The future of competition policy in Canada

Submission by the Business Council of Canada to the federal consultation on Reform of the Competition Act

The Business Council of Canada is pleased to offer its views in response to the federal consultation on potential reform to the Competition Act (hereinafter the “Act”).  The Business Council represents 170 of Canada’s largest businesses, which are active in all sectors of the economy and all regions of the country.  Business Council members are significant players in the economy and recognize the benefits that vibrant and competitive markets bring to all Canadians.  The Council has a long history of engagement on major reforms to Canadian competition law, beginning with the creation of the modern Act in 1986. While we appreciate the opportunity to provide our views, the extremely broad scope of the consultation paper (hereinafter “CP”), and the sheer number of issues raised, makes it extremely challenging for the business community to adequately respond.

It is our view that, as a fundamental piece of Canada’s market-based legislative framework, the Act has worked remarkably well over the last few decades in protecting consumer interests and the state of competition in Canada.  We remain to be convinced that major reform of the Act is warranted. We would have serious reservations about a major overhaul that would lead to years of debate and litigation over new powers and new legislative language.  Canada’s reputation for a stable and predictable policy framework for business has been essential to drawing investment, both domestic and foreign, that contributes to the quality of life which all Canadians enjoy.  Lessening the test for what constitutes anti-competitive behaviour, while also increasing the powers of the Competition Bureau (“the Bureau”) and the penalties for conduct subsequently found to be non-compliant, would erode the policy and market predictability that has been a hallmark of Canadian public policy. The result would be to make Canada a less attractive place to do business.  

The reality is that if the government were to move forward with even a modest number of the ideas raised in the CP, it would arguably constitute one of the most significant overhauls in the legislation in Canadian history, since the Combines Investigation Act was replaced by the Competition Act in 1986.  Such a far-reaching set of proposals should not be lightly considered.  Extensive consultation should be undertaken focused on areas where the evidence clearly suggests a specific challenge with the current Act and where effective and well-tailored solutions can be found.

Canada is highly dependent on trade for its economic prosperity and Canadian firms operate in an open and extremely competitive international marketplace.  Accordingly, it is important to be cognizant of developments in other countries – particularly in the United States, Britain, the European Union and Australia – aimed at fostering enhanced competition. At the same time, we should be cautious and not rush to adopt the latest reform efforts in those countries.  For one thing, they may not be well-suited to Canada’s particular market attributes. The EU in particular has a much higher degree of regulatory oversight and bureaucracy that would not translate well to the Canadian market and Canadian corporate law which is more principles-based. As well, many of the most often cited reforms in other countries are still in their early stages. Accordingly, further experience is needed to judge whether they are actually having the intended positive effects on competition, or whether they might unduly hinder innovation, efficiency, and economic growth.

The CP cites issues such as inflation and inequality as predominant concerns among Canadians today, but it is far from evident that the Act is best suited to address these issues, nor for some of the other potential challenges mentioned in the CP.  In some cases, sector-specific regulation may be the best course. In other cases, relaxation of the restrictions, such as foreign ownership requirements, that limit competition in a sector may be a more effective approach.  In terms of offering greater choice and lower prices to consumers, two areas are ripe for change: reduction of interprovincial barriers to trade and reform of supply management in agricultural products.

Merger Review

Efficiency defence. For several years, various scholars and the Bureau itself have tried to make the case that Canada’s statutory defence of “efficiencies” is a relic of the past and no longer fits with a modern competition law. The mere fact that Canada is one of the few countries to maintain efficiencies as a statutory defence is not in our view reason enough to remove it. Of the many thousands of notifiable mergers reviewed by the Bureau over the years, it is clear that the efficiencies defence has played a substantial role in only a small number of them.   

The CP cites the decision of the Supreme Court of Canada in the Tervita case as part of the rationale for eliminating the defence.  Yet the majority decision of the Court was fairly clear:

“…the Tribunal retains the discretion to reject the efficiencies defence, but must clearly explain the reasons for its decision. The reasons must be seen to be rational even though they reject what the quantitative analysis would otherwise strictly indicate.”

We are not convinced that the existence of the statutory defence makes our law substantially different from how other major countries assess the impact of a merger.  Nor does it prevent the Bureau or the Competition Tribunal (“the Tribunal”) from a careful assessment of the full range of factors relevant to a proposed merger’s potential impact on consumers and the marketplace.  

