17 – Business Law Newsletter – Marketing and Sales Law Feature
In this edition:
- Trader Jailed for Failing to Supply Goods
- Commerce Commission Continues to Audit Industries for Compliance with ‘Unfair Contract Terms’ Legislation
- Agent Found Guilty of Attempted Price-Fixing with Principal in Ground-breaking Australian High Court Decision
- Commerce Commission Clamps Down on Misleading Advertising Claims
- Business Law Team
Trader Jailed for Failing to Supply Goods
In a New Zealand first, a prosecution initiated by the Commerce Commission against a mobile trader has resulted in a term of imprisonment.
Earlier this month, Vikram Mehta, the sole director and shareholder of Flexi Buy Limited, was sentenced to two years jail for obtaining a monetary benefit by deception, in breach of section 240 of the Crimes Act 1961.
Between late 2012 and early 2014, Flexi Buy, a household and electronic goods company, sold household and electronic goods door-to-door around the North Island. Customers were signed up to payment plans, and promised they would receive their goods after making a certain number of payments.
However, of some 300 orders placed by customers during this period, only nine orders were fulfilled.
In February 2016, Flexi Buy was fined $50,000 for breaching the Credit Contracts and Consumer Finance Act 2003 by failing to provide its customers with adequate disclosure of key information about their credit contracts.
Because of the seriousness of the offending, the Commission also filed charges under the Crimes Act 1961 against Vikram Mehta as a party to Flexi Buy’s conduct for obtaining money from customers by deception and accepting payment from customers without intending to supply the goods they had agreed to purchase.
Mr Mehta was found guilty of these criminal charges in November 2016, and sentenced to two years jail in the Auckland District Court on 3 March 2017.
In sentencing Mr Mehta, Justice Cunningham noted that “because of the seriousness of what occurred here, I am not minded to impose home detention. In my view it needs to be a sentence at the top of the hierarchy of sentences to send a message to Mr Mehta and any other persons who seek to, in my words, rip off vulnerable people, that such behaviour that breaches the criminal law will be met with the full force of the criminal law”.
Mr Mehta’s prison term sends a clear message to traders that serious consequences await those who deliberately fail to supply goods or services that customers have paid for.
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Commerce Commission Continues to Audit Industries for Compliance with ‘Unfair Contract Terms’ Legislation
The Commerce Commission is systematically reviewing industries that commonly use ‘standard form consumer contracts’ for compliance with New Zealand’s ‘unfair contract terms’ legislation, which came into force in 2015.
Having completed its reviews of standard form consumer contracts used by energy and telecommunications sectors in 2016, the Commerce Commission is now turning its attention to credit companies, rental car companies, gyms and online coupon deals.
Participants in these industries may be contacted by the Commission over the next few months, and asked to provide a copy of their standard form consumer contracts for the Commission to review.
The findings of the Commission’s industry reviews will be made publically available, and, where non-compliance is identified, the Commission may take enforcement action.
Getting the Green Light from the Commerce Commission
If your business uses standard form consumer contracts, and you have not done so already, we recommend reviewing these contracts for compliance with New Zealand’s ‘unfair contract terms’
Does your business use ‘standard form consumer contracts’?
‘Standard form consumer contracts’ are contracts which are provided to the consumer on a ‘take it or leave it’ basis, and not subject to any effective negotiation between the parties.
Businesses that commonly use standard form consumer contracts include airlines, telecommunications and energy retailers, rental vehicle operators, hire companies, gyms, self-storage facilities and online retailers.
What is an ‘unfair contract terms’?
Under section 26A of the Fair Trading Act 1986, businesses must not use ‘unfair contract terms’ in their standard form consumer contracts.
An ‘unfair contract term’:
- causes a significant imbalance in the parties’ rights and obligations;
- is not reasonably necessary to protect the trader’s interests; and
- if enforced, would cause a consumer to suffer detriment.
The Australian Experience – the Europcar Decision
In April 2016, Europcar became the first company in Australia to be prosecuted under Australia’s unfair contract terms legislation, on which New Zealand’s unfair contract terms law is modelled.
In the Europcar case, various terms in Europcar’s standard rental agreement were found to be unfair because they held consumers liable for vehicle loss or damage regardless of whether the consumer was at fault. Other terms were also found to be unfair because consumers were liable for vehicle loss or damage when they breached the rental agreement, no matter how trivial the breach or whether it had any connection to the loss or damage caused.
The Federal Court also found that, from December 2013 to July 2014, Europcar made false or misleading representations on its website that consumers’ liability for vehicle accident damage would be limited to a “Damage Liability Fee’ of $3650, or less if the consumer purchased Europcar’s ‘extra cover’ products. In fact, under Europcar’s standard rental agreement, consumers’ liability was not limited to these amounts in cases of overhead, underbody or water damage, even when “extra cover” products were purchased.
