Friday, 20 November 2009

Restrictive supermarket leases: going, going...gone?


Introduction
In September 2009, Mr Graeme Samuel, the Chairman of the Australian Competition and Consumer Commission (ACCC), announced a “major breakthrough for grocery competition in Australia”.[1] The “breakthrough” referred to a deal brokered by the ACCC which saw Coles Myer and Woolworths agreeing not to enforce restrictive provisions in over 700 of their leases with supermarket landlords around Australia (Settlement). Dr Craig Emerson, the relevant Minister also described the Settlement as “pro-competitive”.[2]

The Settlement has many pro-competitive benefits. It also raises a number of questions, including:

  • Why were some existing restrictive provisions preserved for up to five years under the Settlement? 
  • Why were Coles and Woolworths not prosecuted by the ACCC for what appears to be quite blatant anticompetitive conduct? 
  • Why didn’t the ACCC seek pecuniary penalties against Coles and Woolworths for these restrictive lease provisions, particularly in the light of the ACCC’s earlier case against Coles and Woolworths for broadly similar conduct in relation to restrictive liquor agreements? 
The Settlement
The Settlement is contained in two separate section 87B undertakings (Undertakings) from Coles and Woolworths.[3]  These Undertakings are identical in their content. [4]

The Undertakings begin by setting out the relevant background. Reference is made to the ACCC inquiry into the competitiveness of the grocery market conducted in 2008. The Undertakings state that in the course of its inquiry, the ACCC identified the existence of a wide range of restrictive provisions in lease agreements which could prevent the entry of supermarket operators into shopping centres.

The Undertakings also refer to an ACCC’s industry-wide investigation into whether the restrictive provisions uncovered by the ACCC could have the purpose and/or effect of substantially lessening competition in a market. It appears that the ACCC’s investigation is continuing.

Clause 7 of the Undertakings describes a number of the restrictive provisions which the ACCC identified in Coles and Woolworths leases with shopping centre owners. For example, the ACCC identified provisions which:

  • prohibit the lessor from granting a lease agreement to, or allow the entry of, another supermarket operator in the shopping centre in which the relevant (Coles or Woolworths) supermarket is located; 
  • impose a penalty upon the lessor if the lessor grants a lease agreement to, or allows the entry of, another supermarket operator in the shopping centre in which the relevant (Coles or Woolworths) supermarket is located; 
  • prohibit the lessor from granting a lease agreement to another supermarket operator, or to another supermarket operator over a certain floor size, in which the relevant (Coles or Woolworths) supermarket is located. 
The Undertakings then describe the ACCC’s concerns about the restrictive provisions. The Undertakings state that the ACCC had concerns that the making or giving effect to the lease agreements containing such restrictive provisions may have had the purpose, effect or likely effect of lessening competition in various retail grocery markets. In addition, the ACCC was concerned that the restrictive provisions may have had the effect of preventing and/or hindering other supermarket operators from entering and competing in various retail grocery markets.

Finally, the Undertakings set out what Woolworths and Coles have agreed not to do – namely not to:

a) give effect to, or threaten to give effect to, a restrictive provision contained in a lease agreement that is in operation as at the commencement of this Undertaking, after a period of five years from the date at which the relevant (Woolworths or Coles) supermarket commenced trading; or

b) enter into a lease agreement that includes one or more restrictive provisions.

The number of leases with restrictive provisions is not stated in the Undertakings. However, an insight into the extent of Coles and Woolworths’ conduct can be gleaned from the Media Release issued about the Settlement by Minister Emerson on 18 September 2009. In his media release, he stated that:

This pro-competitive agreement means that out of 750 active restrictive leases involving Coles and Woolworths, 602 will cease immediately…the remaining 20 per cent will be gone within five years and no restrictive provisions will be allowed in new stores.[5]
Pro-competitive aspects of settlement
There are clearly a number of pro-competitive benefits arising from the Settlement.

First, Coles and Woolworths have agreed not to give effect or threaten to give effect to any of the existing restrictive provisions in the future (subject to one significant exception discussed below). This is a very important pro-competitive benefit of the Settlement, as it may facilitate the entry of other supermarket operators, such as Aldi, Foodworks and IGA, into shopping centres which were previously monopolised or dominated by Coles or Woolworths. Whether these companies actually end up opening supermarkets in shopping centres will depend on a range of factors, particularly whether there is available space within the existing shopping centre to set up a new supermarket. However, there is now at least a theoretical possibility that such companies will be able to set up competing supermarkets in shopping centres around Australia.


Second, Coles and Woolworths have undertaken not to enter into lease agreements that include “one or more restrictive provisions” in the future. There is no time frame on this future undertaking, which means that Coles and Woolworths will be prevented from entering into such restrictive provisions forever. This is also a very important pro-competitive aspect of the settlement as it provides shopping centre owners with certainty that Coles and Woolworths can no longer insist on the inclusion of restrictive provisions in their leases. However, it appears that the scope of this undertaking is limited to the types of restrictive provisions which are defined in clause 7 of the Undertakings. This means that while Coles and Woolworths are prevented from insisting on the inclusion of the restrictive provisions which are defined in clause 7, they are not prevented from insisting on different types of restrictive provisions.

Third, the Settlement will have the effect of opening shopping centres up to greater competition much more quickly than would have been the case if the ACCC had been forced to litigate the matter. Even if the ACCC litigated this matter successfully, it would have taken a long time, perhaps years, for the ACCC to obtain orders declaring the restrictive provisions to be illegal and void.

Negative aspects of the Settlement

Despite the pro-competitive benefits of the Settlement discussed above, the Settlement also has a significant number of negative aspects.

Preservation of restrictive provisions
The most obvious concern about the Settlement is the fact that it does not apply to restrictive provisions in leases which have been in operation for less than 5 years from the date that the relevant Coles or Woolworths supermarket commenced trading. In other words, the ACCC has effectively permitted Coles and Woolworths to enjoy the benefits of a large number of restrictive provisions for a period of up to five years. As stated in Dr Emerson’s media release, this “carve out” applies to 148 separate leases throughout Australia.

It is not clear why the ACCC acquiesced to this exception. Either the restrictive provisions in the lease agreements are illegal and should be prohibited or they are not – there is no middle ground. The Undertakings contain no justification for this "carve out” and the ACCC, Coles or Woolworths have been quite silent on the reasons for this significant exclusion. It would be helpful if the ACCC were to provide some public explanation of why it agreed to this particular condition.

This condition to exempt some restrictive provisions for up to five years is even more puzzling when one considers the clear statement made by the ACCC in the Undertakings about the potentially anticompetitive effects of the restrictive provisions. In the Undertakings, the ACCC stated that it was concerned that the restrictive provisions:
  • may have substantially lessened competition in retail grocery markets; and 
  • may have prevented and hindered other supermarkets from entering retail grocery markets. 
An effect of the conduct described in the Undertakings is that it was likely to lead to higher prices for consumers. It is basic economic theory that companies seek to exclude competitors from markets so that they can enjoy greater pricing power in those markets.

Accordingly, given the ACCC’s serious concerns about the restrictive provisions, it is difficult to understand why it agreed to allow Coles and Woolworths to continue conduct for a period of up to five years in 148 different locations throughout Australia which may have the effect of (1) substantially lessening competition, (2) excluding competitors from markets and (3) leading to higher grocery prices for consumers.

De-facto authorisation?

A related concern is whether the Undertakings constitute a de-facto authorisation by the ACCC of the restrictive provisions in the 148 leases. By carving out these 148 lease agreements, the ACCC has effectively indicated that Coles and Woolworths’ conduct can continue without any fear of legal action from the ACCC.

This raises the question of whether it is appropriate for the competition regulator to effectively authorise conduct (about which it has serious concerns) without following the established legislative process for authorisation set out in the TPA.[6]

There are three significant differences between the approach which the ACCC took to negotiating the Settlement and the way it would have had to approach the matter had Coles and Woolworths lodged an authorisation application.

First, under the Settlement the ACCC was able to negotiate the terms of the Undertaking with each of Coles and Woolworths behind closed doors, with no public scrutiny. The proposed Undertakings were not issued for public comment prior to them being executed by the parties. However, in an authorisation the entire process is conducted in public with interested parties being given ample time to comment on both the proposed conduct as well as any proposed undertakings.

Second, in the Settlement there is no reference to the net public benefit arising from permitting 148 lease agreements to continue for up to five years. However, in an authorisation, Coles and Woolworths would have had to demonstrate that preservation of these 148 leases was likely to result in a public benefit which outweighed the likely public detriment constituted by any lessening of competition. There is a very strong argument that Coles and Woolworths would not have been able to satisfy this onus in relation to the 148 leases. In fact, there dos not appear to be any public benefit arising from the preservation of these restrictive provisions.

Finally, under the Settlement there does not appear to be any right for potentially disaffected parties such as Aldi, Foodworks or IGA Supermarkets to challenge the ACCC’s decision. However, disaffected parties are able to appeal an authorisation decision to the Australian Competition Tribunal.

Accountability
A further concern with the Settlement is that the ACCC does not appear to have made any attempt to hold either Coles or Woolworths accountable for the anti-competitive harm which their conduct may have caused. It is logical to assume that by excluding competitors from up to 750 markets around Australia, Coles and Woolworths have reaped significant commercial benefits from this absence of competition. It also makes sense that by not having to compete with a variety of competitors in particular markets, Coles or Woolworths have been able to maintain higher prices to consumers than would otherwise have been the case.

