Date: 20121119
Docket: A-387-11
Citation: 2012 FCA 298
CORAM: NOËL
J.A.
SHARLOW
J.A.
PELLETIER
J.A.
BETWEEN:
ACKLANDS-GRAINGER INC.
Applicant
and
ATTORNEY GENERAL OF CANADA
Respondent
REASONS FOR JUDGMENT
SHARLOW J.A.
[1]
This
is an application for judicial review of a decision of the Canadian
International Trade Tribunal dismissing the complaint of Acklands-Grainger Inc.
(Acklands) in respect of a solicitation issued by the Department of Public
Works and Government Services Canada (Public Works) for the procurement of
fire, safety and rescue equipment pursuant to national standing offers.
[2]
Acklands
is a distributor of industrial safety and fastener products and equipment. It
acquires fire, safety and rescue equipment products from a variety of
manufacturers who would have been entitled to bid on the solicitation in issue
in competition with Acklands.
[3]
Acklands
complained to the Tribunal that the solicitation gave manufacturers an unfair
advantage over other bidders, and also gave rise to a conflict of interest, in
breach of the trade agreements to which Canada is a signatory. The Tribunal
determined that the complaint was not valid, and dismissed it with costs.
[4]
Acklands
has applied for judicial review of the decision of the Tribunal. It is seeking
an order quashing the decision and returning this matter to the Tribunal with a
direction that the complaint be found valid. For the following reasons, I have
concluded that this application for judicial review should be dismissed.
Standard of review
[5]
The
standard of review in this case is reasonableness: Zenex Engineering Ltd. v.
Defence Construction (1951) Ltd., 2008 FCA 109, at paragraphs 20 and 25.
Judicial review on the reasonableness standard requires consideration of the
decision itself and reasons given for it. The decision must fall “within a
range of possible, acceptable outcomes which are defensible in respect of the
facts and law”, and the reasons must establish “justification, transparency and
intelligibility within the decision-making process”: Dunsmuir v. New Brunswick, 2008 SCC 9, [2008] 1 S.C.R. 190 at paragraph 47.
Preliminary matters
[6]
The
decision of the Tribunal was issued on September 19, 201! (Procurement Inquiry
File PR-2011-007). The application for judicial review was filed within the 30
days required by section 28 of the Federal Courts Act, R.S.C. 1985, c.
F-7. However, the proceedings in this Court were delayed because the Tribunal’s
reasons were not issued until January 31, 2012.
[7]
The
Tribunal has the jurisdiction to adjudicate disputes in government procurement
matters to which certain trade agreements apply. In this case, there was no
dispute as to the jurisdiction of the Tribunal to deal with the Acklands
complaint.
[8]
The
complaint of Acklands relates primarily to what may be referred to as the
non-discrimination provisions of the applicable trade agreements. It is not
necessary to quote the relevant provisions. It is common ground that they are
all intended to prevent governments from adopting a procurement process that
gives a potential bidder or class of potential bidders an unfair competitive
advantage over others.
[9]
Acklands
asserted a second basis for its complaint, namely, that the solicitation gives
rise to a conflict of interest because of the degree to which potential bidders
who are manufacturers can influence the bidding process. The Tribunal concluded
that the allegation of conflict of interest, understood against the factual
context and the submissions of Acklands, is subsidiary to the allegation of
unfair discrimination and does not warrant separate consideration. In its
written and oral submissions in this Court, counsel for Acklands challenged the
Tribunal’s conclusion on this point. Those submissions were rejected without
requiring an oral response from counsel for the Crown. Accordingly, the only substantive
issue in this application for judicial review is whether the Tribunal was
reasonable in concluding that the procurement process in issue did not give
manufacturers an unfair competitive advantage over other bidders.
Background
[10]
Public
Works has a mandate to provide other federal government departments with many
services, including services related to the acquisition of goods. On February
3, 2011, Public Works issued a solicitation for the procurement of fire, safety
and rescue equipment. The solicitation took the form of a request for standing
offers. Its purpose was to establish national master standing offers for the
supply of firefighting, safety and rescue equipment for various government
departments on an as-and-when-required basis. The standing offers would be for
a period of one year. Public Works would have the option to extend the standing
offers for two subsequent one-year periods.
