Federal Court decision sheds light on the difference between unlawful conspiracies and “conscious parallelism”.
You pull up to a major intersection. There’s a gas station on every corner. You notice one of the stations is raising the price on its sign by a few cents higher than its competitors. Later, you drive past the same corner again and all four stations are now advertising that new higher price.
Is this evidence of a conspiracy (under the Competition Act[1])?
The manufacturing business for DRAM computer chips is an oligopoly controlled by three companies. After years of steady declines, the prices of DRAM chips across the industry suddenly reversed course and began a sharp ascent to record highs, for all types of DRAM and all markets.
Is that evidence of a Competition Act conspiracy? And is it sufficient evidence to pursue a class action?
Your inclination may have been to quickly dismiss the gas station example as nothing more than rival businesses, lawfully, jockeying to maximize profits. But in the case of the high-level price matching of computer chips by international corporations perhaps you may have had a sinking suspicion that the activity was more likely consistent with collusion.
Based on a recent decision of the Federal Court in the case of Jensen v Samsung Electronics Co. Ltd,[2] the question of whether there is evidence of a conspiracy is the same in either situation.
Where there is an absence of evidence or material facts pointing to any agreement between competitors, price-matching between rival businesses is nothing more than “conscious parallelism” and is insufficient to bring a viable conspiracy claim under Competition Act.
Cashing in (Computer) Chips: The facts of Jensen v Samsung Electronics
Jensen v Samsung Electronics Co Ltd involved an alleged conspiracy between the world’s leading manufacturers of Dynamic Random-Access Memory (DRAM) computer chips. DRAM is a type of semiconductor memory chip, which allows information to be stored electronically and rapidly and is ubiquitous in most computer products. The Plaintiffs alleged that between 2016 and 2018, the prices of DRAM chips (and the computer products that contained them) were inflated because of a conspiracy, causing Canadians to pay upwards of $1 billion in illegal surcharges.
In their Statement of Claim, the Plaintiffs pled that until 2016 the Defendants competed vigorously over market shares and DRAM prices had steadily declined. However, in 2016 prices reversed course and began a sharp ascent to record highs, for all types of DRAM, in all sizes and all markets.
The Plaintiffs alleged that the increases were due to the Defendants adopting a policy of refusing to increase supply of DRAM – the theory being that, by limiting supply of the product, prices would increase as per the laws of supply and demand. The Defendants allegedly implemented the conspiracy by signalling to their co-conspirators through public statements regarding limiting supply. The Plaintiffs also alleged that the Defendants furthered the conspiracy through secret talks, including at trade association events.
Further, the Claim also alleged China’s economic regulator, the National Development and Reform Commission (“NDRC”) had opened an investigation into DRAM price-fixing, leading to Samsung signing a Memorandum of Understanding (“MOU”) with the NRDC to increase supply.
The Plaintiffs’ pleadings also emphasised the fact that the DRAM market was conducive to collusion. The Defendants controlled over 96% of global DRAM manufacturing, and thus the industry structure was alleged to possess certain characteristics – a small number of players, demand inelasticity, the commodity nature of the product, high barriers to entry for new business – that left it susceptible to anticompetitive behaviour. The Plaintiffs relied on the Defendants’ past conduct in respect of a prior conspiracy to fix DRAM prices between 1999 and 2002 as further support for the likely existence of the new conspiracy.
The Plaintiffs brought a motion to the Federal Court to certify the action as a class proceeding based on a claim under the Competition Act for a violation of section 45: a conspiracy, agreement, or arrangement between competitors to fix, maintain, or increase the price of a product, allocate sales, customers, or markets, or prevent, lessen, or eliminate production or supply.
Great Minds Think Alike, Competitive Minds Act Alike
The Federal Court held that the Plaintiffs had not satisfied the criteria for certification, and that the alleged facts and evidence were consistent with a phenomenon known as “conscious parallelism”.
