Tuesday, 30 June 2009

Clarity in Pricing: TPA changes may muddy the waters


This is an updated version of an article which first appeared in the Law Society Journal, May 2009, Vol 47, pp. 48-52.

Introduction
Since being elected, the Rudd Government has been active in exploring ways to amend the Trade Practices Act 1974 (TPA) to prohibit different types of business conduct. For example, the Federal Government has moved quickly to introduce legislation to criminalise hard-core cartels with a maximum jail term of 10 years.[i]

The federal government has also recently issued a report recommending the creation “an Australian Consumer Law” which, amongst other changes, is likely to give the ACCC a range of new powers to protect consumers, such as the ability to seek civil penalties and disqualification orders, and to issue public warning powers and infringement notices.[ii]

Amongst this flurry of activity, another very important change to the TPA has passed largely unnoticed. The federal government has introduced new laws, which came into effect on 25 May 2009, which regulate the way that businesses can advertise the prices of their goods and services.

The lack of attention to these proposed laws amongst businesses and legal practitioners is particularly surprising given that the legislation will introduce significant criminal penalties for failing to advertise the single price of goods and services. In This article will outline the key provisions of the legislation, the Trade Practices Amendment (Clarity in Pricing) Act 2008 (CIPA)[iii] and explore the implications for business.

Background

Currently, under the TPA, there is an obligation to state the cash price for goods and services in certain circumstances. Section 53C provides that –
A corporation shall not, in trade or commerce, in connection with the supply or possible supply of goods or services or in connection with the promotion by any means of the supply or use of goods or services, make a representation with respect to an amount that, if paid, would constitute a part of the consideration for the supply of the goods or services unless the corporation also specifies the cash price for the goods or services.

The current s.53C places an obligation on businesses to state the cash price for goods or services where the business represents an amount which would constitute a part of the consideration. By implication, s.53C requires businesses to state the full cash price for good and services.

Section 53C was only enforced sporadically by the Australian Competition and Consumer Commission (ACCC) prior to 2000. However, in 2000, the section took on particular importance with the introduction of the Goods and Services Tax (GST).[iv]

During this period, the ACCC relied heavily on s.53C to force businesses to show the full cash price for goods and services, inclusive of the GST. In fact, s.53C became the ACCC’s major weapon in preventing businesses from representing GST-exclusive prices to their customers.

The ACCC preferred to use s.53C rather than s.52 of the TPA to achieve GST-inclusive pricing because, under the former section, there was no obligation on the ACCC to demonstrate that the conduct was misleading or deceptive. All the ACCC had to prove to establish a contravention of s.53C was that the business had failed to represent the full cash price in circumstances where the business has represented part of the consideration.

One implication of the ACCC’s approach to s.53C was that it did not distinguish between representations aimed at consumers and representations aimed at businesses. Therefore, during the GST period the ACCC would often require businesses to represent their prices as GST-inclusive even when they were supplying goods or services exclusively to business consumers.

Many business groups were highly critical of the ACCC’s position on advertising the GST in business-to-business transactions. These groups argued that businesses should not be required to represent GST-inclusive prices in business-to-business transactions because the GST component was irrelevant to businesses which could claim an input tax credit. In other words, business customers were only interested in knowing the price net of GST.

While the ACCC understood the concerns of these business groups, it was faced with a dilemma. A significant number of complaints received by the ACCC in the GST period about GST-exclusive advertising came from small businesses which claimed that they had been misled by other businesses advertising GST-exclusive prices. The picture became even more confusing in industries where some businesses advertised GST-exclusive prices and others advertised GST-inclusive prices.

Indeed, on more than one occasion, the ACCC wrote to a business which was advertising GST-exclusive prices to other businesses, only to be told that they had recently changed from GST-inclusive advertising because their competitors were advertising GST-exclusive prices. When the ACCC pressed these businesses to explain why they had felt the need to change, they claimed they had to change to GST-exclusive pricing because they were losing too many customers to competitors which were advertising GST-exclusive prices. These types of stories provided the ACCC with a basis for concluding that many small businesses may in fact be in a similar position to consumers in terms of being misled by GST-exclusive advertising.

Reasons for the Clarity in Pricing Act

In the Explanatory Memorandum for the CIPA, the justification for the legislative change was based on the perceived shortcomings of the interpretation placed on sv53C by the Federal Court in two cases taken by the ACCC.

