INDU Committee Meeting

STANDING COMMITTEE ON INDUSTRY

COMITÉ PERMANENT DE L'INDUSTRIE

EVIDENCE

[Recorded by Electronic Apparatus]

Thursday, May 4, 2000

• 1531

[English]

The Vice-Chair (Mr. Walt Lastewka (St. Catharines, Lib.)): I will call this meeting to order, pursuant to the committee's mandate under Standing Order 108(2), a review of the Competition Act.

Since this is a video conference, I suggest that members put on their earpieces to make sure it's easier to hear the speaker on the television.

At this time, I'd like to welcome, from the University of British Columbia, Mr. W.T. Stanbury, professor in the faculty of commerce and business administration.

Mr. Stanbury, welcome. Let's hope our high tech works so that we can get on with the program.

Professor W.T. Stanbury (Faculty of Commerce and Business Administration, University of British Columbia): Thank you, Mr. Chairman.

I have provided the committee with a summary of my comments, and I propose now to put those on the record. My full submission has already been submitted to the committee.

First, I'm very pleased to respond to the industry committee's invitation to comment on the proposed changes in Canada's competition legislation as embodied in four private members' bills: Bill C-402, introduced by Mr. McTeague; Bill C-438, introduced by Ms. Redman; Bill C-471, introduced by Ms. Jennings; and Bill C-472, introduced as well by Mr. McTeague.

The focus of my full submission is on Bill C-472 and, in particular, the extensive changes it proposes in the conspiracy provisions now contained in section 45 of the Competition Act.

Let me deal first, however, with Bills C-438, C-471, and C-402. I strongly support Bill C-438, which will deal with the matter of deceptive marketing practices using the mails. I'm glad that it has been endorsed by the committee as of April 10 of this year.

Second, I strongly support Bill C-471. By improving the mutual cooperation with antitrust authorities—in this case, with respect to civil matters—enforcement of the competition policy will be made more effective.

Third, I support Bill C-402, which proposes to add three anti-competitive practices to the list in section 78, which is part of the civil abuse of dominant position provisions in the Competition Act. I do so, however, for pragmatic reasons, and I outline those on pages 4 and 5 of the submission, where I also offer some additional comments on those provisions.

Let me turn now to the heart of the matter, which for me is Bill C-472. In particular, I will focus on the proposed sections 45, 79.1, and 79.2. Together, these provisions would create an entirely new approach to the core conspiracy provisions now contained in section 45 of the Competition Act.

First, then, I want to deal with proposed section 45. While I offer a number of criticisms of Bill C-472, I support its three key principles relating to agreements among the competitors. They are: the creation of a per se approach to certain types of agreements; second, the creation of new civil law provisions to deal with all other types of agreements among competitors; and third, the creation of an “advance clearance” provision with respect to proposed agreements that would be covered by the new civil conspiracy provisions.

• 1535

The Competition Bureau contends that the proposed section 45 will, and I quote,

create a per se prohibition against agreements to fix prices, allocate markets, restrict production or supply, or engage in boycotts targeted at competitors.

In my view, however, it is not clear that this is what the proposed section 45 in Bill C-472 would do if enacted—for several reasons.

First, there is, in my view, serious confusion regarding the element of intent necessary in a per se provision. I refer you to parts 5.(1)(d) and (e) on pages 9 to 11 of my longer submission.

Second, the “safe harbour” provision in proposed paragraph 45(7)(e) is a direct contradiction of the idea that we are making certain agreements among competitors illegal per se, that is to say, regardless of their scope or effects. I would refer you for more details of my argument to pages 11 and 12 of my submission.

Third, it is not clear that the proposed section 45 will cover potential competitors, but it should do so, to be sure that agreements with possible entrants are also banned. I discuss that on pages 12 and 13 of my submission.

Further, I propose that the proposed section 45 in Bill C-472 should be strengthened in several other ways.

First, the committee should recommend that Canada seek the cooperation of its major trading partners—the U.S., Japan, and the EU—in making an agreement under which each country will cease to exempt export cartels under their respective competition legislation.

Second, the limit on the level of fines imposed following a conviction—now $10 million—should be removed if Parliament is to send a clear and strong signal to businesses that these agreements among competitors will not be tolerated. Further, the committee should recommend that the courts be urged to impose a fine of not less than the estimated amount of ill-gotten gains from the agreement—and I discuss that on pages 13 to 15 of my submission.

In appendix 1, attached to my summary, I have embodied all of the changes that I develop in detail in my submission in a redraft of proposed section 45.

Let me turn now to proposed section 79.1, which is to deal with civil anti-competitive agreements. All agreements among competitors—other than those addressed by the criminal law—in the proposed section 45 would become a civil reviewable matter in the Competition Act. I support proposed section 79.1 in principle, but offer some suggestions for improving it.

First, the proposed section 79.1 should specify that the lessening of competition is best assessed by the extent to which the agreement is able to raise prices profitably for at least a certain period of time, say, one year. I develop that point on page 16 of my submission.

Second, I recommend that the word “may” be replaced with “shall” in proposed subsection 79.1(1) of Bill C-472. The reasons are explained on page 18 of my submission. In summary of that point, Mr. Chairman, the point is that the tribunal, if it finds a substantial lessening, should be obligated to impose an order to remedy the situation.

Third, proposed subsection 79.1(3) should be dropped. By focusing the tribunal's attention on the duration of the agreements mentioned in that section, the provision fails to address the expected overall effect of the agreement on competition. I explain why that's the case on pages 18 and 19 of my submission.

Fourth, proposed section 79.1 should contain provision for an administrative monetary penalty sufficient to remove the ill-gotten gains from a conspiracy that is found to have lessened competition substantially. I develop that point on page 19 of my submission.

No doubt you will hear representations that there should be an efficiency defence and/or that other benefits flowing from the agreement should be considered by the tribunal in determining whether or not the competition has been lessened substantially. In my view, the committee should reject these. In proposed section 79.1, the tribunal should focus only on whether or not the agreement meets the SLC test, that is, the substantial lessening of competition test.

