On March 20, 2014, the Competition Bureau (the “Bureau”) released for public comment draft price maintenance enforcement guidelines. The draft guidelines are the Bureau’s first official statement regarding price maintenance since the decriminalization of price maintenance under the Competition Act (the “Act”). Through the decriminalization, the per se criminal offence was replaced with a civil offence, in which it is necessary to demonstrate that price maintenance conduct has had, is having or is likely to have an adverse effect on competition in a market in order to prove the offence. This change provides manufacturers and wholesalers with greater flexibility vis-à-vis their relationships with customers and other resellers of their products. The draft guidelines aim to provide guidance in this regard by describing the Bureau’s general approach to enforcing price maintenance, including common business practices such as minimum resale pricing, manufacturer-suggested resale pricing and minimum advertised pricing.

The Bureau has invited input regarding the draft guidelines by no later than June 2, 2014. This article provides the context for the draft guidelines, followed by the key highlights.

Background

Among the major 2009 amendments to the Act was the decriminalization of price maintenance conduct. The former criminal offence under section 61 of the Act was replaced with a new civil provision in section 76 of the Act. The former criminal provision was a per se price maintenance offence. In other words, it was a criminal offence to attempt to influence the price upwards or discourage price reduction without an onus to show a negative effect on competition. Under the new civil provision, it is necessary to demonstrate that price maintenance conduct has had, is having or is likely to have an adverse effect on competition in a market.

Under section 76 of the Act, the Commissioner of Competition (or a private party granted leave under section 103.1 of the Act) may bring an application for relief to the Competition Tribunal (“Tribunal”). The Tribunal may make a remedial order (essentially injunctive in nature) in respect of three types of price maintenance conduct, described below, if it can be demonstrated that the conduct is having or is likely to have an adverse effect on competition in a market:

  1.  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 (subparagraph 76(1)(a)(i) of the Act).
  2. A person refuses to supply a product to or has otherwise discriminated against any person engaged in business in Canada because of the low-pricing policy of that other person or class of persons (subparagraph 76(1)(a)(ii)).
  3. A person by agreement, threat, promise or any like means induces a supplier, as a condition of doing business with the supplier, to refuse to supply a product to a person because of the low pricing policy of that person or class of persons (subsection 76(8)).

The Act does not permit the Tribunal to order financial penalties (only remedial orders). Further, the Act does not permit a court to award civil damages to private parties arising from a section 76 violation.

The Draft Guidelines

A full discussion of draft guidelines and their implications is beyond the scope of this article. The following, however, highlight some significant points:

Enforcement Action under Section 76 of the Act: The Bureau evaluates allegations of price maintenance on a case-by-case basis in the context of structural and other market-specific characteristics. In the context of an inquiry, the Bureau will afford parties the opportunity to address Bureau concerns arising from alleged contraventions of section 76 and to propose an appropriate resolution. When the Bureau believes that certain price maintenance conduct satisfies the elements of section 76 and another provision of the Act (e.g. sections 45 or 79), the Bureau will choose the enforcement provision it wishes to rely on. The basis for its choice will include the particular facts of each case, the market situation and the available remedies under the Act.

Price Maintenance Practices can be Pro-Competitive: The Bureau recognizes that price maintenance practices are not only common in many markets but pro-competitive in many circumstances. In this regard, the draft guidelines note that price maintenance conduct can enhance non-price dimensions of intra-brand competition, such as service and inventory levels, among competing retailers of the same brand of product, and can correct “free riding” among retainers. The draft guidelines also note that price maintenance conduct can stimulate inter-brand competition among competing brands of products, such as by facilitating the entry or expansion of competitors by encouraging retailers to stock and promote the supplier’s products, or by encouraging retailers to engage in marketing efforts for a particular product.

Market Power is Key: Market power is a key factor in the Bureau’s analysis when examining whether price maintenance conduct is likely to adversely affect competition in a market. Generally, market power is the ability of a firm (or group of firms) to profitably maintain prices above the competitive level, or other elements of competition, such as quality, choice, service or innovation, below the competitive level, for a significant period of time. According to the draft guidelines, where price maintenance conduct is unlikely to create, preserve or enhance market power, the conduct is unlikely to have an adverse effect on competition in a market. Having regard to the Bureau’s approach, smaller competitors acting independently (that is, competitors lacking significant market power in industries without high barriers of entry) will likely not face enforcement action under section 76 of the Act.

Principal Areas of Concern for the Bureau: The draft guidelines note particular price maintenance conduct of concern to the Bureau:

  • Inhibiting competition between suppliers: Price maintenance conduct may be used by suppliers to facilitate less-vigorous price competition among them, or to help police a price-fixing arrangement;
  • Inhibiting competition between retailers: One or more retailers may compel a supplier to adopt price maintenance conduct to facilitate less-vigorous price competition among them, or to help police a price-fixing arrangement;
  • Supplier exclusion: An incumbent supplier may use price maintenance conduct to guarantee margins for retailers to make them unwilling to carry the products of rival or new entrant competitors to the supplier. To the extent this results in the foreclosure of downstream distribution channels to competing suppliers, it may limit or reduce the ability of such suppliers to discipline the supplier’s wholesale pricing, so as to enable the supplier to charge a price that is higher than could be sustained absent the conduct
  • Retailer exclusion: A person may compel a supplier to adopt price maintenance conduct with the objective to exclude competition to a retailer(s) from discount or more efficient retailers.