This Bulletin is intended for public consultation. It describes the Bureau’s preliminary guidance on its approach to the June 2022 amendments to the abuse of dominance provisions (sections 78 and 79) of the Competition Act.
October 25, 2023
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Aussi offert en français sous le titre Bulletin sur les modifications des dispositions sur l’abus de position dominante.
Table of contents
- Executive summary
- Overview of the abuse of dominance provisions
- Updated definition of anti-competitive act
- New anti-competitive act
- Competitive effects
- Administrative monetary penalties
- Private access
- Hypothetical examples
- On June 23, 2022, amendments to the Competition Act (Act)Footnote 1 came into force, including significant amendments to sections 78 and 79 (the abuse of dominance provisions). Key amendments include:
- The abuse of dominance provisions now clearly apply to conduct that is intended to harm competition (not just conduct that is intended to harm a competitor).
- The maximum administrative monetary penalty (AMP) for an abuse of dominance has significantly increased.
- Private parties can now apply to the Competition Tribunal (Tribunal) to stop abuses of dominance in certain circumstances.
- This Bulletin provides preliminary guidance on our approach to these amendments. It is designed to be read alongside the Abuse of Dominance Enforcement Guidelines (Guidelines).
- Further amendments may be made following the Government’s ongoing review of the Act. We intend to revise the Guidelines following the Government’s review as appropriate.
2. Executive summary
- The amendments that came into force on June 23, 2022, make various changes to the abuse of dominance provisions. In some cases, the amendments clarify or strengthen the provisions. In other cases, the amendments do not significantly change our approach. This section summarizes our views.
- A definition for “anti-competitive act” has been added to section 78. This definition clarifies that the abuse of dominance provisions apply to conduct that is intended
- to have a negative predatory, exclusionary, or disciplinary effect on a competitor, or
- to harm competition.
- Agreements between competitors: Agreements among competitors may reduce their ability or incentive to compete;
- Information sharing: Making competitively sensitive information more transparent may increase the risk of conscious parallelism, a form of coordination between firms without an agreement between them;
- Contracts that reference rivals:Footnote 2 Contractual terms that depend on competitors in some way, such as most-favoured nation (MFN) clauses, may reduce incentives for competitors to compete as vigorously as they otherwise would, facilitate conscious parallelism or exclude competitors; and
- Serial acquisitions: Dominant firms may render a market less competitive by making a series of acquisitions.
- We provide hypothetical examples of how we may analyze these types of conduct at the end of this Bulletin.
- Conduct intended to harm competition may be particularly relevant in situations where several firms are jointly dominant. We provide additional guidance on our approach to assessing joint dominance and joint conduct.
- A new example has been added to the non-exhaustive list of anti-competitive acts in section 78: “a selective or discriminatory response to an actual or potential competitor for the purpose of impeding or preventing the competitor’s entry into, or expansion in, a market or eliminating the competitor from a market.” This new example clarifies the scope of section 78. However, considering the list has always been non-exhaustive, we believe that the abuse of dominance provisions previously applied to this type of conduct.
- A list of factors that the Tribunal may consider when assessing the competitive impacts of an abuse of dominance has been added to subsection 79(4). These additions provide examples of factors relevant to assessing competitive effects and a catch all (“any other factor that is relevant”). Since we considered these factors prior to the amendments, this addition does not change our enforcement approach.
- Potential AMPs under the abuse of dominance provisions have been increased. We believe that the principles set out in the Guidelines for AMPs continue to apply. We will seek AMPs that are more than a “cost of doing business”, but are proportionate and serve their statutory purpose.
- Private parties can now apply to the Tribunal for an order under the abuse of dominance provisions if they are directly and substantially affected by anti-competitive conduct.
3. Overview of the abuse of dominance provisions
- Simply being a dominant firm or a monopolist does not engage the abuse of dominance provisions. A dominant firm must also engage in conduct that reduces, or is likely to reduce, the level of competition in a market.
- Section 78 defines an “anti-competitive act” and includes a non-exhaustive list of examples. As such, conduct not listed under section 78 may still be an anti-competitive act.
- Subsection 79(1) includes three requirements for an abuse of dominance:
- 79(1)(a): one or more personsFootnote 3 must substantially or completely control a class or species of business throughout Canada or any area thereof;
- 79(1)(b): that person or those persons must be engaging or have engaged (within the previous three years) in a practice of anti-competitive acts; and
- 79(1)(c): the practice must have had, be having or be likely to have the effect of preventing or lessening competition substantially in a market.
