Canadian COMPETITION LAW

On June 27th, the Competition Bureau announced that would seek to block a proposed joint venture between Air Canada and United Continental which, according to the Bureau, would “monopolize ten important Canada/United States routes, and substantially reduce competition on nine additional routes.”

In making the announcement, the Bureau said:

“The proposed joint venture is effectively a merger between Air Canada and United Continental on all of their Canadian and US operations. It would allow the parties to jointly set prices, capacity and schedules. If allowed to proceed, it will result in:

a monopoly on ten transborder routes;

substantially reduced competition on an additional nine transborder routes; and

significantly higher prices.

In addition to challenging the joint venture, the Commissioner is challenging three existing “coordination agreements” between Air Canada and United Continental. These agreements allow Air Canada and United Continental to coordinate key aspects of competition including, but not limited to, joint pricing and scheduling, as well as revenue sharing. Through these existing agreements, the companies currently have the power to charge passengers inflated fares. Moreover, if these anti-competitive provisions are further implemented, with or without the joint venture, Canadians will pay even more for less choice and higher fares.”

The Bureau has now filed its application in this case (see: Competition Tribunal).

The Bureau’s application, which is only the second contested merger since 2005, has a number of interesting aspects.  These include:

Parties’ press releases. The Bureau became aware of the proposed Air Canada/United JV from press releases issued by the parties.  In the past, it was thought rather uncommon for the Bureau to become aware of mergers through the media (i.e., as opposed to parties notifying transactions to the Bureau under the pre-merger notification provisions of the Act).  This may signal an increasing effort by the Bureau to challenge mergers discovered through media sweeps, either on the basis that they were notifiable or non-notifiable transactions that nevertheless potentially raise substantive competition issues (the Bureau has jurisdiction under the Act to challenge any “merger” as broadly defined in the Act, whether or not it is notifiable, i.e., exceeds the Act’s pre-notification thresholds).

Joint venture challenged as a merger. This case is also interesting as a challenge of a JV as a merger.  While joint ventures can in theory be reviewed under four provisions of the Act (as a criminal conspiracy, under the civil agreements provision, as a merger or under the abuse of dominance provisions), challenges of JVs in Canada on merger grounds are relatively rare.  Having said that, the definition of “merger” under the Act is very broad, encompassing not only conventional asset and share acquisitions, but also the acquisition of a “significant interest” in a business.  While the Bureau has taken the position in its Merger Enforcement Guidelines (MEGs) that acquiring a “significant interest” could include where an acquirer obtained an “ability to materially influence the economic behavior of the business” (such as through control of pricing, purchasing, distribution and marketing decisions), what JVs might in reality be considered a merger has generally been more the subject of speculation than certainty for merging parties and their counsel.  In this regard, the Bureau takes the position in its recently filed Application that the proposed merger will, if allowed to proceed, lead to the parties “acquiring or establishing … a significant interest” in each other’s operations, and in particular the ability to make decisions on “all aspects of competitive behavior” that would be “indistinguishable … from common ownership.”  As such, if this application proceeds, it may shed needed light on what types of de facto acquisitions may trigger the merger provisions of the Act.

First challenge under section 90.1 (civil agreements provision). The case is also the first challenge by the Bureau under the civil agreements provision (section 90.1) of the Act, which came into force in March, 2010 as part of Canada’s new two-track conspiracy regime.  Under section 90.1, the Bureau may make applications to the Competition Tribunal for Tribunal orders where an agreement between actual or potential competitors prevents or lessens competition substantially in one or more markets (or is likely to do so).  While it is generally thought that this new civil provision has many parallels to the existing merger provisions of the Act, including the required competitive effects test, evaluative factors for market impacts and an efficiencies defence, this will be the first case to potentially test the meaning and boundaries of this new section.  If the case proceeds before the Tribunal, it may clarify key elements of section 90.1 including the meaning of “agreement” and “competitors”, the evaluation of the required competitive effects test and how, if at all, a review under section 90.1 differs in substance from merger review under the merger provisions of the Act.

Attempt to block the transaction. Finally, the case is somewhat noteworthy in that the Bureau is seeking to block the Air Canada/United JV altogether.  In Canada, unlike some other jurisdictions, it is relatively unusual for regulators to seek to block a transaction altogether, rather than to negotiate a remedy.

For the Bureau’s news release see:

Competition Bureau Seeks to Block Joint Venture between Air Canada and United Continental

For the Bureau’s Backgrounder see:

Competition Bureau Seeks to Block Joint Venture between Air Canada and United Continental – Backgrounder

For the Bureau’s Tribunal Application see:

Competition Tribunal

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