In 1966, the Government of Canada asked the Economic Council of Canada for its views on the legislative framework for consumer issues, anti-trust issues and intellectual property. In response, the Economic Council published a series of reports over the subsequent few years, each examining a specific aspect of the framework. Its July 1969 report dealt with competition policy (Canada 1969).

In 1969, tariff barriers largely sheltered Canada’s domestic market from foreign competition, and free trade was an unrealistic option. The Economic Council was acutely aware of the dysfunctional impact tariffs were having on the efficiency of the Canadian economy and concluded that they tended to result in small or inadequately specialized plants operating below efficiency.

• In an open economy such as Canada’s, market size is affected to a considerable extent by the tariff policies adopted by both foreign and Canadian governments. Tariffs erected by other countries hamper the efforts of Canadian producers to move beyond national borders and compete for sales in world markets. Tariff barriers set by Canada shelter the domestic market from the inroads of foreign suppliers, and increase the tendency for Canadian manufacturers to try to provide a full range of the requirements of Canadian consumers. Attempts by Canadian manufacturers to supply the wide range of products desired by consumers all too often result in inadequate specialization and short production runs. There are, of course, other impediments limiting market size; in some industries, transportation costs and non-tariff barriers such as patents and the valuation placed on imports for customs purposes may have a more powerful impact (Canada 1969, 74).

The Economic Council observed that tariff barriers on many final products raised important potential obstacles to efficiency. This was because many manufacturers treated the after-tariff cost of imports as the limit up to which they could price their products, regardless of how many competitors they faced or the market share those competitors held (Canada 1969: 77). The tariff effectively sheltered manufacturers from pressure to price their products at truly competitive levels, providing them with a margin for inefficiency.

The Economic Council did not and could not have foreseen the opening up of trade that occurred in the decades following the publication of its 1969 report. That being said, the Economic Council did note the possible impact of freer trade, observing that “the reduction of tariffs on a broad front should result in some inducement for industries to move towards larger scale and increased specialization” (Canada 1969, 78). At the same time, the Economic Council stated that “the continued existence of tariff and non-tariff trade barriers for some time in the future was a reason behind the need for public policies geared toward promoting efficiency” (Canada 1969, 78).

Consistent with its observations about inefficient scale and insufficient specialization in the Canadian economy, the Economic Council advocated a single objective for competition policy: “the improvement of economic efficiency and the avoidance of economic waste” (Canada 1969, 19). It wrote, “Competition should not itself be the objective but rather the most important means by which efficiency is achieved” [emphasis in original] (Canada 1969, 9). The Economic Council also expressed the view that competition policy should not respond to concerns about the equitable distribution of wealth and the diffusion of economic power, since other more comprehensive and faster working instruments could more effectively do so (Canada 1969, 20). In addition, the Economic Council saw competition policy based on economic efficiency as indirectly relating to and supporting five major policy goals it had set out in a previous report — full employment, a high rate of economic growth, price stability, a viable balance of payments and an equitable distribution of wealth — but said that it did not believe that these goals should themselves be the goals of competition policy. Rather, they would be the direct or indirect by-products of a successful competition policy based on economic efficiency (Canada 1969, 21–24).

The Economic Council report included several specific recommendations aimed at improving economic efficiency through competition policy. In particular, the Economic Council recommended that specialization and export agreement provisions be added to competition law to encourage firms to join forces by agreement to increase scale and specialization.

More central to the Panel’s mandate, the Economic Council made recommendations respecting the treatment of the efficiency gains a merger could generate. In particular, the Economic Council recommended that a specialized tribunal with sufficient expertise to hear and adjudicate complex economic issues deal with mergers (Canada 1969, 110). This tribunal would consider “whether the merger was likely to lessen competition to the detriment of final consumers, and whether there were likely to be any offsetting public benefits” (Canada 1969, 115–116). Among the factors the tribunal would consider was the following:

• … the likelihood that the merger would be productive of substantial “social savings”, i.e. savings in the use of resources (including resources used for such purposes as research and development), viewed from the standpoint of the Canadian economy as a whole (Canada 1969, 116).