- Applications under the abuse of dominance provisions are heard by the Tribunal. Where all three requirements of section 79 are met, the Tribunal may prohibit the anti-competitive conduct. The Tribunal may also direct the dominant firm to pay an AMP or to take any action that is reasonable and necessary to overcome the anti-competitive effects of the conduct.
- For more information on the abuse of dominance provisions, see our Guidelines.
4. Updated definition of anti-competitive act
- The defining characteristic of an anti-competitive act is its purpose. The amendments codify the definition of an anti-competitive act from the case lawFootnote 4 and expand the definition to include any other conduct intended to have a negative effect on competition. In particular, an anti-competitive act is now defined as “...any act intended to have a predatory, exclusionary or disciplinary negative effect on a competitor, or to have an adverse effect on competition”.Footnote 5 Accordingly, we will continue to assess the purpose of the conduct as articulated in the Guidelines, including any intended harm to competition. This involves assessing:
- Subjective evidence of intent, for example, business documents describing the purpose of conduct;
- The reasonably foreseeable consequences of the conduct, as we can infer that firms intended the reasonably foreseeable consequences of their actions; and
- Any pro-competitive or efficiency-enhancing justifications for the conduct.
- Conduct intended to harm competition includes any form of conduct that has the purpose of negatively affecting the competitive process. In particular, this may include conduct that softens competition, benefitting one or more competitors. This might include:
- Agreements Between Competitors: Agreements among competitors may reduce their ability or incentive to compete;
- Information Sharing: Making competitively sensitive information more transparent may increase the risk of conscious parallelism, a form of coordination between firms without an agreement between them;
- Contracts that Reference Rivals: Where contractual terms depend on competitors in some way, such as MFN clauses, they may reduce incentives for competitors to compete as vigorously as they otherwise would, facilitate conscious parallelism or exclude competitors; and
- Serial Acquisitions: Dominant firms may render a market less competitive by making a series of acquisitions.
- Each of these types of conduct is discussed further below, and this Bulletin concludes with hypothetical examples of how we may analyze these types of conduct. Importantly, this Bulletin does not provide an exhaustive list of all types of conduct that may intentionally harm competition. These categories may overlap with each other or with predatory, exclusionary or disciplinary conduct described in the Guidelines. For example, as set out below, contracts that reference rivals may also serve as a means to share information or exclude competitors.
A. Agreements between competitors
- Agreements between competitors can take many different forms. For example, competitors could enter into a licensing agreement for intellectual property or could form a joint venture to produce goods.
- Some agreements between competitors benefit competition. However, other agreements between competitors may limit the ability of, or incentive for, competitors to compete independently. Consequently, such agreements may be reviewable under the abuse of dominance provisions where they have an anti-competitive purpose and have the effect or the likely effect of harming competition substantially.
- Other sections of the Act may also apply to agreements between competitors, including section 45, which deals with criminal conspiracies, and section 90.1, which deals with civilly reviewable competitor collaborations. Considering the amendments, more questions may now arise regarding whether we would take action under the abuse of dominance provisions or those other provisions.Footnote 6
- If an agreement gives rise to a criminal offence under section 45, we will refer the matter for criminal prosecution rather than bring an application under the abuse of dominance provisions or section 90.1.
- If an agreement satisfies the requirements of both the abuse of dominance provisions and section 90.1, we will determine the appropriate provision to pursue on a case-by-case basis. Circumstances where we may take action under the abuse of dominance provisions rather than section 90.1 include:
- Where there is clear evidence of anti-competitive intent;
- Where an agreement or arrangement facilitates, or is part of a broader practice of, anti-competitive acts; and
- Where a mandatory order under subsection 79(2) or an AMP is required for an effective and appropriate remedy.
- We may simultaneously investigate an agreement under the abuse of dominance provisions and section 90.1. However, where we believe the requirements of the abuse of dominance provisions are met and the requirements of section 90.1 are not met (or vice versa), we will take action under the applicable provision.
B. Information sharing
- Information sharing may facilitate conscious parallelism, a form of coordination,Footnote 7 between competitors. Therefore, information sharing may be an anti-competitive act intended to harm competition.
- When firms are able to sustain pricesFootnote 8 above the competitive level despite making their pricing decisions independently, it may be due to conscious parallelism, where each firm sets its price with a recognition of its competitor’s anticipated response. While each firm sets its price with a recognition of its competitor’s likely response, conscious parallelism occurs without an agreement between the firms. As such, there is no “meeting of the minds” between the firms to raise prices.Footnote 9
- In and of itself, conscious parallelism does not raise issues under the abuse of dominance provisions. However, we may investigate conduct that makes conscious parallelism more likely or effective, such as information sharing.
