Report from the Competition Bureau — Misleading Advertising and Deceptive Marketing Practices

Raymond Pierce, Deputy Commissioner of Competition
Fair Business Practices Branch
Competition Bureau

Canadian Bar Association
Annual Fall Conference on Competition Law

September 20-21, 2001

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I. Branch Mandate

It is clear that one of the keys to a strong and competitive marketplace is consumer confidence. The Fair Business Practices Branch plays a major role in strengthening this confidence. It is the Branch's mandate to promote fair competition in the marketplace by discouraging deceptive business practices and by encouraging the provision of sufficient information to enable informed consumer choice. The Branch achieves this through the application of the Competition Act (the "Act"), the Consumer Packaging and Labelling Act, the Textile Labelling Act and the Precious Metals Marking Act. Our goal is to have a strong marketplace in which Canadians have confidence in the integrity of business practices as well as in product information and representations.

The aim of this paper is to provide a quick overview on where the Fair Business Practices Branch has been and, more importantly, where it is headed.

II. The Branch's activities over the past year

(A) Criminal Provisions

This past year we continued to devote significant resources in our efforts to combat deceptive telemarketing and deceptive mail solicitations involving materially false or misleading representations where we believe the element of intent or recklessness exists.

The new deceptive telemarketing provisions are proving effective. We now have many active investigations into deceptive telemarketing and we expect these investigations will lead to increased court activity as they near completion. Given the severity of these offences, we intend to vigorously pursue the directing minds behind such operations as well as the individual telemarketers engaging in this unscrupulous activity.

The new provisions have been extremely helpful in setting a code of conduct for the industry as a whole and sending a clear message to deceptive telemarketers. For the most part, we are finding that the majority of legitimate businesses engaged in telemarketing already comply with the legislation and in fact welcome the new provisions and their ability to discourage deceptive practices.

The disclosure provisions are clear and straightforward, and legitimate telemarketers seem to have no difficulty complying with the Act . For those engaged in deceptive telemarketing, we are finding that they usually fail to make the necessary required disclosures under section 52.1(2), in addition to making false or misleading representations as described in the deceptive telemarketing section of the Act (s.52.1(3)).

The deceptive telemarketing provisions have been especially effective in reducing the number of prize pitch telemarketing complaints the Bureau has received since the enactment of the amendments. This is most encouraging, as prize pitch telemarketing was one of the main types of scams targeted by the amendments. However, recent complaints received by the Bureau show what appears to be a migration towards schemes involving direct mail solicitations as well as telemarketing aimed at businesses and charities. Some of the cases currently before the courts reflect this trend.

The YellowBusinessDirectory.com case is a prime example where three individuals were arrested and charges were laid against them and two corporations under the general false or misleading representation provisions of the Act. The charges stemmed from a Bureau investigation into a number of allegedly deceptive mailings sent to hundreds of thousands of Canadian businesses and non-profit organizations requesting payment for a YellowBusinessDirectory.com listing containing their business information. The mailings appeared to be bills from well-known telecommunications firms, copying their style and colour scheme. This case involved using the full range of tools available under the Conformity Continuum, including public education campaigns, compliance contacts, and contested proceedings. This is the first case in which the Bureau obtained a Prohibitory Order from the Minister Responsible for Canada Post, under the Canada Post Corporation Act, removing the rights of the individuals and corporations involved from sending or receiving mail for their personal and business purposes. This tool is most significant because it deters individuals and businesses from engaging in such activity. The order was issued on December 6, 2000 in Ottawa and the matter is now before the courts with the preliminary hearing scheduled for February 11, 2002.

In May, 2001, a mailing by a related company known as YellowBusiness.ca raised similar concerns under the false or misleading representation section of the Act (s. 52(1)). An investigation into the mailing led to arrests and charges against both individuals and corporations. In addition, the Bureau has asked the Canada Post Corporation to extend the Prohibitory Order to stop the delivery of mail to and from this second company.

Charges were also laid this year against Farber Blake Corporation, S.D. Prestige Enterprises Limited, L.A. Premiums Plus Inc., J.C.&A. and a number of individuals for deceptive telemarketing. It is alleged that the accused deceived victims into believing that they had been selected to receive valuable items that were represented as "premiums", when in fact, they had to buy one of the company's promotional items at substantially inflated prices in order to become eligible to win a premium. Numerous misrepresentations are alleged to have been made regarding the nature, value and quality of both the premiums and the promotional items sold, the guarantee to receive valuable premiums and the legitimacy of the companies. The first court appearance for the accused is scheduled for September, 2001.