The term social savings refers in this context to savings of the labour and capital required to produce a product and not to savings resulting from the merged firm being able, for example, to negotiate better prices from its suppliers due to increased bargaining power (Canada 1969, 117). The following example of social savings given by the Economic Council is instructive:

• … an example of a cost saving to a firm that was also a social saving would be the case of a company that had grown through acquisition to the point where it was able to order its raw materials by unit trainloads and so benefit from a lower freight rate. In this instance there would be a social saving arising from the fact, of which the lower freight rate was a reflection, that moving goods in unit trainloads requires lesser total inputs of capital and labour. Thus resources would be freed and the economy as a whole would gain (Canada 1969, 117).

The Economic Council also proposed that an officer of the then Department of Consumer and Corporate Affairs be given responsibility for assessing the likely effect of mergers on competition, taking into account factors such as market share, barriers to entry and remaining competition. The Economic Council left the question of social savings to the specialized tribunal, “which in many cases would find itself required to perform a balancing assessment between possible detrimental effects on competition and possible beneficial effects in the form of social savings” (Canada 1969, 117). These two recommendations resulted several years later in the creation of the function of the Director of Investigation and Research (now the Commissioner of Competition) and the Competition Tribunal.

The Economic Council’s report was the genesis of Canada’ merger efficiency defence and is widely cited today as providing the theoretical rationale for retaining this defence. It is important to observe, however, that the Economic Council itself recognized that competition policy had only limited potential to improve the efficiency of the Canadian economy.

• It is important to appreciate both the potentialities and the limitations of competition policy. How much it can accomplish in the way of improving economic efficiency is heavily conditioned by the setting of other economic policies and other aspects of the general economic environment. In Canada, the intensity of import competition in domestic markets is crucial. To a considerable degree, Canadian competition policy has represented an attempt to provide a partial substitute for the greater intensity of competition that would have prevailed in the absence of tariffs (Canada 1969, 24).
• Our concept of the role that can usefully be played by an effective and properly administered competition policy has laid great emphasis on efficiency. In doing this, we may have conveyed an exaggerated impression of the power of competition policy to promote efficiency. In fact, sole reliance on competition policy would not be nearly enough. Mention has been made in this Report of the great importance of other policies in promoting efficient resource use. Among such other policies are those relating to taxation, tariff, manpower, government purchasing, and the regulation of transport and other activities. In some of these policies, objectives other than efficiency may at times take a higher priority, and such objectives are by no means necessarily to be disparaged (Canada 1969, 197).

In the Panel’s view, the Economic Council was attempting to correct in the only way it could — by suggesting that efficiencies become part of a “balancing assessment” of mergers — the negative effects of tariff protection on the overall efficiency of the Canadian economy. The Panel believes that abolishing the tariffs would likely have been the Economic Council’s preferred option, but in 1969 this was unrealistic.

In the years that followed publication of the Economic Council’s report, successive governments introduced legislative bills to amend Canada’s competition law, the Combines Investigation Act, along the lines recommended by the Economic Council.¹ All of the bills that included provisions relating to merger review also included provisions that would have prohibited the responsible court or tribunal from blocking an anti-competitive merger when it would have generated substantial efficiency gains or resource savings for the Canadian economy.

It was 17 years before Parliament adopted a new legal framework for assessing mergers. Between 1969 and 1986, there were several other studies and reports that considered the problem of scale and specialization in the Canadian economy as well as the appropriate treatment of efficiencies in relation to mergers. The key reports are described below.

The authors of this report, L. A. Skeoch and B. C. McDonald, recommended that a competition board review mergers (Skeoch and McDonald 1976). If the board considered that real-cost economies would have offset the negative effects of a merger on competition, the merger should be allowed to proceed (Skeoch and McDonald 1976, 125). The authors considered that freer trade could make an important contribution to the process of economic transformation but that tariff reduction alone would neither help rationalize industry nor create more efficient plants. The authors also saw that investments by multinational firms, along with other measures, were important to promoting adaptability, flexibility and long-term change (Skeoch and McDonald 1976, 35–38).

This commission, known as the Bryce Commission, saw tariff barriers as a key source of scale inefficiency in Canada, writing in its report as follows.

