Archive for the 'Compliance' Category
The Competition Bureau announced last Friday in a news release that another seven individuals have pleaded guilty to criminal conspiracy charges in relation to the Bureau’s ongoing gasoline price-fixing investigation in Quebec.
FEBRUARY 1-3, 2012 – Vancouver
The Antitrust Law Section of the American Bar Association and the International Bar Association (IBA) will be holding their bi-annual International Cartel Workshop in Vancouver from February 1-3, 2012 at the Fairmont Hotel Vancouver.
From the American Bar Association:
“The International Cartel Workshop, recognized globally as the premier international cartel program offered anywhere, is presented only once every two years. The next Workshop, which will have many new features, will be held in Vancouver, Canada during February 1-3, 2012. The 2012 program will continue the Workshop’s tradition of instruction by demonstration, with experienced faculty from around the globe taking you inside a hypothetical international cartel matter — from detection by government enforcers to the disposition of government prosecutions and private damage claims. The Workshop will also highlight new developments in the law and leniency practices around the world, with leading enforcers and experienced private practitioners demonstrating how critical decisions are made on both sides of the table and providing examples of important interactions between counsel and enforcers. The 2012 Workshop’s international faculty includes many of the most accomplished cartel attorneys in the world, as well as the most senior cartel enforcement officials from a variety of jurisdictions.”
For more information about the joint ABA/IBA Cartel Workshop see:
American Bar Association – Antitrust International Cartel Workshop
On January 6, 2012, the Competition Bureau announced that two companies pleaded guilty of fixing the price of polyurethane foam and were fined a total of $12.5 million (see: Competition Bureau Sends Signal to Price-Fixers with $12.5 Million Fine).
In making the announcement, the Bureau said:
“’Yesterday’s guilty plea is the first conviction under Canada’s amended conspiracy law,’ said Melanie Aitken, Commissioner of Competition. ‘This investigation highlights the Bureau’s reinvigorated mandate to stop consumer harm caused by price-fixing, and to secure significant fines for these serious criminal offences.’
The charges are the first to arise from the Bureau’s investigation into price-fixing cartel in the polyurethane foam industry. Anyone with information relating to this investigation is encouraged to contact the Competition Bureau.
The Bureau’s investigation benefitted from cooperation under the Bureau’s Immunity and Leniency Programs, which create incentives for parties to address their criminal liability by cooperating with the Bureau in its ongoing investigation and prosecution of other alleged cartel participants.
Under the Competition Act, an agreement between competitors to fix prices, allocate markets or restrict output in Canada is a criminal offence. In March 2010, amendments to the conspiracy provision of the Act came into force.”
On January 4, 2012, the U.S. Federal Trade Commission (“FTC”) announced that it filed complaints against three of the largest U.S. suppliers of ductile iron pipe fittings for an alleged price-fixing cartel.
The FTC is also alleging that parties used a trade association (the Ductile Iron Fittings Research Association) to exchange information and monitor adherence to the cartel agreement.
See: FTC Action Protects Competition in Market for Iron Pipe Fittings Used in Municipal Water Systems
The past year has been a busy and eventful one for Canadian advertising and marketing law. Recent developments since 2010 span most key areas including the application of the “general misleading advertising” provisions of the Competition Act, the use of disclaimers, social media, e-mail marketing, performance claims and telemarketing.
At the same time, new legislation has been introduced that will impact how companies market in Canada, most notably the new federal anti-spam legislation (Bill C-28), and new cross-border enforcement initiatives were announced including a new international do-not-call enforcement network co-chaired by the CRTC.
These developments mean that it remains important for companies to effectively and efficiently navigate through Canadian advertising and marketing rules. Some of the more interesting and noteworthy developments in 2010 and 2011 are discussed below.
Most association activities are legitimate and unlikely to raise competition law concerns. However, given that many, if not most, association activities involve the direct interaction of competitors, it is prudent for association executives, staff and their advisors to take practical steps to reduce potential competition law risk.
The Canadian Institute will be holding an Advertising and Marketing Law Conference on Wednesday, January 25-26, 2012 at the Four Seasons Hotel, Toronto, Ontario.
From the Canadian Institute:
“We have obtained the highest quality speakers to present you with cutting edge analysis and practical guidance on the latest issues in this constantly evolving area of law. In fact, leaders in this field have been relying on our conference year after year to hone their skills, so join us at The Canadian Institute’s 18th Annual Advertising & Marketing Law program and be equipped with the tools necessary to be completely confident in your practice. Keynote Address: Melanie Aitken, Commissioner of Competition, Competition Bureau Canada Recent Enforcement Initiatives and Future Directions of the Competition Bureau. In the past year we have already seen, and will continue to see significant developments. You will learn about them all through our stimulating and interactive mix of sessions, including:
The latest need to know enforcement trends and priorities of the Competition Bureau
An in-depth analysis of the Anti-Spam legislation – in anticipation of it being proclaimed into force
The noteworthy differences between our Anti-Spam legislation and the U.S. Can-Spam Act
A practical session on drafting disclaimers on all forms of media
The most up-to-date tips on running contests
Risk mitigation for all emerging and recently revived marketing & advertising techniques
The latest issues and trends from the U.S. and how they may affect you”
____________________
For more information see:
The Canadian Institute – Advertising and Marketing Law Conference
On October 25, 2011, the Competition Bureau published the Commissioner of Competition’s speech given at the 2011 Canadian Bar Association’s Annual Competition Law Conference in Ottawa.
It is fair to say that the Commissioner’s recent speech presented a singular tone across the civil and criminal competition law areas: enhanced enforcement.
Of the Commissioner’s remarks, some of the more interesting points include the Bureau’s increased focus on reviewing non-notifiable mergers (i.e., transactions that do not trigger the notification thresholds under the Competition Act), the statement that the Bureau has begun to revoke markers in some immunity cases where in its view immunity applicants are not complying with its Immunity Program and a subtle suggestion that the Bureau was preparing to bring, but not quite yet in a position to commence, the first conspiracy cases under the amended section 45 (Canada’s new hard core criminal conspiracy offences). The following are some highlights from the Commissioner’s recent speech.
On December 15, 2010 Canada’s new anti-spam legislation received Royal Assent, which will, when it comes into force, be one of the strictest anti-spam regimes in the world:
An Act to promote the efficiency and adaptability of the Canadian economy by regulating certain activities that discourage reliance on electronic means of carrying out commercial activities, and to amend the Canadian Radio-television and Telecommunications Commission Act, the Competition Act, the Personal Information Protection and Electronic Documents Act and the Telecommunications Act (the “Anti-spam Act”).
Earlier this Fall, consultations on two sets of draft Regulations concluded and so the new law may come into effect later this Fall or in the Spring of 2012 (see coming into force information below).
We are pleased to announce the forthcoming publication by Carswell this fall of The Competition Law Guide for Associations in Canada jointly authored by Steve Szentesi and Mark Katz.
The Guide, the first book of its kind in Canada, will be a practical and concise summary of Canadian competition law as it applies to trade, professional and other associations. It will include an overview of the major areas of Canadian competition law that apply to associations, including the conspiracy, bid-rigging, abuse of dominance and misleading advertising provisions of the federal Competition Act.
The Guide will also include discussions of some of the specific types of association activities that can raise competition law concerns including membership criteria and discipline, codes of conduct and standard setting, meetings and information exchanges and joint association activities (e.g., joint negotiation and marketing, joint purchasing activities and lobbying and advocacy). A compendium of “best practices” (i.e., do’s and don’ts) will also be provided together with sample guidelines for the conduct of association meetings, document creation and responding to government investigations (principally search and seizures). Basic sample association compliance presentations for associations will also be included.
The Guide is intended to provide a practical resource for trade and professional association executives, their personnel and counsel to better understand Canadian competition law as it applies to association activities and to assist them in anticipating and reducing potential competition law liability.
For more information about this forthcoming book see Carswell’s product catalogue:
The Competition Law Guide for Trade Associations in Canada
Carswell will also be offering an online webinar in November in conjunction with the publication of the Guide. For more information see:
West LegalEdcenter – A Guide to Canadian Competition Law for Trade and other Associations
On September 7, 2011, the federal Competition Bureau announced that it had reached a settlement with Nivea’s Canadian distributor, Beiersdorf Canada Inc., relating to allegedly false or misleading performance claims in its advertising.
In particular, the Bureau took issue with claims that suggested that the use of skin cream could lead to weight loss. Under the terms of the consent agreement negotiated with the Bureau, Beiersdorf has agreed to pay an “administrative monetary penalty” or “AMP” of Cdn. $300,000 (“AMPs” are essentially civil fines), refund Canadian customers and remove its products from Canadian shelves.
In making its announcement, the Bureau said:
“A Bureau investigation determined that Beiersdorf made a number of deceptive claims about its “My Silhouette” product. The misleading representations were displayed on the package and on Nivea’s Web site. The representations stated that:
use of the product could lead to a “reduction of up to 3 centimetres on targeted body parts, such as thighs, hips, waist and stomach”;
My Silhouette “contains a highly effective natural Bio-Slim Complex for a slimmer looking and more defined silhouette”; and
My Silhouette “combines high performance active ingredients for a dual effect of slimming & reshaping.”
Beiersdorf’s representations also created the misleading impression that use of the product could make the skin more toned and elastic.
““Beiersdorf misled consumers by claiming a person could slim down by simply applying a skin cream,”” said Melanie Aitken, Commissioner of Competition. ““Unfortunately, consumers who purchased My Silhouette learned the hard way that there was no such easy fix.””
Under the terms of the consent agreement registered with the Competition Tribunal today, Beiersdorf is also required to publish a corrective notice on Nivea’s Canadian Web site and in major Canadian newspapers, and to pay $80,000 to cover costs associated with the Bureau’s investigation.”
On July 19th, the Competition Bureau announced that a Montreal company, Les Entreprises Promécanic Ltée, has pleaded guilty to three charges of bid-rigging and was fined $425,000 for its alleged role in rigging bids in relation to residential highrise building ventilation contracts in Montreal.
According to the Bureau, the Montreal company admitted that it was involved in coordinating with competitors to pre-determine the outcome of bids. Interestingly, this case also included an internal compensation arrangement between the parties to ensure that contracts were awarded to the pre-arranged company.
In making the announcement, the Commissioner Melanie Aitken said:
“Bid-rigging deprives Canadians of the benefits of a competitive market, including lower prices and product choice. … The Competition Bureau will continue to vigorously seek prosecution against those who thwart the forces of competition.”
The Bureau also reiterated that criminal cartels and bid-rigging remain enforcement priorities, stating that “attacking cartels, including bid-rigging offences, is one of the Bureau’s top priorities.”
In Canada, bid-rigging is a criminal offence under section 47 of the federal Competition Act, under which it is an offence to enter into an agreement, in response to a call or request for bids or tenders, to not submit a bid or tender, withdraw a bid or tender already made or submit bids or tenders that are arrived at by agreement.
Like criminal conspiracy agreements under section 45 of the Act, bid-rigging is a per se criminal offence, in that it is not necessary to establish any adverse market effects (though all elements of the offence must be proven on the criminal burden of proof – i.e., beyond a reasonable doubt).
Parties violating the bid-rigging provisions of the Act are liable to unlimited fines (i.e., a fine in the discretion of the court), imprisonment for up to 14 years, or both. It is also common for the Bureau to seek prohibition orders in bid-rigging cases, as the Bureau also did in this case, to prohibit the continuation of an offence.