Recent cases resolved before the courts also reflect an increase in fines imposed, sending a clear message that such offences will not be tolerated. A record $300,000 fine was handed down in December 2000 against Stephen Clark, the Director of three Montreal-based telemarketing companies, after he pleaded guilty to three criminal charges of misleading advertising. The fine is the highest ever imposed against an individual for deceptive telemarketing under the Act.

Another deceptive telemarketing operation, C.S.R.H. Heritage Group Inc., was also fined $700,000 and the company's manager, Ronald Howell, was sentenced to a six-month conditional jail term for misleading advertising under the Act. Other telemarketers involved with these operations are currently awaiting trial on similar misleading advertising charges.

A total of 35 criminal charges under the telemarketing provisions of the Act have also been laid against two Montreal-based telemarketing companies- F.D.G. Fortune One Group and F.N.G. First National Galleries, their principal director, and five individual telemarketers. Several telemarketers pleaded guilty and received fines and/or community service duties. The director of the operations is still awaiting trial.

In May, 2001, Lifestyles Canada Ltd. was fined $95,000 after pleading guilty to four criminal charges under the multi-level marketing provisions of the Act. A Prohibition Order was also imposed on the company restricting further anti-competitive conduct. Under the Act, it is illegal to make references to earnings in a multi-level marketing plan without disclosing the income of a typical participant. As part of its recruitment efforts in 1999-2000, Lifestyles Canada and its participants used Internet web sites, pre-recorded telephone messages, promotional material and meetings to highlight participants in their multi-level marketing plan earning hundreds of thousands or even millions of dollars, but failed to disclose that the income of a typical participant was between $399 and $2,000 per year.

We have also been actively pursuing cases under the three standards-based laws. While the vast majority of companies comply with these laws in the context of the Bureau inspections, occasionally it is necessary to resort to the courts to affect compliance. This occurred in three cases this year under the Consumer Packaging and Labelling Act. The first concerns charges against a paint factory in New Brunswick owned by Laurentide Atlantic Limited for allegedly selling products containing less than the net quantity specified on the labels. The second case involves three charges of false or misleading representation against Gaston Charbonneau Floral Ltd., who was fined $1000 for each charge. The company produces bags of sheep and cattle manure compost which did not hold the same amount of net quantity that had been labelled on the package. A third case where charges were laid relates to misleading net quantity information provided to consumers on packages of antifreeze and paint thinner products manufactured by Gotham Industries. The accused's first court appearance took place on September 7, 2001.

(B) Civil Provisions

On the civil matters side of the Branch, we have also been vigorously applying the Act. Numerous matters were resolved through either information contacts, negotiated undertakings or consent orders and many other matters are still in progress. However, where compliance cannot be achieved promptly through negotiations, the Bureau will not hesitate to initiate contested proceedings with the Competition Tribunal.

As evidence of this, on March 1, 2001, the Bureau filed an application for an order with the Tribunal under subsection 74.1(1) of the Act against P.V.I. International Inc., an Edmonton-based company, involved in a national promotion campaign of a fuel saving device, called the Platinum Vapour Injector ("P.V.I"). The advertisements make several performance claims related to fuel savings, increased engine power and durability, and reduced emissions. The advertisements also refer to US government approval and testing of the P.V.I. The Bureau believes these claims are not based on proper or adequate tests. The hearing took place in August, 2001.

The Branch has also registered a consent order with the Competition Tribunal, against Gestion Professionnelle (Électroprotections) Inc. ("GPI"), under the deceptive marketing practices provisions of the Act. GPI marketed its ML-10 electronic anticorrosion device as an electronic device that could be connected to a car battery in order to protect the entire surface of the body of the car against rust. The ML-10 was sold primarily in Quebec through certain car and small and medium sized truck dealers. Under the terms of the consent order, GPI and Jean-Hugues Chénard, in his capacity as President, have agreed to stop selling the ML-10 electronic anticorrosion device and will also refrain from marketing the device or any other similar device in Canada unless adequate and proper tests are carried out, as required under the Act. The order also states that the company will maintain its eight-year anticorrosion insurance for all vehicles already equipped with the ML-10 and will have to notify all purchasers individually.

