Competition Chronicle

Competition Chronicle

Competition & Antitrust | Foreign Investment

Mitigating the Risk of Pre-Closing Information Exchanges

Pre-merger exchanges of information can create competition risk. Companies considering mergers or acquisitions legitimately need access to detailed information about the other party’s business in order to negotiate the deal, engage in due diligence and implement the transaction. While non-competitively sensitive can (subject to any commercial concerns) be freely exchanged, care needs to be exercised when exchanging competitively sensitive information, such as current and future price information, strategic plans and costs. This is especially true if the companies are competitors or potential competitors.

Competition Law Concerns

In the context of mergers, the Competition Bureau is particularly concerned with pre-closing information exchanges of competitively sensitive information among actual or potential competitors. This is because the exchange of such information can facilitate coordination between the parties in the period prior to closing or for a much longer period of time if the transaction ultimately does not close. For example, the exchange of competitively sensitive information can reduce the uncertainty around a competitor’s current or future business, marketing or strategic plans.

If the exchange of competitively sensitive information is accompanied by accommodating actions, it could potentially constitute an unlawful agreement contrary to the criminal cartel provisions in the Competition Act. These provisions prohibit agreements between competitors to fix prices, allocate markets or restrict output, and provide for fines of up to $25 million and/or imprisonment of up to 14 years. As such, it is important that the parties continue to operate independently and compete against each other as they have in the past up to the date of closing, including preserving their competitively sensitive information.

Mitigating Risk

In light of the above, it is important that the parties to a merger have a plan in place to monitor and control the exchange of competitively sensitive information. For example, if competitively sensitive information must be exchanged for due diligence and integration planning purposes, parties should employ third-party consultants, clean teams and other safeguards that limit the dissemination and use of that information within the parties’ businesses. A helpful discussion of the various methods that can be employed to safeguard competitively sensitive information is contained in a short article published by the United States Federal Trade Commission titled “Avoiding Antitrust Pitfalls During Pre-Merger Negotiations and Due Diligence”.

Do’s and Don’ts

In addition to the protocols referred to above, set out below is a non-exhaustive list of do’s and don’ts in respect of pre-closing information exchanges:

“Do’s”

  • Comply with all obligations relating to the exchange of competitively sensitive information set out in any relevant agreements, including confidentiality, non-disclosure and clean team agreements.
  • Limit the exchange of competitively sensitive information to that which is necessary to complete regulatory filings, engage in legitimate pre-closing integration planning or otherwise proceed with the transaction.
  • Restrict access to competitively sensitive information to senior management, legal counsel or those who have a “need to know”.
  • Limit the information exchanged to the minimum necessary, and to historical information, rather than prospective information such as strategic plans, marketing plans, product development plans, forecasts, price initiatives or capital plans.
  • Include “PRIVILEGED & CONFIDENTIAL – JOINT DEFENCE MATERIALS” in the subject line when emailing competitively sensitive information. Include the same note in the header of documents.
  • Keep the information shared as aggregated as possible (i.e. information that does not disclose specific prices, costs, customers or markets), thereby reducing the competitive value and sensitivity of the information.
  • Maintain a record of each communication and the information provided and received and review such record regularly to ensure that the information provided has been appropriate.
  • Be cautious when information is provided orally so that the conversations do not stray to sensitive or prohibited subjects.
  • Seek advice from counsel if you are unsure whether information should be shared.

“Don’ts”

  • Share information with personnel other than senior management, legal counsel or those with a “need to know”. Sales or marketing personnel should not receive or gain access to any competitively sensitive information.
  • Share information relating to any businesses unrelated to the proposed transaction.
  • Agree on customer pricing, jointly negotiate purchases or otherwise act as a single entity. Both parties must strive to be as competitive as possible until the transaction closes.
  • When communicating, even internally, use negative phrases such as “eliminate competition” and “dominant player”. Every document created relating to the transaction should be written with the knowledge that such document may end up in the hands of the Bureau. Therefore, great care should be taken to avoid any implication that the purchaser has any intent, practice or policy to restrict competition. In respect of the transaction, it is preferable to focus on the positive efficiency-enhancing aspects, such as achieve economies of scale.

Conclusion

Having regard to the protocols described in the FTC’s article and the do’s and don’ts summarized above will minimize the risk of issues arising in the context of pre-closing information exchanges. In contrast, parties that choose to exchange competitively sensitive information in the absence of such protocols could find themselves subject to lengthy investigations, prosecution and significant penalties under the criminal cartel provisions in the Competition Act.

Interaction Between Privacy and Competition Law in a Digital Economy

Introduction

In a digital economy, there has been an increasing amount of scrutiny regarding technology’s impact on consumers and competition. One key question is whether privacy should be considered a dimension of competition? That is to say, is privacy relevant to the analysis of competitive effects?

Competition law incorporates many non-price dimensions of competition, including innovation, quality, variety, service and advertising. One significant type of non-price effect involving data is privacy. Firms may compete to offer better privacy terms to customers over their competitors. However, consumers have vastly different ideas about how or when they want their data to be used. Some find targeted or behavioural advertising invasive, while others appreciate more relevant ads and receive free products or services in exchange for targeted ads.

There is tension between competition law and privacy. Competition law enforcers generally want as much data sharing as possible, whereas privacy advocates want to limit data sharing. For example, a competition law enforcer may want to facilitate access to data to alleviate one party from having more or better information than the other in a transaction (information asymmetry), but this may raise privacy concerns if that data includes personal information, as this data could be exploited or misused.

