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Marketing, Advertising,and Criminal Law

The Competition ActThe Competition Act is aimed at ensuring no competitor gains market share by deception orunfair business practices. It governs a wide range of advertising and marketing practices frommisleading advertising to fighting brands and refusal to deal. In 1999 significant amendmentsto the Competition Act created four regimes for offences under that act:

■ illegal trade practices (criminal only)■ dual track matters (civil or criminal)■ civil reviewable-only practices (by court)■ Competition Tribunal reviewable practices

Each of the common Competition Act offences will be discussed under its relevant regime.The introduction of a civil remedy, it is hoped, will result in more effective prosecutionsbecause the civil standard of proof is the balance of probabilities, while the criminal standardof proof is “beyond a reasonable doubt.”

Illegal Trade PracticesThe following are criminal offences under the Competition Act and are prosecuted in the samemanner as an offence under the Criminal Code.

Price Discrimination

A supplier cannot offer different prices to purchasers who do business in competition witheach other. Imagine, for example, an aluminum supplier who for several years has had threescreen and door manufacturers as clients. These long-standing customers learn that a newcompany is about to enter the market, and so approach the supplier asking for a lower pricethan will be charged to the new company.This, they expect, would make it extremely diffi-cult for the new entrant to put a price-competitive product on the market.

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Predatory Pricing

This involves offering a product at a loss—selling it below cost—for a short time in order todrive competition out of the market.The dominant business will offer the product at a priceit could not offer in the long run and survive.When the competitor is put out of business,the price goes back up to its usual, higher level. Independent suppliers of gasoline, often called“discounters,” frequently complain that if they lower their prices below a certain level, thenthe nearby gas stations of the major brands lower their prices below cost until the discounterraises its price to an amount acceptable to them.This is a process called “disciplining the dis-counter.” However, there have been no successful prosecutions for such alleged activity. If itcould be proved that prices were lowered to force competitors keep prices high, that wouldbe predatory pricing. Short-term lowering of prices for real competitive purposes is not pro-hibited. Price wars are one example.

R. v. Hoffman-LaRocheof Canada (1981),

33 O.R. (2d) 694

Diazepam is the generic name of avery common tranquilizer, market-ed by Hoffman-LaRoche under thebrand name Valium. Frank W.Horner, a Canadian subsidiary of alarge U.S. drug company, wanted toenter the market using the nameVival. In order to prevent Horner

from capturing a large market share,Hoffman-LaRoche provided Valiumfree to hospitals. The theory wasthat if patients became used to thedrug and received it from a hospital,then they would probably request itby brand name from their doctorwhen a new prescription was need-ed.

From a business point of viewthis promotion was insupportable,and cost the company an enormousamount of money. During the yearit lasted, Hoffman-LaRoche gave

away about $2.6 million worth ofthe drug.

The Court’s Decision

The court looked at the fact thatHoffman-LaRoche had not justreduced the price of its product, buthad cut it to zero.Thus, the compa-ny was not engaging in price cut-ting, but was guilty of predatorypricing in an attempt to drive com-petition out of the market.

Double Ticketing

When two or more prices are found attached to, or associated with, a product, even by wayof advertisement, the supplier must sell the item at the lowest of the prices mentioned, or elsethe sale would constitute an offence under the Competition Act. Double ticketing is theoffence of failing to sell at the lowest of the two or more prices appearing on a product.Thiscan occur when there are two price tags on a product, or when different prices are given bydifferent methods.

Retail Price Maintenance

Retail price maintenance is the attempt by a supplier of goods to control their resale price.A supplier cannot attempt to control the price at which retailers resell a product. Supplierscan suggest a resale price as long as “suggested,” or some similar word, accompanies the stat-ed price.The retailer must be made aware that there will be no consequences if it sells belowthat price. Advertising often includes the comparison of a sale price with the MSRP—themanufacturer’s suggested retail price.

double ticketingthe offence of fail-ing to sell at thelowest of the twoor more pricesappearing on aproduct

retail pricemaintenance theattempt by a sup-plier of goods tocontrol their resaleprice

Marketing, Adver tising, and Criminal Law 3

Pyramid Selling

Multi-level marketing schemes have become big business in Canada. Companies such asAmway, Avon, and Mary Kay Cosmetics have been attracting participants for a number ofyears with a type of scheme that allows an alternative to retail marketing.

While a number of pyramid selling schemes have been successful, a number of lesser-known schemes riding on the reputation of the widely publicized marketing firms havegreatly disappointed their participants. New pyramid sales legislation has recently been intro-duced by Industry Canada. It is designed to target several areas of complaints, including:

■ participants’ being loaded with a large number of products that they could not sell,and for which they had to pay

■ companies’ telling of one person who was a success, but not revealing what theaverage salesperson made

However,while new legislation exists, it will not help if the company is a fly-by-night oper-ator and you have paid your money.There are some very reputable pyramid sales schemes; thereare others that take advantage of the salespeople that they recruit.You are advised to check anypyramid sales scheme thoroughly with the Unfair Business Practices Division of the FederalBureau of Competition before joining.Other sources of information are the “Economic CrimePrevention” page on the RCMP Web site, as well as the Better Business Bureau site.

Referral Selling

This involves two factors.The first is a sale of goods; the second is the seller’s statement to thebuyer that the buyer will enjoy a benefit in the form of a rebate or commission if the seller

1 A supermarket displayed a tube of toothpaste with a point-of-purchase ticket showing 79cents.When it was brought to the cashier, the scanner printed a price of $1 on the cash-regis-ter receipt.

The customer complained.The store manager said the price on the shelf might be months old,and it was what was on the computer that mattered. A sign at the cash register stated that thiswas the store’s policy:

“In case of conflict, cash-register prices govern.”

a) Was there a violation of the Competition Act? If so, could the store claim any defences?b) What can the customer do?

2 Super Grocer is a large province-wide supermarket chain.When a competing store openedin one community, the local Super Grocer branch lowered its prices. Some were cut to belowcost, and remained in effect till the new competitor was forced out of business. At that time,Super Grocer’s prices slowly began to rise to regular levels.

a) Was there an offence under the Competition Act, or was this simply an example of aggres-sive business tactics?

Business Law What’s Your Opinion?

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3 John Karic received a faxed offer for a complete computer unit, including monitor andprinter, for $700 from a mail-order computer store in Montreal. He quickly sent off his cheque,


is given the name of potential purchasers, and these people actually buy the product. TheCompetition Act makes it an offence to induce another to participate in the scheme.This meansonly the business is liable; the buyer who gives the names of potential purchasers is not.

Telemarketing Fraud

Telemarketing is the use of the telephone to sell products.There has been a serious increasein telemarketing fraud. Much of it is aimed at those who are isolated in society, such as theelderly. The deceptive door-to-door salesperson has been largely replaced by the deceptivetelemarketer. Sophisticated deceptive telemarketers collect and share data on these targets.Thetypes of scams are innumerable, but as in most scams they demand an up-front payment fora promise to provide something free or at a substantial discount in return for this payment.The payment is always to be made before the benefit is to be provided.

The scams change every few years as the current ones become known. One recent scaminvolves the telemarketer’s telling the “mark” that the caller represents a business which has acomputer that searches databases for business lottery promotions. Most people have probablygotten letters in the mail saying that they are on a final list eligible to win thousands of dol-lars on a draw, and then simply thrown them away. Relying on this, the caller says the com-puter has found that the listener had won in such a lottery last year but didn’t collect.Thecaller had the money in trust here for the listener but had trouble reaching that individual onthe phone, and so the money had to be sent back to the U.S. But if the listener would send$1,000 to cover U.S. taxes, the company will have the winnings sent by overnight courier.

A new section of the Competition Act has been enacted which deals directly with tele-marketing fraud. Previously this was dealt with under misleading advertising, but that sectionproved ineffective respecting telemarketing scams, because they were not made to the publicat large.Additionally, under this new section the Crown does not have to prove that any per-son was in fact deceived.

Telemarketing is defined as “the practice of using interactive telephone communicationsfor the purpose of promoting, directly or indirectly, the supply or use of a product or for thepurpose of promoting, directly or indirectly, any business interest.”This section of the act pro-hibits persons engaged in telemarketing from making representations that are false or mis-leading in a material respect.

The section specifically makes both the corporation and any officer or director who is inthe position to direct or influence the policies of the corporation potentially liable for thetelemarketing activities of the corporation’s employees.This provision also creates a due dili-gence defense for both the telemarketers and the officers and directors.

A somewhat unusual remedy is also available to the commissioner with respect to decep-tive telemarketing. The commissioner can obtain an injunction directed to third parties toprevent the supply of articles or services used for the commission or continuation of the tele-marketing offense.The commissioner may also seek a wire tap on an ex parte (secret) basis.

telemarketing theuse of the tele-phone to sell prod-ucts


Civil Reviewable PracticesThe following offences can be prosecuted only as claims in a civil court.

