Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 5 - Evidence - May 6, 2004
OTTAWA, Thursday, May 6, 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 11:04 a.m. to give consideration to the bill.
Senator Richard H. Kroft (Chairman) in the Chair.
[English]
The Chairman: Procedurally, I should like to conclude the public part of this hearing by 12:30 p.m., or as close to that as possible. We will hear from two groups of witnesses today, and we will then continue in camera.
Our witnesses today have come some distance to be with us, so I want to give them the greatest possible opportunity to be heard.
I would introduce Mr. Thomas Fina, a U.S. antitrust attorney from the firm of Howrey Simon Arnold & White, LLP, of Washington, D.C. Thank you for coming to be with us today. Our practice is to invite witnesses to make an opening statement, and I would suggest that you keep that to 10 to 15 minutes, after which we move to questions.
Please proceed, sir.
Mr. Thomas Fina, U.S. Antitrust Attorney, Howrey Simon Arnold & White, LLP, Washington, D.C., as an individual: Thank you for your welcome this morning and for the opportunity to testify here today before the committee on Bill C-249. I am honoured that the Senate is interested in the views of a U.S. antitrust competition lawyer.
I have prepared short remarks which will only run about 10 or so minutes. Then I would be delighted to respond to any questions that the committee may have.
By way of background, as the chairman has mentioned, I am a partner in the Washington, D.C. office of Howrey Simon Arnold & White, LLP, where I specialize in antitrust work and, in particular, in merger and acquisition work. Our firm has the largest competition practice in the world, with over 200 lawyers practising competition law. I am also involved in the antitrust section of the American Bar Association, currently serving as the vice chair of the mergers and acquisition committee.
Obviously, the views that I present today are my own and do not reflect those of either Howrey Simon Arnold & White, LLP or of the ABA.
I have three main observations that I would like to make about Bill C-249. Before I get to those observations, I would like to interject one comment if I may. I understand there has been testimony suggesting that the Canadian efficiencies standard has been subject to ridicule in the international competition arena — among international competition authorities and international competition lawyers. My experience is very different. My experience is that the Canadian treatment of efficiencies is well-respected and considered to be on the cutting edge of the treatment of efficiencies.
To put that in context for you, I am currently chairing a working group that is commenting on the Bureau of Competition's new draft merger guidelines. It is a committee composed of leading U.S. antitrust practitioners as well as some antitrust practitioners from Canada. During the course of our deliberations over the last month or two, as we have sought to come to some consensus as to what the comments of the ABA should be — I do not think I am telling any stories out of school here — no lawyer, and there are probably 20 or 30 leading lawyers involved in this working group, has criticized the Canadian efficiency standard.
I would also say that this is a very difficult issue — it is a difficult issue in the United States, in Europe, and in Canada.
Returning to my three main observations, I will first discuss the U.S. approach to efficiencies with respect to mergers today in the U.S. The U.S. approach continues to evolve and, as it does so, it is placing greater and greater emphasis on efficiencies.
In the U.S., efficiencies are primarily a consideration for the competition authorities in two contexts, senators. One context is understanding the rationale for the transaction. Why is it that the merging parties are coming to the agencies with the transaction? The second context is that it is important in terms of the agencies exercising prosecutorial discretion in deciding whether they wish to bring an action, whether they wish to challenge a proposed merger. However — and I will get to this later — the practical effect of efficiencies in the United States in merger litigation is quite limited.
Second, I will compare section 96 with the U.S. approach to efficiencies. There is no question that efficiencies in Canada are accorded substantially more weight in merger review than they are in the United States.
Third, I will compare the legislation with the current U.S. approach to efficiencies. There is no question that the legislation would increase convergence in the treatment of efficiencies between the United States and Canada. As an U.S. antitrust lawyer, however, I believe that the U.S. should be moving in the direction of Canada and not vice versa in terms of the treatment of efficiencies.
Turning from my summary to my first point, the U.S. approach to efficiencies in merger analysis continues to evolve toward according a greater and greater role to efficiencies over time. Forty years ago in the United States, efficiencies were viewed as being anticompetitive. They were a reason to challenge a transaction and they were often cited by the FTC and the Department of Justice as such. Today, efficiencies are recognized as being pro-competitive in America.
I would characterize the U.S. approach toward efficiencies today as one of acceptance in theory but scepticism in practice. I think that is particularly true in the context of litigation.
One of the limitations of the U.S. approach to efficiencies is the consumer welfare standard that we have in the U.S. In other words, the policy objective in the U.S. is to maximize consumer welfare, that is, lower prices to consumers, whoever they may be, rather than total societal welfare. As a result, the U.S. antitrust enforcement agencies could, and I think can, block transactions on the grounds that the transaction does not seek to maximize consumer welfare, even though the transaction as a whole may be pro-competitive and may benefit society as a whole.
A related concern with the U.S. approach to efficiencies is that it limits the types of efficiencies — because there are numerous types of them — that are recognized or cognizable by the U.S. antitrust authorities.
As in Canada, most government merger review analysis in the U.S. is done at the agency level, and few cases are litigated. In a typical year we might have none to two or three or four cases litigated.
Practically speaking, as I mentioned, where you see the greatest impact of efficiencies is in explaining the business rationale to the government and in its prosecutorial discretion. The practical role of efficiencies in merger litigation has been very limited and courts typically reject any efficiencies defence proffered by the parties.
There is an interesting and recent case that is worth spending a few minutes discussing. It is the Heinz baby food case, a case decided in 2001, if I recall correctly, by the Court of Appeals in the District of Columbia. It was a three-to- two merger meaning there were three competitors and the proposed merger would have combined two of those competitors so that, at the end, there would be only two competitors in the baby food market. Here we are talking about jarred baby food, the type that you might buy in the supermarkets for your infant or young child.
