On March 3, 2023, the Competition Tribunal (“Tribunal”) published an information note advising that it had granted in part the application pursuant to section 92 of the Competition Act (Canada) of the Commissioner of Competition (“Commissioner”) seeking relief with respect to the acquisition (the “Merger”) by SECURE Energy Services Inc. (“Secure”) of Tervita Corporation (“Tervita”). Subsequently, on March 23, 2023, the Tribunal released its decision.

The Commissioner prevailed by showing that the Merger substantially lessened competition in 136 of 143 markets. The Tribunal concluded, subject to the efficiencies defence, that the divestiture of 29 facilities would be required to restore competition (the Commissioner had sought the divestiture of 41 facilities). Because Secure failed to prove that the relevant efficiencies generated by the Merger (that would be lost if the divestitures were ordered) would offset the anti-competitive effects, the Tribunal ordered the 29-facility divestiture. Secure is appealing the decision, but for now, at least, the important takeaways from this Tribunal decision are:

• The Commissioner successfully substantiated the anti-competitive effects of the Merger, which has been a challenge in many past merger challenges – this confirms that the Competition Act is effective for this purpose;
• Secure claimed that the gain in efficiencies offset the lessening of competition brought on by the Merger. The invocation of the efficiencies defence failed to defeat the Commissioner’s challenge. This case shows how very carefully the Tribunal will consider the efficiencies evidence adduced by merging parties. Where the evidence is not clear and convincing, the Tribunal will discount and dismiss purported efficiencies. Stated differently, the efficiencies defence is not a “silver bullet” defence; and
• The Tribunal also stated that, in the future, parties invoking the efficiencies defence will be expected to establish the location of their shareholders (no such evidence was adduced in this case, despite questioning by the Tribunal). The Tribunal’s proactive insistence on this evidence in the future reinforces past Tribunal assertions that savings that flow through to foreign shareholders will not qualify as efficiencies under the Competition Act.

From a legal perspective, the decision is noteworthy because the Tribunal took the opportunity to clarify certain intricacies of the efficiencies defence. From a practical point of view, the decision demonstrates that it is incumbent on parties invoking the efficiencies defence to ensure that evidence adduced is “clear and convincing” to avoid the risk that critical claimed efficiencies are dismissed.

Oilfield Waste Disposal Services: Industry Overview

Secure is (and Tervita was) a provider of oilfield waste disposal services in the Western Canadian Sedimentary Basin, a geological formation housing substantial oil and gas reserves that spans from Manitoba to British Columbia.

Various forms of waste are produced in connection with the development, operation, remediation and reclamation of oil and gas wells including waste water, sludge, drill cuttings, contaminated soil and other chemicals. Companies like Secure process different types of waste at different types of facilities. For the purposes of this application, the Commissioner focused on four types of facilities, namely: treatment recovery and disposal facilities (“TRDs”), industrial landfills, caverns, and water disposals wells.

TRDs process contaminated fluids that contain mixtures of solids, oil and water. At the TRD, each of the solids, water, and oil components are separated. The oil is a useful byproduct that can be utilized by oil and gas suppliers. The water is disposed of at a disposal well (often incorporated into the TRD), while the solids are separately disposed of at an industrial landfill.

Industrial landfills dispose of solid waste. This includes waste from TRDs but also includes solid waste directly produced by and collected from oil and gas customers (e.g., drill cuttings). Depending on the province, different regulatory requirements apply to landfills that dispose of different forms of oilfield waste. Certain types of solid and liquid waste can be disposed of in underground caverns.

The Commissioner submitted that transportation costs are a defining feature of oilfield waste removal services, as suppliers of such services can and do price discriminate among their customers. In particular, the Commissioner submitted that, because transportation costs constrain the ability of customers to haul waste to disposal facilities that are distant from the location where the waste is produced, the geographic location of where the waste is produced is an important factor to determine the price of disposal.

Market Definition

The Tribunal began its analysis by identifying the relevant product markets. The Tribunal accepted the Commissioner’s proposed product markets, preferring to consider certain potential substitutes proposed by Secure later in the competitive effects analysis.[1] These markets were:

• (i) waste processing and treatment services by TRDs;
• (ii) the disposal of solid oil and gas waste into industrial landfills;
• (iii) the disposal of produced and waste water into water disposal wells owned by third party Waste Service providers (so-called standalone disposal wells, or “SWDs”).[2]

With respect to the geographic scope of those markets, the Commissioner’s primary expert conducted an analysis based on the locations of customers served by each facility to identify 271 distinct areas in which Secure and Tervita (prior to the Merger) were competitors of one another with respect the products identified above.[3] This methodology was accepted by one of Secure’s responding experts, who described product and geographic market definition to be “key areas of agreement” between her and the Commissioner’s key expert.[4]

Substantial Lessening of Competition

Section 92 requires the Commissioner to demonstrate that the impugned transaction resulted in a substantial lessening of competition (“SLC”). This analysis was more contentious but, overall, the Tribunal favoured the Commissioner’s evidence.

