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Maddocks advises Atomos Limited on key UK acquisition October 28, 2019

Monday 28 October 2019 Maddocks has advised ASX-listed global video technology company Atomos Limited on its acquisition of UK-based Timecode Systems. Atomos will purchase 100% of Timecode Systems, which develops unique and patented IP for … Continued

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Has the ATO come knocking about your SMSF’s Investment Strategy? November 8, 2019

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Broken Down – ACCC’s ‘future matters’ claims strategy in doubt

In two recent decisions, the Federal Court has ruled against one of the ACCC’s favoured approaches when litigating manufacturers’ claims concerning the features of their products: namely, shifting the evidentiary burden of substantiating the manufacturer’s product claim to the manufacturer by alleging that it amounts to a prediction as to the future use of, or benefit arising from, the product.

While the ACCC has appealed both decisions, if the appeals are unsuccessful, it may have to change its approach to the litigation of such claims and manufacturers may also find it easier to talk up their products without the risk of a successful ACCC challenge.

Representations with respect to any future matter

The Australian Consumer Law (ACL) provides that a representation with respect to future matter that is made without ‘reasonable grounds’ for doing so is taken to be misleading for the purpose of ACL. This creates an evidentiary burden on the person making the predictive representation to establish that they had reasonable grounds for doing so, effectively reversing the burden of proof.[1] If the maker of the representation is unable to establish reasonable grounds for the representation (at the time that it is made), the conduct will be misleading and deceptive under the ACL. This shifts the burden and cost of proving that a statement was made on reasonable grounds onto the maker of the statement.

The ACCC has a long history of using this approach in prosecuting breaches of the ACL[2] having first used it in the late 90’s, which is unsurprising as it shifts much of the burden (and cost) of such litigation from the ACCC to the manufacturer. The ACCC has successfully litigated such claims in a number of cases – in particular:

  • In ACCC v Giraffe World,[3] Giraffe World made representations that a mat that it manufactured emitted negative ions within a person lying upon the mat, which would result in numerous health benefits to the user. The Court held that these representations were with respect to future matters.
  • In ACCC v Purple Harmony Plates,[4] citing ACCC v Giraffe World, the Court held that a representation is with respect to a future matter ‘if a person was to buy the relevant product, it would display the relevant characteristic or produce the relevant benefit in the future after the purchase was made.’[5]
  • In Commissioner for Fair Trading v Perrett, the Court held that a representation that a treatment had ‘anti-cancer’ benefits was a representation with respect to a future matter, as it suggested that the product ‘would have some effect, presumably beneficial, upon [the patient’s] disease in the future.’[6]

Australian Courts haven’t always been willing, however, to imply representations as to a future benefit of a product due to statements made about a product’s present characteristics. In a case involving two manufacturers and a challenge by one to statements made by the other in advertising that compared their products, the Court:

  • differentiated between the fundamental character of a statement giving rise to a representation, and any inference that may arise from it
  • held that as the fundamental character of the statements in that case were concerned an existing state of affairs (namely the characteristics of the product), the statement did not concern a future matter
  • distinguished the Giraffe World decision on the basis that the representation in that matter concerned the efficacy of the relevant products in offering the consumer various health benefits.

By way of illustration, while the statement “this is a stereo sound-system” might give rise to the inference that a person will be able to listen to music in stereo at some point in the future, the ‘fundamental character’ of the statement is ‘with respect to an existing state of affairs’, rather than a future matter.

Recent developments – Kimberly-Clark Australia Pty Ltd and Woolworths Ltd

The ACCC’s approach to such claims and the Court’s willingness to find that statements made about the present characteristics of a product give rise to a prediction or a representation as to a future matter have been challenged in two recent Federal Court decisions: involving, first, Kimberly-Clark Australia (KCA) and its ‘flush-able’ hygiene wet wipe products, and second, Woolworths Ltd and its eco line of disposable crockery which were said to be were ‘biodegradable and compostable’.

