Competition compliance during the COVID-19 crisis: Price-gouging, deceptive marketing and collusion

In response to the COVID-19 pandemic, Canadian businesses are facing unprecedented challenges in obtaining access to financing, maintaining their supply chains, serving their customers and keeping their employees healthy and safe. But as businesses struggle to maintain their normal business operations, they need to remain vigilant to ensure compliance with Canada’s competition and consumer protection laws. While the Competition Bureau (the Bureau) and other regulators have acknowledged the unique economic circumstances facing Canadian businesses at this time, they have also signalled that they will continue to pursue enforcement action against any business that engages in unlawful collusion, deceptive marketing and other anti-competitive practices – particularly in circumstances that seek to take advantage of the vulnerability of Canadian consumers during the crisis. In addition, in an unprecedented development, on March 28, the Ontario government issued an emergency order that prohibits “price gouging” in respect of certain necessary products.

In this Update, we have highlighted the most recent guidance from regulators on pricing and other anti-competitive practices arising from the COVID-19 crisis and have identified the most pressing regulatory risks faced by Canadian businesses in the competition and consumer protection fields.^[1]

Latest guidance from the Bureau

On March 18, 2020, the Commissioner of Competition (the Commissioner) issued an open letter to the competition bar and the public that sought to reassure stakeholders that the Bureau’s activities were continuing in the face of the crisis.^[2] In particular, the Commissioner outlined the Bureau’s steps to implement remote operations and to minimize in-person meetings, and to accommodate existing merger filing timelines. The Commissioner also stressed that in the current environment, the Bureau would be focusing its resources on “urgent marketplace issues” that required “immediate action to protect Canadians,” and that non-urgent matters would likely receive lesser priority.

Two days later, on March 20, the Commissioner issued a second and more forceful statement to remind businesses of the risk of engaging anti-competitive practices during the evolving health crisis. The Commissioner underscored that “the Competition Bureau remains vigilant against potentially harmful anti-competitive conduct,” particularly in respect of businesses that “may seek to take advantage of consumers and businesses during these extraordinary circumstances.” In particular, the Commissioner noted that the Bureau would investigate complaints and scrutinize any evidence that companies or individuals have violated Canada’s competition laws, including the following conduct:

• Deceptive marketing practices, such as false or misleading claims about a product’s ability to prevent, treat or cure the virus; and
• Collusion by competing businesses, such as illegal agreements about what price to charge for products or services.

With respect to the latter risk, the Commissioner did seek to reassure businesses that Canada’s competition laws do accommodate certain forms of pro-competitive collaboration to support the delivery of necessary goods and services of Canadians.^[3]

Latest guidance from the Antitrust Division and the FTC

Separately, on March 24, the U.S. Department of Justice (Antitrust Division) and the Federal Trade Commission (the U.S. Agencies) released a joint statement regarding their competition enforcement priorities in the wake the COVID-19 crisis.^[4] In contrast to the Bureau’s guidance, the U.S. Agencies strongly signalled that they would evaluate and assess any potential conduct in light of the extraordinary circumstances of the crisis and the public need to ensure a swift response to the pandemic. 

In particular, the U.S. Agencies indicated that they were committed to providing “expeditious emergency guidance” to competitors who are seeking to collaborate to respond to the crisis, and they will “account for exigent circumstances in evaluating efforts to address the spread of COVID-19 and its aftermath.” In addition, the U.S. Agencies provided specific guidance on the “many ways” that competitors can engage in pro-competitive collaboration, and noted that “many types of collaborative activities designed to improve the health and safety response to the pandemic would be consistent with the antitrust laws.” In particular, the U.S. Agencies noted:  

• There are forms of collaboration on research and development that are efficiency-enhancing and are procompetitive.
• The sharing of technical know-how, rather than company-specific data about prices, wages, outputs, or costs, may be “necessary to achieve the procompetitive benefits of certain collaborations.”
• In the health care sector, enforcement agencies are unlikely to challenge the development of suggested health practice parameters by health care providers. In addition, joint purchasing arrangements among healthcare providers, such as those designed to increase the efficiency of procurement and reduce transaction costs, will not raise antitrust concerns.

Competition authorities in the European Union and the United Kingdom, for example, have also indicated that they will remain on the alert for anti-competitive behaviour during the crisis.

Specific compliance risk: Price-gouging

As Canadian businesses face spikes in the demand for groceries, disinfectants and health care products coupled with constraints in their supply chains, some businesses may be considering the implementation of price increases for such essential products. In ordinary market circumstances, this type of unilateral behaviour would be considered a normal operation of market forces. However, the implementation of such short-term price increases risk attracting the ire of consumers and the attention of the media. To date, the Canadian media have already published a number of high-profile stories relating to incidents of price gouging. For instance, the CBC published a story earlier this month on certain resellers on Amazon that were selling hand sanitizer for 10 times the regular market price.^[5] More recently, the CBC published a story on a significant price increase for disinfecting wipes at a well-known grocery chain in Toronto, which prompted the Premier of Ontario to label the practice as “disgusting” and to declare that he had “zero tolerance for price gouging.”^[6]

There is no federal offence of price-gouging under Canada’s competition laws. As a general proposition, a supplier or retailer is permitted under the Competition Act (the Act) to unilaterally set its prices in response of the market forces of supply and demand. The Act does provide that in certain circumstances, if a supplier has a dominant position in a market and it engages in “a practice of anti-competitive acts,” it may be subject to civil enforcement action for engaging in an “abuse of dominance.”^[7] However, the caselaw requires proof of a practice of conduct that is intended to have a predatory, exclusionary or disciplinary negative effect on a competitor – and an act of price-gouging by retailers to take advantage of consumers in response to a short-term supply constraint does not fit neatly within this requirement.

