Canadian COMPETITION LAW

June 1, 2010

On May 24, 2010, the U.S. Supreme Court (“USSC”) delivered its opinion in the landmark American Needle antitrust case.   In this important case, the USSC again visited the difficult question as to when an entity will be considered to be a single entity (as opposed to multiple entities) for the purposes of the application of Section 1 of the Sherman Act (Section 1 of the Sherman Act prohibits certain illegal restraints of trade and is the U.S. equivalent to the criminal conspiracy provisions under Section 45 of the Canadian Competition Act).

This case involved a decision by the 32 separately owned professional football teams in the NFL to grant exclusive licenses for their intellectual property (and in particular, an exclusive 10-year licence to Reebok International Ltd. to manufacture and sell trade-marked head wear for the 32 teams).

The plaintiff American Needle filed an action alleging that the agreements between the NFL, its teams, a corporation formed to manage the teams’ intellectual property and Reebok violated Sections 1 and 2 of the Sherman Act.  The defendants argued that they were incapable of conspiring within the meaning of Section 1 “because they [were] a single economic enterprise, at least with respect to the conduct challenged.”

The issue in this case was therefore whether the NFL defendants were capable of engaging in a “contract, combination … or conspiracy” for the purposes of potential antitrust liability under Section 1 of the Sherman Act.  The USSC held that the NFL’s licensing activities constituted concerted, not unilateral, action and, as such, was within the scope of Section 1 of the Sherman Act.

In coming to its decision, the USSC rejected both lower courts’ holdings that the defendants had “so integrated their operations that they should be deemed a single entity rather than joint ventures cooperating for a common purpose.”  While the USSC and lower courts have visited the very difficult issue of how to distinguish between a single v. multiple entities for antitrust law purposes on a number of occasions (e.g., in Copperweld Corp. v. Independent Tube Corp., 467 U.S. 752 (1984), Texaco Inc. v. Dagher, 547 U.S. 1 (2006) and Bork J.’s seminal decision in Rothery Storage & Van Co. v. Atlas Van Line, Inc., 792 F.2d 210 (CADC 1986)), the Court in American Needle provided significant additional analysis into how, in its view, this distinction should be made.

At the core of the unanimous USSC’s reasoning in American Needle is the question of whether the alleged conspiracy “joins together separate decision makers”:

“The key is whether the alleged ‘contract, combination … or conspiracy’ is concerted action – that is, whether it joins together separate decision makers.  The relevant inquiry, therefore, is whether there is a ‘contract, combination … or conspiracy’ amongst ‘separate economic actors pursuing separate economic interests.’ … such that the agreement ‘deprives the marketplace of independent centers of decision making.”

In making its determination that the defendants’ activities constituted concerted, rather than unilateral, action, the Court made a number of other noteworthy statements that may have a bearing on the interpretation of Canada’s recently amended conspiracy law under section 45 of the Competition Act.  For example, the USSC emphasized that in considering whether conduct is unilateral or concerted for the purposes of Section 1 of the Sherman Act, the question does not merely turn on whether parties involved are legally distinct entities (or have organized themselves under a single umbrella or into a structured joint venture), that the “central substance of the situation” must be considered (i.e., the Court stated that it was “moved by the identity of the persons who act, rather than the label of their hats”) and that, following its earlier holding in the leading Copperweld case, “substance, not form, should determine whether [a]n … entity  is capable of conspiring under [Section 1 of the Sherman Act].”

The Court also spent time emphasizing that even where a valid joint venture exists, that does not categorically exclude the joint venture from potential antitrust scrutiny (though may have a bearing on the standard – i.e., per se or rule of reason – that is applied to determining whether restraints imposed by the joint venture are illegal).

On the facts of the particular case, the Court held that “each of the [NFL] teams is a substantial, independently owned and independently managed business”, their “general corporate actions are guided or determined by separate corporate consciousnesses” and “their objectives are not common.”

This recent decision is important not only in the context of American antitrust law, in adding additional Supreme Court reasoning for the difficult problem of distinguishing between unilateral and concerted conduct for the purposes of the application of Section 1 of the Sherman Act in some instances, but may as mentioned above, also have a number of impacts for Canada.

For example, Canada has recently adopted a new U.S.-style criminal conspiracy regime under which bare price-fixing, market allocation and output restriction agreements between competitors (or potential competitors) are now per se illegal, subject to a newly introduced ancillary restraints defence.

As the bar has been lowered to establish hard core conspiracy agreements in Canada, it may well prove to be significantly more important than in the past to make arguments that alleged parties to a conspiracy offence are a single entity (rather than multiple parties, which is a pre-condition for the application of the conspiracy provisions under Section 45 of the Competition Act).  This may particularly be the case, for example, in the context of decisions or rules adopted in the trade association context or certain joint ventures.

This may become a particularly live issue in Canada for at least several reasons, including the fact that the only exception under the Act (in relation to single v. multiple entities point) is a bright line exception for agreements among affiliates (as defined in the Act), and as well based on the fact that the Canadian Competition Bureau (the “Bureau”) has provided little guidance as to when it will refrain from exercising its enforcement discretion in relation to arrangements between entities that are not affiliates under the Act but might nevertheless be considered to be a single economic entity.

For example, in the Bureau’s recently finalized Competitor Collaboration Guidelines, which were issued to coincide with the coming into force of Canada’s new two-track conspiracy regime, the Bureau merely states: “parties should note that the [affiliates exception] applies only to companies, and not to partnerships, trusts or other non-corporate entities or individuals, although the Bureau will consider the nature of any common control or relationship between the parties when determining whether referral of an agreement for prosecution is appropriate.”  [emphasis added]

As to how the next chapter in the post-intra-enterprise conspiracy doctrine era in the United States will unfold, we will need to wait and see.

As for Canada, as the substantive rules for criminal conspiracies have recently significantly changed, this should lead to continuing debate about existing uncertain areas of the law (including the single v. multiple entity problem), as well as newly introduced uncertainties associated with the new conpiracy rules (e.g., the scope and application of the new ancillary restraints defence, the content of the three new conspiracy offence – e.g., whether they include group boycotts  and, if so, whether such arrangements will be held to be per se illegal which has historically been a topic of debate in the U.S. – and as well the application and scope of the new statutory regulated conduct defence provision, which codifies for the first time an already much debated common law “defence”).

For more regulatory law updates follow me on Twitter: @CanadaAttorney

Comments are closed.