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The two-price must be the true price

Feature Articles

Cite as: April 2011 85(4) LIJ, p.52

Under a revamped consumer protection regime, the ACCC has been vigorously pursuing companies that quote misleadingly higher prices in comparison to “sale” prices.

By Jeremy Zwaigoft

Two-price advertising, often referred to as comparative price advertising, is the practice of a company advertising the sale price of a product in a manner which contrasts that sale price against a comparative higher price for the same or similar product (“comparative price advertising”).

The Australian Competition and Consumer Commission (ACCC) has recognised that comparative price advertising is a powerful marketing tool that wields significant influence over the buying decisions of consumers.1 The ACCC has been increasingly vigilant in investigating and taking enforcement action against companies that have engaged in comparative price advertising that did not comply with the Trade Practices Act 1974 (Cth) (TPA).

Competition and Consumer Act 2010 (Cth)

On 1 January 2011, the TPA was renamed the Competition and Consumer Act 2010 (Cth) (CCA), and the consumer protection provisions of the TPA that are relevant to this article, namely the former s52 (the general prohibition on misleading or deceptive conduct), s53 (the prohibition on false or misleading representations with respect to price) and s75AZC(1)(g) (the mirror offence provision to s53) of the TPA have been transplanted, in substantially the same form, into the new Australian Consumer Law (ACL) which forms a schedule to the CCA.

While this article considers comparative price advertising conducted in circumstances where the TPA regime applied, given the relevant TPA provisions have been materially replicated in the ACL, it is expected that the ACCC will apply similar treatment under the ACL regime.

Relevant provisions of the ACL

As with all price-based advertising, comparative price advertising must comply with ss18 and 29(1)(i) of the ACL.2

Section 18 of the ACL prohibits a company from engaging in conduct that is misleading or deceptive, or is likely to be such. Section 29(1)(i) of the ACL is more specific and prohibits a company from making false or misleading representations with respect to the price of goods or services.

Section 151(1)(i) also imposes a pecuniary penalty, potentially $1,100,000, on a company that makes false or misleading representations in respect of the price of goods or services.

Forms of comparative price advertising

Comparative price advertising commonly manifests itself in four forms: recommended retail price (RRP) advertising; “was/now” advertising; strike-through price advertising; and competitor price advertising.

Comparative price advertising will generally not offend the ACL if the overall impression created by the advertisement, in particular as to the saving that is implied to be available, is genuine. Any price comparison must not be illusory.3

RRP advertising

It is common practice for a company to advertise the price of its product compared to a higher RRP to illustrate the purported saving that a consumer will make in purchasing that company’s product.

A common misconception among companies is that the ACL will not be breached so long as the RRP is genuine. However, that is not necessarily the case.

Court-enforceable undertakings in respect of such practices, and as offered to the ACCC pursuant to s87B of the TPA (the predecessor to s218 of the ACL) by the JB Hi-Fi Group Pty Ltd,4 Lisat Holdings Pty Ltd (trading as Rubelli Designs)5 and Sheldon Park Pty Ltd (trading as Sportsmart)6 indicate that a company risks breaching the ACL in circumstances where that company has not sold the product for sale at that RRP for a reasonable period of time and in reasonable quantities immediately prior to the commencement of the “discount”. (Enforceable undertakings are discussed, under “The importance of compliance”.)

Was/now advertising

Similar to RRP advertising, was/now advertising is a powerful tool used to illustrate the savings that a consumer will make in purchasing a company’s product “now”, as opposed to an earlier, and by implication a later, point in time.

Importantly, if a company uses was/now advertising in circumstance where the company has not sold the product in question at the “was” price for a reasonable period of time and in reasonable quantities immediately prior to the “discount”, such advertising risks breaching the ACL.

