ASSOCIATIONS & COMPETITION LAW
“A [compliance] program … 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 [their] 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.”
Corporate Compliance Programs Information Bulletin)
“People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”
“Why does this problem keep recurring? What is it about trade associations that lends itself to antitrust violations? For those of you who have practiced in this area for any length of time, the answer is obvious. A trade association is by definition a group of competitors who get together to share common interests and seek common solutions to common problems. The members of a trade association, singly and as a group, are sitting on an antitrust powder keg! And the job you have signed up for as their antitrust counsel is to help make sure they don’t play with matches.”
(Anne K. Bingaman, Assistant Attorney General, Antirust Division,
U.S. Department of Justice)
“Trade associations, by their very nature, face unique compliance issues. They are naturally exposed to greater risks of anti-competitive behaviour because they provide a forum that may encourage competitors to collaborate. For this reason, compliance programs are of the utmost importance to trade associations. While the Bureau does not believe that trade associations are inherently bad, it is also clear to us that there are practices they engage in which raise significant risks. Indeed, meetings and relationships formed between competitors through trade associations provide the forum and the temptation to engage in anti-competitive activity. On the criminal side, there is the potential for price-fixing and bid rigging and on the civil side there is also the potential to violate the Act in the establishment of rules, policies, by-laws and other initiatives enacted and enforced by an association. These may be considered to be agreements among competitors for the purposes of both the criminal conspiracy and civil agreements provisions. What this means is that any rule that restricts, in some manner, competition, could raise issues under the Act. … Clearly, Trade/Industry Associations must be extra vigilant in their efforts to manage and alleviate risk with respect to their activities. Beyond developing a credible and effective corporate compliance program, there are other steps that trade associations can take including: exercising caution when sharing commercially sensitive information, ensuring accurate minute taking in meetings, and finding alternatives to fee setting guidelines. I cannot; however, underscore enough the importance of what I have about spoken at length today – the development of and, commitment to, a corporate compliance program. And, first and foremost — instilling a culture of compliance throughout the organization.”
(Interim Commissioner of Competition, John Pecman,
October 30, 2012 speech)
Trade and professional associations can serve many legitimate purposes, including promoting common interests to the public, lobbying and advocacy, research, member education and the promotion and improvement of product standards.
However, because association activities by definition commonly involve the interaction of direct competitors, they can also in some cases raise serious competition law concerns under the federal Competition Act.
In general, some of the types of association activities that can raise competition law issues include those dealing with pricing, advertising, customers, territories, market shares, terms of sale and other key aspects of competition.
Some more specific association activities that can be problematic include: (i) board and membership meetings, (ii) exchanges of competitively sensitive information (e.g., information relating to fees, customers, costs, bidding/tendering, etc.), (iii) association rules and bylaws (e.g., mandatory or suggested fee guidelines, advertising restrictions, membership restrictions, etc.) and (iv) advertising or marketing restrictions.
Below is a short discussion of Canadian competition law as it applies to trade and professional associations.
CANADIAN COMPETITION LAW
Competition law in Canada is governed by the Competition Act (the “Act”), which is federal law of “general application” that contains both criminal and civil sections and applies to most business activities in Canada including many association activities.
The Act is administered and enforced by the federal Competition Bureau (the “Bureau”), which is a federal enforcement agency headed by the Commissioner of Competition (the “Commissioner”).
The Act sets out four objectives of Canadian competition law that are not always easily reconcilable: (i) to promote the efficiency and adaptability of the Canadian economy, (ii) to expand opportunities for Canadian participation in world markets, (iii) to ensure that small and medium-sized enterprises have an equitable opportunity to participate in the Canadian economy and (iv) to provide consumers with competitive prices and product choices.
As a practical matter, at least from the perspective of competition/antitrust enforcement agencies, the main overarching purpose of competition law is to ensure that consumers benefit from competitive markets.
Criminal and Civil Sections
The Act contains a number of criminal sections. These include the conspiracy, bid-rigging, criminal misleading advertising and deceptive telemarketing sections.
The Act also contains a number of civil (non-criminal) sections. These include the price maintenance, civil misleading advertising, refusal to deal, abuse of dominance and tied selling, exclusive dealing and market restriction sections.
