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INTRODUCTION

On January 31, 2003, the Federal Court of Appeal ("FCA") released its second decision in the Superior Propane Case.1  The FCA upheld the Competition Tribunal's decision allowing the merger of Superior Propane and ICG Propane based on Canada's so-called efficiencies defence. This defence permits a merger to proceed where the merger creates efficiency gains that will be greater than and will offset its anticompetitive effects.

The Superior Propane Case is now Canada's leading competition law merger case. It is also the first case in which the efficiencies defence was successfully relied upon. Its strategic implications for Canadian businesses are significant. Every merger between competitors in which efficiencies are created will need to have regard to the principles in this case. In addition, we increasingly see industry structures in Canada with one or two large entities competing with a number of smaller (and often new) entities (e.g., air transportation, book retailing and, now, propane). If this trend continues in other sectors, the Superior Propane Case provides a blueprint for achieving this type of market structure through merger. Because of its importance, we explain the case in detail below.

BACKGROUND

Superior Propane agreed to acquire rival ICG in July 1998. At the time, the two companies were the largest national distributors of propane. In December 1998, the Commissioner applied to the Tribunal for a preliminary injunction to prevent the transaction from closing. The Tribunal refused to grant the injunction and the parties consummated the transaction. However, pending final disposition of the matter by the Tribunal, the Commissioner and the parties entered into a "Hold Separate" arrangement, whereby the parties agreed to operate the businesses as separate entities?although both would be owned by the Superior Propane Income Fund.

Tribunal Hearing #1

After a long initial hearing, the Tribunal released its decision on August 30, 2000, allowing Superior and ICG to merge and integrate their operations. In its decision, the Tribunal applied the efficiencies defence based on the economic interpretation set out in the Commissioner's Merger Enforcement Guidelines, known as the "total surplus standard." This standard only considers the economic effects of a merger in balancing economic efficiencies against anticompetitive effects. The total surplus standard ignores non-economic factors such as wealth transfers from consumers to the merged company that would result from higher post-merger prices.

FCA Appeal #1

The Commissioner appealed the Tribunal's initial decision to the FCA. On April 4, 2001, the FCA held that the Tribunal had incorrectly applied the efficiencies defence by relying on the total surplus standard as a matter of law. The FCA remanded the case to the Tribunal to reconsider the effects component of the efficiencies defence.

In remanding the case, the FCA held that the interpretation advocated by the Commissioner, referred to as the "balancing weights approach," was more reflective of the objectives of the Competition Act than the total surplus standard. According to the FCA, the balancing weights approach would require the Tribunal to consider the effects of a merger based on a range of factors, such as deadweight loss (i.e., resource losses to the economy), socially adverse effects on consumers, loss of product choice and services, the creation of a monopoly, and the impact on small and medium-sized businesses. The FCA contemplated that the Tribunal would then assign different weights to these factors on a case by case basis, depending on the judgment and discretion of the individual members of the Tribunal and based on the evidence introduced in any particular case.

Tribunal Hearing #2

On April 4, 2002, the Tribunal released its redetermination decision, which applied a modified version of the balancing weights approach. The Tribunal again upheld the merger, but this time on the basis that even under this new approach, the efficiency gains from the merger were still greater than and offset its anticompetitive effects. The Commissioner again appealed to the FCA.

FEDERAL COURT OF APPEAL'S SECOND DECISION

On January 31, 2003, the FCA released its second decision, dismissing the Commissioner's appeal. The primary issue in this appeal was whether the Tribunal had followed the directions given by the FCA in its first decision.
The majority of the FCA concluded that the Tribunal had prima facie followed its directions:

The Court left it to the Tribunal to decide upon the methodology for determining the extent of anti-competitive effects of the merger. The Tribunal did not restrict itself to the total surplus standard. The Tribunal used, as a foundation for its methodology, the balancing weights approach of Professor Townley and had regard to the purposes in section 1.1 of the Act. It considered the evidence and placed the onus of proving anti-competitive effects on the Commissioner. Prima facie it followed the directions given to it by this Court.

1. The main questions considered by the FCA in this appeal were:
2. whether the Tribunal should have included the entire amount of any consumer wealth transfer as an anticompetitive effect;
3. whether the Tribunal had properly considered the qualitative effects of the merger;
4. whether the Tribunal had adopted an overly restrictive analysis of the effects of the merger on small and medium-sized businesses;
5. whether the Tribunal had erred in refusing to consider the creation of a monopoly as an anticompetitive effect per se; and
6. whether the Commissioner had the onus of proving the extent of the anticompetitive effects.

The FCA found as follows on these issues:

• The Tribunal was correct in not including the entire wealth transfer as an anticompetitive effect of the merger.

The FCA accepted the Tribunal's reasons for not including the entire wealth transfer. The FCA recognized that, if the Tribunal had to include the entire wealth transfer as an effect under the balancing weights approach, the Tribunal would be deprived of the "discretion necessary to deal with the impact of a merger on different socio-economic statuses of consumers and shareholders of a merged entity."

