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An Overview of the Abuse of Dominance Provisions of the Competition Act

David McAllister
Competition Bureau

This paper was prepared for the Canadian Bar Association's Annual Fall Conference on Competition Law, September 20-21, 2001 in Ottawa. The author holds the position of Major Case Director and Strategic Policy Advisor with the Civil Matters Branch of the Canadian Competition Bureau.

Introduction

This paper is intended to provide a brief overview of the abuse of dominance provisions contained in sections 78 and 79 of the Competition Act. Anyone who would like to obtain more information and detail than can be provided in the time and space available here, is encouraged to refer to the enforcement guidelines which are available on the Competition Bureau's website.¹

Abuse of dominance occurs when a dominant firm in a market, or group of firms, engage in conduct that is intended to eliminate or discipline a competitor or to deter future entry by new competitors. Where this results in a situation where competition is prevented or lessened substantially, the Competition Tribunal may issue a remedial order. Essentially, the provision seeks to establish the bounds of legitimate competitive behaviour and to provide for corrective action when dominant firms engage in activities that damage or eliminate their competitors and maintain, entrench, or enhance their market power.

Generally speaking, most of the substantive issues with respect to the law on abuse of dominance have been fairly well settled. This includes issues such as market definition, what constitutes dominance and abuse and the competitive effects to be considered. However, there are still some areas, such as joint dominance, as well as the treatment of efficiency considerations by the Bureau and the Tribunal, which remain to be addressed more fully.² As far as today's panel discussion is concerned, the recent move toward industry specific amendments to the section, as well as the empowerment of the Commissioner to issue temporary orders with respect to the airline industry, are likely to be more controversial.

Origin of the Section

The current abuse of dominance provision of the Competition Act was introduced as part of the major reform of the Act that took place in 1986. Prior to then, criminal prohibitions against monopoly and monopolization existed in the old Combines Investigation Act. Although prosecutions under these provisions were infrequent, the loss by the Crown of the Irving newspaper case in the 1970's confirmed in the minds of most observers that the section had become virtually unenforceable and that change to the legislation was required.³

A major problem with the previous section was the high burden of proof placed on the Crown under the criminal law. In particular, it had become difficult, if not impossible, to demonstrate beyond a reasonable doubt that a business was being operated, or was likely to be operated, 'to the detriment or against the interests of the public', which was the test set out in the law. This problem was exacerbated by the fact that what actually constituted 'detriment' or the 'public interest' was not defined in the legislation.

The 1986 Amendments

The new abuse of dominance provisions introduced in 1986 addressed a number of the difficulties that had grown to plague the predecessor section. Specifically:

the new section was civil rather than criminal law, and hence lowered the burden of proof on the Crown from 'beyond a reasonable doubt' to 'a balance of probabilities';
what constituted 'detriment to the public' was specified as a market test of 'substantial prevention or lessening of competition' (SLC);
the market test of an SLC clarified that the mere possession of market power or the ability to charge high prices, would not constitute a breach of the section. Rather, what the provision is aimed at is predatory or exclusionary behaviour by a dominant firm that is directed at maintaining or enhancing its market power.

Substantive Elements

The abuse of dominance provision has emerged, along with the merger review and conspiracy provisions, as one of the main pillars of the Competition Act. The abuse provisions are contained in two companion sections. The substantive section, section 79, contains five essential elements as follows:

a firm, or group of firms acting jointly, have substantial or complete control (market power);
this control exists with respect to a class or species of business, (a relevant product market);
in Canada or any area thereof, (a relevant geographic market);
the firm or group of firms acting jointly have engaged in a practice of anti-competitive acts;
the practice of anti-competitive acts has resulted, or is likely to result, in a substantial prevention or lessening of competition in a market.

