Saturday, 12 May 2018

Spotlight on the Franchising Industry...again!


I decided to lodge a personal submission to the Parliamentary Joint Committee on Corporations and Financial Services enquiry into the operation and effectiveness of the Franchising Code of Conduct.  A copy of my submission is below







11 May 2018


Committee Secretary
Parliamentary Joint Committee on Corporations and Financial Services
PO Box 6100                                                                                                                          
Parliament House
CANBERRA ACT 2600



Dear Committee Secretary


Terceiro Legal Consulting (TLC) is an incorporated legal practice, which specialises in competition and consumer law (trade practices law). TLC has been operating since 2008 and has represented companies, businesses and individuals in Australian Competition and Consumer Commission (ACCC) matters.  TLC has also advised both franchisees and franchisors in relation to various franchise matters, including in relation to Breach Notices, marketing funds, terminations and restraint of trade provisions.

Michael Terceiro, the principal of TLC, formerly worked at the ACCC for 15 years in a variety of positions, including as a Director of Enforcement and the Director in charge of the Sydney Mergers and Asset Sales Branch. In these roles, he was responsible for running investigations and litigation into alleged breaches of the competition and consumer laws and the Franchising Code of Conduct.  Michael has a great deal of ACCC enforcement experience, having ran more than than 600 investigations, including more than 100 merger clearances, and 30 court cases during his time at the ACCC.

Terms of reference

 (a) the operation and effectiveness of the Franchising Code of Conduct, including the disclosure document and information statement, and the Oil Code of Conduct, in ensuring full disclosure to potential franchisees of all information necessary to make a fully-informed decision when assessing whether to enter a franchise agreement, including information on:


(i) likely financial performance of a franchise and worse-case scenarios,

Based on my experience, it is very rare for a franchisor to provide a prospective franchisee with any meaningful information about the likely financial performance of a franchisee business.  I suspect that the reason for this is due to a tendency amongst advisors to provide particularly cautious legal advice to franchisors which encourages them not to take any chances in relation to the disclosure of financial information.

Rather franchisees are encouraged by the franchisor to speak to as many other franchisees who are already within the system to gain some indication of the likely financial performance of their prospective franchise business.  It is arguable that existing franchisees who assist prospective franchisees in this way may have unwittingly exposed themselves to legal liability in relation to the accuracy of the financial information which they have gratuitously provided to the prospective franchisee.

(ii) the contractual rights and obligations of all parties, including termination rights and geographical exclusivity

I have come across one particular franchise system which has a large number of evergreen / perpetual franchise agreements.  Given the fact that these franchise agreements are evergreen / perpetual, the franchisor is under no legal obligation to amend those agreements to ensure that they are consistent with the particular provisions of the Code which were introduced to protect franchisees, such as the prohibition contained in clause 22 of the Code:
22  Costs of settling disputes
A franchise agreement must not contain a clause that requires the franchisee to pay to the franchisor costs incurred by the franchisor in relation to settling a dispute under the agreement, and if it does, the clause is of no effect.

I believe that some franchisors sometimes use the dispute recovery cost clauses in their evergreen / perpetual franchise agreements as a means of pressuring franchisees to resolve legitimate disputes as quickly as possible and in a manner which is highly advantageous to the franchisor. In effect, franchisees are concerned that if they decide to challenge the franchisor about an issue, such as a Breach Notice, they will be liable not only for their own legal costs, but also for the franchisor’s legal and other costs incurred in resolving the dispute.

Indeed, I had the unfortunate experience of dealing with an advisor for a national franchisor in a franchise dispute involving a franchise agreement which contained just such a dispute cost recovery clause.  Throughout the dispute the advisor for the national franchisor appeared intent on generating as much correspondence as possible in relation to the dispute (sometimes sending two letters in a single day), whilst at the same time continually pointing out to me the financial effects that the dispute cost recovery clause would have on my client. 

Furthermore, franchisors with evergreen / perpetual franchise agreements are not required to update those agreements to ensure that they are consistent with the new Unfair Contract Term laws introduced in November 2016.

(iii) the leasing arrangements and any limitations of the franchisee’s ability to enforce tenants’ rights, and

No comments.

(iv) the expected running costs, including cost of goods required to be purchased through prescribed suppliers;

I have come across a situation where a franchisor has apparently sought to control the retail margins of franchisees so as to prevent them from purchasing goods from outside of the franchise system, which was permitted under the franchise agreement. 

