Christopher Naudie, Tristram Mallett, Adam Hirsh, Peter Glossop
June 26, 2013
In a recent ruling involving a joint purchase agreement, the Alberta Court of Appeal held that an agreement between competitors in the oil and gas industry to exclusively use one supplier over another did not constitute an unlawful conspiracy under the Competition Act and did not constitute a form of unlawful conspiracy at common law. In making this ruling, the Court reversed the trial judge’s finding of liability as well as the award of substantial damages. The Court’s decision highlights the difficulty in challenging joint procurement agreements under Canadian law, particularly in light of recent amendments to the conspiracy provisions of the Competition Act.
The decision in 321665 Alberta Ltd. v. Husky Oil Operations Ltd., 2013 ABCA 221 (Husky Oil), arose in connection with the pre-2010 version of section 45 of the Competition Act (the criminal conspiracy provisions), which provided that a criminal offence was committed when two or more persons agreed to unduly prevent or lessen competition in the “production, manufacture, purchase, sale or supply of a product [emphasis added].” Section 45 of the Act has since been amended to remove the word “purchase” as well as the “unduly” requirement. The Competition Bureau has set out in its Competitor Collaboration Guidelines (Guidelines) on the amended law that joint procurement arrangements will only be addressed by the Bureau as a civil practice under section 90.1, not as criminal conduct under section 45(1)(a). The decision in Husky Oil is consistent with this policy shift and suggests that civil plaintiffs will face an uphill battle in arguing that joint procurement agreements should be actionable on the basis of a breach of section 45 of the Act.
In Husky Oil, the defendants, Husky Oil Operations Ltd. and ExxonMobil Canada Ltd., jointly determined to sole-source a fluid-hauling contract in relation to properties that they jointly and individually owned and operated in the Rainbow Lake area of northwestern Alberta. Husky and Mobil had previously split their Rainbow Lake fluid-hauling requirements between two service providers – Kolt (the plaintiff) and Cardusty Trucking (the company that they ultimately chose to exclusively use). Kolt argued that Husky and Mobil represented 50% to 60% of its annual revenues, and that the defendants’ decision to exclusively use Cardusty put it out of business.
The plaintiff was successful at trial, with the court finding that Husky and Mobil had “enormous degrees of market power” over fluid haulers in Rainbow Lake. The Court also cited significant barriers to entry, such as the expense of acquiring and operating a fleet of trucks, the need to maintain a local maintenance shop and accommodation for employees, and a lack of evidence that another service provider could justify such expenses without providing services to Mobil and/or Husky, because Husky operated a large processing plant in the area, which represented a significant portion of the Rainbow Lake fluid-hauling market. In conclusion, the trial judge held that the defendants’ agreement not only resulted in an undue lessening of competition, but virtually forced Kolt to shut down its business. The judge awarded the plaintiff compensatory damages “at large” of $5 million plus $500,000 in punitive damages against each defendant.
The Court of Appeal’s Decision
In a unanimous decision, the Court of Appeal overturned the trial judge’s decision, accepting the defendants’ submission that the agreement to sole-source their fuel-hauling needs was not unlawful in nature and did not, nor was it likely to, unduly lessen competition. The Court of Appeal’s reasoning focused in large measure on the procurement process and the opportunities to compete that were afforded to the plaintiff. In the Court’s view, the intent of section 45(1) of the Act and the requirement that the lessening of competition be “undue” is to ensure that participants be provided with a fair opportunity to compete for business; that section was not intended to prohibit competitors from collaborating to rationalize operations and reduce unnecessary costs.
The Court stressed that once Husky and Mobil determined that their needs might be better met by relying on a single company, they advised Kolt and Cardusty that they were considering this arrangement and provided each of them with a fair and equal opportunity to be selected as the exclusive supplier. The defendants met with Kolt representatives, requested responses to a questionnaire regarding certain operational information and had follow up communications. The Court noted that this in-depth assessments of the two competitors took more than four months, and that throughout, the focus was not on the price or volume of work, but on the quality and suitability of each candidate. The Court found no evidence that Husky or Mobil attempted to reduce the suppliers’ profit margins, the prices they charged or the volume of work they would provide. Thus, in the Court’s conclusion, there was no reason why Husky and Mobil should not be permitted to work together to achieve efficiencies and reduce costs. Indeed, if they had decided to do their own fuel hauling, the consequences to Kolt would have been the same, and there could be no suggestion that this was contrary to the Act.
Husky and Mobil had also argued that they could not have unduly lessened competition because they jointly owned and operated most of their facilities in the area, and therefore functioned as a single economic entity. Notably, the Court of Appeal rejected this argument, finding that as a matter of principle, joint operators in the oil and gas industry can nonetheless conspire with one another or otherwise engage in anti-competitive behaviour. The Court focused on the fact that the parties’ Memorandum of Agreement contained standard language that it should not “be construed as creating a partnership of any kind, joint venture, association or a trust, or as imposing upon any one or more of the Joint Operators any partnership duty, obligation or liability.” In the Court’s view, this demonstrated that they intended to remain legally separate entities. Accordingly, they had to abide by the terms of the Act. Nonetheless, for the reasons described above, the Court concluded that the defendants’ joint purchasing agreement did not unduly restrict competition in this case.
Implications of the Decision
Even though the case had been decided under the prior law, the trial judge’s decision in Husky Oil had led to unease among some companies interested in pursuing joint procurement activities. The appellate decision in Husky Oil should therefore provide comfort that these activities are unlikely to be considered anti-competitive, at least under the prior version of section 45, so long as they are structured in a manner similar to the approach taken in that case.
However, the fact remains that the decision in Husky Oil was under the former law, and the Bureau’s Guidelines on the new section 45 are not binding on a court. Virtually no jurisprudence exists on the new version of section 45. A court might one day read in a “purchasing” element into the words of the new section 45. Moreover, under new section 45, agreements between competitors amounting to price fixing, market allocation and limits on supply are serious criminal offences punishable by a fine of up to $25 million and a prison term of up to 14 years, and private parties can sue for damages. In addition, under the Bureau’s Guidelines, the Commissioner may still seek to review and challenge joint purchasing agreements under section 90.1 of the Act. Accordingly, parties contemplating joint procurement should work with experienced competition counsel to structure an appropriate procurement arrangement.
Authored by Christopher Naudie, Peter Glossop, Tristram Mallett, Adam Hirsh