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Tap runs dry in beer class action

The Ontario Superior Court recently dismissed a Competition Act class action against the Liquor Control Board of Ontario, The Beer Store and three of its shareholders Labatt, Molson Coors and Sleeman.

In Hughes v. Liquor Control Board of Ontario, the plaintiffs, a restaurant called The Poacher and its owner, had commenced a $1.4 billion damages action alleging, among other things, that the defendants divided the market for beer contrary to s. 45(1)(b) of the Competition Act. Section 45(1)(b) makes it a criminal offence for two or more competitors to allocate sales, territories, customers or markets for the production or supply of a product.

More specifically, the plaintiffs claimed that a 2000 Beer Framework Agreement between the LCBO and The Beer Store, which provided that the LCBO would not sell beer in packages greater than six containers in some of its stores or beer exclusively sold by The Beer Store, constituted an illegal market allocation agreement on which they could sue and recover damages under s. 36 of the Competition Act. Under s. 36, civil plaintiffs may commence damages actions or class actions for the violation of any of the criminal offences of the act or the failure to comply with a competition tribunal or court order under the act.

In reply, the defendants argued that the Beer Framework Agreement was insulated by the regulated conduct defence based, among other things, on 2015 amendments to the Liquor Control Act that declared that the LCBO is deemed to have been directed and The Beer Store is deemed to have been authorized to enter into the agreement.

The RCD, which is former common law doctrine now partially codified under s. 45(7) of the Competition Act, is routinely invoked in competition law cases where there is a question as to whether conduct that would otherwise violate the Competition Act is shielded by federal or provincial legislation. 

The case law to date has held that in order for the RCD to apply, all of the following requirements must be met: (i) there is valid provincial or federal legislation; (ii) conduct is legislatively mandated or authorized; (iii) the authority to regulate has in fact been exercised; and (iv) the regulated scheme has not been hindered or frustrated by the conduct (or used as a shield to engage in anti-competitive conduct).

There remain, however, a number of uncertainties about the scope and application of the RCD. These include whether the RCD is a defence or exception, the level of legislative authorization needed to invoke the RCD (i.e., whether conduct must be mandated or may be merely authorized) and whether the doctrine applies equally to the civil reviewable matters sections of the Competition Act as it does to criminal offences.

In this case, the court held that the RCD did indeed apply to insulate the marketing agreement between the LCBO and The Beer Store based on the LCBO’s legislative powers under the Liquor Control Act to authorize The Beer Store to operate its stores, control the sale and delivery of beer and establish specific terms and conditions relating to the sale of beer. The court also found that the 2015 amendments to the Liquor Control Act made it expressly clear that the defendants could agree to allocate sales of six-packs, 12-packs and 24-packs of beer.

In coming to its decision, the court made a number of interesting points.

First, the court held that in order for the RCD to apply, conduct that may otherwise violate the Competition Act may be legislatively mandated, directed or authorized. This is not new law. However, it is noteworthy in that it reaffirms one of the key uncertainties relating to the RCD — namely, whether conduct must be expressly mandated or merely authorized in order to apply. In this regard, this case follows some earlier ones, which are sometimes referred to as the “high water mark” of RCD jurisprudence, in which conduct was not required to be expressly mandated in order for the doctrine to apply (particularly, the Jabour case: Canada (Attorney General) v. Law Society (British Columbia), 1982 CarswellBC 133 (S.C.C.)). In Jabour, benchers of the Law Society of British Columbia were merely broadly authorized to determine conduct unbecoming lawyers (in this case certain types of advertising, which was enforced through discipline and not any specific rule).

Second, the court held that in order for the RCD to apply, separate and formal legislative action is not required if a regulator already has the regulatory authority to take actions that might otherwise violate the Competition Act (in this case, the LCBO’s authority to enter into contracts such as the Beer Framework Agreement).

Third, the court held that conduct that might otherwise be criminal can be validly authorized by retroactive legislation. This is quite interesting and on my recollection of RCD case law, this is new law.  Given, however, that the RCD is largely a doctrine of statutory interpretation, this holding is arguably consistent with the requirement that in order for the RCD to apply conduct must be either mandated or authorized by valid legislation.

Finally, and perhaps most interesting, is that the court held that the RCD applied equally to civil actions commenced under s. 36 of the Competition Act as to criminal prosecutions under s. 45 (the conspiracy section of the Act).  The court came to this conclusion by analyzing the French version of s. 45(7) (which codifies the RCD for s. 45), which refers to both criminal and civil proceedings.

Overall, the Hughes case is interesting both as an example of the types of regulated activities that may be immune from Competition Act challenge and as well as a reminder for counsel that the potential application of the RCD must be carefully reviewed in cases that involve regulated entities.  This case is, as well, a useful precedent for defendants to argue that activities that may otherwise be illegal under the Competition Act (or subject to civil liability) should be shielded based merely on legislative authority, where no specific rule exists mandating activities.