Competition Chronicle

Competition Chronicle

Competition & Antitrust | Foreign Investment

Kobo’s Quest for Status Quo in the E-books Market: A Never Ending Story

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On February 17, 2017, Toronto-based e-books retailer Rakuten Kobo Inc. (“Kobo”) sought judicial review of the consent agreements reached between the Commissioner of Competition (“Commissioner”) and three e-books publishers earlier this year.

The consent agreements reached between the Commissioner and each of Hachette, Macmillan, and Simon & Schuster are aimed at resolving the Commissioner’s concerns arising from alleged agreements that prevent or lessen competition substantially, which are reviewable under section 90.1 of the Competition Act (the “Act”). The Commissioner, however, was unable reach agreement with a fourth publisher, HarperCollins, and has now filed an application for a prohibition order under section 90.1.

Pursuant to the terms of the consent agreements, publishers are prohibited from using an “agency” model—a model wherein publishers set prices and pay retailers, such as Kobo, a commission. The consent agreements also restrict the ability of publishers to use most favoured nation clauses in their agreements with retailers for a period of 3 years. These clauses prevent retailers from negotiating their own agreement with publishers.

Kobo’s application for judicial review is not at all surprising. The consent agreements mentioned above are recent iterations of agreements that were first reached between the Commissioner and each of Hachette, Macmillan, Simon & Schuster, and HarperCollins in February 2014 but were later rescinded by the Competition Tribunal (the “Tribunal”) at the behest of Kobo.

Among other things, Kobo alleged that the consent agreements struck between the Commissioner and the four e-books publishers in 2014 would negatively impact its ability to effectively compete in the Canadian marketplace. Last year, the Tribunal partially found in Kobo’s favour, nullifying the 2014 consent agreements on the basis that the Commissioner did not sufficiently identify in the consent agreements the six elements of section 90.1 of the Act. However, the Tribunal rejected Kobo’s submissions that the terms of the consent agreements were unenforceable.

Now, more than 3 years later, Kobo appears to be right back where it first started—this time, however, in the Federal Court. Kobo’s decision to file an application for judicial review in Federal Court—as opposed to an application for rescission or variance under subsection 106(2) of the Act before the Tribunal—undoubtedly stems from the Tribunal’s earlier pronouncement (in an adjunct reference proceeding) of its ability to award such an order. In that proceeding, the Tribunal held that:

  • It may confirm that the terms of a consent agreement are within the “purview” of the type of order that the Tribunal would be able to issue in respect of the particular reviewable conduct at issue;
  • It may confirm that the elements of the alleged reviewable conduct have been identified and confirmed; and
  • Applicants may seek to establish that the terms of a consent agreement are unenforceable or would lead to no enforceable obligation.

Investment Canada Act: National Security Review Powers Rarely Invoked

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Canadian government responses to two requests made by Fasken Martineau under the Access to Information Act (AIA) and the recent publication by Innovation, Science and Economic Development Canada (ISED) of its Annual Report Investment Canada Act 2015-16 evidence that Canada’s power to conduct national security reviews under the Investment Canada Act (ICA) in respect of foreign investments in Canada has rarely been invoked during the almost 8 years that such power has existed.

Because of the confidentiality obligations imposed on government officials by the ICA and the sensitive nature of the assessment process which is intended to safeguard Canada’s national security interests, the Government historically has been reluctant to comment publicly on specific investments that it has subjected to national security reviews or on the review process in general.  For a considerable period of time, this reluctance extended to even providing statistics on the number of national security reviews that it had actually undertaken.

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CASL, the Competition Act and Class Actions:  A Primer for Forthcoming Private Enforcement

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Now that 2017 has arrived, we are less than seven months away from private enforcement (particularly through class actions) for false or misleading electronic messages. CASL’s  amendments to the Competition Act sought to address deceptive marketing practices in the electronic marketplace. Three reviewable practices were created – all within section 74.011 of the Competition Act – that focus on false or misleading representations in electronic messages, such as in the subject line of an email, the body of an email and in URLs and metadata.

To date, public enforcement of section 74.011 through the Competition Bureau has taken place on two occasions: the Avis and Budget Consent Agreement (following a contested application before the Competition Tribunal) and the Amazon Consent Agreement.

As discussed below, private enforcement of section 74.011 of the Competition Act by way of class actions is forthcoming.  Companies that engage in any form of digital marketing are best served by being proactive to prevent becoming a defendant of choice.

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The Bicycles case: Silent tandem riders beware

 

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The passive attendee in meetings at which potentially collusive conduct takes place has recently been considered further and developed by the South African Competition Appeal Court in the ‘bicycles case’.

