Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 4 - Evidence - April 28, 2004
OTTAWA, Wednesday, April 28, 2004
The Standing Senate Committee on Banking, Trade and Commerce, to which was referred Bill C-249, to amend the Competition Act, met this day at 4:10 p.m. to give consideration to the bill.
Senator Richard H. Kroft (Chairman) in the Chair.
[English]
The Chairman: Our first witness today is Mr. Robert Russell, who is a lawyer with Borden Ladner Gervais. May I ask you, as I often do, whether you are here on behalf of anyone?
Mr. Robert Russell, Lawyer, Borden Ladner Gervais, As an individual: No, I am not. The views I express today do not represent the views of my client or my firm.
The Chairman: Are you retaining any fees?
Mr. Russell: No, I am not.
The Chairman: Do you have an opening statement?
Mr. Russell: I do. I provided some written comments with respect to Bill C-249, but just initial opening words, if I could.
First, I should like to thank the members of the committee for inviting me to speak to Bill C-249. I consider this bill to be a very important bill within the sphere of competition policy and economic policy in Canada.
I should like to give a few opening comments, then answer any questions you may have. I set out on the back of my written comments a short biography, just to give you my background. I have acted on some major competition matters for the Commissioner of Competition. Hence, I have acted as the commissioner's counsel in contested merger cases, and have acted in a number of significant private-sector merger cases for private-sector clients.
I point that out because I will attempt today not to give you any public-sector or private-sector bias. It will simply be my view of Bill C-249 and where it fits into the world of competition policy.
I support Bill C-249 because I believe it accords with Parliament's intent when it enacted the Competition Act in 1986. The main objective was to provide competitive prices and product choices.
I also support Bill C-249 because I believe it is an important step in our efforts to harmonize Canadian competition policy with that of our major trading partners. I do not believe harmonization for harmonization sake is an objective, but harmonization has important ramifications for the Canadian economy.
I believe when you strip the issues associated with Bill C-249 from legalese or economic-speak, it becomes a pure matter of public policy, which the members of Parliament must decide. The debate on the role of efficiencies and competition policy went on for 18 years before the legislation was enacted in 1986. The debate over the meaning of the wording in section 96 continued for another 17 years following that enactment, and that is what it is all about today.
Superior Propane did not precipitate an issue. It simply put a nail in the coffin of the debate that had gone on for 35 years. The tribunal and the Federal Court of Appeal finally determined what the statutory wording of section 96 meant. That presents an issue for this committee: In other words, does the wording as now interpreted in section 96 accord with the public policy enshrined in the Competition Act? It is a simple matter of public policy. It is not a debate about whether Superior Propane was a good or bad case. You are presented with interpretation by a quasi-judicial body that has interpreted a provision of a statute of Canada which I believe has taken that provision outside of the policy framework we brought into existence in 1986.
If you look at the decisions in Superior Propane, one of the curious things I see is a lack of review of Hansard, which would set out the public policy objectives of the statute. I reviewed certain Hansards. If you have my written comments in front of you, you will see that I have set out the Hansard, the excerpts from April 7, 1986, when Mr. Michel Côté, then Minister of Consumer and Corporate Affairs, introduced the bill into Parliament for second reading. He said:
Hon. members of this House are aware that Parliament has tried several times before to enact amendments...
Honourable senators, there is no statute in this country that has had more stops and starts in terms of trying to get amendments to it than the Competition Act, and before it, the Combines Investigation Act. It takes many years of debate and review and attempted amendments before anything ever gets done in this sphere. What we have before us today is not some quick reaction to one case. The debate on efficiencies has been debated more than any other area of competition policy in this country for many decades.
Continuing with the quote:
As the Consumers Association of Canada stated after I tabled this Bill in December: ``The new Competition Act promises real progress for consumers and is a major improvement over current legislation.
The purpose of Bill C-91, as stated in the purpose clause in the Bill, is to maintain and encourage competition in Canada....
There are four main objectives set out in the Bill. The first objective is to promote the efficiency and adaptability of the Canadian economy....
The second objective is to give us a law which permits Canadian companies to compete effectively in world markets....
The third objective...is to ensure that small and medium-sized enterprises have an equitable opportunity to participate in the Canadian economy....
The fourth but not the least objective is to provide consumers with competitive prices and product choices. As such, this objective becomes the common denominator in what we are trying to achieve. This is the ultimate objective of the Bill.
That is the ultimate objective of the Competition Act.
If honourable senators turn the page in the written documents, they will see a quote from Superior Propane. What the tribunal is saying in Superior Propane is that section 96 means this:
The existence of section 96 signals the importance that Parliament attached to achieving efficiency in the Canadian economy. Indeed, in view of the Tribunal, section 96 makes efficiency the paramount objective...
That is the contest and that is what Bill C-249 is dealing with. Is it the paramount objective of our competition policy to promote efficiency for efficiency's sake, or is it, as was said by the minister at the time, to provide competitive prices and product choices? You have heard a lot in the testimony given before me about total welfare and consumer welfare standards. You are essentially talking here about the very same thing in terms of the emphasis and paramount objectives of the act.
The controversy raged on over the years not only among academics and practitioners, such as myself and others, but also within the tribunal itself. In 1992, Madam Justice Reed, the judicial member of the tribunal, reviewed section 96 and she said that she thought the interpretation of section 96 meant that efficiencies must be passed on to consumers. The initial interpretation by the tribunal was that what Bill C-249 would enshrine was a consumer welfare standard. The debate went on from 1992 until Superior Propane —
The Chairman: What was the nature of that comment? Was that obiter or part of a decision?
Mr. Russell: That is a matter of debate, whether it was obiter dictum or part of the decision. Some practitioners have taken the view that it was obiter dictum in the case. In my view, a decision not to apply a defence is not obiter dictum in a case. It is a matter of litigators deciding whether, in a case, a decision not to apply a firmative defence is obiter dictum. I will not belabour the determination of that issue, but that is what we heard from the tribunal. For a long time, that was the only interpretation we had on section 96 from the Competition Tribunal. Let us wait until we have a final determination of what section 96 means.
Those people who show up and say that Bill C-249 is a knee-jerk reaction by the commissioner of the Competition Tribunal to something that went sour for him are incorrect. This debate was allowed to sit because it was not determined. The benefit of Superior Propane, irrespective of your viewpoint on public policy, is that it told us what section 96 means. Bill C-249 sets the standard toward consumer welfare, as opposed to total welfare, analysis. I will take a few minutes to tell you what I think that means.
This debate of total welfare as a standard and consumer welfare has occurred around the world. Every major jurisdiction has had the same debate happening for some time now. The important point is that, after much consideration and much study, Europe issued a green paper that allowed comments for almost two years from many parties. This past February, it issued its guidelines that clearly adopt a consumer welfare standard, such as C-249 would adopt. I have put that information in the back of the written comments. I may, if time permits, speak further to that because it is instructive.
I want to make two points in respect of looking at other jurisdictions. First, it is not because they did it right and we should take their lead; it is none of that for me. Rather, it is because other jurisdictions have taken the time to study this issue, as we have done in Canada, and they have uniformly decided that a consumer welfare standard is proper in competition policy. Second, there is a net benefit to Canada issue if we have a different standard from other nations. If we have total welfare, then we would not be concerned about some of the benefits and some of the efficiencies flowing outside of Canada to foreign shareholders and companies. Total welfare means no boundaries. Under total welfare, you do not care whether it is a net benefit to Canada. I will quote from some of the proponents of total welfare that actually say that, so you need not take only my viewpoint.
Consumer welfare means net benefit to Canada — consumer written large. That does not mean you or I when we buy our airline ticket. We comprise only one of the consumers. Rather, it is every business consumer or business enterprise that produces goods or services in Canada. If senators could tolerate a short hypothetical, I will illustrate.
