Wednesday, 15 August 2018

When is a cartel not a cartel - when it is exclusive dealing


ACCC has settled with Palram and Ampelite for $5.5 million.  Interestingly the ACCC actually settled on the basis of exclusive dealing and not cartel conduct.  This is surprising given all the hullabaloo which the ACCC made when it commenced the case stating that the companies had engaged in cartel conduct: "The ACCC alleges that over a five year period from 2008 until 2013, these companies made and gave effect to a number of cartel arrangements which had the purpose of preventing or restricting the supply of polycarb to retailers." So it seems to me that the ACCC took legal proceedings believing that there were a number of cartel arrangements, but then failed to obtain the evidence to prove the existence of those arrangements. Accordingly, the ACCC had to settle on the vertical agreements. Looks like a pretty major evidentiary fail for the ACCC.  The ACCC  should have the evidence of the alleged horizontal agreements locked in prior to the commencement of the legal proceedings   The ACCC also noted in its media release the anti-overlap provisions of the Competition and Consumer Act 2010 which effectively state that if conduct can be characterised as both horizontal (more serious) and vertical (less serious), the ACCC has to pursue the conduct as vertical.

https://www.accc.gov.au/media-release/court-orders-penalties-of-55m-against-palram-and-ampelite-for-exclusive-dealing

Thursday, 9 August 2018

Fels' ASIC broadside


Professor Allan Fels won't be making many friends at ASIC after these statements to the ABC and Channel 9. However, he is probably right.   While I specialise in the ACCC area, I do some work in Corporations Law space and it is fair to say that clients have nowhere near the same level of concern about ASIC enforcement action as they do about ACCC enforcement action.   I have found that clients genuinely fear the possibility of the ACCC taking enforcement action against them and particularly the media storm which inevitably follows. However, I think most clients consider ASIC enforcement action to be a remote possibility in all but the most egregious cases.   And even in the most egregious cases, many clients would like their chances of settling with ASIC through an enforceable undertaking rather than worrying about a litigated outcome.

http://www.abc.net.au/news/2018-08-09/former-accc-boss-alan-fels-slams-asic/10092864

https://www.9news.com.au/national/2018/08/09/08/44/strip-bank-watchdog-of-powers-economist


Wednesday, 8 August 2018

Stepping Over the Line?


It seems to me that Justice North's comments about the Australian Building and Construction Commission's case against CFMEU officials may have gone too far: "the ABCC should be publicly exposed as having wasted public money without a proper basis for doing so..." '...it was a completely unnecessary waste of public money" "If you want to make a case that the ABCC should not be criticised, well, you know, let’s hear – bring it on." "I must say it's a terrible waste of everybody's time." "...external forces that are beating up what's just a really ordinary situation that amounts to virtually nothing." He also described the ABCC's decision to take legal action as "outrageous"  I remember Justice North making similar comments 20 years ago about the ACCC's case against the Maritime Union of Australia during the Waterfront Dispute. At that time he said that our case was a waste of public money. 

This was after the MUA had taken illegal boycott action to close down half of Australia's ports and after the MUA had called on its overseas affiliated unions particularly in the US to take sympathy boycott action against vessels loaded with non-union labour.


Click in this link to see the recent article in the Sydney Morning Herald:

https://www.smh.com.au/business/workplace/judge-blasts-building-cop-for-wasting-public-money-on-tea-cup-case-20180808-p4zwb0.html

Here is a story from the Canberra Times, 12 June 1998, p4 about Justice Norths's comments about the MUA case:


Tuesday, 7 August 2018

Podcast: Alphabet in the Soup: A Snapshot of the EC's three investigations into Google - Part 2




Here is Part 2 of the Podcast entitled "Alphabet in the Soup: A Snapshot of EC's three investigations into Google". In this episode I explain the Adsense investigation and make some concluding remarks.


Click on this link to hear the Podcast - https://soundcloud.com/michael-terceiro/part-2





Podcast: Alphabet in the Soup: A Snapshot of the EC's three investigations into Google - Part 1





I thought I would try my hand at some Podcasting.  While I still have some way to go in terms of professionalism and production values (and also preventing the kids from Podcast-bombing during a recording!), I hope you will find the content informative. Here is Part 1 which provides a snapshot of the European Commission's three major investigations into Google - (1) comparison shopping (2) Android Operating System and (3) Adsense. Hope you enjoy the content!

