Annual Report of the Commissioner of Competition for the year ending March 31, 2004

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Chapter 2: Policing Criminal Activities

The Competition Bureau administers and enforces provisions of the Competition Act prohibiting conspiracy, bid-rigging, price discrimination, predatory pricing and price maintenance.

• The conspiracy provisions cover agreements among two or more competitors to unduly lessen competition.
  
• The bid-rigging provisions deal with agreements to thwart the competitive tendering process used to acquire products or services.
  
• The price discrimination provisions help to ensure that small and medium-sized businesses have an equal opportunity to participate in the economy by requiring suppliers to make discounts, price concessions and advertising allowances available to competing customers on fair terms.
  
• The predatory pricing provisions address situations in which a firm engages in a policy of selling products below cost for a sufficiently long period of time to eliminate or deter rivals as competitors, and subsequently raises prices or otherwise harms the competitive process.
  
• The price maintenance provisions are designed to provide resellers of products with the freedom to set their own prices and to protect suppliers from customer-led boycotts because they supply firms with low-pricing policies.

The Act also contains criminal and civil provisions to address false or misleading representations and deceptive marketing practices in promoting the supply or use of a product or any business interest. Under the criminal regime, the general provision prohibits all materially false or misleading representations made knowingly or recklessly. Other provisions specifically prohibit deceptive telemarketing, deceptive prize notices, double ticketing and pyramid schemes. These provisions also define the responsibilities of operators and participants in multi-level marketing plans.

The Consumer Packaging and Labelling Act, the Precious Metals Marking Act and the Textile Labelling Act prohibit false and misleading representations in specific sectors (non-food, pre-packaged consumer products; precious metal articles; and textiles and apparel). In addition, this legislation prescribes basic, standardized labelling information, such as bilingual product descriptions, metric measurement declarations and dealer identity, which allows consumers to make informed choices.

The Competition Bureau has a range of tools at its disposal to enforce these laws. The Bureau refers the most serious matters to the Attorney General of Canada and recommends prosecution. Offenders may receive heavy fines, prison terms or both.

In 2003-2004, the Bureau and the Attorney General secured six convictions against five accused parties, who pleaded guilty to conspiracy and price maintenance charges, with the courts imposing fines totalling $5 870 000. In addition, one preliminary hearing in a bid-rigging matter was held in Toronto and charges were filed by the Attorney General in another domestic conspiracy matter. In one deceptive telemarketing matter, an investigation resulted in a guilty plea from a corporation, which was then fined $125 000 and received a four-year prohibition order. Several corporations and individuals were charged after Bureau investigations into other alleged deceptive telemarketing practices.

These responses to non-conformity during 2003-2004 are described in the first section of this chapter. The Bureau may also work with firms to eliminate anti-competitive behaviour through alternative case resolutions. Examples are provided in the second section of this chapter. Finally, under the Competition Act, parties may request written opinions, some of which are summarized in the third section of this chapter.

For more information on these cases and others, including information notices, news releases and backgrounders, please visit the Bureau's Web site (www.competitionbureau.gc.ca/eic/site/cb-bc.nsf/eng/h_02003.html).

1. Prosecutions

Conspiracy

The conspiracy provisions of the Competition Act prohibit agreements between two or more persons to prevent or unduly lessen competition or to unreasonably enhance the price of a product. Agreements between competitors to fix prices, to allocate customers or geographic markets, or to restrict production of a product by setting quotas among competitors or other means are considered to be "hard-core" cartel activities, with no socially redeeming features. Anti-competitive agreements harm both consumers and businesses, and enforcing the conspiracy provisions is an important priority for the Bureau. Much of the Bureau's work in this area involves investigating and prosecuting international cartels, which is a crucial activity for competition agencies around the world.

Monochloroacetic Acid/Monochloroacetate

In August 2003, Akzo Nobel Chemicals BV pleaded guilty in the Federal Court of Canada to a conspiracy that affected the sale and supply of monochloroacetic acid/monochloroacetate, a chemical ingredient used in numerous commercial and consumer products, such as herbicides, pulp and paper, and plastics. The company was fined $1.9 million for its part in the conspiracy.

