The COVID-19 pandemic has impacted just about every aspect of our personal and professional lives. From where we work and shop to how we stay in touch with family, friends and colleagues – nothing is the same as it was even just a couple of months ago!

M&A practices are also changing as businesses and their counsel carefully consider the impact of COVID-19 on, among other things, material adverse change, purchase price adjustment, regulatory approval, indemnity and force majeure provisions. These considerations apply to agreements signed prior to the pandemic, to agreements currently being negotiated and to agreements that will be negotiated in at least the near future.

As the title suggests, this blog post considers the impact of COVID-19 on interim operating covenants and the potential antitrust concerns that could arise if a purchaser becomes too involved in competitively-sensitive aspects of a seller’s business prior to closing.

Interim Operating Covenants

M&A agreements typically include interim operating covenants, which require that the seller operate the acquired business in a certain way between the time the agreement is signed and the time of closing. The purpose of these covenants is to help ensure that the purchaser receives the business in substantially the same condition at closing as it was when the due diligence was conducted and the agreement was signed.

While the nature and scope of interim operating covenants vary from agreement-to-agreement, they generally require that the seller (a) operate the business in the ordinary course consistent with past practice and (b) maintain relationships with key stakeholders, such as employees, customers and suppliers – except as otherwise agreed to by the purchaser or required by applicable law. In addition to these general requirements, agreements typically include detailed covenants describing specific actions the seller must take, specific actions the seller must refrain from and specific actions the seller must refrain from without the purchaser’s prior consent.

It is often challenging for sellers to comply with these covenants in the best of times. However, it is now even more challenging in the midst of the global COVID-19 pandemic – particularly because most existing agreements do not include exceptions to address the impacts of COVID-19. For example, in order to survive, sellers may determine that it is necessary to incur additional debt, delay the payment of invoices, revise budgets, terminate employees, defer capital expenditures or shut down facilities – actions that in most cases are inconsistent with past practice and require the consent of the purchaser.

While antitrust agencies understand the need for interim operating covenants and other pre-merger coordination, they may become concerned in certain contexts, such as where the merging parties are competitors and they engage in conduct that impacts competition in the marketplace prior to closing. For example, William Blumenthal, the former General Counsel at the United States Federal Trade Commission, previously stated as follows:

… merging firms have a legitimate interest in engaging in certain forms of coordination that would not be expected except in the merger context. The most common forms are due diligence and transition planning, both of which necessarily will involve exchanges of information at levels of detail that would not normally occur among independent firms. In addition, merging firms sometimes enter into covenants or engage in practices that would not normally be seen among independent firms. These forms of premerger coordination will often be reasonable and even necessary to implement the legitimate objectives of the merger agreement. Where the merging firms are competitors or are otherwise in a relationship that affects competitive interactions in the marketplace, however, premerger coordination can present issues…

Gun Jumping

In the context of mergers, antitrust agencies, including the Competition Bureau (the “Bureau”), are particularly concerned with pre-closing information exchanges, coordination and integration that could allow the parties to coordinate future conduct so as to lessen competition – concerns that are amplified if the contemplated transaction does not materialize. This conduct, commonly known as “gun-jumping”, can result in investigations, fines or injunctive relief under the Competition Act (the “Act”). While the Bureau has not been as active as the U.S. antitrust agencies in the area of “gun jumping”, it has expressed interest in pursuing this conduct in appropriate cases.

In Canada, gun-jumping may raise issues under either the civil pre-merger notification provisions or the criminal conspiracy provision of the Act:

  • Transactions that are subject to pre-merger notification in Canada cannot be closed until the applicable waiting period has expired or been terminated or waived. Closing a  transaction early may result in significant consequences, including orders requiring the dissolution of the merger, the divestiture of assets or shares and/or the payment of administrative monetary penalties of up to $10,000 per day.
  • Where parties to a proposed transaction are actual or potential competitors, they may violate the criminal conspiracy provisions if, before the transaction closes, they agree to (a) fix, maintain, increase or control the price for the supply of a product; (b) allocate sales, territories, customers or markets for the production or supply of a product; or (c) fix, maintain, control, prevent, lessen or eliminate the production or supply of a product. The penalties for breaching this provision include fines of up to $25 million and/or imprisonment of up to 14 years.

In light of the above, merging parties must resist the considerable temptation to get on with integration and begin acting as one entity prior to closing. They must continue to compete against each other as they have in the past up to the date of closing. In other words, the proposed transaction must not influence the parties’ competitive behaviour in the marketplace – each party should strive to be as competitive as possible. Merging parties should also be mindful of the information and documents they share in the period prior to closing. For more information, including best practices, see “Mitigating the Risk of Pre-Closing Information Exchanges” and “Bad Documents – So What’s the Problem?”.

The merging parties may, however, engage in legitimate activities directed at completing the proposed transaction. For example, the parties may consider integration opportunities for non-competitively sensitive matters, such as the integration of computer systems, personnel and facilities. However, each initiative should generally be reviewed by counsel as the analysis of what is permissible is often very fact-specific.