• There are two important sources of scale inefficiency in Canada. First, to compete with imports and to satisfy consumer demand, Canadian firms in tariff-protected oligopolies produce a full line of products. Since each plant produces a much more diverse line of products than do similar-sized plants in the United States, Canadian plants employ less specialized equipment, have a higher proportion of set-up and downtime and experience fewer of the economies of scale that arise from “learning by doing”. Secondly, because of the degree of foreign ownership, the small size of firms, and high product diversity within firms, firms in Canada are unwilling or unable to undertake continuous research and development on products and processes, which is necessary to compete both at home and abroad. The cost disadvantage the low level of R&D imposes on Canadian-owned firms is often significant but hard to quantify. Many Canadian-owned firms do not manufacture products that compete directly with foreign products or products of foreign-owned subsidiaries. With low R&D, Canadian-owned firms must compete at the price sensitive end of the product line or purchase new products and processes on the imperfect and often costly market for licences. Many of these problems can be attributed to the presence of high Canadian tariff barriers, which have encouraged both scale-inefficient production and foreign ownership in many industries (Royal Commission 1978, 67).

While the Bryce Commission seemed to share many of the Economic Council’s views about tariffs, it had a very different perspective on merger review. The Bryce Commission recommended that corporate mergers “should not be subject to a review process or require official approval or consent before they are completed” (Royal Commission 1978, 160). Instead, the Bryce Commission believed that competition law should focus on anti-competitive conduct and should only provide ways to deal with the harmful effects of a merger when and if these effects occurred (Royal Commission 1978, 160). The Bryce Commission expressed the view that the regime proposed in then pending amendments to the Combines Investigation Act was overly complex. The Bryce Commission preferred a regime such as that in place in the United States at the time. There, merger reviews focused primarily on market share, without reference to offsetting benefits such as reduced costs or increased efficiency (Royal Commission 1978, 162).

The Macdonald Commission, as this Royal Commission was known, saw trade liberalization as key to balancing the objectives of encouraging efficiency and avoiding abuses of market power, writing in its report as follows.

• Competition policy in many market economies has come to reflect the thesis that the economic benefits of efficient large-scale production will often more than offset the economic costs associated with the increase in market power that is usually inherent in the development of economies of scale. In a small economy, increases in the scale of output are certain to produce net economic benefits when they occur in sectors that are subject to open competition. It is hard to over-emphasize the central role of freer trade as a force for increased domestic competition. In Canada, the number of combines cases in which removal of trade barriers would have eliminated alleged anti-competitive activities is legion (Royal Commission 1985, 220–221).

The Macdonald Commission also suggested that the role of the Director of Investigation and Research be recast to focus less on mergers, monopolies and vertical restraints and more on the fundamental conditions that determine the state of competition in Canada, such as trade barriers and regulatory restrictions on output (Royal Commission 1985, 226).

The Skeoch-McDonald report endorsed the notion that efficiencies should be taken into account as an offsetting benefit during merger review, but this view did not receive much of a hearing. In contrast, the much more influential Bryce and Macdonald commissions were both decidedly cool toward the idea that there should be active oversight of mergers by a competition law authority. Nevertheless, the competition law reform bills that were debated throughout the 1970s and 1980s all proposed that a framework for oversight of mergers by a competition law authority and included a similar model for the treatment of efficiencies, namely that mergers that generated sufficient efficiencies could be approved even when they substantially lessened competition. This model, which was clearly based on the Economic Council of Canada’s 1969 recommendations, was first introduced in Bill C-256 in 1971 and was picked up in each successive bill up to and including Bill C-91, which was enacted as the Competition Act in 1986.

The House of Commons committee that studied Bill C-91 heard testimony about the free trade initiative with the United States and the need for the Canadian economy to restructure to compete with foreign producers. Committee witnesses referred, in particular, to the Canada-U.S. productivity gap, the importance of mergers as a restructuring mechanism and the increasing foreign competition (Canada 1986). Thus, Parliament was clearly aware that changes were occurring in the Canadian economy. However, there is nothing on the public record to indicate that Parliament re-examined the Economic Council’s original rationale for including an efficiency defence at this time — that is, that mergers that created sufficient “social savings” would be good for the Canadian economy, despite their anti-competitive effects.

