Canada: A New Conservative Government in Canada: Implications for Competition Law and Foreign Investment Review

The election of a new minority government in Canada led by Stephen Harper of the Conservative Party comes at a time of considerable debate about the future directions for competition law and policy in Canada. In this Bulletin, we have reviewed the January 2006 Election Platform ("Electoral Platform"), March 2005 Policy Declaration ("Policy Declaration") and past positions of the Conservative Party and its predecessor, the Canadian Alliance Party ("CAP") for clues about the possible future directions for Canadian competition law and policy under a Conservative Federal Government.

The first point to note is that as the Conservative Party does not control an absolute majority of the seats / votes in Parliament, the scope for sweeping policy changes in this area, as in other policy areas, is quite limited. Therefore fundamental reforms will require a consensus in Parliament among the various political parties, or the support of at least one other political party. As we will describe below, there was considerable consensus with respect to some policy proposals in the last Parliament and that bodes well for proceeding with some reforms.

Second, competition law reform was not one of the five priorities set out by the Conservative Party in its Electoral Platform. To the extent that proposed reforms reflect a parliamentary consensus, some competition law reform proposals may present an opportunity for the new government to demonstrate an ability to achieve concrete legislative results.

Third, although the Commissioner of Competition (the "Commissioner") and the Competition Bureau (the "Bureau") are largely independent in making enforcement decisions, they can have an important role in assisting the government in formulating legislative reform proposals. For better or worse, a minority parliament could offer the scope for the Bureau to play a leading role in generating reform proposals, and perhaps even shaping consensus around specific reform proposals if the Commissioner were inclined to play that role.

In the remainder of this Bulletin, we discuss the following specific reform or policy directions:

• general approach to competition law and policy;

• the application of administrative monetary penalties ("AMPs") by the Competition Tribunal (the "tribunal");

• the decriminalization of certain other pricing provisions of the Competition Act (Canada) (the "Competition Act")

• reform of the criminal conspiracy provisions of the Competition Act;

• the role of private parties in proceedings before the Tribunal;

• the role of efficiencies in the analysis of mergers;

• Bank Mergers; and

• foreign investment notification and review.

In April 2002, the House of Commons Standing Committee on Industry, Science and Technology (as it was then called) issued a report titled "A Plan to Modernize Canada’s Competition Regime" (the "2002 Report"). The CAP issued a Supplementary Report ("Supplementary Report") that endorsed "the majority" of the 2002 Report, but disagreeing with the recommendations in three areas.

The first area of disagreement was whether the Competition Act itself is the central instrument or focus of competition policy. They expressed the view that "that Canadian consumers and producers are best served not by a tribunal or by government interference in the marketplace, but by genuine, business-to-business competition." Furthermore, they suggested that the 2002 Report was wrong to focus so much attention on price-fixing conspiracies as opposed to issues of regulation.

Second, the CAP expressed the view that Tribunal proceedings take too long to reach a definitive resolution, and as such impose an excessive regulatory burden on businesses. Although the CAP did not make any specific recommendations on how to arrive at more timely decisions by the Tribunal, it felt that the 2002 Report did not go far enough in this regard. This is an area where we would expect a new Government to focus on if it were to introduce legislative amendments to the Competition Act.

The Supplementary Report stressed the monopoly-creating distortion of government policies, such as foreign ownership rules, which act as barriers to entry in the airline and retail book industries. While appreciating that "Canada's small domestic market and large geography are usually used as justification for regulation", the CAP argued that: (1) "there are too many sectors in the Canadian economy that escape market forces — telecommunications, wheat marketing, and transportation being examples"; (2) it "is far better to have a proper business and tax environment for many competitors than regulation for a few"; and (3) "direct government interference in these sectors has resulted in reduced competition."

As a specific example, the CAP cited the airline industry. They stated that "the government has amended the Competition Act to regulate the airline industry using cease and desist powers, monetary penalties and a consumer complaints referee … yet, all these changes cannot discipline Air Canada like a competitive marketplace would."

