On innovation, efficiencies and immunity: the year ahead

Speech

Remarks by Matthew Boswell, Senior Deputy Commissioner of Competition
Event at Borden Ladner Gervais LLP

September 26, 2017

Toronto, Ontario
(As prepared for delivery)

Introduction

Good afternoon.

Thank you for inviting me to speak with you today.

Two months ago, I moved from leading the Competition Bureau’s Cartels and Deceptive Marketing Practices Branch to heading up our Mergers and Monopolistic Practices Branch.

This change of roles has been, and will continue to be, challenging for me. My background is certainly more in the world of criminal investigations, search warrants and prosecutions, than in the realm of econometrics, abuse of dominance, deadweight loss and cognizable efficiencies. I’m embracing this challenge, but please accept my apologies if I am not as well versed in the latter category as in the former.

What I would like to do today is start by discussing the topic of competition and innovation, and how considerations related to innovation factor into the Bureau’s work. From there, I will briefly discuss the efficiencies exception in our merger review process, and the guidance document that the Bureau intends to prepare on this topic. To wrap things up, I will go back to my traditional comfort zone and outline what the Bureau believes will be the result of the ongoing work to revise Canada’s Immunity and Leniency Programs. 

Competition drives innovation

Promoting innovation in the Canadian economy has been a major focus of our federal government’s work since they came into office in 2015, and we expect this will continue to be the case for the balance of their term.

In 2008, the blue ribbon Competition Policy Review Panel stated in their report to the federal government—Compete to Win—that “competition is the strongest spur to innovation and value creation, leading to a higher standard of living for all Canadians.”

As such, the Bureau’s long track record of vigorously enforcing the Competition Act and promoting competition in Canada is central to the current government’s objective to promote greater innovation.

More competitive markets create stronger incentives for businesses to innovate as they strive to outdo, one-up or set themselves apart from the competition.

In competitive markets, businesses develop new, more convenient or better quality products and services. And both the business and their customers benefit from these innovations.

But that consumer-focussed innovation is only half the story.

A large number of respected studies also show that when firms face increased competition, they get a lot more efficient and productive. I don’t mean 5 or 10 per cent increases―I mean huge productivity gains.

There’s a prominent example of a study of U.S. and Canadian iron ore mining companies around the Great Lakes that suddenly faced competition from Brazilian imports during the 1980s. The result of this increased competition was that labour productivity doubled. Only a few years after competition was introduced, miners were extracting twice the amount of iron ore in an eight-hour shift than they had before. And this occurred without new technology. They simply had a strong incentive to make changes that would improve their performance.

A lot of major increases in efficiency and productivity come not from technological invention, but from innovative business practices. Think of approaches made famous by Japanese companies―like lean inventory or total quality management―that have helped companies like Toyota to grow and succeed on the international stage.

When a business stands to lose or gain depending on how it performs against its rivals, it is driven to invest in changes and improvements that it wouldn’t have considered otherwise.

So on one hand, competition drives innovation in products and services that improve our standard of living. And on the other, competition drives innovation in ways of doing business that increase efficiency, productivity and economic growth.

Creating the conditions for innovation

It is these benefits that drive the Bureau’s efforts to create the conditions for innovation.

As you all know, innovation can be stifled in a variety of ways.

Well-established incumbents sometimes use their dominant position in the market to force out innovative new entrants. Businesses may also enter into a range of anticompetitive agreements that reduce the incentive to innovate. And the merger of two rivals has the potential to impact the level of innovation in an industry.

Like other competition agencies around the world, the Bureau is paying particular attention to activity in the rapidly growing digital economy, where we are seeing the emergence of new technologies and business models (almost daily) that have the potential to transform whole markets.

One example of our determined efforts to create the conditions for innovation is our ongoing litigation against the Toronto Real Estate Board. TREB is preventing its members from offering Multiple Listing Service sales data to prospective home buyers through innovative new online brokerage models—models that pose a competitive threat to TREB members operating in more traditional ways.

These new business models have important implications for non-price elements of competition, such as product quality, consumer choice, convenience, and—most notably—innovation. We were pleased with the strong stance taken by the Competition Tribunal in their decision that “dynamic competition, including innovation, [is] the most important type of competition.” We are eagerly awaiting the Federal Court of Appeal’s decision.

In the TREB matter, the sales data is the input for the new form of proposed dynamic competition.

