STRATEGIC ALLIANCES UNDER THE "COMPETITION ACT"
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Director ofInvestigation and Research
Competition Act
November 1995
The"Competition Act" is available in major public libraries orbookstores that carry government publications.
To obtain copiesof this document or additional. information on .the subjects discussed in it,readers may contact:
Complaints andPublic Enquiries Centre
Bureau ofCompetition Policy
Industry Canada
Hull, Quebec
K1A OC9
Telephone: (819)997-4282
1-800-348-5358
Fax: (819)997-0324
StrategicAlliances under the "Competition Act"
Director ofInvestigation and Research
"CompetitionAct"
InformationBulletin
Copyright Minister of Supply and Services Canada1995;
ISBN,0-662-61944-7
Catalogue No. RG52-2711995 Industry Canada IC5029OB95-10
TABLE OF CONTENTS
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Director'sPreface
Highlights toGuide Firms Considering Strategic Alliances
Part 1:Introduction
Part 2:Inter-Firm Cooperative Arrangements Part 3: Application of the"Competition Act"
3.1 GeneralRemarks
3.2 ProvisionsMost Relevant to Strategic Alliances
3.2.1 Conspiracy Provisions
3.2.1.1 Defences and Exceptions
3.2.1.2 Information Sharing
3.2.2 Export Consortia Provisions
3.2.3 Specialization Agreement Provisions
3.2.4 Merger Provisions
3.2.5 Joint Venture Provisions
3.2.6 Abuse of Dominant Position Provisions
Part 4: PublicEducation Program/Compliance
4.1 TheCommunications and Education Program
4.2 -AdvisoryOpinions
Part 5:Conclusions
Appendix 1:Illustrative Scenarios P.
Appendix 2: Howto Contact the Bureau of Competition Policy
Directors Preface
A growing numberof firms have turned to strategic alliances as a means of improving theircompetitiveness in an age of increasing international competitive pressures,the globalization of markets, and generally decreasing trade barriers. Indeed, several have taken advantage ofour compliance program to obtain advisory opinions from my office on proposedalliances. Nonetheless,, uncertaintyon the part of some business people regarding the legality of strategicalliances may increase the risk that opportunities to create alliances whichare beneficial for the economy may not be pursued. To reduce this risk, I am issuing this policy statementwhich provides general guidance and clarifies my enforcement approach tostrategic alliances under, the "Competition Act'' ¡]the "Act'¡^.
There are nospecific provisions: within the "Act" dealing exclusively withstrategic alliances, which is not surprising when one considers the myriad ofcorporate forms Which these arrangements have taken in the past and may take inthe future. At their broadest,strategic alliances may encompass any form of inter-firm cooperativearrangement beyond contracts completed in the ordinary course of business. A far narrower interpretation mightinclude only those alliances Which are joint ventures or entail an equityinvestment and endorsement of a longer-.term strategic plan. Various definitions have been used byothers in an attempt to distinguish strategic alliances from-alternative formsof inter-firm cooperation. Whilethese definitions may be helpful for particular studies the do little to assistin determining how the "Act" will apply to strategic alliances. Therefore, I have not adopted a setdefinition of a strategic alliance. My ultimate responsibility is the enforcement and administration of theAct, which is why this Bulletin is focused on the competitive effects ofstrategic alliances and not the form they may take.
The use by Canadian firms of strategicalliances to improve their competitiveness should generally lead to positive innovationand efficiency gains without accompanying negative effects on competition. As result, these alliances are unlikelyto raise competition issues. Indeed it is the Bureau of Competition Policy's experience that moststrategic alliances do not raise issues under the "Act." However,alliances can take a variety of forms with varying impact in the marketplaceand where they are likely to lead to anticompetitive effects, intended orotherwise, parties must be able to determine whether the ''Act" is contravened,This Bulletin provides guidance on how the Director will review, and ifnecessary seek to apply the "Act" to the few alliances whichpotentially lead to anticompetitive effects.
The Bulletinbegins by briefly describing some of the types of inter-firm cooperativearrangements Which have been characterized as strategic alliances. The remaining sections focus on theapplication of -the "Act" and key elements of our compliance program. The "Act" contains certainprovisions which do not involve any test of market power, and it is theBureau's experience that most strategic alliances are less likely to raise anyissues. under these- sections. Asa result, the bulletin focuses on those provisions of the "Act" whichinvolve a test of market power.
In conducting ouranalysis of a strategic alliance under the "Act," we will examineWhether an alliance is likely to maintain, create or enhance market power. Market power has been legallyinterpreted to be the ability of the parties to behave relatively independentlyof the market. Consistent-withthis legal interpretation, economists refer to market power of a seller as theability to increase price above competitive levels (or reduce output, quality,choice, service, promotional activity, innovation or other significantdimensions of rivalry, below competitive levels) for a sustained period oftime. Thus, the reason that fewstrategic alliances raise issues under the "Act" is because themajority of them do not result in market power.
In the fewsituations where market power is maintained, created or enhanced by a strategicalliance, the examination involves an in-depth analysis of the nature of thealliance. An alliance may bereviewable under a number of the provisions of the "Act," given thewide range of corporate activity which alliances may encompass. It has been ourgeneral experience that horizontal alliances involving competitors more oftenraise issues of market power than either vertical or conglomerate alliances,and consequently the focus of this Bulletin is on the provisions of the"Act" most applicable to horizontal alliances. Therefore, details on the legal testsWhich must be met under the provisions of the "Act" related toconspiracy, export consortia, .specialization agreements, mergers, jointventures and abuse of dominant position are given. Nine illustrative examples are also provided in Appendix 1.
While thisinformation should assist business people in determining the application of the"Act" to a particular alliance, it is not possible for this documentto answer all possible questions which might arise in an individual case. As a result, parties contemplatingentering into a strategic alliance, particularly one which is-likely to maintain,create or enhance market power, may wish to seek the Bureau of CompetitionPolicy's advice through the Program of Advisory Opinions.
George N. Addy
Director ofInvestigation and Research "Competition Act"
HIGHLIGHTS TOGUIDE FIRMS
CONSIDERING STRATEGIC ALLIANCES
- Most strategic alliances do not raise issues under the "Act."
- Vertical and conglomerate alliances are less -likely than horizontalalliances to raise issues under the "Act."
- The few strategic alliances which may raise competition issues are morelikely to involve those sections of the "Act" which involve a test ofmarket power.
- Firms acting as sellers will hold market power when they have theability to increase@ price above competitive levels (or reduce output, quality,choice, service, promotional activity, innovation or other significantdimensions of rivalry, below competitive levels) for a sustained period oftime,
- In the few cases where an alliance may result in market power, cautionshould be exercised by the parties to ensure that their behaviour does notinvolve or give rise to either an undue lessening or prevention of competitionunder the criminal conspiracy provisions of the "Act," or asubstantial lessening or@ prevention of competition under the civil reviewableprovisions.
- The greater the market power collectively held by the parties to analliance, the more likely is behaviour which Is potentially injurious tocompetition and the greater the likelihood of an inquiry under the conspiracyprovisions of the "Act."
- Where strategic alliances involve behaviour which would be particularlyinjurious to competition, such as agreements in respect of prices, output,marketing strategies or other areas important to rivalry, an inquiry under theconspiracy provisions of the "Act" may be initiated even if the marketpower held by the parties to the alliance is not so considerable.
- Alliances that involve the future acquisition of control will bereviewed under the civil merger provisions rather than the criminal conspiracyprovisions of the "Act" unless there is a basis for believing thatthe acquisition of control is a sham.
PART 1:
INTRODUCTION
In an age of increasing international competitive pressuresglobalization of markets, and generally decreasing trade barriers, somecompanies may find it difficult to match the product and service offerings oftheir rivals. Certain firms haveturned to cooperative arrangements, more generally referred to as strategicalliances, as a means to improve their competitiveness in these circumstances.
Canadian firms' use of strategic, alliances to -improve theircompetitiveness will often lead to positive innovation and efficiency gainswithout accompanying negative effects on competition. As a result these alliances are unlikely to raise concernsamong competition authorities. Indeed, it is the experience of the Bureau of Competition Policy (theBureau) that most strategic alliances do not raise issues under the"Competition Act" (the "Act") [note 1]. However, incircumstances where alliances are likely to lead to anticompetitive effects,intended or otherwise, the Bureau needs to be in a position to respond.
Uncertainty on the part of some businesspeople regarding the position of the Director of Investigation and Research(the Director) on strategic alliances ma increase the risk that alliances whichare beneficial to the economy may be abandoned. In order to provide greater certainty and avoid achilling-effect on these transactions, the Director believes that, as part ofthe Bureau's Program of Compliance, it would be helpful to publish a policystatement to clarify the enforcement approach taken to "inter-firmcooperative arrangements, be they called strategic alliances, joint ventures,or any other name.
Strategic alliances and other forms of inter-firm, cooperation may takenumerous forms and have varying impacts in markets. It is the Bureau's experience that the majority of strategicalliances are either neutral or procompetitive, often designed to takeadvantage of particular firms' competencies or to effect efficiencies which maylead to enhanced competitiveness in international markets. However, there may be instances whereserious competition issues are raised in respect of strategic alliances.
