Competition Bureau
Study of the Historical Cost of Proceedings before the Competition TribunalTABLE OF CONTENTS1. INTRODUCTION
TAB A - RTPC (DIRECTOR OF INVESTIGATION & RESEARCH) V. BBM
TAB B - CANADA (DIRECTOR OF INVESTIGATION & RESEARCH) V. CHRYSLER
TAB C - CANADA (DIRECTOR OF INVESTIGATION & RESEARCH) V. NUTRASWEET
TAB D - CANADA (DIRECTOR OF INVESTIGATION & RESEARCH) V. XEROX
TAB E - CANADA (DIRECTOR OF INVESTIGATION & RESEARCH) V. TELE-DIRECT
TAB F - CANADA (DIRECTOR OF INVESTIGATION & RESEARCH) V. WARNER
APPENDIX I - EXCERPTS OF PROVISIONS OF THE COMPETITION ACT APPENDIX II - CURRICULA VITAE OF PROFESSIONALS March 26, 1999 Mr. Konrad von Finckenstein, QC Dear Mr. von Finckenstein: RE: Study of the Historical Cost of Proceedings Before the Competition Tribunal 1. INTRODUCTIONPursuant to the terms of our engagement, Wise, Blackman has prepared a report on the historical costs incurred by the Competition Bureau ("Bureau") in investigating and prosecuting cases before the Competition Tribunal (Tribunal"),1 for specified cases involving the respective provisions of either Section 752 or Section 773 of the Competition Act.4 We understand that you have requested this report in connection with the Bureau's legislative development, whereby amendments to the Act are being considered to allow limited private rights of access to the Tribunal for cases relating to the above-noted statutory provisions; however, we also understand that concerns have been raised by some stakeholders that private access may lead to an increased number of cases, which will be costly. This report contains the results of our study ("Study") of the average historical costs incurred by the Bureau in litigation before the Tribunal or the RTPC with respect to the following six cases ("Cases"), identified by the Bureau as involving (a) refusal to deal or (b) tied selling:
The Study does not include costs undertaken by the Tribunal or the RTPC in conducting the Cases. In the course of our conducting the Study, we held discussions with members of the Bureau's Amendments Unit, its Compliance and Operations Branch and its Civil Matters Branch, and other staff members as deemed appropriate, in order to establish the availability of data, and the requirements for data gathering. Bureau staff provided the data and documents which were used to estimate the historical costs. Additional cost information relating to the Cases was provided by the Competition Law Division of Industry Canada in order that we may obtain a more complete estimate of the costs of conducting the Cases. Under the terms of our mandate, Wise, Blackman was also to provide an estimate of the respective average historical costs incurred by (i) respondents and (ii) intervenors, pursuant to a Protocol agreed to by the Task Force of the National Competition Law Section of the Canadian Bar Association ("Task Force") and the Assistant Deputy Commissioner of Competition, Amendments Unit, of the Bureau. (In accordance with the terms of the Protocol, firm-specific data would remain strictly confidential.) However, at the time of preparing this report, insufficient data had been provided by the respondents and intervenors to allow for a fair representation of the average historical costs incurred, and to preserve the confidentiality of firm-specific data. Subject to the availability of data, a report on these costs might be issued under separate cover at a later date. 1.1 Credentials of AccountantsWise, Blackman is a nationally recognized independent firm of Chartered Accountants engaged exclusively in the valuation of businesses and securities, litigation support and forensic accounting and auditing. The firm, which has been serving as consultant to business and government for the past eighteen years, has performed an extensive number of business valuations and forensic accounting engagements for public and private enterprises throughout Canada and in the United States. Our principals have been recognized on numerous occasions as financial and business valuation experts by the courts across Canada and in the U.S. Mr. Richard M. Wise, FCA, FCBV, ASA, MCBA, C.Arb., CFE, Managing Partner, and Ms. Sheri-Anne Doyle, CA, Consultant, were responsible for the preparation of the Study. 2. PHASES OF CONDUCTING CASESInvestigating and prosecuting Cases may be segregated among the following three phases: (a) prior to the filing of a Notice of Application ("Application") with the Tribunal; (b) the pre-Hearing stage; and (c) during the Hearing. Subsequent to the Hearing, the Bureau may also engage in enforcement and monitoring activities or participate in the appeals process, if applicable. During the course of our Study, the estimated costs were not allocated by the three above-noted phases. Data were not available so as to permit a fair allocation of the costs without a high degree of imprecision. The estimated costs noted above are the aggregate costs incurred in all phases of conducting Cases,5 including costs incurred during Appeals, if relevant. The methodology applied by us in estimating the Bureau's costs in conducting the Cases is explained in Section 3.1. 