Accordingly, despite changes in the economy, the recommendations of the Economic Council were the single most important motivator behind the adoption of the efficiency defence in section 96 of the Competition Act. Nonetheless, elements of the Competition Act as passed in 1986 were at odds with recommendations of the Economic Council regarding the treatment of efficiencies. In particular, the Economic Council had proposed a competition law with the single purpose of “the improvement of economic efficiency and the avoidance of economic waste” (Canada 1969, 19). In contrast, the Competition Act came into effect with a purpose clause (section 1.1) that states that the Act serves a number of purposes, as follows.

• The purpose of this Act is to maintain and encourage competition in Canada in order to promote the efficiency and adaptability of the Canadian economy, in order to expand opportunities for Canadian participation in world markets while at the same time recognizing the role of foreign competition in Canada, in order to ensure that small and medium-sized enterprises have an equitable opportunity to participate in the Canadian economy and in order to provide consumers with competitive prices and product choices.

The inclusion of this “multi-purpose” clause has complicated the interpretation of the efficiency defence, as is discussed below.

The drafters of the efficiency defence in section 96 also went beyond the Economic Council’s recommendations by incorporating certain industrial policy elements. In particular, the Competition Tribunal is explicitly directed, when assessing the gains in efficiency generated by a merger, to consider whether those gains will enhance exports or lead to a significant substitution of Canadian domestic products for imported products.

Under the Competition Act, the Competition Tribunal has jurisdiction to order that mergers be restructured to address competition concerns.² Section 92(1) allows the Tribunal to make such an order when it finds that the merger “prevents or lessens, or is likely to prevent or lessen, competition substantially” in a relevant market. This is the Act’s anti-competitive threshold. Section 93 sets out a non-exhaustive list of factors that the Tribunal may consider when reviewing a merger, as follows.

• In determining, for the purpose of section 92, whether or not a merger or proposed merger prevents or lessens, or is likely to prevent or lessen, competition substantially, the Tribunal may have regard to the following factors:
   
• (a) the extent to which foreign products or foreign competitors provide or are likely to provide effective competition to the businesses of the parties to the merger or proposed merger;
   
• (b) whether the business, or a part of the business, of a party to the merger or proposed merger has failed or is likely to fail;
   
• (c) the extent to which acceptable substitutes for products supplied by the parties to the merger or proposed merger are or are likely to be available;
   
• (d) any barriers to entry into a market, including
  • (i) tariff and non-tariff barriers to international trade,
  • (ii) interprovincial barriers to trade, and
  • (iii) regulatory control over entry,
    and any effect of the merger or proposed merger on such barriers;
     
• (e) the extent to which effective competition remains or would remain in a market that is or would be affected by the merger or proposed merger;
   
• (f) any likelihood that the merger or proposed merger will or would result in the removal of a vigorous and effective competitor;
• (g) the nature and extent of change and innovation in a relevant market; and
   
• (h) any other factor that is relevant to competition in a market that is or would be affected by the merger or proposed merger.

Although the Competition Act only refers to merger review by the Competition Tribunal, in practice the Competition Bureau is primarily responsible for examining mergers. The Bureau reviews mergers using the factors set out in section 93, and has published detailed Merger Enforcement Guidelines that outline its enforcement approach.

The Bureau does not oppose the vast majority of the mergers it reviews. In a few cases, the Bureau’s decision not to oppose a merger is based on the parties’ agreement to divest certain assets or undertake other remedies. The Commissioner may apply to the Competition Tribunal for an order blocking a merger or requiring remedies when there is no agreement about any changes to the transaction that would remedy the anti-competitive effects. Frequently, the existence of this power is enough to prompt the parties to propose remedies, usually divestitures, aimed at addressing the Bureau’s concerns. Sometimes, parties will abandon their merger when a settlement with the Bureau appears unlikely, out of a desire to avoid protracted litigation before the Tribunal.

Merging parties sometimes insist on proceeding with their merger despite Bureau concerns. In these cases, the Commissioner of Competition is forced to apply to the Competition Tribunal for an order. In response, the parties present their own positions on the facts the Bureau relied on when reviewing the merger. In addition, the parties may raise defences, including the efficiency defence. The merging parties and the Commissioner of Competition may appeal a Competition Tribunal decision to the Federal Court of Appeal.

