Recalibrating functional claiming: A way forward
What are the misconceptions and what should be done to recalibrate functional claiming standards accordingly?
Among the many changes introduced by Canada’s new Liberal government in the fall of 2015, a notable one for competition lawyers was the rebranding of the Department of Industry as the Department of Innovation, Science and Economic Development (ISED). The ISED Minister was tasked with helping “Canadian businesses grow, innovate and export so that they can create good quality jobs and wealth for Canadians.” Canada’s Commissioner of Competition, who is responsible for the administration and enforcement of the Competition Act, reports to the ISED Minister.
The ISED Minister recently launched consultations on developing an innovation agenda for Canada. In so doing, he noted that innovation is a Canadian value, and that Canadians are a nation of innovators. From Alexander Graham Bell and the earliest telephone to the once ubiquitous Blackberry, from medical insulin to the cardiac pacemaker, Canadians have created many innovative, revolutionary products. Well before the changes at the Department of Industry and the launch of the innovation agenda, however, the Commissioner of Competition has been focused on the role and effect of innovation in the marketplace. This paper provides a review of recent efforts by the Commissioner to highlight the role of innovation in competition policy, including its potential impact on an analysis of anti-competitive effects and the need for competition advocacy to promote innovation and seek the repeal of overly burdensome regulations.
In 2014, the Competition Bureau held its first workshop on innovation and antitrust in Ottawa, the purpose of which was to discuss how innovation and dynamic competition inform antitrust analyses. The report from that workshop noted that innovation is “widely recognized as a key driver of economic growth and consumer welfare,” and that “competitive rivalry often drives innovation.” In evaluating whether business conduct is anticompetitive, the Bureau noted that traditionally antitrust enforcers have looked to price and output considerations, rather than the impact on innovation. Due to the importance of innovation for the profitability and growth of businesses, and the productivity and global competitiveness of a country’s economy, it was determined that business and government should work together to foster innovation.
In its 2015-2018 Strategic Vision, the Commissioner noted that it is crucial that the Bureau keep pace with the changes wrought by new technologies and business innovations on the Canadian marketplace. The Bureau recognized that “Canadian consumers have shown interest in stronger competition and more choice through their rapid adoption of innovative products and services in both regulated and non‑regulated sectors,” and committed to prevent anti-competitive conduct that could impede the development of innovation. With the growth of the digital economy, the Bureau also pledged to take action against fraudulent and deceptive advertising in online and mobile markets. Due to the often international nature of these activities, the Bureau stressed its willingness to cooperate with international agencies to accomplish these objectives.
Building on its three-year Strategic Vision, the Bureau released its 2016-2017 Annual Plan in July 2016. Titled “Strengthening Competition to Drive Innovation,” the plan lays out the Bureau’s priorities and objectives for the coming year. In it, the Commissioner notes that disruptive technologies are often the result of competition: “Competition foster the drive to launch products and services that are faster, better, cheaper, more convenient and fulfil the needs of companies and consumers.” He also notes the unique role of the Bureau as not only the enforcer of Canada’s competition law but also that of an advocate for competition, striving to ensure that regulators promote healthy competition that leads to innovation.
The Bureau identified a number of areas of focus for the current year that touch on innovation, including:
Another area of focus in the Annual Plan was to hold further workshops on competition and innovation. On January 19, 2016 the Bureau hosted a workshop on emerging competition issues that examined disruptive business models and their impact on competition policy, and how to incorporate non-price effects in competition analysis. With regard to the latter, the workshop report noted that this issue has taken on greater importance as a result of the recent Supreme Court of Canada decision that discussed the efficiencies defence in the Competition Act.1
The Competition Bureau has traditionally examined non-price effects – including quality, innovation, consumer choice, diversity of business models, convenience – in merger cases, but they have traditionally been difficult to quantify. The Supreme Court’s Tervita decision stated that a substantial lessening or prevention of competition may be proved by qualitative evidence. They added, however, where the merging parties have advanced an efficiencies defence under section 96 of the Act, there will be an additional quantitative burden as the Bureau will be required to quantitatively estimate “all quantifiable anti-competitive effects” where possible. It was acknowledged by workshop participants that this may be difficult to do in practice with non-price effects.
