The recent Kobe Mohr v. National Hockey League decision of the Federal Court (the “Decision”) provides important jurisprudential guidance on the application of sections 45 and 48 of the Competition Act (the “Act”). These provisions prohibit naked anti-competitive conspiracies and conspiracies relating participation in professional sports respectively.
On July 1, 2021, the Competition Tribunal (the “Tribunal”) ruled that it does not have the power to issue “interim, interim orders” in the context of a proposed merger of two companies in the midstream infrastructure and environmental solutions space. Rather, the Tribunal found that, in the case of mergers, interim relief is limited to that expressly provided for by sections 100 and 104 of the Competition Act (the “Act”).
In contrast to Canada, South Africa’s competition law has both competition and public interest objectives. A major focus of the legislation from a public interest perspective is the promotion of historically disadvantaged persons and small business. This is understandable, given the fact that when the legislation was first enacted in 1998, South Africa was emerging from an apartheid era of concentrated large enterprises and the exclusion of many, particularly historically disadvantaged persons, from the economy.
This focus is apparent in the legislation, with the preamble to the Competition Act (the “Act”) noting that “the economy must be open to greater ownership by a greater number of South Africans”. The purpose of the Act is also clear, being to “promote and maintain competition” in South Africa in order to achieve several objectives, including “to ensure that small and medium-sized enterprises have an equitable opportunity to participate in the economy; and “to promote a greater spread of ownership, in particular to increase the ownership stakes of historically disadvantaged persons” (“HDIs”).
These objectives were enhanced through amendments to the Act that were passed into law in 2019. The Department of Trade, Industry and Competition (the “DTIC”), under Minister Patel, has a particular focus on this topic, having recently published a which emphasises the public interest objectives of the Act.
This renewed focus has very recently come to the fore in relation to merger control. In terms of the Act, mergers (a generic term covering M&A activity) must be notified to the competition authorities if they meet certain thresholds, and those transactions may not be implemented before approval has been obtained. In assessing whether a transaction should be approved, the competition authorities must consider not only the traditional competition question of whether the transaction is “likely to substantially prevent or lessen competition” by assessing factors such as market concentration and barriers to entry, but also whether there are public interest concerns arising from the transaction. The competition and public interest assessments are equally important, and it is possible that an otherwise anti-competitive merger could be approved because it is overwhelmingly in the public interest. Similarly, an unproblematic merger from a competition perspective could be prohibited on public interest grounds.
Until now, no merger has been prohibited solely on public interest grounds. Instead, conditions have been imposed to ameliorate the negative public interest effects of the merger. However, following the recent emphasis on public interest, and in particular Black Economic Empowerment (“BEE”) and worker participation, the Competition Commission (the “Commission”) prohibited a merger solely on public interest grounds for the first time on 1 June 2021.
The transaction in question involved the proposed acquisition of Burger King (South Africa) and Grand Foods Meat Plant (the “Target Firms”) by ECP Africa, part of Emerging Capital Partners, a private equity firm founded in the USA with investments across Africa. The seller was Grand Parade Investments, a company controlled by HDIs, whereas ECP Africa had no such shareholding. Although the parties to the merger evidently offered commitments that had public interest benefits, such as increased employment for HDIs, increased employee benefits and investment in capital expenditure, it appears that these commitments were not sufficient to persuade the Commission to approve the merger. The Commission found that the proposed transaction raised no competition concerns, but that it raised very significant public interest concerns in that it would result in a significant reduction in BEE ownership in the Target Firms – from more than 68% to 0% – and on this basis prohibited the merger.
Predictably, the Commission’s decision has drawn strong criticism. The transaction would bring much-needed foreign investment into South Africa, and there is a concern that this decision will deter future potential investors. Some argue that this prohibition hinders rather than assists BEE, as it prevents BEE shareholders from realising their investment and thus freeing capital to HDIs to further invest in the South African economy. Ironically, this is an observation made by the Competition Tribunal (“Tribunal”) in its so-called Shell/Tepco decision some years ago, when the Commission sought to impose conditions to ensure that BEE was not hindered. The Tribunal cautioned the Commission against supporting HDIs by interfering in the commercial decisions made by such investors, indicating that it may put such investors at an unintended disadvantage.
