Rethinking Price-Fixing Law
Presley L. Warner and Michael J. Trebilcock**
Section 45 of the Competition Act prohibits price-fixing and
other forms of horizontal agreements among rivals by imposing
criminal sanctions on parties to arrangements which “unduly
lessen competition.” The authors argue that there are policy rea-
sons for rethinking the current price-fixing prohibition.
The authors argue that many horizontal arrangements by
contract (through agreements among rivals) are similar to hor-
izontal arrangements by ownership (through mergers). In the
1986 amendments to the Competition Act, Parliament removed
merger review from the purview of criminal courts and gave the
Competition Tribunal jurisdiction over mergers. The authors
propose similar amendments to section 45 of the Competition
Act, and argue that all horizontal arrangements other than naked
price-fixing ought to be subject only to civil review by the Com-
petition Tribunal. Naked price-fixing, they tell us, is always
anti-competitive, and should therefore continue to attract crim-
inal penalties and remain within the jurisdiction of criminal
courts.
Having outlined the appropriate focus of a criminal prohibi-
tion, the authors proceed to frame a criminal price-fixing prohi-
bition that will target only naked price-fixing arrangements
without at the same time targeting potentially pro-competitive
arrangements. Many horizontal arrangements are pro-
competitive (joint ventures, for example), yet may have the
ancillary effect of fixing prices. At the same time, arrangements
which purport to be pro-competitive may in fact be naked price-
fixing arrangements in disguise.
Since price-fixing prohibitions are central features of com-
petition laws all over the world, the authors undertake a compar-
ative review of the price-fixing regimes in the United States, the
European Community, the United Kingdom, Germany, Austra-
lia and New Zealand to determine the extent to which those
jurisdictions have been able to maintain workable distinctions
between naked price-fixing arrangements and potentially pro-
competitive arrangements.
From the jurisdictions surveyed, the authors conclude that it
is impossible to frame a criminal prohibition against naked
price-fixing arrangements which will not, in many eases, target
pro-competitive arrangements. The authors therefore propose a
new focus to a criminal prohibition. Since most naked price-
fixing is covert, the authors propose to make covert arrange-
ments the target of the criminal prohibition. That is, the authors
propose to distinguish covert arrangements from overt arrange-
ments, rather than distinguishing naked price-fixing from price-
fixing which is ancillary to some pro-competitive objective. The
authors propose amendments which would confer immediate
immunity from criminal sanctions on parties who notify the
Bureau of Competition Policy of their arrangements. Notified
arrangements would then be subject only to prospective civil
review by the Competition Tribunal. Parties to price-fixing
arrangements who do not notify their arrangements to the
Bureau would remain subject to criminal penalties.
Larticle 45 de la Loi sur ta concurrence interdit la fixation
des prix et autres formes d’ententes horizontales entre concur-
rents en imposant des sanctions criminelles aux parties dont les
arrangements ont pour effet de o riduire indfiment la concur-
rence .i. Les auteurs proposent une reformulation de cette dispo-
sition.
Les auteurs croient que les ententes horizontales par contrat
(ententes entre coneurrents) ressemblent trks souvent aux
ententes horizontales par transfert deproprit (fusionnements).
Depuis les modifications h ]a Loi stur la concurrence en 1986,
la compdtence en matikre de fusionsements ne reline plus des
tribunaux criminels, mais du Tribunal de ]a concurrence. Les
auteurs proposent une modification semblable pour l’article 45,
et prdtendent que les ententes horizontales devraient relever du
seul ressort du Tribunal de ]a concurrence. La snle exception
serait la fixation de prix non diguisde, qui, selon les auteurs, est
toujours anti-concurrentielle, et dolt done comporter des sanc-
tions criminelles.
Ayant ainsi ddfuii ]a portfe d’une disposition criminelle effi-
cace, les auteurs en proposent one pour la fixation de prix qui
vise la fixation de prix non ddguisde sans atteindre les ententes
qui pourraient stimuler la concurrence. It y a beaucoup
d’ententes horizontales qui stimulent la concurrence (par
exemple les co-entreprises) mais qul, accessoiremcnt, fixent les
prix. Par contre, d’autres ententes qui de prime abord semblent
favorables a la concurrence soot en rdalit6 des fixations de prix
non dfguisdes.
La fixation des prix 6tant interdite de par le monde, les
auteurs nous livrent une 6tude comparative des dispositions str
la fixation des prix –
Itats-Unis, Communaut europ6nne,
Royaume-Uni, Allemagne, Australie, Nouvelle-Z6lande –
pour determiner dans quelle meaure ens pays ont rdussi ht main-
tenir des distinctions praticables entre la fixation de prix non
ddguisie et les ententes qui stimulent la concurrence tout en
fixant les prix.
Au terme de cette tude comparative, les auteurs concluent
qu’il est impossible de formuler une disposition interdisant la
fixation des prix sans que celle-ci atteigne dans bien des cs des
ententes qui stimulent la concurrence. Ils sugghent done une
nouvelle approche: one disposition criminelle qui ne viserait
que les ententes secrhtes de fixation de prix non ddguis6e, qui
sont d’ailleurs les plus courantes. Au lieu de distinguer entre la
fixation des prix non diguisde et la fixation des prix accessoire,
les auteurs distinguent plut6t les ententes secrttes de celles qui
sont publiques. La disposition qu’ils proposent conhre une
immunit6 criminelle immddiate aux parties qui avisent le
Bureau de la politique concurrence de I’existence de leur
entente, celles-ci n’dtant sujettes d
lots qu’t un recours civil
devant le Tribunal de la concurrence. Les persones qui n’avi-
sent pas le Bureau de lear entente demeurent passibles de sanc-
tions criminelles.
*LL.B. (University of Toronto); of the Ontario, Massachusetts and New York Bars.
**Director, Law and Economics Programme, Faculty of Law, University of Toronto.
The authors presented an earlier version of this paper at a symposium on Recent Developments
in Canadian Competition Law (15 December 1992) which was sponsored by the Law and Econom-
ics Programme of the University of Toronto Faculty of Law. The authors gratefully acknowledge
the research assistance of Rosemin Keshvani. For helpful comments on earlier drafts, the authors
thank Nancy Gallini and Kent Roach. The research for this paper was supported by the Canadian
Bureau of Competition Policy, although the views expressed herein are those of the authors alone.
Administrative support was provided to the first author by the Toronto law firm of Tory Tory
DesLauriers & Binnington.
McGill Law Journal 1993
Revue de droit de McGill
To be cited as: (1993) 38 McGill L.J. 679
Mode de rfdrence: (1993) 38 R.D. McGill 679
McGILL LAW JOURNAL
[Vol. 38
Synopsis
Introduction
I.
The Theory and History of Canadian Price-Fixing Law
A. The Economics of Horizontal Arrangements
B. The Law of Horizontal Arrangements in Canada
1. The Canadian Competition Act: An Overview
2.
The Partial Rule of Reason: Arrangements Which Lessen
Competition “Unduly” under Subsection 45(1)
a.
b. Substantive Elements
Intent
3. Per Se Illegal Arrangements
4. Per Se Legal Arrangements
5. Rule-of-Reason Arrangements: Subsections 45(3) and 45(4)
C. The Categorization Approach of the Competition Act
D. Disadvantages of the Current Regime
II. The U.S. Experience
A. Evolution of the Rule-of-Reason Approach
1. The Extent to Which an Arrangement Harms Competition
2.
Justification: Whether the Arrangement Promotes
Pro-Competitive Objectives
B. Evolution of the Per Se Illegal Rule
1. The Category of Per Se Ilegal Arrangements
2.
The Problem of Characterization
C. Exemptions from the Antitrust Laws: Per Se Legal Arrangements
D. Institutional Features of the American Regime
III. The European Experience
A. The European Community Law
1. Article 85(1): The General Prohibition
2. Article 85(2): Consequences of Violating the Article 85(1)
Prohibition
Relief from the Prohibition
3.
4. Discussion
B. U.K. Competition Law
1. The Prohibition: “Registrable Agreements”
2.
Consequences of Violating the Prohibition
3.
Relief from the Prohibition: The Effect of Registration
4. Discussion
C. German Competition Law
1. The General Prohibition
2.
Consequences of Violating the Prohibition
1993]
RETHINKING PRICE-FIXING LAW
Relief from the Prohibition
3.
4. Discussion
D. Conclusion
IV. The Australian and New Zealand Experience
A. Overview
B. The General Prohibition: The Australian Approach to
Arrangements Which Substantially Lessen Competition
C. The Deeming Provision: The Australian Approach to Price-Fixing
D. Ex Ante Authorization
1.
2.
Substantive Tests
Procedure
E. Enforcement
V.
Implications for Canada
A. Lessons from the Comparative Experience
B. Proposed Reform of the Competition Act
1. The Proposed Criminal Prohibition
2.
3.
The Proposed Civil Review Procedure
Proposed Collateral Revisions to the Competition Act
Conclusion
Introduction
There is a consensus among most competition law scholars’ that laws
which prohibit price-fixing and other anti-competitive horizontal arrangements
among competitors lie at the core of competition policy.’ Richard Posner calls
the elimination of the formal cartel “the major achievement of American [com-
‘However, this conclusion is not universally shared. The “New Critics” of antitrust hold that price-
fixing should not be prohibited, and they appeal to neo-classical economics and libertarian “laissez-
faire” doctrine to support their position. See L.G. Telser, A Theory of Efficient Cooperation and Com-
petition (Cambridge: Cambridge University Press, 1987) at 101-29; D.T. Armentano, Antitrust
Policy: The Case for Repeal (Washington, D.C.: Cato Institute, 1986); F.A. Hayek, Lav, Legislation
and Liberty, vol. 3 (London: Roufledge & Kegan Paul, 1979). For rejoinders to the New Critics, see
M.E. DeBow, “What’s Wrong with Price Fixing: Responding to the New Critics of Antitrust” (1988)
12:2 Regulation 44; J.S. Wiley, Jr., “Antitrust and Core Theory” (1987) 54 U. Chic. L.R. 556.
2S. 1.1 of the Competition Act, R.S.C. 1985, c. C-34, as am. by R.S.C. 1985 (1st Supp.), c. 27,
ss. 187, 189, R.S.C. 1985 (2d Supp.), c. 19, Part II, R.S.C. 1985 (3d Supp.), c. 34, s. 8, R.S.C. 1985
(4th Supp.), c. 1, s. 11, R.S.C. 1985 (4th Supp.), c. 10, s. 18, S.C. 1990, c. 37, ss. 29-32, S.C. 1991,
c. 45, ss. 547-550, S.C. 1991, c. 46, ss. 590-594, S.C. 1991, c. 47, ss. 714-717, S.C. 1992, c. 1,
ss. 44-46, 145, S.C. 1992, c. 14, s. 1, S.C. 1993, c. 34, ss. 50-51 [hereinafter the Act], provides that:
The purpose of this Act is to maintain and encourage competition in Canada in order
to promote the efficiency and adaptability of the Canadian economy, in order to expand
opportunities for Canadian participation in world markets while at the same time rec-
ognizing the role of foreign competition in Canada, in order to ensure that small and
medium-sized enterprises have an equitable opportunity to participate in the Canadian
economy and in order to provide consumers with competitive prices and product
choices.
REVUE DE DROIT DE McGILL
[Vol. 38
petition] law,”3 while Robert Bork writes that “without doubt thousands of car-
tels have been made less effective and other thousands have never been
broached because of the overhanging threat of [the rule against price-fixing]. Its
contributions to consumer welfare over the decades have been enormous.”4 The
current Canadian prohibition against price-fixing and other horizontal arrange-
ments is set out in paragraph 45(1)(c) of the Canadian Competition Act, which
provides that: “Everyone who conspires, combines, agrees or arranges with
another person … to prevent or lessen, unduly, competition in the production,
manufacture, purchase, barter, sale, storage, rental, transportation or supply of
a product, or in the price of insurance or property … is guilty of an indictable
offence …” This prohibition, in close to its present form, has been the basis of
more than one hundred years of Canadian criminal prosecutions for price-fixing
and other forms of horizontal arrangements.5
In the past two years, several lower court decisions have cast doubt on the
constitutionality of the prohibition by upholding constitutional challenges to both
the vagueness of the prohibition (under section 7 of the Charter) and the lack of
a inens rea requirement for the competition-lessening effects of prohibited arrange-
ments (under paragraphs 11(a) and 11(d) of the Charter).6 While the Supreme
Court of Canada has recently upheld the constitutionality of the prohibition,7 we
believe that there are independent policy reasons for rethinking the existing price-
fixing provisions.’ In particular, in this paper we focus on the difficulties of dis-
tinguishing, ex ante, between horizontal arrangements that, for deterrence rea-
sons, may warrant per se criminal prohibitions and those arrangements that may
at most warrant civil rule-of-reason review on a case-by-case basis.
In section I, we discuss the underlying theory of competition law and the
current Canadian prohibition against price-fixing and other forms of horizontal
arrangements. We also describe. two disadvantages of the current regime. In sec-
tions II, II and IV, we examine American, European, Australian and New Zea-
land approaches to horizontal arrangements. In section V, we draw on the the-
oretical analysis of section I and the comparative analyses of sections II through
IV to propose a new Canadian approach to price-fixing.
I. The Theory and History of Canadian Price-Fixing Law
A prohibition against price-fixing and other forms of horizontal arrange-
ments is a central component of most competition laws. The United States,9 the
3Antitrust Law: An Economic Perspective (Chicago: University of Chicago Press, 1976) at 39.
4The Antitrust Paradox: A Policy at War with Itself (New York: Basic Books, 1978) at 263.
5For a discussion of earlier judicial interpretations of this subsection, see B. Dunlop, D.
McQueen & M. Trebilcock, Canadian Competition Policy: A Legal and Economic Analysis
(Toronto: Canada Law Book, 1987) at 122ff.
6R. v. Nova Scotia Pharmaceutical Society (1991), 108 N.S.R. (2d) 320, 36 C.P.R. (3d) 173
(S.C.A.D.); L’Association quibdcoise des pharmaciens propritaires v. Canada (A.G.), [1991]
R.J.Q. 205 (Sup. Ct,); Alex Couture Inc. v. Canada (A.G.), [1990] R.J.Q. 2668, 30 C.P.R. (3d) 486
(Sup. Ct.), rev’d [1991] R.J.Q. 2534, 38 C.P.R. (3d) 293 (C.A.).
7R. v. Nova Scotia Pharmaceutical Society, [1992] 2 S.C.R. 606, 93 D.L.R. (4th) 36, 43 C.P.R.
(3d) 1 [hereinafter PANS cited to S.C.R.].
8For an overview of alternative approaches to horizontal arrangements in Canada, see T. Ross,
“Proposals for a New Canadian Competition Law on Conspiracy” (1991) 36 Antitrust Bull. 851.
9Shernan Antitrust Act, 15 U.S.C. 1 (1988) [hereinafter Sherman Act].
1993]
RETHINKING PRICE-FIXING LAW
European Community,”0 Germany,” Australia,” and New Zealand 3 all have
strict prohibitions against many forms of horizontal arrangements. 4 In this sec-
tion, we review the economics of horizontal arrangements and consider the sorts
of arrangements that a prohibition ought to address. We then consider the scope
of the term “unduly lessen competition,” and discuss the sorts of arrangements
that the current Canadian prohibition in fact addresses. For convenience we use
the term “arrangement” loosely so that it covers agreements, contracts, under-
standings, and other conduct actionable under the price-fixing prohibition.
A. The Economics of Horizontal Arrangements
Whether an arrangement ought to attract liability under competition laws
depends on the arrangement’s ultimate effects on economic welfare.” Arrange-
ments which ultimately reduce economic welfare should be prohibited.
Not all horizontal arrangements reduce economic welfare. For example, it
is generally accepted that horizontal arrangements effected by ownership,
through mergers and acquisitions, are capable of producing net welfare
increases. 6 The Canadian Parliament adopted this view in 1986 when amend-
ments to the Competition Act de-criminalized mergers and placed merger
review within the purview of the Canadian Competition Tribunal. 7 Accord-
ingly, it follows that horizontal arrangements effected by contract, in the form
of agreements among rivals, may often be capable of producing similar welfare
increases. In evaluating horizontal arrangements among competitors, it quickly
becomes obvious that, with few exceptions, ex ante generalizations about the
ultimate welfare effects of arrangements are impossible.
At one extreme, naked price-fixing cartels among competitors or potential
competitors almost always reduce economic welfare.” The cartel charges
10 Treaty Establishing the European Economic Community, 25 March 1957, 298 U.N.T.S. 3, art.
85 [hereinafter Treaty of Rome].
