Protecting consumers from false and misleading advertising is a key enforcement priority for both Canada’s Competition Bureau and the United States Federal Trade Commission. The Bureau’s most recent case, against two of Canada’s leading furniture and appliance retailers, demonstrates the increasing importance of ensuring clear and accurate advertising. The case draws on a theory relied on by the FTC in a number of proceedings, and underscores the need for compliance vigilance by advertisers in Canada and the United States.

The allegations

On July 9, 2013, the Commissioner of Competition commenced legal action against Leon's Furniture Limited and The Brick Ltd. (the Defendants) for making misrepresentations to the public and for supplying products at prices higher than advertised. The Defendants have indicated that they deny the allegations and will defend the action.

In the documents filed with the court, the Commissioner underscored the impact of “drip pricing” on consumers, and how this practice can trigger behavioural biases in consumers. This is the first case in which the Bureau has explicitly referred to this theory, although as discussed below, there has been considerable focus on “drip pricing” by the FTC.

Misrepresentations to the public

The Commissioner alleges that the Defendants have engaged in misrepresentations to the public, contrary to s 74.01(1)(a) of the Competition Act, by promoting and selling home furnishings and other products with advertising that represents to consumers that they can defer payment of their purchases to a later date without paying more for the product. The representations referred to in the statement of claim include, for example, “Don’t Pay a Cent! Not even the taxes! For [X] months!”

The Commissioner states that these representations are material and can influence consumer behaviour, by increasing upselling and encouraging impulse buying. It is also alleged that the representations are false and/or misleading because they literally mean, and convey the general impression, that consumers can purchase a product without having to pay anything until later. The representations also convey the general impression that if consumers defer the payment they will not pay more than if they paid for the product at the time of purchase.

In addition to the advertised price of the product, the claim also states that consumers who decide to use the “pay later” option often have to pay a number of administrative or processing fees upfront, which add to the cost of the product. According to the claim, these additional fees and surcharges are not included in the advertised “base price” of the product, therefore causing consumers to be misled as to the final cost of the product and the fact that there may be upfront payments required in order to obtain a deferred payment option.

It is possible that the recent Supreme Court of Canada decision in Richard v Time Inc.1  will also have an impact on this proceeding. If so, the test for materiality would be applied, not in the context of the “average purchaser” (which was the previous standard), but in the context of the “ordinary hurried purchaser” who is “credulous and inexperienced”. The determination of whether a representation is false or misleading in a material way would be assessed in the context of “consumers who take no more than ordinary care to observe that which is staring them in the face upon their first contact with an advertisement.”

Higher price than advertised

The Commissioner alleges that the Defendants have supplied products at a price higher than advertised, contrary to s 74.05(1) of the Competition Act. The Commissioner alleges that the Defendants conceal the actual purchase price and do not make it known to the consumer until later in the purchasing process.

Consumers wanting to defer payment of a product must pay additional fees that are not advertised, thereby making the actual supplied price higher than advertised.

Other factors: drip pricing and disclaimers

The claim also refers to the impact of “drip pricing” on a consumer’s purchasing decisions. Drip pricing describes a retailer’s practice of informing the consumer of price surcharges in stages during the purchasing process, instead of presenting the total product price upfront. The Commissioner claims that drip pricing can increase sales by influencing behavioural biases, including price anchoring (consumers anchor to the lower advertised price and fail to adjust their perception as new surcharges are introduced), loss aversion (consumers decide to purchase based on the low price and cannot give up a product that they view as theirs despite the rising cost), and commitment and consistency (once a consumer has decided to start the purchasing process it is difficult to stop).

The Commissioner alleges that the Defendants’ disclaimers, which indicate that certain fees may have to be paid, are ineffective and directly contradict the literal meaning and general impression of the representations.

US experience

The FTC has studied “drip pricing,” and held an all-day conference in May 2012 featuring economists and marketing academics to examine economic theories and empirical studies of the impact on consumers. Then Chairman of the FTC, Jonathan Leibowitz, stated at the May 12 conference that drip pricing “has the potential to mislead and harm consumers, causing them to pay too much and to waste time searching for cell phone plans, airline or concert tickets, hotel rooms, or rental cars with deceptively low prices.” In November 2012, the FTC sent letters to 22 hotel operators, warning them that they may be violating s 5 of the Federal Trade Commission Act by excluding certain mandatory fees — such as resort fees — from their quoted online reservation prices. The FTC found that advertising only part of the price, with the remaining portion nearby but on a separate form, or with an asterisk with the disclosure elsewhere on the site or with a statement that “fees may apply” “may violate the law by misrepresenting the price consumers can expect to pay for their hotel rooms.” Instead, the FTC urged that online hotel reservation sites “include in the quoted total price any unavoidable and mandatory fees, such as resort fees, that consumers will be charged to stay at the hotel.” In addition, the FTC recommended that “the most prominent figure for consumers should be the total inclusive estimate.”

Remedies

The Commissioner has, amongst other remedies, requested that affected customers be reimbursed by the Defendants in an amount that reflects the revenue collected as a result of the Defendants’ conduct. While not quantified in the statement of claim, this would likely be a significant amount. The Commissioner has also requested the payment of an administrative monetary penalty, the amount of which it will quantify prior to trial. The Competition Act provides for a maximum administrative monetary penalty of $10 million.

Conclusion

While none of the allegations against either of the Defendants have yet been proven, this new proceeding highlights the need for all companies to have in place compliance plans and policies that evaluate advertising and marketing plans on an ongoing basis and ensure that such advertising and plans are clear, accurate and not misleading. With close scrutiny being paid to these issues by regulators in Canada and the United States, particular care must be paid to marketing and advertising programs that span both sides of the border.