By way of example, assume that the franchisor supplies particular products through its preferred suppliers at a wholesale price of $100 each and that each of these products are resold at the retail level for $150, at a gross profit margin of $50.  However, the franchisee can also buy these same products from an outside supplier at a wholesale price of $75, which would net the franchisee a net profit margin of $75, based on the same retail price of $150.

However, franchisors are able to discourage this practice (in order to safeguard their own preferred supplier arrangements) by forcing the franchisees to sell outside purchases at low retail margins. Using the above example, a franchisor may decide to set a maximum retail margin of 20% on the outside purchases meaning that the franchisee would only be able to sell the outside purchase which they had purchased at a wholesale price of $75 for $90 retail, with a $15 gross profit margin.  The effect of the franchisor’s conduct in this situation would be to make the outside purchases uneconomic for the franchisee and to force the franchisee to only make sales through preferred suppliers.

 (b) the effectiveness of dispute resolution under the Franchising Code of Conduct and the Oil Code of Conduct;

I understand that there are a number of differences in terminology between the Code and the Oil Code.  It is important to address these differences to reduce the level of confusion which can arise.

 (c) the impact of the Australian consumer law unfair contract provisions on new, renewed and terminated franchise agreements entered into since 12 November 2016, including whether changes to standard franchise agreements have resulted;

As stated above, franchisors with evergreen / perpetual franchise agreement have no legal obligation to update their agreements to ensure that they are consistent with the new Unfair Contract Terms legislation introduced on 12 November 2016.

(d) whether the provisions of other mandatory industry codes of conduct, such as the Oil Code, contain advantages or disadvantages relevant to franchising relationships in comparison with terms of the Franchising Code of Conduct;

No comments.

(e) the adequacy and operation of termination provisions in the Franchising Code of Conduct and the Oil Code of Conduct;

I have come across situations where franchisors have incorrectly alleged that a franchisee has engaged in fraudulent conduct in a Notice of Breach. When asked to advise on these Notices of Breach it has been clear to me that whilst the franchisee may have engaging is false or misleading conduct, the alleged conduct did not satisfy the elements of fraud.
In order to address this particular problem, it make be worthwhile for the Code to be amended to include some further guidance at to the legal meaning of the words “act fraudulently” in clause 29(1)(g) of the Code.

(f) the imposition of restraints of trade on former franchisees following the termination of a franchise agreement;

No comments.

(g) the enforcement of breaches of the Franchising Code of Conduct and the Oil Code of Conduct and other applicable laws, such as the Competition and Consumer Act 2010, and franchisors; and

ACCC’s enforcement of the Code

An issue which will no doubt be front and centre of the enquiry is the effectiveness of the Australian Competition and Consumer Commission (ACCC) as an enforcer of the provisions of the Franchising Code of Conduct. Unfortunately, in my view, the ACCC’s enforcement of the Code has not been effective.

The following table outlines the ACCC’s record in terms of enforcing the provisions of the Code. This table is based on information currently available on the ACCC’s website and the ACCC Annual Reports.

Table 1: ACCC Franchising Code litigation and undertakings 2004 – 2018

Year
ACCC investigations litigation

Matters
2004
2
Synergy, Chaste
2005
3
Bon Levi, Office Support Services, You Can Bake It
2006
4
Archem, Contact Plus, Scotty’s Premium Pet Foods, Photo Safe/Data Vault/ie Networks
2007
3
JV Mobile, Kyloe (dismissed), Quizno’s
2008
2
Duco Magic, Awesome Water
2009
1
ALM/Active Money
2010
5
Allphones, Ray White, Seal-a-Fridge, Mailpost, Refund Home Loans
2011
0

2012
0

2013
0

2014
2
Express Mobile, Taxsmart
2015
2
Coverall, Electrodry
2016
1
Sensaslim
2017
5
Fastway, Pastacup, Geowash, Domino’s, UltraTune
2018
0


Total

30



In other words, over the last fifteen years, the ACCC has pursued 30 formal outcomes in relation to the Franchising Code. The ACCC has been successful in 29 of these cases, with only the Kyloe case having been dismissed as not disclosing a breach of the Code.

