Antitrust/Competition & Marketing Bulletin
February 2005
Fasken Martineau DuMoulin LLP
Sears decision released - First Competition Tribunal decision under the
ordinary pricing provisions of the Competition Act
Also in this issue:
Investment Canada
Act - 2005 threshold
for review
7
Industry Minister
contemplates
changes in foreign
investment
legislation
7
Canada proposes
“Do not call registry”
9
On January 11th, 2005, the Competition
Tribunal (the “Tribunal”) delivered its
first decision under the civil ordinary
selling price (OSP) provisions1 of the
Competition Act (the “Sears Decision”)2.
The Commissioner of Competition (the
“Commissioner”) had alleged that Sears
Canada Inc. (“Sears”) had made deceptive
representations in advertisements about
the regular selling price of five of its lines
of tires (the “Tires”). In finding that Sears
failed to comply with the OSP provisions,
the Tribunal provided lengthy reasons
and, in so doing, provided some guidance
in an area of competition law that has
been a source of some debate for
advertisers.
1
Vancouver
Calgary
Toronto
Montréal
Québec
New York
London
See section 74.01(3) of the Competition
Act. Note that, under the Competition Act,
there are both criminal and civil
misleading representation and deceptive
marketing practice provisions. In a
Competition Bureau information bulletin
(Misleading
Representations
and
Deceptive Marketing Practices: Choice of
Criminal or Civil Track under the
Competition Act), the approach of the
Commissioner in choosing whether to
pursue the criminal or civil track is
outlined. In respect of the Sears matter,
the Competition Bureau pursued Sears
before the Tribunal under the civil track.
Johannesburg
2
www.fasken.com
Commissioner of Competition v. Sears
Canada Inc., 2005 Comp. Trib. 2,
available on the Tribunal website at:
www.ct-tc.gc.ca/english/CaseDetails.asp?x=68&CaseID=168#221.
1. Background
During 1999, Sears offered the Tires for
sale at the following four price levels:
•
The “regular” price - the price at
which Sears would sell a single unit
of the Tires when the Tires were not
promoted as being on sale.
•
The “2For” price - the price at
which Sears would sell two or more
Tires when the Tires were not
promoted as being on sale.
•
The normal promotional price - the
usual sale price of Tires advertised
by Sears (being a set percentage off
the regular price).
•
The special promotional price - a
further discounted price compared
to the normal promotional price.
The normal promotional price and the
special promotional price were always
compared to the regular price (not the
2For price) in advertisements through
various media during 1999.
Fasken Martineau DuMoulin LLP
Antitrust/Competition & Marketing Bulletin
2. The Competition Act OSP Provisions
Under the OSP provisions of the Competition Act,
among other requirements, a savings or
promotional/sale price representation will not
constitute reviewable conduct if either one of the
following tests is satisfied:
a)
A substantial volume of the product was sold
at the OSP to which the sale price is being
compared (or a higher price) within a
reasonable period of time before or after the
making of the representation (the “volume
test”); or
2
OSP provisions violated Sears’ commercial freedom
of expression but argued that such infringement was
a reasonable limit prescribed by law that is
demonstrably justified in a free and democratic
society. The Tribunal agreed with the position of the
Commissioner and upheld the constitutionality of
the OSP provisions.
b) The Reviewable Conduct
The following issues were addressed under the OSP
provisions:5
b) The product was offered for sale, in good faith,
at the OSP or a higher price for a substantial
period of time recently before or immediately
after the making of the representation (the
“time test”).
Sears acknowledged that the representations made in
respect of the Tires did not satisfy the volume test;
therefore, the Tribunal only considered the
representations in the context of the time test.
Further, under the OSP provisions, even if neither
the time test nor the volume test is satisfied, the
advertiser will not have engaged in reviewable
conduct if it is demonstrated that the representation
was not false or misleading in a material respect.3
i.
What is the nature of the product and the
relevant geographic market?
ii.
Were Sears’ regular prices for the Tires
offered in good faith as required by the
time test?
iii.
