The Court of Justice of the European Union (CJEU) has issued a judgment clarifying the interpretation of provisions in the Unfair Consumer Practices Directive that relate to commercial practices that involve giving a consumer the false impression that he has won a prize when the consumer is required to make a payment or incur a cost in order to claim that prize

Business Impact

The Unfair Commercial Practices Directive (2005/29) (the "Directive") sets out an exhaustive list of 31 commercial practices which in all circumstances are deemed to be unfair without the need for a case-by-case assessment. One of those prohibited practices (set out in paragraph 31 of Annex 1 to the Directive) is creating the false impression that the consumer has already won, will win, or will on doing a particular act win, a prize or other equivalent benefit, when in fact either (a) there is no prize or other equivalent benefit, or (b) taking any action in relation to claiming the prize or other equivalent benefit is subject to the consumer paying money or incurring a cost.

The CJEU has held that such a practice is unlawful even if the cost to the consumer is minimal compared to the value of the prize or where the cost to the consumer does not give the trader/promoter any benefit. Such a practice is prohibited even if a number of ways to determine the nature of the prize are offered to the consumer and one of those ways is free of charge.

Thus, if a consumer is told that he is a prize-winner, even if the consumer is told clearly that he has to incur a cost to find out the nature of his prize and that cost is relatively small, or if the consumer is offered a no-cost option, along with options that impose a cost on the consumer, for determining his prize, this is not sufficient to avoid such a promotion being unlawful.

Companies considering using promotions that indicate that a consumer has already won a prize must exercise caution to ensure that the Directive is complied with and that they do not give a false impression that a prize has been won when in fact the consumer is required to incur any form of cost in order to claim the prize no matter how small the cost and even if the consumer is told of that cost.

Background

The reference to the CJEU arose out of a dispute between the Office of Fair Trading ("OFT") and a number of British traders which were engaged in promotions that involved mailings and inserts (such as scratch cards) placed in newspapers and magazines. The promotions shared a number of features which included:

  • The consumer was told that he had won a prize ranging from prizes of considerable value to those worth, at most, a few pounds.
  • In order to find out if he had won the consumer had to:
    • Call a premium rate telephone number; or
    • Use a revers SMS text messaging service; or
    • Obtain the information by ordinary post.
  • Consumers were encouraged to use the more expensive routes rather than the postal method.
  • The consumer was told the cost per minute of the telephone call and the maximum duration of the call. However the consumer was not told that the minimum call time was only a few seconds shorter than the maximum time and that the promoter took over 80% of the cost of the call.
  • In some cases the consumer had to pay an additional cost for "delivery and insurance". The promoter used some of these costs to purchase the prize claimed.
  • Over 99% of participants "won" the lowest value prize. The value of that prize was equivalent to or nearly equivalent to the amount paid by the consumer in telephone/text charges and/or delivery and insurance costs.

The OFT issued enforcement proceedings against the promoters on the basis that such promotions breached the Consumer Protection from Unfair Trading Regulations 2008 (the "Regulations") which implement in the UK the Unfair Commercial Practices Directive (2005/29)( the "Directive").

The Regulations provide that certain commercial practices are unlawful and list 31 commercial practices which are in all circumstances considered to be unfair. The unfair commercial practice listed in Paragraph 31 is :

"Creating the false impression that the consumer has already won, will win, or will on doing a particular act win, a prize or other equivalent benefit, when in fact either—

  1. there is no prize or other equivalent benefit, or
  2. taking any action in relation to claiming the prize or other equivalent benefit is subject to the consumer paying money or incurring a cost."

In each promotion the telephone route was the recommended means for the consumer to determine his prize. The cost of that call (together with the delivery and insurance charges where applicable) was the equivalent or a substantial proportion of the unit cost to the promoter of providing the prize to the consumer. On this basis the Court held that the promoters had infringed Paragraph 31 [2011] EWHC 106 (Ch)]. However, the Judge considered that Paragraph 31 would not be infringed if the payment referred to in sub-paragraph (b) was de minimis in relation to the value of the prize won. The promoters gave certain undertakings to the Court in lieu of an enforcement notice.

