Wednesday, 10 December 2008

When green wash won’t wash: Avoiding misleading environmental claims

This article first appeared in the Law Society Journal (November 2008), Vol 46, No 10, pp. 50-54.
Businesses are increasingly keen to present an environmentally friendly or "green" image to their customers. Both large and small businesses realise that it makes good business sense to offer environmentally conscious consumers the option of a green product or service. Customers are often willing to pay a significant price premium for a green product.

Unfortunately, many businesses, including large businesses, have made fundamental mistakes in their green marketing. Instead of getting positive publicity for offering a green alternative, these companies have received negative publicity for their “green wash”. In some cases, these companies have had to grapple with unwanted attention from the ACCC.

This article explores some of the green marketing mistakes that businesses have made in trying to sell their green credentials and proposes some guidelines that practitioners can use to help their clients to avoid these kinds of mistakes.

Relevant law
The Trade Practice Act 1974 (TPA) contains two main civil provisions which can be used to attack false or misleading green claims. Section 52 prohibits corporations from engaging in conduct which is misleading or deceptive, or is likely to mislead or deceive, while s.53 prohibits corporations from falsely representing:
that goods are of a particular standard, quality, composition or have had a particular history; or that goods have performance characteristics or benefits they do not have. 


These provisions are mirrored under state fair trading legislation which applies to corporations, individuals and unincorporated entities.


The remedies available for a contravention of ss.52 and 53 include injunctions, declarations, damages, corrective advertising and non-punitive orders.

Practitioners should be aware criminal penalties of up to $1.1 million per contravention[1] may be available to punish more serious misrepresentations about environmental benefits.

One important aspect of the civil liability regime under the TPA is that it establishes a reverse onus of proof for representations about future matters.[2] Therefore, if your client makes a representation about the future environmental benefits of their product, it may bear the onus of demonstrating that it had reasonable basis for such representations.

Getting caught out
There are many groups monitoring the green claims made by business and there is a high likelihood of getting caught out if you make false green claims. First, the Australian Competition and Consumer Commission (ACCC) appears to have made green claims an enforcement priority. The ACCC has been very active in this area, having taken an increasing number of green representation cases in the last 12 months.

Second, there are a large number of vigilant and sophisticated non-government organisations constantly on the lookout for green claims that are misleading. For example, a complaint by the Total Environment Centre prompted the ACCC to investigate EnergyAustralia (discussed below). These organisations can also initiate their own private actions of breaches of the relevant civil provisions of the TPA.

The final major risk is posed by competing businesses. Competitors will be very keen to complain to the ACCC about a green claim which does not stack up.

ACCC enforcementThe ACCC is increasingly active in the area of green marketing claims. In the last 12 months it has concluded eight investigations into green claims.

The first notable series of environmental investigations taken by the ACCC relate to claims made by the Australian air-conditioning industry that its products were “environmentally friendly”. The first case was taken against Sanyo Airconditioning Manufacturing Singapore Pte Ltd,[3] which claimed that its Eco Multi Series air conditioners had "environmentally-friendly HFC 'R407C' Added" and were "for a new ozone era - keeping the world green".

A problem with this representation is that R407C is considered to be a potent greenhouse gas and as such is hardly “environmentally friendly”. Another gas used in the Eco Multi Series was R22, an ozone depleting hydrochloroflurocarbon, is clearly not beneficial to the ozone layer.

Two important issues arise from this case (which was settled by consent).

First, the ACCC seems to have taken the view that “environmentally friendly” is a representation that a product will have a neutral effect, as opposed to a beneficial effect, on the environment. Therefore a product that does not harm the environment could arguably be described as environmentally friendly.

Second, the ACCC took action against Sanyo Airconditioning for both the text used in its marketing materials as well as the images of trees, the sea and the moon. The ACCC formed the view that such images conveyed a strong environmental message to consumers.

Following this case, there were two further notable investigations into Daikin[4] and Dimplex[5] for making similar representations. In each of these cases the companies entered into s.87B undertakings to cease making the green representations and carry out a range of corrective remedies, including publishing corrective notices on their websites and industry magazines and writing corrective letters to customers and distributors.

Another area of ACCC activity relates to green representations made in relation to motor vehicles.

Recently, the Federal Court declared by consent that representations made by GM Holden Ltd about the environmental benefits of Saab motor vehicles were misleading.[6] In particular, GMH made the claim that “Every Saab is green. With carbon emissions neutral across the entire Saab range”. The basis for this claim was that GMH would plant 17 native trees per vehicle to offset the emissions generated during the life of each motor vehicle. In actual fact, the 17 trees would have only offset the carbon emissions for one year of motor vehicle’s operation.

GMH was ordered to refrain from making such representations in the future and to retrain its marketing staff. However, the largest cost to GMH (apart from the damage to its credibility as a seller of “green” products) was its offer to plant an additional 12,500 trees to offset the carbon emissions from the motor vehicles which it did sell during the Saab "Grrrrrreen" advertising campaign.

Another recent ACCC matter involved green representations by V8 Supercars as part of its ‘Racing Green Program’.[7] V8 Supercars claimed that planting 10,000 native trees would offset the carbon emissions from the V8 Championship Series as well as all associated transport emissions of the racing teams travelling to events. The ACCC was concerned that consumers would understand that the 10,000 trees would absorb the carbon emissions in a short period of time, when in actual fact the emissions from one year of racing would only be absorbed by these trees over several decades.

The final matter involved representations made by Goodyear about its Eagle LS2000 range of tyres.[8] Goodyear said that this tyre range was environmentally friendly, designed for minimal environmental impact, and that its production processes resulted in reduced carbon dioxide emissions. Goodyear settled this matter with the ACCC by providing a s.87B undertaking in which it admitted that these environmental benefits could not be substantiated.

The ACCC has also looked at green claims made by energy companies. It investigated EnergyAustralia’s representations about its CleanAir and GreenFuture non-accredited electricity products.[9] EnergyAustralia claimed that consumers who signed up would get “100% green electricity at no extra cost” and that “for every kilowatt hour of electricity you buy, the same amount of electricity will be generated from 100% renewable sources, and that’s guaranteed”.

The ACCC was concerned that consumers would conclude that they were supporting new sources of renewable energy rather than simply offsetting their electricity against existing sources. While EnergyAustralia did not admit that its representations were misleading, it did acknowledge that customers may have been confused by the representations. EnergyAustralia agreed to a range of remedies including compensation, corrective letters to customers and a contribution of $100,000 to an educational brochure to explain the difference accredited and non-accredited products.

LessonsThe main lessons to come out of this review of ACCC investigations are:

  • don’t let your client make a green representation unless it has the scientific evidence to back up the claim; 
  • be careful how your client uses images in green marketing material as the ACCC will be looking carefully at any images used, and not just the text; 
  • don’t let your client overstate the environmental benefits of a green initiative; 
  • make sure your client’s green representations are not too confusing for consumers; and 
  • recognise that some environmental benefits are simply too complex to translate into a short and sharp marketing message. 
Resources
There are three key resources for practitioners who are advising clients in the area of green marketing claims: 
  1. “Green marketing and the Trade Practices Act”.[10]
  2. “Carbon claims and the Trade Practices Act”.[11]
  3. “Environmental labels and declarations – Self-declared environmental claims”.[12]
“Green marketing and the Trade Practices Act”
This guide was released by the ACCC in 2008. It explains the specific sections of the TPA that may apply to green marketing claims.

In section 2 the guide sets out a range of principles that businesses should consider prior to making environmental claims. One important principle is that when a business makes a green claim it should consider the whole life cycle of the product. Even if a product is not environmentally detrimental during its useful life, if it has significant environmental impacts when discarded, a business should avoid making broad unqualified environmental claims about it.

In section 4 there is a useful “Checklist for marketers”. This checklist provides a list of the types of questions practitioners should be asking their clients about their products before signing off on any environmental marketing campaign or advertisement.

"Carbon claims and the Trade Practices Act"

This guide was also issued in 2008. It provides a useful guide to how businesses can make carbon claims that will stand up to scrutiny. There are three main types of claim: 

  • a claim that a business has acquired carbon offsets for their product (as in the Saab and V8 racing examples); 
  • that a product is carbon neutral; and 
  • that the product’s carbon footprint has been reduced, for example, through the use of new technology (as in the Goodyear example). 
Section 2 deals with carbon offsets. The section defines relevant terms and provides an insight into some of the issues to be aware of – for example:
  • additionality – the benefits of the carbon reduction should be “in addition” to those that would have happened anyway; 
  • double-counted offsets – defined as when an offset is not “retired” and two or more businesses claim the same emission reduction; and 
  • low-quality offsets – not all offsets have equal value so it is important to ensure that the offsets purchased will match the level of emissions a company is claiming to reduce. 
Section 3 deals with carbon neutral and low carbon claims. Reference is made to the generally accepted means of understanding and quantifying greenhouse gas emissions under the Greenhouse Gas Protocol.[13] This protocol uses the term “scopes” to describe emission sources as either: 
  • scope 1 – direct emissions; 
  • scope 2 – indirect energy emissions; or 
  • scope 3 – other indirect emissions. 
The ACCC encourages businesses to use these concepts when making carbon neutrality claims. This is helpful advice as a business is likely to breach the TPA if it claims that a product is carbon neutral on the basis of scope 1 – direct emissions, but fails to consider scopes 2 and 3. Any marketing claim should be qualified to clearly explain the extent of the carbon neutrality.

