Canadian COMPETITION LAW

The Competition Bureau has announced that a further individual has pleaded guilty and has been fined in the Quebec gas price-fixing cartel.  In making the announcement, the Bureau said that Micheline Lapointe-Cabana, owner of a service station in Magog, Quebec operated under the Petro-Canada banner, was sentenced to personally pay a fine of $20,000.

In this case, which was one of the largest criminal cases in the Bureau’s history, charges were laid against thirty-eight individuals and fourteen companies accused of fixing the price of gasoline at the pumps at several locations in Quebec.  According to the Bureau, to date six companies and eleven individuals have pleaded guilty in the case.

The case is also somewhat noteworthy in that six individuals have been sentenced to total imprisonment of 54 months (served in the community).  While the penalties for contravening the criminal conspiracy provisions of the Competition Act include imprisonment for up to fourteen years, prison sentences have been, at least to date, relatively rare in Canada with liability in many cases being negotiated down to corporate liability and fines.

For the Bureau’s news release see:

Individual Fined in Quebec Gasoline Price-Fixing Cartel

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On May 27, 2011 the Competition Bureau commenced an abuse of dominance case against the Toronto Real Estate Board (“TREB”) before the federal Competition Tribunal.

To establish abuse of dominance under the Competition Act, the Commissioner of Competition must establish that a firm (or firms) is dominant in one or more relevant markets, it has engaged in a practice of anti-competitive acts that has resulted in (or is likely to result in) a substantial lessening of competition.  Where the Tribunal finds that a firm has abused its dominant position, it may make remedial orders (e.g., for the conduct to cease) or order the payment of administrative monetary penalties of up to $10 million ($15 million for subsequent orders).

In its case against TREB, the Commissioner is essentially alleging that through TREB’s MLS rules, which govern the access and use of members’ property listing information, TREB is preventing members from offering innovative non-traditional real estate services including “virtual office websites”  or “VOWs” (secure password-protected websites that allow residential real estate customers to search a database containing MLS information themselves, rather than utilizing traditional bricks and mortar real estate brokerage services – for example, receiving property listing information from agents in person, by fax or by email).

With respect to TREB’s market presence, the Bureau alleges that TREB and its members substantially or completely control the market for the supply of residential real estate brokerage services in the greater Toronto area.  According to the Bureau, TREB achieves its control of the relevant market through its control of its MLS system, which contains detailed member property listing information including historical sales data, by enacting and interpreting rules, policies and agreements that exclude some business models and restrict the offering of some types of innovative real estate services, including VOWs.

Specific TREB restrictions that the Bureau is challenging include rules restricting the advertising of listings, how MLS reports are provided to customers and restrictions on direct client searches of TREB MLS information.

Like its recent abuse of dominance case against The Canadian Real Estate Association, the Bureau is taking the position that TREB’s MLS system is a key (i.e., essential) input in the supply of residential real estate brokerage services, without which competing innovative brokerage models wishing to operate VOWs and other emerging Internet-based brokerage services cannot effectively compete.  While arguments are sometimes made that there are competing property listing services in Canada, or that new listing services can enter or be established, the Bureau argues that the size and breadth of TREB’s MLS system (i.e., network effects) operates as a significant barrier to entry for any new property listing system that could otherwise operate as a substitute to the TREB MLS system.

With respect to TREB’s conduct, the Bureau argues that the interpretation and enforcement of TREB’s MLS rules are a practice of anti-competitive acts, the “purpose and effect of which is to discipline and exclude innovative brokers who would otherwise compete with TREB’s member brokers who use traditional methods.”

Finally, the Bureau’s view is that TREB’s MLS rules have lessened and prevented competition in the market for residential real estate brokerage services in the greater Toronto area.  According to the Bureau, “TREB’s control of the relevant market through [its] MLS Restrictions gives it the power to exclude innovative brokerage models … protecting and perpetuating the static traditional brokerage model for the delivery of residential real estate brokerage services.”  This, it says, denies consumers the benefits of downward pressure on commission rates and, to illustrate its point, the Bureau describes the fact that VOW brokerages are commonplace in the United States and offer rebates of up to 50% of a broker’s ordinary commissions.

