Canada: Legislative Solutions and Regulatory Bypasses
8
Canada: Legislative Solutions and Regulatory Bypasses
8.1 A THREE-PRONGED LEGISLATIVE ASSAULT
The Canadian competition statute1 provides three discrete potential points of entry to the refusals to license and essential facilities debate.2 Their structure and interaction are determined largely by the complicated history of competition law in that country, the complex way in which enforcement powers have been allocated between the various actors in the regulatory process, and the fact that the statute distinguishes between criminal behaviour subject to fines, imprisonment and private actions for damages and behaviour that is a civil reviewable practice subject only to a remedial order (except abuses of a dominant position, which may also be subject to administrative monetary penalties).
The relevant provisions (which are analysed below) are section 75, targeting refusals to deal in particular, section 79, a general misuse of market power provision (with both these provisions being subject to the jurisdiction of the Competition Tribunal3) and section 32, creating special remedies for abuse of intellectual property rights (and subject only to the jurisdiction of the Federal Court).
8.2 ENFORCEMENT AND ADJUDICATION
A small irony that has not escaped the attention of Canadian commentators is that, until its amendment in 2002, the Competition Act allowed a public monopoly over the enforcement of laws intended to redress the evils of private monopoly.4 Prior to 2003, when the amendment came into force, private parties had no right to litigate for refusals to license. Now they may seek leave5 from the Tribunal to bring a refusal to deal claim under section 75, but they have no right to claim under the general abuse of dominance provision section 79, nor to bring an action under section 32.
8.3 SECTION 75: REFUSALS TO DEAL
Unusually, Canadian law contains a specific refusal to deal provision, section 75(1) of the Competition Act 19856 (as amended in 2002), that empowers the Tribunal to order one or more suppliers of a ‘product’ in a market to accept a person as a customer on usual trade terms,7 within a specified time,8 where all elements of the following five-part test are met9:
a) A person is substantially affected in his business or is precluded from carrying on business due to his inability to obtain adequate supplies of a product anywhere in a market10 on usual trade terms.
b) The person referred to in paragraph a) is unable to obtain adequate supplies of the product because of insufficient competition among suppliers of the product in the market.
c) The person referred to in paragraph a) is willing and able to meet the usual trade terms of the supplier or suppliers of the product.
d) The product is in ample supply.
e) The refusal to deal is having or is likely to have an adverse effect on competition in a market.
Section 75 does not require that the business refusing to supply be dominant or impel the Tribunal to inquire into whether the purpose of the refusal is predatory, disciplinary or exclusionary in nature. Neither does it require proof of substantial lessening or prevention of competition. However, what it does require is that the person’s inability to obtain adequate supply is the result of insufficient competition among suppliers.11
The first refusal to deal ruling of the Tribunal under section 75(1) occurred in the private action B-Filer Inc v The Bank of Nova Scotia12 (the refusal did not involve intellectual property). The Tribunal noted that even had the five necessary conditions of section 75(1) been met (which they had not), it would still have exercised its discretion to deny relief on the basis that the defendant bank had had objectively justifiable, non competition-related business reasons for terminating a pre-existing relationship with the plaintiff.13 It is interesting to speculate whether the Tribunal might in future just as easily accept arguments in the form of a defendant’s own pro-competitive rationales.
