The Competition Tribunal (the "Tribunal") released a
decision in Nadeau Poultry Farm Limited v. Westco Inc., et
al (2009 Comp Trib 6), in which it made several valuable
clarifications in its interpretation of the "refusal to
deal" provision contained in section 75 of the Competition
Act (the "Act"). Under this provision, a supplier of
a product can be ordered to sell its product to a particular
customer if certain criteria are met. This case, which came before
the Tribunal through the private access provisions allowing private
parties to bring cases before the Tribunal, sheds light on the
Tribunal's interpretation of the concepts of "ample
supply", "as a result of insufficient competition",
"usual trade terms", and "adverse impact on
competition", all in the context of a supply-managed
industry.
Background
The applicant, Nadeau Poultry Farm, operates the only chicken
processing plant in New Brunswick. The main respondent, Groupe
Westco Inc., is a chicken producer which, itself or through its
subsidiaries, owns or controls just over half of the chicken
production in New Brunswick. Together with the other respondents,
this share increases to almost 75%. Westco has a strong interest in
vertical "egg-to-plate" integration of its operations
and, prior to this case, was already involved in all aspects of
chicken production except processing and distribution.
In furtherance of this integration, Westco offered to buy or invest
in the Nadeau plant in January 2007. The applicant did not wish to
sell and proposed alternative arrangements, but the parties were
unable to reach an agreement. In March 2007, Westco approached
Olymel L.P., Nadeau's main competitor in Québec and the
eastern provinces, to develop a partnership that could either
purchase the Nadeau plant or construct its own. In August 2007,
Westco made it clear to the applicant that if it was not willing to
sell the Nadeau plant, Westco would begin constructing its own
processing plant in partnership with Olymel and that during
construction, it would divert all of its chickens to be processed
by Olymel in Québec. Negotiations for the sale of the plant
were unsuccessful, and in January 2008 Westco gave written notice
that it would stop supplying chickens effective July 20, 2008. The
other respondents followed soon after.
The applicant sought leave from the Tribunal to apply for an order
under s. 75 of the Competition Act; leave was granted on
May 12, 2008. The application was heard in November and December
2008. On August 7, 2009, the Tribunal released its decision
dismissing the application.
The legislation
Subsection 75(1) of the Act provides that where
- a customer is substantially affected in its business or its
precluded from carrying on a business because it is unable to
obtain adequate supplies of a product anywhere in a market on usual
trade terms,
- this occurs as a result of insufficient competition among
suppliers,
- the product is in ample supply,
- the customer is willing and able to meet usual trade terms,
and
- the refusal to deal is having or is likely to have an adverse affect on competition in a market,
the Tribunal may order one or more suppliers in the market to
supply the customer with the product within a specified time and on
usual trade terms. All five criteria must be satisfied before the
order will issue. An application for such an order may be made by
the Commissioner of Competition, or, as here, by a person granted
leave under s. 103.1 of the Act.
The Tribunal's analysis
The Tribunal analyzed each of the five criteria listed in s.
75(1). In the course of its decision, it ruled on or confirmed
several important points.
"Substantially Affected": In
its analysis of paragraph 75(1)(a), the Tribunal confirmed earlier
decisions to the effect that the test of "substantially
affected" will be met if the applicant is "affected in an
important or significant way." In particular, the Tribunal
rejected the respondent's argument that the phrase
"precluded from carrying on business" modifies or has an
affect on the meaning of "substantially affected," so as
to elevate the requirement almost to the point of the applicant
being unable to carry on business.
"As a Result of Insufficient
Competition": The applicant argued that the
supply-management system, which imposed quotas on chicken
producers, meant that there was a lack of competition among chicken
producers and that this was the reason why Nadeau was unable to
obtain adequate supply. The Tribunal disagreed, saying that the
quota system - not insufficient competition - was the reason for
the inadequate supply.