Choline Chloride

In August 2003, Akzo Nobel Chemicals BV and Bioproducts Incorporated pleaded guilty in the Federal Court of Canada for their part in an international conspiracy that affected the sale and supply of choline chloride, an additive widely used in the animal feed industry. Netherlands-based Akzo Nobel Chemicals BV was fined $1 million, and U.S.-based Bioproducts Incorporated was fined $600 000. A significant proportion of the Canadian market was affected by this conspiracy.

Polyester Staple Fibre

In August 2003, Arteva Specialties Sarl, a Luxembourg-based company also known as KoSa, pleaded guilty and was fined $1.5 million in the Federal Court of Canada for its part in a conspiracy that affected the sale of polyester staple fibre. This product is widely used by textile manufacturers in fabrics, sheets, shirts and other clothing, and home furnishings. The investigation is continuing into the alleged involvement of other companies in this conspiracy.

Graphite Electrodes

In September 2003, Robert P. Krass, former head of UCAR International Inc., pleaded guilty in the Federal Court of Canada to fixing the price of graphite electrodes. These are used primarily for steel production in electric arc furnaces and for steel refining in ladle furnaces. He was fined $70 000 by the Federal Court of Canada for his direct involvement in an international conspiracy, which affected the production of Canadian steel. Mr. Krass is the fourth person to plead guilty in Canada in relation to the graphite electrode cartel. Previously, UCAR's Canadian subsidiary, UCAR Inc., the German corporation SGL Carbon Aktiengesellschaft and the Japanese company Tokai Carbon Co., Ltd. were convicted for their roles in this conspiracy, and fined a total of $23.25 million.

Anthraquinone

In September 2003, charges were laid in the Provincial Court of British Columbia against Chanoix Trading Ltd. and two of its executives concerning an alleged conspiracy to unduly lessen competition in the supply of anthraquinone (a chemical used in the pulp and paper industry) in Canada. A preliminary hearing is scheduled for January 2005.

Bid-rigging

The Competition Act prohibits agreements between two or more persons, usually competitors, to not submit a bid in response to a tender and agreements that set the bids various parties will submit. However, the bid-rigging provisions do not apply when the parties make the agreement known to the tendering authority before they submit their bids. This allows the tendering authority to cancel the tendering process or modify it in a way that keeps it competitive. Bid-rigging often targets government agencies and ultimately is a drain on the taxpayer. The Bureau has a well-developed program to help purchasing officials prevent and detect bid-rigging. The program also provides tendering authorities who suspect they are a victim of bid-rigging with guidance on how to help the Bureau with its investigation. In 2003-2004, the Bureau's seven regional offices took on greater responsibility for criminal competition investigations, particularly those related to bid-rigging.

Packaged Liquid Chlorine

On May 30, 2002, the Competition Bureau laid bid-rigging and conspiracy charges against Welland Chemical Ltd., Brenntag Canada Inc., Vopak Canada Ltd. (now Univar Canada Inc.) and two individuals. These charges were laid following an investigation into the sale and supply of packaged liquid chlorine purchased by the City of Toronto for its water purification needs between 1992 and 1998.

Welland Chemical, Vopak and the two individuals were committed to trial after the preliminary hearing in June 2003. The defendants moved to quash the committal on the basis that no offence exists under section 47 of the Competition Act for withdrawing a bid. The Attorney General of Canada filed a cross-application.

On December 29, 2003, a judge granted the defendants' motion and dismissed the Attorney General's cross-application. Although the charges have not been proven, it is noteworthy that the price the City of Toronto pays for packaged liquid chlorine has dropped by approximately 50 percent in the years since the investigation began.