The Federal Court ordered Europcar to place a corrective advertisement in The Australian newspaper in every State, and pay a pecuniary penalty of AUD$100,000 and AUD$65,000 in legal costs for the ACCC.
Significantly, the Europcar litigation in Australia was prompted by an industry review undertaken by the ACCC which examined rental vehicle operators’ compliance with Australia’s unfair contract terms legislation.
With similar reviews anticipated in the New Zealand this year, rental vehicle operators, credit providers, gyms and online coupon traders may wish to initiate a review of their standard form consumer contracts now, and remove any unfair contract terms.
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Dr Maria Pozza
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Agent Found Guilty of Attempted Price-Fixing with Principal in Ground-breaking Australian High Court Decision
The recent Australian decision of Flight Centre v ACCC has important implications for travel agents, insurance brokers, mortgage brokers and other agents and their principals on both sides of the Tasman.
On 14 December 2016, the High Court of Australia held (in a four to one decision, with Chief Justice French dissenting) that Flight Centre had engaged in attempted price fixing with certain airlines’ in-house sales teams, in contravention of Australia’s anti-cartel laws (upon which sections 27 and 30 of New Zealand’s Commerce Act 1986 are modelled).
Central to the Flight Centre decision was the High Court of Australia’s finding that Flight Centre sold airline tickets in competition with the airlines. Flight Centre sold airline tickets in its capacity as an agent for the airlines, and argued that it was inconsistent with Australia’s anti-cartel laws that an agent could simultaneously sell airline tickets on behalf of, and in competition with, its principal. The majority of the High Court of Australia rejected this argument, holding that the existence of a legal agency arrangement did not, in and of itself, preclude the possibility that an agent and a principal might compete with each other in a market for goods or services.
The High Court of Australia’s finding that an agent and a principal can be understood as competitors for the purposes of Australia’s anti-cartel laws is likely to have significant knock-on effects. In both New Zealand and Australia, price-fixing and other forms of cartel conduct are multilateral offences, meaning they require the involvement of at least two parties. Prior to the High Court’s ruling in Flight Centre v ACCC, many assumed that as the actions of agents are ascribed to their principals under the law of agency, agents and principals would be treated as one party for the purposes of anti-cartel law enforcement – meaning that agents and principals could not comprise the minimum two parties necessary to give rise to a price-fixing arrangement.
In holding that an agent and a principal can compete with each other in selling the services of the principal, the High Court of Australia has opened the door for competition regulators such as the Australian ACCC and the New Zealand Commerce Commission to assess agency arrangements on their merits for compliance with anti-cartel laws.
We examine the facts and findings of the Court in Flight Centre, together with the implications of the decision for principals and agents in New Zealand, in further detail below.
Allegations in Flight Centre
By way of brief background, Flight Centre operates 140 retail stores in New Zealand and over 550 stores in Australia, making it the largest travel agency group in Australasia. Listed on the Australian stock-exchange, the company posted a $244 million profit for 2015-2016, and is forecasting between AUD$25 – $30 billion in sales over the next five years.
The conduct complained of in Flight Centre occurred during the period August 2005 – May 2008. During that time, Flight Centre held agency appointments to sell international airline tickets on behalf of various carriers pursuant to a standard form Passenger Sales Agency Agreement (‘Agency Agreement’), which had been prepared by the International Air Transport Association. The Agency Agreement stated that:
“[A]ll services sold pursuant to this Agreement shall be sold on behalf of the Carrier and in compliance with the Carrier’s tariffs, conditions of carriage and the written instructions of the Carrier as provided to the Agent. The Agent shall not in any way vary or modify the terms and conditions set forth in any Traffic Document used for services provided by the Carrier, and the Agent shall complete these documents in the manner prescribed by the Carrier”.
Under the Agency Agreement, Flight Centre was free to sell any ticket to any customer at any price. However, each airline notified Flight Centre of the fare for each ticket – known as the ‘Published Fare’ – through an electronic reservation system called the Global Distribution System. A percentage-based commission for Flight Centre was built in to each Published Fare. Upon sale of an air ticket, Flight Centre was required to remit the Published Fare, minus the percentage-based commission, to the airline. Regardless of whether Flight Centre sold an air ticket for the Published Fare, or a figure higher or lower than the Published Fare, the amount that Flight Centre was required to remit to the airline always remained the same (i.e. the Published Fare, less the percentage based commission). Accordingly, if Flight Centre sold an air ticket for more than the Published Fare, it would recover a greater margin comprising the percentage-based commission and the excess over the Published Fare. However, if Flight Centre sold an air ticket for less than the Published Fare, it would receive less than the percentage-based commission.
