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Competition Act changes bring price maintenance rules in line with U.S.

|Written By Kelly Harris

Price maintenance laws in Canada and the United States will be brought more in line through changes to the Competition Act, according to lawyers who specialize in competition matters.

Some of the federal government’s proposed amendments to the Competition Act, including a two-stage merger review system, are being panned. However, proposed amendments to Canada’s rigid, per se illegal price maintenance rules are being welcomed. Price maintenance is the practice of requiring a distributor to set a basement on product pricing as a criminal offence. The 2007 U.S. Supreme Court decision Leegin Creative Leather Products, Inc. v. PSKS, Inc. put a reasonable test on price maintenance, softening the per se illegal rule south of the border.

In the December 2008 edition of Canadian Lawyer InHouse Magazine, McMillan LLP partner Neil Campbell said he was concerned that Canadian and U.S. laws on price maintenance were out of step.

“The pricing provision I think is positive,” Campbell says. “It does remove from criminal law stuff that really isn’t criminal activity and places it in the proper context, which is to say that we would worry about it when there are anti-competitive effects that come from it.” Randy Hughes, a McCarthy Tétrault LLP partner who specializes in competition law, agrees.

“The proposed changes decriminalizing price maintenance . . . is a welcome change for companies in distribution of these products through resellers or others and those who have dual distribution agreements in Canada and the United States,” he says.

U.S. rules have long been more relaxed than those north of the border, the landmark June 2007 U.S. Supreme Court decision in Leegin went even further. It says Leegin was within their rights to require retailers to sell their products at a certain price, or risk losing distribution rights. It overturned a 1911 decision on vertical price arrangements known as Dr. Miles Medical Co. v. John D. Park & Sons Co., which set out that minimum price agreements are automatically illegal — or illegal per se — regardless of the circumstances. In Leegin, SCOTUS ruled that these agreements should be treated on a case-by-case basis or on the rule of reason and not automatically illegal.

Though some states, with New York being the most vocal, balk at the ruling, nevertheless it exists. This means that the Competition Act in Canada and the Sherman Act in the U.S., that had been somewhat in line, disallowing agreements between manufacturers and retailers on the sale price of products, could now be further at odds.

In the past, U.S. manufacturers of high-line or specialty items had always been able to apply United States v. Colgate & Co. allowing for minimum acceptable pricing on certain products and can terminate distribution to companies that sell under that price. Colgate requires a company to act unilaterally thereby avoiding issues under the Sherman Act because there is no specific agreement.

The idea is specialty items such as designer shoes come with an expected level of service that a customer is unlikely to be able to find at a big-box store. The service can also be part of a company’s marketing plans or requirements so this would be a major part of the distribution agreement drawn up by counsel.

Don Houston, another competition law partner at McCarthy Tétrault says proposed changes to the Competition Act in Canada allows for civil reviews of price maintenance allegations in Canada. That will actually mean the test in Canadian law which is much higher will actually be less than in the U.S.

Price maintenance would be limited to a prohibition order in Canada requiring a company to stop conduct and order them to resupply a distributor that has been cut off because of low pricing.

“It is quite a significant change in fact,” Houston says. “Arguably we’ve gone from the test being much higher in Canada then it is in the United States, to ours being on the lesser side because in the U.S. it is still actionable, but they have to prove competitive effect.”