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Measuring Competition Relatively: The Federal Court’s Decision in Canada Pipe Andrew Roman and Andrew Valentine (Student-at-Law)
This article is provided as an information service only and is not meant as legal advise. Readers are cautioned not to act on the information provided without seeking specific legal advise with respect to their unique circumstances. © Miller Thomson LLP 1998-2006
Measuring Competition Relatively: The Federal Court’s Decision in Canada Pipe by Andrew Roman1 and Andrew Valentine2 Introduction In a decision released June 23, 2006,3 the Federal Court of Appeal overturned the decision of the Competition Tribunal in Canada (Commissioner of Competition) v. Canada Pipe Company Ltd.4 The Tribunal had dismissed an application by the Commissioner for an order against Canada Pipe Company Ltd. (“Canada Pipe”), which the Commissioner believed was engaging in several anti-competitive acts contrary to sections 79 and 77 of the Competition Act (the “Act”).5 The Tribunal had concluded that Canada Pipe, while a dominant firm within its relevant markets, had not engaged in a practice of anti-competitive acts and, in any event, that these acts had not had the effect of substantially preventing or lessening competition. The Court held that the Tribunal had misapplied the test for a substantial lessening of competition under section 79, and provided detailed reasons explaining what it believed was the correct test. Finally, the Court remanded the matter to the Tribunal to reconsider its decision. The Court’s formulation of this test is the focus of this paper. After reviewing the decisions of the Competition Tribunal and the Federal Court of Appeal, we will analyze the Court’s formulation of the appropriate test for section 79. We will consider whether the Court's requirement of a “but-for” analysis – one which seeks to measure the levels of competition in the market conditions in relative terms – is consistent with the purposes of the Act and the practical realities of litigating competition cases. Respectfully, we will suggest that this formulation of the test is needlessly rigid and will suggest a more deferential approach. With respect to the issue of deference, the Court wrote: [85] In Southam FCA, this Court held that the question of the analytical framework to be applied in defining a product market was a question of law, and therefore a matter on which the Court owed no deference to the Tribunal's decision. Before the Supreme Court, the argument turned on whether the Tribunal had in fact properly applied the test for defining the product market. In Southam SCC, the Supreme Court held that if the Tribunal erred, it was in the application of the law to the facts, a question of mixed fact and law. It was therefore entitled some deference on the part of the Court. [86] The question as to whether Canada Pipe exercised market power is, it seems to me, a question of the same order. There is no particular dispute as to the nature of the factors to be considered; the disagreement is as to whether those factors were properly considered. In the circumstances, I conclude that both questions raised by the cross appeal are questions of mixed law and fact. [emphasis added]
The Court then proceeded to show very little deference, treating what it recognized as a question of mixed law and fact as if it were a pure question of law.
1
Partner, Miller Thomson LLP, and Chair of the Firm’s Competition Law Group Summer Student at Miller Thomson LLP, summer of 2006. 3 2006 FCA 233 [Canada Pipe]. The Court's unanimous decision was written by Desjardins J.A. 4 The decision of the Competition Tribunal is reported at 40 C.P.R. (4th) 453 (Comp. Trib.). 5 R.S.C. 1985, c. C-34. 2
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An analogy may help to explain the difference in approach between the Court and the Tribunal. Consider that a professor of engineering assigns to engineering students the laboratory work of determining whether a bathtub filled with scalding hot water would be suitable for taking a comfortable bath, within 10 minutes, at 38 degrees Celsius, by the addition of a specified amount of ice: two ordinary ice cubes taken from the refrigerator freezer. The first student quickly concludes that there is no way such a small volume of ice could cool down such a large volume of scalding water, and submits a brief laboratory report to that effect. The second student takes two identical bathtubs, fills each with the same volume of scalding water at the same temperature, inserts two ice cubes of a carefully measured temperature into one bathtub, and measures the temperatures of both bathtubs with two very accurate thermometers, before the ice is inserted into one of them, and for ten minutes after the ice has melted. This student then carefully plots the data as two curves on a graph, and measures the relative difference between the two, to three decimal points of one degree, over time. Finally, this student, concludes, as did the first student, that the addition of the two ice cubes was insufficient to lower the temperature to the comfortable 38 degrees Celsius within the required time limit. The professor gives the first student a failing grade for failure to follow the proper scientific method, while the second student is given an A grade on this assignment. In comparing the answers of the two students, it is clear that the answer of the A grade student was more precise, but was his conclusion more accurate? No – both conclusions were the same, and were equally accurate. This illustrates the distinction between precision and accuracy. While we would want the ultimate conclusions of the Tribunal to be accurate, the degree of precision we should expect of it should be determined by our assessment of the costs and the benefits of that degree of precision in achieving the necessary accuracy. It would make no sense to purchase a very precise telescope with which to study the stars, and then to mount it on the edge of a trampoline. Similarly, in applying the principle that a chain is only as strong as its weakest link, where the Tribunal is required to make a number of large assumptions and broad estimates, it is not likely to add materially to the accuracy of the final result if we are to require the Tribunal to take these estimates out to the third decimal place. In the exercise of its expertise in this case, the Tribunal recognized that it could determine with reasonable accuracy whether the impugned conduct was damaging competition substantially by looking directly at the actual effects: whether the post-conduct price in the market is significantly above the competitive price. In declining to defer to the expertise of the Tribunal, the Court assumed that the Tribunal had forgotten to consider all of the intermediate steps it had omitted, rather than assuming (as a more deferential court might have) that the Tribunal was aware of the various possible analytical steps, and had omitted those steps that it considered would add little to the ultimate accuracy of its conclusion. In effect, the Court has ordered that the Tribunal must “sweat the small stuff” in order to prove that it has done its homework. Facts Canada Pipe Company Ltd., based in Hamilton, Ontario, produced and sold (among other products) cast iron drain, waste and vent (“DWV”) pipe and related products through its Bibby Ste-Croix division (“Bibby”). Bibby sold these DWV products to various distributors in Canada,
