On January 16, 2009 the Competition Bureau released its long-awaited draft Enforcement Guidelines on The Abuse of Dominance Provisions (Sections 78 and 79 of the Competition Act) for public comment. While these Guidelines do not reflect any major changes to the Bureau’s existing enforcement policy, they provide helpful guidance to the legal and business communities on what constitutes a “legitimate business justification" for a practice. They also contain more specific guidance on the Bureau’s approach to analyzing common distribution practices, including exclusive dealing, tying and bundled rebates.
There are three principal elements to the abuse of dominance provisions in the Competition Act (the Act). In short, it must be demonstrated that:
- one or more persons must substantially or completely control a market in Canada;
- the person or persons have engaged or are engaged in a practice of anti-competitive acts; and
- the practice has had, is having or is likely to have the effect of substantially preventing or lessening competition in a market.
The changes to the existing Guidelines, released in 2001, primarily reflect developments in the case law -- notably, the 2006 decision of the Federal Court of Appeal (FCA) in Commissioner of Competition v. Canada Pipe Company Ltd. (Canada Pipe), with respect to the second and third elements of the test for dominance (as noted above).
Legitimate Business Justifications
The draft Enforcement Guidelines on The Abuse of Dominance Provisions (Sections 78 and 79 of the Competition Act) (Draft Guidelines) provide helpful guidance about what constitutes a legitimate business justification for conduct that may adversely impact on competitors. The FCA had stated that such a justification “must provide a credible efficiency or pro-competitive explanation, unrelated to an anti-competitive purpose” and that there must be an “efficiency-related link” between the justification and the respondent.
The Draft Guidelines attempt to clarify the uncertainty left by this framework by providing that “a ‘credible or pro-competitive rationale’ … will often comprise activities that minimize costs of production or operation, independent of the elimination or discipline of a rival; or activities that improve a firm’s product, service, or some other aspect of the firm’s business.” The Draft Guidelines then elaborate on these two categories of activities. Unfortunately, this welcome clarification and elaboration are somewhat undermined by the Bureau’s position that “if the cost saving can be achieved in an equally effective manner other than through the conduct alleged to be anti-competitive, the Bureau will not consider the conduct as having a valid business justification.”
The Draft Guidelines provide the helpful statement that “where it is clear that the firm’s objective in engaging in that conduct was for reasons other than the exclusion, discipline, or predation of a competitor, then the Bureau will likely not elect to pursue further the investigation.” In cases of mixed motives, the Bureau will continue to investigate the matter. However, the Draft Guidelines do not provide guidance about how the Bureau will conduct the balancing exercise in such cases.
The Draft Guidelines also embrace the FCA’s competitor-oriented approach to what constitutes a practice of “anti-competitive acts.” In short, they define such conduct as behaviour that has “an intended negative effect on a competitor that is predatory, exclusionary or disciplinary”; they note that intent can be inferred from the relevant circumstances and reasonably foreseeable consequences of the conduct.
The “But For” Approach
In addition, the Draft Guidelines reflect the FCA’s “but for” approach to the third of the principal elements of the abuse of dominance test -- namely, what constitutes an actual or likely substantial prevention or lessening of competition. This approach requires an assessment of whether, “but for” the practice in question, competition would be substantially greater in the past, present or future. The Draft Guidelines note that, in conducting this assessment, the Bureau will examine whether, “but for” the challenged conduct, “prices might be substantially lower; product quality, innovation, or choice might be substantially greater; or consumer switching between products or suppliers might be substantially more frequent.”
Other Noteworthy Changes
Other noteworthy changes, unrelated to the FCA’s decision in Canada Pipe, include:
- the removal of material that discussed alternative means of resolving cases and that addressed the misperception that the Act can be invoked to protect the profitability of competitors’ businesses;
- a streamlining of the treatment of joint dominance;
- the adoption of the “hypothetical monopolist” approach to market definition that is reflected in other enforcement guidelines issued by the Bureau;
- the alignment of the section on predatory conduct with the Bureau’s 2008 Predatory Pricing Enforcement Guidelines; and
- a significantly expanded treatment of exclusive dealing, tying and bundling, and denial of access to facilities, services and inputs. These expanded sections of the Draft Guidelines do not appear to change existing policy or differ materially from the corresponding provisions on denial of access in the Bureau’s 2008 Information Bulletin on the Abuse of Dominance Provisions as Applied to the Telecommunications Industry. That Bulletin articulates a somewhat lower intervention threshold for access cases than in other major jurisdictions.
Unfortunately, the Draft Guidelines do not materially change the Bureau’s approach to the issue of what constitutes “dominance” (the first of the three principal elements in the abuse of dominance provisions). While the United States, Europe and other important jurisdictions are gravitating toward a “substantial market power” test, with safe harbours that are higher than those set out in the 2001 Guidelines, the Bureau has maintained the position that dominance can be demonstrated by a showing of merely some market power.
Its safe harbour for single firm dominance remains unchanged at 35%, while its safe harbour for joint dominance has simply been raised from 60% to 65%. It had been expected, particularly in light of the existing jurisprudence under section 79, that these thresholds would be raised to approximately 50% and 75%, respectively. Similarly, while the Bureau should be commended for its expanded discussion on exclusive dealing in Appendix III of the Draft Guidelines, there was some expectation that the Bureau would identify a safe harbour for exclusive dealing arrangements that foreclose less than 30%-35% of existing customers or effective distribution.
The Bureau has invited interested parties to provide comments on the Draft Guidelines by e-mail, fax, or regular mail no later than April 20, 2009.