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On March 12, 2010, the Competition Act amendments dealing with agreements between competitors came into force. Section 45 is intended to deal with conspiracies and cartels, the most egregious forms of competitor collaboration, and section 90.1 provides a civil review process for agreements that prevent or substantially lessen competition in the marketplace. These amendments allow for greater flexibility for legitimate collaboration.

Agreements among competitors that i) fix prices, ii) allocate markets or territories, or iii) restrict outputs or types of products, are likely to harm competition and have no pro-competitive benefits will be caught by the criminal provisions of section 45. The penalties for these types of agreements are criminal in nature and can reach up to 14 years in jail or a fine of up to $25 million. All other types of agreements will be dealt with by section 90.1. Under this civil review section, the Competition Bureau (the “Bureau”) is authorized to issue an order for the parties to stop their reviewable conduct.

The inclusion of one or more of the three offensive matters identified above in an agreement, regardless of its degree of formality or enforceability, or its actual effect on the marketplace, is enough to bring the agreement into the scope of section 45. For example, if there are at least two contractors agreeing that their price for a certain project will be X dollars, the agreement will fall under section 45 because it fixes the price of the project, causing consumers to pay the same price for that project and reducing the number of competing parties in that particular market.

The Bureau will look at agreements between potential competitors as well. In order to determine who is a potential competitor, the Bureau will examine the type of product offered by the parties and the regions in which they are offered. For example, two companies that sell the same product in different provinces, whose selling areas do not overlap, are not technically competitors. However, since a possibility exists for one or both companies to expand their market into the neighbouring province, they are potential competitors for the purposes of the Bureau.

There are some relationships where it appears the parties are in competition, but the Bureau does not consider the types of agreements between these parties egregious enough to fall into the criminal sections. The reason being that many of these types of agreements actually have a pro-competitive nature to them. For example, in the franchise system, the franchise agreement establishes the types of products sold, the prices and the market, but if the Bureau does not consider franchisors and franchisees to be competitors because of the nature of their relationship. If the franchisees make agreements among themselves an issue may arise depending on the type of agreement. Agreements among smaller businesses in trade organizations or buying groups to bargain for lower prices from suppliers in order to compete with larger business will not come within the scope of the criminal provisions. One reason is because they are not fixing supply prices, but rather agreeing on the price they are willing to pay; another reason is because of the pro-competitive aspect of buying groups.

Even if an agreement falls into the impugned area, parties to the agreement may be able to argue the ancillary restraints defence. There are three aspects to this defence and all three must be properly established. First, the agreement must be ancillary to a broader or separate agreement that includes the same parties; second, the agreement must be directly related to and reasonably necessary for the objective of the broader agreement; and third, the broader agreement alone cannot contravene section 45. Take for example a non-competition agreement as a condition of closing for the sale of a business, preventing the former owner from setting up a similar business in the same area that would compete with the newly purchased business. This non-competition agreement is part of a broader scheme, so the first element of the defence is established. The second part of the defence is met because the purpose of the agreement is reasonable; the purchaser does not want to fund a competitor with the purchase price paid for the business. If the purchase and sale agreement itself does not contravene s.45, the ancillary restraints defence will apply.

It should also be noted that the Bureau has an immunity and leniency program; when businesses or individuals know they are party to activities that may violate criminal provisions of the Competition Act, they can approach the Bureau and request immunity from prosecution in return for cooperating with the Bureau’s investigation.

Section 90.1 addresses the gap between mergers and egregious criminal conduct and can be used to review many types of competitor agreements. The Bureau will review an agreement between competitors and if they find it substantially lessens competition they will issue an order for the conduct to cease. An arrangement is considered to prevent or lessen, or be likely to prevent or lessen, competition in the market when a party’s ability to exercise power in the market is created, maintained or enhanced, or its power prevents competition by hindering the development of future competitors. The Bureau will take the market share of the parties into consideration when reviewing agreements. If two minor players have an agreement and together do not form a significant part of the market, the Bureau may not be too concerned. The Bureau will also look at the flexibility of the agreement to see what options are available to the parties for expanding their market and making their own determinations of price and product output. If found to be infringing section 90.1, the parties may argue the efficiency defence. If the parties can demonstrate that the cost savings and other benefits are greater than, and offset any anti-competitive effects that are likely to result from the agreement, the Bureau may be satisfied that no order should be issued.

If you have any questions regarding this article please do not hesitate to contact me at:
Sarah MacDonald
Business Law Group
Tel: 905.276.0416
E-mail: smacdonald@kmblaw.com

The comments in this newsletter are of a general nature and are not designed to replace professional advice in specific situations. If you would like extra copies of this newsletter, or you know of anyone who would be interested in joining our mailing list, please contact Cheryl Woolcott at (905) 276-9111.