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who, in turn, sold them to contractors for use in construction projects. The Tribunal found that Bibby controlled between 80 and 90% of the Canadian market for cast iron DWV products.6 The primary focus in the case was whether Bibby’s so-called Stocking Distributor Program (“SDP”) constituted an anti-competitive practice contrary to section 79 of the Act. The SDP was essentially a loyalty rebate program wherein Bibby gave quarterly and annual rebates to distributors in return for stocking only Bibby-supplied cast iron DWV products. In addition to these rebates, the SDP provided for point-of-sale discounts reducing the list price by up to 40% for stocking distributors. The SDP was based on exclusivity, not volume. Any distributor could participate in the SDP provided that a minimum purchase was made; beyond that threshold, the rebates and discounts were identical regardless of the size of the distributor’s purchase, making the SDP available to both small and large distributors. Distributors were free to join at any time and could receive quarterly and annual rebates for each completed calendar quarter or year. Aside from the loss of future rebates, there were no penalties imposed on distributors for opting out of the program. Distributors were also free to stock other companies’ non-cast iron DWV products. It is useful to contrast the terms of the SDP with those imposed by other loyalty programs which have attracted the attention of the Competition Bureau. While the SDP clearly created an incentive for distributors to participate in the SDP and make Bibby their exclusive supplier, the SDP by comparison was not nearly as aggressive in ensuring loyalty. Indeed, as we will discuss below, this comparison influenced the Tribunal’s ultimate decision. In Canada (Director of Investigation and Research) v. NutraSweet Co.,7 NutraSweet Co. (“NutraSweet”) controlled approximately 95% the Canadian market for aspartame. It achieved this dominance in part through its contracting practices, which the Tribunal found were anticompetitive. NutraSweet’s supply contracts included clauses obligating their customers to purchase all their aspartame from NutraSweet. The contracts also provided for discounts, price allowances, and promotional allowances in return for the use of the NutraSweet logo and name, and for the exclusive use of the NutraSweet product. NutraSweet’s contracts also contained meet-or-release clauses, providing that NutraSweet would match competitors’ prices, and mostfavoured-nation clauses, which provided that NutraSweet would give customers the best price offered to any other customer. The Tribunal found that all these practices constituted anticompetitive behaviour as they required or induced exclusivity and made entry be competitors virtually impossible. The Tribunal reached a similar conclusion in Canada (Director of Investigation and Research) v. The D&B Companies of Canada Ltd.8 In that case, the respondent, D&B Companies of Canada Ltd. (“D&B”) held 100% of the Canadian market for scanner-based market tracking services. It collected data from both suppliers and retailers and in turn sold this information, along with other information and market analysis. The Tribunal found that D&B structured its contracts with the providers of information so that the necessary data would not be available to any other competitor. It did this through long-term contracts with renewals staggered so as to limit the
6
Canada Pipe (Comp. Trib.), supra note 2 at para. 140. (1990), 32 C.P.R. (3d) 1 (Comp. Trib.) [NutraSweet]. 8 (1995), 64 C.P.R. (3d) 216 (Comp. Trib.) [Neilsen]. 7
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available sources of data to competitors. Its contracts also included most-favoured-nation clauses as well as strict conditions for termination (including monetary penalties for early termination). D&B also paid for exclusivity, and imposed financial penalties if a retailer supplied data to a competitor. As in NutraSweet, the Tribunal found that these practices made entry impossible and imposed substantial amendments to D&B’s contracts designed to eliminate the anti-competitive components. Thus, when compared to the contracting practices in these and other cases in which the Tribunal has found a violation of section 79,9 the terms of Bibby’s SDP system were relatively mild. The SDP imposed no penalties for opting out of the program. It did not tie distributors into long term commitments, nor did it contain meet-or-release or most-favoured nation clauses. While it created a clear incentive for distributors to make Bibby their exclusive supplier of cast-iron DWV products, its inducements towards exclusivity were relatively non-aggressive. Nonetheless, the Commissioner alleged that Bibby’s use of the SDP – among other practices10 – constituted an abuse of dominance which had brought about a substantial preventing or lessening competition in six Canadian regions. The Commissioner also argued that the SDP constituted a practice of exclusive dealing contrary to section 77 of the Act. It applied to the Competition Tribunal for an order requiring Bibby to cease these practices. The Decision of the Competition Tribunal The Tribunal began by outlining the purpose of the abuse of dominance provisions in the Competition Act. It cited Nielsen, which emphasized the economic purpose of these provisions. It quoted from the government’s explanatory guide which had accompanied the then-proposed abuse of dominance provisions: Anti-competitive behaviour on the part of dominant firms imposes artificial restraints on the competitive process, impeding the market from efficiently allocating resources. In a healthy, dynamic economy, goods and services are supplied by the firms which can produce them most efficiently and adapt to the everchanging demands of the marketplace. The proposed abuse of dominance provision will ensure that dominant firms compete with other firms on merit, not through the abuse of their market power. This provision is of particular importance for the protection of consumers, new entrants and, in particular, the small business community.11
The Tribunal then noted that by replacing the old criminal offence of monopoly with the new non-criminal abuse of dominance provision, Parliament had shifted the focus from “public
9
