July 26-27, 1999
Montreal, Canada

Misleading Advertising On The Web: A Canadian Perspective

Roger Tassé, O.C., Q.C.
Gowling, Strathy, Henderson
Ottawa, Canada

1. Introduction

• Electronic commerce or e-commerce is growing at an exponential rate
• According to Nua, an Internet strategy firm, as of May 1999, 171 million people across the globe had access to the Internet, over half of them in the United States and Canada
• Not only do the United States and Canada occupy a large absolute share of the Internet world, they also have a high level of Internet participation on a per capita basis
• As use of Internet by North American consumers increases, a concurrent increase in the use of this medium by advertisers has inevitably followed
• According to Media Matrix, as recently as 1996, education sites dominated the top 15 list of most visited sites - the top 15 that year included no e-commerce sites
• Today, nearly all the of the top website destinations offer commerce
• In light of the recent growth of e-commerce, many private forecasts made just a year ago have been revised upward
• In early 1998, forecasters were suggesting that Internet retailing might reach $7 billion by the year 2000
• Forecasters now project online retail sales in the range of $40 billion to $80 billion by the year 2002
• Spending by advertisers on Canadian websites in 1999 is expected to grow from last October's estimates of $37.7 million (C) to $55.5 million (C) and $109 million (C) in 2000 (according to a study released in early July by Ernst & Young Consulting Services Inc. and IAB Canada)

• Forrester Research Inc. projects on-line retail sales in Canada to be $700 million (U.S.) in 1999, $1.5 billion (U.S.) in 2000 and $2.8 billion in 2001
• These figures suggest the growing importance that businesses are placing on this new way of reaching customers
• The arrival of millions of consumers on the global marketplace and the resulting rise in Internet advertising have been accompanied by a heightened concern on the part of governments that consumers be protected
• For example, a recent survey by Angus Reid and the Globe and Mail found that 52% of adults surveyed pegged security as their primary concern about e-commerce
• If the potential economic benefits of e-commerce are to be realized, enhancing consumer confidence is critical
• There exists in Canada a number of statutes that regulate advertising and marketing practices such as the Food and Drug Act, the Trade-marks Act, the Consumer Packaging and Labeling Act, at the federal level, and Business Practices Acts and Consumer Protection Acts, at the provincial level
• Deceptive advertising legislation such as that contained in the Canadian Competition Act will likely increase in importance in the world of e-commerce. This Act will be the focus of my presentation.

2. Outline

• What I propose to do is as follows:
• FIRST, I will briefly describe the primary methods of advertising on the Web
• SECOND, I will provide a brief overview of deceptive practices on the Internet
• THIRD, I will examine the prohibitions in the Competition Act regarding false and misleading advertising as well as the issue of the liability of the Internet Service Providers (ISPs)
• FOURTH, I will speak of the conditions under which our Courts might assert their jurisdiction in regard to foreigners
• FIFTH, I will briefly discuss the issue of enforcement against foreign parties

3. Primary Methods of Advertising on the Net

• Using the Internet to advertise has several advantages over the traditional commercial marketplace, in particular, advertisers can reach an almost limitless number of consumers, quickly, and at a very low cost
• eFlyers: eFlyers are as their name suggests, electronic flyers that are sent to consumers via e-mail
• Web sites and Home Pages: The use by businesses of web sites or home pages is probably the most popular form of marketing carried out on the Internet
• Banners and Frames: Often, when a consumer accesses a web site or a home page, he or she will notice that a frame has been created by dividing the screen into multiple windows. The window framing the screen is filled with advertising while the window within the frame actually contains the content of interest to the consumer. The use by advertisers of such frames on other organizations web sites and home pages is another popular form of marketing.
• Cybermalls: Cybermalls are like virtual shopping malls with electronic catalogues which allow the consumer to browse the goods and services offered and select the items he or she wishes to purchase.
• USENET, LISTSERV, Newsgroups and Chat: Advertisements or product/service information can be posted on electronic bulletin boards. These bulletin boards are mediums of choice for "spammers" - those who send widespread unsolicited commercial e-mail messages or junk mail to a large number of recipients.
• Space on Search Engines or Web Browsers: By purchasing advertising space on search engines (i.e. Yahoo) or browser programs (i.e. Netscape), advertisers can display their icons on already popular Web sites
• E-mail and Spam/Junk/Unsolicited e-mail: Via e-mail, advertisers can send bulk unsolicited e-mail containing commercial messages to many recipients.
• Web Contests and Sweepstakes: Web contests or sweepstakes are merely an electronic form of sweepstakes or contests that are already available though more traditional media.

