05 Aug 2021

No consumer loss, profit, or knowledge a representation is misleading, but multi-million dollar penalty nonetheless

By Ian Bloemendal

Companies must be very careful not to make representations that are capable of creating an impression that their claims are based on scientific or technological evidence when they are not.

The stakes are high when corporations engage in false and misleading conduct directed to consumers. Additionally, the costs and reputation damage that can be sustained when a business is caught exploiting consumers can be significant and greatly outweigh any benefit that may have been perceived at the outset.

Currently, the maximum penalty for a corporation for each contravention of the Australian Consumer Law (ACL) is the greater of:

  • $10 million; or
  • if the Court can determine the value of the benefit obtained from the contravention, three times the value of that benefit; or
  • if the Court cannot determine the value of the benefit, 10% of the annual turnover of the corporation.

In the recent case of Australian Competition and Consumer Commission v Lorna Jane Pty Ltd [2021] FCA 852, the court ordered Lorna Jane Pty Ltd to pay $5 million in penalties for making false and misleading representations to consumers, and engaging in conduct that was liable to mislead the public, in connection with the promotion and supply of its “LJ Shield Activewear”.

The Court also ordered (by consent) that Lorna Jane:

  • be restrained from making any “anti-virus” claims regarding its activewear clothing for a period of three years, unless it has a reasonable basis for doing so,
  • publish corrective notices using the same mediums engaged in the marketing campaign;
  • establish a consumer law compliance program; and
  • pay the ACCC’s costs.

Separate to the ACCC proceedings, the Therapeutic Good Administration (TGA) had previously issued three infringement notices to Lorna Jane, totalling $39,960. The TGA action related to Lorna Jane’s failure to register goods on the Australian register of therapeutic goods, a breach of the advertising code and Lorna Jane’s failure to seek TGA approval prior to making its claims.

The magic spray that was "not a gimmick"

Lorna Jane admitted to the Federal Court that, between 2 and 23 July 2020, it had made a series of false and misleading 'elimination representations' and 'protection representations' to consumers in emails and in media releases, in-store signage, on its website and on Instagram. (The ACCC contended that while most of the claims were removed in mid-July 2020, Lorna Jane had continued to represent on garment tags that the garment permanently protected the wearers against pathogens until at least November 2020).

Lorna Jane claimed that a substance it marketed as “Lorna Jane Shield”, when sprayed on its activewear fabric, would eliminate viruses including COVID-19, when they came into contact with the fabric, thereby protecting the wearer from contracting or spreading dangerous viruses, including COVID-19. It described its LJ Shield as a “technology’, “revolutionary” and “not a gimmick“. It claimed that LJ Shield permanently adhered to the garments, making transferal of pathogens, including COVID-19, to the garments impossible, eliminating viruses on contact.

Lorna Jane's marketing stated:

  • “Cure for the Spread of COVID-19? Lorna Jane Thinks So”;
  • “LJ SHIELD is a groundbreaking technology that makes transferal of all pathogens to your Activewear (and let’s face it, the one we’re all thinking about is Covid-19) impossible by eliminating the virus on contact with the fabric”; and
  • “With Lorna Jane Shield on our garments it meant that we were completely eliminating the possibility of spreading any deadly viruses“.

Examples of the advertising included:

Lorna Jane Shield 

 

In so doing, Lorna Jane represented (amongst other things) that its LJ Shield Activewear “eliminated”, “stopped the spread” and “protected wearers” against “viruses including COVID-19”.

Lorna Jane admitted that its conduct breached:

  • section 18 of the ACL (conduct in trade or commerce liable to mislead or deceive);
  • section 29(1)(g) of the ACL (making false or misleading representations that LJ Shield Activewear had particular performance characteristics, uses and benefits which it did not have); and
  • section 33 of the ACL (engaging in conduct that was liable to mislead the public as to the nature, characteristics and suitability for purpose of LJ Shield Activewear).

How (and why) the Court imposed its penalty on Lorna Jane

Notably, the $5 million penalty arose where the ACCC did not allege that Lorna Jane actually knew that the representations it was making were false, it was not shown that Lorna Jane actually profited from its conduct, nor that the contraventions actually caused harm to consumers.

Of additional relevance to the outcome were the following factors:

  • The advertising campaign was conducted in July 2020 at a time of considerable uncertainty, fear, and concern amongst the public about the consequences and spread of COVID-19. At that time, there had been at least 8,000 reported cases and 104 deaths in Australia. On 16 July 2020, there were 315 new cases of COVID-19 reported in Australia.
  • LJ Shield Activewear did not did not provide anti-virus protection or protect consumers from COVID-19;
  • there was no reasonable scientific or technological basis for the elimination and protection representations at the time they were made by Lorna Jane;
  • the representations were directed by the company's director and chief creative officer, Lorna Jane Clarkson, which meant that the conduct emanated from a very high managerial level within the company; and
  • Lorna Jane admitted the contraventions (although only a short time prior to trial) and consented to the orders proposed by the ACCC.

The court determined that Lorna Jane had sought to exploit the fear and concern of the public through the use of misleading, deceptive, and untrue representations about the properties of LJ Shield Activewear. It described the behaviour of Lorna Jane as "exploitative, predatory, and potentially dangerous". It said there was a need to impose a substantial penalty to reflect the seriousness of the conduct and to demonstrate that exploitative conduct of this kind will not pay.

Take home messages

The ACCC has prioritised consumer and competition issues arising from the COVID-19 pandemic. It continues to look closely at allegations relating to companies that may seek to take advantage of the crisis by engaging in illegal conduct to enhance their commercial position or to harm consumers.

Companies therefore must be very careful not to make representations that are capable of creating an impression that their claims are based on scientific or technological evidence when they are not. This is particularly the case with well-known brands since consumers are prepared to trust and assume that their marketing claims are backed up by solid evidence.

Directors and officers must also exercise real care, as they can be personally liable. Persons who are knowingly concerned in the misleading conduct of the company may find themselves facing individual penalties alongside the company. In the Lorna Jane case, the ACCC ultimately agreed to dismiss the proceeding against her. Others may not be so fortunate.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.