See, for example, Canada (Director of Investigation and Research) v. Laidlaw Waste Systems Ltd. (1992), 40 C.P.R. (3d) 289 (Comp. Trib.) [Laidlaw]. In Laidlaw, the respondent firm was found to control 87% of the market for commercial waste services in certain local communities on Vancouver island. It was found to maintain its dominance in part through (i) long-term customer contracts with automatic renewal, (ii) considerable liquated damages imposed on customers for leaving Laidlaw, and (iii) rights of first refusal granted to Laidlaw. 10 See Canada Pipe (Comp. Trib.), supra note 4 at paras. 192-199. The Commissioner alleged that Canada Pipe’s acquisition of Bibby as well as several other foundries constituted a practice of anti-competitive acts. The Commissioner also argued that the restrictive covenants contained the agreements related to those acquisitions were anti-competitive. The Tribunal rejected both these arguments. 11 Ibid. at para. 7, citing Nielsen, supra note 8 at 222-223
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detriment” under the criminal provisions to anti-competitive conduct, which was more overtly economic in focus and provided for more flexible remedies.12 The abuse of dominance provisions are contained in sections 78 and 79 of the Act. Subsection 79(1) provides, 79. (1) Where, on application by the Commissioner, the Tribunal finds that (a) one or more persons substantially or completely control, throughout Canada or any area thereof, a class or species of business, (b) that person or those persons have engaged in or are engaging in a practice of anti-competitive acts, and (c) the practice has had, is having or is likely to have the effect of preventing or lessening competition substantially in a market, the Tribunal may make an order prohibiting all or any of those persons from engaging in that practice.
Section 78 provides a non-exhaustive list of practices that may constitute anti-competitive acts under section 79. The Tribunal noted that section 79 required a determination of three issues: (i) whether Bibby occupied a dominant position in the market, (ii) whether Bibby had engaged in or was engaging in a practice of anti-competitive acts, and (iii) whether the practice has had, is having or is likely to have the effect of preventing or lessening competition substantially. To make an order under section 79, the Tribunal had to find that all three of these elements were present.13 Thus, after defining the relevant product and geographic markets,14 the Tribunal first considered whether Bibby had market power within these markets, as required by paragraph 79(1)(a). It made the usual observation that market power was the ability to price above competitive levels and, after considering a number of factors both for and against the existence of market power, the Tribunal concluded that Bibby did have market power, in all the relevant markets. The Tribunal then considered whether the SDP constituted a practice of anti-competitive acts as required by paragraph 79(1)(b). It identified and considered four aspects of the issue. First, the Tribunal noted that the SDP was contractual in nature, but on terms not nearly so onerous as in the Nielsen or Laidlaw cases.15 The easy conditions of exit from the program, and the transparent nature of the program did not impose significant legal obstacles to the changing of suppliers by distributors. Second, the Tribunal considered whether a legitimate business justification existed for the SDP.16 While it noted that self-interest is not a sufficient justification
12
Ibid. at 223. Canada Pipe, supra note 4 at paras. 48-50. 14 The Tribunal concluded that within the cast-iron DWV industry in Canada, there existed three relevant product markets (cast-iron pipe, fittings and mechanical joint couplings) and six geographic markets (British Columbia, Alberta, the Prairies, Ontario, Quebec and the Maritimes). As a result, the Commissioner was required to demonstrate that Bibby had market power in eighteen separate relevant markets. Canada Pipe (Comp. Trib.), supra note 4 at paras. 112-13. 15 Ibid. at para. 206. 16 Ibid. at para. 208-12. 13
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for otherwise anti-competitive behaviour, it accepted that in order for a distributor to stock or distribute a complete line of products, high volume sales were necessary. It accepted that the availability of a complete line of products from one supplier was beneficial to both distributors and contractors as items used less often would remain available within the local (and thus lessexpensive) market. Third, the Tribunal considered the switching costs imposed by the SDP. After a lengthy analysis of the costs to distributors of full or partial switching to other suppliers, it concluded that these costs were not a significant deterrent preventing distributors from considering other options or changing suppliers.17 Finally, the Tribunal considered economic evidence of the SDP’s effect on other competitors. It concluded that while the SDP had had an impact on certain competitors, it had not prevented the entry of a new competing supplier, Vandem, nor the expansion of existing competitors within the industry.18 It concluded generally that there was still sufficient competition remaining in the industry between existing and new suppliers. In summary, the Tribunal concluded that the Commissioner had not met its burden of demonstrating that the SDP constituted a practice of anti-competitive acts. It compared the SDP with the practices found in NutraSweet, Neilsen and Laidlaw and found that it bore none of the offensive characteristics of those cases. It noted further that it had not prevented entry nor competition in certain regions. The Tribunal stated that the Commissioner had failed to show a link between the SDP and a negative effect on competition.19 Having determined that the SDP did not constitute a practice of anti-competitive acts, it was unnecessary to consider the third criterion, whether the practice had prevented or substantially lessened competition. However, the Tribunal did go on, in obiter dicta, to consider whether evidence existed of competitive pricing in the different relevant markets. It found that competitive pricing existed in Western Canada and Ontario as a result of both imports and the emergence of a new manufacturer. It accepted that in Quebec and the Maritimes, which represented 25% of the market, there was little evidence of competitive constraint on prices. However, it found insufficient evidence on which to conclude that the SDP was responsible for this. As the Tribunal held that the Commissioner had failed to demonstrate the necessary elements of subsection 79(1), it dismissed the Commissioner’s application. The Decision of the Federal Court of Appeal The Commissioner appealed the Tribunal’s decision to the Federal Court of Appeal, which held that the Competition Tribunal had misapplied both the test for anti-competitive acts (under paragraph 79(1)(b)) and the test for a substantial lessening or preventing of competition (under paragraph 79(1)(c)). Despite the fact that the Tribunal’s decision was based only on its finding under paragraph 79(1)(b), the Court began its analysis by criticizing the Tribunal’s reasoning with respect to paragraph 79(1)(c), that is, its obiter application of the test for a substantial preventing or lessening of competition. 17
