In this issue:
Cartel Bill – still being debated in the Senate
The Trade Practices Amendment (Cartel Conduct and Other Measures) Bill 2008 (Cartel Bill) has been discussed at length in our previous editions. It really is the most significant amendment that has been made to the Trade Practices Act (TPA) since its commencement in 1974, bringing with it the highest jail terms in the world for cartel conduct. It is expected to become law by the end of June or in July this year.
As we have previously discussed, the Cartel Bill is extremely complex and was drafted quickly by the Federal Government. It was referred to the Senate Economics Committee for enquiry and that Committee recommended in February that the Bill be passed. However, various submissions were made to the Committee in relation to the so called “joint venture defence” in particular and the Government has now determined that amendments are desirable “to ensure that the joint venture exceptions will be available where joint venturers can prove that they intended and reasonably believed that they were a party to a valid joint venture”. The latest amendments were debated as recently as 14 May in the Senate.
Joint venture defences are available in relation to a number of provisions of the TPA. The definition of “joint venture” as it applies in these other provisions recognises that joint ventures can be formal or informal and may be constituted by arrangements or understandings. Before the Senate debate on 14 May, the Cartel Bill only allowed joint venturers involved in cartel conduct, to rely on the joint venture defence if their joint venture was formalised. In other words, the defence was a more limited defence than that which applies in relation to other provisions of the TPA. Even now, the Senate has not adopted the same defence as applies in relation to other provisions of the TPA. Instead, it has determined that the cartel provision offence will not apply to “arrangements or understandings” between joint venturers if those arrangements or understandings:
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are not in a contract; and
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when those arrangements or understandings were made or arrived at, each party intended the arrangement or understanding to be a contract AND reasonably believed that it was a contract; and
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the cartel provision is for the purposes of a joint venture; and
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the joint venture is for the production and/or supply of goods or services.
Who knows what more may be debated in relation to this legislation in the weeks left before it becomes law. It really is a moving feast but watch this space!
Is that clear enough for you? Trade Practices Amendment (Clarity in Pricing) Act 2008
Hot on the heels of legal action by the ACCC against a slew of high-profile retailers including Dell Computers and Virgin Mobile Australia for their failure to specify the full price of their products in their advertising, the Federal Government’s Trade Practices Amendment (Clarity in Pricing) Act 2008 (Amendment) has swept aside the previously brief sections 53C and 75AZF of the TPA, replaced them with seven subsections, and given examples of acceptable and unacceptable pricing conduct.
The Amendment has been given little publicity given the focus on the Cartel Bill. However, it comes into effect on 25 May 2009. The ACCC published guidelines on its interpretation of the Amendment on 6 May 2009 (May Guidelines).
One of the very clear things about the Amendment is the potential raft of consequences if you don’t comply. For breach of section 53C, the ACCC can seek a range of civil remedies including injunctions, declarations, compensation orders and corrective advertising orders. For breach of section 75AZF, criminal liability follows and fines of up to $1.1 million for companies and up to $220,000 for individuals can be imposed by the Federal Court.
Clear as mud?
You will be familiar with enticing images displayed on billboards and across national television which seem to offer deals on travel, electronics, and motor vehicles, for example, for practically nothing. Equally, you’ll probably be familiar with the indignation of finding that your $10 (plus surcharges plus taxes) ticket to Buenos Aires was actually going to set you back a whopping $3,000 in those unspecified fuel surcharges and airport taxes.
The current section 53C places an obligation on businesses to state the full cash price for goods and services where part of the price is stated. On a broad interpretation of the provision, the above examples would breach section 53C. However, in a number of cases over the last few years, the Federal Court has interpreted the provision narrowly.
For instance, in its 2002 case against Dell Computers[1] the ACCC alleged Dell breached section 53C for not including mandatory delivery charges as part of the price of its computers. The Federal Court held that a pricing statement to the effect of “$1999 plus $99” was sufficient to satisfy the requirements of section 53C.
In its 2003 case against the Signature Security Group[2] the ACCC alleged that Signature had breached section 53C by advertising GST exclusive prices for various of its security services. The Federal Court however found that the expression, ”$295 plus GST”, did not contravene section 53C.
The Federal Government has concluded that section 53C is not working to achieve the policy objective behind the provision and that consumers need better protection. You will no longer be able to state “$100 plus $10 GST plus $15 delivery” or “$100 plus GST plus delivery”. You must in fact state the single price payable in a single figure.