Application to Interim Operating Covenants

As noted above, interim operating covenants requiring that a seller operate the business in the ordinary course consistent with past practice and maintain relationships with key stakeholders are unlikely to raise any meaningful antitrust risk. However, there is increased risk if the merging parties are actual or potential competitors and the purchaser’s consent is required in respect of matters that may fall within the scope of the criminal conspiracy provisions, such as decisions to set prices at particular levels, target certain customers, defer capital expenditures or shut down facilities. For example, if a purchaser consents to the seller’s request to shut down a manufacturing plant, this could potentially be viewed as an agreement between competitors to limit production capacity contrary to section 45 of the Act.

In contrast, concerns would not arise under the criminal conspiracy provisions if the seller unilaterally makes the decision to close the plant. In this regard, as noted by Mr. Blumenthal:

The spectrum of potential buyer control (from problematic to less so) runs from decisions (i) dictated by the buyer pursuant to powers under the merger covenants, to (ii) reached jointly by the merging firms during the planning process, to (iii) taken unilaterally by the seller after consultation with the buyer, to (iv) taken unilaterally by the seller entirely on its own initiative, although presumably with an eye towards the pendency of the merger.

To mitigate against these concerns, sellers could attempt, when negotiating the merger agreement, to include exceptions to the interim operating covenants requiring the acquired business to be conducted in the ordinary course to address the COVID-19 pandemic. For example, sellers could include a carve-out for any conduct required to comply with social distancing, closures, quarantine, “stay-at-home” or any other applicable law, order, recommendation or guideline by any governmental entity in connection with or in response to COVID-19. Sellers could also consider including an exception for actions or omissions taken in good faith to respond to any impact or probable impact on the acquired business due to the COVID-19 pandemic or measures taken to comply with directives from governmental authorities, including changes in relationships with key stakeholders.

Implications

It is important that merging parties operate independently and strive to be as competitive as possible prior to closing. Agreeing to fix prices, allocate markets or restrict output – even in the context of pre-existing interim operating covenants requiring that the purchaser consent to any and all conduct outside the ordinary course of business – could potentially raise serious issues under the criminal conspiracy provisions in the Act.

When in doubt, reach out to any member of Fasken’s Antitrust/Competition Marketing 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 Antitrust/Competition Marketing group.

On April 18, 2020, the Minister of Innovation, Science and Industry released a policy statement announcing that certain foreign investments into Canada will be subject to enhanced scrutiny under the Investment Canada Act (the “Act”), in light of the evolving COVID-19 pandemic.In particular, the Government will scrutinize “foreign direct investment of any value, controlling or non-controlling, in Canadian businesses that are related to public health or involved in the supply or critical goods and services to Canadians or to the Government” [emphasis added].

In addition, the Government will also subject “all foreign investments by state-owned investors, regardless of their value, or private investors assessed as being closely tied to or subject to direction from foreign governments to enhanced scrutiny under the Act” [emphasis added.] Such enhanced measures may involve additional requests for information and extensions of timelines for reviews in order to ensure the Government can fully assess such investments.

The enhanced measures will continue to apply until “the economy recovers from the effects of the COVID-19 pandemic”, which at this stage, remains to be seen.

These updates are particularly significant for transactions – regardless of value – involving the acquisition of a Canadian business by a non-Canadian entity that is a state-owned investor or a private investor closely tied to or subject to direction from a foreign government. For such transactions, application of the Act should be an important consideration at the earliest stages of transaction planning and transaction agreements should account for longer delays with appropriate protections built in. In addition, where a transaction involves a Canadian business “related to public health or the supply of critical goods and services to Canadians or the Government”, parties should consider early engagement with the Investment Review Division of Innovation, Science and Economic Development Canada.

If you have questions about Canada’s foreign investment laws and regulations, please reach out to a member of Fasken’s Antitrust/Competition Marketing group. Our group has significant experience advising international and Canadian clients on all aspects of Canada’s foreign investment regime.

The information and guidance provided in this blog post does not constitute legal advice and should not be relief on as such. If legal advice is required, please contact a member of Fasken’s Antitrust/Competition Marketing group.

The COVID-19 pandemic has impacted our lives in countless ways. For example, most of us are now working remotely for our home offices, living rooms or kitchen tables. In-person meetings have been replaced by video calls, email and texts. This is expected to continue for weeks – if not months – as governments at all levels are requesting that Canadians stay home in an attempt to “flatten the curve”.

While statistics aren’t available, it’s reasonable to assume that the number of documents being created and retained by businesses has increased since the pandemic began. In many cases, these documents are likely being drafted quickly and without regard to the tremendous impact that they could have on the business, including in the context of future antitrust investigation or proceedings. A short refresher on document creation – including the problems that bad or hot documents may create – is in order.

Continue Reading Bad Documents – So What’s the Problem?

