New Developments in Domestic Law - International Law Office

2005 Agenda
Airline Industry Enforcement Approach
Cartel Crackdown

2005 Agenda

Sheridan Scott, Canada's recently appointed commissioner of competition, gave her inaugural address to the Canadian Competition Bar at its annual conference on September 23 2004.(1) The commissioner's address focused on the initiatives which the Competition Bureau intends to take in response to an increasingly global business environment and the bureau's priorities for developing better practices in enforcement. In this context, the commissioner announced some important new initiatives and goals for the year to come.

Keeping up with the global economy
The commissioner began her address by noting that the continuously evolving nature of business today poses a special challenge to competition authorities. Scott acknowledged that competition authorities must strive to keep current and understand how changes in technology and globalization affect Canadian businesses.
In order to boost the bureau's "understanding of how Canadian businesses are dealing with globalization, technology and deregulation", the commissioner announced the following initiatives:

• Sector days - the bureau will begin conducting one-day workshops with members of the business community aimed at understanding the "effect of the global economy, technology and deregulation" on specific sectors of the Canadian economy. The first sector day will focus on the banking industry.

• Business outreach - the bureau is planning to hold meetings with the executive committees of several major business associations on an annual or semi-annual basis.

• Consumer outreach - the bureau will be meeting with representatives of consumer groups with a view to improving its understanding of the role that consumers play in competition and competition policy in Canada. Similarly, the bureau aims to improve consumers' understanding of the Competition Bureau's mandate and enforcement activities.
  

Developing better practices
Borrowing a phrase used by Bill Kovacic (general counsel of the Federal Trade Commission), in a prior speech to the American Bar Association, Scott referred to the need for "critical self-assessment" at the bureau. This self-assessment contemplates an internal review of the bureau's prior enforcement initiatives and administrative processes. As part of this self-assessment, the commissioner identified the following six areas where the bureau will strive to develop "better practices":

• Regulated conduct defence - the commissioner announced that the bureau will be undertaking a review of the regulated conduct defence, which acts to shield activity from review under Competition Act when it is authorized by another statutory regime. As part of this review, the bureau will soon be calling for comments from stakeholders with regard to the current legal status of the defence. The commissioner also noted that legislative reform "could be borne in mind for future discussions".

• Immunity policy - in an effort to increase transparency, the bureau has conducted an internal review of its current immunity policy. As a result, the bureau has identified a number of issues that require clarification with respect to both the implementation and interpretation of the policy. The bureau plans to issue a formal discussion paper which will address these issues in greater detail by the end of this year.

• Post-merger review - Scott indicated that the bureau is interested in reviewing and understanding the impact of previously completed mergers as well as the impact of actual remedies granted in specific markets. The bureau is currently examining the best approach to conducting such post-merger review.

• Analytical backgrounders - the commissioner commented favourably on jurisdictions which typically release analytical backgrounders containing detailed reasons for their decisions. Although Scott did not specifically commit the bureau to adopting this practice in the near future, she did state that the bureau has begun to study the issue with a view to improving the transparency of its decisions.

• Legislative change - the commissioner stressed the importance of ensuring that the Competition Act reflects current thinking on competition policy. The bureau's initiatives on legislative change will include a review of the need for the Competition Act's 'efficiencies' defence, which is applicable where the efficiencies of a merger outweigh the negative impact on competition. As part of this review, the bureau released a paper discussing its position on the efficiencies defence on September 24 2004. The commissioner also noted that the bureau is still considering how best to revise the conspiracy provision of the Competition Act (Section 45).

• Other "better practices" - the commissioner also commented favourably on jurisdictions such as Australia where all new legislation is reviewed through "a competition lens". Scott suggested that Canada might take a similar approach and consider the impact on competition policy and competition in Canada of all proposed legislation. The commissioner urged members of the Bar to discuss this possibility with members of Parliament and other public decision makers.
  

Airline Industry Enforcement Approach

On September 23 2004 the bureau released the text of a letter sent by the commissioner to major Canadian airlines clarifying the bureau's approach to enforcing the Competition Act's abuse of dominance provisions as they apply to the airline industry.(2) The commissioner's letter marks the latest chapter in the bureau's attempt to deal with the competitive fall-out of Air Canada's acquisition of Canadian Airlines almost five years ago.

In December 1999 the bureau approved Air Canada's acquisition of Canadian Airlines on the basis that Canadian Airlines was facing "imminent insolvency" and there was not likely to be a "competitively preferable" purchaser to Air Canada. At the time, Air Canada was the country's largest domestic air carrier and Canadian Airlines was its closest competitor. The bureau's approval was subject to a set of undertakings provided by Air Canada to the commissioner, which were designed to promote domestic airline competition (the so-called '1999 undertakings'). The acquisition also prompted the Canadian government, at the request of the bureau, to introduce a new set of regulations under the Competition Act dealing specifically with abuse of dominance in the airline sector.

