Canada: Private Enforcement And Litigation

By John B. Laskin and Linda M. Plumpton

First published in The Antitrust Review of the Americas 2004.

Historically, private actions have played a very limited role in the enforcement of Canadian competition law. Their availability has been limited, and even where they have been available, they have not proved effective. However, recent changes suggest that private enforcement mechanisms may be developing more teeth. Companies doing business, or considering doing business, in Canada should take account of the risks associated with private actions.

Most of the law regulating competition and antitrust matters in Canada is found in the federal Competition Act (‘the Act’). The purpose of the Act is to maintain and encourage competition and to promote the efficiency and adaptability of the Canadian economy. The Act seeks to achieve this purpose, in part, through the regulation of conduct that has or may have an adverse effect on consumer welfare and competition.

The Act divides anti-competitive conduct into two categories: criminal offences and civil or ‘reviewable’ matters.

Criminal offences prohibited under the Act include cartel activity (such as price-fixing and market allocation), bid-rigging and discriminatory or predatory pricing practices. These offences require proof on the criminal standard of beyond a reasonable doubt. A conviction under these provisions may lead to imprisonment or a substantial fine.

Civil or reviewable matters include mergers, conduct by market participants who have a dominant market position and certain trade practices, including refusal to deal, exclusive dealing, tied selling and market restriction. These matters involve conduct that may in some circumstances be anti-competitive, but in others may have a neutral or pro-competitive effect. Conduct falling within this category is subject to civil review by the Competition Tribunal (‘the Tribunal’), a specialised adjudicative body comprised of both judicial and lay members. Traditionally, only the Commissioner of Competition (the federal government official responsible for administering the Act) could bring reviewable matters before the Tribunal. However, recent amendments to the Act allow private litigants to seek leave to apply to the Tribunal for remedial orders in certain cases. With very limited exceptions, the only remedies currently available from the Tribunal are prohibition orders or other injunctive relief. It cannot award damages.

Section 36 of the Act confers the private right of action. Under this section, any person who has suffered loss or damage as a result of a breach of one of the criminal provisions of the Act may sue for and recover damages equal to the actual loss suffered, plus the costs of investigating the misconduct and of bringing the proceeding. There is also a right of action under s. 36 for loss and damage resulting from a failure to comply with an order of a court or the Tribunal, including an order of the Tribunal prohibiting a reviewable practice.

The right of action in s. 36 has a relatively short limitation period. An action must be brought within two years from the later of the day on which the conduct was engaged in, the day on which any criminal proceedings are disposed of, or the day on which the breach of the court or Tribunal order occurred.

In contrast to the United States, a person suing under s. 36 may not claim treble damages. Section 36 also does not allow for recovery of punitive damages. Whether interlocutory or permanent injunctions are available in actions under s. 36 remains an open question, although some courts have found that injunctive relief is not available.

In an attempt to avoid these limitations, claimants commencing actions under s. 36 typically also include tort claims alleging, for example, common law conspiracy and unlawful interference with economic interests. These claims may extend the limitation period and the available remedies. They also permit claims for punitive damages.

A private litigant may establish liability under s. 36 whether or not the defendant company has been convicted of the criminal offence underlying the action. In most cases, however, a private action is brought only after a successful criminal prosecution for or a guilty plea to one of the offences described below, or an equivalent offence under another country’s antitrust laws. The conviction can be used in civil proceedings to establish commission of the offence.

Some of the offences under the Act most frequently alleged in private actions are described below.

Subject to limited exceptions, it is an offence under the Act to enter into a conspiracy, agreement or arrangement with another person to lessen competition unduly. The Act also specifically prohibits certain types of conspiracies relating to, for example, price, market allocation, and access to facilities. A conspiracy conviction may lead to imprisonment for up to five years, a fine of up to C$10 million, or both.

The Act contains a separate prohibition against the implementation by a corporation carrying on business in Canada of a foreign directive requiring it to give effect to a conspiracy entered into outside Canada. Even if no director or officer of the Canadian corporation had knowledge of the foreign-directed conspiracy, the corporation is guilty of an offence and subject to a fine in the discretion of the court.

Bid rigging involves either (i) an agreement between or among two or more persons in which a person agrees not to submit a bid in response to a request for bids or tenders, or (ii) the submission of bids that are arrived at by agreement between or among two or more bidders. A conviction for bid-rigging may lead to imprisonment for up to five years or to a fine in the discretion of the court.