In the first case, ACCC v Dell Computers Pty Limited,[v] the ACCC alleged that Dell had breached s.53C by not stating the full cash price of their computers because of not including the mandatory delivery charges. In this case, Justice Branson held that a statement to the effect of “$1999 plus $99” was sufficient to satisfy the requirements of s.53C of stating the full cash price.

In the second case, ACCC v Signature Security Group Pty Limited,[vi] the ACCC alleged that Signature Security had breached s.53C by advertising GST-exclusive prices for various security services. In this case, Justice Stone found that the expression “$295 plus GST” was a compound statement of price which did not contravene s.53C.

Based on the outcome in these two cases, the federal government concluded that s.53C was not adequate to achieve the broader goal of ensuring that businesses advertised and quoted the full price for goods and services. Accordingly, the government identified the need for specific legislation, namely the CIPA, to resolve this perceived problem.

Trade Practices Amendment (Clarity in Pricing) Act 2008[vii]
The CIPA has repealed the existing s.53C and replace it with the following provision –
(1) A corporation must not, in trade or commerce, in connection with:
(a) the supply or possible supply of goods or services to a person (the relevant person); or
(b) the promotion by any means of the supply of goods or services to a person (the relevant person) or of the use of goods or services by a person (the relevant person);
make a representation with respect to an amount that, if paid, would constitute a part of the consideration for the supply of the goods or services unless the corporation also:
(c) specifies, in a prominent way and as a single figure, the single price for the goods or services; and
(d) if, in relation to goods;
(i) the corporation does not include in the single price a charge that is payable in relation to sending the goods from the supplier to the relevant person; and
(ii) the corporation knows, at the time of the representation, the minimum amount of a charge in relation to sending the goods from the supplier to the relevant person that must be paid by the relevant person;
specifies that minimum amount.
The main difference between the existing s.53C and the new s.53C is that businesses will be required to specify the full price for the goods or services as a single figure, in a prominent way.

Subsection 53C(7) defines the term “single price” as “the minimum quantifiable consideration for the supply concerned at the time of the representation concerned...”

The subsection lists the following types of charges which would be covered by the term “single price” – namely, taxes, duties, and levies. Charges which are payable at the option of the purchaser are excluded from the definition of “single price”.

Subsection 53C(4) states that a price will be specified in a prominent way if the single price is “at least as prominent as the most prominent of the parts of the consideration for the supply”. This would seem to indicate that the single price will have to be in the same or larger font than any representation of a component of the single price and
no component of the single price can be represented in a more prominent way than the single price by the use of such devices as bold font or underlining. A further implication of subsection 53C(4) is that the use of asterisks may no longer be permitted as, by using an asterisk, the single price will not be as prominent as the component prices, if the single price is located at the bottom of the advertisement.

Businesses will not be required to specify charges for delivering goods to a customer as part of the “single figure”. However, businesses must specify the minimum amount of any delivery charge which will be incurred by the customer. The reason for this exception is that delivery charges often fluctuate depending on where the customer is located. Accordingly, it would be impossible for a business to advertise the single figure inclusive of delivery for every potential customer location.

Subsection 53C(3) states that the obligation in subsection 53C(1) does not apply when the representation is made exclusively to a body corporate. While this would appear to exclude business-to-business transactions, this is not the case as representations to unincorporated businesses such as sole traders and partnerships are not exempted by s.53C(3). For example, price representations made to large legal, medical or accounting partnerships would have to comply with s.53C(1).

In addition, the requirement that the price representation must be made exclusively to a body corporate to qualify for the exemption contained in s.53C(3) is likely to broaden the application of the legislation. Even if a representation is made to a large number of incorporated businesses, if the representation is also made to even one sole trader or partnership, the exemption in s.53C(3) would not apply.

One limiting principle to the scope of s.53C is contained in subsection 53C(6) which states:
A reference in this section to goods or services is a reference to goods or services of a kind ordinarily acquired for personal, domestic or household use or consumption.
This subsection will restrict the scope of s.53C(1) to goods and services ordinarily acquired for personal, domestic or household use or consumption. This will automatically exclude a wide range of business-to-business transactions, where the goods or services are clearly of a commercial character. However, the provision will also introduce some added complexity, as it will mean that a preliminary step to determining whether s.53C applies in a particular situation, will be to define whether the relevant goods or services are “of a kind ordinarily acquired for personal, domestic or household use or consumption”.

Subsection 53C(5) excludes services supplied under contract from s.53(4) if a number of conditions are satisfied

1. the contract provides for the supply of services for the term of the contract;

2. the contract provides for periodic payments for the services to be made during the term of the contract;

3. if the contract also provides for the supply of goods – the goods are directly related to the supply of the services.

