When legal advisers warn second and third tier telcos and ISPs about advertising content, the single most common retort is ‘Telstra gets away with it’ and ‘We saw an Optus ad like that’ and ‘But Voda says the same thing’.

It’s a pretty good argument.  If the giants can do it, why can’t we ?

No mistake, this is the biggest telco-truth-in-advertising hit ever landed by the national regulator.  Like all good commando raids, it seemed to come from nowhere.  Only yesterday morning did rumours start to circulate that ‘something big’ was coming out of Canberra in the next 24 hours.

If Tiers 2, 3 & 4 don’t get their act together now, they can’t complain they’re being picked on.  And ACCC has made sure that Telstra, Optus & Voda are motivated to keep their networks honest.

The Undertaking:  a summary

ACCC Chairman Graeme Samuel

Here’s what it says in a nutshell:

• The Trade Practices Act prohibits misleading advertising.
• It also prohibits advertising part of the price of a product, but not the whole price.
• ACCC thinks the comms industry in general has an advertising problem.
• ACCC thinks the industry in general has engaged in advertising that:
  • uses misleading headline pricing
  • misuses the word ‘unlimited’
  • misuses phrases like ‘no exceptions’
  • falsely uses words like ‘free’
  • misrepresents price per minute
  • features pricing that only applies in bundles
  • misrepresents data allowances
  • exaggerates broadband speeds
  • exaggerates coverage areas.
• ACCC thinks that Telstra / Optus / Voda are each guilty of one or more of the above.
• Everyone acknowledges that Telstra / Optus / Voda might have their own opinion about a particular instance, and it would be up to the court to decide.
• Because they’re market leaders and want to set a new standard for telco-truth-in-advertising, Telstra / Optus / Voda give an enforceable undertaking to ACCC.
• Telstra / Optus / Voda undertake to desist from any new advertising of the kind described above.
• Within 30 days, they’ll review current ads to see if any offend.
• Within a further 60 days, they’ll cease any that does offend.
• Within 60 days, they’ll confirm to ACCC that they have complaints systems that give redress to customers who are misled.
• Within 60 days, they’ll give redress to all customers with an unresolved complaint about misleading advertising (no more than 12 months old) by a customer who can show a good faith case.
• Within 60 days, they’ll review their trade practices compliance programs to ensure that the targeted advertising issues are under control.
• They’ll report to ACCC on advertising that has been dropped and consumer redress granted.
• They’ll make sure that future ads about headline prices, terms or representations accurately reflect the deal that most of the target audience can expect.
• They’ll make sure all their subsidiaries follow the same rules.
• The undertaking lasts for two years.

Is that all there is ?

No, it isn’t.

ACCC is well aware that:

• hundreds (or thousands) of resellers resupply Telstra / Optus / Voda services, and
• Telstra / Optus / Voda have substantial practical control over how they behave.

So:

• Telstra / Optus / Voda must take reasonable steps to ensure that their resellers follow the telco-truth-in-advertising undertakings.
• Within 30 days, Telstra / Optus / Voda must write to them all to tell them all about it.

A purely voluntary offer by Telstra / Optus / Voda ?

Possibly, but we’d bet a lot more money on the Geelong Football Club winning Australian Idol singing ‘Nessun Dorma’ a capella in five part harmony.

In its media release, ACCC is very positive about the role of the Big Three, saying they are to be ‘applauded’.  We think that’s diplomacy.  Obtaining this undertaking from three massive telcos would have involved more than ACCC explaining the warm glow of good citizenship.  Plainly, the companies were convinced they were at risk of stronger action if they did not agree.

ACCC itself has said about enforceable undertakings:

The Commission stresses that it seeks to resolve matters under s. 87B only when it believes that a breach has occurred or is likely to occur and that an administrative resolution based on enforceable undertakings offers the best solution.

What does it mean ?

