A. INTRODUCTION
Fundraising, by necessity, is occupying
a greater role for charities in recent years, due to a combination
of government cutbacks in support for charities, competition
amongst charities for available donations, and an increased
demand for services being placed upon charities by the public.
Budgetary pressures and time constraints may preclude a
charity from properly evaluating the legal consequences
of the various fundraising programs it undertakes, but the
risks associated with improper fundraising programs can,
however, easily negate any benefit that is realized.
This Bulletin focuses on one particular
area of liability for charities and not-for-profits in the
sphere of fundraising, which is the application of the federal
Competition Act.
The 1999 amendments to the Competition Act created
increased exposure to liability for charities and not-for-profits
that are involved in fundraising programs. Accordingly,
charities and not-for-profits must be careful not to embark
on a fundraising campaign before considering their responsibilities
under the Competition Act.
B. RELEVANT SECTIONS OF THE COMPETITION ACT
The Competition Act is a federal
act and applies throughout Canada, with a purpose to maintain
and encourage competition throughout Canada.
It contains both criminal and civil provisions. If
a charity or a not-for-profit organization contravenes the
provisions of the Competition Act, the Commissioner
of Competition may initiate an inquiry into whether the
conduct is reviewable, and if so, both the organization
and the individuals in the organization may be held liable.
There are several provisions that have
important application to charities and not-for-profit organization
in relation to telemarketing and internet fundraising, as
well as door to door and other forms of fundraising solicitation.
In particular, the amendments to the Competition Act
in 1999 created liability for fundraisers, as well as
charities, their boards of directors, and their officers
if the fundraising activities of the charity violate the
legislation. The amendments that have direct impact upon
fundraising practices are summarized below.
First, the definition of “business” under
section 2(1) of the Competition Act now specifically
includes “the raising of funds for charitable or other non-profit
purposes.” This definition has brought in both charitable
and not-for-profit organizations, as well as their officers,
directors, agents, and any professional fundraisers on behalf
of the organization.
The Competition Bureau has stated that “this amendment clarifies
that persons engaged in fundraising efforts will be covered
by the deceptive telemarketing and deceptive marketing practices
provisions.”
Section 52(1) of the Competition Act
discusses false or misleading representations, and states
that “no person shall, for the purpose of promoting, directly
or indirectly, the supply or use of a product or for the
purpose of promoting, directly or indirectly, any business
interest, by any means whatever, knowingly or recklessly
make a representation to the public that is false or misleading
in a material respect.” Contravening this section constitutes
a criminal offence that could include fines at the discretion
of the court and/or imprisonment for a maximum of 14 years.
Section 52.1(2) focuses on disclosure,
prohibiting anyone from being involved in telemarketing
unless there has been disclosure:
…in a fair and reasonable manner at
the beginning of each telephone communication, of the identity
of the person on behalf of whom the communication is made,
the nature of the product or business interest being promoted
and the purposes of that communication…[as well as] disclosure…in
a fair, reasonable and timely manner, of the price of any
product whose supply or use is being promoted and any material
restrictions, terms or conditions applicable to its delivery;
and…in a fair, reasonable and timely manner, of such other
information in relation to the product as may be prescribed
in the regulations.
Other important provisions in the Competition
Act relate to deceptive telemarketing. Section 52.1(3)
states that no person who engages in telemarketing shall:
(a)
make a representation that is false or misleading
in a material respect;
(b)
conduct or purpose to conduct a contest, lottery
or game of chance, skill or mixed chance and skill, where
(i)
the delivery of a prize or
other benefit to a participant in the contest, lottery or
game is, or is represented to be, conditional on the prior
payment of any amount by the participant, or
(ii)
adequate and fair disclosure
is not made of the number and approximate value of the prizes,
of the area or areas to which they relate and of any fact
within the person’s knowledge, that affects materially the
chances of winning;
(c) offer
a product at no cost, or at a price less than the fair market
value of the product, in consideration of the supply or
use of another product, unless fair, reasonable and timely
disclosure is made of the fair market value of the first
product and of any restrictions, terms or conditions applicable
to its supply to the purchaser; or
(d) offer
a product for sale at a price grossly in excess of its fair
market value, where delivery of the product is, or is represented
to be, conditional on prior payment by the purchaser.
A
violation of the disclosure requirements in section 52.1(2)
or the deceptive telemarketing provisions in section 52.1(3)
constitutes a criminal offence, with punishment that may
include fines at the discretion of the court, and/or imprisonment
for up to 14 years.
If the corporation commits an offence, the officers and
directors who were in a position to direct or influence
the policies of the organization are parties to and guilty
of the offence.
If the offence is committed by an employee or agent of the
corporation (whether or not the employee or agent is identified),
that is sufficient proof that it was committed by the corporation,
unless the corporation can establish that it exercised due
diligence to prevent the commission of the offence.
