What are the legal sources that set out the antitrust law applicable to vertical restraints?
The main source of law applicable to vertical restraints in Canada is the Competition Act (the Act), in particular Part VIII - Matters Reviewable by the Tribunal. Part VIII of the Act captures the following restrictive trade practices: refusal to deal, price maintenance, exclusive dealing, tied selling, market restriction, abuse of dominance and delivered pricing. These reviewable matters are practices that may be reviewed on a discretionary basis by the Competition Tribunal (the Tribunal), but are not per se illegal in recognition of the fact that they are not always anticompetitive. Generally, an anticompetitive effect is required before an Order will be made under these provisions, unlike the criminal offences set out in Part VI of the Act, which are per se offences. Various enforcement guidelines published by the Competition Bureau (the Bureau) are also relevant.
Types of vertical restraint
List and describe the types of vertical restraints that are subject to antitrust law. Is the concept of vertical restraint defined in the antitrust law?
There is no definition of vertical restraint in the Act; however, the Act sets out various types of vertical restraints that are reviewable under Part VIII, including:
- refusal to deal: where, under certain circumstances, a business refuses to supply a product to another business despite that business being willing and able to meet the supplier’s usual trade terms;
- resale price maintenance: when a supplier prevents a customer from selling a product below a minimum price by means of a threat, promise or agreement, or where a supplier refuses to supply a customer because of their low pricing policy;
- exclusive dealing: where a supplier requires or induces a customer to deal only, or mostly, in certain products;
- tied selling: where a supplier, as a condition of supplying a particular product, requires or induces a customer to buy another product or other products;
- market restrictions: where the supplier requires the customer to sell the specified products in a defined market (ie, by penalising the customer for selling outside that defined market);
- abuse of dominance: when a dominant firm in a market, or group of firms, engages in conduct intended to eliminate or discipline a competitor or to deter future entry by new competitors, with the result that competition is prevented or lessened substantially;
- delivered pricing: the practice of refusing a customer, or potential customer, delivery of an article at any place where the supplier delivers the article to any other of the supplier’s customers, on the same trade terms; and
- foreign refusal to supply: where a supplier outside Canada has refused to supply or otherwise discriminated in the supply of a product to a person in Canada at the instance and by reason of the exertion of buying power outside Canada by another person.
These restrictions are found in sections 75-81 and 84 of the Act.
Is the only objective pursued by the law on vertical restraints economic, or does it also seek to promote or protect other interests?
The purpose of the Act is to ‘maintain and encourage competition in Canada in order to promote the efficiency and adaptability of the Canadian economy, in order to expand opportunities for Canadian participation in world markets while at the same time recognising the role of foreign competition in Canada, in order to ensure that small and medium-sized enterprises have an equitable opportunity to participate in the Canadian economy and in order to provide consumers with competitive prices and product choices’. As such, there are economic purposes to the law on vertical restraints - promoting an efficient, adaptive and open Canadian economy - as well as more specific objectives such as supporting medium-sized enterprises and providing consumers with competitive prices and market choices. The immediate past Commissioner of Competition, John Pecman, also emphasised the importance of strong competition in driving innovation.
Which authority is responsible for enforcing prohibitions on anticompetitive vertical restraints? Where there are multiple responsible authorities, how are cases allocated? Do governments or ministers have a role?
The Commissioner of Competition is responsible for the administration and enforcement of the Act, and is supported by staff at the Bureau. The Commissioner investigates alleged anticompetitive conduct and refers criminal matters to the Director of Public Prosecutions of Canada and non-criminal matters to the Tribunal, which is a specialised, quasi-judicial body with the exclusive jurisdiction to consider reviewable matters under the Act.
What is the test for determining whether a vertical restraint will be subject to antitrust law in your jurisdiction? Has the law in your jurisdiction regarding vertical restraints been applied extraterritorially? Has it been applied in a pure internet context and if so, what factors were deemed relevant when considering jurisdiction?
The test for determining whether a vertical restraint would fall under the jurisdiction of the Act is the ‘real and substantial connections’ test. Generally, in order to establish its jurisdiction, a Canadian court must consider whether there is a real and substantial connection to the jurisdiction including whether there are one or more connecting factors that link the subject matter of the litigation to the forum.
In The Commissioner of Competition v HarperCollins Publishers LLC and HarperCollins Canada Limited (2017 Comp Trib 14) (HarperCollins), the Tribunal considered the extraterritorial application of section 90.1 of the Act - which refers to arrangements between competitors that prevent or lesson, or are likely to prevent or lessen, competition substantially in a market - and similar reviewable conduct provisions of the Act. The case involved an application for an order prohibiting the implementation of an alleged agreement between HarperCollins and several other e-book publishers. HarperCollins moved to have the application dismissed on the basis that the Tribunal lacked jurisdiction over an arrangement that was made in the United States. The Tribunal refused HarperCollins’ motion, determining that its jurisdiction was based on a ‘real and substantial connection’ between the challenged conduct and Canada given that the arrangement resulted in anticompetitive effects in Canada. The Tribunal further clarified that this analysis applies to other reviewable conduct under the Act. Therefore, for example, internet retailers that impact the Canadian market must be cognisant of Canadian competition law.
