A market research failure has led to SmileDirectClub being ordered by the Federal Court to pay a fine of $3.5 million, give refunds to customers, send corrections and adopt a compliance program for making false representations in contravention of the Australian Consumer Law.
How the market research failure came about, why the failure resulted in contraventions of the Australian Consumer Law, and how SmileDirectClub was penalised, is the focus of this case note on Australian Competition and Consumer Commission v SmileDirectClub LLC  FCA 1343 – Federal Court of Australia (Anderson J) (11 November 2022).
How the market research failure came about
SmileDirectClub LLC is a public company based in Nashville, Tennessee, with a NASDAQ Stock Echange listing. In early 2019, it registered an Australian subsidiary, SmileDirectClub Aus Pty Ltd to sell into the Australian market (“SmileDrectClub” will be used for both).
Its business is teledentisty. It promotes and supplies plastic teeth aligners and/or associated treatment, designed to gradually straighten mild to moderately mal-aligned teeth over the course of months. It uses a teledentistry website platform: a ‘direct-to-consumer medtech platform’ which it calls ‘Smile Check’ to sell its teeth aligners and treatment. In addition, it operates ‘Smile Shops’ in physical locations, to promote its products and services.
Its business model is to invite consumers to make an application and complete a “Smile Assessment” Form. It prepares a proposed treatment plan. If the consumer accepts the plan and makes a payment arrangement, it supplies the teeth aligners directly to the consumer and assigns an Australian-registered dentist (the “Affiliate Dentist”) to monitor the treatment.
The Affiliated Dentist does not conduct in-person face-to-face consultations or examinations. Instead, they use the ‘teledentistry platform’ to assess consumer eligibility, review modify or reject proposed treatment plans, and remotely track progress, based on photographs and dental impressions uploaded by the consumer. SmileDirectClub pays the Affiliated Dentist fees for service and covers their practice expenses.
Prior to commencing operations in Australia, SmileDirect Club LLC researched the Australian private health insurance market and found that Australian private health insurers provide “extras” coverage for orthodontia such as their teeth aligners and treatment.
The market research failure came about because SmileDirectClub did not ask the private health insurers to confirm that they would cover clear aligner treatment provided exclusively via a teledentistry platform without face-to-face consultations.
Given that it was one of the first companies in Australia to support treatment using teledentistry, SmileDirectClub should have asked for confirmation and not have assumed health insurance cover for its treatment.
In the period from 24 May 2019 when it commenced operations in Australia to 8 October 2020 when it ceased the offending conduct (the “Relevant Period”), SmileDirectClub published statements on its website that some Australian private health insurers provided insurance cover for its teeth aligners and treatment; and that if that insurance cover included items 811 and/or 825, consumers would be entitled to a reimbursement for part of the cost paid to SmileDirectClub for the teeth aligners and treatment.
The website contained statements such as: “Your private health insurer may cover tele-dentistry”.
It sent “Future Grinner’ emails and ‘Goods News’ texts to consumers such as: “Good news … we’ve contacted your private health fund provider and it looks like … you are eligible for up to $925 in potential reimbursement savings”.
Its in-store information cards contained similar messages.
SmileDirectClub admitted to the Court that it had not made adequate enquiries before posting the statements on its website, its emails and text messages to find out whether the orthodontics coverage applied to tele-dentistry treatment, that is, to treatment without a face-to-face consultation. Therefore, it had no reasonable basis to make the statements about health insurance coverage.
In August 2019 SmileDirectClub first learned that health insurers were rejecting claims. By 15 January 2020, it knew that almost all Australian health insurers had refused claims for its teeth aligners and treatment for the reason that the treatment was conducted via teledentistry and not-face-to-face. Even then, it did not take remedial action quickly enough, and did remove all of the statements until October 2020.
The contraventions of the Australian Consumer Law (ACL) were:
- Misleading or deceptive conduct (section 18 ACL)
- False or misleading representations that the goods or services had approval or benefits (section 29(1)(g) ACL)
- False or misleading representations concerning the existence, exclusion or effect of a condition or right (section 29(1)(m) ACL)
How SmileDirectClub was penalised
The Court said that “the primary purpose of civil penalties [under the ACL] is to secure deterrence” … it must “deter [the offender] from the cynical calculation involved in weighing up the risk of penalty against the profits to be made from contravention”, i.e. the conduct must not be regarded as “an acceptable cost of doing business”.
The marketing strategy was successful. The prospect of a health insurance reimbursement was attractive to many, as was the fact that the price was up to 60% less than traditional metal braces.
The Court noted that:
“at least 26,300 customers ordered teeth aligners and treatment [from SmileDirectClub Aus] in the Relevant Period, paying between $2,499 and $3,155 each”; and
SmileDirectClub Aus “earned a net revenue of $46,128,911 and made an operating loss of $15,023,175”.
No details were available of how many customers had made claims to health insurers, how many had been refused, and the reimbursement amounts claimed.
The Court ordered SmileDirectClub to:
- pay a penalty of $3,500,000, and allowed the penalty to be paid by instalments over 30 months, given its poor financial circumstances;
- provide a partial refund to consumers, to the extent that they had made a claim upon their health insurer which had been refused;
- send all consumers a corrective notice;
- establish and implement an ACL compliance program, to be continued for five years; and
- pay the ACCC’s legal costs, in the lump sum of $100,000.
If goods and services are marketed in Australia, any rights and benefits which they are said to have must be fully researched and verified before being promoted on a website, social media, emails, texts or print.
Failure to carry out adequate market research before launching a marketing campaign can prove painful financially and in terms of reputation, if that failure results in a breach of the Australian Consumer Law, as SmileDirectClub found out.
ACCC Fine Takes $3,500,000 Bite Out of SmileDirectClub’s Revenue
In 2022, the total Australian dental services market was worth a staggering $8.4bn.
In 2020 the Australian Clear Aligner market was valued at $72.0m, with forecast Compound Annual Growth rate (CAGR) of 27.8% (2021 – 2028).
Given the current market size, and exponential growth forecasts, it is unsurprising that an international dental services provider such as SmileDirectClub LLC, targeted Australia to fuel their growth plans. What is surprising is the obvious lack of market due diligence by the company, (or their Australian subsidiary), before commencing their marketing campaigns which contained specific claims about eligibility for refunds from health insurers.
The marketing message of promised health fund rebates obviously resonated with consumers as ~26,300 customers purchased aligner treatment from SmileDirectClub Aus in the Relevant Period, generating a gross revenue of $46,128,911.
Over the last few years, there has been a parade of high-profile international companies, who have incurred penalties by Australian regulators for failing to comply with local consumer marketing laws, such as viagogo, and Trivago
Hopefully the message is starting to get through. If you intend to conduct business in Australia, make sure you have thoroughly researched the legal and regulatory frameworks which govern your industry to ensure compliance with Australian consumer marketing law.
SmileDirectClub Shop in the Sydney CBD