Over the last several months, Canada’s head federal antitrust enforcer, the Commissioner of Competition, has lost three rounds of disputes with Labatt Brewing Company Limited. Labatt is the second largest brewery in Canada. The first two losses relate to the Commissioner’s attempt to temporarily block Labatt from completing its merger with Lakeport Brewing Limited Partnership in order to give the Commissioner more time to review the deal. The third involved a Federal Court quashing "enormous" document subpoenas the Commissioner obtained against Labatt, Lakeport and fifteen other breweries. This marked the first time a "section 11" order has been struck down in a merger case.
Round One: Tribunal Rejects Commissioner’s Application to Enjoin the Closing
In February 2007, Labatt, announced its intention to acquire the operations of Lakeport Brewing Limited Partnership. Lakeport beer is marketed as a lower priced alternative to other brands of beer. The same month, the parties filed a "long-form" premerger notification with the Competition Bureau, triggering a 42 day waiting period. Before the waiting period expired, the Commissioner informed Labatt and Lakeport that it would not complete its review of the transaction by the end of the period. The Commissioner was concerned that Lakeport’s lower priced beer would be eliminated from the market, leaving consumers with fewer, higher-priced choices. Influenced by a prior experience where it lost a deal because of the time it took the Competition Bureau to complete its review, Labatt proposed to the Commissioner that the deal close at the end of the waiting period subject to a hold-separate arrangement. Under the hold-separate arrangement, Labatt would acquire Lakeport but delay integrating it in its business for thirty days. Instead of accepting Labatt’s proposal, the Commissioner filed with the Competition Tribunal an application under Section 100 of the Competition Act to obtain a temporary injunction blocking Labatt from completing the deal.
In considering the application, the key issue before the Tribunal was whether allowing the merger to close would substantially impair the Tribunal’s ability to order effective relief post-merger. Commissioner of Competition v. Labatt Brewing Company Limited et al., 2007 Comp. Trib. 8. The Commissioner tried to show this by arguing that the Competition Act gives the Tribunal fewer remedies to use once a merger has been completed, and that it is often more difficult to effectively remedy the anticompetitive effects of a merger after the merger has been effected. Labatt and Lakeport replied there was no evidence that the merger would impair the Tribunal’s ability to order divestiture or dissolution, especially given that the parties had offered to enter into a hold-separate agreement, which the Tribunal has accepted in the past. The Tribunal interpreted Section 100 to mean that the Commissioner has the burden of showing that if it did not block the merger, it would impede its ability later to order a post-merger remedy that would "restore competition to a level not substantially less than it was before" the merger. The Tribunal found the Commissioner did not sufficiently demonstrate this and denied the application. Additionally, it stated that it did not have jurisdiction under Section 100 to order a hold-separate arrangement and that regardless, the arrangement was not necessary.
Round Two: Commissioner Appeals and Loses
With this victory, Labatt and Lakeport closed the deal in late March 2007. The Commissioner, however, appealed the Tribunal’s decision to the Federal Court of Appeal. The Commissioner argued the Tribunal misinterpreted section 100 and imposed too high an evidentiary burden to obtain relief. The Commissioner alleged that relief under section 100 should be nearly automatic, unless the merging parties show that the Commissioner’s application constitutes an abuse of process. The FCA rejected the Commissioner’s arguments, stating in its January 2008 decision, "[w ]e do not agree that Parliament intended the role of the Tribunal to be so limited." Commissioner of Competition v. Labatt Brewing Company Limited, 2008 FCA 22. The FCA found the Tribunal correctly applied the test under Section 100 and that the Tribunal’s finding that the Commissioner had not satisfied the test was reasonable. Offering the Commissioner some guidance, the FCA advised that in a Section 100 application, the Commissioner should show the nature of the potential lessening of competition that the merger will allegedly cause, the kinds of remedies the Commissioner might seek, and the potential effectiveness of those remedies with, and without, an interim order in place.
The Commissioner’s losses in the Labatt case has not stopped her from seeking Section 100 applications. But the Commissioner appears to be following the FCA’s guidance and including the type of information the FCA outlined for the Commissioner in the Labatt decision. There is however a sign that the Commissioner may begin to accept proposals to close a deal pending review subject to a hold-separate arrangement. After losing the appeal, the Commissioner agreed to a hold-separate agreement in the merger of scrap metal firms American Iron & Metal Company Inc. and SNF Inc. Some commentators have observed that the Commissioner’s Section 10 losses should not change the way mergers are reviewed in Canada all that much because most firms that learn that the Commissioner needs more time to study their deal will opt not to close. Rather, most firms choose to obtain substantive clearance of a deal before completing it.