KCA flush-able wipes

In the first decision, ACCC v Kimberly-Clark Australia,[7] KCA’s packaging of various wipes contained claims that the wipes were ‘flush-able’ and that the ‘cloths break down in a sewerage system or septic tank’. These claims were supported by statements on its website that suggested that the wipes were ‘completely flush-able’, ‘environmentally friendly’ and ‘will break up in the sewerage or septic tank like toilet paper’.

The ACCC challenged these statements and alleged that they gave rise to a number of representations that effectively suggested that the KCA wipes would disintegrate in a manner similar to toilet paper when flushed, making the wipes compatible with sewerage systems in Australia – in other words that they were ‘flush-able’. The ACCC alleged that these representations referred to how the wipes would perform after their use and were therefore representations as to future matters.

Woolworths disposable crockery

The second decision, ACCC v Woolworths,[8] involved an action by the ACCC against Woolworths in connection with its eco line of disposable crockery and statements that products in the product line were ‘biodegradable and compostable’. The ACCC alleged that the statements that the products were ‘biodegradable and compostable’ referred not only to their present characteristics, but also to how they would perform after being used and when consumers disposed of them. The ACCC alleged that these representations as to the performance characteristics of the products amounted to representations as to future matters under the ACL.

The Court’s findings

In both the KCA and Woolworths decisions, the Judges hearing each matter were not prepared to hold that KCA’s and Woolworths’ respective descriptions of the products (i.e. as ‘flush-able’ or ‘biodegradable and compostable’) were predictive or with respect to a future matter. Specifically:

  • Her Honour Justice Gleeson in KCA held that representations as to the performance characteristics of flush-able wipes did not contain a predictive element or a statement with respect to a future matter. Her Honour found that the representations were ‘expressed as a representation about the characteristics of the KCA wipes as manufactured…not couched in conditional terms, nor as a prediction’. In doing so, her Honour further stated that that suffix ‘able’ means ‘able to be’, which ‘as a matter of grammar and a matter of substance…is an assertion in the present tense.’[9]
  • In the Woolworths decision, Her Honour Justice Mortimer approved of and applied the reasoning in the KCA decision to find that the terms ‘biodegradable’ and ‘compostable’ were not representations as to the future performance of the products, but ‘representations as to present fact, based on the composition of the Products and their capacity to break down’.[10]

In deciding that the flush-ability representations made by KCA were not with respect to any future matters, the Court considered the earlier cases and applied the previously-held distinction between the treatment of claims made about therapeutic products and those made about non-therapeutic products. It did so on the basis that the representations about the therapeutic products concerned the efficacy of the products in providing the claimed health benefits to the consumer. In order to reach this conclusion, in our view, the Court must have determined either that the character of the representations concerning, or the nature of the products themselves (ie. the wipes) were of a different character to the therapeutic products. Unfortunately, it did so without fully explaining the basis for or the nature of the distinction.

In Woolworths, citing KCA, Her Honour Justice Mortimer held that, in order for a representation to be with respect to a future matter (or be a prediction) it must not be capable of being true or false at the time it was made,[11] a far more onerous test than that applied in any previous authority. Her Honour did so in spite of the ACCC’s submission that such an interpretation of ‘future matters’ was too narrow and did not accord with previous authorities, stating that this narrower interpretation reflected the text of the provision when read it its context and with regard to its purpose.[12]

What does this mean for manufacturers? And the ACCC?

The ACCC has appealed the decisions of the Federal Court in both the KCA and Woolworths matters. At the time, Rod Simms, Chair of the ACCC, said that,

“if businesses make claims about future matters, they must have a reasonable basis for those claims…We are appealing this case because we think that the biodegradable and compostable claims made by Woolworths were predictions about what would happen to these products in the future.”[13]

With these two decisions, the Federal Court has (in our respectful view) muddied the waters on what constitutes a representation with respect to a future matter. They also appear to ignore the well-established principle that a statement regarding a present matter can give rise to an implied representation as to a future state of affairs. Can it really be said that if a party represents that “this is a stereo sound system” that the party is not also impliedly representing that the consumer that buys the sound system will be able to enjoy stereo sound after the purchase?

