Treatment of Efficiencies in the Competition Act - Part 1

Part 1: Current Treatment of Efficiencies

Canada

One of the explicit goals of the Competition Act is to promote the efficiency of the Canadian economy. This goal, among others, is expressed in section 1.1 of the Act, as follows:

1.1 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 Competition Act makes three further references to efficiency.

• Section 82 refers to the general notion of efficiency as it relates to the implementation of foreign judgments in competition matters.
• Section 86 refers to the specific notion of efficiency gains as it relates to the registration of specialization agreements.
• Section 96 refers to efficiency gains generated by a merger (see Appendix A for background information on efficiencies as they relate to mergers).

Each of these provisions is described in more detail below.

While sections 1.1, 82, 86 and 96 contain the only explicit references in the Act to efficiency, the case law of the Competition Tribunal suggests that there may be scope to consider efficiencies in the context of several of the other Act's reviewable practices provisions. These practices are discussed in Appendix C.

Section 82: Foreign Judgments

Section 82 gives the Competition Tribunal the power to block or limit the implementation of a foreign judgment, decree, order or process in Canada that would affect Canadian trade, industry, commerce or competition in certain negative ways. In particular, sub-paragraph 82(b)(ii) allows the ribunal to block or limit a foreign judgment, decree, order or process when implementing it would "adversely affect the efficiency of trade or industry in Canada without bringing about or increasing in Canada competition that would restore or improve that efficiency."

The Tribunal has never issued an order under section 82.

Section 86: Specialization Agreements

Section 86 permits parties to register specialization agreements⁶ that generate gains in efficiency, as follows.

86. (1) Where, on application by any person, and after affording the Commissioner a reasonable opportunity to be heard, the Tribunal finds that an agreement that the person who has made the application has entered into or is about to enter into is a specialization agreement and that

(a) the implementation of the agreement 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 agreement and the gains in efficiency would not likely be attained if the agreement were not implemented, and

(b) no attempt has been made by the persons who have entered or are about to enter into the agreement to coerce any person to become a party to the agreement,

the Tribunal may, subject to subsection (4), make an order directing that the agreement be registered for a period specified in the order.

(2) In considering whether an agreement is likely to bring about gains in efficiency described in paragraph (1)(a), the Tribunal shall consider whether those gains will result in

(a) a significant increase in the real value of exports; or

(b) a significant substitution of domestic articles or services for imported articles or services.

(3) For the purposes of paragraph (1)(a), the Tribunal shall not find that an agreement is likely to bring about gains in efficiency by reason only of a redistribution of income between two or more persons.

(4) Where, on an application under subsection (1), the Tribunal finds that an agreement meets the conditions prescribed by paragraphs (a) and (b) of that subsection but also finds that, as a result of the implementation of the agreement, there is not likely to be substantial competition remaining in the market or markets to which the agreement relates, the Tribunal may provide, in an order made under subsection (1), that the order shall take effect only if, within a reasonable period of time specified in the order, there has occurred any of the following events, specified in the order:

(a) the divestiture of particular assets, specified in the order;

(b) a wider licensing of patents or registered integrated circuit topographies;

(c) a reduction in tariffs;

(d) the making of an order in council under section 23 of the Financial Administration Act effecting a remission or remissions specified in the order of the Tribunal of any customs duties on an article that is a subject of the agreement; or

(e) the removal of import quotas or import licensing requirements.

Section 90 says that the legal effect of registering a specialization agreement is to shield the agreement from scrutiny under section 45 (conspiracy) and section 77 (exclusive dealing).

To date, no applications for registration of a specialization agreement have been filed with the Tribunal. There are several possible explanations for this:

• "specialization agreements" is a narrow category of agreements, only including those in which each party makes a reciprocal commitment to discontinue producing product A in favour of product B;
• parties may be reluctant to go before the Tribunal;
• a registered agreement may nonetheless raise concerns under foreign laws (and public registration may serve to give foreign authorities notice of the agreement);
• the general standards under the conspiracy and merger provisions of the Competition Act provide sufficient scope for efficient co-operative arrangements.⁷

Section 96: Merger Efficiency Exception

Section 96 creates an exception to section 92.⁸ Under section 92, the Competition Tribunal may block a merger, order relief in connection with a completed merger or order that it be dissolved when it finds that the merger prevents or substantially lessens competition, or is likely to. Section 96 prohibits the Tribunal from blocking or making an order when the efficiency gains the merger is expected to generate are greater than, and offset, its anti-competitive effects.

Section 96 reads as follows:

96 . (1) 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) 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) 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.

Origins of Sub-section 96(1)

Economic Council of Canada Report

The incorporation of an efficiencies-based exception into Canadian merger law was first proposed by the Economic Council of Canada in its 1969 Interim Report on Competition Policy.⁹ Prepared at a time when Canada's Combines Investigation Act was purely criminal in nature and was aimed at "protecting the public interest in free competition," the Economic Council report advocated a new approach in which "competition should not itself be the objective but rather the most important single means by which efficiency is achieved" (p. 9, emphasis in original).

Consistent with the move from a criminal public interest focus to a focus on economic goals, the Economic Council recommended that mergers and certain other trade practices be decriminalized and dealt with as civil law matters. It further recommended that a specialized tribunal with economic expertise be created to examine these matters. In the merger sphere, the tribunal would determine whether a merger was likely to "lessen competition to the detriment of final consumers, and whether there were likely to be any offsetting public benefits" (pp. 115-116). Among the factors that the tribunal would be required to consider in its assessment 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 (p. 116).

The Economic Council proposed that an officer of the Department of Consumer and Corporate Affairs be charged with assessing the likely effect of a merger on competition, taking into account factors such as market share, barriers to entry and remaining competition. At the same time, the Economic Council recommended leaving the consideration of the question of any social savings to the 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 (p. 117)." The Economic Council further emphasized that "social savings" referred to savings of the real resources (i.e. labour and capital) required to produce and transport a product, and not from the fact that the merged firm would, for example, be able to negotiate better prices from its suppliers because of its greater bargaining power (p. 117).

The Economic Council also observed that the Canadian economy in the 1960s featured tariff barriers that largely sheltered the domestic market from foreign competition. Firms therefore tended to supply a wide range of products, which "too often result[ed] in inadequate specialization and short production runs (p. 75)." The Economic Council recognized that there were opportunities for Canadian industry to achieve cost reductions based on longer production runs, and specifically recommended that parties be permitted to enter into specialization agreements "temporary agreements between firms to restructure production and distribution with a view to increasing the scale and specialization of Canadian output (pp. 118-119). Parties to specialization agreements would be entitled to register them if they were able to satisfy the tribunal that their agreement would allow them to achieve longer production runs and lower unit costs, and that a substantial part of any cost savings realized was likely to be passed on to Canadian consumers (p. 119). Registered specialization agreements would not be subject to the criminal conspiracy provisions.

The Economic Council also recommended a similar tribunal approval procedure for export agreements, which it defined as agreements between firms to form consortia or other selling groups for the purpose of improving the competitive position of Canadian goods in foreign markets (pp. 119-120). At the time, there were concerns that Canadian tariffs had rendered Canadian industries inefficient. In particular, Eastman and Stykolt (1967) argued that a weak competition law, together with tariff protection, had allowed Canadian firms to raise prices to a level just below the price at which the tariff would be applied, and thereby extract monopoly profits. Such prices encouraged inefficient firms to enter the market and caused them and others to operate at an inefficiently small scale.¹⁰ Eastman and Stykolt recommended that the Canadian tariff be removed, plants of sub-optimal size be encouraged to merge and a stricter and more effective competition law be adopted.