[11]
Under
the solicitation in issue, all fire, safety and rescue equipment was
categorized into one of three major groups: (a) firefighting equipment, (b)
safety equipment, and (c) rescue equipment. The products were further broken
down into 24 categories: 7 categories of firefighting equipment, 12 categories
of safety equipment, and 5 categories of rescue equipment.
[12]
For
each of the 24 categories, Public Works identified specific manufacturers whose
goods could be supplied in that category. Each eligible manufacturer of
products within any of the 24 categories could choose which product or products
within that category it was prepared to supply.
[13]
A
bidder could be either an eligible manufacturer or a distributor who acquired
the products from an eligible manufacturer. In other words, distributors were
in competition with all eligible manufacturers, even though those same
manufacturers were necessarily the source of the products. Only bidders capable
of supplying a minimum of 90% of the eligible manufacturer’s products in the
category which they proposed to supply could win a standing offer for that
category.
[14]
Eligible
manufacturers were requested to provide all distributors with a price list for
all of the products they were prepared to supply, organized according to the 24
product categories. Each listed price was to be “the price suggested by the
manufacturer for small quantity sales directly to the consumer”, referred to in
the solicitation as the “manufacturer’s suggested retail price” or “MSRP”.
They would be used as benchmark prices for that manufacturer’s products for the
purposes of the solicitation. It appears that Public Works assumed that a
manufacturer’s MSRP for a particular product would reflect the actual retail
value of that product. That assumption has not been challenged.
[15]
Each
bidder who was not an eligible manufacturer was required to obtain the most
recent common MSRP list from each eligible manufacturer whose products it
sought to supply. The common MSRP list could be one that the manufacturer had
already produced for its own purposes, or one that was prepared specifically
for the purposes of the solicitation in issue.
[16]
For
any product category, each bidder was required to specify a single discount
percentage rate to be applied to the MSRP for all of that manufacturer’s
products within the category. The bidder was also required to submit, with its
bid, a document from the manufacturer stating that the bidder was authorized by
the manufacturer to supply that manufacturer’s products for the purposes of the
solicitation in issue.
[17]
The
bids were to be ranked by Public Works in descending order of the percentage
discounts (that is, the higher the percentage discount, the higher the bid
would be ranked). In order for a particular manufacturer’s products in a given
product category to be considered, a minimum of three bids to supply that
manufacturer’s products was required. If there were sufficient responsive
offers, three standing offers were to be issued with respect to each product
category. Only the bidders whose bids ranked first, second and third would be
issued a standing offer.
[18]
Once
the standing offers were issued under the solicitations in issue, the
percentage discounts were to remain fixed for the duration of the standing
offer. However, the solicitation provided for the potential revision of the
MSRP lists every six months on the basis of “current market conditions” (an
undefined term). As a result of enquiries from bidders during the solicitation
process, certain amendments were made to the solicitation regarding the price
change mechanism.
The meaning of those amended provisions was the
matter of some dispute before the Tribunal. Ultimately the Tribunal concluded
that an update to a particular manufacturer’s MSRP list for a product category
would be considered only if the same list was submitted to Public Works by all
three standing offer holders for that category, and that the standing offer
holders would receive the updated list directly from the manufacturer. In
effect, each standing offer holder had the power to veto any proposal by a
manufacturer to update its MSRP list.
Discussion
[19]
The
complaint of Acklands is that the initial price setting mechanism established
by the solicitation in issue, as well as the price update mechanism, gives
manufacturers a competitive advantage over distributors in addition to its
inherent competitive advantage as a manufacturer. The submissions made by
Acklands in this Court are substantially the same as the submissions it made to
the Tribunal, which the Tribunal rejected. In light of the Tribunal’s cogent
and detailed reasons, I do not consider it necessary to do more than summarize
the position of Acklands and the Tribunal’s conclusions on each major point.
(a) Initial pricing
mechanism
[20]
Acklands
does not contend that the participation of eligible manufacturers as bidders in
competition with distributors of its products could, in and by itself, support
a complaint of discrimination or unfair competition. Any such complaint would
have failed in the face of the Tribunal’s rejection of a similar proposition in Re Complaint Filed by CAE
Inc., 7 September 2004, PR-2004-008. This is explained as follows in
paragraphs 73 to 77 of the Tribunal’s reasons in this case (footnotes omitted):
|
¶73.
