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2021 has already seen several legislative, regulatory, and case law developments pointing toward a heightened risk of product liability litigation for suppliers, manufacturers, and their insurers.
Australia's product liability laws are a mixture of common law and statute. However, since coming into force in 2011, the Australian Consumer Law (ACL) has proven an extremely popular vehicle for claims brought by persons claiming to have been injured by a product (or to have otherwise suffered loss or damage as a result of it).
The ACL imposes several statutory requirements on the supply of goods to consumers. These include that the goods are of acceptable quality, fit their disclosed purpose, and match any description, sample, or demonstration provided.
Previously under the ACL, a person or business was considered a ‘consumer’ and afforded the protections of its statutory guarantees if they purchased goods ordinarily acquired for domestic, household, or personal use or consumption; or alternatively, goods of any nature up to value of AUD 40,000.
From 1 July 2021, this monetary threshold increased from AUD 40,000 to AUD 100,000, meaning that significantly more business transactions relating to goods that are not of a domestic nature now fall under the ACL.
In circumstances where the evidential burden for proving a claim against a supplier for breach of statutory guarantee(s) under the ACL is lower than proving negligence under the various states’ corresponding civil liability regimes, the raising of the threshold effectively multiplies the number of transactions that consumer guarantees may catch. This inevitably increases businesses’ and their product liability insurers’ exposure to claims under commercial supply transactions.
As the primary federal regulatory authority overseeing product liability issues affecting Australian consumers, the Australian Consumer and Competition Commission (ACCC) has a number of investigative and enforcement powers under the ACL and annually publishes its compliance and enforcement priorities.
In December 2020, consistent with its priority relating to the promotion and sale of products during the COVID‑19 pandemic, the ACCC commenced proceedings under the ACL for alleged false or misleading claims made by Lorna Jane Pty Ltd (L. J.)1 about its ‘anti-virus activewear’ range.
In July 2020, L. J. released a range of garments that were sprayed with a substance it marketed as ‘LJ Shield’. L. J. claimed, and aggressively promoted, that LJ Shield eliminated the spread of COVID‑19 and protected wearers of the garments against viruses and pathogens, including COVID‑19. These claims were made on a wide range of media platforms and in‑store.
Unsurprisingly, L. J.’s marketing campaign attracted the attention of regulators. As a result, on 17 July 2020, the Therapeutic Goods Administration (TGA) issued three infringement notices against L. J. for alleged unlawful advertising concerning the COVID‑19 claims. Following the infringement notices, L. J. removed most of its "anti-virus activewear" marketing. However, until at least November 2020, garment tags representing the LJ Shield’s anti-virus properties continued to adorn its merchandise.
The ACCC commenced proceedings against L. J. and its namesake CEO, alleging that they had contravened the ACL by making certain false claims or misrepresentations in their "anti-virus activewear" marketing campaign.
L. J. admitted liability regarding the false representations and agreed to a range of declaratory, injunctive, penalty, and other orders proposed by the ACCC. In final orders made by the Federal Court of Australia on 23 July 2021, L. J. was ordered to pay a pecuniary penalty of AUD 5,000,000 plus the ACCC’s costs, publish a corrective notice, and establish a program that would ensure the company’s compliance with the ACL going forward.
The Court stated that L. J. had “sought to exploit the fear and concern of the public through the use of misleading, deceptive, and untrue representations”2 about the properties of its anti-virus activewear range and categorised this behaviour as “exploitative, predatory, and potentially dangerous”.
It’s worth noting that while the Court, in this case, accepted the appropriateness of the penalty that was jointly agreed to by the ACCC and L. J., such agreements are not necessarily "rubber stamped" as a matter of course.
A notable contrary example is the proposed penalty agreement between the ACCC and Volkswagen and its Australian subsidiary in 2019. In this case, the parties had agreed on a penalty of AUD 75 million regarding the vehicle manufacturer’s alleged contraventions of the ACL, characterised as deception about the exhaust emissions of certain Volkswagen-branded vehicles imported into Australia for sale. The Court rejected the agreement, stating the penalty was “manifestly inadequate”3 and did not meet the overriding general and specific deterrence objectives. In place, the Court ordered that Volkswagen pay AUD 125 million in pecuniary penalties.
Volkswagen appealed, arguing that the Court’s discretionary imposition of the higher penalty was manifestly excessive. The appeal was dismissed in April 2021. The Full Federal Court found that the penalty “was not excessive, let alone manifestly excessive”4 and that any lesser penalty would not have been appropriate.
Safety is a key indicator of the quality and fitness for purpose of goods under the ACL. In March this year, the ACCC published its 2021 Product Safety Priorities, identifying risk patterns emerging in the following consumer goods in Australia:
The expanded breadth of consumer protections and the ACCC’s continued activity and use of its investigative powers, including to commence penalty proceedings, indicates that the regulator is becoming increasingly proactive in product safety and quality issues. This can be expected to influence both the consumer goods market and the landscape of product liability litigation in Australia.
Since 2018, maximum penalties for breaching various ACL provisions, including those governing false or misleading representations, have been significant. For corporations, the maximum penalty is the greater of:
The maximum penalty was previously capped at AUD 1.1 million. Accordingly, beyond the reputational damage and its inevitable adverse effect on the company’s bottom line, the financial cost to businesses who find themselves on the wrong side of the ACCC’s safety, compliance, and/or enforcement focus can be significant.
The potentially swift metamorphosis of a particular product/issue from being published as an ACCC priority to becoming the subject of a targeted (and likely expensive) regulatory prosecution sends a very clear message that such misconduct will not go unnoticed and that penalties commensurate with the assessed severity of the breach are likely to be imposed.
Pecuniary penalties are generally excluded from cover under standard public/product liability insurance policies. Even when available and legally permissible, statutory liability cover (be it standalone or under the umbrella of a management liability policy) now commonly excludes pecuniary penalties imposed pursuant to consumer protection legislation. However, cover in respect of "investigation costs" or "representation expenses" may be available.
Finally, although the financial risk of regulatory investigations and proceedings cannot be transferred from the business to its insurer, reverberation risks nevertheless remain in circumstances where legal penalty actions can often serve as a catalyst for the commencement of civil claims, either through individual causes of action or class actions. With the recently expanded definition, more consumers may now qualify as class members, which may create upward pressure on the insurer’s quantum exposure.
