Response from Food, Health and Consumer Products of Canada to the Competitor Collaboration Guidelines Consultation

I. Introduction

Food, Health and Consumer Products of Canada (“FHCP”) is the national Canadian industry association representing the food, beverage, health and consumer products industry. FHCP’s members range from small, independent, and privately owned companies to large, global multinationals.

The food, health and consumer products industry is the largest manufacturing employer in Canada, generating billions of dollars in annual gross domestic product and purchasing a substantial proportion of Canadian agricultural output. The industry has invested heavily in Canada, not only in respect of its businesses but in respect of Canada’s labelling, health and wellness, as well as environmental sustainability objectives.

FHCP and its members are committed to compliance with all laws regulating the industry, including the Competition Act (the “Act”), as well as to working with government agencies tasked with enforcing those laws and providing its expertise as to how those laws should be interpreted and enforced.

The Draft Competitor Collaboration Guidelines (the “Draft Guidelines”) set out the Competition Bureau’s (the “Bureau”) general approach to assessing collaborations between competitors and is a useful resource for FHCP members. That being said, FHCP believes that the Draft Guidelines could be improved by the addition of a discussion regarding the situation where it is the customer who competes with the supplier. This dynamic is prevalent in the retail grocery and pharmacy sales sector, where many of FHCP’s largest customers are also their most significant competitors through strong private-label product programs. This issue is not limited to the retail grocery and pharmacy sector and has been raised by competition law enforcement agencies in other jurisdictions in connection with the relationship between suppliers and large ecommerce platform operators.

II. Need for Guidance where Customers Compete with Suppliers

While the Draft Guidelines include a discussion regarding dual-distribution agreements at section 2.2.3, this discussion is limited to assessing the potential competition law compliance issues associated with situations where a supplier competes with its customer through the supplier’s direct-to-consumer sales channel. As stated above, FHCP believes that the Draft Guidelines would be improved by also assessing the potential competition law compliance issues associated with the situation where the customer competes with the supplier, as the potential competition law issues raised in this situation are different from those addressed in in section 2.2.3.

Situations where customers compete with suppliers through own-label products are very different from dual-distribution situations, where suppliers sell their products directly to consumers in competition with their own customers, and therefore require separate guidance. As discussed below, these customer-as-competitor situations involve different competition issues because the customer controls the retail price of both products, and the suppliercustomer relationship involves the provision of significant competitively sensitive information from the supplier to the customer, which, the customer is able to use to compete with the supplier in a manner that can negatively impact competition.

These concerns are especially prevalent in the retail grocery and pharmacy sector where suppliers routinely engage in strategic business planning exercises with their retailer customers related to how to best market the supplier’s products and often involve significant financial investments by suppliers (primarily in the form of supplier-funded promotional pricing that reduces the prices paid by consumers).

III. Disclosure of Competitively Sensitive Information

Grocery retailers often have formal or informal policies requiring suppliers to provide detailed competitively sensitive information regarding product composition, manufacturing costs, and ingredient costs. Additionally, grocery retailers require suppliers to provide significant advance notice of planned new product launches (including detailed information regarding the nature of the new product), cost changes, as well as planned promotional activity (generally these are in the form of supplier-funded price discounts) with the individual retailer.

While FHCP does not believe that all of the competitively sensitive information that grocery retailers require their suppliers to provide is necessary to have an effective customer/supplier relationship (for example detailed information regarding product composition, manufacturing costs or ingredients costs), requiring information regarding cost changes, planned promotional activity with the individual retailer and planned new product launches is generally appropriate in the context of the customer-supplier relationship. However, where the retailer offers own-label products that compete with those purchased from the supplier, the provision of competitively sensitive information (in particular, information regarding the supplier’s costs, supplier-funded price promotions, and new products), can raise potential compliance issues, as well as prevent or lessen competition substantially.

The potential competition law compliance concerns regarding the exchange of competitively sensitive information between competitors (in the case of the retail grocery and pharmacy sector, there is generally no “exchange” in that the information flows solely from the supplier to the retailer with competing own-label products) are clearly acknowledged in section 3.7.2 of the Draft Guidelines. Specifically, this section states that the exchange of competitively sensitive information between competitors:

…can result in a substantial lessening or prevention of competition. For example, exchanging pricing information, costs, trading terms, strategic plans, marketing strategies or other significant competitive variables can raise concerns under the Act. Where competitors agree to share competitively sensitive information, it can become easier for these firms to act in concert, thereby reducing or even eliminating competitive rivalry,

In the context of the retail grocery and pharmacy sector, absent appropriate protections, the fact that a retailer can misuse competitively sensitive information provided by a supplier to further the retailer’s competing own-brand products can deter suppliers’ incentives to engage in activities that benefit consumers such as launching innovative products in Canada or funding price promotions, among other initiatives.