In March 2001, less than two years after the Canadian Airlines acquisition, the bureau launched an abuse of dominance application based on these new regulations. The application was heard by the Competition Tribunal, which issued its Phase 1 decision in July 2003, concluding that Air Canada had engaged in "anti-competitive acts" by operating capacity below "avoidable costs" on certain routes in eastern Canada. The tribunal indicated that Phase 2 of its decision would decide the remaining elements that are required to be proved under the abuse of dominance provisions, namely:

• whether Air Canada had a dominant position;

• whether operating below its avoidable costs on these routes constituted a "practice" of anti-competitive acts by Air Canada; and

• if so, whether there was or was likely to be a substantial lessening or prevention of competition.

The tribunal agreed to delay this part of the hearing pending resolution of Air Canada's bankruptcy protection proceedings, which had commenced in April 2003.

With Air Canada finally scheduled to emerge from bankruptcy protection at the end of September 2004, the commissioner released her letter on September 23 2004, re-affirming the bureau's commitment to investigating allegations of anti-competitive conduct in the airline industry. However, the commissioner also acknowledged in her letter that the past few years have seen major changes in the Canadian airline industry, including the entry and growth of a number of low-cost domestic carriers and a corresponding decline in Air Canada's market share to approximately 57% (based on capacity). In light of these changes, the commissioner's letter states that:

• reviews of alleged abuses of dominance in the airline industry will be triggered only by significant responses by a dominant carrier to existing competition or to new entry, not by a carrier's usual seasonal or operational practices;

• the bureau recognizes that there can be legitimate business reasons for an airline to operate a flight below its avoidable costs. As such, operating capacity below avoidable costs will not necessarily give rise to enforcement action in all circumstances; and

• as a general principle, the bureau will not take enforcement action where a dominant carrier responds to competition by reducing its fares to match, but not undercut, the fares of a competitor. This signals a qualified tolerance of fare matching, which is a softening of the bureau's previous position on this key issue. However, the commissioner's letter also states that if such fare reductions are accompanied by a significant increase in capacity, or an increase in the number of seats available at the lowest price, the bureau will consider whether enforcement action is appropriate.

The commissioner's September 23 letter set the stage for the bureau's subsequent announcement on October 29 2004 that it had resolved its litigation with Air Canada and would not be proceeding with Phase 2 of the tribunal hearing. The commissioner explained this decision by saying that it would not be in the public interest to pursue the case "in light of the passage of time and the significant changes in the industry".(3)

The bureau's decision to settle the Air Canada Case no 11.1 is not a surprise, given the changed competitive landscape in the Canadian airline industry. This brings to an end a lengthy – and sometimes bitter – chapter in the enforcement of the act's abuse of dominance provision. It remains to be seen, however, what longer-term effect this will have for future bureau enforcement affecting the airline industry.

Cartel Crackdown

The bureau announced on September 22 2004 that VAW Carbon of Germany had pleaded guilty in the Federal Court in relation to its involvement in an international conspiracy to fix the price of carbon cathode blocks.(4) VAW pleaded guilty to a similar offence in the United States in 2002.(5)

According to the bureau, VAW is one of only a limited number of manufacturers of carbon cathode blocks, which are commonly used in the production of primary aluminium. Between 1996 and 1997 VAW participated in an international cartel that agreed to implement and maintain price increases affecting sales in Canada and elsewhere. In its plea, VAW agreed that this conduct violated Section 45 of the Competition Act, which makes it a criminal offence to enter into an agreement that has the effect of preventing or lessening competition unduly. VAW was fined C$500,000, based on Canadian sales of approximately C$3.6 million over the duration of the conspiracy.

The VAW guilty plea follows a number of other recent guilty pleas obtained by the Bureau from participants in international cartels. For example, on July 16 2004 the bureau announced that Morganite Canada Corporation had pleaded guilty and was fined C$450,000 for its role in implementing an international conspiracy in Canada relating to carbon brushes.(6) Interestingly, the evidence before the court was that the executives of Morganite Canada were not aware of any illegal agreement. Rather, Morganite Canada simply implemented pricing directives issued to it by its affiliate, Morganite Electrical Carbon Corporation of Wales (MECC), which had been arrived at by agreement between MECC and some of its competitors. Nonetheless, this was sufficient to establish guilt under Section 46, which prohibits a corporation that carries on business in Canada from implementing a directive or instruction from a person outside Canada in order to give effect to a conspiracy that was entered into outside of Canada would be a criminal offence under Section 45 of the Competition Act. A corporation can be convicted under Section 46 even if its officers and directors had no knowledge of the foreign conspiracy.