• 1540

Last night or this morning, I sent you copies of my redraft of proposed section 79.1. It's contained in appendix 2. I'll be happy to answer questions on that when I'm finished.

Finally, I come to proposed section 79.2, the clearance certificate. I support this, but suggest that the language of that provision with respect to the test the commissioner is to apply be identical to that to be applied by the Competition Tribunal in proposed section 79.1. I propose some other smaller changes, and they too can be found, in this case, in appendix 3 of the summary of my submission.

Mr. Chairman, that's a brief summary—I want to emphasize “brief”—of the things I have to say here. I invite your questions.

The Vice-Chair (Mr. Walt Lastewka): Thank you very much, Mr. Stanbury.

Now we'll ask for questions.

We'll start with Mr. Charlie Penson.

Mr. Charlie Penson (Peace River, Canadian Alliance): Thank you, Mr. Chairman.

I'd like to welcome Mr. Stanbury via video conference. It's quite a legal presentation you've made in terms of the different categories, and it would seem to me that I'll need some time to study what you're recommending.

But I do wonder about the suggestion you've made in regard to international cooperation with our trading partners on the export cartel. Could you explain that a little further? Also, I will ask if the negotiations going on at the World Trade Organization in regard to some kind of international competition law would not address the concerns you have.

Prof. W.T. Stanbury: First I want to explain the basic principle here. To me, there is a fundamental anomaly in saying that we are going to ban agreements to fix prices and so forth in the domestic market and simultaneously saying that we will exempt agreements to, in effect, fix prices in foreign markets. By the way, all of our trading partners have laws that are exactly or substantially the same.

On the other hand, we also have a provision—currently, section 46—that bans arrangements between foreigners and domestic suppliers to fix prices, arrangements that affect prices and so forth in Canada.

As I say, I find the export cartel exemption a contradiction in a world of increasing globalization. I am not familiar with exactly what is being proposed at the WTO. It may be perfectly consistent with what I'm suggesting here. In any event, my point is quite simple. Our key trading partners are the United States, Japan, and the EU. If we only established an agreement with those countries to mutually get rid of the export cartel exemption, we would make huge progress.

We do cooperate already with those countries, as you know. In particular, some of the largest fines have been imposed recently on agreements that were in fact international cartels. If that's what we think is the correct thing to do, I can't see that we should have a policy that says it's okay, if I may put it crudely, to screw foreigners. If it's wrong to screw Canadian consumers, I think that correspondingly, in a world of trade globalization, it's wrong to do the same thing to foreigners.

Mr. Charlie Penson: Mr. Stanbury, I'm sure you're aware that a lot of countries have exempted industry from competition law—Canada included. I'm thinking of the supply management farm industry as an example.

Prof. W.T. Stanbury: Yes.

Mr. Charlie Penson: I'm just wondering how that would square with your recommendations. Wouldn't other countries point to the problem we have right here in Canada of no access or very little access for foreigners to our market? Competition law does not even apply to that sector. I could see it being a concern when we ask other countries to remove their cartels.

Prof. W.T. Stanbury: First of all, I will note that there's already the regulated conduct exemption, so the supply management marketing boards are already exempt from the Competition Act.

I'm not proposing to change that in itself, but rather simply by cooperation, by saying “we'll withdraw our export cartel exemption if you'll withdraw yours”, with respect to the U.S., the EU, and Japan. By the way, I'd like to do it with other countries as well, but let's face it, the great bulk of our trade is with those particular countries, etc. I don't see that you're going to have a problem here.

By the way, if you want me to discourse on why we ought to get rid of supply management marketing boards, I'll be pleased to do that, but I think that's for another forum.

• 1545

I don't see that there's anything inconsistent with exempting them domestically, and therefore internationally as well—because they're part of the regulated conduct approach—and simultaneously getting rid of export cartels everywhere else. To me, it's perfectly consistent.

Mr. Charlie Penson: I'm only saying that if you can't even achieve competition within all markets at home, there's an argument to be made that you have problems in your own backyard. Other countries have already challenged Canada on denying access, if you like, on those products I've described.

Prof. W.T. Stanbury: Right.

Mr. Charlie Penson: There's the other question, I guess. One of the biggest cartels of all, OPEC, probably still would be off limits, I gather, because we probably wouldn't be able to get that kind of cooperation from them.

Prof. W.T. Stanbury: Probably not.

On the other hand, to the extent that the OPEC cartel indirectly affects us, we might be able to attract some of its extensions. I'm just not sure about that, but it's unlikely. Of course their interests are in raising the prices and restricting supply and so forth, and that's what you'd expect them to do. Bigger and stronger nations than us have come a cropper on that one, so I take that as more or less exogenous.

On the other hand, we do discover that historically OPEC waxes and wanes. Right now it's waxing. A few years ago, the price of oil was waning and was of the order of $12. It's more than double that now. Cartels come and go. Yes, I'd like to strike at it, but it's not possible with this law. It's just impractical.

Mr. Charlie Penson: Thank you very much.

Prof. W.T. Stanbury: Thank you.

The Vice-Chair (Mr. Walt Lastewka): Mr. McTeague.

Mr. Dan McTeague (Pickering—Ajax—Uxbridge, Lib.): Thank you, Mr. Chairman.

Professor Stanbury, it's an honour to be here today with you. I had actually assumed that we were going to be discussing not only my bill, Bill C-472, and Bill C-402, but more particularly the proposed section dealing with the private right of action, but since you focused on other areas, I'm more than honoured to receive your comments.

We have heard from several other commentators, most notably lawyers, that there seems to be some kind of chasm—at least between the academic community in economics and those in legal circles. Without imputing that they may have interested clients, I think the overall change to the Competition Act is certainly long overdue, and this is certainly one of the first steps towards that eventuality.

