Highlights of Competition Law Enforcement in Canada, 2016: Civil Matters

A number of significant non-criminal matters were concluded in 2016, by way of negotiated settlement or decisions by the Competition Tribunal (the “Tribunal”). As a result, businesses and legal advisors now have greater guidance on issues, such as, interim injunctions under the merger provisions of the Competition Act (the “Act”) and the application of the abuse of dominance provisions to conduct by trade associations. Also, several matters involving online and offline misleading advertising were settled, providing guidance in particular on how the Competition Bureau (the “Bureau”) approaches the presentation of prices where additional fees are imposed and the Bureau’s Made in Canada guidelines. Finally, the Commissioner of Competition (the “Commissioner”) continues to encourage all Canadian businesses to adopt compliance programs to ensure they do not contravene the Act. These and other matters are discussed in greater detail below.

Mergers: Competition Act

Interim injunctions and mediated consent agreements

In September 2014, Parkland Fuel Corporation announced its intention to acquire the assets of Pioneer Energy LP. Both parties owned and leased corporate retail gas stations, as well as supplied gasoline to independently owned gas stations. This case has been a “pioneer” for at least two Canadian competition law issues in the past two years: (i) it is the first case where the Tribunal has considered (and granted) an application for an interim injunction pursuant to Section 104 of the Competition Act where an application under Section 92 (final remedial order) had already been filed,¹ and (ii) it is the first case where a consent agreement has been negotiated through a mediation process.²

On May 29, 2015, the Tribunal issued an interim injunction ordering Parkland and Pioneer to hold separate retail gas stations and supply agreements in six markets identified by the Tribunal, for the duration of the Commissioner’s challenge of the proposed merger under Section 92. The Commissioner initially requested a hold separate in 14 local markets, but the Tribunal only granted the interim injunction in 6 of those 14 local markets as the Commissioner had not satisfied its evidentiary burden to meet the test under Section 104 of the Act in each and every one of those markets.

The Tribunal’s decision confirmed and clarified the three elements of the test for granting an interim injunction, namely that the Commissioner must: (i) demonstrate that there is a serious issue to be tried; (ii) establish that irreparable harm will result if the interim relief is not granted (using clear and non-speculative evidence); and (iii) demonstrate that the balance of convenience supports the granting of the relief.

In its decision, the Tribunal confirmed that the threshold for showing a serious issue to be tried is quite low and once it is determined that the application is neither “vexatious nor frivolous, it should proceed to the second part of the test”. With respect to producing clear and non-speculative evidence of irreparable harm, the Commissioner must show a clear definition of markets and post-merger market concentration.

In light of the Tribunal’s decision, merging parties should remember that transactional uncertainty exists not only in regard to a final order but that interim orders are possible. Thus, parties should plan for the possibility of a hold separate accordingly.

Following the Tribunal’s interim order, the parties opted to resolve the litigation under Section 92 of the Act by going through a mediation process overseen by the Chief Justice of the Federal Court. It is the first time that a consent agreement, in the context of a merger, has been reached through a mediation process. The Tribunal has issued a practice directive that provides guidance on the procedures and other considerations relating to mediation in matters before the Tribunal.  It remains to be seen how often parties will choose to proceed by way of mediation.

The consent agreement resulted in Parkland agreeing to divest a gas station or supply agreement in six local markets and for Parkland to adhere to price restrictions in the wholesale supply of gas in two other markets.  It is worth noting that two of the markets in which a divestiture was required were not part of the six local markets that were subject to the interim hold separate. Again, this shows the uncertainty facing the parties to a merger. The final remedy may vary from that which was sought during the interim remedy stage.

