Competition Law: Directors' and Officers' Liability

January 1, 2003

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August 2, 2017

Deceptive Online Marketing Practices: Intermediaries, what is your legal exposure?

In recent decades, online advertising has become the single most efficient and interactive way to reach consumers and assess their behaviour. While television and print audiences continue to dwindle and overall marketing strategies that focus on these mediums are less able to effectively measure and assess performance, online advertising targets a growing market whose technological medium allows for the direct measurement of a marketing campaign’s success. These changes in the marketing world, exciting and new as they may be, pose an important set of legal risks. In using and displaying online ads, merchants and intermediaries should be wary of consumer protection and competition laws, both provincial and federal, so as to avoid unpleasant surprises in the form of pricy sanctions and lawsuits. The law may not have evolved as much as the technologies, but its broad language can adapt to the modern reality so as to protect those who receive the merchant’s new messages. The two main types of online marketing are Search Engine Marketing (“SEM”) and Social Media Marketing (“SMM”). Search engine companies index website content to organize and present the available information in an understandable format. Merchants offering products at retail can present themselves on top of these rankings, targeting specific keywords consumers search for. SMM is a form of display advertising that allows advertisers to present their services in an engaging manner on various popular social media platforms. This targeted conversation with consumers increases brand awareness and provides insights and feedback. Both SEM and SMM represent advertising formats governed by law. Provincial legislation The Consumer Protection Act1 of Québec (“CPA”) regulates and governs advertising activities in the Province of Québec. Namely, the CPA prohibits false or misleading advertising. The provisions of the CPA are aimed at both the merchants and the actors of the advertising industry. The CPA indicates that “no merchant, manufacturer or advertiser may, by any means whatever, make false or misleading representations to a consumer.”2 This prohibition applies to all media including print, radio and television, the Internet being no exception. The Province also enacted the Act to establish a legal framework for information technology3 (“LCCJIT”), in force since 2001, which provides for the liability of online intermediaries such as search engines and website hosts, in a context that is not specific to advertising. Indeed, Justice Rochon in the Court of Appeal case of Prud’homme c. Rawdon4 explains that while “a contributory fault may be committed by third parties who communicate, broadcast, or host the information [...] sections 22, 26, 36 and 37 of the Act to establish a legal framework for information technology (R.S.Q., c. C-1.1) appear [...] to reduce if not remove certain third parties from any liability.” Section 22 establishes that a non-search engine host will be exempt from liability unless it has knowledge that the information it stores is being used for illegal activity or if it does not promptly act to impede access to such illegal documentation. Similarly, a search engine will be liable if it has knowledge that the service it provides enables illegal activity and if it does not promptly cease to provide such a service to the people it knows are engaged in that activity. Either way, the determining factor is knowledge. Section 27 of this same Act states that: A service provider, acting as an intermediary, that provides communication network services or who stores or transmits technology-based documents on a communication network is not required to monitor the information communicated on the network or contained in the documents or to identify circumstances indicating that the documents are used for illicit activities. As such, knowledge is not presumed and hence, there is an implicit necessity of notifying the intermediary of the existence of such illicit content. Once such notice is given, the intermediary, as defined in section 22, must act promptly to take down the content or limit access to it. Federal legislation The Competition Act5 (“CA”) regulates most business conduct in Canada, its main purpose being to prevent anti-competitive practices in the marketplace. The CA prohibits false or misleading representation and deceptive marketing practices in promoting the supply of a product or any business interest. Moreover, persons who “caused the representation to be made” are held liable for false or misleading representations or deceptive practices. This implies that not only is liability imposed on the person who crafts misleading or false advertisement, but also on the person who permits a representation to be made or sent. The “Enforcement Guidelines – Application of the Competition Act to Representations on the Internet” mention that, in the online environment, the Competition Bureau will be called upon to consider the respective roles of the different intermediaries involved in advertising on the Internet. It is further explained that: [i]n its enforcement efforts, the Bureau focuses on the party who “causes” the representation to be made. Determining causation requires an analysis of the facts to ascertain which player possesses decision-making authority or control over content and to assess the nature and degree of their authority and control.6 [our emphasis] Thus, the level of liability attributed to a given party will largely depend on the level of control they have over the content and whether they played a part in deciding whether the ad ran or not. Under the CA, there are two adjudicative