2.1 Assumptions and LimitationsPursuant to the terms of our mandate, in estimating historical costs for the purpose of this Study, we would not adjust such costs in respect of: (a) changes in the Consumer Price Index; (b) changes in fee structures relating to lawyers' and experts' respective services; and (c) geographic considerations relating to professional fee levels. Furthermore, the historical costs incurred by the Bureau in investigating and prosecuting the Cases were estimated based on the information and documents provided to us. As these were not subjected to audit or review procedures, no assurance is provided as to the accuracy or completeness of such information. 3. BUREAU'S HISTORICAL COSTS3.1 MethodologyOur initial step in estimating the costs incurred by the Bureau to investigate and prosecute the Cases was to determine the historical cost data that were available. The data captured in the financial- and time-reporting systems of the Bureau and the Department of Justice constituted the primary sources of information; however, as a number of years have elapsed since several of the Cases were conducted, the data in many instances had been retained only in summary format. We conducted interviews with representatives of the Bureau's Amendments Unit, Compliance and Operations Branch, and Civil Matters Branch. A lawyer from the Competition Law Division of Industry Canada provided assistance in the gathering of information from the respective lawyers who litigated the Cases. Interviews were also held with the Senior Commerce Officer or Commerce Officer ("Officer") of the Bureau, who had been integrally involved in a particular Case. The involvement of an Officer generally begins at the early stages of assessing the merits of a Case, and continues through to the Hearing before the Tribunal (and to subsequent appeals, if applicable). The individuals selected for interviews, and those who assisted in the data gathering, were either directly involved in investigating and/or prosecuting a Case or were familiar with the workings (including limitations) of the financial-reporting systems. The nature of each Case was discussed in general terms in order for us to (a) gain an understanding of the types of costs that would have been incurred by the Bureau in conducting the Cases, and (b) identify the most reliable sources of historical data, as same relate to the costs in question. Our interviews also assisted us to identify costs incurred by the Bureau in investigating and prosecuting the Cases,6 in situations where such costs would not have been allocated to a specific Case. In such situations, best estimates were developed based upon the information available. In the absence of evidence to the contrary, reported data were assumed to be complete. Accordingly, estimates were made only with respect to those Cases where there was no information reported, or in circumstances where reported data were determined to be incomplete. During the conduct of a Case, related documents, memoranda and financial records are accumulated and filed in case files ("Case Files"). In order for us to obtain relevant historical cost data for the Study, an Officer reviewed the Case Files for evidence as to historical cost data which were not otherwise available; however, minimal evidence of such data was found therein. 3.2 Scope of ReviewThe following lists (a) the historical cost categories which were identified as being the most significant in the investigation and prosecution of Cases before the Tribunal and (b) the sources of the information gathered to assist in the cost estimations. Any calculations or estimations which were specific to a particular Case are explained in the section referencing that Case. It should be noted that the financial-reporting systems record costs using the accrual basis of accounting.7 3.2.1 Salaries and Wages of Bureau StaffDifferent categories of employees within the Bureau were directly involved with various aspects of conducting the Cases. During the course of our Study, we noted the following categories, or groups, of Bureau staff members who were directly involved:
Various time-reporting databases included records of the total number of hours, coded to a particular Case by fiscal year,8 aggregated for all staff who worked on the Case. Summarized time sheets, by employee, were available commencing in the 1994/1995 fiscal year, which provided a breakdown of the hours worked by staff category. For purposes of our Study, the Bureau provided us with a schedule listing the total number of hours worked on each Case, by fiscal year, aggregated for all staff categories. This schedule was compiled by the Bureau from data contained in the following financial-reporting databases:
In addition, we were provided with the summarized time sheets relating to the following Cases:9 (a) Tele-Direct
(b) Warner
