The Competition Bureau's Marketing Practices Branch: Enforcement Priorities and Hotspots

Comments by Rachel Larabie-Lesieur
Deputy Director of Investigation and Research
Marketing Practices Branch
Competition Bureau

The Canadian Institute
Toronto, Ontario

June 2, 1997

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Introduction

Good afternoon ladies and gentlemen. Thank you for inviting me to speak to you today. It is a pleasure to participate in this two-day conference on Advertising.

The Competition Bureau welcomes these opportunities to meet with you and discuss the misleading advertising and deceptive marketing practices provisions of the Competition Act in a forum such as this.

Incidentally, as many of you probably know, the Bureau now has a new Director of Investigation and Research.

Konrad von Finckenstein brings a wealth of experience to the Director's office, having most recently been Assistant Deputy Minister, Business Law, at Industry Canada and Justice Canada. He has also served the government in other important capacities over the years, namely in the area of international trade, and we, at the Bureau, welcome him to his new position.

I would also like to note that shortly after the Director joined the Bureau, in fact as of April 1, the Consumer Products Directorate was integrated into our ranks. The Directorate enforces the following three pieces of legislation: Textile Labeling Act,Consumer Packaging and Labeling Actand Precious Metals Marking Act.

This Directorate has reported to the Director for a few years already. But with full integration, it makes for a more efficient and responsive process when dealing with the accuracy of marketplace information. Ways are now being examined as to the feasibility and opportunity for further integration of the Directorate and Marketing Practices Branch.

Today, I intend to talk about the work of the Marketing Practices Branch, of which I am its Deputy-Director. The staff in the Branch, currently numbering 44, promotes compliance with the misleading advertising and deceptive marketing practices provisions of the Competition Act through enforcement and prevention.

I will highlight today some misleading provisions of the Act and also discuss the selective enforcement approach adopted by the Branch; the Director's Program of Advisory Opinions; alternative case resolution and recent case results.

A key enforcement priority at the Bureau is combating deceptive telemarketing and I will have some thoughts on that as well. Also, a Bureau "hotspot" I wish to discuss today is enforcement of the Act in relation to the INTERNET. I will also share some thoughts with you today on multilateral co-operation.

Purpose Of Misleading Provisions

The Competition Act, as marketplace framework legislation, lays out the boundaries between what Parliament defines as acceptable business practices and conduct which it deems to be unlawful. Within these boundaries, firms are free to seek out market opportunities and carry on business in the manner that best suits their interests.

The purpose of the provisions is to ensure that, within the overall framework of competition policy, the marketplace operates effectively and that misleading or deceptive practices are discouraged.

The efficient operation of a market economy depends on the free flow of information about products and services offered to consumers.

Advertising is a principal means by which firms convey product information to the market. Advertising normally enhances market performance. When truthful and accurate, advertising transfers useful information to consumers and enables firms to compete more vigorously through product and service promotion.

The Key Sections of the Act

The Competition Act, as many of you know, is the only federal statute which has general application to all forms of advertising in Canada. It applies to all means of making representations to the public, including print, broadcast, written, oral, audio-visual and electronic.

Misleading advertising and deceptive marketing practices are criminal offenses under the Competition Act.

Section 52(1)(a) of the Act is the cornerstone of these provisions; it contains the general prohibition and states that misleading advertising will occur when a materially misleading representation is made to the public in the promotion of a product or service.

If the representation could influence a consumer to buy the product or service advertised, it is considered to be material. To determine whether an advertisement is misleading the courts consider the general impression it conveys, as well as its literal meaning.

These provisions are strict liability offenses. The Crown need only prove that the effect of the advertisement was misleading. The Act does not apply to representations or advertisements made solely for a political or charitable purpose.

Sections 55 and 55.1 of the Act --the multi-level marketing and pyramid selling provisions--came into force on January 1, 1993, and revised the legislation dealing with schemes of pyramid selling. The sections contain measures directed against deceptive practices common to multi-level marketing and schemes of pyramid selling. It is contrary to the Act to make earning representations without disclosure of income earned by typical participants. Compensation for recruitment, inventory loading and required purchases are all prohibited. Every plan must provide participants with a right to return product on reasonable commercial terms.

Other misleading advertising and deceptive marketing practices provisions relate to performance claims, regular price claims, "bait and switch" selling, promotional contests and the sale of a product above its advertised price.

