June 26, 2010
“A [compliance] program also plays a crucial role for trade associations because trade associations face unique compliance issues. Given that an association provides a forum where competitors collaborate on association activities, trade associations are exposed to greater risks of anti-competitive conduct. A number of past Bureau cases have involved trade associations that were engaged in agreements to harm competition. It is therefore critical that trade associations implement credible and effective programs with strict codes of ethics and conduct. Such programs may allow trade associations and its members to avoid improper actions and to protect themselves from being used as a conduit for illegal activities. They may also allow trade association members to fully benefit from the association’s activities while reducing the potential for inadvertent contraventions of the Acts.” (Competition Bureau, Corporate Compliance Programs Information Bulletin)
Trade associations often serve many legitimate purposes, including promoting common interests to the public, lobbying, advocacy, research, education and promoting and improving product standards. However, because trade association activities involve the interaction of direct competitors, associations can in some cases raise competition law issues under the federal Competition Act (the “Act”). Recent public criminal and civil association investigations have involved the Saskatchewan Roofing Contractors Association and The Canadian Real Estate Association, among others. There have also recently been historic amendments to the Act that have resulted in, among other things, significantly increased penalties for conspiracy (fines of up to $25 million and/or imprisonment for up to 14 years) and misleading advertising (with civil fines of up to $10 million for corporations).
In general, the types of association activities that can in some cases raise competition law issues under the Competition Act include those dealing with pricing, advertising, customers, territories, market shares, terms of sale and other key aspects of competition. Some of the specific association activities that can potentially raise issues include: (i) board and membership meetings, (ii) information exchanges (exchanges of competitively sensitive information), (iii) association rules and bylaws (e.g., mandatory or suggested fee guidelines, advertising restrictions, membership restrictions, member discipline and other rules relating to competitive aspects of member activities), (iv) dealing with members and discipline and (v) advertising or marketing restrictions.
Sections Relevant to Trade Associations
There are no specific sections of the Act dealing exclusively with trade associations. However, some of the general sections that are particularly relevant to trade association activities include the criminal conspiracy, abuse of dominance, price maintenance and misleading advertising sections of the Act (discussed below).
Criminal Conspiracy
Section 45 of the Act, which is in many cases the most important section for trade associations, contains three criminal conspiracy offences. The investigation and prosecution of criminal conspiracies is also a top enforcement priority for the Bureau.
Under section 45, three types of “hard core” anti-competitive agreements will be illegal as of March 12, 2010:
Price fixing agreements. Section 45 will make it a criminal offence for competitors (or potential competitors) to fix, maintain, increase or control the price for the supply of a product (e.g., agreements to set prices, discounts, minimum prices or establish fee tariffs). “Price” is broadly defined to include discounts, rebates, allowances and price concessions. Based on the potential liability for price fixing agreements, it is important that prices, discounts and other aspects of price are determined independently by association members and that members do not discuss price or other competitively sensitive topics.
Market allocation/division agreements. Section 45 will also makes it a criminal offence for competitors (or potential competitors) to allocate sales, territories, customers or markets for the production or supply of a product (e.g., agreements between competitors to not compete in relation to certain customers, groups or types of customers, in certain regions or market segments or in relation to certain types of transactions or products).
Supply restriction agreements. Finally, section 45 will make it a criminal offence for competitors (or potential competitors) to fix, maintain, control, prevent, lessen or eliminate the production or supply of a product including services (e.g., agreements to limit the quantity or quality of products supplied, reduce the quantity of quality of products supplied to specific customers, limit increases in production or discontinue supply to specific customers or groups of customers).
In general, the risk for trade associations under the criminal conspiracy sections is twofold: (i) that an association itself may become a party (or be seen as aiding or abetting) to an anti-competitive agreement and (ii) that trade association members themselves may become parties to an anti-competitive agreement.
