INST Committee Report

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Committee Report

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INTRODUCTION

Canada’s original competition law was born out of the public’s dislike for some of the business combinations that were being formed just prior to the turn of the 20th century. However, as history would later show, the large-scale businesses that were fashioned from key mergers and acquisitions in related activities at that time were, for the most part, an organizational response to innovation in products and processes that resulted in vast economies of scale. These scale economies dictated new business strategies based on massive investments in physical capital as well as a commitment to building integrated operations extending backward into core raw materials and forward into marketing and distribution networks. Furthermore, these strategies could only just then be implemented with the opening up of more distant markets as integrated railway and telegraph networks were developed.

Unfortunately, this good came with the bad. The unprecedented cost advantages bestowed upon large-scale operators led to the elimination of many small-scale merchants. So the world’s first antitrust law — Canada’s An Act for the Prevention and Suppression of Combinations Formed in Restraint of Trade — was enacted in an attempt to assure the public on two grounds: first, this industrial transformation would occur in an orderly way, only the inefficient would be driven out of business and not efficient small-scale operators through predatory means; and second, in the end, the ultimate beneficiaries of technological and organizational change would be consumers. The original antitrust legislation, as well as the three Acts that would replace it, had three targets: conspiracies to raise prices; mergers and acquisitions that would monopolize markets; and a dominant firm’s abusive business practices and predator policies that would injure, rein in or drive out its smaller rivals.

The modern version of the original antitrust Act, now known as the Competition Act, is a well-crafted economic instrument designed to preserve and enhance the process of competition. It is a law of general application; it applies to all industries in equal measure (except those provided an exemption by federal or provincial legislation) and puts the interest of no one competitor or class of competitor ahead of those of any other. Canada’s Competition Act, the Competition Bureau and the Competition Tribunal have supplemented the competitive process in producing an economic environment in which non-compliance with the law is more the exception than the rule. This has been accomplished by:

I … encourage the Committee to rise to the challenge and provide a more ambitious blueprint for the modernization of our Act … It’s my hope that this blueprint will form the basis of a government white paper that will … launch the next round of amendments. [Paul Crampton, Davies, Ward, Phillips & Vineberg, 59:11:15]

[Y]ou … need amendments … to make the Act more effective in addressing anti-competitive conduct and … to reduce the chilling effect the Act … has on a broad range of pro-competitive conduct, whether it’s these pricing practices …, or horizontal cooperation, which … in the vast majority of circumstances is pro-competitive once you get outside this limited category of hard-core criminal cartel conduct.. [Paul Crampton, Davies, Ward, Phillips & Vineberg, 59:12:45]

establishing a broad competition framework, thereby setting “the rules of the game”;

making the guidelines of the enforcement agency — the Competition Bureau — widely available to the business community, thereby making the rules known to all players;

having the Bureau fulfil its advocacy role at many regulatory hearings and other public events, thereby expanding the coverage of the rules; and

judiciously enforcing the many provisions of the Act under the watchful eye of the referee — the Competition Tribunal — so that the game is called according to the rules.

At the turn of the 21st century, a similar set of circumstances to that of the turn of the 20th century appears to be unfolding. The source of change is again innovation, but this time it has less to do with cost advantages of scale and scope associated with new physical capital and more to do with creative advantages associated with “human capital.” Rather than exploiting the size and scope of a firm, or more succinctly, the efficiencies obtained through central direction of an industrial hierarchy, the business corporation is focusing on being lean and nimble. Many modern corporations are, therefore, spinning off non-core competency activities, while weaving ever-larger webs of business networks. This organizational structure — which relies on independent, highly specialized, interdisciplinary work teams — provides focus to the firm at a time when the currency of the so-called “Information Age” is the creative talents of the workforce. The business sector is thus banking on increased productivity through a strategy of creative competitive advantage. When one combines these corporate developments with innovations (such as containerization in transportation and digitalized broadband in wired and wireless telecommunications) and policy shifts to more liberalized trade and deregulated industries, the business landscape is increasingly becoming global rather than national.

