INDU Committee Report

There’s no reason for a practice like resale price maintenance to be per se illegal under the criminal section. [Ralph Winter, 48:9:10]

Regarding vertical price maintenance, there is no rational economic basis for distinguishing between vertical price maintenance and non-price vertical agreements, as exclusive dealing, exclusive territories, tied selling and market restriction all often have the effect of increasing prices, albeit in a way which may in fact increase competition and efficiency. Accordingly, eliminating the artificial distinction in the Act between price and non-price vertical restraints makes good sense. [Paul Crampton, 53:15:45]

On price maintenance, … I … support it being removed from the criminal side of the law and changed from a per se offence to one that’s consequences are judged according to the effect on competition. [Tim Kennish, 44:9:30]

Price Maintenance

Price maintenance is the practice whereby a firm tries to set the minimum price at which another firm further down the manufacturer-wholesaler-retailer distribution chain can sell its product. Resale price maintenance is one of the most pervasive restraints in the marketplace. It may take place either vertically, for example between a wholesale supplier and a retailer that resells the supplier’s products, or horizontally, for example between competitors who agree to impose resale price maintenance on those who resell their products.

The Committee recognizes that the economic rationale for prohibiting horizontal price maintenance is more easily convincing. Where suppliers agree among themselves to set the resale price of their products, price competition among downstream competitors is precluded. Where the resale price is the more visible of the two, the maintenance of that price may facilitate collusion amongst suppliers. Subtracting the retailer and wholesaler profit margins from the minimum fixed retail price, manufacturers in effect fix their own prices of the product. The Committee was also made aware that resale price maintenance could facilitate the work of a retailer cartel: "Historically, for example, traditional drug stores pressured manufacturers of the products that they carried to impose resale price maintenance. That blocked or delayed the entry of discount drug stores. The same thing happened with the grocery sector in Europe" [ Ralph Winter, 48:9:15] .

Since 1951, following the recommendations of the MacQuarrie Commission, price maintenance has been a criminal offence under section 61 of the Act. Thus, it is illegal for any person engaged in a business to try to "influence upward or discourage the reduction" of the price at which someone else engaged in a business sells the product by "any agreement, threat, promise or like means." On the other hand, requests, discussions, moral suasion, or suggestions to this end are considered to be much the same as setting a suggested list price and are permissible.

Vertical price maintenance is the less obviously anticompetitive act. Professors VanDuzer and Paquet suggest procompetitive motivations for this type of price maintenance:

The classical example that is given is where a supplier requires someone to whom it sells — a retailer — to maintain prices at a particular level as a way of encouraging that retailer to engage in competition on something other than price, usually to encourage the retailer to engage in providing a high level of service to clients or to ensure that the brand image associated with the product is maintained. So to the extent that there are efficiency justifications for price maintenance, the per se criminal prohibition we have in the Act is probably over-inclusive. [ Anthony VanDuzer, 14:15:45]

Professor Winter explains the manufacturer’s rationale in more detail:

Resale price maintenance is most often an instrument for encouraging services of all types at the retail level. These services are things like providing advice to customers, keeping enough staff so that cashier lines are short, keeping inventory organized, even being enthusiastic, anything that a retailer does apart from setting the price.

How does resale price maintenance encourage those services? Resale price maintenance protects the retail margin, the difference between the retail price and the wholesale price at which retailers purchase the product. It protects that margin against being competed down in the retail markets and that encourages the provision of service because it increases the profit per unit that retailers get by attracting customers. Under resale price maintenance, retailers cannot compete in prices so they compete in services. [ Ralph Winter, 48:9:15]

This stream of logic, of course, only leads the Committee to ask why the manufacturer feels he has to intervene in the pricing decision of his distributors. The answer given was that "under quite typical conditions in retail markets, retailers can be biased towards too much price competition and too little service competition from the point of view of the manufacturer. Resale price maintenance is an attempt to correct this ... From the consumer’s perspective, resale price maintenance thus results in more services, which is good, but higher prices, which are bad" [ Ralph Winter, 48:9:15] . However, this answer only prompts the question of whose will should prevail when there is a disagreement over the appropriate retail price: that of the manufacturer or that of the retailer? Professor Winter and other competition law experts side with the manufacturer:

On balance I would suggest that the decision of how to market a product, how to design a distribution system should be left up to the manufacturer. Prohibiting resale price maintenance under per se rule is effectively regulating the manufacturer’s decisions on how best to maximize the sale of their products. We don’t prohibit high levels of advertising even when the advertising raises prices nor should we prohibit under a per se rule resale price maintenance. [ Ralph Winter, 48:9:15]

Professors VanDuzer and Paquet agree: "The only concern we have is that at least in some circumstances it’s a bit broad, in the sense that the economic evidence is that [in some cases] … price maintenance will have an efficiency justification" [ Anthony VanDuzer, 14:15:45] .

