Overview of the activities of the ACCC, lessons learnt and predictions for the near future

Paper presented at the Tonkin’s 3rd Annual Competition and Consumer Law Conference, 6 March 2013

If you would like a PDF copy of this presentation please let me know via email at michael@terceiro.com.au


Introduction

A couple of years ago this paper would have been the most difficult paper to prepare for this entire conference. That was because the previous Chairman of the ACCC, Mr Graeme Samuel, was not a big fan of priorities.

However, the current Chairman of the ACCC, Mr Rod Sims, could not be more different. From the first day in the job, he made it crystal clear which particular areas he would be focusing the ACCC’s resources on. In a speech given to the Law Council’s Competition and Consumer Law Workshop on the Gold Coast in August 2011, Mr Sims set out a seven-point plan of the areas that he would be focusing the ACCC on in the coming year.[1]

About a year after that speech, Mr Sims reported back to the Workshop about how the ACCC had gone in achieving those goals.[2]

The approach which Mr Sims has taken to clearly stating what the ACCC’s priorities will be and then reporting back on the ACCC’s success in achieving those priorities, is a very welcome development.


Structure of paper

In this paper, I will first outline why the ACCC needs to set priorities.

I will then discuss the ACCC’s priorities for 2013, which were only announced by the ACCC about two weeks ago.

I will then discuss some further guidance provided by Mr Sims about how the ACCC is going to be enforcing the law.

I will then be turning to a discussion of the likely impact that a change in government at the Federal level in September may have on the ACCC’s 2013 priorities. The Coalition has a number of different competition and consumer law policies to the government. For example, the Coalition has committed itself to extending the unfair contract term legislation to the small-business sector.

Finally, I will discuss some of the overseas developments in competition and consumer law, which will invariably become significant issues in Australia. Without a doubt, the hottest issue currently in the competition law / anti-trust circles overseas relates to patent ambush in the context of standard-setting organisations. It is inevitable that such issues will also arise for consideration by the ACCC in Australia.


Why does the ACCC have priorities?

The first question to address is why the ACCC believes that there is a need to establish priorities. While the main explanation for having priorities is that it provides greater transparency in the way the ACCC will be using its resources, there are also important practical reasons for having priorities.

As explained by Mr Sims in a recent speech about the ACCC’s priorities, the ACCC receives 160,000 complaints and enquiries each year.[3] The following table shows the breakdown of how those complaints are processed by the ACCC:

Complaints and queries each year	160,000
Initial review / assessment of complaints	3,000
Initial investigations	550
In-depth investigations	140
Formal resolutions	60 plus

By formal resolutions, Mr Sims is referring to either court proceedings (30 plus), court enforceable undertakings (30 plus) and the payment of infringement notices.

As is apparent, there is no way that the ACCC could pursue all of these complaints. Furthermore, the only way the ACCC could pursue any of these complaints effectively is by establishing clear and specific enforcement priorities.

As stated in the above table, the ACCC receives 160,000 complaints and enquiries a year but is only able to consider 3000 of those complaints.

Of these 3000, it will commence what it calls an initial investigation in relation to 550 complaints. An initial investigation generally involves the ACCC writing a letter to the business which has been complained about, to ask them for an explanation of their conduct.

Of this number, the ACCC will then commence about 140 in-depth investigations a year. These are the investigations which the ACCC Commissioners have been briefed about and which they have decided are important and should be pursued more vigorously. These are also the cases where the ACCC has decided to start spending some serious money, usually by retaining external lawyers.

One thing that you should note from the above table is the statement that the ACCC commences 30 plus court cases a year and obtains 30 plus s87B undertakings.

While the numbers in relation to s87B undertakings are accurate, the numbers in relation to court cases are significantly overstated. For example, in 2012 the ACCC commenced 16 court cases and 21 in 2011. However, at least five of the cases commenced in 2011 were contempt of court proceedings, which arose because the business had breached an earlier court order. Therefore, the actual average number of new court cases commenced by the ACCC over the last two years has been 16 and not “30 plus”.[4]

I think the 30 plus court case estimate made by Sims in his speech may be an aspirational target. In other words, I think it is likely Sims has set himself the goal of pursuing about 30 new court cases a year. If I am right about this, it means the ACCC may be looking to double the amount of litigation which it is currently commencing each year.

I also believe that when one looks at the specific cases taken by Sims in the first two years there is a trend for the ACCC to pursue more significant cases against larger businesses than was generally the case under the previous Chairman. For example, the ACCC has commenced legal proceedings against such global multinationals as Visa[5], Apple,[6] Hewlett Packard[7] as well as number of large local businesses such as Harvey Norman[8] and Flight Centre.[9]


What are the ACCC’s 2013 Enforcement and Compliance Priorities?

Goals
On 21 February 2013, the ACCC released its 2013 Compliance and Enforcement Policy.[10]

What businesses must first realise about the ACCC’s Priorities, is that they have to be considered as a whole. This is because the ACCC takes a multifaceted approach to selecting the matters which it will pursue.

First, the ACCC will consider the overall goals of their legislation. Second, it will consider both the outcomes which it is likely to achieve by pursuing a particular enforcement matter and also the type of conduct which the relevant business is engaging in. Finally, the ACCC will determine whether the conduct falls into their specific 2013 “hit list”.

As a guiding principle, the ACCC will not pursue any enforcement matter unless it is confident that:

(1) it can achieve meaningful remedies; and

(2) the conduct is of a type which has caused or may cause significant detriment to consumers, including small business consumers.

There are many cases where the ACCC could achieve a good outcome but decides not to get involved because the complainant also has the resources and motivation to achieve the same outcome through private action. By the same token, there are many matters which involve particularly egregious conduct, which the ACCC will not pursue because it will not be able to achieve worthwhile outcomes.

It is also the case that all of the ACCC’s enforcement activity should be directed to achieving the following two main goals:
to maintain and promote competition and remedy market failure, and
to protect the interests and safety of consumers and support fair trading in markets.