The companion section, section 78, relates to element three, the practice of anti-competitive acts. This section provides guidance on what might constitute anti-competitive behaviour by specifying a non-exhaustive list of eleven potentially anti-competitive acts. None of the acts described in section 78(1) are, in and of themselves, necessarily anti-competitive. Generally, for an act to be considered anti-competitive there must be some element of anti- competitive design, purpose or object that is predatory, exclusionary or disciplinary. The defined conduct includes:

Margin squeezing by a vertically integrated supplier against a customer-competition;
Acquisition by a supplier of a customer to foreclose a competitor;
Freight equalization on a competitor's plant to eliminate or impede competition;
Selective use of fighting brands to discipline or eliminate a competitor;
Pre-emption of scarce facilities or resources required by a competitor;
Buying up products to prevent price erosion;
Adopting incompatible specifications to prevent entry or eliminate a competitor;
Requiring or inducing suppliers to sell only or primarily to certain customers;
Selling articles below acquisition costs to discipline or eliminate a competitor;
Certain acts or conduct of a person operating a domestic airline service;
Denial by a person operating a domestic airline service of access to facilities or services essential to the operation of a competitive air service.

As noted, this list is non-exhaustive. In a number of cases, the Bureau has alleged, and the Tribunal has accepted, that practices not included in section 78 constituted anti-competitive acts which can be addressed by way of orders of the Tribunal under section 79.

Airline Industry Amendments

With some minor exceptions, the Competition Act had always been a general law of general application. This changed in 2000 with the passage of Bill C-26, the Government's legislative response to the restructuring of the Canadian airline industry which was brought about by Air Canada's acquisition of Canadian Airlines. Rather than return to the days of heavy handed regulation, or open the domestic market to greater foreign competition, the Government opted for a policy of fostering domestic airline competition. Given the dominance of Air Canada following the merger and the particular characteristics and economics of the airline industry, the Government was persuaded that the Competition Act should be strengthened to deal with potential anti-competitive conduct by the dominant carrier.

Included in Bill C-26 were amendments in the form of section 78(1)(j) which allow the Government to specify by regulation what would constitute anti-competitive acts by a dominant carrier in the airline industry for the purpose of enforcing section 79. A further amendment, section 78(1)(k), was added to deal with access to facilities and services essential to operate a competing air service.⁴

In August 2000, regulations specifying anti-competitive acts in the airline industry came into force. In summary, the anti-competitive acts listed in the regulations deal with such things as predatory pricing, including operating or adding capacity at fares that do not cover the avoidable cost of providing the service, or using a low-cost or second brand carrier in a similar predatory manner. The list of airline industry specific anti-competitive acts also covers access to airport facilities, takeoff and landing slots, as well as the strategic use of loyalty programs and other incentives to exclude or discipline competitors.

It is important to note that the addition of airline specific amendments to the Act has not altered the substantive test under section 79. The use of the word 'regulation' tends to raise the specter of firms having to file tariffs or seek regulatory approval for new services. However, this is not the case with respect to the airline specific amendments to the Competition Act.

Consistent with the existing scheme of section 78, the anti-competitive acts defined in regulation for the airline industry are intended to be a non-exhaustive list for the guidance of the Tribunal. In order to succeed in obtaining an order from the Tribunal, the Commissioner must still demonstrate dominance and that the practice of anti-competitive acts has, or is likely to, result in a substantial prevention or lessening of competition.

Enforcement, Adjudication and Remedies

The role of the Bureau with respect to section 79 is to carry out investigations and, where grounds warrant, make application to the Competition Tribunal for a remedial order. Most inquiries under this section result from complaints by competitors that they are being foreclosed from entering or expanding in a market due to the tactics of a larger rival.

As is currently the case with respect to all of the civil provisions of the Act, only the Commissioner can file an application with the Tribunal. Applications may proceed to the Tribunal either on consent or a contested basis.