Bait and Switch Advertising

Loss leaders are products sold below cost on the principle that people will be attracted to thestore by the exceptionally low price, and will buy other items on impulse while they are there.Some businesses, however, advertise these great deals but have only a few of the items in stock.This is the offence of bait and switch advertising: advertising a product at a bargain pricebut not having a supply in reasonable quantities. A business must have sufficient stock of anitem on hand to meet the anticipated demand—whatever is reasonable in the circumstances.

There are several special defences that relate only to bait and switch selling.

■ The company was unable to obtain enough supplies because of events beyond itscontrol

■ Public demand exceeded all reasonable expectations■ Rain checks were given, and honoured within a reasonable time

Sale Above Advertised Price

If a business advertises an article at a certain price within a specific geographic area, but sellsabove that price in that area, it has committed an offence.

Performance

Claims about the quality of a product may stand alone, or they may be made by comparinga product to that of a competitor. All claims about quality must be backed up with internalor external tests that conform to scientific principles. For example, the statement “MostEffective Dish Soap” would require that the soap be tested against all other similar productsavailable in the marketplace.The tests themselves must be carried out to accepted industrystandards.The courts apply rigorous scientific analysis to determine that the tests do in factestablish what is claimed for them. It is up to the advertiser to prove the adequacy of the test.

The only statements that do not require the support of scientific evidence are those thatare obvious exaggeration-”The Peanuttiest-Tasting Peanut Butter in the Whole Wide World.”

bait and switchadvertising adver-tising a product ata bargain price butnot having a supplyin reasonable quan-tities

which was cashed in record time, but no computer arrived. Now the company does not respondto Karic’s calls.

a) If the fax offer was fraudulent, is it covered under the new deceptive-telemarketing pro-visions of the Competition Act?

b) If it is not covered under that section, can you think of another section where it might becovered?

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The Civil Remedies

In addition to the lower standard of proof (balance of probabilities), the civil track does notrequire proof of an intention (mens rea) to violate the act, but merely proof that the act hadbeen violated. New civil remedies available to the commissioner are:

■ cease and desist orders which direct that a practice be stopped■ requirement that a corrective notice be published by the business■ payment of an administrative monetary penalty (fine) of up to $50,000 for an indi-

vidual for the first violation, and $100,000 for a corporation for the first violation

R. v. Bristol-Meyers ofCanada Ltd. (1979),

C.C.C. (2d) 384

A television station broadcast thiscommercial for Fleecy FabricSoftener:

Fleecy in the rinse softens rightthrough the wash for three timesmore softness than any drierproduct... Fleecy beats the best.It’s the softest touch of all.

A competitor complained, andthe Director of Investigation andResearch laid charges againstBristol-Meyers, the manufacturer ofthe product.

Bristol-Meyers had to prove thatFleecy makes the wash three timessofter than any competitive product.The company claimed that there isno quantitative way to evaluate acomplex sensory perception such assoftness, and so panel testing wasused. Bristol-Meyers said that it hadwashed one of the test fabrics usingthe recommended quantity ofFleecy, and the other test fabricsusing three times the recommendedamount of the other products. Thepanel picked the fabric laundered inFleecy, and so Bristol-Meyers con-cluded that Fleecy delivered threetimes more softness.


The court accepted a suggestionfrom the Crown Attorney to theeffect that “if a person were asked toeat one hamburger from one outlet,and ten hamburgers from anotheroutlet, then said that the single onewas better, it would not follow thatit was in fact ten times better.” Inother words, it was illogical forBristol-Myers to conclude thatusing three times the quantity of thecompeting product meant thatFleecy was three times better.

As there were no adequate andproper tests supporting its claim,Bristol-Meyers was convicted ofmisleading advertising.

4 A paint company ran a television advertisement showing two samples of wall—one paint-ed using the company’s product, the other with that of a leading competitor. A spotlight wasused on the wall with the manufacturer’s paint but not on that of the competitor.

a) Was the advertisement a violation of the Competition Act?


Both the civil and criminal tracks provide for lessening of the penalty or for a complete defence if immedi-ate appropriate steps are taken to correct any error after discovery. For example, a mistaken price in anewspaper ad must be corrected by replacement ads and point-of-purchase displays. An advertising com-pliance program is now a necessary part of careful management to avoid prosecution under theCompetition Act.

Business Alert! Advertising Compliance


Dual-Track MattersMisleading Advertising

Our Price:

$49.99

Compare at:

$74.95

Regular

$14.95

SPECIAL

$10.9999¢ — Today

ONLY!

Advertising can be misleading in many ways. False claims might be made about the effec-tiveness of a product. Sometimes an advertisement represents or suggests that purchasers willsave over normal prices. For example,“Selling Gold Jewelry Wholesale to the Public” impliesthat the items will be sold at wholesale and not retail price.This must be true in order to theadvertiser to say so.

Similarly, when an item is said to be free with the purchase of another product, the freecomponent must be free of all cost. A snowmobile dealer advertised “Free Florida Vacationwith Purchase of a Snowmobile.”The free vacation paid only for accommodation, and didnot include either transportation or meals.The dealer was convicted under the CompetitionAct.

Misleading advertising is now dealt with under two sections of the act, one criminal andone civil; hence it is called a dual-track offence. Both sections stipulate that no one need actu-ally be deceived and the test for interpretation is not only the literal meaning but also thegeneral impression that the representation conveys. If the product is imported into Canada,the representation is being made to the public in Canada even if it was in fact made outsideof Canada.This means that the Canadian courts will have jurisdiction over actions by non-residents. Jurisdiction over activities beyond a country’s borders is becoming a new concernin the age of improved communications, cross-border business deals, and, particularly, theInternet.

There is an overlap between the two above sections.The Commissioner of Competitionhas the unrestricted choice of prosecuting under the civil or the criminal regime. It is believedthat the commissioner will choose the criminal track only for the most serious intentionaloffences, and possibly for repeat offenders.The act specifically states that misleading advertis-ing relating to comparative pricing, discussed below, is to be prosecuted only by the civiltrack. Recall that misrepresentations are also offences under provincial business-practice acts,and so a business that employs misleading advertising could violate three sections in two acts.

The criminal section of the act (section 52) states that it is an offence for a person tomake any false or misleading representations to promote a product or any business interest.The term “representation” is used the same way as in contract law: it includes statements madeverbally or in writing to induce someone to buy a product or service, and so includes mostforms of advertising.This section is phrased widely enough to catch almost all forms of mis-leading advertising.

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Low initial cost means that the Internet is fertile ground for the scam artist. For the cost of a computer, amodem, and a small monthly fee to an Internet access provider, the scam artist can set up shop and begintaking orders from all quarters of the globe.

Canadian authorities can only prosecute an offender who is in Canada. Extradition is not a realistic pos-sibility for most scams.

Business Alert! Internet Scams

■ Any representation made to the public to sell a product or service that is false or misleading in any respectconstitutes an offence.

■ No one need actually be deceived.An offence is committed if the representation is made to the public.■ The test in deciding whether an advertisement is misleading is: what would the average consumer believe from

this advertisement?

Critical Concepts Misleading Advertising

5 Alfred Mungovan purchased a new television set and VCR at Super Electronics Inc., afterseeing a newspaper advertisement that stated:“No payments or interest for 6 months.”

At the end of the six months, Mungovan received a statement from Super Electronics Inc.,which included an amount for interest calculated over that time. Super Electronics claimed thatits advertisement was valid because Mungovan did not have to pay the interest until the six-month period was over. Mungovan claimed he thought the advertisement meant that his pur-chase was interest-free for six months, and that interest would be charged after that time only ifhe did not pay the outstanding amount in full.

a) When there are two or more possible interpretations of an advertisement, how will thecourt decide which interpretation will govern?

b)Whose interpretation will likely be accepted by the court in this case, the business’s or thecustomer’s?

6 A poster contained the following claim:“Best Rates on International Flights! Paris fromas low as $199; other flights have similar low rates; call 1-900-555-5555; $10 per call.”

When they phoned the number given, callers received a list of flights, destinations, and rates.Theywere also advised that for each flight, varying amounts were added on for tax, landing, and airportcharges.The final cost of every flight added up to the standard rates obtainable at any travel agency.

a) Was an offence committed under the Competition Act?b) What is the test to be used in deciding if the advertisement is misleading to the reader?



Civil Offence of Misleading Advertising

The civil offence of misleading advertising (section 74.01) covers the same matters as thecriminal section but has an additional provision respecting ads that compare prices to implya bargain, such as “$52.50. Compare at $60.”

