Presented by the Canadian Bar Association’s (CBA) National Competition Law Section and

the Professional Development Committee of the CBA

Présentée par la Section nationale du droit de la concurrence de l’Association du Barreau canadien (ABC)

et le Comité du développement professionnel de l’ABC

MATERIALS / MATÉRIAUX

2012 Competition Law Fall Conference

Conférence annuelle d'automne 2012 en droit de la concurrence

Compliance Essentials for Trade Associations

Moderator / Animateur : Christopher Putney, ICBC Panellists / Conférenciers : Mark C. Katz, Davies, Ward, Philips and Vineberg LLP

Jeanne Pratt, Competition Bureau Nathalie Clark, Canadian Bankers Association

September 20 - 21, 2012 | 20 et 21 septembre, 2012 Hilton Lac-Leamy | Gatineau, Québec

2012 ANNUAL COMPETITION LAW FALL CONFERENCE

Competition Compliance Essentials: Trade Associations Under Scrutiny

Mark Katz, Davies Ward Phillips & Vineberg LLP Erika Douglas, Davies Ward Phillips & Vineberg LLP

2012 Annual Competition Law Fall Conference

September 20, 2012

Introduction

• Overview of Trade Associations and Competition Law

• Specific Issues:

• Hard Core Conduct

• Membership Restrictions

• Data Collection and Information Exchanges

• Liability

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Overview of Trade Associations and Competition Law

• Canadian competition law has been concerned with the conduct of trade and professional associations from the start

• By one count, trade associations have been implicated in over 50 competition cases in Canada, involving a wide range of industries

• Most cases have involved prosecutions for conspiracies/bid- rigging; more recently, cases have tended to be brought under the abuse of dominance and other civil provisions

Overview (cont'd)

• Key Issues:

• "Hard Core" Conduct

• Membership Restrictions

• Data Collection and Information Exchanges

• Standard Setting

• Fee Schedules and Compensation

• Joint Negotiations

• Joint Advertising and Marketing

• Joint Research and Development

• Lobbying

Hard Core Conduct

• Involves prohibited agreements under the Competition Act's conspiracy and bid-rigging provisions:

• Price-fixing

• Market allocation

• Output restrictions

• Bid-rigging

• Rules, policies, by-laws or other initiatives enacted by a trade association can constitute an “agreement” between competitors

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Hard Core Conduct (cont'd)

• Examples:

• R. v. Armco Canada Ltd. ("open price policy")

• R. v. Alberta Ambulance Operators' Association (market allocation)

• Saskatchewan Roofing Contractors (bid-rigging)

• Tasmanian Salmon Growers (output restrictions)

• Role of Association

• Central facilitator of conduct

• Used as a "cover" for illegal conduct (informal meetings)

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Hard Core Conduct (cont'd)

• BEST PRACTICES:

• DO NOT adopt any form of policy, plan, program, arrangement or rule that involves "naked" price fixing, market allocation, output restrictions, bid-rigging

• DO NOT permit the discussion of these matters at formal meetings

• DO caution members not to engage in these types of discussions in any informal encounters

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Association Membership

• It is accepted that associations may need to establish membership criteria given that they are generally based on some form of commonality of interest

• Concern that membership criteria could be used to limit competition by:

• Artificially restricting entry into an industry/profession

• Denying competitors access to "essential facilities"

• Limiting the scope of a member's business structure

• Imposing membership rules that are anticompetitive (e.g. pricing policies, advertising restrictions)

• Anti-competitive member discipline

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Association Membership (cont'd)

• Examples:

• Interac

• Canadian Real Estate Association

• Toronto Real Estate Board

• Dental Hygienists

• Wiley v. McLaughlin

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Association Membership (cont'd)

• BEST PRACTICES:

• Membership criteria should be well defined and transparent

• Membership criteria should relate to a legitimate and pro-competitive purpose or objective of the association

• A member or select group of members should not be given a veto over the admission of new members to the association

• Discipline or expulsion should only be utilized in cases of breach of clearly defined rules and for a legitimate purpose (e.g., to enforce safety standards)

• Associations should be careful about seeking to limit or exclude competition from related service providers. It will be important to demonstrate that any such restrictions are necessary to protect consumers

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Data Collection and Information Exchanges

• Information collection is a commonplace association function

• Used for legitimate purposes such as industry benchmarking, safety standards, lobbying