Despite the obvious potential for competitive harm to both competitors and consumers, the ACCC has apparently not taken any steps to hold Coles and Woolworths accountable for this potential harm. It appears that Coles and Woolworths are simply being permitted to retain the financial benefits they may have obtained from their anticompetitive conduct.

Antecedents – the Liquor case
Coles and Woolworths have sought to impose restrictive provisions on competitors and potential competitors in the past in not dissimilar circumstances.

In 2005, Liquorland (Australia) Pty Ltd, a fully owned subsidiary of the Coles Myer Group paid a penalty of $4.75 million after it admitted entering into illegal agreements with applicants for liquor licences in NSW.[7] In this case, Liquorland objected to liquor licence applications which had been lodged by new entrants and then proposed a series of restrictive provisions in return for Liquorland’s agreement to withdraw its objection. The purpose of these restrictive provisions was to ensure that the new entrant could not operate, or could not operate effectively, as a competitor in the relevant retail liquor market.
In 2006, the Federal Court found that Woolworths had also have entered into similarly anticompetitive agreements in various NSW retail liquor markets.[8] The court found that the Woolworths’ agreements contained restrictive provisions which had the purpose of substantially lessening competition in various retail liquor markets in NSW. The Federal Court ordered Woolworths to pay a pecuniary penalty of $7 million for entering into these illegal agreements.

Therefore, Coles and Woolworths have engaged in very similar conduct to that described in the Settlement in the past. Liquorland has admitted entering into illegal restrictive agreements which were aimed at excluding competitors from markets, while Woolworths has been found by the Federal Court to have entered into illegal restrictive agreements for the purpose of substantially lessening competition and excluding competitors from markets. Both companies were ordered to pay significant pecuniary penalties for their illegal conduct.

Despite this background, the ACCC has not sought to take legal proceedings against Coles and Woolworths for their conduct in imposing restrictive provisions to prevent competition in retail grocery markets.

It is very difficult to understand why the ACCC took such a different approach in these two matters.

Conclusion
The grocery settlement sets a poor precedent in terms of how the ACCC may choose to settle what appear to be very serious anticompetitive contraventions of the TPA in the future.

The Settlement is alarming if it points the way to how the ACCC will deal with serious contraventions of the TPA in the future. Will the ACCC continue to negotiate settlements in relation to potentially anticompetitive conduct rather than taking legal proceedings and seeking pecuniary penalties? Will the ACCC not pursue litigation and pecuniary penalties against major corporations which have been found by a court to have breached the same provisions of the TPA in the past?

However, of most concern is the fact that in the future companies may be able to obtain de-facto authorisation from the ACCC for some of their potentially illegal conduct without being required to apply formally for authorisation or indeed without having to provide any public interest justification for being granted such a generous dispensation by the ACCC.

[1] Supermarket agreement opens way for more competition, ACCC News Release, dated 18 September 2009 - http://www.accc.gov.au/content/index.phtml/itemId/893478
[2] Competition barriers to major supermarkets being torn down, Media Release by The Hon Dr Craig Emerson, Minister for Innovation, Industry, Science and Research, dated 18 September 2009 - http://minister.innovation.gov.au/Emerson/Pages/COMPETITIONBARRIERSTOMAJORSUPERMARKETSBEINGTORNDOWN.aspx
[3] Section 87B is an administrative tool which permits the ACCC to accept undertakings from businesses to settle investigations, including consumer protection, restrictive trade practices and merger investigations. Though s87B undertakings are not approved or otherwise brought to the attention of the Federal Court when they are executed, they can be enforced in the Federal Court in the event that its terms are breached.
[4] Undertaking to the ACCC given for the purposes of section 87B by Coles Group Limited, dated 17 September 2009 - http://www.accc.gov.au/content/item.phtml?itemId=893471&nodeId=a2da716b9168b7809f0d8eb136328eb9&fn=Undertaking.PDF and Undertaking to the ACCC given for the purposes of section 87B by Woolworths Limited, dated 17 September 2009 - http://www.accc.gov.au/content/item.phtml?itemId=893470&nodeId=09c305f68e7f97f331d7f32a15c7a31e&fn=Undertaking.PDF.
[5] See footnote 2 above.
[6] The Trade Practices Act 1974 provides a process whereby business can apply to the ACCC to have potentially illegal conduct authorised. This regime only applies to the restrictive trade practices provisions of the TPA, including mergers, but excluding misuse of market power. The ACCC can only authorise conduct if it is satisfied, after a period of public consultation that the conduct delivers a net public benefit. The relevant test for agreements which may breach section 45 of the TPA is that the conduct is likely to result in a public benefit which outweighs the likely public detriment constituted by any lessening of competition. See Authorisations and Notifications: A Summary, ACCC, January 2007 - http://www.accc.gov.au/content/item.phtml?itemId=776052&nodeId=6a570b34b0d37c0545766f52476ca354&fn=Authorisations%20and%20notifications:%20A%20summary.pdf
[7] See Federal Court penalised Liquorland $4.75 million for anticompetitive liquor deals, ACCC News Release dated 31 May 2005 - http://www.accc.gov.au/content/index.phtml/itemId/687035/fromItemId/2332. See also ACCC v Liquorland (Australia) Pty Ltd [2005] FCA 683 - http://www.austlii.edu.au/cgi-bin/sinodisp/au/cases/cth/FCA/2005/683.html?query=^liquorland%20%20%20competition.
The author was responsible for running this particular investigation and litigation while employed as a Director at the ACCC.
[8] See Woolworths penalised $7 million for anticompetitive liquor deals, ACCC News Release, dated 22 December 2007 - http://www.accc.gov.au/content/index.phtml/itemId/773813/fromItemId/622289. See ACCC v Liquorland and Anor [2006] FCA 826 - http://www.austlii.edu.au/cgi-bin/sinodisp/au/cases/cth/FCA/2006/826.html?query=^liquorland%20%20%20competition.
The author was responsible for running this particular investigation and litigation while employed as a Director at the
ACCC.

Sunday, 4 October 2009

Does the ACCC need Public Warning Powers?


This is an edited version of a presentation I gave at the Trade Practices Workshop of the Business Law Section, Law Council of Australia on 15 August 2009 at The Sebel Heritage, in the Yarra Valley, Victoria.

Introduction
The proposed introduction of public warning powers to the Trade Practices Act 1974 (TPA) has raised considerable concern among business groups.[1] The main concern which has been expressed is that the ACCC may use the power to “name and shame” reputable companies, rather than fly by night operators.[2] Some groups have also complained that the introduction of this power is contrary to the right of individuals to be considered innocent until proven guilty.

In this article I will outline the new public warning powers and then discuss how these powers could be implemented by the ACCC in particular circumstances to improve consumer protection outcomes. To illustrate the benefits of a public warning power to the ACCC, I will be referring to two particular ACCC investigations in which such a power would have provided considerable benefit had it been available at the relevant time.[3] I conclude that much of the concern about the introduction of the public warning power is misplaced, as the ACCC is likely to use this power only in the most blatant cases of false and misleading conduct.

Background
In the Australian Consumer Law discussion paper the public warning power was described as a “name and shame power”.[4] The paper stated that public warnings would typically be issued to inform the public of potentially harmful conduct taking place in the very short term. Such warnings would usually be directed to ‘fly by night’ operators, itinerant traders and financial, investment and property spruikers and advisors who often move across state and territory borders.[5]

Implicit in the above discussion of the public warning power was a view that the ACCC requires effective powers to respond more quickly to blatant contraventions of the consumer protection laws. In other words, there is a need to warn consumers about the conduct of dishonest traders at an earlier stage, and well before the commencement of litigation against that trader.

The discussion paper also identifies that a number of existing state and territory fair trading laws contain public warning powers. Therefore, the discussion paper argues that, in the interests of consistency, such a power should be introduced into the TPA.

Proposed legislation
The following is the text of proposed public warning power:

86DA Commission may issue a public warning notice
(1) The Commission may issue to the public a written notice containing a warning about the conduct of a corporation if:
(a) the Commission has reasonable grounds to suspect that the conduct may constitute a contravention of a provision of Part IVA, V or VC; and 
(b) the Commission is satisfied that one or more persons has suffered, or is likely to suffer, detriment as a result of the conduct; and 
(c) the Commission is satisfied that it is in the public interest to issue the notice. 
(2) Subsection (1) does not apply to the supply or possible supply, or the promotion by any means of the supply or use, of services that are financial services. 
(3) Without limiting subsection (1), if 
(a) a person refuses to respond to a substantiation notice given to the person, or fails to respond to the notice before the end of the substantiation notice compliance period for the notice; and
(b) the Commission is satisfied that it is in the public interest to issue a notice under this subsection;
the Commission may issue to the public a written notice containing a warning that the person has refused or failed to respond to the substantiation notice within that period, and specifying the matter to which the substantiation notice related.
The elements of the proposed public warning power are -
the ACCC must have reasonable grounds to suspect that conduct being engaged in may constitute a breach of the TPA and
one or more persons are likely to suffer detriment as a result of the conduct and the ACCC is satisfied that it is in the public interest to issue the notice.

The first element of the new public warning power is that the ACCC must have reasonable grounds to suspect that conduct is in breach of the TPA. It would appear that the test of whether the ACCC has “reasonable grounds to suspect” a breach of the TPA is an objective test. In practice, it will not be very difficult for the ACCC to satisfy this first element due to the use of the word “suspect” rather than “believe” in the legislation.