Barriers to Market Entry and Expansion

Access to data may create or strengthen several economic barriers to entry and help exclude rivals.

The first of these barriers is access to a large amount and variety of data, which can generate economies of scale that allow for innovative products or services that create significant economic value for consumers. For example, the data acquired through a merger may allow firms to develop products or services that would not have been possible otherwise, however this can make it difficult for competing firms to expand or enter the market.

The second barrier access to data can create is switching costs. For example, consumers may find it difficult to transfer from one platform to another competing platform. Dominant firms in the market may take steps to increase switching costs for customers to prevent them from switching products. Dominant firms may use practices such as restrictive contracts to achieve this.

The third barrier is network effects. Network effects exist when the value or benefit from using a product increases with the number of users. For example, search engines like Google gather and analyze data from users who click on ads and links. Increased user counts can therefore lead to improvements in the search algorithms to display more relevant search results and ads. While network effects can improve the quality of a product or service, the effect can create barriers to entry.

Privacy and Data Portability

Privacy frameworks may alleviate barriers to entry by facilitating competition through data portability and interoperability. Data portability protects consumers from having their data stored on platforms that are incompatible with another. Data portability requires common technical standards between firms to facilitate the transfer of data from one firm to another, thus promoting interoperability. Increased data portability can reduce switching costs for consumers and therefore increase completion in the market. Innovation may also increase because firms can more access data more readily and use it in novel ways.

Some companies such as Microsoft, Twitter, Facebook and Google are already taking steps to increase data portability. The companies are participating in the Data Transfer Project, which seeks to create an open-source, service-to-service portability platform so that all individuals across the internet can easily move their data between online service providers when ever they. The Data Transfer Project collaborators believe that portability and interoperability are central to innovation and that making it easier for consumers to chooses among services facilitates completion and consumer value.

Privacy legislation can help facilitate competition. For example, the European Union’s General Data Protection Regulation (“GDPR”) directly addresses the right to data portability in Article 20, facilitating the ability of consumers to switch service providers. While privacy legislation can help provide much needed clarity to enforcers and to firms, policymakers should be aware that privacy legislation can also have negative effects on competition. For example, privacy legislation may increase barriers to entry through increased compliance and legal costs. Often larger established firms are in a better position to absorb these costs at the expense of smaller competitors and potential entrants. Therefore, policymakers must carefully balance the privacy rights of consumers while still facilitating competitive market conditions.

Conclusion

The impact of data accumulation, transparency and control in a digital era creates emerging issues for competition law. While privacy laws deal with breaches of privacy, competition laws also overlap in the regulation of practices related to privacy. Clarity on the boundaries between privacy and competition law is needed going forward to avoid enforcement overlap.

 

Mixed Reaction to Grocery Retail Market Inquiry’s Preliminary Findings

The South African Grocery Retail Market Inquiry (“Inquiry”) published its preliminary report on May 29, 2019 (“Preliminary Report”).

The broad finding of the Inquiry is that there is a combination of features in the South African grocery retail sector that may prevent, distort or restrict competition.

For an overview of the key preliminary findings of the Inquiry, please see our bulletin, Grocery Retail Marketing Inquiry: Key Preliminary Findings and Recommendations.

Stakeholders were invited to submit comments on the Preliminary Report by June 28, 2019 and the Inquiry is currently busy with further consultations and discussions with stakeholders.

The reaction by stakeholders on the key findings has been mixed – some positive and some negative. The purpose of this note is to briefly unpack one positive reaction and two possible areas of concern that will seemingly lead to objections being raised by stakeholders to the preliminary findings and recommendations of the Inquiry.

Support for ending the use of long-term exclusive lease provisions

It is noteworthy and apparent from reading the non-confidential parts of the Preliminary Report that the majority of property developers, financiers and shopping mall owners do not support the retention of exclusive lease provisions. Such provisions essentially ensure retailers, mostly supermarkets, that there will be no other supermarket, or even a similar speciality store (bakery, butchery or liquor store), in a shopping mall for long periods of time (in some instances up to 40 years).

In this regard, in order to remedy what the Preliminary Report describes as “the distortions to competition as a result of the use of long-term exclusive lease agreements”, the Inquiry has recommended that the incumbent national supermarket chains and their successors (a) immediately cease enforcing any exclusivity provisions in their lease agreements against specialty stores; (b) not include exclusivity provisions in any new leases; and (c) phase out the enforcement of exclusivity provisions against other supermarkets within a three-year period.

Based on the non-confidential submissions made to the Inquiry, there is seemingly general support for this finding. An exception is the supermarkets, which understandably have vested interests in retaining the exclusivity provisions in their leases. It is unclear at this time what the approach of the supermarkets will be and it will be interesting to see what additional submissions the supermarkets will make to the Inquiry.

At this stage, it is unlikely that this will be the end of the use of exclusive lease provisions in South Africa.

Concerns about the finding of the Inquiry that the buyer power by the national chains results in smaller retailers bearing higher rental costs in shopping malls (“Rental Differentials”)

One of the findings of the Inquiry has been that the buyer power by the national chains results in smaller retailers bearing higher rental costs in shopping malls, which hinders the participation of competing small grocery retailers and specialty retailers. The Inquiry found that, as an entrenched business practice, this would be hard to change without commercial disruption and it has called for submissions on possible solutions to this concern.

