ACCC Investigatory Insights – Part 2

The Investigatory Process

The Enforcement Committee is a subdivision of the full Commission. It is responsible for making decisions in relation to all enforcement matters – namely, restrictive trade practices, consumer protection, unconscionable conduct, franchise investigations and product safety matters.

The EC meets once a week and comprises a number of Commissioners and senior managers. It makes final decisions on most enforcement issues, except for the decision to institute legal proceedings, which has to be made by the full Commission.

Before staff are able to incur significant amounts of money on an investigation, they must first get the approval of the Enforcement Committee.

The EC may make a range of decisions including whether to:

• pursue a proposed investigation 

• pursue the proposed investigation in the way recommended by the case manager 

• take a different approach to an investigation 

• settle litigation 

• close an investigation. 

The final decision to issue a section 155 notice which must be made by the Chairman or Deputy Chairman after they are satisfied that they have “reason to believe” that a contravention of the Competition and Consumer Act 2010 (CCA) may have occurred.

There are a broad range of investigatory approaches which an ACCC officer may adopt in relation to a particular investigation. However, the way in which restrictive trade practices and consumer protection matters are investigated is usually very different.

Investigating consumer protection cases

In most consumer protection matters, the investigation will commence with either a consumer or competitor complaint. As the issues will often relate to a misrepresentation made to the general public, there is no point in the ACCC carrying out a covert investigation. Rather once the investigator is satisfied that the representation may be misleading, they will write a letter to the company raising the allegations. In addition to asking the company to respond to the allegations, the ACCC will usually ask the company to provide information and relevant documents on a voluntary basis.

The ACCC will ask for a significant amount of information and documentary evidence from traders on a voluntary basis, even in restrictive trade practices matters. The primary reason for asking for information on a voluntary basis is because the process for issuing section 155 notices is quite slow and cumbersome. Only the Chairman or Deputy Chairman of the ACCC can form a reason to believe to issue a section 155 notice. Therefore, all reason to believe papers have to be considered by the Chairman or Deputy Chairman personally.

The powers of the ACCC to issue section 155 Notices are very different to the process at ASIC to issue notices under Division 3 of the ASIC Act 2001. ASIC officers have the authority to issue notices under the ASIC Act.

Usually if the company the subject of the investigation has been quite cooperative in its first response to the ACCC, the ACCC investigator will already be looking for ways to resolve the matter. For example, in cases where the company responds to the ACCC with a credible explanation which demonstrates that their conduct did not result in a great deal of consumer detriment or was inadvertent, the investigator will usually close the matter with little further investigation.

It is usually only when the company has not been forthcoming in its response or has been dismissive of the ACCC’s letter, that the investigator will consider whether they need to pursue the investigation further, usually through issuing section 155 notices.

In most consumer protection investigations, the ACCC will not issue section 155 notices. If section 155 notices are issued in a consumer protection matter, the focus will generally be on obtaining documents to prove accessorial liability – such as the names of the individuals in the company who approved or signed off on advertisements which made the alleged misrepresentations. Section 155 notices requiring the attendance at an oral examinations are rarely used in consumer protection investigations.

Once the investigation has been completed, the investigator may seek legal advice on whether the evidence discloses a breach of the CCA. Legal advice may be sought from internal lawyers or from external lawyers or barristers. However, the ACCC cannot commence legal proceedings based on internal legal advice, except for one limited exception. Where litigation is being contemplated, the ACCC must seek legal advice from an external legal adviser, usually a barrister.

Investigating restrictive trade practices cases

In restrictive trade practices matters the first step in the investigation is to prepare a case theory document. This is simply a narrative which explains what conduct the investigator believes the company under investigation has engaged in and why such conduct constitutes a breach of the CCA. Usually, in more complex restrictive trade practices matters the investigator will also prepare an evidence matrix to identify the evidence that the ACCC either has or will need to obtain to establish each element of the contravention.

Covert and overt phases

Overseas antitrust regulators draw a very clear distinction between the covert and overt phases of an investigation. In the US, the covert phase usually involves a confidential investigation through the grand jury process and/or the use of listening devices. The covert phase usually ends with either the execution of a search warrant on the target’s premises or the issuing of indictments by the grand jury. The European Commission also conducts covert investigations during which it may conduct confidential interviews with whistle blowers or executives of the companies seeking immunity. The overt phase usually commences with a dawn raid.

This contrasts with the ACCC which does not draw such a clear distinction between the covert and overt phases of an investigation. Often the ACCC will write to a company at a very early stage in the investigation, raising the allegations and seeking information and documents on a voluntary basis.

Search Warrants and Dawn Raids

Overseas regulators such as the US Department of Justice (DOJ) and European Commission routinely commence the overt phase of their investigations with a search warrant or dawn raid. They do this because they are very sceptical about the likelihood of companies producing incriminating documents to the regulator on a voluntary basis or even pursuant to a compulsory notice.

The ACCC’s practice is much different. It relies extensively on voluntary production of documents and the use of section 155 notices. Section 155 permits the ACCC to issue compulsory notices to obtain information, documents and oral evidence from companies and individuals. There is no privilege against self-incrimination under section 155 to the extent that the evidence is only used in a civil court proceeding.