Obviously, these goals reflect both the competition and consumer law functions of the ACCC – to fix market failure and to ensure that consumers have perfect information so they can make rational purchasing decisions.

Outcomes
The next part of the Priorities discusses the outcomes which the ACCC will be seeking to achieve – namely to:

• stop unlawful conduct 
• deter future offending conduct 
• where possible, obtain remedies that will undo the harm caused by the contravening conduct (for example, by corrective advertising or securing redress for consumers and businesses adversely affected) 
• encourage the effective use of compliance systems 
• where warranted, take action in the courts to obtain orders which punish the wrongdoer by the imposition of penalties or fines and deter others from breaching the Act. 

The ACCC will be seeking to achieve the first two outcomes listed above in relation to virtually every enforcement action it pursues – namely, to stop the unlawful conduct and to deter future offending conduct.

However, the ACCC will not seek all of the other outcomes listed above in every case. Rather it will pick and choose which remedies are appropriate.

For example, the ACCC rarely seeks consumer redress in cartel cases, preferring instead to leave consumer redress to plaintiff law firms to pursue through private class actions. More recently, the ACCC did not seek consumer redress in relation to Samsung’s allegedly misleading energy rating claims.[11]

The ACCC will also not require every business against which it has taken enforcement action to introduce a comprehensive compliance program. Whilst large and medium sized business will be required to implement a compliance program, smaller businesses will have lower level obligations, such as attending some compliance training.

Types of conduct
The ACCC then lists the types of conduct where it will be focusing its efforts:

• conduct of significant public interest or concern 
• conduct resulting in a substantial consumer (including small business) detriment 
• unconscionable conduct, particularly involving large national companies or traders 
• conduct demonstrating a blatant disregard for the law 
• conduct involving issues of national or international significance 
• conduct detrimentally affecting disadvantaged or vulnerable consumer groups 
• conduct in concentrated markets which impacts on small business consumers or suppliers 
• conduct involving a significant new or emerging market issue 
• conduct that is industry-wide or is likely to become widespread if the ACCC does not intervene 
• where ACCC action is likely to have a worthwhile educative or deterrent effect, and/or 
• where the person, business or industry has a history of previous contraventions of competition, consumer protection or fair trading laws. 

As a general rule above, the ACCC will not pursue an enforcement matter unless it is satisfied that the offending conduct meets the first two criteria listed above – namely it:
is of significant public interest or concern and
has resulted or will result in substantial consumer (including small business) detriment.

The other factors listed above are more relevant to the type of enforcement response which the ACCC may decide to take. For example, if the ACCC forms the view that a business had demonstrated a blatant disregard of the law, it would be more likely to pursue a litigated outcome than say a court enforceable undertaking.

Another longstanding priority area, which will often result in a litigated outcome, is whether the conduct impacts on disadvantaged or vulnerable consumer groups. The ACCC sees such conduct as an aggravating factor which will usually justify a stronger enforcement response.

A relatively new slant on the ACCC’s priority list is the particular focus on unconscionable conduct involving large national companies and traders. While the ACCC has been searching for a good unconscionable conduct case for many years, it has not had much success.

However, the way this priority has been phrased suggests to me that it may be a reference to the ACCC’s investigation into the two major grocery retailers, Coles and Woolworths. In a recent Senate Estimates committee, Mr Sims identified five specific allegations against Coles and Woolworths which the ACCC was investigating. It seems to me that four of these allegations may in fact constitute unconscionable conduct rather that misuse of market power cases.[12]

I believe it is likely that the ACCC will end up taking some legal action against Coles and Woolworths for unconscionable conduct arising from its grocery investigation.

The ACCC has also said in its Priorities that it is on the lookout for illegal conduct:

• in concentrated markets; and 
• in new or emerging markets. 

Focusing on conduct in these areas makes a great deal of sense, as the competitive harm arising from illegal conduct in concentrated markets and emerging markets is likely to be significant.

Sims has also shown a willingness to explore creative approaches to solving industry wide problems. He has done this by:

• getting different regulators to work together on a particular issue; 
• working out an enforcement program; and 
• then supplementing the enforcement program with educational initiatives. 

For example, Sims took such a coordinated approach in relation to ring tones, by getting the major regulators to work together, taking a number of enforcement actions and also educating the consumers about what to look out for when buying a ring tone.

Sims appears to have taken a similar approach in relation to free-range egg claims and representations about virgin olive oil – namely a mix of enforcement and education.

This is a much more sensible way of trying to achieve industry-wide compliance rather than the old-fashioned way of suing the biggest and ugliest player in the market in the hope that all the smaller players in the market will be scared into complying with the law.

Finally, businesses which have breached the relevant legislation before are automatically placed in the high-priority category whenever the ACCC receives a further serious complaint about that business.

Specific 2013 hit-list
The ACCC then goes on to list the specific areas where the ACCC will be focusing its resources in 2013. This could be considered the ACCC’s 2013 “hit-list”:

• consumer protection in the telecommunications and energy sectors 
• online competition and consumer issues including conduct which may impede emerging competition between online traders or limit the ability of small businesses to effectively compete online 
• competition and consumer issues in highly concentrated sectors, in particular in the supermarket and fuel sectors 
• credence claims, particularly those in the food industry with the potential to have a significant impact on consumers or the competitive process 
• misleading carbon pricing representations 
• the ACL consumer guarantees regime 
• consumer protection issues impacting on Indigenous consumers. 

The ACCC’s focus on the telecommunications industry has been a long-standing one. The previous Chairman was particularly active in terms of pursuing telecommunications companies for misleading and deceptive conduct. This trend of taking aggressive enforcement action against the telecommunications companies is likely to continue, given the propensity of these companies to push the boundaries in relation to their marketing claims

Mr Sims has also made the energy sector a much stronger focus of the ACCC‘s work. This is probably due to Mr Sims’ background as the former Chairman of IPART, which gives him considerable insight into the way energy markets work. Mr Sims has shown particular interest in investigating electricity companies for misleading and deceptive conduct, primarily though illegal door-to-door sales techniques.

