The Supreme Court of Canada recently ruled1 legitimate oil and gas joint ventures are not anti-competitive. As a result, the Court of Appeal of Alberta’s judgment in 321665 Alberta Ltd. v Husky Oil Operations Ltd.2 stands and will provide helpful guidance on the boundaries between a legitimate joint venture between competitors and a criminal conspiracy under the Competition Act.3
Husky Oil Operations Ltd. and ExxonMobil Canada Ltd. jointly and separately owned oil and gas properties near Rainbow Lake in northern Alberta. In 1995, they discussed ways to improve their operations in the Rainbow Lake area and determined expenses could be reduced by sole-sourcing fuel-hauling services.
Accordingly, they met with the two local fuel haulers they used in the area, 321665 Alberta Ltd., doing business as Kolt Oilfield, and Cardusty Trucking, to announce they would rely solely on one of the companies to handle all their fuel-hauling needs. Husky and Mobil stressed their ultimate decision would not be based solely on cost, but rather on achieving greater efficiencies in the field. In 1996, after evaluating both suppliers on a number of criteria, Husky and Mobil selected Cardusty as it had a more favourable overall rating.
Kolt's business suffered, and by 1997 it had shut down its operations. Kolt commenced an action against Husky and Mobil, alleging they violated section 45 of the Act by denying Kolt a fair opportunity to compete for Husky's and Mobil's business, and that the agreement between Husky and Mobil to exclusively use Cardusty’s services for their fuel-hauling needs in the Rainbow Lake area resulted in an undue lessening of competition.
Court of Queen's Bench decision
The trial judge found Husky and Mobil had breached section 45 of the Act. He held that the agreement not only resulted in an undue lessening of competition, but it essentially forced Kolt to shut down its operations. He ordered damages "at large" of $5 million, plus punitive damages of $500,000 against each of Husky and Mobil. The trial judge also awarded Kolt investigative costs of $75,000.
Court of Appeal decision
Husky and Mobil appealed the trial judge's decision, arguing their agreement did not, nor was it likely to, unduly lessen competition.
In a unanimous decision the Court of Appeal agreed. It held that the trial judge overlooked the fact Kolt was given an equal opportunity to become the exclusive fuel hauler for Husky and Mobil. The process utilized by Husky and Mobil to select a sole fuel hauler was deemed reasonable and transparent as it took over four months and involved an in-depth assessment of the two companies. The Court of Appeal also concluded Kolt did not establish that Husky and Mobil attempted to reduce Kolt's profit margins, the prices it charged or the volume of work it would provide.
In regard to Kolt's argument that the Act precluded Husky and Mobil from entering into an exclusive arrangement with Cardusty, the Court of Appeal could discern no reason why Husky and Mobil should be precluded from rationalizing their operations, particularly when the purpose was to increase efficiencies and reduce unnecessary costs.
The judges recognized that Husky and Mobil operate in the highly competitive oil and gas industry, where finding efficiencies and developing resources effectively is of the utmost importance. The Court of Appeal held that to find against Husky and Mobil would undermine the competitive nature of their operations by increasing their costs and creating unnecessary inefficiencies, and that such an outcome could not be the intent of the Act.
Husky and Mobil also argued they functioned as a "single economic entity" because they jointly owned and operated most of their assets in the Rainbow Lake area. As a result, their joint purchasing agreement could not be classified as an anti-competitive agreement "between competitors."
The Court of Appeal rejected this argument, stating it is possible for joint operators in the oil and gas industry to conspire with one another and engage in anti-competitive acts. The Court of Appeal pointed out that the parties' memorandum of agreement contained standard language stating the agreement should not "be construed as creating a partnership of any kind, joint venture, association or a trust, or as imposing upon any one or more of the Joint Operators any partnership duty, obligation or liability." This language proved Husky and Mobil intended to remain legally separate entities. Nonetheless, for the reasons set out above, the Court of Appeal held that there was no undue restriction of competition in this case.
The Court of Appeal also overturned the trial judge's award of damages. In doing so, it stated that the $5 million damages "at large" amounted to overcompensation, the $1 million punitive damages were not appropriate as the conduct of Husky and Mobil could not be classified as "reprehensible and malicious in nature," and that there was no basis for an award of investigation costs.
Significance of the case
This case is important because it recognizes that Alberta’s oil and gas industry relies on the cooperation of industry participants to maximize resource base development. In particular, the Court of Appeal held in321665 that a genuine attempt by joint venture partners to create "synergies in the field" (i.e., enter into joint purchasing agreements to reduce procurement costs) will not contravene the Act provided such attempt is directed toward a legitimate business purpose and the suppliers are given a fair opportunity to compete for the business.
Even so, joint venture partners must be cognizant they are not insulated from the Act’s application by virtue of being co-owners. The Court of Appeal in 321665 held that joint venture partners are not considered a "single economic entity" and as such, are capable of conspiring with each other.
321665 was decided under the Act’s criminal conspiracy provisions (section 45), which were amended in 2010 to focus on cartel-like activity in regard to a product’s supply. Accordingly, an anti-competitive agreement between competitors to jointly purchase a product will no longer fall within the purview of the Act’s criminal conspiracy provisions. However, the Competition Bureau has set out in its Competitor Collaboration Guidelines4 that joint procurement agreements may be challenged by the commissioner of competition under the Act’s new civil provisions (section 90.1) if the parties have substantial market power and their conduct is likely to have an anti-competitive effect. Accordingly, collaborating competitors should be cognizant that this decision remains relevant under section 90.1 of the Act.