Tervita Corp. v. Canada (Commissioner of Competition)(Administrative Law — Competition — Mergers)

On appeal from the judgment of the Federal Court of Appeal, 2013 FCA 28, affirming a decision of the Competition Tribunal, [2012] C.C.T.D. No. 14 (QL).  Four permits for the operation of secure landfills for the disposal of hazardous waste generated by oil and gas operations have been issued in Northeastern British Columbia. Tervita holds two permits and operates two landfills pursuant to them. A third permit is held by an Aboriginal community but the landfill has not yet been constructed. The fourth permit is held by Babkirk Land Services Inc., a wholly owned subsidiary of Complete Environmental Inc. When Tervita acquired Complete, the Commissioner of Competition (the “Commissioner”) opposed the transaction on the ground that it was likely to substantially prevent competition in secure landfill services in Northeastern British Columbia. The Commissioner asked the Competition Tribunal (the “Tribunal”) to order, pursuant to s. 92 of theCompetition Act, R.S.C. 1985, c. C-34 (the “Act ”), that the transaction be dissolved, or in the alternative, that Tervita divest itself of Babkirk or Complete.

Pursuant to s. 92 of the Act , the Tribunal found that the merger was likely to prevent competition substantially in the relevant market. It further found that the efficiencies gained by the merger were not greater than and would not offset the anti-competitive effects of the merger, such that Tervita had failed to bring itself within the efficiencies exception contained in s. 96 of the Act. The Tribunal ordered Tervita to divest itself of Babkirk. The Federal Court of Appeal upheld the Tribunal’s conclusion that the merger would likely substantially prevent competition. With respect to the s. 96 efficiencies defence, the court held that the Tribunal erred in a number of respects. However, in its fresh assessment of the matter, the court concluded that the merger only provided marginal gains in efficiency which were not significant enough to approve a merger under s. 96 . As a result, the court dismissed the appeal.

HELD (6:1): (Karakatsanis J. dissenting): The appeal should be allowed, the divestiture order set aside and the s. 92 application dismissed.

Per McLachlin C.J. and Rothstein, Cromwell, Moldaver and Wagner JJ.:

While a standard of reasonableness presumptively applies in this case because the questions at issue are questions of law arising under the Tribunal’s home statute, that presumption is rebutted. The appeal provision in the Competition Tribunal Act, R.S.C. 1985, c. 19 (2nd Supp .), evidences a clear Parliamentary intention that decisions of the Tribunal be reviewed on a less than deferential standard, supporting the view that questions of law should be reviewed for correctness and questions of fact and mixed law and fact for reasonableness.

The concern under the “prevention” branch of s. 92 of the Act is that a firm with market power will use a merger to prevent competition that could otherwise arise in a contestable market. To determine whether a merger gives rise to a substantial prevention of competition under s. 92(1), the Tribunal must look to the “but for” market condition to assess the competitive landscape that would likely exist if there was no merger. First, it is necessary to identify the firm or firms the merger would prevent from independently entering the market. Typically, the potential competitor will be one of the merged parties: the acquired firm or the acquiring firm. The potential entry of the acquired firm will be the focus of the analysis when, but for the merger, it would likely have entered the relevant market. The potential entry of the acquiring firm will be the focus of the analysis when, but for the merger, the acquiring firm would have entered the relevant market independently or through the acquisition and expansion of a smaller firm.

Second, it is necessary to examine the “but for” market condition to see if, absent the merger, the potential competitor would have likely entered the market and if so whether the effect of that competitor’s entry on the market would likely be substantial. If the independent entry has no effect on the market power of the acquiring firm then the merger cannot be said to prevent competition substantially. At this stage of the analysis, any factor that could influence entry upon which evidence has been adduced should be considered, such as the plans and assets of that merging party, current and expected market conditions, and other factors listed in s. 93 of the Act . The timeframe for entry must be discernible. In other words, there must be evidence of when the merging party is realistically expected to enter the market in absence of the merger. That evidence must be sufficient to meet the “likely” test on a balance of probabilities, keeping in mind that the further into the future the Tribunal looks, the more difficult it will be to meet the test. The inherent time delay that a new entrant, facing certain barriers and acting diligently to overcome them, could be expected to experience when trying to enter the market is an important consideration, but should not support an effort to look farther into the future than the evidence supports. As for whether a potential competitor’s entry into the market will have a substantial effect, it is necessary to assess a variety of dimensions of competition including price and output, as well as the degree and duration of any effect it would have on the market. Section 93 of the Act provides a non-exhaustive list of factors that may be considered.