Agreements concluded by public entities
To what extent does antitrust law apply to vertical restraints in agreements concluded by public entities?
Although rarely the subject of antitrust consideration, there is nothing in the Act that specifically excludes its application to public entities.
Do particular laws or regulations apply to the assessment of vertical restraints in specific sectors of industry (motor cars, insurance, etc)? Please identify the rules and the sectors they cover.
The provisions of Part VIII apply generally to all sectors, including e-commerce (which is discussed further below). Additionally, the actions of certain entities operating in highly regulated industries may be immunised from certain provisions of the Act (for further information, see the Bureau’s ‘Regulated’ Conduct Bulletin dated 27 September 2010).
Are there any general exceptions from antitrust law for certain types of agreement containing vertical restraints? If so, please describe.
Exemptions are provided under the Act for price maintenance, exclusive dealing, tied selling and market restriction where such practices occur between entities that are affiliated. There is no specific exception for agreements made among small or medium-sized enterprises (SMEs); however, notably, the reviewable matters provisions in Part VIII generally require that the restraint result in an anticompetitive effect in a market, which may be difficult to establish in the case of SMEs.
Types of agreement
Is there a definition of ‘agreement’ - or its equivalent - in the antitrust law of your jurisdiction?
There is no definition of ‘agreement’ in the Act. However, the Bureau has issued certain guidance in this regard in other contexts, including under the Competitor Collaboration Guidelines. Canadian case law may also provide guidance.
In order to engage the antitrust law in relation to vertical restraints, is it necessary for there to be a formal written agreement or can the relevant rules be engaged by an informal or unwritten understanding?
There is no requirement under the Act for agreements to be formal in order for the Act’s vertical restraints provisions to apply.
Parent and company-related agreements
In what circumstances do the vertical restraints rules apply to agreements between a parent company and a related company (or between related companies of the same parent company)?
There are exemptions under the Act where certain reviewable practices occur between entities that are affiliated. For instance, subsection 77(4) provides that no order be made under section 77 in respect of exclusive dealing, market restriction or tied selling between or among companies, partnerships and sole proprietorships that are affiliated. Section 2 of the Act sets out that an ‘Affiliated corporation, partnership or sole proprietorship’ will be determined in accordance with the following rules:
- one entity is affiliated with another entity if one of them is the subsidiary of the other or both are subsidiaries of the same entity or each of them is controlled by the same entity or individual;
- if two entities are affiliated with the same entity at the same time, they are deemed to be affiliated with each other; and
- an individual is affiliated with an entity if the individual controls the entity.
In what circumstances does antitrust law on vertical restraints apply to agent-principal agreements in which an undertaking agrees to perform certain services on a supplier’s behalf for a sales-based commission payment?
Under subsection 76(4) of the Act, the Tribunal is barred from issuing a remedial order under its price maintenance powers where the reviewable practice occurs in the context of an agent-principal relationship.
Where antitrust rules do not apply (or apply differently) to agent-principal relationships, is there guidance (or are there recent authority decisions) on what constitutes an agent-principal relationship for these purposes?
In its Price Maintenance Enforcement Guidelines, the Bureau states that it will consider ‘relevant legal principles in determining whether a valid agency relationship exists’ as part of the exemption provided for agent-principal relationships under subsection 76(4). The law on agency in Canada is highly dependent on the circumstances of the arrangement, and there has not been a case that has considered the concept of agency under section 76 (or its predecessors).
Intellectual property rights
Is antitrust law applied differently when the agreement containing the vertical restraint also contains provisions granting intellectual property rights (IPRs)?
In its Intellectual Property Enforcement Guidelines, the Bureau sets out its framework for approaching anticompetitive conduct associated with the exercise of intellectual property (IP) rights. The Bureau clearly sets out that the Act generally applies to conduct involving IP as it would apply to conduct involving other forms of property. However, the Bureau applies a two-pronged approach to cases involving IP or IP rights: those involving something more than the mere exercise of the IP right; and those involving the mere exercise of the IP right and nothing else. The Bureau will use the general provisions of the Act to address the former circumstances and section 32 (special remedies) to address the latter.
The Federal Court may make a remedial order under section 32 where use has been made of the exclusive rights and privileges under an IP right, so as to:
- limit unduly the facilities for transporting, producing, manufacturing, supplying, storing or dealing in any article or commodity that may be a subject of trade or commerce;
- restrain or injure, unduly, trade or commerce in relation to any such article or commodity;
- prevent, limit or lessen, unduly, the manufacture or production of any such article or commodity or unreasonably enhance the price thereof; or
- prevent or lessen, unduly, competition in the production, manufacture, purchase, barter, sale, transportation or supply of any such article or commodity.
Section 32 has rarely been used.