The ACCC also provides some practical advice on how to assess a business’s carbon footprint by use of a footprint calculator. Like any such calculation, the end result is only as good as the information fed into it. Businesses need to be very careful to ensure that they have reliable and detailed information before trying to work out their carbon footprint.

The guide also talks about the risks of making low carbon claims. The ACCC is of the view that if a business fails to explain the appropriate context for such claims, they will usually be too vague to be properly understood by consumers.

Finally, in section 4 the ACCC provides a checklist for businesses which are intending to make a carbon claim.

“Environmental labels and declarations – Self-declared environmental claims”
This Australian and New Zealand Standard has been in existence since 2000. While it is still not a mandatory standard, given the interest in green marketing claims in the community, it is only a matter of time before a mandatory standard is introduced. Accordingly, it is worthwhile to consider the main aspects of this standard as it provides some good insights on how to ensure green marketing claims are not misleading or deceptive.

The objective of this standard is described as “to harmonize the various national guidelines on environmental claims used in product labels and in marketing generally, in order to facilitate trade in the global marketplace and to give consumers confidence in environmental claims”.

The object of giving consumers confidence in environmental claims is particularly important in the green marketing area. Consumers do not have the time to fully research the scientific evidence which bears on a green claim. Accordingly, consumers are more reliant on the accuracy of the green marketing material when making their purchasing decision.

The specific objects of the standard are listed in clause 4 and include such objectives as:
  • ensuring that companies make accurate and verifiable environmental claims that are not misleading; 
  • the prevention or minimisation of unwarranted claims; and 
  • the reduction of marketplace confusion. 
Clause 5.3 states that “An environmental claim that is vague or non-specific or which broadly implies that a product is environmentally beneficial or environmentally benign shall not be used. Therefore, environmental claims such as ‘environmentally safe’, ‘environmentally friendly’, ‘earth friendly’, ‘non-polluting’, ‘green’, ‘nature’s friend’, and ‘ozone friendly’ shall not be used.”

Clause 5.4 states that claims that a product is “free” of an environmentally damaging substance should also not be used. The reason being that such claims cannot generally be demonstrated to be literally true owing to the presence of trace contaminants.

Clause 5.5 prohibits the making of sustainability claims as there are no definitive methods of “measuring sustainability or measuring its accomplishment”.

Clause 5.7 provides a checklist of specific requirements that every environmental claim should meet in order to satisfy the standard. For example there is a requirement that environmental claims be accurate and not misleading, and that they can be substantiated and verified. There are also requirements to ensure that consideration is given to the entire life cycle of the product and that any comparative claims are clear and accurate.

Conclusion
Green marketing claims are becoming an increasingly important area for businesses. Businesses risk breaching the TPA if they make sloppy, vague or unresearched green representations.

However, if businesses and their practitioners carefully consider the key resources identified in this article, namely the green marketing and carbon claims guides issued by the ACCC and the current Australian Standard on self-declared environmental claims, they will minimise this risk.

Practitioners should recognise that one implication of following these guides is that sometimes a proposed environmental claim will simply be too qualified or complex to be used in any marketing campaign. However, it is much better to abandon the use of a claim at an early stage than to be the subject of an ACCC investigation, with the resultant negative publicity, if an oversimplified or otherwise misleading green claim is caught short.



[1] Part VC TPA – Section 75AZC(1)(a), (b), (e).[2] Section 51A, TPA.[3] ACCC institutes court action against Sanyo Airconditioners Manufacturing Singapore Pte Ltd: http://www.accc.gov.au/content/index.phtml/itemId/365424/fromItemId/621575.
Federal Court finds "Green" claims to be misleading: http://www.accc.gov.au/content/index.phtml/itemId/398527/fromItemId/621575.
(The author ran this investigation and litigation at the ACCC.)[4] Warning to air conditioning industry after Daikin 'green' claims challenged by ACCC: http://www.accc.gov.au/content/index.phtml/itemId/596776/fromItemId/621575.
(The author ran this investigation at the ACCC.)[5] Dimplex chills out on "environmentally friendly" claims: http://www.accc.gov.au/content/index.phtml/itemId/770506/fromItemId/621575.
(The author ran this investigation at the ACCC.)[6] ACCC takes action against GM Holden Ltd over Saab 'green' claims: http://www.accc.gov.au/content/index.phtml/itemId/808355/fromItemId/621575.
Saab 'Grrrrrreen' claims declared misleading by Federal Court: http://www.accc.gov.au/content/index.phtml/itemId/843395.[7] V8 Supercars corrects carbon emissions claims: http://www.accc.gov.au/content/index.phtml/itemId/843360.[8] Goodyear Tyres apologises, offers compensation for unsubstantiated environmental claims: http://www.accc.gov.au/content/index.phtml?itemId=833219.[9] EnergyAustralia clears air about green electricity claims: http://www.accc.gov.au/content/index.phtml/itemId/806650/fromItemId/621575.
(The author ran this investigation at the ACCC.)[10] Green marketing and the Trade Practices Act, ACCC, 2008 – electronic version available for free download at http://www.accc.gov.au/content/index.phtml/itemId/815763.[11] Carbon claims and the Trade Practices Act, ACCC, 2008 – electronic version available for free download at http://www.accc.gov.au/content/index.phtml/itemId/833279.[12] Environmental labels and declarations – Self-declared environmental claims, AS/NZS ISO 14021: 2000, available for purchase at http://www.saiglobal.com/.[13] http://www.ghgprotocol.org/
.

Wednesday, 3 December 2008

The ten biggest mistakes companies make when dealing with the ACCC


This article first appeared in Keeping good companies, Journal of Chartered Secretaries Australia Ltd, December 2008, Volume 60 No. 11, pp. 681-684

Even if you educate your staff regularly on compliance with the Trade Practices Act 1974 (TPA) and have lawyers review all your communications rigorously, that’s no guarantee that your company will never be the subject of a complaint to the Australian Competition and Consumer Commission (ACCC). When that happens, some companies make fundamental mistakes. Other mistakes raise more subtle issues. So, if you are investigated by the ACCC, what should you do? Or, to look at it another way, what should you not do?

1. Being needlessly aggressive
Be firm in your dealings with the ACCC, but needless aggression is not helpful. Rather than intimidating an ACCC investigator into backing off, it is more likely to push them to ask more questions and request additional information.

Investigators have two universal traits: suspiciousness and stubbornness. (I say this as a former ACCC investigator). If you are needlessly aggressive, you will simply arouse the investigator’s suspicions that your company is hiding something. If an investigator forms this opinion, it may take a long time for them to change their mind.

2. Attacking the credibility of the complainant
Whether the identity of the complainant is known or just suspected, companies often devote considerable effort to explaining how a complainant has a score to settle and is unreliable or dishonest. This is a waste of time. The ACCC receives a significant portion of its evidence from disgruntled former employees who have a score to settle with their former employer and is used to assessing their credibility.

Unless you can provide some fairly hard evidence about their lack of reliability, it is doubly useless. ACCC investigators have to determine the honesty and likely reliability of prospective witness in court. Be wary of making such claims because they are more likely to increase an investigator’s suspicions that your company has something to hide.

3. Not properly responding to ACCC information requests
It is surprising how often companies do not respond properly to the ACCC’s information requests. Often companies don’t respond fully to questions or do not respond to some questions at all.

Possibly, the company does not understand the ACCC’s questions or it rushed its response. However, an investigator may interpret this failure as a sign that the company has something to hide or is not taking the issue seriously.

If you do not fully understand the ACCC’s questions, call the ACCC contact officer to discuss them. The questions might not have been clearly expressed. It is also important that the person from your company who will prepare the information speaks directly to the ACCC contact officer (in the presence of your legal adviser if need be) so nothing is lost in translation.

You should never feel pressured to provide information voluntarily to the ACCC before it is ready. Sometimes inadequate responses to ACCC questions stem from the company rushing to collect and provide information. If your company is struggling to collect all the requested information by the due date, you should call the ACCC and propose a staged delivery of information. The ACCC investigator’s main concern is to ensure that they have enough information to keep the investigation moving forward. An investigator would prefer to get some information quickly, rather than waiting months for complete production.

Finally, be careful to ensure the accuracy and completeness of the information provided voluntarily to the ACCC. It is a criminal offence to provide false, misleading or incomplete information to the ACCC. This offence carries a maximum penalty of 12 months imprisonment (s 137.1 of the Criminal Code).

4. Arguing few customer complaints in mitigation
Many companies argue that the complaints received by the ACCC comprise a very small proportion of their total number of customer inquiries and sales. This is a bad strategy for a number of reasons.

First, in consumer protection circles it is often argued that an absence of complaints can be good evidence that a deception is effective. Customers do not complain about a misleading representation if they do not know it is misleading. A good example is a representation that your company offers the lowest prices. Customers will not complain unless they have compared prices and subsequently realised that your company is not offering the lowest prices. Obviously there are other types of misrepresentations which will be discovered quickly by the consumer, such as bogus free offers.

Second, many consumers often do not complain even if they are misled. Either they never get around to complaining or they blame themselves for having been taken in. In addition, the fact that a customer does not complain to the ACCC does not mean that they have not complained to their family and friends.

Finally, a claim that only a few customers have complained sends the wrong message to the ACCC. It suggests that your company does not value the concerns of a section of its customer base, however small. It also suggests that your company may be taking a cost/benefit approach to dealing with customer complaints.

