Documentation

File No.: CT-2008-004 Registry Document No.:

COMPETITION TRIBUNAL IN THE MATTER of the Competition Act, R.S.C. 1985, c. C-34, as amended AND IN THE MATTER of an Application by Nadeau Fenne Av icole Limitee/Nadeau Poultry Farm Limited for an Order pursuant to section 75 of the Competition Act.

BETWEEN: NADEAU FERME AV ICOLE LIMITEE/ NADEAU POULTRY FARM LIMITED

Applicant AND GROUPE WESTCO INC. AND GROUPE DYNACO, COOPERATIVE AGROALIMENTAIRE AND VOLAILLES ACADIA S.E.C. AND VOLAILLES ACADIA INC./A CADIA POULTRY INC.

Respondents REPLY PURSUANT TO SECTION 75 OF THE COMPETITION ACT LEAH PRICE ANDREA MCCRAE FOGLER, RUBINOFF LLP . Barristers and Solicitors #1200-95 Wellington Street West Toronto, Ontario. M5J 2Z9 Tel: 416 864 9700 Fax: 416 841 8852 lprice@foglers.com amccrae@foglers.com Solicitors for the Applicant

-2-TO: The Registrar Competition Tribunal The Thomas D'Arcy McGee Building #600-90 Sparks Street Ottawa, ON KIP 5B4 Tel: 613 957 7851 Fax: 613 952 1123 AND TO: Sheridan Scott Commissioner of Competition 50 Victoria Street Gatineau, Quebec K 1A OC9 Tel: 819 997 3301 Fax: 819 997 0324 AND TO: Denis Gascon Eric C. Lefebvre Alexandre Bourbonnais Geoffrey Conrad Ogilvy Renault, S.E.N.C.R.L., s.r.l. Suite 1100, 1982 McGill College Street Montreal, Quebec H3A 3Cl Tel: 514 847 4747 Fax: 514 286 5474 Solicitors for Groupe Westco Inc. AND TO: Paul Routhier Paul Michaud Louis Masson Olivier Tousignant Joli-Coeur, Lacasse, Geoffrion, Jette, St-Pierre Suite 600, 1134 Grande Ave. W. Quebec, Quebec G 1S 1E 5

Tel: 418 681 7007 Fax: 418 681 7100 Solicitors for Groupe Dynaco, Co-operative agroalimentaire

-3-AND TO: Pierre Beaudoin Valerie Belle-Isle Lavery, De Billy s.e.n.c.r.1. Suite 500, 925 Grande Ave. W. Quebec, Quebec G 1S 1C1 Tel: 418 266 3068 Fax: 418 688 3458 Solicitors for Volailles Acadia s.e.c.

File No.: ... CT-2008-004 Registry Document No.:

COMPETITION TRIBUNAL IN THE MATTER of the Competition Act, R.S.C. 1985, c. C-34, as amended AND IN THE MATTER of an Application by Nadeau Ferme Avicole Limitee/Nadeau Poultry Farm Limited for an Order pursuant to section 75 of the Competition Act.

BETWEEN: NADEAU FERME A VI COLE LIMITEE/ NADEAU POULTRY FARM LIMITED

Applicant AND GROUPE WESTCO INC. AND GROUP DYNACO, COOPERATIVE AGROALIMENTAIRE AND VOLAILLES ACADIA S.E.C. AND VOLAILLES ACADIA INC./ACADIA POULTRY INC.

Respondents

REPLY PURSUANT TO SECTION 75 OF THE COMPETITION ACT

1. The Applicant ("Nadeau") admits only those allegations contained in the Responses delivered by the Respondents, which constitute admissions of matters alleged by Nadeau in its Notice of Application and accompanying Statement of Grounds and Material Facts. Nadeau otherwise denies each and every allegation contained in the Responses delivered by the Respondents.

- 2 -2. Nadeau repeats and reaffirms the allegations contained in its Notice of Application and the accompanying Statement of Grounds and Material Facts. Nadeau adds the following in specific reply to certain of the allegations made in the Responses of the Respondents. A. THE PARTIES 3. Nadeau is the sole Applicant in these proceedings. It is a private, stand alone company which has its own management and employees, and conducts its own procurement, sales, and operations. Nadeau is a wholly owned subsidiary of Maple Lodge Holding Corporation. Maple Lodge Holding Corporation ("Maple Lodge") is a holding company which does not itself carry on any operating business. 4. The Respondents are not independent of each other. Among other things: (a) the Respondents Groupe Westco Inc. ("Westco") and Groupe Dynaco, Cooperative Agroalimentaire ("Dynaco") together own 55% of the Respondents Volailles Acadia S.E.C. and Volailles Acadia Inc. (collectively, "Acadia");

(b) an additional 30% of Acadia is owned by La Coop federee, which is the majority owner of Olymel S.E.C. ("Olymel"), Westco's "partner" in the proposed business described by Westco in its Response;

(c) Westco has an ownership interest in Dynaco; (d ) one or more of the Respondents have directors or officers in common with each other; and

(e ) the Respondents have acted in concert with respect to the subject matter of these proceedings.

