A recent decision of the Federal Court (ACCC v Lux Distributors Pty Ltd (No 2) [2015] FCA 903) illustrates the need for any business engaging in direct selling or marketing techniques (such as telemarketing or door-to-door sales) to ensure that potential customers are treated fairly and reasonably to avoid breaching the Australian Consumer Law (ACL) and the serious consequences which follow from such a breach.   

Here, Special Counsel Brett Bolton and Law Clerk Amy Detheridge discuss the Federal Court’s decision further. 

Facts

Lux Distributors Pty Ltd (Lux) implemented a sales strategy to target elderly women in their 80s or 90s, who were widowed and living alone. As part of its strategy, Lux created a scripted telemarketing conversation, offering a free maintenance check for householders’ vacuum cleaners. A sales representative of Lux would then attend the residence to test the householder’s current vacuum cleaner for maintenance and efficiency. Notwithstanding the vacuum cleaner was working effectively, the Lux representative would demonstrate the inefficiency of the old vacuum cleaner as compared to the expensive new Lux vacuum cleaner, or tell the householder that their vacuum cleaner was defective. This led to the elderly ladies in this case purchasing new Lux vacuum cleaners for around $2,000.00 to $3,000.00.

For a more detailed outline of the facts, see our previous alert in which we discussed the reasons why the Court found that Lux had acted unconscionably in breach of the ACL and the Trade Practices Act (TPA).

Penalty Order

In addition to the purchasers receiving a refund from Lux, it was ordered to pay a penalty under the ACL and TPA and is subjected to restraining and mandatory orders.

In making these orders, the Court had regard to the overarching objective of deterrence, namely to highlight the fact that contraventions of the ACL should not be seen as part of “the cost of doing business”.

The Court found that:

  • Lux was a small family-owned company trading at a loss, with minimal market share;
  • Lux’s sales technique (which led to the unconscionability findings) was deliberate. Its scripted telemarketing approach was at best a half-truth, and was designed to create an expectation of a free service, whereas its real purpose was for the sales person to gain entry into households to sell vacuum cleaners;
  • senior management of Lux, while not aware of specific details in relation to the individual sales, was responsible for the telemarketing script and the sales method which was central to the unconscionability findings. Furthermore, senior management knew that Lux sales representatives did not earn any remuneration unless they sold a vacuum cleaner;
  • Lux had no formal trade practices compliance program in place, though the sales representatives were given some information relating to the ACL door-to-door trading requirements and were required to sign a document to agree to comply with the ACL; and
  • Lux cooperated with the ACCC by providing responses to its document requests and offering to give further assistance.

The orders against Lux included:

  • A penalty of $370,000.00, which represented 90% of Lux’s pre-tax profit in the five years to 30 June 2014.
  • Permanent restraints to prevent Lux from engaging in the same or similar sales techniques or practices in the future.
  • The establishment of a Compliance and Training Program at its own expense for three years which involved:
    • the appointment of a Compliance Officer;
    • conducting a risk assessment;
    • instituting a corporate policy and complaints handling system;
    • implementing training procedures for its employees; and
    • participating in an annual external review conducted by an independent third party.

The ACCC will supervise Lux’s compliance with the Program.

In addition Lux has also suffered negative publicity from the legal proceedings, which has resulted in a significant decline in its sales.

Impact

This decision serves as a reminder of the severity of the consequences of a breach of the ACL, especially where the court concludes that the breach was deliberate or that the business had recklessly disregarded its obligations under the law.