29.08.2023

High Court imposes record penalty under Fair Trading Act

One NZ (formerly Vodafone NZ) was recently a record-breaker for all the wrong reasons, receiving the largest penalty to date under the Fair Trading Act 1986 (FTA).  

On appeal from the District Court, the High Court upheld convictions on eighteen charges under the FTA, and increased the penalty imposed by the District Court from to $2.25 million to $3.675 million.

Background 

In October 2016, One NZ announced it would market its recently upgraded Hybrid Fibre Coaxial (HFC) broadband network under the brand name “FibreX”.  

There are three different types of wired access broadband networks in New Zealand:

  • Digital Subscriber Line (DSL), a general term for twisted pair copper cable from the home to the nearest exchange of the network provider. This is New Zealand’s original broadband network which utilises telephone lines.
  • HFC, which consists of fibre optic cabling to the “node” (typically a roadside cabinet) and coaxial copper cabling from the node to the home.
  • Fibre-to-the-home (FTTH), which as the name suggests uses fibre optic cables all the way into the home.

FTTH networks, commonly referred to and thought of as “fibre”, have greater capacity and significant functional benefits over HFC networks.  They typically allow for much faster speeds and reduced impact of reliability and interference issues.

One NZ promoted its upgraded HFC network FibreX as “FibreX is here” and “FibreX has arrived” together with images of the night sky filled with shooting stars.  Its broader campaign focused on speed, price and availability/installation time and was marketed where HFC was available; Wellington, Kāpiti, and Christchurch.  The campaign also featured a broadband availability checker tool on its website, which advised customers in FibreX’s area range that FibreX was the only available broadband service.  In many instances, this was not true.

FibreX’s performance did not meet many consumers’ expectations and in March and April 2017, TrueNet released reports which suggested FibreX’s performance suffered from congestion.  In May 2017 Consumer New Zealand published an article following up on the claims made in the TrueNet reports, stating that many FibreX users were complaining about the speed.  Consumer NZ published a further article on 1 June 2017 entitled, “Vodafone’s FibreX risks misleading customers.”  At this point, the Commerce Commission was already investigating.  This investigation resulted from the Commission receiving several complaints about the marketing of FibreX in the months following its October 2016 launch.

From late 2017 One NZ began to change its marketing strategy, and in particular make clearer that FibreX utilised its HFC network.  The availability checker tool on its website was also modified so that customers within FibreX coverage were notified that Vodafone broadband was available at their address but that DSL “might not” be.  FTTH was not presented as an option even where it was available.

By February 2018, One NZ ceased advertising Fibre X.  By 28 March 2018 One NZ also removed the availability checker from its website.  The Commerce Commission subsequently laid 28 charges following its investigation, including nine availability charges to which Vodafone later pleaded guilty, and 18 charges regarding the branding and advertising of the HFC network.

District Court Decision

The District Court was satisfied that a substantial number of consumers in the relevant consumer group would have been misled into believing FibreX was a FTTH product.  The Judge stated that this conclusion was unaffected by the fact that consumers could discover FibreX was in fact an HFC network if they made further enquiries.  This is because consumer had already been lured into the “marketing web” by an erroneous belief, in the Judge’s words.

The District Court imposed a fine of $2.25 million.

High Court Decision 

The Commerce Commission appealed, seeking a higher penalty be imposed.  One NZ appealed both the convictions and sentence.  The High Court dismissed the appeal against conviction.

In considering the competing penalty appeals, the Court observed that the maximum aggregate penalty was $10.8 million.

The High Court determined that the District Court did not give sufficient weight to One NZ’s “gross carelessness” in marketing a product materially different to what it was represented to be, the marketing campaign continuing despite One NZ being put on notice by the Commission from an early stage of its concerns, and the harm to the consumer’s ability to make an informed choice.  The High Court applied an uplift from the District Court’s starting figure of $2.1 million of $700,000, bringing the new starting point to $2.8 million.  In doing so, the Court was conscious of One NZ’s financial resources, commenting that any penalty must have “sting”, particularly having regard to a history of non-compliance with the FTA.

In rejecting One NZ’s appeal against the sentence, the Court observed:

  • An uplift of 25% was awarded because of One NZ’s financial means;
  • One NZ’s previous convictions revealed a “concerning indifference” to its consumer obligations. The fact that different senior managers had been involved over time did not reduce culpability.  If anything, it suggested an entrenched culture and failure to undertake a comprehensive strategy to address regulatory compliance issues.  Previous offending justified a 20% uplift; and
  • A 5% discount for cooperation was appropriate, noting that some cooperation had been given.

The final sentence imposed by the High Court for all charges was a fine of $3.675 million.  

Our Comment 

The decision sends a clear message to businesses regarding the importance of ensuring representations made in trade are not misleading.  This will be particularly important where representations are contained in marketing collateral and disseminated to a wide audience.

The Court has also made clear an expectation that corporates have robust regulatory compliance programmes in place, and that penalties imposed will be sufficiently high to have “sting”. 

We regularly review marketing collateral for clients, assist with Commerce Commission investigations and offer regulatory compliance training programmes to our clients. 

If you have any questions about your compliance with the Fair Trading Act 1986, please get in touch with Glen Holm-Hansen or Julika Wahlmann-Smith or your usual contact at Hesketh Henry.

 

Disclaimer:  The information contained in this article is current at the date of publishing and is of a general nature.  It should be used as a guide only and not as a substitute for obtaining legal advice.  Specific legal advice should be sought where required.

 

 

Do you need expert legal advice?
Contact the expert team at Hesketh Henry.
Kerry
Media contact - Kerry Browne
Please contact Kerry with any media enquiries and with any questions related to marketing or sponsorships on +64 9 375 8747 or via email.

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