It is apparent that a major focus of the ACCC over the last year and over the coming year will be the supermarket sector. As stated earlier, the ACCC is conducting a large and in-depth investigation into the conduct of Coles and Woolworths. Given the amount of expectation which Mr Sims has created about these investigations, it seems inevitable that the ACCC investigations will result in some litigation.

Having said that, Mr Sims is going to have a great deal of difficulty winning these cases unless he can get some of the alleged victims of this conduct to give evidence in court. Mr Sims has said that he is proposing to run these cases on the documents alone, without calling the suppliers as witnesses. I think it will be impossible to win an unconscionable conduct case without putting the alleged victim in the witness box. We will have to wait and see.

Finally, there is a distinct possibility that the ACCC may conclude that the fuel discount dockets scheme introduced by Coles and Woolworths is anti-competitive and should be either dismantled or restructured in some way.

The focus on online selling is one area which has been a central focus of many competition and consumer law agencies around the world. Mr Sims has also pursued a number of cases which demonstrate the ACCC’s focus on this area, including:

• the Ticketek case where the ACCC alleged that Ticketek had breached section 46 by preventing competition from an online seller of discount tickets. Ticketek consented to pay, what for it was a mere parking fine of $2 million[13]

• the Google Ad Words case, which the ACCC recently lost quite comprehensively in the High Court. While the ACCC lost this case, the case also resulted in Google changing much of its conduct in relation to sponsored links.[14] Therefore, in that sense I believe that this case was effectively a win for the ACCC; and 

• the Flight Centre case which involves allegations that Flight Centre attempted to enter into a price-fixing arrangement with its on-line competitors. This case is still before the courts. 

It seems clear that the ACCC will be looking for more cases in the on-line area, particularly attempts by bricks and mortar businesses to stop manufacturers and wholesalers from supplying online sellers at discounted prices or at all.

An interesting area where the ACCC will be focusing its efforts in 2013 is on what it describes as credence claims. This appears to be a reference primarily to food manufacturers which make claims about the origin or composition or their products. The most notable examples appear to be free-range egg claims and virgin olive oil representations.

The ACCC has stated that it will only be looking at credence claims where such claims have the potential to “cause significant impact on consumers or the competitive process.” This would suggest that the ACCC will not be focusing its attentions on small businesses, but rather looking at large companies which make misrepresentations about the origin or nature of their products.

The ACCC has again included misleading carbon pricing representations in its list of priority areas. However, in reality the ACCC has received very few serious complaints about carbon pricing and it is not expecting to receive a many more serious complaints in 2013. The main interest this year will be if the Coalition are elected in September and decide to repeal the carbon tax as promised.

An area where the ACCC has been very active and will continue to be very active is in relation to consumer guarantees. The ACCC has taken actions against a number of large businesses for allegedly making misrepresentations about a consumer's right to receive a refund for a defective good. The most significant cases in this regard are the Hewlett-Packard and the Harvey Norman cases.

While the ACCC has been very interested in the non-excludable consumer guarantees, it has shown much less interest in other consumer rights such as warranties against defects. This is a sensible approach given how problematic those laws are.

Finally, the ACCC has made it clear that it will be focusing on consumer protection issues which impact on indigenous communities. This is a very important priority given that the high incidence of outrageous behaviour by traders in these communities.

What other guidance has the ACCC provided?

In addition to releasing the ACCC Compliance and Enforcement Policy, Mr Sims has provided further guidance to the business community about the way the ACCC will be approaching enforcement this year. This guidance was provided by Ms Sims in a speech he gave to the Committee for Economic Development of Australia on 21 February 2013.[15]

In this speech, Mr Sims identified six insights which will guide and inform the ACCC’s enforcement activities in 2013.

First, Mr Sims said that “strong enforcement by the ACCC is at the top of the list”. The obvious implication of this statement is that the ACCC will be pursuing matters more aggressively in 2013, most likely through litigation. This may be a response to the view held by some groups that the previous Chairman was less willing to litigate matters, preferring instead to settle investigations and contentious mergers without litigation.

What one has to realize is that Mr Sims inherited a large number of court cases from his predecessor, most notably the ACCC’s litigation against the Metcash –Franklins merger and the Google Ad Words case, both of which the ACCC ended up losing quite comprehensively.

Mr Sims has not had much of an opportunity in 2011 and for most of 2012 to put his stamp on the organization by pursuing his own signature cases. Therefore, one can expect that Sims will want pursue a number of high profile cases in 2013 to define his Chairmanship of the ACCC.

There have already been some good examples of Sims’ approach.

For example, the litigation against Apple concerning its iPad was very much a Sims case. As you would recall the ACCC sued Apple for saying its iPad was 4G compatible. After some initial fighting words from Apple, it ended up meekly settling the case.

I think that this case signalled that the ACCC is willing to take on some of the largest companies in the world in relation to key representations about their products. Most significantly, this case signalled that the ACCC was willing to pursue cases against a large company despite the fact that many of the ACCC’s overseas counterparts, primarily in Europe, had decided not to take legal action in relation to the same claims.

The same observations could be made about the ACCC’s recent decision to sue Visa International for alleged breaches of section 46 in relation to currency conversion services.

Both of these cases suggest that Sims is willing to be a global first mover in relation to both competition and consumer law issues, and not a mere follower of the enforcement activities of his overseas counterparts.

Second, the ACCC will be seeking to be more proactive. Every regulator in the world states that it is intending to be more proactive, but rarely does any regulator achieve this goal. The reason regulators can’t be proactive is because there are law enforcement agencies which have to react to complaints and tip-offs.