4. Deceptive Marketing and Business Practices on the Internet

• The National Consumers League, a leading American based consumer advocacy group, has established an "Internet Fraud Watch" project which monitors advertising on the Internet
• The League identified the following top ten complaints about deceptive marketing practices in 1998:
• In Web Auctions, items are bid for but never delivered by the sellers or the value of the items is inflated, etc...
• In the General Merchandise category, which includes sales of everything from t-shirts to toys, the goods are never delivered or those delivered are found to be different from those advertised.
• Another deceptive marketing practice relates to Internet Services. Consumers complained of charges that were supposedly free or of payment for services that were never provided or falsely represented.
• In some cases, Computer Equipment and Software were purchased but were never delivered or were misrepresented.
• The Internet also has its share of Pyramid and multilevel Marketing Schemes and Business Opportunities and Franchises, and Work-at-Home Plans, which contain empty promises of big profits.
• Other prevalent deceptive marketing practices include advance-fee loans that are never disbursed and credit related scams, which include false promises to alter consumers' bad credit histories ("credit repair") or to issue credit cards to consumers for the payment of up-front fees
• With the exception of Web Auctions, many of the practices outlined above were already present in the marketplace prior to the advent of the Internet.
• Ultimately, the challenges created by the Internet are fundamentally not ones of substance but of scale. The Internet allows deceptive marketing practices to be perpetrated on millions of consumers worldwide at little cost, not only by companies but by individuals.
• This raises further complicating factors for consumer redress since individuals, more easily than companies, can disappear without a trace once a consumer has been misled or defrauded.

5. The Prohibitions in the Competition Act
(Prescriptive Jurisdiction)

• Through its misleading advertising provisions, the federal Competition Act serves as a key instrument in fighting deceptive marketing practices.
• These provisions prohibit advertising that is "false or misleading" as well as a number of specific marketing practices, for example, pyramid selling.
• Pursuant to recent amendments brought about by Bill C-20 in March 1999, the Act now contains two streams by which to combat misleading advertising:

  1. The traditional criminal misleading advertising provisions; and
  2. Civil reviewable matters by which the Competition Bureau, which has exclusive responsibility for their enforcement, can counter misleading advertising by requiring corrective action from the Court, without criminal sanction
• A preliminary question is whether advertising or marketing practices on the Internet are covered by the provisions of the Competition Act prohibiting false or misleading advertising
• The term "advertising" is not defined in the Competition Act, but the language used in the provisions relating to the offence of false and misleading advertising appears to be sufficiently broad to capture advertising over the Internet
• Fundamentally, the provisions address the substance of advertising and not the means by which it is transmitted or communicated
• First stream: Under sections 52(1), it is an offence for anyone, for the purpose of promoting, directly or indirectly, the supply or use of a product or , for the purpose of promoting, directly or indirectly, any business interest, by any means whatever, knowingly or recklessly, to make a representation to the public that is false or misleading in a material respect
• Second stream: Same language as that used in first stream except that there is no requirement that reviewable marketing practices be engaged in knowingly or recklessly
• Section 52(2) provides that certain representations accompanying products are deemed to be made to the public
• Under section 52(1.2), a reference to the making of a representation includes permitting a representation to be made in the case of both criminal and civil misleading advertising
• In addition, the Act contains provisions for the review by the Courts of a number of deceptive advertising or marketing practices, including the making of false or misleading representations, representations as to reasonable tests or the publication of testimonials, bait and switch selling, etc. (sections 74.01- 74.07)
• Clearly, the language of the Act would encompass a broad range of advertising over the Internet
• There is nothing in the Act that limits its application to persons located in Canada