In other words, requiring the Tribunal to always include the entire wealth transfer as an effect in the efficiencies trade-off would essentially deprive the balancing weights approach of the very flexibility the FCA believed it was designed to facilitate.

The FCA also held that, since the FCA originally left it to the Tribunal to select the appropriate methodology, the Tribunal had acted within its discretion when it adopted the "socially adverse effects approach" (i.e., it counted only the higher prices paid by low income households against the merger).

• "The Tribunal properly considered qualitative effects.

The Tribunal acknowledged in its redetermination decision that all types of effects had to be considered even if they could not be quantified. However, the FCA did not object to the Tribunal requesting quantification of qualitative factors, even rough estimates, where possible, so that it could make the most objective judgment.

• The Tribunal was correct in its view of the effect of the merger on small and medium-sized businesses.

Regarding the Tribunal's view of the effect of the merger on small and medium-sized businesses, the FCA agreed that this turned on the lack of evidence adduced by the Commissioner that the merger would deny small and medium-sized businesses an equitable opportunity to participate in the Canadian economy.

• The Tribunal was correct in not considering the creation of a monopoly as an anticompetitive effect per se.

The FCA held that the creation of a monopoly is not an anticompetitive effect per se to be weighed against efficiency gains. Instead, it is the effects of the creation of a monopoly that must be considered?something the Tribunal did, in fact, take into account. The FCA accepted the Tribunal's conclusion that many of the harms of monopoly were already counted in the original determination of whether the merger was likely to substantially lessen or prevent competition. The FCA held that to consider these effects again under the rubric of monopoly would be to double count them.

On this basis, the FCA agreed that, for any additional effects of a monopoly to be taken into account, there must be evidence that such additional effects had not already been counted. In this case, there was no such evidence.

• The Commissioner has the burden of proving socially adverse effects.

The FCA ruled that the Commissioner has the burden of proving the extent of all the anticompetitive effects, including the socially adverse portion of higher prices. He must therefore adduce evidence that the merger has socially adverse effects on, for example, lower income consumers.

Dissenting Opinion

In his dissenting opinion, Letourneau J.A. agreed in substance with most of the findings of the majority, except as they related to the creation of monopolies. The dissenting judge would have required divestitures in all monopoly markets. More specifically, the dissenting judge expressed the view that the possible creation of a monopoly (i.e., a 100% or near 100% market share) is the ultimate adverse anticompetitive effect, which renders the efficiency defence inoperable. This conclusion, however, seems to contradict subsection 92(2) of the Competition Act, which explicitly prohibits the Tribunal from blocking a merger solely on the basis of market share.

IMPLICATIONS

The major implication of this decision is that it maintains a viable, although somewhat complex, efficiencies defence in Canada. The complexity stems from the fact that the approach taken in any given case may vary, depending on the composition of the Tribunal and the methodology it chooses to apply. Of critical importance is that the Tribunal must consider effects based on the facts and evidence in each case-it must refrain from making findings that apply as a matter of law to all cases. In this case, the Tribunal applied what is now known as the "socially adverse effects test," which the FCA accepted.

Following the decision, Canadian merger law now involves a four step approach:

First, the Commissioner must prove that a merger is likely to prevent or lessen competition substantially. If the Commissioner fails here, the parties can proceed with the merger.

Second, (assuming the Commissioner succeeds in Step One) the parties must show the efficiencies that would not be achieved if an order were made blocking part or all of the merger. The efficiencies must be merger-specific, i.e., the efficiencies must be attainable only through a merger and not by some less anticompetitive means.

Third, the Commissioner must show the extent of the anticompetitive effects of the merger, including its socially adverse effects and the weight to be applied to these effects.

Fourth, the parties must show that the efficiencies are greater than, and compensate society for, the proven anticompetitive effects.

The Tribunal will consider both quantitative and qualitative efficiency gains and anticompetitive effects; however, where effects and gains can be quantified (even through rough approximation), they must be so quantified or they will be given little weight.

That being said, the issue of efficiencies in Canadian merger law has not been completely settled. The Commissioner could seek leave to appeal to the Supreme Court of Canada. It is also unclear whether the statutory efficiencies defence will be amended. Already, there have been indications that Canada may see amendments, such as those introduced in private member's Bill C 249 (formerly Bill C 248), regarding the manner in which specific efficiencies are treated in merger cases.

In the meantime, however, there is now a useful precedent for mergers between competitors - even dominant ones - to guide businesses and practitioners in evaluating merger scenarios as Canada's markets adapt to increased global and domestic pressures for efficiency and profitability.
 
The purpose of this document is to provide information as to developments in the law. It does not contain a full analysis of the law nor does it constitute an opinion of Ogilvy Renault or any member of the Firm on the points of law discussed.

1. Ogilvy Renault was part of the legal team representing Superior Propane Inc. in this matter.

For further information, please contact one of the following competition/antitrust lawyers.

©OGILVY RENAULT 2003 - All Rights Reserved

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