To begin to identify relevant markets, the Commissioner’s primary expert applied two screens to the 271 local overlaps identified above: (i) a post-Merger market share screen of 35%; and (ii) an estimated price increase screen of 5%.[5] This yielded 143 distinct markets (the “Relevant Markets”).[6] Of these, the Commissioner identified 17 markets where Secure would be the only participant left (“2-to-1s”), 30 where Secure would be one of 2 (“3-to-2s”) and 96 where there would remain at least 2 other competitors (“4-to-3+s”).

The Commissioner refined this structural analysis with further quantitative evidence. The Tribunal accepted the Commissioner’s evidence on market shares,[7] diversion ratios,[8] and margins (once updated in response to Secure’s critique),[9] describing each as “high”.

Further, with respect to post-merger pricing, the Commissioner’s primary expert tendered a model that predicted price increases of 5.2-72.30% across the Relevant Markets.[10] The Tribunal preferred this model over that presented in Secure’s expert evidence.[11]

Ultimately, there was no dispute between Secure and the Commissioner that the estimated price effects of the merger in the 2-to-1 markets and the 3-to-2 markets were likely to exceed 5%.[12]

The Tribunal proceeded to consider qualitative factors to form a conclusion on whether there was an SLC with respect to the 4-to-3+ markets. The Tribunal undertook a detailed analysis of the remaining competitors in each potential 4-to-3+ market. The panel noted the importance of the maps provided by Secure in conducting its analysis, which allowed the Tribunal to avoid making “inferences […] favourable to the Commissioner”.[13] The Tribunal ultimately identified effective remaining competition in 2 TRD markets and 5 SWD markets, narrowing the number of markets where an SLC could arise to 136.

Considering other qualitative factors, the Tribunal found that the Merger eliminated a close, vigorous competitor,[14] that there were no acceptable substitutes for any of the services considered,[15] that there were substantial barriers to entry into the Relevant Markets,[16] that the threat of new entry is not likely to be sufficient to discipline any lessening of competition,[17] that customers are not generally able to effect lower prices via countervailing power,[18] and that Secure could price discriminate based on the distance between its facilities and customers’ locations.[19]

Ultimately, the Tribunal concluded that an SLC was made out in 136 markets (the “SLC Markets”)

Divestiture Analysis

The Commissioner sought the divestiture of all 41 Tervita facilities that served the SLC Markets (8 landfills, 26 TRDs, two caverns, and 5 SWDs).[20] Secure highlighted the problems with this broad request, arguing that it went beyond what would be reasonably necessary to return competition to the point where it could no longer be considered to be substantially less than it was before, and sought to “recreate Tervita”.[21] The Tribunal agreed with Secure. It closely analyzed each overlapping market to assess which divestitures would be required for an effective remedy. In doing so, the Tribunal once again emphasized the importance of the maps provided by Secure to this exercise.[22]

Ultimately, the Tribunal trimmed the required divestitures down to 29 facilities (6 industrial landfills, 17 TRDs, 2 caverns, and 4 SWDs) from 41.[23]

Clarifying Efficiencies

Secure sought to avail itself of the efficiencies defence (section 96 of the Competition Act). Subsection 96(1) states:

96 (1) The Tribunal shall not make an order under section 92 if it finds that the merger or proposed merger in respect of which the application is made has brought about or is likely to bring about gains in efficiency that will be greater than, and will offset, the effects of any prevention or lessening of competition that will result or is likely to result from the merger or proposed merger and that the gains in efficiency would not likely be attained if the order were made.

The overall framework of section 96 balances certain efficiencies resulting from the Merger against the anti-competitive effects of the merger.

The first step of the section 96 requires the party availing oneself of the defence to demonstrate, with clear and convincing evidence, certain specified efficiencies. The jurisprudence establishes a number of “screens” as to what efficiencies are properly “cognizable”. Two of these screens were the subject of discussion in this case.

The first screen that was disputed in this case is found in the text of section 96 itself, which requires the party making use of the defence to show that “the gains in efficiency would not likely be attained if the order were made.” This qualification proved to be a substantial source of controversy in this proceeding.

