Proceedings of the Standing Senate Committee on
National Finance

Issue 12 - Evidence - February 15, 2012


OTTAWA, Wednesday, February 15, 2012

The Standing Senate Committee on National Finance met this day at 6:44 p.m. to study the potential reasons for price discrepancies in respect of certain goods between Canada and the United States, given the value of the Canadian dollar and the effect of cross-border shopping on the Canadian economy.

Senator Joseph A. Day (Chair) in the chair.

[English]

The Chair: I call this meeting of the Standing Senate Committee on National Finance to order.

[Translation]

Honorable senators, this evening we are continuing our special study on the potential reasons for price discrepancies in respect of certain goods between Canada and the United States.

[English]

Honourable senators will recall that some of our recent witnesses have spoken about anti-competitive behaviour and competitive dynamics and concentration in certain industries. Given that the Competition Bureau contains the experts in Canada with respect to competitive behaviour in our country, we thought it would be appropriate to invite the Competition Bureau to provide guidance in some of these areas.

Tonight, we are very pleased to welcome Mr. Richard Bilodeau, Acting Assistant Deputy Commissioner, Civil Matters Branch, Division B. He may get a chance to explain just what that is. Mr. Matthew Kellison is also Acting Assistant Deputy Commissioner, Civil Matters Branch, Division A.

Mr. Bilodeau, I understand that on Mr. Kellison's behalf you have a few introductory remarks, and then it is our practice to go to a question and answer dialogue if that is okay with you.

Richard Bilodeau, Acting Assistant Deputy Commissioner — Civil Matters Branch Division B, Competition Bureau: Thank you very much, Mr. Chairman, and members of the committee. On behalf of the bureau, I am pleased to be here today to discuss the committee's study into price discrepancies of certain goods between Canada and the United States.

[Translation]

My name is Richard Bilodeau. I am an Acting Assistant Deputy Commissioner in the Bureau's Civil Matters Branch.

[English]

With me is my colleague Matthew Kellison, also an Acting Assistant Deputy Commissioner in the Civil Matters Branch. Division A and B are the only two divisions in the branch.

I want to take this opportunity to provide you with an overview of the bureau's mandate and responsibilities and outline how they relate to the topic of your examination.

The Competition Bureau is an independent law enforcement agency headed by the Commissioner of Competition that administers and enforces the Competition Act. Our goal is to ensure that Canadian businesses and consumers prosper in a competitive and innovative marketplace. We deliver on our mandate by focusing on our ongoing and principled commitment to three enforcement priorities: To continue to achieve results for Canadians through active, targeted and principled enforcement; to apply Canada's competition laws in a progressive and transparent way that keeps pace with the changing marketplace; and to cultivate a strong and agile enforcement capacity so that we can deliver results that matter.

By taking consistent, targeted enforcement action, the bureau ensures that it has the largest possible impact on promoting competition, innovation and productivity in the Canadian economy.

[Translation]

The Competition Act applies, with very limited exceptions, to all sectors of the Canadian economy, and sets out criminal and civil penalties for a variety of specific anti-competitive practices. These include engaging in misleading advertising and deceptive marketing activities; entering into agreements with competitors to fix prices, allocate markets or restrict output; and abusing a dominant market position.

We are also responsible for reviewing proposed mergers to ensure that they do not substantially lessen and prevent competition.

[English]

The bureau's focus on principled enforcement has been bolstered by recent significant changes to the Competition Act and Canada's competition regime. These changes were the result of amendments that were passed by Parliament in March 2009 and represent the most significant changes to the act in over 20 years. They modernized Canada's competition law regime and brought it more closely into line with the competition laws of our major trading partners.

Among other things, the amendments created a more effective mechanism for the criminal prosecution of hard core cartel conduct, such as price-fixing or market allocation, while establishing a new civil review process for other forms of agreements between competitors that can be harmful to competition; introduced a new two-stage merger review process to allow for a more efficient and effective review; increased the penalties for deceptive marketing practices and empowered the courts to award restitution to victims of false or misleading representations; and authorized Canada's Competition Tribunal to award administrative monetary penalties against companies who abuse a dominant position in the marketplace.

These amendments strengthened the Competition Act and have played a key role in the record number of litigated cases the bureau is currently involved in. While the bureau always has a strong preference for consensual resolution, when parties resist effective remedies, we will not hesitate to seek those same remedies through the courts or the Competition Tribunal.

One such recent example that may be familiar to you is the commissioner's December 2010 application to the tribunal to strike down restrictive and anti-competitive rules that Visa and MasterCard impose on merchants who accept their credit cards. These restraints result in higher prices for all consumers whether they pay by cash, cheque, debit or credit because merchants pass along some or all of the high costs they are forced to pay as a result of Visa and MasterCard's anti-competitive rules. A hearing on this matter is scheduled to begin in May.

The bureau has also challenged restrictive rules in the real estate industry that harm competition and ultimately harm consumers. For example, the bureau last year reached a resolution with the Canadian Real Estate Association that fully addressed our concerns and that has had a positive impact on the market for real estate services.

Last May, the bureau filed an application against the Toronto Real Estate Board seeking to prohibit restrictions placed on realtors that dictate how they distribute real estate information to their clients. These restrictions are denying consumer choice and the ability of real estate agents to introduce innovative real estate brokerage services through the Internet. The hearing of this matter is scheduled to begin in September.

[Translation]

Furthermore, in November 2010, the Bureau began legal proceedings before the Ontario Superior Court regarding what the bureau has concluded are misleading claims by Rogers about dropped calls, in an advertising campaign, promoting its Chatr cell phone brand. The bureau has also concluded that the claims made were not based on adequate and proper tests. The bureau is asking the court to order Rogers to stop the advertising campaign and refrain from engaging in similar campaigns for a 10-year period; pay an administrative monetary penalty of $10 million; pay restitution to affected customers; and issue a corrective notice to inform the general public about the nature and provisions of the order issued against them.

It is worth noting that while the litigated case continues, the Rogers campaign was dismantled within a month of our filing.

The bureau is also seeking currently to block a joint venture of Air Canada and United Continental that, if allowed, would harm competition, and result in increased prices and reduced consumer choice on key transborder routes of enormous importance to Canadian consumers and business travelers.

In June, we announced that Bell Canada had agreed to stop making what the bureau had concluded were misleading representations about the prices offered for its home phone, Internet, satellite TV and wireless services. We found that the advertised prices were not in fact available, as additional mandatory fees were hidden from consumers in fine-print disclaimers. As part of that settlement, Bell agreed to pay an administrative monetary penalty of $10 million, the maximum amount allowed under the Competition Act.

[English]

Finally, we recently sought refunds for consumers misled by false and misleading representations in a consent agreement with the maker of Nivea creams. As a result of this agreement, the product in question was immediately removed from Canadian shelves and affected consumers were provided refunds on the purchase price and shipping costs. As you can see, when the bureau believes that the act has been violated, we will not hesitate to take action to promote competition to the benefit of Canadian consumers.

This brings me to the issue this committee is currently examining. While there may be a variety of potential factors contributing to a price differential between Canada and the United States for any given product, it is important to understand that the bureau is not a price regulator. We do not determine what is or is not a fair price for any product or service.

In Canada, companies are generally free to set their own prices at whatever levels the market will bear. High prices in and of themselves do not fall under the purview of the act unless they are the result of anti-competitive conduct. If high prices are the result of anti-competitive conduct, such as price-fixing or abuse of a dominant position, we will not hesitate to investigate and take the appropriate action.

The bureau's principled and targeted enforcement of the act strives to ensure that Canadian markets remain competitive. The government's recent amendments to the act have greatly assisted our ability to pursue anti- competitive conduct as evidenced by the cases the bureau has brought forward since the time of the amendments. Let me assure you that we are making every effort to ensure that Canadians fully enjoy all the benefits and advantages of competitive prices, service and product choices.

To conclude, Parliament has provided the bureau with a specific role, and that is to the pursuit of principled enforcement action against individuals and companies engaged in anti-competitive behaviour. As noted at the outset, we are a law enforcement agency. We believe that we have the investigative tools necessary to appropriately address anti-competitive behaviour in any sector of the Canadian economy and even more so since the coming into force of the 2009 amendments. We believe that consistent, targeted enforcement is the most effective way for the bureau to positively impact the economy for both consumers and businesses. We will continue to hold to account companies that engage in anti-competitive conduct contrary to the act so that Canadian businesses and consumers continue to prosper in a competitive and innovative marketplace. I look forward to your questions.

The Chair: Thank you, Mr. Bilodeau. As I normally ask witnesses, what is the total budget for the bureau, and how many employees do you have?

Mr. Bilodeau: I am not sure of the current budget. We usually have between $45 million and $48 million approximately. In terms of total employees, I would estimate it to be around 400 at this time.

The Chair: They would be full-time equivalent employees?

Mr. Bilodeau: Yes.

The Chair: If either of those turns out to be significantly different from that, you will let us know?

Mr. Bilodeau: Sure.

The Chair: We will be getting the estimates for the next fiscal year in the next short while as well. We will be looking at that when we receive them.

I will start with Senator Nancy Ruth.

Senator Nancy Ruth: It is fascinating to be a consumer of most of these companies you are investigating. It was an interesting speech to read and hear. I was curious about you said you believe you have the investigative tools necessary to address the situations you are faced with. What are those tools? How do people write in and tell you? How are you watching the markets? How does that all play out?