There were real, substantial efficiencies associated with the merger. The purpose of the merger was to challenge the dominant player, and the dominant player was Gerber, which had a 65 or 75 per cent share of the market in jarred baby food. At the staff level of the FTC — the bureau of competition and the bureau of economics — the lawyers felt this was, perhaps, one of the best efficiencies cases they had ever seen. It was the Superior Propane of the United States as it were. They recommended against a challenge to the Heinz transaction. The Federal Trade Commission, by a closely divided vote, by three to two, because there are five commissioners on the commission, the commissioners decided to challenge the transaction. At the district court level, the district court found for the parties and against the Federal Trade Commission. At the Court of Appeals level, the decision was reversed and the transaction was enjoined.
The decision has been widely criticized in the United States in the antitrust bar. There is an interesting — in fact I would argue a very interesting — postscript. After the Court of Appeals challenged the transaction and the transaction fell apart because the parties were not willing to go to the Supreme Court to challenge and appeal the decision, Heinz, one of the two ailing parties, one of the two weaker parties, decided to get out of the baby food business entirely and it sold its jarred baby food business to Delmonte, to another company.
Since then, the market share statistics indicate that the dominant player, Gerber, have increased significantly, post transaction. That would suggest to me, and it suggests to other antitrust practitioners in the United States, that the wrong decision was made and that the efficiencies defence that was rejected by the Court of Appeals was probably a mistake.
Turning to my second point, there are substantial differences between the U.S. treatment of efficiencies in the context of a merger and the Canadian treatment of efficiencies under section 96. There is no question about that at all. Canada provides for a statutory efficiency defence, the United States does not. In Canada, efficiency gains must be greater than and offset anticompetitive effects. In the U.S., efficiency gains must show that the transaction itself is not anticompetitive.
In addition, Canada appears to analyze efficiencies by a balancing-of-weights approach or some kind of a modified total welfare standard. In the U.S. we use a consumer welfare standard.
Turning to my third and last point, it appears to me that the legislation would increase convergence between Canada and the United States with respect to efficiencies. First, the legislation would move Canada from a balancing-of- weights approach or a modified total welfare test to a consumer welfare test for efficiencies. Second, the legislation appears to require that efficiencies be merger-specific. Third, the bill appears to suggest that the efficiencies must be passed through to consumers, whoever those consumers may be.
The threshold question to me, however, is why Canada would seek to converge its efficiency standard with that of the United States when one considers the very real limits of the U.S. approach to efficiencies. I would respectfully suggest to the committee that there are several reasons why it might be a mistake for Canada to adopt this bill.
First, the existing Canadian efficiency approach is more flexible. It permits a consideration of a broader range of efficiencies than the U.S. approach.
Second, I would suggest that adopting the statute might introduce structural rigidity into the Canadian treatment of efficiencies. This rigidity may make it difficult for the Competition Bureau to accommodate changes in antitrust learning over time, which is a constant hallmark of antitrust. This is important because antitrust simply evolves constantly.
Third, the evolution and merger analysis and the treatment of efficiencies over the last several decades, if you look back over the last 30 or 40 years, is clearly toward a greater role for efficiencies, a greater acceptance of efficiencies, and this proposed legislation would move Canada against that tide, and in what I think, is the opposite direction.
In conclusion, I have three basic points. First, the U.S. efficiency standard continues to evolve and continues to place greater weight on efficiencies. Second, there are significant differences between the U.S. and the Canadian approach to efficiencies and the legislation would provide convergence, if that is your goal. Third, I think the real threshold question is why Canada would seek to converge with the U.S. with respect to efficiencies.
I thank you for your time and patience. I would be happy to address any questions that the committee might have.
Senator Massicotte: Thank you for your presentation. We very much appreciate you taking your time to share your perspective and expertise.
Obviously, your opinion is that efficiencies should remain a serious consideration and should be given the prominence that we hold it here in Canada as compared with your experience in the United States. Could you, however, educate me a little on the economic implications? I know it is not your area of expertise. Why is a country best served to include that argument as opposed to simply pricing to the consumer?
Mr. Fina: That is an excellent question. I am not an economist, but I will answer your question to the best of my ability.
You want to include a broader range of efficiencies, and analyze a broader range of efficiencies to make your economy more competitive, to create more jobs and to benefit society as a whole. In the old days, consumers were people like you and me shopping at a store. Today, consumers may be large corporations, such as Wal-Mart. From an economics perspective, I believe that an economy as a whole is better off with the Canadian approach where you take a broader view of efficiencies.
Senator Massicotte: On pages 11 to 12, as part of your conclusion you state that, while the government seems to favour the efficiency argument, that is, a broader approach to the consideration of efficiencies, the courts have constantly rejected that consideration. You seem to come to the conclusion that the reason the courts are showing ambivalence to it because it is difficult to quantify. In other words, the theory sounds good but the practice is difficult to apply. That has obviously been the experience of the courts.
We heard testimony that we can argue efficiencies as a defence but it is difficult and complex to define and predict the outcome. Is it so difficult to predict that maybe, as with your court experience, it is dangerous to even allow for it given its unpredictability and given the fact that it is a somewhat dangerous possibility?
Mr. Fina: Senator, whenever you are analyzing a merger, you are making predictions about the future. You have no idea whether those predictions will come to fruition or not.
It is true that efficiencies can be difficult to predict. Sometimes companies get them right, and sometimes they get them wrong. Sometimes the efficiencies are greater than they had anticipated, as we saw in the recent HP merger in the United States.
I do not believe, speaking as a U.S. practitioner, that consideration of efficiencies is so difficult or speculative that they should not be considered at all. I do not think that the standard for efficiencies should be higher than the standard of proof that the government needs to show.
