Speaking Notes for Konrad von Finckenstein, Q.C., Director of Investigation and Research, Competition Bureau

To the Canadian Bar Association
Competition Law Section
Annual Meeting

September 25, 1998

---

Let me open my remarks by thanking the members for this opportunity to address the Canadian Bar Association’s Competition Law Section. The spirit of cooperation exhibited between the Bureau and the section and the role of the section are, in my view, critical to successful competition policy enforcement and administration in Canada.

I want to use this opportunity to:

• touch on the key events in the past year, and
• discuss some of the important issues that we will be emphasizing in the coming year.

Let me begin by commenting on some important developments in the past year.

YEAR IN REVIEW

---

ORGANIZATIONAL CHANGES

During the past year, the former Marketing Practices Branch and Consumer Products Directorate were integrated. They now operate as the Fair Business Practices Branch, responsible for the misleading advertising and deceptive marketing practices provisions of the Competition Act and the Consumer Packaging and Labelling Act, the Precious Metals Marking Act and the Textiles Labelling Act.

We have createda permanent Amendments Unit with the mandate to seek needed changes to the law on a 3-4 year cycle.This will avoid the pitfalls ofour historic approach oftrying to achieve major changes every decade. This Unit has naturally been instrumental in supporting Bill C-20 as it moves through the House.

At the present time, the Bill has been reviewed by the Standing Committee on Industry, which made a limited number of changes. It received third reading, Wednesday, September 23, 1998. Minister Manley is committed to early passage of the Bill into law and it is hoped that it will pass the Senate, receive royal assent and come into force during the Fall session of Parliament.

In April, we created a separate Communications Unit within the Compliance and Operations Branch with a mandate to coordinate all our communications activities. The goal is to expand awareness of our activities and ensure that we are informing and educating our stakeholders, otherpartsof government and our staff about specific competition issues and competition policy in general.

One recent and significant change in our communicationsactivitieshas been the relaunch of our web site. It has undergone a substantial overhaul and is, I believe, much more useful, timely and informative. When I took on this position, I said that I wanted the work of the Bureau to be guided by four principles- openness, timeliness, predictability and fairness. Our renewed emphasis on communications and our revamped web site will support each of these principles.

FEES AND SERVICE STANDARDS

Weintroducedfees for pre-merger notifications, advance ruling certificates, advisory opinions and photocopies in November 1997. The fact that implementation has gone smoothly is, I believe, proof of the value ofopen, two-way communication.

Together with fees, service standards were developed for both Pre-Merger notification filings, requests for Advanced Ruling Certificates and AdvisoryOpinions. While I will be providing more detail in our upcoming forum on the policy, I can tell you that we are very pleased with our performance to date in this area.

INFORMING AND PROTECTING CONSUMERS

Combatting illegal telemarketing schemes remains a priority for the Fair Business Practices Branch. The Branch has successfully concluded a number of important cases in the past year, including, in the Integrity case, the first successful prosecution of a company using the internet to promote its business opportunity. Related to these activities, we established, with our US counterparts, the Task Force on Cross-Border Deceptive Marketing Practices.

Speaking of cooperation, one of the Branch’s key projects in the past year concerned an international collaboration in the area of internet based misleading advertising. This joint activity involved several co-ordinated internet “sweep days” with the Bureau, the Federal Trade Commission and members of the International Marketing Supervision Network that targeted Internet web sites which contained potentially misleading descriptions of business opportunities, get rich quick schemes, and health claims. Internet advertising is increasing rapidly, and the Competition Bureau intends to ensure that advertisers are aware our legal regime applies regardless of how the representation is transmitted to the public.

I mentioned earlier the importance that I attach to good communications. One excellent example was the work done by the Branch in the area of computer software. The Branch engaged in a pro-active effort to ensure appropriate labelling of computer software which included the development of a pamphlet entitled “Be a Smart Shopper: Know your Software”. In the last few months this has been the most requested pamphlet from our Information Centre.