“Gesetz gegen Wettbewerbsbesclirdnkungen, translated in J.J. Marke & N. Samie, eds., Anti-
Trust and Restrictive Business Practices: International, Regional and National Regulation, vol. 16
(New York: Oceana, 1983) [hereinafter GWB].
‘2Trade Practices Act 1974, No. 51, s. 45.
13 Commerce Act 1986, No. 5, s. 27.
14See Special Committee on International Antitrust, Report, 1991 A.B.A. Sec. Antitrust Law, c.
2, app. 1 [hereinafter A.B.A. Report].
15 0n the welfare standard generally, see 0. Williamson, “Economics as an Antitrust Defense:
The Welfare Tradeoffs” (1968) 58 Am. Econ. Rev. 18; Posner, supra note 3 at 8-18; Bork, supra
note 4 at 51-66; Dunlop, McQueen & Trebilcock, supra note 5 at 51-71; H. Hovenkamp, Econom-
ics and Federal Antitrust Law (St. Paul: West, 1985) at 49; L. Schwartz, “The ‘Price Standard’ or
the ‘Efficiency Standard’: Comments on the Hillsdown Decision” (1992) 13:3 Can. Cpmp. Pol.
Rec. 42; P.S. Crampton, ‘The Efficiency Exception to Mergers” (1993) 21 Can. Bus. L.J. 371; J.F
Brodley, “The Economic Goals of Antitrust” (1987) 62 N.Y.U. L. Rev. 1020.
16W. Baxter, “Substitutes and Complements, and the Contours of the Firm” in F. Mathewson,
M. Trebilcock & M. Walker, eds., The Law and Economics of Competition Policy (Vancouver: Fra-
ser Institute, 1990) 27. Baxter was formerly head of the Antitrust Division of the U.S. Department
of Justice.
17The Tribunal is governed by the Competition Tribunal Act, R.S.C. 1985 (2d Supp.), c. 19,
amending the Combines Investigation Act, R.S.C. 1985, .c. C-34.
ISFor a general discussion, see D.W. Carlton & J.M. Perloff, Modern Industrial Organization
(Glenview, Ill.: Harper Collins, 1990) c. 5.
McGILL LAW JOURNAL
[Vol. 38
monopoly prices, 9 but unlike some monopolies.and many horizontal mergers,
the cartel almost never generates offsetting efficiency gains from greater econo-
mies of scale, since the scale of the cartel members’ production units does not
change when the cartel is formed. The cartel’s monopoly prices drive consumers
from the market, and force consumers to allocate their resources to less pre-
ferred forms of consumption.2″
At the other extreme, partnership agreements among professionals almost
always increase economic welfare. Partners may share administrative and over-
head costs and provide a broad range of services to clients which professionals
working on their own could not offer. The renowned American judge Oliver
Wendell Holmes once remarked that if antitrust laws were interpreted so as to
prohibit partnership agreements, this “would make eternal the bellum omnium
contra onmnes and disintegrate society so far as it could into individual atoms.”‘2
Between the two extremes of price-fixing and partnership agreements, hor-
izontal arrangements among competitors may take a wide variety of forms and
produce welfare effects which cannot be determined without extensive case-by-
case inquiries into the surrounding circumstances of the arrangements. Joint
research ventures, for example, are horizontal arrangements which can often
lead to welfare increases. Yet it is impossible to generalize, ex ante, about the
welfare effects of joint ventures. Some horizontal arrangements which purport
to be joint ventures may in fact be naked price-fixing arrangements in disguise.
This analysis suggests that competition laws ought to condemn naked
price-fixing arrangements and allow partnership arrangements. Ambiguous
arrangements which lie between the two extremes ought to be evaluated on a
case-by-case basis.
B. The Law of Horizontal Arrangements in Canada
The Canadian Competition Act creates four categories of horizontal
arrangements and subjects them to different degrees of scrutiny. The Supreme
19W.G. Shepherd reports that the average price-fixing agreement increases prices by 10-30%
(The Economics of Industrial Organization, 2d ed. (Englewood Cliffs, N.J.: Prentice Hall, 1985)
at 245). D.F. Greer suggests that many cartels have successfully increased prices by 30-60%
(Industrial Organization and Public Policy (New York: Macmillan, 1980)).
2 There is persuasive empirical evidence that price-fixing conspiracies succeed in raising prices
for government agencies and utilities (F.M. Westfield, “Regulation and Conspiracy” (1965) 55 Am.
Econ. Rev. 425; A.A. Alchian, “Electrical Equipment Collusion: Why and How?” in A.A. Alchian,
ed., Economic Forces at Work (Indianapolis: Liberty Press, 1977) 259; F.M. Scherer, Industrial
Market Structure and Economic Performance, 2d ed. (Boston: Houghton Mifflin, 1980) at 224-25).
However, there is an ongoing debate among antitrust scholars on the question whether price-
fixing conspiracies raise prices for unregulated for-profit buyers. See C. Newmark, “Does Horizon-
tal Price Fixing Raise Prices? A Look at the Bakers of Washington Case” (1988) 31 J. L. & Econ.
469; D. Dewey, “Information, Entry and Welfare: The Case of Collusion” (1979) 69 Am. Econ.
Rev. 587; G.J. Stigler & J.K. Kindahl, The Behavior of Industrial Prices (New York: National
Bureau of Economic Research, 1970)’at 92-93; W.B. Erickson, “Price Fixing Conspiracies: Their
Long Term Impact” (1976) 24 J. Ind. Econ. 189; F.M. Fisher, “Statisticians, Econometricians and
Adversary Proceedings” (1986) 81 J. Am. Stat. Ass. 277. Whether price-fixing conspiracies in fact
raise prices for non-government for-profit buyers is a question on which we express no conclusion
at this time.
21Northern Securities Co. v. United States, 193 U.S. 197 at 411 (1904).
1993]
RETHINKING PRICE-FIXING LAW
Court of Canada considered these categories in PANS.2 After discussing the
institutional features of the Competition Act, we attempt to articulate the distinc-
tion between the categories.
1.
The Canadian Competition Act: An Overview
Under the Competition Act, the Canadian Bureau of Competition Policy
investigates violations of the statute. The Act is enforced by criminal courts (for
some violations), the Canadian Competition Tribunal and private parties. Public
enforcement begins when the Bureau initiates an inquiry.’s
Violations of section 45 (the price-fixing prohibition) and its related pro-
visions attract criminal sanctions.24 Once the Bureau has begun an inquiry under
those sections it may refer the matter to the Attorney General at any time.’s The
Attorney General considers the Bureau’s findings and decides whether to pros-
ecute the defendant in a criminal court. Upon conviction, defendants are liable
to a maximum penalty of five years’ imprisonment, a maximum fine of ten mil-
lion dollars, or both.26 In addition to initiating a criminal prosecution, the Attor-
ney General may seek an interim injunction restraining the offending conduct.
Courts follow general common law principles in issuing injunctions.27
The Canadian Competition Tribunal is empowered to review practices
which are set out in Part VIII of the Act. Reviewable practices include refusals
to deal,2″ consignment selling, 9 exclusive dealing, tied selling, market restric-
tion,3″ abuse of dominant positions,3′ and mergers (horizontal arrangements by
ownership).32 Once the Bureau has begun an inquiry into a reviewable practice,
the Director of the Bureau may apply to the Tribunal for a civil cease and desist
order restraining the offending conduct or transaction. Price-fixing arrange-
ments and related horizontal arrangements by contract are not reviewable prac-
tices under Part VIII; so the Bureau may not refer price-fixing matters to the Tri-
bunal. The Director has complete discretion as to whether a matter should be
referred to the Tribunal, and no other person may initiate Tribunal hearings. 33
Tribunal hearings do not concern the Attorney General and do not involve
22Supra note 7.
23The Bureau may initiate an inquiry of its own initiative (s. 10(1)(b)), on the direction of the
Minister of Consumer and Corporate Affairs (s. 10(1)(c)), or when six Canadian residents submit
an application under s. 9.
24See Part I.B.2-5, below, for a detailed discussion of s. 45.
25Competition Act, supra note 2, s. 23(1).
261bid., s. 45(1).
27S. 33 of the Act sets out the principles the court should consider when granting injunctions.
These appear to codify the Attorney General’s common law right to seek injunctions. See N. Fin-
kelstein & R. Kwinter, “Competition Act, R.S.C. 1985, 2nd Supp., C.19 – Section 36 and Claims
to Injunctive Relief’ (1990) 69 Can. Bar Rev. 298 at 308.
2SCompetition Act, supra note 2, s. 75.
29Ibid., s. 76.
3Ibid., s. 77.
311bid., s. 78.
321bid., s. 92.
33The exception to this is found in s. 86(1), which allows any person to apply to the Tribunal
to have it review a specialized agreement.
REVUE DE DROIT DE McGILL
[Vol. 38
courts. Panels are composed of between three and five members, at least one of
whom must be a Federal Court judge and at least one of whom must be a “lay
person.”
3 4
The Act confers a civil right of action35 on private parties who have suf-
fered losses from either violations of Part VI of the Act or violations of Tribunal
or court orders made under the Act. Courts may award damages equal to the
plaintiff’s proven loss, along with the plaintiff’s cost of investigating and litigat-
ing the action. In the absence of contrary evidence, courts will treat a previous
criminal conviction under section 45 (or any of its related sections) as evidence
of a breach of section 36. We now consider the Canadian approach to price-
fixing and other horizontal arrangements under section 45 of the Act.
2.
The Partial Rule of Reason: Arrangements Which Lessen Competition
“Unduly” under Subsection 45(1)
Subsection 45(1) has both an intent requirement and the following substan-
tive components: first, there must be an agreement to which the accused was a
party; second, the agreement must, if implemented, have the effect of lessening
competition unduly.
a. Intent
Since subsection 45(1) is a criminal prohibition, the Crown must prove that
the accused had the requisite intent for each element of the offence. To sustain
a conviction, the Crown must prove both (i) the existence of an agreement
which, if implemented, would unduly lessen competition, and (ii) that the
accused intended to enter into that agreement. Until recently, it was unclear
whether the Crown was also required to prove that the accused intended the
competition-lessening effects of the agreement. However, the Supreme Court of
Canada clarified the intent requirement of subsection 45(1) in the recent PANS3 6
decision.
In PANS, Justice Gonthier, writing for the seven-member panel, declared
that the intent requirement of subsection 45(1) consists of two elements: one
subjective, and one objective. The subjective element will be satisfied when the
Crown proves that the accused had the subjective intention to enter into the
impugned agreement and that the accused knew the terms of the agreement. The
objective element will be satisfied when the Crown proves that the accused,
from the objective standpoint of a “reasonable business person” in the accused’s
industry, knew or ought to have known that the impugned agreement would, if
implemented, lessen competition unduly.37 We note in passing that subsection
34 Conipetition Tribunal Act, supra note 17, s. 10(1). “Lay person” is defined in s. 3(3) of that
Act as someone “knowledgeable in economics, industry, commerce or public affairs and may
include, without restricting the generality of the foregoing, individuals chosen from business com-
munities, the legal community, consumer groups and labour.”
35 Conipetition Act, supra note 2, s. 36.
36Supra note 7.
371bid. at 660.
1993]
RETHINKING PRICE-FIXING LAW
45(2.2) of the Act, which only requires the Crown to prove the subjective ele-
ment of intending to enter into the agreement, must now be interpreted in light
of this objective intent requirement.
b. Substantive Elements
When will an arrangement lessen competition unduly? The term “unduly”
dates back to the original Canadian competition law which was enacted in
1889.38 There is no definition of “unduly” in either the current statute or in any
of its predecessors, and courts have wrestled with the task of definition for over
a hundred years.
The most recent exposition of the term “unduly” comes from the PANS
decision.39 Gonthier J. first outlined the scope of the inquiry, and then outlined
the content.
Gonthier J. couched his discussion of the scope of the “unduly” inquiry in
terms of the American antitrust experience under the Sherman Act.” As section
II of this paper will discuss, American antitrust jurisprudence has developed two
sorts of inquiries: rule-of-reason review and per se illegal condemnation. When
American courts apply rule-of-reason review to a challenged arrangement, they
examine all surrounding circumstances of the arrangement to determine whether
the arrangement unreasonably restricts competition without generating offset-
ting efficiency gains. When American courts apply per se illegal condemnation
to an arrangement, they condemn the arrangement on its face without examining
its surrounding circumstances.
Gonthier J. held that the Canadian prohibition
lies somewhere on the continuum between a per se rule and a rule of reason. It
does allow for discussion of the anti-competitive effects of the agreement, unlike
a per se rule, which might dictate that all agreements that lessen competition
attract liability. On the other hand, it does not permit a full-blown discussion of
the economic advantages and disadvantages of the agreement, like a rule of reason
would. Since “unduly” in [paragraph 45(1)(c)] leads to a discussion of the serious-
ness of the competitive effects, but not of all relevant economic matters, one may
say that this section creates a partial rule of reason.41
On this reasoning, the “unduly” inquiry of subsection 45(1) allows courts to
examine the economic background of the arrangement only to the extent neces-
sary to determine whether the challenged arrangement lessens competition to
the point where the lessening is undue. The court cannot consider any offsetting
efficiency or welfare gains from the challenged arrangement. Gonthier J. stated
that “[c]onsiderations such as private gains by the parties to the agreement or
counterbalancing efficiency gains by the public lie therefore outside the inquiry
under [paragraph 45(1)(c)].”’42 The factors which courts can consider in this par-
1889, c. 41.
38Act for the Prevention and Suppression of Combinations Formed in Restraint of Trade, S.C.
39Supra note 7.
40Sherman Act, supra note 9, 1-7.
41Supra note 7 at 650.
42Ibid. at 649-50.
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tial rule-of-reason inquiry, according to Gonthier J., are the market power of the
parties and the behaviour of the parties.
According to Gonthier J., the level of market power required to trigger sub-
section 45(1) is “moderate”43 and includes “the capacity to behave indep~nd-
ently of the market, in a passive way.” 4 While subsection 45(2) of the Act pro-
vides that an arrangement may violate subsection 45(1) even if it does not
completely or virtually eliminate competition in a market, the 1978 Supreme
Court decision in Aetna Insurance Co. v. R.45 suggested a relatively high mar-
ket-power threshold. In PANS, Gonthier J.’s remarks46 imply a considerably
lower threshold –
lower at any rate, according to the judgment, than the test
of “substantial control” of a market which is embodied in the abuse of dominant
position provisions.47
Gonthier J. presented the following non-exhaustive list of factors to be
considered in the market-power inquiry: the number of competitors; barriers to
entry; geographical distribution of buyers and sellers; differences in the degree
of integration among competitors; product differentiation; countervailing
power; and the cross-elasticity of demand for the products.” As well, Gonthier
J. also suggested that a useful approach in the market-power inquiry might be
to determine whether the defendant firm would be able to raise prices on a given
product by five per cent over a year without incurring losses. Only firms with
significant market power would be able to do this successfully. Gonthier J.
derived this approach from the 1984 Merger Guidelines of the U.S. Department
of Justice.49 A similar test is adopted in the 1991 Canadian Merger Enforcement
Guidelines.”0 It is significant that Gonthier J. concluded that the analysis of
mergers (horizontal integrations by ownership) might properly inform the anal-
ysis of arrangements among rivals (horizontal integrations by contract). This
approach is consistent with that of William Baxter,51 and we argue later in this
paper that the Competition Tribunal should evaluate horizontal arrangements
among rivals under the same criteria that it uses to evaluate mergers.
In addition to market power, Gonthier J. concluded that subsection 45(1)
requires “behaviour likely to injure competition.”52 The “behaviour” inquiry
considers the nature and scope of the arrangement, and whether the combination
of the arrangement and the parties’ market power would lessen competition
unduly. “Unduly,” in this context, “carries a connotation of seriousness. 53
431bid. at 654.
441bid.
45[1978] 1 S.C.R. 731, 75 D.L.R. (3d) 332, 34 C.C.C. (2d) 157 [hereinafter Aetna Insurance
cited to S.C.R.]. See text accompanying note 64, below.
46Supra note 7 at 654.
47Competition Act, supra note 2, ss. 78-79.
48Supra note 7 at 653.
4949 Fed. Reg. 26,823.
5 Director of Investigation and Research, Merger Enforcement Guidelines (Information Bulletin
51Supra note 16.
52Snpra note 7 at 656.
531bid. at 657.
No. 5) (Ottawa: Supply Services Canada, 1991).
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RETHINKING PRICE-FIXING LAW
3.