Significantly, a key feature of Flight Centre’s marketing strategy is a ‘lowest airfare guarantee’. In Australia at the relevant time, this involved Flight Centre promising to beat the price of an airline ticket quoted by any other Australian travel agent or website, including any website operated by an airline, by $1 and giving the customer a voucher for $20.
As Justices Kiefel and Gageler observed in their joint judgment in Flight Centre, the ‘lowest price guarantee’ made Flight Centre vulnerable to an airline choosing to offer tickets directly to customers at a discount to the Published Fare.
From time to time, Singapore Airlines, Malaysia Airlines and Emirates all offered airline tickets for sale through their websites at prices lower than the applicable Published Fares.
Flight Centre retaliated by sending a series of emails to these airlines between August 2005 – May 2009, demanding that each airline stop offering airline tickets to customers at a price lower than the applicable Published Fares. Flight Centre went so far as to threaten to stop selling the tickets of each airline if that airline did not agree.
In response, the Australian competition regulator, the ACCC, issued proceedings against Flight Centre alleging that it had engaged in attempted price-fixing.
Litigation in the Lower Courts
Original Federal Court Decision
The Flight Centre case was initially heard in the Australian Federal Court by Justice Logan, who found Flight Centre guilty of six counts of attempted price-fixing in a market for services relating to the distribution and booking of international travel. In respect of these offences, Justice Logan imposed a fine on Flight Centre of $11 million.
Flight Centre appealed to the Full Federal Court of Australia on substantive grounds and the question of penalty. ACCC cross-appealed on the issue of penalty, arguing that a fine of $11 million did not offer adequate deterrence for other businesses tempted to engage in similar conduct, given the Court’s findings about the nature of the illegal activity, and Flight Centre’s size and financial strength.
Appeal to the Full Federal Court
On 31 July 2015, the Full Federal Court upheld Flight Centre’s appeal, overturning Justice Logan’s decision and dismissing the ACCC’s cross-appeal on penalties.
The Full Federal Court held that Justice Logan had erred in finding a separate market for ‘booking and distribution services to customers’, and that the impugned conduct had in fact taken place in a market for ‘the supply of international passenger air travel’. While leaving open the possibility that agents and principals might compete in other markets, the Full Federal Court found that in the market for the supply of international passenger air travel, Flight Centre acted as an agent for, and not in competition with, Singapore, Malaysia and Emirates airlines.
The ACCC sought, and was granted, special leave to appeal to the Full Federal Court’s decision to the High Court of Australia.
Litigation in the High Court
The Findings of the Majority
The key question for the High Court of Australia was whether Flight Centre and the airlines were competitors in any market for goods or services. The majority of the High Court answered this question in the affirmative, holding that Flight Centre and each airline competed in a market ‘for the supply, to customers, of contractual rights to international air carriage’. Importantly, the majority concluded that ‘competition existed in this market notwithstanding that Flight Centre supplied in that market as agent for each airline’.
Chief Justice French’s Dissenting Judgment
In his lone dissenting judgment, Chief Justice French rejected the ACCC’s contention that Flight Centre was in competition with the airlines.
Reflecting on the traditional understanding of the agent/principal relationship, Chief Justice French considered that ‘the proposition that an agent and a principal, both selling the services of the principal, compete with each other in a market for the sale of those services does not command ready assent’.
Chief Justice French concluded that Flight Centre’s actions in selling airline tickets should properly be regarded as an action of the airline itself, meaning that ‘Flight Centre was not in competition, in any relevant market, with the airlines for which it sold tickets. Its proposals with respect to the pricing practices of its principals were not proposals offered by it as their competitor but as their agent…’.
Implications of Flight Centre for Agents and Principals in New Zealand
In Australia, Flight Centre v ACCC removes any doubt that agents can be considered to be in competition with each other for the purposes of Australian anti-cartel legislation. Consequently, agents and principals must take special care not to engage in price-fixing or other cartel-like activities, in circumstances where the principal also sells directly to consumers.
While the New Zealand courts are not legally bound to follow the High Court of Australia’s decision, given the degree of homogeneity between Australian and New Zealand anti-cartel laws, the findings of the majority in Flight Centre would be highly influential if a similar matter were to come before the New Zealand courts.
Accordingly, agents and principals who compete for sales in New Zealand would be wise to have their current agency arrangements reviewed for compliance with section 27 and 30 of the Commerce Act.
