UNILATERAL CONDUCT WORKING GROUP QUESTIONNAIRE EXCLUSIVE DEALING/SINGLE BRANDING FINAL RESPONSE CANADIAN COMPETITION BUREAU

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1 UNILATERAL CONDUCT WORKING GROUP QUESTIONNAIRE EXCLUSIVE DEALING/SINGLE BRANDING FINAL RESPONSE CANADIAN COMPETITION BUREAU Legal Basis and Specific Elements 1. Please provide the main relevant texts (in English if available) of your jurisdiction s laws and guidelines on exclusive dealing/single branding. Exclusive dealing can be reviewed under various provisions of the Competition Act. It is dealt with specifically under s. 77 (which also deals with tied selling and market restriction) and may also be considered as part of a practice of anti-competitive acts engaged in by a dominant firm under the abuse of dominance provisions in sections 78 and 79. The exclusive dealing provision in section 77 is set out below: 77. (1) For the purposes of this section, "exclusive dealing" means (a) any practice whereby a supplier of a product, as a condition of supplying the product to a customer, requires that customer to (i) deal only or primarily in products supplied by or designated by the supplier or the supplier s nominee, or (ii) refrain from dealing in a specified class or kind of product except as supplied by the supplier or the nominee, and (b) any practice whereby a supplier of a product induces a customer to meet a condition set out in subparagraph (a)(i) or (ii) by offering to supply the product to the customer on more favourable terms or conditions if the customer agrees to meet the condition set out in either of those subparagraphs; (2) Where, on application by the Commissioner or a person granted leave under section 103.1, the Tribunal finds that exclusive dealing or tied selling, because it is engaged in by a major supplier of a product in a market or because it is widespread in a market, is likely to (a) impede entry into or expansion of a firm in a market, (b) impede introduction of a product into or expansion of sales of a product in a market, or (c) have any other exclusionary effect in a market,

2 with the result that competition is or is likely to be lessened substantially, the Tribunal may make an order directed to all or any of the suppliers against whom an order is sought prohibiting them from continuing to engage in that exclusive dealing or tied selling and containing any other requirement that, in its opinion, is necessary to overcome the effects thereof in the market or to restore or stimulate competition in the market. (4) The Tribunal shall not make an order under this section where, in its opinion, (a) exclusive dealing or market restriction is or will be engaged in only for a reasonable period of time to facilitate entry of a new supplier of a product into a market or of a new product into a market, (b) tied selling that is engaged in is reasonable having regard to the technological relationship between or among the products to which it applies, or (c) tied selling that is engaged in by a person in the business of lending money is for the purpose of better securing loans made by that person and is reasonably necessary for that purpose, and no order made under this section applies in respect of exclusive dealing, market restriction or tied selling between or among companies, partnerships and sole proprietorships that are affiliated. (5) For the purposes of subsection (4), (a) one company is affiliated with another company if one of them is the subsidiary of the other or both are the subsidiaries of the same company or each of them is controlled by the same person; (b) if two companies are affiliated with the same company at the same time, they are deemed to be affiliated with each other; (c) a partnership or sole proprietorship is affiliated with another partnership, sole proprietorship or a company if both are controlled by the same person; and (d) a company, partnership or sole proprietorship is affiliated with another company, partnership or sole proprietorship in respect of any agreement between them whereby one party grants to the other party the right to use a trade-mark or trade-name to identify the business of the grantee, if (i) the business is related to the sale or distribution, pursuant to a marketing plan or system prescribed substantially by the grantor, of a multiplicity of products obtained from competing sources of supply and a multiplicity of suppliers, and (ii) no one product dominates the business. 2