COMPLIANCE

An increasing number of criminal matters are being dealt with through alternative means. These matters involve situations where some lessening of competition may have occurred, lesser volumes of commerce were involved, or where our investigation had not been concluded and, as a result, not all of the constituent elements of an offence were yet present.In such cases, the Bureau attempts to remedy the situation in a non-adversarial fashion, to successfully restore competition in a given market. This illustrates the point I have been making since I arrived about the balanced approach to enforcement that should exist in criminal matters and allows the Bureau to bring to bear the full force of the law in dealing with the more serious anti-competitive activities.

I think the point will be clearer with a couple of illustrations

The first example concerns a manufacturer of hardwood floors who had attempted, by agreement, to discourage the reduction of the price by which dealers sold its brand of flooring products, contrary to s. 61 of the Act. The dealer agreement required that dealers not sell below the suggested retail price, that they work with other dealers to respect the price, and keep confidential the dealer agreement and the pricing structure.

The matter was resolved by alternative means, in part because of manufacturer's willingness to take corrective action. The company placed a corrective notice in a national newspaper that rescinded its old dealer agreement and explained how a new program was in compliance with the price maintenance provisions of the Act. The company, together with officers from the Bureau, also provided a training session to its dealers, to ensure that they understood the provisions of the Competition Act.

In March 1997, the Director began an inquiry into the business conduct of a major Canadian airport and two taxi companies under the conspiracy provision of the Competition Act. The two taxi companies were alleged to have agreed on the fares to be charged to taxi passengers for trips originating from the airport. This pricing agreement was later incorporated into a contract between the taxi companies and the airport for the exclusive right to service the airport taxi stand.

The matter was resolved by way of a negotiated resolution (ACR) with the three parties promising to cease all agreements alleged to be contrary to the Act. The Bureau discontinued the inquiry in April 1997.

PROSECUTIONS

While we are prepared to pursue alternative case resolutions in the appropriate cases, I have also maintained that I will bring the full force of the law to bear on serious anti-competitive activity. Three examples should serve to emphasise that point.

On May 27, 1998 the Federal Court of Canada accepted a guilty plea from Archer Daniels Midland Company (ADM), one of a number of firms involved in a world-wide price fixing and market sharing conspiracy in the food and feed additive industries. The products under investigation were lysine, an amino acid feed additive used to enhance the leanness of pork and poultry products, and citric acid, an additive in beverages, foods, and cleaning agents. The $16 million fine, agreed to by ADM and imposed by the Court, was the largest ever levied under the Competition Act and we believe, the largest criminal penalty ever awarded for white collar crime in Canada.

On July 23, 1998, three other firms went before the federal courtin the same case. Ajinomoto pleaded guilty to conspiracy to fix prices and allocate markets and was fined $3.5 Million. Sewon America pleaded guilty to price fixing, and was fined $70,000, in recognition of their grave financial position and the cooperation they provided to the Director’s inquiry. The third company, Kyowa Hakko Kogyo, the first co-conspirator to approach the Bureau and afford extensive and valuable cooperation received immunity and therefore, was not fined. It, along with the three other companies, was subjected to a prohibition order.

Between late 1997 and early 1998, five Toronto electrical contractors pleaded guilty to bid-rigging in a total of 19 tenders. Fines totalling $2.65 million were imposed. The bid-rigging schemes targeted primarily tenders for the renovation of commercial office space. Some of these companies were also convicted of rigging tenders relating to major construction projects such as the Skydome Hotel and BCE Place-Phase 2.

The firms approached the Bureau before the matter was referred to the Attorney General, which resulted in their receiving varying degrees of favourable treatment. The firms and certain individuals had been advised that they were targets prior to the referral of the evidence to the Attorney General. In addition to paying these fines, these firms have taken steps to institute internal compliance programs to ensure future conformity with the Act. The investigation into other implicated parties has concluded, andwe haverecently referred the evidence concerning this aspect of the case to the Attorney-General.

The Bureau views bid-rigging as particularly egregious, inasmuch as firms specifically put projects out to tender in order to obtain the best possible price. The Bureau used every means at its disposal to uncover this covert conduct, which demonstrates our commitment to exposing those who seek to corrupt the competitive tenderingprocess through these illegal agreements.

A final important element to this case was the utility of the media attention. Such attention contributed to the objective of deterrence and public education. It led to a number of requests for presentations enabling other firms to identify the boundaries of permissible behaviour, the zones of risk, and, therefore, will enhance compliance with the Act.

