(This article has been previously published by FDLI)

Antitrust law in Canada is, for the most part, contained in the Competition Act (Act), a federal statute that prohibits various kinds of anticompetitive behaviour, including commercial agreements among competitors that have anticompetitive eff ects. Amendments to the Act that were passed in March 2009, but which will only come into eff ect on March 12, 2010, make signifi cant changes to the way commercial agreements are analyzed and challenged by Canada’s antitrust regulator, the Commissioner of Competition (Commissioner).

It will be easier for the Commissioner to bring criminal proceedings with regard to commercial agreements between competitors that fi x prices, allocate markets or restrict production. Th e amendments make such agreements “per se” illegal. It will therefore no longer be necessary for the Commissioner to prove that such agreements cause an undue lessening of competition.

In regard to other anticompetitive aspects of commercial agreements, the Commissioner will have a new civil provision available to challenge agreements or arrangements that prevent or lessen competition substantially, or are likely to do so.

Companies that have commercial agreements in Canada with competitors or potential competitors should review those agreements in light of the new regime, given that there is no grandfathering for pre-March 12, 2010 agreements. Companies entering into agreements with competitors aft er March 12, 2010 will need to ensure the agreements do not run afoul of the Act. Care is especially warranted if the parties to the agreement have a combined Canadian market share of more than 35 percent, which is the usual threshold used by the Commissioner to determine market power. Th is threshold is oft en met relatively easily in Canada, due to the smaller number of competitors in Canadian product markets as compared to countries with larger markets, such as the United States.

Th e new civil provision, s. 90.1, will aff ect agreements and contracts that are common in the pharmaceutical sector and the food industry. Th is includes agreements to license intellectual property, research and development agreements, co-production agreements and agreements to settle litigation. Such agreements were rarely scrutinized under the criminal provision of the current act. Th e new civil provision, however, is likely to encourage the Commissioner to review these types of agreements.

Overview of New Regime

Th e amendments create a “dual-track” approach to antitrust challenges to commercial agreements among competitors. Section 45 remains the “criminal track,” but its current scope will be narrowed to focus only on so-called “hard core” cartel conduct and the need for the prosecution to demonstrate an undue lessening of competition will be eliminated. Th is brings the section in line with the way this conduct is treated in the United States. Th e “civil track” is found in a new provision, s. 90.1, that empowers the Competition Tribunal (Tribunal) to review agreements among competitors that deal with areas other than the three “hard core” areas covered by s. 45.

Criminal Track

As of March 12, 2010, the new s. 45 will prohibit agreements between “competitors” that:  

  • fix, maintain, increase or control the price for the supply of a product in respect of which the agreeing parties are competitors;  
  • 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. Th e term “competitor” is defi ned as including “a person who it is reasonable to believe would be likely to compete with respect to a product in the absence of a conspiracy, agreement or arrangement” described above. While it will no longer be necessary to prove an undue lessening of competition, it will be necessary to prove on a criminal standard that the parties involved are actual or likely competitors. Th e amendments establish two statutory defenses:  
  • An “ancillary restraints” defense, which applies where it can be established, on a balance of probabilities, that the agreement 1) is ancillary to a broader or separate agreement or arrangement that includes the same parties and 2) is directly related to, and reasonably necessary for giving eff ect to, the objective of that broader or separate agreement or arrangement; and,  
  • A “regulated conduct” defense applies where another statute (federal or provincial) provides a defense to prosecution under s. 45.

The penalties for violating the amended s. 45 are a maximum prison term of 14 years and a maximum fi ne of $25 million. In addition to these sanctions, parties may also be liable to private civil actions. Section 36 of the Act allows persons to bring an action for loss or damage caused by conduct that violates s. 45, whether or not criminal proceedings have been taken.

Civil Track

Section 90.1 is new and provides that agreements or proposed agreements between competitors (or those who would be competitors but for the agreement) can be reviewed by the Commissioner to determine whether they are likely to result in a substantial lessening or prevention of competition. If the Commissioner has concerns and the concerns are not satisfi ed by the parties voluntarily, the Commissioner can refer the matter to the Tribunal for adjudication. If the Tribunal is satisfi ed, on a balance of probabilities, that the agreement is likely to result in a substantial lessening or prevention of competition, the Tribunal may prohibit any person (whether a party to the agreement or not), from doing anything under the agreement or may require any person (whether a party to the agreement or not) with the consent of that person and the Commissioner, to take any other action. Th ese behavioral types of orders are the only remedy that can be imposed by the Tribunal. Th e Tribunal cannot impose any monetary penalties. Private parties will not have any ability to bring private actions under the Act in respect of agreements that contravene s. 90.1. In assessing whether an agreement or proposed agreement is likely to result in a substantial lessening or prevention of competition, the Tribunal will consider a prescribed list of factors that is the same one used to assess proposed mergers. Likewise, there is an effi ciency defense similar to that used in the merger context.

