INST Committee Report

The Organizational Continuum

       Cooperation among competitors is a double-edged sword. On one hand, it may offer prospects of economic benefits; on the other hand, it may bear the costs of dulled competitive performance. The economic benefits develop from the synergistic effects when individuals and organizations with different competencies and resources are brought together. More specifically, such collaboration may: (1) result in new and less costly production processes; (2) facilitate the attainment of scale and scope economies; and/or (3) lead to a more efficient allocation of resources or improved product quality. A typical example in today’s knowledge-based economy would be the combining of research, development and marketing resources of two or more firms to reduce the time needed — as well as risk exposure — to develop and bring new products to market. An additional social benefit would be the elimination or mitigation of duplicative work and facilities. Unfortunately, sometimes these benefits accrue, in part, to a market sharing or a coordinated pricing agreement needed to make such cooperation profitable. This may lead to, in varying measure, restricted supply, higher prices, less product selection and/or less-than-optimal product quality. Hence, an intricate weighing of economic factors is required to offer a definitive conclusion on the ultimate impact of such cooperation.

       At the outset, one should be aware that such cooperation could take several organizational forms. It can be purely contractual, purely combinational, or it can be located anywhere between these polar opposites. The Committee will, for simplicity, include the diverse set of business relationships on this organizational continuum under the term “strategic alliance.”¹⁵ This integration can be contrasted with that of a merger or acquisition of assets or capabilities.

In many cases, a strategic alliance is just a contractual joint arrangement similar to a merger. It may be dictated by tax considerations rather than any particular overriding purpose in having a contractual arrangement. [Tim Kennish, Osler, Hoskin & Harcourt, 59:09:25]  

It’s also reasonable to think about these arrangements between firms that fall short of mergers but are not hard-core cartel behaviour, like many strategic alliances and joint ventures. There’s … [the] example of a joint venture to develop a vaccine. A lot of these arrangements are wonderfully efficient on the one hand, but pose some certain competition challenges on the other. They need a more sensitive, nuanced evaluation of the sort we give to mergers. [Tom Ross, University of British Columbia, 59:09:30]

       Public concern over cooperation among competitors, when it is simply a veil for a cartel, begins to rise not only because it potentially redistributes income (from buyers to sellers) in a covert way that is tantamount to fraud, but it may also reduce economic efficiency as resources are misallocated in the economy. Indeed, such monopolization results in lower economic welfare and is, therefore, deemed to be a crime against society. However, a thorough competitive effects review would ensure that both types of cooperation, whether a merger or strategic alliance, receive similar treatment because neither can a priori be categorized as pro-competitive or anticompetitive.

       Theoretically, a strategic alliance that is not what competition specialists call a “naked hard-core cartel” may be afforded criminal or civil treatment under Canada’s Competition Act, even though it may be strictly pro-competitive and restrict competition only in an ancillary way. Law enforcement may proceed by way of a criminal trial under the conspiracy provision (section 45) or by way of a civil review under either joint dominance (section 79) or a merger (section 92). Uncertainty abounds on the possible course to be taken, but a strategic alliance would meet the public policy ideal of a “level playing field” with respect to that of a merger only if it received a section 92 through 96 review. Unfortunately, as many witnesses told the Committee, a strategic alliance may be inadvertently swept into section-45 treatment, where criminal law is not well suited to judge it. Specific court deficiencies in a section 45 case are:

• the absence of specialized expertise in the criminal courts;

• the tendency of structural considerations (market share or concentration) to dominate the very limited analysis;

• the lack of consideration given efficiencies or innovation; and

• the limitation of sanctions to fines, in the absence of behavioural solutions.

 It’s somewhat odd that if two firms or competitors get together in a merger, they get a civil review where they get to talk about efficiencies, and there’s a kind of cost-benefit evaluation of the proposal, yet if they do something less than a merger, they’re subject only to criminal law, and people can go to jail and pay fines. [Tom Ross, University of British Columbia, 59:09:25]

A “chilling effect” on pro-competitive strategic alliances results, and the Committee intends to provide a solution to this design flaw. However, before doing so, the Committee will review and address the circumstances that have led to the over-inclusiveness and under-inclusiveness of the conspiracy provision.

