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A sweet victory for the ACCC leaves a sour taste for H.J. Heinz


The Heinz Shredz kids snack food case shows why marketing a product as healthy when it contains too much sugar for a healthy diet is a serious contravention of the Australian Consumer Law; and shows the serious penalties and compliance orders that follow.

In this article, we examine how H.J. Heinz contravened the Australian Consumer Law, the penalty imposed and compliance order made by the Federal Court of Australia.

A marketing commentary by Michael Field follows.

How did H.J. Heinz contravene the Australian Consumer Law (ACL)?

H.J. Heinz manufactured and supplied three varieties of Heinz Little Kids fruit & veg products:

- SHREDZ berries apple & veg

- SHREDZ peach apple & veg

- SHREDZ strawberry & apple with chia seeds

They were ‘sticks’ made of fruit juice concentrates, and were sold in packets which had words and images of a tree, a smiling boy climbing a rope ladder, an apple and other fruit, pumpkin and other vegetables.

The products were sold in the majority of supermarkets throughout Australia in the period from August 2013 until 18 May 2016, when they were withdrawn, one month before the proceedings commenced.

In the Liability Judgment, Justice White made declarations that:

  1. The representations made that the Shredz Products were beneficial to the health of children aged 1 to 3 years were false or misleading or deceptive because the Shredz Products had high sugar content and sticky texture (the high sugar content leads to obesity, the sticky texture to dental caries) in breach of sections 18 and 29(1)(g) of the Australian Consumer Law.
     
  2. Heinz ought to have known that it was making these false or misleading representations by using words and imagery on the packets to show that the products were a healthy food, and yet a single serve contained two-thirds of the recommended daily intake of sugar for a two year old child.

Liability Judgment: Australian Competition and Consumer Commission v H.J. Heinz Company Australia Limited [2018] FCA 360 Federal Court of Australia

For my commentary: Too much sugar makes Heinz snack food unhealthy for little children

What penalty and compliance order was imposed on H.J. Heinz?

In the Penalty Judgment, Justice White ordered that H.J. Heinz -

  1. Pay the sum of $2.25 million by way of a pecuniary penalty under s 224(1) of the ACL for contraventions of s 29(1)(g) of the ACL; and
     
  2. Establish a Consumer Protection Law Compliance Program and maintain it for three years under s 246(2)(b) of the ACL.
     
  3. Pay the ACCC's legal costs in the proceedings.

Penalty Judgment: Australian Competition and Consumer Commission v H.J. Heinz Company Australia Limited (No 2) [2018] FCA 1286 (24 August 2018).

What ‘relevant matters’ did Justice White take into account to set the penalty?

The penalty imposed was less than the $10 million sought by the ACCC but more than the $400,000 submitted by H.J. Heinz. The Court took these matters into account:

The nature and extent of the contraventions

Heinz sold a total of 1,207,560 packets of the SHREDZ product, with sales revenue of $3,209,205 and gross profit of $429,929.

The Court accepted that the number of persons who saw the packaging may be substantially more than bought the product, but concluded that it was not possible to make any findings as to the number who viewed the packets.

Evidence of actual loss or harm was not presented, nor was it necessary. It was sufficient that there was a distortion of consumer choice by encouraging parents and carers to select the products by representing they would be beneficial for their children's health (when they were not), and the potential for adverse health effects associated with the consumption of free sugars (obesity and dental caries).

The Court found that H.J. Heinz ought to have known that it was making misleading representations that the products were beneficial to the health of little children, but that it had no actual knowledge. H.J. Heinz had a regulatory affairs team, which were found to have developed the packaging in a conscientious and diligent way, but had failed to appreciate a potential non-compliance with the ACL in its packaging.

Characterisation of the conduct

The conduct was extensive - the representations were made on at least 1.2 million occasions, and serious - obesity and dental caries are endemic problems amongst Australian children.