Penalties

Penalties under the Act include fines, the amounts of which are assessed at the discretion of the courts, and imprisonment of up to five years. The highest fine imposed so far under the misleading advertising provisions of the Act is $1 million against Simpsons-Sears Limited in 1983 for inflating the value of diamond rings. The most important one levied against an individual was a $500,000 fine against Donald Cormie for misrepresenting investment opportunities in the Principal Group case. The longest jail term imposed has been one year.

The average total fine per case in fiscal year 1995-96, (which are the latest figures currently available), was approximately $63,000. This represents more than a 100% increase over a period of four years, when the level was $30,000.

This reflects the selective enforcement strategy which I will now turn to.

Selective Enforcement

In this period of change, let's think of fiscal constraint, deregulation, technology and global markets, the search for new and creative ways to administer and enforce competition laws is essential. Therefore it is important that our job be done well and cost effectively.

Due to the large number of complaints received each year, (over 10,000 in the last fiscal year), a priority system for the selection of cases that have the highest impact on the marketplace has been established.

The economic factors considered in determining the priority to be given a specific complaint are: (1) the cost of producing the advertisement; (2) number of repetitions; (3) number of people reached by it; (4) the degree to which the misrepresentation appears to affect purchasing decisions and (5) the likelihood that the deception would be detected by consumers, thereby mitigating damage to the market.

The enforcement considerations that determine the appropriate weight to be given a complaint are: (1) whether the practice is national or inter-provincial; (2) whether there is specific legislation administered by other agencies who can more effectively deal with the complaint; (3) whether the matter is a Branch priority; (4) whether the complaint is representative of a large number of similar complaints; (5) whether the practice was deliberate and (6) whether the case involves an issue that may result in new jurisprudence.

Some Recent Case Results

In April, 1996 in North Vancouver, Fortune in Motion Ltd., operator of a multi-level marketing plan, pleaded guilty to two counts under s. 55(2) and was fined $70,000. In February, 1997 Premier Health Club pleaded guilty here in Toronto to the commission of offenses contrary to ss. 52(1)(a) and 59(1)(a) of the misleading advertising provisions of the Act and was fined $30,000. In addition, a Prohibition Order of five years was imposed on the company and any related companies and on each of its directors, officers and employees.

The Bureau is also looking at more innovative sentencing when a company or individual is found guilty of violating the Act. For example, in the recent DFD Telebroadcasting/Marvin Fine case in Toronto, the company and Mr. Fine pleaded guilty to two counts under s. 52(1)(a) and were fined $11,000 each for a total fine of $44,000. A Prohibition Order was issued against the company and the individual for a period of two years. Furthermore, Mr. Fine donated two computer systems to Toronto area charities.

In the Micro Ear 2000 case, fines of $75,000 on the company and $5,000 on one of its officers, Jack Douglas, were imposed by the Saskatchewan Provincial Court on September 10, 1996. In addition, Prohibition Orders for three years were imposed on Mr. Douglas and the company. As well, Mr. Douglas was sentenced to probation for a period of three years during which time he is to perform 100 hours of community service.

These last two cases are examples of penalties that will have a higher profile in the community at large, as well as create a stronger deterrent effect.

Alternative Case Resolutions, or ACRs, have also been recently used to resolve such cases as MEDITrust Pharmacy Service, Goodyear Tires and St. Clair Paint and Paper. ACRs can often furnish the most appropriate, cost effective and timely solution to correcting false impressions created by misrepresentation in the marketplace. In each of the three cases noted above, the ACR included the publication of corrective notices in major daily newspapers across Canada, advising the public of the Director's concerns with previous advertising in relation to the Competition Act.

Promoting Compliance With The Act

One of the most popular features of the Program of Compliance is the Director's Program of Advisory Opinions. This program, which is not restricted to the Marketing Practices Branch, is designed to assist business people who wish to avoid coming into conflict with the Act.

Under this program, which has been operating for a number of years, the Director invites company officials or their counsel to request an opinion as to whether proposed advertising or promotions would provide grounds to initiate an inquiry under the Act. The key word here is PROPOSED. Once an advertisement has been published or a marketing plan implemented, it is too late to seek an Advisory Opinion.

