Canadian COMPETITION LAW

May 7, 2016

Guest post by Richard Elliott
Member of the Ontario and New York bars

Canada’s Commissioner of Competition (Commissioner) and Parkland Fuel Corporation (Parkland) recently settled their outstanding merger proceedings before the Competition Tribunal (Tribunal) in respect of Parkland’s acquisition of Pioneer Energy (the “Parkland” case).[1] Since the case did not proceed to a final decision on the merits, this note considers an unresolved issue emanating from the interim injunction decision in Parkland: Does the wealth transfer from consumers to producers in an anticompetitive merger constitute harm in merger review under Canada’s Competition Act?

This issue is assessed particularly in light of the seemingly divergent approach to the wealth transfer in the interim injunction decision in Parkland as compared to the most recent fully contested merger decision in Tervita Corp v. Canada (Commissioner of Competition)(the “Tervita” case).[2] The wealth transfer was viewed as harmful in Parkland, but not in Tervita. This divergence may reflect that Parkland was an interim decision, whereas Tervita was a full determination on the merits, including consideration of efficiencies. Nonetheless, it is unclear why a distinction between an interim and final decision would justify potentially viewing the same wealth transfer as both harmful for purposes the interim injunction application and not harmful in a full determination on the merits.

Parkland: The Wealth Transfer Causes Irreparable Harm

In 2014, Parkland, a significant operator and supplier of gas stations in Canada, agreed to acquire from Pioneer 181 gas stations and 212 contracts to supply gas stations in Ontario and Manitoba. Most of the transaction proceeded unopposed by the Commissioner and was completed in June 2015. However, in April 2015, the Commissioner filed an application with the Tribunal challenging Parkland’s acquisition in relation to 14 small communities in Ontario and Manitoba.

The Commissioner also sought an interim injunction prohibiting the parties from implementing the transaction in these 14 local markets pending the hearing on the merits. In May 2015, the Tribunal partially granted the Commissioner’s request for an interim order, requiring the parties to preserve their assets and hold separate their operations in six of the 14 markets.[3]

On March 29, 2016, the Commissioner and Parkland settled the proceedings by registering a consent agreement with the Tribunal.[4] The agreement provided for remedies in eight of the 14 originally contested markets, with six of those eight markets already subject to the interim hold separate order.

The fact that the Parkland case settled was unsurprising. The range of dispute was narrow and the interim injunction decision substantially foreshadowed the ultimate settlement. Parkland is interesting not for what was settled, but rather for what was left unresolved: How should the wealth transfer in an anticompetitive merger be regarded in Canadian merger review?

In its decision on the interim injunction application, the Tribunal gave in depth consideration to the issue of whether the merger, absent interim relief, was likely to cause irreparable harm. The decision to grant interim relief in only six of the 14 local markets at issue was based on the Tribunal’s finding that the Commissioner had only adequately established a likelihood of irreparable harm in six of the markets.

The Commissioner’s approach to irreparable harm, as set out in his notice of application for the interim injunction, focussed particularly on the unavailability of damages to compensate consumers for paying higher prices:

“Irreparable harm to consumers and the broader economy in the Relevant Markets is likely to result if an Interim Order is not made. Consumers will likely pay higher prices for, and purchase less, retail gasoline before the Commissioner’s 92 Application is finally disposed of. The financial harm and other harm to these consumers and to the economy is irreparable owing in part to the Tribunal’s lack of authority in law to remedy the harm suffered by consumers in the event the Commissioner is successful in the 92 Application.”[5]

Parkland, in its response to the notice of application, likewise characterized the concept of irreparable harm in terms of anticompetitive price increases to consumers, although disputed factually that such price increases would likely occur:

“the Commissioner has not established that it is highly probable (or even likely) that consumers will pay higher prices during the pendency of his application such that irreparable harm will result absent a hold separate order.”[6]

In its decision, the Tribunal similarly adopted the Commissioner’s approach of finding irreparable harm based on the lack of power to award damages:

