Canadian COMPETITION LAW

June 21, 2010

RECENT MISLEADING ADVERTISING NEWS

Competition Bureau Confirms Enforcement Approach to New Guidelines on “Made in Canada” and “Product of Canada” Claims

Enforcement Guidelines for “Product of Canada” and “Made in Canada” Claims

Competition Bureau Warns Against Deceptive Business Directories

Deceptive Business Directories Warning

Reitmans Agrees to Correct Misleading Smart Set Promotion

The Competition Bureau announced that Reitmans, one of Canada’s largest clothing retailers, has agreed to correct a misleading promotion by its division Smart Set.  According to the Bureau, Smart Set had offered its customers a $25 “Savings Pass” for each $50 spent, with conditions that included an additional minimum purchase requirement of $50 and a limited redemption period.  The Bureau stated that neither of these conditions had been disclosed in Smart Set’s in-store signage or on its website, contrary to the general misleading advertising provisions of the Competition Act.  Reitmans has agreed to waive its additional purchase requirement to redeem a Savings Pass and extend the expiry date for its promotion.  This recent case emphasizes that the general misleading provisions of the Competition Act prohibit not only literally false advertising claims, but can also potentially catch claims where the “general impression” of a representation is misleading (e.g., where material conditions, limitations or exclusions are not clearly disclosed).  For more see: Reitmans Agrees to Correct Misleading Smart Set Promotion.

Infotel Directors Charged With Deceptive Telemarketing – April 12, 2010

Infotel Alleged Deceptive Telemarketing Case

DataCom Marketing Receives Record $15 Million Fine

Record $15 Million Fine for Business Directory Scam 

OVERVIEW OF MISLEADING ADVERTISING IN CANADA

The federal Competition Act (the “Act”) contains both civil and criminal provisions dealing with false or misleading representations (commonly referred to generally as “misleading advertising”).  In addition, the Act also governs a number of specific forms of marketing conduct including “ordinary selling price” claims (claims made in relation to sales), performance claims, selling above an advertised price, deceptive telemarketing and promotional contests.

False or Misleading Representations

As the Act contains both criminal and civil misleading representations provisions, the Competition Bureau (the “Bureau”) may pursue misleading representations on either a civil or criminal track.  While in most instances the Bureau will proceed civilly, it may commence an investigation or inquiry on the criminal track in some cases – for example, where there is evidence that an accused has engaged in intentional or fraudulent conduct.

The civil misleading representations provisions prohibit representations to the public, for the purpose of promoting a product or business interest, that are false or misleading in a material respect.  The criminal provisions, which are substantially similar, prohibit false or misleading representations that are made intentionally (i.e., knowingly or recklessly).

It is worth noting that a representation to a single person may be caught, both the literal meaning as well as the “general impression” of a claim are relevant in determining whether a representation is false or misleading (i.e., a representation that is literally true may, nevertheless, be false or misleading if the “general impression” of the representation is false or misleading) and that it is not necessary to show that any person has actually been deceived or misled as a result of the claim.

The relevant test to determine whether a representation is false or misleading is an objective test, which considers whether consumers are likely to be misled by the representation (or otherwise alter their conduct).

In addition, it is not necessary to show that a representation was made to persons in Canada or was made in a publicly accessible place (i.e., companies in Canada targeting foreign consumers with misleading advertising can, as a result of recent amendments, now be potentially exposed to liability as well as companies making claims in places not accessible to the public – for example, through catalogue or direct sales).

Promotional Contests

Promotional contests in Canada are primarily governed by the Act and the federal Criminal Code (the “Code”).  In addition, Quebec has separate legislation that applies to promotional contests (the Act respecting lotteries, publicity contests and amusement machines).

Given that the improper operation of a promotional contest can lead to civil and/or criminal liability under Canadian federal legislation (e.g., a Manitoba company recently paid more than $150,000 for making claims in relation to real estate investments that allegedly violated the promotional contest provisions of the Act), it is prudent to have promotional contests reviewed for compliance with the Act and the Code.

Competition Act

The Act for the most part requires that certain disclosure be made when conducting “any contest, lottery, game of chance or skill, or mixed chance and skill, or otherwise disposes of any product or other benefit …”  Some of the key requirements for promotional contests under the Act include: (i) disclosing the number and approximate value of prizes, (ii) disclosing the area (or areas) to which they relate and (iii) any fact that may materially affect the odds of winning.  In addition, the Act provides that the distribution of prizes cannot be unduly delayed.

As a result of the disclosure requirements set out in the Act, most contest organizers provide a short version of a contest’s terms at the point of sale, with a full version of rules available on request, on the organizer’s website, etc.  Point of sale disclosure often includes the number and approximate value of prizes, regional allocation (if any), the skill testing question requirement, information relating to the odds of winning, the closing date for the contest and information relating to the odds of winning.

In addition to specific rules relating to promotional contests, the “general” misleading advertising provisions of the Act also apply to the operation of promotional contests.  As such, it is important that the terms of promotional contests not be false or misleading in a material respect.

The potential penalties for contravening the promotional contest or general misleading advertising provisions include a court order to cease the conduct, civil or criminal fines, an order to publish a “corrective notice” and/or imprisonment.

