6.2.2 Claims which Cannot be Substantiated
Purchasing decisions by consumers have an important role in the development of dynamic and competitive markets, and consumers need to be able to trust the information they are given to make the best decisions. For credence goods – that is goods where it is too difficult for a consumer to determine whether a product is true to its claims – consumers rely on the information presented by suppliers. Suppliers making misleading, false or unsubstantiated claims compromise the effective operation of markets.
Misleading or deceptive conduct is prohibited under section 9 of the Fair Trading Act, and false or misleading representations are prohibited under section 13. The onus of proof for a breach of the prohibitions on misleading and deceptive conduct or false or misleading representations usually falls on the Commerce Commission in its enforcement capacity. Misleading or deceptive conduct under section 9 is a civil claim, so the burden of proof is “on the balance of probabilities”. Making a false or misleading representation is an offence, so the criminal burden of proof of “beyond reasonable doubt” applies.
There are no statutory powers in the Fair Trading Act to allow the Commerce Commission to require substantiation of claims or representations from suppliers. The burden of proving that an unsubstantiated claim is misleading or actually false (rather than just unsubstantiated) can be difficult and expensive for the Commerce Commission to meet, especially in criminal cases. These difficulties make it relatively rare for suppliers making unsubstantiated statements to be held to account.
There is a practice for some traders in the market to make unsubstantiated claims, or claims where there seems to be an inadequate understanding of any basis for the claim. For example, claims of eco-friendliness and sustainability is a growth area where there is significant potential to confuse and mislead consumers, but where there are few guidelines on what is meant by such definitions. Often consumers pay a premium for “organic” products, and it is not always clear what the claim means. Claims of miracle cures, product safety, comparative pricing and business opportunities are also made.
Recent examples of goods advertised as being “more” than they actually were that have led to successful prosecutions by the Commerce Commission include:
- Ready to drink Ribena – where GlaxoSmithKline advertised the product as containing Vitamin C when it did not; and
- Probitas – a fertiliser which claimed to activate the electrical and magnetic processes in the soil when it did not.
These examples are different from puffery advertising commonly associated with cosmetics – with claims such as “feel years younger”, “increase the shine and bounce in your hair” etc.
The Advertising Standards Authority (ASA) provides alternative remedies for complaints relating to claims made in advertisements and the ASA can request evidence to support a claim made in an advertisement. This process only covers advertising claims. It does not cover labelling or packaging claims, unless they can be seen in an advertisement. The ASA also does not have the full range of sanctions available under the Fair Trading Act.
As noted, the new Australian Consumer Law includes provisions allowing the regulator (the Australian Competition and Consumer Commission (ACCC)) to issue substantiation notices21. The same approach has also been applied in the Australian Corporations Law, which gives the Australian Securities and Investments Commission power to also issue substantiation notices22.
The inclusion of these provisions followed the Australian Productivity Commission’s consideration of the full range of policy issues in relation to substantiation notices in its Review of Australia’s Consumer Policy Framework, which concluded that substantiation notices should be included in the new Australian Consumer Law23.
The Australian Consumer Law provides that when the ACCC becomes aware of a representation that may appear to contravene the Australian Consumer Law, it can require a person to provide information which could be capable of supporting the claim, or ask for particular documents that may be relevant to the claim.
The substantiation notice powers are described as a preliminary investigative tool to seek information about claims or representations that may assist a regulator in determining whether to take action for a suspected breach of consumer protection provisions of the Australian Consumer Law24. Substantiation notices do not require the person to prove that a representation is true or is not misleading.
The Ministry of Consumer Affairs’ 2006 Review of the Redress and Enforcement Provisions of Consumer Law proposed including in the Fair Trading Act a similar provision to that now in the Australian Consumer Law empowering the Commerce Commission to issue “substantiation notices”, requiring suppliers to substantiate the claims they make in relation to the products they supply25. The review of the Fair Trading Act identified that several other jurisdictions have substantiation requirements26.
Nearly half of the submitters who responded to the 2006 Review supported the substantiation notices proposal. There was a strong view that the ability of traders to substantiate the claims they make is a basic tenet of consumer protection law.
Those submitters that did not support this proposal were concerned by the criminal sanctions in the Fair Trading Act. They considered that the proposal would require suppliers to prove they were innocent, which is a “reverse onus” that is contrary to their rights under the New Zealand Bill of Rights Act 1990. Submitters also stated that if suppliers were required to substantiate product characteristics then they will be reluctant to supply new products or to obtain products from new traders. Concerns were raised about the costs associated with proving claims and some submitters thought this proposal would mean the Commerce Commission would not be required to conduct thorough investigations.