History of the Legal Treatment of Conspiracies

       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. However, 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 the provision’s reference to “prevent or lessen competition unduly” when assessing the agreement’s economic effects. In this period, several unsuccessful attempts were made to rid the Act of this word in order to strengthen the prohibition. After the Supreme Court decisions 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%.¹⁶

We have not had great success with this provision. Particularly because of some of the burdens and the wording of the section, it’s made it much more difficult to use it against hard-core cartels … [Robert Russell, Borden, Ladner & Gervais, 59:09:10]

        However, the enactment of the Competition Act de facto reversed these court decisions. 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

• the adoption of the metric system of weights and measures.

       There are also specific defences for export consortia and specialized agreements.

       The Act’s most significant changes, however, were introduced in subsections 45(2.1) and 45(2.2). These provisions permit the Court to infer the existence of a conspiracy, combination, agreement or arrangement from circumstantial evidence; and while it is necessary to prove that the parties intended to and did enter into the agreement, it is not necessary to prove that the agreement was intended to have the effect of lessening competition “unduly.” Subsequent jurisprudence has been consistent with this interpretation.

       The Supreme Court further provided the more controversial interpretation on the meaning and implications of the word “unduly” when it handed down its decision in the Nova Scotia Pharmaceutical Association case, which is commonly referred to as the PANS case. The courts are now required to conduct a two-part test on price-fixing arrangements before condemning them as lessening competition “unduly.” The first part would be a market power test, while the second would be a test to establish injurious behaviour to competition that would qualify as “undue.” This legal framework in fact establishes a partial rule of reason because agreements are neither treated as per se illegal, even those that are patently “naked hard-core cartels” with no redeeming benefits to society, nor treated under a “rule of reason,” whereby the economic advantages and disadvantages of the agreement would be weighed. A strategic alliance that restricts price competition only in an ancillary way would then be subject to less than a thorough review to determine its ultimate economic impact.

[W]hen we analysed the cases back in the early 1980s, … we found that the government lost as many if not more of the cases because they couldn’t prove agreement. It wasn’t that they couldn’t prove undueness; they couldn’t prove there was actually an agreement. That is the cornerstone of a conspiracy section. [Lawson Hunter, Stikeman Elliott, 59:09:25] 

The question of whether to strike unduly from section 45 rather than go to a two-track approach has been raised before. The simple response to why we wouldn’t do it is because it would make the section too inclusive. It would trap many agreements, which are innocent. For example, agreements between a franchise and a franchisee might be captured by section 45 if it simply said that any agreement that restricts competition, supply, production and so on. …
[R.W. McCrone, Competition Bureau, 64:09:15]

       As it currently stands, the Crown must establish four elements beyond a reasonable doubt when bringing forth a section 45 case:

A review of the enforceability of the law on conspiracies is revealing.

The Enforceability of Section 45

       Competition law experts believe, almost unanimously, that section 45, as currently written, is hard to enforce in a contested trial setting, even when applied to a “naked hard-core cartel.” They also believe the two-step “market structure-behaviour” tests provide too much room for litigating irrelevant economic matters in the case of a “naked hard-core cartel.” Public enforcement costs are therefore excessive. Given that these views are so widely held, the Committee sees no reason for going to great lengths to validate them. The Committee will exclusively rely on Bureau data, analyses and conclusions.¹⁷

[Canada is] the only jurisdiction in the world that requires the level of analysis in order to prove a conviction under section 45. Most jurisdictions, … Europe, the United States, Australia, New Zealand, South Africa, … have adopted a per se approach to hard-core cartel behaviour, while providing for a civil track approach … to deal with strategic alliances … [Robert Russell, Borden, Ladner & Gervais, 59:09:10]

It’s recognized that our standard of undueness is a partial rule of reason, but it doesn’t embrace any recognition of efficiencies. Efficiencies are one of the objectives of competition law, and are something that ought to be considered in determining whether or not some action or arrangement ought to be condemned. [Tim Kennish, Osler, Hoskin & Harcourt, 59:09:25]

