We are pleased to present our forecast of key trends and developments to watch for in Canadian competition and foreign investment law enforcement in 2019.
Competition in the Digital Economy to Remain Top Priority
The Competition Bureau’s enforcement efforts and public statements relating to the digital economy in 2018 were wide-ranging and preview what is to come in 2019 and beyond.
Competition enforcement in digital economy cases will continue to be a top priority with the Bureau placing the digital economy first in its list of priorities in its annual plan. The Bureau defines digital economy cases as those that “support innovation and the competitiveness of the digital economy (including but not limited to e-business, online promotions, sales and transfers, infrastructure support) by deterring anti‑competitive conduct such as impeding new entrants, products or services and stopping deceptive marketing practices online” . In the summer of 2018, the Bureau said it would commence 10 digital economy investigations and in the fall, it reported that it was advancing 41 digital economy investigations. To build enforcement capacity in this area, the Bureau created a new position: Chief Digital Enforcement Officer
The Bureau has set its sights on digital economy investigations with high impact and consumer focus, such as drip pricing practices. Stemming from a series of investigations into drip pricing practices by car rental companies, the Bureau reached consent agreements with two car rental companies to correct what the Bureau concluded were misleading advertisements. Each company also had to pay an administrative monetary penalty. The Bureau concluded that the companies’ prices, advertised across various media (including online, mobile applications and emails), were not attainable due to mandatory fees added later during the purchasing process. The Bureau has also launched an action against Ticketmaster for allegedly using drip pricing in its online sports and entertainment ticket price advertising. The Bureau alleges that Ticketmaster’s mandatory fees often inflate the advertised price by more than 20% (in some cases by 65%). Given that most businesses have an online presence and use digital media to advertise, the Bureau can be expected to continue to pursue deceptive marketing practices impacting this area.
One of the biggest stories in 2018 was the Supreme Court of Canada’s decision to refuse leave to appeal the Federal Court of Appeal decision in the Toronto Real Estate Board case. The Federal Court decision affirmed the Competition Tribunal’s holding that the Toronto Real Estate Board (“TREB”), a trade association, had abused its dominant position by restricting the manner in which its member real estate agents could use and disseminate information from the multiple listing service it controls, including historical listings and sales prices. The Supreme Court’s decision, which the Bureau touts as a “win for innovation”, marks the end of a saga that took more than seven years to litigate. Among other reasons, the case is important as it confirms that an organization could be found to be engaged in an anti-competitive practice when it restricts access to data. For other important takeaways from the case, see our previous article, The End of a 7-Year Saga: Supreme Court of Canada refuses leave to appeal in abuse case against Toronto Real Estate Board.
The Bureau is also scrutinizing competition in the digital economy in other ways. It is studying pricing practices in the digital economy, including new and evolving pricing techniques. In its Big Data white paper, it reported on key competition policy themes for Big Data. Although Big Data is rapidly changing the way that business is conducted, the Bureau’s view is that its existing analytical principles and enforcement tools remain appropriate for evaluating Big Data cases. For further insight, see our previous article, Bureau Releases Key Competition Policy Themes for Big Data. In respect of FinTech, the Bureau plans to carry out 10 FinTech-focused advocacy interventions. In the area of broadband internet services, the Bureau has commenced a market study to assess whether changes to internet regulations may enhance competition in the broadband sector. In the realm of social media marketing, the Bureau recently published guidance on influencer marketing best practices. The key takeaway: conspicuous disclosure. To learn more, see our previous article, Influencer Marketing: Understanding Disclosure Best Practices.
Cartel Enforcement: Increased Burdens and Uncertainties under Updated Immunity and Leniency Programs
In September 2018, fundamental and controversial changes to the Bureau’s immunity and leniency programs came into effect with the release of the new immunity and leniency bulletin. The changes carry with them increased burdens and uncertainties for applicants which has led many to question whether such changes undermine the immunity and leniency programs.
For example, a new “grant of interim immunity” stage - a conditional immunity agreement setting out the applicant’s obligations in order for immunity to be finalized - will increase uncertainty as it would result in a final immunity agreement only being provided several years after the initial proffer. The new privilege review process is also concerning, specifically in relation to whether external counsel’s notes and other documents created during the internal investigation (in Canada or in other countries) would have to be disclosed and whether such disclosure could result in a waiver and loss of privilege in other jurisdictions. In addition, the new bulletin emphasizes the risks of revocation of immunity or expulsion from the leniency program which also creates uncertainty for applicants of the programs. Furthermore, the updated immunity and leniency programs have been criticized for not containing an express debarment exemption for leniency applicants, who therefore face debarment from federal public procurement under the Canadian government’s Ineligibility and Suspension Policy after pleading guilty as part of the leniency process. A draft revised Ineligibility and Suspension Policy was recently published for consultation, and sets out the circumstances in which a supplier may be declared ineligible or suspended from being awarded a federal public procurement contract. The draft provides information on the suspension/ineligibility process, including the criteria for entering into an administrative agreement. However, it remains to be seen whether the final version (expected in early 2019) will include a debarment exemption for leniency applicants. Only time will tell whether the updated immunity and leniency programs will continue to be what the Bureau considers a “powerful means of detecting criminal activity”, or whether would-be applicants will be deterred by the increased burdens and uncertainties associated with the changes.