The above figures are somewhat misleading, as a number of these Franchising Code investigations and outcomes listed on the ACCC website as franchising outcomes did not in fact allege any Code breaches.  For example:

  • the Chaste case did not allege any contraventions of the Franchising Code - rather, the focus of that case was on false representations, misleading and deceptive conduct and resale price maintenance. 
  • the Archem and Refund Home Loans case also did not allege any breaches of the Franchising Code; and
  • finally, the Electrodry case was focused solely on the making of false testimonials.
Accordingly, the ACCC has actually had 25 successful outcomes in relation to Code breaches in the last 15 years.   In my view this is a very low level of enforcement activity given the size of the franchising sector in Australia and the number of franchising complaints received by the ACCC over that period.

Table 2: Franchising complaints

Year
Number of complaints
2003-2004
1557
2004-2005
1235
2005-2006
747
2006-2007
853
2007-2008
715
2008-2009
949
2009-2010
765
2010-2011
990*
2011-2012
861
2012-2013
802
2013-2014
818
2014-2015
809
2015-2016
931
2016-2017
608

Total

12640

            * estimate

While it is probable that the ACCC received multiple complaints about each of the franchisors against which it took enforcement action over the last fifteen years, even if we assume 15 complaints against each of those franchisors, that means that the ACCC took enforcement action in relation to 3.5% of all franchising complaints received – ie

  • 30 x 15 = 450 divided by 12,640 x 100 = 3.56%.

In addition, many of the franchisors against which the ACCC has taken enforcement action are relatively small operators with both limited market share and low brand recognition.  Accordingly, one is left to question the effectiveness of these enforcement actions in terms of achieving general deterrence, particularly in the boardrooms of larger, national franchisors.

While the ACCC’s record in the enforcement of both the Competition and Consumer Act 2010 and the Australian Consumer Law 2010 has been nothing short of sensational in recent years, the ACCC continues to struggle in the franchising area.  Put simply I believe that there is a significant degree of serious non-compliance occurring in the franchising sector which the ACCC is simply not addressing.

(h) any related matter

Marketing funds

I believe that there are a number of large franchisors that are not complying with their obligations under the Code in relation to marketing and cooperative funds.  Not only are significant expenditures not being approved by the franchisees, but audit reports are not being sent to franchisees.

Franchise associations

Some franchisors actively discourage franchisees from establishing franchisee associations.  I am aware of a situation where a large national franchisor simply refused to meet with the duly elected representatives of a franchisee association for no good reason.

Fear of franchisor

Many franchisees are quite fearful of challenging the franchisor on any legitimate issues because of their concern about the possibility of reprisals and victimisation.  It is clear from my engagement in the franchising sector that some franchisors adopt a divide and conquer strategy when dealing with their franchisees.  Franchisees who are perceived to be trouble-makers are subject to additional scrutiny, including having to respond to questionable Breach Notices.

Small Business Code Authority

An idea which may be worth considering is the establishment of a specialist Small Business Code Authority (SBCA) modelled in the newly created Australian Financial Complaints Authority.

A significant issue for many small businesses, particularly franchisees which are engaged in a dispute with their franchisor, are the costs of pursuing their dispute through the courts, in the event that mandatory mediation does not result in a resolution.

Currently, small businesses have the option of commencing proceedings in the Federal Court or the Federal Circuit Court which is a very costly exercise.  A more cost-effective option may be to establish a specialist agency with jurisdiction to both mediate and adjudicate disputes arising under various Codes. 

The purpose of the new SBCA would be to mediate and adjudicate various small business disputes arising under various mandatory Codes, including the Franchising Code of Conduct, Oil Code and the Horticulture Code.  The jurisdiction of the SBCA could also be extended as new mandatory codes are introduced, for example the Grocery Code, if a decision is made to make that Code mandatory, and the recently proposed Dairy Code.

I acknowledge that the establishment of a new federal Authority to deal exclusively with small business code disputes, particularly franchise disputes, may appear to be a costly exercise for the government to consider. However, there are a number of arguments in favour of such an approach, particularly in relation to franchising:
  1. franchising is a very large sector in Australia with approximately 1100 franchising systems, employing many hundreds of thousands of employees;
  2. the costs of pursuing a legitimate grievance against a franchisor are currently cost prohibitive;
  3. often franchisees have invested their entire savings in their business and as such risk losing everything unless the dispute is resolved in a quick and cost-effective manner; and
  4. franchising is a complex area, best dealt with by specialists with expertise in franchising.
Many of the above arguments would also apply in relation to other mandatory Codes, particularly points (2), (3) and (4).