Like the recently settled case against The Canadian Real Estate Association, the Bureau’s most recent challenge against organized real estate raises a number of interesting and largely unsettled abuse of dominance issues.

These include whether, and the extent to which, a real estate board can be said to control the market for a product that it does not actually supply (residential real estate brokerage services), whether the Tribunal will accept that the TREB MLS system is an essential input or facility (there has not yet to date been a decided essential facilities case in Canada) and how successful TREB will be in making arguments that it should have the right to assert control over or licence its MLS information (for example, based on intellectual property or privacy law arguments).

For a copy of the Commissioner’s Notice of Application see: The Commissioner of Competition and The Toronto Real Estate Board.  For a copy of the Competition Bureau’s news release see: Competition Bureau Sues Canada’s Largest Real Estate Board for Denying Services Over the Internet.

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The Competition Bureau announced today that it has filed an application with the federal Competition Tribunal seeking, according to the Bureau, to “prohibit anti-competitive practices by the Toronto Real Estate Board that are denying consumer choice and the ability of real estate agents to introduce innovative real estate brokerage services through the Internet.”

In making the announcement, the Bureau said:

“TREB is the largest real estate board in Canada, with approximately 31,000 members. It owns and operates the Toronto Multiple Listing Service system (the Toronto MLS system), which contains current property listings and historical information about the purchase and sale of residential real estate in Toronto and the surrounding area. The vast majority of local real estate transactions make use of the Toronto MLS system, which is an essential tool for agents to help customers buy and sell homes. TREB is restricting how its member agents can provide information from the Toronto MLS system to their customers, thereby denying member agents the ability to provide innovative brokerage services over the Internet.

Today, consumers are demanding a greater selection of service and pricing options when buying or selling their homes and many agents are eager to accommodate them, said Melanie Aitken, Commissioner of Competition. Yet TREB‘s leadership continues to impose anti-competitive restrictions on its members that deny consumer choice and stifle innovation.

Toronto MLS information is controlled by TREB and is only accessible to its members. It is much more detailed than what is available on public sites, such as Realtor.ca. For example, the Toronto MLS system contains data about previous listing and sale prices, historical prices for comparable properties in the area, and the amount of time a property has been on the market.

Because of TREB‘s restrictive practices, agents do not have the flexibility to share this important data with customers in innovative new ways, such as through password protected Web sites, also called Virtual Office Web sites (VOWs). VOWs permit a customer to search a full inventory of listings containing up to date data online, before making the decision to tour a home or attend an open house. This enables customers to be more selective and focused, and agents to spend less time trying to find an appropriate property for a specific customer.

While agents can provide detailed MLS listing information not available on Realtor.ca to customers by hand, mail, fax, or email, TREB‘s anti-competitive practices effectively prevent agents from providing the same MLS listing information to customers via a password-protected Web site. As a result, there are currently no VOWs operating in the Toronto real estate market that enable customers to search a full inventory of listings.”

For the full Competition Bureau news release see:

Competition Bureau Sues Canada’s Largest Real Estate Board for Denying Services Over the Internet

For a copy of the Commissioner’s Notice of Application see:

The Commissioner of Competition and The Toronto Real Estate Board

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On May 24^th, the European Commission announced that it had fined Suez Environment and Lyonnaise des Eaux €8 million for breaching a seal during a regulatory inspection.

In making the announcement, the Commission stated:

“Joaquín Almunia, Vice President of the Commission in charge of competition policy, said: ‘Inspections are a key tool in the fight against cartels as companies rarely voluntarily hand over evidence of anti-competitive practices. Even when a company does give evidence in return for immunity, the Commission must still prove the participation of others, the practices themselves and their duration. It is therefore important that companies do not break seals, which may be necessary when there is more than one office to inspect or a day is not enough.’

