Canada: Caveat Venditor

Recall and Crisis Management

Seller beware. Or, more precisely, seller, manufacturer, distributor, importer, advertiser and tester beware.

On April 8, 2008, the federal government introduced Bill C-52, the Canada Consumer Product Safety Act.1 This sweeping new legislation will implement a comprehensive regulatory regime for all consumer products other than those regulated under certain federal statutes (such as food, drugs, motor vehicles). The new legislative proposal represents a sea change that will subject hundreds of thousands of consumer products to direct government regulation for the first time. The legislation also extends to anything used in the manufacturing, importation, packaging, storing, advertising, selling, labelling, testing or transportation of a consumer product.

Bill C-52 reaches beyond manufacturers and importers to sellers, testers, packagers and advertisers. Its extensive breadth encompasses non-commercial sellers and even persons giving away used goods. On the other hand, Bill C-52 fails to acknowledge, or make any concession for, patently and inherently dangerous consumer goods such as knives.

In the end, the legislation raises more questions than it answers. Although regulations to be enacted under the new legislation may provide some clarification, as the legislation currently reads, manufacturers, importers and sellers have few procedural safeguards. The legislation is silent on the factors governing the development of product standards yet grants very wide discretion to inspectors appointed under the new legislation to issue recall and other remedial orders. This power is limited only by a vague requirement that the inspector believe "on reasonable grounds" that the product is a danger to human health or safety. The lack of procedural safeguards in the proposed legislation is in sharp contrast to the legislation in effect in the United States and in other jurisdictions.

These are questions and concerns that Parliament must address.

DUTIES OF MANUFACTURERS, IMPORTERS, SELLERS AND ADVERTISERS

  • Bill C-52 provides that no manufacturer or importer may manufacture, import, advertise or sell a consumer product that is a danger to human health or safety, is the subject of a recall or is the subject of a remedial order that has not been complied with.

Disturbingly, however, a "danger to human health or safety" is vaguely defined as one that may reasonably be expected to have an adverse effect on health, including injury. There is, moreover, no indication in Bill C-52 of the circumstances under which a seller ought to have known that a product poses a danger to human health or safety.

  • Under the proposed legislation, a manufacturer, importer or seller must report an incident that occurs (potentially anywhere in the world) and that could reasonably be expected to have serious adverse effects on health or result in serious injury. This notification is required within two days. Further detailed information must be provided within seven days after the manufacturer, importer or seller becomes aware of the incident. A recall ordered by any other authority also triggers this 2/7 day reporting requirement.

The term "serious" is undefined in the legislation. It is also clear that the set timeframe would not permit the recipient of the information about the incident any time to investigate the validity (or, potentially, the severity) of the incident or the causal connection to the product. In practical terms, there is a substantial risk that manufacturers, importers and sellers may, in the "race to report", overreport such that the reporting function becomes, for all intents and purposes, a futile exercise. Similarly, the information required includes all incidents related to the product (presumably back to the date of first sale) and information relating to other products that could be involved in similar incidents. The scope of the information that may be required is potentially so voluminous as to be overwhelming and impractical from a regulatory oversight perspective.

  • Bill C-52 contains general provisions prohibiting any person from packaging, labelling, advertising or selling a product that the person ought to have known contained a claim that was false, misleading, deceptive or likely to create an erroneous impression regarding the fact that it is not a danger to human health or safety.

These provisions in the proposed legislation add a breathtaking level of over-regulation to the Canadian marketplace. Consumer products will be subject to four misleading advertising regimes Bill C-52, the civil and criminal provisions of the Competition Act and the Consumer Packaging and Labelling Act.

POWERS OF INSPECTORS

  • Inspectors appointed under the legislation may conduct "spot" inspections and may order cessation of manufacturing, importation, packaging, storing, advertising, selling, labelling, testing or transportation of consumer products.

In such cases, an inspector need not have reasonable grounds to believe the legislation has been contravened before exercising such powers. The regulatory proposal does not include an avenue of recourse from such orders.

  • Inspectors may also seize articles and order a recall if the inspector believes on reasonable grounds that a consumer product is a danger to human health or safety.

