Canadian COMPETITION LAW

In a development earlier today that I can only describe as astonishing, the Calgary Herald,  Victoria Times Colonist, Montreal Gazette and others are reporting that the personal residence and city hall offices of the mayor of Laval, Quebec’s third largest municipality, were raided by dozens of police officers in relation to allegations in Quebec that members of the Quebec construction industry have been involved in a variety of corruption, bribery and bid-rigging offences for municipal and provincial construction contracts.

For more see: Anti-corruption squad raids home, office of Laval mayor, Anti-corruption squad raiding Laval city hall, Police raids at home, office of mayor in Montreal-area Laval.

While none of the allegations in the ongoing Quebec inquiry have been proven, and subsequent investigations may continue for some months or years, the following is a short overview of Canada’s bid-rigging and cartel (i.e., conspiracy) laws.

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BID-RIGGING

Canada has a standalone bid-rigging provision under section 47 of the Competition Act (the “Act”) (unlike some other major jurisdictions, where bid-rigging falls under general conspiracy or cartel offences).

Section 47 makes it a criminal offence to: (i) agree to not submit a bid or tender, (ii) agree to withdraw a bid or tender already submitted (recently added to the Act as a result of the 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 (though all of the elements need to be established on the standard criminal burden of proof – i.e., beyond a reasonable doubt).

COMMON TYPES OF BID-RIGGING

Some common types of bid-rigging that can contravene the criminal bid-rigging provisions of the Act include:

“Cover”, “courtesy” or “complementary” bidding. Some firms submit bids that are too high to be accepted, or with terms that are unacceptable to the party calling for bids, to protect an agreed upon low bidder.

Bid suppression. One or more bidders that would otherwise bid agree to refrain from bidding (or withdraw a previously made bid).

Bid rotation. All parties submit bids but take turns being the low bidder according to a systematic or rotating basis.

Market division. Suppliers agree not to compete in designated geographic areas or for specified customers.

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.

ELEMENTS TO ESTABLISH BID-RIGGING

To establish a bid-rigging offence under section 47 of the Act, 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.

Agreement or Arrangement

The first necessary element to establish bid-rigging is the existence of an agreement or arrangement to not submit a bid, withdraw a bid already made or submit a bid arrived at by agreement.

It has been held, as under the conspiracy offences of the Act (section 45), that an agreement is an essential element to establish a bid-rigging offence under section 47.  Also as under the criminal conspiracy provisions, Canadian courts have articulated this element as requiring a “consensus of minds” or a “mutual understanding” between the parties to an agreement.

It has been held, however, that mere consultations between parties bidding in relation to pricing, where there has been no agreement or arrangement between the parties and their respective bids are not communicated to the other before tenders are submitted, does not contravene section 47.

However, discussions or interaction with co-tenderers, where such interaction is not part of a bid consortium or other legitimate joint bidding arrangement, may well raise significant issues and risk for the parties – for example, lead to the formation of an actual illegal agreement or allow the Competition Bureau or a court to infer the existence of an agreement.

As with criminal conspiracies, a bid-rigging agreement may also be inferred from mere circumstantial evidence – for example, the submission of identical bids following a meeting of bidders, identical (or highly similar) terms in bid documentation, etc.

Intent

The second necessary element to establish bid-rigging is intent.

In this regard, it must be established that an accused intentionally entered into an agreement or arrangement with one or more persons (or bidders as the case may be) to not submit a bid, withdraw a bid already made or submit a bid arrived at by agreement.

It is worth noting, however, that while it must be established that an accused intended to engage in conduct prohibited under section 47, motive is irrelevant to establish an offence.

Call or Request for Bids or Tenders

It must also be established that a bid or tender is made “in response to a call or request for bids or tenders”.

It has been held that this requirement will not be met where mere price quotations are submitted where there is “no specific direction or call” for bids or tenders (e.g., where price quotations by subcontractors are submitted to a general contractor, where the call for tenders or bids has been made to general contractors not subcontractors).

Agreement Not Made Known to Person Calling for Bids or Tenders

Finally, to establish a bid-rigging offence, it must be proven that an agreement or arrangement has not been 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.

The Act in essence provides a defense for parties that are engaged in joint bidding projects, such as bidding consortia or other types of joint ventures that may involve the submission of joint bids.

The time when a bid or tender is made is critical to ensuring that this requirement is met, which has been held to be when the contents of a tender are communicated to the party calling for tenders (i.e., when a tender is opened).

It is also crucial that communication of any joint tendering be expressly made.  Merely inferring the submission of joint bids – for example, by the fact that bids are identical – has been held to be insufficient.

