Canada (Commissioner of Competition) v. Canada Pipe Company Ltd.

Canada (Commissioner of Competition) v. Canada Pipe Company Ltd.
Court (s) Database
Federal Court of Appeal Decisions
Date
2006-06-23
Neutral citation
2006 FCA 236
File numbers
A-106-05
Notes
Reported Decision
Reported Decision
Decision Content
Date: 20060623
Docket: A-106-05
Citation: 2006 FCA 236
CORAM: DESJARDINS J.A.
LÉTOURNEAU J.A.
PELLETIER J.A.
BETWEEN:
Commissioner of Competition
Appellant
and
Canada Pipe Company Ltd./Tuyauteries Canada Ltée
Respondent
Heard at Ottawa, Ontario, on February 7 and 8, 2006.
Judgment delivered at Ottawa, Ontario, on June 23, 2006.
REASONS FOR JUDGMENT BY: DESJARDINS J.A.
CONCURRED IN BY: LÉTOURNEAU J.A.
DISSENTING REASONS BY: PELLETIER J.A.
Date: 20060623
Docket: A-106-05
Citation: 2006 FCA 236
CORAM: DESJARDINS J.A.
LÉTOURNEAU J.A.
PELLETIER J.A.
BETWEEN:
Commissioner of Competition
Appellant
and
Canada Pipe Company Ltd./Tuyauteries Canada Ltée
Respondent
REASONS FOR JUDGMENT
DESJARDINS J.A.
[1] The Competition Tribunal (the Tribunal) dismissed an application by the appellant Commissioner of Competition (the Commissioner) seeking an order against the respondent (Canada Pipe or Bibby, which is a division of the respondent) under sections 77 and 79 of the Competition Act (reported as 2005 Comp. Trib. 3).
[2] The application related to the marketing strategy – referred to as the Stocking Distribution Program or SDP – adopted by Canada Pipe for the sale and supply of its cast iron drain, waste and vent (DWV) products. The Tribunal held that Canada Pipe is dominant in each of the relevant markets in Canada for cast iron DWV products, that Canada Pipe is a “major supplier” of cast iron products, and that by marketing its cast iron DWV products using the SDP, Canada Pipe has engaged in a practice of exclusive dealing. The Tribunal further held, however, that the Commissioner had failed to establish that Canada Pipe has engaged in a practice of anti-competitive acts that has, is or is likely to result in a substantial lessening or prevention of competition in the relevant markets, or that Canada Pipe’s practice of exclusive dealing is likely to impede entry or expansion of a firm in a market or have any other exclusionary effect in a market such that competition is or is likely to be lessened substantially.
[3] The appeal by the Commissioner is disposed of in separate reasons.
[4] We are seized of the cross-appeal whereby Canada Pipe claims that the Tribunal erred in its assessment of product market definition and market power.
[5] Canada Pipe’s cross-appeal is confined to the Tribunal’s treatment of paragraph 79(1)(a) of the Act and to its determinations concerning the issues of product market and market power. (In a footnote to its memorandum of fact and law, para. 119, Canada Pipe adds, however, that these submissions have equal application to the exclusive dealings provisions of the Act in subsection 77(2). The determination of whether a market participant is a “major supplier” of a product in a market within the meaning of subsection 77(2) also hinges on the issues of market definition and market power.)
[6] The purpose of defining the relevant product market is to identify the possibility for the exercise of market power (Commissioner of Competition v. Superior Propane Inc. et al (2000) 7 C.P.R. (4th) 385, 2000 Comp. Trib. 15 at para. 47, rev’d on other grounds [2001] 3 F.C. 185 (F.C.A.)). Market power has been defined as the ability to set prices above competitive levels for a considerable period of time (Canada (Director of Investigations and Research) v. Southam, Inc., (1992), 43 C.P.R. (3d) 161 at 177 (Comp. Trib.); Canada (Director of Investigation and Research) v. NutraSweet Co. (1990), 32 C.P.R. (3d) 1 at 28 (Comp. Trib.)).