If you have any questions about this submission, please contact me on (02) 8086 2005.

Yours sincerely




Michael Terceiro
Competition and Consumer Lawyer
Terceiro Legal Consulting  



Thursday, 28 December 2017

You’re NYKKed (nicked)! – Australia’s first successful criminal cartel prosecution


Introduction
In August 2017, the ACCC achieved its first successful prosecution under the criminal cartel provisions of the Competition and Consumer Act 2010 (CCA) against Nippon Yusen Kamushiki Kaisha (NYKK).[1]  There is no doubt that this was a ground-breaking moment for the ACCC given that the criminal cartel provisions were introduced nine years ago, in 2009.  The case is also notable for the quality and comprehensiveness of the judgment delivered by Justice Wigney of the Federal Court of Australia.  Justice Wigney has a great deal of experience in relation to criminal matters, which he was able to bring to bear in his judgment.[2]

ACCC Chairman Rod Sims was also quick to claim that the case demonstrated that the ACCC’s investment in building a substantial team of specialist criminal cartel investigators was paying off:

To put all this another way, our criminal cartel machine is now built, and running at its appropriate capacity. You will now see its continuing output.[3]

While it is true that the NYKK case was a very positive outcome for both the ACCC and for criminal cartel jurisprudence in Australia, its seems decidedly premature to claim that the ACCC’s criminal cartel machine is now built and running at appropriate capacity.  Such a judgment can only be made once the ACCC has successfully investigated, and the CDPP has successfully litigated, a contested criminal cartel prosecution.

Background
NYKK’s conduct arose from a longstanding global cartel in the market for the supply of ocean shipping services for “roll-on, roll-off” cargo, primarily cars and trucks.  The other shipping companies implicated in the cartel were:
  •  Mitsui OSK Lines Ltd
  • Kawasaki Kisen Kaisha Ltd
  • Toyofuji Shipping Co.
  • Nissan Motor Car Carrier Co and
  • Wallenius Wilhelmsen Logistics AS.

 The cartel offence related to:
  • the fixing of freight rates on shipping routes to Australia
  • the rigging of bids in response to requests for bids by the motor vehicle manufacturers, and
  • the allocation of customers (ie motor vehicle manufacturers) between the members of the cartel. 

Justice Wigney found that whilst NYKK’s conduct had occurred over an extensive period of time, the charges only related to the three-year period from 2010 to 2012.  He also found that NYKK’s illegal conduct had involved 69,348 new vehicles and that NYKK had derived revenue of AU$54.9 million and profit of AU$15.4 million from the contracts which were the subject of the illegal conduct [para 6].

Overseas investigations
Justice Wigney also described the cartel investigations which had been conducted by overseas competition regulators.  He referred to the Japan Fair Trade Commission (JFTC) and the United States Department of Justice (DOJ) which had commenced their investigations on 6 September 2012 with dawn raids at a number of offices of both NYKK and the other shipping companies implicated in the cartel [para 160].

The ACCC commenced its own investigation at around the same time, on 10 September 2012.  In stark contrast to the way in which the JFTC and DOJ commenced their investigations, the ACCC did not conduct a dawn raid but instead decided to send a fax to NYKK’s Australia office. Somewhat embarrassingly for the ACCC it appears that their fax was sent to the wrong number. As noted by Justice Wigney:

It would appear that the ACCC’s fax did not come to the immediate attention of management of NYK Australia or NYK because it was received by a fax machine located in the container shipping sales department of NYK [para 162].

Overseas investigations were subsequently commenced by the Competition Commission of South Africa, Chile’s Fiscalia National Economica, and China’s National Development and Reform Commission.

Significant penalties were levied against NYKK in a number of these jurisdictions:
  • United States – US$59.4 million
  • Japan - AU$157 million administrative surcharge
  • South Africa – AU$10 million
  • Chile – US$25 million.
NYKK was not fined in China as it was the immunity applicant. The other participants in the cartel was fined a total of US$65 million [para’s 163-170].