To establish these offences, it is not necessary to prove that there have been any negative effects on any particular market (i.e., the offences are “per se” offences, which means that merely establishing that there was an agreement and intent to enter the agreement is sufficient with no adverse market effects).
It is also not necessary to show that an agreement was ever carried out (i.e., the offence is in the agreement not in the implementation). An agreement can also be established based merely on circumstantial evidence (i.e., while the existence of an agreement must be proven beyond a reasonable doubt, an actual written agreement does not need to be produced, which can be proven by other evidence – e.g., evidence of meetings among competitors followed by a stabilization of prices, etc.).
Finally, with respect to the criminal conspiracy offences, there will now be a new “ancillary restraints” defense, which will provide a defense where it can be shown that an agreement between competitors is: (i) ancillary to a broader agreement, (ii) is directly related to and reasonably necessary to give effect to the broader agreement and (iii) that the broader agreement does not itself constitute an offence under section 45. While this new defense will likely apply to agreements that are either potentially pro-competitive (e.g., certain joint venture arrangements) or “on the line”, it will likely provide no defense to “hard core” anti-competitive agreements – i.e., bare price fixing, market division/allocation or output restriction agreements.
The penalties for violating the criminal conspiracy sections can be very severe and, as of March 12th, will include fines of up to $25 million (per count), imprisonment for up to 14 years and/or “prohibition orders” to stop the conduct. In addition, private parties that have suffered actual loss or damage as a result of criminal conduct under the Act (including s. 45 – criminal conspiracies), including competitors or customers, have the right to commence private civil damages actions.
Abuse of Dominance
Abuse of dominance is another section that potentially applies to trade associations and their activities. Under sections 78 and 79 of the Act, abuse of dominance occurs where a dominant firm (or firms) in a market has engaged in or is engaging in a practice of anti-competitive acts that has an intended negative effect on a competitor that is exclusionary, predatory or disciplinary, with the result that competition has been, is being or is likely to be prevented or lessened substantially.
Evaluating whether conduct constitutes an abuse of dominance can be highly complex and require significant economic analysis. Having said that, some of the types of trade association activities that can potentially raise abuse of dominance issues include efforts to restrict access to essential services or markets or setting educational, qualification or membership standards that result in impeding entry.
The penalties for abuse of dominance include “administrative monetary penalties” (essentially civil fines) of up to $10 million ($15 million for subsequent orders).
Price Maintenance
The new civil price maintenance sections of the Act can also, in some cases, be relevant to trade association activities.
The first type of price maintenance that is potentially relevant involves refusals to supply products (including services) or discriminate against other persons engaged in business based on their low pricing policy, where the conduct has an adverse effect on competition in a market. The second type of price maintenance that is potentially relevant to association activities involves inducing a supplier, by agreement, threat, promise or any like means, as a condition of doing business with the supplier, to refuse to supply to another person based on the other person’s low pricing policy.
Where the elements for the new price maintenance sections are established, the Competition Tribunal (the “Tribunal”) may make an order prohibiting a person from engaging in the conduct.
Misleading Advertising
The false or misleading representation provisions of the Act (often referred to as “misleading advertising”) can be highly relevant to both trade associations and their members, depending on the level of advertising and marketing engaged in by an association and its members.
The Act contains both criminal and civil misleading advertising provisions, which apply to false or misleading representations made to promote the supply or use of a product, including services, or any business interest. Subsection 74.01(1) of the Act contains the general civil prohibition against false or misleading representations:
“A person engages in reviewable conduct who, for the purpose of promoting, directly or indirectly, the supply or use of a product or for the purpose of promoting, directly or indirectly, any business interest, by any means whatever, makes a representation to the public that is false or misleading in a material respect.”
For a representation to be false or misleading, it must be shown that a representation has been made, to the public, to promote a product or business interest, that is literally false or misleading (or with a false or misleading “general impression”) and that the representation is “material” – i.e., likely to influence a consumer into buying or using the product or changing their conduct.
