Competition Chronicle

Competition Chronicle

Competition & Antitrust | Foreign Investment

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.”

Competition Bureau Expands Merger Investigation Activities

In a recent speech given at the Canadian Bar Association’s Competition Law Spring Conference, Commissioner of Competition, Matthew Boswell, announced the Bureau’s decision to place more focus on identifying non-notifiable mergers which could potentially raise competition law concerns.

While the Competition Act (“the Act”) requires pre-merger notification of certain proposed mergers when prescribed monetary thresholds are exceeded, the Act has application to all mergers, both proposed and recently completed, where such mergers prevent or lessen, or are likely to prevent or lessen, competition substantially. In an effort to identify potentially problematic non-notifiable 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. Within two months of the implementation of this broader focus, the Bureau has already detected two potentially problematic non-notifiable transactions that it is now reviewing.

This increased focus by the Merger Intelligence and Notification Unit on identifying potentially problematic non-notifiable mergers should serve to reinforce the importance to parties proposing non-notifiable mergers to perform a pre-merger assessment of the potential anti-competitive impact of their proposed transaction. Parties who fail to do so may find themselves involved in an unexpected Bureau review of their proposed or completed merger. Should the Commissioner conclude that their merger is problematic from a competition law perspective, the Commissioner has the right, under section 92 of the Act, to make an application to the Competition Tribunal to, among other things, have the Tribunal order a proposed merger not to proceed and a completed merger to be dissolved.

Brave New Digital World – Canadian Government Announces Digital Charter

The Federal Government has announced the creation of a 10-point Digital Charter, which will involve, among other things, updating the Privacy Act. The Digital Charter will outline what Canadians can expect from both the government and the private sector as it relates to the digital landscape. This initiative is geared towards providing greater transparency in the ways that technology companies use personal data that they collect from Canadians. According to Innovation, Science and Economic Development Minister Navdeep Bains, this new development will build greater trust in the digital world by protecting citizens’ privacy and providing control of their data. This update will be implemented via a review of the Canada’s privacy laws, the Statistics Act, and the enforcement tools of the Competition Bureau, in conjunction with the development of a new Data Governance Standardization Collaborative to improve data governance standards.

In furtherance of the Digital Charter initiative, Minister Bains wrote to the new Commissioner of Competition outlining the Minister’s views on the Competition Bureau’s role in implementing this initiative. The Minister stresses the necessity to review the risks of data abuse and data monopolies given the increasing reliance on technological data by companies in order to establish a competitive advantage. Further, he outlines that it is crucial to also consider the potential for market distortions and disruptions that arise as a result of the collection, processing and use of data. He suggests 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.” Consideration of these factors by the Bureau will be a significant input to the broader data and digital strategy underway and will foster greater trust in the digital marketplace.

It is noteworthy that the Minister is asking the Bureau, through a mandate letter, to co-lead this significant competition policy project despite the fact that the competition policy function  has not been with the Bureau  for some time. It remains to be seen whether this will mean an increase in resources for the Bureau from the government.

 

Commissioner Points to More Active Enforcement, Greater Transparency and Refined Approach to Efficiencies Defence

During his keynote speech at the Canadian Bar Association’s Competition Law Spring Conference on May 7, 2019, the Commissioner of Competition discussed several important topics, including more active enforcement, a refined approach to the efficiencies defence and greater transparency with merging parties. Each of these developments has significant implications for the merger review process, particularly in the context of complex transactions.

More Active Enforcement

First, the Commissioner stated that “active enforcement will be an area of primary focus” and that “the [Competition] Bureau will not hesitate to take appropriate action to safeguard Canadians against anticompetitive conduct”. This includes the use of all tools at the Bureau’s disposal, including increased and more frequent consideration of injunctions to prevent the closing of  mergers pending a full hearing before the Competition Tribunal.

The Commissioner also stated that the Bureau will bring forward principled cases when it cannot reach a reasonable and appropriate consensual resolution with the parties. While the Commissioner acknowledged that this could result in difficult cases being litigated, he recognized that these cases will provide valuable jurisprudence and help clarify the law – regardless of “[w]hether we win or lose”.

Approach to Efficiencies Defence

Second, the Commissioner acknowledged that “the efficiencies defence is a reality in Canadian competition law”. However, he also noted that, as result of recent experience, the Bureau has changed its procedural approach to this defence. Specifically, the Commissioner emphasized that the “refined procedural approach” will call for the provision of detailed evidence supporting 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.

The Bureau intends to release a model form of timing agreement for consultation that will include timed stages for production of information and evidence and engagement with the Bureau during a review that involves efficiencies claims. Part of this model timing agreement will also include a commitment that the Commissioner will not file an application with the Tribunal while this process is ongoing, provided that parties also commit to not take steps towards closing the proposed transaction. In the absence of the parties agreeing to such a timing agreement, it appears that the Commissioner will not be willing to exercise his discretion to consider efficiencies claims as part of the merger review process. Rather, it will likely be left up to the Tribunal to determine, in the context of a contested application, whether the efficiencies likely to arise from a merger are greater than and offset its anti-competitive effects.

Greater Transparency

Finally, the Commissioner noted that the Bureau will work hard to continuously improve the timeliness, effectiveness and efficiency of its enforcement work. This will be realized through a number of initiatives, including empowering officers to be as transparent as possible with merging parties and their counsel, on a without-prejudice basis, earlier in the merger review process. While the Commissioner cautioned that the Bureau’s analysis and views may evolve as the review progresses, he indicated that such changes would be communicated to the parties as part of “an ongoing dialogue with our teams”.

Implications

As noted above, each these developments has significant implications for the merger review process, particularly in the context of complex transactions. For example, more active enforcement will likely require merging parties to carefully consider issues relating antitrust risk, including the need to build remedies or a hell-or-high-water clause into the transaction documents. Similarly, the refined procedural approach to the efficiencies defence will likely require merging parties to raise efficiencies claims earlier in the process in order to allow the Bureau sufficient time to test these claims. At the same time, increased transparency with merging parties earlier in the process should allow for more timely merger reviews by the Bureau.