On December 9, 2014, the Canadian government released Bill C-49, the Price Transparency Act, to amend the Competition Act. February's federal budget proposed prohibiting unjustified price discrimination to reduce the gap between consumer prices in Canada and the United States. However, possibly in recognition of significant concerns raised in response to this proposal, Bill C-49 contains no penalties for country-based pricing (cross-border price discrimination). Instead, it allows the Commissioner of Competition to investigate and publicly report on Canada/U.S. cross-border price discrimination.
The bill also introduces some technical amendments designed to treat partnerships and other non-corporate entities in the same way that the Competition Act treats corporations. These amendments would help to clarify the availability of certain defences or exemptions to particular provisions of the Act.
Cross-Border Price Discrimination
Bill C-49 authorizes the Commissioner of Competition, the head of Canada's Competition Bureau, to seek court orders to compel the production of documents or information relevant to determining whether the selling price of a product or class of products is or was higher in Canada than the selling price of that (or a similar) product or class of products in the United States. The Commissioner may inquire into both the extent of the difference between the selling prices and the reasons for the difference, and issue a publicly accessible report of his conclusions within one year of receiving such information.
Many commentators, including the C.D. Howe Institute, criticized the government's earlier proposed prohibition as likely to be impractical, costly and ineffective in achieving its goals, while other measures such as tariff reductions and elimination of government supply management of a number of staple agricultural products would likely better enhance competition in Canada and reduce the Canada-U.S. price gap.
Possibly in recognition of such concerns, Bill C-49 would not prohibit cross-border price discrimination. Rather, it enables the Competition Bureau to investigate and publicly disclose cross-border price discrimination and the reasons for it. The Minister of Industry described the bill as giving the Commissioner "the power to investigate price discrimination and expose it".
While the Minister of Industry, in announcing the bill, described the legislation as "doing something about" country pricing strategies and said that it will "help tackle geographic price discrimination", it is unclear how or whether the government expects either the proposed legislation or the Commissioner's reports to reduce cross-border price discrimination, except perhaps through negative publicity for companies named in the Commissioner's reports as having engaged in unjustified geographic price discrimination. It is also unclear how the Commissioner will select the products or suppliers to investigate under these new powers, or which levels of distributors will have their price differences investigated. There is an obvious risk of strategic complaints by rivals or special interest groups and of politically driven requests to the Commissioner to initiate a study, all of which could undermine the credibility of any Bureau investigation or conclusions. Given that much of the information collected by the Commissioner will be commercially sensitive, it isn't clear how much detail the Commissioner might include in his public reports or how much opportunity the subjects of an inquiry may have to respond to the Commissioner's initial conclusions.
An analysis of cross-border price differences and the reasons for them may require a complex comparison of prices and operating costs over a sustained period, including differences in currency rates, tariffs, transportation and labour costs, to name a few. Inherent volatility in exchange rates could make this analysis especially complex. Accordingly, the Commissioner may well seek very extensive and detailed information from subjects of a cross-border price discrimination inquiry as well as from third parties. Additionally, the definition of what constitutes a "similar product or class of products" seems particularly vague and subjective and, in many cases, assessing the reasons for price differences between similar products may be an "apples and oranges" comparison, adding even more complexity to the Commissioner's review.
The Competition Act generally focuses on conduct that harms the competitive process and does not purport to regulate prices. This point was made by Competition Bureau officials who testified in 2012 before a committee of the Canadian Senate that was examining an alleged "Canada- USA Price Gap". As highlighted in the committee's final report, the officials underscored that the Bureau is "not a price regulator", "high prices in themselves do not mean that a particular market is uncompetitive" and, under the current Competition Act, "Canadian businesses are free to set their own prices at whatever levels the market will bear, provided that these high prices are not the result of anti-competitive conduct such as price-fixing or abuse of a dominant position."
While Bill C-49 does not expressly provide for price regulation, and the Minister disclaims any such effect for the Bill, the study of price differences isolated from potential concerns about the exercise or acquisition of market power is clearly beyond the Competition Bureau's traditional mandate.
In addition to the provisions concerning cross-border price discrimination, Bill C-49 also proposes amendments to the Competition Act regarding compulsory document and information production, provisions dealing with entities subject to common control and the application of the merger notification provisions to non-corporate entities.