Mergers: Investment Canada Act

Changes to review threshold

The past year has seen a significant upward trend in the monetary threshold that triggers a mandatory pre-closing review of proposed foreign direct investments in Canada under the Investment Canada Act (the “ICA”).  In such transactions, the Canadian Minister of Innovation, Science and Economic Development must be satisfied that the transaction is ‘likely to be of net benefit to Canada’ before the investment may be completed. Currently, the baseline threshold for most transactions is CAD 600 million in enterprise value. The threshold was originally slated to be increased to CAD 800 million on April 24, 2017 and to CAD 1 billion on April 24, 2019. However, in the 2016 Fall Economic Statement, the Government of Canada announced that the threshold will be raised to CAD 1 billion in 2017, two years earlier than planned.³

Additionally, pursuant to the Canada-European Union Comprehensive Economic and Trade Agreement (the “Agreement”), signed on October 30, 2016, the threshold will be increased to CAD 1.5 billion for investors from EU member states. Due to the existence of most favoured nation provisions in other free trade agreements, eight other countries will also benefit from this higher threshold – Chile, Colombia, Honduras, South Korea, Mexico, Panama, Peru, and the United States – which is expected to come into effect when the Agreement is provisionally applied as early as spring 2017.

National security review developments

Following amendments to the ICA in 2009, any investment in a Canadian business by a non-Canadian is also assessed to determine if it could be injurious to Canada’s national security. Little guidance was provided on what could trigger such concerns. In the 2016 Fall Economic Update, the Government of Canada announced that, before the end of the year, it would publish guidelines regarding how investments are examined under the ICA’s national security provisions.

This announcement came just days before the Federal Court of Canada made an order on consent setting aside the Governor in Council’s decision to require Chinese company O-Net Communications Holdings Limited to divest itself of an investment by which it had acquired control of a Canadian optical components and modules manufacturer as a result of national security concerns.⁴ O-Net challenged the decision on the basis that the Minister had not provided O-Net with sufficient details of the Minister’s concerns or a meaningful opportunity to respond. In its decision of November 9, 2016, the Federal Court remitted the matter back to the Minister to undertake a fresh review of the acquisition.⁵

Abuse of Dominance

In Canada, abuse of dominance is a civil offence which requires the Commissioner to show before the Tribunal that (i) one or more persons substantially or completely control, throughout Canada or any part of Canada, a class of business; (ii) that the person has engaged or is engaging in a practice of anti-competitive acts; and (iii) the practice has had, is having, or is likely to substantially prevent or lessen competition in a market.  There were several matters of note in 2016.

Competition Tribunal finds Toronto Real Estate Board abused its dominance

Five years after the Commissioner started proceedings against the Toronto Real Estate Board (the “TREB”), the Competition Tribunal ruled in April 2016 that TREB abused its dominance by preventing its members from offering more innovative services to their customers.

TREB is a trade association whose members include most real estate agents in Canada’s largest city, Toronto. Through rules and policies it restricted how its members could provide information to their customers, which the Commissioner argued is an abuse of dominance contrary to section 79 of the Act. The application alleged that TREB used its market power to restrict its members from offering various innovative products and services to consumers, and in particular, restrictions on the display and use of information related to real estate listings on password-protected virtual office websites.⁶

The Tribunal found that a competitor is a person who competes in the relevant market and does not have to be a competitor of the specific respondent. In other words, the anti-competitive practice did not have to affect a competitor of TREB, but it did have to affect a competitor in the relevant market. Thus, trade associations must exercise caution in establishing industry-wide rules.

The Tribunal noted that this case focussed on dynamic competition and innovation, which are important forms of competition, and stated that by “preventing competition from determining how innovation should be introduced” into the market that TREB “substantially distorted the competitive market process.”

While the Tribunal has discretion to impose administrative monetary penalties of up to C$10 million, the only remedy it imposed was a prohibition order which effectively required TREB to rectify its offending conduct, and it ordered TREB to pay part of the Commissioner’s legal fees and disbursements. TREB appealed the Tribunal’s decision, and obtained a stay of the Tribunal’s order in August 2016. The appeal was heard by the Federal Court of Appeal in December 2016.

Application against the Vancouver Airport Authority

Several months after the conclusion of the TREB case, the Commissioner commenced a new abuse of dominance case. In September, the Commissioner filed an application arguing that the Vancouver Airport Authority (the “VAA”) abused its dominant position in relation to supply in the markets for (i) galley handling at the Vancouver International Airport and (ii) airside airport airside access for the supply of galley handling.⁷ No date has been set for a hearing on the matter.

