Canadian COMPETITION LAW

January 23, 2010

CANADA’S NEW CARTEL RULES:
NEW TWO TRACK REGIME, HARD CORE OFFENCES & FINES UP TO $25 MILLION

Effective March 12, 2010, parties that contravene Canada’s new criminal cartel rules under the federal Competition Act (the “Act”) will potentially be exposed to fines of up to Cdn. $25 million and/or imprisonment for up to 14 years.  The impending changes to Canada’s criminal conspiracy regime are the most significant since Canada introduced competition law in 1889. The upcoming changes will impact organizations and individuals in a variety of business sectors, including trade associations and businesses involved in joint venture, franchise, licensing, research and development and dual distribution agreements, among others.  This update discusses some of the highlights of the new rules and impacts on Canadian and international organizations and their managers.

NEW TWO-TRACK CRIMINAL CONSPIRACY REGIME

As of March 12, 2010, Canada will have a two-track criminal conspiracy regime. One track will be criminal and reserved for “hard core” anti-competitive agreements (agreements to fix prices, allocate markets or restrict output).  A second civil track will address non-hard core agreements that prevent or lessen competition substantially, requiring an analysis similar to merger review.  In addition, the penalties for contravening the new criminal conspiracy provisions will be substantially increased with fines of up to Cdn. $25 million and/or imprisonment for up to 14 years (increased from the previous Cdn. $10 million and 5 years).  Some of the key impacts of the upcoming changes include:

– Increasing the importance for trade associations and companies to review existing or adopt new competition law compliance programs
– Substantially increasing the risk associated with “hard core” cartel agreements based on the lower legal burden and increased penalties
– The introduction of a U.S.-style ancillary restraints defence, relevant for the negotiation, drafting and review of commercial agreements
– Altering the analysis for the review of common commercial agreements between competitors including franchise, JV, licence and dual distribution agreements
– Increasing the importance of reviewing and controlling information exchanges with competitors (i.e., exchanges of competitively sensitive information)

Impacts on Private Civil Actions

The impending changes are also expected to result in an increased number of private civil actions, and potentially competition law class actions, as a result of the lower bar to establish criminal price fixing, market allocation and output restriction agreements.

Other Recent Amendments

The upcoming changes to Canada’s criminal conspiracy rules are part of recent sweeping amendments to Canada’s competition and foreign investment law including: (i) a new U.S.-style merger notification regime, (ii) increased penalties for failure to comply with the merger notification provisions, (iii) higher fines for misleading advertising (of up to $10 million for corporations), (iv) civil fines for abuse of dominance (of up to $10 million), (v) amendments to the Investment Canada Act and (vi) a new national security test for foreign investment in Canada.

NEW COMPETITOR COLLABORATION GUIDELINES

On December 23, 2009, the federal Competition Bureau (the “Bureau”) issued its final Competitor Collaboration Guidelines (the “Guidelines”). The Guidelines, which were issued to coincide with the coming into force of Canada’s new criminal conspiracy rules and replace the Bureau’s previous Strategic Alliance Guidelines, set out the Bureau’s enforcement approach to Canada’s new two-track criminal conspiracy regime.

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 or existing abuse of dominance provisions).  Exceptions may include dual distribution agreements in some instances.

Naked Restraints May be Criminal

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, 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 process for reviewing agreements under section 45 (hard-core 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 and (iii) where it determines that the ancillary restraints defence applies, it may still seek a remedy under the civil section 90.1 or refer the matter to the Director of Public Prosecutions for prosecution.

Given that there will be no existing Canadian jurisprudence to interpret Canada’s new ancillary restraints defence when the new criminal cartel provisions come into force, in the first few years American jurisprudence will likely be important to give shape to both this new exception as well as Canada’s new cartel rules generally.

The American Experience

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 three forms of hard core cartel offences, the United States has over a century of case law that has defined its section 1 of the Sherman Act which, unlike Canada’s new rules, does not explicitly set out the types of agreements that are proscribed.

Establishing an Agreement

With respect to establishing an agreement, the Bureau confirms existing jurisprudence that there must be a “meeting of minds”, that informal or covert arrangements may be caught, that a cartel may be established whether or not the arrangement has been implemented and that an agreement may be established only with circumstantial evidence.

Conscious Parallelism

With respect to one of the most challenging 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 for which the parties compete (or are likely to compete).

Impacts for Trade Associations

With respect to trade associations, the new 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 a cartel agreement is noteworthy for several reasons. First, there is little recent authority for this proposition.  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 new narrower horizontal prohibition under section 45. Unlike the previous version of section 45, which could potentially catch horizontal and vertical agreements, the new section 45 is structured to only apply to horizontal cartel agreements.

Other Common Commercial Agreements

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 new civil provisions and not under the criminal 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 and 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 of the JV.

Non-hard Core 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 existing Merger Enforcement Guidelines (the “MEGs”).  For example, the Bureau adopts very similar market share safe harbours to those set out in the MEGs.  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.

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