I'd like to ask you if you believe that the limited private right of action in certain areas, as I have proposed in Bill C-472, is, for you, a small step in the right direction, a negligible step that won't mean a whole lot down the road. Or should we be pursuing this more abundantly? I have already come up against a number of individuals who have suggested that this is not the right thing to do.

As well, I'd like to get your comments on the cease and desist provisions I have provided in my bill.

Prof. W.T. Stanbury: On the private access to the tribunal, I was on the advisory panel in 1996. We had to negotiate an arrangement to go and study it further. That led to the report by Roach and Trebilcock. I find their analysis is very strong. The way I interpret your proposal is that it's a reasonable first step.

Now, I share with my colleague, Tom Ross, some concerns about the proposal for section 75. He and I are in print saying some fairly rude things about that provision. I understand that what you're trying to do with that access is to, in a sense, allow private parties to get some redress on matters that might not be of sufficient import as to affect competition more generally. If that's the purpose, this seems to be a practicable tool to do it.

I'd prefer, frankly, to have a more root-and-branch analysis of section 75 and ask whether or not it needs to be amended before we put your provision in. Now, it can obviously be amended later, but what I'm worried about is that I think section 75 is one of the few sections in the act that has no competitive harm test, and that's an anomaly.

Anyway, I'm sure Tom has discoursed on that and has made that very clear.

Mr. Dan McTeague: Further to that, I suspect—and I hope—you will be a participant in Dr. Sessman's policy forum that's going across the country.

Prof. W.T. Stanbury: Yes. I've already had some discussions with him. I'll have a little more time than I did for the committee, so I propose to address more issues.

Mr. Dan McTeague: Professor Stanbury, there are concerns that have been generally registered, at least that we as members of Parliament have received, short of those who have some degree of understanding of the Competition Act—those being advisers, legal advisers, economists—that the act as it's currently written says a lot conceptually—we heard this from Lawson Hunter this morning—but that it is in fact practically impossible to enforce in many respects.

• 1550

Do you see Bills C-472 and C-402 as furthering the opportunity for much-needed judicial interpretation of this economic act?

Prof. W.T. Stanbury: It would generally have that effect—obviously with more cases.

But can I suggest an alternative or a complement that might assist you? As you know, you can bring private actions in general in front of the courts for single damages. As you also know, there have been very few such cases, for very good reasons. First, you can only get single damages; in the United States, you can get treble. Second, we have the Anglo-Canadian cost rules as opposed to the American style of cost rules, which means that if you lose, you have to pay the other side's costs. Third, in general, we're more restrictive in creating class actions.

So my modest proposal would be to put a double damages provision in there. I'm quite sure that would stimulate a variety of private actions.

Mr. Dan McTeague: Professor Stanbury, I've obviously read your material, and I had actually thought of doing that, but I thought I would go the more—

Prof. W.T. Stanbury: You know, that was in Bill C-256 in 1971.

Mr. Dan McTeague: In fact, I find that most interesting, because I also understand that we've had not very much success in the past. The same group that is appearing to resist any type of change, usually from the Canadian Bar Association, but not all the members—I don't want to speak disparagingly of them—is very much a group of the same individuals who, in 1971, would not brook that change and did the same again when André Ouellet, in 1984, attempted to remove that word “unduly”.

Prof. W.T. Stanbury: In 1981.

Mr. Dan McTeague: In 1981 to 1984, I believe, and he was asked to—

Prof. W.T. Stanbury: No. In 1981.

Mr. Dan McTeague: —consult more widely.

I have one final question, because I know there are other members who do want to enter into this, Professor Stanbury. Would it not be better for the Competition Bureau to maybe select five to ten merger cases rather than devoting all of its resources to bank reviews, which are already being done by the Office of the Superintendent of Financial Institutions, to see if there's any jurisprudence that can come of that—as opposed to dealing with the 412 or 420 that are before it right now?

Prof. W.T. Stanbury: Well, you must understand—and I'm sure they've explained it to you—that it is a filtering process. Some of those reviews take a few hours, some a few days, some a few weeks, and some multiples of months. You have to recognize that as they filter down through the process, a whole bunch of them get rejected as simply not being anti-competitive and not worthy of further inquiry.

I would be loath to take away an analysis of bank mergers from the Competition Bureau, because what you would have is the regulator also effectively being the competition authority in the industry. I think there's a potential conflict there. I think the Minister of Finance really needs the kind, quality, and depth of analysis that the Competition Bureau provides.

There is another way out of this, and I'm sure you're quite aware of it, Mr. McTeague, that is, to give them more resources. Your committee has been very supportive, and as you know, I've written an article saying that there has been a problem here and that things have changed in the last few years. But nevertheless, more resources.... I mean, there are a lot of economists who are quite prepared to come and work on these problems.

Mr. Dan McTeague: Thank you.

I've been given notice that I can ask another question, and I'm pleased to do just that.

You referred a little earlier to the American contrast in terms of triple damages. Given that provinces like mine, Ontario, do not accept contingency fees, that lawyers aren't allowed to operate on that basis, how clear is it that we could have triple damages simply adjudicated by the tribunal, as opposed to the American model, which is to bring them more widely before the courts? Or better yet, how clear is it that we could have two bodies looking out for the interests of the consumer in general, as they have in the United States, rather than one Competition Bureau?

Prof. W.T. Stanbury: First of all, we don't need two bodies in Canada, given the scale of our operations and so on. Second, if you go for double damages.... And I'm proposing that it would continue to go to the courts, not the tribunal. You could go to both if you wanted to; I mean, that could be changed. I don't think there's any legal impediment to do that.

But if I can go back for a second more generally in terms of access to the tribunal, I would urge upon you an approach that is a little more ambitious, Mr. McTeague, in endorsing the Trebilcock and Roach approach, which would include more sections in giving private parties access to that tribunal. That would contribute to your goal of increasing the body of jurisprudence here.

