INST Committee Report
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CHAPTER 6: ABUSE OF DOMINANCE
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Sections 78 and 79 together form the so-called “abuse of dominance” provisions, constituting a key element of Part VIII of the Competition Act dealing with “reviewable practices.” These sections were enacted in 1986 and replaced the previous criminal offence of being party to, or to the formation of, a monopoly. Section 79 permits the Commissioner to apply for, and the Tribunal to make, an order prohibiting a person or persons from engaging in anticompetitive acts. Section 78 provides a list of some of these so-called “anticompetitive” acts for the purposes of invoking section 79; the list in section 78 is not exhaustive and so does not narrow the application of section 79 to only the practices specifically listed in section 78. In fact, the Tribunal has ventured outside this list on a number of occasions. Some of the anticompetitive acts contemplated in Part VIII may also be addressed, in the alternative, in criminal proceedings under section 45 or 61, or paragraph 50(1)(c) of the Act. The Act requires that either one approach or the other be adopted, but not both. To get an order under section 79, the Commissioner must convince the Tribunal, on the “balance of probabilities” (the standard of proof in civil law), of three elements:
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I think the Tribunal, when it has articulated the need
for a market power test in the abuse-of-dominance provisions, has never gone further and
told us what degree of market power you need. [Paul Crampton, Davies, Ward, Phillips
& Vineberg, 59:13:00] |
Where these three elements are present, the Tribunal may make a cease and desist order. In addition to ordering the cessation of the anticompetitive activity, the Tribunal may also, to the extent that it is reasonable and necessary to overcome the effects of the activity, make an order requiring any person to take certain action, including the divestiture of assets or shares. The order must be only for the purpose of restoring competition in the relevant market and may not be for the purpose of imposing punitive measures. The phrase “substantial or complete control” in the first element is the same wording used in the criminal monopoly section that preceded the current abuse of dominance rules. 25 But what degree of control is “substantial”? The case law interpreting the predecessor criminal provision suggests that control must approach 100% of the relevant geographic and product market, but subsequent cases have refined this analysis considerably.
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Predatory pricing can be
captured under section 79…. And also we had a panel of experts who suggested that
price discrimination could already be dealt with under section 79 of the civil provisions
also. [R.W. McCrone, Competition Bureau, 64:09:40] |
| 25 | In section 2 of the Combines Investigation Act. |
The Tribunal must, as the first step to determining whether abuse of dominance exists, define the “relevant market.” Market definition has two aspects: the product market and the geographic market. Determining the relevant market for a product is a complicated undertaking, involving consideration of such factors as direct and indirect evidence of substitutability and functional interchangeability of products, trade views on what constitutes the same product, and the costs of switching from one product to another.In addition to defining the relevant product market, the Tribunal must also define the relevant geographic market. It does so by reference to the boundaries within which competitors must be located if they are to compete with each other and where prices either tend toward uniformity or change in response to each other. The Tribunal has recognized that the relevant market (so defined) will have a significant impact on any conclusion regarding the effect of the dominant firm’s behaviour on competition. In general, however, the more broadly the market is defined, the less likely it is that the firm will possess market power and that its behaviour will be found to substantially lessen competition. Once the market is defined, the Tribunal will address whether there exists “substantial or complete control” over that market. The Tribunal has equated this rather ambiguous phrase to mean market power. “Market power” may be understood to be the case of a dominant player that has the ability to raise its prices (or reduce product quality) in a non-transitory way (the longer term, usually defined as two years) without suffering a loss in profit. With respect to market power, high market share alone will not give rise to a presumption of dominance. In Laidlaw, 26 the Tribunal held that dominance would not be presumed where market share is below 50%. The Tribunal has yet to deal with a contested claim of dominance where the allegedly dominant firm has a market share of less than 85%. Interestingly, the 50% threshold enunciated in Laidlaw is higher than the 35% threshold set in the Bureau’s Merger Enforcement Guidelines and the Predatory Pricing Enforcement Guidelines. More jurisprudence on this issue would be helpful.
