Canada: $1.2 Million Settlement In Misleading Advertising Case

The Competition Bureau reached a $1.2 milion settlement concerning the pricing practices of one of Canada's largest menswear retailers.

On July 27. 2006. the Competition Bureau (the "Bureau") announced that it had reached a settlement with Grafton-Fraser Inc. ("Grafton-Fraser") and Glenn Stonehouse.

The settlement, which calls for the payment of an administrative monetary penalty and costs of $1.2 milion, resolves the Bureau's concerns that the pricing practices of one of Canada's largest retailers of menswear contravened the ordinary selling price provisions of the Competition Act (the "Act").

Facts

Grafton- Fraser operates over 180 corporate stores under.a number of banners, including "George Richards Big & Tall," "Grafton & Co.," "Mr. Big & Tall," "The Suit Exchange." "Timberland" and "Tip Top Tailors."

Mr. Stonehouse, the President, Chief Executive Officer and majority shareholder of Grafton-Fraser, has direct responsibility for the operations of the business. including its marketing and pricing practices.

Ordinary Sellng Price

Under the ordinary selling price provision, the Competition Tribunal (the "Tribunal") may issue an order against a person who makes a representation as to the ordinar or "regular" selling price of a product in the market (usually compared to its own lower or "sale" price) where either that person or suppliers in the market generally have not either

(1) sold a substantial volume of the product at that price or a higher price within a reasonable time before or after the making of the representation (the "volume test"), or

(2) offered the product at that price or a higher price in good faith for a substantial period of time recently before or immediately after the making of the representation (the "time test").

Guidelines

The Bureau has issued guidelines stating that, in its view,

(1) regular price sales of more than 50% of the total sales during the last i 2 months are generally required .to satisfy the volume test, and

(2) offering a regular price for more than half of the time during the preceding six months is generally required to satisfy the time test. Conduct within the scope of these provisions potentially could also be subject to the criminal misleading representation offence under the Act if engaged in knowingly or recklessly.

Allegations

The Bureau commenced an inquiry into the pricing practices of Grafton- Fraser in March 2005, which included the execution of search warrants.

Following its investigation, the Bureau concluded that Grafton-Fraser had, between November 1999 and September 2005, significantly inflated the regular price of certain menswear products in certain of stores resulting in an overstatement of the savings to consumers when these products were on sale.

Specifically, according to its news release,

(t)he Bureau found that Grafton-Fraser tagged these garments with both a ('compare at) regular price and a sale price when . . . the garments were not sold in any significant quantity or for any reasonable period of time at the regular pnce.

In fact, the Bureau found that there were no sales of certain products at the regular price and that certain products were immediately put on sale following their arrival at Grafton-Fraser's retail outlets.

Consent Agreement

According to the consent agreement filed with the TribunaL. the Commissioner also concluded that Grafton- Fraser did not exercise sufficient due diligence in its efforts to ensure compliance with the Act despite being advised of the new ordinary selling price provisions in the fall of 1999, and despite being aware of recent enforcement actions by the Bureau involving these provisions.

Monetary Penalty

The agreement is to remain in effect for 10 years and has the same effect as an order of the Tribunal. It requires Grafton-Fraser to pay an administrative monetar penalty in the amount of $1 milion, and $200,000 towards the costs of the Bureau's inquir.

It also requires Grafton-Fraser to:

  • Comply with the ordinary selling price provisions of the Act;
  • Implement a comprehensive competition law compliance program designed to promote compliance with the Act, including the ordinary selling price provisions; and
  • Display a corrective notice prominently in its retail stores across Canada, on any of the company's web sites, and in designated newspapers across Canada.

Other Penalties

Previous enforcement actions under the ordinary price provisions have resulted in significant penalties being imposed, including a $1.2 milion penalty against Forzani Group Ltd., a $1 million penalty against Suzy Shier Inc., and a $500,000 penalty against Sears Canada.

Moreover, in mid-July 2006, Media Syndication Global ("MSG") and Havas SA. agreed to provide refunds to CIBC VISA cardholders who purchased certain binoculars and blood pressure monitors to resolve issues concerning the marketing practices of MSG.

Although fines were not imposed in that instance, it is not possible to determine the total cost of the rebates to customers by examining the public record.

REFERENCES: Competition Bureau, News Release, "Grafton-Fraser Pay $1.2 Million to Settle Misleading Advertising Case With Competition Bureau" (27 July 2006); Commissioner of Competition v. Grafton-Fraser Inc., CT-2006-007, Consent Agreement (27 July 2006) (Competition Tribunal).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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