It is understood that developers and shopping mall owners have specific concerns about this finding. They submit that the determination of rentals depends on numerous commercial factors and that there is never a “one size fits all” approach that will address the Inquiry’s concern. A landlord must assess the individual requirements of a tenant, the tenant’s business model, affordability, and the merits of each tenant prior to entering into a lease agreement. Aside from the tenant mix, competing stores, proximity, space required by a tenant and the shopper catchment area are also relevant considerations.

Further arguments are that supermarkets usually occupy between 2,000 and 4,000 m2 of floor space while smaller tenants typically occupy less than 300 m2 of floor space, with the result that supermarkets and smaller tenants cannot be compared with each other. For example, if a supermarket is charged the same rent as a small retailer, there would be no anchor tenants.

A more fundamental issue raised in the submissions is that the finding affects normal commercial aspects of contractual freedom between parties and does not address actual competition concerns.

It will be interesting to see whether any of these submissions will have an impact on the conclusion of the Inquiry.

Market share concerns by the supermarkets

One of the main findings of the Inquiry is that the formal retail channel is highly concentrated, with the national supermarket chains, namely Shoprite, Pick n Pay, Spar and Woolworths, collectively accounting for 72% of turnover in 2015.

This finding was contested in an opinion article by David North, an executive of Pick n Pay, that appeared in Business Times on June 23, 2019. The article, which was titled “The ‘big four’ grocers are not guilty as charged”, included the following passage:

One of our concerns about the commission’s report, and Hodge’s column [Mr. James Hodge is the Commission’s chief economist], is that they rely on a fundamentally incorrect assertion that the market is “highly concentrated” with the “big four” supermarkets allegedly “accounting for more than 70% of sales”.

In making this claim, the commission relies on a report published by Stats SA in 2015. Unfortunately, it has misinterpreted the data in that report. When it says the “big four” account for the 72% of sales, it has mistakenly included R15bn of sales in countries outside SA. It has also mistakenly included in the “big four’s” grocery sales R14bn in turnover for furniture and building products.

The commission has also underestimated the size of the formal retail sector by almost 15% – excluding a category of general merchandise sales from non-specified stores that are part of the grocery retail sector.

David North’s opinion is that the actual market percentage of the “big four” is less than 30%, which is well below the benchmarks used by the commission for identifying competitive markets.

It is noteworthy that this opinion article was published in the press and thus became public prior to the last date for furnishing comments (June 28, 2019). At this stage, it is unclear what the Inquiry’s response will be. If the market share was indeed incorrectly calculated, the findings of the report may be materially affected.

It is anticipated that the Inquiry’s final report will be published towards the end of the year and future developments will be quite interesting to monitor.

Competition Bureau Releases Draft Model Timing Agreement

As mentioned in our prior blog post titled Commissioner Points to More Active Enforcement, Greater Transparency and Refined Approach to Efficiencies Defence, the Commissioner of Competition announced during his keynote speech at the Canadian Bar Association’s Competition Law Spring Conference on May 7, 2019 that the Competition Bureau intended to release for public comment a draft model timing agreement for merger reviews where the parties raise the efficiencies defence. The draft agreement was released yesterday and interested parties have been invited to provide their views to the Bureau by no later than August 30, 2019.

As stated in the Bureau’s News Release announcing the consultation, “[t]he purpose of the timing agreement is to ensure that the Bureau has the time and information it requires to properly assess the parties’ claimed efficiencies”. In this regard, “[t]he model agreement establishes timed stages for the parties’ engagement with the Bureau, including the production of evidence and information, throughout the review process”. It also describes the general categories of information that the Bureau will require from the parties in order to conduct its efficiencies analysis, including (a) information on parties’ operations and assets; (b) plans for the merging parties’ businesses in the absence of the merger; (c) analysis and planning documents relating to the implementation of the merger; (d) analysis of merger efficiencies; and (e) information from past comparable integrations.

While the draft agreement is intended to “establish a schedule for the expeditious resolution of [proposed transactions]”, it may actually increase the length of the Bureau’s review (at least in certain cases). In this regard, while the Bureau’s draft Practical Guide to Efficiencies Analysis in Merger Reviews encourages parties to provide their initial efficiencies submissions and available supporting information at an early stage in order to “allow the Bureau sufficient opportunity to analyze potential effects and efficiencies concurrently”, the draft agreement contemplates that efficiencies submissions will now be provided within 30-40 days after full compliance with supplementary information requests (SIRs). This, combined with recent statements made by the Commissioner during an interview sponsored by the American Bar Association on July 10, 2019, suggests that the Bureau will no longer be willing to consider potential effects and efficiencies simultaneously. Rather, even if parties choose to provide an efficiencies submission at an earlier stage, it appears that the Bureau will not be willing to consider efficiencies until after it has determined whether the proposed transaction is likely to result in a substantial prevention or lessening of competition. Using the maximum timelines set out in the draft agreement, the Bureau’s assessment of the parties’ efficiencies claims likely will not be completed until 110 days from the date of full compliance with the SIRs.

In the absence of the parties entering into a timing agreement that the Bureau deems acceptable, it appears that the Commissioner will not be willing to exercise his discretion to consider the efficiencies defence as part of the merger review process. If this is the case, efficiencies, and, in particular, whether the efficiencies likely to arise from a merger are greater than and offset its anti-competitive effects, will likely be analyzed for the first time by the Competition Tribunal rather than by the Bureau in advance of any prospective litigation.