Efficiencies play two roles within this framework. First and foremost, they may form a defence to a merger that is found to substantially lessen or prevent competition: such a merger may proceed when the efficiencies are greater than and offset any anti-competitive effects. The defence involves a trade-off between the reduction of competition and the gains in efficiency. Second, efficiencies may be considered in the analysis of whether a merger substantially lessens competition. Both of these roles are discussed below.

Section 96 of the Competition Act sets out the efficiency defence as follows.

• (1) Exception where gains in efficiency – The Tribunal shall not make an order under section 92 if it finds that the merger or proposed merger in respect of which the application is made has brought about or is likely to bring about gains in efficiency that will be greater than, and will offset, the effects of any prevention or lessening of competition that will result or is likely to result from the merger or proposed merger and that the gains in efficiency would not likely be attained if the order were made.
   
• (2) Factors to be considered – In considering whether a merger or proposed merger is likely to bring about gains in efficiency described in subsection (1), the Tribunal shall consider whether such gains will result in
  (a) a significant increase in the real value of exports; or
  (b) a significant substitution of domestic products for imported products.
   
• (3) Restriction – For the purposes of this section, the Tribunal shall not find that a merger or proposed merger has brought about or is likely to bring about gains in efficiency by reason only of a redistribution of income between two or more persons.

The efficiency defence only comes into play when a merger is found to prevent or substantially lessen competition, or would be likely to do so. When a merger meets the requirements of section 96, it is allowed to proceed without divestitures or other remedies.

The efficiency gains must be greater than and offset the effects of any lessening or prevention of competition, but Parliament failed to dictate precisely how this trade-off is to occur. This failure was the object of some discussion in the hearings of the House of Commons committee that studied Bill C-91, which became the Competition Act in 1986. One witness testified as follows.

• … there is an inherent and unavoidable value judgment that the tribunal must make in dealing with the proposed section 68 [now section 96]. The sad part is that Parliament has given no guidance to the tribunal as to its priorities, as to the weights to be applied to the lessening of competition and gains in efficiency (Canada 1986, 3:7).

The nature and precise mechanics of the trade-off were therefore left to the Competition Tribunal and the courts.

Efficiency considered during analysis of merger

Under section 93, the Tribunal (and at first instance the Bureau) may consider any and all relevant evidence when assessing the impact of a merger on competition. Although section 93 does not actually include efficiencies as a factor, the list is non-exhaustive, due to paragraph 93(h). This paragraph explicitly allows the Bureau and the Tribunal to consider “any other factor that is relevant to competition in a market that is or would be affected by the merger or proposed merger.” As a result, there may be room for the Bureau and the Tribunal to consider efficiencies in their analysis, to the extent that they are relevant to competition in the market in question.

In addition, efficiency may be implicit in some of the listed factors. For example, analysis of a merger based on paragraph 93(g), which refers to “the nature and extent of change and innovation in a relevant market,” would include assessment of dynamic efficiency considerations.

Despite this, the Competition Tribunal cast some doubt on the Bureau’s jurisdiction to review efficiencies under sections 92 and 93 in its second (redetermination) decision in the Superior Propane case, as follows.

• It is plainly Parliament’s intent that, in merger review, efficiencies are to be considered only under section 96 and not under section 92. As a result, the consideration of efficiency gains is not to be tied into the analysis of competitive effects of the merger. Section 96 is worded accordingly by requiring that gains in efficiency be “greater than and offset” the effects of lessening or prevention of competition, rather than prevent those effects from occurring. Accordingly, “cleansing” of those effects is not required under the Act and, indeed, effects of lessening or prevention of competition may remain even when the test under section 96 is met (para. 137).

This statement was not discussed in the subsequent appeal to the Federal Court of Appeal.

Only 35 of the more than 4000 mergers the Competition Bureau has reviewed since 1986 have come before the Competition Tribunal. Of these, only a handful have been substantively litigated; the vast majority resulted in consent orders or agreements, which do not involve consideration of defences or other issues). The first case to feature an efficiency defence was Hillsdown (1992) but the defence was moot, since the Tribunal found that the merger did not substantially lessen or prevent competition. The defence has also been mentioned (but not applied) in a small number of other Tribunal cases.³

To date, the Tribunal has only cleared one merger based on the efficiency defence — the Superior Propane-ICG Propane merger.