The offence of price discrimination encompasses both classic price discrimination and predatory pricing practices. A seller may be convicted of price discrimination if the seller engages in sales that discriminate by providing an advantage to a purchaser not provided to the purchaser’s competitor in respect of sales of articles of like quality or quantity. It is also illegal to engage in a policy of selling products in any area of Canada at prices lower than those charged elsewhere in Canada, or to engage in a policy of selling products at unreasonably low prices, with the design or effect of substantially lessening competition or eliminating a competitor. A person convicted of price discrimination is liable to imprisonment for up to two years. There is no fine prescribed for this offence.

It is a criminal offence for a person who produces or supplies a product to attempt to influence upward or to discourage the reduction of the price at which another person supplies, offers to supply or advertises the product in Canada. It is also an offence to refuse to supply a product or otherwise to discriminate against a person because of a low pricing policy. A conviction for price maintenance is punishable by a fine in the discretion of the court, imprisonment for up to five years, or both.

Misleading advertising is also a criminal offence under the Act. It is an offence to knowingly or recklessly make a representation to the public that is false or misleading in a material respect. The maximum penalty for misleading advertising is a fine in the discretion of the court, imprisonment for up to five years, or both. Recent amendments to the Act have moved other types of deceptive marketing practices to the civil regime.

It is expensive and difficult for a claimant in a civil action to establish the commission of one of the offences in the Act. In the absence of a prior conviction in a criminal proceeding, courts will require a high degree of proof before finding that criminal conduct has taken place. For these reasons, actions brought under s. 36 of the Act were rare, and successful judgments even more so. With the advent of class proceedings in Canada, however, the volume of private actions has increased dramatically.

Class proceedings, or class actions, are now available by statute in many provinces (Ontario, British Columbia and Quebec among them) and in the Federal Court of Canada. The incentives created by the availability of contingency fees, and the possibility of much larger damage awards, have encouraged counsel and potential class members to pursue claims under s. 36 that otherwise would not have been brought. While there are undoubtedly substantially more actions being commenced under s. 36, class proceedings involve their own unique procedural hurdles.

Like other class proceedings, a class proceeding alleging a violation of Canadian competition law must satisfy the test for certifi- cation before a court will allow it to proceed to trial. The certification test in a Canadian class proceeding typically includes the following elements:

• the claim must disclose a cause of action;

• there must be an identifiable class of persons;

• the claims must raise common issues;

• a class proceeding must be the preferable procedure; and

• there must be an appropriate representative plaintiff.

To date, only one antitrust class proceeding has been certified in Canada, and the decision to certify in that Ontario case was ultimately overturned on appeal. The case involved an alleged conspiracy to fix the price of iron oxide pigments used in the manufacture of bricks, paving stones and other building materials. A class composed entirely of indirect purchasers—homeowners—asserted that the alleged overcharge was passed on to them through a lengthy distribution chain.

The appeal court determined that s. 36 requires claimants to establish proof of loss as an essential component of liability. Liability could not be a common issue on the facts of the case. Each homeowner would be required to establish his or her loss independently. The complexities of proving the extent to which various participants in the distribution chain passed on the higher price caused by the alleged price-fixing conspiracy led the court to determine that a class proceeding was not the preferable procedure. The court left open the possibility that in another case where the evidence met the court’s concerns, claims by indirect purchasers could be pursued through a class action.

A lower court in Ontario recently applied similar reasoning in denying certification of a class proceeding alleging price maintenance. The action was brought on behalf of an estimated 20 million consumers who had allegedly overpaid for various audio-video products over a 20 year period. In refusing to certify, the court noted that the need for each plaintiff to prove actual loss or damage would require individual trials for each class member. As a result, even though the case raised a number of common issues, the more complex individual issues would make a class action unmanageable.

It remains uncertain whether consumers or other indirect purchasers will be able to use Canadian class proceedings to obtain relief for damage caused by price-fixing. In the United States, the law surrounding indirect purchaser class actions is more rigid. Indirect purchasers do not have standing to sue under federal antitrust legislation, although class actions may still be brought by indirect purchasers under some state antitrust statutes. For the time being, Canadian courts have declined to import these bright line rules.

With few cases decided concerning these issues, Canadian courts have yet to articulate clear principles setting out whether and when antitrust class actions will proceed past the certification stage. However, the continuing proliferation of class proceedings suggests that this uncertainty is not deterring potential plaintiffs.

The reviewable practices part of the Act deals with conduct that is potentially, but not inherently, anticompetitive. This conduct, which includes various trade practices, mergers, and abuses of dominant position, is subject to review by the Tribunal on application by the Commissioner of Competition, acting as prosecutor. The Tribunal may make a variety of remedial orders if it finds that reviewable conduct exists. For example, the Tribunal may issue a prohibition order or impose conditions on a merger that it believes would substantially lessen competition.

