10 Tips for Dealing with Zealous Regulators

The following is the text of a presentation I was to deliver [1] at the Franchise Council of Australia National Franchise Convention 2012 with Mark Brennan, the then Chairman of the Victorian Commission for Gaming and Liquor Regulation[2]. 

Introduction

Good afternoon. Today Mark and I will be talking about two separate topics. The first topic is entitled “10 Tips for Dealing with Zealous Regulators”. We will be seeking to provide franchisors and franchisees with 10 practical and common sense tips for dealing with Zealous Regulators. This presentation focuses on such regulators as the Australian Competition and Consumer Commission (ACCC) and the Australian Securities and Investments Commission (ASIC) and state based consumer protection and fair trading regulators. The advice we provide may not be suitable for dealing with such regulators as the Australian Taxation Office which appears to operate quite differently.

The second Topic is entitled “and 5 tips for the Regulator Dealing with the Regulated”. In the knowledge that there were likely to be a number of regulators present during this presentation, we couldn’t resist the temptation to provide them with some advice also. Mark will be presenting this part of the presentation given his considerably greater eminence as a regulator.


Tip Number 1 – Don’t ignore correspondence

While this advice sounds pretty obvious it is surprising how often businesses don’t respond to a regulator’s letter in a timely manner or at all. It is very rare for a regulator to send a letter to a business which does not require a response. Indeed, if your business receives a letter the likelihood is that the complaint against you has passed through the various screens used by regulators to identify and focus on high priority matters.

If you have received a letter from a regulator the chances are you are already listed as a high priority investigation on the regulator’s regular internal management reports. Indeed your businesses' conduct may already have been the subject of an internal report by staff to the commissioners in charge of the regulator, so you are definitely on the radar.

If you ignore the regulator’s letter and fail to provide a response by the due date, you could find yourself in much more trouble. The regulator may be able to impose penalties on your business for not responding by the due date. Alternatively, the regulator may have the power to compel your business to provide the requested information and documents through a statutory notice. If this happens, your compliance costs are likely to rise significantly.

A recent example of a company which appears not to have taken an ACCC letter as seriously as it should have was Apple in relation to its new iPad 4G claims. I understand that Apple failed to provide a timely response to the ACCC’s initial letter. I guess we all know what the ultimate outcome was for Apple – it was sued by the ACCC, fined $2.25 million (which was quite a lot of money for a first time loser) and most significantly it received a great deal of negative publicity.


Tip Number 2- Make sure you fully understand what the regulator is asking

Again this sounds like obvious advice, but it is remarkable the number of times when I was at the ACCC that I saw responses from businesses which did not answer the questions that we asked. Businesses and their legal advisers seem very reluctant just to pick up the phone and speak to the regulator about their requests for information, preferring instead to make assumptions about what the regulator really wants. In most cases, you can gain a better understanding of what is required, by calling the contact officer listed on the letter and asking them to explain their request.

If you receive a letter from a regulator or even a statutory notice, make sure you understand what they want before you respond. You must avoid providing a non-responsive answer, as the regulator may wrongly interpret this as your business trying to be evasive or even dishonest.


Tip Number 3- Get specialist advice if necessary

You have to know what you don’t know. Therefore, before sending any response to a regulator, ask yourself whether you fully understand the relevant area of law. While the Competition and Consumer Act is not rocket science there are a few quite technical areas where you really should get some specialist advice. For example, the new cartel provisions are ridiculously complex.

In some cases, the issues raised by a regulator will relate to very serious allegations of misconduct. For example, a letter may state that your business is at risk of having contravened particular legislation and that you may be potentially liable to pay a significant criminal or civil penalty or even be subject to imprisonment. For example, the civil penalties for contraventions of the competition provisions of the Competition and Consumer Act 2010 are now the highest of either $10 million, three times the benefit of the illegal conduct or 10% of annual turnover of the business.

If you are not confident answering the regulator’s letter, you should get advice from somebody who specialises in the relevant area. That may mean that you don’t use your usual commercial lawyer but rather a specialist trade practices or corporation lawyer.