In her reasons delivered at sentencing, Justice Chapnik, the presiding judge, commented upon the implications of Section 46 for multinational corporations carrying on business in Canada:

"In this age of globalization, I do not know whether a subsidiary company implementing such directives, that is, acting as a conduit for pricing directives, has or should have a duty to make inquiries in such a situation or if it would have borne fruit in this case in any event, but it appears at the very least that this section of the [Competition Act] is one which multinational corporations ought to be aware of in developing their compliance programmes."

Chapnik also noted that it was important that Morganite Canada would itself be paying the fine imposed by the court as this: "sends a message to the corporate community that not only does the parent company expose itself to penal sanction when [it engages] in such illegal activity but that the affiliates will also be severely punished".

In related proceedings, Morgan Crucible Company PLC, the parent holding company of the Morgan group of companies, pleaded guilty under Section 139(2) of the Canadian Criminal Code and was fined C$550,000 for obstructing the bureau's investigation into the carbon brush cartel. Specifically, former senior executives of Morgan Crucible and some of its subsidiaries initially denied in interviews with bureau officers that Morgan entities had participated in, or had any knowledge of, the carbon brush cartel. This is one of only a very few cases in which the bureau has proceeded against a party for obstruction.

Finally, on May 28 2004 the bureau announced that Crompton Corporation had pleaded guilty under Section 45 and was fined C$9 million for its part in an international price-fixing conspiracy in the rubber chemicals industry.(7)

Crompton is a US-based global marketer of specialty chemicals, polymer products and processing equipment. According to documents filed in court, from at least July 1995, senior and mid-level executives of Crompton participated in meetings and other communications with various other producers at which the parties agreed to coordinate the timing and amount of price increases for certain rubber chemicals. The parties also agreed to exchange sales data and customer information on a periodic basis in order to monitor and enforce adherence to the agreement. All of these meetings and communications took place outside Canada, but affected pricing for products sold in Canada.

Crompton is the first party to plead guilty in Canada in relation to the international rubber chemicals cartel, but may not be the last. The bureau has stated that it is continuing to conduct extensive inquiries into the rubber chemicals industry in Canada. In addition, Crompton sought and received immunity with respect to certain other chemical products and is cooperating with the bureau's investigation into those products. Accordingly, there may be additional prosecutions stemming from this investigation at some point in the future.

For further information on this topic please contact Mark Katz, Anita Banicevic, Christopher Margison or Charles Tingley at Davies Ward Phillips & Vineberg LLP by telephone (+1 416 863 0900) or by fax (+1 416 863 0871) or by email (mkatz@dwpv.com or abanicevic@dwpv.com or cmargison@dwpv.com or ctingley@dwpv.com). The Davies Ward Phillips & Vineberg LLP website can be accessed at www.dwpv.com.

Endnotes

(1) The commissioner's speech is available at http://competition.ic.gc.ca/epic/internet/incb-bc.nsf/en/ct02950e.html.

(2) See http://competition.ic.gc.ca/epic/internet/incb-bc.nsf/en/ct02952e.html.

(3) Competition Bureau, "Competition Bureau Settles Case with Air Canada" (October 29 2004), http://strategis.ic.gc.ca/epic/internet/incb-bc.nsf/en/ct02973e.html.

(4) Competition Bureau, "VAW Carbon Fined C$500,000 for Role in International Price-Fixing Conspiracy" (September 22 2004), http://strategis.ic.gc.ca/epic/internet/incb-bc.nsf/en/ct02949e.html.

(5) US Department of Justice, "Japanese and German Companies to Plead Guilty and Pay Fines for Role in International Price-Fixing Conspiracy" (April 1 2002), http://www.usdoj.gov/atr/public/press_releases/2002/10908.htm. The Japanese company referred to in the press release is Nippon Electrode Company Ltd, which pleaded guilty in the United States at the same time as VAW for participation in the carbon cathode block cartel.

(6) Competition Bureau, "Morgan Companies Fined C$1 Million for Obstruction and Price-Fixing" (July 16 2004), http://competition.ic.gc.ca/epic/internet/incb-bc.nsf/en/ct02917e.html. Carbon brushes are used to transfer electrical current from wires or rails to vehicles such as subways, streetcars and light rail trains.

(7) Competition Bureau, "Crompton Corporation Fined C$9 Million for Role in Rubber Chemicals Cartel" (May 28 2004), http://competition.ic.gc.ca/epic/internet/incb-bc.nsf/en/ct02853e.html.