Part 1: substantiation notices and public warning notices
This article first appeared in the Australian Competition & Consumer Law Tracker, CCH, Issue 11, November 2011.
Introduction
Australian consumer laws have undergone a great deal of change in the last two years. While much of the recent commentary on these changes has related to the new legislation which commenced in January 2011,[1] in many ways the more profound changes occurred 18 months ago.[2] In April 2010, the Australian Competition and Consumer Commission (ACCC) received a wide range of new powers and access to a number of new remedies for combating suspected breaches of consumer protection and unconscionable conduct laws.
In this three-part article, I will be discussing the new powers and remedies which have been given to the ACCC to assist it in its fight against breaches of the Australian Consumer Law (ACL). I will also be conducting a stocktake of how the ACCC has used these powers and remedies in practice over the first 18 months since their introduction.
My stocktake of how the ACCC has used its new powers and remedies confirms the concern held by many legal practitioners at the time of their introduction that these new powers and remedies were likely to tilt the balance too heavily in favour of the ACCC. The ACCC now has a comprehensive and quite unparalleled armoury of powers which it can use to combat suspected breaches of consumer protection and unconscionable conduct laws. Furthermore, the ACCC has also shown that it is very willing to use these new powers and remedies regularly and aggressively to obtain its desired outcomes.
Background
The new powers and remedies were introduced into the Trade Practices Act 1974 (TPA) in April 2010. In January 2011, the TPA was renamed and replaced by the Competition and Consumer Act 2010 (CCA). Therefore, the ACCC had access to these new powers and remedies for nine months prior to the renaming of the TPA. The main change brought about by the enactment of the CCA in January 2011, was the amalgamation of all consumer protection laws into Schedule 2 of the CCA, which is also known as the ACL. The ACL has replaced all of the various state and territory fair trading laws to create, for the first time, a truly national system of consumer protection laws.[3] As part of this reform process, the ACCC gained a wide range of intrusive investigatory powers as well as access to a range of new remedies to combat alleged breaches of the ACL.
The ACCC’s new powers and remedies
The new enforcement powers the ACCC gained in April 2010 were the power to issue:
- substantiation notices
- public warning powers
- infringement notices.
- civil pecuniary penalties
- disqualification orders
- non-party redress orders.
A substantiation notice is a notice which "requires a supplier to provide a consumer regulator with a basis for representations that it makes regarding its supply of goods and services".[4] Under s 219 of the ACL, the ACCC has the ability to issue a substantiation notice to persons who have made a claim or representation promoting the supply of goods or services, or an interest in land or employment. The person (which includes corporations) can be required to provide information or documents to substantiate or support their claims or representations. The period for compliance with a substantiation notice is 21 days unless extended by the ACCC under s 220.
The second element is that one or more persons are likely to suffer detriment because of the conduct. The legislation does not require that the consumer must actually suffer detriment, but rather that it be likely that the consumer will suffer detriment. This approach is appropriate given that the entire rationale for the new power is to empower the ACCC to take action before consumers have suffered any financial detriment.
The third element of the legislation is the most onerous for the ACCC when using its public warning power. This element requires that the ACCC be satisfied that it is in the public interest to issue a public warning. This will require that the ACCC balance up the utility of issuing a public warning notice with other strategies such as commencing rapid court action or seeking ex parte injunctions. In applying the public interest test, it may also be incumbent on the ACCC to consider the negative impact that issuing a public warning notice may have on a business' ability to continue trading.
Finally, the legislation provides that the ACCC can issue a notice where a business has failed to respond to a substantiation notice. In these circumstances, the ACCC must also satisfy itself that it is in the public interest to issue a notice.
At the time of writing this article, the ACCC has only issued one public warning notice since it obtained this new power in April 2010.[11] On 20 August 2010, the ACCC issued a public warning notice in relation to a number of companies which were advertising part time parcel delivery businesses.[12] The ACCC suspected that the following companies had breached the relevant legislation by making misleading claims about the income to be earned from delivering Heartlink-branded household products to independent supermarkets:
The ACCC then issued the following specific warning to the public:
There are three main concerns about the ACCC’s power to issue public warnings.
