INDU Committee Report

CHAPTER 2:

CONSPIRACIES AND OTHER
HORIZONTAL AGREEMENTS

Section 45 is one of the central pillars of the Competition Act, dating back to 1889. [Paul Crampton, 53:15:40]

In joining forces in business life today, parties have choices of how they want to integrate their businesses or coordinate them. Those choices today are affected by whether or not it will receive merger treatment or may be exposed to the sanctions of the criminal law if it transgresses that standard. [Tim Kennish, 44:9:15]

The principle of separating agreements between competitors into a criminal category that address hard-core cartel conduct and a non-criminal category that address everything else … holds some significant potential for improving the Competition Act. [Paul Crampton, 53:15:40]

Legal Treatment of Conspiracies and its History

The prohibition against horizontal agreements (i.e. between competitors in the same product market) to fix prices, allocate markets and/or restrict the entry of competitors has been a central feature of Canada’s antitrust Act since 1889. For most of the original Act’s history, the prohibition was ineffective due to the presence of the word "unlawful" and the lack of a permanent investigative and enforcement body. Between the Combines Investigation Act of 1923 and the enactment of the Competition Act in 1986, the enforcement of the prohibition varied according to the legal interpretation given to the term unduly. In this period, not surprisingly, there were several unsuccessful attempts to rid the Act of this word in order to strengthen the prohibition. After the decisions of the Supreme Court in Aetna Insurance (1977) and Atlantic Sugar (1980), the Crown had to prove that the alleged conspirators both intended to enter into the agreement and intended to lessen competition unduly. The double intent proved hard to establish, as can be seen by the drop in the Crown’s success rate from 90% to 55%.

The enactment of the Competition Act reversed these court decisions, however. Section 45 of the Competition Act provides that "everyone who conspires, combines, agrees or arranges" to lessen or prevent competition unduly is guilty of a criminal offence and is liable to fines and/or imprisonment. This provision incorporates a defence for horizontal agreements between competitors for the exchange of statistics, defining product standards, or the sizes or shapes of product containers and packaging, the exchange of credit information, research and development, placing restrictions on advertising, promotion or measures to protect the environment, and for the adoption of the metric system of weights and measures. There are specific defences for export consortia and specialized agreements. The Act’s most significant changes, however, were introduced in sections 45(2.1) and 45(2.2), which required that "the court may infer the existence of a conspiracy, combination, agreement or arrangement from circumstantial evidence" and "it is necessary to prove that the parties thereto intended to and did enter into the conspiracy, combination, agreement or arrangement, but it is not necessary to prove that the conspiracy, combination, agreement or arrangement" would have the effect of lessening competition unduly.

Conspiracy-Strategic Alliance-Merger: An Organizational Continuum

The primary concern about cooperation between competitors stems from the fear that these will reduce their competitiveness through restricting supply and raising prices (possibly also leading to lower quality and less product selection). Cartel-like behaviour of this sort not only redistributes income (from buyers to sellers) in a covert way that is tantamount to fraud, it also reduces economic efficiency as resources are misallocated. Such monopolization thus produces lower economic welfare and is deemed to be a crime against society. Mergers and acquisitions may also amount to an alternative form of achieving this desired result (although they may also lead to additional efficiencies).

Not all cooperation between competitors is anticompetitive. Perennial examples would include time-limited agreements not to compete after the sale of a business to allow the buyer to profit from its goodwill and agreements on product standards. Recently, however, the business sector has preferred to form strategic alliances, usually in the form of a joint venture and involving less integration than a full-blown merger. These horizontal agreements typically provide for formal supply arrangements, access to technologies and specialized expertise, distributional channels and customers (particularly in foreign markets where there are trade barriers), capital funding, risk sharing, or collaboration on research and development. These agreements are thought to offer efficiencies, particularly in network industries.