This documentprovides general guidance on the status of strategic alliances under the"Act." While this-statement will address a number of key issuesraised under the various sections of the "Act" which may potentiallyapply to such arrangements, .particularly horizontal alliances, it cannotanticipate all questions that may arise in the marketplace. It is not a bindingstatement of how discretion will be exercised in a particular situation. Guidance regarding a specific situationmay be requested from the Bureau through its Program of Advisory Opinions. This Bulletin is also not intended tobind or affect in .any way the discretion of the Attorney General of Canada inthe prosecution of matters under the "Act." Nor is it intended to bea substitute for the advice of legal counsel. The approach outlined does not represent a substantivechange in' enforcement policy or arestatement of the law. Final interpretation of the law is the responsibility of the courts andthe Competition Tribunal.
PART 2:
INTER-FIRMCOOPERATIVE ARRANGEMENTS
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Many firms arefacing external pressures to become more innovative and efficient in order toremain competitive in domestic and foreign markets. These pressures include falling trade barriers; innovationswhich affect the types of products and services. produced, the productionprocess, or the organization of firms and institutions; and, consumer demandsfor better product and service quality, highly customized products andservices, and greater product and service variety. These external pressuresmake u the forces of economic globalization p
and tradeliberalization which are the dominant trends in commerce in the 1990s,especially in the North American, South-East Asian and European markets. The response of some firms to these,pressures is to form strategic alliances.
The arrangements in which firms may- become involved, in response tothese pressures, may take numerous forms and have varying impacts in themarket. In this section there aredescriptions of the more common forms of alliances and explanations of howtheir structure and behaviour may give rise to inquiry under the"Act." This Bulletin does not offer a definition of strategicalliances, but instead relies upon several of the more common features ofalliances. The lack of adefinition does not affect the approach the Bureau will take in examining thecompetitive effects of a particular alliance.
Many strategicalliances are characterized by the continuing independence of the partners and,while generally established to jointly pursue medium to longer term goals, theyoften have a set time frame and termination date. A common feature of some alliances is the acquisition of aminority, non-controlling investment by one of the parties in their alliance partner,together with some sort of undertaking to work or),a cooperative basis in aparticular area. In addition,these arrangements may provide for the exchange of property rights or technicalassistance, but allow for the parties' independent pursuit of interests outsideof the alliance. Typically,strategic alliances cover only a portion of the partners total operations(e.g., research and development, promotional activity, or foreign sales). Onthe other hand, even the most informal strategic alliances differ from"one-shot" contracts because the partners make some attempt to aligntheir longer-term interests. Hence, information sharing on technologies, products, processes, and/orcustomer needs is generally greater compared-to more traditional contractualarrangements.
Alliances mayalso act as a mechanism for transferring the skills and relationships ofemployees within participating firms. These resources may be hard to acquire through normal markettransactions. Many alliancesinvolve something new, innovative looking: a new research and developmentprogram, new products, technologies and processes, or a new marketing strategyto be conducted jointly by the parties. The adjective "strategic" has a definite meaning here. It Implies a concern with thelonger-term, with investment rather than day-to-day operations, and withdeveloping new markets rather than servicing existing ones.
Another distinguishing feature of strategic alliances is that theygenerally involve swaps, trades, or the barter of goods-or, services, ratherthan the exchange of goods and/or services for money. As is generally the, case with barter, there must be a closealignment of interests for this to be beneficial, illustrating thecomplementary and reciprocal nature of the alliance partners' goals. Each. party has something the otherwants, involving either tangible or intangible assets (e.g., skills knowledge,reputation or contacts). Strategicalliances, particularly those involving international partners, can also bedesigned to facilitate transfers of technology, surmount non-tariff barriersto' trade, and/or reduce the time needed to gain access to new markets whereexpertise on local market conditions is required.
In short, the major features of strategic alliances appear to be, therelative continuing independence of the parties in respect of those matters notcovered by the alliance, a set (albeit longer-term) time frame; limited scopeof the arrangement and greater flexibility of the parties compared to takeoversor acquisitions; and, reciprocity between the parties, as seen in the sharingof objectives, information and key assets. Whatever the form taken, the competition analysis of aparticular strategic alliance will focus on its effects and likely effects, aswell as the purpose for which the alliance is formed.
The Bureau Will be particularly concerned with strategic alliances incases where there is either a substantial or undue lessening or prevention ofcompetition. In determiningWhether either of these thresholds is met the Director seeks to determinewhether the strategic alliance is likely to maintain, create or enhance marketpower. Market power may exist ateither a selling or buying level. Market ability to increase price abovecompetitive levels (or reduce output, quality, choice, service, promotionalactivity, innovation or other significant dimensions of rivalry, belowcompetitive levels) for a sustained period of time. The Director will also examine the nature of the strategicalliance to determine if competition is diminished and, if so, whether the"Act" applies and which of its, provisions are the most relevant.
PART 3:
APPLICATION OF THE COMPETITION ACT
3.1 General Remarks
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A fundamental objective of the "Act," as highlighted by itspurpose clause, is to foster competition so that Canadian businesses becomemore efficient and are better able to adapt to changing markets both at homeand abroad.. In Canada', our small and geographically sparse markets have oftenresulted in firms that, though large relative to the domestic market, are smallby world standards. In an age ofincreasing international competitive pressures, globalization of markets, andgenerally decreasing trade barriers, there is a continuing requirement forCanadian business to become more efficient. This is recognized both in Canada's competition legislationand in the Bureau's enforcement approach.
At the same time, a fundamental premise of the law is that firmsindependently operating in an unrestrained market system are best able to meetthe constant pressure to innovate, improve and adjust to changing consumerdemands and market conditions. This is the best means of allocating our economic resources. In an effort to balance these twoprinciples, the "Act" principally seeks to prevent those businesspractices which unduly or substantially lessen or prevent competition and sodiminish the efficiency and competitiveness of the Canadian economy. The "Act" also containscertain provisions which do not involve any test of market power. These include bid-rigging, certaintypes of agreements among federal financial institutions, price maintenance andconsignment selling.
Strategic alliances may come-to the Director's attention either throughthe parties to the alliance, a. complaint, media reports or staffresearch. In each of theseinstances, Bureau staff carry out a preliminary examination and determinewhether further .action is, warranted. [note 2] If upon further examination,the Director believes on reasonable grounds that there has been a contraventionof the criminal or civil reviewable provisions of the "Act" or of anoutstanding order made under the "Act," the Director is required tocommence an inquiry. [note 3] All inquiries are conducted in private. Once an inquiry has begun, the Directorhas access to a number of investigative tools.
At any stage of an inquiry relating t thecriminal revisions of the "Act," the Director may refer a matter tothe Attorney General. The AttorneyGeneral determines Whether charges should be laid and conducts prosecutions orsuch action as the Attorney General may wish to take. In the case of an inquiry into a civil reviewable matter,the Director may apply to the Competition -Tribunal for a remedial order. [note4] The Tribunal may issue orders designed to remedy the effects of the conductin question, but it cannot fine firms or take other punitive action. Private rights of civil action are alsoavailable to anyone who has suffered losses or damages as a, result of aviolation of the criminal-provisions of the "Act" or contravention ofan, order issued under the "Act."
3.2 ProvisionsMost Relevant to Strategic Alliances
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There are no specific provisions within the "Act" dealingexclusively with strategic alliances. This is not surprising when one considers the myriad of forms whichthese arrangements--may take. Manystrategic alliances involve types of cooperation among firms which do notdiffer significantly from those effected in the past. Hence the Bureau's analysis of these alliances will followthe analytical framework dictated by the applicable section. of the"Act." The fact that a relationship between two or more firms iscalled a strategic alliance does not in any material manner affect its legalstatus under the "Act."
Most strategic alliances will pose no competition issues, because theydo not maintain, create or enhance market power. Those which do, however, may be reviewable under a number ofprovisions of the "Act," given the wide range of corporate activitywhich strategic alliances may include. It is possible a particular alliance may be reviewed under the-criminalconspiracy provisions of the "Act" or any of the civil provisionsrelated to specialization agreements joint ventures, abuse of dominant positionor mergers. In addition, analliance between vertically related firms may also be reviewed under thevertical restraint provisions of the "Act," including tied soiling,exclusive dealing, market restriction, or price maintenance [note 5] dependingupon the nature of the arrangement. It has been the Bureau's experience that horizontal arrangementsinvolving competitors are more likely to raise competition issues than eithervertical or conglomerate alliances. It is only in very limited circumstances that arrangements between firmswhich are either vertically related or are in different lines of operation(i.e., conglomerate alliances) are likely to be found to maintain, create orenhance market -power. [note 6] In light of this, the focus of this documentwill be the provisions of the "Act" most applicable to horizontalalliances.
In most of the cases where an alliance results in market power and issubject to examination, it is the Bureau's expectation that following anexamination of the nature of the alliance, the alliance usually will fallsquarely within a single section of the "Act", and the'Director willadhere to the analytical approach dictated by the relevant provision. However, given the- broad range ofactivities which strategic alliances may encompass, it is possible that several -sections of the "Act" may apply.