- Firms may increase the risk of conscious parallelism by disclosing, sharing or gathering competitively sensitive information that would otherwise not be accessible to competitors, which could include pricing, costs or other strategic information. This increased risk occurs because conscious parallelism, like other forms of behaviour, may occur and be sustainable where firms are able to:
- Individually recognize mutually beneficial terms of coordination;
- Monitor one another’s conduct and detect deviations from the terms of coordination; and
- Respond to any deviations from the terms of coordination through credible deterrent mechanisms.Footnote 10
- Regarding how information sharing can increase the risk of conscious parallelism, consider, for example, a market where two competing firms sell a product for $10 and where both firms know each other’s prices. In this example, conscious parallelism would occur if one firm increases its price to $12, the competing firm observes and makes an independent business decision to match the price increase and, as a result, both firms profit from the new price. Alternatively, if prices were negotiated confidentially with individual buyers, the same conscious parallelism would not occur because the competing firm would not be able to observe and match the price increase of its competitor. As such, information sharing regarding each other’s prices can increase the risk of conscious parallelism.
- There are several ways in which firms may share competitively sensitive information. For example, firms may choose to unilaterally disclose competitively sensitive information with the hope that competitors will reciprocate or factor that information into their own decision-making. In other circumstances, firms may share competitively sensitive information through explicitly coordinated activities, such as through trade associations or joint ventures. In other circumstances, firms may adopt market practices such as meet-or-release clauses that result in mutual knowledge of pricing decisions.Footnote 11
- Information sharing can also be indirect. For example, an industry participant may provide commercially sensitive information to a third-party algorithm developer that provides pricing recommendations to industry participants. If the developer’s algorithm considers commercially sensitive information provided to the developer by other firms,Footnote 12 this could result in coordinated outcomes despite no direct information sharing between industry participants.
- In general, conduct that increases the transparency of competitively sensitive information is concerning where it provides competitors with information that they would not otherwise have access to that contributes to recognizing or achieving coordinated outcomes, or monitoring compliance with them. To this end, we may consider factors such as:
- The degree of competitive sensitivity of the information shared;
- Whether the information shared relates to current or future activities or to historical information that is likely to indicate future decisions;
- The level of aggregation of information shared, and whether information is attributable to a specific competitor; and
- Any business justification for the information shared.
C. Contracts that reference rivals
- Contracts that reference rivals may negatively affect competition. A contract references rivals when it contains terms that relate to a different commercial relationship involving at least one of the two contracting parties. There are various types of contracts that reference rivals, including:
- MFN clauses, which may require a supplier to offer its most favourable price or terms to a customer;
- Price parity clauses, which may require a seller to maintain identical prices across different distribution channels;
- Non-discrimination clauses, which may require a distributor to not provide more favourable treatment to any other supplier’s products; and
- Meet or release clauses, which may require a customer to give its current supplier the opportunity to match a lower-priced offer from a competitor before the customer can accept that offer.Footnote 13
- Contracts that reference rivals can be pro-competitive and benefit consumers. For example, a commitment by a supplier to charge a customer a price no higher than that charged to any other customer could lower prices without regularly re-negotiating or amending contracts by making them more flexible to changing circumstances.
- However, contracts that reference rivals can also harm competition. In particular, contracts that reference rivals may (1) reduce the incentive or ability to compete, (2) facilitate coordination or (3) exclude competitors. In some cases, these harms may occur simultaneously and reinforce each other.
- Our analysis of the actual, likely or reasonably foreseeable effects of contracts that reference rivals will strongly depend on their nature and market circumstances. In general, contracts that reference rivals will be more likely to harm competition substantially when used by dominant firms.
a) Reducing incentives or ability to compete
- Contracts that reference rivals can potentially soften competition by affecting the ability of, or incentive for, competitors to compete. For example, consider a dominant retailer that requires a supplier to offer it sufficient compensation to match any lower retail price charged by a competing retailer. This requirement could harm competition by:
- Discouraging price competition by reducing the benefit that competing retailers receive from undercutting the price of the dominant retailer, which will be able to match the price without any loss of margin;
- Discouraging suppliers from providing lower wholesale prices to competing retailers as the supplier may also have to compensate the dominant retailer; or
- Incentivizing the supplier to limit price competition by competing retailers, such as by imposing minimum pricing policies, to avoid compensating the dominant retailer.Footnote 14
- Other forms of conduct may similarly reduce incentives to compete. For example, a dominant retailer that implements a policy to match any lower price offered by a competitor (similar to a meet-or-release clause) may soften competition. In this example, a competitor may have less incentive to lower its price if it anticipates the dominant firm will match the lower price. A dynamic pricing algorithm that automatically monitors and matches the prices of competitors could also have this effect.Footnote 15
b) Facilitating coordination
- In certain circumstances, contracts that reference rivals may facilitate conscious parallelism in a market.
