B2B Marketplaces and Canadian Competition Law

by

Stanley Wong1
Davis & Company (Vancouver and Toronto)

INTRODUCTION

1. Almost everyday the news reports the formation of yet another B2B (business to business)

trading exchange or marketplace using the internet. Some are high profile like Covisint which was

set up as a central marketplace for car components, supplies, services and information in February

2000 by three major automobile manufacturers (DaimlerChrysler, Ford and General Motors).

Shortly thereafter two others (Renault and Nissan) joined. There is little doubt that B2B electronic

marketplaces will transform the way business is conducted.

2. Some B2B exchanges are vertical, dealing with products or services for a single industry, e.g.

automobile (Covisint), aerospace (MyAircraft2, Exostar and AeroXchange), petroleum (PetroCosm)

and petrochemicals (Trade-Ranger). Others exchanges are horizontal, organized around a narrower

range of goods or services, e.g. chemicals (Omnexus for plastics and Chemdex for laboratory

chemicals), metals (E-Steel and MetalSite) and paper (PaperX). Still others are focussed more

broadly, e.g. on products for small and medium-sized businesses (Onvia and BizBuyer).

1
The author is a partner at the Vancouver and Toronto Offices of Dav is & Com pany. T he pape r is
prepared for the programme, “E-Commerce Advances”, Osgoode Hall Law School of York University, Professional
Development Program, Toronto, November 2, 2000. He acknowledges the helpful assistance of his colleague, Elana
M. Hahn, in the preparation of this paper.

2
On October 26, 2000, nine of the wo rld’s largest airlines including American Airlines, United, Delta,
British Airways and Air France, announced that they would link up with MyAircraft, the exchange owned by three of
the largest aerospace suppliers, to form a new site to offer a broad range of products from parts and fuel to in-fight m eals
and stationary sup plies. This new site is expec ted to handle up to $75 billion wo rth of business.
 -2-

3. The ownership of B2B marketplaces varies. Some are owned by buyers, sellers or both. For

example, Covisint is owned by the five major automobile manufacturers. The new aerospace

exchange is jointly owned by buyers (major airlines) and sellers (major aerospace manufacturers).

Most are owned by third parties who are independent of buyers or sellers.

4. B2B electronic marketplaces are being developed to harness the vast potential of the internet.

The internet enables communications between virtually any points on the planet served by wire or

wireless links, simultaneous communication with almost a limitless number of persons anywhere

and the transmittal of messages and responses instantaneously. Vast quantities of information in

text, voice or graphic forms can be stored, sorted, searched and retrieved and made accessible

simultaneously to a seemingly limitless number of persons located anywhere in the world. Online

ordering of goods has been an early use of e-mail and the internet. What distinguishes a B2B

electronic marketplace is the bringing together of many people in many different places at the same

time.

5. The main attraction of most B2B electronic marketplaces is the potential to reduce the

transaction, processing and inventory cost of procurement of goods or services as well as the prices

for them. Some marketplaces seek to offer other services as well.

6. At the simplest level, an electronic marketplace serves as an electronic catalogue for

procurement. The benefits are obvious. Electronic catalogues, as compared with printed versions,

can provide greater detail about more products with continuous updating of product information

including pricing and availability, all of which can be enhanced with sound and still or moving
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graphic images. From the buyer’s perspective, search costs are significantly reduced if electronic

catalogues from alternative suppliers are made available in the same place. From the seller’s

perspective, the costs of marketing are reduced if prospective buyers use the same internet site.

7. The next level is e-auctions. A supplier can post on the marketplace site the goods or

services it wishes to sell and invite bids. A variant of this is the reverse auction where a buyer may

invite suppliers to bid or quote for the supply of goods or services. A further and more sophisticated

variant is to combine the auction and reverse auction into an exchange which seeks to match buyers

and sellers.

8. The electronic marketplace also enables more effective management of production and

delivery schedules and thereby improve the efficiency of the entire production supply chain.

OVERVIEW OF COMPETITION LAW ISSUES

9. B2B electronic marketplaces have important implications for competition. There are obvious

benefits. Significant transaction, processing and inventory cost savings could be realized through

the use of electronic marketplaces. These benefits are difficult to dispute. The question is whether

the benefits to the participants cause harm to the competitive process and the economy as a whole.