Additionally, the recent case of The Commissioner of Competition v The Toronto Real Estate Board, 2016 Comp Trib 7, involved a restriction on certain virtual uses of the Toronto Real Estate Board (TREB) real estate multiple listing service (MLS) database. TREB argued that its copyright in the MLS database was a complete defence to the allegations that it had abused its dominance contrary to section 79 of the Act. In its 2016 decision, the Tribunal found, among other things, that the restrictions were more than the ‘mere exercise’ of TREB’s IP rights. TREB also argued that the Tribunal did not have jurisdiction to order it to grant compulsory IP licences, but the Tribunal found that its broad remedial jurisdiction included jurisdiction in respect of IP rights. In December 2017, the Federal Court of Appeal dismissed TREB’s appeal with costs (see Toronto Real Estate Board v Commissioner of Competition, 2017 FCA 236), and the Supreme Court of Canada declined to hear an appeal of that decision.
Finally, subsection 79(5) of the Act sets out that an act engaged in pursuant only to the exercise or enjoyment of any interest derived under certain IP legislation including the Patent Act is not an anticompetitive effect for the purposes of the abuse of dominance provisions.
Analytical framework for assessment
Analytical framework for assessment
Explain the analytical framework that applies when assessing vertical restraints under antitrust law.
As discussed in questions 1 and 2, vertical restraints are assessed under Part VIII of the Act, which prohibits certain types of restrictive trade practices. These provisions and their remedies are all civil in nature and involve a ‘rule of reason’ analysis to determine the effect of the alleged conduct on competition in the relevant market.
Generally, the alleged conduct must have or be likely to have an ‘adverse effect’ on competition (sections 75-76) or have the effect of a ‘substantial lessening or prevention of competition’ (sections 77-79). The Tribunal has held that ‘adverse effect’ is a lower threshold than ‘substantial lessening or prevention of competition’ (B-Filer v The Bank of Nova Scotia, 2006 Comp Trib 42).
The first step is to define the relevant product and geographic markets. Note that there is a distinction between a product brand and a relevant product market. A particular brand of product may not constitute a separate product market in itself.
The second step is to determine whether the firm possesses market power. Without market power, it is unlikely that the alleged conduct will have an effect on competition in a market. Market power is the ability of a firm to increase prices above the competitive level for a significant period of time (or decrease quality, choice, service or innovation). Pre-conduct market power is considered as well as market power derived as a result of the alleged conduct. There are various direct and indirect indicators of market power, including profitability, market share, share stability and distribution, barriers to entry, technological change and retail or supplier countervailing power.
The third step is to consider whether the effect of the alleged conduct on the market is adverse or positive. In some instances, the alleged conduct may have a positive effect on competition. For example, it may eliminate inefficiency in non-price dimensions of intra-brand competition or it may enhance inter-brand competition.
To what extent are supplier market shares relevant when assessing the legality of individual restraints? Are the market positions and conduct of other suppliers relevant? Is it relevant whether certain types of restriction are widely used by suppliers in the market?
Market share is only one indicator of market power. Market power is part of the analysis of determining whether the alleged conduct has or is likely to have an effect on competition. However, the Bureau has stated in its Price Maintenance Enforcement Guidelines that where a firm has a market share of less than 35 per cent, the Bureau will typically not conduct further examination as to whether the firm possesses market power. In a consultation draft of the Abuse of Dominance Enforcement Guidelines released on 14 March 2018, the Bureau describes the approach generally taken towards market share for dominance cases:
- a market share below 50 per cent will generally only prompt further examination if other evidence indicates the firm possesses market power, or that it appears the firm is likely to realise market power through the alleged anticompetitive conduct within a reasonable period of time while a practice of anticompetitive acts is ongoing;
- a market share of 50 per cent or more will generally prompt further examination; and
- in the case of a group of firms alleged to be jointly dominant, a combined market share equal to or exceeding 65 per cent will generally prompt further examination.
To what extent are buyer market shares relevant when assessing the legality of individual restraints? Are the market positions and conduct of other buyers relevant? Is it relevant whether certain types of restriction are widely used by buyers in the market?
Buyer market share may be relevant when determining whether a buyer has countervailing power. If a buyer has countervailing power, the supplier may not have the necessary market power in order for the alleged conduct to have an effect on competition. However, buyer market share is just one factor in the analysis of determining whether a supplier has market power.
Block exemption and safe harbour
Is there a block exemption or safe harbour that provides certainty to companies as to the legality of vertical restraints under certain conditions? If so, please explain how this block exemption or safe harbour functions.
There is no block exemption or safe harbour contained in the Act with respect to vertical restraints.
Types of restraint
Assessment of restrictions
How is restricting the buyer’s ability to determine its resale price assessed under antitrust law?
The Act prohibits certain price maintenance practices under section 76:
- where a person, by agreement, threat, promise or any like means, influences upward, or discourages the reduction of the price at which the person’s customer or any other person to whom the product comes for resale supplies or offers to supply or advertises a product within Canada, and the conduct has had, is having or is likely to have an adverse effect on competition in a market; or
- where a person has refused to supply a product to or has otherwise discriminated against any person or class of persons engaged in business in Canada because of the low pricing policy of that other person or class of persons, and the conduct has had, is having or is likely to have an adverse effect on competition in a market.
