Misleading Advertising

OVERVIEW OF CANADIAN
MISLEADING ADVERTISING LAW

“[The Competition Act] is the expression of a social purpose, namely the establishment of more ethical trade practices calculated to afford greater protection of the consuming public.  It represents the will of the people of Canada that the old maxim caveat emptor, let the purchaser beware, yield somewhat to the more enlightened view caveat venditor – let the seller beware.”

(Matheson J., R. v. Colgate-Palmolive Ltd.)

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“The general impression test … must be applied from a perspective similar to that of ‘ordinary hurried purchasers’, that is, consumers who take no more than ordinary care to observe that which is staring them in the face upon their first contact with an advertisement.  The courts must not conduct their analysis from the perspective of a careful and diligent consumer. … In sum, it is clear that … the ‘general impression’ test … is the impression of a commercial representation on a credulous and inexperienced consumer. … courts view the average consumer as someone who is not particularly experienced at detecting the falsehoods or subtleties found in commercial representations.”

(Supreme Court of Canada, Richard v. Time)

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“Deception in commercial advertising or promotion can harm competition, consumers, and competitors by raising prices, reducing output, deterring entry, and decreasing product quality and consumer choice.  Compounding the problem, deception is a low-cost and financially rational tactic that creates no salutary competitive benefits to offset its anticompetitive harm.  Moreover, deceptive harm can be particularly injurious to consumer welfare, because it often inhibits both dynamic and allocative efficiency.  When a firm successfully deceives, it is unjustly enriched at the expense of other market participants.  Deception injures consumers by inducing mistaken demand for inferior or unneeded products, raising search costs, and sometimes creating ‘lemon’ markets where lower-quality goods or services drive out higher-quality goods.  Deception also injures competitors by raising their costs (whether to differentiate their products from the deceiver’s or to respond to the deceptive statements), raising entry barriers, or by driving them out of the market.  Moreover, deception injures competition itself, because it distorts markets and misallocates resources. … For paying this price, society receives nothing in return.  Deception is a form of ‘cheap exclusion.’ It is not merely a low-cost exclusionary strategy but ‘a particular kind of low-cost exclusionary strategy, namely, one that does not raise any cognizable efficiency claims; that is, ‘cheap’ in that it has little positive value.’”

(American Antitrust Institute, Amicus Brief,
Lexmark International v. Static Control Components)

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The federal Competition Act is Canada’s principal, but by no means only, legislation governing misleading advertising.  In addition to this federal legislation, a number of other federal and provincial laws can apply to advertising and marketing practices in Canada.  These include provincial consumer protection laws, sector-specific legislation and federal packaging and labeling statutes.

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

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 an average consumer into buying or using a product or otherwise altering their conduct).  Criminal misleading advertising is substantially similar, but in addition also requires that a claim be made “knowingly or recklessly” (i.e., with intent).

A few key points about Canadian misleading advertising law include:

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

2.  A representation to a single person can be sufficient to be “to the public”.

3.  Both the literal meaning and “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.  Similarly, the monetary value of a transaction is not relevant to whether a claim is materially false or misleading.

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 more “private” marketing events/seminars, 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.

Potential penalties for civil misleading advertising in Canada include “administrative monetary penalties” or “AMPs” (essentially civil fines) of up to $750,000 (for individuals) and up to $10 million (for corporations) and court 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, selling products above advertised prices 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 competitors.  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 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 such claims be both accurate and substantiated before being made.

ORDINARY SELLING PRICE CLAIMS

The Competition Act contains “ordinary selling price” (“OSP”) provisions, which are intended to prevent inflated “regular” prices in relation to sales.  In general, 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 (“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 (“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).

PERFORMANCE CLAIMS

The Competition Act contains a standalone civil provision that prohibits performance claims that are not based on an “adequate and proper test”.

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 ensure that relevant 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 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.

SALE ABOVE ADVERTISED PRICE

The Competition Act 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

The federal Competition Act makes it criminal offences to engage in deceptive telemarketing or 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, 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; (iii) offer free or below cost products, as consideration for supplying another product, unless certain disclosure is made; 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.

Like the general misleading advertising provisions of the Competition Act, 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 fines without limit (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).

PENALTIES

The potential penalties for violating the civil misleading representations provisions of the Competition Act 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).

Potential penalties for contravening the criminal misleading representations provisions of the Competition Act (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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