The COVID-19 crisis has caused havoc to daily life and to economies around the world. Among other things, it has put immense pressure on businesses to coordinate and collaborate with each other in order to address unprecedented disruptions to major parts of the economy (e.g., shortages of essential goods and services, collapse of supply chains, mass bankruptcies).  Coordination and collaborations among competitors, however, raise significant antitrust/competition law risks because certain agreements among competitors (cartel agreements) are subject to severe criminal sanctions in Canada.

In the wake of calls from Canadian businesses and the legal community for more meaningful guidance and following in the footsteps of competition authorities in other jurisdictions,[1] the Competition Bureau (the “Bureau”) issued a Statement on April 8, 2020 on competitor collaborations during the COVID-19 pandemic. Ostensibly, given time constraints, the Statement and the guidelines contained therein were not the subject of consultation with the bar.

In the Statement, the Bureau seeks to provide further guidance to businesses so as not to chill competitor collaborations that may be needed to respond to the challenges posed by COVID-19 pandemic. The Bureau provides both general guidance, as well as a mechanism for companies to obtain informal specific guidance from the Bureau.

(a) General Guidance – The Bureau’s Enforcement Approach to COVID-19 Collaborations

“The Bureau therefore wishes to signal that in circumstances where there is a clear imperative for companies to be collaborating in the short-term to respond to the crisis, where those collaborations are undertaken and executed in good faith and do not go further than what is needed, it will generally refrain from exercising scrutiny.”

According to the Statement, the Bureau will refrain from scrutinizing agreements or other forms of collaboration between competitors where they are (i) necessary to respond to the crisis; (ii) limited in duration, (iii) done in “good faith”, and; (iv) do not go further than what is needed for the crisis response.

“Good faith” is a general principle of Canadian contract law which requires parties to perform their obligations honestly and to not lie or knowingly mislead another party. In this context, the Bureau’s use of the term “good faith” goes to the parties motivation for acting in coordination. The Bureau has indicated that it will not scrutinize agreements between parties motivated by a desire to contribute to the crisis response as opposed to those motivated by a desire to achieve competitive advantage.

The Bureau also emphasized that it has “zero tolerance for any attempts to abuse this flexibility or the guidance offered herein as cover for unnecessary conduct that would violate the Competition Act.”

(b) Informal Specific Guidance

The Bureau has created a process for the provision of informal guidance to parties that are looking for greater certainty before entering into specific agreements, or even communication, with competitors in connection with COVID-19. This informal guidance option is distinct from the Bureau’s pre-existing, but ineffective, Written Opinions process whereby parties can request, from the Bureau, a binding written opinion on the applicability of the Competition Act (the “Act”) or regulations made thereunder to proposed business conduct for a fee.

When assessing a proposed collaboration on request for informal specific guidance, the Bureau says that it may seek input from other parts of government at all levels, stakeholders, and market contacts. The Bureau will look to ensure that the impact on competition is limited only to the extent necessary to meet the critical needs in this emergency period and may require conditions on the proposed collaboration.

New Guidance Misses the Mark

Although well-intentioned, the Bureau’s Statement falls well short of the mark, especially when compared to guidance issued by other agencies around the world.  Its general guidance is limited and creates confusion, while the informal specific guidance process outlined in the Statement contains elements that are likely to deter its use.

Businesses are primarily concerned with staying “on side” of the criminal cartel prohibition under s.45 of the Act. Whether or not the Bureau is likely to bring enforcement action under the civil reviewable matter provision (s.90.1), is not likely to chill competitor collaborations because under s.90.1 a remedial order can only be obtained if the Competition Tribunal is satisfied that the conduct is likely to substantially lessen or prevent competition, and such remedial orders cannot impose penalties or award damages. As such, it is curious that the Bureau provides buying group arrangements as an example of competitor collaborations that the Bureau would not scrutinize if they were arrived at in response to the COVID-19 crisis.  Buying group arrangements do not fall within the scope of s.45 given its plain language and legislative history. The Bureau’s own Competitor Collaboration Guidelines clearly indicate that buying group arrangements are not captured under s.45.  At best, the new guidance re buying groups is redundant and unnecessary. At worst, it sows confusion – raising questions as to whether the Bureau is reconsidering its position in relation to buying groups and s.45.

The informal specific guidance mechanism announced in the Statement also falls short of the mark and risks falling into disuse, similar to the Bureau’s existing formal Advisory Opinion process. Unlike the Advisory Opinion process, however, the informal specific guidance process is informal and technically not binding. In addition, it contains elements that will deter its use. Given that the Bureau’s specific guidance cannot insulate businesses from private actions (something that the Bureau points out in the Statement), the prospect of the Bureau reaching out to stakeholders and market contacts will surely make businesses think twice about invoking such a process.  Moreover, such a process of stakeholder consultation and market contacts is unnecessary and will inevitably take time, delaying the process, in circumstances where speed is critical. If the specific advice sought is whether a proposed competitor collaboration would be prosecuted under s.45, there is no need to contact market participants because competitive effects are irrelevant under s.45.  If the concerns relates to the “good faith” of the parties to the collaboration, that is already a condition of the guidance – if the Bureau subsequently determines that it was misled by the parties, it can repudiate the informal guidance.  Further, the Statement does not contain an indication of how long the Bureau will take to render such informal specific guidance. This stands in stark contrast with the willingness of the US Department of Justice and Federal Trade Commission to come out and say publicly that they are committed to providing specific guidance to parties within 7 calendar days of the request.

