Competition Policy

Competition Policy

Competition policy refers to legislation used by the federal government to eliminate privately imposed restraints on trade and to encourage competition. The statutory basis of federal competition policy is contained in the Competition Act and Competition Tribunal Act, which came into force on 19 June 1986, replacing the Combines Investigation Act, whose history can be traced to 1889. The purpose of the legislation is to "maintain and encourage competition in Canada in order to promote the efficiency and adaptability of the Canadian economy." The Act applies to all economic activities (both goods and services) except those specifically exempted, eg, COLLECTIVE BARGAINING, amateur sports, securities underwriting or activities subject to other legislation, eg, industries where price or output or both are regulated by federal or provincial governments.

The Competition Act incorporates both criminal offences and civil reviewable matters. The official with the primary responsibility for enforcement is the Director of Investigation and Research (DIR). Most inquiries into alleged offences are initiated by the DIR following a complaint by businesspeople or consumers. However, an inquiry must be initiated by the DIR following an application by 6 adult Canadian citizens, or at the direction of the Minister of Industry.

The Director on his own initiative may apply to the Competition Tribunal for an order to prohibit the continuation of a civil reviewable trade practice. In criminal cases, the DIR provides a statement of evidence to the Department of Justice which makes the decision to prosecute or not. The DIR is also authorized to make representations in respect to competition in the proceedings of federal regulatory tribunals and at the request of provincial regulatory bodies.

The principal criminal offences are as follows: First, agreements to lessen competition, although only those agreements concerning the supply, manufacture, production, etc, of a product to lessen competition unduly are prohibited. Second, agreements among banks, eg, to fix interest rates on loans or deposits, are illegal per se (new in 1986). Third, suppliers may not attempt to influence upwardly or discourage the reduction of the price at which another person supplies or advertises a product (price maintenance). It is also an offence to refuse to supply anyone because of that person's low-pricing policy. Fourth, it is an offence to discriminate against competitors of a purchaser of an article by granting a price discount or other advantage (eg, advertising allowances) to the purchaser that is not also available to the competitors. Fifth, it is also illegal to engage in a policy of regional price discrimination, so that products are sold at lower prices in one area of the country than in others, or to engage in predatory pricing (ie, sell at unreasonably low prices) where the effect or tendency is to lessen competition substantially or eliminate a competitor. Sixth, all false or misleading advertising and representations are prohibited. Other sections of the Act prohibit double ticketing, "bait-and-switch" advertising, and pyramid and referral-selling schemes.

Civil reviewable matters are adjudicated by the Competition Tribunal, established in 1986, rather than the courts. The Tribunal, which works in panels of 3, consists of both lay persons and judges of the Federal Court of Canada. Decisions may be appealed to the Federal Court-Appeal Division. The most important civil matters deal with mergers, abuse of dominant position and specialization agreements (all new in 1986). Other civil matters include a variety of trade practices which may be anti-competitive in their effects, eg, delivered pricing (new in 1986), refusal to supply, consignment selling for the purpose of controlling dealer prices, tied selling and market restriction.

To obtain an order by the Tribunal dissolving a previous merger or prohibiting a proposed one, the DIR must show, on the balance of probabilities, that the merger has or is likely to "prevent or lessen competition substantially." However, the Competition Tribunal shall not make an Order prohibiting or dissolving a merger if it finds that the merger or proposed merger has brought out "gains in efficiency that will be greater than, and will offset," the effects of any prevention or lessening of competition. This "efficiency defence" is a special feature of Canada's merger law. Mergers involving large firms (assets or sales exceeding $400 million) or large acquisitions (assets or sales exceeding $35 million) are subject to advance notification requirements.

The civil merger provisions of 1986, which deal with both horizontal and vertical mergers, replaced the ineffectual criminal law provisions under which only a handful of cases were brought between 1910 and 1976. Only one conviction was obtained, and that upon a plea of guilty. Since 1986, only a tiny percentage of mergers has been subjected to a detailed assessment, largely because they pose no threat to competition. Most cases where the DIR has raised questions have been "settled in the DIR's office," eg, by restructuring the deal. There were only a handful of contested merger cases taken to the Competition Tribunal between 1986 and 1998.

To obtain an order from the Tribunal prohibiting abuse of dominant position, the DIR must establish that the firm(s) involved 1) substantially or completely control the market, 2) have engaged, or are engaged, in a "practice of anti-competitive acts," and 3) the practice has had, is having, or is likely to have the effect of "preventing or lessening competition substantially in a market." Where the Tribunal finds a substantial lessening competition, it must determine "whether the practice is a result of superior competitive performance." Unfortunately, none of the key words or phrases in either the merger or abuse of dominant-position provisions are defined in the new Act. From 1986 to 1998, only a handful of abuse cases went to the Tribunal.

In order to encourage efficiency, the Competition Act provides for the registration of specialization agreements under which 2 or more firms each agree to discontinue the production of certain articles or services and to buy that item exclusively from another party to the agreement. In this way, all of the firms involved can specialize to a greater degree and enjoy lower costs through longer production runs. If the agreement meets the conditions in the Act and is registered by the Competition Tribunal, it is then exempt from the conspiracy and exclusive dealing provisions. This provision was not used between 1986 and 1998.

The Competition Act of 1986 contains other notable changes: 1) the conspiracy provisions were amended to overcome recent adverse interpretations by the Supreme Court of Canada; 2) the commercial activities of federal and provincial Crown corporations were made subject to the Act; 3) the maximum fine for conspiracies to fix prices or allocate markets was increased from $1 million to $10 million; and 4) applications for the use of formal investigatory powers, eg, search orders, written returns of information and examination of witnesses under oath, must now be made to the courts so as to be consistent with the charter provisions of the new constitution enacted in 1982.

Over the past decade, the budget of the Competition Bureau has declined in real terms, yet its responsibilities have increased. The result has been a drop in the number of cases recommended for prosecution by the DIR, and only a modest number of merger and abuse-of-dominant-position (civil) cases have been taken to the Competition Tribunal. Part of the decline, however, may be attributable to the DIR's increased emphasis on efforts to gain compliance with the law by voluntary means.

During the 1980 and 1990s, fines in conspiracy cases (sections 45-47) increased greatly in real terms even though there were very few fully contested cases. A record fine was obtained on 27 May 1998 when Archer Daniels Midland of the US pleaded guilty and paid $14 million in fines for a conspiracy involving lysine and $2 million for one involving citric acid. The fines amounted to 29.2% and 11.8% respectively of ADM's sales in Canada during the conspiracy.

Following the report of a widely representative consultative panel, a set of amendments to the Competition Act was introduced into Parliament in April 1996, but died on the Order Paper. The bill was changed and reintroduced as Bill C-20 on 20 November 1997. After being amended, it received third reading in the House of Commons on 23 September 1998. The proposed amendments deal with deceptive telemarketing, judicially authorized interception of private communications for a few criminal offences, new civil provisions for misleading advertising, improvements to the merger prenotification process and clarification of the provisions for regular price claims.