In the United States, the government demonstrates a prima facie case against a merger by saying merely, ``There is a high level of concentration. We believe it could lead to higher prices.'' In the United States, in the litigation context, it is up to the merging parties to rebut that case by demonstrating that there are efficiencies of the pro-competitive benefit of the transaction.
Senator Massicotte: Your law firm has one of the largest practices and expertise in the world. What is the experience in other parts of the world relative to the practice of considering efficiencies, in Europe for instance? What is the trend in the world in that respect?
Mr. Fina: Senator, the trend is clearly toward according efficiencies greater respect and greater weight. You see this in Europe, for example.
Senator Oliver: Toward the Canadian standard?
Mr. Fina: It is not necessarily toward the Canadian standard per se in terms of the statutory defence that you have, but in terms of according efficiencies greater weight. Historically, if you look at antitrust, efficiencies were looked at as a negative. It is only with greater economic learning and greater economic analysis that agencies throughout the world, which includes Europe and the United States, have begun to realize that efficiencies are pro-competitive. That is what antitrust is all about.
In Europe, you see a movement in the same direction. You see the same evolution moving from efficiencies as anticompetitive, or neutral at best, toward thinking that they are a real positive. We saw that in the GE-Honeywell merger, which was so widely debated in the press and among antitrust practitioners.
Senator Tkachuk: I am sorry that I was a little late. I had another meeting so I did not hear all of your presentation.
You have raised the subject of efficiencies again. I am having some trouble with that because it seems to me that it is such a stretch of an argument, but perhaps you can help me out with it. I will try to put this in my terms, which are layman's terms — being neither a lawyer nor economist, although it has not seemed to have stopped either of those professions commenting on the other — that efficiencies result in higher prices. In our case it was Superior Propane. The argument was that the efficiencies outweighed the consumer interest because the efficiencies were so great. That was seen to be in order because foreign buyers of propane, or companies that were well off put forward made a better argument than the people that were not well-served because of higher prices.
In other words, they tried to justify higher prices by putting forward the argument that foreigners and rich companies would buy the product and that would outweigh the problems caused to ordinary Canadians.
To me, efficiencies should create lower prices. Am I missing something? Could you help me through that?
Mr. Fina: Senator, I do not think you are missing anything. In general, a transaction may have substantial efficiencies, whether they are what we would call productive efficiencies that might be immediately passed through to consumers or innovative or managerial efficiencies, which might take longer to trickle down to consumers. You should not limit the focus on the types of efficiencies that you are willing to consider. You should, instead, broaden the efficiencies that you are willing to consider. Does the transaction as a whole make society better off? If the transaction leads to using fewer resources and fewer inputs to generate the same output, society as a whole is better off.
You may then decide that there are other things you want to do. You may decide that there are certain consumers who may be adversely impacted in the short term by the decision. You may want to compensate them in some shape, way or form. However, that is a different issue.
The point that I am trying to make is that, by focusing very narrowly on efficiencies that are passed through purely to consumers immediately, you are losing out on many other efficiencies that make your economy more competitive internationally and domestically. Those efficiencies ultimately trickle down.
As a practical matter, there are not many cases at the end of the day. I believe there have only been one or two in Canada and there have been a limited number in the United States out of the thousands or tens of thousands of mergers that have been considered where pure efficiencies defence has become a real issue.
Should more emphasis be placed on efficiencies so that society is better off, recognizing that certain pockets may be made worse off in the short term under certain circumstances?
Senator Harb: Thank you very much for your presentation which is quite a contrast from what we heard yesterday when one of the witnesses indicated that the efficiency element in Canada is a laughing matter internationally. It was quite refreshing to hear what you had to say on this.
It strikes me that the whole debate centres on how you define ``efficiencies,'' and it appears there can be differing interpretations of the term.
If this bill is passed and it becomes part of the Competition Act and a client of yours showed up at your doorstep and tells you that he has a company that is operating in Canada, can he make a claim? As you know, Canada, the United States and Mexico, have the NAFTA. Under chapter 11 of that agreement, companies who have an investment in member countries of NAFTA can claim injuries.
Do you think there could be a case for a company that is investing in Canada, to make a claim that they were injured as a result of a proposal for merger between that company and another company being denied, based on what we have in this bill?
If that is the case, do you think it would be appropriate for Canada, Mexico and the United States, to have some sort of a panel discussion to look at this whole notion of treatment related to mergers and acquisitions in relation to companies that may be operating in more than one jurisdiction?
Mr. Fina: Senator, with respect to your first question, I am not familiar with that subject. It is outside my area of expertise with respect to NAFTA. I can speculate and say that there would not be a cause of action, but that is purely speculation on my part.
With regard to your second question of whether or not it makes sense to have some kind of a panel discussion, when there is a merger or a transaction that implicates multiple jurisdictions there is typically formal and informal contact between the competition authorities and agencies in which they discuss theories, issues, remedies and whatnot. I would suggest that some of that is already going on right now. There is certainly a great deal of cooperation between the U.S. and Canadian competition authorities. There is increasing cooperation with the Mexican competition authorities.
Senator Harb: If you were to compare the Canadian law as we have it now with that of the United States or other jurisdictions internationally, how would we rank?
Mr. Fina: You are in the vanguard. You are leading the charge. You are doing what I believe — and I say this as a liberal democrat — is in the best interests of a jurisdiction, of a country, by considering efficiencies on a broader basis than we consider them in the United States.
In the United States — and I do not want to say this in a denigrating sense — there is a great deal of lip service paid to the importance of efficiencies. Efficiencies are critical, important and we consider them. The U.S. competition authorities push the European Union very hard to move their standard from one of being neutral on efficiencies to considering efficiencies to be pro-competitive.
The movement and the evolution are clearly in that direction. I would say that you are leading the charge. I would submit that that is a good place to be. Canada does many things better than the United States. This is one of them.