If you have questions about the informal guidance process or competitor collaboration more generally, you can reach out to any member of Fasken’s Antitrust/Competition Marketing 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 Antitrust/Competition Marketing group.

[1]       See our earlier blog post – Antitrust/Competition, Foreign Investment and Marketing Law Implications of the COVID-19 Response: Practical Guidance for Business.

On March 18, 2020, the Commissioner of Competition (the “Commissioner”) issued an open letter to the executive members of the Canadian Bar Association’s Competition Law Section regarding the impacts of the COVID-19 pandemic on the Competition Bureau’s (the “Bureau”) enforcement processes. In this letter, the Commissioner stated that “the Bureau may … need to prioritize urgent marketplace issues that require immediate action to protect Canadians”. While the Commissioner did not provide specific examples of “urgent market issues”, a subsequent statement issued by the Bureau suggests that these issues include, among other things, deceptive marketing practices relating to COVID-19 and, in particular, false, misleading or unsubstantiated performance claims about a product’s ability to prevent, treat or cure the virus.

Continue Reading A Refresher on Performance Claims

Many have expressed concern that retailers are now incentivized to unilaterally increase the prices for products critical to the COVID-19 response. Canada’s competition enforcer, the Competition Bureau, does not have clear jurisdiction to regulate prices or otherwise directly prevent price gouging. However, the Ontario government is now expressly prohibiting price gouging for “necessary goods” (as defined). In particular, through an emergency prohibition order made under the Emergency Management and Civil Protection Act on March 27, 2020, certain persons are prohibited from selling “necessary goods” at “unconscionable prices”.

Continue Reading Ontario Implements Price Gouging Measures: What You Need to Know

In response to the COVID-19 virus, Canada’s federal government has restricted non-essential travel and closed the US border. Canada’s provincial governments have enacted highly restrictive measures including mandating the closure of facilities providing recreational programs (i.e. gyms), libraries, public and private schools, licensed childcare centres, bars and restaurants, theaters, cinemas and concert venues, and the list goes on. Some provinces have also banned gatherings of more than 5 people and prohibited all non-essential businesses. The status quo is likely to continue for weeks, if not months. While both federal and provincial governments have implemented measures to support businesses during this time, including tax deferrals, increased credit availability, and wage subsidies to help prevent layoffs, these programs, regrettably, may not be enough to keep some businesses afloat.

Continue Reading Refresher on the Failing Firm Defence

Canada’s antitrust/competition, marketing and foreign investment laws continue to apply despite the global health and economic crisis arising from COVID-19. However, the enforcement of these laws are being significantly impacted by the COVID-19 response. These developments are fast moving and change almost daily.

Fasken’s Antitrust/Competition & Marketing Group continues to monitor these developments very closely. Below we outline developments in: (i) transaction planning and merger review, (ii) communication and coordination with competitors, (iii) changes in priority for competition enforcement, (iv) national security and Investment Canada Act reviews and (v) investigative and adjudicative delays. We also offer practical strategies for businesses moving forward.

I. Transaction Planning and Merger Review

Globally, many agencies, including the European Commission, have encouraged merging parties to delay originally planned filings where possible. Other agencies have amended their procedures, including the U.S. Federal Trade Commission (the “FTC”), which will no longer grant early terminations for Hart-Scott-Rodino filings. To date, the Competition Bureau (the “Bureau”) has done neither. However, the Bureau, whose staff are working remotely, has warned of delays in its merger review process due to difficulties reaching third-party market contacts, such as customers, suppliers and competitors.

The Bureau has non-binding service standards within which it endeavours to complete its review of a proposed transaction. Proposed transactions are designated as either “non-complex” or “complex” and are assigned a corresponding service standard, which is 14 days for “non-complex” transactions and 45 days for “complex” transactions (except where a supplementary information request (a “SIR”) is issued, in which case it is 30 days from the date the SIR is responded to). Merging parties should expect that the Bureau may not be able to meet its service standards in the current environment and should plan accordingly. Planning should include earlier engagement with the Bureau. Transaction agreements should also account for longer delays with appropriate protections.

Substantively, forward-looking analyses in merger review will be more challenging given the unpredictable and fast moving changes to the economy. We expect the “failing firm” and “flailing firm” defenses to gain more prevalence, particularly in sectors heavily impacted by COVID-19. In light of excess capacity and declining demand in many sectors, companies are expected to maximize available efficiencies, including through mergers and acquisitions. In instances where there is excess capacity and/or declining demand at the time of the merger, there may be increased scope for merging parties to use the efficiencies defence in Canada.

