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Canadian Competition Bureau Releases Draft Enforcement Guidelines on Price Maintenance
Bureau may be signalling an increased focus on price maintenance, and an apparent willingness to challenge non-traditional indirect forms of price maintenance, such as price parity agreements.
On March 20, 2014, the Canadian Competition Bureau released draft guidelines on price maintenance for public consultation.
Generally speaking, price maintenance involves conduct by a supplier to influence upwards or discourage the reduction of the price charged by the supplier’s reseller customers, such as a policy requiring resellers to sell the supplier’s products at a minimum price or to discontinue discounting on these products.
2009 Amendments to the Competition Act
In 2009, amendments to the Canadian Competition Act (the “Act”) repealed a criminal price maintenance offence and replaced it with provisions enabling the Commissioner of Competition or an affected private party to apply to the Competition Tribunal for an order to prohibit certain price maintenance practices. In some circumstances, the Tribunal may also order that a supplier accept a person as a customer on usual trade terms. In any case, the 2009 provisions require that the Tribunal find that a challenged practice has had, is having or is likely to have an adverse effect on competition in a market before it can issue an order.
The 2009 amendments provided greater flexibility for suppliers in Canada to engage in practices such as minimum advertised price (MAP) policies that were (and are) sometimes utilized in the United States. More generally, in the absence of significant guidance from the Bureau or applications by private parties, it was unclear whether and to what extent the Bureau might challenge or the Tribunal might restrain price maintenance policies that apply only to certain of a supplier’s own products (i.e., restraints on “intra-brand” competition).
The Commissioner brought an unsuccessful challenge under the 2009 price maintenance provisions against VISA and MasterCard in an unusual context relating to the imposition of restrictions on retailers by those credit card networks. Although the Tribunal found that the restrictions led to higher prices for credit card services and had an adverse effect on competition, the Tribunal held that the price maintenance provisions did not apply because the credit card services supplied by VISA and MasterCard were not “resold” to the affected merchants.
For more typical supplier/reseller relationships, the Bureau’s draft guidelines represent the most significant guidance to date from the Bureau on the 2009 price maintenance legislation.
Draft Guidelines May Signal a More Activist Approach by the Bureau
As discussed in more detail below, some aspects of the draft guidelines suggest a relatively more activist approach to the price maintenance provisions than some commentators had come to expect from the Bureau, or what had been evident to date under the 2009 amendments. Also notable are media reports earlier in 2014 to the effect that some major consumer product suppliers, particularly in the grocery and pharmacy sectors, have begun to impose new limits on the ability of retailers to advertise certain products below specified retail prices.
In addition, in the context of an acquisition by Loblaw, a major Canadian grocery chain, of Shoppers Drug Mart, a major pharmacy chain, the Bureau identified issues and obtained commitments relating to certain Loblaw policies that required suppliers to compensate Loblaw for discounts that Loblaw made to match competitors’ lower advertised prices. The Bureau was concerned that these policies created incentives for those suppliers to impose price maintenance restrictions on Loblaw’s competitors, thereby preventing lower prices by those competing retailers.
The Price Maintenance Provisions
The price maintenance provisions of the Act may apply where a supplier, by agreement, threat promise or any like means, directly or indirectly influences upward (or discourages the reduction of) the price at which the supplier’s customer, or any other person (e.g., a retailer) to whom the product comes for resale, supplies or offers to supply or advertises a product within Canada.
The provisions may also apply where a supplier discriminates against any person because of the low pricing policy of that person.
Similarly, the provisions may be engaged where a person (e.g., a retailer) has, by an agreement, threat, promise or like means, induced a supplier, as a condition of doing business, to refuse to supply another person (e.g., a competing retailer) because of the low pricing policy of that other person.
However, in any case, for the Tribunal to issue an order, the challenged conduct must have had, be having or be likely to have an adverse effect on competition in a market.
Key Points from the Draft Enforcement Guidelines
The following are key points in or arising from the Bureau’s draft guidelines:
- Price maintenance is often pro-competitive. The Bureau recognizes that price maintenance is common in many markets, and can be pro-competitive in many circumstances.
- Multi-supplier challenges. The Bureau may consider enforcement action against more than one supplier in an industry or sector to address an adverse effect on competition in a market resulting from price maintenance practices. However, it remains to be seen how the Bureau would frame such an application where the various suppliers had each independently adopted a price maintenance policy and no one of them alone has “market power”, as discussed below.
- A wholesale price increase is not price maintenance. The draft guidelines indicate that a supplier’s influence on a retailer’s selling or advertised prices could warrant enforcement action when, for example, the supplier’s conduct results in a retailer setting the price of the relevant product at a level higher than it would otherwise sell the product. However, even though an increase by a supplier of the wholesale price of a product may lead to an increase in the retailer’s price of that product, such a price increase is insufficient, in and of itself, to warrant enforcement action by the Bureau.