With regard to bringing innovative products to market, there have been instances where a supplier has provided significant advance notice and details regarding a planned new product in accordance with the retailer’s applicable new product policy only to have the retailer launch a competing own-label product shortly after the new product is available to Canadian consumers – or in some cases before the supplier has had the opportunity to launch the new product. This is clearly only possible due to the advance notice and information provided by the supplier to the retailer. The potential misuse of new product information by retailer to further their own-label strategy is a disincentive to launching new products in the Canadian retail grocery and pharmacy sector.

Similarly, a supplier must work with retailers to develop a strategy for the promotion of the supplier’s products in the retailer’s conventional (i.e., retail stores) and ecommerce platforms. This typically involves developing a promotional calendar with the individual retailer that details which of the supplier’s products will be on sale, when, for how long and the promotional price. Supplier’s typically fund most, if not all, of the costs associated with the majority of promotional price activity enjoyed by consumers. Where a retailer who offers competing own-label products has full knowledge of the supplier’s promotional program with that retailer, it can use this knowledge to proactively plan whether and how to modify its own-label promotional strategy to counteract that of the supplier. While this may create the appearance of increased competition, the longer-term effect is to reduce the supplier’s incentive to invest in price promotions (both in terms of frequency and discount amount), as the supplier will not obtain the required return on its investment on price promotional activity.

Where a customer of a supplier competes with that supplier through an own-label product, the customer and supplier are competitors. Agreements between them are not just vertical supply agreements, but have the added characteristic of being agreements between competitors.

Thus, the flow of competitively sensitive information between supplier to customer takes place in the context of an agreement between competitors. That information flow can therefore attract scrutiny under the Act, in particular under section 90.1, as it has the potential to substantially lessen or prevent competition between branded and own-label products. Additionally, in the retail grocery and pharmacy sector suppliers are often compelled to provide retailers with competitively sensitive information beyond that which is truly necessary to ensure the efficient functioning of the supplier-customer relationship. Where this occurs, there may be grounds to question why the customer insists on obtaining the information. Given the competition issues that these information flows raise, it is both appropriate and useful for the Draft Guidelines to address how the Bureau would analyze flows of competitively sensitive information in customer-ascompetitor relationships, and suggest appropriate compliance measures to avoid harm to competition and risks to businesses arising from non-compliance.

IV. Additional Compliance Guidance Regarding Competitively Senstive Information

FHCP believes that retailers’ own-label products can enhance competition in the marketplace and provide value to consumers. However, the ability of a retailer to use a supplier’s competitively sensitive information in a way that advantages its competing own-label products can negatively impact competition in a way that harms both suppliers and consumers, in addition to raising significant issues of fairness.

In this regard, FHCP believes that the Draft Guidelines would be enhanced by the inclusion of a discussion regarding steps to mitigate the potential competition law compliance concerns and competitive harms that can result from a customer that competes with a supplier using competitively sensitive information that the customer obtains from the supplier as part of the supplier-customer relationship. As noted above, often suppliers must share (either from apractical perspective or because the customer demands it) a significant volume of the type of the competitively sensitive information that the Draft Guidelines suggest as being the most likely to negatively impact competition.

This request for compliance guidance, in addition to increasing the usefulness of the Draft Guidelines by providing practical suggestions as to how potential compliance concerns can be mitigated proactively, is consistent with the Bureau’s Competition and Compliance Framework Bulletin and, in particular, the stated principle of promoting the spirit of “shared compliance”.

It is worth noting that the Australian Food and Grocery Code of Conduct^{Footnote 1} acknowledges the need to proactively address both the fairness issues and potential competitive harm that can arise in the situation where a supplier must provide competitively sensitive to a customer who offers competing own-label products. In this regard, sections 24 and 25 of the Australian Food and Grocery Code of Conduct contains provisions that prohibit a retailer from:

1. infringing a supplier’s intellectual property rights in developing its own-brand products;
2. using confidential information, a supplier discloses (including information relating to product development, promotions or pricing) other than for a purpose for which it was disclosed, and may only disclose it to employees or agents of the retailer who need to have that information in connection with that purpose.