EXCEPTIONS

The only express bid-rigging exception in the Competition Act is for agreements between “affiliates” as defined in the Act (i.e., where an agreement or arrangement is entered into only between affiliates).

Having said that, as discussed above, a bid-rigging offence will 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.  Where this is effectively achieved, the elements necessary to establish a bid-rigging offence cannot be made out.

CARTELS (CONSPIRACY OFFENCES)

As a result of amendments to the Competition Act (the “Act”) in 2009 and 2010, Canada now has a dual-track conspiracy regime with a criminal track for three categories of “hard core” conspiracy agreements between competitors and a second civil track for other agreements between competitors that may prevent or lessen competition substantially.

This new two-track conspiracy regime is intended to make the enforcement of hard-core criminal cartel activity easier under section 45 (given that the former competitive effects test has been removed) while allowing other non-hard core agreements, such as joint venture, franchise and licensing agreements, to be subject to a more detailed review under a separate civil track (section 90.1).

Some of the key impacts of the new conspiracy provisions on Canadian and international firms include: (i) substantially increasing the risk of “hard core” cartel agreements (i.e., bare price-fixing, market division/allocation or output/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) compliance programs and (iv) enhancing the importance of reviewing and controlling dealings with competitors (e.g., information exchanges, trade association activities, etc.).

CRIMINAL OFFENCES (SECTION 45)

Three categories of agreements between competitors are now “per se” illegal under the amended section 45 of the Act – i.e., with no adverse impacts on a market or markets required any longer:

1.  Price-fixing agreements.  Agreements to fix, maintain, increase or control the price for the supply of a product.

2.  Market allocation/division agreements.  Agreements to allocate sales, territories, customers or markets for the production or supply of a product.

3.  Output/supply restriction agreements.  Agreements to fix, maintain, control, prevent, lessen or eliminate the production or supply of a product. Section 45, however, omits any express reference to group boycotts (i.e., concerted refusals to supply), which may nevertheless fall within subparagraph 45(1)(c) (output/supply restriction agreements) in some cases (though this remains to be decided by Canadian courts).

Other types of agreements between competitors are now potentially subject to review under a second and separate non-criminal reviewable matters provision (section 90.1).

“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 (i.e., currently) competitors may also potentially be caught in some cases.

CIVIL AGREEMENTS PROVISION (SECTION 90.1)

Agreements between competitors that are not caught by the three new per se criminal offences are now potentially reviewable under the new civil reviewable matters provision (section 90.1).  These 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.

Following the amendments, the Tribunal now has the power, on application by the Commissioner of Competition, to make remedial orders where it is established that an agreement prevents or lessens (or is likely to prevent or lessen) competition in a relevant market.  The Tribunal may make orders: (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 under section 45, however, fines cannot be ordered under section 90.1 and private parties have no right to commence civil actions.

DEFENCES

The amendments to the Act have also introduced a new ancillary restraints defense that applies where it can be shown that: (i) an 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.

Most of the other pre-existing exceptions, including for agreements between affiliates, remain under section 45.

The new civil agreements provision (section 90.1) also includes an efficiencies defense that applies 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 an agreement.  In this regard, the new civil provision dealing with non-criminal anti-competitive agreements is now closely aligned with the existing merger provisions of the Act, which also include an efficiencies defence.

ENFORCEMENT

The Competition Bureau has broad powers of investigation under the Act in relation to conspiracies, including search warrants and wiretaps.

In Canada, prosecution of criminal conspiracies is the responsibility of the Public Prosecution Service of Canada (“PPSC”), which is headed by the Director of Public Prosecutions (“DPP”).  Criminal matters are referred to the PPSC by the Competition Bureau, which has the authority to determine whether to commence criminal proceedings.  Criminal prosecutions are brought in provincial criminal courts and, while the DPP has official responsibility for criminal competition matters, the Bureau typically works closely with the PPSC during a criminal investigation.

PENALTIES

The potential penalties for violating the criminal conspiracy provisions of the Act include fines of up to $25 million (per count), imprisonment for up to 14 years, or both.  These have been increased from the previous $10 million per count and 5 years imprisonment.  Canadian courts may also issue “prohibition orders” ordering that conduct stop and that a party (or parties) take steps to avoid future offences and comply with the law.