Lawyers for Telstra / Optus / Voda have been restricted to damage control.  There’s no two ways about it:  ACCC has convinced all three companies that it could ‘slot’ them for Trade Practices Act breaches, and the best way out was to roll over.

Watch out for Telstra / Optus / Voda spin that they reckon it’s all a good thing and were always deeply committed to the same principles.

Sure.

ACCC has a history of being gracious in victory in these situations, so we don’t expect them to taunt the losers.  But make no mistake, this is a complete capitulation by Telstra / Optus / Voda.

And what’s an ‘enforceable undertaking’ ?

It’s similar to being under a court injunction.

Under section 87B of the Trade Practices Act 1974:

• ACCC may accept a written undertaking given by a person in connection with a matter in relation to which ACCC has a power or function under the Act.
• If ACCC considers that the person who gave the undertaking has breached any of its terms, it may apply to the Federal Court for an order.
• If the Court is satisfied that the person has breached a term of the undertaking, the Court may make all or any of the following orders:
  • an order directing the person to comply with that term of the undertaking;
  • an order directing the person to pay to the Commonwealth an amount up to the amount of any financial benefit that the person has obtained directly or indirectly and that is reasonably attributable to the breach;
  • any order that the Court considers appropriate directing the person to compensate any other person who has suffered loss or damage as a result of the breach;
  • any other order that the Court considers appropriate.

This undertaking builds in a short ‘please explain’ procedure, to give the telcos some opportunity to resolve issues early.

By the way, the wording of the TPA explains why the Undertaking has been ‘offered’ by the telcos and ‘accepted’ by ACCC.  You’ll see from above that this is the only way the TPA allows an Undertaking to be created.

The next part of the play

Telstra / Optus / Voda have rarely been the worst offenders in CSP advertising.  Resellers often far outdo them.  While the undertaking doesn’t bind the resellers, it sets up a two pronged attack against them.

• Telstra / Optus / Voda have undertaken to ‘take reasonable steps to ensure that the obligations outlined in paragraphs 32 and 33 of [the] Undertaking are applied’.
• ACCC will have its usual weapons available.

Frankly, we’re not sure which resellers need be more alarmed about:  ACCC with its potent TPA weaponry or Telstra / Optus / Voda with their brutal, arbitrary reseller contracts.  If Telstra / Optus / Voda really want to clean up the reseller channels, they can do it in weeks.  They lord it over their channels.  They can rapidly assert their will over them.

And who are the ‘resellers’ ?

The undertaking doesn’t actually refer to ‘resellers’.  It refers to ‘any party with whom [Telstra / Optus / Voda] has a commercial agreement that allows it to control the advertising and promotion of goods and services by that party’.

Now, Telstra / Optus / Voda have been on a power trip for years.  Their contracts routinely give them every power known to woman, man or beast.  The lawyers have basically been instructed ‘Make them sell us their souls’.

So in many cases, parties that fall under the description ‘any party with whom [Telstra / Optus / Voda] has a commercial agreement that allows it to control the advertising and promotion of goods and services by that party’ will include large scale wholesale customers.  And for all such customers, Telstra / Optus / Voda are assuming responsibility to ‘take reasonable steps to ensure that the obligations outlined in paragraphs 32 and 33 of [the] Undertaking are applied’.

What an ACCC coup.  Telstra / Optus / Voda forced to use the powers they have forced on other companies, for ACCC purposes.

But for once, the regulator hasn’t shot the messenger

For too long, regulators have ignored the reality of the Australian communications industry:  that combo retailer / wholesalers effectively force downstream operators into dodgy practices.  How can TinyTel, as a Telstra / Optus / Voda reseller, conduct itself squeaky clean if Telstra / Optus / Voda doesn’t ?

What next ?

ACCC Chairman Graeme Samuel has already said that second tier operators can expect to be contacted soon, with a request to commit to the principles of the principles of the advertising undertaking.

