By Kristen Wittman
Have you ever wondered whether it would be possible to be the only player in the market? Is that anti-competitive behaviour or just smart business? Sometimes, manufacturers enter into agreements with their suppliers that restrain the ability of the suppliers to source products in order to ensure exclusivity in a market. But are those exclusivity agreements legal? In the age of supply chain disruption, should these exclusivity arrangements be allowed?
The answers may be found in certain sections of the Competition Act (the “Act”).
The purpose of the Act is to promote the public interest by eliminating anti-competitive activities in the marketplace. Vertical agreements are agreements between parties at different levels of the supply chain, such as agreements between a manufacturer and supplier. The Act creates a tribunal that may review vertical agreements where the agreements might contain price maintenance restraints or result in unfair market restrictions.
Assessing the potential effects on competition of vertical agreements is complex and raises issues relating to the market power of parties and barriers to entry. Competitive harm arises if an agreement establishes unfair market power, leads to higher prices, or operates as a barrier for new entrants. While there are legitimate types of vertical agreements, whenever a vertical agreement is introduced by someone with market power, this can raise competition law concerns.
While there is no obligation on any business to supply to or buy a product from another business, there are some matters of interest to the Competition Tribunal where a vertical agreement is in use.
Section 75 –Refusal to Deal
• If a manufacturer denies a supplier sales into a market, such as through an exclusivity agreement with another party which precludes the supplier being able to sell that manufacturer’s product at market price, this action could be reviewable by the Tribunal if certain requirements are met:
• if the supplier can demonstrate that its business had been substantially affected, or that it is unable to carry on its business as a result of not being able to obtain adequate supplies of a product on usual trade terms;
• the inability of the supplier to obtain adequate supplies results from a lack of competition among suppliers;
• the supplier is otherwise willing to meet the manufacturer’s usual trade terms;
• the product is in ample supply; and
• the refusal to supply has an adverse effect on competition in a market and otherwise reduces the availability of the product at market prices.
If these conditions are met, the Competition Tribunal can issue an order requiring the manufacturer to accept the supplier into the market.
Section 76 –Price Maintenance
Price maintenance occurs when a supplier of products sets a fixed minimum price at which another supplier in a vertical distribution chain may sell a product. These agreements can include manufacturer-suggested resale pricing.
The Act prohibits a person who produces or supplies a product from attempting, by means of agreement, to influence pricing upward or discourage lower pricing by others. This section is designed to protect the public by prohibiting an upstream supplier from preventing competition among retailers, thereby increasing the price paid by the ultimate consumer. At one time, the consequence of engaging in this behavior could include jail time, but in 2009 the provisions were decriminalized, so that now it is only a civil offence.
To be in breach, the restraint must have an anti-competitive effect in a market. This can be difficult to establish in the case of small and medium-sized enterprises. In assessing the anti-competitive effect in the market, three issues are considered:
• the relevant product and geographic markets;
• whether the party possesses market power; (market power is the ability of a party to increase prices above the competitive level for a significant period of time. Market share is only one indicator of market power.)
• whether the effect of the conduct on the market is adverse or positive.
Section 76(8) –Refusal to Supply
If a supplier induces a manufacturer to enter into an agreement by making it a condition that the supplier will only do business with that manufacturer if that manufacturer refuses to supply the products to others at market price, the excluded supplier could ask the Competition Tribunal to review this conduct. If the Tribunal finds the required conditions are met, it can make an order prohibiting the manufacturer and supplier from engaging in this conduct or requiring the manufacturer to do business with the excluded supplier.
A remedial order by the Tribunal will only be made where the conduct “has had, is having or is likely to have an adverse effect on competition in a market.” Whether the supplier has market power is a factor in determining whether its conduct will have an adverse effect on competition.
In determining market power, the Tribunal will compare the level of competitiveness in the market in the presence of the particular price maintenance conduct with that which would exist in its absence to determine whether the effect of the conduct creates, preserves or enhances market power. The Tribunal also looks at whether price maintenance conduct facilitates or is a result of coordination between suppliers or retailers that inhibits their competitive vigor, or whether the conduct excludes actual or potential competition at the supplier or retailer level. The question to be answered is: would the market be more competitive in the absence of the price maintenance conduct?
Section 77 – Market Restriction
If a manufacturer prohibits or requires the sale of products in a defined market, the behaviour is illegal if the following conditions are met:
• The conduct is engaged in by a major supplier or is widespread in a market;
• The conduct in question constitutes a practice (repeated behaviour);
• The restrictive practice discourages a party’s entry into, or expansion in, the market;
• The practice has substantially lessened competition, or is likely to do so.
Absent this “substantial lessening” these types of practices are legitimate. For the government, it’s a question of fairness. Remember playing Monopoly with your big brother, and flipping the board in the air when he ended up with all the hotels? Even if he didn’t cheat, it didn’t end well.
Kristen Wittman is a lawyer and writer living in Winnipeg. She is a partner at Taylor McCaffrey LLP and practices in the corporate commercial department. She has recently published Death Becomes Us, with Turnstone Press. She can be found at tmlawyers.com.