In a ruling released on August 7, 2009,1 the Competition Tribunal dismissed an application by Nadeau Poultry Farm Limited which would have forced Groupe Westco inc., the largest chicken producer in New Brunswick, and two smaller producers, Groupe Dynaco and Volailles Acadia S.E.C., to continue selling their entire production of live chickens to Nadeau, despite the fact that there was no contract of supply between the parties.

The ruling afforded an opportunity for the Tribunal to clarify the scope of s. 75 of the Competition Act, which deals with “refusal to deal”, a civil provision that, in specific circumstances, may allow an applicant business to obtain an order forcing a supplier to accept it as a customer. Since 2002, the Act provides that private individuals may, with leave of the Tribunal, make application directly to the Tribunal on a matter of refusal to deal. This is the second time that the Tribunal has considered the tests that must be met in order to succeed in an application on the merits pursuant to s. 75 of the Act. The decision is an important one for Canadian businesses as the decision underlines the fact that even if a customer’s business may be substantially affected by a refusal to deal the Tribunal will not make an order forcing a supplier to accept the customer unless the customer is also able to prove that the refusal has an adverse effect on competition in the market.

Westco was represented in this case by a team from Ogilvy Renault.

THE FACTS

Nadeau operates the only chicken slaughterhouse in New Brunswick. In early 2008, Westco, Dynaco and Acadia informed Nadeau that they would no longer be supplying Nadeau’s slaughterhouse as of July of the same year, because they intended to complete the vertical integration of their operations and start slaughtering their own chickens. To that effect, Westco had entered into a partnership with Quebec-based Olymel S.E.C., and Olymel and Westco had jointly announced that they intended to build a new slaughterhouse in New Brunswick.

Nadeau claimed that the decision to stop supplying it with live chickens would have a substantial effect on its business, that it would be unable to find an alternative source of chickens on the market and that there would be an adverse effect on competition in the market for processed chicken. Nadeau sought an order by the Tribunal to force Westco, Dynaco and Acadia to continue supplying Nadeau with the same volume of live chickens as before.

An unusual feature of this dispute is that it occurred in a highly regulated industry, namely, the production and sale of live chickens. In fact, chicken farming may only be carried on in Canada for commercial purposes by holders of quotas issued by federal/provincial authorities under Canada’s supply management system for chicken.

In the main application, the Tribunal had to decide whether Nadeau’s situation satisfied the five conditions set forth in s. 75 of the Act, namely, that:

  1. it was substantially affected in its business due to its inability to obtain adequate supplies of live chickens anywhere in a market on usual trade terms;
  2. its inability to obtain adequate supplies was due to insufficient competition among chicken producers in the market;
  3. it was willing and able to meet the usual trade terms of chicken producers;
  4. live chickens are in ample supply; and
  5. the refusal to deal is having or is likely to have an adverse effect on competition in the processed chicken market.

THE DECISION

Substantial Effect

On the matter of substantial effect, the Tribunal determined that even if the relevant market effectively included, as Westco argued, the supply of live chickens from New Brunswick, Nova Scotia, Prince Edward Island and a part of Quebec, the termination of the supply of live chickens to Nadeau by Westco, Dynaco and Acadia would have a substantial effect on Nadeau, since Nadeau’s supply would become too expensive, particularly due to the premiums that would have to be paid to producers and the higher transportation costs and mortality rates that would result from the longer distances involved in obtaining replacement chickens.

However, the Tribunal pointed out that a finding of substantial effect is not sufficient to compel a supplier to accept a person as a customer if the other requirements of s. 75 of the Act are not also satisfied. After twelve days of hearings the Tribunal dismissed Nadeau’s application because Nadeau was not able to establish that all elements of the s. 75 test had been met.

Insufficient Competition Between Suppliers

The Tribunal noted that there was no evidence of insufficient competition among chicken producers and that, in any case, the substantial effect feared by Nadeau did not stem from insufficient competition. In fact, there were many chicken producers in the relevant geographic market and there was no evidence of collusion or lack of independence among chicken producers.

Thus, Nadeau’s inability to obtain live chickens anywhere in the market on usual trade terms was not the result of insufficient competition among producers, but rather a consequence of the restrictions imposed by the supply management system, which controls and limits the supply of live chickens. The Tribunal concluded that the restriction of supply was the main reason why Nadeau could not obtain sufficient quantities of live chickens.

Product Available in Ample Supply

The Tribunal also found that live chickens were not available in “ample supply”, another condition set forth in s. 75 of the Act. According to the Tribunal, the expression “ample supply” must be interpreted in accordance with the purpose and scheme of the Act; therefore, a product will not be found to be in ample supply if suppliers are prevented from growing or even changing the nature of their business or are forced to ration supplies between current and potential customers because supply is limited. As it is impossible for producers to either unilaterally expand their quota or quickly increase their production to meet greater demand, the product cannot be considered to be in “ample supply”.

Adverse Effect on Competition in the Processed Chicken Market

Almost half of the Tribunal’s decision is devoted to an analysis of the fifth test under s. 75 of the Act (which was added in 2002 when private remedies became available), namely, the adverse effect on competition that may be caused by refusal to deal.

The Tribunal found that in order to determine whether a refusal to deal would be likely to have an adverse effect on competition in the market, it was necessary to examine a series of indicators such as market share and market concentration, barriers to entry, impact on prices, the effect on rivals’ costs, the impact on the quality and variety of the product, possible foreclosure of supply to other processors in the market and the impact of the possible elimination of Nadeau as a processor.

The Tribunal stated that even if the threshold for establishing an “adverse” effect on competition referred to in s. 75 of the Act is clearly lower than that for a “substantial” reduction in competition (referred to in several other provisions of the Act), establishing an adverse effect on competition in a market still requires evidence that the refusal to deal would have the effect of creating or enhancing a supplier’s “market power”. After analyzing all the indicators mentioned above, the Tribunal concluded that Nadeau had not proved that Westco’s and the other producers’ refusal to deal would create, enhance or preserve market power for any other processor, even if Nadeau were to be completely eliminated from the processed chicken market. The Tribunal examined the market shares of processors in the downstream market and determined that there were many large competitors, none of whom could be said to have market power.

Finally, the Tribunal agreed with Westco that the refusal to supply Nadeau was not likely to have an adverse effect on competition and that the order sought by Nadeau would itself have a harmful effect on competition. The Tribunal concluded that an order that would force Westco, Dynaco and Acadia to continue supplying their chickens to Nadeau would be anticompetitive in all of the circumstances.

CONCLUSION

The Tribunal has thus confirmed that the business decision of Westco, Dynaco and Acadia to cease supplying chicken to Nadeau is not a refusal to deal within the meaning of s. 75 of the Act. The Tribunal refused to give too broad a scope to the provision in the Act respecting refusal to deal and has confirmed that an adverse effect on competition must be established in order to obtain an order forcing a supplier to accept (or continue to supply) a customer that it does not want (or cannot supply without foreclosing other business opportunities).