Instead of dismissing complaints as a minority of customers, carefully investigate each of the complaints and explain to the ACCC the reason for each complaint. The main focus of your internal investigation is to satisfy the ACCC that the complaints are not symptomatic of a wider problem within the organisation, but represent isolated incidents.

5. Being too reactive in dealing with the ACCC about its media
release
Many companies neglect the issue of the ACCC media release until the very end of the investigation. Then they seek a range of concessions from the ACCC such as the right to agree the content of the media release, the right to edit the media release or the opportunity to provide comments on the media release before it is issued. However, the ACCC will rarely compromise the integrity of its media release.

Consider other ways to influence both the content of the ACCC media release and its impact. The way your company responds to the ACCC during the investigation will have a bearing on the content of the media release. Obviously if your company has not cooperated with the investigation, it can hardly expect praise. But if your company cooperates in a timely way it is entitled to have that acknowledged.

The ACCC media release concerning GIO’s refund of GST payments on car leases is a good example of the ACCC acknowledging the cooperation of a company. GIO made sure it commenced the process of providing refunds prior to the issue of the media release so that it would get positive comments from the ACCC.[1]

Make sure you contact the ACCC in writing before the end of the investigation requesting that it mention in its media release the cooperation your company provided during the investigation. Emphasize the benefits to the ACCC of this approach. If the ACCC praises your company for constructively resolving a problem, this will provide an incentive for other companies to come forward to resolve their own problems (as happened following the GIO media release referred to above).

Your company should also ensure that it has a contact person available for reporters to call when an investigation is resolved and the ACCC media release is issued.[2] It would be very unfortunate to have a report in the newspapers the day after the ACCC media release along the lines that ‘the Managing Director of XYZ Pty Ltd was unavailable for comment.’ Your company should provide the ACCC investigator with the name, position and contact details of the relevant person and ask that this information be provided to the ACCC’s Media Unit. When reporters call the ACCC for further information about its media release, the Media Unit will be in a position to provide these details.

Finally, it is surprising how few companies issue media releases themselves following an ACCC media release. The ACCC announcement will rarely cover all issues which are important to your company. For example your media release could reassure customers that the TPA problems have been fixed and that they were not systemic but isolated.

If your company was particularly strategic you could issue your own media release before the ACCC issued its media release. By taking this approach, you will more or less guarantee that the ACCC media release does not get much coverage. However, be aware that if you adopt this approach, it may upset the ACCC.

6. Saying that everybody else is doing it
The effect of this statement on an investigator is clear. They immediately get much more excited about the investigation as they realise they are now dealing with a broad industry problem rather than an isolated incident. Also, the fact that many companies in an industry engage in the same conduct makes the investigation a much higher priority.

Clearly, if it’s true, your company should advise the ACCC as early as possible that the alleged conduct is common in the industry. However, you should try to turn this to your advantage. To do this, you need to be aware of some of the enforcement philosophies of regulators such as the ACCC. In taking enforcement action, a regulator will try to achieve both specific and general deterrence. As it cannot take on every case, it has to select the cases which will best achieve both goals.

Accordingly, there are three broad enforcement approaches. The ACCC may pursue a case against: 
  • the market leader because a successful outcome will achieve general deterrence by getting smaller players to fall into line 
  • the company which is engaging in the most blatant conduct in breach of the TPA, as the ACCC is likely to both win this case and get the most extensive remedies or 
  • the company which has a history of similar conduct, as this may provide an opportunity to secure the most severe sanctions such as a criminal conviction.
If the ACCC approaches your company about an issue which is a widespread industry problem, try to persuade the ACCC to pursue somebody else. For example, if you are the market leader, you may want to suggest to the ACCC that it focus its efforts on another company which is engaging in more blatant conduct or is a repeat offender. Alternatively, if you are a repeat offender you may try to focus the ACCC on a company which is engaging in more blatant conduct. However, if your company is engaging in the most blatant conduct, I suggest you give up as soon as possible.

7. Not using a lawyer who specialises in the Trade Practices Act
While it may come as a surprise, many companies use lawyers who have little or no knowledge or experience of the TPA or the ACCC. The TPA is a specialised area and companies should retain a specialist lawyer to represent them. The exception to this may be straightforward instances of misleading and deceptive conduct.

However, in all other matters, your company should ensure its lawyer has appropriate experience. Ask your lawyer for details of the trade practices matters they have managed and then check to see how successful they have been. You would probably want to know whether your lawyer had lost every trade practices case that they had run.

8. Being too reactive about remedies
Companies often err in being too reactive in terms of the remedies required to fix a contravention of the TPA. They often provide masses of information to the ACCC voluntarily, but may never suggest remedies to the ACCC to resolve the problem. Rather, they will wait for the ACCC to propose a remedies package which may contain all manner of elaborate remedies, many of which are not acceptable to the company. Then the company will spend weeks trying to whittle down the ACCC’s proposals to something it can live with.

Instead, try to get on the front foot by proposing a range of remedies to the ACCC at an early stage. By doing this, you will shift the onus to the ACCC to explain to your company why the remedies you have proposed are inadequate and why additional or more elaborate remedies are needed. You should try to set the agenda on appropriate remedies, rather than allow the ACCC to do it.

9. Not implementing remedies immediately

Many companies are willing to implement remedies from an early stage in the investigation, but don’t do so because they think it is better to wait for ACCC approval. By not implementing the remedies you are happy to implement immediately, your company runs the risk of the ACCC upping the ante and proposing additional and more elaborate remedies.

If you acknowledge that there is a need to take remedial steps, you should implement these steps immediately even if the investigation is still ongoing. There are a number of strategic benefits from taking this pre-emptive approach in dealing with the ACCC.

First, your company will show the ACCC that it responded positively to the concerns at the earliest possible stage. Second, this will reduce the likelihood that the ACCC will make demands for additional or more elaborate remedies. In other words, the ACCC will be in the position of having to explain why the measures you have already implemented did not fix the problem. Finally, if your company has already implemented a range of remedies, there is less likelihood that the ACCC will press for a court enforceable undertaking, as there will be few, if any, remedies left to implement.

10. Agreeing to a section 87B undertaking too readily
The biggest mistake a company can make is to agree to a s87B undertaking too readily. Section 87B is an administrative tool which permits the ACCC to accept undertakings from companies to settle investigations, including consumer protection, restrictive trade practices and merger investigations.[3] Though a s87B undertaking is not approved or otherwise brought to the attention of the Federal Court when it is executed, it can be enforced in the Federal Court if its terms are breached.

Many companies don’t understand that, when they sign a s87B undertaking, they are exposed to a range of broad and open-ended remedies if the undertaking is breached. The court can order the company in breach of the undertaking to:
  • pay to the Commonwealth the amount of the financial benefit obtained directly or indirectly and reasonably attributable to the breach and / or 
  • compensate any other person who has suffered loss or damage as a result of the breach.
An order to pay the Commonwealth the amount of the financial benefit obtained could be a significant sum of money, for example, all the revenue that a misleading advertising campaign has generated.

In dealing with the ACCC, companies should seek to enter into a dialogue about the reasons why it is seeking a s87B undertaking. The ACCC usually tries to resolve investigations in one of three ways: an administrative undertaking, a s87B court enforceable undertaking, or through court action. The ACCC will generally take court action if:
a company refuses to provide remedies to resolve a TPA problem
the contravention is considered to be particularly blatant or
the company is a repeat offender.

However, the basis for an ACCC decision to seek a s87B undertaking is often far from clear. Some people see the s87B undertaking as constituting a greater punishment than an administrative undertaking. There are strong grounds for arguing that a s 87B undertaking should only be sought if the ACCC has genuine concerns that your company cannot be trusted to comply with the terms of an administrative undertaking.

The best way for you to reduce the likelihood of the ACCC requiring a s 87B undertaking is to start implementing corrective remedies prior to the settlement of the investigation. Your company will thus be able to counter any claims by the ACCC that a s87B undertaking is required because it cannot be trusted to implement the agreed remedies.

A further benefit of implementing remedies at an early stage is that you will remove much of the ACCC’s leverage in the settlement negotiations. The main leverage which the ACCC has in seeking a s87B undertaking is that it will commence legal proceedings unless your company agrees to the undertaking. However if some of the proposed remedies have already been implemented, there is very little justification for the ACCC to go to court to get the balance of the remedies it is seeking.




[1] ‘GIO provides 2,800 GST refunds on car leases’ ACCC media release MR 231/00, 24 August 2000 - http://www.accc.gov.au/content/index.phtml/itemId/87475/fromItemId/621406

[2] See also C Anderson ‘Managing communications and reputation’ Keeping good companies, Vol 60 No 9, pp. 565-568.[3] See also C Coops ‘Take it away! – approaching section 87B undertakings in a merger context’, Keeping good companies, Vol 60 No 8, pp. 481-483.

Tuesday, 18 November 2008

Largest ever fine of $2.7 billion imposed for glass cartel


Introduction

The European Commission has imposed the largest fine in the history of antitrust enforcement for illegal market sharing conduct by a number of manufacturers of car glass. The total fines imposed against the four companies involved in the cartel were 1.3 billion euros or 2.7 billion Australian dollars. The largest fine of 896 million euros or 1.7 billion Australian dollars was imposed on Saint-Gobain.

