- SCC Undoes the Competition Tribunal and FCA Decisions in Tervita
- February 26, 2015
- Law Firm: McCarthy Tetrault LLP - Toronto Office
The highly anticipated judgment of the Supreme Court of Canada (SCC) in Tervita Corporation, et al v Commissioner of Competition is finally here (leave was granted back in July 2013 and argument heard in March 2014). Many expressed concerns about potential problems arising from the Tribunal and Federal Court of Appeal (FCA) decisions in this case, including greater complications and less predictability in merger assessment and the reach of the Bureau, regardless of the size of the merger. The SCC decision seems to have brought some clarity and addresses the central problematic aspects of the underlying decisions.
As anticipated, the SCC confirmed the proper analytical framework to apply to the “prevention” branch of s. 92(1); the seven justices were unanimous on this point. A majority of the SCC (six of seven justices) also confirmed the proper approach to the “efficiencies defence” set out in s. 96 (with Karakatsanis J. in dissent). The SCC did not in any way restrict the scope of the Bureau’s power to review and undo mergers of any size, but it did comment briefly that this case (dealing with competition on a local scale) did not appear to reflect the policy considerations Parliament likely had in mind in in creating the efficiencies defence; although the current wording of the statute did support finding the defence was available in this case.
Overall, this decision is important because it: (i) should reduce complications in assessing competitive effects of mergers, since there cannot be any speculation about the future; and (ii) returns an objective standard to the efficiencies defence, making it more predictable. While the SCC did not comment on the remedy of divestiture vs unwinding of transactions, divestiture may remain the more likely order, given the comments of the Tribunal and FCA in that regard.
Brief Background - Decisions of the Tribunal and FCA
Tervita was an appeal from a divestiture order of the Competition Tribunal in regards to the acquisition of a hazardous waste disposal site. Tervita owned and operated two hazardous waste landfills in Northeastern BC. In 2011, it sought to acquire a third site, which would have given it three of the four permits for the operation of hazardous waste landfills in that area. Despite the fact the merger price was only about $6 Million (far below the limit for notifiable transactions), the Commissioner of Competition opposed the transaction on the basis that it was likely to substantially prevent competition in secure landfill services in that area.
The Competition Tribunal found the merger was likely to prevent competition substantially in the relevant market. It also concluded that the efficiencies exception in s. 96 of the Act did not apply. The Tribunal ordered Tervita to divest itself of the newly acquired site; the Commissioner’s request for unwinding was found to be an intrusive and overbroad remedy when divestiture was available and would be effective.
Tervita’s appeal from the Tribunal’s order was dismissed by the FCA in 2013. The FCA agreed with the Tribunal’s analytical framework and decision on prevention of competition, but found its methodology for the efficiencies defence was overly subjective. In any event, however, the FCA’s own application of the efficiencies defence in a more “objective” manner still concluded that it did not succeed on the facts of the case.
SCC: The proper framework for “prevention” merger reviews under s. 92 of the Act
Rothstein J. (writing for the entire Court on this issue) confirmed that a forwarding-looking “but for” market condition analysis should be used to determine if a merger gives rise to a substantial prevention of competition under s. 92(1). This involves a two-stage analysis: (i) identify the potential competitor - the firm(s) the merger would prevent from independently entering the market; and (ii) determine whether, “but for” the merger, the potential competitor (usually one of the merging parties) would have likely entered the market and, if so, whether that entry would have decreased the market power of the acquiring firm, i.e., had a substantial effect on competition. At the second stage of the analysis, the Tribunal should consider evidence of any factor that could influence entry, including those in s. 93.
Rothstein J. clarified that the timeframe for likely entry must be discernable, so there must be evidence of when the potential competitor is realistically expected to enter the market (in absence of the merger) , assessed on balance of probabilities. It was emphasized that the further into the future the Tribunal looks, the more difficult it will be to meet the test and that there should be no effort to look farther into the future than the evidence supports - speculation is improper and mere possibilities are insufficient to meet the standard - nor should the Tribunal or courts try to make future decisions for companies.
In the present case, it was found that the Tribunal’s analytical framework and conclusion that the merger was likely to substantially prevent competition was correct. The Tribunal properly used a forward-looking “but for” analysis, did not speculate and made factual findings based on abundant evidence.
SCC: The proper approach to the s. 96 efficiencies defence
Rothstein J. (writing for the majority of five as well as Abella J.) explained that the s. 96 efficiencies defence is a balancing test, requiring analysis of whether the quantitative and qualitative efficiency gains of the merger outweighs the anti-competitive effects. The Tribunal has flexibility to choose which methodology should be used in light of the particular circumstances of each merger. However, the approach should be objectively reasonable, quantifying all effects that are realistically measurable and ensuring that the estimates provided are grounded in the evidence. This will minimize the degree of subjective judgment necessary in the analysis so the Tribunal can make the most objective assessment possible. In addition, it was held that: (i) not all economic efficiencies should be taken into account, e.g., efficiencies resulting from the regulatory process; (ii) consideration cannot be given to the existence of a monopoly per se as opposed to its effects; (iii) environmental effects that have economic dimensions may be considered; and (iv) more than marginal efficiency gains should not be required for the defence to apply, as that would require an overly subjective analysis.
In this case, the majority found that the Commissioner failed to meet the burden under s. 96 by failing to quantify certain quantifiable anti-competitive effects, resulting in the quantifiable effects being assigned a weight of zero. The FCA improperly allowed subjective judgment to overtake the analysis when it weighed undetermined effects based on a rough estimate. This did not meet the requisite objective standard and also raised concerns of fairness, putting the parties in an impossible position because they would not know the case they have to meet). The FCA also erred in holding that an anti-competitive merger cannot be approved if only marginal or insignificant gains in efficiency result. Here, there were some efficiency gains established and so the efficiencies defence was made out.
Karakatsanis J., in dissent on this issue, did not agree with the majority that “reasonable objectivity” required qualitative effects to be treated as less important than quantitative effects, that failure to quantify quantifiable anti-competitive effects means such undetermined effects become irrelevant or invalid or that a court cannot find efficiency gains are too marginal. Overall, she could not agree that Tervita was entitled to the benefit of the efficiencies defence in this case.
SCC: The Competition Tribunal must be Correct, not just Reasonable
As a final note, Rothstein J. confirmed (for the majority of five as well as Karakatsanis J.) that the standard of reasonableness, which presumptively applied given the issues were questions of law under the Tribunal’s governing statute, did not apply in this case given the statutory language granting the right of appeal in the Act. Rather, the less deferential standard of correctness was required on questions of law. This has been the consistent finding of the FCA in other cases.
Nonetheless, Abella J., in partially concurring reasons, raised concerns about the majority’s finding that the correctness standard applied. In her view, the presumption of reasonableness should apply regardless of the legislative wording since statutory wording alone is not determinative of the applicable standard of review. She described this as “a reversion to the pre-Pezim era”, bringing confusion back to the analysis and “chipping away” or eroding the long-standing deference given to specialized tribunals. Nonetheless, she found the Tribunal’s interpretation of s. 96 was unreasonable, so concurred in the result.