The Federal Court of Appeal (“Court of Appeal”) has dismissed an appeal from the May 29, 2012 order of the Competition Tribunal (“Tribunal”) requiring Tervita Corporation (“Tervita”), formerly known as CCS Corporation, to divest itself of a secure landfill site for solid hazardous waste from oil and gas operations acquired through its merger with Complete Environmental Inc. (“Complete”). This case is the first contested merger to be adjudicated by the Competition Tribunal since 2005.
Section 92 of the Competition Act (“Act”) allows the Tribunal to issue remedial orders where it finds that a merger or proposed merger is likely to, inter alia, prevent or lessen competition substantially in a relevant market. Although the Act imposes party and transaction size thresholds below which notifications of mergers do not need to be filed, the Commissioner of Competition (“Commissioner”) on behalf of the Competition Bureau (“Bureau”) is entitled to challenge any merger under section 92, irrespective of the size of the parties or transaction.
This case underscores two issues:
- Small mergers — The Bureau is willing to challenge even small mergers, regardless of the value of the transaction or the breadth of the area it involves – and the Tribunal and Court of Appeal are willing to hold that such transactions may violate section 92.
- Prevent Case — Mergers of potential competitors, even if not competing at the time of the transaction, and mergers which in any other way are likely to prevent the entry or expansion of a new competitor within a reasonable period of time, may be challenged as likely to prevent competition in the future under section 92.
Tervita (CCS) is a private energy and environmental waste company which provides waste management services to upstream oil and gas producers in Western Canada. On January 7, 2011, Tervita acquired Complete, including its wholly-owned subsidiary which owned property in North-Eastern British Columbia (“NEBC”) that had a British Columbia government-issued permit to develop a secure landfill for solid hazardous waste from oil and gas operations (the “Babkirk Site”).
At the time of the acquisition, only four permits for secure landfills for solid hazardous waste in NEBC had been issued. In addition to the Babkirk Site’s permit, Tervita owned and operated the only two operational sites, while the other permit-holding project was stalled and unlikely to be completed.
On January 24, 2011, the Commissioner brought an application to the Tribunal, challenging the completed acquisition pursuant to section 92 of the Act, notwithstanding that the transaction value was significantly below the pre-merger notification threshold at the time.
The grounds for the application were not that the transaction lessened competition, as would be expected in a typical merger challenge. Rather, the Commissioner’s grounds were that the transaction was likely to prevent future competition, because it likely prevented the only foreseeable future competitor in the market for solid hazardous waste generated by oil and gas producers.
The Tribunal recognized the relative uniqueness of a challenge to a merger based on a likely prevention of competition, and set out an analytical framework to be used in such cases. The Court of Appeal affirmed this structure. The foundation of the framework was a “but for” analysis, comparing the likely competitive situation if the transaction was allowed with those that would likely exist “but for” (without) the merger. The goal of this analysis was to determine whether the relevant market would have been substantially more competitive “but for” the merger, particularly whether “but for” the merger, one of the merging parties likely would have entered or expanded within the relevant market within a reasonable period of time and on a sufficient scale to effect either a material reduction of prices or a material increase in one or more levels of non-price competition. As the applicant, the Commissioner bore the burden of proof to a balance of probabilities of the likelihood of the future events both if the merger was allowed, and “but for” (without) the merger.
Because the entire “but for” analysis looked at future market conditions, it required the Tribunal to make a number of detailed findings as to likely future events, and to evaluate their likely impact on competition in the relevant market. The Tribunal found that absent the merger, due to business realities, no later than the spring of 2013 the Babkirk Site would likely have been made into a full-scale competing secure landfill, in direct and substantial competition with Tervita. Therefore, it held, concurred with by the Court of Appeal, that by eliminating the likely emergence of this competitor, which would have challenged Tervita’s monopoly in the NEBC secure landfill market within approximately one year from the date of its decision, the merger was likely to prevent competition substantially in that market, in violation of section 92 of the Act. The Tribunal found, and the Court of Appeal agreed, that there were significant barriers to entry for any potential new competitor, including a site selection and testing process of approximately 15 to 18 months, a permitting process of at least 18 to 24 months, and 3 to 4 months for construction – and considerable costs for each step.
The Tribunal, and the Court of Appeal also considered Tervita’s efficiency defence but only accepted one major efficiency – a reduction in overhead costs, since Tervita could rely upon its existing administrative staff in operating the Babkirk Site. The Tribunal found that the effects of the prevention of competition outweighed the efficiencies that would have resulted from the transaction. The Court of Appeal disagreed with the Tribunal’s decision to weigh the efficiencies and likely effects subjectively, stating that this balancing will be conducted objectively with econometric evidence. However, upon reviewing the facts, the Court of Appeal determined that even when weighed objectively, the efficiencies still did not outweigh the likely effects.
HOW FAR AHEAD WILL POTENTIAL PREVENTION BE CONSIDERED?