Of course, one of the oldest marketing tricks is to take an item that would sell for, say,$10, mark the price tag at $15, and then mark the price as reduced to $12.This basic decep-tion, along with sophisticated variations, continues to be used by even the largest retailers.Theproblem is made more complex in relation to “house brands,” for which there is no compar-ative external market. Retailers have been accused, for example, of putting one mattress bear-ing a house-brand name in stock at $700 for three months, and then announcing a sale of themattress at $500. At this time several hundred mattresses are ordered and put into stock forthe sale period. Can this retailer honestly claim that the mattress’s regular price was $700 onthe basis that it was actually displayed for a few months at this price?

Regular Price

The concept of “regular price” has proved a difficult problem. It can be established by com-parison to the general market in the same area by market research surveys; or it can be theoriginal price at which this particular store has sold the product.The civil offence containstwo tests to determine a product’s regular or ordinary price. One test is in relation to priorsales by the business itself, and the other is in relation to the market.

Where the business making the reduced-price claim has sold the item it is available at thereduced price, a reasonable quantity of that item must have been sold at that price by thebusiness for a reasonable time. Except for seasonal products, that reasonable time will likelybe at least six months.

The reasonableness of the volume may be determined by market data as to the normalsales of such items. Referring again to the mattress example above, if the business usually hadabout 20 mattresses for each model in stock over the previous few years and had an averageof 20 mattresses of the type in question priced at $700 for a six-month period, then that busi-ness could establish that its regular price was $700 for this particular mattress for the purpos-es of the Competition Act.

If the business did not sell the item prior to the reduced-price claim, then the compari-son would be to the normal market for the regular price. If, for example, all the drugstores inthe city sell a similar size of Crest toothpaste for $1, one store cannot advertise the item as“Regular $1.25. Our Price $0.75.”Where there is a range of regular prices, any of the priceswould qualify as the comparative price.

■ The comparison price must be a true regular price.■ If a business claims that the comparison price is its own regular price, a reasonable amount of the product must

have been sold at that price for a reasonable time before the price-reduction claim.■ Another test for regular price is that the product must actually be sold at the comparison price on the market.

Critical Concepts Comparative Pricing

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Competition Tribunal Reviewable PracticesA number of business practices are not illegal in themselves, but are only made criminaloffences if they are found to harm competition after review by the competition tribunal.Theoffences that fall into this category are:

■ consignment selling—the supplier keeping ownership of a product while it is in theretailer’s store, and setting the price at which it will be sold.

■ refusal to deal—the supplier selling the product to only one distributor, and refus-ing to sell to others.

■ exclusive dealing—the supplier requiring that the retailer use only, or primarily,its particular products in the retail outlet.

■ tied selling—the supplier requires that the customer buy other products as a condi-tion of buying a main product. Previously, Bell Canada was allowed to practise tiedselling—as part of buying the service for telephone lines, people had to buy thephones from Bell.This practice has been disallowed.

R. v. Scotia ChevroletOldsmobile Ltd. (1980),

62 C.P.R. (2d) 172 (N.S. Dist. Ct.)

Scotia Chevrolet Oldsmobile Ltd.ran a series of advertisements for a10-day truck sale in the HalifaxHerald.The advertisement read:

Eight 1980 Trucks For Sale

Camino.Was $9913. Now$8744. Save $1169.

Chev 70 Series.Was $21,777.Now $17,980. Save $3397.

The dealership was charged, bythe Director of Investigation andResearch under the Competition Act,with making a misleading price rep-resentation, contrary to section 52(1) (d) of the act. In its defence, thefirm argued that the first prices stat-ed, which were the manufacturer’ssuggested retail prices, were the trueprices of the vehicles. However,Scotia admitted that dealers neversold the trucks at the manufacturer’sretail price.


The court held that the advertiseddiscount during the sale was nogreater than the discount the com-pany offered before and after thesale. In addition, the court conclud-ed that any reasonable person read-ing the advertisement would believea better bargain was possible duringthe sale period, when in fact thatwas not the case. Therefore, theadvertisement was misleading, andthe business was fined.

7 Smart Drug Mart Inc. introduced what was to it a new size of a particular product—a 365ml can of hairspray.The item was displayed in the store with a ticket reading:“Special $1.49.”

The company was charged with misleading advertising. The Crown claimed the market evi-dence was that all other stores in the area were selling the same product at prices ranging from99 cents to $1.49. Nowhere was it sold for more than $1.49. Smart Drug claimed that it hadoriginally intended to sell the item for $1.85 since, based on the value of smaller bottles of thesame product, they felt this price was justified.The $1.49 was an introductory special price.

a) Did Smart Drug Mart Inc. commit an offence under the Competition Act?


exclusive dealingthe supplier requir-ing that the retaileruse only, or prima-rily, its par ticularproducts in theretail outlet


■ market restriction—the supplier requires the distributor to sell only to certain per-sons, or within a restricted geographical area.

The sections dealing with these practices are very technical, and set out a series of teststo help the competition tribunal decide whether the transaction is an offence.

Provincial Legislation

There is also provincial legislation in most provinces to cover deceptive and misleading busi-ness practices. Some of the provincial laws are reviewed in Chapter 5 under the heading“Special Consumer Rules.”

Complaints

Complaints under the Competition Act can be made to Industry Canada, which is listed in thefederal government section of the telephone directory. Information on how to make a for-mal complaint can be found on the Industry Canada Web site at strategis.ic.gc.ca/SSG/ct01246e.html.

The Abuse of Monopolistic Power

It used to be a criminal offence for a company simply to operate a monopoly that wentagainst the public good. A monopoly involves either one firm or several in control of all ormost of the business in which they are engaged. Bell Canada, for example, for many years helda monopoly on telephone communications in Canada. This is starting to change as othercompanies enter the long-distance telephone market and the business of communicationswiring.

The previous law was relatively ineffective, with only one successful prosecution in its 70-year history.The law was revised under the Competition Act, and now focuses on the abuse ofmonopolistic power. It is not an offence for a company to hold a dominant position in themarketplace; it is an offence to take unfair advantage of a monopoly or dominant position inthe marketplace.The law requires that all companies compete on merit, not on the strengthof market power.The intent is to protect consumers, firms entering the market for the firsttime, and the small-business community.

One of the areas targeted by the act is what is called a fighting brand. In the oil industry,for example, a major brand name might become concerned that a cut-price retail discounter istaking over too large a market share.The major brand will then put a second product on themarket to compete directly with the discounter.This new product will undercut the discounter’sprice until prices are raised to what the dominant company considers an acceptable level.

If you feel that your business is the victim of illegal practices, discuss the matter with thefield office of Industry Canada, which will determine if an offence has been made under theCompetition Act.

Corporate Criminal LawThe Criminal Code OffencesCriminal law applies to business just as it does to private citizens. If a business is not incor-porated, such as a sole proprietorship or a partnership, the person who commits the criminal

dominant posi-tion the offence oftaking unfair advan-tage of a monopolyor dominant posi-tion in the market-place

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act is liable to prosecution.A corporation, however, presents a special problem in criminal lawbecause it is an artificial person—sometimes referred to as a legal fiction—with no physicalexistence.

What Constitutes a Crime?Criminal law generally requires that two elements be present for a particular action to beviewed as a crime:

■ actus reus—a guilty act■ mens rea—a guilty mind

Thus, an individual who went into a store to purchase a box of baking soda, but in factbought a box containing heroin, was not found guilty of a criminal offence. Unknown to thepurchaser, a drug-dealing employee at the supermarket had been hiding heroin in baking sodaboxes.The unsuspecting consumer did have possession of the heroin—a guilty act—but didnot know it was heroin and therefore did not have a guilty mind.

A corporation has neither arms nor legs with which to commit a guilty act, nor a mindto know that it has done so. Liability in criminal matters, then, can fall on the corporationonly by the guilty acts of the people who form the corporation.

With a small corporation, such as a one-person company, there is no problem in identi-fying who is liable. However, very large corporations—Canadian Tire, for example—normal-ly involve thousands of individuals, including the board of directors, shareholders, in-storeemployees, the president, and the maintenance staff. Is the firm liable for the criminal acts ofany or all of these people? For example, if a salesperson independently agreed—unknown tothat individual’s superiors—to take a kickback from one purchaser for not selling to a com-petitor, should the corporation be liable, or only the salesperson? The test to decide a corpo-ration’s liability under criminal law is:

■ Who is the directing mind of (that is, who runs) the corporation’s activities?

This question is answered by two more tests:

■ Does the employee have a high rank in the corporation?■ Did the corporation delegate complete responsibility for that area of the company’s

business to that person?