The Competition Act also discusses
deceptive marketing practices, stating that “reviewable
conduct” occurs when the person or organization, for the
purpose of promoting the supply or use of a product, or
for the purpose of promoting a business interest:
(a)
makes a representation to the public that is false
or misleading in a material respect;
(b)
makes a representation to the public in the form
of a statement, warranty or guarantee of the performance,
efficacy or length of life of a product that is not based
on an adequate and proper test thereof, the proof of which
lies on the person making the representation; or
(c)
makes a representation to the public in a form that
purports to be
(i)
a warranty or guarantee of
a product, or
(ii)
a promise to replace, maintain or repair an article or any
part thereof or to repeat or continue a service until it
has achieved a specified result,
if
the form of purported warranty or guarantee or promise is
materially misleading or if there is no reasonable prospect
that it will be carried out.
The possibility that directors and officers
of a charity or not-for-profit organization may be personally
liable for criminal prosecution from deceptive telemarketing,
or false or misleading representations, will necessitate
that the board of a charity, as well as its officers and
senior management, become actively involved in reviewing
and approving procedures involved in telemarketing, and
thereafter to regularly ensure that those procedures are
being carefully followed.
C. RECOMMENDATIONS FOR AVOIDING LIABILITY UNDER THE COMPETITION
ACT
In light of the increased exposure to
liability for charities, not-for-profits, and individuals
under the new provisions of the Competition Act,
it is essential that preventative steps be implemented to
reduce the exposure as much as possible. In this regard,
section 74.1(5) confirms that, where an administrative penalty
is possible, there are both mitigating and aggravating factors.
If, for example, the offending organization can demonstrate
a history of compliance with the Competition Act,
it is possible that the penalties may be reduced or waived
altogether. Having and adhering to a fundraising policy
may also assist in lessening the amount of any administrative
monetary penalty, as it will, if properly drafted and implemented,
demonstrate an organization’s commitment to operating in
compliance with applicable legislation. As a result, it
is essential for charities and not-for-profits to adopt
fundraising practice to guard against improper telemarketing
and misrepresentation in fundraising.
A few recommendations for charities and
not-for-profit organizations are as follows:
1.
Ensure that the fundraising
materials (including scripts) accurately describe the charity,
its activities, and the purposes for which those donations
will be used.
2.
Consider providing written
instructions to telephone solicitors, as well as door to
door canvassers advising them that any misrepresentation
could result in a severe penalty for them personally as
for the charity that they are acting on behalf of.
3.
Ensure that the telephone
fundraising scripts used by employees, volunteers and contract
fundraisers disclose at the outset both the identity of
the organization and the purpose for the call.
4.
Ensure that the contract
with telephone solicitors includes a provision requiring
adherence to the disclosure and misrepresentation provisions
of the Competition Act.
5.
Ensure that any promotional
materials concerning lotteries or contests include the required
disclosures, such as the number and value of the prizes
and any available information that materially affects the
chances of “winning.” Winners should be chosen either randomly
or on the basis of their skill, and the organization must
ensure that the prizes are distributed properly.
6.
Advise the governing board
of the charity or not-for-profit concerning the measures
that have been taken and the procedures that are in place
to ensure compliance with the provisions of the Competition
Act.
7.
Have the board of the charity
or not-for-profit organization adopt a policy committing
the organization, its directors, officers, employees, and
volunteers to, at all times, avoid making “false or misleading
representations” on behalf of the organization. Then ensure
that such policy is provided to everyone in the organization,
including volunteers as well as employees.
8.
Finally, it is possible to
obtain an opinion from the Competition Bureau on whether
a proposed fundraising program is in compliance with the
Competition Act. The Competition Bureau facilitates
compliance with the law by providing written opinions in
return for a monetary fee. The Competition Bureau’s website
encourages company officials, lawyers, and others to request
an opinion on whether the implementation of a proposed business
plan or practice would raise an issue under the Competition
Act. These written opinions are binding on the Commissioner
of Competition when all the material facts have been submitted
by or on behalf of an applicant for an opinion and when
they are accurate. A specific written opinion will be based
on information provided by the requestor and will take into
account previous case law, prior opinions and the stated
policies of the Competition Bureau.
D. CONCLUSION
In consideration of the heightened public
anxiety that has resulted from frequent telemarketing scams,
it is likely that the Competition Bureau will be under pressure
to be diligent in enforcing compliance with the provisions
of the Competition Act. In this regard, the Competition
Bureau is now able to apply for judicial authorization to
intercept private communications, without the consent of
either party to a telephone call (ie. a wire tap), to investigate
more serious cases.
The amendments to the Competition
Act in 1999 that many charities and not-for-profits
are still not aware of constitute a substantive change in
the law with regard to fundraising across Canada, as charities
and not-for-profit organizations are no longer exempt from
the application of the Act. These organizations and their
legal counsel will therefore need to carefully study the
Act when considering implementing a fundraising program,
given the substantive penalties that may result and even
the possibility of criminal charges being laid.