Did Sears meet the frequency
requirement of the time test?
iv.
If Sears did not meet the good faith or
frequency requirements of the time test,
had Sears established that the
representations were not false or
misleading in a material respect?
v.
If Sears engaged in reviewable conduct,
what administrative remedies should be
ordered?
3. The Tribunal’s Decision
a) The Constitutional Challenge
As a preliminary matter, Sears challenged the
constitutionality of the OSP provisions as a violation
of Sears’ fundamental right to freedom of
expression.4 The Commissioner conceded that the
3
4
See section 74.01(5) of the Competition Act.
Section 2(b) of the Charter of Rights and Freedoms
5
For the purposes of section 74.01(3), Sears
acknowledged that the evidence established Sears to
be: (i) a person; (ii) who, for the purpose of
promoting, directly or indirectly, the supply or use of
tires and for the purpose of promoting, directly or
indirectly, its business interests generally; (iii) in
1999, made representations to the public as to tire
prices that were clearly specified to be the prices at
which the tires were ordinarily supplied.
Fasken Martineau DuMoulin LLP
Antitrust/Competition & Marketing Bulletin
c) The Nature of the Product and
Geographic Market
The OSP provisions state that, in considering
whether the volume and/or time tests have been
satisfied, regard must be had to the nature of the
product and the relevant geographic market.
In respect of the nature of the product, the Tribunal
found that tires generally had the following
characteristics: (i) tires are typically sold in
multiples; (ii) sales of all-season tires (such as the
Tires) are relatively stable over time, with some
predictable seasonal patterns; (iii) a significant
percentage of consumers do not spend much time
searching for tires or evaluating alternative products;
(iv) consumers have a limited ability to evaluate the
intrinsic qualities of tires; and (v) generally,
consumers only replace tires when they become
worn, and consumers engage in a passive search for
tires as they notice that their tires are becoming
worn.
In respect of the relevant geographic market, the
Tribunal found that Canada was the appropriate
geographic market to evaluate the context of Sears’
representations. In making this determination, the
Tribunal rejected the traditional competition law
approach to the definition of geographic market (for
example, that utilized in merger analysis) noting
that, unlike in other contexts, the OSP analysis does
not concern itself with whether there has been a
substantial lessening of competition. The Tribunal
looked at how Sears priced and marketed the Tires
and cited a number of factors as relevant to the
determination of the relevant geographic market,
including the fact that Sears’ regular and
promotional prices were set on a national basis, that
its internal documents contained no discussion of
local markets, that Sears generally did not produce
separate marketing material for each region, and that
the representations in question appeared in flyers
that were distributed across the country.
3
d) The Time Test
As noted above, Sears conceded that the
representations made in respect of the Tires did not
satisfy the volume test; therefore, the Tribunal only
considered the representations in the context of the
time test. In accordance with the time test, products
must be “offered for sale, in good faith…for a
substantial period of time…”. The time test resulted
in the following two-part analysis: first, were the
Tires offered for sale in good faith at the ordinary
selling price?; and second, were the Tires offered for
sale at the ordinary selling price for a substantial
period of time recently before the making of the
representation?6
i.
Good Faith
The Competition Act does not define the term “good
faith” and given that no previous case law had
considered the term in the context of the OSP
provisions, the Tribunal reviewed case law in other
legislative contexts.
The Tribunal concluded that good faith should be
determined on a subjective basis. In other words:
Did Sears truly believe that its regular prices were
genuine and bona fide prices, set with the
expectation that the market would validate those
regular prices? The Tribunal also stated however
that the following external/objective factors should
be considered in determining good faith: (i) the
reasonableness of the belief (which the Tribunal
stated is a factor to be considered in determining
whether a belief is honestly held); and (ii) other
external, objective factors such as whether the
reference price was comparable to prices offered by
competitors, and whether sales occurred at the
reference price, as such factors may provide
6
In the Sears Decision, the Tribunal found that the
relevant period to consider was before the making of
the representation, given that the representations
related to the price at which the Tires had been sold.