In its initial decision in this case, the Competition Tribunal made a number of findings.

• The merger of Superior Propane Inc. and ICG Propane Inc., Canada’s two leading suppliers of propane gas, substantially lessened competition in 66 local markets across Canada.
   
• The market share of the merged company would be close to that of a monopoly — more than 95 percent — in 16 of these markets.
   
• The merger would likely result in an average price increase for retail propane of at least eight percent.
   
• The merger would substantially lessen competition in the market for coordination services for national account customers and substantially prevent competition in Atlantic Canada (paras. 252, 253, 261).

The Tribunal nonetheless rejected the Commissioner’s post-closing challenge to the merger, basing its decision on the efficiency defence. The Tribunal weighed the efficiency gains against the loss of allocative efficiency (or deadweight loss) — that is, the loss of resources to the economy as a whole — and found that these gains were greater than and offset the negative effects of the merger on competition. The Commissioner appealed the d ecision to the Federal Court of Appeal.

On appeal, the key issue was the nature of the trade-off between efficiencies and anti-competitive effects. The Court found that the Tribunal had made a legal error when it used what is known as the total surplus standard to assess the effects of the merger (paras. 73 ff). Using this standard, the Tribunal only considered the loss of allocative efficiency (or deadweight loss), not the amount of wealth likely to be transferred from consumers to producers when the merged firm raised prices. The Court rejected this approach (paras. 73, 90) and found that the Tribunal must consider all the anti-competitive effects of a merger, including all or part of the wealth transfer, in light of the Competition Act’s purpose clause (section 1.1), commenting as follows.

• In spite of the existence of the multiple and ultimately inconsistent objectives set out in s. 1.1, in certain instances the Act clearly prefers one objective over another. Thus, s. 96 gives primacy to the statutory objective of economic efficiency, because it provides that, if efficiency gains exceed, and offset, the effects of an anti-competitive merger, the merger must be permitted to proceed, even though it would otherwise be prohibited by s. 92. In this sense, the Tribunal was correct to state that s. 96 gives paramountcy to the statutory objective of economic efficiency.
• However, it does not follow from this that the only effects to be weighted against efficiency gains are limited to the potential losses to the economy as a whole. Indeed, in the same Parliamentary speech referred to above the Minister indicated [reference omitted] that the question posed to the Tribunal is:
  • Would a particular merger result in efficiency gains which would offset any negative effects on competition? [emphasis added by the Court]
     
• Thus, although s. 96 requires the approval of an anti-competitive merger where the efficiencies generated are greater than, and offset, its anti-competitive effects, the ultimate preference for the objective of efficiency in no way restricts the countervailing “effects” to dead weight loss. Instead, the word “effects”, should be interpreted to include all the anti-competitive effects to which a merger found to fall within s. 92 in fact gives rise, having regard to all of the statutory purposes set out in s. 1.1 (paras. 90–92).

The Court said that it would “not prescribe the ‘correct’ standard for determining the extent of the anticompetitive effects of a merger” (para. 139). Instead, it suggested that an approach known as the balancing weights standard “met the broad requirements” of the Court’s decision, although it would require considerable elaboration and refinement in particular cases (paras. 139–141).

The balancing weights standard requires the Competition Tribunal to consider as part of the trade-off of efficiencies and anti-competitive effects the consequences of the redistribution of wealth, in particular, the “socially adverse” portion of this redistribution. This must be weighed, along with other effects (including the loss of allocative efficiency or deadweight loss) against the efficiency gains. The question of what is socially adverse depends on the facts of a particular case. The relative weights to be attached to the efficiencies and the effects may also vary from case to case.

When the Tribunal considered the Superior Propane case again following the appeal, it found that the efficiency gains were greater than and offset the anti-competitive effects of the merger, this time using the balancing weights standard. In coming to this decision, the Tribunal considered evidence about the amount of the wealth transfer in relation to the income of propane consumers as well as about the essential and non-essential uses of propane. The Federal Court of Appeal dismissed the Commissioner’s appeal of the Tribunal’s second (redetermination) decision.