Private parties that have suffered loss or damage as a result of a breach of the criminal provisions of the Act, including the bid-rigging offences under section 47, may also commence private civil actions.
For the complete Bureau news release see:
Guilty Plea and $425,000 Fine for Bid-rigging in Montreal
For more information about Canadian bid-rigging law, see: Bid-Rigging and Bid-Rigging News
For recent Canadian bid-rigging cases see: Competition Bureau Charges Eight Companies and Five Individuals in Alleged Bid-Rigging Scheme and Competition Bureau Launches Criminal Investigation into Quebec Construction Industry
On June 28th, the Competition Bureau announced that Bell Canada has agreed to stop making allegedly misleading claims relating to the prices for its services and to pay an administrative monetary penalty of $10 million.
In making the announcement, the Bureau said:
“The Bureau determined that, since December 2007, Bell has charged higher prices than advertised for many of its services, including home phone, Internet, satellite TV and wireless. The advertised prices were not in fact available, as additional mandatory fees, such as those related to TouchTone, modem rental and digital television services, were hidden from consumers in fine-print disclaimers.
…
As an example, Bell’s Web site had been advertising a bundle for home phone, Internet and television services starting as low as $69.90 per month. However, it was impossible for customers to buy the bundle for the advertised price. In fact, the lowest possible price, including the mandatory fees, was $80.27—approximately 15% higher than advertised. Customers purchasing any of the services individually were also faced with the same misleading information, as additional fees were excluded from those advertised prices as well.”
In Canada, the federal Competition Act contains both civil and criminal provisions dealing with false or misleading representations and also governs a variety of specific forms of marketing conduct including “ordinary selling price” claims, selling above an advertised price, deceptive telemarketing, promotional contests and performance claims.
Generally speaking, the “general” civil misleading advertising provisions of the Act prohibit representations to the public, for the purpose of promoting a product or business interest, that are false or misleading in a material respect. The criminal provisions, which are substantially similar, prohibit false or misleading representations that are made intentionally (i.e., knowingly or recklessly).
The maximum penalties under the civil misleading advertising provisions of the Act were also dramatically increased in 2009, as a result of sweeping amendments to the Competition Act (up to $10 million for corporations). Parties can, however, and in a number of past cases have agreed to, settle misleading advertising cases for amounts exceeding the statutory maximum fines provided under the Act – for example, to avoid potential criminal liability (as misleading advertising can be reviewed by the Bureau as either a civil matter or criminal offence).
In this case, the Bureau challenged the accuracy of price claims made by Bell, as well as hidden fees and fine-print disclaimers. According to the Bureau, its concerns were based primarily on allegedly literally false claims (i.e., services that were not available at all at the advertised prices, including for Bell’s home phone, Internet, satellite TV and wireless services).
Advertising and marketing claims can violate the misleading advertising provisions of the Act where they are either literally false or merely misleading (e.g., true claims can also violate the Act in some cases where they fail to disclose essential information).
Not surprisingly, courts and the Bureau have, as in this case, for the most part raised concerns with either literally false or misleading claims that relate to price, performance or other essential product aspects, which are the most likely to be found to be “material” for the purposes of the misleading advertising provisions of the Act (to constitute misleading advertising under the Act a claim must be shown to be not only false or misleading but also “material” – i.e., likely to cause an average consumer to purchase the product).
This most recent case involving Bell follows other recent enforcement efforts by the Bureau against high profile companies including its $10 million misleading advertising claim against Rogers (see: Competition Bureau Takes Action Against Rogers Over Misleading Advertising).
Misleading advertising and other deceptive marketing also continues to be an enforcement priority for the Bureau. For example, in a recent speech, the Commissioner of Competition Melanie Aitken said:
“We are also on the watch for misleading and fraudulent representations in areas that hit close to home for Canadians. Our goal is to address and redress such unlawful conduct and, at the same time, to build confidence in the marketplace and demonstrate the relevance of the Bureau’s work to Canadians in their everyday lives.”
See: Remarks by Melanie Aitken, Commissioner of Competition to the CBA Spring Conference: Focus on Civil.
For the complete Bureau news release in the Bell case see:
For a copy of the consent agreement filed with the Competition Tribunal see:
For more about misleading advertising law in Canada see:
The U.S. Federal Trade Commission has announced that it has filed a $450 million internet fraud civil suit against an Alberta online operator.
According to the FTC, Jesse Willms, an online operator with ten marketing companies, has:
“… raked in more than $450 million from consumers in the United States, Canada, the United Kingdom, Australia, and New Zealand by luring them into ‘free’ or ‘risk-free’ offers, and then charging them for products and services they did not want or agree to purchase. … The defendants used the lure of a ‘free’ offer to open an illegal pipeline to consumers’ credit card and bank accounts.” See: FTC Charges Online Marketers with Scamming Consumers out of Hundreds of Millions of Dollars with “Free” Trial Offers.
The FTC’s complaint alleges, among other things, that Willms and the companies he controls:
- Used deceptive tactics in offering “free trials” for various online products, including acai berry weight-loss pills, teeth whiteners and health supplements.
- Obtained consumers’ credit or debit card account numbers, by enticing them with “bogus ‘free’ or ‘risk-free’ trial offers that supposedly required only small shipping and handling fees, and also promised phony ‘bonus’ offers just for signing up” (and were charged for trial and bonus products plus recurring monthly fees).
- Made false claims about the total cost of products, recurring charges and the availability of refunds.
- Made false weight loss and cancer cure claims in relation to products.
- Provided merchant banks with false or misleading information to acquire and maintain credit and debit card processing services from the banks in light of “mounting chargeback rates and consumer complaints.”
- Concealed important terms and conditions relating to product sales.
According to the FTC, it worked closely with Canadian law enforcement officials, including the federal Competition Bureau, the Royal Canadian Mounted Police, the Alberta Partnership Against Cross Border Fraud and the Edmonton Better Business Bureau.
In Canada, the federal Competition Act contains both civil and criminal provisions dealing with false or misleading representations and also governs a variety of specific forms of marketing conduct including “ordinary selling price” claims, selling above an advertised price, deceptive telemarketing, promotional contests and performance claims.
Generally speaking, the civil misleading advertising provisions of the Act prohibit representations to the public, for the purpose of promoting a product or business interest, that are false or misleading in a material respect. The criminal provisions, which are substantially similar, prohibit false or misleading representations that are made intentionally (i.e., knowingly or recklessly).
Some of the types of claims that have been of concern for Canadian courts and the Competition Bureau in the past include literally false claims, omitting key information relating to the price or terms of sale of products and false claims regarding the performance of products (product performance claims must be supported by “adequate and proper” tests before any claim is made).
As with the FTC claims, the Competition Bureau has also pursued companies for inaccurate use of the term “free” in connection with marketing claims (see: False or Misleading Representations and Deceptive Marketing Practices and Misleading Advertising Guidelines) and has also issued specific guidelines setting out its enforcement position for online marketing and advertising (see: Application of the Competition Act to Representations on the Internet).
As a result of amendments to the Act in 2009, it is also not necessary to show that a misleading claim was made to Canadian consumers or was made in a publicly accessible place. These changes were recently made to address perceived gaps in the Act and to specifically address misleading claims made in Canada targeting foreign consumers (as is alleged in this FTC case, albeit from a U.S. enforcement perspective) and claims originating in places without direct consumer contact (e.g., in the context of online marketing operations).
For copies of the FTC’s complaint and motion for injunction see:
Complaint for Permanent Injunction and Other Equitable Relief
Motion for Preliminary Injunction and Memorandum of Points and Authorities in Support
For Jessie Willms’ news release in reply to the FTC’s allegations see:
For more information about Canadian misleading advertising law see:
On May 24th, the European Commission announced that it had fined Suez Environment and Lyonnaise des Eaux €8 million for breaching a seal during a regulatory inspection.
In making the announcement, the Commission stated:
“Joaquín Almunia, Vice President of the Commission in charge of competition policy, said: ‘Inspections are a key tool in the fight against cartels as companies rarely voluntarily hand over evidence of anti-competitive practices. Even when a company does give evidence in return for immunity, the Commission must still prove the participation of others, the practices themselves and their duration. It is therefore important that companies do not break seals, which may be necessary when there is more than one office to inspect or a day is not enough.’
From 13 to 16 April 2010 the Commission conducted an inspection at the premises of water management companies in France, including LDE, over suspicions of anti-competitive behaviour (see MEMO/10/134). Coming back the morning of the second day, the Commission officials found that a seal had been broken at LDE’s headquarters. The Commission immediately started an investigation (see IP/10/691). LDE and Suez Environnement admitted that an LDE employee breached the seal, arguing an unintentional act
Breaches of seals are a serious infringement of competition law. The Commission however took into account the immediate and constructive cooperation of Suez Environnement and LDE, which provided more information than was its obligation, when setting the fine.
The investigation into suspected anticompetitive practices in the water and waste water markets is still on-going (see MEMO/10/134).”
Like the European Commission, the Competition Bureau has a wide range of enforcement powers available to it to investigate potential violations of competition law under the Competition Act. These include the power to obtain search warrants, document production orders, orders compelling testimony under oath and wiretaps. The Bureau is increasingly resorting to these powers, particularly in relation to its enforcement priorities that include the detection and investigation of criminal cartels and deceptive and fraudulent marketing.
The Competition Act also contains obstruction provisions, which make it a criminal offence to impede or prevent (or attempt to impede or prevent) inquiries or examinations under the Act[1] (see for example: Morgan Companies Fined $1 Million for Obstruction and Price-fixing).
As such, companies and organizations that may realistically face the prospect of a competition law investigation or search at some point – for example, companies in higher risk industries including construction, oil and gas, trade associations, etc – are well advised to adopt basic search and seizure guidelines to reduce the likelihood of breaching Canadian competition law in the event of a search.
These commonly include guidelines dealing with how to deal with Bureau officials during a search, advising company/organization personnel, the control of information and PR, inspecting the search warrant and reducing the risk of breaching the obstruction provisions of the Act which can lead to additional liability (such as by breaching sealed boxes or rooms or impeding Bureau officers during a search).
For the full news release see: Commission Fines Suez Environnement and Lyonnaise des Eaux €8 Million for the Breach of a Seal During an Inspection.
For more information about the Competition Bureau’s enforcement powers see: Competition Bureau Enforcement.
[1] Obstruction of an inquiry or examination is a criminal offence under the Act, with potential penalties, on summary conviction, of a fine up to $100,000, imprisonment for up to 2 years, or both and, on indictment, an unlimited fine (i.e., in the discretion of the court), imprisonment for up to 10 years, or both (Act, subsections 64(1), (2)). Failure to comply with sections 11 (section 11 orders) or 15 (search warrants) are also criminal offences, with potential penalties, on summary conviction, of a fine up to 100,000, imprisonment for up to 2 years, or both and, on indictment, an unlimited fine (i.e., in the discretion of the court), imprisonment for up to 2 years, or both (Act, subsections 65(1), (2)). In addition, destruction or alteration of records that are sought by the Bureau under section 11 (section 11 orders) or 15 (search warrants) is punishable, on summary conviction, by fines up to 100,000, imprisonment for up to 2 years, or both and, on indictment, by unlimited fines (i.e., in the discretion of the court), imprisonment up to 10 years, or both (Act, subsection 65(3)). The Act also provides that corporate officers, directors or agents may be liable independently of whether a company is prosecuted for a failure to comply (Act, subsection 64(4)).