Per Se illegal Arrangements
Two sorts of arrangements are per se illegal in Canada: (i) bid-rigging (pro-
vided that the parties seeking the bid have no knowledge of the bid-rigging
agreement); 4 and (ii) agreements among banks to set interest rates on loans or
deposits.” Courts will condemn these arrangements on their face, and will not
undertake a partial rule-of-reason inquiry into the surrounding circumstances of
these arrangements.
4.
Per Se Legal Arrangements
Parliament has concluded that the following arrangements are in the public
interest, and should be exempt from the prohibition against horizontal arrange-
ments: (i) collective bargaining arrangements and fishing cooperatives;56 (ii)
underwriting agreements; 7 (iii) amateur sports leagues;58 (iv) specialization
agreements;59 (v) joint ventures;’ and (vi) export agreements.6
5.
Rule-of-Reason Arrangements: Subsections 45(3) and 45(4)
Subsection 45(3) of the Act declares that horizontal arrangements are
exempt from the subsection 45(1) prohibition where they relate only to one or
more of the following: (a) the exchange of statistics; (b) the defining of product
standards; (c) the exchange of credit information; (d) the definition of terminol-
ogy used in a trade, industry or profession; (e) cooperation in research and
development; (f) the restriction of advertising or promotion, other than a dis-
criminatory restriction directed against a member of the mass media; (g) the
sizes or shapes of containers in which an article is packaged; (h) the adoption
of the metric system of weights and measures; or (i) measures to protect the
environment.
Subsection 45(4) provides that the exemption conferred by subsection
45(3) does not apply when the arrangement has lessened, or is likely to lessen,
competition unduly in respect of one of the following: prices; quantity or quality
of information; markets or customers; or channels or methods of distribution.
The exemption will also be lost if the arrangement is likely to restrict any person
from entering a market.
As. noted above,62 Gonthier I. held that subsection 45(1) creates a partial
rule-of-reason inquiry for arrangements which unduly lessen competition. How-
ever, arrangements which fall under the criteria of subsection 45(3) are subject
to subsection 45(4), not subsection 45(1). For subsection 45(4) to stand on its
54Competition Act, supra note 2, s. 47.
551bid., s. 49.
56Ibid., s. 4.
57Tbid., s. 5.
58Ibid., s. 6.
591bid., s. 86.
6lbid., s. 95.
6’Ibid., s. 45(6).
62See text accompanying note 41, above.
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own, it must create a level of scrutiny which differs from the one mandated by
subsection 45(1). Since Parliament has determined that arrangements which
meet the subsection 45(3) criteria are likely to be in the public interest, it would
seem sensible to infer that subsection 45(3)-type arrangements should be subject
to a full rule-of-reason review before they are condemned. The subsection 45(4)
limit on the subsection 45(3) exemption should therefore be read as requiring
courts to engage in a searching inquiry into an arrangement’s surrounding cir-
cumstances to determine whether a subsection 45(3)-type arrangement actually
generates net welfare gains. As the next section will show, this type of inquiry
is similar to the American rule-of-reason review to which Gonthier J. referred
when he outlined the limits of the subsection 45(1) inquiry.
C. The Categorization Approach of the Competition Act
Section 45 of the Canadian Competition Act and the recent Supreme Court
of Canada decision in PANS create four categories of horizontal arrangements
and four corresponding levels of review. At one extreme, the Act makes arrange-
ments such as bid-rigging agreements per se illegal. Courts will condemn those
arrangements summarily without inquiring into surrounding circumstances. At
the other extreme, the Act makes arrangements such as collective bargaining and
underwriting agreements per se legal. Courts will uphold those arrangements
regardless of any competition-lessening effects.
Between these extremes, there are two categories of arrangements to which
courts will apply intermediate levels of review on a case-by-case basis. First,
arrangements which do not fall under the criteria set out in subsection 45(3) are
evaluated under a partial rule of reason. Courts examine the surrounding cir-
cumstances of the challenged arrangement only to the extent necessary to deter-
mine whether competition has been lessened unduly. Offsetting efficiency gains
are not considered. The second intermediate level of review is the full-blown
rule-of-reason review. A functional reading of the PANS decision suggests that
arrangements which fall under the criteria set out in subsection 45(3) are subject
to a full-blown rule-of-reason inquiry under subsection 45(4). Courts will exam-
ine the surrounding circumstances of those arrangements and consider whether
they produce a net reduction in welfare before condemning them under subsec-
tion 45(4).
D. Disadvantages of the Current Regime
In this paper, we focus on two disadvantages of the current regime. First,
the criminal prohibition is both underinclusive and overinclusive. Second, for-
cing all-purpose criminal courts to undertake complex rule-of-reason inquiries
(or partial rule-of- reason inquiries) runs contrary to our notions of the relative
institutional competence of criminal courts as compared with a specialized
administrative agency.
The current prohibition is underinclusive because it can allow manifestly
anti-competitive arrangements to escape condemnation. We believe that some
horizontal arrangements, such as naked price-fixing and market-sharing
1993]
RETHINKING PRICE-FIXING LAW
arrangements, must be deterred with criminal sanctions. 63 But the current pro-
hibition, which requires the Crown to prove on a criminal burden of proof that
an arrangement has lessened competition “unduly,” can allow price-fixers to
escape conviction with the kind of specious arguments that were advanced in
Aetna Insurance.’ In Aetna Insurance, the Supreme Court of Canada upheld the
acquittal of an association of insurance underwriters, representing fifty to sev-
enty per cent of the Nova Scotia insurance market, which had fixed the price of
insurance over ten years. The Court declared that the association performed var-
ious collateral, socially-useful functions.
At the same time, the current prohibition is overinclusive because it sub-
jects all horizontal arrangements to criminal prohibitions and casts a shadow
over many arrangements that may potentially increase welfare. Apart from the
obvious price-fixing case, the welfare effects of many horizontal arrangements
are ambiguous, and arrangements with ambiguous welfare effects should not be
deterred and do not require criminal sanctions.
The ambiguity of many horizontal arrangements leads to the second disad-
vantage of the current regime. Currently, all-purpose criminal courts evaluate
the welfare effects of ambiguous arrangements through complex rule-of-reason
-inquiries on a criminal burden of proof. We believe that the Competition Tribu-
nal is better equipped to analyse the welfare effects of ambiguous arrangements
than criminal courts. The Tribunal has specialized expertise, and evaluates
reviewable practices on a civil, rather than criminal, burden of proof. As well,
the principal sanctions available to the Tribunal are cease and desist orders –
not criminal sanctions.
In 1986, Parliament removed merger review from all-purpose criminal
courts and vested it in the Tribunal. We believe that the Tribunal should now
assume responsibility for all ambiguous horizontal arrangements which lie out-
side obvious price-fixing and market-sharing agreements. The thrust of our
thinking is reflected in a report of the Law Reform Commission of Canada65 and
in recommendations to the Director of Competition Policy by the Working
Group on Amendments to the Misleading Advertising and Deceptive Marketing
Practices Provisions of the Competition Act. The working group proposes to
transfer jurisdiction over many forms of misleading advertising to the Tribunal,
and proposes to confine criminal sanctions for misleading advertising to cases
of actual fraud or dishonesty.66
63See F.R. Warren-Boulton, “Implications of U.S. Experience with Horizontal Mergers and
Takeovers for Canadian Competition Policy” in Mathewson, Trebilcock & Walker, eds., supra note
16, 345; W.M. Landes, “Optimal Sanctions for Antitrust Violations” (1983) 50 U. Chic. L.R. 652;
G. Werden & M. Simon, “Why Price Fixers Should Go to Prison” (1987) 32 Antitrust Bull. 917.
64Supra note 45.
651n Our Criminal Law (Ottawa: Information Canada, 1976) at 27, the Commission declared
that: “The fact is, criminal law is a blunt and costly instrument … [; so it] must be an instrument
of last resort. It must be used as little as possible. The message must not be diluted by overkill –
too many laws and offences and charges and trials and prison sentences.”
66Working Group on Amendments to the Misleading Advertising and Deceptive Marketing Prac-
tices Provisions of the Competition Act, Effective and Equitable Enforcement (Report presented to
the Director of Investigation and Research, 31 January 1991) [unpublished].
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In section V, we propose a new approach to horizontal arrangements which
we believe is responsive to both our underinclusive/overinclusive concerns and
our institutional-competence concerns. Briefly, our proposal consists of a crim-
inal prohibition which would be narrowly defined to target only naked price-
fixing arrangements of the Aetna Insurance variety. We propose that all other
horizontal arrangements would, like mergers, fall within the jurisdiction of the
Competition Tribunal.
The remaining problem is to draft a criminal prohibition which will target
naked price-fixing without at the same time targeting other, potentially pro-
competitive, arrangements. In the comparative reviews which follow, we con-
sider how other jurisdictions have addressed the difficulties of distinguishing, ex
ante, between naked price-fixing arrangements and potentially pro-competitive
arrangements.
II. The U.S..Experience
The price-fixing provisions of the Canadian Competition Act are detailed
and specific, and include definitions of such practices as bid-rigging67 and
exchanges of information.” In contrast, the U.S. Sherman Act is general and
non-specific. Section 1 of the Sherman Act condemns “[e]very contract, combi-
nation in the form of trust or otherwise, or conspiracy, in restraint of trade or
commerce.” With the exception of special legislation which exempts certain
practices from the scope of the Sherman Act, practices which attract liability
under the Sherman Act have been defined by over one hundred years of juris-
prudence.
The Sherman Act governs “every contract,” and the U.S. Supreme Court
adopted an expansive definition of “every contract” in its first Sherman Act
decision.69 In subsequent cases,70 the Court recognized that an overly broad
interpretation of “every contract” would invalidate many ordinary business con-
tracts, including partnership agreements. Ultimately, the Court recognized that
the Sherman Act was designed to prohibit only unreasonable restraints of
trade .7 The crucial question for modem courts in Sherman Act cases is whether
the challenged arrangement is “unreasonably restrictive” of competition.72
Like Canada, the United States has adopted a categorization approach to
horizontal arrangements. There are three categories: per se illegal arrangements,
6 7Competition Act, supra note 2, s. 47.
6Stbid., s. 45(3).
69 United States v. Trans-Missouri Freight Association, 166 U.S. 290 (1897).
71n Hopkins v. United States, 171 U.S. 578 at 594 (1898), the U.S. Supreme Court declared that
“Itihe effect upon the commerce spoken of must be direct and proximate.” The Court also
remarked that the Sherman Act “must have a reasonable construction or else there would scarcely
be an agreement or contract among businessmen that could not be said to have, indirectly or
remotely, some bearing upon interstate commerce, and possibly to restrain it” (ibid. at 600). See
also United States v. Joint Traffic Association, 171 U.S. 505 (1898).
7 1This view was propounded in Standard Oil Co. of New Jersey v. United States, 221 U.S. 1 at
58 (1911), where the Court held that the purpose of the Sherman Act is to deem “illegal all con-
tracts or acts which [are] unreasonably restrictive of competitive conditions” [emphasis added].
72For a recent restatement, see National Collegiate Athletic Association v. Board of Regents of
the University of Oklahoma, 468 U.S. 85 at 98 (1984) [hereinafter NCAA].
1993]
RETHIKING PRICE-FIXING LAW
rule-of-reason arrangements, and per se legal arrangements. Per se illegal
arrangements, which include naked price-fixing, are thought to be manifestly
anti-competitive, and (ideally) courts condemn those arrangements without
examining their surrounding circumstances. Rule-of-reason arrangements are
thought to be potentially pro-competitive, and courts examine the surrounding
circumstances of rule-of-reason arrangements before condemning them.
In this section we trace the evolution of the categories and attempt to artic-
ulate the conceptual distinction (such as there is) between per se illegal arrange-
ments and rule-of-reason arrangements.
A. Evolution of the Rule-of-Reason Approach
Courts look to surrounding circumstances to determine whether an
arrangement unreasonably restricts competition. According to Bork,” the fol-
lowing dictum is the “quintessential expression of the rule of reason” approach:
The true test of legality is whether the restraint imposed is such as merely regu-
lates and perhaps thereby promotes competition or whether it is such as may sup-
press or even destroy competition. To determine that question the court must ordi-
narily consider the facts peculiar to the business to which the restraint is applied;
its condition before and after the restraint was imposed; the nature of the restraint
and its effect, actual or probable. The history of the restraint, the evil believed to
exist, the reason for adopting the particular remedy, the purpose or end sought to
be attained, are all relevant facts.’ 4
The U.S. rule-of-reason approach consists of essentially two inquiries.’
Given a horizontal arrangement among competitors, courts first ask if the
arrangement harms competition. If the arrangement is found not to harm com-
petition, it is upheld. If the arrangement is found to harm competition, courts
proceed to ask whether the anti-competitive arrangement may nonetheless be
justified on the basis of offsetting efficiency gains.
1.
The Extent to Which an Arrangement Harms Competition
One measure of the harm an arrangement inflicts on competition is the
extent to which the arrangement reduces output.76 Recent American cases have
approved the output-reduction measure of unreasonableness.77 However, as
73Supra note 4 at 43.
74Board of Trade of the City of Chicago v. United States, 246 U.S. 231 at 238 (1918).
75p.E. Areeda & D.F. Turner, Antitrust Law, vol. 7 (Boston: Little, Brown & Company, 1986) at
371. The authors discuss “two clear directions, and a third as well.” The third direction asks: “[i]s
the restraint reasonably necessary for the achievement of any such legislative objective?” See gen-
eraly S. Ross, Principles of Antitrust Law (New York: Foundation Press, 1993) c. 4.
76This test is not infallible. For example, a price-fixing cartel which practises perfect price dis-
crimination would produce the perfectly competitive level of output, yet the cartel would remain
anti-competitive despite the absence of a reduction in output.
7 71n Broadcast Music Inc. v. Columbia Broadcasting Systems, 441 U.S. 1 at 20 (1979) [herein-
after Broadcast Music], the U.S. Supreme Court held that the proper test is whether the practice
would “tend to restrict competition and decrease output.” See also NCAA, supra note 72 at 120,
where the Court held that a plan to limit the live television broadcast of NCAA college football
games was “curtailing output” and was thus unreasonable.
REVUE DE DROIT DE McGILL
[Vol. 38
Philip Areeda and Donald Tumer note,7″ it is not always easy to measure an
arrangement’s effect on output. While anti-competitive arrangements will ulti-
mately reduce output, output will also decrease if there are fluctuations in output
demand or fluctuations in the supply of inputs. Because of the inherent diffi-
culty of measuring the effects of arrangements on output, courts often treat the
market power of parties to an arrangement as a surrogate for the arrangement’s
output-reducing effects.79 The greater the parties’ market power, so courts rea-
son, the greater the likely output-reducing effects of the arrangement.
There is no consensus among either courts or academics on the degree of
market power that parties must possess for courts to conclude that their arrange-
ments reduce output.8″ Lawrence Sullivan suggests that a “truncated or thresh-
old analysis will suffice.”‘” Bork argues that market shares which merger stand-
ards deem to be presumptively lawful should be presumptively lawful under
rule-of-reason review, and the U.S. Department of Justice adopted a similar
approach in its Antitrust Guide for International Operations. 2 Philip Areeda and
Herbert Hovenkamp remark that courts will often conclude that an arrangement
reduces output whenever parties have a “non-trivial” level of market power.83
2.
Justification: Whether the Arrangement Promotes Pro-Competitive
Objectives
Once an arrangement is found to harm competition, the burden shifts to the
defendant to justify the arrangement. As stated earlier, the “quintessential rule
of reason” declares that “[t]he history of the restraint, the evil believed to exist,
the reason for adopting the particular remedy, the purpose or end sought to be
obtained, are all-relevant facts.”8 4 These facts become relevant in the justifica-
tion inquiry.
During the justification inquiry, courts consider only the extent to which
challenged arrangements promote competition,85 and do not consider other fac-
78Supra note 75 at 374-76.
7 9Federal Trade Commission v. Indiana Federation of Dentists, 476 U.S. 447 (1986) [hereinafter
hidiana Dentists].
8See W.M. Landes & R.A. Posner, “Market Power in Antitrust Cases” (1981) 94 Harv. L. Rev.
937; Hovenkamp, supra note 15, c. 3; H. Hovenkamp, “The Measurement of Market Power: Policy
and Science” in Mathewson, Trebilcock & Walker, eds., supra note 16, 43.
