Business Law

What are the laws concerning advertising of “free” products? A primer for businesses

Published in: December 2016

The offer of a “free” item is a powerful selling incentive, and for any businesses who wish to use the offer of a free item as a lure should be mindful of the laws relating to anything promoting a “free” product.

What is meant by “free”?

Section 32(1) of the Australian Consumer Law (ACL), prohibits a business from offering “any rebate, gift, prize or other free item with the intention of not providing it.” The courts having recognised the magnetism of the word “free” and have ruled that the appropriate qualifications need to be clearly spelled out as to avoid contravention of s 32(1) of the ACL, along with ss 18 or 29(m) of the ACL governing misleading conduct, as Lindgren J observed in Nationwide News Pty Ltd v Australian Competition and Consumer Commission (ACCC) (1996) 71 FCR 215. Nationwide News Pty Ltd v ACCC was a matter where purchasers who wished to acquire a “free” mobile phone had to enter into a 15 month contract with Smartcom Telecommunications, which granted purchasers access to the Vodafone network. The “free” mobile phone would end up costing purchasers more than $2000. Lindgren J said the following in relation to the use of “free” in this instance (at 228):

“Any respect in which goods or services offered as “free” may not be free should be prominently and clearly spelled out so that the magnetism of the word “free” is appropriately qualified...An offer to a newspaper reader of a “free” mobile phone without any reference to conditions is, in my view, an offer to cause the reader to become the owner of such a phone without his or her first having to outlay money or to undertake to do so.”

In contrast, in ACCC v Telstra Corporation Ltd (2004) 208 ALR 459, Telstra placed advertisements promoting “$0*” and “$0 upfront*” handsets and mobile telephone services. The Australian Competition and Consumer Commission (ACCC) asserted that the statement was indistinguishable from the use of the word free, and the principles established in relation to products described as “free” were also applicable in this instance. Giles J did not accept the ACCC’s assertion and his Honour held [at 53]:

“In my opinion, a reasonable reader of the class concerned would understand that the offer was only made in connection with the supply of telephony and would inevitably involve signing up with Telstra for that purpose. It would be known that Telstra’s primary business is telephony, not providing mobile phones. The presence of the asterisk and the words adjacent “Telstra Mobile $20 (or other amount) Member Plan for 24 months” would underline that reading. It is not necessary for that purpose to go to the fine print at the bottom.”   

For offers relating to financial products and services, s 12DE of the Australian Securities and Investments Commission Act 2001 (Cth) mirrors s 32 of the ACL.

What are the exemptions?

Section 32(3) of the ACL states that if the business’ failure to provide the rebate, gift, prize or other free item was in accordance with the offer, was due to an act or omission of another party, or the cause of the failure was beyond the control of the business, and the business took reasonable precautions and exercised due diligence to avoid the failure, s 32(2) of the ACL would not be applicable.

Section 32(4) allows a customer to accept a different prize, rebate or other free item if they agree to do so. The section allows a business that has genuinely attempted to provide something but could not, even with the existence of an appropriate substitute. The section allows a business to make an offer of another product in lieu of the original item, however, the customer is not obliged to accept the offer, or if they wish to retain other rights to compensation, they may. In the event that the customer accepts the substitute, the business is still obliged to provide the product within a reasonable time. 

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