Since most of the electronic marketplaces involve collaboration among competitors, potential

competition law concerns arise. There is potential for collusive activity by competitors that harms

the markets in which they sell their products either by harming their customers or their competitors

outside of the exchange who compete for customers. There is also potential for harm to the markets

in which competitors buy goods and services. Joint buying may lower the cost of procurement but
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may distort the competitive process if the joint buying group becomes a monopoly buyer, that is, a

monopsonist.

10. So far, antitrust and competition enforcement agencies throughout the world have taken a

cautious approach to the proliferation of electronic marketplaces and have avoided making overly

generalized pronouncements about potential competition issues. The best example of this approach

is that shown by the U.S. Federal Trade Commission (“FTC”), one of the U.S. antitrust enforcement

agencies.

11. In June 2000, the FTC hosted a two-day public workshop, “Competition Policy in the World

of B2B Electronic Marketplaces” which attracted a large audience of academics, lawyers, regulators

and business people. Recently, on September 11, 2000, the FTC completed its first review of a B2B

electronic marketplace under the merger laws of s. 7 of the Clayton Act. It decided not to oppose

the formation of Covisint. In cautious words, the Commission advised the parties:

This action is not to be construe d as a determination that a violation may not have
occurred, just as the pendency of an investigation shou ld not be constru ed as a
determination that a violation has occu rred. Bec ause Co visint is in the early stages
of its developme nt and has no t yet adopted by laws, operating ru les, or terms of
participant access, because it is not yet operational, and in particula r because it
represen ts such a large share of the automobile market, we cannot say that
impleme ntation of the Cov isint venture will not cause competitive co ncerns.

In view of the undeveloped status of Covisint, the Commission reserves the right
to take such further action as the public interest may require.

12. In a public statement, FTC Chairman Robert Pitofsky commented:

As we learned at the F TC's worksh op in June, B2 B electronic m arketplaces o ffer great

promise as the means through w hich significant cost saving s can be achiev ed, business
processes can be more efficiently organized, and competition may be enhanced. B2Bs have
a great potential to benefit both businesses and consumers through increased produc tivity
and lower prices. Of cou rse, as is the case with any joint ventu re, wheth er in the traditional
 -5-
or new economy, B2Bs should be organized and implemented in ways that maintain
comp etition. The antitrust ana lysis of an ind ividual B 2B will be specific to its mission , its
structure, its particular market circumstances, procedures and rules for organization and
operation, and actual operations and market performance.

13. Approval of Covisint was also given by the Bundeskartellamt, the German competition

enforcement agency. In early October 2000, Covisint became operational. It is expected that the

marketplace will handle a significant portion of the procurement needs of the five participating

automobile manufacturers. The estimated procurement needs of DaimlerChrysler, Ford and General

Motors total US$250 billion per year.

14. On October 26, 2000, the FTC Staff released its report, Entering the 21st Century:

Competition Policy in the World of B2B Electronic Marketplaces which summarizes the discussions

of the recently held public workshop and outlines a framework for dealing with the antitrust issues

that B2B electronic marketplaces raise.

OUTLINE OF COMPETITION LAW ISSUES

15. B2B electronic marketplaces affect both the markets for the goods and services that are being

traded and the market for marketplaces. In considering how competition may be affected, it would

be necessary to identify the markets that could be affected by the electronic marketplace and to

determine the degree, if any, to which competition in the market(s) would be impacted.

16. For competition analysis, a market is defined by its product and geographic dimension. The

product market consists of all goods (or services) which are close substitutes. The geographic

market is defined by the location of the suppliers which buyers of the product consider to be
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alternative sources. For example, retail buyers of milk look to suppliers who are located in a

relatively small geographic area. Buyers are unlikely to travel a great distance to buy the product.

For example, a household in Rosedale would not regard a supermarket in Thornhill as an alternative

supplier for milk.