It is clear
that, under normal commercial circumstances, all suppliers, whether
manufacturers, distributors or resellers, will possess certain natural
competitive advantages vis-à-vis other suppliers. For manufacturers,
advantages may lie in their ability to produce goods efficiently while
keeping costs, such as input costs and labour costs, as low as possible. For
distributors or resellers, advantages may lie in their ability to carry a
larger selection of products and to reduce logistical costs normally
associated with getting those products in the hands of consumers. For
example, they may have warehouses located across the country, established
distribution networks and special freight agreements or rates.
¶74.
It is also
understood that, under normal commercial circumstances, distributors may have
preferred relationships with specific manufacturers, which results in their
obtaining advantageous pricing and commercial terms. Mr. Kaul specifically
recognized that such relationships are commonplace. Notwithstanding
the existence of preferred relationships, the Tribunal tends to believe that
manufacturers generally want to foster positive relationships with all their
distributors and resellers, as they help to ensure that the products
fabricated by these manufacturers actually make it to market.
¶75.
Thus, in the
context of a solicitation where manufacturers, distributors and resellers
compete against each other, it is entirely reasonable to expect that they
will each rely on their respective natural competitive advantages in order to
offer the lowest possible price or, in the context of the current
solicitation, the greatest percentage discount from the prices set out in
common MSRP lists. These inherent advantages, which exist independently from
the manner in which a solicitation is structured, do not lead to the
conclusion that tendering procedures are discriminatory.
¶76.
This principle
was explicitly recognized by the Tribunal in CAE Inc., where it stated
the following:
[43]
Regarding the
first ground of complaint that PWGSC and DND failed to ensure equal access to
the procurement, the Tribunal does not believe that there is necessarily anything
inherently discriminatory in the tendering procedures where bidders are on an
unequal footing going into the bidding process. As stated by CAE in its March
15, 2004, letter to PWGSC: "There is no question that certain bidders
have certain competitive advantages in certain bids. This is simply part of
the ordinary ebb and flow of business." The Tribunal notes that these
competitive advantages could be created as a result of incumbency,
[intellectual property], [International Traffic in Arms Regulations] or any
number of other business factors. The Tribunal is in agreement with CAE's
statement as quoted above and is of the opinion that, if a bidder is at a
disadvantage, it does not necessarily follow that the tendering procedures
used by PWGSC are discriminatory. [Footnote omitted]
¶77. Therefore, while the trade
agreements impose fairness and transparency obligations upon government
entities, the Tribunal is of the view that these obligations cannot be
interpreted in a fashion that would require the government to adopt tendering
procedures that seek to eliminate the effects of any natural or legitimate
competitive advantages that may be held by suppliers. In fact, such tendering
procedures, if they were adopted, would likely be construed as discriminatory.
|
[21]
With
respect to the initial pricing mechanism, the main argument of Acklands is that
because only eligible manufacturers have the right to set the benchmark price
for their products, they can manipulate the benchmark prices in their favour
and to the prejudice of distributors. Acklands says that this ability to
manipulate benchmark prices is not attributable to any inherent advantage of
manufacturers, but is entirely the result of the provision in the solicitation
that gives manufacturers the power to set the benchmark price.
[22]
Suppose
that a particular distributor, Smithco, is prepared to supply Product B for
$40. It could offer a 20% discount for this category, for any or all of the
eligible manufacturers. However, by the terms of the solicitation, a 20% bid
with respect to the Yco products within the category would apply to all Yco
products within the category. That means that the bid price for Yco’s Product A
would be $1,600.
[23]
For
this product category, bids could be submitted by Xco, Yco, Zco, and any number
of other bidders who could acquire Product A from Yco, and Product B from Xco,
Yco and Zco. Note that Yco as the manufacturer of Product A would always be
able to ensure for itself a price of $1,600 for Product A by submitting a bid
for a 20% discount.
[24]
Suppose
that a particular distributor, Smithco, is prepared to supply Product B for
$40. It could offer a 20% discount for Product B acquired from any of the three
eligible manufacturers. However, by the terms of the solicitation, Smithco’s
offer of a 20% discount would apply to all products within the category. Thus,
the same 20% discount would have to be applied to Yco’s Product A, resulting in
a price for Product A of $1,600.
