Why was Samsung fined $14 million for advertising that its ‘Galaxy’ branded mobile phones would not be damaged if submerged in a pool or in sea water?
The Galaxy phones had been tested for water resistance in Korea prior to their launch and had achieved a rating of ‘IP68’ under International Standard IEC 0529. This rating reflected the phone’s protection against total immersion in fresh water (not pool or sea water) at a depth of 1.5 metres for 30 minutes. Submersion tests were conducted for short periods in salt water, chlorinated water and soapy water, with no corrosion evident to the charging port.
Despite this testing, Samsung Australia admitted in the Court proceedings that the charging port might be damaged due to corrosion if any of the Galaxy phones were attempted to be charged (whether switched on or off) while pool or sea water was present in the charging port. Samsung also admitted that the screen ‘warning’ messages that appeared if moisture was detected in the charging port did not remove the risk of damage.
Galaxy phones were sold in Australia between March 2016 until at least March 2018 with this defect. From March 2018, software and hardware upgrades were applied to remove the risk of damage.
The reason why Samsung got it so wrong was not the design but the marketing.
According to the testing, the Galaxy phones could be marketed as water resistant. But the marketing went beyond the test results.
In Australia, the Galaxy phones were marketed as suitable for recreational use in swimming pools, in sea water and in the surf with no risk of damage. These phones needed to be waterproof, not merely water resistant, for these uses.
The marketing was in website articles and videos, press releases, social media videos and posts on Facebook, Instagram and Twitter, and in-store booklets. These are ‘stills’ from videos posted on Facebook and the Samsung website, of phones used in swimming pools, sea water and in the surf:
Many customers bought Galaxy phones, used them in water, and discovered that their phone charging port needed replacement due to corrosion if they charged their phone after it had been submerged in a swimming pool or in salt water.
Their complaints led to legal proceedings.
The Legal Proceedings
The Australian Competition and Consumer Commission (ACCC) commenced proceedings on 4 July 2019 because it was concerned that: “Samsung’s advertisements denied consumers an informed choice and gave Samsung an unfair competitive advantage” and the Galaxy phones were “advertised as being water resistant were sold at a higher price than Samsung phones which do not have this feature”.
See my article Does Samsung have waterproof evidence that its Galaxy phones don’t leak?
The Court decision is Australian Competition and Consumer Commission v Samsung Electronics Australia Pty Ltd [2022] FCA 875 (28 July 2022) (Murphy J) Federal Court of Australia.
The legal basis was contraventions of the Australian Consumer Law (ACL):
- section 18 (1) - misleading and deceptive conduct;
- section 29(1) – false and misleading representations as to (a) - standard, quality or grade, and (g) – performance characteristics and uses or benefits;
- section 33 – misleading conduct as to the characteristics and suitability for their purpose of any goods.
Although Samsung left it until late in the proceedings before admitting the contraventions of the ACL, it did so before the hearing and assisted the Court by submitting a joint statement (with the ACCC) of agreed facts and joint submissions for the hearing.
The Court proceedings were therefore for assessment of the penalty and to make declarations for contraventions of the ACL.
The Court fined Samsung Australia $14 million and made declarations that its advertisements from March 2016 to October 2018 that Galaxy phones were water resistant were false, misleading and deceptive.
The Court took these considerations into account:
The nature, extent and duration of the conduct was the most significant consideration in setting the penalty. These are paragraphs 56 to 59 of the judgment:
“56 The estimated number of Galaxy phones sold to Australian consumers is approximately 3.1 million and the contravening conduct spanned a period of approximately two and a half years. The representations were made in the context of a highly competitive Australian mobile phone market in which there are numerous other competing phone manufacturers, including on the basis of the advertised features of their phones.
57 The Galaxy phones are mass consumer products which were the subject of a mass marketing campaign. The contraventions occurred over a lengthy period and in my view it is likely they affected a great many consumers and Samsung Australia’s competitors in a highly competitive market. They constitute serious contraventions of the ACL. All too often cases are brought before the Court in which products and services that have been ‘oversold’ to consumers in marketing campaigns, and in response to an application for a civil penalty the respondent argues that it is impossible to quantify or estimate the damage actually suffered by consumers and/or competitors.
58 I have no difficulty in accepting that the Galaxy phones provided a reasonable level of water resistance, but they were promoted by Samsung Australia as capable of being used in the surf, at the bottom of a swimming pool and in other similar circumstances, when they were not. Samsung Australia has now admitted that if the Galaxy phones were submerged in a swimming pool or sea water, there was a material prospect that the charging ports might be damaged by corrosion if the phones were charged or attempted to be charged while there was still some water remaining in the charging port.
59 The nature, duration and extent of the contravening conduct points to imposition of a substantial pecuniary penalty.”
The circumstances of the conduct: It does not appear that the beach of the ACL was deliberate (if it were, the penalty would have been higher). As the Court noted, it is entirely possible that the parent company Samsung Electronics Co. Ltd (“SEC”) did not let Samsung Australia know of the potential corrosion problem. This is paragraph 61 of the judgement:
“61 There is nothing in the evidence to indicate that Samsung Australia was aware of the risk, and took the chance of marketing the Galaxy phones with a known or suspected defect in order to increase its market share.”