Firms using today’s newest business models, such as “just-in-time” production and “Big Box” retailing, are exerting tremendous pressure on small and medium-sized businesses that are not adjusting. As a result, new stresses and fracture points in the competition policy framework are appearing once again. Although the Competition Act is a modern piece of legislation that reflects contemporary economic thinking and provides a balanced approach to enforcement, there are signs that it can be made more effective in certain areas and, where it is already effective, can be made more efficient. Amendments to selected provisions of the Competition Act and to the administrative processes of the Competition Tribunal are the order of the day.

I think the proposals for the two tracks, criminal versus civil in section 45, is something that will have to be done … it’s the sensible thing to do. [Jeffrey Church, University of Calgary, 59:10:55]

The difficulty with the reform of section 45 is not … that there’s any disagreement around the evil of hard-core cartels. The difficulty is whether you can … write … a law that is not massively over-inclusive.[Neil Campbell, McMillan Binch, 59:12:55]

[W]hy do we not have a Microsoft case in Canada? Seventeen states in the U.S., the federal government in the U.S., and Europe have all looked at that. There’s no argument that the impact in Canada … is any different. … [T]he answer: We don’t have the funding to take that abuse case in Canada. [Robert Russell, Borden, Ladner & Gervais, 59:09:50]

My own reading of what the Bureau has … in the merger area is that … they are probably pretty well funded … The user fees have provided a cashflow to assist in that. [Neil Campbell, McMillan Binch, 59:12:35]

The Committee began answering the call for a modern and effective competition law regime in its Interim Report. We broached, amongst other issues, the private right of action in respect of some civilly reviewable matters, such as refusal to deal (section 75), exclusive dealing, tied selling, and market restriction (section 77) and delivered pricing (section 80). With the Public Policy Forum’s subsequent finding of a favourable consensus (provided that adequate safeguards against vexatious and frivolous suits were put in place), the Committee amended Bill C-23 in favour of such rights (excluding section 80). Consequential amendments were also necessary. The Committee further amended section 75 to ensure that an “adverse effects on competition” test was added, which would eliminate any incentive for frivolous commercial disputes, given that the Commissioner would no longer be the gatekeeper of these sections.¹

In terms of … enforcement … there are really three things that can be dealt with … There is this question of funding … the question of alternative enforcement mechanisms like private access, which … for civil cases would help the Bureau a great deal by taking some of the workload away from them. The other area on the agenda … is … reform of the Tribunal process. [Margaret Sanderson, Charles River Associates, 59:11:20]

Typically, the “competitive effects test” used in the Act is that of a “substantial lessening of competition.” Section 75 will, however, use an “adverse effects on competition” test. The meaning of “substantial lessening of competition” has been refined to a degree by judicial interpretation and the meaning of “adverse effect on competition” will have to be similarly clarified. The use of the “adverse effects” test in section 75 is to permit small and medium-sized enterprises the opportunity to have their cases heard in the new private access regime. In the case of a firm with a small market share, a refusal to deal might not “substantially lessen” but still “adversely affect” competition. The requirement to show a “substantial lessening of competition” in a market would be likely to exclude private action in all but the largest cases.

The Committee’s actions will not stop there; we intend this report to become a blueprint for a government White Paper that will launch the next round of amendments to the Competition Act and the Competition Tribunal Act. The report will identify both the relevant sections of the two Acts needing reform and the pertinent issues related to the options under consideration. Once these options for reform are clarified, the Committee will weigh them, look for consensus among the various stakeholders, and recommend a course of action; where warranted, a timetable for reform may also be provided. The reasoning for the Committee’s preferences will be spelled out in detail where possible, as the Committee finds transparency an essential ingredient to the reform of complex issues involving competition policy and its many varied stakeholders.

