BUSINESS

THE TEST OF COMPETITION

OTTAWA’S NEW MONOPOLIES LAW IS ON TRIAL IN A CRITICAL CASE OVER NUTRASWEET

BRENDA DALGLISH July 16 1990
BUSINESS

THE TEST OF COMPETITION

OTTAWA’S NEW MONOPOLIES LAW IS ON TRIAL IN A CRITICAL CASE OVER NUTRASWEET

BRENDA DALGLISH July 16 1990

THE TEST OF COMPETITION

BUSINESS

OTTAWA’S NEW MONOPOLIES LAW IS ON TRIAL IN A CRITICAL CASE OVER NUTRASWEET

Aerobic exercise drills. Fad diets. Liposuction. Losing weight is not a pleasant task. But it got a little easier nine years ago when an odorless white powder called aspartame made its debut on grocery-store shelves. Aspartame, an artificial sweetener now common in diet soft drinks and other snack food, has made caloriecutting almost painless. And it hardly costs a cent. Indeed, every time a consumer pays 80 cents for a can of diet pop, less than a penny goes to cover the cost of the low-calorie sugar substitute that sweetens the drink. The value of the entire amount of aspartame consumed in Canada each year is just $25 million, or less

than $1 a person. But those modest amounts in no way reflect the importance of a precedent-setting case involving aspartame now before the federal Competition Tribunal.

The case is a critical first test of a key section of Canada’s new competition legislation, and it pits NutraSweet Co. of Skokie, 111., whose sweetener accounts for 95 per cent of Canadian aspartame sales, against Tosoh Canada Ltd. of North York, Ont., NutraSweet’s last surviving aspartame competitor in Canada. Ottawa’s competition watchdog, the Bureau of Competition Policy, alleges that, since 1987, NutraSweet violated several provisions of the legislation and abused its dominant position in the market. Although the cost of aspartame represents only a tiny portion of most consumers’ budgets, the case raises issues that go to the heart of competition law, which is designed to protect consumers from companies that try to

improve profits by muscling out competitors. Says NutraSweet’s lawyer, Bruce McDonald: “The question is where to draw the line —when does hard competition get so hard that it stifles competition?”

For the bureau, which is supposed to encourage competition in the Canadian economy by tracking down and stamping out anticompetitive behavior such as price fixing or tied selling, the case will help define the limits of its power under the 1986 Competition Act. The act replaced Canada’s much-criticized competition laws, under which Ottawa secured just two convictions under the monopoly section of the law. The bureau, economists, corporate lawyers and their business clients are eagerly awaiting the three-man tribunal panel’s decision, expected later this year. The panel is an independent body appointed by the federal government and must include two federal court judges and a lay member.

The first hearing in the aspartame case, which dealt with the competition arguments, ended in April. The case came before the tribunal after the bureau’s director of investigation and research looked into a complaint from Tosoh. For the bureau to win its case and for Tosoh to obtain any redress, they must prove that NutraSweet controls the aspartame market in Canada, that it practised anticompetitive behavior and that competition was reduced as a result. Under Ottawa’s new legislation, monopolies are permitted as long as they do not abuse their power. Before the tribunal can issue its decision on the competition complaint, it is going to hold a second hearing, beginning July 10 in Ottawa, on whether or not

its quasijudicial rulings are constitutional and valid under the Charter of Rights and Freedoms.

For the two companies, the case is the latest battle in an ongoing war for global market share in aspartame, a key ingredient in the fastgrowing and lucrative diet-food market. Aspartame is the generic name of an artificial sweetener 200 times sweeter than sugar. It does not cause cavities and adds just 1.2 calories to a can of Diet Coke, compared with the 122 calories in a regular Coke.

Tosoh sells aspartame produced by a jointventure partnership between its Japanese parent and a Dutch company, Holland Sweetener Co. Tosoh vice-president Louis Hoshimi says that his company’s future could hang in the balance. While the Canadian market is small—less than 10 per cent of the world aspartame market—Hoshimi says, “it’s just a first step for us. If we get established in Canada, it gives us a great incentive.”

