Business to Business Marketplaces and Canadian Competition Law

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3. The ownership of B2B marketplaces varies. Some are owned by buyers, sellers or both. For

example, Covisint is owned by the five major automobile manufacturers. The new aerospace

exchange is jointly owned by buyers (major airlines) and sellers (major aerospace manufacturers).

Most are owned by third parties who are independent of buyers or sellers.

4. B2B electronic marketplaces are being developed to harness the vast potential of the internet.

The internet enables communications between virtually any points on the planet served by wire or

wireless links, simultaneous communication with almost a limitless number of persons anywhere

and the transmittal of messages and responses instantaneously. Vast quantities of information in

text, voice or graphic forms can be stored, sorted, searched and retrieved and made accessible

simultaneously to a seemingly limitless number of persons located anywhere in the world. Online

ordering of goods has been an early use of e-mail and the internet. What distinguishes a B2B

electronic marketplace is the bringing together of many people in many different places at the same

time.

5. The main attraction of most B2B electronic marketplaces is the potential to reduce the

transaction, processing and inventory cost of procurement of goods or services as well as the prices

for them. Some marketplaces seek to offer other services as well.

6. At the simplest level, an electronic marketplace serves as an electronic catalogue for

procurement. The benefits are obvious. Electronic catalogues, as compared with printed versions,

can provide greater detail about more products with continuous updating of product information

including pricing and availability, all of which can be enhanced with sound and still or moving


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graphic images. From the buyers perspective, search costs are significantly reduced if electronic

catalogues from alternative suppliers are made available in the same place. From the sellers

perspective, the costs of marketing are reduced if prospective buyers use the same internet site.

7. The next level is e-auctions. A supplier can post on the marketplace site the goods or

services it wishes to sell and invite bids. A variant of this is the reverse auction where a buyer may

invite suppliers to bid or quote for the supply of goods or services. A further and more sophisticated

variant is to combine the auction and reverse auction into an exchange which seeks to match buyers

and sellers.

8. The electronic marketplace also enables more effective management of production and

delivery schedules and thereby improve the efficiency of the entire production supply chain.

OVERVIEW OF COMPETITION LAW ISSUES

9. B2B electronic marketplaces have important implications for competition. There are obvious

benefits. Significant transaction, processing and inventory cost savings could be realized through

the use of electronic marketplaces. These benefits are difficult to dispute. The question is whether

the benefits to the participants cause harm to the competitive process and the economy as a whole.

Since most of the electronic marketplaces involve collaboration among competitors, potential

competition law concerns arise. There is potential for collusive activity by competitors that harms

the markets in which they sell their products either by harming their customers or their competitors

outside of the exchange who compete for customers. There is also potential for harm to the markets

in which competitors buy goods and services. Joint buying may lower the cost of procurement but


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may distort the competitive process if the joint buying group becomes a monopoly buyer, that is, a

monopsonist.

10. So far, antitrust and competition enforcement agencies throughout the world have taken a

cautious approach to the proliferation of electronic marketplaces and have avoided making overly

generalized pronouncements about potential competition issues. The best example of this approach

is that shown by the U.S. Federal Trade Commission (FTC), one of the U.S. antitrust enforcement

agencies.

11. In June 2000, the FTC hosted a two-day public workshop, Competition Policy in the World

of B2B Electronic Marketplaces which attracted a large audience of academics, lawyers, regulators

and business people. Recently, on September 11, 2000, the FTC completed its first review of a B2B

electronic marketplace under the merger laws of s. 7 of the Clayton Act. It decided not to oppose

the formation of Covisint. In cautious words, the Commission advised the parties:

This action is not to be construed as a determination that a violation may not have

occurred, just as the pendency of an investigation should not be construed as a

dete rmination that a violation has occu rred. Bec ause Covisint is in the earl y stages

of its development and has not yet adopted bylaws, operating rules, or terms of

participant access, because it is not yet operational, and in particular because it

represents such a large share of the automobile market, we cannot say that

impleme ntation of the Cov isint venture will not cause competitive concerns.

In view of the undeveloped status of Covisint, the Commission reserves the right

to take such further action as the public interest may require.

