Dulux has been fined because its regulatory compliance programme failed to prevent false or misleading performance claims from being made for its heat reflective / cooling paints, in contravention of the Australian Consumer Law.
On 2 November 2016, the Federal Court of Australia (Siopis J) made penalty orders and accepted an undertaking in penalty proceedings against Dulux for breach of section 18 (misleading or deceptive conduct) and section 29(1)(g) (false or misleading representations) of the Australian Consumer Law.
The judgment is reported as Australian Competition and Consumer Commission v Dulux Group (Australia) Pty Limited (No 2)  FCA 1286. The liability decision is reported as Australian Competition and Consumer Commission v Dulux Group (Australia) Pty Limited  FCA 1158.
This article looks at why Dulux’s regulatory compliance programme failed and is followed by marketing commentary – What Were The Dulux Marketing Team Thinking?
How did Dulux fall into the trap of falsely advertising the cooling effects of its paints?
Dulux’s compliance programme failed because there were no reasonable grounds for making these performance claims for its heat reflective paint range:
- Applying Dulux InfraCool roof paint to the roof can reduce the interior temperature of the living zones of that house by up to 10° Celsius
- Applying Dulux Weathershield Heat Reflect house paint to the exterior walls can and will:
- reduce the surface temperature of the exterior walls by up to 15° Celsius
- reduce the interior temperature of that house
This is how the performance claims came to be made:
Starting in 2006, Dulux developed an InfraCool roof paint which used infrared reflective pigments supplied by a US corporation, which also provided Dulux with test models.
Dulux admitted that it did not use studies or test whether the temperature of the interior living space of the house was reduced by 10° when the roof was painted with InfraCool. What it did rely upon were measurements that the ‘cool’ paint made the surface temperature of the roof and inside the ceiling cavity cooler compared with normal paint of the same colour.
In addition, the tests did not take into account factors such as roof pitch, paint colour, attic ventilation and insulation, window placements, building materials, shading, wind and external air temperature which affect the interior temperature of a house.
The marketing took place between June 2009 and September 2012. It was primarily directed to the trade: 30,000 InfraCool colour cards were distributed to trade centres, and the range was published online on the Dulux websites. It was sold at a price premium of $4.94 per litre.
The marketing proceeded without review by Dulux’s legal division, because the compliance programme did not require legal compliance approval.
The Weathershield Heat Reflect wall paint was developed in 2011, as a product extension. Again, Dulux relied upon wall surface temperature measurements without testing internal temperatures and without taking into account the “solar availability” of the walls.
Marketing and advertising took place between November 2011 and September 2012. It was an extensive marketing campaign directed to consumers: 256,000 Heat Reflect colour cards were distributed to retail outlets, paint tin labels contained the claims, television commercials were broadcast, advertisements were placed in the print media and in lifestyle magazines, the claims were published on the Dulux websites and Facebook page, and were shown in a YouTube video. It was sold at a price premium of $2.20 per litre.
The Heat Reflect marketing was approved by Dulux’s legal division, which relied to a large extent on the opinion of the technical department when approving performance claims.
Why was Dulux’s compliance programme inadequate and what can we learn from it?
The Court found that the Dulux compliance programme was inadequate because there was no active and effective compliance culture, for these reasons:
- The compliance guide did not include a practical formal procedure to have marketing materials which made claims about the attributes and performance of new, or existing, products reviewed by the legal division before release to the public.
- The trade practices compliance training had failed to educate the marketing and technical managers that marketing claims about performance characteristics and benefits create a compliance risk and need to be referred to the legal division for advice.
- There was insufficient awareness in the technical department that the research in relation to new products needed to be rigorous to provide reasonable grounds to make the performance claims.
What businesses which make performance claims for their products can learn from the Dulux debacle is that their regulatory compliance programme needs to make clear that:
- Changes to existing and new product marketing material need to be legally vetted for compliance with the Australian Consumer Law, particularly claims made as to benefits and characteristics of the product.
- The technical managers need to devise and conduct a rigorous testing programme if they wish to use the results as the basis for making performance claims for the product.
- A continuous training programme needs to be implemented for marketing and technical managers to make them aware of their obligations under the Australian Consumer Law to have reasonable grounds for making performance claims.