Round Three: Commissioner Suffers Aftereffects of Omitting Facts in Subpoena Application
The Commissioner’s difficulties with the Labatt-Lakeport merger did not end there. In February 2007, in connection with its ongoing investigation of the merger, the Commissioner obtained document production orders from the Federal Court ex parte (i.e. without notice to responding parties) under Section 11 of the Act. The orders required Labatt and Lakeport, and eleven others in the beer industry, to produce voluminous information to the Commissioner. Many of the same entities had been subject to similar orders in 2003 when the Commissioner conducted an inquiry into a bottling agreement among the brewers, and in 2006, when the Commissioner was reviewing the sale of another Canadian brewery, Sleeman’s. Labatt reportedly produced close to 140,000 pages of documents in response to the February 2007 subpoena, costing it $750,000 in external legal costs alone. This was in addition to some 10,000 pages of records and other information the Commissioner received in the parties’ long-form premerger filing. Nevertheless, in November 2007, the Commissioner obtained yet even more production orders, again ex parte, against Labatt, Lakeport and fifteen others in the beer industry. The Federal Court described these orders as "enormous" in complexity and scope. Labatt, Lakeport and one other brewery, Moosehead, filed motions with the Federal Court to set aside the November 2007 orders. They alleged these orders were substantially duplicative to the February orders and called for records and information irrelevant to the Labatt-Lakeport merger.
Justice Mactavish, the same judge who had issued the November orders, decided the motion. In her reasons for her order quashing the November 11 orders, Justice Mactavish said that had the Commissioner provided her with complete disclosure, she would not have granted the orders. Commissioner of Competition v. Labatt Brewing Company Limited, 2008 FC 59. She sharply criticized the Commissioner’s disclosures in its ex parte application as "misleading, inaccurate or incomplete." A party seeking ex parte relief, she wrote, has the duty of ensuring that the court is apprised of all of the relevant facts. The reason why this is so, she added, is self-evident, the judge and the party against whom the order is sought are literally at the mercy of the party seeking relief. In this instance, the Commissioner’s disclosures were unsatisfactory in three ways. As the first time that Section 11 orders have been struck down in the context of a merger, the Labatt decision is an important precedent. For the Commissioner, the decision may be hard to shake like a bad hangover, raising the bar the Commissioner must meet to obtain a section 11 subpoena. For parties on whom such subpoenas are imposed, the decision, like a cold Labatt Blue in mid-July, may offer some relief.
First, although the Commissioner disclosed in her November application the orders she had obtained in February, she did not disclose that she had previously represented to the Court in seeking the February orders that the information she sought would likely be sufficient for the purposes of her inquiry into the merger. Justice Mactavish held The Commissioner’s failure to disclose this representation or indicate what had changed since February 2007 were material omissions which justified setting aside the November order. "In order to properly exercise the discretion conferred on the Court by section 11 of the Competition Act, and for the Court to be able to control its own processes, and to guard against the abuse of those processes, the Court must also be fully apprised of the relevant circumstances surrounding the request."
Second, the Commissioner represented in her November application that "none of the records or information sought has previously been requested from the respondents.” In fact, Justice Mactavish found, there was obvious overlap between the subject matter of the orders. The Commissioner argued this was made known to the Court by including the February orders in the November application. Justice Mactavish disagreed. "The fact that a document is before the Court, "given the volume of exhibits and the time which an ex parte judge has to deal with such matters, does not relieve the moving party of its duty to make full and fair disclosure. "
Third, the Commissioner failed to bring the concerns Labatt had articulated about the burdensome nature of the Commissioner’s prior demands to the Court’s attention. More particularly, the Commissioner should have disclosed counsel for Labatt’s letters sent the Commissioner’s office after Labatt was served the February, 2007 order, expressing dismay over the Commissioner’s failure to advise the Court of the large volume of material already in the possession of the Commissioner with respect to the state of the beer industry in Ontario. Labatt’s counsel also advised the Commissioner that the February order required Labatt to waive privilege by disclosing a high level of detail in documents over which the privilege was claimed, required disclosure of irrelevant information, and that efforts to comply with the orders caused Labbat’s file server to crash, and would have cost Labatt over half a million dollars to restore the lost data. Justice Mactavish observed that the duty of full and frank disclosure requires a party seeking ex parte relief to inform the Court of any points of fact or law known to it which favor the other side, so that a balanced consideration of the issues can occur. The Commissioner breached this duty.
Following this rebuke, the Minister of Industry announced he intended to investigate the matter and appointed a third party to review it. On March 3, 2008, the Commissioner announced that a former executive legal officer of the Ontario Supreme Court and prosecutor would conduct the review. Since its inception, Section 11 has been widely criticized by practitioners, academics, the Canadian Bar Association and others. See Canadian Bar Association Letter Re: Information Bulletin on Section 11 of the Competition Act; D. Assaf, E. Lefebvre & H. Cooper, "Section 11 of the Competition Act: Time to Revisit and Reset the Balance in Criminal Investigations," Canadian Competition Record, Spring 2004.
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