Treatment of Efficiencies in the Competition Act - Appendix C

Appendix C: Consideration of Efficiencies in Non-Merger Matters

Canada

Conspiracy Offence

The Supreme Court of Canada has held that ?private gains by the parties to the agreement or counterbalancing efficiency gains by the public [?] lie outside of the inquiry under s. [45(1)(c)]? of the Competition Act. This is because the Act presumes that an undue lessening or prevention of competition is an injury to the public and is not concerned about public injury or public benefit from any other standpoint.¹³⁸

Other Reviewable Practices

Sections 75 (refusal to deal), 77 (exclusive dealing/tied selling) and 79 (abuse of dominant position) of the Competition Act all describe circumstances in which the Competition Tribunal may make an order about a particular reviewable practice. Under each of the provisions, the Tribunal retains discretion that permits it to consider any efficiency-enhancing aspects of the challenged practice. The Tribunal has recognized the existence of such discretion in some cases.

• In the context of the refusal to deal provision (section 75), paragraph 75(1)(b) states that a necessary element of a refusal to supply is that the complainant ?is unable to obtain adequate supplies of a product because of insufficient competition among suppliers of the product in the market.? The Tribunal has held that when the refusal does not result from insufficient competition but rather for objectively justifiable business reasons, the complaint cannot be substantiated.¹³⁹ One legitimate business reason for a refusal to deal is maintenance of an efficient distribution network involving selective distributors.
• In a case involved the telephone directory company Tele-Direct, the Tribunal recognized that vertical integration is generally pro-competitive on efficiency grounds, and noted that many forced ?package sales? or tied sales (section 77) are the product of efficiency, and even a supplier with market power may sell items in combination for efficiency reasons.¹⁴⁰ The Tribunal refused to accept the argument that efficiency considerations are not relevant under section 77.¹⁴¹
• In the context of the abuse of dominance position provision (section 79), the Competition Tribunal has noted that legitimate efficiency arguments and business justifications can be factored in when determining the purpose of an alleged anti-competitive act.¹⁴² It should be noted that the drafters of Bill C-91 (which became the Competition Act) chose not to incorporate the language of the abuse of dominant position provision contained in a previous set of proposed amendments (Bill C-29). This proposed provision would have prohibited the Restrictive Trade Practices Commission from making an order against a dominant firm when competition was prevented or substantially lessened, ?as a result of the superior economic efficiency of the person or persons against whom the order is sought.? ¹⁴³

United States

Conspiracy Offence

In the United States, section 1 of the Sherman Act prohibits contracts, combinations or conspiracies that unreasonably restrain trade.¹⁴⁴ Certain categories of agreements, such as horizontal pre-fixing and market allocation agreements, are treated as per se illegal, meaning that there is no defence against them, based on efficiencies or any other factor.

Other types of agreements are assessed on what is known as a ?rule of reason? standard, which requires analysis of the effect of the agreement on competition in the relevant market and weighing of the agreement?s pro- and anti-competitive effects. In rule-of-reason cases, efficiency considerations play an important role. Guidelines issued in April 2000 by the Federal Trade Commission and U.S. Department of Justice indicate that the primary pro-competitive benefit of competitor collaborations to the economy is their potential to generate efficiencies.¹⁴⁵ The guidelines provide an overview of the enforcement approach taken by the two organizations to efficiencies and state that the agencies will recognize only ?cognizable? efficiencies. These are efficiencies that the two organizations have verified, that do not arise from anti-competitive reductions in output or service, and that cannot be achieved through practical, significantly less restrictive means. The guidelines also state that when weighing the cognizable efficiencies against anti-competitive harms, the two agencies consider whether the efficiencies are sufficient to offset the potential of the agreement to harm consumers in the relevant market, for example, by preventing price increases. This statement, which parallels content in the U.S. merger guidelines, is qualified by a footnote that indicates that delayed benefits from efficiencies (because the efficiencies are themselves delayed, or the realization of consumer benefits is delayed) are given less weight because they are less proximate and more difficult to predict.