From 13 to 16 April 2010 the Commission conducted an inspection at the premises of water management companies in France, including LDE, over suspicions of anti-competitive behaviour (see MEMO/10/134). Coming back the morning of the second day, the Commission officials found that a seal had been broken at LDE’s headquarters. The Commission immediately started an investigation (see IP/10/691). LDE and Suez Environnement admitted that an LDE employee breached the seal, arguing an unintentional act

Breaches of seals are a serious infringement of competition law. The Commission however took into account the immediate and constructive cooperation of Suez Environnement and LDE, which provided more information than was its obligation, when setting the fine.

The investigation into suspected anticompetitive practices in the water and waste water markets is still on-going (see MEMO/10/134).”

Like the European Commission, the Competition Bureau has a wide range of enforcement powers available to it to investigate potential violations of competition law under the Competition Act.  These include the power to obtain search warrants, document production orders, orders compelling testimony under oath and wiretaps.  The Bureau is increasingly resorting to these powers, particularly in relation to its enforcement priorities that include the detection and investigation of criminal cartels and deceptive and fraudulent marketing.

The Competition Act also contains obstruction provisions, which make it a criminal offence to impede or prevent (or attempt to impede or prevent) inquiries or examinations under the Act[1] (see for example: Morgan Companies Fined $1 Million for Obstruction and Price-fixing).

As such, companies and organizations that may realistically face the prospect of a competition law investigation or search at some point – for example, companies in higher risk industries including construction, oil and gas, trade associations, etc – are well advised to adopt basic search and seizure guidelines to reduce the likelihood of breaching Canadian competition law in the event of a search.

These commonly include guidelines dealing with how to deal with Bureau officials during a search, advising company/organization personnel, the control of information and PR, inspecting the search warrant and reducing the risk of breaching the obstruction provisions of the Act which can lead to additional liability (such as by breaching sealed boxes or rooms or impeding Bureau officers during a search).

For the full news release see: Commission Fines Suez Environnement and Lyonnaise des Eaux €8 Million for the Breach of a Seal During an Inspection.

For more information about the Competition Bureau’s enforcement powers see: Competition Bureau Enforcement.

[1] Obstruction of an inquiry or examination is a criminal offence under the Act, with potential penalties, on summary conviction, of a fine up to $100,000, imprisonment for up to 2 years, or both and, on indictment, an unlimited fine (i.e., in the discretion of the court), imprisonment for up to 10 years, or both (Act, subsections 64(1), (2)).  Failure to comply with sections 11 (section 11 orders) or 15 (search warrants) are also criminal offences, with potential penalties, on summary conviction, of a fine up to 100,000, imprisonment for up to 2 years, or both and, on indictment, an unlimited fine (i.e., in the discretion of the court), imprisonment for up to 2 years, or both (Act, subsections 65(1), (2)).  In addition, destruction or alteration of records that are sought by the Bureau under section 11 (section 11 orders) or 15 (search warrants) is punishable, on summary conviction, by fines up to 100,000, imprisonment for up to 2 years, or both and, on indictment, by unlimited fines (i.e., in the discretion of the court), imprisonment up to 10 years, or both (Act, subsection 65(3)).  The Act also provides that corporate officers, directors or agents may be liable independently of whether a company is prosecuted for a failure to comply (Act, subsection 64(4)).

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On May 23, 2011, the U.S. Department of Justice announced that it had filed a lawsuit to block H&R Block Inc. from acquiring TaxAct based on concerns that the proposed transaction would further consolidate the “growing U.S. digital do-it-yourself tax preparation software market” from 3 to 2 and eliminate a maverick (TaxAct).

In making the announcement, the U.S. DoJ said:

“’The combination of H&R Block and TaxACT would likely lead to millions of American taxpayers paying higher prices for digital do-it-yourself tax preparation products,’ said Christine Varney, Assistant Attorney General in charge of the Department of Justice’s Antitrust Division. ‘In addition, TaxACT has aggressively competed in the digital do-it-yourself tax preparation market with innovations such as free federal filing. If this merger is allowed to proceed, that type of innovation will be lost.’

