Heavy Fines Given to Retailers for Misleading Consumers

Recent decisions of the District Court highlight the need for businesses to adhere to the Fair Trading Act 1986 ("FTA") and not mislead their customers, particularly if their customers are 'consumers' under the Consumer Guarantees Act 1993 ("CGA").  Both decisions involved prosecutions by the Commerce Commission against high profile retailers and resulted in substantial fines being awarded against these retailers.

Noel Leeming    
In December 2018, Noel Leeming was convicted of eight charges under the FTA following a finding by the Court that consumers were misled, repeatedly, about their rights under the CGA.  Following consumer complaints to Noel Leeming about faulty goods they had purchased, the retailer was found to have acted in a misleading fashion over a period of nearly 18 months across seven stores.  The Court held that consumers were misled about:

   
• Their rights under the CGA to seek remedies for faulty goods from Noel Leeming as the supplier rather than directly from the manufacturer;

   
• Their rights under the CGA to a refund for a faulty product;

   
• Their rights under the CGA to a replacement for a faulty product.

In sentencing, the Judge outlined that consumers had "real difficulty dealing with Noel Leeming" who was found to have made "direct and significant departures from the truth in every case".1 Rather than sending consumers to the manufacturer for a solution, the Judge outlined that the CGA entitles consumers to a remedy from the supplier.  As a result, the Judge fined the company $200,000.00.

PB Technologies2    
In September 2018, PB Technologies was fined $77,000.00 and pled guilty to 14 charges for failing to comply with its disclosure obligations set out in s36U of the FTA in respect of extended warranty contracts that it sold to consumers (as well as to businesses).  Most of these contracts related to the Company's own extended warranty agreement, but some contracts were the manufacturer's (Apple) extended warranty agreements. For the 4,400 or so contracts that were sold to consumers, the violations included:  

   
• Failing to provide a copy of the extended warranty agreements to customers;

   
• Failing to provide a summary of a customer's rights under the warranty agreement and under the CGA;

   
• Failing to provide oral notice to a customer that they were entitled to cancel without penalty within five working days.

When assessing the penalty, the Court held that the failure to comply was a result of a "wide systemic failure...[with] at least a moderate degree of carelessness with a significant number of victims".

Discounts were awarded for an early guilty plea (25%) as well as for the company's cooperation with the authorities and remedial steps including halting sales of such contracts.

Analysis    
In recent years the FTA has been amended to give the Commerce Commission more teeth to allow it to keep a vigilant eye on businesses who may be misleading consumers. Misleading behaviour can occur through a variety of ways, even inadvertently, including through a failure to adequately disclose consumers rights to them, or simply a misunderstanding of what their consumers are entitled to under the CGA. More recently, the result of such powers has seen substantial fines in the range of hundreds of thousands of dollars given to major telecommunications companies for misleading consumers about the costs they were required to pay.

Whether a company is large or small, it should regularly review its returns policies and sales procedures to ensure that it is not misleading consumers and breaching the FTA. Even a prompt guilty plea and a lack of knowledge of a breach of the FTA can be costly to businesses, both in terms of the level of fines, but the associated publicity and time spent dealing with the resolution of the matter.

We can assist you and your business with general advice in how your practices can remain compliant, as legal review of your business and advertising practices can ensure that you remain compliant with the FTA and not inadvertently misleading your customers.    

For enquiries or requests for assistance related to the subject matter of this article, or more general corporate/commercial law enquiries, please contact  McVeagh Fleming's corporate/commercial law specialists:  

Andrew Knight on (09) 306 6730 (aknight@mcveaghfleming.co.nz)  

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