Click on this link to hear the Podcast -https://soundcloud.com/michael-terceiro/alphabet-in-the-soup-a-snapshot-of-the-3-ec-investigations-into-google-part-1







Top Australian Law Blog?


Came across a website which listed my Blog as one of the Top 25 Australian Law Blogs - apparently I came in at 15th place!

https://blog.feedspot.com/australia_law_blogs

Not too sure if it is on the up and up, but they did say I could use the following image on my blog, so why not!





Monday, 6 August 2018

De Ja Vu...all over again! Qualcomm SEP penalties


I was reading an interesting article entitled "The Global Standards Wars: Patent and Competition Disputes in North America, Europe and Asia" by Jorge Contreras. I was surprised to read how many actions have been taken against Qualcomm for repeated misuses of its Standard Essential Patents (SEP): 2009 - Korean Fair Trade Commission - fine $US208 million 2013 - China's National Development and Reform Commission - fine $US975 million 2016 - Korean Fair Trade Commission (again)- fine $US853 million 2017 - Taiwanese Fair Trade Commission - fine $US774 million 2018 - European Commission - fine $US1.2 billion Total fines (so far) - $US4.01 billion! Furthermore, in 2016 the US Federal Trade Commission commenced legal proceedings against Qualcomm for the alleged misuse of its SEP's. So much for huge fines achieving specific deterrence!

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3106090

Tuesday, 24 July 2018

Time for a cartel rewards rethink?


If the ACCC wants more whistleblowers, they might have to push a lot harder for whistleblower reward legislation. I acted for a whistleblower in a major corporate corruption matter (not an ACCC matter but rather a NSW Police matter) and based on my experience there is simply no rational reason for an employee to blow the whistle on illegal conduct (unless of course they are involved in the illegal conduct up to their neck and are blowing the whistle to save their own skin!).   If regulators want "clean skin" whistleblowers to come forward, the only way to encourage them is by offering a reward.  Why else would a clean skin decide to blow the whistle? Not only is blowing the whistle extremely stressful, but the employer will look for any devious means of getting rid of the whistleblower, the whistleblower's colleagues won't trust and won't want to work with the whistleblower anymore and the relevant law enforcement agencies will more than likely forget about the whistleblower as soon as they have secured the whistleblower's evidence! The ACCC should follow the lead of the UK Competition and Markets Authority which is offering rewards of up to £100,000 to whistleblowers for evidence of a cartel.

https://www.smh.com.au/business/consumer-affairs/top-watchdog-seeks-out-new-whistleblowers-20180724-p4ztcx.html

Thursday, 19 July 2018

Alphabet in the soup...again!


The European Commission has fined Google €4.34 billion ($AUD6.86 billion) for illegal practices regarding Android mobile devices to strengthen dominance of Google's search engine. Sounds a bit like the Microsoft case all over again!

By the way, the EC is still to announce the sanctions it will be imposing against Google as a result of its Adsense investigation. In relation to Adsense, the EC has formed the preliminary view that Google abused its dominant position in order to prevented existing and potential competitors, including other search providers and online advertising platforms, from entering and growing in this commercially important area. 

Sounds like another multi-billion euro fine for Google is just around the corner!

Tuesday, 17 July 2018

Regulatory Returns on Investment


I was reading an article in the recent edition of the AICD's Company Director Magazine.  The article recorded the total civil penalties recovered by ASIC over the 2017-2018 financial year at $35.1m.  I thought I'd compare that figure to the amount recovered by the ACCC over the same period - here are the results: ASIC Annual budget 2017-2018    $550m Civil penalty recoveries         $35.1m ROI                                            6.3% ACCC Annual budget 2017-2018      $215m Civil penalty recoveries        $172.5m ROI                                            80.2% Looks to me like the ACCC is a much better financial investment for the Government that ASIC! However, neither the ACCC or ASIC can compete with AUSTRAC after their $700 million penalty against CBA: AUSTRAC Annual budget 2017-2018      $92m CBA penalty                            $700m ROI                                          760%




ACCC v Heinz - penalty case survives...just!


I was having a quick look at the ACCC's case against Heinz in relation to the Little Kids Shredz products.  I must admit, I was left scratching my head...again! The ACCC sues Heinz for contraventions of sections 18, 29 and 33 of the ACL. However, the ACCC then fails to make any evidentiary submissions to the Court in relation to either sections 29 and 33 - see para 271.