Ibid. at para. 237. Ibid. at para. 254-55. 19 Ibid. at para. 256-61. 18
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The Court held that in applying the test under paragraph 79(1)(c), the Tribunal had mistakenly evaluated the sufficiency of competition in absolute terms. The correct approach, the Court stated, would be to compare the relative level of competition that would exist as a result of the impugned practice with the level of competition that would exist, or has existed, in the absence of this practice.20 In other words, the Court held, paragraph 79(1)(c) requires the Tribunal to apply a “but-for” test: but for this practice, what would the level of competition be? The Court arrived at this conclusion in part by parsing the words of paragraph 79(1)(c). The words “preventing or lessening”, it held, do not call for an absolute evaluation of the level of competitiveness observed in the presence of the impugned practice. Rather, they demand, in every case, a relative and comparative analysis.21 Under this comparative analysis, the Tribunal must, in every case, determine whether, but for the impugned practice, the market would be characterized by greater price competition, choice, service or innovation than exists in the presence of this practice. The test is to be applied by reference to up to three different time frames: actual effects past or present, or likely effects in the future.22 A decision as to whether the degree of competition at present is sufficient is not good enough to meet the requirements of this paragraph. In support of this approach, the Court noted that the expression “but for” had appeared in certain American antitrust jurisprudence.23 It also stated that the “but-for” test had, in essence, been endorsed by the Competition Tribunal in three earlier Canadian abuse of dominance cases.24 Interestingly, the Court also supported the Commissioner’s proposed formulation of the test by reference to the Competition Bureau’s Abuse of Dominance Enforcement Guidelines, which also use the expression “but for”.25 This latter source of support adds little weight. Aside from the fact that the Bureau’s Guidelines have no legal force, the use of Bureau publications as authority to support the correctness of the Bureau’s position is obviously circular. Having set out the required approach, the Court considered the Tribunal’s decision under paragraph 79(1)(c). It concluded that the Tribunal had based its finding of an absence of a substantial lessening of competition on three factors: the existence of competitive pricing, the increasing presence of imported cast iron DWV products, and the effective entry of a new cast iron manufacturer, Vandem. In so doing, the Tribunal erred in law as it failed to consider the state of competition, and the effect of the SDP, in relative terms. The mere fact of entry by a competitor, or of increasing competition from foreign suppliers, does not by itself address the question of whether, in the absence of the SDP, there would be substantially more competition in
20
Canada Pipe (F.C.A.), supra note 3 at para. 37. Ibid. at para. 37. 22 Ibid. at para. 36. 23 Ibid. at para. 40. The Court cited the U.S. case of Concord Boat Corporation v. Brunswick Corporation, 207 F.3d 1039 at 1055 (8th Cir. 2000). 24 Ibid. at para. 42. The Court quoted Laidlaw, supra note 9 at 344-46, where the Tribunal stated, “Substantial lessening can also be assessed by reference to the competitiveness of the market in the presence of the anticompetitive acts and its likely competitiveness in their absence.” The Court also found similar statements in Neilsen, supra note 8 at 267, and in NutraSweet, supra note 7 at 47. However, these decisions of the Tribunal do not indicate that only a “but for” analysis should ever be used. It was merely one tool in the toolbox. 25 Ibid. at para. 39. 21
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the relevant markets in the past, present and future.26 The Court identified numerous questions that the Tribunal should have asked in applying this relative analysis.27 By failing to apply the mandatory “but-for” test, the Court held, the Tribunal erred in law. The Court then moved backward, to address the Tribunal’s application of the test for anticompetitive acts under paragraph 79(1)(b). Essentially, the Court held that the Tribunal had conflated the tests under paragraph 79(1)(b) with the test under paragraph 79(1)(c). Paragraph 79(1)(b) focuses entirely on the purpose for which an impugned practice was adopted, and on whether that practice was “predatory, exclusionary or disciplinary.”28 The effects of the practice are relevant only to the extent that they throw light on the purpose of the practice29. There is no need, the Court held, to prove a causal link between the impugned practice and any actual decrease in competition in order to find an anti-competitive practice under paragraph 79(1)(b). By apparently considering or requiring proof of a connection between a practice and either a decrease in competition or a detriment to the consumer, the Tribunal erred in law.30 The Court finally considered the Tribunal’s application of the business justification doctrine, as well as the Tribunal’s assessment of whether Bibby violated section 77 of the Act by engaging in a practice of exclusive dealing. The Court held that the Tribunal had overstated the role of the business justification doctrine by elevating it to the status of an absolute defence to otherwise anti-competitive conduct. The business justification doctrine is properly employed only to counterbalance other evidence of an anti-competitive purpose.31 With respect to exclusive dealing under section 77, the Court held that given the parallel structure and logic between sections 77 and 79, there was no need to consider section 77 separately. The Court allowed the Commissioner’s appeal and remanded the matter to be reconsidered by the Tribunal in light of the court’s formulation of the appropriate tests. Analysis of the Federal Court’s Decision What is to be made of the Federal Court’s decision? Should the Competition Tribunal be required in every case to employ a “but-for” analysis in order to determine the validity of the Commissioner's application under 79? Respectfully, we would question the correctness of the Court's imposing such a test in the context of this legislation. 26 27
Ibid. at para. 53. Ibid. at para. 58. The Court stated, Proper examination of this question might include the following considerations: whether entry or expansion might be substantially faster, more frequent or more significant without the SDP; whether switching between products and suppliers might be substantially more frequent; whether prices might be substantially lower; and whether the quality of products might be substantially greater.
