First defended case on unsubstantiated claims

The Commerce Commission has been focusing on substantiation of claims over the past year with a number of investigations into this topic.  Judicial guidance on the extent of the obligations for substantiation under s 12A of the Fair Trading Act 1986 is still limited.

However, in late 2019 the District Court issued a judgment in the first defended case involving allegations of unsubstantiated representations.[1]  Kiwipure Limited (Kiwipure) was found guilty of making unsubstantiated claims about the benefits and effectiveness of its magnetic water filtration system and fined $162,000.  The judgment contains helpful guidance for companies on how to substantiate claims.

Facts

Kiwipure developed and distributed household water filtration systems that utilised magnets.  Between 2015 and 2018, the company sold several hundred of its water filtration systems at a cost of $1,395 excluding installation.  Kiwipure’s website stated the benefits of its “world first” magnetic water filtration system were “scientifically proven.”   Marketing claims included the following:

  • A magnetic “virtual ionizer” in its water filtration system softened water.
  • The benefits that consumers could expect of soft water after using the water filter, were “no scum build up”, “use less washing powder” and “no scale build-up in hot water systems and pipes saves electricity and maintenance.”
  • Use of the water filter would lead to a “reduction in skin irritations and eczema”.

The Commission alleged that Kiwipure lacked reasonable grounds for making the representations.  At trial, Kiwipure argued that it relied on the following in making the claims:

  • Literature on the internet: particular reliance was placed on a report on tests conducted by a University that Kiwipure said demonstrated the effect of treating water with a magnetic field.
  • Anecdotal evidence: anecdotal information provided by others on the effectiveness of the magnetic water filtration system, including by another company engaged in the magnetic treatment of water.
  • Product trials: a “clinical trial” (involving a sample size of four) undertaken by a dermatologist on the effect of a Kiwipure filter on household domestic water supply which purportedly demonstrated improvement to dermatitis, and field tests involving periodic observations of performance of the installed device over several months.
  • Customer testimonials and sales record: hundreds of systems were sold without complaint.

The Court’s decision and observations

The Court made some useful general comments in relation to substantiation:

  • Representations concerning benefits to health require a far higher degree of substantiation than anecdotal evidence and limited research.
  • Credence claims (claims which are difficult or impossible for consumers to evaluate or claims which can only be evaluated after purchase) also need to be sufficiently supported by research.  For example, measurements or evidence of a reduction in washing powder was required to back up Kiwipure’s claim that less washing powder is needed from the use of the device.
  • The Commission does not have to undertake tests to check the accuracy of representations.  The trader, in making its representations, must ensure they are substantiated at the time they are made.

The Court held that Kiwipure lacked reasonable grounds for making the representations, as it “did not go far enough in its testing and research” before it made the representations.  The research undertaken was simply research into the underlying idea, not research into the product itself.  The fact that the company lacked the resources to conduct scientific testing and analysis was no defence.  In reaching this conclusion, the Court made the following observations:

  • Most of the literature relied upon were marketing materials and contained limited scientific analysis.
  • The results of the University paper on the effect of treating water with a magnetic field could not be extrapolated to Kiwipure’s product.  The paper relied on the use of oxygenated water in a laboratory environment, whereas the Kiwipure device was used in a different way – domestic treatment of water.  The University report also noted that any effect was lost at temperatures greater than 50 degrees – which meant the treatment would be ineffective for domestic hot water systems.  Further, the Court determined that the director “did not have the necessary background to understand the conclusions that might be drawn from the University study, and how that could be applied to the defendant’s own product (which is a different product).”
  • The product trials were not conducted in scientifically controlled settings.  The sample size of one of the field tests was inadequate – only one house was tested.  There was also an absence of a controlled sample, and lack of appropriately qualified persons analysing the results.
  • Similarly, the “clinical trial” undertaken by a dermatologist suggesting an improvement to skin conditions (in which 4 people were involved) was simply too small in the number of participants to be of any value.
  • Evidence of customer satisfaction and anecdotal evidence following a purchase is irrelevant.  This is because customer testimonials (particularly on scientific matters) are inherently subjective, and the representations need to be substantiated at the time they are made.  Given the consumers would not have the knowledge or experience to ascertain the accuracy of representations, scientific evidence was necessary.

Our view

Although the Commerce Commission has stated that it will be pragmatic in its enforcement during the Covid-19 lockdown, we expect to see a renewed focus from the Commerce Commission on substantiation of claims after the Covid-19 crisis.  Therefore, you should still take care that claims made during the lockdown can be backed up.

A higher degree of substantiation is required for claims relating to health benefits, claims that are difficult for consumers to evaluate or that purport to be backed up by scientific research.  For these types of claims in particular, it is important to ensure that research results can be extrapolated, and scientific testing is conducted with qualified personnel interpreting results (such as appropriately involving expert opinion).

As a practical risk management action, we recommend documenting the steps taken in the due diligence process, such as a copy of the information relied on, the date the information was obtained, the source of information relied on, who in your organisation reviewed the information, and (for scientific claims) the qualification of personnel interpreting results.  For larger companies, it is also prudent to facilitate critical information flow between marketing, legal and product development teams and a standardised process for due diligence and audit to ensure all claims are substantiated.

For more information on substantiation of claims please contact our experts.

[1] Commerce Commission v Kiwipure Limited [2019] NZDC 12149.

Who can help