Price Maintenance

The Competition Act prohibits attempts by agreement, threat, promise or any like means to influence upward the prices of a reseller's products or to discourage the reduction of those prices. Refusal to supply or discrimination in the supply of products to resellers with low-pricing policies are also illegal under the Act. These provisions, known as the price maintenance provisions, are designed to ensure that resellers, notably retailers, are free to set their own prices for their products. These provisions also protect suppliers from customer-led boycotts because they have decided to supply resellers with low prices.

Isostatic Graphite

A Bureau investigation revealed that Toyo Tanso USA Inc., an indirect subsidiary of Toyo Tanso Co., Ltd. of Osaka, Japan, met with its independent distributor, Electrodes Canada Inc., in an attempt to raise the price of unmachined and semi-machined isostatic graphite in Canada. The product is used to make moulds and dies for various industries, including the auto parts and semi-conductor industries. In April 2003, Toyo Tanso USA pleaded guilty in the Federal Court of Canada to charges of attempting to maintain the price of isostatic graphite, and was fined $200 000.

Toyo Tanso is the second corporation to be convicted as a result of the Bureau's investigation into the supply and sale of isostatic graphite in Canada. In 2001, Carbone of America Industries Corp. pleaded guilty for its role in the price maintenance scheme.

Deceptive Telemarketing

The Competition Act prohibits telemarketers from making materially false or misleading representations when promoting the supply of a product or a business interest during telephone calls. Telemarketers are also prohibited from asking for payment in advance as a condition of receiving a prize that has been, or supposedly has been, won in a contest or game, failing to provide adequate and fair disclosure of the number and value of the prizes, offering a gift as an inducement to buy another product (without fairly disclosing the value of the gift), and offering a product at a grossly inflated price and requiring the consumer to pay for it in advance. The Act also requires that telemarketers disclose the name of the company or person for whom they are working, the type of product or business interest they are promoting, the purpose of the call, the price of any product being sold, and any restrictions or conditions the consumer must meet before the product is delivered.

Partnerships and Outside Initiatives to Enforce Criminal Provisions

Unfortunately, Canada's reputation has been tarnished internationally because of the large number of deceptive telemarketers who bilk consumers around the world from their Canadian-based operations. The Bureau has partnered with a number of other law enforcement agencies to combat these criminals.

Toronto Strategic Partnership

The Toronto Strategic Partnership is a law enforcement partnership established to combat deceptive marketing practices across North America. The following are the members of the partnership: Competition Bureau, Toronto Police Service, Ontario Provincial Police, Ontario Ministry of Consumer and Business Services, PhoneBusters (the Canadian anti-fraud call centre), U.S. Federal Trade Commission, U.S. Postal Inspection Service, Attorney General of Ohio and York Regional Police.

Alberta Partnership Against Cross-Border Fraud

The Bureau, along with Alberta Government Services, Royal Canadian Mounted Police (RCMP) "K" Division, the Calgary Police Service, the Edmonton Police Service, the U.S. Federal Trade Commission and the U.S. Postal Inspection Service, announced the formation of the Alberta Partnership Against Cross-Border Fraud in September 2003. Partnership members coordinate and provide reciprocal support for their respective law enforcement activities, identify fraudulent, misleading and deceptive marketing practices with an Alberta connection, and share information.

Co-operation Arrangement with the United Kingdom

In October 2003, the Bureau signed a co-operation arrangement with two agencies in the United Kingdom -- the Office of Fair Trading and the Department of Trade and Industry -- to improve competition law enforcement in areas such as deceptive marketing and criminal cartel activity. The arrangement sets out a framework for notification of law enforcement activities, coordination of and co-operation in those activities, information exchanges and conflict avoidance. It also builds on the Organisation for Economic Co-operation and Development's (OECD) June 2003 OECD Guidelines for Protecting Consumers from Fraudulent and Deceptive Commercial Practices Across Borders.

National Deceptive Telemarketing Outreach

In January 2004, the Bureau wrote to provincial government departments of development and to economic development agencies across Canada to inform them about the risk of inadvertently funding the establishment of deceptive telemarketing operations. Since these organizations are actively involved in financing call centres, the Bureau hopes that providing this information will encourage the organizations to take the necessary steps to properly screen all applications for economic support. The Bureau also provided these organizations with tools to help them in the screening process.