This brings us to the issue of the role of “big data” when it comes to competition and innovation.

Big data is big news at the moment: firms are increasingly using big data in ways that drive innovation in many different industries.

Meanwhile, a healthy debate is taking place on the ultimate effects of big data on competition. Some feel that big data offers substantial benefits to both individuals and businesses; others say it has the potential to undermine the competitive process.

On September 18, the Bureau released a white paper entitled Big Data and Innovation: Implications for Competition Policy in Canada.

Rather than making predictions about the ultimate effects from big data, our paper recognizes the role that competition policy can play in tipping the scales one way or the other by acknowledging the risks of over- and under-enforcement. 

We have three goals in releasing the white paper:

  1. We would like it to prompt a discussion on how the Bureau should strike a balance in enforcing the Competition Act in big data cases;
  2. We would like to identify discrete areas where conduct related to big data could potentially fall under the Act;
  3. We describe some of the challenges of analysing big data cases under the Act and we aim to spark a discussion with stakeholders on how they can be addressed.

I would encourage all of you that are interested to review the white paper and to please let us know your comments by November 17th. The Bureau plans to release a concise summary of important insights informed by the comments we receive.

Finally, on the topic of innovation and the Bureau’s work, let me indicate that, as part of our merger review analysis, the Bureau will continue to examine the impact of mergers on innovation, where applicable.

In June, for example, we concluded our review of the Dow/Dupont merger in the agricultural sector with a consent agreement to remedy our concerns of, among other things, the merger’s impact on innovation.

Our position statement in that case recognized the central role that innovation plays in the agricultural sector, and describes how we assessed the merger’s innovation effects in that case.

So, as you can see, the Bureau is committed to continuing to focus on creating the conditions for innovation in Canada through both our enforcement and our competition promotion work. These efforts are essential, given that innovation plays such a critical role in driving overall economic well-being. It should make perfect sense that preserving incentives to innovate is one of the Bureau’s most important priorities.

Efficiencies exception

My move to Mergers has also given me the chance to become more familiar with the Competition Act’s efficiencies exception in merger reviews, a subject with which the Bureau has a significant history in the courts, and which our Commissioner has publically spoken about on many occasions.

By now, it should be clear to the legal and business communities that the Bureau is following the jurisprudence and we are willing to clear a merger on the basis of the efficiency exception where the efficiencies clearly and significantly outweigh the anti-competitive effects of the merger.

But those who have advanced the efficiencies exception know that we will not do so lightly. We will continue to require strong evidence to support efficiencies claims and our teams will be testing that evidence to ensure it meets the screens for cognizable efficiencies.

On that front, I am pleased to advise that the Bureau intends to put out additional guidance on efficiencies by the end of the calendar year. It is anticipated that this guidance will be a summary of our approach to efficiencies analysis, including clarification surrounding the more nuanced issues we have encountered in efficiencies analysis. This guidance will help ensure that there is a level playing field among firms when providing guidance to their clients on the Bureau’s approach to efficiencies.

At a high level, we anticipate addressing the following:

  • How the Bureau approaches quantification of price and non-price anti-competitive effects;
  • What is the Bureau’s approach to assessing the impact of mergers on dynamic efficiency and innovation;
  • What does the Bureau expect from parties in their efficiency submissions and what are the most common pitfalls they can avoid in these submissions; and
  • Finally, we aim to explain what parties and third parties might expect in terms of information requests related to the efficiencies analysis.

Until we publish a guidance document, we will continue to give guidance on efficiencies in our position statements as those opportunities come up.

So mergers and monopolistic practices is my new day-to-day. But I haven’t lost sight of the Bureau’s important work in cartel enforcement.

Businesses can collude to eliminate competition between them and remove the incentive to innovate―which is one of the reasons why cracking down on cartels continues to be a priority for the Bureau.

The Cartels Directorate is extremely busy with dozens of active investigations, multiple matters that we have referred to the Public Prosecution Service of Canada (PPSC) for them to make decisions on prosecutions, and multiple criminal trials making their way through the courts.

The Bureau is also pleased to be hosting the International Competition Network’s Cartel Workshop next week in Ottawa. The Workshop’s theme is Combatting Cartels in Public Procurement, which is an area of focus for the Bureau this year and has been for several years now.

