Competition Act Amendments to Address "Unjustified" Canada-US Price Discrimination 

publication 

December 2014

Competition Bulletin
Dr. A. Neil Campbell, James B. Musgrove, William Wu, Student-at-Law

On December 9, 2014, the Minister of Industry introduced the Price Transparency Act ("Bill C-49") which is aimed at the perceived problem of higher retail prices of some products in Canada as compared to the United States. Bill C-49 will give the Commissioner of Competition (the "Commissioner") new powers to investigate and publicize cross-border price discrimination, but no power to take any enforcement action against it.

The Federal government first signalled a concern about what it calls "unjustified cross-border price discrimination" in its 2013 Speech from the Throne, and again in the Federal budget tabled in February 2014. The original intention was to prohibit geographic price discrimination that is not justified by higher operating costs in Canada. This proposal was widely criticized in the business, legal and policy communities as unworkable and intrusive price regulation (see McMillan's earlier bulletins here and here).

Bill C-49 instead addresses cross-border price discrimination through possible investigation and public exposure. It contains three key measures:

  1. If the Commissioner has reason to believe that the retail price of a product in Canada is higher than the retail price of an identical or similar product in the United States (the price differential need not be material) the Commissioner may commence an investigation to determine the facts, including the extent of and the reasons for the price difference. Unlike the other matters that the Commissioner has the power to investigate, the Commissioner cannot be required to conduct an inquiry into cross-border price discrimination by way of an application under oath from any six Canadian residents or a direction from the Minister of Industry. In contrast, under Bill C-49, the Commissioner has the sole discretion to initiate such an investigation. This will reduce but not eliminate the possibility that investigations are commenced in response to media or political pressures.

  2. The Commissioner is given extensive powers to obtain court orders to compel the production of records or written returns under oath, and these orders purport to be enforceable against persons outside of Canada, as well as the affiliates of the target of any investigation. (Bill C-49 also broadens the definition of "affiliate", which has important implications not only in this area but for merger-pre-notification, affiliate defenses for conspiracy conduct and other matters – see McMillan's bulletin).

  3. The Commissioner is required to publish the findings from any inquiry into cross-border price differences.

When he announced Bill C-49, the Minister stated that these amendments to the Competition Act (the "Act") "will not set or regulate prices in Canada", but will "create the tools necessary to investigate and expose cases of unjustified price discrimination". It should be expected that the potential for negative publicity and reputational damage that a company may suffer due to a finding of unjustified price discrimination will be used to deter such conduct.

This is a novel approach. Even though some of the most problematic aspects of the originally proposed regulatory approach have been avoided, there are serious concerns related to due process and the protection of confidential (and potentially competitively sensitive) information. There is also no substantive guidance on the framework for determining whether a particular differential is justified.

Assessing the Justifications for Differences

For the Commissioner to reach an appropriate conclusion about whether the cross-border price difference of a product is "justified by higher operating costs in Canada", the Commissioner must first have a defensible measure of cross-border prices and costs. Economies of scale, product safety or other regulatory standards, freight and importation costs, and the constantly fluctuating exchange rate, among other things, are all legitimate reasons for a cross-border price gap. It is unclear how the Commissioner will assess whether price discrimination is "unjustified" and how the Commissioner will identify and account for all of the legitimate reasons for a price gap for each individual product subject to investigation.

In the anti-dumping context, the Canada Border Services Agency engages in a comparison between actual export prices and home market prices to determine whether exporters that sell into Canada are engaged in dumping. The framework for this analysis is set out in detail in the Special Import Measures Act and Special Import Measures Regulations. The rules are a complex system with the result that the investigation process can be time-consuming and costly, but there is an established framework that must be followed. In the price comparisons under Bill C-49, the Commissioner will have enormous discretion since there is no guidance as to how price comparisons are to be undertaken.

Due Process

While Bill C-49 provides the Commissioner with expanded investigative powers, it does not establish any rights or procedures for the targets of investigation to respond to allegations and an inquiry conducted by the Commissioner. For all other conduct that may be subject to investigation by the Commissioner, the Commissioner acts as a law enforcement official who must bring allegations and evidence before the Competition Tribunal or a court in a proceeding in which the target can fully respond. In contrast, under Bill C-49 the Commissioner will act as both the investigator and judge, with the power to reach and publicize a conclusion unilaterally. Given the intended consequence of public shaming, clear and strong procedural protections are needed for persons that are subject to such investigations.