To assist us in determining the historical personnel cost, the Officers10 who had worked on the respective Cases allocated the recorded time prior to 1994/1995 by category11 of employee. Any inaccuracies or omissions in such allocation were not expected to result in a material error, because the majority of the time expended on a particular Case was generally attributable to the Officer(s) assigned thereto. No information was available to permit a further refinement in allocating the hours by staff category. During the course of our interviews with the Officers, it became apparent that overtime hours were not always recorded by the staff members working on a Case. However, we did not make an adjustment for potentially understated hours relating to unrecorded overtime, as any such adjustment would be arbitrary. Moreover, the hours recorded in the time-reporting system may be understated with respect to support-staff hours. Because of the number of years which have elapsed since the Cases were conducted, it was determined that any estimates which might otherwise be provided by the support staff would not be reliable. As noted above, the majority of the time spent on a Case was incurred by the Officers; consequently, any understated support-staff time would not result in a material understatement of costs. Generally, one member of the Executive or Management Group ("Manager") supervised the investigation and prosecution of a Case. During our interviews with the Officers, we were informed that Managers would occasionally code their time to a Case if they participated in meetings or were involved in activities directly related to the Case. With respect to in-house discussions, supervisory and other general activities, the hours worked on the project would normally have been coded as "Case Management" or "Administrative Support", and not allocated directly to the Case. The Officers involved in the Cases, with input from the Managers, as required, estimated the potential number of hours of unrecorded Manager time, which was then added to the total recorded hours. Once the hours worked on the Cases were segregated by staff category and the appropriate adjustments to the recorded hours were made, the historical staff cost was determined by multiplying (a) the hours worked by (b) the estimated hourly salary, based on the category of employee who performed the services. As a general rule, there are a disproportionate number of employees at the higher levels in any given employee category.12 In order to fairly represent the hourly remuneration of staff by category, the hourly salaries in the third quartile of the range between the lowest and the highest hourly wages among all levels in a category were used. Staff benefits were then estimated as a percentage of the total cost.13 The Bureau provided us with salary schedules which were obtained from the Treasury Board of Canada, to assist in determining the appropriate hourly rate to use in the calculation. Because the effective dates of salary increases did not coincide with the fiscal year, there was generally a blend of rates in effect during any given fiscal year. The rates in force in the immediately preceding calendar year were used to calculate the cost of staff time expended on the Case.14 3.2.2 Salaries and Wages of Justice Department StaffGenerally, Department of Justice lawyers litigate Cases on behalf of the Bureau. With respect to all but one of the Cases, the data as to the number of hours worked, by category of lawyer,15 were based on estimates, because no time-reporting information was available.16 The estimates were provided by the respective lawyers who worked on the Cases.17 Only one lawyer who had provided time estimates included time prior to the filing of the Application for a Hearing before the Tribunal.18 In all Cases for which estimates were provided, time spent in appeals and/or in relation to enforcement activities has been excluded, as the lawyers were unable to estimate the number of hours spent in such activities. Furthermore, the estimated hours provided by the lawyers were not segregated by fiscal year. The lawyers' hours were allocated among the years during which a Case was conducted. This allocation was based on the assumption that the lawyers' workload in a fiscal year, as a percentage of total hours, was proportionate to the Officers' workload per fiscal year.19 The cost of the Justice Department's legal services was then determined by multiplying (a) hours worked by (b) the hourly salary based on the category of the lawyer who performed the services. As each category of lawyer has a salary range (based upon his or her level), the lawyers indicated whether salaries at the high-, mid- or low-range would be more appropriate for the relevant years. The employee benefits were then estimated based on a percentage of the total cost.20 No estimates for support-staff hours were included in the Study. Considering the number of years which had elapsed since several of the Cases were conducted, it was determined that any estimates which might otherwise be provided by the support staff would not be reliable. 