OCTOBER 2008

IN THIS ISSUE

Please Select an Article to Read

• HWL Ebsworth Trade Practices Law Group: Introducing Richard Westmoreland
• 10 year jail terms for cartel conduct - final Bill released
• Proposed Legislative Changes to Component Pricing

 

Proposed Legislative Changes to Component Pricing

Trade Practices Amendment (Clarity in Pricing) Bill 2008

On 25 September 2008, the Trade Practices Amendment (Clarity in Pricing) Bill 2008 (the Bill) was introduced into the Commonwealth Parliament.

The Bill seeks to amend section 53C of the Trade Practices Act 1974 (TPA).

Current Operation of Section 53C

Section 53C currently prohibits a corporation from representing, in connection with the supply or possible supply of goods or services, a part only of the consideration without specifying the total cash price to purchase the goods or services.

In ACCC v Signature Security Group Pty Ltd [2003] FCA 3, Signature Security distributed brochures that contained a representation that the cost to install its security system was "from just $295".  Adjacent to the price was an asterisk and in significantly smaller print on another page the explanation signified by the asterisk included the words "plus GST where applicable".  Signature Security also produced advertisements for the Yellow Pages and on radio that contained a representation that the price was "$295 plus GST".

The Court held that the statement that the price was "$295 plus GST" (irrespective of whether the reference to GST was near or far from the reference to $295) indicated that $295 was part only of the price.  Section 53C requires that the actual cash price for the goods must also be specified, and the GST was held to be a separate cash component.  The Court did not, however, accept the ACCC’s submission that section 53C requires that the cash price be stated as a GST inclusive price.  In obiter, Stone J thought that a statement to the effect that the price was “$295 plus GST of $29.50” would have been in conformity with section 53C.

In summary, section 53C as currently drafted permits component pricing, provided that all components are separately specified - "$100 plus $10 GST".

Proposed Operation of Section 53C

In April 2005, the Ministerial Council on Consumer Affairs stated its view that component pricing still had the potential to be detrimental to consumers where the total price was not clearly identifiable or involved a complex calculation to determine.  In his second reading speech on the Bill, the Hon. Chris Bowen (Minister for Competition Policy and Consumer Affairs) said that “[t]his practice has the potential to draw consumers in to purchases based on prices that do not fully reflect what they will ultimately have to pay”.

The Bill is designed to avoid that potential detriment to consumers by replacing section 53C with a new section (in line with the ACCC’s submission in Signature Security) making it mandatory to also (or in substitution for specifying component prices) disclose a single figure minimum total price to the extent that it is quantifiable at the time of the representation.

Under the proposed new section 53C, a supplier will have to represent prices as, or to the following effect:

• $249 + $24.90 GST for a total price of $273.90;
• $249 + $24.90 GST = $273.90 (total price);
• $199 + $45 taxes, fees and charges for a total of $244; or
• $299 (including all taxes, fees and charges).

The total minimum quantifiable price must be stated at least as prominently as the most prominent of any other price amounts relating to the purchase.  This requirement applies not only to written price representations, but also to television or radio advertisements where the price might be spoken.

However, an exception to the ‘at least as prominently’ requirement is in relation to contracts for services that provide for periodic payments.  In such cases, the disclosure of the periodic component for the service may be displayed more prominently than the single price over the contract term.

For example, a mobile phone company may advertise a mobile phone service at $30 per month for a minimum period of 24 months.  The single price for those services (i.e. $30 x 24 months = $720) must still be displayed prominently but it may be displayed less prominently than the periodic component price.

Another exception is in relation to the ‘bundling’ of products or services. In such situations, the single figure price of the final product or service may not be quantifiable because the consumer may select ‘optional extras’.  However, the costs of any constituent parts that are necessary for the basic functioning or provision of the product or service must be included in the single figure price.  In this way, the minimum price is identifiable and disclosure could take the form of “from $495”.

Similarly, where additional charges or fees are compulsory (such as where a purchase can be effected only by a credit card payment which attracts a compulsory surcharge), those amounts, if quantifiable, must be disclosed as a separate component of the price or included in the single price.

