Canada: Misleading Advertising: The Credulous, Inexperienced Consumer

Last Updated: October 1 2013
Article by John McKeown

A recent proceeding in the Ontario Superior Court of Justice considered whether Rogers Communication Inc. (Rogers) and Chatr Wireless Inc. (Chatr) had engaged in reviewable conduct contrary to the Competition Act.

The Facts

In 2007, the Government of Canada decided that Canadian consumers and businesses were paying more for wireless services than consumers in other countries.  In order to increase competition, Industry Canada conducted an auction of bands of the wireless service radio frequency spectrum.  At the time of the auction, the wireless sector was dominated by Rogers, Bell Canada, and Telus who had 94% of the subscribers and 95% of the revenues.  As a result of the auction, in 2008 a number of new wireless carriers were created including Wind Mobile, Mobilicity and Public Mobile.

Based in part on public statements, Rogers anticipated that these new entrants would try to appeal to the unlimited talking and texting segment of the wireless services market.  Rogers developed a strategy for competing with the new entrants.

One of the significant challenges facing the new entrants, related to dropped calls.  Although their customers were allowed to roam the Rogers network, when customers left their coverage area during a call their call would be "dropped". They would have to re-dial to roam the Rogers network.  This was referred to as the hard hand off.

Rogers launched Chatr in 2010 to compete directly with the new entrants.  For a Chatr subscriber who had a call underway and left a Chatr coverage zone, the call continued and did not drop.  The subscriber would be charged a roaming fee by Rogers.  This process was known as the seamless hand off.

The new entrants complained unsuccessfully to the Canadian Radio Television Telecommunications Commission (CRTC) about the dropped calls, as Industry Canada required Rogers to permit the new entrant's customers to roam on its network.

Both the new entrants and Chatr engaged in a substantial amount of advertising. Chatr's communication program made numerous representations in at least three campaigns about "fewer dropped calls", "no worries about dropped calls", and finally the "no worries network".

The Proceedings

The new entrants complained about these representations to the Commissioner of Competition who instituted the proceeding alleging that Rogers and Chatr had engaged in reviewable conduct contrary to The Competition Act. The Commissioner sought, among other things, an administrative monetary penalty of $10,000,000.00.

Section 74.01(a) of the Competition Act provides that a person engages in reviewable conduct who, for the purpose of promoting, directly or indirectly, the supply or use of a product, by any means whatever makes a representation to the public that is false or misleading in a material respect.

In proceedings under section 74.01 the general impression conveyed by a representation as well as its literal meaning must be taken into account in determining if an advertisement is false or misleading. Previously, in cases considering the section and previous versions of it, judges have reviewed advertisements from the perspective of the ordinary consumer to whom the statements were directed.  This can result in a higher standard when the advertisement is delivered to a more sophisticated audience.

The application of this approach has been in considerable doubt as a result of a recent decision of the Supreme Court of Canada.  In interpreting consumer protection legislation, the Court said an advertisement should be viewed from the point of view of a "credulous and inexperienced consumer who takes no more than ordinary care to observe that which is staring him or her in the face".

The trial judge said that the Supreme Court of Canada had defined the person considering the advertisement in three ways: credulous, inexperienced, and a consumer.  This was accepted as a starting point for determining the proper consumer perspective.  As a result, the point of view was that of a credulous and technically inexperienced consumer of wireless services.

The judge considered a significant amount of evidence including a number of expert witnesses but concluded that the Commissioner's contention that the fewer dropped calls claim was misleading was not made out.

Adequate and Proper Test

Section 74.01(1)(b) provides that it is reviewable conduct for any person, for the purposes of promoting directly or indirectly the supply or use of a product, by any means whatever, to make a representation 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 adequate and proper test thereof, the proof of which lies on the person making the representation.

The judge said the phrase "adequate and proper test" is not defined in the Competition Act. Whether a particular test is "adequate and proper" will depend on the nature of the representation made and the meaning or impression conveyed by that representation. Subjectivity in the testing should be eliminated as much as possible. The test must establish the effect claimed. The testing need not be as exacting as would be required to publish the test in a scholarly journal. The test should demonstrate that the result claimed is not a chance result.

The respondents must show that adequate and proper testing supported the fewer dropped calls claim ("fewer dropped calls than new wireless carriers" and "no worries about dropped calls."). After a lengthy review of technical evidence, Rogers was able to demonstrate that the statements were substantiated by adequate and proper tests.  However, the evidence was quite clear that in some cases, Rogers and Chatr had not carried out relevant tests before they made the representations in issue.

As a result, it was found that Rogers and Chatr had failed to conduct an adequate and proper test in certain instances and thereby engaged in reviewable conduct contrary to section 74.01(1)(b) of the Competition Act.  The amount of the administrative monetary penalty is to be assessed at a later date.

Comment

Changing the standard under the Competition Act from the perspective of the ordinary consumer to that of the credulous, inexperienced consumer is significant.  Advertisers must take this into consideration when they prepare and review proposed advertisements.

Advertisers need to follow an organized and disciplined approach to ensure that all product claims are substantiated before they are made to the public.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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