In the years following the release of the Economic Council's report, a series of Government Bills were introduced to amend the Combines Investigation Act, either partially or completely, along the lines suggested by the Economic Council. Each of these Bills included proposals that would replace the criminal prohibition against mergers with a civil review process that would include consideration of efficiency gains. However, the language of these proposals differed in several important respects from the efficiency exception that was ultimately embodied in the Competition Act in 1986. These Bills also included proposals relating to the registration and/or approval of specialization agreements.

Bill C-256 (1971)

The first effort to amend the Combines Investigation Act along the lines proposed by the Economic Council of Canada was Bill C-256 in June 1971.¹¹ Bill C-256 proposed to make mergers a civil reviewable matter to be adjudicated by a new tribunal. The tribunal could prohibit or dissolve a merger if it "has resulted, is resulting or is likely to result in significantly less competition than would have existed or would be likely to exist [...]" in the absence of the merger. One of the efficiency-related provisions provided that "[a] merger shall not be prohibited or dissolved by order of the Tribunal if it is satisfied" with the following:

(b) that

(i) the merger has led, is leading or is likely to lead to a significant improvement of efficiency over that which any of the parties to the merger could have achieved by commencing or continuing to carry on business independently or in any other manner that would have led to less restriction of competition than resulted or would be likely to result from the merger, and

(ii) a substantial part of the benefits derived or to be derived from such improvement of efficiency are being or are likely to be passed on, through conditions imposed by the market or by order of the Tribunal, to the public within a reasonable time in the form of lower prices or better products.

The second provision of Bill C-256 regarding efficiency gains outlined the factors to be considered by the tribunal when assessing efficiency gains, as follows:

(5) In determining whether a merger has resulted, is resulting or is likely to result in a significant improvement of efficiency over that which any of the parties to the merger could have achieved by commencing or continuing to carry on business independently or in any other manner that would have led to less restriction of competition than resulted or would be likely to result from the merger, the Tribunal shall take into consideration the following factors:

(a) the economics of the particular market or industry, including the minimum efficient size of plants and firms therein,

(b) the size of each of the parties involved in the merger and of any resultant firm, relative to the minimum efficient size of firms in the particular market or industry,

(c) any likelihood that the merger will bring about economies of scale,

(d) any likelihood that the merger will facilitate the meeting of import competition,

(e) any likelihood that the merger will facilitate entry into or expansion of export trade, and

(f) any likely effect of the merger on research and development,

and any other factors that the Tribunal considers to be relevant.

Bill C-256 also contained provisions relating to the registration of specialization agreements with the tribunal, and the tribunal's approval of them. Registered specialization agreements could not be challenged under the proposed conspiracy and exclusive dealing provisions.

In the face of significant opposition from business, the Government withdrew Bill C-256 and announced in July 1973 that it would split efforts to reform Canada's competition regime into two stages. The Stage I amendments, which extended the reach of the Combines Investigation Act to service industries, extended the jurisdiction of the Restrictive Trade Practices Commission to certain civil reviewable practices, expanded the price maintenance and misleading advertising offences, and dealt with various other matters, became law on January 1, 1976.¹² Monopolization/abuse of dominant position, mergers and specialization agreements (and the notion of efficiency gains) fell under Stage II, and became the object of further study and discussion.

Dynamic Change and Accountability in a Canadian Market Economy

In the spring of 1975, the Minister of Consumer and Corporate Affairs asked an independent committee of five individuals from the private sector to make proposals relating to the content of the Stage II amendments. Their March 1976 report, entitled Dynamic Change and Accountability in a Canadian Market Economy,¹³ was one of the most influential studies published during the consultations on the Stage II amendments. The report was drafted at a time when concerns about inflation dominated the Canadian and world economies, and when suspicions were being raised that inflation was being driven by groups with economic power who were engaged in a contest to achieve the greatest price increases.¹⁴ The report cited Organisation for Economic Co-operation and Development recommendations that action be taken to ensure that firms be limited to the size required "for exploiting the real economies of large scale operations."

The authors of the Dynamic Change and Accountability in a Canadian Market Economy concluded that a mixed economic system founded predominantly on private ownership, and that was flexible and promotes dynamic change, would be likely to satisfy more people than any other system in the long run. Secondarily, the report encouraged real-cost production and distribution economies and discouraged restraints that result from mere market power rather than from superior economic performance. On the issue of mergers, the report observed that Canada might benefit from more mergers that increased the ability of firms to improve manufacturing and distribution and to take advantage of the risk and promise of innovation. Further, the authors said, in relation to merger efficiencies, that growth by merger was desirable only when no significant artificial market restraints resulted or, when they did, to the extent that real-cost economies might be expected to offset them.¹⁵

Bill C-42 (1977)

Bill C-42 was the first attempt to implement the Stage II amendments.¹⁶ Under these proposals, mergers were to be a civil matter adjudicated by a board. The board was empowered to dissolve a merger or require a divestiture of assets when a merger "lessens or is likely to lessen,

substantially, actual or potential competition [...]" and when the combined market share of the merging parties exceeded 20 percent of any market. However, the Board could not make such an order in the following circumstances:

[when] it is satisfied by the parties to a merger or proposed merger to which this section applies that the merger or proposed merger has brought about or that there is a high probability that it will bring about substantial gains in efficiency, by way of savings of resources for the Canadian economy that are not reasonably attainable by means other than the merger (section 31.71(5)).

The efficiency gains exception proposed in these amendments did not apply when a merger would or would likely "result in virtually complete control by the parties to the merger or proposed merger in respect of a product in a market." When such control existed, the board would have been required to block the merger. However, a merger that would result in virtually complete control of a market could proceed on the condition customs duties or other trade barriers be removed, when such removal would prevent competition from being substantially lessened.

Bill C-42 also contained detailed provisions relating to Competition Board approval of specialization agreements that generated substantial gains in efficiency.

Within weeks of its introduction in the House of Commons, Bill C-42 was withdrawn, although the subject matter was referred to the House of Commons Standing Committee on Finance, Trade and Economic Affairs. The Standing Senate Committee on Banking, Trade and Commerce also prepared an interim report on the Bill, and both committees held public hearings and received representations from interested parties. The Senate Committee was decidedly negative about the Bill, writing that it was "the cornerstone of a comprehensively government-planned economy" and that "there is hardly a provision in the Bill which does not warrant serious reconsideration."¹⁷ The House Committee was not as overtly negative, but did make 94 specific recommendations for amending the Bill and/or relating to process matters. One of these recommendations was that the list of factors the board would consider when determining whether a merger lessened actual or potential competition be expanded to include the following:

a new factor giving the Board discretion to take into account the nature, extent and timing of the transmission of the benefits of any efficiency gains to society.¹⁸

Bill C-13 (1977)

Bill C-13, introduced in the House of Commons in November 1977, also proposed that mergers become a civil matter adjudicated by a board.¹⁹ The test for challenging a merger was identical to that articulated in Bill C-42.