3.2.3 ExpertsThe Bureau often retains the services of outside experts to: (a) assist in evaluating the merits of a Case in the course of preparing for the Application and/or the Hearings, (b) appear as witnesses; and (c) provide expertise in other aspects of conducting the Cases. The historical cost data with respect to experts were taken from departmental financial reports, viz., Department of Supply and Services Reports ("DSS Reports"). While these reports contain summarized historical cost information, by fiscal year and by cost category,21 we identified limitations to the data contained therein: (a) The data are in summarized form and, consequently, it is not possible to verify the completeness or accuracy of the classification of the recorded costs. During our interview with a member of the Compliance and Operations Branch, we learned that various types of expenditures may have been recorded in the same cost classification, or may not have been coded to a Case (resulting in an incomplete record of the historical costs); (b) Travel and other disbursements incurred by experts have been aggregated and included in the "Professional Services" category. Considering that the required level of detail was not available to reallocate these costs to the appropriate cost category, the "Professional Services" classification is likely to be overstated with respect to such costs; and (c) The costs of external legal counsel were generally classified in the "Professional Services" category. Notwithstanding the limitations of the DSS Reports, the reports often provided the best source of data for the historical costs of experts, considering that information on a more detailed level was not available to us and invoices rendered by the various experts were generally not available. In several instances, additional information was provided, allowing us to reallocate the costs as categorized in the DSS Reports. Tabs A through F contain a description of how historical experts' costs were estimated for a particular Case. For the two most recent Cases (Tele-Direct and Warner), departmental cost tracking systems ("Civil Budget System Reports" or "CBS Reports") were available and were used by us to estimate the costs of experts, as the cost allocations were considered more accurate and provided a higher level of detail with respect to the nature of the historical costs. 3.2.4 External Legal CounselIn three Cases included in the sample, external counsel were retained to provide legal services. In two of the Cases, copies of the lawyers' accounts were available, permitting us to calculate the historical cost to the Bureau of the services from those invoices. In the third Case, the legal costs were estimated by the Officer and the estimated cost was transferred from the "Professional Services" category in the DSS Reports to the "External Legal Counsel" cost category for purposes of our Study.22 3.2.5 TravelTravel expenses can be significant, depending on the nature and length of the Case. These costs were extracted from the DSS Reports, which summarized costs by fiscal year and by Case. The "Travel" category in these reports includes the travel costs of Bureau staff as well as costs incurred by the Department of Justice lawyers assigned to the Case. The Bureau pays travel costs for witnesses23 who appear before the Tribunal; such costs would also be included in the "Travel" category in the DSS Reports. For the two Cases with respect to which the CBS Reports were available, the "Travel" costs were extracted from the reports. As noted in Section 3.2.3, travel costs incurred by experts retained by the Bureau have been aggregated with Professional Services at the data capture stage in the DSS Reports.24 The necessary detail is unavailable to permit a segregation of these costs in order to report professional travel costs separately. 3.2.6 OtherHistorical cost data with respect to miscellaneous other expenditures were taken from the DSS Reports or the CBS Reports (where available). Included in this cost category are the cost of transcripts, postage, courier services, etc. The cost of document reproduction was not included in the historical cost records. The Bureau provided an approximation of the number of photocopies that was made for each Case. To estimate the number of copies, an Officer of the Bureau reviewed the records of the number of documents filed with the Tribunal, and estimated the number of pages and the number of copies of each document that were made. Interviews with the Officers and Managers involved in the respective Cases as well as miscellaneous documents found in the Case Files assisted the Officer in estimating the number of photocopies made for each Case. The estimated number of photocopies was then multiplied by an approximate cost per copy,25 yielding the cost to the Bureau of the documents reproduced in each Case. Transcript costs can be significant, depending on the nature of the Case. Based on the magnitude of the amounts classified as "Other" costs in the DSS Reports, it is likely that transcript costs have not been included in the "Other" classification but, rather, as "Professional Services". There was insufficient detail to permit a reallocation of transcript costs from "Professional Services" to "Other". For Cases with respect to which CBS Reports were available (Cases conducted during and after the 1994/1995 fiscal year), transcript costs were properly classified as "Other" costs. 