Fraud Prevention Forum

The Fraud Prevention Forum comprises a group of concerned private sector firms, consumer and volunteer groups, government agencies and law enforcement organizations committed to fighting fraud aimed at consumers and businesses. Its mandate is to prevent Canadians, through awareness and education, from becoming victims of fraud, as well as to increase reporting when incidents occur to improve the effectiveness of law enforcement.

On March 2, 2004, then Industry Minister Lucienne Robillard launched the Forum's national awareness campaign at a news conference in Toronto. The Minister was joined by the Commissioner of Competition, campaign spokespersons from the Ontario Provincial Police and the Royal Canadian Mounted Police and other Forum members.

The following are members of the Fraud Prevention Forum: Competition Bureau (chair and founding member), Bell Canada, Canada Post, CARP -- Canada's Association for the Fifty-Plus, Canadian Bankers Association, Canadian Council of Better Business Bureaus, Canadian Marketing Association, Canadian Survey Research Council, Consumers Council of Canada, eBay Canada, Industry Canada (Office of Consumer Affairs), MasterCard Canada, Ontario Ministry of Consumer and Business Services, Ontario Provincial Police, Public Safety and Emergency Preparedness Canada, Royal Canadian Mounted Police, Toronto Police Service, U.S. Federal Trade Commission, Vancouver Police Department, Visa Canada, Volunteer Centre of Toronto -- ABCs of Fraud and Western Union.

The following cases were prosecuted in 2003-2004.

Office Toner Products

On September 23, 2003, the Bureau announced that it had laid criminal charges against two Toronto-based companies engaged in telemarketing office toner products. This telemarketing operation was alleged to have targeted businesses, not-for-profit organizations and government agencies in Canada and the United States. The telemarketing companies invoiced these organizations for toner products they neither ordered nor wanted.

The charges stemmed from a Bureau investigation into Lexcan International Corp. and H&P Communications, which also operated as the Calcom Business Centre, Lexam International Corp. and MPL. The owner and office manager were arrested and also charged with offences under the Competition Act and the Criminal Code.

Health Care Discount Programs

On March 9, 2004, Medical Discount Inc. (Canada) of Toronto was fined $125 000 and prohibited for four years from engaging, participating or assisting others in any activity involving the sale or offer for sale of health care discount plans.

Medical Discount had been associated with nine Ontario corporations, which are also subject to the prohibition order, in promoting discount cards under the names MedPlan and Global. Between March 2001 and January 2003, telemarketers from these corporations used high-pressure sales techniques to induce potential clients from the United States to buy medical discount plans going by the names MedPlan and Global and to release bank account information. The corporations then withdrew funds from these accounts without consumers' authorization.

The Bureau received more than 500 complaints about Medical Discount's activities from law enforcement and government agencies across the U.S., and developed its case in co-operation with the Toronto Strategic Partnership. The U.S. Federal Trade Commission filed a separate consumer protection action against Medical Discount in the U.S.

Boiler-Room Takedown

In June 2003, a Toronto Strategic Partnership investigation led to charges under the Competition Act and the Criminal Code against individuals involved in a telemarketing operation. Telemarketers allegedly misled businesses into donating money for advertising space in fraudulent magazines devoted to police services, fire safety and children's issues.

2. Alternative Case Resolutions

The Bureau chooses the best and most efficient means of restoring competition in the marketplace. It resorts to an adversarial approach only when all other avenues to correct anti-competitive behaviour have failed or the activities constitute a flagrant disregard for the law. Some matters may be resolved quickly and easily, without a full inquiry or judicial proceeding. This reduces uncertainty, saves time and avoids lengthy court actions.

Conspiracy

Septic Haulers

In February and March 2003, the Bureau received numerous complaints that three septic haulers had fixed the price of septic removal in a county in southern Ontario. Following interviews with the parties involved, Bureau officers made information visits to the three companies. They all agreed that their actions were inappropriate and that they would not meet again to discuss prices, costs or customers. The matter was closed in October 2003.