The Chairman: We are constantly preoccupied in Canada generally, and this committee especially, in matters that deal with financial institutions and economic issues that have cross-border and international implications. Living next to the United States, Canada can take advantage of many wonderful things but it also must deal with the problems that come with that. We are a much smaller economy. Therefore, the challenges of our industrial strategy in terms of international competitiveness, particularly with your country, are a preoccupation for us in all of our policy issues.
Imagine that you are a Canadian lawyer practising your specialty in Canada and that you are advising us on policy issues. Would you say that your perspective as a Canadian with a smaller economy against a larger economy would be the same as you are recommending to us, or would it be different? Is this issue of efficiency more important for us as a smaller economy than it is for the U.S., or is it less important, or is there any difference?
Mr. Fina: Mr. Chairman, that is an excellent question. Putting myself in the shoes of being a Canadian competition lawyer, my view would be that in the United States, because the economy is so big that we can afford it sometimes not to accord efficiencies as much weight as they should be accorded. In the Heinz case, which is a case most people feel was wrongly decided, the market share of the dominant player went up. That is a mistake. That is something that the U.S. economy can absorb.
In a smaller economy and in an economy that has typically accepted higher levels of concentration in businesses, because you need to be competitive internationally, I argue that you have less room to err. I would argue that efficiencies should be treated — my position would be even stronger — as very important in Canada because it is not purely a question of providing the lowest price to Wal-Mart. It is a question of Canada being as competitive as it can be internationally with other economies.
The Chairman: We tend to talk about product-producing companies. We talked about Superior Propane and about Heinz because those are cases have been decided. Have you had direct experience in dealing with these issues in terms of the banking or financial industry? If so, is it your observation that the principles running through these issues are fundamentally the same? I know that is a leading question, but do you have any initial observations?
Mr. Fina: Mr. Chairman, I do not have much experience in finance or banking. I know that some consideration of revised guidelines is now being considered by the Bureau of Competition. I would argue that this is a universal principle that cuts across industries and that it is not purely specific to cases such as Heinz or Superior Propane.
Senator Massicotte: I agree with your comment. In many respects, Canada is much better than the United States.
From a technical point of view, you agree that the efficiency argument has merit. As the act is currently structured, it is a defence argument. The bureau must determine non-competitive behaviour and then the party may say, irrespective of that, the efficiency argument is greater than the pricing argument. If you are to rewrite that completely and say, I accept the argument of efficiency, is that the proper way to do so? Should the efficiency argument be considered as part of the total consideration to arrive at a decision as opposed to being a defence argument?
Mr. Fina: I would argue that, by making it a factor and not an affirmative defence, as the current statute in Canada does, you are, in effect, demoting the role of efficiencies and making the consideration of efficiencies less important. My advice, as a U.S. practitioner, to my U.S. counterparts would be that we should have a statutory defence similar to what Canada has, so that we do not lose socially beneficial mergers.
Senator Massicotte: To be clear, is this your opinion we are hearing or that of your law firm?
Mr. Fina: This is my personal opinion. I would venture to say that, from my contacts with colleagues, partners and other competition lawyers in the United States, I believe that most feel that efficiencies, not specifically the Canadian statute and proposed changes, are seriously short-changed in the United States and that needs to change.
Senator Oliver: This is a small bill that has come a long way quickly. I am interested to know how an international lawyer from Washington, D.C, accustomed to big cases, would have heard about this bill. Having heard about it, what would make you come all this way to speak to the bill and the effect it will have on the efficiency test? Why did you come?
Mr. Fina: I will answer those questions one at a time. I came here because I learned of the bill through some work that I was doing with some Canadian and U.S. colleagues. We were looking at the proposed merger guidelines coming out of Canada. Periodically, every 10 to 15 years, antitrust competition authorities throughout the world update and revise their merger guidelines to reflect current thinking. It was through that that I learned about the proposed legislation from a Canadian colleague.
With respect to why I came here, this issue is of some debate in the United States. I will not say that it is a painful subject, but it has the American bar exorcised. Time and time again, the U.S. agencies will say that efficiencies are important; that they factor them in; and that they want us to bring them our efficiency cases. Time and time again, as a U.S. practitioner, I will go before the Department of Justice or the Federal Trade Commission, the two agencies that enforce antitrust laws in the U.S. The efficiencies are, at best, a thumb on the scale, but only in extremely close cases. It is a matter of the discretion of agencies. In the judicial arena, which I think is lagging behind the agencies, courts routinely say that they have considered the efficiency defence and that they are not merger-specific because they are not extraordinary enough to overcome the structural presumptions — a 4 to 3 merger or a 3 to 2 merger. This is a highly significant topic in the United States, although we do not have any legislation pending. In the U.S., the statutes tend to be broader and the changes tend to occur at the agency level.
My interest was greatly piqued when I learned of the bill in Canada and I thought immediately that Canadians are doing the right thing; they are moving in the right direction. It would be a shame, from my standpoint as a U.S. competition attorney, to see a jurisdiction that is leading the charge and that is doing the right thing move in the opposite direction.
Senator Oliver: I have not read the Heinz case but I was interested in the way that you presented it to us today. You said that the court made a wrong decision and that it was wrong because the dominant carrier increased its market share. Why do you continue to say that it was the wrong decision of the courts? What if the Heinz senior management were not able to carry out what they had planned to do in the merger in increasing their market share? How can you blame that on the court if it were, in fact, a failure of the board or senior management in the merged company? Do you understand my question?
Mr. Fina: I do and it is a good question. It is one of speculation. What the parties in the Heinz case were trying to do was to take two weakened competitors. One had a great deal of capacity and a very modern plant but no brand recognition to speak of, and the other had great brand recognition but old plants where employees were working manually. The idea was to merge those two companies.
Senator Oliver: To enhance their market share.
Mr. Fina: Yes, to enhance their market share and to challenge the dominant company, Gerber.