The end result of the Superior Propane case was that the efficiency defence was used to justify a merger that created a local monopoly in numerous markets and that substantially lessened and prevented competition in many others. The Panel does not think that the Economic Council had the creation of monopolies in mind when it advocated a defence in competition law based on “social savings.”

Moreover, it has been argued that as a result of the precedent set in the Superior Propane case, and in particular the cumbersome methodology for weighing efficiency gains against anti-competitive effects approved by the Federal Court of Appeal, the efficiency defence may be less accessible today than it was when it was first enacted. In particular, a number of the business representatives and advisors who participated in the consultations the Competition Bureau launched in September 2004 have suggested that the balancing weights standard is complex and difficult to apply.⁴ It also appears from the report on the Bureau’s international round table that the enforcement authorities in other jurisdictions consider that using the balancing weights standard results in merging parties who are making an efficiency argument being unable to predict the outcome of their transaction (Canada 2005, 17). Concerns were also raised at the round table about the political ramifications of valuing the effects of a merger on various types of customers differently (Canada 2005, 17).

The efficiency defence is generally regarded as being a matter for the Competition Tribunal. However, the Competition Bureau’s Merger Enforcement Guidelines (both the 1991 and 2004 versions) discuss section 96 and encourage merging parties to bring their efficiencies claims to the Bureau at an early stage of the transaction. As such, it appears that the Bureau is willing to consider the strength of a possible efficiency defence when determining whether to devote resources to a merger challenge before the Competition Tribunal. Nonetheless, there are varying perceptions of the Bureau’s willingness to consider efficiency claims in detail. In addition, the Bureau’s practice in this regard seems to have changed over time.

The Bureau’s merger review decisions are generally treated as confidential and are not routinely published; thus, it is not possible to determine with certainty whether, or the extent to which, the Bureau takes efficiencies into account (either as a defence or a factor). News releases the Bureau issued in the late 1980s refer to efficiency gains being as an important consideration in the Bureau’s decision not to challenge a few mergers.⁵ However, some of the participants in the recent consultations on efficiencies expressed the view that the Bureau does not regularly review efficiencies nor do merging parties raise them (Intersol 2005, 7, 8, 9). For example, one commentator, a former senior enforcement official at the Competition Bureau, stated the following.

• First, the efficiency defence has been applied only once in over 4,000 mergers reviewed since 1986. It has rarely played a role in the decisions of the Competition Bureau. Where it has carried some weight has been in cases where there were borderline competition problems and where efficiencies were significant. It has clearly not worked in the way the supporters of the defence intended (Goodmans 2004, 2).

The Bureau does take efficiency claims into account when assessing the motives for a merger, and efficiencies may be one of a number of factors the Bureau considers when deciding not to challenge a merger in a close case. However, it also appears that merging parties do not frequently present detailed efficiency arguments.

Indeed, there appears to be a strong disincentive for parties to vigorously present their efficiency claims to the Competition Bureau. In particular, relying on an efficiency defence may be viewed as an implicit or explicit admission that a merger substantially lessens competition. As a result, parties are only likely to make a strong efficiency defence argument when they are willing to litigate the matter before the Tribunal. The Panel’s impression is that the business appetite for merger litigation is small, given the costs involved and the time-sensitive nature of many mergers. As a result, the Panel understands why efficiency defence arguments are rarely made to the Competition Bureau.

While the Panel cannot draw definitive conclusions about the Competition Bureau’s treatment of efficiencies in cases that did not reach the Competition Tribunal, the sense of Panel members is that efficiencies (as either a factor or a defence) have not been a regular consideration in the Bureau’s merger review decisions.

As will be shown in Chapter 3, there is evidence that mergers have contributed to improvements in the efficiency of the Canadian economy in recent decades. During the same period, the Competition Bureau has allowed the vast majority of mergers to proceed without opposition.