“The ACCC recognises there is more to do. The ACCC will now contact the next tier of operators who will be encouraged to adhere to the principles set out in the undertaking. When taken together with the three major carriers, this would then account for almost 90 per cent of the market for telecommunications goods and services in Australia.”

And FunnyTel has the last laugh

As always, Australia’s rising telco star FunnyTel was miles ahead of the industry on the truth-in-advertising push.  The company’s new FAT plan announcement is sure to score a big elephant stamp from ACCC.

Chad Blake, Manager (Legal Affairs & Hospitality) at Funnytel, told CSP Central:

We’ve never really worried about Telstra, Optus or Vodafone.  ‘Don’t sweat the small stuff’, says our CEO Steve.  We confidently expect to acquire all three of them within the next 18 months, as FunnyTel’s stellar growth continues, and Steve works out a way to buy millions of instant scratchies using BarterCard.

The Senate Standing Committee on Economics has received, and noted, strong submissions that part of the proposed new unfair contracts law can’t be right. 

But so what ?  The Committee majority finds no fault with the reasoning of law Professor Frank Zumbo, or the Consumer Action Law Centre … but it has still rubber stamped the Bill, virtually guaranteeing its passage into law.

And yes, the problem wording is the part we described as the Bill’s ‘bonkers bit’ back in June 2009.  It’s disappointing that the Senate Committee system hasn’t been able to deliver a sensible outcome.

The problem

We described it at length in an earlier post.  But in a nutshell, it’s this:

The new law will say that a contract term is unfair if it creates imbalanced rights or obligations without good reason.  And it goes on to say that in assessing that, the court must consider how ‘transparent’ (i.e. clear and obvious) the term is.

So the exact same imbalanced term, effectively forced by the exact same dominant supplier on the exact same customer with the exact same minimal bargaining power might be (a) unfair, if it is on page 21 of the contract in ordinary print but (b) fair, if it is on page 1 in bold type.

How does the page, or font size, affect whether a term creates imbalanced rights ?  How do they affect whether there’s a good reason for including an imbalanced right ?  It is, as they say in the classics, a non sequitur.  Transparency forms no part of the definition of ‘unfairness’ offered by the Bill.  So how can it be a factor in deciding if a certain case falls within the definition ?

The Zumbo view

Associate Professor Frank Zumbo submitted to the Committee:

… That the bill’s reference to whether or not a contract term is transparent in section 3(3) should be deleted. As with the ‘detriment’ provision, he argued that the test for transparency should be distinct from whether or not the contract term is unfair. Indeed, he argued that a contract term may be transparent but drafted by the larger party in a way that represents a significant imbalance in contractual rights of that party and which goes beyond what is reasonably necessary to protect its legitimate interests.

Consumer Action Law Centre view

Consumer Action Law Centre submitted:

… That the transparency clause is ‘the only part of the Bill’s definition of ‘unfair’ that was not in the MCCA-agreed model for UCT provisions and was not foreshadowed in the consultation information paper of February 2009′. The two other matters in subsection 3(2) of the bill – detriment and the contract as a whole – are both ‘reasonable and in accord with the MCCA model’.

The Centre explained that the unfair contract laws are a negotiation problem (a substantive issue), not a disclosure problem (a procedural issue). In this context, the availability, legibility and presentation of contract terms is irrelevant: the key obstacle is the inability of consumers to negotiate the terms of standard form contracts proposed by suppliers.

The Centre feared that despite the government’s good intentions in introducing the ‘transparency’ test, the test may substantially undermine the operation of the provisions. It could mean that the courts will regard a term as:

…’less unfair’, and thus possibly not unfair at all, if it has been clearly typed out in the contract, regardless of whether it is realistic to expect the consumer to have read, understood or negotiated over that contract term, and regardless of the extent of the unfairness of the content and effect of that term. Despite the EM’s statements, the provision is not drafted in terms of a court being required to take into account the extent to which a term is not transparent but the extent to which it is.