The Commissioner alleges that the VAA is engaging in anti-competitive acts by refusing to grant access to the airport airside for new entrants, and by its continued tying of access to the airport airside to the leasing of airport land for catering kitchens. The VAA argues that it does not have any anti-competitive purpose, that it has valid, efficiency-enhancing, pro-competitive business justifications for not permitting new entrants, and that it is acting according to its public interest mandate.

Investigation discontinued into alleged anti-competitive conduct of TMX Group Ltd

On November 21, 2016, the Commissioner discontinued its investigation into TMX Group Ltd. for alleged restrictive trade practices, including abuse of dominance. The Commissioner began an investigation following a complaint that TMX Group was impeding another company’s ability to develop a product delivering consolidated securities market data due to restrictive clauses in TMX Group’s contracts with investment dealers.

In a position statement explaining his analysis, the Commissioner focussed on the third part of the test, and looked at whether the contractual clauses were likely to substantially prevent or lessen competition in a market. Based on the evidence collected it was unlikely that the complainant would have been able to obtain enough data from investment dealers, even absent the TMX Group’s contractual agreements, for the complainant’s product to provide sufficient future competition. On these grounds, the Commissioner determined that the alleged anti-competitive clauses did not likely have the effect of preventing competition substantially in a market, did not finalize his review of the first two parts of the test, and closed his investigation.

Misleading Advertising

Price representations: Avis Budget Group

Following a multi-year investigation and inquiry, in March 2015 the Commissioner commenced proceedings against the Canadian operating subsidiaries of the Avis and Budget car rental businesses, as well as, their US parent company, Avis Budget Group Inc. The Commissioner alleged that the manner in which the companies advertised the prices of its rental cars and certain related accessories was misleading in that the price advertised could not be obtained without the payment of additional mandatory fees, and the description of certain of those fees was misleading. This was also the first case in which the Commissioner sought a penalty under the anti-spam provisions of the Act, which provide (in part) that an email with a misleading subject line can run afoul of the Act regardless of the materiality of the alleged misrepresentation.

In addition to an order seeking to prohibit these representations, and unspecified restitution for consumers expected to total some C$35 million, the Commissioner sought the maximum C$10 million penalty against each of the Canadian entities, as well as, an additional C$10 million from their US parent entities. In June 2016, the parties settled the case, entering into a consent agreement which provided that they would, among other things, no longer make the representations in question and agreed to pay an administrative monetary penalty of C$3 million plus C$250,000 towards the Commissioner’s investigative costs. To implement these changes, the parties changed the manner in which prices are displayed to Canadian residents on their websites and mobile apps so that the initial price shown to consumers includes all fees and taxes, rather than only the base rate.  They also changed the names of certain of the additional fees.

The lesson to be drawn from this case is that the Commissioner does not consider it sufficient if consumers are shown the estimated total price of a product before confirming their purchase where that price consists of a base price that is advertised but additional fees are disclosed and added later in the transaction process. The Commissioner will consider that to be misleading.

Deceptive marketing: record restitution orders

Until 2009, the Act did not empower the Tribunal to award restitution for consumers affected by deceptive marketing. As a result of an action by the Commissioner against Canada’s three largest wireless carriers, Canadian consumers will receive approximately C$24 million in restitution to settle allegations that the carriers were making or permitting false or misleading representations to be made to customers in third party advertisements relating to premium text messaging services and placing charges for these services on wireless phone bills without prior authorization from their customers.⁸

The Commissioner commenced a court action against the three carriers, as well as, the Canadian Wireless Telecommunications Association (the “CWTA”), in September 2012. In addition to the record restitution orders, the case is noteworthy because of the cooperation between the Bureau and the United States Federal Trade Commission (the “FTC”). FTC officials were asked to assist in obtaining evidence from a US-based company that had been contracted by the CWTA to collect and analyse the advertising through which the carriers promoted the premium text messages. Applying the US Safe Web Act, the US District Court of Maryland upheld an order requiring that company to produce relevant records. As such, it was the first case in which a US court has ordered such assistance to aid in an investigation by the Bureau.