Corporations can be liable for most offences under the Criminal Code just as any natu-ral person is. There are a few offences—such as sexual assault—in which it seems veryimprobable that a corporation would be found guilty.

mens rea a guiltymind

In law, a corporation is considered to be a person—albeit a fictional or legal one.This causes some confusion when it isnecessary to refer to a human, as distinct from a corporation. For this reason a real person is known as a natural per-son or individual in legal writing.

Legalese Person


Why Corporate Responsibility?The purpose of corporate responsibility in criminal law is to make sure that the real benefi-ciaries of the crime—the corporate treasury, and hence the shareholders—pay for the offence.The company officer(s) may also be personally indicted in the criminal charge.

In what has become known as the dredging trial, several very large corporations and high-level executives in the Canadian dredging industry were charged with a long series of bid-rig-ging agreements (agreeing in advance what bids will be submitted) for government contracts,spanning a period of about 30 years. In that case, the court said of a corporation’s liability:

If the servant virtually is its directing mind in the sphere of duty assigned to himso that his actions and intent are the very actions and intent of the company itself,then his conduct is sufficient to render the company liable.

R. v. St. LawrenceCorporation Ltd. et al.,

[1963] 3 C.C.C. 263

Crown Zellerbach Canada Ltd. andits wholly owned subsidiary,Canadian Boxes Ltd., were in thebusiness of supplying cardboardcontainers to manufacturing com-panies.The two firms shared a vice-president, Mr. Pim, whose dutiesincluded sales for both companies.

F.C. Hayes had been an advisorin the Prices and Trade Board,which, during World War II, pub-lished a manual containing maxi-mum prices for the cardboard-con-tainer industry. After the war Hayesretired, and used the informationthat he had obtained while workingwith the government to publish a

manual of competitors’ prices. Thisdocument was sold to many corpo-rations in the container business.These firms used the manual to fixprices in the industry—in directcontravention of the CriminalCode.

After an RCMP investigation, 19corporations were charged.Each firmadmitted that its actions amounted toprice fixing and, with the exceptionof Crown Zellerbach and CanadianBox, pleaded guilty.These two firmsclaimed that their boards of directorshad not authorized Pim to purchaseand use the manual to fix prices, andthat they were not therefore liable forhis actions.


The court held that the properquestion to ask was whether Pim

was a directing mind of the organi-zations. If he was, it was irrelevantwhether the boards had sanctionedhis actions.The court observed thatoften it is very useful for the righthand not to know what the lefthand is doing.

Two tests had to be applied:

1. Did Pim hold a high rankwith the corporation? Ashe was a vice-president,that answer was clearly yes.

2. Was he delegated control ofthat area of business? Sinceprices related to sales, andPim was vice-president ofsales for both corporations,that answer, too, was yes.

Therefore Pim was the directingmind of both corporations, and bothwere found guilty of price fixing.

bid rigging agree-ing in advance whatbids will be submit-ted

The circulation of any price lists among suppliers will be seen by the courts as evidence of price fixing. Asupplier can obtain a competitor’s price list from another customer, but suppliers themselves cannotexchange lists. Suppliers can, however, exchange statistics or credit information, and can mutually defineproduct standards.

Business Alert! Price Lists

14

Other StatutesThe tests dealt with here are for offences under the Criminal Code. Other statutes may havespecific sections setting out different tests that are used in deciding liability. For example,under the Canadian Human Rights Act, the test for determining corporate liability is muchbroader. Under this legislation, the corporation can be held liable for the actions of employ-ees who hold relatively low rank—sexual harassment is one example.

■ Corporations can be liable under the Criminal Code and other statutes that are criminal or regulatory innature.

■ For a conviction under the Criminal Code, the guilty act must be done by a directing mind of the corporation.■ A directing mind of the corporation is an employee who has a high status and complete responsibility for that

area of the corporate business.

Critical Concepts Criminal Responsibility of a Corporation

The Corruption of Foreign Public Officials ActThe new Corruption of Foreign Public Officials Act makes it a criminal offence for Canadians tobribe or attempt to bribe a foreign public official. This act makes Canadians liable withinCanada for criminal acts committed outside of Canada.

On a strict reading of that act, it is now a criminal offence to possess the benefits of anycontract obtained even partially by a bribe.The proceeds of such a contract are treated as pro-ceeds of crime, and so they may be subject to forfeiture (loss of money, such as a deposit, orof a right because of a breach of contract) under the Criminal Code money-laundering pro-visions.

Bribery of foreign officials is a serious international business problem. It has been con-sidered acceptable. Some Canadian companies have even been claiming bribes to foreign offi-cials as expenses on their tax return and describing them as commissions or promotions.Thisact is intended to ensure that bribery of foreign officials is recognized as a criminal offence.

It is now imperative that Canadian corporations which do business in foreign countrieshave effective internal controls and corporate compliance proceedings to ensure that theircorporations do not pay bribes to foreign officials.

8 Sellco is a national chain of supermarkets with branches throughout the country. Unknownto any of his superiors, the branch manager of one outlet regularly bought stolen goods for resalein the store. His branch always showed high profitability figures, no doubt because of this cost-saving practice.

a) Will Sellco be held liable under the test for corporate criminal liability?b) Will the branch manager be found personally liable as well?


forfeiture loss ofmoney, such as adeposit, or of aright because of abreach of contract


Environmental LawEnvironmental laws are targeted at business, since certain industries are the main cause oflarge-scale pollution. But such laws must balance the interests of business against preservationof the environment, so that they may continue to provide a better standard of living.Sustainable development means that business activities are limited to what does not causemajor harm to the environment. Under this principle, the cost of restoring and preservingthe environment is borne by the business whose actions cause the environmental damage.

Both federal and provincial governments have passed many environmental laws in recentyears. Statutes such as the Pesticide Act and the Fisheries Act are aimed at controlling the pol-lution of land, air, and water. Many acts have a separate organization within a governmentministry, with a staff to administer that particular legislation.The number of acts and govern-ment agencies involved in them is recognized as unwieldy—Nova Scotia, for example, has 14different statutes dealing with environmental matters.An attempt is now being made to haveall regulations consolidated under one act, with uniform provisions among all the provinces.

The Canadian Environmental Protection Act (CEPA), passed in 1988, was to be a model forenvironmental protection legislation. In this section, we examine the main issues most com-monly involved in environmental protection law.

Environmental protection legislation normally:■ contains a general prohibition against releasing any harmful substance into the environment■ names harmful substances in an act, or sets out regulations for their use and levels of permitted discharge■ targets businesses that are known as high-risk polluters (waste-disposal companies or pulp and paper mills, for

example) with special acts and regulations that require licences from the government to operate and regularinspections by government agencies

■ requires that spills of contaminants be reported immediately.

Critical Concepts The Legislative Framework

General Pollution DischargeEnvironmental protection acts are worded very generally in order to catch pollution in anyway that it can be done.They typically say little more than “do not pollute” in legal language.There is no specific definition of a contaminant.The general pollution prohibition section inthe Ontario Environmental Protection Act is an instance of such broad language use.

The Ontario act defines “contaminant” merely as anything that has an adverse effect. Inturn, an adverse effect is defined as a number of broad possibilities, some of which are:

(a) “ impairment of the quality of the natural environment for any use that can be madeof it;

(b) injury or damage to property or to plant or animal life;...

(g) loss of enjoyment of normal use of property; and(h) interference with the normal conduct of business.”

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The government gave “contaminated” the broadest possible meaning in the act, and thecourts have interpreted that word in like fashion. Even sand and dust—natural substances,which flew in clouds to another property because a business removed topsoil and grasscover—have been classed as a contaminant by the courts. In that case, the business was con-victed of an environmental offence.

Not only does “contaminant” allow a wide interpretation to catch an extensive range ofactivities, but other words, such as “control” and “permits,” can be similarly interpreted.As aresult, a variety of individuals may be held liable for environmental damage.

Environmental Protection Act, R.S.O. 1990, c. E.19, s. 14(1)

14(1) Despite any other provision of this act or the regula-tions, no person shall discharge a contaminant or cause or permitthe discharge of a contaminant into the natural environment thatcauses or is likely to cause an adverse effect.

R. v. Sault Ste. Marie,

[1978] 2 S.C.R. 1299

The city of Sault Ste. Marie con-tracted out the disposal of all cityrefuse to a waste disposal business.The agreement required the con-tractor to provide a landfill site, aswell as adequate labour, material,and equipment.The contractor useda landfill near a river, and leachingfrom the site polluted the river.

The city was charged, under theOntario Water Resources Act, withpermitting the discharge of a con-taminant, and defended claimingthat it had given the matter over toa competent waste disposal business.

The city had no knowledge of theleaching, and no control over thebusiness or the leaching.


The court held that environmentalprotection legislation should beinterpreted as a strict liability offence,meaning that prosecution did nothave to prove intention, or mens rea.So, lack of intention or knowledgewas not a defence for the city. Theprosecution had to prove only thatthe prohibited act took place. In thiscase, that act was permitting the dis-charge of a contaminant.