• But collection and exchange of competitively sensitive information can raise concerns if used to facilitate illegal agreements

• See, e.g., Bureau Competitor Collaboration Guidelines: cartels often involve and are based on information exchanges between competitors (e.g., to monitor adherence by cartel participants)

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Data Collection and Information Exchanges (cont'd) • Relevant factors to assess information exchange risk:

• Type of information – “competitively sensitive” information (pricing, costs, terms of sale, markets and territories, capacity/production, customers, business/strategic plans) v. competitively neutral or pro-competitive

• Currency of information – current/future v. historic

• Frequency of exchange – frequent v. occasional related to legitimate pro-competitive aims

• Level of detail and aggregation – sufficiently aggregated v. company specific

• Who has access – will the information be accessible to company personnel who are directly involved in competitively-sensitive activities?

• Use of a third party – will an outside party be used to gather and analyze information?

• Market characteristics – market shares, barriers and concentration can be relevant for review under section 90.1 (civil agreements provision)

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Data Collection and Information Exchanges (cont'd)

• BEST PRACTICES:

• Information collected should be based on historical data

• Raw data should not be shared between members

• Associations should not coerce members to participate in information exchanges (or punish non-participation)

• Circulated information should be of a generalized (i.e., aggregated) nature

• Competitively-sensitive information should only be retained as long as necessary for particular legitimate objective

• Consider using an independent firm to collect, analyze and distribute information

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Liability

• Competitor Collaboration Guidelines: A trade association may be considered a principal party to a conspiracy under the Competition Act

• Is the trade association a single actor entity?

• Is the trade association a "competitor"?

• A trade association may also be subject to prosecution under the aiding and abetting provisions of the Criminal Code (s.21)

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Liability (cont'd)

• Criminal liability/intent (mens rea)

• Prosecution must show (beyond a reasonable doubt) that accused had knowledge and understanding of nature and scope of the agreement and an intention to put the "common design" into effect

• Several instances in Canada where case against certain members of trade associations dismissed because of an absence of the requisite degree of intent

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Liability (cont'd)

• In re Processed Egg Prods. Antitrust Litigation:

• Defendants allegedly conspired to reduce the supply of eggs and drive up prices through the vehicle of a trade association/cooperative

• Defendants brought motions to dismiss based on rule of U.S. law that mere membership in an association is not sufficient to establish liability; must be knowing, intentional and active participation in the allegedly illegal scheme

• Court examined each individual defendant's level of participation, including factors such as meeting attendance, comments at meetings, voting record on key issues, board membership and adherence to the impugned association programs

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Liability (cont'd)

• New Zealand: All members of a trade association are deemed to be parties to any agreement entered into by the association, regardless of an individual member's involvement or knowledge of the agreement, unless:

• The member formally notifies the association in writing that it wishes to disassociate itself from the agreement and takes steps to do so;

or

• The member can positively establish that it did not have any knowledge of the agreement and could not reasonably have been expected to possess such knowledge

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Competition Compliance Essentials: Trade Associations Under Scrutiny

Mark Katz, Davies Ward Phillips & Vineberg LLP 416.864.5578, mkatz@dwpv.com

Erika Douglas, Davies Ward Phillips & Vineberg LLP 416.367.7545, edouglas@dwpv.com

2012 Annual Competition Law Fall Conference

September 20, 2012

Jeanne L. Pratt Assistant Deputy Commissioner/Sous-commissaire adjointe Criminal Matters Branch/Direction generale des affaires criminelles Competition Bureau/Bureau de la concurrence

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COMPLYING WITH THE COMPETITION

ACT: THE CHALLENGE FOR TRADE

ASSOCIATIONS AND THE RESPONSE

OF THE CBA

Nathalie Clark

2012 Competition Law Conference

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COMPETITION ACT AND TRADE

ASSOCIATIONS

“People of the same trade seldom meet together, even for

merriment or diversion, but the conversation ends in a

conspiracy against the public, or in some contrivance to

raise prices.”