1landbook of Antitrust Law (St. Paul: West, 1977) at 190-92. See also F.H. Easterbrook, “The
Limits of Antitrust” (1984) 63 Tex. L. Rev. I at 20; J.D. Briggs & S. Calkins, “Antitrust 1986-87:
Power and Access (Part I)” (1987) 32 Antitrust Bull. 275 at 285-300.
8 2Rothetjy Storage & Van Co. v. Atlas Van Lines Inc., 792 F.2d 210 at 229-30 (D.C. Cir. 1986),
Bork J. [hereinafter Rothery Storage]; Justice Department, International Operations, Antitrust
Enforcement Policy (Nov. 10, 1988) (CCH. Supp.) at 42.
8 3Antitrust Law: An Analysis of Antitrust Principles and Their Application, 1990 Supp. (Boston:
Little, Brown & Company, 1990) at 970-72.
84Supra note 74.
8 5Although competition is the sole ground on which courts weigh alleged justifications, courts
interpret the term “competition” broadly. If the nature of a product is such that it can only be pro-
duced through a horizontal arrangement, the arrangement will be upheld. See Broadcast Music,
supra note 77, where the Supreme Court held that a combination which created a central repository
of music copyrights and required copyright users to purchase blanket-licences for all copyrights
1993]
RETHINKING PRICE-FIXING LAW
tors such as the public interest.8 6 Once a restraint is shown to possess an effi-
ciency justification, courts ask whether the objectives achieved by the restraint
may be achieved while causing less harm to competition. Courts will not excuse
a challenged arrangement on the basis of an alleged pro-competitive justifica-
tion unless they find that the arrangement is reasonably necessary to fulfill the
alleged pro-competitive goal. Where the alleged pro-competitive justification is
clearly not pro-competitive, courts will dismiss the justification claim summa-
rily.87
B. Evolution of the Per Se Illegal Rule
Rule-of-reason inquiries into the surrounding circumstances of arrange-
ments can be difficult and time-consuming. The per se illegal rule is an eviden-
tiary presumption which, in some cases, allows courts to condemn arrangements
without engaging in a full-blown rule-of-reason inquiry.
The per se illegal rule originated in the 1897 Joint Traffic case, where the
U.S. Supreme Court held that arrangements such as price-fixing, which have a
“direct and immediate effect … upon interstate commerce” are invalid.”8 The
modem per se illegal rule began with U.S. v. Socony-Vacuum Oil Co., 9 where
the Supreme Court held that “[u]nder the Sherman Act a combination formed
for the purpose and.with the effect of raising, depressing, fixing, pegging, or sta-
bilizing the price of a commodity in interstate commerce is illegal per se.”90
Once the Socony-Vacuum Court concluded that price-fixing, by definition, is an
unreasonable restraint of competition, it condemned the arrangement on its face
without a rule-of-reason inquiry into surrounding circumstances.
was pro-competitive. Without the central repository, the market for music broadcast would not
function at all. See also NCAA, supra note 72, where the Court condemned an arrangement because
it was not essential to the market for the product. For a discussion of the characteristics of those
markets in which horizontal arrangements may be essential for the market to operate, see G. Bit-
tlingmayer, “Decreasing Average Cost and Competition: A New Look at the Addyston Pipe Case”
(1982) 25 J. L. & Econ. 201.
86See Federal Trade Commission v. Superior Court Trial Lawyers Association, 493 U.S. 411 at
422 (1990), where the U.S. Supreme Court refused to “pass upon [sic] the social utility or political
wisdom of price-fixing agreements.” In National Society of Professional Engineers v. United
States, 435 U.S. 679 (1978) [hereinafter Society of Engineers], the Supreme Court struck down an
agreement among engineers to collectively refuse to negotiate prices with prospective clients
before being retained. The Court rejected the engineers’ argument that the agreement was neces-
sary to prevent unscrupulous engineers from cutting costs (and ultimately reducing public safety)
to attract clients, and declared that “the Rule of Reason does not support a defense based on the
assumption that competition itself is unreasonable.” See also Indiana Dentists, supra note 79;
Areeda & Turner, supra note 75 at 380-81.
There have been some exceptions to the rule against considering other factors in the justification
inquiry (see e.g. Appalachian Coals, Inc. v. United States, 288 U.S. 344 at 361 (1933), where the
Court upheld an arrangement due to the unfavourable economic conditions of the industry). These
cases are generally thought to be anomalous (see e.g. Bork, supra note 4, c. 2-3; Sullivan, supra
note 81 at 180-86).
87 1n NCAA, supra note 72 at 111, for example, the Court cites Areeda in saying that “the rule
of reason sometimes’can be applied in the twinkling of an eye.” See also B. Bock, “An Economist
Considers Some Basic Issues of Anti-trust Law in the United States” (1990) 2 E.C.L.R. 52 at 62.
88United States v. Joint Traffic Association, 171 U.S. 505 at 568 (1897).
89310 U.S. 150 (1940) [hereinafter Socony-Vacuum].
901bid. at 223.
McGILL LAW JOURNAL
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1.
The Category of Per Se Illegal Arrangements
Since Socony-Vacuum, American courts have added to the category of per
se illegal arrangements91 both by broadening the scope of the term “price-
fixing” and by declaring other sorts of arrangements, such as market-allocation
agreements,9″ to be per se illegal.
Courts have characterized the following sorts of arrangements as “price-
fixing”: agreements to fix minimum93 or maximum.94 prices; agreements to pro-
hibit or interfere with competitive bidding;95 agreements to eliminate short-term
credit;96 and buyers’ agreements to offer particular prices or to limit purchases.9 7
2.
The Problem of Characterization
The advantage of the per se illegal rule is that it allows courts to condemn
naked price-fixing and other manifestly anti-competitive arrangements without
a complex rule-of-reason inquiry. The problem with the rule is its inflexibility,
since not all arrangements which fix prices are anti-competitive. Bork offers the
example of an agreement among independent drug stores to purchase a collec-
tive advertisement which lists their products at specified prices. While the
agreement fixes prices, it also generates advertising economies of scale.9″ Since
the per se illegal rule requires the court to condemn price-fixing arrangements
without examining surrounding circumstances, the crucial question for the court
is whether the drug stores’ agreement may be characterized as “price-fixing”
within the meaning of the per se illegal rule. Yet it is difficult to characterize
the agreement as “price-fixing” without examining the surrounding circumstan-
ces of the agreement. This has been called the problem of “characterization.”99
Since Socony-Vacuum, American courts have been confronted with many
seeming price-fixing arrangements which they have been unable to characterize
as “price-fixing” without first examining surrounding circumstances. This has
9 1For the development of per se illegality, see generally Briggs & Calkins, supra note 81 at
290-94; Sullivan, supra note 81 at 213-16.
92Agreements among competitors to divide markets are per se illegal. See United States v.
Addyston Pipe & Steel, 175 U.S. 211 (1899) [hereinafter Addyston Pipe]; Timken Roller Bearing
Co. v. United States, 341 U.S. 593 (1951); United States v. Topco Associates, Inc., 405 U.S. 596
(1972). However, in recent years there has been a trend to evaluate market-division agreements on
a rule of reason. There is now strong authority for the proposition that defendants must have market
power for their market-sharing arrangements to be condemned. See NCAA, supra note 72; Rothery
Storage, supra note 82; Polk Brothers Inc. v. Forest City Enterprises Inc., 776 F.2d 185 (7th Cir.
1985), Easterbrook J. [hereinafter Polk Brothers]; General Leaseways, Inc. v. National Truck Leas-
ing Assoc., 744 F.2d 588 (7th Cir. 1984), Posner J.
93Goldfarb v. Virginia State Bar, 421 U.S. 773 (1975) [hereinafter Goldfarb].
9 Arizona v. Maricopa County Medical Society, 457 U.S. 332 (1982) [hereinafter Maricopa
County].
95Society of Engineers, supra note 86; United States v. W.F. Brinkley & Son Construction Co.,
783 F.2d 1157 (4th Cir. 1986).
96Catalano v. Target Sales, Inc., 446 U.S. 643 (1980).
97National Macaroni Manufacturers Association v. Federal Trade Commission, 345 F.2d 421
(7th Cir. 1975); Mandeville Island Farms v. American Crystal Sugar, 334 U.S. 219 (1948).
93Supra note 4 at 437-38.
9 9Baxter, supra note 16 at 128.
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RETHINKING PRICE-FIXING LAW
compelled the U.S. Supreme Court to blur the distinction between per se illegal
arrangements and arrangements which attract rule-of-reason review.00 In
NCAA, the Supreme Court declared that “there is often no bright line separating
per se from Rule of Reason analysis. Per se rules may require considerable
inquiry into market conditions before the evidence justifies a presumption of
In later cases, the Supreme Court confirmed its
anticompetitive conduct.’..
movement away from a strict per se illegal rule, 12 and circuit courts have fol-
lowed the Supreme Court’s lead.’03
American courts are now using almost a full rule-of-reason analysis to
evaluate arrangements which, at one time, they would have summarily con-
demned as per se illegal.” However, in adopting this approach, American
courts risk losing the benefits of the per se illegal rule. The rule serves no pur-
pose if courts must engage in a rule-of-reason analysis before characterizing an
arrangement as per se illegal. The problem of characterization suggests that it
may not be possible to frame a prohibition against naked price-fixing without
at the same time targeting potentially pro-competitive arrangements. Thomas
Webb has indeed argued that a straight rule-of-reason approach for all arrange-
ments would be preferable to the per se illegal/rule of reason distinction. 1
5
The per se illegal rule persists despite the difficulty of creating a watertight
category of per se illegal arrangements. The current apprQach requires courts to
examine whether an alleged price-fixing arrangement is a “naked” restraint or
If courts
is a restraint which is “ancillary” to some pro-competitive objective.’
find restraints to be naked, they will characterize the arrangements asperse ille-
gal, and condemn them summarily. If, on the other hand, courts find that the
restraints can plausibly create integrative efficiencies, they will examine other
factors such as the defendant’s market power. 7 Paradoxically, the naked/
ancillary distinction was first propounded by Justice Taft of the U.S. Supreme
Court in the 1898 Addyston Pipe case.’ Bork remarks that “[i]t is both startling
and discouraging to realize that, in view of what came later, the Addyston opin-
‘See L.H. Pasahow, “Erosion of the Per Se Rule: Trends in the Law of Horizontal Restraints”
(1987) 2:1 Antitrust 22.
‘0 ‘Supra note 72 at 104.
l2See Northwest Wholesale Stationers’ Inc. v. Pacific Stationary & Printing Co., 472 U.S. 284
(1985); Maricopa County, supra note 94.
’03National Bancard Corp. v. Visa U.S.A. Inc., 779 F.2d 592 (11th Cir. 1986), cert. denied 479
U.S. 923 (1986) [hereinafter NaBanco]. See also Stratmore v. Goodbody, 1986-2 Trade Cas. para.
67 193 (E.D. Ky.), aff’d 866 F.2d 189 (6th Cir. 1989), cert. denied 109 S. Ct. 2065 (1989). Hoven-
kamp, supra note 15 at 128-29, remarks that “determining when a practice should be [characterized
as per se illegal] can be very difficult, and may involve a fair amount of sophisticated economic
inquiry.”
‘For an extensive discussion of the shift away from per se rules, see J. Halverson, “The Future
of Horizontal Restraints Analysis” (1988) 57 Antitrust L.J. 33.
’05T. Webb, “Fixing the Price Fixing Confusion: A Rule of Reason Approach” (1983) 92 Yale
L.J. 706.
l06Polk Brothers, supra note 92; Hennessy Industries v. FMC Corp., 779 F.2d 402 (7th Cir.
1985); NaBanco, supra note 103.
‘TP.E. Areeda & H. Hovenkamp, Antitrust Law: An Analysis of Antitrust Principles and Their
Application, 1992 Supp. (Boston: Little, Brown & Company, 1992) at 1089-95.
’08Supra note 92.
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[Vol. 38
ion of 1898 may well have been the high-water mark of rational antitrust doc-
trine.””‘
A recent decision of the U.S. Federal Trade Commission provides a useful
summary of the modem American approach to horizontal arrangements:
First, we ask whether the restraint is “inherently suspect.” In other words, is the
practice the kind that appears likely, absent an efficiency justification, to “restrict
competition and reduce output”? … If the restraint is not inherently suspect, then
the traditional rule of reason, with attendant issues of market definition and power,
must be employed. But if it is inherently suspect, we must pose a second question:
Is there a plausible efficiency justification for the practice? … Such an efficiency
defense is plausible if it cannot be rejected without extensive factual inquiry. If it
is not plausible, then the restraint can be quickly condemned. But if the efficiency
justification is plausible, further inquiry –
is needed to deter-
mine whether the justification is really valid. If it is, it must be assessed under the
full balancing test of the rule of reason. But if the justification is, on examination,
not valid, then the practice is unreasonable and unlawful under the rule of reason
without further inquiry –
there are no likely benefits to offset the threat to com-
petition.”
a third inquiry –
0
C. Exemptions from the Antitrust Laws: Per Se Legal Arrangements
The U.S. Congress has concluded that certain arrangements are in the pub-
lic interest and should be immune from antitrust scrutiny. These arrangements
include: (i) collective bargaining agreements;.. (ii) agricultural cooperatives;”.
(iii) cartel agreements which relate solely to exports;” 3 and (iv) certain produc-
tion agreements among newspapers, provided the Attorney General gives writ-
ten consent.” 4 As well, many regulated industries have been granted a qualified
exemption from antitrust liability.”5 Finally, the Sherman Act only applies to
arrangements which affect “interstate commerce” within the meaning of the
American Constitution, although American courts usually conclude that hori-
zontal arrangements affect interstate commerce.” 6 Baseball is the only signifi-
1″9Supra note 4 at 30.
“0Massachusetts Bd. of Registration in Optometry, 5 Trade Reg. Rep. 122,555 (F.T.C. 1988),
quoted in Areeda & Hovenkamp, supra note 107 at 1094-95.
11
“‘Norris-La Guardia Act, 29 U.S.C. 101-115 (1988); Clayton Act, 15 U.S.C. 17 (1988);
National Labour Relations Act, 29 U.S.C. 151 (1988); Labour Management Relations Act, 29
U.S.C. 141 (1988).
2Capper-Volstead Act, 7 U.S.C. 291-92 (1988); Clayton Act, 15 U.S.C. 17 (1988).
113Webb-Pomerene Act, 15 U.S.C. 61-66 (1988).
“4The Newspaper Preservation Act, 15 U.S.C. 1801-04 (1988), provides that failing newspa-
pers may enter into joint-operation agreements with solvent newspapers with the Attorney Gene-
ral’s written consent.
1iSSullivan, supra note 81 at 744, lists the following examples of such industries: conventional
utility industries, such as water, telephones, gas and electricity; rail, air and much of water and
truck transportation, communication and banking; many professions and occupations and even
organized exchanges. The insurance industry is subject to regulation by state insurance regulators
under the McCarran-Ferguson Act, 15 U.S.C. 1011-15 (1988).
“16See e.g. Goldfarb, supra note 93, in which the U.S. Supreme Court held that a state bar asso-
ciation’s practice of fixing fees for title examinations violated I of the Sherman Act because many
homesite-purchasers were from out of state; thus there was held to be an effect on interstate com-
merce. See generally Areeda & Hovenkamp, supra note 107 at 269-86.
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RETHINKING PRICE-FIXING LAW
cant activity which American courts have concluded falls outside the “interstate.
commerce” requirement.” 7
D. Institutional Features of the American Regime
Both the U.S. Department of Justice (“DJ”) and the Federal Trade Com-
mission (“FTC”) investigate antitrust violations. Antitrust laws are enforced by
criminal courts, the Federal Trade Commission, and private parties.
The DJ generally initiates prosecutions for antitrust violations. Upon con-
viction, defendants are liable to fines of up to $350,000 for individuals and up
to $10 million for corporations, to imprisonment of up to three years, or to
both.”‘ The DJ wins or settles the vast majority of its criminal price-fixing pros-
ecutions.” 9
The Federal Trade Commission Act’ empowers the FTC to investigate
and challenge “unfair methods of competition.” Any individual, partnership,
association, corporation or organization may request that the FTC initiate an
investigation. 22 The FTC may also undertake an investigation on its own initia-
tive.”n If, following an investigation, the FTC concludes that a party has been,
or is, using any unfair method of competition, it holds a “show cause hearing.”
At the hearing, the defendants must “show cause,” on a balance of probabilities,
why the FTC should not issue a cease and desist order against their unfair prac-
tices. “’24 Once the FTC issues a cease and desist order, any violation of the order
subjects defendants to civil penalties.