1. The first concern about the public warning power is that it may be exercised by the ACCC against a company which has not, in fact, engaged in any illegal conduct. Clearly, a public warning issued by the ACCC about any business is likely to have devastating consequences for that business. The public warning notice will have the effect of preventing prospective consumers from dealing with that business. Another likely consequence is that current customers of that business (who may have been quite happy with the business before the public warning was issued), may now want their money back because they believe that the business is disreputable. Despite the devastating effects of a public warning notice on a business, there is no provision in the ACL to permit a business who may have been incorrectly accused of illegal conduct through a public warning notice to seek compensation.
2. The second concern is that there is no obligation on the ACCC to advise the public if its concerns about a business’ conduct have subsequently proved to be without foundation. This is in contrast with the provisions relating to the issuing of safety warning notices under the ACL. Under s 129 of the ACL, the Minister can issue a safety warning notice if he or she believes that a good will cause injury or that a reasonably foreseeable use or misuse of a good will or may cause injury. The Minister is also required under s 130 of the ACL to announce publicly the results of any investigation into the supplier/s if the investigation has not resulted in any formal corrective action. In other words, the Minister must advise the public if the relevant investigation into the product safety issue has not disclosed any safety concerns. Accordingly, it seems strange not to have a similar obligation to s 130 included in the ACL in relation to public warning notices.
3. The final concern about public warning notices is that the ACCC does not have to have the intention, prior to issuing the public warning notice, of taking the relevant business or businesses to court. In other words, there is no obligation on the ACCC to follow through on its public warning by commencing legal action against a business which has been the subject of a public warning. In the matter discussed above, the ACCC did ultimately take follow-up legal action against the three companies and two of the directors after it issued the public warning.[15] However, it is still possible that a business which has been the subject of a public warning notice may never get the opportunity to refute or challenge the ACCC’s allegations in court.
One can appreciate the benefits of using the public warning power in relation to blatant fly by night operators. There is a considerable public interest in warning unsuspecting consumers about such fly by night operators as soon as possible, as often the money obtained by such operators is immediately siphoned overseas to distant jurisdictions and their Australian operations liquidated. However, it is unfortunate that given the obviously devastating consequences that a public warning notice will have on a business, that additional accountability safeguards were not included in the ACL to govern its use.
In the Part 2 to this article, I will be discussing the ACCC’s power to issue infringement notices and the extensive use which the ACCC has made of this power since its introduction in April 2010.
[11] Public warning notice register (s. 86DA),
http://www.accc.gov.au/content/index.phtml/itemId/943316.
[13]ACCC News Release, Distribution
scheme 'business opportunity' draws ACCC's first public warning, NR 170/10,
Failure to comply with a substantiation notice is a criminal offence with a maximum criminal penalty of $16,500 for a corporation or $3,300 for an individual: s 205. Providing false or misleading information in response to a substantiation notice is also a criminal offence with a maximum criminal penalty of $27,500 for a corporation or $5,500 for an individual: s 206.
Previously, the ACCC's practice was to request information from a business either on a voluntary basis or in accordance with a s 155 notice. Under an s 155 notice, a business could be compelled to produce information and/or documents to the ACCC. Prior to issuing a s 155 notice, the Chairperson of the ACCC had to satisfy themself that they had reason to believe that the business had information or documents which related to a matter which constituted, or may have constituted, a contravention of the TPA. While the requirement to form a "reason to believe" did not involve a very high burden for the ACCC, it did impose some evidentiary threshold.
The evidentiary threshold that the ACCC must satisfy now before issuing a substantiation notice is significantly lower. The ACCC only needs evidence of a claim or representation before exercising its powers. The ACCC does not need to have a reasonable belief or reasonable grounds for suspecting a breach of the ACL before issuing a substantiation notice. The availability of substantiation notices gives the ACCC the ability to move much more quickly against traders which have made, in the ACCC's opinion, outlandish claims about the uses and benefits of their goods or services.
A good example of a case where the ACCC most probably used its new substantiation notice powers is the Power Balance matter.[5] In this matter, the ACCC appears to have issued a substantiation notice or notices to Power Balance Australia Pty Ltd (Power Balance) to ascertain whether the company could substantiate its claims that its wristbands and pendants “improve[d] balance, strength and flexibility and worked positively with the body’s natural energy field”.
Power Balance admitted that there was no credible scientific basis for the claims that they were making about their wristbands and pendants. The company also admitted that it had no reasonable grounds for making the representations about the benefits of its products. It seems that these admissions may have been made in response to a substantiation notice or notices from the ACCC. As a consequence of making these admissions, Power Balance agreed to a range of remedies including refraining from making such representations in the future unless they could be supported by an independent testing agency. It also offered consumers full refunds.