Was/now advertising in the absence of a genuine “was” price was the target of an ACCC investigation into Snooze Management Pty Ltd and Snooze Sleep Well Pty Ltd (Snooze). The ACCC investigation culminated in late 2009 in Snooze offering enforceable undertakings to the ACCC.7

The practical reality is that companies tend to assuage the ACCC by offering up enforceable undertakings, and substantial guidance on the ACCC’s position in respect of was/now advertising can be found in the text of those undertakings. However, there are also several preeminent judicial decisions that serve to elucidate the judicial position in regard to such advertising.

(a) The Prouds case

The Federal Court decision of Australian Competition & Consumer Commission v Prouds Jewellers Pty Ltd8 considered the use of was/now advertising by Prouds in respect of 17 lines of jewellery advertised by Prouds in two catalogues in early to mid-2006.

The ACCC alleged (at [7]) that the “was” price advertised by Prouds breached the TPA as that price misleadingly represented:

  • the usual price at which the jewellery would have been purchased prior to the commencement of the sale (usual price representation);
  • that consumers would save the difference between the “was” price and the “now” price (savings representation);
  • that a substantial volume of sales prior to the sale period had occurred at the “was” price (volume representation);
  • in respect of three lines of jewellery, that those lines had actually been sold at the “was” price immediately prior to the sale period (prior actual sale price representation); and
  • that the jewellery had been offered for sale at the “was” price immediately prior to the sale period (prior offered sale price representation).

Moore J, while dismissing the ACCC’s claims in respect of the savings representation (at [48]–[49]),9 the volume representation (at [53]) and the prior actual sale price representation (at [55]), held that the usual price representation and the prior offered sale price representation were misleading (at [51] and [66]).

Moore J said that (at [70]):

“The contravening conduct of Prouds flows from the fact that the goods offered for sale in the context of dual pricing, were not offered for sale at the ‘was’ price immediately before the sale”; and

“In my opinion there would be no contravention of the Act . . . if the goods had been offered for sale at the ‘was’ price for a period of two months preceding the sale period. While there can be no precision about the length of time of the anterior period, it must represent a period of substance in which the goods were offered for sale at the ‘was’ price, and negotiated discounts aside, would have been purchased at that price”.

The decision of Moore J was upheld on appeal to the Full Federal Court.10

(b) The Terania case

In Australian Competition and Consumer Commission v Terania,11 the ACCC instituted proceedings against Terania Pty Ltd (Terania) and Australian Rug Expos Pty Ltd (Rug Expos). Terania and Rug Expos were in the business of conducting sales of rugs and manchester products at hired venues throughout Australia.

While the ACCC alleged numerous infringements of the TPA by Terania and Rug Expos,12 relevant for present purposes were the allegations that was/now advertising used by Terania and Rug Expos breached the TPA. In the evidence before the court, Terania and Rug Expos accepted that certain products were labelled with a higher price (the “was” price) and a lower price (the “now” price) when the products had not previously been offered for sale by Terania or Rug Expos for the “was” price (at [16]).

Mansfield J held that the advertising breached the TPA as “consumers were likely to have been misled into believing that the goods in question had previously been offered for sale at the was price, so that the sale price represented a significant reduction from the normal retail price” (at [20]).

(c) The StoresOnline case

It is also worthwhile noting the 2010 decision of Australian Competition and Consumer Commission v StoresOnline International Inc (No. 2).13

StoresOnline was in the business of conducting seminars and workshops with a view to selling licences to use its package of software and related goods and services (at [8]). Representatives of StoresOnline represented, among other things, that the full price of the package was $5600. It ultimately transpired that consumers who attended the workshop were able to purchase the package for $2700 for three websites or $4900 for six websites, and that the package had never been sold at the full price (at [23]).

While that case did not involve was/now advertising per se, Edmonds J drew parallels with the Prouds case to find that the fact that the package had never been offered for sale at the full price contravened the TPA (at [23], [25] and [26]).

By extension from the above, it is apparent that advertisements in the following forms will also risk breaching the ACL if the calculated saving is based on the difference between the current sale price and a higher price at which the product has not actually been sold for a reasonable period of time, and in reasonable quantities, immediately prior to the date of the “discount”:14

  • “save up to $X”;
  • “$X off”; and/or
  • “Y% off”.