• 1555

Mr. Dan McTeague: That's indeed what I was trying to strike out at, but I understand that we have to try to develop a consensus here, Professor Stanbury. I am one backbencher with a lot of ideas, but if you don't work with your colleagues on both sides you find these things very quickly derailed by powers that are far greater than my few resources in the riding of Pickering, Ajax, and Uxbridge.

I am, however, interested in what you have to say with respect to the question of private rights of action. Could you elaborate a little more? If you believe that what we're doing is rather limited—and I would agree with you that it is—what are other areas? Do you suggest, therefore, that we should expand the private right of action at some point to the entire abuse of dominant position provision of the Competition Act?

Prof. W.T. Stanbury: Yes, I have no difficulty with that, but again, what I would like is the approach in Roach and Trebilcock, where you have a filtration effect on that, so that the right of first refusal, if you like, would go to the Competition Bureau. If they've decided not to proceed, then private parties could do so. But it's important to have the provision that you have in there now, which says that if these are, to coin a phrase, “abusive actions” and without merit, the tribunal could shut them down very quickly and throw them out.

Mr. Dan McTeague: Frivolous and vexatious, which is well-rooted, steeped in English law.... We do not proceed with—

Prof. W.T. Stanbury: Yes.

Mr. Dan McTeague: —ridiculous cases that might otherwise tie up the hands. I think that's one of the safety valves I tried to put in the legislation by simply having one person review it.

In the context that Canada doesn't have a true civil sanction that has no injunctive or general application, but that is, in fact, civilly reviewable, there is a massive distinction between ourselves and other jurisdictions, and I'm not just referring to the United States. If every person has to bring the matter to the tribunal and there are hundreds of cases out there that would otherwise not get to a tribunal, I'm wondering if there is not the need to deal with the more injunctive powers or the more general application of a particular case.

For instance, a company—the examples I've been working with are the grocery industry and the gas industry—an independent, says he's being squeezed out and the tribunal finds that in fact there is a prima facie case, that there is abuse of dominance or whatever the case may be, Bob's your uncle. What prevents another individual who doesn't have the wherewithal from coming to the tribunal but is nevertheless subjected to the same kind of abuse by the same kind of player...? Everything, in my view, in terms of our civilly reviewable provisions of the Competition Act, is on a case-by-case basis. How do we get around that?

Prof. W.T. Stanbury: I'm sorry. I can't give you the answer to that. I can't tell you the subtlety of what we could do in the civil law to deal with that. I just can't help you on that point.

Mr. Dan McTeague: Thank you, Mr. Stanbury.

Thank you, Mr. Chairman.

The Vice-Chair (Mr. Walt Lastewka): Mr. Penson.

Mr. Charlie Penson: Mr. Stanbury, when you were talking earlier about the powers of the Competition Bureau and the need to do a thorough analysis, it raised the question with me about the recent Air Canada-Canadian merger, if you like, where the Minister of Transport asked for a pretty narrow definition or study from the Competition Bureau. What I'm getting at is that you can change all of this regulation as much as you like, but if they're not allowed to apply it, how do we get around that particular scenario?

Prof. W.T. Stanbury: Frankly, it was Parliament that put the provision in the Canada Transportation Act to allow that suspension of the Competition Act. I must admit that I think that's a horrendous mistake. I was an adviser to the commissioner on that case, and I was very troubled from the outset by exactly the point you made, that is, the way it was framed from the Department of Transport. To put it bluntly, I think they wanted a rubber stamp.

Now, I want to give the commissioner full marks for pushing the envelope there, for looking at it rigorously and finding a way to really give the public a sense of what the problems associated with that merger to dominance are likely to be.

The difficulty lies in that provision of the Transport Act, frankly: I mean, change that.

Mr. Charlie Penson: I take your point. I guess it comes back to the point I was making earlier about deregulated industries too. It's a decision made by government as to whether to have them or not, but it really doesn't do much for the Competition Bureau when they're restricted in that regard, and it doesn't protect the public to the extent that is probably necessary.

• 1600

Prof. W.T. Stanbury: Well, remember that before that the Canada Transportation Act brought that.... That section came in with the 1996 act. Before that, mergers in the transport sector, airlines among others, were addressed in parallel by both the Department of Transport and the competition authorities. Why the government chose to change it, I don't know. I don't think it was a good change. I think we could go back and, in a sense, keep the airline industry and all the rest of them subject to the competition law.

If I can add one more point about regulated industries, as you know, the division of labour between regulated industries and competition law is a judge-made series of cases going under the name of the “regulated conduct exemption”. Well, in other jurisdictions, governments have decided to have a statute that spells out, formally, under what conditions an industry will be subject to regulation and what will be subject to competition law.

Now, I know this in the area of telecommunications very well, where telecommunications has moved from regulated monopoly to competition and to, in some cases, almost open entry and full-scale competition. The sad part about it is that although there has been quite good, informal cooperation between the two authorities, I think, there's still a problem of when the transition occurs. When do you shift from CRTC regulation, when the Competition Act doesn't apply, to the day when the reverse is true and the Competition Act applies and CRTC is not part of it?

I would suggest that, again, Parliament could be of great help to both parties by laying out a set of what I would call functional rules in order to establish what that is. I discussed these in an article a few years ago. I would urge you to think about that, because it's within your power to straighten out some of those matters.

Mr. Charlie Penson: It would be a transitional set of rules. Is that what you're suggesting?

Prof. W.T. Stanbury: Yes. Well, it would be a set of rules that would determine at what point you get out from under regulation and become subject to the competition law, because it's more important as we are—quote—“deregulating” and introducing more competition, as we have in telecom and as we did earlier in airlines.

Mr. Charlie Penson: I have one further question. It was in regard to Mr. McTeague's question on cease and desist provisions within Bill C-472. I didn't hear you respond. I'm wondering what you think of the provisions under cease and desist in Bill C-472.

Prof. W.T. Stanbury: I should preface it by saying that I'm one of those who strongly believes in a separation between the investigation and the prosecutorial aspects of enforcement, and the adjudication. In effect, what's happening there is that it's giving the commissioner authority to adjudicate on a short-term basis.

