The experience of Amcor and its CEO have lessons for all businesses because setting prices is a daily activity in business. Before setting a price you think about such things as your costs, margins and value. Do you also check price information for trade practices compliance? Consider your price lists, flyers, brochures, schedule of fees and approach to stating the GST element in prices. Do they bend the truth when indicating the price of any of your products or services?
There are major risks due to consumer protection law. Price information is regulated by trade practices law. If price information is not correct or is misleading, there will be exposure to potentially huge fines and criminal offences. Under the Trade Practices Act (Cth) 1974 ("Act"), fines of up to $500,000 can be imposed on individuals and up to $10 million on companies. Also, parties who have suffered loss by the contraventions can sue for damages. [Update: the Act is now named the Competition and Consumer Act 2010 (Cth).]
Action is regularly taken by customers as well as regulatory authorities such as the Australian Competition and Consumer Commission (“ACCC”) and state Fair Trading Offices.
Professional marketing involves both trade practices law checks and trade practices law compliance. Trade practices law states basic legal standards for marketing, advertising and promotional conduct in Australia. Section 52 states:
A corporation shall not, in trade or in commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive.
Puffery
A marketing trick, which is not exposed under law, is "product puffing" or "puffery". This is why action is not taken against, for example, washing powder television ads that claim the power cleans laundry "whiter than white". Critically, in law such claims are considered to be "self-evident exaggeration".
However hidden exaggeration is not self-evident. Hidden exaggeration in price information is a high risk marketing activity as illustrated in recent cases.
Delivery Charges
The recent full Federal Court decision in ACCC v Dell Computers Pty Ltd [2002] FCA 847; BC200203654 held that Dell Computers Pty Ltd made false and misleading representations as to the price of its computer products by failing to disclose adequately the compulsory nature of the delivery charge and attributing unacceptable prominence to the cost excluding delivery.
GST and Advertisements
Since July 2000, misleading pricing has come to the fore. The ACCC has emphasised the importance of advertising a GST-inclusive price or in the alternative ensuring that the total price payable is clear.
The recent Federal Court decision of ACCC v Signature Security Group Pty Limited (unreported, 13 January 2003) indicates that while it is acceptable for businesses to provide customers with additional pricing information such as the GST component of the price, making a statement that 10% GST will be added to the advertised price either in the body of an advertisement or in an asterisked footnote is likely to be misleading or deceptive if the final GST-inclusive price is not as prominent as the statement of the GST-exclusive price. In a press release the ACCC has stated "A statement that the price of good or service is $295 plus $29.50 GST would conform with the Act."
Two-price Advertising
All retailers at some time think about using "was $X, now $Y" promotion. Let’s face it, consumers love a bargain. With two-price advertising they expect the offered price to be less than the previous price they would have paid at the same business before the promotion began.
In ACCC v Allans Music Group Pty Ltd [2002] FCA 1552 the court found Allans’ advertising was false because, the items in question had not been sold in the pre-Christmas period at the "was" price but rather at prices substantially below the claimed "was" price. The prosecution of this case was the first time a retailer has been convicted for false "was-now" advertising. The ACCC regarded the conduct to be particularly blatant and reckless and therefore pursued it as a criminal prosecution. Fines were imposed of $80,000 cumulatively across the nine counts.
The ACCC is making it clear that where advertising contains a hidden price exaggeration, businesses risk large fines, bad publicity, criminal prosecution, the cost of corrective advertising and court proceedings.
To assist retailers, the ACCC has published these checklist questions for two-price advertising:
1. With what other price is the current price being compared?
2. Is that other price a genuine and accurate one that reflects actual market circumstances?
3. Does the two-price advertising involved have real substance, or is it misleading?
Sale Price Maintenance
Image and prestige are often important for market positioning. Prestige often attaches to brands which are not discounted. However, under the Act resale price maintenance is illegal so as to ensure that competition in the market is unfettered by price restraints imposed by suppliers or re-suppliers. Suppliers (including manufacturers and wholesalers) may not specify to resellers a minimum price below which goods or services are not to be resold or advertised for resale.
