Canada’s efficiencies defence may enable Rogers-Shaw merger
“In other words, if a merger creates a significant amount of cost savings, it is legal under Canadian law, even if it hurts consumers. These cost savings often come from laying off staff, which may exacerbate the harm these mergers can inflict on Canadians. Ultimately, the increased revenues from higher prices and cost savings accrue to business owners and shareholders, exacerbating economic inequity.”
Canada’s efficiencies defence may enable Rogers-Shaw merger
Rogers and Shaw issued a joint communique on Monday announcing their intent to merge, a deal totaling $26-billion, including debt. The two companies also claim the merger will create $1-billion a year in synergies within two years after it is finalized.
Their synergies claim is interesting because, if upheld, it will severely hamper the Competition Bureau’s ability to take meaningful action to protect competition in the industry, further contributing to the high prices Canadians pay for telecommunications services. The core problem is Canada’s so-called efficiencies defence for mergers, contained in Section 96 of the Competition Act.
Unlike most other jurisdictions on the planet – many of which have their own efficiencies defence for mergers – ours lets companies undertake mergers that will harm competition if a union creates efficiencies that are “greater than and offset” the harm the merger causes to competition.
In other words, if a merger creates a significant amount of cost savings, it is legal under Canadian law, even if it hurts consumers. These cost savings often come from laying off staff, which may exacerbate the harm these mergers can inflict on Canadians. Ultimately, the increased revenues from higher prices and cost savings accrue to business owners and shareholders, exacerbating economic inequity.
The history of the efficiencies defence can be traced back to a 1969 report issued by the Economic Council of Canada (since disbanded). In it, the council argued the only goal of competition policy should be to promote and protect economic efficiency, not to protect consumers – or prevent concentrations of economic power, for that matter.
The report said if a merger created greater efficiency on a net basis, the merger should be permitted under the law. The council argued that sometimes the quest for greater efficiency, such as economies of scale, can come at the cost of fairness and equity, such as fair prices. In these cases, efficiency should take precedence over fairness.
This line of thinking was imported from the United States, inspired by the right-wing, pro-free-market Chicago School of law and economics (based at the University of Chicago), which was taking root around that time. The Chicago School argued for lax enforcement of competition laws in the belief that market forces could address most competition problems in the long run, and those views revolutionized competition policy in the U.S. and Canada.
However, modern research by American scholars, among others, has begun to demonstrate the Chicago School’s approach to competition policy has not been particularly effective. For example, Dr. Fiona Scott Morton and the Washington Center for Equitable Growth have created a database of more than 150 research papers, many of which show “evidence of significant problems of underenforcement of antitrust law” in the country. Canada has yet to see the same level of research in universities and think tanks, although interest may be growing.
In highlighting the estimated $1-billion in annual synergies, we should expect Rogers and Shaw to make an efficiencies argument to the Competition Bureau. And if the synergies generated from the merger are even remotely close to $1-billion per year, it’s very possible the argument will be successful and lead to an unprecedented consolidation in the telecom industry.
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What Canada should learn from the FTC’s case against Facebook
Canadians are watching the Federal Trade Commission’s anti-trust suit against Facebook with intrigue. If the FTC is successful in its case against the social-media giant, Facebook may be ordered to divest of the WhatsApp and Instagram assets it purchased in 2014 and 2012, respectively.
While the suit may be necessary, we should not see it as a victory. This whole situation could have been avoided if the FTC had challenged Facebook Inc.’s acquisitions of Instagram and WhatsApp years earlier. The moral of this story is that merger regulation in both the U.S. and elsewhere is not doing enough to prevent mergers that are intended to take out future competitors. The case also serves as a warning to Canadians: If we don’t push for reform of our national competition policy, we may find ourselves in the same situation, or worse.
Compelling e-mail quotes found in the FTC’s filing to the court suggest Facebook chief executive Mark Zuckerberg intended to acquire WhatsApp and Instagram to prevent them from becoming competitors in the future. The evidence suggests that Mr. Zuckerberg and his team feared that WhatsApp was poised to launch its own social-networking service as an extension of its messaging service.
Recognizing the growth of social-media use on mobile devices and the rising popularity of photos online, Facebook also knew that Instagram was a coming threat that it could not effectively compete with. Yet, these mergers were still permitted by the FTC, which is now alleging that Facebook’s acquisitions were part of a “systematic strategy” to “eliminate threats to its monopoly.”
We may never truly understand why the FTC allowed Facebook to acquire Instagram and WhatsApp, only to deem those mergers a problem years later. Perhaps it found new evidence through an in-depth study of past mergers by the digital giants. What we do know is that according to the U.S. Horizontal Merger Guidelines, the FTC is supposed to challenge mergers that neutralize potential competitors. There is no reason to think the FTC didn’t follow these guidelines.
The FTC is not the only competition agency that permitted Facebook’s acquisitions. The European Commission also reviewed Facebook’s purchase of WhatsApp in 2014, but did not challenge it. It claimed there was no indication that WhatsApp was planning to launch a social-networking service, but even if it did, the commission determined that WhatsApp and Facebook would not be close competitors. The fact that Mr. Zuckerberg saw a competitive threat in WhatsApp, while the European Commission did not is curious, and troubling.
