Ruling protects beer monopoly from Competition Act

An Ontario Court of Appeal ruling has confirmed that the LCBO and Ontario beer producers are insulated from violations of the Competition Act when selling beer in a manner dictated by provincial legislation.

Ruling protects beer monopoly from Competition Act
This ruling shows how the regulated conduct defence can be used to defend class action litigation arising out of alleged violations of the Competition Act, says Antonio Di Domenico.
An Ontario Court of Appeal ruling has confirmed that the LCBO and Ontario beer producers are insulated from violations of the Competition Act when selling beer in a manner dictated by provincial legislation.

In Hughes v. Liquor Control Board of Ontario, 2019 ONCA 305, which was released April 17, justices Gladys Pardu Alexandra Hoy and Janet Simmons of the Ontario Court of Appeal dismissed the appeal brought by a restaurant operator named David Hughes, who was suing the Liquor Control Board of Ontario, The Beer Store and several beer producers for what he alleged was anti-competitive commercial conduct. Pardu found the regulated conduct defence, where a party is protected from liability if they are engaging in the illegal activity — in this case, violating the Competition Act — under the direction of constitutionally valid legislation.

“The purpose of extending that defence in the context of the Competition Act is to avoid criminalizing conduct that a province deems to be in the public interest,” said the decision.

“So that means that the LCBO and countless other federal and provincial agencies, when they engage in commerce — they’re not doing regulatory work, they’re engaging in commercial competitive behaviour — are probably not going to be subject to the Competition Act,” says Paul Bates of Paul Bates Barrister, who acted for the appellant Hughes.

Usually, parties would raise the regulated conduct defence when facing criminal prosecution under the Competition Act, but, in this case, it was used to defend against a civil action that was relying on the cartel provisions of the Competition Act, says Antonio Di Domenico, a partner and co-leader of the antitrust competition and marketing group at Fasken Martineau DuMoulin LLP.

“This is the most recent example, and, I may say, a very provocative example of how the defence can be used to defend class action litigation arising out of allegations that the criminal provisions of the Competition Act have been violated,” he says.

After prohibition was repealed in Ontario in 1927, alcohol sales have been regulated through the provincially owned LCBO — under the Liquor Control Act, Liquor Licence Act, Alcohol and Gaming Regulation and Public Protection Act and the federal Importation of Intoxicating Liquors Act. At the birth of the LCBO, the Ontario government established a single distribution system for Ontario beer — now called Brewers Retail Inc. and known as The Beer Store. The respondents Labatt Breweries of Canada LP, Labatt Brewing Company Limited, Molson Coors Canada Inc. and Molson Canada collectively own 90 per cent of Brewers Retail Inc.

In 2000, an agreement between the LCBO and The Beer Store arranged that the LCBO would not sell beer products larger than a six-pack and would not sell beer that was exclusively sold by The Beer Store — though this agreement merely articulated what had been standard practice for decades, said the decision.

Hughes argued that the framework agreement amounted to a conspiracy to divide the beer market between the respondents and went against s. 45(1) of the Competition Act. He claimed that a licensee surcharge imposed on operators holding liquor licences meant he was charged an extra five per cent for beer in violation of the uniform pricing requirement of the Liquor Control Act. Hughes sought damages from the LCBO, alleging their involvement in the framework agreement amounted to the “novel tort” of misconduct by a civil authority.

In 2015, Ontario’s provincial government passed the Building Ontario Up Act, which amended the Liquor Control Act and retroactively authorized the framework agreement. Hughes claimed this provincially legislated retroactive authorization was an ultra vires invasion on federal criminal law and trade and commerce powers.

Section 45 of the Competition Act prohibits businesses conspiring with their competition to “prevent or lessen, unduly, competition in the production, manufacture, purchase, barter, sale, storage, rental, transportation or supply of a product” or “allocate sales, territories, customers or markets for the production or supply of the product.”

Justice Paul Perell of the Ontario Superior Court of Justice dismissed Hughes’ action. Perell found the regulated conduct defence protected the beer sellers from the alleged Competition Act violations, that the differential pricing was authorized by the Liquor Control Act as long as pricing was equivalent within the two streams of licensees and retail customers, that even if the tort of misconduct by a civil authority existed in Ontario the LCBO was exercising its authority “in a reasonable manner” and the retroactive authorization was “a lawful exercise of the province’s undoubted ability to regulate the sale of alcoholic beverages in the province.” Hughes appealed on each of these findings.

The “controlling authority” that authorized the regular conduct defence was the 1982 Supreme Court of Canada decision in A.G. Can v. Law Society of B.C., known as the Jabour decision, in which a lawyer named Donald Jabour was disciplined by his law society for advertising. The court held that the Law Society of British Columbia had the provincial statutory justification to restrict lawyer advertising by dictating professional standards and could not be violating competition law because they were mandated to maintain professional standards for lawyers in B.C.

“And the court is extrapolated from that holding in the Supreme Court of Canada, to the liquor industry in Ontario, that when the LCBO makes a decision, even one which was made for competitive, not regulatory reasons, that it is a decision made by the board under the Act, and it is implicitly one, which cannot be subject to competition law . . . Because it's done by virtue of an authorization under an act,” says Bates.

The court dismissed the appeal and dismissed the request for leave to appeal costs. The Law Foundation of Ontario and the appellants sought leave to appeal the costs award saying the motion judge erred in assessing costs. They argued that a cost award that large — $2,374,497.13 — had an impact on access to justice. Pardu returned that as the appellants had sued for nearly $2 billion and accused the respondents of a criminal conspiracy, “a reasonable litigant” wouldn’t be surprised to be met with an opposition willing to spend significant resources.

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