substantive changes and risk of significantly increased penalties; and (vi) requiring Canadian competition counsel and the Bureau to engage in a more economic-based approach to reviewing agreements and commercial arrangements between competitors (and potential competitors).

 

OUR SERVICES FOR TRADE ASSOCIATIONS

We practice federal competition law, have provided competition law and compliance advice to clients across Canada and internationally and provide a full range of competition law services in relation to the criminal conspiracy, merger, abuse of dominance, misleading advertising and deceptive marketing provisions of the federal Competition Act.

We also regularly counsel Canadian trade associations on the application of the Competition Act to activities of trade associations and their members.  Some of the types of trade association activities that can, in some instances, raise criminal or civil competition law issues include fee tariffs or guidelines, advertising restrictions or guidelines, membership criteria and member expulsions, meetings and other events where competitively sensitive information is discussed, unilateral and concerted refusals to deal with competitors (including discounters and alternative business models) and some joint association activities including joint negotiation and lobbying.

Our Canadian competition law services for trade associations include:

- Competition law compliance programs for associations.
- Competition law compliance seminars and talks for association executives.
- Audits and compliance reviews of trade association activities.
- Advice on the application of the recently amended Competition Act.
- Vetting trade association meetings, conventions and communications.
- Reviewing trade association rules, bylaws, policies and voluntary codes.
- Advice in relation to joint association activities (e.g., joint negotiation).
- General competition law and competition compliance advice for associations.

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