Parliament has clearly contemplated that there can be an overlapbetween various provisions within the "Act." While the possibility ofreview under several sections of the "Act" exists, since -1 986 therehave only been a handful of cases where the Director has initiated an inquiryunder both the civil and criminal provisions of the "Act" for aparticular fact situation. Whilean inquiry pursuant to either the abuse, conspiracy or merger provisions may becommenced concurrently, the "Act" limits prosecutions or applicationsto the Competition Tribunal for remedies to a single section on the basis ofthe same or substantially the same facts. In determining which provision is the most appropriate an analyticalframework is also implicitly determined ---for example, either an unduelessening or prevention of corn petition test with no efficiency considerationsin the case of a criminal conspiracy investigation, or a substantial lesseningor prevention of competition test with an efficiency trade-off as would-be thecase in a reviewable merger investigation.
Generally, the Bureau will examinealliances that involve the future acquisition of control [note 7] as mergers,unless there is a basis for believing that the acquisition of control is asham. [note 8] Where there is evidence of an agreement in violation of theconspiracy provisions arising from an alliance or discussions related to aprospective strategic alliance, the Director will launch a criminalinvestigation. Factors which bearon this decision include evidence of an anticompetitive objective, intent oreffect, covert or fraudulent behaviour, the nature of the evidence and whetherthere is a need for deterrence through criminal remedies. Finally, any acquisition of controlthrough a strategic alliance, public or otherwise, cannot insulate the partiesfrom initiation of an inquiry under the conspiracy provisions into pastcriminal conduct which occurred prior to the acquisition of control.
A fuller description of the relevant provisions of the "Act"is provided below to assist business people in determining a particularsection's applicability. Althoughthis- document provides a summary of the major considerations, more detailedinformation is available from the Bureau on its enforcement approach toparticular provisions.,
3.2.1 ConspiracyProvisions
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Strategic alliances between competitorsinvolve agreements which may be reviewed by the Director under the criminalconspiracy provisions of the "Act" in certain circumstances. The Crown's burden of proof is thecriminal standard of "beyond a reasonable doubt". Sanctions are severe in cases ofconviction with fines Up to $l0 million and imprisonment terms up to five yearsfor individuals reflecting the serious nature of the offence.
Substantively, section 45 of the "Act" prohibits parties fromentering into an agreement which, "inter alia," prevents or lessenscompetition unduly or is likely to do so. Several elements must be established in order for an offence to befound. First, the Crown must prove -the existence of anagreement, with or without direct evidence. The "Act" provides for the finding of an agreementfrom circumstantial- evidence, and in past judicial decisions-exchanges ofinformation have been used to infer the existence of an agreement in certaincircumstances. [note 9] Second, the agreement is one whose likely effect is toprevent or lessen competition unduly. [note 10]Finally, the Crown must show"mens tea" or a "guilty mind". This involves establishing that the parties intended toenter into the agreement -in question, Were aware of its terms and intended tocarry it out. It is also necessaryto show that the, parties intended to lessen competition unduly which can besatisfied by establishing that a reasonable business person, who can bepresumed to be familiar With the business in Which he or she-engages, would orshould have known that the likely effect of the agreement would be to undulyprevent or lessen competition. [note 11 ] The Supreme Court of Canada has notedthat in most situations where it is shown that the agreement is likely to havean undue effect, the Crown could establish that this was the case. [note 12]
The Supreme Court has provided considerable guidance on the meaning ofthe element of undueness. [note 13] In addition to stating that an undue effectis one which is serious or of significance the Court outlined a two-stepapproach which may be used to determine undueness. After determining: the relevant product and geographicmarkets in which the parties operate, the first step is to determine whetherthe parties to the agreement have market power or will be likely to obtain itpursuant to the agreement. Consistent with other provisions of the "Act," the SupremeCourt has made it clear that market share, alone, is not sufficient todemonstrate market power. Otherfactors are also of importance, particularly the ease of entry. [note 14] The SupremeCourt has noted that possessing only a moderate amount of market power may besufficient to support a finding of undueness. [note 15]
In the second step the Court will evaluate the parties' behaviour todetermine whether some behaviour likely to injure competition has occurred, oris likely to occur. Price fixingrestrictions on-output or market sharing are almost always of competitivesignificance, and hence the Director will view such agreements as constitutinginjurious behaviour. Likewise,-incases Where product quality, service, promotional activity or innovation are animportant determinant of competitive rivalry such that an agreement in respectof one of these is likely to have a significant adverse effect on competitionbetween the parties, the Director may view such agreements as providing groundsfor inquiry where the parties possess -market power.
The Supreme Court has stated that it is the combination of market powerand injurious behaviour that makes a lessening of competition undue. In noting that many combinations arepossible, the Court suggested that "a particularly injurious behaviour may... trigger liability even if market power is not so considerable". [note16] It is the Director's position that the. converse is also true, in that witha considerable amount of market power a less injurious behaviour may triggerinitiation of an inquiry under the "Act.".
Applying the above test to strategic alliances would involve thefoil-owing determinations. First,have the parties to the alliance entered into an agreement? Second, does the alliance, or is itlikely to, unduly lessen or prevent competition? Third, do the requisite elements of intent exist? In order to address the issue ofundueness within the framework discussed. by the Supreme Court, the BureauWill: (i) define the relevant product and geographic markets affected by thestrategic alliance; (ii) determine whether the parties to the alliance possessmarket power in the defined relevant markets, or whether they are likely toobtain market power in these markets as a result of the alliance; (iii) assesswhat behaviour is specifically restricted or prescribed by the strategicalliance; and, (iv) determine if the alliance results in a combination ofmarket power and behaviour injurious to competition which is serious orsignificant.
As the above discussion indicates, only those elements of a strategicalliance which represent a serious restraint of competition would be targetedby the conspiracy law. This meansthat many of the beneficial aspects of a strategic alliance may not bechallenged. For example, wherecompetitors develop technology sharing agreements and reciprocal patentlicensing there may not- be a serious adverse effect on competition, but whereancillary to these arrangements the parties begin to allocate markets betweenthemselves or agree on prices, then this may run afoul of the conspiracyprovisions. Unless the beneficialelements of the cooperative arrangement are tied to a broader conspiracy theywill not be challenged by the Bureau.
In setting out the test of undueness the Supreme Court made it clearthat the test focuses solely on the competitive effects, and not theefficiencies which may result from the agreement: "Considerations such asprivate gains by the parties to the agreement or counterbalancing efficiencygains to the public lie ... outside of the inquiry under paragraph 32(l)(c)[now paragraph 45(l)(c)].,Competition is presumed by the "Act" to bein the public benefit." [note 17] Thus, parties, in considering whether toenter into strategic alliances, should realize that if an agreement undulylessens or prevents competition, efficiencies -provide no defence under,section 45.
3.2.1.1 Defences and Exceptions
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Not allagreements between competitors violate the conspiracy provisions, as the"Act" contains twelve specific defences. Among these, the following ma' be more likely to haveapplication to strategic, alliances -- an agreement in respect of- the exchangeof statistics; the definition of product standards; the size and shapes ofproduct packaging-, cooperation in research and development; restrictions onadvertising or promotion; or, measures to protect the environment. There are also specific defencesdealing with export consortia and specialization agreements, which aredescribed in separate sections, below.
It is importantto note that these defences are not without limits. The "Act" makes it clear that what would not beacceptable under the basic conspiracy provisions will not be permitted to occurthrough activities related to these defences. As a result, if the strategic alliance is likely to lead toan undue lessening or prevention of competition in respect of prices, quantityor quality of production, markets or customers or channels or methods ofdistribution, or if the alliance restricts anyone from entering into orexpanding a business, the defence does not apply.
It is theDirectors position that for a defence to be lost, it is not necessary that theagreement be directed explicitly at any of these fields, only that one of thesedimensions of competition is likely to be lessened or prevented unduly as aresult of the alliance. Consequently, a strategic alliance which may be directed primarily atresearch and development, but which is likely to have an undue effect onprices, for example, owing to an ancillary arrangement to jointly market anddistribute the newly produced goods or services, may cause the Director toinitiate an inquiry under the conspiracy provisions. At the same time, the beneficial features of the strategicalliance will not be subject to challenge by the Director unless they are seenas part of a broader conspiracy.
To date the courts have not considered a conspiracy case in which thedefences and exceptions, under subsections 45(3) and 45(4) respectively, havebeen argued. Historically, thekind of cases brought before the courts under section 45 have generally been price-fixingor market sharing agreements. Furthermore,the Bureau has dealt with very few requests for advisory opinions in, areasrelated to the defences. Nevertheless, the scope of the exceptions is relatively wide. This suggests that where the partieswish to avail themselves of a defence under subsection 45(3) -for a strategicalliance that results in market power, caution would indicate that they maywish to strictly confine the agreement to the elements of the specific defenceunder subsection 45(3) in order to avoid straying into the fields listed in theexceptions in subsection 45(4). For example, firms possessing market power who enter into an agreementin respect of product packaging are advised not to extend the agreement to themarketing or promotion terms particularly price, of the product. It should be emphasized however, thateven if a party has lost the defence it had available under subsection 45(3),it Would still be necessary to demonstrate in any prosecution under subsection45(l) that the agreement unduly _prevents or lessens competition.
