April 4th, 2019
On March 7, the Competition Bureau released its newest set of Abuse of Dominance Enforcement Guidelines. These new guidelines describe the Bureau’s general approach to enforcing the Abuse of Dominance sections of the Competition Act. According to the Bureau, “they supersede all previous guidelines and statements of the Commissioner or other Bureau officials regarding the administration and enforcement of the Act’s abuse of dominance provisions.” The new guidelines are intended to replace all previous statements and guidelines issued by the Bureau and provide a clear set of principles for the enforcement of the Abuse of Dominance sections of the Act. While these guidelines are not binding law, they are a strong indicator of how the Bureau is likely to proceed in enforcing the relevant sections of the Act.
The guidelines provide a rundown of the legislation, the Tribunal’s powers, and the Bureau’s general enforcement procedure.
The Guidelines note that under s. 79 of the Act, there are three elements necessary to constitute an abuse of dominance.
1) One or more persons must substantially or completely control a class or species of business throughout Canada or any area thereof;
2) That person or those persons must have engaged in (within the previous three years) or be engaging in a practice of anti-competitive acts; and
3) The practice must have had, be having or be likely to have the effect of preventing or lessening competition substantially in a market.
The Bureau addresses their approach to each of the three elements of abuse of dominance in turn before moving on to remedies.
The bureau concludes by providing a series of illustrative examples to showcase the analytical framework set out in the guidelines.
The Bureau relies on four factors to determine if the first element of the abuse of dominance test is met. The four factors are as follows:
- A product market
- A geographic market
- A substantial degree of market power
- Joint dominance
1) Product Market
The Bureau must identify a specific product market that is the subject of abuse of dominance analysis. To identify the appropriate target market for analysis, the Bureau relies on the “hypothetical monopolist test.” This test asks: what is the smallest set of products in which a theoretical monopolist could impose and sustain a small, but significant price increase, usually 5%, above what would prevail without the anti-competitive conduct. Direct evidence of to answer this question may not always be available, in such an event the Bureau’s analysis will look at factors of substitutability. These may include past practice of buyers, interchangeability between products, switching costs, and other evidence on a case by case basis.
2) Geographic Market
The Bureau must determine the appropriate geographic market for the abuse of dominance analysis. The Bureau also uses the “hypothetical monopolist test” here to determine the smallest possible geographic area that could sustain a small, but significant price increase. As above, direct evidence is not always available; as a result, the Bureau will consider indirect evidence of substitutability between locations.
3) Market Power
The Bureau must determine whether the firm in question holds a substantial degree of market power and can influence price, quality, variety, or other dimensions of competition within the previously identified product and geographic market. The Bureau looks at contextual factors to determine the extent to which a firm can influence the market. The Bureau measures market power both directly and indirectly. The Bureau includes the market power gained as a result of the allegedly anti-competitive practices in its analysis. According to the guidelines, the two major indicia of market power are market share and the ability to exclude.
The Bureau is of the view that a higher market share is usually a necessary, but not sufficient, condition to establish the requisite degree of market power. Where a party controls a larger share of the market, they exert greater control over the market. The Bureau uses market share as an initial screening mechanism to assess abuse of dominance. A market share under 50% is unlikely to prompt investigation absent extenuating circumstances, while a market share above 65% will have the opposite effect. The Bureau will also consider the durability of market shares. The Bureau notes that market share alone is not determinative and may be thwarted by the expansion or emergence of existing and new competitors respectively. However, current market share becomes increasingly important to determining market power where expansion or entry is blocked by high costs of entry, regulatory barriers, or other obstacles.
Ability to Exclude
The Bureau notes that the ability to exclude other market participants constitutes market power. A firm need not even compete in a market to exercise control over it as long as it can exclude other participants. The Bureau will consider the extent to which a firm may impose and enforce rules on the conduct of competitors in determining its market power.
4) Joint Dominance
Under the Act, a group of firms may control a market as if they were a single firm. The Bureau must determine the extent to which competition from rival firms, outside the jointly dominant group, will constrain a price increase. If outside competition is not sufficient, the Bureau will consider the nature of the jointly dominant group. More than similar or parallel conduct is required for the Bureau to find that multiple firms are jointly dominant. On the other hand, evidence of coordinated behaviour is helpful, but not necessary to prove joint dominance if there is other evidence that competition among members of the group is not sufficient.
In order to satisfy the second element of the abuse of dominance test, the Bureau must show that a firm has been engaging in a practice of anti-competitive acts. Though a practice usually involves more than one act, the Bureau may consider a single sustained and systemic or long-lasting act a practice.