US DOJ Policy Shift Highlighting Importance of Corporate Compliance Programs

In his remarks at the New York University School of Law on July 11, 2019, Assistant Attorney General Makan Delrahim announced a significant policy shift at the US Department of Justice (DOJ) that would incentivize the adoption of adequate and effective corporate compliance programs.

Going forward, in deciding on how to resolve criminal charges against corporations, US DOJ prosecutors will consider “the adequacy and effectiveness of the corporation’s compliance program at the time of the offense, as well as at the time of the charging decision.” In short, the US DOJ will now give corporations credit for having an adequate and effective compliance program, which can lead to a reduction in the penalty sought, something that was already occurring in other jurisdictions such as Canada. Having such a compliance program may, in certain circumstances, also qualify the corporation to a non-prosecution agreement, notwithstanding the DOJ’s general “disfavor” for such agreements.

SUMMER HAS ARRIVED: FASKEN’S 2019 MID-YEAR REVIEW OF TOP ANTITRUST/COMPETITION AND MARKETING TRENDS

The front half of 2019 has seen a number of important competition law developments in Canada. In addition to a new Commissioner, a different procedural approach to the efficiencies defence in merger review and an increased focus on the digital economy, there have also been a number of consent agreements in the deceptive marketing space and we eagerly anticipate the Competition Tribunal’s expected guidance on abuse of dominance matters. In a landscape of increased enforcement, it is more important than ever for businesses, particularly those operating in the digital domain, to remain current on competition law developments and to maintain internal best practices to ensure ongoing compliance with the Competition Act.

Now that the summer has arrived, we thought it would be helpful to provide a closer look at some of the most important developments in antitrust/competition and marketing law in Canada to date in 2019.

New leadership at the Competition Bureau

In March 2019, Matthew Boswell was appointed the new Commissioner of Competition for a five-year term. Mr. Boswell first joined the Bureau in 2011, where he served as Associate Deputy Commissioner, Criminal Matters. He then became Senior Deputy Commissioner, Cartels and Deceptive Marketing Practices the following year and, in 2017, began a one-year assignment as Senior Deputy Commissioner, Mergers and Monopolistic Practices. Finally, he was appointed Interim Commissioner of Competition in 2018. Prior to joining the Bureau, Mr. Boswell was Senior Litigation Counsel in the Enforcement Branch at the Ontario Securities Commission and an Assistant Crown Attorney in Toronto, where he prosecuted numerous criminal offences.

In addition, after a long and illustrious career at the Bureau, Ann Wallwork has stepped down as Deputy Commissioner of the Mergers Directorate. Ms. Wallwork has been replaced by Melissa Fisher, previously an Associate Deputy Commissioner in the Mergers Directorate.

Non-notifiable transactions under scrutiny

In a recent speech, the Commissioner announced that the Bureau is going to increase its focus on identifying non-notifiable mergers which could potentially raise competition law concerns.

In order to more effectively identify such mergers, the role of the Bureau’s Merger Intelligence and Notification Unit has been expanded to include a broader focus on intelligence gathering with respect to non-notifiable merger transactions. This increased focus reinforces the importance of performing a pre-merger assessment of the potential anti-competitive impact of any proposed non-notifiable merger transaction to avoid an unexpected review by the Bureau. Should the Commissioner conclude that a merger is problematic from a competition law perspective, the Commissioner can apply to the Tribunal for an order requiring, in the case of a proposed merger, that the merger not proceed (either in whole or in part) or, in the case of a completed merger, that the merger be dissolved or that the parties dispose of assets or shares.

The Bureau’s increased focus on non-notifiable mergers is already bearing fruit. For example, according to the Commissioner, as of early May 2019, the Bureau had already detected and was reviewing two potentially problematic non-notifiable transactions. Subsequently, on June 14, 2019, the Commissioner filed a notice of application with the Tribunal challenging Thoma Bravo’s acquisition of Aucerna, a company that offers valuation and reporting software to Canadian oil and gas producers. This is the first contested merger challenge filed with the Tribunal since the Commissioner sought to block Staples Inc.’s proposed acquisition of Office Depot Inc. in December 2015.

The digital economy and innovation remains a Bureau enforcement priority

On May 30, 2019, the Competition Bureau hosted the Data Forum Discussing Competition Policy in the Digital Era. During the Forum, the new Commissioner made a number of comments relevant to big tech companies and the digital economy. Namely, the Commissioner noted that in pursuit of the Bureau’s new increased focus on identifying non-notifiable mergers which could potentially raise competition law concerns, they are going to be more vigilant about monitoring the acquisition of small firms by big tech companies. He also noted that the Federal Government should increase penalties to more effectively deter anti-competitive behaviour and promote compliance by tech giants and other firms in the digital economy.

In addition to this, the Federal Government announced the creation of a ten-point Digital Charter, which will outline what Canadians can expect from both the government and the private sector as it relates to the digital landscape. Minister Bains outlined the Competition Bureau’s role in implementing this initiative in a letter to the Commissioner, suggesting that the Bureau work with the policy leads in the Strategy and Innovation Policy Sector to explore issues such as “the impact of digital transformation on competition, the emerging issues in data communication, transparency and control, the effectiveness of current competition policy tools and market frameworks, and the effectiveness of current investigative and judicial processes”.

