Canadian COMPETITION LAW

May 14, 2010

The federal Competition Act is Canada’s principal, but by no means only, legislation governing misleading advertising.  In addition to this federal legislation, a broad array of other federal and provincial laws can apply to advertising and marketing practices, including provincial consumer protection laws, sectoral legislation and federal packaging and labeling legislation.

The Competition Act contains both civil and criminal misleading advertising provisions that apply to false or misleading claims made to promote the supply or use of products (including services).

For a claim to be misleading, it must be proven that: (i) a representation has been made, (ii) to the public, (iii) to promote a product or business interest, (iv) that is literally false or misleading (or with a false or misleading general impression) and (v) that the claim is “material” (i.e., likely to influence a consumer into buying or using a product or otherwise altering their conduct).

Criminal misleading advertising is substantially similar, but also requires that a claim be made “knowingly or recklessly” (i.e., with intent).

Some important points to note about misleading advertising law in Canada include:

1.  The misleading advertising sections of the Competition Act are broad enough to apply to claims made relating to both services and “any business interest”.

2.  A representation to a single person may be caught.

3.  Both the literal meaning and the “general impression” of a claim are relevant in determining whether a claim is false or misleading (i.e., a representation that is literally true may, nevertheless, be false or misleading if the “general impression” of the claim is false or misleading).

4.  It is not necessary to show that any person has actually been deceived or misled as a result of a claim.

5.  It is also not necessary to show that a claim was made to Canadian consumers (i.e., as opposed to cross-border marketing) or was made in a publicly accessible place (i.e., the sections can apply to “private” marketing events, telemarketing activities, etc.).

The Competition Bureau has issued an Information Bulletin (Misleading Representations and Deceptive Marketing Practices: Choice of Criminal or Civil Track under the Competition Act) that outlines its approach to determining whether to pursue the criminal or civil track in relation to misleading advertising.  In general, the Bureau will in most cases follow the civil track unless certain criteria are satisfied including clear and compelling evidence that misleading advertising was engaged in intentionally and that a criminal prosecution would be in the public interest.

Penalties for misleading advertising include “administrative monetary penalties” or “AMPs” (essentially civil fines) of up to $750,000 (for individuals) and up to $10 million (for corporations) and orders to stop the activity or compensate consumers harmed by misleading claims.  The penalties for criminal misleading advertising include fines of up to $200,000 and/or imprisonment for up to one year (on summary conviction) or fines in the discretion of the court and/or imprisonment for up to 14 years (on indictment).

In addition to the “general” misleading advertising provisions, the Competition Act also contains a number of other criminal and civil provisions that prohibit or regulate specific types of marketing practices, including deceptive telemarketing, deceptive prize notices, double ticketing, multi-level marketing, pyramid selling schemes, representations not based on adequate and proper tests, false or misleading ordinary selling price claims, misleading or unauthorized use of tests and testimonials, bait and switch selling, the sale of a product above its advertised price and promotional contests.

Some of these provisions are discussed below.

COMPARATIVE ADVERTISING

A common type of advertising/marketing that can be the subject of challenge by provincial or federal enforcement agencies (e.g., provincial consumer protection officials or the federal Competition Bureau) is comparative advertising.

Generally speaking, comparative advertising is where individuals or companies compare prices, product or service quality or performance to their competitors.

Like performance claims (see our Performance Claims page), comparative advertising can be an effective and legitimate way to distinguish products or services from the competition.

For example, the Competition Bureau has endorsed the potentially pro-competitive benefits of comparative advertising, including in its 2007 Report on the self-regulated professions in Canada (Self-regulated professions – Balancing competition and regulation) with respect to legal fees:

“[c]omparative advertising fosters price competition by allowing prospective clients to compare fees.  When consumers cannot compare the prices for legal services, there is little or no incentive for lawyers to compete on price, thereby raising the costs to consumers.”

However, comparative advertising can also raise misleading advertising concerns in some cases – for example, where the information in a comparative advertising claim is false or misleading or where it includes a performance claim that is not substantiated (i.e., that is not based on adequate and proper testing, which is required under the Competition Act).