Where the Commissioner concludes that a person has "unjustifiably" priced products at higher prices in Canada than in the United States, Bill C-49 provides no avenue for the person to appeal the Commissioner's conclusion. Given the potentially serious reputational consequences, this is a major concern.

Evidence Gathering From Affiliates

Under the existing subsection 11(2) of the Act, the Commissioner can obtain court orders to compel a person under investigation to produce records that are in the possession of its Canadian or foreign affiliates. Given the wide definition of "affiliate" in the Act, a person under investigation may not be in a position to influence or control its affiliates. For example, when the Canadian corporation under investigation is a subsidiary of a foreign parent company, it may not be able to force an unwilling foreign parent to disclose records. Yet, the corporation, and its officers and directors, could be subject to significant criminal penalties for failure to comply with the order.

In 2010, subsection 11(2) and a production order made under this provision were subject to constitutional challenge in the Toshiba case,1 among other things, for violation of the right to be free from unreasonable search and seizure and for violation of the right to life, liberty and security of the person not in accordance with the principles of fundamental justice. The constitutional issues were left unresolved in this case after the court denied Toshiba access to documents that it sought to support its constitutional challenge. Soon after in 2012, similar constitutional arguments were made in the Royal Bank of Scotland2 case against subsection 11(2). This case was resolved on consent before the constitutional concerns could be addressed.

Bill C-49 expands the Commissioner's investigative power under subsection 11(2) in three ways. First, the parties that could be subject to a subsection 11(2) court order have been expanded to include individuals, in addition to corporations. Second, the range of potential affiliate sources from whom the Commissioner could compel disclosure is expanded with a broadened definition of "affiliate", which will apply more fully to partnerships, sole proprietorships, trusts and other unincorporated entities. Third, the type of documents the disclosure of which can be compelled now also includes written returns under oath, in addition to records. This is potentially a very intrusive power in situations where a party does not have control or influence over its affiliate and does not have the information necessary to prepare the required written return. It would have been desirable to limit these powers to situations where the affiliate is an entity under the control of the target of the investigation.

Protection for Confidential Information

Bill C-49 does not impose a duty of confidentiality on the Commissioner when he publishes a report on a cross-border price discrimination inquiry. Any confidential information about the person under investigation that the Commissioner collects in the course of the investigation could potentially be made public. In fact, Bill C-49 puts a positive obligation on the Commissioner to publicize a conclusion and, by implication, information required to support that conclusion. The Commissioner appears to have some discretion regarding the level of supporting detail that is necessary to explain the conclusion. However, there is no statutory guidance in respect of this crucial issue and no guarantee as to whether the Commissioner will exercise its discretion in a manner similar to the approach followed when enforcing other provisions of the Act.

Concluding Observations

In addition to the specific difficulties with Bill C-49 discussed above, a more fundamental question should also be addressed: What is the evil sought to be remedied? While the Government has referred to a widespread perception that Canadians pay more than Americans for a variety of products, it is not clear that this is a competition concern. Economists generally consider price discrimination to have benign or ambiguous effects, rarely causing economic injury. It is typical to see different levels of costs and competition as well as different consumer demand in different markets. In 2011, the Standing Senate Committee on National Finance studied cross-border price differences and found that they would be better addressed by import tariff reductions and regulatory reforms. The Commissioner's new responsibilities seem to be a solution in search of a problem, and may divert resources from other areas in which the Competition Bureau already has abundant work and constrained resources.

In summary, these proposed amendments establish a process through which a business may be found to be engaging in unjustified price discrimination and is subjected to substantial reputational damage, without a clear framework for determining what is "unjustified", without clear procedural protections to make its case, without assurance that its confidential information will not be publicly disclosed by the Commissioner, and without any avenue of appeal, all without a clear economic policy justification.

by Dr. A. Neil Campbell, James B. Musgrove and William Wu, Student-at-Law

1 Canada (Commissioner of Competition) v. Toshiba of Canada Ltd., 2010 ONSC 659, leave to appeal denied, 2011 ONSC 949.

2 Royal Bank of Scotland v Commissioner of Competition, Ontario Superior Court of Justice (East Region), Court File 13010-11.

a cautionary note

The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.

© McMillan LLP 2014