Canada: Competition Bureau Releases Updated Enforcement Guidelines On Abuse Of Dominance And Intellectual Property

Last Updated: March 21 2019
Article by Julien Beaulieu, Donald B. Houston, Nikiforos Iatrou and Dominic Thérien

Most Read Contributor in Canada, August 2019

I. Abuse of Dominance Enforcement Guidelines

On March 7, 2019, the Competition Bureau (Bureau) published new Abuse of Dominance Enforcement Guidelines (2019 Guidelines). These guidelines supersede the Bureau's previous guidelines (2012 Guidelines) on sections 78 and 79 of the Competition Act (Act) and set out the Bureau's approach to these sections of the Act.  Although they are not legally binding in the same way as judicial precedent is binding, the 2019 Guidelines are instructive and provide a window into how the Bureau analyzes and considers allegations of abuse. Key changes include comments on network effects and multi-sided platforms, the removal of the 35% market share "safe-harbour" threshold, and the incorporation of a section on the "ability to exclude" reflecting the recent decisions in TREB.[1] In addition, the 2019 Guidelines provide new insight on the Bureau's approach to judicial and consensual remedies, and introduces for the first time practical examples illustrating its updated framework.  This bulletin focuses on what has changed since the 2012 Guidelines were released and what implications these changes may have for firms that enjoy a high degree of market power or high market shares. 

Context

In Canada, section 79 of the Act makes it a reviewable practice for dominant firms to engage in anti-competitive conduct that is likely to prevent or lessen competition substantially in a market. A non-exhaustive list of such practices is provided at section 78 of the Act, and includes margin squeezing, disciplinary conduct, exclusivity practices and predatory pricing. As indicated in section 79, a violation of the abuse of dominance provisions of the Act can result in prohibition orders by the Competition Tribunal and an administrative monetary penalty (AMP) of up to $10 million for a first violation. The Bureau has conducted multiple abuse of dominance investigations in recent years, and recently prevailed in the litigated TREB case, noted above.[2]

Content of the 2019 Guidelines

The Bureau's analytical approach can be broken down into three stages. First, the Bureau assesses whether a firm (or group of firms) is dominant. Second, it determines whether the conduct under review amounts to a practice of anti-competitive acts. Third, it assesses whether the impugned acts have or are likely to substantially prevent or lessen competition in a market. 

  1. Dominance

Dominance is established by reference to the relevant product and geographic market, and by assessing whether one or many persons hold market power in that market. However, the Bureau recognizes that it is not always possible or necessary to conduct a market definition exercise (e.g., if a firm is dominant under all plausible definitions) to assess dominance.  

a. Market definition

The Bureau's framework to define the relevant market remains the same in the 2019 Guidelines, but additional comments are provided on new market definition considerations, reflecting the Bureau's 2018 report on big data:[3]

  • Multi-sided platforms. One or both sides of a multi-sided platform may now be defined as the relevant product market. When conducting a hypothetical monopolist test on such platforms, the Bureau will consider the relationship between demand, feedback effects and changes in profit on all sides of the platform.  
  • Free services. When a firm offers its services for free (e.g., a multi-sided advertising platform willing to attract users), the hypothetical monopolist test may be adapted to assess non-price dimensions of competition (quality, innovation, etc.).

b. Market Power

Once the relevant market has been defined, the Bureau examines whether the allegedly dominant firm or firms hold the required level market power in such market. The 2019 Guidelines require the existence of a "substantial degree of market power", instead of the broader "market power" requirement of the 2012 Guidelines.[4] To identify such a degree of market power, the Bureau uses direct evidence of supra-competitive pricing or profitability or, if not available, market shares and barriers to entry. Reflecting the TREB rulings, the 2019 Guidelines state that a firm that does not compete in a market may still substantially or completely control that market, for example by holding power to exclude current or potential competitors. Market shares may not be relevant in such cases.[5]

i.   Market Shares and Barriers to Entry

The 2019 Guidelines indicate that market share data is often used as an initial screening mechanism to assess market power. The Bureau's approach has slightly changed since 2012 in that respect:

  • Removal of the 35% "safe harbour" threshold. Under the 2012 Guidelines, a market share of less than 35 percent would generally not lead to an examination by the Bureau. This threshold has been removed in the 2019 Guidelines, although, notably, the 35% safe harbour threshold seems to live on in the Bureau's 2019 Intellectual Property Enforcement Guidelines, released just days after the 2019 Abuse Guidelines, as noted at the end of this Bulletin.
  • Generally no further examination below 50%. Under the 2019 Guidelines, a share below 50% (as opposed to between 35% and 50% under the previous guidelines) will generally not lead to further examination, except if other evidence indicates the existence of a substantial degree of market power, or if the alleged anti-competitive practice may lead to such power within a reasonable period of time.[6] In discussions leading up to the 2019 Guidelines, Bureau officials seemed to imply that their intention in removing the 35% safe harbour was to effectively raise the safe harbour to 50%, but this has not been made explicit in the 2019 Guidelines.
  • No final market definition. Reflecting the fact that the Bureau may not always reach a single final market definition under its new framework, the Bureau may conduct further examination of such cases where at least one plausible market definition indicates the existence of a substantial degree of market power.

