Canada: Bigger Penalties And Tighter Rules - How Changes To Competition Act Will Affect Canadian Advertisers And Marketers

The Federal Government has proposed sweeping amendments to the Competition Act (the "Act") in its 2009 Budget Implementation Act. The amendments change the misleading advertising and marketing provisions of the Act (the "Marketing Provisions") in at least two ways. First, the amendments significantly increase the consequences for businesses, that violate the Marketing Provisions. And second, the amendments codify certain case law and expand the reach of the Marketing Provisions to remedy a case where the government has been unable to prove a violation of the Marketing Provisions in the past. As a result, businesses will have to ensure that their advertising does not violate the Marketing Provisions in situations where, prior to the amendments, the Marketing Provisions would not have been applicable.

Bigger Penalties Make Violations Even More Costly

Violating the Marketing Provisions is an expensive proposition. The amendments make this price steeper. Currently, individuals that violate the Marketing Provisions criminal section can be sentenced to five years in prison. The amendments increase this maximum to 14 years. Prosecutions under the criminal section are reserved for the most egregious misleading advertisements with most businesses and individuals being prosecuted under the civil section of the Marketing Provisions.

Currently, individuals that violate the civil section can be ordered by the Competition Tribunal (the "Tribunal") to pay an administrative monetary penalty ("AMP") of up to $50,000 for the first offence and $100,000 for subsequent offences. Businesses pay an AMP of $100,000 for the first offence and $200,000 for the subsequent offences. The amendments raise this penalty for individuals to $750,000 for a first offence and up to $1 million for repeat offences. Businesses will pay up to $10 million for a first offence and up to $15 million for repeat offences.

In the past, most civil track cases (especially cases involving alleged violation of the ordinary selling price provisions of the Act) were resolved before a Tribunal hearing. However, businesses that settled cases typically agreed to pay more than what the Bureau could receive from the Tribunal because they wanted to avoid the time and cost of the court proceeding and also because the Bureau could allege multi-count violations. It remains to be seen whether the Bureau will use the AMP increase as a justification to demand even higher consent settlement agreements.

Finally, with respect to penalties, the Tribunal will be empowered to require businesses to pay restitution to victims of deceptive marketing practices. The Tribunal will also be able to freeze the assets and prevent the disposal of property before a finding that a business has made misleading representations. We expect that the Bureau will use this type of interim remedy in cases where the respondent is not a sizeable and reputable business.

Tighter Rules Make it Easier to Prove an Offence

The amendments also make substantive changes to the Marketing Provisions by adding the following provision (a similar provision has been added to the criminal section):

74.03 (4) For greater certainty, in proceedings under sections 74.01 and 74.02, it is not necessary to establish that

  1. any person was deceived or mislead;
  2. any member of the public to whom the representation was made was within Canada; or
  3. the representation was made in a place to which the public had access.

Proposed section 74.03(4)(a) is a codification of existing case law. Courts have held that a representation can be misleading even if no one is actually misled. Instead, the Courts ask whether on a subjective consideration of the facts it would be likely that someone would have been misled. Proposed section 74.03(4)(b) was meant to remedy the Crown's encounter with Mr. Stucky. Mr. Stucky ran a direct mail and marketing operation out of Toronto. By all accounts Mr. Stucky was a successful and articulate business man who ran a business that regrettably made false and misleading representations.

Mr. Stucky sent his advertisements to our neighbors to the south and not his fellow Canadians. When it came time for the Court to determine whether Mr. Stucky made a representation to "the public" it determined that this phrase meant "to persons in Canada". As a result, at trial at least, the Crown could not make the charge of misleading advertising stick to Mr. Stucky.

On February 17, 2009, after the proposed amendments were made, the Ontario Court of Appeal overturned the trial decision and held that the term "to the public" is not restricted to the Canadian public. All that is required is a misrepresentation "to the public" that has a "real and substantial connection between the offence alleged and Canada". In this case, the test was met because the misrepresentation originated in Canada and the profits from the misrepresentation were received in Canada.

As a result, this amendment, which would have changed the case law, now only codifies the finding of the Ontario Court of Appeal. This amendment and the Ontario Court of Appeal's decision means that Canadian businesses advertising outside of Canada will now need to ensure that their advertisements don't violate the Marketing Provisions.

Proposed section 74.03(4)(c) clarifies that a misleading representation can be made even if it is made in a place to which the public does not have access. On its face, this provision appears to contradict the requirement that a misleading representation has to be made to "the public". How can a representation be made to "the public" if it is made in a place that "the public" does not have access to?

The term "to the public" is already broadly construed by the courts. The Competition Bureau's (the "Bureau") recent case against Premier Career Management Group Corp ("PCMG") slightly limits the scope of what "to the public" means, if it is not overturned on appeal. PCMG was engaged in providing career management services to individuals. The Bureau alleged that PCMG made misleading representations about, among other things, its ability to provide its clients with superior job leads because of PCMG's contacts with senior executives at businesses that were hiring. The Bureau proved all of the elements of the offence but foundered upon the requirement that the misleading representations be to "the public".

The misleading representations were done in PCMG's office. This was one of many factors, the Tribunal used to support its decision that the misleading representation was not to the public. The Tribunal reasoned that the purpose of the Act is to protect consumers and competitors in the marketplace. In this case the misleading advertising representations were not fed into the marketplace because they were done in the privacy of PCMG's office. As a result, the misrepresentations could not have had an impact on competition. The Tribunal also rightly pointed out that victims of PCMG's misleading representations could sue PCMG for fraudulent or negligent misrepresentation. A right that some of the victims had exercised to recover their damages arising from the misleading representation.

The Tribunal's decision in PCMG is sensible. The Tribunal's reasoning also did not rest solely on the fact that the misleading representation was made in a place where the public did not have access. However, PCMG is under appeal. This amendment means that businesses cannot ignore the Marketing Provisions merely because they are making a representation in a place where the public does not have access.

Overall, the new advertising and marketing regime will make it easier for offences to be proven and will make non-compliance more costly. Businesses should review and update their marketing law compliance programs to ensure that these risks are mitigated.

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 2009 McMillan LLP

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