[7] Canada Pipe submits that if the Tribunal had followed the analytical approach it was required by law to adopt in respect of these issues, it would have had to define the applicable product market to include competing DWV products made from a variety of different materials, including plastic, copper, stainless steel, asbestos cement and cast iron. Canada Pipe’s market share in such a properly defined product market would not have exceeded approximately 10% at any relevant point in time. Canada Pipe says this is so regardless of the manner in which the applicable geographic markets are defined and regardless of whether the product market is further sub-divided into pipe, fittings and couplings. The issue of market power, says Canada Pipe, simply does not arise in respect of a market participant having a market share in the range of 10%. There has never been, it says, an abuse of dominance case brought against a market participant having a market share of less than 10% (memorandum of fact and law of the respondent Canada Pipe, para. 119).
Product Market – Analysis of the law and the evidence
[8] Defining the relevant product market is a necessary first step under paragraph 79(1)(a) of the Act, as the Tribunal clearly recognized.
[9] Paragraph 79(1)(a) provides:
Prohibition where abuse of dominant position
79. (1) Where, on application by the Commissioner, the Tribunal finds that
(a) one or more persons substantially or completely control, throughout Canada or any area thereof, a class or species of business,
[Emphasis is mine.]
Ordonnance d’interdiction dans les cas d’abus de position dominante
79. (1) Lorsque, à la suite d’une demande du commissaire, il conclut à l’existence de la situation suivante :
a) une ou plusieurs personnes contrôlent sensiblement ou complètement une catégorie ou espèce d’entreprises à la grandeur du Canada ou d’une de ses régions;
[Non souligné dans l’original.]
[10] The Tribunal was careful in defining the operative terms of this provision of the Act (para. 65, 66 and 67 of its reasons and order):
65 A "class or species of business" has been interpreted by the Tribunal in abuse of dominance cases to mean the relevant product market. The expression "Canada or any area thereof" is to be understood as the geographic market, while "control" has been found to be synonymous with market power (Canada (Director of Investigation and Research) v. D&B Companies of Canada Ltd. (1995) 64 C.P.R. (3d) 216; Canada (Director of Investigation and Research) v. Laidlaw Waste Systems Ltd. (1992) 40 C.P.R. (3d) 289; Canada (Director of Investigation and Research) v. NutraSweet Co. (1990), 32 C.P.R. (3d) 1; Canada (Director of Investigation and Research) v. Tele-Direct (1997) 73 C.P.R. (3d) 1.
[11] The Tribunal further explained:
66 The Act does not specify how the analysis under paragraph 79(1)(a) of the Act is to proceed. However, in the above-mentioned cases, the analysis begins with a definition of the product market. This approach is also the one adopted by the Competition Bureau's (the "Bureau") Enforcement Guidelines on the Abuse of Dominance Provisions (the "Guidelines"). Although the Guidelines have no binding effect on the Tribunal, they are useful in that they serve to indicate how the Bureau will proceed in an abuse of dominance case. At section 3.2.1 the Guidelines underscore the importance of defining the product market:
This paragraph [79(1)(a)] of the Act contains a number of elements that need to be separately clarified: (i) the existence of a class or species of business in Canada or any area thereof; (ii) the meaning of "control"; and (iii) the meaning of "one or more persons."
3.2.1(a) "Class or species of business" -- Product Market Definition
A precondition for assessing market power is identifying existing competitors that are likely to constrain the ability of the firm or firms to profitably raise prices or otherwise restrict competition. The 1986 provisions adopted the term "class or species of business" rather than the term "market" in the context of the control element. The Bureau approach is to consider defining a "class or species of business" as synonymous with defining a relevant product. The analysis begins by examining the product market(s) within which the alleged abuse of dominance has occurred or is occurring.
67 The Tribunal restates the same principle in Tele-Direct, and adds that the exercise is also necessary for the purposes of section 77:
A necessary first step in deciding this case is to define the relevant market. This must be done for purposes of section 79 in order to determine if Tele-Direct, as alleged by the Director, "substantially or completely control[s] throughout Canada or any area thereof, a class or species of business". The Tribunal decided in Canada (Director of Investigation and Research) v. D & B Companies of Canada Ltd. (1995), 64 C.P.R. (3d) 216, [1995] C.C.T.D. No. 20 (QL) (Comp. Trib.), that "class or species of business" means product market and "control" means market power. ...
[Emphasis is mine.]
