A few days ago, we posted a short note on the Competition Bureau’s announcement that five companies and three individuals were found by the Ontario Superior Court of Justice to have violated the Competition Act in relation to a deceptive marketing operation (see: Advertising Update: $9 Million Penalty and Restitution Obtained in Deceptive Marketing Scheme).
We thought we would post a few more observations about this rather significant case following the issuance of the decision by the Ontario Superior Court.
Facts
The Competition Bureau sought orders for restitution and administrative monetary penalties or “AMPs” (essentially civil fines) in relation to alleged deceptive marketing by a group of related companies that included Yellow Page Marketing B.V., Yellow Publishing Ltd., Yellow Data Services Ltd., Yellow Business Marketing Ltd. and several individual defendants (none related to the Yellow Pages Group (“YPG”), well known and reputable in Canada).
The Bureau alleged that this group of companies misled thousands of Canadian businesses, individuals and organizations to pay more than $2,000 each for “agreed upon” services on the assumption that the target companies were merely updating existing records to obtain free Google advertising. In fact, fine print disclaimers disclosed that the targets were actually signing new two-year contracts.
While unrelated to the YPG, the defendants registered 13 Internet domains for websites that included highly similar trade-marks, colours and designs used by the YPG. The defendants also sent faxes to businesses, individuals and organizations that, according to the Court, were “designed to mislead existing or potential YPG customers” into paying $2,856 to them and which included designs that highly resembled the YPG “Walking Fingers” logo.
Companies responding to the faxes received invoices, which, if not paid, were followed by more invoices, reminder notices or letters.
Law
The Court considered the facts of this case under section 74.01 of the Competition Act (the general civil misleading advertising section of the Act).
Generally speaking, the misleading advertising provisions of the Competition Act prohibit false or misleading statements to the public that are made to promote products (including services) or business interests and that are materially false or misleading (i.e., likely to cause an ordinary or average consumer into purchasing a product or otherwise altering their conduct).
The Court reviewed the relevant law under the general misleading advertising provisions of the Act, including the test for materiality, the “general impression test” (the general impression of a claim is relevant under both the criminal and civil misleading advertising provisions in addition to its literal meaning), the fact that the general misleading advertising provisions apply to claims relating to both products or “any business interest” and the law relating to fine print disclaimers.
With respect to materiality, the Court held:
“The false or misleading representations made by the respondents were material. They were intended to deceive and did, in fact, deceive many Canadian businesses and individuals into believing that they were dealing with YPG, when they signed and returned the Unsolicited Faxes and sent payment to the respondents. Materiality of the false or misleading representations is further evidenced by the fact that a majority of complainants stated that they would never have ordered the service by returning the Unsolicited Faxes had they known that the respondents were unaffiliated with YPG and/or would never have paid the respondents invoices or reminder notices had they not believed that they had been sent by YPG.”
With respect to the fine print disclaimers, the Court held:
“The fact that the fine print of the Unsolicited Faxes stated that returning them would bind the recipient to a two year contract does not reduce its false or misleading nature. The fine print did not clarify that the Unsolicited Faxes had not been sent by YPG and the disclosure was insufficiently prominent.”
With respect to the meaning of “business interest” in section 74.01, the Court construed this phrase broadly holding:
“Similar misrepresentations appear in the respondents’ domain names, invoices, reminder notices and letters sent by the respondents. Although the respondents argue that collection efforts after the contract had been completed were not to increase sales, the relevant provision of the Competition Act refers to promoting “any business interest” and not just sales. The phrase ‘business interest’ must be given a wide meaning and collecting money, and threats made in relation to collection efforts, constitute promotion of the respondents’ business interests.”
The Court also found the defendants’ domain names, invoices, reminder notices and letters to be misleading and rejected the defendants’ argument that a due diligence was available.
Under the penalty provisions of the civil misleading advertising sections, a limited defense is available to the corrective notice, administrative monetary penalty and restitution provisions where a person establishes that they exercised due diligence to prevent the reviewable conduct from occurring.
Penalties
The Court issued a declaration that the defendants made false or misleading representations, issued a ten year prohibition order prohibiting them from engaging in similar conduct, ordered them to publish corrective notices, compensate their customers and pay an $8 million AMP.
Key Points & Trends
This case is an example of an intentional deceptive marketing scheme and one of the most recent in a long series of deceptive “business directory” cases (i.e., deceptive or fraudulent billing for business directories, or related products, never ordered by the targets of deceptive marketers).
Having said that, it does illustrate several important trends by Canadian courts and regulators and provides useful additional guidance for several key concepts under the general misleading advertising provisions of the Act. These include:
1. Misleading and deceptive advertising remains a top enforcement priority for Canadian regulators.
2. Canadian courts and regulators appear to be growing increasingly aggressive toward the use of fine print disclaimers.
3. Confirming that the “general impression” as well as the literal meaning of claims is relevant to assessing whether a claim is false or misleading.
4. Providing useful additional analysis regarding the “materiality” element for the general misleading advertising provisions of the Competition Act.
5. Providing useful analysis regarding the factors to be considered for calculating AMPs for misleading advertising. In this regard, in March, 2009, the penalties for civil misleading advertising under the Competition Act were significantly increased to maximums of C $750,000 (for individuals) and C $10 million (for corporations).
6. A reminder that the general misleading advertising provisions of the Competition Act apply not only to claims in relation to the marketing of products, but “any business interest”, a phrase that was construed broadly in this case.
7. Indicating that regulators are more inclined to seek, and some Courts are willing to award, individual penalties (granted in this case).
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