3.2.1.2 Information Sharing
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Strategicalliances often involve a considerable exchange of information between theparties. Such exchanges aregenerally constrained, by the terms of the alliance and may not extend beyondthe confines of the alliance-agreement. The reasoning behind this is that it is not normally in the interest ofany one alliance partner to risk losing a competitive advantage it may holdrelative to its partners when these firms are its competitors. However, information sharing may alsoextend beyond the terms of the alliance agreement either between the alliancepartners or to outside firms.
The exchange ofinformation will not necessarily give rise to competition issues under the conspiracyprovisions. Indeed, competitivemarkets function more efficiently when information is relatively free andopenly available to market participants. At the same time it is recognized that information exchanged amongcompetitors who collectively possess market power may have serious adverseeffects on competition, depending upon the nature and timing of the informationexchange. Where markets arecharacterized by high levels of concentration, barriers to entry and relativestability, information exchanges in respect of sensitive commercial informationmay reduce uncertainty about rivals' competitive responses and so act tofurther temper rivalry. When theproducts involved are relatively homogeneous and firms compete across a limitednumber of competitive variables, the risk that such exchanges will havesignificant adverse effects on competition is further heightened. In light of this and the possibleapplication of section 45, the parties to a strategic alliance which results inmarket-power must remain cognizant of the. risks involved when information. isexchanged either directly via the alliance, or indirectly via an industry ortrade association, or other third party.
in order forinformation sharing among competitors to cause the Director to initiate aninquiry under section 45, the information exchange would have to satisfy all ofthe elements of the conspiracy provisions discussed above. Hence, it would be necessary toestablish that either the information exchange itself constitutes an "agreement"between the parties, or that the information exchange is part of a broaderagreement in violation of section 45. Second, the information exchange must be one Which gives rise, or islikely to give rise, to an undue lessening or prevention of competition. Finally, the requisite elements ofintent must be demonstrated. Depending upon the type of information to be shared, the exchange mayqualify for one of the defences to section 45- provided none of the exceptionsapply.
The SupremeCourt's discussion of undueness makes it clear that without market power, aninformation exchange among strategic alliance partners will not be subject tosection 45. Furthermore, Where-the' information being exchanged among alliance partners is not likely, tohave a significant adverse effect on competitive rivalry or relates to mattersthat lack competitive significance, it is unlikely to constitute behaviourinjurious to competition.
As a result, it is only in circumstances where the parties to theinformation exchange collectively possess market power and are engaged in the-type of information sharing which may adversely impact competitive rivalry ina serious or significant way that section 45 applies.
The risk of initiation of a formal inquiry under section 45 is alsoreduced when the. alliance partners design the sharing of information betweenthemselves in a manner which preserves the ability, of the individual partiesto determine "independently" what strategy, outside of the alliancethey will follow in the market. Itis also advisable not to use the alliance as a means of "signaling"to competitors in the market what action the alliance partners wish theiroutside rivals to take or what action an individual member of the alliancewishes its partners to take in an area outside the scope of the allianceagreement.
The risk that an inquiry may be initiated in respect of informationsharing increases with several factors. First, the greater the market power collectively held by the parties tothe information exchange, the more likely it is that an information exchange inrespect of any significant aspect of rivalry may adversely impact oncompetition. Second, whenparticularly sensitive information important to rivalry is shared, this may bemore likely to be viewed as behaviour injurious to competition. In this regard,exchanging information in respect of current or future pricing, costs, tradingterms, or marketing strategies significantly heightens the risk of inquiry bythe Director. [note 18] Direct exchanges of sensitive commercial informationbetween competitors are riskier than those made through an independent thirdparty which holds the information in confidence, although care needs to also betaken when involving these or other third parties, particularly tradeassociations. [note 19] Firms should also be cautious in sharing the analysesor conclusions developed from the information exchange, in order to preservetheir ability to act independently beyond the alliance. Similarly, the exchange of disaggregateddata which allows for identification of an individual firm's plans is riskierthan exchanges involving aggregated data. Third, any evidence of anticompetitive intent increases the likelihoodthat an inquiry may be initiated. Evidence of coercion on the part of one or more of the alliance partnersto have another party act in a prescribed anticompetitive manner may lead to aninference of anticompetitive intent.
3.2.2. ExportConsortia Provisions
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The importance of exports to theCanadian economy is recognized both in the purpose clause of the"Act" and in the export defence to the general conspiracyprovisions. Subsection 45(5) ofthe "Act" provides a defence to an alleged conspiracy where theagreement relates only to the export of products from Canada.
However,like the earlier discusseddefences, this is not absolute and hence the defence can be lost under certaincircumstances. First, the defence applies to agreements that relate only to theexport of products from Canada. Those agreements which may impact negatively on the Canadian marketwould therefore be subject to review by the Director under the general,conspiracy provisions to determine, in particular, whether the parties. to theagreement intended to lessen or prevent competition unduly in Canada. [note 20]Second, if the alliance in respect of exports is likely to reduce or limit thereal value of the exported product, the defence is lost. Third, in cases where the exportalliance restricts other firms from entering or expanding their business ofexporting products from Canada, the defence is negated. Finally, the defence will be lost inthe event that the alliance unduly prevents or lessens competition in thesupply of services facilitating the export of the product from Canada.
A final consideration, whichgenerally applies but is particularly important in the case of exportconsortia, is the application of foreign competition laws. Canadian businesses need to recognizethat the export defence under section 45 applies only to Canadian competitionlaw, and provides no defence or exemption under the competition laws of foreigncountries Where the consortia hope to sell their products, to the extent thatsuch laws apply.
3.2.3 SpecializationAgreement Provisions
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As noted above, the "Act"also allows an exemption from the conspiracy provisions for the use ofspecialization agreements among competing firms. [note 21] The provisions allowfor a civil -review of specialization agreements before the CompetitionTribunal. In order for a strategicalliance to be reviewed under the specialization agreement provisions, it mustmeet certain conditions. Section85 of the "Act"2defines a specialization agreement as:
"an agreement under which each party thereto agrees to discontinueproducing an article or service that he is engaged in producing at the time theagreement is entered into on the condition that each other party to theagreement' agrees to discontinue producing an article or service that he isengaged in producing at the time the agreement is entered into, and includesany such agreement under which the parties also agree to buy exclusively fromeach other the articles or services that are the subject of theagreement". [note 22]
Specializationagreements are meant to provide a means by which firms may benefit fromefficiencies not available except through' forms of inter-firm cooperationwhich adversely. affect competition to some degree. The wording of the section indicates that it applies onlyto, production which is in existence at the -time that the agreement is enteredinto, and hence it does not apply to anticipated or future products.
To be exempt fromthe conspiracy provisions of the "Act" , thespecialization agreement must be registered with the Competition Tribunal. In considering whether to register suchan agreement,, the Tribunal will examine the alliance to determine whether itis likely to bring -about gains in efficiency that will be greater than, andwill offset,-the effects of any prevention or lessening of competition that arelikely to result. Further, it mustbe established that these efficiency gains would hot be attainable if thespecialization agreement was not implemented.
Thus, it is onlywhere firms decide to discontinue existing production of a particular articleor service in exchange for the same with a second firm that the specializationagreement provisions will apply. Many strategic alliances contemplate more than a simple exchange ofexisting production, requiring cooperation across a broader range of eitherexisting or future activities. Where this is the case or where the parties do not wish to subject theiralliance to a Tribunal review process, the exemption from the conspiracyprovisions afforded through specialization agreements will not apply.
3.2.4 MergerProvisions [note 23]
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It is alsopossible that a strategic alliance may be reviewable under the civil mergerprovisions given the frequency of equity investments in these arrangements andthe broad definition given to mergers under the "Act." Under section91, a merger is defined to be the acquisition of control over, or significantinterest in, a; business or part thereof. With respect to corporations, control is defined to mean "dejure" control, and so requires a .direct or indirect holding of more. than50¢Mof the corporation's votingrights. In the case of significantinterest", it is the Director's position that this arises when one or morepersons directly or indirectly acquire or establish the ability to materiallyinfluence the economic behaviour of the business, or part thereof. Hence where it is found that one firm'sdecisions in respect of pricing, purchasing, distribution, marketing orinvestment are materially influenced by another firm, a significant interestmay be deemed to have been acquired or established.
Given the widerange of ownership structures and various arrangements that can be implementedpre- and post-closing, the determination of whether a. "Significantinterest" exists can only be made by considering the particular factssurrounding each alliance on a case by case basis. In advisory opinions in this area, consideration has beengiven to the collective influence of a number of factors including: equityownership; board Participation; shareholder agreements, management contracts andother contractual arrangements; roles of the parties, be they financier,supplier or competitor; access to commercially sensitive information; extent ofcollaboration; advisory role to be taken or other participation in day-to-dayoperations long-term supply agreements; asset acquisition, or leases, subleasesand rights to purchase assets. Ultimately, where the effect of the strategic alliance is to give oneparty the ability to materially influence the economic decisions of another,then the definition of a merger is likely satisfied.