The majority Committee position

Professor Zumbo and Consumer Action Law Centre are plainly correct on the transparency question.  The Committee majority didn’t find otherwise.

But some Senate Committees have a real brief to critique, while others seem to consider themselves a rubber stamp.  In this case, the majority simply approved the Bill, including this obvious mistake.

The minority Committee position

Senators Alan Eggleston and Barnaby Joyce made some separate comments of a rather confused kind:

In relation to … whether a term is ‘transparent’ in the context of matters to which a court must have regard in deciding whether a term is unfair, Coalition senators are attracted to the arguments of the Consumer Action Law Centre and Professor Frank Zumbo that the “transparent” element is superfluous in this clause and should be removed.

Coalition senators recognise that difficulty and unease these concepts have caused from the evidence of a number of witnesses. We are however satisfied, based on the UK and Victorian experience and Treasury and other evidence, that these elements, in their context of “matters to which a court must have regard,” are not impassable.

Coalition senators note with satisfaction that the experience in the UK is that the key role in enforcement of the UK Regulations has been with the regulator and not the courts.

As far as we can tell, they ended up in support of the majority position, although if the final paragraph means what it seems to (that Parliament needn’t worry so much about how an Act directs courts if it considers that there won’t be many court cases, because a regulator will sort most things out), the Senators need their mouths washed out.

One logical and strong position

It was up to independent Senator Nick Xenophon to stand up for logic in legislation:

Courts’ consideration of … ‘transparency’

As it stands, courts have the discretion to consider all aspects of cases before them, and should not be constrained to focus on ‘transparency’ and ‘detriment’ specifically when it comes to determining whether or not a contract is unfair. The mandatory requirement for the Court to focus on transparency and detriment will require the court to address these specific questions and will effectively turn these mandatory requirements into tests in themselves and in a manner that negatively impacts on the consumer.

National Legal Aid argues that the concept of ‘transparency’ implies that consumers are able to make informed choices about contract terms, however it stated in its submission that their case work would suggest the opposite.

… because most consumers do not read contracts – most rely on a notion that traders will act in a fair and reasonable way when it comes to enforcing their rights. Even when they read contracts, consumers do not often understand how a particular clause will operate in practice. And, even when a contract is read and understood, standard clause contracts are nonnegotiable – it is a falsity to think that consumers can somehow bargain their way through amending or deleting a clause in a contract that is unfair but transparent.

Associate Professor Frank Zumbo also argued in his submission that a term can be considered ‘transparent’ but may still be ‘unfair’.

…on the simple, but objective basis that the larger party’s bargaining power allows the larger party to draft and impose a contract term in such a way as to (i) represent a significant imbalance in the contractual rights and obligations in the larger party’s favour; and (ii) in a manner that goes beyond what is reasonably necessary in order to protect the legitimate interest of the larger party.

Our take on it

It seems to us that this was an extreme case of law making gone wrong. 

• The transparency ‘test’ forms no logical part of the definition it is supposed to test for.
• That problem was clearly pointed out to the Committee.
• So were its practical consequences.

But somehow, it was all OK by everyone except Senator Xenophon.

Two separate groups of telco companies promoted the notorious telco equipment / finance / servces bundling scam that has cheated businesses of millions of dollars, saddling them with massive debt for goods and services never supplied.  One of these groups has been taken to court by ACCC, which is determined to smash its illegal conduct.

Watching on the sidelines are the financiers of the other group.  It doesn’t take much to figure out that they won’t be able to recover their dodgy debts after the Federal Court case against the first group is over.  So the finance companies are grabbing as much cash from innocent business operators as they can before the ACCC shuts the gate.

And Bank of Queensland’s equipment finance subsidiary is one of the players.  Yes, that’e the same Bank of Queensland that denies all responsibility for the outrageous lending practices of failed Storm Financial.

Elements of the scam

The scam typically depended on three elements.

