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Section 45 at the Crossroads

Konrad von Finckenstein
Commissioner of Competition
Competition Bureau

Remarks to
2001 Invitational Forum on Competition Law

October 12, 2001

In 1889, Canada was the first western nation to pass a law designed to prevent firms from forming agreements in restraint of trade. That legislation, largely unchanged from what it was more than 100 years ago, is today embodied in section 45 of the Competition Act, which makes it a criminal offence for anyone to conspire, combine, agree or arrange to unduly lessen competition or unreasonably enhance the price of a product.

While often criticized, section 45 is still a core provision of the Competition Act. Hard core cartel activity such as price fixing and market allocation is widely recognized as among the worst forms of anti-competitive conduct. Even Robert Bork, considered by many to be among the most conservative anti-trust commentators, has argued that:

"The subject of cartels lies at the center of anti-trust policy. The law's oldest and, properly qualified, most valuable rule states it is illegal per se for competitors to agree to limit rivalry among themselves. Y Its contributions to consumer welfare over the decades have been enormous."

Indeed, I would suggest that the conspiracy provisions of the Acthave become more important in recent years. The types of international cartels that have come to light in the past ten years have clearly undermined the economic benefits that flow from lower barriers to international trade.

For example, most Canadians were victimized by the bulk vitamin conspiracy of the 1990's which affected the prices of milk, orange juice and bread. The conspiracies were designed to allocate the sale and artificially raise the price of certain vitamins and related products, including those most widely used in food, animal feed and pharmaceutical products. It is estimated that sales of bulk vitamins in Canada were between $650 and $700 million during the period of the conspiracy and the prices of some vitamin products were inflated by 30% over competitive price levels.

Another example of an international cartel being successfully prosecuted involved a conspiracy to fix prices and allocate markets for graphite electrodes, which are used primarily in the production of steel in certain types of furnaces. Between 1992 and 1997, the operators of electric arc and ladle furnaces in Canada are estimated to have consumed at least $440 million of graphite electrodes. During this same period, electrode prices in Canada increased by more than 90 per cent.

On an international basis, cartels result in even greater damages. For this reason, the OECD has encouraged its Member countries to ensure that their competition laws effectively halt and deter hard core cartels. While Canada has enjoyed some recent success in this area, including record fines in a number of cases involving international conspiracies, this has been primarily accomplished through an effective immunity program and guilty pleas.

Cases brought to court have produced very different results. Last year, Harry Chandler and Robert Jackson noted in their study that, since 1980, 17 out of the 20 contested conspiracy cases had resulted in acquittals or dismissals. Another study done for us recently by Al Gourley found that:

"since 1975, of the 7 litigated cases that did not involve a monopoly or 'virtual monopoly,' the Crown lost every case."

A second reason for suggesting that the conspiracy provisions of the Act are more relevant today is that strategic alliances among competitors have become increasingly common and important to firms competing in a globalized market. In many cases, these alliances are not only benign but pro-competitive. They can allow firms to lower costs, take advantage of each other's specialized skills, expand into foreign markets, or fund expensive research and development efforts.

Yet, there is at least a potential that the conspiracy provisions of the Act are discouraging or placing a chill on some of these strategic alliances because people do not want to risk violating section 45. While there may be disagreement on this point, there are members of the business, legal and academic communities who believe that the chill is very real.

For these reasons, and others, the Competition Bureau started examining the possibility of amending section 45 several years ago. As many of you know, MP Dan McTeague also initiated plans to amend section 45 and proposed certain changes through a Private Members' Bill that was part of the Public Policy Forum (PPF) consultation process between April and December 2000. The PPF concluded in its final report that: (i) there was general agreement that section 45 needed to be modernized; (ii) there was substantial support for a two-track approach under which criminal sanctions would be limited to the most harmful behaviours and other types of agreements would be subject to review under a civil standard; but (iii) because of the importance and complexity of the issues involved, most felt that more discussion, analysis and consultation was required. As a result of the PPF consultations, it was decided that amendments to section 45 should not be included in the Government's current Bill C-23.

Further to the suggestion that more analysis and consultation was required, the Competition Bureau contracted three independent studies which will be discussed in the next session this afternoon. Before going any further, I would like to thank the authors, Rob Russell and his colleagues at Borden Ladner Gervais, Al Gourley and his colleagues at Macleod Dixon, and Yves Bériault and his colleagues at McCarthy Tétrault, for their excellent work. It is absolutely clear to me that they each put a great deal of work and thought into their efforts.

While they differ on many of the technical details, and I don't want to steal any thunder from this afternoon's session, they all agree that a two-track approach is not only feasible but infinitely preferable to the current system. Furthermore, they all agree that hard core cartel behaviour should be a criminal offence without a competition test. The technical details are, of course, very important and the authors of these reports have each stressed that the issues are complex. I can assure you that the Competition Bureau understands this and, as I have said before, we are unequivocally committed to the consultative process as an indispensable part of improving section 45. Conferences like this, organized by groups other than the Bureau, are a useful forum for discussing technical details.

However, the consultation process necessarily and correctly takes time. We have to recognize that it may be a while before a revised section 45 becomes law, and we must be concerned about the possible chilling effects on strategic alliances today.