The second element is that one or more persons are likely to suffer detriment as a result of the conduct. The draft legislation does not specify that the consumer must actually suffer detriment, but rather that it be likely that the consumer will suffer detriment. This approach is appropriate given that the entire rationale for the new power is to prevent consumers from suffering detriment.

The third element of the legislation is the most onerous aspect in terms the ACCC utilising the public warning power. This element requires that the ACCC be satisfied that it is in the public interest to issue a public warning. This will require that the ACCC balance up the utility of issuing a public warning notice with other litigation strategies such as commencing rapid court action or seeking ex parte injunctions.

In applying the public interest test, it may also be incumbent on the ACCC to consider the negative impact which issuing a public warning notice may have on a trader’s ability to continue trading. In some circumstances, a public warning notice may deter such a large number of prospective consumers from dealing with a trader that it can no longer continue to trade. While such a development may “protect” new customers from dealing with the trader, it could also disadvantage existing customers who have bought a good or service from that trader.

Finally, the legislation provides that the ACCC can issue a notice where a trader has failed to respond to a substantiation notice. In these circumstances, the ACCC must also believe it is in the public interest to issue a notice.

Case Study 1 – Phoenix firms
The first case study relates to an individual, Daniel Albert. Mr Albert set up number of companies which sold franchises in the period between 2002 and 2004. Unfortunately, after selling the franchises and obtaining large amounts of money from the franchisees, Mr Albert would move the money off shore and liquidate the companies.

The first company he set up was Photo Safe which was touted as a revolutionary new way of duplicating and storing photographs and negatives on compact disc and/or the internet. The second company was The Data Vault which allegedly provided a service to facilitate the secure storage of data from a person’s computer. The final business was ie Networks which provided internet access terminals and mobile download terminals by which consumers could access the internet, their email account, send text messages and download mobile phone ring tones.

Mr Albert promoted each of these franchisees in rapid succession and obtained between $60,000 and $160,000 from each unsuspecting franchisee. He made various representations to these franchisees, including that: 

  • there was a high level of demand in the market for the franchisee’s services; 
  • the franchisees were likely to be very profitable; 
  • a high level of support would be provided by the Albert companies to the franchisees, including expenditure on national advertising campaigns; and 
  • the Albert companies had entered into agreements with major national retailers to place franchisee equipment in their stores. 
Unfortunately, all of the above representations (and many more representations) proved to be entirely false.

The difficulty the ACCC faced in this matter was that as soon as it had collected evidence about one Albert company, the company would be closed down by Albert. Shortly after, the ACCC would hear reports that Albert had set up a new company, which was engaging in quite similar conduct to the earlier company. The ACCC would then commence an investigation into the new conduct until that company was in turn closed down and a new company started up.

This was very frustrating situation for the ACCC as no sooner had it obtained evidence about one company, it would be closed down. The ACCC would then have to commence a new investigation into the new company to obtain evidence to prosecute the Albert’s most recent conduct.

The ACCC eventually commenced legal action against Albert in April 2005.[6] However, by this time, Albert had obtained approximately $3 million in franchise fees from various franchisees.

As soon as the ACCC commenced legal proceedings, Albert and Greg Zimbulis, a sales manager indicated their willingness to consent to all of the ACCC’s orders which including extensive declarations and injunctions. The main aim of the ACCC in commencing legal proceedings had been to obtain extensive injunctions, which would prevent Albert from engaging in similar conduct in the future. Unfortunately, the Federal Court refused to grant any injunctions at all – as a result, the ACCC obtained over 100 declarations against Albert of serious contraventions of the TPA but not even one injunction.[7]

This would have been an ideal case for the ACCC to use a public warning power (had such a power been available). The ACCC would have been able to issue a public waning power when Albert liquidated his first company and set up his second company. At this particular time, the ACCC held a great deal of evidence demonstrating that Albert was making blatant misrepresentations about his business operations. Therefore, the ACCC would have been quite confident to issue a public warning notice at this time as it clearly would have met the public interest test in the legislation.

In addition, had the ACCC been able to issue a public warning at an early stage, it could have prevented many franchisees from subsequently signing up with Albert and losing their money. This is because the public warning notice could have been issued up to 12 months before the date on which the ACCC did ultimately issue a type of “public warning” – namely a media release announcing that the ACCC had commence legal action against Albert.

This case demonstrates the fact that the ACCC often has a considerable amount of evidence in relation to a trader’s illegal conduct well before it is in a position to commence legal proceedings. In many cases, the ACCC is faced with a dilemma of whether it should commence legal proceedings against historical conduct by a trader about which it has obtained evidence, or rather, whether it should focus its efforts investigating new conduct by the same trader with a view to preventing that conduct.

Access to a public warning power would allow the ACCC to take both approaches – that is, to issue a public warning concerning a trader that is engaging in a new scam, while at the same time, focusing its efforts and resources on commencing legal proceedings against that same trader for their past dishonest conduct.

Case Study 2 – the elaborate hoax
The second case study relates to a company called L&L Supply Pty Ltd which operated in Australia between 2003 and 2005. 
L&L Supply was a small company based in Newcastle about which the ACCC had a handful of complaints. The company had never come to the ACCC’s attention until a former disgruntled employee called the ACCC to explain the conduct which L&L Supply was engaging in.

This whistleblower explained to the ACCC that the Newcastle business was simply a front for a much larger scam – ie it was responsible for despatched packing tape to customers and processing payments. However, the heart of the operation was based in Florida in the US where an elaborate hoax was being perpetrated against Australian businesses.

The 
L&L Supply scam operated as follows. A person from the L&L Supply call centre would call a procurement manager of an Australian business and claim to be the daughter of the recently deceased owner of L&L Supply. She would claim that her father had recently passed away and that she had been forced to take over the business of L&L Supply. She would then explain that as she was not interested in continuing her father’s business (ostensibly because she was a qualified medical doctor), she was proposing to liquidate the stock at bargain basement prices.

The
L&L Supply caller also claimed to the procurement manager that her father had been a very good friend of CEO/MD/Chairman of the company she was calling. She would then claim that she had spoken to the CEO/MD/Chairman of the company who had put her through to the procurement manager with a promise that the company would “help her out” by placing an order.

In many cases, the procurement officer would accept the story of the person from 
L&L Supply and place an order. The procurement officer would not check if the story was true as they were reluctant to call the CEO/MD/Chairman of the company and question them about the alleged conversation.

The truth of the matter was quite different:

  • the owner of L&L Supply was not deceased;
  • the person calling the Australian business was not the daughter of the deceased owner;
  • the deceased owner did not know the CEO/MD/Chairman of the relevant company;
  • the daughter of the deceased owner had not spoken to the CEO/MD/Chairman of the company;
  • the CEO/MD/Chairman of the company had not agreed to help L&L Supply out by placing an order; and
  • the packing tape was not being sold at bargain basement prices.
The whistleblower advised the ACCC that L&L Supply were banking between $30,000 and $40,000 a week in tape sales. At $2000 a sale, that meant that between 15 and 20 companies were falling for the L&L Supply hoax each week. In addition, over the course of L&L Supply’s operations had grossed sales of over $1 million, most of which had been transferred overseas.

The ACCC commenced legal action against 
L&L supply in March 2005.[8] It sought ex-parte orders freezing L&L Supply’s bank account and other urgent interlocutory orders. L&L Supply did not contest the ACCC’s case.[9]

This case demonstrates that access to a public warning power would have made a significant difference in reducing consumer detriment from this scam.

Even though the evidence from the whistleblower was very strong, the ACCC was not able to commence legal proceedings immediately. The ACCC first needed witness statements from both the procurement officers whom the 
L&L Supply person had spoken to as well as the various CEO/MD/Chairman who had allegedly authorised the order. Obtaining these statements took some time, particularly as the ACCC had to obtain statements from approximately 15 different companies to demonstrate that L&L Supply was engaging in a pattern of dishonest conduct.

During the time that the ACCC was obtaining this evidence, L&L Supply were continuing their activities and regularly transferring funds to overseas bank accounts from its Australian bank account.

In this case, the period from the initial evidence from the whistleblower to commencing legal proceedings was approximately three months. Had the ACCC had a public warning power, it could have warned the public about 
L&L Supply’s conduct at a much earlier stage than when it issued a media release announcing the commencement of legal proceedings. This would have prevented a many Australian businesses from falling foul of L&L Supply’s scam.

Conclusions
Public warning powers are needed by the ACCC to combat both phoenix operations and blatant scams. In the cases described above, the ACCC had very strong evidence at an early stage to prove that the trader was engaging in illegal conduct. However, the period between obtaining this initial evidence and being in a position to commence legal proceedings was between 3 and 12 months. During this period, each of the traders was able to mislead many consumers, obtain significant sums of money from these consumers and move most of this money overseas.

The concern expressed by some businesses that the public warning powers may be used against “reputable firms” is not a valid concern. The ACCC must look at the conduct of the company in deciding to use its public warning power and not the identity of the company. The ACCC should use its public warning powers against any company which is engaging in blatant false and misleading conduct, whether it is a Top 100 company or a fly by night operator. In reality, “reputable” companies are very unlikely to engage in the type of blatant false and misleading conduct against which the ACCC will be seeking to use its public warning powers.

I believe that there is an argument for establishing a mechanism to allow companies which have been inappropriately “named and shamed” through a public warning notice to seek redress. Such redress should only apply where it can be demonstrated that the ACCC issued a public warning for an improper purpose or in bad faith or alternatively in circumstances where the public interest did not support the issuing of the public warning notice.