In the first instance, the phrase ‘by agreement, threat, promise or any like means’ has been interpreted broadly to encompass a wide range of circumstances. The Act also specifically states that the suggestion by a supplier of a resale price or minimum resale price for the product, however arrived at, is proof that the retailer is influenced in accordance with the suggestion, in the absence of proof that the supplier, in so doing, also made it clear to the retailer that they were under no obligation to accept the suggestion and would in no way suffer in their business relations with the supplier or with any other person if they failed to accept the suggestion (section 76(5)). A similar presumption is made when a supplier publishes an advertisement that mentions a resale price (section 76(6)). Section 76 also requires that the alleged conduct have an ‘adverse effect’ on competition.
Section 76 does not currently prohibit the establishment of maximum resale price policies.
Have the authorities considered in their decisions or guidelines resale price maintenance restrictions that apply for a limited period to the launch of a new product or brand, or to a specific promotion or sales campaign; or specifically to prevent a retailer using a brand as a ‘loss leader’?
The Act establishes a few limited exceptions with respect to the price maintenance restrictions. A supplier can refuse to supply a product to any person or class of persons engaged in business in Canada, where such person or class of persons:
- was making a practice of using the products as loss leaders, that is to say, not for the purpose of making a profit on those products, but for the purposes of advertising;
- was making a practice of using the products not for the purpose of selling them at a profit but for the purpose of attracting customers in the hope of selling them other products (ie, ‘bait and switch’);
- was making a practice of engaging in misleading advertising; or
- made a practice of providing the level of servicing that purchaser of the products might reasonably expect (section 76(9)).
These exceptions only apply when a supplier actually refuses to supply the retailer engaged in the alleged conduct. They do not apply in situations where a supplier by ‘agreement, threat, promise or any like means, influences upward, or discourages the reduction of the price’. The alleged conduct must also constitute a ‘practice’ of the retailer and not be an isolated event.
There are also exceptions under the exclusive dealing and tied selling provisions of the Act (section 77(4)).
Have decisions or guidelines relating to resale price maintenance addressed the possible links between such conduct and other forms of restraint?
Conduct that allegedly contravenes the price maintenance provisions (section 76) may also contravene other provisions in the Act. However, section 76(11) prevents the Commissioner of Competition from commencing proceedings under section 76 against a person on substantially the same facts on which he or she commenced proceedings under section 45 or 49, or sought an order under section 79 or 90.1. These provisions deal with horizontal restraints as well as abuse of dominance, another vertical restraint. As noted in the Bureau’s Price Maintenance Enforcement Guidelines, where the alleged conduct satisfies the elements of one more of these provisions, the Bureau will base its choice of enforcement provision on the particular facts of each case, the market situation and any other relevant considerations (as well as the nature of the remedy available).
Have decisions or guidelines relating to resale price maintenance addressed the efficiencies that can arguably arise out of such restrictions?
The resale price maintenance provisions of the Act require that there be an ‘adverse effect’ on competition. In certain circumstances, resale price maintenance can have pro-competitive effects and, therefore, would not contravene the resale price maintenance provisions. For example, the Bureau has stated in its Price Maintenance Enforcement Guidelines that, depending on the nature of the product, resale price maintenance may:
- eliminate inefficiency in non-price dimensions of intra-brand competition (ie, by correcting ‘free-riding’ among downstream retailers); and
- enhance inter-brand competition (ie, by providing retailers with a margin in which to invest in promotional efforts or stock and promote new or competing brands).
Where resale price maintenance is demand-enhancing in the market, the Bureau believes it is unlikely to create, preserve or enhance market power, so as to have an ‘adverse effect’ on competition. The Bureau, in its Price Maintenance Enforcement Guidelines, has also identified some general circumstances in which resale price maintenance may be demand-restricting, so as to have an ‘adverse effect’ on competition, including: inhibiting competition between suppliers, inhibiting competition between retailers, supplier exclusion and retailer exclusion.
Explain how a buyer agreeing to set its retail price for supplier A’s products by reference to its retail price for supplier B’s equivalent products is assessed.
Pricing relativity agreements may be assessed under the price maintenance provisions (section 76) or the abuse of dominance provisions (section 79).
For example, if the buyer agrees to set its retail price for supplier A’s products above the retail price for supplier B’s equivalent products, then such agreement may constitute price maintenance under section 76. The analysis relating to price maintenance is discussed further in question 19.
Alternatively, if the buyer agrees to set its retail price for supplier A’s products below the retail price for supplier B’s equivalent products, then such agreement may constitute abuse of dominance under section 79. Section 79 applies where one or more persons substantially or completely control, throughout Canada or any area thereof, a class or species of business, that person or those persons have engaged in or are engaging in a practice of anticompetitive acts, and the practice has had, is having or is likely to have the effect of preventing or lessening competition substantially in a market. Section 78 contains a non-exhaustive list of anticompetitive acts, which includes selling articles at a price lower than the acquisition cost for the purpose of disciplining or eliminating a competitor. As a result, if a pricing relativity agreement is used for the purpose of eliminating a competitor, it may constitute an abuse of dominance under section 79 (ie, if Supplier A is attempting to eliminate Supplier B from the market).