Mr. Bilodeau: The best way to answer your question is to take you from point A to point Z, if you want, of how we do our work. We become aware of situations, anti-competitive behaviour, whether it is on the civil or criminal side, primarily through complaints from either individuals, business people that are in certain sectors of the economy that may be either victims of this conduct or witnessing this conduct. When we receive this information, these allegations, we initially start within a preliminary investigation, try to determine whether or not the conduct could be reviewed under the act, whether the act is what we refer to as being engaged. A lot of times, complaints raise issues that do not fall under our purview and would not be appropriate for us to get involved in.

We determine one of two things from our preliminary investigation. We can determine that the act has not been violated or there is nothing anti-competitive going on under the act. In some cases, if we determine that conduct has or has potentially breached the act, if we have reason to believe the act has been violated, we have the ability to go under what we refer to as an inquiry. It is a formal step that the Commissioner of Competition can take, and in so doing it gives her the ability to access a number of investigative tools, formal statutory investigative tools. She has the power at that point to subpoena records, to subpoena written responses to question and to compel oral testimony. To do so, however, she must seek the authorization of a court and she does require a court order. She also has the ability, for criminal matters, to obtain authorization from the court to conduct searches of businesses or individuals; and also in extreme circumstances, for section 45, what we refer to as cartel cases and some criminal, misleading advertising, she has the ability under the Criminal Code to seek the ability to conduct wiretaps.

When we have collected all the evidence and collected documents, we will sometimes engage the services of experts, industry experts and/or economic experts to help us do our work. We will come to the conclusion whether or not there is a problem that needs to be remedied; and at that point, if we think the situation requires a remedy in the marketplace, as I said in my opening remarks, we try to reach a consensual resolution. We try to sit down with companies and say this is what we think you are doing that is anti-competitive, how you are harming competition and consumers. We want you to stop. If, unfortunately, they are not willing to agree to the remedies we think are necessary to change their behaviour, as we have done in a number of cases recently — Visa, MasterCard, Rogers, the airlines matter — we will go to the Competition Tribunal or the courts and seek an order forcing them to change their behaviour. That is the process, generally, from A to Z.

Senator Nancy Ruth: When someone tells you there is a problem, you look at the two companies or groups of companies that are involved in whatever it is, a cartel or whatever. What are your tests for deciding whether the Competition Act has been breached and how do you judge what remedy is appropriate?

Mr. Bilodeau: I will turn it over to Mr. Kellison in a second, but the tests will vary depending on which sections of the act we are looking at. If you are looking at a cartel, for example, it would be sufficient to show there was an agreement between competitors to fix prices, allocate markets. If we can demonstrate that has happened, then they have violated the act.

Senator Nancy Ruth: You have to be pretty snoopy to find out where those documents are to prove that, other than hearsay.

Mr. Bilodeau: Exactly.

Senator Nancy Ruth: What authority do you have to do that?

Mr. Bilodeau: As I mentioned, we could use the ability to search businesses to obtain records they may have. It is very important in cartel cases. As you would suspect, cartels do not do it out in the open. It is very covert, and we need to use tools like search warrants, in some cases wiretaps, to get that information.

We also have what we refer to as an immunity program. If a company is engaged in criminal activity, like a cartel, they can let us know they have been involved in a cartel, tell us what they have been doing and who they have been doing it with, and that person can receive immunity from prosecutions for basically divulging to us that the cartel exists. That would be in the context of criminal cases, and Mr. Kellison can elaborate in a civil context where he and I work, how we come to those conclusions.

Senator Nancy Ruth: Does one of you do civil and the other does criminal?

Mr. Bilodeau: We both do civil.

Matthew Kellison, Acting Assistant Deputy Commissioner — Civil Matters Branch Division A, Competition Bureau: With respect to a lot of the civil provisions, the act does have some criminal provisions dealing with cartels, price- fixing, as Mr. Bilodeau mentioned, bid rigging, and certain deceptive marketing practices. Most of the rest of the provisions of the act fall under a civil standard, which means that usually, rather than having a burden of proof beyond a reasonable doubt, we have a balance of probability standard if we are choosing to litigate the matter in court. Where we are dealing with a civil provision, usually there is a competition test. There is a civil provision dealing with refusal to supply if, for whatever reason, you are not selling to a customer or, in some cases, to a competitor. There is a provision dealing with exclusive arrangements and tied selling arrangements. There is the provision dealing with, generally, abuse of dominance, which is a catch-all for a lot of things.

In the package of 2009 amendments, there is a new provision that deals with collaborations between competitors. Before, any time two competitors got together and agreed to do something, they might be subject to criminal sanctions under section 45, which, depending on the nature of the arrangement, could be far too much exposure. In a lot of cases, there may be compelling reasons why competitors may agree to do something together — joint research and development, for example — that has nothing to do with price-fixing.

In any event, all of these cases have a competition test. That means that we need to show not only that the practice has occurred, but also that, subsequently, it has an effect on competition in the form of, for example: higher consumer prices, reduced consumer choice, depressed innovation in the market, depressed product quality, or raised barriers to entry preventing competitors from coming in. Those are the kinds of things we look at when we look at whether or not a practice is having harmful effects on competition.

Senator Nancy Ruth: Of these 400 people you employ, some are legal counsel, some are criminal, some are civil, and then have you all of these investigators. Do you hire outside expertise if, say, you are doing something that is related to IT companies? I would have no idea whether or not it was harming the market or developing future products because I do not have that expertise. How do you gain those kinds of things?

Mr. Bilodeau: We have a number of investigators who are divided up. Mr. Kellison and I work in the Civil Matters Branch, and we have colleagues who work in the Criminal Matters Branch. We have colleagues who exclusively deal with misleading advertising, working in what we refer to as the Fair Business Practices Branch, and we have a group that reviews mergers. We develop our own expertise. We will conduct the initial stage of an investigation ourselves, but we start from scratch. When we look into an industry subject to allegations of anti-competitive behaviour, we typically start from scratch, unless we have had prior experience in that industry. We will be out talking to market participants. We will be collecting information from suppliers, customers, competitors, and regulators, depending on what kind of markets we are looking at. We bring all of that back to the office when we are done. We put them all together, and we see if the act has been violated. There comes a point in many cases — if they become complex and serious — where we require the help of outside expertise, whether it is industry experts or economic experts. The act is legislation, but it has a strong economic component. It is often necessary to hire outside economic help to help us understand the market dynamics, if you like. That is a bit what the bureau is composed of. We have administrative support and a branch that helps us out with our economics as well.

Senator Nancy Ruth: My final question is: We have heard in this study that there are issues of competition in the distribution channels for American goods in Canada, as well as issues of competition at the retail level. When I say those words and ask those questions, does that relate to you at all?

Mr. Kellison: I guess this is a good opportunity to clarify what we do and what we do not do. Our mandate is, essentially, to ensure that businesses and consumers prosper in a competitive and innovative marketplace. That is our mission statement. We do that through our enforcement of the Competition Act. While we would not directly regulate a price and say, "This price is too high, and you should lower your prices," or necessarily say that this market is too concentrated and should be less concentrated, we would ask whether any of those things are occurring as a result of anti-competitive conduct of some of the types we have mentioned, whether it be price-fixing, abuse of a dominant position, exclusive dealing, or tied selling. We would ask, "Are the prices that we are seeing in this market a result of that anti-competitive conduct? Has competition been substantially lessened as a result of that anti-competitive conduct?" If we determine, through our investigation, that it has, then we can go to the Competition Tribunal, which is the court that generally adjudicates the civil provisions of the act, and apply for a remedy. That can be as simple as an order prohibiting the conduct. It can be any other order that is necessary to overcome the effects of that conduct, which could even include the divestiture of assets or shares. One of the remedies we can now seek, thanks to the 2009 amendments, is administrative monetary penalties for abuse of dominance, which is important in terms of giving the law some teeth. In the past, if you were to engage in abuse of dominance, for example, we could get an order prohibiting that conduct, but any money you made breaking the law was yours to keep. We think that administrative monetary penalties provide a deterrent to engaging in the conduct in the first place. Those penalties are substantial. In the case of a first order by the tribunal, it can be up to $10 million, and, in the case of a subsequent order against the same company, it could be up to $15 million.

Senator Nancy Ruth: It seems to me that if Bell came back with $10 million as quickly as they seem to have from your speech, they are making sufficient profits that it is not a penalty of too much consequence. Are there sectors of industry or particularly groups of goods that you watch for peculiar movements?

Mr. Kellison: I should say, generally, that we do not necessarily engage the economy at a sectoral level. We would not, for example, necessarily look at the entire retail sector, as a whole, and say, "What is going on there?" When we investigate an allegation of anti-competitive conduct, it tends to be occurring in a specific market, which may not be the retail sector as a whole. It may be a narrow subset of the retail sector. It may be with respect to a specific product; it may be in a specific area, as opposed to nationally. With respect to a specific market, if we are faced with an allegation of anti-competitive conduct, we will investigate it. Where we find it is contrary to the act, we believe we have the tools, and certainly the motivation, to seek a remedy against that type of conduct.

The Chair: Can I put you down for round two? Your last question was two questions ago.

Senator Nancy Ruth: I know, but there is no standing brief for, say, the cellphone industry or something.

Mr. Kellison: If we are faced with an allegation of anti-competitive conduct in the cellphone industry, then we will look into the nature of that allegation, the firms involved, et cetera.

In terms of whether we are monitoring sectors of our own volition —

The Chair: We are going on to Senator Ringuette, from the province of New Brunswick.