In competitive markets where price is a key differentiating factor for purchasers, companies often closely monitor their rivals’ reactions to changes in their behaviour, and account for the reaction of others in deciding on prices. When one competitor takes the lead in raising or lowering prices, the others will then often follow suit, raising or lowering their prices by the same amount, with the understanding that greater profits result. This type of conduct is frequent in oligopolistic markets where competitors base their actions in part on the anticipated reactions of their rivals.
The Court stated that situations involving competitors independently choosing to adjust their prices in order to match their rivals are examples of “conscious parallelism” – a pattern of business conduct which occurs when businesses unilaterally adopt similar or identical business practices in response to the conduct of competitors or with an awareness of the likely response of competitors. The result is a set of circumstances where competitors act in parallel to each other, including potentially adopting parallel prices, while engaging in perfectly legal behaviour.
Most people are familiar with examples of this type of activity in situations like the anecdote about rival gas stations. Sometimes, this sort of price-matching can be beneficial for consumers at the retail level, such as when grocery chains offer to match lower prices of competitors.
However, there are many situations where competitors engage in conscious parallelism, which result in parallel price increases that harm consumers. Particularly, in oligopolistic markets where this type of conduct is frequent, when rivals choose to raise prices to match their competitors, consumers have no viable alternative but to suffer the added expense of the price increase.
A striking feature of these latter examples of conscious parallelism is that they bear certain strong similarities to typical situations of illegal price-fixing conspiracies: namely they result in the same impacts on purchasers – parallel price increases across an industry – and tend to occur in the same sorts of industries: oligopolies. Accordingly, while it can be tempting to see or imagine an unlawful conspiracy between suppliers whenever there are conspicuous concurrent price increases in highly concentrated markets, the events could be just as consistent with innocent behaviour.
“Agreement is the beating heart of conspiracy”
In Jensen, the Court confirmed that the key difference between legal “conscious parallelism” and illegal anticompetitive conduct is the absence of an agreement between competitors. Concurrent price increases, no matter how anomalous they may look, cannot amount to an illegal conspiracy without some form of communication or conduct to establish the required agreement. The mere expectation that a competitor will act in a certain way is insufficient to infer a meeting of the minds.
Because a section 45 conspiracy offence is rooted in the existence of an agreement, any class action hinging on a breach of section 45 has to put forth adequate allegations and some minimal evidentiary background, that defendants explicitly or tacitly agreed to act in concert.
In Jensen, the Court held that both of these elements were missing.
“The evidence does not even allow me to detect a pulse“
Upon a review of the Plaintiffs’ certification motion materials, the Court held that there was a complete absence of any factual basis or minimal evidence regarding an agreement between the Defendants to support the Plaintiffs’ proposed common issues.
With respect to the “coordinated supply restrictions” of DRAM, there was not a scintilla of evidence that the supply of DRAM had been suppressed, restricted, or limited by the Defendants, let alone in a coordinated way. In fact, the Court held that the Plaintiffs did not lead evidence related to the supply of DRAM whatsoever.
There was also no evidence that the Defendants met or directly communicated with one another at any time, let alone to discuss DRAM supply or prices. With respect to the key trade meetings identified as opportunities to conspire, there was no evidence about who was in attendance or what was discussed. The Defendants’ memberships in perfectly legal associations did not constitute any basis in fact supporting the existence of a conspiracy.
Evidence of prior conduct (such as the prior conspiracy between the Defendants) did not amount to some basis in fact for the existence of any different conduct now alleged.
Evidence of price increases – even significant ones, or of the general oligopolistic market conditions prevailing in an industry, could also not amount to some basis in fact for an illegal conspiracy, without any link to concerted conduct or coordinated behaviour.
Notably, these criticisms of the evidentiary record were made at the certification stage – before the Plaintiffs received any documentary or other discovery. It is possible that evidence made available through the discovery process would substantiate the claim. However, evidence regarding the merits of the claim is typically not adduced at certification, as certification is about the form of the action and not the merits.