The ACCC does not routinely execute search warrants in its matters. For example, in the 2009-2010 Financial Year the ACCC executed only 4 search warrants throughout the whole of Australia in all its investigations. These four search warrants were all executed in relation to consumer protection matters.

Next instalment

In the next instalment of ACCC Investigatory Insights I will discuss how to respond to an ACCC section 155 Notice.

ACCC Investigatory Insights – Part 1

Introduction 

While a great number of Australian businesses have been the subject of an ACCC investigation at some time in the past, it is likely that most of these businesses did not gain a good understanding at the time of how the ACCC actually conducts its investigations. However, it is only by gaining a good understanding of how the ACCC conducts its investigations, that businesses may be able to avoid having further problems with the ACCC in the future. In this article, I will endeavour to provide some insights about how the ACCC conducts its investigations in order to assist businesses in avoiding the ACCC’s unwanted attentions in the future.

Case selection

Cases come to the ACCC from a variety of sources. Most complaints come from telephone complainants through the ACCC’s centralised call centre.

The call centre operators are able to answer most enquiries, including simple complaints about contraventions of the consumer protection provisions of the Competition and Consumer Act 2010 (CCA) (formerly the Trade Practices Act 1974). These complaints are recorded on a national database usually on the same day they have been received by the ACCC.

Call centre operators are required to refer complainants about alleged contraventions of the restrictive trade practices and unconscionable conduct sections of the CCA to a regional office. These calls are automatically referred to regional offices because the ACCC sees them are more complex and thus more appropriately directed to more experienced officers. Call centre staff are also required to refer particular complainants about cartel conduct directly to a senior officer in a regional office. Usually these types of complaints involve a whistleblower or a person with direct evidence of a suspected cartel.

The call centre operators have developed a good sense of what complaints may constitute a significant breach of the CCA. Accordingly, call centre operators will often refer promising consumer protection matters to regional offices or flag them on the database.

The way the ACCC call centre operates is a particular strength of the ACCC. There are very few antitrust or consumer protection regulators in the world that could claim that significant complaints are escalated to an investigator on the very same day that the complaint is received.

Despite the bulk of complaints coming to the ACCC through the call centre, most investigations begin with a written complaint. This is because written complaints are generally more substantive as they provide more evidence in support of the allegations.

The main groups which write to the ACCC to lodge a complaint are:

• companies complaining about the conduct of one of their competitors 

• sophisticated consumers 

• government departments 

• non-government organisations, particularly in the environmental area 

• industry associations 

• politicians 

• companies which are self-reporting their conduct. 

Only a small proportion of total complaints received by the ACCC are escalated to a regional office for further investigation.

The types of matters that are routinely not investigated by the ACCC include:

• conduct which may be more suitable for private action, such as misleading representations about a competitor 

• matters which are very difficult to investigate for jurisdictional reasons, for example an overseas-based lottery scam which required consumers to send money to an overseas post office box 

• franchise matters where the franchisee complainant has not already been to the Office of Mediation Advisor 

• contraventions which do not appear to cause a great deal of consumer detriment 

• matters involving small local traders or unincorporated businesses

Each regional office around Australia may received between 10 and 40 written complaints a week plus a further 20 call centre referrals. This means that ACCC directors have to make difficult decisions about which matters to pursue. Obviously, directors will try to take on a manageable number of cases. Director will also try to ensure that their case load is somewhat representative of the major enforcement areas under the CCA – ie restrictive trade practices, consumer protection, unconscionable conduct, franchisee matters and product safety.

Unfortunately, given the volume of complaints, there can be a tendency for the ACCC directors to select matters which may be easier to prove, rather than matters which may raise more complex issues. Therefore, an ACCC director may decide to pursue a resale price maintenance complaint, rather than a misuse of market power complaint, because the former case is generally much easier to prove.

Another source of complaints to the ACCC are private law firms. These firms approach the ACCC to either – 

• advise the ACCC that their client has engaged in a contravention of the CCA; or 

• complain to the ACCC about an alleged contravention of the CCA by their client’s competitor. When a company complains about a competitor, the ACCC will generally ask the company why it is not taking its own legal action, particularly if it is a large publicly listed company.

Another source of potential cases investigations from publicly available information which may come to the attention of an ACCC staff member. For example, a report in a newspaper may suggest that a company has engaged in conduct which contravenes the CCA or a staff member may see an advertisement in the newspaper or on television which they believe is misleading.

The ACCC’s regional offices have considerable discretion whether to commence an investigation into a complaint. The absence of clear priorities gives staff considerable discretion to pursue whatever matters they want.

However, there are a number of informal priorities within the ACCC at any one time. For example, it appears that the following areas are informal ACCC’s priority areas at the current time: 

• cartels; 

• environmental misrepresentations; 

• health related misrepresentations; 

• two price advertising; 

• failure to state the full cash price; 

• misrepresentations in relation to telecommunications products and services; 

• misrepresentations about statutory warranties. 

Next instalment

In the next instalment of ACCC Investigatory Insights, I will discuss the ACCC’s Investigatory Processes.

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.