Adam Smith, An Inquiry Into the Nature and Causes of The Wealth of Nations 128, Edward Cannan

ed., Random House, Inc. (1937)

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COMPETITION ACT AND TRADE

ASSOCIATIONS

Trade associations are perfectly legitimate and serve

useful purposes:

• Enhancing public policy through lobbying activities

• Increasing transparency of the market through education and

information gathering

But everything a trade association does is decided by its

members and they are perhaps the most fertile ground for

conspiracies (intended and unintended)

• By their nature, trade associations bring together competitors to

address topics of common interest or concern

• Competition enforcers carefully monitor trade association activity

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PREMIUM ON COMPLIANCE

Competition Act is the Criminal Code of the business world and

provides for jail terms, multi-million dollar fines and civil damages

• Landscape

• 2010 restructuring of conspiracy law eases enforcement

• 2011 ease of certification for competition law class actions

• Dramatic increase in penalties & surge in private damage actions

• Commissioner of Competition has described #1 Priority Cartels

and #2 Priority Bid-Rigging

• Americanization of competition class action litigation

Plaintiffs do not wait for the Competition Bureau to act

Media reports often trigger action

• Result: Premium on Compliance

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PREMIUM ON COMPLIANCE

Objective: Prevention

An ounce of prevention is worth a pound of cure

Effective compliance program creates a culture of compliance

Association needs to have compliance program –cannot rely on the

compliance programs of individual members

Certain basic safeguards should be in place to avoid exposing

members (and the Trade Association) to the risk of violating the

Competition Act, including:

Criminal: e.g. sections 45 (conspiracy), 47 ( bid-rigging), and 49

(arrangements between federal financial institutions)

Civil: e.g. sections 90.1 ( non-criminal agreement between

competitors); and 79 (abuse of dominance)

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TRADE ASSOCIATIONS – EXAMPLE OF

DOs

DO ensure that an agenda is prepared for each meeting and, if necessary, is reviewed by the legal division prior to circulation

DO restrict discussion at the meeting to the topics included on the agenda

DO ensure that internal legal counsel attend meetings where competition issues may arise

DO ensure that meeting minutes are recorded, distributed, reviewed and errors reported and corrected

DO always object to and stop any discussion in a trade association meeting or otherwise that you think is or may be inappropriate

DO obtain legal advice before discussing agreements on sensitive issues such as data collection and exchange, standard-setting or joint activities in the marketplace.

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TRADE ASSOCIATIONS – EXAMPLE OF

DON’T

Do NOT discuss commercially sensitive matters, such as information

regarding current or future prices/ rates/ fees, costs, profits, capacity,

suppliers, customers, business plans or strategies, bids, market share

or any non-public information

Do NOT participate in “off the record” discussions or social encounters

with competitors concerning commercially sensitive matters

Do NOT take any action or make any statements which could be

construed as suggesting or expressing an agreement to boycott,

penalize or otherwise discriminate against another company or

person, whether or not a member of the association

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COMPETITION BUREAU GUIDANCE FOR

TRADE ASSOCIATIONS

Competitor Collaboration Guidelines

• Issued in December 2009

• Articulates Bureau’s enforcement policy for ss. 45 and 90.1

Draft Information Bulletin on Trade Associations

• Issued in September 2008

• Bureau has decided not to proceed with final bulletin in view of

Competitor Collaboration Guidelines

• Useful tool to identify issues, but not a statement of Bureau Policy

Competition Bureau Advisory Opinions

• Note: these opinions were issued prior to the 2009 and 2010

amendments to the Competition Act

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KEY SPECIFIC PROVISIONS IN

COMPETITION ACT FOR CBA: SECTION 45

Section 45 is the cornerstone of the Competition Act

Criminal offence for two or more competitors to agree to • Fix, maintain, increase or control the price for the supply of a

product (“price-fixing”),

• Allocate sales, territories, customers or markets (“customer/market allocation”), or

• Fix, maintain, control, prevent, lessen or eliminate the production or supply of a product (“production allocation”)

The offence is the agreement itself • it is not necessary for the agreement to have been implemented

• no requirement to prove anti-competitive effect

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KEY SPECIFIC PROVISIONS IN

COMPETITION ACT FOR CBA: SECTION 45

Agreement can be inferred from circumstantial evidence

Penalties

• $25 million per count and/or 14-year imprisonment

• easier to prosecute as no need to prove negative effect

on competition

• civil liability exposure (individual and class basis) →

typically much more significant from a financial

perspective than the criminal fines

• significant reputational risk

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KEY SPECIFIC PROVISION IN

COMPETITION ACT: SECTION 49

“Federal Financial Institutions” (FFI) are subject to an additional criminal offence designed just for them.