The Power Balance case provides a good example of the types of cases where the ACCC will be able to use its new substantiation notice powers to quickly and effectively to stop outlandish representations, particularly about the health benefits of products.
The main concern prior to the introduction of the substantiation notice power was that the ACCC may simply 'churn out' substantiation notices, rather than going to the effort of actually collecting evidence to prove a contravention of the CCA. This has not eventuated. The ACCC has used the substantiation notice very sparingly since its introduction in April 2010. As at the end of August 2011, the ACCC had only issued five substantiation notices.[6]
Having said this, there are some indications that the ACCC will be using its substantiation notice powers much more often in the future. The current Chairman of the ACCC, Mr Rod Sims, has stated in a speech that the ACCC is likely to make greater use of its substantiation notice powers as part of its role in preventing carbon tax price gouging.[7] Indeed, the substantiation notice power will be the ideal tool for the ACCC in investigating the basis for business claims that their prices have increased by a particular amount due to the introduction of the carbon tax.
Public warning powers
The ACL also provides the ACCC with the power to issue a public warning about a trader. In this regard, An Australian Consumer Law: Fair Markets - Confident Consumers, which recommended the introduction of the ACL, stated that: "public warnings [will be] issued to inform the public of potentially harmful conduct taking place in the very short term."[8]
Public warning powers were intended to be directed against:
The ACCC’s power to issue a public warning notice is contained in s 223(1) of the ACL which states that:
The evidentiary threshold that the ACCC must satisfy now before issuing a substantiation notice is significantly lower. The ACCC only needs evidence of a claim or representation before exercising its powers. The ACCC does not need to have a reasonable belief or reasonable grounds for suspecting a breach of the ACL before issuing a substantiation notice. The availability of substantiation notices gives the ACCC the ability to move much more quickly against traders which have made, in the ACCC's opinion, outlandish claims about the uses and benefits of their goods or services.
A good example of a case where the ACCC most probably used its new substantiation notice powers is the Power Balance matter.[5] In this matter, the ACCC appears to have issued a substantiation notice or notices to Power Balance Australia Pty Ltd (Power Balance) to ascertain whether the company could substantiate its claims that its wristbands and pendants “improve[d] balance, strength and flexibility and worked positively with the body’s natural energy field”.
Power Balance admitted that there was no credible scientific basis for the claims that they were making about their wristbands and pendants. The company also admitted that it had no reasonable grounds for making the representations about the benefits of its products. It seems that these admissions may have been made in response to a substantiation notice or notices from the ACCC. As a consequence of making these admissions, Power Balance agreed to a range of remedies including refraining from making such representations in the future unless they could be supported by an independent testing agency. It also offered consumers full refunds.
The Power Balance case provides a good example of the types of cases where the ACCC will be able to use its new substantiation notice powers to quickly and effectively to stop outlandish representations, particularly about the health benefits of products.
The main concern prior to the introduction of the substantiation notice power was that the ACCC may simply 'churn out' substantiation notices, rather than going to the effort of actually collecting evidence to prove a contravention of the CCA. This has not eventuated. The ACCC has used the substantiation notice very sparingly since its introduction in April 2010. As at the end of August 2011, the ACCC had only issued five substantiation notices.[6]
Having said this, there are some indications that the ACCC will be using its substantiation notice powers much more often in the future. The current Chairman of the ACCC, Mr Rod Sims, has stated in a speech that the ACCC is likely to make greater use of its substantiation notice powers as part of its role in preventing carbon tax price gouging.[7] Indeed, the substantiation notice power will be the ideal tool for the ACCC in investigating the basis for business claims that their prices have increased by a particular amount due to the introduction of the carbon tax.
Public warning powers
The ACL also provides the ACCC with the power to issue a public warning about a trader. In this regard, An Australian Consumer Law: Fair Markets - Confident Consumers, which recommended the introduction of the ACL, stated that: "public warnings [will be] issued to inform the public of potentially harmful conduct taking place in the very short term."[8]
Public warning powers were intended to be directed against:
“'fly by night' operators, itinerant traders and financial, investment and property spruikers and advisors who often move across state and territory borders.”[9]Therefore, the intended focus of this new power was on bogus traders who simply seek to misappropriate money from consumers and then vanish, making subsequent legal action against them all but impossible.