In the private law context, private plaintiffs have strong incentives to
enforce the antitrust laws,”z and may recover treble damages’ 26 or obtain injunc-
tive relief’27 for antitrust violations.”2 To recover damages under the antitrust
“l7 Federal Baseball Club of Baltimore Inc. v. National League of Professional Baseball Clubs,
259 U.S. 200 (1922); Flood v. Kuhn, 407 U.S. 258 (1972).
“t8Antitrust Amendments Act of 1990, Pub. L. No. 101-588, 104 Stat. 2880 (codified as amended
at 15 U.S.C. 1 (1988)), 4(a). See generally J.L. Whalley, “Crime and Punishment – Criminal
Antitrust Enforcement in the 1990s” (1990) 59 Antitrust L.J 151 at 158-59.
” 9H.p. Marvel, J.M. Netter & A.M. Robinson, “Price Fixing and Civil Damages: An Economic
Analysis” (1988) 40 Stanford L. Rev. 561 at 562.
12015 U.S.C. 45(a)(2) (1988).
121The FTC has jurisdiction over all antitrust statutes; its jurisdiction overlaps with that of the
DJ. Since the DJ generally initiates most price-fixing prosecutions, the FTC will generally seek
clearance from the DJ before initiating investigations into alleged price-fixing (The FTC as an
Antitrust Enforcement Agency: Its Structure, Powers and Procedures (1981) 2 A.B.A. Antitrust
See. Antitrust Law (Monog. 5) at 16).
122Federal Trade Commission, 16 C.F.R. 2.2 (1991).
121bid., 2.1.
124 Ibid., 5(a)(2).
125For a useful discussion of the procedural aspects of private actions, see A.D. Neale & D.G.
Goyder, The Antitrust Laws of the United States of America, 3d ed. (Cambridge: Cambridge Uni-
versity Press, 1980) at 420-28.
126Clayton Act, 15 U.S.C. 15 (1988).
‘271bid., 26.
128The treble damages remedy has been heavily criticized for inducing excessive litigation. Over
1,000 private antitrust actions are filed each year in the U.S. (S.C. Salop & L.J. White, “Treble
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laws, private plaintiffs must establish both (1) that they have standing to sue,
and (2) that they have suffered injury as a result of the antitrust violation.
Hovenkamp concludes that customers and competitors of the violator will nor-
mally be granted standing, while nonpurchasers, potential competitors and
employees of the violator, and stockholders, creditors, landlords and employees
of the victims will normally be refused standing. 9 For injunctive relief, plain-
tiffs need only establish “threatened loss or damage.”‘3
m. The European Experience
The three regimes reviewed in this section represent a significant departure
from both the Canadian and American regimes. Instead of attempting to frame
prohibitions which distinguish naked price-fixing from potentially pro-
competitive arrangements, these regimes combine overinclusive prohibitions
against all forms of horizontal arrangements with procedural mechanisms for ex
ante administrative review of potentially pro-competitive arrangements.
A. The European Community Law
In the European Community (“EC”), the basic rules which govern poten-
tially anti-competitive arrangements are set out in Article 85 of the Treaty of
Rome,’ which provides that:
(1) The following shall be prohibited as incompatible with the common market:
all agreements between undertakings, decisions by associations of undertak-
ings and concerted practices which may affect trade between Member States
and which have as their object or effect the prevention, restriction or distortion
of competition within the common market, and in particular those which:
(a) directly or indirectly fix purchase or selling prices or any other trading
(b) limit or control production, markets, technical development, or invest-
conditions;
ment;
Damages Reform: Implications of the Georgetown Project” (1986) 55 Antitrust L.J. 73 at 78).
Posner blames treble damages for the “wild and woolly antitrust suits that the private bar has
brought –
and won” (supra note 3 at 228). See also W. Breit & K.G. Elzinga, “Private Antitrust
Enforcement: The New Learning” (1985) 28 1. L. & Econ. 405; W. Breit & K.G. Elzinga, “Anti-
trust Enforcement and Economic Efficiency: The Uneasy Case for Treble Damages” (1974) 17 J.
L. & Econ. 329; K.G. Elzinga & W. Breit, The Antitrust Penalties: A Study in Law and Economics
(New Haven: Yale University Press, 1976) c. 4; S.W. Salant, “Treble Damages Awards in Private
Lawsuits for Price Fixing” (1987) 95 J. Pol. Econ. 1326; F.H. Easterbrook, “Detrebling Antitrust
Damages” (1985) 28 J. L. & Econ. 445.
Criticism has not been universal. S.C. Salop & L.J. White argue that the damages multiplier
should be at the discretion of the judge, with treble damages being the norm (“Economic Analysis
of Private Antitrust Litigation” (1986) 74 Geo. L.J. 1001 at 1051-52). D. Besanko & D.F. Spulber
show mathematically that a multiple damages remedy can lead to welfare improvements if the
damage multiple is sufficiently large (“Are Treble Damages Neutral? Sequential Equilibrium and
Private Antitrust Enforcement” (1990) 80 Am. Econ. Rev. 870). See also H. Hovenkamp, “Treble
Damages Reform” (1988) 33 Antitrust Bull. 233.
129Supra note 15 at 361.
130See Hawaii v. Standard Oil Co. of California, 405 U.S. 251 at 260-64 (1972); In re Multi-
district Vehicle Air Pollution M.D.L. No. 31, 481 F.2d 122 at 130-31 (9th Cir. 1973), cert. denied
414 U.S. 1045 (1973). See also Sullivan, supra note 81 at 772.
’31Supra note 10.
matically void.
(3) The provisions of paragraph 1 may, however, be declared inapplicable in case
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RETHINKING PRICE-FIXING LAW
(c) share markets or sources of supply;
(d) apply dissimilar conditions to equivalent transactions with other trading
parties, thereby placing them at a competitive disadvantage;
(e) make the conclusion of contracts subject to acceptance by the other par-
ties of supplementary obligations which, by their nature or according to
commercial usage, have no connection with the subject of such contracts.
(2) Any agreements or decisions prohibited pursuant to this Article shall be auto-
of:
– any agreement or category of agreements between undertakings;
– any decision or category of decisions by associations of undertakings;
– any concerted practice or category of concerted practices;
which contributes to improving the production or distribution of goods or to
promoting technical or economic progress, while allowing consumers a fair
share of the resulting benefit, and which does not:
(a) impose on the undertakings concerned restrictions which are not indis-
pensable to the attainment of these objectives; [and]
(b) afford such undertakings the possibility of eliminating competition in
respect of a substantial part of the products in question.
1.
Article 85(1): The General Prohibition
While the prohibition is broad, and extends to all arrangements which
“may affect trade between Member States,” the European Commission has
established a de minimis threshold. In the Commission’s view, arrangements do
not trigger the prohibition unless they have an “appreciable” effect on compe-
tition. Arrangements will have “appreciable” effects on competition when they
appreciably alter the market position or sales and supply opportunities of third
parties. According to the Commission, arrangements will not have an apprecia-
ble effect on competition where: (i) the total goods or services affected by the
agreement do not represent more that five per cent of total supply; and (ii)
where the aggregate annual turnover of the participating enterprises does not
exceed 200 million ECU. 32,
2.
Article 85(2): Consequences of Violating the Article 85(1) Prohibition
The Treaty of Rome provides two consequences of violating the prohibition
in article 85(1). First, article 85(2) deems arrangements which violate the pro-
hibition to be categorically unenforceable. Thus, any party to a prohibited
arrangement may avoid its contractual obligations by pleading article 85(1).
The second consequence is the risk of administrative action by the Com-
mission. The Treaty of Rome empowers the Commission to impose severe fines
for intentional or negligent violations of the prohibition.’33 The Commission
ESC Publishing, 1990) at 43-44.
’32See V. Korah, An Introductory Guide to EEC Competition Law and Practice, 4th ed. (Oxford:
133
1n 1989, the Commission imposed a fine of ECU 48 million on soda ash manufacturers who
had engaged in market sharing (“EC Commission Imposes Largest Fines for Cartel Arrangements
in Soda Ash Sector” (1991) 60 Antitrust & Trade Reg. Rep. 14). During 1988, the Commission
imposed fines of ECU 23,500,000 and ECU 37,000,000 on price-fixers, and declared that the fimes
imposed were “low” because the price-fixing scheme had not been profitable (A.B.A. Report, supra
note 14, app. 1 at 21).
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may also issue decisions (termination orders) to parties requiring them to termi-
nate all article 85(1) violations. Failure to comply with decisions will attract
substantial fines.
3.
Relief from the Prohibition
There are four ways for parties to secure relief from the article 85(1) pro-
hibition. First, the arrangement may not meet the de minimis requirement of an
“appreciable” effect on competition.” Second, the arrangement may qualify for
one of the block exemptions the Commission has created for certain types of
arrangements.’35 Third, the arrangement may qualify for a negative clearance
from the Commission.’ 36 Fourth, the arrangement may qualify for a Commission
exemption from article 85(1) under the criteria set out in article 85(3).
The Commission has published guidelines which allow parties to deter-
mine whether their arrangements fall below the de minimis requirement or qual-
ify for a block exemption. 37 Parties to arrangements which satisfy either crite-
rion need not take any action to insulate their arrangements from scrutiny. All
other arrangements trigger the prohibition unless they qualify for either a neg-
ative clearance or a specific exemption. To qualify for a negative clearance or
a specific exemption, the parties must first provide the Commission with exten-
sive information about both their business practices and their arrangement by
filing a Form A/B.
Filing a Form A/B does three things. First, it renders the arrangement pro-
visionally valid and enforceable in national courts.3 8 Second, it renders the
arrangement immune from fines as of the date of filing, although one commen-
tator has suggested that notification may not insulate an obvious violation
because that would constitute an “abuse” of the notification mechanism. 39
Third, it begins the Commission’s administrative review of the arrangement.
134Korah, supra note 132 at 43.
135Block exemptions have been granted for exclusive dealing agreements (EC, Commission Reg-
ulation (EEC) No 67167 of 22 March 1967, O.J. (1967) No 57 at 849); exclusive distribution agree-
ments (EC, Commission Regulation (EEC) No 1983183 of 22 June 1983, O.J. Legislation (1983)
No L173 at 1); exclusive purchasing agreements (EC, Commission Regulation (EEC) No 1984183
of 22 June 1983, O.J. Legislation (1983) No L173 at 5); patent licensing agreements (EC, Com-
mission Regulation (EEC) No 2349184 of 23 July 1984, O.J. Legislation (1984) No L219 at 15);
motor vehicle distribution and servicing agreements (EC, Commission Regulation (EEC) No
123185 of 12 December 1984, O.J. Legislation (1985) No L15 at 16); research and development
agreements (EC, Commission Regulation (EEC) No 418185 of 19 December 1984, O.J. Legislation
(1985) No L53 at 5); and air transport agreements (EC, Commission Regulation (EEC) No 3976187
of 14 December 1987, O.J. Legislation (1987) No L374 at 9; EC, Commission Regulation (EEC)
No 2671188 of30 August 1988, O.J. Legislation (1988) No L239 at 9; EC, Commission Regulation
(EEC) No 2672188 of 30 August 1988, O.J. Legislation (1988) No L239 at 13; EC, Commission
Regulation (EEC) No 2673188 of 30 August 1988, O.J. Legislation (1988) No L239 at 17).
136EC, Council Regulation No 204162 of 6 February 1962 concerning the implementation of
articles 85 and 86 of the Treaty, OJ. Special Edition (1959-1962) at 87, art. 2 [hereinafter Council
Regulation 17].
137Korah, supra note 132.
138Grundig AG v. Metro-SB-Grossmiirkte GmbH & Co. KG, [1979] 2 C.M.L.R. 564 at 568.
139Korah, supra note 132 at 115.
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RETHINKING PRICE-FIXING LAW
Once the Commission receives the parties’ Form A/B, it determines
whether their arrangement triggers the prohibition. 40 If the arrangement does
not meet one of the conditions necessary to trigger the prohibition, the Commis-
sion issues a negative clearance. A negative clearance is a certification by the
Commission that, on the basis of the facts in its possession, there are no grounds
under articles 85(1) or 86 for action on its part in respect of the arrangement. 4′
If the arrangement triggers the prohibition, then it is ineligible for a negative
clearance, but may be eligible for an exemption. The Commission grants
exemptions based on the efficiency, consumer welfare, and least-restrictive-
restraint tests set out in article 85(3).
4.
Discussion
While the European regime avoids the American problem of characteriza-
tion through an overinclusive non-criminal prohibition, the existing ex ante
authorization regime is cumbersome for both parties and the Commission. The
Commission’s published criteria for arrangements which either qualify for block
exemptions or fall below the de minimis threshold allow parties themselves to
determine whether their arrangements trigger the prohibition. However, even
with published criteria, parties cannot be legally certain that their arrangements
will avoid the prohibition unless they have secured negative clearances or
exemptions from the Commission. The need for legal certainty has led many
parties to routinely seek negative clearances or exemptions.
The negative clearance and exemption mechanism is cumbersome for three
reasons. First, the filing of the Form A/B requires parties to provide extensive
information which is difficult to compile and often irrelevant. Ivo Van Bael and
Jean-Frangois Bellis have charged that the Form requires parties to provide
“soul-searching comments, bordering on self incrimination.”‘ 42 Second, the
backlog of arrangements awaiting clearances and exemptions from the Commis-
sion means that parties are often exposed to considerable delays before receiv-
ing responses from the Commission. While the EC system was designed to pro-
vide parties with legal certainty, parties are in fact exposed to great uncertainty
while they await Commission decisions.’43 Third, the large number of negative
clearance and exemption applications overloads Commission resources by for-
cing Commission staff to evaluate often trivial or benign arrangements.
B. U.K. Competition Law
The U.K. regime'” consists of a prohibition against many forms of hori-
zontal arrangements coupled with an ex ante registration and authorization
14Council Regulation 17, supra note 136, grants to the Commission the power to review
arrangements and to issue negative clearances, individual exemptions. and block exemptions.
14’Council Regulation 17, ibid., art. 2.
14Competition Law of the EEC (Oxfordshire: CCH, 1987) 1022.
143In 1989, 3239 cases were pending before the Commission (A.B.A. Report, supra note 14, app.
1 at 21). Korah, supra note 132 at 116, argues that delays have been a major disincentive to appli-
cations for clearances and exemptions. See also I. Forrester & C. Norall, “The Laicization of Com-
munity Law: Self-Help and the Rule of Reason: How Competition Law Is and Could Be Applied”
(1984) 21 C.M. L. Rev. 11.
144The Restrictive Trade Practices Act 1976 (U.K.), 1976, c. 34 [hereinafter RTPA] and the
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mechanism. The Restrictive Trade Practices Act 1976 compels regulatory
authorities to review all horizontal arrangements as a precondition to their valid-
ity.
1.
The Prohibition: “Registrable Agreements”
The U.K. regime creates a category of “registrable” arrangements.
Arrangements which meet the “registrable” criteria are unenforceable and sub-
ject to administrative cease and desist orders until they have been both regis-
tered with the Office of Fair Trading (“OFT”) and specifically authorized (as
described below). Unlike the EC regime, there are no de minimis exceptions or
block exemptions available for registrable arrangements.
The U.K. category of registrable arrangements is based on formalistic cri-
teria instead of economic or effects-based criteria. Registrable arrangements
include restrictive agreements relating to goods’45 and information agreements
relating to goods.’46 While the formalistic definitions of registrable agreements
were designed to increase certainty, they are both over and underinclusive. They
are overinclusive because they require a large number of arrangements to be
registered and evaluated even though many arrangements are clearly benign or
have only minimal effects on competition. The provisions are underinclusive
because they allow anti-competitive arrangements to be structured in such a
way as to circumvent the technical definitions of registrable agreements and
hence avoid the prohibition. For example, non-registrable arrangements include
agreements which forbid price renegotiation,147 agreements restricting advertis-
ing 48 and an oligopolist price leader’s practice of providing its price list to inter-
dependent firms.’49
The focus of the U.K. prohibition has been heavily criticized 5′ for its lack
of effects-based criteria.’ The U.K. Department of Trade and Industry recently
proposed that the current definitions be abolished and replaced with a broad
effects-based prohibition along the lines of Article 85(1) of the Treaty of
Rome.
52
Restrictive Practices Court Act 1976 (U.K.), 1976, c. 33, comprise the current body of statute law
concerning anti-competitive combinations within the United Kingdom. See also the Restrictive
Trade Practices (Stock Exchange) Act 1984 (U.K.), 1984, c. 2, which exempted certain agreements
related to the stock exchange from the scope of the RTPA.
145RTPA, ibid., s. 6.