• So the Act would apply to anyone whether located in Canada or not (subject to applicable adjudicative rules)
• This being said, there are questions as to how the Act will apply in the context of e-commerce
• In particular, there are questions as to how the Act will apply to the various participants in online transactions

• In order for a transaction to occur, the consumer and the vendor require access to the Internet
• To access the Internet, a vendor requires a web server (computer) and content (information on the website).
• Some vendors access the Internet by signing up with a third party, such as an Internet Service Provider (ISP)
• Examples of ISPs include America Online, Compuserve and Sympatico
• In general, the role of the ISP is to host the content, that is to say, the information contained, for example, on a vendor's particular website.
• In turn, consumers who wish to access the content on a website that is hosted by an ISP connect through their own ISP.
• Thus, generally speaking, there are two types of ISPs, ones that host the content and others that merely act as conduits, allowing consumers to access the content
• To apply these concepts to an advertising practice I mentioned earlier, let's examine how these provisions of the Competition Act might apply to the sale of general merchandise
• ILLUSTRATION: The GAP is a popular clothing store whose headquarters are in Los Angeles, California. On-line retailing occurs on its website (www.gap.com) that is maintained by an ISP (pilot.net) which is also in California. Let us suppose that a consumer in Ottawa, using a Canadian ISP such as Sympatico, accesses misleading advertising regarding a product sold by the GAP.
• The Gap would be making the representation for the "purpose of promoting....the supply or use of a product" and be caught by the Act
• In addition, it is conceivable that the description of the product made by the GAP - which is viewed by the consumer on his or her computer screen - could constitute "an in-store or other point-of-purchase display" under the misleading advertising provisions of the Competition Act and the representation would be deemed to have been made to the public (sections 52(2)(c) and 74.03(1)(c))
• It is also conceivable that the description might as well constitute a misrepresentation that is "contained in or on anything that is sold, sent, delivered, transmitted or made available in any other manner to a member of the public"(s.52(2)(e) and 74.03(1)(e))
• It is likely that the GAP would attract liability under the Competition Act