The criminal misleading advertising provision is substantially similar, but requires in addition to the above elements that a representation be made with intent (i.e., knowingly or recklessly).
The penalties for civil misleading advertising include “administrative monetary penalties” (essentially civil fines) of up to $750,000 (for individuals) or up to $10 million (for corporations), an order to cease the activity or an order to publish a corrective notice. The penalties for criminal misleading advertising include fines up to $200,000 and/or imprisonment for up to one year (on summary conviction) or fines in the discretion of the court and/or imprisonment for up to 14 years (on indictment).
Based on the potential liability, it is prudent for trade associations and their members to ensure that they do not engage in false or misleading representations in their day-to-day business dealings and as well that associations ensure that their rules and bylaws do not encourage misleading advertising (or restrict legitimate pro-competitive advertising by members).
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Competition Law Compliance Tips for
Canadian Trade and Professional Associations
The federal Competition Act can apply to many trade and professional association activities in Canada, including board and membership meetings, membership criteria and discipline, member surveys and benchmarking, association codes of conduct and dealings with suppliers and customers. While trade associations can, and frequently do, serve many legitimate purposes, since trade and professional association activities typically involve direct interaction between competitors, it is prudent for association executives, members and their advisors to take basic steps to proactively reduce potential competition law risk.
The federal Competition Bureau (Bureau) has also commenced many civil and criminal association related enforcement matters, including in the areas of conspiracy (cartels), bid-rigging and abuse of dominance, as well as regularly discussing association activities that can raise concerns and the importance of Competition Act compliance. The Bureau has also released several trade association related enforcement guidelines, including its Trade Associations and the Competition Act pamphlet and Corporate Compliance Programs bulletin.
The following are some key legal tips for trade and professional associations to comply with Canada’s Competition Act:
Implement a competition law compliance program. Developing and implementing an effective and credible competition law compliance program plays a crucial role for trade associations to mitigate risk under the Competition Act. As such, implementing a compliance program should be at the top of the compliance list for all associations.
Competition compliance options for associations range from formal compliance programs, which encompass all association activities to compliance guidelines for key activities based on risk (e.g., meetings, surveys/benchmarking and other types of information exchanges and specific initiatives that may raise competition law issues, such as joint negotiations with suppliers or customers, discussions or projects involving competitively sensitive topics).
Some of the key benefits of a competition law compliance program include reducing the risk of violating federal competition law, reducing the costs of investigations and proceedings should they occur and potentially mitigating penalties. Association board and other members may also consider requiring that their associations have a credible and effective competition compliance program to participate in association activities. For more information, see: Associations, Association Compliance, Compliance and Immunity & Leniency.
Prepare agendas and meeting minutes. Associations should prepare written agendas for all meetings involving competitors (including board of director meetings) and meeting minutes. Discussions at meetings should also stay within the boundaries of legitimate agenda items and discussions (or exchanges) of “competitively sensitive information” should be avoided, including discussions of current or future pricing, costs, individual customers and suppliers, markets, market shares, output, competitive bidding and business or strategic plans.
The Bureau recommends that associations provide a clear copy of the agenda before trade association meetings for competing firms to participate in the meeting. For more information, see: Association Compliance and Information Exchanges.
Prepare and adopt conduct of meeting guidelines. Adopting and strictly following conduct of meeting guidelines is a proactive method to reduce competition law risks for associations. Such guidelines commonly include restrictions on the exchange of competitively sensitive information and topics that may lead to conspiracy risks under section 45 of the Competition Act (e.g., discussions relating to pricing, markets, concerted refusals to deal or limiting the production or supply of goods or services). For more information, see: Information Exchanges, Conspiracy (Cartels), Conspiracy FAQs and Refusal to Deal.
Compliance guidelines should also address steps to take if inappropriate discussions or activities arise during association meetings or events, including when attendees should leave meetings, report incidents to association executives and/or legal counsel and record efforts to prevent anti-competitive discussions from continuing. In certain cases, individuals or organizations that have participated in potentially illegal activities may also qualify for immunity from prosecution or lenient treatment under the Bureau’s Immunity and Leniency Programs. For more information, see: Immunity & Leniency.