The ACCC’s power to issue a public warning notice is contained in s 223(1) of the ACL which states that:
“The regulator [that is, the ACCC or local fair trading agency] may issue to the public a written notice containing a warning about the conduct of a person if:
(a) the regulator has reasonable grounds to suspect that the conduct may constitute a contravention of a provision of Chapter 2, 3 or 4 [of the ACL[10]]; and
(b) the regulator is satisfied that one or more other persons has suffered, or is likely to suffer, detriment as a result of the conduct; and
Therefore the elements of the public warning power are:
(c) the regulator is satisfied that it is in the public interest to issue the notice.”
- the ACCC must have reasonable grounds to suspect that conduct being engaged in may constitute a breach of the ACL
- one or more persons are likely to suffer detriment as a result of the conduct
- the ACCC is satisfied that it is in the public interest to issue the notice.
The second element is that one or more persons are likely to suffer detriment because of the conduct. The legislation does not require that the consumer must actually suffer detriment, but rather that it be likely that the consumer will suffer detriment. This approach is appropriate given that the entire rationale for the new power is to empower the ACCC to take action before consumers have suffered any financial detriment.
The third element of the legislation is the most onerous for the ACCC when using its public warning power. This element requires that the ACCC be satisfied that it is in the public interest to issue a public warning. This will require that the ACCC balance up the utility of issuing a public warning notice with other strategies such as commencing rapid court action or seeking ex parte injunctions. In applying the public interest test, it may also be incumbent on the ACCC to consider the negative impact that issuing a public warning notice may have on a business' ability to continue trading.
Finally, the legislation provides that the ACCC can issue a notice where a business has failed to respond to a substantiation notice. In these circumstances, the ACCC must also satisfy itself that it is in the public interest to issue a notice.
At the time of writing this article, the ACCC has only issued one public warning notice since it obtained this new power in April 2010.[11] On 20 August 2010, the ACCC issued a public warning notice in relation to a number of companies which were advertising part time parcel delivery businesses.[12] The ACCC suspected that the following companies had breached the relevant legislation by making misleading claims about the income to be earned from delivering Heartlink-branded household products to independent supermarkets:
- Halkalia Pty Ltd (the sole director being Mr Norman Lander)
- Heartlink Enterprises Pty Ltd (the sole director being Ms Vicki Lowe)
- National Semi-Retired Group Pty Ltd (the sole director being Mr Laurence Hann).
The ACCC then issued the following specific warning to the public:
“The ACCC is warning the public that the advertisements may be misleading and that individuals who pay money for the advertised business opportunity may derive no earnings from the business.”[14]The ACCC can also issue public warning notices under s 51ADA of the CCA in relation to suspected breaches of an applicable industry code of conduct, such as the Franchising Code of Conduct. The test for issuing such a notice is the same as the test under s 223 of the ACL.
There are three main concerns about the ACCC’s power to issue public warnings.
1. The first concern about the public warning power is that it may be exercised by the ACCC against a company which has not, in fact, engaged in any illegal conduct. Clearly, a public warning issued by the ACCC about any business is likely to have devastating consequences for that business. The public warning notice will have the effect of preventing prospective consumers from dealing with that business. Another likely consequence is that current customers of that business (who may have been quite happy with the business before the public warning was issued), may now want their money back because they believe that the business is disreputable. Despite the devastating effects of a public warning notice on a business, there is no provision in the ACL to permit a business who may have been incorrectly accused of illegal conduct through a public warning notice to seek compensation.
2. The second concern is that there is no obligation on the ACCC to advise the public if its concerns about a business’ conduct have subsequently proved to be without foundation. This is in contrast with the provisions relating to the issuing of safety warning notices under the ACL. Under s 129 of the ACL, the Minister can issue a safety warning notice if he or she believes that a good will cause injury or that a reasonably foreseeable use or misuse of a good will or may cause injury. The Minister is also required under s 130 of the ACL to announce publicly the results of any investigation into the supplier/s if the investigation has not resulted in any formal corrective action. In other words, the Minister must advise the public if the relevant investigation into the product safety issue has not disclosed any safety concerns. Accordingly, it seems strange not to have a similar obligation to s 130 included in the ACL in relation to public warning notices.
