Canadian COMPETITION LAW

July 15, 2010

The Competition Bureau announced today that yet more criminal charges have been laid in the ongoing Quebec gasoline price-fixing case against twenty-five individuals and three companies.  The accused are alleged to have fixed the price of gasoline at the pump in several regions of Quebec including Victoriaville, Thetford Mines and Sherbrooke.

In announcing the new charges, the Bureau stated:

“Unless new evidence comes to light, these charges mark the final charges in the largest criminal investigation in the history of the Competition Bureau. Investigators seized over 100,000 records, searched 90 locations, and intercepted thousands of telephone conversations over the course of the investigation.

These charges demonstrate that we are unwavering in our commitment to crack down on cartels,” said Melanie Aitken, Commissioner of Competition. “This case of price-fixing in the gasoline industry illustrates how cartels cheat honest taxpayers out of their money.”

The Bureau also stated that it was conducting other investigations into price-fixing in the gasoline industry outside Quebec.

With respect to the scope of its investigation, the Bureau stated:

“The charges were broken up into two groups owing to the size of the case. Today’s new charges bring the total to 38 individuals and 14 companies accused in this case. These are new charges against important alleged cartel participants stemming from the extensive Bureau investigation that culminated in a first wave of charges in June 2008. The names of the individuals and companies charged are available on the Bureau’s Web site. A complete list of the pleas, fines, and sentences in this case to date is also available.

The Bureau’s investigation found evidence that gas retailers or their representatives in the four regional markets phoned one another and agreed on the price they would charge customers for gasoline. The evidence suggests that the overwhelming majority of gasoline retailers in these markets participated in the cartel.”

In its investigation, the Bureau used wiretaps and searches, as well as utilizing its Immunity and Leniency programs.

For more information, see the Bureau’s Backgrounder, Gas Prices FAQs and the Bureau’s outline of how the Bureau investigates marketplace activities:Criminal Investigations — Basic Process.

CANADA’S NEW CRIMINAL CONSPIRACY REGIME

As a result of the recent sweeping amendments to the Competition Act (the “Act”), the criminal conspiracy provisions of the Act, considered to a “cornerstone” of the Act and Canadian competition law, have been amended. Effective March 12, 2010, Canada will now have a dual-track criminal conspiracy regime with “per se” criminal offences for three forms of “hard core” criminal agreements (i.e., with no requirement to show any adverse market effects on a relevant market(s)) and a second civil reviewable matters provision under which other non-hard core agreements may be subject to review.

This new U.S.-style criminal conspiracy regime is meant to make the enforcement of hard-core criminal cartel activity easier (by removing the former competitive effects test) while at the same time allowing non-hard core agreements, such as joint venture and other agreements where a more detailed analysis of the potential effects on a market may be warranted, to be subject to more detailed scrutiny.

The enforcement of the criminal conspiracy provisions, which can apply to a wide range of commercial agreements and arrangements (e.g., joint venture, franchise, dual distribution and license agreements – in short any commercial arrangement between competitors or potential competitors), remains a top enforcement priority for the Bureau.  Moreover, in the past fifteen years there have been more than eighty convictions for cartel offences in Canada with total fines of approximately $250 million.

Some of the key impacts of the new conspiracy provisions on Canadian and international firms include: (i) substantially increasing the risk associated with “hard core” cartel agreements (i.e., bare price fixing, market division or supply restriction agreements), as a result of the lower legal burden and higher penalties, (ii) altering the review of many common forms of commercial agreements (e.g., franchise, license, dual distribution and joint venture agreements), (iii) increasing the importance for trade associations and companies to review existing (or adopt new) competition compliance programs and (iv) enhancing the importance of reviewing and controlling dealings with competitors (e.g., information exchanges, etc.).

Canada’s new criminal conspiracy regime, which is part of Canada’s new competition law, is discussed in more detail below.

Criminal Offences – Section 45

Under the new conspiracy provisions of the Act, three categories of agreements are now “per se” criminal offences (i.e., with no requirement to establish any negative effect on a relevant market or markets).  All other forms of agreements among competitors will be potentially subject to review under a second and separate non-criminal reviewable matters provision.

The following three types of agreements will be per se illegal: (i) agreements to fix, maintain, increase or control the price for the supply of a product (price fixing agreements); (ii) agreements to allocate sales, territories, customers or markets for the production or supply of a product (market division/allocation agreements); and (iii) agreements to fix, maintain, control, prevent, lessen or eliminate the production or supply of a product (supply restriction agreements).  Interestingly, the new provisions omits any express reference to group boycotts which, together with bid rigging, has traditionally completed the group of so-called “hard core” anti-competitive forms of agreements both in Canada and internationally (though the language of the new supply restriction offence is broad enough to likely cover group boycotts).

“Competitor” is defined broadly to include potential competitors (i.e., “a person who it is reasonable to believe would be likely to compete with respect to a product in the absence of a conspiracy, agreement or arrangement”).  As such, agreements and arrangements between parties that are not actual competitors may also potentially be caught (e.g., in a franchise arrangement, where a franchisor does not currently but could compete with its franchisees).