3.2.7 OverheadOverhead costs are costs that cannot be identified specifically with, or traced to, cost objects26 in an economically feasible manner. Because of the inherent difficulties in tracing overhead costs to cost objects, overhead is generally allocated to cost objects applying various allocation techniques. In one commonly-used method of assigning overhead, an appropriate overhead "pool" of costs is determined, which is then allocated to cost objects based on a reasonable "cost driver".27 However, in attempting to determine the "pool" of overhead costs to allocate to the Cases, we encountered a number of difficulties, namely:
Comparability among the various Cases would be obscured by assigning to each Case overhead costs which varied materially between fiscal periods depending on the organizational structure at that time. Furthermore, data were not available to permit an overhead calculation for each year of the Study. Finally, the Program review process resulted in the elimination of various activities which were considered unnecessary, redundant or excessive, while reorganizing other activities. Consequently, the overhead pool prior to Program review was not representative of costs accumulated subsequent to the review process, thus rendering comparisons difficult. In 1996/97, the Comptroller's Office of Industry Canada prepared costing tables which were used to develop Fee and Service Standards policy. These tables were based on 1995/96 actual financial results and reflect the cost-cutting and reorganizations of Program review. Furthermore, the costing tables segregate direct costs from overhead and shared service costs. We therefore used these tables as the basis for the cost pool from which overhead application rates were developed for all Cases, regardless of the years during which they were conducted. It was determined, upon consultation with the Bureau, that adopting this approach would provide comparability among the Cases, thus avoiding the distortions in costing which would result from applying costs to Cases from cost pools which varied materially from one year to the next. It should be noted, however, that as the data from which overhead application rates were developed related to the 1995/96 fiscal year, the overhead calculation provides only an approximation for all other years. In determining the amount of overhead and shared service costs to allocate to the respective Cases, it was necessary to accumulate the costs in several stages. First, the Bureau was allocated a share of Industry Canada's overhead and shared services costs. Industry Canada's overhead pool includes, among others, costs relating to Information Management and Accommodation service, Communications, Finance, Human Resources, Industry and Scientific Policy and Business Law and General Counsel. Industry Canada overhead was allocated to the Bureau in the proportion that (a) the number of full-time equivalent personnel in the Bureau bears to (b) the total number of full-time equivalents in all programs within Industry Canada. The Bureau's shared services and overhead costs were then allocated to the Branches within the Bureau,28 based on each Branch's proportionate share of full-time equivalents. For purposes of allocating overhead to the individual Cases, the approximate number of hours worked by the full-time equivalents in the Civil Branch was determined by multiplying (a) the number of full-time equivalents by (b) the approximate number of hours worked in a year, excluding overtime.29 The overhead pool, comprising the Civil Branch's proportionate share of (a) Industry Canada's overhead and (b) the Bureau's overhead, was divided by the total estimated number of hours worked in a year. This calculation yielded the overhead cost per hour of work. Such hourly cost was then multiplied by the number of hours worked on a Case, yielding the amount of overhead that should be applied per Case. 4. RESULTS OF THE STUDYThe estimated historical costs incurred by the Bureau in investigating and prosecuting the Cases considered in our Study are summarized as follows:
Each Tab provides a background summary of the respective Case as well as the source of the information gathered to assist in estimating the historical costs which were identified as being the most significant in the investigation and prosecution of the Case. Within the Tabs, we have summarized the estimated historical costs incurred by the Bureau and have included supporting schedules to provide additional details as to our calculations. We remain available to explain or discuss any aspects of our study with you at your convenience.
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