No pot of gold at the end of the Rainbow

A decision by joint operators of an oil field to use a single fluid hauler was not an unlawful conspiracy, the Alberta Court of Appeal held recently, overturning a 2011 decision that awarded about $8 million to the loser of a competitive bidding process: 321665 Alberta Ltd. v. Husky Oil Operations Ltd., 2013 ABCA 221.

The decision provides important guidance on a number of competition law and damages issues. Propositions that may be drawn from this case include:

• A reduction in competition arising from the operation of the free market is not an “undue lessening” for purposes of the old section 45. While section 45 has since been amended to remove the undueness element, this decision will be important for the “legacy” cases still in the system.
• Normal business practices may be relevant in assessing whether conduct breaches the Competition Act.
• Damages at large are not a substitute for a proper assessment of damages, which must be proven by the plaintiff.
• Damages after a business failure should be based on a going concern valuation, not future profits or future investment value.
• Investigative costs, which are compensable under the Competition Act, cannot be awarded based on an estimate, but must be proven.

The Rainbow Lake Oilfield

Husky Oil Operations Ltd. and Mobil Oil Canada (now ExxonMobil Canada Ltd.) each owned 50% of the Rainbow Lake oilfield and operated it jointly. They embarked on a joint synergy initiative called “Mosky”, whose object was to reduce costs on jointly-owned properties in the Rainbow Lake area. In 1996, as part of this initiative, they decided to sole-source fluid hauling for the Rainbow Lake oilfield. Fluid hauling was the second biggest cost of the oilfield. Before 1996, they had contracted with two fluid haulers. Husky and Mobil interviewed both incumbent fluid haulers, and decided on one of them. The loser, Kolt Oilfield, ultimately went out of business and sued.

Kolt claimed that the decision by the joint operators to sole-source fluid hauling eliminated competition to supply fluid hauling to the oilfield and therefore offended section 45 of the Competition Act. At the time, this provision made it a criminal offence to enter into an agreement to lessen competition unduly.

In his 2011 decision, Belzil J. agreed, holding that the decision jointly to sole-source the fluid hauling contract beached section 45. He awarded $5 million in damages at large, $1 million in punitive damages, $75,000 in investigative costs, and interest and costs, for a total of about $8 million. (For comment on this decision, see Joint Venture Decision Criminal, Alberta Court Says.)

No undue lessening

The Court of Appeal’s central criticism of Belzil J.’s decision was that the lessening of competition he perceived was not what the Competition Act was intended to address.

Mobil and Husky gave Kolt a fair opportunity to compete for their business, the court noted. The Competition Act is not intended to prevent businesses from restructuring their affairs to increase efficiencies and reduce costs. Any lessening of competition arising from the operation of the free market economy is not an “undue” lessening. The court wrote:

[23] Kolt’s position is that the Act precluded Husky and Mobil from restructuring their services by entering into an exclusive arrangement with Cardusty (or Kolt, for that matter) for their joint operations. We disagree. We can discern no reason why Husky and Mobil should not be permitted to rationalize their operations, particularly when the purpose was to increase efficiencies and reduce unnecessary costs. To find otherwise would necessarily undermine the competitive nature of Husky and Mobil’s operations by driving up their costs, and create unnecessary inefficiencies in a highly competitive industry that attempts to efficiently and effectively develop and produce scarce, natural resources. That cannot have been the intent of the Act. We simply do not accept that Husky and Mobil were bound to continue their previous practice of dividing up their fluid hauling requirements between Kolt and Cardusty, to their detriment.

[24] We are also concerned that the approach taken by the trial judge effectively gave no meaning to the word “unduly” contained in s 45(1)(c) of the Act. […] Parliament’s clear intent by the wording of s 45(1) of the Act is to distinguish between the de facto lessening of competition that arises naturally from the ordinary vicissitudes of the free market economy, and the artificial lessening of competition due to conduct that “unduly” prevents or lessens competition. While the Act cannot, and does not, guarantee that a business will successfully continue in perpetuity, the purpose is to provide participants with a fair opportunity to compete for business.