The language relating to efficiency gains was slightly different than the language in Bill C-42. The relevant section read as follows:

(5) The Board shall not make an order under subsection (3) where, after hearing the parties to a merger or proposed merger to which this section applies, it finds that the merger or proposed merger has brought about or that there is a clear probability that it will bring about substantial gains in efficiency that save resources for the Canadian economy.

Bill C-13 prohibited the efficiency gains section from being applied to justify a merger that would result in virtually complete control of a market, using language identical to that in the same provision in Bill C-42, and also included an exception relating to the removal of trade barriers. The Bill also contained provisions relating to the registration of specialization agreements, similar to the provisions in Bill C-42.

Bill C-13 faced opposition, since it was largely viewed as a "watered down" and rearranged version of Bill C-42.²⁰

Bill C-29 (1984)

Bill C-29 proposed that mergers be dealt with as a civil law matter in the ordinary courts (rather than by a specialized board or tribunal).²¹ The core test for determining whether a court would make an order against a merger was whether the merger "prevents or lessens, or is likely to prevent or lessen, competition significantly." However, the court could not make an order against a merger or proposed merger in the following circumstances:

where it finds that the merger or proposed merger has brought about or is likely to bring about gains in efficiency that will result in a substantial real net saving of resources for the Canadian economy and that the gains in efficiency could not reasonably be expected to be attained if the order were made: section 31.73(c).²²

The Clause-by-Clause Analysis and the Background Information and Explanatory Notes published by the Minister of Consumer and Corporate Affairs in connection with Bill C-29 explained that the term efficiency gains in this section referred to real savings in costs to society rather than simply to pecuniary gains to a firm resulting from a redistribution of income.²³ The Clause-by-Clause Analysis further set out the following:

even where competition is likely to be significantly lessened, the merger could still be approved where, on balance, it is likely that the merger could give rise to a substantial real net saving of resources. This provision allows mergers where the gains in efficiency to the firm will result in resource savings to the economy that are substantially greater than the resource costs due to the lessening of competition.²⁴

Although this explanation of the efficiency exception referred to a requirement to weigh resource savings from efficiencies against resource costs due to a lessening of competition, Bill C-29 did not include a statutorily prescribed balancing test.

Bill C-29 contained detailed provisions relating to specialization agreements, which were to be subject to review and approval by the Restricted Trade Practices Commission. Of particular interest is one section, which read as follows:

31.95(3) In considering whether an agreement is likely to bring about gains in efficiency described in paragraph (2)(a), the Commission 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.

Also of interest in Bill C-29 was another section, which referred to efficiency in the context of the proposed abuse of dominant position provisions. No order against a firm for abuse of dominant position could be made when competition was substantially prevented or lessened "as a result of the superior economic efficiency of the person or persons against whom the order is sought" (sub-section 31.41(4)).

Bill C-29 died on the Order Paper in the summer of 1984, when a federal election was called.

Bill C-91 (introduced in 1985, enacted 1986)

Bill C-91²⁵ was ultimately passed into law and became the Competition Act, R.S.C. 1985, c. C-34, effective June 19, 1986. The language of the efficiencies exception currently contained in sub-sections 96(1)(2) and (3) is identical to that in the first reading version of Bill C-91.

Like the previous attempts to legislate in this area, Bill C-91 proposed that a merger that would otherwise be prohibited, dissolved or for which divestitures would be required, could proceed based on efficiency considerations. However, Bill C-91 went further than these previous Bills by adding a requirement that the gains be weighed against the "effects of any prevention or lessening of competition" resulting from the merger, and by specifying that the exception would apply only when these efficiency gains "are greater than, and will offset" these effects. The notion of balancing the efficiency gains against the effects was new in Bill C-91, and concerns were raised in the House of Commons Committee review of the bill that it failed to provide sufficient guidance on how to perform this balancing test, given that effects and efficiency gains are not directly comparable concepts.²⁶

Also, in contrast to the previous attempts to legislate in the area, the efficiencies exception in Bill C-91 did not include the following:

• any requirement that efficiencies be "passed on" to the public (as was required in Bill C-256);
• any conditional or absolute prohibition on using the efficiency gains exception to justify a merger that would lead to virtually complete control of a market (i.e. a merger to monopoly or near-monopoly; as in Bills C-42 and C-13); or
• an explicit requirement that efficiency gains generate "savings of resources" or "a substantial real net saving of resources" or "save resources" for the Canadian economy (as in Bills C-42, C-29 and C-13, respectively).

The language of sections 85 and 86 of the Competition Act relating to specialization agreements is also identical to the language proposed in Bill C-91 at first reading. The specialization agreement provisions paralleled the merger provisions by including the requirement that the gains in efficiency be greater than, and offset, the effects of any prevention or lessening of competition.

In the guide that accompanied the amendments, the Minister of Consumer and Corporate Affairs described the rationale for the merger efficiencies exception in the following terms:

The new merger law will also provide a defence in situations where the gains in efficiency that would result from the merger would more than offset the costs due to the lessening of competition. It is important for the performance of the economy that significant cost savings brought about by mergers, for example, through scale economies or other efficiencies, be allowed. Moreover, the Tribunal will be invited to consider whether the gains in efficiency result in increased exports or increased import substitution.²⁷

The guide described the purpose of the specialization agreement provisions as follows:

The Canadian domestic market is relatively small compared to our most important trading partners. Also, many Canadian industries are characterized by firms with short production runs of several different products. For these reasons, many Canadian enterprises have not been able to take advantage of potential economies of scale in production, distribution and marketing. Hence, efficiency gains could be possible, in certain industries, through greater specialization and longer production runs. Moreover, as the global economy becomes increasingly competitive and the Canadian economy becomes exposed more directly to international trade, the need to rationalize and restructure certain industries becomes even stronger. This could be achieved by a reciprocal arrangement whereby each party agrees to discontinue producing one or more articles.

A new provision for specialization agreements in the Competition Act should enhance the economic efficiency and international competitiveness of many Canadian industries. The provision will apply to services as well as articles. The new law will exempt specialization agreements from the conspiracy and exclusive dealing provisions, provided they are approved and registered by the Tribunal.²⁸

Origins of Sub-section 96(2)

Sub-section 96(2) traces its roots back to Bill C-256. Under the Bill, a new tribunal would have assessed whether a merger resulted in a "significant improvement of efficiency." In doing do, the tribunal would have been required to consider whether a merger would help firms meet import competition or encourage the entry into or expansion of export trade. The Bill also made meeting import competition a basis for approving a specialization agreement. In 1984, further proposed amendments to the Act (Bill C-29) would have required the Restrictive Trade Practices Commission to consider import substitution and export expansion when assessing the efficiency gains generated by a specialization agreement (but not a merger).