Bill Directed at ‘Consumers’

The obligation to state a single price does not apply where representations are made exclusively to bodies corporate (see section 53C(3)).  The obligation will still apply where a representation is made to the public at large, or is capable of being so made, such that ‘consumers’ (in the colloquial sense of individual shoppers) may see or hear the representation even if they are not its intended target.  An example would be an advertisement in a trade publication or journal, usually only viewed by industry participants but which is freely available.

However, it is important to note that the obligation will still apply in many business contexts even where representations are made only to businesses and not to ‘consumers’.  This is because many business entities do not operate under a corporate structure - for example, partnerships or sole traders.

As a result, in most advertising and marketing contexts, the obligation to state a single price is likely to apply either in a direct sense or, even in targeted advertising situations, as a precaution because the supplier will not know the corporate status of all of the recipients.

Under section 53C(6), the term ‘goods or services’ in section 53C refers to goods or services of a kind ordinarily acquired for personal, domestic or household use or consumption.1

Therefore, a supplier will be relieved of the obligation to state a single price only where:

• the representation as to price is made exclusively to bodies corporate; or
• the goods or services are not of a kind ordinarily acquired for personal, domestic or household use or consumption.

Scenarios and Exceptions

Take the case of an electrical wholesaler who advertises its prices in an ‘industry catalogue’ on its website: if the catalogue can be viewed by the public at large, the wholesaler will need to ensure its prices conform to the new section 53C, even if in practice only companies are likely to actually view the website and make purchases (first limb above).  Moreover, although the wholesaler may, in practice, sell in bulk to hardware stores, lighting stores etc, if the goods or services are nevertheless of a kind that could be considered personal, domestic or household in nature - for example, light bulbs - section 53C will apply (second limb above).

Any general advertising or promotion (internet, trade publications, etc), even if directed at businesses, would normally run the risk of being seen by non-corporate entities such as sole traders, partnerships, etc.  Unless the goods or services are unequivocally not personal, domestic or household in nature, businesses will have an obligation to disclose a single price.
One scenario in which the obligation may not apply is for “one-to-one” communications to known recipients, such as direct marketing to identified corporate customers, where the supplier knows for certain through previous dealings that the customer is a company.

on-line advertising, particularly catalogue advertising, one means to avoid coming within the operation of section 53C might be to ensure that pricing cannot be viewed unless the customer has first registered on-line and established that it is a body corporate, for example, by providing its ACN (note that merely having an ABN is not sufficient because non-corporate business entities such as sole traders or partnerships will also have ABNs). This option would obviously involve an administrative overhead in verifying any ACNs supplied.

Unforseen Consequence?

There is an interesting and perhaps unforseen consequence of the Bill in that its provisions are designed to operate as a replacement for, rather than as an addition to, the current provisions of section 53C.  As discussed above, section 53C currently has the effect that in all representations - whether made to corporate or non-corporate entities - the full cash price must be specified.  In other words, component pricing is permitted provided all individual component amounts are specified.

However, because the Bill effects a complete carve-out for representations made solely to bodies corporate, if the supplier can be sure the representation is being made only to such entities, the supplier could engage in component pricing without specifying the cash price of the different components, e.g. “$100 plus GST” or “$100 plus applicable taxes and charges".

Of course, the supplier would still have to ensure that its pricing representations did not offend any other relevant provisions of the TPA such as the section 53(e) prohibition against making a false or misleading representation with respect to the price of goods or services or otherwise engaging in misleading and deceptive conduct in contravention of section 52.

Nevertheless, the operation of the new section 53C would ostensibly be a diminution of suppliers’ current obligations vis their dealings with ‘businesses’ and it is not clear whether that is an intended consequence of the proposed operation of the Bill.

Taking Proactive Steps

The Bill has passed the House of Representatives without amendment and is currently being considered by the Senate.  It is likely to be become law in the short-to-medium term.  There is unlikely to be any significant opposition to the Bill and it may become law in the short-to-medium term.  If it does, it will have a significant impact on the way suppliers advertise and promote their products across all forms of media. 

Not only will additional information be required when advertising prices for individual products, but suppliers of bundled products and services will need to consider the minimum components required in order to achieve the basic level of functionality for consumers to use the goods or receive the service advertised.

Many suppliers require long lead times to make changes to their catalogues and general advertising and promotional material.  Suppliers should factor the impending changes heralded by the Bill into their marketing and advertising plans.

 

Authors: Richard Gration, Partner and Adam Jacobs, Associate