On May 23, 2011, the U.S. Department of Justice announced that it had filed a lawsuit to block H&R Block Inc. from acquiring TaxAct based on concerns that the proposed transaction would further consolidate the “growing U.S. digital do-it-yourself tax preparation software market” from 3 to 2 and eliminate a maverick (TaxAct).
In making the announcement, the U.S. DoJ said:
“’The combination of H&R Block and TaxACT would likely lead to millions of American taxpayers paying higher prices for digital do-it-yourself tax preparation products,’ said Christine Varney, Assistant Attorney General in charge of the Department of Justice’s Antitrust Division. ‘In addition, TaxACT has aggressively competed in the digital do-it-yourself tax preparation market with innovations such as free federal filing. If this merger is allowed to proceed, that type of innovation will be lost.’
…
According to the department’s complaint, H&R Block’s acquisition of 2SS Holdings would eliminate a company that has aggressively competed with H&R Block and disrupted the U.S. digital do-it-yourself tax preparation market through low pricing and product innovation. By ending the head-to-head competition between TaxACT and H&R Block, American taxpayers would be left with only two major digital do-it-yourself tax preparation providers. This would lead to higher prices, lower quality, and reduced innovation. In addition, by taking control of the TaxACT business, which has been a maverick in the market, it would be easier for H&R Block to coordinate on prices, quality, and other business decisions with the other remaining industry leader – Mountain View, Calif.-based Intuit, which makes personal finance programs such as Quicken and TurboTax – the department said.”
This case is interesting in that in addition to considering market shares and existing remaining competition (according to the DoJ, the top three players including H&R Block and TaxAct account for about 90% of the relevant market), the DoJ is basing its challenge on the fact that in its view TaxAct is also a maverick. Like the U.S., in Canada whether a merging party is a maverick can also be a relevant factor for considering whether competition will be substantially lessened post-merger (though, not surprisingly, whether a party is a maverick can be the subject of considerable debate and maverick cases are relatively rare). In this regard, the Competition Bureau states in its Merger Enforcement Guidelines:
“Pre-merger, effective coordination may be constrained by the activities of a particularly vigorous and effective competitor (a ‘maverick’). An acquisition of a maverick may remove this constraint on coordination by reducing incentives to behave in an aggressive manner. Such an acquisition increases the likelihood that coordinated behaviour will be effective.”
This case is also interesting, if only for being a cautionary tale, in that the DoJ is basing its challenge of the proposed transaction in part on the merging parties’ own internal documents. According to the DoJ, these include statements from H&R Block’s internal emails and presentations that a primary benefit of acquiring TaxAct is “elimination of a competitor” and the “strategic opportunities” include to “eliminate the brand to regain control of industry pricing and further price erosion”.
Given that “4c documents” are a routine and required part of merger notification in the U.S., and that strategic planning documents are also now required for merger notification filings in Canada regardless of complexity (see Notifiable Transactions Regulations, 16(1)(d)),[1] merging parties are well advised to seek competition/antitrust counsel early in the planning stages of a proposed transaction to avoid similar potential issues from arising.
For the complete DoJ news release see: Justice Department Files Antitrust Lawsuit to Stop H&R Block Inc. From Buying TaxAct.
For Canada’s merger control rules see: Competition Act, Part IX – Notifiable Transactions and Notifiable Transactions Regulations.
For an overview of merger control in Canada see: Merger Control and Investment Canada.
[1] Subparagraph 16(1)(d) of the Notifiable Transactions Regulations requires that parties to a transaction, and their affiliates, file “all studies, surveys, analyses and reports that were prepared or received by an officer or director of the corporation … for the purpose of evaluating or analysing the proposed transaction with respect to market shares, competition, competitors, markets, potential for sales growth or expansion into new products or geographic regions …” This requirement to file strategic planning documents as part of a pre-merger notification filing was recently added to the Canadian Notifiable Transactions Regulations as part of amendments to the Competition Act in 2009, and further aligns Canadian merger control rules with that in the U.S. under the HSR Act (the existing 4c documents requirement).
The U.S. Department of Justice announced that an Iowa ready-mix concrete company has plead guilty to participating in price-fixing and bid-rigging conspiracies in relation to the sale of ready-mix concrete (see: Iowa Ready-mix Concrete Company Pleads Guilty to Participating in Price-fixing and Bid-rigging Conspiracies).
In making the announcement, the U.S. DoJ stated:
“According to a three-count felony charge filed on May 18, 2011, in U.S. District Court in Sioux City, Iowa, GCC Alliance Concrete Inc., a producer of ready-mix concrete headquartered in Orange City, Iowa, participated in separate conspiracies with three different companies involving agreements to fix prices and/or to rig bids for ready-mix concrete sold to various companies in the northern district of Iowa and elsewhere. The department said that the conspiracies took place during various time periods starting as early as January 2006 to as late as August 2009. Under the terms of the plea agreement, GCC Alliance Concrete has agreed to pay a criminal fine, as determined by the court.
Ready-mix concrete is a product comprised of cement, aggregate (sand and gravel), water and other additives. The concrete generally is produced in a concrete plant and is transported by concrete-mixer trucks to work sites, where it is used in various types of construction projects, including buildings and roads.
According to court documents, GCC Alliance Concrete participated in conspiracies through its former sales manager, Steven VandeBrake, in which he engaged in discussions concerning project bids for sales of ready-mix concrete, submitted rigged bids at collusive and noncompetitive prices to customers in Iowa and elsewhere and accepted payment for sales of ready-mix concrete at predetermined prices. VandeBrake also engaged in discussions and reached agreements regarding the prices on the conspirators’ annual price lists for ready-mix concrete sold in Iowa on behalf of GCC Alliance Concrete, the department said.”
Like the United States, in Canada conspiracies (agreements between actual or potential competitors to fix prices, divide markets or restrict output) and bid-rigging (including agreements not to bid or submit bids based on agreement) are criminal offences subject to potential significant penalties including imprisonment for up to 14 years, fines up to $25 million, or both (per count).
Also like other major jurisdictions, many criminal conspiracies have been formed in Canada historically in industries in which it is difficult to compete other than on price – for example, cement, steel and other homogenous products (e.g., chemical inputs).
Unlike the U.S., however, of which this case is a sober reminder, it is relatively rare for Canadian accused to be sentenced to imprisonment, although this has been gradually been changing, particularly in relation to contraventions of the deceptive marketing provisions of the Competition Act (i.e., in relation to fraudulent marketing activities).
For more information about Canada’s conspiracy and bid-rigging laws see: Conspiracy (Cartels), Conspiracy FAQs, Bid-rigging and Bid-rigging News.
On May 18, 2011, the Competition Bureau issued its new Fee and Service Standards Handbook for Written Opinions to reflect the significant amendments to the Competition Act that came into force in 2009 and 2010 (see news release: Competition Bureau Updates Fee and Service Standards Handbook for Written Opinions).
In releasing its new Fee and Service Standards Handbook, the Bureau said:
“The changes to the Handbook were necessary to reflect amendments to the Act that came into force in 2009 and 2010, including changes to the conspiracy provision, the addition of a provision governing competitor collaborations that substantially prevent or lessen competition, and changes to other provisions of the Act relating to certain pricing practices. The release of the Handbook follows the issuance of the Bureau’s revised Fee and Services Standards Handbook for Mergers and Merger Related Matters on October 22, 2010.”
Under section 124.1 of the Act, any person may apply to the Commissioner, together with supporting information, for a binding written opinion regarding the applicability of any provision of the Act. A written opinion is binding on the Commissioner provided that all material facts relating to the proposed conduct have been submitted for an opinion (which remains binding for as long as the material facts on which the opinion was based remain substantially unchanged and the conduct is carried out substantially as proposed).
Binding written opinions are available, subject to the Commissioner’s discretion to issue an opinion, for proposed conduct only under the following provisions of the Competition Act, among others:
price maintenance (section 76), exclusive dealing, tied selling or market restriction (section 77), abuse of dominance (section 79), the new civil agreements provision (section 90.1), conspiracy (section 45), misleading representations and deceptive marketing practices (sections 52 to 55.1 and 74.01 to 74.06), deceptive telemarketing (section 52.1), deceptive prize notices (section 53), multi-level marketing and pyramid selling (sections 55 and 55.1), performance claims (section 74.01(1)(b)) and promotional contests (section 74.06).
For past written opinions issued by the Bureau see: Written Opinions.
Key updates in the Bureau’s new Handbook include:
- How the Commissioner of Competition determines whether to issue binding written opinions under section 124.1 of the Competition Act for proposed business conduct (while the issuance of binding advisory opinions under the Act is discretionary, the Bureau will in some cases provide non-binding informal advice regarding proposed business conduct).
- What information is required by the Bureau to commence applicable service standard periods (the Bureau has adopted non-binding service standard periods for its internal performance, including for the issuance of binding written opinions).
- When service standard periods may be paused or terminated by the Bureau.
- How the Bureau determines the complexity level for a proposed practice or conduct (the Bureau assigns complexity designations – namely non-complex or complex – to matters including the issuance of written opinions and merger review, which determines the Bureau’s service standard periods).
- There have been no changes to the required fees or service standard periods applicable to written opinion requests under section 124.1 of the Act.
For a copy of the Bureau’s new Handbook see: Fee and Service Standards Handbook for Written Opinions.
The Corporate Counsel Committee of the Canadian Bar Association’s National Competition Law Section will be presenting a “Brown Bag” Teleseminar: Competition Compliance: Up Your Game, Add to the Bottom Line, and Be a Corporate Star on Wednesday, June 1, 2011.
From the CBA National Competition Law Section:
“Today, in Canada, corporations and their managers that do not comply with competition law play a high risk game of facing massive fines, class action lawsuits, and event jail – not only at home, but wherever else they do business around the globe. Learn the latest techniques and secrets of how to make compliance part of your company’s DNA, hot to turn procurement staff into cartel scouts, and hot cutting edge screening techniques are enhancing detection of violations worldwide.”
For more information about the Brown Bag see: Program Flyer and CBA National Competition Law Section.
For more information about Canadian competition law compliance see: Competition Law Compliance Programs.
The Competition Bureau has announced that Kason Industries Inc. plead guilty for its part in a customer allocation conspiracy and was fined $250,000 by the Federal Court of Canada.
In its news release, the Bureau stated:
“The Competition Bureau announced today that Kason Industries Inc. was fined $250,000 by the Federal Court after pleading guilty on March 8, 2011 to a criminal charge that it conspired to allocate customers for the sale of refrigeration and food service equipment components in Canada and the U.S.
Between January 2005 and December 2008, Kason Industries Inc. engaged in meetings with Component Hardware Group Inc., to allocate their major customers, allowing them to maintain uncompetitive prices.
During this period, Kason was responsible for approximately 40% of the overall sales of food service equipment components in Canada and the U.S., worth nearly $3.16 million to their allocated Canadian customers.”
According to the Bureau, its investigation included the cooperation of the parties to the alleged conspiracy under the Bureau’s formal Immunity and Leniency Programs, as well as coordination from the U.S. Department of Justice.
This case is interesting given that Canadian market allocation cases, both involving the allocation of customers or geographic markets, have been relatively uncommon in Canada.
As such, this case may be an indication that the Bureau’s ongoing criminal investigations are focused on testing the boundaries of Canada’s new criminal conspiracy laws, which were significantly amended in 2010 to expressly prohibit market allocation agreements among competitors, in addition to price-fixing and output restriction conspiracies.
