Loblaws, Sobeys owners under investigation by Competition Bureau for alleged anti-competitive conduct

Canada's Competition Bureau has launched investigations into the parent companies of grocery chains Loblaws and Sobeys for alleged anti-competitive conduct, court documents reveal, with Sobeys'owner calling the inquiry "unlawful."

The Federal Court documents show the commissioner of competition launched the probes on March 1, saying there's reason to believe the firms' use of so-called property controls limits retail grocery competition.

The commissioner claims the controls that the grocery giants have baked into lease agreements are designed to restrict other potential tenants and their activities and are hampering competition in the grocery market.

Empire filed a notice on April 12 asking the Federal Court to review the Competition Bureau's complaint, alleging that the complaint is "invalid and unlawful," and asking that it should be quashed or set aside,according to the court documents obtainedby CBC News.

The Competition Bureau revealed its investigation into the use of property controls in the grocery sector in February.

At the time, deputy commissioner Anthony Durocher told a House of Commons committee that property controls can be a barrier both for independent grocery stores and chains looking to expand, as well as for foreign players looking to enter Canada.

That's why in a report last June, the bureau recommended the government limit their use in the grocery sector in order to help boost competition and make it easier for new supermarkets to open.

Industry Minister Franois-Philippe Champagne has said he's seeking a foreign grocer to strengthen competition in the Canadian market.

Property controls in contracts

Loblaw Cos. Ltd. and Sobeys parent Empire Co. Ltd. are two of the three major Canadian grocery companies and each owns a number of grocery chains across the country.

Details of the investigations are contained in a pair of court applications lodged by the commissioner on May 6.

Sobeys owner Empire has pushed back against the investigation, saying in a separate court application that the probe gave the commissioner "the appearance of a lack of independence" amid public criticism from federal politicians over grocery pricing and retailers' conduct.

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Loblaws' parent company is co-operating with the bureau's review, said spokeswoman Catherine Thomas on behalf of George Weston Ltd.

"Restrictive covenants are very common in many industries, including retail. They help support property development investments, encouraging opening of new stores and capital risk-taking," she said.

The commissioner applied in the Federal Court to order Empire and George Weston to hand over records about real estate holdings, lease agreements, customer data and other records.

In the court documents, the commissioner describes Empire and George Weston's holdings in real estate investment trusts, or REITs. In both cases, the companies' own grocery banners are significant tenants for the real estate companies.

Through a subsidiary, Empire holds a 41.5 per cent interest in Crombie Real Estate Investment Trust, and Empire is an anchor tenant in the majority of Crombie's properties, the documents say, adding that Empire's ownership interest in Crombie puts it in a position to exercise influence over the REIT.

George Weston has a controlling ownership interest of 61.7 per cent in Choice Properties Real Estate Investment Trust, and Loblaw accounted for more than half of Choice Properties' rental revenue in 2023, the documents say and Choice Properties and Loblaw have a strategic alliance under which the REIT has agreed to "significant restrictions" limiting "its ability to enter into leases with supermarket tenants other than Loblaw."

The commissioner's probe is focused on the companies' operations in Halifax, but also more broadly across the country.

Committee wants government to tackle high profits

The Competition Bureau's inquiry comes amid a House of Commons committee'srecommendationthat the federal government consider policies to tackle "excessive net profits" in the food industry.

In a report, the food price committee detailed its research into the causes of food inflation and insecurity in Canada, including the high-profile testimonies it drew from grocery executives.

The report lists a number of recommendations that range from lowering the barrier to entry for new companies into Canadato making legislative changes to strengthen competition law regarding mergers.

The committee is also recommending that the government discuss with the provinces and territories legislation to make the grocery code of conduct mandatory.

Examining restrictions and 'exclusivity clauses'

The Federal Courtdocuments show the inquiries are zeroing in on two types of property controls in contracts and commercial leases used by the grocery retailers "in many markets in Canada."

Restrictive covenants in private contracts, the commissioner says, "limit or restrict" how a piece of land can be used and can apply even after changing ownership.

The covenants can "leave restrictions or exclusions on competitors that extend beyond ownership of the land, sometimes for decades," the applications say.

The probes are also looking into "exclusivity clauses" in commercial lease agreements that "limit or restrict" who a landowner can lease to and which products can be sold by other parties close to another leaseholders' business.

The property controls, the commissioner says, may give the companies "the ability to exclude actual or potential competitors from selling food products within certain geographic areas or to dictate the terms upon which they carry on business."

Empire denies 'dominant' position

"This is a novel case," said Michael Osborne, chair of the Canadian competition practice at law firm Cozen O'Connor.

Previous cases alleging abuse of dominance involved companies with significantly more market power than George Weston or Empire have individually, said Osborne.

Therefore, the bureau will have to argue the companies are jointly dominant because they're using the same tools and together represent a large portion of the market, he said.

Sobeys parent Empire claims the commissioner was wrong to start the inquiry because it doesn't have a "dominant" market position.

In a separate application in Federal Court that has yet to be decided by a judge, the company denies that property controls are anti-competitive and says they "are not unique to the grocery sector, but have been widely used for decades in a range of retail and other sectors across the country."

Empire also claims the inquiry was launched for an "improper purpose," claiming the grocery sector has been the subject of an "inordinate" amount of attention from politicians.

Empire says the decision to launch an inquiry, amid a wave of criticism over rising grocery prices, raises "at least the appearance of a lack of independence of the Commissioner."

The company's lawyer declined to comment since the matter is still before the courts.

A spokesperson for Loblaw said in a statement to CBC News that the company is co-operating with the bureau's review.

"Restrictive covenants are very common in many industries, including retail.They help support property development investments, encouragingopening of new stores and capital risk taking," the spokesperson said.

CBC News reached out to Empire for further comment and did not hear back by deadline.