There was a great efficiency story in this. It is particularly ironic that the government successfully blocked the transaction because they were afraid it would lead to less competition. In fact, by blocking the transaction, less competition has occurred. Heinz sold its business to a third party. Gerber, the dominant firm, has increased its share so that it has more pricing power and, ultimately, customers are worse off.
Senator Oliver: I understand now.
Senator Hervieux-Payette: If you need to change a law in the U.S., could we appear before you?
Mr. Fina: There are a number of laws that I would like to change in the U.S. I would be happy to share our president and our health care policy with you, too.
The Chairman: I take it there were no political overtones in the Heinz case that foresaw any of today's political scene.
Mr. Fina: No, there were not.
The Chairman: That was not a serious question.
Mr. Fina: It raises a serious issue, though, senator. Historically, the Democratic Party and the Republican Party disagreed on the antitrust enforcement. Today, in the last 20 or 25 years, there is consensus between the Democratic and Republican parties in antitrust enforcement. You do not see antitrust enforcement change materially from one administration or one party to the next.
The Chairman: If there are no further questions, I will adjourn this portion of the hearing with this witness. Thank you very much for coming. It has been a valuable, clear and interesting intervention.
Mr. Fina: I thank you and the committee very much for allowing me to appear.
The Chairman: We will continue our consideration of Bill C-249, to amend the Competition Act. Our next witnesses are Ms. Majewski and Mr. Clifford, who both represent the Canadian Chamber of Commerce. Welcome and thank you for coming.
I do not know how you wish to organize your presentation. Are you dividing it up? However you wish to do it is up to you. My main point is that we will have both of you present and then we will go to questions. It is just past 11:55 a.m. and I would like to work to our schedule of about 12:30 p.m., if we can.
Ms. Kasia Majewski, Policy Analyst, Canadian Chamber of Commerce: Honourable senators, thank you for inviting us today to speak to you on the subject of Bill C-249, to amend the Competition Act.
By way of introduction, the Canadian Chamber of Commerce represents roughly 170,000 businesses, both large and small and from all sectors across Canada. We also have a network of local chambers of commerce and boards of trade, roughly 350 of those, which are located in every province, territory and federal electoral constituency.
First, we would like to commend you on your previous decision, communicated in your letter of November 14 to the Minister of Industry, that this bill should be considered as part of the public consultation being undertaken in regard to other proposed reforms to the Competition Act.
The Canadian Chamber of Commerce believes that the Competition Act is a key piece of framework legislation that governs the full scope of business opportunities in Canada. Hence, it is crucial that reforms to this legislation are brought forward in the context of a thorough and open consultative process. That is the way we believe good public policy should be made.
I will now turn the microphone over to Mr. Clifford, who will make more detailed remarks on this bill on behalf of the chamber.
Mr. John Clifford, Counsel, McMillan Binch, Canadian Chamber of Commerce: Honourable senators, you have the Canadian chamber's submission on this bill, which was provided to you in October 2003. The chamber continues to believe that the efficiency defence is a vitally important part of Canada's merger review process, and that any changes should be made judicially, within the current process of reform of the Competition Act.
As you know, Bill C-249 proposes to amend section 96 of the Competition Act, which provides a so-called efficiency defence. Section 96 states that an anti-competitive merger, that is a merger that is determined to prevent or lessen competition substantially, should not be prohibited if the merger will result in gains in efficiency to the Canadian economy that are greater than, and offset the anticompetitive effects of the merger.
The intent of the Bill C-249 is to remove the efficiency defence from the act. Efficiencies, instead, would be considered as one of a number of factors in a merger analysis, without any particular weight or importance given to efficiencies vis-à-vis other factors in the Competition Act, section 93 in particular.
The amendment further instructs the Competition Tribunal and, thus the Competition Bureau, to consider only those efficiencies that are shown to benefit consumers, provided those efficiencies could not be attained in the absence of the merger.
Importantly, by using the word ``may'' instead of the word ``shall'' Bill C-249 suggests to the tribunal, and hence to the bureau, that it might consider efficiencies, but consideration of efficiencies is not mandated.
As we have stated in our submission, the Canadian Chamber of Commerce is not convinced of the merits of this bill. The chamber believes that the efficiencies defence in a merger review is a vitally important aspect of the act and that, overall, the amendments proposed to section 96 by Bill C-249 would result in the Canadian economy losing the important efficiency and productivity benefits that section 96 was designed to capture. Canada would, on average, be a poorer, less productive and less efficient economy.
Moreover, the Canadian Chamber of Commerce is concerned by the lack of open, public debate on Bill C-249. The Competition Act is an important piece of framework legislation that governs daily business activities on a variety of levels. It is not consumer protection legislation. It has an element of consumer protection or welfare, but that is not the primary goal of this legislation.
Recognizing that Canada is a very open economy with a smaller consumer base, section 96 was designed to capture benefits for the Canadian economy as a whole, which, absent such a defence, would be lost to Canada when certain mergers are prohibited by Canada's competition law regulators. In short, it is designed to help Canada create a more productive economy.
The efficiencies resulting from such a merger may increase the global competitiveness of the relevant industry sector by reducing duplication and allowing firms to engage in more efficient production. They may increase product quality or allow a firm to survive and continue to serve consumers in a region in which it is difficult to profit. That is the goal of section 96 as it exists.
This goal fits within the tradition of the Competition Act. Unlike the United States antitrust laws that are directed primarily at protecting and benefiting consumers, our competition legislation seeks to ensure that marketplace frameworks are in place to promote competition and the efficient operation of markets. This, in turn, will lead to benefits for all segments of society.
By enacting Bill C-249, the Senate would be indicating not only that efficiencies do not hold the central role that we believe they should in Canadian competition policy, but also that Canadian competition law should play a role in wealth distribution. Despite what you may have heard from other witnesses, this is a role for which Canadian competition law is not suited.