For further detail about the updated immunity and leniency programs, including the key changes from the former programs, see our previous article, Cartel Enforcement: Fundamental changes on the way as Competition Bureau publishes new immunity and leniency bulletin.
Fewer Investments by Foreign Investors will Require Approval under the Net Benefit Regime, but National Security is under the Spotlight
Over the last two years, the review thresholds under the Investment Canada Act’s (ICA) net benefit regime have increased significantly. The review threshold that applies to direct acquisitions of control of Canadian businesses by non-state-owned investors from the U.S., E.U., Australia, Chile, Columbia, Honduras, Japan, Mexico, New Zealand, Panama, Peru, Singapore, South Korea, and Vietnam (referred to as private sector “trade agreement investors”) has risen to C$1.5 billion in enterprise value. The threshold for direct acquisitions by non-state-owned investors from other World Trade Organization member states (referred to as private sector WTO investors) also increased to C$1 billion enterprise value. As the thresholds are subject to an annual adjustment to reflect changes in Canada’s nominal GDP, the current (2019) private sector trade agreement investment threshold and private sector WTO investment threshold are C$1.568 billion and C$1.045 billion, respectively. Generally speaking, one of these review thresholds will apply to most direct acquisitions of control of Canadian businesses by non-state-owned enterprise investors from WTO member states, which means that fewer investments will require approval under the ICA’s net benefit review regime. As reported in the most recent Investment Canada Act Annual Report, there has been a significant decrease in the number of transactions subject to a net benefit review (falling from 22 in 2016-2017 fiscal year, to 9 in 2017-2018 fiscal year) which is attributable in part to the significant increase in the review threshold.
While the above thresholds represent a shift in the Canadian government’s focus whereby it will scrutinize fewer investments under the net benefit review regime (which focuses on economic benefit to Canada), national security is increasingly in the spotlight. To the extent that the Canadian government believes that a transaction may be injurious to Canada’s national security, such a transaction can be blocked, subjected to conditions, or, if already implemented, subject to remedies up to and including a divestiture of the acquired business. The ICA’s national security review regime applies not only to significant acquisitions of control (as is the case for the net economic benefit regime), but to any investment that involves a non-Canadian -- regardless of size and whether control was acquired. Certain industries attract greater scrutiny, such as high-tech, critical infrastructure and defence. The Canadian government’s relatively recent Guidelines on the National Security Review of Investments set out a non-exhaustive list of activities that may be engaged in by the parties that can relate to national security. Although these guidelines provide some insight as to the circumstances that may draw an investment into the realm of a national security review, there are notable gaps. For example, the guidelines make it clear that technology is a significant focus of what the government will consider as potentially leading to national security concerns, but there is no specific guidance as to when technology is sensitive. As a practical matter, it is our experience that foreign investors will receive limited transparency during the national security review process.
In the six years since 2012, when the Canadian government started publishing aggregated statistics regarding the national security review process, four transactions were reported as blocked and various others have been subjected to conditions or were abandoned. In 2018, CCCC International Holding Limited’s (a state-controlled Chinese investment firm) proposed acquisition of Aecon Group Ltd (a leading Canadian construction company) was blocked. This transaction garnered significant media attention and public scrutiny. In light of the public scrutiny surrounding the deal, ISED Minister Bains released a public statement after the decision was announced which indicated that “in order to protect national security, we ordered CCCI not to implement the proposed investment”. He further noted that “[o]ur government is open to international investment that creates jobs and increased prosperity, but not at the expense of national security.”Minister Bains’ statement is notable both because the government rarely comments on national security review under the ICA, and because it did not provide any further detail as to the national security concern raised by the transaction.
The combination of heightened regulatory scrutiny with little transparency in respect of the national security review process and considerations raises questions as to whether Canada has become a less friendly destination for inbound foreign investment. In this context, it goes without saying that national security considerations will be crucial for investors and targets in deal planning and risk allocation in 2019.