What the ACCC probably means is that it will be seeking to anticipate broader compliance problems earlier by more carefully analysing complaint data. It can no longer wait until there are 100 complaints about a particular trader or industry practice before acting. Rather, it has to be able to work out earlier, on the basis of only a few complaints, whether a particular trader is going to be trouble or whether a particular practice is going to become an industry wide problem and then take pre-emptive action.

One practical way that the ACCC could be more proactive is by releasing guidelines about new powers and provisions much more quickly than it has in the past. For example, it took the ACCC more than 2 ½ years to issue any substantive Guidelines about to how it was going to use its new infringement notice powers. The ACCC has also not released any Guidelines on when it is likely to seek to have a person disqualified as a director or manager of a business. This is despite the ACCC having the ability to seek this remedy since 2010 and having sought this order against at least six individuals.

Third, Mr Sims somewhat cryptically said that the ACCC “need(s) to seek to get the big and usually very public decisions right”. This seems like a veiled reference to decisions made by the previous Chairman which Sims believes were incorrect, for example the case theory advanced by the ACCC in the Metcash – Franklins case.

Fourth, Sims states that the ACCC will be seeking to be more practical in the future. In particular, he states that the ACCC will be “grounding (its) decisions in real world understanding, gained in part through detailed discussion with the parties and, importantly, those familiar with the industry and circumstances.” This again seems to be a fairly pointed reference to the Metcash decision which saw the ACCC being rebuffed by the court both at first instance and on appeal for its failure to show a good understanding of commercial realities.

Fifth, Mr Sims stated that whilst competition will generally yield the best outcomes, there is still a need for effective regulation. This is likely to be a reference to the continuing importance of the Australian Energy Regulator, which some state governments would like to disband.

Finally, Mr Sims said it is crucially important for the ACCC to explain “what we are and are not doing, and why”. He added that this is “fundamental in order to achieve strong compliance with the law and to ensure that people can have a better understanding of how or why a market economy works for them”. Sims already gets full marks on this particular criteria.

While working out the full implications of these six points requires some reading between the lines, I think the main take-home point is that:

The ACCC under the Chairmanship of Mr Sims will be more aggressive, more litigious, more practical, and less prone to making mistakes on the big decisions that was the case under the previous Chairman.

What if the Coalition win in September 2013?

In the event that the Coalition win the next Federal election in September 2013, they are likely to make a number of changes to both the legislation and, by implication, the ACCC’s priorities.[16]

The most significant change will be the repeal of the carbon tax. Not only will the ACCC no longer have to prevent carbon price misrepresentations, but it may be given a role in ensuring that businesses which have added the carbon tax to their prices are forced to remove the tax from their prices. If the Coalition passes laws to that effect, it will be a very complicated law for the ACCC to enforce.

Another significant change which the Coalition has said it will introduce is to extend unfair contract terms legislation to small businesses. The introduction of this law will be a very significant change, not only in terms of the level of legal protection which will be available to small businesses but also in terms of the ACCC’s workload. It is likely that the Coalition government would direct the ACCC to make enforcement of this new law a priority area.

Another area where I believe there may be more pressure on the ACCC to step up its enforcement activities is in relation to the Franchising Code. The Shadow Minister for Small Business, Competition and Consumer Affairs, Mr Bruce Billson, has stated that the ACCC should have the power to seek civil pecuniary penalties against franchisors for breaches of the Franchising Code.

I think that there will also be considerable pressure on the ACCC to increase its enforcement of the Franchising Code, given that it has only pursued 17 noteworthy court cases and investigations in relation to the Franchising Code in the last 10 years.

Another area where changes in government at the Federal level, have a significant impact is in relation to union boycotts. It is a quite well-known that when Labor is in power at the Federal level, the ACCC generally goes pretty quiet on the enforcement of the primary and secondary boycott laws against unions. I think the ACCC has gone a lot quieter than usual on this front over the last few years, with the ACCC not taking any litigation against a union for a primary or secondary boycott since 2006, over six years ago, just before Kevin Rudd was elected as Prime Minister.[17]

It is likely that the ACCC will be under considerably more pressure to investigate and take legal action against unions which may be breaching the boycott provisions. 

What can we learn from overseas?

As is the case with most things, overseas developments eventually find their way to Australian shores. This trend is also evident in relation to competition and consumer law issues

For example, on the election of the Obama administration in the US, the US Department of Justice immediately announced that it would be increasing its enforcement activities in relation to breaches of section 2 of the Sherman Act, which is the counterpart of section 46, the misuse of market power provision in the Competition and Consumer Act.[18] Sims similarly stated shortly after becoming Chairman in 2011 that the ACCC would be focusing more on section 46 cases.

The ACCC has a very poor record in taking section 46 cases. Since the provision was introduced to the Trade Practices Act in 1974 the ACCC has only taken 19 cases – in other words 19 cases in 39 years or less than one case every two years.

Interestingly, and contrary to popular belief, when the ACCC actually pursues a section 46 case it usually wins – ie it has won 11 of the 19 cases it has taken, lost 4 and had no result in the remaining four cases (two of these cases are currently before the courts). In other words, the ACCC’s success rate in concluded section 46 cases is a highly respectable 73%.[19]

There has been a considerable amount of activity overseas in relation to suppliers seeking to stop on-line traders from competing with bricks and mortar businesses. In the European Community, there have been a number of decisions which have found that bans on on-line traders constituted a breach of competition laws. It is clear that this particular overseas development has been picked up by the ACCC in its priorities.

There is also increasing pressure on the ACCC to commence its first criminal prosecution in relation to a hardcore cartel, preferably a global hardcore cartel. While hardcore cartels have been subject to criminal sanctions since July 2009, the ACCC is yet to initiate its first criminal prosecution. I personally believe that the first criminal prosecution is still a number of years away.

By far the biggest issue in global anti-trust/competition law at the moment is a phenomenon called “patent ambush” or “patent hold-up”.