Senator Ringuette: Thank you, Chair. I guess I would be remiss if I did not highlight the fact that the Competition Bureau is bringing Visa and MasterCard before the tribunal for their abuse of their dominant market position. I was under the impression that it was going to be going forth in April, but now you indicate that it is in May. Why is it a month later?

Mr. Bilodeau: The tribunal had to move the start of the hearing by two weeks, so we moved it from April 23 to May 8. That is the only reason.

Senator Ringuette: On a yearly basis, how many valid complaints would you get? I know you get a variety of complaints, but you always have to investigate and so forth. How many investigations would you do?

Mr. Bilodeau: It is a bit of a difficult question. We get approximately 14,000 complaints a year.

Senator Ringuette: Fourteen thousand complaints.

Mr. Bilodeau: As you can suspect, the majority of those do not end up being litigated. It does not necessarily mean that there is an issue.

I do not know how many of those 14,000 are investigated. I can tell you how many we have taken forward, obviously, whether it is criminal, civil, or fair business practices, and we can get you those numbers if you would like. That number will vary from time to time, obviously. Cases may get resolved or decided by the courts. We may close a case after we have investigated and determined that there is no anti-competitive conduct or that there was not price- fixing after all.

It is hard to quantify that number sitting here today; and I apologize for that. We are very busy.

Senator Ringuette: In order to trigger an investigation, there needs to be a valid complaint.

Mr. Bilodeau: Not necessarily. Complaints make up the majority of the starting point for a lot of our investigations and cases. We have the ability to wake up tomorrow morning and see something in the paper, bring it back to the office, have a chat with my colleagues that there is something going on in the market, and we will look at it. We can do investigations of our own doing if think there is something going on in the market. You are correct in that the majority come through complaints, typically from people who are victims of that practice and are suffering from it.

Senator Ringuette: It is somehow unfortunate, but how can you do otherwise, that your mandate is not proactive with regard to looking at what is happening on the Internet in terms of misleading advertising or deceptive marketing; at least I assume that. Do you have a unit or one or two people whose job is to look at advertising on those sales channels on television, for instance?

Mr. Kellison: We look at online markets; and you mentioned television. We look at that as well and at any sales or distribution channel and any method of retail or advertising if we think there is a reason to look at it under the act. Our Fair Business Practices Branch is very engaged in dealing with online deceptive marketing, misleading claims and spam. We have a number of international partners in fraud prevention that we work with. Quite often we deal with scams, for example, which are not specific to Canada and may be global. It may be a case of a U.S. company defrauding Canadian consumers. I can assure you that we are very interested in misleading advertising or deceptive marketing and we view online markets and services just as seriously as traditional bricks and mortar ones.

Senator Ringuette: With regard to deceptive online marketing, have you come across major price differentials that at the end of the day were because of misleading advertising?

Mr. Kellison: So that I understand, is the question: Was there a price differential resulting from misleading advertising?

Senator Ringuette: Yes.

Mr. Kellison: If that were the case, we would seek to address that under the Competition Act. Misleading advertising generally can harm the competitive process by misleading consumers and making them less able to make informed choices about what they are buying.

Senator Ringuette: I am trying to discern if at any time in your mandate you have identified price discrepancies between Canada and the U.S. because of misleading advertising or deceptive marketing?

Mr. Kellison: When we look at misleading advertising, it is in our interest to show a price differential; but it is not necessarily always the case that we need to. For example, in our recent Rogers case, essentially the government had taken steps to promote new entry into the cellphone market, and those new entrants were being faced with what we felt was a misleading advertising campaign by Rogers. Rogers said that its Chatr wireless, which was introduced to compete in that market segment, had fewer dropped calls than new entrants and that there would be no worry about dropped calls for consumers who went with Chatr instead of a new entrant. In that case, it was our view that those claims were misleading based on the data that we looked at and that their claims were not true. Furthermore, it was our view that Rogers had not done adequate testing of those claims. We think those kinds of cases are important to the extent that a firm, for example, could seek to prevent new entrants from acquiring customers through misleading claims. That can have a knock-on effect on price to the extent that you are harming your competitor's ability to compete and it may allow you to keep your prices up. If we were looking at a price differential resulting from that kind of conduct, we would certainly look at whether the practice is having an effect on competition.

Senator Ringuette: What is the maximum penalty? You mentioned $10 million to Rogers and I think the same amount to Bell. What is the maximum penalty that you or the tribunal can request?

Mr. Kellison: It depends on whether we are dealing with the civil or criminal provisions of the act. Under the civil provisions of the act, the administrative monetary penalties that the tribunal can order in the case of abuse of dominance are up to $10 million in the first instance and up to $15 million for a subsequent order against the same company. I believe those amounts are the same in the misleading advertising context when dealing civilly. When we deal with a case in the criminal world of price fixing, bid-rigging and deceptive marketing, there are substantial criminal fines. The 2009 amendments to section 45, the cartel provision, increased the fine for cartel activity up to $25 million; and there is risk of jail time as well.

Mr. Bilodeau: If I may add in the context of misleading advertising, which is at section 74.01 of the Competition Act, the Competition Tribunal or the court can order restitution for consumers harmed by the conduct. That has been available since the 2009 amendments.

Senator Ringuette: In the case of abusive practice to dominate the market, can the tribunal ask for compensation to consumers or is it just the maximum $10 million?

Mr. Bilodeau: No. It is a monetary penalty only.

Mr. Kellison: That would be in addition to any other order made by the tribunal to prohibit the conduct or require any other action on the part of the dominant firm to take steps to remedy the effects that its conduct had caused.

The Chair: I need clarification on your descriptions of criminal and civil. In the background that I am familiar with, a civil case is one party against another party and a criminal case is the Crown against a party or a group of people. When you talk about civil cases, you often refer to administrative. Are you talking about administrative versus criminal process as opposed to a civil case? Have I misunderstood what you said?

Mr. Bilodeau: In the context of criminal cases, you are correct: The Director of Public Prosecutions will bring the charges against companies that have violated the act. In civil cases, the Commissioner of the Competition Bureau is the primary litigant against the parties, for example, the commissioner versus Visa and MasterCard. When we refer to administrative monetary penalties, we refer to penalties aimed at deterring future conduct. The monetary penalties are in the context of civil cases and not present under the Competition Act for criminal cases. In criminal cases, we simply refer to them as fines.

The Chair: I understand the burden of proof difference; you have clarified it.

Senator Marshall: I think my question is somewhat related.

What is the difference between Branch Division A and Branch Division B? What are the other branches? I want a brief explanation. I would assume we requested someone from your organization to appear, so why would you be the one selected to appear here tonight with the knowledge of what we are studying?

Mr. Bilodeau: Primarily, the bureau is divided for reasons of administration. We do have legal services that on one side do civil cases and we have legal services that do criminal cases. Those are separated. Our civil matters branch enforces some of the civil provisions of the act, including everything that has to do with abuse of dominance, price maintenance and agreements between competitors that are not criminal in nature. The criminal matters branch handles hard-core cartels and bid-rigging. Those are the two things that they do primarily.

Senator Marshall: Do we have criminal matters branch A and criminal matters branch B?

Mr. Bilodeau: The divisions themselves are basically administrative divisions within the branch. We have about 40 people in our branch and to make our jobs easier they just split everything in two, and we have divisions that report to us at that point. It is the same in the mergers branch where there are three divisions and fair business practices. It is meant to be administrative divisions more than anything else.

Senator Marshall: Why would you two gentlemen have been selected to come here tonight, as opposed to someone under the criminal matters branch?

Mr. Bilodeau: A lot of issues that have come up through different testimony touch on issues that the civil matters branch would look into, for example, barriers to entry that exist because of anti-competitive behaviour. We understand that credit cards came up a few times during the testimony of several individuals and that is something that falls under the responsibility of the civil matters branch. A lot of matters that came up just seemed to fit better.

Senator Marshall: Earlier you gave an estimate of 14,000 complaints a year. We are also speaking about whether you were proactive or reactive or both. For proactive, I had the impression that you are looking at Internet sites and the shopping channel. Is that correct? Are you mostly reactive to complaints or is there a proactive body?

Mr. Bilodeau: There is no proactive body, per se. We are primarily reactive to problems in markets that are identified, and whether it is merchants bringing to our attention credit card fees or real estate agents complaining about certain rules and things like that, but we are generally reactive to complaints brought to us. We can be proactive. Like I said, if we are reading the paper one morning and we see something, or something comes across our desk that would not come through complaints, for example, then we can be proactive in that sense.

Senator Marshall: Would 95 per cent of your work be based on 14,000 complaints?

Mr. Bilodeau: I would not know if it is 95 per cent, but the vast majority would be responding to and investigating complaints.

Senator Marshall: For the work you do, what is made public? I suppose the details of all your investigations would be made public, but what is made public? Is it only your successful cases? I am just trying to get a handle on where we go if we want to peruse cases that in which you have been involved. What is there? Everything is not there. What is publicly available?

Mr. Bilodeau: One key element of the legislation in the Competition Act, section 29, requires that our investigations and enquiries be conducted in private and that the information we collect through investigations remains confidential. The reason for that is we need people to feel comfort in coming to us and telling us that there is a cartel going on or a company is abusing its dominant position. It protects that process, it protects them when they give us information, and it also protects them to a certain degree from reprisals and similar things like that.

