Introduction

The Full Federal Court judgment in ACCC v Lux (2013),1 marks a significant decision on the application of the prohibition against unconscionable conduct contained in the Australian Consumer Law (ACL).2 Notably, the case provides greater clarity on the statutory concept of unconscionable conduct. Relevantly for direct selling businesses, this decision examines, in detail, unconscionable conduct that was engaged in by direct salespersons.

We explore below the factors that make up unconscionable conduct and provide take home points designed to help businesses avoid engaging in unconscionable conduct.

Unconscionable Conduct

Broadly speaking, “unconscionable conduct” is a statement or action so unreasonable or harsh that it defies good conscience.

The statutory provisions governing unconscionable conduct in the ACL are set out in sections 20 to 22. Namely, section 21 prohibits a person (including a business) from engaging in unconscionable conduct in connection with the supply of or the acquisition of goods and services to or from a person. Section 22 provides a list of factors to be taken into account when the court considers whether there has been a breach of section 21.

The maximum civil penalties are $220,000 for an individual and $1.1 million for a body corporate.3

Background

Lux conducted business through selling vacuum cleaners. The conduct in question involved Lux sales representatives calling three elderly women, on separate occasions, for the purpose of making meetings to arrange a "free maintenance check" on their existing vacuum cleaner. Upon agreeing to the "free maintenance check", the Lux sales representatives attended the premises of the three elderly women as part of an attempt to sell them a new vacuum cleaner. The Lux sales representatives tested the existing vacuum cleaners and conducted a test which compared their vacuum cleaners to a demonstration model. The results were used to convince the elderly women to replace their existing vacuum cleaners with the Lux model at a price of $1,999 or more.

On 10 May 2012, the ACCC commenced proceedings against Lux in the Federal Court of Australia, asserting contraventions of section 51AB of the Trade Practices Act 1974 (Cth) and section 21 of the ACL. However, Jessup J dismissed the ACCC's case at first instance.

Decision on Appeal

The Full Federal Court (the Court) unanimously overturned the trial judge's decision and allowed the ACCC's appeal.

The issue before the Court was whether Lux engaged in unconscionable conduct in connection with the supply of vacuum cleaners to each of the purchasers. In assessing unconscionability, the Court considered:

  1. The societal values and expectations that consumers will be dealt with honestly, fairly and without deception or unfair pressure by direct salespersons; and
  2. The relevant State laws which contained provisions preventing unfairness in direct sales transactions

In determining the scope of societal values and expectations in respect of direct selling, the Court referred to the ACL's Explanatory Memorandum4 and indicated that the purpose of the ACL is to address the inherent inequalities in the bargaining power involved in the conduct of door-to-door selling. The Court acknowledged that the vulnerability of the consumer in having a salesperson in his or her home arises from the difficulty in terminating the sales process when the salesperson is in the home. Critical to the success of the sales conduct is gaining entry into private homes and winning the consumer's confidence. In this respect, truthfulness of the salesperson's information is of utmost significance.

In the present case, the Court found that Lux had engaged in unconscionable conduct by virtue of the following:

  • The "free maintenance check" was a deceptive ruse to gain entry to the consumers' homes, which is inconsistent with today's norms and standards requiring businesses to exhibit honesty and openness when gaining entry to the homes of people for selling opportunities;
  • The long length of time spent by Lux sales representatives at the elderly women's homes placed pressure on them;
  • The deception by Lux sales representatives at the outset tainted all conduct which occurred subsequently on the basis that it deprived each of the consumers of the opportunity to decline having the Lux sales representatives in their homes;
  • The opportunity to enter and remain in the consumers' homes created a position of power for the Lux sales representatives; and
  • The "cooling-off period", as required by law, did not lessen the deceptive conduct which had occurred beforehand.

The Court did not decide on the penalty to be imposed on Lux and ordered the parties to submit further submissions on the issue of penalty.

Take Home Message

The Lux case makes it clear that unconscionable conduct should be given a broad interpretation. Further, it clarifies that businesses cannot rely on a cooling-off period to overcome conduct that may be deemed unconscionable.

For direct selling businesses, we would recommend the following to ensure that unconscionable conduct does not occur:

  • Be honest about the purpose of the visit when securing entrance to a potential customer's home;
  • Comply with Commonwealth legislation regulating direct selling;
  • Be aware that the longer the time a sales representative stays on the premises, the more vulnerable the customer may be perceived;
  • Do not reward workers for unfair, pressure-based selling;
  • Ensure that the contracts are thorough, easy to understand and not too lengthy; and
  • Make sure that the sales representatives disclose clearly important or unusual terms or conditionsof an agreement.