The Bureau’s approach to the ‘efficiencies’ defence and timing considerations for merging parties

While the Commissioner has acknowledged that “the efficiencies defence is a reality in Canadian competition law”, the Bureau has changed its procedural approach to this defence. Specifically, the “refined procedural approach” calls for the provision of detailed evidence supporting each of the efficiencies claimed; the ability to test the evidence underlying those claims; and adequate time, set out in a timing agreement, to conduct a meaningful assessment of the efficiencies claimed. Significantly, the Commissioner has indicated that he will not exercise his discretion to consider efficiencies claims in the absence of a timing agreement – something that could impact the timing of both the merger reviews and when parties decide to submit an efficiencies report. The Bureau has indicated that it will release a model form of timing agreement for public consultation shortly.

Is the price right? – further enforcement of sale price claims and ‘drip’ pricing

With respect to sale price claims, the Commissioner’s application in respect of the pricing practices of Hudson’s Bay Company (HBC) culminated in a consent agreement in May 2019 providing for the payment by HBC of an administrative monetary penalty (AMP) of $4,000,000 and costs of $500,000 plus a commitment to establish and maintain a corporate compliance program with the goal of promoting HBC’s compliance with the Act. In his application, the Commissioner alleged that HBC had engaged in deceptive marketing practices by offering sleep sets at inflated regular prices and then advertised discounts off these deceptive regular prices contrary to the Act. While not contesting the Commissioner’s conclusions, HBC made no admissions in connection with the consent agreement.

With respect to ‘drip’ pricing claims, the Commissioner’s application against Ticketmaster’s advertised price practices was also resolved by way of a consent agreement whereby Ticketmaster agreed to pay an AMP of $4,000,000 and costs of $500,000 and to establish and maintain a corporate compliance program with the goal of promoting Ticketmaster’s compliance with the Act. The Commissioner alleged that Ticketmaster engaged in deceptive marketing practices by promoting the sale of tickets to the public at prices that were not in fact attainable and then supplied such tickets at prices above the advertised price. The Commissioner described Ticketmaster’s pricing practice as “dripping prices” where the true cost of tickets is disclosed only after the consumer has selected its seats and decided to buy the tickets to the event. In its response, Ticketmaster stated, among other things, that its pricing practices were at all times transparent, pro-consumer and proper and that what the Commissioner refers to as “drip pricing” is not a reviewable practice under the Act.

The above case follows on the heels of other recent actions taken by the Commissioner regarding the advertised price practices of companies such as Discount Car & Truck Rentals Ltd. and Enterprise Rent-A-Car Canada Company, both of which resulted in consent agreements being filed with the Tribunal.

Clarifications in indirect purchaser class actions expected

The Supreme Court of Canada heard Godfrey in December 2018, an appeal arising from the optical disc drive price-fixing class action. The decision is expected to clarify certain aspects of the Supreme Court of Canada’s 2013 price-fixing trilogy of decisions in Pro-Sys, Sun-Rype and Infineon, including whether “umbrella purchasers” (i.e. those who purchased the product at issue in the alleged price-fixing conspiracy from parties other than the alleged conspirators) have a cause of action; whether section 36 of the Competition Act is a “complete code” (and if so, precluding causes of action in tort and restitution at common law from being brought); as well as the standard to be met, and the economic methodology to be pursued in fixing that standard, by plaintiffs and their experts in seeking to certify harm as a common issue. Many ongoing price-fixing class actions in Canada, particularly in auto parts, are on hold pending the Supreme Court’s decision.

Guidance in abuse of dominance

In March 2019, the Bureau released its Abuse of Dominance Enforcement Guidelines. The Guidelines detail the Bureau’s general approach to enforcing the abuse of dominance provisions (section 78 and 79 of the Act) and provide illustrative examples to demonstrate the Bureau’s analytical framework for enforcement of the abuse of dominance provisions. The Guidelines also provide expanded guidance on business justifications, making it clear that, in certain circumstances, “a legitimate business justification can outweigh evidence of anti-competitive purpose when the two are balanced against each other”. In addition to the new Guidelines, an important abuse of dominance case is expected to be decided this year. The Tribunal will rule on the Commissioner’s application against the Vancouver Airport Authority (VAA), which has been alleged to abuse its dominant position arising from in-flight catering services at Vancouver International Airport.

Participants of the immunity and leniency programs are cooperating witnesses – not confidential informers

The Bureau’s Immunity and Leniency Programs set out incentives for parties involved in certain criminal conduct in violation of the Competition Act to come forward to seek immunity or leniency in return for their cooperation with the Bureau’s investigation of others involved in criminal conduct.  In March 2019, the Bureau issued updated Immunity and Leniency Programs to provide increased clarity on the status of cooperating witnesses, including clarification that participants in the Programs are cooperating witnesses and not confidential informers. Although this clarification does not change how the Programs function, the distinction is important. A confidential informer receives the protection of informer privilege, whereas the identity of a cooperating witness and any information that might identify them are not subject to any such privilege. Although the Bureau treats the identity of immunity and leniency applicants and any information provided by such applicants as confidential, there are important exceptions where disclosure is permitted, such as where disclosure is necessary for the exercise of investigative powers, for the purpose of securing the assistance of a Canadian law enforcement agency in the exercise of investigative powers, or in the case of information other than the applicant’s identity, where disclosure is for the purpose of the administration or enforcement of the Competition Act. While many practitioners have not read the Immunity and Leniency Programs to equate cooperating witnesses as confidential informants, the Bureau obviously felt that the clarification was needed as a result of litigation on this very issue.