3 (7) In considering an application by a person granted leave under section 103.1, the Tribunal may not draw any inference from the fact that the Commissioner has or has not taken any action in respect of the matter raised by the application. R.S., 1985, c. C-34, s. 77; R.S., 1985, c. 19 (2nd Supp.), s. 45; 1999, c. 2, ss. 23, 37, c. 31, s. 52(F); 2002, c. 16, ss. 11.2, In respect of abuse of dominance, section 78 of the Act contains a non-exhaustive list of the types of conduct that may be reviewed under s. 79, including subsection 78 (1)(h), requiring or inducing a supplier to sell only or primarily to certain customers, or to refrain from selling to a competitor, with the object of preventing a competitor s entry into, or expansion in a market. S. 79 states that: 79. (1) Where, on application by the Commissioner, the Tribunal finds that (a) one or more persons substantially or completely control, throughout Canada or any area thereof, a class or species of business, (b) that person or those persons have engaged in or are engaging in a practice of anti-competitive acts, and (c) the practice has had, is having or is likely to have the effect of preventing or lessening competition substantially in a market, the Tribunal may make an order prohibiting all or any of those persons from engaging in that practice. (2) Where, on an application under subsection (1), the Tribunal finds that a practice of anti-competitive acts has had or is having the effect of preventing or lessening competition substantially in a market and that an order under subsection (1) is not likely to restore competition in that market, the Tribunal may, in addition to or in lieu of making an order under subsection (1), make an order directing any or all the persons against whom an order is sought to take such actions, including the divestiture of assets or shares, as are reasonable and as are necessary to overcome the effects of the practice in that market. (4) In determining, for the purposes of subsection (1), whether a practice has had, is having or is likely to have the effect of preventing or lessening competition substantially in a market, the Tribunal shall consider whether the practice is a result of superior competitive performance. (5) For the purpose of this section, an act engaged in pursuant only to the exercise of any right or enjoyment of any interest derived under the Copyright Act, Industrial Design Act, Integrated Circuit Topography Act, Patent Act, Trademarks Act or any other Act of Parliament pertaining to intellectual or industrial property is not an anti-competitive act. 3

4 (6) No application may be made under this section in respect of a practice of anticompetitive acts more than three years after the practice has ceased. (7) No application may be made under this section against a person (a) against whom proceedings have been commenced under section 45, or (b) against whom an order is sought under section 92 on the basis of the same or substantially the same facts as would be alleged in the proceedings under section 45 or 92, as the case may be. R.S., 1985, c. 19 (2nd Supp.), s. 45; 1990, c. 37, s. 31; 1999, c. 2, s. 37; 2002, c. 16, s The Competition Bureau (the Bureau ) has not published any guidelines relating to exclusive dealing under s. 77. However, the Bureau s Enforcement Guidelines on the Abuse of Dominance Provisions (the Guidelines ) describe exclusive dealing in the context of the abuse of dominance provisions: Effective exclusion may result from exclusive dealing contracts or from contractual practices that create exclusivity. The Nielsen case, for example, involved exclusive dealing. Retailers agreed to sell scanner-based data to Nielsen only, which, in combination with a number of other factors, foreclosed entrants from participating in the scanner-based tracking services market. Other contractual practices that may effectively create exclusivity include requirements contracts, which set out that a party must purchase all its requirements from a particular vendor. A meet-or-release clause may also work to discourage a potential supplier from seeking to sell to a buyer, because the potential supplier anticipates that the current suppliers will match the price. A most-favoured-nation (MFN) clause, which requires the seller to give a buyer the best price it offers to any other customer, could also result in exclusivity. Such contractual practices can also aid a dominant firm in excluding competitors, by keeping the dominant firm informed about attempted entry or any actions of its rivals. [footnotes omitted] 1 2. Please list your jurisdiction s criteria for an abuse of dominance/ monopolization based on exclusive dealing. To secure a remedy under the exclusive dealing provision found in section 77 of the Act, the following elements must be established: 1 Competition Bureau, Enforcement Guidelines on the Abuse of Dominance Provisions (Sections 78 and 79 of the Competition Act) (Ottawa: Industry Canada, 2001) at p Available online at 4