Tip Number 4 – Don’t rush your response

If you don’t believe you have enough time to respond to a regulator’s request for information and documents, ask for more time. Regulators will often be willing to allow your business more time to provide a response as long as you agree to give them information in a staged manner. The regulator’s overriding concern in an investigation is to ensure that their investigation isn’t stalled by a lack of relevant information. If they can keep moving forward with their investigation, they will usually agreed to getting information in regular tranches.

The risk of rushing your response is that you may fail to provide some relevant information or documents. If the regulator subsequently finds out you have failed to provide relevant information or documents, they may suspect that you did this on purpose rather than by accident. There are serious criminal penalties for providing misleading and incorrect information to a regulator.

Also don’t wait for the day before the information is due to ask for a two-month extension. If you think you need an extension ask for one as quickly as possible. If you don’t, the regulator may brand you as recalcitrant and decide to compel you to produce information and documents. Obviously, this will increase your compliance costs dramatically.


Tip Number 5 – Always try speak to the regulator on a without prejudice basis

If the regulator has contacted your business in relation to a potential breach of legislation, for example a claim by the ACCC that you have misrepresented the effect of the carbon tax, make sure you try to speak to the regulator on a without prejudice basis. By speaking only on a without prejudice basis you may be able to ensure that any admissions which you may inadvertently make, either in correspondence or orally during meetings or over the telephone, will not be able to be used against you in subsequent legal proceedings.

What you have to remember is that the regulator is trying to make a case against your business, so if they can get an admission from you in a meeting or over the telephone they will be tempted to use it against you.

The practical way of doing this in correspondence is by placing the words “Without Prejudice” at the top of all correspondence to the regulator.

In relation to meetings with the regulator, you should make it clear at the beginning of every meeting that you will only speak to them on a without prejudice basis.

You must also try to ensure that all telephone conversations with the regulator are on a without prejudice basis. While you may initially call the regulator with the intention of simply asking a question about process, before you know it you will be discussing substantive issues. Accordingly, it is safest to begin all conversations with a quick disclaimer along he lines of: “I am speaking to you on without prejudice basis”.

If the regulator refuses to speak to you on a without prejudice basis, you should immediately retain a lawyer.


Tip Number 6 – Don’t be too aggressive or too passive

It may sound like a difficult balancing act but when you deal with regulators you have to try to avoid being either too aggressive or too passive.

If you take an aggressive approach, you are likely to antagonise the regulator. When I worked at the ACCC it was very common for lawyers to be unnecessarily aggressive towards the ACCC. Like in human relationships, regulators will tend to respond to aggression with aggression. Furthermore, if you are very aggressive the regulator may suspect that you may have something to hide.

Similarly, don’t be too passive. You must avoid just agreeing with every proposition put to you by the regulator. Don’t admit things to the regulator simply because you believe that by being agreeable, the regulator may decide to let you off. In reality, most regulators will be seeking to use any concessions or admissions which you make to bolster their case.

When I started at the I ACCC as a not so fresh faced graduate, I was accused of being overly aggressive towards the businesses I was investigating. Fortunately for me a brilliant and very wise ACCC lawyer, took me aside and gave me some very valuable advice – he said I had to avoid being either too aggressive or too passive when dealing with businesses – rather I had to attempt to be polite but firm. Polite in the way I communicated with businesses while at the same time firmly asserting the ACCC’s legal position.

I think that this is excellent advice for businesses when dealing with regulators – you must aim to be polite in the way you communicate with the regulator while at the same time firmly asserting your legal rights.


Tip Number 7 – Be aware that regulators have coercive powers

You must remember that regulators have a wide range of coercive powers, which they can use against your business.

For example, the ACCC and ASIC can serve notices on individuals and corporations compelling them to provide information and documents in relation to suspected breaches of their legislation.

These agencies can also issue notices forcing individuals to answer questions orally about suspected breaches of the law. Furthermore, corporations and individuals cannot claim the privilege against self-incrimination when answering questions in oral examinations of civil contraventions of the legislation. The privilege against self-incrimination still applies in relation to criminal investigations.

Regulators also have the power to execute search warrants at a corporation’s premises or at an individual’s home. While the ACCC and ASIC use their search warrant powers quite sparingly, business must know how to respond to a search warrant.

Both the ACCC and ASIC have the power to issue infringement notices to a corporation or an individual in relation to particular breaches of their legislation. Such notices are like parking fines in the sense that they can be paid without going to court. The ACCC has shown a great liking for infringement notices having issued over 80 such notices in the first two and a half years since the law was introduced.