The Tribunal's function is to act as the adjudicator. The abuse of dominance provisions provide broad powers of remedy to the Tribunal. Where the Tribunal finds that the elements of section 79 are met, it may make an order prohibiting a respondent firm or firms from engaging in the practice of anti-competitive acts. In addition, or alternatively, if the Tribunal concludes that a prohibition order may not be adequate to restore competition, it may make an order directing any such actions, including the divestiture of assets of shares, as are reasonable and necessary to overcome the effects of the practice of anti-competitive acts.⁵

Authority of the Commissioner to Issue Temporary Orders

The package of airline industry specific amendments contained in Bill C-26 included a new authority for the Commissioner to issue temporary orders during the course of inquiries. This provision is contained in section 104.1.

Parliament accepted that the combination of Air Canada's position relative to that of its smaller competitors, the presence of highly mobile assets and low variable costs in the airline industry, required that the Commissioner be able to respond quickly. While the Act allowed for the Tribunal to provide interim relief once the Commissioner had filed an application, there was no ability to do so at the inquiry stage.

Under section 104.1, The Commissioner may make a temporary order prohibiting a carrier from engaging in conduct that could, in the opinion of the Commissioner, constitute an anti-competitive act where the following conditions are met:

the Commissioner has commenced an inquiry with regard into whether a carrier has engaged in conduct that is reviewable under section 79; and
the Commissioner considers that in the absence of a temporary order:

injury to competition that cannot adequately be remedied by the Tribunal is likely to occur, or
a person is likely to be eliminated as a competitor, suffer a significant loss of market share, suffer a significant loss of revenue or suffer other harm that cannot be adequately remedied by the Tribunal.

Temporary orders under section 104.1 are limited to an initial term of 20 days and can be renewed by the Commissioner for two additional terms of 30 days each, for a maximum of 80 days. Carriers who are subject to a temporary order can apply to the Tribunal to have the order varied or set aside.

To date, the Commissioner has only issued one temporary order. This order was issued in October 2000, during the course of an inquiry into allegations of anti-competitive conduct on the part of Air Canada against CanJet. The evidence obtained in the CanJet inquiry and a separate inquiry involving allegations by WestJet, form the basis of an application by the Commissioner under section 79 which is currently being heard by the Competition Tribunal.

Air Canada challenged the temporary order on constitutional grounds before the Quebec Superior Court and also sought to have the Tribunal set it aside. The Tribunal upheld the order in November and extended it to the end of December.⁶ In July, the Quebec Superior Court dismissed Air Canada's challenge. Air Canada has appealed both the decision of Justice Simpson of the Tribunal as well the decision of the Quebec Superior Court on the validity of section 104.1.

Tribunal Cases to Date

There have been six decisions rendered by the Competition Tribunal since the abuse of dominance provisions were introduced in 1986.⁷ The current case being heard by the Tribunal involving Air Canada is the seventh. Of these six decided cases, four of them, NutraSweet, Laidlaw, Nielsen and Tele-Direct, involved contested applications. The other two cases, Interac and CANYPS, involved joint abuse and were resolved by way of consent orders. All six of these cases have resulted in an order by the Tribunal.⁸

As already noted, in a majority of these cases, the Tribunal found that business practices that have not been defined in section 78 nevertheless constituted anti-competitive acts against which the Tribunal issued an order. This confirms that section 79 is capable of broad application to the business practices of dominant firms.

Enforcement Guidelines

On August 1, 2001 the Bureau published its Enforcement Guidelines on the Abuse of Dominance Provisions of the Competition Act as part of its continuing efforts to ensure a more transparent and predictable enforcement policy. In addition, in February 2001 the Bureau also published draft guidelines on abuse of dominance specific to the airline industry. Consultations with stakeholders on these guidelines are continuing. However, the Bureau will not be finalizing the airline guidelines until the Competition Tribunal has rendered a decision in the current case against Air Canada. Both the general section 78 and 79 guidelines as well as the draft airline-specific guidelines are available on the Bureau's website, or in hard copy from the Bureau's Resource Centre.