3. The final concern about public warning notices is that the ACCC does not have to have the intention, prior to issuing the public warning notice, of taking the relevant business or businesses to court. In other words, there is no obligation on the ACCC to follow through on its public warning by commencing legal action against a business which has been the subject of a public warning. In the matter discussed above, the ACCC did ultimately take follow-up legal action against the three companies and two of the directors after it issued the public warning.[15] However, it is still possible that a business which has been the subject of a public warning notice may never get the opportunity to refute or challenge the ACCC’s allegations in court.
One can appreciate the benefits of using the public warning power in relation to blatant fly by night operators. There is a considerable public interest in warning unsuspecting consumers about such fly by night operators as soon as possible, as often the money obtained by such operators is immediately siphoned overseas to distant jurisdictions and their Australian operations liquidated. However, it is unfortunate that given the obviously devastating consequences that a public warning notice will have on a business, that additional accountability safeguards were not included in the ACL to govern its use.
In the Part 2 to this article, I will be discussing the ACCC’s power to issue infringement notices and the extensive use which the ACCC has made of this power since its introduction in April 2010.
[1] In January 2011, the Trade
Practices Act 1974 was renamed
and replaced with the Competition and
Consumer Act 2010. This also saw
the introduction of the Australian Consumer Law.
[2] The period of 18 months is calculated from 15 April 2010 to 15 October 2010 .
[3] An Australian Consumer Law: Fair Markets -
Confident Consumers, 17 February 2009 , available
at www.treasury.gov.au/contentitem.asp?NavId=037&ContentID=1482
(ACL: Fair
Markets).
[4] ACL: Fair Markets, op.
cit., 46.
[5] It is the ACCC’s policy to not disclose the identities
of parties who have been issued with a substantiation notice. This is
consistent with its existing policy of not disclosing the identities of parties
who have been issued with section 155 Notice or been served with a search
warrant. Accordingly, I can only speculate about which particular ACCC
investigations the ACCC used its new substantiation notice powers. I believe that there is a very highly
likelihood that the ACCC used its substantiation notice powers in the Power
Balance matter. ACCC News Release, Power
Balance admits no reasonable basis for wristband claims, consumers offered
refunds, NR 284/10, 22 December 2010 , available at http://www.accc.gov.au/content/index.phtml/itemId/964074.
[6] The ACCC’s
initial experience with Australian Consumer Law remedies and powers, Speech
by Peter Kell, Deputy Chair of the ACCC to the 36th Competition and
Consumer Workshop, 26-28 August 2011, 2, available at http://www.cch.com.au/AttachmentLibrary/MarketingPromo/Peter_Kell_The_ACCC%E2%80%99s_initial_experience_with_Australian_Consumer_Law_remedies_and_powers.pdf
(Speech by Peter Kell).
[7] Some compliance
and enforcement issues, Speech by Rod Sims, Chairman of the ACCC to the Law
Institute of Victoria, 25 October 2011, 7, available at http://www.accc.gov.au/content/item.phtml?itemId=1014098&nodeId=19e390ff37e28f4162412d52635be1a4&fn=Some%20compliance%20and%20enforcement%20issues.pdf.
[8] ACL: Fair Markets, op.
cit., 47.
[9] Ibid.
[10] Chapter 2 of the ACL deals with misleading or deceptive conduct,
unconscionable conduct and unfair contract terms. Chapter 3 deals with false or misleading
representations, unsolicited supplies, pyramid schemes, pricing issues,
consumer guarantees, unsolicited consumer agreements, lay-by agreements, product
safety, information standards and defective goods. Chapter 4 deals with the
same types of conduct as are contained in Chapter 3. However, contraventions of
Ch 4 are criminal offences.
[11] Public warning notice register (s. 86DA),
http://www.accc.gov.au/content/index.phtml/itemId/943316.
[12] Trade Practices
Act 1974 Section 86DA Public Warning Notice, 20 August 2010 , available athttp://www.accc.gov.au/content/item.phtml?itemId=943358&nodeId=fd4dc116921390237549e0970958b939&fn=%20Notice.pdf
(Public Warning Notice).
[13]ACCC News Release, Distribution
scheme 'business opportunity' draws ACCC's first public warning, NR 170/10,
20th August
2010 , available at
http://www.accc.gov.au/content/index.phtml/itemId/943380/fromItemId/927069.
[14] Public Warning Notice, op. cit..
[15]ACCC v Halkalia Pty Ltd & Ors, VID362/2011 available at https://www.comcourts.gov.au/file/Federal/P/VID362/2011/actions.
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