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 gronds 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.

TheL&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