There are other mechanisms, for example the taxation system, which are better suited to wealth and income distribution. The Competition Act is best suited to maximizing total Canadian wealth — promoting the efficiency, productivity, adaptability, innovative potential, strength and size of the Canadian economy. That is to say, the act looks at the size of the entire pie, and the means to keep it growing, not to allocating the pieces. It is not and cannot effectively be a wealth distribution mechanism.
Efficiencies have been the subject of ongoing debate, however, because efficiencies are important. We believe they are so important that the treatment of efficiencies in merger review and other aspects of the Competition Act deserve more thorough consideration. It is not sufficient to study the existence of efficiencies in other jurisdictions; we need to draw conclusions about what is best for the Canadian economy.
In addition, a round of proposed reforms to the Competition Act is underway. Parliamentarians initiated this reform through a hearing held by the House of Commons Standing Committee on Industry, Science and Technology. According to the Government of Canada in its response to the recommendations of that committee, the hearings were part of an ongoing effort to amend the act. If the government is indeed committed to a thorough review of the Competition Act in order to build a competitive business climate conducive to innovation, it is inappropriate to leave efficiencies out of its review.
You may ask, as others who have appeared before you: Does resolution of the Superior Propane case in favour of the merger necessitate changes to section 96? We believer the answer is a resounding no.
The efficiency defence in the Competition Act is not a relic of the original legislation. It is not an outdated, antiquated section. Rather, section 96 itself came about through a process of reform that started with the introduction of Bill C-256 in 1971 and represented the result of long deliberations between various stakeholder groups. The legislative history and debate is summarized well by the Competition Tribunal in its reconsideration decision in the Superior Propane case.
It is also important to note that the efficiency defence has been applied very judiciously. Since 1986, when the merger provisions of the Competition Act were adopted, including section 96, there has been no case in which the Commissioner of Competition is on record as having decided not to challenge a merger because there were greater offsetting efficiencies.
Superior Propane is the only efficiencies case in the first 18 years of the existence of the merger efficiency defence. The case was hard fought by both the commissioner and the parties, in part because the commissioner's own position in the case was inconsistent with his merger enforcement guidelines.
Superior Propane has brought clarity to the rules relevant to establishing an efficiency defence, and it has begun the important process of building a body of case law on this section of the Competition Act. The Canadian Chamber of Commerce is of the view that section 96, as interpreted by the Competition Tribunal and the Federal Court of Appeal, while not entirely free from doubt, is workable, and that no amendment to the section is needed at this time.
We believe that the reason there have been so few cases based on section 96 is that mergers that not only lead to a substantial lessening of competition but also generate efficiencies that offset and exceed the lessening of competition, are quite rare. The Superior Propane decision will not change this. However, even if the existence of the efficiency defence as now understood under the Superior Propane interpretation did lead to such a wave of mergers, which were efficient, it is the submission of the Canadian Chamber of Commerce that Canada would be better off, because such mergers are beneficial to the economy and these mergers should be allowed to proceed.
If it is thought that an amendment to the act is required, a view with which we disagree, there is no urgency to make the amendment. Any amendment to section 96, or indeed any section of the Competition Act, should be the subject of careful study and analysis.
In fact, the House of Commons Standing Committee on Industry, Science and Technology made this very recommendation in the report that began the current reform process. In the plan to modernize Canada's competition regime, the committee recommended that an independent task force of experts be established to study the role that efficiencies should play in all civilly reviewable sections of the Competition Act, not just within section 96.
The amendments proposed by Bill C-249 represent a fundamental change in the consideration of efficiencies in any merger analysis. In essence, the defence would be abolished and the consumer-related efficiencies left as one of a number of factors to be considered by the Competition Bureau and Competition Tribunal.
Without wading into a lengthy discussion of the relative merits of a total welfare standard versus a consumer welfare standard, the Canadian Chamber of Commerce believes that a standard that recognizes both the needs of producers and consumers is most appropriate. Such a fundamental policy change should only be made after careful consideration and discussion, which has not occurred.
In summary we believe that the Bill C-249 should not be enacted. Amending section 96 of the Competition Act, as proposed, suggests that maximizing the efficiency and strength of the Canadian economy is not a fundamental goal of the act. The chamber's view is that the amended Bill C-249 would reduce the value of efficiencies, as they will have minimal relevance in a merger analysis.
We recommend that the government pursue its commitment to study the role of efficiencies in mergers and engage in full consultations with all stakeholders on this important and complex issue.
Mr. Chairman, thank you again for this opportunity to speak. Ms. Majewski and I would welcome any questions at this time.
The Chairman: Thank you very much.
Senator Massicotte: Thank you very much for your presentation and taking the time to appear before us and explain your view.
I will ask you to help educate me to better understand the efficiency argument. Your presentation, at the top of page 4, states that the efficiency argument will promote efficiency, productivity, adaptability, innovative potential and strengthen the size of the Canadian economy. In other words, you take the word ``efficiency'' and you interpret it to mean that it is for the overall good of Canada. I do not understand this.
Quantification of the anticompetitive effect versus efficiency is based on site-specific efficiency. They say that the number is greater than the effect of the price increase if it exceeds 5 per cent. From an economic sense, explain to me, if you can, how the efficiency argument becomes so broad in order to say that something is good for the economy, adaptability and innovative potential?
Mr. Clifford: I am not an economist but I am a lawyer who has practised in this area for about 15 years and has thought about efficiencies in merger analysis.
When clients come to us and propose a merger, we have to think about the likely competitive effects of the merger. We take a look at what the result will be when you put these two companies together, and our views are influenced heavily by economic thinking on how you measure the likely results of a merger in order to determine whether or not the merger might lessen competition substantially.
