The Supreme Court recently ruled(1) that legitimate oil and gas joint ventures are not anti-competitive. As a result, the Court of Appeal of Alberta's judgment in 321665 Alberta Ltd v Husky Oil Operations Ltd(2) stands, and will provide helpful guidance on the boundaries between a legitimate joint venture between competitors and a criminal conspiracy under the Competition Act.(3)
Husky Oil Operations and ExxonMobil Canada jointly and separately owned oil and gas properties near Rainbow Lake in northern Alberta. In 1995 they discussed ways to improve their operations in the Rainbow Lake area and determined that expenses could be reduced by sole-sourcing fuel-hauling services.
Accordingly, they met with the two local fuel haulers that they used in the area – 321665 Alberta Ltd (doing business as Kolt Oilfield) and Cardusty Trucking – to announce that they would rely solely on one of the companies to handle all of their fuel-hauling needs. Husky and Mobil stressed that their ultimate decision would be based not solely on cost, but rather on achieving greater efficiencies in the field. In 1996, after evaluating both suppliers on a number of criteria, Husky and Mobil selected Cardusty, as it had a more favourable overall rating.
Kolt's business suffered, and by 1997 it had shut down its operations. Kolt commenced an action against Husky and Mobil, alleging that:
- they had violated Section 45 of the Competition Act by denying it a fair opportunity to compete for their business; and
- that the agreement between Husky and Mobil to use Cardusty's services exclusively for their fuel-hauling needs in the Rainbow Lake area resulted in an undue lessening of competition.
The trial judge found that Husky and Mobil had breached Section 45 of the act. He held that the agreement not only resulted in an undue lessening of competition, but essentially forced Kolt to shut down its operations. He ordered damages "at large" of C$5 million, plus punitive damages of C$500,000 against each of Husky and Mobil. The trial judge also awarded Kolt investigative costs of C$75,000.
Husky and Mobil appealed the trial judge's decision, arguing that their agreement did not, and was unlikely to, unduly lessen competition.
In a unanimous decision, the Court of Appeal of Alberta agreed. It held that the trial judge had overlooked the fact that Kolt was given an equal opportunity to become the exclusive fuel hauler for Husky and Mobil. The process that Husky and Mobil used to select a sole fuel hauler was deemed reasonable and transparent, as it took over four months and involved an in-depth assessment of the two companies. The court also concluded that Kolt did not establish that Husky and Mobil had attempted to reduce Kolt's profit margins, the prices it charged or the volume of work it would have provided.
In regard to Kolt's argument that the Competition Act precluded Husky and Mobil from entering into an exclusive arrangement with Cardusty, the court could discern no reason why Husky and Mobil should be precluded from rationalising their operations, particularly when the purpose was to increase efficiencies and reduce unnecessary costs.
The court also recognised that Husky and Mobil operate in the highly competitive oil and gas industry, where finding efficiencies and developing resources effectively is of the utmost importance. The court held that to find against Husky and Mobil would undermine the competitive nature of their operations by increasing their costs and creating unnecessary inefficiencies, and that such an outcome could not be the intent of the act.
Husky and Mobil also argued that they functioned as a "single economic entity" because they jointly owned and operated most of their assets in the Rainbow Lake area. As a result, their joint purchasing agreement could not be classified as an anti-competitive agreement between competitors.
The court rejected this argument, stating that it is possible for joint operators in the oil and gas industry to conspire with one another and engage in anti-competitive acts. The court pointed out that the parties' memorandum of agreement contained standard language stating that the agreement should not "be construed as creating a partnership of any kind, joint venture, association or a trust, or as imposing upon any one or more of the Joint Operators any partnership duty, obligation or liability". This language proved that Husky and Mobil intended to remain legally separate entities. Nonetheless, for the reasons set out above, the court held that there was no undue restriction of competition in this case.
The court also overturned the trial judge's award of damages. In doing so, it stated that:
- the C$5 million damages "at large" amounted to overcompensation;
- the C$1 million punitive damages were not appropriate, as the conduct of Husky and Mobil could not be classified as "reprehensible and malicious in nature"; and
- there was no basis for an award of investigation costs.
This case is important because it recognises that Alberta's oil and gas industry relies on the cooperation of industry participants to maximise resource base development. In particular, the court held that a genuine attempt by joint venture partners to create "synergies in the field" (ie, enter into joint purchasing agreements to reduce procurement costs) will not contravene the act, provided such an attempt is directed towards a legitimate business purpose and that the suppliers are given a fair opportunity to compete for the business.
Even so, joint venture partners must be cognisant that they are not insulated from the Competition Act's application by virtue of being co-owners. The court held that joint venture partners are not considered a "single economic entity" and, as such, are capable of conspiring with each other.
This case was decided under the act's criminal conspiracy provisions (Section 45), which were amended in 2010 to focus on cartel-like activity in regard to a product's supply. Accordingly, an anti-competitive agreement between competitors to purchase a product jointly will no longer fall within the purview of the act's criminal conspiracy provisions. However, the Competition Bureau has set out in its Competitor Collaboration Guidelines(4) that joint procurement agreements may be challenged by the commissioner of competition under the act's new civil provisions (Section 90.1) if the parties have substantial market power and their conduct is likely to have an anti-competitive effect. Accordingly, collaborating competitors should be cognisant that this decision remains relevant under Section 90.1 of the act.
For further information on this topic please contact Bradley Schneider at Norton Rose Fulbright Canada LLP by telephone (+1 416 216 4000), fax (+1 416 216 3930) or email (firstname.lastname@example.org). The Norton Rose Fulbright Canada website can be accessed at www.nortonrosefulbright.com/ca.
(1) Supreme Court of Canada, Judgments in Leave Applications (January 16 2014), available at http://scc-csc.lexum.com/decisia-scc-csc/scc-csc/scc-l-csc-a/en/item/13413/index.do.
(4) Competition Bureau, Competitor Collaboration Guidelines available at http://www.competitionbureau.gc.ca/eic/site/cb-bc.nsf/eng/03177.html.