Licenses of Intellectual Property

Intellectual property (IP) licenses among competitors can be viewed as being pro-competitive if they do not aff ect competition by, for example, reducing the number of suppliers of competing products in a market. If, however, the license agreement provides that the licensee/competitor must stop selling its own product which is the only other competing product in the market, or must charge the same price for the only two products on the market, then liability for elimination of supply or price fi xing might arise under s. 45. Section 90.1 could be invoked by the Commissioner where an IP license to a competitor substantially lessens competition in a market by, for example, requiring the licensee to use the licensor’s distribution network for all products sold by the licensee, including non-licensed products. Parties to IP licenses will therefore need to determine if they have a signifi cant market share in the relevant product market. If they do, they should ensure that 1) the license agreement does not contain terms that would violate s. 45 and 2) the agreement will not result in a substantial lessening or prevention of competition in the relevant product market contrary to s. 90.1.

Research and Development Agreements

In the draft Competitor Collaboration Guidelines (Guidelines) issued by Commissioner, it is noted that research and development (R&D) can result in signifi cant benefi ts. Th e Guidelines, however, identify various anti-competitive concerns. Th ese include 1) whether an R&D agreement among competitors actually reduces the level of innovation that would have prevailed in the absence of the agreement, and 2) if anticompetitive restrictions are imposed in the agreement on the exploitation of the products that result from the R&D.

Given these concerns, it will be important for competitors who are considering a joint R&D project agreement in Canada to include an analysis of whether the agreement raises issues that could result in the Commissioner taking enforcement action under the Act.

Co-Production Agreements

Like R&D agreements, the Guidelines acknowledge that joint production agreements among competitors can be pro-competitive. Th e anti-competitive concerns focus on issues such as whether the joint production agreement limits output or fi xes prices, or whether the agreement reduces the incentive or ability of the competitors to continue to compete.

Competitors who have or are considering co-production agreements with competitors in Canada will need to ensure that the arrangement and the agreements are structured and worded so as to avoid allegations of price fi xing, supply reduction or that the agreement substantially lessens competition in some other manner. It should be noted that the defense that the joint production agreement enhances effi ciency is available to justify co-production arrangements in certain circumstances. Accordingly, the effi ciencies rationale should be part of any antitrust analysis of such agreements.

Agreements to Settle Litigation

Section 90.1 is broad enough to allow the Commissioner to make fi ndings with respect to agreements to settle litigation. If, for example, a patentee and infringer were to settle a patent infringement action whereby the infringer agreed to stop marketing an infringing product, such an agreement could have the eff ect of preventing or lessening competition. On the other hand, the Patent Act gives a patentee the exclusive right, privilege and liberty of making constructing and using the invention and selling it to others to be used. Th e new powers provided by Section 90.1 may well encourage the Commissioner to scrutinize agreements to settle patent infringement actions in the pharmaceutical field.

Conclusion

Th e addition of section 90.1 to the Competition Act is certain to encourage the Commissioner to enquire into transactions between private parties to an extent never before seen in this country. Companies which have agreements with competitors (or likely competitors) in Canada should review those agreements before the amendments to the Act take eff ect on March 12, 2010. Where appropriate, it is possible to obtain an opinion from the Commissioner. In fact, in an eff ort to promote compliance with the new regime, the amendments to the Act actually provide that anyone can apply to the Commissioner for a free written opinion on the potential application of the amended s. 45 and the new s. 90.1 for agreements entered into before March 12, 2009 (the date the amendments to the Act were actually passed by Parliament). It is understood that to date, the Commissioner has received few requests for such free opinions. This may be an indication of a high level of compliance in Canada or that everyone is waiting until the last minute before seeking an opinion. More likely, it is due to a fear of asking for an opinion that may expose a party to monetary or penal liability under the current s. 45 and, in the case of agreements that contain possible risks under the new s. 90.1, to the possible need to change the arrangements among the competitors.

There is one additional wrinkle that pharmaceutical companies with patented medicines should keep in mind. Patented medicines are subject to the jurisdiction of the Patented Medicines Prices Review Board (PMPRB) which is empowered to ensure that prices charged for patented medicines are “not excessive.” Th e interplay between the Commissioner, the PMPRB, pharmaceutical patent owners and Canadian courts will keep Canadian lawyers very busy in the next few years. March in Canada is generally a stormy month. If companies want to avoid being caught up in an antitrust storm resulting from the regime change in 2010, now is the time to conduct due diligence.