Report from the Competition Bureau Deceptive Marketing Practices

Raymond Pierce
Deputy Commissioner of Competition
Fair Business Practices Branch

Canadian Bar Association
Annual Fall Conference on Competition Law

(PDF: 823 KB)

October 2-3, 2003
Hilton Lac Leamy - Hull, Québec

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I. Branch Mandate

In today's competitive marketplace, consumers are particularly vulnerable to deceptive business practices such as unsubstantiated product performance claims, pricing claims and deceptive telemarketing practices. The mandate of the Fair Business Practices Branch is to promote fair competition in the marketplace by discouraging deceptive business practices and by encouraging the provision of fair and accurate information to enable informed consumer choice. The Branch is responsible for the administration and enforcement of the misleading representations and deceptive marketing practices provisions of the Competition Act (the "Act") [Part VI (sections 52 to 60) and Part VII.1], the Consumer Packaging and Labelling Act, the Textile Labelling Act and the Precious Metals Marking Act.

It is my intention to outline for you the significant developments in the work of the Fair Business Practices Branch which have taken place over the past year since the last Canadian Bar Association Annual Conference on Competition Law.

II. The Branch's activities over the past year

(A) Civil Provisions

The past year has seen a continuing increase in the Competition Bureau's (the "Bureau") activity under the civil provisions of the Act. The Bureau attempts to resolve matters through a variety of methods, including information contacts, negotiated undertakings and consent orders. Over the past year, the Bureau has filed numerous consent agreements with the Competition Tribunal. As well, there are currently two contested matters before the Tribunal.

Ordinary Selling Price

The Act provides specific provisions for ordinary selling prices. These provisions provide a framework to sellers for making claims about regular prices. These provisions are designed to ensure that when products are promoted at sale prices, consumers are not misled by reference to "inflated" regular prices. It is a violation of the ordinary selling price provisions of the Act for retailers to make "regular price" claims without selling a substantial volume of the product, or offering the product at that price or a higher price within a reasonable amount of time. The Bureau is committed to stop the use of fictitious "regular prices" as deceptive sales ploys.

• A consent agreement was filed with the Competition Tribunal on December 20, 2002, against two Ontario-based jewellery retail chains, Fine Gold Jewellers and The Diamond Co. These jewellery retailers were deceiving consumers about the value of their savings by continuously offering significant discounts from their inflated regular prices of gold and diamond jewellery. Under the terms of the agreement, the corporations and their officers have agreed to cease making any written or verbal representations relating to the regular selling price of their products unless 50% of the products have been sold at the stated regular price within the prior 12 months of making the claim. In addition, the corporations and their officers have agreed to pay a $25,000 administrative penalty.
• In a second consent agreement in the jewellery industry, the Bureau settled a case on April 24, 2003, against The Gold Factory and R. Pye & Sons Jewellers in St. John's, Newfoundland. The consent agreement, which was filed with the Competition Tribunal, requires that the corporation and its officers operating the jewellery retail chains refrain from using deceptive pricing practices in promoting jewellery sales. Under the terms of the agreement, the officers of the corporation agreed to cease making any written or verbal representations relating to the regular selling price of products unless; (i) 50% of the products had been sold at the stated regular price within 12 months prior to the making of the representation; and (ii) the products were offered for sale at the stated price or a higher price within 12 months prior to the making of the representation. The consent agreement will remain in effect for 10 years.
• A settlement was reached with Suzy Shier Inc. over the pricing practices of the women's clothing retailer. A consent agreement was filed on June 13, 2003 with the Competition Tribunal. Under the terms of the agreement, Suzy Shier Inc. will: (i) ensure that all future regular price representations comply with the ordinary selling price provisions of the Act; (ii) implement a corporate compliance program designed to ensure that the company complies with these provisions of the Act; (iii) publish corrective notices in newspapers across Canada; and (iv) pay an administrative monetary penalty in the amount of $1,000,000. This settlement was reached on the basis of a thorough investigation by the Bureau which found that Suzy Shier Inc. had placed price tags on garments indicating a "regular" and "sale" price when in fact the garments were not sold in any significant quantity or for any reasonable period of time at the "regular" price.
• On July 23, 2002, the Bureau filed with the Competition Tribunal its first application under the ordinary selling price provisions. The Commissioner's application alleges that Sears Canada Inc. deceived consumers about the real value of their savings by referring to "inflated" regular prices when advertising certain tires at "sale" prices in 1999. The Commissioner is requesting that the Tribunal issue a prohibition order for 10 years and order Sears to cease and desist the alleged conduct, publish a corrective notice, and pay a monetary penalty. This case is scheduled to go before the Tribunal this fall. Sears Canada Inc. has challenged the constitutionality of the relevant sections of the Act based on freedom of commercial expression. The Commissioner has conceded this breach, but is arguing that this breach is saved under the Canadian Charter of Rights and Freedoms. The outcome of this case will have a significant impact on the enforcement of this section of the Act in the future.