II. Communication and Coordination with Competitors

Globally, some agencies have suspended laws that would otherwise prohibit collusion between competitors to address unprecedented health and economic challenges. These suspensions aim to enhance the output, supply and distribution of much needed medical and food supplies during the COVID-19 pandemic. For example:

  • The European Competition Network, made up of the European Commission and the European Union’s national competition agencies, released a joint statement noting that it “will not actively intervene against necessary and temporary measures put in place in order to avoid a shortage of supply” due to the COVID-19 pandemic, and that the “extraordinary situation may trigger the need for companies to cooperate in order to ensure the supply and fair distribution of scarce products”.
  • The United Kingdom’s Competition and Markets Authority (the “CMA”) has published guidance regarding its priorities and approach to enforcement during the COVID-19 pandemic. The CMA stated that so long as coordination between competitors is undertaken solely to address concerns arising from the current crisis and does not go further or last longer than what is necessary, the CMA will not take action. Some examples given by the CMA include businesses coordinating to ensure essential goods and services are available to the public and that there is no shortage of these goods, to ensure fair distribution of scarce products or to provide new services such as food delivery to vulnerable customers. The CMA has specifically advised supermarkets that they will not face enforcement action for cooperating, or even rationing products, where necessary to protect consumers during the COVID-19 outbreak.
  • In a joint statement by the U.S. Department of Justice and the FTC, both agencies committed to accounting for “exigent circumstances” in evaluating efforts to address the spread of COVID-19, including competitor collaborations. For example, they make explicit their recognition that businesses may need to temporarily combine production, distribution or service networks to facilitate production and distribution of COVID-19-related supplies that they may not otherwise manufacture or distribute. This joint statement also made clear that these sorts of efforts, which are limited in duration and necessary to assist patients, consumers and communities affected by COVID-19 and its aftermath, would be examples of “exigent circumstances”. In addition, the agencies stated their aim of providing individuals and businesses that are responding to the COVID-19 emergency with expeditious guidance about how to ensure their efforts comply with U.S. antitrust laws (i.e., within 7 days of such requests).

Canada’s Competition Act (the “Act”) does draw a distinction between criminal collusion and civilly reviewable agreements or arrangements that prevent or lessen competition substantially. Criminal collusion, which includes horizontal agreements between competitors to fix prices, allocate markets/customers or limit output as well as big-rigging, is per se unlawful, meaning such agreements are deemed illegal without any proof of anticompetitive effects. Other forms of competitor collaborations, such as research and development agreements or joint purchasing agreements, are presumptively legal, absent proof of anticompetitive effects.

As a practical matter, competitor collaborations that would be presumptively legal and viewed as particularly helpful under the circumstances are those that would support the delivery of affordable goods and services to address health and food supply needs of Canadians. In particular, collaborations aimed at increasing output of products and services, addressing supply or distribution issues, and driving efficiencies, would likely be viewed as pro-competitive.

Canada has not implemented any suspension of its laws against competitor collaborations nor has the Bureau released guidance akin in scope to that of the above agencies. However, the Bureau did remind the public that “Canada’s competition laws accommodate pro-competitive collaborations between companies to support the delivery of affordable goods and services to meet the needs of Canadians”. The Bureau further noted that it is “committed to a reasonable and principled enforcement of Canada’s competition laws, and [that it] will work closely with [its] partners in federal, provincial and municipal governments, along with the business and legal communities, to navigate these exceptional circumstances for the benefit of all Canadians”.

III. Changes in Priority for Competition Enforcement

Not surprisingly, the Bureau has stated that “investigations that may involve face-to-face interviews with Immunity/Leniency applicant witnesses, the operationalization of solicitor-client protocols, meetings with complainants, and plea or other settlement negotiations may suffer some delays”.

The Bureau has also emphasized that it may need to prioritize urgent marketplace issues that require immediate action to protect Canadians – an approach that may have implications on its ability to address other ongoing matters. While the Bureau did not provide specific examples of “urgent market issues”, such issues may include the following.

a) Deceptive Marketing Claims

The Bureau will likely focus on deceptive marketing practices relating to COVID-19 and, in particular, false, misleading or unsubstantiated performance claims about a product’s ability to prevent, treat or cure the virus. It bears noting that “health-related products and their marketing claims” were a Bureau priority before the COVID-19 crisis. For example, the Bureau recently sought a temporary order preventing Nuvocare Health Sciences Inc. from making unsubstantiated weight loss and fat burning claims in the marketing of certain natural health products. Given the current climate, it will be even more important for businesses to exercise caution when making health-related claims concerning COVID-19 and to ensure that such claims are supported by adequate and proper testing conducted before any such claims are made.

b) Refusal to Deal (Supply)

Suppliers generally have wide contractual freedom to supply their products or services to whomever they wish. Even suppliers with considerable market power can generally unilaterally refuse to supply their products or services for legitimate business reasons.