When strategicalliances are examined, as mergers, they will be reviewed following theanalytical framework set out in the "Merger Enforcement Guidelines."The applicable legal test is whether the merger prevents or lessens competitionsubstantially or is likely to do, so. The provisions of the "Act" are expressly formulated toreflect that mergers are recognized as a legitimate way for companies to growand consolidate. Hence inanalyzing any merger, markets are defined on an economic basis, with a focus ondemand and supply responses. Market share or concentration, alone, cannot be used to challenge amerger. The "Act" alsorequires an assessment of foreign competition, the availability of substitutes'whether one of the arties is failing, barriers to entry, the effectiveness ofremaining competition, whether the merger removes a vigorous and effectivecompetitor, change and innovation, and any other relevant factor. Finally, even if a merger is challengedby the Director and it is found to (likely) prevent or lessen competitionsubstantially, the Competition Tribunal may allow the merger to proceed if itfinds that it is also likely to result in gains in efficiency that are greaterthan, and will offset, the reduction in competition, and that these efficiencygains would not be attained if an order of the Tribunal were made.
3.2.5 Joint Venture Provisions
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An exemption fromthe merger provisions may be made for strategic alliances Which fall within thejoint venture provisions. To beexempt from a Competition Tribunal order under the merger provisions, section95 requires the joint venture to meet the following criteria:
- the joint venture cannot be structured as a corporation,
- the joint venture must be formed to undertake a specific project or aprogram of research and development, where it can be demonstrated that theproject or program would not reasonably have taken place in the absence of thejoint venture;
- no change of control over any party to the combination resulted orwould result from the joint venture;
- the agreement is in writing, requires that one or more of the partiescontribute assets, and governs a continuing relationship between the parties-,
- the agreement entered into restricts the range of activities that maybe carried on, and provides for termination on the completion of the project orprogram; and
- the combination does not prevent or lessen, or is not likely to preventor lessen, competition except to the extent reasonably required to undertakeand complete the project or program.
Given that section 95 only covers agreements related to a specificproject or program of research and development, and hence does not cover thebroader collaboration often witnessed in strategic alliances, the provision'sapplication to strategic alliances may be somewhat limited.
3.2.6 Abuse ofDominant Position Provisions
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In other situations, a strategic alliance may be reviewable under theabuse of dominate position provisions. Several conditions will need to apply in such a case. First, the parties to the alliance willhave to collectively control a class or species of business. The wording of the section refers tosubstantial or complete control of a class or species of business by "oneor more persons", and hence it contemplates situations where a group. offirms, perhaps through a strategic alliance holds substantial or completecontrol of the class or species of business. In its interpretation of the word "control", theCompetition Tribunal has adopted the economic test of market power. [note 24]Hence, a class or species of business" involves defining relevant product.and geographic -markets. Becausecontrol requires market power,' market, share alone is not determinative. Other factors, most notably conditionsof entry are equally important.
Simply finding a dominant position, however, is not enough. The section also requires that theparties involved in the strategic alliance be engaged in a practice ofanticompetitive acts. Anon-exhaustive list of anticompetitive acts is found in section 78. In itsdecisions to date, the Competition Tribunal has taken a broad view of whatconstitutes a practice of anticompetitive acts, allowing for consideration ofany act, the intended effect of which is either "predatory, exclusionaryor disciplinary". [note 25] While anticompetitive purpose is a necessaryingredient in making this determination, the Competition Tribunal accepts thatevidence related to the likely effect of the act itself can be used toestablish purpose. [note 26]
Finally, thepractice of anticompetitive acts will need to have led to, or be likely to leadto, a substantial lessening' or prevention of competition. The likelihood that this may resultfrom the anticompetitive acts can be assessed by reference to the level ofcompetition in the relevant market in which the alleged anticompetitive actsoccur and its likely level of competition in their absence. [note 27] Indetermining whether a practice is likely to prevent or lessen competitionsubstantially the Tribunal may consider whether the practice is the result of "superior competitive performance", as referenced in subsection79(4).
PART 4:
PUBLIC EDUCATIONPROGRAM/COMPLIANCE
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Compliance withthe "Act" is the Director's overall objective. This is accomplishedthrough a number of instruments and can best. be achieved when business peoplehave a sound understanding of the provisions of the "Act. The Director places a great deal ofemphasis on communications and education to foster a- better Understanding ofthe "Act" and its application, and has implemented an open-door,fix-it-first approach when. dealing with the business community. In light of the various provisionswhich may apply to strategic alliances, parties may wish to approach the BureauUnder the Program of Advisory Opinions to determine the "Act"'sapplicability.
4.1 TheCommunications and Education Program
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The Director andstaff of the Bureau undertake speaking engagements on a variety of competitionmatters. Bureau staff oftenconduct seminars for businesses and associations on topics of particularinterest to them such as- the detection and prevention of bid-rigging whencalling for tenders; the notification and review procedures for large mergers-and the preparation of promotional material that conforms to the misleadingadvertising provisions f the "Act." Other issues addressed includethe application of the "Act" to joint ventures, specializationagreements and other strategic arrangements contemplated to respond to thedemands for structure adjustment in the economy. These sessions, while general in approach, often lead tofurther, more specific, consultation through the Program of AdvisoryOpinions. The general educationand communications program of the Director supplemented by advisory opinionsand information contacts Which are designed to facilitate compliance with the"Act" in particular situations.
4.2 AdvisoryOpinions
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The Director facilitates compliance by providing advisory opinions tothose who wish to avoid coming into conflict with the "A6t." Underthis program, company officials, lawyers, and others may request an opinion onwhether the implementation of a proposed business plan or practice would complywith the "Act." Opinions take into account previous jurisprudence,previous opinions and the stated policies of the Director, especially those setout in published Enforcement Guidelines. Under this program, the Director provides advisory opinions in relationto the specific set of facts presented by the parties. Hence, the degree of comfort providedby the Director in offering inopinion on a specific alliance will be directly proportional to the.information the parties provide on the likely competitive effects of thealliance.
In providing an opinion, the Director neither regulates conduct norpronounces on the legality of the proposal. Instead, the Director will, indicate whether a proposal islikely to provide' grounds to initiate an inquiry under the "Act."The parties, remain free to adopt or pursue a particular course of action: notwithstandinga negative opinion from the Director with the understanding that they may,following investigation, be challenged by either a referral to the AttorneyGeneral for prosecution under the criminal provisions or an application filedwith the Competition Tribunal under the reviewable provisions.
Advance Ruling Certificates are also. available for parties to aproposed merger who wish assurance that it will not give rise to proceedingsunder the merger provisions of the "Act."
PART 5:
CONCLUSIONS
As is evident from the above, black and white issues are infrequentwhen applying the "Act" to strategic alliances which maintain, createor enhance market power. Therefore, parties who believe their alliance is likely to have thiseffect may wish to request an advisory opinion.
When dealing with strategic alliances, it is important to focus ontheir actual and likely competitive effects. This focus highlights the fact that most strategic allianceswill not be an issue under the "Act." This results, not from anargument about the "Act"'s application tothese new forms of inter-firm cooperation, but rather from the fact that, inmost cases, strategic alliances are unlikely to have as their purpose or,effect the maintenance, creation or enhancement of market Power.. Wherecompetition issues do arise, the "Act" is well-equipped to deal withthese on a balanced basis.
APPENDIX 1:
ILLUSTRATIVESCENARIOS
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The possibilitiesfor different kinds of strategic alliances are virtually without limit. Strategic alliances can be found in,most, if not all, industries and include firms of all sizes anddescriptions. The motivations forentering into alliances also vary considerably, including research efficiency,learning, market access, or anticompetitive ends. Finally, strategic alliances may be constructed in variouscorporate forms.
To assistbusiness people in determining the status of various types of strategicalliances under the "Act nine illustrative scenarios are presented belowrelating to conspiracy, information sharing, cooperative measures to meetenvironmental regulations, export consortia specialization agreements, mergersinternational alliances, abuse of dominance, and industry-wide alliances. These scenarios are presented insummary form and of necessity do not include an exhaustive factual backgroundnor a lengthy discussion of the issues raised. They are meant only to highlight the likely analyticalapproach taken in each situation. While the principles and issues identified in these scenarios havegeneral application to all industries and to the many-forms which strategicalliances, may take, parties may wish to approach the Bureau for more specificguidance in respect of a particular alliance.
STRATEGICALLIANCES SCENARIOS
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(1) ConspiracyExample,
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All of the members at one trade level of an industry want- to takejoint action to rectify or "clean up" two principal concerns:discount levels have become "too high" and credit terms have become"too long". Because eachof these "problems represents a form of competitive inducement to thecustomers' of the industry, no single firm is willing to discontinue thecurrent practice unilaterally due to the risk of lost business. Hence, they argue that joint action isrequired, perhaps through an alliance of interests established by their tradeassociation. It is agreed. by thethree largest members of the industry association that they will participate inan alliance to better align their long-term interests, particularly theirmarketing strategies. As part ofthis strategy, the parties agree to discount levels and credit terms. A couple of smaller firms engaged inimporting remain outside of the agreement although neither is viewed as a.significant rival by the alliance partners.
Discussion
Whether the firms' proposals will cause the Director to initiate aninquiry will depend upon whether the likely effect of the alliance is an undueprevention or lessening of competition. As noted earlier, the "undueness" concept essentially involvesa measurement of the market power held by the parties to the agreement combinedwith behaviour injurious to competition. In this example, the alliance of -interests to be established involvesthe largest and most significant members of the industry. There are few firms outside of thealliance, and they are not viewed as providing significant enough competitionto disrupt the participating firms' efforts to align their marketing strategies. If it is also the case that new firmswould find it difficult to profitably enter this industry on a timely basisthen new entry is unlikely to discourage the implementation of the agreement. In such circumstances, the Director islikely to find that the arties to the alliance possess market power.