For the Bureau’s news release, see: Competition Bureau Exposes Customer Allocation Conspiracy.
The Competition Bureau has announced that it has reached a settlement with two spa retailers in relation to allegedly false energy savings claims (see: Spa Retailers Required to Stop Making False ENERGY Star Claims). According to the Bureau, the retailers had made misleading representations incorrectly conveying the impression that their hot tubs or insulation met the criteria of the ENERGY STAR Program.
This case is the most recent example of the Bureau taking action against allegedly false performance claims in the spa retailing sector (see for example: Competition Bureau Takes Action Against Spa Retailers For False Energy Efficiency Claims, Competition Bureau Reaches Further Agreements with Hot Tub Retailers on Unsupported Claims and Competition Bureau Cracks Down on Unsupported Energy Savings Claims). Somewhat curiously, the Bureau has moved from investigating fuel energy savings devices a few years ago to enforcement against the (not immediately clear) evils of spa performance claims.
The Competition Bureau and Canadian Standards Association (CSA) have also jointly published enforcement guidelines addressed specifically to environmental marketing (see: Environmental Claims: A Guide for Industry and Advertisers) which, according to the Bureau, are intended to “provide the business community with the necessary tools to ensure that environmental marketing is not misleading, while providing consumers with greater assurance about the accuracy of environmental claims.”
In making the announcement, the Bureau said:
“Under the terms of a consent agreement filed today with the Competition Tribunal, which has the force of a Tribunal order, “EcoSmart Spas” and “Dynasty Spas”, as well as a director of both retailers, Brent Marsall, have agreed to cease making misleading representations and to pay an administrative monetary penalty of $130,000. Corrective notices will also be published in all stores, and on their Web site, to inform customers of the misleading representations. In addition, a corporate compliance program will be developed and implemented for both retailers. …
On June 29, 2010, the Bureau announced that it had filed an application with the Competition Tribunal seeking to prohibit Mr. Marsall and his companies from making claims that the products were eligible for ENERGY STAR certification. The ENERGY STAR Program is an international standard for energy efficient and environmentally friendly consumer products. No hot tubs, spas, or insulation products for sale in Canada are eligible for certification by, or in association with, the ENERGY STAR Program.
Since announcing a crackdown on unsupported energy savings claims in June 2009, the Bureau has reached agreements with all Canadian hot tub and spa retailers identified as having made similar false or misleading claims, except EcoSmart Spas and Dynasty Spas. The Bureau was forced to start enforcement action against Mr. Marsall, EcoSmart Spas and Dynasty Spas. The consent agreement resolves the matter with respect to these final violations.
Canadian and American government agencies cooperated in the Bureau’s investigation. This includes the United States Environmental Protection Agency, which owns and manages the ENERGY STAR Program, and the Office of Energy Efficiency of Natural Resources Canada, which administers the program in Canada.”
While misleading advertising and deceptive marketing practices are (and generally have been) an enforcement priority for the Competition Bureau, it has frequently focused on false performance claims made by distributors and retailers to ground its claims. In this regard, false product performance claims can violate the “general” criminal (section 52) or civil (section 74.01) misleading advertising provisions of the Competition Act (i.e., where a claim is either literally false merely the “general impression” of a performance claim is misleading).
The Competition Act also prohibits false performance claims (prohibiting representations to the public about the “performance, efficacy or length of life of a product that is not based on an adequate and proper test”), which can be particularly relevant to the advertising and marketing of products where the speed, efficiency or other performance is a key marketing component.
While performance claims themselves are not prohibited, any testing or verification must be conducted before a claim is made and the onus, if challenged, is on the person making the claim to show that it is based on an “adequate and proper test”. As such, while performance claims are a common and often legitimate means to distinguish products from competitors, it is important that proper testing be performed (or appropriate statistics or support are obtained) before performance claims are made.
In this regard, the Competition Tribunal recently held that a non-exhaustive list of factors are relevant to determine whether testing is “adequate and proper”. In Canada (Commissioner of Competition) v. Imperial Brush Co. (2008), 2008 Comp. Trib. 2 (Comp. Trib.), the Tribunal held:
“[i]n summary, and in respect of this case, I conclude that a ‘proper and adequate’ test depends on the claim made as understood by the common person; must be reflective of the risk or harm which the product is designed to prevent or assist in preventing; must be done under controlled circumstances or in conditions which exclude external variables or take account in a measurable way for such variables; are conducted on more than one independent sample wherever possible; results need not be measured against a test of certainty but must be reasonable given the nature of the harm at issue and establish that it is the product itself which causes the desired effect in a material manner; and must be performed regardless of the size of the seller’s organization or the anticipated volume of sales.”
In order to be “adequate and proper”, however, testing does not need to be 100% reliable or the best scientific testing that could have been performed (i.e., testing does not need to meet a test of certainty).
For more information about misleading advertising law in Canada see: Misleading Advertising, Misleading Advertising FAQs and Misleading Advertising News.
The U.K. Office of Fair Trading has announced that seven insurance companies and two IT software and service providers have offered formal commitments to resolve the OFT’s concerns in relation to an information exchange system implemented by the companies. For a copy of the OFT’s Press Release, see: Motor insurers agree to limit data exchange after OFT investigation.
In making its announcement, the OFT said:
“Insurers Ageas Insurance Limited (formally Fortis Insurance Limited), Aviva plc, AXA Insurance UK plc, Liverpool Victoria Friendly Society, RBS Insurance Group Limited, Royal Sun Alliance and Zurich Insurance plc, and the IT software and service providers Experian Limited and SSP Limited have all offered formal commitments to the OFT. This follows an OFT investigation which identified an increased risk of price coordination among motor insurers using a specialist market analysis tool by Experian called Whatif? Private Motor.
The OFT limited the scope of its investigation to a small number of parties with a view to achieving a swift and effective outcome. However, the investigation potentially has wider implications as the Experian tool is just one of a number of similar products used throughout the insurance industry.
The tool allowed insurers to access not only the pricing information they themselves provided to brokers but also pricing information supplied by other competing insurers. The OFT warned the firms that the information exchanged through WhatIf? Private Motor raised competition law concerns because:
- the analysis tool enabled insurers to access individualised and highly disaggregated pricing data for vast numbers of permutations of customer risks across most competing private motor insurers that sold through brokers
- the information accessible through the analysis tool was not genuinely public information. While it would, in theory, be possible to replicate the information by obtaining individual quotes from insurers, this would be almost impossible in practice as it would require obtaining hundreds of thousands of individual quotes
- insurers were able to access information about their competitors’ future pricing intentions as the tool was received by insurers in advance of the pricing information going ‘live’ in insurance policies sold by brokers, and
- the analysis tool was updated and provided to subscribing insurers on a frequent and regular (monthly) basis.
The nine companies under investigation are proposing to address the OFT’s concerns by giving formal commitments that will result in the insurers no longer being able to access each other’s individual pricing information through Whatif? Private Motor. Instead, they propose to exchange pricing information through the analysis tool only if that information meets certain principles agreed with the OFT. These would require the pricing information to be anonymised, aggregated across at least five insurers and already ‘live’ in broker-sold policies.”
Like Canada, the U.K. Competition Act 1998 prohibits certain types of agreements that may have a damaging effect on competition (in Canada, some types of agreements between competitors, including price-fixing and market allocation/division agreements, are “per se” illegal without any requirement to show anti-competitive effects, while others are potentially subject to civil review where they may prevent or lessen competition substantially in a relevant market).
Unlike Canada, where an agreement or arrangement must be proven, U.K. and EU competition rules prohibit not only certain types of anti-competitive agreements, but also “concerted practices” that have the object or effect of preventing, restricting or distorting competition.
As such, the potential risk associated with the exchange of competitively sensitive information between competitors, including through third parties such as customers or suppliers, is considered to be higher in the U.K. and Europe than in Canada (though is still considered to be a high risk area under both Canadian and American competition/antitrust law). In this regard, courts and competition/antitrust enforcement agencies are inherently suspicious when direct competitors exchange competitively sensitive information (or engage in discussions regarding confidential or competitively sensitive aspects of their businesses).
Some of the types of competitively sensitive information that can raise issues when exchanged among direct competitors without adequate precautions include information relating to individual pricing (e.g., current or future pricing, pricing formulas and discounts), costs, sales and terms of sale, territories, capacity and production data, output, customers and business and strategic plans.
The principal risk of information exchanges between competitors is that they can lead to agreements that violate the criminal conspiracy provisions under section 45 of the Competition Act. In addition, even where an express agreement does not exist, the exchange of competitively sensitive information between competitors can allow the federal Competition Bureau or a court to more easily infer the existence of an agreement. For example, in its recently issued Competitor Collaboration Guidelines, the Competition Bureau has highlighted the potential risk that an information exchange between competitors can lead to the inference of an agreement that contravenes the Competition Act.
Having said that, before the 2009 amendments to the Competition Act, it was thought (at least in theory – as there had never been a decided case) that an information agreement itself could, depending on the circumstances, contravene the criminal conspiracy provisions of the Act (i.e., where an information exchange agreement prevented or lessened competition “unduly”).
This could no longer be the case under Canada’s newly amended conspiracy rules under the Competition Act, given that section 45 of the Act now only prohibits three specific categories of agreements between actual or potential competitors: price-fixing, market allocation and supply restriction agreements.
An information exchange agreement between competitors could, however, now contravene the new civil agreements provision (section 90.1), where the Competition Bureau was able to prove that it prevented or lessened competition substantially in one or more relevant markets. It would, however, be necessary to establish both the existence of an agreement between two or more competitors, as well as the other necessary elements under section 90.1 (including the requisite market effects test – i.e., that competition has been prevented or lessened substantially as a result of the information exchange or agreement).
By G.R. Bhatia of Luthra & Luthra (India)
‘Dawn Raids’ colloquially known as ‘unannounced search & seizure’ is a common tool that may be used by the investigating arm of a competition law agency to gather documentary evidence in an anti-trust probe. Such visits by officials of the competition law agency are increasingly becoming a global phenomenon. The competition law jurisprudence also suggests a higher rate of detection of anti- trust infringements in cases where raids are undertaken. To mention few:
(a) In Feb. 2009, EU and US competition authorities launched a joint, fully synchronized dawn raid on the refrigeration compressor industry across these two continents and the searches primarily contributed in proving the infringement of the competition law provisions[2];
(b) In Oct. 2006, in Singapore, the CCS carried out dawn raids on six pest control companies after a complaint of collusion in submitting tenders for termite treatment projects was received and recently these six companies were fined S$ 262,759.66[3];
(c) In Dec. 2009, in Poland, the Polish Competition Authority undertook biggest dawn raids on major cement players. The raid revealed documents inter-alia relating to resale price maintenance for an unprecedented period of 11 years and a total fine of 108 million euros was imposed on seven cement makers[4];
(d) In South Africa, a dawn raid was conducted on the offices of Airlines Association of Southern Africa for alleged settlement agreement; in April 2007[5], the Commission unleashed a dawn raid upon the tyre industry, seizing documents from Dunlop Tyres International, Bridgestone SA and SA Tyre Manufacturers Conference; in May, 2010, raid was conducted on four electric cable companies for alleged price fixing[6];
(e) In Nov. 2010, in Brazil, the Secretariat Economic Law (SDE) has raided a handful of companies and home of former Government official for suspected bid rigging conspiracy[7]; and
(f) In June, 2009, in Japan, the JFTC conducted dawn raids on three galvanized steel sheet makers for participating in a price fixing cartel and these companies were fined an aggregate of 10 billion Yen, the highest amount yet imposed by the JFTC[8].