…

According to the department’s complaint, H&R Block’s acquisition of 2SS Holdings would eliminate a company that has aggressively competed with H&R Block and disrupted the U.S. digital do-it-yourself tax preparation market through low pricing and product innovation. By ending the head-to-head competition between TaxACT and H&R Block, American taxpayers would be left with only two major digital do-it-yourself tax preparation providers. This would lead to higher prices, lower quality, and reduced innovation. In addition, by taking control of the TaxACT business, which has been a maverick in the market, it would be easier for H&R Block to coordinate on prices, quality, and other business decisions with the other remaining industry leader – Mountain View, Calif.-based Intuit, which makes personal finance programs such as Quicken and TurboTax – the department said.”

This case is interesting in that in addition to considering market shares and existing remaining competition (according to the DoJ, the top three players including H&R Block and TaxAct account for about 90% of the relevant market), the DoJ is basing its challenge on the fact that in its view TaxAct is also a maverick.  Like the U.S., in Canada whether a merging party is a maverick can also be a relevant factor for considering whether competition will be substantially lessened post-merger (though, not surprisingly, whether a party is a maverick can be the subject of considerable debate and maverick cases are relatively rare).  In this regard, the Competition Bureau states in its Merger Enforcement Guidelines:

“Pre-merger, effective coordination may be constrained by the activities of a particularly vigorous and effective competitor (a ‘maverick’).  An acquisition of a maverick may remove this constraint on coordination by reducing incentives to behave in an aggressive manner.  Such an acquisition increases the likelihood that coordinated behaviour will be effective.”

This case is also interesting, if only for being a cautionary tale, in that the DoJ is basing its challenge of the proposed transaction in part on the merging parties’ own internal documents.  According to the DoJ, these include statements from H&R Block’s internal emails and presentations that a primary benefit of acquiring TaxAct is “elimination of a competitor” and the “strategic opportunities” include to “eliminate the brand to regain control of industry pricing and further price erosion”.

Given that “4c documents” are a routine and required part of merger notification in the U.S., and that strategic planning documents are also now required for merger notification filings in Canada regardless of complexity (see Notifiable Transactions Regulations, 16(1)(d)),[1] merging parties are well advised to seek competition/antitrust counsel early in the planning stages of a proposed transaction to avoid similar potential issues from arising.

For the complete DoJ news release see: Justice Department Files Antitrust Lawsuit to Stop H&R Block Inc. From  Buying TaxAct.

For Canada’s merger control rules see: Competition Act, Part IX – Notifiable Transactions and Notifiable Transactions Regulations.

For an overview of merger control in Canada see: Merger Control and Investment Canada.

[1] Subparagraph 16(1)(d) of the Notifiable Transactions Regulations requires that parties to a transaction, and their affiliates, file “all studies, surveys, analyses and reports that were prepared or received by an officer or director of the corporation … for the purpose of evaluating or analysing the proposed transaction with respect to market shares, competition, competitors, markets, potential for sales growth or expansion into new products or geographic regions …”  This requirement to file strategic planning documents as part of a pre-merger notification filing was recently added to the Canadian Notifiable Transactions Regulations as part of amendments to the Competition Act in 2009, and further aligns Canadian merger control rules with that in the U.S. under the HSR Act (the existing 4c documents requirement).

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The U.S. Department of Justice announced that an Iowa ready-mix concrete company has plead guilty to participating in price-fixing and bid-rigging conspiracies in relation to the sale of ready-mix concrete (see: Iowa Ready-mix Concrete Company Pleads Guilty to Participating in Price-fixing and Bid-rigging Conspiracies).

In making the announcement, the U.S. DoJ stated:

“According to a three-count felony charge filed on May 18, 2011, in U.S. District Court in Sioux City, Iowa, GCC Alliance Concrete Inc., a producer of ready-mix concrete headquartered in Orange City, Iowa, participated in separate conspiracies with three different companies involving agreements to fix prices and/or to rig bids for ready-mix concrete sold to various companies in the northern district of Iowa and elsewhere. The department said that the conspiracies took place during various time periods starting as early as January 2006 to as late as August 2009. Under the terms of the plea agreement, GCC Alliance Concrete has agreed to pay a criminal fine, as determined by the court.