Fasken Martineau DuMoulin LLP
Antitrust/Competition & Marketing Bulletin
evidence relevant to an assessment of whether Sears
truly believed its regular prices were genuine and
bona fide.
The Tribunal ultimately concluded (based notably
on, among other things, internally produced
competitive
profiles
and
strategy/planning
documents), that Sears had not offered the Tires in
good faith at their regular price. The Tribunal
reached this conclusion with respect to both the
private label tires and the national brands at issue.
The following were factors that the Tribunal
considered relevant to its conclusion:
•
Sears expected that 90-95% of the Tires to be
sold would be sold in multiples; therefore
regular prices were not relevant for these sales.
•
With respect to any given line of Tires, Sears
could only have expected to sell between 2 and
6% at the regular price.
•
The regular prices of the Tires were not
competitive with competitors’ prices.
•
Competitive profiles did not analyze/compare
Sears’ regular price to the prices of its
competitors.
•
Sears’ “2For” pricing was described as its
“every day pricing”, not its regular price.
•
Sears did not and could not track the number
of tires it sold at the regular price.
•
Tire dealers generally sold nationally branded
tires at 35% off the MSLP7. (Sears had
attempted to use the MSLP to objectively
support its regular prices.)
prices for the Tires were genuine and bona fide
prices that the market would validate. The Tribunal
also looked at the objective factor of actual sales at
regular prices and found that with respect to any
given line of Tires, less than 2.3% were sold at their
regular prices in the preceding 12 month period.
ii.
7
Manufacturer’s Suggested List Price (MSLP).
The Time Test
Requirement
and
the
Frequency
Although the finding that Sears did not offer the
Tires in good faith at the regular prices would have
disposed of the issue before the Tribunal in respect
of the time test, the Tribunal briefly addressed the
frequency requirement under such test (i.e. whether
the product was offered for sale, in good faith, at that
price or higher price for a substantial period of time
recently before…the making of the representation).
In applying the time test, the Tribunal had to first
select the relevant period of time within which to
examine Sears’ conduct. The Tribunal concluded
that the appropriate reference period is 6 months,
consistent with the Competition Bureau’s guidelines
respecting the OSP provisions.8 In support of this
conclusion, the Tribunal noted that the OSP
provisions refer to having offered the product at the
regular price “recently” before the representation at
issue, which in the Tribunal’s view requires
“reasonable temporal proximity” between the
representations at issue and the offering of the Tires
at the regular prices. Moreover, Sears internal
documents and practices used a six month period as
the reference period. Finally, given the nature of the
product in issue, a six month period was thought to
provide an accurate picture of OSP behaviour, given
8
On the basis of the evidence, the Tribunal found that
Sears could not have truly believed that its regular
4
See Information Bulletin: Ordinary Price Claims
Subsections 74.01(2) and 74.01(3) of the Competition
Act, available on the Competition Bureau’s website at
www.competition.ic.gc.ca, in which the Bureau states
that the reference period would generally be 6
months, though it would depend on the nature of the
product.
Fasken Martineau DuMoulin LLP
Antitrust/Competition & Marketing Bulletin
that there was not much seasonal variation in sales
of all-season tires and that to the extent there were
increases/decreases at certain times of year, any six
month period would capture such fluctuations.
The Tribunal found that for the purposes of the
frequency requirement, since four of the five lines of
Tires were on sale half or more than half of the time
during the 6 months preceding the representations, it
could not be said that the Tires had been offered at
their regular price for a substantial period of time.
d) False or Misleading in Material Respect
As noted above, even if neither the time test nor the
volume test is satisfied, the advertiser will not have
engaged in reviewable conduct under the OSP
provisions if, in the circumstances, the price
representation was not false or misleading in a
material respect.