These agreements may also raise concerns in the event that they are facilitating horizontal restraints (agreements among competitors). The provisions dealing with horizontal restraints are found in sections 45 and 90.1 of the Act.
Explain how a supplier warranting to the buyer that it will supply the contract products on the terms applied to the supplier’s most-favoured customer, or that it will not supply the contract products on more favourable terms to other buyers, is assessed.
Exclusive dealing means any practice whereby a supplier of a product, as a condition of supplying the product, requires that customer to:
- deal only or primarily in products supplied by or designated by the supplier, or refrain from dealing in a specified class or kind of product except as supplied by the supplier; and
- any practice whereby a supplier of a product induces a customer to meet a condition as set out above by offering to supply the product to the customer on more favourable terms or conditions if the customer agrees to meet such conditions.
Section 77 applies where exclusive dealing, because it is engaged in by a major supplier or because it is widespread in a market, is likely to impede entry into or expansion of a firm in a market, impede introduction of a product into or expansion of sales of a product in a market, or have any other exclusionary effect in a market, with the result that competition is likely to be lessened substantially.
For example, in Canada (Director of Investigation and Research, Competition Act) v NutraSweet Co  CCTD No 17 (NutraSweet), the Tribunal found that the ‘most-favoured nation’ clause and the ‘meet or release’ clause contained in the agreements between the NutraSweet Company, a supplier of the sweetener aspartame, and its customers constituted anticompetitive acts for the purpose of section 79. The ‘meet or release’ clause gave the NutraSweet Company the option to meet the lower price offered to its customer or to release the customer to purchase from the other supplier, and the most-favoured nation clause ensures that the price to a particular customer is the lowest price paid by any customer for an equivalent volume of aspartame.
Explain how a supplier agreeing to sell a product via internet platform A at the same price as it sells the product via internet platform B is assessed.
This form of agreement is likely to be assessed under the price maintenance provisions of the Act, as it discourages the reduction of the price at which the buyer or any other person supplies or offers to supply or advertises a product within Canada. See the discussion in question 19.
Depending on the circumstances, this form of agreement may also give rise to concerns under the abuse of dominance provisions, and it may raise concerns in the event that it is facilitating horizontal restraints (agreements among competitors), which are set out in sections 45 and 90.1 of the Act.
Explain how a supplier preventing a buyer from advertising its products for sale below a certain price (but allowing that buyer subsequently to offer discounts to its customers) is assessed.
This form of agreement would be assessed under the price maintenance provisions of the Act. The price maintenance provisions also apply to the price at which the buyer advertises a product within Canada, not just the price at which the buyer actually resells the product. It does not matter that the supplier allows the buyer to subsequently offer discounts to its customers. See the discussion in question 19.
Depending on the circumstances, this form of agreement may also give rise to concerns under the abuse of dominance provisions.
Explain how a buyer’s warranting to the supplier that it will purchase the contract products on terms applied to the buyer’s most-favoured supplier, or that it will not purchase the contract products on more favourable terms from other suppliers, is assessed.
This form of agreement is likely to be assessed under the price maintenance provisions of the Act, as it may discourage the reduction of the price at which the buyer or any other person supplies or offers to supply or advertises a product within Canada by requiring the buyer to purchase the supplier’s products at higher prices than offered by other suppliers. See the discussion in question 19.
Depending on the circumstances, this form of agreement may also give rise to concerns under the abuse of dominance provisions. It may also raise concerns in the event that it facilitates horizontal restraints (agreements among competitors), which are set out in sections 45 and 90.1 of the Act.
Restrictions on territory
How is restricting the territory into which a buyer may resell contract products assessed? In what circumstances may a supplier require a buyer of its products not to resell the products in certain territories?
Market restrictions are assessed under the market restriction provisions of the Act (section 77(3)). Market restriction is defined as any practice whereby a supplier of a product, as a condition of supplying the product to a customer, required that customer to supply any product only in a defined market, or exacts a penalty of any kind from the customer if he or she supplied any product outside of a defined market (section 77(1)). Where the Tribunal finds that the market restriction, because it is engaged in by a major supplier of a product or because it is widespread in relation to a product, is likely to substantially lessen competition in relation to the product, the Tribunal may make an order prohibiting all or any of the suppliers from continuing to engage in market restriction. The order may also contain any other requirement that is necessary to restore or stimulate competition.
There is an exception where the market restriction is or will be engaged in only for a reasonable period of time to facilitate entry of a new supplier of a product into a market or of a new product into a market (section 77(4)).
Have decisions or guidance on vertical restraints dealt in any way with restrictions on the territory into which a buyer selling via the internet may resell contract products?
The market restriction analysis applies the same to both distribution channels (via the internet or traditional bricks-and-mortar stores). See the discussion in question 28.