Whether an accused permits thedischarge of a polluting substance is

a question to be answered takinginto account all of the circum-stances. The fact that the dischargewas done by an independent busi-ness and not a city employee wasnot decisive. The city could notavoid responsibility by contractingout the work. It was in a position tocontrol those whom it hired tocarry out the garbage disposal oper-ations, and to supervise the activity.It certainly had the ability to con-trol, simply by reason of its bargain-ing power.

As the city made no effort tosupervise or to influence the busi-ness, it was found guilty of permit-ting the discharge of a contaminant,and was fined.

9 Christian Schmitz owns a small house. She leases it to Pat Giroux on a two-year lease.Giroux is an auto mechanic, who does a little moonlighting in the two-car garage at the backof the house.At the end of the lease, Giroux moves to another province and cannot be found.



SpillsThe general pollution discharge prohibition deals with actions that are deliberate.Unintentional discharge, in which contaminants are spilled into the environment, is also pro-hibited under legislation—it is irrelevant whether the spill is the result of carelessness.

The courts will enforce this provision very strictly.This is illustrated by a statement madein a prosecution against MacMillan Bloedel, which operated a deep-sea dock.A small amountof oil had escaped, and the company was charged with spilling, contrary to the Fisheries Act.MacMillan Bloedel said the amount was very small, and should not amount to a violation ofthe act. But the court said a teaspoonful was enough to contravene the act.

Environmental legislation requires that a spill be reported forthwith. The meaning offorthwith is discussed in the next case—also dealing with MacMillan Bloedel.

Mortgagee’s PositionThe importance given to environmental protection legislation can be seen no more clearlythan in cases involving mortgagees. It was at one time thought that nothing could take pri-ority over a valid land mortgage. However, the cost of cleanup can be put in front of even amortgagee’s interest.

Schmitz has a contractor do some renovation work.The contractor calls Schmitz’s attention tothe fact that there is a large barrel in the garage, containing what appears to be a mixture of oil,battery acid, and other fluids related to automobile repair.There is also an odour coming frombehind the garage.When the contractor digs into the soil, there is a large pit containing similarliquid waste.

A neighbour said that he saw Giroux late at night behind the garage on a number of occasions,but could not understand why he was there. The neighbour is quite upset about the pit. Heclaims that he has been unable to grow tomatoes for the past year, and it is probably because ofthe contaminants. He reports the matter to the Ministry of the Environment, and Schmitz ischarged with permitting the discharge of a contaminant.

a) On the basis of the Sault Ste. Marie decision, what will the ministry’s argument likely bein order to obtain a conviction against Schmitz?

b) Do you think it will be successful?

j Lyle Jenish is the owner and CEO of a car tune-up and lubrication business, with 10 loca-tions throughout the province.At each, liquid waste is put in storage bins until it can be trans-ported to the local industrial dump.

A government inspector visited one branch, managed by Daniel Mailloux, and found that thestorage tanks are leaking.The inspector ordered changes and improvements to be made. Jenishhappened to be visiting the branch the day of the inspector’s visit, and he told Daniel Maillouxto make the required changes.

The inspector returned two weeks later, but nothing had been done. Jenish was charged withbeing a person in control of a toxic substance and permitting it to spill.

a) What argument would the prosecution likely raise to obtain a conviction?b) What is the defence, and would it be successful?

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R. v. MacMillanBloedel,

Lawyers Weekly 15:13

A machine superintendent forMacMillan Bloedel, one of thelargest lumber mill operators inCanada, reported to his supervisorthat he believed a spill hadoccurred. The supervisor advisedthe mill’s environmental engineerone hour later, and the engineerbegan an investigation to determineif the spill had in fact occurred.Theengineer took water samples andlooked for evidence of impact onthe river. This investigation tookanother hour.The engineer said theresults of his investigation wereinconclusive but, acting on an abun-dance of caution, he called the localministry abatement officer to warnof the possibility of a spill.

That officer was handling anoth-er phone call at the time, and theengineer left a message asking theofficer to call him back. The engi-

neer did not mention that he wascalling about a spill.

The engineer then continued hisinvestigation by taking more sam-ples and conducting further analysis.Two and a half hours later, the engi-neer had still not made up his mindthat a spill had occurred but, nothaving had his call returned, hereported the incident to the min-istry’s Spills Action Centre inToronto.This was the formal reportrequired under the act.

MacMillan Bloedel was chargedunder Ontario environmental pro-tection legislation with failing toreport a spill forthwith.The ministryargued that forthwith meant that if abusiness even suspects that a spill hashappened, it must report to the SpillsAction Centre. MacMillan Bloedelargued that it was not required toreport until it was reasonably certainthat a spill had in fact occurred.


The court held that forthwith shouldbe interpreted to allow reasonable

investigation by qualified personnelto determine if a spill actuallyoccurred.The mere fact that a shop-floor employee reports a possiblespill does not create an obligation toreport immediately. The businesswill be allowed time to make aninquiry as long as proper proceduresand capable personnel are involved.

The court went on to applaudMacMillan Bloedel. One judge sug-gested that the ministry should haveawarded the company’s environmen-tal engineer an environmental medalfor his efforts in dealing with thespill, rather than charging the com-pany.This same judge was also criti-cal of the ministry for failing to havea better mechanism for respondingto spill reports made to local offices.The judge said that it was difficult tounderstand why the local ministryofficial did not immediately respondto a call from an engineer at a milloperated by Canada’s largest forestproducts company.

King Township v. RolexEquipment Company(1992),

9 C.E.L.R. (N.S.) 1

The Rolex Equipment Companyoperated a business on a site in KingTownship in Toronto. It owned theproperty, but there was a first mort-

gage on it. Rolex was ordered bythe township to remove a largeaccumulation of waste on the prop-erty, but the company went out ofbusiness. The township applied tothe court to have a receiver/manag-er appointed for the company, withthe authority to remove the wasteand have the cost of this removal asa first charge against the land in pri-ority to the mortgage.

The mortgagee objected to hav-ing the cost of cleanup take priorityover the mortgage.


The court held that this was not adispute between private parties, butan issue that concerned the publicinterest. If a receiver was not


Wide-ranging RemediesIf a business or individual pollutes contrary to environmental legislation, there are a numberof possible consequences.

■ The individual can be fired.Violation of an environmental law that exposes thecompany to criminal prosecution or cleanup orders is just cause for dismissal.

■ The business can be sued in a civil action.With the advent of class actions, this islikely to occur more frequently in the future. (A class action is an action in whichone individual represents a group and the judgment decides the matter for all mem-bers of the class at once.) Directors and officers will likely be made defendants insuch actions personally.

■ The corporation and the people directly involved in prohibited action can becharged criminally, and jailed or fined.

■ The ministry can order certain actions—such as cleanup—to be taken, and make thebusiness or individuals associated with the company pay personally for this work.

Inspectors are given unusual powers under environmental legislation. They can enterpremises without permission, and without a search warrant, for routine inspections.They areusually not permitted to break doors or locks without a warrant.

Criminal ChargesThe environmental protection legislation usually has two types of remedy. One is consideredadministrative, or preventive, and the other is criminal. Enforcement officers are not hesitantto lay criminal charges, and the courts treat environmental offences as serious matters. In acase against the United Keno Hill Mines Limited, the Yukon District Court said that pollu-tion offences were serious criminal offences and would be dealt with as such. Other courtshave echoed these words in sentencing businesses and their owners.

appointed and the cost chargedagainst the land, the garbage dumpwould remain a blight on the land-scape of the township.The court feltthat it was against the public interest

that a community must continue tocontend with a garbage dump in itsmidst because a secured creditorwith the greatest interest in theproperty refused to take any action

to deal with the matter.The court appointed the receiv-

er, and declared that the cost ofcleanup would be a first charge onthe land in priority to the mortgage.

k You have just inherited $100,000 from a relative.A friend hears of your good fortune, andtells you of a foolproof business plan. He has a new idea of how to salvage used automobile parts.He also has a small factory that is just perfect for his proposed business, but he needs $100,000.He advises you that he can give you a first mortgage for $100,000 on the building and, sincethe land is worth far more than $100,000, you can’t lose.

a) Is the friend correct or is there some risk involved from the point of view of environ-mental law?


class action anaction in which oneindividual repre-sents a group andthe judgmentdecides the matterfor all members ofthe class at once

20

Fines can be substantial. Courts have stated that fines will not be a mere licence fee toallow businesses to pollute.The fines will be large enough that it will be more expensive tobe convicted than it would be to make sure the pollution was unlikely to happen in the firstplace.The courts examine a business’s financial statement before setting the amount of thefine.