The Committee got the impression from Professors VanDuzer and Paquet that the Competition Bureau showed it was sensitive to these efficiency-enhancing situations by being less prosecutorial than in the past:

Price maintenance is a criminal offence under the Act. … There have been a large number of prosecutions in the past, although relatively few during the period we looked at, the five-year period ending March 31, 1999. The explanation for the reduction in the number of prosecutions is that the Bureau has … treated these cases through some kind of alternative case resolution process ... which is in general a much more cost-effective way of securing compliance with the Act than going through contested criminal litigation. So it’s been a very successful provision. [ Anthony VanDuzer, 14:15:45]

Or could it be that the increased workload of the Bureau is forcing more cost-effective bureaucratic responses? In any event, the Commissioner of Competition did not look favourably on their recommendation to distinguish between the two types of price maintenance and to recognize different legal treatment:

Starting with the pricing provisions, Mr. VanDuzer believes the civil review process would be better than the current criminal process for all pricing provisions, apart from horizontal price maintenance. There is no doubt that some of these provisions do work better in a civil context, and it’s a position we endorse for price discrimination. Generally, however, we do not favour shifting completely away from criminal law. We believe a proper mix of criminal and civil provisions is required for the anticompetitive pricing provisions, for a number of reasons. [ Konrad von Finckenstein, 9:9:15]

In addition to being less costly to administer, apparently the status quo provides a very effective means to achieve compliance:

Criminal law is really appropriate for the most egregious offences. … Professor VanDuzer … makes a distinction between horizontal and vertical price maintenance. If somebody deliberately wants to drive somebody else out of business and engages in a practice to that effect, I think criminal law is the proper way to deal with these offences. Second, while criminal provisions may be harder to prove, they act as a powerful deterrent. They result in fines and imprisonment, while civil provisions only result in injunctive relief. Third, section 36 provides for a private action based on criminal conduct. If there were only civil provisions regarding pricing, there would be no access for private parties to go to court on the basis of anticompetitive pricing. For those three reasons, we think one should retain criminal provisions. [ Konrad von Finckenstein, 9:9:15]

The Committee finds it difficult to understand how vertical price maintenance can be said to constitute egregious anticompetitive behaviour in all circumstances and why enforcement officials could not easily distinguish between pro and anticompetitive vertical price maintenance. Some of the experts appearing before the Committee ¾ some of whom have even been retained by the Bureau to do specialized work and, therefore, know only too well the pros and cons of this issue from the enforcement agency’s perspective ¾ thought that making this distinction would be rather simple in the overall scheme of things that the Bureau and Tribunal are asked to do. As one witness said, in view of the fact that other vertical restraint policies are reviewable civil matters:

On resale price maintenance, it’s sort of an anomaly. Given that we recognize the possible efficiency benefits of things like exclusive dealing and tied selling. We don’t make them criminal and we don’t make them per se illegal. … There are lots of good reasons to use resale price maintenance that have nothing to do with hurting competition. ... I would move it to the civil side, a reviewable practice, and put in an efficiencies defence there, or at least a competitive effects test. [ Tom Ross, 46:9:20]

Another witness appearing before the Committee suggested that, as a result of the knowledge-based economy, which appears to rely increasingly on strategic alliances between network operators (airlines, trucking, railways, fixed and mobile telephones, cable and satellite television, television programmers, Internet service providers, etc.) and between parts and systems manufacturers and assemblers, will likely probably mean price maintenance will become a more pervasive business practice, particularly in the economically benign form of price maintenance.

The real problem I find with the price maintenance section is the strategic alliances that people are getting into now where one party comes forward with one component of the product the other party comes forward with the other component of the product, and they’re going to go out and market it jointly. One of them buys it from the other and sells the whole package. Both parties in that kind of case have a real and legitimate interest in what price the thing is going to the market at, and yet because of the wording in the price maintenance section, there are serious difficulties with that. You can work with them, but it’s hard and largely inefficient … [ James Musgrove, Lang Michener, 46:10:45]

A solution was proposed:

Horizontal price maintenance … should be dealt with under section 45 of the Act. Among other things, this would help to address the types of serious issues that have arisen in the context of planning strategic alliances and joint ventures that become difficult to implement if the parties cannot agree on the price to be charged for the products which are the subject of the alliance or the joint venture. [Paul Crampton, 53:15:45]

Thus, the criminal status may be an effective means of achieving compliance, but it is not necessarily an efficient means when one considers its chilling effect on instances of vertical price maintenance that are procompetitive.

The Committee found the arguments made by those who were in favour of decriminalizing this practice to be well thought out and very persuasive. Given recent organizational and strategic developments in the business sector, economic benefits accruing from innovative pricing policies will likely more than outweigh the added enforcement costs involved in distinguishing between pro and anticompetitive price maintenance practices. The Committee, therefore, finds that:

9. The Government of Canada, after consulting with stakeholders, should consider amending the Competition Act with respect to price maintenance (section 61) to distinguish between those that are anticompetitive and those that are efficiency-enhancing. Price maintenance practices among competitors, whether manufacturers or distributors, should remain in the criminal section of the Competition Act, possibly to be shifted to the conspiracy provision (section 45). Price maintenance agreements between a manufacturer and its distributors might best be moved to the reviewable civil section, possibly to be made applicable to abuse of dominant position provision (section 79). This provision should also ensure that both the person in question has "market power" and the practice in question would "lessen competition substantially."

