Last month the Ontario Superior Court of Justice upheld the constitutionality of the Competition Act’s misleading advertising and administrative monetary penalty provisions, but dismissed most of the Commissioner of Competition’s case against Chatr Wireless Inc. and its parent company, Rogers Communications Inc.1 The court ruled that the comparative advertising run by Chatr was not false or misleading, but that in certain markets the company had failed to perform adequate and proper testing to support these claims prior to running the ads. As such, a separate proceeding will be held to determine the appropriate penalty for this breach of the Competition Act.

The decision marks the third straight defeat for the Competition Bureau in four months, in what had been high-profile cases launched by the previous commissioner, Melanie Aitken.

In April 2013, the Competition Tribunal brusquely rejected the commissioner’s abuse of dominance complaint against the Toronto Real Estate Board,2 and in July 2013 the tribunal held that the commissioner’s price maintenance case against Visa Canada Corporation and MasterCard International Incorporated was not supported by the legislative history of the provision.3 Commissioner John Pecman released a statement following the Chatr decision expressing disappointment with the finding that the advertisements were not false or misleading, and indicating that the bureau was considering its options.4

Preventing false and misleading advertising is a key priority for the Competition Bureau. The Chatr case is noteworthy as it provides guidance on what constitutes an “average consumer” for the purpose of assessing whether an advertisement is false or misleading. It applies the reasoning from the Supreme Court of Canada’s recent decision Richard v Time Inc.5 to the Competition Act (Act). The decision expands on the factors set out in previous case law for what will be considered an “adequate and proper” test, and confirms that those tests must take place before the associated claim is made. Finally, the decision confirms that the administrative monetary penalty regime, added to the Act in 2009 amid some controversy over its validity, is constitutional, as are the misleading advertising provisions themselves.

Background

On November 19, 2010, the commissioner of competition announced proceedings against Rogers and Chatr (the Respondents), alleging Chatr’s advertising claiming its subscribers would experience “fewer dropped calls than new wireless carriers” and have “no worries about dropped calls” was false and misleading, and not based on adequate and proper testing. Several new wireless companies complained to the bureau and Canada’s telecommunications regulator about the conduct of Rogers. The bureau responded by commencing this application against the Respondents.

The commissioner sought administrative monetary penalties (AMPs) of $10 million, and orders directing the Respondents to make restitution for the benefit of affected Chatr customers, requiring the Respondents to publish notices detailing the findings against them, stopping the advertising campaign, and allowing contract term/cancellation to any customer claiming the ads gave him or her incentive to choose Chatr.

The allegations: misrepresentations to the public

The commissioner alleged that the Respondents engaged in reviewable conduct contrary to section 74.01(1)(a) of the Act, which states that it is a deceptive marketing practice to make a representation to the public that is “false or misleading in a material respect.” The commissioner also alleged that, contrary to section 74.01(1) (b), the Respondents made representations to the public about performance and efficacy that were not “based on an adequate and proper” test.

The representations were false, the commissioner argued, because Chatr had higher dropped call rates in certain markets than at least one new carrier. The commissioner also alleged that the claims were misleading because they conveyed the general impression there was an appreciable dropped call rate difference among carriers, whereas there was no significant difference between certain dates.

General impressions of a consumer

The court applied, for the first time in a competition case, the Supreme Court of Canada’s test for the average consumer set out in Richard v Time Inc. when analyzing the “general impression” that an advertisement conveys. The court noted differences between the purposes of the Competition Act and Quebec’s Consumer Protection Act, under which Richard was decided, and the court adopted a slightly modified version of the test for the purposes of this case.

Instead of the average consumer being “credulous and inexperienced” as under Quebec’s legislation, the average consumer looking at advertisements for wireless phones is a “credulous and technically inexperienced consumer of wireless services,” who would be unable to decipher the technical information contained in the advertisements. The court did not include “inexperienced” because of the nature of the product and services in question: prepaid wireless services. A consumer would need to be sufficiently experienced to know he or she was interested in unlimited minutes and a prepaid service offering.

Chatr’s advertising

Chatr's advertising of fewer dropped calls was found to be fair and accurate. The court looked at the statistical significance of the “fewer dropped calls” claim, and found that small statistical differences between carriers would not matter to a “credulous and technically inexperienced” consumer influenced by the claims.

However, because Rogers and Chatr failed to conduct adequate and proper testing in certain geographical areas prior to launching their advertisements, the Respondents engaged in conduct contrary to the Act. A separate hearing will be held to deal with the remedies for this portion of the case.

Adequate and proper testing

The court provided guidance as to what would be considered “adequate and proper” testing:

  • There must be a test, but a flexible and contextual analysis will be applied when assessing whether a representation is based on an “adequate and proper” test;
  • Whether a test is “adequate and proper” depends on the nature of the representation made and the meaning or impression conveyed by it;
  • Testing must be conducted before making public representations;
  • Testing does not need to be scientifically exacting, but must be verifiable and demonstrate that the result is not by chance;
  • Testing must be an accurate, established, and industry-accepted practice for providing comparative assessments;
  • Independent validation of the testing methodology and results will be viewed favourably, but is not necessary; and
  • Technological advantages alone do not negate testing, but are capable of confirming the adequacy of a test

Constitutional challenges

The Respondents, in defence, argued that the Act’s deceptive marketing sections violated their freedom of expression under the Canadian Charter of Rights and Freedoms because the limits imposed by the Act affect a companies’ ability to make product claims. The court rejected this argument, stating that the benefit of protecting the marketplace from the harmful effects of false or misleading claims outweighs the potential negative effect of preventing a company from putting forward a true but untested claim. As such, the violation of the right to freedom of expression was a justifiable infringement under section 1 of the Charter.

Rogers and Chatr also argued that the AMPs remedy was unconstitutional because AMPs amount to a penal sanction that should engage various Charter protections customarily afforded persons “charged with an offence.” The court said that AMPs are a civil remedy, and the Charter only protects those accused of a criminal offense that carries the possibility of imprisonment. Although not noted by the court, this is consistent with the result in United States Steel Corporation v Canada (Attorney General),6 wherein the Federal Court of Appeal upheld the AMPs regime found in the Investment Canada Act.

Do not make claims without testing

This case demonstrates that the Competition Bureau is willing to pursue companies that engage in deceptive marketing practices. Representations made to the public must not be false or misleading, and their general impressions should be considered prior to publication.

Further, care must be taken to ensure adequate and proper testing is carried out before the advertising, and the tests must substantiate the claims. Likewise, the tests must be undertaken on an ongoing basis to ensure they continue to support the claims as technologies evolve and develop. Failure to do so could result in penalties of up to $10 million and other orders in the discretion of the court.