Case Documents

THE COMPETITION TRIBUNAL

IN THE MATTER of the Competition Act, R.S.C. 1985, c. C-34, as amended; and AND IN THE MATTER OF an application for orders pursuant to section 74.1 of the Competition Act for conduct reviewable pursuant to paragraph 74.01(1)(a) and subsection 74.01(3) of the Competition Act.

BETWEEN: THE COMMISSIONER OF COMPETITION Applicant - and - HUDSON’S BAY COMPANY Respondent AMENDED RESPONSE 1. The Respondent, Hudson’s Bay Company (“HBC”) submits this Amended Response to the Amended Notice of Application and Application of the Commissioner of Competition (the “Commissioner”), dated February 26, 2018 (the “Application”) for an order pursuant to section 74.1 of the Competition Act, R.S.C. 1985, c. C-34, as amended (the “Act”). For the reasons set out below, the Application should be dismissed in its entirety.

I. OVERVIEW 2. The Commissioner alleges that HBC “is engaging or has engaged in reviewable conduct, contrary to paragraph 74.01(1)(a) and subsection 74.01(3) of the Act” and seeks declaratory relief, a prohibition order, an administrative monetary penalty and corrective notices against HBC. The Commissioner’s Application is fundamentally flawed and should be dismissed for multiple reasons.

CT-2017-008

- 2 - 3. The Commissioner claims that HBC contravened subsection 74.01(3) of the Act, as a result of HBC’s retail banner Hudson’s Bay (“Hudson’s Bay”) advertising certain sleep sets, (among dozens offered by Hudson’s Bay), at prices that were “grossly inflated” and “not an actual regular price”. The fact is that Hudson’s Bay’s regular prices were set in relation to and were in line with the regular prices of Hudson’s Bay’s main, and much larger, retail competitors in the sale of mattresses in Canada. Hudson’s Bay did not negotiate the prices of its sleep sets with customers and there was no undisclosed price at which Hudson’s Bay was willing to sell sleep sets to customers during non-promotional periods other than the regular price. Contrary to the Commissioner’s allegations, Hudson’s Bay’s regular prices for the identified its sleep sets were manifestly actual prices offered in good faith by Hudson’s Bay. 4. The Commissioner’s position is based on an inherently flawed interpretation of the meaning of “good faith” in paragraph 74.01(3)(b) of the Act; it is an interpretation that conflicts with the Competition Bureau’s own Ordinary Price Guidelines and that, if adopted, would effectively write the “time test” contained in paragraph 74.01(3)(b) right out of the Act. Hudson’s Bay offered the identified (and all of its) sleep sets at a good faith regular price for a substantial period of time within the meaning of paragraph 74.01(3)(b), and therefore HBC did not contravene the Act. 5. Moreover, even if HBC had not complied with the “time test” set out in paragraph 74.01(3)(b) (which it did), Hudson’s Bay’s advertising of the sleep sets was not “false or misleading in a material respect” under 74.01(1)(a) of the Act, as the Commissioner alleges, especially when considering the competitive nature of advertising and pricing for mattresses

- 3 - in Canada in which most of Hudson’s Bay’s major competitors follow similar “high-low” pricing strategies. In no way was Hudson’s Bay’s advertising of its sleep sets deceptive, nor were its customers deceived by it. 6. In the Application as amended, the Commissioner now alleges that HBC “continues to engage” in conduct purportedly in violation of subsection 74.01(3) of the Act and asserts that “inflated regular price representations were and continue to be made by HBC to the public about all or substantially all of its sleep sets.” At paragraph 75, Table 4 of the Application, the Commissioner provides a Table purporting to list the “number of identified Sleep Sets promoted using O[rdinary] S[elling] P[rice] Representations” and the number “of OSP representations with savings of 50% or more off the regular price” by Hudson’s Bay during each year from 2013 through 2017. This Table ignores that it is not a contravention of the Act simply to advertise products at “50 or more off the regular price”. HBC’s “high-low” marketing of mattresses did not violate the Act. 7. The Commissioner’s (amended) Application also ignores that, beginning on February 2, 2018, Hudson’s Bay implemented a change to the manner in which it promotes and sells mattresses. Hudson’s Bay has now shifted to the general marketing strategy of promoting regular low everyday prices for mattresses, as opposed to its previous “high-low” selling strategy. Under its current marketing approach, Hudson’s Bay is not advertising sale prices with “deep discounts” of “50% or more off the regular price” of its mattresses (sleep sets). 8. The Commissioner also claims that HBC contravened paragraph 74.01(1)(a) of the Act by publishing advertisements for certain sleep sets that contained “clearance” or “end of line” language. There is no basis for the assertion that Hudson’s Bay’s use of “clearance” or