These surprise inspections occur without warning and are usually conducted at times when least expected often at the crack of dawn and/or during weekends. The ‘raids’ are conducted in a covert manner leaving no scope with the party under investigation to scuttle the search in any manner and also not to give any opportunity to ‘sanitize’ the records. In case of multi-national corporations, simultaneous raids can be coordinated in several jurisdictions and at different locations in the same jurisdiction. Further, raids can be conducted regardless of size of the enterprise, nature of business and both at business and personal premises.
Cartel conduct is one of the fertile grounds for dawn raids. As obtaining convincing evidence on price fixing and other concerted practices between rivals is extremely tricky, there can be little doubt that the frequency of dawn raids will be stepped up steeply in times to come in such cases.
In line with international trend, the Indian Competition Law also empowers the Director General (the investigating arm of the CCI) to undertake such ‘search and seizure’[9]. An irrefutable fact is that a raid is the most intrusive and disruptive experience that is faced by an alleged delinquent. Businesses and their associations against which investigations are ordered pursuant to commencement of an Inquiry for suspected infringement of the Act, run a risk of their personal/official premises being ‘raided’ by the Director General (‘DG’) [10]. Thus, there is immense need to understand the (I) the limits, conditions and manner in which the ‘unannounced raid’ can be undertaken by the DG, (II) the rights of investigated enterprise; (III) the obligations of an enterprise faced with such search and seizure and (IV) post raid actions.
The scope, ambit and gravity of these dimensions are of great relevance for an “enterprise & its principal officers’ as unearthing of documents in the wake of a raid is the foundation and precursor to the final order of an Agency. Further, there is an obligation to cooperate/assist the investigator failing which penal provisions can be triggered. The in-house legal counsel and also the most senior executive of the company at the premises also need to take note of this aspect of law as he/she is the first port of call for a company which is faced with anti trust inspector at its door.
LIMITS, CONDITIONS & MANNER IN WHICH UNANNOUNCED RAID CAN BE UNDERTAKEN BY THE DIRECTOR GENERAL (DG)
(i) Though, the office of DG is meant to assist the CCI in investigating into any contravention of Act/ Rules/ Regulations, however, it is incumbent upon the DG to be fair & impartial in carrying out the investigation as well in drawing his findings/ conclusions in its report. The process and product of DG have to be reasoned in order to meet the counter arguments of the charged enterprise or the referrer, as the case may be;
(ii) Investigation by the DG begins only when directed by the CCI[11] and formation of a prima face case of contravention of the Act by the CCI ought not influence the investigation undertaken by the DG;
(iii) On receipt of order of investigation, the DG in the first instance is to send a ‘questionnaire’ to the alleged charged party to respond and to furnish documents/evidence in support thereof. The DG is vested with powers of a civil court in carrying out investigation and therefore, it is advisable for the addressee to furnish correct & complete information/documents failing which (a) non compliance/ disobedience liability devolves on the addressee[12] and (b) prompts DG to invoke powers of ‘search and seizure’ with the approval of Chief Metropolitan Magistrate (‘CMM’), Delhi;
(iv) The analogous power in DG of seizure as are vested in an Inspector under Section 240A of the Companies Act, 1956 are not open ended. The ‘search & seizure’ can be undertaken only when he has reasonable ground to believe that the books and papers of, or relating to, any company or other body corporate may be destroyed, mutilated, altered, falsified or secreted. The expression ‘reason to believe’ has been viewed as:
The crucial expression ‘reason to believe’ postulates belief and the existence of reasons for that belief. The word ‘reason’ means cause or justification and the word ‘believe’ means to accept as true or to have faith in it. The belief may not be open to scrutiny as it is the final conclusion arrived at by the officer concerned, as a result of mental exercise made by him on the information received. The existence of reasons to believe is supposed to be the check, a limitation upon the power[13].
The expression ‘reason to believe’ is stronger than the expression ‘is satisfied’. Belief should not be irrational and arbitrary. To put it differently, it must be reasonable and must be based on reasons which are material. [14]
Belief must be held in good faith. It can not be merely pretence. It is open to court to examine whether reasons for belief have a rational nexus or a relevant bearing to the formation of belief and are not extraneous or irrelevant for the purpose of the Section. To that limited extent, action of the assessing officer in initiating proceedings under section 147 can be challenged in a court of law.[15]
There must be reasons to induce belief. The same should be by reason of omission or failure on the part of assessed to disclosed fully and truly his income.[16]
(v) The principles as emerged from the case law(s), are (a) the authority must be in possession of information and that there is reason to believe that the addressee would not disclose or that it will not part with; (b) the information must be in existence and it should not be merely rumour; (c) the active application of mind on the information is a condition precedent and is open to scrutiny; (d) the court will not go into the question of sufficiency of material and that it will not sit in appeal[17].
The jurisprudence evolved clearly indicates that the DG does not have unbridled powers to invoke provisions relating to ‘unannounced raid’ at the premises of the charged party and/or person related thereto and that law and precedents do prescribe the limits, conditions and manner in which DG can resort to ‘search & seizure’.
THE RIGHTS OF THE COMPANY FACING “RAID”
(i) The representative(s) of a raided company may request the DG to allow a reasonable time for the in-house counsel or external counsel to arrive. However, it is not obligatory for the investigator to wait for the arrival of the counsel;
(ii) The representative has a right to ask for the identity and the order of the CMM, Delhi and the scope of dawn raid. It is advisable to confirm the authenticity of the dawn raid by telephoning the Director General; (iii) Take steps which are necessary to preserve the documents or prevent any interference with them;
(iii) Keep full record of all questions asked and answers given and make copies of all documents copied by the officials;
(iv) The representative can object to the review or taking of copies of privileged documents including confidential communication between the client and its external attorney;
(v) It is not within the power of the investigating officer to (a) use force against any person, (b) examine any document or take copy of documents which are not relevant for the purpose of dawn raid and (c) documents which enjoy legal privilege (d) compel answering a question which leads to self incrimination; and
(vi) Seek clarification from the Investigator, if the question posed is complicated or vague.
OBLIGATIONS OF THE INVESTIGATED COMPANY
It is obligatory on the functionary of the investigated company to:
(i) furnish to the point and correct explanation/answer relating to a document covered in the search. The person answering on behalf of company should ensure that his response is not false or misleading beside being not based on speculation and keep a record of all questions and answers;
(ii) furnish location of a document as per person’s knowledge and belief, electronic information to be produced in hard or soft copy. DG can seize only those mails/electronic records which are relevant to the investigation and which do not enjoy privilege. In case the whole email box is seized, the inspector can open the box subsequently in the presence of authorised official of the investigated enterprise and the inspector has to return all other mails which are personal and not construed to be relevant for the investigation. On 2nd November, 2010, the Paris Court of Appeal has objected to the seizure of the whole content of email boxes by the French Competition Authority. The Court, however, ruled that the seizure of certain personal documents belonging to employees or documents that may be irrelevant to the investigation, does not invalidate the entire search which was pre approved by the judge.[18] However, there is need to strike a balance between the powers of DG during dawn-raids and the data protection and privacy of the individuals. The principle as to legitimacy, proportionality and transparency during such dawn-raids needs to be observed and these be incorporated in the Manual of Office Procedure which is under preparation by the Office of DG[19] ;
(iii) not to obstruct or recklessly destroy/shred or otherwise falsify or conceal the documents of which production has been required;
(iv) not providing information knowingly which is materially false.
POST DAWN RAID STEPS BY THE INVESTIGATED COMPANY
Before the DG team departs:
There is need to determine if/when the inspector will return next day, ensure to have copy of documents (both electronic and otherwise) taken by inspector, make a request for a copy of written records of interviews taken by the inspector and make a record in the event of refusal. Take a copy of minutes and ensure recording of disputes and disagreements therein. In the notes, classify printed/electronics documents into three categories (i) not contested, (ii) outside scope and (iii) privileged. In the event of non resolution of dispute or doubt as to document being privileged or outside the scope of investigation, the DG be requested to keep the document in the sealed cover for later’s consideration with the company’s lawyers.
After the DG Leaves
Compile all your notes, recheck inspector’s written records including interviews and computer searches, prepare your own report and conduct final meeting with the in-house legal head/external counsel for review to identify potential issues, analyse and assess risk and scope of enquiry.
The DG can keep in his custody the documents/ records seized for such period not later than the conclusion of the investigation as he considers necessary and thereafter there is an obligation to return the same to the investigated company or any other person from whom custody these were seized[20]. The DG is also required to inform this position to the CMM, Delhi with whose approval the dawn raid was undertaken.
Key Take Aways:
Undoubtedly,’ dawn raids’ tarnish the image and goodwill of a raided company and its management. It dampens the business prospects of the raided company in the ever growing competitive environment. Thus, it is imperative for business and their associations to ward off and take guard of such unpleasant visits and visitors. Prudence suggests that the business and the concerned trade bodies should have in place a detailed programme to effectively meet the requirements of such search & seizure.
Enterprises against which enquiries have already commenced should in the first instance extend full cooperation/assistance and furnish complete and correct information/documents within the given time. Adherence to this golden principle not only rules out triggering of penalty provisions but also minimises the risk of being raided by the DG. However, taking cue from global experience, size and success in business does attract scrutiny through such mode. It is therefore, critical for such target company to designate an officer(s) as a ‘Dawn Raid Warden’ who should ensure a full fledged programme encompassing (i) dawn raid training, (ii) guidelines/checklists before, during and after the dawn-raids, (iii) instant response team during the visit and (iv) follow up action. It is difficult to suggest a tailor-made programme in view of variance as to nature & size of business, total market and structure thereof, nature of trade practices being probed etc and all these heterogeneities necessitate a customised detailed dawn raid programme.
[1] G R Bhatia is Partner & Head of Competition Law Practice, Luthra & Luthra Law Offices (a full service law firm) India. He advises and represents before the Competition Commission of India (CCI)/Competition Appellate Tribunal/Supreme Court on competition issues. He is an Expert on Competition Law before London Court of International Arbitration. Mr. Bhatia is former Additional Director General, CCI and Monopolies & Restrictive Trade Practice Commission (MRTPC). He was associated with amendments to the Indian Competition Act and formulation of Regulations which set out procedure of enquiries by the CCI. He underwent intensive training with JFTC and KFTC. He held office of Registrar of Companies & Official Liquidator of a State in India. He is on the Editorial Board of Chartered Secretary and a Consulting Editor, Manupatra Competition Law Reports and faculty with Institute of Chartered Accountants of India and the Institute of Chartered Secretaries of India. He contributes regularly articles on competition matters and are available on the firm’s website Luthra & Luthra (www.luthra.com).