The third case I should mention, where we received the second largest fine under the misleading advertising provisions of the Act ($600,000), involved Hudson’s Bay Company which pleaded guilty to charges relating to its marketing practices in the sale of bicycles.

FINANCIAL MARKETS

Obviously, a major priority for the Mergers Branch and the Bureau is our review of the two proposed mergers involving four of our major banks. Our policy paper, The Merger Enforcement Guidelines as Applied to a Bank Merger, has been public for some time now. The paper is the result of careful internal analysis and public consultation, and clarifies how our analysis of the announced bank merger transactions will be conducted. The major points made in the policy paper are that:

• the two proposed transactions will be dealt with concurrently
• While we accept that innovation will play a major role in the evolution of the bank market, it is too early to say how big that impact will be. So, while we will take this into account, we will be looking at the market as it is. Therefore, for example, we will clearly lookat branch banking as an integral part of banking;
• the intention is that, once the Bureau review is complete, I will advise the parties and the Minister of Finance of my conclusions with respect to the competitive aspects of the mergers.

It is important to note that this document does not represent a departure from the Merger Enforcement Guidelines as the analytical approach to merger analysis used by the Bureau. Rather, it sets out how the MEGs will be applied in this industry. In my view, it is a tool that is also applicable to mergers involving financial institutions other than banks.

Since the announcement of the two proposals, the Branch has been engaged in the largest and most complex review undertaken since the passage of the Competition Act in 1986.

MERGER REVIEW

At the same time, the Mergers Branch has been faced with a rapidly increasing workload and, in the last fiscal year, saw a 32% increase in notifiable transactions and requests for Advance Ruling Certificates (100% since 1994-5). Further adding to the demands on the Branch has been the fact that an increasing percentage of its reviews have related to horizontal acquisitions, raising immediate competition concerns.

One example of the challenging proposals we reviewed in the past year was that involving Ultramar and PetroCanada. We were able to complete our review and provide our views to the parties well within the service standard established as part of our Fees and Service Standards Policy. As you know, the parties chose not to proceed after hearing the nature and extent of our concerns.

Most recently, I announced that we would not oppose the proposedacquisition of The Financial Post by Southam Inc. After an intensive month long examination, I concluded that the combination of the new national daily proposed by Southam with the Financial Post would not prevent competition substantially and may, in fact, result in more vigorous competition.

In addition both the Seaspan and Waste Disposal cases were resolved, during the year, with the completion of divestitures which addressed our competition concerns.Inthe Cast matter, to that point one of our largest and most complex cases, proceedings were stayed following new entry in the relevant market.

SUBMISSIONS AND REPRESENTATIONS

In the Civil Matters Branch, there has been considerable and on-going activity working with regulatory boards to open markets to competition.

In January we made a presentation to the Ontario Energy Board outlining our views on the Ontario White Paper on restructuring of the Ontario electricity system and opening it to competition. Briefly, one of our recommendations was that structural separation would be necessary to ensure competition in the energy sector. Our comments also focussed on how to introduce competition into both energy generation and retail marketing.

Over the year, submissions were made to the CRTC on a number of important issues for competition in the telecommunications sector.

One of these related to competition in the local pay phone market. The Bureau’s submission contended that it was time to break up the monopoly of the Stentor companies and open up the local pay phone market to competition. The Commission’s decision strongly reflected the Bureau’s submission.

Last December, the CRTC issued a decision ordering the deregulation of the Stentor company rates in long-distance services. This decision reflectedtheBureau’s submission which had argued that reducing the regulatory burden on the Stentor companies will provide them with greater flexibility to respond quickly to a rapidly changing competitive market for long distance services. The thrust of the Bureau's submission argued that competition and market forces were sufficient to protect the public interest and that long-distance rates should be deregulated.

In another CRTC proceeding, the Bureau advocated that restrictions on the Stentor companies bundling monopoly and competitive services should be maintained until the local exchange market is opened to competition. The Commission rendered a decision allowing such bundling subject to certain conditions. The Bureau is concerned that increasing the opportunity for the Stentor companies to bundle monopoly and competitive services will further entrench their monopoly position in local services, thereby making the already complex task of opening local markets to competition even more difficult. Accordingly, the Bureau has supported an appeal to the Cabinet of theCommission’s bundling decision filed by a number of wireless competitors.