5 (i) (ii) (iii) (iv) the supplier has engaged in a practice 2 of exclusive dealing. Exclusive dealing is defined as any practice whereby a supplier of a product, as a condition of supplying the product to a customer, requires that customer to: (i) deal only or primarily in products supplied by or designated by the supplier or his nominee; or, (ii) refrain from dealing in a specified class or kind of product except as supplied by the supplier or his nominee. Exclusive dealing also includes situations where the supplier agrees to supply the product to the customer on more favourable terms or conditions if the customer agrees to deal only or primarily in products supplied by or designated by the supplier or his nominee or to refrain from dealing in a specified class or kind of product except as supplied by the supplier or his nominee; the supplier is a major supplier of a product in the relevant market or the practice of exclusive dealing is widespread in the market; In Director of Investigation and Research v. Bombardier Ltd. 3 a major supplier was defined as one whose actions are taken to have an appreciable or significant impact on the markets where it sells. Later, Canada (Director of Investigation and Research) v. Tele-Direct (Publications) Inc. 4 established that a firm with market power would qualify as a major supplier, albeit in the context of tied selling. the practice of exclusive dealing is likely to impede entry into or expansion of a firm in a market, impede introduction of a product into or expansion of sales of a product in a market, or have any other exclusionary effect in a market; and as a result of the exclusive dealing, competition is or is likely to be lessened substantially. To subject exclusive dealing to a remedy under the abuse of dominance provision in section 79(1) of the Act, the following elements must be established: (i) (ii) the supplier or suppliers in question hold a dominant position within a relevant product and geographic market; 5 the supplier or suppliers have engaged in or are engaging in a practice of anti-competitive acts (in this case, exclusive dealing) 6 ; and 2 A practice has been defined as something beyond an isolated act, but may constitute a single sustained occurrence. See Canada (Director of Investigation and Research) v. NutraSweet Co., [1990] 32 C.P.R. (3d) 1 (Comp. Trib.) [NutraSweet] at p. 23, where the Tribunal found that different individual anticompetitive acts, taken together, may constitute a practice. 3 [1980], 53 C.P.R. (2d) [1997], 73 C.P.R. (3d) 1 (Comp. Trib.) [Tele-Direct] 5 See the Bureau s response to last year s questionnaire for a detailed description of how dominance is assessed. Available online at: estionnaireresponse.pdf 5

6 (iii) as a result, competition has been, is being, or is likely to be lessened or prevented substantially. 7 For enforcement purposes, the Bureau has generally brought exclusive dealing cases under s. 77 and s. 79 concurrently. Exclusive Purchasing and Supply Arrangements 3. How does your jurisdiction define single branding or exclusive dealing? For example: Must a firm require that all purchases come from it or that all sales go to it? Can something less than all purchases or all sales be considered single branding or exclusive dealing? Please specify (providing actual percentages, as relevant). The statutory definition of exclusive dealing includes both positive and negative restrictions, i.e., requiring customers to deal only or primarily with the supplier (or the supplier s nominee), and/or requiring customers not to deal with any other parties for the product or class of business in question. Note that only or primarily includes exclusivity requirements that are less than 100% of all purchases; neither the Act nor the case law establish a specific numerical threshold. Also, s. 77(2) only refers to exclusive supply arrangements, and does not address exclusive purchasing arrangements entered into at the behest of a dominant buyer; although such arrangements could be the subject of a remedy under the abuse of dominance provision in s Is the duration of the arrangement relevant to your assessment? If so, please explain. Yes. Long-term contracts, when combined with exclusivity requirements, have been challenged by the Bureau under the abuse of dominance provision in s. 79 for creating high customer switching costs and increasing barriers to entry. In Laidlaw 9, for example, three-year exclusive contracts combined with automatic renewal clauses, among other factors, were found by the Tribunal to constitute a practice of anti-competitive acts under s. 79(1)(b). Similarly in Nielsen, use of exclusive contracts with terms of three years or longer, combined with other restrictive clauses, were found by the Tribunal to constitute a practice of anti-competitive acts. Although in both of these cases three years was considered to be an excessive period for an exclusive contract, neither the jurisprudence nor the Bureau s Guidelines establish a set term at which an agreement will be considered 6 The Federal Court of Appeal affirmed NutraSweet s definition of an anti-competitive act being one with an intended negative effect on a competitor that is exclusionary, disciplinary, or predatory. See Commissioner of Competition v. Canada Pipe Company Ltd./Tuyauteries Canada Ltée, 2006 FCA 233 at para. 77 [Canada Pipe]. 7 The Tribunal stated in NutraSweet that the test for a substantial lessening of competition is the same under both s. 77 and s See for example Canada (Director of Investigation and Research) v. The D&B Companies of Canada Ltd. [1995], 64 C.P.R. (3d) 216 (Comp. Trib.) [Nielsen]. 9 Canada (Director of Investigation and Research) v. Laidlaw Waste Systems Ltd., [1992] 40 C.P.R. (3d) 289 (Comp. Trib.) [Laidlaw] 6

