Speaking Notes for Sheridan Scott Commissioner of Competition

Competition Bureau

Speech to the Canadian Marketing Association

Toronto, Ontario
September 22, 2005

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(PDF: 31 KB)

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Thank you for those kind words of introduction. I am delighted to be here today because we share so many of the same concerns. For both of us, protecting the integrity of the marketplace and maintaining consumer confidence are key priorities. Events like this one are a chance to open up the dialogue; to discuss emerging issues and to work together on solutions.

I want to talk to you today about our shared responsibility for encouraging a healthy and vibrant marketplace - a market where your customers can make informed decisions.

Fair competition benefits the economy, and gives businesses – big and small -- an equal opportunity to compete for market share. Profound changes are taking place in our economy today – particularly in terms of increasing globalization and the rise of e-commerce. Working together as partners to ensure compliance will help put our marketplace on a more solid foundation and position Canadian commerce for innovation and enhanced economic growth.

The Bureau administers and enforces the Competition Act, a vital piece of legislation, which is based on the idea that the marketplace, not government intervention, produces the best results. Only if the market fails to work, is action warranted. We do not see ourselves as crusaders, but as facilitators, seeking to ensure fair entrepreneurial opportunities for all.

One way in which our mandate is triggered is when an advertiser deceives consumers about the quality or price of a product or service, or fails to fairly provide consumers with information necessary for making informed choices.

We appreciate this Association’s strong support of our work attacking fraud in the marketplace - something that clearly undermines consumer confidence. Today, I would like to speak about other parts of our legislation that are also aimed at truth in advertising, and about the public and private sector’s shared responsibility for making the Competition Act work.

First, I would like to spend a few minutes focusing on false and misleading advertising claims and the roles that each of us might play in eradicating this threat to Canada’s economic well-being.

The Bureau’s primary responsibility in this area is to enforce the Competition Act - to go after dishonest marketers who break the law and are able to steal customers from legitimate operators.

We also have a responsibility to help you understand our approach to the law so that you can exercise due diligence. We know that most firms do comply with the law – and this is where you come in. We believe that everyone can benefit if businesses put in place internal mechanisms designed to make compliance automatic and ongoing.

Your responsibility is to arrange your affairs so that your advertisements don't cross the line. We can help you do that, by explaining your obligations under the Act, and by providing guidance on the tools necessary to achieve ongoing compliance.

An easy starting point is our web site. It sets out the elements which we see as fundamental to the success of an effective compliance program; one that educates employees, directors and officers about the requirements of the Act and reduces uncertainty about what is or is not legal conduct.

It can also give early warnings of potentially illegal conduct, as well as reduce the exposure of corporate officers, directors and employees, and the corporation itself, to criminal and civil liability.

The pre-emptive identification of potential risk can save time and money, protect goodwill, and set your company on a good track for the future. Ensuring that compliance is a given frees your company and your employees to focus on pursuing innovative and profitable business practices.

Our web site also helps you stay on the right side of the law by outlining how we interpret many of the provisions of the Competition Act. We also issue information bulletins to guide the business community, which was the approach we took to explaining the ordinary selling price (OSP) provisions.

Shoppers love a bargain, and sale prices naturally influence their buying decisions. Further, because it is often difficult for consumers to judge a true bargain, they rely on the regular or "ordinary" selling price as an indicator of the product’s worth and quality. When businesses misrepresent that ordinary price, consumers can be deceived, and honest competitors can lose sales. It is this type of deceptive behaviour that Parliament is attempting to address with the ordinary selling price provisions of the Competition Act.

These provisions were amended relatively recently -- in 1999 – at the request of the retail community in response to a need for greater flexibility. The amendments were the result of consultations with a blue ribbon panel of stakeholders, including the Retail Council of Canada.

Under the legislation, retailers now have the option of meeting one of two tests in order to be able to claim savings off of a regular price:

The first test asks: Was a substantial volume of the product sold at the regular price within a reasonable time period? The second test is: Was the product offered for sale at that price in good faith for a substantial period of time? We refer to these as the volume test and the time test. Retailers need to meet only one of them in order to comply with the law.

In keeping with our role of providing businesses with an understanding of our interpretation of the Competition Act, the Bureau released a detailed Information Bulletin to give guidance on the OSP provisions shortly after the law came into force.

The Sears Canada case was the first decision to be handed down under these new ordinary price provisions of the Competition Act. While the Bureau does not litigate lightly, Sears disagreed fundamentally with the our interpretation of the OSP provisions set out in the Information Bulletin, and accordingly, it was felt that clarification from the Tribunal was needed.

The Tribunal's decision, which involved over 100 pages of carefully considered reasons, provided the clarification that people were looking for.

In this regard, one of the most important and informative aspects of the decision involves the discussion surrounding the concept of 'good faith' found in the time test. There, the Tribunal concluded that good faith is a subjective concept. It asks the question "what did the advertiser truly believe about the genuineness of its regular prices?".

The Tribunal went on to explain that although the test is subjective, the reasonableness of the advertiser's belief is a factor to be considered in determining whether a belief is honestly held. In this regard, the Tribunal indicated that it would consider other factors, such as whether the reference price was comparable to that offered by competitors, and whether sales occurred at the reference price, to help assess that belief.

Therefore, it is important to underline that if the facts point to a true belief on the part of the advertiser that the market would validate its regular prices, then it will be seen to be acting in good faith and not contrary to the law even if it turns out that the advertiser was mistaken in its belief.