Strike-through advertising

Strike-through advertising refers to the practice of a company advertising a price that has been struck through in proximity to (typically above) the actual sale price, which is lower than the struck-through price.

Even in absence of the words “was/now”, such advertising may breach the ACL if the represented saving between the struck-through price and the sale price is not genuine.

In Ascot Four Pty Ltd v Australian Competition & Consumer Commission,15 Ascot Four appealed to the Full Federal Court against the finding of the Federal Court that Ascot Four’s strike-through pricing breached the TPA. The Full Federal Court held, in dismissing the appeal, that Ascot Four had breached the TPA as the struck-through price represented to consumers that the products in question had actually been sold at the higher struck-through price prior to the sale period, when in fact they had not been sold at that price prior to the commencement of the sale period.

Competitor price advertising

Competitor price advertising refers to the practice of a company advertising its price for a given product, contrasted against the price charged by a competitor for such a product.

An interesting subset of competitor price advertising includes advertisements that compare the price of a company’s product against the price of a non-identical competitor product and represent the difference between the two as a saving available to consumers.

On that issue, in November 2008, online retailer Kogan Electronics Pty Ltd (Kogan) advertised several of its products in the form “Now only $X (save Y%)”. Following an investigation by the ACCC, it was noted that Kogan did not actually sell the products at the higher price and, of greater relevance for the purposes of competitor price advertising, the “savings” calculated by Kogan were based on the difference between Kogan’s price and an estimated price that a consumer might pay for a product with the same specifications as Kogan’s product but from another (unspecified) retailer.

In response to the ACCC’s concerns, Kogan conceded that such advertising likely contravened the TPA and provided the ACCC with enforceable undertakings.16

Generally speaking, competitor price advertising should be approached with caution. It is prudent to avoid the practice of comparing non-identical products for the purposes of illustrating “savings”, as such comparisons do not necessarily take into account other “value-adding” features of the comparative product.17

A high degree of caution is particularly important given that the competitor specified in the advertisement is likely to be instinctively driven towards defending its goods and services and, independent of any further action, may notify the ACCC of its concerns.18

The effect of disclaimers

The question of whether conduct is misleading or deceptive (or likely to be such) is largely fact-specific and driven by the overall impression created in the minds of consumers. Therefore, whether a disclaimer will be sufficient to prevent a consumer from being misled or deceived often turns on whether the disclaimer prominently dispels a representation that, in absence of the disclaimer, is misleading or deceptive.

In the context of comparative price advertising, the test applied by the ACCC in its investigation into Forty Winks provides useful guidance on the effectiveness (or lack thereof) of disclaimers.

In May 2005, Forty Winks advertised that consumers could “save up to $X” on particular products. The saving was calculated from the “normal ticketed price” of products (a price at which Forty Winks had not actually sold the product for a reasonable period of time and in reasonable quantities immediately prior to the date of the “discount”).

In fine print on the reverse of the catalogue, Forty Winks included the following disclaimer:

“Savings shown in the catalogue are off the normal ticketed prices. Forty Winks stores usually sell their products at less than the ticketed prices because we want to give our customers the best and most competitive prices we can. Accordingly, the comparisons to ticketed prices given in this catalogue are an indication of the maximum price from which savings are calculated, not necessarily the usual selling price of the product”.

The ACCC’s position was that the fine print disclaimer may not have been sufficient to prevent consumers from being misled or deceived as to the true nature of the saving, and thus was ineffective.

It is apparent that any disclaimer must be “clear and prominent” and explain the nature of the higher price used to calculate the purported saving in order to minimise the risk of breaching the ACL.19 A similar line was expressed, in the context of RRP advertising, in the enforceable undertaking offered up by Sportsmart.20

The importance of compliance

A significant number of investigations by the ACCC into companies’ advertising practices conclude in an investigated company offering enforceable undertakings to the ACCC.

While offering an enforceable undertaking to the ACCC may avoid the institution of time-consuming and costly litigation by the ACCC, an enforceable undertaking is far from a “slap on the wrist”.