12. In a public statement, FTC Chairman Robert Pitofsky commented:

As we learned at the FTC's workshop in June, B2B electronic marketplaces offer great

promise as the means through which significant cost savings can be achieved, business

processes can be more efficiently organized, and competition may be enhanced. B2Bs have

a great pot ential to benefit both businesses and consumer s through increased productivity

and lower prices. Of course, as is the case with any joint venture, whether in the tra ditional


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alternative sources. For example, retail buyers of milk look to suppliers who are located in a

relatively small geographic area. Buyers are unlikely to travel a great distance to buy the product.

For example, a household in Rosedale would not regard a supermarket in Thornhill as an alternative

supplier for milk.

17. Competition law is concerned with controlling the exercise, creation and increase of market

power. TheCompetition Act, R.S.C. 1985, c. C-34 (the Act), consists of criminal offences such

as conspiracy, bid-rigging, price discrimination and price maintenance, non-criminal (civil)

reviewable matters such as mergers, abuse of dominant position, tied-selling, exclusive dealing and

market restriction and administrative provisions such as the notification filing regime for certain

large proposed transactions.

18. A breach of a criminal provision may result in a fine, a term of imprisonment or both. The

non-criminal, reviewable matters are not inherently anti-competitive. If the Competition Tribunal

determines that there is a breach of a reviewable matter, it has broad remedial powers that does not

include the power to impose a fine or a term of imprisonment or to make an award of damages.

19. The Competition Bureau, which is headed by the Commissioner of Competition, is

responsible for the investigation and enforcement of the Act. With respect to criminal matters, it

may refer violations to the Attorney General of Canada for prosecution or other disposition. With

respect of non-criminal, reviewable matters, the Commissioner may apply to the Competition

Tribunal for a remedial order. The Tribunal is composed of judicial members, who are appointed

from the Federal Court of Canada (Trial Division), and lay members, who have experience in


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3For a comp arision of the U.S. an d Canadian approaches to strategic allian ces, see Stanley Wong, A

Commentary from th e Perspective of Canadian Competition Law on the Draft U.S. Guidelines n Collaboration among

Competitors, in Joint Ventures and Strategic Alliances: The New F ederal Antitrust Competitor Collabo ration

Guidelines, Conference Proceedings, American Bar Association, Section of A ntitrust Law , Washington, D .C., November

11 and 12, 1999.

business, economics, accounting and other areas.

Enforcement Approach of the Competition Bureau

20. Although the Competition Bureau has not yet issued any comprehensive statement about its

approach to competition issues raised by B2B electronic marketplaces or e-commerce, in general,

an indication of its approach can be gleaned from reviewing some of its published statements and

other enforcement pronouncements as well as from its enforcement approach in other areas.

21. The 1995 Bulletin, Strategic Alliances under the Competition Act was published by the

Competition Bureau to address the uncertain treatment of strategic alliances under the Act. This

Bulletin addressed the concern that the uncertainty, which stems from the possible application of the

criminal provisions, may deter businesses from pursuing procompetitive alliances. The Bureau

recognized that collaboration by businesses has enormous potential benefits for the Canadian

economy in the face of the growing trend of the globalization of business. It also acknowledged that

under the Act, there are some legitimate concerns about the legality of strategic alliances. The

formation and operation of B2B electronic marketplaces could be viewed as a strategic alliances

among buyers, sellers or both. In April 2000, the U.S. antitrust enforcement agenices jointly

released Antitrust Guidelines for Collaborations among Competitors. The Guidelines adopt an

approach to that taken in the Bulletin, recognizing the potential benefits of competitor collaborations

while acknowledging that only a few collaborations raise serious competitive concerns.3


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4See Closing the Deal: Ten Years after the Real Estate Prohibition Order, Remarks of Harry

Chandler, Deputy Director of Investigation and Research (Criminal Matters), Competition Bureau, Annual Conference

and Trade Show, Canadian Real Estate Association, Windsor, Ontario, September 27, 1998.

22. The main conclusions of the Bulletin are important. First, few strategic alliances raise

concerns under the Act. Secondly, vertical and conglomerate alliances raise fewer concerns than

horizontal ones. Thirdly, the few strategic alliances which raise competition issues are likely to

involve the provisions of the Act dealing with the creation, maintenance or enhancement of market

power, which is defined to be the ability to raise prices (or adversely affect some dimension of

competition) above the competitive level for a sustained period of time. Fourthly, except where an

alliance involves agreements or arrangements concerning prices, output, business strategy or some

other important aspect of competitive rivalry, the Bureau is likely to review a strategic alliance under

the non-criminal, civil provisions rather than the criminal provisions of the Act.