Let us say that we have a hypothetical monopolist, a software company, that has 95 per cent of the market for operating systems for personal computers. My hypothetical competitor, as a result of having that 95 per cent market share, is able to sell its software for $10 more than they would be able to sell if it were a competitive market. That $10 is a wealth transfer. It means that such a company is able to extract wealth from you, from me and from every business that uses personal computers in Canada. It becomes a $10 tax. If you have a total welfare standard, that tax can leave Canada. The foreign corporation and shareholders extract that wealth out of Canada. If you have consumer welfare standard, it has to be net benefit to Canadian consumers — you, me and every business that produces goods and services in Canada. Otherwise, that $10 will always be directed at us if we have a personal computer or built into our cup of coffee, if Second Cup has that software in its computer. That is what wealth transfers are. I want to strip this of the economic speak and the legalese because it is nothing more than a form of taxation on our economy; it is a wealth transfer.
The standard that Bill C-249 brings is to say, no, that for efficiencies to be recognized in our competition policy, it has to be a net benefit to the Canadian economy and to Canadian consumers — consumers written large, meaning the Canadian economy at large. That is the difference between the two standards.
There are other reasons that I believe, beyond the parliamentary intent — and it is clear that Bill C-249 brings the Competition Act back to what Parliament intended. It places the consumer welfare standard. There has been no substantive debate among people who either support or are opposed to Bill C-249 that suggests that Bill C-249 does not bring a consumer welfare standard back to our Competition Act. No one is debating that. They are debating whether we should or not, and whether total welfare is better. I do not believe it is up to a competition lawyer but rather that it is up to Canadian legislators to make that policy decision. I am concerned that if we do not focus the issue properly it will be buried in some argument about this being a knee-jerk reaction to one case. This has been written about and debated extensively in the circles in which I am involved, among the economists, and around the world. It has been given a great deal of study. The debate about what total welfare and consumer welfare mean is well delineated.
If senators have the written copy, please turn to page 8. I said that I would give you some quotes of people who are opposed to Bill C-249, to make my point. At page 8 is a quote by Mr. Brian Facey, whom you may recall appeared before your committee last fall with his co-counsel in the Superior Propane case, Mr. Neil Finkelstein. I quote Mr. Facey in respect of the result of the interpretation of section 96 in Superior Propane:
All other non-economic effects of mergers, such as job loss, plant closures, loss of sovereignty, the concentration of wealth, the protection of small business, and wealth transfers are considered neutral from an economic perspective under Canadian merger law and are, consequentially, irrelevant under this standard.
That is what total welfare means. Parliamentarians would have to convince themselves that none of those affects of mergers is important to our public policy. I would risk saying that I do not think there would be too many parliamentarians who would put their hands up and say that those things are not important to the Canadian economy.
The other reason that I believe Bill C-249 should be supported is that it is consistent with our major trading partners and that if we do not have consistency it would be the equivalent of one-way free trade. Who would support one-way free trade? Who would support wealth transfers out of Canada with a standard in the U.S. that would never permit, in a test of efficiencies for mergers, wealth transfers to Canada, to the detriment of U.S. consumers and the U.S. economy? Their standard and Europe's, the U.K.'s and Australia's is consumer welfare. Would we be the only nation that allows the benefits of a merger — the efficiencies derived — to be net wealth flows outside Canada? It would be like one-way free trade.
There are other provisions in the Competition Act and other amendments that the Government of Canada has endorsed. One is a review and decriminalization of our conspiracy legislation. Within the proposed draft of the new cartel legislation, there is an efficiency provision, which, as proposed for that amendment is almost identical, I believe it is identical, to the content of Bill C-249.
It is important that I add a little history on Bill C-249. Mr. McTeague put a private member's bill forward that had various provisions. There were few people who supported it. I did not support Bill C-249 before it was amended. It did not provide a proper consumer welfare standard. In the parliamentary committees, Mr. McTeague asked people about that and I was frank in telling him that I could never support it because I am a consumer welfare advocate and I believe in that standard for our legislation; but his bill did not accomplish that. There was a distillation in that committee to what you see before you in Bill C-249 today. That had the input of a number of people who appeared before the committee on the wording of the bill. Then, the honourable member amended his bill to read as it does today. That is the history.
Hence, although I accept that it is a private member's bill, it had the support of a parliamentary committee. As you know, it had full parliamentary support, as it did on the parliamentary committee. That was why, namely, it was a distilled version that moved, respectively to Mr. McTeague, a fair distance away from his original draft.
The final point I should like to make in my support for Bill C-249 is the practical effect of where we are today. Again, I will give you a quote from one of the people who are opposed to Bill C-249, because it serves my interest to make the point that they acknowledge what I am about to say to you.
Clause 96, as currently interpreted by the Competition Tribunal, will make merger review in Canada very complex and very uncertain. Business uncertainty will rule the day because we have a test where discretion is applied and where balancing takes place. However, we do not know what that balancing will be until that balancing takes place at some point before the tribunal. That means that when mergers are reviewed — and only a fraction of the reviewed mergers actually go to the tribunal — the Competition Tribunal will be required to look at efficiencies in the broad concept of total welfare that the Superior Propane decision now forces upon them. This multi-million dollar litigation, if it is before the tribunal, will become more expensive. However, I am not contesting the point. In one contested merger in which I acted for the commissioner, the opposing party disclosed publicly, when it was finished, that they had spent $10 million in legal fees in that one contested merger. We have just found that it will be more complex — efficiencies were not even argued in that case.
I would ask you to turn to page 17 of the written submission. I included there a quote from Mr. Brian Facey, who appeared before you last fall, and Mr. Dany Assaf, who is appearing following my submissions today. They were both supporters of the total surplus standard and they were both co-counsel to Superior Propane. They lamented in an article that — and I quote — ``that it appears that the application of the efficiencies defence in Canada will involve a multi-faceted analysis may will differ on a case-by-case basis with business predictability being subordinated.'' Those counsel who argued the Superior Propane case and who won the total welfare standard in that case are telling you in that quote that business predictability has just been subordinated.
My final point is that we have confusion and a standard that is broad, uncertain and complex and one that does not accord with the parliamentary intent that it was intended to serve.
I am sorry I have taken so long in what I called my ``short opening statement,'' but as a litigator we always say it is shorter than it will be.
The Chairman: Before I go to my first question, I should like to observe a couple of things. Today, we are getting up to speed on some things that we heard about a number of months ago. I know we are all working at it diligently, but I should like to make the record a little clearer. This may only have been in my mind, but there was a suggestion earlier about broad parliamentary support and you have used it. For the record, we should make clear that the official opposition opposed this totally, in the vote. I think there was a point at which all parliamentary support was suggested and I checked that. I want to be clear that the official opposition did not support it on the vote. What that would be in terms of the newly structured opposition, I am not sure, but it was a divided Parliament on the vote. That is not determinative of anything for the purposes of our committee, but I want to make that clear.
Another thing I should like to ask you about, as you have been a close observer of the process, concerns a language change in the amendment. The word was changed, I believe, from ``shall'' to ``may.'' It was moved from the permissive to the mandatory at some point late in the procedure. Had that change been made before you and other witnesses made your comments?
Mr. Russell: Yes, it had been made before I had made my comments. If you wish, I can give you my reaction to the change.
The Chairman: I want to get the fact clear because I have advice that that was changed after all witnesses were heard. I am not challenging you, but your recollection is clear? I am trying to understand what led to that change and what the process was when that change happened.
Mr. Russell: Officially, you are correct in your recollection. Maybe I could explain. As I recall, the Commissioner of Competition proposed that wording change. I was aware of that when I appeared before the parliamentary committee. However, it might not have been formally amended that stage. I am not sure about the process, but I was certainly aware of the wording change that you are referring to at that point in time.
The Chairman: Were you counsel for the Competition Bureau at that time?
Mr. Russell: No. None of my representations with respect to Bill C-249 has involved any retainer by the commissioner whatsoever.