28
Ibid. at paras. 64-65, citing the definition from NutraSweet, supra note 7 at 34. The purpose of the practice should be irrelevant, as sections 78-9 deal with reviewable practices, not offences for which a mens rea or mental component matters. If the practice has the effect of preventing competition, why would it matter what the purpose of the firm was in engaging in that practice? 30 Ibid. at paras. 75-79. It is not clear what the economic purpose would be served by a law that allows the Tribunal to prohibit the continuation of a business practice that had no negative impact on competition, or on consumers of a product. 31 Ibid. at para. 88. 29
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There may be conceptual and practical difficulties with attempting to measure whether a practice has had, is having or is likely to have the effect of preventing or lessening competition substantially on a “relative” basis. There are two different words, “preventing” and “lessening”, used disjunctively. This means the practice could affect competition by either preventing it entirely, or by lessening it. The word “preventing” could be interpreted as absolute rather than relative, as competition is either prevented or it is not. The word “lessening”, read literally and in isolation, implies relativity, but when read in the context of the entire phrase “preventing or lessening competition substantially… .”, each word takes on the colour of the surrounding words. The entire phrase could reasonably be interpreted by economists as meaning substantially harming or damaging competition. Such a concept could be assessed either relatively or absolutely, depending upon the circumstances. While the “but-for” test, when applied to the word “lessening” alone, may be acceptable in theory, it may prove excessively rigid and costly in its practical application in cases such as this one. What are the units of measure for comparing relative levels, quantities, degrees or amounts of competition? Competition is not like temperature, which one can measure with a thermometer. Competition is, in essence, effective commercial rivalry. This is as much a quality of a market as a degree or level. This complex mix of both qualitative and quantitative factors cannot simply be measured, but must be determined judgmentally. It is to be judged by considering a host of intangible factors such as the psychology of the participants in the marketplace as they respond to each other’s competitive actions and reactions; their fear of, or complacency towards new domestic or foreign entry; evolving technology creating new uses for substitute products, and so on. Factors such as these cannot all be meaningfully quantified, or compared with quantifiable tests. Since even relative changes in the quantitative aspects competition cannot be measured directly, only a partial quantitative picture can be developed, and even that only by using indirect indicia of competition, such as number of entrants in the market and their relative market shares. Issues such as the feasibility of new entry from imports from other countries such as the US or China, potentially important sources of competitive discipline, are really quite difficult to evaluate in practice. That is because they would involve the exercise of large amounts of judgment, if not pure guesswork, to try to assess (a) which manufacturers in which other countries would have the right machinery and sufficient production capacity to export to Canada, (b) their costs of retooling to Canadian specifications, establishing a Canadian distribution network, maintaining Canadian inventories, and shipping to Canada and within Canada for various hypothetical quantities of product, (c) the potential entrant’s reasonable profit requirements, and (d) the price in Canada at which the products would have to be sold to meet all these costs and earn a reasonable profit. As well, it would be necessary to consider alternative profit opportunities available to this hypothetical manufacturer in order to determine whether entry into the Canadian pipe market would be more or less attractive than other opportunities. Without knowing or being able to estimate accurately at what price suitably profitable new entry could be undertaken, one could not begin to estimate what market share, and therefore what sales volume the new entrant would be likely to achieve. Similarly, evaluating whether Canada Pipe has market power requires estimating how much above competitive prices it is selling or could sell its products. This would require estimating the prices that would prevail for each product, in each market in Canada, if there was fully effective
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competition. This estimate should include estimates of the price at which various potential foreign entrants (discussed in the previous paragraph) could offer. Such estimates would involve highly conjectural and rather crude estimates of elasticities of supply and demand, each of which would require several data points, which are not likely to be available. In practice, the Court has created as a minimum requirement that the parties before the Tribunal conduct a costly and detailed analysis, in situations where the data necessary to do this properly will often be unavailable, or available only through the expenditure of inordinate amounts of time and resources in data collection and analysis. There is neither the time nor the money to conduct this kind of massive Royal Commission exercise for every potential complaint. Regrettably, in its micro-analysis of the precise wording of “lessening” in section 79, the Court lost sight of the bigger picture: the economic analysis performed by the Tribunal is more of an art than a precise science. It is a pragmatic mixture of quantified economic analysis, where it is reasonable to spend the time and the money to do so, and pure business judgment, where data is unavailable or too costly or time-consuming to obtain. That is why Parliament has required a hearing panel of the Competition Tribunal to be comprised of one judge, but two business persons. Perhaps the most important task of the Tribunal, which it must undertake at the very beginning of every case, is to conduct an implicit cost-benefit analysis of the availability, the timing to obtain, and the cost of obtaining the information that would be potentially useful in determining the economic issues before it. This is not a task which a court should readily second-guess. However, in this case, for the second time32 in recent years, the Court has taken an approach