[12] The Tribunal then explained (at para. 68 of its reasons and order) that in determining the relevant product market, it had to consider “substitutability”. This meant whether there exist sufficiently close substitutes to the product at issue, such that the market for that product includes those substitutes.
[13] The Tribunal adopted the definition of “substitutability” which is found in the decision of this Court in Canada (Director of Investigation and Research) v. Southam Inc., [1995] 3 F.C. 557, para. 161, rev’d on other grounds [1997] 1 S.C.R. 748.
68 In determining the relevant product market one considers substitutability - in other words, whether there exist sufficiently close substitutes to the product at issue, such that the market for that product includes those substitutes. In Tele-Direct, the Tribunal cites the market definition set out in Canada (Director of Investigation and Research) v. Southam Inc., [1995] 3 F.C. 557 (F.C.A.), where the Federal Court of Appeal defines what is meant by substitutability:
Products can be said to be in the same market if they are close substitutes. In turn, products are close substitutes if buyers are willing to switch from one product to another in response to a relative change in price, i.e. if there is buyer price sensitivity. Direct evidence of substitutability includes both statistical evidence of buyer price sensitivity and anecdotal evidence, such as the testimony of buyers on past or hypothetical responses to price changes. However, since direct evidence may be difficult to obtain, it is also possible to measure substitutability and thereby infer price sensitivity through indirect means. Such indirect evidence focusses on certain practical indicia, such as functional interchangeability and industry views/behaviour, to show that products are close substitutes. (paragraph 161)
[Emphasis is mine.]
[14] The Tribunal noted, at paras. 69 and 71, that no direct evidence was presented to the Tribunal on the cross-elasticity of demand – that is, whether increasing the price of DWV cast iron products would lead to an increased demand for DWV products made of other materials. Therefore, the product market could not be determined directly.
[15] Given the importance of determining whether other products would constrain price increases of cast iron DWV products, the Tribunal proceeded to consider the indirect evidence by reference to the topics enumerated in the Enforcement Guidelines on the Abuse of Dominance Provisions (the Guidelines), which include such headings as the views, strategies, behaviour and identity of buyers; trade views, strategies and behaviours; end use, physical and technical characteristics; price relationship and relative price levels; substitutability; and three product markets or one.
[16] The Tribunal thus correctly identified the legal principles applicable to the determination of the product market, and adopted an appropriate methodology to apply these principles in the particular case of Canada Pipe. The Tribunal considered the indirect evidence under each of the topics suggested in the Guidelines. Its conclusions on the basis of this evidence included the following findings.
[17] First, the Tribunal, at its para. 82 of the reasons and order, under the heading “The views, strategies, behaviour and identity of buyers”, made the finding that “in high-rise buildings, cast iron offers the advantage of meeting all requirements for fire and life safety purposes, and that only non-combustible materials, essentially cast iron, can be used in vertical shafts”.
[18] Second, with respect to end use, other advantages of cast iron were noted, namely strength, durability and lower level noise. The Tribunal then indicated (at para. 92 of the reasons and order) that although plastic may eventually replace cast iron entirely, “this has yet to happen and cast iron continues to be in a class of its own” [my emphasis].
[19] Third, the Tribunal noted, at para. 97 of the reasons and order, under the heading “Price relationships and relative price levels”, that the evidence showed that Canada Pipe had reacted to the entry of new cast iron suppliers, whether manufacturers (Vandem) or imports (Sierra, New Centurion), by aggressively lowering its prices. In Quebec and the Maritimes, where no such competition exists, prices had increased since 1998.
[20] Fourth, at para. 101 and 102 of the reasons and order, under the heading “substitutability” with regard to para. 102, the Tribunal said the following:
101 The competition with plastics appears to have had little effect on the prices of cast iron. Bibby devotes considerable effort to promoting the physical characteristics of cast iron products as compared to plastics, but these efforts do not lead to a reduction in price for cast iron products. From the evidence, it appears that the use of plastics is prevalent and increasing across the country. The prices of cast iron have not been decreasing with the increased use of plastics. Prices of cast iron DWV products have increased in Quebec and the Maritimes. They have decreased where Bibby has met cast iron competition - in Ontario with Vandem, in the West with importers. In other words, even though the Respondent claims that plastic is a competing material, there is no evidence that plastic products have had a constraining effect on prices of cast iron DWV products.
