Valid business justification.
The Federal Court held in the Canada Pipe case that a valid business justification for a challenged practice could potentially offset, and provide an alternative explanation, for conduct that may otherwise be anti-competitive for the purposes of the abuse of dominance provisions of the Competition Act (under sections 78 and 79).
Competition Bureau, Enforcement Guidelines, The Abuse of Dominance Provisions: Sections 78 and 79 of the Competition Act (2012): “An additional factor in the determination of whether an act is anti-competitive is whether it was in furtherance of a legitimate business objective. A business justification is not a defence to an allegation that a firm has engaged in anti-competitive conduct, but rather an alternative explanation for the overriding purpose of that conduct, if and as required, that a firm can put forward where the Bureau believes that purpose to be anti-competitive. For such purposes, proof of the existence of some legitimate business purpose underlying the conduct is not sufficient. Rather, the Federal Court of Appeal has said that ‘a business justification must be a credible efficiency or pro-competitive rationale for the conduct in question, attributable to the respondent, which relates to and counterbalances the anti-competitive effects and/or subjective intent of the acts.’ Depending on the circumstances, this could include, for example, reducing the firm’s costs of production or operation, or improvements in technology or production processes that result in innovative new products or improvements in product quality or service. When assessing the overriding purpose of an alleged anti-competitive practice, the Bureau will examine the credibility of any efficiency or pro-competitive claims raised by the allegedly dominant firm(s), their link to the alleged anti-competitive practice, and the likelihood of these claims being achieved.”
Canada (Commissioner of Competition) v. Canada Pipe Co. (Federal Court of Appeal): “In appropriate circumstances, proof of a valid business justification for the conduct in question can overcome the deemed intention arising from the actual or foreseeable effects of the conduct, by showing that such anti-competitive effects are not in fact the overriding purpose of the conduct in question. In essence, a valid business justification provides an alternative explanation as to why the impugned act was performed. To be relevant in the context of paragraph 79(1)(b), a business justification must be a credible efficiency or pro-competitive rationale for the conduct in question, attributable to the respondent, which relates to and counterbalances the anti-competitive effects and/or subjective intent of the acts.”
Competition Bureau, Report, Round Table on Monopsony and Buyer Power (2008): “The Canadian abuse provisions do not have an efficiency defence, but business justifications that are pro-competitive will be considered when assessing particular conduct. Such a justification can overcome the reasonably foreseeable effects of the conduct if the firm(s) can show that those anti-competitive effects were not the overall purpose of that conduct. The Bureau considers credible efficiency or pro-competitive rationales to generally fall into one of two categories: activities that minimise costs of production or operation, independent of the elimination or discipline of a rival; and activities that improve a firm’s product, service, or some other aspect of the firm’s business.”
OECD, Reviews of Regulatory Reform, Regulatory Reform in Canada, The Role of Competition Policy in Regulatory Reform (2002): “[Vertical agreements] try to control aspects of distribution. The reasons for concern are the same—that the agreements might lead to increased prices, lower quantity (or poorer quality), or prevention of entry and innovation. Because the competitive effects of vertical agreements can be more complex than those of horizontal agreements, the legal treatment of different kinds of vertical agreements varies even more than for horizontal agreements. One basic type of agreement is resale price maintenance: vertical agreements can control minimum, or maximum, prices. In some settings, the result can be to curb market abuses by distributors. In others, though, it can be to duplicate or enforce a horizontal cartel. Agreements granting exclusive dealing rights or territories can encourage greater effort to sell the supplier’s product, or they can protect distributors from competition or prevent entry by other suppliers. Depending on the circumstances, agreements about product combinations, such as requiring distributors to carry full lines or tying different products together, can either facilitate or discourage introduction of new products. Franchising often involves a complex of vertical agreements with potential competitive significance: a franchise agreement may contain provisions about competition within geographic territories, about exclusive dealing for supplies, and about rights to intellectual property such as trademarks.”
European Commission, Commission Notice, Guidelines on Vertical Restraints (2010): “an agreement or concerted practice entered into between two or more undertakings each of which operates, for the purposes of the agreement or the concerted practice, at a different level of the production or distribution chain, and relating to the conditions under which the parties may purchase, sell or resell certain goods or services”.
OECD, Policy Roundtable, Vertical Mergers (2007): “Prior to a vertical merger the two firms are either in, or there is a possibility that they might be in, a customer-supplier relationship. Pre-transaction, the firms are located at different stages of production or distribution, with one producing an input used by the other. Post-merger, the two separate firms are replaced by a single firm that now performs both activities or stages of production. A vertical merger replaces an actual or potential market transaction, where an input is traded between firms, with a transfer within the same firm. … A vertical merger can involve integration forward, where the upstream firm (pre-merger the seller) acquires a downstream firm (pre-merger the buyer), for example the acquisition by a shoe manufacturer of a shoe retailer or an automobile manufacturer of a taxi service or car rental firm. A vertical merger involving backwards integration occurs when the buyer acquires the seller, for example the acquisition by an automobile manufacturer of a parts supplier or an aluminum manufacturer that purchases bauxite mines.”
U.S. Federal Trade Commission, Guide to the Antitrust Laws: “Vertical mergers involve firms in a buyer-seller relationship — for example, a manufacturer merging with a supplier of an input product, or a manufacturer merging with a distributor of its finished products. Vertical mergers can generate significant cost savings and improve coordination of manufacturing or distribution. But some vertical mergers present competitive problems. For instance, a vertical merger can make it difficult for competitors to gain access to an important component product or to an important channel of distribution. This problem occurs when the merged firm gains the ability and incentive to limit its rivals’ access to key inputs or outlets.”
U.S. Federal Trade Commission, FTC Guide to the Antitrust Laws: “The antitrust laws also affect a variety of ‘vertical’ relationships – those involving firms at different levels of the supply chain – such as manufacturer-dealer or supplier-manufacturer.”
European Commission, Guidelines on Vertical Restraints: “Vertical restraints are agreements or concerted practices entered into between two or more companies each of which operates, for the purposes of the agreement, at a different level of the production or distribution chain, and relating to the conditions under which the parties may purchase, sell or resell certain goods or services.”
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