Author(s):
Christopher Naudie
Feb 3, 2014
In many misleading advertising and consumer protection cases, a company that discovers a regulatory breach will self-report to the Competition Bureau or other law enforcement agencies, and implement a voluntary compensation program to mitigate the company’s regulatory and civil class action exposure. In some circumstances, the immediate and voluntary implementation of a restitution program can operate as an important tool in managing the company’s risk. However, the recent class action settlements that were announced in the Hyundai/Kia misleading advertising case serve as a sobering reminder that the adoption of a voluntary compensation program for consumers will not eliminate class action exposure. In short, while Hyundai and Kia were able to reach favourable settlements with the Canadian Commissioner of Competition that did not involve any financial penalties or any admission of liability, they were subsequently stung by a class settlement for about $70 million.
Background – The Voluntary Restitutionary Programs
Hyundai and Kia are affiliated companies that market, distribute, and sell motor vehicles in Canada. In 2011, they engaged in a widespread marketing campaign that advertised the vehicles’ fuel consumption ratings. Subsequently, the companies learned that, due to procedural errors at a testing facility, the advertised fuel consumption ratings were incorrect and were actually between 0.2 and 0.8 of a litre/100 km higher. Upon discovery of the error the companies issued a joint press release notifying Canadians of the incorrect fuel consumption ratings. At the same time, the companies announced a voluntary, claims-based restitution program to compensate customers for their additional fuel costs, plus an additional 15% premium for any inconvenience, for the entire period the vehicle is or was owned. Under the program, customers were required to submit claims for reimbursement, and the reimbursement amount was based upon the difference between the old and new fuel consumption ratings, multiplied by the average fuel price in the customer’s geographic area and the actual number of kilometres driven. The reimbursement was provided by way of a pre-paid credit card – i.e., customers were not provided with immediate actual cash payments.
Consent Agreement with the Commissioner of Competition
On the same day that they issued their joint press release announcing the consumer compensation programs, the companies proactively advised Canada’s Competition Bureau of the incorrect fuel consumption ratings in their marketing campaign. After examining the matter, the Commissioner of Competition concluded that the incorrect fuel consumption ratings in the marketing campaign had breached the civil misleading advertising provisions of the Competition Act because they: (i) were false and misleading in a material respect; and (ii) were performance claims based on inadequate or improper testing. Hyundai and Kia did not agree with the Commissioner’s conclusions, but in view of their self-reporting, they were able to reach a “no-penalty” settlement with the Commissioner that did not carry any admission of liability. Under the consent agreements, the companies agreed to: (i) fulfill the terms of the voluntary restitution programs; (ii) comply with the deceptive marketing provisions in the Competition Act; and (iii) engage in certain compliance monitoring-related activities. But most significantly, in light of the comprehensive restitutionary programs instituted by the companies and their commitment to fulfill the terms of the programs, the Commissioner did not require either company to pay any additional amounts for the alleged statutory breaches. And as noted above, the restitution programs were claims-based and did not involve immediate actual cash payments. The settlements with the Commissioner were captured in consent agreements filed with the Competition Tribunal on August 2, 2013.
Settlement of Related Class Actions
Despite their self-reporting and their adoption of a voluntary restitution program, the companies faced a number of proposed class action lawsuits in a number of provinces on behalf of consumers across Canada. In general terms, the class plaintiffs asserted that the companies had breached the criminal misleading advertising provisions of the Competition Act and the provisions of applicable consumer protection legislation, including Ontario’s Consumer Protection Act. Under the Competition Act, private parties (on an individual or class basis) may sue a company for damages based on an actual or alleged breach of the criminal provisions of the statute. The same right of private action is not available for breaches of the civil provisions of the statute. In addition, the class plaintiffs asserted claims in tort, including the tort of negligent misrepresentation.
In the face of these class actions, the companies had a number of robust defences. In their settlement with the Competition Bureau, the Commissioner did not allege that the companies had breached the criminal provisions of the Competition Act, and the companies did not admit any liability under the Act. In addition, the companies had arguments that they had mitigated any potential harm as a result of the comprehensive scope of the existing restitutionary programs. And perhaps most significantly, the proposed proceeding faced a steep hurdle for class certification and for proving damage, since each class member would arguably be required to demonstrate that it had relied on the incorrect fuel consumption ratings in purchasing their vehicles in order to demonstrate class-wide harm or damage. Surprisingly, the companies announced last week that they had entered into proposed settlements that offer compensation to consumers that go well beyond the existing restitutionary programs that were confirmed in their consent agreements with the Commissioner.
The value of the Hyundai and Kia settlements are approximately $46.7 million and $23 million respectively. Under the settlement agreement, the companies have agreed to add a variety of lump sum payments and other options to the existing restitution programs. Consumers may now elect a one-time lump sum cash payment or choose to remain in the existing restitution program that requires ongoing claims and related reimbursement. The lump sum payments will vary by vehicle, and will be reduced for any amounts already received by the customer through the existing restitution program. In addition, customers can elect other options, such as a dealership credit of 150% of the new lump sum cash payment amount or a new purchase credit of 200% of the new lump sum cash payment amount. The key aspects of the settlement, namely the availability of an immediate, one-time lump sum cash payment and enhanced credits, are expected to increase the costs for the companies well beyond the projected costs of the original restitution programs.
Implications
The comprehensive restitution programs implemented by the companies were designed to fully compensate consumers for their additional fuel costs and any inconvenience. The companies arguably did the right thing – they discovered the problem, immediately and voluntarily implemented remedial measures, and self-reported to the Commissioner. The Commissioner was satisfied with the companies’ proactive conduct and restitution programs and, beyond formalizing the programs in the consent agreements, did not impose any financial penalties. Nonetheless, the companies were vigorously pursued by plaintiffs for additional compensation, and they eventually agreed to provide significant additional compensation to settle those claims. This case is another example of the continuing trend of plaintiffs pursuing class actions on behalf of consumers in misleading advertising cases. It is also a reminder that proactive disclosure and voluntary restitution programs will not necessarily shield a company from the penalties and significant monetary liability associated with regulatory enforcement proceedings and related class actions.
Authored by Christopher Naudie, Michelle Lally, Sandeep J. Joshi