Future of Competition Class Actions: Supreme Court of Canada to Decide on Key Issues Related to Certification, Limitation Period, Common Law Claims Based on Competition Act Violations and Umbrella Purchasers
On December 11, 2018, the Supreme Court of Canada heard the appeal from the British Columbia (BC) Court of Appeal decision in Godfrey v. Sony Corporation.
In this case, the plaintiff initiated a class action alleging that the defendant companies had participated in a price-fixing cartel that had raised the price paid by British Columbians for optical disc drives and products containing such devices between 2004 and 2010. The proposed class consisted of both direct and indirect purchasers, as well as purchasers of products that were not manufactured or supplied by the defendants, i.e. umbrella purchasers. The plaintiff alleged five causes of action, including a breach of section 45 of the Competition Act, the tort of civil conspiracy, the unlawful means tort, unjust enrichment and waiver of tort. With certain exceptions, the certification judge conditionally certified the action as a class proceeding. The BC Court of Appeal dismissed the appeal and confirmed the certification judge’s decision.
The defendants have appealed to the Supreme Court of Canada and its decision is anxiously awaited as it is expected to clarify many aspects of competition class action law which will greatly impact future cases.
First, this appeal offers the opportunity for the Supreme Court to clarify whether the discoverability principle and fraudulent concealment rule apply to the limitation period for a claim under section 36 of the Competition Act. While there exists contradictory case law on this issue, the BC Court of Appeal adopted the reasoning of the Ontario Court of Appeal in Fanshawe College of Applied Arts and Technology v. AU Optronics Corporation, and concluded that it was not plain and obvious that the discoverability principle, according to which a limitation period does not begin to run until the basis of the claim is reasonably discoverable, and the fraudulent concealment rule, which has the effect of suspending the limitation period, do not apply to section 36 claims. Whether this principle and rule are found to be applicable could have a significant impact on the assessment of risks by companies for past conduct.
Second, the Supreme Court will have the opportunity to decide on the validity of umbrella purchaser claims at certification. The theory behind the inclusion of umbrella purchasers is that the cartel’s price-fixing leads competitors who are not part of the conspiracy to also set their prices higher than they otherwise would have under competitive conditions. This allegedly causes harm to umbrella purchasers even when they buy their products from non-defendant suppliers.
The BC Court of Appeal first observed that the law governing the claims of umbrella purchasers in Canadian class action proceedings was still in its nascent stages. It noted that the Ontario Superior Court of Justice, in Shah v. LG Chem, Ltd., had refused to certify the umbrella purchaser claims, on the basis that doing so would expose the defendants to indeterminate liability, relying on the Supreme Court’s decision in Imperial Tobacco. However, the BC Court of Appeal disagreed with the Ontario Superior Court of Justice and concluded that indeterminate liability would not be a concern, notably because sections 36 and 45 of the Competition Actoffered internal limitations, the class period was temporally limited, the class definition constrained, the claims related to a specific product, and the umbrella purchasers likely represented a smaller proportion of customers than direct and indirect purchasers. The BC Court of Appeal also refused the proposition that non-defendant manufacturers and suppliers made decisions that were truly autonomous and independent given the distorted market price allegedly fixed by the defendants.
The Supreme Court’s decision on the validity of these umbrella purchaser claims will have a significant impact on the extent of potential damages for which a company may be found liable.
The third issue on appeal and perhaps the most significant, is whether there is a requirement on plaintiffs, at certification, to demonstrate a methodology to show harm to all class members. With respect to this issue, the interpretation of previous Supreme Court decisions, including its decision in Microsoft, is key to the arguments on both sides. The BC Court of Appeal disagreed with the defendants’ contention that the methodology must establish that each and every class member suffered harm. Instead, it found that the methodology must offer a reasonable prospect of establishing that overcharges have been passed through to the indirect purchaser level.
These are important issues since, as noted by the Intervener the Canadian Chamber of Commerce, certification is often a very important decision in the context of a proposed class action due to the enormous costs of class action litigation and the risk of potentially ruinous liability which put intense pressure on defendants to settle even unmeritorious claims rather than proceed to trial.
Finally, the Supreme Court of Canada will have the opportunity to clarify whether Competition Act violations can form the basis of a claim under the common law or whether the Competition Act is a “complete code”. In analyzing this issue, the BC Court of Appeal turned to two of its recent decisions, which the defendants argued were contradictory, Wakelam and Watson. It concluded that Watsonalready answered the question and confirmed that a breach of s. 45 of the Competition Act could form the “unlawfulness” element for various common law causes of action in tort, and refused to find a contradiction with Wakelam.