Previously addressed by the South African Competition Tribunal in DPI Plastics Pipes (2012), the Tribunal concluded that an attendee simply cannot stay silent nor adopt an ambiguous stance if the content of discussion between competitors turns to potential co-operation, conspiracy or collusion. There is an obligation to overtly disagree and distance oneself from the conduct discussed or proposed, even if one has been innocently lured into such discussions. A failure to do so will lead to an inference that the competitor concerned formed part of the unlawful agreement.

In the Omnico Cool Heat ‘bicycles case’ the Appeal Court dismissed two companies’ appeal against findings of a contravention and consequent fine imposed for their participation in a cartel affecting pricing in bicycle manufacturing and supplies, rejecting arguments that the companies had distanced themselves from the anti-competitive conduct.

The Competition Tribunal found 21 bicycle and bicycle part manufacturers and suppliers guilty of indirect price fixing.  The Competition Tribunal concluded that these manufacturers and suppliers agreed to collectively raise their recommended retail prices in order to boost their retail profit margins. Approximately 60 industry wholesalers and retailers attended a September 2008 meeting. Agendas for the meeting were distributed in advance and minutes from the meeting were subsequently posted on social media available to the cycling community.  The key issue was whether silent attendance or participation without protest could be regarded as cartel behaviour.

The Appeal Court discussed and endorsed the European competition jurisprudence on the principle of passive attendance at collusive meetings. The court found that there is a clear duty to speak out and establish a distance from any potential cartel discussion or conduct. Where attendees receive advance notice of discussion on competitive sensitive matters between competitors, as there was in this case with agenda items spelled out, even greater caution is to be exercised in attending any such meeting.

In a noteworthy development, the Appeal Court also confirmed that, given ‘the complex and clandestine nature’ of cartel behaviour, the correct approach of the competition authorities will be to examine the cumulative effect of the conduct, both passive and active, in its context to determine whether it constitutes cartel behaviour. That effect, taken as a whole, will be evaluated and can be equally compelling as the much sought after ‘smoking gun’ in cartel investigations.

It is therefore clear than a party cannot silently go along for the ride should the track prove to be off-course, but rather an attendee must call a stop to the journey and make it clear that it does not agree with the conduct proposed in order to successfully defend claims of participation in cartel activity.

Investment Canada Issues National Security Review Guidelines

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On December 19, 2016, the Minister of Innovation, Science and Economic Development (Minister) issued Guidelines on the National Security Review of Investments (Guidelines) in an effort to provide foreign investors and their advisers with a better understanding as to the circumstances in which a national security review might be initiated by the Government of Canada under the Investment Canada Act (Act).

Background

In February 2009, the Act was amended to provide the Government of Canada with the authority to review virtually any foreign investment that, in its opinion, could be injurious to Canada’s national security.  The national security review process is an additional clearance under the Act which is separate and distinct from the “net benefit to Canada” economic impact review process for which the Act was originally created.

In summary, if the Canadian Government, principally Canada’s security and intelligence agencies, identifies a potential national security threat associated with an investment in Canada by a non-Canadian, the Minister is advised of that concern and, after consultation with the Minister of Public Safety and Emergency Preparedness (Public Safety Minister), the Minister is responsible for referring the investment to the Governor in Council (GIC) if he agrees that the investment could be injurious to national security.  The GIC then determines whether a review should be ordered.  If the GIC orders a review, the Minister, after consultation with the Public Safety Minister, then conducts a formal review and, if necessary, submits a report to the GIC with his recommendations at which point the GIC has the authority to take any measures in respect of the investment that it considers advisable to protect national security.  These measures include permitting the investment to proceed with or without conditions or prohibiting the investment or, if already made, requiring the divestiture of the investment.

Unfortunately, little practical guidance was until now provided to foreign investors and their advisers as to the circumstances in which a national security review might be initiated.  This situation contrasted with national security reviews conducted by the Committee on Foreign Investment in the United States which had issued guidance on the types of investments that might be of concern to it.  The Guidelines which inform investors of the procedures that will be followed in the administration of the national security review process set out in Part IV.1 of the Act and in the National Security Review of Investments Regulations are intended to help remedy this lack of guidance.

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Competition Bureau Settles “Made in Canada” Advertising Dispute with Moose Knuckles

calgary-1751847_1920The Competition Bureau (Bureau) announced on December 7, 2016 that the Commissioner of Competition (Commissioner) had reached a settlement with Moose International Inc. (Moose) regarding his concerns over Moose’s “Made in Canada” advertising and labelling with respect to certain of its premium brand parkas.  The settlement brings to an end legal proceedings between the parties that had started earlier this year.