Monopolization

Section 2 of the Sherman Act reads as follows:

Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any person or persons, to monopolize any part of trade or commerce among the several states or with foreign nations is guilty of a felony [?].¹⁴⁶

A firm with a monopoly in a particular industry violates section 2 when it acquires or maintains a monopoly, or attempts to, by engaging in exclusionary conduct ?as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident.?¹⁴⁷

Some of the categories of exclusionary conduct that have been the subject of prosecutions and private suits under section 2 include unilateral refusals to deal, price squeezing, predatory pricing, predatory innovation, exclusive dealing (which may also be assessed under section 1) and monopoly leveraging. Whether any particular practice or conduct is illegal under section 2 depends on whether it was exclusionary, and the case law has set out detailed assessment standards relevant to many of these specific categories of conduct. For example, exclusive dealing arrangements and other vertical agreements entered into by a monopolist are assessed on a rule-of-reason standard, due to their potential to generate pro-competitive (i.e. efficiency-enhancing) benefits.¹⁴⁸ Predatory pricing is dealt with under tests developed through the case law that require determination of whether pricing is below some measure of cost, and whether there is a ?dangerous probability? that the alleged monopolist will recover its investment in below cost pricing by, for example, squeezing competitors out of the market.¹⁴⁹

In U.S. v. Microsoft,¹⁵⁰ the district court held that certain exclusive licensing arrangements and other exclusionary acts engaged in by Microsoft violated section 2. On appeal, the circuit court affirmed the district court?s findings in part, and commented both on the scope of the section 2 offence and the relevance of efficiency claims. The circuit court observed that pro-competitive justifications and efficiency claims may serve to rebut the government?s prima facie case in a monopolization claim, writing as follows:

Third, if a plaintiff successfully establishes a prima facie case under § 2 by demonstrating anticompetitive effect, then the monopolist may proffer a ?procompetitive justification? for its conduct. See Eastman Kodak, 504 U.S. 483. If the monopolist asserts a procompetitive justification?a nonpretextual claim that its conduct is indeed a form of competition on the merits because it involves, for example, greater efficiency or enhanced consumer appeal?then the burden shifts back to the plaintiff to rebut that claim. Cf. Capital Imaging Assocs., P.C. v. Mohawk Valley Med. Assocs., Inc., 996 F.2d 537, 543 (2d Cir. 1993).

Fourth, if the monopolist?s procompetitive justification stands unrebutted, then the plaintiff must demonstrate that the anticompetitive harm of the conduct outweighs the procompetitive benefit. In cases arising under § 1 of the Sherman Act, the courts routinely apply a similar balancing approach under the rubric of the ?rule of reason.?¹⁵¹

As such, efficiencies are relevant in monopolization cases in the United States, under a rule-of-reason standard, when they form the basis for a pro-competitive justification of the exclusionary conduct.

European Union

Conspiracy Law

Article 81(1) (formerly 85(1)) of the EC Treaty prohibits:

all agreements between undertakings, decisions by associations of undertakings and concerted practices which may affect trade between Member States and which have as their object or effect the prevention, restriction or distortion of competition ?

As an exception to this rule, Article 81(3) provides that the prohibition contained in Article 81(1) does not apply in the case of an agreement:

which contributes to improving the production or distribution of goods or to promoting technical or economic progress, while allowing consumers a fair share of the resulting benefit, and which does not:

(a) impose on the undertakings concerned restrictions which are not indispensable to the attainment of these objectives;

(b) afford such undertakings the possibility of eliminating competition in respect of a substantial part of the products in question.

The first condition in article 81(3), which refers to an agreement that ?contributes to improving the production or distribution of goods or to promoting technical or economic progress?, has been interpreted as the basis for taking into account efficiency gains as part of the assessment of restrictive agreements. Note that this condition is qualified by the second, which requires that ?consumers receive a fair share of the resulting benefits.? Also note that the ?defence? in article 81(3) applies only when the agreement does not impose restrictive conditions that are not indispensable to the efficiency objectives, and when the agreement does not eliminate competition substantially (i.e. agreements to monopolize an industry could not benefit from the article 81(3) defence). The Commission has published a detailed guidance note on the application of article 81(3) that sets out the nature of the required analysis, including categories of efficiencies that will be considered, the nature of the consumer benefit requirement, and other matters.¹⁵²

Abuse of Dominant Position

Article 82 of the EC Treaty prohibits any abuse by one or more undertakings of a dominant position within the common market or in a substantial part of it, because such abuse may affect trade between member states. Article 82 cites a number of examples of abuses. It has been interpreted to include in the notion of abuse practices such as excessive pricing, predatory pricing, price discrimination and price squeezing, refusals to deal, tying and other practices.