The width of liability under the control and permission test established in the Sault Ste.Marie case (see p. 16) allowed prosecutors wide discretion in whom to charge. Prosecutorshave made it known that they will look for the first deep pocket—a business that has the bestability to pay.

Who Goes to Jail?

To date, anyone sentenced to jail for an environmental offence has been the directing mindof a small corporation.The best known example was George Crowe, owner of a small con-struction company, Blackbird Construction. He was sentenced to 15 days in jail for burying185 drums containing toxic waste in his own backyard. Sam Siapias, directing mind ofB.E.S.T. Plating Shop, served six months in jail after ignoring 64 corporate convictions and acourt order to cease discharging acid into the public sewer system.

Whistle-blower ProtectionIt is certain that the courts will protect employees who tell the government of environmen-tal law violations by their employer and are fired for doing so. In one decision of the OntarioLabour Relations Board, Bakelight Thermostats Limited was ordered to pay an employee forlost earnings between the time he was fired and the date he found employment.The employ-ee was fired because he gave documents to the Ministry of the Environment, who used themto successfully prosecute Bakelight.

Buying LandEnvironmental laws add an additional concern if a property being purchased has likely beenused for an industrial purpose. An environmental audit may be required, and specified in aninspection clause in the agreement of purchase and sale.

Environmental assessments can be done in several phases.A Phase I assessment or site pro-file usually includes:

■ a review of records with the government that show past use of the property■ a visit to the site to note visible damage—an oily sheen on water, stained soil, waste

containers, and so on■ examination of storage facilities and records for past and present inventories

If a Phase I assessment indicates that there may be an environmental problem, then aPhase II assessment, which involves taking soil samples, can be undertaken. The dangers ofnot properly inspecting property and the effects of the standard form exemption clause arewell illustrated in the next case.


DefencesDefences that are unique to a corporation depend on the nature of the offence. Offences aredivided into three categories.

■ Traditional crimes. Criminal Code offences that require proof that a senior officercommitted the guilty act within the area of responsibility delegated to that indi-vidual by the corporation.

■ Strict liability offences (found in what courts call public welfare statutes or regulatorystatutes). Strict liability offences are offences in which responsibility is imposedeven when there was no intention to do the act, unless the defendant can show thathe or she took reasonable care (due diligence).They are phrased so that there is noneed to prove the mental element (mens rea), only the guilty act (actus rea). Suchoffences were created to avoid a situation in which a board of directors would passhigh-sounding resolutions in the area of, for example, environmental protection,and distribute endless memos to employees describing high standards of environ-mental care—but with winks and nods to let the employees know that they wereto violate environmental statutes to save the company money. Strict liabilityoffences do not mean automatic liability.The courts permit the directors to provedue diligence as a defence.

Tony’s Broadloom andFloor Covering Limitedv. NCM Canada Inc.(1995),

22 O.R. (3d) 244

NCM Canada operated a metal-stamping factory, using a series ofmetal presses and oil.Varsol was usedto clean the machinery. Between1979 and 1985, NCM disposed ofapproximately 20 litres per day ofdirty Varsol by pouring it into theground at the back of the factory.This resulted in contamination ofthe soil and the ground water.

The dumping ceased in 1985because the Ontario Ministry of theEnvironment declared Varsol a haz-ardous waste. In that year, NCMretained Monenco ConsultantsLimited, environmental engineers,to help remedy the problems. On

Monenco’s advice, NCM took anumber of measures to control theVarsol contamination, includinginstalling a containment well. Thiswell was a large lined pit dug intothe property so that the Varsol in thesoil would drain into it.

Tony’s Broadloom and FloorCovering was located down thestreet, and learned that NCM hadits property up for sale. Tony’sBroadloom thought that it wouldbe a good site on which to build aresidential condominium.

After the transaction closed,Tony’s discovered the contamina-tion problem. It meant that therecould not be a change of use. Themunicipal by-laws would permit acontinued use of the same type, butthey would not permit a change toa higher use—such as residential—without a cleanup of the property.Tony’s brought an action to have theagreement rescinded and its moneyrefunded.


The court found that the rule ofcaveat emptor requires a purchaser totake that which it sees, or which acareful purchaser ought to haveseen. In this case, the court foundthat the Varsol problem was easilydiscovered by the purchaser if aninspection of the property had beenmade.

The court also mentioned thatTony’s Broadloom should haveasked pertinent questions of theseller, and insisted on making thepurchase conditional on the proper-ty being appropriate for residentialuse. There was no evidence thatNCM actively concealed the condi-tion. Also, there was no obligationon NCM to disclose the informa-tion it possessed concerning theVarsol contamination if Tony’sBroadloom did not ask.

strict liabilityoffences offencesin which responsi-bility is imposedeven when therewas no intention todo the act, unlessthe defendant canshow that he orshe took reason-able care (due dili-gence)

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■ Absolute liability offences.These are as close to automatic liability as the law per-mits. Even due diligence is not a defence. However, there are a very few defences—such as insanity—that are still permitted. (It is hard to imagine a realistic situationin which a director of a corporation could take advantage of such defences.)

Environmental Protection Act, R.S.O. 1990, c. E19, s. 192

s.146(f) For the purposes of this act and the regulations, anact or thing done or omitted to be done by an officer, official,employee or agent of a corporation in the course of his or heremployment or in the exercise of his or her powers or the per-formance of his or her duties shall be deemed to be also an act orthing done or omitted to be done by the corporation.

Due DiligenceTo understand the difference between a traditional crime and the public welfare statute thatpermits due diligence, consider the example of a bookkeeper in a large corporation whosends false accounts to a customer and keeps the money they bring in. If the corporation wereto be charged with fraud under the Criminal Code—the bookkeeper would also becharged—the Crown would have to prove the corporation had a guilty mind and intendedto commit the fraud.To do this, the Crown would have to prove that the corporation’s direct-ing mind—a senior official—had intended to carry out the fraud. In this case, the bookkeeperis not sufficiently senior in the corporation to be considered a directing mind, and the chargeagainst the corporation would fail.The bookkeeper would be convicted, as the Crown couldprove both a guilty mind and a guilty act.

However, if an ordinary worker poured a barrel of contaminant onto the corporation’sland, violating the Environmental Protection Act, the corporation could be found guilty simplyon proof of the guilty act.The Crown would not have to prove the act of a high-level offi-cial of the corporation. The corporation would still have a defence if it proved that it hadtaken active steps—due diligence—to ensure that its employees did not dump contaminantson the land. These might include posting notices on the site and appropriately trainingemployees in waste disposal.

Directors’ Personal LiabilityThe public-welfare statutes often pierce the corporate veil and make directors personallyliable for guilty acts of corporations. The only defence a director has against a charge laidunder one of these statutes is to prove due diligence—that the director took the same careany reasonable person would have done in the circumstances.The director must prove activesteps were taken to remain aware of what was going on in the company—it is no longeracceptable to say in effect, “Sorry, I wasn’t at the board meeting when that was discussed.”This excuse would only be a defence to a Criminal Code charge involving mens rea—actualknowledge.


Strict liability laws under many public welfare statutes impose serious obligations on a company’s directors.Beware of accepting a position on the board of directors of a corporation in which you have no active part.

If you are a director, you should consider indemnification agreements from the corporation and theshareholders. Indemnification from the corporation will do you no good if the corporation becomesinsolvent.You should also consider whether insurance is available to cover risks of criminal prosecutionunder public-welfare acts. However, even these steps may not be protection, as courts are makingorders that the directors must pay fines out of their personal assets and cannot be reimbursed for themoney involved.

Business Alert! Boards of Directors

Diligence in this context means attentiveness, prudence, or vigilant activity.These words imply something above the aver-age standard of care. Due comes from the same Latin root as debt, and is used in the same sense as money due—some-thing owing, or an obligation.

The combination of the two words—due diligence—implies that an attentiveness or vigilance is owed in the cir-cumstances. In other words, there is an obligation to be vigilant.

Legalese Due Diligence

■ Due diligence is a defence available to charges under public-welfare statutes even if the statute creating theoffence does not specifically state that it is.

■ Criminal Code offences require a high test, that of a directing mind, to make a corporation liable for the actsof an employee.

■ Public-welfare acts usually impose liability on the corporation for acts of even low-level employees.

Critical Concepts Due Diligence

R. v. Bata IndustriesLtd. (1992),

9 O.R. (3d) 329 (Prov. Ct.)

The Ontario Environmental ProtectionAct, R.S.O. 1990, chapter E.19, con-tains provisions that require compa-

nies to exercise care in waste man-agement, especially in relation totoxic liquid industrial waste. In thiscase, three directors of a corporationwere charged personally with astrict liability offence committed bythe corporation. One director wasable to prove the defence of duediligence; the others were not.