to statutory interpretation that shows little or no awareness of this crucial preliminary step. Rather, the Court has treated the statute as setting out a standard form with a number of boxes, each of which the Tribunal must check off without omission. And, where a box has been followed by several sub-boxes, each of those must also be checked off. Unless all of the boxes have been checked off, the Court will draw the legal conclusion that the Tribunal has failed to perform the task that Parliament has required it to perform. This approach assumes that the collection and analysis of information has little or no cost in terms of time and money. We question whether Parliament really intended that the state of competition always be assessed in this manner. Where the Tribunal has concluded that, at present, there is adequate competition in a market, the Tribunal should be permitted to leave well-enough alone. Fundamentally, the Tribunal is asked, in a section 79 application, to determine what is acceptable for the economy in a particular market: the status quo with the practice that is complained of, or a different situation, to be brought about by a remedial order from the Tribunal. Given its superior economic expertise, the Tribunal should be permitted wide latitude to use, or to refrain from using various 32
The earlier case, involving a merger, was Superior Propane, in which the Federal Court of Appeal took the same general approach. Commissioner of Competition v. Superior Propane Inc. et al. (2000), 7 C.P.R. (4th) 385 (Comp. Trib.), available at http://www.ct-tc.gc.ca/CMFiles/CT-1998-002_192b_45QNQ-42320043036.pdf?windowSize=popup, first reviewed by the court at Canada (Commissioner of Competition) v. Superior Propane Inc. (2001), 199 D.L.R. (4th) 130 (F.C.A.), available at http://reports.fja.gc.ca/fc/2001/pub/v3/2001fc28500.html, redetermined by the Tribunal at Commissioner of Competition v. Superior Propane et al. (2002), 18 C.P.R. (4th) 417 (Comp. Trib.), available at http://www.cttc.gc.ca/CMFiles/CT-1998-002_0238a_45OUC-4262004-5548.pdf?windowSize=popup and re-reviewed by the Court at Commissioner of Competition v. Superior Propane Inc. et al. (2003), 223 D.L.R. (4th) 55 (F.C.A.), available at http://recueil.cmf.gc.ca/fc/2003/pub/v3/2003fc31974.html.
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alternative techniques of economic analysis which would aid it in making this complex business judgment. Even after the information that is available and affordable has been collected, the difficulties in using that information to evaluate the anti-competitive effects of any given practice within an industry should not be underestimated. Indeed, the Federal Court acknowledged this fact at the outset of its judgment.33 More often than not, there is little or no direct evidence available to establish the elements of section 79 and recourse must be had to indirect indicators of the effects of a competitor’s practices. Furthermore, the same indirect evidence must often be employed to establish more than one element under the section.34 For example, evidence of market share can be used to as part of the determination of a firm’s market power, the effect of its practices on competition, as well as the purpose for which it is carrying on a given practice. The trier of fact must be skilled at recognizing the disparate relationships between such indirect evidence and various judgmental aspects of the state of competition in a given market. Assessment of the degree or quality of competitive rivalry in a “market” the boundaries of which are inherently somewhat arbitrary is a blunt, imprecise tool that is fundamentally inferential in nature. Thus, as a general proposition, any legal test to be imposed by the Court should be formulated with this reality in mind. In this respect, a mandatory “but-for” test may be ill-suited to this task. It is premised on the availability of detailed evidence, not only on the current state of competition but also on different comparator periods which could be used to measure the relative changes in the market. Such detailed evidence is almost always lacking. Although the Court recognized this, it then went on to suggest that its mandatory but-for test might require the construction of a hypothetical comparator model, “a market identical to reality in all respects except that the impugned practice is absent.”35 The Court also suggested that the market conditions both before and after the impugned practice could be used as proxies for the market, with and without the practice. Such tests are easily stated, but are costly, time consuming and hypothetical. It will require larger budgets and many new bodies to be hired by the Commissioner and the Competition Tribunal. This may be of some benefit to the Commissioner, the Tribunal, and law firms representing the parties. However, from the standpoint of the complainant, who probably triggered the Commissioner’s inquiry into this matter, a speedy resolution is preferable to one that must laboriously check every box before there is any opportunity for relief from an abusive, anti-competitive practice. Any expert witness’ economic comparison of market conditions across time that would withstand cross-examination would require adjustments for a myriad of factors which change in different directions and at different rates over time, and which must be corrected for in order to make useful comparisons. Inflation, changes in consumer tastes, changes in the regulation of the industry, changes in the availability and cost of inputs – these are simply the most obvious factors that must be meticulously adjusted for when modeling a comparison of market conditions over time. As there are no facts in the future, all we can do is debate various forecasts or
33
Ibid. at paras. 25-27. Ibid. at para. 27. 35 Ibid. at para. 46. 34