An Introduction to Price signalling

Introduction

Recently there has been considerable debate about the introduction of proposed price signalling legislation in relation to the banking sector, as part of the Competitive and Sustainable Banking package. Most of the commentators, ranging from journalists to lawyers, have been highly critical of the proposed laws which would make price signalling in the banking sector illegal under the Competition and Consumer Act 2010 (formerly the Trade Practices Act 1974).

The short article will discuss a recent US Federal court decision in relation to a price signalling allegation involving Delta Air and Air Tran. A consideration of this recent decision may go some way to better understanding the types of conduct which may be targeted by the proposed price signalling legislation in Australia.

Background

The central allegation In re Delta/AirTran Baggage Fees, No. 10-md-2089 (N.D. Ga. Aug 2, 2010) was that Delta Air and Air Tran had attempted to engage in cartel activity through price signalling.

The plaintiffs in the case alleged that Delta and Air Tran agreed to increase prices for flights to and from Atlanta by introducing a surcharge on baggage. The plaintiffs based their allegations on a number of earning calls and industry meetings at which executives of Delta Air and Air Trans disclosed information about their pricing plans in public meetings.

For example, in one of the earnings calls, AirTran Chief Executive Officer Robert Fornaro was asked by an analyst if AirTran would impose a surcharge of $US15 on passengers’ first checked baggage. He allegedly responded that AirTran preferred to be a follower on the baggage-fee issue and would introduce such a surcharge if Delta introduced such a surcharge first.

In November 2008, Delta did in fact announce that it was going to introduce a surcharge of $US15 on the passengers’ first checked baggage. This was then followed by a similar announcement by AirTran about a week later – namely, that it would be introducing the same type of fee on the same day as the Delta surcharge was scheduled to take effect.

At the relevant time, Delta Air and AirTran together accounted for 92% of all air traffic out of the Hartsfield-Jackson Atlanta International Airport.

District Court decision

The central issue in the District Court case before District Court Judge Timothy C. Batten was whether the allegations should proceed or whether they should be dismissed on the grounds that they were unlikely to succeed at trial.

Judge Batten decided that the allegations of price signalling should be allowed to proceed. In deciding to allow the price signalling case to proceed, Judge Batten observed that Delta Air and AirTran are clearly each other’s closest competitors in the relevant market. He also stated that it was undisputed that the two companies closely monitored each other's earning calls.

Judge Batten concluded that “because the allegations in the plaintiff’s complaint contained sufficient factual specificity to establish unlawful conspiracy, dismissal would be improper.”

However, he stated that there may be a legitimate and lawful business justification for the introduction of the surcharge by Delta Air, given that it was acquired by Northwest in October 2008, and at that time, Northwest already imposed a similar surcharge on its passengers’ baggage. Therefore, there may be an argument that the introduction of surcharge was simply a standardisation of charges of across the merged group, and not the response to the price signal received from AirTran.

Judge Batten also dismissed two other claims that Delta Air and AirTran had attempted to monopolise certain markets through their alleged collusion in relation to baggage fees.

Conclusion

The Delta AirTran case demonstrates that a plaintiff or anti-trust regulator will need a significant amount of factual specificity in order to succeed in establishing a price signalling case.

Not only will the plaintiff or regulator have to establish that a business had made a clear public statement about its future pricing plans, but there will also need to be evidence that the businesses’ competitors were aware of these public statements and that certain actions occurred after the making of these public statements.

However, one issue is abundantly clear from the Delta AirTran case - it is a very bad idea for the CEO of a large corporation to state publicly that they would only introduce a new fee if their major competitor did so before them and then proceed to do exactly that.

Events – Environmental Defender's Office National Conference

I was recently invited by the Environmental Defender's Office to present a paper at their National Conference "Public Interest Law In Australia: 25 Year On"

My paper was an updated version of the article entitled “When Green Wash Won’t Wash – Avoiding Misleading Environmental Claims” which I wrote for the November 2008 edition of the NSW Law Society Journal – see blog post Wednesday, 10 December 2008.

For more information about the Conference see – http://www.edo.org.au/conference_2010.php

Woolworths and Children's Safety

Introduction

Woolworths’ record in complying with product safety laws leaves a lot to be desired. Despite an extremely poor record of compliance with product safety laws, the ACCC recently settled yet another contravention with a mere slap on the wrist.[i] The ACCC has to get serious with Woolworths about its compliance with product safety standards.

Recent ACCC settlement

On 30 March 2010, the ACCC announced that it had reached a settlement with Woolworths, after its subsidiary, Big W, conducted a “major recall of children’s nightwear”. 

The ACCC News Release stated that “after being advised of the breach” by the ACCC, Woolworths “undertook a voluntary recall across dozens of styles across its nightwear range, including 19 styles from the Pink Sugar and Bed Bugs Single Nighties range and eight styles from the Selected Sleepwear Nite Club Nightwear range”. Obviously, Big W’s failure to comply with the mandatory standard for children’s nightwear was quite significant.

What action did the ACCC take in relation to this clearly significant breach of the product safety laws?

Woolworths were able to settle the mater by providing the ACCC with a section 87B undertaking. In other words, Woolworths were able to avoid court action and settle the matter administratively.