The Court orders and the Dulux undertaking
The Court had regard to a number of factors in determining the pecuniary penalty including - the contravention of the Australian Consumer Law was serious (at the lower to middling range), but not deliberate; Dulux’s senior management was involved; it was effective in securing a 12% market share of the reflective paint market in Australia (from a zero base).
Normally the existence of a compliance programme is a mitigating factor in setting the penalty. In this case, the failure neutralised this factor, although the revised compliance program which was introduced in July 2012 was accepted as a mitigating factor.
The Court orders were:
1. Publication order - Publication of one quarter page advertisement in the Australian; and posting a Notice on the Dulux Website, accessible via a one-click link (for 30 days).
2. Pecuniary penalty – The sum of $400,000 in respect of Dulux’s conduct from 15 April 2010 to September 2012 in marketing and advertising the InfraCool and Heat Reflect paints.
3. Costs – The payment by Dulux of $150,000 for the ACCC’s legal costs of the proceeding.
The Dulux undertaking was to not make representations for a period of 3 years that:
(A) applying heat reflective paint to the roof of a house can reduce the interior temperature of the living zones of that house by up to 10 degrees Celsius;
(B) applying heat reflective paint to the exterior walls of a house can and will reduce the surface temperature of those walls by up to 15 degrees Celsius; or
(C) applying heat reflective paint to the exterior walls of a house can and will significantly reduce the interior temperature of that house;
(D) has reasonable grounds for making the particular representation; and
(E) clearly and prominently explains the environmental, structural and other factors that may reduce the effect of applying heat reflective paint to a normal house in realistic conditions.
The failure of the Dulux compliance programme resulted in: 4 years of legal proceedings, a substantial penalty, legal costs, reputational damage, loss of marketing opportunity and financial loss.
Soon after the proceedings commenced, Dulux discontinued the sale of its Heat Reflect paint. To add insult to injury, the trading losses from the Heat Reflect paint sales were $911,000 because in the limited time until it was discontinued, the 4,800 cans of paint sold were insufficient to amortise the substantial marketing costs.
Companies such as Dulux, which make performance claims in respect of their products which depend upon technical or scientific testing and research, need to have an effective compliance programme which impresses upon its technical staff the need for a reasonable basis when making performance claims.
MARKETING COMMENTARY BY EVERETTFIELD
What Were The Dulux Marketing Team Thinking?
This is an interesting case as it highlights the influential role B2B trade marketing has on consumer buying behaviour, especially from established and trusted brands such as Dulux.
Research conducted by EvettField Partners has revealed that 74% of consumers rely on advice from the retailer when making homewares and hardware purchasing decisions. In fact, advice from the retailer is the number one source of information, ranking above the internet which is placed second, ahead of brochures, magazines, publications and trade shows. In this case, the combination of trade (B2B) and consumer (B2C) clearly had a substantial impact on consumer buying decisions as it assisted Dulux in obtaining a 12% market share of the reflective paint market in Australia from a zero base in a very short time.
The effect of trade marketing would likely have been magnified in a specialist category such as heat reflective paint as the risk and investment for the consumer is high and the costs of remedying a wrong decision are substantial compared to say choosing the wrong colour taps for your bathroom.
Consumers hold marketers of industrial, homewares and hardware products to a high standard because they view the purchase as protecting or increasing the value or amenity of their home, and as part of their investment.
The follow-up consumer marketing Dulux engaged in reinforced the false messages already distributed through the trade market and made it impossible for the consumer to be making an informed purchase decision based on research and fact.
The admission from Dulux that it did not obtain proper studies or tests to confirm the claims is damning and is likely to damage their reputation with consumers.
The corrective advertising, namely the publication of a quarter page advertisement in The Australian and a one page notice on its website, was misdirected because it did not reflect the way the product was promoted in-store, online, and through lifestyle magazines. Therefore, it is highly unlikely customers would be aware of the corrective advertising.
About Michael Field
Michael Field is a partner in EvettField Partners, a specialist consultancy providing competitive strategy advice to medium sized B2B, NFP and membership organisations. See www.evettfield.com