The Alberta Court of Appeal recently overturned a decision which had suggested that joint purchasing activities are highly risky. In 321665 Alberta Ltd. v Husky Oil Operations Ltd.,1 the trial court had awarded damages in a private action based on an alleged "undue lessening of competition" under the conspiracy offence in the Competition Act.2 Although the conspiracy provision has since been amended to focus on three types of cartel-like activity in sell-side markets (which are now per se illegal), the decision remains relevant under a new civil provision that applies to joint purchasing activities.
the trial court decision
The plaintiff, Kolt Oilfield, and its competitor, Cardusty Trucking, provided fluid hauling services to the two defendant oil companies in Rainbow Lake, Alberta. Husky was a major Kolt customer, accounting for approximately half of Kolt's revenue; ExxonMobil Canada was smaller customer. Husky and Exxon jointly owned numerous facilities in the area, though they also carried on separate operations.
Husky and Exxon determined that efficiencies could be achieved by utilizing a single fluid hauling company. They developed evaluation criteria, solicited operational and financial information from Kolt and Cardusty, and obtained proposals for the supply of their combined hauling requirements. Cardusty was ultimately selected to be the sole supplier of hauling services for both defendants, and Kolt ceased operations less than a year later. Kolt then brought a claim against Husky and Exxon, alleging that their conduct unduly lessened competition, in contravention of the pre-amendment version of the conspiracy provision and related torts.3
In a loosely reasoned decision, the Alberta Court of Queen's Bench found that Husky and Exxon had "enormous degrees of market power" over the fluid haulers and that their agreement denied the plaintiff the right to compete in the marketplace. It awarded damages "at large" in the amount of $5 million, punitive damages of $500,000 against each defendant, investigation costs, and party and party litigation costs.
the appeal court decision
The Court of Appeal concluded that the defendants' conduct did not result in an undue lessening of competition. It agreed with the trial court that the joint ownership of certain assets did not insulate Husky and Exxon from application of the conspiracy provision. However, the trial court had overlooked the opportunity provided to the plaintiff to compete to become the exclusive supplier of fluid hauling services to the defendants.
The Court of Appeal found the defendants' assessment process to be fair and not motivated by anticompetitive intentions. Notably, the focus of the assessment was on the quality and suitability of each candidate and not on price - in fact, Kolt had been rated better on the pricing criterion during the evaluation process. The Court also drew a distinction between a de facto lessening of competition that may arise naturally due to the operation of the free market economy, and an artificial "undue" lessening of competition which would contravene the conspiracy provision.
In obiter, the Court of Appeal also disagreed with the trial court's award of compensatory damages, noting the opaque reasons and the possibility that the award incorrectly included two mutually exclusive amounts (for future profit and for loss of investment value). In addition, even if the defendants had breached the conspiracy provision, punitive damages would not be warranted because the conduct was not reprehensible or malicious and did not warrant denunciation or retribution. The Court viewed the defendants as corporations who were seeking efficiencies in furtherance of their goal to generate profits for shareholders within the confines of the law.
implications for joint purchasers
The Court of Appeal commented in passing that the defendants' activities would not contravene the amended conspiracy offence which criminalizes agreements between competitors to fix prices, restrict output or allocate markets/customers in the supply of a product. This view is consistent with Competition Bureauguidelines, which assert that the amended criminal conspiracy provision is intended to apply to suppliers of a product and not to purchasers.
Unfortunately, the Court of Appeal decision does not provide a clear framework for assessing whether purchaser collaborations are likely to lessen competition. It expressly declined to address the central issue of whether Husky and Exxon had the ability to exercise market power in the buy-side market in which they had been competing purchasers. The Court of Appeal put significant weight on the fact that both suppliers had been provided "with a fair opportunity to compete for business." Collaborating purchasers would be well advised to give suppliers such an opportunity before contracting on a long-term exclusive basis. However, a proper assessment of market power should include a determination of the purchasers' shares in the relevant buy-side market, the effectiveness of remaining competition, the availability of acceptable substitutes, barriers to entry, and any other factor that is relevant to competition in the market.5
The Court of Appeal appeared to be heavily influenced by the desirability of allowing businesses to "rationalize their operations, particularly when the purpose [is] to create efficiencies and reduce unnecessary costs." This is difficult to reconcile with well-established jurisprudence that efficiencies are not a defence to an otherwise unlawful conspiracy. However, the new civil competitor agreements provision introduced in 2010 allows for a formal efficiency defence where an agreement is found to be likely to prevent or lessen competition substantially.
Although the Court of Appeal ultimately denied recovery for the plaintiff in this case, joint purchasers should be mindful the new civil provision and the importance of ensuring that buy-side collaboration does not spill over into a sell-side conspiracy.