Lit up! E-retailers of e-cigarettes fined for misleading conduct

The Federal Court found that three online retailers and their directors had engaged in “serious” contraventions of the Australian Consumer Law for misleading Australian consumers as to the health benefits of e-cigarettes in three separate decisions that emphasise the importance of cooperation as a mitigating factor.

Australian Competition and Consumer Commission v The Joystick Company Pty Ltd, Australian Competition and Consumer Commission v Social-Lites Pty Ltd, and Australian Competition and Consumer Commission v Burden [2017] FCA 397, [2017] FCA 398, and [2017] FCA 399

1. On 2 May 2017, the Federal Court found that three separate online retailers and their directors had breached the Australian Consumer Law (ACL) by making false or misleading representations as to the health effects and benefits of e-cigarette products.

2. The Joystick Company Pty Ltd (Joystick), Social-Lites Pty Ltd (Social-Lites) and Elusion Australia Limited (Elusion) are online retailers of electronic cigarette (e-cigarette) products. These products were promoted and sold to Australian consumers via each retailer’s website and via a video published on YouTube by Social-Lites.

3. Between June 2015 to July 2016, Joystick, Social-Lites and Elusion made many representations on their websites (and on Social-Lites’ YouTube video) about the composition of the e-cigarette products they supplied, including that the products:

3.1 did not contain carcinogens and toxic substances;

3.2 did not contain any of the carcinogens and toxic substances found in traditional tobacco cigarettes; and

3.3 had flavours all of which had received “compliancy” approval from the ACCC.

4. Joystick, Social-Lites and Elusion (as well as their directors) admitted that the online representations had breached the ACL, and the ACCC sought penalties by consent.

5. In three separate judgments [1], Justice Gilmour ordered the penalties sought by consent, including that:

5.1 the retailers pay pecuniary penalties (ranging between $40,000 to $50,000);

5.2 the directors of the retailers pay pecuniary penalties (ranging between $10,000 to $15,000);

5.3 the directors of the retailers undertake training sessions as to their responsibilities and obligations under the ACL;

5.4 notices be published online for 90 days informing viewers about the Court’s orders;

5.5 the retailers be restrained from engaging in the supply, possible supply, sale or promotion of e-cigarette products for three years (this was in the form of an injunction for Social-Lites and Elusion, but an undertaking by Joystick which had ceased trading); and

6. In addition, Joystick undertook to close its Facebook, Twitter and Instagram accounts and not reactivate those accounts for three years.

7. In making the orders, his Honour noted the following:

7.1 The nature and extent of the retailers’ contraventions were “serious”. Joystick, Social-Lites and Elusion “did not have scientific or other evidence to support the Representations” [2] and their conduct was “in respect of serious matters concerning public health. The conduct was directed to the general public and the medium of communication was the internet, which is far-reaching” [3].

7.2 The representations had the potential to mislead a wide range of consumers, who were not in a position to determine the falsity of the representations. However, the parties were unable to ascertain the number of consumers who relied upon the representations or to quantify the non-pecuniary loss to consumers caused by the contraventions. In any event, his Honour found that consumers were denied the opportunity to make properly informed decisions. Furthermore, “[t]he exposure to those carcinogens or toxic chemicals may have caused harm to the health of those consumers who, if they had been informed of the presence of these chemicals in the e-cigarettes, may have chosen not to purchase and use them” [4].

7.3 By failing to have scientific or other evidence to support the representations, or to carry out or commission any testing or to make reasonable or adequate enquiries to substantiate the accuracy of the representations, the retailers made the representations deliberately or recklessly, “without reasonable grounds” and “for commercial reasons” [5]. However, Social-Lites “expressed contrition over the contravening representations by accepting responsibility and expressed their regret over their error” [6].

7.4 In terms of mitigating factors, the Court looked favourably on the negotiated settlements between the ACCC and each of the retailers, noting the “well-recognised public interest in the settlement of cases” [7]. Each of the retailers cooperated with the ACCC and avoided the time and expense of a contested trial, thereby freeing the Court and the ACCC as regulator to deal with other matters. Having been satisfied that the orders sought by consent were appropriate, his Honour appears to have accepted the submission that “it is in the public interest for the Court to make orders on the terms that have been agreed between the parties so as to encourage parties to assist the ACCC in its investigations and achieve negotiated settlements”, at least in the circumstances of these cases [8].

8. These cases, and the penalties imposed, highlight the importance of cooperation as a mitigating factor. They also send a strong message to online traders that they must comply with the ACL when selling to Australian consumers.

[1] Joystick at [53], Social-Lites at [71], Elusion at [62].
[2] Joystick at [51], Social-Lites at [68], Elusion at [59].
[3] Joystick at [53], Social-Lites at [71], Elusion at [62].
[4] Joystick at [55], Social-Lites at [73], Elusion at [64].
[5] See Joystick at [64]-[67], Social-Lites at [80]-[83], Elusion at [72]-[74].
[6] Social-Lites at [83].
[7] Joystick at [11], Social-Lites at [11], Elusion at [11].
[8] Joystick at [39], Social-Lites at [57], Elusion at [52].