The Chairman: I did not want to be accusatory on that. I just wanted the record to be clear.
Mr. Russell: That is a fair question. To be clear, I have been retained in the past to advise the commissioner on reform issues with respect to section 45, which is the conspiracy provision and the proposed draft legislation, so I have had a retainer in the nature of reviewing reform issues but not with respect to Bill C-249.
The Chairman: Before we go to the first substantive questions, Senator Meighen, do you have a question in relation to this issue?
Senator Meighen: It is a procedural matter. I do not feel strongly about this. I hope, at the very least, that Mr. Russell can stay around. Mr. Assaf, incidentally, is a partner of the firm to which I am counsel. I do not know if that puts me in a conflict of interest or not.
The Chairman: No, you have declared your position.
Senator Prud'homme: If there is a vote, we will know.
Senator Meighen: I do not think there will be a vote. As Mr. Russell points out in his paper, and as I know from reading Mr. Assaf's submission, they are of two diametrically opposed views on this — one for, one against. I wonder if questions would be better after we have heard the other side of the story so that we can have both of them at the table and they can answer back and forth.
However, if the committee feels that it is better to proceed with one and then with the other, then that is fine with me, too.
The Chairman: Let us try to get the best of both worlds. Let us put any questions we have to Mr. Russell. If you have the time, please stay.
Mr. Russell: I am prepared to give the committee whatever time it needs on Bill C-249. I consider it important.
The Chairman: Let us ask any immediate questions we have of Mr. Russell on the understanding that he will stay and listen to the discussion. We can then call him back.
Senator Massicotte: I can appreciate where you are coming from but the proposed amendment basically takes away the importance of the efficiency argument and gives more importance to the consumer argument. I appreciate that, in the last 15, 20 years, the consumer is king and we are all working to satisfy the consumer. There are other factors in the economy, however — employees, shareholders and other components to a successful economy. What are your thoughts? There are some circumstances whereby they would not pass the test — that is, the consumer would not be a winner from a merger but maybe the economy would still benefit from it. This removes the comment.
Mr. Russell: It is an important question. I did read the earlier transcripts where the honourable senator posed a similar question. I do not believe there are any efficiencies that are not considered under Bill C-249. You do not look just at prices and product choices. You will see the wording says that it includes those things. The jurisdiction is quite broad, and it is clear in other jurisdictions that they consider things such as innovation and other efficiencies. You look at all the efficiencies and determine if there is a net benefit to the Canadian economy.
I will say ``Canadian economy'' because I think it is clearer than saying ``consumer.'' ``Consumer'' throws people off. They think of the person buying propane in Halifax. It is, but it is also the farmer, who is in business, using propane in Red Deer or wherever it may be. It is any consumer of the goods and services. It is not consumer written small, in the sense of the lady that we are trying to protect on that street who is paying too much for bread that day. That is important, obviously, but it is not confined to that.
You look at all efficiencies. You can see situations where you look at a merger and, because of R&D efficiencies, for example, somebody could come up with an AIDS vaccine because they brought two companies together, although that may mean that they are not as price competitive as they might be had they separately come up with two vaccines. We would look at all the efficiencies in that process to see if there is a net benefit to Canadians. It may subjugate price within that analysis. Price is not always the most important thing when you look at efficiencies. We look for net consumer welfare, ``consumer'' again translating as net benefit to Canada.
I do not agree that this standard limits the analysis. It limits where the benefit must end up. That is the difference. Total welfare means that it can be not a net benefit to Canadian consumers, to the Canadian economy, but still have enough efficiencies to outweigh the downside to those consumers. It is the standard of where the net benefit ends up that we are talking about, not the breadth of efficiencies considered.
Senator Massicotte: I would be more in agreement if I were convinced it said what you just said it said. You are interpreting ``consumer'' to be the Canadian economy, which is a very broad term. I would have thought a consumer is one who consumes the product, not someone very unrelated to that product. Do not forgot that the proposed amendment says efficiency, but effectively always to the consumer — not to job creation, not to export, not to saving an industry that probably cannot compete internationally. It is to consumers of that product. How can you convince me that ``consumer'' means Canadian economy, as you said?
Mr. Russell: I guess I have to say from experience. I am trying to think of an example. We have looked at many cartel cases and merger cases where there is no consumer on the street. Let me think of an example. Glysophate is a chemical that you would never buy for your home. It is incorporated into various products. I think it is derived from the starch of potatoes, if I remember correctly — but please do not quote me on that. There is an example where we would still look at consumers of that product, but they will be Canadian businesses and other consumers. I should say it is not just producers but also suppliers that we look to in a merger. Anyone who consumes the product or service in question is the consumer.
Senator Massicotte: But it is the consumer of the product, being retail or wholesale or supplier, not the Canadian economy, as you interpreted so widely.
Mr. Russell: When you interpret ``consumer'' as broadly as every Canadian business and every person on the street, you are actually talking about the Canadian economy. I am pointing out that the word ``consumer'' is the Canadian economy.
Senator Massicotte: Is there legal precedent to say ``consumer'' is that broad?
Mr. Russell: Definitely. The Competition Tribunal looks at the word ``consumer'' in that broad context.
Senator Massicotte: We have had two cases that use this particular clause that used to be stated for the purpose of their arguments. In one recent case, Superior Propane, the tribunal reversed the decision of the bureau. Why is this issue coming up? What is wrong with it? What is so bad? What is the issue? Why do we have 10 people wanting to speak to us on this issue? What is the urgency?
Mr. Russell: The urgency is the dramatic impact on the act. You have to appreciate that this standard has changed so dramatically as a result of a decision that simply interprets a section of the act. I am on record as saying, even when I was acting for the commissioner, that I thought section 96 was one of the worst-worded sections in the act. It was convoluted. It was subject to debate for years as to what it meant. Was there an economic or legal interpretation? What did it mean? No other jurisdiction has one as long.
I was in Naples, Italy, two years ago when the International Competition Network was meeting — all the regulators from around the world. The chair of the competition tribunal from South Africa was on the stage and said, ``We have just started into our new act, and the tribunal has just started sitting. We used Canada's legislation as our roadmap, but we did not pay enough attention to their efficiency provision, and it is causing us an untold amount of grief.'' They are looking at the wording of that section.
It is no surprise to me that we have had legal debate over section 96 since it came into effect in 1996. Everybody was so afraid of it, afraid to make the arguments, afraid to make a determination on the bureau's side, in my view, and I speak for myself, because it was so poorly worded. Now what we have had is the tribunal saying, ``The Federal Court of Appeal has confirmed that this is what it means.'' ``This is what it means'' is what I am concerned about, but what it means is total welfare state. It allows those wealth transfers.
Competition policy to me is no different than tax policy written differently. It prevents people from taking wealth from others, from monopolization, and exerting prices that are too high. It prevents one corporation and its shareholders from exerting that effect on our economy to the detriment of you and I and every other producer.
If my hypothetical monopolist of consumer operating systems can extract $10 from Canadian producers, that means it costs more to produce in Canada because of that monopolization. We are simply dealing with wealth transfers. When you read the economic literature, they acknowledge that.
Mr. Stephen Ross, who is eminent, and I respect him very much as an economist in this area, is of the other view. He said, and I quoted him in the paper I gave to you, that wealth transfers become neutral or irrelevant. He also acknowledged that total welfare is regressive. It is like regressive tax policy. That is what in essence it imposes upon our economy. To my view, it is also detrimental to our economy because it allows wealth transfers outside of Canada to foreign corporations and foreign shareholders, to the detriment of our economy, not to just my detriment as an individual consumer but to every business in Canada that uses that product as an input.
The Chairman: Before we go to the next questioner, I will ask you, if you would, to provide our clerk with a reference. I am getting increasingly confused. We care quite a bit about language here, and the word ``consumer'' is causing an enormous amount of problem for me, and, I am sure, others.
It is convenient for you to use the word ``consumer,'' because you want to tie your argument to the parliamentary language of the minister, and that is the language that he used. I understand the line of argument you are using.
