What competition and antitrust issues are specific to, or particularly relevant for, the automotive industry? Is follow-on litigation significant in competition cases?
Participants in the automotive industry must ensure compliance with Canada’s Competition Act, the key legislation in Canada that regulates competition. The Competition Act includes provisions that regulate civil practices (such as mergers, refusals to deal, price maintenance, exclusive dealing, tied selling, abuse of dominance, competitor collaborations and deceptive marketing practices) and those that prohibit criminal conduct (including conspiracies, bid rigging and criminal misleading advertising practices).
Over the past few years, one of the key issues for the automotive industry has been the enforcement activity of antitrust regulators in the automotive parts sector. Specifically, numerous investigations have been launched by antitrust regulators around the world concerning alleged conspiracies and bid rigging arrangements entered into among various suppliers for the sale and supply of automotive parts. These investigations have resulted in a number of convictions and fines, including in Canada. To date, the Canadian Competition Bureau’s investigations have resulted in multiple guilty pleas and over C$80 million in fines imposed by Canadian courts.
The investigations in Canada, and around the world, have led to significant follow on civil litigation in Canada. Section 36 of the Competition Act provides that any person who has suffered loss or damage arising out of conduct that contravenes the criminal provisions of the Competition Act has the right to commence a private right of action to recover the damages suffered, plus legal costs. Class actions alleging conspiracies and bid rigging arrangements relating to approximately 40 different automotive parts have been launched in British Columbia, Saskatchewan, Manitoba, Ontario and Quebec. These actions seek millions of dollars in damages from the defendants (automotive parts suppliers) on behalf of both direct purchasers of the alleged cartelised products, such as original equipment manufacturers (OEMs), and indirect purchasers, such as consumers who purchased automobiles during the proposed class period.
Dispute resolution mechanisms
What kind of disputes have been experienced in the automotive industry, and how are they usually resolved? Are there any quick solutions along the supply chain available?
Disputes in the automotive industry generally arise in three contexts: vehicle owner or lessee claims against manufacturers, distributors and dealers, claims between OEMs and their dealer networks, and claims involving OEMs and their suppliers.
Vehicle owner and lessee claims
In Canada, automotive owner or lessee claims take many forms including class action civil suits by one or more plaintiffs seeking to represent a class of owners or lessees of vehicles. These representative plaintiffs commence a civil action alleging a class-wide product defect in the manufacture or design of a vehicle model or some specific part of a vehicle or alleging breaches of consumer protection legislation provisions implying warranties or prohibiting ‘false’, ‘misleading’ or ‘deceptive’ practices. These claims seek compensation or other relief against manufacturers or distributors, or both, on behalf of the entire class. In Canada, product liability class actions will often be commenced in concert with similar proceedings in the US and, increasingly, recalls of vehicles in the industry will lead to class action proceedings where a plaintiff is seeking additional economic loss damages that extend beyond the repairs called for in the recall notice.
In addition, the courts deal with many individual personal injury or property damage civil suits alleging that a product defect caused damage, usually personal injury or property damage. Another source of litigation is individual warranty claims in which vehicle owners or lessees allege defects in the manufacture of a vehicle that are not adequately repaired by a manufacturer under warranty. For these disputes, owners or lessees may seek binding arbitration under the CAMVAP, an arbitral process set up by participating Canadian manufacturers, which is available at no charge to consumers and can be accessed by consumers in all provinces and territories in Canada.
In provinces where franchise laws apply, duties of good faith and fair dealing are imposed by statute on the OEM and on the dealer. Some disputes between manufacturers and dealers in the automotive industry are determined in the courts, but most are not because roughly 90 per cent of Canada’s automobile dealers have agreed to participate with their manufacturers in a nationwide mediation and arbitration plan called the National Automobile Dealer Arbitration Program.
Disputes between OEMs and their suppliers can be determined in court proceedings in Canada, but most supplier agreements will include mandatory mediation and arbitration clauses that require that disputes be determined by way of private alternative dispute mechanisms. The exception is when suppliers are added as third parties to ongoing court proceedings involving product liability and product quality claims made by consumers against OEMs. Increasingly, manufacturers are pursuing suppliers in claims for contribution and indemnity in the context of product liability and product quality class action proceedings as well as other civil product liability proceedings.
What is the process for dealing with distressed suppliers in the automotive industry?
Canadian automotive parts suppliers that have undergone formal insolvency proceedings in the past several years include Tiercon Industries, Hunjan International, AutoSystems Manufacturing, AG Simpson and Ajax Precision Manufacturing.
The statute of choice for the restructuring of an insolvent company of significant size and complexity is the Companies’ Creditors Arrangement Act (CCAA). To qualify, a debtor company (or its corporate organisation) must have in excess of C$5 million in debt. The CCAA is a short, flexible statute that allows for wide judicial discretion and relief can largely be tailored to fit the specific needs of a particular case.
A Canadian court cannot order a supplier to a debtor company to advance ‘further credit’ following the CCAA filing. Suppliers are entitled to payment on delivery. Also, if a party is not under a continuing legal obligation to supply or provide services, it cannot be compelled to supply the debtor following the filing, even if the debtor is prepared to pay on a cash on delivery basis. Thus, in certain circumstances, the court may authorise the payment of ‘prefiling debt’ to critical vendors to induce them to continue the provision of goods or services to the debtor during the restructuring. There is no statutory authority in Canada to authorise payments of this nature; thus, the practice remains controversial as it appears that certain creditors are receiving preferential treatment.
In the case of an insolvency of an automotive parts supplier, a large proportion of these critical supplier payments (often referred to as hostage payments) are made to tooling vendors. The Tier I and Tier II suppliers will often act as a general contractor for building tools and outsource construction to specialised tool builders. As a result, critical supplier payments could be required to induce the contractor to finish or release the tools. This is of greater significance if the tools are needed for an upcoming product launch.
Intellectual property disputes
Are intellectual property disputes significant in the automotive industry? If so, how effectively is industrial intellectual property protected? Are intellectual property disputes easily resolved?
Automotive companies generally own their own licences to use numerous patents, copyrights and trademarks on a global basis. Automotive companies typically have policies to protect their competitive position by, among other methods, filing international patent applications to protect technology and improvements that the companies consider important to the development of their business, including the filing of patents under the Canadian Patent Act.
Non-practising entities, more commonly referred to as ‘patent trolls,’ are a large issue in Canada. This is increasingly so in the automotive industry given the proliferation of communications technology in automobiles. Patent trolls typically acquire patent rights that are perceived to be infringed by the industry at large. Since the cost of patent litigation can be in the millions of dollars, patent trolls often propose a quick settlement that is less than the potential cost of litigation. A sophisticated intellectual property strategy – namely, having strong intellectual property protections in place – can minimise the effect of patent trolls.
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