Rather the ACCC focuses entirely on section 18 which is a non-penalty provision. 

Did the ACCC forget that in order to get a penalty out of Heinz it needed to establish a contravention of either sections 29 or 33?   Strangely the ACCC then goes to great lengths to try to prove that Heinz had either actual or constructive knowledge of the misrepresentations, even though knowledge is not an element of any of the contraventions.   The only explanation I can see for spending so much time trying to prove knowledge is to get a bigger penalty. 

However, why bother making submissions on knowledge unless you have first established a contravention of a penalty provision? Luckily for the ACCC the Judge was able to find an evidentiary basis for a contravention of section 29(1)(g) (see para 278), so the ACCC should end up getting a penalty out of Heinz!

271    Although both the ACCC’s opening and closing submissions indicated that it pursued its allegations of contraventions of ss 29(1)(a), 29(1)(g) and 33 and its closing submissions identified in an distinct way the elements of contraventions of those provisions, it did not address any submissions relating the evidence in this case to those elements or seek to show how those contraventions were established. Its position seemed to be that the contraventions would be established by the same matters indicating that Heinz’s conduct was misleading or deceptive.
278    In summary, in the absence of submissions from the ACCC, I find that it has established only contraventions of s 29(1)(g) of the ACL. I do not think that conclusion involves unfairness to Heinz as the elements of the contraventions are the same as those it knew it had to confront in relation to s 18.

http://www.judgments.fedcourt.gov.au/judgments/Judgments/fca/single/2018/2018fca0360

Servcorp cops a serve for unfair contract terms


Servcorp has consented to orders declaring a number of its contractual terms as unfair.  I always like going back and having a looking at the comments the company made when it got sued by the ACCC. Here is what Servcorp said in September 2017: "SRV is disappointed that the ACCC has decided to commence legal proceedings against it,"he (Pearce) said. "SRV maintains that its serviced office agreements are negotiable contracts and do not constitute standard-form contracts regulated by the unfair contract terms regime under the Australian Consumer Law." "In its 39 years of existence, Servcorp's agreements with its clients have never been challenged by any government authority as to their fairness or legitimacy, SRV currently operates in over 60 jurisdictions globally," he said. Servcorp executive director Taine Moufarrige told Fairfax Media that Servcorp has instructed its lawyers, PWC, to defend the proceedings. I really thought (particularly after reading the above fightin' words!) that this case may go the distance, all the way to a judgment. I guess we will have to wait a little bit longer for some meaningful case law in relation to the now not so new UCT laws.

https://www.accc.gov.au/media-release/servcorp%E2%80%99s-business-contract-terms-declared-unfair

ACCC v Click Energy - sub judice cart before the horse


It seems to me that the ACCC does not get the concept of sub judice comment when it commences legal proceedings.  Have a look at the recent media release re the Click Energy case filed yesterday. The title to the media release is "ACCC takes action against Click Energy for misleading savings claims"  Note that the ACCC has left out the word "alleged" in the title to the media release. In other words, Click is not facing an "allegation" but rather has been found, at least by the ACCC, to have engaged in misleading conduct. Then there is this comment in the body of the media release -  “We believe that Click Energy’s conduct is among the worst practices we see in retail electricity marketing". Therefore, not only has the ACCC declared that Click has engaged in misleading conduct but their conduct is amongst the worst misleading conduct that the ACCC has ever seen in retail electricity marketing.   It is just a matter of time before a judge gets very annoyed about the statements which the ACCC is making in its media releases on the commencement of legal proceedings.

https://www.accc.gov.au/media-release/accc-takes-action-against-click-energy-for-misleading-savings-claims

ACCC v Cascade - another one bites the dust


Looks like the ACCC has gone down again - this time in relation to their case against the Obeids for the alleged Mount Penny cartel. Seems to me the ACCC has been losing many of their big cases over the last few years : 1 Cussons - alleged cartel  2 Pfizer - alleged misuse of market power 3 Woolworths - alleged unconscionable conduct (Mind the Gap) 4 Medibank Private - alleged misleading and deceptive 5 Egg Corporation - alleged attempted price fixing 6 Electrical Contractors - alleged cartel 7 ANZ - alleged price fixing The question is whether the ACCC is losing because it is pushing the boundaries of the law and thus taking bigger risks or rather whether its investigation and litigation skills are not up to the job.  Unfortunately, from my understanding of the above cases, I'd have to lean towards the latter explanation for the losses.   It seems to me that many ACCC cases are misconceived and poorly prepared.  Eg the ACCC must always cross examine the other sides' expert witness at trial, witnesses have to be locked in to give evidence prior to the ACCC instituting proceedings, don't run unconscionable conduct cases on the documents and is an attempt to induce a cartel really worth the time and effort to litigate. I could go on!

https://lawyerly.com.au/accc-loses-coal-tender-cartel-case-obeid-son-wins-suppression-order/

SME Committee Annual Conference - 26 October 2018


The SME Committee of the Law Council of Australia is holding its annual conference in Melbourne this year on Friday, 26 October 2018. 

