Wednesday, 12 October 2011

Carbon tax price gouging – understanding the pitfalls


This article first appeared in the October 2011 edition of the NSW Law Society Journal, Vol. 49, No. 9, pp. 68-71.

Introduction

On 13 July 2011, the Prime Minister, Julia Gillard and the Treasurer, Wayne Swan announced that the ACCC would be given responsibility to police how businesses pass on the carbon tax.[1] The ACCC will be responsible to ensure that businesses do not engage in price gouging by using the tax as an excuse to increase prices beyond the actual price effect of the carbon tax.

If the introduction of the GST is any guide, the carbon tax is likely to result in a great deal of investigatory activity by the ACCC.[2] The ACCC received over 35,000 GST related complaints in the first 18 months of the tax, and conducted more than 3000 formal investigations into alleged price exploitation and misleading and deceptive conduct. [3]

Practitioners need to be prepared for the introduction of the carbon tax so that they can assist their clients:
  • to implement proactive strategies to minimise the risk of gaining unwanted attention from the ACCC; and 
  • dealing with the ACCC, if they do become the unfortunate subject of an investigation. 
ACCC’s role
The ACCC’s role will be to prevent price gouging during the introduction of the carbon tax. This role will be limited to investigating alleged misrepresentations by businesses about their pricing rather than investigating all price rises. The ACCC will not be able to investigate price rises if the business has made no mention of the carbon tax.

This contrasts to the situation during the introduction if the GST, when the ACCC was given new powers to prevent price exploitation.

In order to fulfil this new role, the ACCC has been given additional funding of $12.8 million over four years. The ACCC will use this funding to hire 20 additional staff who will be engaged in education, liaison, investigations and litigation.

What will the ACCC are looking for?
The ACCC will be looking for four main types of conduct as part of its carbon tax-policing role, both before and after the introduction of the carbon tax on 1 July 2012.

Pre-1 July 2012 conduct

The ACCC is on the lookout for businesses which may attribute price increases to the carbon tax even before the tax is introduced. As remarkable as it sounds, there has already been a report of an Australia Post employee allegedly attributing an increase in the price of posting a parcel to the carbon tax.[4]

Sections 18 and 29(1)(c) of Australian Consumer Law (ACL)[5] will be the ACCC’s primary weapons against carbon tax price gouging.

Section 18:
A person must not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive.
Section 29(1)(i):
A person must 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:

(i) make a false or misleading representation with respect to the price of goods or services…
The above sections are very broad in their scope. They capture both misleading representations and representations which are likely to be misleading. These sections apply to all businesses regardless of their size, including unincorporated sole traders.

Representations that price rises prior to the introduction of the carbon tax are due to the carbon tax are likely to be viewed very seriously by the ACCC, because of their apparent blatancy. The ACCC is likely to pursue such cases very vigorously.

The second category of cases prior to 1 July 2012 will be future representations by businesses about the likely impact of the carbon tax on their prices. Both ss.18 and 29(1)(i) apply to future representations as well as to current representations.

Under s.4(1) of the ACL if a person makes a representation with respect to a future matter without reasonable grounds the representation will be taken to be misleading. Accordingly, a business may breach the ACL if it makes a forward estimate of the likely effect of the carbon tax on their pricing without having properly worked out the pricing impacts beforehand.

The ACCC will no doubt be guided by Treasury estimates of the likely price effects of the carbon tax. Where there is a significant difference between Treasury estimates and the business’s own forward estimates, the ACCC is likely to demand all costings to determine whether the business had a reasonable basis for its future representations.

Post 1 July 2012 conduct

The third type of conduct which the ACCC will be on the lookout after 1 July 2012 is businesses which overstate the impact of the carbon tax on their pricing. For example, a contravention will arise where a company claims that its prices have increased by, say $100 due to the carbon tax when the true impact of the tax was only $50. The ACCC’s investigations of these types of matters will be fairly complex as they will require detailed information about the business’s costs.

The ACCC’s task will be further complicated if the relevant business is receiving compensation payments from the Federal Government to offset the impact of the carbon tax. Such businesses will be expected to offset their price increases by the level of any compensation received.

The final type of conduct relates to representations by businesses that a price rise is due to the carbon tax when no part of the price increase can be attributed to the carbon tax. While this is likely to involve a relatively small number of matters, it will mainly arise in relation to businesses and products which are exempt from the carbon tax. For example, the carbon tax does not apply to petrol or diesel for passenger cars or other light on-road vehicles. However, if a service station operator claimed that the price of fuel had increased due to the carbon tax, this representation will breach the ACL.