“Uttering the word conspiracy cannot be enough to trigger an action”
Beyond its holding of a lack of evidence, the Court also held that the Claim did not contain material facts to establish that the Defendants agreed to suppress the supply of DRAM, leading to a fairly uncommon finding in a competition law case: that the pleadings failed to disclose a cause of action.
While acknowledging that the test for a reasonable cause of action is low, the Court emphasized the requirement for sufficient particulars and the limits to the presumed trueness of allegations.
Every pleading must contain a concise statement of the material facts on which the party relies, and for allegations to be considered material facts, they must be supported by sufficient particularization, and must not be bald assertions or conclusory statements based on assumptions or speculation. While the Court must accept as true material facts as pleaded, the obligation does not extend to bare allegations or statements that are inconsistent with documents incorporated by reference, as these things are incapable of proof and cannot be assumed to be true.
The Court held that general allegations of a conspiracy in this case were nothing more than bald assertions in light of the complete absence of evidence to support them. With respect to the specific allegations regarding public statements and the China investigation, the motion judge found that the allegations were not anchored in material facts because they were based upon documents which, when scrutinized, showed that the facts had been misrepresented. The public statements actually showed growthin the supply of DRAM, and the reports about the NDRC showed the MOU was signed before any investigation was opened.
The concept that evidence is required at certification to support the pleading does not find support with recent Supreme Court of Canada authority. The Supreme Court of Canada has held that there must be “some basis in fact” to support the certification requirements, aside from the cause of action requirement.[3]
Notwithstanding that leave to amend a pleading is generally granted in class proceedings, the Court held that in light of the Plaintiffs’ failure to show some basis in fact for the common issues, no purpose would be served by granting the Plaintiffs leave to amend.
On the Plus Side: The Plus Factors
The Jensen case sets a precedent that evidence and allegations of anti-competitive effects (such as simultaneous price increases of a certain magnitude) and a particular industry structure (such as an oligopoly market) is not enough to ground a Competition Act claim. This presents a challenge for plaintiffs looking to pursue future conspiracy class actions.
In cases involving potential conspiracies, the evidence of any agreement invariably lies in the hands and minds of the alleged conspirators. Plaintiffs lack access to key documents and discovery information at the pleadings stage and so are at a significant disadvantage in terms of gathering direct evidence of a potential agreement.
However, the Jensen decision also describes an alternate means of establishing evidence of an agreement: circumstantial evidence of “facilitating practices”. The Court endorsed the Competition Bureau’s guidance that parallel conduct coupled with facilitating practices (such as sharing competitively sensitive information or activities that assist competitors in monitoring one another’s prices) is potentially sufficient to establish an agreement. Facilitating practices are reminiscent “Plus factors” identified in U.S. antitrust cases and may include enforcement activities by the competitors; advance announcements of price changes; exchange of confidential information; campaigns to convince competitors to adopt an open price policy; or efforts to keep meetings or communications covert.
The Plaintiffs in Jensen are appealing the decision to the Federal Court of Appeal. We expect they will raise arguments that the judge improperly engaged in the merits of the claim at the certification motion.
Pending the appeal, in light of Jensen v Samsung Electronics Co. Ltd., 2021 FC 118, plaintiffs pursuing Competition Act claims who are relying on parallel conduct would be well-served by identifying “plus factors” / “facilitating practices” that exist with respect to their cases. Without those details, the prospects of any conspiracy claim may only be as strong as the prospects of a claim based on simultaneous increases in retail gasoline prices.
[1] Competition Act, RSC 1985, c C-34, s 45.
[2] Jensen v Samsung Electronics Co. Ltd., 2021 FC 118
[3] Pro‑Sys Consultants Ltd. v. Microsoft Corporation, 2013 SCC 57 at paras 99-105, citing Hollick v. Toronto (City), 2001 SCC 68 at para 25