We have an excellent lineup of top quality speakers, including:
* Judy O'Connell, Victoria Small Business Commissioner; * Kate Carnell AO, ASBFE Ombudsman; * Mick Keogh, ACCC Deputy Chair and Small Business Commissioner and * Peter Strong, COSBOA CEO. So, if you want to hear from speakers who genuinely "get" small business, make sure you come along.

https://www.lawcouncil.asn.au/event/sme-conference-2018

ACL penalties to go up, up and away...but not quite yet


Looks like the Bill to increase the pecuniary penalties under the Australian Consumer Law to $10m, three times the benefit gained or 10% of annual turnover has been held up in the Senate. 

The new law was supposed to commence on 1 July 2018.

Australian businesses will be thankful for a reprieve until mid August when the Senate will be back in session.

https://www.aph.gov.au/Parliamentary_Business/Bills_Legislation/Bills_Search_Results/Result?bId=r6053

ACCC v Mitolo - more "egregious" sub judice commentary


ACCC has taken legal action against Mitolo, the largest potato wholesaler in Australia, for alleged unfair contract terms and breaches of the Horticulture Code. Unfortunately,, the ACCC has again decided to make some "egregious" sub judice commentary about the case in its media release: “These are some of the most egregious terms we have seen in agricultural contracts, and are key examples of the contracting practices in the sector that we want to address..." “We believe that these terms have caused, or could cause, significant detriment to farmers, by passing a heavy burden of risk down to farmers, the most vulnerable player in the supply chain." Will the ACCC never learn!

https://www.accc.gov.au/media-release/action-against-mitolo-for-alleged-unfair-contract-terms

ACCC v Cussons - free pass for expert economist


I was having a closer look at Justice Wigney's decision in the ACCC's unsuccessful case against Cussons for alleged cartel conduct.  I was very surprised to read (at para 400) that the ACCC chose not to cross examine Cussons' expert economist Professor George Hay. 

I've never heard of the ACCC ever giving the other side's expert, let alone their economic expert, a free pass on cross examination!


  1. Professor Hay’s opinion, in summary, was that it was likely that the Suppliers would have transitioned to ultra concentrates at the same time in early 2009 without any collusive arrangement or understanding. That was so for a number of reasons, including: that there was no economic incentive for an individual supplier to delay the introduction of ultra concentrates and forgo the economic benefits of reduced costs and possibly higher margins which were known to exist by 2008; the retailers’ strong economic reasons for requiring a prompt and simultaneous transition by all suppliers; and the retailers’ structured range review processes. Professor Hay was not cross-examined and his opinions were not tested or challenged.
  2. The Commission submitted, in effect, that the Court should prefer the opinions of Professor Williams. It expressly or implicitly criticised aspects of Professor Hay’s analysis and his opinions. In those circumstances it was somewhat unusual, if not unhelpful, that the Commission elected not to cross-examine Professor Hay. Be that as it may, the Commission’s efforts to persuade the Court to prefer Professor Williams’ opinions were unsuccessful. That was not simply a product of the fact that Professor Hay was not cross-examined. Ultimately, upon careful consideration of the respective reports, and taking into account Professor Williams’ oral evidence, and the evidence as a whole, the opinions of Professor Hay were found to be of more probative value and assistance than those of Professor Williams. Professor Hay’s evidence and his opinions were, on the whole, more persuasive than Professor Williams’. That is so for a number of reasons.