Even before this decision was issued, there was understandably some scepticism that the competition authorities’ increased focused on public interest objectives might not achieve the desired outcome. It could legitimately be argued that the more interventionist approach to tip the scales unduly in favour of the government’s developmental objectives would blunt the ability of free markets to kickstart economic growth. This risks a movement towards single-minded interventionism, at the expense of investment, market-dynamism and international competitiveness. This decision simply serves to justify the critics’ scepticism.
It is critical that authorities do more than simply pay lip service to the benefits of investment. Advancement of small firms and transformation should, quite rightly, be prioritised, but with a balanced and holistic appreciation for trade-offs that may result, and with sufficient care to preserve and promote competitiveness. This sentiment is adequately expressed by the Tribunal in the Shell/Tepco merger, where then Chairperson, David Lewis warned that “the competition authorities, however well intentioned, are well advised not to pursue their public interest mandate in an overzealous manner lest they damage precisely those interests that they ostensibly seek to protect”.
As noted in our prior blog post titled “New Competitor Collaboration Guidelines”, the updated Competitor Collaboration Guidelines (the “CCGs”) issued earlier this month include a new hypothetical example of an illegal “hub and spoke” conspiracy among a mid-stream distributor and the retailers selling its products. As discussed in more detail below, this example suggests that the Competition Bureau (the “Bureau”) intends to take a relatively broad and expansive approach to hub and spoke conspiracies – one that is not entirely supported by existing case law in Canada.
This blog post includes an overview of the conspiracy provisions in the Competition Act (the “Act”), a summary of hub and spoke conspiracies, a discussion of the new example in the CCGs and some practical advice on what businesses can do to minimize the risk of issues arising under the Act.
Overview of Conspiracy Provisions
Section 45 of the Act makes it a criminal offence for competitors or potential competitors to agree to (a) fix, maintain, increase or control the price for the supply of the product; (b) allocate sales, territories, customers or markets for the production or supply of the product; or (c) fix, maintain, control, prevent, lessen or eliminate the production or supply of the product. These types of agreements, which are often referred to a “naked” or “hardcore” cartels, are considered the “supreme evil” of competition law and, as such, are subject to severe criminal penalties. In fact, a person found guilty of an offence under this section may be imprisoned for up to 14 years and/or fined up to $25 million – which are among the most severe penalties anywhere in the world for cartel-related offences.
Summary of Hub and Spoke Conspiracies
A “hub and spoke conspiracy” is a term of art used to describe horizontal conspiracies that include participants who are in a vertical relationship with one or more of the competitor conspirators. As set out in the illustration below, the conspiracy is organized so that one level of a supply chain (e.g., a wholesaler) acts like the “hub” of a wheel. Vertical relationships up or down the supply chain act as the “spokes” and, most importantly, a horizontal agreement among the spokes acts as the “rim” of the wheel. The distinguishing feature of a hub and spoke conspiracy is the participation of the vertically aligned conspirator in the horizontal agreement, which is intended to eliminate competition among the spokes.
In order to prove a hub and spoke conspiracy, there must be direct or circumstantial evidence of an agreement among the competitors that make up the rim. In this regard, jurisprudence in the United States has made it clear that “rimless” wheels do not give rise to a hub and spoke conspiracy as that term is used in antitrust law. For example, as stated by the United States Court of Appeals for the Ninth Circuit in its decision in Guitar Centre, “what is a wheel without a rim?”
Absent direct evidence of a horizontal agreement, it can be difficult to find sufficient evidence to show a connecting agreement between the horizontal competitors to form the rim. When this is the case, courts generally look for circumstantial evidence – or “plus factors” – that may allow them to infer a horizontal agreement. As discussed in more detail in the United States’ submission to the Organisation for Economic Co-operation and Development on hub and spoke arrangements, these factors include, but are not limited to, the following: (a) the spokes acting against their own self-interest; (b) the spokes knowing about agreements with other spokes and expecting reciprocity; (c) abrupt changes to business practices; (d) bid rigging among the spokes; (e) communication among the spokes; or (f) communications from hubs to spokes regarding other spokes’ intentions.