The strategy of pre-emptively buying businesses that may become your competitors is straight out of the digital-giant playbook. Over the past three decades, the big five digital companies have acquired more than 700 businesses and, on average, the number of acquisitions has increased by 20 per cent per year. Some have talked about the “kill zone” where smaller companies face the threat of being overrun by digital giants, and may sell to avoid the danger. This dynamic undermines innovation by making it harder for entrepreneurs to bring products to market.
The Facebook case raises serious issues about how mergers are evaluated in the U.S. If the FTC overlooked these Facebook acquisitions, how many more harmful mergers has the FTC let slide? We could ask the same question to our national competition authority, the Competition Bureau. Both our law and process for regulating mergers is similar to that of the U.S. But, there are differences that make it even harder for the bureau to prevent mergers that quash potential competitors.
For example, we can speculate about Canadian digital titan Shopify Inc., an e-platform for retailers, and its acquisition of Handshake, a B2B wholesale platform. If Handshake were not purchased by Shopify, could it have become a competitor by expanding its wholesale platform to retailers? And could the bureau have challenged the merger if Shopify did buy Handshake to neutralize them as a potential competitor?
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Competition Bureau signals worker welfare is not a priority in Canada
Canada’s Competition Bureau recently issued a statement on how it plans to assess non-poaching and wage-fixing agreements. It’s worth paying attention to.
After seeking legal advice from the government, the bureau said it will not criminally prosecute companies that fix wages or actively prevent workers from getting jobs at other firms. Instead, these agreements will fall under civil provisions of the Competition Act, specifically section 90.1, and require a much higher threshold of proof.
The statement means that it will be much harder to prosecute firms that collude to suppress workers’ wages or, in antitrust jargon, “create and exercise monopsony power.” In order to do so, the bureau’s commissioner must first find that such an agreement exists. Second, they must find that the agreement substantially lessens or prevents competition. This is a hard test to meet, especially in a digital age where it’s harder to trace a paper trail.
Under criminal provisions, you only need to prove the first point (that an agreement exists). This is in stark contrast to U.S. guidelines that were issued four years earlier. In the United States, authorities have committed to criminally prosecute businesses that make these blatantly collusive agreements.
The core reason behind the Canadian bureau’s position was a tiny change to the Competition Act in 2009. Bill C-10 (the Budget Implementation Act) dropped the word “purchase” from the part of the act that deals with criminal conspiracies, price-fixing, and collusions to carve up and share markets. This means that it’s now a criminal offence to collude with competitors to sell something, but it’s not a criminal offence to collude to purchase something. Because of this change, what U.S. authorities characterize as hardcore, criminal cartels fall under much lighter civil law in Canada.
It’s tempting to think of this issue as just legal pedantics. But even at first blush the implications of dropping this one word – purchase – from the Competition Act are profound.
For instance, as the country roils through COVID-19′s second wave, only Sobeys has reinstated “hero pay” for grocery workers in lockdown areas. Under our competition law, it wouldn’t be criminal for other grocers like Loblaw, Metro and Safeway to conspire to withhold such a bonus despite initially offering it in the pandemic. Earlier this year, MP Nathaniel Erskine-Smith raised questions about the timing of the pay premium reduction and whether companies co-ordinated their decision to end the wage bump.
And it’s not just grocery store workers who would be harmed by unchecked collusion. The technology sector is rife with “no poach” agreements that unnecessarily limit the mobility of talent. A US$415-million settlement between the U.S. Department of Justice and some of America’s largest tech firms, reached 10 years ago, is an example. Given that the average tenure of a tech worker is around three years, artificially preventing workers from continuing their careers at similar firms not only inhibits their mobility, but also prevents them from getting jobs with competitors at higher wages.
Sure, the Competition Bureau could investigate firms that collude to fix wages for tech and grocery store workers through non-criminal parts of the act, like section 90.1. But the chances of a successful outcome are lower and fines could not be issued. There is no real incentive for firms in Canada not to collude to suppress wages.
The bureau’s public statement is a disappointing signal that worker welfare is not a priority in Canada. As the statement describes, our laws are simply weaker than those in the United States when it comes to collusion between competitors.
But even with the laws we have, the Competition Bureau’s leadership does not do enough to address monopsony power in Canadian labour markets. From what we can gather from publicly accessible information, the bureau has never done a serious investigation into anti-competitive conduct related to workers – either under criminal or civil law. This same publicly available information suggests it has also never considered the effect that a merger may have on labour markets and employer monopsony power when reviewing mergers.
Competition policy in Canada is ignoring and hurting workers across the income spectrum at a time when it is needed most. Collusive agreements, like non-compete clauses, enhance employers’ market power by depriving workers of their right to threaten to quit and find new employment if wages fall or stagnate. This is especially salient for technology companies that are seeing record profits in the pandemic but may choose to freeze worker wages.
Competition policy is fundamentally intended to promote competition and prevent practices that could restrict it such as price-fixing, monopolistic behaviours or restrictive trading practices. But, if anything, Canada’s competition policy shows ambivalence and overt favouritism for firms to the detriment of consumers and workers.
Through weak competition policy, we are reducing competition for talent, stifling worker mobility and hurting Canadian industries. We need to consider legislative reform that gives the Competition Bureau more power to fix labour market monopsony when it arises, and make it clear that we expect the bureau to use them.
Correction: Under the Competition Act, the Competition Bureau does not have the authority to prosecute, impose criminal fines or impose civil administrative monetary penalties. Incorrect information appeared in an earlier version of this column.
Read the original publication here.