5. The Respondents directly own or control over 74% of New Brunswick's chicken production quota. In addition, the Respondent Dynaco co-owns Cormico Inc., which holds about

- 3 -5% of New Brunswick's chicken production quota. Of 33 nominal quota holders in New Brunswick, only 7 are independent of the Respondents. As such, the Respondents exercise an effective monopoly over the production and supply of live chicken in New Brunswick. 6. Nadeau agrees that it operates the only chicken processing plant in New Brunswick (the "St-Fran~ois Plant"). However, under no circumstances can Nadeau be considered to be a "monopolist", as alleged by the Respondents. This is because, among other things: (a) Nadeau competes in the processing market with numerous other processors located in Eastern Canada (Quebec and Nova Scotia);

(b) there is vigorous competition among processors in this market; ( c) in contrast with the legislative controls over the production sector, there is no legislative limit or prohibition on new entrants into the processing market;

(d) a number of Nadeau's competitors, including Olymel, have a competitive advantage in that they have a legislatively guaranteed live chicken supply under the supply management system as operated by the chicken board of Quebec;

( e) Nadeau currently has no such legislatively guaranteed supply; and (f) Olymel's "partnership" with the Respondents guarantees it access to additional live chicken supply, over and above the supply already granted to it by the Quebec chicken board.

7. Nadeau is very vulnerable to the anti-competitive conduct of the Respondents, and in particular, to the Respondents' proposed refusal to supply. Contrary to the allegations made by Westco in its Response, the Respondents' conduct is motivated not by a wish to "vertically integrate", but by a desire to hamper or limit competition.

- 4 -B. THE CHICKEN MARKETING SYSTEM 8. The Respondents refer to and rely upon the decision of the Supreme Court of Canada in Quebec v Pelland, 2005 SCC 20. That decision upheld the constitutional validity of the Quebec component of the federal-provincial chicken marketing scheme. 9. The Supreme Court noted (at para. 4) that the purpose of the chicken marketing scheme is to "ensure effective marketing and a dependable supply of chicken to Canadian consumers". The Court described the function of the federal body (the Chicken Farmers of Canada) as being "to assess the national market and set a global production quota for each province" (at para. 7). 10. Since the scheme contemplates setting periodic supply quotas based on assessment of consumer need, the global amount of chicken that can be produced nationally (and hence provincially) is not subject to any a priori limitations. For this reason, chicken is, and will continue to be, in ample supply. As stated by the Supreme Court (at para. 38): "The quota system is an attempt to maintain an equilibrium between supply and demand and attenuate the inherent instability oft he markets".

11. Although the global number of chickens produced can grow based on consumer demand, the number of producers is limited. As stated in Pelland (para. 33), "a producer must be allotted an individual production quota in order to produce chicken in the province". Once possessed of a quota, the producer may (subject to the relevant legislation) market both intra-and extra-provincially. Only producers owning or controlling quota may produce chicken. There is therefore insufficient competition at the production (supply) level of the chicken marketing

- 5 -system. The system creates a sanctioned monopoly in favour of existing quota-holders or owners, such as the Respondents. 12. In New Brunswick, the provincial component of the system is administered by the Chicken Farmers of New Brunswick ("CFNB"). The Marketing Orders of the CFNB reiterate the goals and objectives of the system, and reinforce the regulatory protection offered by the system to existing producers such as the Respondents. For example: (a) Marketing Order I (1) describes the object of the marketing plan as: 11 ••• to control the number of chickens raised for marketing within the Province, in such a manner:

(a) As to ensure there is an adequate supply ofN ew Brunswick grown chicken consumer.

(b) To provide an opportunity for the maximum number of residents in New Brunswick to earn a living in the marketing ofc hicken.

(c) To ensure a reasonable rate of return from the sale ofc hicken and to ensure a continuity ofs upply.

(d) To avoid the development of monopolies which could result in excessive cost to the consumers of chicken.

