Canadian COMPETITION LAW

December 24, 2009

On December 23, 2009, the Competition Bureau (the “Bureau”) issued its final Competitor Collaboration Guidelines (the “Collaboration Guidelines”).  The Collaboration Guidelines, which have been issued to coincide with the upcoming coming into force of Canada’s new criminal conspiracy rules and replace the Bureau’s earlier Strategic Alliances Guidelines, set out the Bureau’s enforcement approach to Canada’s new two-track criminal conspiracy regime under sections 45 and 90.1 of the federal Competition Act (the “Act”).

General Analytical Framework

In general, the Bureau states that mergers will be reviewed under the existing merger provisions of the Act and that most vertical agreements will be analyzed under the civil provisions of the Act (e.g., the new civil price maintenance and existing abuse of dominance provisions).  Exceptions may include dual distribution agreements (i.e., where a supplier may compete with one or more of its customers).

With respect to determining whether to evaluate agreements under the criminal or civil track, the Bureau indicates that only naked restraints (i.e., bare price fixing, market allocation and output restriction agreements) will be reviewed under the new section 45.  With respect to the process for review of agreements under section 45 (hard-core criminal offences), the Bureau indicates that it will take the following approach: (i) determine whether to review the agreement/arrangement under the criminal or civil provisions, (ii) if reviewing an agreement under section 45, determine whether in its view the new ancillary restraints defence applies, (iii) where it determines that the ancillary restraints defence applies, it may still seek a remedy under the civil provision (section 90.1) or (iv) refer the matter to the Director of Public Prosecutions for prosecution.

Given that there will be no existing Canadian jurisprudence to interpret the new ancillary restraints defence when the new criminal cartel provisions come into force in March, 2010, in the first few years after the new provisions are in force American jurisprudence will be important to interpret the new provisions.  In this regard, the United States has had a two-track criminal cartel regime for over a century, with hard core agreements reviewed under a per se rule (encompassing for the most part bare price fixing agreements) and non-hard core agreements analyzed under a second separate “rule of reason” approach that considers the pro- and anti-competitive effects of challenged agreements. Unlike Canada’s new regime, however, which has now expressly codified a two-track approach to criminal conspiracies, the United States has over a century of case law that has interpreted Section 1 of the Sherman Act that does not explicitly set out the categories that are proscribed.

Section 45 – Hard Core Anti-competitive Agreements

The Bureau indicates in its new Competitor Collaboration Guidelines that section 45 will be reserved for the review of hard core agreements (i.e., price-fixing, market allocation and output restriction agreements between competitors and potential competitors) while other types of agreements, such as joint venture agreements, will potentially be subject to review under the new civil provisions.

With respect to the existence of an agreement, the Bureau confirms existing jurisprudence (e.g., that there must be a “meeting of minds”, that informal or covert arrangements may be caught, a cartel may be established whether or not the arrangement has been implemented and that an agreement may be established based on only circumstantial evidence).  With respect to one of the most difficult and controversial areas of criminal cartels – i.e., “tacit agreements” or “conscious parallelism” – the Bureau takes the position that “parallel conduct coupled with facilitating practices, such as sharing competitively sensitive information … may be sufficient to prove that an agreement was concluded between parties.” With respect to determining whether parties are competitors for the purposes of section 45, the Bureau confirms that the impugned agreement must be in relation to a product in relation to which the parties compete (or are likely to compete).