Example of Hub and Spoke Conspiracy
The CCGs include the following example of a price-fixing hub and spoke conspiracy:
Example 1: Price-fixing agreement
X, Y and Z are firms that compete in respect of the retail sale of gadgets in Canada. They are all supplied gadgets by Company A, a mid-stream distributor, and have traditionally been aggressive competitors who never spoke to one another. Company A advised X that it wanted to increase the price of gadgets and that it had already received the consent of Y who agreed to raise prices by 5% if X raised its prices by 5% too. X agreed with its supplier to increase its price by 5%.
This agreement would likely raise concerns under section 45 of the Act. Subsection 45(1) of the Act provides that it is illegal for two or more competitors to agree to fix, maintain, increase or control the price for the supply of a product. It is unnecessary for parties to communicate directly. In this instance, the intermediary’s assurances that Y would be increasing its prices if X did too facilitated the parties’ “meeting of the minds”, as required under subsection 45(1). Further, if Company A then proceeded to have a similar conversation with Z and Z was unaware of X’s participation in the conspiracy but was aware of Y’s participation, Z could be found guilty of conspiring with X and Y, even if it was unaware that company X was party to the conspiracy. Further, Company A may also be guilty of an offence under section 45 for aiding and abetting the conspiracy as described in sections 21 and 22 of the Code, even though Company A does not compete with any of X, Y or Z in the retail market.
The concerns in the above example arise from the existence of certain “plus factors” described in the US jurisprudence. In particular, the concerns are based on (a) communications between the mid-stream distributor (which is the hub) and the retailers (which are the spokes) regarding proposed price increases and (b) the expectation of reciprocity among the retailers. Significantly, the example also suggests that one retailer (in this case Company Z) can be liable for the entire conspiracy, even when it is not aware of all of the other participants to the conspiracy (in this case Companies X and Y). This is a broad and expansive view of the hub and spoke theory – and one that does not appear to be supported by any jurisprudence in Canada.
Only time will tell if Canadian courts are willing to accept the broad and expansive notion of hub and spoke conspiracies articulated by the Bureau in the CCGs. That being said, because the CCGs describe the general approach of the Bureau in applying section 45 of the Act, businesses would be well advised to take any and all steps to minimize the risk – or even the perception – of such concerns under this theory of harm.
In particular, in addition to avoiding inappropriate communications with competitors, businesses need to be mindful of communications with common upstream suppliers from which they acquire products or services and common downstream customers to whom they supply products or services. For example, businesses should not discuss or share any competitively-sensitive information with competitors, common suppliers or common customers, such as information relating to their current or proposed pricing, marketing plans or business strategies. Similarly, if a business has legitimately obtained competitively-sensitive information from one of its customers or suppliers, it should avoid sharing it with other common customers or suppliers – as doing so could increase the risk of the business being viewed as a “hub”.
In addition, businesses should avoid engaging in any conduct that may be construed as a “plus factor”, such as acting against their own self-interest, making abrupt changes to their business practices or communicating the intentions of one customer with another customer. To the extent that a business does engage in any such conduct, the rationale for doing so should be clearly and unambiguously recorded in relevant business documents, such as meeting minutes or business, marketing or strategic plans.
Given the Bureau’s broad and expansive view of hub and spoke conspiracies, and the significant consequences that can arise from a breach of the cartel provisions in the Act, businesses should consider adopting robust compliance policies or updating their existing policies.
If you have questions about the cartel provisions in the Competition Act and/or compliance policies, you can reach out to any member of Fasken’s Competition, Marketing & Foreign Investment group. Our group has significant experience advising clients on all aspects of Canadian competition law.
The information and guidance provided in this blog post does not constitute legal advice and should not be relied on as such. If legal advice is required, please contact a member Fasken’s Competition, Marketing & Foreign Investment group.