The other important issue to remember in relation to statutory notices is that, while the privilege against self-incrimination has been removed in civil investigations, a business can still claim legal professional privilege over its legal documents. In other words, a corporation or an individual does not have to produce documents or answer questions which may disclose a privileged communication with their lawyer. Furthermore, regulators cannot seize legally privileged documents during a search warrant.

The ACCC also has the power to ask the court for permission to use listening devices in relation to cartel conduct.

So remember if you business tries to play games, the regulator will not hesitate to use its coercive powers to get what it wants from your business.


Tip Number 8 – Protect your confidentiality

Make sure that you take steps to protect the confidentiality of any information you voluntarily provide to the regulator. It is important to take such steps, as all regulators are subject to freedom of information legislation. If you provide the regulator with commercially confidential information, there is a risk that one of your competitors or the media may obtain this information through a FOI request.

The simplest way to protect confidential information is to make sure that you place the words “Commercial in Confidence” on each page of every document that you wish to keep confidential. The reason you should place the words “Commercial in Confidence” on each page is to make sure every individual page can be easily identified as confidential if the page becomes separated from the rest of your document.

You may even wish to be more explicit about the confidentiality of the information which you are providing to the regulator by including the following words from section 47 of the Freedom of Information Act 1982 (Cth) on all your confidential documents:

This document and all attachments to this document have commercial value that would be, or could reasonably be expected to be, destroyed or diminished if the information were disclosed.


Tip Number 9 – Don’t be too reactive

A mistake that many businesses make regardless of whether they are a large company or a small business is being too reactive with regulators. Companies will often respond diligently to every request for information and documents made by the regulator but never make any attempt to be proactive in challenging or seeking to resolve the regulator’s concerns. I think that this reactive approach is based on a misplaced view that the regulator may simply go away once they have been provided with all the relevant information by the business.

Being reactive is usually not the right approach to take. If you simply respond to the regulator’s requests for information and documents, all you will be doing is assisting the regulator to build their case against you. What you should be trying to do is to demonstrate to the regulator that their concerns about your business are misplaced.

For example, you could point out to the regulator that there is a flaw in their case theory, which means that your business has not contravened the relevant legislation. Or you may argue that even if there has been a contravention, it is not worth the regulator’s time and effort to pursue a case against your business, because there has been limited consumer detriment.

Another approach you could take is to try to fix any potential problems identified by the regulator, before being asked to do so by the regulator. For example, if the ACCC were concerned that your company had published a misleading advertisement, you may decide to publish a corrective notice and offer refunds to customers, before being asked to do so by the ACCC. The benefit of doing this is that you may take the momentum out of the regulator’s investigation.

The biggest mistake which business can make in dealing with a regulator is deciding to give up too late. How many times have you seen a business respond defiantly to regulator on the commencement of legal proceedings, only to meekly settle the case a couple of months later after spending an enormous about of money on legal fees. What you have to try to do is take preventative action to stop the regulator from commencing legal proceedings against your business in the first place. You can do this by fixing the problems early so that there is nothing left for the regulator to go after.


Tip Number 10 – Remember ignorance of the law is relevant

There is a well-known saying that ignorance of the law is no excuse for breaking the law. This statement is clearly correct as a matter of law. It is also the view which most regulators take in relation to liability – ie even if your business did not know that particular conduct was illegal, it will still be held liable.

The classic example is Resale Price Maintenance which many small and medium sized businesses have never heard of and do not know is illegal.

However, ignorance of the law is a highly relevant consideration in relation to the appropriate punishment which should be imposed. In other words, while a claim that you were ignorant of the law is unlikely to get you off the hook with a regulator, it should have a significant effect on the size and severity of any penalties which the regulator is seeking to have imposed.

In the event that your business is found to have breached a law and your business was ignorant of that law, make sure that you emphasise this fact to the regulator when negotiating an appropriate punishment.

On that note, I will now hand over to Mark for the second part of the presentation “And 5 tips for the regulators dealing with the regulated”.

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[1] Unfortunately, due to a medical emergency I could not attend the Convention. Alicia Hill of McInnes Wilson Lawyers kindly stepped in at the last moment to deliver my part of the presentation.