The requirement that efficiencies be assessed in light of their impact on the real value of exports may be best understood in light of the Economic Council's 1969 discussion of encouraging export agreements as a means to achieving longer Canadian production runs. In the 1986 House of Commons debates on Bill C-91, a member of the Government observed that sub-section 96(2) was linked to the international trade environment:

Canada is a trading nation. One job out of three depends on international trade. This is why when a merger would greatly improve efficiency, thereby increasing exports or substitutions to imports, the tribunal will have to authorize such a merger.²⁹

More recently, in its redetermination decision in the Superior Propane case, the Competition Tribunal observed that sub-section 96(2) was drafted in light of the pressures of growing international trade, and rejected the suggestion that sub-section 96(2) is intended to limit the application of sub-section 96(1) to situations involving imports and exports. In this regard, Justice Marc Nadon, wrote the following:

As I understand the legislative history, the 1986 amendments, including section 96, were motivated in large part by the pressures of growing international trade and investment on Canadian businesses and by the need to encourage them to restructure in order to be able to succeed in the more competitive environment that ultimately benefits Canadian consumers. However, this does not indicate to me that the efficiency defence in subsection 96(1) was limited to mergers where subsection 96(2) considerations were directly involved. Rather, Canadian firms that become more efficient through mergers that stimulate exports and reduce imports can be given special consideration.³⁰

Origins of Sub-section 96(3)

Section 96(3), which says that the Tribunal may not find that a merger results in efficiency gains based merely on the redistribution of income between two or more persons, also finds its origins in the 1969 Economic Council report. In particular, the Economic Council specified that the "social savings" resulting from any proposed merger were to be savings in terms of the real resources (the physical amounts of labour, capital, etc.) required to produce and transport a product, and the efficiency gains due merely to the fact that the merged firm would, for example, be able to negotiate better prices from its suppliers because of its greater bargaining power.

Precursors to sub-section 96(3) are found in Bill C-42 and Bill C-13, which specified that efficiency gains had to lead to resource savings for the Canadian economy (a mere income redistribution does not save any resources; it just shifts them around). Similar language was found in Bill C-29 , which referred to "gains in efficiency that will result in a substantial real net saving of resources for the Canadian economy." The Clause-by-Clause Analysis and the Background Information and Explanatory Notes published by the Minister of Consumer and Corporate Affairs in connection with Bill C-249 made it clear that the term efficiency gains in the Bill referred to real savings in costs to society rather than to pecuniary gains to a firm resulting from a redistribution of income.

In Bill C-91, the potentially difficult-to-interpret language from the predecessor Bills relating to "real net savings" was avoided in favour of a clear explanation in section 96(3) that a mere redistribution of income is not an efficiency gain.

Analytical Framework for Applying Section 96

The Competition Tribunal uses the following analytical framework to determine whether the section 96 exception applies to a merger that it considers will prevent or lessen competition within the meaning of section 92, or will be likely to.

• The Tribunal must assess (and quantify when possible) the effects of the prevention and lessening of competition, keeping in mind all the purposes set out in section 1.1 of the Competition Act, in accordance with the rulings of the Federal Court of Appeal in the Superior Propane case.
• The Tribunal must assess the nature, amount (when possible) and/or qualitative impact of any efficiency gains according to the following requirements and in light of the jurisprudence on these matters (in particular, the Hillsdown and Superior Propane cases; see below).

• Mere wealth transfers are not efficiency gains (sub-section 96(3)).
• Only gains that would not likely be attained if the Competition Tribunal blocked the merger or ordered remedies for its anticompetitive effects may properly be taken into account in the analysis (sub-section 96(1)).³¹
• When assessing the gains, the Tribunal must consider whether the gains result in increased import substitution or an increase in the real value of exports (sub-section 96(2)).
• The Tribunal must determine whether the gains in efficiency are greater than, and will offset, the "effects" of the prevention or lessening of competition, in accordance with the relevant jurisprudence.

The apparent simplicity of this framework belies the complexity of its application, which involves not only estimating and quantifying the efficiencies and effects of a proposed merger, but also determining any adverse consequences of any associated wealth transfer and the appropriate weight to be attached to the efficiencies and effects in light of these consequences. The enforcement approach outlined in the Competition Bureau's Merger Enforcement Guidelines and the relevant jurisprudence inform the assessment of efficiencies and effects, and are explained in detail below.

Merger Enforcement Guidelines

The Competition Bureau first published the Merger Enforcement Guidelines (MEGs) in 1991 as a comprehensive explanation of the Bureau's merger enforcement policy under the Competition Act.³² In 1998, the Bureau issued the Merger Enforcement Guidelines as Applied to a Bank Merger.

Part 5 of the MEGs set out the Competition Bureau's approach to assessing claimed efficiencies and to balancing efficiency gains against anti-competitive effects under section 96. Appendix II described the categories of efficiency gains the Bureau recognized (production efficiencies and dynamic efficiencies). However, the enforcement approach relied on the total surplus standard for balancing the claimed efficiency gains of a merger against the anti-competitive effects. Under this approach, the efficiency gains are only weighed against the anti-competitive effects that represent a loss to the economy as a whole, resulting from the diversion of resources to lower valued uses (in economic terms, the deadweight loss), and not against any wealth transfer from one party to another. A similar approach was articulated in the Merger Enforcement Guidelines as Applied to a Bank Merger. See Appendix A for more information on the total surplus standard.

During the course of the Superior Propane litigation, the then Commissioner of Competition stated that he would expand the standard described in the MEGs for assessing efficiencies. Furthermore, he announced after the first Court of Appeal judgment in the case that the efficiencies section of the MEGs would be revised to reflect the outcome of that case.³³

Revised MEGS, which reflect the refinement and evolution of the Bureau's practice in light of not only jurisprudence but also other legal and economic advancements since 1991, were published in September 2004, and revised Merger Enforcement Guidelines as Applied to a Bank Merger will be published shortly.

Part 8 of the MEGs outlines the new approach to balancing efficiency gains against anti-competitive effects, identifying three categories of efficiency gains (allocative, productive and dynamic)³⁴ that are considered when analyzing the efficiency gains and anti-competitive effects (including losses in efficiency). Paragraph 8.1 describes sub-section 96(1) as creating "a trade-off framework in which efficiency gains that are likely to be brought about by a merger are balanced against the anti-competitive effects that are likely to result."

Under the heading "Gains in Efficiencies," the MEGs discuss the general requirement that the efficiency gains be those that "would not likely be attained if the order (before the Tribunal) were made," and review the need for the claimed efficiencies to be verifiable and the scope of sub-section 96(2). This is followed by a detailed review of the categories of cost savings considered in the assessment of productive efficiencies. The MEGs also discuss dynamic efficiencies, which are generally assessed from a qualitative perspective, noting, in particular, that attaining dynamic efficiency is crucial to both the general evolution of competition and the international competitiveness of Canadian industries. The MEGs note that costs incurred to achieve efficiencies must be deducted from the total value of efficiency gains. Finally, it is noted that certain types of efficiency claims do not qualify as gains, in particular, the following:

• efficiencies that would likely be attained even if the Tribunal made an order about the merger;
• savings resulting from a reduction in output, service, quality or choice; and
• a mere redistribution of income (sub-section 96(3)).

Under the heading "Anti-Competitive Effects," the MEGs refer to the Superior Propane case and note that the Bureau must consider all of the anti-competitive effects of a merger in light of all of the purposes of the Competition Act. A non-exhaustive list of the price and non-price effects the Bureau considers is then set out, including the loss of allocative efficiency (deadweight loss) and the effects of any wealth transfer. The extent to which the wealth transfer is part of the analysis is examined case-by-case. The non-price effects the Bureau considers include reductions in service, quality and choice, loss of productive efficiency and loss of dynamic efficiency.