In determining whether a
representation is false or misleading in a material
respect, the general impression of the representation
as well as its literal meaning must be considered.9
In determining whether the price representations
were false or misleading in a material respect, the
Tribunal adopted the familiar test of whether the
representation readily conveyed an impression that is
false or misleading to an ordinary citizen that would
be influenced by that impression in making a
decision whether to purchase the product to which
the representations relate.10
The Tribunal found that the impression conveyed by
the representations was that substantial savings
would be realized over what would have been paid
for the Tires had they not been on promotion, and
that the representations were false and misleading.
9
10
See section 74.01(6) of the Competition Act.
See paragraph 325 of the Sears Decision where the
Tribunal refers to R. v. Kenitex Canada Ltd. et. al.
(1980), 51 C.P.R. (2d) 103 (Ontario Country Court).
5
As noted above, the comparisons in the
advertisements were to Sears “regular prices”, but
when the Tires were not on promotion, Sears’ 2For
price was always available if a purchaser bought
more than one tire. The 2For price was always
substantially lower than the regular (single unit)
price and 90-95% of Tires were sold in multiples.
Therefore, for Tires purchased in multiples, the
savings would not be the difference between the
regular price and the promotional price, but rather,
the difference between the 2For price and the
promotional price.
Next, the Tribunal had to consider whether the
representations were false or misleading in a
material respect. In that regard, the Tribunal
considered whether the representations would
constitute a material influence in the mind of a
consumer.
Given, among other factors, the
magnitude of the exaggerated savings, the fact that
Sears was recognized to be a high-low retailer, that
tires were sold in a competitive market, that national
brands were generally sold at a price 35% lower than
the MSLP, consumers’ inability to evaluate the
intrinsic attributes of tires (the 5 lines of Tires were
exclusive to Sears), and that a significant percentage
of consumers do not spend time searching for tires,
the representations were considered to be false or
misleading in a material respect. Notably the
Tribunal found that the fact that Sears presented
evidence that consumers were not harmed by the
representations was irrelevant to the consideration
by the Tribunal of the reviewable conduct: “whether
or not a consumer in fact got a bargain or paid less
than what the consumer would ordinarily have paid
is not the criteria”.
e) Conclusion and Disposition
In summary, the Tribunal found that Sears had not
offered the Tires for sales in good faith at the
“regular” prices in the representations and that Sears
failed to meet the frequency requirement of the time
Fasken Martineau DuMoulin LLP
Antitrust/Competition & Marketing Bulletin
test. Further, the Tribunal found that Sears was
unable to demonstrate that the representations in
respect of the Tires were not false or misleading in a
material respect. As a result, Sears was found to
have engaged in reviewable conduct under the OSP
provisions of the Competition Act.
The Tribunal issued a 10-year prohibition order (an
order not to engage in the conduct or substantially
similar reviewable conduct) applicable to Sears’ tires
and automotive-related products and services (rather
than all of Sears’ products and services) and
reserved judgement on the issue of whether an
administrative monetary penalty should be imposed
and if so, the amount. The Tribunal declined to
require Sears to publish corrective notices given the
length of time that had passed (i.e. 5 years) since the
representations had been published.
As noted above, the Sears decision was the first to
be decided by the Tribunal under the civil OSP
provisions of the Act. Of course, though the decision
does provide some guidance to advertisers, such
guidance must be interpreted in light of the specific
facts before the Tribunal in the case. Recently, there
have also been two consent agreements relating to
the OSP provisions.11
11
See Commissioner of Competition v. The Forzani
Group Ltd. and Commissioner of Competition v. Suzy
Shier Inc., both available on the Competition
Tribunal website at www.ct-tc.gc.ca.
6
Clearly, the OSP provisions appear to be a priority
area of enforcement for the Competition Bureau. It
is also important to note that amendments currently
being proposed to the Competition Act would
increase the risks of non-compliance under the OSP
provisions. If they become law, the proposed
amendments would significantly increase the
administrative monetary penalties and incorporate a
restitution remedy.
