BUSINESS

Ottawa’s cautious competition bill

Linda McQuaig July 18 1983
BUSINESS

Ottawa’s cautious competition bill

Linda McQuaig July 18 1983

Ottawa’s cautious competition bill

BUSINESS

Linda McQuaig

The timing could hardly be more appropriate. With the federal government expected to introduce its long-awaited competition bill next fall, a recent rash of corporate mergers threatens to reduce further the ever-dwindling level of competition in the Canadian marketplace. Some federal officials are alarmed at the prospect of further concentration of the nation’s economic power, but they say that there is little they can do about it under the current ineffectual competition laws. Yet, with Canada’s competition laws among the weakest in the Western world and its economy among the most concentrated, Ottawa is now poised to back away from earlier plans to bring in tough new legislation. And it plans to let the cabinet override merger rulings made by an independent tribunal charged with overseeing the laws.

Under current laws, companies involved in mergers that reduce competition can be prosecuted. But there has only been one successful prosecution in Canadian history. (In that case the conviction was obtained only after the company, Electric Reduction Co. of Canada,

pleaded guilty in 1970.) The task of reforming the laws has been difficult largely because of intense opposition from the business community. Since the federal government first indicated in 1966 that it wanted to revise the laws, business has kept up a barrage of stren-

uous objections. Roy Davidson, former senior deputy director of the federal bureau of competition policy, recalls the “tidal wave of opposition” to the first proposals for change in 1971.

Some changes were introduced in 1975, but the more contentious items were postponed. The government made several more tries. Then, in a discussion paper circulated to interested groups in April, 1981, it outlined proposals for tightening the key merger, monopolization and conspiracy sections. But a hos-

tile business reaction sent the government back to the drawing boards once again. By September that year André Ouellet, minister of consumer and corporate affairs, informed the Calgary Chamber of Commerce that the newly revised legislation would contain “a number of pleasant surprises” for business. Those surprises are contained in a milder bill, yet to be tabled, which the government now hopes business will find more acceptable.

The government has also taken the unusual step of actually showing parts of the draft legislation to a select group of business representatives. The fiveman group includes members from the Canadian Chamber of Commerce, the Canadian Manufacturers’ Association and the Business Council on National Issues (BCNl), a low-profile but powerful lobby that represents such blue-chip corporations as Stelco Inc. and Bell Canada. After more than a decade of fierce opposition, business now appears relatively content with the government’s milder prescription for competition policy. Says Tom d’Aquino, president of BCNl: “We’re generally pleased with the way they’re thinking.” That view is echoed by CMA spokesman Doug

After years of wrangling, Ottawa has allowed business a major say in the rules that will govern commerce

Montgomery, who points out that, while government leaders have always listened to business, “they’re listening more intently now.”

The keen attention is part of Ottawa’s new attempts to woo the business community. D’Aquino compares the cooperation to the business-government consultations that preceded Finance Minister Marc Lalonde’s pro-business budget last April. D’Aquino gives Lalonde 10 out of 10 for that consultation and hopes this round will be as fruitful.

The coziness disturbs the 150,000-member Consumers’ Association of Canada (CAC), a longtime proponent of tougher competition laws. Specifically, the consumers’ group is angry that it does not have access to the draft bill and is excluded from the closed-door sessions in which business representatives and government officials are reviewing the legislation.

The CAC’s David McKendry argues that consumers have a strong interest in seeing that Ottawa enacts tougher competition laws, since that is the only way to prevent large firms from Competition gaining control of markets and raising prices arbitrarily. Adds Davidson, former deputy head of the federal competition bureau: “That’s the way the free enterprise system works—you’re under constant pressure to offer a better deal to your customers. It’s not surprising business people do not like it too much.”

One business sector that does favor competition—and would like to see more—is small business.

It suffers if a few large firms gain control of a market and use their power to squeeze out competitors, says Jim Conrad, executive director of the Canadian Federation of Independent Petroleum Marketers.

“It really boils down to whether you want a few large firms or a number of smalland mediumsize firms.”

Throughout the debate over competition laws in the past decade, economic concentration proceeded at a rapid pace. The number of mergers almost doubled

in Canada, from 264 per year in 1975 to 511 in 1979. Some dramatic acquisitions caught national attention in the late 1970s—among them the Bay’s takeover of Simpsons, and the ThomsonSoutham newspaper deals that eliminated competitors in three major cities. After a relative lull during the recession, the urge to merge is back again, notably in the forest products and housing industries. While some mergers arguably benefit the economy by creating more efficient businesses,

the rash of takeovers in the past few months offers no benefit, according to Lawson Hunter, director of the bureau of competition policy. “We are certainly seeing a number of acquisitions in Canada that give us cause for considerable concern,” he said.

