Remember those harrowing ads from the Advanced Medical Institute (AMI) that always seemed to come on the car radio when you were with your parents? They went along the lines of “are you good in bed?”, “want to have longer lasting sex?” then “call the doctors at Advanced Medical Institute”.  Last week, the Full Federal Court of Australia upheld a decision that AMI and its Director, Mr Jacov Vaisman, was guilty of unconscionable conduct and transacting by using unfair contract terms.

What Was the Problem?

In December 2010, the Australian Consumer and Competition Commission (ACCC) instituted proceedings against Advanced Medical Institute Pty Ltd and AMI Australian Holdings Pty Ltd (together, AMI) and Mr  Vaisman. NRM Corporation and NRM Trading Pty Ltd (together, NRM) later joined the proceedings. However, the issues at hand commenced well before 2010.

Unconscionable Advertising

Between 2008 and 2010, AMI extensively advertised urging men suffering from sexual dysfunction (premature ejaculation (PE) or erectile dysfunction (ED)) to “call the doctors at the Advanced Medical Institute”. There were two dominant themes in AMI advertising during the above period:

  1. Theme one: AMI treatment constituted a nasal spray delivery technology available through a telephone conversation;
  2. Theme two: Doctors provided AMI treatment. These advertisements highlighted the anxiety, deficiency of competence, and lack of confidence associated with sexual dysfunction. The name Advanced Medical Institute also conveyed a message that the treatment was based on scientific medical knowledge.

This latter theme represented to men that a qualified medical doctor would provide an impartial and unbiased medical assessment of their condition. However, it appeared that clients of AMI did not receive fair or proper treatment.

The Unconscionable Statements Made by Sale Representatives

It is evident AMI promoted a business on the basis that a medically qualified individual would assess its clients. On the first contact with AMI, customers spoke with a sale representative. Sale representatives were not medically trained, yet they described themselves as a “Clinical Coordinator”, “Medical Coordinator” or “Administrative Assistant”.

In recorded telephone conversations, sale representatives made many flawed and unconscionable statements. For example, clients were told that:

  1. If they didn’t receive the treatment, their condition is going to get progressively worse.
  2. 80 percent of men don’t have erectile dysfunction problems and “no matter how good it feels, they can ejaculate when it suits them…have you had that control at all?”
  3. Regular sex reduces the chance of developing prostate cancer, heart attack or a stroke.
  4. Untreated sexual dysfunction can lead to psychological impotence. Notably, this statement was used in 34 discussions by sales representatives.   
  5. Untreated sexual dysfunction can result in shrinkage of the penis. Again of note, this statement was used in 11 discussions by sales representatives.

The AMI Doctors

Doctors never greeted clients who came to the AMI clinic. Doctors were only available for consultations over the telephone, and this was only ever after speaking with a sales representative.  

Further, the doctors only ever prescribed AMI medication and never offered an alternative brand or product. Again, this was unconscionable as the medical profession does not regard AMI products as the usual form of treatment.

The Unfair Contract Terms – AMI Treatment Plans

There were also several issues with the presentation of treatment plans and the clause in those contracts.  

Once signed up to an AMI treatment plan, clients were bound to pay for the treatment for a set period. The contracts usually lasted for 12 to 18 months and typically cost $2,500 and $3,500 respectively.  

If the treatment did not work, or if the client experienced adverse side effects, the clients could not automatically terminate the contract. There was a clause in the contract that did not allow cancellation of the contract unless the customer had tried at least one option from each of the available delivery mechanisms AMI offered. This included clients self-administrating injections into the base of their penis. After this occurred, AMI would then deduct the cost of the medication and a 15% administration fee.

On top of this strict exit clause, clients were only provided with a copy of the above terms after they had already agreed to purchase the AMI treatments. Once NRM took over, the exit plans were improved considerably. However, patients still faced penalties for termination where it was otherwise reasonable that they should be allowed to stop the contract.

What Was the Outcome?

On 22 April 2015, Justice North found that AMI and NRM:

  1. Engaged in unconscionable conduct (section 21 of the Australian Consumer Law (Cth) (ACL); and
  2. Used unfair contract terms in the way it promoted or supplied male sexual dysfunction products (sections 24 and 250 of the ACL).  

Justice North stated the conduct was “immoral” and the unfair contract terms added to the finding of unconscionable conduct.

What Did the Judge Order?

In brief summary, Justice North ordered that:

  1. NRM compensate clients;
  2. Mr Vaisman is restrained from continuing his central role in NRM;
  3. Corrective advertising takes place; and
  4. NRM is permanently restrained from:
  • Making agreements with customers in connection with the supply of the treatment of male sexual dysfunction, unless the patients have a consultation with a qualified medical practitioner;
  • Making any statements about the efficacy of NRM treatments, unless made by a qualified medical practitioner;
  • Making agreements with a client for the supply of the treatment, without providing a written statement of the terms of the agreement and termination rights;
  • Making a deal with a customer for the supply of the treatment, unless that agreement has a cooling off period of at least 14-days’ notice.

The Aftermath of Justice North’s Decision

The events following Justice North’s decision (the Decision) can be summarised as follows:

  1. NRM did not agree with Justice North’s orders. NRM appealed the Decision.
  2. Shortly after, NRM also sought a stay (hold-off or delay) of the orders, pending the outcome of the appeal. The stay application was refused, which means NRM was required to comply immediately with the above orders. NRM, however, failed to comply. 

Contempt of Court

  1. In August 2015, the ACCC commenced proceedings in the Federal Court against NRM, alleging contempt of court (disobeying the Court’s orders).
  2. In November 2015, Justice Moshinsky of the Federal Court of Australia found NRM committed contempt of court by making representations on its website and in radio and television advertisements regarding the efficacy of AMI sexual dysfunction treatments offered by NRM in breach of Justice North’s orders. A penalty for this has not yet been determined and will be determined on a date not yet fixed.

Events of Last Week

On 21 July 2016, the Full Federal Court of Australia dismissed the NRM’s appeal. The Full Court rejected many of NRM’s arguments and upheld Justice North’s decision ordering the appeal be dismissed, and NRM pay the ACCC’s costs.

Key Takeaways

Section 21 of the ACL prohibits unconscionable conduct in connection with the supply of goods or services to a person. Unconscionable conduct does not have a precise legal definition. Rather, courts develop its meaning on a case-by-case basis.

Last week’s decision reinforces the zero tolerance policy for any exploitation of consumers’ vulnerability for commercial gain, especially in the health sector. The lesson for businesses is that they may be held liable for unconscionable conduct if they take advantage of vulnerable consumers.

This case also reinforces the importance of businesses revisiting any contracts that might seem unfair.  Section 24 of the ACL defines the meaning of unfair, specifically considering:

  • Whether there is a significant imbalance between the parties;
  • Whether it is reasonably necessary to include the interests of the advantaged party; and
  • Whether a party would suffer detriment (financial or otherwise) if they relied on the term.

When determining fairness, courts will take into account whether the terms are legible and clearly presented to the party.

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If you have any questions about your business’ terms and conditions, get in touch with our contract lawyers on 1300 544 755.

Esther Mistarz

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