- “Indirect” influence on price. An “indirect” influence on a reseller’s prices may occur where a supplier does not specify a particular price, but nevertheless influences the level of prices through non-price-based conduct, such as the terms and conditions on which the supplier provides a product to a retailer.
- Parity agreements. In the discussion of an “indirect” influence on prices, the draft guidelines cite the example of price parity agreements. Such parity agreements include commitments by retailers to suppliers to charge the same price as other retailers charge for the supplier’s products, or to charge the same price as the retailer charges for products supplied by competitors to the supplier. In recent years, such parity agreements have come under increased scrutiny by various competition agencies because of concerns that they may reduce price competition between retailers and/or suppliers. According to the draft guidelines, such parity agreements can constitute a form of price maintenance, possibly signalling greater scrutiny by the Bureau of these types of arrangements and other less traditional forms of price maintenance.
- Exemptions. The Bureau appears to adopt a narrow view of the scope of an exemption in the Act in respect of persons that engage in loss leader selling, false advertising, bait and switch, and inadequate servicing. While a supplier may refuse to supply a reseller on these grounds, the draft guidelines state that the Bureau may still establish that the supplier’s minimum resale pricing, MSRP or MAP pricing practices have in fact influenced a retailer’s pricing upwards. However, it is not clear how or in what circumstances that scenario could arise when the reseller has been refused supply, or whether the Tribunal would sustain a challenge on that basis.
- Constructive refusals to supply. According to the draft guidelines, constructive refusals to supply involving price or non-price conduct can provide grounds for challenge under the price maintenance provisions. For example, the draft states that a wholesale price for a product that is patently in excess of any price that could reasonably be expected to be obtained for the product in a downstream market could constitute a constructive refusal to supply. Non-price constructive refusals to supply could also include, for example, delays in filling orders, or shipping incomplete orders.
- Single incident. The draft guidelines state that a single incidence of a refusal to supply or discrimination is sufficient to engage the price maintenance provisions. However, it may be difficult to establish that a single instance has the anti-competitive effect required for the Tribunal to issue an order.
- “Because of a low pricing policy.” Consistent with case law under the prior price maintenance offence, the Bureau considers that a refusal to supply or discrimination in the supply of a product will have occurred “because of the low pricing policy” of a person where the low pricing policy is the “proximate cause” of the supplier’s refusal or discrimination. The draft guidelines go further, stating that, in the Bureau’s view, a person’s low pricing policy need not be the only or even the primary reason for the refusal or discrimination: it is sufficient that it be “a factor informing the supplier’s decision”. However, a hypothetical example in the draft seems to imply that the “low pricing policy” must have made a difference in the determination not to supply, e.g., if poor service would have led to refused supply regardless of the reseller’s pricing policy—or if good service would have restored supply regardless of the pricing policy — the refusal is not “because of” the low pricing policy.
- Prospective customers. The draft guidelines state that the refusal to supply provision can apply to a prospective reseller even if that person is not an existing or previous customer of the supplier.
- Safe Harbour: Assurance of pricing freedom. The draft guidelines state that the price maintenance provisions will not apply where a person (e.g., retailer “A”) induces a supplier to refuse supply to another person (e.g., competing retailer “B”) if retailer “A” would have done business with the supplier regardless of the success of the inducement. Accordingly, a retailer who wishes to discuss product prices with a supplier could minimize its risks under the price maintenance provisions by making it clear to its supplier that it will continue to purchase from the supplier on the same terms whether or not the supplier continues to sell to other retailers. Similarly, the Act expressly provides that the suggestion of a resale or minimum resale price by a supplier is deemed to influence the reseller to whom the suggestion was made unless the supplier made clear that the reseller is under no obligation to accept the suggestion and would in no way suffer in its business relations if it refuses to accept the suggestion. (Of course, even if a suggestion is made and resale prices are influenced upwards, the other elements of the provisions, including an adverse effect on competition, must also be present before the Tribunal can issue an order.)
- Adverse effect on competition. As noted above, the Tribunal cannot issue an order under the price maintenance provisions of the Act unless the challenged practice has an “adverse effect” on competition. This is a lower threshold than the “substantial lessening or prevention of competition” test that applies in many other provisions of the Act. The Tribunal has said that “without market power there can be no adverse effect in a market”. As a result, the Bureau will be concerned with price maintenance conduct only where it is likely to create, preserve or enhance market power —namely, the ability to behave relatively independently of the market.
The Bureau’s general approach is that a market share of less than 35% will typically not prompt further examination of whether a firm possesses market power. However, the draft guidelines point out that, consistent with the Tribunal’s findings in VISA/MasterCard, a firm with a market share of less than 35% could have a degree of unilateral market power in some instances, depending on the characteristics of the relevant market. In that case, the Tribunal found the market to consist of the supply of certain credit card network services provided by only two suppliers. While VISA had two-thirds of the market and MasterCard accounted for the balance, given the highly concentrated market, MasterCard’s pricing discretion, its margins and the very high barriers to entry, the Tribunal found that both VISA and MasterCard had market power.
