August 22, 2010
What is “Misleading Advertising”?
The federal Competition Act contains criminal and civil provisions that prohibit false or misleading representations and deceptive marketing practices. These are frequently referred to as the “misleading advertising” provisions of the Act.
The general civil misleading advertising provision of the Act (subparagraph 74.01(1)(a)) prohibits any person from making a representation to the public, to promote a product or any business interest, that is false or misleading in a material respect.
Is misleading advertising a criminal offence or a civil matter?
Misleading advertising may also be pursued by the Competition Bureau as a civil or criminal matter. In this regard, the Bureau has issued an Information Bulletin (Misleading Representations and Deceptive Marketing Practices – Choice of Criminal or Civil Track under the Competition Act) that sets out when it is likely to proceed on the criminal as opposed to the civil track for misleading representations and deceptive marketing practices.
In general, the Bureau’s Information Bulletin states that in most instances the civil track will be followed unless certain criteria are satisfied as follows: (i) there is clear and compelling evidence suggesting that the accused knowingly or recklessly made a false or misleading representation to the public and (ii) a criminal prosecution would be in the public interest.
In making the public interest determination, the Bureau sets out a number of factors that include: (i) whether there was substantial harm to consumers that could not adequately be dealt with by civil remedies, (ii) whether the deceptive practices targeted vulnerable groups, (iii) whether timely attempts were made to remedy the adverse effects of the conduct and (iv) any evidence of similar conduct in the past. The Bureau also sets out several mitigating factors: (i) whether a prosecution or conviction would be disproportionately harsh or oppressive and (ii) the existence of an effective compliance program.
What other marketing practices are regulated by the Competition Act?
In addition to the “general” misleading advertising provisions, the Act also contains a number of other criminal and civil provisions prohibiting and regulating specific types of marketing practices.
These include provisions relating to deceptive telemarketing (section 52.1), deceptive prize notices (section 53), double ticketing (section 54), multi-level marketing (section 55), pyramid selling schemes (section 55.1), representations that are not based on adequate and proper tests (subparagraph 74.01(1)(b)), false or misleading ordinary selling price representations (subsections 74.01(2), (3)), misleading or unauthorized use of tests and testimonials (section 74.02), bait and switch selling (section 74.04), the sale of a product above its advertised price (section 74.05) and promotional contests (section 74.06).
What has to be proven for misleading advertising?
For a representation to be false or misleading under subparagraph 74.01(1)(a) (the civil misleading advertising section), it must be established on the civil burden of proof (i.e., balance of probabilities) that: (i) a representation has been made, (ii) to the public, (iii) to promote a product or business interest, (iv) the representation is false or misleading and (v) the representation is false or misleading in a “material” respect.
The criminal misleading advertising provision of the Act (subsection 52(1)) is substantially the same, except that in order to establish criminal misleading advertising, it must also be proven that a representation was made “knowingly or recklessly” (i.e., subjective intent) and the burden of proof is the criminal standard (i.e., beyond a reasonable doubt).
What is a representation?
The first element of misleading advertising is that a “representation” (i.e., advertising claim) must be made. This element is typically easily met and is broader than mere advertising. A representation may encompass printed, oral, broadcast and visual representations or claims. The Bureau’s position is also that all representations, regardless of form, are subject to the Act.
It is also worth noting that online representations fall well within the scope of “representation” and the Bureau has issued enforcement guidelines addressing misleading advertising in the online environment (Application of the Competition Act to Representations on the Internet). As a practical matter, the Bureau also periodically conducts online “sweeps” of Internet advertising as part of its misleading advertising and deceptive marketing enforcement efforts.
What does “to the public” mean?
The second element of misleading advertising is that a representation must be made to the “public”. Canadian courts have, with a few exceptions, had little difficulty in finding that advertising and marketing claims have been made “to the public” and have interpreted the phrase broadly.
A claim may be made to a single person and be considered to have been made to the public. In addition, as a result of recent amendments, a representation does not need to be made in a place where the public has access (e.g., telemarketing) or to the Canadian public (and so cross-border marketing to non-Canadians can be caught). The Act also contains provisions that deem certain types of conduct to be a representation to the public.
What does “promote a product or business interest” mean?
The third element of misleading advertising is that a representation must be made to promote either a product, including professional or other services, or any business interest, which may be merely a subsidiary or indirect intention of a representation.
