Canada: Changes to the Competition Act: end of the “efficiencies defence”, return of compelled information production for market studies

On September 14, 2023, the Government of Canada announced its “fighting for the middle class” legislative plan. As part of that plan, the government intends to make substantial changes to the Competition Act, most significantly, ending the “efficiencies defence”. The changes could be implemented quickly.

Key Competition Takeaways

• Abolishing the efficiencies defence. The government proposes abolition of Canada’s controversial efficiencies defence, a unique characteristic of Canadian competition law whereby a merger that is otherwise found to be anti-competitive can, under certain conditions, be permitted to proceed if the merger is likely to bring about gains in efficiency that would be greater than, and offset, the anti-competitive effects of the merger.
• Enhanced information gathering powers in market studies. From time-to-time, the Competition Bureau conducts “market studies” to examine competition issues in specific markets and industries. Presently, the Bureau has no formal powers to compel information in support of such studies. The government intends to provide the Bureau with formal powers to compel production of information from industry participants in support of such market studies.
• New rules for restrictive covenants in grocery store leases. Following the lead of the United Kingdom, and a recent recommendation of a Bureau market study into the grocery sector, the Canadian government proposes to give the Bureau new powers to take action against grocery stores and their lessors when they enter into restrictive covenant agreements that preclude other grocers from establishing in a given location (e.g., a shopping plaza).

In November 2022, the Ministry of Innovation, Science and Economic Development launched a consultation process on the future of competition policy in Canada. While it is unusual for a law enforcement agency in Canada to lobby for specific legislative change, the Bureau made a comprehensive submission as part of the consultation process in March 2023 (the “Bureau Submission”). The Bureau Submission included 59 specific legislative recommendations, two of which appear to be adopted by the government’s announcement (although it is possible other recommendations may also be forthcoming).

Abolition of the Efficiencies Defence

The efficiencies defence is contained in section 96 of the Competition Act, and its repeal has been sought by the Bureau for many years. The efficiencies defence permits otherwise anti-competitive mergers to withstand legal challenge where they generate sufficient efficiencies to exceed and offset anti-competitive effects.

The Bureau has stated the defence is inconsistent with international best practices and permits anti-competitive mergers that are harmful to Canadians. In the United States and Europe, competition regulators might assess efficiencies as part of a merger review only if, for example, the efficiencies are likely to make the merging parties more competitive (i.e., achieving lower marginal costs) and total output is likely to increase as a result, or if the benefits of efficiencies are likely to be shared with consumers (i.e., passed through). However, unlike Canadian law, those foreign regulators do not consider efficiencies that result in exclusively private gain or that do not impact competition directly (e.g., head office savings or real estate savings). The Bureau has advocated for a similar approach in Canada, calling for the removal of the efficiencies defence and the adding of “efficiencies” as a new discretionary factor for the evaluation of a merger under section 93 of the Competition Act.

Draft legislation has not yet been released, but interested observers will pay close attention to the details of how the government’s proposal is implemented. One possibility is that implementation will render the Supreme Court’s decision in Tervita less relevant (or irrelevant) to future merger challenges. That decision had the practical effect of making merger challenges more burdensome and complex for the Bureau, because it required that the Bureau quantify anti-competitive effects in response to the efficiencies defence (which parties assert in almost all litigated cases).

Market Power Information Gathering Powers

The government asserts it will provide the Bureau with powers to compel the production of information to conduct effective and complete market studies.

Like other antitrust regulators around the world, the Bureau periodically conducts in-depth studies of individual markets and industries to identify competition problems and suggest solutions. While many peer agencies (e.g., the US Federal Trade Commission and the UK Competition and Markets Authority) have the authority to compel the production of information from parties subject to these investigations, the Bureau relies exclusively on public and voluntarily-provided information.

While draft legislation has not yet been released, it is possible the government will implement this change by permitting the Bureau to seek court orders for information or sworn testimony in a manner similar to the existing provisions of section 11 of the Competition Act, as suggested by the Bureau Submission. These orders have been criticized for being burdensome and frequently require significant cost and effort on the part of businesses who are compelled to respond.

Restrictive Covenants in Grocery Leases

The Canadian government asserts it will “empower the Bureau to take action against collaborations that stifle competition and consumer choice, in particular situations where large grocers prevent smaller competitors from establishing operations nearby”.

In a recent market study of the grocery sector, the Bureau recommended that governments restrict the ability of grocers and their landlords to enter into leases with restrictive covenants that preclude competing grocers from operating in a proximate location (e.g., a particular plaza). The Bureau’s recommendation mirrors a similar conclusion reached by the UK Competition and Markets Authority, which banned restrictive covenants relating to the grocery sector in 2010.

Looking Forward

While the recent government announcement signals an intention to amend the Competition Act, no changes will be effected until the government puts forward legislation that is approved by the necessary parliamentary processes. Canada’s Parliament will reconvene following summer recess on Monday, September 18. Previous amendments to the Competition Act were enacted without consultation as part of an omnibus budget bill in June 2022. Those amendments created a prohibition on wage-fixing and no-poaching agreements between employers, clarified the prohibition against drip pricing, and enabled private access to the Competition Tribunal in abuse of dominance matters, among other changes.

For further information concerning these proposed changes, please contact any member of our Competition and Foreign Investment Group.