“The Commissioner states that it [the harm] would be irreparable because the Tribunal has no authority to award damages under the merger provisions of the Act and lacks the jurisdiction to remedy the harm that may be suffered by consumers and the broader economy during the interim period in the event the Commissioner is successful in his underlying section 92 application. I agree.”[7]

The inability to award damages in respect of mergers under the Competition Act means that there is no way to compensate consumers for the harm from paying higher prices (i.e., the wealth transfer). By comparison, a damages action in respect of collusion under the Competition Act seeks to redress the overcharges paid by consumers. In other words, the Tribunal’s focus in Parkland on the unavailability of such damages in the merger context was directed at the harm from the wealth transfer.

The Tribunal’s analysis of harm in Parkland consisted almost entirely of factual determinations of whether sufficient evidence was adduced with respect to the impact on competition in each market to warrant a conclusion that anticompetitive effects and price increases would likely ensue. There was no dispute that price increases, if proven, constituted harm.

The Tribunal’s focus on price increases as central to the analysis of harm is also evident in the Tribunal’s conclusions on the expert testimony regarding harm in the six markets for which the injunction was ordered:

“Dr. Boyer [Commissioner’s expert] states that the concentration levels, combined with other factors such as barriers to entry and loss of pre-merger rivalry, raise the likelihood of unilateral effects and substantially raise the chances of coordinated price increases emerging. He states that the Proposed Merger poses serious risks to competition through unilateral effects and coordinated effects and that price overcharges would likely result from the transaction. I have considered the evidence adduced by Parkland with respect to its economic incentive to keep prices low in order to keep volumes high, but I conclude that, in this case, the more persuasive evidence for the Six Markets is the logical rational behaviour of profit-maximizing firms as described by Dr. Boyer.”[8]

In addition to harm from price increases, the Commissioner also alleged that consumers could incur harm due to purchasing less gas (foregone consumer surplus). However, it is apparent that any such potential harm to consumers from allocative inefficiency did not play a significant role in the Tribunal’s decision.[9] For instance, while the Tribunal made numerous references to the prospect of price increases (such as in the above quote), it only mentioned allocative efficiency twice and provided no discussion of it. There was similarly no mention of deadweight loss. Moreover, the limited evidence available in the Commissioner’s application suggests that the magnitude of any possible harm to consumers from allocative inefficiency was miniscule in comparison to the harm from the wealth transfer.[10] As such, if the analysis of irreparable harm had focussed only on such consumer harm from allocative inefficiency without also counting the wealth transfer, the balance of convenience would have overwhelmingly favoured the merging parties such that no injunction would have been granted. In short, the critical basis for the Tribunal’s finding of irreparable harm was the wealth transfer.

It is important to note that there was no determination by the Tribunal that the wealth transfer in Parkland was socially adverse. (See the discussion below regarding Tervita of the relevance in Canadian merger law of determining whether a wealth transfer is socially adverse.) Nonetheless, in the absence of any finding concerning the relative positions of consumers and producers, the default presumption applied in Parkland was that the wealth transfer was harmful. This was not dissimilar to the approach to wealth transfers in other competition law contexts. For instance, if Firm A colludes with Firm B to put up prices, this is viewed as harmful to consumers. The same price increase resulting instead from Firm A merging with Firm B might be seen to impact consumers in the same way.

The view in Parkland that the wealth transfer constituted harm may seem unremarkable. However, the prevailing approach in Canadian merger review in a full hearing on the merits has been to effectively apply the opposite default presumption: absent specific evidence that the wealth transfer is socially adverse, the wealth transfer is presumed to be neutral, not harmful. This is evident in the most recent fully contested merger decision in Tervita.

Tervita: The Wealth Transfer is Neutral, Not Harmful

Unlike Parkland, which was an interim injunction decision, Tervita involved a full determination on the merits, including consideration of efficiencies. The case culminated in a decision by the Supreme Court of Canada in 2015 to allow the merger on the basis of the efficiency defence under the Competition Act.

