Canadian COMPETITION LAW

November 12, 2010

“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).

**********

Competition Law Compliance Tips for
Canadian Trade and Professional Associations

The federal Competition Act can apply to many trade and professional association activities in Canada, including board and membership meetings, membership criteria and discipline, member surveys and benchmarking, association codes of conduct and dealings with suppliers and customers. While trade associations can, and frequently do, serve many legitimate purposes, since trade and professional association activities typically involve direct interaction between competitors, it is prudent for association executives, members and their advisors to take basic steps to proactively reduce potential competition law risk.

The federal Competition Bureau (Bureau) has also commenced many civil and criminal association related enforcement matters, including in the areas of conspiracy (cartels), bid-rigging and abuse of dominance, as well as regularly discussing association activities that can raise concerns and the importance of Competition Act compliance. The Bureau has also released several trade association related enforcement guidelines, including its Trade Associations and the Competition Act pamphlet and Corporate Compliance Programs bulletin.

The following are some key legal tips for trade and professional associations to comply with Canada’s Competition Act:

Implement a competition law compliance program. Developing and implementing an effective and credible competition law compliance program plays a crucial role for trade associations to mitigate risk under the Competition Act. As such, implementing a compliance program should be at the top of the compliance list for all associations.

Competition compliance options for associations range from formal compliance programs, which encompass all association activities to compliance guidelines for key activities based on risk (e.g., meetings, surveys/benchmarking and other types of information exchanges and specific initiatives that may raise competition law issues, such as joint negotiations with suppliers or customers, discussions or projects involving competitively sensitive topics).

Some of the key benefits of a competition law compliance program include reducing the risk of violating federal competition law, reducing the costs of investigations and proceedings should they occur and potentially mitigating penalties. Association board and other members may also consider requiring that their associations have a credible and effective competition compliance program to participate in association activities. For more information, see: Associations, Association Compliance, Compliance and Immunity & Leniency.

Prepare agendas and meeting minutes. Associations should prepare written agendas for all meetings involving competitors (including board of director meetings) and meeting minutes.  Discussions at meetings should also stay within the boundaries of legitimate agenda items and discussions (or exchanges) of “competitively sensitive information” should be avoided, including discussions of current or future pricing, costs, individual customers and suppliers, markets, market shares, output, competitive bidding and business or strategic plans.

The Bureau recommends that associations provide a clear copy of the agenda before trade association meetings for competing firms to participate in the meeting. For more information, see: Association Compliance and Information Exchanges.

Prepare and adopt conduct of meeting guidelines. Adopting and strictly following conduct of meeting guidelines is a proactive method to reduce competition law risks for associations. Such guidelines commonly include restrictions on the exchange of competitively sensitive information and topics that may lead to conspiracy risks under section 45 of the Competition Act (e.g., discussions relating to pricing, markets, concerted refusals to deal or limiting the production or supply of goods or services). For more information, see: Information Exchanges, Conspiracy (Cartels), Conspiracy FAQs and Refusal to Deal.

Compliance guidelines should also address steps to take if inappropriate discussions or activities arise during association meetings or events, including when attendees should leave meetings, report incidents to association executives and/or legal counsel and record efforts to prevent anti-competitive discussions from continuing. In certain cases, individuals or organizations that have participated in potentially illegal activities may also qualify for immunity from prosecution or lenient treatment under the Bureau’s Immunity and Leniency Programs. For more information, see: Immunity & Leniency.

Conduct compliance audits and appoint a compliance officer. One practical way for associations to monitor compliance is to conduct periodic audits of association activities, which can be performed on an association-wide, activity-specific or spot basis. Appointing a compliance officer to monitor, audit and assist with compliance can also help ensure that association members understand and comply with the Competition Act. For more information, see: Association Compliance and Compliance.

Conduct compliance orientations for new executives and personnel. Another practical step associations can take to assist with competition law compliance is to conduct compliance orientations for new board members, executives and other key personnel (e.g., staffers who are routinely involved in association surveys or benchmarking). The Bureau also recommends requiring company/member representatives to complete competition law compliance training before joining trade associations and participating in association activities. For more information, see: Association Compliance and Compliance.

Obtain legal advice for key association initiatives. Care should be taken in relation to specific types of trade association activities where there is increased potential risk.  Associations should obtain advice from qualified legal counsel for key activities that may raise competition law concerns, including surveys and benchmarking, standard setting, member discipline and joint member initiatives (e.g., joint marketing, purchasing or negotiations with significant purchasers).

Avoid “off the record” meetings. Associations should discourage informal or “off the record” meetings between members, particularly on the “fringes” of association meetings or using association facilities. Private meetings between competitors under the pretext of association meetings should also be discouraged. Association members should also be aware that merely because a meeting is held “off the record” or “in camera” (i.e., a discussion is not recorded in meeting minutes) does not mean that discussions (which may be recorded in other ways such as attendee notes, e-mails or texts, etc.) or the fact of the meeting itself cannot be used as evidence in competition law proceedings.  The Bureau and private plaintiffs can, and often have in the past, used such “circumstantial evidence” to establish a criminal conspiracy agreement.

Review association activities and rules. Associations should generally review their initiatives and activities through a “competition lens”. For example, if a particular association activity may lead to higher prices, less quality or choice, increase barriers for some members or competitors to compete or generally reduce competition, this may well raise competition law concerns (or at minimum the need to consult knowledgeable legal counsel).

It is also prudent for associations to ensure open consultations among members when developing or reviewing existing rules, codes of conduct and standards and include a clear statement of objectives, expectations and responsibilities that comply with the Competition Act. For example, associations should avoid rules (e.g., in association codes of conduct) that establish prices, mandate levels or types of services, restrict advertising or exclude viable competitors from the market.

Require associations to adopt credible and effective competition compliance programs. Before allowing company personnel to participate in trade or professional association activities, ensure that the association has adopted and follows a credible and effective competition compliance program. As a practical matter, if competition law issues arise (or enforcement) the association, member firms and their participating directors and officers and other personnel may be exposed to risk or penalties under the Competition Act. For more information, see: Association Compliance and Compliance.

Consider using third parties for surveys, benchmarking and other information exchanges. Before collecting and sharing competitively sensitive information within the association, consider using third parties to collect such information and distribute it with precautions to minimize potential competition law risk (e.g., circulating information in aggregated form, not distributing raw competitively sensitive data to competing board or other members, etc.). For more information, see: Information Exchanges.

For more regulatory law updates follow me on Twitter: @CanadaAttorney

Comments are closed.