Predatory Loyalty Programs Are Not Welcomed

Consider the Effects

Loyalty programs are important marketing tools that can help promote repeat business and deepen customer relationships.

And in general, they don’t create problems. That is, unless the Competition Bureau becomes concerned that a company’s loyalty program abuses a dominant market position and diminishes competition.

Predatory Acts and Other Factors  While the Competition Tribunal does consider the effect that a business practice has on competition, two cases illustrate other factors the panel considers when the issue involves abuse of dominance. In Canada (Director of Investigation and Research) v. NutraSweet, the Tribunal ruled that a “necessary ingredient” for determining anti-competitive behaviour is an “intended negative effect on a competitor that is predatory, exclusionary or disciplinary”. In Canada (Director of Investigation and Research) v. Tele-Direct, the Tribunal concluded that it was impossible to set out a list of objective actions for dominant companies that would never attract scrutiny. Instead, the overall character of the action needs to be considered on a case-by-case basis, weighing any legitimate business justification with anti-competitive effects.

The Competition Act constrains dominant companies in ways that don’t affect other market participants. And of course, the Competition Bureau and the Competition Tribunal take steps to delineate those constraints and to distinguish healthy competition from anti-competitive behaviour.

Some insight can be gleaned from a Tribunal determination that Canada Pipe Co.’s loyalty rebate program didn’t abuse the company’s market dominance by promoting exclusivity and weakening competition. The company offers significant rebates to distributors that stock cast-iron pipes supplied only by Canada Pipe.

The Tribunal conceded the company’s dominance in the cast-iron plumbing pipes and fittings market but noted that the distributors were free at any time to stock similar plastic products made by other manufacturers. The Tribunal also noted that the plastic, or PVC, versions have been taking an increasing share of the overall market.

In another loyalty program decision, however, the Competition Bureau expressed concerns that IKO Industries abused its market dominance and was hurting competition in the supply of low-end asphalt roofing shingles. The case never went to the Tribunal because IKO agreed to modify its program by, among other changes, allowing customers to choose between loyalty and volume-based rebates.

Both cases illustrate the effect-based approach under which a business practice is considered anti-competitive when its effect is to harm competition. In making those determinations, the specific aspects of a program and the nature of the market are considered. In fact, there are regulations specific to industries, such as a ruling that airlines cannot strategically use frequent flier and other incentive programs to exclude or discipline competitors.

Based on the Canada Pipe case, a loyalty program should include at least two features in order to pass muster:

1. An opt out, where the consumer can decide to end participation and choose another supplier without significant penalty. Canada Pipe let distributors leave the program and buy other products, including imported cast iron, with no penalty other than the loss of the rebates.

2. A legitimate business reason for the program. This feature is a bit more complicated and the Tribunal reaffirmed an earlier ruling that a business justification must be a “credible efficiency or pro-competitive” reason. That alone, however, is not enough. All known factors are taken into account in assessing the nature and purpose of the acts alleged to be anti-competitive. In the Canada Pipe situation, the program not only benefited small and medium-sized companies, it also helped the division gain better efficiencies, lower production costs and continue to offer a full product line.

In Canada, the effect a business practice has on competition remains an important consideration in determining whether behaviour is valid competition or runs counter to the law. At the same time, there are other considerations (see box above).

Final Note: The Competition Bureau has Enforcement Guidelines on the Abuse of Dominance Provisions, which state that an action is considered anti-competitive if it falls into one or more of the following categories:

• Acts that raise rivals’ costs (or reduce rivals’ revenues) or that foreclose existing or potential rivals from key inputs or facilities.
• Predatory conduct (such as predatory pricing).
• Acts intended to facilitate coordinated behaviour among companies.