On January 16, 2009, the Canadian Competition Bureau released for public comment a draft of its Enforcement Guidelines on the Abuse of Dominance Provisions. These Draft Guidelines present the Bureau’s current approach to sections 78 and 79 of the Competition Act, reflecting developments in case law and economic thinking since the original guidelines were published in 2001. While there are no major changes to the general enforcement framework for abuse of dominance, the Draft Guidelines present new or expanded discussions of certain key concepts in assessing whether a party or parties have engaged in anti-competitive conduct.

BACKGROUND

Since 2001, only one significant abuse of dominance case heard by the Competition Tribunal (the specialized tribunal that hears cases involving reviewable practices under the Act), Commissioner of Competition v. Canada Pipe Company Ltd., has been appealed to the Federal Court of Appeal, thus marking the first time that the abuse provisions have been analysed by a court. As a result of this case, the Bureau has updated its guidelines.

ELEMENTS OF ABUSE OF DOMINANCE

Under section 79, the Commissioner of Competition must prove three elements on a balance of probabilities before the Tribunal may make an order proscribing the allegedly abusive behaviour:

(a) one or more persons substantially or completely control, throughout Canada or any area thereof, a class or species of business;

(b) that person or those persons have engaged in or are engaging in a practice of anti-competitive acts; and

(c) the practice has had, is having or is likely to have the effect of preventing or lessening competition substantially in a market.

NEW FEATURES OF THE DRAFT GUIDELINES

The key additions in the Draft Guidelines relate to issues raised by the Federal Court of Appeal in the Canada Pipe decision, particularly in connection with the second and third elements noted above.

Valid Business Justification

Section 78 of the Act sets out a non-exhaustive list of anti-competitive acts. A common element among nearly all of the acts listed is that they must be performed for an anti-competitive purpose, which is an intended negative effect on a competitor that is “predatory, exclusionary or disciplinary.” Upon examining a party’s intentions, valid business reasons may be found to have motivated the conduct in question. Meanwhile, the Federal Court of Appeal has ruled that “a business justification must be a credible efficiency or pro-competitive rationale for the conduct in question.” In the Draft Guidelines, the Bureau offers its view on this issue, explaining that such a rationale, “without limiting its scope, will often comprise activities that minimize costs of production or operation, independent of the elimination or discipline of a rival; or activities that improve a firm’s product, service, or some other aspect of the firm’s business.” However, if the cost savings can be achieved in an equally effective manner other than through the allegedly anti-competitive behaviour, the Bureau will not consider there to be a valid business justification.

Impact on Competitors versus Competition

In determining whether a particular act was anti-competitive, the Court in Canada Pipe focused on the intended negative impact on a competitor. In the Draft Guidelines, the Bureau notes that it is ultimately interested in harm to competition (in addition to the anti-competitive intent of the respondent). This is done when examining whether the third element of section 79 (a substantial lessening or prevention of competition) has been met.

Substantial Lessening or Prevention of Competition

The Court established a relativist, “but for” test in Canada Pipe that is to be used when determining whether the allegedly abusive conduct has had, is having, or is likely to have the effect of substantially lessening or preventing competition. This test involves answering the following question: “but for the practice in question, would there be substantially greater competition in the past, present or future?” The Draft Guidelines elaborate on this approach, indicating that the “Bureau will examine such factors as whether or not consumer prices might be substantially lower; product quality, innovation, or choice might be substantially greater; or consumer switching between products or suppliers might be substantially more frequent in the absence of the practice.”

Increased Threshold for Joint Dominance

The Bureau did not change its threshold for concerns about single-firm dominance: a market share of less than 35% will generally not give rise to dominance concerns, whereas a share of 35% or greater will generally prompt further examination. However, the Bureau did increase the safe harbour for concerns about a group of firms alleged to be jointly dominant: a combined market share of 65% or more – up from 60% in the 2001 Guidelines – will generally prompt further review.

The Draft Guidelines also discuss the Bureau’s approach to assessing joint dominance. Where firms are each engaging in similar practices alleged to be anti-competitive, and appear to together hold market power based on their collective share of the market, barriers to entry or expansion, or other prescribed factors, the Bureau will consider these firms to hold a jointly dominant position.

Expanded Discussion of Specific Anti-competitive Acts

The Draft Guidelines contain substantial discussions of exclusive dealing, tied selling, bundling, and the denial of access to a facility or a service, and when these will constitute anti-competitive acts. The denial of access discussion largely mirrors what was contained in the Bureau’s 2008 Information Bulletin on the Abuse of Dominance Provisions as Applied to the Telecommunications Industry.

IMPLICATIONS

As noted above, the Draft Guidelines do not represent a marked departure in the Bureau’s enforcement approach for the abuse of dominance provisions. However, the update does provide some helpful guidance to businesses in understanding how the Bureau will interpret the Federal Court of Appeal’s decision in Canada Pipe with respect to assessing anti-competitive intent, valid business justifications, and the “but for” test for the substantial lessening or prevention of competition. Likewise, the expanded discussion of exclusive dealing, tied selling and bundling will offer clarity to businesses when structuring their distribution practices.

NEXT STEPS

The Bureau has invited comments from interested parties on the Draft Guidelines by April 20, 2009.