Now, I also want to be pragmatic, and I know that in the airline industry and in others what can happen with predatory conduct and some other kinds of nasty practices is that you can do sufficient harm to a competitor in the short term—by that, I mean a few days, a few weeks—so that subsequently winning the case months later may be, shall we say, academic.

So the concern would be to be able to do that. The question is: what's the best way to get a temporary, almost near-instant injunction in those kinds of emergency situations? You have two options. One, cease and desist the hands of the commissioner with a distinct time limit, as has been proposed. The other option is essentially the analogous power of an ex parte injunction under an expedited basis in the tribunal—or a judicial member of the tribunal—followed by a mandatory hearing within 40 days or 30 days or whatever seems to be appropriate, just the way the commissioner would have to be subject to it. Those are the two options.

Mr. Charlie Penson: So just to use an example, there's discriminatory pricing happening and somebody would have to convince a judge or whoever in the judiciary that there needs to be an order to cease and desist. Is that what you're suggesting?

Prof. W.T. Stanbury: No, it would be ex parte, just like it would be in the case of the commissioner. In other words, the complainant would appear in front of the commissioner or in front of a judge of the tribunal. The same standards that are normally applied for an ex parte injunction, for a very short-term basis, because the other side is not being heard and you don't want to damage their rights in this matter as well.... You want to stem the bleeding if it's a serious problem, but you don't want to assume that's the end of the matter. So in the case that's being proposed, instead of the commissioner, you could have it done with a judge of the tribunal, on, again, essentially analogous criteria.

• 1605

Mr. Charlie Penson: Yes, I understand what you're saying, but it seems to me that there's going to be some time required to make that case. There has to be an analysis done of how much damage or how much harm is happening. The judge has to make that decision based on some kind of criteria that are pretty clear to him.

Prof. W.T. Stanbury: Yes, that's true, and indeed, one of the things the commissioner is going to have to do is to establish criteria or written guidelines as to how he is going to interpret that provision.

Again, I would suggest that Parliament could specify some of the factors that he is to take into account. We could help you there by giving you some suggestions as to the criteria that he should apply—or, by the way, that a judge should apply.

Now, in regard to the point about the need for analysis, absolutely, but that is necessary whether the commissioner is going to make the decision or whether a single member of the tribunal is going to make the decision. The only difference, I suppose, is getting an appointment with him, if you like to act in that capacity; it might be a day or two less than it would be in the case of a judge. But again—

Mr. Charlie Penson: Your point is well taken. You want the separation there so that the people who are hearing the case eventually and the people who are taking the action are different people.

Prof. W.T. Stanbury: Yes—and undertaking the investigation.

Mr. Charlie Penson: Okay. Thank you.

The Vice-Chair (Mr. Walt Lastewka): Thank you, Mr. Penson.

Colleagues, I've been giving you some extra time because I know that once you get on a roll of asking questions, you want to have them kind of successive. I'm being lenient with your time on this difficult subject.

Mr. Murray, I'll follow up with you and then go back to Mr. McTeague.

Mr. Ian Murray (Lanark—Carleton, Lib.): Thanks, Mr. Chairman.

This is a follow-up too. This whole question of predatory pricing has been one that some of us laymen have had trouble with. I was wondering if you could define price predation. What set of circumstances must exist? There are sometimes circumstances that seem to casual observers to be predatory pricing when perhaps they really aren't.

Prof. W.T. Stanbury: The essence of predatory pricing is selling below cost, under conditions where the only way it makes sense economically for the predator is if, in the future, the predator can raise prices and recoup those losses.

The necessary conditions are that the predator has to have a substantial degree of market power, and second, there have to be sufficiently high barriers to entry so that the predator, subsequently having punished the rival—either banished them or just subdued them—can then raise the price in the future.

If there are no barriers to entry, they can't raise the price, because if they do, entry will come flooding in and drive it back down to the competitive level.

Those are the two necessary conditions for that to occur. That's the basic idea.

Now it gets complicated. Where it gets complicated is that in many service industries, airlines being one of them, the marginal cost in the very short run is near zero. I did an analysis of this. If you take it on transcontinental flights for Air Canada or Canadian Airlines, once they're committed to the schedule, as they are every quarter, and they have an empty seat, they should accept anybody who is willing to pay more than $40 or $50, because that covers the additional baggage handling, the commission, a little bit of fuel, and a meal.

Now, at the lowest fare, like the last one I got, they charged, I think, something like $399. That's very low relative to the unconstrained economy fare, which is well over $2,000, but it's still well above that very short-run measure of cost. That's the tricky part: are there some industries where the very short-run marginal cost is essentially zero?

That means that when you get into that kind of situation, the competitor that has the deeper pockets.... As I say, if you get into a bleeding match, the person with more blood will survive and the one with less will collapse, and that'll be the end of the story.

It gets a lot more complicated than that, but that gives you a feel for it, I think. The point is that the law, the way it's drafted today, was drafted in 1935. It essentially was designed to deal with supermarkets and corner stores, to be honest about it, and it was to deal with goods. Well, we're in a world now where most of the sales and production is in services, and some of those services have the characteristics I mentioned, in which case this law is absolutely useless. We need a new predatory pricing law.

Mr. Ian Murray: That's very helpful. I appreciate your analogy.

In the Canadian experience, do you know how often price predation has been alleged and how often it has been proven? I'm just wondering if the director of competition is asking for—

• 1610

Prof. W.T. Stanbury: I think there have been six or seven cases since 1935. As far as I know, it has been successful two or three times. But you must realize that the problem now lies in the law itself, right?

In many areas, by the way, I would not even have the language in terms of predatory pricing. In the airlines, in some circumstances, you can do almost as much harm to a competitor by adjustments in capacity as by fiddling around with low prices.

