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June 15, 2013

In an interesting decision issued yesterday, the Alberta Court of Appeal overturned a Court of Queen’s Bench decision that found that two oil producers (Husky and Exxon) had violated Canada’s former conspiracy offence under section 45 of the Competition Act (the “Act”) by jointly deciding not to source fluid hauling services from a company called 321665 Alberta Ltd. (Kolt) (321665 Alberta Ltd. v. Husky Oil Operations Ltd., 2013 ABCA 221).

In this case Husky and Exxon, joint owners of some oil and gas properties in Alberta, considered ways to increase the value of their assets and make their fluid hauling more efficient.  This ultimately led to a decision to source their hauling needs exclusively from a competitor of Kolt (Cardusty).  According to the producers, and which was accepted on appeal, their primary rationale in jointly deciding to source their fluid hauling needs from a single company was to improve efficiencies not reduce price, including the level of service and performance, reliability, personnel turnover and financial stability.

Kolt, which ultimately shut down its operations, challenged the producers’ decision as a violation of section 45 of the Act, with the trial judge finding that the joint decision to rely on a single company to provide oilfield services unduly limited competition under section 45 (ordering damages at large of $5 million and $500,000 in punitive damages against each defendant).  The trial judge also found Husky and Exxon civilly liable for the torts of conspiracy and interference with business relations based on his finding that the producers had violated section 45.

In overturning the lower court’s decision, the Court of Appeal focused on whether the producers’ conduct constituted an undue lessening of competition.  Canada’s previous conspiracy offences, before the Act was amended in 2009, made it a criminal offence, among other things, for persons to agree to prevent or lessen competition “unduly”, which required four elements to be proven including “undueness” (which involved considering the structure of the relevant market and purpose of an agreement – e.g., whether an agreement had a pro- or anti-competitive purpose or effect).

The Court of Appeal found that the trial judge erred in finding that the producers’ agreement lessened competition unduly.  In coming to this decision, the Court reasoned that Kolt had a fair opportunity to compete for the producers’ business, price was not the primary criteria (but rather efficiency and the quality and suitability of each supplier) and that the producers were justified in taking steps to rationalize their operations where the purpose was to increase efficiencies and reduce unnecessary costs.  In this regard, the Court reasoned that an opposite conclusion would be contrary to the intent of the Competition Act:

“We can discern no reason why Husky and Mobil should not be permitted to rationalize their operations, particularly when the purpose was to increase efficiencies and reduce unnecessary costs.  To find otherwise would necessarily undermine the competitive nature of Husky and Mobil’s operations by driving up their costs, and create unnecessary inefficiencies in a highly competitive industry that attempts to efficiently and effectively develop and produce scarce, natural resources.  That cannot have been the intent of the Act.”

The Court also criticized the trial judge’s failure to address the “undueness” element of the former section 45.  While the Court did not expressly apply the so-called “structural-behavioural” test set out by the Supreme Court in the PANS case (Canada’s leading pre-amendment cartel case), referring instead to older section 45 jurisprudence, the Court nevertheless appeared to give significant weight to the purpose of the producers’ joint decision to choose one fluid hauling company to service their needs.  In this regard, the Court found that the producers had “engaged in a genuine attempt to create ‘synergies in the field’ by drawing upon the expertise and experience of both companies to find improvements and to maximize the development and production from their depleting resource base.”

Based on its finding on undueness, and ultimately that the producers’ conduct did not violate the Act, the Court found it unnecessary to address other arguments made by the appellants on appeal, including in relation to the relevant market, market power and the parties’ mens rea.  The Court, however, did also consider the trial judge’s damages holdings, finding that the award of damages at large of $5 million was erroneous and that punitive damages were not warranted (finding in particular that punitive damages were “unnecessary and unwarranted” and that the facts did not come close to meeting the test to award punitive damages).

While a decision under Canada’s former conspiracy provision, it illustrates that refusals to deal (in this case purchase), including joint refusals to deal, can have clear pro-competitive and efficiency enhancing justifications.  This is potentially relevant to Canada’s new criminal output restriction offence (under section 45) and civil agreements provision (section 90.1), which include ancillary restraints and efficiencies defences.

The decision also provides helpful new (and positive for JVs) guidance for production joint ventures in Canada, showing some of the potential reasoning that may be considered by courts in Canada when evaluating whether a joint venture between competitors will be found to contravene the Act or is instead consistent with the overall purposes of the Act to encourage more competitive and efficient markets.

It also seems to me that this decision shows that buying side arrangements, even those that may result in exclusivity, must consider more closely and carefully the purposes and potential effects of combined purchasing decisions before a conclusion as to whether the Act has been violated can be made.

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