- 4 - “end of line” terminology to advertise mattresses was false or misleading in any respect whatsoever, or otherwise contravened section 74.01 of the Act. 9. Contrary to the Commissioner’s allegations, most consumers would not assume that a “clearance” sale of sleep sets involves only sleep sets that the retailer physically has in stock in its stores – something which common sense suggests would be impractical given the size and nature of mattresses. Rather, the term “clearance” reasonably denotes to consumers that a mattress is available for purchase for a limited time at the end of the model’s life at a price that is lower than typical promotional pricing. This is exactly the context in which Hudson’s Bay used the term “clearance”. 10. Notwithstanding this, Hudson’s Bay voluntarily ceased using “clearance” language, and instead shifted to the use of “end of line” in its advertising promotions for mattress models which are about to be discontinued. When used with respect to mattresses, the phrase “end of line” does not, as the Commissioner asserts, give customers the impression that “Hudson’s Bay will be selling specific inventory and will not replenish what gets sold”. Rather, the general impression created by Hudson’s Bay’s “end of line” advertising for some of its mattresses was limited and obvious: those models were being discontinued and new sales of those models would not be made past a certain date – which again is exactly the context in which Hudson’s Bay used the phrase. 11. In addition, even if some of Hudson’s Bay’s advertising did contravene section 74.01 of the Act, which is denied, the Commissioner is not entitled to the corrective notices and administrative monetary penalty he is seeking against HBC because HBC exercised due diligence to prevent the reviewable conduct from occurring. HBC has (and at the relevant

- 5 - times, had) a strict and comprehensive advertising compliance program and trains all of its employees engaging in marketing or buying the mattresses that Hudson’s Bay offers for sale on the importance of being, and how to be, compliant with advertising law. 12. As none of the Commissioner’s claims has any merit, this Application should be dismissed in its entirety.

II. ADMISSIONS/DENIALS 13. HBC denies each and every allegation in the Commissioner’s Application unless specifically admitted herein. 14. With respect to the allegations in paragraphs 29-35 of the Application, HBC admits that Hudson’s Bay advertised the four identified mattresses/sleep sets in the described flyers at the prices listed therein. 15. With respect to the allegations in paragraphs 37-38 of the Application, HBC admits that Hudson’s Bay did not make a substantial volume of sales of the four identified sleep sets at their respective regular prices over a twelve month period from the respective dates of the launches of those mattresses. 16. HBC denies that any of Hudson’s Bay’s regular price/savings promotional representations with respect to those four sleep sets constituted a breach of subsection 74.01(3) of the Act, as alleged by the Commissioner or at all. 17. With respect to the allegations in paragraphs 12, 26, 28, 53 and 74-76 of the Application, as amended, HBC denies that Hudson’s Bay made or is making representations

- 6 - with “grossly inflated” or “deceptive regular prices” for any, let alone “all or substantially all of its sleep sets”. Moreover, HBC specifically denies the allegation in paragraph 75 of the Application (as amended) that, as of February 26, 2018, HBC “continues to follow the same practice” with respect to the marketing of its sleep sets that it employed in 2013-2014 with respect to the four sleep sets specifically identified and used as “examples” in the Application. 18. With respect to the allegations in paragraphs 78, 82, and 91 of the Application, HBC admits that Hudson’s Bay made the alleged “clearance” or “end of line” representations concerning the identified mattresses/sleep sets in the described flyers. 19. With respect to the allegations in paragraphs 86-87 of the Application, HBC admits that Hudson’s Bay changed from making “clearance” to “end of line” promotional representations in respect of mattresses/sleep sets in or about December 2014. HBC further states that the Commissioner was aware of Hudson’s Bay’s change in this regard at the time it was made, and did not object to the use of “end of line” representations by Hudson’s Bay until the Application was filed. 20. HBC denies that any of Hudson’s Bay’s “clearance” or “end of line” representations constituted a breach of paragraph 74.01(1)(a) of the Act, as alleged by the Commissioner or at all.