Throughout the investigation, when we do our investigation, the fact that we are investigating typically remains confidential and does not necessarily go public. There are circumstances sometimes when a complainant will say they have complained to us about something but that is someone else basically divulging that. Matters will become public, for example, if we file charges before the Competition Tribunal. When we filed charges in the Quebec gas price fixing matter, that matter became public at that point as well. Even though things become public and, again, if there are decisions stemming from those cases before the tribunal or the courts, those decisions, successful or not, will obviously be made public. That is the nature of the process.

Senator Marshall: Will they be made public on your website or is it just in the media?

Mr. Bilodeau: It will depend. If a decision is rendered by the Competition Tribunal it will be posted on the Competition Tribunal's website. The tribunal is an independent body that is not linked to the Competition Bureau at all, is independent and has judges from the Federal Court who preside there. The same thing would apply to court decisions. If it is a superior court of Ontario, I would presume it would be on their website if there is a decision there.

There is a lot of information on the Competition Tribunal website, but what you will not see in regard to our cases are specific facts necessarily because those are oftentimes protected by the judicial process. The majority of the hearings themselves will be open to the public.

Senator Marshall: You are aware that we are studying the potential reasons for the price discrepancies between Canada and the U.S. How do we find out whether you have done any work in that area? Do we ask you or do we pursue your website?

Mr. Kellison: Certainly we have a lot of information on our website. There are the actual decisions on the Competition Tribunal website. There are also a number of background documents that we provide in terms of how we enforce the act, how we look at the provisions and look at markets. Obviously we are putting out announcements and news releases when we file a case and when we win a case.

With respect to an investigation, let us say we looked into a particular allegation of anti-competitive conduct in a market and for whatever reason it did not go anywhere. It could turn out that at the end of the day there was no merit to that allegation or perhaps there was merit at one time, circumstances changed, which can happen all the time, and it simply did not support us pursuing that case any further.

In those cases, as Mr. Bilodeau said, we conduct our investigations confidentially and so we would not necessarily post that on the bureau's website. One of the reasons for not doing that is simply because we deal with 14,000 complaints a year against every company you can name. There is a reputational aspect to saying you are being investigated by the bureau and we take that seriously. We would not, as soon as we get a complaint, say we have a complaint against company X because there could be no basis for it and no reason to involve them, for example.

With respect to mergers we review, for example, we have been putting out position statements that outline what we looked at and why we made the decisions we made. We are committed to being as transparent as possible within the bounds of the confidentiality requirements we have under the act.

Senator Marshall: Have you done any work that we could reference in relation to our study?

Mr. Bilodeau: We would not look necessarily at a price discrepancy as being the element we would look at first. It is possible, in the context of our investigations of anti-competitive behaviour, that we could notice that there is a price discrepancy. Whether or not the price discrepancy is because of the anti-competitive conduct would depend on investigation on a case-by-case basis. We would not necessarily know that.

Mr. Kellison referred to how we determine whether the conduct has substantially lessened competition. When we look at anti-competitive behaviour, our assessment of whether or not there has been a substantial lessening of competition is a relative one. It is not that prices are higher in Canada than in the United States. It is more a question of whether prices are higher because of the anti-competitive practice. If the practice was not present in the market — "but for the practice" is a phrase we often use — would the market be more competitive?

One of the ways we look at that is would prices be lower, would consumers in Canada have more choice, would innovation be better and would the quality be better? Obviously the first element we look at is price. It is in the nature of an economic calculation such as ours that price is usually the first thing we will look at in determining whether or not an anti-competitive practice or an agreement has had an impact on that price.

Mr. Kellison: I think that is right. Just to follow up on what Mr. Bilodeau said, when I said we do not necessarily regulate the level of competition in a market or determine whether a competition is sufficient or determine whether a price is fair, what we do when we investigate anti-competitive conduct is essentially say if we took that conduct away — this is the relative assessment he is referring to — what would happen to those prices? We use price as shorthand for several dimensions of competition, which could include quality, choice, innovation, levels of service, and those sorts of things. That is the kind of assessment we do.

What we can do as the bureau is that if we think there is anti-competitive conduct that is raising prices, we will seek to enforce the act and take action against that conduct and eliminate it. Whether or not that speaks to every possible factor that could be raising prices in a market, we cannot really speak to every other factor. We can only speak to what we do under the act, which is enforce the provisions of the act. I understand that other witnesses before this committee have raised what some of those factors may be. Our act allows us to focus on the anti-competitive behaviour.

Senator Marshall: Do you produce an annual report?

Mr. Kellison: We do produce an annual report. Our reporting is usually done through Industry Canada, which is our overarching department. We contribute to the annual report that way.

Senator Marshall: What kind of information is in the annual report?

Mr. Bilodeau: Just to add on to that, it is the annual report of the Competition Bureau that is tabled in Parliament on a yearly basis. It would involve a description of all the cases we have had this year that are public in nature. Obviously, as we have talked about and because of the confidentiality aspect of it, there are limitations to that.

Senator Callbeck: I want to pursue this misleading advertising. You pick up the newspaper and you see a product where it says save $500, pay $1,000, previously $1500. You get a complaint from someone who has bought it for $1,000 because their next-door neighbour bought it two weeks ago and it was $1,000 then too. When you go to the retailer, what does the retailer have to produce? Do they have to produce a sales bill where they have actually sold that product for $1500?

Mr. Kellison: That is an interesting question. With respect to a strict price claim, one of the things we look at is whether or not that price actually existed. You are right. That could be one of the things we would look at. The test that we use is basically, "Did you give consumers the general impression that this product would be available at this price," if that is what we are talking about. To the extent we were looking to investigate a claim of misleading advertising about a price, we would obviously want to know whether or not that price was available. At the same time, we would want to know, did you make any representations about when it was available and when it was not? If you have one car on the lot that is for sale and all the rest are full price and that is not necessarily clear from the advertising material, then that is the kind of thing that could raise concerns.

Senator Callbeck: Let us say the regular retail is $1,500 and that you can buy it for $1,000. They are promoting a savings of $500, but that product was never sold for $1,500.

Mr. Kellison: I see. You are describing a situation where they are saying this is the regular retail price. We have what is called ordinary selling price provisions in the act to deal with that sort of thing. There are some dimensions as to if you are going to claim this is the ordinary price, how long it has been available for and whether or not you actually did sell it that price. That is something we can look at.

Senator Callbeck: That was my question, if they had to show a bill sale that they actually sold it at that price.

Mr. Kellison: One of the things we would want to look at is, if you were advertizing this as the ordinary selling price, how many days of the year was it for sale at that price? Can you characterize it as the ordinary price and then say you are discounting it below that? If you are saying it is the ordinary price because you charged it for a day, then the whole rest of the time it was at the discounted price, can that price you are saying is the regular price be characterized as the ordinary selling price? That would be the kind of assessment we would do.

Mr. Bilodeau: If I could add, in that context or any context that we have an investigation, when we are investigating a specific company or companies, it is normal for us to either go to them voluntarily or use our subpoena powers to require them to produce to us documents that will help us understand the situation in the marketplace. In that context, it could be sales information. In other contexts it could be agreements they have with suppliers. It could be cost information. It depends on a case-by-case basis what kind of allegations we are looking into and what facts we need to collect as part of the investigation to support the allegations or disclaim them.

Senator Callbeck: Another question is on abusing a dominant market position. How do you define "dominant?" In Canada, they tell us the top four retailers have 28 per cent of the business, compared to the United States where the top four retailers have 12 per cent.

Mr. Kellison: It might be helpful if I explained what the abuse of dominance provisions of the act entail. Section 79 of the Competition Act is our abuse of dominance provision. Essentially, we have to show three things under the act before the tribunal would grant an order. We have to demonstrate first and foremost that someone substantially or completely controls a class or species of business. That is what the law says, which I will shorthand and just say someone is dominant. We have to show that they have engaged in what we call a practice of anti-competitive acts. Subsequently, we have to show that those acts have resulted or are likely to result in a substantial lessening or prevention of competition, which as I have mentioned is substantial effect on price, on product quality, on consumer choice, on the ability of consumers to switch from one product to another.

Your question is about when is a firm dominant. Dominance, the way it is traditionally been looked at by the bureau and by the courts, is based on two factors. One is market share, as you mention. The other is barriers to entry. The reason why barriers to entry are important is because, for a firm to be dominant in the sense they have market power, they have the ability to raise their price and keep it there above what you would probably see in a competitive market. They may be able to do that if they have a large share of the market but, at the same time, we look at entry barriers. If you have 90 per cent of a market, for example, but as soon as you raise your price someone comes in and takes that away, that may be sufficient to prevent you from raising your price. So market share is a necessary part of market power. It is not always a sufficient part. We need to show that we have these barriers that basically entrench that market share and allow you to raise your prices. In terms of the kind of market shares we would look at, traditionally, in the cases that we have litigated before the tribunal, those market shares have been very high.

Senator Callbeck: Like what?

Mr. Kellison: Most of the cases we have taken have been in the 80 to 100 per cent range, in terms of market share when we are dealing with single firms. That said, that does not imply that that is the threshold necessarily. The courts have said that, above 50, you are in the neighbourhood. We have said basically that we will not look at something below about 35 per cent, but there is a lot of room there in terms of the kind of market shares we would look at.

Mr. Bilodeau: It will vary depending on the market and the market participants, how aggressive some of the competitors are, and also what kind of anti-competitive practises we are looking at in the market. It is not a hard and fast rule. We have to look at the market dynamics. You could have a market share at 40 that is troubling because of market dynamics and one at 60 that is not because they have different dynamics.