Prior to its amendment in 2002, section 75(1) had required only four conditions to be met before relief could be granted, and most of the jurisprudence relating to the interpretation and application of that provision precedes the addition of the fifth condition that a refusal to deal must cause or be likely to have an ‘adverse effect’ on competition in a market. One case invoking the truncated version was Canada (Director of Investigation and Research) v Chrysler Canada Ltd.15 The case touched on trade mark ownership and control, and involved a refusal by the Canadian subsidiary of the United States Chrysler Corporation to continue to supply spare parts for its cars to one Brunet who was in the business of exporting such parts to markets outside North America. Brunet had been supplied with parts, prior to a policy change by Chrysler. Indeed his exporting ventures had been actively encouraged by that company. After Chrysler’s rebuff, Brunet was able to obtain parts from other authorised Chrysler dealers, an avenue of supply quickly quashed by Chrysler once it found out about it. The Tribunal held, first, that the relevant ‘product’ (as the Act required16) comprised ‘proprietary’ Chrysler parts17 and, secondly, that insufficient competition existed among suppliers. More troubling to the Tribunal, however, was Chrysler’s explanation that its decision to cut off Brunet’s access to its parts was inevitable because of its American parent’s changed strategy to source most exports to the Western Hemisphere (Canada apart) from its United States plants, plants that had demanded in return that a condition be imposed on independents such as Brunet not to sell to licensed dealers outside the United States and Canada, the very condition that Brunet had allegedly breached. This Canadian version of what in the United States would be termed a legitimate business explanation, and in the European Union an objective justification, was rejected by the Tribunal on factual grounds. Chrysler was undone by its own internal memoranda that showed it had been just as much, if not more, concerned that parts sold to Brunet should not find their way onto the domestic Canadian market and there had been considerable doubt as to whether Brunet had actually accepted ‘a no sales outside North America’ limitation. Having placed something closely resembling the onus of persuasion on Chrysler,18 the Tribunal held that the company had failed to discharge it.19 The Tribunal did, however, go to some pains to point out that Chrysler could have had multiple objectives, one of them being to increase the ‘efficiency’20 of its operations worldwide, the implication being that, had that been its sole motivation for acting as it did, the outcome in the case could have been otherwise. The Tribunal also placed considerable weight on Chrysler’s previously harmonious dealings with Brunet and its failure to warn him about the consequences of continuing to export to destinations in Europe and Latin America. While falling short of finding a European or Aspen-style ‘duty’21 on the part of a dominant firm to continue dealing, its practical effect was not dissimilar.
The next decision of the Tribunal to involve the application of section 75 was Canada (Director of Investigation and Research) v Xerox Canada Inc (Xerox Canada).22 The case derived, like its United States counterpart a decade later,23 from Xerox’s decision to discontinue the supply of copier parts to independent service organisations to enhance (or at least preserve) the market positioning of Xerox’s own after-sales service activities. When the policy was put into effect in Canada, Xerox’s Canadian subsidiary found itself on the receiving end of a claim under section 75, still unencumbered, as the section then stood, by any need to point to any adverse effect on the competitive process. The Tribunal was thus able to focus on the effect on competitors alone, an effect it found easily proven. On the subject of inadequate supply, it rejected arguments that it should take into account those parts resuscitated from defunct machines24 or else provided on an incomplete, unpredictable and haphazard basis by independent manufacturers.25
The Tribunal’s attempts to pinpoint the market in which the refusal to supply operated were more than a little tentative. It is true that it ultimately found untenable Xerox’s contention that the appropriate market was the one in which it saw itself competing, a single unified market for the provision of a ‘package’ of equipment parts and services, preferring instead the regulator’s definition of a market for parts for Xerox copiers. The Tribunal also stressed that market definition depends on legislative context,26 thus hinting at the possibility that the definition might have been different for the purpose of meeting the competition statute’s other liability-creating provisions. Less helpfully perhaps, it suggested that even should it be wrong on these two points, the circle could still be squared by characterising the market for replacement parts as an ‘intermediate’ market.27 This flirtation with the now discredited notion of a submarket, while harmless in this context, could have more serious implications if more widely applied in leveraging situations.
As to the link between market definition and market power, the Tribunal pointed out28 that section 75, while it required the market in which the inadequate supply had occurred to be identified, did not stipulate that the party refusing supply had to wield any power in that market. (Indeed the section still does not so stipulate, even in its post-2002 incarnation, and while complainants may now have to prove an adverse effect29 on competition in a market, this may, of course, be the downstream market, in this case post-sales servicing.) The Tribunal was similarly dismissive of suggestions that Xerox had acted for the legitimate purpose of changing its distribution system, holding that the switch to in-house servicing was taken for the very purpose of curtailing competition in the downstream market.30
While intellectual property considerations were merely in the wings in Chrysler and Xerox Canada, they occupied centre stage in Canada (Director of Investigation and Research) v Warner Music Canada Ltd.31 The case arose out of the refusal by Warner and its Canadian subsidiary to grant a mail order firm, BMG Canada, licences to reproduce sound recordings in which Warner owned the copyright. BMG Canada wanted the licences so that it could compete effectively against Warner’s own licensees in the mail order record club business in Canada, by manufacturing its own records instead of buying them at wholesale prices. The Tribunal struck out the proceedings in an application for summary judgment, holding that the requirements in section 75 for an ‘ample supply’ of a ‘product’ and usual trade terms for a product show that the ‘exclusive legal rights over intellectual property cannot be a product’.32 It went on to expand on this33:
[T]here cannot be an ‘ample supply’ of legal rights over intellectual property which are exclusive by their very nature and there cannot be usual trade terms when licences may be withheld. The right granted by Parliament is fundamental to intellectual property rights and cannot be considered to be anti-competitive, and there is nothing in the legislative history of section 75 of the Act which would reveal an intention to have section 75 operate as a compulsory licensing provision for intellectual property.