As was widely reported in the press, a proposed merger transaction earlier this year involving Telus and AT&T Canada did not materialize. Clearly, such a transaction would have had significant implications for competition in telecommunications and on the future of the Stentor alliance. Since that time, Bell Canada has announced the formation of a national company to provide advanced telecommunications services to business customers and only last week, a major reorganization of Stentor was announced. The Bureau will continue to watch developments in the telecommunications industry very closely, particularly mergers or other matters which may raise issues under the Competition Act.

The Civil Matters Branch coordinated our major Submission to the Task force on the Future of the Canadian Financial Services Sector, working with both the Mergers and Economics and International Affairs Branches. I am pleased that the Report, which was released last week, strongly endorsed the approach that the Bureau is taking to bank merger review.

As a result of a decision by the Canadian International Trade Tribunal (CITT) on the dumping in Canada of certain baby foods originating from the United States, the Bureau filed a submission with the CITT requesting a public interest inquiry and the hearings on this issuehave just been completed. In addition, the Bureau filed a complaint under NAFTA claiming that the Canadian International Trade Tribunal erred in finding that dumping by Gerber had caused material injury. This finding resulted in the imposition of a 148% tariff on imported baby food. In the Bureau’s view, this will create a monopoly in the Canadian market. This is the first time we have taken such action but I believe very strongly that my role is to protect and promote competition and this includes taking action when I believe that any body, including an agency of government is acting in a way that will limit or eliminate competition.

An important issue was decided by the Competition Tribunal in the BMG case. In that case, an application under Section 75 was filed against Warner Music Canada Ltd and its U.S. affiliates with respect to their refusal to supply music reproduction and sales licences to BMG.

The Tribunal, ruling on a motion by Warner and its affiliates, concluded that the term “ product” in Section 75 cannot be read to include copyright licences and that, as a matter of copyright law, Warner and its affiliates had the right to refuse to licence their master recordings to BMG. As a result, the Tribunal concluded that it did not have the jurisdiction to issue the order sought by the Bureau.

Shortly after the Tribunal decision, the Warner companies and BMG reached an agreement for supply and, as a consequence, BMG withdrew its complaint to the Bureau. Given these circumstances and with competition maintained in the market, we decided not to appeal the Tribunal’s decision.

INTERNATIONAL ACTIVITY

An agreement regarding the application of their respective competition laws has been initialed by both the Bureau and the European Commission earlier this year. Similar to the 1995 agreement with the United States, this agreement will allow for expanded cooperation and coordination regarding the enforcement of each party’s competition laws and will be consistent with existing laws protecting confidentiality of information.

The agreement will enter into force upon signature following its approval by Canada and by the Council of Ministers of the European Union, after consultation of the European Parliament. Signature is likely to take place early in 1999. Until then, we will continue to cooperate with our European counterparts under the auspices of the OECD framework.

In March of this year, the OECD adopted a recommendation concerning effective action against hard core cartels, as a result of work undertaken by members of the Competition Law and Policy Committee. This is the first timethe OECD has defined and condemned a particular kind of anticompetitive conduct. The Recommendation provides that Members should ensure that their competition laws effectively halt and deter hard core cartels and encourages international cooperation to deal with this problem, which is increasingly becoming a multi jurisdictional issue. Canada intends to agree to the recommendation.

THE YEAR AHEAD

---

So much for the year past. Turning to the year ahead, what do I see as the major challenges and initiatives for the Bureau.

CONSULTATIONS FOR NEXT ROUND OF AMENDMENTS

The Bureau is already doing preliminary work for a future round of amendments. We expect that the consultation process will be similar to the previous one, which was well-received. However, it is clear that we will want to address a number of concerns that were raised. For example,one concern was that some viewpoints, notably those of the small business community, were under-represented.

Three key areas have been identified for this round of consultations. First, now that we have the Supreme Court’s Schreiber decision, we will need to address the issue of confidentiality and mutual assistance. Second, we will want to define the scope of any private access to the Competition Tribunal. Third, we will work with the Tribunal, to develop appropriate amendments to the Competition Tribunal Act to allow cost awards and other powers to make the Tribunal's processes more efficient and to prevent or deter strategic litigation.

