Court rules against trade challenge in yogurt wars

Court rules against trade challenge in yogurt wars
Gowling Lafleur Henderson LLP partner Robert Armstrong represented Agro-Farma Canada Inc.

Canadian producers were dealt a blow in the Greek yogurt wars last week as a Federal Court decision ruled against complaints from Danone Inc. and Yoplait that a U.S.-based yogurt company has an unfair advantage by using a temporary permit to sidestep steep tariffs for more than a year.
In a decision made public last week, Justice Sandra J. Simpson argued the presence of Chobani Inc., a new entrant to the Canadian market, will in fact be good for farmers and consumers on this side of the border and not a threat to the supply management system in place for dairy products.

“It was very satisfying to receive the reasons of the Federal Court because our client is anxious to bring Chobani to Canadian consumers,” says Robert Armstrong, a partner with Gowling Lafleur Henderson LLP who represented Agro-Farma Canada Inc., the Canadian affiliate of an American dairy processor that makes Chobani.

“This decision will obviously be closely followed in supply-managed industries because it gives a clear indication to Canadian companies and foreign companies how entry into the market is possible.”

Yogurt is on the federal import control list, but the government has the power to grant companies in other countries a test permit for a period if they demonstrate interest in investing in manufacturing the product in Canada.

Last spring, Agro-Farma applied for a test permit for 90 days to import its yogurt duty-free in a limited volume to test it in the Greater Toronto Area. The company also applied for a bridge permit for another 12 months while its manufacturing plant would be under construction, a move that allowed it to avoid paying the hefty 237.5-per-cent tariff that would typically be applied to foreign yogurt. The tariff is in place to protect Canadian dairy farmers. Under the permit period, Chobani would only pay a five-per-cent tariff. This meant that for 15 months, Agro-Farma could produce Chobani yogurt for the GTA using cheaper U.S. milk.

When the first 90-day permit was granted in September 2011, three of the largest competing yogurt companies in Canada wrote to the minister of International Trade seeking judicial review of the decision to grant it. Ultima Foods Inc., a dairy processor that makes and markets Yoplait yogurt with a subsidiary that produces two brands of Greek yogurt, and Danone, which sells Oikos Greek yogurt, also sought review. A third group, Agropur, represents dairy farmers in Quebec and is a part owner of Ultima.

The incumbent yogurt producers said Chobani’s entry would destroy the supply management system already in place on this side of the border and argued milk in New York state costs considerably less than in Quebec. The type of milk used in yogurt production is 79 per cent more expensive in Quebec than in New York state because the U.S. government pays direct subsidies to dairy farmers to support their incomes.

“It was our argument that the minister’s power to grant special permits should not be interpreted as a power to allow people to get around the system,” says Simon Potter, a partner with McCarthy Tétrault LLP who represented Danone.

“What we were arguing was that it should be a power to issue permits in times of need to protect the integrity of supply management, such as in a time of shortage or if a product is not available in Canada. It should not be a get-out-of-jail-free card to allow people to import goods just because they want to.”

Potter notes that the volume given to Chobani for the test market permit was for more than 100 per cent of the GTA market for Greek-style yogurt.

He adds there’s no decision yet on whether Danone or the other Canadian yogurt producers will appeal the decision.

Simpson also decided against the applicants on the issue of standing because they couldn’t demonstrate any specific losses and weren’t the ones who should be bringing the complaint forward.

Simpson stated that the complaint had nothing to do with supply concerns and everything to do with competition. “There is no evidence that the change in the competitive environment has any bearing on supply management.”
She went on to note that “in the circumstances of this case, the market for yogurt is growing. Danone says that if Chobani captures market share as a result of the permits, Danone will lose opportunity to gain the future market share it presently anticipates. This, in my view, is a change in the competitive landscape that has no impact on supply management.”

Potter says it should seem natural that competitors would be the ones to challenge the government on granting permits to producers outside the country, especially in an area already protected by trade laws.

“Who is going to complain about these things unless it’s the people whose oxen are gored?” he asks.

“If the decision is immune because nobody can attack it except people who won’t anyway and once you get to attack it you’ve got to show the whole system of supply management is at peril, it means the minister has the power to issue permits to give a leg up to those he wants to give a leg up to.”

Potter says it was clear his clients were worried about losing a share of the market but were more concerned about losing it to a competitor given an unfair advantage.

Simpson also considered the long-term impact of Chobani’s construction of a factory in Canada and its use of milk produced here. “As well, the evidence before the minister suggested that, in spite of the disruption to supply management caused by the short-term cannibalization of domestic yogurt sales and the resulting possibility of reduced demand for milk, the longer-term prospects for supply management were excellent because the demand for milk would increase by 80 million litres by the end of four years.”

Potter notes Danone obtained a permit a few years ago when it wanted to import DanActive, a probiotic drink considered to be a non-yogurt product. It was imported under a different classification but then the government changed its mind and it was suddenly classified as yogurt and subjected to the 237.5-per-cent duty.

“Rather than have it disappear from market shelves while a plant was being constructed in Canada to produce it, Danone applied for a permit and got one,” he says.

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