Following its recent announcement of a proposed market inquiry in this sector, the South African Competition Commission (the “Commission”) is continuing its efforts to improve regulatory scrutiny within digital markets. On 7 May 2021, the Commission published for comments draft amendments to its guidelines for the notification of small mergers (the “Draft Amendments”).
Pursuant to the provisions of the Competition Act, No. 89 of 1998 (as amended) (the “Act”), small mergers are not subject to pre-merger notification because they do not exceed the applicable pre-merger notification thresholds. However, the Commission may, for a period of up to 6 months following the implementation of a small merger, call for the merger to be notified if it is of the opinion that the merger may substantially prevent or lessen competition or that it cannot be justified on public interest grounds.
The existing guidelines require that parties to a small merger who are being investigated or prosecuted for engaging in prohibited practices inform the Commission of their proposed merger. The Draft Amendments seek to expand the scope of these guidelines as outlined below.
The Commission has increasingly expressed concerns over the insufficient regulation of competition within digital markets, resulting in its recent launch of a market inquiry into online intermediation platforms. The Draft Amendments note that there is an increasing risk that the growth of digital players through the acquisition of new, innovative companies “may have a detrimental impact on innovation, particularly where these digital companies act as gatekeepers in multiple markets.” The Commission has concerns that where these acquisitions are of start up entities with assets and turnover that fall below the merger notification thresholds, they will not require notification and may therefore escape regulatory scrutiny. The Draft Amendments thus seek to clarify instances where small mergers within digital markets will need to be notified.
The Draft Amendments retain the requirement of the existing small merger guidelines that the Commission be informed of a small merger where, at the time of entering into the transaction, any of the firms, or firms within their group, are:
- subject to an investigation by the Commission under Chapter 2 of the Act (being the chapter dealing with prohibited practices); or
- respondents to pending proceedings referred by the Commission to the Competition Tribunal under Chapter 2 of the Act.
To address the concerns outlined above, the Draft Guidelines seek to expand the criteria for such notification to include small mergers where either the acquiring firm or target firm, or both, operate within one or more digital markets and one of the following criteria are met:
- “the consideration exceeds R190 million provided the target firm has activities in South Africa;
- the consideration for the acquisition of a part of the target firm is less than R190 million but effectively values the target firm at R190 million (for example, the acquisition of a 25% stake at R47.5 million) provided the target firm has activities in South Africa and, as a result of the acquisition, the acquiring firm gains access to commercially sensitive information of the target firm or exerts material influence over the target firm within the meaning of section 12(2)(g) of the Act;
- at least one of the parties to the transaction has a market share of 35% or more in at least one digital market; or
- the proposed merger results in a combined post-merger market share at which the merged entity gains or reinforces dominance over the market, as defined by the Act.”
Parties have until 21 June 2021 to submit comments on the Draft Amendments. For more information please contact any member of Fasken’s Competition, Marketing & Foreign Investment group. Our group has significant experience advising clients on all aspects of South African competition law.
Non-compete clauses are included in virtually all purchase and sale agreements. They are designed to ensure that purchasers realize the full value of the acquired business by, for example, prohibiting competition from vendors within a defined area for a certain amount of time. There is no question that such clauses are valuable to purchasers and essential in the mergers and acquisition context.
The Canadian Competition Bureau (the “Bureau”) has long recognized that non-compete clauses “can serve legitimate purposes”. However, the Bureau’s approach to non-compete clauses has been revised in its updated Competitor Collaboration Guidelines (the “CCGs”), which were issued on May 6, 2021 – see our prior blog post titled “New Competitor Collaboration Guidelines”. Significantly, as discussed in more detail below, the Bureau has signalled that it may consider such clauses under the criminal cartel provisions in the Competition Act (the “Act”) where they, for example, amount to a market allocation agreement or there is evidence that they are nothing more than a “sham”. Continue Reading Non-Compete Clauses – So What’s the Risk?
