Direct Selling/Multi-Level Marketing - How will Phase 2 of the Proposed Australian Consumer Law Reforms Affect Your Business?
By Jamie Nettleton, Partner, Laura Hartley, Partner and Andrew Dawson, Special Counsel
17 May 2010
Introduction
Australian direct selling organisations (DSOs) are likely to be impacted significantly if the changes proposed by the Trade Practices Amendment (Australian Consumer Law) Bill (No. 2) 2010 (ACL) become law.
Of particular concern are the provisions targeting door-to-door selling, telephone sales and other forms of direct selling which do not take place in a retail context.
Does your organisation effect sales through "Unsolicited Consumer Agreements"?
A new concept of "unsolicited consumer agreements" is proposed by the ACL. In essence, this means any sales arrangement under which goods and/or services are supplied other than through retail outlets or trade premises. As many DSOs achieve sales away from fixed premises - for example through home visits, party plans or other private/domestic contexts - the prescriptive obligations relating to unsolicited consumer agreements will affect materially the way in which DSOs conduct their businesses.
Among the key issues proposed by the ACL are:
- Supplier liability: where a sales representative (e.g. a consultant or associate) of a DSO acts in a manner inconsistent with the obligations of the ACL in negotiating a consumer agreement, the DSO will also be taken to have contravened that provision. While there is a defence for DSOs that take reasonable precautions and exercise due diligence, this presumption will extend significantly the scope of a DSO's liability for the conduct of their associates/representatives.
- Permitted hours: the ACL effectively places restrictions on when calls can be made to prospective customers. In particular, calls cannot be made on Sundays, after 6 pm on weekdays or after 5 pm on Saturdays.
This places significant restrictions on the operations of most DSOs since the time prohibitions apply are the periods when customers are most likely to be available. The restrictions do not apply if a consumer invites a sales representative of a DSO to their home for a purpose other than to supply a good or service, and the representative subsequently negotiates with the consumer for supply.
- Disclosing purpose, identity and other consumer rights: DSO representatives must advise consumers (including repeat customers), at the outset of an approach, of their purpose, identity and the consumer's right to request them to leave at any time from their premises. This may severely limit the ability of the DSO to negotiate a sale and may well strain the relationship with consumers given the fact that disclosure of purpose and identity must take place on every occasion.
- Consumer termination rights: consumers must be advised of their right to terminate an agreement for a period of 10 days after execution. DSOs must also immediately repay money received under any terminated unsolicited consumer agreement.
- Consumer agreements: for there to be a valid agreement terminated during this 10 day termination period, a number of specific terms must be included, in particular, terms relating to the termination notice and information about the supplier.
- Post-contractual conduct: where a consumer agreement is made, no goods or services can be supplied, and no payment for these goods or services can be accepted, for 10 business days. Accordingly, even if a consumer requires supply immediately and the DSO agrees with this request, or accepts payment within this period, it would generally be in contravention of the ACL.
It is probable that all documentation for DSOs will need to be reviewed to ensure compliance if the ACL becomes law. Certainly, all procedures and practices of DSOs will need to be revisited so that they are consistent with ACL requirements.
Miscellaneous Areas of Concern for Direct Sellers
There are also other elements of the ACL of relevance to DSOs. These include:
- Consumer goods associated with death, serious injury or illness: a new obligation on suppliers of consumer goods is proposed to notify the Commonwealth Minister when it becomes aware that a good has been associated with the death, serious injury or illness of any person. The broad nature of the term "supplier" means that any person involved in the supply of the good, including any DSO, may have notification obligations.
- Pyramid selling: the current prohibitions on pyramid selling are generally well-understood by DSOs. However, a minor change has been proposed to the provision dealing with pyramid selling and the implications of this are, as yet, unknown.
The key change is that, when considering whether a sales arrangement constitutes pyramid selling, courts will be required to consider if any participation payment bears a reasonable relationship to the value of the relevant goods and services. In the past, the courts have had discretion as to whether to consider this issue. What ramifications this change has are uncertain, but there are a number of questions posed by the change. For example: - can the court consider such a factor and disregard it?
- can a court consider such a factor and place minimal weight on it?
- if not, how much weight must a court place on it?
- Unfair contract terms: standard form contracts between DSOs and consumers will also be required to comply with the new unfair contract terms legislation brought in by Phase 1 of the ACL. Addisons has previously released a Focus Paper titled "Australian Consumer Law Reform - The introduction of unfair contract terms legislation" commenting on these changes. For DSOs, it is important to remember that unless the contract you use for signing up a consumer, or supplying goods or services to one, complies with these regulations it may be unenforceable. One risk exists through the use of standard form consumer agreement used by DSOs - particular care needs to be taken to ensure that they do not include unfair terms as this may cause them to be unenforceable and render the DSO liable to penalties.
- Misleading and deceptive conduct: if you are familiar with labelling misleading and deceptive prohibition as a "section 52 prohibition", begin to call it a "section 18 prohibition." The proposed misleading and deceptive conduct prohibitions in the ACL are in the same form as the former prohibition, except for the reference to "persons" rather than "corporations".
- when DSO representatives may negotiate with a consumer;
- what DSO representatives must disclose to a consumer;
- what are the obligations of DSOs to consumers; and
- what DSO's must, and cannot do, following the formation and termination of any consumer agreement.
For DSOs, the proposed change will result in a degree of uncertainty existing as to what constitutes pyramid selling.
Conclusion
The ACL will have material ramifications for DSOs. Indeed, the model of DSO should be reviewed in light of the changes effected by the ACL and the first tranche of reforms (see our FocusPaper titled "Phase 1 of the Australian Consumer Law reform process begins!" for a summary). For example, the following processes will be regulated under the ACL:
The assistance of Rahil Patel, Clerk, of Addisons in the preparation of this article is noted and greatly appreciated