17. Competition law is concerned with controlling the exercise, creation and increase of market

power. The Competition Act, R.S.C. 1985, c. C-34 (the “Act”), consists of criminal offences such

as conspiracy, bid-rigging, price discrimination and price maintenance, non-criminal (civil)

reviewable matters such as mergers, abuse of dominant position, tied-selling, exclusive dealing and

market restriction and administrative provisions such as the notification filing regime for certain

large proposed transactions.

18. A breach of a criminal provision may result in a fine, a term of imprisonment or both. The

non-criminal, reviewable matters are not inherently anti-competitive. If the Competition Tribunal

determines that there is a breach of a reviewable matter, it has broad remedial powers that does not

include the power to impose a fine or a term of imprisonment or to make an award of damages.

19. The Competition Bureau, which is headed by the Commissioner of Competition, is

responsible for the investigation and enforcement of the Act. With respect to criminal matters, it

may refer violations to the Attorney General of Canada for prosecution or other disposition. With

respect of non-criminal, reviewable matters, the Commissioner may apply to the Competition

Tribunal for a remedial order. The Tribunal is composed of judicial members, who are appointed

from the Federal Court of Canada (Trial Division), and lay members, who have experience in
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business, economics, accounting and other areas.

Enforcement Approach of the Competition Bureau

20. Although the Competition Bureau has not yet issued any comprehensive statement about its

approach to competition issues raised by B2B electronic marketplaces or e-commerce, in general,

an indication of its approach can be gleaned from reviewing some of its published statements and

other enforcement pronouncements as well as from its enforcement approach in other areas.

21. The 1995 Bulletin, “Strategic Alliances under the Competition Act” was published by the

Competition Bureau to address the uncertain treatment of strategic alliances under the Act. This

Bulletin addressed the concern that the uncertainty, which stems from the possible application of the

criminal provisions, may deter businesses from pursuing procompetitive alliances. The Bureau

recognized that collaboration by businesses has enormous potential benefits for the Canadian

economy in the face of the growing trend of the globalization of business. It also acknowledged that

under the Act, there are some legitimate concerns about the legality of strategic alliances. The

formation and operation of B2B electronic marketplaces could be viewed as a strategic alliances

among buyers, sellers or both. In April 2000, the U.S. antitrust enforcement agenices jointly

released “Antitrust Guidelines for Collaborations among Competitors.” The Guidelines adopt an

approach to that taken in the Bulletin, recognizing the potential benefits of competitor collaborations

while acknowledging that only a few collaborations raise serious competitive concerns.3

3
For a comp arision of th e U.S. an d Cana dian app roaches to strategic alliances, see Stanley Wong, “A
Comm entary from the Perspective of Canadian Competition Law on the Draft U.S. Guidelines n Collaboration among
Com petitors,” in Joint Ven tures and Strategic A lliances: Th e New F ederal A ntitrust Competitor Collaboration
Guidelines, Conference Proceeding s, American Bar Asso ciation, Sec tion of A ntitrust Law , Washin gton, D .C., November
11 and 12, 1999.
 -8-

22. The main conclusions of the Bulletin are important. First, few strategic alliances raise

concerns under the Act. Secondly, vertical and conglomerate alliances raise fewer concerns than

horizontal ones. Thirdly, the few strategic alliances which raise competition issues are likely to

involve the provisions of the Act dealing with the creation, maintenance or enhancement of market

power, which is defined to be the ability to raise prices (or adversely affect some dimension of

competition) above the competitive level for a sustained period of time. Fourthly, except where an

alliance involves agreements or arrangements concerning prices, output, business strategy or some

other important aspect of competitive rivalry, the Bureau is likely to review a strategic alliance under

the non-criminal, civil provisions rather than the criminal provisions of the Act.

23. The enforcement experience of the Competition Bureau with trade associations and the real

estate listing services are also helpful. B2B marketplaces owned or operated by competitors raise

many of the same issues as the activities of trade associations. Trade associations provide many

benefits to its participants that are not harmful to competition but they have often been used as the

forum in which to engage in collusive conduct regarding prices, output or some other important

dimension of competitive rivalry.