- 78 of the Act sets out a non-exhaustive list of anti-competitive acts. However, the Bureau does not rely solely on this list. In assessing whether an act is anti-competitive, the Bureau examines the act’s purpose and whether it is predatory, exclusionary, or disciplinary. The purpose of an act may be established by direct evidence of intent and/or inference from the consequences of conduct. The Bureau may also consider evidence of a legitimate business justification.
1) Predatory conduct
A firm engages in predatory conduct when it intentionally deflates prices to eliminate, discipline, or deter a competitor and expects to recoup losses later through raised prices afterwards. The Bureau considers prices that do not cover the cost of selling a product to be predatory unless there is a credible efficiency or pro-competitive rationale for the price.
2) Exclusionary Conduct
Exclusionary conduct is designed to make rival firms less efficient or bar them from the market altogether, usually by raising their costs or reducing their revenues. S. 78 sets out a non-exhaustive list of forms of exclusionary conduct.
The firm supplies products on the condition that the customers or suppliers only deal in the firm’s version of the products. This may be through explicit rules, contractual practices, or even product limits such as technological incompatibilities.
Tying and Bundling
The firm requires, as a condition of obtaining one product, that the customer purchase one or more other products. While many products are sold in bundles, the Bureau will take an interest where the tying/bundling excludes a competitor. The Bureau will also look at whether the tied products are separate products, whether there is demand for the individual products, and whether efficiencies arise from the tying.
Refusals to supply
While there is no obligation for a business to supply or buy a product from another business, in certain cases, this may be exclusionary conduct. The Bureau will look at whether the product being denied is competitively significant and cannot otherwise be feasibly obtained. In the absence of a reasonable justification, the Bureau may assume it was done to exclude a competitor.
3) Disciplinary Conduct
Disciplinary conduct is conduct by a dominant firm that is taken to dissuade a competitor from competing vigorously or disrupting the status quo. These may include actions that facilitate punishments or increase their threat. The Bureau tends to look at subjective evidence of intent as it is often difficult to distinguish between discipline and vigorous competition. The Bureau anticipates only investigating disciplinary conduct where it is disciplinary on its face.
4) Business Justifications
Where there is an alleged anti-competitive purpose, a firm may provide an alternate explanation for the conduct. A credible efficiency or pro-competitive rationale that counterbalances the anti-competitive effects/intent of the act will constitute a business justification. The Bureau will look at the credibility of the claim, the link to the anti-competitive act, and the likelihood of the claim’s success. The Bureau is unlikely to accept a business justification in the absence of contemporaneous evidence of the firm’s motivation. The Bureau will also consider whether the business justification could have been achieved by means that had less of an anti-competitive effect.
In order to satisfy the final element of the abuse of dominance test, the Bureau must show that anti-competitive practice has, had, is having, or is likely to have the effect of preventing or lessening competition in a marketplace. The Bureau’s approach is to determine whether, but for the practice in question, there would be substantially greater competition in the market. The Bureau relies on qualitative and quantitative evidence to determine if the lessening or prevention of competition is substantial and compares the state of competition with a hypothetical market without the practice in question. The Bureau considers both static and dynamic competition at this stage and focuses on conduct which reduces innovation. The Bureau also looks at indicia such as higher monetary prices; lower product quality, service, innovation, or choice; or whether switching between products/suppliers is limited.
In the case where the effect of a practice is to create barriers to entry or expansion in the market, the Bureau determines the state of competition in the absence of the anti-competitive acts.
The Bureau has multiple remedies available where it has proven a case of abuse of dominance. The Bureau encourages voluntary compliance and will usually seek a settlement, formalized in a consent agreement and registered with the Tribunal. However, where cases are not able to be resolved on a consensual basis or it is not appropriate, the Bureau may apply to the Tribunal, which has broad discretionary remedial powers.
Prohibition and Prescriptive Orders
The Tribunal may make an order prohibiting the anti-competitive practice. Alternatively, it may order that the firm takes the action that is reasonably necessary to overcome the anti-competitive effects of the practice. Failure to comply with such an order is a criminal offence
The Tribunal may order a firm to pay a fine of up to $10 million for a first order and $15 for subsequent orders. The purpose of the order is not punitive, but to promote compliance. The Bureau treats these orders as complimenting other remedies that are designed to restore competition. In determining whether a penalty is appropriate, the Bureau will consider the firm’s willingness to collaborate with the Bureau’s investigation/inquiry, the firm’s compliance history, and whether the conduct showed a reckless or wanton disregard for the Act.
In determining the amount of the penalty, the Bureau will consider the effect on competition in the market, the revenue from sales affected by the practice, the profits affected by the practice, the financial position of the firm, their history of compliance, and any other relevant factor. The Bureau is careful to ensure that these monetary penalties are of a sufficient quantum that they do not become the cost of doing business, while also not excessive.