Misleading Advertising on the Internet: Competition Law Enforcement in the Electronic Marketplace

Remarks by Rachel Larabie-LeSieur
Deputy Director of Investigation and Research
Competition Bureau

Canadian Corporate Shareholder Services Association

September 19, 1996

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Good morning. I am pleased to have this opportunity to share with you some thoughts about the Internet and the provisions of the Competition Act that deal with misleading advertising and deceptive marketing practices.

The Competition Act is the only federal statute of general application to all forms of advertising in Canada. The Act applies to all means of making representations including print, TV or radio advertisements, written or oral representations, audiovisual promotions and illustrations. Its provisions are sufficiently broadly worded to encompass representations electronically generated and distributed. As the Deputy Director of Investigation and Research, Marketing Practices, I am responsible for the administration and enforcement of the misleading advertising and deceptive marketing practices provisions of the Act. It is in that capacity that I address you today.

My remarks this morning shall be in three parts.

I shall begin with a brief outline of the underlying rationale for the misleading advertising provisions of the Act.

Secondly, I shall offer some observations about the Internet as a marketplace, the characteristics of online advertising and the related implications for the participants of this new marketplace.

In the final part of my presentation, I shall touch upon a number of investigative and legal challenges likely to be encountered in the application of competition law to deceptive Internet advertising and marketing activity. I should note that the Criminal Code also finds application in regard to fraud.

With respect to this last area, I shall preface my remarks now by saying that there are far more questions to be asked than answers to be given when considering the possible implications for enforcement of competition law in the Internet-based electronic marketplace.

The Competition Act and the Misleading Advertising 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 rationale underlying the misleading advertising provisions, which are criminal law provisions, is directed to the question of market information.

The efficient operation of a market economy depends on the free flow of information about products and services offered for sale. Advertising is the principal means by which firms convey product information to the market. When truthful and accurate, advertising normally enhances market performance. Advertising transfers useful information to consumers and enables firms to compete more vigorously through product and service promotion. However, where incomplete or false information in relation to a product or service is fed into the market, market performance is adversely affected. Distortion of the marketplace harms both consumers and honest competitors. Consumers are precluded from making informed purchasing decisions and firms are denied the ability to compete on a level playing field.

In terms of practical application, enforcement of the misleading advertising and deceptive marketing practices provisions of the Act is geared to ensuring that no competitor gains or retains market share by deception. The overall policy goal is to allow competitive market forces, within the framework provisions of the Competition Act, to determine winners and losers in the marketplace.

Most situations involving false or misleading representations in respect of share offerings or investments come under the purview of the various securities law and regulation and accordingly, there are very few cases under the Competition Act. A fairly recent one is the Principal Group in which D. Cormie was fined $500,000 for making false representations in the company's Annual Review document.¹

The Internet

1. The New Marketplace

Description of the Internet in the popular press seems always to invite hyperbole. Estimates and projections as to current size and future growth, if not overly precise, are indeed impressive.

• It is estimated that the Internet now links over 40 thousand local networks, 4 million computers and over 40 million users. ²  Estimates as to users range as high as 70 million. ³
  
  
• The World Wide Web may now contain more than 100 million documents and is said to be doubling in size every 52 days. ⁴
  
  
• A recent study suggests that almost a third of Canadians have used the Internet at least once in the past year compared to only 12 percent in 1995. ⁵ More than 20 percent of the Internet users surveyed reported that they had used the Net to purchase products or services. ⁶
  
  
• American forecasts predict that Web advertising will total $110 million US in 1996 and will reach $1.86 billion US in the year 2000. ⁷ Over the next two years, Web advertising revenues are expected to increase by more than 265 per cent to approximately $400 million US. ⁸

The Internet offers inexpensive and easy access to a population that is well educated, affluent, and in many cases, willing to disclose its interests and desires by joining "mailing lists" and "newsgroups".

As you are no doubt aware, the Internet is a vast collection of computer networks which are inter-connected world-wide through the use of a common computer protocol. It provides a system of borderless communication and information retrieval. Anyone with the requisite computer equipment and software programs can access the Internet. When connected to the system, any one computer can communicate with any other computer that is online.

As the "network of networks" continues to evolve into a global marketplace, the interaction between buyers and sellers will carry with it a number of important implications for the ways in which market transactions and product promotions are carried out. The technological and interactive nature of the Internet already affords consumers and firms substantial benefits.