24. The Bureau’s experience with real estate listing services is highly relevant. Where a listing

service is an essential tool for the selling of residential real estate properties, the terms for access to

the service can be used to discipline persons who have access as well as those who do not.4

4
See “Closing the Deal: Ten Years after the Real Estate Prohibition Order,” Remarks of Harry
Chandler, Deputy Director of Investigation and Research (Crim inal Matters), Competition Bureau, Annual Conference
and Trade Show, Canadian Real Estate Association, Windsor, Ontario, September 27, 1998.
 -9-

The Market for Goods and Services: Impact on Competition Among Participants

25. A marketplace that sells goods and services will obviously have an impact on competition

in the supply of the goods and services. Any collaboration among competitors in the formation and

operation of the marketplace may have an adverse effect on a dimension of competition such as

prices, quality or service.

26. By their nature, these marketplaces bring together businesses who are competitors. Covisint

is an example of this. It brings together the five major automobile manufacturers who are each

others major competitors in the selling of automobiles.

27. Any collaboration among competitors requires consideration of the conspiracy offence under

s. 45 of the Act. The required elements of the offence are:

a. an agreement between two or more persons;

b. the effect of the agreement, if implemented would lessen competition unduly;

c. the accused intended to enter into the agreement; and

d. the accused knew or ought to have know that the effect of the agreement, if

implemented, would lessen competition unduly.

Upon conviction, the court may impose a fine of up to $10 million, a term of imprisonment of up

to 5 years, or both. Conspiracy is the most serious offence under the Act. The Competition Bureau,

which is responsible for the enforcement of the Act, places a high priority on the detection and

investigation of conspiracies. Where most competitors are involved in the impugned activity, it is

likely that it would be “undue”.

 -10-

28. Collusive activity may be subject to the bid-rigging provisions of s. 47 of the Act. Unlike

the conspiracy provisions, there is no market impact test. The offence of bid-rigging is a potential

concern with respect to auctions and reverse auctions.

29. Under s. 47, “bid-rigging” means:

(a) an agreement or arrangement between or among two or more persons whereby

one or more of those persons agrees or undertakes no t to submit a bid in resp onse
to a call or request for bids or tenders, or

(b) t h e s u bm ission, in response to a ca ll or request for bids or tend ers, of bids or

tenders that are arrived at by agreement or arrangement between or among two or
more bidd ers or tenderers,

where th e agreem ent or arran geme nt is not m ade kno wn to the person calling for
or requesting the bids or tenders at or before the time when any bid or tender is
made by any person w ho is a party to the agre emen t or arrang emen t.

30. Obviously, any agreement among competitors who have a large market share to fix prices

or output, to allocate markets or customers, or to agree on some important dimension of competitive

rivalry would raise serious concerns under the conspiracy, bid-rigging or other criminal provisions

of the Act. These agreements are clearly designed to be anti-competitive. What is less obvious are

the various activities engaged in by competitors with respect to the formation and operation of an

electronic marketplace. In an electronic marketplace, vast amounts of highly specific and often

highly confidential information about prices and production are collected. The sharing of this

information raises potential competition law concerns. Any sharing of highly specific, commercially

sensitive information raises suspicion that there may be an underlying agreement to limit

competition among competitors who participate in the marketplace. Thus, great care must be

exercised in determining the types of information that are collected, the form in which is stored and

the persons who have access.

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31. Another potential area of concern arises if the marketplace favours owners over other

participants, for example, in the display of information or the terms of access. While such

exclusionary conduct is unlikely to be reviewed under the criminal provisions of the Act, it may be

subject to review under the non-criminal, reviewable matters provisions such as abuse of dominant

position. This is discussed further below.

The Market for Goods and Services: Impact of Joint Buying

32. Some electronic marketplaces engage in joint buying in order to obtain lower costs of goods

or services. There is a potential competition law problem if a marketplace acts as a monopsonist,

a monopoly buyer, and as a result, the prices at which it buys goods are below the competitive level.

This becomes a serious concern if the goods being purchased of limited use. For example, if the five

major automobile manufacturers in Covisint use the marketplace to engage in joint buying of a good

which is of limited use outside of the automobile industry, for example, brake pads, the monopsony

problem could arise.

