Canada: Behold The Future: Federal Court Of Appeal Endorses Projecting Future Events In Upholding Canadian Competition Tribunal Decision

On February 11, 2013, the Federal Court of Appeal (FCA) released its reasons in Commissioner of Competition v Tervita Corporation, an appeal of the Competition Tribunal's (the Tribunal) 2012 divestiture order against Tervita.

The case is important because it marks the first time the commissioner of competition has successfully challenged a merger based on a projection that the parties to the transaction would have become competitors if the transaction had not taken place. The FCA ruled that the "Competition Act requires [the Tribunal] to project into the future various events in order to ascertain their potential economic and commercial impacts." In addition, this challenge related to a merger that fell below the notification thresholds.

Background

The case involved the acquisition of a company that had a permit to operate a secure landfill that could have competed with the two secure landfills already owned by Tervita. These two sites were the only sites in the area.

The vendors argued they hadn't planned to open a secure landfill, but a bioremediation business that would not have competed with Tervita's secure landfills. The Tribunal's analysis went further than this: having concluded that the vendors would have operated the bioremediation site, the Tribunal determined it would have failed within one year. At that point the vendors would have either tried to sell the site or convert it into a secure landfill site. The Tribunal concluded that the site would thus ultimately have been used as a secure landfill site in competition with Tervita's sites.

The transaction was found to substantially lessen competition because it allowed Tervita to remove the threat of a potential competitor. Internal documents from Tervita showed they expected prices would fall for customers if the new site opened as a secure landfill.

Key lessons from the Tervita decision

• The Competition Bureau (Bureau) will not shy away from reviewing mergers that are below the pre-merger notification thresholds in the Competition Act (Act). Merging parties must be cognizant of this fact and not stop their competition analysis after merely reviewing the notification thresholds.
• In determining potential market entry, merging parties must take into account future events likely to occur after the merger closes. As such, parties to a merger must be aware that the Bureau may challenge their merger if there are grounds to believe that, absent the merger, they could become competitors in the future.
• The FCA determined that in a prevention of competition case, the potential market entry must occur within a "reasonable period of time," which the court found as the time it would take a new party to enter the market. Thus, if it can be established that one of the merging parties, absent the merger, would have entered the market and begun competing with the other merging party within such a period of time, the parties should be aware that the Bureau may have grounds to challenge their merger.
• Be careful when drafting internal analyses and correspondence. The Bureau can find them and use them against you. The Tribunal relied upon internal documentation from the parties to conclude that the planned bioremediation business would fail and the vendor's eventual entrance into the secure landfill market in northeastern British Columbia would result in a reduction in prices charged to customers in this market and cause financial hardship on Tervita. Merging parties must be cognizant that the Bureau will seek all relevant internal documentation to bolster its case.
• The efficiency defence under section 96 of the Act can only be relied upon if the efficiencies gained from the merger outweigh and offset its anti-competitive effects. Moreover, even in the absence of evidence of the merger's anti-competitive effects, the efficiency defence can only be utilized by merging parties if the efficiencies created by the merger are more than "marginal" or "negligible." Thus, to rely on this defence merging parties must be able to establish significant and quantifiable efficiencies gained from the merger that outweigh and offset its negative effects.

For more information and analysis on the Tervita case's implications, click here.

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