Unlike other areas of antitrust law and policy, Canada is less lenient than United States law when it comes to refusals to deal and resale price maintenance. Since January 2004, Canada's Competition Act has included a private right of action for refusals to deal. Attempting to use this relatively new right, one of Canada's largest retailers, Sears Canada, filed suit against Givenchy and Christian Dior's perfume affiliates earlier this year when Givenchy and Dior advised Sears that they would stop supplying Sears after fourteen years of doing business with it. Unlike under U.S. law, where firms generally may lawfully refuse to deal to anyone they choose provided the refusal is unilateral, Canada's Competition Act restricts refusals to deal when the refusal is causes a person's business to be "substantially affected" and has or is likely to have "an adverse effect on competition in a market"
Sears speculated that the refusals to supply were prompted by the discounts Sears offered in December 2006 on all cosmetic products sold in its stores, including Givenchy's and Dior's. It is a criminal offense in Canada to refuse to deal with retailers because of the low prices they offer. Section 61(1)(b) of the Act provides that no person shall refuse to supply a product to or otherwise discriminate against any other person engaged in business in Canada because of the low pricing policy of that other person. Presumably, evidence that Givenchy and Dior refused to deal further to Sears because of Sears' discounting practices was lacking, otherwise the Commissioner of Competition might have prosecuted Givenchy and Dior under the Act's resale price maintenance provisions.
The Act requires all private parties that wish to institute a refusal to deal suit to first obtain leave from the Competition Tribunal. The Tribunal will grant leave if has reason to believe that the applicant is "directly and substantially affected in the applicant's business or is precluded from carrying on business" due to a refusal to deal on usual trade terms. The same showing is necessary to prevail on the merits of a refusal to deal claim. Sears' application for leave, like an alluring fragrance, initially attracted attention in Canada. But when Sears failed to establish that its business was directly and substantially affected due to Givenchy's and Dior's refusals to deal, its case, like all perfumes, evaporated.
The key issue that resulted in this outcome was whether Sears’ entire department store business, its cosmetics and fragrance business, or its sales of Dior and Givenchy cosmetics and fragrances constituted the "business" for purposes of assessing whether Sears' business was substantially affected. Surprisingly, Sears did not provide any written representations on this issue in its application for leave with the Competition Tribunal. During oral argument, Sears' counsel represented that the appropriate "business" was the sale of Dior and Givenchy products. Dior and Givenchy countered that the appropriate business was Sears' entire department store business. The Tribunal reviewed four previous decisions on applications for leave for refusal to deal actions and found that it "has consistently taken the position that a substantial effect on a business is measured in the context of the entire business". The Tribunal acknowledged that unlike sections 103.1(7) and 75(1)(a) of the Act which refer only to a substantial effect on the applicant's business, section 75(1)(b) refers to a substantial effect in the applicant's ability to "carry on business in that class of articles". However, the Tribunal concluded that if Canada's Parliament intended the effect in sections 103(1)(7) and 75(1)(a) to be on a business in a class of articles, such as the Dior and Givenchy products, it would have said so. Thus, the Tribunal used Sears' entire department store business as the benchmark for measuring whether the effect of Dior's and Givenchy's refusals on that business was substantial.
On the issue of substantial effect, Sears argued that the French version of section 75(1)(a) of the Act differed from the English because the French phrase, "sensiblement gênée" did not have the same meaning as the English phrase "substantial effect." While "sensiblement" is defined in some French-English dictionaries as "appreciably", "noticeably", and "markedly", and "gênée" is defined as to "bother", "disturb" or "be in the way", the Tribunal found that these translations did not detract from the notion that the effect should be important and significant. The Tribunal thus rejected Sears' linguistic argument. Sears also argued that it would lose $16 million in business because customers would not substitute an alternate brand but instead shop elsewhere for the Dior and Givenchy products. The Tribunal expressed some doubt about this and said that regardless, $16 million (CDN) was not substantial when compared to Sears' annual overall revenues of $6 billion (CDN). The Tribunal also rejected Sears' allegation that another $14 million of cross-over sales would be lost because Sears did not have adequate evidence to back this up and even if it did, the Tribunal said, a $24 billion loss would neither be "substantial" when the overall revenues were $6 billion annually. The Tribunal did accept Sears' allegation that the loss of Dior's and Givenchy's products would mean it would lose additional business to its department store competitor, The Bay, and that Sears will lose the marketing message that its fragrance and cosmetics are a "destination category" for "prestige" products, but this did not change the Tribunal's conclusions. Sears may be directly affected by the refusals to deal, but the effect will not be substantial, the Tribunal explained.
In the press, Sears alleged that the refusal to deal to Sears would give The Bay monopoly power as a department store cosmetics and fragrance retailer. However Givenchy only has a 3-4% market share and the Tribunal itself noted that the Dior and Givenchy products represented a modest percentage of Sears' total cosmetics business.
What the Tribunal's order means for Canadian department stores, big box and other multiple product category retailers is that such firms will likely have a difficult time challenging a supplier's decision not to deal to them unless the refusal leads to a significant loss to its overall business and not just a portion of it. On the other hand, Canadian retailers that specialize in a category of products, such as cosmetics, sporting goods, and automobile parts, may have a relatively easier time challenging refusals to deal. For suppliers, this means that the greater the share of the market their products have, the more they should exercise caution and consult counsel before refusing to deal to customers, particularly since a refusal to deal may also serve as the basis of a prosecution for resale price maintenance.