The Tribunal thus justified its decision on two grounds. The first was a narrow one (here recast as a canon of statutory interpretation) and involved a literal reading of section 75 which would deny an intellectual property licence the status of a ‘product’. The second was an endorsement of the ‘what the State has granted it must expressly take away’ fallacy discussed in chapter one.34 While the case concerned copyright licences, the Tribunal’s approach could be applied more widely. The first ‘narrow’ approach could be applied to almost anything other than a physical object, and therefore would place beyond the reach of section 75 the kind of distribution system that figured in Oscar Bronner35 and the protocols for allowing product interoperability that lay at the heart of the Microsoft litigation in Europe.36 The wider approach is equally open-ended but is not easily applied, as we have seen, to forms of intellectual property not created by express statutory grant. The Tribunal’s thinking could be said to point in two different directions on the issue of coverage. From a policy perspective, however, the actual decision on the facts in Warner is unexceptionable. The record companies had no anti-competitive intent, neither was there an anti-competitive outcome. BMG Canada’s claims would have been regarded as unmeritorious by most courts in most jurisdictions. Ironically, post-2002, the Tribunal could have found for Warner without artificially reading down the meaning of ‘product’ or postulating an unstated legislative intent not to interfere in property rights.
8.4 SECTION 79: GENERAL AND SPECIFIC PROHIBITIONS
Section 79 is Canada’s general misuse of market power provision. Under it, dominant firms attract liability if they have engaged in (or are engaging in) a ‘practice of anti-competitive acts’ that have an intended negative effect on a competitor that is exclusionary, predatory or disciplinary, with the result that competition has been, is being or is likely to be prevented or lessened substantially. An inclusive rather than an exhaustive list of such anti-competitive acts is set out in section 78. Of the activities there listed, three are capable on their face of applying to refusals to deal. These are:
a) ‘Squeezing’ by a vertically-integrated supplier of the margin available to an unintegrated customer who competes with the supplier, for the purpose of impeding or preventing the customer’s entry into, or expansion in, a market.37
b) Pre-emption of scarce facilities or resources required by a competitor for the operation of a business, with the object of withholding the facilities or resources from a market.38
c) Adoption of product specifications that are incompatible with products produced by any other person and are designed to prevent entry into, or elimination from, a market.39
It will be noted that while the general prohibition in section 79 is effects-based, all the enumerated examples, with their referencing to ‘purpose’ and ‘object’, revolve around the dominant firm’s intentions. These are very mixed signals to be sending the regulator. Unsurprisingly, the resulting confusion is reflected in the regulator’s enforcement policy, as will be seen.
Much more fatal to the application of section 79(1) to refusals to license is section 79(5), which stipulates:
The range of rights covered by this provision is potentially much wider than those alluded to in counterpart provisions in other jurisdictions such as New Zealand. Trade secrets, for example, remain a matter of exclusive provincial jurisdiction.41 That said, to date no province has opted to enact legislation to protect trade secrets in general.42 Again, the reference to any ‘enjoyment of any interest’ would seem wide enough to embrace the various kinds of digital rights management systems developed for and used by copyright owners to protect electronic works and information products. Thus, should Canada proceed to pass its pending Copyright Modernisation Bill43 to, inter alia, create ‘paracopyright’ rules,44 the reference could, at first blush, cover the use by copyright owners of TPMs to restrict copying of and/or access to their works. It may not, however, do so in situations in which the right owner has built physical incompatibility into technology not in itself protected,45 nor where access or copying a work by users may otherwise be permitted on ordinary fair use principles.46
Exclusive rights provided by intellectual property law do not of themselves constitute abusive conduct by a dominant firm. Subsection 79(5) is intended to ensure that the legitimate use of intellectual property rights does not constitute an anti-competitive act. However, conduct that is beyond the ‘mere exercise’ of those rights could result in a violation of section 79, if it creates, preserves or enhances market power.