102 The experts on both sides agreed that there was a lack of data for calculating the elasticity of the demand, such that a direct measure of substitutability was impossible. The Tribunal does not have sufficient evidence to show whether consumers (in this case, distributors) would change their behaviour because of a rise in prices. In the present context, such an analysis is impossible, and not only because of a lack of data. The fact is that the choice to buy cast iron over other products is not only a matter of price; as seen earlier in these reasons, other important considerations come into play. From the evidence of Mr. Zorko and others, we find that for certain applications, such as in vertical shafts, non-combustible material remains the only acceptable material, which in practical terms means cast iron. In certain other applications, where considerations of safety and non-combustibility are paramount (based on use, occupancy, and height of building) the use of material other than metal will be constrained. For example, a sprinkler system may be compulsory or fire separation sealants will be required. The Respondent sought to convince the Tribunal that this situation was evolving, and that plastics in particular were offering true competition. On the evidence, the Tribunal is satisfied that for certain applications, cast iron has no economic substitute.
[Emphasis is mine.]
[21] On the basis of its review of the indirect evidence, the Tribunal concluded as follows on product market and geographic markets (para. 112 of the reasons and order):
112 The evidence reflects a market that is changing because of the increasing importance of plastics in the DWV industry. We find the American data presented by Dr. Ware on plastics replacing cast iron of limited assistance in the Canadian context, given the impact of Canadian regulations on the choice of materials and the absence of statistical evidence showing a similar trend in Canada. From the evidence we have heard, however, plastics seem to offer a number of advantages to the construction industry and appear to be increasingly used. Nevertheless, the Tribunal is of the view that cast iron still plays a distinct role in the DWV industry, and it is treated as a separate market by distributors and contractors. More importantly, it is treated differently by Bibby itself, in its marketing and its pricing policies. In consequence, the Tribunal finds that the product market is the cast iron DWV product market, within which three distinct markets can be identified: cast iron pipe and fittings and MJ couplings. Because of the significant price variations in cast iron DWV products from region to region, we find that there are six distinct geographic markets: British Columbia, Alberta, the Prairies, Ontario, Quebec and the Maritimes.
[Emphasis is mine.]
[22] The Tribunal was therefore of the view (para. 112 of the reasons and order) that cast iron still played a distinct role in the DWV industry and was treated as a separate market by distributors and contractors, and by Canada Pipe itself. It found that the product market was the cast iron DWV product market, within which three distinct markets were identified: cast iron pipe, fittings and MJ couplings. Moreover, because of the significant price variations in cast iron DWV products, from region to region, the Tribunal found there were six distinct geographic markets: British Columbia, Alberta, the Prairies, Ontario, Quebec and the Maritimes.
Market power – Analysis of the law and the evidence
[23] The Tribunal then addressed the issue of market power. Its analysis in this regard was divided into two sections, titled “Direct approach” and “Indirect approach”. The Tribunal explained the distinction between the two approaches as follows:
122 Market power is defined as the ability to set prices above competitive levels for a considerable period. The direct approach involves showing that prices are indeed above the competitive level. In Tele-Direct, for example, the Tribunal found that the very large accounting profits were a direct indication of market power. However, as was the case in Laidlaw, Nielsen and NutraSweet, this approach is not always feasible. If a market is monopolized or not perfectly competitive because of a trade restraint imposed by a major supplier, it may be difficult to determine what would be the relevant competitive benchmark. In such a case, an indirect approach can be taken, which will consider such indicia as market share, barriers to entry and customer countervailing power.
[Emphasis is mine.]
[24] Later in its decision, the Tribunal explained the principles underpinning the indirect approach:
138 As stated in Laidlaw and Nielsen, a large market share leads to a prima facie conclusion that the firm likely has market power. In order to establish market power, this conclusion must be supported by other findings on issues such as the existence of barriers to entry, the number of other competitors, excess capacity and the state of the market. Where barriers to entry are non-existent, even a very large market share will not support a finding of market power. In the case of cast iron DWV products, it would appear that the following barriers to entry should be considered: sunk costs, cost of entry, incumbent advantage and the Stocking Distributor Program.
139 The Tribunal must also review evidence of actual entry into the market, which would serve to negate the presence of barriers. Entry, of course, must be both effective and viable to be significant. In addition, the Tribunal must consider customer countervailing power and the state of the market.