European car glass cartel
The EC alleged that between 1998 and 2003 Saint-Gobain, Pilkington, and Asashi discussed target prices and engaged in market sharing and customer allocation at meetings held at various locations. A fourth company, Soliver took part in some of these meetings –

http://europa.eu/rapid/pressReleasesAction.do?reference=IP/08/1685&format=HTML&aged=0&language=EN&guiLanguage=en

The EC alleged that the companies agreed to allocate car glass tenders to each company for new release cars, took steps to maintain stable market shares and exchanged commercially sensitive information.

The market for the supply of car glass in Europe is highly concentrated with Saint-Gobain, Pilkington and Asashi accounting for 90% of the market for car glass fitted in new cars and replacement glass fitted in second hand cars. This high degree of market concentration made it easier for the companies to form and maintain the cartel for 6 years.

The EC investigation was triggered by an anonymous tip-off. Based on this information, the EC conducted dawn raids on each of the companies. Shortly after the raids, Asashi lodged an application for leniency under the EC’s 2002 Leniency Notice. Asashi provided full cooperation and was rewarded with a 50% discount off its fine.

The size of the fines imposed against Saint-Gobain reflects the fact that the company is a repeat offender. Saint-Gobain had already been the subject of cartel actions by the EC in relation to the supply of flat glass in the Benelux countries in 1988 and in Italy in 1984. Because of Saint-Gobain’s previous record, its fines were increased by 60% under the EC’s 2006 Guidelines on Fines.

Antitrust fines for cartel conduct
This case demonstrates the global trend of antitrust penalty regimes towards larger fines. Most antitrust jurisdictions have moved away from a set maximum fine for cartel conduct preferring, instead to penalise a company by reference to either the financial gain that it derived from the cartel conduct or a percentage of its total sales turnover.

In most cases, the antitrust regulator has not been able to calculate the financial gain obtained from the cartel conduct. As a result, the default position has been to impose a fine or penalty based on the company’s sales turnover during the period of the cartel conduct.

A consequence of calculating the relevant fine by reference to the total sales turnover of a company is that total fines have increased significantly in both Europe and the United States and are likely to rise in Australia.

Australian cartel penalty regime

A similar approach has been taken in Australia to calculating the appropriate fine for cartel conduct. Relevantly, section 76(1A) of the Trade Practices Act 1974 (TPA) provides -
(ii) if the Court can determine the value of the benefit that the body corporate, and any body corporate related to the body corporate, have obtained directly or indirectly and that is reasonably attributable to the act or omission--3 times the value of that benefit; 
(iii) if the Court cannot determine the value of that benefit--10% of the annual turnover of the body corporate during the period (the turnover period ) of 12 months ending at the end of the month in which the act or omission occurred…Section 76(1A)(ii) establishes a formula whereby the financial gain over the entire life of the cartel is first calculated and then multiplied by 3.
However, antitrust authorities have found it virtually impossible to work out the financial benefits obtained by members of a cartel. Consequently, the percentage of sales turnover has been used by antitrust regulators in most cases.

An example of how significant the introduction of section 76(1A)(iii) would be in escalating the penalties for cartel conduct in Australia can be appreciated by looking at the penalties imposed against Woolworths in the liquor case.

In 2003, the ACCC commenced legal proceedings against Woolworths and Liquorland for entering into illegal agreements with small business competitors. In 2006, the Federal Court found that the conduct contravened section 45 of the TPA - http://www.accc.gov.au/content/index.phtml/itemId/773813/fromItemId/622289.

Justice Allsop ordered that Woolworths pay a pecuniary penalty of $7 million for its illegal conduct. However has the 10% sales turnover approach been applied in this case, the total penalty could have been as high as $3.8 billion based on a total sales turnover of Woolworths Limited in 2006 of $38 billion.

Conclusion
Over the next five years in Australia, pecuniary penalties for cartels and indeed all contraventions of the restrictive trade practices provisions of the TPA are going to increase dramatically. The application of the 10% sales turnover approach is going to increase corporate penalties in most cases from less than $10 million currently, to corporate penalties in the tens of millions of dollars.

Most trade practices practitioners have been focussing on the proposed introduction of criminal penalties including jail time for engaging in illegal cartel conduct. However, companies should not forget the very significant changes that have been made to civil penalty regime which raises the maximum penalties for a contravention of Part IV of the TPA to a new level.

There is a clear intent within Government to increase the punishment for illegal anticompetitive conduct, particularly cartels. Companies need to respond to this new environment by ensuring that they have an up-to-date, comprehensive and effective trade practices compliance program. Companies will also have to be increasingly vigilant in monitoring all contact between their employees and their competitor's employees to ensure that their company is not held liable for a multi-million dollar penalty due to their employee's actions.

Friday, 7 November 2008

ACCC to target tardy traders


Introduction
ACCC Chairman Graeme Samuel recently stated that the ACCC will target big businesses that unilaterally and arbitrarily delay payment to a small business supplier. The ACCC indicated that such conduct is likely to constitute unconscionable conduct under the Trade Practices Act 1974 (TPA) - http://www.smartcompany.com.au/Free-Articles/The-Briefing/20081027-ACCC-to-go-after-late-payers.html

Why is the ACCC interested in this area? What provisions can it use to challenge this conduct?

Background
The ACCC’s concern about big businesses delaying payment to small businesses is somewhat surprising. In the past, actions by big businesses to change trading terms unilaterally or to delay payment were usually seen by the ACCC as raising private contractual issues that did not require ACCC intervention. The ACCC left small traders to take their own legal action.

There were some exceptions. One particularly well known example a number of years ago involved a major grocery wholesaler that unilaterally extended its payment terms to small business suppliers from 30 to 120 days. To add insult to injury when this wholesaler did get around to paying their small business suppliers, they would automatically discount the invoice to give itself the benefit of the early payment discount!

Another well-known practice by the major grocery wholesalers and retailers, which was investigated by the ACCC, involved storage pallets. Storage pallets for grocery items are rented by the party that has use of them. The small business supplier pays the rental on the pallet from the time their goods are loaded onto the pallet until the time that the goods are delivered to the wholesaler or retailer. On delivery of the goods, property in the pallet passes from the small business supplier to the wholesaler or retailer which is then responsible for the rental payments.

Many of the major wholesalers and retailers decided some years ago to unilaterally change the terms on which they accepted pallets from small business suppliers. Instead of property in the pallet passing when the small business supplier delivered it to their wholesaler or retailer customer, the passing of property in the pallet was delayed for 30 days by imposition of a new contractual term by the wholesalers and retailers into their agreements with small business suppliers. As a result, the small business supplier remained liable for paying rental on the pallet for 30 days after it had come into the possession of the major wholesaler or retailer. The small business supplier also became legally responsible for any damage to the pallet which was caused by the wholesaler or retailer while it was in their possession.

This unilateral change resulted in most of the pallet rental costs of the major wholesalers and retailers being transferred to small business suppliers without their agreement.

Recent developments
The ACCC’s interest in policing tardy payments to small businesses follows a commitment made by Prime Minister Kevin Rudd at the small business summit in Brisbane on 24 October 2008. At this summit, Kevin Rudd announced that all Federal Government Departments would pay small business suppliers and contractors within 30 days as a way of helping them with their cash flow during these current difficult economic conditions. If a Department fails to pay within 30 days, the small business will have the right to charge penalty interest on the unpaid debt.

Kevin Rudd also called on big business to follow the Federal Government’s example and commit to paying small businesses within 30 days - http://www.news.com.au/business/story/0,27753,24553740-5017675,00.html

A few days later, on 27 October 2008, Graeme Samuel was reported as stating that the ACCC could take action against businesses that delayed paying their small business suppliers. For example, extending payment terms from 30 to 120 days could be seen as constituting unconscionable conduct - http://www.smartcompany.com.au/Free-Articles/The-Briefing/20081027-ACCC-to-go-after-late-payers.html

On 28 October 2008, there were further detailed reports about the ACCC stance on tardy payers. In one such report, the Chairman of the ACCC identified a number of factors that would be relevant to its assessment of whether a particular matter should be investigated as potentially unconscionable. It would be relevant that the conduct had been “unilateral”, “arbitrarily applied” “harsh and oppressive”, "imposed without consultation” and caused “extraordinary hardship” - http://www.smartcompany.com.au/Free-Articles/The-Briefing/20081027-ACCC-to-go-after-late-payers.html

The ACCC’s public stance on late payments to small businesses by big businesses was immediately praised by the Rudd Government - http://www.abc.net.au/news/stories/2008/10/28/2402841.htm?section=justin

Relevant legislation
There are two provisions in the TPA that could be used to target unconscionable conduct in the commercial context, sections 51AA and 51AC.

Section 51AA requires a finding that the small business suffered from a special disadvantage such as illiteracy, low levels of education, a significant lack of commercial sophistication. Therefore, section 51AA is unlikely to be the ACCC’s preferred approach to this issue.

Section 51AC is more likely to be used by the ACCC to target tardy traders.