‘461bid., s. 7.
147Re Blanket Manufacturers’ Association’s Agreement, [1959] 2 All E.R. 1 (RPC), aff’d [19591
148R. Whish, Competition Law (London: Butterworths, 1985) at 303.
149S . 7(l) of the RTPA, supra note 144, provides that information agreements relating to goods
2 All E.R. 630 (C.A.).
are only registrable if two or more parties supply information.
‘5See U.K., H.C., “Review of Restrictive Trade Practices Policy: A Consultative Document”
Cmnd 331 (March 1988), c. 2 [hereinafter Green Paper]; U.K., H.C., “Opening Markets: New Pol-
icy on Restrictive Trade Practices” Cmnd 727 (July 1989), c. 2 [hereinafter White Paper]; Whish,
supra note 148 at 12-24.
15’Green Paper, ibid. at 27-28; Whish, ibid. at 107.
152 VIite Paper, supra note 150 at 1.
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2.
Consequences of Violating the Prohibition
There are three consequences of violating the prohibition. First, unregis-
tered registrable arrangements are unenforceable. Second, the Director General
(“DG”) of the OFT may apply for a court order restraining the parties from per-
forming their obligations under the agreement. Parties are subject to nominal
fines if they breach those orders. Third, unlike the EC regime, in the U.K. pri-
vate parties may initiate private damage actions against parties to unregistered
registrable arrangements. However, there has been only one successful private
action under the U.K. regime. 153
The U.K. regime favours administrative cease and desist orders over pen-
alties. The basis on which the U.K. imposes fines seems grounded in a theory
of contempt for violating court orders rather than in a theory of deterrence for
manifestly anti-competitive behaviour. Even parties who engage in naked price-
fixing are only subject to fines if they ignore specific court orders, and even
then the fines are nominal: parties who ignore information requests from the
OFT, for example, are subject to maximum fines of 40O. s4
3.
Relief from the Prohibition: The Effect of Registration
Parties to registrable arrangements are subject to cease and desist orders,
and their arraigements are subject to declarations of nullity unless parties have
registered the arrangements with the OFT before the arrangement’s effective
date, and within three months of the arrangement’s execution. 5 Registration is
the first step in securing relief from the prohibition.
Once the DG receives a registered arrangement, itrecords the arrangement
in a public registry. The DG then has two options. The legislatioin requires the
DG to prosecute every registered arrangement in the Restrictive Practices Court
(RPC). However, the legislation also allows the Secretary of State to excuse the
DG from his or her duty to prosecute provided that the DG satisfies the Secre-
tary of State that the registered arrangement either (i) is too insignificant to war-
rant prosecution before the RPC, 56 or (ii) qualifies for a specific exemption
order from the Secretary of State. 15 7
If the DG concludes that the arrangement will not qualify for either an
insignificance declaration or for a specific exemption order from the Secretary
of State, it must prosecute the arrangement. In a prosecution, the parties to the
arrangement bear the burden of satisfying the RPC that the arrangement qual-
ifies under one of eight gateways while satisfying a tailpiece (public interest)
15 3U.K., Annual Report of the Director General of Fair Trading (London: H.M.S.O., 1979). See
also T. Frazer, Monopoly, Competition and the Law: The Regulation of Business Activity in Britain,
Europe and America (Sussex: Wheatsheaf Books, 1988) at 130.
154RTPA, supra note 144, s. 38(4).
1551bid., s. 24, sch. 2, part 5. Time limits vary depending on the nature of the arrangement.
1561bid., s. 21(2).
157The criteria for exemptions are set out in the RTPA, ibid., ss. 29, 30, sch. 3.
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[Vol. 38
requirement. 5 ‘ Very few arrangements qualify for gateways.’59 The high cost of
litigation and the heavy evidentiary burden parties face in the RPC lead most
parties to abandon their arrangements before the RPC convenes a hearing. 60
The unpopularity of RPC prosecutions has resulted in most arrangements
being processed through insignificance declarations. 6’ Whether arrangements
will qualify for insignificance declarations depends on qualitative (as opposed
to quantitative) criteria. Joint ventures and business practice codes have quali-
fied for negative clearances.1 62 However, it is highly unlikely that a price-fixing
arrangement would qualify for a negative clearance, regardless of how trivial its
effects might be. 163 In this regard, the term “insignificance” is misleading. The
U.K. test for insignificance is not a de minimis test like the EC’s “appreciable
effect on competition” test. Registrable arrangements cannot avoid the prohibi-
tion merely because they have only minimal effects on competition.
Arrangements which do not qualify for insignificance declarations may, in
the alternative, qualify for a specific exemption. The Secretary of State may
grant specific exemptions in respect of the following: arrangements which
enhance efficiencies and are important for the national economy; ‘ 4 export
agreements and intellectual property licensing agreements; 165 and price-control
agreements necessary to curb inflation.”
Arrangements which qualify for either insignificance declarations or spe-
cific exemptions are enforceable and are immune from cease and desist orders
once the declarations or exemptions have been issued.
4.
Discussion
As the U.K. Department of Trade and Industry itself acknowledges, 67 the
present U.K. regime is the worst of all possible worlds. The over-broad prohi-
bition, along with the guilty-until-proven-innocent registration requirement and
the lack of either de minimis exceptions or block exemptions, force officials at
the OFT to review far too wide a swathe of arrangements as a precondition of
their validity, and entail a gross misallocation of government resources.
15 tThese are set out in ss. 10 and 19 of the RTPA, ibid. Gateways include arrangements which
do not restrict competition (gateway h) and arrangements which are necessary to ensure that goods
or services remain available to the public (gateway b).
t59Frazer, supra note 153 at 130-33, 140.
1601bid, at 133.
16 Green Paper, supra note 150 at 29-30.
162The following arrangements have qualified for insignificance declarations: joint ventures,
restrictive covenants on the sale of a business, codes of business practice, recommendations of
standard terms by trade associations, and buying groups. See generally Annual Report of the Direc-
tor of Fair Trading (London: H.M.S.O.), for the years 1987 through 1991.
163 Whish, supra note 148 at 131.
164RTPA, supra note 144, s. 29. This exemption is rarely used. Questions which concern an
arrangement’s importance to the national economy are usually referred to the RPC. See Frazer,
supra note 153, c. 1.
16 5RTPA, ibid., sch. 3.
1661bid., s. 30. See Frazer, supra note 153 at 133-39.
167Green Paper, supra note 150.
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The backlog of registered arrangements awaiting insignificance declara-
tions or specific exemptions subjects parties to considerable delays since they
cannot proceed with their arrangements until they have been specifically author-
ized. The DG has no discretion to ignore trivial or benign arrangements. At the
same time, the regime has only minimal deterrent effects because parties who
fail to register registrable arrangements are subject only to cease and desist
orders.
The U.K. Department of Trade and Industry has recommended sweeping
changes to the regime which address these problems.16 Inaddition to a less for-
malistic prohibition, the Department recommends both a de minimis exception
for parties with less than 5 million annual turnover (although the de minimis
exception would not apply to price-fixing agreements), 69 and a system of block
exemptions. 70 Parties who qualify under either exception would be excused
from registering their arrangements. This would reduce the number of arrange-
ments submitted to the OFT for approval. Finally, the Department has recog-
nized that the current regime has minimal deterrent effects and has recom-
mended that parties who fail to register registrable arrangements be subject to
substantial fines.17 1 The Department rejects the current regime of making pen-
alties contingent on breaches of cease and desist orders. 72
C. German Competition Law
The German regime has elements of both the EC regime and the U.K.
regime,, although we believe it represents an improvement over both.
1.
The General Prohibition
Like the EC and the U.K. regimes, German legislation imposes a general
and overinclusive prohibition against cartels and concerted actions between
potential competitors: “Agreements made for a common purpose by enterprises
… shall be of no effect, in so far as they are likely to influence, by restraining
competition, production or market conditions with respect to trade in goods or
commercial services.””‘ Like the U.K. regime, all arrangements trigger the pro-
hibition, and there are no automatic de minimis or block exemptions available.
However, as described below, parties to so-called exempt arrangements may
avoid penalties by filing notifications of their arrangements with the Federal Car-
tel Office (“FCO”). Exempt arrangements become legal and enforceable three
months after the parties file a notification of the arrangement with the FCO.
2.
Consequences of Violating the Prohibition
There are three consequences of violating the prohibition. First, the GWB
deems all cartels formed in violation of the prohibition to be “non-effective.”‘ 74
168White Paper, supra note 150 at 1-5.
169 1bid. at 9.
17″Ibid. at 16-17.
1711bid. at 25.
172 White Paper, ibid. at 25; Green Paper, supra note 150 at 25.
“‘3GWB, supra note 11, s. 1(1).
‘7lbid., s. 38.
McGILL LAW JOURNAL
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Second, participants in illegal cartels commit an administrative offence under
the GWB which is punishable by heavy fines.’75 Fines may also be imposed for
providing false information to the FCO.’7 6 Third, private parties may bring
either private or class actions against parties who execute prohibited arrange-
ments.”‘
3.
Relief from the Prohibition
There are two ways for parties to obtain relief from the prohibition. First,
the arrangement may qualify for an exemption. Second, the FCO may expressly
authorize the arrangement. Under the GWB, the following sorts of arrangements
are exempt from the prohibition: (i) arrangements which deal with the uniform
application of general terms of business, delivery and payment; 78 (ii) arrange-
ments which relate to rebates, so long as the rebates represent genuine consid-
eration; 79 and (iii) arrangements which relate to uniform standards, technical
and organizational efficiency, specialization, and rationalization.8 0 To secure
the benefits of an exemption, parties to exempt arrangements must file notifica-
tions of their arrangements with the FCO. Notifications must include informa-
tion concerning the parties to the arrangement and the nature of the terms of the
arrangement. Where suppliers or purchasers may be affected by the arrange-
ment, the notification must establish that all the suppliers and purchasers have
been consulted about the arrangement, and comments from the purchasers and
suppliers concerning the arrangement must be attached to the notification.
If the notified arrangement qualifies for an exemption, the FCO generally
will not object to the arrangement unless it would result in an abuse of the mar-
ket position brought about by the arrangement.’8′ The arrangement will then
become legal automatically three months after the notification has been filed
with the FCO. If the notified arrangement does not qualify for an exemption, the
FCO will object, and the arrangement will remain illegal. Arrangements are
therefore immune from sanctions when (i) they qualify for exemption; (ii)
appropriate notifications in respect of those arrangements have been filed with
the FCO; and (iii) three months (in most cases) have elapsed since the notifica-
tion was filed with the FCO. Arrangements which do not meet all of these cri-
teria may, however, still be rendered legal if the FCO expressly authorizes the
arrangement. The FCO may authorize the following: (i) arrangements which are
necessary to promote planned adjustments in the economy;’
(ii) arrangements
which promote efficiencies, rationalization or economies of scale;’83 and (iii)
1751n 1988, for example, the FCO imposed fines totalling DM 244 million against a group of
cement workers (A.BA. Report, supra note 14, app. 1 at 34).
176GVB, supra note 11, ss. 38(1), 38(7). See also s. 38a.
1771bid., s. 35.
1781bid., s. 2.
t7 91bid., s. 3.
S”Ibid., ss. 5(1), 5a(1), 5b(1).
‘8 1Ibid., s. 12(1). However, the FCO has residual powers to declare arrangements to be of no
force (s. 12(3)). The exercise of this residual power is appealable (ss. 83, 95).
‘8 21bid., s. 4.
“t 3Ibid., s. 5(3).
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RETHINKING PRICE-FIXING LAW
export promotion agreements which affect domestic commerce.’84 Authoriza-
tions are valid for up to three years.’ The FCO may attach conditions to author-
izations to minimize any anti-competitive effects.
The immunity conferred by notification and authorization applies only to
arrangements which are either notified to the FCO or expressly authorized by
the FCO. Parties lose the immunity if they modify the terms of their arrange-
ment subsequent to notification or authorization.
4.
Discussion
The German regime avoids many of the problems that have plagued the EC
and U.K. regimes. The overinclusive prohibition ensures that all anti-competi-
tive arrangements are subject to scrutiny. Heavy fmes for violations of the pro-
hibition ensure adequate deterrence.
While the prohibition on its own may chill potentially pro-competitive activ-
ities, the notification regime allows parties to potentially exempt arrangements to
avoid sanctions with certainty by fiing notifications of their arrangements with
the FCO and waiting for the three-month FCO response period to expire.
Although the EC regime also confers immunity from sanctions on parties who
notify the Commission of the arrangements, EC immunity is not triggered until
parties file a detailed Form A/B. In Germany, parties need only fie their actual
arrangements and comments from any affected suppliers and purchasers to secure
immunity. The German notification requirements are arguably less onerous than
the EC Form A/B. Moreover, parties are not subject to the delays that their coun-
terparts suffer in the EC and the U.K. because arrangements become automati-
cally legal within three months after the filing of a notification.
D, Conclusion
Instead of creating categories of arrangements which attract different levels
of scrutiny, the EC, U.K. and German regimes subject all horizontal arrange-
ments to overinclusive prohibitions. To ensure that the prohibitions do not deter
potentially pro-competitive behaviour, each regime has developed ex ante
authorization mechanisms which allow parties to insulate their arrangements
from the prohibition. A comparison of the three regimes shows that a variety of
authorization mechanisms are possible.
In reviewing the advantages and disadvantages of each regime, we have
concluded that, to be effective in targeting manifestly anti-competitive arrange-
ments without chilling potentially pro-competitive arrangements, prohibitions
and authorization mechanisms should conform to the following “effectiveness
criteria.”
First, prohibitions must be broad enough to target naked price-fixing. The
EC, the U.K. and the German regimes all satisfy this criterion, although the
over-technical U.K. prohibition has been criticized for being underinclusive.
’84Ibid., ss. 7, 8.
1851bid., ss. 11(3), 11(4).
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Second, the authorization mechanism must be effective in reducing the
chilling effect of the overinclusive prohibition. Prohibitions deter potentially
pro-competitive arrangements. The mere availability of an authorization mech-
anism may not be sufficient to encourage parties to proceed with potentially
competitive arrangements, since parties to arrangements which may trigger the
prohibition will be reluctant to proceed with their arrangements if they must
submit to cumbersome procedures to protect themselves from sanctions. We
believe that in order for an authorization mechanism to effectively reduce the
chilling effect of a prohibition, the mechanism must be simple to invoke and
must provide legal certainty to the parties.
The U.K. regime has the most cumbersome mechanism of the three
regimes. To avoid the prohibition, parties must register arrangements with the
Office of Fair Trading and then either defend their arrangements in the Restric-
tive Practices Court or attempt to negotiate with the Office of Fair Trading and
the Secretary of State to obtain either an insignificance declaration 6r an exemp-
tion. In the process, they are subject to extensive delays while the OFT works
through its backlog of registered arrangements. While the regime provides legal
certainty to the parties –
they know their arrangements are illegal until
expressly approved –
the uncertainty associated with the approval process
makes it difficult for parties to determine in advance whether their proposed
arrangements will survive scrutiny.
The German regime, on the other hand, has the simplest protection mech-
anism of the three regimes and may provide parties with the greatest degree of
certainty. To secure the benefit of the protection, parties to exempt arrangements
need only file notifications of their arrangements with the FCO. Their arrange-
ments become legal automatically three months after the FCO receives the noti-
fication. While parties risk the possibility of the FCO objecting to their arrange-
ments after notification, their uncertainty is limited to the three-month period in
which the FCO is entitled to object.
The simplicity and certainty of the EC regime lies between the U.K. and
the German regimes. While block exemptions and the de minimis appreciable-
effect criteria allow parties to determine for themselves whether their arrange-
ments are protected, parties cannot be absolutely certain that their arrangements
will avoid scrutiny unless they have received a negative clearance or exemption
from the Commission. On the other hand, parties who require legal certainty,
and parties whose arrangements either do not qualify for a block exemption or
fall below the de minimis test, must compile the extensive information requested
in the Commission’s Form A/B and apply for negative clearances or exemp-
tions. They are then subject to considerable delays as the Commission works
through its backlog.
Our third criterion for an effective authorization mechanism is that it
should promote the most efficient use of the regime’s regulatory resources. In
each of the three regimes, administrative agencies perform the separate tasks of
authorizing arrangements, and investigating and prosecuting violations. The
authorization mechanism should not create a misallocation of resources between
the three tasks.