Woolworths also agreed to donate $200,000 to the Sydney Children’s Hospital and provide a further $200,000 to a research project into the mandatory safety standard. Therefore, Woolworths had to part with a mere $400,000 in relation to multiple contraventions of the Trade Practices Act 1974 (TPA).

It is important to put Woolworth’s conduct in context. In the present case, Woolworths contravened the TPA each time it sold one single item of children’s nightwear which did not comply with the mandatory standard. The maximum criminal penalty for a breach of the relevant product safety provision is $1.1 million per contravention.

Therefore, Woolworths incurred a maximum criminal liability of $1.1 million each time it sold one single item of children’s nightwear which did not comply with the mandatory standard. If Woolworths sold 10 items of clothing through Big W in breach of the mandatory standard, then it was potentially liable for a total criminal penalty of more than $10 million. No doubt, Big W sold a lot more than 10 items of children’s nightwear.

Woolworths also agreed to take other remedial steps such as:

• implementing an Action Plan to make sure Big W does not breach product safety standards in relation to children’s nightwear in the future; 

• auditing their compliance with the Action Plan; and 

• providing staff with training on product safety. One would have expected that any good corporate citizen involved in the sale of children’s nightwear would already have had these types of systems in place.

One very disconcerting aspect of the undertakings is the definition of “Children’s Nightwear products”. It appears that the term “Children’s Nightwear products” was defined in the undertaking to mean only Big W exclusive brands or products licensed exclusively to Big W. Accordingly, Big W’s obligations under the Action Plan and the related remedies appear limited only to this narrow range of products.

However, a retailer’s legal obligation to prevent the sale of products which do not comply with the mandatory standard is much broader. Section 65C of the TPA states that:

(1) A corporation shall not, in trade or commerce, supply goods that are intended to be used, or are of a kind likely to be used, by a consumer if the goods are of a kind:

(a) in respect of which there is a prescribed consumer product safety standard and which do not comply with that standard…

The equivalent criminal provision contains a similar prohibition – section 75AZS.

Therefore, it would appear that Woolworths has limited the scope of Big W’s Action Plan and related remedies to ensuring compliance with mandatory product safety standards for children’s nightwear products which are either Big W exclusive brands or products licensed exclusively to Big W. This is despite the fact that Big W has an obligation to ensure that all the children’s nightwear products which it sells comply with the mandatory standard.

First time offender?

One may take the view that Woolworths and Big W were treated appropriately in the present case because it was the first time they have breached product safety laws.

Unfortunately, Woolworths is not a first time offender.

Woolworths have been accused by the ACCC of breaching products safety standards on two earlier occasions.

In 1996, the ACCC took legal action against Woolworths and a number of its subsidiaries for selling and offering for sale six styles of children’s nightclothes which did not comply with the mandatory standard.[ii] Woolworths settled this litigation by admitting that it had breached section 52, 53(a), 53(c) and 65C of the TPA.[iii] It also provided a range of other undertakings:

• appoint an independent external investigator to report to Woolworths and the ACCC on how the contraventions occurred and who was responsible; 

• identify necessary modifications to Woolworths quality assurance, warehouse, inspection and product recall procedures; 

• routinely submit all new product lines of children's nightclothes to Woolworths quality assurance department for testing and certifying compliance with the standard; 

• routinely test representative samples of each batch of imported children's nightclothes for compliance with the standard; and 

• revise existing inspection and product recall procedures in consultation with the Commission. 

If these remedies sound familiar, they are. They are effectively the same remedies which Woolworths offered the ACCC in 2010 to settle their most recent product safety breaches. The only significant difference is that the measures agreed to by Woolworths in 1996 applied more broadly to all new product lines of children’s nightclothes sold by Woolworths, whereas the measures agreed to in 2010 are limited to Big W exclusive brands or products licensed exclusively to Big W.

At the time of the 1996 settlement, Professor Fels made the following comment:

Although Woolworths has for many years had a system of checking for compliance with this standard, it is quite clear that its systems were not fool proof. When human errors of this sort can get through it’s clearly time to revisit the controls the companies have in place. The aim of the review is to minimise the likelihood of such a problem occurring again, and at the same time to maximise the speed and efficiency with which products are removed from sale and recalled.

Unfortunately, these measures do not appear to have achieved their stated aims.

Two time loser

In October 2006, Big W was accused by the ACCC of having sold children’s swimming aid vests which did not comply with the mandatory product standard for flotation devices.[iv] Big W sold up to 4000 non-compliant Maui swimming vests exclusively through its stores on a national basis.

Big W was able to settle this matter administratively by agreeing with the ACCC to: 

• revise its checking procedures to ensure mandatory standards are met; 

• conduct refresher training for its staff; and 

• introduce procedures requiring its staff to proactively investigate products suspected of being non-compliant with mandatory products safety and information standards. 

One particularly curious aspect of this matter was the following comment by ACCC Chairman, Graeme Samuels about Big W conduct:

The ACCC was particularly concerned that Big W, once alerted by Brand Direct that there may have been a problem with the vests, continued to sell them for another week until it received written notification from Brand Direct requesting that the vests be withdrawn from sale.

Such an attitude towards compliance would ordinarily provoke a regulator to taking legal action against a trader. However, in this case, the regulator opted for an administrative settlement.