Section 51AC provides –
(1) A corporation must not, in trade or commerce, in connection with:
(a) the supply or possible supply of goods or services to a person (other than a listed public company); or
(b) the acquisition or possible acquisition of goods or services from a person (other than a listed public company);
engage in conduct that is, in all the circumstances, unconscionable.
Section 51AC prohibits unconscionable conduct both in a supply and acquisition situation. In the context of taking action against big businesses for tardy payment, it is the acquisition situation that would be relevant. In other words –
(1) A big business must not, in trade or commerce, in connection with:
(b) the acquisition of goods or services from a small business (other than a listed public company);
engage in conduct that is, in all the circumstances, unconscionable.
In subsection 51AC(4) a range of non-exclusive factors are listed which the Courts are to consider in determining whether unconscionable conduct has occurred in an acquisition situation. In the following section, each factor in subsection 51AC(4) with be discussed in turn.
(4) Without in any way limiting the matters to which the Court may have regard for the purpose of determining whether a corporation or a person (the acquirer ) has contravened subsection (1) or (2) in connection with the acquisition or possible acquisition of goods or services from a person or corporation (the small business supplier), the Court may have regard to:
(a) the relative strengths of the bargaining positions of the acquirer and the small business supplier...
Factor (a) requires that there be a disparity in bargaining power between the big business acquirer and the small business supplier. This is not only a question purely of relative size but is likely to extend to an analysis of how dependant the small business is on the big business acquirer. For example, does the big business acquirer purchase a large proportion of the small business’s total sales or is there an exclusive supply arrangement?

This factor will be relatively easy to establish in the context of tardy payers, as the small business has already supplied the goods or services to the big business and is simply awaiting payment. It would not be feasible for the small business to take legal action against its customer to recover debts owing due to the cost of the proceedings and likely loss of that customer’s business.
(b) whether, as a result of conduct engaged in by the acquirer, the small business supplier was required to comply with conditions that were not reasonably necessary for the protection of the legitimate interests of the acquirer...
Factor (b) relates to whether the conditions imposed by the big business acquirer were reasonably necessary for the protection of its legitimate business interests. It is hard to see how the unilateral decision of the big business acquirer to delay payment or change other terms of the contract could be seen as protecting a legitimate interest. Rather such conduct is likely to be seen as opportunistic and illegitimate.
(c) whether the small business supplier was able to understand any documents relating to the acquisition or possible acquisition of the goods or services...
Factor (c) is not likely to be relevant to the issue of late payers.
(d) whether any undue influence or pressure was exerted on, or any unfair tactics were used against, the small business supplier or a person acting on behalf of the small business supplier by the acquirer or a person acting on behalf of the acquirer in relation to the acquisition or possible acquisition of the goods or services...
Factor (d) is likely to be one of the most important factor in establishing that late payment is unconscionable. It is likely that the very act of unilaterally changing trading terms would be seen as by the Court as an unfair tactic. There may be instances where a big business withheld payment in an attempt to extract some other concession. For example, where a big business withheld payment to a small business for the purpose of extracting some favourable trading terms such as larger volume rebates or stocking payments. In such circumstances, the big business may be seen as using unfair pressure on the small business.
(e) the amount for which, and the circumstances in which, the small business supplier could have supplied identical or equivalent goods or services to a person other than the acquirer...
Factor (e) is not relevant to an investigation into tardy payment. Rather this factor arises when a big business tries to push down the selling prices of a supplier below the prices charged by that supplier’s competitors.
(f) the extent to which the acquirer's conduct towards the small business supplier was consistent with the acquirer's conduct in similar transactions between the acquirer and other like small business suppliers...
Factor (f) is quite similar in its focus to factor (e). This focus is on determining whether the big business acquirer is treating the same types of suppliers in a different or discriminatory manner. This factor asks whether the big business’s conduct towards a small business supplier is consistent with their conduct towards other similar kinds of suppliers in like transactions.

Indeed factors (e) and (f) could be seen as encapsulating the essence of unconscionable conduct – namely the singling out a particular small business operator for discriminatory and unfair treatment usually to achieve some ulterior purpose.
(g) the requirements of any applicable industry code...
(h) the requirements of any other industry code, if the small business supplier acted on the reasonable belief that the acquirer would comply with that code
Factors (g) and (h) will not be relevant to the majority of situations of tardy payments as there are no general industry codes of conduct. The Franchise Code of Conduct is unlikely to apply as it is usually the franchisee that owes money to the franchisor. The Horticulture Code and Oil Code could be relevant to small businesses in those particular industries.
(i) the extent to which the acquirer unreasonably failed to disclose to the small business supplier:
(i) any intended conduct of the acquirer that might affect the interests of the small business supplier; and
(ii) any risks to the small business supplier arising from the acquirer's intended conduct (being risks that the acquirer should have foreseen would not be apparent to the small business supplier); and
Factors (i) is unlikely to be relevant as the act of delaying payment or otherwise unilaterally altering trading terms would appear to be opportunistic conduct rather than planned. Tardy payment is a change to the ordinary trading relations between a big and small business rather than an intended, but undisclosed, future plan of action.
(j) the extent to which the acquirer was willing to negotiate the terms and conditions of any contract for the acquisition of the goods and services with the small business supplier; and
(ja) whether the acquirer has a contractual right to vary unilaterally a term or condition of a contract between the acquirer and the small business supplier for the acquisition of the goods or services; and
Factors (j) and (ja) would have to be satisfied for any action against a tardy payer to be successful. Factor (j) refers to the willingness of the big business acquirer to negotiate terms and conditions. Clearly if the big business acquirer was willing to discuss terms and conditions with the small business, it would be very difficult to establish unconscionable conduct. For such an action to be successful, the big business acquirer would have to be acting unilaterally.

Factor (ja) asks whether the acquirer has a contractual right to unilaterally vary a term or condition of a contract with a small business supplier. If there is such a right to vary terms unilaterally then any action for tardy payment would not succeed. Indeed, satisfaction of this factor would appear to be a necessary precondition to running any successful action against a big business for tardy payment.
(k) the extent to which the acquirer and the small business supplier acted in good faith.
Finally, factor (k) inquires into the extent to which both parties acted in good faith. It is arguable that the unilateral alteration of a long standing trading arrangement without notice to the small business would not be considered to be acting in good faith.

Conclusions
On an impressionistic level, section 51AC would appear to give the ACCC adequate power to take action against big business acquirers that unilaterally delayed payments or otherwise sought to change pre-existing trading terms. A number of the relevant factors under subsection 51AC(4) could be satisfied in most cases of tardy payment. It also appears that factors (j) and (ja) would necessarily have to be satisfied for any action for tardy payment to be successful.

However, as stated above, the essence of commercial unconscionable conduct is the singling out a particular small business for discriminatory and unfair treatment usually to achieve some ulterior purpose. The problem with using section 51AC to challenge tardy payers is that their conduct may not be discriminatory in its application. Rather, the big business acquirer is more likely to unilaterally delay payment or change trading terms for all its small business suppliers across the board. Furthermore, the big business acquirer is unlikely to have any ulterior purpose in delaying payment or changing trading terms other than to improve their cash flow position.

Ultimately, it is unlikely that a Court is going to find that even the tardiest payers have engaged in unconscionable conduct. Courts are much more likely to decide that late payments and other unilateral changes to trading terms should properly be characterised as a breach of contract sounding in damages, rather than as some new species of unconscionable conduct.

This does not mean that large companies should be blasé about this issue. Even though the ACCC is unlikely to be ultimately successful in such cases, this does not mean that the ACCC will not vigorously pursue a handful of investigations into such conduct. Big businesses should appreciate that being the subject of such an ACCC investigation, particularly an unconscionable conduct investigation, is likely to be a very costly exercise that would be best avoided.

The best way to avoid unwanted ACCC attention in this area is to make sure that big businesses discuss any proposed changes to payment terms and other contractual terms with their small business suppliers in an effort to reach a mutually acceptable position.

Saturday, 25 October 2008

High Court clarifies remedies under Franchising Code

Case note: Master Education Services Pty Limited v Ketchell [2008] HCA 38
http://www.austlii.edu.au/au/cases/cth/HCA/2008/38.html

Issue: Whether a breach of the Franchising Code would result in the franchise agreement being unenforceable due to illegality at common law?

Context: The factual background to this case was that Master Education Services Pty Limited (franchisor) provided a disclosure document and copy of the Code to Mrs Ketchell (franchisee) but it did not obtain the statement from her as required under clause 11(1) of the Code prior to entering into the Franchise Agreement. Clause 11(1) relevantly provides that a franchisor must not enter into a franchise agreement unless they have received a written statement from the franchisee that they have read and had a reasonable opportunity to understand the disclosure document and the Code.

In this case, the NSW Court of Appeal held that the contravention of the Code and section 51AD led to illegality at common law and the consequent unenforceability of the franchise agreement.

Decision: In a unanimous decision, the High Court held the detailed remedial provisions of the TPA spelled out the consequences of non-compliance with an industry Code, such as the Franchising Code. Parliament did not intend that the harsh consequences of the common law were to be available to remedy a contravention of section 51AD.

Significance: The High Court has provided welcome clarification of an important area of the operation of Part IVB and the Code. The case clarifies that the remedies for a breach of section 51AD are to be found in the relevant provisions of the TPA and not in the common law. The Court noted that the TPA provides a more flexible approach in terms of the appropriate remedies to be applied in particular circumstances.

The Court also noted that the purpose of the scheme of Part IVB and the Code is to regulate the conduct of persons in the franchising industry in order to improve business practices, to provide some protection for franchisees proposing to enter into franchise agreements and to decrease litigation. Therefore, the purpose of Part IVB and the Code could not be to provide franchisors (and franchisees) with a simple way to avoid their obligations under the Franchise Agreement by claiming that the agreement was unenforceable due to a minor breach of the Code.