[Emphasis is mine.]
[25] It is apparent that the Tribunal correctly identified and articulated the principles applicable to the determination concerning market power, including both the direct and indirect approaches to this issue. The above-quoted passages show that the Tribunal properly understood the analytic purpose and role of the different types of direct and indirect evidence adduced with respect to the issue of market power.
[26] The Tribunal summarized the direct and indirect evidence adduced by the Commissioner on the issue of the market power (para. 114 to 117 of the reasons and order) in the following manner:
114 The Commissioner's case for market power relies heavily on Dr. Ross's analysis of the direct evidence - i.e. evidence that Bibby has the ability to raise and maintain prices above competitive levels for a significant period of time. Dr. Ross never defines what the competitive price levels would be; rather, he postulates that the direct information on prices and margins leads to the conclusion that Bibby's prices are supra-competitive. More specifically, Dr. Ross relies on three elements of direct evidence to conclude that Bibby has market power in the relevant markets: 1) high profit margins; 2) prices well above the landed prices of imports; and 3) Bibby's capacity to set prices, as shown by the high prices where no competition exists (Quebec and the Maritimes) and its capacity to lower its prices dramatically in the face of competition. (Expert Report of Dr. Ross at paragraph 31.)
115 There are as well, according to Dr. Ross, indirect indicators of Bibby's market power: Bibby's considerable market share and little or no sustained and successful entry for the last several years. His conclusions on this last point are summarized as follows:
While imports have made inroads periodically, they have been met by aggressive responses from Bibby, and Bibby's market share remains very high. Similarly, Vandem has been trying to establish itself as a largely domestic competitor, but has had considerable difficulty. (Expert Report of Dr. Ross at paragraph 32.)
116 Dr. Ross is of the view that there are several barriers to entry. First, he states that it would be difficult to establish a new foundry, or adapt a current foundry to produce cast iron DWV pipe and fittings. Secondly, since there is excess capacity in the industry, the industry may not be likely to attract new investment. Adapting an existing foundry to produce DWV cast iron products could represent risky sunk costs. Given the fact that Bibby itself holds much of the excess capacity, it could use or threaten to use this capacity to produce large quantities to be sold at low prices. (Expert Report of Dr. Ross at paragraph 68.) In addition, although not a barrier per se, both parties agree that the cast iron DWV industry is a mature industry, not one in which one can expect great growth or innovation.
117 Thirdly, Dr. Ross maintains that imports face barriers of their own. Bibby is a well-established manufacturer, offering complete lines of products. Imported product lines may be less complete, and buyers may be wary of their quality and of the warranties attached. Fourthly, Bibby's vigorous response to entry by imports and by Vandem may have had a chilling effect on potential entrants. Finally, and most importantly, the SDP program is itself a barrier to entry: entrants, whether importers or manufacturers, have difficulty having access to the distributors, already tied into Bibby's loyalty program.
[Emphasis is mine.]
[27] The Tribunal then considered the direct and the indirect evidence concerning market power that was adduced before it, as the following summary and extracts demonstrate.
[28] The direct evidence related to Dr. Ross’ submission in three main areas: high margins, prices substantially above import prices, and high prices absent competition with the corollary of being able to significantly lower prices where competition occurred.
[29] With regard to high margins, the Tribunal stated:
124 When studied closely, Dr. Ross's presentation on high margins appears somewhat strained. The margins are based on cost of production (fittings and pipe) and do not include MJ couplings (which Bibby imports). In addition, the analysis is centred on margins, not profits. Dr. Ross cautions that marginal costs do not necessarily give us an exact idea of Bibby's profits, because the costs are extrapolated from Bibby data without complete information on how those costs were established. We have no information on whether the costs include only variable costs, or also fixed costs. (Expert Report of Dr. Ross at paragraph 17 and footnote 6.) However, the Tribunal is prepared to accept Dr. Ross' calculations of production costs and variable costs, from which he derives gross profit margins and contribution margins. (Expert Report of Dr. Ross at Appendix 3, p.6.) We note that the marginal costs are only based on the cost of production of pipe and fittings; they therefore exclude MJ couplings, which Bibby does not manufacture but imports from a sister company.