(e) To avoid a curtailment of the overall supply in the event one or more producers cease to market chicken. 11 (b) Marketing Order III (11) provides that the Province's marketing quota "shall be allocated by the Board on a pro rata basis to existing producers" (emphasis added).

(c ) Marketing Orders VII and IX deal with the prices to be paid by processors, and other conditions for the sale of chicken by a producer to a processor. These Orders provide that the minimum prices paid shall be those fixed from time to time by the CFNB.

available to the

- 6 -13. As a result, existing producers are fully protected in New Brunswick, in that the producer board (the CFNB) sets minimum prices and uniform terms and conditions of sale, which are intended to ensure "a reasonable rate of return", and new entrants are essentially barred from the producer end of the market. 14. The system does not contemplate that producers like the Respondents will use their protected monopoly to attack competition at the unprotected processing level of the market. The Respondents are working in concert for the purpose of driving Nadeau out of business. Once Nadeau is gone, this leaves the field open for Olymel, together with Westco and its cohorts, to comer the processing market in Eastern Canada from a base of the "guaranteed supply" provided by the system to the Respondents. C. THE CONDUCT OF THE RESPONDENTS 15. The Respondents or their predecessors have been doing business with Nadeau smce 1989. Over that period of time Nadeau has: (a) always purchased all of the chicken produced by them; (b) always paid at least the price fixed by the CFNB (usually at least 6.5¢ more per kilogram than the prices set by chicken boards in the neighbouring provinces); and

(c) offered market incentives from time to time (such as for smaller birds, or for relocation of production facilities closer to the St-Fran9ois Plant).

16. These long-term supply arrangements have allowed the Respondents to grow and prosper. Westco, for example, has been able to become, according to its own literature, "an example of success and profitability" and "one of the biggest poultry producing companies in Canada".

- 7 -17. Contrary to the allegations made by Westco in its Response, at no time was Westco interested in any genuine partnership with Nadeau. 18. At a meeting which took place on January 25, 2007, Westco advised Nadeau that: (a) Westco was interested in buying or investing in the St-Frarn;:ois Plant; and (b) Westco wanted a price increase or additional incentives. 19. Nadeau responded that: (a) its shareholders would likely not be interested in selling the St-Frarn;ois Plant; (b) a structure that would result in Westco owning a percentage of the St-Fran9ois Plant and retaining 100% of their live production assets would result in non-aligned shareholder interests and likely eventually lead to conflicts over time. If Nadeau were to pursue discussions for a sale of the St-Fran9ois Plant, the structure needed to be such that shareholders had the same aligned interests; and

(c ) even though the negotiated market price for live chicken in New Brunswick was 6.5¢ per kg. higher than the negotiated market price in Quebec, Nadeau would consider a market based incentive plan for New Brunswick producers.

20. Nadeau subsequently: (a) advised Westco that Nadeau would be prepared to look at an ownership structure where the Nadeau and Westco assets would be pooled and Westco and Maple Lodge would each own a part of the combined operations; and

(b) developed an incentive plan which resulted m additional payments to the Respondents totalling $830,000 through the end of 2007.

21. Westco did not respond to Nadeau's offer to pool assets. Rather, it proceeded, as early as March, 2007, to enter into a "partnership" with Olymel. The "partnership" thereafter took steps

- 8 ­aimed at destroying Nadeau. Nadeau was advised that if it did not sell the St-Frarn;ois Plant to the "partnership" at a price that took no account whatsoever of Nadeau's accumulated business and goodwill, its chicken supply would be cut off. The details of the conduct of Westco, Olymel and the other Respondents, are set out in Nadeau's Statement of Grounds and Material Facts herein. 22. With regard to Westco's allegations that it intends to build a processing plant in New Brunswick, as of June, 2008, Westo had not: (a) purchased any land; (b) paid for any equipment; (c ) obtained any permits or approvals; (d ) signed any contracts in connection with construction; or (e ) determined whether the supposed plant would be in New Brunswick or Quebec. 23. If Westco intends to build a plant at all, which is not admitted but denied, any such plant will not be operational before the year 2010, at the earliest. D. QUASI-JURISDICTIONAL ISSUES 24. The Respondent Westco argues (for example, in paragraphs 6 and 10 of its Response), that the order sought by Nadeau is an indirect attempt to obtain a plant supply guarantee, which has so far not been provided to it under New Brunswick law. 25. The Respondent Acadia alleges (paragraphs 51-56 of Acadia's Response) that the passage in New Brunswick of Bill 81 (which has been passed but not proclaimed) has, in effect, "occupied the field" in this case. ("A partir du moment ou le legislateur occupe un champ, le