We have multiple ongoing investigations and prosecutions related to alleged bid-rigging on government procurement processes. Further, we are doing as much as we can to assist in deterring additional bid-rigging in relation to the billions of dollars the federal government is distributing to fund infrastructure projects. The Cartel Workshop will be an excellent opportunity to discuss issues related to combatting bid-rigging with delegates from around the world and across Canada.

Immunity & leniency update

The most important piece of non-enforcement work in the Cartels Directorate is the ongoing work to advance possible revisions to the Bureau’s Immunity and Leniency Programs.

As many of you know, we embarked on this review some time ago and there is no doubt that it is taking much longer than we had hoped. This is a process that requires two separate and independent organizations—the Bureau and the Public Prosecution Service of Canada—to agree on the proposed changes to Canada’s programs. There have been some controversial ideas put forward that have required much discussion and debate between the two organizations.

As it stands now, I expect that the proposed changes to the Immunity Program will be published for consultation before the end of October and the proposed revised Leniency Program will be published for comment before the end of the year.

It is likely that the two Programs will be “merged” into one Program, as is the case in other jurisdictions, once the changes are finalized.

Today, I will outline for you some of the key aspects and likely changes in the revised Program.

Of course, what I say today may not all come to pass in the final versions. We are continuing to revise proposed changes, we are quietly consulting as we go along, and we will be conducting extensive public consultation before the final revised Program is published.

Immunity

I will begin by setting out changes specific to the Immunity Program.

Presently, the immunity process operates in 3 steps.

The first is the marker stage, in which confirmation is given to an immunity applicant that it is the first party to approach the Bureau requesting a recommendation of immunity.

The second is the proffer stage, in which a “without prejudice” hypothetical statement is taken in which the applicant’s counsel describes in detail the illegal activity, its role in the offence for which immunity is sought, and the effect of the illegal activity in Canada.

The last is the immunity agreement stage, in which the PPSC and applicant agree on terms and conditions under which the PPSC grants the applicant immunity from prosecution.

It is anticipated that after the changes are implemented, the immunity process will have 4 steps: Marker, Proffer, Interim Grant of Immunity and the Immunity agreement.

Following the Bureau’s recommendation—on the basis of proffered information, and in some circumstances on the basis of key documents and witnesses—an Interim Grant of Immunity will be issued by the PPSC in order to facilitate the full disclosure of records and the interviewing of relevant witnesses. This change is designed so that the Bureau will be provided with documents and access to witnesses faster than is often the case under the current program.  

It is anticipated that full disclosure will be completed within 6 months of the Interim Grant being issued. That is at the outside and it would often be much sooner. Final immunity will be granted once the Crown is satisfied that no further assistance is required by the applicant.

Immunity will be available to all those (current and possibly former employees, directors etc.) who are prepared to admit culpability and cooperate with the investigation. This maintains the status quo.

Individuals will be covered under the corporate Interim Grant, but will also receive a letter confirming their coverage from the PPSC if they are being interviewed. At this stage, individuals to be covered need to be identified in order to be carved into the Interim Grant and the final immunity agreement.

Leniency

In terms of the Leniency Program, the Bureau and the PPSC agree with the fundamental notion that there is tremendous value in having a leniency program to further investigations and prosecutions in order to optimize the use of scarce judicial, prosecutorial, and investigatory resources.

Subject to earlier disclosure requirements, the revised Leniency Program will follow the same general process as the current version. Which is as follows: marker; proffer and limited disclosure; leniency recommendation to the PPSC; plea agreement; full disclosure; entering of the guilty plea and sentencing; and, ongoing cooperation and testimony.

The limited disclosure at the proffer stage will include key witness interviews made under oath (Queen for a Day letters) and key documents provided on a without prejudice basis. The PPSC will facilitate disclosure by providing “use immunity” letters to eligible leniency applicants. This prevents the prosecution from using the leniency applicant’s own testimony or any evidence derived from the testimony against the applicant should they withdraw from leniency.

So long as there is a connection with Canada, leniency will be available for all cartel offences regardless of the cartel’s geographic scope, or market share, or the number of firms involved.

Eligibility for leniency will be based on the criteria included in the current Leniency Program—so no changes there. These include terminating participation in the cartel, agreeing to cooperate fully and in a timely manner at their expense, and pleading guilty.

For first-in leniency applicants, individuals (current and possibly former employees) are eligible for immunity if they are prepared to admit culpability and cooperate with the investigation. They would be carved into the corporate plea agreement and immunized from prosecution. This maintains the status quo.