Under the heading "The Trade-Off," the MEGs note that the efficiency exception only applies when the efficiency gains are greater than (i.e. are more extensive or of a larger magnitude) and offset (i.e. compensate for) the anti-competitive effects. The Bureau takes both quantitative and qualitative aspects of the efficiency gains and anti-competitive effects into account. In terms of the mechanics of the trade-off itself, paragraph 8.34 reads as follows:

There is currently no statutory basis for assuming any fixed set of weighting between redistributive effects, deadweight losses and efficiency gains. Such weighting depends on the facts of a particular case. Because all gains must be weighed against all effects, the exercise of judgment is required when combining measured gains (effects) with qualitative gains (effects) for the purpose of performing the trade-off. [footnotes omitted]

Finally, it should be noted that throughout the MEGs, there are references to the types of evidence and submissions required to support efficiencies claims.

Case Law

To date, the Competition Tribunal has referred to efficiencies in six merger cases,³⁵ but has only given detailed consideration to the merger efficiencies exception in two: Canada (Director of Investigation and Research) v. Hillsdown Holdings (Canada) Ltd. and The Commissioner of Competition v. Superior Propane Inc. The Superior Propane case was appealed to the Federal Court of Appeal and it is the only case in which the court has been called upon to interpret section 96.

Hillsdown (1992)

In Hillsdown,³⁶ the judicial member of the Competition Tribunal, Madame Justice Barbara J. Reed, made a number of comments on the legal standard for balancing efficiency gains against the detrimental effects of a merger. These comments were peripheral to the Tribunal's decision and, therefore, not legally binding. Nonetheless, they are of interest in light of the subsequent decisions and judgments in the Superior Propane case. Specifically, Justice Reed took issue with the position of the Director of Investigation and Research (now the Commissioner of Competition) and the merging parties that efficiency gains should only be balanced against the deadweight loss or allocative inefficiency to the Canadian economy and not against any wealth transfer from consumers to producers that might result from the merger (in other words, the parties advocated use of the total surplus standard, as set out in part 5 of the MEGs). In Justice Reed's view, had Parliament intended that only the deadweight loss be weighed in the balance, section 96 would have been drafted specifically to allow this (p. 337). She noted that competition law serves various purposes, and that the parties had improperly interpreted it to give precedence to the efficiency purpose in section 1.1 over all the others. In this regard, Justice Reed cited House of Commons debates in which the Minister responsible for the Competition Act stated that the "ultimate objective" and "common denominator" of Bill C-91 were to provide consumers with competitive prices and product choice (p. 340).

Justice Reed suggested that one possible interpretation of sub-section 96(1) was that it permitted the Tribunal to weigh any alleged efficiency gains against the likelihood that detrimental effects of a merger (both the deadweight loss/allocative inefficiency and any wealth transfer) would arise (p. 343). She further wrote that "to the extent that efficiency gains would be likely to lead to lower prices for consumers this would likely be determinative (p. 343)."

Finally, Justice Reed questioned the parties' arguments that the wealth transfer in the case of an anti-competitive merger is always a neutral one, and provided the following examples.

If, for example, the merging parties in question were drug companies and the relevant product market related to a life-saving drug would economists say that the wealth transfer was neutral. The tribunal does no more than raise this as a question. Another question regarding the neutrality of the wealth transfer is: if the dominant firm which charges supra-competitive prices is foreign-owned so that all the wealth transfer leaves the country, should the transfer be considered neutral? [?] The tribunal does no more than raise these questions since for the reasons expressed above it is not necessary to make a decision on them in the present context (p. 343).

Superior Propane (2000-2003)³⁷

In its initial reasons and order in the Superior Propane case, a majority of the Competition Tribunal found that the merger of Superior Propane Inc. and ICG Propane Inc. would likely substantially lessen competition in 66 local markets across Canada for the retail supply of propane and in the market for coordination services for national account customers, and would likely prevent competition in Atlantic Canada. The Tribunal accepted expert opinion evidence that the parties' post-merger market share would be more than 95 percent in 16 of the affected local retail markets (these were referred to by the Commissioner's expert as "merger to monopoly" markets). The Tribunal also accepted expert evidence that the merger would likely result in average price increases for retail propane of at least 8 percent (paras. 252, 253, 261).

However, the Tribunal concluded that the merger should be permitted to proceed based on the efficiencies defence. The Tribunal held that given the "paramount" importance of efficiencies, the meaning of "the effects of any lessening or prevention of competition" in section 96 should be interpreted only to mean the loss of resources to the economy as a whole (the deadweight loss resulting from the price increase along with some qualitative effects on output) and not a wider range of effects. In particular, the Tribunal did not consider the transfer or redistribution of wealth from consumers to the shareholders of the merged firm (the value of this transfer was estimated to be $40.5 million annually). The Tribunal accepted evidence that the efficiency gains would amount to $29.2 million per year, against a deadweight loss of not more than $6 million annually.³⁸ The Tribunal also held that section 96 applies to any merger about which the Tribunal may make an order under section 92, including a merger to monopoly.

The dissenting member of the Tribunal, Christine Lloyd, took issue with the majority's finding that the efficiencies gains would not likely have occurred if Superior Propane had been ordered to divest ICG Propane. She further stated that the analysis under section 96 requires a flexible consideration of all the qualitative and quantitative effects of proposed mergers, including the wealth transfer from consumers to producers.

On appeal, the Federal Court of Appeal set aside the Tribunal's findings, saying that the Tribunal had erred in law by limiting the factors that could be considered as "effects" under section 96 to the deadweight loss to the Canadian economy.³⁹ The court held that the word effects in section 96 should be interpreted to include all anti-competitive effects, keeping in mind all of the purposes of the Competition Act, as articulated in section 1.1. Accordingly, the Tribunal had erred in failing to consider including all or part of the wealth transfer extracted from consumers. The Court did not dictate the standard for determining the scope of the effects, but suggested that the balancing weights approach outlined by the expert witness, Professor Peter Townley (see Appendix A), would be an appropriate standard. In this regard, Mr. Justice John Maxwell Evans wrote as follows:

Having concluded for the above reasons that the Tribunal erred in law when it interpreted s. 96 as mandating that, in all cases, the only effects of an anti-competitive merger that may be balanced against the efficiencies created by the merger are those identified by the total surplus standard, this Court should not prescribe the "correct" methodology for determining the extent of the anti-competitive effects of a merger. Such a task is beyond the limits of the Court's competence.

Whatever standard is selected (and, for all I know, the same standard may not be equally apposite for all mergers) must be more reflective than the total surplus standard of the different objectives of the Competition Act. It should also be sufficiently flexible in its application to enable the Tribunal fully to assess the particular fact situation before it.

It seems to me that the balancing weights approach proposed by Professor Townley, and adopted by the Commissioner, meets those requirements. Of course this approach will no doubt require considerable elaboration and refinement when it comes to be applied to the facts of particular cases (paras. 139?141, p. 327).

The Federal Court of Appeal then remitted the case to the Competition Tribunal to reconsider the anti-competitive effects and to balance them against the efficiency gains.⁴⁰ The court also confirmed that the Commissioner has the legal burden of proving the extent of the relevant effects, while the respondents have the burden of proving the scale of the efficiency gains that would not have occurred but for the merger, and of persuading the Tribunal that the efficiency gains are likely to be greater than, and offset, the effects. (For more information on this issue, see para. 154).

