Platforms are the New Cloud: Marketplaces, Delivery Services, Consumer Finance, and More, Part II of II
Continuing from Part I of our two-part blog series on platforms, here in Part II we shine some light on common issues in the areas of trade and product compliance, competition law and consumer protection.
Trade and Product Compliance
Online platforms have increasingly become critical extensions of brand experience, as well as supplementary sales channels or marketplaces. In both cases, multijurisdictional customs, trade and regulatory considerations arise from the platform-based provision of goods and services across provincial and international borders.
In the world of web-based marketplaces and supplier relationships, the ability to track and retain visibility into supply chains can be challenging, and increased scrutiny of sourcing practices underscores the importance of diligent supply chain oversight. This scrutiny is coming not only from investors and stakeholders, but from regulators as well. The Federal government’s proposed Modern Slavery Act is but one example of a legislative instrument that will require proactive review of supply chain integrity. Once passed, importers will be obligated to ensure the products they import into Canada have not been manufactured using child or forced labour. Specifically, the Modern Slavery Act would, if implemented, solidify Canada’s international commitment to combat modern slavery by imposing supply chain obligations on certain businesses that rely on human labour in the production of their goods. Given the broad application of the Modern Slavery Act – which will apply to any entity that imports goods manufactured outside of Canada – platform operators and sellers alike will need to consider instituting appropriate compliance auditing mechanisms and contractual commitments.
As both consumers and sellers double down on platforms and marketplaces, jurisdictional borders blur – potentially obscuring opportunities to leverage preferential trading terms, and giving rise to increased product compliance exposure. Amidst the web of relationships that platforms can give rise to, identification of the importer of record (and the attendant compliance obligations) sometimes gets lost in the shuffle. The latent financial exposure associated with a historical failure to pay appropriate import duties, for instance, can be a scary prospect. Given that trade, customs and product regulatory compliance all have implications for the importer of record, this role is a central one within the broader platform structure. Understanding the significance of the importer of record, reflecting it in platform agreements, and adequate disclosure if customers are to be the importers of the products they purchase on a platform or marketplace, are critical.
Platform operators and sellers are well-advised to identify high risk product categories that trigger unique or particularly onerous compliance requirements. For instance, Natural Health Products, infant apparel, alcoholic beverages, and personal protective equipment are all subject to specialized regulatory approvals and standards in Canada – regulatory requirements which are in many respects distinct from other significant markets, including the United States. By flagging those product categories that attract more stringent regulatory obligations, platform operators and participants can take steps to mitigate instances of non-compliance.
Central competition law considerations for platform operators and sellers are the Competition Act’s restrictive trade practices provisions, and deceptive marketing practices provisions (including, for both, related Competition Bureau guidelines). As always, when dealing with competitors or potential competitors – an operator may compete with its sellers in this context – compliance and the appearance of compliance with the Competition Act’s criminal conspiracy provision (i.e., the prohibition on agreements to fix prices, control supply or allocate customers or markets) should be a priority.
Regarding restrictive trade practices, under the Competition Act, certain trade practices (i.e., abuse of dominance, refusal to deal, exclusive dealing, tied selling, market restriction and price maintenance) can be subject to civil review. Proving a negative effect on competition is a required element of all. As such, these practices are usually unlikely to raise competition concerns unless the person in question has market power (typically, at least a 35% market share) or, in the case of abuse of dominance, obviously, a dominant market position (typically, at least a 50% market share).
Where an operator has a dominant position, self-preferencing behaviour (e.g., favouring operators’ products over sellers’ in search results; using data accessible only to the operator to inhibit the success of sellers) may constitute abuse of dominance in certain contexts. In fact, this type of conduct forms part of the competition scrutiny that the global tech giants are facing in the U.S., Europe and Canada. It is therefore prudent for an operator to consider whether its conduct is intended to have a predatory, exclusionary or disciplinary effect on a competitor. If an operator does not have a dominant position, it may have more leeway to engage in such conduct. In terms of assessing whether a new platform is likely to attain a dominant position, looking to the operator’s bricks-and-mortar market position could be a useful indicator.
