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.
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.
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.
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.
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
-------------------
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.
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.
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.
3.2 ProvisionsMost Relevant to Strategic Alliances
==========================================
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.
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.
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
-------------------------------
Strategic alliances between competitorsinvolve agreements which may be reviewed by the Director under the criminalconspiracy provisions of the "Act" in certain circumstances.
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
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.
Applying the above test to strategic alliances would involve thefoil-owing determinations. First,have the parties to the alliance entered into an agreement?
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
-----------------------------------------
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.
3.2.1.2 Information Sharing
------------------------------------