The Tribunal's decision also shed light on the use of list prices in the context of good faith. The Tribunal's reasons on that issue might best be summarized by saying that list prices should not be relied upon as a proxy for doing your homework to ensure that your regular prices are genuine.

These and other clarifications should help everyone understand their obligations and reduce the number of businesses making claims that Parliament has defined as false and misleading.

As part of our commitment to educate businesses about the Competition Act, we are holding a seminar in January to further explain the ordinary selling price provisions to the retail community. You’ll be hearing more about this in the coming months. We hope you can join us.

We will continue to keep an eye out for the less than honest competitor, who chooses to disregard the law, not just with respect to OSP claims, but in other areas such as false and misleading product performance claims.

This year, we have been focusing on health claims relating to such matters as cancer cures, tanning benefits and weight loss products. Since health claims are difficult or impossible for consumers to evaluate, the Competition Act states that representations about the performance or effectiveness of products must be based on adequate and proper testing. Part of your compliance program should ensure that you can back up your claims. It is important to note that you need to have these tests before you start your advertising campaign.

While many of our actions have dealt with traditional retailing methods, we’re looking increasingly at e-commerce.

E-commerce is appealing to consumers because it offers convenient shopping alternatives. However, because the Internet is more anonymous, there is greater temptation for unethical companies to try to get away with fraud and deceptive advertising practices. Such prohibited behavior undermines consumer confidence in e-commerce and threatens the growth of this increasingly important sector of our economy.

The Competition Act is indifferent to the medium used -- false or misleading representations and deceptive marketing practices, whether perpetrated on-line or via traditional routes, are equally offensive in our opinion.

As always, we prefer to educate rather than prosecute. In February 2003, we issued a bulletin explaining how the Competition Act applies to deceptive marketing practices on the Internet. The goal of our Internet policy is to minimize confusion and increase stakeholders’ understanding.

A major initiative on this front is Fair Web, which we launched in April 2004 to monitor and combat misleading and deceptive advertising on the Internet. Our office conducts regular Internet sweeps to identify potentially problematic sites.

If we find examples of product claims that could raise issues under the deceptive marketing provisions of the Act, we inform the company of its obligation to tell the truth and to support all claims with adequate test results. We consider appropriate enforcement action where compliance is not achieved.

Our efforts to date have focused on bogus weight loss products, which account for a large proportion of Internet complaints and prey on particularly vulnerable consumers -- people who are desperate for a solution to their weight loss problems.

In December 2004, we resolved our first case under project Fairweb. It involved diet patches sold on-line by an American company, Performance Marketing Ltd. The marketing claims in question gave the false impression that without dieting or physical exercise, the patches could help consumers lose weight by speeding up their metabolism. The company also failed to enforce its own anti-SPAM policy, which theoretically forbade its affiliates from using SPAM to sell their products.

The company signed a consent agreement to stop making claims that are not based on adequate and proper tests, to ensure that SPAM is not used in marketing its products, to post a corrective notice on its web site and to offer a full refund to customers who bought the diet patches.

Another priority for the Bureau is to strengthen the Competition Act to provide necessary incentives to promote compliance. This led to Bill C-19, which was tabled in November 2004 and is now before the House of Commons Industry Committee for review. The Bill includes proposals that will strengthen the remedies available under the Act to provide strong incentives for businesses to comply with the law in a timely and voluntary fashion.

Without going into details on C-19, I would like to clarify a few misunderstandings about the proposed amendments related to marketing practices.

First, I would like to address the proposal to increase the administrative monetary penalties, or AMPs, for deceptive marketing practices. The current AMP levels are not sufficient deterrents.

Misleading advertising causes serious harm to the Canadian economy - in terms of direct and indirect losses to both consumers and competitors. In many instances, deceptive marketing campaigns have generated revenues in the millions of dollars. To unscrupulous practitioners, the existing maximum AMPs of $100,000 for a first contravention or $200,000 for subsequent orders are merely seen as a cost of doing business.

Furthermore, I want to stress that the proposed maximum penalty of $10 million for a first breach of the Act is just that - a maximum. It is not a set penalty. The maximum is only intended to give courts room to apply the AMPs appropriately in relation to the severity of the conduct.

In order to ensure the AMP is remedial and not punitive, the proposals in C-19 set out criteria to guide the Tribunal in assessing the amount of the AMP to be imposed. These criteria include the financial position of the company, the volume of gross sales and the profits generated by the conduct. The AMP is not intended to financially impair the company, but rather, to remove any financial incentive to break the rules.

On the issue of restitution, it is important to note that an order could only be issued when a consumer has lost money buying a product, because of a false or misleading representation by a vendor.

The proposals dealing with AMPs and restitution are designed to encourage compliance. Therefore, advertisers who can establish that they exercised due diligence to prevent consumers from being deceived can avoid paying an AMP and restitution.

Also, written opinions, which are binding on the Commissioner, are available to help businesses in Canada understand their obligations under the Act.

The proposed amendments included in Bill C-19 are aimed at strengthening Canada’s competition framework in a global economy while balancing the interests of consumers and businesses both large and small. Committee consideration of Bill C-19 should resume in the coming weeks.

In closing, let me say that I believe each of us shares an interest in maintaining consumer confidence and a vibrant competitive marketplace.

As I said at the outset, the Bureau often prefers the role of facilitator to that of enforcer. You have the expertise to market your products; we have the expertise to help you ensure that those initiatives meet Parliament’s rules regarding honesty and to take action against those who don’t play fair.

I encourage you to implement compliance programs and to continue working with us to make Canadian enterprise a leader in fair and effective marketing.

Thank you very much.