- As mentioned above, contracts that reference rivals may also facilitate information sharing. For example, a meet-or-release clause that requires a customer to disclose to their current supplier when they receive a lower-priced offer from a competing supplier can increase transparency in market pricing.
- Contracts that reference rivals may also reduce incentives to deviate from a coordinated outcome. In many cases, this effect arises because of how the contract affects unilateral incentives to compete. For example, if the same meet-or-release clause results in competitors believing that they will not increase sales by lowering their prices, they will have less incentive to deviate from the terms of coordination.Footnote 16
- In addition, contracts that reference rivals can also exclude them. For example, consider a new entrant who seeks to establish itself in a market by offering low prices to select customers in order to scale its operations to compete effectively. A meet-or-release clause from a competitor may allow that competitor to selectively match the entrant’s price, denying the entrant scale and rendering it a less effective competitor. Exclusionary conduct is discussed further in the Guidelines.
D. Serial acquisitions
- While individual acquisitions are generally reviewed under the merger provisions of the Act, a series of acquisitions may engage the abuse of dominance provisions in certain circumstances. Serial acquisitions may also be coupled with other anti-competitive conduct to form a broader practice of anti-competitive acts.Footnote 17
- Acquisitions can be pro-competitive. For example, they may combine complementary assets to help the merged firm compete. They may also serve as a means for vigorous competitors to enter markets. However, in some cases, acquisitions may have an anti-competitive purpose and therefore be reviewable under the abuse of dominance provisions.
- When assessing serial acquisitions under the abuse of dominance provisions, we examine the collective impact and purpose of the acquisitions. When examined individually, each acquisition may have limited competitive effects. However, when examined collectively, the series of acquisitions may have substantial competitive effects. As such, serial acquisitions can raise similar competition risks as individual transactions that we review under the merger provisions. For example, serial acquisitions may:
- Eliminate several existing competitors who currently exercise competitive discipline on the dominant firm;
- Eliminate potential entrants or nascent competitors who may become a competitive threat to the dominant firm in the future;
- Raise barriers to entry or expansion for existing or potential competitors;
- Make price coordination between remaining competitors more likely or effective; or
- Facilitate, in vertical transactions, the foreclosure of inputs or markets to competitors or customers.
- Each of these effects is discussed in more detail in our Merger Enforcement Guidelines. In general, the same principles apply when assessing the competitive effects of a series of acquisitions under paragraph 79(1)(c).Footnote 18
- There may be circumstances where an individual transaction is considered under the abuse of dominance provisions. In some cases, a transaction may be anti-competitive because it increases the ability or incentive of the merged firms to engage in anti-competitive conduct, like foreclosing access to inputs or markets.Footnote 19 Where we are able to remedy or prevent this type of anti-competitive transaction prior to its completion under the merger provisions, this will generally be preferable to pursuing a post‑merger remedy under the abuse of dominance provisions. However, it may be that we determine a transaction facilitated other anti-competitive conduct after it is completed. A single transaction could also be otherwise coupled with other anti-competitive conduct that collectively harms competition. In such cases we may consider the transaction under the abuse of dominance provisions, alongside the other anti-competitive conduct.Footnote 20
- We may simultaneously investigate a transaction under both the merger provisions and the abuse of dominance provisions where it appears that the transaction may be a part of a practice of anti-competitive acts. We may also investigate acquisitions that we have previously reviewed under the merger provisions as part of a practice of anti-competitive serial acquisitions under the abuse of dominance provisions.Footnote 21
E. Application to joint conduct
- The abuse of dominance provisions can apply when several firms are jointly dominant in a market. As discussed in the Guidelines, a group of firms is jointly dominant where its members can collectively exercise a substantial degree of market power. This may occur where there is insufficient competition both from firms outside of the group and between firms within it.
- Simply being jointly dominant does not engage the abuse of dominance provisions. Similar to individually dominant firms, jointly dominant firms must also engage in a practice of anti-competitive acts that harms competition substantially. Since anti-competitive acts may strengthen joint dominance, conduct that has the purpose of harming competition may be particularly relevant because it can soften competition among the jointly dominant firms. For example, conduct that facilitates conscious parallelism may allow jointly dominant firms in a concentrated market to increase their prices.