Secure argued that the proper test is that “all efficiencies likely to be brought about by the merger are cognizable under section 96”.[24] In support of this proposition, Secure cited the Supreme Court of Canada’s decision in Tervita, which described section 96 as precluding “the Tribunal from making an order where it finds that the merger is likely to bring about gains in efficiency that would be greater than and would offset the anti-competitive effects resulting from the merger”.[25]

Chief Justice Crampton disagreed with Secure’s interpretation, concluding that section 96 appropriately discounts “efficiencies that would likely be attained through alternative means if the Tribunal were to make the order that it determines would be necessary to ensure that the merger in question does not prevent or lessen competition substantially”.[26] He held that this reading was consistent with the plain meaning of the provision as well as the purpose of the Competition Act.[27] Further, from a policy perspective, he held that this interpretation focuses section 96 on the actual cost of making the order.[28]

The second screen highlighted by the Tribunal concerned foreign shareholders. The Tribunal’s decisions in Parrish & Heimbecker and Tervita establish that efficiencies that flow to foreign shareholders are to be discounted.[29] However, in this case, the Tribunal took one step further and actively inquired into the locations of Secure’s shareholders. While ultimately no evidence was adduced on this point, the Tribunal explicitly stated: “In the future, the party invoking the efficiencies defence will be expected to establish, on a balance of probabilities and with clear and convincing evidence, the location of its shareholders”.[30]

The Evidence on Efficiencies

Notwithstanding the legal dispute over cognizable efficiencies, the bulk of the efficiencies adduced by Secure were eliminated as a result of the Tribunal’s concerns that they were not established on the balance of probabilities.

Secure’s efficiencies expert began with an estimate of approximately $138.5 million (adjusted by the Tribunal to $140.6 million to account for its modified divestiture order).[31] By far the largest adjustment to this figure arose from the Tribunal’s consideration of fixed cost savings from facility rationalizations (that is, higher utilization of one’s capital by closing a plant and diverting its prior customers to another plant one owns).

The Tribunal identified two problems with Secure’s evidence on facility rationalizations. First, in order to determine fixed costs savings, Secure’s efficiencies expert needed to correct for variable costs. The Commissioner was able to demonstrate that there were errors in this adjustment which tainted Secure’s calculations.[32] Second, the Tribunal held that determining the total benefit of consolidating one facility with another needs to account for the comparative variable costs at each facility. The evidence suggested that there were meaningfully different variable costs across different facilities, but that this was not accounted for in the analysis.[33] Because these issues pervaded the facility rationalization analysis, the Tribunal deducted $75.7 million in fixed cost savings from Secure’s claimed efficiencies.[34]

The next largest adjustment concerned efficiencies flowing from corporate cost allowances. They were adjusted in two ways, both of which flowed from the Tribunal’s earlier holding that section 96 concerns efficiencies that “would not likely be attained if the order were made”. First, the Commissioner’s efficiencies expert explained that certain cost savings related to employees that would have been rendered redundant by any divestiture buyer, and, therefore, said efficiencies would be realized by another party if the divestiture order were to be made.[35] The Tribunal accepted this, and discounted Secure’s claimed efficiencies by approximately $23 million.[36]

Second, Secure’s efficiencies expert identified forgone efficiencies premised on the assumption that Secure would be ordered to divest the 41 facilities that the Commissioner sought to divest (rather than the 29 that the Tribunal identified). The Tribunal ‘scaled down’ Secure’s forgone efficiencies to account for the fact that Secure would be able to realize efficiencies from 12 of those facilities, after all.

Ultimately, factoring these adjustments (along with a few smaller ones), the Tribunal reduced Secure’s claimed $138.5 million in cognizable gains in efficiency to approximately $32,205,813 ($4,618,433 on an annualized basis).[37]

Anti-Competitive Effects

The second stage of the efficiencies analysis requires one to weigh the cognizable efficiencies against the anti-competitive effects of the Merger. Just as cognizable efficiencies were subject to dispute at the first stage of the test, so too was the appropriate scope for anti-competitive effects subject to legal argument at this second stage.

One key dispute concerned the scope of the anti-competitive effects that are relevant to the analysis. While Secure sought to limit the scope of the anti-competitive effects inquiry, the Commissioner argued that the inquiry can extend beyond the markets in which the SLC is identified (and, indeed, beyond markets in which the parties ever were competitors). [38]

Ultimately, the Tribunal held that section 96 anti-competitive effects can extend beyond the 136 SLC Markets. The Tribunal held that it was appropriate to consider anti-competitive effects flowing from the 271 local overlaps, as Secure and Tervita were previously competitors in those areas, but that the scope cannot be extended any further. The Tribunal reasoned that, because section 96 contemplated weighing efficiencies against “any prevention or lessening of competition”, any impact on competition across all 271 local overlaps where Secure and Tervita were previously competitors would be relevant to the analysis.[39]

This impacted the Commissioner’s evidence concerning the anti-competitive effects of the transaction.