• Could the Canadian ISP conceivably attract any liability?
• It may be argued that the Canadian ISP merely acts as an intermediary to further information and thus, it should be exempt from liability
• Whether a party which acts as a mere conduit for information should be exposed to liability for permitting another party outside (or inside) the jurisdiction to engage in misleading advertising raises interesting questions
• The liability of the Internet Service Provider
• Competition Act: In Canada, the Criminal Code supplements the Competition Act by virtue of the offence of aiding and abetting the commission of a crime.
• Of interest also are the recent amendments to the Competition Act which provide that the "making of a representation" which may attract liability under the Act's misleading advertising and deceptive marketing provisions includes "permitting a representation to be made."
• To return to the example used earlier, the Canadian ISP could possibly be viewed as having "aided" or "abetted" the foreign vendor to engage in misleading advertising in Canada
• Could an ISP be viewed as having permitted the vendor to engage in misleading advertising by the mere fact that it provided access to the vendor's representation?
• There is no clear answer to that question, although a more plausible interpretation of "permitting " would rather refer to a situation where it is the vendor that "permits" another person to make a representation on its behalf
• An example would be the Canadian vendor that establishes a website in the US that is accessed by Canadian consumers
• In any event, in light of the high degree of intent envisaged under the Criminal Code and the criminal deceptive marketing provisions of the Competition Act, it seems unlikely that a passive Canadian ISP that acts as a mere conduit of information would be caught by these criminal provisions
• It is expected that, in general, all but the most egregious instances of misleading advertising will be dealt with through the civil stream as reviewable conduct
• The position of an ISP hosting the content is likely to be different
• In hosting the "representations", the Canadian ISP might become a party to the reviewable conduct
• In the case of a reviewable conduct, the ISP could benefit from a "publisher's defence" under s. 74.07 which stipulates that the reviewable conduct provisions do not apply to a person who "prints or publishes or otherwise disseminates a representation...on behalf of another person in Canada", if the publisher "obtained and recorded the name and address of that other person and accepted the representation "in good faith" and "in the ordinary course of that person's business"
• This defence could likely apply to ISPs if they meet the conditions set out in the section.
• However, note that the defence only applies in relation to information received from a person in Canada, thus placing a higher onus on the publishers (ISPs) to ensure accuracy when the information is received from outside Canada although the likelihood of a Canadian ISP hosting information on behalf of foreign vendor is probably minimal
• Overall, a number of issues remain unclear which our Courts may eventually be called upon to address
• Judicial developments in other jurisdictions, particularly but not only in the US, are likely to influence developments in Canada
• Developments in other countries: While there is little, if any, Canadian case law on ISP liability, including in relation to misleading advertising, the issue of ISP liability has been the subject of litigation in the American and European courts.
• Litigation has involved defamation, copyright infringement, and the violation of legislation prohibiting obscenity or pornography.
• These cases give some indication of the principles that might apply to those ISPs that act as facilitators of misleading advertising or fraudulent business practices in the Competition Act.

A. Has the ISP exercised sufficient control over the transaction or the vendor's website?

• Some cases indicate that the greater the discretion of the ISP to make a decision as to what is to take place in the transaction, the greater the liability that should be imposed when a transaction goes wrong
• In the case of Felix Somm, Compuserve U.S.A provided Internet access to child pornography websites. Mr. Somm, the managing director of Compuserve Germany, a subsidiary of Compuserve U.S.A., was found guilty by a Munich court of having assisted in the dissemination of child pornography ( see http://www/cyb ermalls-rights.org/isp's/somm-dec.htm)
• The court noted that Mr. Somm was responsible for connecting customers of Compuserve Germany by means of dial-in nodes and a dedicated line existing between Compuserve Germany and Compuserve U.S.A.

B. Has the ISP set up a code of conduct that all users of its services are requested to follow?

• In the case of Stratton Oakmont Inc. v. Prodigy Services, ( No. 31063, N.Y. Sup.Ct, 24 (May 1995)) the issue was whether statements regarding the plaintiff made by an unidentified user of a financial computer bulletin board maintained by Prodigy could be considered to have been "published" by Prodigy for the purposes of the plaintiff's libel claims
• In imposing liability on Prodigy, the Supreme Court of New York noted that Prodigy had held itself out as an online service that exercised editorial control over the content of messages posted on the bulletin board and had promulgated "content guidelines" for users

C. Is it common practice of the ISP to examine, review, editorialize or filter misleading advertising and to put a stop to those actions which do not fulfill the criteria established by the ISP?

• In Stratton Oakmont where the Supreme Court of New York imposed liability on the ISP Prodigy, the court was influenced by the fact that statements regarding the plaintiff made by the unidentified user of the financial computer bulletin board maintained by Prodigy could have been filtered by Prodigy
• The evidence before the court was that Prodigy had a software screening program that automatically pre-screened all bulletin board postings for offensive language and Prodigy employed a "Board Leader" who not only enforced the content guidelines, but who also had the authority to remove postings from the bulletin board

D. Did the ISP know that a prohibited business practice was taking place on its interface and did it turn a blind eye to the problem?