Mr. Justice Gilles Létourneau concurred with the majority on the scope of the term effects but dissented on the ground that, in his view, section 96 is not intended to authorize a merger to monopoly. Justice Létourneau also dissented with respect to the burden of proof. In his opinion, the merging parties should bear the legal burden to convince the Tribunal of the following:

• that the efficiency gains are of the amount claimed;
• that the effects of the lessening of competition are those that they have identified and not those submitted by the Commissioner; and
• that the efficiency gains are greater than, and offset, the effects.

In its redetermination decision following the appeal,⁴¹ the Competition Tribunal considered the range of qualitative anti-competitive effects the Commissioner alleged would result from the merger: deadweight loss, interdependent and coordinated behaviour, effects on service quality and programs, loss of competition in Atlantic Canada, loss of potential dynamic efficiency gains, and the effect on small and medium-sized enterprises.

The Tribunal found that there was no evidence on the record, nor could it admit further evidence, that there were additional anti-competitive effects that could not be accounted for in the deadweight loss of $6 million. In addition, the Tribunal stated that it had no jurisdiction to revisit this figure, given the limited scope of the redetermination proceedings to assess the effects not considered in the initial decision (para. 226).

The Tribunal then considered the degree to which the wealth transfer from consumers to shareholders occasioned by the merger should be weighed against the efficiency gains. The Tribunal rejected assertions that the entire $40.5 million annual wealth transfer should be treated as an effect.⁴² In particular, it rejected the application of the consumer surplus standard in the context of section 96. Under the consumer surplus approach, no mergers that would likely increase consumer prices (and therefore reduce consumers' surplus) would be permitted as part of an efficiency gains trade-off. (For more information on the consumer surplus standard, see Appendix A.)

The Tribunal then considered the amount of the wealth transfer in relation to the income levels of propane consumers as well as the essential and non-essential uses of propane. The Tribunal concluded that the impact of the anticipated post-merger price increase on low-income propane-consuming households would be socially adverse, at an estimated $2.6 million annually. There was insufficient evidence upon which to draw conclusions about the impact of the wealth transfer for business purchasers of propane (who account for 90 percent of propane sales).

The Tribunal's final conclusion was that, even taking into account the adverse effects of the wealth transfer, the efficiency gains would be greater than and would offset the effects of the prevention or lessening of competition the merger would cause.

Having assessed the measured redistributive effect based on the evidence, it remains for the Tribunal to decide how to combine it with the measured deadweight loss of $3 million and the maximum deadweight loss attributable to changes in the merged company's product line of $3 million. Weighting redistributive effects equally with efficiency losses, the three effects would be added together to produce a maximum total effect of approximately $8.6 million.

However, there is no statutory basis under the Act (or in U.S. antitrust law) for assuming such equal weighting: perhaps the adverse redistributive effects should weigh twice as heavily as efficiency losses, in which case the three weighted effects would not exceed $11.2 million. Alternatively, since efficiency concerns are paramount in merger review, perhaps adverse redistributive effects should be weighted half as much as deadweight losses. In the instant case, it is clear that the adverse redistributive effects are, on the evidence, quite small. Accordingly, the Tribunal is of the view that any under any reasonable weighting scheme, the gains in efficiency of $29.2 million are greater than and offset all of the effects of lessening and prevention of competition attributable to the merger under review (paras. 370?371).

As a result, the Tribunal allowed the merger to proceed.

The Government appealed the redetermination decision to the Federal Court of Appeal.⁴³ The main ground of the appeal was the Tribunal had not properly followed the court's directions after the first appeal. The court disagreed. Among other things, the Court found that the Tribunal had not erred in failing to include the entire wealth transfer in its assessment of anti-competitive effects (paras. 31-32).⁴⁴ The court reasoned that including the entire wealth transfer (i.e. applying the consumer surplus standard; see Appendix A) would not provide the Tribunal with the discretion necessary to deal with the impact of a merger on consumers and shareholders, in light of their different socio-economic status (para. 31).

In March 2003, the Commissioner indicated that he would not appeal the Federal Court of Appeal's decision.

Summary of the State of the Law After the Superior Propane Case In the initial appeal of the Superior Propane case, the Federal Court of Appeal found that the Tribunal had "erred in law when it interpreted section 96 as mandating that, in all cases, the only effects of an anti-competitive merger that may be balanced against the efficiencies created by the merger are those identified by the total surplus standard," in which the effects are limited to the deadweight loss (para. 139). In the second appeal, the Court found that the Tribunal had not erred in refusing to include the entire wealth transfer in the notion of effects, since to do so would not provide the Tribunal with the discretion necessary to deal with the impact of the merger on customers and shareholders, in light of their different socio-economic status (para. 31). The Federal Court of Appeal explicitly declined to dictate the precise standard to be used in assessing the scope of the term effects in section 96 (and indeed the court suggested that different standards may be appropriate in different cases). It did state that whatever standard is selected must be "sufficiently flexible in its application to enable the Tribunal to assess the particular fact situation before it" (para. 140). This may be best understood in light of the court's statement that the assessment of effects must take into account all the statutory purposes in section 1.1 (para. 92). The court said that the balancing weights approach "meets these broad requirements," although it noted that the approach would require considerable elaboration and refinement when it was applied in particular cases (para. 141). A further important legal conclusion that may be drawn from the Superior Propane case is that section 96 applies to all mergers that substantially lessen or prevent competition, or are likely to do so, even when they lead to monopolies. This was the Tribunal?s conclusion in its original decision (paras 418 and 419), and the Federal Court of Appeal did not question this finding (although Justice Létourneau dissented on this point in both appeals; paras. 14-15 and 72, respectively). The court in the second appeal also confirmed that a monopoly is not in and of itself an "anticompetitive effect" that must be weighed against efficiency gains, unless there is evidence of additional anti-competitive effects (para. 51). (There was no such evidence on the record in the Superior Propane case.)

Realization of Efficiencies

Burden of Proof

The Federal Court of Appeal provided clear guidance in the Superior Propane case on the burden of proof that applies to the efficiencies defence. The Commissioner has the legal burden of proving the extent of the relevant effects. The merging parties have the burden of proving the scale of the efficiency gains that would not have occurred but for the merger, and that the efficiency gains are likely to be greater than, and offset, the effects.⁴⁵

Scope of Efficiencies

The main categories of efficiency relevant to merger review are described in Appendix A. The most obvious and measurable types of efficiencies arising from a merger usually fall within the productive efficiencies category. Dynamic and innovation efficiencies may be more difficult to measure and in many cases cannot be quantified, but nonetheless are of critical importance to efficiencies analysis. While dynamic efficiencies may not give rise to any immediate or long-term price effects, they may have a positive impact on product quality and variety, the development of more productive processes, and the introduction of new products and other non-price elements of competition. Attaining dynamic efficiency is crucial to both the general evolution of competition and to the international competitiveness of Canadian industries.

Nature, Availability and Weight of Evidence

While the Superior Propane case and the new Merger Enforcement Guidelines provide a framework for assessing efficiencies and effects, this framework is highly complex in application. Among other things, qualitative and quantitative evidence cannot truly be compared; nor are efficiencies and effects directly comparable concepts. In addition, absent a crystal ball, it is not objectively possible to determine either the extent of anti-competitive effects (particularly when the assessment of effects also requires advance judgment on which effects will have an adverse impact due to a transfer of wealth) or the amount of claimed efficiencies that will be generated by a future merger. Moreover, the Tribunal in its redetermination decision in the Superior Propane case left it open for various relative weights to be attached to efficiency losses (deadweight losses) and the adverse redistributive effects in future cases. ⁴⁶ Practically speaking, this means that merging parties will be required to speculate on, and bring evidence in support of, the relative weight of any adverse redistributive effects in a particular case. Most likely, such evidence would relate to the social impacts of any adverse distribution, which is in itself speculative and would require highly complex evidence.

