OFT wins court case against clothing outlet for misleading advertising

The OFT has won its court case against The Officers Club Ltd (TOC), a chain of clothing outlets, for men, for its misleading advertising strategy. TOC had long been advertising its heavily discounted clothing lines at a permanent '70% off' which, the court has decided, was in breach of the Control of Misleading Advertising Regulations 1988. TOC had, on the face of it, complied with the OFT's Code of practice for traders on the avoidance of misleading advertisements yet the court decided that strict compliance was not enough to make advertising practices 'genuine'.

The '70% Off' Strategy:

In a small number of TOC's national chain of 146 stores, all of the goods for sale were marked at 'Red Star' prices for a period of 28 days. Once this period had expired, these goods were offered for sale in all branches under the advertisement "70 % Off Red Star Prices".

Alongside this strategy, TOC were also operating 'Stock Clearance' and 'Store Closure' discounts and, in some stores, a combination of all three. Initially, the OFT took issue with all of these practices. During a series of talks, which ended in February 2004, the two parties did come to some broad agreement and, in any case, from early 2004 the "70% Off" strategy was actively being phased out. However, it was TOC's refusal to formalise these agreements by entering into signed undertakings with the OFT which prompted the issuing of proceedings in March 2004. TOC's refusal to co-operate as requested by the OFT was cited as being for 'legal and commercial' reasons and a desire on TOC's part to retain the right to resurrect this strategy, if it is proved lawful, in the future.

The Legal Framework:

The OFT's case centred around three statutory provisions:

1. The Control of Misleading Advertisements Regulations 1988, which implement Council Directive 84/450/EEC, define a 'misleading' advertisement as follows:

"An advertisement is misleading if in any way, including its presentation, it deceives or is likely to deceive the persons to whom it is addressed or whom it reaches and if, by reason of its deceptive nature, it is likely to affect their economic behaviour, or for those reasons, injures or is likely to injure a competitor of the person whose interests the advertisement seeks to promote" (Regulation 2.2)

The power of the OFT to bring proceedings for an injunction against a person appearing to him to be concerned with the publication of a misleading advertisement is given by Regulation 5.1.

2. The Enterprise Act 2002 (Part 8), which came into force on the 20 June 2003, contains alternative powers to seek injunctions against businesses which engage in misleading advertising.

In this case the OFT, relied on provisions relating to Community Infringement set out in s.212:

"A Community Infringement is an act or omission which harms the collective interests of consumers" and

"Contravenes a Listed Directive".

Directive 84/450/EEC is a Listed Directive for the purposes of the Enterprise Act 2002.

3. The Consumer Protection Act 1987

s.20 creates an offence for giving consumers an indication "which is misleading" as to the price at which goods are available.

s.25 of this Act creates a power for the Secretary of State (in consultation with the OFT) to approve a Code of Practice for the benefit of traders. The Code's purpose is stated to be:

The giving of practical guidance for adhering to the requirements of s20 CPA

The promotion of what appears to the Secretary of State to be desirable practice as to the circumstances and manner in which any person who gives an indication as to the price at which goods are available.

Using these powers, the OFT has developed and established the Code of Practice.

It should be noted that a breach of the s.25 Code does not incur civil or criminal liability. It has a more evidential role, in that proof of contravention or compliance with the Code can be relied upon in relation to proceedings to establish that a person has committed the s.20 offence.

The OFT's Case

The broad premise of the OFT's claim is this: The discounts offered by TOC under its' permanent '70% Off' strategy were not 'genuine'. An ordinary and reasonable consumer, however, given all the circumstances, would be led to believe that they were. Although the OFT acknowledged TOC's inclusion of a disclaimer on the price tags of discounted garments which read:

"All discounted goods have been for sale at a higher price at six or more of a our branches for a minimum of 28 days in the preceding six months"

but they contended that this was not enough to remove this inference.

The OFT cited a number of factors to be taken into account when weighing up whether or not a discount is genuine, drawing on a wide range of sources, including law and regulatory material from counties such as the US and New Zealand. These factors include:

Whether or not the higher prices were genuine and set in 'good faith'

Whether or not the higher prices were 'actively offered for sale'.

In their closing submissions, the OFT concluded that TOC had not offered the higher 'Red Star' prices in a genuine way. Instead, these prices were "artificial", "inflated" and "set with the overriding purpose of claiming the subsequent discount".

Supporting the OFT's position was a close sales figures analysis which showed that during the period September 2002 to June 2003, goods sold at full 'Red Star' prices amounted to only 0.15% of total goods sold.

As a result of such findings, the OFT submitted that the advertisements were misleading within the meaning of Regulation 2.2 of the Control of Misleading Advertisements Regulations.

TOC's Case:

TOC's argument was based on strict legal interpretations. In their view, the only legislative guidance on 'misleading' practices was the Code. They argued that their '70%' strategy had been tightly structured around the guidance offered under the Code and did not breach its perameters. They therefore took the position, that if they had not breached the Code, it was impossible for them to have breached the Regulation. It was argued further, that if it was possible to breach the Regulation without there being a breach of the Code, then the State had failed to make the applicable law clear for traders.

TOC also included a Human Rights element in their defence, where they claimed that the action by the OFT, breached their rights under Article 10 of the Convention (Right to Freedom of Expression). Their argument was that they were permitted under its wording "to impart information and ideas without interference by a public authority" unless "that interference is prescribed by law". The case of Casado Coca v Spain, (1994), established that Article 10 could be applied to cases involving commercial advertising.

Aside from legal interpretation TOC argued that their advertisements would satisfy any information requirements that a reasonable consumer might have. Further, a reasonable consumer would not, in fact, be interested in the purposes behind TOC's marketing strategies and that any concerns would be satisfied. As a final point, it was noted that setting higher prices in order to demonstrate a subsequent discount is both an established and accepted commercial practice and that TOC had not received a single complaint from the public in respect of their '70%' offer.

Judgment

The High Court had "no hesitation" in rejecting TOC's argument that it was a statutory impossibility for them to have breached the Regulations without having breached the Code under the CPA. The Court held that the Code only had statutory relevance to the s.20 offence under the CPA and that even then it was of persuasive value only.

The State had not been remiss in providing adequate guidance to traders. The Code's purpose was both to allow certainty for those engaged in commercial advertising but also to allow "sufficient flexibility to curtail and prevent misleading price indications irrespective of strict compliance with the letter of the practical guide".

If strict adherence to the Code was all that was needed to avoid 'misleading' consumers then, it would be entirely permissible for a trader to run a strategy similar to the '70% Off' practice and advertise only one item of clothing, irrespective of size and colour and "no matter how exorbitant and artificial the price". The judge found that a situation like this would be "manifestly contrary to proper regulation".

Comment

This case shows that demonstrating a strict adherence to the rules will not provide an irrefutable defence to an accusation of misleading advertising. Although the rules must be adhered to there is an additional requirement to be within the 'spirit' of the regulations in order to show that discounts are 'genuine' and offered in good faith. This case provides an insight into how the Courts will deal with misleading advertisement claims brought by the OFT. TOC's arguments relating to the hypothetical consumer's viewpoint were quickly rejected by the court. We can see this from the prompt dismissal of TOC's contention that 'the consumer doesn't care' what the backroom policies behind retailer discounts are just so long as they are reaping the benefits of cheap goods.

What does seem clear is that regulation of misleading practices is high on the agenda with both the courts and enforcing bodies such as the OFT keen to maintain a rigorous level of protection for consumers. In April this year a European Directive on Unfair Business-to-Consumer Commercial Practices was adopted by the European Council and is due for implementation in Britain by 2007.