On another front, ordinary selling price claims remain a Branch priority and a number of significant matters in various retail industries are currently at different stages of review. We expect some of these reviews to reach a resolution in the near future. In particular, investigating ordinary selling price claims in the retail jewellery industry- identified as a Branch priority following the passage of the amendments- remains a key priority. This national project was implemented following the assignment of a team of officers from across the country whose mandate was to deal with and respond to industry concerns. As a result, the team designed a three-phase conformity strategy for the retail jewellery industry. The first phase involved sending close to 3,000 personalized letters to jewellers across the country, educating and informing them of their responsibilities under the ordinary selling price provisions of the Competition Act as well as the Precious Metals Marking Act. Bureau staff followed up with close to 700 visits to retail establishments to respond to questions and to identify instances of continued non-compliance. The second phase involved monitoring the industry to identify cases of non-compliance. We have successfully received written commitments to comply with the law from nine corporations, representing in excess of 350 retail jewellery outlets. The last phase- where we are right now- involves dealing with retailers who have failed to comply despite this national initiative.

(C) Policy

The Branch has also been very active over the past year in developing a number of policy initiatives and voluntary code projects. Some of the key projects include:

i) Environmental Labelling and Advertising

On July 17, 2001, we issued a Notice of Consultation announcing a request for public comments on our proposal to adopt new guidelines on environmental labelling and advertising. The Standard reflected in the guidelines is that of the Canadian Standards Association (CAN/CSA-ISO 14021-00) which will be used when assessing environmental labelling and advertising claims, under the provisions of the Act and the Consumer Packaging and Labelling Act. This Standard provides an internationally harmonized and more comprehensive guidance to manufacturers and importers as well as benefits consumers, enabling better informed decisions when shopping for products or services making environmental claims on their packaging or in their advertising.

ii) Canadian Care Labelling Standard

The Branch has also launched a review of the Canadian Care Labelling Standard, which describes the symbols used to convey cleaning care instructions to consumers and dry cleaners. While these standards are not currently mandatory under the Textile Labelling Act, we believe consumers and the marketplace would benefit from a move towards harmonized care labelling requirements to facilitate trade in textile and apparel goods.

iii) Pet Food Labelling

We have also recently completed consultations related to a voluntary code on pet food labelling, which was developed by a cross-section of stakeholders with Bureau participation. We have received and reviewed comments and expect that this code will be published in its final form shortly.

iv) Marketing and Advertising of Diamonds

On a another front, we have completed a consultation exercise to obtain public comments on the application of the 'Made in Canada' guide to the marketing and advertising of diamonds. The main goal of these consultations was to seek comments on how the Bureau enforces the Act when reviewing promotional claims alluding to Canada as the origin of a diamond. In light of these consultations, the Bureau is currently finalizing its enforcement policy related to the marketing of Canadian diamonds.

v) Internet Advertising

In May, the Bureau issued draft "Internet Advertising Guidelines" aimed at providing businesses and consumers with practical advice on how the Bureau will apply the Act to online marketing practices. The public consultation process ended on August 28, 2001 after which we will be reviewing and making the appropriate changes before issuing the final version of the Guidelines.

vi) econsumer.gov

Also related to electronic commerce, the Branch participated in the launch of the "econsumer.gov" web site initiative by IMSN members and the Consumer Sentinel Network. The site allows consumers from all over the world to file complaints against foreign companies concerning transactions on the Internet. Users are also able to get information on consumer protection in IMSN member countries, find contact information and get practical advice on making on-line purchases safely. This international pilot project will enhance consumer confidence in electronic commerce as well as strengthen and increase international cooperation in combatting misleading advertising and deceptive marketing practices on the Internet.

vii) Multi-level Marketing Multimedia Tool

The Branch began developing this project in September 2000 after identifying a need in the marketplace for a multimedia guide that could build greater awareness and conformity with the Act in the area of multi-level marketing and pyramid selling. As a result, in June of this year, the Bureau launched Mutli-level Marketing and the Competition Act- an animated multimedia tool designed to inform Canadian businesses and consumers about the provisions of multi-level marketing and pyramid selling under the Act. Available in both ID-ROM and Web-based formats, the animated presentation depicts the story of a Canadian entrepreneur as she learns how to operate a legitimate multi-level marketing business which conforms with the Act. The Web version is available on the Bureau's Internet site at www.competitionbureau.gc.ca .

III. Branch priorities for the current fiscal year

Given the unscrupulous nature of the offence and the financial ruin that it often causes, the Branch will continue to vigorously enforce the criminal provisions of the Act against deceptive telemarketing and deceptive mail solicitations. Not only are individuals at risk, but the business sector, particularly the SME segment, is also vulnerable to such deceptive practices. The Branch has made it a priority to bring to a conclusion several ongoing investigations, to seek ways to expedite its work, and to take advantage of every opportunity to educate and warn the public about such practices.