In addition, the track records of the Competition Tribunal and Competition Bureau show that they tolerate greater post-merger market share and market concentration than do competition law agencies in some other jurisdictions, most notably the United States. Academic commentators have observed that when relatively high post-merger shares and concentration levels are tolerated, efficiency-enhancing mergers are allowed to proceed without the parties having to explicitly prove that the efficiencies would occur (Gal 2000, 520–521; Bork 1993, 221–222). Similar observations were made during the Bureau’s recent consultations on efficiencies.⁶

From its review of the history and current treatment of efficiencies by the Competition Tribunal and Bureau, the Panel concludes that while efficiencies have not been entirely ignored — and they may be implicitly built into the market share thresholds the Bureau and Tribunal use — they have not been a regular or explicit consideration in merger review either. At the same time, given the large number of mergers that have proceeded without opposition since 1986, there is no clear evidence that the Act impedes efficiency-enhancing mergers.

When Bill C-91 (which became the Competition Act) was debated in 1985–1986, there were concerns that the efficiency defence might turn out to be a loophole for anti-competitive mergers.⁷ History shows that these concerns were unwarranted. In fact, the efficiency defence has had very little public policy relevance. Certainly it has not lived up to the hopes and expectations of the members of the Economic Council of Canada. They saw their social savings “balancing assessment” as a means of ensuring that merger review promoted economic efficiency, which they thought should be the primary purpose of Canadian competition law. Indeed, structuring efficiencies as a defence may even have detracted from the explicit consideration of efficiencies.

The inclusion of an efficiency defence in the Competition Act was largely motivated by the recommendations of the Economic Council in 1969. These recommendations were tied to the state of the Canadian economy at that time. In light of the limited consideration of efficiencies in merger review, it is important also to review how the Canadian economy has evolved since those recommendations were made. This is the subject of Chapter 3.

1. Bill C-256 (1971), Bill C-42 (1977), Bill C-13 (1977), Bill C-29 (1984) and Bill C-91 (1985), which became the Competition Act in 1986.

2. A registered consent agreement has the same effect as an order of the Tribunal. Under section 105 of the Competition Act, the Commissioner and the merging parties may sign a consent agreement. Once signed, the consent agreement may be filed with the Tribunal for immediate registration.

3. In addition to the Hillsdown and Superior Propane cases, summary references to and/or summary discussion of the section 96 efficiency defence are found in the following four Tribunal cases: Canada (Director of Investigation and Research) v. Air Canada (the Tribunal observed that section 96 had to be interpreted in light of section 1.1); Canada (Director of Investigation and Research) v. Imperial Oil Limited (the Tribunal commented on the quantum of claimed efficiency gains); Director of Investigation and Research v. Canadian Pacific Ltd. (request for particulars relating to efficiencies); and Commissioner of Competition v. Canadian Waste Services Holdings Inc. (efficiency arguments rejected as speculative at the remedy stage).

4. These views are summarized in Intersol Group (2005, 7, 8, 9). It is interesting to note that even some of those who support retaining the efficiency defence expressed the view that the total surplus standard for weighing efficiencies against anti-competitive effects should be reinstated, since it is a clear standard that does not concern itself with wealth distribution (Intersol Group 2005, 5).

5. See the following: “DIR announces decision on InterBake acquisition” (February 1, 1988, NR-88-9); “DIR accepts revised undertakings from Trailmobile” (July 11, 1988, NR-10124); “DIR announces decision on Dofasco acquisition of Algoma” (September 30, 1988, NR-10138); “DIR announces decision on Wolverine acquisition of Noranda Metal Industries” (November 2, 1988, NR-11044); “DIR decision on the acquisition of the assets of Domglas Inc. by Consumers Packaging Inc.” (April 25, 1989, NR-10188); “Proposed merger of the brewing operations of Molson and Carling O’Keefe” (July 6, 1989, NR-10256).

6. For example, the former Bureau enforcement official who observed that the efficiency defence has rarely played a role in the decisions of the Competition Bureau, also wrote:

• …Canada has had a much more permissive approach to mergers than the United States. By setting a higher tolerance for domestic concentration and greater reliance on import competition, the Competition Bureau has provided scope for efficiency-enhancing mergers as a matter of practice, without the need for an explicit defence (Goodmans 2004, 2).

7. See, for example, the issues discussed in the context of a motion by a member of the House of Commons committee on Bill C-91 to remove the efficiency defence from the bill, as recorded in Canada (1986, 11:38–42).