The Tribunal found that the merger was likely to prevent competition substantially because it found that “but for” the merger, the Babkirk Site would likely have become a serious competitor to Tervita within one year of the Tribunal’s decision. It established a rule, that if a transaction would likely prevent a “poised entrant” such as the Babkirk Site from entering or expanding significantly within a “reasonable period of time”, that could constitute likely prevention of competition under section 92.
The Court of Appeal agreed with the rule as stated by the Tribunal, and that the prevention of the entry of the Babkirk Site as a new competitor within one year qualified as prevention within a reasonable period of time. However, it also clarified how a “reasonable period of time” should be calculated in future cases. The Court of Appeal explained that “a reasonable period of time” must always be discernible, meaning that the poised entry of a new competitor at some indiscernible point in the future will not substantiate a prevention of competition case. Furthermore, it held that the “reasonable period of time” should generally not, absent special circumstances, be further in the future than the period of time during which it could be shown that barriers to entry to the market would be effective. This means that if in a future case, the Tribunal could only find that entry was limited for one year, that the reasonable period of time during which a likely future prevention of entry or expansion could give rise to a finding that section 92 was violated would be one year.
OTHER IMPORTANT NOTES FROM THE COURT OF APPEAL`S DECISION
Environmental Effects Are Not a Consideration Under Section 96
The Tribunal found that the merger would have had certain environmental benefits, particularly that it was likely to result in there being less hazardous waste deposited in secure landfills than there would have been “but for” the merger. It considered such environmental benefits to be efficiencies weighing on the side of saving the transaction in the offsetting under section 96. However, the Court of Appeal very clearly held that, other than a quantifiable economic benefit associated with an environmental benefit, positive or negative environmental effects from a merger are not valid considerations in an analysis of efficiencies versus likely anti-competitive effects.
PROOF OF “DEADWEIGHT LOSS”
The Court of Appeal rebuked the Tribunal for not requiring the Commissioner to adduce quantifiable evidence of the “deadweight loss” it claimed resulted from Tervita’s monopoly and which would be protected by the prevention of the Babkirk Site’s entry. In future cases, the Commissioner will be required to affirmatively prove any claimed “deadweight loss” resulting from any merger – it will not be able to simply assert its existence as a matter of fact based on the existence of market power.
PROOF OF QUANTITATIVE EFFECTS
Contrary to the Tribunal’s finding, the Court of Appeal made clear that where clear quantitative proof of gains in efficiency are adduced by a party to a merger, claims of quantitative anti-competitive effects by the Commissioner, absent actual quantification thereof, will not be sufficient to overcome the proof of efficiency gains in the offsetting under section 96. However, the Court of Appeal also held that marginal or insignificant efficiency gains, such as the very limited administrative savings proven by Tervita, will not qualify as clear quantitative proof of gains in efficiency. This means that had clear efficiency gains likely to result from the merger been proven by Tervita, the Commissioner’s failure to quantify the “deadweight loss” from the merger would likely have resulted in the Court of Appeal dismissing the Commissioner’s application.
CLARIFICATION THAT GEOGRAPHIC MARKETS MUST BE PROVEN
On February 15, 2013 on a motion to strike the Application commenced in December 2012 was brought by Reliance Comfort Limited Partnership in The Commissioner of Competition v Reliance. The Commissioner took the position that the Tribunal’s Tervita decision supported the principle that in anti-trust cases, the Commissioner is not required to delineate an exact boundary for relevant geographic markets. This was based predominantly on two sentences in the Tribunal’s Tervita decision that “it is the Tribunal’s view that, in this case, the Tribunal may evaluate the competitive effects of the Merger without precisely defining the relevant geographic market. This conclusion is important because...the evidence that has been adduced does not permit the Tribunal to delineate the exact boundaries of the geographic market.”
However, quoting other text from the Tribunal’s decision in Tervita, the Court of Appeal made clear that what the Tribunal meant was that, once clear minimum geographic boundaries of the relevant market had been determined, in this case because Tervita would have remained the sole potential supplier of secure hazardous waste landfills for any reasonably defined group of customers beyond those boundaries, it was not necessary to precisely define the geographic market beyond that which was already defined. It is thereby evident that, contrary to the Commissioner’s position in Reliance, clear boundaries of a geographic market must still be established in anti-trust cases.
The decisions of both the Tribunal and the Court of Appeal in this case make clear that parties contemplating mergers and/or acquisitions must note that the competitive effects of a merger in going forward will be considered when the Bureau decides to review a transaction.
Furthermore, the case’s origins demonstrate the important of seeking advanced guidance, such as an Advance Ruling Certificate, before closing any potentially controversial transaction. Otherwise, the parties risk being drawn into costly litigation before the Tribunal, and costly divestiture proceedings. Tervita demonstrates that the Bureau is not reluctant to challenge small and geographically isolated mergers under the right circumstances.