Conclusions

The ACCC’s response to repeated and blatant product safety breaches by Woolworths and its subsidiaries is unsatisfactory. This is particularly apparent when one recognises that the product safety standards that Woolworths has breached on three occasions all related to product safety standards specifically designed to protect children from injury and death.

Despite Woolworths being a three time loser, the ACCC has never instituted criminal proceedings against it for breaching product safety laws. In actual fact, the clear trend at the ACCC appears to be that it will settle such matters administratively, once Woolworth’s promises to review its product safety systems (yet again) and provide its staff with (yet another) product safety refresher course.

The ACCC has to realise that the only way it will ensure industry wide compliance with the product safety laws is by taking criminal proceedings against large corporations which continually breach product safety laws. Woolworths was a prime candidate for a criminal prosecution given the scale of its recent contraventions and its history of breaching product safety laws. Woolworths cannot be allowed to take any more chances with our children’s safety.

[i] Hospital, research benefits after nightwear code breach – at http://www.accc.gov.au/content/index.phtml/itemId/921010
[ii] ACCC seeks injunctions over children’s nightclothes - http://www.accc.gov.au/content/index.phtml/itemId/86875/fromItemId/378002
[iii] Woolworths / ACCC ‘first’ to protect children - http://www.accc.gov.au/content/index.phtml/itemId/86861/fromItemId/378002
[iv] ACCC acts against unsafe children’s swimming vests - http://www.accc.gov.au/content/index.phtml/itemId/764572

Ramping up the powers of the consumer regulator and the court: the ACCC's new powers and remedies under the Trade Practices Act

This article first appeared in the Law Society Journal (April 2010), Vol 48, No 3, pp. 66-70.

Introduction

Legal practitioners and their business clients will benefit from a good understanding of the significant and far-reaching impacts of the changes on both consumer and business transactions due to the new Australian Consumer Law,1 the first phase of which was passed in March 2010.

In particular, the Australian Competition and Consumer Commission (ACCC) is gaining a range of intrusive investigatory powers as well as the ability to seek new penalties for breaches of the Trade Practices Act (TPA).

These additional ACCC powers will greatly enhance its ability to combat breaches of unconscionable conduct and consumer protection laws. However, there is a real question whether granting these additional powers will tilt the balance of power too far in favour of the ACCC in its dealings with business.

The Australian Consumer Law changes

The Australian Consumer Law introduces four main changes to the existing consumer protection law system:

• a range of new enforcement powers and remedies for the ACCC;

• introduction of unfair contract terms legislation; 

• a new product safety system; and 

• a range of miscellaneous changes to standardise consumer protection laws across Australia. 

The new enforcement powers which the ACCC has gained are:

• substantiation notices; 

• public warning powers; and 

• infringement notices. 

The new remedies available to the ACCC in unconscionable conduct and consumer protection matters are:

• civil pecuniary penalties; 

• disqualification orders; and 

• non-party redress. 

Substantiation Notices

A substantiation notice is a notice which "requires a supplier to provide a consumer regulator with a basis for representations that it makes regarding its goods and services".2

The Trade Practices (Australian Consumer Law) Act (No 1) 2010 (ACL) states that the new s.87ZL of the TPA provides the ACCC with the ability to issue a substantiation notice to persons who have made a claim or representation promoting the supply of goods or services, or an interest in land or employment. The person, which includes corporations, can be required to provide information or documents to substantiate or support their claims or representations. The period for compliance with a substantiation notice is 21 days unless extended by the ACCC under s.87ZM.

The penalty for failing to comply with a substantiation notice is a pecuniary penalty of $16,500 for a corporation or $3,300 for an individual. The penalties for providing false or misleading information in a substantiation notice are $27,500 for a corporation and $5,500 for an individual.

Previously, the ACCC's practice was to request information from a business either on a voluntary basis or in accordance with a s.155 notice. Under a s.155 notice a business was compelled to produce information and/or documents to the ACCC. Prior to issuing a s.155 notice, the chairman of the ACCC had to satisfy himself that he had reason to believe that the business had information or documents which related to a matter which constituted a contravention of the TPA. While the requirement to form a "reason to believe" did not involve a very high burden for the ACCC, it did impose an evidentiary threshold.

The evidentiary threshold that the ACCC must satisfy now before issuing a substantiation notice is significantly lower. The ACCC only needs evidence of a claim or representation before exercising its powers. The ACCC does not need to have a reasonable belief or reasonable grounds for suspecting a breach of the TPA before issuing a substantiation notice.

The availability of a substantiation notice gives the ACCC the ability to move much more quickly against traders which have made, in the ACCC's opinion, outlandish claims about the uses and benefits of their goods or services.

The main concern about the ACCC's substantiation notice power is that the ACCC may seek to use this power in situations where it is inappropriate. For example, it may be very tempting for the ACCC to simply 'churn out' substantiation notices in investigations where previously it would have had to collect evidence to prove a contravention of the TPA.

Public warning powers

The ACL also provides the ACCC with the power to issue a public warning about a trader. In this regard, the ACL report states that "public warnings are issued to inform the public of potentially harmful conduct taking place in the very short term".3

It would appear that public warning powers are intended to be directed against "'fly-by-night' operators, itinerant traders and financial, investment and property spruikers and advisors who often move across state and territory borders".4 Therefore the focus appears to be on bogus traders who are simply seeking to misappropriate money from consumers and then vanish, making subsequent legal action against them all but impossible.