Until section 45 is improved, the Competition Bureau will take steps or develop policies which will help alleviate some of the problems. Three steps are currently planned:

(1) In order to reduce the uncertainty associated with potentially pro-competitive agreements, the Bureau is preparing new draft guidelines for reviewing strategic alliances under the existing law. The intent of these guidelines is to provide greater certainty to businesses and their legal advisors about how the Bureau will examine agreements among competitors. The guidelines will provide an analytical framework under which hard core cartel activity will still be addressed under s.45. Other types of activities, however, will be examined under the civil provisions of the Act. As with all draft guidelines, they will be circulated for comments before being finalized.

(2) Bill C-23, currently under review by the House of Commons' Standing Committee on Industry, Science and Technology, contains a provision which would make written advisory opinions by the Bureau legally binding on the Commissioner so long as the material facts upon which the opinion is based remain substantially unchanged. Once this becomes law, the provision will be able to provide further certainty for competitors considering strategic alliances or collaborations.

(3) Section 45(1)(b) prohibits agreements or arrangements that "enhance unreasonably the price" of a product, it does not require the Crown to prove undueness. On the basis of existing jurisprudence, it is the manner and not the extent of the enhancement that must be shown to be unreasonable. Whether the manner is unreasonable will be determined by considering the business necessities of the parties to the agreement as well as the interests of the consumers, having regard to the underlying principles of the Competition Act embodied in section 1.1. For example, while it is reasonable for a producer to seek to increase its its own profits, it is not reasonable for producers to set a common price for a product for the sole purpose of increasing each other's profit. This denies consumers their right to competitive prices. Given the appropriate case, the Competition Bureau will prosecute it on the basis of this argument.

However, I view both the ongoing work in developing guidelines for strategic alliances under the current law, and the use of s.45(1)(b) to attack price fixing, as only interim measures. There is simply too much uncertainty associated with the current conspiracy provisions. As Yves Bériault points out in his report, criminal law should have clarity and predictability. And as Rob Russell points out in his report:

"Various commentators have criticized section 45 on the basis that it is both underinclusive, because it can allow manifestly anti-competitive arrangements to escape condemnation, and overinclusive, because it subjects all horizontal arrangements to criminal prohibitions, even where these may potentially increase welfare."

Clearly, there is a need for substantive review and reform of section 45. The Competition Bureau would like to see amendments to the Act which provide an effective deterrent for hard core cartel activity that is clear, predictable and enforceable. We recognize that agreements among competitors in today's globalized economy can be benign or pro-competitive and that there is a need for a means to evaluate other types of agreements among competitors under a civil regime. The Bureau believes that this can best be done through a new civil provision which would authorize the Commissioner to apply to the Tribunal with respect to agreements between actual or potential competitors which have, or are likely to have, the effect of preventing or lessening competition substantially. Remedies available to the Tribunal would be consistent with those currently available for reviewable matters under the Act.

In order to complement the bifurcated process of civil and criminal, the Bureau also believes that some form of a pre-clearance process, similar to the one currently in place for mergers, but voluntary, is needed to deal with benign or pro-competitive agreements. Any pre-clearance system would be fee-based, prospective and conditional on no material changes in fact.

Interestingly, this is one of the areas in which the three reports commissioned by the Bureau provided three very different recommendations. Rob Russell's report, for example, outlines two different models but cautions about the problems that can develop from a system that: (a) results in an overwhelming number of applications; or (b) promotes "strategic behaviour" by granting immunity from the criminal sanctions solely on the basis that an application has been filed. Al Gourley provides a number of suggestions which include providing the Commissioner with the ability to grant block exemptions, as has been done in Europe, for types of agreements which are commonly accepted as raising no serious competition issues. Yves Bériault proposes a simple notification system, not a request for exemption or a process which imposes a waiting period before implementation, and also proposes immunity from criminal prosecution for conduct subsequent to the date of filing. However, this only touches on some of the issues raised by the authors concerning notification or pre-clearance. Clearly, more discussion is required.

To summarize, here are the major points that I want to leave with you:

(1) The Competition Bureau has enjoyed considerable success and record fines in recent years with respect to international cartels. These results, however, have been achieved through an effective immunity program and guilty pleas.

(2) In contested cases involving hard core cartel behaviour, section 45 does not work. The evidence is overwhelming.

(3) In today's globalized market, strategic alliances or collaborations among competitors have become increasingly common and important.

(4) In addition to its problems in preventing hard core cartels, section 45 also has the potential to place a chill on pro-competitive collaborations among competitors.

(5) While the Competition Bureau is working towards interim solutions, such as developing new Guidelines for Strategic Alliances, there is a growing consensus that section 45 needs to be modernized through a two-track approach.

(6) The Bureau also recognizes the benefits that could flow from an optional pre-clearance system.

Following this conference, we anticipate using the independent reports commissioned by the Bureau, related studies that have been done in recent years, comments from stakeholders, as well as the experience of international competition authorities, to prepare a white paper that discusses relevant issues and makes specific proposals for change.

As suggested earlier, it is our intention to consult widely on any proposed changes to section 45. Nevertheless, it should be understood that there is pressure developing to modernize section 45 and make it more effective. Clearly section 45 is going to be the centrepiece of the next round of amendments. Our challenge is to ensure that it is done carefully, correctly and on a timely basis.

I enjoyed this morning's sessions, and I look forward to further discussions this afternoon.