regimes which sanction false or misleading representations: a civil track or the criminal track. The civil regime applies to most instances of misleading representations and deceptive marketing practices since the burden of proof is lighter. The general criminal process, however, covers “the most egregious matters” and requires that a component of criminal intent be demonstrated.7 Potential liability for advertising generators Merchant The merchant is the party that has the authority to decide whether an ad is run or not. As such, it is usually easiest to attribute liability to the merchant, who is the party most often held liable for deceptive marketing practices, be it with respect to the CPA or the CA. Media planning agency The media planning agency can have a dual role. That is, it may act as a creative agency that creates the advertisement (liable under the CA) and/or may assist an advertiser in determining which media to use, be it television programs, newspapers, bus-stop posters, in-store displays, banner ads on the web, or a flyer on Facebook. The liability of an Internet media planning agency will naturally depend on the exact role it plays in the advertisement. In terms of the criterion of authority and control, if the agency acts as “the creative” and is responsible for the ad content, then it is likely to be held liable for false or misleading representation. If, on the contrary, the media planning agency is solely responsible for speculating on the viewer demographics and accordingly elaborating strategies as to which media would be the most effective to run ads in, then it is not likely to be held liable for deceptive marketing practices. As the agency’s participation increases so does its duty of care.8 Participation, in the eyes of the Federal Trade Commission and the courts is taken to mean when the agency carries out the will of the advertiser.9 Ultimately, whether an agency’s participation is “active” depends on a case-bycase analysis.10 There could also be instances where the agency would be responsible towards the merchant. Potential liability for advertising disseminators Media placement agency The media placement agency, also known as media buyer, is responsible for the negotiation and placement of the media campaign. Its role includes optimizing and evaluating the ad’s effectiveness both during and after the advertising campaign’s completion. Additionally, the media placement agency generates added value by either negotiating lower rates with the host or adding layers of behavioural or location based targeting through ad-platforms (typically not liable). Website or web page host The host, also known as the publisher, is an entity that owns a web page or a website and that, in exchange for some economic compensation, is willing to publish ads of other parties in some spaces of its page or site. LCCJTI establishes that a non-search engine host will be exempt from liability unless it has knowledge that the information it stores is being used for illegal activity or if it does not promptly act to impede access to such illegal documentation. Similarly, a search engine will be liable if it has knowledge that the service it provides enables illegal activity and if it does not promptly cease to provide such a service to the people it knows are engaged in that activity. Either way, the determining factor is knowledge. With respect to the CA, a host may benefit from the publisher’s defense and not be held liable in a civil suit provided it does not knowingly or recklessly partake in or allow false or misleading advertising. The take-away In navigating new online marketing strategies, one should bear in mind that as efficient as online advertising can be, it has also significantly contributed to a rise in the potential for false or misleading representations. The threshold in assessing false or misleading representations is particularly low, as it is evaluated from the average consumer’s perspective, i.e. a “credulous and inexperienced” consumer.11 Although the various players in the marketing world are no strangers to the concept of false or misleading advertising, they should be cautious in using new forms of marketing so as not to go beyond this low threshold. Indeed, there are certain considerations that are specific to the Internet medium, which involve among other things, the speed and efficiency with which consumers can perceive ads. One should also be wary of legislative changes regarding consumer protection and competition law. For instance, Bill 13412 has recently set out to amend the CPA so as to prohibit merchants from “falsely or misleadingly representing to consumers that credit may improve their financial situation or that credit reports prepared about them will be improved.”13 There is a considerable volume of credit offering advertising that circulates via SEM and SMM. Advertisers should be cautious and make sure they respect these measures once they are enacted as well as the other legislative tools mentioned in this publication. R.S.Q., c. P-40.1. Ibid., s. 219. R.S.Q., c. C-1.1. 2010 QCCA 584, para 75 [Unofficial English translation]. R.S.C. 1985, c. C-34. Innovation Government of Canada, “Application of the Competition Act to Representations on the Internet”, (October 16, 2009). Innovation Government of Canada, “Misleading Representations and Deceptive Marketing Practices: Choice of Criminal or Civil Track under the Competition Act”, (September 22, 1999). Kelley Drye & Collier Shannon, “Ad Agency Liability” (2005) Ad Law Advisory. Ibid. Ibid. Richard v. Time Inc., 2012 SCC 8, [2012] 1 SCR 265, para 78. An Act mainly to modernize rules relating to consumer credit and to regulate debt settlement service contracts, high-cost credit contracts and loyalty programs, Bill 134 (Introduction – May 2, 2017), 1st Sess., 41st Legis (QC). Ibid., Explanatory Notes.