Senator Callbeck: You mentioned here that, because of the amendments to the Competition Act, the bureau has played a key role in a record number of litigated cases. What is the number? How many?

Mr. Bilodeau: I can tell you, in the civil matters branch, we have two cases that are currently being litigated, the Visa-MasterCard case and the Toronto Real Estate Board case. Last year, we also had the CREA real estate case that was litigated and eventually resolved. In the mergers branch, we have two cases being litigated currently. One is a merger of a waste company out in British Columbia. That hearing before the tribunal is over. We are waiting for a decision from the tribunal. There is the Air Canada and United Continental matter in the merger branch as well that is being litigated. In fair business practices, the key one there is the Rogers case that is being litigated. There are a number of other smaller cases. I do not profess to know all of them. It is not my area of expertise. There are a number of criminal cases as well before the courts. The Quebec gas price-fixing is before the courts. There are a number of cases in Quebec in the construction area as well. All branches of the bureau currently are pretty active. As I indicated in my opening remarks, our focus is on enforcement. The 2009 amendments gave us an increased ability to take cases and to challenge anti-competitive conduct. It is the best way we can make sure that Canadians are benefiting from competitive prices. In the Visa/ MasterCard case, we talked about the retail market. It is attacking the fees that Visa and MasterCard charge to merchants. If those fees are high, they are being passed on to consumers. The reverse is also true. If merchants pay lower fees because we are successful, those will be passed on to consumers. Even though we may not be, in the Visa/MasterCard case, looking at consumers, we are attacking rules that will eventually benefit consumers if we are successful.

The Chair: I have three senators who want to participate in dialogue. I am going to ask those three senators to get their questions on the record. If you are able to answer any or all three of them in the three minutes that we have left, that would be great. Otherwise, we would be pleased if you could provide us with a written answer that will be circulated to every member of the committee.

Senator Peterson: How many times have you investigated the oil companies and what have the results been?

The Chair: There are not going to be any answers now; you just put your questions on the record.

Senator Peterson: I just put my question in.

The Chair: That is it?

Senator Peterson: I thought that was a pretty succinct question. It needed a quick answer.

The Chair: Thank you very much. We almost got an answer on that.

Senator Peterson: He was starting.

The Chair: I saw it coming.

Senator Buth: There is considerable concentration in the retail book sector. I am wondering if that is a sector you have ever looked at. Also, when you look at anti-competitive behaviour or prices, have you ever taken a look at the impact of the Canadian dollar and the appreciation of the Canadian dollar on prices?

Senator Gerstein: I will follow Senator Buth on that. We are really focused on the fact that in the past 15 years the Canadian dollar has appreciated by 50 per cent against the U.S. dollar. In paragraph 8, you state, "While there may be a variety of potential factors contributing to price, our job is not to decide what a fair price is and only to see if it is as a result of an anti-competitive conduct." In a polite way, are you basically saying to us that the issue that we are studying is really not your problem?

The Chair: You have a couple of minutes. Will you try to answer those questions now?

Senator Buth: Especially the book one.

Mr. Bilodeau: In terms of the last question, I do not think that is what we are saying. You have to look back at what our role or our mandate is — to enforce the Competition Act. To the extent that we investigate competitive practices that lead to higher prices, which could be a higher price than it is in the United States, we can take action in regard to those anti-competitive practices to deal with and remedy that conduct. To that extent, we do have a role in making sure that Canadians benefit from having no anti-competitive behaviour at all in any industry.

The Chair: How about Senator Buth's questions?

Mr. Kellison: In answer to your question about the books market — I like the lightning round we are having — I will try to address it in the limited amount of time we have. We have heard that. We know that the book market has come up in discussions of this committee, and I do think that that is a topic you should raise to our colleges from Canadian Heritage, who, I understand, are next. As I said, if we saw, for example, that any price differential in the book market was the result of anti-competitive conduct, we would seek to take action against that conduct. The fact, in and of itself, that the book market is, in the view of some people, very concentrated is not sufficient to raise issues under the act. Some markets are concentrated, some are not. It is hard to say. Mr. Bilodeau was talking about market dynamics. Sometimes we can see a market being vigorously competitive with two firms, depending on their products and how they compete with each other. Sometimes we can see a market being less competitive with several more firms. Dealing at a very high level, it is difficult to say why any particular market, with the market share that you see in that market, would be more or less competitive. As I have said, we do not really make that kind of absolute assessment. We say, "Is there conduct occurring that is resulting in a price differential?" If so, we will take action against that conduct.

The Chair: Senator Peterson had a short question. Are you able to answer, Mr. Bilodeau?

Mr. Bilodeau: I can tell you that we have conducted six major investigations into the price of gasoline over the last 15 years. Prior to that, going back to the 1980s and 1990s, we had 13 trials involving our former criminal price-fixing provision. Eight of those resulted in convictions. Right now, we have a number of gas price-fixing cases in Quebec. I think 29 charges have been laid, or something like that number. We have been able to get approximately $3 million in fines. We have had imprisonments totalling 54 months. Individuals, as well as companies, have been charged. It is a market we have looked at. Obviously, it is of interest to Canadians, and we have looked at it often. It is a market that we have taken action in the past on.

Senator Peterson: When the price of oil goes up, the price of gasoline goes up immediately. When price of oil goes down, it does not go down. They say it takes us a while to get all the oil that is there out of the system. It has to work both ways. Why you let them get away with one and not the other is beyond me.

Mr. Bilodeau: Is that a question?

The Chair: Only if you have an answer. Our time is up. I have two senators on round two. I will ask them to put their questions, and then, if you could provide us with a written reply, that would be appreciated.

Senator Ringuette: This committee has requested to put forth its report in June. I believe that the Visa and MasterCard issue is a very important component of the difference in price. I was wondering, if the tribunal only hears your case in regard to MasterCard and Visa in May, when do you expect to have a reasonable decision from the tribunal so that we can include that in our report?

Mr. Bilodeau: The hearing is scheduled from May 8 to June 21. We do not expect the decision to come from the bench, so it will take a couple of months at least before we get a decision. To give you an example, the merger case that was heard finished in early December. We do not have a decision yet.

The Chair: There is one other point that we should clarify for the record. We have been told that in certain industries — certain markets — there is more competition in the United States, which helps keep the price of the product down. There is less competition in Canada. That it was alluded to in terms of percentages. As long as the Canadian marketplace is not involved in an anti-competitive activity, you do not look at the market across the border to say, "Why is the price less in the United States than it is in Canada." Is that correct?

Mr. Kellison: In a very general sense, we do not monitor international pricing trends. What we would do, though, is, as you have said, if we determined that a price differential or even just any price, regardless of where the United States is, was being affected by anti-competitive conduct, we would deal with that conduct.

That said, as we have mentioned, there could be other underlying factors contributing to a price differential that have nothing to do with anti-competitive conduct, whether they be tariffs, taxes, regulatory barriers, or that kind of thing. However, if we were looking at a market and investigating an allegation of anti-competitive conduct — specific conduct in a specific market — we generally would inform ourselves about what is going on in other jurisdictions, in terms of whether that conduct is happening there too, whether it was stopped and, as a result, prices went down, or whether there are any other relevant experiences we can draw from that. As I said, that is with respect to specific conduct.

The Chair: Unfortunately, our time it up, but it has now become clear to us why they sent the two of you along to help us out. This is a very helpful discussion we have had. The frustration we have is that we keep hearing from witnesses saying it could be any of a number of factors. We would like to try to reduce that number of factors so that we can understand the significant ones in different industries. That is what we are working on. When you go back and talk to your colleagues in your divisions A and B or elsewhere, if there is any other information could you give us that would help us come to some answers in that regard, that would be very much appreciated. Please feel free to contact us at any time. Mr. Bilodeau and Mr. Kellison, thank you very much for being here.

In the second session this evening, we are pleased to welcome officials from the Department of Canadian Heritage, who will take their seats promptly. Yesterday, we had an interesting discussion on discrepancies in book prices between Canada and United States. We are hopeful that officials before us this evening can offer some further insight into the Canadian book retail sector generally as well as some of the specific legislative provisions that may affect book prices.

I am pleased to introduce Ms. Helen C. Kennedy, Deputy Director General, Cultural Industries; and Ms. Carla Curran, Director, Book Publishing Policy and Programs.

Ms. Kennedy, I understand you will be providing opening remarks, after which we will have questions.

Helen C. Kennedy, Deputy Director General, Cultural Industries, Canadian Heritage: Thank you, Mr. Chair. Now that you have completed the introductions, which were lovely, I want to say that we have come here tonight at your invitation to provide you with some background information on the Book Importation Regulations and how they work in Canada. We will do our best to answer any questions you might have on the subject.

We have circulated a deck that you can take away with you. We hope that you will find our presentation useful.

[Translation]

First, we thought it would be helpful to situate this regulation within the Canadian book policy framework. We are starting with the federal government's general objective with regard to books, which is to provide readers around the world with access to a wide range of books by Canadian authors.

The department is responsible for three key measures. The Canada Book Fund provides over $30 million to the book publishing industry to support Canadian publishers in producing Canadian books. The fund also provides support for promotion, digital initiatives and international marketing.

Furthermore, the department ensures the application and implementation of the federal policy on foreign investments in the book industry, simultaneously applied with the Investment Canada Act. Finally, we ensure the enforcement, with Industry Canada, of book importation regulations under the Copyright Act, the subject of this evening's presentation.

