Some men have wives who drag them shopping, some women have husbands who drag them to football games (and, of course, vice-versa). I have a wife who drags me to the Canadian Economics Association's annual conference, which is fair because she's an economist. I don't mind going to the occasional economics conference, though it's probably a less than good thing if you get stuck beside me on an airplane.
While she went to the keynote address, I went to watch three economists (Roger Ware, Ralph Winter and Andy Baziliauskas) and one lawyer (Adam Fanaki) discuss the Supreme Court of Canada's recent decision in Tervita Corp. v. Canada (Commissioner of Competition).
Tervita involved a completed merger – one that's relatively tiny, for competition law purposes – between two hazardous waste landfill companies in Northern British Columbia. Tervita bought Complete Environmental Inc, a company that owned another company that had permits to develop a landfill site, one which would compete with Tervita. The Commissioner appealed to the Competition Tribunal to have the merger blocked on the theory that Tervita purchase of a potential competitor stopped the competitor from entering the market, and hurt competition. The Tribunal agreed with the Commissioner and issued a divestiture order, leading to a series of appeals and, ultimately, a hearing by the Supreme Court.
The Supreme Court held in Tervita's favour, setting aside the divestiture order and allowing the merger, finding that the merger would lead to marginal efficiency gains. The court found that in making its argument that although the merger would not lead to increased economic efficiencies, the Commissioner had failed to quantify all quantifiable anti-competitive effects of the merger. That, the court found, injected too much subjectivity into the analysis and relied too much on qualitative evidence, which should only be considered once quantitative evidence is set forth.
One would think that a panel of economists would be largely supportive of a decision that placed such a large premium on quantitative analysis. But no, the economists were all deeply critical of the decision. So why would a group of economists, whose power the Supreme Court has just deigned to increase, be so reticent about their increased clout?
To understand why requires some grasp of how the Competition Act works. The Competition Act uses a two-step test to decide whether a merger should be blocked. First, the Act asks whether a merger prevents or substantially lessens competition. Second, the Competition Tribunal or Court investigates whether the economic efficiencies of the merger outweigh the competition-lessening effects of the merger.
From an economic perspective, this is a sensible method of analysis. Monopolies earn outsized profits by reducing the supply of a good and increasing its price, relative to what you would see in a competitive market. This reduction in output represents an overall loss to the economy – what economists call the "deadweight" loss of a monopoly. Essentially, there are units of a good that producers could afford to supply and consumers would like to buy but that are not being produced. Generally, not a good thing.
But monopolies aren't all bad. Scale brings with it all sorts of economic efficiencies that can be beneficial to consumers, so prohibiting all mergers that have anti-competitive effects would also block some mergers that have net economic benefits. Quite sensibly, then, Canadian competition law weighs the two factors against one another and asks whether the deadweight loss of a merger is greater than its scale efficiencies. If the deadweight loss associated with a merger outweighs its efficiencies, the Competition Tribunal or court blocks the merger; if the economic benefits outweigh the losses, the merger should proceed.
This requires evidence of either what would happen in absence of the merger ("but for" the merger, as the lawyers say) or what will happen after the merger takes place. And this always involves asking economists to provide quantitative analysis that puts a number on the deadweight loss and potential economic efficiencies. In Tervita, the Court found that this inequality must always be quantified by the Commissioner, and that the Commissioner had failed to meet this burden. In particular, the Commissioner did not quantify "price elasticity," an economic concept used to calculate deadweight loss, and only calculated the potential price decrease that Complete's entry into the market may have caused, leading the Court to find that it was impossible to assess the deadweight loss of the merger.
The panellists at the economic conference I watched forwarded the notion that, in imposing a requirement to "quantify all quantifiable anti-competitive effects" before introducing qualitative evidence, the Supreme Court was asking too much of economic theory. While quantification may look objective from a distance, in the economic weeds, it's not as concrete a standard. Simply because something is quantifiable in principle does not mean that it is quantifiable in fact.
Quantification without adequate data, which is often not available, leads to large errors, and creates the false appearance of precision. Requiring that such evidence be presented and analyzed prior to qualitative evidence – for example, asking suppliers what the effect of a merger may be – could exclude valuable evidence from trial and constrain the Commissioner's ability to set forth a strong case. The economists agreed with Justice Karakatsanis's dissent that such an approach could lead to an illusory objectivity and that the Commissioner's analysis of the loss from the merger should not have been rejected wholesale due to the failure to estimate price elasticity.
In short, courts should be able to look at all evidence, even if one side hasn't engaged in an entirely exhaustive quantitative economic analysis. This is especially true in cases like Tervita, where quantifiable efficiency gains were marginal and possibly within margins of error.
All that said, there is good reason for the majority decision – unwinding mergers is serious business, and a quantification standard will likely mean that only the strongest cases move forward. But it's also a relief to hear a room full of economists admit that they don't have all the answers and that they're uncomfortable with the law asking them to.
The upshot of the decision is that, in competition law, Tervita is a radioactive spider and economists now have Spiderman-like powers. Though I have to admit, it's refreshing to hear members of a profession admit that there are limits to their powers, because I somehow doubt that the Canadian Bar Association would be willing to do the same.
Adrian Myers is a lawyer at Torkin Manes LLP.
Adrian Myers