The ACCC should not be held liable for issuing a public warning which proved in hindsight not to have been justified, when all the objective factors on which the ACCC relied when it issued the public warning pointed the other way. Redress should take the form of an apology and/or financial damages. Such a regime would ensure that the ACCC uses its new power to issue public warnings wisely.

The public warning power is a valuable addition to the ACCC’s investigatory powers. It will allow the ACCC to be more proactive in warning consumers not to deal with particular traders. As a result, the level of consumer detriment caused by disreputable traders will be significantly reduced. However, this will only occur if the ACCC takes a robust and consumer focused approach to using its new power.


[1] See http://www.treasury.gov.au/contentitem.asp?ContentID=1501&NavID for copies of submissions lodged concerning The Australian Consumer Law.
[2] See submission of Law Council of Australia - http://www.treasury.gov.au/documents/1501/PDF/LCA-Trade_Practices_Committee.pdf, page 14.
[3] I was the ACCC Director in charge of each of these investigations at the relevant time.
[4] See An Australian Consumer Law - Fair Markets – Confident Consumers, 17 February 2009 - http://www.treasury.gov.au/documents/1484/PDF/An_Australian_Consumer_Law.pdf
[5] Ibid., p. 55.
[6] See ACCC media release entitled “ACCC acts over alleged $3 million franchising scams” - http://www.accc.gov.au/content/index.phtml/itemId/679001/fromItemId/2332
[7] See ACCC v Albert [2005] FCA 1311 - http://www.austlii.edu.au/cgi-bin/sinodisp/au/cases/cth/FCA/2005/1311.html?query=^albert%20%20%20accc
[8] See ACCC media release entitled “ACCC freezes bank account of alleged international office supply scam” - http://www.accc.gov.au/content/index.phtml/itemId/663197/fromItemId/2332
[9] See ACCC media release entitled “International packing tape scam mislead customers” - http://www.accc.gov.au/content/index.phtml/itemId/721100

Tuesday, 30 June 2009

Clarity in Pricing: TPA changes may muddy the waters


This is an updated version of an article which first appeared in the Law Society Journal, May 2009, Vol 47, pp. 48-52.

Introduction
Since being elected, the Rudd Government has been active in exploring ways to amend the Trade Practices Act 1974 (TPA) to prohibit different types of business conduct. For example, the Federal Government has moved quickly to introduce legislation to criminalise hard-core cartels with a maximum jail term of 10 years.[i]

The federal government has also recently issued a report recommending the creation “an Australian Consumer Law” which, amongst other changes, is likely to give the ACCC a range of new powers to protect consumers, such as the ability to seek civil penalties and disqualification orders, and to issue public warning powers and infringement notices.[ii]

Amongst this flurry of activity, another very important change to the TPA has passed largely unnoticed. The federal government has introduced new laws, which came into effect on 25 May 2009, which regulate the way that businesses can advertise the prices of their goods and services.

The lack of attention to these proposed laws amongst businesses and legal practitioners is particularly surprising given that the legislation will introduce significant criminal penalties for failing to advertise the single price of goods and services. In This article will outline the key provisions of the legislation, the Trade Practices Amendment (Clarity in Pricing) Act 2008 (CIPA)[iii] and explore the implications for business.

Background

Currently, under the TPA, there is an obligation to state the cash price for goods and services in certain circumstances. Section 53C provides that –
A corporation shall not, in trade or commerce, in connection with the supply or possible supply of goods or services or in connection with the promotion by any means of the supply or use of goods or services, make a representation with respect to an amount that, if paid, would constitute a part of the consideration for the supply of the goods or services unless the corporation also specifies the cash price for the goods or services.

The current s.53C places an obligation on businesses to state the cash price for goods or services where the business represents an amount which would constitute a part of the consideration. By implication, s.53C requires businesses to state the full cash price for good and services.

Section 53C was only enforced sporadically by the Australian Competition and Consumer Commission (ACCC) prior to 2000. However, in 2000, the section took on particular importance with the introduction of the Goods and Services Tax (GST).[iv]

During this period, the ACCC relied heavily on s.53C to force businesses to show the full cash price for goods and services, inclusive of the GST. In fact, s.53C became the ACCC’s major weapon in preventing businesses from representing GST-exclusive prices to their customers.

The ACCC preferred to use s.53C rather than s.52 of the TPA to achieve GST-inclusive pricing because, under the former section, there was no obligation on the ACCC to demonstrate that the conduct was misleading or deceptive. All the ACCC had to prove to establish a contravention of s.53C was that the business had failed to represent the full cash price in circumstances where the business has represented part of the consideration.

One implication of the ACCC’s approach to s.53C was that it did not distinguish between representations aimed at consumers and representations aimed at businesses. Therefore, during the GST period the ACCC would often require businesses to represent their prices as GST-inclusive even when they were supplying goods or services exclusively to business consumers.

Many business groups were highly critical of the ACCC’s position on advertising the GST in business-to-business transactions. These groups argued that businesses should not be required to represent GST-inclusive prices in business-to-business transactions because the GST component was irrelevant to businesses which could claim an input tax credit. In other words, business customers were only interested in knowing the price net of GST.

While the ACCC understood the concerns of these business groups, it was faced with a dilemma. A significant number of complaints received by the ACCC in the GST period about GST-exclusive advertising came from small businesses which claimed that they had been misled by other businesses advertising GST-exclusive prices. The picture became even more confusing in industries where some businesses advertised GST-exclusive prices and others advertised GST-inclusive prices.

Indeed, on more than one occasion, the ACCC wrote to a business which was advertising GST-exclusive prices to other businesses, only to be told that they had recently changed from GST-inclusive advertising because their competitors were advertising GST-exclusive prices. When the ACCC pressed these businesses to explain why they had felt the need to change, they claimed they had to change to GST-exclusive pricing because they were losing too many customers to competitors which were advertising GST-exclusive prices. These types of stories provided the ACCC with a basis for concluding that many small businesses may in fact be in a similar position to consumers in terms of being misled by GST-exclusive advertising.

Reasons for the Clarity in Pricing Act

In the Explanatory Memorandum for the CIPA, the justification for the legislative change was based on the perceived shortcomings of the interpretation placed on sv53C by the Federal Court in two cases taken by the ACCC.

In the first case, ACCC v Dell Computers Pty Limited,[v] the ACCC alleged that Dell had breached s.53C by not stating the full cash price of their computers because of not including the mandatory delivery charges. In this case, Justice Branson held that a statement to the effect of “$1999 plus $99” was sufficient to satisfy the requirements of s.53C of stating the full cash price.

In the second case, ACCC v Signature Security Group Pty Limited,[vi] the ACCC alleged that Signature Security had breached s.53C by advertising GST-exclusive prices for various security services. In this case, Justice Stone found that the expression “$295 plus GST” was a compound statement of price which did not contravene s.53C.

Based on the outcome in these two cases, the federal government concluded that s.53C was not adequate to achieve the broader goal of ensuring that businesses advertised and quoted the full price for goods and services. Accordingly, the government identified the need for specific legislation, namely the CIPA, to resolve this perceived problem.

Trade Practices Amendment (Clarity in Pricing) Act 2008[vii]
The CIPA has repealed the existing s.53C and replace it with the following provision –
(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 (the relevant person); or
(b) the promotion by any means of the supply of goods or services to a person (the relevant person) or of the use of goods or services by a person (the relevant person);
make a representation with respect to an amount that, if paid, would constitute a part of the consideration for the supply of the goods or services unless the corporation also:
(c) specifies, in a prominent way and as a single figure, the single price for the goods or services; and
(d) if, in relation to goods;
(i) the corporation does not include in the single price a charge that is payable in relation to sending the goods from the supplier to the relevant person; and
(ii) the corporation knows, at the time of the representation, the minimum amount of a charge in relation to sending the goods from the supplier to the relevant person that must be paid by the relevant person;
specifies that minimum amount.
The main difference between the existing s.53C and the new s.53C is that businesses will be required to specify the full price for the goods or services as a single figure, in a prominent way.

Subsection 53C(7) defines the term “single price” as “the minimum quantifiable consideration for the supply concerned at the time of the representation concerned...”

The subsection lists the following types of charges which would be covered by the term “single price” – namely, taxes, duties, and levies. Charges which are payable at the option of the purchaser are excluded from the definition of “single price”.

Subsection 53C(4) states that a price will be specified in a prominent way if the single price is “at least as prominent as the most prominent of the parts of the consideration for the supply”. This would seem to indicate that the single price will have to be in the same or larger font than any representation of a component of the single price and
no component of the single price can be represented in a more prominent way than the single price by the use of such devices as bold font or underlining. A further implication of subsection 53C(4) is that the use of asterisks may no longer be permitted as, by using an asterisk, the single price will not be as prominent as the component prices, if the single price is located at the bottom of the advertisement.

Businesses will not be required to specify charges for delivering goods to a customer as part of the “single figure”. However, businesses must specify the minimum amount of any delivery charge which will be incurred by the customer. The reason for this exception is that delivery charges often fluctuate depending on where the customer is located. Accordingly, it would be impossible for a business to advertise the single figure inclusive of delivery for every potential customer location.

Subsection 53C(3) states that the obligation in subsection 53C(1) does not apply when the representation is made exclusively to a body corporate. While this would appear to exclude business-to-business transactions, this is not the case as representations to unincorporated businesses such as sole traders and partnerships are not exempted by s.53C(3). For example, price representations made to large legal, medical or accounting partnerships would have to comply with s.53C(1).