7 excessive or a specific minimum duration; rather, each agreement must be assessed in the circumstances. As well, under subsection 77(4), suppliers are permitted to have exclusive arrangements for a reasonable period of time to facilitate entry of a new supplier or a new product in a market. What constitutes a reasonable period of time for the purpose of this section has not yet been defined in decisions of the Tribunal. 5. Must the use of such arrangements by the firm cover a substantial portion of the market? If so, how do you interpret this requirement, including any relevant percentage thresholds for the purchase or supply covered, and the evidence needed to determine whether this is met? There is no specific benchmark for how widespread exclusive dealing must be to constitute a practice of anti-competitive acts. However, exclusive dealing under either s. 77 or s. 79 requires an exclusionary effect on a competitor such that competition is likely to be substantially lessened or prevented. Thus any practice of exclusive dealing must affect a significant enough portion of the market to have a significant anti-competitive effect. Past cases have involved all or nearly all of the customers, suppliers, or distributors in a given market, either contractually (Laidlaw, Nielsen) or through inducement (Canada Pipe, NutraSweet). 6. Does it matter whether the arrangement in question was requested by the non-dominant customer or supplier? If so, how and why? The fact that the arrangement in question was requested by the non-dominant customer may be relevant. Previously contested cases under s. 77 or s. 79 have generally involved contractual or induced exclusive dealing at the request of dominant suppliers or buyers. As with other forms of unilateral conduct, exclusive dealing will only raise an issue under the Act when engaged in by a dominant firm. If, as the question suggests, it is engaged in by a dominant firm, but at the insistence of a non-dominant trading partner, such a circumstance might suggest that there was no intended negative effect on a competitor and therefore fall outside of the definitions of an anti-competitive act under s. 79(1)(b) or exclusive dealing under s. 77(1)(a). 7. Might otherwise legal exclusive dealing/single branding arrangements be deemed abusive if they contain other provisions, e.g., an English Clause (requiring e.g., the customer to report any better offers to the supplier, and prohibiting the customer from accepting the offer unless the supplier does not match it), rights of first refusal (right of e.g., the supplier to enter into an agreement with the customer according to specified terms, before the customer is entitled to enter into an agreement with a third party)? If so, please explain and provide relevant examples. There are no types of exclusive dealing agreements that are deemed to be abusive under the Act; rather, for a remedy to be issued under either s. 77 or s. 79, the agreement must, among other things, be likely to result in a substantial lessening or prevention of competition. To the extent that arrangements such as evergreen (automatic renewal) clauses, English ( most favoured nation ) clauses or rights of first refusal contribute to 7