The size of Heinz

H.J. Heinz describes itself as "A Global Food Powerhouse" with global net sales of US$26.5 billion of which $448.255 million was in Australia in 2016. The ACCC argued for a higher penalty based on size, but the Court said that size is a relevant factor only in terms of general deterrence.

Deterrence

The Court did not accept that H.J. Heinz regarded possible sanctions as a cost of doing business, nor did it have a corporate culture marked by lack of concern for compliance. But an appropriate penalty was required to encourage H.J. Heinz to consider the effect of its packaging and for disregarding its own guidelines.

Corporate culture and the involvement of senior management

There was evidence of regular compliance training of staff, which was mandatory for all staff members. There is no evidence of indifference by senior management.

The amount of the penalty

The penalty imposed of $2.25 million is an aggregate amount for the misleading representations in all of the products. The court stated that to simply negate the profit on sale of the products was not sufficient given the serious and extensive nature of the contraventions, their effects and the need for deterrence.

Consumer Protection Law Compliance Program

The Court imposed a very strict compliance order upon H.J. Heinz, to which H.J. Heinz agreed.

What is interesting is the detail, which should serve as a guide to consumer product suppliers as to the standard expected of a compliance program. It covers -

  • The appointment of a Compliance Officer and a Compliance Adviser, and the preparation of a Risk Assessment Report (within three months).
  • The issue of a Compliance Policy.
  • The inclusion of a Complaints Handling System, Whistleblower Protection, Staff Training and reports to Senior Management.
  • An annual Compliance Review and Compliance Reports.
  • Reporting Material Failures to the ACCC.
  • The provision of Compliance Program documents to the ACCC, on request.

The Compliance Program is to continue for three years.

Analysis: Would the penalty have been higher if the recent increase in maximum financial penalties under the ACL had applied?

Legislation to increase the maximum financial penalties and to provide three alternative methods of calculation under the ACL passed Federal Parliament on 23 August 2018. It will apply to breaches which take place after it becomes law.

Alternative 1 is the penalty increase, alternatives 2 and 3 are new.

  1. Increase in the maximum penalty to $10 million (presently $1.1 million) per offence this would have made no difference because the Court found 1,207,560 breaches (i.e. sales of Shredz packets)’ and so the penalty of $2.25 million would represent a penalty of $1.86 per breach; OR
     
  2. Three times the value of the benefit received i.e. three times gross profit, would have resulted in a penalty of $1,289,787, which is less than the actual penalty; OR
     
  3. 10% of the annual turnover in the preceding 12 months this would have yielded a significantly higher maximum penalty, in this case $44.8 million, reflective of the substantial sales revenue of H.J. Heinz in Australia.

Had the new law applied to this case, then new alternative 3 would have helped the ACCC.

Conclusion – the public interest – Public Health benefits

In the ACCC media release, ACCC Chair Rod Sims referenced the new law when he said: "The ACCC wants to ensure that penalties for breaches of the consumer law are large enough to get the attention of the financial markets, boards and senior management."

The media release went on to state "The ACCC is carefully considering the judgment", which indicates that the ACCC is disappointed with what it regards as a low penalty, and is considering an appeal.

There is scope for arguing for a higher penalty in the public interest. This is because the ACCC appears not to have emphasised the Public Health benefits of a higher penalty by acting as a general deterrence to adding ‘free sugars’ to food and drink.

The harm that ‘free sugars’ cause has led to three strong recommendations being made in the World Health Organization Guideline: Sugars intake for adults and children; 2015 (at p 16):

  • WHO recommends a reduced intake of free sugars throughout the lifecourse.
     
  • in both adults and children, WHO recommends reducing the intake of free sugars to less than 10% of total energy intake.
     
  • WHO suggests a further reduction of the intake of free sugars to below 5% of the total energy intake.

Note: 'free sugars' are defined to include monosaccharides and disaccharides added to foods and beverages by the manufacturer, cook or consumer, and sugars naturally present in honey, syrups, fruit juices and fruit juice concentrates.

After all, as Justice White stated (in relation to the costs order) "the ACCC acts in the public interest in bringing proceedings of the present kind".

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