In terms of the nature of the evidence required in an efficiencies case, it must first be noted that evidence of both qualitative and quantitative gains and effects is relevant under section 96.⁴⁷ However, in the redetermination decision in the Superior Propane case, the Tribunal specified that the efficiency gains and effects should be quantified when possible to do so:

In the Tribunal's view, the requirement in subsection 96(1) that efficiency gains must be "greater than" the effects of lessening or prevention of competition favours a quantification of efficiency gains and the effects to be considered, where possible. That a particular effect cannot, even in principle, be quantified does not relieve the Tribunal of assessing that effect in the "greater than" test. Accordingly, where it is possible to quantitatively estimate such effects even in a rough way, perhaps by establishing limits as the Tribunal has done regarding certain qualitative effects, it is desirable to do so where the evidence permits. On the other hand, effects that are, in principle, measurable should be estimated; failure to do so will not lead the Tribunal to view them qualitatively.⁴⁸ [emphasis added].

On appeal, the Federal Court of Appeal held that the Tribunal did not act unreasonably in requiring that efficiencies and effects should be quantified, when possible.⁴⁹

The Commissioner bears the burden of proving the nature and magnitude of the effects of the lessening or prevention of competition. Parties who wish to rely on section 96 must prove the existence and magnitude of the claimed efficiency gains, must establish that the efficiency gains claimed would not likely be realized in the absence of the merger, and must prove that the efficiency gains are greater than, and offset, the effects. In order to discharge their burden, the parties will therefore have to bring evidence, as follows:

• describing the nature and magnitude of each claimed efficiency gain and the likelihood that such gain will be achieved;
• describing the amount of any costs that must be incurred to realize the efficiency gains (these costs are then deducted from the gains); and
• when applicable, demonstrating that the gains in efficiency will result in a significant increase in the real value of exports or a significant substitution of domestic for imported products within the meaning of sub-section 96(2).

Furthermore, the evidence adduced by the parties must demonstrate the following:

• the efficiency gains would not likely be achieved by means other than the merger;
• the claimed gains represent real resource savings and not simply wealth transfers;
• the savings do not result from a reduction of output, service, quality or choice; and
• the efficiency gains are greater than and offset the anti-competitive effects of the merger, under the standards established in the Superior Propane case.

The Merger Enforcement Guidelines contain some general guidance on the type and weight of evidence required for a section 96 defence. In particular, they specify that the evidence should permit the Competition Bureau or the Competition Tribunal to objectively verify the anticipated efficiency gains. Whenever possible, this evidence should consist of documentation prepared in the ordinary course of business.⁵⁰ Examples of this documentation are plant and firm-level accounting statements, internal studies, strategic plans, integration plans, management consultant studies and other available data.

In addition to this documentation, parties may also wish to provide third-party studies and evaluations and expert testimony regarding their efficiency claims. In the Superior Propane case, the parties submitted a comprehensive independent study of the efficiencies prepared by a business valuation firm, together with the report of a management consulting firm with expertise in logistics and operations management.⁵¹

Although the preference is always to quantify gains and effects, the Merger Enforcement Guidelines make it clear that, consistent with the findings of the Tribunal in the Superior Propane case, gains and effects that cannot be quantified will be assessed from a qualitative perspective (paras. 8.15, 8.21). Qualitative evidence may be contained in ordinary course business documents, or in documents prepared in connection with the merger litigation, although, in general, ordinary course documents are given more weight.

Other Jurisdictions

Appendix B contains a detailed review of how four jurisdictions treat efficiencies in merger review: the United States, the European Union, the United Kingdom and Australia. These same jurisdictions were the object of the report by Everett and Ross (2002),⁵² and this paper updates that earlier work. These jurisdictions were selected because they comprise a sampling of Canada's major trading partners, and because all four are significant jurisdictions with modern economies, sophisticated antitrust laws and skilled, professional enforcement agencies.

While the precise approach these jurisdictions take varies, it is noteworthy that only Canada allows efficiencies to serve as a full defence to an otherwise anti-competitive merger. (In Australia, there is a "public benefits" authorization process that focusses on efficiencies but also takes into account other economic and social factors.)

The chart below gives the highlights of the treatment of merger efficiencies in Canada and in the four jurisdictions that are discussed in detail in Appendix B. A brief discussion of how efficiencies are treated in non-merger cases in Canada and in these jurisdictions is found in Appendix C.

	Statutory or Enforcement Approach to Efficiencies	Applicable Welfare Standard	Merger to Monopoly Permitted?
Canada	Efficiencies are a defence to a merger that prevents or substantially lessens competition (section 96).	No single standard prescribed; rather, it varies depending on the facts. The balancing weights approach meets the broad requirements of the Superior Propane case.	Yes.
United States	Efficiencies are an integrated part of the assessment of whether a merger substantially lessens competition, rather than a defence to an anti-competitive merger.	Consumer surplus. Short-term efficiencies are considered when determining whether a merger substantially lessens competition. Long-term efficiencies with no direct consumer benefits are also considered in this determination but are given less weight.	Merger guidelines statement that "[e]fficiencies almost never justify a merger to monopoly or near-monopoly was cited favourably by the court in the Heinz case.
European Union	Efficiencies are an integrated part of the assessment of whether a merger substantially lessens competition, rather than a defence to an anti-competitive merger.	Consumer surplus.	Merger guidelines state that it is highly unlikely that efficiencies would justify a merger to monopoly.
United Kingdom	Office of Fair Trading Efficiencies that increase rivalry are considered in the determination of whether a merger substantially lessens competition. The Office may decline to refer a case to the Competition Commission when customer benefits, including efficiencies, outweigh a substantial lessening of competition. Competition Commission Efficiencies that increase rivalry are considered in the determination of whether a merger substantially lessens competition. Customer benefits, including efficiencies, are considered when designing a remedy to a merger that substantially lessens competition.	Office of Fair Trading Consumer surplus for cases not referred by the Office of Fair Trading to the Competition Commission. Competition Commission Consumer surplus at the remedies stage.	Office of Fair Trading Guidelines state that it will be rare that customer benefits resulting from efficiencies will offset a lessening of competition, but the guidelines do not comment specifically on mergers to monopoly. Competition Commission Guidelines acknowledge that the Commission may decline to order a remedy when consumer benefits are significant, despite a substantial lessening of competition. Guidelines do not discuss merger to monopoly.
Australia	Under section 50 of the Trade Practices Act, efficiencies are part of the assessment of whether a merger substantially lessens competition. Under section 90(9), efficiencies are part of a public interest defence under which Australian authorities may authorize an otherwise anti-competitive merger.	Consumer surplus standard under section 50 of the Trade Practices Act. Bias toward consumer surplus standard in the authorization process: efficiencies that are passed on to consumers are given greater weight.	It is theoretically possible for a merger to monopoly to proceed under the authorization process, but it is very unlikely.