The correct approach is to carefully consider the circumstances of the non-compliance with the Code and determine which remedies will most appropriately address the damage created by the non-compliance. In extreme cases of non-disclosure, it may be appropriate to prevent entry into a franchise agreement or to terminate the franchise agreement, but where the breach is more technical other, less extreme, remedies would be appropriate.

Sunday, 12 October 2008

Is the ACCC the new anti-counterfeiting cop?

Introduction
The Australian Competition and Consumer Commission (ACCC) recently took legal action against DBO - Designer Brand Outlet, an internet reseller of women’s clothing. The ACCC alleged that DBO falsely represented that its products were genuine designer labels when they were actually counterfeits.

This appears to be the first foray by the ACCC into the area of anti-counterfeiting. In this article, I will examine the DBO case, discuss the various options available for persons wishing to protect their intellectual property rights from counterfeiters, and consider the advantages and disadvantages of the ACCC pursuing such cases.

Background
On 5 September 2008, the ACCC initiated legal proceedings against DBO alleging contraventions of the Trade Practices Act 1974 (TPA). The ACCC stated in its media release of 9 September 2008, that it took action due to representations on DBO’s website that items for sale were genuine designer label women's clothing when in fact these items were counterfeit copies - http://www.accc.gov.au/content/index.phtml/itemId/842259

The ACCC obtained a number of interlocutory orders against DBO on ex parte basis. These orders included injunctions restraining the operators of the DBO website from “disposing, mortgaging, assigning, charging or otherwise dealing with their assets” (subject to some limited exceptions). In addition, the ACCC appears to have obtained orders suspending the DBO website, for the time being.

On 19 September 2008, the ACCC issued a second media release calling on consumers who believed they had been misled by DBO to contact the ACCC - http://www.accc.gov.au/content/index.phtml/itemId/843467. It appears that this appeal was made with the dual purpose of obtaining further evidence and identifying consumers who may have a claim for compensation.

In this media release, the ACCC identified a number of the brands which were the subject of the alleged counterfeiting including Chloe, Marc Jacobs and Diane von Furstenberg.

The case is continuing before Justice Flick of the Federal Court.

Why did the ACCC take the case?
In its initial media release, the ACCC stated that the matter was brought to its attention by the US Federal Trade Commission as a result of complaints received through the eCommerce.Gov website. It appears US consumers were allegedly misled by DBO representations. One would also assume that the ACCC was aware of Australian consumers who were also allegedly misled by DBO’s representations.

A notable aspect of this case is the comprehensive approach taken by the ACCC in its investigation. In the ACCC’s initial media release, it states that –

• The ACCC investigation was carried out in conjunction with the US FTC and OK Office of Fair Trading.

• The bank with which DBO held credit card merchant facilities co-operated with the ACCC. This bank made the unilateral decision to suspend DBO’s merchant facility and settlement account pending further investigation by the bank.

• NetRegistry Pty Ltd, the domain name registrar for DBO’s website, also cooperated with the ACCC by effectively disabling the DBO website.

Due to the ACCC’s action, DBO’s internet operations were well and truly closed down, at least in the short term.

What has been the ACCC’s historical practice in relation to counterfeit matters? Historically the ACCC has not investigated counterfeiting matters. Rather, it has referred complainants either to the industry associations set up to combat such counterfeiting or to other law enforcement agencies such as the Australian Federal Police, State Police or the Australian Customs Service (ACS).

There are two good reasons for referring counterfeiting complaints to the industry association, the police or the ACS. Firstly, the complainants are often very large corporations with the financial resources and commercial interests to take their own private legal action to protect their brands from counterfeits. Secondly, the penalties for counterfeiting under other legislation such as the Copyright Act and Trade Marks Act are generally considered to be more serious than the remedies available under the TPA, such as term of imprisonment.

Historically, the main industry association which took action against counterfeiting is the Australian Counterfeiting Action Group (ACAG). ACAG is an association of manufacturers and wholesalers of clothing and other goods who are concerned with the sale of counterfeit products throughout Australia. ACAG’s members include -

• Billabong
• Esprit
• Gucci
• Industrie
• Mossimo
• Mooks
• Quiksilver
• Rip Curl
• Tommy Hilfiger

While there is not a great deal of current information available about ACAG’s activities, some indication of their operations can be obtained from a submission it made to the Standing Committee on Legal and Constitutional Affairs in 1999 as part of the Inquiry into the Enforcement of Copyright in Australia - http://www.aph.gov.au/house/committee/laca/copyrightenforcement/sub36acag.pdf

ACAG advised the Committee it had taken seven cases against small stallholders in 1997 for alleged copyright infringements. ACAG said that the cost of running these cases, all of which it won, was approximately $80,000.

ACAG advised the Committee that while it had been awarded costs and damages of approximately $80,000 in these cases it only recovered $15,000. ACAG claimed that some of the respondent stall holders fled the country to avoid paying ACAG’s costs and damages.

ACAG submitted that due to the delays in taking the civil litigation route, the government should devote greater resources to public enforcement of copyright law through the Federal and State Police and the ACS.

What options are available to counter counterfeiting conduct?
Counterfeiting of clothing can be prosecuted as a breach of either copyright, design or the trademark as well as misleading and deceptive conduct.

In the case of copyright infringements, the relevant legislation is the Commonwealth Copyright Act 1968, which provides both civil and criminal sanctions. The criminal provisions of the Copyright Act are investigated by the Australian Federal Police.

Under section 115 of the Copyright Act, the owner of copyright can take an infringement action seeking an injunction to stop the continued sale of the counterfeit goods, and either damages or an account of profits. There is also provision for the award of exemplary damages by the Court in appropriate cases. Under section 116, the owner of the copyright can also take an action for conversion or detention in relation to the infringing copies.

The criminal provisions of the Copyright Act are contained in Division 5. The first relevant provision is section 132AC which relates to commercial scale infringements. The maximum penalty for a person committing this offence is 550 penalty units (or $60,500) or up to 5 years imprisonment. The maximum penalty for a corporation is five times the maximum penalty (or $302,500).

The same level of penalties applies under Division 5, Subdivision C which deals with the acts of making, selling, importing, distributing and possessing infringing products (sections 132AD to 132AJ). Under section 133, the Court can order that infringing products either be destroyed or delivered up to the owner of the copyright.

Division 7 provides for the seizure of imported copies of copyright material by the ACS. Section 135AI provides that the Court can order that infringing copies be forfeited to the Commonwealth.

In the case of design breaches, the relevant legislation is the Commonwealth Design Act 2003. Under section 73, the registered owner of a design can take infringement proceedings against a person who has infringed their design. Under section 75 the remedies available include an injunction and either damages or an account of profits. Exemplary damages are also available for flagrant breaches.

In the case of trademark breaches, the relevant legislation is the Commonwealth Trade Marks Act 2005. The registered owner of a trademark can take infringement proceedings against a person who infringes their trademark. Under section 126, the remedies which are available to a registered owner are an injunction and either damages or an account of profits.

Part 13 of the Trade Marks Act relates to the importation of infringing Australian trademarks. The object of this part is to provide the CEO of the ACS with the power to seize goods that infringe a registered trademark. Under section 137, the registered owner can commence an infringement proceeding in relation to the infringing products and seek an order that these products be released to the registered owner or forfeited to the Commonwealth.

Part 14 provides various criminal offences for infringement of registered trademarks. Sections 145 to 148 prohibit a person from falsifying, falsely applying and selling goods with a counterfeit trademark. The penalties for a person contravening these provisions are 500 penalty units ($55,000) and / or two years imprisonment. The penalty for a corporation engaging in such conduct is 5 times the maximum penalty or a fine of $550,000.

There are no specific provisions in the TPA dealing with counterfeiting. However, a number of provisions have been used to challenge such conduct.

The most commonly used provision is section 52 which states –

(1) A corporation shall not, in trade or commerce engage in conduct that is misleading or deceptive or is likely to mislead or deceive.

Given the broad prohibition in section 52 against conduct which is misleading and deceptive, it is an ideal provision to use against counterfeiting claims.

One restriction on the use of this section is that it only applies to corporations (subject to some limited exceptions). Therefore it cannot be used against small unincorporated stallholders. However, section 52 is mirrored in State fair trading legislation which applies to corporations, unincorporated businesses and individuals.

Section 53 has also been used to combat counterfeiting. Relevantly, section 53 provides -
A corporation shall not, in trade or commerce, in connexion with the supply or possible supply of goods or services or in connexion with the promotion by any means of the supply or use of goods or services:


(a) falsely represent that goods are of a particular standard, quality, value, grade, composition, style or model or have had a particular history or particular previous use;

(c) represent that goods or services have sponsorship, approval, performance characteristics, accessories, uses or benefits they do not have.


Section 53 has been used in conjunction with a private counterfeiting claim under section 52.

Section 53 is mirrored in section 75AZC of the TPA. The differences between section 53 and section 75AZC is that section 53 is an exclusively civil provision while section 75AZC is a criminal offence.

Section 55 could also be used to combat counterfeiting conduct –

A person shall not, in trade or commerce, engage in conduct that is liable to mislead the public as to the nature, the manufacturing process, the characteristics, and the suitability for their purpose or the quantity of any goods.

This provision is mirrored in section 75AZH, which is a criminal offence.

The remedies available to the ACCC under Part V are injunctions, declarations, corrective remedies, compensation for consumers and non-punitive orders. However, the ACCC cannot seek any civil penalties against a corporation which has been proved to have engaged in counterfeiting.