[2]http://europa.eu/rapid/pressReleasesAction.do?reference=SPEECH/09/454&format=HTML&aged=1&language=EN&guiLanguage=en
[3] www.drewnapier.com/pdf/Quarterly%20Update%20Q109.pdf
[4] www.ec.europa.eu/competition/ecn/brief/01_2010/cement_pl.pdf
[5] www.ens.co.za/…/briefs/10_11_08%2001%2001lr1011LAW_AL_10b.pdf
[6] http://www.abndigital.com/news/sens/497910.htm
[7] http://www.latinlawyer.com/news/article/41205/brazil-raids-former-state-officials-amid-ambulance-probe/
[8] http://www.globalcompetitionreview.com/news/article/16239/japan-fine-three-steel-companies/
[9] Section 41 of the Act lays down the duties & powers of the Director General. Sub-section (3) thereof envisages that the powers as they apply to an Inspector in terms of Section 240 and 240A of the Companies Act, 1956 shall apply to an investigation made by the Director General. In terms of Section 240A, where in the course of investigation, the Inspector has reasonable ground to believe that the books and papers of , or relating to any company or any other body corporate, may be destroyed, mutilated, altered, falsified or secreted, as the case may be, the Inspector, on order of Tribunal/Magistrate, may (a) enter with such assistance to such places where the books are kept, (b) to search in the manner as may be specified in the order and (c) seize the books and papers as he considers necessary. In terms of an explanation below sub section (3), the DG, CCI may search and seize with the approval of CMM, Delhi.
It is interesting to note that such power was never invoked by the Director General (Investigation & Research) under the repealed MRTP Act, 1969 but it seems to be history going by the presentations made by DG in some of the recent concluded workshops/seminars.
[10] DG means the Director General appointed under sub-section (1) of Section 16, Competition Act, 2002 and includes any Additional, Joint, Deputy or Assistant Director General appointed under that section 16(1), Competition Act, 2002.
[11] Section 26(1) stipulates that on receipt of a reference from Central/State Government or a statutory authority or on its own knowledge or information received under Section 19, if the Commission is of the opinion that there exists a prima facie case, it shall direct the DG to cause an investigation to be made into the matter.
[12] In Nov., 2010, the CCI, on the application of DG, imposed a fine Rs. 1 crore on Kingfisher Airlines for not furnishing information as sought by DG in order to carry out investigation into the carrier’s alleged strategic agreement with another private player, the Jet Airways – News item in Financial Express of 22nd Nov., 2010 under the caption ‘CCI slaps Rs. 1crore fine on Kingfisher’. However, the Competition Appellate Tribunal had directed the CCI not to recover the fine amount from the airline company until the matter is heard by the CCI on Jan., 2011- News item Financial Express of 2nd Dec., 2010 under the caption’ Appellate Tribunal stays CCI’s Rs. 1 crore penalty on Kingfisher’.
[13] In Barium Chemicals Limited vs Company Law Board (MANU/SC/ 0037/1966) & : (1966) 36 Comp Cas 639 (SC) : 1966 Suppl SCR 311 at 361: AIR 1967 SC 295 AT 324.
[14] In Ganga Saran & Sons (P) Ltd Vs. ITO : MANU/SC/0297/1981L1981) 130ITR 1 (SC).
[15] In S. Narayanappa Vs. CIT MANU/SC/0124/1966: (1967) 63ITR219(SC).
[16] In R. Dalmia Vs UOI MANU/DE/0408/1971: (1972) 84ITR616 (Delhi).
[17] Guide to SEBI Capital Issue Debentures and Listing (2003) pg 282 by K Sekhar.
[18] World Data Protection Report- ISSN 1473-3579 Volume 10, Number 5- May 2010 -Janssen-Claig case illustrates how the investigative powers of the competition authority may conflict with employee’s right to privacy and shows that there is a possible conflict of laws between data protection Act and competition law. While the plaintiff argued that the competition officials had used unnecessary and disproportionate means to gather the evidence, including global and massive seizures, which disrupted the normal functioning of the company. However, the court cancelled seizure of three computer files but validated the investigation on the grounds there was no evidence that the officials had not selected in advance the documents seized, nor that the seizure was disproportionate. The Court also validated the investigation on the grounds that it had used only methods enabling them to preserve the accuracy and reliability of the relevant documents.
[19] Presentation by the Director General on 19th Oct., 2010 in 2nd International Conference on Competition Law, held in New Delhi to commemorate the Ist Anniversary of the Competition Appellate Tribunal.
[20] Before return of these seized documents, the DG can place identification marks in terms of proviso below Section 240(1A) of the Companies Act, 1956.
The Competition Bureau announced earlier today that it has laid criminal charges against eight companies and five individuals in Quebec that are accused of rigging bids for private sector ventilation contracts for residential highrise buildings in the Montreal area (see: Charges Laid in Residential Construction Bid-Rigging Scheme in Montreal and Competition Bureau, Backgrounder, Charges Laid in Residential Construction Bid-Rigging Scheme in Montreal).
In making its announcement, the Bureau stated:
“The Bureau uncovered evidence indicating that several companies specializing in ventilation, air conditioning and heating services, secretly coordinated their bids in order to pre-determine the winners of the contracts, while blocking out honest competitors.
…
The Bureau’s investigation found evidence of criminal activity in five competitive bidding processes between 2003 and 2005, for contracts worth approximately $8 million. The contracts in question relate to the supply and installation of ventilation and/or air conditioning systems in residential highrise construction projects in the greater Montreal region.”
According to the Bureau, it began investigating this matter in 2005 based on a tip from a former employee of one of the companies charged and the objective of the bidders was to pre-determine the winners of the contracts (while blocking other companies that were not involved in the alleged bid-rigging scheme).
Some of the common types of bid-rigging that can violate the criminal bid-rigging offences under the Competition Act 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).
Section 47 of the federal Competition Act sets out three distinct criminal bid-rigging offences, making it a criminal offence to: (i) agree to not submit a bid or tender, (ii) agree to withdraw a bid or tender already submitted (which was recently added to the Act as a result of March, 2009 amendments) or (iii) submit a bid or tender that is arrived at by agreement.
In Canada, bid-rigging is ”per se” illegal, in that no anti-competitive effects on a relevant market (or markets) need to be established in order to make out an offence. However, all of the elements need to be established on the criminal standard (i.e., beyond a reasonable doubt).
This most recent case also appears to signal a more aggressive enforcement approach by the Bureau under the helm of the new Commissioner, which has included the recent Visa/MasterCard price maintenance case, misleading advertising case against Rogers in Ontario (relating to allegations from telecom new entrants Wind Mobile and Mobilicity) and the recently concluded CREA MLS abuse of dominance case.
For more information about bid-rigging law in Canada see: Bid-Rigging.
OUR SERVICES
We practice federal competition law, have provided Canadian competition law advice to clients across Canada and internationally and provide a full range of competition law and foreign investment law services including in relation to the criminal conspiracy, merger, abuse of dominance, misleading advertising and deceptive marketing provisions of the federal Competition Act. Our bid-rigging law services include:
- Advice on the application of the bid rigging provisions of the Competition Act.
- Reviewing competitive bid and tender documents for compliance.
- Advice in relation to bid consortiums, joint ventures and joint bidding.
- Advice on the Competition Bureau’s immunity and leniency programs.
The Competition Bureau has announced that it will update its Fee and Service Standards Handbook to reflect amendments to the Competition Act made in 2009 and 2010.
In making the announcement, the Bureau stated:
“The changes to the Handbook are necessary to reflect amendments to the Act that came into force in 2009 and 2010, including changes to the conspiracy provision, the addition of a provision governing competitor collaborations that substantially prevent or lessen competition, and changes to other provisions of the Act relating to certain pricing practices.
Since 2002, the Bureau has required the payment of fees for binding written opinions provided pursuant to section 124.1 of the Act regarding the applicability of the Act’s provisions to a proposed practice or conduct. Service standards were established in order to provide applicants with timely and predictable periods for written opinions, and to comply with Treasury Board requirements with respect to the imposition of fees.
The revised Handbook will provide updated guidance on how the Commissioner of Competition generally determines whether to exercise her discretion to provide a binding written opinion on the applicability of the provisions requested by an applicant to a proposed practice or conduct, how the Bureau determines the complexity of a proposed practice or conduct, the information required by the Bureau to commence the applicable service standard, and when service standards may be paused or terminated.”
One of the key aspects of the Bureau’s review of its Fee and Service Standards Handbook is guidance on when the Commissioner will issue section 124.1 advisory opinions.
While the Competition Act provides that the Commissioner may issue binding advisory opinions on the application of the Act to business activities, that power is discretionary (i.e., the Commissioner is not required to issue an opinion in any particular case, and in some cases will decline to issue and opinion).
In addition, the time-frames for issuance of advisory opinions, when issued, can be highly inconsistent ranging from a few weeks to many months in some cases.
The Competition Bureau announced earlier today that it has commenced legal proceedings against Rogers to stop what, according to the Bureau, constitutes misleading advertising in connection with Rogers’ Chatr discount cell phone service.
In making the announcement, the Bureau said:
“Rogers’ Canada-wide advertising campaign claims that consumers subscribing to Rogers’ Chatr brand would experience “fewer dropped calls than new wireless carriers” and have “no worries about dropped calls”.
The Bureau’s investigation, which involved an extensive review of technical data, obtained from a number of sources, led the Bureau to conclude that there is no discernible difference in dropped call rates between Rogers/Chatr and new entrants.
“We take misleading advertising very seriously,” said Melanie Aitken, Commissioner of Competition. “Consumers deserve accurate information when making purchasing decisions and need to have confidence they are not being misled by false advertising campaigns.”
The Government of Canada opened up the domestic cell phone market in 2008 with a spectrum auction that made additional frequencies available to new wireless service providers.”
The legal proceedings begun by the Bureau are being brought in the Ontario Superior Court of Justice. In its claim, the Bureau is seeking an order that Rogers: (i) stop its advertising campaign, (ii) pay an administrative monetary penalty of $10 million, (iii) pay restitution to affected customers and (iv) issue a corrective notice.
The Bureau’s announcement follows a series of competition law related disputes in the telecom sector that have included an abuse of dominance complaint by Mobilicity against Rogers apparently alleging that Rogers is abusing its dominant position in the use of “fighting” or “flanking” brands (see: Mobilicity Files Competition Bureau Complaint Against Rogers) and recent novel proceedings in which the Supreme Court of British Columbia struck out Novus Entertainment’s claims against Shaw Cablesystems based on the abuse of dominance provisions of the Competition Act (and in particular predatory pricing related claims) (see: British Columbia Supreme Court Rejects Novus’ Section 79 Predatory Pricing Claim Against Shaw).
The proceedings commenced against Rogers appear to be based on complaints made by Wind Mobile about Rogers advertising claims for its Chatr brand. For example, the Globe and Mail reported that Wind Mobile had filed a complaint with the Bureau and quoted Wind Mobile’s Chairman Anthony Lacavera as saying that “there is absolutely no solid or objective technical basis for Chatr’s claim to have more network reliability and fewer dropped calls than Wind.” See: Wind Mobile Files Competition Bureau Complaint Against Rogers.
In this regard, the Commissioner of Competition, Melanie Aitken, stated:
“The spectrum auction was intended to enhance competition in the wireless sector,” Ms. Aitken said. “New entrants attempting to gain a foothold in the market should not be discredited by misleading claims made by their competitors.”
The Bureau’s recent announcement, with allegations against Rogers that have not been proven, is a sober reminder of the new penalties for misleading advertising under the Competition Act, which were enacted as part of sweeping amendments to the Act in 2009. As a result of the amendments, significantly increased penalties for civil false or misleading representations were introduced including “administrative monetary penalties” (essentially civil fines) of up to $750,000 for individuals ($1 million for subsequent orders) and $10 million for corporations ($15 million for subsequent orders), which are more than ten times the previous penalties.