The Tervita case involved a very small transaction (well below pre-merger notification thresholds) in northeastern British Columbia. The acquirer, an operator of two hazardous waste secure landfills, acquired the target company, which held a permit for another secure landfill site. The merger was found to be likely to prevent competition substantially by preserving a monopoly. In particular, the Tribunal concluded that, absent the merger, the target site would likely be developed as future competition to the acquirer with the effect that prices would likely be at least 10% lower.

Notwithstanding the finding that the merger would substantially prevent competition and lead to higher prices for customers, the merger was ultimately allowed by the Supreme Court pursuant to the efficiency defence of the Competition Act. That defence may permit an anticompetitive merger to proceed where the “gains in efficiency” are greater than and offset the “effects” of the lessening or prevention of competition. In this case, although the efficiency gains were found to be very small (amounting to minor savings in back-office staffing costs), the Court allowed the efficiency defence to prevail because the Commissioner had not established any amount of harmful “effects” resulting from the merger.

To understand the conclusion in Tervita, it is necessary to consider how two possible “effects” were treated. First, while it was recognized that a loss of allocative efficiency (deadweight loss) could constitute an anticompetitive effect, the Supreme Court held that merely establishing a substantial lessening or prevention of competition and associated price increases was not in itself proof of deadweight loss. The Court concluded that given the lack of quantification of the deadweight loss (requiring inputs such as elasticity of demand and output effects), no loss of allocative efficiency could be attributed to the merger. As such, the Court assigned no weight (a default value of zero) to the deadweight loss in Tervita.

Second (and more relevant for purposes of this note), the wealth transfer from consumers to the merged entity was viewed as benign. In the absence of a finding that customers were worse off than the merged firm such that the effect of the wealth transfer was “socially adverse”, the Tribunal (and appellate Courts) treated the transfer as neutral. A “total surplus” approach was applied such that any loss in consumer surplus due to the wealth transfer was exactly offset by the corresponding gain in producer surplus, with the overall welfare impact of the transfer being regarded as neutral. It is true that the wealth transfer was cited in reaching the threshold conclusion that competition would likely be prevented substantially; however, there was no finding that the transfer itself caused harm. To the contrary, it was expressly held that the wealth transfer was neutral and did not amount to an anticompetitive effect.

The treatment of the wealth transfer in Tervita was not novel in Canadian merger review. The original 1991 version of the Competition Bureau’s Merger Enforcement Guidelines espoused a total surplus approach to analyzing efficiencies. In addition, in the only prior case that required the Tribunal to analyze the efficiency defence, Superior Propane, little weight was given to the wealth transfer.[11] The Tribunal, guided by the Federal Court of Appeal, moved away from strict adherence to a total surplus standard in that case and allowed that the wealth transfer could be considered an anticompetitive effect to the extent that it constituted a socially adverse transfer. However, this would require evidence that consumers were socially disadvantaged relative to producers, which may be far from straightforward in many cases. In Superior Propane, the Tribunal ultimately held that only a very small portion of the transfer was socially adverse and, therefore, amounted to a harmful effect (which did not affect the overall conclusion to accept the efficiency defence). In reverting to a pure total surplus standard in Tervita (while still allowing the possibility of treating the wealth transfer as harmful in other cases to the extent it is proven to be socially adverse), the Tribunal underscored that establishing socially adverse effects may often be difficult in practice.