- Joint conduct may engage the abuse of dominance provisions regardless of whether it is coordinated between the jointly dominant firms. In particular, it is not necessary for there to be any agreement between firms relating to the conduct, although such an agreement may be relevant to our analysis. For example, the abuse of dominance provisions may apply when:
- Several firms agree to engage in anti-competitive conduct;
- An agreement between firms is itself anti-competitive conduct as discussed above; or
- A firm correctly recognizes that if it engages in anti-competitive conduct its competitors will likely reciprocate.
- In many cases, joint conduct involves several jointly dominant firms adopting similar or identical practices that collectively harm competition. However, jointly dominant firms engaging in different, but complementary, practices may also contravene the abuse of dominance provisions. Additionally, we do not consider it necessary that all jointly dominant firms engage in anti-competitive conduct to contravene the abuse of dominance provisions. For example, if two of three jointly dominant firms were engaging in conduct with an anti-competitive purpose that harmed, or was likely to harm, competition substantially, we may take action under the abuse of dominance provisions.
5. New anti-competitive act
- The amendments add a new example of an anti-competitive act to the non-exhaustive list of examples in subsection 78(1), namely:
- (j) a selective or discriminatory response to an actual or potential competitor for the purpose of impeding or preventing the competitor’s entry into, or expansion in, a market or eliminating the competitor from a market.
- Because paragraph 78(1)(j) describes an act with a negative exclusionary purpose regarding a competitor, it does not expand the scope of the abuse of dominance provisions. In fact, we investigated allegations of this nature prior to the amendments.
- When assessing allegations of this type, we carefully consider whether a response represents vigorous competition that ultimately benefits consumers rather than anti-competitive conduct.
6. Competitive effects
- The amendments added several factors to subsection 79(4) that the Tribunal may consider when assessing if a practice of competitive acts has, or is likely to, prevent or lessen competition substantially, namely:
- the effect of the practice on barriers to entry in the market, including network effects;
- the effect of the practice on price or non-price competition, including quality, choice or consumer privacy;
- the nature and extent of change and innovation in a relevant market; and
- any other factor that is relevant to competition in the market that is or would be affected by the practice.Footnote 22
- Prior to these amendments, where appropriate we considered each of these factors, which were already referenced in the Guidelines. Consequently, these additions do not change our enforcement approach.
- Regarding consumer privacy, we consider it to be a relevant factor if it is a dimension of non-price competition. For example, consumer privacy is relevant if a dominant firm can exclude a competitor who would otherwise compete through offering greater privacy protection.
7. Administrative Monetary Penalties
- The amendments significantly increase the maximum AMPs available under section 79. Prior to the amendments, the maximum AMP was $10 million for an initial order and $15 million in the case of a subsequent order. Following the amendments, the Tribunal may now order AMPs not exceeding the greater of:
- $10,000,000 and, for each subsequent order under either of those subsections, an amount not exceeding $15,000,000, and
- three times the value of the benefit derived from the anti-competitive practice, or, if that amount cannot be reasonably determined, 3% of the person’s annual worldwide gross revenues.
- As a result, we may seek higher AMPs than were possible prior to the amendments. When considering whether an AMP and its amount are appropriate, the principles set out in the Guidelines continue to apply. In particular, we will seek AMPs that are more than a "cost of doing business", are proportionate and serve their statutory purpose: to promote conduct that is in compliance with the purposes of the abuse of dominance provisions.
8. Private access
- The amendments allow private parties to make applications to the Tribunal under the abuse of dominance provisions. Prior to the amendments, only we could bring abuse of dominance applications.
- A private party must be granted leave before it can make an application to the Tribunal. As set out in subsection 103.1(7), the Tribunal may grant leave where it has reason to believe that party is directly and substantially affected in their business by any practice that could be subject to an order under the abuse of dominance provisions. The Tribunal will not hear an application if it is currently subject to an inquiry, or an application to the Tribunal, by us or if it was previously subject to an inquiry that was discontinued by us because of a settlement.
- In general, we investigate all credible allegations of abuse of dominance to the extent we consider appropriate. However, in some cases, a private party may choose to pursue private access if they believe they are better positioned than us to bring an application or if they disagree with a decision by us not to proceed with a matter.
- For more information on our approach to private access, see our Information Bulletin on Private Access to the Competition Tribunal. We intend to update that document.
9. Hypothetical examples
A. Agreements between competitors and information sharing
- SEMAPHORE and HELIOGRAPH are the only two suppliers of modular communications equipment (COMMS) in the northern part of a province. Each supplier has a market share of approximately 50 percent.
- Businesses use COMMS to communicate in remote locations where there is limited access to internet and other communication methods. Because of their remote location, installing and servicing COMMS require complex logistics, including lengthy travel by technicians. COMMS prices are typically negotiated between the supplier and the business and are confidential.