Made in Canada claims: another mediated settlement

Following the mediated resolution of the Pioneer/Parkland merger, late in 2016 the Commissioner used mediation to resolve another matter in which litigation had been commenced. The Commissioner had filed an application with the Tribunal in April 2016 alleging that the maker of Moose Knuckles branded premium parkas breached the misleading advertising provisions of the Competition Act by improperly claiming that certain of its parkas were made in Canada.⁹ The Commissioner alleged that the parkas in question were “mostly manufactured in Vietnam and elsewhere in Asia…[when] only the finishing touches to the jackets, such as adding the trim, zippers and snaps, are done in Canada.”

This case turned on the interpretation of the Commissioner’s Bulletin on "Product of Canada" and "Made in Canada" claims. The guidelines provide that the Commissioner will not take issue with Made in Canada claims where the following three conditions are met:

• The last substantial transformation of the good occurred in Canada; and
• At least 51 per cent of the total direct costs of producing or manufacturing the good have been incurred in Canada; and
• The ‘Made in Canada’ representation is accompanied by a qualifying statement, such as "Made in Canada with imported parts" or "Made in Canada with domestic and imported parts". This could also include more specific information such as "Made in Canada with 60 per cent Canadian content and 40 per cent imported content".

Moose Knuckles vehemently denied the allegations, and claimed that they fulfilled the criteria in the guidelines. Had it not settled, the case would have provided useful guidance on the types of costs that could properly be included for the calculation in the second criterion. In the alternative, the company claimed that the guidelines were not legally binding as the criteria are not contained in the text of the Act.

The matter had been set for a hearing in February 2017, but on December 7th, the Commissioner consent agreement.  Moose Knuckles must publish corrective notices, add qualifying language to its made in Canada claims, pay C$750,000 to various charities over five years, and adopt a compliance policy to ensure that the company complies with the misleading advertising provisions of the Act. The company, as is usual in consent agreements, did not have to admit that it violated the Act.

The Push for Compliance Programs in Canada

As part of its ongoing mandate to encourage compliance with all aspects of Canadian competition legislation, the Bureau released its updated Competition and Compliance Framework in late 2015 which outline the various outreach, enforcement and advocacy instruments used by the Bureau to promote compliance with the Act. The Bulletin outlines the consideration given by the Bureau to compliance programs and provides guidance on the design of credible and effective compliance programs.

Advantages of a Compliance Program

There are several advantages to adopting a compliance program in light of the Bulletin.

First, a compliance program reduces the costs of compliance with Canadian competition legislation because managers and employees are more knowledgeable on the subject.

Second, a compliance program facilitates the early detection of anti-competitive conduct. The early detection of conduct that violates the cartel related provisions of Canadian competition legislation is particularly advantageous, as the first party to disclose to the Bureau a cartel related offence may receive immunity under the Bureau’s immunity program. Subsequent parties that come forward and cooperate with the Bureau may be eligible for a reduction in potential fines under the Bureau’s leniency program, with the amount of the reduction dependent on the order in which each application is received.

Third, the existence of a compliance program may also be considered by the Bureau and courts as a mitigating factor when considering fines and remedies for violations of Canadian competition legislation.

Finally, a compliance program also assists businesses in determining the circumstances in which they may be the victim of anti-competitive conduct by other parties.

The Bureau has emphasized that compliance programs should be taken seriously by management. The fact that a business and relevant individuals knowingly contravened the law, despite the existence of a compliance program, may be considered an aggravating factor when assessing fines and remedies.

Elements of Credible and Effective Compliance Programs

The Bureau has stated that compliance programs should be both credible and effective. The Bulletin outlines seven elements of a credible and effective compliance program:

1. Management commitment and support
2. Risk-based corporate compliance assessment
3. Compliance policies and procedures
4. Training and education
5. Monitoring, verification and reporting mechanisms
6. Disciplinary procedures and incentives
7. Program evaluation

All businesses, regardless of size, can benefit from a compliance program. The exact structure of the compliance program should be tailored to the needs of each business and take into account the size and specific risks affecting the business.

In addition, the Bureau has emphasized that compliance programs are not limited to businesses. For example, the Bureau also encourages trade associations to adopt credible and effective compliance programs and other measures to prevent improper conduct.