Buyers gain primarily from the availability of information that reduces uncertainty in the purchase decision. The Internet provides a window into global markets where the full range of available goods or services can be sought. The ability of the Web to analyze information speeds the process of finding items to purchase and greatly enhances purchaser convenience. Potential buyers can test certain products online, locate hard-to-find products and enjoy a wider choice of goods and services.

The benefits to business are several. Most firms, at this point, use the Internet to deliver to consumers and to other firms commercial information about their offerings and themselves. Web sites are accessible 24 hours a day and can be accessed from anywhere in the world. Arguably, Internet marketing is one of the lowest-cost methods of bringing products and services to market and through online ordering, commercial transaction costs are reduced. Marketing information can be updated instantly and with little or no cost.

As a channel for product distribution, the Internet can deliver any product that can be digitized. Firms in the publishing, information services and computer software industries are at the forefront of electronic commerce.

Clearly, technological innovation is at the core of the emergence of this new marketplace. To sum up, the skillful application of advanced information technologies and services permits easy entry by all participants and, for business, generates productivity gains and competitive advantage.

At the same time, industry observers point to a number of difficulties that, at present, limit the growth of electronic commerce.

Concerns about payment transaction security and its impact on consumer willingness to purchase products and services is perhaps the greatest barrier to a fully realized commercialization of the Internet. This issue encompasses more than finding technological solutions to permit "virtually unbreakable" credit card encryption or the adoption of digital cash as electronic currency. It is also a matter of consumer confidence, an area where perception may lag substantially behind technological advance. Consumers and, for that matter, firms as industrial consumers, must first become comfortable with and accustomed to transacting purchases over the Internet. This possibly is a function of time as much as any other consideration.

Privacy of information issues go far beyond transaction security. The digital footprints that electronic transactions leave behind raise serious concerns about the use of personal information collected through the Internet. Computer technology enables firms to gather market intelligence, monitor customer choices and track consumer preferences. In the new world of electronic commerce, every business – big or small, reliable or not – will have the capacity to stockpile data or to buy electronically generated data bases from other sources.

While there is no question as to the advantages that this technology brings, a balance between the benefits of advanced information technologies and the risks that they introduce to individual privacy will have to be struck. The adoption of national and international privacy standards may well play an important role in the development of electronic commerce.

There are other concerns such as: pricing issues in the "for free" environment of the Internet and accessibility costs to low-income households; the legal, political and ethical questions that arise when firms attempt to market services and information globally; and inherent conflicts between the historically open culture of the Internet and the more narrow requirements of private commercial interests.

2. Interactive Marketing

On the subject of electronic commerce, one development that has attracted much attention is the advent of computer-mediated interactive marketing.

Traditionally, products and services have been marketed in a minimum of two stages: broad dissemination of product information through broadcast, print or other advertising media followed by a second stage in which sales transactions are effected through sales personnel, over the telephone, or by some other means.

The Internet brings together these two functions. It serves both as a vehicle for the broad dissemination of product information and has the capability of interactive communication which is necessary to process a sales transaction.

The control that Internet technology gives to the buyer has created a new kind of consumer sovereignty. The Internet is not only a medium in which the buyer can choose whether or not to approach the seller but also is one in which he can exercise control over the content with which he interacts. With a single click of the mouse, the potential purchaser can end the "dialogue" with the seller.

Proponents of electronic commerce argue that the Internet has already become an essential component to an increasingly integrated business environment.

Consumer advocates applaud the shift in market power from producer to consumer that the emerging technology continues to bring.

However, with all the benefits and opportunities that the Internet gives individuals and businesses, there are risks that must be assumed, one of which is possible economic injury arising from misleading advertising or deceptive marketing practices.

Misleading Advertising on the Internet

The same technologies that give the Internet its potential as a marketplace also tend to facilitate fraud and deception.

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.

The online techniques that honest competitors use to capture consumer information and target potential customers are similarly available to scam artists to find potential victims.

Digital technology presents other possibilities for deception. The tampering with logos and trademarks can not only mislead consumers but also harm the economic interests of legitimate advertisers.

