This week, the Commerce Commission has released details of the sentence handed down to Ego Pharmaceuticals (Ego), an Australian-owned pharmaceuticals company.

Ego has been fined $280,000 following its guilty plea last month to two charges under the Fair Trading Act 1986 for making unsubstantiated representations.

The fine emphasises the importance of ensuring that your business can back up with supporting evidence any claims made about products or services, at the time that those claims are made.

The unsubstantiated representations

The Fair Trading Act prohibits any person in trade from making a representation if that representation is unsubstantiated; in other words, if the person does not have reasonable grounds for the representation at the time that representation is made. It is a breach of the Fair Trading Act to make an unsubstantiated representation even in situations where the representation turns out to be true.

In this instance, Ego had represented that two of its sunscreen products provided “very high” sun protection for consumers, and were “SPF50+”, in line with an Australian and New Zealand Standard for sunscreen products.

Initially Ego did have reasonable grounds for the representations when the products were introduced in New Zealand. However, subsequent adverse test results meant that from early 2019 Ego no longer had reasonable grounds for the claims.

The sentence

In imposing the $280,000 fine, the District Court noted that the principal sentencing factor was deterrence. Although it wasn’t possible to quantify the actual harm to consumers and commercial competitors, the sentence needed to acknowledge that harm had occurred through exposing consumers to an unnecessary risk of melanoma.

The Court noted that the nature of the goods, as products with health/medicinal properties, and the atmospheric conditions in New Zealand make it “vitally important” that consumers have accurate information about the products so they can be adequately protected. The fact that the representations were about the “core quality” of the product and asserted an important health benefit makes it vital that consumers can trust representations about the products’ effectiveness.

What does this mean for your business?

Be careful when making “effectiveness” claims: The Commerce Commission has emphasised that consumers are entitled to rely on the accuracy of claims made about the products they buy, particularly regarding health or nutritional claims. It is almost impossible for consumers to verify these claims themselves, so the Commerce Commission is likely to take a particularly strict approach.

Check your evidence regularly: Ensuring claims are substantiated is not simply a matter of making sure there is evidence when a claim is first made. Manufacturers need to regularly check that the evidence relied on to substantiate claims remains accurate.

Sunscreen manufacturers beware: This is not the first time that sunscreen manufacturers have attracted the regulators’ attention. In 2017, the producers of Neutrogena sunscreen made court enforceable undertakings to only sell sunscreen products that met the Australian/New Zealand standard. Earlier this year, Consumer NZ complained to the Commerce Commission after its testing found that only eight of 21 sunscreens tested met their SPF label claims.[1] The unanimous passing of the Sunscreen (Product Safety Standard) Act 2022 means that makers of sunscreens that don’t provide the protection promised on the labels may be fined up to $600,000 under the Fair Trading Act.

Ego’s sentencing illustrates the serious consequences for businesses who fail to meet their obligations under consumer laws in New Zealand.

If you are struggling to decide whether your company has reasonable grounds for a claim, consider:

• the kind of goods or services that the claim is about;
• the nature of the claim;
• any research or other steps taken before the claim was made;
• the nature and source of the information relied on to make the claim;
• the actual or potential effects of the claim; and
• whether you have complied with any standards, codes or practices relating to the grounds for the claim.

The Commerce Commission summarised its position pithily: “If you can’t back it up, don’t say it.”

Commerce Commission announces new Chair

In other news, the Government has recently announced the appointment of a new Commerce Commission Chair, Dr John Small.[2] Dr Small previously served as an associate member and then member of the Commission, and has contributed to various merger decisions and all three market studies to date. He begins his new role on 5 December 2022, and his appointment will expire in June 2025.

Special thanks to Julia Marshall-Mead and Elsie Stone for their assistance in preparing this article.