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Understanding How the Ordinary Selling Price Provisions of the Competition Act Apply to Your Business

Vancouver Convention & Exhibition Centre
999 Canada Place
Vancouver, British Columbia
October 19, 2006

(Vancouver-English.ppt (198KB))

Table of Contents

Overview of presentation

  • Ordinary Selling Price (OSP) – Harm to consumers and competitors
  • What the OSP Provisions Do Not Do
  • Basic Framework – Ordinary Selling Price
    • Two kinds of OSP
    • Nature of the product/geographic market
    • Volume and time tests
  • Special OSP Issues (Seasonal, Short-Life Cycle)
  • Corporate Compliance Program
  • OSP Do's and Don'ts
  • Questions and Answers

Harm to consumers and competitors

Harm to consumers

  • Misleading impression of savings
  • Misleading impression regarding the quality of the product

Harm to competitors

  • Lost sales of the advertised item
  • Diminished sales not only for competing products but also for other products
  • Negative goodwill to honest competitors

What the OSP Provisions Do Not Do

  • They do not regulate pricing – advertisers are free to set prices and change those prices to accommodate whatever the market will bear
  • OSP provisions only triggered when a savings claim from a regular selling price is made

Basic Framework – Ordinary Selling Price

Section 74.01(2) – Market price and 74.01(3) – Supplier's own of the Competition Act Essentially prohibit retailers from making false or misleading representations to the public as to the ordinary selling price (OSP) of a product

Retailers can refer to regular selling price if they can satisfy one of the following two tests

recently before or immediately after the making of the representation
nature of the product
relevant geographic market
Volume test Time test
  • reasonable period of time
  • substantial volume
  • in good faith
  • substantial period of time

Two Kinds of OSP

Section 74.01(2) – Market price and 74.01(3) – Supplier's ownof the Competition Act Essentially prohibit retailers from making false or misleading representations to the public as to the ordinary selling price (OSP) of a product

  • Section 74.01(2) – applies when a supplier references the market's regular selling price of the item

Section 74.01(2) – Market price and 74.01(3) – Supplier's own of the Competition Act Essentially prohibit retailers from making false or misleading representations to the public as to the ordinary selling price (OSP) of a product

  • Section 74.01(3) – applies when the supplier references their own regular selling price

Nature of product-geographic market

Retailers can refer to regular selling price if they can satisfy one of the following two tests

nature of the product
relevant geographic market
Volume test Time test
  • Under ss. 74.01(2) and (3), compliance with the volume and time tests is assessed having regard to the nature of the product and the geographic market:
    • 74.01(2) – “… where suppliers generally in the relevant geographic market, having regard to the nature of the product”;
    • 74.01(3) – “… having regard to the nature of the product and the relevant geographic market”.

Nature of product: Bulletin

  • Infinite variety of products
  • Vary in nature in numerous ways:
    • seasonal/non-seasonal
    • national brand/private label
    • durable/perishable
    • fashionable
    • novelty/commonplace
    • frequently/infrequently purchased
    • new/established
  • Why look at the nature of the product?
    • e.g.: a seasonal product may be sold or offered for sale for a shorter period of time than a non-seasonal one

Nature of product: Sears

  • Almost all tires sold in multiples
  • Tire sales fairly stable over time
  • Consumers do not spend much time searching for tires or evaluating alternatives
  • Consumers have limited ability to evaluate intrinsic qualities of tires
  • Consumers engage in passive search over time for tires
  • Available throughout the year

Relevant geographic market: Bulletin

  • Flexible concept
  • Determined based on relevant factors, which could include some or all of:
    • the market reach of the representations
    • the number and location of competitors
    • the likelihood of travel to purchase the product in question
    • the location of consumers reached by the representation and ease of price comparison

Relevant geographic market: Sears

  • Canada is the relevant market …Why?
    • Sears prices set on national basis
    • No discussion of “local markets” in Sears documents
    • Representations made nationally in flyers; no regional variation
    • Decisions re: sale pricing based on “market trends and consumer preferences in Canada”

Volume test

“… have not sold 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, as the case may be”

Volume test: The elements

nature of the product
relevant geographic market
Volume test Time test
  • reasonable period of time
  • substantial volume
  • in good faith
  • substantial period of time
recently before or immediately after the making of the representation
  1. “before or after the making of the representation”
  2. “reasonable period of time”
  3. “substantial volume”

Volume test: 1. “before or after” – Bulletin

  • S. 74.01(4) says that whether you look at the period of time before or after the representation depends on whether the representation relates to the price at which it was supplied or will be supplied
    • Before:
      • e.g.: Our Regular $100 – Now $50
    • After:
      • e.g.: After Sale Price $100 – Now Available $50

    Volume test: 1. “before or after” – Sears

    • the period of time prior to the representations was found to be the relevant period of time

    Volume test: 1. “before or after” – Hypothetical example 1

    • national brand upright vacuum
    • national retailer wants to offer a spring cleaning sales event starting April 1
    • product also available through national department and hardware stores
    • carried the last 5 years
    • Our Regular $500 – Now $300
      • therefore, it is likely appropriate to consider time period before the making of the representation