Although aspartame is used in a number of diet foods, including chewing gum and mints, by far the biggest use for aspartame is in the fast-growing diet-soda market, where the larg-

est customers are Coca-Cola Co. and PepsiCola Co. Depending on the tribunal’s findings, NutraSweet could be forced to alter its aggressive—some say arrogant—business practices. If the tribunal finds NutraSweet at fault, it can order the company to end practices that lessen competition. That could cost NutraSweet its overwhelming share of the aspartame market, as happened in the European Community after a similar competition challenge in 1986. For Canadian consumers, the decision will be an indication of whether or not the new law has the teeth necessary to keep the pressure on

companies to compete vigorously. And for business in general, the decision will make clearer what they can and cannot do. Said Tosoh lawyer Alan Pratt: “This case will outline for business what the limits of this idea of abuse of dominant power might be.”

NutraSweet started out with a legal monopoly because it owned the patent to produce aspartame. The Illinois-based pharmaceutical company G. D. Searle and Co., which invented the sweetener, was bought by Monsanto Co., a St. Louis chemical company that now owns the NutraSweet Co. Many chemical companies are trying to develop alternative low-calorie artificial sweeteners, but the food industry generally considers aspartame the best one now available.

With or without patent protection, NutraSweet is a clever and formidable competitor. Indeed, even when NutraSweet’s extended patent expires in the United States in 1992, other aspartame manufacturers likely will have trouble countering its marketing muscle. The company has managed to tum a basic ingredient, aspartame, into a well-known brand name, NutraSweet, that has been advertised for years on millions of products.

Robert Shapiro, chairman of NutraSweet until he moved to Monsanto’s agricultural products division earlier this year, is credited with being the brains behind NutraSweet’s success. Shapiro says the NutraSweet name and logo help to sell products now. Shapiro declined to be interviewed by Maclean ’s but, in a 1988 interview submitted to the Competition Tribunal panel, Shapiro said: “We’re not selling a molecule. We are selling a whole package of value to our customers and our customers’ customers.” NutraSweet’s goal, he added, is to be able to keep customers “even if a competitor offered sweetener for free.”

Aspartame was patented in 2 Canada in 1970, but because I of extensive testing by feder| al food and drug authorities, it ° was not allowed on the market until 1981. Shortly before NutraSweet’s Canadian patent was due to expire in 1987, federal Conservative MP Claude Lanthier introduced a bill to extend it after the company said it would build a $10-million plant in his LaSalle, Que. riding. After Tosoh and several buyers of artificial sweeteners complained, the bill died on the order paper, and NutraSweet cancelled its plans for the new plant.

As the expiry of NutraSweet’s patent approached, Tosoh says that it began calling on potential Canadian customers only to discover that a few of the major customers were locked into exclusive contracts with NutraSweet that

prevented them from buying aspartame from anyone else. Those exclusive contracts are a key issue in the case now before the tribunal. One of the questions the tribunal will deal with is why the Canadian subsidiaries of the worldwide corporate giants Coca-Cola and PepsiCola agreed to sign restrictive contracts that limited their supply options.

The competition bureau and Tosoh argue that Coke and Pepsi agreed to sign because they were motivated by factors beyond the Canadian market. NutraSweet’s patent in the United States, which represents more than 80 per cent of the world market for aspartame, continues until the end of 1992. As a result, Coke and Pepsi will have to rely on NutraSweet as their sole source of supply for aspartame in their own biggest market for two more years. The bureau argues, therefore, that it is in Coke and Pepsi’s interest to curry favor with NutraSweet. Says Warren Grover, the bureau’s counsel: “Their interest is self-interest. They don’t care about providing competition in Canada. Their interests are worldwide. Canada is a very small proportion of their worldwide market.”

Tosoh and the bureau also allege that NutraSweet dramatically reduced its prices in an anticompetitive act intended to drive competitors out of the market. While NutraSweet declines to reveal its prices, Tosoh’s Hoshimi says that NutraSweet’s price has dropped to somewhere between $23 and $34 a pound, depending on the customer, from about $90 a pound when it was first introduced in Canada in 1981. Indeed, Hoshimi questions how long aspartame prices would remain that low if there were no other competitors in the market. Says Hoshimi: “I can’t believe this is the long-term price for

aspartame.” Tosoh entered the market in Canada offering aspartame at $40 to $50 a pound.