Increased resolution of criminal matters with leniency applicants – without any guilty plea

In February and March of 2019, two Quebec-based engineering firms, Dessau and Genivar (now WSP Canada), paid $1.9 million and $4 million settlements respectively, in relation to bid-rigging for municipal infrastructure contracts in Quebec. The Bureau also required that Genivar implement and maintain a corporate compliance program. Significantly, in both cases, the parties reached settlements without pleading guilty or receiving a conviction. Rather, the matters were resolved by way of prohibition orders under subsection 34(2) of the Competition Act. This is particularly noteworthy because convictions for certain Competition Act offences, such as bid-rigging, result in ineligibility to bid on public contracts in Canada for up to 10 years.

Although Canada has a deferred prosecution agreement (DPA) regime whereby the Crown may suspend outstanding prosecution while establishing specific undertakings that the organization must fulfill to avoid facing potential criminal charges, DPAs are not available for companies facing Competition Act offences – the rationale being that extending DPAs to competition law offences may undermine the Bureau’s Leniency Program. However, the Leniency Program requires the leniency applicant to plead guilty, which would result in their being barred from bidding for government projects. The Bureau’s recent willingness to resolve criminal matters such as bid-ridding without a guilty plea, thereby preserving a party’s ability to bid for public projects, is a notable shift in approach.

Influencer Marketing: A Changing Landscape for the Regulation of Deceptive Marketing in Canada

In recent years, advertisers have increasingly established commercial relationships with online personalities or “influencers”, who market their products through various digital platforms and social media. The prevalence of “influencer marketing” has become an emerging frontier for the regulation of deceptive marketing in Canada and abroad.

Digital Marketing in Canada

In Canada, issues regarding misleading representations and deceptive marketing are covered under the Competition Act. If a representation may influence a consumer to buy or use the product or service advertised, it is considered material under the Act. While the Competition Act does not include any provision that expressly references digital marketing, the Competition Bureau has explicitly stated that its jurisdiction includes the regulation of influencer marketing.

The standard for what is considered “deceptive marketing” may be drawn from Ad Standard’s Canadian Code of Advertising Standards. The Code specifically prohibits deceptive testimonials and endorsements and includes an obligation for advertisers to disclose any “material connection” between the influencer or person making the representation and the entity that makes the product or service available to the influencer or person making the representation.

The increasing focus of regulatory authorities on influencer marketing has been reflected by an increase in the frequency of action taken by regulatory authorities concerning influencers marketing both in Canada and abroad.

Is it a #ad?

In Canada, most litigation has been undertaken by complaints made to Ad Standards. In 2017, a UK blogger promoted Ottawa as an attractive travel destination in a Twitter posting and was found by Ad Standards as “disguised advertising” since the blogger failed to disclose that the tweet was sponsored. While the tweet was intentionally aimed at a UK audience, Ad Standards found the tweet to be applicable to Canadian standards since it was accessible to Canadians and the use of “#Canada” and “#Ottawa” highlighted matters of interest specific to Canadians. In 2018, a Canadian influencer narrowly avoided a finding by Ad Standards that her Instagram post, which described her experience with a facial product, was “disguised advertising”. Prior to adjudication of the complaint, the advertiser, a cosmetic company, rectified the post by amending it to include “#ad”. The influencer and advertiser were able to both avoid repercussions and were not identified in the complaint. This was similarly reflected in an Australian case regarding an Instagram post promoting a vehicle brand, whereby the Advertising Standards Bureau of Australia noted that the use of “#ad” would be sufficient to distinguish the post as an advertisement.

While legal concerns pertaining to “influencer marketing” have largely been kept to relatively small regulatory complaints, there are civil cases emerging, particularly in the US. For example, in 2018, the boxer Floyd Mayweather and musician DJ Khaled were both named in a multimillion dollar class action lawsuit brought by US investors who lost money investing in a fraudulent cryptocurrency venture. While the celebrity influencers were later dismissed from the lawsuit, the case raised important questions regarding “influencer marketing” since both celebrities promoted the brand without disclosing that they were compensated for their posts.

Guidance from Canadian Regulators

In reflecting on the increasing regulation of “influencer marketing”, the Competition Bureau has stated that the broad consensus among consumer protection agencies around the world is the importance of clearly and effectively disclosing material connections between influencers and advertisers.

Canadian authorities are providing guidance to influencers and brands to assist them in minimizing risk of liability associated with “influencer marketing”. Ad Standards has published the Influence Marketing Disclosure Guidelines, which serves as a guide to assist influencers and brands in complying with disclosure requirements. The Guidelines provide practical compliance advice, including the “dos” and “dont’s” of disclosure. In addition, the Competition Bureau has recently published the Deceptive Marketing Practices Digest, which includes disclosure checklists for influencers and brands. There is no doubt, with the increasing breadth of social media and “influencer marketing”, that these guidelines will serve as a helpful resource to influencers and brands.

Competition Bureau Challenges Thoma Bravo’s Acquisition of Oil and Gas Reserves Software Firm, Aucerna

On June 17, 2019 the Competition Bureau announced that it is challenging Thoma Bravo’s acquisition of Aucerna, a company that offers valuation and reporting software to Canadian oil and gas producers.