Takeover of nascent firms.  The CP raises the question of whether the Bureau should be given greater powers to review mergers that might otherwise fall under pre-notification thresholds in cases where a larger, perhaps dominant, firm is acquiring an innovative start-up company. The CP suggests that the purchase of an emerging firm with a new technology, product or service to offer could impede competition in that a potentially vigorous competitor is eliminated from the market before it can establish itself.  But that suggests a level of clairvoyance that the Bureau does not possess.  The CP floats the concept of an “appreciable risk” to competition from the acquisition, but how would that be reliably assessed before the fact?

A broad power of this sort could actually have unintended and negative consequences. It would be exceedingly difficult to establish a priori whether the nascent firm could have become an able competitor.  The reality is that many innovative start-ups reach the point where they need a significant injection of capital to commercialize their innovations and move forward with production at scale.  Seeking outside capital becomes essential to their growth and indeed, in some cases, their ability to survive.  Refusing to approve such a merger hardly guarantees the success of the nascent firm.  Rather, it may hobble the potential acquiror, reduce or eliminate the efficiency and productivity gains it might have achieved through the merger, and actually reduce its ability to offer highly competitive goods or services going forward.

Ability to challenge a merger after it has closed.  The CP raises the possibility that the time period beyond which the Bureau could challenge a non-notifiable merger after it has closed could be extended from the current one-year to three years.  The 2009 amendments to the Act lowered the limitation period from three years to one, but as the CP notes, that was balanced with the enhanced power given to the Bureau to issue supplementary information requests (SIRs) that provided a much stronger basis on which the Bureau can assess the impact of a merger. In today’s fast-paced marketplace, it is troubling to suggest that parties may have to wait three years before being assured that their merger will not be undone.  This would lead to considerable uncertainty, deter investment and complicate the closing of the transaction.  Equally important, it could delay the integration of the merged parties and reduce the efficiency, product alignment and other benefits that were the rationale for the merger in the first place. For firms that decide to proceed with integration notwithstanding the uncertainty created by the three-year limitation period, it may be extremely difficult to unwind the combined business structure and attempt to return the two firms to what existed pre-merger.  The Bureau would still have all of the criminal and civil review provisions of the Act available should it become apparent that the merger is having an anti-competitive impact. 

Exemptions to pre-merger notification requirements.  The CP suggests that there may be a need for reform to ensure capture of “mergers of interest” which are not now caught by the existing pre-notification regime.  We suggest there is also a need to examine whether the current process too easily captures transactions that do not raise competition issues. 

The limited resources of the Competition Bureau should be focused on cases where there is a substantial risk of competitive harm, and not tied up in reviews that do little to serve the public interest.  Such reviews involve substantial transaction and legal fees for the notifying company.  More importantly, the lengthy review process can delay closing and create execution risk, needlessly in most cases, for both parties to the transaction.

Real estate transactions would appear to garner a significant number (approximately one in six) of the mergers subject to mandatory pre-notification.  We are not aware that any real estate transaction has ever occasioned enforcement under the Act. Indeed, most such transactions take place within fragmented and highly competitive markets and are unlikely to raise any serious competition issues. Similarly, upstream oil and gas companies are fairly active in the buying and selling of hydrocarbon reserves and associated exploration and production assets, yet such transactions rarely raise competition concerns.

The Act contains certain limited exceptions for mergers which present no appreciable risk of harm to competition, but too many pro-competitive or neutral transactions are still caught.  The federal government should consider amendments that more closely mirror what exists in the United States under the Hart-Scott-Rodino Act and provide exemption for a broader class of real estate and hydrocarbon asset transactions.  

Unilateral Conduct

The CP raises a number of issues with respect to the abuse of dominance provisions of the Act.  We have serious concerns about suggestions to move the law in the following directions:

• The replacement of the “substantial lessening or prevention of competition” test, around which a large body of case law has developed, with a lesser and potentially vaguer standard, for example an “appreciable risk” of competitive harm;
• The adoption of presumptions, “bright line”, or reverse onus rules designating certain actions in concentrated sectors as reflective of abuse of dominance; without full consideration of their actual effects or the context in which such actions are taken;
• The possibility of the Bureau issuing remedial orders without the necessity to show an intent to cause competitive harm or demonstration of actual harm;
• The potential to label a firm or firms as “dominant” based solely on market share, without consideration of other relevant indicators of the state of competition in a particular market.  