False and Misleading Representations

The false and misleading representations provisions of the Act aim to improve the quality and accuracy of marketplace information and discourage deceptive marketing practices. Over the past year, the Bureau has continued to ensure that consumers are not subjected to unsubstantiated product performance claims.

• On December 16, 2002, a consent agreement was filed with the Competition Tribunal against Thane Direct Canada Inc. ("Thane"). Thane sold two electronic muscle stimulation devices, the Abtronic and Abtronic Pro, via television Infomercials and their Web site for approximately $120 each, giving the false impression that without performing any physical exercise a person could lose weight, obtain an athletic physique with well-defined abdominal muscles, replace the workout benefits of a fully equipped gymnasium and increase their strength. The consent agreement requires that Thane stop selling and marketing the Abtronic and Abtronic Pro, and not market any similar device that offers weight loss or muscle toning without exercise, unless the Bureau agrees that the claims are based on adequate and proper tests. The company also agreed to pay an administrative penalty of $75,000 and refund consumers the full value of the devices.
• A consent agreement was filed with the Competition Tribunal on May 7, 2003 regarding the marketing practices of Para Inc. The consent agreement concerned a paint product, the Radiance™ low e-line, which Para claimed would generate energy savings for its users. As a result of an analysis of tests conducted by both the Bureau and Para Inc. with respect to the paints, the Bureau and Para agreed to limitations on performance claims made in the marketing of the paint. Para Inc. agreed to: (i) not claim energy savings in an average residential house greater than five per cent; (ii) state that the energy savings will vary according to the climate in the region where the building is situated and the quality of construction of the building amongst other factors; and (iii) not state the heat transference qualities without identifying the energy saving qualities in accordance with the agreement.
• On May 31, 2002, the Competition Tribunal ruled that a gas-saving device known as the Platinum Vapour Injector (PVI), marketed by PVI International Inc., did not work and the company's claims of saving fuel and reducing emissions were false and unsubstantiated by "adequate and proper tests". PVI International Inc. and its two owners, Mr. Michael and Mr. Darren Golka, were ordered to cease making representations with respect to the gas-saving device for a period of 10 years. Furthermore, the company was ordered to pay an administrative penalty of $75,000 while the owners were each ordered to pay $25,000. The company and the owners have appealed this decision. On July 16, 2002, the Bureau commenced a cross-appeal against the decision in order to force the Edmonton-based company to inform customers, through corrective notices in newspapers across Canada and on the Internet, that its gas-saving device does not work. The appeal is scheduled to be heard later this year.

(B) Criminal Provisions

On the criminal matters side of the Branch, the Bureau continues to devote significant resources in its efforts to combat deceptive telemarketing and deceptive mail solicitations which target vulnerable consumers. The Bureau is determined to ensure that Canada is not seen as a haven for these criminal activities.