• In Godfrey v. Demon Internet Limited, [1999] E.W.J. 1226 (H.C.J. Q.B.), an ISP was found liable for having failed to remove a defamatory USENET posting from someone in the United States who falsely identified himself as being the plaintiff. Upon becoming aware of the forged posting, the plaintiff sent a letter by facsimile to the defendant ISP insisting that the posting be removed. The defendants did not do so. The court concluded that because the ISP had notice of the defamatory content of the posting, it could not avail itself of the defense of innocent publication.
• The central theme in the emerging case law and legislation or regulation is the degree of involvement or control that the ISP has in, or exercises over, the conduct taking place on the interface
• To impose liability on passive intermediaries such as an ISP for offensive content is generally considered to be unfair in view of the volume of data that flows through ISP systems
• To impose liability would also be inconsistent with the treatment of other intermediaries outside the virtual world, such as telecommunication carriers and Canada Post
• A preferable approach is similar to that taken by the United States and proposed by the European Commission in a recent Directive
• This approach exempts passive intermediaries such as ISPs from liability where they act as a mere conduit of information from third parties
• At present, the current criminal provisions of the Competition Act appear to provide for an appropriate balance in relation to ISP liability for deceptive marketing practices
• While generally excluded from liability, an ISP could still face criminal liability if it were actively engaged in making a false or misleading representation or, conceivably, where it had been put on notice that information that it was disseminating was false or misleading
• In relation to civil offences under the Competition Act, however, the uncertainty as to whether or not a passive Canadian ISP could be deemed to have permitted misleading advertising will require clarification

6. Court Jurisdiction
(Adjudicative Jurisdiction)

• Cyberspace is amorphous. It has no borders. When a wrong is committed on the Internet, where does it take place and which court is authorized to seek redress?
• General comments: the rules respecting the issue of jurisdiction are based on the international law doctrine of territorial sovereignty
• According to this doctrine, every nation possesses exclusive sovereignty within its own territory
• Generally speaking, the scope of a nation's jurisdiction is confined to the established boundaries of its territory
• It follows that legislation is intended to apply to all persons, things and events within these boundaries
• Conversely, it is presumed that legislation is not intended to apply extra-territorially, that is to persons, things or events outside the boundaries
• As Professor Ruth Sullivan has commented, "while the presumption against extra-territorial application of legislation is easy to understand, often it is difficult to apply"
• This difficulty arises because the notion of territoriality is based on two assumptions:
  1. that persons, property and events are situate within only one jurisdiction at a time; and
  2. that it is possible to identify this jurisdiction with reasonable confidence.
• However, because of the complex and highly mobile character of much modern life, it is possible for persons who establish legal relations with one another to be connected to several jurisdictions
• The major challenge in determining the territorial application of legislation lies in dealing with multi-jurisdictional complexities
• In this regard, Canada has adopted a relatively liberal approach to asserting jurisdiction
• Penal Legislation: an example of Canada's liberal approach in asserting its jurisdiction may be seen in the development of the common law, for example, in the context of the application of the Criminal Code
• Section 6(2) of the Criminal Code provides that "subject to this Act or any other Act of Parliament, no person shall be convicted...of an offence committed outside Canada"
• While this may appear on its face to be a restrictive principle, section 6(2) was interpreted broadly by the Supreme Court of Canada in Libman v. R. [1985] 2 S.C.R. 178 to make the offence of fraud as defined in the Criminal Code applicable to a Canadian-based, multi-national telephone scam
• In Libman, the accused ran a telephone solicitation operation in which persons in Ontario phoned residents of the United States, and, under false pretenses, induced them to send money to addresses in Panama and Costa Rica
• The accused argued that Parliament could not have intended the Criminal Code to apply to activity that occurred primarily outside Canada
• The Supreme Court of Canada rejected this argument holding instead that

  "...in considering whether a transaction falls outside Canadian territory, we must...take into account all relevant facts that take place in Canada that may legitimately give this country an interest in prosecuting the offence. One must then consider whether there is anything in those facts that offends international comity."