The question was put to you, has ``consumer'' been judicially defined in this broad context? You said yes. If you could, please provide the references so that when we are looking at it, we have some guidance as to what these words mean. If words do not mean what they appear to mean, we can often get into trouble.
Senator Kelleher: Will this proposed amendment permit the Competition Bureau to revisit the Superior Propane case?
Mr. Russell: No.
Senator Kelleher: Are you absolutely sure on that?
Mr. Russell: Absolutely. Unless there are new facts that allow them to revisit that industry, they cannot revisit it — unless somebody is proposing that the amendment be retrospective, and there is certainly no proposal that that be so.
Another concern that I have about delay is that a number of mergers are being considered. If we were to put it into another process, that would take years, and I can tell you that all the processes in the amendment of the Competition Act take years, where mergers will be reviewed under the standard that I just described. That is the urgency. Do we have our public policy aligned with the true objectives of our act?
Senator Kelleher: I will come to that in a minute. Will this particular bill eliminate the efficiencies defence?
Mr. Russell: Let me answer that accurately. It eliminates efficiencies as a defence, but it does not eliminate efficiencies from being fully considered as a factor.
Senator Kelleher: Having said that, as you amended it for me, does it have any implications on any other sections of the Competition Act?
Mr. Russell: No, section 96 is applicable to merger review. As I mentioned earlier, there are other proposals that would have efficiency provisions. Those proposals mirror Bill C-249, so if amendments that are proposed continue there would be other efficiency provisions that would be similar to Bill C-249. Bill C-249 only amends section 96, which is in the merger section of the act.
Senator Kelleher: It will not apply to other sections of the act, or have implications for sections, such as section 79, section 77 or section 75?
Mr. Russell: No, your efficiencies are going to be considered. You are asking me a very broad question. The application of efficiencies with Bill C-249 with a consumer-welfare standard — when efficiencies are considered under any section of the act, you would expect them to be considered the same way as Bill C-249 sets out.
Senator Kelleher: One final question — and I think I know your answer to this before I even ask, given your predisposition on this matter. Is this section a little premature at this time? Have we not given it much of a chance to be reviewed, or to be discussed in other cases?
Mr. Russell: No. You are able to anticipate my response, but my response is — and I have said this on other occasions as well — I have spent more time, as have many practitioners in this field, talking about efficiencies than any other topic. What you are talking about here is a policy issue. Bill C-249 is just wording that accomplishes that policy position. We were able to get the instruction, if you will, from other jurisdictions that looked at the wording and considered the wording in their courts.
I reviewed the American case law, for example, on the application of efficiencies. That was one of the things I did in terms of my review of the cartel legislation for the commissioner. I also reviewed European decisions with respect to the limited consideration that they give to efficiencies or have given in the past. There is nothing about Bill C-249 that is untoward that will make Canada more restrictive of efficiencies in those other jurisdictions.
When you ask whether it is premature, I think we have had lots of debate, lots of minds being brought to bear on the issue, and Bill C-249, as I said, is a distillation out of the parliamentary committee that brought many of the people there.
Now, people who will believe in total welfare do not like Bill C-249, and will never say they like Bill C-249 because it is a consumer welfare standard. The wording no one has quibbled with — I read Mr. Kennish's view. He appeared before you with respect to the Canadian Bar Association. He admits the bar is divided. The bar is divided on this issue, no doubt about that. On the wording, he does not like the fact that it has to be merger-specific. That is what he said to you. Again, other jurisdictions, the benefits have to be merger-specific. That simply means this: You could not have gotten the efficiencies some other way and that is the standard.
Here is how it works. We will not let you merge when it is anti-competitive because you are only considering efficiencies when you have already said it is anti-competitive to allow this merger. We would not allow you to make an efficiencies argument, to say you can go ahead with your anti-competitive merger if you could have gotten the efficiencies some other way but merging, which is anti-competitive. That is what that means.
Senator Kelleher: I am through questioning, but one of the problems I have here, given my disposition of this matter in my own mind, is that I cannot recall, unfortunately, what happened with our previous witnesses. Were they for it or against it? I do not have the recall, and there is nothing in our documentation that helps me in that regard.
The Chairman: We will bring back all the prior evidence. I can characterize that evidence, but I am not sure it would be appropriate for me to do so.
Senator Kelleher: I do not know how many witnesses there were and how they were divided.
The Chairman: It is all in our records. It is part of your file.
Senator Kelleher: I know, but I certainly did not take the time to go back and —
The Chairman: Well, you will have the time.
Senator Kelleher: I will have all summer — is that what you are saying?
The Chairman: No, you will have until tomorrow. It is a long night.
Senator Kelleher: Just thought I would ask.
Senator Angus: They were all against.
Mr. Russell: If I can help, I have read the transcripts. You had three witnesses on one day — Mr. Kennish, on behalf of the Canadian Bar Association, Mr. Finkelstein, was here as an individual — he was one of the counsel to Superior Propane — and Mr. Facey, who was along with Mr. Finkelstein, who was counsel to Superior Propane. The committee also heard from Mr. Peter Townley, an economist, was retained by the Commissioner of Competition in respect of Superior Propane. You had a good part of Superior Propane before you. Then, an another day, you had a number of representatives from the Competition Bureau, including the acting director, Mr. Gaston Jorré, who gave their comments and views on Bill C-249.
The Chairman: Part of the problem is that we do not have a significant reference back to the House of Commons hearings, because the list of appearances there was not very extensive, neither very long nor very representative. To that extent, we are digging into some material.
Senator Kelleher: This is my problem.
The Chairman: I should like to come back and, if I could, ask you a very specific question, because it is important to me. I asked you before whether, when you gave your evidence, the language of the amendment was the same as it is now. We had our discussion about that.
Let me go beyond that. It seems to me that, if it had been mandatory to consider the efficiency factor, the efficiency case would have still been left stronger than if it became permissive. Can I ask you to either speculate or speak from your knowledge why that language was diluted at the time?
Mr. Russell: I think your instincts are probably right on why it was suggested the change be made. My own reaction was that it was a difference without much of a difference. I have argued enough cases where ``shall'' means ``may'' and ``may'' means ``shall'' — and I am not kidding, in terms of judicial consideration of statutes — that I do not have any confidence that it changed the necessary application of efficiencies for consideration. The factors that need to be reviewed in a merger require consideration; people advocate consideration of those factors. The process, which has to be a fair process in front of the tribunal, allows people to make out their case with respect to those issues. The balancing of those various factors that the tribunal has to consider in a merger are part of the discretion the tribunal has.
Hence, I believe, saying ``may'' or ``shall,'' if they believe it is applicable, they will consider it. I do not think it is much of a change.
The Chairman: They are not obliged to under the language. Anyway, we need not argue.
Mr. Russell: I know there are a number of lawyers here. I think proper process to not consider the issue would be a ground for appeal in my own view.
Senator Meighen: Senator Kelleher asked the questions that I had in mind, but I will go back to this question of urgency. First of all, am I dreaming, or is there not an overall comprehensive review ongoing in the Competition Bureau — or review of policy?
Mr. Russell: There is not a comprehensive review going on. This is a review of various provisions in the act and various issues.
Senator Meighen: Is this one of them?
Mr. Russell: No, this is not one of them. This was not part of the initial process in which I participated. There were a number of roundtables, a parliamentary committee report on that, and a response from the government. If you forgive me, I can give you some of them, but not the full list because I do not remember them.
Section 45 is up for consideration for amendment. Administrative monetary penalties: Currently you can abuse your dominant position in Canada without being subject to any penalty whatsoever, and again that is different than other jurisdictions. AMPs, as they are being called, are being considered. Giving greater rights to individuals to sue is being considered. There are a number of things like that, but this was not part of it.