Some of the amendments regarding the definition of "affiliate" and the merger notification provisions are similar to some proposals in our October 2013 paper on opportunities to improve regulatory efficiency. If these amendments are implemented, they should allow Canadian businesses different forms of structuring their organizations and facilitate internal corporate reorganizations.
Compulsory Production of Documents and Information Outside Canada
Bill C-49 would expand the Commissioner's right to seek investigative orders under section 11 of the Competition Act to compel the production of information held by entities operating outside Canada. Under the existing legislation, the Commissioner can seek a court order compelling firms to produce documents and responses to questions in furtherance of investigations. In addition, subsection 11(2) of the Competition Act allows the Commissioner to seek an order requiring a firm operating in Canada to produce documents that are held by its foreign affiliates. This provision recognizes that, for example, the relevant information relating to anti-competitive conduct may be held by a parent company located in the United States or elsewhere, as opposed to its Canadian branch office or subsidiary.
Broadly speaking, the bill would make three changes to the investigative powers under subsection 11(2) of the Act:
- Remove the requirement that, in seeking an order to compel the production of information from a foreign affiliate, the Commissioner must have reason to believe that the Canadian subsidiary also has relevant documents.
- Authorize a court to issue an order under subsection 11(2) compelling a foreign firm to produce documents from its affiliates. For example, the amendments would authorize the court to issue an order against a firm located in the United States requiring the firm to produce records from its Japanese affiliate.
- In addition to seeking records from a foreign affiliate, the bill would allow a court to order the foreign firm to also provide responses to written questions under oath.
Despite these amendments, significant questions remain regarding the effectiveness and enforceability of orders seeking the production of information from foreign entities.
Agreements between "affiliates" under common control are, for good reason, exempt from a number of provisions of the Competition Act, including the price-fixing conspiracy offence, restrictions on price maintenance, and merger notification. For example, it is generally accepted that agreements or transactions between entities under common control should not be subject to prohibitions under the Competition Act because these entities are not expected to compete with one another. Rather, they may coordinate their activities as efficiently as possible.
Since the implementation of Competition Act amendments in 2009 and 2010, any agreement between competitors in respect of a product or service to fix prices, allocate markets or restrict production is an offence, in the absence of a specific defence or exemption, even if the parties do not possess any market power and even if the agreement does not lessen or prevent competition in any way. The Act's current definition of "affiliate" addresses corporations under common control, but does not, for example, apply at all to trusts and does not apply fully to partnerships. If a widely held corporation A owns 100% of the shares of corporation B, A and B can agree that each will sell its products or services only in different parts of Canada without breaching the Act's conspiracy offence. However, if A is a trust or a partnership, the exemption is not clearly available. While Bureau guidelines state that it will consider whether other types of entities are under common control in deciding whether to refer an agreement for prosecution, the guidelines are not binding on the Bureau or a court. Bill C-49 proposes to amend both the exemption to the conspiracy offence and the definition of affiliate to apply to non-corporate entities in the same way that they apply to corporations. Amendments to similar exemptions to other prohibitions in the Competition Act, such as the price-maintenance provision, are also proposed.
Pre-merger notification of a proposed transaction to the Bureau may be required under Part IX of the Competition Act if the parties and their affiliates have, in aggregate, assets in Canada with a book value in excess of $400 million or annual gross revenues from sales in, from or into Canada in excess of $400 million, and the acquired business has assets in Canada with a book value in excess of $82 million or annual gross revenues from sales in or from Canada in excess of $82 million. Bill C-49 will exempt some types of transfers of assets or ownership interests between entities under common control that would currently be subject to mandatory pre- merger notification to the Competition Bureau with a $50,000-notification fee – for example, a transfer between a trust and a controlled corporation that exceeds the notification thresholds will become exempt under the bill. The amendments in Bill C-49 should reduce the cost of analyzing intra-control group transactions.
Additionally, the merger-notification provisions of the Competition Act currently require corporations that are the target of a hostile bid to file a merger notification with the Bureau within 10 days of the bidder submitting its notification. Other provisions clarify that in a share acquisition, the relevant statutory waiting periods are determined with reference to the day on which the bidder files its required information. (For other types of transactions, waiting periods do not commence until all parties have filed their respective required information.) These provisions are intended to ensure that targets of hostile bids cannot use the merger notification provisions of the Competition Act as a way to delay or otherwise influence the outcome of a bid. Bill C-49 proposes to expand the application of these rules to bids for equity interests in non-corporate entities (e.g., REITs).