Let me give you an example. Suppose the discount price is $399. Instead of cutting it down lower than that, simply put on a lot more seats than were previously available or put on more flights, matching the rival. At the same price, most people prefer more convenience to less, so what will happen is that you will, in effect, by flooding that market.... That's what I would call, or what could be, predatory conduct. There are some other games you can play as well.

That's why, for example, Bill C-26, I think, is going to address some of those matters by bringing into regulation some provisions that could be addressed under the abuse of dominant position sections, proposed sections 78 and 79. Those particular matters are going to deal directly with things in the airline industry, where predatory conduct can occur.

Mr. Ian Murray: Thanks very much.

The Vice-Chair (Mr. Walt Lastewka): Mr. McTeague.

Mr. Dan McTeague: Professor Stanbury, I was interested in a couple of the comments that were made a little earlier with respect to your dual solution in terms of cease and desist, one that is contained in Bill C-472 to deal with a limited, temporary order as opposed to what we currently have, which requires in some instances consent, in some instances a tribunal, to make an order that could take anywhere from two weeks to two years.

Of course, we've heard from other witnesses who've said that by this point, of course, the issue is moot, because the person is gone and buried, the hearse has gone away, and the damage is done. You wind up with one or two dominant players who can further their abuse in a potential situation—perhaps in a situation that is more real than potential.

You've also suggested the ex parte order to the tribunal. I was interested in that because it seems to me that in my limited understanding of the securities industry, that's exactly what can happen.

In a securities situation—and I'm not sure about British Columbia, but certainly in Ontario—an order can be made very quickly and a person can get the consent. The securities commission can go in for a few days, at least, and have some kind of temporary stop until they can gather more evidence. That seems to me to be a fairly reasonable bridge, I think, where we can probably bring some of the opposition to the cease and desist provisions back on-line and perhaps make amendments to my own bill, which of course is now the subject of many other discussions.

I'm wondering if you could expand on the notion of the ex parte orders, as you had suggested to Mr. Penson a little earlier. I'm wondering if you believe that might be the best route, as opposed to what I currently have in the bill right now.

Prof. W.T. Stanbury: I haven't devoted much thought to this, but the gist of it would be that what you want in terms of these cease and desist orders is prompt action—

Mr. Dan McTeague: Exactly.

Prof. W.T. Stanbury: —in the light of a house fire, and I understand that. What I would propose is analogous language, only applied to the tribunal, which says that the tribunal shall, within 24 hours, etc., and then all the rest of it would be the same.

The only thing we're really kvetching about is whether it's better to handle that inside the commissioner's office or whether it's best for a judicial member of the tribunal. My point would be that if Parliament spoke very clearly, if it said it expected the tribunal to be able to meet on 24 hours' notice for an ex parte proceeding, for a temporary cease and desist order with specific criteria, etc., with a full hearing to be held not later than 30 days, 40 days, I don't know, whatever seems to be appropriate, it seems to me to be analogous. It has the advantage of a clearer separation between the investigation/prosecution type of role the director and the Department of Justice play and the adjudication role tribunals and courts play. That's really my concern.

By the way, I want to be clear. This is not a lack of confidence in the commissioner. It's just a concern that it's too easy to add more and more of those provisions, etc. Then you're into a Federal Trade Commission kind of situation without really formally appreciating it.

Mr. Dan McTeague: Imagine the possibility of a constitutional challenge under section 7: I think there is a likelihood of that happening whether I like it or not.

• 1615

I appreciate your comments because I think they may be very constructive in helping us to ameliorate this law and to make it more palatable to all sides.

Earlier in the day we heard from Professor Ross with respect to the competitive effects tests in Bill C-472. I was wondering if you could expand on that in terms of what you had defined as an acceptable test or medium. I'm sorry that I haven't had enough time to look at your brief; I'm still going through the hundreds of pages that you've written in years past, with Khemani and many others.

Prof. W.T. Stanbury: Mr. Chairman, if I could direct you to appendix 2, perhaps we can take a look at that, in particular, my subsection 79.1(5).

What I'm proposing in my redraft of your proposed section 79.1, Mr. McTeague, is that the tribunal have a single criterion: substantial lessening of competition.

But then, to help focus the tribunal on what that means, I first started to think about an analogy to the merger provisions, where there's a series of factors that the tribunal is asked to take a look at. Then I thought about it again and I thought it would be even better to narrow the list of factors to one.

That is what I'm suggesting here in my subsection 79.1(5). I'm saying here that:

In determining whether or not an agreement or arrangement in subsection (1)

—that's the SLC test—

has had, is having or is likely to have the effect of preventing or lessening competition substantially, the Tribunal shall give the greatest weight to the extent to which the agreement has had, is having or is likely to have generated economic benefits for the participants.

The gist of that, of course, and the economic benefits for the participants, take the form of increased prices and profits. It's precisely that which we want a bill aimed at preventing price fixing, market sharing, and so on to do: to restrict the ability of the firms to reduce their output and raise price above the competitive level. That's what I'm getting at there.

Mr. Dan McTeague: If it indeed hinges, then, on the prospect of increased prices and profits, and if that's how you would test those, would you not also include in that matters like reduction in choice? Or how about no increase in prices? If you're a successful predator or a successful conspiratorial type and you don't want to have anyone take notice of what you've done, why would you limit it to just those two?

Prof. W.T. Stanbury: Well, because.... Let's suppose that you're faced with a situation in which you think market prices are going to fall, so you form a conspiracy to avoid the fall. That's covered here. Because, in a sense, what the tribunal would be called upon to look at is this: in the absence of this agreement, what would the price level have been? Say it's $1, and they fix the price at $1.50, which is what it was in the marketplace before the shift in demand occurred, which would otherwise bring about a reduction in price. They were able to hold the price, and it would have fallen. The benefit was 50¢ a unit times whatever the units were. If this isn't clear, I'll draft it again to make it very clear that this is what I'm after.

Mr. Dan McTeague: Very good, thank you. I wanted to commend you in terms of the thrust in making the tribunal a little busier. I think they can use a lot more work, considering the history. This may very well go in that direction, although I don't have the ultimate say in that.