Misleading Advertising Law in Canada
The federal Competition Act contains both criminal and civil provisions that prohibit false or misleading representations. The general civil misleading advertising provision of the Act prohibits representations to the public, to promote a product or any business interest, that are false or misleading in a material respect. For a representation to be false or misleading under the civil misleading advertising provision, it must be established on the civil burden of proof (i.e., on a balance of probabilities) that: (i) a representation has been made, (ii) to the public, (iii) to promote a product (including services) or any business interest, (iv) the representation is false or misleading and (v) that it is false or misleading in a “material” respect. The criminal misleading advertising provision of the Act is substantially similar, except that in order to establish criminal misleading advertising, it must also be established on the criminal burden of proof (i.e., beyond a reasonable doubt) that a representation was intentionally made (i.e., was made “knowingly or recklessly”).
Performance Claims under the Competition Act
In addition to the “general misleading advertising” provisions, the Competition Act also prohibits false performance claims, and in particular prohibits representations to the public about the “performance, efficacy or length of life of a product” that is not based on an “adequate and proper test.” While performance claims themselves are not prohibited, any testing or verification of a performance claim must be performed before the claim is made and the onus is on the person making the representation to prove that the claim is based on an adequate and proper test. As such, while performance claims can be a legitimate and effective way to distinguish goods or services from competitors, it is important that adequate and proper testing is performed (or appropriate statistics or support are obtained) before performance claims are made. (the federal Competition Tribunal has also recently held that there a non-exhaustive list of factors are relevant in considering whether testing is “adequate and proper”).
Promotional contests in Canada are primarily governed by the Competition Act, the Criminal Code, privacy legislation (Personal Information Protection and Electronic Documents Act, PIPEDA) and the common law of contract.
In addition, Quebec has separate legislation that applies to promotional contests (the Act respecting lotteries, publicity contests and amusement machines). As such, promotional contest law in Canada is combination of federal and provincial regulatory law, criminal law and common law contract law.
Moreover, given that the improper operation of a promotional contest can lead to civil and/or criminal liability under the Competition Act, the Criminal Code, based on a contractual (i.e., common law) challenge or failure to comply with Quebec legislative requirements, it is critical to review proposed promotional contests for legal compliance. Failure to properly structure a promotional contest in Canada can have disastrous consequences.
For example, a Manitoba real estate investment company recently paid a penalty of more than $150,000 for operating a promotional contest allegedly in contravention of the promotional contest provisions of the Act. See: Resort Company Penalized for Running Misleading Contests.
Competition Act
Short Rules
The Competition Act for the most part requires that certain disclosure be made when conducting “any contest, lottery, game of chance or skill, or mixed chance and skill, or otherwise disposes of any product or other benefit …” Some of the key requirements under the Act include: (i) disclosing the number and approximate value of prizes, (ii) disclosing the area (or areas) to which they relate and (iii) any fact that may materially affect the odds of winning. In addition, the Act provides that the distribution of prizes cannot be unduly delayed.
As a result of the disclosure requirements set out in the Act, most contest organizers provide a short version of a contest’s terms (frequently referred to as “short rules”) in all point-of-purchase materials regardless of media (i.e., in all print, online and other electronic media), with a full version of the contest rules available on request (and often on the contest organizer’s website). Point-of-purchase disclosure often includes the number and approximate value of prizes, any regional allocation, the skill testing question requirement, information relating to the odds of winning, the closing date for the contest and information relating to the odds of winning.
While short, and usually straightforward, it is critical that the required statutory disclosure be drafted precisely and correctly. It is also important that the timing for the launch of a contest and promotional materials ensure that the necessary disclosure be included in all public marketing materials.
General Misleading Advertising Provisions
In addition to specific rules relating to promotional contests, the “general misleading advertising” provisions of the Competition Act also apply to the operation of promotional contests, and should not be underestimated.
In this regard, the criminal and civil false or misleading representation provisions of the Competition Act prohibit representations to the public, for the purpose of promoting a product or any business interest, that is false or misleading in a material respect. The penalties for contravention of the misleading advertising provisions of the Competition Act can also be severe, including civil fines of up to $750,000 (for individuals) and $10 million (for corporations) and orders to cease the conduct, publish corrective notices or make restitution to consumers.
In sum, the penalties under the Competition Act can be significant if you don’t get a contest right. For example, a Manitoba real estate investment company recently paid a penalty of more than $150,000 for operating a promotional contest allegedly in contravention of the promotional contest provisions of the Act. See: Resort Company Penalized for Running Misleading Contests.
As such, it is important that the terms of promotional contests (i.e., short rules, long rules and any other advertising or marketing materials) not be false or misleading in a material respect (i.e., do not raise issues under the general misleading advertising provisions of the Competition Act, which means that in addition to the detailed statutory disclosure, the overall impression of contest claims must practically be considered as part of a review).
Internet Contests & Promotions – Special Considerations
The Competition Bureau also takes the position that the promotional contest provisions of the Competition Act, as well as the general misleading advertising provisions, apply to Internet marketing and advertising (see:Application of the Competition Act to Representations on the Internet (Enforcement Guidelines)). In this regard, the Bureau states that special considerations may apply in the online environment to ensure that the required statutory disclosure for promotional contests is met:
“Pursuant to section 74.06 of the Act, in contests designed to promote a product or business interest, adequate and fair disclosure must be made of certain information, including facts which materially affect the chances of winning. … The Bureau takes the position that all required disclosures must be displayed in such a way that they are likely to be read. In the context of representations made on-line, what is considered adequately displayed will depend on the format and design of the Web site. For example, a notice of a contest should not require readers to take an active step, such as sending an e-mail or placing a phone call, in order to obtain the required information. The Bureau does not consider clicking on a clearly labelled hyperlink as being an ‘active step.’”
Criminal Code
In addition to the promotional contest provisions in the Competition Act, the federal Criminal Code also governs promotional contests in Canada (sections 206 and 207 of the Code). In particular, the Criminal Codemakes it a criminal offence to operate illegal lotteries.
While the relevant provisions of the Criminal Code are complex and somewhat archaic, in general an illegal lottery consists of: (i) a prize, (ii) chance and (iii) consideration (i.e., something of value provided by contestants as a condition for eligibility or participation in a contest).
Based on the Criminal Code requirements, promotional contest organizers often remove either the consideration element (e.g., providing that “no purchase is necessary”), the chance element (e.g., adding a skill element, for example making the contest a skill contest or including a skill-testing question), or both in order to remove a promotional contest from the scope of the illegal lottery provisions of the Criminal Code.
It is worth noting, however, that the determination of what constitutes “consideration” and “chance” can be challenging and complex in some cases, and that what little case law exists is inconsistent and old.
Common Law of Contract
In addition to the regulatory requirements set out in the federal Competition Act and Criminal Code, promotional contests have also been held to be contracts. For this reason, promotional contests are also governed by the common law of contract in Canada.
As such, in addition to ensuring compliance with the statutory requirements of the Competition Act and Criminal Code, as well as Quebec legislation if applicable and privacy legislation, it is also important that the terms and conditions of a promotional contest be carefully structured to reduce potential contractual liability.
This includes a careful review of short rules, long rules and winner release documentation (e.g., winner release forms) to ensure that the terms are precise, enforceable and to reduce the likelihood of a credible contractual challenge. As well, potential technical problems and other contingencies should also be addressed, including in relation to unavailability of prizes as disclosed, technical problems relating to the operation of the contest (e.g., computer, Internet or server issues), as well as typically giving contest organizers broad and unilateral discretion to resolve contingencies that may arise.
Privacy Legislation
Canadian privacy legislation also applies to promotional contests. In this regard, contest organizers should be cognizant of federal privacy legislative requirements under PIPEDA, which include requiring consent for the collection, use, storage and disclosure of personal information collected in relation to the operation of a contest. Such requirements may include, for example, advising contestants of how their personal information will be used, as well as the contest organizer’s practices and policies in relation to the security (and destruction) of contestants’ personal information once a contest has closed.
Conclusion & Practical Considerations
As promotional contests in Canada are, generally speaking, governed by the Competition Act, Criminal Code, contract law, privacy law and Quebec regulation if operated in Quebec, it is critical that promotional contest documentation and marketing materials (e.g., point-of-purchase marketing) be prepared with care, and to ensure that the key legal requirements are met.
Some of the key practical aspects in effectively designing a promotional contest in Canada, and to avoid disasters, include attention and care in the drafting of mandatory short rules (short statutory disclosure required under the Competition Act), long rules (which raise many similar issues as drafting effective contracts), reviewing all print and electronic disclosure to ensure that the statutory disclosure requirements are met (and that no significant misleading advertising issues are raised) and that the basic, but important, requirements of the Criminal Code are met (including removing either the chance element, consideration element, or both).
In sum, while the basic law of promotional contests is Canada is not generally complex, the devil is in the details and it is critical that care be taken to ensure that all of the key legal requirements are met.
RECENT CANADIAN PROMOTIONAL CONTEST CASES
On November 23, 2009 the Competition Bureau announced that Elkhorn Ranch & Resort Ltd., a Manitoba-based company that sells vacation property time shares, agreed to pay Cdn. $170,000 for operating promotional contests in alleged contravention of the promotional contest provisions of the federal Competition Act. In its News Release, the Bureau stated:
“After conducting an investigation into Elkhorn’s 2006 and 2007 promotional contests, the Bureau concluded that the company had run contests without fair disclosure of accurate odds of winning and without ensuring that winners were selected on a random basis. Elkhorn’s contests also gave the misleading impression that the grand prize was a brand new SUV, when the prize, if awarded, was a one or two–year lease on an SUV, with stringent conditions. The contests were primarily associated with the marketing of Elkhorn’s time share properties in Western Canada. Consumers were solicited by phone, at trade shows and at time share presentations.”
As part of its settlement with the Bureau, under a consent agreement with the Bureau, Elkhorn is required to: (i) pay an administrative monetary penalty of $150,000, (ii) pay the costs of the Bureau’s investigation in the amount of $20,000, (iii) ensure that all of its future contests are conducted fairly and with full disclosure, (iv) publish corrective notices in select newspapers and on its websites and (v) adopt a corporate compliance program to ensure compliance with the deceptive marketing provisions of the Competition Act.
In addition to general misleading advertising provisions, the Competition Act also contains a number of other provisions that regulate a range of marketing activities including bait and switch selling, selling above advertised price, multi-level marketing plans, pyramid selling schemes, deceptive telemarketing and the “ordinary selling price” provisions (dealing with sales) and promotional contests.
While enforcement of the promotional contest rules under the Competition Act is relatively uncommon, the Bureau does commence investigations for breaches of these rules from time to time and this most recent case is a sober reminder of the potential dangers of being offside the rules. It is also worth noting that, as a result of recent amendments, the penalties for contravention of the civil false or misleading representation provisions of the Competition Act have also been significantly increased to up to $750,000 (for individuals) and $10 million (for corporations) (and higher for subsequent orders).
“A [compliance] program also 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 its 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.” (Competition Bureau, Corporate Compliance Programs Information Bulletin)
OVERVIEW
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 involve the interaction of direct competitors, they can in some cases raise serious competition law concerns under the federal Competition Act.
In general, some of 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 elements of competition.
Some of the specific association activities that can be problematic include: (i) board and membership meetings, (ii) exchanges of competitively sensitive information (e.g., 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.
