Canada: What Retailers Should Learn from the Canadian Competition Tribunal’s Ruling Against Sears Canada

Every major retailer operating in Canada will be taking note of the landmark ruling against Sears Canada Inc. released earlier this week by the Competition Tribunal. Some have already begun to review their pricing strategies to ensure they comply with the ordinary selling price provisions of the Competition Act.

Retailers should also be aware that the need to implement and diligently enforce a pricing policy to minimize potential liability will become even more critical if proposed changes to the misleading advertising provisions of the Competition Act come into force. Those changes would significantly increase the maximum fines for deceptive marketing practices – from $100,000 to $10 million for a first court or Tribunal order and $15 million for subsequent violations.

In this Osler Update, we examine how the Tribunal arrived at its first decision under the ordinary selling price provisions of the Competition Act and highlight what retailers should learn from the Tribunal’s reasoning.

The Tribunal’s decision came after a lengthy trial following a claim initially launched by the Competition Bureau in 2002. In its January 24, 2005 decision, the Tribunal found that Sears Canada Inc. violated Section 74.01(3) of the Competition Act by referencing significantly inflated regular prices in sales advertisements for certain lines of automotive tires.

Under Section 74.01(3), a person engages in reviewable conduct when advertisements refer to regular or ordinary selling prices that do not pass either the "volume test" or the "time test." To meet the volume test, the price must be one at which a substantial volume of product has been sold at that price (or a higher price) within a reasonable period before a savings claim is made. The time test is satisfied when the product has been offered at the price (or a higher price) in good faith for a substantial time recently before making the savings claim.

Sears conceded that it failed to comply with the volume test in that it had sold less than 2% of the tires at the full regular price in the 12 months before they were advertised on sale. As a result, the issues to be determined at trial were limited to:

• Whether Sears’ regular prices for the tires were offered in good faith;

• Whether Sears met the "frequency requirement" of the time test (i.e., whether the tires had been offered at or above the advertised regular price for more than 50% of the relevant time period);

• If Sears had met neither the good faith nor frequency requirements, whether it had been able to establish that the representations were neither false nor misleading in a material respect; and

• If Sears had engaged in reviewable conduct, what administrative remedies should be ordered.

The Tribunal found that Sears failed the time test in that it could not have truly believed that its regular tire prices were genuine prices offered in good faith. Neither did Sears meet the frequency requirement of the time test with respect to four of the five lines of tires in question because they had been on sale for more than half of the six months before the advertised savings.

In response to Sears’ constitutional challenge to Section 74.01(3), the Tribunal upheld the constitutionality of the section under the Charter of Rights and Freedoms. Specifically, the Tribunal found that the section is a reasonable limit prescribed by law that is demonstrably justified in a free and democratic society, rejecting Sears’ argument that the section is an unjustified limit on its fundamental freedom of commercial expression.

An attentive reading of the Tribunal’s decision reveals some interesting issues. First, in support of her position that the relevant reference period for the time test was six months (as opposed to 12), the Commissioner of Competition relied in part on a memorandum circulated by Sears’ legal department to its vice presidents. The memo described the legislation and stated, among other things, that the relevant period for the time test would be the six months prior to making the savings representation. The fact that this internal memo formed part of the Commissioner’s case raises interesting privilege and evidentiary issues for retailers to consider. At the very least, in-house and external legal counsel should keep in mind that not every document prepared by a lawyer is privileged, and privilege can be waived through disclosure or in other ways.

Second, in finding that Sears had failed to establish that the representations were neither materially false nor misleading, the Tribunal held that the magnitude of the advertised savings would have had a material influence on a consumer buying the tires in question. Interestingly, the Tribunal stated that consumer harm is not a necessary element of reviewable conduct or for a finding of a material misrepresentation.

Third, the Tribunal determined that the phrase "good faith" must be interpreted subjectively; that is, "good faith" should be determined by asking whether the supplier truly believed that its regular prices were genuine and bona fide prices, i.e., set with the expectation that they would be validated in the market. External or objective criteria — such as actual sales at the reference price, and whether or not that price was comparable to prices offered by other competitors — may provide evidence that is relevant to assessing whether the supplier truly believed its regular prices to be genuine and bona fide.

The Tribunal issued an order prohibiting Sears from engaging in any similar pricing practices for tires and other automotive products for 10 years (the maximum duration of an order permitted under the Competition Act). However, in view of the length of time that had passed since the advertisements were published in 1999, the Tribunal denied the Competition Bureau’s request for an order requiring Sears to publish public corrective notices.

The Tribunal has reserved its decision with respect to costs and an appropriate administrative monetary penalty, pending further evidence and submissions to be made at a future hearing. The Bureau is seeking the maximum administrative monetary penalty of $100,000 for each line of the advertised tires, for a total of $500,000.

The Sears decision, when considered with the Competition Bureau’s recent consent agreements with Suzy Shier and the Forzani Group Ltd., sends a loud and clear signal to retailers that enforcement of the ordinary selling price provisions of the Competition Act is a priority to the Competition Bureau. In light of this decision and the proposed changes to the Competition Act, retailers should carefully review their current pricing and marketing strategies to ensure they are in compliance with the ordinary selling price provisions.

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