Even if market shares are low, direct evidence of market power, significant commercial leverage, anti-competitive effects or of "considerable latitude" to influence competition may also indicate dominance. When the market share "screening mechanism" has led to a high market share conclusion, such share will not itself be a sufficient proof of dominance, especially in markets where the expansion or entry of new competitors would be likely in case of price increase. In that respect, the 2019 Guidelines provide additional comments on certain forms of barriers to entry and expansion (sunk costs, regulatory barriers, economies of scale and scope, market maturity and access to necessary inputs). The Bureau also mentions that network effects, i.e., effects created when demand for a product depends on use of that product by others (the most common examples being directories and newspapers, where demand for advertisement turns on how many customers subscribe to the directory or newspaper), may favor incumbent firms and hamper the entry or expansion of competitors.

ii.   Ability to Exclude

As previously mentioned, the Bureau's comments on the ability to exclude are new. They have been incorporated in the 2019 Guidelines to reflect the TREB rulings, and provide for cases where a firm does not compete in the market where the alleged anti-competitive effects are incurred, but is dominant in an adjacent market and has the ability to control the market where the effects occur. Indeed, according to the Bureau, an ability to restrict other market participants' output and profitably influence price, notably through the control of important inputs or effective business rules, indicates market power.

  1. Practice of Anti-competitive Acts

Anti-competitive acts are defined by their intended negative effect on a competitor, but the Bureau recognizes that they may not always be specifically directed at competitors (e.g., an act targeting the competitive process in itself can also amount to an anti-competitive act). As indicated in TREB FCA, when a firm does not compete in the market where the alleged harm is occurring, the firm must have a "plausible competitive interest" in negatively impacting this market.  The 2019 Guidelines provide significant comments on two categories of anti-competitive acts:[7]

a. Exclusionary Conduct

The 2019 Guidelines contain additional guidance on three types of exclusionary conduct:

  • Exclusive dealing. This type of conduct occurs when supply is restricted to certain versions of a product, or when a supplier prohibits purchases/sales of products from/to competitors. It may be explicit or implemented through most-favoured-nation (MFN) clauses or other contractual practices.[8] The 2019 Guidelines recognize that exclusive dealing is not always anti-competitive.
  • Tying and bundling. This type of conduct occurs when products are sold together or as a condition of purchasing another product. To determine if this conduct is anti-competitive, the Bureau may consider resulting efficiencies and the existence of separate customer demand.
  • Refusals to supply. When a competitively significant product or service is being denied and cannot be otherwise feasibly obtained, the Bureau may conclude that the refusal was for exclusion purposes.

b. Disciplinary Conduct

This category of anti-competitive act was not discussed in the 2012 Guidelines. Disciplinary conduct relates to actions to discourage competitors from competing more vigorously, or from disrupting the market. This includes pricing below the acquisition cost, or the punishing of deviations from a coordinated conduct between competitors. To determine whether a practice's purpose was disciplinary, the Bureau will look for evidence of subjective intent.

However, as disciplinary conduct may be hard to distinguish from true vigorous competition, the Bureau will investigate such conduct in limited circumstances, mainly when the alleged conduct is prima facie disciplinary.

c. Business Justifications

A business justification for an alleged anti-competitive act may provide an alternative explanation for the overriding purpose of that conduct. As indicated by the Competition Tribunal in TREB, compliance with a legal requirement may constitute a proper business justification. The 2019 Guidelines indicate that the allegedly dominant firm has the burden to prove a business justification in support of the conduct under review, preferably using contemporaneous evidence asserting its motivation. The Bureau will assess whether alternative methods existed to achieve the firm's business objective, and will examine the reasonably foreseeable consequences of the conduct. As stated in TREB FCA, there is no need for the Bureau to quantify the efficiencies resulting form anti-competitive acts, but such efficiencies (qualitative or quantitative) will be considered by the Bureau in assessing any business justifications that are advanced.

  1. Substantial Anti-competitive Effects

According to the 2019 Guidelines, a substantial prevention or lessening of competition occurs when a practice causes a materially greater degree of market power to exist, through new or increased market power, or the preservation of existing market power. No threshold is provided by the Bureau regarding substantiality, but a smaller market power increase may be sufficient if the dominant firm already exercises a high degree of market power. The Bureau may rely on qualitative and quantitative evidence, and might conduct a counter-factual test using direct evidence or natural experiments. To do so, the Bureau will consider the effects on prices and output, but also on innovation.

  1. Remedies

The Bureau encourages voluntary compliance with the Act, and will often negotiate settlements through registered consent agreements. When the Bureau believes a party has engaged in abuse of dominance and consensual remedies are not appropriate or possible, it may make an application before the Competition Tribunal for a remedial prohibition order or other prescriptive measures. Respondents of course have the right to defend such applications.