Such reforms could lead to substantial confusion among businesses as to precisely what conduct is off side the Act, as opposed to an instance of vigorous competition.  Far from improving competition, these proposed changes could lead firms to be overly cautious and forego actions and collaborations that could be pro-competitive and of benefit to consumers and the economy as a whole.  Relaxing of the standard is particularly inappropriate given increased powers of the Bureau to seek remedial orders or multi-million-dollar fines and the newly created right of private parties to initiate abuse of dominance proceedings. 

The CP appears to take particular aim at the competitive impact of large players which allegedly control digital platforms.  However, the language used is broad enough to encompass business-to-business platforms. Such B2B platforms are invariably developed to stimulate innovation and should be considered based on what they contribute to innovation and pro-competitive markets, rather than be caught by some per se definition.  This potential reform could have significant unintended consequences because it appears to stem from concern over a select few digital players whose conduct differs from the way other market players utilize digital platforms.

Competitor Collaborations

The CP raises the prospect of further intervention by the Bureau to examine collaborations amongst competitors, including with respect to buy-side agreements.  We would be concerned by any movement towards defining competitor collaborations as problematic by definition and potentially subject to the criminal conspiracy provisions of the Act.  We equally question the suggestion that the law should “deem or infer agreements more easily” for purposes of making them subject to the provisions dealing with civilly reviewable conduct.  Nor would we support lowering the standard of a “substantial lessening or prevention of competition” in such a review.

Such collaborations are often aimed at pursuing innovation, product development and new market entry and are most often benign and even pro-competitive.  The CP even references research to this effect.  Companies are collaborating more often on research and development to help solve some of the more perplexing product innovation and development challenges and in areas where the cost of such R&D may be prohibitive for any one firm.  Indeed, many such cooperative efforts are designed to pursue positive outcomes for society. For example, several Canadian retailers have established joint programs that reduce and recycle packaging waste. Canada’s oil sands companies are sharing research on technologies that can greatly reduce greenhouse gas emissions. As well, the ability of energy industry competitors to share infrastructure and avoid redundancy lowers the costs to users of the infrastructure and reduces the environmental impacts of multiple, separate facilities. Such competitor collaboration also creates new avenues for Canada to achieve the Competition Act goals of facilitating the export of Canadian products and enabling Canadian industry to compete more effectively in global markets.  In the financial sector, Canada’s banks share information to mitigate the risk of fraud and money laundering, and yet technically this could be considered an “arrangement” to withhold services from a customer or group of customers.

In the case of buy-side agreements, they also are likely to have a pro-competition and pro-consumer impact. Joint-buying is particularly beneficial for small to medium sized companies that do not, on their own, have the buying power to secure inputs at costs that would facilitate being able to offer a more competitive price to consumers.

With supply chain disruptions occasioned by the pandemic and the war in Europe, more companies have established arrangements that ensure access to essential inputs. This has allowed them to offer goods to consumers on a more timely and cost-effective basis.  Companies that rely on critical minerals to produce products as varied as electric vehicles, cell phones, computers and solar panels are also likely to look at joint buying as a means to secure supplies at reasonable cost and to thwart efforts by some unscrupulous countries to seek to control supply of essential materials for geopolitical reasons.  

Artificial Intelligence

The CP raises the possibility that the Act could be used as a tool to regulate firms which may seek to use artificial intelligence (AI) as a means to avoid detection of anti-competitive behaviour.  Whether or not this is a real threat is an open question.  As the CP itself acknowledges, the potential to use AI to facilitate collusion without actual human direction is at present a “theoretical challenge”.  More importantly, Bill C-27 is currently before Parliament and would, amongst other things, create the office of AI and Data Commissioner with the responsibility to regulate the use of AI.  The government should be careful not to create confusion and overlap between the roles of the Competition Bureau, federal and provincial agencies responsible for privacy and this new AI and Data Commissioner.  Such an outcome would lead to further fragmentation in the regulatory landscape and could easily stifle, rather than promote, innovation and competition.