Refusals to supply critical products or services in the response against COVID-19 may be subject to greater regulatory scrutiny. Businesses should memorialize their valid business reasons for any refusals to supply, particularly any pro-competitive and efficiency enhancing rationales. Further, any refusals to supply should be made unilaterally and not in coordination with competitors.

c) Unilateral Price-Gouging

The COVID-19 pandemic has also impacted the price of various goods and services across the country. For example, many retailers are incentivized to increase the prices of hand sanitizers and masks because consumers are willing to pay more for these products. The Act does not regulate prices or otherwise prevent price gouging. Retailers are generally able to charge whatever prices they choose. That being said, Canada’s Emergencies Act allows the Federal Government to take measures regarding “the regulation of the distribution and availability of essential goods, services and resources”, which could be used to address price gouging for at least some products and services – something that has already been done across much of the United States.

Further, consumers may make price gouging complaints to the Bureau. Although it does not have clear jurisdiction over unilateral price-gouging, the Bureau may choose to engage on the issue.

IV. National Security and Investment Canada Reviews

The Investment Review Division (“IRD”), which is responsible for enforcing the Investment Canada Act, has not requested delays in filing or amended its processes. However, IRD staff is working remotely, which is expected to lead to delays.

Substantively, new national security issues are expected to emerge. Indeed, from the perspective of critical infrastructure, supply chains and supply, national security suddenly means fighting scarcity and disease.

There is a limited but important implication for businesses considering merger and acquisition activity at this time: COVID-19 has created conditions in which even close allies and friends may need to compete for critical resources, particularly in the health field. Scarcity of supply of products like medical protective equipment, ventilators and associated manufacturing inputs means that Canadian regulators will cast a keen eye over any deal that would make the mass acquisition of such goods more difficult. Mitigation in the form of supply guarantees will be in order.

As such, even if a deal involves a purchaser from a Canadian-friendly state, if the transaction may result in control of critical infrastructure falling out of Canadian hands, resulting in short supply of vital goods or services to Canadians, a deal could be blocked.

V. Investigative and Adjudicative Delays

Adjudicative bodies that hear competition matters have released practice directions outlining the impact of the COVID-19 pandemic on their respective operations. These delays are expected to delay Bureau investigations and the enforcement and adjudication of competition disputes.

a) Competition Tribunal

Canada’s main adjudicative body for competition disputes, the Competition Tribunal (the “Tribunal”), remains open for business. However, its members and employees are working remotely and its premises are closed to the public until further notice. According to the Tribunal’s Notice Regarding the COVID-19 Pandemic, there will be no in-person hearings until at least April 17, 2020. This notice contemplates the possibility of further postponements. The Tribunal will, however, continue to hear urgent matters by telephone conference.

Though no paper filings will be accepted for the time being, the Tribunal’s secure e-filing system remains fully operational and parties are urged to continue to file documents by electronic transmission through the Tribunal’s secure e-filing application.

b) The Federal Court of Canada

The Federal Court of Canada (the “Federal Court”) has jurisdiction to hear certain competition matters. It is primarily used by the Bureau for the issuance of section 11 orders under the Act, an evidence gathering tool for the production of records, written returns of information under oath and, at times, oral examinations under oath.

Through a Practice Direction and Order (COVID-19) and an updated Practice Direction and Order (COVID-19), the Federal Court has implemented a 33-day suspension period, from March 16, 2020 – April 17, 2020 (the “Suspension Period”). All Federal Court hearings scheduled to be heard during the Suspension Period are adjourned without any future date being designated. Further, all hearings that were scheduled to proceed by way of a telephone conference and all general sittings of the Federal Court falling within the Suspension Period are also cancelled. Matters that the Federal Court deems urgent or exceptional will proceed on a case-by-case basis.

Significantly, the running of all timelines under orders and directions of the Federal Court made prior to March 16, 2020 are extended for the duration of the Suspension Period. This includes section 11 orders requiring parties to attend an oral examination and to produce records and written information. The extended timelines will likely delay the Bureau’s evidence gathering activities related to its ongoing investigations. Depending on the way in which the COVID-19 pandemic evolves, further extensions to the Suspension Period are foreseeable which will, in turn, further delay the Bureau’s investigations.

The Federal Court is not closed but has only maintained skeleton staff which will not be monitoring registry counters. As such, parties are exempted from filing any required paper copies of filings and are urged to instead use the Federal Court’s e-filing portal or email to file documents.

c) Warrants for Search and Seizure/Investigative Delays

In light of superior courts across Canada and the Federal Court suspending all regular operations and Bureau officials working from home, previously planned search and seizures by the Bureau are also likely to be delayed. This will impact and delay the progression of Bureau investigations.

d) Class Actions

The suspension of regular operations at superior courts across Canada is also expected to impact ongoing competition class actions. This includes certification hearings, settlement approval hearings and related interlocutory motions.

Fasken’s Antitrust/Competition & Marketing Group will continue to monitor these developments and will keep you apprised, including through a series of blog posts on many of the topics discussed above.