The terms of an enforceable undertaking typically require the investigated company to, among other things:

  • undertake corrective advertising;
  • implement compliance programs; and
  • acknowledge that the undertaking will be available for public inspection.

Further, in April 2010, the ACCC received greater preventative, investigative and enforcement powers under the TPA.21 Those powers have been replicated in Part 5-1 of the ACL. In the context of comparative price advertising, the ACL empowers the ACCC to issue:

  • substantiation notices, requiring a company to, within 21 days, substantiate its comparative price advertising claims;22
  • infringement notices, if a company fails to respond to, or provides false or misleading information in, a substantiation notice;23 and
  • public warning notices to alert consumers to a suspected breach of the ACL or to non-compliance.24

Conclusion

Comparative price advertising is a powerful tool in the hands of companies to entice consumers to purchase a product for a price that appears to be an alluring discount.

The ACCC has acknowledged the seductive effect that represented savings have on consumers, and has been increasingly vigilant in investigating and enforcing apparent breaches of the TPA by reason of non-compliant comparative price advertising. This is likely to continue under the ACL regime.

In view of the costs and adverse publicity that may flow from a breach, it is important for companies (and their solicitors) to ensure that any advertising complies with the ACL.

JEREMY ZWAIGOFT is a legal counsel for the ASX listed company M2 Telecommunications Group Limited, practising in Melbourne. He regularly provides legal and compliance advice to the M2 group of companies in respect of consumer protection issues. The views and opinions expressed in this article are the views of the author and do not necessarily represent the views and opinions of the M2 Telecommunications Group Limited.

1. See, for example, the ACCC’s publication titled Price Comparison Advertising, 2009, p1, available at www.accc.gov.au/content/index.phtml/itemId/876614.

2. The successors to ss52 and 53(e) of the TPA.

3. Australian Competition and Consumer Commission, Advertising and Selling, (17 January 2011), p. 26, available at www.accc.gov.au/content/index.phtml/itemId/303213.

4. See undertaking dated 5 December 2006, TRIM document number D06/85555, available at www.accc.gov.au/content/index.phtml/itemId/772856.

5. See undertaking dated 22 October 2008, TRIM document number D08/107568, available at www.accc.gov.au/content/index.phtml/itemId/846848.

6. See undertaking dated 2 August 2005, TRIM document number D05/4855, available at www.accc.gov.au/content/index.phtml/itemId/701418.

7. See undertaking dated 18 November 2009, TRIM document numberD09/187186, available at www.accc.gov.au/content/index.phtml/itemId/902985.

8. [2008] FCA 75.

9. The court did not find a breach, as the ACCC pleading required the court to find that consumers would be misled into believing that the saving available was that between the “now” price and the price at which consumers actually bought the jewellery prior to the sale. In part due to the discount culture of the jewellery industry, consumers could not be said to be imputed with knowledge of the prices actually paid by consumers prior to the sale.

10. Australian Competition and Consumer Commission v Prouds Jewellers Pty Ltd [2008] FCAFC 199.

11. [2008] FCA 732 (Terania).

12. See the alleged representations in respect of a purported limited sale duration: Terania, note 11 above, at [7].

13. [2010] FCA 418.

14. See the undertaking offered to the ACCC by Forty Winks Franchising Pty Ltd dated 18 October 2005, TRIM document number D05/71838, available at www.accc.gov.au/content/index.phtml/itemId/715410.

15. [2009] FCAFC 61.

16. See undertaking dated 20 April 2009, TRIM document number D09/40388, available at www.accc.gov.au/content/index.phtml/itemId/870009.

17. Note 16 above, [12].

18. See note 3 above, p25.

19. See note 14 above.

20. See note 6 above at [12(b)].

21. See the “Consumer Law” reforms made to the TPA.

22. See ACL, Part 5-1, Div 2.

23. See, s134A(2)(h) of the CCA.

24. See ACL, Part 5-1, Div 3.

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