The Act is administered by the Bureau, a federal enforcement agency headed by the Commissioner that investigates complaints by consumers and businesses. The Bureau and its predecessor enforcement agencies have been investigating associations in Canada for over a century, during which time numerous Canadian associations and their members have been investigated or been the subject of fines or other penalties.
These have included associations of ambulance operators, banks, building contractors, business forms suppliers, coal dealers, corrugated box manufacturers, corrugated metal pipe manufacturers, electrical contractors, fruit growers, gypsum dealers and manufacturers, insurance salespersons, lawyers, mandarin orange importers, notaries, pharmacists, paper mills, plumbing contractors and suppliers, real estate agents, roofing contractors, softwood lumber dealers, surveyors and wholesale grocers, among many others.
Many international cartel cases have also involved associations, including in the flat glass, fasteners, synthetic rubber, raw tobacco, copper fittings, sorbates, citric acid, acrylic glass, choline chloride, industrial bags, copper tubes, carbon brushes, concrete reinforcing bar, industrial gases and carbonless paper industries, among many others.
Recent Canadian association cases have involved the Saskatchewan Roofing Contractors Association (2009 – a bid-rigging case), The Canadian Real Estate Association (2009/2010 – an abuse of dominance (i.e., monopoly) case) and The Toronto Real Estate Board (ongoing – also an abuse of dominance case). Some associations have also been challenged for advertising related conduct, such as restrictions on member advertising, as well as alleged misleading advertising (e.g., the Bureau’s recent challenge against Bell, Rogers and TELUS includes allegations against the Canadian Wireless Telecommunications Association).
The Commissioner’s enforcement tools under the Act include the power to make voluntary information requests, obtain compulsory production orders and search warrants from the courts and court orders to interview employees under oath. The Commissioner may also apply to the federal Competition Tribunal (the “Tribunal”) for orders, including orders to stop conduct and/or pay civil penalties, and to refer criminal matters to the Director of Public Prosecutions (“DPP”) for criminal prosecution. Proceedings may be commenced by the Bureau both based on its own investigations or as a result of complaints from customers, competitors, suppliers or other industry participants.
In other cases, investigations may begin as a result of a party seeking immunity or leniency under the Bureau’s formal Immunity or Leniency Programs (which, if all the requirements are met, can allow applicants to receive full immunity from prosecution or a reduction in penalties for cooperating with a Bureau investigation).
In addition to Bureau investigations, private parties may in some cases commence private civil actions against persons contravening the criminal sections of the Act, including the criminal conspiracy and criminal misleading advertising sections, or seek “private access” to the Tribunal for a remedial order (e.g., to stop conduct or resume supply on usual trade terms).
In the context of trade associations, for example, actions can be commenced by competitors or customers that have suffered damages as a result of the activities of an association, its members or both.
The Bureau has also issued enforcement guidelines describing its enforcement approach to collaborations between competitors, including trade association activities (Competitor Collaboration Guidelines), which are available on the Bureau’s website.
Contravention of the Act can lead to significant penalties, lost time and negative publicity for organizations and their personnel. Potential penalties under the Act include criminal fines, civil “administrative monetary penalties” or “AMPs” (essentially civil fines), imprisonment, damages as a result of civil actions brought by private plaintiffs and prohibition orders or injunctions to stop conduct.
For example, potential penalties include criminal fines of up to $25 million or imprisonment for up to 14 years for criminal conspiracy and civil fines of up to $10 million for abuse of dominance and civil misleading advertising. In addition, there is also potential director and officer liability for competition law violations.
As a practical matter, the Bureau is more likely to proceed criminally where there has been intentional or fraudulent anti-competitive conduct, as opposed to where, for example, conduct has been engaged in accidentally or negligently and immediate remedial steps are taken to correct the conduct.
Recent fines in connection with price-fixing investigations have included $3 million against suppliers of air compressors, $17 million against air cargo suppliers, $2.7 million against gasoline suppliers, $5.6 million against hydrogen peroxide suppliers and $12 million for polyurethane foam suppliers.
SECTIONS RELEVANT TO ASSOCIATIONS
There are no specific sections of the Act dealing exclusively with trade or professional associations. However, some of the general sections of the Act that are particularly relevant to association activities include the criminal conspiracy, bid-rigging, abuse of dominance, price maintenance and misleading advertising sections, which are discussed below.