The fact that the Competition Bureau is challenging the transaction after it has been completed suggests that the transaction was not subject to pre-merger notification and that the Bureau learned about the transaction only after it closed, or at least too late to seek to enjoin its completion. Presumably, this will become clear when the Bureau’s application becomes available on the Competition Tribunal website.

It’s noteworthy that the Bureau only recently decided to place more focus on detecting potentially anticompetitive non-notifiable transactions. It may be that Thoma Bravo’s acquisition of Aucerna is an early success.

The Bureau’s action against the merger also falls within its focus on the digital economy.

In its press release, the Bureau asserts “that the transaction is a merger to monopoly in the supply of reserves software in Canada to medium and large producers”. In this regard, the Bureau will likely have to contend with significant issues pertaining to market definition and entry conditions. And of course we can anticipate the merging parties advancing the efficiencies defence.

The Bureau’s action serves as a reminder that in non-notifiable mergers that raise significant competition issues, parties must decide whether to voluntarily consult the Bureau or not. Many factors come into play in that decision including the likelihood of complaints, the parties’ appetite for risk and possible litigation, and the availability of defences (including the efficiencies defence). The parties must also turn their minds to appropriate contractual protections in their merger agreement. In this regard it’s noteworthy that the Bureau has a one-year limitation period following closing of a merger to challenge the merger.

VERTICAL AGREEMENTS IN SOUTH AFRICA: A NEW DAWN?

This article considers the potential for changes in the treatment of vertical agreements under South African competition law as a result of recent amendments to the Competition Act, as well as current policy views within the law-makers and regulators.

Section 5(1) of the South African Competition Act prohibits vertical agreements that substantially prevent or lessen competition, unless technological, efficiency or other pro-competitive gains arising from the agreement outweigh the anti-competitive effect. This provision is not dissimilar from corresponding prohibitions in competition laws elsewhere.

Since the advent of the Competition Act, contraventions of section 5(1) have been punishable with an administrative penalty only for a repeat offence. A first-time offender could be the subject of a behavioural order, most likely to revise the agreement in question to remove the restrictive restraints.

As a result, with a high economic onus for successful enforcement and without the carrot of an administrative penalty for proving a contravention, cases under section 5(1) have been few and far between. Section 5(1) has been a section tucked away deep beneath the higher profile anti-cartel and abuse of dominance prohibitions, with relatively little attention paid to its precise content.

But change may be on the horizon. Recent revision of the law will raise the consequences for a contravention of section 5(1), and one may also speculate that current policy within government and the Competition Commission points in the direction of increased enforcement under the section in the near future.

Legal Consequences – Fine for a First Offence

The Competition Amendment Act, which became law in February 2019 but is not yet in force, will soon enable the Competition Tribunal to impose an administrative penalty of up to 10% of a firm’s turnover for a contravention of section 5(1). Repeat offences will attract a fine of up to 25% of turnover.

With an increased ability to grab headlines and promote compliance culture within corporate South Africa, these weighty financial consequences may peek a renewed interest in section 5(1) within the corridors of the Commission. A cynic may also suggest that because successful cases under section 5(1) will soon result in revenue for the fiscus, stronger enforcement may curry favour with the executive actors who control the Commission’s purse strings, and therefore further incentivize more casework in this area.

What’s more, in a number of recent cases the Commission has sought to characterize supply relations between actual and potential competitors as “horizontal”, and capable of adjudication under the anti-cartel provisions of section 4(1)(b) of the Act. In defence, firms are quick to produce evidence that the true economic relationship between them is vertical, rather than horizontal, hoping not only to escape the per se confines of section 4(1)(b) which renders conduct illegal regardless of effects, but also in order to avoid the risk of a fine.

The introduction of an administrative penalty for a contravention of section 5(1) pulls the rug from beneath this defence somewhat. The fight will not end once characterization of the relationship has been concluded, as a section 5(1) dispute will carry more meaningful consequences for both enforcer and respondent.

The Prevailing Policy Winds

Since inception, the Competition Act has sought to achieve inclusive growth through strengthening competition, opening up markets to new entrants and with a leaning towards promotion of small and locally-owned businesses.

This desire to facilitate participation by small firms now seems stronger than ever. Under the Competition Amendment Act, new prohibitions have been introduced which are unfamiliar to competition law orthodoxy and in some cases expressly aimed at protecting the public interest, rather than “pure” competition concerns. These provisions place a heightened duty of care upon dominant firms when supplying or purchasing from small firms. A dominant seller is prohibited from discriminatory pricing if the effect is to impede the effective participation of small and medium businesses, and firms owned or controlled by historically disadvantaged persons. A dominant buyer is prohibited from imposing unfair pricing or trading terms on small and medium businesses, and firms owned or controlled by historically disadvantaged persons, if the effect is to impede such firms’ effective participation.

This is a strong show of intent by government, determined to ratchet up the application of competition law to tackle slow rates of transformation and high barriers to participation by small firms.

Simultaneously, through its merger control work, the Commission has often taken care to ensure that small and locally-owned firms are not precluded from supply on fair terms as a result of mergers.

When viewed through this policy lens, it is possible to envisage a move towards more aggressive enforcement against restrictive vertical agreements outside of the merger context, particularly in light of the possibility of a fine for a first offence of section 5(1). For example, where an agreement confers exclusivity or preferential terms on a large supplier or distributor, there may be policy reasons for thorough investigation of whether the effect is to raise barriers to participation by small and locally-owned firms, to the detriment of competition.

