As we previously reported, the Competition Bureau (Bureau) has published its Price Maintenance Enforcement Guidelines (Guidelines). Summarized below are the top 10 things businesses operating in Canada need to know about the law of price maintenance in Canada and the Guidelines.
1. Price Maintenance under the Competition Act
Under section 76 of the Canadian Competition Act (Act), the Bureau or a third party (with leave) can apply to the Competition Tribunal (Tribunal) for an order prohibiting certain conduct that has an adverse effect on competition. The conduct that can be prohibited under section 76 involves (i) a person influencing upward or discouraging the reduction of a second person’s selling or advertised price; (ii) a person refusing to supply a second person or otherwise discriminating against that second person because of that second person’s low pricing policy; and (iii) a person conditioning their supply to a second person on that second person not supplying a third person because of the third person’s low pricing policy. Section 76 is a civil provision that permits the Tribunal to prohibit conduct that violates section 76 or to require that a person supply another person. A violation of section 76 will not result in any criminal conviction, criminal sentence, administrative monetary penalty or exposure to private damages (unless an order under the provision is breached).
2. Guidelines Intended to Provide Additional Clarity
In 2010, the Bureau brought a case against Visa and MasterCard under section 76 that created significant uncertainty about the scope of this section. The 2013 decision by the Tribunal – which found that Visa’s and MasterCard’s conduct was not subject to section 76 – went some way toward illuminating the boundaries of this section. The Guidelines are intended to provide additional clarity about how the Bureau (as the main enforcer of section 76) interprets section 76, including in light of the 2013 decision by the Tribunal. The Guidelines are therefore useful to businesses in Canada seeking to better understand what distribution practices could potentially be subject to an expensive and time-consuming Bureau investigation and proceedings before the Tribunal.
3. Guidelines are Principled but Conservative
The Guidelines are conservative, in that they preserve the Bureau’s ability to exercise significant discretion in deciding what forms of conduct to investigate and potentially bring before the Tribunal under section 76. However, the Guidelines are also principled in that they take account of legal decisions and economic learning that show how price maintenance rules – if applied too broadly – can inadvertently be applied to conduct that should instead be tested under stricter terms of the Act, or lead to the prohibition of different forms of conduct that are actually pro-competitive.
4. Section 76 Can Apply to a Broad Range of Conduct – No “Agreement” Needed
Under section 76, the Bureau can bring a supplier before the Tribunal if its conduct directly or indirectly influences upward (or discouraged the reduction of) a customer’s resale price. Unlike in other jurisdictions, there is no obligation for the Bureau to prove that the supplier and the customer entered into any form of “agreement” for such purposes. Instead, the Bureau need only show the existence of influence, whether by “agreement, threat, promise or any like means.” The Guidelines provide that the Bureau will find such influence where the supplier’s conduct “results in a retailer setting the price of its product at a higher level than it would otherwise sell the product,” which could be proven by, for example, “evidence that the retailer’s price was lower prior to implementation of the price maintenance conduct.” Such evidence could include common terms and conditions in distribution agreements, such as price parity terms, if not justifiable in the circumstances of the case. When dealing with distributors in Canada, businesses should be conscious that a wide range of common business practices could be characterized as an attempt to influence a customer (whether or not any actual agreement exists).
5. Resale Requirement is Broadly Interpreted
The language of section 76 appears to limit its application to situations involving the “resale” of a product; the Tribunal endorsed this interpretation in its decision in the Visa and MasterCard case, finding that a resale involved the resale of a product that is “identical or substantially similar on the important characteristics of the product” originally supplied. The Guidelines take account of this limitation in section 76 but still assert that a product that is “repackaged, reapportioned, processed or transformed from the product supplied, or is bundled with products other than the product supplied,” might potentially satisfy the interpretation of “resale” set out by the Tribunal. While section 76 is most obviously applicable to a supplier whose distributors resell the supplier’s products, given the Guidelines’ broad approach to the interpretation of the term “resale,” businesses should also be conscious that the Bureau may continue to use section 76 to investigate a supplier’s conduct that the Bureau believes has an effect on downstream prices even if the supplier’s customer transforms the product it supplies.