These measures seek to ensure the vitality of the Canadian book industry because it plays a role in providing Canadian books to readers. Approximately 80 per cent of books by Canadian authors are published by Canadian publishers within Canada.

[English]

The Canadian book industry is substantial, representing in the order of $2 billion in revenues. It includes not only publishers but also distributors, wholesalers and retailers. The slide sets out in broad terms what each player contributes to what has been referred to as the "supply chain" in the Canadian book industry.

You will note that the slide contains a definition of "exclusive distributor." This concept of exclusive distributor refers to a distributor who is actually licensed by a publisher to be the only importer or supplier of that publisher's books to retailers and institutions, such as libraries, in a given territory. If you look to the back of the presentation, you will see a list of some foreign-owned and Canadian-owned exclusive distributors. These distributors provide a variety of services to their publisher clients, including logistics and fulfillment, things like transportation, inventory and data management, warehousing, customer account management and marketing in Canada.

Many of our largest foreign-owned publishers first began operations as the exclusive distributors of their parent companies' titles in Canada, and the revenues from distribution on an exclusive basis helped to fund the creation of Canadian publishing programs and continue to support them today. According to Statistics Canada, foreign-owned publisher contributions, for example, invested over $0.75 billion into their Canadian operations in 2008 and, in a typical year, generate 44 per cent of their revenues through the sales of books they publish in Canada.

Before we get into some of the mechanics of how the regulations operate, we thought it would be useful to provide the committee with some history on how those regulations came into being.

[Translation]

A number of years ago, concerns were expressed — mainly by distributors and publishers — about a practice known as buying around. Buying around occurs when a retailer or other buyer imports copies without sourcing through a publisher or exclusive distributor in a given territory.

This practice was troubling because it compromised the territorial rights holder's investment in a title and resulted in lost revenues for the Canadian industry.

[English]

The government of the day agreed that this was an issue and committed to addressing it. It chose to do so through amendments to the Copyright Act. When the act was amended by Parliament in 1997, one of the changes provided exclusive distributors of books access to remedies in the act when buying around occurred. These remedies included certain abilities to sue and to obtain a court order for the seizure and detention by customs officials of illegally imported shipments of books.

[Translation]

Two years later, the current regulations came into force following a consultation process in which English- and French-language industry stakeholders took part, as well as those representing various sectors of the Canadian industry.

[English]

The following slide sets out some of the key considerations at play in the development of the regulations, including how close Canada is to the United States, which of course makes buying around more feasible. It also explains why the issue does not tend to be as big in the French language market, which is more distant from other French language book markets internationally, giving distributors greater obvious distance from competing foreign suppliers.

[Translation]

There were also concerns about recognition for the fact that exclusive rights holders had invested in a title and played a role in marketing books.

The interests of retailers and consumers were also taken into consideration. For example, at that time, retailers were concerned that exclusive distributors were not offering them appropriate or competitive prices or adequate services.

[English]

Finally, there was recognition of the higher cost of doing business in Canada's relatively small market in areas such as transportation, labour, taxes and economies of scale.

What do these regulations do? This slide attempts to boil down the regulations to their essence and to give you a sense of what they actually say. At root is the concept of balance — an attempt to balance the interests of different players whose collective actions serve to bring books to Canadians.

The bottom line is that if an exclusive distributor wishes to be able to rely on the remedies we talked about earlier, it must meet certain notice, service and pricing provisions. You see some of them there. We give examples. They will vary depending on the market and are specified in detail in the regulations.

The pricing provisions are particularly relevant and essentially set a ceiling on how much the exclusive distributor can mark up the price of a book he offers to the retailer. Also taken into account in this calculation, as specified in the regulations, are the exchange rate and any applicable discounts. These discounts are negotiated between distributors and retailers and typically range from between 40 to 48 per cent.

Finally, I would point out that the government does not play a role in enforcing these regulations. The onus is on the distributors to pursue the remedies made available to them under the Copyright Act.

The following slide is where we try to give you an example of how the ceiling for books imported from the United States works. If you will bear with me, I will try to walk us all through this. Again, it is an example.

An American title has an SRP, which stands for suggested retail price, for the United States of US$14.99, let us say, set by the foreign publisher. If the Canadian dollar is at par, the suggested retail price for the Canadian market must be no more than $16.49. If the exclusive distributor in Canada offers that book to a retailer at C$16.49 or less minus those applicable discounts but the retailer decides to source the book from a competing supplier, the exclusive distributor can access the remedies in the act. If the exclusive distributor sets the suggested retail price above C$16.49 minus the applicable discounts, the retailer can legally import the book directly from a foreign supplier, for example, an American wholesaler.

These provisions, it is important to note, apply only to books that are physically imported by exclusive distributors. They do not apply to e-books, imports by individual consumers or books published in Canada. Ultimately, it is the retailer who sets the actual price for consumers, which can be affected by a number of considerations.

In conclusion, again, the regulations seek to strike a balance, providing access to legal remedies for distributors who have negotiated exclusive rights for the distribution of books in Canada while setting service standards and limiting how much the distributor can increase the suggested retail price of the book for Canada.

These requirements must be respected if the exclusive distributor wishes to benefit from the provisions in the Copyright Act. Again, it is the retailer who sets the actual price for consumers, taking into account a variety of factors.

[Translation]

Thank you for your attention. The presentation was somewhat technical, but I hope that the information we have provided is satisfactory.

[English]

The Chair: Thank you very much, Ms. Kennedy. We learned about the Book Publishing Industry Development Program yesterday. Can you tell us a little bit about that and just how that fits in with what you have had to say and how that fits into the scheme that has been devised to protect the U.S. publisher of books that cannot control their market in the U.S.?

Ms. Kennedy: What you were referring to is what we currently call the Canada Book Fund.

The Chair: I think that is right. I think it changed its name.

Ms. Kennedy: It was renewed, reformulated and rebranded and announced in 2009. It provides over $30 million in financial support to the Canadian-owned section of the book industry. It provides most of its funding through a formula that is designed to reward the sales of Canadian publishers of Canadian books. It also provides support for marketing and promotion and some digital initiatives. As I mentioned before, it is a fund that is available to the Canadian-owned publishing sector.

The Chair: I was looking for the fund in the estimates to see how much it was. However, I could not locate it, and it might have been because the name had changed. Are you able to tell us how much is appropriated for this particular funding on an annual basis?

Carla Curran, Director, Book Publishing Policy and Programs, Canadian Heritage: It is $39.5 million.

The Chair: That is Canadian dollars?

Ms. Curran: Right.

Senator Peterson: I want to talk about this 10 to 15 per cent that had been put on, because yesterday we had the book people in and they basically say that this regulation stipulated the importer can charge a book seller the price of the book, country of origin, plus the difference in exchange rate, plus an additional 10 to 15 per cent depending on the country of origin. They go on to say all it does is allow publishers to receive an additional 10 to 15 per cent of pure profit from their product before risk losing a sale to parallel importers. They also go on to say that the 10 to 15 per cent primarily leaves the country. Then they went on to say that, with the stroke of a pen, a change in regulation can save Canadian students tens of millions of dollars each year without any cost to the public purse. When I asked them who was stroking the pen, they said Canadian Heritage. I would ask you, could you stroke the pen?

Ms. Kennedy: The reality is that changing regulations would involve a process. It is not just the stroke of a pen. Changing regulations would involve a formal process of consultations with the various parts of the industry. We talked earlier about when these regulations were first established that there was a consultation process that involved representatives from all sectors of the industry in both the French and English language markets. It is not our understanding that a stroke of the pen would be sufficient to change or to repeal the regulations.

Senator Peterson: You would consult with the very people who are collecting this 10 or 15 per cent? Is that what you do?

Ms. Kennedy: I cannot comment on the government's intention on this, but, yes, the normal process for making changes to regulations would involve consultations with affected parties.

Senator Peterson: They are the people getting the money. It is strange. There is nothing to gain. They say themselves they do not need this, but because that is sitting there, they are allowed to do that. That is just manna from heaven. Why would they not do it, just tack it on, get the money, put it in the bank and everyone is happy? Well, they are happy, but not the students.

Ms. Kennedy: That is right. The regulations, as we pointed out, do allow the exclusive distributors to set the Canadian list price as much as 10 per cent higher than the U.S. list price, factoring in the exchange rate. The price paid for a book in Canada, including any markup applied to the foreign list price of an imported book, flows to the various participants in the book industry, whether that be the retailer, distributor, publisher or author, based on negotiated terms between the parties. To understand those relationships in finer detail, we would encourage the committee to seek additional information from representatives of those industry groups; that would be helpful to the committee.

Senator Peterson: The campus stores had tried to meet but were not able to. Do you think it would be advantageous for someone to set up a meeting to discuss this? We could do something with this, could we not?

Ms. Kennedy: It would be helpful to the committee to understand those relationships in finer detail. As I mentioned, the money flows through to the various participants in the book industry — retailer, distributor, publisher or author — based on negotiated terms between those parties. If the committee is trying to understand what is going on and what those business relationships and the money flows are, we would encourage you to seek additional information from representatives of those industry groupings.

Senator Peterson: Why do publishers put both prices on the backs of books — the U.S. price and the Canadian price. In the United States they do not block out the Canadian price, while up here, they try to block out the U.S. price.

Ms. Curran: Dual-pricing on a book is a long-standing industry practice. My understanding is that it was done at the request of retailers in the past. It has been a tradition in the book industry to have both prices; but it is being done somewhat less so now. Occasionally, we see books that do not have both prices but if the foreign publisher anticipates having a book distributed in the Canadian market, they do not have to do a separate print run when both prices are on the back of the book.