"Usual Trade Terms": The
Tribunal made two rulings on the meaning of this phrase. First, it
held that the "usual trade terms" to be considered are
not those that are usual between the specific parties, but those
that are usual from the perspective of suppliers and customers
generally in the relevant market, at roughly the time when the
respondents refused to supply to the applicant.
Second, s. 75(4) states that "trade terms" means
"terms in respect of payment, units of purchase and reasonable
technical and servicing requirements." The Tribunal clarified
that "terms in respect of payment" means not only
repayment terms such as credit and grace periods, but also the
actual price paid for the product.
"Ample Supply": The Tribunal
considered the meaning of "ample" in contrast to
"adequate" and found that an "ample" supply
"means more than a sufficient or adequate supply". It
means supply available "in abundance or to the point that it
is considered to be excessive." A product is in "ample
supply" when "its availability is not in issue when a
supplier considers whether to develop its business by seeking new
customers and/or new distribution channels". A product is not
in ample supply when limits on supply (e.g., the chicken
quota system in place in this case) inhibit suppliers from growing
or changing the nature of their business, or when they are forced
to ration supply between existing and potential new
customers.
"Adverse Effect on
Competition": The Tribunal agreed with and
adopted the approach from the B-Filer case to the meaning
of "adverse effect on competition." According to this
approach, the analytical process to be used in determining if the
refusal has had an "adverse effect" on competition is the
same as that used in assessing whether there has been a
"substantial lessening or prevention of competition,"
which is mentioned elsewhere in the Act. An "adverse
effect" is simply smaller than a "substantial lessening
or prevention of competition." This means that, "the
remaining market participants must be placed in a position, as
result of the refusal, of created, enhanced or preserved market
power."
The Tribunal's conclusions
The Applicant succeeded on the first element of the test because
the marketing board/quota system would have precluded it from
obtaining chickens from other sources without paying a substantial
premium, and this would have a substantial negative effect on its
business. (Quantitative details of the effects on Nadeau are
confidential, but subsequent to the ruling Nadeau announced that it
would be cutting 175 jobs at the plant, which is roughly half of
its workforce.)
The Applicant had argued that the quota system, which limited the
overall supply of chickens, satisfied the requirement that
"insufficient competition" be the reason for its
inability to obtain supply on usual trade terms. It failed on this
element of the case. The Tribunal found that, even though the
respondents accounted for 75% of the available supply in the
market, there was no evidence of collusion among them. Moreover,
the remaining 25% of the available supply in the market was
comprised of several different producers, all of whom were prepared
to sell chickens to the highest bidder - which in the
supply-managed context meant at a substantial premium. Perhaps
somewhat cryptically, but understandable in light of the
Tribunal's ultimate ruling in the case, the Tribunal found that
the quota system - and not insufficient competition - was the
reason for Nadeau's inability to obtain supply.
The Applicant succeeded on the third element because it easily
established that it had always met, and remained willing and able
to meet, the usual trade terms (including paying prices at or near
prevailing levels).
The Applicant failed on the fourth element because the Tribunal
found that chickens were not in "ample supply". The quota
system restricts the ability of chicken suppliers to meet new
demands, and prevents chickens from being available on a timely
basis to individuals wishing to expand or develop their businesses.
To rule otherwise, the Tribunal noted, would imply that in a
supply-managed industry, suppliers would be precluded from changing
customers or from vertically integrating - as the principal
respondent in this case had done.
The Applicant also failed on the fifth element because its evidence
did not establish an adverse effect on competition. That is, it
failed to establish through economic evidence that the refusal to
supply Nadeau would create, enhance or reinforce market power among
chicken processors in the relevant market. In reaching its decision
on this element, the Tribunal considered indicators of market power
among chicken processors (market share and market concentration,
barriers to entry, and impact on prices), as well as the effect of
the refusal on rival processors' costs, quality and variety of
the product, possible foreclosure of supply to other processors in
the market, and possible elimination of an efficient
processor.
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