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[I]n terms of pricing
provisions … The current provisions under the abuse of dominance might cover that
kind of conduct, but it’s a bit of a grey area because the firm that’s entering
the new market may not in fact be dominant in that market. The abuse-of-dominance
provisions refer to a firm having substantial or complete control of a class or species of
business. Now, you could try to sandwich the conduct under the abuse-of-dominance
provision. It’s not clear that this is what it was intended for … [Douglas
West, University of Alberta, 59:12:40] |
| 26 | Director of Investigation and Research v. Laidlaw Waste Systems Ltd. (1992), 20 C.P.R. (3d) 289. |
| Barriers to the entry of new competition also constitute an important factor. In determining the existence of a barrier to entry, the Tribunal will examine factors such as sunk costs27 and economies of scale, as well as technical and regulatory barriers. Sunk costs or economies of scale on their own are unlikely to be regarded as sufficient. The Tribunal must also consider the number of competitors, their relative market shares, and whether there is excess capacity in the market. Notwithstanding the guidance provided by the Tribunal in past cases, predicting when the Tribunal will find dominance will often be difficult. | [Y]ou
have the right … idea … with respect to modernizing and decriminalizing …
the pricing provisions in the Act and moving them into … the abuse-of-dominance
regime. This will provide a … coherent and single place in which you can think about
those types of behaviour … where there is a competition concern as opposed to the
many situations where there is not. [Neil Campbell, McMillan Binch, 59:11:25] |
| 27 | The costs that the new entrant will not recoup if he subsequently exits the market. Advertising is the most common example of a sunk cost. |
The second element to be considered in section 79 is whether the practice has the effect of lessening competition substantially (this is more commonly referred to as an “SLC” test). Determining whether a practice will result, or has resulted, in an SLC is a difficult determination. What meaning is to be given to the term “substantial”? In Nutrasweet, approximately 90% of the market was controlled by the leading aspartame company. Although a high market share may suggest dominance, such a high level may not be necessary to prove dominance. The Committee anticipates that the meaning of the term will in time become clear through jurisprudence.The final element that must be demonstrated under section 79 is a “practice of anticompetitive acts.” Although “practice” was not defined in Nutrasweet, the Tribunal appears to have set the bar quite low, stating that a practice may exist “where there is more than an isolated act or acts.” Moreover, a number of different isolated anticompetitive acts might constitute a practice when taken together. Anticompetitive Pricing Practices: The Civil Approach As discussed in the previous chapter, the Committee believes that the current approach of treating the practices in sections 50, 51 and 61 as criminal offences is inappropriate in the modern business environment. These provisions — owing to their possible efficiency-enhancing or pro-competitive effects — would be more effectively addressed as reviewable trade practices under Part VIII of the Act, and more specifically under the abuse of dominance rules. At the same time, as the VanDuzer Report and other commentators have suggested, there are certain conceptual difficulties in treating the pricing practices under section 79.The first objection is that removing these practices from criminal treatment to civil review may undermine the deterrence value of treating them as criminal offences. However, the Committee believes that this same deterrence could be accomplished by empowering the Tribunal to levy monetary penalties under section 79. Furthermore, the criminal law treatment could remain in place for practices, such as hard-core cartel activity, that are without redeeming social value. The second objection is not as simply understood. It requires the enunciation of a single legal test to unify under the abuse of dominant position provisions the different legal tests which the Crown, or the Commissioner as the case may be, must meet to succeed before the Court or Tribunal. In addition to the different legal tests existing under the criminal pricing sections and section 79, the different standard of proof in the criminal provisions (i.e., “beyond a reasonable doubt”) must be addressed. |
A remedy based on
damages and fines seems to be a sensible deterrent. You can move that into the civil side
without having the problems on the criminal side. [Jeffrey Church, University of
Calgary, 59:10:55] |