FINANCIAL SERVICES

As I mentioned earlier, the MacKay Task force issued its report last week and we are presently reviewing it.

Naturally,a major priority is to bring our work on the review of the two proposed bank mergers to a conclusion Bureau is currently engaged in very intensive and thorough analysis of the two proposed bank mergers. This includes examination of voluminous documentary evidence and oral information from industry participants and reports from several industry experts engaged as consultants.

MERGER INITIATIVES

There are a number of merger related initiatives upon which I wish to comment.

Preparations are well under way for a consultative forum on the first year’s experience with our Fees and Service Standards Policy. I had initially intended to hold the forum in November but have decided it would be better to hold it early in the new year so that we can benefit from a full year’s experience with the policy. The forum will now be held on February 2nd in Toronto. Those of you who participated in the consultative forums will be receiving information packages in November. At the forum, the agenda will include both issues directly related to the fees policy and other indirectly related issues such as the threshold levels of and exemptions from the notifiable transactions provisions.

We will soon be issuing a Guideline on the Pre-Notification provisions. Since the coming into effect of the Fees and Service Standards Policy, I have received a number of suggestions that there was uncertainty as to the interpretation of certain provisions relating to pre-notification and that it would be appropriate to issue some guidance in this area, particularly now thatfees are levied for pre-notifiable transactions. In addition, once Bill C-20 becomes law I will be moving forward to issueregulations relating to the information requirements for transactions requiring notification. As you are aware, the content of these regulations has been the subject of consultation and discussion over the last several months.

ELECTRONIC COMMERCE

On a related matter, the department is taking a leading role in government to ensure the effective application of computer technology in the workplace. Among its initiatives is the implementation of electronic commerce to departmental activities over the next few years, so that our clients can take advantage of doing business with us on the Internet. For its part, the Bureau is committed to developing electronic commerce applications in such activities as pre-merger notification.

Still on the subject of electronic commerce and technology, the Department is also playing a leading role in ensuring the preparedness of computer systems for the Year 2000. I know that I can count on your support to ensure that your systems are Year 2000 compliant, so that we will all be able to reap the expanding benefits of electronic commerce into the 21st century. I have heard some concerns expressed that members of the business community are worried that communication with their competitors on Year 2000 related issues may be viewed with suspicion by the Bureau. If there are particular issues of concern to you or any of your clients, I encourage you to bring them to our attention for full discussion.

INTELLECTUAL PROPERTY

This winter the Bureauwill release for consultation draft guidelines for enforcement of the Competition Act in matters involving intellectual property issues. We see a need for Intellectual Property Enforcement Guidelines (IPEGs) for a number of reasons. Obviously, there is increased economic activity in knowledge-based and network industries and innovation and rapid technological development are an important characteristic of the competitive environment of such industries. Intellectual property rights have always been a key component of some businesses, but their importance is increasing in the modern economy.

Given the important role of intellectual property as a source of competitive advantage, the Bureau anticipates that it will need to deal with an increased number of complaints involving intellectual property issues and that, indeed, there will be increased opportunity for anticompetitive conduct involving intellectual property.

While competition law and intellectual property law are two key government policy instruments, providing incentives for rapid innovation and development of new technology, there is a perceived tension between them in terms of their application. In part, this may be due to there being little overlap between lawyers practising in the intellectual property field and those in the competition field. This results in uncertainty as to how the Competition Act will be applied in cases involving intellectual property. Like with other areas, e.g. strategic alliances, the concern is that uncertainty may hinder business practices that would otherwise assist in innovation and technology diffusion.

Our purpose in developing these draft IPEGs is twofold. We want to develop a better understanding within the Bureau of how intellectual property rights and licensing can be used anticompetitively and we want to provide the business and legal communities with more certainty ( predictability and openness to repeat two of my four guiding principles) of how the Competition Act will apply to intellectual property. This will deter anticompetitive behaviour, inform affected firms of how their situations may be dealt with, mitigate any “chilling” effect the current uncertainty may create, and structure the debate regarding the interface of intellectual property law and competition law in the future.

