In an unprecedented move, the Federal Government has included as part of its 2009 Budget Implementation Act (Bill C-10) a radical overhaul of the Competition Act and a number of important amendments to the Investment Canada Act. Budget bills are enacted quickly and with few revisions. A new era in Canadian competition law is on the horizon.

This McMillan Bulletin discusses the proposed amendments relating to Competitor Agreements and their implications for business. The proposed amendments relating to Advertising and Marketing, mergers and Pricing Practices are dealt with in separate Bulletins.

Restructuring of the Competitor Agreements Regime

Currently, it is a criminal offence under the Competition Act to conspire, combine, agree or arrange with another person to restrain or injure competition “unduly”. Courts have interpreted the “unduly” requirement to mean that only agreements among businesses with market power that have serious adverse effects on competition are unlawful. The maximum penalties are imprisonment for up to five years and a fine of up to C$10 million. There is also a private right of action for injured parties to recover damages (which may occur as a class action).

Bill C-10 proposes to create a dual-track regime for assessing the legality of competitor agreements by creating a new criminal offence for so-called “hardcore” cartels and a new non-criminal regime under which the Competition Tribunal can review and prohibit other types of competitor agreements.

New Criminal Offence

The amendments will create a criminal offence for every person who conspires, agrees or arranges with a “competitor” (which includes a person who would likely be competing in the absence of the agreement) of that person with respect to a product (which includes any article or service) to:

  • fix, maintain, increase or control the price (including any discount, rebate, allowance, price concession or other advantage) for the supply of the product;
  • allocate sales, territories, customers or markets for the production or supply of the product; or
  • fix, maintain, control, prevent, lessen or eliminate the production or supply of the product.

An ancillary restraints defence has been added to provide a partial safety valve for non-hard-core conduct. However, it will place the onus on the parties to the agreement to establish that the price, customer/ territory or content restriction was directly related to and reasonably necessary to achieve the objective of a broader agreement between the same parties that, when considered without the restriction, would not contravene the new criminal offence. This will be a difficult standard to meet in many situations.

These types of agreements and arrangements will be “per se” illegal regardless of whether they have any actual anti-competitive effects. The maximum penalties also will be raised to imprisonment for up to 14 years and a fine of up to C$25 million. The private right of action for injured parties will remain unchanged.

New Civil Regime

Under the new civil regime created by Bill C-10, if the Competition Tribunal finds that an existing or proposed agreement or arrangement between competitors is likely to prevent or lessen competition substantially in a market, the Competition Tribunal may:

  • prohibit any person from doing anything under the agreement or arrangement, or
  • with the consent of the Commissioner of Competition, require any person from taking any other action.

In assessing the competitive effects of such an agreement or arrangement, the Tribunal is directed to consider the same factors that it considers when assessing the competitive effects of a merger. Bill C-10 also includes an efficiency defence identical to the efficiency defence provided in the existing merger provisions of the Competition Act. Thus, the Competition Bureau’s Merger Enforcement Guidelines will provide useful guidance for assessing competitor agreements in the non-criminal context.

Only the Commissioner of Competition may initiate proceedings for the Tribunal to review an agreement or arrangement between competitors. The Tribunal is not empowered to order the payment of a fine or other monetary award in respect of agreements or arrangements that are found to prevent or lessen competition substantially.

Implications for Business

Read literally, the new per se conspiracy offence is likely to catch a variety of activity which does not constitute hardcore cartel conduct.

It will be difficult to draw a clear line to distinguish all criminally offensive agreements from civilly reviewable agreements. This uncertainty may make it difficult for businesses to assess the risks associated with entering into an agreement with a competitor, which could chill pro-competitive, efficiency-enhancing arrangements.

Since the new criminal offence does not contain a competitive effects test, it will be easier for the Crown to prosecute cases and easier for plaintiffs to establish their cases. A rise in private and class actions should be expected.

The provisions of Bill C-10 relating to competitor agreements will not come into force until one year after the Bill receives Royal Assent. This time lag is to allow businesses that have agreements or arrangements with competitors to access whether they will be unlawful under the new law. Businesses should identify every agreement or arrangement currently in place with a competitor (or likely competitor, in the absence of the agreement) and assess the risks associated with continuing the arrangement after the Bill becomes law.

Areas of particular concern may include pricing, territorial and output restrictions in joint ventures, “dual distribution” where a firm makes direct sales in competition with its independent distributors, and collaborative arrangements in network industries such as transportation or telecommunications. The effort required by many businesses to review existing arrangements with competitors will be an unexpected burden in an already challenging economic environment.