Criminal Conspiracy (Section 45)
Section 45 of the Act, which is in many cases the most important section for trade associations to be aware of, contains three criminal conspiracy offences. The investigation and prosecution of criminal conspiracies also remains a top enforcement priority for the Bureau.
Under section 45, the following three types of “hard core” anti-competitive agreements between competitors (and potential competitors in some cases) are illegal:
1. Price fixing agreements. Section 45 makes 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 under the Act 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 during association meetings or events.
2. Market allocation/division agreements. Section 45 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). As with price-fixing, it is prudent for members of associations to both not expressly enter into such arrangements and also to avoid discussions of markets, market shares or dividing or allocating geographic markets, customers or product or service lines.
3. Output/supply restriction agreements. Finally, section 45 makes 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). This section of the Act (subparagraph 45(1)(c)) is also potentially broad enough that it may also apply to concerted refusals to deal or “boycotts” (agreements between competitors to refuse to deal with other marketplace participants).
In general, the risk for trade associations under the criminal conspiracy sections is twofold: first, that an association itself may become a party (or be seen as aiding or abetting) to an anti-competitive agreement; and second, that trade association members themselves may become parties to an anti-competitive agreement that violates section 45.
To establish these offences under section 45, it is not necessary to prove that there have been any negative effects on a 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). It is also unnecessary to prove that an agreement was ever carried out (i.e., the offence is in the agreement not in the implementation).
Importantly for association activities, 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 established by other evidence – e.g., meetings among competitors followed by a stabilization of prices, suggestions of price-fixing, etc. in written documents or e-mails, etc.). As such, as discussed below, it is important for associations to take common sense precautions around member meetings (e.g., board, committee, task force and membership meetings) and in the context of information exchanged through an association.
Finally, with respect to the criminal conspiracy offences, there is now a new “ancillary restraints” defense, which provides 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/supply restriction agreements.
The penalties for violating the criminal conspiracy sections can be severe, and include fines of up to $25 million (per count), imprisonment for up to 14 years and/or court orders (“prohibition orders”) to stop the conduct.
Private parties that have suffered actual loss or damage as a result of criminal conduct, including under the conspiracy provisions, may also commence private damages actions.
Bid-Rigging (Section 47)
The criminal bid-rigging provisions of the Act can also be relevant to association activities – for example, where an association’s members are engaged in competitive bids or tenders (e.g., in the construction and IT sectors, etc.) or where an association attempts to regulate or control competitive tendering processes.
Section 47 of the Act sets out three distinct criminal bid-rigging offences, making it an offence to: (i) agree to not submit a bid or tender, (ii) agree to withdraw a bid or tender already submitted or (iii) submit a bid or tender that is arrived at by agreement.
Like the new conspiracy offences under section 45, bid-rigging is also “per se” illegal, in that no anti-competitive market effects need to be proven (though, also like conspiracy, all elements need to be proven on the criminal burden of proof – i.e., beyond a reasonable doubt).
Some common types of bid-rigging that can violate section 47 include: (i) “cover”, “courtesy” or “complementary” bidding (some firms submit bids that are too high to be accepted, or with terms that are unacceptable to the buyer, to protect an agreed upon low bidder), (ii) bid suppression (one or more bidders that would otherwise bid agree to refrain from bidding or withdraw a previously made bid), (iii) bid rotation (all parties submit bids but take turns being the low bidder according to a systematic or rotating basis), (iv) market division (where suppliers agree not to compete in designated geographic areas or for specified customers) and (v) subcontracting (parties that agree not to submit a bid, or submit a losing bid, are awarded subcontracts or supply agreements from the successful low bidder).
To establish bid-rigging, all of the following elements must be established: (i) an agreement or arrangement between two or more persons (or bidders or tenderers as the case may be), (ii) to not submit a bid or tender, withdraw a bid or tender already made, or submit bids or tenders arrived at by agreement, (iii) intent, (iv) a call or request for bids or tenders and (v) the agreement or arrangement is not made known to the person calling for bids or tenders at or before the submission or withdrawal of a bid or tender by any party to the agreement.