For more information on the subject of this article,
please contact the authors:
Angela Di Padova
416 865 4557
[email protected]
Lisa Tracey
416 865 4554
[email protected]
Fasken Martineau DuMoulin LLP
Antitrust/Competition & Marketing Bulletin
7
Investment Canada Act - 2005 Threshold for Review
The Minister responsible for the administration of
the Investment Canada Act has announced that $250
million (Canadian) will be the threshold amount for
the review of direct acquisitions of control of
Canadian businesses involving WTO investors or
vendors, other than Canadians, for the year 2005.
The threshold for 2004 was $237 million.
For more information on the subject of this article,
please contact the author:
Douglas C. New
416 865 4414
[email protected]
The Investment Canada Act provides for the
government review of significant investments in
Canada by non-Canadians in order to ensure that
such investments will result in net benefit to Canada.
Industry Minister Contemplates Changes in Foreign Investment Legislation
The Industry Minster has raised the possibility of
changes to the Investment Canada Act (“ICA”) to
address concerns connected with a recent move by
Chinese state-controlled companies to acquire major
Canadian natural resource sector corporations state-owned China Minmetals Corp. has reportedly
been in merger talks with Noranda Inc., a major
Canadian public mining company.
The Industry Minister was quoted in Canada’s Globe
and Mail newspaper as saying: “I think I share some
of those concerns that when you have state-owned
enterprises such as enterprises owned, controlled by
the government of China, that they may not be
entirely market motivated.”
One proposal suggested was a requirement that
foreign state-owned companies would have to issue
shares on a Canadian stock exchange to obtain
acquisition approval under the ICA, the rational
appearing to be that provincial securities regulators
and market forces would temper the conduct of the
foreign government.
While the Industry Minister appears to have
specifically referred to the possibility of
amendments to the current legislation, existing
powers provided in the ICA are arguably sufficient
to impose whatever conditions the Minister believes
are warranted to protect Canadian interests in the
case of any foreign takeover of a major Canadian
natural resource concern.
As drafted, the ICA requires that direct acquisitions
of control of Canadian businesses by non-Canadians,
including foreign state-controlled corporations, must
be subjected to a pre-merger review and approval
process if such investments involve assets in Canada
over a prescribed monetary threshold, generally
$250 million for WTO investors such as China,
which joined the WTO on December 11, 2001, and
$5 million in the case of businesses involved in
prescribed sensitive business sectors (i.e. uranium
mining, financial services, transportation services
and cultural businesses).
In order to obtain Canadian government approval,
the foreign entity is required to demonstrate to the
satisfaction of the Minister that the investment will
“likely be of net benefit to Canada”, failing which
the acquisition may not proceed. The legislation also
contemplates the submission of legally binding
Fasken Martineau DuMoulin LLP
Antitrust/Competition & Marketing Bulletin
undertakings by the non-Canadian to support any
claims of “net benefit”.
The foregoing signals a change in the Canada’s
attitude concerning the benefits of certain foreign
investment in Canada. Under then Prime Minister
Pierre Trudeau, the Liberal government introduced
the Act’s predecessor legislation, the Foreign
Investment Review Act (“FIRA”), in the early
1970’s. While at that time generally viewed as
directed at U.S. investment in Canada, FIRA applied
to almost all foreign investments into Canada, both
acquisitions and new business ventures. FIRA
required that foreign investors demonstrate that their
investments would be of “significant benefit to
Canada”. Following the Progressive Conservative
Party coming into power under former Prime
Minister Brian Mulroney in the mid-1980’s, FIRA
was repealed and replaced by the current legislation
with the accompanying announcement that “Canada
[was] open for business”. The lessening of the
approval threshold to a “net benefit” test,
8
accompanied by a general relaxation in the manner
of the ICA’s administration, conveyed to foreign
investors the feeling that Canada welcomed foreign
investment except in the case of a limited number of
culturally sensitive business sectors such as book
publishing and the film distribution industry.