Although the Committee is not under the illusion that only one combination of reforms is possible or desirable, we do caution both the reader and policy-maker that the recommendations offered here are a package of reforms that are not easily cherry-picked due to the Competition Act’s complex set of interrelationships within its different sections. Attempts to select among these recommendations to craft a different competition framework or different strategy are not without consequences.

The plan of this report is as follows. In Chapter 1, the Committee picks up the discussion on the historical background of competition law and policy and the key economic developments that are challenging Canada’s competition framework today, as set out in this introduction, by placing it in three settings. We first venture into the proper role of competition law given our understanding of the workings of the process of competition and the impacts of other complementary government policies. Gaining an appreciation for the interplay of these influential factors, we are able to establish a suitable role for competition law in Canada. In the second setting, a comparative analysis of different competition law provisions, involving both criminal and civil matters, is undertaken; this analysis suggests an optimal enforcement strategy for a mid-sized, open-trading economy — the Canadian circumstance. Finally, the merits of framework law versus “special provisions for special industries” approach are debated, concluding in favour of a return to a framework law, but one that is bolstered by more general enforcement powers than in the past.

[T]here’s been a tendency to describe private action as … a … way of helping the Commissioner out, … putting more resources into his pocket and doing some of his work … but I don’t see it that way … [O]ne has to think much more broadly about private action … [as] a way of … enlarging the scope of competition cases. … [W]e should get a much richer case law and a much richer body of decisions from which to draw. [Roger Ware, Queen’s University, 59:11:35

[T]here’s a theme percolating that jurisprudence is just inherently good and we should have lots of it. I’m concerned about that, because it’s a very costly way to create law, relative to legislation that’s fleshed out by regulations or guidelines, which have their imperfections but can also play a much more efficient and faster role in many areas. The real question … is how do we ensure that we get good, economically sound competition law enforcement …? [Neil Campbell, McMillan Binch, 59:12:15]

In Chapter 2, the Committee reports on the state of competition in Canada and the state of enforcement. In analyzing the latter’s contribution to the former, we distinguish between the Bureau’s array of enforcement instruments, enforcement guidelines and resources, and its Commissioner’s independence and accountability structure. We also evaluate the role of the Tribunal and the courts, the deterrence incentive structure of fines and jail time, as well as the enforcement potential that private rights of action are likely to provide. In Chapter 3, the Committee discusses the role of the Competition Tribunal and its decision-making procedures.

In chapters 4, 5, 6 and 7, the Committee addresses the important provisions of the Competition Act: conspiracy; the anticompetitive pricing practices; acts constituting abuse of dominance; and merger review. In each chapter, we assess the economic content of the law, the merits and appropriateness of whether the relevant practices should be placed in the criminal or civil part of the Act, the substantive elements of each provision and the Bureau’s administration. The contentious issues will be identified, sorted out and thoroughly assessed in light of modern economic exigencies. The Committee will advance reforms where a consensus can be reached; where it cannot, further study is recommended.

In Chapter 8, the Committee considers a narrow but important issue dealing with the application of the refusal to deal provision (section 75) in gasoline retailing. That industry presents particular competition concerns because independent retailers must necessarily depend on large, vertically integrated producers who both supply and compete with them. Could a large, vertically integrated producer restrict competition by withholding supply to a competing independent retailer in the case of a general supply shortage? And, if so, how would the Competition Act respond? Answers to these questions are necessary because there may be competition implications for other sectors of the Canadian economy where vertical integration is also a structural characteristic. Finally, in the Conclusion, the Committee summarizes its recommendations for improvement of the competition policy framework.

Innovation is a lot faster. Transactions are taking place in nanoseconds, as opposed to quill pens on parchment. The pace of market behaviour is so fast today that it really imposes a very difficult challenge on an enforcement agency. [George Addy, Osler, Hoskin & Harcourt, 59:12:00]

[I]t would be very helpful if your final report provided a strong endorsement of the principle that competition law as framework legislation ought not to be expanded to include a hodgepodge of industry-specific amendments. [Paul Crampton, Davies, Ward, Phillips & Vineberg, 59:11:15]