Criminal Code

In addition to the promotional contest provisions in the Act, the Code also governs promotional contests in Canada (sections 206 and 207 of the Code).  In particular, the Code makes it a criminal offence to operate an illegal lottery.

While the relevant provisions of the Code are complex and somewhat archaic, in short an illegal lottery consists of: (i) a prize, (ii) chance and (iii) consideration (i.e., something of value provided by contestants as a condition for eligibility to participate in the contest).  For this reason, promotional contest organizers often remove either the consideration and/or chance elements (i.e., including a sufficiently skill testing question) in order to remove a contest from the scope of the illegal lottery provisions of the Code.  It is worth noting, however, that the determination of what constitutes “consideration” and “chance” can be challenging and complex.

Common Law

It is also worth noting that in addition to the regulatory requirements set out in the Act and Code, promotional contests have been held to be contracts (and, as such, are also governed by the common law of contract in Canada).   As such, in addition to ensuring compliance with the Act (including the general misleading advertising provisions), the Code and Quebec legislation, if applicable, it is also important that the terms and conditions of a promotional contest be reviewed with care to avoid potential contractual liability.

Performance Claims

The Act also prohibits performance claims that are not based on an adequate and proper test.  In particular, the Act prohibits representations made to the public, in the form of a statement, warranty or guarantee, of the performance, efficacy or length of life of a product that is not based on an adequate and proper test.

Some of the types of performance claims that may be caught by this provision include claims relating to the performance of a product, comparative advertising and claims relating to preferences or perceptions.  Importantly, any test that is carried out must be performed before the claim is made and be appropriate for the claim (i.e., support the claims being made and be based on appropriate test methodology).

Sale Above Advertised Price

The Act also prohibits selling (or renting) products at a higher price than advertised.  As such, it is the responsibility of sellers to ensure that the prices that are charged correspond to the advertised prices.  There are, however, a number of exceptions to this prohibition, including where an advertisement is immediately followed by a correction, sales of products by persons that are not in the business of selling such products (i.e., private sellers) and catalogue advertisements where it is clearly stated that the advertised prices are subject to error, providing the person advertising the product establishes that there has in fact been an error.

Deceptive Telemarketing

The Act makes it a criminal offence to engage in telemarketing for the purpose of making false or misleading representations in promoting the supply of a product.  Telemarketing is defined under the Act as “interactive telephone communications.”  In addition to prohibiting telemarketers from making false or misleading representations, the Act also prohibits telemarketers from engaging in a number of other activities including: (i) requiring advance payments in order to receive a prize, (ii) offering gifts as inducements to purchase other products (without fairly disclosing the value of gifts), (iii) not providing adequate and fair disclosure of the number and value of prizes and (iv) requiring advance payments for products offered at inflated prices.  In addition, telemarketers are required to make up-front disclosure of the identity of the person for whom the communication is being made, the purpose of the call, nature of the product and disclosure of the price and other material terms.  In this regard, the Act sets out specific disclosure to be included at the beginning of a call (and other mandatory disclosure to be made at some point during a call).

The enforcement of the telemarketing provisions of the Act has been aimed for the most part at companies engaged in true “scams” not legitimate marketers who may have committed technical violations.  Having said that, a number of individuals have been either charged or imprisoned in connection with the marketing of a broad range of products including business directories, office supplies and credit cards.

Ordinary Selling Price Claims

The ordinary selling price (“OSP”) provisions of the Act are intended to prevent inflated “regular” prices in relation to sales.  In short, these provisions make it a reviewable practice to mislead consumers about the “ordinary” selling price of a product.  Claims relating to the ordinary or regular price of a product cannot be made unless one of two alternative tests is met: (i) a “substantial volume” of the product has been sold at the stated “regular” price (or higher) within a “reasonable period” of time before or after the claim (the “volume test”) or (ii) the product has been offered for sale in good faith at that price (or higher) for a “substantial period of time” before or after the claim (the “time test”).

With respect to the volume test, the Bureau has taken the position that a substantial volume means more than 50% of sales at (or above) the reference price and that a reasonable period of time means twelve months before (or after) the claim (though this period may be shorter depending on the nature of the product).  With respect to the time test, the Bureau has taken the position that whether a product has been offered for sale in good faith will depend on a number of factors and that a substantial period of time means more than 50% of the six months before (or after) the claim is made (which may again be shorter depending on the nature of the product).  Since the OSP provisions were enacted in 1999, several prominent retailers have paid civil penalties ranging from $100,000 to $1.7 million for contravention of the OSP provisions of the Act.

Misleading Advertising Penalties

The potential penalties for contravening the civil misleading representations provisions include Competition Tribunal or court orders to cease the conduct, publish a corrective notice, pay restitution and/or pay “administrative monetary penalties” (essentially civil fines) of up to $750,000 for individuals ($1 million for subsequent violations) and $10 million for corporations ($15 million for subsequent violations).  The potential penalties for contravening the criminal misleading representations provisions (and deceptive marketing provisions) include up to 14 years imprisonment and/or an unlimited fine (i.e., in the discretion of the court).

For more regulatory law updates follow me on Twitter: @CanadaAttorney

Comments are closed.