Two officers of the Ministry ofthe Environment visited the Batashoe manufacturing plant atBattawa, Ontario, on an unrelatedmatter.While they were there, theywalked around the site and hap-pened to notice chemical waste bar-rels at a storage area, in variousstages of decay and rusting. There

24

was also evidence of staining on theground.

Three directors of BataIndustries were charged under theEnvironmental Protection Act and theOntario Water Resources Act with fail-ing to take all reasonable care toprevent the corporation from caus-ing or permitting unlawful dis-charge of toxic substances.


The first director was Thomas Bata,the founder of Bata Industries. He

was primarily concerned with theworldwide operations of the Batashoe organization, and was rarely atthe Battawa site. He had previouslycirculated a memo to all parts of theBata organization detailing environ-mental protection steps, and testifiedthat he expected on-site people tobring any problems to his attention.The court found that he had exer-cised due diligence, and taken allreasonable steps to discharge hisresponsibility. He was acquitted ofthe charge.

The other two directors general-ly worked from the Battawa plant,

and the court found that they had apositive duty to inspect the site.Oneof the directors said that while hewalked around the site, he did notlook too closely and was not awareof any problems. The court foundthat this did not amount to due dili-gence and convicted both of thesedirectors.

l An instructor at a large community college, which is a corporation, received a phone callfrom the mother of one of his students.The woman was concerned about how her daughterwas doing in school.The instructor informed her that the student was failing, and mentionedthe grade she had achieved in an exam the previous month.As the student was over 18, this wasa violation of the provincial privacy act, which specifically states that the acts of any employeeare the acts of the corporation.

a) Can the college be convicted under the act for the actions of one teacher?b) How many teachers do you think there are in the average college?c) Could a teacher be considered the directing mind of the college?d) Would the Crown have to prove that senior officials of the college knew of the incident?e) What must the college prove to avoid liability?


In Summation

The Competition Act

■ The Competition Act is aimed at preserving competition by eliminating business practices identi-fied as unfairly reducing competition. It governs much of advertising and marketing law.

■ The act provides four types of matters:a) Illegal trade practices, which are criminal offences, and thus banned absolutely.b) Civil reviewable offences, which are prosecuted as a civil claim.c) Dual-track offences, which can be prosecuted as a criminal or a civil offence.


d) Competition tribunal reviewable practices, which may or may not be harmful to competi-tion, and will be reviewed by the competition tribunal. If found anti-competitive, the tribunalwill order the practice to cease.

■ Civil misleading advertising is concerned with comparative prices.There are two tests for regularprice: one is internal and relates to the advertiser’s own sales history for that product; the other isexternal and is a comparison to market prices.

Corporate Criminal Law

■ The corporate form caused a problem for criminal law.A corporation was a concept only, and hadno body with which to act (actus reus) nor mind with which to intend guilty acts (mens rea). It alsoconsisted of a potentially large number of people, from maintenance staff to directors and execu-tives, whose acts could be said to be the acts of the corporation.

■ The test developed in criminal law to make a corporation guilty for acts done by its agents wasto determine whether the act was done by a senior officer in an area of that individual’s respon-sibility.

■ It is an offence for a Canadian business to bribe or attempt to bribe a foreign official.The accusedwill be prosecuted in Canada even if the act took place in a foreign country.

Environmental Law

■ Pollution-control legislation is drafted in wide terms to catch pollution in any way it can occurand to make a wide number of people possible targets for criminal and civil actions.

■ Corporations who engage other businesses to do work that pollutes, landlords, and mortgagees allpotentially have control, and possibly permit pollution, depending on the circumstances. Directorsand employees of a corporation can be caught personally by this wording.

■ The general prohibition section of environmental protection acts prohibits any discharge of aharmful substance into the environment.

■ The slightest spill must be reported as soon as possible, but a reasonable time will be allowed fora competent person to investigate to determine if a spill did occur.

■ There are many remedies against polluters, both civil and criminal. Government agents responsi-ble for enforcement of environmental legislation are quick to use the criminal options, and courtstreat these violations as serious criminal offences.

■ Jail sentences are given to people who flagrantly violate the restrictions.

■ Cleanup charges can be made against the land, in priority over a mortgagee’s interest.

■ Caveat emptor applies to purchasing land, and any agreement to purchase land in commercial andindustrial zones should contain an inspection clause to ensure the land is not contaminated.

26

Closing Questions

The Competition Act1. Hank Cassidy was concerned that his desk job was doing nothing for his spreading waistline.

Responding to a flyer that had been pinned to the bulletin board in the local supermarket, he vis-ited the store Wanda’s Weighty Thoughts.Wanda demonstrated a new body-toning apparatus thatwas accompanied by a video entitled Minimus Gluteus Maximus.

Smiling kindly at Cassidy,Wanda told him to take the machine home for a five-day trial, andindicated that if he provided her with the names of potential customers who subsequently actu-ally bought her product, she would provide him with various pieces of exercise equipment, theamount and quality of the equipment directly reflecting the number of people who bought hermerchandise.

This arrangement appealed to Cassidy and he spent a great deal of time rounding up namesand phone numbers of people for Wanda to pursue. Later, Cassidy checked with the people whosenames he provided to Wanda, and found that the majority of them had purchased the equipment.Cassidy then returned to the store to choose the promised pieces of exercise equipment, at whichtime Wanda told him most of the people had returned the equipment, and he was out of luck.a) Is this a prohibited practice or a reviewable practice under the Competition Act?b) What is the name attached to this type of sales technique?c) Did either Wanda or Hank Cassidy commit an offence, and if so, what is the nature of that

offence?

2. Arkady Ltd. was a record label that produced CDs for several bands. One group in particular—theDarlings, whose last CD was entitled The Darlings Die Live—was very popular, and sales had beensteady. Unfortunately, the group had disbanded, and there would be no future recording sessions.Jackson, the vice-president of sales and marketing, came up with a clever marketing plan to max-imize the label’s income from the group’s popularity.An advertising campaign was started, statingthat no further copies of the group’s last CD would be available or would be manufactured afterJune 30. CD sales picked up appreciably, and the stock was cleared out. In the meantime, Jacksonhad already commenced planes to reissue the CD under the new title The Darlings Remembered intime for December sales.a) Has an offence under the Competition Act occurred here?b) If so, what is the nature of that offence, and what subsection of section 52 of the Competition

Act would the offence fall under?c) What are the tests that would be applied to determine if Arkady Ltd. is liable for the com-

mission of the offence?d) Would Jackson be personally charged as well in this situation?

3. Perfect Pasta Inc., a pasta manufacturer whose reputation had grown rapidly, was now looking toexpand into other market areas. Its standard contract with its distributors included two clauses.Thefirst identified the particular territory allocated to the distributor for the sale of Perfect’s products.The second clause stated that, should the distributor sell any other pasta products into a territoryother than the one designated in the contract, it would be considered a breach of contract and therelationship would be terminated.a) Is this an offence under the Competition Act, and if so, what is the category and nature of the

offence?b) To avoid committing an offence would it be necessary for both these clauses to be removed

from the contract or only one of them? If so, which must be deleted?

4. a) Find the Competition Bureau’s home site on the Web and list the most recent telemarketingscams reported on this Web site or on the RCMP Web site, which is linked to it.


b) Review several of the online pamphlets and report to the class on the one you found mostuseful and informative.

c) Describe how to make a complaint about misleading advertising from information on theCompetition Bureau’s Web site.

5. A large retailer plans an advertising campaign. It will advertise several very popular items at belowcost (loss leaders).At the same time it will raise prices on certain items, some by only a few cents.It has market research to show that consumers usually can’t detect small price increases over a largenumber of items. It also has research to show that given a large number of customers, those attract-ed by the loss leaders will buy enough other items at the increased price to offset the low priceson the selected items.a) Is this practice misleading? Is it an offence under the misleading-advertising section or any

other section of the Competition Act?

6. a) Can a manufacturer’s suggested retail price be used to establish regular price as a defence toa charge of misleading advertising?

b) The Competition Bureau successfully prosecutes many retailers, both large and small, for mis-leading advertising violations. Are you aware of any? If not, why do you think you’re notaware of them?

Criminal Code Offences7. Must both actus reus and mens rea be present for the traditional criminal offence? What do these

terms mean?

8. If a corporation is found guilty of a criminal act, will the company employee or officer responsi-ble for the act also be found personally guilty?

9. Avignon Aircraft Corp. was an aircraft manufacturer facing financial troubles. It had for a numberof years been existing on government grants that were based on signed sales contracts for futuredelivery of aircraft. Recent grant requests from Avignon had prompted an investigation, and it wasdiscovered after several customers were contacted that grants had been paid for contracts that hadbeen cancelled, or never actually existed.