Furthermore, the CAP rejected the view that "certain industries must be protected from foreign ownership or interference" pointing to the history of the National Energy Program and the Canadian oil industry. They noted that although, "the Competition Commissioner has approved large-scale mergers in the airline or retail book industry, with caveats that certain assets be sold to other interests, … in both cases, the deadlines passed with no prospective buyers coming forward due to government-imposed domestic-ownership rules … [and that] the end result in both industries has been a more concentrated monopoly and less choice for the Canadian consumer."

In the Policy Declaration of the Conservative Party, this view was modified. The CAP stated that it supported "relaxing foreign ownership rules on Canadian industry in concert with other major trading partners in the telecommunications, broadcast distribution and the airline industry" and indicated that it would study "whether to reduce or completely remove these rules."

The 2002 Report contained recommendations concerning empowering the Tribunal with the right to impose AMPs on anyone found in breach of sections of the Competition Act concerned with refusals to deal, consignment selling, exclusive dealing, tied selling and market restriction, abuse of dominant position and delivered pricing. The Liberal government introduced Bill C-19, which proposed to introduce a $10 million AMP (and $15 million for subsequent occurrences) under the abuse of dominance provision of the Competition Act.

In the Standing Committee on Industry, Natural Resources, Science and Technology (the "Industry Committee") James Rajotte the Senior Critic for Industry for the Conservative Party made critical comments regarding the necessity of such large penalties and proposed amendments to Bill C-19 to reduce the penalty to $3 million. Accordingly, we would not expect the new Conservative Government to proceed with the introduction of AMPs, or at least not at the level proposed in Bill C-19.

The 2002 Report recommended the repeal of the sector-specific provisions of the Competition Act, notably those in respect of abuse of dominance. This recommendation was included in Bill C-19, and approved of by the Conservative Party in the discussions in the Industry Committee. If legislation were introduced to reform the Competition Act, we would expect this to be included by a Conservative Government.

Following on the recommendations made in the 2002 Report, Bill C-19 provided for the repeal of the criminal price discrimination, promotional allow-ance and predatory pricing provisions of the Competition Act. Recourse would, however, remain possible in respect of such conduct under the abuse of dominant position provisions of the Competition Act if such conduct were carried on by a person with market power and prevents or lessens competition substantially in a market. The CAP did not oppose these recommendations in the 2002 Report or in the discussion of Bill C-19 in the Industry Committee. The only question is whether a Conservative Government would make a priority of re-introducing these amendments or would focus more on addressing the regulatory barriers that impede competition as a matter of priority.

The 2002 Report recommended that the Government amend the Competition Act to create a two-track approach for agreements between competitors. The first track would retain the conspiracy provision in Section 45 of the Competition Act for agreements that are strictly devised to restrict competition directly through raising prices or indirectly through output restrictions or market sharing, such as customer or territorial assignments, as well as both group customer or supplier boycotts. The second track would deal with any other type of agreement between competitors in which restrictions on competition are ancillary to the agreement’s main or broader purpose.

In addition the 2002 Report recommended the repeal of the term "unduly" from the Section 45 of the Competition Act, and the addition of paragraphs to Section 45 that would provide for exceptions based on factors such as whether: (1) the restraint is part of a broader agreement that is likely to generate efficiencies or foster innovation; and (2) the restraint is reasonably necessary to achieve these efficiencies or cultivate innovation. The onus of proof, based on the "beyond a reasonable doubt" standard, for such an exception would be placed on the proponents of the agreement. Others have proposed that Canada distinguish more clearly between "hard core" cartels that would be per se illegal, and others that would be judged only after weighing their pro-competitive and efficiency benefits against their anti-competitive effects.

The Bureau has been studying various options for reforming Section 45 to determine whether they would likely have led to a materially different result in past cases. At this stage, we would not expect reform of Section 45 to be a priority for the new Conservative Government.

