Assessing Anticompetitive Effects and Foreclosure PANEL III

The Canada Pipe Matter Presentation to the ICN Unilateral Conduct Workshop Martine Dagenais and Richard Bilodeau Civil Matters Branch Competition Bureau Canada March 24, 2009

Background Allegations were that Canada Pipe abused its dominant position pursuant to section 79 of the Competition Act because: –It had market power in the sale and supply of cast iron DWV pipe, fittings and MJ couplings markets in Canada –It engaged in a practice of anti-competitive acts that included an exclusivity program entitled Stocking Distributor Program and full-line forcing –This practice had the effect of substantially preventing and lessening competition in the above markets by restricting the entry or expansion of competitors offering less than Canada Pipes full line of products

The Stocking Distributor Program Two classes of distributors –Stocking and Non-Stocking Stocking Distributors –Must give Canada Pipe first opportunity to supply all their cast iron needs –In return, distributors purchase at a heavily discounted rate –Distributors who purchase exclusively from Canada Pipe during a quarter and a calendar year, are eligible to receive a quarterly (7-15%) and an annual rebate (4%) calculated on their total purchases –Distributors who do not respect the conditions, risk losing their accumulated rebates and the stocking distributor status

Relevant Markets Three Relevant Product Markets –Consists of Cast Iron pipes, fittings and MJ couplings used in Drain, Waste or Vent applications in buildings higher than 4-6 stories –Three relevant product markets because the three products were complimentary and not interchangeable in nature –Other materials (plastics, copper, steel, asbestos cement) were not part of the relevant product market as they were not close substitutes Six Relevant Geographic Markets –The six relevant geographic markets reflect the six pricing zones that Bibby has established. Bibbys prices for cast iron DWV products vary across these six regions.

Market Power Market Shares –Between 80% and 90% in each of the eighteen relevant markets. Barriers to Entry –The Bureau argued that the principal barrier to entry is Canada Pipes SDP –Tribunal did not agree but stated that Canada Pipes large market share, its range of products and national presence limited the penetration of competitors.

Anti-Competitive Acts Exclusive Dealing and Full-Line Forcing The Bureau argued that: –the SDP was designed to induce distributors to carry Canada Pipe products exclusively, thus foreclosing these markets to competitors offering similar products; –the SDP foreclosed between 80 and 90% of the distribution network to competitors and potential entrants

Anti-competitive Acts Exclusive Dealing and Full-Line Forcing Canada Pipe contended that: –the SDP was not a contract; –participants could choose to deal with other suppliers; and, –on January 1 of each year, distributors could choose who to deal with.

Anti-Competitive Acts The Federal Court Appeal stated the following: An anti-competitive act is one whose purpose is an intended negative effect on a competitor that is predatory, exclusionary or disciplinary. The focus of analysis is thus on the act itself, to discern its purpose.

Business Justification Canada Pipe presented two business justifications –the SDP encouraged the stocking of a full product line consumers might not otherwise have access to; and –that the SDP leveled the playing field between large and small distributors Tribunal accepted the first business justification but not the second

Business Justification Federal Court of Appeal stated the following in rejecting the Tribunals finding on the first business justification: To be relevant in the context of paragraph 79(1)(b), a business justification must be a credible efficiency or pro-competitive rationale for the conduct in question, attributable to the respondent, which relates to and counterbalances the anti-competitive effects and/or subjective intent of the acts.