The only express bid-rigging exception in the Act is for agreements between affiliates (i.e., where an agreement or arrangement is entered into only between affiliates as defined in the Act). Having said that, a bid-rigging offence will also not be established where parties (or bidders) expressly communicate an agreement to a party calling for bids or tenders at or before the time a bid is submitted or withdrawn. Where this is effectively achieved, the elements necessary to establish a bid-rigging offence cannot be made out.
The penalties for violating the bid-rigging provisions can be severe and include unlimited fines (i.e., in the discretion of the court), imprisonment for up to 14 years, or both.
Abuse of Dominance (Sections 78 and 79)
Abuse of dominance is another section that can potentially apply to associations and their activities. Under sections 78 and 79 of the Act, abuse of dominance occurs where (i) a dominant firm (or firms), (ii) has engaged in or is engaging in a practice of anti-competitive acts, (iii) 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, depending on the circumstances, include efforts to restrict access to essential services or markets or setting educational, qualification or membership standards that make it more difficult for competitors to enter or effectively compete.
Recent Canadian association abuse of dominance cases have involved The Canadian Real Estate Association (2009/2010) and The Toronto Real Estate Board (2011/2012).
The penalties for abuse of dominance include “administrative monetary penalties” (essentially civil fines) of up to $10 million ($15 million for subsequent orders) and Tribunal orders to stop conduct.
Price Maintenance (Section 76)
The price maintenance sections of the Act under section 76 can also be relevant to trade association activities in some cases.
The first type of price maintenance that is potentially relevant to associations 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 can be relevant to associations and their members 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 that other person’s low pricing policy.
Where all of the elements for price maintenance are established, the Tribunal may make “remedial orders” for parties to cease the conduct.
Misleading Advertising (Sections 52 and 74.01)
The misleading advertising provisions of the Act can also be relevant to associations and their members, depending on the level of advertising and marketing engaged in by them. In this regard, the Act contains both criminal and civil misleading advertising provisions.
For a claim 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 an average consumer into buying or using the product). Criminal misleading advertising is substantially similar, but requires, in addition to the above elements, that a representation be made with intent (i.e., “knowingly or recklessly”).
The Bureau has issued an Information Bulletin (Misleading Representations and Deceptive Marketing Practices: Choice of Criminal or Civil Track under the Competition Act) that outlines its approach to determining whether to pursue the criminal or civil track in relation to misleading advertising. In general, the Bureau will in most cases follow the civil track unless certain criteria are satisfied as follows: (i) there is clear and compelling evidence suggesting that the accused intentionally made a false or misleading representation to the public and (ii) a criminal prosecution would be in the public interest.
The penalties for civil misleading advertising include “administrative monetary penalties” of up to $750,000 (for individuals) and up to $10 million (for corporations) and “remedial orders” (e.g., to stop the activity or publish a corrective notice). The penalties for criminal misleading advertising include fines of 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).
In addition to these “general” misleading advertising provisions, the Act also contains a number of other criminal and civil provisions that prohibit or regulate specific types of marketing practices, including deceptive telemarketing, deceptive prize notices, double ticketing, multi-level marketing, pyramid selling schemes, product performance claims, false or misleading ordinary selling price representations, misleading or unauthorized use of tests and testimonials, bait and switch selling, the sale of a product above its advertised price and promotional contests.
Based on the potential liability, it is prudent for associations and their members to ensure that they do not engage in false or misleading representations in their business dealings and that association rules and bylaws do not overly restrict legitimate pro-competitive advertising and marketing by members. Some associations have been challenged for advertising restrictions and the Bureau has also focused on advertising limitations in the context of self-regulated professions – for example, in its 2007 Self-regulated Professions study. In another recent case, in which the Bureau is challenging Bell, Rogers and TELUS for alleged misleading advertising in relation to “premium texting services”, the Bureau is also challenging the Canadian Wireless Telecommunications Association.
TRADE & PROFESSIONAL ASSOCIATION ACTIVITIES
Some of the specific association activities that can potentially raise competition law concerns include: (i) board and association meetings, (ii) information exchanges (i.e., exchanges of competitively sensitive information, such as relating to fees, customers, costs, bidding/tendering, etc.), (iii) association rules and bylaws (e.g., mandatory or suggested fee guidelines, advertising restrictions, etc.) and (iv) advertising or marketing restrictions.
