Sample Question and Guided Answer (Consumer Law) - Law PDF

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200909 - ENTERPRISE LAW SAMPLE EXAM QUESTION – Consumer Law (Modules 9 and 10) Use your notes and revision materials to attempt an answer to the following question *before* working through the guided exercise starting on the next page … Crafty Chocolate Company (‘Crafty’) has developed a new type of chocolate which they claim causes weight loss. The product is called ‘Chocoslim’. Crafty has developed a series of television infomercials that are run during morning and daytime talk shows, and also a print advertising campaign, both of which prominently feature the statement: ‘This chocolate actually makes you lose weight. Eat as much as you like and you’ll STILL lose weight — the more you eat the more you lose!’. The advertisements also state that the product has been scientifically formulated to give the maximum weight loss benefits and include photographs of a laboratory technician with some scientific equipment to support this claim. ‘Before and after’ photographs of persons who claim to have lost large amounts of weight by eating Chocoslim appear in both campaigns along with the statement: ‘95% of our customers lost 7–10kg in the first month of using Chocoslim!’. The television infomercials also include interviews with satisfied customers. It turns out that the ‘satisfied customers’ are really actors who have been told what to say, and the ‘before and after’ photographs have been artificially altered to look as though the subjects have lost weight. Nevertheless, the advertisements work well and Crafty is flooded with orders for Chocoslim. However, after several weeks have passed, customers start complaining that they are not losing weight and in fact most have gained weight, in some cases quite dramatically. Other businesses specialising in weight loss supplements are also unhappy about Crafty’s advertising. Tom has purchased a carton of the Chocoslim product for $550 from Weight for Me Pty Ltd (WFM) – an online supplier who sell various weight loss supplements including Chocoslim. When Tom hears about the ‘scam’ on Facebook, he seeks a refund from WFM, but they refuse to give him one on the grounds that he has to get the refund from Crafty, and not from the ‘supplier’ / retailer that he bought the product directly from. WFM also tells Tom that he would in any case have to return the carton to them unopened (in its original packaging) first. Tom does not have the original packaging any more. Answer the following questions and support your answers with reference to relevant legal principles. a. Could the ACCC successfully sue Crafty for misleading or deceptive conduct, or for false or misleading representations? Why or why not? b. What aspects of the advertisements should Crafty change, and why? How would you suggest they protect themselves against the possibility of consumers misunderstanding their advertisement/s in future? c. Is Tom entitled to a refund? Why or why not?

GUIDED EXERCISE for use in developing a SAMPLE / OUTLINE ANSWER A. Crafty could be sued for misleading or deceptive conduct (s 18 ACL) or for false or misleading representations (s 29 ACL), either at the instigation of a customer or customers (less common), a competitor, or on the ACCC’s own motion (often acting on customer complaints). 1. First consider the elements / issues that arise when we’re looking at s 18 (‘ACL’ is fine to use as an acronym for the Australian Consumer Law). We need the following: a. Conduct occurring in trade or commerce: this is clearly satisfied as advertisements are obviously commercial in nature, and constitute ‘conduct’ for the purposes of s 18. Crafty is also a ‘person’ for the purposes of the ACL, as ‘person’ includes artificial persons such as corporations. So s 18 applies to Crafty in relation to these threshold elements. b. We then need to consider the 3 step test to see whether consumers were likely to be ‘led into error’ by this advertisement. We do this by: i.

Identifying the target audience - the advertisements could be described as directed to the public at large, or perhaps to a slightly more specific market of those wanting to lose weight;

ii.

Explain the message this advertisement conveys to that particular audience - the aspects listed in the question (text, photos, interviews) convey the message that the product has dramatic weight loss benefits, that requires no work on their part, that they can eat chocolate and lose weight, that it actually does work, and also suggests that it is scientifically tested; and then

iii.

whether this leads those consumers into error – does it tell consumers something about the product that is untrue? Fairly clearly here the messages do, although strong answers might go on from here to consider how sceptical the audience might be about these types of claims (ie, would they really believe them, given how ‘unreal’ they seem?).