Restrictions on customers
Explain how restricting the customers to whom a buyer may resell contract products is assessed. In what circumstances may a supplier require a buyer not to resell products to certain resellers or end-consumers?
The same market restriction analysis applies, as discussed in question 28.
Restrictions on use
How is restricting the uses to which a buyer puts the contract products assessed?
These forms of restrictions are likely to be assessed under the abuse of dominance provisions (section 79). Such restriction may constitute an anticompetitive act. However, the Tribunal would still need to find a ‘substantial prevention or lessening’ of competition as a result of such conduct.
Restrictions on online sales
How is restricting the buyer’s ability to generate or effect sales via the internet assessed?
Restricting a buyer’s ability to generate or effect sales via the internet is likely to be assessed under the market restriction provision (section 77(3)) and the abuse of dominance provision (section 79). Two restraints commonly brought to the Bureau’s attention are: suppliers prohibiting bricks-and-mortar retailers from also selling the products online, and suppliers refusing to distribute their products through retailers that only have an online presence. The Bureau has indicated that while these restrictions may preserve exclusive retailer distribution territories, they may also be imposed for pro-competitive reasons. Generally, where effective competition remains at the supplier or retailer level, it is unlikely the restraint will create, preserve or enhance market power, which means there is no ‘adverse effect’ on competition or ‘substantial prevention or lessening’ of competition (see the Bureau’s submissions to the OECD Policy Roundtable on Vertical Restraints for On-line Sales (2013), available online).
For example, as discussed in question 36, the Bureau brought an application against TREB under the abuse of dominance provisions on the basis that its rules prevented members who wished to operate virtual offices from having full access to MLS.
Have decisions or guidelines on vertical restraints dealt in any way with the differential treatment of different types of internet sales channel? In particular, have there been any developments in relation to ‘platform bans’?
There have been no recent notable cases covering such a scenario in Canada.
Selective distribution systems
Briefly explain how agreements establishing ‘selective’ distribution systems are assessed. Must the criteria for selection be published?
Such selective distribution systems are likely to be assessed under the refusal to deal provisions (section 75) and the abuse of dominance provisions (section 79) of the Act. If the Tribunal finds that such a selective distribution system constitutes a refusal to deal, it may order that one or more suppliers of the product in the market accept the person as a customer within a specified time on usual trade terms.
A refusal to deal exists where:
- a person is substantially affected in his or her business or is precluded from carrying on business owing to his or her inability to obtain adequate supplies of a product anywhere in a market on usual trade terms;
- the person referred to in point (i) is unable to obtain adequate supplies of the product because of insufficient competition among suppliers of the product in the market;
- the person referred to in point (i) is willing and able to meet the usual trade terms of the supplier or suppliers of the product;
- the product is in ample supply; and
- the refusal to deal is having or is likely to have an adverse effect on competition in a market.
Such selective distribution systems may also constitute an anticompetitive act for the purposes of section 79 and give rise to a ‘substantial prevention or lessening of competition’, depending on the circumstances.
Are selective distribution systems more likely to be lawful where they relate to certain types of product? If so, which types of product and why?
Yes, products that are rare or scarce are less likely to be the subject of an order under section 75 of the Act because, in order for an order to be made under this provision, the Tribunal must generally be satisfied that the product in question is in ample supply. Products that are highly regulated may also be less likely to be the subject of an order under Part VIII.
In selective distribution systems, what kinds of restrictions on internet sales by approved distributors are permitted and in what circumstances? To what extent must internet sales criteria mirror offline sales criteria?
The Bureau has indicated that it will evaluate vertical restraints in online sales in the same general manner as traditional retail markets. It is not per se illegal for suppliers to prohibit bricks-and-mortar retailers of their products from also selling the products online, or to refuse to distribute their products through retailers that only have an online presence, for example. However, where such restrictions raise serious competition concerns, the Bureau may take enforcement action, as the Bureau did in a recent and highly publicised case dealing with virtual restrictions. In The Commissioner of Competition v The Toronto Real Estate Board, the Bureau filed an application with the Tribunal against TREB alleging that its implementation of certain rules and policies focused on virtual use constituted an abuse of dominance under section 79 of the Act. The TREB system, an electronic property listings database only available to authorised users, was used in the vast majority of local real estate transactions, but TREB’s rules and policies effectively prohibited real estate agents from providing the same listing information as bricks-and-mortar agents to customers in new and technologically innovative ways, such as through password-protected virtual office websites. In 2016, the Tribunal ruled that TREB had abused its dominance. In December 2017, the Federal Court of Appeal dismissed TREB’s appeal with costs (see Toronto Real Estate Board v Commissioner of Competition), and the Supreme Court of Canada declined to entertain an appeal (see question 14). Therefore, dominant suppliers should ensure that any e-commerce related restrictions do not have an anticompetitive effect, including a considerable adverse impact on innovation, quality and the range of services offered.
Has the authority taken any decisions in relation to actions by suppliers to enforce the terms of selective distribution agreements where such actions are aimed at preventing sales by unauthorised buyers or sales by authorised buyers in an unauthorised manner?