Apple loose change


Apple has agreed to pay $9 million in penalties for making false or misleading representations to customers with faulty iPhones and iPads about their rights under the Australian Consumer Law By my reckoning that means Apple has only $199,991,000,000 cash left in the bank!  Oops, forgot to convert the penalty into US dollars. Should be a $US6.7 million penalty, leaving only $199,993,300,000 left in Apple's bank account.


https://www.accc.gov.au/media-release/iphone-and-ipad-misrepresentations-cost-apple-inc-9-million-in-penalties


Interesting observation by Justice Lee about the ACCC's $9m penalty against Apple. He is spot on describing the penalty as "loose change".   I particularly liked how Justice Lee pointedly asked counsel for the ACCC how many minutes it would take the “behemoth” to recoup the $AUD9 million. By my calculations and based on Apple's annual sales to September 2017 of $AUS308 billion, the answer is 15 minutes and 21 seconds! You have to wonder why the ACCC didn't hold out for more money given they had up to 275 separate contraventions each worth $10 m each - maybe someone at the ACCC forgot to put a zero in their penalty submissions!

https://www.brisbanetimes.com.au/business/consumer-affairs/loose-change-judge-suggests-apple-could-recoup-9m-penalty-in-minutes-20180719-p4zset.html

ACCC always get their man!


ACCC has had a win against Domain Name Corp and Domain Name Agency in relation to blowing - ie sending unsolicited renewal notices. However, the most interesting aspect of the case is arguably the following order made earlier in the proceedings by Justice McKerracher in relation to Steven Bell, the third respondent and owner of the businesses: Pursuant to Rule 30.33 of the Federal Court Rules 2011 (Cth), the Third Respondent (Steven Bell), a prisoner detained in custody at Hakea Prison, be produced to the Federal Court of Australia in order to attend and participate in mediation in this proceeding on Thursday 21 December 2017 at 10.00 am at Level 4, Commonwealth Law Courts Building, 1 Victoria Avenue, Perth, Western Australia.  It just shows the lengths the ACCC will go to get their man.

https://www.accc.gov.au/media-release/domain-name-corp-and-domain-name-agency-to-pay-195-million-in-penalties

Austrac v CBA - opportunity lost


Austrac's $700 million fine against CBA in the money laundering case may sound impressive but in reality it's an opportunity lost.  Austrac should have hung in there for a $1 billion plus penalty. After all, CBA failed to report 53,500 illegal transactions through its IDMs (Immediate Deposit Machines) of $10,000 or more, totalling $625 million, plus a further $77 million of suspicious transactions.   In other words, CBA is paying approximately $13,000 per breach in relation to conduct which is subject to a maximum penalty of $21 million per breach. By my calculations that means the fine is actually only 0.06% of the maximum fine which could have been imposed. I also reckon Tabcorp must be feeling a bit hard done by at the moment after agreeing to pay a fine of $45 million back in March 2017 for a "measly" 108 breaches of the same legislation, which equates to $416,000 per breach!

https://www.smh.com.au/business/banking-and-finance/cba-reaches-700m-settlement-over-austrac-allegations-20180604-p4zj9p.html

Alleged Banking Cartel Case Commenced


Some major news on the ACCC front - the ACCC has foreshadowed that criminal charges are to be laid against ANZ and others in relation to an alleged cartel concerning an institutional share placement.


https://www.accc.gov.au/media-release/correction-criminal-cartel-charges-to-be-laid-against-anz


Wow! The ACCC has also foreshadowed criminal proceedings against Deutsche Bank for the alleged cartel concerning the institutional placement.  The other two underwriters were Citigroup and JP Morgan so it will be interesting to see if they both get charged as well.  If one of them doesn't get charged that may suggest that they were the whistleblower. Hope the ACCC has deep pockets as this case is going to be a very expensive fight for them to win!


https://www.accc.gov.au/media-release/update-criminal-cartel-charges-to-be-laid-against-deutsche-bank


Further ACCC announcement - charges are to be laid against Citigroup. Therefore, it looks like JP Morgan as the third underwriter may have been the whistleblower.


https://www.accc.gov.au/media-release/update-criminal-cartel-charges-to-be-laid-against-citigroup


A number of senior executives have also been charged as part of the ACCC's case against ANZ, Deutsche Bank and Citi Group. One thing that should be noted is how the criminal prosecution process works. It is the Commonwealth Director of Public Prosecutions (CDPP) who has to make the final decision whether to commence a criminal prosecution. The CDPP's decision also has to be made independently of the referring agency. In other words, the ACCC doesn't make the final decision on whether to commence a prosecution or who to charge. The CDPP under its Prosecution Policy has a two-stage test that must be satisfied before a prosecution is commenced: (1) there must be sufficient evidence to prosecute the case; and (2) it must be evident from the facts of the case, and all the surrounding circumstances, that the prosecution would be in the public interest. I worked with the CDPP on a couple of criminal prosecutions during my time at the ACCC and I found them to be very exacting in terms of the evidence they required before they would decide to commence a prosecution. Indeed, it seemed to me at the time that the standard was way higher than merely "sufficient evidence".

https://www.accc.gov.au/media-release/criminal-cartel-charges-laid-against-anz-citigroup-and-deutsche-bank

ACCC v Pfizer - time to move on?