Deceptive Telemarketing

Deceptive telemarketing continues to be a priority for the Bureau on the criminal matters side. As a result of investigations led by the Bureau, over 900 criminal charges have been laid against individual telemarketers and their companies in the past three years. Much of this success is due to the concerted efforts of domestic and international law enforcement agencies working in partnership. Telemarketing is defined as the practice of using "interactive telephone communications" for the purpose of promoting directly or indirectly any product or business interest. Telemarketing is made subject to disclosure requirements, and specific offences are created with regard to certain deceptive telemarketing practices.

• On January 20, 2003, the telemarketing company Farber Blake Corporation pled guilty to one criminal charge and was fined $300,000 for misleading consumers in Canada and New Zealand. Victims of the deceptive telemarketing were contacted by telemarketers and told that they had won prizes, however to claim such prizes victims were informed that they had to buy one of the company's promotional items. The Bureau found that Farber Blake Corporation sold these promotional items at highly inflated prices and misrepresented the nature, value and quality of both the prizes and the promotional items sold.
• On February 18, 2003, criminal charges were laid under the Act and the Criminal Code against seven individuals engaged in an Ontario-based telemarketing operation targeting U.S. residents. The Bureau had received more than 500 complaints from other law enforcement and government agencies, including Phonebusters National Call Centre, the U.S.'s Federal Trade Commission, various Better Business Bureaus and offices of the Attorneys General across the U.S. The boiler rooms in the Toronto area conducted promotions under the names MedPlan, Global and STF Group. The telemarketers used high pressure sales techniques to induce potential clients to purchase a medical discount plan and to induce them through false and misleading representations to release bank account information. Funds were then withdrawn from the accounts without authorization of the client. Promises of a free trial period and refund conditions were not respected. Charges under the Act and the Criminal Code were laid against Mr. Alex Aaron Korn, Mr. Christian R. Quilliam, Mr. Allan Michael Shiell, Mr. Julian David Shiell, Mr. Sean Zaichick, Mr. Nicholas Ian Bridges and Mr. Cory Darren Besser.
• On November 19, 2002, charges were laid under the Act and the Criminal Code against six companies and six people for allegedly engaging in deceptive telemarketing which targeted businesses and not-for-profit organizations worldwide. The corporations, operating as Commercial Business Supplies, Merchant Supply Services and International Business Directories, sold paper rolls and cleaning cartridges used in debit and credit card machines, as well as business directories and listings in those directories. Complaints from around the world alleged that telemarketers would contact them and misrepresent themselves as their regular suppliers of business directories or office supplies. The telemarketers also allegedly made false and misleading representations regarding the price of the products and the renewal and the duration of the subscriptions. According to complaints, products and invoices were then received for supplies or directories that had not been ordered. Charges were laid under the Act and the Criminal Code against Mr. Michael Mouyal, Mr. Randy Misiurak, Mr. Charles Picotte, Mr. Justin Pold, Mr. Stéphan Ouellet, Mr. François Lefort and Mr. Charles McCulloch. Also charged were 153595 Canada Inc., 162013 Canada Inc., 162014 Canada Inc., 174440 Canada Inc., M.M. Annuaires d'entreprises internationales Ltée., and 3350550 Canada Inc.