First, a finance company stuffed to the gills with lending cash during a boom, needing to push out loans to keep profits high.

Second, a dodgy telco, willing to tell potential customers anything to get their signature on paper.  Even willing to forge signatures if the prospect was unhelpful and didn’t sign enough documents.

Third, a middleman to connect the two.  A finance broker with links to the finance company and the dodgy telco.

The broker has the credibility with the finance company to access a stream of funds.  Behind the curtain, it makes the funding source available to the dodgy telco.  The telco sends out sales staff out to do deals at any cost (to the customer).

We’ve explained previously what happened next.  It makes chilling reading.

Two players in the game

There were two major players in the game:  one group of companies featuring Axis Telecoms Pty Ltd, and a separate one starring Komtel Pty Ltd.

They had to be caught and they were

Frankly, ACCC could have picked either group of companies to sue in the Federal Court.  But they chose the Axis Telecoms companies and look as though they are slowly steamrolling them into defeat.

That leaves the Komtel group of companies watching on the sidelines.  Actually, Komtel was allowed to go into liquidation as one of the orchestrated steps in the scam.

Also on the sidelines are the finance companies.

The position of the financiers

You’d weep (with laughter, sometimes) if you hear the line the ultimate financiers are pushing.

“We aren’t guilty.  We totally trusted the middleman.  So how can we be guilty ?  It’s the customer’s fault for being ripped off.”

The argument is that because the finance companies were careless about everything their broker representatives did, and because their broker representatives appointed dishonest telco companies to do the face-to-face selling, they (the financiers) are the innocent parties.  PLEASE !!!

So the finance companies find themselves:

• ripped off by Komtel and companies like it (but no point chasing Komtel … it’s being liquidated, remember ?)
• facing the prospect of a Federal Court decision in a few months that will blow the lid off this type of scam - making any further recoveries from ripped off customers very difficult
• with a window of opportunity to collect as much as possible from the ripped off customers.

So what are they doing ?  Demanding, demanding, demanding.  Suing, suing, suing.

The position of the ripped off customers

They’re in small business.  They know they’ve been scammed, but they couldn’t explain the legalities.  They’re being chased for $30k or $50k or $60k and they can’t afford big legal fees to fight it.  So when they get a chance to settle for two thirds, they take it.

That’s two thirds of a false claim against them.  Not two thirds of anything they really owe.

And that suits the finance companies, too.  Two thirds of a false claim is a fantastic result.  Especially when it will all come to a screaming halt when the Federal Court deals with the ACCC case.

But we’re ‘innocent’ bleat the finance companies

Did they actually know what the telcos were doing ?  Probably not.

Did they take reasonable steps to prevent their money from financing dodgy telco schemes ?  No.

That’s not ‘innocent’.

An interesting parallel

There’s an interesting parallel with the allegations against the Bank of Queensland in relation to Storm Financial.

Commonwealth Bank has admitted that it allowed Storm to sign up borrowers without due care.  As The Australian reported on 18 June 2009:

CBA chief executive Ralph Norris, who initially played down the bank’s role in the collapse of Storm in January, said yesterday it had identified “shortcomings” concerning loans it made to Storm clients. The issue is understood to involve some customers being granted loans they were unable to repay.

“We are not proud of our involvement in some of these issues and we are working toward a fair and equitable outcome for our affected customers,” Mr Norris said yesterday. “Our customers can be assured that where we have done wrong, we will put it right.”

Contrast that with Bank of Queensland’s irresponsible position on the same issue:

Statement from Bank of Queensland regarding Storm Financial

Thursday, 25 June 2009

Given the significant misinformation in the media recently regarding Bank of Queensland’s dealings with Storm Financial and treatment of Storm Financial customer accounts, the Bank would like to take the opportunity to clarify key facts.

Based on the Bank’s knowledge and enquiries to date:

• There is no evidence of improper or dishonest practices or conduct by the Bank in connection with Storm clients; and
• There is no evidence that the Bank has engaged in any misleading and deceptive conduct or unconscionable conduct in relation to its lending to Storm clients.

