Competition Chronicle

Competition Chronicle

Competition & Antitrust | Foreign Investment

A Refresher on “Six Resident Applications”

Under the Competition Act (the “Act”), any six persons who are resident in Canada, at least 18 years of age and of the opinion that (a) an offence has been or is about to be committed under the criminal provisions in the Act, (b) grounds exist for the making of an order under the civil provisions in the Act or (c) a person has contravened an order made by the Competition Tribunal or a court pursuant to the Act, may apply to the Commissioner of Competition (the “Commissioner”) for an inquiry into the matter. These types of applications are commonly referred to as “six resident applications”.

A six resident application must be accompanied by a statement that includes the following: (a) the names and addresses of the applicants; (b) the nature of the alleged contravention or offence under the Act; (c) the names of persons they believe to be concerned; and (d) a statement of the evidence supporting their opinion.

Upon receipt of a six resident application, the Commissioner is required to commence an inquiry into all such matters as the Commissioner considers necessary to inquire into with a view of determining the facts. Upon commencing an inquiry, the Commissioner has access to and may in his discretion use a wide range of formal information gathering tools, such as (a) orders requiring oral examinations under oath, the production of documents and/or the delivery of written information under oath; (b) search warrants; or (c) in certain cases, wiretaps.

Six resident applications are a relatively straightforward and cost-effective tool for Canadians looking to capture the attention of the Competition Bureau (the “Bureau”). There are many examples of six resident applications resulting in inquiries under the Act. In the past, six resident applications have generally been used to bring attention to consumer-protection issues. For example, Friends of the Earth Canada recently brought a six resident application with respect to alleged false or misleading marketing practices by certain manufacturers and distributors of single-use “flushable” wipes. This application has resulted in increased awareness for Canadians of the environmental impact of such wipes.

While six resident applicants are entitled to updates on the progress of an inquiry, they should be mindful that the Bureau is required by law to conducts its investigations in private and is bound by strict confidentiality provisions in the Act. If a prosecution or civil proceeding results from an inquiry, that fact will become a matter of public record and the Bureau will often make the public aware through announcements or position statements. However, where no prosecution or civil proceeding has been commenced, and despite that the Bureau strives to be as transparent as possible, parties can, at times, feel “in the dark” while the Bureau advances its inquiry. Should the Bureau commence an inquiry pursuant to a six resident application and discontinue its inquiry, the Commissioner is required to inform the six resident applicants of the reasons for doing so.

Private Equity in the Cross-Hairs of the Competition Regulator: Lessons Learned from Thoma Bravo

In recent years, competition/antitrust enforcers around the world, including Canada, have taken a marked interest in private equity deals.  As part of a broader global trend of tougher merger enforcement, private equity firms that have taken ownership positions (controlling or minority) in portfolio companies that are competitors have been subject to heightened scrutiny.  The litigation and subsequent settlement in involving Canada’s Competition Bureau and Thoma Bravo is the most recent example.

The Transaction

On May 13, 2019, Thoma Bravo (a private equity firm based in the United States) acquired Aucerna, a Calgary-based company that supplies reserves software, known as Val Nav, to oil and gas producers.

Before the acquisition, Thoma controlled several software companies, including a company known as Quorum. Quorum supplies reserves software, known as MOSAIC, to oil and gas producers.

The Bureau’s Challenge

32 days after the transaction closed, the Bureau sought to unwind the transaction, alleging a substantial lessening of competition in the market for reserves software for oil and gas producers in Canada. By bringing Aucerna and Quorum under common ownership and control, the Bureau alleged a merger to monopoly among the two largest Canadian suppliers of reserves software. The Bureau identified Aucerna’s Val Nav software and Quorum’s MOSAIC software as built and developed specifically for the Canadian market, and further alleged international competition from Schlumberger and Halliburton as insufficiently tailored for Canadian customers.