 

Introduction

Following up from Part 1 of our article on the interaction of between privacy and competition law in the economy, Part 2 surveys how competition law enforcers in the United States, European Union, and Canada have addressed both competition and privacy concerns as it relates to data.

A number of significant mergers have taken place within the digital economy in the past few years. Notable highlights include Microsoft’s acquisition of LinkedIn, Facebook’s acquisition of WhatsApp, and more recently Salesforce’s acquisition of Tableau Software. Each also highlights the important nexus between competition and data privacy concerns. Consolidation in this market is only expected to continue, so the question becomes when and how should competition law authorities intervene?

United States

In the US, the Federal Trade Commission (“FTC”) is the authority responsible among other things for the enforcement of antitrust laws and the review of proposed mergers. The FTC also contains the Bureau of Consumer Protection, which enables it to address both competition and privacy concerns. This past year, both the FTC and the Government Accountability Office have called on congress for a federal privacy law. On January 1, 2020, the California Consumer Privacy Act came into effect, which grants California residents new rights to know what personal information about them businesses hold, to access and delete such information, and to opt-out of a sale by the business of their personal information.

The matter of Nielsen Holdings N.V. and Arbitron Inc. demonstrates the FTC’s ability to identify the importance of data in merger and acquisition review. By way of background, Nielsen and Arbitron competed in the supply of syndicated cross-platform audience measurement services to media companies and advertisers. The FTC found that access to data posed a significant barrier to entry and obtained a consent order “requiring divestiture of assets to Arbitron’s cross-platform audience measurement services business, including audience data with individual-level demographic information and related technology, and intellectual property.”

European Union

In the EU, the European Commission (“EC”) and its Directorate General for Competition are responsible for the administration of competition law. In regard to privacy matters, the General Data Protection Regulation is regulated by the European Data Protection Board. European authorities have had to deal with data implications on several occasions.

In 2016, the EC approved the acquisition of LinkedIn by Microsoft, subject to several conditions. Both companies retained large datasets comprised primarily of personal information. The EC found that the combination of Microsoft’s and LinkedIn’s datasets would act as a barrier to entry. The EC’s commitments included granting competing professional social network service providers access to Microsoft Graph, a gateway for software developers which is used to build applications and services that can, subject to user consent, access data stored in the Microsoft cloud, such as contact information, calendar information, emails etc. Software developers can potentially use this data to drive subscribers and usage to their professional social networks. Interestingly, the FTC did not find anticompetitive implications in this transaction.

In 2019, Germany’s antitrust regulator, the Bundeskartellamt, found Facebook had abused its market power based on the extent of collecting, using and merging data in a user account and imposed on Facebook far-reaching restrictions in the processing of user data. Andreas Mundt, President of the Bundeskartellamt, commented on the barrier of task switching stating that in the operation of its business model, Facebook must take into account that its users practically cannot switch to other social networks.

Canada

In Canada, the Competition Bureau (“the Bureau”) is the federal agency that is responsible the administration and enforcement of competition laws. The federal body responsible for privacy issues is the Office of the Privacy Commissioner. As such, Canada has separated issues that combine both competition and privacy issues between two federal bodies.

The Bureau has long acted in competition matters involving data. Two recent abuse of dominance investigations involving Google and the Toronto Real Estate Board (“TREB”) highlight some of the developing issues that have informed the Bureau’s consideration of competition issues in this area.

In 2016, the Bureau announced that it had discontinued its abuse of dominance investigation into Google’s alleged anti-competitive conduct relating to online search and search advertising services. In its investigation, the Bureau considered a number of developing issues related to the competitive significance of data, including:

  • Zero pricing for online search services, which generate significant amounts of valuable data;
  • Platforms and multi-sided markets that intermediate between users and advertisers on the basis of data; and
  • Network effects, where the search engine gathers and analyzes 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, thus attracting more users and advertisers.

In 2018, the Supreme Court of Canada ruled in favour of the Bureau and dismissed TREB’s application to appeal over the restrictions imposed by TREB on real estate brokers’ and consumers’ access to historical sales data and novel real estate services. TREB argued that the restrictions were designed to protect consumer privacy to comply with federal privacy law and requirements of the Ontario real estate regulator. The Bureau’s decision in the matter touched on many issues related to data, such as:

  • market power, including through the control of access to data;
  • the assessment of innovation and dynamic competition enabled by data;
  • the role of qualitative evidence; and
  • the existence and exercise of intellectual property rights over a database.

Conclusion

Competition law enforcers generally have a good grasp on the implications of data as it relates to competition law issues. However, several jurisdictions lack modern data privacy regulations all together, or in some cases, have divided authority for competition and privacy matters to different agencies. As data privacy issues become more prevalent, policy makers should be aware of these potential legislative and organizational challenges to effectively address both competition and privacy concerns as they relate to data.

