Canada: Canadian Competition Tribunal Refuses To Apply U.S. Horizontal Merger Guidelines

Summary

On Oct. 31, 2022, the Canadian Competition Tribunal (the Tribunal) issued its decision¹ in the merger litigation in Canada (Commissioner of Competition) v Parrish & Heimbecker, Limited (CT-2019-005).

The Tribunal dismissed the application brought by the Commissioner of Competition (the Commissioner) under section 92 of the Competition Act (the Act), concluding that the Commissioner did not prove that the acquisition of a grain elevator near Virden, Manitoba by Parrish & Heimbecker, Limited (P&H) would lessen competition substantially in the markets for the purchase of wheat and canola in the area around the elevator.

Key to the decision was the Tribunal's refusal to apply an approach to relevant product market definition advanced in the U.S. Horizontal Merger Guidelines that the Commissioner had urged the Tribunal to adopt.

In this article, we provide a summary of the main arguments advanced by the Commissioner and P&H in regard to the relevant product market and the Tribunal's conclusions.

The acquisition

P&H, a family-owned Canadian agribusiness founded in 1909 and headquartered in Winnipeg Manitoba, acquired 10 primary grain elevators (Elevators) from Louis Dreyfus Company Canada ULC (LDC) in September 2019 and closed the deal in December 2019² (the Acquisition). The Commissioner challenged the Acquisition by P&H of one of these Elevators: the LDC Elevator located on the Trans-Canada Highway in Virden, Manitoba (the Virden  Elevator).

In his application, the Commissioner claimed that the Acquisition was likely to cause a substantial lessening of competition in the supply of grain handling services (GHS) for wheat and canola for those farms that, the Commissioner posited, benefited from competition between the Virden Elevator and a nearby elevator owned by P&H located in Moosomin, Saskatchewan (Moosomin  Elevator).

Relevant product market: Purchase of wheat and canola or supply of grain handling services?

As the Tribunal noted in its summary of the ruling, the "definition of the relevant product market was a fundamental point of disagreement between the parties" that "significantly influenced many elements in the Tribunal's overall analysis". On his part, the Commissioner argued that the relevant product market was the supply of GHS, which according to the Commissioner includes: the elevation, grading, and segregation of the grain as well as cleaning, drying, blending and storage offered by the grain Elevators.³

The Commissioner, in his closing arguments, contended that the approach of defining the provision of intermediary services — such as GHS — as the relevant product market was supported by jurisprudence from Canada, the United States, and the European Commission,⁴ noting in particular that the U.S. Horizontal Merger Guidelines (the U.S. HMGs)⁵ "contemplate that the benchmark price used for analyzing product market can be different than the explicit price where the firms' specific contributions to value can be identified with reasonable clarity."⁶ The Commissioner therefore argued that that the "value-added" approach advocated for in the U.S. HMGs be applied in this case.

In  response, P&H asserted that the relevant product market was the purchase of wheat or canola, and that there was no evidence that farmers and grain companies conduct their transactions on the basis of the sale and purchase of GHS. In particular, P&H, quoting the Competition Bureau's Merger Enforcement Guidelines (the MEGS)⁷, noted that the base price used to postulate a price increase is typically the prevailing price in the relevant market, which is whatever is ordinarily considered to be the price of the product in the sector of the industry being examined.⁸

Further, P&H added that a review of the evolution of the MEGs confirmed a deliberate and "considered" abandonment of the 1991 MEGS that had adopted a "value-added" approach".⁹ P&H noted that while a "value-added" approach was introduced into the revised U.S. HMGs issued in August 2010, the Commissioner did not include the "value-added" approach in either the draft or final versions of the revised MEGS published in October 2011. Moreover, P&H argued, even if one were to consider the U.S. HMGs approach in Canadian merger reviews (a point P&H did not concede), the U.S. HMGs expressly require that, in order to base a small but significant non-transitory increase in price (SSNIP) on an implicit price, the merging firms' specific contribution to value need to be identified with "reasonable clarity".¹⁰ This condition was not met on the facts of the case.

P&H noted that the 1991 MEGS in fact referred to the general principle that the base price that is employed in postulating a SSNIP is "whatever is ordinarily considered to be the price of the product at the stage of the industry ... being examined" which is "typically the cumulative value of the product, inclusive of the value added (mark-up) at the industry level in question." This meant, according to P&H, applying the transaction price between farms and companies as the base price.¹¹ P&H further pressed that the 1991 MEGs referred to the "value-added" approach as an "exception" to the general principle that would apply only in limited circumstances if "the value added is billed as a separate fee, and no-mark-up is applied to the product in relation to which the service (or other value added) is performed."¹²

P&H pointed out that these conditions were not met on the facts of the case because the Commissioner was asking the Tribunal to use a base price for market definition that was founded on an imputed price equal to only a fraction of the total value added provided by the grain companies. Further, P&H recounted that: there was no separate fee for the alleged value added provided by the grain companies; farmers and grain companies do not transact business on the basis of the sale and purchase of GHS, and; any value-add by the grain companies to get the grain to export markets occurs after  the purchase transaction with farmers.¹³

P&H additionally submitted that there were no precedents in Canada for a court or the Tribunal utilizing an implicit price for the merging firms' specific contribution to the value of a product to determine the SSNIP and relevant market. P&H noted that while the approach had been advanced in a handful of cases in the EU, the U.S. and Australia, the approach had either been rejected outright, or applied to facts that were distinguishable.