- 7 - III. MATERIAL FACTS RELIED ON BY HBC A. About HBC 21. Founded in 1670, HBC is North America’s oldest company. HBC is a Canadian corporation amalgamated under the Canada Business Corporations Act. HBC’s registered head office is in Toronto, Ontario. 22. HBC operates Hudson’s Bay, which is a leading North American retailer offering a wide selection of branded merchandise throughout Canada. 23. There are 90 Hudson’s Bay stores across Canada and Hudson’s Bay also sells merchandise online at thebay.com. B. Hudson’s Bay’s Sale of Mattresses/Sleep Sets in Canada 24. The mattress industry in Canada is a highly competitive business. During 2013, the year in which the first advertisements challenged by the Commissioner appeared, retail sales of mattresses in Canada were approximately $1.2 billion. 25. Major manufacturers or suppliers of mattresses in Canada include Simmons/Serta, Sealy/Tempurpedic, Kingsdown and Springwall. Mattress manufacturers have significant influence on the retail market for mattresses in Canada. In 2013, Simmons/Serta (with a share of approximately 40%) and Sealy/Tempurpedic (with of a share of approximately 36%) were the two largest manufacturers of mattresses sold in Canada. 26. Hudson’s Bay sells mattresses at 78 of its retail stores across Canada and online, as part of its major home products division. Hudson’s Bay’s share of overall mattress sales in

- 8 - Canada is relatively small: in 2013, it was approximately 4% of total Canadian mattress sales. Hudson’s Bay had (and has) no “market power” in respect of the sale of mattresses. 27. The business of retail mattress sales in Canada is highly competitive, and Hudson’s Bay faces stiff competition from a number of competitors, several of which sell substantially more mattresses than Hudson’s Bay. In 2013, Hudson’s Bay’s major Canadian competitors included The Brick/Leon’s (which made approximately 29% of overall mattress sales in Canada); Sleep Country (which had approximately a 25% share); Sears (approximately 14% share of sales); Costco (approximately 3%) and IKEA (approximately 3%). In addition, Hudson’s Bay faced competition from a number of independent retailers, such as Bad Boy, which made substantial mattresses sales. The independents’ combined share of sales in 2013 was approximately 20%. 1. Hudson’s Bay’s Sourcing of Mattresses/Sleep Sets 28. In the 2013-2014 time frame, Hudson’s Bay purchased mattresses for sale in Canada from three mattress manufacturers/suppliers: Simmons/Serta, Sealy/Tempurpedic and Marshall (a mattress manufacturer located in Toronto, Ontario). It currently also purchases from 3 additional manufacturers. 29. Generally, Hudson’s Bay offers its particular mattress models for sale for approximately twelve months, as the mattress manufacturers typically update or change their mattress models and collections each year. Accordingly, Hudson’s Bay will discontinue selling the manufacturers’ “old” (previous year) mattress models and replace them with the new (current year) models. On occasion, Hudson’s Bay will sell a mattress model for longer

- 9 - than 12 months; such occurrences usually are the result of a delay in the availability of the new model from the manufacturer. 30. Every year, Hudson’s Bay’s mattress buyer deals with the mattress manufacturers’ sales representatives as part of determining which mattress models Hudson’s Bay will offer for sale in the upcoming year. As stated in the Commissioner’s Application, mattress manufacturers make a variety of mattress models, each of which typically comes in several different sizes ranging from twin to king. Each manufacturer’s mattress model typically can be matched with one of several corresponding box-springs from the manufacturer that have different “profiles” (such as standard, low-profile, and split-profile box springs). The combination of mattress and box-spring is known as a “sleep set”. Manufacturers typically group their sleep sets by “collection,” which may consist of multiple different mattress models and matching box-springs. 31. As also noted in the Commissioner’s Application, the characteristics and features of a manufacturer’s mattresses will vary across collections and by model within a collection. The variation across mattress models may include differences in construction, format, ticking and comfort level. 32. In a given year, many of the particular mattress models selected by Hudson’s Bay’s buyer, in consultation with the manufacturer’s sales representative, to be offered for sale by Hudson’s Bay will be exclusively available at retail from Hudson’s Bay. However, HBC denies the Commissioner’s allegation that such exclusivity purportedly makes it “very difficult for consumers to comparison shop between retailers” and states that consumers can and do compare mattress models offered by different retailers, particularly with respect to the