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6. Section 85 defines a specialization agreement as follows:
[...] an agreement under which each party thereto agrees to discontinue producing an article or service that he is engaged in producing at the time the agreement is entered into on the condition that each other party to the agreement agrees to discontinue producing an article or service that he is engaged in producing at the time the agreement is entered into, and includes any such agreement under which the parties also agree to buy exclusively from each other the articles or services that are the subject of the agreement.

7. A number of these possible explanations for the non-use of section 86 are suggested in R. D. Anderson and S. Dlev Khosla, Competition Policy as a Dimension of Economic Policy: A Comparative Perspective, Industry Canada Occasional Paper No. 7 (Ottawa: Industry Canada, May 1995), pp. 85-86.

8. While it is described in the marginal notes to the Competition Act as an "exception," section 96 operates as a full defence to a finding that a merger substantially lessens or prevents competition, and is commonly referred to as a defence.

9. This and subsequent references in this section are taken from Economic Council of Canada, Interim Report on Competition Policy (Ottawa: Queen?s Printer, 1969), unless otherwise indicated.

10. H. C. Eastman and S. Stykolt, The Tariff and Competition in Canada (Toronto: MacMillan of Canada, 1967).

11. 28^th Parl., 3^rd Sess., 1^st Reading, June 29, 1971.

12. S.C. 1974-75-76, c. 76.

13. L. A. Skeoch and B. C. McDonald, Dynamic Change and Accountability in a Canadian Market Economy (March 31, 1976).

14. Ibid., p. 3.

15. This summary is taken primarily from a letter to the editor of a Canadian newspaper drafted by B. C. McDonald shortly after the report was released.

16. 30^th Parl., 2^nd Sess., 1^st Reading, March 16, 1977.

17. Interim Report of the Standing Senate Committee of Banking Trade and Commerce on Bill C-42 (July 6, 1977), p. 7.

18. House Committee report as reported in Votes and Proceedings of the House of Commons (August 5, 1977), 1458, pp. 1489?1490.

19. 30^th Parl., 3^rd Sess., 1^st Reading, November 18, 1977.

20. See, for example, Minutes of the Proceedings of the Senate, June 29, 1978, p. 555, where the changes in Bill C-13 over Bill C-42 are described as "largely cosmetic."

21. 32^nd Parl., 2^nd Sess., 1^st Reading, April 2, 1984.

22. Under section 31.77 orders prohibiting a merger could contain a condition permitting the order to be varied or rescinded if trade barriers were removed within a set period of time.

23. Minister of Consumer and Corporate Affairs, Clause-by-Clause Analysis (1984), p. 17; and Background Information and Explanatory Notes (1984), pp. 17-18.

24. Clause-by-Clause Analysis, ibid, pp. 16?17.

25. 33^rd Parl., 1^st Sess., First Reading, December 17, 1985.

26. In this regard, see, for example, the issues discussed in the context of a motion by a member of the House of Commons Legislative Committee on Bill C-91 to remove the efficiency exception from the Bill, as recorded in the Proceedings of the Committee, No. 11, pp. 38?42 (Clause-by-Clause Review May 21, 1986).

27. Minister of Consumer and Corporate Affairs, Competition Law Amendments: A Guide (Ottawa: Minister of Supply and Services Canada, 1985), p. 17.

28. Ibid, pp. 28?29.

29. Debates of the House of Commons of Canada, comments of Pierre Blais, Parliamentary Secretary to the Minister of Agriculture (April 7, 1986), p. 11962.

30. Commissioner of Competition v. Superior Propane Inc., 2000 Comp. Trib. 16 (April 4, 2002), para. 387.

31. In this regard, the Tribunal in the Hillsdown case established that the test to be applied is whether the efficiency gains would likely have been realized in the absence of the merger.

32. Canada, Director of Investigation and Research, Merger Enforcement Guidelines (Ottawa: Supply and Services Canada, 1991).

33. Notes for an Address by Konrad von Finckenstein, Commissioner of Competition, Canadian Bar Association, Competition Law Section, Annual Meeting, Ottawa (September 20, 2001).

34. Appendix A contains a description and discussion of each type of efficiency.

35. In addition to the Hillsdown and Superior Propane cases, four other Tribunal cases contain summary references to and/or summary discussion of the section 96 efficiency exception:

• Canada (Director of Investigation and Research) v. Air Canada (1988), 23 C.P.R. 160 (Comp. Trib.); reversed 23 C.P.R. (3d) 178 (F.C.A.); F.C.A. judgment affirmed at 26 C.P.R. (3d) 95 (S.C.C.) (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 (CT-1989/003) (Comp. Trib.) (the Tribunal commented on the amount of claimed efficiency gains);
• Canada (Director of Investigation and Research) v. Canadian Pacific Ltd. (1997), 73 C.P.R. (3d) 573 and (1997), 74 C.P.R. (3d) 55 (request for particulars relating to efficiencies); and
• Commissioner of Competition v. Canadian Waste Services Holdings Inc. (2001), 15 C.P.R. (4^th) 5 (Comp. Trib.); affirmed 24 C.P.R. (4^th) 178 (F.C.A.) (efficiency arguments rejected as speculative at the remedy stage).
  

36. This and any subsequent references to this case in this section are taken from CT-91/01, reported in 41 C.P.R. (3d) 289, unless otherwise indicated.

37. This and any subsequent reference to the Tribunal's original decision are taken from Commissioner of Competition v. Superior Propane Inc., 2000 Comp. Trib. 15 (August 30, 2000), unless otherwise indicated.

38. The Tribunal made no specific finding on the amount of the deadweight loss, but stated that it accepted the estimate of $3 million the Commissioner's expert put forward, even though it considered that this figure was likely overstated. It also considered that there were qualitative negative resource allocation effects resulting from the reduction or removal of certain specific service and pricing programs that had been introduced by ICG Propane, and estimated that the impact of these effects was unlikely to exceed the amount of the deadweight loss. The net conclusion was that the combined "effects" for section 96 purposes could not exceed $6 million per year for 10 years (paras. 451?458, 467).

39. This and any subsequent reference to the first Federal Court of Appeal judgment are taken from Commissioner of Competition v. Superior Propane Inc. (2001), 11 C.P.R. (4^th) 289 (April 4, 2001), unless otherwise indicated.

40. Leave to appeal the Federal Court of Appeals judgment to the Supreme Court of Canada was denied. (2001), 278 N.R. 196 (S.C.C.).

41. This and any subsequent reference to the Tribunal's second decision is taken from Commissioner of Competition v. Superior Propane Inc., 2000 Comp. Trib. 16 (April 4, 2002), unless otherwise indicated.

42. Christine Lloyd, dissented from this decision, expressing the view that the entire wealth transfer from consumers to the merged firm should have been included in the trade-off analysis under section 96.

43. This and any subsequent reference to the second appeal to the Federal Court of Appeals is taken from Commissioner of Competition v. Superior Propane Inc., 2003 F.C.A. 53, unless otherwise indicated.

44. Justice Létourneau dissented with the decision on various grounds and reiterated his view that section 96 was not intended to authorize a "merger to monopoly."

45. See n. 37, paras. 156-157.

46. See n. 41, para. 371.

47. See n. 37, paras. 459 and 461.

48. See n. 41, para. 233.

49. See n. 43, paras. 34?38.

50. In general, this means that greater weight is given to ordinary course business documents than to studies prepared especially for an efficiencies case.

51. Cole-Kearney Report, as described in n. 37, paras. 318-324.

52. See n. 2.