The following is the text of the new s.86DA:

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 acontravention 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.

Therefore the elements of the public warning power are:

• the ACCC must have reasonable grounds 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 seems 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 element because of the use of the word "suspect" in the legislation.

The second element is that one or more persons are likely to suffer detriment because of the conduct. The 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 financial detriment.

The third element of the legislation is the most onerous aspect in terms of the ACCC utilising its 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 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 business's ability to continue trading.

Finally, the legislation provides that the ACCC can issue a notice where a business 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.

The main concern with the public warning power is that it may be exercised by the ACCC in inappropriate circumstances. Clearly, a public warning issued by the ACCC about a business is likely to have the effect of preventing consumers from dealing with that business. Another likely consequence is that current customers of that business (who may have been quite happy with the business before the public warning was issued), may now want their money back because they believe that the business is disreputable. This could jeopardise the financial position of the business even though a court has not found that the business has engaged in any illegal conduct.

Another concern is that there is no obligation on the ACCC to commence legal action against a business which has been the subject of a public warning. Rather, the ACCC will, at least in theory, be able to issue a public warning and then take no further legal action against the business to establish their concerns in court.

There is no doubt that the public warning power is a significant addition to the ACCC's enforcement powers. It is also a power which can be used to great effect against very blatant fly-by-night operators. In relation to such businesses, it is vitally important to warn consumers at a very early stage since the money accumulated by such businesses is often siphoned overseas to distant jurisdictions and their Australian companies liquidated.

It is not clear whether the ACCC will be seeking to use the public warning power extensively once it is introduced or whether its use will be reserved for the most blatant cases. In this regard, it would be particularly helpful for both practitioners and businesses if the ACCC issued a public statement about its attitude to the public warning power and the circumstances in which the power will be exercised.

Infringement notices

Along with the public warning power, the most controversial new power given to the ACCC is the power to issue infringement notices. Under this power, the ACCC is able to issue on-the-spot fines to traders for particular conduct without taking a matter to court.

Under the ACL, s.4 of the TPA has been amended to include a definition of "infringement notice provision". Infringement notice provisions will include unconscionable conduct, false and misleading conduct, misleading conduct in relation to employment and business activities, misrepresentations about the full cash price misrepresentations, referral selling, harassment and coercion, unsolicited debit and credit cards, product safety matters and breaches of the substantiation notice provisions.

Significantly, the ACCC will not be able to issue infringement notices for s.52 conduct, breaches of s.54 (offering gifts and prices without being able to supply), bait advertising, breaches of s.58 (accepting payment without being able to supply goods) or blowing (unsolicited directory entries and goods).

The onus which the ACCC needs to satisfy in order to issue an infringement notice is set out in s.87ZE which states: "If the Commission has reasonable grounds to believe that a person has contravened an infringement notice provision, the Commission may issue an infringement notice to a person."

Only one infringement notice may be issued in relation to an alleged contravention. Infringement notices cannot be issued in relation to conduct which is more than 12 months old. The infringement notice penalty must be paid within 28 days of the notice being issued.

The maximum penalties which can be obtained through the use of an infringement notice are $6,600 for a corporation and $1,320 for an individual. The ACCC can also issue an infringement notice for a contravention of the substantiation notice provisions.

Once the infringement notice has been paid, no civil or criminal proceedings may be started or continued against the person by the Commonwealth or Commission in relation to the conduct the subject of the infringement notice.

As is apparent from the maximum penalties which can be obtained through an infringement notice, such notices are only to be issued for less serious contraventions of the consumer protection laws.

The new power to issue infringement notices is controversial because it raises separation of powers issues - namely, the blurring of executive and judicial functions. The power to impose a pecuniary penalty on a business for a breach of legislation would appear to be the exercise of a judicial function, which should properly reside in the courts, rather than with a federal government agency, such as the ACCC.

It is likely that a business which is the subject of an infringement notice will have the right to challenge the notice in court if it does not believe it has contravened the relevant provision of the TPA. This challenge is likely to be based on administrative law grounds, as the decision to issue an infringement notice appears to be an administrative decision. However, the cost of challenging an infringement notice is likely to be significantly greater than the amount being sought under the notice. Therefore few businesses are likely to challenge an infringement notice even if they have not contravened the TPA.

Another significant concern about the introduction of the infringement notice power is that it may result in the ACCC focusing its investigatory resources on relatively minor contraventions of the TPA by smaller businesses or on purely local issues, rather than focusing on conduct by larger businesses or conduct occurring on a national basis.

Pecuniary penalties

The most significant change to the remedies available to the ACCC are civil pecuniary penalties for contraventions of the consumer protection laws.5 Previously, when the ACCC took civil proceedings for breaches of consumer protection laws, the only remedies it could seek were injunctions, declarations, non-punitive orders and compensation. If the ACCC wished to obtain a fine for a breach of consumer protection laws it was only able to refer a criminal prosecution to the Commonwealth Director of Public Prosecutions.

