Vertical Practices: Exclusive Dealing, Market Restriction, Tied Selling, and Refusals to Supply

AuthorJohn S. Tyhurst
Pages402-448
402
CHAPTER 8
VERTICAL PRACTICES:
EXCLUSIVE DEALING,
MARKET RESTRICTION,
TIED SELLING, AND
REFUSALS TO SUPPLY
A. INTRODUCTION
“Vertical” practices occur between players performing dierent func-
tions in the chai n of supply. The various functions in that chain i nclude
resource extraction, manufacturing, distribution, wholesaling, retailing,
and end consumption.
Vertical practices by a given f‌irm m ay be directed at f‌irms “upstream”
(e.g., applied by a customer to a supply source) or “downstream” (e.g.,
applied by a manufacturer to a consumer or supplier further down the
chain of supply), or both. These practices can be contrasted with “hori-
zontal” conduct (such as mergers between competitors or price f‌ixing),
which occurs between players at the same competitive level in the sup-
ply chain.
Vertical practices are widespread in the economy and are often not
anti-competitive. Examples include franchise agreements restricting
competition between food and beverage outlets of a particular brand,
exclusive arrangements requi ring car or farm equipment retailers to sel l
only the supplier’s branded product, or telecommunications services
oered to customers at discounts tied to the customer taking a bundle
of services from the same f‌irm.
Such arrangements may have varying eects on competition and
eciency depending on the context, which means that they require
a case-by-case assessment to determine their anti-competitive eect.
In general, unless the f‌irm imposing the vertical restraint is a major
Vertical Practices403
supplier or possesses market power in a properly def‌ined market, the
practices are unlikely to raise issues under the Competition Act.1
There is a high degree of overlap between the vertical practices and
abuse of dominance provisions, given that each of the vertical practices
described below may also be assessed as an anti-competitive practice
under section 79 when engaged in by a dominant f‌irm. Indeed, several of
the cases rev iewed below, such a s Canada (Commissioner of Competition)
v Canada Pipe2and Tele-Direct,3were brought under both the abuse of
dominance and vertical practices provisions. A tabular comparison of
the main elements of abuse of dominance and of vertical practices fall-
ing within section 77 is set out below in Table 8.1. Several dierences
can be seen in comparing the elements set out there: under section 77,
the respondent f‌irm need only be a “major supplier”; the practice of
anti-competitive acts is narrowed under section77 and must have an
“exclusionary eect”; and there is no “prevention of competition” branch
under section 77.
Table 8.1. Comparison of the Elements of Sections 78–79 and 77
Abuse of Dominance
(Sections –)
Vertical Practices
(Section )
Market
Def‌inition,
Structure,
Control
()(a): substantial or complete
control of a class or species of
business
() & (): major supplier of a
product in a market or wide -
spread in a market
Conduct  and ()(b): practice of anti-
competitive acts that are “preda-
tory, exclusionary or disciplinary”
(): practice of tied selling,
exclusive dealing, and market
restriction as def‌ined
Ef‌fect ()(c): practice is likely to
substantially prevent or l essen
competition (SPLC), i.e., “likely
to create, maintain or enhan ce”
market power
() & (): practice is likely to
have an “exclusionary ef‌fect ,”
including impeding entry or expan-
sion of a f‌irm or the introduc tion
of a product to a market, resul ting
in a likely substantial less ening of
competition
1 RSC 1985, c C-34 [Competition Act or A ct].
2 Canada (Commissioner o f Competition) v Canada Pipe, [2005] CCTD No 3 [Can-
ada Pipe CCT], overturned on ot her grounds 2006 FCA 233 [Canada Pipe F CA],
based on f‌indi ng that the Tribunal erre d in its consideration of the ant i-com-
petitive eect s of the practice.
3 Canada (Competition Ac t, Director of Investigation and Research) v Tele-Direct
(Publications) Inc (1997), 73 CPR (3d) 1 (CCT) [Tele-Direct].
4 Except refusa l to supply, s 75.
CANA DIAN COM PETITION LAW AND POLIC Y404
It is important to draw a di stinction, when discussing vertical prac-
tices, between “intrabrand” and “interbrand” competition. Intrabrand
competition occurs among suppliers of the same branded product, such
as among Petro-Canada gas stations. Interbrand competition is that
between rival suppliers’ products and outlets: e.g., between those of
Petro- Canada, Shell, Ultramar, etc.
Vertical restraints can aect both intrabrand and interbrand com-
petition. In most cases, intrabrand restraints, such as limitations on
the ability of the same branded franchises to compete against each
other, are not a concern for competition law as long as there is su-
cient interbrand competition.5 For example, if Petro-Canada were to
limit the geographic territory within which its service stations could
market their branded motor oil (reducing intrabrand competition in oil
between those stations), that would pose few concerns, as consumers
can purchase oil from many dierent competing sources (i.e., there are
plenty of interbrand competitors in motor oil).
B. BACKGROUND AND HISTORY
These provisions were added in the Stage I amendments of 1976.6 The
genesis of the amendments was a research inquiry conducted by the
Restrictive Trade Practices Commission (RTPC) in the early 1960s into
the distribution practice s of the major oil companies of products such as
motor oil, anti-freeze, tires, batteries, and other products.7
Its 1962 TBA Report concluded that most of the oil companies
required their branded ser vice station operators8 to carry only t he prod-
ucts supplied by that company — a form of exclusive dealing.9 It found
that the eect of this a nd other practices, such as tied selling, was to cre-
ate barriers to entry for competing suppliers of oil and other products
5 See, however, the discu ssion of the importance of intr abrand competition in
Stephen Marti n & John T Scott, “GTE Sylvania and Interbr and Competition as the
Primar y Concern of Antitru st Law” (2017) 51 Review of Industr ial Organization 217.
6 An Act to amend the Combines Investigat ion Act and the Bank Act and to repeal
an Act to amend an A ct to amend the Combines Investigation Act a nd the Criminal
Code,SC 1974-75-76, c 76, s 12.
7 Canada, Re strictive Trade Practices C ommission, Report on the D istribution and
Sale of Automotive Oils, Grea ses, Anti-Freeze, Additives, Tires, Batteries and A cces-
sories and Relat ed Products (Queen’s Printer: Ottawa, 1962) — the s o-called TBA
Report [TBA Report].
8 Operators of non-company owned st ations, which made up the bulk of t he
stations in t hat era.
9 TBA Report,above note 7 at 40 –48.

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