Potential Implications

Leaving aside speculation about potential policy incentives of the Commission to increase enforcement against vertical agreements, changes to the financial consequences of contravening section 5(1) in the Competition Amendment Act alone change the playing field in this area.

The competition law community will certainly need to engage with the economic substance of section 5(1) at a level of precision and thoroughness which has to date not been necessary. Identifying and quantifying anti-competitive effects, as well as countervailing efficiency gains, against the factual context of each specific agreement, is likely to become increasingly important, particularly where there is market power.

Under the Competition Amendment Act, the Minister of Economic Development is required to promulgate regulations on the application of section 5. This unusual inclusion in the amendments may signal an intention to reshape the scope of section 5(1) to give greater protection to small business. Alternatively, the regulations may simply articulate the applicable economic test in greater detail than set out in the Act. Either way, this area is likely to see growth and development in the next period which firms and their advisors would be well advised to follow closely.

Recent Comments Regarding Big Tech Companies and the Digital Economy

Over the past week, the Commissioner of Competition has made a number of comments relevant to big tech companies and the digital economy. These comments were made on a panel at the Data Forum Discussing Competition Policy in the Digital Era in Ottawa on May 30th, at a conference hosted by the Organisation for Economic Co-operation and Development in Paris on June 3rd and during an interview with CBC News. The key comments are summarized below.

Competition Bureau to Monitor Acquisitions by Big Tech Companies

As noted in our recent blog post titled “Competition Bureau Expands Merger Investigation Activities”, the Commissioner announced that the Competition Bureau has placed more focus on identifying non-notifiable mergers that could potentially raise competition law concerns. In fact, according to the Commissioner, the Bureau has already detected two potentially problematic non-notifiable transactions that it is now reviewing.

At the time this initiative was announced, the Commissioner did not identify which sectors of the economy the Merger Intelligence and Notification Unit would be focused on. However, the Commissioner recently stated that the Bureau would be more vigilant about monitoring the acquisition of small firms by big tech companies.

The Bureau’s focus on these types of transactions should come as no surprise, particularly given that such acquisitions touch on two priority areas for the Bureau – namely innovation and the digital economy. The policy rationale behind the increased scrutiny is understandable. For example, over the past 10 years, the five largest digital companies in the world have acquired over 400 firms globally. None of these acquisitions were blocked, and very few had conditions attached to approval or were reviewed by competition authorities at all (see Unlocking Digital Competition: Report of the Digital Competition Expert Panel). The Bureau’s focus on the digital economy is also consistent with recent actions by the U.S. antitrust agencies.

While it is recommended that parties to non-notifiable mergers always perform a pre-merger assessment of the potential anti-competitive impact of their proposed transaction, this is especially important where a big tech company is proposing to acquire a small start-up firm. Moreover, if the assessment identifies potential competition concerns, the parties should discuss the pros and cons of providing advance notice to the Bureau. This is a complex topic that involves the consideration of a number of factors, including the likelihood of complaints from market participants.

Commissioner Critical of Efficiencies Defence

The Commissioner stated that the efficiencies defence, which prevents the Competition Tribunal from making an order where it finds that the efficiencies likely to arise from a merger are greater than and offset its anti-competitive effects, is “particularly ill-suited to the digital economy”. Among other things, the Commissioner noted that (a) the defence “is poorly adapted to take into account dynamic competition”, which the Tribunal described as “the most important type of competition” in its decision in the Toronto Real Estate Board case; (b) the Commissioner’s burden of quantifying non-price effects (including those resulting from a reduction in dynamic competition) is much more difficult than the merging parties’ burden of “estimating cognisable efficiencies such as savings from cutting duplicative jobs”; and (c) “[c]ompetition in the data-driven economy in particular has many different characteristics from traditional types of markets for the export of goods.”

While the Commissioner has acknowledged that “the efficiencies defence is a reality in Canadian competition law”, his comments suggest that he may be skeptical of this defence in the case of transactions involving the digital economy – especially when the balancing exercise involves the consideration of non-price effects and dynamic competition. In these cases, it may be more difficult for the parties to establish to the satisfaction of the Commissioner that the defence has been met.

Other Points Relevant to the Digital Economy

The Commissioner has also made a number of other points applicable to the digital economy, including the following:

  • The Federal Government should increase penalties to more effectively deter anti-competitive behaviour and promote compliance by tech giants and other firms in the digital economy. According to the Commissioner, “[t]he maximum penalties for anti-competitive behaviour are, quite simply, not high enough in Canada” and “lack the teeth necessary to deter anticompetitive behaviour, particularly when you are talking about large, multinational tech firms”.
  • While Canada’s competition law is “generally up to the task” of dealing with big data, the Bureau needs new tools in the context of the digital economy. In particular, the Commissioner noted that there are “several gaps” in the competition regime “that simply don’t measure up to best practices”. For example, the Commissioner noted that the Bureau lacks the power to conduct market studies and to compel the production of information for purpose of such studies.
  • Countries have to work together to deal with the challenges of tech giants and the digital economy. In this regard, the Commissioner stated as follows: “The rapid rise of the borderless digital economy is a truly global phenomenon, which requires competition authorities to collaborate and cooperate on an almost daily basis. I believe that the best way to look at global conduct that may cause concern is by taking a globally-coordinated approach to enforcement.”