On the civil side of the law, the Branch has devoted considerable resources to issues involving the ordinary selling price provisions of the Competition Act. A major initiative involving the retail jewellery industry has resulted in voluntary compliance by an overwhelming majority of those establishments where concerns were identified. However, the Bureau continues to have concerns about the practices of a small number of retailers. Resolving such issues in the jewellery as well as other sectors of Canada's retail industry will continue to be a priority.

As the Internet continues to grow as a medium for conducting commerce, it is important that those offering services electronically adhere to the same rules as others. The draft guidelines on Internet advertising are designed to ensure that those doing business on-line understand how the Act applies to them. As mentioned previously, the guidelines should be finalized shortly. The Branch will also be more proactive this year in conducing sweeps of Web sites to assure they comply with the Act. A group of officers headed by the regional office in British Columbia will conduct such sweeps on a monthly basis and increase our capacity for on-line investigations. Our approach to potential violations will be assessed in light of the guidelines and the Bureau's conformity continuum.

It is equally important that the Branch remains active on the policy front. The types of initiatives outlined earlier are essential to assuring maximum compliance with and awareness of the law. To that end, we will work closely with a broad range of stakeholders representing both consumers and business as well as actively maintaining our participation in intergovernmental committees, working groups, major trade shows, info-fairs and international fora.

In addition, the Branch will continue to dedicate resources to pursuing and implementing strategic partnerships with other law enforcement agencies as we aim to improve information sharing and enhance our cooperative efforts to combat deceptive telemarketing and deceptive mail solicitations. For example, the Bureau will continue to be an active member of the International Marketing Supervision Network (IMSN), a group composed of different international enforcement agencies. We are also actively involved in other cooperative initiatives such as the Ontario Strategic Partnership against Deceptive Telemarketing and the RCMP's Project Emptor which are task-forces of Canadian and American law enforcement agencies created to coordinate and conduct investigations of fraudulent telemarketers operating in Ontario and British Columbia respectively and targeting Canadian and U.S. citizens.

IV. The Branch's experience with the dual civil-criminal regime

The Act was amended in March, 1999 to, among other changes, allow for a dual criminal-civil regime to address misleading representations and deceptive marketing practices. These new provisions make some types of conduct such as fraudulent telemarketing exclusively criminal while having others, such as promotional contests and ordinary price claims, fall within the civil adjudicative regime.

However, the general provisions which prohibit the making of materially false or misleading representations to the public appear in both the civil and the criminal provisions of the Act, set apart by the requirement for the element of intent for the criminal provision to apply. The choice of proceeding under either the criminal or civil track is a matter of weighing the facts and evidence particular to each case.

The Act itself provides little guidance as to which track the Bureau should choose. To lend transparency and predictability to the process, the Bureau published a bulletin setting out the approach that it will employ in making such decisions. The fundamental principle emerging from this bulletin is that the civil track will be selected unless there is clear and compelling evidence suggesting that the party responsible for the representation knowingly or recklessly made a false representation to the public and that a criminal prosecution would be in the public interest. The factors taken into account in making this determination include:

Choosing the appropriate track is a simple task in cases where the Act creates specific criminal offences involving pyramid selling, multi-level marketing or deceptive telemarketing where no precise civil equivalent is available. For those that fall outside this category, applying the criteria outlined in the bulletin has resulted in the majority of examinations currently underway being treated as civil matters. This is consistent with the desire to more effectively and rapidly address and resolve marketplace issues.

There remain however, cases which present evidence of specific mens rea that require a more careful analysis of the 'public interest' criteria. While the bulletin strives to lend transparency and predictability to this process, ultimately it must be recognized that this involves a case-by-case weighing of the various factors, as opposed to a formulaic approach.

This approach has enabled the Branch to investigate cases under the civil track where a more expeditious resolution is needed, either through a consent order, prohibition order or by using one of the tools available through the Bureau's Conformity Continuum. While the number of complaints following the amendments to the Act has increased dramatically from 9,000 to about 15,000 last fiscal year, the Branch has been able to complete more examinations and inquiries than prior to the amendments. For instance, for the fiscal year ending March 31, 2001, we completed 238 inquiries and examinations compared to168 for the year ending March 31, 1999.