As part of the settlement and while not admitting to the Commissioner’s allegations, Moose has agreed to donate $750,000 over five years to Canadian charities providing winter jackets to children in need.  Additionally, Moose also agreed to make it clearer in its advertising and labelling that certain parkas are in fact made with Canadian and imported components and to implement an internal compliance program to help ensure that these types of advertising and labelling issues not arise in the future.  Moose has also advised the Commissioner that it will be adding certain additional operations to its Canadian factories that manufacture its parkas.

In June, we reported that, following the completion of an inquiry into Moose’s marketing practices, the Commissioner had filed an application (Application) before the Competition Tribunal alleging that certain of Moose’s “Made in Canada” representations had created a materially false or misleading general impression with consumers and, as such, were contrary to paragraph 74.01(1)(a) of the Competition Act (Act).  Moose’s response to the Application denied the Commissioner’s allegations and any breach of the Act.

In support of his Application, the Commissioner made extensive reference to his “Product of Canada” and “Made in Canada” Claims Enforcement Guidelines (Guidelines) which he had issued in 2009 to provide predictability for businesses regarding the assessment by the Commissioner of “Product of Canada” and “Made in Canada” claims.  Moose responded by denying that its marketing activities fell below the standard set out in the Guidelines and, regardless, argued that the Guidelines were not, in fact, the law.

What is perhaps most notable about the settlement is that it was arrived at using a relatively new mediation process.  This settlement represents the second such settlement using mediation as a tool to achieve a timely and efficient resolution in a dispute with the Commissioner.

Investment Canada: National Security Guidelines To Be Published

vancouver-754242On November 1, 2016, the Honourable William Morneau, Canada’s Minister of Finance, tabled his government’s Fall Economic StatementIncluded in the Statement was a commitment by the Liberal Government to ensure that Canada makes the most of every opportunity to attract global investment.

Since his election in 2015, Prime Minister Justin Trudeau has indicated both in his public statements and in his actions that his government is more open to foreign investment than the government of former Prime Minister Stephen Harper.  In furtherance of that openness, a new federal body, the Invest in Canada Hub, is to be created to coordinate Canada’s investment promotion activities and the number of trade commissioners will be increased in markets that are considered strategic to Canada.

The Investment Canada Act is federal legislation that requires any non-Canadian proposing to directly acquire control of a Canadian business that exceeds a prescribed monetary threshold to obtain government approval before proceeding with its investment.  In 2009, the Harper Government amended that legislation to create an additional review power in respect of foreign investments that appear to raise national security concerns.  Unfortunately, the government provided no insight or explanation as to how the new national security review power would be used in practice.  Subsequent exercises of that power to block a number of transactions have not resulted in a much better understanding as to the circumstances in which this power will be invoked.  This situation has resulted in considerable uncertainty in the minds of foreign investors contemplating potential investments in Canada.

As part of the Statement, the Minister of Finance announced that, before the end of the current calendar year, his government will publish informational guidelines explaining the circumstances under which foreign investments will be examined under the national security review provisions.  It is hoped that this increase in transparency as to how the review process works in the context of national security reviews will attract desirable foreign investments in Canada by providing foreign investors with a better understanding as to exactly what types of investments will be subjected to nation security review attention.   The new guidelines hopefully will also assist foreigners to better navigate the Investment Canada Act review process thereby encouraging foreign investment in Canada while at the same time ensuring the ongoing integrity of Canada’s national security processes

Competition Bureau Conducts Internet Sweep Focusing on Online Reviews and Endorsements

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Online reviews and endorsements are a growing tool used by businesses to sell their products and services.  Last month, the Canadian Competition Bureau (with international partners) conducted a “sweep” of the internet targeting online reviews and endorsements. The sweep is identifying websites that use online reviews or endorsements as part of their business model.  The Bureau has noted that it will follow-up with websites of concern, ranging from a warning or information letter to opening an investigation.

The Bureau’s sweep follows the June 2016 publication of the International Consumer Protection and Enforcement Network’s (ICPEN) Online Reviews and Endorsement Guidelines for digital influencers (e.g., bloggers, tweeters), review administrators (i.e., processors of consumer reviews online) and marketing professionals (i.e., promoters of goods and services on review platforms, social media).

The Bureau’s sweep in an important reminder for companies and individuals to be informed and vigilant when using online reviews and endorsements to sells goods and services.  In this regard, salient portions of ICPEN’s guidelines for digital influencers, review administrators and marketing professionals are summarized below.  The application of the guidelines will vary depending on the circumstances the business and products and services at issue.