Conduct compliance audits and appoint a compliance officer. One practical way for associations to monitor compliance is to conduct periodic audits of association activities, which can be performed on an association-wide, activity-specific or spot basis. Appointing a compliance officer to monitor, audit and assist with compliance can also help ensure that association members understand and comply with the Competition Act. For more information, see: Association Compliance and Compliance.
Conduct compliance orientations for new executives and personnel. Another practical step associations can take to assist with competition law compliance is to conduct compliance orientations for new board members, executives and other key personnel (e.g., staffers who are routinely involved in association surveys or benchmarking). The Bureau also recommends requiring company/member representatives to complete competition law compliance training before joining trade associations and participating in association activities. For more information, see: Association Compliance and Compliance.
Obtain legal advice for key association initiatives. Care should be taken in relation to specific types of trade association activities where there is increased potential risk. Associations should obtain advice from qualified legal counsel for key activities that may raise competition law concerns, including surveys and benchmarking, standard setting, member discipline and joint member initiatives (e.g., joint marketing, purchasing or negotiations with significant purchasers).
Avoid “off the record” meetings. Associations should discourage informal or “off the record” meetings between members, particularly on the “fringes” of association meetings or using association facilities. Private meetings between competitors under the pretext of association meetings should also be discouraged. Association members should also be aware that merely because a meeting is held “off the record” or “in camera” (i.e., a discussion is not recorded in meeting minutes) does not mean that discussions (which may be recorded in other ways such as attendee notes, e-mails or texts, etc.) or the fact of the meeting itself cannot be used as evidence in competition law proceedings. The Bureau and private plaintiffs can, and often have in the past, used such “circumstantial evidence” to establish a criminal conspiracy agreement.
Review association activities and rules. Associations should generally review their initiatives and activities through a “competition lens”. For example, if a particular association activity may lead to higher prices, less quality or choice, increase barriers for some members or competitors to compete or generally reduce competition, this may well raise competition law concerns (or at minimum the need to consult knowledgeable legal counsel).
It is also prudent for associations to ensure open consultations among members when developing or reviewing existing rules, codes of conduct and standards and include a clear statement of objectives, expectations and responsibilities that comply with the Competition Act. For example, associations should avoid rules (e.g., in association codes of conduct) that establish prices, mandate levels or types of services, restrict advertising or exclude viable competitors from the market.
Require associations to adopt credible and effective competition compliance programs. Before allowing company personnel to participate in trade or professional association activities, ensure that the association has adopted and follows a credible and effective competition compliance program. As a practical matter, if competition law issues arise (or enforcement) the association, member firms and their participating directors and officers and other personnel may be exposed to risk or penalties under the Competition Act. For more information, see: Association Compliance and Compliance.
Consider using third parties for surveys, benchmarking and other information exchanges. Before collecting and sharing competitively sensitive information within the association, consider using third parties to collect such information and distribute it with precautions to minimize potential competition law risk (e.g., circulating information in aggregated form, not distributing raw competitively sensitive data to competing board or other members, etc.). For more information, see: Information Exchanges.
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SERVICES AND CONTACT
I am a Toronto competition and advertising lawyer offering business and individual clients efficient and strategic advice in relation to competition/antitrust, advertising, Internet and new media law and contest law. I also offer competition and regulatory law compliance, education and policy services to companies, trade and professional associations and government agencies.
My experience includes advising clients in Toronto, Canada and the US on the application of Canadian competition and regulatory laws and I have worked on hundreds of domestic and cross-border competition, advertising and marketing, promotional contest (sweepstakes), conspiracy (cartel), abuse of dominance, compliance, refusal to deal, pricing and distribution, Investment Canada Act and merger matters. For more information about my competition and advertising law services see: competition law services.
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