• In a similar case, criminal charges were laid against seven companies and eight individuals engaged in telemarketing business directories, credit card supplies and office toner supplies in November 2002. Charges were laid under the Act and the Criminal Code. The charges stem from a Bureau investigation into allegations of criminal deceptive telemarketing by a group of corporations and individuals operating as Hanson Publications, Copier Supply Centre and Associated Merchant Paper Supplies. Consumers across Canada and the U.S. complained they were contacted by telemarketers who allegedly misrepresented themselves as the consumer's regular supplier of business directories or office supplies. Telemarketers made false or misleading representations and failed to disclose pertinent information, such as the price of the product and the terms and conditions of delivery. Consumers were subsequently invoiced for items they allege they had neither ordered nor wished to order. Charges under the Act and the Criminal Code were laid against Mr. Charles Hamouth, Mr. Adrian Towning, Mr. Todd Ivison, Mr. Francis Loo and Mr. Jamie Lynes of Toronto, Ontario, and Mr. Albert Mouyal, Mr. Ricardo (Rick) Aquino and Ms. Atilla (Kris) Jausz of Montreal, Quebec. Also charged were: 1230704 Ontario Inc., operating as Hanson Publications Inc.; 3579573 Canada Inc., operating as Associated Merchant Paper Supplies Inc./Fourniture de Papier Associated Merchant Inc.; 1018961 Ontario Inc., operating as Copier Supply Centre Inc., as well as several other affiliated companies.
• On October 28, 2002, charges were laid against the Internet Registry of Canada and its principals under the Act's misleading advertising and deceptive telemarketing provisions. The Internet Registry of Canada and its two principals, Mr. James Tetaka and Mr. Daniel Klemann, marketed the Registry's services by sending mail solicitations which appeared to be invoices sent on behalf of the Government of Canada or an officially sanctioned agency registering domain names in Canada, to individuals and organizations whose domain names were about to expire. The marketing allegedly gave the impression that domain name holders were existing customers and had to re-register their domain names with the Internet Registry of Canada, which was not true.
• On January 21, 2003, a Bureau investigation into the deceptive telemarketing activities of two Montreal-based companies resulted in guilty pleas from five individuals who were involved in a prize-pitch scam targeting consumers in Australia and New Zealand. The criminal investigation used wiretaps to gather information about the companies which carried on business as Alexis Corporation and 3587932 Canada Inc., its administrative affiliate. The Court of Quebec (Judicial District of Montreal) imposed the following sentences: Mr. Jerry Browman: 15-month conditional sentence and 150 hours of community service; Mr. Marcus Miller: eight-month conditional sentence, 12 months probation and 100 hours of community service; Mr. Michel Rosenberg: six-month conditional sentence, six months probation and 100 hours of community service; Mr. Lawrence Walsh: 12 months probation, 100 hours of community service and a $1,000 fine; and Mr. Doron Kunin: 16-month conditional sentence. All the parties also received a 10-year prohibition order banning them from working in telemarketing operations, and an order prohibiting them from communicating with any of the co-accused. The remaining co-accused, Sheldon Cutler, Scarlet Jove, Gerald Goldstein, Constantina Athanasopoulos, Armenia Linhares and William Kenwood, will appear in a Montreal court for a preliminary hearing in November 2003.
  