In any merger case where the parties allege efficiencies (which they did in Parkland and are likely to do now as a matter of course post-Tervita), the burden of proof lies with the Commissioner to establish whether, and if so to what extent, the wealth transfer should be considered a harmful effect. Absent discharging that burden, the default presumption is that the effect of the wealth transfer is neutral. Moreover, in Tervita, the Tribunal made it clear that it expected that the wealth transfer would usually be considered neutral:

“The Tribunal expects that in most cases, it will be readily apparent that the wealth transfer should be treated as neutral in its analysis, because the socio-economic profiles of consumers and the merged entity’s shareholders will not be sufficiently different to warrant a conclusion that the wealth transfer is likely to lead to socially adverse Effects.”[12]

The Unresolved Question

If Parkland had proceeded to a full decision on the merits, it would have been interesting to see how the wealth transfer was treated. Parkland had pleaded efficiencies, meaning that the Tribunal would have had to determine if the wealth transfer amounted to an anticompetitive “effect” for purposes of the efficiency defence. Unless the Commissioner had met the burden of proof to establish that the wealth transfer was socially adverse, applying the Tervita approach would have resulted in the default position that the effect of the wealth transfer was neutral, not harmful.

Parkland and Tervita thus leave unresolved a basic question regarding how to treat the wealth transfer in merger review under the Competition Act. How is it possible that the same wealth transfer could potentially be viewed to both cause irreparable harm for purposes of an interim injunction application and cause no harm at all in a full determination on the merits?

[1] See Competition Bureau announcement, March 29, 2016, available at: http://www.competitionbureau.gc.ca/eic/site/cb-bc.nsf/eng/04049.html.

[2]     Tervita Corp v. Canada (Commissioner of Competition), 2015 SCC 3.

[3]     The Commissioner of Competition v. Parkland Industries Ltd. et al., Competition Tribunal (“Parkland“), available at www.ct-tc.gc.ca. See Reasons and Order Granting in Part an Application for Interim Relief Under Section 104 of the Competition Act, May 29, 2015.

[4]     Parkland, supra note 3, Registered Consent Agreement, Competition Tribunal, March 29, 2016.

[5]     Parkland, supra note 3, Notice of Application pursuant to Section 104 for an Interim Order, paragraph 12.

[6]     Parkland, supra note 3, Response of Parkland to the Application for an interim order pursuant to section 104, paragraph 9.

[7]     Parkland, supra note 3, Reasons and Order Granting in Part an Application for Interim Relief Under Section 104 of the Competition Act, paragraph 48.

[8]     Parkland, supra note 3, Reasons and Order Granting in Part an Application for Interim Relief Under Section 104 of the Competition Act, paragraph 97.

[9]    Allocative inefficiency could in theory also potentially include foregone producer surplus (foregone profits on sales no longer occurring). However, it is difficult to see how the impact on the merging parties themselves due to their own decision to raise price and reduce output could be relevant to assessing irreparable harm.

[10]   In his notice of application materials, the Commissioner illustrated the harm to consumers with an example in which the wealth transfer impact was estimated to be $3.5 million, whereas the harm to consumers from allocative inefficiency could be shown to amount to approximately only $5,000. See Parkland, supra note 3, Memorandum of Argument of the Commissioner, paragraphs 52-54.

[11]   Commissioner of Competition v. Superior Propane Inc., Final Reasons and Order, Competition Tribunal, April 4, 2001, available at www.ct-tc.gc.ca.

[12]   The Commissioner of Competition v. CCS Corporation et al., Reasons for Order and Order, paragraph 283, available at 2012 Comp. Trib. 14, [2012] C.C.T.D. No. 14 (QL), 2012 CarswellNat 4409 (WL Can.) and at www.ct-tc.gc.ca. Note that CCS Corporation is the predecessor name of Tervita Corp.

********************

SERVICES AND CONTACT

We are a Toronto based competition and advertising law firm offering business and individual clients efficient and strategic advice in relation to competition/antitrust, advertising, Internet and new media law and contest law. We also offer competition and regulatory law compliance, education and policy services to companies, trade and professional associations and government agencies.

Our experience includes advising clients in Toronto, across Canada and the United States on the application of Canadian competition and regulatory laws and we 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 and pricing and distribution matters. For more information about our competition and advertising law services see: competition law services.

To contact us about a potential legal matter, see: contact

For more information about our firm, visit our website: Competitionlawyer.ca

Comments are closed.