The interactive quality of Internet marketing poses its own dangers. It allows entire transactions, from first contact to final sale, to take place within a few minutes. This will permit scams to be perpetrated much more rapidly. Victims will be precluded from the safeguards that time and distance have traditionally afforded. As payment systems become more secure and electronic commercial transactions more common, the vulnerability of net surfers will increase in turn.

It may even become more difficult for consumers to discern suspicious advertisements. Similar to the development of television infomercials, Web technology makes it possible for commercial communication or, in the case of illegitimate marketers, misleading representations to be presented as online entertainment. For example, the direct marketing of products to children through Web sites that feature entertainment is now seen as an area of serious concern.

It is clear that, 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.

As are other law enforcement agencies worldwide – securities commissions are among these I'm sure – the Competition Bureau is actively monitoring online advertising for possible competition law violations. Based on our activities in this area, I can make the following observations:

• The fraudulent marketing that now appears on the Internet is not new either in content or subject matter. The same types of scams perpetrated in the print and broadcast media and effected through telemarketing and television infomercials are to be found on the Internet. Deceptive practices specific to the new medium of the Internet do not appear to have developed to date.
  
  
• Law enforcement agencies have identified electronic fraud involving a number of different products and services, examples of which are stock offerings, credit record rehabilitation, high-tech investment opportunities, sweepstakes promotions, charitable solicitations, weight loss programs, hearing aids and pyramid schemes.
  
  
• Not surprisingly, the undisguised "classified advertising" to be found in online areas designated for commercial messages are as likely or as unlikely as advertising in the print and broadcast media to contain false or misleading representations.

Our monitoring of Internet advertising is in its initial stages. Nonetheless, I can tell you that a company was charged earlier this year in connection with misleading online representations relating to a multi-level marketing plan. While I cannot specifically comment on the case as it is still before the courts, I can mention that other matters are under active investigation and that, if events follow a usual pattern, current investigations should culminate in additional future prosecutions.

From the Canadian perspective, we are confident that current investigative methods and existing legal principles can be adapted effectively to online advertising where the offences occur within Canadian jurisdiction and the offender resides in Canada. However, the situation may be less certain when offences take on international proportions. While many of the problems related to foreign-based Internet advertising are similar to those that are raised when more conventional forms of advertising involve cross-border aspects, the characteristics of an open unrestricted global computer network certainly pose unique difficulties.

First and foremost, the Internet is not regulated, nationally or internationally. There is no central authority or supranational organization to control the flow of information or to determine who or who may not market online. Existing laws require national borders in order to be enforced and yet the very nature of the Internet is that it is borderless.

What steps can be taken, for instance, when a buyer resides in Canada, the seller is located in Columbia, the good is shipped from Japan and the financial transaction is cleared through a bank in Switzerland? Where does the offence occur? Which country's laws and standards should prevail? How will conflicts between different legal regimes be resolved?

Legal complexities present but one set of daunting challenges. The list of problems related to the detection and apprehension of offenders is equally long.

It may not be possible to identify or to locate offenders. Internet technology can provide anonymity and make it nearly impossible to trace the origin of a posted message or advertisement. Illegitimate marketers can slow detection by using encryption technology to mask the information they exchange. The Internet furnishes the criminally-minded marketer with mobility. Scam artists can easily relocate from country to country and continue their illegal activities from another base of operation. Human resource limitations, competing enforcement priorities in foreign jurisdictions, and legal restrictions on the communication of information all add to the list.

Nevertheless, the search for solutions to these and other problems is underway.

One obvious approach is to make greater use of the new computer technologies to combat illegal activities. With fewer resources to call upon and mounting pressures to maximize the effectiveness of their efforts, law enforcement authorities must move in this direction if they are to keep pace in the fight against deceptive marketing practices. Even so, technological solutions must be carefully crafted to avoid hindering the technological innovation that has created the new marketplace.

Another set of proposals focuses on the roles of intermediaries, notably online service providers. In exploring the options, hard-to-answer questions are raised. How should the legal relationship between online service providers and advertisers be characterized? What are the liabilities and responsibilities of each party? Under which circumstances, if at all, should online service providers be held liable for advertisers' deceptive practices?

It has been argued that self-regulation of the Internet should be encouraged. The Internet may indeed be suitable to some form of self-policing since consumers can and do provide quick feedback to advertisers and service providers. However, under the influx of millions of new users in the forthcoming years, it seems unrealistic to rely overly on the culture of the Internet to ensure effective deterrence against fraudulent practices.