Following these amendments, the Committee finds that:

10. Should the Government of Canada act on the Committee’s previous finding, the Competition Bureau introduce new enforcement guidelines with respect to abuse of dominant position (section 79) in relation to price maintenance agreements between a manufacturer and its distributors, including the analytical framework for the assessment of market power and competitive effects. Consideration should be given to introducing enforcement guidelines for conspiracies (section 45) that relate to price maintenance agreements between manufacturers or distributors under section 61.

Delivered Pricing

Delivered pricing is defined in section 80 of the Competition Act as the practice of refusing delivery of a product to a customer (or person seeking to be a customer), on the same trade terms, at any place where the supplier ordinarily makes deliveries. Section 81 makes this practice a prohibitive offence subject to a rule of reason.

The Committee understands that some delivered pricing schemes, by facilitating price collusion and/or coordination, are anticompetitive; however, in most cases they are not. We were repeatedly reminded by all experts in the field that in the spirit of promoting and encouraging the competitive process, rather than individuals or classes of competitors, a competitive effects test should accompany such reviewable civil matters such as delivered pricing. For example: "On delivered pricing, once again there is no competitive effects test in there and I think … you shouldn’t take an action on deliver pricing unless you think the practice is hurting competition" [ Tom Ross, 46:9:20] . This advice is particularly relevant in an environment that permits private rights of action and access to the Competition Tribunal.

The Committee would like the government to correct this anomaly and, therefore, finds that:

11. Should private individuals be permitted to make application to the Competition Tribunal for relief in matters involving civil review, the Government of Canada should consider amending the delivered pricing provision (section 81) of the Competition Act to ensure that the practice in question would "lessen competition substantially."

Refusal to Deal

The Committee agrees with the description by Professors VanDuzer and Paquet of "refusal to deal" as the ultimate discriminatory practice. Since section 61(6) incorporates this act as a method of achieving or enforcing price maintenance, and because the Committee recommends that vertical price maintenance cases should be adjudicated as a civil matter, we address this practice here.

The refusal to deal provision, the Committee was told, could be used to undermine the competitive process:

Competition law can be misused. It can be used as a tool for competitive harassment. It can be used to discourage aggressive price, quality or service competition which makes other competitors uncomfortable and which they are all too ready to label as predatory. It can be used as a bargaining lever in what are essentially contractual disputes. For example, a distributor whose dealership is terminated may claim or threaten to claim that this is a refusal to supply under section 61(6) or section 75. It is essential to understand that the grievances of individual market participants matter or should matter only to the extent that they imply a threat to the integrity of the competitive process itself. [ Donald McFetridge, 44:9:05]

Some witnesses thought the refusal to deal provision in the Act was a somewhat over-zealous for the following reasons and with the following recommendation:

What I particularly don’t like about refusal to deal is that there’s no competitive effects test. In almost all of the Competition Act, in order to get into trouble, you have to lessen competition somehow. But not so with refusal to deal. There’s just someone whose business is hurt because he can’t get supply from you. The Tribunal has been willing to define markets around brand names, so if you’re the Chrysler parts dealer and he can’t get Chrysler parts, that’s good enough for the Tribunal, with the result that what should sort of be private contract disputes get brought up as competition matters.

So my preference would actually be just to scrap the "refusal to deal" provisions, knowing that if it’s done by a dominant firm, you can always catch it under abuse of dominance where there is a "lessening of competition" test. Failing that, I would add some sort of competitive effects test, something that says competition must be lessened … then allow the private parties to take these actions on their own if the Commissioner doesn’t see a public interest in taking them. [ Tom Ross, 46:9:15]

This advice is particularly relevant when granting private rights of action, as noted by the following witness:

In my view, section 75, for example, which covers refusals to deal is not a well-written section of the Act to begin with and in particular it is essentially a per se … prohibition. It says that if a firm can establish that a manufacturer or supplier has refused to supply, then that violates the Act. It doesn’t say that we have to establish that that action lessens competition. There’s no substantial lessening of competition or what is usually called a competitive effects requirement in section 75. Now of course the way that’s been interpreted up until now is that the Commissioner, acting as a gatekeeper, has prevented frivolous prosecutions under section 75 but once we allow private access that’s not likely to happen so we would undoubtedly get private prosecutions, in cases where the refusal to deal was probably, or could have been, procompetitive. [Roger Ware, 52:9:40-9:45]

In the spirit of preserving the process of competition and refraining from intervening in what may amount to a private contractual dispute, the Committee finds that:

12. Should private individuals be permitted to make application to the Competition Tribunal for relief in matters involving civil review, the Government of Canada should consider amending the refusal to deal provision (section 75) of the Competition Act to ensure that the practice in question would "lessen competition substantially."