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mathematical projections for the future, under the two hypothetical future scenarios. These forecasts can only be based on a variety of assumptions that are purely judgemental and inherently incapable of verification. It is questionable whether this type of highly structured but speculative analysis, layered on top of a similarly structured analysis of the past and present which will also have numerous information gaps and assumptions, will be a significant improvement over the more direct and less rigid analysis actually conducted by the Tribunal in this case. The proposal of a “hypothetical comparator” model, while superficially appealing, also suffers from the problem of circularity, in that it essentially assumes prior knowledge – or the making of assumptions in the absence of prior knowledge – of precisely that which it purports to test. The Court proposed the construction of a hypothetical market that is identical to the actual market but for the absence of the effects of the impugned practice. By so doing, the effects of the impugned practice would, the Court suggests, be isolated and measured. However, the only way to construct a model – one in which the impugned practice and its effects are both present and absent – is if the effects of the impugned practice are already known, or can readily be calculated from what is already known, or are simply given assumed numerical values. Thus, the construction of the hypothetical model will be an entirely redundant exercise, based on speculative assumptions. In any event, the outputs of such a model cannot answer the single most important question to be determined: if competition is not prevented entirely, would there be a substantial lessening of competition. To answer that question, it is still necessary to determine whether the difference between the two outputs is a minor lessening of competition or a substantial lessening of competition. How can that determination be made? The legislation offers no suggestions. Nor is there any benchmark or technique for determining how much lessening of competition is enough to be substantial. It is a question of pure judgment. Techniques of economic analysis, including various kinds of modeling, are merely aids to the exercise of good judgment, not substitutes for it. If Parliament can trust the expertise of the Tribunal to answer the larger questions judgementally, perhaps the Court should also trust it to be able to select the most appropriate technique of economic analysis to be used by the Tribunal to aid it in making that judgment. The Tribunal essentially approached this ultimate question by the least circuitous route: it evaluated the adequacy of the competitiveness of the market after a substantial period of the impugned anti-competitive practice had been engaged in, found that the consumer was adequately protected by the current level of competition because the prices were not significantly higher than a competitive price, and from that drew the inference that a substantial lessening of competition had not occurred, was not occurring, and would be unlikely to occur (absent a material change in circumstances). Since protecting competition is not an end in itself, but a means of protecting consumers, the Tribunal’s determination of the ultimate question on the basis of whether consumers were adequately protected was an eminently purposive (rather than a merely literal) analysis of the statutory requirements. Now, however, unless the decision of this Court is reversed by the Supreme Court of Canada, or unless the Tribunal finds a pragmatic
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shortcut36, decisions of the Tribunal in such cases will be unlawful if they do not follow the process and sequence of the issues in section 79 strictly and to the letter. Mark D. Whitener, writing his Editor’s Note in a recent issue of Antitrust37, discussed the “dismal science” of economics as applied to antitrust law. Although he was writing in the context of mergers, his analysis is equally applicable: … . The econometric tools themselves may seem mystifying to some but, at its best, quantitative analysis reduces antitrust to relatively simple, testable questions. If the conduct in question has already occurred, … then, in theory the analysis should be a fairly straightforward search for actual effects. … . Predicting the effects of future conduct, such as a proposed merger, raises even more difficult questions.
The Court accepted that the precise formulation of the but-for is best left to the Tribunal, whose economic expertise exceeds that of the court. It quoted from the Supreme Court of Canada’s decision in Canada (Director of Research and Investigation) v. Southam Inc.,38 in which the Court stated that “what is required in the end is an assessment of the economic significance of the evidence; and to this task an economist is almost by definition better suited than is a judge.”39 However, by requiring that the Tribunal conduct a but-for test in abuse of dominance cases, the Court limited the capacity of the Tribunal to apply another economic test that the Tribunal considered equivalent or superior. If we look at the difference between the Tribunal and the Court in terms of statutory interpretation, the main difference is in their views of the expression “preventing or lessening competition substantially”. The Tribunal recognized that any marketing program is designed to give the marketer some sort of advantage over its competitors, otherwise the marketing costs would never be incurred. This intended competitive advantage, if achieved, can be characterized as “anti-competitive” by competitors, especially those that are smaller than the successful marketer, and have lost business to it. Accordingly, the Tribunal focused its attention on the word “substantially”. It made the pragmatic judgment that because the impugned practice had been in place for a considerable period of time, if it was ever going to do so, it would by now have had the effect of damaging competition to the degree that it would no longer be sufficiently robust to protect consumers. For similar or related reasons, it also judged that the impugned practice was not really anti-competitive because if it had been, one would have expected it to have reduced competition substantially. The Court, for its part, focused on the single word “lessening”. It held that this word implied a relative analysis, which had to be done by means of a side-by-side, with/without comparison of two scenarios, the actual events (broken down into several discrete questions) and a hypothetical scenario (using the same questions) without the impugned practices. It also held that the determination of whether the impugned practice was anti-competitive was logically antecedent to 36
As it did in Superior Propane, ibid, and provided, also, that this shortcut is held acceptable on any second appeal to the Court, as was the case in Superior Propane. 37 Mark Whitener, the Editorial Chair of Antitrust, is Senior Counsel, Competition Law and Policy for General Electric Company in Washington, D.C. His Editorial Note appeared in Antitrust, Volume 20, Number 3, Summer, 2006, at p. 6. 38 [1997] 1 S.C.R. 748 [Southam]. 39 Ibid. at para. 52, quoted in Canada Pipe (F.C.A.), supra note 3 at para. 45.