Unlike for Article 81, there is no defence or exception to article 82. Nonetheless, efficiencies may come into play during the assessment of whether the conduct of a dominant firm is in fact an abuse. In particular, when there is an objective economic or other justification for the conduct being attacked, it is not considered to be an abuse. In a speech given to the 2003 Fordham Corporate Law Institute, Philip Lowe, Director General of Competition for the European Commission, referred to the fact that the Commission is conducting an internal review of article 82, and mentioned the need to clarify the scope of objective justifications for allegedly abusive conduct. On the issue of efficiencies in the context of article 82, he wrote the following:

What are the objective justifications for any type of conduct which we might say is abusive? It follows from the case law which we have at the moment that there could be certain types of defence, but so far they have not had a great deal of success with our courts. [?]

A dominant undertaking may also argue that, on balance, its conduct is not abusive because it is necessary to produce efficiency gains that outweigh the alleged anticompetitive effects. Now, one problem with that is we don?t actually legally have an exemption rule under 82. And also, from the point of view of the consumer, short-term efficiency gains may be outweighed by long-term harm to the competitive process. On the other hand, as we have clearly recognized in our Merger Guidelines, efficiencies may be taken into account in the merger area, and we have to look again very closely at the examination of these arguments under 82.¹⁵³

Accordingly, there is some scope for efficiencies to be a consideration to the abuse of dominant position, in the context of understanding whether conduct is in fact abusive or whether it was motivated by legitimate efficiency-enhancing business objectives.

United Kingdom

In the Competition Act 1998, the U.K. substantially harmonized its competition laws with those of the European Union by adopting provisions that are based on articles 81 and 82 of the EC Treaty (see above).

Australia

Trade Practices Subject to Public Benefit Authorzsation

The public authorization process in the Australian Trade Practices Act, 1974, applies to a range of restrictive trade practices, including agreements that substantially lessen competition, covenants affecting competition, primary and secondary boycotts, anti-competitive exclusive dealing, resale price maintenance and mergers that substantially lessen competition.¹⁵⁴ Authorization confers full immunity under the Act. Efficiencies are an important consideration within the context of the overall public benefit test for authorization (see Appendix B).

Misuse of Market Power

Under section 46 of the Trade Practices Act, a corporation that has a substantial degree of power in a market must not take advantage of that power for the purpose of the following:

(a) eliminating or substantially damaging a competitor of the corporation or of a body corporate that is related to the corporation in that or any other market;

(b) preventing the entry of a person into that or any other market; or

(c) deterring or preventing a person from engaging in competitive conduct in that or any other market.

The process of public benefit authorization is not available in connection with the prohibition on the misuse of market power, because the latter is a purpose-based prohibition. As such, there is no public benefit defence (incorporating considerations of efficiencies) to the misuse of monopoly power. There is, however, an exception in sub-section 46(6) that states that section 46 does not prohibit conduct to the extent that it does not constitute a contravention of other sections for which it has authorization.

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138. R. v. Nova Scotia Pharmaceutical Society, [1992] 2 S.C.R. 606, pp. 649?650.

139. Director of Investigation & Research v. Xerox Canada Inc. (1990), 33 C.P.R. (3d) 83 (Comp. Trib.), p. 115.

140. Canada (Director of Investigation and Research) v. Tele-Direct (Publications) Inc. [1997], 73 C.P.R. (3^rd) 1 (Comp. Trib.), p. 115.

141. Ibid, p. 118.

142. Canada (Director of Investigation and Research) v. The D&B Companies of Canada Ltd. (1995), 64 C.P.R. (3^rd) 216 (Comp. Trib.), p. 261.

143. Bill C-29, 32^nd Parl., 2^nd Sess., 1^st Reading, April 2, 1984, section 31.41(4).

144. 15 U.S.C. § 1 (2000).

145. U.S. Department of Justice and Federal Trade Commission, Antitrust Guidelines for Collaborations Among Competitors (April 2000).

146. 15 U.S.C. §2.

147. United States v. Grinnell Corp., 384 U.S. 563, p. 571.

148. Tampa Electric Co. v. Nashville Coal Co., 365 U.S. 320 (1961).

149. Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209 (1993).

150. U.S. v. Microsoft, 253 F. 3d (D.C. Cir.), 2001-1 Trade Cas. 73,321, certiorari denied, 122 S. Ct. 350 (2001).

151. Ibid, 2001-1, Trade Cas. 73,321, p. 90,792.

152. See Guidelines on the application of Article 81(3) of the Treaty, O.J. C 101/97 (April 27, 2004).

153. Philip Lowe, speech to the Fordham Corporate Law Institute Thirtieth Annual Conference on International Antitrust Law and Policy (October 23, 2003).

154. Allan Fels AO, The Public Benefit Test in the Trade Practices Act 1974, paper prepared for the National Competition Policy Workshop, Melbourne, Australia (July 12, 2001), pp. 2?3.