Proposals to require suppliers to substantiate claims about their products or services are therefore controversial.
The Commerce Commission considers that giving it the ability to issue substantiation notices would strongly assist its enforcement of misleading claims and misrepresentation under the Fair Trading Act. The Commerce Commission already has the power to require the supply of information or documents when it is investigating a claim under section 47G of the Fair Trading Act. However the Commerce Commission has argued that this power is insufficient, because the High Court has interpreted the Commerce Commission’s powers to require information or documents to be provided under the Commerce Act in a way which limits these powers27. The relevant provision in the Commerce Act is the same as section 47G of the Fair Trading Act, so the same limitation on the Commerce Commission’s power applies.
Reducing compliance costs on businesses where possible is also a priority. Requiring supporting information for a product or service claim is likely to increase costs on businesses, although the cost burden will vary according to the claim.
Should substantiation provisions be included in the Fair Trading Act?
Including substantiation provisions in the Fair Trading Act along the lines of the Australian Consumer Law would be in accord with harmonising consumer and business law as part of the promotion of the SEM with Australia. One aspect of the SEM is the New Zealand and Australian regulatory authorities such as the Commerce Commission and the ACCC working more closely together and being able to share information and provide investigative assistance. Information sharing and investigative assistance would be enhanced with similar enforcement powers under the Fair Trading Act and the Australian Consumer Law.
There is, however, a problem for New Zealand with the reverse onus inherent in the substantiation notice process adopted by Australia which would likely be a prima facie breach of the New Zealand Bill of Rights Act. Rather than adding a substantiation notice process to the Fair Trading Act, another option would be to add a general prohibition on suppliers not to make unsubstantiated claims under Part 1 of the Fair Trading Act. A new section could be added to Part 1 along the following lines:
No person shall, in trade, make a material claim in relation to the supply or possible supply of goods or services as to the nature, characteristic, or suitability for a purpose of those goods or services, without having reasonable grounds to justify or substantiate the claim.
This would mean unsubstantiated claims could be investigated and prosecuted in their own right, instead of having a substantiation notice procedure as an investigatory tool which would effectively reverse the onus of proof.
Why a general prohibition?
A prohibition on unsubstantiated claims would improve the ability to quickly clarify and take enforcement action against unsubstantiated claims. It is likely to be used most often as a “wake-up call”, rather than as a full-blown prosecution, and would ideally lead to rapid changes to, or clarification of, claims to the consumer’s benefit, voluntarily or by court enforceable undertaking.
There is a fundamental premise that honest business should only make supported and justified claims. This enhances the confidence consumers have in the market. Loss of credibility by one business may affect the whole sector unfairly.
A claim must be suspected of being unable to be substantiated before the claim would be investigated.
Where a particular level of supporting evidence is claimed, then that level of substantiation must be shown. For example, if the claim is “clinical tests show”, the substantiation should be competent and reliable scientific evidence should be included.
For other non-scientific claims, such as price comparisons (“sale price”, “marked down”, “below cost”), the substantiation should be appropriate to the level of the claim, for example, by providing pre-sale price and cost price.
When no particular level of support is claimed, a “reasonable basis” could be obtained by analysing28:
- the type of claim
- the type of product or service
- the benefits of a truthful claim
- the cost/difficulty of developing or obtaining support for the claim
- the consequences of a false claim, and
- the amount of substantiation experts in the field believe is reasonable.
Testimonials can be acceptable as supporting evidence for certain claims, but not for scientific claims.
Absolute claims, such as “XX-free” must be justified, but the interpretation of this definition can have some flexibility, such as “XX must not be detectable”. This is consistent with the Food Code for gluten-free and lactose-free claims.
It is important to note that only civil remedies are available for breaches of section 9 of the Fair Trading Act (misleading and deceptive conduct), while civil and criminal remedies apply to most of the other prohibitions in the Fair Trading Act. Therefore breaches of section 9 only need to be proved to the balance of probabilities, while breaches of sections 10-14 are required to be proved beyond reasonable doubt or on the balance of probabilities, depending on whether the claim is criminal (by the Commerce Commission) or civil (by a consumer or other business).
It would be appropriate for the prohibition on unsubstantiated claims to also be civil and criminal. This would allow the Commerce Commission and other parties, such as consumers and other businesses, to take action.