One of the most challenging issues likely to be faced by competition counsel will be what arguments can be made in situations of common control or where individuals or entities may reasonably be considered to be a single legal entity (and, therefore, that the conspiracy provisions should not apply).  Whereas the United States has developed an intra-enterprise doctrine, under which entities that are in fact a single legal entity may be immune from the application of the Sherman Act, it remains to be seen whether a similar doctrine will develop in Canada.  This is key considering that the exceptions under section 45, including the pre-existing bright line exception for agreements between affiliates, are relatively narrow and do not provide express exceptions for agreements in other types of commercial arrangements (e.g., for principals and agents, partnerships, etc.).   The Bureau does indicate, however, that there may be some latitude for arguing that parties in other types of commercial relationships may, despite the existence of an express exception, nevertheless be considered by the Bureau to be a single economic entity (which was not present in the Bureau’s earlier draft guidelines):

“Parties should note that this exception applies only to companies, and not partnerships, trusts or other non-corporate entities or individuals, although the Bureau will consider the nature of any common control or relationship between the parties when determining whether referral of an agreement for prosecution is appropriate.”

With respect to trade associations, the new Collaboration Guidelines indicate that there may be increased exposure for associations that facilitate anti-competitive agreements.  In this regard, the Bureau states that “rules, policies, by-laws or other initiatives enacted and enforced by an association with the approval of members who are competitors, are considered by the Bureau to be agreements between competitors for the purpose of section 45.”  The Bureau’s position that trade associations that facilitate anti-competitive agreements may be parties to the agreement is noteworthy for several reasons: first, there is little or no recent Canadian authority for this proposition; and second, it is not clear that many trade associations could be considered to compete (or potentially compete) with their members in order to fall within the horizontal prohibition under the new section 45.

With respect to dual distribution agreements, the Bureau indicates that it will review such agreements (i.e., arrangements where a supplier may compete with one or more of its distributors) under the civil provisions of the Act, not under the new criminal conspiracy provisions.

Finally, the Bureau indicates that it will generally not review the following types of (common commercial) ancillary restraints under the criminal provisions, but rather under the civil provisions: (i) non-compete clauses in employment agreements or asset/share agreements, (ii) agreements not to make material changes to a business prior to completing a merger and (iii) non-compete agreements between joint venture partners (where the restraint relates only to the products, services or territories covered by the joint venture).

Section 90.1 – Non-hard Core Anti-competitive Agreements

With respect to the application of the new civil provision (section 90.1) for non-hard-core anti-competitive agreements, the Bureau states that in general agreements that fall within this new provision will be reviewed in a manner consistent with mergers under the Bureau’s Merger Enforcement Guidelines (the “MEGs”).  For example, the Bureau adopts very similar market share safe harbours to those set out for parties to mergers in its MEGs:

“The Commissioner will not challenge an agreement under section 90.1 on the basis of: (i) a concern related to the exercise of market power by the parties to the agreement where the market share held by the parties represents less than 35% of the relevant market; or (ii) a concern related to a coordinated exercise of market power by firms in the relevant market where the share of the four largest firms in the relevant market is less than 65%, or the share of the parties to the agreement is less than 10% of the relevant market.”

Moreover, the Bureau sets out a similar analytical framework to that in the MEGs for mergers for considering whether parties possess market power, with factors including market shares, the likelihood of entry, foreign competition, barriers to entry and innovation.  The Bureau indicates that the new civil provision will be used to review six common forms of commercial agreements: (i) commercialization agreements, (ii) information sharing agreements, (iii) research and development agreements, (iv) joint production agreements, (v) joint purchasing agreements and (vi) non-compete agreements.  These six forms of agreements generally fall into two categories: (i) non-hard-core horizontal agreements whose effects require closer scrutiny (i.e., agreements other than bare price fixing, market allocation and output restriction agreements) and (ii) agreements that fall entirely outside the language of the new section 45 (e.g., upstream joint purchasing agreements).

As a practical matter, the introduction of a two-track regime for cartels in Canada will demand that both counsel and the Bureau engage in a more economic-based approach to reviewing agreements, particularly those challenged under the new section 90.1.

It will also mean that increased advocacy will be necessary to argue that some agreements, particularly those whose competitive effects may be unclear, fall either within the new ancillary restraints defence or within the new civil provision (as opposed to the criminal provisions).

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

Comments are closed.