A brief statement to the effect that it does not matter whether or not Crafty intended to convey this misleading message to their audience of consumers – intention to mislead or deceive is not required for s 18. It also doesn’t matter whether or not anyone has actually been misled or deceived by the advertisement – the ACCC would not need to prove that, although we do know of at least one person, Tom, and the others who have complained, but importantly actual misleading isn’t a necessary element for this action, although it is helpful if you can point to individuals who have been misled. The question has therefore given us a fairly straightforward example of misleading or deceptive conduct.

2. Next consider s 29 of the ACL. This one requires a representation – we can think of that as a specific statement of facts that the maker is claiming about their product. Start by asking yourself is there a representation being made here – if so, what is that representation? Here the representations are quite easy to identify – for example, there are various statements made about the Chocoslim product, such as the text statements and the ‘before and after’ photos, although it could be arguable whether the photos of the lab/scientists makes quite so definite a representation (I would argue it does though). We then apply a similar test to the one in s 18 (remember for the exam that you may cross-refer if you feel you need to repeat anything like this) – here it would be: a. Identify the relevant class of consumers / target audience to whom the advertisement is directed b. Determine what representation the advertisement would convey / give to a typical ‘reasonable’ member of that class / audience c. Determine whether that representation is true or false (or misleading) about the product? For s 29 we also need to identify the category or type of contravention that this representation falls into. Look over the list in the textbook and/or the table in the online module and find the one this situation relates to. I would place this situation under the category of ‘uses or benefits’ the product claims to have and/or (possibly) the ‘quality’ aspect of the first category as well – ie, that the product has a quality of making people lose weight (there is arguably some similarity here with cases about ‘green’ or ‘free-range’ types of claims that turn out to be untrue). But the uses or benefits aspect fairly clearly covers this situation. A finding that s 29 applies brings us to the point that s 29 is an offence provision carrying large fines (up to $220,000 for individuals and $1.1M for corporations). It might also be worth mentioning that, like s 18, s 29 does not require that Crafty intended to convey a false or misleading representation – neither does the ACCC need to be able to prove that some members of the target class of consumers have actually been misled (although we do know that some have). B. Crafty should reconsider most aspects of this advertisement: specifically the claims made in the text, the before and after photos (these should not be altered), the ‘satisfied customers’ should obviously not be actors, but genuine comments and they should not show the lab photos unless they actually have conducted lab tests. If Crafty does not want to change the problematic aspects of the advertisements, then they need to be able to back up their claims - they need to be able to prove the product does work (seeing as that’s the message they are sending), if keeping the lab photos that suggest scientific tests they should actually do those tests. Further, they should take the time needed to produce real before and after photos and they should ensure that all claims made in their text can really be proved. Interviews should be unscripted, or at least largely so, and with real customers. Better answers might suggest they

could also consider using a disclaimer - which would have to be prominently displayed and clearly worded in order to be effective - but query whether they wouldn’t just have to disclaim almost the whole advertisement as it presently stands, rendering it largely useless for marketing purposes anyway. C. Can Tom get a refund? This part of the question involves the Australian Consumer Guarantees (‘ACG/s’ is acceptable if you would prefer to use an acronym). These are covered at the start of Module 10. We need to establish that this product has failed to satisfy one of the ACGs. a. First we need to establish that the ACGs apply to this type of purchase. These are ‘consumer’ goods purchased from a supplier (WFM) for less than $40,000 so the ACGs potentially apply (we have passed the ‘threshold’ test for them to apply to Tom’s purchase. More detailed answers might briefly explain the underlined terms and why Tom’s situation satisfies those requirements. b. Next, revisit the list of ACGs and you will probably notice the one about acceptable quality as a possible matches with Tom’s situation. Note that these are not in the ‘fitness for a specific purpose made known to the supplier’ category because the intended purpose for this product is obvious – whereas the specified purpose category is more usually applied to situations where the customer wants the product for some additional or unusual purpose and they tell the retailer / supplier about it. c. Is the product of acceptable quality? The relevant aspect of ‘acceptable quality’ here appears to be the requirement that Chocoslim must be fit for all purposes for which products of that sort are usually supplied. Obviously Chocoslim has not met that requirement (ideally you could add a brief explanation why here). d. There is also an available argument about compliance with express warranties that more detailed answers might consider here. The advertisement clearly represents that this product will cause weightloss – which is a representation about the product’s performance or perhaps its characteristics. We already have the acceptable quality issue, but a more detailed answer might mention this one as well (there can be more than one ACG involved in a breach). e. To answer the question whether Tom is entitled to his refund or not we need to work out whether the failure to comply with these ACG/s is a major or minor failure to comply. In this situation it seems fairly clear that Tom (or our hypothetical reasonable consumer) would not have purchased the product if he had known about this failing (ie, that it doesn’t work – actually appears to cause weight gain, etc). It is also not fit for the purpose for which goods of this kind are usually supplied. Both of those finding mean the failure is classed as a major failure, and that gives Tom the right to a refund. He should return the goods to WFM and indicate that he is rejecting the goods and that he wants a refund. WFM cannot refuse to give a refund because the goods are not in their original packaging (a common, but illegal assertion by suppliers