The recent publicly reported musings of the current
Liberal Industry Minister suggest that perhaps
Canada’s front door is no longer being held wide
open for foreign investors but that, once again,
foreign investors, or at least certain of them, will
have to ring Canada’s investment door bell and then
wait to see on what basis admission may be granted
to them.
For more information on the subject of this article,
please contact the author:
Douglas C. New
416 865 4414
[email protected]
Fasken Martineau DuMoulin LLP
Antitrust/Competition & Marketing Bulletin
9
Canada Proposes “Do not call registry”
The Government of Canada intends to enact
legislation to reduce the volume of unsolicited
telemarketing calls received by Canadians at home.
The proposal involves amendments to the
Telecommunications Act which, if enacted by
Parliament, would empower the Canadian Radiotelevision and Telecommunications Commission
(“CRTC”) to establish a national Do Not Call list.
Once implemented, any Canadian who does not
wish to receive calls from companies offering goods
and services will be able to add his/her telephone
number to a single, centralized list that telemarketers
will be required to download regularly and honour.
The proposal contemplates penalties against
telemarketers who do not follow the rules - $1,500
per offending call for individuals and $15,000 per
offending call to companies.
Similar legislation enacted by the U.S. in 2003
resulted in excess of 10 million U.S. consumers
listing their telephone numbers on that registry
within 3 days of its implementation. Over 64 million
telephone numbers were registered by the end of
2004.
While U.S consumers appeared to welcome the Do
Not Call registry system, the legislation was initially
successfully attacked in the U.S. courts by a group
of marketing organizations as breaching the
Constitution’s First Amendment which guarantees
that Congress will make no law abridging the
freedom of speech. The initial court order was
stayed however and the legislation has since been
held to be constitutional by the Tenth Circuit.
Following enactment of the bill, the CRTC will
undertake a consultation process on the manner of
the implementation of Canada’s Do Not Call list.
Under the U.S. regime, certain organizations such as
charities have special rules which apply to them and
political solicitations are not covered by that
legislation. The CRTC will likely wish input as to
which Canadian organizations should be exempt
from its Do Not Call list.
No doubt with the cost of the Gun Registry in mind,
the government proposes that the operations of the
Do Not Call register will be funded on a costrecovery basis by Canadian telemarketers –
presumably by charging such telemarketers a fee for
the periodic downloading of the list’s database of
registered numbers. As well, we can expect that the
actual operation of the registry will be contracted out
to the private sector.
For more information on the subject of this article,
please contact the author:
Douglas C. New
416 865 4414
[email protected]
Fasken Martineau DuMoulin LLP
Antitrust/Competition & Marketing Bulletin
10
Our Antitrust/Competition & Marketing Law Group Local Office Contacts
Vancouver
Calgary
Montréal
Toronto
Don M. Dalik
604 631 4739
Kristine Kennedy
403 261 5361
René Cadieux
514 397 7591
Anthony F. Baldanza*
416 865 4352
[email protected]
[email protected]
[email protected]
[email protected]
Québec City
New York
London
Johannesburg
Jean M.-Gagné
418 640 2010
Philippe David
212 935 0910
John M. Elias
44 20 7929 2894
Al Gourley
21 11 658 0802
[email protected]
[email protected]
[email protected]
[email protected]
* Chair, Fasken Martineau Antitrust/Competition & Marketing Law Group
This publication is intended to provide information to clients on recent developments in provincial, national and international law. Articles in this bulletin
are not legal opinions and readers should not act on the basis of these articles without first consulting a lawyer who will provide analysis and advice on a
specific matter. Fasken Martineau DuMoulin LLP is a limited liability partnership under the laws of Ontario and includes law corporations.
© 2005 Fasken Martineau DuMoulin LLP
Vancouver
Calgary
Toronto
Montréal
604 631 3131
[email protected]
403 261 5350
[email protected]
416 366 8381
[email protected]
514 397 7400
[email protected]
Québec City
New York
London
Johannesburg
418 640 2000
[email protected]
212 935 32 03
[email protected]
44 20 7929 2894
[email protected]
27 11 685 0800
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