    Volume test: 2. “reasonable period of time” – Bulletin

    “The time period to be considered will be the twelve months prior to (or following) the making of the representation. However, this period may be shorter having regard to the nature of the product”

    Volume test: 2. “reasonable period of time” – Sears

    • tires at issue
    • “all season”- available throughout the year
    • 12 month period “reasonable” in circumstances

    Volume test: 2. “reasonable period of time” – Hypothetical example 1

    • national brand upright vacuum
    • national retailer wants to offer a spring cleaning sales event starting April 1
    • product also available through national department and hardware stores
    • carried the last 5 years
    • available throughout year
      • therefore, 12 month period likely “reasonable” in circumstances

    Volume test: 3. “substantial volume” – Bulletin

    “The substantial volume of product requirement will be met if more than 50% of sales are at or above the reference price”

    Volume test: 3. “substantial volume” – Sears

    • Sears sold 1.28% of tires at ordinary selling price in the 12 months preceding the representation
    • Sears agreed that the volume was not substantial

    Volume test: 3. “substantial volume” – Hypothetical example 1

    • national brand upright vacuum
    • national retailer wants to offer a spring cleaning sales event starting April 1
    • product also available through national department and hardware stores
    • carried the last 5 years
    • 25% in the past year were sold at or above $500
      • therefore, likely does not meet the volume test as set out in the Bulletin

    Time test

    “… has not 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, as the case may be”

    Time test: The elements

    nature of the product
    relevant geographic market
    Volume test Time test
    • reasonable period of time
    • substantial volume
    • in good faith
    • substantial period of time
    recently before or immediately after the making of the representation
    1. “in good faith”
    2. “substantial period of time”

    Time test: 1. “in good faith” – Bulletin

    Relevant factors:

    • product was openly available in appropriate volumes
    • ordinary price based on sound pricing principles and/or was reasonable given competition in relevant market
    • ordinary price was a price that the supplier fully expected the market to validate, whether or not the market did validate this price
    • ordinary price was price at which genuine sales occurred, or it was price comparable to that offered by competitors

    Time test: 1. “in good faith” – Sears

    • Good faith – inherently subjective concept
    • Sears' regular prices were not offered “in good faith”:
      • Sears had low expectations for sales at regular price
      • Sears knew:
        • regular prices greatly in excess of what it knew to be the competitive price range; and
        • regular prices irrelevant for 90-95% of tires sold
    • 2-for pricing was Sears' “every day pricing”
    • Sears did not track number of tires sold at regular price

    Time test: “in good faith”

    The bottom line:

    Does the retailer in question truly believe that its regular prices are genuine prices, set with expectation that the market will validate them?

    Time test: 1. “in good faith” – Hypothetical example 1

    • national brand upright vacuum
    • national retailer wants to offer a spring cleaning sales event starting April 1
    • product also available through national department and hardware stores
    • carried the last 5 years
    • regular price of the product has been $500 for several years and has traditionally sold well at that price by retailer and competitors, and demand is expected to continue
    • the vacuum market is stable
      • in light of these considerations, the retailer honestly believes that the regular price is a bona fide price that the market will validate
      • therefore, the regular price appears to have been set in good faith

    Time test: 2. “substantial period of time” – Bulletin

    “the substantial period of time requirement will be met if the product is offered at or above the reference price for more than 50% of the time period considered. The time period to be considered will be six months prior to (or following) the making of the representation”

    Time test: 2. “substantial period of time” – Sears

    Decision:

    • The Tribunal decided that a 6 month time period is appropriate
    • “In this context, it seems to me that if a product is on sale half, or more than half, of the time, it can not be said that the product has been offered at its regular price for a substantial period of time”
    • 4 of 5 tires “on sale” more than 50% of the time
    • failed the “substantial period of time” aspect of the time test

    Time test: 2. “substantial period of time” – Hypothetical example 1

    • national brand upright vacuum
    • national retailer wants to offer a spring cleaning sales event starting April 1
    • product also available through national department and hardware stores
    • carried the last 5 years
    • product was offered at regular price 60% of the time in the 6 months prior to the sale
      • therefore, the retailer has offered a product for a substantial period of time at the reference price before the sales event

    Special Issues

    Seasonal and Short Life-Cycle Products

    • The OSP provisions are flexible enough to accommodate a wide variety of goods and services
    • This flexibility comes from the fact that the time and volume tests are influenced by the nature of the product and the geographic market
    • Therefore, the application of the tests will be different for products with fundamentally different characteristics