Administration and Enforcement of the Law

We appreciate the view of Bureau officials that they often find themselves without sufficient resources to investigate and take action against what appear to them to be cases of anti-competitive conduct.  We agree that upholding competition in the Canadian marketplace requires vigorous enforcement, and the Bureau should be provided with sufficient resources to effectively carry out its legislated mandate.  But we would have concerns with the suggestion that the Competition Commissioner should be granted additional powers to issue interim orders to halt potentially harmful conduct pending a final determination.  There may be the unusual case where justification for such intervention is manifest and necessary to prevent irreparable harm.  But as a general rule, the Bureau should not have the power to investigate, prosecute and essentially adjudicate cases.  This may result in the Bureau taking action that materially impacts a firm’s ability to carry out its business without affording the aggrieved business a chance to answer the charges, contrary to our commonly accepted principles of law.  

Right of private access. The 2022 Budget Implementation Act (BIA) granted private parties access to the Competition Tribunal (“the Tribunal”) to bring forward cases of alleged abuses of a dominant position.  The CP suggests private access might be extended to allow access to the courts to sue for damages.  Given the BIA provision is less than a year old, at the very least, the government should wait to see how this new right of access to the Tribunal works in practice and how effective it proves to be, before contemplating expanding it.

More fundamentally, we question whether the right to pursue private actions for damages will in fact lead to more effective remedies for cases of anti-competitive behaviour.  While we support strong enforcement of the Act, it is quite likely that this kind of provision would encourage class action lawsuits.  Faced with such litigation, many firms would choose to settle to avoid the cost, management distraction and uncertainty of outcome.  We are concerned about creating more impetus for lawsuits, the goal of which is often to extract a settlement from the defendant, without any real prospect of having the alleged behaviour tested in court to see if it meets the legal test of abuse of dominance. It also could encourage tactical litigation by competitors designed to chill aggressive but legitimate competitive behaviour. The CP at least acknowledges the risk that private access could lead to frivolous and vexatious litigation. However, few concrete ideas are offered as to how to control such abuse. 

Market studies.  The idea of granting the Bureau new powers to conduct “market studies” has been a feature of several past reform initiatives but has never been acted upon, and for good reason. The Bureau currently can avail itself of voluntary information requests, which strike the correct balance by encouraging firms to share their insights into markets they know well without placing them under an undue burden to generate additional data and financial information. The Retail Grocery Market Study is a recent example of the success of this approach, as is the Bureau’s 2017 study on “Technology-led innovation in the Canadian financial services sector”.

Should the government decide to proceed with providing the Bureau with enhanced market study powers, any additional powers should be tightly constrained to prevent overly broad production orders, be limited to truly relevant information and provide specific protections for privileged information.  There also should be appropriate guardrails on the ability to compel evidence and time limits placed on the duration of studies. This would avoid placing an unreasonable burden on companies and deter the possibility of prolonged uncertainty in the marketplace as to how the study would be used. And to avoid overuse by the Bureau, the Minister of Science, Innovation and Industry should be required to approve a formal market study.

Repeal of Section 49

We question the continued relevance of section 49 of the Act given that the potential for federal financial institutions to collaborate to fix interest rates or fees is already covered by the general conspiracy provisions of the Act.  We suggest that section 49 should be deleted as part of the next reform effort.  It is redundant, since similar provisions are now found in the Bank Act; it has resulted in zero enforcement actions; and it is discriminatory in that it applies only to federal financial institutions and not provincial agencies such as credit unions.

Next Steps

The CP provides little detail on the next steps in development of proposed reforms to the Act.  Our ability to offer a responsive submission also has been hampered by the lack of a clear indication of government priorities or preferred options amongst the many possible reforms discussed.  Based on past reform efforts, we expect there will be further detailed consultations and discussions before the government proceeds to place a bill before Parliament. 

The government’s decision to put forward several substantive amendments in the 2022 Budget Implementation Act without first engaging in meaningful consultation with affected parties, or careful review by Parliament, is not a practice that should be repeated.  We trust that the next stage of the reform process will consist of careful consideration, and a clear articulation, of the most evident areas for reform, buttressed by robust engagement with the business community and other affected parties. This should be followed by a draft bill with clear legislative language that is also subject to full consultation.  A much shorter list of essential issues will allow them to get the attention they deserve, improve the quality of the consultation process and ensure development of “fit for purpose” solutions without the risk of unintended negative consequences.

When a bill to reform the Competition Act is presented to Parliament it should stipulate a period of at least 12 months before it comes into force to ensure affected parties have sufficient time to make any necessary changes.  It should also not apply retroactively to impugn past lawful conduct.