The Federal Court of Appeal’s recent decision[1] upholding the Commissioner of Competition’s largely successful challenge of Secure Energy Services Inc.’s acquisition of Tervita Corporation provides further evidence that the Commissioner can succeed in challenging mergers even when efficiencies are raised as a defence, despite oft-stated concerns about the defence. It has now been almost ten years since the courts have saved an anti-competitive merger on the basis of the efficiencies defence (which decision was reached on the narrowest of technical grounds). The Secure decision further limits the scope of the efficiencies defence, with particular implications for mergers involving multiple product or geographic markets.
Background
Secure acquired Tervita on July 2, 2021 (the “Merger”) after the expiry of the statutory waiting period and having defeated an emergency injunction application brought by the Commissioner to prevent closing of the Merger. Secure therefore closed “at risk” knowing that its ownership of the Tervita business would be subject to complex, ongoing litigation that could ultimately result in significant divestitures, which is what has in fact happened. The Commissioner’s merger challenge alleged that the Merger substantially lessened competition in approximately 143 local geographic markets in Saskatchewan, Alberta, and Northeastern British Columbia for (i) the supply of waste processing and treatment services by treatment, recovery, and disposal facilities, (ii) the disposal of solid oil and gas waste into industrial landfills, and (iii) the disposal of produced water and wastewater into stand-alone water disposal wells owned by third party waste service providers, and sought the divestiture of 41 facilities previously owned by Tervita.
In addition to arguing that the Merger would not substantially lessen competition, Secure invoked the efficiencies defense, arguing that the gains in efficiency brought about by the Merger would be greater than and would offset any anti-competitive effects and those gains in efficiency would not likely be attained if the divestiture order were made.
The Competition Tribunal[2] largely granted the Commissioner’s application and ordered Secure to divest 29 of the 41 facilities sought by the Commissioner. The Tribunal also found that Secure failed to establish the efficiencies defence on the facts of the case. This represents a major win for the Commissioner.
The Tribunal decision demonstrated that the Commissioner is capable of establishing the anti-competitive effects of a merger under the Competition Act in its current form, and that there is a higher threshold to establish the efficiencies defence than has been indicated by recent public commentary. Closing a notifiable transaction in the face of the Commissioner’s outstanding concerns may carry a material risk of facing a post-closing divestiture order.
FCA Decision
The FCA found no merit in any of the issues raised by Secure and, in a decisive victory for the Commissioner, dismissed the appeal with costs to be awarded to the Competition Bureau.
The FCA’s decision focused primarily on the Tribunal’s interpretation and application of the efficiencies defence. The FCA agreed with the Tribunal’s use of the “order-driven approach”, that in order for an efficiency defence to be successful, an acquiror would have to establish that the gains in efficiency brought about by the Merger and that would not likely be attained if the Tribunal issued an order under section 92 would be greater than all of the anti-competitive effects of the Merger, and not just the anti-competitive effects in markets where a substantial lessening of competition was found to occur. Further, the FCA agreed that the Tribunal adequately explained its conclusion on the matter and that Secure had failed to meet its burden under the defence.
Key Takeaways
The key takeaway from this decision is that the efficiencies defence is not and has never been a panacea or a “free merger to monopoly card” card. The Tribunal applies five screens to determine whether stated efficiencies in fact count towards the defence, with certain stated efficiencies lost to each screen. It is not sufficient for parties to a merger with anticompetitive effects to simply put forward quantified efficiency savings where the Commissioner has quantified anti-competitive harm – a series of tests must be passed in order for the defence to be made out. This decision makes clear that the anti-competitive harm on the other side of the ledger to be weighed against the efficiencies is broader than some might have expected.
The FCA’s decision is particularly noteworthy in that it confirms that the Tribunal’s decision to count all anti-competitive effects in the balancing against efficiencies properly includes anti-competitive effects in markets where a substantial lessening of competition did not occur or was not alleged. Put differently, in future cases where the efficiencies defence is raised, three types of markets will likely need to be considered, being:
- markets where there is a substantial lessening of competition and in relation to which efficiencies count because they would be lost in the event of a divestiture order;
- markets where there is an anti-competitive effect (e., a degree of material concentration) but not rising to the level of a substantial lessening of competition that is required for a divestiture order to be issued, and in relation to which the efficiencies therefore do not count because they would not be lost due to a divestiture order, but the anti-competitive effects do count on the negative side of the ledger.
- markets where there is no anti-competitive effect (e., no degree of material concentration) and in relation to which the efficiencies therefore do not count because they would not be lost due to a divestiture order.
Taken together, the above means that in order for efficiencies to save a merger, they must arise in markets where there is a substantial lessening of competition, and they must offset both: (a) the substantial lessening of competition in those very markets; and (b) the anti-competitive effects, falling short of a substantial lessening of competition, in other markets.
This will have particular implications for “multi-market” mergers or retail mergers, as parties seeking to raise the efficiencies defence will have to consider a somewhat awkward category of markets, being markets in respect of which some anti-competitive effect will occur falling short of a substantial lessening of competition. While no divestitures should be required in such markets, they may be highly relevant in that they will count against the efficiencies asserted. Whereas historically under Canadian competition law, one would generally consider only two types of markets, being markets where there is a substantial lessening of competition and markets where there is not a substantial lessening of competition, one must now, where the efficiencies defence is asserted, assess whether there is anti-competitive effect falling short of a substantial lessening of competition in certain markets, in distinction to markets where there is no anti-competitive effect at all. In other transactions, where there is only a single product or geographic market at issue, the above issue would not be expected to arise.
While this is all rather technical, the basic takeaways here are that the FCA decision confirms the highly technical nature of the efficiencies defence and also could be said to limit the defence further or more precisely to make it harder to make out.
This decision arguably flies in the face of recent criticism of the operation and even existence of the efficiencies defence, which has been viewed by some as a major obstacle to the Commissioner’s ability to win merger challenges at the Tribunal when efficiencies are claimed by the merging parties.
This decision further demonstrates that the Commissioner can succeed in challenging mergers under the existing legislation, even when the efficiencies defence is in play. Indeed, since the Competition Act was significantly amended in 2009 to more closely reflect a US-style merger regime with “second request” powers, there have been four full merger challenges decided on the merits by the Tribunal. In only one of them did the efficiencies defence prevail (on the most technical of grounds). Contrary to widespread commentary, we would argue that the role of the efficiencies defence has been shrinking over time rather than growing.
[1]Secure Energy Services Inc. v. The Commissioner of Competition, 2023 FCA 172.
[2]Commissioner of Competition v. Secure Energy Services Inc. (CT-2021-002).