There is a theoretical way to measure that lessening through a comparison of price effects. For example, one of the ways to approach it is: If this merger were to be consummated, would prices increase by a material amount such that the price increase will not be disciplined away by new competition over the next two years? That is generally the test. We also look at some softer things: qualitative factors, changes in service levels, and how the merger impacts the structure of industry generally.
Then you overlay that with an analysis of what efficiencies might result from this transaction. Business people and economists do not focus on whether the efficiencies are applicable only to a particular segment of the economy. They step back and say, ``If you combine these two companies, there will be a number of efficiencies that might result either because you reduced fixed costs, you have production efficiencies, or you bring together two complementary research teams that will result in some innovative efficiencies.'' As well, there may be something as simple as — and I know you have talked about the Superior Propane case — going from two delivery trucks down to one, basic production efficiencies.
Then you try to measure the value of those efficiencies. To weigh the value of efficiencies against the anticipated substantial lessening of competition is a bit of an apples-and-oranges comparison. You have to rely heavily on economists and economic thinking to try to ascribe a value to the total efficiency gain. Some are easy to measure while others are less easy to measure. At the same time, you ascribe a value to the lessening of competition. There may be price effects and other things, but you try to put numbers against them and then draw a comparison.
Senator Massicotte: Some people have suggested that that calculation is so complex and so theoretical that a company will not want to go through the process because it will take a long time, the company does not know what the result will be, and it is very difficult to predict the outcome. Do you share that opinion?
Mr. Clifford: I share the view that it can be complex. Some industries are more complex than others. In some cases, it is very straightforward. It depends on what particular transaction you are looking at and what industry you are engaged in.
Even determining whether a merger might substantially lessen competition without regard to whether there are efficiencies that might save that transaction can be a complex consideration. It can require value judgments that business people and their informed counsel and economists have to make, based on the facts as they understand them. At the end of the day, there are very well known and understood theories that we apply to facts and try to make informed decisions. Yes, it is complex, but it can be done.
Senator Massicotte: If you buy into the efficiency argument, it should remain a defence if you were to restructure the proposed amendment, or would you make it a factor to be considered in the whole argument of whether it is anticompetitive, but make it a factor in deciding whether it is good for Canada or not?
Mr. Clifford: I think making it a factor reduces the importance of efficiencies to such a fundamental degree that efficiencies will never be given sufficient weight, that transactions that result in greater efficiencies would be allowed to proceed. I think unless efficiencies are clearly a defence to a potentially anticompetitive merger, then efficiencies will be relevant at best on borderline cases, to save the borderline case, but I think there is a huge risk that efficiencies that do offer great benefits to the economy will not be approved.
Senator Tkachuk: This efficiencies argument as it relates to a reduction of one truck is intriguing to me. Efficiency is measured by what it costs to produce something. You take all the input costs and say, here is what it costs to produce that, or for this company to produce that. Then, it may, through some efficiency measures, reduce that cost, therefore, making more profit, which it then distributes to its shareholders, pays to the tax department or else it passes it on to consumers in lower prices.
All of the discussions that we have had here from all of the witnesses have measured various costs, which has nothing to do with efficiencies if at the end it costs just as much money to make that product. It is not any more efficient unless it costs less money to make that profit. It is not more money. Should that not be the real measure? It should not be complicated. The business has to show how it can produce the same product or provide the same service for less cost and then the question is: Shall it pass it on to the consumer? The only way it will pass it on to the consumer is if there is competition. If there is no competition, it will keep it in its pocket because why would it pass it on to the consumer? What does that have to do with the total net gain to the economy? What is the difference?
Mr. Clifford: The difference is that, when you are looking at the total net gain to the economy, as I understand it, you do look at and factor in the cost savings, as you have articulated, through production efficiencies, without regard to whether or not those savings are passed through to consumers.
When looking today at a merger that might be completed two months from now, and thinking about what the result will be on efficiency and operations going forward one, two or three years from now, is crystal-ball gazing. It is difficult to predict what those efficiencies will be, although business people typically have a good idea and they have an incentive to ensure they maximize those efficiencies. It is difficult to be able to predict today, in fact I would suggest next to impossible to predict today, whether those efficiencies will be passed through to consumers and if so what portion of the efficiencies will be passed through. You could recognize that with hindsight and see how business has conducted itself, but it is very difficult to predict.
Senator Tkachuk: Would you not use economic theory to predict that?
Mr. Clifford: Economic theory will give you the theoretical outcome, and that is clearly how we do it.
Senator Tkachuk: If there is only one grocery store in Saskatoon, I guarantee you prices will be higher than if there are ten.
Mr. Clifford: What you do not know is whether the prices will be higher by 10 cents or 20 cents. You do not know what portion of those efficiencies will be passed on.
Senator Tkachuk: They will go as high as they can get without the consumer going to Regina to buy cheaper groceries. Economic theory will tell you that. How can you use an efficiency argument as in Superior Propane? What I do not understand about that argument is how they could sell it to someone and say it is good for the economy when, in reality, it creates a monopoly?
Mr. Clifford: If those efficiencies are achieved, there is benefit to society at the producer level to have those efficiencies recognized, even though those efficiencies are not passed through to consumers. With respect, I believe your question presumes that an efficiency is only valuable if it reaches the consumer. An economist will tell you that is not in fact the case. You should look at total producer efficiencies, consumer efficiencies and the total welfare approach — look at the entire pie without thinking about how the pie is divided.
Ms. Majewski: There is another issue we need to consider. There has only been one case and it is hard to keep that case out of mind when we talk about amendments to the efficiency defence. Not every merger that would come before the tribunal or the commissioner, speaking about efficiencies, would necessarily be a merger to a monopoly. It could be a merger between two small firms in, say, a small market, not a market as large as a province, but some sort of sub- provincial regional market.