Affected parties may also like to call for the Government to progress the Commerce (Cartels and Other Matters) Amendment Bill, which has been languishing since receiving its second reading in Parliament on 26 November 2014. Amongst other things, the Bill proposes to:
- introduce a new cartel prohibition, which would replace the current prohibition on price fixing under section 30 of the Commerce Act; and
- provide an exemption to the cartel prohibition for ‘collaborative activities’.
On the current wording of the draft Bill, the collaborative activities exemption would immunise agents and principals from liability for cartel conduct in circumstances where:
- the agent and the principal are carrying on an enterprise, venture or other activity, in trade in cooperation;
- the agent and the principal are not carrying on the collaborative activity for the dominant purpose of substantially lessening competition between them; and
- fixing prices or other cartel conduct is reasonably necessary for the purposes of the collaborative activity.
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Commerce Commission Clamps Down on Misleading Advertising Claims
The Commerce Commission has been very active in enforcing the Fair Trading Act 1986 recently, with misleading pricing particularly high on the Commission’s agenda for 2017.
Making headlines last month were three high profile Fair Trading Act cases concerning well known brands Nurofen, Bike Barn and Bunnings, all of which were alleged to have engaged in misleading advertising.
These cases highlight the importance of truthfulness and accuracy in advertising, and serve as a reminder that all marketing strategies, regardless of how clever or effective, must comply with minimum legal standards of fairness and transparency.
We examine each case briefly below.
It was a painful start to 2017 for Reckitt Benckiser (New Zealand) Limited, who in early February received a $1.08 million fine for ‘highly misleading’ advertising claims relating to various products in Nurofen’s ‘specific pain range’.
Specifically, in the period between 2011 and 2015, Reckitt Benckiser advertised certain products in its ‘specific pain range’ (including Nurofen Migraine Pain, Nurofen Tension Headache, Nurofen Period Pain and Nurofen Back Pain) as ‘targeting’ a particular type of pain. These products were sold at a significantly higher price than other ibuprofen products.
Significantly, Reckitt Benckiser’s claims that its specific pain range products targeted a particular type of pain were completely untrue, with each product in fact containing exactly the same active ingredient – 342 mg ibuprofen lysine – and working identically to the other products.
In sentencing Reckitt Benckiser, Judge Jelas observed that it was “blatantly apparent they were in breach of their lawful obligations to New Zealand consumers”.
Following the decision, Commerce Commission Chairman Dr Mark Berry commented that the Commission takes “a particularly dim view where goods for human consumption are mis-described; especially where pharmaceutical or healthcare products are not promoted truthfully. With these types of products consumers have little opportunity to verify the claims being made and tend to rely heavily on what they are told by the trader. To be able to choose the product best suited for them, consumers must have accurate and reliable information”.
February 2017 also saw Bike Barn back-pedalling over misleading pricing claims, with the joint operators of the Bike Barn in New Zealand, the Bike Retail Group Limited and Bikes International Limited, fined $800,000 for employing false discount-pricing strategies.
In the period from 1 July 2013 to 30 June 2015, Bike Barn sought to attract customers by using exaggerated discounting strategies that gave the impression that customers were purchasing bikes at significant mark-downs from the normal retail price – typically 50% off. During the same period, Bike Barn also advertised clearance specials that gave customers the impression discounts were being offered for a limited time only.
Neither impression was correct. Of some 6,000 Bike Barn sales analysed by the Commission, only 30 bikes had been sold at full price, and products were commonly available at the same price both before and after advertised sales.
In sentencing Bike Barn, Judge Sharp described its conduct as ‘pervasive’ and ‘calculated’.
Commissioner Anna Rawlings described the Bike Barn judgment as sending “a strong message to all retailers that employ discounting strategies. Sales are an important marketing tool and, when genuine, drive competition and value for consumers. But it’s vital that deals offer a real saving and products are not promoted in a way that entices consumers to make a purchase under false pretences”.
Finally, the Commission also announced last month that it has filed 45 charges against Bunnings alleging that it misled consumers by advertising the prices of its goods as being the lowest on the market.
The Commission alleges that in the period from 1 July 2014 – 28 February 2016, Bunnings’ advertising activities (which include advertising in-store, online, on television, radio and in newspapers and catalogues), gave an overall impression that Bunnings offered the lowest prices for its products, when this was not true.
Each of the 45 offences carries a maximum fine of $600,000. The case will be called in the Auckland District Court for the first time on 7 May 2017.
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Business Law Team
If you have any queries in respect of the above, or any other business law issues, please contact a member of Lane Neave’s Business Law Team:
Disclaimer: The content of these articles are general in nature and not intended as a substitute for specific professional advice on any matter and should not be relied upon for that purpose.