In the first time a Canadian court has considered the tests for exclusive dealing and abuse of dominant position under the Competition Act, Canada’s Federal Court of Appeal (the FCA or the court) held last June that the Competition Tribunal failed to correctly apply these tests.1 The FCA thus overturned the Tribunal’s dismissal of the Competition Commissioner’s application seeking orders against manufacturer Canada Pipe Company Ltd. for abusing its dominant position and having a practice of exclusive dealing and remanded the case to the Tribunal for re-determination. The Commissioner appealed the Tribunal’s dismissal of its claims, and Canada Pipe cross-appealed the Tribunal’s finding that it had market power in the relevant markets.2 The case also reveals significant differences in the legal tests employed in the United States and Canada for unlawful exclusive dealing.
Canada Pipe produces cast-iron drain, waste and vent ("DWP") products. These products are used in a variety of structures to carry waste and drain water, and to vent plumbing systems. Through its Stocking Distributor Program, a form of loyalty rebate program sometimes known as an "exotic discount", Canada Pipe offered substantial rebates and discounts to distributors that agreed to stock exclusively Canada Pipe brand cast-iron DWP products. Distributors could stock other makers’ non-cast-iron DWP products and still obtain discounts from Canada Pipe.
The Competition Commissioner alleged in its application to the Tribunal, filed in late 2002, that the loyalty rebate program constituted a practice of exclusive dealing under section 77 of the Act, and an abuse of dominant position under section 79 of the Act by preventing or lessening competition substantially in the markets for DWP products.
At the outset of its review, the FCA pointed out that exclusive dealing and abuse of dominant position claims have parallel structure and logic, as they both involve identifying particular conduct, and both require findings of market power and actual or likely substantial lessening of competition.3 The court cautioned, however, that each statutory element "must give rise to a distinct legal test or otherwise the interpretation risks rendering a portion of the statute meaningless or redundant".4
Abuse of Dominant Position
Under Section 79(1) of the Act, the Tribunal may issue an order against a party where it exercises market power in a relevant market5 and engages in a practice of anti-competitive acts6 which is having or is likely to have the effect of preventing or lessening competition substantially in that relevant market.7 As noted by the FCA, "anti-competitive" act is not defined in the Act. A non-exhaustive list of eleven anti-competitive acts is, however, enumerated in section 78 of the Act.
In its February 2005 decision, the Tribunal held that Canada Pipe had market power in the relevant markets for DWP products but that the loyalty rebate program was not an anticompetitive act as meant in § 79(1)(b). The program was not anticompetitive, the Tribunal held, because it had not been shown to have substantially lessened or prevented competition in any market.8
The FCA began its review of the Tribunal’s decision with what it considered the Tribunal’s most serious error, the issue of whether Canada Pipe’s loyalty rebate program has or is likely to have the effect of preventing or lessening competition substantially (§ 79(1)(c)).
The FCA, endorsing the Commissioner’s arguments, held that the correct test for establishing substantial lessening or prevention of competition is whether, but for the impugned conduct, the relevant market would have been "substantially more competitive". 9The Tribunal’s focus on whether substantial competition continued to exist in the relevant markets following the introduction of the rebate program was wrong, the FCA held. Whether or not competition is substantial in a relevant market does not determine whether a certain practice has resulted in, or is likely to result in, a substantial lessening or prevention of competition.10 The correct approach is not to exclusively focus, as the Tribunal did, on entry by new firms and switching by incumbent firms, but rather to compare the level of competition in the presence of the exclusive arrangement with what it would have been in the absence of the arrangement.
Canada Pipe objected to the "but for" test on the basis that it was novel. In fact, the Tribunal has never before used the "but for" wording in a decision. However, the FCA rejected Canada Pipe’s argument. The no new argument principle, though well-established in Canadian jurisprudence, was inapplicable, the court held, because the Competition Tribunal had used the words of the but for test in its Enforcement Guidelines on the Abuse of Dominance Provisions and the substance of this test has been applied by the Tribunal in prior decisions. Canada Pipe thus had "ample notice" of this argument.11
The FCA next turned to whether the Tribunal erred in finding that Canada Pipe’s loyalty rebate program was not an anti-competitive act as meant in § 77(1)(b), for once market power and substantial lessening or prevention is shown, it must additionally be shown that the act is anti-competitive as meant in § 77(1)(b). Adopting the Tribunal’s decision in the Nutrasweet case, the FCA held that the focus for whether an act is anti-competitive under § 77(1)(b) should be on the purpose of the conduct.12 If the act’s purpose is to have an anti-competitive effect on a competitor, that its predatory, exclusionary, or disciplinary, the act itself should be viewed as anti-competitive. Section 79(1)(b) requires no more, the court held.