    Hypothetical example 2 – Christmas lights

    • National retailer offers the seasonal product at regular price starting November 1st at $19.99
    • Retailer wants to offer this product at 20% off the regular price ($15.99) starting November 15th through to December 6th
    Statistical chart representing an item priced at $19.99 for a 2-week period which was then lowered to $15.99 for a 3-week period .
    • Before or after the representation?
      “$15.99 - Our regular $19.99 (20% Off)”
      • Therefore, the period of time before the representation was made is likely to be considered
    • Volume test
      (Reasonable period of time & Substantial volume)
      • Assume the volume test has not been met
    • What about the time test?
    (Time test)
    • Good faith
      • Let's assume the regular price of $19.99 was set in good faith
    • Substantial period of time
      • Substantial period of time will be met if the product is offered at or above the reference price more than 50% of the time period considered
      • The time period to be considered is the period starting December 6th back to November 1st
    Statistical chart representing an item priced at $19.99 for a 2-week period which was then lowered to $15.99 for a 3-week period .
    • Conclusion
      • The sale started out as being compliant, but as of the last day of the sale, the product had been sold for 2 weeks at the regular price and for 3 weeks at the sale price
      • Therefore the product would have been on sale for 60% of the time period considered, and would likely not meet the time test
    Statistical chart representing an item priced at $19.99 for a 2-week period which was then lowered to $15.99 for a 3-week period .

    What happens if the product returns to the regular price, and is then offered at a percentage off that regular price again later in time?

    • the entire period of time the product was offered would likely need to be considered in determining whether the volume or the time test is met

    What happens if the reference to the regular price is now removed entirely on all representations and the sale price becomes the new regular price?

    • The OSP provisions are only triggered when a savings claim is made with reference to a regular selling price
    • However, ensure that the savings claims do not create the false or misleading general impression that after the sale, prices will return to the former regular price if that's not the case (e.g.: Hurry in! One week only!)

    What happens if a new, lower OSP representation is made about the product?

    • the entire period of time the product was offered would likely need to be considered in determining whether the volume or the time test is met

    OSP-Related Issues

    The Saving Provision

    • Section 74.01(5) of the Competition Act provides that the OSP tests “… do not apply to a person who establishes that, in the circumstances, a representation as to price is not false or misleading in a material respect”.
    • “Advertisers should be allowed the freedom to make any price representations they wish so long as they are reasonably based and not deceptive or misleading”
      • Report of the Consultative Panel on Amendments to the Competition Act

    Clearance sales

    • Clearance sales, if legitimate, may be an example of an exception to the OSP tests
    • Bulletin indicates that a supplier would likely be able to show that OSP representations were not misleading if:
      • the supplier can demonstrate that the sale was clearly marked as a clearance sale
      • the representations refer to the original price and any subsequent interim prices
      • the original price was offered in good faith
    • The Bulletin indicates that such a sale may occur where:
      • a retailer offers for sale products not intended to be sold again at the original price;
      • the products did not sell well or were no longer selling at the original or lower price; or
      • the supplier wants to take a firm mark-down to make room for new merchandise.
    • The regular price must still have been set in good faith and the clearance must be legitimate

    MSRP (Manufactured Suggested Retail Price)

    • MSRP representations are popular in certain markets
    • Example: Save $50.00 off of MSRP!!
    • The Commissioner treats these as representations as to the market price

    Other Pricing Strategies

    • Depending on the circumstances, a particular pricing strategy may fall outside the parameters of the OSP provisions altogether:
      • but it will still be captured by the general prohibition against false or misleading representations if the conduct is deceptive.

    Corporate Compliance Programs

    • Bureau's bulletin on Corporate Compliance Programs (available on the Bureau's web site)
    • 5 essential elements:
      • the involvement and support of senior management
      • the development of relevant policies and procedures
      • the ongoing education of management and employees
      • monitoring, auditing and reporting mechanisms
      • disciplinary procedures

    Compliance Tips for OSP

    Some Do's and Don'ts

    • Do start by fostering a culture of compliance
    • Do develop and refine a credible and effective compliance program
    • Do ensure that compliance policies articulate the difference between market price and supplier's own price references, so staff understand that different claims require different substantiation
    • Don't forget to be clear if your references are intended to be to your own regular prices; otherwise the Act assumes it is a market price representation
    • Do remember that the tests are informed by the nature of the product and geographic market
    • Do remember that your savings claims must meet the time or volume test for each day they are offered – not just the first day of a sale
    • Don't rely solely upon mathematical calculations of time to meet the time test – the 'good faith' component of the test still has to be met
    • Do set regular prices in good faith, following the test set out in Sears, as appropriate
    • Don't set regular prices that the market won't bear, and then advertise discounts off of those prices
    • Do keep records of steps taken to ensure regular prices are set in good faith, such as competitive analyses
    • Do put the same efforts into setting regular prices as you do setting sale prices, including appropriate consideration of competitor's prices, as well as sales history for the same or similar products
    • DON'T 'set it and forget it'
      • monitor volumes of sales to ensure that you still have a reasonable good faith belief that the market is validating your regular prices
    • Don't rely on MSRPs or list prices as a shortcut
    • Do remember that OSP is a marketing technique which has a powerful influence on consumers
    • As such, recognize that it must be used in a way that is not deceptive

    Key web sites

    http://www.competitionbureau.gc.ca

    http://www.ct-tc.gc.ca

Date Modified: 2008-03-12

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