On 13 February 2020, the Minister of Trade, Industry and Competition (South Africa) brought the long-awaited buyer-power and price discrimination provisions into effect. These provisions were introduced through a suite of amendments made to the Competition Act (the “Act”) in early 2019. They may be summarized as follows:

  • the price discrimination provisions prohibit dominant sellers from discriminating in the prices they charge to small and medium businesses, and firms owned or controlled by historically disadvantaged persons (referred to in the regulations, explained below, as “the designated class”), if the effect is to impede the ability of such firms to participate effectively, and
  • the buyer power provisions prohibit dominant buyers in certain sectors from requiring or imposing unfair prices or trading conditions on sellers in the designated class.

In conjunction with bringing these provisions into effect, the Minister has also published the final regulations to assist with the interpretation of these provisions.

We have summarized the main features of these regulations below, and the impact that they will have on dominant firms’ conduct in the market towards small and medium sized businesses, as well as businesses owned or controlled by historically disadvantaged persons.

Price Discrimination Regulations

  • Critically, the regulations provide that in order to establish a contravention, the differential in price must impede the effective participation of “a firm or firms” in the designated class of purchasers. An effect on all or a substantial number of buyers in the designated class does not appear to be required, although practical enforcement by the authorities may focus on conduct that impedes participation by a number of firms.
  • The factors for determining when price discrimination is likely to impede effective participation by firms in the designated class include:
    • The extent of the difference in respect of price or other factors outlined in section 9(1)(c) of the Act relative to other purchasers in the same market or in markets in which the purchaser in the designated class is a potential competitor;
    • The significance of the input in the cost structure of the purchaser in the designated class of purchaser or as a driver of sales in the downstream market for the purchaser in the designated class of purchaser;
    • The duration and timing of the price differential;
    • The likelihood that the differential treatment would result in the purchaser in the designated class of purchaser facing decreased demand for its goods or services in the downstream market; and
    • The likelihood that the differential treatment would result in decreased investment by the purchaser in the designated class.
  • The regulations suggest that firms owned or controlled by historically disadvantaged persons should only qualify for protection under the relevant section if they purchase less than 20% of the relevant goods or services supplied by the dominant seller. This provision seeks to filter out complaints by large firms owned or controlled by historically disadvantaged persons, focusing the section’s scope on protecting smaller firms with limited negotiating power.

Buyer power regulations

  • As with the price discrimination regulations, the buyer power regulations appear to set a low threshold for the effect required to establish a contravention. The language setting out the elements of a contravention refer to the effect on “the supplier”, rather than suppliers in the designated class in the aggregate.
  • The buyer power regulations suggest application of the relevant prohibition only to dominant buyers in the following industries:
    • Agro-processing, which is defined as “the processing of raw materials and intermediate products derived from the agricultural sector, including agriculture, forestry and fisheries”.
    • Grocery wholesale and retail, which is defined as, “the wholesale or retail of food, pet food, drinks, cleaning products, toiletries and household goods”.
    • Ecommerce and online services sector, which is defined as, “the online sale of goods or services to businesses or consumers”. ‘Ecommerce’ is defined as including “the sale, or facilitation of sale, of goods supplied by third party businesses” and ‘online services’ is defined to include “(a) the provision or facilitation of a service using contracted individuals or other businesses to supply the service that forms the basis for an online sale; and (b) online e-commerce market places, online application stores and so-called ‘gig economy’ services”.
  • “Price” is broadly defined to include “discounts, rebates, commissions, allowances or credit”, with the net being cast even more broadly by the definition of “trading conditions” to include “any explicit terms contained in contractual arrangements as well as any implied or actual trading terms implemented by the buyer outside of the supply contract”.
  • Factors to be taken into account when determining whether a price will be unfair include:
    • The prices paid to other suppliers of like goods or services, in particular those outside the designated class, and whether such prices are higher;
    • The magnitude of any differences in prices to other suppliers of like goods or services;
    • Whether reductions in the existing purchasing price are directly or indirectly required from, or imposed on, the supplier;
    • Whether reductions to an existing purchasing price are retrospective, unilateral or unreasonable;
    • Whether costs are directly or indirectly imposed on or required from the supplier which reduce the net price received by the supplier; or
    • Whether the direct or indirect imposition or requirement of costs is retrospective, unilateral or unreasonable.
  • Factors to be taken into account when determining whether a trading condition will be unfair include whether the trading condition:
    • unreasonably transfers risks or costs onto a firm in the designated class of suppliers;
    • is one-sided, onerous or not proportionate to the objective of the clause (such as unduly long payment terms); or
    • bears no reasonable relation to the objective of the supply agreement.
  • Like the price discrimination regulations, the buyer power regulations restrict application of the relevant provisions to firms owned or controlled by historically disadvantaged persons only if such firms supply less than 20% of the dominant buyer’s requirements of the goods or services in question.

General comment

The regulations are very slim, but provide important guidance for a novel area of competition law in South Africa. Read with the Competition Commission’s draft guidelines on buyer power and price discrimination, which are likely to be finalized soon, there is sufficient understanding of what Government and the regulators would like to achieve through these provisions whilst, at the same time, leaving sufficient room for organic development of the law through practice and case law.