[Emphasis is mine.]
[30] The Tribunal was apparently very critical of Dr. Ross’ analysis, as also shown in paras 127, 131 and 135, but nevertheless noted at para. 137 that Canada Pipe had offered no evidence to rebut the Commissioner’s assertions of high margins.
[31] Turning to the indirect evidence of market power, the Tribunal first considered Canada Pipe’s market share. It stated (at para. 140 of the reasons and order):
140 The concentration of the market in Bibby's hands, through the various buy-outs, consolidations and marketing arrangements with American sister companies, has given Bibby an overwhelming share of the market. Evidence shows that Bibby controls between 80 and 90% of the market in cast iron DWV products. Market share can be a significant indicator of market power, absent evidence of ease of entry for competitors (Tele-Direct). What needs to be considered, therefore, is whether the barriers to entry or other factors preclude other competitors from entering the market.
[Emphasis is mine.]
[32] The Tribunal considered under the heading of “Barriers to Entry”: sunk costs, cost of entry, incumbent advantage, stock distributor program, and actual entry. Under the heading “Other factors”, it considered countervailing power and the state of the market.
[33] Sunk costs were defined by the Tribunal as costs that cannot be recovered if investment is made to enter the market and that attempt fails. While sunk costs could be a significant barrier to entry, the Tribunal did not find them significant considering the paucity of explanation given by the Commissioner on the question (para. 141 of the reasons and order).
[34] The cost of entry, wrote the Tribunal, involved either refitting an existing foundry or buying imported goods. The Tribunal estimated that the viability of the current importers did not seem threatened and imports were steadily on the rise (paras. 142-143 of the reasons and order).
[35] On the topic of the incumbent advantage, the Tribunal noted that Canada Pipe was a well-known and well-established manufacturer and that a new entrant would probably have difficulty competing with the quality and quantity of products Canada Pipe was able to offer. No other supplier, it said, had a strong national presence (para. 144 of the reasons and order).
[36] With regard to the factor of Stocking Distribution Program, the Tribunal was satisfied that it had an impact in the market. There was, however, no direct evidence that would support the conclusion that it was a barrier to entry (para. 149 of the reasons and order).
[37] With respect to the factor of actual entry, the Tribunal came to the conclusion that successful entry was possible – but limited, considering that Canada Pipe maintained a considerable market share (para. 156 of the reasons and order).
[38] The Tribunal was of the view that distributors had little countervailing power, considering that Canada Pipe had maintained its SDP since 1998 (para. 159 of the reasons and order).
[39] The Tribunal accepted that the market was mature, i.e., it was a market with little real growth potential. This factor could therefore discourage more active entry (para. 160 of the reasons and order).
[40] Ultimately, the Tribunal accepted Dr. Ross’ analysis that the direct and indirect evidence together established that Canada Pipe could and did exercise market power in the relevant markets (para. 161 of the reasons and order). This conclusion of the Tribunal will be considered in more detail further below.
The standard of review and its application
[41] I agree with Pelletier J.A. that to be successful on the cross-appeal, Canada Pipe must demonstrate that the Tribunal acted unreasonably, considering that product market and market power raise issues of mixed fact and law. As examined in detail above, the Tribunal articulated the correct legal tests in the course of its determinations concerning product market and market power. The Supreme Court’s conclusion in Southam, supra, therefore applies with equal force in this case: “if the Tribunal erred, it was in applying the law to the facts; and that is a matter of mixed fact and law” (para. 43).
[42] The nature of the question is an important factor in determining the standard of review according to the pragmatic and functional approach. In general, all else being equal, a question of mixed fact and law attracts the reasonableness standard of review. However, the jurisprudence has recognized the existence of different types of questions of mixed fact and law: as McLachlin C.J. explained in Dr. Q v. College of Physicians and Surgeons of British Columbia, [2003] 1 S.C.R. 226, a question of mixed fact and law “will call for more deference if the question is fact-intensive, and less deference if it is law intensive” (para. 34). In Law Society of New Brunswick v. Ryan, [2003] 1 S.C.R. 247, the Court applied this analysis, observing that the question of mixed fact and law at issue in that case contained fact-intensive elements which did “not involve easily extracted and discretely framed questions of law” (para. 41).
