There has been no shortage of drama over the past few months with the fallout of FTX–the now-defamed cryptocurrency exchange. After its peak in July 2021 and having the third largest cryptocurrency exchange, they declared bankruptcy in November 2022, causing many investors and users to lose millions of dollars and search for who to blame.
Former customers and investors have filed lawsuits after it was discovered that billions of dollars in customer funds had been misappropriated by the now-bankrupt company. However, one of the more interesting approaches that plaintiffs have taken has been to also sue celebrities who publicly endorsed FTX.
NFL Quarterback Tom Brady, NBA superstar Stephen Curry, and comedian Larry David are a few of those celebrities who have been named in lawsuits. However, it begs the question: can these celebrities really be liable for a product they endorsed in a television commercial? Below, we will examine the laws surrounding individual liability for misleading advertising from a Canadian perspective.
Relevant Canadian Legislation
In Canada, there are various pieces of legislation that form the country’s consumer protection laws. The main piece of legislation is the federal Competition Act (the Act) which prohibits false or misleading advertising. Provinces also have their own consumer protection laws which govern how businesses interact with their customers, with each prohibiting false, misleading, or deceptive representations in some capacity. In addition to federal and provincial statutes, self-regulating bodies of Advertising Standards Canada (ASC) and the Canadian Marketing Association (CMA), also oversee advertising activities across the country.
The federal Competition Tribunal and the provincial superior courts have concurrent jurisdiction over deceptive marketing practices. The Commissioner of Competition can refer cases of misleading advertising to either the Competition Tribunal, the Federal Court or to the superior courts of each province. Consumers or advertisers can also file complaints with ASC and CMA to inform them that misleading advertising practices are taking place.
As it relates to the Act, there are two main sections that discuss misleading advertising:
- Section 52(1), a criminal provision, prohibits knowingly or recklessly making a representation to the public that is false or misleading in a material respect”. Knowledge that a representation is false or misleading is a key element to be prosecuted under this section. Contravention of Section 52 can carry fines up to the discretion of the court and/or imprisonment up to 14 years.
- Section 74.01, a civil provision, prohibits activities that are (i) false or misleading in a material respect, and (ii) 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 adequate and proper testing.”
According to the Competition Bureau of Canada (the “Bureau”), “material information” is information that could be used to influence consumer behavior, such as influencing customers to buy or use the advertised products or services. Knowledge that a representation is false or misleading is not a requirement to be prosecuted under Section 74.01. Contravention of Section 74.01 can carry penalties for individuals that is the greater of (i) $750,000.00 CAD or (ii) three times the value of the benefit derived from deceptive conduct.
The Bureau has stated that in most instances, offenses will be pursued under the civil provision, unless the Bureau is convinced that:
- there is clear and compelling evidence suggesting the accused knowingly or recklessly made a false or misleading representation to the public; and,
- criminal prosecution would be in the public interest.
The factors the Bureau will look at when considering the public interest are:
- whether there was substantial harm to consumers or competitors which could not be adequately dealt with by available civil remedies;
- whether the deceptive practices targeted or took unfair advantage of vulnerable groups (e.g., children and seniors);
- whether the people involved failed to make timely and effective attempts to remedy the adverse effects of the conduct, or whether the conduct continued after corporate officials became aware of it;
- whether the conduct involved a failure to comply with a previous undertaking, a promised voluntary corrective action, or a prohibition order; and
- whether the people had engaged in similar conduct in the past.
Canadian Case Law
So far, there are no cases in Canada that discuss a celebrity endorser’s false or misleading representations in the context of a television commercial. However, there are several cases that deal with an individual’s liability in the context of misleading advertising.
An example of an individual being charged under Section 52 is a case that took place in 2017: Dragan. In this case, the defendant claimed a TV antenna “improved the reception from the weakest stations without paying a penny for cable service” and could “capture satellite signals”. Expert evidence explained that the antenna did not have such capabilities. Thus, the defendant was sentenced to 18 months in prison due to aggravating factors in advertising the products, including:
- All advertising content was approved by the defendant and he did not make an effort to correct the advertising even when faced with customer complaints;
- The defendant knew there was no inventory of his product but continued to take orders and payments for his products; and,
- The defendant had known for almost 10 years that he had been in violation of the Act.
Furthermore, an example of an individual being charged under Section 74 of the Act is a 2006 case, Lebski. In Lebski, the Competition Bureau filed an application against the defendant for promoting certain products that claimed they could make users lose weight. Expert evidence indicated that the products in question did not function in the way the products were advertised, and the defendant was fined individually $20,000.00 CAD, while the defendant’s company was fined $50,000.00.
Canadian Application to FTX Endorsers
Given the high standard of culpability required for a Section 52 infraction, it’s unlikely that FTX celebrity endorsers would be charged criminally under Canadian law. Additionally, It is difficult to prove if any of the celebrities appearing in FTX advertisements had knowledge that the company was misusing customer funds or that the platform was at risk of insolvency. If the endorsers did have such knowledge that FTX was not as safe as they made it appear prior to filming their advertisements, there would be an argument to prosecute the endorsers under this section.
On the other hand, stronger arguments can be made about the endorsers providing materially false or misleading statements in contravention of Section 74.01 of the Act. Specifically, in a Stephen Curry ad, he states “with FTX I have everything I need to buy and sell and trade crypto safely”. Tom Brady also states in his ad , “FTX is the safest and easiest way to buy and sell crypto”. On its face, both of these statements appear to be materially false as billions of dollars worth of customer funds were lost by the platform.
Alternatively, in a Larry David ad , when he is presented with FTX as a “safe and easy way to get into crypto”, he responds “I don’t think so, and I’m never wrong about this stuff”. Larry David is never actually seen advocating for FTX, rather, he only expresses skepticism of the product.
Thus, if Stephen Curry, Tom Brady and Larry David were brought before the Competition Tribunal, it appears as if Larry David would actually have a strong defense since he did not make a materially false statement about FTX. On the contrary, Stephen Curry and Tom Brady would have a more difficult time defending the statements they made in their advertisements. However, any financial liability of the endorsers may be restricted through limitation of liability and indemnification clauses that were in the endorsers’ individual contracts with FTX.
Conclusion
Based on the Act, endorsers in Canada can be prosecuted by the Bureau for making false or misleading statements in advertisements, even if endorsers do not have knowledge of the reliability of a product. As the gaming industry continues to utilize celebrity endorsers and brand ambassadors in print, linear and digital media, it is extremely important for these endorsers to be conscious of how they describe and promote gaming products. Otherwise, if those endorsers are found to make materially false or misleading statements, absent strong limitation of liability and indemnification clauses in their contracts, they could be subject to fines and possible jail time. If you would like us to discuss your company’s advertisements to ensure compliance with Canadian laws, please contact us at zack@gmelawyers.com or jack@gmelawyers.com.