A 2016 decision of the Competition Tribunal also looked at the impact of anti-competitive conduct on innovation.2 In 2011, the Commissioner challenged certain rules of the Toronto Real Estate Board (TREB), a trade association for real estate agents in Canada’s largest city, that restricted how its member agents could provide information to consumers. This included information on historical listings and sale prices. In the Commissioner’s view, these rules amounted to an abuse of dominance in that they denied agents the ability to introduce new and innovative real estate brokerage services using the internet.
The Tribunal agreed with the Commissioner, finding that the restrictions substantially prevent competition in the supply of residential real estate brokerage services in Toronto. Removing the restrictions would allow member agents to offer a broader array of innovative and higher quality services at a lower cost. In a recent speech,3 the Commissioner welcomed this decision and “the strong message it sends about the role of competition and innovation in the Canadian marketplace. The Tribunal noted that dynamic competition, including innovation, is the most important type of competition, and consumers are deprived of the enhanced services when TREB members are shielded from disruptive competition. The decision provides the Bureau with important jurisprudence regarding the scope of section 79 of the Competition Act, and paves the way for enforcement action dealing with non‑price effects and innovation.”
As noted above, one of the roles that the Commissioner has focused on is to advocate for pro-competitive regulations to encourage innovation. In the 2015 fiscal year, the Bureau undertook 23 advocacy-related activities, of which 9 were formal interventions using its authority under the Act to appear before boards, commissions and tribunals. The balance were written submissions, meetings and presentations. One of the most high-profile interventions that the Bureau has undertaken occurred in 2015, and the Commissioner has described it as “perhaps the most discussed and most impactful advocacy work we have done to date.” Like many jurisdictions throughout the world, Canadian cities have been grappling with the impact of new ride-sharing applications such as Uber and Lyft on their taxi industries, which traditionally were subject to significant regulation. For example, between 2012 and 2015, the City of Toronto laid 208 charges against 104 Uber drivers. The City of Ottawa laid 142 charges against unlicensed drivers believed to be Uber drivers between October 2014 and August 2015. In the City of Montreal, some 200 vehicles were seized for allegedly being operated as illegal ride-sharing.
In 2015 the Bureau released a white paper, Modernizing Regulation in the Canadian Taxi Industry,4 that called on regulators to review taxi regulations to allow ride-sharing services to compete on an even playing field. This would permit consumers to benefit from what are typically lower fares, and an often improved customer service experience. Services such as Uber allow for greater transparency with consumers being able to see the location and estimated arrival of their car. The Bureau has called on regulators to recognize that incumbents facing challenges from disruptors often react by calling on regulatory bodies to impose rules that raise barriers to entry or otherwise impede the ability of these innovators to operate. Doing so would, in the Bureau’s view, “stifle competition or innovation.” The white paper called for a leveling of the playing field by reconsidering whether “needlessly burdensome regulations…such as rigid fare structures and restrictions on the number of taxis that can operate” are necessary. In this manner, all players – taxis and ride-sharing services – would need to play by the same rules.
A final example of the Bureau’s innovation-related advocacy efforts is a recently-launched market study into technology‑led innovation in the Canadian financial services (FinTech) sector. The purpose of the study is to “enable the Bureau to advise and guide financial sector regulators and other relevant authorities on how to ensure that regulation does not unnecessarily impede innovation and competition in the sector.” The Bureau chose this sector in part because “the FinTech landscape is rapidly evolving as new products and services are being unveiled and the number of start‑ups entering the industry grows. FinTech holds the potential to disrupt financial services, spur innovation, and generate benefits for individuals and companies across Canada.”
As stated in the Market Study Notice,5 the study will strive to answer the following questions:
The Bureau consulted stakeholders and undertook preliminary research over the summer of 2016. They will work to compile and analyse information through the fall of 2016 and decide whether to continue with the study or revise its scope. The expectation is that a report will be released in spring of 2017 in the event the study proceeds.
In his opening remarks6 to the 2016 workshop on emerging competition issues, the Commissioner noted that policymakers, regulators and enforcers have a duty “to nurture innovation and keep pace with changing times.” It is clear that the Commissioner intends to maintain a highly active advocacy program in the coming years to ensure policymakers and regulators do not impose needlessly burdensome rules, and take the opportunity to review and repeal any outdated rules. Through a combination of enforcement to prevent or deter anti-competitive conduct that may thwart innovation, market studies and other advocacy efforts, it is hoped that the Commissioner can do his part to achieve his goal of creating “an environment which nurtures competition, innovation and economic development.”
What are the misconceptions and what should be done to recalibrate functional claiming standards accordingly?
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