The Resolution

Approximately two months later, the litigation settled by way of a Registered Consent Agreement before Canada’s Competition Tribunal.  As part of the settlement, Thoma agreed to divest Quorum to a purchaser acceptable to the Bureau. The Bureau and Thoma agreed to the divestment of Quorum rather than any of the assets Thoma acquired from Aucerna through the transaction.

Lessons Learned

  • Great Scrutiny of Private Equity: The Thoma Bravo litigation demonstrates that Canada is no exception to the growing global scrutiny of private equity deals. Whether taking controlling or minority interests, private equity firms need to analyze the antitrust/competition implications of their prospective transactions, whether or not the transaction is subject to pre-merger notification before the Bureau.
  • Greater Scrutiny of Non-Notifiable Transactions: While not entirely clear, Thoma’s acquisition of Aucerna was likely not subject to pre-merger notification before the Bureau. The Bureau’s challenge of a non-notifiable transaction aligns with recent statements by the Bureau regarding its expanded Merger Intelligence and Notification Unit. The Bureau’s newly created Unit aims to identify non-notifiable transactions that may have competition concern. The Unit also aims to incentivize merging parties involved in competitively sensitive non-notifiable transactions to engage the Bureau pre-closing.
  • Post-Closing Unwinding of Transactions: Most merger challenges by the Bureau take place pre-closing, thereby preventing the intermingling of the merger parties’ businesses. The Bureau actions – seeking to unwind a transaction over a month post-closing – represents a rare exercise of discretion and a signal that no comfort should be taken from the lack of a pre-merger challenge by the Bureau.

Please contact any member of our Competition or Private Equity Group to discuss this development to ensure that appropriate consideration has been given to the heightened scrutiny from the Canadian competition regulators for private equity transactions.

Agreement Amongst Competition Authorities of the G7 Countries on the Digital Economy

The Competition authorities of the G7 countries (Canada, France, Germany, Italy, Japan, the U.K. and the U.S.) and the European Commission have reached a common agreement on the opportunities and challenges arising from the growing digital economy. The agreement was reached on June 5, and adopted by the Finance Ministers and the Bank of Governors of the G7 and the European Commission on July 18.

The competition authorities agreed on four primary principles:

  • Competitive markets are key to well-functioning economies.
  • Competition law is flexible and can and should adapt to the challenges posed by the digital economy without wholesale changes to its guiding principles and goals.
  • Governments should assess whether policies or regulations unnecessarily restrict competition in digital markets or between digital and non-digital players, and should consider procompetitive alternatives where possible.
  • Given the borderless nature of the digital economy, it is important to promote greater international cooperation and convergence in the application of competition laws.

The agreement notes that the digital economy has fundamentally changed the way that goods and services are produced and sold, and that the accumulation of data can aid in the improvement of existing products, or the formation of new ones. These benefits assist in evaluating how the digital economy has affected competition over time. The authorities noted that innovation facilitates economic growth and allows new entrants to enter the market and increase competition, while competition law enforcement has an important role to play in safeguarding consumer trust in the marketplace.

The authorities also noted the competition-related challenges that the growing digital economy presents, including factors that make market definition, market power assessment and competitive effects analysis more difficult, requiring closer analysis of non-price aspects of competition. They also discussed that an increased awareness for the identification of anti-competitive behaviour by dominant firms might be necessary as digital markets become more concentrated. The authorities agreed that these challenges are not outside of the reach of competition law, and that many features of digital markets are already being addressed by existing frameworks.

The agreement notes that in order to have effective enforcement, competition authorities need to be consistently improving their understanding of the competitive effects of new business models.

The agreement also highlights the importance of advocacy and of competition impact assessments of policies. The authorities agreed that governments should avoid using competition law enforcement to address non-competition objectives. They also noted that regulations can increase the cost of entry and entrench incumbents, and therefore have anti-competitive effects. They agreed that governments should monitor the competitive impact of prospective regulations and review the existing ones to ensure that they promote competition and maintain competitive markets.

Finally, the authorities confirmed their agreement on the importance of cooperation with their international counterparts.

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.