As a result, the proposed course of action would likely cause theDirector to initiate an inquiry under the conspiracy provisions. Notwithstanding the fact that the firmsdo not want to fix the nominal prices of the products which the sell incompetition with each other, they are agreeing with respect to factors (i.e.,discount levels and credit terms) which do have a bearing on the ultimatetransaction prices to be paid and costs to be borne by their customers, withensuing downstream price consequences. Hence, it is the Director's view that the behaviour of the firms wouldlikely be injurious to competition.
(II) Information Sharing Example
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A manufacturer of consumer appliances finds that it must become moreefficient if it is to maintain its market position, relative to its rivals in aincreasingly competitive market. Impressive efficiency gains in warehousing anddistribution have been realized by some firms outside of the applianceindustry, which are being widely benchmarked by their own and other industries.[note 28] Following the example of others, the manufacturer seeks out aclothing retailer as a benchmark for distribution. The two firms enter into a contract, pursuant to which theretailing, company agrees to share confidential cost information with themanufacturer for a fee and subject to various non-disclosure provisions. The two firms also agree to worktogether to improve future warehousing and distribution techniques.
Encouraged by the benchmarking of the clothing retailer, themanufacturer seeks a wider strategic alliance with one of its competitors. Each firm would benchmark the otherwith respect to administration, warehousing and distribution.
The key lesson learned by the participants involved in the secondbenchmarking exercise is that neither firm can. individually afford aninformation techh6logy-system but each needs to utilize such a system in orderto re-main competitive with the largest firms in the industry who are able toafford the system on their own. The two competitors enter into a further alliance whereby they jointlybuy the information technology and share it as a common facility, but do notshare competitively sensitive information through it. The sharing ofinformation on their administration Warehousing and distribution costs endswith the acquisition of the information technology.
Discussion
In the first alliance involving benchmarking between the appliancemanufacturer and the clothing retailer, there are no competition issues,, giventhat the two firms do not compete with, each other in their relevantmarkets. As the benchmarking'exercise is shifted towards a horizontal competitor of the appliancemanufacturer, however, there is a potential risk of exposure under theconspiracy provisions of the "Act." The level bf risk Will dependupon the degree of collective market power held by the two manufacturers andupon what kind of information is shared, Who shares it and the particularprocess whereby the information is compiled and disseminated.
In this example, it is unlikely that the participants in the secondbenchmarking exercise possess market power. While the benchmarking exercise includes two horizontalfirms, it does not include the largest firms in the industry. Furthermore, the larger firms operatingin the industry are able to afford the new technology and hence would appear tohave a cost advantage over the benchmarking participants. This cost advantage presumably allowsthe larger firms to price in a more aggressive fashion compared to thebenchmarking firms.
Under a different set of assumptions, the example could be constructed to give the parties to thesecond benchmarking exercise market power. In such a case, the benchmarking exercise could give rise toreduced uncertainty about the competitive reaction of rivals. Under these circumstances, acompetition issue could arise even in cases where the information to be shared'does, not relate to future pricing, output, or marketing strategies. As the above example of sharinginformation technology is constructed, the parties jointly purchase informationtechnology which is shared as a common facility without competitively sensitiveinformation being exchanged. Hence, their behaviour is unlikely to be found to be injurious tocompetition.
(III) Cooperative Measures To Meet
EnvironmentalRegulations Example
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An industry facesstrong pressures from its customers, the general public and the federalgovernment to reduce the level of emissions in manufacturing.' Eachmanufacturer is willing to comply with environmental targets but only if itscompetitors also comply. Concernedthat laggards would enjoy a competitive cost advantage, no firm is willing totake the lead in spending the necessary funds to reduce its level ofemissions. To remove this concern,the industry association signs a memorandum of understanding with the federalgovernment pursuant to Which its members will work together to voluntarilyachieve target reductions of certain emissions.
The four largestfirms, accounting for 80% of Canadian output, also agree to enter into aresearch alliance to develop new technologies for reducing emissions and tofind substitutes to existing products which present an environmental hazard.
Discussion
Voluntary agreements by industry to comply with environmental standardsset by government are an alternative to command-and-control type regulations.They are part of an international trend towards market-oriented policies anddecreasing reliance on industry-specific government regulation. Voluntary environmental agreements mayrefer only to emissions and the unwanted by-products of production, or they mayrefer to the final products that are sold on the market themselves (e.g., thereduction or complete elimination Of products that contain certain harmful
substances).
This example falls within the defences to the conspiracy provisionsoutlined in the "Act;" namely, measures to protect the environment.[note 29] As a result, it will cause the Director to initiate an inquiry underthe conspiracy provisions only if the exception to the defence applies. If the environmental agreement relatesonly to emissions and unwanted byproducts of production, it. is not likely toprevent or lesson competition unduly in respect of either prices, quantity orquality of production, markets or customers, channels or methods ofdistribution or restrict entry or expansion and as a result the defence willhold. Likewise, if the researchalliance is not likely to result in any of the adverse effects contained in theexceptions above it too will fall within the defence.
Alternatively, if the environment at goal requires a reduction orlimitation upon final product Output, as opposed to emissions, an issue couldarise under the "Act" if the participants t the voluntary-agreementcollectively possess market power. Targets for reduced industry output or an agreement on levels of outputcould well amount to a market sharing agreement, behaviour which is capturedunder the exceptions in subsection 45(4). Where market power is present, such agreements would likely lead to anundue lessening or prevention of competition.
With all firmswithin the industry party to the voluntary agreement it is likely thatcollectively they hold marketpower although this will depend upon barriers to entry. Having found that market power exists,information sharing in the course of discussions relating to the voluntaryagreement that results in. an agreement that adversely impacts on prices,market shares, quantity or quality of output or industry capacity would likelycause the Director to initiate an inquiry 'Under section 45.
In principle,there is less potential for anticompetitive actions, to be taken if all of theaffected groups -- including key customers and suppliers -- are adequatelyrepresented in the process. Bothindustry and government participants could obtain comfort if a voluntaryenvironmental agreement incorporates a disclaimer to send a clear message thatthe government is not condoning or promoting any type of activity that wouldviolate the "Act" or any other Canadian statute. [note 30]
In the case ofthe research alliance, a determination of whether the parties to the alliancehold market power will depend upon the degree of import competition andbarriers to entry . If it is found that market power exists and that theinformation exchange extends beyond cooperation in research and developmentsuch that either, market shares, output or industry capacity are negativelyaffected, it is likely that the Director would initiate an inquiry undersection 45.
(IV) Export Consortium Example
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Canadianproducers of certain resource processing equipment sell their outputexclusively Within the domestic market. They realize that there are opportunities in foreign markets but eachfirm lacks the knowledge of how to penetrate those markets. Individual firms also face strongpressure to minimize costs, making any, individual firm reluctant to invest thetime, money and, managerial attention required to establish a position inexport markets.
The Canadianproducers form an export consortium, which would purchase the expertise that isnecessary to penetrate foreign markets, coordinate and combine the output fromdifferent firms into large shipment units, negotiate favorable shipping ratesfor the combined shipments, and negotiate on behalf of the industry withforeign buyers. The firms involvedwould possess market power if they acted in concert in the domestic marketowing to existing trade restrictions, but not necessarily in any of the foreignmarkets they seek to enter.
Discussion
The "Act" provides a defence to the conspiracy provisionswhere the agreement in question relates only to the export of products fromCanada. In this example, thealliance falls within the defence and hence the Director would not initiate aninquiry in respect of the alliance. It is only in the event that participation in the consortium is used asa cover to unduly lessen or prevent competition in the domestic market that theconspiracy provisions may be violated. Alternatively the defence may be lost if the consortium acts to reducethe real value of exports of the product from Canada. This could be the effect if potential exporters were deniedmembership in the, consortium or, denied supply of the product in order topreclude them from participating in the export market.
(V) SpecializationAgreement Example
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Two Canadian firms account for the entire domestic production of a typeof manufacturing equipment. Eachdomestic firm has several manufacturing plants spread across the country toserve regional markets, and sells its products through sales agents who visitmanufacturing plants. Whileimports have traditionally been minimal, the threat of more significant importcompetition has increased following a reduction of tariffs, This has forced thetwo firms to consider further rationalization of their plants in order toachieve available economies of scale. They decide to enter into a specialization agreement in which each firmwill concentrate on producing of certain of the products while discontinuingproduction of certain others. Allof the products currently: being produced would continue to be produced by onefirm or the other.
Under the agreement each firm would continue to market a full line ofproducts by virtue of an exclusive supply arrangement between themselves. Transaction prices between the firmswould be determined over time by a cost-based formula set out in theiragreement, but final prices to customers are to be set by each firm independently. The firms claim that entering into thisspecialization agreement will enable them to realize certain purchasing andproduction economies, and result also in transportation savings. Since they are currently directcompetitors in the production and sale of the relevant product S, they want toknow if their negotiations to enter into a specialization agreement would causethe Director to oppose the registration of the agreement by the CompetitionTribunal.