How will the ACCC do its job?
The ACCC is likely to take an aggressive approach to its role in seeking to prevent carbon tax price gouging. Not only has the Federal Government made it quite clear that it expects the ACCC to be the “tough cop on the beat”, but the ACCC knows from hindsight that the aggressive approach which it took during the GST implementation was remarkably successful.

The ACCC will be aiming to conduct a number of high profile investigations into alleged carbon tax price gouging at an early stage in its policing role.

Early on in the GST period, the ACCC was able to conduct an extremely high profile investigation into Franklins Supermarkets for price exploitation.[6] The ACCC discovered that Franklins was charging GST on a number of GST-free food and beverage products. As a result, Franklins was forced to offer a discount on the products for three weeks, conduct national corrective advertising and to carry out a number of other corrective measures.

The Franklins outcome not only raised the ACCC’s GST enforcement profile enormously but contributed greatly to achieving general deterrence. More than one business said to the ACCC after the Franklins case that they were willing to do anything to avoid a Franklins-type situation.

In conducting an investigation, the ACCC is likely to allege contraventions of both ss.18 and 29(1)(i) of the ACL. This is because s.29(1)(i) carries significant pecuniary penalties, whilst s,18 does not. Under s.29(1)(i) the maximum pecuniary penalty is $1.1 million for a corporation and $220,000 for an individual per contravention.

The ACCC will commence an investigation either by writing to a business to ask it to explain its representations or by issuing a substantiation notice. A substantiation notice requires a business to substantiate their representations, including representations about the price effect of the carbon tax . A person has 21 days to comply with a substantiation notice or face a fine.

The ACCC may also commence an investigation by issuing s.155 notices to compel the production of information and documents. However, s.155 notices are only used in more serious cases and usually not as first step in an investigation.

Finally, the ACCC could also decide to commence an investigation by executing a search warrant. This is the ACCC’s most intrusive investigatory power and one which it has shown a great reluctance to use.[7] If the ACCC wishes to take a very aggressive approach to investigating allegations of carbon tax price gouging, it may decide to use its search warrant powers extensively

Once the ACCC has commenced its investigation and has satisfied itself that the business has engaged in a breach of the ACL, it will then have to decide how to resolve the matter. In this regard, the ACCC has a wide range of options.

First, it may decide to resolve the matter administratively without a fine or court proceedings. This option is likely only in the least serious cases, such as unauthorised misrepresentations by junior employees.

Alternatively, the ACCC may also decide to issue an infringement notice to a business which it believes has misrepresented the price effect of the carbon tax. The maximum amount which can be levied under an infringement notice for one breach of the ACL is $66,000 for a listed corporation, $6600 for an unlisted company and $3300 for an individual. The recipient of the infringement notice must pay the notice within 28 days or contest the notice.

The ACCC has used its infringement notice powers quite extensively since it received the power in April 2010. The ACCC has also shown a propensity to issue multiple infringement notices to a company in relation to related contraventions. For example, the ACCC issued 27 infringement notices totalling $178,000 to Optus concerning its “max cap” advertising campaign.[8]

The ACCC may also issue a public warning about a business which it believes is misrepresenting the price effects of the carbon tax. The ACCC can issue a public warning if it believes that:
  • there has been a contravention of the ACL; 
  • one or more persons has, or is likely to, suffer detriment; and
  • it is in the public interest to issue the notice. 
However, the ACCC is only likely to issue a public warning where it believes that conduct poses a serious and irreversible risk to consumers.

It is would make sense for the ACCC to use its public warning powers where it believes it has identified a blatant cases of carbon tax price gouging in order to warn consumers about the conduct.

The ACCC may seek to resolve an investigation by either obtaining an s.87B undertaking or commencing legal proceedings. Section 87B undertakings are court enforceable agreements between the ACCC and a business whereby the business agrees to carry out remedial steps, which usually include:
  • an admission that the business has breached the ACL / CCA;
  • injunctive undertakings;
  • an agreement to undertake corrective action, such as advertisements; and
  • implementation of a compliance program.
Section 87B undertakings can include some informal mechanism for providing consumers with financial redress.

The ACCC cannot obtain pecuniary penalties, disqualification orders or non-party redress through the use of s.87B undertakings. These remedies can only be obtained by the ACCC taking legal action.

