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.