- 10 - central “features” for consumers, which are comfort and price. Indeed, certain of Hudson’s Bay’s competitors offer price matching for "comparable" mattresses regardless of a particular model name, number or construction. 33. The nature of the mattress industry is such that Hudson’s Bay tends (as do other retailers) to maintain relatively low levels of mattress inventory in its stores and warehouses, and many mattresses are sold on a “made to order” basis. Factors which favour this method of production and sale include: the wide range of choices available to customers in terms of mattress sizes, technologies and features; the relatively large size of mattresses, which makes handling and storage costs high; and the importance of cleanliness and hygiene with respect to mattresses (making it undesirable that the mattresses be stored for long). It is important to note, however, that while many Hudson’s Bay mattresses are sold on a “made to order” basis, the mattresses will generally be produced by the manufacturers from fabrics and materials that were chosen by and earmarked for Hudson’s Bay prior to the launch of the mattress model, and that the stock of such materials will be reduced as mattresses are sold throughout the year. 34. Each year, Hudson’s Bay offers numerous collections and, within those collections, multiple sleep sets, for sale in Canada. In 2013, for example, Hudson’s Bay offered approximately two dozen collections of mattresses for sale, consistent with a product assortment developed by Hudson’s Bay’s mattress buyer in conjunction with managers in Hudson’s Bay’s major home products division. The Commissioner’s Application in respect of HBC’s purported breach of subsection 74.01(3) of the Act relates only to four particular sleep sets offered for sale by Hudson’s Bay in 2013 and 2014.

- 11 - 2. Hudson’s Bay’s Regular Pricing for Sleep Sets 35. Hudson’s Bay follows a consistent process for setting the regular prices of the sleep sets it offers for sale in any given year. In this regard, consistent with its share of mattress sales in Canada, Hudson’s Bay is a price-follower (price-taker), rather than a price-leader. 36. Hudson’s Bay’s primary considerations in setting regular prices for its sleep sets are the products and prices of its competitors in the industry at the relevant time. In determining the regular price for a sleep set, Hudson’s Bay compares that sleep set to similar products being offered by Hudson’s Bay’s competitors and the prices at which those similar sleep sets are being offered. The primary benchmarks that Hudson’s Bay considers when comparing the sleep sets are the brand and the various aspects of the mattress’ construction (e.g., the type and number of coils where applicable, the foam used, whether the mattress is a eurotop, the fabric, ticking and other applicable features). 37. In making its comparison, Hudson’s Bay pays particular attention to the pricing of market leaders, such as The Brick/Leon’s and Sears. In addition, as noted above, the manufacture/supply of mattresses in Canada is concentrated, with the two leading manufacturers having a combined share of approximately 70%. Accordingly, Hudson’s Bay’s buyers take guidance from mattress manufacturers about the marketplace, competitive offerings, and suggested retail prices, when determining the regular prices for Hudson’s Bay’s sleep sets. Once set, Hudson’s Bay generally does not change the regular price of a sleep set, until the set is being discontinued. 38. HBC denies the Commissioner’s allegations that Hudson’s Bay lacked “an appropriate benchmark of their competitors’ regular prices against which to assess their own

- 12 - regular prices” or that the Hudson’s Bay buyers’ product comparisons were purportedly “arbitrary and informal.” Hudson’s Bay’s regular pricing for its sleep sets was based on an informed view of the competitive landscape – in which Hudson’s Bay was a relatively small player and a price-taker – and its regular prices for sleep sets were in line with those of its major competitors. 39. It should also be noted that Hudson’s Bay offers certain premium value items for its mattress customers, such as: free delivery, order cancellation prior to delivery, and a generous “comfort guarantee” that allows the customer to exchange a used mattress for up to 60 days from the date of delivery. 3. Hudson’s Bay’s Promotional Pricing for Sleep Sets 40. Each year, when Hudson’s Bay introduces its new mattress models for sale, the new models are offered at Hudson’s Bay’s regular price for at least four weeks. For example, the Brooklyn sleep set identified in the Commissioner’s Application was launched by Hudson’s Bay on February 24, 2013 and was offered at its regular price of $3,098 continuously through April 11, 2013, before it was first offered by Hudson’s Bay at a promotional price. HBC states that this establishes the product’s ordinary price for purposes of the Act. 41. Hudson’s Bay operates on a February through January fiscal year. Throughout its fiscal year, Hudson’s Bay runs various marketing and promotional events. These include weekly marketing events (generally running from Friday – Thursday) as well as promotional events based upon special occasions in the Canadian calendar (such as Mother’s Day, Victoria Day long weekend, Father’s Day and Thanksgiving) or other seasonal events (for example, Back to School and Boxing Day/Week) that are significant for Canadian retailers