The Market for Goods and Services: The Impact on Competitors Who are not Participants

33. If some competitors are not part of the B2B electronic marketplace, the impact on them must

be considered. If participants in a B2B marketplace together dominate a market, certain exclusionary

conduct by the marketplace could be seen as anti-competitive in the sense of enhancing market

power. In particular, the abuse of dominant position provisions of ss. 78 and 79 of the Act deal with

this concern.

34. The abuse of dominant position is concerned with the exercise of market power through the
 -12-

practice of anti-competitive acts. The Tribunal may make an order prohibiting anti-competitive acts

where the Tribunal finds that:

(a) one or m ore perso ns substan tially or completely control, throughout Canada or
any area thereo f, a class or species of business,
(b) that person or those persons have engaged in or are en gaging in a practice of
anti-competitive acts, and
(c) the practice has had, is having or is likely to have the effect of preventing or
lessening competition substantially in a market

If an order of prohibition would not be effective in restoring competition, the Tribunal may make,

in addition to or in lieu of that order, any other order including divestiture (s. 79(2)). The Tribunal

is required to interfere with a person's rights only to the extent necessary to redress the anti-

competitive effects of the impugned practice (s.79(3)).

35. In determining whether a practice is anti-competitive, the Tribunal shall consider whether

the practice is a result of superior competitive performance (s. 79(4)).

36. The expression “anti-competitive act” is defined in s. 78 to include any of the following acts:

(a) squeezing, by a vertically integrated supplier, of the margin available to an

unintegrated customer who competes with the supplier, for the purpose of impeding
or preve nting the c ustome r's entry into, o r expan sion in, a m arket;
(b) acquisition by a supplier of a customer who would otherwise be available to a
competitor of the supplier, or acquisition by a custo mer of a supplier w ho wo uld
otherwise be available to a competitor of the customer, for the purpose of impeding
or preventing the competitor's entry into, or eliminating the competitor f r om , a
marke t;
(c) freight equalization on the plant of a competitor for the purpose of impeding or
preventing the com petitor's entry into, or eliminatin g the com petitor from , a
marke t;
(d) use of fighting brands introduc ed selective ly on a tem porary b asis to discipline
or eliminate a competitor;
(e) pre-em ption of sc arce facilities or resource s required by a com petitor for the
operation of a busin ess, with the obje ct of withholding the facilities or resources
from a m arket;
(f) buying up of products to p revent the erosion of existing price levels;
(g) adoption of product specifications that are incompatible with products produced
by any oth er person and are d esigned to prevent his entry into , or to elimin ate him
 -13-
from, a m arket;
(h) requiring or inducing a supplier to sell only or primarily to certain cu stomers,
or to refrain from selling to a comp etitor, with the object of preventing a
comp etitor's entry in to, or exp ansion in , a marke t;
(i) selling articles at a price lower than the acquisition cost for the purpose of
disciplining or eliminating a competitor;
(j) acts or conduct of a person opera t in g a d o m estic service, as d efined in
subsection 55(1) of the Canada Transportation Act, that are specified under
paragraph (2)(a); and
(k) the denia l by a perso n opera ting a dom estic service, a s defined in subsecti on
55(1) of the Canada Transportation Act, of access on reasonable commercial terms
to facilities or services that are essential to the operation in a marke t of an air
service, as defined in that subsection, or refusal by such a person to supply such
facilities or services on such term s.

37. Section 79(5) provides that:

an act engaged in pursuant only to the exercise of any right or enjoyment of any
interest derived under the Copyright Act, Industrial Design Act, Patent Act, Trade-
marks Act or any other Act of Parliament pertaining to intellectual or industrial
property is not an an ti-comp etitive act.

This is not a blanket exemption in respect of the exploitation of intellectual property rights. Abuses

of intellectual property rights are arguably not excluded from the definition of an “anti-competitive

act”.

38. The Director has three years after the practice has ceased to bring an application to the

Competition Tribunal (s. 79(6)). The Director may not bring an application under s. 79 if he has

commenced proceedings under. s. 45 or under s. 92 on the basis of the same or substantially the same

facts (s. 79(7)).