On May 6, 2021, the Competition Bureau (the “Bureau”) released its new (and long-awaited) competitor collaboration guidelines (the “New CCGs”). This is the first update to these guidelines since the previous version was published by the Bureau over a decade ago, in 2009 (the “2009 CCGs”).
The New CCGs include updated guidance on various matters, including with respect to (i) how the Bureau assesses whether or not certain firms are competitors or potential competitors, (ii) how the Bureau intends to approach buy-side agreements, and (iii) increased scrutiny of certain agreements between competitors, particular in the context of mergers.
Competitors and Potential Competitors
The New CCGs clarify the types of evidence the Bureau will consider when deciding whether suppliers of differentiated products are competitors or potential competitors. The types of evidence enumerated in the CCGs include business and strategic plans prepared in the course of business, marketing and communications with potential customers, evidence of actual competition for similar customers, and the extent to which each party considers the other party to be a competitor or potential competitor.
With respect to section 45 of the Competition Act (the “Act”), new examples provided in the New CCGs clarify that where a wholesaler facilitates a price-fixing conspiracy among its retail clients, such wholesaler may be a party to the conspiracy even if it does not compete in the retail market. This new guidance may act to remove some of the ambiguity around certain “hub-and-spoke” – like arrangements.
The updated guidance in the New CCGs directly addresses buy-side agreements such as no-poach and wage-fixing agreements (something the previous guidelines did not). In addition to reiterating the statement from the 2009 CCGs that section 45 applies only to the supply – and not the purchase – of a product, the New CCGs also explicitly contemplate no-poaching and wage-fixing agreements, stating that such agreements may be subject to review under Part VIII of the Act. This echoes the previous guidance by the Bureau set out in its November 2020 statement on buy-side agreements.
Mergers and Ancillary Agreements
The New CCGs include some additional notable changes regarding review of ancillary arrangements, which appear to signal increased scrutiny and enforcement by the Bureau.
The New CCGs suggest that some merger transactions may be reviewed under other provisions of the Act, aside from section 92. The New CCGs include a note that “[w]here parties enter into any agreement(s) that goes beyond the acquisition, amalgamation or combination agreement, whether within or outside said agreement, the Bureau will consider under which provision(s) of the Act any investigation or inquiry should be pursued.” For example, the New CCGs also note that where non-compete agreements are entered into in connection with a merger, such agreements may, in rare circumstances, be considered under section 45 of the Act.
The New CCGs also note that, in general, the Bureau will be looking closely at agreements between competitors which are structured so as to avoid the application of section 45. The Bureau will carefully assess whether such collaboration is a “sham” and whether the arrangement should be reviewed under section 45. Together with the above point, this signals that the Bureau will be increasing its scrutiny of certain business agreements, including non-compete agreements entered into in connection with a merger, and may be less willing to accept these as ancillary restraints in all cases.
Lastly, in its list of examples of agreements/clauses which may potentially be considered an ancillary restraint by the Bureau, and therefore generally be reviewed under Part VIII rather than section 45 of the Act, the New CCG’s have notably removed the example of a non-competes found in employment agreements, which was previously included in the 2009 CCGs. This may not be a significant change, and may simply be recognition by the Bureau that employment agreement non-competes should not have been contemplated as an ancillary restraint under section 45(4). Such agreements are generally vertical agreements between an employer and an employee rather than horizontal agreements between competitors, and accordingly they would not generally be considered under section 45 at all.
While the revisions to the New CCGs may not be as drastic as expected after more than a decade, they do signal that the Bureau is taking note of current issues, and may be increasing its scrutiny of competitor collaborations.
In recent years, competition authorities around the globe have indicated an increased interest in the video game industry. As noted in a 2019 perspective paper by the US FTC, video games have evolved from being static one-time purchases to functioning as a dynamic service where players can make further in-game purchase, or microtransactions, for in-game content.