6. Application to Advertising Practices
Section 76 deems the setting of minimum resale prices by suppliers, the setting of “manufacturer suggested retail prices” by suppliers, and the setting of “minimum advertised prices” (MAP) by suppliers to constitute price maintenance. However, section 76 also contains a number of defences that suppliers that utilize certain of these practices can avail themselves of. For example, a supplier may advertise a “manufacturer suggested retail price” (MSRP) for its product if it also makes clear in the advertisement that retailers may sell the product for less. Despite the existence of these defences, the Bureau’s position as set out in the Guidelines is that the defences are not a “complete” defence – instead, they merely prevent the pricing practices from being deemed to be a contravention of section 76. The Guidelines make clear that even where defences apply, the Bureau may still investigate and seek to establish that a supplier’s minimum resale pricing, MSRP or MAP pricing practices have in fact influenced a customer’s pricing. The Guidelines do not provide additional indications as to what steps, if any, a supplier utilizing these pricing practices might take to avoid being investigated under section 76.
7. Exception for Principals and Agents is Vague
No order can be made under section 76 where the supplier and customer are principal and agent. The Guidelines provide only that the “Bureau will consider relevant legal principles in determining whether a valid agency relationship exists….” There has never been a case under section 76 (or its predecessors) that considered the concept of agency. As such, it is not clear what “relevant legal principles” the Bureau intends to apply to this question. Before the courts, the Bureau has asserted in filings that agency relationships may not be “bona fide;” this may be equivalent to an allegation that the agency relationship is a “sham” in that it was entered into for the purposes of avoiding the application of section 76 of the Act. This approach to determining whether an agency relationship exists or not is not consistent with economic-based approaches that have been adopted in the United States (where, under Morrison v. Murray Biscuit Co., the inquiry is merely whether there is a rational economic purpose to the agency agreement) and the European Union (where the inquiry focuses on whether and to what extent the reseller takes on different forms of commercial risk). The Guidelines provide little comfort to businesses that their agreements with their agents will be shielded from section 76.
8. Pro-Competitive Justifications are Recognized
Mere conduct that constitutes price maintenance is not contrary to section 76; instead, the conduct must also result in an adverse effect on competition. The effects-based requirement of section 76 takes account of the fact that some conduct that could constitute price maintenance is in fact pro-competitive and should not be prohibited. The Guidelines recognize that conduct that could constitute price maintenance may be pro-competitive, such as where such conduct permits a supplier to distribute its products among a broader group of customers (because concerns about free-riding among discounters can be addressed) or where conduct enhances the degree of inter-brand competition. However, the Guidelines provide little guidance as to what circumstances are, in the Bureau’s view, most likely to result in pro-competitive effects from the imposition of price maintenance. For example, the Guidelines appear to define the problem of “free-riding” narrowly and do not make reference to a supplier’s expectations of service from a customer or brand profile.
9. Adverse Effect on Competition Standard is Low
Conduct can be subject to an order under section 76 if it results in an adverse effect on competition. The Tribunal has previously held that this standard of competitive effect is lower than a “substantial lessening of competition,” which is the applicable standard under other civil sections of the Act. The Guidelines acknowledge that a firm must have a degree of market power in order to affect competition adversely, and that as a result the Bureau’s concern under section 76 will be with conduct that “is likely to create, preserve or enhance market power” in a market. However, the Guidelines warn that the Bureau may define markets narrowly as the circumstances of a case dictate – for example, the Bureau may define an e-commerce market separate from a bricks-and-mortar market in appropriate circumstances. The possibility of such narrow markets renders less important the “safe harbor” created in the Guidelines for firms whose share is less than 35 per cent of a market. The Guidelines also describe a wide but economically standard range of theories of harm that can result from price maintenance conduct, including less vigorous competition upstream or downstream, and foreclosure upstream or downstream.
10. Investigative Practices and Remedies
The Guidelines describe how the Bureau – when it identifies conduct that it believes is contrary to section 76 – will consider accepting a range of remedies proposed by businesses that would avoid the need to present a case to the Tribunal. The Guidelines indicate that the Bureau’s approach to remedies will be flexible depending upon the circumstances of the case and range from mere commitments to discontinue a particular business practice to requiring that commitments agreed with the Bureau be registered with the Tribunal (which permits the commitments to be enforced as if they were an order of the Tribunal). The Guidelines take account of the fact that the range of remedies available under section 76 is different (and often narrower) than under other sections of the Act; for example, under section 79 the Tribunal can impose an administrative monetary penalty upon a defendant (which penalty cannot be imposed under section 76). The Guidelines note that where conduct could be subject to different sections of the Act, the Bureau’s choice as to which section to bring its case before the Tribunal under will have regard to, among other things, the range of available remedies under each section and whether those available remedies would be effective at addressing the competitive harm the Bureau perceives to have occurred or that would be likely to occur from the conduct at issue.