/ retailers) and it is WFM, as the suppliers of the goods, who are required to give a refund for a breach of the ACGs. Think of ‘suppliers’ in relation to the ACGs as the retailer – the one who ‘supplies’ the goods directly to the consumer. While WFM having to give the refund to Tom might at first seem unfair, as the fault was really with Crafty not WFM, note that WFM would have a further right to recover their losses either under the Sale of Goods Act or possibly under contract (if they have one with Crafty – usually this sort of business-to-business or B2B situation would involve a contract though). Although we don’t cover it in this Unit specifically, the Sale of Goods Act implies various clauses into contracts for the sale of goods – such as those that usually should be in place between a manufacturer of goods and the retailer who buys those goods to sell them on to consumers. Those implied terms are broadly similar to the ACGs – the relevant one here would be the implied requirement for what is called ‘merchantable quality’ and its application to this situation would depend on knowing more about the actual contract between WFM and Crafty (whether there had been an attempt to exclude that implied term, etc). That aspect is really outside the scope of this Unit, but I mention it as sometimes people want to know about this aspect as well. OUTLINE / ‘SKELETON’ Version The underlined concepts in the following outline indicate aspects that I would invite you to add in a bit more on – places where legal principles and/or tests could be inserted for more detail in your answer, making it a better answer. In other respects this is an outline of the issues / elements raised by this particular question – note that Modules 9 and 10 also cover other aspects though. Try to develop an outline of brief headings / a checklist for the other sections of Modules 9 and 10 not covered here. For ACL s 18 (Module 9): •

Threshold issues of application: has a person engaged in conduct that has taken place in trade or commerce?

•

Has the conduct led consumers into error? 3-step test: o Identify the target audience? o Meaning of the conduct: what would the hypothetical member of that audience understand the conduct to mean? o Is that meaning correct or not?

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Neither intention to mislead or actual instances of misleading are required.

For ACL s 29 (Module 9): •

Has a representation been made, and if so what is that representation?

•

Does the representation fall into one of the specific categories set out by s 29? It’s important to know what these categories are – see the lists in the textbook and the online module for more.

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Is the representation false (ie, untrue) or otherwise misleading, as determined by the 3-step test as for s 18.

•

Intention and proof of misled consumers not required, like s 18

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Unlike s 18 though s 29 is an offence provision carrying substantial penalties

Refunds for breaches of the Australian Consumer Guarantees (‘ACGs’ Module 10) •

Threshold issues of application: the goods or services must have been supplied to a consumer in the course of trade or commerce

•

Has there been a failure to comply with one or more of the ACGs? It’s important to know what these are - see the lists in the text and also the online module for more.

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Is the failure major or non-major (minor)? If it is major the consumer may elect to return the goods for a refund or a replacement, or to seek compensation for the shortfall in value. The consumer has the choice for major failures. Non-major failures that are fixable may be remedied either by repairing or replacing the goods or giving a refund. The supplier (retailer) has the choice for non-major failures though. Nonmajor failures that cannot be remedied by repair or replacement are effectively treated the same as major failures (above)....