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By Adv. Yael Navon

When Renata Kotwitz, an 85 year old woman, was visited by a person claiming to be a certified beautician representing a respectable firm, she agreed to buy a line of cosmetic products from her for several hundred US Dollars. After she applied one of the products she had just bought, her face began to swell and her skin turned red. She described the feeling as if her "face caught fire".

The following day, and after receiving medical treatment for the allergic reaction, she contacted the company in order to cancel the transaction. Surprisingly, her request was denied by the company and even after Renata sent the products back, the company still persisted in its refusal to cancel the deal. Renata was one of several consumers who had a similar experience with that company and following a criminal investigation, the heads of the company were tried and convicted of violating a series of provisions under the Consumer Protection Law [1], among them deception of customers as to the nature and ingredients of the products, and the refusal to cancel transactions.        

This case is one of several cases which were tried in Israel in recent years, in which directors of companies were convicted in a criminal court for violating the provisions of the Consumer Protection Law. In this newsletter we will try to provide an outlook on the position of the Israeli law and recent court decisions on the issue of directors' criminal liability in respect of consumer law violations.  

Why Apply Criminal Law in Consumer Protection?

It can be argued that consumer protection should be resolved by the forces of the free market economy and the civil justice system and that the government does not need to play a major role in that field. Despite this the Israeli legislator decided to impose criminal liability on violators of the Consumer Protection Law as it believed that for the markets to function well, it is crucial that the state provide them with a strong framework in which they can operate freely [2].

Israeli scholars explained that the application of criminal law to the consumer protection field is required due to the inherent difference in powers between the private consumer and the corporation. This disproportion in powers between the parties (consumer-corporation) differs from classic contract laws which assume a relative symmetry between the contracting parties [3]. The state is therefore expected to play a larger role in order to balance this a-symmetry and in some cases is doing so using the criminal law. The personal deterrence of heads of companies who violate consumer protection laws is deemed as an effective tool used to maintain free and fair market economics.     

Criminal Offences According to the Israeli Consumer Protection Law

Article 23 of the Israeli Consumer Protection Law (1981) states that violation of certain provisions of the law, such as deception of consumers (article 2), exploitation of consumers' distress (article 3), or using misleading advertisements (article 7) is a criminal offence. The penalty for these offences can be imprisonment for up to one year or a fine of 26,100 NIS (approximately $6,200).

Article 23A, which deals with offences committed under severe circumstances, allows the court to impose even stricter punishments if the offence was against a large group of consumers, if the damage to the consumers was great or if the offender gained large profits from his or her actions.

According to Article 25, directors and employers are required to do everything in their power to ensure there are no infringements of the law's directives. The article further states that in the event an infringement committed by an employee of the organization, the presumption is that the officers have violated their duties and unless they can prove they did everything in their power to fulfill their duties, they will be held accountable.

Recently, two directors of Prime Trading [4], a communications company, were convicted. In that case, the company's representatives introduced themselves as representatives of a "governmental company" in charge of distributing T.V channels via satellite and promised potential clients a variety of premium channels. Some customers were talked into signing agreements they could not even read. On numerous occasions, shortly after the agreement was signed and the satellite dish installed, customers discovered they could not view a single channel on their television screens. When they tried to cancel the agreement the Company usually refused. After complaints against the company started to accumulate the Company was sued. A trial was conducted in a criminal court in which two directors of the company were charged and convicted of violations of the Consumer Protection Law. They were  each ordered to pay NIS 80,000 (equivalent to $20,000) to the claimants  as compensation.

Possible Defenses

The law acknowledges that, under certain circumstances, a director should enjoy protection from prosecution and provides that if the director proves that he or she has done everything possible in order to ensure the compliance with the statute's directives then he or she will be exempt from criminal liability.

Another issue arising from the fact that we are dealing with penal proceedings is that the level of proof needs to be beyond "a reasonable doubt". Furthermore, according to article 34 of the Israeli Penal Code, the defendant should enjoy a more lenient interpretation of the law.

In the case of Dr. Ron Baby Products[5] , it was argued by the prosecution that using the title "Dr." in the company name implies that the company sells medically approved diapers and that it is headed by a qualified medical persona. The district court reversed the lower court's decision that found the CEO guilty, and concluded that the defendant is entitled to the protection of the commercial freedom of speech and that there is reasonable doubt that customers were actually tricked into buying diapers only due to the presence of the medical title in the company's name.

Conclusion

The Israeli law regards directors as personally accountable for violations of consumer protection directives by their firms. Due to the serious implications of criminal charges, this personal liability is limited by a number of aspects: First, as in all criminal proceedings, the offence needs to be proven beyond a reasonable doubt. Secondly, if the defendant can prove he or she has taken substantial measures in order to insure that these violations should not occur or that he or she had no way of knowing of these violations, then no criminal liability will be imposed.