Comments and Observations

Counsel may find themselves looking at section 79 through opposite ends of the telescope. This will depend on whether they represent a firm accused of engaging in abusive conduct toward its rivals, or a smaller firm which alleges that it is being squeezed out of a market by a larger competitor. Whatever the situation, I would offer the following comments and observations:

In terms of section 79, the elements of 'control', 'class or species of business' and 'in Canada or any area thereof', all go toward the fundamental issue of 'dominance'. A finding of dominance will normally flow from evidence of significant market shares and the presence of barriers to entry.⁹
Market definition, as it is in all competition analysis, is critical to an abuse case. However, dominance of a market or exploiting that dominance by charging high prices is not, in and of itself, sufficient to trigger an application to the Tribunal.
There must be evidence of a 'practice of anti-competitive acts'. These acts may include things routinely regarded as normal business practices. Therefore, the market structure and the context in which the practices in question take place, together with evidence as to the purpose and intent of the practices will be important to how the Bureau views complaints.
In section 79 cases, a substantial lessening or prevention of competition typically involves a situation where smaller competitors are either foreclosed from entering a market or their growth is significantly curtailed by the actions of a dominant firm. The threshold question for the Tribunal is whether the practice of anti-competitive acts serves to preserve, entrench or enhance the market power of the dominant firm.
The relatively small number of cases that have gone to the Tribunal is not necessarily a reflection of the effectiveness of the section. In an environment of free trade, only a minority of Canadian industries are likely to be found to be dominated by a single firm. Even where this occurs, it is not necessarily the case that such a firm act will engage in conduct which is contrary to the section.
Moreover, where the Commissioner commences an inquiry under the abuse provisions, it is not unknown for firms to abandon questionable practices or otherwise seek a resolution that does not involve an application to the Tribunal.
Concern has been expressed in some quarters that the airline specific amendments foreshadow a shift away from the principle of a general law of general application. While the Bureau believes that it may be beneficial to publish more industry specific enforcement guidelines to articulate its approach to enforcement in certain industries, this can be done without amending the Act. It should also be recognized that the situation involving airlines was unique and that the amendments were confined to section 78 without affecting the substantive provisions contained in section 79.
In summary, section 79 has proven to be an effective provision. It is noteworthy that amendments are being proposed to the Act which are aimed at streamlining the Tribunal process. Hopefully, this will result in more cases coming before the Tribunal. In the meantime, the current case against Air Canada is the first one involving the airline specific amendments. Because this case also deals with the difficult question of predatory pricing and the new avoidable cost approach to below-cost selling, it is one that observers of Canadian competition law policy will surely watch with interest.

Footnotes

¹ http://www.competitionbureau.gc.ca

² Unlike the merger provisions of the Act, section 79 does not provide for an explicit efficiency defence in assessing acts that are considered to be anti-competitive, but that may enhance efficiency.

³ Between 1935 and 1986 there were seven contested cases. The Crown prevailed in only one case, that involving the Eddy Match Co. in 1952.

⁴ In addition, Bill C-26 contained amendments to provide for a new merger review process for the airline industry involving the Minister of Transport, the CTA and the Bureau as well as a limited exemption from section 45 for travel agent negotiations with the dominant carrier.

⁵ Although the Tribunal has wide latitude to impose remedies under subsection 79, the section also contains a number of limitations, exceptions and clarifications with respect to orders of the Tribunal and applications by the Commissioner. These provisions are specified in paragraphs 79 (3) to 79 (7) of the Act.

⁶ In upholding the Order, Justice Simpson of the Tribunal deleted a provision prohibiting Air Canada from charging 'similar fares' on grounds of vagueness.

⁷ Appendix IV of the Commissioner's enforcement guidelines on section 79 contains a summary of each of these cases which sets out, among other things, the key facts, the anti-competitive acts alleged and the remedy imposed by the Tribunal.

⁸ However, not in all cases was the order issued by the Tribunal as broad as sought by the Bureau in its application.

⁹ All of the cases heard by the Tribunal to date have involved very high market shares ranging from 87% in the Laidlaw case to 100% in Nielsen and Interac. However, the Bureau has indicated in its enforcement guidelines that it considers a market share greater than 35% as potentially sufficient to give rise to a finding of dominance.