The phenomenon arises when a company lobbies a standard setting organisation to make a particular technology part of a national or international standard for a product. If these arguments are accepted by the standards setting body, the technology becomes part of the relevant standard and all the companies supplying that product must use that technology to comply with the relevant standard.

The problem arises when it is discovered that the company which has been promoting the use of particular technology in a standard, actually owns or has the exclusive licence for the patent in respect of that particular technology. As is apparent the competitors to the proposer will need to get access to the patent in order to manufacture a product which complies with the relevant standard. However, the proposer may decide to charge its competitors exorbitant licence fees to gain access to the patent or even refuse to licence the patent at all, thus forcing its competitors out of the market.

Anti-trust and competition law agencies around the world have been trying to counter this conduct by establishing guidelines on the use of patents in the context of standard-setting organisations. The focus has been very much on requiring companies which are part of the standard-setting process to provide an undertaking that, in the event that a patent which they own, or have control over, is included in a relevant standard, they will grant their competitors a licence to use their patent on reasonable commercial terms.

I think it is inevitable that the ACCC will have to start looking at this particular area. Indeed, there is evidence that this practice has already been attempted and failed in Australia.

Case Study – Smorgon Steel – BHP Steel and Tempcore patent[20]

In 1999, Smorgon Steel was proposing to acquire Australian National Industries, another local steel manufacturer. In the course of the ACCC’s investigation into this merger, it discovered that representatives of Smorgon Steel were seeking to have the Australian Standard for Reinforcement Bar changed so that it was equivalent to the reinforcement bar which was produced through the use of the Tempcore manufacturing process

The only problem with this proposal was that the Tempcore process was subject to a patent which was initially licensed exclusively to Smorgon Steel in Australia. Quite surprisingly, Smorgon Steel subsequently decided to grant a sub-licence of the Tempcore patent to its major competitor in the Australian market, BHP Steel.

The ACCC was very concerned that if the Tempcore patent was made the basis of the relevant Australian Standard for reinforcement bar, this would have had the effect of excluding imported reinforcement bar from the Australian market. This was because many large building contracts specified that the reinforcement bar used in the project had to comply with the relevant Australian standard.

In order to prevent the situation from arising, the ACCC made it a condition of granting Smorgon Steel approval to buy ANI that it agree not to exercise its voting rights on the relevant Australian Standards Committee for Reinforcement Bar until the Tempcore patent had expired.[21]
By taking out the Smorgon representatives on the Committee, the ACCC was able to ensure that independent steel manufacturers and suppliers on the Committee had a sufficient voting majority to prevent the Australian Standard from being changed to make it equivalent to the Tempcore patent.

Smorgon’s undertaking was timed to expire at the same time as the Tempcore patent expired.

Conclusions

There are no excuses for businesses not to know where the ACCC will be focusing its enforcement energies in 2013 – this is because the current Chairman of the ACCC has made it crystal clear what the ACCC’s priorities will be in 2013.

Furthermore, Mr Sims has explained how the ACCC will be approaching its enforcement– namely, the ACCC is going to be more aggressive, more litigious, more practical and hopefully less prone to making mistakes on the bigger decisions.

The main downside of setting priorities so rigidly, is that there will be a tendency amongst ACCC staff not to consider matters which fall outside those priorities. While this is a likely result of such rigid priority setting, it is probably a necessary evil given the extremely large number of complaints which the ACCC receives every year.

The final message, I would like to leave with you today is what you should do if you receive a letter from the ACCC.

If you receive a letter from the ACCC about an issue which is identified as one of the ACCC’s specific priority areas, you can be fairly certain that the ACCC will pursue that matter vigorously and aggressively to a final conclusion. You should expect that that the ACCC will most likely be seeking a formal outcome, such as court orders or an s87B undertaking, and also be looking to publicise the outcome heavily in the media.

If, on the other hand, the ACCC writes to you about a matter which is not within its priority areas, you should argue quite strongly that the ACCC should resolve that matter informally or forget about the matter entirely given that the matter is outside ACCC’s stated priority areas. By the ACCC’s own admission, the matter could not really be that important after all, if it did not make it into the ACCC’s 2013 priorities document.

Then again, maybe the only real benefit to business in the ACCC having such clear priorities is that now all businesses will know, without a shadow of a doubt, when they are in VERY BIG trouble with the ACCC, as opposed to just being in BIG trouble with the ACCC.

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[1] ACCC Future Directions - speech given by Mr Rod Sims to the 36th Law Council Competition and Consumer Workshop on 28 August 2011 at http://www.accc.gov.au/speech/accc-future-directions

[2] Looking back, looking forward – the ACCC’s approach to making markets work for Australian Consumers - speech given by Mr Rod Sims to the 37th Law Council Competition and Consumer Workshop on 25 August 2012 at http://www.accc.gov.au/speech/looking-back-looking-forward-%E2%80%93-the-accc%E2%80%99s-approach-to-making-markets-work-for-australian

[3] The ACCC’s 2013 Priorities - speech given by Mr Rod Sims to Committee for Economic Development of Australia, Sydney on 21 February 2013 at http://www.accc.gov.au/speech/the-accc%E2%80%99s-2013-priorities

[4] Source ACCC website at http://www.accc.gov.au

[5] ACCC commences Federal Court proceedings against Visa Inc, ACCC News Release dated 4 February 2013 at http://www.accc.gov.au/media-release/accc-commences-federal-court-proceedings-against-visa-inc

[6] ACCC to seek orders against Apple for alleged misleading iPad "4G" claims, ACCC News Release, dated 27 March 2012 at http://www.accc.gov.au/media-release/accc-to-seek-orders-against-apple-for-alleged-misleading-ipad-4g-claims

[7] ACCC institutes proceedings against Hewlett-Packard Australia Pty Ltd for allegedly misrepresenting consumer rights, ACCC News Release, dated 16 October 2013 at http://www.accc.gov.au/media-release/accc-institutes-proceedings-against-hewlett-packard-australia-pty-ltd-for-allegedly