However, this bill, before it was amended, had been around for some time. I can tell you, there is an annual event at Langdon Hall to consider various issues of the act. Efficiencies will be on the panel tomorrow; they were on last year, and the year before that. Efficiencies have been part of the CBA annual conference since its inception.
This issue has been around for a long time, and I guess this is what I am trying to delineate. That debate about what is the right approach has been there. We have the tribunal saying what section 96 means and then Parliament saying that that is not the policy, at least thus far, we want the act to achieve.
The wording is at issue, in my opinion. I do advocate consumer welfare, so there is no doubt that I have a bias toward a consumer welfare standard for our act. However, I can legitimately say that the issue is yours. You can say what the policy should be.
I can say, without equivocation, that Bill C-249 does it, if you want consumer welfare, if you want efficiencies that will be fully considered and have that net benefit to the Canadian economy — C-249 does it.
Senator Meighen: Could you tell me with equal assurance that, without Bill C-249, it could not happen?
Mr. Russell: Without Bill C-249, you have a total welfare standard. That is what we know from the Superior Propane decision. Quite frankly, I believe that has a significant effect on competition policy in Canada.
Senator Meighen: Should we not wait to see how the Superior Propane decision plays out in subsequent cases? Alternatively, is it your view that all judges will read Superior Propane, salute and say that is it, that there is no room for interpretation, and that the results will be as dire as you forecast in terms of consumer welfare?
Mr. Russell: The decision in that case is binding upon the Competition Tribunal. Henceforth, they will have to apply this standard when they hear cases. That is the effect of the decision. That is what I say conclusively determined that that standard shall be applied by the Competition Bureau.
It definitely sends it back. If that is not the public policy desired by Canada, then it is back to parliamentarians to decide what they will do about it.
Senator Meighen: It is not applied in a vacuum, is it? Are there not other factors that weigh in the decision? If that is the law or that is what it says, then it must be applied, I understand. However, are there not other factors that weigh in, as well as efficiency?
Mr. Russell: Most definitely there are other factors in consideration of what makes a merger anti-competitive. We look at barriers to entry.
Remember, the way it applies today is that if the merger is anti-competitive — you have looked at all the other factors, you have weighed them, the tribunal has weighed them and has determined that the merger would substantially lessen the competition, that it is anti-competitive, then, as is said by many of the commentators, section 96 is clearly the trump card. So, yes, you consider those factors, and only consider section 96 in terms of the trump card; in other words, it is the defence.
Something has not been said on this. I actually believe that, by making efficiencies a factor, you are giving fairer consideration to innovation and other benefits to consumers in the initial determination of whether a merger is anti- competitive. I think that is healthy. If the two drug companies can come up with a vaccine to cure AIDS, then let us look at that up front as one of the factors in consideration of the merger of the two companies. Let us not leave it to an affirmative defence by the party.
We were the only country that did that. In the United States, although they called it that, the courts clearly factored it in — as well as the Federal Trade Commission, I should add; I do not want to misstate it. They factor efficiencies in when they consider a merger, as does Europe, Australia and other countries.
Hence, this is a positive step in one way for efficiencies, in that we will consider it as one of the factors. However, we will require that those efficiencies have that net benefit to consumers — in other words, the Canadian economy.
On that note, I certainly will provide what I can to this committee about my definition. I do not use it conveniently, I can say with confidence.
The Chairman: You mentioned that it had been judicially defined.
Mr. Russell: I will follow up on that point.
Senator Meighen: In terms of the wider context, someone passed me a note that says, ``Public consultation process on merger enforcement guidelines has begun in April 2004.'' Are you aware of that?
Mr. Russell: Yes. Merger enforcement guidelines are the stated views of the Competition Bureau on how to enforce the act. It does not lead to any change in legislation whatsoever.
Senator Meighen: I have two final questions, if I may. You talked about wealth transfer in the case of a 95 per cent monopolist, as I understood it. Would that transfer pertain only if the corporation were a non-Canadian corporation? I heard you say, ``transfer out of the country.''
Mr. Russell: Wealth transfers can occur from any merger. If we had a monopolist that operated only in Canada, we would still have wealth transfers; it occurs all the time. What I am saying is that total welfare allows the transfers to go out of Canada in terms of what we will recognize in overcoming an otherwise anti-competitive merger. That is the problem with total welfare.
If you apply the test in consumer welfare, you still look at the net benefit to the Canadian economy. In other words, I may pay more for the vaccine I am getting, but it would not have come about as quickly if the merger had not occurred, because there are efficiencies that are derived from the merger. The tribunal will have to weigh the net benefit to the Canadian economy and to the consumer. Innovation, in this case — the efficiencies that would drive the innovation to get the product to market — outweigh the cost increase to you for the product. They will have to balance that; they will have to balance it in consumer welfare as well.
The tribunal will always have to look at what is the best outcome for the Canadian economy, and that has to be done under what you see in Bill C-249 as well.
Senator Meighen: What would your response be to those who say that the smaller markets in Canada, New Zealand, Ireland and the like, where the efficiencies defence is used, need it and that it is of greater benefit to them than it is to the larger economies of the U.S., the EEC, or whatever?
Mr. Russell: It is absolutely the contrary. A smaller economy, such as Canada's, has the potential for an industry in Canada to be acquired by an American company and have Canadian consumers in a smaller, more concentrated market.
At one time, 20 years ago, it was oft quoted that the Canadian economy was already four times more concentrated than the U.S. economy. We are more vulnerable in Canada to anti-competitive effects because we are already more concentrated. We need a standard that protects the Canadian economy even more so than a large economy because the Canadian economy has diversity.
The Superior Propane case makes it so clear. We were talking about two companies acquiring up to 90 per cent of a market. It was recognized in the decision that there were six players in the U.S. That is the point. They have six players, and we have two, with 90 per cent. We are more concentrated, so we need to ensure that our policy is strong to protect our economy, particularly from the kind of transfers that could occur with total welfare standards.
The Chairman: Thank you, Mr. Russell. Do not go far, in case we need to call on you to answer an additional question or two.
Mr. Russell: Thank you, Mr. Chairman.
The Chairman: We will now hear Mr. Dany Assaf, a lawyer with Ogilvy Renault and co-chair of the firm's competition trade law team. He is here representing his firm, but he has no other client interest; is that correct?
Mr. Dany H. Assaf, Lawyer, Ogilvy Renault, Co-Chair of the Firm's Competition and Trade Law Team, As an Individual: I am here representing my own personal views, which do not reflect the views of the firm. I am chair of the economics and law committee of the CBA, and my comments do not reflect their position either.
The Chairman: It is a personal presentation. I do not think we have anything on paper, do we?
Mr. Assaf: I brought a submission with me today. Things came together very quickly.
Thank you, honourable senators, for allowing me to participate in your hearings. It is a pleasure to be here. I come here to echo some of the sentiments of Mr. Russell, not only in the capacity of someone who has acted for Superior Propane or other clients, but also in my capacity as a practitioner in this area who has had experience in cases, and as a participant in many other forums, non-client related, to advance the development of this law and to try to provide my views about where the policy is and where it should go. In that regard, I hope I will be able to convey to you my broader interests in being here today. I have a few items to clarify, and then I will continue with my remarks. In connection with what has been discussed today, it is important to keep a few things in mind at the outset. We will discuss those in depth later.
My first comment is that the total welfare standard is not the standard that is being applied in Canada today. That is not the case, and it is not the result that came out of the Federal Court of Appeal decisions and the tribunal decisions ultimately in Superior Propane. It is a much more detailed type of standard which does in fact take into account certain wealth transfers.
My second comment is in connection with the discussion earlier that efficiencies have been debated. It is true that efficiencies is an important topic that has been discussed in competition and antitrust circles for decades. Has this particular bill been subject to debate? No. That makes all the difference in the world.
In connection with where this debate will go, my opinion is that passage of Bill C-249 will mean the end, effectively, in practice, of an efficiencies exception. There is no doubt in my mind that that is what the ultimate impact will be, because the standard is just impossible, from a practical point of view.
