Canadian COMPETITION LAW

November 24, 2009

Steve Szentesi will be speaking at the upcoming Canadian Bar Association Business Law Subsection Lunch at the Sutton Place Hotel in Vancouver on November 25, 2009.  The topic will be Canada’s New Competition Law and will include highlights of the recent Competition Act amendments including the new criminal conspiracy rules, new merger control rules, changes to the abuse of dominance provisions and criminal pricing provisions, increased penalties for false or misleading representations and new Investment Canada Act and national security test for foreign investment.

Significant and sweeping changes were recently made to Canada’s competition laws.

Some of the key changes include:

Criminal conspiracy provisions.  New criminal conspiracy provisions have been enacted for price fixing, market allocation and output restriction agreements.  Canada has now adopted a “per se” U.S. style criminal conspiracy provision, which means that as of early next year it will not be necessary to show any adverse market effects in order to establish a criminal conspiracy under the Act for “hard-core” cartel agreements (i.e., agreements to allocate markets or customers, fix prices or restrict or limit output/production).  The practical impact of this fundamental change is that whereas formerly only large market participants were potentially exposed to criminal liability, small players (i.e., companies with small market shares) now also face potential criminal liability.  The recent amendments will also make it easier in theory for private parties to commence damages actions for alleged criminal conduct under the conspiracy provisions of the Act (section 45).  Moreover, the recent amendments have resulted in a degree of uncertainty regarding the treatment of many common forms of commercial agreements including franchise, licence and dual distribution agreements.

Criminal conspiracy penalties.  Significantly increased penalties under the criminal conspiracy provisions have been enacted, with fines of up to CDN $25 million (per count) and/or imprisonment for up to 14 years, which will come into force in March next year.  These penalties are significantly amplified from the former CDN $10 million and five years and signal both the continuing importance to the Bureau of detecting and deterring cartels and what may be a more vigorous enforcement approach following the recent appointment of a new Commissioner of Competition.

Civil provision for anti-competitive agreements.  Under the newly amended Act, agreements among competitors that are not caught by the new per se criminal provisions will be potentially reviewable under a new civil section for other types of anti-competitive agreements.  Such agreements may include non-compete, research and development, joint purchasing, joint production, joint selling and commercialization agreements.  Under this recently enacted provision, which is part of the new “two-track” conspiracy regime (consisting of a per se criminal provision and a civil provision), the federal Competition Tribunal (the “Tribunal”) will have the power, on application by the Commissioner of Competition (the “Commissioner”), to make remedial orders where it is established that the agreement prevents or lessens (or is likely to prevent or lessen) competition in one or more relevant markets.  In this regard, the new civil provision for anti-competitive agreements will be brought into alignment with substantive merger review under the Act.  Under the new rules, the Tribunal will have the power 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 consent, to take any other action.  Unlike the criminal provisions, however, no monetary penalties can be imposed and no private right of action will be possible.

Private actions.  As a result of the recent amendments, and in particular based on the repeal of the “undueness” requirement for criminal conspiracies (i.e., removing the necessity of showing anti-competitive effects), it will now in theory be easier for private plaintiffs and the Bureau to establish the elements of a criminal conspiracy under section 45.  This change, together with recent favourable case law to certification proceedings for competition law class actions in Canada, is expected to lead to an increase in competition law based private actions.

Bid rigging.  New criminal bid rigging rules have been enacted, which are relevant to companies involved in competitive tenders.  These include a new bid rigging offence in addition to the existing offences (for agreements to withdraw a bid that has already been made) and increasing the maximum prison sentence for bid-rigging to fourteen years (increased from the former five years).  The previous unlimited fines for bid rigging, which can be set in the discretion of the court, remain unchanged.

Misleading advertising penalties.  Significantly increased penalties under the civil misleading advertising provisions have been introduced.  These include “administrative monetary penalties” (essentially civil fines) of up to CDN $750,000 for individuals and CDN $10 million for corporations that breach the misleading advertising provisions of the Act.

Merger review and notification.  Fundamental changes have been made to Canada’s merger review and notification regime.  The key changes include: (i) increasing the “size of transaction” threshold for merger notification, (ii) introducing a U.S. style two-phase merger review and notification process with a single initial waiting period, (iii) introducing a U.S. “second request” style of supplementary information request for complex mergers, (iv) shortening the period during which the Bureau may challenge a completed merger and (v) introducing a single uniform merger notification form.  While the law relating to the substantive analysis of mergers has not changed, the new U.S. style two-phase notification and review regime is expected to introduce additional delay and expense for complex mergers in Canada (i.e., those subject to second requests issued by the Bureau).  While some aspects of the new merger notification regime remain unclear, the Bureau has recently introduced new guidelines setting out its approach to the new process.

Criminal price maintenance, predatory pricing and price discrimination repealed.  The former criminal price maintenance, predatory pricing and price discrimination provisions under the Act have been repealed.  These provisions were widely criticized as being unsound in relation to current economic thinking and as well as being overbroad in potentially sanctioning conduct with no adverse market effects.  While predatory pricing and price discrimination will now be dealt with under the civil abuse of dominance provisions, the former criminal price maintenance provision has been replaced with a civil section together with a new right of private access allowing private parties to seek Tribunal remedial orders.

Administrative monetary penalties for abuse of dominance.  Significant “administrative monetary penalties” have been introduced for the first time for contravention of the civil abuse of dominance provisions under the Act of CDN $10 million (CDN $15 million for subsequent contraventions).  The introduction of what are essentially civil fines for abuse of dominance is both controversial and significant – controversial in respect that abuse of dominance is not conduct that is per se illegal, but rather prohibited only when extensive economic analysis shows that a dominant player has abused its dominant position in one or more relevant markets; the change  is significant because firms now potentially face significant penalties for aggressive competitive conduct, whereas formerly the most that could be obtained was a Tribunal order to cease the conduct.  Among the many potential impacts of this change is that it may have a chilling effect on some forms of perfectly legitimate competitive conduct or alter the analysis in settlement negotiations with the Bureau.

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