The Law of Refusal to Deal: Distributors as Lifetime Partners? 


Winter 2007 - (Lang Michener InBrief )

Lang Michener InBrief 
Since 1976, Canada has had a "refusal to deal" law that allows the Competition Tribunal to order firms to take on – or prevent them from cutting off – distributors of their products in certain circumstances. 

Unlike virtually all the other reviewable vertical practices under Canada's Competition Act, section 75 of the Act did not have an express competitive effects test requiring that the practice led or would lead to a substantial lessening or prevention of competition. The four elements of the refusal to deal provision, between 1976 and 2002, were as follows: 

a. a person is substantially affected in his business or is precluded from carrying on business due to his inability to obtain adequate supplies of a product anywhere in a market on usual trade terms;

b. the person referred to in paragraph (a) is unable to obtain adequate supplies of the product because of insufficient competition among suppliers of the product in the market;

c. the person referred to in paragraph (a) is willing and able to meet the usual trade terms of the supplier or suppliers of the product; and

d. the product is in ample supply.

During the 1976–2002 period, only five applications were brought to the Competition Tribunal respecting refusal to supply, and only three of those considered section 75 in any detail. This state of affairs existed because, despite the lack of an express competitive effects test, only the Commissioner of Competition could bring cases, and various Commissioners over those years only brought cases when they believed there were adverse competitive effects. 

That changed in 2002, when exclusive access to the Competition Tribunal for refusal to deal was taken from the Commissioner of Competition. For the first time, those directly and substantially affected by the conduct obtained the right to bring cases in their own name, with leave to the Tribunal. 

At the same time that this right to bring a private case was created, the substantive law was amended to add a fifth element; that is, the requirement that the conduct have or be likely to have an adverse effect on competition in a market. However, as noted above, this element differs from the general anti-competitive effects test found in other provisions of the Act. It does not require a substantial lessening of competition, but only an "adverse" effect. 

This difference makes bringing a refusal to deal case much easier than it would otherwise have been, as virtually any refusal to supply removes one potential supplier from the marketplace and, therefore, at least prima facie, is likely to have some "adverse" effect on competition. 

The consequences of this change have been fully predictable. Indeed, if one were to assess the importance of various aspects of Canada's competition law merely on the basis of the number of cases filed with the Competition Tribunal, one would conclude that refusal to deal is the central antitrust problem of our time. Section 75 cases overwhelmingly dominate. Since 2002, there have been 15 refusal to deal cases filed, all by private parties. Since the time that private access to the Tribunal was given for refusal to deal – as well as exclusive dealing, market restriction and tied selling cases – refusal to deal has been an aspect of each and every one of the private cases brought and, in only two of the cases were other aspects added to the refusal to deal claim. 

Despite the fact that many cases have been commenced, it would be fair to note that fewer than half of those cases have been granted leave by the Tribunal to proceed, and many of those have been resolved one way or another short of a hearing. The only case that has gone to a final hearing, B-Filer Inc. v. Bank of Nova Scotia, has resulted in a dismissal of the applicant's case. 

Nevertheless, the fact that cases can be brought by persons cut off from supply – or even initially refused supply – despite the fact that there is no breach of contract, has a practical impact on the willingness of product suppliers to set up third-party distribution arrangements. They can have no real confidence that those arrangements are terminable in accordance with agreed-upon contract terms. Consequently, the risks of establishing such distribution arrangements are higher than they would otherwise be and, therefore, the willingness of suppliers to enter into third-party distribution arrangements, rather than vertically integrated product distribution, is lower. This suggests a lower level of distribution efficiency than would exist but for section 75 of the Act and its enforcement by private parties. 

As noted above, the only refusal to deal case which has reached the hearing stage involved B-Filer Inc. B-Filer's business offered purchasers who held bank debit cards the ability to use those cards to pay participating vendors for the purchase of goods and services over the Internet. B-Filer sought an Order directing the Bank of Nova Scotia ("BNS") to accept B-Filer as a customer on usual trade terms. 

On December 20, 2006, the Tribunal dismissed B-Filer's application under section 75. The Tribunal rejected B-Filer's application for a number of reasons. B-Filer has filed an appeal with the Federal Court of Appeal and that remains outstanding. 

The Tribunal was clearly sympathetic to BNS's justification for cutting off supply to B-Filer, both in finding that the reason B-Filer could not obtain supply was not due to insufficient competition, and also in stating that it would have exercised its discretion in favour of BNS in any event. BNS argued that its refused to supply B-Filer because the B-Filer business model required BNS customers to disclose their confidential PIN to B-Filer, in breach of BNS rules, thereby putting bank account security at risk. 

However, the facts in this case were unusual. How the Tribunal will react in the more usual situation of a supplier simply seeking to restructure its distribution arrangements will be important to the future course of refusal to deal litigation, and for the ability of Canadian firms to ensure that their distribution systems are efficient. 

In any event, the existing refusal to deal provision of the Competition Act represents a genuine challenge for suppliers of products in Canada. They cannot know with confidence that terminating a distribution arrangement will not lead to the cost and expense of Tribunal proceedings – perhaps involving an interim supply order – and in many cases they cannot have confidence that a final order will not be made requiring continuing supply. Consequently, at least until the law is clarified, entering into a supply arrangement in Canada will be easier than exiting from one. 

This article appeared in InBrief Winter 2007/2008.  

The unexpurgated version of this article appeared in Competition & Antitrust Brief Summer 2007.