As such, it is important to ensure that comparative advertising claims are, among other things, true, accurate and that any important information (e.g., conditions, limitations, etc.) is clearly disclosed.  In addition, if comparative advertising involves performance claims, such as claims relating to the performance or reliability of a product/service, it is also important that any such claim be both accurate and substantiated before being made.

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.

PACKAGING AND LABELLING LEGISLATION

Packaging and labelling of products in Canada is highly regulated, with general and product specific legislation settting out requirements for the format of labels, mandatory labelling information, prescribed containers and prohibiting false or misleading representations on package labels.  Some of the types of products for which packaging and labelling is regulated in Canada include pre-packaged consumer products, certain dangerous and hazardous products, cosmetics, drugs, food, medical devices, textiles and precious metals.

Key Canadian packaging and labelling legislation includes the Canada Agricultural Products Act, Canada Consumer Product Safety Act, Consumer Packaging and Labelling Act, Food and Drugs Act, Hazardous Products Act, Marking of Imported Goods Order, Precious Metals Marking Act, Textile Labelling Act and Weights and Measures Act (and related Regulations under these statutes).

For more information about Canada’s packaging and labelling legislation see: Canadian packaging and labelling legislation.

PERFORMANCE CLAIMS

In addition to the “general” misleading advertising provisions, the Act also contains a standalone civil provision that prohibits performance claims that are not based on an “adequate and proper test”.  In this regard, 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 (the proof of which lies on the person making the claim).

Some of the types of performance claims that may fall under this provision include claims relating to the performance of a product (e.g., speed, reliability, sales performance, etc.), comparative advertising (e.g., where one firm’s product’s performance is being compared to another company’s products or services) and claims relating to preferences or perceptions.

While performance claims themselves are not prohibited, any testing or verification must be conducted before the claim is made.  Also, the onus, if challenged, is on the person making the claim to show that it is based on an adequate and proper test.

The Competition Tribunal has set out a non-exhaustive list of factors relevant to determining whether testing is “adequate and proper”.  Testing also does not need to be 100% reliable or the best scientific testing that could have been performed (i.e., it has been held that testing does not need to meet a test of certainty).

Given that the Competition Bureau has challenged performance claims in a wide variety of industries over the years, including in relation to weight loss products (diet patches, skin care cream, sauna belts, weight loss devices and natural products, etc.), clothing (alleged therapeutic benefits of some types of clothing), fuel saving devices, chimney cleaning products, UV ray protection, anticorrosion devices, disease cures (e.g., cancer, AIDS, etc.) and therapeutic benefits of tanning, among others, it is incumbent on companies and their external advisors and agencies to take steps to ensure that testing is conducted before performance claims are made.

PROMOTIONAL CONTESTS

Promotional contests in Canada are primarily governed by the Competition 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) and contract, intellectual property, privacy and new media law issues can be relevant to the trouble-free operation of contests in Canada.  Given that the improper operation of a promotional contest can lead to civil and/or criminal liability, it is prudent to have promotional contests reviewed for compliance with the Competition Act and the Code, as well as other laws that may apply.

For more information about Canadian contest laws see: contests.

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

Competition Act

The federal Competition Act makes it criminal offences to engage in deceptive telemarketing or to engage in telemarketing unless certain required disclosure under the Act is made.

Under section 52.1, “telemarketing” is defined as “the practice of using interactive telephone communications for the purpose of promoting, directly or indirectly, the supply or use of a product or for the purpose of promoting, directly or indirectly, any business interest”.  In its telemarketing enforcement guidelines (Telemarketing – Section 52.1 of the Competition Act), the Competition Bureau has taken the position that “interactive telephone communications” does not include fax, Internet or automated pre-recorded messages but are limited to live voice communications between two persons.

Under the Competition Act’s deceptive telemarketing provisions, it is a criminal offence to: (i) make materially false or misleading representations; (ii) operate a contest where the delivery of a prize is conditional on prior payment or certain disclosure is not made (regarding the number and value of prizes, area or areas to which they relate and odds of winning); (iii) offer free or below cost products, as consideration for supplying another product, unless disclosure is made of the fair market value of the first product (and any restrictions, terms or conditions relating to its supply); or (iv) offer products for sale grossly in excess of their fair market value where their delivery is conditional on prior payment by buyers.