The consequence of a breach can be the imposition of penalties, damages, injunction remedies and remedial orders. A penalty totalling $220,000 was imposed by the Federal Court, Brisbane in the case of ACCC v Sundaze Australia Pty Ltd [1999] FCA 1642; (2000) ATPR 41-736 where the exclusive distributor of a well-known brand of sunglasses sought to stop discounting by making it known to certain retailers that it would not supply them unless they agreed not to discount.
Compliance Programs are Essential
The ACCC and the courts acknowledge the importance of effective compliance programs and recommend that all companies implement trade practice compliance programs to minimise the risk of breaching the Act. The key objective of a trade practices compliance strategy is to avoid breach of the law, disputes and litigation.
In the recent decision of ACCC v Wizard Mortgage Corporation Limited [2002] FCA 1414 (20 November 2002), Wizard’s television advertisement was found to be misleading or deceptive. Legal compliance had been checked, but only for a prior version of the ad. The Court noted the systemic failure in Wizard’s compliance system. The lesson is that even slight variations from what has been used before can make a big impact on the message conveyed. As indicated by the Court in this case, a good compliance system should ensure all versions of ads are checked for legal compliance.
Compliance in form and not substance will not suffice. At the core of effective compliance is the idea that the system should be constantly monitored and continually improved. Compliance training and implementation are also essential.
Commonwealth Criminal Code
The successful implementation of an effective compliance program by all corporations is even more significant due to the application of the Commonwealth Criminal Code. It makes it a criminal offence to breach sections of the Act. For example, a criminal office could arise if a board of directors permits a "corporate culture" to exist that tolerates non-compliance with price information requirements of the Act. The Code defines "Corporate culture" to include attitude, policy, rule, course of conduct or practice existing within the body corporate.
Given the potential liability under the Trade Practices Act 1994 and the Commonwealth Criminal Code it will be interesting to watch the course of developments which may now affect Amcor, its board, its former CEO and its existing and former Amcor executives.
PRACTICAL ADVICE
Compliance Programs for Marketers and Marketing
The existence of a well designed and properly implemented compliance program has often been a factor which courts have considered in assessing a lower penalty when a breach of the law has occurred.
On its own preparation of a compliance manual does not constitute a compliance program. As stated in the Federal Court decision of TPC v Sony (Aust.) Pty Ltd & Ors (1990) ATPR 41-053, the failure of Sony to give any directions with respect to compliance was considered significant in imposing a penalty of $250,000 for a breach of retail price maintenance provisions in the Act.
A compliance program can include the following features or stages:
- commitment by senior management
- legal audit
- legal manual
- operating procedures
- education program
- job induction
- job training
- supervision
- monitoring
- contingency plan
At Dilanchian, our trade practices law compliance services include:
- preparing or reviewing compliance manuals and supporting programs;
- conducting staff and management training;
- reviewing all types of marketing material for compliance; and
- advice on specific marketing programs, advertisements and promotions.
A compliance program has many advantages as it:
- helps avoid civil damages;
- may avoid the disruption and loss of morale that arises from litigation and adverse publicity;
- may avoid higher legal costs arising from defences to trade practices claims;
- may avoid a company being put to the expense of making restitution or other corrective action; and
- can reduce the risk of company officers being liable to fines.
Practical Tips for Compliance
When preparing marketing, publicity and advertising material:
- check that price information is clear and correct; "hidden" extras should be disclosed;
- ensure claims (ie representations) are factual and correct or at the very least, there are clear and reasonable grounds for making them; and
- as regards people – ensure that marketing and sales staff understand the need for trade practices compliance under the Act and there is a documented system in place for legal sign offs, and dealing with any complaints or breaches. Remember, personal fines of up to $500,000 can be imposed on executives.
If there are uncertainties contact us for legal advice.
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