Based on material submitted for review, the Director, or members of his staff, will give an opinion as to whether the promotion gives him reason to initiate an inquiry. As the Director has no authority under the Act to regulate business practices or to decide the law, opinions are not binding on the Director or the party requesting it.

As you are aware, the Competition Bureau is proposing to implement user fees for certain services, including Advisory Opinions. The Bureau was recently authorized by Treasury Board to introduce user fees as part of the government's continued efforts to improve service delivery.

User fee consultations will begin later this month in Toronto, Montreal and Vancouver. The target date for implementation of user fees is the fall of 1997.

To provide the greatest transparency for the business and legal community on how the Director enforces the Act, the Bureau has also prepared informational material available on misleading advertising such as videos, pamphlets, information bulletins, and the Misleading Advertising Bulletin.

And these materials are popular. For example, during fiscal year 1996-97, our Complaints and Public Enquiries Centre handled requests for 292 Misleading Advertising Bulletins, 621 copies of the Misleading Advertising Guidelines and 1,482 copies of the "Scam Alert" video. Our regular mailing list for the Bulletin currently consists of close to 6,000 names.

Deceptive Telemarketing: Key Bureau Enforcement Priority

I was asked to speak today on Bureau enforcement priorities. In short, there is no greater priority than combating deceptive telemarketing.

You may be surprised--and hopefully disturbed--to learn that approximately $60 million was lost in Canada last year as a result of illegal telemarketing activity. Although deceptive telemarketers target all groups in society, they tend to focus on those which are the most vulnerable, such as senior citizens.

Fraudulent and deceptive telemarketing practices involve representations made by telephone to promote the sale of products or services that either do not exist or are given grossly inflated values. Both consumers and businesses fall victim to such schemes. Victims are not just the gullible or less "consumer conscious" members of Canadian society, as one might assume, but also include persons from all walks of life and all levels of sophistication. Deceptive telemarketers exploit trust, often using abusive, high pressure sales tactics, which includes misrepresentation.

Fraudulent and deceptive telemarketing schemes have specific characteristics that make these illegal practices hard to combat. Telemarketing scams often operate from another jurisdiction. The pitch involves a one to one transaction designed to quickly obtain as much money as possible from victims. Deceptive telemarketers are extremely mobile. Scams disappear one day only to resurface later at another address and under another name.

Because the practices of illegal telemarketers have had an adverse impact on Canadians' perception of the legitimacy of telephone solicitations as an acceptable marketing method, legitimate telemarketers, and the Bureau, see a pressing need to address the problem. Effectively combating illegal telemarketing requires extensive co-operation among all stakeholders, such as police forces, law enforcement agencies and key private sector participants.

Canada's Project Phonebusters is an excellent example of that co-operation. Headed by the Ontario Provincial Police in North Bay, Project Phonebusters, now in its fifth year, combines resources from several government law enforcement agencies, including the Competition Bureau, and has become the central sourcing for telemarketing complaints throughout Canada. In addition to its law enforcement activities, Project Phonebusters has also adopted a very innovative approach by obtaining the assistance of banking and credit card institutions, as well as courier operators, in order to reduce the economic impact of illicit telemarketing practices.

Public education and awareness initiatives have had a positive impact in addressing the problem of deceptive telemarketing. The Telemarketing Fraud Education Committee, consisting of government and private sector participants including the Bureau, was established in 1996 to identify measures to prevent telemarketing fraud and alert Canadians to telemarketing scams. In March, 1997, notices were included with Old Age Pension cheques warning about possible scams. This is the second notice that has been included with cheques for seniors, who are, as I mentioned earlier, a primary target for illegal telemarketers.

These initiatives are working. Project Phonebusters estimates the loss to Canadians this year as a result of illegal telemarketing will be $19 million. But it does not stop with education alone.

I'm sure many of you read in the newspaper that 35 telemarketers and their companies, suspected of being part of a scam that bilked hundreds of thousands of dollars from seniors in western Canada, were recently charged under the Competition Act.

As well, the preliminary inquiry in the Office Supply Centre telemarketing case, which involved allegedly misleading victims to purchase office supplies, took place just last week here in Toronto. Both the corporate and individual accused have been committed to trial.

Additionally, in April of this year, Prime Minister Jean Chretien and U.S. President Bill Clinton agreed to set up a bi-national law enforcement working group to tackle the problem of cross-border telemarketing fraud. Law enforcement agencies are to report back within six months on their progress. The Competition Bureau is part of this group, which will hold its first meeting later this week.