Court of Appeal

The promoters appealed to the Court of Appeal [2011] EWCA Civ 920] on the following basis:

  • the cost of submitting a claim is not a cost caught by Paragraph 31(b), particularly since the consumer has the choice of using a postage stamp (rather than making a premium rate call)
  • even if the premium phone line was recommended, it did not falsify the impression that a prize had been won;
  • the judge was wrong to consider whether the promoter made a profit by comparing the costs of providing the prize with what he received from the premium rate phone calls ( and delivery/insurance costs where applicable)
  • if there is to be any comparison then it should be between the cost to the consumer of claiming the prize and the cost to the consumer acquiring the prize from another source
  • the judge characterised the award and claim of the prize as a sale and purchase and this was a wrong characterisation of the transaction

The Court of Appeal stated that, absent any other considerations, it would reject the five arguments and dismiss the appeal. In the Court's view, paragraph 31 applies to any action in relation to claiming a prize and applies if any money is paid or any cost is incurred by the consumer regardless of the value of the cost to the consumer compared to the cost of the prize.

The OFT had cross-appealed to the Court of Appeal seeking a tightening up of the undertakings given by the promoters and had also proposed that questions on the interpretation of Paragraph 31 were referred to the Court of Justice of the European Union (CJEU).

Reference to CJEU

The Court of Appeal considered that a reference would be appropriate since there had been no judgment from any Member State on the proper interpretation of Paragraph 31 and the enactment of the Directive in each Member State showed variations in translation of the Directive which indicated there was doubt as to the proper interpretation of the Directive. Having regards to each party's position the Court of Appeal referred the following questions:

  1. Does the banned practice set out in [Paragraph 31 of the Directive]  prohibit traders from informing consumers that they have won a prize or equivalent benefit when in fact the consumer is invited to incur any cost, including a de minimis cost, in relation to claiming the prize or equivalent benefit?
  2. If the trader offers the consumer a variety of possible methods of claiming the prize or equivalent benefit, is [Paragraph 31] breached if taking any action in relation to any of the methods of claiming is subject to the consumer incurring a cost, including a de minimis cost?
  3. If [Paragraph 31] is not breached where the method of claiming involves the consumer in incurring de minimis costs only, how is the national court to judge whether such costs are de minimis? In particular, must such costs be wholly necessary:
  1. in order for the promoter to identify the consumer as the winner of the prize, and/or
  2. for the consumer to take possession of the prize,
  3. and/or for the consumer to enjoy the experience described as the prize?
  1. Does the use of the words “false impression” in Paragraph 31 impose some requirement additional to the requirement that the consumer pays money or incurs a cost in relation to claiming the prize, in order for the national court to find that the provisions of Paragraph 31 have been contravened?
  2. If so, how is the national court to determine whether such a “false impression” has been created? In particular, is the national court required to consider the relative value of the prize as compared with the cost of claiming it in deciding whether a “false impression” has been created? If so, should that “relative value” be assessed by reference to:
  1. the unit cost to the promoter in acquiring the prize; or
  2. to the unit cost to the promoter in providing the prize to the consumer; or
  3. to the value that the consumer may attribute to the prize by reference to an assessment of the “market value” of an equivalent item for purchase?

The CJEU delivered its judgment on 18 October 2012 (Case C-428/11)  and following a detailed analysis of the wording and the structure of Paragraph 31 considered that a false impression is given to a consumer when he is told that he has won a prize and either of the situations in sub-paragraphs (a) or (b) is also present. The promoters argued that there can be no unfair practice if the consumer is sufficiently informed of the cost of claiming the prize. The CJEU disagreed and therefore telling a consumer that he has won when in fact he has to pay something to claim his prize will always create a false impression. This will be the case even if the consumer only has to bear a de minimis cost compared to the value of the prize or if he has to bear a cost which does not benefit the trader such as the price of a stamp.

Paragraph 31(b) imposes an absolute prohibition on imposing any cost. As such offering to the consumer a number of options for him to claim his prize will still amount to an unfair practice if any of the proposed options require the consumer to bear a cost even if it is a de minimis cost.

The CJEU considered that its interpretation of Paragraph 31 was confirmed by the objective of the Directive of ensuring a high level of consumer protection.

The CJEU concluded its decision by ruling that it is for the national courts to assess the information provided to consumers by taking into account whether that information is clear and can be understood by the public targeted by the commercial practice.