[2] Mark Brennan has since been appointed the inaugural Commonwealth Small Business Commissioner

No privilege for in-house counsel

Introduction

In September 2010, the European Court of Justice decided that communications between a company and its in-house lawyer are not covered by legal professional privilege. The decision in this case must be considered quite out of step with the law in many other jurisdictions, including Australia. It may also cause some practical difficulties where multinational corporations seek to use in-house lawyers outside the European Union on global mergers.

Background

Akzo Nobel Chemicals Ltd v Commission involved an appeal by Akzo against the judgement of the Court of First instance of the European Communities, which rejected their claim of legal professional privilege in respect of two e-mail messages between the company and its in-house lawyer. These two e-mails had been seized by the European Commission during a raid of Akzo’s premises in 2003.

During the raid of Akzo’s premises, a large number of documents were seized by European Commission officials. A dispute arose in relation to a small number of documents which Akzo claimed were protected by legal professional privilege.

After some discussion, it was agreed that the Commission officials would examine the relevant documents to determine whether the documents should be privileged. This narrowed the range of documents in dispute to five documents.

After examining these remaining five documents, the Commission officials formed the view that three of those documents were definitely not privileged. Accordingly, the officials took copies of these documents and then placed copies of these documents in a sealed envelope.

The Commission subsequently invited submissions from Akzo as to why these documents should be subject to a claim of legal professional privilege.

The three documents at issue consisted of: 

• handwritten notes made by the general manager during discussions with employees and used for the purpose of preparing a typewritten memorandum; and 

• two e-mails between the general manager and Akzo’s coordinator for competition law, who was enrolled as a lawyer in the Netherlands bar and was also member of Azko’s legal department 

European Court of Justice decision

As stated above, Azko appealed the first instance decision not to grant legal professional privilege status to the two e-mails.

Azko was joined in its appeal by a number of legal associations, including the International Bar Association, as well as the governments of the United Kingdom, Northern Ireland and the Netherlands.

It was also noted in the case, that the Commission had subsequently finalised the substantive investigation into Akzo during which the two e-mails were seized. In relation to this investigation, the Commission imposed fines against Akzo for a cartel in the supply of heat stabilisers. It was also common ground that two emails which were the subject of the appeal had not played a part in the successful conclusion of the Commissions substantive investigation.

The Commission’s main argument was that the relevant documents did not qualify for legal professional privilege as they did not meet the relevant test as established in Case 155/79 AM&S Europe v Commission (1982) ECR 1575. The test established in this case was that legal advice must be requested by the client and given for the purposes of the client’s right of defence. The Commission argued that the first e-mail was merely a request for comments on a draft letter, while the second e-mail only contained further drafting changes.

The Court held that in order to claim legal professional privilege in relation to communications with in house counsel two conditions must be met:

• that the exchange with the lawyer must be connected to the client’s right of defence and 

• that the exchange must emanate from independent lawyers, that is to say lawyers who are not bound to the client by a relationship of employment. 

 The second requirement of independence meant that the there must be an absence of any employment relationship between the lawyer and the client. In other words, legal professional privilege will not cover exchanges within a company or group with in-house lawyers.

The Court held that the concept of independence must be determined both positively and negatively:

• positively, by reference to the professional ethical obligations the lawyer; but also 

• negatively, by the absence of any employment relationship. 

 The Court observed that despite a lawyer’s membership of a Bar Association or Law Society and the professional ethical obligations that they are subject to, they clearly do not enjoy the same degree of independence from their employer as a lawyer working in an external firm.

Consequently, the Court concluded that in-house lawyers are less able to deal effectively with conflicts of interest between their professional obligations and their employer and as such, legal professional privilege was not available.

Conclusions 

While commentators on European union competition law did not see this case as an unexpected development, it does provide a strong indication that courts are looking to restrict the scope of legal professional privilege in relation to in-house lawyers.

The case is likely to create added complexities for multinational corporations which operate in the European Union and in other jurisdictions where claims of legal professional privilege can be made in relation to communications with in-house lawyers.

Such corporations will have to avoid situations where communications which they believe are protected in one jurisdiction, may subsequently lose this protection because the communication relates to a transaction or conduct which is the subject of an investigation by the European Commission.