Within the Industry Committee, with respect to misleading advertising, the Conservative Party opposed amendments providing for increased AMPs under the civil misleading representation provisions in Bill C-19. Likewise the Conservative Party opposed the proposed amendments in Bill C-19 that would empower courts to order restitution for persons that have purchased a product that the court determines has been the subject of a material misleading representation. However, the Conservative Party proposed an amendment to Bill C-19 that would empower courts to freeze assets of persons where the is "a strong prima facie case" that they have violated the criminal false or misleading representations provisions of the Competition Act. We would not expect this to be a priority area for legislative reform by the new Conservative Government.

Perhaps no provision of the Competition Act has stirred more academic and judicial controversy than the Section 96 efficiencies exception to the merger provisions. See Canada (Director of Investigation & Research) v. Hillsdown Holdings (Canada) Ltd. (1992), 41 C.P.R. (3d) 289 (Comp. Trib.); Canada (Commissioner of Competition) v. Superior Propane (2001), 11 C.P.R. (4th) 289, (Fed. C.A.) and Canada (Commissioner of Competition) v. Superior Propane (2002), 18 C.P.R. (4th) 417 (Comp. Trib.); affirmed (2003), (23 C.P.R. (4th) 316 (Fed. C.A.).

The 2002 Report, recommended that the Government of Canada establish an independent task force of experts to study the role that efficiencies should play in all civilly reviewable sections of the Competition Act, and that the report of the task force be submitted to a parliamentary committee for further study within six months of the tabling of this report. In October 2005, a three-member Advisory Panel appointed by the Commissioner issued its Report on Efficiencies.

The Advisory Panel concluded that "Canada should retain an efficiency defence, because in rare but important cases, a trade-off between efficiency gains and a substantial lessening or prevention of competition may be justified" and that "both productive and dynamic efficiency gains should be considered in this analysis."

With respect to the controversial issue of weighting efficiencies, the Advisory Panel stated that: "the current standard for weighing efficiency gains against competition effects is not satisfactory. Parliament should therefore define the standard that any trade-off would have to meet, since this is fundamentally a policy question of who should benefit from the efficiency gains of an otherwise anti-competitive merger."

Furthermore, the Advisory Panel concluded that "the existence of an efficiency defence, which is likely to apply rarely, should not detract from the Competition Bureau and Tribunal regularly considering pro-competitive efficiency gains when assessing the competitive effects of a merger."

The Advisory Panel Report was published as the Liberal Government was collapsing in the Fall. Consequently, the Report was not considered by the Industry Committee, and the Conservative Party did not express a formal position on it. However, it is fair to say that the Conservative Party members of the Industry Committee expressed a great deal of scepticism towards the merits and utility of attempting to weigh merger-specific efficiencies against consumer losses when the issue was discussed in connection with Bill C-249 in 2002 and 2003. On the other hand, the Conservative Government would probably be much more sympathetic to the Advisory Panel’s recommendation that efficiencies be considered as a factor in merger analysis, not simply as a defence. At this stage, we would not expect the Conservative Government to make a priority of amending Section 96 of the Competition Act.

While weighing efficiencies in merger review has raised complex economic and legal controversy, the subject of bank mergers has done the same, but with far greater political controversy. In Canada, bank mergers require, review under the Competition Act and under the Bank Act and ultimately approval by the Minister of Finance. In the late 1990’s, when outgoing Prime Minister Paul Martin served as Finance Minister, he blocked two large mergers between members of the 5 largest banks in Canada – Royal Bank and Bank of Montreal and CIBC and Toronto Dominion.

It was widely expected that the Liberal Government would release a White Paper on reforms to the Bank Act in Fall 2005, however this did not occur before the Parliamentary defeat of the Liberal Government. By statute, the Bank Act must be reviewed every five years, and thus amendments are expected before Fall 2006.