NutraSweet’s McDonald, however, says that the rapid drop in aspartame prices after NutraSweet’s Canadian patent expired is evidence that competition is indeed working. NutraSweet says that it just does a better job of selling than its competitors by delivering topquality product at competitive prices. McDonald adds that, if the competition bureau had believed that NutraSweet was guilty of “unreasonably low” pricing, it could have charged the company with the criminal offence of predatory pricing. Says McDonald: “They didn’t, because they didn’t have the evidence.”

Economists agree that it is often difficult to distinguish between predatory pricing and healthy price competition. The tribunal panel, which is made up of two judges, Barry Strayer and Max Teitelbaum, and one economist, Frank Roseman, a competition expert, faces

the difficult task of drawing the line.

The case is further complicated by three additional factors. The tribunal may consider the issue of patent protection and decide how quickly the industry will become competitive after a legal monopoly ends. Then, there is a constitutional challenge prompted by a Quebec Superior Court ruling earlier this year, which said that the quasijudicial nature of the tribunal violates the Charter of Rights and Freedoms because the panel members are appointed by the government for a fixed period of time and, therefore, their impartiality is in question. The tribunal itself has decided to rule on that issue, but NutraSweet and others could appeal.

As well, Maclean ’s has learned that certain information relating to taxes paid on NutraSweet’s Canadian sales, which was part of the extensive confidential material the tribunal panel has received, but which has not been made public, may have an impact on the tribunal’s decision. NutraSweet’s McDonald says that he believes any tax matter is a “red herring” that has no bearing on the competition arguments. But other legal experts say that the tribunal might find that the information raises critical questions.

In the end, the tribunal will have to decide whether NutraSweet is simply a clever, aggressive marketer that bested the competition fairly and squarely, or whether, in its zeal to hang on to the benefits that accompanied the invention of this low-calorie chemical, it simply went too far, too fast.

BRENDA DALGLISH

SETTING A NEW STANDARD

Most economists acknowledge that although perfect competition is a cornerstone of elegant economic theories, it exists only in textbooks. The real world is filled with companies who have figured out that eliminating aggressive competition is a sure way to make a buck. To prevent just that, the federal government, as long ago as 1889, began wrestling with ways to ensure that companies competed fairly even when they had the opportunity to work together to raise prices, or drive competitors out of business. But, for most of the past century, competition legislation in Canada has been ineffective compared with the stringent antitrust laws in the United States.

After years of debate in business and political circles, the Conservative government enacted a new Competition Act in 1986. The new legislation corrected the most glaring weakness of the old Combines Investigation Act, which had been enacted in 1910. The new act brought most anti-

competitive actions under civil, rather than criminal, law, ensuring that federal prosecutors would no longer have to prove their cases to the tough standard required by criminal law—beyond a reasonable doubt. That was heralded as a step forward, because most anticompetitive behavior can be arranged quietly among a small group of people without leaving behind the hard evidence needed for a criminal conviction.

Without hard evidence, competition watchdogs had little on which to build cases. Under the old law’s monopoly section, Ottawa obtained only two major convictions, including one of the country’s most famous competition

cases. In 1951, Eddy Match Co., based in Hull, Que., was convicted of predatory pricing, forcing competitors into bankruptcy and taking over their operations.

’ The NutraSweet case is the first I test of the new act’s “abuse of ! dominant position” sections, \ which replaced the old monopoly : offences.

The old rules forbade compa' nies to create a monopoly, which was defined as an entity that acted against public interests. Now, simply being a monopoly is no longer an offence—a company must also abuse its dominant power by preventing the development of any competition.

Economists say that the new Competition Act has already proven more effective than the old legislation in several minor cases. But the NutraSweet case is its first major test. Says York University economist David McQueen: “Whatever the outcome, this one is going into the history books.”

B.D.