The Competition Act also requires that certain disclosure be made by telemarketers both at the beginning of a call and sometime during a call.  For example, the Act requires that the following information be disclosed by telemarketers at the beginning of a call: (i) the person on whose behalf the call is being made; (ii) the nature of the product or business interest; and (iii) the purpose of the call.

Like the general misleading advertising provisions of the Competition Act (sections 52 and 74.01), the general impression is relevant to determining whether a claim made by a telemarketer is materially false or misleading.  Unlike misleading advertising generally, however, if misleading claims are made in the context of telemarketing, the Competition Bureau does not have the discretion to proceed civilly, given that the only deceptive marketing provisions are criminal offences under section 52.1.

Deceptive telemarketing is punishable, on indictment, by unlimited fines (i.e., in the discretion of the court), imprisonment for up to 14 years, or both (and on summary conviction, to fines of up to $200,000, imprisonment for up to one year, or both).

There is also no “mens rea” (i.e., intent) required for deceptive telemarketing, in that the offences under section 52.1 are strict liability offences.  As such, proof of the act, regardless of any guilty mind (or lack of), is sufficient to make out an offence.  There is, however, a due diligence defence available under section 52.1.

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

The Competition Bureau has also issued enforcement guidelines on deceptive telemarketing: Telemarketing – Section 52.1 of the Competition Act (2009).

The Competition Act is not, however, the only relevant legislation applicable to telemarketing.  In this regard, provincial consumer protection legislation can also be relevant as well as the National Do Not Call List under the federal Telecommunications Act.

Consumer Protection Legislation

In addition to federal law, in some provinces consumer protection laws may also apply to telemarketing activities.

For example, in British Columbia the Telemarketer Licensing Regulation (the “Telemarketer Regulation”) under the Business Practices and Consumer Protection Act applies to “telemarketers”.

“Telemarketer” is defined in the Telemarketer Regulation as “a supplier who engages in the business or occupation of initiating contact with a consumer by telephone or facsimile for the purpose of conducting a consumer transaction.”

The Telemarketer Regulation requires telemarketers to obtain licences for each location from which they conduct business in British Columbia, to display licences, report certain changes in a telemarketing business (e.g., the names and addresses of new employees and changes in senior officers) and maintain certain records (e.g., in relation to sales contracts with consumers).

The Telemarketer Regulation also regulates and prohibits certain activities by telemarketers, including regulating the days and times telemarketers can contact consumers, the frequency that telemarketers can contact consumers and requiring that certain disclosure be made.

National Do Not Call List

In addition to the federal Competition Act and provincial consumer protection legislation, the national Do Not Call List is also important for telemarketers in Canada to understand.

The Canadian Radio-Television and Telecommunications Commission (the “CRTC”) launched the National Do Not Call List (the “DNCL”) in Canada in 2008.

Generally speaking, telemarketers cannot contact consumers that have registered their numbers for free (residential, wireless, fax or VoIP) on the DNCL (subject to certain exceptions).  Registration for consumers is valid for five years (and may be renewed) and becomes effective thirty-one days after registration.

Registration on the DNCL will not eliminate all telemarketing calls, as there are a number of exemptions including calls made by or on behalf of: (i) Canadian registered charities, (ii) organizations that telemarketers have done business with in the past eighteen months (or to whom a consumer has made an inquiry in the past six months), (iii) political parties, candidates and associations of members of a political party, (iv) people collecting information for surveys, (v) general circulation newspapers (for soliciting subscriptions), (vi) where express consent has been given, and (vii) calls to businesses.

Consumers may also directly or expressly request that the organizations listed above, except for market research firms in certain circumstances, place their numbers on specific do not call lists, in which case such numbers must be kept on their do not call lists for five years.  (All telemarketers, even if they are exempted generally, must keep internal do not call lists.)

The CRTC also has other specific rules for telemarketers, including rules governing disclosure (e.g., requiring telemarketers to disclose why they’re calling and on whose behalf the call is being made), times for calling (e.g., telemarketers may only call within certain hours) and regulating the use of automated dialing-announcing devices (so-called “ADADs”).

Penalties for violating the DNCL rules, which are enforced by the CRTC, include penalties of up to Cdn. $1,500 per violation (for individuals) and up to Cdn. $15,000 per violation (for corporations).

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).

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