[8] ACCC starts legal proceedings against Harvey Norman franchisees, ACCC News Release, dated 20 November 2012 at http://www.accc.gov.au/media-release/accc-starts-legal-proceedings-against-harvey-norman-franchisees

[9] ACCC takes court action against Flight Centre Limited, ACCC News Release, dated 9 March 2012 at http://www.accc.gov.au/media-release/accc-takes-court-action-against-flight-centre-limited

[10] At http://www.accc.gov.au/media-release/accc-releases-new-compliance-and-enforcement-policy

[11] Samsung Electronics Australia provides ACCC with undertaking over energy savings claims, ACCC News Release, dated 21 January 2013 at http://www.accc.gov.au/media-release/samsung-electronics-australia-provides-accc-with-undertaking-over-energy-savings

[12] Senate Estimates – Tabled Document No 3 at http://www.aph.gov.au/Parliamentary_Business/Committees/Senate_Committees?url=economics_ctte/estimates/add_1213/index.htm

[13] Ticketek Pty Ltd penalised $2.5 million for misusing its market power, ACCC News Release, dated 22 December 2011 at http://www.accc.gov.au/media-release/ticketek-pty-ltd-penalised-25-million-for-misusing-its-market-power

[14] Google appeal upheld, ACCC news release, dated 6 February 2013 at http://www.accc.gov.au/media-release/google-appeal-upheld and Google Inc v ACCC [2013] HCA 1 at http://www.austlii.edu.au/au/cases/cth/HCA/2013/1.html

[15] See footnote 3.

[16] For the Coalition’s policies in relation to competition and consumer law see the Hon Bruce Billson MP’s website at http://brucebillson.com.au

[17] Secondary Boycotts, CCH Australian Competition and Consumer Law Reporter, Volume 1 – Competition Law, 2013

[18] Justice Department Withdraws Report on Antitrust Monopoly Law, Antitrust Division Press Release, dated 11 may 2009 at
http://www.justice.gov/atr/public/press_releases/2009/245710.htm

[19] ACCC v Ticketek – a non-event? Keeping Good Companies, Journal of the Chartered Secretaries Australia Ltd, April 2012, Volume 63 No. 3, pp. 158-161.

[20] The author was the Director in charge of this particular ACCC investigation. The views expressed in this paper are his own and should not be attributed to the ACCC.

[21] Undertaking to the Australian Competition and Consumer Commission given under s87B by Smorgon Steel Group Pty Ltd, dated 29 January 1999 at http://transition.accc.gov.au/content/item.phtml?itemId=361052&nodeId=0f46c363009b8602499a35369e29e460&fn=s87B_99_3S.pdf

Recent events and activities

It has been a busy period at the moment with a number of interesting events and activities.

Secondary Boycotts

I recently revised and updated the commentary of the Secondary Boycotts chapter in the CCH Competition and Consumer Law Reporter loose leaf section.


SME Committee Law Council of Australia

I have also recently stepped into the role of Deputy Chair of the SME Committee of the Law Council of Australia. My main goal in the role in 2013 is to try to raise the profile of the Committee.


Nationally Accredited Mediator

I received confirmation this week that my application to become a Nationally Accredited Mediator has been successful under the Australian National Mediator Accreditation System (NMAS).

So if you need a mediator, particularly one who knows a fair bit about competition and consumer law, make sure to look me up.


Tonkin Competition and Consumer Law Conference

On 6 March 2013, I gave the opening presentation at the Tonkin Competition and Consumer Law Conference at the Grace Hotel in Sydney. The title of my paper was "Overview of the activities of the ACCC, lessons learnt and predictions for the future".

A will be posting a copy of my paper on this blog sometime next week.


Master of Laws - Dispute Resolution

I have commenced a Master of Laws in Dispute Resolution through the University of New South Wales. This follows on from a busy 2012 on the education front when I completed the Professional Certificate of Arbitration through the University of Adelaide and the Mediation: Skills, Techniques and Practice Course through the Australian Commercial Disputes Centre.

Needless to say after years of being bit of a litigation snob, I have now become a strong believer in the many benefits of Alternative Dispute Resolution.

Submission to 2013 Review of the Franchising Code of Conduct

I recently lodged a submission with the 2013 Review of the Franchising Code of Conduct (Review).

The reason for lodging a submission was due to my concern that various industry and professional groups were making submissions to the Review stating that the Australian Competition and Consumer Commission's (ACCC) had a good record in enforcing the Franchising Code of Conduct (Code).

I do not believe that this is an accurate statement about the ACCC's record in enforcing the Code, particularly over the last two years. In my view, the failure to include enforcement of the Code in the ACCC's Compliance and Enforcement Priorities over the last two years has resulted in significant under-enforcement of the provisions of the Code.

Here is my submission:


_________________________________________________

22 February 2013

Franchising Code Review Secretariat
Department of industry, Innovation, Science, Research and Tertiary Education
Small Business Division
GPO Box 9839
Canberra ACT 2601

Via email: franchisingcodereview@innovation.gov.au


Dear Mr Wein

Submission to 2013 Review of Franchising Code of Conduct from Terceiro Legal Consulting

Terceiro Legal Consulting (TLC) is a boutique law firm, which specialises in competition and consumer law (trade practices law). TLC has been operating since 2008 and has represented numerous companies and businesses in Australian Competition and Consumer Commission (ACCC) matters.

Michael Terceiro, the principal of TLC, formerly worked at the ACCC for 15 years in a variety of positions, including as a Director of Enforcement. In this role, he was responsible for running investigations and litigation into alleged breaches of the Trade Practices Act 1974 and the Franchising Code of Conduct.

Enforcement of the Franchising Code

Introduction
In this submission, I will only be focusing on Part Six of your Discussion Paper: Review of the Franchising Code of Conduct which discusses enforcement of the Franchising Code.