In my view, efficient cooperation among enforcement agencies on a global scale is essential.

Complementary to enhanced cooperation with foreign enforcement agencies, consumer and business education initiatives need to be pursued proactively. This task should be undertaken by all parties with a stake in the healthy growth of the Internet as a marketplace – legitimate advertisers, government authorities, Internet access providers, commercial online services and individual users.

The Internet itself is a valuable utility for disseminating information about the requirements of the law, the steps that consumers can take to protect themselves and warnings as to ongoing deceptive marketing practices.

Ultimately, the solutions that will be adopted will have to be extremely flexible. The Internet is still evolving and from our present perspective, it is difficult to know what shape online advertising will take in future years.

Conclusion

The emergence of the borderless marketplace brings with it the threat of widespread economic injury caused by deceptive practices in Internet advertising and marketing. It is an unfortunate fact that unscrupulous marketers will be quick to use the new technologies to victimize the unwary or the naive.

At a time of fiscal restraint, law enforcement agencies, whether at the international, federal, or provincial level, are responding as vigorously as possible in seeking the most efficient ways to carry out their mandates effectively in the wired global marketplace. You may be sure that we will continue to pay close attention to Internet marketing and will strive to ensure that competitive market forces are encouraged and maintained wherever and whenever possible.

On a final note, I wish to make a request.

In a previous speech on the subject of advertising in the electronic age, I expressed the view that the suitability of existing law and the capabilities of investigative tools currently at hand would be tested in meeting the challenges of flexible and effective enforcement.⁹ I made at that time a request that I would now like to reiterate.

I would ask that you consider seriously the questions that I have posed in relation to the difficulties which we all face in ensuring that fair and effective competition thrives in the electronic marketplace. The implications for business, the individual and government that will flow from the resolution of the many issues presently before us deserve, I think you would agree, the most careful consideration.

We would welcome your insights on these and any other matters that you might wish to share with us.

Thank you for your attention.

Endnotes

¹R. V. Cormie, Alta. Q.B., January 22, 1992 (unreported). Mr. Cormie was convicted on a charge related to the "Chairman's Message" in the Principal Group's Annual Review for 1985, which represented in a false or misleading manner that the group had been successful in moving out of the real estate market in advance of that market's subsequent collapse. Investors relied on this representation when deciding whether to invest in products offered by the Principal Group.

²The Internet: Beyond the Year 2000, April 28 to May 1, 1996, University of Toronto, Convocation Hall, a Special Colloquium of the University of Toronto Department of Computer Sciences Distinguished Lecture Series. The conference explored the technology, applications, implications and impacts of the Internet.

³Internet Statistics – Estimated, Internet Solutions. "As of Mon. Aug 5 9:41:47 1996, (Pacific Time) there are an estimated: .70, 223,7701 people on the Internet*....~~ The asterisk in the proceeding quote refers readers to the following explanation: "By 'on the Internet' we mean people with access to e-mail, ftp, gopher, and telnet services. These accounts may be dial-up shell accounts, PPP/SLIP accounts, or accounts on company LANs connected to the Internet."

⁴ The Internet: Beyond the Year 2000.

⁵Andersen Consulting, as reported in The Ottawa Citizen (Online) "One-third of Canadians have surfed the Internet", Tuesday, July 23, 1996.

⁶ Ibid.

⁷ Web Advertising: Market Analysis & Forecast,,SIMBA Information Inc. Estimates cited in company press release (1uly 1996) announcing that report had been published.

⁸ Ibid.

⁹Modern Communications & Global Markets - Enforcement Challenges and Deceptive Marketing Practices; an Update on Operation and Priorities. Rachel Larabie-LeSieur, Deputy Director of Investigation and Research (Marketing Practices) delivered the speech in Toronto on October 23, 1995 to the Canadian Institute's conference on "Misleading Advertising – Advertising and the Law in the Electronic Age". The full text of the speech is reproduced on pages 1 to 15 of the Misleading Advertising Bulletin, No.3 – 1995. The speech can also be found on pages 77 to 91 of Volume 2 of "Misleading Advertising Bulletin: Reprint of Selected Articles from the Past Issues January 1992 to December 1995".