Senator Peterson: Why put it there at all? They always have a sticker with the price as well as 30 per cent stickers. I do not know why they put it on there, because it antagonizes people.

Ms. Kennedy: I suggest you ask the publishers.

Senator Ringuette: Ms. Curran, you mentioned that putting two prices on the backs of books is usual practice and that it was requested by the retail sector. Is that an assumption or a fact?

Ms. Curran: It is something that I have been told by people in the industry; but you would want to check it.

Senator Ringuette: On slide 4 you identify the interveners in the book industry — the publisher, distributor, wholesaler and retailers. On page 10 with regard to Canadian owned, you say "some are also publisher distributors, for example . . . ." Some of them remove one of the additional partners in the chain. For example, if a publisher wants to have an exclusive distribution network with a certain entity, why should we reinforce that exclusive privilege, given the 10 per cent?

Ms. Kennedy: As we explained at the beginning, the original rationale for the regulations had to do with creating a balance between giving the exclusive distributor, who had negotiated exclusive rights for the Canadian territory, rights under the Copyright Act, and the desire to have adequate service standards and to create a ceiling on the price — any markup — that the exclusive distributor could apply to the book that he or she was importing. That is the basis of the rationale.

Senator Ringuette: I understand the rationale. It might have been a good rationale when that legislation was put in here. Today, we are looking at global purchasing power. I do not agree that we would be reinforcing market exclusiveness. We just heard witnesses from the Competition Bureau. An exclusive market logically leads to price fixing and so forth. Certainly, we have an issue with legislation and the way it is put together in terms of the end result for consumers.

Ms. Kennedy: The other factor I should mention with respect to the original rationale is the role that the exclusive distributors play in the Canadian market and the services that they provide. Their physical presence is part of the relationships that build the industry as a whole. They have investments and jobs and, as we mentioned earlier, they invest in publishing Canadian authors. That is another factor under consideration.

Senator Ringuette: Correct me if I am wrong, but I think Canadian Heritage has another specific program to encourage the publishing of Canadian writers. Am I wrong?

Ms. Kennedy: We have the Canada Book Fund, which supports the publication of Canadian books by Canadian publishers.

Senator Nancy Ruth: Ms. Kennedy, I want to go back to the 10 per cent. You suggested that we hear from others to give us more detail. Are you telling me that the 10 per cent is split on the basis of an agreement between distributors, retailers, wholesalers and the others? Do they make the decision about how the 10 per cent is factored?

Ms. Kennedy: If there is an exclusive distribution arrangement and if it is covered by these regulations, the price of the book can include that 10 per cent.

Senator Nancy Ruth: In your deck you say, "The suggested retail price (SRP) for Canada of books imported from the U.S. must be no more than 10 per cent higher" Have you ever seen it less than 10 per cent than the original SRP? Then you go on to say, "converted to Canadian dollars at the prevailing rate of exchange." If the prevailing rate of exchange is par or the Canadian dollar is worth more than the U.S. dollar, there should not be a price differential on the American book imported into Canada. Is that correct?

Ms. Kennedy: No.

Senator Nancy Ruth: Why is that? It is conditional upon "converted to Canadian dollars at the prevailing rate of exchange."

The Chair: You can convert and take advantage of any exchange rate difference and 10 per cent is added on the top.

Ms. Curran: Yes.

Senator Nancy Ruth: Have you ever seen it less than 10 per cent?

Ms. Kennedy: I do not recall.

Senator Nancy Ruth: It is 15 per cent in Europe.

Ms. Kennedy: I cannot say one way or the other, senator.

The Chair: I think Senator Nancy Ruth was getting to this next question. What if the regulation changed so there was not this artificial 10 to 15 per cent additional amount that can be put in there? What would happen to the market?

Ms. Kennedy: I have to be honest, I cannot speculate right now. We would have to do a considered assessment of that. I would not want to speculate and mislead the committee on that.

The Chair: We are trying to determine if we should have a recommendation to do away with this. Is this really needed to have a market in Canada? In effect, what we are doing is protecting the U.S. publisher, even though that publisher may sell the books loosely. There are all kinds of opportunities for someone from Canada to bring them in at discounted prices, but they cannot do it because of these regulations.

Ms. Kennedy: If the exclusive distributor wants access to the remedies in the act, he or she complies with the regime set out in the regulations. There are business decisions and choices that are made in all of this. I think we would have to look at what the range of impacts from changing these provisions would be.

The Chair: Have you done any speculating, study or predicting?

Ms. Kennedy: We have not done any speculating. The department is not currently conducting what we would call a formal review of the regulations. As I mentioned before, changing them would require a formal process. I cannot comment on the intention of government, for example, to review the regulations or not, but, in the context of our continuous assessment of policy measures, the department has contracted with independent researchers to conduct a study on the relevance and effectiveness of the regulations in both official-language markets in Canada. The study in still in progress and is expected to be finalized in the coming months.

The Chair: Given that regulations flow from legislation and that we have new legislation related to copyright before the House of Commons now, is there a basis for these regulations to continue in that proposed legislation?

Ms. Kennedy: The Copyright Act does include the provision that anchors the regulations. The act that is going through the legislative process does not contain amendments that affect these regulations.

The Chair: That was not my question. You have already answered my question. With the new legislation, there is still a basis for the regulations to continue.

Ms. Kennedy: The provisions in the act have not been affected by the current bill.

The Chair: That was my question. Thank you.

Senator Runciman: I am still confused by this. I am not sure why we are in the business of setting prices for a consumer product. I really go along with what Senator Nancy Ruth was suggesting earlier.

I live in a border community and I buy a lot of pocket books. We have seen the Canadian dollar reach parity — a 30 per cent increase over the last year or two — and there has been no real benefit to Canadian consumers. It just strikes me as a strange position. We had the booksellers here yesterday indicating that they are on the front line, and they are the people who are facing the wrath of purchasers. Business is suffering as well. Plus, you can look at the textbook side of things and university student costs as well. I still do not understand — and I guess this is not your role to play — why we are in this business and why Canadian consumers should not be able, in some way, shape or form, at least in this one area, to benefit from the appreciation of our dollar.

The Chair: That was somewhat of a statement, but if you would like to react to it with another statement, that would be okay.

Ms. Kennedy: It is very difficult to isolate the impact of these particular regulations on the price of books because there are, obviously, a variety of factors at play when it comes to what retailers choose to charge consumers for books. I appreciate the senator's points, but these particular regulations are permissive and allow for a markup. It is a limited one; there is a ceiling there, obviously. It cannot be higher than what the regulations provide. It is difficult for us to isolate the impact of that specific measure on the price of every single Canadian book sold to consumers.

Senator Runciman: This may have been asked earlier. I could not be here earlier, but I know that Senator Marshall raised it yesterday. It was pointed out by our witnesses yesterday that this is not the same regulation, if there is a regulation, that applies to magazines.

Ms. Kennedy: That is right.

Senator Runciman: Is it a different regulation?

Ms. Kennedy: These regulations do not apply to magazines.

Senator Runciman: When we see the stark differences in pricing, is there any role that government plays in that at all in the magazine sector?

Ms. Kennedy: Not that I am aware of, senator.

Senator Buth: Maybe I will go about this question in a different way. I expect you will give me the same answer. Maybe I should not have made that comment, but do you think that, if this regulation was eliminated, we would see the loss of distributors in Canada?

Ms. Kennedy: It is not appropriate for me to speculate. However, the impact of the elimination of these regulations on the distribution sector would be something we would need to assess if we were looking at that as an option. You are right; we would need to assess what we think the impact would be on all the players, including the exclusive distributors.

Senator Buth: Do all of these distributors that you have listed, like Random House of Canada and McGraw-Hill Ryerson, meet the notice, service and pricing provisions under the act? It is a voluntary thing, right?

Ms. Kennedy: Yes, it is a voluntary thing, and we do not have good statistics or data on the extent of buying around, that is, people operating outside of scope of those regulations.

Again, I think the industry players might be better placed to provide senators with a sense of how much buying around they think is happening or how much commercial activity is occurring outside the scope of these regulations for other business reasons.

Senator Buth: Who would be the largest distributors in Canada? You have five of them listed: Random House, McGraw-Hill, HarperCollins, Penguin, et cetera.

Ms. Curran: Of the large players, I do not know which one would be the largest. Random House is very large. HarperCollins also does quite a lot of distribution in Canada. On the Canadian side, according to a study we undertook in 2007, Rain Coast Books is the leading English-language, Canadian-owned, exclusive distributor.

Senator Buth: They are Canadian owned, but they are importing foreign books. The same regulation could apply for them.

Ms. Curran: Yes. Rain Coast Books is just a distributor, not a publisher. It was in the past, but it is not now.

Senator Marshall: Ms. Kennedy, when you were going through the deck and talking about the 10 per cent ceiling, you gave the example of the $14.99 and the $16.49. Then you said that if the Canadian dollar is at par, the suggested retail price for the Canadian market must be no more than the 10 per cent. How does the department measure or ensure compliance with that regulation?

Ms. Kennedy: It is not the department's role, actually, to monitor or enforce those regulations. The onus is on the distributors themselves to pursue or to take advantage of any of the remedies available to them in the Copyright Act if they become aware that buying around has occurred when they have been complying with the terms in the regulations. No, we do not monitor or run after people or enforce those regulations.