- 9 ­pouvoir judicaire doit, sur le meme objet, agir avec grande deference et ne pas provoquer de choc entre les deux pouvoirs d'intervention. ") 26. The Respondent Dynaco suggests (Dynaco Response, paragraphs 24-29) that the Tribunal ought to "read down" its powers ("interprete de maniere attenue") in order to preserve constitutional equilibrium ("afin de preserver l'equilibre constitutionnel canadien"). 27. Nadeau denies the legal validity of the foregoing arguments, and says that they are in any event inapplicable to the case at bar. 28. As noted above, a guaranteed supply to processing plants in Ontario and Quebec is a feature of the operation of the supply management system in those provinces, but does not currently exist in New Brunswick. 29. If, and to the extent that, any legislatively guaranteed supply to the St-Fran9ois Plant is actually implemented in New Brunswick before the hearing in this matter, that supply can and will be taken into account as a fact in these proceedings. If, on the other hand, no guaranteed supply is actually implemented, then this Tribunal can and should determine the issues based on the Respondents' proposed refusal to supply, which would remove 271,350 chickens per week from Nadeau, that is, removal of 100% of the live chicken that has been historically supplied to Nadeau by the Respondents. 30. The actions, or the failure to act, by provincial authorities m New Brunswick are otherwise wholly irrelevant to these proceedings. 31. To the extent that the arguments made by the Respondents amount to a jurisdictional challenge to the Tribunal's authority or discretion in these proceedings, they are contrary to well-

- 10 ­established authority. That authority makes it clear that the Tribunal has plenary jurisdiction to make the order sought herein by Nadeau. There is no legal impediment to the exercise by the Tribunal of its jurisdiction under section 75 of the Competition Act. E. NADEAU MEETS THE TESTS SET OUT IN SECTION 75 (i) Substantial Effect (s. 75(1)(a)) 32. It is undisputed that the Respondents' refusal to deal will deprive Nadeau of 271,350 chickens per week, or about 48% of Nadeau's current production of 565,800 chickens per week. Even in the absence of anything else, this would satisfy the test under s. 75 (l)(a). 33. Each 100,000 chickens represent approximately 150,000 kgs. of saleable product with a selling value of approximately $3 per kg., or $450,000. The profit on this volume, in fiscal 2007, was approximately $.50 per kg., or $75,000. Accordingly, the removal of Westco's 186,230 birds alone would cause revenue loss of over $830,000 per week. Because of the high level of fixed costs, loss of the Westco birds alone would reduce profits by about 50% on an annualized basis. 34. If Westco, Acadia and Dynaco cut off Nadeau's supply, the St-Fran9ois Plant will only be able to run at 40% of capacity Gust over% of 1 shift). Nadeau would be unable to continue to employ its employees. A majority of the 340 jobs would be lost immediately, and the viability of the whole plant would be severely compromised. 35. Nadeau supplies reliable and predictable amounts of chicken to its customers, in a timely manner, that meet specific weight requirements for each individual customer. Nadeau requires a full range of chickens of specified gender, weights and ages, in order to be able to continue to meet volume and size commitments.

- 11 -36. Interruption of supply would create an immediate inability to fulfill the needs of Nadeau's customers. This would cause immediate damage to the relationships Nadeau has built with its customers over the last 18 years. More specifically, this would result in: a loss of confidence, a loss of goodwill, a potential loss of market share, and a potential loss of customers. 3 7. The refusal to deal in this matter would clearly have a direct and very substantial effect on Nadeau's business. (ii) Inability to Obtain Adequate Replacement Supplies (s. 75(1)(a)) 38. If the Respondents remove their birds from Nadeau, it will be unable to obtain adequate supplies of live chicken anywhere in the relevant market on usual trade terms. 39. The Respondents say that the current Nova Scotia (160,000) and P.E.I. (40,000) birds being supplied to Nadeau can be treated as replacements for the threatened refusal to deal of the Respondents. This is incorrect. Nadeau seeks an order requiring continuation of supply from a base of its existing business, which processes about 565,800 chickens per week (inclusive of the Respondents' supply and the Nova Scotia and P.E.I. birds). The relevant measure under s. 75(l)(a) of the Competition Act is Nadeau's existing business, and its existing supply. 40. In any event, Nova Scotia and P.E.I. chickens are not an adequate replacement for the Respondents' (New Brunswick) birds, because: (a) these birds are only being processed by Nadeau as a short-term measure following the closure in April, 2007, of one of the two processing plants in Nova Scotia, because the remaining plant cannot handle them. Contrary to the Respondents' allegations, these supplies will cease once there is a local plant capable of processing these birds; and