In addition, the requirement that the price representation must be made exclusively to a body corporate to qualify for the exemption contained in s.53C(3) is likely to broaden the application of the legislation. Even if a representation is made to a large number of incorporated businesses, if the representation is also made to even one sole trader or partnership, the exemption in s.53C(3) would not apply.

One limiting principle to the scope of s.53C is contained in subsection 53C(6) which states:
A reference in this section to goods or services is a reference to goods or services of a kind ordinarily acquired for personal, domestic or household use or consumption.
This subsection will restrict the scope of s.53C(1) to goods and services ordinarily acquired for personal, domestic or household use or consumption. This will automatically exclude a wide range of business-to-business transactions, where the goods or services are clearly of a commercial character. However, the provision will also introduce some added complexity, as it will mean that a preliminary step to determining whether s.53C applies in a particular situation, will be to define whether the relevant goods or services are “of a kind ordinarily acquired for personal, domestic or household use or consumption”.

Subsection 53C(5) excludes services supplied under contract from s.53(4) if a number of conditions are satisfied

1. the contract provides for the supply of services for the term of the contract;

2. the contract provides for periodic payments for the services to be made during the term of the contract;

3. if the contract also provides for the supply of goods – the goods are directly related to the supply of the services.

Section 53C(4) will not apply to services supplied under a contract which are paid for through periodic payments. The supply of goods under such contracts will also be exempt where the first two conditions are satisfied and the supply of the goods is directly related to the supply of services.

The exemption in s.53C(5) operates to relieve a business from ensuring that any component of the single price be as prominent as the single price. For example, goods and services which satisfy the elements of s53C(5) can be advertised showing the GST-exclusive component of the price in large, prominent writing and the single, full price in smaller, less prominent writing.

The most obvious area where this exemption will apply is in the advertising of mobile phone plans. These advertisements usually show a prominent headline price for the mobile phone if a particular plan is entered into and a single price of the plan over the life of the contract in much smaller and less prominent writing. S.53C(5) means that this practice can continue.

The ACCC is able to seek a range of civil remedies for a breach of the new s.53C including injunctions, declarations, compensation, corrective advertising and non-punitive orders. Financial penalties will not be available for a breach of s.53C.

The CIPA also makes it a criminal offence to fail to represent a single price. Under s.75AZF(1) it will be a criminal offence to “...make a representation with respect to an amount that, if paid, would constitute a part of the consideration for the supply of goods or services”. Section 75AZF is effectively identical to s,53C in all respects, with one major exception - the maximum criminal penalty for contravening s.75AZF is $1.1 million for a corporation and $220,000 for an individual.

Implications for business
The main implication of the CIPA for businesses is that they will be exposed to legal action, including potentially a criminal prosecution, for failing to specify a single price for their goods and services. With maximum criminal fines of $1.1 million for a single instance of failing to represent the single price for goods or services, corporations must ensure that they take a great degree of care when making price representations in their advertising, including newspaper advertisements, promotional brochures, price lists, on their web-sites and even when providing prices verbally.

While it is highly unlikely that the ACCC would decide to refer a brief to the Commonwealth Director of Public Prosecutions for a breach of s.75AZF unless the business had engaged in very blatant conduct or was a repeat offender, the fact that such serious criminal penalties apply to this type of conduct is cause for concern. For example, businesses could be exposed to liability under s.75AZF where they have inadvertently failed to represent a single price to a customer because they did not know that particular customer was unincorporated. Furthermore, liability may depend on whether a particular good or service is properly characterised as “ordinarily acquired for personal, domestic or household use or consumption.”

An example of conduct which would be subject to the CIPA is the supply of a price list for office products by a large multinational office supply company to a large accountancy partnership. It would appear that the representation of prices in this situation would be caught by the CIPA because the goods are of a kind ordinarily acquired for personal, domestic or household use and the recipient of the price list is not incorporated.

A further implication for business arising from the CIPA will be the need for businesses to potentially prepare both GST-inclusive and GST-exclusive price lists depending on the nature of the goods sold. If the business sells products of a kind ordinarily acquired for personal, domestic or household use or consumption as well as commercial products, it may need to prepare two different price lists. The need for different price lists may also arise where companies deal with both incorporated and unincorporated business customers. It may be more prudent for such businesses to simply use GST-inclusive price lists for all their goods and services and customers to avoid any potential problems under the new s.53C.

The CIPA is likely to have a significant impact on the way businesses advertise their goods and services. Unfortunately, the CIPA is unnecessarily complex and has failed to exclude many business-to-business transactions from its scope. As a result, when preparing price advertisements and price lists. businesses will have to consider carefully both the nature of the products they sell to determine whether they may be exempt, and the types of customers they are likely to reach with their advertising.



[i] See http://www.treasury.gov.au/contentitem.asp?ContentID=1330&NavId=037
[ii] See An Australian Consumer Law: Fair Markets – Confident Consumers,http://www.treasury.gov.au/contentitem.asp?NavId=&ContentID=1484
[iii] For downloadable versions of the CIP, Explanatory Memorandum and details of the legislative history see:http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id:%22legislation/billhome/r3090%22
[iv] The author was the ACCC’s National GST Enforcement Coordinator during the GST period. Accordingly, the author’s observations concerning the ACCC’s enforcement of section 53C during this period are based on his personal experience while at the ACCC.
[v] (2002) FCAFC 434.
[vi] (2003) FCA 3.
[vii] The acknowledges the insights provided by Geoff Taperell, DLA Phillips Fox about the operation of the CLA in his presentation entitled “Consumer Reforms – The emerging issues that will impact your business” given at the Inaugural Thomson Reuters Competition and Trade Practices Summit held in Sydney on 12 and 13 March 2009.



Saturday, 16 May 2009

Blast from the Past Case Summary


American Banana Co. v United Fruit Co. 213 US 347 (1909)
The “Blast from the Past Case Summary” is a new feature for this blog. I would like to feature interesting and remarkable cases that are sometimes overlooked in antitrust and consumer protection law textbooks.
The first case in this series is American Banana Co. v United Fruit Co. which was decided by the US Supreme Court at the turn of the century with the legendary Justice Oliver Wendell Holmes delivering the Court’s judgment. I found the most striking aspect of this case to be the extreme lengths which United Fruit Company went to try to sabotage their competitor, American Banana.

Facts: The plaintiff, American Banana Company (American), alleged that prior to setting up its own company, the plaintiff, United Fruit Company (United) had engaged in a concerted scheme to monopolise the US banana trade. American alleged that United had acquired a number of its major competitors with the aim of reducing competition. United was also accused of entering into restrictive agreements with its remaining competitors to regulate the quantity of bananas to be purchased and the price to be paid. United set up a selling company with its competitors which fixed the prices of all bananas sold by the combining parties.

In 1903, a person called McConnell set up a banana plantation in Panama which at that time was part of the United States of Columbia. He also started building a railway to facilitate the export of his bananas. After setting up his plantation, McConnell was approached by United and advised that he had to either enter into a restrictive agreement with United or cease his business. McConnell refused.

Two months later, at the alleged instigation of United, the Governor of Panama recommended to his government that the territory through which McConnell’s railroad was to run be transferred to the administration of Costa Rica. This recommendation was accepted by the government of Panama. Subsequently, United and the government of Costa Rica started to interfere with McConnell’s operations.

In June 1904 (after a civil war in which Panama revolted and become an independent state), American acquired McConnell’s business and continued with the construction work. However, in July, United persuaded Costa Rica soldiers and officials to seize part of the American plantation and part of its banana inventory. Construction and operation of American’s plantation and railway also ceased.

In August 1904, a person called Astua took ex-parte proceedings in a Costa Rica court claiming he was the lawful owner of the American banana plantation. It would appear that Astua took this action at the instigation of United. Astua obtained judgment that he was the owner of the American plantation. Subsequently, representatives of United bought the American plantation from Astua.

United approached the government of Costa Rica to ask them to withdraw their soldiers from the plantation. Unfortunately, for United, the government of Costa Rica did not withdraw its soldiers and remained in possession of the plantation.

American took action seeking treble damages for a breach of section 1 of the Sherman Act against United and the government of Costa Rica.

Issues: Does the Sherman Act apply to the acts of United towards American banana interests in Panama and Costa Rica? Could the acts of the governments of Panama and Costa Rica be subject to an anti-trust suit under the Sherman Act?

Decision: The US Supreme Court decided that the Sherman Act did not apply to the acts of United towards American in Panama and Costa Rica. In his judgment, Justice Holmes stated:

For another jurisdiction, if it should happen to lay hold of the actor, to treat him according to its own notions rather than those of the place where he did the acts, not only would be unjust, but would be an interference with the authority of another sovereign, contrary to the comity of nations, which the other state concerned justly might resent.

It is apparent that this statement of principle by Justice Holmes no longer represents good law as far as the extraterritorial reach of US antitrust laws is concerned. It is now well established that US antitrust laws do have extraterritorial application based on whether the relevant overseas conduct has an effect on US commerce. This “effect” test for determining jurisdiction was first formulated in United States v Aluminium Company of America (ALCOA) 148 F 2d 416 (2nd Cir., 1945).

Justice Holmes also denied American’s claims against the government of Costa Rice on the following basis –

The fundamental reason why persuading a sovereign power to do this or that cannot be a tort is not that the sovereign cannot be joined as a defendant or because it must be assumed to be acting lawfully...The fundamental reason is that it is a contradiction in terms to say that, within its jurisdiction, it is unlawful to persuade a sovereign power to bring about a result that it declares by its conduct to be desirable and proper. It does not, and foreign courts cannot, admit that the influences were improper or the results bad. It makes the persuasion lawful by its own act. The very meaning of sovereignty is that the decree of the sovereign makes law.