That the limitation may be more apparent than real can be seen from the decision of the Copyright Tribunal in Canada (Director of Investigation and Research) v Tele-Direct (Publications) Inc.49 The case involved allegations of both tying and refusals to license trade marks (namely the words ‘yellow pages’ and the ‘walking fingers’ logo), and had its origins in a dispute over the right to control access to advertising in the yellow pages of telephone directories. Tele-Direct both published directories and (through subsidiaries) provided what were essentially the services of an advertising agency (that is, it provided advice and information to would-be advertisers on the design, content and placement of particular advertisements in the directories). Tele-Direct had for a number of years used both its own workforce and outside agencies to provide the latter services. The external agencies were not paid directly by advertisers but received a cut of the money paid to Tele-Direct by advertisers as a combined fee for both the advertising space and the downstream advisory services. Outside agencies were engaged only for so-called ‘national accounts’ based on the volume of business done and geographical spread of placements. Tele-Direct reserved to itself all other business (approximately 90 per cent of the total) by bundling the provision of advertising space and downstream services.50 This, the Tribunal held, amounted to tied selling under the discrete tying provisions of the Canadian competition statute,51 in the process observing that leveraging across markets can, and in this case did, occur.
The Tribunal’s analysis of the tying claim was detailed and evidence-based, one that explored in detail rival economic approaches to the different weight to be given to functional interchangeability, past pricing policy, and practices and industry perceptions in defining the product markets. It also engaged in a complex US-style dissection of the ‘is it a one or two product?’ problem,52 while at the same time rejecting the then prevalent technique of trying to soften a rigid per se tying rule with a series of equally rigid exceptions, an approach it thought incompatible with the rule of reason approach to tying required under the Canadian statute.53
None of this complex reasoning was carried over into the Tribunal’s treatment of Tele-Direct’s refusal to license its trade marks, a refusal the Tribunal found to be fully justified even if motivated by a desire to exclude. As it found54:
[Tele-Direct’s] refusal to license [its] trade-marks falls squarely within [its] prerogative. Inherent in the very nature of the right to license a trade-mark is the right for the owner of the trade-mark to determine whether or not, and to whom, to grant a licence; selectivity in licensing is fundamental to the rationale behind protecting trade-marks.
There was no discussion of whether or how the trade mark might affect substitutability, and no attempt to apply (if only to reject) the two products requirement of the tying cases to refusals to license that figured so largely in Magill55 and IMS56 and dominated tying cases prior to Illinois Tool57 in the United States.58
This relative reticence can in part be explained by the existence of section 79(5), but that cannot be the whole answer. The Tribunal did concede that the limitation built into the subsection that the exempted act be ‘engaged in pursuant only’ (our emphasis) to the ‘exercise’ or ‘enjoyment’ of the protected right or interest, thus leaving open, even if only the merest of chinks, the door to future coerced licensing. The Tribunal made it clear, however, that such intervention would not in general be justified. Its starting (and for most purposes its finishing) point was that the trade marks statute allows trade mark owners to choose to whom they will license their trade marks,59 however selectively the right to refuse might be exercised (for example, to exclude future competitors) and whatever the motives of the excluder.60 This near-absolute discretion in the right holder was justified by the Tribunal on various grounds. The first was that coerced licensing would amount to a compulsory and involuntary sharing of goodwill.61 The second was that because the trade marks legislation did not contain any provision for compulsory licensing, this silence should be taken as an instruction from the legislature that such coercion should not be applied in other statutory contexts.62 Both these grounds manifest the kind of circular reasoning criticised in chapter four. The third ground is more idiosyncratically embedded in the intricacies of Canadian trade marks law, in this case in the requirement in the Trade-Marks Act 1985 that licences may be invalidated where the licensor has ‘no direct or indirect control over the character or quality’ of the goods or services protected by the mark.63 How, the Tribunal rhetorically asks, could Tele-Direct be expected realistically to exercise such control over competitors who shared no commonality of interest with it. Also noteworthy was the clear line the Tribunal drew between refusals to license and situations where anti-competitive provisions were actively attached to a trade mark licence.64