In the present case, the Tribunal’s conclusion that the merger is likely to substantially prevent competition is correct. It used a forward-looking “but for” analysis, identified the acquired party as the focus of the analysis, and assessed whether, but for the merger, the acquired party would likely have entered the relevant market in a manner sufficient to compete with T. The Tribunal did not speculate; rather, it made findings of fact based on the abundant evidence before it. While the Tribunal’s treatment of the asserted 10 percent reduction in prices that would allegedly have been realized in absence of the merger was flawed, there was sufficient other evidence upon which it could find a substantial prevention of competition as a result of the merger.

As section 92 of the Act is engaged, it is necessary to determine whether the s. 96 efficiencies defence applies to prevent the making of an order under s. 92 . The defence requires an analysis of whether the efficiency gains of the merger, which result from the integration of resources, outweigh the anti-competitive effects, which result from the decrease in or absence of competition in the relevant geographic and product market. The Commissioner has the burden of proving the anti-competitive effects, and the merging parties bear the onus of proving the remaining elements of the defence. There are different possible methodologies for the comparative exercise under s. 96, two of which have been the subject of judicial consideration in Canada: the “total surplus standard” which involves quantifying the deadweight loss which will result from a merger, and the “balancing weights standard” under which the Tribunal weighs the effects of the merger on consumers against the effects of the merger on the shareholders of the merged entity. Because the Act does not set out which methodology should be used, the Tribunal has the flexibility to make the ultimate choice of methodology in view of the particular circumstances of each merger.

While section 96 does give primacy to economic efficiency, it is not without limitation. Not all economic efficiencies should be taken into account under s. 96 . A distinction should be drawn between efficiencies claimed because a merging party would be able to bring those efficiencies into being faster than would be the case but for the merger (“early-mover efficiencies”), and efficiencies that a merging party could realize sooner than a competitor only because the competitor would be delayed in implementing those efficiencies because of legal proceedings associated with a divestiture order (“order implementation efficiencies”). Efficiencies that are the result of the regulatory process of the Act are not cognizable under s. 96 , because they result from the operation and application of the legal framework regulating competition law in Canada, rather than from the merger itself. On the other hand, early-mover efficiencies are cognizable under s. 96 , because they are real economic efficiencies that are caused by the merger. In this case, however, the classification of the one-year transportation and market efficiency gains claimed by Tervita as either early-mover efficiencies or order implementation efficiencies would not be dispositive because the efficiencies were not ultimately realized by Tervita.

In its consideration of the efficiencies defence, the Tribunal should consider all available quantitative and qualitative evidence. It is the Commissioner’s burden to quantify all quantifiable anti-competitive effects. Effects that can be quantified should be quantified, even as estimates, provided such estimates are grounded in evidence that can be challenged and weighed. If effects are realistically measurable, failure to at least estimate the quantification of those effects will not result in the effects being assessed on a qualitative basis. Effects will only be considered qualitatively if they cannot be quantitatively estimated. This approach minimizes the degree of subjective judgment necessary in the analysis and enables the Tribunal to make the most objective assessment possible in the circumstances.

Here, the Commissioner did not quantify quantifiable anti-competitive effects and therefore failed to meet her burden under s. 96 . Specifically, there is no price elasticity information which means that the possible range of deadweight loss resulting from the merger is unknown. To permit the Tribunal to consider the price decrease evidence without the rest of the information necessary to quantify deadweight loss admits far too much subjectivity into the analysis, with no guarantee that the Tribunal will have enough information to ensure that a subjective assessment would align with what would actually be observed if the effect were properly quantified. As a result, those quantifiable anti-competitive effects should be assigned zero weight. In setting the weight of these effects at undetermined, the Federal Court of Appeal allowed for subjective judgment to overtake the analysis. Its “undetermined” approach also raises concerns of fairness to the merging parties, in that it places them in the impossible position of having to demonstrate that the efficiency gains exceed and offset an amount that is undetermined. Under this approach, requiring the merging parties to prove the remaining elements of the defence on a balance of probabilities becomes an unfair exercise as they do not know the case they have to meet.

The balancing test under s. 96 mandates a flexible but objectively reasonable approach by which the Tribunal must determine both quantitative and qualitative aspects of the merger, and then weigh and balance those aspects. The test may be framed as a two-step inquiry. First, the quantitative efficiencies of the merger should be compared against the quantitative anti-competitive effects. Where the quantitative anti-competitive effects outweigh the quantitative efficiencies, this step will in most cases be dispositive, and the defence will not apply. Under the second step, the qualitative efficiencies should be balanced against the qualitative anti-competitive effects, and a final determination must be made as to whether the total efficiencies offset the total anti-competitive effects of the merger at issue. However, despite the flexibility the Tribunal has in applying this balancing approach, more than marginal efficiency gains should not be required for the defence to apply. The words of the Act do not provide a basis for requiring this kind of threshold. Nor does the statutory context of s. 96(1) indicate that it should be read to include a threshold significance requirement. As a result, the Federal Court of Appeal erred in holding that an anti-competitive merger cannot be approved under s. 96 if only marginal or insignificant gains in efficiency result from that merger.