FFI are defined as:

• a bank or an authorized foreign bank within meaning of section 2 of the Bank Act

• a company to which the Trust and Loan Companies Act applies

• a company or society to which the Insurance Companies Act

applies. Agreement/Arrangement

• Important to remember that Section 49 (and Section 45) applies to an “arrangement” as well as an “agreement”. An “arrangement” reflects a form of active coordination among the conspiring parties. An agreement or arrangement need not be formal or in writing.

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KEY SPECIFIC PROVISION IN

COMPETITION ACT: SECTION 49

The scope of section 49 is very broad- covers agreement between FFI with respect to

(a) the rate of interest on a deposit,

(b) the rate of interest or the charges on a loan,

(c) the amount or kind of any charge for a service provided to a customer,

(d) the amount or kind of a loan to a customer,

(e) the kind of service to be provided to a customer, or

(f) the person or classes of persons to whom a loan or other service will be made or provided or from whom a loan or other service will be withheld.

Appears to apply to any “kind of service”.

There is no statutory definition of “service”, but it is safe to assume that

the meaning of and scope of the term service covers any service that a bank might provide

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KEY SPECIFIC PROVISION IN

COMPETITION ACT: SECTION 49:

EXEMPTIONS

Section 49 exemptions include agreements with respect to:

• a loan or deposit made or payable outside Canada;

• bid for or purchase, sale or underwriting of securities

• with respect to the exchange of statistics and credit information,

the development and utilization of systems, forms, methods,

procedures and standards, the utilization of common facilities and

joint research and development in connection therewith, and the

restriction of advertising;

• certain guaranteed or insured loan programs (e.g. Small Business

Loans Act)

• a Minister of Finance Certification to the Commissioner of

Competition

• among affiliates

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KEY SPECIFIC PROVISION IN

COMPETITION ACT: SECTION 49:

PENALTIES

Similar to section 45 not necessary to show that the agreement was

implemented or had or is likely to have an adverse impact on

competition

Penalties similar to conspiracy

Fine of $10M and 5 years imprisonment

Civil liability exposure (individual and class basis)

Significant reputational risk

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Competition Act Compliance & the CBA

CBA has a Competition Act Compliance Program to minimize the risk of non-compliance with the Competition Act by CBA or its staff

CBA is committed to ensuring that all its activities are performed with strict adherence to the Competition Act

Concern about penalties but also reputational risk

Three key provisions for CBA: Sections 45, 47 and 49

The CBA and its employees may be subject to prosecution pursuant to the provisions of the Criminal Code, including:

• Aiding & Abetting- Section 21 of the Criminal Code

• Counseling- Section 22 of the Criminal Code

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COMPETITION ACT COMPLIANCE

PROGRAM: KEY VALUES

Prevents or minimizes the risk of non-compliance with the

Competition Act

Alerts staff to potential problems

Allows association to take steps to protect itself and its

members from potential breaches of the Competition Act

Protection against both legal and reputational risks

Allows association to demonstrate commitment to

ensuring that it is compliance with Competition Act

Provides staff with tools to avoid problems

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COMPETITION ACT COMPLIANCE

PROGRAM: KEY ELEMENTS

Clear and active support of President & other senior

management

Clear commitment to compliance with the Competition Act

Clear guidance on procedures to be followed

On-going and regular training of staff

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CBA COMPLIANCE PROGRAM: KEY

RESPONSIBILITIES FOR CBA STAFF

All CBA staff should conduct business activities in

compliance with Competition Act

Every CBA employee is required to sign an

“acknowledgement form”

If in doubt, consult with Legal Division • sometimes challenging to distinguish between appropriate and

inappropriate subject areas for collaboration

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CBA COMPLIANCE PROGRAM: KEY

GUIDELINES FOR CBA STAFF

Key Guidelines:

• Agendas

• Discussion at CBA Meetings

• Committee Activities

• Discussions with Government Officials

• Committee Minutes

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CBA COMPLIANCE PROGRAM: KEY

GUIDELINES FOR CBA STAFF

Check to ensure information provided by a member has not been provided in confidence

Avoid any unintended exchange of confidential competitively-sensitive information

Avoid loose language when drafting e-mails, memos and other communications

• Over-exuberance may leave misleading impressions from an antitrust perspective

Ensure external communications (e.g. press release) reflect the facts and do not confuse activities undertaken collectively by the members with activities which may or may not be undertaken unilaterally by any member