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and separate from the lessening of competition substantially analysis. Undoubtedly, the sequence of the paragraphs in section 79 might suggest that the analysis of (b) should come before (c), and, because they are separate paragraphs, they must be considered separately. However, that may say more about precision than accuracy. If, in the particular case, one central fact – the continued existence of sufficiently robust competition – indicates that from a business perspective, any damage to competition must be insubstantial, then it does not appear to be unreasonable or irrational for the Tribunal to infer that the practice is neither anti-competitive (if that still matters40), nor substantial in its effect on competition. On the facts of Canada Pipe, the Tribunal appears to have reasoned just this way. While it recognized that the SDP had brought about some reduction in competition in the relevant markets in Canada, it found that despite this, competition remained sufficiently effective as to make it unnecessary to make any remedial order against Bibby. One could certainly imagine a contrary finding; the SDP intentionally and clearly did affect, to some degree, the ability of competitors to prosper in the cast-iron DWV product market in Canada. However, there was sufficient evidence from which the Tribunal could find as it did that the damage to competition was not significant. Mergers versus Abuse of Dominance41 The argument may not have been presented to the Court, but the language of “preventing or lessening competition substantially in a market” appears not only in sections 78-9, but also in section 92, dealing with mergers. Should the analysis be the same? In merger review, the analysis is conducted on a “before and after” basis, with the “after” portion being a forecast. It is done this way because the central issue is whether the proposed merger will create substantial new market power, or enhance existing market power substantially. The before-merger situation is the base, the “before” onto which is added the post-merger prospective analysis. It is not part of the merger analysis to determine whether the current price is a competitive price; the current price is simply what it is, and the relevant question is whether the merged entity will be able to increase the price over the pre-merger level. A proposed merger would not be rejected or prohibited merely because the pre-merger price is already higher than it would be at a competitive level. Because the test is always whether the proposed merger would lessen competition versus the base period, it is always a relative test rather than an absolute test. In abuse of dominance cases, the issue is somewhat different, so that the test used by the Tribunal may also be somewhat different. If one considers the purpose of reviewing complaints of abuse of dominance, the key issue is not whether the firm in question has market power, or is engaging in a practice of anti-competitive acts, but whether its conduct has enabled it to exercise that market power abusively. If, as in merger analysis, we were to ask whether the conduct in
40
If a practice has no material effect, does it matter whether it is anti-competitive? If it has no material effect, the Tribunal will make no remedial order to correct the situation because none is necessary. Thus, whether the Tribunal decides the case on the basis of a negative finding on paragraph (c) alone, or a negative finding on (b) alone, or negative findings on both (b) and (c) will make no real difference. 41 The authors wish to thank Larry Schwartz of LECG Canada, consulting economists, for bringing to our attention the similarities and differences between the merger analysis of “prevention/lessening competition substantially” and the analysis of this expression in abuse of dominance cases.
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question created market power, the answer might well be that the firm cannot raise the price any further, which would lead to the conclusion that it has no market power because of the existence of many good substitutes that would limit its pricing power. To accept this conclusion would be to commit the “cellophane fallacy42”. Where the Tribunal is required to determine whether one or more firms have abused a monopoly position, it would be committing the cellophane fallacy to use prevailing market prices as the base, since there is a good chance that those prices will already reflect a substantial element of monopoly power. The better approach would be to start by determining what level of prices might prevail were the market to be competitive. Accordingly, the appropriate question in abuse cases is whether the conduct in question allowed the firm or firms to exercise market power in the past (up to the present). Thus, the test is a “before and after” test, comparing whether the current, post-conduct price is above the competitive price that should have prevailed (in a competitive market) prior to the allegedly anti-competitive conduct. This is an absolute test rather than a relative test. Is it the wrong test? The relative “but for” test deals with essentially the same issue as the retrospective application of the absolute “before and after” test, namely, whether the post-conduct price would be the same as the pre-conduct price, but for the conduct. A properly applied “before and after” test should produce the same result as a properly applied “but for” analysis. Therefore, the Court’s distinction between a so-called “relative” test and a so-called “absolute” test is not a very useful one; nor is its insistence that only a “but for” test can produce the right result. Conclusion It may be hoped that the Federal Court of Appeal is more deferential in the future to the expertise of the Tribunal than it has been in Canada Pipe, as well as in the earlier Superior Propane case. While the Court’s desire for greater precision in analysis is understandable, the unavailability or incompleteness of relevant information, as well as the time and effort required to analyze it, may not justify the modest increment in precision that may result in some situations. The economic purposes of the Act require the Tribunal to have latitude to act according to its determination of the best economic interests of the market. The Court did not have before it the result of a relative, “but for” analysis, and hence, was not in a position to determine whether the result would have been the same as, or different from the analysis conducted by the Tribunal.
42
This fallacy was identified after a famous US antitrust case against Du Pont. Du Pont argued successfully that cellophane was not a separate market because at prevailing prices there appeared to be a high cross-elasticity of demand between cellophane and aluminum foil, wax paper and polyethylene. Thus, what appeared to be a virtual monopoly of the cellophane market was really a much more modest share of the “wrappings market”. The Court accepted this argument, which is now widely recognized to have been fallacious. That is because a monopolist will set prices just that the point where consumers will switch to some other product or drop out of the market entirely. It will set prices at that point because that is where profits are maximized. When monopoly prices prevail in the market, there will appear to be many substitutes for the monopolist’s product. However, this appearance of many substitutes, at this price, does not mean that it is not a monopoly price; rather, if there were no apparent substitutes at that price, it would mean that the price was not being set at the income-maximizing monopoly level. It would follow that the appearance of substitutes at prevailing prices does not necessarily mean that they are in the same market, and should be treated as being competitive with the monopolist’s product.
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If a drinking glass with parallel sides was 12 cm. high, and it had 6 cm. of water poured into it, one could determine what percentage of the space in the glass was occupied by water by means of an absolute test or a relative test. The absolute test would measure the height of the water column and subtract that height from the height of the glass. The relative test would measure both the height of the column of water and the height of the column of air above the water in the glass, and would calculate the ratio of the second column to the first. There is nothing to indicate that the relative method is better than the absolute one. In abuse of dominance/monopolization cases, an absolute analysis may, at least in some cases, be the better approach. With greater deference to the Tribunal, it would not have been precluded.
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