Board and Association Meetings
Meetings are a normal and routine part of most professional and trade associations and can involve a variety of legitimate and pro-competitive activities. However, given that association meetings also in many, if not most, cases involve the interaction of direct competitors, they are considered to be a high-risk area for associations and their personnel.
This is because meetings between direct competitors can in some instances either result in conduct that actually violates the Act (e.g., the formation of price-fixing or other agreements that contravene the conspiracy offences of the Act) or can make it easier for the Bureau, a court or private plaintiff to infer that anti-competitive conduct has occurred (e.g., use a meeting, if appropriate precautions are not taken, such as where competitively sensitive topics are discussed, as evidence of an anti-competitive agreement).
Based on the potential risk, it is prudent for associations to adopt basic conduct of meeting guidelines for the conduct of board, committee, task force and membership meetings.
Information exchanges (i.e., the exchange of competitively sensitive information) is another of the main risk areas for trade and professional associations, which may include the exchange of information relating to current/future pricing, market shares, costs, customers, markets, market shares and current/future business plans and strategic plans.
The reason the exchange or discussion of such information can potentially raise issues is because, when shared with competitors, it can lead to the formation of an anti-competitive agreement (e.g., a price-fixing agreement) or support the inference of an anti-competitive agreement (e.g., the exchange of pricing information followed by a stabilization of price could infer that an anti-competitive agreement exists).
Based on the potential risk, associations should adopt basic compliance guidelines for information exchanges between members (e.g., in relation to benchmarking, research, lobbying or other joint activities among members).
Association Rules and Bylaws
Association rules, policies or bylaws can also, in some instances, raise competition law concerns if they deal with competitively sensitive topics such as fees/pricing, marketing, advertising or membership restrictions or discipline. The key potential issue is that where an association enacts or enforces rules on competitively sensitive topics (e.g., fee tariffs, advertising restrictions, etc.), an allegation may be made that the association is either a party to or assisting in the formation of an anti-competitive agreement under section 45 of the Act. Association rules and codes of conduct can also in some cases raise concerns under the price maintenance and abuse of dominance provisions.
For example, in its Competitor Collaboration Guidelines the Bureau takes the position that anti-competitive agreements involving industry trade associations (or association rules, policies or by-laws that prevent or lessen competition substantially, and are enacted and enforced by an association with the approval of members who are competitors), can lead to liability for an association as either a party to an offence or on the basis of aiding and abetting an agreement (i.e., under the aiding or abetting offences of the federal Criminal Code).
As such, associations should review any rules, policies or bylaws that touch on competitively sensitive topics including fees/pricing, discounts, marketing and advertising and membership restrictions and discipline.
Advertising or Marketing Restrictions
Finally, the criminal and civil misleading advertising provisions of the Act can also be highly relevant to associations (see discussion above).
Trade and professional associations should ensure that their advertising and marketing activities comply with the Act. In addition, it is prudent for associations to review any association rules or codes of conduct regulating member advertising or marketing to reduce the likelihood that such rules themselves (i.e., association restrictions on member advertising or marketing) may be subject to challenge.
SEARCHES AND INVESTIGATIONS
The Bureau has a wide range of enforcement powers available to investigate potential violations of the Act.
These include the ability to obtain search warrants, document production orders, orders compelling testimony under oath and wiretaps. Moreover, the Bureau is increasingly resorting to these powers, particularly in relation to its enforcement priorities, notably the detection and investigation of criminal cartels, bid-rigging and deceptive marketing and advertising.
The Act also contains obstruction provisions, which make it a criminal offence to impede or prevent (or attempt to impede or prevent) inquiries or examinations being conducted by the Bureau. As such, it is prudent for associations to adopt basic “search and seizure guidelines” in the event of a Bureau search or investigation.
Search and seizure guidelines are intended to assist organizations and their personnel to protect their rights (e.g., by claiming solicitor-client privilege to protect the confidentiality of legally privileged documents) and as well to reduce the potential liability that can arise in the context of a search (e.g., to avoid allegations of obstruction).
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