[43] The issues raised in the case at bar contain fact-intensive elements which do not involve easily extracted and discretely framed questions of law.
[44] I agree with Pelletier J.A. that the analysis of the categories or factors referred to in the Guidelines as indirect evidence for the determination of product market (namely the views, strategies, behaviour and identity of buyers; trade views, strategies and behaviours; end use; physical and technical characteristics; and price relationships and relative price levels) is a matter of weighing evidence. It therefore falls within the province of the Tribunal. Consequently, unless the Tribunal’s conclusion is unreasonable, it is of no concern to this Court. Substitutability is always a question of degree (R. v. S.W. Mills & Sons Ltd., [1968] Ex.C.R. 275, cited with approval in Southam, [1997] 1 S.C.R. 748). Since the Tribunal considered the appropriate elements and arrived at a reasonable conclusion, its finding on product market is therefore immune from judicial intervention.
[45] I do not share Pelletier J.A.’s view, however, that the Tribunal’s findings on market power in four of the six geographic markets, namely British Columbia, Alberta, the Prairies and Ontario, are flawed and warrant the intervention of this Court.
[46] My analysis with respect to the Tribunal’s determination on market power is the following.
[47] As stated earlier, the Tribunal was highly critical of Dr. Ross’ analysis of the direct evidence of market power, as evidenced in paras 124 to 137 of the reasons and order, and of Canada Pipe’s lack of response on the topic (para. 137 of the reasons and order).
[48] The Tribunal, with hesitation, I would say, accepted Dr. Ross’ calculations of production costs and variable costs from which he derived gross profit margins and contribution margins. However, the Tribunal noted (at para. 124 of the reasons and order) that the marginal costs were only based on the cost of production of pipe and fittings: they therefore excluded MJ couplings which Canada Pipe did not manufacture but imported from its sister company. The Tribunal indicated that Dr. Ware, for Canada Pipe, cast some doubt on Dr. Ross’ calculations.
[49] The Tribunal concluded, at para. 136 and 137 of the reasons and order:
136 Notwithstanding the statistical debate between the two experts, the fact remains that prices in the West are significantly lower than prices in the East, and the obvious explanation, confirmed by witnesses appearing before the Tribunal, is the presence of imports. Prices for Bibby products are lower in British Columbia than in Quebec, yet the products are manufactured in Quebec, and the cost of transport has to be added to the cost of production for items sold in British Columbia. The Tribunal is therefore satisfied, from consideration of the price differentials, particularly in British Columbia and Alberta, that imports have had an impact on prices of cast iron DWV products. Similarly, the Tribunal is satisfied that Vandem's entry in Ontario has exerted downward pressure on the prices in that province. No such movement is noted in Quebec and the Maritimes.
137 It is somewhat puzzling that Bibby offers no evidence to rebut the Commissioner's assertions of high margins. Dr. Ware and counsel for the Respondent certainly have shown the frailties of the Commissioner's position, but the Tribunal notes that no cost calculations are provided in response. It would have been within Bibby's power to present the true profitability of pipe and fittings sales. No such evidence is before us. We are left with Bibby's hefty margins and its significant ability to vary prices across the regions.
[Emphasis is mine.]
[50] The Tribunal bolstered the conclusions derived from the direct evidence with a careful analysis of the elements contained in the indirect approach, stressing the positive elements and the drawbacks. The Tribunal then concluded:
161 The Tribunal is of the view that Bibby can and does exercise market control in the three product markets and the six geographic regions. The evidence provided by the direct approach was incomplete, since the high margins dealt only with two of the three products. For those two products, the Tribunal finds that Bibby is pricing above marginal cost. For all three products, Bibby's ability to lower prices indicates supra-competitive pricing. With regards to the indirect approach, the Tribunal finds that on balance the evidence indicates that Bibby has market power. The evidence on barriers to entry is not entirely conclusive. However, Bibby's large market share, its range of products and national presence, the limited penetration of competitors and the fact that this market offers only limited growth potential are sufficient to establish that Bibby does control a substantial part of the cast iron DWV products market.
[Emphasis is mine.]