Sentence
In approaching the task of determining the appropriate sentence, Justice Wigney outlined the relevant legislative scheme namely Part IB of the Crimes Act.  The relevant checklist of factors to be taken into consideration in determining sentence are listed in section 16A(2) of the Crimes Act:

(a)     the nature and circumstances of the offence;
(c)      if the offence forms part of a course of conduct consisting of a series of criminal acts of the same or a similar character--that course of conduct;
(d)     the personal circumstances of any victim of the offence;
(e)     any injury, loss or damage resulting from the offence;
(ea)   if an individual who is a victim of the offence has suffered harm as a result of the offence--any victim impact statement for the victim;
 (f)     the degree to which the person has shown contrition for the offence:
(i)      by taking action to make reparation for any injury, loss or damage resulting from the offence; or
(ii)     in any other manner;
 (fa)  the extent to which the person has failed to comply with:
(i)             any order under subsection 23CD(1) of the Federal Court of Australia Act 1976 ; or
(ii)            (ii)  any obligation under a law of the Commonwealth; or
(iii)         (iii)  any obligation under a law of the State or Territory applying under subsection 68(1) of the Judiciary Act 1903;
about pre-trial disclosure, or ongoing disclosure, in proceedings relating to the offence;
(g)     if the person has pleaded guilty to the charge in respect of the offence--that fact;
(h)     the degree to which the person has co-operated with law enforcement agencies in the investigation of the offence or of other offences;
(j)      the deterrent effect that any sentence or order under consideration may have on the person;
(ja)    the deterrent effect that any sentence or order under consideration may have on other persons;
(k)      the need to ensure that the person is adequately punished for the offence;
(m)    the character, antecedents, age, means and physical or mental condition of the person;
(n)     the prospect of rehabilitation of the person;
(p)     the probable effect that any sentence or order under consideration would have on any of the person's family or dependants.

As is an apparent, a number of the section 16A(2) factors relate specifically to individual defendants, as opposed to corporate defendants.

Nature and circumstances of the offence - section 16A(2)(a)
Justice Wigney stated that NYKK had committed a very serious offence which required condign or appropriate punishment [para 204].  As set out in the agreed facts, NYKK had given effect to the cartel on at least 20 separate occasions over a three-year period.  Having said that the CDPP presented an indictment containing a single “rolled up" charge, rather than 20 separate charges [para 206].

Maximum penalty
Based in the “rolled up” charge, the maximum fine for the offence was $100 million or 10% of NYKK’s annual Australian turnover [para 208]. Despite some attempts by NYKK to argue for a lower maximum penalty (ie three times the illegal profits made from the cartel or approximately $45 million) these submissions were rejected by the Court [para 212].

Justice Wigney also noted that both the CDPP and NYKK had “controversially” taken the Court to various civil penalties imposed by the Court in relation to civil cartels and other anti-competitive conduct. Again, the Court rejected these submissions as being of little assistance in the determination of the appropriate sentence for a criminal offence [para 221].

Duration and scale of conduct
The Court found that the conduct the subject of the charges had continued for three years. However, the Court also noted that the relevant cartel agreements had been in place for substantially longer than three years – in fact, one of the relevant agreements had been in place for 15 years, since 1997.  Justice Wigney stated that this earlier conduct was relevant to sentencing as an aggravating factor [para 224].

The Court also found the scale of the conduct to be substantial, impacting on a significant and valuable market. Justice Wigney stated that:

There could be little doubt that anti-competitive conduct the subject of the charge had the capacity to substantially limit or distort the competitive setting of freight rates in the relevant routes to Australia, the likely result being that rates were higher than they would have been in a competitive market. [para 226].

Deliberate, systematic and covert conduct
Justice Wigney found that NYKK’s conduct was systematic, well-orchestrated and involved a high-level of planning and coordination [para 240]. He also found that steps were taken by NYKK managers to hide their illegal conduct by communicating orally over the telephone and at face-to-face meetings and either not documenting these communications or documenting them in such a way as to hide the substance of the communications [para 241].

Seniority of managers engaged in illegal conduct
There was no dispute that senior NYKK managers were the driving force behind the illegal conduct [para 244].

Profitability of illegal conduct
It was agreed that NYKK generated revenue of $54.9 million and profits of $15.4 million from the contracts the subject of cartels.  However, it was not possible to calculate the actual revenues and profits directly attributable to the cartel conduct [para 245].