Senator Marshall: You have the regulations. The department really does not know the extent of compliance or non- compliance, does it?

Ms. Kennedy: That is right. We do not have the ability to take the data we have now and disaggregate within the import activity that is measured to distinguish what is happening within the scope of the regulations and what is happening maybe outside of the scope of the regulations.

Senator Marshall: Based on what you know, are you aware of examples of non-compliance? You do not monitor compliance. You do not determine compliance. Do you have any knowledge or any general feeling with regard to whether that rule is being complied with?

Ms. Kennedy: I will ask Ms. Curran to take that question because she has long-standing experience in the sector.

Ms. Curran: I guess what I would say is that, to date, our understanding is that you will see books where, at the end of the day, the price that is actually available may seem to be more than the 10 per cent. That does not necessarily mean that the distributor priced over the 10 per cent. If the distributor does price over the 10 per cent and the Canadian dollar is at par, the retailer has options. They can decide to purchase the book from a different supplier, usually outside Canada, and can try to get the book cheaper. At the end of the day, the extent to which the markup on the book happens at the end, we do not really know to what extent it is affected by the 10 per cent.

Senator Marshall: It just seems odd to me that there is this 10 per cent rule set in regulations, yet there is no monitoring with regard to whether it is being complied with or not. I find that unusual.

Just to go back to the legislation, I was always under the impression that federal legislation was reviewed every five years. Is that not correct?

Ms. Kennedy: It is not in this case, although I think the current Copyright Act that is going to the bill does contain a provision, if memory serves, that would allow for review of the copyright legislation on a five-year basis.

Senator Marshall: This regulation has been in place since 1999. That would be 13 years. Has that been there for 13 years and never been reviewed?

Ms. Kennedy: Not, as we said before, in the formal sense of launching a review of regulations, no, not to my knowledge.

Senator Marshall: It is odd that you would have a regulation in place that you do not monitor to make sure that it is being complied with, and in 13 years it has not been reviewed.

To go back, one of the earlier questions focused on the implications of removing the 10 per cent price ceiling. Would you have any information at all with regard to what you think the implications would be of removing that?

Ms. Kennedy: No. Like I say, we are undertaking a study now that is looking at the relevance and effectiveness of the regulations, but I do not have anything now to give the committee that would take an isolated approach to exactly what would be the impact of removing simply that particular element of the regulations for the Canadian industry.

Senator Marshall: When you talk about the study of the effectiveness of the regulations, have you laid out how you will determine that?

Ms. Kennedy: As I mentioned, the study is under way. It is not final, it has to be said. We are expecting it to be finalized in the coming months. At that point, we will be in a better position to see what the findings are with regard to the regulations. As I said in my presentation, it is part of our ongoing work we do to assess our policy measures in the department, and obviously we wanted to take a look at this one.

Senator Marshall: Are the terms of reference done for that study? I have to go back on the comment I have made a couple of times. If you are studying the effectiveness of the regulations that you are not monitoring for compliance, I would think it would be difficult to determine the effectiveness of that.

Ms. Kennedy: Again, the consultants will be talking to people in the industry who will be able to help with the questions that he will be asking around those issues. I would point out that the regulations do not require us to monitor compliance for these regulations.

Senator Callbeck: I am looking at page 4. You talk about the publishers, the distributors and the wholesalers. If a book is coming in from the United States, there has to be an exclusive distributor or, if it is a fast-selling title, it can just go to a wholesaler, can it?

Ms. Kennedy: There does not have to be an exclusive distributor. What occurs is that a distributor negotiates exclusive arrangements with the publisher. That is what happens. Do not forget that this is only covering the physical importation of books, so it is not covering other forms, as we said before, e-books or individual consumers who may be buying books. It is the business negotiations that occur between the publisher and distributor, and both agree that it works for them, essentially.

Senator Callbeck: I thought there had to be an exclusive distributor.

Ms. Curran: No. It is possible for a foreign publisher to decide that the book will be distributed in Canada in a nonexclusive way. Sometimes publishers will go to a foreign wholesaler that has sales representation in Canada to have the book distributed in Canada. By and large, most of the books that are physically imported into Canada are distributed in Canada by exclusive distributors.

Senator Callbeck: But they do not have to be?

Ms. Curran: They do not have to be.

Senator Callbeck: Regardless whether it is a wholesaler or distributor, the 10 per cent applies?

Ms. Curran: No, it only applies to exclusive distributors because that is a specific right that the exclusive distributor has for the distribution of the title in a particular territory.

Senator Callbeck: A publisher, you say here, buys a range of fast selling titles, but can they buy other books that are not fast-selling?

Ms. Kennedy: Which page are you looking at?

Senator Callbeck: I am looking at page 4.

Ms. Curran: Wholesalers.

Senator Callbeck: What did I say?

Ms. Curran: Publishers.

Senator Callbeck: I am sorry.

Ms. Curran: Yes. It is the nature of their business. They can buy other types of titles, but they are typically set up in their warehouses to be able to deal with smaller volumes that move quickly of a vast variety of books.

Senator Callbeck: Any book can go through a distributor or wholesaler.

Ms. Curran: Yes.

The Chair: Presumably these fast-selling titles could also be remaindered books or discounted books in the U.S. that the wholesaler brings in and sells. We see all kinds of books selling at a third of their original price and that kind of thing as well.

Ms. Curran: Yes.

Senator Peterson: Can we have clarity on that 10 per cent and that it goes directly to the publisher? Do you have clarity on that?

Ms. Kennedy: No.

Senator Peterson: Where does it go?

Ms. Kennedy: As we said before, in terms of the total price of the book, including any of the markups or discounts that have been applied, the money flows are split between all the players in the production and distribution chain, right from the publisher to the retailer, the distributor and the authors. It is difficult for me to say of the 10 per cent how much goes here or there. My best advice to the committee is to seek more clarity on that from the industry players.

Senator Peterson: It would seem unusual that the government would impose itself to help the process along. They can look after themselves; they are big players. They have managed to negotiate this, and they do not want to give it up. Do we have any idea how much money we are talking about?

Ms. Kennedy: We will get back to the committee with our statistics that indicate how much the importation of foreign books represents in terms of revenues in the Canadian industry. I think we can get that statistic.

Senator Peterson: How much money are you getting from this regulation? How much does that come to?

The Chair: That would be importation by exclusive distributors.

Senator Peterson: Someone must know the number. It is probably a lot of money.

An Hon. Senator: Did you mumble $8 million?

Ms. Kennedy: No, I did not mumble $8 million. We will look into providing that number. We will get back to the committee with what we can in terms of the statistics on importation of books and any detail we can provide within that.

The Chair: That would be good; thank you.

Ms. Kennedy: You are most welcome.

The Chair: You can deal with the clerk of the committee.

Senator Buth: This is a strange regulation, I find, in trying to understand it. Would it be fair to say that the regulation has been put into place for the express purpose of putting conditions on the ability for buyers to do a buy- around?

Ms. Kennedy: Yes. As I said in the beginning, historically distributors and publishers were concerned about a practice they called "buying around," which in legalese is called "parallel importation." The government-of-the day decided it was an issue to be addressed and did so in the Copyright Act. Under the act if a distributor, who has negotiated exclusive rights with a publisher in another country to bring the book in and to supply the Canadian market, complies with all the notice, service and pricing conditions placed in the regulations, then that buyer has access to those legal remedies if a retailer or another institution buys around you to another foreign supplier. If that buyer does not comply with those terms in the regulations and if that retailer or other institution wants to source the book from somewhere else, it can do so; and the buyer has no recourse to those remedies in the Copyright Act.

Senator Buth: It essentially protects exclusiveness.

Ms. Kennedy: Yes, it protects the rights that have been negotiated for the Canadian territory in this instance.

Ms. Curran: The maximum 10 per cent is designed to protect the retailer and the consumer in relation to that market exclusivity held by the distributor.

Ms. Kennedy: If it is over 10 per cent, someone can buy-around.

Senator Buth: I think I understand; thank you.

Ms. Kennedy: That is gratifying. After a long day, that is good to hear because it is complicated.

The Chair: There is no buying around the Senate.

Senator Ringuette: When will your study on the issues we are discussing tonight be completed? We have to report to the Senate by June. I have a feeling that in order to give due process, we should look into your report.

Ms. Kennedy: At this time, we estimate that we will have the study within the coming months. I do not want to be too specific in case I mislead the committee and give a deadline that does not happen. I know you have a schedule. We are expecting it to be completed within the coming months.

Senator Ringuette: Are we looking at mid-April, the end of April or the beginning of May?

Ms. Kennedy: We are thinking it will be in the summer at some point.

The Chair: That will be another source of information. There seems to be, and I think you have detected that from the questions, some concern about this provision that seems contrary to an open and free market. We have not seen enough background information as to why this would be desirable or important. If you have any other information along those lines, could you send it to the committee? It would be helpful. Our inclination seems to be moving away from supporting this, so we are giving you an opportunity to help bring us around.

Ms. Kennedy: It will provide you as well with the historical information and the considerations.

The Chair: That would be helpful.

Ms. Kennedy: We will do that.

The Chair: Thank you, Ms. Kennedy and Ms. Curran. There is interest in copyright matters here. Maybe we will lobby our leadership to have the copyright bill sent to this committee when it comes to the Senate. Then we will have all kinds of fun.

That concludes our work for today. On behalf of the Standing Senate Committee on National Finance, I thank you very much for coming from Canadian Heritage to help us out.

(The committee adjourned.)