Recall orders are one of the few powers that Bill C-52 specifies may be exercised when the inspector has reasonable grounds for belief that there is a risk of harm. This restriction underscores, again, the need for a clear definition of a "danger to human health or safety".

It should also be noted that the term "recall" is undefined and provides no indication as to whether the term refers to a full recall at the consumer level or whether it is also intended to include other measures such as a stop sale or product withdrawal at the wholesale level.

  • Inspectors may order that a remedial measure be taken including ordering cessation of the manufacturing, importation, packaging, storing, advertising, selling, labelling, testing or transportation of a consumer product; they may also implement a recall or remedial order at the person's expense if the person does not comply with the recall or remedial order. Recalls and remedial orders are reviewable at the request of the person affected by the order or at the initiative of the review officer.

It is of very significant concern that the proposed legislation includes no indication of the factors to be considered in the review. Any review that is wholly undefined will be unlikely to offer manufacturers, importers or sellers any comfort that there is real value to the review process.

  • Contravention of a recall or remedial order gives rise to an administrative monetary penalty of up to $25,000. Due diligence is no defence. Corporate officers, directors and agents who direct, authorize, assent to, acquiesce or participate in a violation are liable. Each day that a violation continues is a separate violation. There is vicarious liability for employees and agents acting in the course of their employment or the scope of their agency.

The only right accorded to the person who is the subject of a violation order is to request a review by the Minister. Again, Bill C-52 provides no parameters within which the review is to be conducted or the basis upon which the review would be assessed.

POWERS OF THE MINISTER

  • The Minister may require manufacturers/importers to conduct tests and provide information.

The only standard provided in the proposed legislation is that the Minister considers the tests or information necessary.

  • The Minister may also disclose confidential business information without notice in the event of serious and imminent danger to human health or safety or the environment.

This is the only provision where the effect on the environment is a factor. The need for such a provision is puzzling given the far more balanced approach to such issues under the Access to Information Act.

  • The Minster may apply for an injunction in the event that an offence is likely to be committed and may make interim orders if immediate action is required to deal with a significant danger direct or indirect to human health or safety. The subject matter of such interim orders is confined to those matters that could be the subject of a regulation. The Minister may also accept a compliance agreement in lieu of an administrative monetary penalty and may review violation orders to determine whether a violation has been committed and/or the correct penalty has been assessed.

The review is conducted only according to the standard of the balance of probabilities. The Minister's review respecting the amount of a penalty is final. The Ministerial powers, generally, are not subject to any procedural safeguards or appeals. A manufacturer's only remedy would be to seek judicial review before the Federal Court. The Court, however, would be unlikely to second-guess a Minister's determination that there is a danger to human health or safety.

OFFENCES

  • Offences may be prosecuted by summary conviction or indictment and each day that an offence continues constitutes a separate offence.

  • Conviction for wilfully or recklessly contravening the legislation gives rise to an unlimited fine and/or five years' imprisonment.

  • Corporate directors, officers and agents who direct, authorize, assent to, acquiesce in or participate in the offence are liable.

  • There is vicarious liability for employees and agents.

Unlike violations, vicarious liability for offences is not limited to acts committed by employees/agents in the course of the employee's employment or the scope of the agent's authority.

The policy considerations underlying this proposed legislation are to be commended. No one could disagree that the protection of consumer safety is of paramount concern to not only the federal government but also to sellers, manufacturers, distributors, importers and, of course, consumers. The means employed by the federal government to address this concern, however, are sweeping in scope and may give rise to unintended consequences. The work ahead for the Committee scrutinizing the proposed legislation is truly daunting.

Footnote

1. Bill C-52 received Second Reading (approval in principle) on May 1, 2008 and has now been referred to the Standing Committee on Health for detailed review.

About Ogilvy Renault

Ogilvy Renault LLP is a full-service law firm with close to 450 lawyers and patent and trade-mark agents practicing in the areas of business, litigation, intellectual property, and employment and labour. Ogilvy Renault has offices in Montréal, Ottawa, Québec, Toronto, and London (England), and serves some of the largest and most successful corporations in Canada and in more than 120 countries worldwide. Find out more at www.ogilvyrenault.com.

Ogilvy Renault is the International Legal Alliance's Canadian Gold Award winner for 2008 in M&A and Corporate Finance.

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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