  Libman v. R, at 211 (LaForest J.)

  "...all that is necessary to make an offence subject to the jurisdiction of our courts is that a significant portion of the activities constituting that offence took place in Canada. As it is put my modern academics, it is sufficient that there be a "real and substantial link" between an offence and this country, a test well known in public and private international law..."

  Libman v. R, at 200 (LaForest J.)

• The "real and substantial connection" test has been applied by the Supreme Court in both contract an tort cases
• Court Jurisdiction in the case of the Competition Act: Under the Competition Act, no person shall, for the purpose of promoting the supply or use of a product or any business interest, make a materially false or misleading representation to the public or permit such a representation to be made (sections 52(1). 52(1.2) and 74.01(1))
• By virtue of the Interpretation Act person includes a corporation (s.35(1))
• In the earlier example - the consumer resided in Ottawa - the website was accessed via a Canadian ISP - the vendor's website was hosted by an American ISP - and the retailer engaging in misleading advertising resided in Los Angeles
• In theory, the application of the "real and substantial connection" test in conjunction with these provisions would allow for the assertion of jurisdiction over the retailer who violates the misleading advertising provisions of the Competition Act
• But, would mere access by a Canadian resident to a foreign website not conforming to the provisions of the Competition Act be sufficient for the purpose of the "real and substantial connection" test? Not likely.
• The test might be met, however, if the vendor's goods are effectively sold in Canada; or otherwise offered in Canada via media other than the Internet, or are serviced in Canada, etc.
• It is not entirely clear how Canadian courts will apply the test to the Internet

7. Enforcement Jurisdiction

• E-commerce has no territorial boundaries - it is as easy for a person in Montreal to do business with a person in India as it is to do business with a person in Ottawa
• However, as I stated earlier, the laws that govern our rights and responsibilities tend to be territorial in nature
• Courts are thus limited in the extent to which they can enforce laws and render judgments against people outside their boundaries
• An assertion of jurisdiction and subsequent determination of liability is of little use without effective enforcement mechanisms
• A fraudulent vendor may have no physical connection to the Canadian jurisdiction
• This generally would preclude reliance upon traditional enforcement mechanisms such as garnishment or seizure of assets
• Reciprocal enforcement of judgments procedures are also very costly and time-consuming
• Moreover, in many cases, the fraudulent vendor will not be traceable given the ease with which a domain name can be changed
• In addition, an individual can set up a misleading website from several countries
• Because of the transborder nature of electronic commerce, bilateral and multilateral approaches to enforcement are clearly required
• In this regard, the draft OECD Guidelines for Consumer Protection in Electronic Commerce note the importance of international government cooperation
• Canada has already taken the lead in this regard, through the Joint Canada-U.S. Task Force on Cross-Border Deceptive Marketing Practices and Mutual Enforcement Agreements with the U.S. and the European Union
• Canada also recognizes that a cooperative approach with industry is necessary if an effective enforcement is to be implemented

8. Conclusion

• The Competition Act is not likely to present significant problems in its application to online transactions where the vendors and the website are located in Canada
• The effective application and enforcement of the Competition Act in Canada would bring benefits both to Canadian and foreign consumers when transacting with Canadian vendors and would help to create the atmosphere of confidence that is necessary for the expansion and growth of e-commerce in Canada
• Problems will occur with respect to Court jurisdiction and enforcement when the vendors are located outside Canada
• It may be that the Act would apply to Canadian ISPs for having permitted false or misleading representations to be made in Canada
• While the Competition Act per se may reach out to a foreign vendor engaging in misleading advertising, the provisions of the Act dealing with corrective action would allow a Canadian court to order a Canadian ISP to remove or block such information
• From the ISP's perspective, the advantage of such an approach is that it is not placed in the difficult position of assessing the validity of a complaint and it can also rest assured that it will not be liable for information to which it provides access until a court has ordered the information removed