Sections 53 and 55 are mirrored under sections 75AZC and 75AZH of the TPA. These sections allow the ACCC (through the CDPP) to seek criminal convictions and fines. The ACCC can seek a maximum criminal fine of $1.1 million for a corporation and $220,000 for an individual for false and misleading representations under section 75AZC. Under section 75AZH (the equivalent of section 55) , the maximum fine is $220,000 as it applies to natural persons only.

The TPA does not provide a term of imprisonment for contraventions of these sections.

Comparison of statutory regimes As can be appreciated there are a range of significant differences between the statutory regimes described above. The Copyright Act, Trade Marks Act and the TPA provide for criminal prosecutions for alleged counterfeiting. However, the TPA does not provide any period of imprisonment for persons found guilty of counterfeiting.

The absence of imprisonment as a punishment for counterfeiting conduct is a serious shortcoming in terms of using the TPA as a solution to counterfeiting from the perspective of specific and general deterrence. When one acknowledges that much of counterfeiting activity is being undertaken by organised crime groups, any penalty that does not include a period of imprisonment will not be a very effective deterrent.

On the other hand, the criminal penalties available under the TPA for both corporations and individuals are much higher that the monetary penalties under the Copyright Act and Trade Marks Act. This goes some way to compensating for the absence of imprisonment under the TPA in terms of achieving both specific and general deterrence.

Another significant deterrent to a counterfeiter would be the risk of forfeiting the counterfeit products. In many cases, the forfeiture of the products would constitute a larger financial penalty to the counterfeiter than the criminal penalties that apply under the Copyright Act and Trademarks Act. A forfeiture remedy is not available under the TPA.

On the other hand, the ACCC’s ability to take civil actions against alleged counterfeiters provides a very rapid means of stopping any misleading conduct. As shown in the DBO case the ACCC can effectively stop the alleged counterfeiter from trading by obtaining interlocutory injunctions and an order freezing the alleged counterfeiter’s bank account pending final resolution of the matter. The ACCC has the advantage of not having to give an undertaking as to damages if it seeking an injunction pursuant to section 80 of the TPA. However the ACCC must give an undertaking to damages if it is seeking other urgent, such as an asset preservation order (Mareva injunction).

In relation to the DBO case, it appears from the ACCC’s media releases that DBO’s principals reside in China but operated their website through an Australian internet provider. Usually obtaining injunctions against natural persons residing in Australia provides the ACCC with the powerful sanction of contempt of Court in the event that the injuncted person breaches the Court’s order.

However, if the principals of DBO reside overseas, the injunctions which the ACCC obtained will not prevent the principals of DBO setting up a new website, located outside Australia, to sell the same allegedly counterfeit goods.

A further limitation on the ACCC obtaining a satisfactory outcome, in the event that they establish that DBO’s representations were misleading, is that most of the frozen funds are likely to be dissipated before final hearing due to the conditions imposed by the Court. The Court ordered that the assets not be removed from Australia or otherwise dealt with “other than for specific living, business and legal expenses”. The consequence of this order is that DBO will be able to use its funds to pay normal business expenses as well as pay its legal team to fight the case. Therefore, there is nothing to prevent DBO from running down the frozen funds in defending this case so that no funds are left for consumers in the event that the ACCC is successful in proving its case.

Conclusions The ACCC’s foray into anti-counterfeiting is an unusual step, particularly when one considers its historical practice of referring such matters to the relevant industry associations or other law enforcement agencies.

The ACCC is ideally placed to get swift outcomes by taking civil action against counterfeiters, particularly those that operate through a website as opposed to a retail store or market stall. The willingness of the ACCC to proceed on an ex parte basis and to seek urgent interlocutory and asset preservation orders demonstrates that it is serious about eliminating any potential consumer detriment that would arise from the alleged counterfeiting prior to any final hearing.

The ACCC’s case also appears to have been very successful in terms of warning consumers to be very careful in dealing with on-line retailers of allegedly exclusive brands.

One risk of the ACCC deciding to enter this area is that it may send the wrong message to large clothing manufacturers that they can take their counterfeiting complaints to the ACCC, rather than take their own private actions. This could create a significant burden on the ACCC resources given the estimated scale of counterfeiting in Australia - ACAG estimated that in 1999 the total value of counterfeit clothing in Australia was approximately $300 million.

The problem that the ACCC faces in taking on overseas-based counterfeiters is that any remedies that it does obtain cannot be enforced in many of those jurisdictions. As a result, the alleged counterfeiter will be able to simply set up a new website in a different jurisdiction selling the same counterfeit products. A more effective way of dealing with overseas based counterfeiters needs to be found.

Monday, 22 September 2008

Is the Birdsville amendment a dud?


Introduction
The Birdsville amendment (or section 46(1AA) of the Trade Practices Act) has been subject to widespread criticism. Most recently, Allan Fels, the former Chairman of the ACCC, in an article co-authored with Fred Brenchley, made the following statement[1]

Let’s be clear on two aspects of Birdsville. It is bad law. Why? Because it junks the market power and taking advantage concepts that have been the bulwark of competition policy.

The current Chairman of the ACCC, Graeme Samuel has also been critical of the Birdsville amendment[2]
…the last minute inclusion of the so-called Birdsville amendment introduced a number of complexities and legally untested terms that would potentially take years for the courts to clarify – a case of one step forward but perhaps a couple backward.
The Birdsville amendment established a dual track process, whereby a business could potentially have been found guilty of predatory pricing under one part of the Act, yet not under the other, divergent track. While well intentioned, this change was ill conceived and created more problems than it solved by increasing complexity rather than removing it.

Are these criticisms of the Birdsville amendment valid? Has it introduced greater complexity?

Background
The Birdsville Amendment was introduced to the TPA by Senator Barnaby Joyce as a way of providing small businesses with greater protection from predatory pricing. There is a clear relationship between Birdsville and the High Court decision in the Boral section 46 case.[3] In the Boral case the ACCC was successful in proving every element of section 46(1) of the TPA except for market power and taking advantage. In drafting the Birdsville Amendment, it appears that there was an intention to remove the two stumbling blocks identified in Boral to successfully proving a section 46(1) case – ie market power and taking advantage.

Since its introduction to the TPA, the ACCC has not commenced any litigation under section 46(1AA). This is probably not surprising given that in the quotation above, the Chairman of the ACCC was already referring to section 46(1AA) in the past tense as early as June 2008.

More recently the Labor Government introduced a range of amendments to the TPA which would have effectively have repealed the Birdsville amendment and replaced it with a number of changes which it claims would produce greater protection for small businesses. In particular, these amendments would have clarified what constitutes taking advantage for the purposes of section 46, as well as clarifying that the ACCC need not show recoupment to succeed in a predatory pricing case.

The Opposition and independents voted down these proposed amendments in the Senate on 16 September 2008. This ensured that at least for the moment the Birdsville amendment remains on the statute books.

Legislation
Before considering whether the criticisms of section 46(1AA) are valid it is important to set out the relevant legislation and identify the elements of both section 46(1) and 46(1AA).

Section 46(1) provides –
(1) A corporation that has a substantial degree of power in a market shall not take advantage of that power in that or any other market for the purpose of: 
(a) eliminating or substantially damaging a competitor of the corporation or of a body corporate that is related to the corporation in that or any other market; 
(b) preventing the entry of a person into that or any other market; or
(c) deterring or preventing a person from engaging in competitive conduct in that or any other market.
The elements of section 46(1) are as follows –
  1. Corporation 
  2. Market 
  3. Substantial degree of market power in a market 
  4. Take Advantage of market power 
  5. Purpose to achieve either (a), (b) or (c) 
The first element which has to be proven in a section 46(1) case is that a corporation has engaged in relevant conduct. Natural persons and unincorporated entities may also be caught under section 46(1) through use of the state Competition Policy Reform Acts, which extend the operation of Part IV of the TPA to these groups.

The second element is to define the market in which the relevant firm operates. One cannot seek to establish whether a firm has a substantial degree of market power unless one has first defined the market. To do this recourse would be had to the analytical framework for defining markets provided by the ACCC in its Merger Guidelines.

The third element is to prove that the firm’s position in the relevant market gives it a substantial degree of market power. The ACCC’s Merger Guidelines suggest that the relevant firm would need to have a market share of at least 40% to satisfy this requirement. However, in a number of section 46 cases, the ACCC has been successful in establishing a corporation had a substantial degree of market power even though its market share was less than 40%.[4]

The ACCC would decide whether a firm had market power by considering the extent to which the market was characterised by high barriers to entry, low levels of actual and potential import competition, and the absence of countervailing power.

The fourth element is that the corporation has taken advantage of its market power to achieve one of the proscribed purposes. This is the element of section 46(1) which raises the most difficulty. On first glance one would simply assume that taking advantage requires that there be a causal nexus between the market power and the proscribed conduct. This seems a sensible approach because if it were not the case any firm which has market power could be liable for conduct which had the purpose of damaging a competitor. For example a firm with market power may be liable under section 46(1) for damaging its competitor by simply taking legal proceedings against it for breaching its intellectual property rights.

The issue of taking advantage is the source of most of the confusion and complexity in applying section 46(1).