A “Business interest” must be the business interest of the person making the representation, but has been interpreted broadly and may include any business interest and not necessarily an interest with the persons who might be misled by the representation.
What does “false or misleading” mean?
The fourth element for misleading advertising is that a representation must be literally false or misleading. In this regard, both the literal meaning and the general impression conveyed by the representation are relevant.
Also, in determining whether a representation is false or misleading, the entire context of the representation, including illustrations, photographs and the association of different words and phrases, must be considered.
What does “material” mean?
Finally, to contravene both the civil and criminal misleading advertising provisions, a representation must be false or misleading in a “material respect.” For the materiality requirement, is not necessary to show that anyone has actually been deceived or misled and the monetary amount involved is irrelevant.
The relevant question, though Canadian courts have been inconsistent in articulating the standard, has in many cases been held to be whether an “average consumer” (or equivalent) interested in using the relevant product would be influenced in deciding whether or not to purchase the product being offered (or to otherwise alter their conduct).
As to what may be considered “material”, many Canadian courts have found that false or misleading representations in relation to price and essential or fundamental terms are material. In addition, the omission of important information, conditions or limitations can also be considered to be material.
Does a misleading claim need to be made intentionally?
To establish criminal misleading advertising, it must also be shown, in addition to all of the other necessary elements for misleading advertising, that a representation was made intentionally (i.e., “knowingly or recklessly”).
Are performance claims prohibited?
No. However, in addition to the “general misleading advertising” provisions of the Act, paragraph 74.01(1)(b) prohibits any person from making any representation to the public about the performance, efficacy or length of life of a product that is not based on an “adequate and proper test”.
The testing or verification of any performance claims must be made before a claim is made and the onus is on the person making the representation to prove that the performance claim is based on an adequate and proper test.
While performance claims can be a legitimate means to distinguish goods or services from competitors, it is important that adequate and proper testing is performed (or appropriate statistics or support are obtained) before a claim is made.
The federal Competition Tribunal has recently held that there is a non-exhaustive list of factors to consider whether a test is “adequate and proper” and that the testing does not need to be 100% reliable or the best scientific testing that could have been performed (i.e., the testing does not need to meet a test of certainty).
Is comparative advertising prohibited?
No. Comparative advertising can lead to price and other competition by allowing prospective clients to compare prices and service offerings.
While comparative advertising is not itself prohibited under the Act, and while accurate and truthful comparisons can be highly pro-competitive, comparative advertising can in some instances raise issues (e.g., where unfounded performance claims are made).
As such, when making comparative advertising claims, it is prudent to ensure that, as is the case with general advertising, claims be accurate, that any important information or conditions are clearly disclosed and, if performance claims form part of the comparative advertising, that the claims are substantiated before the claims are made.
What are the penalties for misleading advertising?
The potential penalties for contravening the criminal or civil misleading advertising provisions can be severe. Under the criminal misleading advertising provision (section 52) the potential penalties are, on indictment, a fine in the discretion of the court, imprisonment for up to fourteen years, or both. On summary conviction, the penalties are a fine of up to $200,000, imprisonment for up to one year, or both.
Under the general civil misleading advertising provision, penalties include judicial orders to: (i) cease the conduct, (ii) publish a corrective notice, and/or (iii) pay an “administrative monetary penalty” (essentially a civil fine) on the first occurrence of up to $750,000 for individuals ($1 million for each subsequent order) or $10 million for corporations ($15 million for each subsequent order) or (iv) make restitution to compensate consumers that have purchased a product.
In reality, the vast majority of misleading advertising matters are resolved by way of negotiated settlement, either by way of a consent agreement, in the case of civil reviewable matters, or a prohibition order, in the case of criminal matters. In some cases, a misleading advertising matter may also be resolved voluntarily without formal proceedings being initiated.
Are private actions possible?
Yes. Private parties may commence civil damages actions for contravention of the criminal provisions of the Act (including section 52 – the criminal misleading advertising provision). The necessary elements to be proved are all of the elements of misleading advertising (under 52 of the Act) and that the conduct has caused actual loss or damage (under section 36 of the Act). Private actions are increasingly common, particularly in the context of performance and comparative advertising claims made by competitors (for example the perennial “telecom wars”).
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