Ready-mix concrete is a product comprised of cement, aggregate (sand and gravel), water and other additives. The concrete generally is produced in a concrete plant and is transported by concrete-mixer trucks to work sites, where it is used in various types of construction projects, including buildings and roads.

According to court documents, GCC Alliance Concrete participated in conspiracies through its former sales manager, Steven VandeBrake, in which he engaged in discussions concerning project bids for sales of ready-mix concrete, submitted rigged bids at collusive and noncompetitive prices to customers in Iowa and elsewhere and accepted payment for sales of ready-mix concrete at predetermined prices. VandeBrake also engaged in discussions and reached agreements regarding the prices on the conspirators’ annual price lists for ready-mix concrete sold in Iowa on behalf of GCC Alliance Concrete, the department said.”

Like the United States, in Canada conspiracies (agreements between actual or potential competitors to fix prices, divide markets or restrict output) and bid-rigging (including agreements not to bid or submit bids based on agreement) are criminal offences subject to potential significant penalties including imprisonment for up to 14 years, fines up to $25 million, or both (per count).

Also like other major jurisdictions, many criminal conspiracies have been formed in Canada historically in industries in which it is difficult to compete other than on price – for example, cement, steel and other homogenous products (e.g., chemical inputs).

Unlike the U.S., however, of which this case is a sober reminder, it is relatively rare for Canadian accused to be sentenced to imprisonment, although this has been gradually been changing, particularly in relation to contraventions of the deceptive marketing provisions of the Competition Act (i.e., in relation to fraudulent marketing activities).

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On May 18, 2011, the Competition Bureau issued its new Fee and Service Standards Handbook for Written Opinions to reflect the significant amendments to the Competition Act that came into force in 2009 and 2010 (see news release: Competition Bureau Updates Fee and Service Standards Handbook for Written Opinions).

In releasing its new Fee and Service Standards Handbook, the Bureau said:

“The changes to the Handbook were necessary to reflect amendments to the Act that came into force in 2009 and 2010, including changes to the conspiracy provision, the addition of a provision governing competitor collaborations that substantially prevent or lessen competition, and changes to other provisions of the Act relating to certain pricing practices. The release of the Handbook follows the issuance of the Bureau’s revised Fee and Services Standards Handbook for Mergers and Merger Related Matters on October 22, 2010.”

Under section 124.1 of the Act, any person may apply to the Commissioner, together with supporting information, for a binding written opinion regarding the applicability of any provision of the Act.  A written opinion is binding on the Commissioner provided that all material facts relating to the proposed conduct have been submitted for an opinion (which remains binding for as long as the material facts on which the opinion was based remain substantially unchanged and the conduct is carried out substantially as proposed).

Binding written opinions are available, subject to the Commissioner’s discretion to issue an opinion, for proposed conduct only under the following provisions of the Competition Act, among others:

price maintenance (section 76), exclusive dealing, tied selling or market restriction (section 77), abuse of dominance (section 79), the new civil agreements provision (section 90.1), conspiracy (section 45), misleading representations and deceptive marketing practices (sections 52 to 55.1 and 74.01 to 74.06), deceptive telemarketing (section 52.1), deceptive prize notices (section 53), multi-level marketing and pyramid selling (sections 55 and 55.1), performance claims (section 74.01(1)(b)) and promotional contests (section 74.06).

For past written opinions issued by the Bureau see: Written Opinions.

Key updates in the Bureau’s new Handbook include:

– How the Commissioner of Competition determines whether to issue binding written opinions under section 124.1 of the Competition Act for proposed business conduct (while the issuance of binding advisory opinions under the Act is discretionary, the Bureau will in some cases provide non-binding informal advice regarding proposed business conduct).

– What information is required by the Bureau to commence applicable service standard periods (the Bureau has adopted non-binding service standard periods for its internal performance, including for the issuance of binding written opinions).

– When service standard periods may be paused or terminated by the Bureau.

– How the Bureau determines the complexity level for a proposed practice or conduct (the Bureau assigns complexity designations – namely non-complex or complex – to matters including the issuance of written opinions and merger review, which determines the Bureau’s service standard periods).

– There have been no changes to the required fees or service standard periods applicable to written opinion requests under section 124.1 of the Act.

