Canada: Government Introduces Legislation to Amend the Competition Act, end the “Efficiencies Defence”

Last week, the Government of Canada announced its intention to amend the Competition Act (the “Act”) in three ways. Yesterday, the government introduced Bill C-56, draft legislation that implements the amendments. This Update compares the government’s original announcement (see our September 15, 2023 Update) against the draft legislation. We expect the draft legislation to move quickly through Parliament and come into force later this year.

Compelled Production and Market Studies

The government’s original announcement indicated the Competition Bureau would be given powers to compel the production of information from third parties to conduct market studies. The draft legislation permits the Bureau to seek a court order to compel information from third parties when conducting a market study, including the production of business records and sworn testimony of individuals.

However, the Bureau is only permitted to seek such a court order if the Minister of Innovation, Science and Industry has directed the Bureau to conduct the market study. The Bureau must also seek the Minister’s approval for the terms of reference for its market study.

The draft legislation introduces a political decision-maker, the Minister, into additional day-to-day aspects of administration of the Act.

Efficiencies Defence and Merger Review

The government’s original announcement indicated that the controversial “efficiencies defence” would be removed from Canadian merger law. 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 draft legislation deletes the efficiencies defence, root and branch, from the Act.

Interestingly, the draft legislation does not direct the Competition Tribunal to consider efficiencies as one of several factors as part of its review (i.e., a factor under section 93 of the Act), which the Bureau had recommended. However, existing Canadian case law and international best practices suggest that regardless of whether efficiencies are explicitly listed as a factor in its analysis, the Tribunal may continue to consider certain types of efficiencies (for example, marginal cost savings that are likely to result in lower prices or greater output) as a factor in determining whether a given merger is anti-competitive.

The draft legislation includes a transitional provision that preserves the efficiencies defence for mergers that are notified to the Competition Bureau or substantially completed before Bill C-34 comes into force. Consequentially, Canadian companies contemplating a strategic M&A with a competitor may wish to immediately expedite their plans so as to benefit from the current regime.

The draft legislation also preserves the efficiencies defence in other parts of the Act, including in section 90.1 of the Act, which relates to competitor collaborations.

Grocery Competition and Competitor Collaborations

The government’s original announcement indicated the Bureau would be empowered to take action against “collaborations that stifle competition and consumer choice, in particular in situations where large grocers prevent smaller competitors from establishing operations nearby.” In a recent market study into 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 draft legislation proposes changes to the Act that are far broader than what the announcement signaled, and which apply to all industries (not just the grocery industry). At present, section 90.1 of the Act permits the Bureau to make an application, and the Tribunal to prohibit agreements that prevent or lessen competition where at least two parties to such agreements are competitors.

The requirement that two parties be competitors means that, in practice, section 90.1 (as presently in force) does not apply to agreements like a lease between a landlord and grocer containing a restrictive covenant not to lease space to a competing grocer, because landlords are not competitors of grocers. The draft legislation would permit the Bureau to make an application, and the Tribunal to make an order, even if no parties to the agreement are competitors of each other, provided that a “significant purpose” of the agreement is to prevent or lessen competition.

In practice, all types of agreements that reference a competitor (e.g., most-favoured-nation agreements, meet-or-release agreements, quantity forcing agreements, exclusivity agreements, etc.) have as their purpose an effect on a competitor – if not competition itself – and therefore could potentially be subject to an order under section 90.1 of the Act if they prevent or lessen competition substantially. As amended by Bill C-56, section 90.1 will be significantly more similar to US antitrust law as articulated in section 1 of the Sherman Act.

However, as a practical matter, there are still significant gaps in section 90.1 of the Act that are likely to continue to make enforcement challenging for the Bureau. The Bureau has rarely sought and never successfully obtained an order under section 90.1 of the Act. Among other challenges:

• Except with the consent of the parties and the Commissioner of Competition, the Tribunal’s only remedy under section 90.1 is to make an order that parties to an agreement refrain from doing something under the impugned agreement. Unlike other provisions of the Act, the Tribunal has no authority to issue administrative monetary penalties or make other orders to restore competition.
• For the Tribunal to make an order under section 90.1 of the Act, the Bureau must establish that the impugned agreement has the effect of substantially lessening or preventing competition in a market. Agreements that narrowly injure private interests without substantially lessening or preventing competition as a whole are not subject to section 90.1. For example, while the government has titled Bill C-56 the Affordable Housing and Groceries Act, in order for the Bureau to actually obtain an order under section 90.1 in respect of any restrictive covenants in grocery leases, the Bureau would need to demonstrate that such clauses in individual grocery store leases are substantially lessening or preventing competition in an entire market (a geographic area likely much larger than any given plaza).
• As noted above, section 90.1 of the Act contains an efficiencies defence not impacted by the draft legislation. Under this provision, the Tribunal may not make an order in respect of agreements that are likely to bring about efficiencies that are greater than, and offset, any anti-competitive effects of the agreement.
• Unlike other sections of the Act which permit access to the Tribunal by private litigants, applications for an order under section 90.1 of the Act may only be brought by the Commissioner, who is resource constrained.

For further information concerning this draft legislation, please contact any member of our Competition and Foreign Investment Group.