8.5 - prohibited sales methods PDF

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Advertising and Sales: Consumer Law 1 Topic 5: Prohibited sales methods Introduction This topic explores a range of prohibited selling methods that all businesses must avoid. According to the Australian Competition and Consumer Commission these, and other scams, cost businesses and consumers across the country many millions of dollars each year. These prohibited sales methods we will examine are: 

inertia selling

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pyramid schemes

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bait advertising

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referral selling

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undue harassment or coercion

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deceptive pricing practices.

Each of these practices can lead to criminal as well as civil liability under the Australian Consumer Law (ACL). Fines of up to $220,000 for individuals and $1.1 million for corporations may be imposed on those found guilty of engaging in these practices. Civil remedies include injunctions (a court order that the conduct is to cease), awards of damages and corrective advertising (‘adverse publicity orders’). Defences include reasonable mistake, reasonable reliance on information supplied by third parties (eg, such as legal advice that turned out to be incorrect) and accident, omission or some other cause that was outside the defendant’s control.

Inertia selling Inertia selling involves sending unsolicited (unrequested) goods to consumers or other businesses, or providing unsolicited services to consumers or other businesses, in the hope that the recipient will feel obliged to pay for them. Module9:AdvertisingandSales:ConsumerLaw1 Topic5:Prohibitedsalesmethods 1 Copyright©WesternSydneyUniversity,2016

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Sometimes the recipient of the unordered goods may be told that there is a ‘time limit’ within which to return the unordered goods otherwise they will be responsible for payment , or threatened with legal action if they do not pay. The ACL prohibits businesses from asserting a right to payment for unordered goods or services. While it is legal to provide unsolicited goods or services, no right to payment may be made against the recipient. In effect, businesses may provide unsolicited goods or services but do so at their own risk. For example, if unsolicited goods have been received, and the recipient notifies the sender that the goods are not wanted, the sender must arrange to collect the goods (at the sender’s expense) within one month otherwise property in the goods automatically passes to the recipient. If the recipient does not provide any notification to the business property in the goods passes to the recipient three months after receipt. The ACL specifically prohibits the following forms of inertia selling: 

providing unordered goods or services and then asserting a right to payment (as described above) — s 40

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sending credit or debit cards to individuals (unless the individual has requested a card to be sent or it is a replacement card) — s 39

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claiming a right to payment for entries in ‘directories’ that a business or individual has not authorised or requested (this last one is surprisingly prevalent) — s 43.

Pyramid schemes Pyramid schemes are layered marketing schemes, so called because they operate (and make money) by encouraging larger and larger numbers of investors to participate in the scheme. The scheme works in the following way: individual investors are encouraged to purchase a share in the scheme with the promise that if they are able to attract a sufficient number of additional investors, they will make money. For example, each investor might be required to recruit eight additional investors before having the right to recover a profit. Eventually, the scheme fails because the scheme runs out of investors; that is, the investors at the ‘bottom’ of the scheme (who constitute the majority of investors) are unable to attract a sufficient number of participants and consequently, lose their money. These schemes make money from the (often large) fees, called ‘participation payments’, which new recruits must pay to join the scheme. There is very little, if any, actual selling of products. Pyramid schemes can be very convoluted in their structure in an attempt to avoid the law; quite often, some pretence will be made that a product or service is being traded in an attempt to lend legitimacy to the scheme. Sometimes ‘sales’ of (usually token) goods are involved, but this is always of secondary importance to the recruitment activity. Schemes that have been promoted Module9:AdvertisingandSales:ConsumerLaw1 Topic5:Prohibitedsalesmethods 2 Copyright©WesternSydneyUniversity,2016

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as clubs, profit sharing schemes and even motivational or self help programs have all been prosecuted when they turned out to be pyramid schemes instead. When the scheme collapses, as it must eventually do because there is no genuine sales activity supporting it, most of the participants will lose their investments. The ACL prohibits both participation in a pyramid scheme and ‘inducing’ others to participate. Regular participants, as well as the promoters of the scheme, may be prosecuted. Offences involving pyramid schemes are strict liability offences which means the intention of the person in entering into the scheme is irrelevant and affords no excuse to participation. Pyramid schemes should be differentiated from ‘multi-level marketing schemes’ which are legal. Multi-level marketing schemes make their money primarily from selling products and from sales commissions. The initial cost to a person joining the scheme is usually fairly low and may often just be the cost of an initial selling kit. There is genuine commercial activity going on and the participants are attracted to the scheme by the prospect of earning commissions from actual sales, not by payments they derive from recruiting other members. Pyramid schemes are dealt with by Part 3–1, Division 3 of the ACL.

Bait advertising Bait advertising involves luring or ‘baiting’ customers to your business with offers of bargain goods or services which either do not exist or do not exist in sufficient quantities to satisfy demand. Advertising goods or services at a specified price when the advertiser knows, or ought reasonably to know, that it does not have reasonable quantities available for a reasonable period is an offence under the ACL. Failing to supply the goods at the specified price in reasonable quantities for a reasonable time is a corresponding offence. Customers may be given rainchecks to return later when more stock is available and purchase the goods at the same price. Substitution of an equivalent product or brand in place of the one advertised will also avoid liability for bait advertising. By comparison to bait advertising, ‘loss leadering’ is perfectly acceptable. It involves advertising very cheap prices on some products to attract customers. So long as there are sufficient stocks available at the advertised price there will be no bait advertising. Loss leadering is a common practice in supermarkets and works on the idea that customers will almost always buy additional items once they are in the supermarket. Bait advertising is dealt with by s 35 of the ACL.

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Other prohibited sales methods The following sales methods or behaviours are also prohibited by the ACL.

Referralselling Referral selling is a sales method by which consumers are induced to buy a product by the offer of a rebate, commission or other benefit if they introduce the product to another person, but only if the other person actually buys the product. Referral selling is dealt with by s 49 of the ACL.

Undueharassmentorcoercion Undue harassment or coercion refers to a range of conduct from high pressure selling tactics, such as repeatedly ‘pestering’ the consumer, to threatened or even actual force or physical violence. Breaches are not just committed by salespeople but often by debt collection agencies. Behaviour at the worse end of the scale is likely to engage the criminal law, as well as being subject to hefty fines under the ACL. Undue harassment or coercion is dealt with by s 50 of the ACL.

Deceptivepricingpractices Deceptive pricing practices refers to a range of actions in relation to the pricing of goods or services. A notable example is the failure to specify a single, all inclusive, price for goods or services, such as a café failing to provide a full price for items affected by 10% Sunday or public holiday surcharges. The actual price is required to be specified — simply indicating that there is a 10% surcharge is not sufficient and will place the business in breach of the law. The requirement to specify a single price for goods or services is provided by s 48 of the ACL.

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