Bid-Rigging

Supply of Paper Products

In June 2003, the Bureau received information that three suppliers of paper products had rigged their bids on three tenders for two Ontario school boards. After a thorough analysis of the tender documents, a representative of the Bureau met with the three suppliers in August 2003 to discuss the allegations. Subsequently, the companies agreed to stop bid-rigging and to ensure that officers, employees, agents and assigners did not agree to arrange any future bids. In addition, the school boards removed the names of the three suppliers from their lists of approved suppliers.

Price Maintenance

Incense Burners

In November 2002, the Bureau received a complaint regarding a supplier of incense burners, who had allegedly told the complainant to increase his prices if he wanted to continue to receive the burners. In June 2003, the Bureau informed the supplier that such behaviour likely contravened the price maintenance provision of the Competition Act. Following a meeting with Bureau representatives, the supplier assured the Bureau that it would take the necessary measures to comply with the Act.

Natural Food and Products Retailer

In July 2003, the Bureau received a complaint from a natural food and products retailer who had been told that he would have to increase the selling price of some products supplied by a Canadian natural products manufacturer and distributor if he wanted to continue to receive them. The Bureau informed the supplier that such behaviour likely contravened the price maintenance provision of the Competition Act. Following discussions with Bureau representatives, the supplier assured the Bureau that it would take the necessary measures to comply with the Act, informing its salesperson about the Competition Act and its price maintenance provision.

Funeral Homes

In December 2003, a funeral home owner contacted the Bureau regarding an advertising regulation issued by a professional association representing numerous members of the Quebec funeral industry. One of the provisions of the regulation was ambiguous and could have created problems under paragraph 61(1)(a) of the Competition Act. Bureau representatives contacted the professional association's lawyer, who agreed to take the necessary measures to ensure that the regulation complied with the Act.

Misleading Representations and Deceptive Marketing Practices and the Standards-Based Statutes

In 2003-2004, the Bureau used alternative case resolutions to settle 47 matters under the criminal and civil misleading representations and deceptive marketing practices provisions of the Competition Act, and 10 matters under the three standards-based statutes.

The Bureau may examine certain matters under the criminal and civil provisions of the Competition Act and the standards-based statutes. The following is an example of such as case.

Electronics Liquidator: Warranty Claims and Mandatory Labelling Information

A complaint alleging that an electronics liquidator was making misleading warranty claims and that its products were missing mandatory labelling information led to an examination by the Bureau under the misleading representations provisions of the Competition Act and the mandatory labelling provisions of the Consumer Packaging and Labelling Act and regulations. Following a meeting between a Bureau officer and the company's president, the company provided written assurance that it would ensure the accuracy of warranty claims. It also agreed to add the required information to products that did not meet mandatory labelling provisions.

3. Written Opinions

The Bureau provides legally binding written opinions to businesses seeking to comply with the Competition Act and the standards-based statutes. Company officials, lawyers and others may request a written opinion on whether a proposed business plan or practice would raise concerns under any of these laws. The Bureau's written opinions take into account jurisprudence, previous written opinions and current policies. Written opinions remain binding for as long as the material facts remain substantially unchanged and the conduct or practice is carried out substantially as proposed.

To promote compliance with and foster transparency in the administration and enforcement of the Act, the Bureau publishes detailed summaries of its written opinions on its Web site (www.competitionbureau.gc.ca/eic/site/cb-bc.nsf/eng/ h_03000.html). Here are some examples of the written opinions the Bureau issued in 2003-2004.

Misleading Representations and Deceptive Marketing Practices

The Bureau issued 23 written opinions concerning the criminal and civil misleading representations and deceptive marketing practices provisions of the Act.¹ Twenty-two of these opinions dealt with the criminal provisions of the Act, specifically the multi-level marketing and pyramid selling provisions.