However, under provincial emergency legislation in Ontario, the government has the power to prohibit the charging of “unconscionable prices in respect of necessary goods, services and resources.”^[8] On March 28, 2020, the government issued an unprecedented emergency order that prohibits retail businesses and individuals from charging “unfair prices” for “necessary goods.”^[9] The list of necessary goods at this time is limited to:

• Masks and gloves used as personal protective equipment in relation to infections.
• Non-prescription medications for the treatment of the symptoms of the coronavirus.
• Disinfecting agents intended for cleaning and disinfecting objects or humans.
• Personal hygiene products, including soap products and paper products.

The risks of engaging in such pricing practices are severe. Individual offenders can face an initial ticketed penalty of C$750 or, if summoned to court and convicted, could face a provincial offence and a maximum penalty of a C$100,000 fine and one year in jail. If a company is convicted of such an offence, a director or officer could face a fine of up to C$500,000 and up to a year in jail, and a company could face a fine of up to C$10 million.

The compliance risks associated with the pricing of such products are enormous. There is no legislated definition of “unfair prices” or “unconscionable prices” in the order, and there is no settled objective definition of such terms in the economic profession. Moreover, given the criminal and reputational risks, companies in the health and pharmaceutical sector will face enormous challenges in assessing the legitimacy of possible price changes in response to spiking demand and constraints on their supply chains. 

Specific compliance risk: Deceptive marketing

In his enforcement statement, the Commissioner also underscored the need for businesses to refrain from deceptive marketing practices during the crisis. In particular, the Commissioner provided the example of a company that was making false or misleading claims about a product’s ability to prevent, treat or cure the COVID-19 virus. In the past, the Commissioner has collaborated with Health Canada to ensure that consumers are not deceived in the marketing of health products. The Commissioner has not hesitated to take enforcement action against businesses that make deceptive or unsubstantiated claims about the effectiveness of natural health products and weight-loss products. If a business engaged in deceptive practices that take advantage of the vulnerability of consumers and even aggravated the risks of infection, we can expect that the Bureau would react swiftly with decisive enforcement action.   

Under the Act, a business that makes a statement to the public in promoting the supply or use of a product that is false or misleading in a material respect may be subject to enforcement action. In particular, the Commissioner may investigate allegations and pursue enforcement action under a criminal or civil track. In the vast majority of cases that do not involve egregious conduct, the Commissioner generally pursues matters under the civil provisions of the Act. If the Commissioner establishes a reviewable practice in proceedings before the Competition Tribunal or a court, the Commissioner may seek penalties up C$750,000 in respect of an individual for a first occurrence. For proceedings against a business, the Commissioner may seek penalties up C$10 million.

Specific compliance risk: Collusion

In the face of unpredictable spikes in demand and supply and the compelling need to deliver essential goods to the market, firms may be want to explore collaboration with their competitors to develop effective responses to the crisis. While there are legitimate areas of competitor collaboration that are permitted under the Act, there are very strict criminal prohibitions under the Act in respect of anti-competitive agreements relating to price fixing, output restriction and market allocation. In addition, there are criminal prohibitions relating to bid-rigging in respect of public or private tender processes. And in contrast to certain other international jurisdictions, there is no statutory exemption for collusion or bid-rigging in the context of an economic crisis. As such, communications with competitors about such matters can carry significant risk.

In his most recent enforcement statement, the Commissioner noted that he would be vigilant in investigating conduct that violated the criminal provisions of the Act in his public enforcement statement.^[10] A business that enters into an anti-competitive agreement under the Act is subject to criminal enforcement. A party that is convicted could face up to fourteen years in prison (for an individual) and fines up to C$25 million per count.^[11] There are also parallel civil provisions under the Act whereby the Commissioner may seek an order prohibiting a party from implementing such an agreement where the agreement is likely to prevent or lessen competition substantially.^[12]

However, similar to the U.S., there are permissible areas of competitor collaboration in Canada, such as in respect of joint ventures, strategic alliances and research and development initiatives. In addition, in Canada, joint purchasing arrangements are generally permissible. And while the Bureau has not explicitly embraced the “exigent circumstances” of the crisis in the same way as the U.S. Agencies, we can expect that the Bureau would consider the extraordinary circumstances of the crisis in evaluating whether a legitimate joint venture or strategic alliance that seeks to explore initiatives to mitigate the impact of the crisis on Canadians prevents or lessens competition or otherwise provides efficiency benefits. In addition, collaborative conduct that is specifically mandated or authorised by legislation should be permitted under the Act. 

Conclusion 

The challenges posed by COVID-19 do not give businesses a “free pass” from competition law enforcement. If anything, new realities such as employees working from home for long periods of time with minimal supervision and management’s focus on business survival may make compliance more difficult than ever before. For further information or any questions regarding the pricing, competition and other business risks presented by the extraordinary circumstances of the COVID-19 crisis, please contact the members of Osler’s Competition/Antitrust and Foreign Investment Group.