Translation:  ‘We didn’t do it.  Those people that we allowed to represent us in the market place did it.  What has that to do with us ???’

More than a parallel

Actually, the gross lack of safeguards and responsibility that characterise the Bank of Queensland / Storm Financial case are not a mere parallel with the telco scam.  They are history repeating itself.

The Bank of Queensland’s equipment finance arm, Bank of Queensland Equipment Finance Ltd, was just as slack in managing its representative relationships during the economic boom.

Yes, it appointed a middleman finance broker but didn’t have processes in place to effectively monitor what the broker did,  And yes the broker engaged with the scammer Komtel, which took Bank of Queensland finance into the streets and misled small businesses into signing dodgy deals.

And yes Bank of Queensland Equipment Finance Ltd is using the window of opportunity to try and ‘recover debt’ from a small business that really doesn’t owe them a penny.

And yes, when we wrote (months ago) about a major lender that flatly denied that it had ever been involved with telco bundles, that was Bank of Queensland Equipment Finance Limited.

Time for ACCC to step up

Finance companies like Bank of Queensland Equipment Finance Ltd are no doubt working on the assumption that any ‘settlements’ they achieve are money in the bank.  If ACCC put them on notice that each and every past ‘settlement’ will be liable to be re-opened and repaid (with an allowance for legal costs) if ACCC is forced to take formal action, we bet the financiers would get of the backs of Australia’s small businesses in an instant.

Because they know that they allowed the wrong thing to happen.

CommBank has had the guts to admit it, re Storm Financial.  If BoQEF hasn’t got the decency to do the same thing, ACCC should help it see the error of its ways.  Otherwise ACCC’s Federal Court action will be a blessing for some victims but leave others at the mercy of powerful finance companies that want little guys to pay for the companies’ mistakes.

Five of the respondents to the Federal Court action have failed to take necessary procedural steps, and the Court has agreed to ACMA’s application for default judgments.  After hearing evidence about the defaults and the original conduct, the Court has ordered:

• that parties including Mobilegate Ltd, Winning Bid Pty Ltd, Simon Anthony Owen, Tarek Andreas Salcedo and Glenn Christopher Maughan have breached the Spam Act and / or Trade Practices Act in various ways;
• that they be restrained from certain conduct, of the kind involved in the scam, for seven years; and
• the matter be re-listed for directions in relation to any penalty hearing as the above respondents on 18 September 2009.

The case against other respondents, who have defended the case, continues.

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Ads that show ‘two price’ or ‘was / now’ pricing are common, effective and legal … provided they’re not misleading. There are special rules about how to get ‘was / now” pricing ads right. While care needs to be taken, getting it right is relatively easy.

Getting it wrong can be costly, as the former owners of the Zamel’s jewellery chain have found – the ACCC took them to court over allegedly misleading ‘was / now’ price ads in one of their catalogues. In January 2009, the court handed down a fine of $380,000.

So, what are the rules? Well, the ACCC has actually published guides on issues to be addressed before running a ‘was / now” price promotion. Here’s a summary:

You should ensure that:

• products were actually sold at the ‘was’ price for a period of at least 14 days before the advertisement (note that this is the suggested minimum – a longer period may be reasonable in the circumstances)
• at least 75% of the actual sales of the product before the promotion were at the ‘was’ or higher price
• the ‘was’ price is not simply the RRP if the products were not actually sold at that price in sufficient quantities
• the promotion is intended to end or the intention is to remove the ‘was’ price by a specified date
• the products were sold at the ‘was’ price for a longer period of time than the period of the promotion
• there are reasonable grounds to believe that there will be stock at the end of the promotion (i.e. this is not a stock run out)
• if the promotion is a stock run out sale, that must be made clear to customers.

Last December Optus incurred customer wrath, effectively torpedoing mobile access to cheap international VoIP services by charging them at international rates. 