Simple maths or quantum mechanics
“Single price” is defined in subsection (7) as being “the minimum quantifiable consideration for the supply concerned at the time of the representation concerned” and includes any:
- charges payable by a purchaser to the seller (unless optional);
- taxes, duties, fees, levies or charges imposed on a seller that are forwarded on to the purchaser;
- amounts paid or payable by a seller under an agreement or legal obligation that would otherwise have been payable by the purchaser in connection with the supply.
The first point to note is that it is only the “quantifiable” parts of price that must be represented as a single figure. In its May Guidelines, the ACCC states that an amount is quantifiable if it can readily be converted into a dollar amount. The ACCC says “If it is subject to variation (such as fluctuations in currency), you must calculate it based on information available at that time and clearly advise consumers that it may be subject to change.”
But what about variable amounts? For example, prices are often subject to a number of additional amounts that vary from State to State and even from town to town. For example, delivery charges can vary depending on the location to which a product is to be delivered. Subsection (2) has tried to address the specific issue of delivery charges by excluding charges payable in relation to sending goods from the supplier to the purchaser. However, businesses must specify the minimum amount of any delivery charge which will be incurred by the customer. Whether or not this exclusion solely relates to transportation costs, such as shipping, or whether it extends to other associated expenses that are specific to particular goods – such as costs of extended refrigeration of perishables – is open to interpretation.
What other requirements are there?
The requirement is that the single price be displayed “in a prominent way”. Subsection (4) specifies that a price will be displayed in a prominent way if the single price is “at least as prominent as the most prominent of the parts of the consideration for the supply”. This suggests that the use of bold, underlining and different font sizes or typefaces for components of a price need to be carefully considered to make sure that these do not make a component of price more prominent than the “single price”. Conversely, the use of an asterisk to take a reader to the “single price” will not be possible any longer if that use makes the single price less prominent than components of the price. In its May Guidelines, the ACCC gives an example of an advertisement which states upfront “6 easy repayments of $19.95” but puts the total price at the bottom of the ad and in fine print and in a colour similar to the background design. In this case the ACCC says “The single price is not as prominent as the most prominent component of $19.95 and is therefore unlikely to comply with section 53C of the TPA.”
Are there any exclusions?
Notably, there has been an attempt to exempt some business to business transactions from the operation of the Amendment as section 53C will not apply if the price representation is made “exclusively” to a body corporate. However, representations to unincorporated bodies, partnerships and sole traders are not exempt. Furthermore, it remains to be seen whether the use of the word “exclusively” here exempts representations made to bodies corporate and sole traders for instance as part of the same representation.
Furthermore, the representation as to price must be made in relation to goods or services of a kind ordinarily acquired for personal, domestic or household use or consumption. Therefore, goods of a commercial character are outside the section.
Finally, subsection (5) excludes services supplied under a contract if the services are to be provided over the term of the contract, the contract provides for periodic payments for those services and if the contract also provides for the supply of goods, that those goods are directly related to the services.
The forecast is for clear skies with a chance of showers
Ultimately, whether or not the Amendment actually has the desired effect remains to be seen as it is complex and untested at this stage. On its current construction, there are clearly a number of pitfalls for the unwary – both consumer and supplier alike. At this point in time, the clearest matter is that suppliers of personal, domestic or household goods and services which are looking at advertising campaigns to be circulated after 25 May 2009 and which include representations as to price should have their material reviewed by their legal teams for any potential danger issues and to make sure they comply with these new provisions.
P.S. Charges payable by airlines under the Passenger Movement Charge Act 1978 are non-quantifiable as they change from time to time so make sure you read the fine print before buying that ticket to Barbados!
ACCC, section 52 and getting creative
Misleading Advertisements: The ACCC Shows its Creative Side
We are all familiar with those black and white corrective notices buried somewhere in a newspaper that have been placed by businesses in order to settle or avoid proceedings threatened by the ACCC for alleged misleading and deceptive advertising. Corrective notices and other compliance measures have in the past been relatively standard tools employed by numerous regulatory bodies around the world to ensure companies comply with consumer protection laws. Recently, however, we are seeing a move towards more creative and, in their own way, tougher enforcement measures by these regulatory bodies to deter misleading advertising.
Recent news from the United States
Earlier this year, Bayer HealthCare Pharmaceuticals (Bayer) produced a remedial television campaign to be aired for 6 months at a cost of $20 million. The corrective TV commercial begins: “You may have seen some Yaz commercials recently that were not clear. The FDA wants us to correct a few points in those ads.”