[51] Considering the evidence, with all its flaws, left uncontradicted by Canada Pipe, it was open to the Tribunal to conclude on the direct approach that Canada Pipe was pricing pipe and fittings with “hefty margins” (para. 137 of the reasons and order), and that for pipe, fittings and MJ couplings, Canada Pipe had a “significant ability to vary prices across the regions” (para. 137 of the reasons and order). This indicated supra-competitive pricing. On the indirect approach, it was open to the Tribunal, on the balance of the evidence, to conclude that Canada Pipe had market power.
Conclusion
[52] The Tribunal correctly interpreted and applied the law with respect to paragraph 79(1)(a) throughout in its reasons. Market power is not an easy concept to handle. In R. v. Nova Scotia Pharmaceutical Society, [1992] 2 S.C.R. 606, at para. 101, the Supreme Court of Canada noted that with regard to para. 79(1)(a) of the Act (formerly section 51), alleged holders of a dominant position must be shown to “substantially or completely control, throughout Canada or any other area thereof, a class or species of business”. Gonthier J. for the Court added “The required degree of market power under s. 51 of the Act comprises ‘control’ and not simply the ability to behave independently of the market”. The Tribunal in the case at bar complied with this analysis.
[53] The factual analysis by the Tribunal is sometimes not as clearly stated and analyzed as one might have wished. This may be explained in part by the variety of factors the Tribunal was called upon to consider. But one cannot ignore, on the point raised by Pelletier J.A., that the Tribunal considered not only the direct evidence of market power, but also extensive indirect evidence. On both approaches, it was satisfied that Canada Pipe exercised market power. I cannot say that the Tribunal acted unreasonably in so concluding: the Tribunal demonstrably “had its reasons for doing so, and those reasons cannot be said to be without foundation or logical coherence” (SCC, Southam, supra at para. 68).
[54] Considering the standard of review and the intense fact-finding character of these issues, the further intervention of this Court is, in my view, unwarranted.
[55] I would dismiss this cross-appeal with costs.
“Alice Desjardins”
J.A.
“I concur.
Gilles Létourneau J.A.”
PELLETIER J.A. (Dissenting Reasons)
INTRODUCTION
[56] In response to the Commissioner’s appeal of the dismissal of her application, Canada Pipe has cross-appealed from the Competition Tribunal’s (the Tribunal) finding that it dominated the market for cast iron DWV pipes, joints and fittings. Canada Pipe attacks both aspects of that finding, namely the definition of the product and geographic markets, as well as the finding that it has market power in the relevant markets.
[57] As my colleague Desjardins J.A.’s reasons allowing the Commissioner’s appeal make clear, the Tribunal was required to decide a number of discrete questions in disposing of the Commissioner’s application for an order against Canada Pipe pursuant to section 79 of the Competition Act R.S.C. 1985 c. C-34 (the Act). The Commissioner’s appeal deals with two of those questions, namely whether Canada Pipe’s Stocking Distributor Program (SDP) was a practice of anti-competitive acts, and whether the SDP had the effect of substantially preventing or lessening competition in a market. This cross appeal deals with the issue of whether Canada Pipe occupies a dominant position in that market; in other words, does Canada Pipe “substantially or completely control, throughout Canada or any area thereof, a class or species of business”, to use the words of paragraph 79(1)(a) of the Act?
[58] That question can be broken down into two other questions: the definition of the product and geographic markets in which Canada Pipe trades, and whether Canada Pipe exercises market power within those markets. The Tribunal decided that there were three product markets, namely the markets for cast iron pipe, cast iron fittings and cast iron joints, and six geographical markets, namely British Columbia, Alberta, the Prairies, Ontario, Quebec and the Maritimes. It also decided that Canada Pipe exercised market power in all those markets and that, as a result, the conditions of paragraph 79(1) (a) of the Act were satisfied. It is those conclusions which are in issue in this cross-appeal.
[59] As an aside, the Tribunal decision refers to Canada Pipe as Bibby because the Stocking Distributor Program is operated by its Bibby-St. Croix division. In these reasons, I will refer to the cross-appellant as Canada Pipe and to the respondent by cross-appeal as the Commissioner.
THE TRIBUNAL DECISION
[60] The first question which the Tribunal had to address was the definition of the product and geographic markets in which Canada Pipe trades. This question is fundamental because any finding of abuse of market dominance must be in relation to those markets.
[61] This Court took up the question of the