In other words, an antitrust action directed against the acts of a sovereign cannot be successful, as the acts of the sovereign, within its jurisdiction, cannot be held to be unlawful. Whenever a sovereign acts to pass a law or achieve some other result, these acts are lawful if done within the sovereign’s jurisdiction.

Justice Holmes may have stated the rule concerning the lawfulness of sovereign acts too broadly. In many jurisdictions, a sovereign’s power is subject to the limitations contained in its Constitution. Sovereign power may also be limited by external laws and treaties which the sovereign has voluntarily agreed to be bound by, such as United Nations conventions and international courts. However, in these circumstances the sovereign also retains the power to free itself from these external limitations if it so chooses.


Monday, 4 May 2009

Australian Consumer Law: Fair Markets – Informed Consumers



Introduction
The Federal Minister for Competition Policy and Consumer Affairs, Mr Chris Bowen recently released a report entitled Australian Consumer Law: Fair Markets – Informed Consumers (ACL).[1] The main purpose of this report is to seek comment on a range of changes to consumer protection laws in Australia in an attempt to create a truly national consumer protection law system.

The most notable aspect of the report is that it does not seek any comment on a number of significant additions to the ACCC’s enforcement powers in the consumer protection area. Indeed, it appears that the Federal Government has already decided that additional powers identified in the ACL Report will be provided to the ACCC.[2]

The granting of these additional powers to the ACCC will have an immense impact on its ability to combat breaches of the consumer protection laws. On the other hand, there are real questions about whether granting these additional powers will tilt the balance of power too far in favour of the ACCC in its dealings with business.

What is being proposed?
The ACL proposes four main changes to the existing consumer protection law system -

1. introduction of a range of new enforcement powers and remedies for the ACCC.

2. introduction of unfair contract terms legislation

3. introduction of a new product safety system

4. a range of miscellaneous changes to standardise consumer protection laws across Australia.

New enforcement powers and remedies for the ACCC
The new enforcement powers being proposed for the ACCC are -
  • substantiation notices
  • public warning powers
  • infringement notices
The new remedies which will be available to the ACCC in consumer protection matters are –
  • civil pecuniary penalties
  • disqualification orders
  • non-party redress
Substantiation notices
A substantiation notice is described in the ACL as a notice which “requires a supplier to provide a consumer regulator with a basis for representations that it makes regarding its goods and services”.[3] A substantiation notice would require that the trader provide specific information to the ACCC within a particular time.

The main advantage of substantiation notices for the ACCC is that it will lower the factual threshold it needs to satisfy itself that a trader may have engaged in a contravention of the consumer protection provisions of the TPA. Currently, the ACCC requests information from a trader either on a voluntary basis or pursuant to section 155 notice. The limitation of a voluntary request for information is that the trader is not required to provide the information and does not have to provide the information within a particular timeframe. However if the trader does provide information voluntarily to the ACCC is has an obligation to ensure that such information is accurate and complete.[4]

The ACCC will often choose to issue a section 155 notice to a trader to compel the production of information and documents rather than seek documents voluntarily. However, in order to issue a section 155 notice, the Chairman of the ACCC must satisfy himself that he has reason to believe that the trader has information or documents which relates to a matter which constitutes or may constitute a contravention of the TPA. While the requirement to form a “reason to believe” does not involve a very high burden for the ACCC, of particular matters it does present a problem.

Where traders are making exaggerated health or medical claims about their products, for example about the ability of their product to cure cancer or other life threatening diseases, it is often difficult for the ACCC to satisfy itself that it has reason to believe unless it first obtains expert medical advice. Unfortunately, the process of locating a suitably qualified expert, retaining and briefing this expert and then obtaining an expert report can take a considerable period. Consequently, the ACCC is often prevented from taking quick action against such bogus traders.

Another area where the ACCC is often unable to move quickly is where a trader makes exaggerated claims about the financial returns which can be made from a particular business venture. The ACCC often needs to obtain expert opinion on the reasonableness of the claimed financial returns before seeking to issue a section 155 notice to a trader.

In both of the types of cases described above, the availability of a substantiation notice will give the ACCC the ability to move much more quickly against traders which have made what, in the ACCC’s opinion, are outlandish claims about the uses and benefits of their goods or services. It is very important to move quickly in these types of cases, because often such traders are simply operating a scam in which they will seek to dupe a number of vulnerable consumers into paying substantial sums of money before transferring the money out of the jurisdiction, liquidating their company and simply vanishing.

The main concern of business about the ACCC having access to a substantiation notice power is that the ACCC may seek to use this power in situations where it is inappropriate. For example, in many consumer protection matters a section 155 notice may be issued in response to customer evidence. While obtaining such evidence does take time, it also provides a valuable cross- check on the initial allegation. When an initial allegation is received from a consumer about a trader’s conduct, it is important to corroborate that account from evidence obtained from other, unrelated consumers to ensure that the original evidence has not been fabricated or misrepresented. The concern is that the ACCC may opt to simply issue a substantiation notice to a trader because this would be simpler and quicker rather than carrying out a preliminary investigation of the allegation

Public warning powers

The ACL also proposes that the ACCC be provided with the power to issue a public warning about a trader. In this regard, the ACL states that “public warnings are (to be) issued to inform the public of potentially harmful conduct taking place in the very short term”.[5]

On the basis of the ACL, it would appear that the public warning power is to be directed against are “...’fly-by-night’ operators, itinerant traders and financial, investment and property spruikers and advisors who often move across state and territory borders.”[6] Therefore, the focus would appear to be on bogus traders which are simply seeking to misappropriate money from consumers and then vanish, making subsequent legal action against them all but impossible.

It is proposed that the public warning power would be subject to certain protocols to govern its use and prevent its misuse. These protocols are likely to be based on existing safeguards contained in state legislation in respect of public warning powers.[7] For example, the decision to issue a public warning will only be exercised in very blatant situations of misleading and deceptive conduct, bordering on fraud. In addition, the decision to issue a public warning is likely to be subject to a public interest test and must be exercised in accordance with the principles of natural justice. It may also be the case that a person subject to a public warning power will have the right to take legal action against the ACCC for defamation in the event that the public warning power has been exercised inappropriately or without a proper basis.

There are a number of concerns about the introduction of a public warning power.

The first concern is that the power may be exercised by the ACCC in inappropriate circumstances. Clearly, a public warning issued about a trader by the ACCC is likely to have the effect of preventing consumers from dealing with that trader. Another likely consequence will be that current customers of that trader, which may have had no particular concern about the trader before the public warning was issued, may now want their money back from the trader believing that trader to be disreputable. This could jeopardise the financial position of the trader in circumstances where it has not been found by a Court to have engaged in any illegal conduct.

The second concern is that even if there is a right for a trader to take action against the ACCC for defamation in circumstances where the ACCC has inappropriately exercised this power, the trader may simply not be able to afford to take such legal action. This is likely to be particularly true where the effect of the public warning has been to significant damage the trader’s business. The right of legal action against the ACCC may be an illusionary right if the company cannot fund the action.

Infringement notices
The most controversial new power being proposed is the power of the ACCC to issue infringement notices. The ACCC will have the power to issue a notice stating that a corporation has engaged in conduct in breach of a provision of the consumer law provisions and requiring that corporation to pay a penalty.[8] It is likely that infringement notices will only be issued for less serious contraventions of the consumer protection laws.

A number of state consumer protection agencies currently have the power to issue infringement notices. These infringement notices can be issued in relation to administrative breaches and less serious substantive breaches. ASIC also has the power to issue infringement notices in respect of breaches of the Corporations Act 2001.[9]

The proposed power to issue infringement notices is controversial because it raises separation of powers issues – namely the blurring of executive and judicial functions. The power to impose a pecuniary penalty on a corporation for a breach of legislation is the exercise of a judicial function, which should properly reside in the Courts, rather than a federal government department, such as the ACCC, which forms part of the executive.

While it is not yet clear how the infringement power will operate, it is likely that a corporation which is the subject of an infringement notice will have the right to challenge the notice in court if they do not believe they have contravened the relevant provision of the consumer protection law.

One would assume that in order to issue an infringement notice, the ACCC would require quite strong evidence that the trader had engaged in a contravention of the TPA. Therefore, while the power to issue an infringement notice may mean that the ACCC does not need to incur the added expense of running litigation, it is unlikely to avoid the expense of having to conduct a full investigation.

One area where the infringement notice may be used in a cost effective way, is where a corporation has admitted that it has contravened a provision of the consumer protection law. In these types of matters, the ACCC does not need to conduct a full investigation, as it can rely instead on the corporation’s admissions. An infringement notice could be issued to the trader on the basis of its admissions, thus saving both the ACCC and the trader investigation and litigation costs.

New remedies available to the ACCC
Pecuniary penalties
The most significant new remedy being proposed is the power of the ACCC to seek a pecuniary penalty for a contravention of the consumer protection law provisions.[10] Currently, the ACCC can seek injunctions, declarations, non-punitive orders and compensation in a civil consumer protection case. Currently, if the ACCC wishes to obtain a penalty for a contravention of the consumer protection provisions it must take a criminal prosecution.