The corrective TV commercial was part of a settlement with the United States Food and Drug Administration (FDA) and 27 States, over allegations of deceptive advertising in relation to Yaz, the most popular birth control pill in the United States. Bayer also agreed to submit all upcoming advertisements to the FDA for preclearance for the following six years!
While it is not unusual in the United States for drug companies to submit advertisements to the FDA for preclearance, the use of a corrective TV commercial is a surprising development for the FDA which rarely asks for corrective advertising.
What’s happening in Australia?
In Australia, on the other hand, corrective notices have been a common tool employed by the ACCC given the effect these can have on the reputation of an advertiser. However, similar to the FDA, there has been a now noticeable trend in Australia towards more creative and, in a number of cases, more onerous corrective requirements.
Recently in Australia:
- No more black and white corrective ads: Coca-Cola South Pacific Pty Ltd agreed to publish a corrective advertisement in response to ACCC concerns that certain representations about Coca-Cola in its “myth-busting” advertisement may have been misleading and deceptive. This was however no ordinary black and white corrective notice. The advertisement was in the same style, colour, size and format as the original allegedly misleading advertisement and was a clearly branded a Coca-Cola ad rather than a less noticeable black and white correction.
- Donation to charity: South Australian wine retailer, Moving Juice Pty Ltd, in addition to the usual enforcement techniques, was required to donate $2,000 to charity (being an estimate of the amount that Moving Juice profited by from its alleged contravening conduct). This was in response to ACCC concerns that price savings set out in Moving Juice catalogues were misleading and “Was $X Now $Y” price comparisons were likely to mislead and deceive consumers.
- Write an article: The publishers of Dolly and Girlfriend magazines were required to publish articles in its magazines which brought the attention of young readers to the nature, cost and characteristics of mobile phone premium services advertised in the magazines (i.e. downloadable ringtones and screensavers.) The undertaking was in response to ACCC concerns that the overall impression created by the attractive and busy layout of some advertisements, combined with the inadequate and inappropriate use of fine print disclaimers, was likely to be misleading.
- Audit your suppliers: Black & Decker was caught supplying products incorrectly labelled as “Made in Australia” for the second time. The ACCC extended the original undertaking Black & Decker had supplied to the ACCC but also required Black & Decker to undertake an audit of its domestic suppliers to identify the source of all of the materials used in the manufacture of the products that they supply to Black & Decker.
These are just a few examples of the ACCC’s move towards more creative techniques to ensure that businesses think twice before publishing advertisements that could mislead or deceive consumers.
Here’s how to avoid misleading advertisements
There’s nothing new here! But as always, there are a few important lessons for advertisers to remember in order to avoid misleading advertisements:
- Make sure that what you are saying is factually correct and can be verified. Although this is an obvious watch out, it can never be overstated…advertisers are still being caught on a regular basis! Make sure you check every claim you make and sight evidence of the facts you are asserting.
- Remember that even though a particular law relating to your industry may permit a certain claim to be made, this does not mean the claim can be made under the TPA. For instance, the Food Standards Code allows “flavours” to be labelled “not artificial” if they are identical in chemical composition to flavours found in nature even though manufactured synthetically. The ACCC has a different view. If a flavour is to be described as “not artificial”, it must not be synthetic at all.
- The overall impression that is conveyed to consumers by your advertisement is of utmost importance. Putting important information into the fine print is not sufficient if the overall impression of the advertisement is misleading. Even copy as part of the body of the advertisement which qualifies some of the messages in the advertisement may not be enough. Stand back from your ad once you have created it and ask “What is the overall impression my target audience will have after seeing or reading this ad”. If that overall impression is misleading or false, change your draft copy before it goes to print.
Shipwreck: Resale price maintenance penalties for Telwater
Resale price maintenance (RPM) was once again in the headlines recently. In fact, the ACCC keeps taking action for breach of the RPM provisions of the TPA. In March, the Federal Court imposed penalties of $210,000 on the producer and distributer of Quintrex and Stacer products, Telwater Pty Limited (Telwater) [3] after action was commenced by the ACCC. The Court also ordered that one of Telwater’s directors pay a fine of $28,000 personally – remember that individuals are captured for breach of the RPM provisions under section 76 of the TPA. Companies cannot pay the fines imposed on individuals for breach of the RPM provisions. That is illegal. The individuals themselves must foot the bill. That is intended to make you sit up and think before engaging in this type of conduct.