- Two years ago, SEMAPHORE and HELIOGRAPH entered into a joint venture (Venture) to install and service COMMS. Before this, each company did so independently. Rather than each company maintaining full networks of technicians and facilities across the northern part of a province, the Venture consolidated the operations of both suppliers. SEMAPHORE and HELIOGRAPH maintain that the terms of the Venture are limited to installing and servicing COMMS and do not address joint selling or pricing.
- Since the Venture began, many customers noticed that COMMS prices increased. They also noticed that prices from SEMAPHORE and HELIOGRAPH became increasingly similar. Several of these customers brought their concerns to us.
- During our investigation, we discovered that the Venture provides SEMAPHORE and HELIOGRAPH with significant transparency regarding each other’s prices, operational costs and sales volumes to particular customers.
- For simplicity, please assume:
- The relevant product market is the sale and service of COMMS;
- The relevant geographic market is the northern part of the province;
- SEMAPHORE and HELIOGRAPH are jointly dominant in that market;Footnote 23 and
- The information sharing is not a criminal offence under section 45 to fix prices, allocate markets or restrict output.Footnote 24
- In this case, we would likely conduct an investigation under both sections 79 and 90.1. If both sections applied, in determining which provision to pursue, we would consider whether there was evidence of an anti-competitive purpose and whether a mandatory order under subsection 79(2) or an AMP is required for an effective and appropriate remedy. Regardless of provision, we would likely focus on whether the information sharing between SEMAPHORE and HELIOGRAPH through the Venture led to higher prices.Footnote 25
- Under section 79, we would assess if the purpose of the information sharing was to adversely affect competition. This would include considering any evidence of subjective intent as well as the reasonably foreseeable consequences of the information sharing. When assessing the reasonably foreseeable consequences, we may consider any evidence the information shared was used to inform pricing strategies or that prices increased following its implementation. The types of information shared during the Venture – namely prices, operational costs, and sales volumes – are typically considered competitively sensitive and strongly support an inference of an anti-competitive purpose.
- Business justifications alleged by SEMAPHORE or HELIOGRAPH could include that sharing information was necessary for the Venture and was therefore pro-competitive. Without a strong rationale for why the information sharing was necessary, we would likely conclude that it was anti-competitive. On the other hand, evidence that the information sharing was necessary for the Venture, and that the Venture resulted in cost savings, would support SEMAPHORE and HELIOGRAPH’s justification. However, such evidence would be weighed against any evidence of an anti-competitive intent to determine the overall purpose of the information sharing.Footnote 26
- We would then assess if the information sharing led to, or would likely to lead to, a substantial lessening or prevention of competition. This would include assessing evidence that the Venture resulted in raising prices.
B. Contracts that reference rivals
- COUNTRYLOVE is Canada’s largest online retailer of flags and memorabilia (F&M), which are used by its customers to celebrate their favourite countries.
- COUNTRYLOVE sells an unparalleled variety of F&M products, and many customers have come to automatically turn to them for their F&M needs.
- COUNTRYLOVE sources its products from a variety of suppliers, many of whom also sell to smaller online retailers. COUNTRYLOVE accounts for about 85 percent of all online sales of F&M in Canada. Smaller online retailers account for the remaining 15 percent.
- As part of its agreements with suppliers, COUNTRYLOVE recently began requiring that if another retailer sells the same product as COUNTRYLOVE at a lower price, the supplier must provide COUNTRYLOVE with compensation sufficient to permit it to match the lower price. COUNTRYLOVE claims that these terms are necessary to ensure that COUNTRYLOVE can offer competitive prices and to prevent consumers from using COUNTRYLOVE’s extensive selection to identify the particular F&M they wish to purchase and then buying it from a competitor at a lower price (that is, competitors are “free-riding” on COUNTRYLOVE’s services).
- COUNTRYLOVE’s new policy was reported on in several media outlets, which attracted the attention of our proactive intelligence gathering unit.
- For simplicity, please assume:
- The relevant product market is the online sale of F&M;
- The relevant geographic market is Canada; and
- COUNTRYLOVE is dominant in that market.
- In this context, our investigation would assess whether COUNTRYLOVE’s contractual terms have an anti-competitive purpose. This could include the intent to reduce the incentive or ability of competitors to compete, facilitate conscious parallelism or exclude competitors.
- Regarding the incentive or ability to compete, we would likely consider at least two theories of harm: first, whether competing retailers may be deterred from undercutting COUNTRYLOVE because they know COUNTRYLOVE will be able to match any lower price without any loss of margin; and second, whether the suppliers may be able to increase the prices they charge to, or impose pricing restraints on, small retailers to ensure they do not undercut the prices of COUNTRYLOVE, in order to avoid having to pay compensation.