The ACCC may take legal action where it considers conduct to be blatant, where it wants to achieve general deterrence or where it wishes to obtain a pecuniary penalty, to disqualify a director or manager or obtain non-party redress. Under s.248 of the ACL the ACCC can seek an order from a Court to disqualify a person from managing a corporation if they believe the person has contravened the ACL. Non-party redress is financial compensation for consumers.

How to respond to the ACCC
If one of your clients becomes the subject of an ACCC investigation into carbon tax price gouging, the first thing to do is to impress on your client the need to take the investigation very seriously. The ACCC is under a considerable amount of pressure to get results in its carbon tax enforcement role. Your client should not treat a letter from the ACCC about carbon tax pricing as simply a routine matter.

The other important issue to keep in mind is to be proactive during the ACCC investigation. Do not wait for the ACCC to direct your client to carry out particular remedial steps if it has breached the ACL, as the ACCC may well propose a more formal resolution, such as an s.87B undertaking.

If your client has made a mistake, it should immediately implement remedial steps to fix the problem. This may involve posting a corrective notice on its website, providing consumers with refunds or retraining front line staff. The more corrective steps your client implements of its own volition and before an ACCC demand, the more likely your client will be able to avoid the matter escalating into an in-depth investigation, s.87B undertaking or even litigation.

Prevention is better than cure
Legal practitioners should also be thinking of ways to help their clients to avoid getting a letter from the ACCC in the first place. The best way to avoid such unwanted attention is to start a conversation with your clients now about how they are preparing for the implementation of the carbon tax.

For example, legal practitioners should be asking their clients the following questions:
  • Is your business going to absorb the impact of the carbon tax on its prices or is it proposing to pass the cost on to customers?
  • Has your business prepared estimates of the likely impact of the carbon tax on its prices?
  • How do these estimates compare to the estimates prepared by Treasury?
  • Does your company wish to advise customers that price increases are due to the effect of the carbon tax or do they wish to remain silent on this point?
  • Will your forward estimates of the likely impact of the carbon tax on your prices stand up to ACCC scrutiny?
  • ·Have all your front line staff been briefed on what to say to customers if asked about the impact of the carbon tax on their prices?
Conclusions
While the simplest ways of avoiding unwanted attention from the ACCC in relation to carbon tax pricing issues is either to absorb the effect of the carbon tax or to make no mention of the carbon tax in relation to your price rises, these approaches are not good business. Businesses have a right to pass on the impact of the carbon tax in the form of high prices and should do so.

Accordingly, the most sensible approach for businesses is to spend the time now to calculate the likely price effect of the carbon tax on their prices and then to advise customers in clear and unambiguous terms what that price effect is.

While the introduction of the carbon tax is unlikely to have the same impact in terms of ACCC enforcement as the introduction of the GST, the potential for businesses to suffer significant reputation damage by being the subject of an ACCC investigation is still great. Businesses and their legal advisers must start preparing for the introduction of the carbon tax now, in order to minimise the chances of receiving unwanted attention in the future from the ACCC.



[1] “New funding for ACCC to crack down on misleading carbon price claims”, Media Release by Julia Gillard, dated 15 July 2011 - http://www.pm.gov.au/press-office/new-funding-accc-crack-down-misleading-carbon-price-claims
[2] Michael Terceiro was the National GST Enforcement Coordinator at the Australian Competition and Consumer Commission during the introduction of the GST - he was responsible for coordinating the ACCC’s GST enforcement and running GST investigations and litigation.
[3] “GST Compliance”, ACCC Media Release, dated 20 December 2000, http://www.accc.gov.au/content/index.phtml/itemId/87603/fromItemId/378010
[4] “Man told mail price rise due to carbon tax”, Ninemsn, 6 July 2011 - http://news.ninemsn.com.au/national/8269824/man-told-mail-price-rise-due-to-carbon-tax
[5] The Australian Consumer Law is contained in Schedule 2 of the Competition and Consumer Act 2010 which has replaced the Trade Practices Act 1974 (TPA). Section 18 of the ACL is effectively the same as section 52 of the TPA, while section 29(1)(i) is section 53(1)(e) of the TPA.

[6] “Franklins to provide three week discount to consumers for GST errors”, ACCC News Release, dated 24 July 2000 - http://www.accc.gov.au/content/index.phtml/itemId/87435/fromItemId/378010
[7] Since the introduction of the search warrant power in 2006 until June 2010, the ACCC had only executed six search warrants – source ACCC Annual Reports.
[8] “Optus pays for max cap advertising”, ACCC Media Release dated 18 May 2011 - http://www.accc.gov.au/content/index.phtml/itemId/988219

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