Canada: Potential Impacts Of "New" SLPC Factors In The Competition Act

On June 23, 2022, significant amendments were made to the Competition Act (the "Act"). Our previous blog post discusses these amendments in detail. Among other things, the proposed amendments added to the list of the factors enumerated in the Act that the Competition Tribunal (the "Tribunal") may consider under the abuse of dominance, merger review and civil competitor collaboration provisions when determining whether a practice, merger or agreement prevents or lessens competition substantially.

Background

Each of the abuse of dominance, merger review and civil competitor collaboration provisions require an effects-based analysis when assessing whether certain conduct is offside the Act. Under each of these provisions, the relevant effects threshold that must be met is a "substantial lessening or prevention of competition" (an "SLPC"):

• Abuse of dominance occurs when a dominant firm (or multiple firms in a situation of joint dominance) engages in a practice of anti-competitive acts that result in an SLPC. It is not the dominance or act itself that is prohibited under the Act, but rather, it is the combination of the market power coupled with one or more anti-competitive actions and the resulting negative effect in a market (or markets).
• Under the merger review provisions of the Act, the Tribunal may make an order when it finds that a merger "prevents or lessens, or is likely to prevent or lessen, competition substantially." An SLPC results only from mergers that are likely to create, maintain or enhance the ability of the merged entity, unilaterally or in coordination with other firms, to exercise market power.
• Under the civil competitor collaboration provisions of the Act, agreements or arrangements (existing or proposed) between competitors (or potential competitors) that are likely to result in an SLPC can be reviewed and challenged before the Tribunal.

For the SLPC analysis, the Tribunal will compare the level of competition which exists, or would likely exist, after the implementation of the impugned practice/merger/agreement to the level of competition which would exist but-for the practice/merger/agreement. The Tribunal will then consider whether the difference between these two levels of competition is substantial. This is a fact-intensive analysis that takes into account many factors. However, the Act enumerates several factors that may be considered when undertaking this analysis with respect to each provision.

SLPC Factors under the Act

With respect to abuse of dominance, when determining whether a practice has had, is having or is likely to have the effect of preventing or lessening competition substantially in a market, the Act previously required that the Tribunal consider whether the practice is a result of superior competitive performance. However, following the amendments, the Act now states that the Tribunal may consider the following factors as part of its analysis:

• the effect of the practice on barriers to entry in the market, including network effects;
• the effect of the practice on price or non-price competition, including quality, choice or consumer privacy;
• the nature and extent of change and innovation in a relevant market; and
• any other factor that is relevant to competition in the market that is or would be affected by the practice.

With respect to both merger review and civil competitor collaboration, the factors set out in the Act that may be considered as part of the SLPC analysis are substantially similar. Prior to the amendments, these factors were as follows:

• the extent to which foreign products or foreign competitors provide or are likely to provide effective competition to the businesses of the parties to the merger or agreement;
• the extent to which acceptable substitutes for products supplied by the parties to the merger or agreement are or are likely to be available;
• any barriers to entry into a market, including (i) tariff and non-tariff barriers to international trade, (ii) interprovincial barriers to trade, and (iii) regulatory control over entry, along with the effect of the merger or agreement on such barriers;
• the extent to which effective competition remains in a market that is or would be affected by the merger or agreement;
• the likelihood that the merger or agreement will result in the removal of a vigorous and effective competitor;
• the nature and extent of change and innovation in a relevant market; and
• any other factor that is relevant to competition in a market that is or would be affected by the merger or agreement.

Consistent with the amendments to the abuse of dominance provisions, the merger review and civil collaboration provisions were revised to allow the Tribunal to consider the following additional factors as part of its analysis:

• network effects within the market;
• whether the merger or agreement would contribute to the entrenchment of the market position of leading incumbents; and
• any effect of the merger or agreement on price or non-price competition, including quality, choice or consumer privacy.

Impact of the Amendments

While the SLPC amendments to the Act do, at the least, signal increased scrutiny with respect to certain non-price effects (such as privacy) and with respect to markets that exhibit network effects (including, for example, many markets in the digital economy), it is questionable whether these amendments will have any substantive effect on the SLPC analysis under the abuse of dominance, merger review and civil competitor collaboration provisions. This is due to the fact that many of these "new" factors are already considered by the Competition Bureau (the "Bureau") and the Tribunal as part of an SLPC analysis. In particular, barriers to entry (which include network effects), non-price effects (which include quality, choice and innovation) and the entrenchment of a competitor's market position are already considered as part of the SLPC analysis. This is clear based on both the Bureau's own guidance documents and existing case law.

For instance, in its Abuse of Dominance Guidelines, the Bureau notes that, in many cases, a substantial lessening or prevention of competition is created by erecting or strengthening barriers to entry or expansion. The Bureau also notes in these guidelines that as part of its SLPC analysis it assess the effects of a practice of anti-competitive acts on various indicators of the intensity of competition, including product quality, service, innovation and choice. These guidelines also note that the Bureau may consider effects on dynamic competition (i.e. the level of innovation in a market). Similarly, in the Bureau's Merger Enforcement Guidelines (the "MEGs") and Competitor Collaboration Guidelines (the "CCGs") (which incorporate the SLPC analysis guidance set out in the MEGs by reference), the Bureau states that in its SLPC analysis it will take into consideration barriers to entry, quality, choice and innovation.

