Effective March 12, 2010, the new “per se” conspiracy offence under the Competition Act (the “Act”) will come into effect. Agreements or arrangements between competitors to fix prices, allocate markets or control production––so-called “naked restraints”––may now result in fines and/or imprisonment even where implementation has not, or would not have, any effect on the level of competition in a market. The new law marks a significant departure from Canada’s time-tested, market-effects requirement, i.e. that the conspiracy would lessen or prevent competition “unduly.” As an alternative to criminal prosecution, agreements between competitors may be reviewed by the Competition Tribunal under a new civil provision which incorporates a competitive effects test.
The Competition Bureau (the “Bureau”) has provided its initial interpretation and approach to enforcement of the new conspiracy provisions in its Competitor Collaboration Guidelines (the “Guidelines”) issued on December 23, 2009.1 Although the Guidelines are a helpful resource for businesses as they adjust to the new conspiracy laws, their usefulness in a particular case is curtailed because of the generalities inherent in such publications. Moreover, the Guidelines are not binding on private litigants, the courts, the Director of Public Prosecutions (who prosecutes offences under the Act) or, ironically enough, the Bureau itself: the actual scope of the new laws remains to be developed through judicial interpretation.
New Criminal Provision
A person is prohibited from conspiring, agreeing or arranging with a “competitor” of that person with respect to a “product” (“products” include articles and services) to:
- fix, maintain, increase or control the price for the supply of the product. This includes any discount, rebate, allowance, price concession or other advantage in relation to the supply of the product. Agreements regarding a component of price or a term of reference used to calculate a price might be caught.
- allocate sales, territories, customers or markets for the production or supply of the product. In the Guidelines, the Bureau indicates that where a supplier supplies the product both through distributors and directly to end customers (i.e., dual-distribution), restraints in agreements between the supplier and its distributor will generally be reviewed under the civil provisions of the Act and not under the new criminal conspiracy law.
- fix, maintain, control, prevent, lessen or eliminate the production or supply of the product. In the Guidelines, the Bureau takes the position that agreements that impact either the quantity or the quality of the products supplied may be subject to the conspiracy offence.
If convicted, potential penalties include a term of imprisonment of up to 14 years, a fine of up to $25 million, or both. Further, private parties may sue to recover their loss and damage resulting from violation of this provision, plus the costs of their investigation, even in the absence of a criminal proceeding or conviction.
The term “competitor” includes potential competitors––a person who would likely compete with respect to the product in the absence of the conspiracy. Unfortunately, the Act (and the Guidelines) do not address how similar (or substitutable) the wares or services must be to characterize suppliers as competitors.
The Act establishes very few exceptions or defences to the criminal provision. The main defence exempts restraints that are ancillary to and reasonably necessary to give effect to a broader or separate (and otherwise legitimate) agreement involving the same parties. This defence is expected to apply to restraints found in joint ventures and non-compete clauses in employment and purchase and sale agreements.
In addition, the conspiracy offence does not apply to agreements only between companies that are affiliates of each other (e.g., a parent and a wholly-owned subsidiary may agree to fix the prices at which each will market a product). The Guidelines suggest that the Bureau will not enforce the conspiracy provisions entered by other types of entities which are all commonly controlled.
New Civil Provision
Under a new civil provision, the Competition Tribunal may prohibit persons from implementing or enforcing an agreement or arrangement between competitors that prevents or lessens, or is likely to prevent or lessen, competition “substantially” in a market. Similar to the criminal offence, the civil provision also has an exception for agreements between affiliates.
The civil provision is intended to address those competitor collaborations that may have some legitimate or pro-competitive purpose but which may nevertheless have an anticompetitive effect. To this end, the Tribunal must weigh the evidence and determine whether there has been or will be a substantial lessening or prevention of competition. In particular, the Tribunal may not make an order where the agreement has brought about or is likely to bring about gains in efficiency that will be greater than, and will offset, the effects of any prevention or lessening of competition.
Implications of the New Regime
The shift in Canada’s conspiracy law deserves the attention of anyone conducting business in or into Canada. While it is difficult to predict how court decisions will shape Canada’s new conspiracy laws, we offer a few observations at this stage:
- The provisions apply to virtually every business in Canada. A company may be convicted regardless of its size or market share. Furthermore, officers, directors, employees and other individuals that participate in or direct the illegal conduct may be charged.
- The Crown does not have to show the agreement was ever implemented or acted upon: the offence is complete when the agreement is made.
- The focus of the new criminal provision is on who enters into the conspiracy (i.e., competitors) and what the conspiracy is about (i.e., fixing or controlling prices, allocating markets or controlling production) as opposed to the likely effect. The nature and effect of any implementation would be relevant to the appropriate disposition or penalty and damages in the event of civil actions.
- Ongoing agreements or arrangements entered before March 12 will likely be subject to the new law. There is no “grandfathering” under the old law for existing arrangements.
- A conspiracy might be inferred from communications between competitors (or their directors, officer, employees etc.) about sensitive subjects such as pricing, customers, and plans for marketing and production. The conspiracy need not be in writing or be formal.
- Although the Bureau has signalled in its Guidelines that competitors can still pursue legitimate collaborations such as joint ventures, the non-binding nature of the Guidelines mitigates, but does not eliminate, the competition law risk associated with such collaborations.
In summary, a business should be extremely careful and diligent about all communications with its competitors, educate staff, agents, officers and directors about the implications of the new laws, and review current business practices to ensure compliance. Legal advice ought to be obtained before proposing or discussing arrangements with one’s competitors.
If an organization or individual discovers they may have been involved in an illegal conspiracy, they should contact counsel immediately. Counsel can advise on possible options, including participation in the Bureau’s immunity or leniency program. Both of these programs operate on a “race to the door” rule. Accordingly, early detection and reporting will be crucial if participation in these programs is desirable.