• Following a Bureau investigation into cross-border deceptive telemarketing practices carried out by a company operating as First Capital Consumers Group, U.S. Guardian United Consumers and Trans America United Benefits Group, the Bureau laid criminal charges on October 22, 2002. The company allegedly defrauded close to 100,000 American consumers with poor credit history, claiming they had been approved for a credit card. Receipt of the card was subject to the prior payment of a one-time processing fee. Victims never received a valid credit card. Between October 2001 and July 2002, the Bureau received approximately 1,200 complaints from various sources, including Phonebusters National Call Centre and Consumer Sentinel, a call centre maintained by the U.S. Federal Trade Commission. This was the largest criminal deceptive telemarketing operation investigated by the Bureau and the Toronto Strategic Partnership. Charges were laid under the Act and the Criminal Code against four directors of the Toronto-based telemarketing operation: Mr. David Dalglish, Mr. Leslie Anderson, Mr. Mark Lennox, and Mr. Lloyd Prudenza.

Deceptive Mail

• In 2002, two Toronto corporations, HMS Direct Limited and Hallstone Products Ltd. and their director, Mr. David Stucky and employees, Ms. Sylvia Carbone, Mr. Norm Pemberton and Mr. Jan Swanson were charged under the Act and under the illegal gaming provisions of the Criminal Code for their involvement in making unsolicited deceptive mail promoting participation in the purchase of lottery tickets. In March 2003, these same parties were charged under the misleading representations and deceptive marketing provisions of the Act. The Bureau received complaints from consumers in 91 countries relating to unsolicited mailings which encouraged recipients to send money to receive what they believed would be valuable prizes. The mailing allegedly gave the false impression that they were to receive a cash prize or some other valuable prize. Recipients were requested to send a "processing fee" of $14.95 to $29.95 (U.S.) to receive their prize. In reality, every respondent received a predetermined prize, which in most cases was an inexpensive piece of jewellery.

Activities Under the Standards-Based Statutes

The Bureau continues to pursue cases under the labelling statutes enforced by the Bureau.

• On January 28, 2003, Modugno-Hortibec Inc., a Quebec company specializing in the packaging and sales of garden products, pleaded guilty to five counts of false or misleading representation on the quantity of their products. The Court of Quebec imposed an $850 fine for each charge, totalling $4,250, under the Consumer Packaging and Labelling Act. In this case, inspections revealed that the net quantity of certain items was not the same as that indicated on the labels, thus deceiving consumers about the quantity of the product.

(C) Enforcement Policy

Over the past few years, the Bureau has been active in developing a number of policy initiatives and voluntary code projects. The Bureau believes that the use of guidelines and voluntary codes assists in outlining and clarifying the Bureau's position on the application and enforcement of the Act.

• In November 2002, the Bureau endorsed the Voluntary Code for Authenticating Canadian Diamond Claims, which was launched by the Canadian Diamond Code Committee. The Code was developed through the combined efforts of the diamond mining sector, cutters and polishers, retailers, the Canadian Jewellers Association and Jewellers Vigilance Canada, as well as government officials, including the RCMP. The Code stems from the Bureau's Enforcement Policy on the Marketing of Canadian Diamonds, which states that a diamond mined in Canada qualifies as "Canadian" for the purposes of the Act. The purpose of the Code is to ensure that the marketing of Canadian diamonds is clear and accurate.
• In June 2003, the Bureau announced its participation in the adoption of international guidelines for co-operation in the fight against cross-border fraudulent and deceptive commercial practices. The Guidelines for Protecting Consumers from Fraudulent and Deceptive Commercial Practices Across Borders were prepared by the Committee on Consumer Policy of the Organization for Economic Co-Operation and Development (OECD). The Guidelines were developed as part of an effort to combat the growing problem of cross-border scams. Statistics compiled from Consumer Sentinel, an international call centre maintained by the FTC, reported over 30,000 cross-border fraud complaints in 2002. While 2,700 were from Canadian consumers, 14,000 were from U.S. consumers who were scammed by Canadian companies. The Bureau's own statistics demonstrate the gravity of the problem with cross-border scams. In the past year, the Bureau has laid about 1,000 charges under the Act and the Criminal Code against individuals and companies involved in illegal scams. In the first quarter of 2003, 47% of all complaints received by the Bureau were from other countries, in particular the United States, the United Kingdom, Australia and France. The Bureau believes that the implementation of these Guidelines is key to stopping consumer scams which target the most vulnerable consumers and result in billions of dollars in losses. The Guidelines provide a list of recommendations to be implemented by member countries which include broad principles for international co-operation, as well as specific provisions covering notification, information sharing and assistance in investigations. They also cover issues regarding the authority of law enforcement agencies, invite private-sector co-operation and set the stage for future work on consumer redress.
• In February 2003, the Bureau released an Information Bulletin on the Application of the Competition Act to Representations on the Internet. The Bulletin is designed to ensure that those making representations on-line understand their responsibilities under the misleading representations and deceptive marketing provisions of the Act. The Bulletin outlines and clarifies the Bureau's position on the application of the Act to on-line representations. The Bulletin was released following a consultation process with stakeholders.
• In August of 2003, the Bureau endorsed a set of guidelines that will help the Canadian jewellery industry provide consumers with consistent, accurate and meaningful product information. The publication, Canadian Guidelines with Respect to the Sale and Marketing of Diamonds, Coloured Gemstones and Pearls: Revised Edition 2003, is a result of a Jewellers Vigilance Canada special committee, which included industry members and a Bureau representative. The revised guidelines reflect recent amendments to the Act, as well as the need to ensure that Canadian jewellery definitions remain consistent with international standards.