Impact on victims - section 16A(2)(d)
There did not appear to be a significant amount of evidence in the case about the actual impact of the illegal cartel agreement on victims (ie the major new car manufacturers and ultimately Australian consumers).   Due to the absence of evidence, Justice Wigney surmised that there was likely to be significant impact on markets and the economic system, although the amount could not be quantified [para 252].

Contrition and rehabilitation - sections 16A(2)(f) and (n)
The Court found that NYKK had demonstrated genuine contrition.  NYKK had also made significant changes to its management and compliance structures which indicated that NYKK’s prospects of rehabilitation were high [para 253].

Plea of guilty - section 16A(2)(g)
The Court found that NYLL had entered a plea of guilty at the earliest opportunity:

Full recognition should be given to the remorse, acceptance of responsibility and willingness to facilitate the course of justice demonstrated by the plea. [para 255]

NYKK Cooperation - sections 16A(2)(h) and 16AC
NYKK agreed to fully cooperate with the ACCC investigation, including facilitating interviews with NYKK executives who could not have been compelled by the ACCC to come to Australia to attend interviews [para 264]. 

In the relevant Statement of Agreed Facts put before Justice Wigney, an ACCC officer gave evidence that NYKK had provided “full, frank and truthful disclosure and cooperated fully and, in most instances, expeditiously, on a continuing basis throughout the ACCC’s investigation” [para 264].

Furthermore, NYKK agreed to plead guilty to a “rolled up” charge at a very early stage and signed an undertaking pursuant to section 16AC of the Crimes Act 1914 to provide future assistance.

Interestingly, Justice Wigney also referred in his reasons to confidential evidence which had been filed in the case which could not be referred to with any specificity.  He described this confidential evidence as “potentially significant”. Whilst one can only speculate about this evidence, it most likely relates to evidence from NYKK of other separate and significant contraventions of the CCA. For example, the existence of a cartel in a related market, such as the container shipping market [para 268].

Justice Wigney concluded that in all the circumstances the appropriate discount for NYKK’s past cooperation, assistance, plea of guilty, contrition and remorse was 40%, He also allowed a further discount of 10% for NYKK’s future cooperation [para’s 267 and 269].

Deterrence - sections 16A(2)(j) and (ja)
In considering the issue of deterrence the Court is required to consider both specific and general deterrence. However, in this case the Court found that specific deterrence was not a significant consideration as such specific deterrence had already been achieved, as demonstrated by NYKK’s contrition. Accordingly, the main purpose of the penalty in this case was general deterrence or to deter other companies which may be weighing up whether to engage in cartel conduct [para 274].

Adequate punishment - section 16A(2)(k)
The main question in relation to this factor was the weight which the Court should accord to the penalties paid by NYKK in other jurisdictions in relation to the cartel conduct.  The Court concluded that while some weight should be given to the overseas penalties, these penalties should not be given significant weight. This was because these overseas penalties related to different routes, contracts and customers [para 275ff].

Antecedents - section 16A(2)(m)
A highly relevant factor in mitigation was the fact that NYKK did not have a prior record of corporate criminal misconduct in Australia or indeed elsewhere [para 284].

Appropriate Sentence
After weighing up all of the above factors Justice Wigney determined that the appropriate penalty for NYKK’s conduct was half of the maximum penalty – ie $50 million.  He then applied a 50% discount to the appropriate penalty to arrive at a total penalty of $25 million. 

It is worthwhile to quote in full Justice Wigney’s comments about how he arrived at the penalty:

299.     Having regard to all of the relevant features and factors, and giving them appropriate weight, the appropriate sentence in all the circumstances is a fine of $25 million. That fine incorporates a global discount of 50% for NYK’s early plea of guilty and past and future assistance and cooperation, together with the contrition inherent in the early plea and cooperation: meaning that but for the early plea and past and future cooperation, the fine would have been $50 million. Of that 50% discount, 10% relates to future cooperation. For the purposes of s16AC of the Crimes Act, it is stated that the severity of the sentence imposed on NYK has been reduced because NYK has undertaken to cooperate with law enforcement agencies in proceedings relating to alleged offences committed by others and that the sentence that would have been imposed but for that reduction was $30 million.

