Canada: Proposed Restitution Policies for Consumer Loss: Advertisers, Beware the Hydra!

Background to Reform Proposals

In June of this year, the federal government released a Discussion Paper entitled "Options for Amending the Competition Act: Fostering a Competitive Marketplace". The Discussion Paper, an amalgam of reform proposals from the House of Commons Industry Committee Report and leftovers from the 2000 proposals to amend the Act, proposes a dramatic overhaul of key areas of the Act including remedies for reviewable conduct, the conspiracy offence, the pricing offences and the creation of "market inquiry" powers for the Canadian International Trade Tribunal or other federal agencies.

With respect to misleading advertising, the Discussion Paper advocates: (1) removing the current cap on "administrative monetary penalties" ("AMPs"); (2) requiring companies to reimburse consumers for the purchase price of products sold under misleading ads; (3) imposing "freezing" orders on a company’s assets where there is a possibility that it may deplete those assets prior to a restitution order; and (4) expanding section 36 of the Act to allow private litigants to bring damages claims for misleading advertising.

Restitution Orders — The First Bite at the Apple

The Discussion Paper would allow a "court" (defined to include the Competition Tribunal and the Federal Court) to order a company that has engaged in misleading advertising to reimburse consumers the purchase price paid for the product. Such orders could also include provisions governing notice of reimbursement, the establishment of a restitution fund (with a court-appointed administrator), the manner and time in which claims can be made and how they are to be paid out, and the payment of any unclaimed balance in the fund to non-profit organizations for "projects" to benefit persons "in circumstances similar to" purchasers.

The proposal is troubling for several reasons. For instance,

• No causal connection is required between a person claiming reimbursement and the impugned conduct — as drafted, the provision would allow purchasers who had never seen the misleading representation or advertisement to claim restitution.

• No consideration is given to whether the purchaser received any value whatsoever from the product; depending on the terms of the order, the purchaser could be permitted to keep the product and recover the entire purchase price.

• Any unclaimed balance in the fund could be payable to a non-profit organization with absolutely no connection to persons affected by the misleading representation. If consumers choose not to exercise their right to reimbursement, unpaid balances should be returned to the company to help offset the potentially significant administrative costs of establishing and maintaining the fund (including the fees of a independent administrator, where so ordered by the court).

The proposal also raises concerns about the basis for amendments to the Act. The Discussion Paper provides no analysis of, or justification for, this significant amendment other than a passing reference to the Industry Committee’s support for an "optimum mix of incentives" to promote compliance with the Act. However, the Industry Committee made this comment in reference to expanding private rights of action under the Act (see below).1 It did not recommend, nor even contemplate, the adoption of a restitution remedy.

Other Proposed Remedies — The Many Heads of the Hydra

The Discussion Paper proposes the following additional remedies:

(a) AMPs

The government is proposing to eliminate the current $100,000/$200,000 cap on AMPs orders against companies, leaving the amount of an order to the court’s discretion. Given the AMP levels obtained by the Bureau in the recent Suzy Shier case ($1 million), and sought in the pending case against Sears Canada ($500,000), there can be no doubt that the Bureau will encourage courts to use this discretion liberally.

Since 1999, the Act has employed a dual-track approach to dealing with misleading advertising claims: a new civil standard in Part VII.1, and the old criminal provision (revised to include an intent element) under section 52. One wonders whether the current reform proposals are simply another enforcement tool to make the Bureau’s life easier.2 Rather than having to prove misleading advertising under the more difficult criminal standard, of proof "beyond a reasonable doubt", the present reforms would allow the Bureau to pursue cases under the revised Part VII.1, with its lower standard of proof and reduced procedural safeguards, and obtain penalties that are equivalent to (or perhaps even greater than) those available under the criminal track. Under section 52, a hybrid offence, the maximum penalties available are 1 year imprisonment/$200,000 fine (on summary conviction) and 5 years’ imprisonment/unlimited fine (on indictment). Since corporations cannot be imprisoned and are subject to fines in lieu of jail time,3 a company’s maximum exposure under criminal prosecution for misleading advertising is $200,000/unlimited fine — the same potential exposure as under the revised civil track.

The proposed reforms will therefore raise serious concerns under the Charter of Rights and Freedoms and the Bill of Rights about the imposition of criminal law penalties for "deceptive marketing practices" proven on the civil standard. The addition of some cursory text to the Discussion Paper, noting that the purpose of an AMPs order is to promote compliance and "not with a view to punishment", indicates that the government may be alive to this concern.

(b) Private Actions for Damages

The Discussion Paper advocates expanding the private right of action in section 36 of the Act, currently limited to claims for damages caused by violation of the Act’s criminal provisions or an order of the Tribunal, to all of the Act’s reviewable practices, including the misleading advertising provisions. While some comfort is provided by requiring a court to set off any money paid under a restitution order against an order for damages, section 36 would still allow a consumer (or a plaintiff class) to recover any "loss or damage" suffered beyond the purchase price, as well as costs of investigation and litigation of the claim.

(c) Freezing Orders

Where the Bureau undertakes to seek a restitution order in a particular case, the proposals would also allow for "accessory" (freezing) orders preventing a company from disposing of or otherwise dealing with its assets, if: (1) the court finds there is a strong prima facie case that the company engaged in misleading advertising, and (2) the court is satisfied that the company is likely to deplete its property. The Bureau can seek a freezing order on 48 hours notice or, under certain limited circumstance, on an ex parte basis.

Speaking Out on the Reform Proposals

The Discussion Paper speaks generally about the need to increase compliance through greater deterrence. But the Act already has a "mix of incentives" to address misleading advertising concerns. Part VII.1 remedies include prohibition orders, publication notices and AMPs of up to $100,000 ($200,000 for repeat occurrences). Truly egregious cases of misleading advertising that warrant greater deterrence can be prosecuted criminally under section 52 of the Act, with penalties ranging up to 5 years’ imprisonment or an unlimited fine. Moreover, the Discussion Paper raises serious concerns about the multiplicity of remedies and over-deterrence. The proposals will expose companies to AMPs, restitution orders, freezing orders and private damages claims for the same conduct, resulting in potential chilling effects on business.

The reform package will be debated in public "Roundtable Discussions" over the month of November. A schedule for these discussions is available online, at . Interested parties can register to attend by contacting the Public Policy Forum at (613) 238-7160 or at .

1 House of Commons, Standing Committee on Industry, Science and Technology, A Plan to Modernize Canada’s Competition Regime (Ottawa: Public Works and Government Services, 2002) at 50. 

2 Some observers have suggested that this is also, at least in part, the motivation behind the attempt to create a dual-track approach to conspiracy and extend AMPs to the civil side (excluding mergers) of the Act. 

3 Criminal Code, R.S.C. 1985, c. C-46, s. 735. 

The foregoing provides only an overview. Readers are cautioned against making any decisions based on this material alone. Rather, a qualified lawyer should be consulted.

© Copyright 2003 McMillan Binch LLP

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