If these decisions are upheld on appeal, they have the potential to lower the standard of testing and evidence to which manufacturers are required to adhere when making representations about the characteristics of their products. It may also create a different test for claims regarding therapeutic products than for other types of products, which would be undesirable.

Given the current uncertainty and the risk that these two decisions will be overturned on appeal, we recommend that manufacturers assume that the broader test for ‘future matters’ applies and continue to adhere to a high standard of testing and evidence gathering when making statements about the characteristics of their products.

[1] ACCC v Kimberly-Clark Australia Pty Ltd [2019] FCA 992, [15]

[2] Competition and Consumer Act 2010 (Cth) sch 2 s 4

[3] ACCC v Giraffe World Australia Pty Ltd (1999) 95 FCR 302, [123]-[124]

[4] ACCC v Purple Harmony Plates Pty Ltd [2001] FCA 1062

[5] Ibid [18], citing ACCC v Giraffe World Australia, 332

[6] Commissioner for Fair Trading, Department of Commerce v Perrett [2007] NSWSC 1130, [121]-[123]

[7] ACCC v Kimberly-Clark Australia Pty Ltd [2019] FCA 992

[8] ACCC v Woolworths Limited [2019] FCA 1039

[9] ACCC v Kimberly-Clark Australia Pty Ltd [2019] FCA 992, [285]

[10] ACCC v Woolworths Limited [2019] FCA 1039, [297]

[11] Ibid, [87]

[12] Ibid, [89]

[13] ‘ACCC appeals decision on Woolworths disposable picnic products’ (Press Release 136/19, ACCC, 5 August 2019) <https://www.accc.gov.au/media-release/accc-appeals-decision-on-woolworths-disposable-picnic-products>

AUTHORS
Shaun Temby | Partner
T +61 2 9291 6287
shaun.temby@maddocks.com.au 
Christopher Marsh | Senior Associate
+61 2 9291 6196
christopher.marsh@maddocks.com.au
Aman Dhingra| Paralegal
T +61 2 9291 6285
E aman.dhingra@maddocks.com.au

 

In two recent decisions, the Federal Court has ruled against one of the ACCC’s favoured approaches when litigating manufacturers’ claims concerning the features of their products: namely, shifting the evidentiary burden of substantiating the manufacturer’s product claim to the manufacturer by alleging that it amounts to a prediction as to the future use of, or benefit arising from, the product.

While the ACCC has appealed both decisions, if the appeals are unsuccessful, it may have to change its approach to the litigation of such claims and manufacturers may also find it easier to talk up their products without the risk of a successful ACCC challenge.

Representations with respect to any future matter

The Australian Consumer Law (ACL) provides that a representation with respect to future matter that is made without ‘reasonable grounds’ for doing so is taken to be misleading for the purpose of ACL. This creates an evidentiary burden on the person making the predictive representation to establish that they had reasonable grounds for doing so, effectively reversing the burden of proof.[1] If the maker of the representation is unable to establish reasonable grounds for the representation (at the time that it is made), the conduct will be misleading and deceptive under the ACL. This shifts the burden and cost of proving that a statement was made on reasonable grounds onto the maker of the statement.

The ACCC has a long history of using this approach in prosecuting breaches of the ACL[2] having first used it in the late 90’s, which is unsurprising as it shifts much of the burden (and cost) of such litigation from the ACCC to the manufacturer. The ACCC has successfully litigated such claims in a number of cases – in particular:

  • In ACCC v Giraffe World,[3] Giraffe World made representations that a mat that it manufactured emitted negative ions within a person lying upon the mat, which would result in numerous health benefits to the user. The Court held that these representations were with respect to future matters.
  • In ACCC v Purple Harmony Plates,[4] citing ACCC v Giraffe World, the Court held that a representation is with respect to a future matter ‘if a person was to buy the relevant product, it would display the relevant characteristic or produce the relevant benefit in the future after the purchase was made.’[5]
  • In Commissioner for Fair Trading v Perrett, the Court held that a representation that a treatment had ‘anti-cancer’ benefits was a representation with respect to a future matter, as it suggested that the product ‘would have some effect, presumably beneficial, upon [the patient’s] disease in the future.’[6]

Australian Courts haven’t always been willing, however, to imply representations as to a future benefit of a product due to statements made about a product’s present characteristics. In a case involving two manufacturers and a challenge by one to statements made by the other in advertising that compared their products, the Court:

  • differentiated between the fundamental character of a statement giving rise to a representation, and any inference that may arise from it
  • held that as the fundamental character of the statements in that case were concerned an existing state of affairs (namely the characteristics of the product), the statement did not concern a future matter
  • distinguished the Giraffe World decision on the basis that the representation in that matter concerned the efficacy of the relevant products in offering the consumer various health benefits.

By way of illustration, while the statement “this is a stereo sound-system” might give rise to the inference that a person will be able to listen to music in stereo at some point in the future, the ‘fundamental character’ of the statement is ‘with respect to an existing state of affairs’, rather than a future matter.

Recent developments – Kimberly-Clark Australia Pty Ltd and Woolworths Ltd

The ACCC’s approach to such claims and the Court’s willingness to find that statements made about the present characteristics of a product give rise to a prediction or a representation as to a future matter have been challenged in two recent Federal Court decisions: involving, first, Kimberly-Clark Australia (KCA) and its ‘flush-able’ hygiene wet wipe products, and second, Woolworths Ltd and its eco line of disposable crockery which were said to be were ‘biodegradable and compostable’.

KCA flush-able wipes

In the first decision, ACCC v Kimberly-Clark Australia,[7] KCA’s packaging of various wipes contained claims that the wipes were ‘flush-able’ and that the ‘cloths break down in a sewerage system or septic tank’. These claims were supported by statements on its website that suggested that the wipes were ‘completely flush-able’, ‘environmentally friendly’ and ‘will break up in the sewerage or septic tank like toilet paper’.

The ACCC challenged these statements and alleged that they gave rise to a number of representations that effectively suggested that the KCA wipes would disintegrate in a manner similar to toilet paper when flushed, making the wipes compatible with sewerage systems in Australia – in other words that they were ‘flush-able’. The ACCC alleged that these representations referred to how the wipes would perform after their use and were therefore representations as to future matters.

Woolworths disposable crockery

The second decision, ACCC v Woolworths,[8] involved an action by the ACCC against Woolworths in connection with its eco line of disposable crockery and statements that products in the product line were ‘biodegradable and compostable’. The ACCC alleged that the statements that the products were ‘biodegradable and compostable’ referred not only to their present characteristics, but also to how they would perform after being used and when consumers disposed of them. The ACCC alleged that these representations as to the performance characteristics of the products amounted to representations as to future matters under the ACL.

The Court’s findings

In both the KCA and Woolworths decisions, the Judges hearing each matter were not prepared to hold that KCA’s and Woolworths’ respective descriptions of the products (i.e. as ‘flush-able’ or ‘biodegradable and compostable’) were predictive or with respect to a future matter. Specifically:

  • Her Honour Justice Gleeson in KCA held that representations as to the performance characteristics of flush-able wipes did not contain a predictive element or a statement with respect to a future matter. Her Honour found that the representations were ‘expressed as a representation about the characteristics of the KCA wipes as manufactured…not couched in conditional terms, nor as a prediction’. In doing so, her Honour further stated that that suffix ‘able’ means ‘able to be’, which ‘as a matter of grammar and a matter of substance…is an assertion in the present tense.’[9]
  • In the Woolworths decision, Her Honour Justice Mortimer approved of and applied the reasoning in the KCA decision to find that the terms ‘biodegradable’ and ‘compostable’ were not representations as to the future performance of the products, but ‘representations as to present fact, based on the composition of the Products and their capacity to break down’.[10]