Discussion
The registrationof a specialization agreement by the parties with the Competition Tribunalprovides an exemption from the conspiracy and exclusive dealing provisions ofthe "Act" where the efficiency gains expected to result from theagreement outweigh any lessening or prevention of competition. In this example, the parties to theagreement account for all domestic t A final conclusion on market power, andhence the likelihood of a lessening or prevention of competition, will dependon the degree of import competition and barriers to entry. The efficiency gains flowing from theagreement may be defined as, "inter alia," economies of scale, betterintegrated production facilities, plant specialization lower transportationcosts, and improved services and distribution operations. Reduction in general overhead expensesmay also result. If the. agreementis likely to lead to any lessening or prevention of competition, these costsavings must be large enough to offset the adverse effects on competition. In assessing the extent to whichcompetition is lessened, the continued independence of the parties in pricingor marketing their products would be an important consideration. Furthermore, the relevant efficiencygains included in the trade-off analysis are those which would not likely beattained if the specialization agreement was not implemented.
Thespecialization agreement exemption relates only to the registered agreement,and does not cover other activities which may go beyond the registeredagreement. In addition, enteringinto a specialization agreement Without first attempting to have it registeredbefore the Tribunal would leave the parties open to a possible inquiry underthe conspiracy provisions for which the efficiency aspects of their agreementwould not be a defence. Section 45does not contain any provision for assessing the merit or value of efficiencygains which may offset negative effects on competition. The sole issue reviewed by the Directorunder the conspiracy provisions would be the extent to which the agreementlessened or prevented competition unduly.
(VI) MergerExample
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Two horizontal competitors produce high technology equipment. A large, foreign multinational (Firm A)acquires a 14.9% equity share in a Canadian firm (Firm B) -and Will place oneperson on the six person board of directors of Firm B. Firm B supplies Firm Awith a component of the equipment they produce whose source of supply has beenrapidly diminishing in recent years. The alliance involves a long-term supply contract for this componentbetween the two firms; Firm A will collaborate with Firm B in certain research,development and manufacturing activities related to the equipment but the twofirms will operate independently with respect to manufacturing, distributionand sales activities- Firm A will act as an "industry advisor" toFirm B and as such will have access to confidential proprietary information onFirm B and will play a significant role in expanding, altering, anddiversifying product development and technology and the marketing anddistribution of Firm B's products.
Discussion
Under section 91, a merger is defined to be the acquisition of controlover or significant interest in, a business or part thereof. While there is not an acquisitionof "de jure"control in this case, the Director is likely to find that the transactionconstitutes the acquisition of a "significant interest" by Firm A inFirm B. In this case, the collective effect of the various arrangements enteredinto is to place Firm A in a position to materially influence the competitivebehaviour of Firm B by virtue of its equity holding; participation on theacquired firm's board of directors- multiple roles of financier, supplier andcompetitor; long-term supply agreement; advisory role; access to commerciallyconfidential information; and the likelihood that a the arrangementsignificantly changes the economic behaviour of Firm B or ends vigorous,effective competition between the partners. In order to determine whether the transaction is likely togive rise to a substantial lessening or prevention of competition it willrequire a full analysis following the "Merger EnforcementGuidelines."
In general, a merger will be found to likely prevent or lessencompetition substantially when the parties to the merger would be in aposition. to exercise a materially greater degree of market power in asubstantial part of the relevant market for two years or more. In order to make this assessment,information in respect of market share or industry concentration must beaugmented with an analysis of foreign competition, the availability ofsubstitutes, whether one of the parties is failing, barriers to entry, theeffectiveness of remaining competition, and any other relevant factor. Finally, even in the event that amerger is found to prevent or lessen competition substantially, the merger Willnot be prohibited when there are gains in efficiency sufficient to offset theanticompetitive effects and these efficiencies would not be attainable if anorder against the merger were made by the Competition Tribunal.
(VII) International Alliance Example
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A small Canadian company specializes in pharmaceutical research. The firm has patents on four promisingcompounds, but finds that in order to generate profits from the patents, itrequires certain complementary resources, including: clinical researchcapability in terms of experienced personnel and the funds to finance it;production facilities capable of producing large volumes after the drug hasbeen approved by the government management of the government approval processwhich requires experienced personnel and significant financial resources; andmarketing and sales capability. The company enters into a strategic alliance with a major multinationalpharmaceutical manufacturer in order to acquire these resources for one of itsmost promising compounds. Theagreement covers the obligations of each partner with respect to developmentand distribution of the new drugs, the manufacturer's "right of firstnegotiation" on new drugs that are developed from the compound, world-widemarketing rights, the sharing of confidential information, and the sharing ofdevelopment costs and revenues. Inorder to minimize its dependence upon the manufacturer, the research firm makessimilar agreements with different manufacturers for each of its other threecompounds.
Discussion
It. is possible to view this example, as a strategic alliance whichcombines the core competence of each partner. The core competence of the small research firm is itsability to develop new compounds. The manufacturer's core competence (at least with respect to thisparticular compound) lies in the financial resources and knowledge required toshepherd new compounds through the regulatory approval process, manufacturing,marketing and distribution. Thetwo firms may in fact be competitors in research but when the smaller companyhas produced a marketable compound, it is advantageous for both to combinetheir respective core competencies.
There are numerous firms participating in the market for drug research,production and sale world-Wide. Small research companies may select their alliance partners from among anumber of large, multinational pharmaceutical manufacturers and distributors,as illustrated in the example above. The opportunities to make alliances of this sort encourages smallerfirms to enter into the research field in competition with the largemultinationals. Given, thesefactors, an alliance of this type would not likely maintain, create or enhancemarket power and as such would not raise an issue under the "Act."
(VIII) Abuse Of Dominance Example
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There is only one supplier of a chemical which is an essentialingredient in producing a new model of a consumer product. The chemical is used in manyapplications and is produced under patent, which will not expire for anotherten years. The new consumerproduct enjoys a substantial price premium over the old models because of itsunique features making it far more convenient to use. Two consumer product manufacturers begin producing the newmodel which- quickly wins a 70% market share The larger of these manufacturers,holding a 50% market share enters into a strategic alliance with the chemicalsupplier to replace existing production facilities for the chemical with a new plant, Pursuant to the alliance, themanufacturer offers financing for the new chemical plant and the supplieragrees to sell the chemical exclusively to the consumer productmanufacturer. The manufacturer'scompetitor is then excluded from producing the new model because the allianceagreement has tied up the supply of the chemical. There are no other producers of a substitute for thechemical apparent on the horizon.
In response to repeated requests of the smaller manufacturer, thelarger manufacturer agrees to supply the chemical to its competitor on a spotbasis. While the smallermanufacturer gains access to the chemical, it finds its sup I is sporadic andas a result it is unable to maintain its production levels at a cost-efficientlevel. In addition, the smallermanufacturer complains that the price which it is charged for the chemicalgreatly exceeds the price which the chemical supplier had previously chargedalleging that the larger manufacturer is attempting to squeeze its competitor'smargins to reduce its ability to effectively compete and possibly force itsexit. Even when the smallermanufacturer receives supply from the larger manufacturer, it finds thatdelivery is erratic, quality is not necessarily of the standard agreed to, andit is required to meet what it believes are unreasonable credit and paymentterms. In response to itscomplaints, the larger manufacturer threatens to cut off supply entirely and toreinitiate an old-standing legal action against- the smaller manufacturer in anunrelated area.
Discussion
In this example, the source of market power lies in the control of thechemical. By excluding competitorsfrom reliable and independent access to an essential resource, the alliance mayraise an issue under the abuse of dominance provisions of the "Act"Among the nine anticompetitive act examples outlined. in section 78 is thepre-emption of scarce facilities or resources required by a competitor for theoperation of a business, with the object of withholding the facilities orresources from a market.
A number of factors make it likely that this agreement would cause theDirector to initiate an inquiry under the abuse provisions . By preemptions anessential input, the larger manufacturer effectively excludes. its smallercompetitor from producing, in a cost-effective manner, a model which has won70% of the market for a product and thereby effectively controls the market forthe new model of consumer product. The rapid gain in market share of the newmodel despite being sold at a substantial price premium indicates that the oldmodels are not particularly close substitutes. Control in this case is achieved by an anticompetitive act,namely the pre-emption of an essential input through the strategic alliancewith the chemical supplier.
Having gained this control, the manufacturer proceeds to engage .in anumber of anticompetitive acts which appear to be designed to exclude ordiscipline it smaller rival. Theseacts include the original exclusive supply agreement for the chemical andsqueezing of its rival's margins through a number of actions designed to raisethe rival's costs, including higher prices for the chemical, spot supply,erratic delivery schedules, poorer, chemical quality, and unfavourable creditand payment terms. The threatenedlegal action might also be found to constitute an anticompetitive act if it isfrivolous or otherwise without merit. Such control and the subsequent anticompetitive acts appear likelyto'le6d to a substantial lessening of competition for the consumerproduct. As the example isconstructed, there does not appear to be any efficiency enhancing aspect of theexclusive supply arrangement between the parties to the alliance or the otheractions taken by the manufacturer against its smaller rival.
