Product development, misleading advertising and regulatory compliance

Why is it so hard for some businesses to accurately advertise their products? Are they too complex or is the advertising not checked?

Last week the ACCC issued proceedings for misleading advertising against Crazy John’s (in respect of mobile phones) and Saab Australia (in respect of green claims on their cars). How could such claims be prevented?

The Australian Competition and Consumer Commission has instituted
proceedings in the Federal Court against Mobileworld Operating Pty Ltd
(trading as Crazy John’s)
for alleged contraventions of sections 52
and 53 of the Trade
Practices Act 1974 in relation to the promotion of certain of its
mobile phone plans.

The ACCC alleges that Crazy John’s has engaged in misleading or
deceptive conduct by representing that handsets on its Crazy Phone
Plans are available ‘FREE’ or for ‘$0’, when in fact consumers are
required to pay for the handsets through higher call rates than those
available on comparable plans which do not include a handset.

The ACCC has also instituted legal
proceedings against GM Holden Ltd, which supplies and markets Saab
motor vehicles in Australia and trades as Saab Australia, alleging
misleading and deceptive conduct and false representations concerning
‘green’ claims made in the advertising of Saab vehicles.

In 2004 I posted this article (pdf) on the need to consider end compliance issues (such as product standards and misleading advertising) when developing new products or modifying existing products (regardless whether it is a car, a mobile phone plan or a financial product). I recently updated the article to take into account the decisions in ACCC v Audi and ACCC v Telstra. As the issues covered are still relevant I am publishing the full amended version below.

Even in organisations that have well designed compliance systems,  compliance must be put into the daily practice of the business.

New product development and changes to existing products involve compliance risks. This can occur because of the way in which decisions are made and the way such projects are implemented.

Poor product knowledge combined with lack of understanding of regulatory requirements can lead to a breach.

Even small changes have risks.

In Australian Competition and Consumer Commission V Wizard Mortgage Corporation Limited [2002] FCA 1317 considered an existing advertisement for a loan product which had been legally cleared but had been changed by the marketing head by adding in an interest rate (there was no rate before). However the product was not available at that rate. The Federal Court agreed with the ACCC that the ad was misleading and deceptive.

In BMW Australia Limited v Australian Competition & Consumer Commission [2003] FCA 727 the Federal Court of Australia found that BMW’s 2002 318i model had breached the Trade Practices Act (TPA) by using safety warnings on the jacks which did not comply with the Australian Safety Standards. In dispute was the importance of 5 words which had been omitted.

In Australian Competition and Consumer
Commission v Audi Australia Pty Ltd
[2007] FCA 1990, the Federal Court made orders against Audi relating to its misleading advertising that the Audi Q7 3.6 SE
motor vehicle had 7 seats as a standard feature at the standard price when in fact the standard seating for the Audi Q7 3.6 SE was 5 seats.

In Australian Competition and Consumer
Commission v Telstra Corporation Limited
  [2004] FCA 987 the Federal Court decided that Telstra’s $0 mobile phone advertising was misleading and deceptive after analyding Telstra’s mobile phone plans.

The decision making process
Decisions on new products and changes to existing products may be made for different reasons:
• Defensive: follow the leader
• Product innovation
• Market research
• Compliance input

How is the decision made? Is there a team that investigates the options and puts together a business case before a decision is made or does the CEO or the board make the decision and then ask one or more people to investigate it?

You need to do your homework to show that careful business judgment was exercised.

Do you have all the regulatory licences and approvals?
Have you satisfied all regulatory conditions?
Does your pricing model take into account different scenarios?
Have you considered tax issues?
Have you done full "specifications" of the product?
What are the product terms and conditions?
Have pros and cons been weighed?
What are the most important objectives?
Can compromises be made?
Is the change worth making?
What are the different options?
Are there ethical or governance issues?
Is there any ambiguity?
Is it fully documented?
Have you done a cost/benefit analysis?

Implementing decisions
Once the decision is made, who has control?
Is there an external Project Manager?
Is there an implementation team? If so, is every relevant person on it?

An implementation committee should represent the following interests:
• Legal (for issues such as name of product, intellectual property, trade practices, advertising clearance, documentation and specific product regulation)
• Commercial
• Prudential/risk profile
• Accounting/actuarial
• Software (new, modifications)
• Marketing
• HR/training

Will you seek input from your front line staff, key suppliers, customers or regulators?
The committee needs to give clearance at both draft AND final stages.

Product documentation
The process should result in documentation that identifies the background of the product, specifications and operational risks. This will ensure that whoever markets the product has a proper understanding of the product and does not inadvertently mislead consumers. And when the marketing material is produced, a person must have responsibility for checking its accuracy and compliance.

There needs to be a method for ensuring that a new product or a change to an  existing product has been considered from all angles (marketing, IT, compliance, HR, finance etc) before a decision is made to proceed with it.

At the least, failure to do your basic homework can jeopardize your marketing campaign. If timing is critical, the success of the product can be affected.

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