Senator Tkachuk: Alternatively, it could be two banks trying to convince us that, by getting together and making more money and charging more, it would be good for the economy, which is what they would be doing with the efficiency defence. They will say, ``It will cost us less, we will make more money and we will charge everybody more.'' Is that not what it is all about?
Mr. Clifford: It is not necessarily the right conclusion that they will charge you more.
Senator Tkachuk: I think they will.
Mr. Clifford: If efficiencies result from a merger, those cost savings can be used in other parts of an entity's business to benefit other parts of the economy. It may allow them to grow or to become more international. They can do other things.
Senator Tkachuk: Economists also say that a dollar in the hands of a corporation or in my pocket is a dollar. My choice in spending that dollar is just as important to the economy as the Royal Bank of Canada spending money. They do not say it has more value because the Royal Bank of Canada spends the money. It is the same thing.
What does it do for the economy having more money in the hands of the corporation than in my pockets and I was spending the money. What is the difference?
Mr. Clifford: If I understand your comment, an economist would say there is no difference. There is savings. It may be a dollar in the hands of the producers. It may be a dollar in the hands of a consumer. The important thing is that there are recognized savings without regard to whether a dollar in the pocket of the consumer has more value than the dollar in the pocket of the producer.
Senator Massicotte: I am a bit confused with this argument.
In the example used, the banks merged and we presumed that all they did was increase the price of services. Therefore, they would make a greater profit. Am I correct in understanding that in that case there is no efficiency argument? It is simply a transfer of wealth from the consumer to the shareholder. There is no efficiency argument; therefore, it could not work.
Senator Tkachuk: Unless they use it.
Senator Massicotte: They will use it, but the consumer would use it also. Am I correct in saying that it is a zero efficiency argument in that case? Simply consolidating and charging higher prices has zilch value. Am I not correct in saying that?
Mr. Clifford: I think you are correct.
Senator Massicotte: You are not sure though.
Mr. Clifford: The impact of the merger on prices is a separate inquiry from whether there are efficiencies. Assume two banks came together. Banks have a wide range of business lines. You look at various lines in which they are involved. You think about the impact on the industry — for example, in retail banking or aggressive banking — of combining these two banks. You would have regard to the fact that there are two or three other banks still remaining in those business lines. You need to assess whether the combination of those two banks will result in a substantial lessening of competition. That could mean a price increase. That is one element of it.
On the other side of the ledger, irrespective of whether there is a lessening of competition that is substantial, are there efficiency gains? What gains in efficiencies might result from this culmination of these two banks and their business lines? You try to compare those two.
Senator Massicotte: The example was two banks merging. Let us presume that they hold the same number of branches. With the increased market power, they could increase pricing. That would mean zero efficiency. Therefore, the tribunal would not allow that; is that correct?
Mr. Clifford: That is correct.
Senator Massicotte: The shareholder having a dollar more has no merit; the consumer has one dollar less.
Mr. Clifford: That is right.
The Chairman: The committee has been having some difficulty with this issue. We have spent a lot of time on it. Obviously, it is not simple.
This last discussion points to something for me on which I would appreciate your comment. We keep getting involved in policy and the technique of executing that policy. The lines between the two are blurred, which is why I found your comments in point 12 on the bottom of page 3 interesting. The thought is clearly raised by you.
Let us understand what this bill is about and, perhaps even more important, understand what it is not about. Your point is that we should be clearer on our expectations. You say that we should not look to this act as a method of wealth distribution. I think this is part of the problem.
What is policy, and what is a means of achieving that policy? That has been part of our difficulty. We have been drawn in by many of our witnesses into detailed economic analysis and technical legal arguments.
It seems to me that you are trying to define the policy objective of this act more narrowly. You are saying that the rest of it is about how you execute that policy.
Mr. Clifford: That is an excellent question, senator, and I agree with the comment. In the view of the Canadian Chamber of Commerce, and I share this view, our competition legislation should have as a cornerstone the goal of achieving maximum efficiency in our economy and ensuring in all aspects of competition law enforcement that steps are not taken by those charged with the responsibility to enforce the legislation that would prohibit or lessen the importance of efficiency gains to the economy.
Section 96, which was the result of years of discussion and debate, gives the greatest weight to efficiencies when considered in the context of a merger. It allows the Competition Bureau and the Competition Tribunal to consider all efficiencies that might result from a merger. It also mandates that a merger, even if anticompetitive, should not be blocked if the gains to efficiency, as a whole, outweigh the anticompetitive effects.
That is the underlying policy that we think will be changed by this bill in two respects. First, by making efficiencies a factor instead of a defence, you send a signal that efficiencies are less important and less fundamental. This bill says that efficiencies should be considered, along with the other factors. That is in the proposed section 93. There is no relative weight to be accorded to efficiencies versus these other factors in a merger analysis. It waters down the importance of efficiencies. Second, it permits efficiencies to be considered only if it can be shown that those efficiencies will benefit consumers and those efficiencies cannot be achieved other than through the merger.
Those two qualifying factors make it difficult to be able to meaningfully rely on this provision as factor to ensure that an efficiency-enhancing merger can be completed. We believe it represents a fundamental policy change.
The Chairman: That is summed up in your statement that the act looks at the size of the entire pie and the means to keep it growing, not at allocating the pieces.
Mr. Clifford: That is correct.
We recognize that this is framework legislation. There has been great evolution of economic thought since the act was substantially amended in 1986 to implement the merger provision and other provisions. Decisions made by our Competition Bureau and Competition Tribunal are heavily influenced by economic thinking and economists, quite appropriately. The economic thinking and the economist approach inform and help us to recognize that it is the total efficiencies that really matter. We should be focusing on that.
As framework legislation, we should not tinker with it lightly.
The Chairman: Thank you very much. We appreciate you coming and the clarity and effectiveness of your report.
The committee adjourned.