Competition Bureau finalizes competitor property controls guidance

The Competition Bureau (the Bureau) recently finalized its competitor property controls enforcement guidance (the Guidance) under the Competition Act (the Act)¹, replacing the preliminary guidance it issued last year. Overall, the Guidance maintains the Bureau’s strict enforcement approach to property controls set out in the preliminary guidance, but it also provides additional helpful clarification.

What you need to know

• The Bureau takes a skeptical view of property controls and will only consider them to be justified in “limited cases”.
• Bureau enforcement can proceed under the abuse of dominance or civil anti-competitive collaboration provisions of the Act, with remedies ranging from prohibition orders to corrective orders (including divestiture) to significant administrative monetary penalties.
• Private parties can now bring applications under both the abuse of dominance and civil anti-competitive collaborations provisions of the Act, introducing an additional avenue for enforcement.
• Businesses should ensure any proposed competitor property controls are reasonably necessary to induce entry or investment and are appropriately focused in terms of duration, geography, and product/service scope in connection with their pro-competitive purpose.

The Guidance

The Guidance focuses on two types of competitor property controls:

1. Exclusivity clauses in commercial leases, which restrict how property can be used by competitors to a tenant, such as prohibiting leasing to competitors of a tenant, or limiting what or how products can be sold.
2. Restrictive covenants that run with lands, which are restrictions that prevent a purchaser or owner of a commercial property from using the location to operate, or lease to operators of, certain types of businesses that compete with a previous owner. The Bureau views restrictive covenants as being particularly concerning and does not consider their use to be justified outside of exceptional circumstances.

The Bureau will consider a competitor property control to be justified in only “limited cases”—namely, where it has a pro-competitive rationale, such as encouraging a retailer to make investments to enter a market or improve a space it already leases. The Bureau acknowledges that a competitor property control that is not justified does not “automatically” mean the Act has been breached. Nonetheless, because a key part of the Bureau’s analysis is whether a property control has a pro-competitive rationale, the Guidance encourages businesses to eliminate or modify property controls that cannot be justified to reduce the risk of contravening the Act.

Businesses that use or are considering using a competitor property control should consider the following in assessing whether it is likely to be justified: (i) its necessity in attracting entry or investment or whether alternative means are available; (ii) whether it can last for a shorter duration; (iii) whether it can cover a smaller geographic area; and (iv) whether it can apply to fewer products or services.

The Bureau will generally pursue enforcement action under the abuse of dominance and civil anti-competitive collaboration provisions of the Act:

• Abuse of dominance. Under the abuse of dominance provisions, the Bureau may seek a prohibition order if a dominant firm’s (or jointly, dominant firms’) use of a property control has an anti-competitive purpose or results in a substantial prevention or lessening of competition. If the dominant firm’s (or firms’) use of a property control has both an anti-competitive purpose and results in a substantial prevention or lessening of competition, corrective orders (including divestiture) or substantial administrative monetary penalties may be ordered.
• Anti-competitive collaborations. Under the civil anti-competitive collaboration provisions, a prohibition order, corrective orders (including divestiture) and substantial administrative monetary penalties may be ordered where the property control is likely to result in a substantial prevention or lessening of competition.

Private parties can now bring applications under both the abuse of dominance and civil anti-competitive collaborations provisions of the Act, introducing an additional avenue for enforcement.

Conclusion

The Guidance maintains the Bureau’s strict approach to competitor property controls, and recent Bureau enforcement shows this is an enforcement priority. Moreover, private parties can now bring applications under both the abuse of dominance and civil anti-competitive collaborations provisions of the Act.

Businesses should expect continued heightened scrutiny of competitor property controls notwithstanding that they were previously widely sought by retailers and tenants (including the use of exclusivity clauses in leases and restrictive covenants registered on title to commercial properties).

As best practice, businesses should review and, where appropriate, modify existing competitor property controls to eliminate any potential competitive harm to reduce the risk that they could be found in contravention of the Act. Businesses should also ensure any new property controls are appropriately tailored having regard to its duration, geography and product/service scope to only the extent necessary to promote new entry and investment, so as to be easily justified by a credible pro-competitive rationale. It is also recommended that businesses clearly articulate the intent and purpose of any competitor property controls contained in contractual agreements (such as agreements of purchase and sale for real property, leases or restrictive covenant agreements) in order to show that the parties considered the strict nature of these types of provisions, and to document that any agreed-upon controls are directly correlated to the commercial arrangements being transacted, and not more onerous or broad than strictly necessary in the particular commercial circumstances.