The consideration of non-price effects, such as quality, choice and innovation is recognized in existing case law as well, including in the Tribunal's decisions in Toronto Real Estate Board ("TREB") and CCS Corporation and the Supreme Court of Canada's decision in Tervita. Moreover, barriers to entry are already considered as part of the SLPC analysis, as recognized in, among others, TREB and the Federal Court of Appeal's decision in Canada Pipe.

As such, many of the "new" factors included in the amendments may not substantively change the SLPC analysis due to the fact that they are not, in any real sense, "new". That being said, the enumeration of these factors may signal a change in the Bureau's enforcement priorities and the weight that the Tribunal may give to certain issues. Moreover, it is not yet entirely clear how some of these new factors will be interpreted by the Tribunal and the Bureau: namely, the consideration of "privacy", "network effects" and the entrenchment of "leading incumbents".

With respect to privacy, it is not clear how it will be considered by the Bureau. For example, will increased privacy for its own sake (outside of consumer preferences) be considered a goal of the Act, and decreased privacy be considered an indicator of an SLPC? Alternatively, it may be that privacy is simply being highlighted as an aspect of consumer preference, akin to choice and quality. That is, a product that has better privacy will simply be considered to be of higher quality, and whether different products offer different privacy options will be considered an aspect of consumer choice. If the interpretation is the latter (privacy as an aspect of quality and choice), then the assertion of this new "privacy" factor is not a substantive change to the existing SLPC analysis framework (as all aspects of quality can already be captured in the existing framework), and this amendment simply acts to highlight that the Tribunal and Bureau may be taking a closer look at the privacy dimension of quality and choice moving forward.

Similarly, barriers to entry are already a central issue in the SLPC analysis. As network effects are simply one type of barrier to entry, the new factors introduced by the amendments regarding network effects may simply be highlighting that network effects are an important barrier which should be considered. However, it is unclear whether this new factor will be considered a stand-alone factor which may change the way the SLPC analysis is applied with respect to markets that exhibit network effects. This is particularly notable in the case of the amendments to the merger review and civil competitor collaboration provisions, where "network effects" are now listed separately from barriers to entry.

Additionally, the CCGs, MEGs and existing case law (including, for instance, Tervita) already note that an SLPC will result from an agreement that is likely to create, maintain or enhance the ability of the parties to exercise market power. This requires consideration of many of the same issues that likely arise when assessing whether a merger or agreement would contribute to the entrenchment of the market position of leading incumbents. However, this new factor focuses more closely on whether the market power of a "leading incumbent" (as opposed to just any competitor) is created, maintained or enhanced. As such, this new factor may simply be reiterating the existing framework and signaling that this issue will be considered more closely when the competitor in question is a "leading incumbent". Alternatively, this new factor may be interpreted as an entirely new dimension of the SLPC analysis, which applies only in the case of "leading incumbents". If this is the case, it may signal that the Bureau is following changes in the EU, where concepts such as gatekeepers and structural presumptions are being introduced to competition law. This is out of step with the current approach in Canada, which, for the most part, does not focus on structural presumptions or apply the law differently to larger or leading firms, and uses market share only as an initial screen in the SLPC analysis.

Finally, it is notable that the amendments to the factors under the SLPC analysis focus on qualitative factors. Historically, while qualitative factors have been considered as part of the SLPC analysis, precedence and more weight have been given to quantitative factors - particularly in the merger review space. As such, it will be interesting to watch whether the introduction of these amendments and their focus on qualitative SLPC factors signals that the Bureau and Tribunal will be giving qualitative factors more weight in their analysis.

Impact of Future Amendments to the Act

The June 23, 2022 amendments are considered only the first step in a "comprehensive" review of the Act. There are additional potential amendments that are being considered as part of "phase two" of the review of the Act which may impact the interpretation of the new SLPC factors contained in the first phase of amendments. As discussed in more detail in the context of Senator Howard Wetston's ongoing consultation on Canada's competition policy framework, including in the discussion paper authored by Professor Edward Iacobucci and the submissions received from interested stakeholders, these phase two amendments could include, among others things: (a) changing the purpose clause of the Act; (b) further strengthening the merger review process, including adopting structural presumptions and lowering the burden with respect to emerging competitor acquisitions in the digital economy; and (c) further strengthening the abuse of dominance provisions for the digital economy, including adding provisions to deal with dedicated gatekeepers and serial emerging competitor acquisitions.

To the extent the purpose clause is updated (to include, perhaps, privacy as a grounding purpose), this could drastically change the interpretation of the new "privacy" factor in the SLPC analysis. Moreover, to the extent the proposed revisions regarding structural presumptions and stronger protection for emerging competitors and competitors in the digital economy (which includes many markets exhibiting network effects) are implemented, this may also impact how the new factors (particularly those new factors related to network effects and the entrenchment of the market position of leading incumbents) are interpreted, applied and weighed in the SLPC analysis.

Overall, these new factors in the SLPC analysis could have very little impact, and could simply signal that increased attention should be paid to modern issues, such as privacy and network effects. Alternatively, these amendments could signal the beginning of a change to the entire SLPC framework. The actual impact of these amendments will only be clear once these factors are interpreted and applied in practice as part of Bureau investigations and proceedings before the Tribunal.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.