Section 53C(4) will not apply to services supplied under a contract which are paid for through periodic payments. The supply of goods under such contracts will also be exempt where the first two conditions are satisfied and the supply of the goods is directly related to the supply of services.

The exemption in s.53C(5) operates to relieve a business from ensuring that any component of the single price be as prominent as the single price. For example, goods and services which satisfy the elements of s53C(5) can be advertised showing the GST-exclusive component of the price in large, prominent writing and the single, full price in smaller, less prominent writing.

The most obvious area where this exemption will apply is in the advertising of mobile phone plans. These advertisements usually show a prominent headline price for the mobile phone if a particular plan is entered into and a single price of the plan over the life of the contract in much smaller and less prominent writing. S.53C(5) means that this practice can continue.

The ACCC is able to seek a range of civil remedies for a breach of the new s.53C including injunctions, declarations, compensation, corrective advertising and non-punitive orders. Financial penalties will not be available for a breach of s.53C.

The CIPA also makes it a criminal offence to fail to represent a single price. Under s.75AZF(1) it will be a criminal offence to “...make a representation with respect to an amount that, if paid, would constitute a part of the consideration for the supply of goods or services”. Section 75AZF is effectively identical to s,53C in all respects, with one major exception - the maximum criminal penalty for contravening s.75AZF is $1.1 million for a corporation and $220,000 for an individual.

Implications for business
The main implication of the CIPA for businesses is that they will be exposed to legal action, including potentially a criminal prosecution, for failing to specify a single price for their goods and services. With maximum criminal fines of $1.1 million for a single instance of failing to represent the single price for goods or services, corporations must ensure that they take a great degree of care when making price representations in their advertising, including newspaper advertisements, promotional brochures, price lists, on their web-sites and even when providing prices verbally.

While it is highly unlikely that the ACCC would decide to refer a brief to the Commonwealth Director of Public Prosecutions for a breach of s.75AZF unless the business had engaged in very blatant conduct or was a repeat offender, the fact that such serious criminal penalties apply to this type of conduct is cause for concern. For example, businesses could be exposed to liability under s.75AZF where they have inadvertently failed to represent a single price to a customer because they did not know that particular customer was unincorporated. Furthermore, liability may depend on whether a particular good or service is properly characterised as “ordinarily acquired for personal, domestic or household use or consumption.”

An example of conduct which would be subject to the CIPA is the supply of a price list for office products by a large multinational office supply company to a large accountancy partnership. It would appear that the representation of prices in this situation would be caught by the CIPA because the goods are of a kind ordinarily acquired for personal, domestic or household use and the recipient of the price list is not incorporated.

A further implication for business arising from the CIPA will be the need for businesses to potentially prepare both GST-inclusive and GST-exclusive price lists depending on the nature of the goods sold. If the business sells products of a kind ordinarily acquired for personal, domestic or household use or consumption as well as commercial products, it may need to prepare two different price lists. The need for different price lists may also arise where companies deal with both incorporated and unincorporated business customers. It may be more prudent for such businesses to simply use GST-inclusive price lists for all their goods and services and customers to avoid any potential problems under the new s.53C.

The CIPA is likely to have a significant impact on the way businesses advertise their goods and services. Unfortunately, the CIPA is unnecessarily complex and has failed to exclude many business-to-business transactions from its scope. As a result, when preparing price advertisements and price lists. businesses will have to consider carefully both the nature of the products they sell to determine whether they may be exempt, and the types of customers they are likely to reach with their advertising.



[i] See http://www.treasury.gov.au/contentitem.asp?ContentID=1330&NavId=037
[ii] See An Australian Consumer Law: Fair Markets – Confident Consumers,http://www.treasury.gov.au/contentitem.asp?NavId=&ContentID=1484
[iii] For downloadable versions of the CIP, Explanatory Memorandum and details of the legislative history see:http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id:%22legislation/billhome/r3090%22
[iv] The author was the ACCC’s National GST Enforcement Coordinator during the GST period. Accordingly, the author’s observations concerning the ACCC’s enforcement of section 53C during this period are based on his personal experience while at the ACCC.
[v] (2002) FCAFC 434.
[vi] (2003) FCA 3.
[vii] The acknowledges the insights provided by Geoff Taperell, DLA Phillips Fox about the operation of the CLA in his presentation entitled “Consumer Reforms – The emerging issues that will impact your business” given at the Inaugural Thomson Reuters Competition and Trade Practices Summit held in Sydney on 12 and 13 March 2009.