While FHCP understands that the Bureau is not in a position to mandate that a company implement particular compliance measures, it would be very useful from a compliance promotion perspective to incorporate compliance recommendations or suggested best practices for addressing this issue in the Draft Guidelines, possibly drawing on the principles set out above. In this regard, FHCP believes the Draft Guidelines should clearly state that best practices for managing the competition law compliance issues associated with the transmission of competitively sensitive information where a customer competes with its suppliers should include the following:

1. the customer should not require a supplier to provide any more competitively sensitive information than is truly necessary for the effective functioning of the customer-supplier relationship (for example customers should not require detailed information regarding product composition or a supplier’s costs, as this is not necessary for the effective functioning of the customer-supplier relationship);
2. competitively sensitive information provided by a supplier cannot be used to further the customer’s competing own-label business; and
3. to the extent that competitively sensitive information is provided by a supplier, this information should not be shared with employees or agents of the customer who have responsibility for the customer’s competing own-label strategy (either in terms of product development or pricing).

This suggested guidance is entirely consistent with the Bureau’s evaluation criteria for assessing agreements to exchange information set out in subsection 3.7.2(a) of the Draft Guidelines, which states:

In evaluating an agreement to exchange information, the Bureau will also consider the safeguards established through the organization and governance of the collaboration that are directed at preventing or minimizing the disclosure of competitively sensitive information. For example, participants in the collaboration can limit disclosure of information to personnel who are not engaged in sales or marketing activities, or can prevent sales and marketing personnel from participating in a research and development joint venture.

At the very least, the Draft Guidelines should make it clear that this guidance is equally applicable to situations where a supplier provides competitively sensitive information to a customer who offers or may offer competing own-label products. Absent clear guidance on this issue many customers may simply assume that information provided by suppliers does not constitute an “information sharing agreement”, despite the fact that the customer has a competing own-label business.

V. Customer-As-Competitor A Growing Issue in E-Commerce

While the experience of FHCP and its members is focussed on the retail grocery and pharmacy sector, the potential competition issues associated with situations where a supplier’s largest customers are also their most significant competitors are not unique to the retail grocery and pharmacy sector. This issue is increasingly being raised in connection with the actions of large internet platform businesses. The issue of customer-as-competitor is increasingly being acknowledged by other competition law enforcement agencies. A recent example of this is the opening of a formal investigation by the European Commission into the possible anticompetitive conduct of Amazon relating to use of competitively sensitive information acquired as a marketplace operator to improperly advantage its own-label product strategy. Additionally, the potential competitive harm associated with the potential misuse of sensitive information obtained from third-party sellers to further an online platform’s own-label strategy is a live issue in the ongoing US House Judiciary Committee’s Digital Markets Investigation.

On this issue, the Bureau’s “call-out to market participants for information on potentiallyanticompetitive conduct in the digital economy” specifically raises the concern that platform operators can engage in “self-preferencing” behaviour to unfairly promote their own-label products and that this behaviour can negatively impact competition. While the “call-out” raises issues such as manipulating rankings and biasing search results to favour the platform operator’s own-label products, it is clear that the potential misuse of competitively sensitive information received from suppliers can similarly be improperly used for self-preferencing purposes in a manner that harms competition. In this regard, the Bureau should recognize that grocery and pharmacy retailers are essentially platform operators – historically, this has been through the operation of brick-and-mortar stores, but increasingly takes place through their own e-commerce platforms. Accordingly, FHCP submits that the Bureau should examine the retail grocery and pharmacy sector through the same lens as they and other competition agencies are applying to online marketplace/platform operators.

For all of the reasons set out above, FHCP believes that it is both appropriate and necessary to address the competition law issues related to the customer-as-competitor dynamic in the Draft Guidelines. In addition to providing useful guidance to the retail grocery and pharmacy sector, this issue will only continue to become more relevant with the growth of ecommerce platforms (including those operated by or on behalf of grocery retailers) across a broad range of products and services.

VI. Conclusion

FHCP appreciates the opportunity to comment on the Draft Guidelines and welcomes the opportunity to further engage with the Bureau and other stakeholders regarding the issues raised in this submission.