Bureau "Hotspot"--The Internet

A Bureau "hotspot" I wish to discuss today is online misleading advertising and deceptive marketing practices through the INTERNET.

The INTERNET, something that would have seemed like science fiction a few years ago, is now reality. And as an offshoot of this infrastructure, cyber marketing is a fast growing activity bringing to consumers online magazines, catalogues, shopping centres, interactive advertisements and more. Online marketing is now used to promote products as diverse as motor oil, cars and computers.

The size and growth of the NET over the past few years is mind boggling. The following figures are not up to date, but provide a good snapshot of INTERNET use. It was estimated in 1996 that the INTERNET linked over 40,000 local networks, 4 million computers and over 40 million users. Nobody knows for sure how many Canadians are shopping through the cyber world, but estimates last October ranged as high as 18 million INTERNET browsers throughout North America alone. Business on the INTERNET has been forecast to reach $200 billion by the year 2000, as compared to $15 billion in 1996.

Needless to say, this is a phenomenal rate of growth and provides more and more incentives every day for businesses to advertise on this information highway. Among other things, it is a relatively inexpensive way to reach millions of people on a global scale with merely the click of a "mouse". As an added incentive, "stores" are open 24 hours a day, seven days a week-- and both weather and parking are never problems on the NET!

The INTERNET is changing the way we do business. Traditionally, products and services have been marketed in a minimum of two stages: (1) broad dissemination of information through advertising followed by (2) a second stage in which sales transactions are effected through sales personnel, in stores or over the telephone, or by some other means such as mail order.

The NET is arguably the only remote system capable of collapsing these two functions into one operation. It serves both as a vehicle for the broad dissemination of information and has the capability of interactive communication which is necessary to process a sales transaction.

Unfortunately, the same technologies that give the INTERNET its potential as a marketplace also tend to facilitate fraud and deception. In essence, the INTERNET offers two very different streams--one for conventional and legitimate business advertising and one for deceptive and illegal cyber scams.

Ease of entry and low initial cost means that the INTERNET is fertile ground for scam artists. For the cost of a computer and a modem, and a small monthly fee to an INTERNET access provider, the scam artist can set up shop and begin taking orders from all corners of the globe.

As the world becomes more interconnected through the INTERNET, present and future technologies will extend the reach of fraudulent marketers significantly and multiply several fold the economic injury that their activities cause.

However, while the medium is different, the story is the same. There are really no new scams on the INTERNET. We have seen them all before in other shapes and forms. For example, multi-level marketing and pyramid sales scams are common "business opportunities" on the NET.

From the Canadian perspective, we are confident that current investigative methods and existing legal provisions can be adapted effectively to online advertising where the offenses occur within Canadian jurisdiction and the offender resides in Canada. However, the situation may be more challenging when offenses take on international proportions, not to mention the challenges of the time and space continuum of the NET. I'm told a year in cyber space is only two and a half months "on earth".

Many of the problems related to foreign-based INTERNET advertising are similar to those that are raised when more conventional forms of advertising are involved, but the characteristics of an open unrestricted global computer network certainly pose unique difficulties.

Existing laws require national borders in order to be enforced and yet the very nature of the INTERNET is that it is borderless. The problem is compounded because it is often difficult to distinguish a legitimate Web site from an illegal one.

As with deceptive telemarketing, consumer education goes hand in hand with enforcement action. Private sector and community leaders are developing innovative programs to challenge the new technology when it is used for illegal purposes. Earlier this year, the Canadian Direct Marketing Association announced that it had moved to establish standards for its members' use of the INTERNET and other forms of online marketing in Canada. This was prompted because of concern over the protection of personal information, marketing to children and unsolicited mail.

Efficient co-operation among enforcement agencies on a global scale is another key component to deal with these crossborder issues. Significant parts of the infrastructure are already in place. International agreements such as mutual legal assistance agreements on criminal enforcement matters or extradition treaties are highly useful tools that aid the Bureau to advance priority cases with an international dimension. Of particular note is the agreement that Canada and the United States entered into in 1995 on competition policy and deceptive marketing practices, something I will discuss later in my remarks.