The ACL report noted that civil penalties were not available under either federal or state consumer protection legislation. This was identified as a "significant gap in the range of enforcement options available to consumer regulators".6 Reference is also made in the report to the greater deterrent effect that access to civil penalties should have on businesses which may be tempted to breach the consumer protection law provisions.7

The new s.76E establishes civil pecuniary penalties for unconscionable conduct, consumer protection (except breaches of s.52) and product safety breaches. The penalty for contravening these provisions is $1.1 million for a corporation and $220,000 for an individual per contravention. The ACL makes it clear that corporations and individuals cannot be fined twice in separate civil and criminal cases for the same conduct. A new defence to the imposition of civil pecuniary penalties has been introduced (s. 85(7)).

Access to civil penalties for contraventions of consumer law provisions will have a very significant impact on the ACCC's enforcement activities. For example, civil penalties will give the ACCC considerably more leverage in dealing with businesses which it believes have contravened consumer protection laws. Previously the ACCC has been quite hamstrung in its settlement negotiations with businesses due to its inability to use civil penalties as leverage in unconscionable conduct and consumer protection cases However, with access to large maximum penalties the ACCC is in a strong position to offer to accept a lower pecuniary penalty in return for a business agreeing to other remedies, such as paying compensation to consumers.

Another area where the ACCC is likely to seek large civil penalties is in relation the so-called fly-by-night operator. As stated above, the problem which the ACCC faces with fly-by-night operators is that by the time legal proceedings have been commenced the assets of the company are gone, and the company itself is in liquidation. The only action which the ACCC can then take is to sue the former directors and managers of the company, seeking injunctions and declarations in the hope that such orders may prevent these individuals from engaging in similar conduct in the future.

However, once the ACCC can seek civil penalties for consumer protection breaches, it is able to seek significant penalties personally against the directors and managers of these failed fly-by-night operators. This provides the ACCC with two specific advantages. First, a successful civil penalty action against a former director or manager of such a business will have the effect of depriving such a person of some of their ill-gotten gains. Second, if these individuals fail to pay the civil pecuniary penalty, the ACCC may be able to take action to bankrupt them personally which would prevent them from being directors in the future.

Disqualification orders

The ACL also introduces disqualification orders for individuals who have engaged in conduct in breach of consumer protection laws.8 The ACL states these orders may "ban or restrict individuals from participating in specific activities for a period of time, including managing corporations or undertaking specific business conduct".9 Disqualification orders are already available for contraventions of the restrictive trade practices provisions of the TPA (Part IV).

The power to make a disqualification order is outlined in s.86E(1B). This subsection states that the court may make an order disqualifying a person from managing a corporation for a period of time that the court considers appropriate if it is satisfied that: 

• the person has engaged in or has attempted to engage in a contravention of the relevant provisions of the TPA; and

• the disqualification is justified.

Individuals can be disqualified for breaches of the unconscionable conduct, consumer protection (except for s.52) and product safety provisions of the TPA.

The most notable feature of the new disqualification order is the width of the court's discretion to make such an order. The only guidance provided about how the discretion should be exercised is contained in s.86E(2) which states that the court can consider "the person's conduct in relation to the management, business or property of any corporation".

There is no indication in the legislation that a disqualification order should only be made in circumstances where the individual has been shown to have engaged in similar breaches of the TPA in the past and is therefore a repeat offender. Further, the length of the disqualification order is not subject to any statutory maximum period, but rather is subject to the court's opinion as to the appropriate period of disqualification.

The availability of disqualification orders also gives the ACCC much greater leverage in settlement negotiations with businesses and their directors or managers. The ACCC is able to propose that it will not pursue disqualification orders against particular directors or managers in return for their agreeing to other orders, such as a higher civil pecuniary penalty or an order to pay compensation to consumers.

Non-party redress

The final new remedy introduced by the ACL is non-party redress. The ACL report described non-party redress as the power to seek an order from the court to "seek redress for persons who are not parties to the particular action".10 The ACL report specifically referred to the full Federal Court decision in Medibank Private Ltd v Cassidy11 where it was held that there was no power in the TPA to order a business to provide redress to non-parties to a proceeding.

In order to understand fully the significance of the new provisions concerning non-party redress, one first needs to understand the ACCC's previous powers to obtain compensation for consumers under the TPA.

Previously, there were two ways that the ACCC could get financial redress for consumers for a contravention of the consumer protection provisions of the TPA. The ACCC could either take an action under s.87(1B) of the TPA or a class action under the Federal Court Act.

In the past, the ACCC has shown a clear preference for proceedings under s.87(1B). This is because the ACCC is in control of the proceedings and, importantly, can decide when to settle and on what terms. However, in a class action, it is the class rather than the ACCC that controls the legal proceedings. Often a class is happy to settle for financial compensation, and will have no interest in obtaining injunctions or declarations which are remedies which the ACCC see as important to achieve specific and general deterrence.

The ACCC's preferred approach in seeking compensation under s.87(1B) where there are a large number of consumers who have suffered loss, has been to adopt what has been described as the two-step approach. Under the two-step approach the ACCC commenced litigation against a business alleging various breaches of the consumer protection provisions and sought injunctions, declarations, corrective orders, and the implementation of a trade practices compliance program. The ACCC did not seek compensation in these initial proceedings - rather it foreshadowed that it was going to seek compensation for consumers under s.87(1B) in a follow-up legal action.