In deciding that the flush-ability representations made by KCA were not with respect to any future matters, the Court considered the earlier cases and applied the previously-held distinction between the treatment of claims made about therapeutic products and those made about non-therapeutic products. It did so on the basis that the representations about the therapeutic products concerned the efficacy of the products in providing the claimed health benefits to the consumer. In order to reach this conclusion, in our view, the Court must have determined either that the character of the representations concerning, or the nature of the products themselves (ie. the wipes) were of a different character to the therapeutic products. Unfortunately, it did so without fully explaining the basis for or the nature of the distinction.

In Woolworths, citing KCA, Her Honour Justice Mortimer held that, in order for a representation to be with respect to a future matter (or be a prediction) it must not be capable of being true or false at the time it was made,[11] a far more onerous test than that applied in any previous authority. Her Honour did so in spite of the ACCC’s submission that such an interpretation of ‘future matters’ was too narrow and did not accord with previous authorities, stating that this narrower interpretation reflected the text of the provision when read it its context and with regard to its purpose.[12]

What does this mean for manufacturers? And the ACCC?

The ACCC has appealed the decisions of the Federal Court in both the KCA and Woolworths matters. At the time, Rod Simms, Chair of the ACCC, said that,

“if businesses make claims about future matters, they must have a reasonable basis for those claims…We are appealing this case because we think that the biodegradable and compostable claims made by Woolworths were predictions about what would happen to these products in the future.”[13]

With these two decisions, the Federal Court has (in our respectful view) muddied the waters on what constitutes a representation with respect to a future matter. They also appear to ignore the well-established principle that a statement regarding a present matter can give rise to an implied representation as to a future state of affairs. Can it really be said that if a party represents that “this is a stereo sound system” that the party is not also impliedly representing that the consumer that buys the sound system will be able to enjoy stereo sound after the purchase?

If these decisions are upheld on appeal, they have the potential to lower the standard of testing and evidence to which manufacturers are required to adhere when making representations about the characteristics of their products. It may also create a different test for claims regarding therapeutic products than for other types of products, which would be undesirable.

Given the current uncertainty and the risk that these two decisions will be overturned on appeal, we recommend that manufacturers assume that the broader test for ‘future matters’ applies and continue to adhere to a high standard of testing and evidence gathering when making statements about the characteristics of their products.

[1] ACCC v Kimberly-Clark Australia Pty Ltd [2019] FCA 992, [15]

[2] Competition and Consumer Act 2010 (Cth) sch 2 s 4

[3] ACCC v Giraffe World Australia Pty Ltd (1999) 95 FCR 302, [123]-[124]

[4] ACCC v Purple Harmony Plates Pty Ltd [2001] FCA 1062

[5] Ibid [18], citing ACCC v Giraffe World Australia, 332

[6] Commissioner for Fair Trading, Department of Commerce v Perrett [2007] NSWSC 1130, [121]-[123]

[7] ACCC v Kimberly-Clark Australia Pty Ltd [2019] FCA 992

[8] ACCC v Woolworths Limited [2019] FCA 1039

[9] ACCC v Kimberly-Clark Australia Pty Ltd [2019] FCA 992, [285]

[10] ACCC v Woolworths Limited [2019] FCA 1039, [297]

[11] Ibid, [87]

[12] Ibid, [89]

[13] ‘ACCC appeals decision on Woolworths disposable picnic products’ (Press Release 136/19, ACCC, 5 August 2019) <https://www.accc.gov.au/media-release/accc-appeals-decision-on-woolworths-disposable-picnic-products>

AUTHORS
Shaun Temby | Partner
T +61 2 9291 6287
shaun.temby@maddocks.com.au 
Christopher Marsh | Senior Associate
+61 2 9291 6196
christopher.marsh@maddocks.com.au
Aman Dhingra| Paralegal
T +61 2 9291 6285
E aman.dhingra@maddocks.com.au