39. If the participants of an electronic marketplace enjoy a dominant position in certain markets,

the following types of conduct or activity could be of concern under the abuse of dominant position

provisions:

a. requiring suppliers to deal only with the marketplace or its participants;

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b. requiring suppliers to give favourable treatment to the marketplace and its

participants;

c. restricting access of competitors to the marketplace by imposing unreasonable terms;

d. requiring its participants to not deal with any other marketplace.

There would be a concern under the abuse provisions if anti-competitive intent is also present.

The Market for Marketplaces

40. With respect to the market for marketplaces, competition law issues could arise. First, the

formation of a marketplace may be subject to a notification filing (as was the case of Covisint with

the U.S. premerger Hart-Scott-Rodino filing). Under Part IX of the Act, for certain large proposed

transactions in the form of an acquisition of assets or shares, an amalgamation or a combination,

there is a requirement to make a filing with the Competition Bureau and wait until the expiry of the

applicable waiting period (generally 14 or 42 days) before completing the transaction. Generally,

notification is required if the applicable size of parties and size of transaction thresholds are met.

The size of parties threshold is: the parties together with their affiliates have assets in Canada with

an aggregate value of over $400 million or gross revenues from sales in, from or into Canada with

an aggregate value of over $400 million for an annual period. The size of transaction threshold is:

the transaction involves assets in Canada of an operating business with a value of over $35 million

($70 million for an amalgamation) or the gross revenues from sales generated by these assets exceed

$35 million ($70 million for an amalgamation).

41. The main underlying purpose of a notification filing is to allow the Competition Bureau to

determine whether the proposed transaction is an anti-competitive merger under s. 92 of the Act for
 -15-

which an application can be made to the Competition Tribunal for a divestiture or some other

remedial order. A merger is anti-competitive under s. 92 if it would result in a substantial lessening

or prevention of competition.

42. The formation of a marketplace could have an adverse impact on competition between

marketplaces. Some of the newly-formed marketplaces are mergers of previously independent

marketplaces, for example, the merger of the MyAircraft with the newly created aerospace exchange

supported by major airlines and major aerospace suppliers. Such mergers may be subject to

notification filing and review under the substantive merger provisions of s. 92 of the Act.

43. Also, other concerns arise if a marketplace engages in exclusionary conduct to seek more

favourable treatment from suppliers or otherwise raise costs for rival marketplaces.

MULTI-JURISDICTIONAL CONCERNS

44. Most B2B electronic marketplaces are being designed to transcend national boundaries. In

so doing, they raise concerns about the application of antitrust and competition laws of the countries

that may be affected. The common view among enforcement authorities is that the application of

national laws is governed by the “effects doctrine”, that is, foreign conduct is subject to domestic

laws if the conduct affects domestic commerce.6 Given this view, it becomes necessary to consider

the possible application of the different competition laws and regulations that could affect B2B

electronic marketplaces. While there are common themes underlying competition laws around the

6
See, “Antitrust Enforcement Guidelines for International Operations,” issued jointly by the U.S.
Department of Justice and the Federal Trade Commission, April 1995.
 -16-

world, there are sufficiently important differences that advice should be sought about the competition

laws and the enforcement approach in the countries that may be affected.

CONCLUSIONS

45. Since B2B electronic marketplaces can take many different forms and operate under very

different rules, only a few general comments can be made potential competition law issues.

46. First, the marketplace should be structured so that it can be considered as a non-criminal,

reviewable matter under Part VIII rather than as an agreement subject to the conspiracy provisions

of s. 45 of the Act.

47. Secondly, other things being equal, the marketplace should be owned by a third party, i.e,

not a person who is a buyer or seller of goods offered by the marketplace. This should minimize the

opportunities for competitor collaborations about inappropriate subjects such as price, output and

other important dimensions of competitive rivalry or the discipling of competitors inside or outside

the marketplace. Further, it would also minimize the likelihood that unresonable terms of access

would be imposed on persons seeking to join or participate. An independent marketplace is better

suited to deal with the commercially sensitive information that is accumulated about competitors.

48. Thirdly, other things being equal, there should be open access for participation in the

marketplace. The rules for access or participation should be transparent and on reasonable business

terms.
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