Further investigation revealed that Eric Hald, the salesperson responsible for NorthAmerica—where most of the cancelled contracts appeared to have occurred—would visit apotential customer and record a completed sales contract on office records.These documents werethen used to request grant funds from the government for the corporation.When Hald was inter-viewed he promptly said,“I was just following orders,” and walked the investigators down the hallto the office of the vice-president of sales, Richard Knox.

Knox denied any knowledge of the activity, until a search and seizure raid by the RCMPturned up several tapes of conversations held in his office with his sales personnel.The tapes con-tained several minutes of blank space—however, there was a part of one conversation, with EricHald, in which Operation Deep Pocket was referred to. When confronted with this, Knoxexclaimed,“I’m not a crook; I did not deal with any of the contracts that Hald brought in.”a) What tests would be applied to determine whether the corporation would be liable under

criminal law for these fraudulent acts?b) Is the vice-president’s explanation that Eric Hald originated the idea and that he, as vice-pres-

ident, did not deal with these contracts directly, a sufficient answer to the tests outlined byyou in response to question a)? If not, explain why.

c) Would any natural person be charged with the crime of fraud in these circumstances, and ifso, who?

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10. The Hotel Belle Rue decided to run a promotion campaign in February and March. Guests whostayed four nights would be given a voucher for one free night, with a complimentary breakfast.The voucher could be used at any time within the next year.

Over dinner one evening, Tammy Ellis, an employee in the hotel’s public relations depart-ment, told her boyfriend, Al Nelson, about the promotion campaign and how popular it was.Nelson, who is always short of money but long on schemes, was promptly struck by a brilliantidea. He asked Ellis to get one of the vouchers for him on the pretext that he wanted to give itto a friend coming to town. He convinced Ellis that the hotel would never miss one voucher, andshe would be doing him and his friend a big favour.

The next day, Ellis removed a voucher from the drawer in the office, and gave it to Nelsonthat same night. Nelson spent the next day visiting various photocopy shops in town and prac-ticing the hotel manager’s signature. He then sold the vouchers he had created at a discount rateto friends and tourists.All was going without a hitch until the manager noticed that many of thepeople presenting the vouchers had clearly, from the questions they asked, never stayed in the hotelbefore. He checked the records, and found that 150 vouchers had been redeemed by people whodid not qualify for the promotion.A little detective work led him to Tammy Ellis, and the policewere called. Sitting under a single bright light, Ellis broke down and confessed to having taken avoucher and giving it to Nelson.a) Who would the Crown charge with having committed a crime, and what elements must the

Crown prove to get a conviction?b) The Criminal Code definition of fraud is:

380. Every one who, by deceit, falsehood or other fraudulent means, whether or not itis a false pretence within the meaning of this Act, defrauds the public or any person,whether ascertained or not, of any property, money or valuable security,

a) is guilty of an indictable offence and liable to a term of imprisonment not exceed-ing ten years, where the subject-matter of the offence is a testamentary instrumentor where the value of the subject-matter of the offence exceeds one thousand dol-lars; or

b) is guilty

(i) of an indictable offence and liable to imprisonment for a term not exceeding twoyears, or

(ii) of an offence punishable on summary conviction, where the value of the sub-ject-matter of the offence does not exceed one thousand dollars.

What is the likelihood of success in prosecuting either Tammy Ellis and/or Al Nelson?

Environmental Law11. Snowtracks Inc. manufactures snowmobiles. Part of the manufacturing process involves spraying

the metal snowmobile bodies with a rust-retardant prior to final painting and the installation ofthe engine.

The paint shop has two ventilation systems. One is to be used when toxic material, such asthe rust-retardant, is being used; the other is for use when non-toxic activities are being carriedout. A recent internal inspection revealed that it would be a simple matter for a mistake to bemade and the wrong ventilation system activated.The report recommended that corrective meas-ures be taken to ensure that the wrong system could not be accidentally turned on, and that thecost to the company would be approximately $10,000.

The report was tabled at the last directors’ meeting, at which time Nina Campbell, a direc-tor, was allocated the responsibility of following up and making sure the necessary steps to


correct the problem were taken. Campbell left next day for two weeks’ vacation, but made a notein her diary to meet with the paint shop people to discuss the issue a week after her return.

Two days after Campbell returned from holiday, Paul Pearson in the paint shop pulled thewrong lever.As a result, the second ventilation system was activated instead of the first, and rust-retardant was vented out of the building. Unfortunately, it was a windy day, and the material wascarried throughout the neighbourhood.The paint was damaged on cars parked on nearby streets,and several people in the neighbourhood became seriously ill.a) Has an offence under the Environmental Protection Act occurred?b) What must the Crown prove in order to obtain a conviction under the act?c) Is there any defence available to the corporation in these circumstances?d) If so, what is that defence, and would it succeed?e) Should Campbell be retaining a lawyer and, if so, what would be the nature of her concern?f) What would be the nature of the legal action brought by the neighbours affected by Pearson’s

action?

12. Beth Finn was an inspector for the Ministry of the Environment. She received a letter from BenMcGrath, an employee of Supple Skins Ltd., a leather tannery, about liquid being flushed down adrain into the municipal sewage system.While in the neighbourhood one day, Finn decided to paya visit to Supple Skins’ operation. After identifying herself as an inspector, she asked to speak toBen McGrath and, when she was told that it was his day off, she asked to see the plant facilities.

The receptionist spoke to the plant supervisor, Mario Murphy, on the telephone and advisedFinn that it was not convenient. Finn insisted, and Murphy came to the front office. He told herthat it was not a good time to view the plant since the machinery was in the process of beingcleaned with solvents and there were toxic fumes. Finn pulled a gas mask out of her briefcase andsaid she was prepared for such events, at which point Murphy replied,“Look, I’ve taken a coursein law and I know you can’t come in without a warrant unless we agree and I’ve been told notto let people like you in.”

When Finn tried to follow Murphy through the door to the plant, he turned and told herthat his boss didn’t like inspectors and she should leave before he made her leave quickly. Finnrepacked her gas mask and left. Outside, she immediately sneaked around to the back of the shopand looked in through a window. Some men were pouring a dark-coloured liquid into the floordrain. Finn turned the handle on a nearby door. It was unlocked, and so she quietly walked overto the men at the drain and suddenly asked them for a sample of the liquid.The men were so sur-prised that they dropped the container and Finn’s shoes were spattered by the liquid. Murphyarrived at this point and, grabbing Finn by the arm, pushed her back out the door, yelling that hetold her she could not come in and she would be sued for trespass.

Back at the office, the sample of the liquid on Finn’s shoes was analyzed and found to be ahighly toxic substance.A check on the company’s owner showed Marion Beetz as the director andpresident. Later that day, Ben McGrath called to thank Finn for her visit and for using his name,and to ask her if she knew of any jobs as he was suddenly available.a) Will the company’s court action against Finn for trespass be successful?b) Did Finn have a legal right to enter the plant even after she was refused admittance?c) Under what legislation would charges be brought dealing with the toxic waste?d) Who would the charges be brought against? Why?e) If the company’s financial status is so poor that it does not have funds to pay for the envi-

ronmental cleanup needed after pouring the liquid into the municipal sewage system, arethere any other parties who might be required to pay the bill?

f) Marion Beetz’s defence is that she rarely visited the premises except to pick up her mail, andthat Mario Murphy, the supervisor, was in charge of all aspects of the operation. Beetz has amemo, dated the day of Murphy’s joining the company, in which she delegates all authorityto him.Would this memo provide her with a successful defence?

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g) Is it fair to bring charges against the men who were found pouring the liquid down the drain,since they were following Murphy’s orders?

h) What remedies, if any, does Ben McGrath have in this situation?i) Who’s going to pay for Beth Finn’s shoes?

13. a) List and discuss the steps you might take to show due diligence on your part if you were adirector of a corporation that handled toxic material as part of its manufacturing process.

b) Explain what you hope to achieve by taking these steps.

Web Siteswww.rcmp-grc.gc.ca/scams/ecbweb.htm—Economic Crime Prevention Web site. RCMP site includes thelatest scams, business frauds, etc.

canadaonline.about.com/cs/marketing/index.htm?terms=marketing—Canada Online, Business: Marketing inCanada. General guide to effective and legal advertising, via a variety of links.

strategis.ic.gc.ca/SSG/ct01246e.html—Industry Canada, Competition Bureau. Gives information on howto file a formal complaint under the Competition Act.

www.the-cma.org—This site gives information on marketing and advertising practices.

Documents

Marketing,Advertising, and Criminal Law - Pearsonwps.prenhall.com/wps/media/objects/540/553310/WeirBonusCh.pdf · Marketing,Advertising, and Criminal Law ... that price.Advertising