The same offences would apply as for the misleading and deceptive conduct, and misrepresentation under the Fair Trading Act (sections 40-43). There is a possibility of an alternate/additional offence specifically for the prohibition of unsubstantiated claims, along the lines of that given in section 40A for section 24 (pyramid selling schemes).
The inability to provide supporting evidence for a claim could be a strict liability offence.
Costs and benefits
The previous work of the Ministry of Consumer Affairs on possible substantiation provisions in the Fair Trading Act29 and the Australian Productivity Commission’s thorough analysis of substantiation30 have informed consideration of the above proposals and the following assessment of costs and benefits.
The requirement for businesses to verify their claims is an important safeguard against misleading or deceptive conduct. This may motivate traders to consider the claims they make, and therefore change behaviours and potentially reduce the chances of misrepresentation and misleading and deceptive conduct.
Such a provision would protect vulnerable consumers, as many unsubstantiated claims take advantage of the vulnerability of certain groups. In the case of miracle cures, people with chronic or terminal illnesses are targeted.
If not being able to supply supporting information for a claim is a strict liability offence, then there is a potential to resolve the breach rapidly. There would not be the requirement for a prolonged investigation of the matter.
Consumers and other businesses would be able to take action on such a breach, not only the Commerce Commission. This would allow cases that would otherwise not meet the Commerce Commission’s enforcement criteria to be taken.
The disadvantage for honest businesses would be reduced because their competitors could not make unsubstantiated claims. This is also part of the justification for prohibiting misleading and deceptive conduct. Additionally, unsupported claims by one business can negatively affect other businesses in the same sector. Conversely, supported claims can improve the credibility of an entire sector. Businesses which can provide supporting evidence to their claims can leverage off this to improve their credibility and reputation. This can lead to improved marketability of their goods and services.
It would be a compliance cost on businesses to require them to ensure they have supporting information for their products. This would vary with the nature of the claims they make. For example, a scientific claim would require more complex substantiation than a claim such as “hens being free-range”. However, many businesses would rely on information from others, and this is a defence (to a certain extent) under the Fair Trading Act.
There may be uncertainty as to what would be reasonable or best endeavours to substantiate a claim. This was the main concern of the ACCC in their submission to the Australian Productivity Commission’s review into the consumer policy framework.
There is a possibility that businesses may not put any claims on their products, therefore not informing consumers at all. This option has been open to products in the regulated medicine sector for many years, yet few traders choose to take this course. Claims are a useful marketing tool, and it is clear that traders regard the benefits of making claims outweigh the costs of having to prove those claims.
7. Should there be a general prohibition on unsubstantiated claims under the Fair Trading Act, and for what reasons?
8. Should any general prohibition on unsubstantiated claims (or any other preferred approach) be enforceable by the Commerce Commission and/or privately under the Fair Trading Act?
21. Trade Practices Amendment (Australian Consumer Law) Act (No. 1) 2010, Schedule 2 Part 3, section 87ZL.
22. Trade Practices Amendment (Australian Consumer Law) Act (No.1) 2010, Schedule 3 Part 4 (amending the Australian Securities and Investments Commission Act 2001).
23. Review of Australia’s Consumer Policy Framework, Productivity Commission Inquiry Report, No. 45, 30 April 2008, page 242 – http://www.pc.gov.au/projects/inquiry/consumer/docs/finalreport.
24. The Australian Consumer Law, A Guide to Provisions, Commonwealth of Australia, April 2010 – http://www.treasury.gov.au/consumerlaw/content/downloads/Australian_Consumer_Law_A_Guide_to_Provisions_April_2010.pdf.
25. Ministry of Consumer Affairs, Review of the Redress and Enforcement Provisions of Consumer Protection Law: International Comparison Discussion Paper (May 2006) – http://www.consumeraffairs.govt.nz.
26. Most recently the UK has introduced The Consumer Protection from Unfair Trading Regulations 2008.
27. Telecom Corporation of New Zealand Ltd v Commerce Commission  NZAR 155 discusses section 98 of the Commerce Act 1986.
28. Based on the Australian Federal Trade Commission approach.
29. Ministry of Consumer Affairs, Review of the Redress and Enforcement Provisions of Consumer Protection Law: International Comparison Discussion Paper (May 2006) – http://www.consumeraffairs.govt.nz.
30. Review of Australia’s Consumer Policy Framework, Productivity Commission Inquiry Report, No. 45, 30 April 2008 – http://www.pc.gov.au/projects/inquiry/consumer/docs/finalreport.