The ACL points out that civil penalties are not currently available under either federal or state consumer protection legislation. This is seen as “significant gap in the range of enforcement options available to consumer regulators”.[11] Reference is also made to the greater deterrent effect that access to civil penalties will have on corporations which may be tempted to breach the consumer protection law provisions.[12]

Access to civil penalties for contraventions of consumer law provisions will have a significant impact on the ACCC’s enforcement activities. Civil penalties will give the ACCC considerably more leverage in dealing with corporations which have contravened consumer protection laws. For example, the ACCC will be able to propose a smaller civil penalty in a settlement in return for the corporation agreeing to provide other remedies such as compensation to consumers or corrective advertising.

Another area where the availability of civil penalties will improve the ACCC’s enforcement outcomes is in relation to fly by night operators. Often these types of operators will obtain a significant amount of money from consumers, transfer the money out of the country and then liquidate the company. The ACCC is often faced with the prospect of taking legal action against a company in liquidation and former directors and managers of the company, seeking only injunctions and declarations. Further, the ACCC will not be able to proceed against the company in liquidation unless it has leave of the Court which will often require the consent of the liquidator. Generally, the liquidator will only consent if the ACCC legal action is not going to cost the company in liquidation any money. In these circumstances, the only effective remedy the ACCC can obtain is an injunction against the directors and managers seeking to prevent them from engaging in similar conduct in the future.

If the ACCC has access to civil penalties, it will be able to achieve much better specific and general deterrence. First, a successful civil penalties action against former directors and managers will have the effect of depriving these individuals of some of their ill-gotten gains from their contravention of the TPA. Second, if these individuals failed to pay the civil pecuniary penalty, the ACCC may be able to take action to bankrupt them which would prevent them from taking on director roles for a period.

Disqualification orders
The ACL also proposes the introduction of disqualification orders for individuals who have engaged in conduct in breach of the consumer protection law.[13] The ACL states these orders may “ban or restrict individuals from participating in specific activities for specific periods of time, including managing corporations or undertaking specific business conduct”.[14] Disqualification orders are already available for contraventions of the restrictive trade practices provisions of the TPA.

The introduction of a disqualification order for breaches of consumer protection law is a significant reform. The ACCC often deals with individuals who set up a succession of different companies so that they can continue to engage in the same type of illegal conduct. Currently, all the ACCC can do to prevent these people from repeating their illegal conduct is to obtain an injunction to prevent them from engaging in the same type of conduct. It is relatively easy for an individual to change their conduct slightly to avoid the terms of the injunction, particularly if the Court’s injunction has been drafted quite narrowly. The disqualification order would be a much better way to prevent these types of individuals from setting up new companies to continue engaging in illegal conduct.

The availability of disqualification orders will also give the ACCC much greater leverage in settlement negotiations with companies and their directors/management. The ACCC could advise a company that it would not pursue disqualification orders against particular directors or managers in return for the company’s agreement to other orders such as a higher corporate civil or individual penalty or agreement to pay compensation for consumers.

Non-party redress
The final proposed order in the ACL is non-party redress. The ACL Report describes non-party redress as the power to seek an order from the Court to “seek redress for persons who are not parties to the particular action”.[15] The ACL specifically refers to the Full Federal Court decision in Medibank Private Ltd v Cassidy[16] where it was held that there was no power in the TPA to order a business to provide redress to non-parties to a proceeding.

Currently there are two ways that the ACCC can get financial redress for consumers for a contravention of the consumer protection provisions of the TPA. It can either take an action under section 87(1B) of the TPA or a class action under the Federal Court Act.

In the past, the ACCC has shown a clear preference for proceedings under section 87(1B). This is because under such proceedings the ACCC remains in control of the legal action and can decide when to settle and on what terms. However, under FCA, the class controls the legal proceedings and can decide when and on what terms to settle the litigation. The ACCC is often attempting to achieve other outcomes in its litigation, in addition to compensation for consumers, and it may not want to settle the litigation on the same terms as a class would.

There are a number of difficulties associated with seeking compensation under section 87(1B) of the TPA. There are two ways to run proceedings under section 87(1B) which are described by the ACCC as the one-step approach and the two-step approach.

The one-step approach has the ACCC seeking compensation as part of its initial case, along with other remedies such as injunctions, declarations and non-punitive orders. The main problem with this approach is that the ACCC must obtain written consents from all persons it wishes to represent for compensation before it commences the litigation. Getting these written consents prior to institution of legal proceedings often presents major logistical problems, particularly if there are more than 10 consumers.

The alternative is the two-step approach, in which the ACCC takes legal action for a limited range of remedies and foreshadows that it will be seeking compensation for consumers under section 87(1B) in a follow up action. This is a much simpler approach as the ACCC will not need to get consents from consumers until after it has won the first action.

The two-step approach also has some drawbacks. First, because compensation can only be obtained after the second successful action by the ACCC, there will be a considerable delay before consumers obtain their compensation. Second, there is often a risk that the company against which the ACCC takes legal action will not have sufficient funds to pay compensation after the initial legal action has been concluded. In some cases, the company may even go into administration a consequence of the costs associated with the initial ACCC action.

The new provisions concerning obtain non-party redress will solve a number of these problems. Of central importance is that consumers which have suffered loss will not need to become parties to the litigation in order to get compensation. In addition, ACCC litigation of matters involving a large number of disaffected consumers will be much less complex.

Unfair contracts
The ACL also proposes the introduction of unfair contracts legislation.[17] There are two main aspects to this proposed legislation –
  • specific unfair contracts legislation which will give the ACCC and individuals the right to challenge unfair terms in standard form contracts
  • banning of particular terms in standard form contracts on the basis that they are unfair. 
Unfair contract terms legislation
The ACL defines unfair contract terms as terms that “cause a significant imbalance in the parties’ rights and obligations under a contract and are not reasonably necessary to protect the legitimate business interests of the supplier”.[18] The ACL also makes reference to the unfair contract terms legislation which currently exists in the UK and Victoria.

The justification for the introduction of unfair contract term legislation appears to be the finding by the Productivity Commission that the consumer detriment from unfair contract terms is likely to be “non-trivial”.[19] In its report, the PC found that from 5% to 15% consumers may be detrimentally affected by unfair contract terms.[20] If this statistic is correct, it would demonstrate that unfair contract terms are indeed a significant problem as effectively one in six consumers is being adversely affected by unfair contracts.

One surprising conclusion reached by the PC was that businesses had not identified major costs associated with the introduction of unfair contract terms in the EU, UK and Victoria.[21]

The description of unfair contract term legislation suggests that there will be a two-step process in applying the legislation – a contract terms will be considered unfair if -

1. the relevant term causes a significant imbalance in the parties’ rights and obligations

2. the relevant term is not reasonably necessary to protect legitimate interests of supplier[22]

The first step in determining whether a contract term is unfair will be to assess whether the term causes a significant imbalance in the rights and obligations of the parties. This suggests that the courts will have to consider what the effect of one particular contractual term will be on the respective legal positions of each party to the contract. It is not a case of considering whether the cumulative effect of a number of contractual terms will create a significant imbalance, but rather whether one contractual term in isolation will have that effect.

For example, a term which allowed one party to vary unilaterally the terms of the contract may be seen as providing that party with significantly greater rights than the other party to the contract. Another example would be a clause which excluded the right of one party to take legal action against the other party to the contract for negligence.

The second step in applying the unfair contract term test would be to ascertain whether the term is reasonably necessary protect the legitimate interests of the supplier. This step could be broken down into two separate issues. First, one must identify what the legitimate interests of the supplier are in entering into the contract. This will involve a consideration of whether for example, it is legitimate for a supplier to limit their liability and, if so, to what extent. Second, one will have to consider whether the term is reasonably necessary to protect that legitimate interest. For example, a Court may find that while it is legitimate for a supplier to attempt to exclude liability for certain acts, it may find that the relevant contractual term goes beyond was is reasonably necessary to protect the suppliers’ legitimate interest because it seeks to exclude all liability.

The main concern about the test outlined about to determine whether a contract term is unfair is that it is likely to be quite difficult to apply in practice. In particular, it is likely to be quite difficult to determine what the suppliers “legitimate interests” are and also what is considered to be “reasonably necessary” to protect those interests.

The ACL proposes three limitations on the unfair contract term legislation.

First, remedies under the legislation will only be available where the claimant can show that the contractual term is likely to cause detriment, or a substantial likelihood of detriment, to the consumer. Detriment is not limited to financial detriment.[23] In other words, remedies will not be available to claimants in relation to unfair contract terms if they are not likely to result in any consumer detriment. This will prevent claimants, including the ACCC, from taking action in relation to a particular term which appears unfair on its face but which the supplier is not proposing to enforce against the consumer.

While this requirement will limit access to the unfair contract terms legislation, claimants still have considerable scope to argue that there is a “substantial likelihood” of detriment in circumstances where the supplier has not indicated an intention to enforce the allegedly unfair contract term. A better approach would be to limit access to unfair contract terms remedies to situations where the supplier has enforced or expressed their intention to enforce the allegedly unfair contract term against a consumer. This would limit the application of the legislation to only genuine disputes and avoid theoretical debates about whether there was a “substantial likelihood” of detriment.

The second limitation is that the unfair contract term legislation will only apply to standard, non-negotiated contracts.[24] The onus will be on the supplier to prove that the contract is not a standard contract. This is a necessary limitation on the scope of the legislation which is aimed at addressing the problems arising from contracts which are not subject to any negotiation of the contract terms. Even though this limitation will exclude many contracts from the purview of the legislation, it will still mean than tens of thousands of standard form contracts will be within the scope of the legislation.