With the development of new monetization strategies, new deceptive marketing practices have also emerged. In particular, mobile game publishers have been criticized by both players and industry observers for publishing deceptive advertisements making use of embellished or unrelated gameplay footage in order to entice individuals to download what are often simple and lacklustre mobile games. The goal of these advertisements is not to necessarily achieve a high degree of player retention, but to maximize consumer exposure and attract the sizeable minority of players whom are willing to spend money for in-game microtransactions or sit through a large number of in-game ads which generate ad revenue.
Deceptive Gameplay Footage in Video Game Advertising
There is a recognized degree of difficulty when reviewing advertising that features purported representations of gameplay and in-game content. Compared to more traditional advertising which shows dramatized representations of video games that are evidently disconnected from actual in-game content, such a distinction is blurred with the use of gameplay footage and brings into question the acceptable degree of flexibility or “artistic license” that publishers may have when marketing their respective games. In this respect, two decisions from the UK’s Advertising Standards Authority (ASA) provide contrasting examples illustrating the difficulty in addressing this legal question.
In 2016, the ASA dismissed a complaint against a video game publisher over marketing materials for “No Man’s Sky”, an open world space and planetary exploration game. In that case, complainants stated that some of the game’s content and graphics were not as depicted in the allegedly misleading marketing materials. The ASA considered a wide range of issues but generally concluded that any apparent differences with in-game content were unlikely to substantially impact a consumer’s decision to buy the game, and any differences with in-game graphics were subject to consumer understandings that graphics were dependent on the power of the consumer’s computer. In concluding their decision, the ASA “acknowledged that … advertisers would aim to show the product in the best light” and “that the overall impression of the ad was consistent with gameplay and the footage provided… and did not exaggerate the expected player experience of the game.”
In contrast, in September 2020, the ASA upheld a complaint against a mobile game publisher concerning deceptive Facebook advertisements for two mobile games. In this case, the ads showed a game where users pull pins in a specific order to solve a puzzle. However, such puzzles were only available once every 20 levels, with all other levels being simple “match-three” style games where players simply moved shapes so as to match three in a row. In their decision, the ASA found that consumers would understand from the ads that the content featured was representative of the games overall. While the publisher included text which stated “Not all images represent actual gameplay”, the ASA found this insufficient as consumers would still expect the two mobile games to consist of a similar sequential problem solving puzzles as opposed to a “match-three” style game.
The seemingly disparate conclusions reached by the ASA were clarified in a recent 2021 bulletin where the ASA summarized that their consideration of gameplay is “context and content” specific and should be undertaken on a “case-by-case” basis. Citing their 2016 decision, the ASA specifically noted that there may be some features that are “unlikely to affect a consumer’s decision to make a purchase” and other extenuating circumstances that “will impact on visuals and gameplay being replicated by players.”
Assessing Deceptive Gameplay Footage under the Canadian Competition Act
While there have not been any similar decisions in Canada, it is clear that such deceptive practices are within the ambit of Canada’s Competition Act.
The Competition Act prohibits the making of a false or misleading representation to the public by “any means whatsoever”. Any potentially deceptive representation is assessed as to whether it is (1) “false or misleading”; and (2) “false or misleading in a material respect.” In regards to the first factor, it involves, among other things, an analysis of the “general impression” conveyed by the representation which is assessed from the perspective of a “credulous and inexperienced” average consumer. In regards to the second factor, “materiality” is defined as whether the representation would influence a consumer in deciding whether to purchase the product being offered.
In the context of such an analysis, a similar “case-by-case” approach as described by the ASA would appear to be applicable in the Canadian context. While the application of such an approach may be more difficult for complex video games where authorities must consider alleged misrepresentations amid a myriad of content and features, such difficulties are evidently lessened for simple mobile games with fewer moving parts. The comparatively simple parameters of a mobile game make any alleged misleading representation of gameplay more likely to be material from the perspective of the average consumer. Furthermore, the simplicity of a mobile game makes it easier for a publisher to provide a more encompassing impression of their mobile game. In turn, this underscores the comparative ease for regulatory authorities to see whether the general impression conveyed by featured gameplay footage is actually in line with the content available to mobile game users.
Avoid it being “Game Over” – Comply with the Competition Act!