• E.g., collectively defining basic standards for a new product/service in order to enhance efficiencies, incent innovation and accelerate entry versus each members unilateral decision to develop and market such product/ service and the matters relating to downstream offering of such product /service

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QUESTION

Nathalie Clark

General Counsel & Corporate Secretary

Canadian Bankers Association

Discussion Scenarios

2012 ANNUAL COMPETITION LAW FALL CONFERENCE

The federal government has decided that at least some aspects of the "payment card network" (i.e. credit and debit cards) needs some general rules governing the relationship between participants. In particular, the government is looking at the relationship between the "issuers" (normally financial institutions such as banks and credit unions), "acquirers" (entities that enable merchants to accept payments by credit or debit card, by providing merchants with access to a payment card network for the transmission or processing of payments) and "users" (i.e. merchants and consumers) of credit and debit cards. Rather than adopting formal legislation, however, the government is considering developing a "Code of Conduct. " As a result, the government approaches various stakeholders, including the Canadian Bankers Association, to see if they are willing to discuss: i) the matters to be covered in the Code, and ii) the wording of the Code.

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Widget Manufacturer A has historically sold its widgets in Canada through a national network of independent retailers. Manufacturer A is the largest widget manufacturer in Canada and its products make up the bulk of widgets sold by these retailers. All of Manufacturer A's retail distributors are members of an association that was formed to promote their collective interests, known as the Canadian Widget Retailers Association of Canada ("CWRAC").

In August 2012, Manufacturer A notified the CWRAC that it would be expanding its distribution channels in Canada as of October 2012 by also selling widgets directly to customers over the Internet. Manufacturer A also indicated that it would offer its widgets to online customers at a 15% discount from the wholesale prices it charges to the CWRAC members.

The CWRAC members are perturbed by the prospect of having to compete against their principal supplier. At an association meeting, they authorize the CWRAC board of directors to advise Manufacturer A that, if it goes ahead with its plans, association members will thereafter refuse to buy widgets from Manufacturer A. The members also endorse a special by-law authorizing the CWRAC to expel any retailer from the association that continues to purchase widgets from Manufacturer A in the event that it proceeds with its plans to sell directly to customers online.

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The widget manufacturers of Canada have their own industry association (the "CWMA"). At a meeting, the members discuss their concerns about the potential entry of a new widget manufacturer from China which is promising to slash prices to customers by 50%. The CWMA members decide unanimously to adopt the following counter-measures:

issue a new specification standard for widgets to be sold in Canada which they know the Chinese manufacturer is unable to meet;

initiate a campaign to persuade all widget customers in Canada to only buy widgets that conform with the CWMA code; and

threaten to discontinue supply to any widget customer in Canada that uses non-conforming widgets (e.g., buys them from the Chinese competitor).

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The national knee-bone x-ray association holds an annual meeting once a year during which, among other things, it updates and publishes a fee guide for its several thousand members. The guide is part of an effort by the association and its members to have an “open pricing policy” without fixing prices. The guide is compiled based on current fee, cost and other relevant fee-related information collected by association staff, some of which are competing knee-bone x-ray professionals, from members during the previous year. The fee guide includes clear statements that the fees are “recommended fees only” and that members are “free to determine their own fees”. The association discusses the pricing and related data it collects at association and board meetings and keeps the raw data collected for other projects. In practice, the majority of knee-bone x-ray technicians adhere to the suggested fees in their association’s fee guide, from time-to-time the association disciplines members who deviate significantly from the guide and some members, when asked about knee-bone x-ray fees by the general public, reply that their association has fee guidelines.

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For some years the Western Canadian hearing aid retailers association has assisted its members negotiate prices for sales to some Federal Government departments. One department in particular, which is a particularly powerful buyer and represents a large portion of members’ sales, has been Veterans Affairs Canada. The association sees its periodic negotiation role as a natural part of its services for members, has formed task forces and steering groups (made up of association personnel and competing members) to assist with negotiations and has historically tended have proposed framework sales agreements with Government agencies ratified by its members. A fair amount of industry information (pricing, costs, customers, etc.) is circulated among members during typical negotiations with the end result usually consisting of a framework sale agreement (between the association and the Government agency) and individual distribution agreements (between individual members and the Government agency), with prices established based on the joint negotiations.

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