Canadian COMPETITION LAW

Excerpt from Featured Update
Practical Law Canada Competition

June 20, 2016

This update discusses the Competition Tribunal’s recent Kobo decision, which clarifies the substantive requirements for consent agreements.  This update also discusses the Competition Bureau’s increased bid-rigging enforcement and awareness efforts.

Practical Law Canada Competition

Competition Tribunal Clarifies Test for Consent Agreements

On June 10, 2016, Canada’s Competition Tribunal (Tribunal) issued a decision in Rakuten Kobo Inc. v. Commissioner of Competition, 2016 CarswellNat 2171 (Competition Trib.) (Kobo), which rescinded a previously registered consent agreement on the basis that it did not satisfy the necessary elements for a proper consent agreement before the Tribunal. The decision was without prejudice to the Commissioner of Competition (Commissioner), entering into a new consent agreement that corrects the deficiencies. Nonetheless, the decision provides helpful clarification regarding the substantive requirements for a consent agreement.

Background to the Consent Agreement Process

Prior to 1999, a settlement before the Tribunal took the form of a “consent order”, which had to be approved by the Tribunal as satisfying certain substantive elements. The approval process involved pleadings (including a competitive impact statement and sometimes an agreed statement of fact) and a hearing which, in a few cases, became protracted.

In an effort to streamline the process and provide greater certainty to parties negotiating settlements with the Commissioner, the Competition Act, R.S.C. 1985, c. C-34 (Competition Act) was amended in 1999 to provide for the much simpler “consent agreement” registration process that exists today. While achieving speed and certainty, this process has been subject to the criticism that it has become too abbreviated and does not provide adequate context for understanding the rationale for the consent agreement. This informational vacuum may compromise the Tribunal’s ability to address subsequent contested applications to rescind or vary the agreement.

The Kobo Decision

In 2014, the Commissioner and four e-book publishers entered into a Consent Agreement designed to address the Commissioner’s concerns that certain agreements or arrangements regarding the pricing of e-books were substantially preventing or lessening competition, contrary to section 90.1 of the Competition Act. (For a discussion of section 90.1, see Practice Note, Canadian Conspiracy (Cartel) Law.) The consent agreement prohibited the publishers from directly or indirectly restricting or impeding an e-book retailer’s ability to set the retail price (or offer discounts or other promotions) on any e-book for sale to consumers in Canada.

Kobo, an e-book retailer that was not a party to the consent agreement, challenged the validity of the consent agreement, alleging that it was not within the authority of the Tribunal. The Commissioner brought a reference application to seek clarification of the scope for Kobo, as a third party, to challenge the agreement. The Tribunal issued its reference decision, Kobo Inc. v. Commissioner of Competition, 2014 CarswellNat 3434 (Competition Trib.), in September 2014.

This most recent Kobo decision applies the standards set out in the reference decision. In essence, the Tribunal has now rescinded the consent agreement for failing to adequately specify the factual and legal basis to support the Tribunal’s jurisdiction. The Tribunal held that the consent agreement failed to provide sufficient information for all of the following:

1. Understanding the subject matter of the impugned agreement.

2. Understanding whether the impugned agreement was existing or proposed.

3. Understanding whether two or more parties to that agreement were competitors.

4. Concluding that the impugned agreement was likely to prevent or lessen competition substantially.

In the result, the Tribunal rescinded the consent agreement. However, it did so without prejudice to the Commissioner, entering into a new consent agreement that addresses these deficiencies. In that regard, the Tribunal stressed that there must be a clear conclusion (not merely an allegation) that competition is likely to be prevented or lessened substantially (the statutory precondition for the Tribunal’s jurisdiction under section 90.1 of the Competition Act).

Observations and Implications

The Kobo decision reflects a desire by the Tribunal to strike an appropriate balance that maintains a streamlined settlement process, while requiring greater disclosure to facilitate better understanding of the rationale for the consent agreement.

Going forward, parties to a consent agreement should expect that the agreement will require sufficient detail to describe the factual basis underlying the agreement, as well as meet the legal elements supporting the Tribunal authority to issue orders.

Practical implications:

1. Parties should expect that the negotiation of consent agreements may take more time to set out the necessary particulars required by the Tribunal.

2. Parties must be prepared to accept a conclusion (not a mere allegation) that competition is likely to be prevented or lessened substantially, where such a finding is necessary to support the Tribunal’s jurisdiction to issue a remedy.

3. Parties should also consider the implications of this increased disclosure in matters where related private actions may be a possibility. For a discussion of private actions, see Practice Note, Private Competition Law Actions.

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For the full Featured Update, see: Recent Competition Tribunal and Competition Bureau Developments.

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