For subsequent leniency applicants, once the proffer is completed, the Bureau will seek to conduct an interview with one or more key witnesses (current and possibly former employees) who are willing to admit culpability and cooperate with the investigation. Those witnesses, who will be selected by the Bureau, may be eligible to be immunized from prosecution. They would be carved into the corporate plea agreement and immunised from prosecution.

The Bureau will make its leniency recommendation to the PPSC after receiving proffers, sworn statements, and available records from both the immunity applicant and the firm or person seeking leniency.

Fines in leniency cases will, generally speaking, continue to be determined on, and the cooperation discount will be applied to, at least 20 percent of the applicant’s relevant volume of commerce, unless there is clear and compelling evidence demonstrating that a different amount is appropriate.

Presently, the first leniency applicant is eligible for a 50 percent reduction of the fine that would have otherwise been recommended by the Bureau to the PPSC. The second leniency applicant would then be eligible for a reduction of 30 percent of its recommended fine, and subsequent applicants would generally be eligible for reductions no greater than 30 percent.

Going forward, it is anticipated that all leniency applicants will be eligible for a discount of up to 50 percent.

The goal of this change is to further incentivize subsequent parties to come forward and co-operate with the Bureau and to more accurately reflect their contributions to the investigation. The amount of discount available to an applicant will be based on the “value of its cooperation”.

The value of cooperation will ultimately be determined by the PPSC after giving serious consideration to the Bureau’s recommendation and having regard to the extent that the cooperation added to the Bureau’s investigation and ability to pursue other parties, taking into account:

  • the timing of the leniency request (relative to other participants in the cartel);
  • the timeliness of disclosure;
  • the credibility and reliability of available witnesses;
  • the relevance and materiality of documents provided; and
  • any other factor relevant to the development of the Bureau’s investigation into the matter or any additional matter for which the party is eligible for “immunity plus”  (i.e. an offence that is newly disclosed by the leniency applicant).

Pleas will be taken from cooperating parties as soon as possible. That is, without regard to the timing of other plea arrangements in the same matter.

Plea arrangements, entered into pursuant to the leniency program, made subsequent to the entering of a plea in the same matter, will be made by taking into account, among other things, the terms of the previous pleas. 

For both immunity and leniency, the Bureau requires full, complete, frank and truthful disclosure of non-privileged information, evidence or records that are available to the applicant and that relate in any manner to the criminal offences.

The operation and design of the revised program respects sustainable claims of privilege made on information that otherwise would need to be provided to the Bureau.

Further, non-privileged internal investigation records will be treated the same as others and presumptively considered disclosable. An applicant will be required to provide a description of all relevant records over which the applicant claims privilege, as well as the identification of the applicable privilege claimed. No waiver of the privilege claimed will occur in the review process described below, however, the description of the record must enable the Bureau and the PPSC to understand the nature of the information over which privilege is claimed and the context and basis upon which the privilege claim is founded.

Upon reception of this information, the Bureau will seek the advice of the PPSC. If the PPSC is not persuaded of the privilege claim’s sustainability, it will notify the applicant within fourteen days that it is appointing an independent counsel from its list of available crown agents, and that it will require the applicant to submit the sealed documents to the independent counsel within fourteen days of the appointment.

The applicant is expected to abide by the determinations made by the independent counsel, who will determine the validity of the claim of privilege and its scope. An applicant may withdraw from this process (and the Program) at any time, but failure to comply may be a breach of the cooperation obligations and result in the immunity or leniency marker being cancelled or in the PPSC denying to grant immunity.

Also, under the revised Program, witness interviews will ordinarily be under oath and audio or video recorded.

It is worthwhile to note that at a Canadian and American bar association event earlier in the year, I announced that a potential term of the new Program was that proffers “could be audio-recorded .

We’ve heard significant concerns from the Bar in Canada and elsewhere regarding this issue and we will be discussing those concerns further with the PPSC in the days ahead.

We fully expect that, once the public consultations are underway, we will hear additional concerns. We will, of course, listen to the concerns and issues raised as we continue to work toward a final version.

The immunity and leniency programs have been instrumental in detecting and prosecuting cartel conduct in Canada and we at the Bureau want them to continue to be effective law enforcement tools in the future.

Thank you very much for your attention.


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