Nadeau Poultry Farm’s application to the Competition Tribunal for an order requiring its suppliers to continue providing it with live chickens was dismissed in August 2009. The respondents stopped supplying Nadeau with chickens after they decided to vertically integrate into the downstream processing of chickens.
In Canada, a person who is refused the supply of a product or the Commissioner of Competition can apply under section 75 of the Competition Act to the Tribunal for an order requiring a supplier to accept the person as a customer. A successful application under section 75 requires proof that:
“(a) the person is substantially affected in his business or is precluded from carrying on business due to his inability to obtain adequate supplies of a product anywhere in the market on usual trade terms;
(b) the person is unable to obtain adequate supplies of the product because of insufficient competition among suppliers of the product in the market;
(c) the person is willing and able to meet the usual trade terms of the supplier or suppliers of the product;
(d) the product is in ample supply; an
(e) the refusal to deal is having or is likely to have an adverse effect on competition in the market.”
The decision provides useful guidance on several elements of the refusal to deal test. Most importantly, it affirms that a refusal to deal must create, enhance or preserve the market power of the remaining competitors in the downstream market in order to satisfy the ‘adverse effect on competition’ element. The Tribunal also provided useful guidance on the ‘usual trade terms’ and ‘ample supply’ elements of the refusal to deal provision.
adverse effect on competition
One purpose of the refusal to deal provision is to protect small companies in Canada from being squeezed out of business by big suppliers. When the provision was enacted in 1976, the refusal did not have to have any impact on competition. When the Act was amended to allow private actions for mandatory supplier orders in 2002, an ‘adverse effect on competition’ requirement was added to discourage unmeritorious litigation by terminated customers and to bring this section in line with the primary purpose of the Act, which is to protect competition in Canada.
Because other reviewable distribution practices are evaluated using a ‘substantial lessening of competition’ test, many observers were concerned that the bar for demonstrating an adverse effect on competition would be interpreted as trivial (e.g., any removal or weakening of a competitor resulting from a refusal to deal could be viewed as having some ‘adverse effect’ on competition).
Instead of adopting a low bar, the Tribunal held that a traditional analysis of market power and competitive effects must be carried out to determine whether a refusal to deal has caused an adverse effect on competition. This means that the applicant must establish the relevant product and geographic market, and then show that within that market the remaining competitors, will have created, enhanced or preserved market power as a result of the refusal to deal. While an ‘adverse effect on competition’ is not as great as the impact required to demonstrate a ‘substantial lessening of competition’ under other provisions of the Act, the Tribunal found that the difference lies in the degree of the effect rather than the methodology for evaluating competitive effects.
usual trade terms
The Act defines ‘usual trade terms’ as meaning terms ‘in respect of payment, units of purchase and reasonable technical and servicing requirements’. Nadeau argued that the phrase ‘trade term’, when modified by the word ‘usual’, encompasses the business relationship that had been in place between the supplier and the customer before the refusal to supply (including price). The respondents argued that the definition in the Act was exhaustive and did not include price.
The Tribunal held that trade terms are not those specific to parties, but rather those terms that are usual when viewed from the perspective of the suppliers and customers transacting for the relevant market (in this case, the usual trade terms that any chicken processor could expect when purchasing live chickens). The Tribunal identified price as being one of the most important elements influencing trade in chickens. Price in the context of live chickens consisted of the minimum price set by the respective provincial marketing boards plus a market-established premium paid by processors to producers. In this case, the Tribunal found that Nadeau could not obtain supply on ‘usual trade terms’ because Nadeau would have to pay a higher than usual premium to obtain live chickens from other producers who were currently selling their quota to other processors.
The Tribunal held that the term ‘ample supply’ must be interpreted harmoniously with the Act’s purpose of protecting competition. Supply is not ample, when suppliers generally would be inhibited from growing or even changing the nature of their business, or would be forced to ration supplies between customers, because supply is limited. In the context of this regulated industry, the respondents were limited in their ability to supply live chickens by the quotas set by provincial marketing boards. Therefore, the Tribunal found that Nadeau had not demonstrated that there was an ample supply of live chickens.
implications of the decision
The guidance provided by the Tribunal is a positive development in competition law jurisprudence. The Tribunal’s decision leaves no doubt that the refusal to deal provision can be used successfully only where the decision not to supply contributes to market power in the downstream market. Small businesses should also take note of the significant investment required to successfully litigate a refusal to deal application. Nadeau called three expert witnesses and 17 other witnesses and the respondents called one expert witness and seven other witnesses in a hearing that lasted 12 days. The market power analysis under the ‘adverse effect’ requirement is fact-intensive and economics-intensive. This is likely to reduce unmeritorious use of the refusal to deal provision by terminated resellers who have other viable business options.