       The Competition Bureau reports that 51 cases have been prosecuted under section 45 or its predecessor between 1980 and 2000. Almost 60% of these cases (29 of 51) resulted in a guilty plea. The conviction rate in contested trials was exceptionally low, somewhere between 10% and 15% (3 of 22). The Bureau estimates that slightly more than 35% of cases (6 of 17) were acquitted at trial or discharged at a preliminary hearing because of insufficient evidence of an agreement — the first element described above. Almost 65% of cases (11 of 17) were acquitted or discharged because of insufficient evidence of an undue lessening of competition (the second element) or of the parties’ intent that the agreement would have that effect (the third and fourth elements). These data and analyses indicate that the burden of proof “beyond a reasonable doubt” is a formidable one, but the “undueness” element poses the greatest obstacle to a successful conviction under section 45.

The Two-Track Proposal: Criminal and Civil

       At this point, the Committee must remind the reader that the object of competition policy is not about winning or losing litigated cases; it is about prescribing a framework for an efficient business sector that delivers products and services at competitive prices. We strongly believe that section 45 is meant to only apply to certain types of agreements, and the current law does not give fair warning of what type of agreement constitutes a serious indictable offence. Furthermore, although the Committee understands that writing law with so much precision as to preclude uncertainty is unattainable — watertight compartments are not possible — the law should not, at the same time, be written so loosely as to capture all horizontal agreements between competitors in achieving its objective.

       As it currently stands, section 45 excessively relies on prosecutorial discretion, which can be exercised differently by different individuals, rather than on a law crafted to properly discriminate between the two forms of cooperation — an anticompetitive cartel arrangement and a competitively benign or pro-competitive strategic alliance. By the same token, the Committee does not think it is appropriate for criminal liability, which may involve fines and jail terms, to depend on a court’s assessment of complex economic factors — such as the cross-price elasticity of demand, the height of barriers to entry in the industry, the extent of sunk costs, the strength of other competitors or potential competitors, market power, etc. — that a court is not well suited to judge.

[T]he Bureau contracted three independent studies [on the issue horizontal agreements amongst competitors]. … [T]hey all agree that hard-core cartel behaviour, such as price fixing, market sharing and output restrictions, should be a criminal offence without a competition test.[Gaston Jorré, Competition Bureau, 64:09:10]

There have certainly been prominent examples where the problem was evaluating the undueness of the lessening of competition. Clarifying this is the way to go, by breaking the law into two pieces — a criminal part without the word “undue” for naked price-fixing, hard-core cartels, and then a civil branch for the more complicated arrangements. [Tom Ross, University of British Columbia, 59:09:25]

       Advocates for change have successfully persuaded this Committee to accept this view; in all respects, change is long overdue. The conspiracy provision 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 under-restrictive in clearly anticompetitive cases. The Committee, therefore, recommends:

The Criminal Track

       The necessary elements in a contested section 45 case must accurately reflect contemporary economic thinking on conspiracies; they should not require excessive labouring on irrelevant economic factors coincidental to the agreement or to the industry under scrutiny. We believe that a conspiracy should be a per se criminal offence and should be guided by the simple and pertinent facts of the case at hand. The Committee, therefore, recommends:

 When we’re going to go after hard-core cartel behaviour the standard should be met, but we shouldn’t have to go into the economic effects. That’s what every other regime in the world has done. Per se simply means if I engage in a price-fixing arrangement, you don’t have to look to see whether it has an anti-competitive effect, with the huge cost of litigation that goes to that issue, because that is the main issue. [Robert Russell, Borden, Ladner & Gervais, 59:09:35]

       A per se criminal offence without a provision for exceptions would cast a wide net — too wide a net. Horizontal agreements other than that of a cartel would be captured by a strict per se offence. Therefore, a provision for exceptions is necessary. Although recognizing that a long list may have to be drawn to sufficiently reduce the uncertainty surrounding such a specific prohibition, the Committee believes the best approach for an exception would be based, rather than a so-called laundry list of items, on guiding principles. These guiding principles would be premised on known characteristics of a pro-competitive horizontal agreement, such as the existence of economic factors, other than the restraint in question, incorporated into the agreement. Other economic factors would include efficiencies (whether technical or organizational) and innovation. The Committee, therefore, recommends:

       The Committee further recognizes that the two-track approach of pursuing horizontal agreements between competitors provides considerable prosecutorial discretion — although less than provided under the current law. To limit this discretion, the Committee recommends:

[Y]ou need to be careful. The United States, as we all know, has a per se offence, but it is judge-interpreted. It is not statutorily defined. I think you also need to watch that the exemptions don’t overwhelm what you’re catching. [Lawson Hunter, Stikeman Elliott, 59:09:20]

[C]reating that sort of bifurcated approach puts an incredible amount of discretion and authority into the hands of the Commissioner. … If you think of a situation where there is a conspiracy that could go one way or the other … the Commissioner would have incredible authority to say, for instance, if you don’t do what I like, then I will throw you on the criminal side. [Lawson Hunter, Stikeman Elliott, 59:09:20]

       In its Interim Report, the Committee suggested that the government consider modifying the abuse of dominant position provision (section 79) to allow for a civil review of horizontal agreements between competitors. This suggestion may have been premature. Although section 79 deals with joint dominance cases and could in some way be modified to accommodate horizontal agreements that fall under the joint dominance category, we believe that such modifications should not be made. The nature of these horizontal agreements is fundamentally different and incompatible with practices that would be considered potentially abusive behaviour. In other words, a proposed agreement between competitors that may restrict competition only in an ancillary way is an agreement between allies; it is not about an abuser-victim relationship. Consequently, modifications to section 79 to accommodate horizontal agreements that may or may not be anticompetitive may not be the most effective way of pursuing these agreements, and, at the same time, such an approach may risk a loss in effectiveness in pursuing abuse of dominance cases. Indeed, two instruments designed to target two different types of behaviour would be the prudent approach to take.

       The Committee is also reluctant to propose that these agreements be afforded a section 92 through 96 merger review. A horizontal agreement may not easily meet the definition given a merger under section 91 and there is no compelling reason dictating that we modify one to accommodate the other when unforeseen consequences may inadvertently arise. Nevertheless, a strategic alliance should be afforded a similar review to that of a merger. The Committee, therefore, recommends:

It strikes me that it will be better if … we can look at these arrangements the same way we look at mergers, with the full panoply of economic analysis ... [Tim Kennish, Osler, Hoskin & Harcourt, 59:09:25]

Our proposal was to focus on the question of whether the agreement was … in … substance price-fixing … or price-fixing element only ancillary to some larger agreement that itself would not be found in violation of section 45. If it were just ancillary to a larger agreement, then the whole agreement would go down the civil track and be reviewed, very much like a merger. [Tom Ross, University of British Columbia, 59:09:30]

       The Committee intends that this new section only apply to horizontal agreements between competitors, whether suppliers or buyers, and not to vertical agreements, i.e., agreements between a seller and many buyers or between a buyer and many sellers. The Committee, therefore, recommends:

In addition to the prospect of a fine or incarceration for committing a criminal offence under the Act, would-be offenders must also consider that (if they are convicted) they may also be ordered to pay monetary damages to any person suffering loss as a result of their criminal conduct. The Committee is aware that moving a practice from criminal treatment and subjecting it to civil review will remove the availability of damages awards under section 36 of the Act. This could have an adverse impact on deterrence and compliance, since it lowers the potential “cost” to the offender of engaging in the conduct. This would not be the case, of course, if the government amends the Act to permit the Tribunal to award damages (as set out in recommendation 8).

       At the same time, however, it does not appear to be the case that damages are commonly awarded as a result of a criminal conviction, and for that reason we do not wish to overstate their value as a deterrent. The Committee believes that, for the same reasons that it is inappropriate to treat certain pricing practices under criminal law, it is equally inappropriate to permit a remedy of damages to attach to such conduct. If we were to permit damages awards with respect to only a few select practices, but not to other civilly reviewable matters, inconsistency would result in the Act. This underscores the importance of extending the right to claim damages under all civil practices, including those for which transfer into the civil steam is recommended