- When assessing whether the contractual terms have the purpose of facilitating conscious parallelism, we would consider whether they result in sharing competitively sensitive information. For example, if the terms result in suppliers sharing information on the prices they charge COUNTRYLOVE’s competitors, or sharing information about a competitor’s future pricing plans, we may have concerns. We would also consider whether the contractual terms reduce incentives for competitors to lower their prices from coordinated levels.
- Additionally, we would consider whether the contractual terms intend to exclude competitors. For example, we may consider whether a competitor must be able to offer lower prices than COUNTRYLOVE to effectively compete. If so, the contractual terms may deter potential competitors from entering the F&M market and competing with COUNTRYLOVE.
- When assessing these potential anti-competitive purposes of COUNTRYLOVE’s contractual terms, we would consider any evidence of subjective intent and the reasonably foreseeable effects of those terms. Evidence of subjective intent may include business documents related to COUNTRYLOVE’s concern that a competitor that offers lower prices could become a more effective competitor.
- We would also assess any evidence in support of COUNTRYLOVE’s asserted business justification for the terms and consider whether it counterbalances any evidence of anti-competitive intent. This may include assessing if, prior to the contractual terms, there was any impediment to COUNTRYLOVE negotiating low prices with suppliers that did not depend on the pricing of competitors. If there was no such impediment, this would suggest the contractual terms are not necessary for COUNTRYLOVE to deliver low prices to consumers, and therefore are less likely to be justified. We would also assess COUNTRYLOVE’s claims that customers were free-riding on COUNTRYLOVE’s services to purchase F&M products elsewhere for a lower price. This would involve looking for evidence that COUNTRYLOVE would not develop new features or maintain its product line if customers come to COUNTRYLOVE to learn about the products but then purchase them at a lower-priced retailer. As part of this analysis, we may consider whether consumers impose costs on COUNTRYLOVE when they use the website in this way. In either case, we would consider if there was evidence that COUNTRYLOVE competed more vigorously as a result of the contractual terms. This could include comparing COUNTRYLOVE’s actions before and after the contractual terms were imposed.
- When assessing if the contractual terms substantially lessened or prevented competition, or would likely do so, we may consider whether the contractual terms resulted in higher prices. We would also consider any other relevant competitive effects, such as whether the contractual terms diminished non-price competition between online retailers (for example, if it excluded a new entrant who would have introduced a broader product line and therefore greater choice for consumers).
C. Serial acquisitions
- ACCRETIVE is the leading provider of 3D printers in Canada. ACCRETIVE is a first mover in this space, which is characterized by high barriers to entry. As a result, there has been no entry in the market for 3D printers in the last five years. However, a number of small firms have developed complementary products (for example, design software, accessories and parts) that integrate with ACCRETIVE’s 3D printers.
- We have received a complaint from WHITTLE, a small firm claiming to be poised to sell a 3D printer with a number of innovative features that improve the quality and speed of the printing process. For its printer, WHITTLE sources a key component from POSSIBILITY, a manufacturer of parts that can both be used in 3D printers and other applications.
- POSSIBILITY was recently acquired by ACCRETIVE. Following this acquisition, supply to WHITTLE was suspended. According to the complaint, ACCRETIVE continues to provide this component to other companies that do not compete directly with ACCRETIVE. WHITTLE asserts that without POSSIBILITY’s input, it will be unable to bring its innovative 3D printers to market as planned.
- During our investigation into WHITTLE’s complaint, we learned that ACCRETIVE recently acquired two other small firms that provide complementary software to 3D printers and that offered products that would work with any 3D printer. While none of the transactions met the threshold for notification under the Act, information gathered suggests the price paid by ACCRETIVE for each of the three firms far exceeded their estimated value.
- For simplicity, please assume:
- the relevant product market is 3D printers;
- The relevant geographic market is Canada; and
- ACCRETIVE is dominant in that market.
- In this example, we would investigate whether:
- ACCRETIVE’s refusal to provide WHITTLE with the necessary input is a selective or discriminatory response meant to prevent WHITTLE from entering the market for 3D printers; or
- The recent acquisitions were anti-competitive, for example because they directly eliminated potential competition to ACCRETIVE or facilitated other anti-competitive conduct.
- We would investigate whether one or both of these behaviours are part of a practice of anti-competitive acts that harmed, or is likely to harm, competition in Canada substantially.