8 this anti-competitive effect by maintaining or enhancing barriers to entry, they can lead to a finding that a dominant firm s exclusive dealing practices contravene the Act. In Laidlaw, for example, Laidlaw s long-term exclusive contracts for waste disposal services also involved evergreen clauses, excessive damages for termination, meet-orrelease clauses, and negative-option pricing. Meet-or-release and most-favoured-nation clauses were used in NutraSweet as well, along with other inducements to exclusivity such as promotional allowances and uses of trademarks and logos. In Nielsen, long-term contracts with most-favoured-nation clauses and strict termination conditions, combined with staggered contract renewals that significantly increased barriers to entry, were found to be anti-competitive by the Tribunal. In each of the above cases, the Tribunal considered the combined impact of the various exclusivity clauses to determine whether these arrangements had an exclusionary effect on a competitor or enhanced barriers to entry so as to substantially lessen competition in the relevant market. Presumptions and Safe Harbors 8. Are there circumstances under which a firm s use of single branding or exclusive dealing arrangements is presumed illegal? See below. 9. Is there a safe harbour from a finding of liability under your single branding/exclusive dealing provisions? If so, please explain, including its terms. As stated in the response to question 7, exclusive dealing is subject to an effects test under the Act, and there is no per se treatment of exclusive dealing by a firm found to hold a dominant position. Similarly, there are no rebuttable presumptions or safe harbours under the Act for exclusive dealing, except that the firm in question must be found to be dominant, or, under s. 77, exclusive dealing is found to be engaged in by a major supplier or be widespread within a market. In the Bureau s guidelines, the Bureau states that a market share below 35 per cent will generally not give rise to concerns of market power or dominance under s. 79, and this can be considered a safe harbour in this context. Effects 10. Must a market foreclosure effect be shown for an abuse? How is market foreclosure defined in your jurisdiction, which factors are taken into account to assess a market foreclosure effect, and what evidence is used to demonstrate these effects and must they be actual, likely, or potential effects? See below. 11. Must other effects, e.g. consumer welfare effects, be shown for an abuse? If yes, please specify what must be demonstrated and the evidence required. Yes. Paragraphs (a)-(c) of s. 77(2) establish that to be subject to a remedy under the exclusive dealing provision, the conduct must be likely to have an exclusionary effect on a competing product or firm through the impedance of entry or expansion, or by any other means. This is consistent with abuse of dominance under s. 79(1)(b) which requires 8

9 an intended negative effect on a competitor that is exclusionary, disciplinary, or predatory. S. 77(2) and 79(1)(c) also require that the exclusive dealing arrangement be likely to lessen competition substantially (namely, have an effect on competition). See the response to question 2 above. The Bureau applies a but for test in analyzing a potential substantial lessening or prevention of competition; specifically, but for the practice in question, would there be substantially greater competition in the relevant market in the past, present or future? 10 The Tribunal and Federal Court of Appeal have agreed that the Tribunal is required to engage in a relative assessment of whether the relevant markets would be substantially more competitive in the absence of the impugned practice, rather than an absolute assessment of whether the prevailing level of competition is sufficient. 11 The Bureau will also have regard to the degree to which the anti-competitive acts at issue enhance or preserve barriers to entry. In examining this issue, the Bureau will focus on whether the practice in question has materially altered the prospects or feasibility of entry, such as whether, but for the practice in question, an effective competitor or group of competitors could have emerged within a reasonable period of time (usually taken to be two years) to challenge the market power of the firm responsible for that practice. There are also a variety of other considerations in determining whether or not there has been a substantial lessening or prevention of competition, such as whether or not consumer prices might be significantly lower, or product quality, innovation, or choice significantly greater, in the absence of the practice. Justifications/Defenses 12. What justifications/defenses are available to the dominant firm, e.g., an efficiency, meeting competition, or objective necessity defense? Please specify. When assessing exclusive dealing or any other form of potentially anti-competitive unilateral conduct under the civil provisions of the Act, the Tribunal has considered whether there was a reasonable business justification for the impugned conduct. For example, the Tribunal in Laidlaw found that subjective intent is not necessary to prove that a practice of anti-competitive acts has occurred (parties are assumed to intend the effects of their actions); however, the Tribunal will consider whether the conduct was undertaken with a predatory, exclusionary or disciplinary intent. 12 If a valid business justification for the impugned conduct is established, the Tribunal may find that the conduct was not undertaken for an anti-competitive purpose. The Tribunal in Nielsen, later affirmed by the Federal Court of Appeal in Canada Pipe, defined a business justification to be a credible efficiency or pro-competitive rationale (beyond mere self-interest) for the conduct in question. This effect must be attributable to the firm in question, relating to and counterbalancing the anti-competitive effects and/or subjective intent of the acts. 13 The predominant purpose of the conduct must be to 10 This test was endorsed by the Federal Court of Appeal. Supra 6 at para Supra note 9 at para Supra 6 at para Supra 6 at para