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March 23, 2017

Artificial Intelligence and the 2017 Canadian Budget: is your business ready?

The March 22, 2017 Budget of the Government of Canada, through its “Innovation and Skills Plan” (http://www.budget.gc.ca/2017/docs/plan/budget-2017-en.pdf) mentions that Canadian academic and research leadership in artificial intelligence will be translated into a more innovative economy and increased economic growth. The 2017 Budget proposes to provide renewed and enhanced funding of $35 million over five years, beginning in 2017–2018 to the Canadian Institute for Advanced Research (CIFAR) which connects Canadian researchers with collaborative research networks led by eminent Canadian and international researchers on topics including artificial intelligence and deep learning. These measures are in addition to a number of interesting tax measures that support the artificial intelligence sector at both the federal and provincial levels. In Canada and in Québec, the Scientific Research and Experimental Development (SR&ED) Program provides a twofold benefit: SR&ED expenses are deductible from income for tax purposes and a SR&ED investment tax credit (ITC) for SR&ED is available to reduce income tax. In some cases, the remaining ITC can be refunded. In Québec, a refundable tax credit is also available for the development of e-business, where a corporation mainly operates in the field of computer system design or that of software edition and its activities are carried out in an establishment located in Québec. This 2017 Budget aims to improve the competitive and strategic advantage of Canada in the field of artificial intelligence, and, therefore, that of Montréal, a city already enjoying an international reputation in this field. It recognises that artificial intelligence, despite the debates over ethical issues that currently stir up passions within the international community, could help generate strong economic growth, by improving the way in which we produce goods, deliver services and tackle all kinds of social challenges. The Budget also adds that artificial intelligence “opens up possibilities across many sectors, from agriculture to financial services, creating opportunities for companies of all sizes, whether technology start-ups or Canada’s largest financial institutions”. This influence of Canada on the international scene cannot be achieved without government supporting research programs and our universities contributing their expertise. This Budget is therefore a step in the right direction to ensure that all the activities related to artificial intelligence, from R&D to marketing, as well as design and distributions, remain here in Canada. The 2017 budget provides $125 million to launch a Pan-Canadian Artificial Intelligence Strategy for research and talent to promote collaboration between Canada’s main centres of expertise and reinforce Canada’s position as a leading destination for companies seeking to invest in artificial intelligence and innovation. Lavery Legal Lab on Artificial Intelligence (L3AI) We anticipate that within a few years, all companies, businesses and organizations, in every sector and industry, will use some form of artificial intelligence in their day-to-day operations to improve productivity or efficiency, ensure better quality control, conquer new markets and customers, implement new marketing strategies, as well as improve processes, automation and marketing or the profitability of operations. For this reason, Lavery created the Lavery Legal Lab on Artificial Intelligence (L3AI) to analyze and monitor recent and anticipated developments in artificial intelligence from a legal perspective. Our Lab is interested in all projects pertaining to artificial intelligence (AI) and their legal peculiarities, particularly the various branches and applications of artificial intelligence which will rapidly appear in companies and industries. The development of artificial intelligence, through a broad spectrum of branches and applications, will also have an impact on many legal sectors and practices, from intellectual property to protection of personal information, including corporate and business integrity and all fields of business law. In our following publications, the members of our Lavery Legal Lab on Artificial Intelligence (L3AI) will more specifically analyze certain applications of artificial intelligence in various sectors and industries.