With that in mind, I want to make three essential points that were alluded to earlier today but need elaboration. The first point is, in my observations and based on the evidence out there, there is no practical need for this amendment today. There has been no rush of mergers since Superior Propane, and there does not seem to be some welling up of mergers coming through the floodgates.
Second, this is a very narrow and limited exception to the law.
Third, this particular approach to mergers we have today, which I will describe later in more detail, is something that is in fact in our broader economic and national interest. It is not something that is just skewed toward one party or another. There is a legitimate basis for adopting this.
Lastly, in connection with the current approach to mergers, the process has evolved to become a transparent and fair one. The roles of the interested parties are distinct, and the questions remain distinct. Namely, the commissioner shows what the harm is from a merger, and the merging parties try to show the benefits. The matter goes to an independent tribunal or a court to be determined at the end of the day.
What is the standard applicable today? As I mentioned, it is not total surplus. The standard can be described as follows: We calculate all of the gains that society derives. I am not talking about general gains, I am talking about specific resource savings. In Superior Propane, there used to be two or three propane trucks traveling down the same road and waving to each other every morning, and Bill would get out and deliver the propane to 344, and John would get out and deliver the propane to 341. Now you have one truck going up that road and one driver. Resources are freed up in the other parts of the economy. That is important. Therefore, where a company used to use 22 trucks to deliver propane, they now use 10. That puts 12 more trucks and the steel and the rubber all the other things used to make that truck back into the marketplace, which should theoretically have the impact of lowering prices in those particular markets because they have been freed up to be put to more valued uses. I am talking about real resource savings. You put those on one side of the ledger.
You then try to figure out if they exceed the harm. This is where we depart from what is traditionally called the total welfare approach. The harm is a two-part component today, subsequent to Superior Propane.
The first part of it is trying to figure out what the loss to the economy is in resources. That means that, if a merger causes prices to increase, people will buy less, output will go down, and then people may start to use materials and resources from other areas to make less effective substitutes. You have a situation where people are trying to shove a square peg into a round hole. That is referred to as the dead weight loss. We do not just take the hard numbers to try to figure that out. The price goes up so much, consumers will buy a lesser quantity, and that means a certain dead weight loss. The tribunal has said that we must look at the dead weight loss qualitatively. That means estimating poorer service. When a company merges, it might do away with, say, frequent flier programs or customer programs that one of the merging parties offered, so there is poorer service. There is poorer quality. We try to factor all those in and put those in as the harm that is caused.
That is not the end of it in trying to establish the harm. There is a plus factor. The commissioner and the bureau advocated initially the balancing weights test, that is, taking on what are called ``socially adverse effects.'' What are the socially adverse effects? The Federal Court of Appeal decided that it should not be based on total surplus alone, because the purpose clause covers more than just efficiency. They looked at the impact on customers. The court tried to figure out who those customers were, and if they were disadvantaged, add the money taken from them to the equation.
You have real resource savings. As well, there would be higher prices charged to, for instance, lower income people who would use propane not to heat pools, luxury items, but to cook or heat their homes. The court decided to take the extra that they would pay and add that to the harm and figure out, at the end of the day, if the country would be better off. Did we gain more than we lost?
Already, as articulated by the courts, the current standard is not total welfare. It does incorporate a wealth transfer, but it does not look at the money taken from wealthy people or the money that people spend on the use of a luxury item. It tries to zero in on exactly those who would be harmed. It is a more accurate reflection of a consumer surplus standard because it zeros in on identifying the vulnerable and the weakest customers. That is what the standard is, not total welfare.
As to the practical need for this bill, we can look at the history of the Competition Act and its development and the various iterations. We have heard that this is somehow an advancement and that we are progressing in the consideration of efficiencies. In fact, we are regressing, because many of these pass-on requirements, limitations that efficiency exception cannot be used in circumstances where you have control of a market or if you have to pass on to consumers, were already contemplated in previous versions of a bill that were proposed — for instance, Bill C-256 in the early 1970s and the various iterations of Bill C-42 and Bill C-19. At the end of the day, through all of that, we came out with where we are today in section 96. It depends where you want to start in history if you want to justify your position about what Hansard said or did not say. The reality is this is where we are. The act has four goals. They are all equally weighted and the section is worded like it is not by accident, because other versions were considered that had limitations, and rejected.
Now we must consider what is the standard of a defence. What burden of proof do parties have to meet? A merging party cannot just walk into the tribunal or the office of the commissioner or the bureau and say, ``I have these efficiencies, therefore, the merger should be approved.''
First, as was stated earlier, only one case in the history of the act has ever benefited from this exception. We are not talking about a three-alarm blaze. Second, it was not an easy road. It was a rigorous exercise. The parties have the onus to prove that they are going to get the efficiency. The efficiency must be real and cognizable, not something that is in the air. It must be proven.
In the Superior Propane case, the tribunal, which is viewed as having been favourable to Superior Propane, went through in painstaking detail every claimed efficiency and agreed with the commissioner in many cases to eliminate some of the efficiency considerations from the total. They went through the process, and the tribunal rejected some of them.
In that regard, even if you can show an efficiency, it cannot be something that is a mere pecuniary gain. It has to be a real resource savings. For example, if I claim that, by merging, I will have more buying power and, as a result, I will be able to buy this input for 50 cents instead of a dollar, that is not a resource savings, that is just a matter the merged company getting a better deal because it got bigger. That does not count.
What would count is, instead of having three people on the phone purchasing those inputs there would be one or, instead of using four computers or inventory management systems to develop inventory only one is used. That is a resource saving because the three other computers go back into the marketplace. Those are the things we count. It is not something that is just an easy card to play when you walk in before the bureau or before the tribunal. You must meet a rigorous standard.
At the end of the day, we get to the point where we did not allow a merger just because it was big in cost efficiencies. As far as I know, and I checked, it is still not permitted to engage in a merger where the only benefit to the economy is you raise prices by gaining market power. That is still not allowed under the Competition Act. What is permitted is a limited exception, in controlled circumstances, after we have carefully considered all of the factors and come out the other end and said we gain more than we lose as a society. Why would we want to preclude ourselves from that possibility by saying the answer to that question today is always going to be no? We have decided today that the answer will always be no. Forget about those. It is just not prudent. There has not been a floodgate of cases coming through, so there is no practical need that this amendment will address.
We have a vibrant but small export driven economy, so having this kind of efficiency exception is not something that just appeals to lawyers or economists who want to help get deals through. This is something that must appeal to all of us at a certain level. It is a limited exception that says, in a particular case, in a very limited number of circumstances, we look to see whether it is in our interests to let these companies merge. That is because we see there is a vital worldwide industry where we wanted to have a key player. Therefore, we say in that context, in our national interest, we want to permit two Canadian companies to merge in order to allow Canada to have a voice at that table in those key industries in the future. Why would we want to effectively say no to those cases for the future?
The reality is that the act has four goals: to promote the efficiency and adaptability of the economy, so efficiency; to expand opportunities for Canadian participation in world markets; to ensure small and medium enterprises have an equitable opportunity; and to provide consumers with competitive prices. Section 249 essentially tells us today that we will skew the efficiencies considerations to facilitate only one of those goals.
While the goal of providing lower prices to consumers cannot be underestimated, why is it that we would say today it is always the most important, and more important than the other goals? In this regard, I would refer to a Federal Court of Appeal decision. Incidentally this is the one the commissioner won. This is what our federal court says in connection with interpreting generally how we approach considering efficiencies in the context and purpose of the act. It tells us clearly:
...a purpose clause serves as a guide to the court or tribunal in its interpretation of other statutory provisions...and may establish parameters within which it must interpret the provisions of the statute...
In my view, section 1.1 suggests that an interpretation of ``effects'' should not focus exclusively on one of the objectives of promoting competition, namely, promoting the efficiency and adaptability of the economy.