Equally, I had a question with respect to your concerns on Bill C-402. You seem to illustrate some concern about it being industry specific, which I can assure you is not the intent of the bill. Bill C-402 is generally designed to deal with the much wider question of slotting fees in an environment where.... For instance, in the United States, I understand, the U.S. subcommittee on small business is absolutely apoplectic over the fact that five players now constitute 30% of the grocery retail market. Words like “oligopsony” are now beginning to permeate that country.

However, the fact that three or four players control up to 90% of all the grocery retail in this country barely makes politicians and policy-makers alike bat an eyelid. In that kind of context, I guess, yes, the grocery industry is of concern, but you're from British Columbia so you'll be familiar with Pendragon cards, who last summer couldn't put any of their anniversary or birthday cards on the shelves of many of the drug chains. According to them, Hallmark Cards and Carleton Cards had arranged exclusively to pay exorbitant amounts to ensure that they would have exclusivity on those shelves, thereby denying an effective competitor from even having an opportunity to compete at retail.

• 1620

I'm wondering if you can perhaps appreciate that there is more generality to Bill C-402 as opposed to specificity, which some people are very concerned about. I have said, in fact, on Bill C-235 last year, that it was impossible to craft legislation that dealt only with the oil industry; it must perforce apply to all, otherwise it would be laughed out of every court in the country. But indeed, that was the position taken by many here in Ottawa.

Prof. W.T. Stanbury: I understand that a number of the issues brought to your attention come from retailing in general, from groceries perhaps more than others, but you've mentioned this one.

My point, for example, on purchasing shelf space or access to a company's inventory, is addressed on page 5. One of the points we'd ask you to think about is that if a firm has oligopsony power or monopsony power along the lines you suggest, it can extract its benefits in a number of ways, but in two principal ways. One is by charging for shelf space, the way you've suggested, or by doing an exclusive deal or whatever—like that. The second is that it can simply extract lower prices from the purchase price, and I'm dealing here from the point of view of the retailer with market power. Or there can be some combination of the two.

My point would be that I want to make sure that when you draft it, we get this straight, that what we're after is the exercise of that oligopsony or monopsony power—buyer power—regardless of which way it's done. That's all. That's the reason for my quibble, if you like. I support it; I'm just saying that in general I want to make sure those provisions have broad application, and second, I want to make sure that you get what you want. I think I know what you want; I'm just not sure you're going to get it.

If, for example, you have your provision, and in the industry they said, oh, well, we can't, we're barred from that method, the shelf-purchase method, we'll just simply demand from you, the supplier, that you sell us 10% below what it would have been in the absence of the deal.... Now, I've seen this in operation. Some years ago—and it's a long time now—I used to stock shelves in a supermarket. That is when the process of renting end displays for the weekend began, so I'm quite aware of this kind of practice—

Mr. Dan McTeague: —more discounts, everyday low prices, co-op allowances.... These are all various trade allowances that the industry has accepted.

Professor Stanbury, we did our own investigation because there was a grave apprehension over the ability to bring some of these matters confidentially before the bureau. If ever tried at a tribunal level, it would suddenly become public and they would be outed.

I know we presented this to the committee some months ago, and I'd be happy to provide you a copy of that, but what we did find was a number of situations where individuals, manufacturers in particular, were all too happy to provide the slotting fee and have a 300%, 400%, or 500% increase in that slotting fee in a one- or two-year period, because they knew that the effect of that would be to drive the smaller manufacturer out and literally crowd them out of the shelf space. It's one of the reasons why, right now, Professor Stanbury, there is a reality that the Canadian consumer's choices on the shelves are a lot less than those in the United States. As a comparison, you may want to look into that.

But I have a more important and pressing question: do you see the proliferation of one- or two-player industries right across Canada as necessitating far greater changes to the Competition Act than those envisioned or allowed by my bill?

Prof. W.T. Stanbury: I must admit I am troubled by the rising concentration, despite the rhetoric that in the world of globalization and so forth and so on, foreign competition will take care of things and you shouldn't pay attention to domestic concentration. Well, that all depends, frankly, on whether, in a specific market, product or geographic, there is in fact real foreign and domestic competition. In some of the retail markets you're dealing with, there is a very tight oligopoly or oligopsony, and that should be a matter of concern to us.

Now, you might want to think, in addressing that more generally, as to whether we need yet a further provision to the conspiracy section, which would not actually address conspiracy but would deal with conscious parallelism. Because many of these practices can find their way in the way these small numbers of firms coordinate their behaviour; I've addressed this at some length in some other literature and so on.

• 1625

I think what you need to do is to think about the alternative ways, the range of ways, to try to get at the problem you're identifying. I'm not saying this isn't a reasonable start. I'm just saying I wouldn't hold my breath, that by going after this one particular practice it doesn't shift and go somewhere else and make it.... In a sense, they'll be able to get around you. That's what's troubling me.

If your real problem is oligopsony, let's write it in terms of oligopsony and simply give some illustrative ways that it might be used, but don't try to foreclose it or get too specific. Focus on the gravamen, which is oligopsony power, the capacity to drive prices below the competitive level when you're buying goods, rather than above the competitive level when you're selling goods as an oligopolist.

Mr. Dan McTeague: Thank you, Professor Stanbury. I also want to thank you in particular for all the good work you've done on this. It has been very helpful. I spent a whole summer last year sifting through most of your information. I can tell you that we don't gather these things by osmosis. The good work that so many of you have done—Professor Ross and others—has contributed immensely in helping, so that maybe, even though we get one shot at this as members of Parliament from time to time, we'll get it right the first time.

Thank you, Mr. Chairman, for your time.

The Vice-Chair (Mr. Walt Lastewka): Thank you, Mr. McTeague.

Are there any further questions?

Mr. Penson.