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RETHINKING PRICE-FIXING LAW
The German regime uses its administrative agency most efficiently. By
making all arrangements illegal until notified, the German regime provides
incentives to parties to notify their arrangements to the FCO. These incentives
are strengthened by the heavy fines imposed on parties to prohibited arrange-
ments. Notification gives the FCO an information set on which to evaluate
arrangements, and saves investigative resources. At the same time, the agency
is not overburdened with issuing clearances for trivial arrangements because
notified arrangements which qualify for an exemption become legal automati-
cally by the agency taking no action at all.
The U.K. regime, on the other hand, entails a gross misallocation of
resources. While the obligation to register arrangements gives the Office of Fair
Trading an information set on which to evaluate arrangements, the incentives to
register are weak because the principal sanctions to non-registering parties are
cease and desist orders. At the same time, every registered arrangement
received by the agency requires administrative officials either to initiate a pros-
ecution before the RPC or to secure a Secretary of State’s exemption or insig-
nificance declaration.
The EC regime falls between the two regimes. On the one hand, the de
minimis exception and block exemptions mean that the Commission does not
have to evaluate every arrangement. On the other hand, the need for legal cer-
tainty has led many parties to request negative clearances and exemptions, and
the backlog of applications taxes Commission resources. Moreover, the lack of
a formal requirement to provide information to the Commission means that the
Commission must often engage in field investigations to detect violations of the
prohibition.
From the European experience, we conclude that regimes which (1) have
prohibitions which target naked price-fixing; (2) have authorization mecha-
nisms which are both simple to invoke and legally certain; and (3) make effi-
cient use of regulatory resources, will be effective in targeting naked price-
fixing arrangements without deterring potentially pro-competitive arrange-
ments. We refer to these “effectiveness criteria” in section V.
IV. The Australian and New Zealand Experience’86
A. Overview
The Australian and New Zealand regimes”8 7 contain elements of both the
American and European regimes. Like the American Sherman Act, the Austra-
lian Trade Practices Act 1974. and the New Zealand Commerce Act 1986189
186See generally B.G. Donald & J.D. Heydon, Trade Practices Law, vol. 1 (Sydney: Law Book,
1978) c. 4; D. Healey, Australian Trade Practices Law, 2d ed. (Sydney: CCH Australia, 1993) c.
4-5; R.V. Miller, Annotated Trade Practices Act, 9th ed. (Sydney: Law Book, 1988) at 56-90.
187In this section we focus on the Australian legislation, but identify any salient differences
between the Australian and the New Zealand positions.
‘8sSupra note 12, ss. 45(1), 45(2).
’89Supra note 13, ss. 27(1), 27(4).
McGILL LAW JOURNAL
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contain a general prohibition against all arrangements which substantially
lessen competition. These statutes also have a provision which declares that
price-fixing arrangements shall be deemed to substantially lessen competi-
tion.”I The Australian deeming provision, like the American per se illegal rule,
allows courts to summarily condemn price-fixing arrangements without a com-
plex inquiry into whether the arrangement substantially lessens competition.
Like the European regimes, the Australian/New Zealand regimes also provide
for ex ante authorizations of arrangements through administrative reviews.
B. The General Prohibition: The Australian Approach to Arrangements
Which Substantially Lessen Competition
In Australia, the general prohibition against anti-competitive arrangements
provides that:
45(1) If a provision of a contract
lessening competition,
(b) has the purpose, or has or is likely to have the effect, of substantially
that provision is unenforceable in so far as it confers rights or benefits or
imposes duties or obligations on a corporation.’ 9′
45(2) A corporation shall not –
(a) make a contract or arrangement, or arrive at an understanding, if-
(ii) a provision of the proposed contract, arrangement or understanding
has the purpose, or would have or be likely to have the effect, of
substantially lessening competition; or
(b) give effect to a provision of a contract, arrangement or understanding,
whether the contract or arrangement was made, or the understanding
was arrived at, before or after the commencement of this section, if that
provision –
(ii) has the purpose, or is likely to have the effect, of substantially les-
sening competition. 92
Subsection 45(1) renders contracts which substantially lessen competition
unenforceable, and subsection 45(2) prohibits corporations from giving effect to
contracts which substantially lessen competition.
Australian courts consider the following factors in determining whether an
arrangement has the purpose or effect of substantially lessening competition: (1)
the degree of market concentration and the number of independent sellers; (2)
the height of barriers to entry; (3) the fungibility of products; (4) the degree of
“vertical relationships” with customers; and (5) the nature of formal arrange-
ments between sellers which restrict their independence. 93
C. The Deeming Provision: The Australian Approach to Price-Fixing
The most crucial part of the deeming provision provides that:
1’Trade Practices Act 1974, supra note 12, s. 45(A)(1); Commerce Act 1986, supra note 13, ss.
30(l)(a), 30(l)(b).
191See Commerce Act 1986, ibid., s. 27(4).
I92S. 27(l) of the New Zealand Commerce Act 1986, ibid., prohibits persons from entering “into
a contract or arrangement, or [arriving] at an understanding, containing a provision that has the pur-
pose, or has or is likely to have the effect, of substantially lessening competition in a market.” S.
27(2) is comparable to s. 45(2)(b) of the Australian provision.
193Re Queensland Co-operative Milling Association Ltd. (1976), 25 F.L.R. 169 at 189 (T.P.T.)
[hereinafter Re QCMA], See also Healey, supra note 186, 305.
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RETHINKING PRICE-FIXING LAW
45A(1) Without limiting the generality of section 45, a provision of a contract,
arrangement or understanding, or of a proposed contract, arrangement or
understanding, shall be deemed for the purposes of that section to have the
purpose, or to have or to be likely to have the effect, of substantially les-
sening competition if the provision has the purpose, or has or is likely to
have the effect, as the case may be, of fixing, controlling or maintaining,
or providing for the fixing, controlling or maintaining of, the price for, or
a discount, allowance, rebate or credit in relation to, goods or services sup-
plied or acquired or to be supplied or acquired by the parties to the contract,
arrangement or understanding or the proposed parties to the proposed con-
tract, arrangement or understanding, or by any of them, or by any bodies
corporate that are related to any of them, in competition with each other.194
Price-fixing is made illegal by the general prohibition against arrangements
which substantially lessen competition. The deeming provision deems price-
fixing to substantially lessen competition, and saves courts the trouble of deter-
mining the actual competitive impact of price-fixing arrangements.
In applying the deeming provision, Australian and New Zealand courts
have apparently experienced the same difficulties as American courts have had
in applying the American per se illegal rule. In at least some cases, Australian
courts have been unable to apply the deeming provision to price-fixing arrange-
ments in such a way as to avoid inquiring into the surrounding circumstances
of those arrangements.
In one case, 95 the Australian Federal Court declared that the deeming pro-
vision was not, in its view
introduced by Parliament to make arrangements unlawful which affected price by
affecting competition. It is fundamental to both [the deeming provision] and [the
general prohibition] that the relevant conduct, in purpose or effect, substantially
lessens competition or would be likely to do so. If competition is improved by an
arrangement, I cannot perceive how it could be characterized as a price-fixing
arrangement within the ambit of [the deeming provision]. 96
In this passage, the court declared that an arrangement cannot be characterized
as “price-fixing” within the meaning of the deeming provision unless it in fact
substantially lessens competition. But this approach to the deeming provision
frustrates the purpose of the provision, which is to allow courts to condemn
price-fixing arrangements without first determining whether they substantially
lessen competition.’97
D. Ex Ante Authorization198
1.
Substantive Tests
The Australian Trade Practices Commission (“ATPC”) and the New Zea-
land Commerce Commission (“NZCC”) are empowered to authorize certain
194Trade Practices Act 1974, supra note 12. See also Commerce Act 1986, supra note 13, ss.
30(l)(a), 30(1)(b).
195Radio 2UE Sydney Pty. Ltd. v. Stereo F.M. Pty. Ltd. (1982), 62 F.L.R. 437.
’96Ibid. at 448.
197While the passage quoted was a lower court judgment, the judgment was upheld on appeal.
The appeal court did not comment on the passage, but the passage is widely quoted (see Healey,
supra note 186, 455; Miller, supra note 186 at 67).
’98See generally Healey, ibid.,
1201-92.
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[Vol. 38
conduct which would otherwise trigger the general prohibition. An authoriza-
tion insulates an arrangement from both administrative penalties and private
actions.
The ATPC may authorize any arrangement which substantially lessens
competition, except price-fixing arrangements among fewer than 50 persons.’ 9
Such price-fixing arrangements are thought to be incapable of generating offset-
ting efficiency gains. The NZCC, by comparison, may authorize any arrange-
ment.200
The substantive tests for authorization are similar to the EC article 85(3)
exemption criteria.2 ‘ Arrangements will be authorized when they create effi-
ciency gains which outweigh any lessening of competition as long as those
gains cannot be achieved by less restrictive restraints on competition.2″
2.
Procedure
To secure authorizations, parties must submit requests to the appropriate
regulatory authority. The ATPC has four months in which to deny the applica-
tion for authorization. Otherwise, the legislation deems the ATPC to have
granted the authorization.0 3 There is no time limit for denials in the New Zea-
land regime.
Unlike the German or EC regimes, the mere act of applying for an author-
ization does not affect the legality (or illegality) of an arrangement. Arrange-
ments which are the subject of an authorization application remain open to both
prosecution and private actions until an authorization has been affirmatively
granted (or, in Australia, until four months have passed since the application
was submitted to the ATPC).
E. Enforcement
The ATPC and the NZCC investigate and prosecute arrangements which
violate the general prohibition. Violations are administrative offences, and while
they do not attract criminal penalties, they can attract both substantial fines and
subsequent private damages actions.2″ Both the ATPC and the NZCC may seek
t99Trade Practices Act 1974, supra note 12, s. 88(3)(b).
200Comerce Act 1986, supra note 13, s. 58.
20 See Part IlA, above.
202Trade Practices Act 1974, supra note 12, s. 90(7); Commerce Act 1986, supra note 13, s.
61(6). The legislation requires the administrative agencies to be satisfied that the arrangement
would be likely to result in a benefit to ihe public which will outweigh the detriment to the public
constituted by any lessening of competition. See Re QCMA, supra note 193 at 180-89; Miller,
supra note 186 at 302. See also Healey, supra note 186, 1229.
203Trade Practices Act 1974, ibid., s. 90(10).
24The Australian Federal Court may impose fines of up to A$50,000 for individual defendants
and up to A$250,000 for convicted corporate defendants (Trade Practices Act 1974, ibid., ss.
76(l)(a)-W). The Australian government has announced proposals to increase fines to A$500,000
for individuals and A$10 million for corporations (H.R. Spier & B. Baxt, “Australian Newsletter”
(1991) 12:3 C.C.P.R. 26 at 27). The New Zealand High Court may impose fines of up to
NZ$500,000 for individuals and up to NZ$5,000,000 for corporate defendants (Commerce Act
1986, supra note 13, ss. 80(1)(a)-(f)).
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RETHINKING PRICE-FIXING LAW
injunctions restraining breaches, attempted breaches or the counselling of
breaches. 5 Both fines and injunctions are imposed on a civil balance of prob-
abilities standard of proof.2″
Private plaintiffs may seek either actual damages or injunctions for
breaches of the prohibition. Like the Canadian regime,27 a conviction in a pro-
ceeding initiated by the Trade Practices Commission is prima facie evidence of
a breach of the Act.28 However, since a damages award is contingent on proof
of a breach of the Act, private plaintiffs may not initiate proceedings in relation
to conduct which has been authorized by the ATPC.
V.
Implications for Canada
A. Lessons from the Comparative Experience
We undertook the comparative reviews to determine the extent to which
other jurisdictions have been able to maintain workable distinctions between
naked price-fixing and potentially pro-competitive arrangements. The jurisdic-
tions surveyed disclose a striking commonality of approach towards naked
price-fixing arrangements. In every jurisdiction they are subject to a per se pro-
hibition, but greater diversity of practice exists in terms of both the substance
of absolute and qualified exemptions with respect to other kinds of horizontal
arrangements, and the procedures by which those absolute or qualified exemp-
tions are established.
The United States has attempted to maintain a distinction between pure
price-fixing (which is per se illegal) and other forms of horizontal arrangements
(which attract rule-of-reason review) for much longer than any other jurisdic-
tion, yet a watertight distinction between the two categories of arrangements has
proved elusive. That is, in many contexts, the exercise of characterizing an
arrangement as a price-fixing arrangement requires a full review of the terms
and context of the arrangement much like a rule-of-reason review in other cases.
While American courts now try to distinguish “naked” price-fixing from price-
fixing arrangements that are ancillary to a pro-competitive objective, this line
is not sharp or stable, and it has shifted over time as courts have been confronted
with new arrangements or have re-evaluated their views on previous classes of
arrangements. Well-known cases such as Broadcast Music,2″ NCAA, 210 and
Maricopa County n amply demonstrate the difficulties of drawing this line.
Australian courts, in recognizing the same distinction, appear to have encoun-
tered similar difficulties.
Canada’s current categorization approach to horizontal arrangements is
vulnerable to the same problems that have plagued the American per se illegal/
205Trade Practices Act 1974, ibid., ss. 80(1)(a)-(O); Commerce Act 1986, ibid., s. 81.
26Heating Centre Pty. Ltd. v. Trade Practices Commission (1986), 65 A.L.R. 429 at 435 (Fed.
Ct. Gen. Div.).
207Competition Act, supra note 2, s. 36(2).
20 Trade Practices Act 1974, supra note 12, s. 83.
2gSupra note 77.
21Supra note 72.
21 Supra note 94.
McGILL LAW JOURNAL
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rule of reason distinction. Webb’s call for the abolition of the American per se
illegal category in favour of straight rule-of-reason analysis applies with equal
force to the Canadian regime.2 2
From the jurisdictions surveyed, we conclude that a per se criminal prohi-
bition for naked price-fixing cannot be formulated with complete precision, and
will unavoidably target potentially pro-competitive arrangements. Even
arrangements which appear to lessen competition “unduly” may generate offset-
ting efficiencies which produce net welfare gains. Yet, as we argued in the intro-
duction, a broadly-cast criminal prohibition which would require criminal
courts to engage in complex rule-of-reason analyses for all horizontal arrange-
ments rightly offends both widely-held notions of due process with respect to
criminal liability and notions of the relative institutional competence of criminal
courts as compared to specialized administrative agencies.
We believe that the way around the impasse is to redefine the focus of a
criminal prohibition. A criminal prohibition should target only naked price-
fixing arrangements. What are the characteristics of such arrangements? Obvi-
ously, naked price-fixing arrangements lessen competition. However, a second
distinguishing characteristic of such arrangements is that they are generally cov-
ert. As Warren-Boulton notes in the U.S. context:
[T]he overwhelming number of price-fixing, bid-rigging, and market allocation
cases are brought against relatively small, owner-managed firms with limited
assets that might be exposed to damage claims. These firms tend to operate in
local or regional markets where concentration and barriers to entry are low. In
such markets, implicit collusion or dominant firm behaviour is neither likely nor
treatable by structural policies. In the absence of substantial barriers to entry, cus-
tomers and/or potential competitors would simply enter if they knew that supra-
competitive prices were being charged. Most bid-rigging and price-fixing cases
are thus essentially simple frauds, where customers or suppliers are deceived into
believing that their suppliers or customers are competing with each other.2 13
We propose a criminal prohibition which focuses on the covertness of hor-
izontal arrangements. Rather than targeting “naked” price-fixing arrangements
(as distinguished from price-fixing arrangements which are ancillary to pro-
competitive objectives), we believe that a criminal prohibition should target
covert (as distinguished from overt) price-fixing arrangements. In this respect,
the American naked/ancillary distinction is highly misleading. Most “naked”
price-fixing arrangements are in fact covert, and anything but overt, obvious or
shameless. We believe that.the covert/overt distinction reflects both the U.S.
experience and the Canadian prosecutorial experience under the Competition
Act and its predecessors.
Following Warren-Boulton, we conceive of a criminal prohibition against
price-fixing as being essentially an anti-fr-aud statute directed at covert but
explicit forms of price-fixing. Having identified covert price-fixing as the
appropriate focus of a criminal prohibition, we believe that it would be inappro-
priate to remit covert price-fixing arrangements to rule-of-reason review by the
212Supra note 105.
2t3Supra note 63 at 346.
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Competition Tribunal. The principal sanction available to the Tribunal is merely
a prospective cease and desist order. Yet apprehension rates for covert forms of
naked price-fixing are typically quite low – U.S. Department of Justice offi-
cials estimate no higher than ten per cent 1 –
and to abandon criminal sanc-
tions would seriously undermine socially desirable deterrence objectives.
In light of the foregoing analysis, we proceed to elaborate our proposal for
redesigning the price-fixing provisions of the Competition Act.
