Canada: When Is A "Sale" Not A "Sale"? Canada’s Competition Bureau Issues Its First "Ordinary Price" Decision

Apart from dealing with traditional antitrust matters such as cartels, mergers, abuse of dominance and distribution/pricing practices, Canada’s Competition Act also contains an array of provisions governing various types of misleading representations and other deceptive marketing practices. These include provisions with respect to misleading advertising, "ordinary price" claims, deceptive telemarketing, promotional contests and "pyramid" selling.

The Canadian Competition Bureau has placed misleading representations/deceptive marketing practices among its top enforcement priorities. Recently, the Bureau has paid particular attention to the Competition Act’s "ordinary selling price" ("OSP") provisions, which are intended to ensure that consumers are not misled by inflated "ordinary prices" when buying items that are advertised as being "on sale."

In 2003, for example, the Bureau entered into a settlement with a leading women’s clothing retailer, which agreed to pay an "administrative monetary penalty" of C$1m (€621,000) for making allegedly misleading "sale" claims. Similarly, in 2004, Canada’s largest national retailer of sporting goods agreed to pay a total of C$1.7m (€1m) for allegedly overstating the actual savings to consumers on items bought at its so-called "sale" prices.

The beginning of 2005 has witnessed yet another Canadian retailer falling foul of the Competition Act’s OSP provisions. In the first contested proceeding under these provisions, the Canadian Competition Tribunal held on 24 January 2005 that Sears Canada misled consumers in 1999 by exaggerating the possible savings available to them when buying certain automobile tyres. The Tribunal also upheld the constitutionality of the OSP provisions, which Sears had challenged as part of its defence in this case.

The Competition Act’s OSP provisions authorise the Competition Tribunal to issue a remedial order where a person who makes a representation about the price at which a product has been "ordinarily supplied":

• did not sell a "substantial volume" of the product at that price (or a higher price) within a "reasonable period of time" before or after the making of the representation (the "volume test"), and
• did not offer the product at that price (or a higher price) in "good faith" for a "substantial period of time" either "recently before" or "immediately after" the making of the representation (the "time test").

However, the OSP provisions do not apply if the person establishes that, in the circumstances, the impugned representation was not "false or misleading in a material respect."

The Competition Bureau filed its application against Sears on 22 July 2002. The Commissioner alleged that Sears had misled consumers on several occasions in 1999 about the real value of their savings on the purchase of five brands of tyres by referring to inflated "regular" prices when advertising these tyres as having been "on sale." Moreover, based on Sears’s internal documents, the Bureau alleged that the company was aware of these problems and did not take sufficient steps to avoid them, thus failing to publish its advertisements with the requisite "good faith."

In its application for relief, the Bureau sought an order from the Tribunal

(i) prohibiting Sears from engaging in this type of conduct for ten years – the maximum period provided for in the OSP provisions,

(ii) requiring Sears to issue "corrective notices," and

(iii) obliging Sears to pay an "administrative monetary penalty" of C$500,000 (€310,000).

The Bureau’s application was hotly contested by Sears. There were numerous interlocutory motions and the hearing took 28 days, including testimony from eight expert witnesses. In the end, however, the Tribunal agreed with the Bureau and held that Sears had violated the OSP provisions, which it also found to be constitutionally valid. Specifically, the Tribunal found that:

(i) Sears had failed to meet the volume test with respect to the sale of all five of the lines of tyres at issue because less than 5% of these tyres had been sold at the purported "regular" price (Sears conceded that this was the case).

(ii) Based on Sears’s own documents, its purported "regular" prices were not offered in "good faith" as required under the time test.

(iii) Sears did not meet the "substantial period of time" requirement in the time test for four of the five lines of tyres because the tyres were only sold at the purported "regular" prices for less than half the applicable reference period of six months.

(iv) Sears failed to establish that its representations were not "false or misleading in a material respect."

In reaching its conclusion, the Tribunal made a number of important points regarding the OSP provisions:

• The terms "substantial volume," "reasonable period of time" and "substantial period of time" may defy precise measurement but they are terms of common usage with commonly understood meanings. They help ensure that the OSP provisions are applied flexibly, which is necessary to deal with the variety of circumstances that may arise.
• Although the Tribunal did not discuss the volume test at great length, it made its view clear that selling less than 5% of an item at the "ordinary" (or "regular") price will not be sufficient to meet this requirement.
• The "good faith" element of the "time test" will be satisfied if the supplier truly believed that its "ordinary" prices were genuine and bona fide, i.e. there was an expectation that the market would validate those "ordinary" prices.
• A product that has been "on sale" for more than half the applicable reference period preceding the savings claim, has not been offered at its "ordinary" price for a "substantial period of time" and therefore will not meet the time test.
• The onus is on the supplier to prove that a representation that fails to comply with the OSP provisions is not otherwise materially misleading. In this case, the Tribunal held that the size of the advertised savings (25%-50%) was of sufficient magnitude to cross the materiality threshold because it was large enough to attract consumers to buy Sears’s tyres.
• The absence of actual consumer harm or the fact that many consumers may be satisfied with their purchases is not relevant to whether the representations are material and, as such, is not relevant to whether a contravention of the OSP provisions has or has not occurred.

Having found a contravention of the OSP provisions, the Tribunal issued an order prohibiting Sears from engaging in similar reviewable conduct for a period of ten years. However, the Tribunal declined to extend this prohibition to all products offered for sale by Sears and instead limited it to Sears’s tyres and automotive products. The Tribunal also held that ordering Sears to publish corrective notices would serve no purpose, given that the misleading claims in question were made more than five years earlier.

The Tribunal also reserved on the question of whether Sears should be ordered to pay a penalty of C$500,000 (€310,000), as requested by the Bureau. The Tribunal ordered that a separate hearing be held to consider this issue together with the question of costs.

The OSP provisions were established as a civil reviewable practice under amendments to the Competition Act introduced in 1999. Before that, making misleading claims about "sale" prices was a criminal offence.

The objective in decriminalising the OSP provisions was to put in place a less complicated process to deal with potentially misleading "sale" claims. However, it is not at all clear that these goals are being met, considering that the Sears case took more than two and a half years to resolve – and more than five years after the representations in question were made.

That said, the Competition Bureau is obviously very pleased with the Tribunal’s ruling. The Commissioner of Competition heralded the decision as an "important milestone in the Competition Bureau’s efforts to ensure that consumers get honest and accurate pricing information from retailers," adding that "Canadian consumers should expect nothing less than truth in advertising, when deciding where to spend their hard earned money."

As a result of the Bureau’s success in Sears, retailers doing business in Canada can expect their "on sale" promotions to be subjected to closer scrutiny. Moreover, the consequences for companies of violating the OSP provisions may become even more onerous in the near future, given the Canadian government’s proposal to increase the maximum monetary penalty for a first violation from C$100,000 to C$10 million (€62,000 to €6.2m) and for any subsequent violations, from C$200,000 to C$15 million (€124,000 to €9.3m).

There is also a proposal to authorise the Tribunal to order parties found to have engaged in misleading advertising – including misleading "ordinary price" claims – to pay restitution to consumers.