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

• Author: John S. Tyhurst
• Pages: 402-448

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.