The loss or damage caused was another important consideration. The Court was concerned with the likely effect of the advertising because it was not possible to know how many phones were purchased because of the advertising: In paragraph 64 of the judgment, the Court said:
“64 … it is appropriate to assess the penalty on the basis that a great many consumers are likely to have seen the offending advertisements; and a significant number of those who did so are likely to have purchased one of the Galaxy phones. It is likely that the misleading representations were material in many such purchases, as the capacity of the Galaxy phones to continue to properly operate after having been submerged in pool or sea water was the primary thrust of the advertisements; and that capacity was portrayed as a desirable and differentiating feature from many other phones available on the market. In my view many of those consumers who purchased a Galaxy phone are likely to have used it in a manner similar to that advertised. They were entitled to assume that a large company like Samsung Australia would not advertise that its Galaxy phones could safely be submerged in pool or sea water, if in fact they could not be.”
Samsung Australia’s size and degree of power was an important consideration. In paragraph 66, the Court said:
“66 … three factors are present in this case: there is no suggestion that SEC was involved in the contravening conduct and the advertisements were published only in Australia; Samsung Australia is one of the leading players in the Australian smartphone market; and during the years of the relevant period, Samsung Australia had very substantial annual revenue.”
The Court concluded that a penalty of $14 million: “will carry a sufficient sting or burden so as to deter Samsung Australia from a repetition of similar conduct, and it should serve as a salutary reminder to other large providers of smartphones to avoid such conduct”.
ACCC Comments
In the ACCC media release, the ACCC made these comments:
“We reviewed hundreds of complaints from consumers who reported they experienced issues with their Galaxy phones after it was exposed to water and, in many cases, they reported their Galaxy phone stopped working entirely,” ACCC Chair Ms Cass-Gottlieb said.
“This penalty is a strong reminder to businesses that all product claims must be substantiated. The ACCC will continue to take enforcement action against businesses that mislead consumers with claims about the nature or benefits of their products,” Ms Cass-Gottlieb said.
Samsung ‘Jumps The Shark’ With Waterproof Claims
The handset wars
Marketing commentary by Michael Field
Why did Samsung pursue such an aggressive and risky marketing strategy?
According to Statista, the mobile device market in Australia is dominated by Apple, with a comfortable lead of more than 50% market share since 2011. Samsung phones are the next most popular mobile device choice for Australians.
During the offending period (2016 to 2018), Samsung were in a fierce battle with Apple to gain market share. The pressure to maintain the record of market share growth to 2015 (at the expense of Apple), most likely influenced their judgement as to what claims they should, or should not make, in relation to their product’s features, and suitability for Australian conditions.
Statistica: Market share of leading mobile device vendors in Australia from 2011 to 2022
In 2016 Samsung released its Galaxy S7 and S7 Edge; the best smartphones Samsung had ever made, with great design, displays, cameras, and battery life. To capitalize on the launch, and maximize their market share, they needed to come up with a compelling value proposition to entice Australian consumers to choose the new Samsung handset over the alternative, the Apple iPhone.
Despite the release of the Galaxy phones, Samsung struggled to compete against Apple’s much larger product range including the App store, Apple TV, iTunes, and the Apple watch launched in 2014. The Samsung smartwatch was not launched until 2018.
The fight was not a short-term battle for number of units sold per quarter, but rather a long-term play for an ‘installed base’ of customers, called End User Licence Agreements (EULA’s). Once a customer is locked into a vendor’s handset, they provide a stable revenue base for the lifetime of that customer from additional sales such as handset upgrades, accessories including headsets and smartwatches, and the highly profitable add-on services such as apps, music, TV, and VR.
Why waterproof claims worked
All iPhones built after 2006 had built-in Liquid Contact Indicators (LCI’s) that show whether the device has been in contact with water or a liquid containing water. As the Apple One-Year Limited Warranty does not cover servicing for liquid damage, many consumers became disillusioned with Apple mobile devices, which had the effect of priming them for Samsung’s marketing promise of water resistance.
Where did Samsung go wrong?
Samsung had a great product, and had successfully grown their market share to 27% in 2015/2016, so why risk your brand name and reputation with unsubstantiated marketing claims? The answer is likely a combination of the following:
- allure of the long and predictable revenue tail available from an installed user base, creating pressure for continued market share growth
- frustration of having a weaker product ecosystem, meaning less products to integrate, cross-sell and upsell
- fear that the nascent success of the Apple watch as an add-on accessory would slow Samsung’s growth in an increasingly tech-savvy market. As Samsung’s smartwatch was still a few years away, taking greater risks to gain market share may have looked attractive, if not essential.
Lessons for the marketers
When making product claims, ensure that the claims are accurate, and can be substantiated.
When the product claims relate to product performance in specific conditions, ensure that the test conditions match the marketing context when the product is promoted, especially in mass market advertising campaigns across multiple media platforms such as print, radio and TV.
Finally, focus on the true strengths and points of difference of your product compared to your competitors. Don’t make outlandish claims that will land you in hot water with the regulators and damage your most valuable asset – your reputation in the market with your core customers.
