On March 23, 2007, the Competition Tribunal ("Tribunal") rendered a decision concerning the supply of (or refusal to supply) brand name wares to department stores. In a nutshell, the Tribunal refused to grant Sears Canada Inc. ("Sears") leave to commence a private application to compel Parfums Christian Dior Canada Inc. ("Dior") and Parfums Givenchy Canada Ltd. ("Givenchy") to supply it with DIOR® and GIVENCHY® products. This decision will be of interest to famous marks owners and distributors alike as it canvasses a number of issues inherent to the dynamic between these two market forces, such as:
- What portion of the distributor's business should be considered to determine whether the refusal to supply a product has a substantial effect on the distributor?
- What evidence must be adduced by distributors to establish that the effect on their business is substantial?
Many owners of famous marks put in place policies of selective distribution with a view to limiting the channels of trade in which their products are sold. This may entail, from time to time, refusing to supply products. In Canada, the Competition Act, R.S.C. 1985, c. C-34, provides that a person who, despite being willing and able to meet the usual trade terms of the suppliers of products that are in ample supply, is unable to obtain adequate supplies of said products because of insufficient competition among suppliers, can apply to the Tribunal for an order compelling a supplier to supply the product on usual trade terms. In order to obtain this remedy, the private applicant must first obtain permission from the Tribunal to bring such an application, by demonstrating that the refusal to supply either precludes it from carrying on business or has a direct and substantial effect on its business and that the refusal to deal is also having or is likely to have an adverse effect on competition in a market.
In 1993, Dior and Givenchy started retailing their high-end fragrances and skin-care products through Sears department stores. In January 2007, Dior and Givenchy informed Sears of their decision to end their relationship and supply.
SEARS' APPLICATION TO THE TRIBUNAL
On February 23, 2007, Sears sought the Tribunal's permission to bring an application requiring Dior and Givenchy to resume their supply of fragrances and cosmetics. In order to be successful, Sears had to prove that its business was directly and substantially affected by the inability to obtain adequate supplies of the DIOR® and GIVENCHY® products on usual trade terms.
DEFINING SEARS' BUSINESS
In order to determine whether or not the refusal to supply had a substantial effect on Sears, the Tribunal first had to define Sears' business. Despite the fact that Sears is a multi-product retailer, with various individual product sectors, the Tribunal relied on a number of its earlier decisions and found that the definition of Sears' business should include the entire department store. This determination was critical in that the Tribunal would subsequently measure the substantial effect of the refusal to supply (estimated at most at C$16 million in lost sales) against the earnings of the department store as a whole (estimated at C$6 billion).
Of the six arguments raised by Sears to show the substantial effect on its business, only two were accepted by the Tribunal, namely that the loss of DIOR® and GIVENCHY® products would:
- contribute to Sears' continuing to lose market share in brand name fragrances and cosmetics to its competitor, The Bay;
- affect its reputation and market image as a credible destination in the field of brand name fragrances and cosmetics.
Other arguments raised by Sears, which were discounted or given little weight by the Tribunal, include:
- Lost sales of, at most, C$16 million. On this point, the Tribunal noted that this figure did not take nto account the fact that some customers would switch over to other brands of fragrances and cosmetics sold by Sears and that, in any event, this amount was "insignificant when considered in the context of Sears' $6 billion overall business";
- Lost cross-segment sales of C$14 million. On this point, the Tribunal discounted this figure as there was no evidence as to the portions of the sales made by Sears which were attributable to customers who first came to Sears to buy a DIOR® and GIVENCHY® product and then bought other products. Here also the Tribunal held that, "whatever that amount may be, it will not, even when combined with lost sales, be substantial in the context of Sears' entire business";
- That other owners of brand name fragrances and cosmetics would benefit from a better bargaining and negotiating position (to Sears' detriment) due to the absence of DIOR® and GIVENCHY® products. This argument was afforded little weight as it does not appear to have been supported by evidence, whether from Sears' past experience or comments made by other brand owners;
- The high cost of removing and replacing DIOR® and GIVENCHY® displays, amounting to $600,000. On this point, the Tribunal noted that Givenchy and Dior had undertaken to cover reasonable costs associated with the removal of their displays.
In light of the foregoing, the Tribunal concluded that, while Sears would be directly affected by Dior and Givenchy's refusal to supply their products, the effect on Sears' department store business would not be substantial. Therefore, Sears' application for leave was dismissed by the Tribunal.
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