Strategic alliances of this sort, while usually procompetitive and restricting competition in only an ancilliary way, may be afforded criminal or civil treatment under Canada’s Competition Act. Law enforcement may proceed by way of a criminal trial under the conspiracy provision (section 45) or by way of a civil trial under either joint dominance (section 79) or a merger (section 92). The choice of venue has important consequences:

The principal differences between the criminal treatment and the civil provision is that the new civil approach would not expose those agreements to the imposition of fines or penalties. Also, there would be the application of the rule of reason, wherein there would be an assessment of procompetitive benefits, such as efficiency improvements that might come about, which is not possible under the present law. [Tim Kennish, 44:9:10]

In effect, a strategic alliance might be regarded and treated as a so-called "hardcore cartel" or a questionable merger:

The so-called hardcore offences are considered to be presumptively unredeeming and not worthy of examination as to whether there are any benefits that flow from them and simply banned outright. The per se approach on these hardcore offences is thought to have an enforcement simplicity that would enable prosecutions to be more effective in areas which pose the greatest threat to competition. [Tim Kennish, 44:9:10]

This is significantly different from how mergers are judged. Mergers are assessed on a solely civil basis, again applying a rule-of-reason approach. Interestingly, mergers are much more effective in eliminating competition between parties to those mergers than agreements amongst competitors which might just create a strategic alliance or joint venture, in that they are permanent and they tend to eliminate all aspects of competition in the area of the merged business. [Tim Kennish, 44:9:15]

Many witnesses, including the Commissioner of Competition, admitted that procompetitive strategic alliances might be inadvertently caught by the conspiracy category of horizontal agreements and that this possibility could be having a significant chilling effect on the business community. Criminal law is not well suited to judge these agreements. Specialized expertise is missing in the criminal courts; structural considerations (market share or concentration) tend to dominate the very limited analysis; no consideration is given to efficiencies or innovation; and sanctions are limited to fines as behavioural solutions are not available. For these reasons:

We need to deal with the area of strategic alliances and the conspiracy provisions of the Competition Act. Presently, Canadian businesses are doing their best to compete more effectively in these global markets. Some are developing close ties with other firms to gain access to technologies, to cooperate in research and development, and to achieve economies in marketing and supplier arrangements in new markets. The challenge here comes from the conspiracy provisions of the Act, which prohibit agreements that lessen competition unduly. The problem is that strategic alliances often involve agreements among competitors. Certainly the criminal sanctions against conspiracy may discourage business from entering into strategic alliances. They may, in effect, bring a chill on business in order to enter into such an alliance. It’s a problem … that criminal law is not well suited to distinguish between truly anticompetitive conduct and conduct that is in fact a manifestation of healthy competition. [Konrad von Finckenstein, 43:9:10]

The Committee observed a general consensus form on this opinion.

Proposal for Two-Track Treatment

Only a few witnesses commented on the conspiracy provisions of the Act. Most of them were satisfied with the established framework for market power/behaviour and the jurisprudence afforded these provisions. In the view of most commentators, section 45 adequately reflects modern economic thinking; though, it was conceded that some efficiency-enhancing strategic alliances might inadvertently be caught by it. For these and other reasons, some witnesses ventured a two-track alternative:

In our view, the Competition Act would be strengthened if you drew a clear line between egregious criminal behaviour, such as price-fixing, to which conspiracy provisions should apply, and behaviour that is really an arrangement among competitors to compete more effectively, and which, if it has any anticompetitive aspects, would be assessed under civil law rather than criminal law. [Konrad von Finckenstein, 43:9:10]

And

Since about 1990-1991 I’ve been arguing … for a change in our laws against price fixing … I think it is important that we create two branches for agreements between competitors, one branch that makes securing convictions against real true price fixers easier than it is currently. The current law can make that rather difficult because of the inclusion of the word "unduly," which can be confounding. But at the same time I recognize that we need to be more accommodating to strategic alliances and joint ventures, all these kinds of complex agreements that we see these days between firms that are in some sense competitors but in another sense can benefit, and all of Canada can benefit, from their cooperation. So I thought the law needed to create the two branches. [Tom Ross, 46:9:10]

Additional work could go into redesigning the abuse of dominant position provision (section 79) in order to make the treatment of strategic alliances and joint ventures similar to that accorded to a merger.