AMPs for abuse are a controversial topic. The Bureau portrays AMPs as complementary remedies that serve the purpose of promoting compliance with the Act, and says it wants to ensure they do not become a "cost of doing business". To determine whether an AMP is appropriate, the Bureau will consider the respondent's collaboration with the Bureau, its compliance history, its intent and other factors set out in subsection 79(3.2) of the Act.

  1. Illustrative Examples

The final part of the 2019 Guidelines provide 10 new practical examples illustrating the Bureau's updated analytical framework. These examples cover topics like the mere exercise of market power, market definition, joint dominance, predatory pricing, exclusive dealing, tied selling, trade association rules and disciplinary conduct and are helpful illustrations of the Bureau's approach.

II. Updated Intellectual Property Enforcement Guidelines

The Bureau recently released the final version of its revised Intellectual Property Enforcement Guidelines (IPEGs). This version is almost identical to the Bureau's November 1, 2018 draft ( see our comments), except for a reference to the Bureau's discontinued pharma investigation involving generic access to samples of brand name drugs, and an indication that previous PMNOC regulations apply to cases involving notices of allegation served before September 21, 2017 .

McCarthy Tétrault Notes on Abuse of Dominance Guidelines

While some of the 2019 Abuse Guidelines changes may bring uncertainty (removal of the 35% "safe-harbour" threshold, creation of the "substantial degree of market power" threshold, assessment of undefined markets), the Bureau's comments on new market definition issues (network effects, multi-sided platforms, innovation) and anti-competitive acts provide helpful guidance on its approach to abuse of dominance. As previously mentioned, many of the changes to the guidelines reflect the TREB decisions, which have also impacted the content of the Bureau's IPEGs. The 2019 Guidelines are released at time when a Competition Tribunal decision on abuse of dominance is still pending.[9] Depending of the outcome of this decision, the Bureau's broad approach to abuse of dominance by firms which do not compete in the relevant market may need to be further updated. This decision will also provide guidance on the availability of the regulated conduct defence in abuse of dominance cases, which is not expressly recognized in the 2019 Guidelines.[10]

Footnotes 

[1] In August 2018, the Supreme Court of Canada denied leave to the Toronto Real Estate Board (TREB) to appeal a Federal Court of Appeal decision (TREB FCA) from December 2017. TREB FCA confirmed that an organization may be found to have abused its dominant position even where it does not compete with the parties who are alleged to be harmed by the dominant organization's conduct. It also provided guidance on data market power and on the quantification of anti-competitive effects in abuse of dominance cases. For more details, please see our article on the TREB saga.

[2] Notably, in December 2018 and February 2019, the Bureau announced that it discontinued two abuse of dominance investigations in the pharmaceutical sector that related to the development of biosimilar and bio-equivalent drugs. Also in 2018, the Bureau reached a consent agreement with a travel-related software developer Softvoyage Inc. after investigating its contractual terms with tour operators and travel agencies.

[3] In addition, the Bureau indicates that it now may sometimes define product markets by distinguishing particular type of purchasers or by referring to specific levels of the supply chain. Similarly, multiple product markets and geographic markets, if similar from a competition perspective, may be analyzed jointly by the Bureau for market definition when such analysis does not affect the assessment of dominance. Finally, groups of products that are not themselves substitutes for each other may now be categorized as one single product market (e.g., when high transaction costs prevent the purchasing of individual products of the group from different sellers).

[4] Under the 2019 Guidelines, the Bureau's definition of the required level of market power relies on a few court decisions which have defined it as an ability to profitably and with a considerable latitude influence the different dimensions of competition (price, quality, variety, service, advertising, innovation, etc.), including the way business is carried on in the market (e.g., power to restrict the output of other market participants).

[5] In addition to high market shares, barriers to entry and the ability to exclude, the Bureau may also look at the existence of customer or supplier countervailing power, or technological change and innovation as part of the market power assessment.

[6] As before, a share above 50% will generally lead to further examination by the Bureau.

[7] The 2019 Guidelines do not provide significant new comments on predatory pricing, excepting an indication that a pricing below the average avoidable costs will be considered predatory in the absence of evidence of an overriding purpose relating to a credible efficiency or pro-competitive rationale.

[8] For an example of contractual practices deemed problematic by the Bureau, see its 2018 consent agreement with Softvoyage Inc., referred to at note 2.

[9] In September 2016, the Bureau filed a notice of application against the Vancouver Airport Authority (VAA), which had allegedly refused to new food catering providers an access to planes. Even if this case involves a non-profit organization instead of a trade organization, it is similar to TREB, as it relates to an entity that does not compete in the market where the alleged anti-competitive effects were incurred.

[10] However, the 2019 Guidelines indicate that compliance with a statutory or regulatory requirement may constitute a business justification.

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