At the time, Optus insisted that:

International calls within the meaning of your Optus Mobile Standard Form of Agreement for all Timeless and Cap plans includes calls that re-route or divert to international numbers.

CSP Central asked Optus to tell us where the SFoA said that.  We couldn’t be sure – because the document is a confused mish-mash – but as far as we could tell it said no such thing.

Apparently Optus didn’t feel too sure of its grounds, either.  So it has bolted on a powerful, unbalanced  new contract term that is sure to attract the interest of consumer regulators who have unfair contract terms legislation in their armory.  Today, that’s only Victoria.  On 1 January 2010, it will be every Australian State and Territory, and the ACCC.

The new Optus contract term

The following little gem has been added to Optus’ standard terms:

5.2A  Blocking Calls
Effective 12 August 2009, we may block access to a number (other than an emergency service number) if we reasonably require this to be done for technical, operational or commercial reasons.

Seems pretty rude, to us

It’s the ‘commercial reasons’ that trouble us most. 

It’s a ‘commercial reason’ to block a particular number that it relates to a service that competes with Optus. 

It’s a ‘commercial reason’ to block access because the number represents a call type that is unprofitable for Optus.

For many purposes, the word ‘commercial’ can reasonably be translated as ‘money making’.  That’s not a cheap shot.  ‘Commercial real estate’ is real estate used for money making purposes.  ‘Commercial loans’ are financial arrangements made to facilitate money making activities.

So substitute that for ‘commercial’ in Optus’ new term and you get:

5.2A  Blocking Calls
Effective 12 August 2009, we may block access to a number … if we reasonably require this to be done for … money making reasons.

It’s a pretty unbalanced and unreasonable power to have, unless Optus can explain what legitimate interest it is necessary to protect.

Unbalanced and unreasonable equals illegal

Under the new national unfair contracts law, due to take effect on 1 January 2010, a term in a standard form contract that is (a) seriously unbalanced and (b) not reasonably necessary to protect a legitimate interest is void.  And the onus of showing the legitimate interest will lie on the party that benefits from it.

Back in January, we were asking Dear Optus, please show us where the supposed definition of international calls could be found.  Now, we’re asking What legitimate interest of Optus justifies a power to block access to numbers for unspecified ‘commercial’ reasons ?

Prepaid Services Pty Ltd supplies phone cards that are resold by an independent company Boost Tel Pty Ltd. 

ACCC alleges that Prepaid and Boost were involved in false advertising.

 
The allegations

ACCC says that Prepaid and Boost falsely represented that:

• phone cards would provide consumers with a specified amount of call time (when they couldn’t really talk that long for the card price)
• only timed call charges would apply (when in fact other fees were charged)
• a rate per minute for calls would apply regardless of the number / length of calls made (when in fact that call rate is highly unlikely to be achieved in practice).

What ACCC wants

In court, ACCC is seeking orders for:

• declarations that Prepaid’s and Boost’s conduct breached the Trade Practices Act
• injunctive relief preventing repeat breaches
• corrective advertising
• community service orders
• costs of the proceeding.

What next

The case is filed in the Federal Court’s ‘fast track’ list.  The first court scheduling conference is due in Perth on 14 September 2009.

Our take on it

It’s a court case.  ACCC has allegations and the other parties are entitled to debate them.

But ACCC takes careful aim in these situations.  Don’t be surprised if this one comes to a head quickly.

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We’ll offer a repeat session soon … keep watching.

• isn’t in the Productivity Commission report that recommended the new law
• isn’t in the Victorian law that is already in force in Victoria
• isn’t in the United Kingdom law that served as the model for Victoria’s law, and
• is bonkers.

It makes no sense.  It’s bananas.  And the Explanatory Memorandum that accompanies the Bill admits as much.

The definition of ‘unfair term’

Since the proposed law voids ‘unfair terms’, it needs to say what that expression means.  Here’s how it does that.

