Saturday, 25 October 2008

High Court clarifies remedies under Franchising Code

Case note: Master Education Services Pty Limited v Ketchell [2008] HCA 38

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

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

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

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

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

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

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

Sunday, 12 October 2008

Is the ACCC the new anti-counterfeiting cop?


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

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


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

The ACCC obtained a number of interlocutory orders against DBO on ex parte basis. These orders included injunctions restraining the operators of the DBO website from “disposing, mortgaging, assigning, charging or otherwise dealing with their assets” (subject to some limited exceptions). In addition, the ACCC appears to have obtained orders suspending the DBO website, for the time being.
On 19 September 2008, the ACCC issued a second media release calling on consumers who believed they had been misled by DBO to contact the ACCC -

It appears that this appeal was made with the dual purpose of obtaining further evidence and identifying consumers who may have a claim for compensation.

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

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

Why did the ACCC take the case?

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

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

  • The ACCC investigation was carried out in conjunction with the US FTC and OK Office of Fair Trading. 
  • The bank with which DBO held credit card merchant facilities co-operated with the ACCC. This bank made the unilateral decision to suspend DBO’s merchant facility and settlement account pending further investigation by the bank. 
  • NetRegistry Pty Ltd, the domain name registrar for DBO’s website, also cooperated with the ACCC by effectively disabling the DBO website. 
Due to the ACCC’s action, DBO’s internet operations were well and truly closed down, at least in the short term. 

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

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

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

  • Billabong 
  • Esprit 
  • Gucci
  • Industrie 
  • Mossimo 
  • Mooks 
  • Quiksilver 
  • Rip Curl
  • Tommy Hilfiger 
While there is not a great deal of current information available about ACAG’s activities, some indication of their operations can be obtained from a submission it made to the Standing Committee on Legal and Constitutional Affairs in 1999 as part of the Inquiry into the Enforcement of Copyright in Australia - 

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

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

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

What options are available to counter counterfeiting conduct?

Counterfeiting of clothing can be prosecuted as a breach of either copyright, design or the trademark as well as misleading and deceptive conduct.

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

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

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

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

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

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

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

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

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

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

The most commonly used provision is section 52 which states – 

(1) A corporation shall not, in trade or commerce engage in conduct that is misleading or deceptive or is likely to mislead or deceive.
Given the broad prohibition in section 52 against conduct which is misleading and deceptive, it is an ideal provision to use against counterfeiting claims.

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

Section 53 has also been used to combat counterfeiting. 

Relevantly, section 53 provides - 
A corporation shall not, in trade or commerce, in connexion with the supply or possible supply of goods or services or in connexion with the promotion by any means of the supply or use of goods or services:
(a) falsely represent that goods are of a particular standard, quality, value, grade, composition, style or model or have had a particular history or particular previous use;
(c) represent that goods or services have sponsorship, approval, performance characteristics, accessories, uses or benefits they do not have.
Section 53 has been used in conjunction with a private counterfeiting claim under section 52.

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

Section 55 could also be used to combat counterfeiting conduct –

A person shall not, in trade or commerce, engage in conduct that is liable to mislead the public as to the nature, the manufacturing process, the characteristics, and the suitability for their purpose or the quantity of any goods.
This provision is mirrored in section 75AZH, which is a criminal offence. 

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

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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