Among the most significant recent changes to the Act was the creation of a private right of access to the Tribunal for certain civilly reviewable conduct. The Act now permits private parties to seek leave from the Tribunal to bring an application relating to refusal to deal, exclusive dealing, tied selling or market restriction. Applications for leave must be made within one year from the day on which the practice that is subject to the application has ceased.

The reviewable practices that may be the subject of an application for leave are described below.

If the Tribunal finds that there has been a refusal to supply a product and that:

• a person is substantially affected in his business and cannot obtain adequate supply elsewhere in the market on usual trade terms due to insufficient competition among suppliers;

• the person is willing and able to meet the usual trade terms of suppliers of the product;

• the product is in ample supply; and

• the refusal is having or is likely to have an adverse effect on competition in a market,

the Tribunal may order the supply of the product on usual trade terms.

Exclusive dealing refers to the practice of requiring, as a condition of supplying a product, that a customer deal only with the supplier, or refrain from dealing in certain products except as supplied by the supplier. Tied selling generally refers to the practice of requiring, as a condition of supplying a product, that a customer acquire another product from the supplier. These activities are subject to review by the Tribunal if:

• the supplier is a major supplier of product in a market;

• the activity is likely to impede entry or expansion of a firm in the market, to impede product introduction or expansion of sales in the market, or to have some other exclusionary effect; and

• the activity is likely to lessen competition substantially.

If these criteria are established, the Tribunal may make a prohibition order or such other order as is necessary to restore or stimulate competition in relation to the product.

Market restriction is any practice of supplying a product to a customer on the condition that the customer restrict its sales to a defined market. If this practice is engaged in by a major supplier and is likely to substantially lessen competition, the Tribunal may make a prohibition order or such other order as is necessary to restore or stimulate competition.

Before bringing an application, prospective private litigants must first obtain leave from the Tribunal. Leave will not be granted where a matter is already the subject of an inquiry by the Commissioner, was settled between the Commissioner and the person against whom the order is sought, or is already the subject of an application before the Tribunal.

In an application for leave, the applicant must file an affidavit setting out the supporting evidence. The Commissioner may also make written submissions on a leave application. The Tribunal may grant leave to make an application if it has ‘reason to believe’ that the applicant is directly and substantially affected in his or her business and the alleged practice could be subject to an order under one of the specified reviewable practices provisions.

There has to date been only one application for leave to the Tribunal. The Tribunal used the opportunity presented by this case to state more clearly the circumstances when it would grant leave. According to the Tribunal, the test for leave requires the Tribunal to determine:

This test imposes a high evidentiary burden. An order under the refusal to deal provision requires the applicant to establish that there has been or is likely to be an adverse effect on competition in the market. An order under the exclusive dealing, tied selling or market restriction provision requires a substantial lessening of competition. In most cases, meeting the leave test will require expert evidence.

Once leave is granted, the Commissioner may not make an application on the basis of the same or substantially the same facts as are alleged in the private proceeding. The Commissioner may intervene in any private proceeding, although he will likely only do so where the issues raised may have a significant impact on consumers, the business community, or the Canadian economy.

Unlike the private right of action in s. 36, applications to the Tribunal do not permit the recovery of damages. The Tribunal is also empowered to award costs against an applicant, a power that may deter strategic or frivolous litigation.

As a result, the right to seek private access to the Tribunal is unlikely to be frequently exercised. Actions likely will be brought only where the conduct is easily detectable and the applicant has deep pockets to meet the stringent test for leave and high evidentiary burden. Applicants will likely be from industries where it will be easy to establish a direct and substantial impact on the business—for example, in markets that have few participants. Small and mediumsized enterprises may use private access to resolve local or limited private matters that the Commissioner of Competition would normally not take forward.

There is currently no mechanism under which a private litigant may bring a class proceeding before the Tribunal. Experience with s. 36 suggests that making class proceedings available might address some of the limitations of the right to seek private access.

Establishing anti-competitive conduct requires sophisticated expert evidence and experienced counsel. Individual actions tend to be brought under s. 36 only where the plaintiff has deep pockets and has suffered significant damage. Class proceedings make it more efficient for plaintiffs who have suffered minimal damage to seek remedies. They attract more sophisticated counsel through the availability of contingency fees. The possibility of large damage awards in class proceedings also creates an incentive to litigate. Even if applications could be made to the Tribunal on a class basis, damages would likely have to be available to create the necessary incentives.