23. The enforcement experience of the Competition Bureau with trade associations and the real

estate listing services are also helpful. B2B marketplaces owned or operated by competitors raise

many of the same issues as the activities of trade associations. Trade associations provide many

benefits to its participants that are not harmful to competition but they have often been used as the

forum in which to engage in collusive conduct regarding prices, output or some other important

dimension of competitive rivalry.

24. The Bureaus experience with real estate listing services is highly relevant. Where a listing

service is an essential tool for the selling of residential real estate properties, the terms for access to

the service can be used to discipline persons who have access as well as those who do not.4


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The Market for Goods and Services: Impact on Competition Among Participants

25. A marketplace that sells goods and services will obviously have an impact on competition

in the supply of the goods and services. Any collaboration among competitors in the formation and

operation of the marketplace may have an adverse effect on a dimension of competition such as

prices, quality or service.

26. By their nature, these marketplaces bring together businesses who are competitors. Covisint

is an example of this. It brings together the five major automobile manufacturers who are each

others major competitors in the selling of automobiles.

27. Any collaboration among competitors requires consideration of the conspiracy offence under

s. 45 of theAct. The required elements of the offence are:

a. an agreement between two or more persons;

b. the effect of the agreement, if implemented would lessen competition unduly;

c. the accused intended to enter into the agreement; and

d. the accused knew or ought to have know that the effect of the agreement, if

implemented, would lessen competition unduly.

Upon conviction, the court may impose a fine of up to $10 million, a term of imprisonment of up

to 5 years, or both. Conspiracy is the most serious offence under the Act. The Competition Bureau,

which is responsible for the enforcement of the Act, places a high priority on the detection and

investigation of conspiracies. Where most competitors are involved in the impugned activity, it is

likely that it would be undue.


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28. Collusive activity may be subject to the bid-rigging provisions of s. 47 of the Act. Unlike

the conspiracy provisions, there is no market impact test. The offence of bid-rigging is a potential

concern with respect to auctions and reverse auctions.

29. Under s. 47, bid-rigging means:

(a) an agreement or arrangement between or among two or more persons whereby

one or more of t hose pe rsons agr ees or undertakes not to submit a bid in response

to a ca ll or requ est for bids or tenders, or

(b) the submission, in response to a call or request for bids or tenders, of bids or

tenders that are arrived at by agreement or arrangement between or amo ng two or

more bidders or tenderers,

where th e agreem ent or arrangement is not made kno wn to the person calling for

or requesting the bids or tenders at or before the time when any bid or tender is

made by any person w ho is a party to the agreemen t or arrangement.

30. Obviously, any agreement among competitors who have a large market share to fix prices

or output, to allocate markets or customers, or to agree on some important dimension of competitive

rivalry would raise serious concerns under the conspiracy, bid-rigging or other criminal provisions

of the Act. These agreements are clearly designed to be anti-competitive. What is less obvious are

the various activities engaged in by competitors with respect to the formation and operation of an

electronic marketplace. In an electronic marketplace, vast amounts of highly specific and often

highly confidential information about prices and production are collected. The sharing of this

information raises potential competition law concerns. Any sharing of highly specific, commercially

sensitive information raises suspicion that there may be an underlying agreement to limit

competition among competitors who participate in the marketplace. Thus, great care must be

exercised in determining the types of information that are collected, the form in which is stored and

the persons who have access.


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31. Another potential area of concern arises if the marketplace favours owners over other

participants, for example, in the display of information or the terms of access. While such

exclusionary conduct is unlikely to be reviewed under the criminal provisions of the Act, it may be

subject to review under the non-criminal, reviewable matters provisions such as abuse of dominant

position. This is discussed further below.

The Market for Goods and Services: Impact of Joint Buying

32. Some electronic marketplaces engage in joint buying in order to obtain lower costs of goods

or services. There is a potential competition law problem if a marketplace acts as a monopsonist,

a monopoly buyer, and as a result, the prices at which it buys goods are below the competitive level.

