On January 24, 2005 the Competition Tribunal (the Tribunal) released its reasons (dated January 11, 2005) in The Commissioner of Competition v. Sears Canada Inc. The Tribunal found that Sears Canada Inc. (Sears) had violated section 74.01(3) of the Competition Act, which prohibits the making of materially misleading representations to the public about the ordinary selling price of a product. The Commissioner of Competition (the Commissioner) specifically alleged that, in 1999, Sears deceived consumers by inflating the "regular" price of certain tires while advertising those tires at "sale" prices. In reaching its conclusions, the Tribunal essentially adopted the analytical approach set out in the Competition Bureau's Information Bulletin - Ordinary Price Claims: Subsections 74.01(2) and 74.01(3) (the Bulletin).
Under the Act, claims regarding the ordinary price at which products are sold are legitimate if: i) a substantial volume of recent sales has occurred at the "regular" or "ordinary" price; or ii) the product has been offered for sale at the "regular" or "ordinary" price in good faith for a substantial period of time just prior to or immediately after the sale. According to the Bulletin, in order to determine whether a product has been offered for sale in good faith for a substantial period of time, the volume and time offered for sale at the regular price is assessed during a 6 month window. The substantial period of time requirement will be met if the product is offered at or about the regular price for more than 50 per cent of the time period considered. Sears conceded that it did not meet the substantial volume test, but maintained that it met the good faith test with respect to time, albeit over a one-year period. The Commissioner argued that Sears did not meet the good faith test when sales were assessed over the six-month period preceding the ads in question and that in any event, Sears had no expectation that it would sell a substantial volume of the tires at its regular prices, and Sears' regular prices for the tires were much higher than the regular prices for comparable tires offered by Sears' competitors.
Sears also challenged the constitutionality of subsection 74.01(3) on the basis that it is an unjustifiable infringement of Sears' fundamental freedom of commercial expression, which is guaranteed by subsection 2(b) of the Canadian Charter of Rights and Freedoms (the Charter). With respect to the constitutional challenge, the Tribunal found that, while subsection 74.03(1) infringed Sears' rights under section 2(b) of the Charter, it was a reasonable limit prescribed by law that is "demonstrably justified in a free and democratic society," thus saving it under section 1 of the Charter.
The Tribunal determined that Sears' regular prices for the tires were not offered in good faith because: Sears only expected to sell between 5 and 10 per cent of tires at the advertised regular prices; Sears did not generally refer to the advertised regular price in conducting competitive profiles; the advertised regular price was higher than the price Sears described as its "everyday pricing" in its internal documents; and Sears did not track the sale of tires sold at the advertised regular price. As most of the tires in the relevant advertisements were "on sale" more than 50 per cent of the time in the six-month period predating the advertisements, the Tribunal also determined that Sears failed to offer those tires to the public at the regular price for a "substantial period of time." In this respect, the Tribunal adopted the analytic approach set out in the Bulletin. Finally, the Tribunal rejected Sears' submissions that its representations were not materially misleading and specifically held that consumer harm is not relevant to the consideration of the materiality of any misrepresentations and "hence is not relevant to the existence of reviewable conduct."
The Tribunal ordered that Sears cease and desist from making ordinary pricing claims that do not conform with the Act for a period of ten years. In response to the Commissioner's request for imposition of an administrative monetary penalty ("AMP") of $500,000, the Tribunal declined to rule on this issue until the parties make further submissions regarding the appropriateness of an AMP. It remains to be seen whether Sears will raise a constitutional challenge to the validity of AMPs under the Act, a topic with widespread relevance given the proposal, currently before Parliament in Bill C-19, to introduce AMPs as high as C$5 million for misleading advertising and for abuse of dominance.
This landmark decision is the most recent development in a series of Competition Bureau investigations and settlements with various retailers for deceptive pricing practices. The Tribunal's findings further validate the Commissioner's stated commitment to ensuring consumers receive honest and accurate pricing information from retailers. Retailers should be aware that "ordinary price" claims may now be subject to greater enforcement scrutiny than ever before. Additionally, as mentioned, the proposed amendments to the Act contained in Bill C-19 would substantially increase maximum administrative monetary penalties to $10 million for a first infringement of the deceptive marketing provisions of the Act and $15 million for any subsequent infringement. As a result, future violations of section 74.01(3) of the Act or the other deceptive marketing provisions could have devastating financial consequences for retailers.