In the TREB case, discussed above, the Tribunal dealt with restrictions on certain virtual uses of the TREB real estate listing system, which would have made providing information from the system to users through password-protected virtual office websites unauthorised, even when done by ‘authorised’ users of the system. As noted, the Tribunal found this restriction to be an abuse of dominance in the circumstances and the Federal Court of Appeal upheld its finding. Several cases have also dealt with authorised buyers purchasing products within distribution systems for the unauthorised purpose of export. One such case under section 77(3) was discontinued (see the Annual Report of the Commissioner of Competition for the year ending 31 March 1998 (Ottawa, Industry Canada, 1998)). Another such case, Polaroid Canada Inc v Continent-Wide Enterprises Ltd (1994) 18 BLR 2(d) 294, came before the courts of Ontario as a breach of contract claim by the supplier in which the purchaser counter-claimed that the export policy was an illegal restraint of trade. However, the court held that unless and until there was an application to the Tribunal and an order by it, no action could be taken under the Act in respect of a market restriction.
Does the relevant authority take into account the possible cumulative restrictive effects of multiple selective distribution systems operating in the same market?
Yes, cumulative effects would be relevant to an analysis under sections 75 and 77, for example. Under the refusal to deal provisions of section 75 of the Act, the Tribunal has held that an applicant must be able to establish that it has been substantially affected in its business or precluded from carrying on business owing to the inability to source the product in question anywhere in the market on normal trade terms and would be unable to obtain adequate supplies of a product owing to insufficient competition among suppliers anywhere in the market. As such, a refusal to supply a particular brand to a retailer who can obtain other brands within the market will not normally satisfy the requirements of section 75. Note that section 77(3) also refers to market restrictions that are ‘widespread in relation to a product’.
Has the authority taken decisions (or is there guidance) concerning distribution arrangements that combine selective distribution with restrictions on the territory into which approved buyers may resell the contract products?
There have been no recent notable cases covering such a scenario in Canada.
How is restricting the buyer’s ability to obtain the supplier’s products from alternative sources assessed?
Such a restriction may be evaluated under the exclusive dealing provision in section 77(2) or the abuse of dominance provision in section 79.
How is restricting the buyer’s ability to sell non-competing products that the supplier deems ‘inappropriate’ assessed?
Such a restriction could be assessed under the exclusive dealing provisions in section 77(2) of the Act, which includes a practice by a supplier of supplying to a customer on the condition that they deal only or primarily in products supplied by or designated by the supplier or refrain from dealing in a specified class or kind of product except as supplied by the supplier. As with other provisions in Part VIII of the Act, exclusive dealing is not per se illegal, but the Bureau may take enforcement action where such activities have an exclusionary effect in a market.
Such a restriction could also be assessed under the tied selling provisions in the same section, which refers to any practice whereby a supplier of a product, as a condition of supplying the product to a customer, requires that customer to refrain from using or distributing another product that is not of a brand or manufacture designated by the supplier.
Explain how restricting the buyer’s ability to stock products competing with those supplied by the supplier under the agreement is assessed.
As with question 41, such a restriction could be assessed under the exclusive dealing or tied selling provisions of section 77(2).
How is requiring the buyer to purchase from the supplier a certain amount or minimum percentage of the contract products or a full range of the supplier’s products assessed?
There is no blanket prohibition on entering into an agreement that requires a customer to purchase a certain minimum amount or percentage of products from a supplier, though the tied selling provision of section 77(2) may be relevant in certain circumstances. In 2014, the Bureau commenced an inquiry into certain conduct of Apple Inc and Apple Canada Inc (collectively, Apple), including regarding minimum order quantities and other volume commitments. Ultimately, however, the Bureau concluded that it did not have sufficient evidence that Apple was indeed contravening the Act and had not found evidence that the Apple’s terms resulted in a significant effect on competition.
Another case dealing with minimum purchase requirements is NutraSweet, which involved allegations that the NutraSweet Company was contravening sections 77 (exclusive dealing and tied selling) and 79 (abuse of dominant position) of the Act, including by requiring purchasers to purchase all of their aspartame requirements from NutraSweet and providing substantial discounts to buyers in exchange for displaying the NutraSweet name and logo. The contracts also contained certain clauses that were at issue (see discussion in question 24). The Tribunal found that the NutraSweet Company had induced exclusive dealing and that its practices constituted an abuse of dominance. The Tribunal issued an order prohibiting the NutraSweet Company from enforcing, or entering into, certain terms of contracts for the supply of aspartame to Canadian customers, unless such clauses were also inserted in supply contracts between the respondent and any competitor of that Canadian customer.
Explain how restricting the supplier’s ability to supply to other buyers is assessed.
Such a restriction could be assessed under subsection 77(3), which refers to any practice whereby a supplier of a product, as a condition of supplying the product to a customer, requires that customer to supply any product only in a defined market, or exacts a penalty of any kind from the customer if he or she supplies any product outside a defined market. Where the Tribunal finds that such a practice is likely to substantially lessen competition in relation to the product, the Tribunal may make an order prohibiting the suppliers from continuing to engage in market restriction and may impose any other requirement that, in its opinion, is necessary to restore or stimulate competition in relation to the product.