(D) Partnerships/International Co-operation

• In June 2003, Operation Cure-All was announced by the Federal Trade Commission and the Food and Drug Administration emphasizing the importance of their relationship with the Bureau and other agencies in Canada and Mexico. Operation Cure-All is aimed at dealing with the multi-jurisdictional nature of deceptive marketing practices pertaining to health-related products. For example, in February 2003, the Bureau led an international law enforcement effort against a Canadian telemarketing operation that targeted U.S. residents worried about the adequacy of their health-care coverage (see MedPlan above). The multi-jurisdictional nature of these deceptive marketing practices, particularly with the growth of the Internet, requires law enforcement organizations, both domestic and international, to work in full co-operation to effectively combat the problem. Another such initiative to combat these issues involves the Bureau as a member of MUCH, the Mexico/U.S./Canada Health Fraud Work Group, which was established to strengthen the three countries' ability to prevent the growing problem of cross-border health fraud.
• Also in June 2003, a Toronto Strategic Partnership investigation led to charges under the Act and the Criminal Code against individuals allegedly involved in a telemarketing operation that misled businesses into donating money for advertising space in fraudulent magazines devoted to police, fire safety and children's issues. The Partnership is a law enforcement partnership established to combat deceptive marketing practices across North America. The Bureau is one of the founding members of the Partnership, which also includes the Ontario Ministry of Consumer and Business Services, the Ontario Provincial Police, PhoneBusters National Call Centre, the Toronto Police Service, the U.S. Federal Trade Commission and the United States Postal Inspection Service. As part of its commitment to the Partnership, the Bureau currently provides the Toronto Police Service with one full-time competition law officer to assist police with deceptive marketing investigations under the Act and the Criminal Code.
• Special Constable Status was granted to 10 competition law officers from the Bureau's Ontario Region and eight competition law officers from the Bureau's Prairie and Northern Region. The special constable designation permits competition law officers to serve summonses and subpoenas while fulfilling their duties under the Act, the standards-based statutes and the Criminal Code. These appointments are aimed at further improving the criminal investigative process and relieving police agencies from the burden of serving court documents for anti-competitive offences. The Bureau now has special constable status in British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, Quebec, Nova Scotia and Prince Edward Island. The Bureau first received the status in February 2002 when the OPP granted it to 10 National Capital Region officers at a ceremony in Ottawa.
• The Bureau is continuing its work on the Fraud Prevention Forum (formerly the Mass Marketing Fraud Forum). This forum is a collaborative effort chaired by the Bureau and includes the OPP, RCMP, Solicitor General of Canada, Consumers Council of Canada and MasterCard Canada. In a joint effort, Forum members will work collectively to develop public outreach campaigns that are aimed at educating and empowering consumers against criminal marketing schemes. The Forum anticipates launching its campaign in the new year.

(E) Amendments to the Competition Act

In June 2003, the Government of Canada announced that it will launch a consultation process with Canadians on proposed changes to the Act, including the addition of restitution as a key remedy to deal with consumer loss in cases of false and misleading representations. Detailed legislative proposals are outlined in a Government discussion paper entitled Options for Amending the Competition Act: Fostering a Competitive Marketplace. This discussion paper is available on the Bureau's Web site. The Bureau has hired the Public Policy Forum to conduct national consultations based on the discussion paper. Further details on the consultation process and on how to submit comments on the discussion paper can be found at www.ppforum.ca.