The draft IPEGs have been researched and drafted by Bureau staff, with guidance, review and comments provided by an external team of experts in the field.They outline three general principles for the application of the Competition Act to intellectual property. First, intellectual property should be treated in the same manner as any other property. Second, there should be no presumption that intellectual property rights confer market power on their owners. Third, the licensing of intellectual property should generally be considered to be procompetitive.

When the draft IPEGs have been released, I look forward to receiving comments from you. This consultation exercise will produce a final document that provides clear guidance on an issue of growing importance in the field of competition law.

INTERNATIONAL COOPERATION

I am committed, as a priority for the coming year, to the further development of the close working relationship and cooperation with US authorities. In an increasingly integrated continental economy, I see this as essential to effectively carrying out our mandate. The FTA and NAFTA have opened up tremendous opportunities for companies to take advantage of economies of scale, to focus on specific markets. At the same time, the potential is increased for collusion on a much grander scale. As just one indication of the growing problem, our investigations of cartels involving foreign interests have more than tripled since 1994.

We have had a lot of success working with the US authorities under the formal agreement signed in 1995 which commits our two governments to more extensive cooperation in the enforcement of laws governing competition and deceptive marketing practices. The exchange of information in the criminal area under the Canada-US Mutual Legal Assistance Treaty has also proved to be most valuable.

Our cooperation has covered a wide range of enforcement activities including:

• regular communications at all levels of our organizations,
• discussions of case theories and market definitions
• carrying out Internet sweeps together,

Under the MLAT, our activities have included

• sharing evidence
• coordinating searches
• even conducting parallel coordinated investigations from start to finish

Nonetheless, I am committed to working to further deepen this already successful relationship, to increase the number of cases in which we coordinate our investigations, to continue to share evidence that would simply have been beyond our reach had we been acting alone.

I also want to explore the possibility of refining our positive comity arrangement which clearly has a number of advantages including saving resources by avoiding duplication of effort and avoiding the pitfalls of extraterritorial orders which can affect the enforcement efforts of another jurisdiction.

The principle of positive comity has already been incorporated into our agreement with the US and we will want to explore the possibility of further refining the approach.

In the multilateral context, I am encouraged that the discussion of competition policy is gaining momentum in a number of international fora. I certainly believe that effective competition policy is essential to ensuring that anti-competitive business practices do not replace the tariff and non-tariff barriers that have been eliminated or reduced through our various bilateral and multilateral agreements.

The current dialogue within the WTO Working Group on Trade and Competition is encouraging in that it demonstrates a common recognition of the links between liberalized trade and competition policy. I support continued efforts by the Working Group to explore the possible role of the WTO in dealing with multi-jurisdictionalcompetition issues. Further, the negotiations that have now begun within the FTAA, may also proved valuable in contributing to such discussion within the Americas.

As I have said in the past, I believe the OECD is an ideal forum for the development of new concepts and ideas relating to international competition issues. I am currently chairing Working Party #3 of the Competition Law and Policy Committee. At our upcoming meeting in October, we hope to finalize a framework on notification of transnational mergers. I understand that the CBA’s Competition Law Section as well as the Business and Industry Advisory Committee to the OECD (BIAC) have both had a chance to provide useful feedback to the OECD on the draft framework. In addition, at our October Working Party #3 meeting, we will also address investigative issues that may arise in enforcement activities envisaged in the recent OECD Recommendation relating to effective action against hard core cartels.

On the subject of international cooperation ,as I mentioned earlier, it is a priority for the Bureau for us to consider amendments to the Competition Act that would permit us to enter into international mutual assistance treaties with other countries, particularly those contemplated under the US International Antitrust Enforcement Assistance Act (IAEAA).

I recognise that, in order to implement such an agreement, we must address a number of issues mainly concerning the limits of the existing provisions of our legislation -- particularly the confidentiality provisions. As I have said earlier, this is for me a priority for the next round of amendments. I do recognise the strong concern that our confidentiality provisions will be amended to allow us to send information to the US which will expose Canadian firms to US civil actions and treble damages.

CLOSING REMARKS

In closing, let me thank you again for the opportunity to address you today. As you can see the world of competition law remains busy and interesting. I look forward to an interesting and active year and wish the members of the section the same. As I stated earlier, I feel our cooperative, consultative relationship is important to the continued successful enforcement and administration of competition law and policy in Canada.