The Commissioner adduced limited evidence on anti-competitive effects in the form of increased prices or reduced output (the “Price/Output Effects”) that would result from the Merger. The Commissioner’s primary expert provided an estimate which, adjusted by the Tribunal, resulted in $0.5-1.5 million in annualized Price/Output effects.[40]

The bulk of the anti-competitive effects alleged by the Commissioner were in the form of non-price anti-competitive effects (“Non-Price Effects”), with the primary line item being the additional transportation costs customers would need to incur to transport their waste further when travelling to more distant facilities owned by Secure.

The Tribunal ultimately rejected both models proposed by the Commissioner to determine the Non-Price Effects, one of which was based on variable cost and the other of which was based on market share. The first model was rejected in part because it would have captured effects of the Merger in areas beyond the 271 areas of pre-Merger overlap between Secure and Tervita. Instead of using “top down” approaches such that these, the Tribunal reasoned “bottom up”.

The “only persuasive estimate” the Tribunal gleaned from the Commissioner’s expert evidence was that the Merger would result in $7,200,000 in increased transportation costs assuming a divestiture of all 41 facilities.[41] From this figure, the Tribunal applied a discounting method from one of the models it had previously rejected to account for the divestiture of 29 facilities, yielding a value of approximately $2,808,132 per year.[42]

Ultimately, accounting for other smaller adjustments, the panel identified the combined Price/Output Effects and Non-Price Effects demonstrated by the Commissioner to be in the range of approximately $30,219,522 to at least $39,354,443 on a net present value basis, or $4,333,591 to at least $5,643,572 on an annualized basis.[43]

An Overlapping Range

The Tribunal concluded by weighing the range of anticompetitive effects (on an annualized basis, $4,333,591 to at least $5,643,572) against cognizable gains in efficiency (approximately $4,618,433 on an annualized basis).

Despite the overlap between the Commissioner’s range and the respondent’s proven efficiencies, the Tribunal declared the case a win for the Commissioner. It held that “in order for a respondent relying upon the efficiencies defence to meet the “likely” element of section 96, it must demonstrate, on a balance of probabilities, that the cognizable Foregone Efficiencies will be greater than, and will offset, the entire range of likely anti-competitive effects that the Tribunal has determined”.[Emphasis added][44]

Takeaways

The result in this case provides a number of key takeaways:

• Efficiencies are not a ‘silver bullet’ defence. Once again, contrary to the Commissioner’s insistence that the efficiencies defence is frustrating his enforcement priorities, this case represents yet another recent merger challenge in which the defence did no such thing. Despite a contested record, and, indeed, a range of anticompetitive effects that overlapped with the proven efficiency gains, the Commissioner nevertheless prevailed. The problems that Secure faced in concretizing its efficiency gains demonstrate the hurdles inherent in availing oneself of the defence. This will only prove more difficult now that the Tribunal has expanded the test to allow anti-competitive effects beyond the markets where an SLC has been demonstrated to be weighed against cognizable efficiencies. This decision comes at a potential turning point for the efficiencies defence, as the government is presently considering whether to amend the Competition Act to make efficiencies merely one factor to be considered rather than a complete defence.
• The Importance of Non-Price Effects. The Tribunal noted Secure’s objections that non-price effects have no basis “in law, economics, or fact”, but has now breathed life into them. Practitioners should be aware that non-price effects may grow in importance in the wake of this decision.
• Utilizing the Efficiencies Defence May Require Respondents to Adduce Information on Shareholders. The Tribunal’s decisions in Parrish & Heimbecker and Tervita both detail that claimed efficiencies are not cognizable if they flow to foreign shareholders.[45] However, in this case, the Tribunal took one step further and actively inquired into the locations of Secure’s shareholders. While ultimately no evidence was adduced on this point, the Tribunal explicitly stated: “In the future, the party invoking the efficiencies defence will be expected to establish, on a balance of probabilities and with clear and convincing evidence, the location of its shareholders”.[46]
• The Importance of Evidence on Local Markets. The panel in this case emphasized that, where the Tribunal must conduct a local analysis, the transacting parties may wish to provide aids such as maps to the Tribunal. Should they withhold such information, they “do so at their own peril”, risking that the Tribunal will simply rely on “market shares/concentration and the qualitative assessment factors listed in section 93 of the Act, from which inferences that are favourable to the Commissioner may be made.”[47] In this case, the Tribunal not only used this evidence to narrow the number of markets in which an SLC could arise, but also to limit its remedial order.