To obtain a conviction under paragraphs 50(1)(b) or 50(1)(c), the Crown is merely required to show that the policy has, or is designed to have, the effect of lessening competition or eliminating a competitor. Paragraph 50(1)(a) and sections 51 and 61 require only that the practice itself be proven (the per se approach) in order to secure a conviction, that is there is no need to show that a lessening of competition has occurred. In both cases, the Crown must prove the offence according to the criminal standard of proof, that is, “beyond a reasonable doubt.” By removing or shifting those provisions from criminal prosecution to section 79, the Tribunal would consider the competitive effects or the efficiencies resulting from the practice, and would make its determination accordingly. The result, in the Committee’s view, would be a better approach for dealing with these practices, one that is more consistent with sound economic analysis. However, if we are going to treat these practices as civil matters, it is necessary to enunciate the single test that will apply to any application brought under section 79. The obstacles to creating a single test under section 79 to permit both criminal and civil practices to be addressed may, in fact, not be as significant in practice as the legislation suggests. With respect to paragraph 50(1)(a) and sections 51 and 61, the Committee has already stated that those practices should be subject to an SLC test. Moving them to section 79 would have this effect. For its part, the Bureau does not appear to have pursued conduct that does not prevent or lessen competition substantially; this suggests that such an amendment would be in line with current enforcement practice. Furthermore, the Bureau’s Enforcement Guidelines on the Abuse of Dominance Provisions seem (the “Abuse Guidelines”) to suggest that the Bureau does not consider there to be any significant difference between the thresholds. This inference is drawn from the same 35% single-firm “safe harbour” found in the criminal Predatory Pricing Enforcement Guidelines and the civil Merger Enforcement Guidelines. So this suggests that the amendment would only clarify the law and enhance its enforceability, without altering it in substance. |
[I]f you put a civil
administrative penalty power into the abuse-of-dominance provisions, you would retain that
deterrence effect of the law. And if you further amended the abuse-of-dominance provisions
to eliminate the words “substantially or completely control”, then the
anti-competitive test would simply be substantial lessening of competition, which is the
same test that you have right now in the predatory pricing provisions. [Paul
Crampton, Davies, Ward, Phillips & Vineberg, 59:12:25]
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With respect to the “eliminating a competitor” test in paragraphs 50(1)(b) and 50(1)(c), the Committee believes that this offends the overriding spirit of the Competition Act, which is to preserve the process of competition and not competitors specifically. Moreover, the Bureau’s Predatory Pricing Enforcement Guidelines and the Abuse Guidelines, make it quite clear that the focus of the Bureau’s analysis is upon the likely impact of conduct on competition, not on individual competitors. Moving these practices to section 79 would make them subject to the SLC test and to the civil standard of proof. This would remove the chilling effect that currently results from treating these practices as criminal offences. Instead, the practices would be subject to a more appropriate treatment, i.e., one that takes into consideration possible efficiency gains. For all these reasons, the Committee recommends:
This amendment would bring the wording of section 79 into closer conformity with the concept of market power as it has evolved through judicial interpretation. Finally, a word on guidelines. The Committee recognizes that the Bureau’s current Abuse Guidelines may need to be revised and expanded in order to accommodate the expanded scope of section 79. Many issues may need to be addressed including, for example, a minimum market share for assessing market control, the best analytical framework for assessing when price discrimination and vertical price maintenance are anticompetitive acts, as well as appropriate approaches to dealing with so-called price predation in the civil context. The Committee, therefore, recommends: |
So the abuse-of-dominance
provisions basically would have a similar anti-competitive threshold and similar
deterrence power in the form of an administrative fine that the criminal provision today
has, except you wouldn’t have to deal with the criminal burden of proof. That’s
… the most effective way of dealing with not only predatory pricing but also price
discrimination and the other pricing practices. [Paul Crampton, Davies, Ward,
Phillips & Vineberg, 59:12:25] In fact, the Supreme Court of Canada told us we need a
greater degree of market power because of the presence of those words “substantially
or completely controlled.” So if we get rid of those words, we simply have the
general market power requirement we have with respect to all of the other provisions of
the Act that have this substantial lessening of competition test, which is a lower
anti-competitive threshold, and the same one that you currently have in the predatory
pricing provision. So you wouldn’t be losing anything by shifting over to the
abuse-of-dominance provisions. [Paul Crampton, Davies, Ward, Phillips & Vineberg,
59:13:00] |
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I think we have a very good
abuse-of-dominance framework that applies to most industries ... The abuse guidelines that
have just been issued are very well done. They’re exceptional. The Bureau is to be
commended for that perspective. [Jeffrey Church, University of Calgary, 59:10:15] |