This becomes a serious concern if the goods being purchased of limited use. For example, if the five

major automobile manufacturers in Covisint use the marketplace to engage in joint buying of a good

which is of limited use outside of the automobile industry, for example, brake pads, the monopsony

problem could arise.

The Market for Goods and Services: The Impact on Competitors Who are not Participants

33. If some competitors are not part of the B2B electronic marketplace, the impact on them must

be considered. If participants in a B2B marketplace together dominate a market, certain exclusionary

conduct by the marketplace could be seen as anti-competitive in the sense of enhancing market

power. In particular, the abuse of dominant position provisions of ss. 78 and 79 of the Act deal with

this concern.

34. The abuse of dominant position is concerned with the exercise of market power through the


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practice of anti-competitive acts. The Tribunal may make an order prohibiting anti-competitive acts

where the Tribunal finds that:

(a) one or m ore perso ns substan tially or complete ly contro l, throu ghout Ca nada or

any area thereof, a class or species of business,

(b) that person or those persons have engage d in or are en gaging in a practice of

anti-competitive acts, a nd

(c) the practice has had, is having or is likely to have the effect of prevent ing or

lessening competition substantially in a market

If an order of prohibition would not be effective in restoring competition, the Tribunal may make,

in addition to or in lieu of that order, any other order including divestiture (s. 79(2)). The Tribunal

is required to interfere with a person's rights only to the extent necessary to redress the anti-

competitive effects of the impugned practice (s.79(3)).

35. In determining whether a practice is anti-competitive, the Tribunal shall consider whether

the practice is a result of superior competitive performance (s. 79(4)).

36. The expression anti-competitive act is defined in s. 78 to include any of the following acts:

(a) squeezing, by a vertically integrated supplier, of the margin available to an

unintegrated customer who co mpete s with the suppl ier, for the purpo se of impedi ng

or preventing the custome r's entry into, o r expansion in, a m arket;

(b) acquisition by a suppl ier of a customer who would otherwise be available to a

competitor of the supplier, or acquisition by a customer of a supplier who would

otherwise be available to a competitor of the customer, for the purpose of impeding

or preventing the competitor's entry into, or eliminating the competitor from, a

market;

(c) freight equaliz ation on the p lant of a comp etitor for the purpos e of impedi ng or

prevent ing the competitor's entry into, or eliminatin g the com petitor from , a

market;

(d) use of fightin g brands introduced selective ly on a tem porary basis to d iscip line

or eliminate a competitor;

(e) pre-emption of scarce facilities or resource s required by a com petitor f or the

operation of a business, with the object of withholding the facilities or resources

from a m arket;

(f) buying up of products to prevent the erosion of existing price levels;

(g) adoption of produc t specifications that are incompatible with prod ucts produced

by any other person and are d esigned to prev ent his entry into, or to eliminate him


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from, a m arket;

(h) req uiring or inducin g a suppl ier to sell only or primarily to certain cu stomers,

or to refrain from selling to a competitor, with the object of preventing a

competitor's entry into, or expansion in, a market;

(i) selling articles at a price lower than the acquisition cost for the purpose ofdisciplining or eliminating a competitor;

(j) acts or conduct of a person operating a domestic service, as defined in

subsection 55(1) of the Canada Transportation Act, that are specified under

paragraph (2)(a); a nd

(k) the denia l by a perso n operating a dom estic service, as defined in subsection

55(1) of the Canada Transportation Act, of access on reasonable com mercial te rms

to facil ities or service s that ar e essent ial to the operat ion in a marke t of an air

service, as defined in that subsection, or refusal by such a person to supply such

facilities or services on such terms.

37. Section 79(5) provides that:

an act engaged in pursuant only to the exercise of any right or enjoyment of any

interest derived unde r the Copyrigh t Act, Industria l Design Ac t, Paten t Act, Trade-

marks Act or any other Act of Parliament pertaining to intellectual or industrial

property is not an anti-comp etitive act.

This is not a blanket exemption in respect of the exploitation of intellectual property rights. Abuses

of intellectual property rights are arguably not excluded from the definition of an anti-competitive

act.

38. The Director has three years after the practice has ceased to bring an application to the

Competition Tribunal (s. 79(6)). The Director may not bring an application under s. 79 if he has

commenced proceedings under. s. 45 or under s. 92 on the basis of the same or substantially the same

facts (s. 79(7)).

