Nova ruling puts spotlight on Japan’s consumer affairs

Nozomu Sahashi, the former president of collapsed English language school operator Nova, was recently handed a three-year six month prison sentence in a ruling at the Osaka District Court.

Sahashi was convicted of embezzlement in the conduct of business, by misappropriating money from an employees’ fund to cover payments for cancelled contracts. Nova had collected some 56 billion yen in advance from around 300,000 students, in one of the biggest cases of consumer damage in Japan’s postwar history.

The former president has no assets, and even if bankruptcy proceeding are undertaken, there appears to be no prospect of students having their lesson fees returned. The fact that relief from the damage cannot be obtained by pursuing the criminal responsibility of the company’s operator is a consumer problem — and a governmental lapse.

If Ministry of Economy, Trade and Industry, which has jurisdiction over the industry, had taken a more serious view of the problem of canceled contracts and had quickly issued an administrative order against Nova, it is possible the damage could have been reduced. However, the ministry, the government body responsible for nurturing industry, was not greatly concerned with the damage caused to consumers and left the problem unaddressed.

The imminent formation of a consumer agency is based on reflection on this kind of problem. The agency is designed to be a kind of consumer administration control tower, intended to aggregate information on consumer problems like fraudulent sales methods and accidents involving common products — such as the carbon monoxide poisonings caused by water heaters produced by Paloma — and solve these issues.

The National Consumer Affairs Center of Japan had received complaints from students about Nova’s handling of cancelled contracts, such as its lowering of the amount of lesson fees returned, for more than a decade. In 2002, the Tokyo Metropolitan Government issued an administrative order to the company, but the Ministry of Economy, Trade and Industry sided with Nova’s claim that cancellation of contracts was made at the convenience of consumers. This effectively gave Nova an official stamp of approval and the company expanded its business while receiving lesson fees in advance without taking profit into consideration.

Later, the company was hit with a succession of lawsuits from students who demanded the return of their lesson fees. In April 2007, the Supreme Court ruled that provisions demanding heavy compensation for terminated contracts are invalid.

Just before the ruling, the Ministry of Economy, Trade and Industry had finally carried out a spot inspection at Nova on suspicion that the company was violating the Specified Commercial Transaction Law. In June 2007, the ministry judged that Nova had violated 18 provisions of the law, which pertain to procedures for cancelled contracts, and issued a business suspension order against the company. The move was an echo of the judicial decision.