[25]
Now,
suppose that the $1,600 price for Product A is unacceptable to Smithco because
Yco will not sell Product A to Smithco for less than $1,600. If Smithco wishes
to submit a bid that ensures that its sale price for Product A is more than
$1,600, it would have to ensure that its discount is less than 20% for all Yco
products in the category. That necessarily means that, in respect of Product A,
Smithco’s bid would always rank behind the bid of Yco.
[26]
It
is part of the inherent advantage of Yco, as manufacturer of Product A, to
determine Smithco’s cost of Product A at $1,600. However, Acklands argues that
because the solicitation gives manufacturer Yco the further right to set the
benchmark price of Product A at $2,000 through its MSRP, Yco has a competitive
advantage over Smithco with respect to Product A that is not part of Yco’s
inherent advantage as manufacturer.
[27]
The
Tribunal concluded, contrary to the submission of Acklands, that any advantage
that might accrue to a manufacturer by virtue of its right to set the benchmark
price of the products within a particular category is in fact part of its
inherent advantage as a manufacturer and supplier of products to bidders who
are its distributors. That advantage flows naturally from the knowledge of a
manufacturer of the product costs of its distributors, and the degree of control
it has over those costs. That competitive advantage would exist even in respect
of a solicitation that did not use a common MSRP list as a benchmark price.
Therefore, the use of that pricing technique does not give manufacturers any
advantage they do not already have by virtue of being manufacturers.
[28]
In
my view, it was reasonable for the Tribunal to conclude, on the basis of the
record before it, that the inherent advantages of manufacturers existed
independently of the pricing mechanism chosen for the solicitation in issue,
and were not substantially altered or enhanced by the requirement that
manufacturers effectively set the benchmark price for their products.
[29]
Acklands
also submitted, with respect to the initial price setting mechanism, that
manufacturers are under no enforceable obligation to provide the same MSRP list
to all bidders. Since a bidder who submits a MSRP list of a particular
manufacturer that is not the same as the MSRP list submitted by a majority of
that manufacturer’s distributors would be deemed non-compliant, the
manufacturer effectively has the power to exclude any bidder.
[30]
The
Tribunal agreed that a manufacturer could not be forced to give the same MSRP
list to all bidders and so had a certain ability to cause the exclusion of some
bidders. However, the Tribunal noted that a manufacturer inherently has the
advantage of excluding a bidder because it might significantly increase its
price to a bidder, offer unfavourable terms to a bidder, or refuse to sell to a
bidder. The Tribunal concluded that this inherent advantage was no greater as a
result of the manufacturer being able to set the benchmark price. In my view,
that conclusion is reasonable.
(b) Price adjustment
mechanism
[31]
Acklands
submitted that the price adjustment mechanism is fatally flawed because a
manufacturer was not obliged to provide the same updated MSRP list to all
standing offer holders. The Tribunal rejected that submission on the basis of
its interpretation of the terms of the solicitation, as explained above. In my
view, that interpretation of the solicitation was reasonably open to the
Tribunal, and is a complete answer to this aspect of Acklands’ complaint.
[32]
Acklands
also submitted that manufacturers could make strategic changes to their MSRP
lists to favour their own bid, or the bid of a favoured distributor. For
example, manufacturers and their preferred suppliers could submit a greater
percentage discount initially, increasing their chance of receiving a standing
offeqr, and then subsequently submit a new MSRP with higher prices to reduce
the burden of the discount. The Tribunal rejected this submission on the basis
that any such attempted manipulation would likely result in a subsequent price
increase beyond what market conditions would justify, and also would likely
result in a rejection of the new MSRP. Again, in my view this was a reasonable
conclusion on the part of the Tribunal on the record before it.
[33]
Acklands
submitted that the fact that Public Works purported to reserve the right to
reject an amended MSRP list provided no protection against unfair price
manipulation by a manufacturer, because the solicitation did not state any
standards or parameters by which Public Works would exercise its discretion to
accept or reject an amendment, except a reference to “reasonableness”. However,
the Tribunal was not persuaded that Public Works would exercise its discretion
in an arbitrary or complacent manner, or that it would fail to consider the
purpose for which it retained this discretion, which was to deter potential
future abuse by standing offer holders. In my view, that conclusion was
reasonably open to the Tribunal on the basis of the record before it.
Conclusion
[34]
For
these reasons, I would dismiss the application for judicial review with costs.
“K. Sharlow”
“I
agree
Marc Noël J.A.”
“I
agree
J.D. Denis Pelletier J.A.”
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