300.     Cartel conduct of the sort engaged in by NYK warrants denunciation and condign punishment. It is inimical to and destructive of the competition that underpins Australia’s free market economy. It is ultimately detrimental to, or at least likely to be detrimental to, Australian businesses and consumers. The penalty imposed on NYK should send a powerful message to multinational corporations that conduct business in Australia that anti-competitive conduct will not be tolerated and will be dealt with harshly. That is so even where, as here, the decisions and conduct are engaged in overseas and as part of a global cartel. As has already been explained, but for NYK’s cooperation and willingness to facilitate the administration of justice, the penalty would have been substantially higher. That should serve as a clear and present warning to others who may have, or may be considering or planning to, engage in similar conduct.

Jumping the gun
The ACCC should be applauded for its efforts in investigating the NYKK cartel case. After a clumsy start, the ACCC appears to have conducted a thorough investigation which lead to the preparation and presentation of a sound brief of evidence to the CDPP.  Unfortunately, Rod Sims’ claims that the ACCC's “criminal cartel machine is built and running at appropriate capacity” sounds more like hubris than an accurate assessment of the challenges facing the ACCC in successfully investigating and prosecuting a contested criminal cartel case. 

Based on my own personal experience of representing clients in ACCC criminal cartel investigations, it is apparent that the ACCC has a great deal more fine tuning to do in relation to its criminal cartel machine. For example, I acted for a client in 2015 who was the subject of a criminal cartel investigation in which the ACCC had executed a number of search warrants.  It became apparent in the course of that particular investigation that the ACCC had made at least five fundamental mistakes in the execution of its search warrants.  After these five mistakes were pointed out to the ACCC, it decided to terminate its investigation of the matter (admittedly without conceding that it had made any of the alleged mistakes!)

The true proof of the effectiveness of the ACCC criminal cartel machine will be when it successfully investigates and the CDPP successfully prosecutes a contested criminal cartel matter.  In order to succeed in a contested criminal cartel case, the ACCC will have to ensure that it:
  • properly executes all search warrants and maintains a proper chain of evidence
  • carefully selects appropriate witnesses for trial and
  • genuinely seeks to identify and address all potential weaknesses in its case prior to submitting a brief of evidence to the CDPP.
The CDPP will only be able to succeed in a contested criminal trial if it is able to:
  • navigate all of the evidentiary requirements in terms of proving the physical elements (ie the act of participating in the cartel or the making and/or giving effect to the cartel agreement) and the additional fault elements (ie knowledge or belief) of the cartel offence; and
  • address all of the various defences which may be raised by the defendant/s, including the recently expanded joint venture defence. 

Significantly, in order to be successful in the prosecution the CDPP will also have to prove its case beyond reasonable doubt to the satisfaction of a jury and achieve a unanimous jury verdict.

While the ACCC and the CDPP have the capacity to successfully run contested criminal cartel prosecutions, this will only be possible if the ACCC tones down the hubris and accepts that there is still an enormous amount of work to do on fine tuning its “criminal cartel machine”.  A good starting point would be for the ACCC to take steps to engage with legal practitioners who have been on the other side of a criminal cartel investigation in a genuine effort to learn from its mistakes.







[1] Commonwealth Director of Public Prosecutions v Nippon Yusen Kabushiki Kaisha [2017] FCA 876 (3 August 2017) at https://www.austlii.edu.au/cgi-bin/viewdoc/au/cases/cth/FCA/2017/876.html

[2] As stated in Justice Wigney’s Federal Court biography, prior to his appointment, his Honour practiced as a barrister who specialized in, in complex "white collar" crime and civil penalty contraventions (in particular insider trading and other financial market offences, directors' duties, taxation, fraud and money laundering), competition and consumer law, administrative law, taxation and commissions and inquiries. Justice Wigney had also previously worked as a solicitor at the Commonwealth Director of Public Prosecutions. Interestingly, Justice Wigney also worked on an earlier ACCC - CDPP criminal prosecution of Chubb Australia Pty Ltd in 2004 as junior to Des Fagan SC - Australian Competition and Consumer Commission v Chubb Security Australia Pty Limited [2004] FCA 1750 (30 December 2004) at http://classic.austlii.edu.au/au/cases/cth/FCA/2004/1750.html

[3] Rod Sims, “Criminal cartel investment pays off”, ACCC Media Release, dated 5 August 2016 at https://www.accc.gov.au/media-release/criminal-cartel-investment-pays-off