The Sears decision: much needed clarification or just spinning our wheels?

On January 24, 2005 , the Competition Tribunal determined that Sears Canada Inc. violated the ordinary selling price provisions of the Competition Act (subsection 74.01(3)).[1] In light of the recent success of the Competition Bureau in obtaining hefty administrative monetary penalties (“AMP”) under the ordinary selling price provisions, and the Bureau’s controversial non-binding Guidelines on the provisions, a judicial interpretation has been highly anticipated by the competition law community. The Tribunal’s decision largely reinforces the interpretation advanced by the Bureau in its Guidelines.

Tribunal determines Sears snowed customers with inflated tire pricing

The Tribunal determined that Sears exaggerated the possible savings to consumers across Canada when it advertised five lines of its tires on sale. Sears quoted inflated regular prices when promoting tires to consumers at so-called sale prices, contrary to the ordinary selling price provisions of the Act. Sears admitted it sold less than 2% of the tires at full regular price before they were advertised on sale, and the Tribunal found that Sears could not have believed that its regular tire prices were genuine and bona fide prices that would be validated by the market. Furthermore, the representations as to price were false and misleading in a material respect.

The Tribunal issued an order prohibiting Sears from engaging in conduct contrary to the ordinary selling price provisions for a period of 10 years, in relation to its tires and automotive-related products and services. But because a long time had passed since the first application was filed, it did not require Sears to publish a corrective notice. Finally, the Tribunal left the issue of an AMP and costs to be determined after further submissions.

Though Sears challenged the constitutionality of the relevant section of the Act as an unjustifiable infringement of its fundamental freedom of commercial expression, the Tribunal upheld the constitutionality of the provision as a reasonable limit prescribed by law demonstrably justified in a free and democratic society. Such a limit was justified as false or misleading ordinary selling price claims harm consumers, business competitors and competition in general.

Tribunal upholds the Bureau’s interpretation of “time test”

In reaching its decision, the Tribunal determined that Sears’ regular prices were inflated because it did not sell a “substantial volume” of them at that “regular” price within a reasonable period of time before making the representations (the “volume test”). As well, Sears did not offer these tires in “good faith” at the regular price featured in the advertisements for a “substantial period of time” “recently before” making the representations (the “time test”).

It was unnecessary for the Tribunal to consider the “volume test” component of the ordinary selling price provisions, as Sears admitted it did not meet this test. However, it is important to note that the Tribunal decision largely re-enforces the interpretation of the “time test” advanced in the Bureau’s Guidelines, and contested by Sears.

In particular, the Tribunal accepted the Bureau’s interpretation of “recently before”, determining that the appropriate reference period for the application of the time test is a 6 month period prior to the making of the targeted representation, and not twelve months, as argued by Sears. Though the Tribunal noted that internal Sears documents also made reference to a 6 month period, it ultimately endorsed a 6 month time frame as, “a 12 month time frame would not, in my view, be in accordance with the requirement that the reference period be in reasonable temporal proximity to the making of the representation.”

As well, the Tribunal held that the “substantial period of time” requirement of the time test would be met if the product was not offered at a sale price for 50% of the time or greater, as set out in the Bureau Guidelines. Furthermore, the Tribunal interpreted the term “good faith” as the subjective belief of an advertiser that its regular prices were genuine and bona fide, set with the expectation that the market would validate them. The Tribunal noted this interpretation was “consistent with the description found in the Commissioner’s Guidelines concerning the assessment of good faith in the context of the time test.”

Finally, the Tribunal accepted the method contained in the Bureau’s Guidelines for defining the relevant geographic market, or “the area covered by the medium of communication that is employed.” It found inapplicable the “traditional competition law approach” or “demand side perspective” of defining geographic markets by considering the alternatives available to consumers as well as examining substantial lessening of competition. Instead, the Tribunal favoured examining where and how the advertiser marketed the product in question, or essentially the area in which the impugned representations were made.

Implications of the Sears decision

The Sears decision lends greater force to the controversial Bureau Guidelines and possibly foreshadows future judicial support of the Bureau’s interpretation of the volume test. Generally, this means that the ordinary selling price provisions may be interpreted in a way that reduces advertisers’ flexibility in advertising “sale” prices.

Published March 3, 2005