Mr. Charlie Penson: Mr. Stanbury, I've had a little trouble getting my head around this whole competitive business area and what the role of government should be in these areas. As a member of Parliament, I haven't had a lot of complaints about anti-competitive behaviour. There certainly have been some, but I guess my concern is this: where is the line between competition law and the marketplace? In any case, isn't business really, by its nature, out to try to win a bigger market share? Every company would like to grow their business and have a bigger market share.

I'm just struggling with this whole idea of how much competition law you need. When we talk about starting to divide it up by regions, does that mean that it should be by county? When you get into anti-competitive behaviour, how do you sort this all out in terms of what the marketplace should be looking after and what should be competition law? That's what I'm struggling with. If you have any thoughts that could help us, I would appreciate it.

Prof. W.T. Stanbury: The first thing is that competition law is designed to strike at anti-competitive behaviour. In other words, the thing we rely on to get allocative efficiency, variety, choice, and all the other good things we want is effectively competitive markets.

However, it's certainly true that businesses don't just want to maximize market share; they want to maximize profits. There are two broad ways in which you can do that. One, you can compete over a wide range of techniques. You may or may not succeed, or you may succeed moderately, or you may succeed spectacularly well with a great innovation and get very rich.

Great. I'm not at all opposed to that, but then there are certain kinds of behaviour that, if they're used in the context of market competition, can be anti-competitive. Of course, the problem for competition law is separating the sheep from the goats, because, as I'm sure Tom Ross pointed out, there's such a thing as really tough but fair competition, which we don't want to stop. Some people, by the way, will go to the wall under that kind of competition. Then, there are other kinds of competitive tactics and behaviour that we want to strike down.

For example, I don't want.... And the law today does not say that you cannot fairly and properly obtain a monopoly, that is, become essentially the sole seller in a given market. By the way, a market is a combination of geographic scope and product substitution. I'll come back to that if you like.

At the same time, it says that you can retain a monopoly but you must do it, in a sense, by fair means, by means that do not violate the competition law.

That's what Bill Gates ran into. The issue wasn't whether he got a monopoly or its very dominant position. The issue was, how did he get it and, in particular, how did he maintain it? That's what the court was offended.... Certain of the tactics were unacceptable. He's not being taken to task for having 95%. The issue is, how did he get it and, more importantly, how has he set about to keep it? According to the U.S. courts, he has gone over the line.

• 1630

Well, the Canadian law is substantially the same, that is, it's behaviourally oriented, not structurally oriented.

So to go back, the key idea is to give business a wide range in which to compete, but where businesses, in a sense, collude to fix prices or bar entry or they engage in predation or seek to merge to restrict competition rather than for efficiency gains, we have to put a stop to it.

Competition law is essentially a backup. If the market runs beautifully, the commissioner should be asleep. The reality is, the market does not work on a perfectly good, self-sustaining basis. There are competitors who will seek to fix prices. There are competitors who will exercise their market power in ways that are unacceptable to society. We simply have to hit them on the nose and say “no”.

The problem is to be sure that the criteria you are using are appropriate, that people get fair warning, that the penalties are appropriate, and that the means of investigation are appropriate. This is a complex process. If you're newer to this than I am, you realize that this has evolved in Canada since 1889, and for many many decades we did a lousy job. We're doing a pretty good job now, but we can do a better one.

Mr. Charlie Penson: Mr. Stanbury, I certainly hear what you're saying and agree with you, but it seems to me that there are quite a few methods of getting to a competitive marketplace. We've had this discussion around the table here quite a bit. I often use the example of retail gasoline sales in the United States, which are supplied 80% by independents, 20% by the majors. Canada is just about the exact opposite of how that works.

It seems to me that if you have a healthy environment for businesses to work in, there's more chance of competition that will look after all of these areas—without having to use competition law. As you said, I think competition law is a kind of backstop in case it doesn't work.

I'm just wondering if you would agree that there's really no substitute for a healthy business environment that encourages a lot of businesses to operate. That might be the best method.

Prof. W.T. Stanbury: Yes, but part of that encouraging includes using the law to strike down, for example, certain kinds of barriers to entry, like tariffs. We have been phasing those out. Now we have to worry about non-tariff barriers.

What we want is the greatest degree of competition in general, but while government is promoting competition over here, it's restricting it over there. We all know—and you referred to it earlier—that large sections of the economy are subject to direct regulation.

There's a wonderful book I read years ago, which was called Government as the Mother of Monopoly. It's really true. What the author was referring to are the situations like supply management marketing boards and other arrangements. At that time, it included the monopoly of the telephone system and so on. That has all changed, but my point is, that's the direction. We'd have to systematically go through it and strike down, where at all possible, all of those constraints, because the state is the author of many of those constraints.

Let me give you another one that is very abstract but extremely important. How about all those barriers to interprovincial trade? I mean, you and your provincial counterparts—

Mr. Charlie Penson: My understanding is that it's a cost to Canadians of $7 billion a year.

Prof. W.T. Stanbury: Yes, and frankly, between you and me, that sounds low.

My point would be that at the federal-provincial ministers' meeting every year, that ought to be on the top item on the agenda, and every year they ought to have a progress report: what have we done to reduce those barriers? Instead, what happens is that when Ottawa wants to get along with the provinces, they tolerate all kinds of interprovincial barriers to trade.

It seems to me that if you're really serious about making markets work, the agenda has to include all of those things as well as competition law. I don't think we have any differences there. It's just that you have to realize the range of issues that you really need to bring into play.

Mr. Charlie Penson: Yes. Thank you very much. I appreciate your comments.

The Vice-Chair (Mr. Walt Lastewka): Are there any further questions?

Mr. Stanbury, I want to thank you very much for your presentation and for the dialogue we've had this afternoon. It has been very valuable to us. I'm sure we'll have some more questions for you at a later date, but for now, thank you for your participation today.

Prof. W.T. Stanbury: Thank you, Mr. Chairman. It has been a pleasure to try to help you.

The Vice-Chair (Mr. Walt Lastewka): The meeting is adjourned.