- 12 -(b) it is hard to transport live chickens over long distances, especially in the cold of winter and in the heat of summer. Nadeau has problems transporting chicken from Nova Scotia, including logistical problems, increased transportation costs, higher rates of attrition, occasional unacceptable death rates in transit, and concerns raised under laws governing livestock handling. There are major advantages to Nadeau in maintaining all of its historic New Brunswick supply, including increased efficiency, reduced costs, and the ability to closely match production of live chicken to anticipated processing needs.

41. Accordingly, the relevant geographic market for supplies of live chicken for the purposes of s. 75(1)(a) is New Brunswick. There are no replacement supplies available from New Brunswick producers. 42. In the alternative, if the relevant supply market under section 75(1)(a) extends beyond New Brunswick, which is not admitted but denied, it encompasses only those producers in Quebec: (a) who are not bound by express or implied contracts with other processors; (b) who are willing and able to supply chicken to Nadeau at a price that is equal to or lower than the New Brunswick price (inclusive of transportation and other corollary costs);

(c) whose facilities are within 7 hours by truck (including in winter) from the St-Franc;:ois Plant; and

(d) who are able to grow chicken of the size and quality required by Nadeau's customers.

43. There are nowhere near enough producers who meet the above criteria, to permit replacement of the Respondents' supply. Nadeau is therefore unable to obtain adequate replacement supplies of chicken.

- 13 -(iii) Insufficient Competition (s. 75(l)(b)) 44. To the extent that the relevant market for the purposes of s. 75(1)(b) is New Brunswick, the Respondents have an effective monopoly, as described above. There is therefore insufficient competition within the meaning of s. 75(1 )(b ). 45. In the alternative, even if the relevant market extends to production facilities in neighbouring provinces, there is insufficient competition among producers. This is because, as described above, the supply management system: limits new entrants; matches production to expected demand; and sets (minimum) prices. Accordingly, producers have ready markets for all their chicken, and need not compete with each other on price. There is no meaningful competition at the production level of the market at all. (iv) Willingness to Meet Usual Trade Terms (s. 75(1)(c)) 46. Nadeau has always met the usual and customary trade terms set by the CFNB and the Respondents. There is no evidence to the contrary. (v) Ample Supply (s. 75(l)(d)) 47. The Respondents allege that there is not an "ample supply" of chicken because the supply management system creates limits on supply. This is not correct. Supplies allocated to existing producer quotas are adjusted every eight weeks following a consultative process between the federal body (Chicken Farmers of Canada) and the provincial producer boards (such as the CFO and the CFNB). The process is intended to ensure that there is an ample supply of chicken to meet consumer needs.

- 14 -48. In fact, production of chicken has increased substantially over time. In New Brunswick alone, chicken production increased by close to 60% in the period from 1990 to 2000. There are no a priori limits on production. 49. Westco also argues that its production is "promised" to Olymel. However, since Westco's chickens are actually sold to the "partnership", there is no innocent third party whose interests need to be considered. 50. Westco relies upon paragraphs 18 - 21 of the decision in Quinlan's in connection with its argument concerning "ample supply". In that case, the Tribunal refused to require the Respondent to supply Harley-Davidson motorcycles to the applicant by way of interim order, because they were not in "ample supply". However, that was a special case. All of the supply of 2005 Harley-Davidson motorcycles in that case had been ordered from the Harley-Davidson factory and allocated to independent third party dealers in March, 2004 (the interim application was heard in October, 2004). The motorcycles had actually begun arriving at these other dealerships in August, 2004. The evidence was that any interim order would "not only harm [the respondent], but will harm other independent dealerships as well". Clearly, the decision in Quinlan's was driven by the fact that pre-existing customers, innocent third parties, would be deprived of product already sold to them. The equities in that case favoured the refusal of an order. 51. By contrast, in this case, there is no innocent third party. Olymel is not independent, and was present at all of the key meetings with Nadeau. Indeed, it is a co-conspirator with Westco in the attempt to destroy Nadeau by refusing chicken supplies. At the August 19, 2007 meeting, Rejean Nadeau of Olymel was present with Mr. Soucy when Nadeau was told that, if Nadeau