Mobile game publishers who advertise their games to Canadian consumers with deceptive gameplay footage run the substantial risk of being in violation of the Canadian Competition Act. Accordingly, in avoiding any enforcement action and potential penalties, mobile game publishers should be cognizant in ensuring that any marketing materials making use of purported gameplay convey an accurate representation of actual gameplay content.
South Africa’s Competition Commission (the “Commission”) has published the finalised Terms of Reference for its Online Intermediation Platforms Market Inquiry (“OIPMI”). The OIPMI follows the Commission’s release of its “Competition in the Digital Economy” paper wherein it notes the benefits of online products and services but expressed concerns about the ‘winner-takes-all’ nature of some of these markets, particularly for search, shopping and social media.
The OIPMI seeks to examine and potentially address the features of online intermediation platform markets which may hinder competition. The Commission has noted that the “normal” competition enforcement tools may be insufficient to address issues within digital markets, particularly the ability of first-movers to entrench their positions as well as the dominance of certain platforms, resulting in an inability for new players to enter the market. The Commission notes that in addition to platform competition concerns, the dependency of business users, and in particular small and medium sized enterprises (“SMEs”), on these platforms creates the opportunity for exploitative and/or exclusionary conduct.
The Commission notes that the Covid-19 pandemic has accelerated the growth of the online economy and access thereto for local online business will be critical for economic recovery.
The Commission has sought a narrow, focused scope of the OIPMI to deal with platforms intermediating goods and services between businesses and customers, which are typically monetised on commission/sales business models. This includes online classifieds, travel and accommodation aggregators, short-term accommodation intermediation, food delivery, application stores; and any other platforms the Commission may identify in the course of the inquiry.
The OIPMI will broadly focus on three areas of competition and public interest: a) market features that may hinder competition amongst the platforms themselves; b) market features that give rise to discriminatory or exploitative treatment of business users; and c) market features that may negatively impact on the participation of SMEs and/or firms owned by historically disadvantaged persons (“HDPs”). More specifically, some of the objectives of the inquiry include evaluating:
- trends in adoption and use of the different online intermediation platform markets, including the identification of leading platforms across each market.
- whether conduct or contracts are likely to have the effect of raising barriers to entry and reducing competition amongst platforms. Price parity clauses, exclusive contracting, and loyalty incentives have been identified as potential issues.
- whether particular conduct is discriminatory or unfair, and the likely effect on consumer choice, competition amongst business users and the participation of SMEs and HDPs. Self-preferencing conduct, discriminatory pricing, promotional or pricing restrictions, inflated access pricing and access to business user transaction data have been flagged as potential issues.
- whether the ranking algorithms used by platforms, including any ‘pay for position’ or promotional opportunities, negatively impact competition on the merits, consumer choice and/or the participation of SMEs and HDPs.
The OIPMI will commence on 10 May 2021, whereafter the Commission will have 18 months to complete the inquiry (i.e. October 2022, although this period can be extended). The Commission envisages gathering information through a range of mechanisms, including questionnaires, stakeholder meetings and public hearings. Firms wishing to make submissions to the Commission on the OIPMI should notify the Commission in the prescribed form. Further details of the administrative phases of the inquiry will be published at the commencement of the inquiry.
The information and guidance provided in this blog post does not constitute legal advice and should not be relied on as such. If legal advice is required, please contact a member of Fasken’s Competition Marketing and Foreign Investment Group.
National security concerns have been cited by some countries as the motivation behind recent legislative and policy changes directed at regulating foreign investment. The creation of new or the bolstering of existing national security investment review regimes raises the question as to whether these changes are solely based on legitimate national security concerns or whether some countries are using national security as a guise for more protectionist practices.
For example, while critical infrastructure has long been considered as needing protection from foreign threats to security, the COVID pandemic has brought such concerns to the forefront, at times perhaps overshadowing the concerns more typically associated with national security such as threats of terror and espionage. Unfortunately, if an overly broad definition is given to what is considered to be “critical infrastructure”, or what constitutes a threat or risk to critical infrastructure, government protective actions may also appear anti-globalist.