Meaning of unfair

(1) A term of a consumer contract is unfair if:

(a) it would cause a significant imbalance in the parties’ rights and obligations arising under the contract; and

(b) it is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term.

OK, that’s cool as far as it goes.  There are two conditions that define an unfair term:

• My rights are significantly greater than yours, or my obligations are significantly less.
• That disparity isn’t reasonably necessary to protect my legitimate interests.

We can understand that.  Fine.

An example

Before we get to the bonkers bit, let’s dream up an example of how that definition might work.  Let’s say that there was a court decision that ISPs could be liable to massive damages if they receive a copyright infringement allegation and don’t suspend the alleged account within 5 minutes. 

Well, every ISP would add a contract term that allowed it to immediately suspend a customer in those circumstances.

That term would clearly be ‘fair’.  The powerful and unbalanced right to suspend is necessary for the ISP to protect itself against big damages awards.  End of story ?  Would a court have to think about it a moment longer ?  Hasn’t the definition of ‘unfair’ been applied and resolved in this case ?

Well, not quite.  Thanks to the bonkers bit.

The other thing the court would have to do

The draft law directs the judge:

In determining whether a term of a consumer contract is unfair under subsection (1), a court must take into account the extent to which the term is

(a) expressed in reasonably plain language; and

(b) legible; and

(c) presented clearly; and

(d) readily available to any party affected by the term.

Think about that.  We have a term that, according to the definition in the proposed law, is not unfair.  But the poor judge can’t just say that.  She also has to consider its ‘transparency’. 

Well, what if it’s totally ‘non-transparent’ ? 

What does she do ?  What can she do ?  She has already concluded that the term ‘is reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term.’  If she also decides it was ‘non-transparent’ is she obliged to reverse the result ?  Does lack of transparency have the effect that it is ‘not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term’ ?

‘I am satisfied that that the term is reasonably necessary to protect your legitimate interests’ she says.  ‘But it isn’t presented clearly.  So now I rule it is not reasonably necessary to protect your legitimate interests.’ 

Get it ?  A factor that is not part of the definition, but (for bonkers reasons) is described as a mandatory consideration, changes the outcome.  If it can do that, why is it not part of the definition of unfairness ?  If it can’t, why is it mentioned at all ?

Why is it so ?

Bonkers logic lead to bonkers results.  Imagine this … We introduce a law that says:

• You must not say rude things to tram drivers.
• In determining whether person has been rude, the court must have regard to the direction of travel of the tram.

You see, the direction of the tram isn’t an element of rudeness.  It’s like saying ‘to decide if a person is tall, the court must have regard to whether it is Tuesday.’  There’s just no logical connection.

And here’s the punch line:  the Explanatory Memorandum admits the nonsense

Transparency, on its own account, cannot overcome underlying unfairness in a contract term. Furthermore, the extent to which a term is not transparent is not, of itself, determinative of the unfairness of a term in a consumer contract and the nature and effect of the term will continue to be relevant.

Translation:

• The clearest, most readable, most transparent wording cannot make an unfair term fair.
• Obscurity, complexity and non-transparency don’t make a fair term unfair.

So here’s the question …

What the hell is the transparency ‘factor’ doing in the Bill ?   If the legislators want to say that obscure terms can be unfair – purely because of their obscurity and no other factor – fine.  But don’t say that the only test is reasonable necessity for the term to exist, but then direct judges to consider ‘transparency’.

From 1 January 2010, the Government intends that we’ll have a national unfair contract terms law.  ACCC will have power to demand that advertisers positively substantiate any claims they make.  And there’ll be new penalties, enforcement powers and options for compensating consumers.

Stay tuned to CSP Central for plenty of news and expert commentary about the new law.  We already have some detailed comments on one misconceived part of the drafting.

Links

• CSP Central backgrounders
• Parliament home page for the Bill
• Treasury’s information site