The third limitation is that claims that the upfront price for a good or service is unfair are excluded from the operation of the legislation.[25] This appears to be a sensible limitation as an upfront price should not be considered unfair, as the consumer would normally be aware of the price before signing the contract. The only qualification to this is where the supplier does not disclose the full costs of the good or service to the consumer. The failure by a supplier to state the full upfront cost of the good or service would contravene other provisions of the TPA, including the new section 53A.

The ACL also refers to one additional feature of the proposed unfair contract term legislation – namely that in considering whether a contract term is unfair “all of the circumstances of the contract (are) to be considered, taking into account the broader interests of consumers, as well as the particular consumers affected”.[26] The ACL suggests that the purpose of this additional feature will be to facilitate private and ACCC representative actions for damages. In other words, the Court will be required under the legislation to consider whether a wider ban on an unfair contract term may be appropriate if it is in “the broader interests of consumers”.

The main areas of enforcement activity for the ACCC once the unfair contract legislation is introduced are likely to include the car rental, fitness club and telecommunications industries. Many of the examples of potentially unfair contract terms in the ACL have been drawn from standard form contracts in these industries.

The main objections to the unfair contract terms legislation are that –
  • there is no clear evidence that there is a need for such legislation
  • the scope of the proposed legislation appears to be too broad
  • the enforcement of the legislation may put a significant strain on the ACCC’s resources.
The Federal Government has not demonstrated the need for this legislation. While most consumers who sign a standard form contract would (if they actually read the contract) no doubt find that many of the contract terms appear to be quite unfair, the reality is that many of these allegedly unfair terms will rarely be enforced. Either the contract will performed without the need for legal action by the supplier or the supplier will choose not to enforce a term which is allegedly unfair. Therefore, a legitimate criticism of the unfair contract legislation is that before any such legislation is introduced, steps should be taken by the Federal Government to ascertain whether a significant problem with unfair contract terms exists in the community.

Also as stated above the proposed legislation is likely to be too broad as it focuses on “substantial likelihood” of detriment, rather than on allegedly unfair terms which have been or are going to be enforced by the supplier against the consumer. It is arguable that the “significant likelihood” requirement is too vague a test to limit the scope of the legislation effectively.

Finally, there must be significant concerns that the ACCC’s role in investigating alleged unfair contract terms in standard form contracts will put a significant strain on its enforcement resources. It is likely that unfair contract term investigations will be quite resource intensive.

Banning unfair contract terms

The ACL also proposes that mechanisms be put in place to ban unfair contract terms from all standard form contracts.[27] While there is no discussion of the policy reasons behind banning allegedly unfair contract terms, the main justification would probably be that there are certain contractual terms which are so clearly and objectively unfair that they should be banned.

The ACL discusses a number of contract terms which may be considered to be clearly and objectively unfair including –
  • terms retaining title in goods to suppliers even though the goods cannot be removed from the consumers’ premises without damage[28]
  • terms denying the existence or validity of pre- or post-contractual representations made to consumers[29]
  • terms deeming something to be a fact when it is not actually factual or true[30]
  • terms under which consumers’ acknowledge that they have read or understood the contract[31]
  • conclusive evidence terms[32]
  • terms requiring consumers’ to pay more than the suppliers’ reasonable enforcement costs[33]
While it is difficult to see how some of the contract terms listed would be anything but unfair, one common objection which had been raised to the idea of banning contract terms is that any unfairness may depend on the context of the relevant transaction. A contract term cannot be banned unless regard is also had to the particular context in which the contract clause applies. On the other hand, by banning particular terms the ACCC will not have to take enforcement action in relation to the same contract term in numerous different types of standard form contracts. Rather the ACCC could take steps to have the particular unfair contract term banned from all standard form contracts.

One possible concern about the proposed mechanism for banning unfair contract terms is that it appears that the power will be exercised by the relevant Minister on the advice of the ACCC. A more transparent approach could be to require the ACCC to take legal action in the Federal Court seeking a declaration that particular contract term was unfair. If the ACCC was successful in obtaining a declaration that a particular contract term was unfair, it would be able to use this finding as a basis for making a recommendation to the Minister that the unfair term be banned in all standard form contracts. This may introduce more accountability to the process of banning a contract terms as being unfair.

Product Liability
The ACL also proposes the introduction of a national regulatory regime for product safety. Under this system, the ACCC will be responsible for recommending permanent bans of unsafe products to the relevant Minister. State and Territory consumer affairs departments will be responsible for recommending temporary bans of no more than 60 days of unsafe products within their jurisdictions. The ACCC will be responsible for determining whether a recommendation should be made to the Minister that a temporary ban is made permanent.[34]

These proposed changes to the administration of product safety laws are significant. Currently, there is a great degree of duplication of effort in relation to product safety between the ACCC and state consumer protection agencies. Further, the level of coordination between these agencies in terms of their product survey work is quite poor. On more than one occasion, this lack of coordination has resulting in some finger pointing when an unsafe product slips through the regulatory safety net, as occurred during the Mattel toy recalls.

One clear implication of the proposed reforms is that the ACCC will have to increase its skill base in the enforcement of product safety standards. Currently the ACCC utilises its general enforcement investigators to conduct product safety surveys and investigations. These investigators have no specific training in relation to the particular standards they are enforcing, which is a concern particularly in relation to some of the more complex standards. The simplest way for the ACCC to acquire the necessary skills is for highly experienced and specialised investigators from state consumer affairs departments to transfer to the ACCC to form the core of a new dedicated product safety enforcement area.

Miscellaneous proposed reforms

The ACL outlined a number of other proposed changes to the consumer protection laws which are aimed at achieving harmonisation. Many of these proposed changes are relatively uncontroversial.

For example, consideration is being given to standardising the definition to the term “consumer” in consumer protection legislation.[35] Currently, there are a number of different definitions of the term “consumer” in Federal and State consumer protection legislation. These definitions of “consumer” differ quite significantly. It stands to reason, that such significant inconsistencies in foundational definitional issues, such as the term “consumer”, must create unnecessary costs and complexity for businesses which operate on a national basis.

Other suggested changes include whether to–
  • harmonise door-to-door legislation[36]
  • introduce specific legislation concerning telemarketing into the ACL[37]
  • introduce specific legislation in relation to third-party trading schemes into the ACL[38]
  • introduce specific legislation banning mock auctions[39]
  • to change the current provisions of the TPA in relation to pyramid selling to make them more effective[40]
  • to consider banning dual pricing under the ACL.[41]
Conclusions
The proposals contained in the ACL will result in a radical transformation of consumer law protection in Australia. The proposed changes in the ACL will provide the ACCC with both a significant extension of its investigatory and enforcement powers in dealing with businesses and access to a number of new and powerful remedies.

With the power to issue substantiation notices, public warning notices and infringement notices, the ACCC will have extensive powers to take aggressive and pre-emptive enforcement action against businesses which have contravened the consumer protection laws. The ACCC’s access to pecuniary penalties and disqualification orders will provide it with significantly more leverage in settlement negotiations with companies accused of breaching the consumer protection laws.

The main substantive legislative change proposed under the ACL is the introduction of the unfair contract terms laws. This legislation will have far-reaching consequences for most Australian business involved in retail transactions with consumers. All businesses using standard form contracts will have to review the terms of these contracts prior to the introduction of the legislation to remove or redraft any terms which are at risk of being found to be unfair. Indications are that the task of identifying unfair contract terms is going to be anything but a straightforward exercise.

[1] An Australian Consumer Law : Fair Markets Confident Consumers, 17 February 2009 (ACL)-http://www.treasury.gov.au/contentitem.asp?NavId=037&ContentID=1482
[2] For example see Speech of The Hon. Chris Bowen, Minister for Competition Policy and Consumer Affairs, Australian Consumer Law – The Future, Address to the Monash Centre for Regulatory Studies, 17 February 2009, http://www.treasurer.gov.au/DisplayDocs.aspx?doc=speeches/2009/001.htm&pageID=005&min=ceb&Year=&DocType=
[3] ACL, op. cit., p. 46.
[4] See section 137.1 of the Criminal Code.
[5] ACL, op. cit., p. 47.
[6] Ibid.
[7] Ibid., p. 51.
[8] Ibid.
[9] Ibid.
[10] See ACL, op. cit., pp. 43-45.
[11] Ibid., pp. 44-45.
[12] Ibid., p. 45
[13] Ibid.
[14] Ibid.
[15] Ibid., p. 52.
[16] [2002] FCAFC 290.
[17] ACL, op. cit., pp. 29-42.
[18] Ibid., p. 29.
[19] Ibid.
[20] Productivity Commission, Review of Australian Consumer Policy Framework, Appendix D, Box. 7.3
[21] Ibid., pp. 434-435.
[22] ACL, op. cit., p. 30
[23] Ibid., p. 32.
[24] Ibid.
[25] Ibid., p. 34.
[26] Ibid.
[27] Ibid., pp. 35-42.
[28] Ibid., p. 35.
[29] Ibid.
[30] Ibid.
[31] Ibid., p. 36.
[32] Ibid., p. 37.
[33] Ibid., p. 40.
[34] Ibid., pp. 53-54.
[35] Ibid., pp. 63-66.
[36] Ibid., pp. 67-72.
[37] Ibid., pp. 72-74.
[38] Ibid., pp. 79-80.
[39] Ibid., p. 80.
[40] Ibid., pp. 85-87.
[41] Ibid., pp. 88-89.