¡]IX¡^Industry-Wide Agreement Example
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Canadianmanufacturers of a wide range of branded products find themselves exposed tostrong import competition as a result of falling barriers to trade and reducedtransportation costs'. They findthat they are competitive with foreign producers on manufacturing costs, havingrecently modernized plants and rationalized capacity' but that theirdistribution system is highly uncompetitive. Foreign manufacturers have achieved distribution economiesby selling through alternative retail formats such as warehouse stores and massmerchandisers, which enjoy economies of scale low-cost location, and who haveelectronically linked their retail check-out scanners to the foreignmanufacturers' factory floors.
The Canadianmanufacturers wish to continue selling to the traditional retail chains becausethey are viewed as giving better support to the value of brand names than doalternative retail formats. However, they do not believe that distribution efficiencies could be achieved quickly enough to preventa drastic loss of market share to foreign manufacturers on the basis of eachindividual retailer working one -on-one with each of its suppliers to establishelectronic links and implement new logistics systems. As a result, the manufacturers seek an industry-widecommitment, involving both Vertical and horizontal alliances, Which-wouldsignificantly accelerate improvements to the, distribution process. Once the new system is in place, itwill function purely as a vertical alliance between traditional retail chains,brokers and manufacturers.
Discussion
Although this example looks quite different from the cooperativemeasures to meet environmental regulations example and the information sharingexample above, the same principles regarding horizontal agreements andinformation sharing among firms which collectively possess market powerapply. In this example, thehorizontal feature of the alliance involves a significant amount ofcommunication and cooperation between the domestic manufacturers. This will only cause the Director toinitiate an inquiry under section 45 if the parties to the exchange possessmarket power. An important factorto consider in making this determination is the presence of strong importcompetition. If competition fromthe foreign-based manufacturers limits the domestic firms' ability tocollectively raise price or lower output, quality, service, promotionalactivity or inn-ovation then the Director is unlikely to initiate a formalinquiry.
If the parties are found to collectively possess market power, theDirector's examination will turn to whether the contemplated arrangements arelikely to constitute behaviour injurious to competition. The potential always exists whencompetitors meet around the same table-, even for the purpose of implementingan essentially vertical arrangement that discussions regarding competitivefactors, such as pricing policy and the details of trade promotions will takeplace or that information exchanges may unduly lessen or prevent competition. If the arrangements, entered into relateprimarily to achieving cost-savings efficiencies along the vertical chain, theyare unlikely to constitute injurious behaviour and hence unlikely to cause theDirector to initiated formal inquiry. The risk of a formal inquiry is increased, however, should thearrangements contemplate coordination among the horizontal manufacture in respect of pricing, output serviceor promotional activity.
This scenario is an example of competition, not only betweenindividual firms, but between vertical systems. Such rivalry can be highly beneficial, resulting in lowercosts, lower prices a better selection of products and better service toconsumers. Nonetheless. given the potential for widespread effects across, theindustry, particularly-when the alliance entails agreements between alldomestic horizontal competitors, firms contemplating such an arrangement maywish to approach the Bureau under its Program of Advisory Opinions. In responding to a request under the Programof Advisory Opinions, the Bureau would provide advice to assist the firms inachieving their aims without coming into conflict with the "Act."
APPENDIX 2:
HOW TO CONTACTTHE BUREAU OF COMPETITION POLICY
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(1) GeneralInformation
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Anyone wishing to reach- the Director or a member of the Bureau to obtain generalinformation, make a complaint, or request an advisory opinion may, contact thefollowing office:
Complaints andPublic Enquiries Centre Bureau of Competition Policy
Industry Canada
50 VictoriaStreet
Hull, Quebec
K1A OC9
By telephone:
National CapitalRegion (819) 997-4282
Long distance(toll free) 1-800-348-5358-
TDD service1-800-642-3844
By fax: (819)997-0324
(II) Mergers
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Anyone wishing toobtain information concerning the application of the merger provisions of the"Act," including those relating to notification of proposedtransactions, may contact the Mergers Branch directly at the address below:
Mergers Branch
Bureau ofCompetition Policy
Industry Canada
50 VictoriaStreet, 19th Floor
Hull Quebec
KlA OC9
By telephone:(819) 953-7092
By fax- (819)953-6169
The Bureaurecommends that notification filings be hand-delivered.
ENDNOTES
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1 . "The"Act"" refers to the "Competition Act," R.S.C., 1985,
c-34, as am.R.S.C. 1985, c. 27 (lst Supp.), ss. 187,
198;R.S.C. 1985 c. 19 (2nd Supp.), Part II; R.S.C. 1985,
c.34 (3rd Supp.) s. 8; R.S.C. 1985, c. 1 (4th Supp.), s.
11; R.S.C..1985, c. 10 (4thSupp.), s. 18; S.C@ 1990, c. 37
ss. 27-32, S.C. 1992, c.14, s.l.
2. For a complete description of theapproach taken by the Director to promote and to ensure compliance with theprovisions of the "Competition Act," see the Director ofInvestigation and Research's "Program of Compliance," InformationBulletin No. 3 (revised) March 1993.
3. The Directoris also obliged to commence an inquiry when the Minister of Industry sodirects, or when six Canadian residents make an application in accordance withthe "Act." An inquiry may be discontinued at any stage if, in theDirector's opinion, further inquiry is not justified. .Director is required tore ort in writing to the Minister when an inquiry is discontinued. lf theinquiry was commenced as a result of a six-resident application,, the Directormust inform the applicants of the decision and the grounds fordiscontinuance. The Minister may,on the Written request of the applicants or on his own motion, review theDirector's decision and, if in his opinion the circumstances warrant, instructthe Director to make further inquiry.
4. Note that theburden of proof required to obtain a conviction under the criminal provisions(proof beyond a reasonable doubt) is higher than that required for the Tribunalto conclude that grounds exist to make an order under the civil provisions(proof on a balance of probabilities).
5. The price maintenance provisions do notinvolve any test of market power.
6. For a discussion of the circumstanceswhen a vertical or conglomerate merger may raise, competition concerns, see theDirector of Investigation and Research's "Merger Enforcement Guidelines," Information BulletinNo. 5, April 1991, at 41-43.
7. Seethediscussionbelowatl8-19whichdescribestheapproach taken to "control" in the Director of Investigation and Research's"Merger Enforcement Guidelines, lbid."
8. Competitivelysensitive information exchanged by competitors during merger negotiations whichdo not ultimately lead to a merger could provide, grounds for an examinationunder the conspiracy provisions. See the "Merger Enforcement Guidelines, Ibid.," at 59 for adiscussion of how to minimize this risk.
9. See "R. v. Armco Canada Ltd."(1974), 6 O.R. (2d) 521; 21 C.C.C. (2d) 129; 17 C.P.R. (2d) 21 1, and"R. V. Canadian GeneralElectric Company Ltd." (1976), 29:C.P.R. (2d) 1; 34 C.C.C. (2d) 489.
10. It is possible that anoffense may be established solely on the basis of evidence that the specificpurpose or object of the agreement was to prevent or lessen competition unduly.However; the Bureau's enforcement approach has been to inquire into thoseagreements which are likely to have an anti-competitive impact in the market.
11. "R. v. Nova Scotia PharmaceuticalSociety" (1999),,S.C.R. 606 139 N.R.,43 C.P.R. (3d) 1, 10 C.R.R. 34[hereinafter cited to SCR], at 611.
12. "lbid.,"at 660.
13. "lbid."
14."lbid.," at 653.
15. "lbid.," at 654.
16."lbid.,"at 657.
17."lbid.," at 649-650.
18. The exchange of such information, particularly current or futurepricing, may also raise issues under other provisions of the "Act,"including bid-rigging and price maintenance which do not involve any test ofmarket power.
19. Several prosecutions under the conspiracyprovisions have involved trade associations. In "R. v. Armco" (1974), supra" note 9, forexample, a conspiracy conviction was obtained in a matter involving informationexchanges and other activities made through an industry association.
20. In conducting such an analysis, the Bureau wouldconsider the extent of foreign competition in defining the scope of therelevant geographic market which could extend well beyond Canada.
21. The"Act" also provides an exemption from the exclusive dealingprovisions for specialization agreements.
22."Competition Act, supra" note 1.
23. Where an alliance falls within the mergerprovisions, it may be subject to the notification provisions in Part IX of the"Act." These provisions require persons who are proposing certainlarge acquisitions, amalgamations or combinations to notify the Director beforecompleting the transaction and to supply certain information. In addition, persons who are planning amerger who wish to seek some assurance that the transaction they are proposingwill not be challenged by the Director may apply for an Advance RulingCertificate under section 102 of the "Act." Issuance of an AdvanceRuling Certificate also exempts parties from the requirement to comply with theprenotification provisions of the "Act." For further information, seethe Director of Investigation and Research's "Merger Enforcement-Guidelines, supra" note 6.
24. "Canada (Director of Investigationand Research) v. NutraSweet Company (1 991), 32 C.P.R. (3d) (C.T.) at 28.
25."lbid.," at 34.
26. "lbid.'," at 35-36.
27."lbid.," at 33.
28. Benchmarking refers tocomparisons made with other firms in order to highlight best practices andpromote their adoption.
29. The research alliance could fall undereither the defence related to measures to protect the environment orcooperation in research and development.
30. Governmentinvolvement would preclude conviction under the
"Act"only when., such conduct is specifically authorized and effectively regulatedpursuant to valid legislation.