With respect to the other restrictive trade practices, which are vertical restraints on competition (i.e., between supplier and customer), it is also prudent for an operator (i.e., the supplier in this scenario) to consider whether it is engaging in such practices with its sellers (i.e., its customers). Given the requirement for a negative effect on competition, an operator may still choose to proceed, but this should be an informed decision. Another factor that favours operators is that no monetary penalties are available for engaging in such practices. Abuse of dominance, on the other hand, can result in administrative monetary penalties of up to $10 million ($15 million for repeat conduct).
In terms of deceptive marketing practices (the competition law principles are similar to the consumer protection principles discussed below), apart from ensuring that one’s own advertising is compliant, risk can arise for an operator with respect to representations made by sellers on its platform. Helpfully, the Competition Act contains a civil “publisher’s defence” for a person that disseminates the representations of others, provided that the person obtains the contact details of the party making the representations, and accepts the representations in good faith. Accordingly, it is often sensible for an operator to get the name and address of all third parties who will be making claims on the platform, as well as a covenant from such third parties that they will comply with the Competition Act and the Competition Bureau’s guidance.
Depending on the facts, following the above approach (and removing from the platform third parties who have broken their covenant) should arguably be sufficient to insulate an operator from potential competition liability based on the actions of its sellers. However, the Competition Act contains another provision that deems making a representation to include permitting a representation to be made. Although there is support for the proposition that this provision should not apply in this context (and rather, that it is meant to apply, for example, where a person permits an advertising agency to make a representation on its behalf), the Competition Bureau has argued, in another context, that liability attaches for alleged misrepresentations made by third parties, although jurisprudence is lacking. As a practical matter, it may be very costly and cumbersome to review and approve third-party representations, and doing so could potentially diminish an operator’s ability to rely on the “publisher’s defence”.
Among other consequences, breaching the Competition Act’s deceptive marketing practices provisions can result in administrative monetary penalties of up to $10 million ($15 million for repeat conduct) and restitution. For egregious conduct, criminal consequences are theoretically available, but are generally only sought for illegitimate businesses.
As a general rule, consumer protection legislation of a certain province tends to apply to all consumer transactions where the consumer or the person engaging in the transaction with the consumer is located in that province when the transaction takes place. Consumer protection legislation applies irrespective of whether a transaction is concluded in a physical or electronic marketplace and generally cannot be contracted out of by the parties.
Two key protections offered under consumer protection legislation that are particularly relevant to platforms are the prohibition on false, misleading or deceptive representations and the disclosure requirements to the consumer. Examples of false, misleading or deceptive representations listed in the Ontario Consumer Protection Act (the “CPA”), by way of example, include: the supplier (which includes both operators and sellers, depending on the circumstances) implying they have a sponsorship, approval, status, affiliation or connection they do not have; representing goods or services to be of a particular standard, quality, grade, style or model if they are not; misrepresenting the purpose of any charge; or stating that goods or services will be available or can be delivered or performed by a specified time when the contrary is or ought to be known.
Additionally, electronic agreements entered into remotely must comply with "internet agreement" and "remote agreement" provisions in the CPA. These requirements address some of the information gaps that result from consumers being unable to inspect products themselves or meet sellers in person. These requirements include: providing the name and contact information of the supplier; a description of additional charges such as duties or brokerage fees; the terms and method of payment; and the method and timing of delivery. Consumers have certain cancellation rights if the agreement does not contain the prescribed information or if a copy of the agreement is not provided to the consumer in a manner where it can be printed or retained.
Platforms may also consider national and international best practices, such as the Canadian Code of Practise for Consumer Protection in Electronic Commerce and the OECD Guidelines for Consumer Protection in the Context of Electronic Commerce. The general principle of these guidelines is to ensure online consumers are afforded protection that is no less effective than the protection afforded to offline consumers. Following the recommended best practises can help grow online sales and address some of the main concerns of online consumers – namely, the anonymity of sellers who may be difficult to trace, a consumer's inability to examine products and labels, and challenges with resolving disputes or obtaining refunds.
Platforms are proliferating as a delivery model for good reason: actors can focus their time and resources on optimizing a specific role in the transaction process, while relying on other parties to seamlessly fill the gaps. These benefits, however, could be outweighed if key issues are not identified and addressed early on. Discussing these issues with legal counsel can help ensure an efficient and strategic platform experience, both for operators and sellers.