The Competition Bureau (the "Bureau") recently published interim guidance (the "Guidance") outlining its preliminary enforcement approach to competitor property controls under the Competition Act (the "Act"). The Guidance was published after Parliament's recent amendments to the Act in Bill C-59 and Bill C-56 expanded the scope of the civil collaboration and abuse of dominance provisions.
Competitor property controls are restrictions on the use of commercial real estate. The Guidance addresses the following two primary types of competitor property controls, which are said to be "common across Canada, especially in retail settings":
- Exclusivity Clauses: Exclusivity clauses in a commercial lease limit how land can be used by competitors to a tenant. These clauses could restrict the landlord's ability to lease space or land to a competitor of an existing tenant, or limit what or how products are sold.
- Restrictive Covenants: Restrictive covenants place a restriction on land that prevents subsequent owners from using the location for business purposes which compete with a previous owner.
Overall, the Guidance presents a generally antagonistic view of competitor property controls and an incomplete analytical framework for how such controls are to be properly considered under the Act's "rule of reason" / effects based approach. A subsequent draft of the Guidance would benefit from a discussion of the entire analytical framework applicable to competitor property controls that is prescribed by the Act and jurisprudence.
Pro-Competitive Justifications of Competitor Property Controls
The Guidance recognizes that, in certain limited or exceptional situations, competitor property controls be pro-competitive. In this regard, the Guidance provides as follows:
When can competitor property controls be justified?
... there are certain limited situations where these types of restrictions can be justified because they increase competition overall, such as where they protect incentives for a retailer to make investments in order to enter a market.
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Exclusivity clauses
Exclusivity clauses are only justified in limited circumstances, such as where they go no further than necessary to encourage new entry or to allow a tenant to make investments to develop their storefront. This could be because once a key tenant has made the investments necessary to open their store and attract customers to the plaza, the increased customer base may make it more attractive for competitors to open stores in the plaza as well. The presence of competitors could in turn reduce the benefit the key tenant receives from its investments in opening their store. This could reduce or eliminate their incentive to make the investments unless they are protected by an exclusivity clause.
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Restrictive covenants
Restrictive covenants are exclusionary. Restrictive covenants apply to the land itself, and can restrict future owners of the land. They tend to be long lasting, and can create areas where no competitor can operate. Importantly, restrictive covenants create advantages for companies that have historically operated in an area based on their past ownership of land. We do not consider their use to be justified outside of exceptional circumstances. [emphasis added]
Despite recognizing the pro-competitive effect that exclusivity clauses can provide to, for example, anchor tenants, who can then leverage their lease into increased investments that attract more customers to a shopping centre and otherwise benefit consumers, the Bureau recommends that lessors of property consider whether there are other suitable tenants who either do not require an exclusivity clause or require a less restrictive exclusivity clause. While the Bureau recognizes that "whether a different tenant would be appropriate may depend on a variety of factors", this recommendation could place a new and costly obligation on lessors.
Abuse of Dominance Enforcement
As discussed in a prior blog post, the recent amendments to the Act introduced a new framework for abuse of dominance, which applies a different test depending on the remedy being sought. In summary:
- Prohibition Order: In order for a prohibition order to be imposed, it must be established that a firm (either on its own or jointly with another firm) is dominant in a market and has engaged in or is engaging in either (1) a practice of anti-competitive acts or (2) conduct (that is not a result of superior competitive performance) that has had, is having or is likely to have the effect of preventing or lessening competition substantially in a market in which the dominant firm has a plausible competitive interest. In other words, in this context, the abuse of dominance provisions require either anti-competitive intent or anti-competitive effects.
- Other Remedies: In order for any other remedies to be imposed, such as administrative monetary penalties, it must be established that a firm (either on its own or jointly with another firm) is dominant in a market and has engaged in or is engaging in both (1) a practice of anti-competitive acts and (2) conduct (that is not a result of superior competitive performance) that has had, is having or is likely to have the effect of preventing or lessening competition substantially in a market in which the dominant firm has a plausible competitive interest. In other words, in this context, the abuse of dominance provisions require both anti-competitive intent and anti-competitive effects.
The Guidance includes a high-level discussion of the application of the abuse of dominance provisions to competitor property controls. In particular, the Guidance provides as follows:
- Dominance: The Bureau will consider several factors when evaluating whether a firm (either on its own or jointly with another firm) is dominant in a market, including (1) the ability to restrict competitors or competition; (2) the presence of effective competitors, which the Bureau often considers based on market share; (3) barriers to entry in the market, including barriers to entry created by the competitor property control; (4) the position of the firm in the broader industry; and (5) evidence of bargaining leverage, including the ability to seek the competitor property control. Importantly, the Guidance notes that "[d]ominance can be created by the competitor property control itself in cases where there is already a lack of existing effective competitors and it creates significant barriers to competitors entering the market". In most cases, the Bureau will treat the party that proposed or benefits from the competitor property control as the focus of an abuse of dominance investigation.
- Practice of Anti-Competitive Acts: The Bureau will consider several factors when evaluating whether conduct constitutes an anti-competitive business practice, including (1) subjective evidence of intent (which may be gleaned from business documents describing the reasons for the behaviour); (2) the likely outcome of the behaviour (as firms may be found to have intended the reasonably foreseeable consequences of their actions; and (3) any pro-competitive or efficiency enhancing justifications for the behaviour. Importantly, in the context of competitor property controls, the Guidance provides as follows:
Restricting competition is inherent in a competitor property control. This is because restricting competition is the source of a competitor property control's value. Competitor property controls may prevent competitors from entering markets in locations that would be competitively significant or exclude them from a market entirely. If a competitor property control is not capable of restricting competition it does not provide any benefit, raising questions about why it exists.