For a copy of the Bureau’s new Handbook see: Fee and Service Standards Handbook for Written Opinions.

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The U.S. Department of Justice announced today that the NASDAQ OMX Group Inc. and IntercontinentalExchange Inc. have abandoned their joint bid to acquire NYSE Euronext, following a decision by the U.S. DoJ to block the transaction.

In making the announcement, Christine Varney, Assistant Attorney General in charge of the DoJ’s Antitrust Division said:

“The companies’ decision to abandon their bid for NYSE Euronext eliminates the competitive concerns developed during our investigation. … The acquisition would have removed incentives for competitive pricing, high quality of service, and innovation in the listing, trading and data services these exchange operators provide to the investing public and to new and established companies that need access to U.S. stock markets.”

Like Canada, transactions in the U.S. exceeding certain monetary thresholds are required to be pre-notified and obtain regulatory approval.  In Canada, the pre-merger notification provisions of the Competition Act require both parties to specified types of transactions that exceed the statutory monetary thresholds under the Act to file pre-merger notification filings with the Competition Bureau.

Substantive Competition/Antitrust Concerns

It appears from the DoJ’s announcement that its concerns were based on overlap in several relevant markets, including for corporate stock listing services in the United States.  According to the U.S. DoJ, the NYSE and NASDAQ are “effectively the only companies providing corporate stock listing services in the United States.”

In this regard, NYSE owns the New York Stock Exchange, the oldest stock exchange in the United States, while NASDAQ operates the NASDAQ Stock Market, the NASDAQ OMX BX (previously the Boston Stock Market) and the NASDAQ OMX PSX (previously the Philadelphia Stock Exchange).

Other relevant markets that appear to have been a concern for the DoJ included stock auction services, used at the open and close of trading and periodically during market imbalances, and trade reporting facilities, used for the reporting of stock trades occurring outside of a stock exchange, which according to the DoJ would have given the merged entity a monopoly post-merger (i.e., the NYSE and NASDAQ are currently the only two entities competing to collect this data).

For the DoJ news release see: Nasdaq OMX Group Inc. and IntercontinentalExchange Inc. Abandon Their Proposed Acquisition of NYSE Euronext After Justice Department Threatens Lawsuit.

For the Assistant Attorney General’s remarks see Remarks of Assistant Attorney General Christine Varney.

Maple Group Launches Rival Bid for TMX Group Inc.

The decision by NASDAQ OMX and IntercontinentalExchange to abandon their bid for the NYSE comes at the same time as a second rival bid has been launched by Maple Group Acquisition Corp. to acquire the TMX Group Inc.  (see: TSX Will Prosper, Canadian Bidders Say).  The London Stock Exchange Group PLC had already proposed a merger with the TMX worth about $40 a share.

While spokespersons for the rival bidder, a consortium of nine banks and pension funds, have been downplaying the regulatory approvals required for the bid, and in particular merger clearance, it is not clear that sufficient existing competition will remain to avoid behavioural or structural merger remedies being imposed if the rival bid is ultimately successful.

Existing remaining competition is both a substantive factor for merger review under the Competition Act and a key factor for the Competition Bureau in its review of proposed mergers (see for example the Bureau’s Merger Enforcement Guidelines).

In this regard, potential overlap includes the Alpha Group (a new trading system that may be seen as competing and overlapping with the TMX) and CDS Inc. (that handles the clearing of share trades).

On the other hand, the reality is that, unlike some other jurisdictions, fully contested mergers are rare in Canada with most substantive issues being resolved by way of negotiated settlements (i.e., remedies imposed by the merging parties) (see e.g., the Competition Bureau’s Information Bulletin on Merger Remedies).

Potential remedies in this case could include behavioural remedies partitioning existing bank-owned competing exchange facilities from the TMX or the divestiture of some existing bank-owned exchange assets.

One interesting aspect that will remain to be seen is whether existing bank-owned trading assets are seen as merely an incremental addition to the TMX share or whether any such assets are seen as a sufficiently vigorous new entrant as to pose more serious competition law concerns for the Bureau.

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