This summary discusses Canadian competition law as it applies to trade and professional associations, including an overview of the Competition Act, key sections relevant to associations, some association activities that can raise competition law issues and searches and investigations.
CANADIAN COMPETITION LAW
Legislation
Competition law in Canada is governed by the federal Competition Act (the “Act”). The Act, which contains both criminal offences and civil “reviewable matters”, is law of “general application” in that it applies to most business activities in Canada including many trade association activities.
Purposes
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 law 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 provisions. These include the conspiracy, bid-rigging, criminal misleading advertising and deceptive telemarketing sections.
The Act also contains a number of civil (non-criminal) “reviewable matters” sections. These include the price maintenance, civil misleading advertising, refusal to deal, abuse of dominance and tied selling, exclusive dealing and market restriction sections.
Enforcement
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“).
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, softwood lumber dealers, surveyors and wholesale grocers, among many others.
A great 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 others.
Recent Canadian cases have involved the Saskatchewan Roofing Contractors Association (2009 – alleged bid-rigging issues) and The Canadian Real Estate Association (2009/2010 – alleged abuse of dominance).
Under the Act, the Commissioner’s enforcement powers include the power to make voluntary information requests, obtain compulsory production orders and search warrants and orders to interview employees under oath. In addition, the Commissioner has the power to apply to the federal Competition Tribunal (the “Tribunal”) for orders and refer criminal matters to the Director of Public Prosecutions (“DPP”) for criminal prosecution.
Proceedings may be commenced under the Act by the Bureau itself as a result of its own investigations or based on complaints from customers, competitors, suppliers or other industry participants.
In addition to Bureau investigations, private parties may commence private civil actions against persons contravening the criminal sections of the Act, including the criminal conspiracy and criminal misleading advertising sections, and make “private access” applications to the Tribunal for Tribunal orders.
In the context of trade associations, for example, private actions can be commenced by competitors or customers that have suffered damages as a result of the activities of an association or its members.
The Bureau has also recently issued new enforcement guidelines setting out its enforcement approach to collaborations between competitors, including trade association activities (Competitor Collaboration Guidelines).
Penalties
Contravention of the Act can be a serious matter and lead to significant penalties, lost time and negative publicity for companies, associations and their management. Potential penalties under the Act include criminal fines, civil “administrative monetary penalties” (essentially civil fines), imprisonment, damages as a result of private civil actions and prohibition orders or injunctions to stop conduct and/or take positive action (e.g., adopt compliance programs).
For example, penalties under the Act include criminal fines of up to $25 million or imprisonment for up to 14 years (under the criminal conspiracy provisions) and civil fines of up to $10 million (under the abuse of dominance provisions). In addition, there is also potential director and officer liability under the Act.
Recent fines in the last year, in connection with price-fixing investigations, include $3 million against suppliers of air compressors, $17 million against air cargo suppliers, $2.7 million against gasoline suppliers and $5.6 million against hydrogen peroxide suppliers. Recent penalties imposed on individuals include 54 months imprisonment (served in the community) imposed on gasoline company employees in the Quebec gasoline price-fixing case.
As a practical matter, the Bureau is more likely to proceed criminally (as opposed to civilly) 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.
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 that are particularly relevant to trade association activities include the criminal conspiracy, abuse of dominance, price maintenance and misleading advertising sections of the Act. These are discussed in more detail below.
Criminal Conspiracy
Section 45 of the Act, which is in many cases the most important section for trade associations to understand and comply with, contains three criminal conspiracy offences. Under section 45, three types of “hard core” anti-competitive agreements are illegal:
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 or service (e.g., agreements to set prices, discounts, minimum prices or establish fee tariffs). “Price” is broadly defined to include discounts, rebates, allowances, etc.
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 or service (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).
Output restriction agreements. Finally, section 45 also 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 or service (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).
In general, the risk for trade associations under the criminal conspiracy sections is twofold: (i) that an association may become a party to an anti-competitive agreement (or aid or abet an agreement) or (ii) that trade association members may become parties to an anti-competitive agreement.
To establish these offences, it is not necessary to prove that there have been any negative effects on any particular 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 not necessary to show that an agreement was ever carried out (i.e., the offence is in the agreement not in the implementation). An agreement can also be, and in a great many cases has been, 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 proven by other evidence or so-called “facilitating factors” – e.g., evidence of meetings, exchanges of competitively sensitive information, behaviour that can only be explained based on the existence of an agreement, etc.).
Finally, with respect to the criminal conspiracy offences, there is now a new “ancillary restraints” defense, which provides a defense under section 45 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 restriction agreements between competitors.
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, or both. In addition, court orders (so-called “prohibition orders”) may also be imposed to stop the conduct. In addition, private parties that have suffered actual loss or damage as a result of criminal conduct under the Act, including under section 45, may commence private civil damages actions.
Bid Rigging
The criminal bid-rigging provisions of the Act are also 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 a criminal offence to: (i) agree to not submit a bid or tender, (ii) agree to withdraw a bid or tender already submitted (which was added to the Act as part of recent amendments) or (iii) submit a bid or tender that is arrived at by agreement.
Bid-rigging is ”per se” illegal, in that no anti-competitive effects on a relevant market (or markets) needs to be established in order to make out an offence (though, like conspiracy, all elements need to be established on the criminal burden – 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 by the successful bidder).
To establish a bid rigging offence, 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.
Bid-rigging cannot be established where an agreement only involves affiliates (i.e., where an agreement or arrangement is entered into only between affiliates, as defined in the Act). In addition, a bid-rigging offence can 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 when a bid is submitted or withdrawn.
The penalties for contravention of the bid-rigging provisions can be severe and include unlimited fines (i.e., fines in the discretion of the court), imprisonment for up to 14 years, or both.
Abuse of Dominance
The abuse of dominance provisions of the Act are also potentially relevant to trade and professional associations. Under sections 78 and 79 of the Act, abuse of dominance occurs where: (i) a dominant firm (or firms) in a market, (ii) has engaged in or is engaging in a practice of anti-competitive acts that has an intended negative effect on a competitor that is exclusionary, predatory or disciplinary, (iii) with the result that competition has been, is being or is likely to be prevented or lessened substantially.
Evaluating whether conduct constitutes abuse of dominance under the Act can be highly complex and require significant economic analysis, but in general terms usually involves anti-competitive conduct by one or more dominant firms that is either predatory (e.g., predatory pricing) or exclusionary (e.g., making it more difficult for some firms to compete, such as through long-term exclusive contracts).
Some of the types of trade association activities that can potentially raise abuse of dominance issues include efforts to restrict access to essential services or markets or set educational, qualification or membership standards that make it more difficult for competitors to enter or effectively compete.
The penalties for abuse of dominance include “administrative monetary penalties” (essentially civil fines) of up to $10 million ($15 million for repeat contraventions).
Price Maintenance
The new civil price maintenance sections of the Act under section 76 can also, in some cases, be relevant to trade association activities.
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 is potentially relevant to association activities 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 the other person’s low pricing policy.
Where the elements for price maintenance are established under section 76, the Tribunal has the power to make “remedial orders” for parties to cease the conduct.
Misleading Advertising
The misleading advertising provisions of the Act can also be highly relevant to both trade associations and their members. In this regard, the Act contains both criminal and civil misleading advertising provisions, which apply to false or misleading representations to promote the supply or use of a product, including services, or any business interest.
For a representation to be false or misleading, it must be shown that it has been made to the public, to promote a product or business interest, that it is literally false or misleading (or creates a false or misleading general impression) and that it is “material” (i.e., likely to influence a consumer into buying or using the product, or otherwise alter their conduct). The criminal misleading advertising provision is substantially similar, but requires in addition to the above elements that a representation be made intentionally (i.e., knowingly or recklessly).
The penalties for civil misleading advertising include “administrative monetary penalties” (essentially civil fines) of up to $750,000 (for individuals) and up to $10 million (for corporations), an order to cease the activity or an order to publish a corrective notice. The penalties for criminal misleading advertising include fines 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).
Based on the potential liability, associations and their members should ensure that they do not engage in false or misleading representations in their day-to-day business dealings and that their rules and bylaws do not overly restrict legitimate pro-competitive advertising and marketing by members.
TRADE ASSOCIATION ACTIVITIES
Some of the specific association activities that can raise competition law concerns in some cases include: (i) association meetings, (ii) information exchanges (i.e., exchanges of competitively sensitive information 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.
Association Meetings
Meetings are a normal part of professional and trade association activities and can be related to 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., lead to a price-fixing or other agreement that contravenes the Act) or can make it easier for a court or the Bureau to infer that anti-competitive conduct has occurred (e.g., use a meeting, if precautions are not taken, as evidence of an anti-competitive agreement).
As such, associations should adopt and comply with basic conduct of meeting guidelines.
Information Exchanges
Information exchanges (i.e., the exchange of competitively sensitive information between competitors) 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, current/future business plans and strategic plans and markets.
The reason the exchange or discussion of such information can potentially raise issues under the Act is because, when shared with competitors, it can in some cases lead to either the formation of an anti-competitive agreement (e.g., a price fixing agreement) or be used to infer the existence of an anti-competitive agreement (e.g., the exchange of pricing information between competitors followed by a stabilization of price).
Based on the potential risk, associations should adopt basic compliance guidelines for information exchanges between members in relation to legitimate association activities such as benchmarking, research, lobbying or other joint member initiatives.
Association Rules and Bylaws
Association rules, policies or bylaws can also, in some instances, raise competition law issues 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 of the Act.
For example, the Bureau, in its recently issued Competitor Collaboration Guidelines, 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.
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 and Marketing
The misleading advertising provisions of the Act, discussed above, can also be potentially relevant to associations.
As such, 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 to reduce the likelihood that such rules themselves (i.e., association restrictions on member advertising) may be challenged under the Act.
SEARCHES AND INVESTIGATIONS
Finally, the Bureau has a wide range of enforcement powers available to it 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. 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 under the Act.
As such, associations and other organizations should adopt basic “search and seizure guidelines” in the event of a Bureau search or investigation. Such guidelines are meant to assist associations and other organizations to protect their rights (e.g., by claiming solicitor-client privilege to protect the confidentiality of legally privileged documents) and to reduce the potential liability that can arise in the context of a search (e.g., to avoid allegations of obstruction).
OUR SERVICES
We practice federal competition law, have provided competition law and compliance advice to clients across Canada and provide a full range of competition law services in relation to the criminal conspiracy, merger, abuse of dominance, misleading advertising and deceptive marketing provisions of the federal Competition Act. We regularly counsel trade associations and their executives and personnel on compliance with theCompetition Act. Our Canadian competition law services for trade associations include:
- Trade association competition law compliance programs.
- Competition law compliance seminars and talks for association executives.
- Audits and compliance reviews of trade association activities.
- Advice on the application of the recently amended Competition Act.
- Vetting trade association meetings, conventions and communications.
- Reviewing trade association rules, bylaws, policies and voluntary codes.
- General competition law and competition compliance advice for associations.
CONTACT US
We provide a full range of Canadian competition/antitrust law and consulting services to domestic and international clients. Contact Us
OUR BOOKS
The Competition Law Guide for Trade Associations in Canada is a practical and concise summary of Canadian competition law as it applies to trade, professional and other associations.
OUR COURSES
Competition Law and REALTORS®: What You Say and Do Matters was designed by ACRE with the assistance of CREA to help Canadian REALTORS® understand and comply with Canadian competition law.
This course is available
to members of Canadian
real estate boards.
For more information see ACRE