In this case, the Commissioner did not meet her burden to prove the anti-competitive effects, and as such, the weight given to the quantifiable effects is zero. There are no proven qualitative effects. Tervita, however, established overhead efficiency gains resulting from B’s obtaining access to Tervita’s administrative and operating functions. These proven gains meet the “greater than and offset “requirement, and the efficiencies defence has therefore been made out.

Per Abella J.:

The applicable standard of review in this case is reasonableness, not correctness. Following the case ofPezim v. British Columbia (Superintendent of Brokers), [1994] 2 S.C.R. 557, which introduced a new edifice for the review of specialized tribunals, the jurisprudence of this Court has developed into a presumption that, regardless of the presence or absence of either a right of appeal or a privative clause, when a tribunal is interpreting its home statute, reasonableness applies. While the statutory language granting the right of appeal in this case may be different from the language granting the right of appeal in other cases where this Court has applied a reasonableness standard, it is not sufficiently different to undermine the established principle of deference to tribunal expertise in the interpretation of the tribunal’s own statute. Using such language to trump the deference owed to tribunal expertise, elevates the factor of statutory language to a preeminent and determinative status we have long denied it. To apply correctness in this case represents a reversion to the pre-Pezim era, undermines the statutorily-recognized expertise of the Tribunal, and constitutes an inexplicable variation from the Court’s jurisprudence that is certain to engender the very ‘standard of review’ confusion that inspired this Court to try to weave the strands together in the first place. Applying the reasonableness standard, the Tribunal’s interpretation of s. 96 of the Act was unreasonable.

Per Karakatsanis J. (dissenting):

Tervita was not entitled to the benefit of the s. 96 efficiencies defence. Efficiencies and effects should be quantified wherever reasonably possible in the s. 96 analysis, and the assessment of qualitative effects should be objectively reasonable, supported by evidence and clear reasoning. However, the need for “reasonable objectivity” does not justify a hierarchical approach to quantitative and qualitative aspects under the efficiencies defence; nor should qualitative effects be of lesser importance than quantitative effects. The statutory language of the Act does not distinguish between quantitative and qualitative efficiencies, and many of the wide-ranging purposes of the Act set out in s. 1.1 may not be quantifiable. Indeed, many important anti-competitive effects of a merger may be qualitative in nature, and in some cases, those qualitative effects may be determinative in the s. 96 analysis. The legislation mandates a purposive analysis, and the relative significance of qualitative and quantitative gains or effects can only be determined in the circumstances of each case. It is neither helpful nor necessary to predetermine their relative role and importance in the s. 96 defence.

The Federal Court of Appeal’s view that the s. 96 analysis is at heart about balancing overall efficiency gains against overall anti-competitive effects is an approach that provides an appropriate level of flexibility, given that efficiencies and anti-competitive effects will not always be easy to measure. The s. 96 framework enables the expert Tribunal to holistically assess the entirety of the evidence before it, rather than artificially bifurcating the analysis of qualitative and quantitative effects that may, in some cases, more helpfully be analyzed together.

Further, while the Commissioner bears the evidentiary burden to lead evidence of the anti-competitive effects of a merger, and bears the risk that the failure to fully quantify such effects where possible may render the evidence insufficient to counter the evidence of efficiency gains, the failure to quantify quantifiable anti-competitive effects does not invalidate the evidence that established there was a known anti-competitive effect of undetermined extent. Relevant evidence is generally admissible, and the failure to lead the best evidence available goes to weight, not admissibility. Neither the statutory language of the Act nor its purpose or context require that an anti-competitive effect of undetermined weight become irrelevant or inadmissible.

The Federal Court of Appeal was entitled to conclude that the Tribunal’s finding that prices would have been 10 percent lower in the relevant area in the absence of a merger amounted to evidence of a known anti-competitive effect of undetermined weight. The court was also in a position to accept that Tervita’s pre-existing monopoly was likely to magnify the anti-competitive effects of the merger. Ultimately, the court was entitled to find that the proven efficiency gains were marginal to the point of being negligible and did not likely exceed the known (but undetermined) anti-competitive effects.

Reasons for judgment by Rothstein J., concurring reasons by Abella J., dissenting reasons by Karakatsanis J.  Neutral citation:  2015 SCC 3.  No. 35314.