Canada / US Price Maintenance Rules

Susan Hutton for The Lawyers Weekly

November 13, 2009

Canada, U.S. loosen rules on price maintenance but restrictions remain that can trip up unwary suppliers and dealers.

Suppliers on both sides of the Canada/U.S. border who seek to take advantage of the recent liberalization of the rules on minimum pricing policies should proceed with caution, especially if they have high market shares or are responding to dealer pressure to "discipline" other dealers.

The sweeping amendments to Canada's Competition Act included the repeal of the criminal prohibition against "price maintenance," and its replacement with a civilly enforceable provision that enables the Competition Tribunal to prohibit the practice only if it has an "adverse effect on competition."

Meanwhile, the landmark decision of the U.S. Supreme Court in Leegin Creative Leather Products, Inc. v. PSKS, Inc. dba Kay's Kloset, signalled a loosening of the restrictions against resale price maintenance in that country. Both countries seemed headed toward sanctioning resale price maintenance only if it proved to be anti-competitive.

Suppliers on both sides of the border may well be tempted to agree on minimum resale pricing policies with dealers in the belief that asserting control over the pricing of their own products is now legal in both countries. But they are misguided in doing so without checking the fine print. Resale price maintenance is not necessarily legal in either country (it's just not necessarily illegal either). When a supplier enjoys high market shares or is responding to dealer coercion, suppliers still need to proceed with caution.

The old law in Canada was clear, if somewhat draconian. Attempts "by agreement, threat, promise or like means" to induce another person to raise or refrain from lowering the price at which it offered a product for sale in Canada, or refusing to supply or otherwise discriminating against a customer because of that customer's low pricing policy, were criminal offences, unless (in the case of refusal to supply) the accused could prove that the other person had engaged in loss-leadering, bait-and-switch, misleading advertising or sub-standard service in relation to the products in question.

Dealers were also prohibited from using threats, promises or like means to induce a supplier, as a condition of doing business with the supplier, to refuse to supply a person because of that person's low pricing policies.

Until Leegin, with certain possible exceptions such as the Colgate doctrine (see United States v. Colgate & Co.) in which the U.S. Supreme Court acquitted Colgate on the grounds that it had unilaterally imposed its pricing policy without agreement from its distributors, resale price maintenance had been viewed as one of the "per se" violations of U.S. federal antitrust law.

The U.S. Supreme Court updated the law in Leegin to account for more modern economic thinking, which suggests that price maintenance is not always anti-competitive. The court applied instead the rule of reason analysis to the conduct in that case, pursuant to which the agreement had to be analyzed to determine if it was in fact anti-competitive.

In so doing, however, the court failed to quell the controversy over whether minimum resale price agreements should be subject to a "competitive effects" test under the rule of reason - or should continue to be "per se" illegal. Some U.S. states have passed legislation restricting the use of resale price maintenance and the U.S. House of Representatives is considering the Discount Pricing Consumer Protection Act of 2009, a bill to countermand Leegin.

While price maintenance may no longer be criminally sanctioned in Canada, a civil provision has nonetheless been maintained, with a relatively low threshold for proof of anti-competitive harm. Under the new s. 76, the Competition Tribunal, on application by the Commissioner of Competition or a directly affected private party (with leave of the tribunal), may prohibit the continuation of price maintenance if it finds that the conduct is having, has had or is likely to have an "adverse effect on competition in a market."

The threshold for proof of anti-competitive harm is lower than that required in most other civil cases under the Competition Act ("adverse effects on competition" as opposed to "substantially lessen or prevent competition" ) - perhaps not dissimilar to the approach being advocated by the U.S. assistant attorney general for antitrust. But unlike in the U.S., the tribunal in Canada cannot impose fines, and no civil suits for damages are possible.

By all accounts, removal of the threat of "per se" criminal liability in the U.S. and Canada has led some suppliers to begin demanding minimum resale prices of their dealers.

One problem with this blanket approach in Canada, as in the U.S., is that resale price maintenance policies are sometimes the result of dealer coercion that can amount to a price-fixing conspiracy among dealers. In Canada, the resale price maintenance provision was originally enacted in the 1950s not only out of concern that suppliers would seek to control their own distributors' prices, but also out of concern that minimum resale price policies can mask horizontal price agreements among dealers.

This was among the concerns voiced by the U.S. assistant attorney general for antitrust in her recent speech, and by John Pecman, acting head of the Canadian Competition Bureau's Criminal Matters Branch, in answer to questions at the recent Canadian Bar Association Annual Fall Competition Law Conference.

Dealers who put pressure on their suppliers to force other dealers to raise their prices may put themselves, and their suppliers, at risk of potential allegations of criminal price fixing pursuant to another of Canada's competition law amendments. As of March 12, 2010, it will be per se criminal in Canada for competitors or potential competitors to agree among other things "to fix, maintain, increase or control" prices.

Suppliers who aid and abet a conspiracy among dealers may be equally culpable. Maximum fines have been increased to $25 million per offence and individuals may be sentenced to up to 14 years in jail. Suppliers on both sides of the border who seek to take greater control of their distribution channels by imposing minimum resale pricing policies on their dealers enjoy greater freedom to do so, but should proceed with caution.

Susan Hutton is a senior partner in Stikeman Elliott LLP's Competition Group, based in Ottawa. Her practice focuses on competition law and related areas, such as foreign investment review, international trade remedies and unfair trade practices.

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