For more information, please consult our Competition/Antitrust & Foreign Investment Group.

[1] Canada (Commissioner of Competition) v Secure Energy Services Inc, 2023 Comp Trib 02, paras 125-132. [Secure]

[2]Secure, 2023 Comp Trib 02, para 132.

[3] For a detailed chart broken down by product market and market structure, see: Secure, 2023 Comp Trib 02, para 147.

[4]Secure, 2023 Comp Trib 02, para 145.

[5]Secure, 2023 Comp Trib 02, para 148.

[6]Secure, 2023 Comp Trib 02, para 148.

[7] For a table of the shares in the Relevant Markets, see: Secure, 2023 Comp Trib 02, paras 153-156.

[8]Secure, 2023 Comp Trib 02, paras 186, 189

[9] For all geographic overlaps. See: Secure, 2023 Comp Trib 02, paras 194, 200.

[10]Secure, 2023 Comp Trib 02, para 201.

[11]Secure, 2023 Comp Trib 02, para 212.

[12]Secure, 2023 Comp Trib 02, para 213.

[13] For the comments concerning maps, see: Secure, 2023 Comp Trib 02, paras 259, 260. For completeness, note that the Tribunal also confirmed that there was insufficient competition to restraint Secure’s market power in the 2-to-1 and 3-to-2 markets. See: Secure, 2023 Comp Trib 02, paras 249, 253.

[14]Secure, 2023 Comp Trib 02, para 231.

[15]Secure, 2023 Comp Trib 02, paras 290-292.

[16]Secure, 2023 Comp Trib 02, para 330.

[17]Secure, 2023 Comp Trib 02, para 330.

[18] Two separate theories were rejected, one where customers would exert “geographic leverage” by switching away from Secure in areas where they had more competitors, and a second where customers would threaten to “self supply” as a bargaining chip. See: Secure, 2023 Comp Trib 02, paras 337, 350.

[19]Secure, 2023 Comp Trib 02, para 357.

[20]Secure, 2023 Comp Trib 02, paras 386, 387.

[21]Secure, 2023 Comp Trib 02, para 387.

[22]Secure, 2023 Comp Trib 02, para 389.

[23]Secure, 2023 Comp Trib 02, paras 478-482.

[24]Secure, 2023 Comp Trib 02, para 499.

[25]Tervita Corp. v. Canada (Commissioner of Competition), 2015 SCC 3, paras 17, 48.

[26]Secure, 2023 Comp Trib 02, para 497.

[27]Secure, 2023 Comp Trib 02, paras 502-503.

[28]Secure, 2023 Comp Trib 02, para 504.

[29]Canada (Commissioner of Competition) v Parrish & Heimbecker, Limited, 2022 Comp Trib 18, para 657; Commissioner of Competition v. CCS Corporation et al., 2012 Comp. Trib. 14, para 262.

[30]Secure, 2023 Comp Trib 02, para 496.

[31]Secure, 2023 Comp Trib 02, para 548.

[32]Secure, 2023 Comp Trib 02, paras 569, 570.

[33]Secure, 2023 Comp Trib 02, paras 574, 580.

[34]Secure, 2023 Comp Trib 02, para 598.

[35]Secure, 2023 Comp Trib 02, paras 604, 607-609.

[36]Secure, 2023 Comp Trib 02, para 610.

[37]Secure, 2023 Comp Trib 02, para 628.

[38]Secure, 2023 Comp Trib 02, para 521.

[39]Secure, 2023 Comp Trib 02, para 524.

[40]Secure, 2023 Comp Trib 02, paras 667-668.

[41]Secure, 2023 Comp Trib 02, para 694.

[42]Secure, 2023 Comp Trib 02, paras 698-699.

[43]Secure, 2023 Comp Trib 02, para 707.

[44]Secure, 2023 Comp Trib 02, para 713.

[45]Canada (Commissioner of Competition) v Parrish & Heimbecker, Limited, 2022 Comp Trib 18, para 657; Commissioner of Competition v. CCS Corporation et al., 2012 Comp. Trib. 14, para 262.

[46]Secure, 2023 Comp Trib 02, para 496.

[47]Secure, 2023 Comp Trib 02, para 260.