How COVID-19 changed the ‘national security’ review process
Rarely in recent memory have domestic resource vulnerabilities been as obvious as they have been during the pandemic. Supply chains have been shaken and availability of necessities such as vaccines and other pharmaceuticals, food, energy, etc. has becomes a serious concern for many nations.
Canada faced the direct consequences of relying on non-domestic sources of supply at the outset of the pandemic when it needed to obtain personal protective equipment not just for health care workers, but also for the general population. Where Canada had historically relied on foreign suppliers, including on its close relationship with its largest trading partner, the US, the global crisis drove home the fact that in a time of shortages of critical goods such as PPE, every country has a primary obligation to first protect its own citizens.
Because of supply issues caused by the global crisis, countries worldwide are creating or strengthening their national security review regimes to guard against unwanted foreign investment. As we move forward, perhaps at some point with the pandemic in our collective hindsight, the question may be asked whether countries were, in fact, directly responding to the pandemic, or whether they were taking advantage of the opportunity to pursue a more protectionist approach to trade.
How ‘national security’ is expanding
Whether related to the pandemic entirely, partially, or not at all, the fact is that countries are strengthening their foreign investment laws in the name of national security, in part, by expanding the list of investment categories that could potentially attract national security reviews. Germany, which had been developing a stronger foreign investment review process to apply to the pharmaceutical industry and other related sectors in response to the pandemic, now intends to apply its new rules to additional sectors including robotics, aerospace, autonomous driving, artificial intelligence, quantum and nuclear technologies, and cybersecurity.
The United Kingdom’s National Security and Investment Bill, currently working its way through the UK Parliament, originally applied to defence industries but was subsequently broadened to include critical infrastructure, advanced technology and personal data.
China’s new Measures for Security Review of Foreign Investment, which came into effect in January 2021 provides a broad and open-ended list of key sectors to which its investment regime applies.
Beyond simply strengthening legislation, developed nations around the globe have taken and continue to take actions that raise questions of whether countries are pursuing economic objectives under the guise of ‘national security’ – less welcoming to foreign investment and moving away from globalism. For example, Australia and New Zealand have blocked a number of Chinese investments on national security grounds in recent years. China’s reaction has been to question the true motivation behind such actions.
Even Canadian investment proposals have been impacted. Notably, in January 2021, Canadian convenience store operator, Alimentation Couche-Tard Inc., abandoned its proposed $20-billion+ acquisition of France’s largest grocery chain, Carrefour SA, after the French government, upon being informed of the deal, immediately reacted by publicly promising to block it. While the French government has insisted that its resistance to the deal was grounded in a concern over food security, it is also possible that, with Carrefour being a flagship of French business, the decision was also politically motivated, with fear of support coalescing around the government’s political opposition, which has consistently maintained a nationalist economic platform.
How Canada’s approach measures up
In contrast to some of the national security measures being taken by other countries, one might suggest Canada’s rules-based national security review process is much more reasonable and predictable. While “national security” is not defined in the Investment Canada Act, Canada’s national security review guidelines provide for a number of factors used to determine whether a national security review will be conducted. Where legitimate national security concerns exist, Canada may intervene, but even in such cases, parties may be able to reach a mediation agreement to mitigate concerns, allowing a transaction to proceed.
On March 24, 2021, Canada announced updates to its national security review guidelines, which expanded the list of factors the government will consider during the national security review process, and provided some added clarity with respect to some of the pre-existing factors (see Fasken’s bulletin on the updates here). Although the list is structured as a non-exhaustive list of factors to be considered (and thus, other factors can and likely will come in to play), the recent updates to the guidelines have provided more clarity around what may constitute a national security concern.
While one cannot entirely mitigate against the risk of a national security review even in Canada, in the wake of the pandemic with countries world-wide reimagining the scope of ‘national security’ and responding unpredictably to possible foreign investment, Canada’s fair and steady approach to welcoming most foreign investment proposals may positively distinguish it from other jurisdictions.