The source of this confusion can be traced to the majority decisions in Melway[5] where the High Court elevated the market power test established by Kaysen and Turner to a test for proving taking advantage. Kaysen and Turner stated[6] -
A firm possesses market power when it can behave persistently in a manner different from the behavior that a competitive market would enforce on a firm facing otherwise similar cost and demand conditions.
The Melway majority translated this into a test for proving taking advantage as follows[7]
To ask how a firm would behave if it lacked a substantial degree of power in a market, for the purpose of making a judgment as to whether it is taking advantage of its market power, involves a process of economic analysis which, if it can be undertaken with sufficient cogency, is consistent with the purpose of s 46.
In other words, to determine whether a firm had engaged in a taking advantage of its market power one should be guided by how a firm without a substantial degree of market power would behave in the market. This is a very odd approach which is not based on any accepted economic theory.

The problem with the approach taken by the High Court in Melway is that it did not define the characteristics of the market in which its hypothetical firm without a substantial degree of market power operates. It appears that what the High Court did in Melway was conclude that because Melway was able to operate an exclusive distribution system when it did not have a substantial degree of market power, that the decision by Melway to retain this system once it acquired a substantial degree of market power could not be considered to be taking advantage.

While the Melway decision may have been correct on the facts of the case, the approach adopted is not capable of broad application, particularly in circumstances where the firm with a substantial degree of market power has implemented exclusive dealing or tying arrangements after it has acquired a substantial degree of market power. Clearly, the Melway test has no application to allegations of predatory pricing by a firm with a substantial degree of market power as pricing below avoidable cost is by definition irrational unless the firm intends to drive out its competitors.

One must conclude that the High Court in Melway erred in effectively elevating the Kaysen and Turner test for determining whether market power exists into a test for taking advantage. Taking advantage in section 46(1) was never intended to do anything more than require a causal nexus between the market power and the proscribed conduct.

The High Court in Melway does not appear to have taken much notice of the US case law, despite citing some of the relevant cases. These cases provide a helpful conceptual framework for assessing market power cases. As stated by Scalia J in Eastman Kodak Co v Image Technical Services Inc[8] -
Where a defendant maintains substantial market power, his activities are examined through a special lens: Behaviour that might otherwise not be of concern to the antitrust laws – or that might even be viewed as pro-competitive – can take on exclusionary connotations when practiced by a monopolist.
The US approach does not assess the conduct of a firm with a substantial degree of market power by reference to what a firm without a substantial degree of market power can do. Rather it takes into account the fact that certain conduct may be offensive to competition because the relevant firm has market power.

The fifth element in proving a section 46(1) case is to show that the corporation had engaged in conduct with the purpose of achieving one of the prescribed purposes. Therefore, even if a firm with a substantial degree of market power used its market power to extract exclusive long term contracts from customers, there would still be a need to show that the firm’s purpose was to eliminate, damage or prevent the entry of a competitor. The Courts are willing to infer purpose from conduct. The classic inference being that predatory pricing (defined as making sales at below avoidable cost) must be for a proscribed purpose as it is otherwise irrational to sell goods or services below avoidable cost.

Section 46(1AA)
Section 46(1AA) provides –

(1AA) A corporation that has a substantial share of a market must not supply, or offer to supply, goods or services for a sustained period at a price that is less than the relevant cost to the corporation of supplying such goods or services, for the purpose of:
(a) eliminating or substantially damaging a competitor of the corporation or of a body corporate that is related to the corporation in that or any other market; or
(b) preventing the entry of a person into that or any other market; or
(c) deterring or preventing a person from engaging in competitive conduct in that or any other market.

The elements of section 46(1AA) are as follows – 
  1. Corporation 
  2. Market 
  3. Substantial share of the market
  4. Supply or offer to supply goods or services 
  5. Sustained period 
  6. Price 
Less than relevant price to corporation of supplying good or service
Purpose to achieve either (a), (b) or (c) It is immediately apparent that in order to establish a contravention of section 46(1AA) three more elements have to be proven than need to be proved to establish a contravention of section 46(1). There are also five elements in section 46(1AA) which are not found in section 46(1) – namely elements (3), (4), (5), (6) and (7). Elements (1), (2) and (8) are mirrored in section 46(1).

Turning to the third element, namely a substantial share of the market, it is apparent that once the market has been defined, it would be quite easy for the ACCC to work out the respective market shares of the firms in that market. Contrary to the substantial degree of market power test in section 46(1), this test appears to be quite straightforward. The term substantial has been considered in numerous cases with the most relevant definition being Lockhart J in Dowling v Dalgety Australia Ltd[9] in which he found that substantial in the context of section 46(1) means “large” or “considerable”.

The fourth element is to show that the corporation has engaged in the supply of goods or services. This also involves a very simple evidentiary burden that could be proved by sales invoices which show that goods or services have been sold.

The fifth element is that the supply of goods or services be for a sustained period. While the term “sustained period” is not defined in the TPA, it is not a difficult concept. The emphasis has to be on a period of time that is not intermittent but continuing for a longer period of time. It would exclude short term sales such as when large firms offer loss leader products. In defining the term, it is likely that consideration would have to be given to the usual sales patterns in the relevant market. For example, if sales occur on a daily basis such as in food retailing, a sustained period is likely to be a shorter period. However if sales are lumpy, occurring every few weeks or months, then a sustained period would be a longer period of time.

The sixth element is to prove the price at which the goods or services have been sold. This could easily be shown by documentary evidence such as the relevant tax invoice provided to the customer.

The seventh element to prove is that the price at which the good or service was sold (ie the figure identified at element six above) was below the relevant price to the corporation of supplying the good or service. On first glance, it seems that any sale of a product below total cost would be caught by section 46(1AA). However a more likely construction is that this element would require proof that the selling price was below avoidable cost.

There can be many problems working out whether a good or service is being sold below avoidable cost mainly because of cost allocation debates. Firms will often argue that costs that have been classified as avoidable should be considered fixed costs, for example labour costs. The fundamental point is that it is no harder to prove below avoidable cost pricing under section 46(1AA) than it would be under section 46(1). Section 46(1AA) has not introduced any added complexity by referring to this below cost pricing test.

In summary, while there are more and different elements to prove to establish a breach of section 46(1AA) than to establish a contravention of section 46(1), it cannot be said that section 46(1AA) is any more complex to prove than section 46(1). In actual fact, by not requiring proof of market power and taking advantage, section 46(1AA) is considerably easier to prove than section 46(1).

Criticisms
The introduction of the Birdsville amendment has not introduced a “number of complexities” or led to “increasing complexity” in terms of pursuing a monopolisation case. Rather it has removed the two main complexities from establishing a monopolisation case and replaced them with concepts which are easier to prove. Section 46(1AA) will be considerably easier to prove than section 46(1).

The criticism voiced by the former Chairman of the ACCC, Professor Fels is also misplaced. Professor Fels claims that the concepts of “market power” and taking advantage” are the “bulwark of competition policy”. However even a cursory review of the anti-competitive provisions of Part IV of the TPA demonstrate that this claim is not correct. Neither of the concepts of “market power” or “taking advantage” appear in any other provision of Part IV. Only section 50 is partly concerned with preventing a firm from obtaining a substantial degree of market power through mergers and acquisitions. However, section 50 is equally concerned with the preventing of concentrated markets on the principle that concentrated markets are more likely to lead to collusion.

Far from being a bulwark of competition policy, the concept of taking advantage is an anomaly, not just in terms of the TPA but also in antitrust law around the world.

Conclusion
In conclusion, the Birdsville amendment should not be considered “bad law”. Rather the section provides the ACCC with a more straightforward method of pursuing predatory pricing cases. It would be also be open to the ACCC to plead section 46(1AA) as the alternative to a predatory pricing case taken under section 46(1). The provisions are not mutually exclusive.

The ACCC has been sitting on its hands long enough in relation to the Birdsville amendment. It is time that it stopped complaining about section 46(1AA) (and stopped talking about the section in the past tense!), and started enforcing it. After all the section was enacted by the Australian Parliament and, until it is repealed, (which is not likely to happen in the near future) constitutes a law of Australia over which the ACCC has jurisdiction. The ACCC has an obligation to enforce the Birdsville amendment. Small business also have a right to expect the ACCC will at least attempt to fulfil its statutory duty by enforcing Birdsville to protect them from predatory pricing in the market.



[1] A Fels and F Brenchley, “Big business led up the Birdsville track”, The Age Online, 20 September 2008 - http://business.theage.com.au/business/big-business-led-up-birdsville-track-20080919-4kay.html
[2] Graeme Samuel, “Delivering for Australian Consumers: making a good Act better”, ACCC Website, 28 June 2008, p. 5 - http://www.accc.gov.au/content/index.phtml/itemId/833067/fromItemId/8973
[3] Boral Besser Masonry v ACCC [2003] HCA 5 - http://www.austlii.edu.au/au/cases/cth/HCA/2003/5.html
[4] For example ACCC v Safeway Stores Pty Limited [2003] FCAFC 149 – approximately 20% market share - http://www.austlii.edu.au/cgi-bin/sinodisp/au/cases/cth/FCAFC/2003/149.html?query=^safeway
[5] Melway Publishing Pty Ltd v Robert Hicks Pty Ltd [2001] HCA 13 - http://www.austlii.edu.au/au/cases/cth/HCA/2001/13.html
[6] Kaysen and Turner, Antitrust Policy (1959) cited by the majority in Melway at para. 42.
[7] Melway, at para. 52.
[8] Cited by the Melway majority at para. 29.
[9] Dowling v Dalgety [1992] FCA 35 at para. 127.