As Superfone found out recently, a small business cannot escape a heavy penalty if it fails to comply with the Australian Consumer Law.
In the decision of Australian Competition and Consumer Commission v Superfone Pty Ltd  FCA 278 (26 March 2021) the Federal Court of Australia (Murphy J) said:
“There is a possibility that orders imposing a $300,000 penalty, coupled with the consumer redress orders and costs will push Superfone into insolvency, but having regard to the seriousness of the contraventions and the principal object of deterrence, in my view the imposition of such a penalty is appropriate.”[judgment, paragraph 2, also paragraph 90]
To put the penalty into context, Superfone is a small company making small profits. In the financial year 2018/19 it had gross sales of $1,009,478 of which it paid $298,345 to its telemarketer, Inspire Telecom. It made a net loss of $1,477.
What did Superfone do? (the contravening conduct)
Superfone is a reseller to consumers of mobile, landline and internet services which use major telecommunications companies’ networks.
Between June 2017 and December 2018, Superfone engaged Inspire Telecom, based in Delhi India as a telemarketer. Inspire Telecom made unsolicited phone calls (cold-calls) to prospective consumers in Australia, to convince them to sign agreements for mobile, landline and internet services with Superfone.
Superfone provided Inspire Telcom with a “lead generation script” which contained a series of statements and questions which were often false or misleading representations:
- That the purpose of the call was to provide discounts or savings on the customer’s existing plan for telecommunications services, when in fact it was to sell Superfone’s services to the consumer;
- That the sales representative was calling from, or was affiliated with, the consumer’s existing telecommunications provider; and/or
- That Superfone’s services were being offered with the approval of the consumer’s existing telecommunications provider.
In addition, Superfone often failed to comply with the unsolicited consumer agreements law. It:
- Did not inform the consumer that they could terminate the agreement and receive a refund of their deposit within the statutory cooling off period of 10 business days, or that payment was not required until after the cooling off period had expired;
- Informed consumers that they faced large fees if they terminated the agreement;
- Did not provide a complete copy of the agreement within the requisite 5 business days, or at all.
A total of 1,447 agreements were entered into by consumers during the relevant period, which represented 1,447 contraventions of the Australian Consumer Law, that is:
- Misleading or Deceptive Conduct (s 18);
- False or Misleading Representations (ss 29(1)(h), (g) and (m)); and
- Unsolicited Consumer Agreements (ss 76, 77, 78, 79 and 86).
Assessing the penalty (deterrence is the object)
According to the Court, the principal object of a pecuniary penalty is deterrence. That is:
“to discourage repetition of the contravening conduct by the contravener (specific deterrence) and discouraging others who might be tempted to engage in similar contraventions (general deterrence)” [judgment, paragraph 22]
The Court weighed a number of factors in deciding whether to impose a financial penalty of $400,000 as submitted by the ACCC, or a financial penalty of $60,000 as submitted by Superfone, or something in between. The Court found:
- The contravening conduct was deliberate. It was not, as Superfone submitted “the result of rogue conduct by a few sales representatives” who departed from the company’s “sales script”. Instead, the Court concluded that “Superfone’s activities in misleading consumers into thinking that the unsolicited telemarketing calls were made by or with the authority or approval of their existing telecommunication providers has the appearance of a deliberate strategy to get through the difficult early part of such a call and to entice consumers into its marketing web.”
- Senior management knew of and approved of the contravening conduct.
- Superfone has accepted responsibility for its conduct, has ceased to make unsolicited offers, has co-operated with the ACCC, has instigated training and compliance programs, and consumer redress orders have been made including refunds.
In justifying a penalty of $300,000, the Court took into consideration the fact that Superfone was a small business:
“Such a penalty is substantial when seen in the context of the Superfone’s size and financial capacity. It is unlikely to be seen by other companies in the telecommunications industry as being merely an acceptable cost of doing business, and it also takes into account the requirement to avoid a penalty which is oppressive. I would have ordered a substantially higher penalty for such contraventions had Superfone been larger and financially stronger.”
Ignorance of the law is no defence
All businesses, large and small, must comply with the Australian Consumer Law (ACL), even if they have not heard of the ACL.
As the Court said:
“Superfone’s claim to have been ignorant of the law is of little assistance to its submissions regarding penalty. Indeed, to some extent it tells against mitigation. A company seeking to conduct a business providing telecommunication services to consumers in Australia has an obligation to comply with the ACL and its State analogues, which entails familiarising itself with the relevant regulatory framework. Superfone should have known that misleading or deceptive conduct is prohibited. A failure to understand that provides little support for a reduction in the penalty for contraventions of the relevant norms.” [judgment, paragraph 73]
Oh, What A Tangled Web We Weave, When First We Practice To Deceive
As part of an overall marketing mix, telemarketing is a valid form of customer acquisition. It does however come at a higher cost when compared to other marketing options such as digital marketing or social media.
The inherent costs in telemarketing include:
- the development and maintenance, or purchase of a valid prospect database
- access to premises, computer hardware and software including telephone systems, either directly or via subcontract arrangement with a specialist telemarketing firm to conduct the telemarketing activity
- access to qualified staff and suitably skilled management
- script development and training
- legal review and compliance
- call monitoring, quality assurance and reporting
Given the high cost of a professional telemarketing operation and the uncertain returns, the temptation cut costs and/or avoid responsibility by outsourcing the activity to an offshore provider may be very appealing – but fundamentally flawed as a commercial practice, as evidenced by the dollar value of the financial penalty imposed by the ACCC in this case of $300,000.
Despite the impact of the penalty on Superfone as a small business, the ACCC are on the money with the penalty, as it achieves the intended outcome of deterring rogue operators from attempting to skirt the law or avoiding their legal obligations.
ACCC and ACMA appear to be ramping up their monitoring and compliance activities to ensure commercial operators are complying with the relevant laws including Australian Consumer Law when it comes to telemarketing and digital marketing.