First of all, the new section 79.1, which is the branch that is sort of designed for these strategic alliances and joint ventures, does not have an efficiency defence in it. It does give the Tribunal discretion. It says the Tribunal may issue an order, but it doesn’t really give much guidance as to what would influence that. Our view was that we should treat these kinds of agreements like we would treat mergers. In mergers, we consider efficiency defences. In fact, that’s the main point of breaking these things off … so that you can review their efficiency impact and weigh it against the anticompetitive effect. Sometimes the anticompetitive effect might be quite small relative to the gains that could be attained through the joint venture of the strategic alliance. [Tom Ross, 46:9:10]

Modification to the Bureau’s enforcement guidelines is also recommended: "As we do with mergers, I like the idea of some sort of safe harbour guidelines, but I like them to reside in guidelines rather than in the legislation" [Tom Ross, 46:9:15].

Another witness, though committed to reform, was more forthcoming in his reservations with respect to the proposed changes in Bill C-472:

The Competition Bureau contends that the new 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 amended section 45 in Bill C-472 would do, if enacted ¾ 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 sections 5(1)(d) and (e) ... Second, the "safe harbour" provision in section 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. … Third, it is not clear that the proposed new section 45 will cover potential competitors. It should do so, to be sure that agreements with possible entrants are also banned. [William Stanbury, University of British Columbia, 47:15:35]

Professor Stanbury also warned the Committee against including an efficiency defence and/or any other benefits flowing from an agreement. Instead, the Tribunal should focus on a "substantial lessening of competition" test.

Yet other witnesses were tentative in their commitment to change:

The amendment proposed by Bill C-472 would be the most comprehensive change to section 45 in its 111-year history. Its implications for Canadian competition policy are arguably far more important than any of the amendments in Bill C-20, which received significantly greater public consultation than what’s currently being contemplated. The risks of proceeding without carefully considering and assessing the implications of the potential amendments are, simply put, enormous. This is because competitors in many industries engage in a broad range of perfectly legitimate, cooperative conduct, which may be chilled by any ambiguity that may be introduced by the amendments. Conversely, we may inadvertently reduce the risks associated with engaging in certain types of harmful conduct which should remain subject to criminal sanctions. [Paul Crampton, 53:15:40]

 

Since Professors Ross and Stanbury advocate different courses of action on the second track of the two-track proposal, the Committee finds relief in the advice provided by Mr. Crampton.

The Committee is, nevertheless, persuaded by the witnesses advocating change; in all respects, change is long overdue. The conspiracy provisions of the Competition Act must be reformed to reflect modern business tendencies to form strategic alliances and joint ventures, circumstances in which the current Act is unnecessarily restrictive, while at the same time being overly restrictive in clearly anticompetitive cases. The Committee, however, is reluctant to advance any one proposal for change at this time and, therefore, finds that:

3. The Government of Canada, after consulting with stakeholders, consider the feasibility of creating a two-track approach for agreements between competitors. The first track under consideration would be to retain the conspiracy provision (section 45) of the Competition Act for agreements that are strictly devised to restrict competition through reducing output and raising prices (i.e. hardcore cartels). The second track under consideration would deal with any other type of agreement between competitors in which restrictions on competition are ancilliary, under a modified abuse of dominant position provision (section 79) of the Competition Act.

In order to lessen the burden of proof placed on the Crown in the case of hardcore conspiracies, the Committee is convinced that more study is required and finds that:

4. The Government of Canada, after consulting with stakeholders, should study the impact of repealing the term "unduly" from the conspiracy provision (section 45) of the Competition Act.

In order that a strategic alliance be treated in the same way as a merger, the abuse of dominant position provision (section 79) ought to be modified to allow for an explicit efficiencies defence to be weighed against the anticompetitive effects of the alliance. A "safe harbour" provision should also be built into the enforcement guidelines. On the other hand, in order that a strategic alliance be treated in the same way as any other anticompetitive conduct reviewed under this provision, the abuse of dominant position provision (section 79) ought to be modified to provide a test of whether competition would be substantially lessened by the alliance. We thus have a conflict on the conspiracy-strategic alliance-merger continuum.

Recognizing that it is in no position to choose between either suggested course of action, the Committee, therefore, finds that:

5. The Government of Canada should undertake a complete economic and legal analyses of proposals for modifying the abuse of dominant position provision (section 79) of the Competition Act with a view to include either a test that considers whether an agreement between competitors would "lessen competition substantially" or an explicit defence in which resulting efficiencies would be weighed against the anticompetitive effects of such an agreement.