However, as discussed, there are certain limited situations where these types of restrictions can support competition. We will consider these types of justifications as we determine whether a competitor property control is an anti-competitive business practice. In the absence of evidence of this type of pro-competitive justification we will consider competitor property controls used by dominant firms to be anti-competitive.
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As noted, we do not consider the use of restrictive covenants to be justified outside of exceptional circumstances. Therefore, we will consider their use by dominant firms to be an anti-competitive business practice in almost all cases. [emphasis added]
- Effect on Competition: When evaluating the effect that a competitor property control has on competition, the Bureau will consider whether it creates, increases or protects the market power of one of the targets in a market or is likely to do so. The analysis will center on barriers to entry created by the competitor property control and the presence of effective competition.
Businesses reviewing the Guidance could understandably be very concerned about the application of the abuse of dominance provisions to competitor property controls based on, among other things, the Bureau's apparent view that (1) the mere presence of a competitor property control could demonstrate dominance and (2) competitor property controls are inherently anti-competitive. However, each of these positions is, in our view, unsupported by the abuse of dominance provisions themselves and existing jurisprudence, with the result that competitor property controls will need to be evaluated on a case-by-case basis having regard to all the facts in question. In any event, in order to obtain a remedy beyond a prohibition order, it is necessary to demonstrate, among other things, (1) dominance in one or more relevant markets and (2) that the competitor property control has had, is having or is likely to have the effect of preventing or lessening competition substantially in a market in which the dominant firm has a plausible competitive interest. Dominance is not meaningfully discussed in the Guidance and there is no discussion whatsoever in the Guidance of the need for a substantial prevention or lessening of competition. The Guidance would benefit from a discussion of these important issues.
Civil Anti-Competitive Collaborations Enforcement
Historically, section 90.1 of the Act has allowed the Tribunal to issue certain remedies in respect of existing or proposed agreements between competitors or potential competitors that are likely to result in a substantial prevention or lessening of competition. However, effective December 15, 2024, section 90.1 of the Act will extend to collaborations among parties that are not competitors, provided that a "significant purpose" of the collaboration, or any part of it, is to prevent or lessen competition in any market.
According to the Guidance, "[t]his change will make section 90.1 applicable to competitor property controls ... because agreements that contain competitor property controls are not usually among competitors". In the Bureau's view, the same rationale that competitor property controls are generally anti-competitive business practices in the context of the abuse of dominance provisions will also apply to the analysis under section 90.1. Therefore, "section 90.1 could apply to competitor property controls where there is proof that the agreement has the effect of harming competition". In the context of competitor property controls, the Bureau could consider both tenants and lessors as the targets of its investigations.
Significantly, while the Guidance notes that "section 90.1 could apply to competitor property controls where there is proof that the agreement has the effect of harming competition", it fails to include any discussion on when the Bureau may find that a "significant purpose" of competitor property control is to prevent or lessen competition in any market. The Guidance would benefit from such a discussion. In our view, it can be challenging to establish this element, which could limit potentially limit the reach of section 90.1 to competitor property controls. In addition, and perhaps more importantly, even if it could be established that a "significant purpose" of a competitor property control is to prevent or lessen competition in any market, it would still be necessary to establish that the competitor property control is likely to result in a substantial prevention or lessening of competition. These issues are entirely absent in the Guidance and the Guidance would benefit from a discussion of these issues.
Compliance Takeaways
The Bureau encourages businesses who use competitor property controls to consider a set of questions:
- Is the property control necessary to allow a new business to enter the market or to encourage a new investment?
- Could this property control last for a shorter period of time?
- Could this property control cover fewer products or services?
- Could this property control cover less geographic area?
Although these vaguely prescriptive questions confirm the Bureau's position throughout the Guidance that competitor property controls are inherently anti-competitive and justified in very limited situations, the fact remains that all of the requisite elements of the relevant rule of reason provisions need to be established in order to demonstrate a contravention of these provisions and, in turn, to obtain a remedial order or penalty. Some parts of the Guidance's commentary and compliance suggestions may imply that any harm to competition is sufficient, but it makes no mention of the circumstances in which a substantial prevention or lessening of competition must be proven in order to obtain such an order.
Although the Guidance is targeted towards commercial retail agreements broadly, the Bureau contextualizes its approach by reference to international enforcement actions conducted in the United Kingdom and New Zealand that limited the ability of large grocers to use property controls. These countries have different legal frameworks with lower thresholds to challenge property controls than are available under the Act, which currently allows for property control clauses that are neutral in their competitive effects. Furthermore, as the Guidance itself alludes to, the retail sector is not a monolith. Naturally, the justifications for property controls and their competitive effects on other retailers in a shopping centre, plaza or other location could vary significantly between specialty areas.
The Bureau's Consultation
The Bureau is seeking feedback on the Guidance from Canadians who have experience with competitor property controls, such as tenants, lessors and landowners. Feedback can be provided until October 7, 2024 through an online feedback form. Each submissions received will be published on the Bureau's website unless the provider requests that it be kept confidential.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.