B. Proposed Reform of the Competition Act
Our proposal draws in large part on two sources: (1) Section 45A of the
Australian Trade Practices Act 1974, which deems price-fixing arrangements to
be per se violations of the general prohibition against horizontal arrangements
that substantially lessen competition; and (2) legal practice under article 85 of
the Treaty of Rome, where notification of an arrangement confers immunity
from subsequent fines (although not from cease and desist orders, breaches of
which can lead to fines).
1.
The Proposed Criminal Prohibition
(A) Everyone who enters into a contract, agreement or understanding with a com-
petitor or potential competitor, a provision of which has or is likely to have
the effect of fixing, controlling or maintaining the price for goods’or services
supplied or acquired, or to be supplied or acquired, by the parties to the con-
tract, agreement or understanding, and who knew, or ought reasonably to have
known, that the contract, agreement, or understanding has, or would be likely
to have, the effect of fixing, controlling or maintaining the price of such goods
or services
is guilty of an indictable offence.
(3) (1) In this section,
“arrangement” means the contract, agreement or understanding which
forms the basis for the prosecution under subsection (A);
“Bureau” means the Canadian Bureau of Competition Policy
“notification” means a written statement which discloses each of the fol-
lowing:
(i) the full terms of the arrangement;
(ii) the names of all parties to the arrangement;
(iii) the fact that the accused is or was a party to the arrangement;
(iv) the nature of the accused’s rights and obligations under the arrange-
(v) the date of execution of the arrangement; and
(vi) the date, or other triggering event, at which the arrangement takes
ment;
effect.
(2) In a proceeding under subsection (A), the court shall not convict the
accused if the accused has filed a notification with the Bureau either prior
to the time at which the arrangement takes effect, or within 30 days of the
execution of the arrangement, whichever is earlier.
(C) In a proceeding under subsection (A), the court shall not convict the accused
if:
(1) the court is satisfied that the accused, in good faith, made all reasonable
214C.F. Rule, “Report from Official Washington: 60 Minutes with Charles F. Rule, Assistant
Attorney-General, Antitrust Division” (Address to the American Bar Association, Section of Anti-
trust Law, 36th Annual Spring Meeting, 22-24 March 1988) (1988) 57 Antitrust L.J. 257 at 265.
REVUE DE DROIT DE McGILL
[Vol. 38
attempts to comply with the provisions of subsection (B), part (2); and
(2) the court is satisfied that the accused has, within a reasonable time, com-
plied with any demands for particulars the Bureau may have issued in
connection with a notification.
(D) The Crown shall have the onus of proving that a notification satisfying the
conditions prescribed in clauses (B) and (C) was not filed by the accused.
Our proposal requires some explanation. The core prohibition removes any
reference to “unduly lessening competition.” Instead, it merely requires courts
to look at the price effects or likely price effects of a horizontal arrangement.
The intent requirement pertains only to the actual or likely price effects of an
agreement, and it incorporates an objective element. It is therefore consistent
with the subjective and objective intent elements of the current prohibition
which the Supreme Court of Canada upheld in PANS.
While more precise than the current provisions, our prohibition, on its face,
is over-broad because it completely disregards the distinction between “naked”
and ancillary price-fixing restrictions. Greater precision comes at the cost of
undesirable over-breadth. However, we believe that our proposed notification
procedure is fully responsive to the over-breadth concern. By the mere act of fil-
ing a notification with the Bureau, under clause (B) of our prohibition, parties
to horizontal arrangements with potential price effects are granted immediate
and permanent immunity from criminal liability. The optional notification
mechanism gives parties to arrangements which might otherwise violate clause
(A) a unilateral entitlement to avoid criminal liability.
The immunity from criminal prosecution will obviously no longer obtain
if the parties significantly modify the arrangement described in the notification.
If the parties are prosecuted, it will be up to the court to determine whether the
arrangement described in the indictment is the same as that described in the
notification.
The central rationale for our proposal is that the covert forms of price-
fixing to which Warren-Boulton refers become self-defeating through the act of
filing a notification before the arrangement is acted upon. Notification renders
arrangements which might otherwise have been covert now overt.2 15 The benefit
of notification is already recognized in the bid-rigging offence contained in sec-
tion 47 of the Act: Liability for bid-rigging is expressly made conditional on the
bid-rigging agreement not being known to the party soliciting the bids. Like bid-
rigging, the efficacy of price-fixing depends critically on concealment. But,
under our proposal, if concealment occurs (i.e. the parties do not file a notifi-
cation) the Crown can properly prosecute under clause (A), and it can probably
secure convictions more easily than under the present less precise legal stand-
ards. On the other hand, horizontal arrangements that may have positive welfare
effects can easily escape the risk of criminal sanctions by the election of the par-
ties themselves.
In addition to conferring benefits on third parties, notification also confers
benefits on the Bureau. Notification gives the Director of the Bureau an infor-
215Supra note 63 at 346.
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RETHINKING PRICE-FIXING LAW
mation set on which to evaluate arrangements. If the Director considers the noti-
fied arrangement to be ambiguous, he or she may ask the parties to provide rel-
evant particulars. Failure to comply, in good faith, with Bureau demands for par-
ticulars vitiates the immunity conferred by notification. If the Director considers
the notified arrangement to be anti-competitive, he or she may pursue a civil
review proceeding before the Competition Tribunal, as detailed below.” 6
The Bureau’s current “whistle-blowing” policy2″7 recognizes that voluntary
notification confers benefits on the Bureau. Under this policy, the Bureau offers
immunity from criminal sanctions to parties who notify the Bureau of violations
of the Act, provided that the notifying parties are the first among the violators
to notify the Bureau of the violation. The Bureau then has evidence with which
to prosecute the other violators. The “whistle-blowing” policy applies to notifi-
cations which are received after violations and anti-competitive effects have
occurred, and it restricts criminal immunity to the first notifying party. In con-
trast, our proposed notification defence applies to notifications received before
violations and anti-competitive effects have occurred, and it confers criminal
immunity on all parties to a notified arrangement, but not necessarily immunity
from civil review.
We cannot emphasize too strongly that the notification regime we propose
is not a registration or authorization procedure. To empower the Director to
review notifications and to decide whether to accept, reject or propose modifi-
-cations to the underlying agreement as a precondition of the parties’ immunity
from criminal prosecution would impose heavy burdens on both the parties and
the Bureau. Conferring such powers on the Director risks creating the same
paper nightmare that has bedevilled both the European Commission, with neg-
ative clearance and exemption applications under article 85 of the Treaty of
Rome, and the Office of Fair Trading in the United Kingdom under the Restric-
tive Trade Practices Act. Under both regimes, parties are subjected to enormous
delays and great uncertainty pending the administrative review of often trivial
or benign arrangements by official agencies.
We believe that our proposal avoids the bureaucratic mire of a registration
or authorization system, while at the same time focusing criminal deterrents on
precisely that class of transactions where they are most warranted. We also
believe that our proposal meets the “effectiveness criteria” which we derived
from our review of European authorization regimes.218 First, our proposed crim-
inal prohibition clearly targets naked price-fixing. Second, our proposed prohi-
bition will not deter potential pro-competitive behaviour because our notifica-
tion regime is simple to invoke, since parties need only file their arrangements,
and it provides legal certainty to parties. Parties receive immediate and absolute
immunity from criminal sanctions upon filing an appropriate notification with
the Bureau. Third, our proposed regime makes efficient use of the enforcement
2 16See Part V.B.2, below.
217See J.E Clifford & A.N. Campbell, “Antitrust/Competition Law” (1992) 15 Can. Law News-
letter 8 at 12, in which reference is made to comments made by H.I. Wetston in “Notes for an
Address” (Address to the Canadian Corporate Counsel Association, Calgary, 19 August 1991).
2 18See Part IIE.D, above.
McGILL LAW JOURNAL
[Vol. 38
resources of the Bureau. Criminal sanctions give parties strong incentives to
notify arrangements to the Bureau, and notified arrangements give the Bureau
an information set on which to evaluate arrangements for possible civil review
before the Tribunal. Unlike the EC and U.K. regimes, the Bureau is not bur-
dened with the task of evaluating arrangements as a precondition to parties’
immunity from criminal sanctions. As well, the Bureau is not burdened with
having to expressly approve trivial arrangements because, like the German
regime, notified arrangements become legal by the Bureau taking no action at
all.
2.
The Proposed Civil Review Procedure
Our proposed criminal prohibition would constitute the sole route for the
criminal prosecution of horizontal arrangements, and criminal prosecutions
would be limited to parties who had not notified their arrangements to the
Bureau. We recommend that the criminal prohibition be complemented with a
civil review mechanism which would entail vesting in the Competition Tribunal
a power of civil review. We propose that Part VIII of the present Act, concerning
reviewable practices, be amended to make it a reviewable practice for compet-
itors or potential competitors to enter into any contract, agreement, arrangement
or understanding with each other that “substantially lessens competition.” The
“substantially lessens competition” test should be the same test which the Tri-
bunal currently applies to mergers (which are horizontal integration by owner-
ship) under section 92 of the Competition Act.
Under our proposal, the Director will be able to challenge anti-competitive
horizontal arrangements more easily than under the current criminal prohibition.
Under the current provisions, the Director must prove, on a criminal burden of
proof before an all-purpose criminal court, that the arrangement lessens compe-
tition “unduly.” Under our proposal, the Director may successfully challenge a
notified anti-competitive arrangement by proving, on a civil burden of proof
before the Tribunal, that the arrangement substantially lessens competition.
Our proposal is also consistent with our understanding of the relative insti-
tutional competence of all-purpose criminal courts as compared to specialized
tribunals. In the areas of monopolies and mergers, for example, Parliament has
accepted that it is inappropriate to ask criminal courts to engage in a compli-
cated rule-of-reason or welfare analysis. Parliament specifically created the
Competition Tribunal to engage in those analyses.
When the Tribunal evaluates the extent to which a challenged arrangement
lessens competition, we believe that it should undertake an inquiry along the
lines of a rule-of-reason review. In particular, it would seem sensible to require
the Tribunal to consider the provisions of Part V of the Act, which address trade
associations, export agreements, sports leagues, professional bodies and other
sub-classes of horizontal arrangements. These provisions now qualify the cur-
rent subsection 45(1) criminal prohibition against horizontal arrangements. The
provisions in Part V should be transferred to Part VIII of the Act to provide
guidance to the Tribunal when it undertakes rule-of-reason reviews of horizon-
tal arrangements. We also believe that the Tribunal should use this framework
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RETHINKING PRICE-FIXING LAW
for evaluating joint research ventures zl9 and specialization agreements.” In par-
ticular, it is not clear to us why specialization agreements sh6uld require special
registration with the Tribunal as provided by the current Act.
3.
Proposed Collateral Revisions to the. Competition Act
We recommend that an efficiency defence be made part of the provisions
for civil review proceedings of horizontal arrangements. This would be consist-
ent with section 96 of the Competition Act (which provides such a defence in
the case of mergers), and with article 85(3) of the Treaty of Rome. Moreover,
such a defence would place horizontal integration by ownership and horizontal
integration by contract on a similar legal footing.221 We acknowledge that the
recent decision of the Canadian Competition Tribunal in Canada (Director of
Investigation and Research) v. Hillsdown Holdings (Canada) Ltd.’ has created
considerable uncertainty as to whether the existing section 96 efficiency defence
embodies a consumer welfare or a total welfare standard. We favour the latter
standard.’
We also believe that procedural innovations adopted in the 1986 amend-
ments to the Competition Act, which created the new merger regime, should be
adopted for horizontal arrangements, and indeed all reviewable practices, that
follow the civil review route. In particular, the ability of the Director to seek and
obtain an interim order from the Tribunal, immediately following notification of
a horizontal arrangement to which he or she takes objection, is indispensable in
the general framework that we have outlined. Substantial sanctions for breaches
of either interim or final orders of the Tribunal are also essential to deter non-
compliance. 4 As well, advance-ruling certificates for mergers under section
102, consent orders under section 105 and interim orders under section 100 or
section 104 seem equally appropriate in the case of reviewable practices, as do
advisory opinions and undertakings, although advisory opinions and undertak-
ings are not at present formally recognized in the Act, despite being common
practices.
It is also important that parties not be exposed to multiple proceedings by,
for example, the Director initiating Tribunal review proceedings after an unsuc-
cessful criminal prosecution, or (less realistically) the converse. Thus, an elec-
tion provision like the combination of section 45.1, subsection 79(7) and section
98, which addresses this type of problem in the context of abuse of dominant
position and mergers, would need to be included in the revisions.
Once the Bureau receives notification of an arrangement, the Director
should be subject to a limitation period within which to file an application with
2 19Competition Act, supra note 2, s. 95.
2 10 bid., s. 86.
21 See Baxter, supra note 16.
222(1992), 41 C.P.R. (3d) 289 (Comp. Trib.).
MSee Schwartz, supra note 15; Crampton, supra note 15.
-24The Tribunal’s contempt powers have now been affirmed by the Supreme Court of Canada
in Chrysler Canada Ltd. v. Canada (Competition Tribunal), [1992] 2 S.C.R. 394, 42 C.P.R. (3d)
353.
REVUE DE DROIT DE McGILL
[Vol. 38
the Tribunal if he or she objects to the arrangement. The German GWB, for
example, imposes a limitation period of three months from the filing of the noti-
fication. Of course, this limitation period should not be binding on the Director
if parties subsequently modify their arrangement. As well, any significant mod-
ification will vitiate the criminal immunity conferred by the initial notification
unless the parties subsequently notify the Bureau of the modified arrangement.
We also propose two amendments to section 36 of the Competition Act,
which governs private actions. First, section 36 should render unenforceable all
arrangements which violate the criminal prohibition. Australia, New Zealand,
the EC, the United Kingdom and Germany have similar provisions. Second,
section 36 should preclude private civil actions for damages in respect of
arrangements for which valid notifications have been filed under our proposed
notification mechanism. There are three reasons why such private actions
should be precluded in those cases. First, if a notification has been filed before
the arrangement has been implemented, it will be rare that third parties will be
able to prove damages. Second, as a matter of relative institutional competence,
we believe that the Competition Tribunal is better able to evaluate the welfare
effects of these arrangements than civil courts. Third, if notification confers
immediate immunity from private civil suits as well as criminal prosecutions,
the incentives to notify will be further strengthened. This will further broaden
the Director’s information base, and will facilitate applications to the Tribunal
in appropriate cases.
Finally, some transitional provision would also need to be made -for
arrangements already in place at the time of proclamation of the new legislative
scheme. Perhaps parties could be given up to three months from proclamation
to notify the Director in order to qualify for immunity from criminal liability.
Conclusion
The recent constitutional challenges2″ to the validity of the price-fixing
provisions of the Canadian Competition Act, while ultimately unsuccessful,
point to substantive deficiencies in the existing provisions and warrant a recon-
sideration of these provisions on policy rather than constitutional grounds. The
current provisions attempt to categorize horizontal arrangements. Our compar-
ative review demonstrates the elusiveness of a watertight distinction between
pure price-fixing arrangements and potentially pro-competitive arrangements,
and suggests little prospect of a tightly focused criminal prohibition. Yet a
broadly-cast criminal prohibition that requires rule-of-reason review by courts
will in many cases deter potentially pro-competitive behaviour as well as offend
notions of criminal due process and relative institutional competence.
Our proposals instead envisage a two-track process for reviewing the legal-
ity of horizontal arrangements: a criminal law per se prohibition of price-fixing
and a civil rule-of-reason review of other horizontal arrangements by the Com-
petition Tribunal.
225See Introduction, above.
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RETHINKING PRICE-FIXING LAW
723
Despite our best efforts to confine the scope of the per se criminal prohi-
bition to naked price-fixing, we recognize that in many instances our proposed
prohibition will be over-broad: We seek to solve this problem not through fur-
ther attempts at more precise substantive elaboration, but rather by creating
incentives for parties to horizontal arrangements to self-select or channel them-
selves into the appropriate legal track. By providing automatic criminal and
civil immunity to parties who have, in a timely fashion, notified the Bureau of
their arrangements, only covert arrangements among competitors are likely to
be left in the criminal law track. Horizontal arrangements which have been noti-
fied to the Bureau will be subject to civil rule-of-reason review administered by
the Competition Tribunal at the instance of the Director. The adoption of these
proposals will retain criminal sanctions for those arrangements where they are
most warranted (i.e. covert arrangements), while providing the Director with a
much more complete information set for reviewing other, potentially pro-
competitive, horizontal arrangements.