The ACCC has lost the Pfizer s46  misuse of market power appeal.

It may be time for the ACCC to drop this one given they lost at the first instance before Justice Yates and have now lost before Justices Greenwood, Foster and Middleton on appeal, who are all very smart competition law judges


https://www.accc.gov.au/media-release/accc-unsuccessful-in-appeal-against-pfizer

ASIC v Westpac [2018] FCA 571 - the quick version


The Federal Court handed down its decision in the Westpac BBSW rate rigging case today.  Given the judgment is 667 pages long I thought a summary of what the court decided would be helpful. ASIC failed to make out its allegations against Westpac:  * under ss1041A and 1041B of the Corporations Act concerning market manipulation and market rigging or * under s 1041H of the Corporations Act or ss 12DA, 12DB and 12DF of the ASIC Act, for misleading or deceptive conduct and misrepresentation ASIC was successful in proving that Westpac: * engaged in unconscionable conduct under s 12CC of the ASIC Act on four occasions by trading Prime Bank Bills in the Bank Bill Market with the dominant purpose of influencing yields and where BBSW set; and * contravened ss 912A(1)(a), (c), (ca) and (f) of the Corporations Act by breaching its financial services licensee obligations. I suspect that ASIC will be very disappointed losing on the big ticket items namely the market market manipulation and market rigging claims.

http://www.austlii.edu.au/cgi-bin/viewdoc/au/cases/cth/FCA//2018/751.html

Grocery Code of Conduct Review Disappoints


Graeme Samuel, the reviewer of the Grocery Code of Conduct, has foreshadowed that he will be recommending a range of significant changes to the Code. However, it seems to me he has fallen short of recommending that the Code be made mandatory. 

I can't see why he isn't recommending that the Code become mandatory given that he has found that there are still examples of egregious behaviour occurring in the market and Metcash hasn't even signed up to the Code.

https://www.afr.com/business/manufacturing/exaccc-boss-graeme-samuel-recommends-major-changes-to-grocery-code-of-conduct-20180523-h10fms

CFMEU case collapses


I was pretty surprised at these reported comment by the lawyer for the defendants about the Victorian DPP's decision to withdraw charges against Mr Setka and Mr Reardon: "Crucially it's been exposed that neither of the Boral men viewed the coffee shop conversation as any kind of threat at the time and did not think of it as any kind of threat for over a year," Mr Gordon said. "And after a year, their view of that coffee shop conversation, their recollection of it got changed. "It got changed only after various lawyers got involved, internal lawyers for Boral, external lawyers for Boral, lawyers for the ACCC, and crucially lawyers for Dyson Heydon's Trade Union Royal Commission." He said multiple drafts were made of witness statements that changed an "entirely innocent" coffee shop conversation into a blackmail threat. I wonder how the lawyers referred to above will respond to those claims? I know what I'd be doing.

https://www.afr.com/news/policy/industrial-relations/cfmmeu-boss-john-setka-has-blackmail-charges-dropped-over-alleged-boral-ban-20180516-h104d5

Saturday, 12 May 2018

Spotlight on the Franchising Industry...again!


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







11 May 2018


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



Dear Committee Secretary


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

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

Terms of reference

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


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

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

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

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

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

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

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

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

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

No comments.

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

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

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

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

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

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

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

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

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

No comments.

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

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

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

No comments.

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

ACCC’s enforcement of the Code

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

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

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

Year
ACCC investigations litigation

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

2012
0

2013
0

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


Total

30



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

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

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

Table 2: Franchising complaints

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

Total

12640

            * estimate

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

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

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

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

(h) any related matter

Marketing funds

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

Franchise associations

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

Fear of franchisor

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

Small Business Code Authority

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

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

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

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

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

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

Yours sincerely




Michael Terceiro
Competition and Consumer Lawyer
Terceiro Legal Consulting