“Purpose" in this context is meant in a broader sense than the subjective intent of the party, the overall character of the act in question should be taken into account.13 Furthermore, in the context of § 77(1)(b), "anti-competitive" refers to an act whose purpose is a negative effect on a competitor.14 This can be established not only by subjective intent but also by the reasonably foreseeable consequences of the acts themselves and the circumstances surrounding their commission, or both.15
Having made these findings, the FAC held that the Tribunal erred by concerning itself with the loyalty rebate program’s intended effect on the state of competition in the market, as opposed to a competitor, and by requiring proof of a causal link between the program and a decrease in competition. No causal link is required, the FCA held, in the test for whether an act is "anti-competitive" under the abuse of dominant power provisions.16 Thus, a practice need not necessarily have an anticompetitive effect yet it still can be determined to be anti-competitive and, if other elements are proven, an abuse of dominant position.
Likewise, factors such as the business justifications for a firm’s conduct, would also be irrelevant for the purposes of Section 79(1)(b). Business justifications are only relevant, in the FCA’s view, in determining whether the purpose of the alleged anti-competitive act had a predatory, exclusionary or disciplinary negative effect on a competitor. A valid business justification can overcome the deemed intention to prevent or lessen competition but is not an absolute defense. "A business justification is properly employed to counterbalance or neutralize other evidence of an anti-competitive purpose prior to making a determination under 79(1)(b)".17
The Tribunal’s consideration of irrelevant factors critically influenced its reasoning and its determination as to whether Canada Pipe’s program constituted an abuse of dominant position and its dismissal of this claim had to be overturned, the FCA held.
An order prohibiting exclusive dealing under section 77 of the Act can be issued where the Tribunal finds that a "major supplier", or a supplier in a market where exclusive dealing is widespread, has a practice of exclusive dealing that is likely to impede entry or expansion of a firm or product in a market,18 or has or is likely to lessen competition substantially.19
The Tribunal held that the loyalty rebate program did not constitute exclusive dealing as prohibited by section 77(2) for the same reasons that the program did not constitute an abuse of dominant position, in particular, that no actual or likely substantial prevention or lessening of competition had been shown.
Reviewing this decision, the FCA pointed out that in other cases the differences in the wording of the exclusive dealing and abuse of dominant position provisions might yield different results. In this instance, however, the Tribunal’s adoption of the same legal test and analysis with respect to the substantial lessening of competition element for both provisions meant that to the extent the Tribunal erred in law in applying the test for substantial lessening of competition under § 77(1)(c), the same errors apply with respect to § 77(2).
The Tribunal’s exclusive dealing decision was also erroneous, the FCA held, because the Tribunal analyzed the loyalty rebate program "from the narrow perspective of prevention, and not the broader perspective implied by the word "impede" used in § 77(2)(a) and (b). This unduly narrow perspective thus also constituted reversible error, the FCA held.20
Canada Pipe is expected to seek leave to appeal to the Supreme Court of Canada. The leave application may be determined in early 2007. Since this is the first time these provisions have been considered by a court, there is a good chance that the Court will decide to hear the appeal. In the meantime, firms doing business in Canada are advised to consult competent antitrust counsel to consider whether their distribution programs and policies comply with all applicable legislation and the relevant jurisprudence. Those familiar with the tests for unlawful exclusive dealing under United States antitrust law should understand from the above that the legal tests for unlawful exclusive dealing in Canada are substantially different from the test employed in U.S. antitrust law and require careful consideration.
1 Canada (Commissioner of Competition) v. Canada Pipe Company Ltd., 2006 FCA 233 (23 June 2006). The Competition Tribunal is a specialized adjudicative body comprised of economics and legal experts which exclusively hears applications and issues orders. Although it has previously elaborated its perspective on the abuse of dominant position and exclusive dealing provisions of the Act, no court prior to this case has interpreted these provisions of the Competition Act.
2 The FCA wrote a separate opinion disposing of Canada Pipe’s cross-appeal: Canada (Commission of Competition) v. Canada Pipe Ltd., 2006 FCA 236 (23 June 2006). The court upheld the Tribunal’s definition of the relevant product market and its finding that Canada Pipe had market power in the relevant product market.
3 2006 FCA 233 at para 21.
4 Ibid. at para. 26. The FCA explained further that although supporting evidence may be employed as an indirect indicator in respect of more than one element of the tests used in applying the Act, the elements themselves must remain conceptually distinct. Id. at para. 28.
5 § 79(1)(a).
6 § 79(1)(b).
7 § 79(1)(c).
8 Commissioner of Competition v. Canada Pipe Company Ltd., 2005 Comp. Trib. 3 (Competition Tribunal).
9 Id. at para. 38.
10 Id. at para. 36, 37.
11 The FCA’s position on this issue underscores the weight of what is articulated in government issued antitrust guidelines.
12 Canada (Director of Investigation and Research) v. NutraSweet Co., (1990) 32 C.P.R. (3d) 1.
13 2006 FCA 233 at para. 67, citing Canada (Director of Investigation and Research v. Tele-Direct, (1997) 73 C.P.R. (3d) 1.
14 2006 FCA 233 at para. 68.
15 Id. at para. 72.
16 Id. at paras. 78, 80
17 Id. at para. 88.
18 § 77(2)(a) and (b)
19 § 77(2)(c). The provision states, in English, "have any other exclusionary effect in a market, with the effect that competition is or is likely to be lessened substantially…"
20 Id. at para. 98.