The Tribunal's decision

The Tribunal, in its Decision Summary, noted that it had concluded that the relevant product was not the sale of GHS to farms, as alleged by the Commissioner, but the purchase of wheat and canola, as advanced by P&H. The Tribunal held that the Commissioner's proposed product market, the sale of GHS, "was not grounded in commercial reality and in the evidence."

Additionally, the Tribunal held that the "value-added" approach to product market definition proposed by the Commissioner "failed on the facts, from a precedential and legal standpoint, and from a conceptual and economic perspective", and thus refused to apply the approach outlined in the U.S. HMGs. 

With regards to the geographic market, P&H had argued that the market was broader than that proposed by the Commissioner, noting that Elevators purchased grain from farms farther away than what the Commissioner alleged. The Tribunal agreed with P&H and found that the relevant geographic market for wheat and canola comprised at least seven and ten Elevators, respectively, for wheat and canola, as well as four canola crushing plants

After considering the extensive economic and factual evidence tendered in the case, the Tribunal ultimately concluded that the Commissioner had not established that the Acquisition lessened, or was likely to lessen competition substantially in any relevant market. The Tribunal found that the evidence established that the price effects of the Acquisition were immaterial, that several effective remaining competitors remained after the Acquisition, and that post-merger market shares were below  the 35 per cent safe harbor threshold.

While the Tribunal did not need to determine the efficiencies issue put to it by the parties in light of its conclusions above, the Tribunal nevertheless noted that the P&H would not have met its burden of demonstrating, on a balance of probabilities, that the claimed gains in efficiency would be greater than, and would offset the anti-competitive effects of any lessening of competition resulting from the merger.

Conclusions

This case, among other things, demonstrates the importance of properly defining the relevant product market. While the U.S. HMGs expressly contemplate the potential use of a "value-added" approach in defining relevant product markets, the Canadian MEGs provide that "the base price used to postulate a price increase is whatever is ordinarily considered to be the price of the product in the sector of the industry...being examined." Further, as P&H noted, and as the Tribunal accepted, the "value-added" approach to product market definition was not supportable by the facts or legal precedents. While the concept was argued in a handful of cases in the EU, the U.S. and Australia, it was explicitly rejected (such as in the Metcash¹⁴  case), or applied to facts completely different from those in the present case.

The "value-added" approach also portends further risks to market definition, including imposing stricter merger analysis criteria than established in the MEGs and legal precedents, and introducing an undesirable degree of uncertainty and unintended consequences for merger law in Canada. As some antitrust economists have noted, applying the hypothetical monopolist test using the "value-added" approach tends to "produce more narrowly defined markets whenever the threshold used for the value added test is not sufficiently increased to account for the ratio of value added to prices."¹⁵

For example, in Metcash, the Federal Court of Australia did not accept the use of the "value-added" approach because applying a 5 per cent SSNIP to the imputed value-added price (wholesaler profit margin in that case) would reflect just a ~0.26 per cent final retail price increase. The Australian court did not accept that such a small increase could be used to define a product market and refused the "value-added" approach.

Using the "value-added" approach in this case would have produced similar results that would have effectively changed the SSNIP test from 5 per cent to less than 1 per cent. Such an approach would be unprecedented and would impose unusually low intervention thresholds that is in not accordance with the MEGs and the legal precedents.

Footnotes

1 The Tribunal has only issued a summary of its decision at this time (Decision Summary).

2 The parties closed the transaction on December 10, 2019, 32 days after submitting responses to the Competition Bureau's supplementary information requests (SIR).t

3 Notice of Application of the Commissioner of Competition, CT 2019-005, Doc # 2 at para 1.

4 Closing Arguments of the Commissioner of Competition, CT-2019-005, Doc #234 at paras 63 and 71.

5 US Department of Justice and Federal Trade Commission, Horizontal Merger Guidelines, August, 19, 2010.

6 Closing Arguments of the Commissioner of Competition, CT-2019-005, Doc # 234 at para 76-81.

7 Competition Bureau, Merger Enforcement Guidelines (2011). 

8 P&H Closing Arguments, CT-2019-005, Doc # 238 at para 52.

9 P&H Submissions on the 1991 MEGs, CT-2019-005, Doc #259 at para 6.

10 P&H Closing Arguments, CT-2019-005, Doc # 238 at para 63.

11 P&H Submissions on the 1991 MEGs, CT-2019-005, Doc #259 at para 1.

12 P&H Closing Arguments, CT-2019-005, Doc # 238 at para 63

13 P&H Submissions on the 1991 MEGs, CT-2019-005, Doc #259 at para 4.

14 Australian Competition and Consumer Commission v Metcash Trading Limited [2011] FCA 967 [Metcash].

15 P Davis and U Haegler, "Should competition agencies focus on `value added' instead of final prices?", March 1, 2016.

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