The draft guidelines identify the following circumstances in which price maintenance may be demand-restricting, adversely affecting competition in a market and serving to create, preserve or enhance market power:
- Inhibiting competition between suppliers: Price maintenance may be used by suppliers to facilitate less vigorous price competition among them, or to help police a price-fixing arrangement among them.
- Inhibiting competition between retailers: One or more retailers may compel a supplier to adopt price maintenance to facilitate less vigorous price competition among them, or to help police a price-fixing arrangement among them.
- Supplier exclusion: An incumbent supplier may use price maintenance to guarantee margins for retailers that would discourage them from carrying the products of existing or new entrant competitors of the supplier. To the extent that this results in the foreclosure of downstream distribution channels to competing suppliers, it may limit or reduce the ability of such suppliers to discipline the supplier’s wholesale pricing, enabling the supplier to charge a price that is higher than could be sustained absent such conduct. (However, the abuse of dominance provisions of the Act may present a clearer basis for challenging such exclusionary conduct if it is likely to prevent or lessen competition substantially.)
- Retailer exclusion: A retailer may compel a supplier to engage in price maintenance with a view to excluding competition to the retailer from competing discount or more efficient retailers. This example is similar to the above-noted concerns that the Bureau raised in the context of Loblaw’s acquisition of Shoppers Drug Mart.
- Case resolutions. Prior to commencing formal proceedings with the Tribunal under the price maintenance provisions, the Commissioner will generally afford parties an opportunity to respond to the Bureau’s concerns, and to propose an appropriate resolution to address them. On the one hand, the draft guidelines state that any approved resolution proposal “will be embodied in a consent agreement registered with the Tribunal”, which has potentially severe repercussions for the respondent in the event of an inadvertent breach or a subsequent change in market conditions which require a more flexible response by the respondent. However, the draft guidelines also state that, in some cases, the Bureau may resolve a matter by way of an alternative case resolution, such as other forms of undertakings or corrective action, which suggests more flexibility.
- After-the-fact analysis. The draft guidelines include an example of co-operative advertising agreements that appears to focus on an after-the-fact analysis of whether a MAP policy in fact had the effect of increasing prices. However, as a practical matter, a supplier must determine whether a proposed policy complies with the price maintenance provisions before it proceeds to implement the policy. Nevertheless, to minimize risks of Bureau investigations, suppliers may wish to monitor the impact on market prices of any price maintenance policies that they may adopt from time to time.
Notably, the draft guidelines do not discuss any factors that might cause the Commissioner to exercise his discretion not to pursue a case that satisfies the elements of the price maintenance provisions of the Act. In its VISA/MasterCard decision, the Tribunal noted that its power to issue an order under these provisions is discretionary and, having regard to the complexity of the market and likely unforeseen consequences of an order, the Tribunal would not have issued an order in that case, even if the Commissioner had established all of the elements of the price maintenance provisions. Presumably, the Commissioner is entitled to, and will, also exercise discretion in deciding which cases of actionable price maintenance that come to his attention he will investigate or take to the Tribunal.
In designing a Canadian pricing and distribution policy, suppliers should keep in mind that even a unilateral policy that complies with the price maintenance provisions might still raise issues under other provisions of the Act. For example, unless reversed on appeal, recent proceedings against the Toronto Real Estate Board under the abuse of dominance provisions of the Act allow these provisions to be applied to a firm that is dominant in one market but whose conduct has exclusionary effects in another market — e.g., a dominant supplier engaging in conduct that excludes downstream distributors or retailers from a market could potentially raise issues under the abuse of dominance provisions. Similarly, even if termination of a retailer does not provide grounds for challenge under the price maintenance provisions, consideration should also be given to separate refusal to deal provisions in the Act which, in some circumstances, allow the Tribunal to order supply on usual trade terms to a person who is substantially affected in his business, or is precluded from carrying on business, due to his inability to obtain adequate supplies of the product anywhere in a market on usual trade terms because of insufficient competition among suppliers for a product that is in ample supply, and where the refusal is having or is likely to have an adverse effect on competition in a market.
Finally, suppliers considering adopting minimum resale pricing programs may wish to consider not only their own compliance with the price maintenance provisions of the Act, but also whether their reseller customers can realistically comply with both the supplier’s minimum resale price policy and new federal legislation expected to prohibit “unjustified” cross-border price discrimination. In its February 2014 budget, the federal government announced that the Commissioner will be given new powers to enforce a prohibition on unjustified cross-border price discrimination. (See here for more details.) As a practical matter, a prohibition on “unjustified” cross-border price discrimination could require a Canadian reseller to sell in Canada at a price set by market conditions in the U.S., even if it is below a price specified in the supplier’s minimum resale price policy. Even if a supplier seeks to impose the same resale price on resellers on both sides of the border, different costs in each market and currency fluctuations could complicate efforts to enforce a North American-wide resale price policy.
The Bureau is accepting comments on the draft guidelines until June 2, 2014.
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