In this Part, you list four discussion questions as follows:

1. Is the current enforcement framework adequate to deal with the conduct in the franchising industry?

2. How can compliance with the Franchising Code be improved?

3. What additional enforcement options, if any, should be considered in response to breaches of the Franchising Code?

4. What options are available to address breaches of the Franchising Code, or any other adverse conduct in the franchising industry?

Background

Before responding to these questions, it is necessary to consider the ACCC’s record in enforcing the Franchising Code. While a number of submissions to your Review have claimed that the ACCC is effective in enforcing the Franchising Code, the ACCC’s own statistics concerning court cases and investigations into Franchising Code breaches tells a very different story.

A number of years ago the ACCC decided to create a page on its website entitled “Franchising Code complaints, investigations and outcomes”.

On this page, the ACCC listed the “Matters the ACCC has pursued” in relation to Franchising Code breaches.

The ACCC made it clear that the list was not intended to list every Franchise Code investigation. However, I believe that this list is likely to represent most, if not all, of the noteworthy Franchising Code investigations and litigation undertaken by the ACCC since 2004.

An analysis of the list shows the following level of enforcement activity by the ACCC in the franchise sector since 2004:

Table 1: Noteworthy ACCC Franchising Code cases and investigations 2004 – 2012

In other words, in the last nine years, the ACCC has taken a total of 24 noteworthy cases and investigations in relation to the Franchising Code, which is less than three cases and investigations a year.

Furthermore, there appears to have been a significant decline in the ACCC’s enforcement activity in relation to Franchising Code matters over the last two years with only one noteworthy Franchising Code case being commenced by the ACCC in that period.

Unfortunately, the above figures are somewhat misleading. While the title of the relevant page from the ACCC’s website states that it is a list of the ACCC’s “Franchising Code complaints, investigations and outcomes”, on closer examination it turns out that a number of the so-called Franchising Code investigations and outcomes did not in fact allege or establish any Franchising Code breaches.

Rather, a number of the cases and investigations included on the ACCC list involved a franchisor engaging in other conduct in breach of the Trade Practices Act 1974 or the Competition and Consumer Act 2010, but not, as claimed, in any breaches of the Franchising Code.

For example, the ACCC’s Sensaslim case does not appear to allege any contraventions of the Franchising Code. Rather, the focus of that case is on false representations and misleading and deceptive conduct. The Refund Home Loans case also did not allege any breaches of the Franchising Code. The Photo Shop matter (which I ran whilst employed at the ACCC) did not result in any findings of a breach of the Franchising Code.

Therefore, if one removes the cases and investigations from the above list which did not allege or establish a breach of the Franchising Code, the table would show the following results:

Table 2: Actual noteworthy ACCC Franchising Code cases and investigations 2004 – 2012

The above table shows that once one removes the matters where a breach of the Franchising Code was not in fact alleged or established by the ACCC, that the ACCC has only pursued 17 noteworthy Franchising Code cases and investigations over the last nine years, which is less than two Franchising Code cases and investigations a year.

Furthermore, the ACCC has not pursued any noteworthy Franchising Code cases or investigations over the last two years.


Responses to questions

1. Is the current enforcement framework adequate to deal with the conduct in the franchising industry?

The ACCC has an adequate range of powers to investigate alleged breaches of the Franchising Code. Unfortunately, the ACCC does not appear to be using these powers effectively in relation to the franchising sector.

The ACCC only has access to a limited range of remedies in relation to breaches of the Franchising Code. I believe that if the ACCC had access to civil pecuniary penalties for Franchising Code breaches, its ability and willingness to enforce the Franchising Code would be significantly enhanced.


2. How can compliance with the Franchising Code be improved?

Compliance with the Franchising Code can be improved by the ACCC pursuing more cases and investigations in the sector, particularly in relation to rogue franchisors. I believe that successful ACCC cases and investigations and the imposition of civil pecuniary penalties would be very effective in achieving general deterrence in the franchise sector. It is likely that the ACCC will pursue more cases and investigations if it can seek civil pecuniary penalties in relation to breaches of the Franchising Code.


3. What additional enforcement options, if any, should be considered in response to breaches of the Franchising Code?

On 20 February 2013, the ACCC issued its new Compliance and Enforcement Policy for 2013. It is clear from this document that enforcement of the Franchising Code is not a current enforcement priority for the ACCC. Indeed, the Franchising Code is not mentioned once in the entire document.

The ACCC should consider including enforcement of the Franchising Code as a priority enforcement area in future Compliance and Enforcement Policy documents.


4. What options are available to address breaches of the Franchising Code, or any other adverse conduct in the franchising industry?

The ACCC must make enforcement of the Franchising Code a priority, particularly in relation to rogue franchisors. It is clear on the figures quoted above, that the ACCC has all but ignored enforcement of the Franchising Code in terms of cases and investigations over the last two years. The omission of enforcement of the Franchising Code from the ACCC’s current Compliance and Enforcement Policy suggests that this trend is likely to continue.

The introduction of civil pecuniary penalties for breaches of the Franchising Code is likely to encourage the ACCC to pursue more enforcement actions in relation to breaches of the Franchising Code in the future.

Finally, the ACCC should give some thought to establishing a dedicated team to investigate alleged breaches of the Franchising Code. I understand from first hand experience that such investigations are both difficult to run and resource intensive.

Therefore, a dedicated team would be able, over time, to develop the necessary expertise and focus to pursue a larger number of significant Franchising Code cases and investigations successfully each year. This approach would be preferable to the hit-and-miss approach which the ACCC appears to be taking in relation to enforcement of the Franchising Code at the current time.