I can assure you that positive efforts are being made to prevent the INTERNET from becoming a safe haven for misleading advertising or deceptive marketing practices. The Bureau will take whatever measures are appropriate and available to make certain that online advertisers and marketers comply fully with the provisions of the Competition Act. In March of this year, for example, the Competition Bureau, the U.S. Federal Trade Commission and members of provincial, territorial and state law enforcement organizations joined forces to sweep through INTERNET Web sites and user groups to identify "business opportunities" which could raise issues under our respective legislation.

The sweep was also designed to make promoters of business opportunities on the INTERNET aware of relevant Canadian and American laws. It is expected more sweeps of this nature will follow in the future.

Multilateral Co-Operation

I would be remiss this afternoon if I did not also mention multilateral co-operation.

Due to the crossborder nature of telemarketing and INTERNET access, the enforcement of laws concerning misleading advertising practices can no longer be conducted on a strictly national basis without consideration of enforcement policies in other jurisdictions. Sophisticated communications technologies now makes it possible for businesses to communicate rapidly and at low cost with their clients, no matter where they are located. It is also difficult to obtain information or evidence concerning illegal practices which originate in a foreign jurisdiction and affect Canadians. Human resource limitations and competing enforcement priorities in the foreign jurisdiction are hindrances, as is the impossibility of using the formal powers provided for in the CompetitionAct.

The Canada-U.S. agreement on competition policy and deceptive marketing practices of August 3, 1995, which I mentioned earlier, provides for the exchange of information to combat illegal marketing practices with a transborder dimension. This agreement was followed up last year in September when the Competition Bureau and the FTC signed an agreement in Burlington, Vermont, establishing a Canadian-U.S. Task Force on Cross-Border Deceptive Marketing Practices.

The primary purpose of the Task Force is to provide a framework to promote co-operation between law enforcement agencies in Canada and in the U.S. with respect to deceptive marketing practices with a transborder component. The Task Force will operate within the confines of existing laws, policies and practices for each country.

This being said, I want to stress that any information sharing and enforcement co-operation initiative with the FTC or, for that matter, with any other foreign law enforcement agency, remains subject to the confidentiality restrictions of the Competition Act.

I would also like to say a few words on the International Marketing Supervision Network, which is chaired by Canada until this fall. The Bureau's Marketing Practices Branch represents Canada in the IMSN and is a conduit to other Canadian agencies. The IMSN, an informal forum created in 1992, involves 28 OECD member countries from Europe, the Americas, Australia, New Zealand and Japan. Members regularly exchange information, with a view to promoting international co-operation in detecting and fighting unfair and deceptive marketing practices. At a meeting held in Canada last fall, the IMSN dealt at length with online fraud and deceptive marketing practices. The IMSN has begun to also examine the potential of an INTERNET-based information network to support this work, thereby facilitating the rapid exchange of law enforcement information--again within the limits of our respective legislation.

I also want to say a few words about telecommunications. There is a Bureau-wide team that works in the telecommunications area and it will be closely monitoring the market for local telephone service as it opens up to competition in the near future.

Amendments Update

As I'm sure you are all aware, there were proposed amendments tabled in the House of Commons late last year to provide improved enforcement tools that were tailored to today's marketplace. Many of these amendments were directed toward the misleading provisions, and the amendments would have changed the focus of the misleading advertising and deceptive marketing practices provisions from punishment under a strictly criminal regime to quick and efficient corrective action through the addition of a civil regime. There would also have been specific legislation relating to deceptive telemarketing and proposed amendments relating to regular price claims under s. 52(1)(d). However, this package of amendments did not pass through Parliament before the General Election, which incidentally, is occurring today, was called by the Prime Minister.

We will have to wait and see what happens to this amendments package once the new session of Parliament resumes sitting after the Election.

Conclusion

Before I conclude, I would like to leave you with the following observations. Truthful and innovative advertising is beneficial to industry and consumers alike since it promotes fair and effective competition.

The Bureau's lines of communication are always open to help ensure that advertising complies with the misleading advertising and deceptive marketing practices provisions of the Competition Act.

While we at the Bureau strive to meet challenges both old and new, I would like to add that we also look to the business and legal community for possible suggestions and innovative proposals on how we can best fulfill our mandate in the coming years. We are no further away than your telephone--or computer if you are on the INTERNET.

I hope this presentation has been beneficial and I thank you again for this opportunity to meet with you today.