The court also expressed some doubt about Belzil J.’s conclusion that because a 1964 contract said that Husky and Mobil owned the assets as tenants in common, not joint tenants, they could not be considered to be a single economic entity for purposes of section 45. The fact that Husky and Mobil co-owned the asset meant they had to work together. The court noted that the kind of collaboration they engaged in is common in the industry:

[28] The simple fact that Husky and Mobil jointly owned numerous facilities in the Rainbow Lake area assumes that they would work together to produce and develop petroleum substances from their assets. Owners of any co-owned asset must, by necessity, be able to agree as to how to properly manage their operations, particularly in a situation where, as here, the owners equally shared the costs. Indeed, the oil and gas regime in Alberta anticipates and relies on cooperation between and amongst owners of properties. As the appointed operator, Husky was obligated to conduct joint operations in a good and workmanlike fashion, consistent with accepted operating practices, and included the responsibility to consult with Mobil in carrying out joint operations.

[29] As part of that consultation, Husky and Mobil engaged in a review of the Rainbow Lake operations and decided to adopt a more strategic relationship with one another. In doing so, they did not create any new structural change, nor did they attempt to use any market power they may have had to force down Kolt’s price or level of services. Instead, they engaged in a genuine attempt to create “synergies in the field” by drawing upon the expertise and experience of both companies to find improvements and to maximize the development and production from their depleting resource base. In sum, Husky and Mobil collaborated with one another in a manner that is common for oil and gas development.

The court stopped short, however, of adopting the American single economic entity doctrine.

Damages “at large” were too large

The Court of Appeal found that Belzil J.’s $5 million award of damages at large violated a number of principles of assessment of damages.

First, damages at large are not a substitute for a proper assessment of damages:

An award of damages “at large” is not a broad discretionary substitute for a proper assessment of damages flowing from the tortfeasor’s conduct. A plaintiff must still prove damages, unless a reverse onus arises: 581257 Alberta Ltd v Aujla, 2013 ABCA 16 at para 48, 542 AR 123. Damages “at large” is an approach that arises when the nature of the tort has made it impossible for the plaintiff to prove damages with precision: see e.g. Polar Ice Express Inc. v Arctic Glacier Inc., 2009 ABCA 20 at para 15, 446 AR 295. But the outcome must still reasonably approximate actual or foreseeable loss, or else it becomes disconnected from its foundational rationale.

Second, the trial judge appeared to have awarded double recovery, since he awarded both future profits and future investment value, concepts that are mutually exclusive of one another.

Third, the preferable approach is to value the business on a going concern basis instead of awarding future profits or future investment value.

Fourth, the trial judge did not apply any contingency, but essentially guaranteed Kolt’s profits during an arbitrary – and overlong – 14  ½ year period.

The court pointed to two events that underlined the importance of providing for contingencies in this case. First, one of Kolt’s biggest customers, CNRL, installed a pipeline to replace fluid hauling. Second, Kolt’s competitor, Kardusty, only maintained its exclusive relationship with Husky and Mobil for seven years.

Not a case for punitive damages

The Court of Appeal also disagreed with Belzil J.’s award of $500,000 in punitive damages against each of Husky and Mobil. Even if Husky and Mobil had breached section 45, their conduct lacked the reprehensible and malicious quality required for an award of punitive damages.

Investigative costs must be proven

Section 36 of the Competition Act allows a plaintiff to recover costs of the investigation. Kolt claimed nearly $1 million, without any supporting records. Belzil J. awarded estimated investigation costs of $75,000.

The Court of Appeal disagreed with this approach: the plaintiff must prove investigative costs. Mere participation in litigation is not compensable as an investigative cost.

The relevance of common business practices

The Court of Appeal’s statement that “In sum, Husky and Mobil collaborated with one another in a manner that is common for oil and gas development” is intriguing. It can sometimes be difficult to determine whether particular conduct contravenes section 45. Even the new section 45, which has more sharply defined boundaries than the old section 45, presents interpretive problems that have yet to be worked out. The Court of Appeal’s reference to common business practices in Husky suggests a possible approach to dealing with interpretive problems that arise under section 45: business practices that are common and widely accepted generally should not be deemed to violate section 45.

Guidance on damages

The Court of Appeal reaffirmed the importance of proof of damages. The court’s reasoning would seem to exclude damages at large being awarded in private actions under the Competition Act and related business torts. They are reserved for cases where the nature of the tort makes it impossible for the plaintiff to prove damages with precision.