- 13 - generally. In addition, Hudson’s Bay plans certain major corporate marketing events at various points in its fiscal year, such as Bay Days and White Sales that involve significant promotional activities for Hudson’s Bay. These events represent opportune times for customers to be shopping for mattresses, and, accordingly, Hudson’s Bay will plan targeted promotional activities for sleep sets around these important dates/events. 42. When Hudson’s Bay plans its promotional activities for sleep sets, whether as part of a weekly marketing event, an important calendar date or occasion, or a major Hudson’s Bay sale event, Hudson’s Bay will choose to promote a range of price points and models in order to demonstrate the breadth and variety of its mattress selection to customers. In general, Hudson’s Bay will choose to put all the sleep sets within a collection on sale at the same time rather than only one or two models within the collection. Over the course of the year, Hudson’s Bay will rotate the sleep set models it is featuring from promotional event to event, in order to ensure its promotions are “fresh” and present appropriate variety to consumers. 43. As with its regular price-setting for sleep sets, Hudson’s Bay’s process for setting promotional prices for its mattresses primarily takes into consideration the product and prices of its competitors and their promotional/marketing activities. Hudson’s Bay reviews the activities of its major competitors (such as The Brick/Leon’s and Sears) on a weekly basis to make sure that Hudson’s Bay remains competitive and relevant to consumers in the marketplace in light of those retailers’ promotions. In addition, the major mattress manufacturers provide input to Hudson’s Bay on promotional pricing levels for sleep sets and on when to consider offering those sleep sets on promotion.

- 14 - 44. Hudson’s Bay’s advertising for mattresses takes place in-store, in flyers, via e-mail communications and/or over the radio. During the period prior to February 2018, Hudson’s Bay and many of its major competitors in the sale of sleep sets, including The Brick/Leon’s, 1 Sears, and Bad Boy, followed a “high-low” retail marketing strategy for mattresses. That is, their promotions will offered substantial discounts off the regular sleep set prices (50% or more). Indeed, the advertised savings in the Hudson’s Bay flyers which are the subject of used as examples in the Commissioner’s Application are similar to and in line with the promotions and savings claims in respect of mattresses made by Hudson’s Bay’s competitors in the same time frame, which also advertised hundreds or thousands of dollars of savings from the regular prices of many mattress models. 4. Hudson’s Bay’s Advertising Compliance for Mattresses 45. HBC has, and during the entire period of the advertising flyers challenged by the Commissioner in his Application had, a comprehensive advertising compliance manual (the “Compliance Manual”) that applicable to Hudson’s Bay’s sale of sleep sets. Among other things, the Compliance Manual addresses matters such as price representations, the use of disclaimers or “fine print”, performance claims, and the potential need for corrective action. 46. As the Compliance Manual states, HBC “regards compliance with advertising laws as being of fundamental importance,” such that failure to comply with the rules “may result in disciplinary action, up to and including dismissal.” HBC requires all of its employees in Hudson’s Bay’s marketing and buying groups to take an online course on advertising

1 Although Sleep Country advertises extensively, it does not follow this marketing strategy. Sleep Country does not consistently advertise prices for its mattresses, and the price the customer pays for a mattress is negotiated with the Sleep Country sales associate on the floor. As such, there is little transparency to Sleep Country’s mattress pricing.

- 15 - compliance annually (and to pass that test with a perfect score), and to attend a session with HBC’s legal counsel on advertising law. There is no basis for the Commissioner’s assertions in the Application that “Hudson’s Bay management failed to demonstrate a clear, continuous and unequivocal commitment to compliance.” 47. HBC’s Compliance Manual provides that Hudson’s Bay’s regular prices must be set in “good faith”; the regular price “should be a price at which we reasonably believe that sales of the item may occur; or it must be a price which is comparable to that offered by a competitor.” With respect to sales events, in which “the regular price is temporarily lowered,” the Compliance Manual provides, among other things, that: an item can only be put ‘on sale’ if it has been (or will be) available for at least four weeks; the maximum length of a single sales event is 10 weeks; a regular price item may be on sale up to 45% of the days it is available; and Hudson’s Bay buyers should (and do) use a Hudson’s Bay form to plan and track the number of days on sale. 48. As noted above, Hudson’s Bay offered each new mattress model at its regular price for a period of at least four weeks from the launch date, in order to establish the sleep set’s ordinary or regular price, before placing it on promotion. Thereafter, during the 2013-14 period of the advertising challenged in the Commissioner’s Application (prior to it being amended), Hudson’s Bay tracked the number of days each sleep set was on sale over the year, for purposes of ensuring compliance with “time on sale” requirements over that period. 49. Particularly given that Hudson’s Bay generally offered mattress models for sale for a period of 12 months, monitoring compliance over the period of one year was reasonable and appropriate. As discussed further below, HBC denies the Commissioner’s allegations that,