Report of the Advisory Panel on Efficiencies:- Appendix A Efficiency gains and strategic alliances

The Panel’s mandate suggested that Panel members “may wish to consider the applicability of their findings to the treatment of efficiencies in the context of strategic alliances and other trade practices.” This appendix briefly explores the current treatment of strategic alliances under the Competition Act and also describes the role of efficiencies in the context of strategic alliances.

The Panel regards strategic alliances as being very similar to mergers, since a strategic alliance is also a form of business combination. The Panel’s general conclusion is that the regime for dealing with efficiency gains in strategic alliances should be identical to that in place for mergers.

 

Current treatment of strategic alliances under the Competition Act

The Competition Act does not use or define the term strategic alliance. Business people commonly use it to describe an agreement or arrangement between two or more persons to undertake a specific business or project. Strategic alliances may be structured as mergers or as purely contractual arrangements.

The definition of merger in section 91 of the Competition Act is very broad. It applies to any manner in which one business acquires control over or a “significant interest” in another business. The term significant interest is not defined in the Act, and has been interpreted to apply to a range of business relationships that involve one party obtaining the ability to materially influence the economic behaviour of another, including some strategic alliances (Canada 2004b, para. 1.5). In some circumstances, a purely contractual relationship between two or more business parties may be viewed as a merger for competition law purposes (Canada 2004b, paras. 1.12–1.13).

When a strategic alliance is structured as a merger, it may be reviewed like any other merger and so the efficiency defence may apply. The Panel’s recommendations respecting the appropriate framework for the treatment of efficiency gains in the merger review context set out in Chapter 6 extend by definition to any strategic alliance that is structured or reviewed as a merger.

Strategic alliances also come up in the context of Canada’s criminal conspiracy law, section 45 of the Competition Act. The PANS case (R. v. Nova Scotia Pharmaceutical Society) is the leading case respecting the interpretation of section 45. In it, the Supreme Court of Canada identified three elements of the offence under section 45:

• the accused, in fact, entered into an agreement;
• the agreement prevents or unduly lessens competition; and
• the parties intended to enter the agreement, were aware of its terms and were aware or should reasonably have been aware that their agreement was likely to prevent or unduly lessen competition.

Any agreement between two or more parties, such as a contractual strategic alliance, may potentially be caught by this provision — although few are — if the agreement is found to unduly prevent or lessen competition. This may occur, in particular, when the parties collectively hold a large share of the market and are found to have market power and when the agreement restricts competition. The offence of conspiracy is complete when an agreement is reached, whether or not it is actually implemented.

Canada’s conspiracy law has been criticized as being “under-inclusive,” since it is very hard to prove intent and undueness, even in the case of hard-core cartel conduct, such as price fixing. At the same time, section 45 has been criticized as being “over-inclusive,” since it applies, at least in theory, to all horizontal arrangements, and it has been argued that section 45 may deter the formation of pro-competitive, efficiency-enhancing arrangements.

In recent years, there have been numerous calls to reform section 45. In June 2003, the Competition Bureau published a discussion paper that included proposals to limit the criminal conspiracy provision to hard-core cartels (Canada 2003: 17). Under these proposals, the Competition Tribunal could review horizontal and vertical arrangements that prevent or substantially lessen competition, or are likely to, but that are not covered by the criminal conspiracy provision. It was suggested that efficiencies become a factor to be considered when determining whether an alliance substantially lessens or prevents competition, along with other factors, similar to those listed in section 93.

Public consultations about the appropriate model for section 45 were launched with the June 2003 discussion paper, and the Bureau’s assessment of whether section 45 needs to be amended, and how, is ongoing.

Efficiencies generated by a strategic alliance are not a defence or even a consideration under section 45. This is because the Supreme Court of Canada found in the PANS case 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. The Supreme Court reasoned that the Competition 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 (pp. 640–650).

In summary, efficiency gains are only considered under the current law when strategic alliances are reviewed as mergers under the general merger review framework. Efficiencies are not a defence or even a consideration when alliances are reviewed as potential conspiracies. That this is so does not necessarily imply that large numbers of efficiency-enhancing agreements are being prevented, since the vast majority of contractual strategic alliances do not raise any issues under section 45.

 

Conclusions

In 1995, the Competition Bureau published the Strategic Alliances Bulletin, which outlined its views on the circumstances in which a strategic alliance might contravene section 45 or raise other issues under the Competition Act. In that document, the Competition Bureau recognized the following.

• A growing number of firms have turned to strategic alliances as a means of improving their competitiveness in an age of increasing international competitive pressures, the globalization of markets, and generally decreasing trade barriers (Canada 1995, 2).
• The use by Canadian firms of strategic alliances to improve their competitiveness should generally lead to positive innovation and efficiency gains without accompanying negative effects on competition (Canada 1995, 3).

The Bureau’s general enforcement position under the Strategic Alliances Bulletin was that most strategic alliances do not raise concerns under the Competition Act. In 2002, the Bureau invited comments on how it should clarify the Strategic Alliances Bulletin to ensure that the conspiracy provision did not place a “chill” on pro-competitive and beneficial strategic alliances, pending the reform of section 45 (Canada 2002c).

The Panel recognizes that strategic alliances can be an important way for firms to improve their efficiency and competitiveness. The Panel therefore believes that efficiency gains should be considered in the assessment of strategic alliances under the Competition Act. In terms of the model that should apply, the Panel sees no principled reason to distinguish between the efficiency-enhancing aspects of mergers and those of strategic alliances. Strategic alliances and mergers are simply two ways in which businesses can combine their operations. For the purposes of assessing any pro-competitive efficiency gains, the Panel believes the same framework should apply to both strategic alliances and mergers.

The Panel recognizes that, in light of the Supreme Court’s judgment in the PANS case, efficiencies do not arise under the current criminal conspiracy provisions. However, if a civil strategic alliances provision along the lines of that proposed in the June 2003 discussion paper were to be adopted, it should incorporate a framework for assessing efficiency gains identical to that for mergers. The elements of the framework recommended by the Panel are described in Chapter 6.