It is also worth noting that while the previous conspiracy provisions applied to both vertical and horizontal agreements (e.g., supplier-distributor-consumer and competitor-competitor agreements), the new criminal provisions are restricted to horizontal agreements between competitors (and potential competitors).  In this regard, the ambit of the new conspiracy provisions has been narrowed.  Moreover, it is likely that the majority of allegedly anti-competitive vertical arrangements and agreements will be reviewed under the new civil provision or other reviewable matters provisions, such as the civil abuse of dominance provisions of the Act.

Some of the impacts of the new conspiracy provisions include a lower burden to establish criminal conspiracies in Canada, an increased risk for parties engaged in “hard core” anti-competitive agreements (e.g., price fixing or market allocation agreements) and altering the framework for the analysis of non-hard core commercial agreements (e.g., franchise, license, dual distribution and joint venture agreements).

Defences

The recent amendments have also introduced a new ancillary restraints defense that will apply where it can be shown that: (i) the agreement is ancillary to a broader or separate agreement that includes the same parties; (ii) the agreement is directly related to, and reasonably necessary for giving effect to, the objective of the broader or separate agreement; and (iii) the broader or separate agreement does not itself constitute an offence under section 45.  Other pre-existing exceptions, including for agreements between affiliates, will still apply.

In addition, the new civil provision (section 90.1) will include an efficiencies defense that will apply where an agreement has resulted in (or is likely to result in) efficiency gains that are greater than, and will offset, the adverse effects of the agreement (i.e., any prevention or lessening of competition that will result or is likely to result from the agreement).  In this regard, the new civil provision dealing with non-criminal anti-competitive agreements will be more closely aligned with the existing merger provisions of the Act.

Civil Section – Section 90.1

Under the amended Act, agreements among competitors that are not caught by the three new per se criminal offences will be potentially reviewable under the new civil reviewable matters provision.

Such agreements may include, for example, non-compete agreements, research and development agreements, joint purchasing agreements, joint production agreements, joint selling and commercialization agreements and information sharing agreements (i.e., vertical agreements involving competitors or potential competitors that are not “hard core” anti-competitive agreements caught under section 45).

The Tribunal will be able to, on an application by the Commissioner, make remedial orders where it is established that the agreement prevents or lessens (or is likely to prevent or lessen) competition in a relevant market.  The Tribunal may make an order: (i) prohibiting any person (whether or not a party to the agreement) from doing anything under the agreement or (ii) requiring any person, with their consent, to take any other action.  Unlike the criminal conspiracy provisions, the Tribunal will not have any power to impose monetary penalties and private parties will not have any right to commence private actions.

Enforcement

The Bureau has broad powers of investigation under the Act in relation to conspiracies.  These include the power to obtain search warrants (including for computer searches), orders to compel testimony, to compel written returns under oath and wiretaps.

In Canada, prosecution of criminal conspiracies is the responsibility of the Public Prosecution Service of Canada (the “PPSC”), which is headed by the DPP.  Criminal matters are referred to the PPSC by the Bureau, which has the authority to determine whether to commence criminal proceedings.  Criminal prosecutions are brought in Canadian criminal courts and, while the DPP has official responsibility for criminal competition matters, the Bureau will typically work alongside the DPP during the course of a prosecution.

Penalties

Under the new legislation, the penalties for contravention of the criminal conspiracy provisions have been increased to include fines of up to $25 million (per count) and/or imprisonment for up to 14 years (increased from the previous $10 million per count and 5 years).  Canadian courts may also issue “prohibition orders” prohibiting the continuation or repetition of an offence and order a party to take certain steps to avoid future offences and comply with the law (e.g., to implement a corporate compliance program).

In reality, however, most penalties in Canada for violations of the criminal conspiracy provisions arise as a result of plea negotiations between the Bureau and accused.

Competition Bureau Immunity Program

The Bureau has a formal immunity program that is intended to encourage participants in criminal cartels to disclose their illegal conduct to potentially receive immunity from prosecution.  The Bureau’s immunity program is set out in a Bureau Information Bulletin.  Immunity applications are made to the Bureau, which will determine whether to recommend to the DPP that the request be granted.  In general, a party may receive immunity where they are the first to approach the Bureau with evidence of a cartel offence that the Bureau is unaware of or, alternatively, of which the Bureau is aware but has insufficient proof to refer the matter to the DPP.

Other requirements that a party must satisfy in order to obtain immunity include immediately taking steps to stop its involvement in the illegal conduct, it cannot have coerced unwilling parties to participate in the conspiracy, it must give full, frank and truthful disclosure of all evidence and information it knows (or is available to it), it must disclose all offences under the Act in which it may be involved (i.e., not limited only to conspiracy offences) and must agree to provide full, timely and continuous cooperation during the Bureau’s investigation.

Private Damages Actions

Under section 36 of the Act any person that has suffered loss or damage as a result of a contravention of the criminal provisions of the Act, including the criminal conspiracy provisions, may commence a damages action.  Class actions are also possible for violations of the criminal provisions of the Act in some cases.

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