“Abuse of a dominant position occurs when a dominant firm in a market, or a dominant group of firms, engages in conduct that is intended to eliminate or discipline a competitor or to deter future entry by new competitors, with the result that competition is prevented or lessened substantially. These provisions, contained in sections 78 and 79 of the Competition Act, establish the bounds of legitimate competitive behaviour and provide for corrective action when firms engage in anti-competitive activities that damage or eliminate competitors and that maintain, entrench or enhance their market power.”
“The successful competitor having been urged to compete must not be turned on when he wins.”
(Judge Learned Hand)
MAJOR COMPETITION LAW COMPLIANCE UPDATE: On June 3, 2015, the Competition Bureau (Bureau) finalized its new core competition law compliance materials. The Bureau’s new compliance materials, which include information on most major competition law areas, misleading advertising, associations and the Bureau’s Leniency Program, are essential reading for corporate compliance officers, senior management and in-house and general counsel. For an overview of the developments (with links) see: Canadian Competition Law Compliance Programs.
In Canada, like other major jurisdictions including the EU and the United States, the three major areas of competition law are: (i) conspiracy (i.e., cartels), (ii) mergers (i.e., merger control) and (iii) abuse of dominance (i.e., monopolization).
Generally speaking, under section 79 of the federal Competition Act (the “Act”), abuse of dominance occurs when a dominant firm (or firms) engages in a practice of anti-competitive acts that results in a prevention or substantial lessening of competition. Canada’s modern abuse of dominance provisions were added to the Act following significant amendments to the Act in 1986.
In Canada, like other major jurisdictions like the United States, it is not dominance per se that is prohibited, but rather the abuse of a dominant position. Also, unlike in the United States, Canada does not recognize the concept of attempted monopolization.
While the relevant test to establish abuse of dominance considers anti-competitive conduct directed at particular competitors, the requisite market impact is that competition overall in a relevant market must be prevented altogether or substantially lessened. In other words, like other provisions of the Act generally, the focus of the abuse of dominance provisions is the impact on competition generally not individual competitors (though the distinction can be difficult to draw in practice).
Since the modern Act was introduced in 1986, there have been less than 15 abuse of dominance cases brought in Canada (a number of which have been settled).
To establish abuse of dominance under the Act, which is one of the Act’s civil “reviewable matters”, the Commissioner of Competition (the “Commissioner”) must establish the following elements on application to the federal Competition Tribunal (the “Tribunal”): (1) a firm (or firms) is dominant in a relevant market; (2) the firm has engaged in a practice of anti-competitive acts; and (3) the firm’s conduct has resulted in (or is or is likely to result in) a prevention or substantial lessening of competition.
(“One or more persons substantially or completely control, throughout Canada or
any area thereof, a class or species of business”)
Generally speaking, the first element of abuse of dominance considers a firm’s market position in a market (i.e., whether it is dominant), which requires that the relevant product and geographic markets be defined.
“Control” has been held to mean market power, which in turn generally means the ability to profitably maintain prices above a competitive level for a considerable period of time. “Class or species of business” has been held to mean the relevant product market. “Canada or any area thereof” has been held to mean the relevant geographic market.
There is no bright line market share threshold for dominance under section 79. Having said that, the Tribunal has held that a market share of less than 50% would not give rise to a prima facie finding of dominance. This does not mean, however, that market power could never be found below a 50% market share. As a practical matter, however, all of the contested abuse of dominance cases in Canada have involved companies with market shares exceeding 80%.
This first branch of the test for abuse of dominance also contemplates both single firm and joint dominance. While several joint dominance cases have been brought by the Bureau, however, including the Interac and recent Waste Services case in British Columbia, there have to date been no decided joint dominance cases in Canada (i.e., both of these cases resulted in settlements).
Practice of Anti-competitive Acts
(“The person or persons have engaged in or are engaging in a
practice of anti-competitive acts”)
With respect to a “practice of anti-competitive acts”, the Tribunal has held that conduct must be engaged with an “exclusionary, predatory or disciplinary” purpose toward a competitor. A practice must also constitute more than an isolated act. In considering whether conduct is anti-competitive, subjective intent is not required and the Tribunal may consider both subjective intent and the foreseeable effects of the conduct.
Anti-competitive acts may include, for example, conduct that raises rivals’ costs, reduces their revenues or forecloses access to key suppliers, inputs/assets or suppliers. Abusive conduct may also take the form of predatory conduct – for example, through below cost (i.e., predatory) pricing.