The gradual weakening in the past decade of Canada’s competition laws seems to have accelerated this trend toward increased concentration. While Canadian laws have never been as tough as U.S. regulations, for instance, they were rendered considerably less potent following a series of Supreme Court decisions since the mid-1970s. Hunter wryly comments that it “would be hard to do something about merger law and not make it better.” The strongest blow to the merger law came in 1976, when the Supreme Court of Canada overturned a merger conviction

against New Brunswick industrialist K.C. Irving.

The court ruled that even though the acquisition of five newspapers gave Irving control of all the province’s Englishlanguage dailies, the Crown failed to prove that this was detrimental to the public—an essential part of the current law. Part of the problem arose from the fact that the merger provisions are criminal law and therefore guilt must be proved beyond a reasonable doubt, a much higher standard of proof than that required under civil law. After the Supreme Court concluded that not even

the ownership by one man of all the province’s English newspapers could be shown to be detrimental beyond a reasonable doubt, many experts concluded that few mergers would meet this test. Hunter believes that many of the mergers since the Irving decision were undertaken by companies operating under the assumption that the law could not affect their actions.

Under the proposed new merger laws, it will not be necessary to prove that a merger is detrimental to the public. Instead, the Crown must prove that the effect of the merger is to lessen competition substantially. (Companies would be allowed to argue in their defence that the merger increased their efficiency.) More important, mergers would no longer be subject to criminal law but would be incorporated into civil law and decided by the Restrictive Trade Practices Commission (RTPC), a government-appointed tribunal which would have the power to approve or prohibit mergers. (Charges of monopoly that would in future come under the heading “abuse of dominant position” would also move from criminal to civil law, but these cases would be decided by the courts. )

While these changes represent a

tightening of the merger laws, there is an important new provision. If the RTPC rules against a merger, companies will have the right to appeal the decision to the federal cabinet, a right not allowed under current law. McKendry, of the consumers’ association, fears that this will leave decisions open to political interference. “The problem is compounded by the fact that an appeal to cabinet is conducted in secrecy and no one would ever know why they made their decision.” This procedure would leave the final decision with ministers, as is the case under the Foreign Investment Review Act.

In another key area—the laws governing conspiracies that restrict competition—Ouellet appears to have backed down from the much stronger position he advocated in his 1981 paper. Unlike mergers, which are sometimes considered beneficial to the economy, conspiracies between companies—to fix prices, to allocate market shares or to restrict entry of new competitors into a market—are always considered harmful. The government traditionally prosecuted them vigorously, winning convictions in a majority of cases. But this changed dramatically after the Supreme Court, in 1980, overturned conspiracy convictions against three large sugar refiners—Atlantic, Redpath and St. Lawrence. The court ruled that even though the sugar companies had essentially operated as a cartel, controlling market shares for more than a decade, the Crown had not proved that they had lessened competition unduly. This is a vague term, and the court’s rulings have effectively meant that if virtually any competition remained then it had not been reduced unduly.

Two years ago Ouellet indicated that he planned to adopt a tougher standard, similar to the U.S. law, which says that conspiracy is illegal in itself, regardless of how much it reduces competition. In Ouellet’s 1981 paper, he wrote: “From a public policy viewpoint, it has always been rather anomalous to tell competitors that they would get together and agree to fix prices or otherwise lessen competition as long as it was not lessened too much.” This would be equivalent to condoning a little bit of rape, argues William Stanbury, an economist at the University of British Columbia. Yet the conspiracy section in the new draft bill will require that the Crown prove that a conspiracy lessens competition significantly. Since significantly is also vague, the new law’s effectiveness will depend on how the courts interpret it. Some critics fear that unless the courts take a tougher stand than in the past, the new law may not offer consumers much more protection.

But the new legislation may never be introduced in the House let alone en-

acted. Some insiders speculate that after the government’s wooing of the business community with the budget last April, it may be unwilling to antagonize business with a tough competition bill—especially with Liberal fund raisers about to hit the road looking for contributions for the upcoming federal election campaign. It is precisely to avoid this kind of business resistance that the government is now giving business a hand in shaping the new laws.

Some critics charge, however, that allowing businessmen so much say in drafting laws designed to control them is akin to letting the fox guard the henhouse. Says Davidson: “If it is going to be legislation that will meet the weaknesses of the present law, the business community won’t like it.” Yet if it does not remedy that weakness, the new draft legislation is unlikely to satisfy

consumers and small business. “If they water down the laws to appease big business, they’re going to hear from small business,” warns Conrad of the petroleum marketers federation. For the unpopular Liberal government, the dilemma now is how far to go in appeasing big business without alienating legions of consumers.