Such a restriction could also be assessed under section 75 if it constituted a refusal to deal. In order to establish a refusal to deal the barred buyer must be: (i) substantially affected in their business or precluded from carrying on business owing to their inability to obtain adequate supplies anywhere in the market on usual trade terms; (ii) unable to obtain supplies owing to insufficient competition; and (iii) willing and able to meet the usual trade terms. Additionally, the product must be in ample supply and the refusal to deal must be having (or be likely to have) an adverse effect on competition in the market.
Explain how restricting the supplier’s ability to sell directly to end-consumers is assessed.
Such a restriction could potentially be assessed under subsection 77(3) as a restriction on the customer supplying the product into a particular market (the end-user market).
Have guidelines or agency decisions in your jurisdiction dealt with the antitrust assessment of restrictions on suppliers other than those covered above? If so, what were the restrictions in question and how were they assessed?
No, the restrictions discussed above are the main limitations on vertical restraints in Canada.
Outline any formal procedure for notifying agreements containing vertical restraints to the authority responsible for antitrust enforcement.
There are no such blanket notification procedures.
If there is no formal procedure for notification, is it possible to obtain guidance from the authority responsible for antitrust enforcement or a declaratory judgment from a court as to the assessment of a particular agreement in certain circumstances?
Yes, under section 124.1 of the Act, any person may apply to the Commissioner of Competition for an advisory opinion.
Complaints procedure for private parties
Is there a procedure whereby private parties can complain to the authority responsible for antitrust enforcement about alleged unlawful vertical restraints?
Yes, private parties may make complaints informally to the Bureau. Additionally, section 103.1 of the Act permits private parties to apply to the Tribunal for leave to make an application if they are directly and substantially affected by the conduct of another party. Private access to the Tribunal is only available for conduct reviewable under sections 75 (refusal to deal), 76 (price maintenance) and 77 (tied selling, exclusive dealing and market restriction) of the Act, which are all Reviewable Matters.
How frequently is antitrust law applied to vertical restraints by the authority responsible for antitrust enforcement? What are the main enforcement priorities regarding vertical restraints?
Antitrust enforcement against vertical restraints is not overly common in comparison to other provisions of the Act. This is in part owing to the private right of action that is available for affected parties to challenge the conduct on their own. The Bureau has indicated in the last few years that an increasingly important enforcement priority is ensuring that consumers are able to enjoy the competitive benefits of e-commerce.
What are the consequences of an infringement of antitrust law for the validity or enforceability of a contract containing prohibited vertical restraints?
Conduct that is reviewable by the Tribunal under Part VIII of the Act is not per se illegal; the Tribunal must first make a finding that it is prohibited conduct under Part VIII. Therefore, a party to a contract cannot challenge the enforceability of the contract until the Tribunal makes a finding that it is contrary to the Part VIII of the Act. See Chadha v Bayer Inc  OJ No 6419.
May the authority responsible for antitrust enforcement directly impose penalties or must it petition another entity? What sanctions and remedies can the authorities impose? What notable sanctions or remedies have been imposed? Can any trends be identified in this regard?
The Bureau must petition the Tribunal for an order under Part VIII or the court for an order under section 11 (discussed further below). The Act contemplates serious penalties for failure to comply with such orders. For instance, section 66 of the Act provides for serious penalties for failure to comply with an order imposed by the Tribunal under the provisions of Part VIII of the Act (subject to certain exceptions), including a fine in the discretion of the court and imprisonment for a term not exceeding five years. Section 65(1) sets the penalty for failure to comply with an order made under section 11 (or a contravention of subsection 15(5) or 16(2), which refer to cooperation with a warrant). Contraventions could lead to a fine in the discretion of the court and imprisonment for two years.
Investigative powers of the authority
What investigative powers does the authority responsible for antitrust enforcement have when enforcing the prohibition of vertical restraints?
Section 11 allows a judge to make an order on application by the Commissioner for, among other things, the production of documents. Subsection 11(4) establishes that an order made under section 11 has effect anywhere in Canada. It is possible, though very rare, that the Bureau would request information from suppliers outside Canada.
To what extent is private enforcement possible? Can non-parties to agreements containing vertical restraints obtain declaratory judgments or injunctions and bring damages claims? Can the parties to agreements themselves bring damages claims? What remedies are available? How long should a company expect a private enforcement action to take?
Section 36 of the Act provides a limited statutory right of action for damages granted to persons who have suffered loss or damages resulting from actions contrary to the criminal provisions of the Act (which does not include the provisions dealing with vertical restraints), or the failure to comply with any orders made under the Act. Court actions can take several years.
Section 103.1 of the Act permits private litigants to apply to the Tribunal an order (but not damages) in certain circumstances. See the discussion in question 49.
Is there any unique point relating to the assessment of vertical restraints in your jurisdiction that is not covered above?