Although in the past, the Conservative Party, and its predecessors, have been supportive of bank mergers, the issue of bank mergers per se was not mentioned in either their Policy Declaration or Electoral Platform. However, the Electoral Platform does contain a pledge to "maintain the current regulations governing insurance marketing by chartered banks." Nonetheless, during the election campaign, Prime Minister Harper and Conservative Finance Critic in the last Parliament indicated that that the Conservatives want a process to be set up that would enable bank mergers to be evaluated independently – not by politicians – according to a range of clearly established, objective, public policy concerns.¹ It is also interesting to note that while the Policy Declaration, Electoral Platform and Supplementary Report critique foreign ownership restrictions in certain sectors, they do not refer to the banking industry.

With the new Conservative Government lacking a clear parliamentary majority, it would be difficult, though not impossible, to see much progress on this front. That said, we understand that under the previous Liberal Government, the Bureau has already worked towards issuing a bank merger bulletin that would revise the Enforcement Guidelines for Bank Mergers published by the previous Commissioner Konrad Von Finkenstein in January 2003. Presumably, that would enable the Bureau to act swiftly in response to any initiative in this area, should the new Conservative Government decide to wade into this difficult political and policy area.

In order to establish a new Canadian businesses or acquire control of an existing Canadian business, a non-Canadian must provide either a notification or, in rarer circumstances, an application for review, under the Investment Canada Act (the "ICA"). The minister appointed under the ICA can only prevent and/or impose conditions on the non-Canadian purchaser of a Canadian businesses in the event such acquisition is subject to an application for review. On June 20, 2005, the Liberal Government tabled Bill C-59 an Act to Amend the Investment Canada Act.

The amendment proposed a mechanism to enable the government to review any foreign investment/ acquisition that "might be injurious to Canada’s national security" and impose restrictions on the completion of the investment until satisfactory conditions had been met. The amendment was widely viewed as a response to increasing foreign ownership of Canadian natural resource assets as well as addressing security concerns, although the previous Liberal Minister of Industry said that this was not the case. (For a discussion on the ICA and Bill C-59 please refer to our June 2005 Bulletin.)

Bill C-59 failed to become law with the fall of the Liberal government. A resurrection of some form however appears likely as Bill C-59’s stated goal of protecting national security is supported by the new Conservative Government. In addition, in its Policy Declaration, the Conservative Party advocated including "security of supply, technology transfer and any anti-trust implications" under the heading "national security."

The ICA already provides for consideration of "the effect of the investment on competition within any industry or industries in Canada" in section 20(d) of the ICA for determining whether a reviewable investment by a non-Canadian is of "net benefit to Canada" in the case of reviewable transactions. In this regard, it has been our experience that such evaluations are generally left to the expertise of the Bureau.

Only time will tell how the Conservative government will approach the issue of competition law and policy. The Conservative Industry Critic Rajotte while in opposition was an experienced and capable member of Parliament. Choosing a cabinet involves juggling geographical, experience and seniority concerns, among other factors, and Prime Minister Harper surprised many observers by appointing a first-time M.P. from Quebec as Minister of Industry, Maxime Bernier and appointing as his Parliamentary Secretary, Colin Carrie, a young returning M.P. from the base of the automotive industry, Oshawa, Ontario.

Neither Mr. Bernier nor Mr. Carrie has a known public record with respect to competition law and policy. That said, Mr. Bernier is a lawyer with a bachelor’s degree in commerce and was a member of the board of the Montreal Economic Institute. Prior to his election, Mr. Bernier was vice-president of a prominent Canadian insurance company, and manager of corporate and international relations at the Commission des valeurs mobilières du Québec. As a consultant, he provided advice on the legislation on financial institutions and development of the regulations governing this sector. Again, only time will tell how the appointments of Messrs. Bernier and Carrie will influence the development of competition law and policy under the new Conservative Administration.

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