10 enhance efficiencies or have some other pro-competitive purpose. The Federal Court of Appeal found in Canada Pipe that although the conduct in question may have pass-on effects to final consumers, they are not relevant to the determination of whether the conduct is anti-competitive for the purpose of s. 79(1)(b), although evidence regarding the effect on consumers may in some circumstances be relevant in assessing the credibility and weight of a proffered business justification. There are also certain statutory exemptions. Paragraph 77(4)(a) specifies that exclusive dealing engaged in for a reasonable period of time to facilitate entry of a new supplier of a product into a market or of a new product into a market will not be subject to prohibition under the section; subsection 77(4) also specifies that no order under the section will apply in respect of exclusive dealing between affiliates as defined in subsection 77(5). As well, subsection 79(5) exempts from the abuse of dominance provisions any act taken only pursuant only to the exercise of intellectual property rights. Enforcement 13. Please provide the following information for the past ten years (as information is available): a. The number of exclusive dealing/single branding cases your agency reviewed (investigated beyond a preliminary phase). b. The number of such cases that resulted in (i) an agency decision that the conduct violates antitrust rules; (ii) a settlement with relief. c. The number of agency decisions issued, if any, that found that the practice did not violate your jurisdiction s exclusive dealing/single branding rules (i.e., clearance decisions ). d. Each of the number of agency decisions or settlements that were (i) challenged in court and, of those, either (ii) overturned by court decision or (iii) confirmed by court decision. a. Since 1997, the Bureau has conducted 19 formal inquiries related to allegations of exclusive dealing under s. 77 and/or s. 79 of the Act. b. The Bureau contested one induced exclusivity case (Canada Pipe) before the Tribunal and entered into one consent order regarding induced exclusivity (Enbridge). Five inquiries resulted in undertakings by parties. c. The remaining 12 inquiries were discontinued on grounds that the practice or practices in question did not raise competition issues under the Act. d. Note that the Bureau is not a formal decision-making body, and so cases under the civil provisions are tried in the first instance before the Competition Tribunal. In the case of Canada Pipe, the Bureau appealed the Tribunal s decision to the Federal Court of 10

11 Appeal, which granted the appeal and remanded the case back to the Competition Tribunal. Redetermination by the Tribunal is still pending. 14. Does your jurisdiction allow private cases challenging exclusive dealing/single branding? If so, please provide a description of representative examples, as available. Yes, exclusive dealing under section 77 can be challenged by private parties pursuant to private access to the Competition Tribunal under s The available remedies in such proceedings are limited to cease and desist orders; the Tribunal is not empowered to make an award of damages. To date, only two applications under s. 77 have been made, both corollary to applications made under s. 75 (refusal to deal). In B-Filer vs. Bank of Nova Scotia (2007), the Tribunal granted leave only under s. 75, and in Construx vs. GM Canada (2005), the Tribunal did not grant leave at all. 15. As relevant, please provide a short English summary of the leading exclusive dealing/single branding cases in your jurisdiction and, if possible, a link to the English translation of the decision, an executive summary or the press release of the case. Selected decisions related to exclusive dealing follow. While the decisions contested under s. 79 are too lengthy to include here, select portions have been summarized above and are also summarized in the Bureau s abuse guidelines. The decisions themselves can be read at the Tribunal s website: Director of Investigation and Research v. The Nutrasweet Company (1990) Director of Investigation and Research v. Laidlaw Waste Systems Ltd. (1992) Director of Investigation and Research v. D&B Companies of Canada Ltd. (A.C. Nielsen) (1995) The Commissioner of Competition v. Canada Pipe Ltd. (2005) The Commissioner of Competition v. Canada Pipe Ltd. (2006), Federal Court of Appeal

12 Please note that Canada Pipe has been remanded to the Tribunal by the Federal Court of Appeal. 16. Please provide any additional comments that you would like to make on your experience with exclusive dealing/single branding rules and their enforcement in your jurisdiction, including, as appropriate but not limited to whether there have there been or you expect there to be major developments or significant changes in the criteria by which you assess exclusive dealing/single branding, explaining these developments as relevant. Since the enactment of the Act in 1986, there have not been significant changes in the criteria by which the Bureau assesses exclusive dealing. The Bureau does not expect these criteria to change significantly in the future. 12