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October 21, 2016

Positive advice of the European Securities and Markets Authority to the extension of the European passport to the managers of alternative investment funds in Canada

Martine Samuelian and Virginia Barat, JEANTET On July 18, 2016, the European Securities and Markets Authority (ESMA) issued a favourable advice for a future extension of the European passport concerning Alternative Investment Fund Managers (AIFMs)1 in Canada. This advice, which is based on objective criteria of cooperation and guarantee of overall protection level equal to that in force in European State members, constitutes the last stage prior to the effective extension of the European regime to Canada. 1. Assessment criteria The ESMA reviewed the individual situation of twelve non-European countries2, including Canada, to assess the guarantees offered by their respective local legislation against the requirements of the AIFM Directive (AIFMD). With respect to cooperation, the assessment criteria relate to: the possibilities for the exchange of information, on site visits, between the competent monitoring authorities respectively in Canada and those of the European State member; the fact that the non-European third country in which the Alternative Investment Fund (AIF) is established is not listed as a Non-Cooperative Country and Territory of the Financial Action Task Force (FATF); the existence of agreements for exchange of information in tax matters. Furthermore, sufficient guarantees (as defined by the AIFMD) must exist in respect of: investor protection, particularly in relation to complaint management, the safeguarding of assets, the prudential soundness of the depositary, the separation and management of conflicts of interests between the depositary function and that of alternative investment fund manager, the scope of monitoring by local regulatory authorities, compliance with the requirements of the AIFM Directive; market disruption as a result of a potential extension of the AIFM passport to a non-European country; competition, by the assessment of the level of reciprocity in respect of the marketing of European AIFs in a non-European third country; systemic risk management, particularly the mechanism for monitoring existing markets. 2. Final result of the assessment of Canada by ESMA The ESMA notes that the Canadian financial system had been assessed by the International Monetary Fund (IMF) in 2014, the IMF concluding that the international principles on securities regulations were “fully implemented” in Canada. In its advice dated July 18, 2016 respecting a possible extension of the AIFM passport to Canada, the ESMA thus confirms that there is no significant obstacle which may hinder the application of the passport to Canada with respect to the systemic risk, market disruption and obstacles to competition. Nevertheless, it notes differences between the Canadian regulations and the AIFMD. These differences particularly relate to the supervisory function that are imposed on the European AIF depositary (contrarily to the Canadian custodian which, pursuant to National Instrument 81-102 – Investment Funds (Regulation 81-102 respecting Investment Funds in the province of Quebec) (“NI 81-102”), is not subject to supervisory functions but rather only subject to obligations of custodianship of the portfolio assets). The ESMA also mentions the rules pertaining to the compensation of the manager (notably to align the interests of the manager and of the investors). There are various rules regarding compensation in Europe while NI 81-102 provides for very few rules in that regard (further, many investment funds in Canada are not subject to NI 81-102). However, the ESMA concludes that these differences between the Canadian regulatory framework and that of the AIFMD do not constitute a significant obstacle to the application of the European passport to Canada. Conclusion Where ESMA3 considers that “there are no significant obstacles regarding investor protection, market disruption, competition and the monitoring of systemic risk, impeding the application of the passport to the marketing of non-EU AIFs by EU AIFMs in the Member States and the management and/or marketing of AIFs by non-EU AIFMs in the Member States in accordance with the rules set out in Article 35 and Articles 37 to 41, it shall issue positive advice in this regard.” It is this positive recommendation that the ESMA sent on July 18, 2016 to the European Commission (EC), to the European Parliament and Council, which should allow the EC, within three months, to define by delegated act the date of coming into force and the terms for the extension of the European passport to Canadian Alternative Investment Fund Managers to market these funds in EU countries. Includes notably private equity funds, venture capital funds and hedge funds. See our article entitled “Impact of the possible extension of the European passport regime on Canadian fund managers” published in the Lavery Capital newsletter, May 25, 2016. Australia, Bermuda, Canada, United States, Guernsey, Hong Kong, Cayman Islands, Isle of Man, Japan, Jersey, Singapore, Switzerland. See article 67(4) of the Directive 2011/61/UE on Alternative Investment Fund Managers.

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March 1, 2012

Quarterly legal newsletter intended for accounting, management, and finance professionals, Number 15

Recourses Seeking Rectification Under the New Business Corporations Act You do Business in a Province Other than Quebec: Are You Required to Register Yourself? Resale Prices and Authorized Distributors: A Synopsis France Arms Itself Against Trusts

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