Section 78 of the Act contains a non-exhaustive list of anti-competitive acts for the purposes of section 79. Other types of conduct have been held to be anti-competitive by the Tribunal.
While the number of contested abuse of dominance cases in Canada to date have been relatively small, the Tribunal has reviewed a reasonably wide variety of alleged anti-competitive acts. These have included: (i) non-compete clauses; (ii) the extension of patent and trade-mark rights; (iii) exclusivity provisions in contracts; (iv) other types of contract terms (e.g., first rights of refusal, penalty provisions, etc.); (v) strategic litigation; (vi) tied selling; (vii) foreclosing access to key/essential assets (i.e., “essential facilities”); (viii) discriminatory conduct towards customers; (ix) most favoured nation provisions; (x) meet-or-release clauses; (xi) acquisition of competitors; and (xii) predatory pricing.
Some of these types of conduct may be challenged under other provisions of the Act as well, notably the exclusive dealing and tied selling provisions under section 77.
Some types of conduct that could have been subject to challenge criminally under standalone provisions prior to amendments to the Act in 2009 (e.g., predatory pricing and price discrimination) may now only be reviewed civilly under section 79.
Unlike some other jurisdictions, high pricing alone (sometimes referred to as price “gouging”) has not been held to be an anti-competitive act under section 79. In this regard, the Bureau has noted that its role is not to function as a price regulator.
A valid business justification may also, in some cases, act as an explanation to alleged anti-competitive acts. In this regard, the Federal Court of Canada has held that a valid business justification is a “credible efficiency or pro-competitive explanation, unrelated to an anti-competitive purpose, for why the dominant firm engaged in the conduct alleged to be anti-competitive.” What may constitute a valid business justification, however, still remains unsettled.
Substantial Lessening of Competition
(“The practice has had, is having or is likely to have the effect of
preventing or lessening competition substantially in a market”)
In general, this element of abuse of dominance considers a company’s ability to preserve, entrench or enhance its market power. This may be achieved, for example, by a dominant firm creating or strengthening barriers to entry, thereby making it more difficult for its competitors to compete effectively.
In the leading Canadian case, Canada Pipe, it was held that the relevant question is whether the market(s) would have been substantially more competitive “but for” the dominant firm’s conduct (i.e., the state of competition in the relevant market must be analyzed both in the presence and absence of the allegedly dominant firm’s anti-competitive conduct).
There are several exceptions under section 79. Under subsection 79(4), the Tribunal must evaluate whether any impact on competition is based on “superior competitive performance”. Subsection 79(5) provides that any act engaged in pursuant only to the exercise of a right under certain intellectual property legislation, including the Copyright Act, Patent Act or Trade-marks Act, is not an anti-competitive act for the purposes of section 79. The intersection of IP rights and competition law, and the application of the Act generally to the exercise of IP rights, is a complex and largely untested area in Canada.
In addition, while not an exception per se, as a result of the Canada Pipe decision, a legitimate business purpose can be relevant in determining whether conduct has been engaged in for an anti-competitive purpose. In this regard, the Federal Court of Canada has held that a “business justification must be a credible efficiency or pro-competitive rationale for the conduct in question, which relates to and counterbalances the anti-competitive effects and/or subjective intent of the acts.” It largely remains to be seen, however, what the Tribunal will find to be a legitimate business justification for the purposes of section 79.
ENFORCEMENT AND PENALTIES
The Commissioner has exclusive jurisdiction to make applications to the Tribunal for remedial orders. In other words, no civil actions or “private access” proceedings may be commenced by private parties under the abuse of dominance provisions of the Act, though private parties may intervene before the Tribunal with leave.
Where abuse of dominance is established, the Tribunal has the power to make “remedial orders” prohibiting the continuation of anti-competitive conduct. The Tribunal may also, where it finds that an order prohibiting conduct is unlikely to restore competition in the relevant market, order a person to “take such actions … as are reasonable and as are necessary to overcome the effects of the practice” including ordering the divestiture of assets or shares.
In addition, as a result of the 2009 amendments to the Act, the Tribunal may now also order the payment of “administrative monetary penalties” (“AMPs”, essentially civil fines) of up to Cdn. $10 million (Cdn. $15 million for subsequent orders).
LINKS AND RESOURCES
Legislation: Competition Act – Competition Tribunal: Competition Tribunal, Competition Tribunal Act, Competition Tribunal Rules – Competition Bureau: Competition Bureau, Abuse of Dominance, Preventing Abuse of Market Power – Pamphlets: Abuse of Market Power – Enforcement Guidelines: The Abuse of Dominance Provisions: Sections 78 and 79 of the Competition Act
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