[O]utside what would be the new criminal track under a revised two-track approach to conspiracies … you would want to have basically the same efficiency provision … But the nature of that efficiency provision would have to be different from the one we have today in section 96, which never worked for almost 10 years … [Paul Crampton, Davies, Ward, Phillips & Vineberg, 59:13:00]

       Given the numerous changes we are recommending, the Competition Bureau’s Strategic Alliance Bulletin will have to be thoroughly reworked and upgraded to the status of enforcement guidelines. The business community, in the absence of jurisprudence, will need ample guidance from the Commissioner on how the Bureau will treat horizontal agreements between competitors. The Committee, therefore, recommends:

Strategic Alliances and a Pre-Clearance Process

       As stated above, the Committee accepts the general proposition that no conspiracy law can be written with perfect precision; a number of pro-competitive horizontal agreements will be inadvertently caught by any per se provision, no matter how carefully it is written. The above exception provides some measure of certainty for some contemplated pro-competitive horizontal agreements, yet more is needed to reduce the uncertainty and “chilling effect” that arises in some of the more controversial or borderline agreements. A systematic way of reducing or eliminating a horizontal agreement’s prospective liability to criminal sanctions prior to being consummated is required. On this point, there have been two suggestions: a notification process and a pre-clearance process.

        The notification system would prohibit all secret or covert conspiracies to directly or indirectly fix prices, but would provide an exemption from subsection 45(1) to all overt horizontal agreements provided that their proponents notify the Bureau before the agreement takes effect. Major deviations from the original agreement would be subject to criminal prosecution. The notification of such an agreement would be optional; there would be no obligation to disclose the facts of any agreement. The Commissioner would also be entitled to request additional information in order to determine whether the agreement should be opposed or altered under a civil proceedings or, as others have coined it, the civil track.

Others have suggested approaches based on whether the agreement itself is public. If it were a public agreement, it would get the civil review, whereas secretive agreements would be viewed as per se, illegal, and there are other approaches as well. [Tom Ross, University of British Columbia, 59:09:35]

       The pre-clearance system would operate much like the advance ruling certificate for mergers pursuant to section 102 of the Competition Act. This would be a voluntary reporting system, with a limited cost-recovery fee assessed in return for providing an advance ruling. Under such a system, the Commissioner of Competition would be authorized to issue a clearance certificate if he is satisfied that the agreement, as proposed and implemented, does not substantially lessen competition or poses a threat under section 45 or under the newly proposed civil track. The certificate might or might not grant a time-limited exception from criminal liability and, like the notification system, major deviations from the original agreement would be subject to criminal prosecution.

       The Committee is of the opinion that both systems have their advantages and disadvantages; however, for a number of reasons, we favour a pre-clearance system. Such a system provides more assurance that contrived or “dressed up” cartel agreements will not slip through the cracks. The Committee, therefore, recommends:

[T]here have been a number of suggestions that the salvation for some trade-restraining agreements would be the public notification of those agreements that would enable the parties to them to be assured that they wouldn’t be challenged. As a policy matter, I think it’s undesirable to have agreements that are in contradiction to our general principles simply on the theory — a naive one, I think — that public disclosure of them will deter people from dealing with people who have entered into these kinds of restrictive arrangements. [Tim Kennish, Osler, Hoskin & Harcourt, 59:10:20]

[T]here have been a number of suggestions that the salvation for some trade-restraining agreements would be the public notification of those agreements that would enable the parties to them to be assured that they wouldn’t be challenged. As a policy matter, I think it’s undesirable to have agreements that are in contradiction to our general principles simply on the theory — a naive one, I think — that public disclosure of them will deter people from dealing with people who have entered into these kinds of restrictive arrangements. [Tim Kennish, Osler, Hoskin & Harcourt, 59:10:20]

       In the case where the Commissioner does not grant a pre-clearance certificate, the applicant should be given fair hearing before the Tribunal. The Committee, therefore, recommends:

The experience in other jurisdictions will evidence the fact that lawyers are very clever in the way they write up these arrangements, and describe them using obfuscation and confusing legal documents or burying the filings with the appropriate agency such that people really don’t have a good understanding of what in fact is being disclosed. [Tim Kennish, Osler, Hoskin & Harcourt, 59:10:25]