Digital influencers

A “digital influencer” is broadly understood as anyone who posts online content on their own website, online platform or social media account that includes an opinion, experience or other information about a market, business, good or service.  Key principles for digital influencers include the following:

  • Disclose all paid-for content clearly and prominently:   digital influencers are expected to ensure that any content they post (or which payment has been received) is clearly identifiable to viewers as paid-for content.  “Paid-for” includes monetary and non-monetary payments. Paid-for content may include advertisements, advertorials, product placements, sponsored posts, sponsored links, articles written in collaboration, promotional features and consumer interest stories.
  • Disclose other commercial relationships:  digital influencers are expected to ensure that viewers are advised of any relevant commercial relationships that may be featured in their online content.
  • Views are expected to be genuine:   digital influencers are expected to make clear whose opinion or experience is being conveyed regarding markets, businesses, goods or services, such as whether the opinion is the person’s own opinion or that of an employee’s, a guest contributor’s or an advertiser’s.
  • Decline non-complaint businesses:  Digital influencers are expected to decline requests from businesses to post paid-for content without proper disclosure.

Review Administrators

A “review administrator” is generally regarded as an organization or individual that processes consumer reviews.  Review administrators come in many forms and include: (a) entities that manufacture, distribute or supply products and services, and also obtain reviews about them, (b) third parties that obtain reviews on behalf of an entity that manufactures, distributes or supplies products and services; and (c) third parties that are involved in the collection, moderation and display of reviews.  Key principles for review administrators include the following:

  • Publish terms and conditions prior to collection: review administrators should have terms and conditions under which it will collect, moderate and publish consumer reviews, and publish those terms and conditions.
  • Verifying consumer reviews as authentic:  review administrators should exercise adequate due diligence, such as only accepting reviews from consumers who have purchased the product or service at issue or allowing site users to assess the reliability of reviewers.
  • Publishing reviews in a neutral manner:  review administrators should publish reviews in an objective and neutral manner (i.e., without delay, select editing)

Marketing Professionals

Marketing professionals include those who promote their goods or services on review platforms, blog posts, video blogs, tweets or online publications (sometime known as traders) as well as search engine optimisers.  Key principles for marketing professionals include:

  • Disclose clearly and prominently where content is paid-for or where other commercial relationships may be relevant to the content.
  • Never write fake reviews.

 

Competition Bureau Releases Updated Consent Agreement Template for Merger Remedy Negotiations

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On September 29, 2016, the Competition Bureau (the “Bureau”) released a revised consent agreement template for merger remedy negotiations. The release of the Bureau’s updated template is timely, as the number of consent agreements registered with the Competition Tribunal (the “Tribunal”) have risen significantly since the last template was published in 2007.

This year alone, 6 consent agreements have been registered with the Tribunal, compared to the 2 agreements that were registered in 2007. Since 2007, more than 30 consent agreements have been registered with Tribunal, following remedy negotiations between the Bureau and the merging parties.

The intent of the consent agreement template is to provide formal guidance to the legal and business communities in respect of the Bureau’s expectations when negotiating measures to address competitive issues likely to arise from a proposed merger.

Despite the publication of this guidance document designed to facilitate a conciliatory resolution, the Bureau noted in its accompanying press release that it “will not compromise its responsibility to preserve competition in the marketplace by contested proceedings.” In that regard, the Bureau is keeping true to the commitments it outlined in its 2016-2017 annual plan, namely its focus on “high-impact enforcement cases, merger reviews and outreach, including the advancement of a number of ongoing cases and projects.”

New Trial Ordered: Application of Co-Conspirators’ Exception to the Hearsay Rule at Issue in Price-Fixing Conspiracy Case

On September 9, 2016, the Quebec Court of Appeal (“QCCA”) issued its judgment in two gasoline price-fixing conspiracy cases. The cases were the product of the Competition Bureau’s (the “Bureau”) year-long investigation into the fixing of retail gasoline prices in the province of Quebec from April 2005 to May 2006.

The three accused individuals in the cases (Yves Gosselin, Linda Proulx, and Michel Lagrandeur) were charged under the Competition Act’s (the “Act”) former price-fixing provisions for conspiring to fix retail gasoline prices in the cities of Magog and Sherbrooke. All three accused were subsequently convicted at trial. The trial judge arrived at his decision based on the preponderance of evidence adduced during the trial, which included, among other things, hundreds of intercepted telephone conversations, which included statements by co-conspirators.

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