39. If the participants of an electronic marketplace enjoy a dominant position in certain markets,

the following types of conduct or activity could be of concern under the abuse of dominant position

provisions:

a. requiring suppliers to deal only with the marketplace or its participants;


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b. requiring suppliers to give favourable treatment to the marketplace and its

participants;

c. restricting access of competitors to the marketplace by imposing unreasonable terms;

d. requiring its participants to not deal with any other marketplace.

There would be a concern under the abuse provisions if anti-competitive intent is also present.

The Market for Marketplaces

40. With respect to the market for marketplaces, competition law issues could arise. First, the

formation of a marketplace may be subject to a notification filing (as was the case of Covisint with

the U.S. premerger Hart-Scott-Rodino filing). Under Part IX of the Act, for certain large proposed

transactions in the form of an acquisition of assets or shares, an amalgamation or a combination,

there is a requirement to make a filing with the Competition Bureau and wait until the expiry of the

applicable waiting period (generally 14 or 42 days) before completing the transaction. Generally,

notification is required if the applicable size of parties and size of transaction thresholds are met.

The size of parties threshold is: the parties together with their affiliates have assets in Canada with

an aggregate value of over $400 million or gross revenues from sales in, from or into Canada with

an aggregate value of over $400 million for an annual period. The size of transaction threshold is:

the transaction involves assets in Canada of an operating business with a value of over $35 million

($70 million for an amalgamation) or the gross revenues from sales generated by these assets exceed

$35 million ($70 million for an amalgamation).

41. The main underlying purpose of a notification filing is to allow the Competition Bureau to

determine whether the proposed transaction is an anti-competitive merger under s. 92 of the Act for


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6See, Antitrust Enforcement Guidelines for International Operations, issued jointly by the U.S.

Department of Justice and the Federal Trade Commission, April 1995.

which an application can be made to the Competition Tribunal for a divestiture or some other

remedial order. A merger is anti-competitive under s. 92 if it would result in a substantial lessening

or prevention of competition.

42. The formation of a marketplace could have an adverse impact on competition between

marketplaces. Some of the newly-formed marketplaces are mergers of previously independent

marketplaces, for example, the merger of the MyAircraft with the newly created aerospace exchange

supported by major airlines and major aerospace suppliers. Such mergers may be subject to

notification filing and review under the substantive merger provisions of s. 92 of the Act.

43. Also, other concerns arise if a marketplace engages in exclusionary conduct to seek more

favourable treatment from suppliers or otherwise raise costs for rival marketplaces.

MULTI-JURISDICTIONAL CONCERNS

44. Most B2B electronic marketplaces are being designed to transcend national boundaries. In

so doing, they raise concerns about the application of antitrust and competition laws of the countries

that may be affected. The common view among enforcement authorities is that the application of

national laws is governed by the effects doctrine, that is, foreign conduct is subject to domestic

laws if the conduct affects domestic commerce.6 Given this view, it becomes necessary to consider

the possible application of the different competition laws and regulations that could affect B2B

electronic marketplaces. While there are common themes underlying competition laws around the


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world, there are sufficiently important differences that advice should be sought about the competition

laws and the enforcement approach in the countries that may be affected.

CONCLUSIONS

45. Since B2B electronic marketplaces can take many different forms and operate under very

different rules, only a few general comments can be made potential competition law issues.

46. First, the marketplace should be structured so that it can be considered as a non-criminal,

reviewable matter under Part VIII rather than as an agreement subject to the conspiracy provisions

of s. 45 of the Act.

47. Secondly, other things being equal, the marketplace should be owned by a third party, i.e,

not a person who is a buyer or seller of goods offered by the marketplace. This should minimize the

opportunities for competitor collaborations about inappropriate subjects such as price, output and

other important dimensions of competitive rivalry or the discipling of competitors inside or outside

the marketplace. Further, it would also minimize the likelihood that unresonable terms of access

would be imposed on persons seeking to join or participate. An independent marketplace is better

suited to deal with the commercially sensitive information that is accumulated about competitors.

48. Thirdly, other things being equal, there should be open access for participation in the

marketplace. The rules for access or participation should be transparent and on reasonable business

terms.


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Business to Business Marketplaces and Canadian Competition Law

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