As for this last issue, it is interesting to note that the possibility for Competition Act violations to form the basis of a claim under article 1457 of the Civil Code of Quebechas already been recognized by the Supreme Court. One of the interveners, Option Consommateurs, in fact draws a parallel and argues that the same reasoning should apply in common law jurisdictions. However, given that civil law and common law are two very distinct legal systems, it is a rather simplistic parallel to make, and the Court is not likely to simply equate the reasoning. That being said, if the Supreme Court concludes that there is no possibility for Competition Act claims to form the basis of a common law claim, this could mean that consumers would benefit from additional causes of action in case of a Competition Act violation in Quebec, as compared to anywhere else in Canada.
Post-TREB Evolution – Who Falls within the Abuse of Dominance Prohibition?
In the TREB case, the Competition Tribunal and Federal Court of Appeal confirmed that a non-market participant, i.e. a party who does not compete in the relevant market where the effects of the anticompetitive conduct are witnessed, can have market power, and be found to have met the first criterion of an abuse of dominance case. This represents a significant expansion of the previously-understood scope of the abuse of dominance provision.
Since TREB, the Competition Bureau has instituted proceedings against another non-market participant, the Vancouver Airport Authority (VAA), for abuse of dominance. The hearing took place at the end of 2018 and the parties are awaiting a decision. In this case, the Commissioner of Competition alleges that VAA has abused its dominant position by excluding and denying the benefits of competition to the in-flight catering marketplace at the Vancouver International Airport.
The Commissioner alleges VAA, which is a non-market participant, controls (as in the TREB case) both the upstream market (the market for access to the airside at the airport for the supply of galley handling) and the downstream market (the market for the supply of galley handling at the airport). VAA allegedly controls the downstream market as it controls access to it and is generally able to dictate the terms upon which it sells or supplies access to the airport airside.
To be found to have abused a dominant position, however, the non-market participant, VAA, according to the TREB case, must also be found to have a plausible competitive interest in the relevant market. In the TREB case, the Competition Tribunal concluded that the trade association did have “a horse in the game”: as a trade association with the core purpose being supporting the success of its realtor members, the Tribunal found TREB had a vested interest in how competition amongst its members occurred. In that case, the Tribunal found that TREB’s competitive interest was in protecting its members from new entrants or disruptive competitors.
More generally, the Tribunal noted in TREB that, in the case of an upstream entity, a competitive interest may involve demonstrating that the entity has a plausible interest that is different from the typical interest of a supplier in cultivating downstream competition for its goods and services. The Competition Tribunal noted that this competitive interest requirement would ensure to limit who may be subject to the abuse of dominance prohibition. This is so even if an entity’s conduct might incidentally adversely impact upon competition.
In the VAA case, the Commissioner alleges that VAA shares in the revenue generated from the downstream market (supply of galley handling and in-flight catering at or from the airport), and benefits financially (through the lease and access fees) from the prevention of competition it creates in the downstream market. The Tribunal will have to determine whether this constitutes a sufficient competitive interest. This case will be an opportunity for the Tribunal to delineate this new concept of “competitive interest” and potentially better define its scope. Until then, there appears to still be uncertainty as to who may be held responsible under the abuse of dominance provisions.
On March 7, 2019, the Bureau published new Abuse of Dominance Enforcement Guidelines, which incorporate, notably, key findings from TREB. For further detail, see our previous article, Competition Bureau Releases Updated Enforcement Guidelines on Abuse of Dominance and Intellectual Property.
Other Signs of Things To Come…
Below are additional developments to watch for in 2019 and beyond:
- Bureau to seek more interviews under oath? One of the Bureau’s principal investigative tools is its ability to apply for a court order under section 11 of the Competition Act to gather a broad range of information to assist in its inquiries (known as section 11 Orders). Under section 11, a person may be ordered to provide oral testimony, records and/or written responses to questions. Historically, when using its section 11 powers, the Bureau typically sought records and/or written responses. However, in recent high profile investigations, the Bureau has obtained court orders requiring individuals to appear and answer questions under oath. For example, the Bureau recently announced that it had obtained a court order requiring executives to be interviewed under oath in connection with its conspiracy investigation of the Postmedia and Torstar deal. We expect an increase in the frequency with which the Bureau will seek oral testimony under section 11.
- New rules will subject previously non-notifiable transactions to mandatory notification. The affiliation rules under the Competition Act were expanded in 2018. Among other things, the new affiliation rules may result in a greater number of transactions being subject to pre-merger notification. For more detail, see our previous article Broader Affiliation Rules Now in Force.
- New direction under the new head of Canada’s Competition Bureau? Matthew Boswell has been named the new head of Canada’s Competition Bureau after John Pecman stepped down in May 2018. While Commissioner Boswell was interim commissioner of competition he said that the Bureau will “continue on the course we have been on for over five years now” . All will be watching to see if this holds true in 2019 and beyond.