FOREIGN DIRECTED CONSPIRACIES

In addition to general conspiracy (cartel) offences, the Act also contains several specific provisions for conspiracies relating to professional sport (section 48), agreements or arrangements between federal financial institutions (section 49) and foreign directed conspiracies (section 46).  Section 46 of the Act makes it a criminal offence for any corporation carrying on business in Canada to implement the directives from any person in another country that is in a position to direct or influence the Canadian corporation’s policies to give effect to a conspiracy entered into outside Canada that would, if formed in Canada, violate section 45 (the general criminal conspiracy provision of the Act).  Section 46 purports to make corporations liable to an indictable offence, subject to fines in the discretion of a court, regardless of whether Canadian directors or officers of the Canadian corporation have knowledge of the conspiracy.  This offence is also, on its face, limited to corporations.  As such, while directors and officers are not expressly exposed to liability under section 46, they may liability under other theories of liability, such as through aiding and abetting an offence.  Section 46 expressly extends the jurisdiction of the conspiracy provisions of the Act to include cartel agreements that are formed outside Canada (although Canada is an effects based jurisdiction).

CIVIL ACTIONS

Under section 36 of the Act any person that has suffered actual 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.

IMMUNITY & LENIENCY PROGRAMS

The Competition Bureau has formal Immunity and Leniency Programs under which applicants may receive full immunity from prosecution (or reductions in penalties) for cooperating with an investigation.

Immunity Program

Under the Bureau’s Immunity Program, a party or company implicated in criminal conduct under the Act may offer to cooperate with the Bureau in its investigation and request immunity (i.e., full immunity from prosecution for criminal offences under the Act).  The criminal provisions of the Act include section 45 (conspiracy), section 47 (bid-rigging) and section 52 (criminal misleading advertising).

In general, in order to be eligible under the Immunity Program, the Bureau must either be unaware of an offence (and the immunity applicant is the first to disclose it) or the Bureau is aware of an offence, but does not yet have enough evidence to refer the matter for prosecution.

There are a number of other requirements including: (i) termination of participation in the illegal activity, (ii) not being the “ringleader” (i.e., not having coerced others to be a party to the illegal activity) and (iii) providing “complete, timely and ongoing co-operation” with the Bureau during an investigation (including confidentiality obligations, disclosing any other offences and securing the co-operation of current directors and officers).

Generally speaking the process for obtaining immunity is a multi-step process that involves seeking a “marker” from the Bureau (essentially a place in line, typically made on a hypothetical basis), making an initial “proffer” of information to determine eligibility in the Program (typically made by an applicant’s counsel on a without prejudice basis), the negotiation of an immunity agreement (setting out the obligations of the immunity applicant and their protections if the requirements of the Program are met) and disclosure and cooperation with the Bureau in an investigation and any resulting criminal prosecution.

Obtaining immunity is a “race” in that full immunity is only available to the first applicant that complies with the Bureau’s requirements under its Program.  As such, it is important for counsel advising individuals or companies that may have been involved in criminal conduct under the Act to immediately explore the potential benefits of seeking immunity, which can significantly reduce potential liability for violations of the Act.

The Bureau has issued guidelines that describe the requirements an applicant must meet to obtain immunity (see: Immunity Program under the Competition Act (Bulletin)).

Leniency Program

Under the Bureau’s Leniency Program, parties that have contravened criminal provisions of the Act that are not entitled to full immunity may nevertheless be eligible for leniency in sentencing.

In general, in order to be eligible, an applicant must: (i) have terminated its participation in the illegal conduct, (ii) provide full, frank, timely and truthful cooperation with the Bureau in its investigation and (iii) agreed to plead guilty (not required for Immunity Program applicants).

Importantly, as under the Bureau’s Immunity Program, timing is critical for immunity applicants under the Bureau’s Leniency Program.  This is because the first leniency applicant is eligible to receive a 50% reduction of the fine that would have otherwise been recommended, the second leniency applicant is entitled to receive a 30% reduction in fine with subsequent applicants possibly receiving reductions in fines.  In addition, once the Bureau has referred a matter to the DPP for prosecution, leniency is no longer available.

In addition, a leniency applicant that discloses evidence of another criminal offence under the Act may be eligible for “Immunity Plus” – i.e., full immunity from prosecution under the Bureau’s Immunity Program for a second previously unknown offence, if the applicant meets all the requirements of the Bureau’s Immunity Program.

Generally speaking the process for obtaining leniency, like immunity, is a multi-step process that involves: (i) seeking a “marker” from the Bureau (a place in line which is, like an immunity application, typically made by an applicant’s counsel on a hypothetical basis), (ii) making an initial “proffer” of information to determine eligibility in the Program, (iii) the negotiation of a plea agreement and (iv) full disclosure and cooperation with the Bureau in an investigation and any resulting criminal prosecution.

Successful leniency applicants may also be required to attend interviews and testify in prosecutions of other parties involved in the criminal conduct.

The Bureau has issued guidelines that describe the requirements an applicant must meet to obtain leniency under its Leniency Program (see: Leniency Program (Bulletin)).

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