In that case the court said that we cannot have one goal guide the entire process of merger efficiencies, we need to consider all of the goals. In this case it is maybe the reverse in terms of context, but the same principle should apply. We should have an efficiencies exception that will effectively facilitate or potentially facilitate all four of the goals.
Where are we today? We still have an effective Competition Act that prevents mergers that result in market power that harm consumers without any other benefit to society. That is still not permitted. What have we got then? We have a limited exception that permits us to say that in these cases we want to allow a particular merger so we can participate and have a voice in world markets in particular industries. We have an exception that will permit a merger between two larger companies that may want to merge in order to promote or develop some research, some key technology. That may be in our national interest. There may be some developing technology where we want to have a strong player on the front end so that we can adopt and adapt that technology.
In terms of the other goal of ensuring medium-size business an opportunity to participate, the current act permits that and, in connection with the current efficiencies defence it does help it too. There could be two smaller national players, for example, two credit unions, in a rural market that, together, have a large local market share. Why would we want to stop them from merging to gain the scale and the ability to develop into a viable tier competitor in the financial industry when we know we have much larger players than them? It is something that could benefit not just big companies, but smaller companies that may have large local market share.
In connection with the current approach to the merger efficiency exception, it is a clear process, like I say, that was largely proposed by the previous commissioner. The commissioner said that we would deal with the efficiencies exception in a real transparent and fair way, and he laid out how it will break out. It evolved through case law as well. The commissioner is in the best position to investigate what the harm from a merger is, including whether or not there is a substantial lessening of competition, and determining the adverse part of the wealth transfer. Commissioners are in the best position to investigate and prove that. The parties have access to the information in connection with their efficiencies. They are in the best position to describe and prove those, and then they go to the tribunal and they put their positions forward in a de-politicized adjudicative forum, where there are not the pressures of all the stakeholders, and the tribunal makes the decision. There are contentious cases.
On another level Bill C-249 commingles two separate questions — efficiencies and harm — because either something will cause a substantial lessening of competition or it is not. Efficiency is a separate question that you are weighing in the balance to determine whether you will allow this merger to proceed on an exceptional basis. It brings them together, commingles them, and, in effect, procedurally, it will throw the whole issue back into the commissioner's lap in isolation because it is brought into this initial phase. Why, on a practical level, the commissioner may want to have that kind of pressure and isolation is not clear when we already have an existing, transparent and fair process.
I want to cover a few things off because they were raised today. I agree with Mr. Russell that this is an issue of policy. The policy we have now is a good one. It is to prevent anti-competitive mergers in limited exceptions where it is in all our greater interests to do that. We have a law that permits that, as opposed to saying that we will never allow that.
In my opinion, Hillsdown is clearly obiter. Basically, the court questioned the relevant standard and they left it open to conjecture. That was obiter because, number one, even in its context, it did not provide a clear direction. Second, it was once removed from the question they were answering.
In connection with one-way trade, we must ask, in connection with Bill C-249, what does it prevent? It prevents mergers that may even result in modest price increases to consumers when there are outweighing benefits. In reality, the way it is worded, we do not even ask who are the consumers. Are they wealthy or poor? Do we want to help wealthy consumers? Are they producers or consumers? The identity of the consumers has to be relevant. Who will suffer the price increases? Canadian customers? Foreign customers? Do we care if foreign customers pay more?
The existing standard permits an assessment of which particular customers will be harmed and brings that into the balance. At the end of the day, if we do have a problem, the Competition Act should not be looked at as the only act that can address issues. Other policy tools can be used to try to rectify the balance, instead of using a blunt tool like the Competition Act to fulfil all these other goals and say, well, the sacrificial lamb at the table will be this merger because we will use this blunt tool of the Competition Act to facilitate tax policy, employment policy and all of these things.
We have much more experience and we have the ability now to be much more sophisticated in our approach. That is why my last line here is: In many respects, the cure here is worse than the disease that it seeks to remedy.
Regarding the quote used by Mr. Russell, from me, about a total welfare standard that permits all those things, those comments were made in the context of advocating a total surplus, a total welfare standard. That is not the case today. We have experience now with this new standard. The issues can be adjudicated, determined and proven. There is no practical need to change that at all and to disturb the very good policy foundations in our economic and broader national interests.
The Chairman: Thank you very much.
Senator Massicotte: To make sure I understand the existing legislation, section 96(1), you interpret the efficiency argument. You use the words loosely that all matters relative to the economy are considered, not only the efficiencies to the company and the industry. It is everything that is important to our national economy. Is that correct?
Mr. Assaf: With the existing legislation, that is correct. There is an analysis of harm.
Senator Massicotte: I am asking from a macro-economic perspective.
Mr. Assaf: It absolutely does permit us to contemplate every one of those goals. At the end of the day, we make a judgment call.
Senator Massicotte: Were you here for Mr. Russell's presentation?
Mr. Assaf: Yes.
Senator Massicotte: Would you agree with his definition of ``consumer'' being as large as the Canadian economy? Is there any support for that?
Mr. Assaf: Consumers as a particular group in a particular context are different from consumers generally. It is easy to refer to all consumers, but we must be a little more specific — it is all consumers in the context of those particular markets. I may not buy propane, so how would I gain from what happens in that market? I could, perhaps buy the trucks that the propane companies otherwise will not use, so I would gain. By limiting it to ``consumers,'' you are precluding yourself from contemplating other real benefits to the economy. It does not help you just to say ``consumers.''
Senator Massicotte: Is there any jurisprudence to determine how the courts will interpret ``consumer'' in this amendment?
Mr. Assaf: In this amendment what we have is Superior Propane, a case that showed how you would do this analysis.
Senator Massicotte: Does Superior Propane go on to define the term ``consumer?''
Mr. Assaf: We can define ``consumer'' in two different ways. We are familiar with the definitions: Somebody who purchases and consumes something. We know that.
Senator Massicotte: It must have something to do with the product being consumed. We are all consumers.
Mr. Assaf: That is exactly my point. What is the product being consumed? Who is paying more for that product? That is what our current standard allows us to do. That is exactly right.
Senator Tkachuk: What difference will Bill C-249 make to a bank merger?
Mr. Assaf: A bank merger is a bit of an odd animal because you have so many different levels of legislation.
Senator Tkachuk: Let us talk about a merger between two of the big five.
Mr. Assaf: There could be components of the merger that would be permitted, let us say the investment banking component or some other component that allows them to compete better internationally. Perhaps they would benefit from a merger in that context from the efficiencies defence. We see that, on balance, we had the ability to contemplate the winners and losers. We realize that the consumers in those cases are not disadvantaged or vulnerable. Maybe some of them are foreign. In that context, we say that aspect of the merger should be permitted, although there may be some lessening of competition because there is a broader economic interest to allow the scale of capacity in those particular niches of, perhaps, investment banking or some other international banking fora. They would benefit from that.
Then you can look at other components and say that the efficiencies there do not outweigh the benefits. If we look at merging, say, retail banking, we see there is a loss to the economy, including a large wealth transfer that is taken not from large, foreign, rich, sophisticated companies, but from everyday banking clients. In that case, we would say the efficiencies do not help. That is the flexibility that the current standard permits.
Senator Tkachuk: Are you saying that, if Bill C-249 were passed, some of the considerations, in particular, the investment banking part, would not be allowed?
Mr. Assaf: It would be very difficult because it says you have to show benefits to consumers. It says that. It says ``may.'' Do you want to exercise your discretion to maybe help the banks? Maybe I do not. It is not ``shall;'' it is ``may.'' As well, you have to show benefits to consumers. That is what the section says.
There are no benefits to consumers in that sense. We looked at it. We researched it. We thought about it. Those consumers are not really people we want to help because the Canadian economy benefits more, and the consumers are not people we want to protect in that particular case.
The Chairman: We have just a few minutes. Do you each have one matter on which you would like to challenge the other? This is an unusual procedure but it has been requested.