- To assess whether ACCRETIVE’s refusal to supply WHITTLE was selective or discriminatory, we would investigate the reasons for the refusal. Although WHITTLE claims to meet ACCRETIVE’s requirements to obtain supply, we would confirm this with evidence from ACCRETIVE. In doing so, we would likely assess the circumstances and decision-making surrounding the suspension of supply from ACCRETIVE to WHITTLE and compare them with those surrounding the continuous supply to other firms. Absent compelling evidence that ACCRETIVE’s refusal was justified, we would give significant weight to evidence that ACCRETIVE selectively supplies only firms that do not appear to be a competitive threat.
- To assess whether the purpose of ACCRETIVE’s acquisitions was to harm competition, we would consider any evidence of subjective intent as well as the reasonably foreseeable consequences. This may include gathering information on the rationale for the individual and series of acquisitions. In this instance, we would consider any evidence that ACCRETIVE had concerns that the acquired firms could have become direct competitors. We would seek any evidence from the acquired firms that they intended to enter the market for 3D printers. We would also consider any evidence that the acquisitions removed direct competitors to products or services offered by ACCRETIVE, which could include those that were acquired through the transactions.
- We would also consider any evidence that ACCRETIVE acquired the firms because of concerns that access to the complementary products they produced would have facilitated entry by competitors in the 3D printer market. In comparison, prior to the acquisitions, there may have been a wide range of independent complements that would have had an incentive to work with the new entrants. In this situation, we would give significant weight to evidence that ACCRETIVE stopped supplying WHITTLE while continuing to supply other firms not considered a competitive threat. We may consider whether the other acquisitions could enable similar responses in the future, or otherwise allow for the degradation of service to competitors. Such evidence could lead us to conclude that the acquisitions enabled ACCRETIVE to adopt a selective or discriminatory response to WHITTLE’s potential entry into the market. If we determine that the only anti-competitive conduct was one of the acquisitions and the merger provisions were engaged and would provide an effective remedy, we would likely challenge it as a merger under section 92 if the limitation period has not expired.Footnote 27
- We may also examine whether ACCRETIVE paid a premium to acquire these firms in order to pre-emptively limit competition. For instance, if the price paid by ACCRETIVE for the acquired firms far exceeded their value based on standard valuation tools, this could indicate the price was determined based on anticipated profits from anti-competitive conduct rather than business value and synergies. In that case, we would investigate the justification of the price paid by ACCRETIVE.
- We would also assess any evidence in support of business justifications asserted by ACCRETIVE for the acquisitions. We would then consider whether they counterbalance any evidence of anti-competitive intent. Depending on the business justification asserted, this may include assessing if there was any benefit from the integration of the acquired firms, or whether ACCRETIVE made active use of their assets. If the evidence established that ACCRETIVE acted with anti-competitive intent and that its business justifications were not compelling, we could conclude that ACCRETIVE has engaged in a practice of anti-competitive acts.
- We would then consider whether the acquisitions harmed, or were likely to harm, competition substantially. This would likely include assessing whether any or all of the acquired firms would have developed into a meaningful competitive constraint on ACCRETIVE. When assessing this, we may consider evidence such as the strategic business plans of the acquired firms and whether ACCRETIVE feared that the acquired firms could become competitors. We would also consider any evidence that the acquisitions raised barriers to timely and effective entry for any other potential entrants in the 3D printer market. This may include any internal assessments of ACCRETIVE and views from such potential entrants. We would also consider any competitive effects as a result of reduced direct competition with respect to complements controlled by ACCRETIVE.
- We would also assess the effects of the acquisitions on innovation. Evidence that ACCRETIVE’s conduct may have reduced innovation by itself, the acquired entities, WHITTLE or other potential entrants could support a conclusion that ACCRETIVE’s conduct has substantially prevented competition.
- This publication is not a legal document. It is intended to provide general information and is provided for convenience. To learn more, please refer to the full text of the Act or contact us.
- Final interpretation of the law is the responsibility of the Tribunal and the courts. This Bulletin does not replace the advice of legal counsel and is not intended to restate the law or to constitute a binding statement of how the Commissioner of Competition will proceed in specific matters. The decisions of the Commissioner and the ultimate resolution of issues will depend on the particular circumstances of the matter in question.
How to contact the Competition Bureau
Anyone wishing to obtain additional information about the Competition Act, the Consumer Packaging and Labelling Act (except as it relates to food), the Textile Labelling Act, the Precious Metals Marking Act or the program of written opinions, or to file a complaint under any of these acts should contact the Competition Bureau's Information Centre:
50 Victoria Street
Toll free: 1-800-348-5358
National Capital Region: 819-997-4282
TTY (for hearing impaired) 1-866-694-8389