The written opinions covered plans for marketing a wide variety of products and services, such as health and lifestyle products, clothing, hobby supplies, travel and vacation plans, and computer software and services. Under sections 55 and 55.1 of the Competition Act, an operator or participant in a multi-level marketing plan cannot make representations about compensation unless they disclose the compensation a typical participant receives. Further, a multi-level marketing plan that features recruitment bonuses, a required volume of purchases by participants as a condition of entry or inventory loading, or that lacks a buy-back guarantee on reasonable commercial terms constitutes a prohibited pyramid scheme. More details about these written opinions can be found on the Bureau's Web site (www.competitionbureau.gc.ca/eic/site/cb-bc.nsf/eng/h_03000.html).

Conspiracy, Refusal to Deal, Exclusive Dealing, Tied Selling, Market Restriction and Abuse of Dominant Position

Proposed Outsourcing of Processing

A supplier of a product sought a written opinion in September 2003 to determine whether a proposed service arrangement with a processing company would raise concerns under the Competition Act. The supplier had previously processed the product at its own facility but had decided to close that facility and outsource its processing requirements.

The Bureau examined the proposal under the criminal and civil provisions of the Act, specifically those on conspiracy (section 45), refusal to deal (section 75), exclusive dealing, tied selling and market restriction (section 77) and abuse of dominant position (section 79). Based on its understanding of the facts, the Bureau determined that should the parties implement the arrangement as proposed, the Bureau would not have sufficient grounds to launch an inquiry for the following reasons.

• The proposed arrangement related specifically to providing processing services to the supplier and did not affect any existing arrangements the processor might have had with its customers, nor did it preclude the processor from taking on new customers.
  
• The supplier's decision to close its processing facility was a unilateral decision and not the result of an agreement with the processor.
  
• The processor took measures to ensure the proposed service arrangement would not affect output.
  
• There were other processors in the market.

Conspiracy

Agreement to Reduce Samples

A non-profit organization sought a written opinion in October 2003 on whether a proposed agreement to reduce the number of samples four major suppliers of a product provide to the organization would raise concerns under the Competition Act. As part of the arrangement, the suppliers agreed to provide funding to the organization to enable it to meet its objectives, including conducting research and providing education to specific groups of consumers. The proposed agreement, which follows a similar arrangement that ended in December 2003, was to begin in January 2004 and end in December 2006.

The Bureau examined the proposal under the criminal conspiracy provision of the Act, with particular reference to the statutory defence for agreements restricting advertising and promotion under paragraph 45(3)(f) and the exceptions to this defence under sub-section 45(4). Based on its understanding of the facts, the Bureau determined that if the parties were to implement the proposed agreement as presented, the Bureau would not have sufficient grounds to launch an inquiry under the criminal provisions of the Act for the following reasons.

• The retail price of the product was regulated, with little price variation between brands offered by suppliers.
  
• Historical data from 1999 to 2002 showed that a reduction in samples had little effect on the number of units consumers purchased.
  
• The agreement likely would not have an impact on the quantity or quality of production of the product.
  
• Data on the growth of the market and the volatility of market shares between the suppliers over the past several years indicated that there was a competitive marketplace.

For the above reasons, the Bureau concluded that the proposal fell under the statutory defence in paragraph 45(3)(f) of the Act, as an agreement relating only to the restriction of advertising or promotion, and that it was unlikely to unduly lessen competition.

Breakdown of Written Opinions, 2003-2004

Section of the Competition Act	Fee	Service Standard	Complexity	Number of Transactions	% Service Standard Met
55 (multi-level marketing) 55.1 (pyramid selling) 74.06 (promotional contests)	$1000	2 weeks	Non-complex	22	59%
		6 weeks	Complex	1	100%
45 to 51 (offences in relation to competition) 79 (prohibition where abuse of dominant position)	$15000	6 weeks	Non-complex	1	100%
		10 weeks	Complex	1	100%

 

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Footnotes

¹ See page 16 for a general description of the criminal misleading representations and deceptive marketing practices provisions of the Competition Act.
See Chapter 3 (page 23) for a general description of the civil misleading representations and deceptive marketing practices provisions of the Competition Act.