Mr. Russell: I am a litigator, so I enjoy rebuttal.
The Chairman: It is with a great deal of nervousness that I allow this. After each has listened to the other, I will invite each of you to suggest one point on which we could benefit from some clarification. We are tight on time.
Mr. Russell: I will respond to the last question first, if I could.
To try to anticipate how this bill would affect bank mergers, anybody at this table would be pretty bold to say how that would work out because you have to be able to analyze the evidence. However, I do not believe, as I understand the markets where banks operate, that Bill C-249 would affect the equation to any extent whatsoever.
We have many retailers, such as grocers. I acted for Loblaws and its acquisition of Provigo. We have had many similar retail acquisitions in terms of the effects on the economy. I do not believe that Bill C-249 will affect the issue. I would have argued anything that I had to argue with efficiencies on the retail case, after Superior Propane, with the current section 96 and if Bill C-249 were in place. We could mystify you more with our debate. The balancing weights and this other that I will refer to, is simply taking total welfare, looking at the pluses, minuses, who is hurt, who is not hurt and allowing the tribunal to decide, with you harmed but in a position of gain, how it will balance those things. The tribunal has to determine the net beneficial economic effect of that merger. There is delegation of authority to decide what is more important in Canadian society: the welfare of certain consumers or certain kinds of businesses.
One thing about banks that you raise illustrates the point with consumers. Who are the consumers of banks? You and I and every single business in this country are those consumers.
Senator Tkachuk: When you say that Bill C-249 would not have any effect whatsoever. On whom would it have an effect?
Mr. Russell: I am no expert on Superior Propane but my friend and others argued it as various counsel for the commission. In respect of the distribution efficiencies that Mr. Assaf referred to, they were ready and exported to the U.S. They were already trying to gain the benefits in being stronger by their activity of distributional efficiencies, that is, not sending two trucks to the same place. You could come up with any number of such examples of distribution efficiencies. They were able to provide the overall efficiencies gained and the figures. Mr. Finkelstein provided the committee with the relevant math and said that the benefits outweighed the cost that consumers would pay, in Halifax and other places, in higher prices for propane. The tribunal, having weighed all of that, let the merger proceed. That is the balancing aspect to which my friend referred.
The consumer welfare standard would say that the balance must be in favour of the consumer, writ large, whether there are innovation or distribution efficiencies to be passed on. You could have distribution efficiencies by sending one truck but it has to mean that you and I will derive some benefit out of it. Mr. Finkelstein referred to a fact in the west about drying wheat with propane when you cannot use other things. That kind of business consumer has to derive some net benefits from the efficiencies of the merger.
You are setting a standard. My friend is right in saying that you define markets and decide who the consumers are. However, I do not think he would purport to say to you today that ``consumer'' means only individuals on the street.
Mr. Assaf: ``Consumer'' is not synonymous with ``citizen.''
Mr. Russell: That is what I said.
Mr. Assaf: It is not though. In the context of a particular merger, you cannot say that consumer equals citizen.
Mr. Russell: In a relevant market, it is everybody who consumes the product.
Mr. Assaf: That is right and we weigh it. I agree that consumers benefit the economy. However, let us be more specific. Which consumers benefit and who in the economy benefits? In a particular merger, they are not the same person and, in fact, consumers do not equal citizens, writ large. It boils down to who gains and who loses in society. Ask the economists, because they know. They will be here tomorrow. Is the approach being put forward today and followed, based on the Federal Court of Appeal decision, equal to total welfare or total surplus? Ask the economists tomorrow and I suspect the answer will be, no.
The Chairman: I have a supplementary. You asked who might be affected. Is it obvious that, if this bill were in effect, Superior Propane would not have been allowed to merge? Is that a given?
Mr. Assaf: In my opinion, yes, because it says, ``benefits to consumers.'' The efficiencies have to reflect in benefits to consumers. People such as Robert Pitofsky, former Chairman of the Federal Trade Commission in the U.S., have called this kind of qualification, ``the killer qualification.'' That means you would not meet it, so do not worry about it. That is essentially what Bill C-249 will do.
To put it back into perspective, we are not saying that every big merger should go through — absolutely not. We are simply saying that there should be a legal regime that permits an exception in limited circumstances, where we, as reasonable people and members of society and Canada, all gain more than we lose. There is a defence to murder, but there is not be a defence to mergers.
Mr. Russell: In respect of Superior Propane, I would have to say that it is likely that, given the difference, it would not have passed under the new standard, although I do not know that for sure. The real difference would have been that they would have to prove that the efficiencies would lead to a net benefit to consumers. I know the term ``consumer'' is an issue today, whether in Europe, the U.S. or anywhere else. I will send the quotes to the committee that say it has been interpreted to mean ``anyone who takes the input.'' My friend is simply saying that, if the product were widgets, not everyone in Canada consumes widgets. Therefore, it is only the people who consume widgets. I accept that. It is the consumer of the product, but it is not individuals and business. They are both consumers. If I could confine him enough, he would have to at least acknowledge that.
Mr. Assaf: I agree with that. We have identified it is the consumers of the product. The existing standard allows us to go one step further and ask who those consumers are. Are they rich people heating their pools with propane? Do we want to stop this merger that may benefit the economy because we want wealthy people to have cheap propane to heat their pools? This standard allows us to at least ask the question. I do not understand why we would want to preclude that question from being asked.
Mr. Russell: I personally believe that it is perverse for a tribunal of three people to decide who is wealthy, who deserves, who should get benefits and who should not get benefits. That is a public policy delineation that Parliament makes in every sphere of our economy. That is, perhaps, the core of the issue. You have distilled that from this debate. Should it be a public policy standard, or should it be at the discretion of the tribunal to weigh what it considers important? Who is wealthy? You and I are wealthy, so it does not matter whether we pay too much for gasoline. Some people would agree with that. Whether we are wealthy will be in the eyes of someone else. All those things are to be considered within the ambit of a litigation process in front of a tribunal. We will decide who is worthy and who is not worthy, and who should benefit and who should not benefit, because we declined to set a standard. Every other nation in the world says that, if you want to overcome an anti-competitive merger, show that it benefits the people of Canada who are the consumers of the product.
Senator Massicotte: I have a quick question, and yes or no will do as a response. If you have three players in a non- profitable industry and two players are about to go insolvent because there is too much competition, would the proposed provisions of this bill allow the merger of two if it represented a 5 per cent or 10 per cent increase in pricing while saving 1,000 jobs? What would be the result? Mr. Russell, would such a merger be permitted?
Mr. Russell: I need to insert a few facts. The two companies might be able to say that they both had production efficiencies. For example, each company is running one line. Now, they will be able to take one plant and run the line two shifts. That creates efficiency.
Senator Massicotte: Hypothetically, the consumer will face a 10 per cent price increase.
Mr. Russell: Your price standard means that I would not find it anti-competitive in the first place. If you gave me a 20 per cent price increase, then I can answer your question. We would then look to see whether the production efficiency would be passed on to consumers.
Senator Massicotte: Presume it would not be passed on. It saves 1,000 jobs but the ``consumer'' by your definition, suffers from the increase in price.
Mr. Russell: If the consumers, wherever they are, will be the only beneficiaries of that efficiency, then it would not pass the tribunal.
Senator Massicotte: What about the 1,000 jobs that would be saved?
Mr. Russell: Neither one of us is saying that the Competition Act would preserve jobs. Jobs and job losses in the competition policy of Canada — I cannot speak for any nation other than the U.S. and Europe — are not relevant. In places such as South Africa and New Zealand, it is a criterion in the statute to examine those other kinds of issues, but it is not in the statutes of Canada.
Mr. Assaf: The answer is no. On the other fact, if the tribunal would not consider a 10 per cent price increase as material, that would be the bigger problem.
The Chairman: Thank you, gentlemen. Your evidence has been helpful and stimulating.
The committee adjourned.