RPM
Most of you reading this will already know that it is illegal to specify to a reseller or distributor of your products, a price for the resupply of your goods and services. Telling a reseller or distributor that they can’t sell your products below a specified price is prohibited under the TPA, and it does not matter whether that practice lessens competition or not.
It is not so well known, however, that you also can’t require resellers and distributors not to advertise below a specified price. In the words of ACCC Chairman, Graeme Samuel, “resale price maintenance can take many forms… requiring independent dealers not to advertise below a specified price is one such form.” Mr Samuel confirms that “businesses must allow independent distributors of their products the freedom to determine the prices at which they both advertise and sell.”
Even if you don’t require your dealers to sell or advertise only at a certain price, it is also very important to think about whether anything you do might in fact encourage or induce them to do so (which was what Telwater was found to have been doing). One of the acts constituting RPM (set out in section 96 of the TPA) is the supplier inducing, or attempting to induce, a reseller or distributor not to re-sell goods at a price less than a price specified by the supplier. Further, as noted by Justice Spender in this case, the maintenance of advertised prices indirectly amounts to maintenance of sale prices. The ACCC has a high level of sensitivity to conduct it suspects breaches the RPM provisions of the TPA and even if you’re not ultimately prosecuted for a breach of the TPA on this front, you can probably expect some form of investigation if the ACCC gets wind of just one incident involving this kind of conduct.
What exactly was Telwater doing?
From time to time, Telwater would determine a “brochure price” for boat, motor and trailer packages for its Quintrex and Stacer products (Brochure Price). While it was not obviously specifying a minimum resale price, Telwater was inducing dealers not to advertise those products for a price less than the Brochure Price. Telwater made it known to dealers that packages were to be advertised at the Brochure Price (or above).
Telwater also administered a marketing fund where advertising was paid for by Telwater only if the advertised price was the Brochure Price or above. It also kept a close watch on the dealers’ advertising and if it discovered that a dealer was advertising at below the Brochure Price it would contact the dealer to ask for an explanation as to why that was occurring. All of this was happening with the managing director’s knowledge, authorisation, and approval.
Importantly, there was no allegation that Telwater attempted to directly restrain the price at which dealers could sell their products: the only restrictions were on advertising. There was also no claim that Telwater terminated, or threatened to terminate, its relationship with a dealer because a dealer advertised the products below the Brochure Price. Further, because Telwater’s managing director was knowingly involved in the alleged conduct he was captured by section 76.
If you remember nothing else from this article, remember this…
This decision highlights two important words – induce and advertise. RPM is much more than requiring or forcing dealers to resell your products at your specified price, it also covers advertising and inducements to carry out certain behaviour.
How can you minimise the risk?
Whether your conduct is a breach of the TPA or not will depend on the particular circumstances of your case (the typical lawyer response). But in truth, it does depend and is always going to be a question of fact. However, there are a few simple steps that you can take to put your company and yourself (if you’re knowingly involved) on the better side of the ledger. They are:
- If you wish to give indications of prices (e.g. RRP), make it clear that they are recommended only and the reseller or distributor is free to sell or advertise at any price above or below.
- If you have policies for advertising or sales support, do not include requirements or any encouragement to only advertise or sell at the prices you specify.
- Look at your trade practices compliance program to make sure one of the issues addressed in training or in the manual is inducement and advertising in the specifics of RPM.
- Ensure that you review your trade practices compliance program as soon as the ACCC raises any concerns. If you don’t have a compliance program, put one in place right away.
Just for interest
RPM has long been treated by economists (of the Chicago School mainly) as a practice which is not anti-competitive and should not be illegal unless it substantially lessens competition. There are some pro-competitive arguments for RPM - it stimulates competition between brands, for example. More generally, there is a non-economic argument that suppliers should be able to protect their brands in highly competitive markets where there are substitutable items available (e.g. for luxury brands and discounting). In the United States (since late 2007), RPM is no longer an offence unless it substantially lessens competition essentially for those reasons. In Australia, however, that has not quite filtered through. So even if you are in a highly competitive market and trying to maintain pricing structures, you need to watch out so you do not breach these provisions.
Footnotes
- ACCC v Dell Computers Pty Ltd [2002] FCA 847
- ACCC v Signature Security Group Pty Ltd [2003] FCA 3
- ACCC v Telwater Pty Ltd [2009] FCA 263