The reason the ACCC took this approach is because under s.87(1B) the ACCC was required to have the written consent of all the consumers on whose behalf the ACCC was seeking compensation before making an application for compensation. As can be appreciated, getting written consent from potentially hundreds of consumers prior to commencing the initial legal proceedings would have been a time-consuming process which would delay the initiation of proceedings for a very long time.

Therefore, under the two-step approach, the ACCC could seek to prove liability in an initial action and then commence a follow-up action (once liability had been established) to seek compensation for affected consumers.

However, even the two-step process was not an ideal approach. The most obvious problem with the two-step approach was the delay before compensation was paid. Because the ACCC has to run and win its initial action before running a second proceeding for compensation, it could take a number of years before consumers were paid any compensation.

The second significant problem was that by the time the initial action had been completed the business sued by the ACCC might have had no money left to pay any compensation, particularly after it had paid the ACCC's costs. The ACCC has a statutory obligation under the Financial Management and Accountability Act 1997 to recover the costs of its legal action, so the ACCC couldn't simply waive or defer its legal costs to other claims.

Therefore, the ACCC could find itself in the ridiculous position of commencing litigation (with the ultimate goal of getting consumers compensation) and winning its case, only to see the pool of funds available to pay compensation to consumers being diminished or even extinguished by the its claim for legal costs.

Under the new s.87AAA the court may make an order against a person who has engaged in contravening conduct. Contravening conduct is defined as contraventions of the unconscionable conduct, civil consumer protection and criminal consumer protection provisions of the TPA.

Under s.87AAA(6), the court, in deciding whether to make an order, may have regard to the conduct of both the person who has engaged in the contravening conduct and the non-party consumer.

The new s.87AAB provides a list of the kinds of orders which the court can make to redress the loss or damage suffered by the non-party consumer, including orders:

• declaring a contract to be void;

• varying the terms of a contract; or 

• directing a person to refund money or return property to the non-party consumer. 

Sub-section 87AAA(3) states that the court must not make an order unless the order will:

a. redress, in whole or in part, the loss or damage suffered by the non-party consumers in relation to the contravening conduct; or

b. prevent or reduce the loss or damage suffered, or likely to be suffered, by the non-party consumers in relation to the contravening conduct.

The most curious proposed provision in relation to non-part redress is s.87AAA(4) which states: "An application may be made under s.(1) (that is for an order for non-party redress) even if an enforcement proceeding in relation to the contravening conduct has not been instituted."

Therefore, it seems that the ACCC can seek an order for non-party redress even if it has not commenced legal proceedings in relation to contravening conduct.

The new provisions governing non-party redress will overcome many of the problems identified above associated with s.87(1B). The main advantage for the ACCC is that it will no longer have to obtain written consent from consumers prior to making an application for redress. In addition, the ACCC can seek redress through a one-step process rather than a two-step process - the ACCC is able to commence a single proceeding seeking all relevant remedies, including compensation.

The main concern about the new non-party redress remedy is that it appears to provide the court with a very broad discretion to order the payment of money to what is likely to be a fairly imprecise class of consumers. In addition, the ability of the ACCC to seek an order for non-party redress in circumstances where the ACCC has not even commenced legal proceedings seems quite odd. It would appear that such an order would normally be granted if the party against whom the order was being sought consented to it being made, because there would be no evidence before the court on which to base such an order.

Summary

The ACL introduces a quite remarkable suite of new enforcement powers and remedies to the TPA. With the power to issue substantiation notices, public warning notices and infringement notices, the ACCC will have unparalleled powers to take aggressive and pre-emptive enforcement action against businesses which it believes have contravened the consumer protection laws.

The ACCC's access to pecuniary penalties and disqualification orders will provide it with a great deal more leverage in settlement negotiations with businesses. The main consequence of the non-party redress provisions is that it will no doubt become standard practice for the ACCC to seek an order for non-party redress for consumers in virtually all of its consumer protection cases. Indeed, one can see a situation arising where the ACCC may offer not to seek pecuniary penalties or disqualification orders against the directors or managers of a business, on condition that they consent to an order to pay non-party redress to consumers under s.87AAA(4).

With this new legislation, it seems clear that the balance of power in terms of the investigation and prosecution of suspected breaches of consumer protection laws is tilted heavily in favour of the ACCC. Whether the ACCC will seek to fully utilise its new investigatory powers and use the new remedies aggressively as leverage in settlement negotiations, remains to be seen. However, one thing is clear - representing clients in consumer protection matters before the ACCC will never be quite the same again.

ENDNOTES

1. An Australian Consumer Law: Fair Markets, Confident Consumers, 17 February 2009 (ACL) at www.treasury.gov.au/contentitem.asp?NavId=037&ContentID=1482.
2. ACL, op. cit., p.46.
3. ACL, op. cit., p.47.
4. Ibid.
5. See ACL, op. cit., pp.43-45.
6. Ibid., pp.44-45.
7. Ibid., p.45.
8. Ibid.
9. Ibid.
10. Ibid., p.52.
11. [2002] FCAFC 290.