Conclusions

The ACCC’s record in enforcing the Franchising Code over the last nine years has been poor. Despite its efforts, particularly during the term of previous ACCC Chairman, to argue that it was enforcing the Franchising Code effectively, there is simply no objective evidence to back up this claim. The ACCC’s own numbers show a very low level of enforcement activity, which unfortunately appears to be on a downward trend.

The simplest way to increase the ACCC’s level of enforcement in this sector is to provide the ACCC will access to civil pecuniary penalties for contraventions of the Franchising Code.

However, the introduction of civil pecuniary penalties alone will not reverse the trend of under-enforcement in this area. Rather this important change must also be complemented by two other important changes (1) the ACCC issuing a clear statement that enforcement of the Franchising Code is in fact a priority area and (2) the ACCC making internal structural changes to the way in which the ACCC investigates alleged breaches of the Franchising Code.

Only by implementing these changes will the ACCC be able to adopt a more effective, focused and ultimately successful approach to ensuring compliance with the Franchising Code.

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


Yours sincerely




Michael Terceiro

Competition and Consumer Lawyer

Terceiro Legal Consulting

 

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”.

---

[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

Banks Behaving Badly

This article was recently reproduced in CCH's Australian Competition and Consumer Law Tracker, Issue 3, March 2013.

Introduction

While there has been a great deal of publicity recently about various global investigations into alleged LIBOR manipulation by up to 16 major banks, this is not the only scandal which is plaguing the banking industry. Indeed, there are an ever increasing number of scandals involving most of the world’s largest banks. For example, quite recently, in December 2012, HSBC was fined $US1.9 billion for failing to put measures in place to prevent money laundering in its US and Mexican operations.[1] The DOJ’s investigation found that HSBC accounts in both of these locations were being used by drug dealers to hide millions of dollars from the sale of drugs. The DOJ also found evidence of the bank being used to transfer money to criminals and suspected terrorists in other countries such as Russia, Iran and Saudi Arabia.

The HSBC settlement was followed in mid-December 2012 by the announcement of UBS’s $1.5 billion settlement with various regulators over its role in manipulating the LIBOR.[2] I will be discussing this settlement in more detail in an upcoming post. In the meantime, I will be discussing yet another banking scandal, which stars UBS as one of the main protagonists– namely the criminal prosecution of three former UBS executives for big rigging in the US municipal bond market.[3]

The question raised by this particular case and many other banking settlements is – “Why are regulators taking such a soft approach with the banks in relation such serious, institutionalised, blatant and continuing criminal conduct?”


Background[4]

In the US, municipal bonds are issued by various government entities, such as states counties and cities or public authorities, such as schools, utilities, for the purpose of assisting these entities to raise money for a variety of purposes such as special projects or to refinance debt.

In 2007 and 2008 the combined, the value of the municipal bond market in the US was approximately $800 billion.

In some cases, the money raised from such bond issues is used for not-for-profit purposes such as the construction of low cost housing, school buildings or public roads.

As municipal bonds are often used for not-for-profit purposes, they have tax-exempt status under US tax laws. However, in order to obtain and maintain this tax exempt status municipal bond issuers are required to follow specific rules set down by the Internal Revenue Service (IRS) and the US Treasury.

Issuers will often seek to invest some or all of the bond proceeds in investment products, which are sold by banks, insurance companies and other financial service providers.

Issuers will generally select the investment product for the proceeds of the bond issue through a competitive tendering process. In other words, the issuer will seek a number of competing bids from sellers of investment products, and select the bid which they believe is most attractive. This competitive bid process is one of the requirements for claiming tax exempt status.

This is where UBS comes into the picture. Issuers will often hire third parties or brokers to act as their agents in conducting the competitive bidding process for the investment products. These brokers, including UBS, are then responsible for distributing the bid packages, answering questions about the bid specifications, assessing the competing bids and then advising the issuer of the outcome of the bid process.


The Defendants

The defendants in the DOJ case were Mr Peter Ghavami, Mr Garry Heinz and Mr Michael Welty.

At the relevant time of the offences, Ghavami was Managing Director and the co-Head of the Municipal Bond Reinvestment and Derivatives (MBRD) desk at UBS. Heinz and Welty were both Vice-Presidents and Marketers on the MBRD desk at UBS.

Somewhat surprisingly, UBS itself was not a defendant in the case, despite the fact that the illegal conduct was engaged in by three of its senior executives and whatsmore, UBS reaped the financial benefits of the fraud.

The reason UBS was not a defendant in the case was because it had entered into a non-prosecution agreement with the Antitrust Division of the US Department of Justice in April 2011. Under this agreement, the DOJ agreed not to prosecute UBS in return for its full cooperation in the DOJ’s ongoing municipal bond derivatives industry investigation and a payment of $160 million in restitution, penalties and disgorgement.[5]


The Offences

The relevant indictment describes the offences as follows:[6]

25. From at least as early as August 2001 until at least July 2002…PETER GHAVAMI, GARY HEINZ and MICHAEL WELTY, the defendants (collectively, the "FSC Defendants"), and co-conspirators, including Financial Institution A, FSC (UBS), Financial Institution C, Financial Institution D, and others known and unknown, unlawfully, willfully, and knowingly did combine, conspire, confederate, and agree together and with each other to commit offenses against the United States of America, to wit, to violate Title 18, United States Code, Section 1343 all in violation of Title 18, United States Code, Section 371.

26. It was a part and an object of the conspiracy that the FSC Defendants, and co-conspirators, including Financial Institution A, FSC (UBS), Financial Institution C, Financial Institution D, and others known and unknown, unlawfully, willfully and knowingly, would and did devise and intend to devise a scheme and artifice to defraud, and to obtain money and property by means of false and fraudulent pretenses, representations, and promises, namely, a scheme to defraud municipal issuers and the United States Department of the Treasury and the IRS by manipulating the bidding process for investment agreements and other municipal finance contracts by colluding with each other, and further to deprive the municipal issuers of the property right to control their assets by causing them to make economic decisions based on misleading and false information, and for the purpose of executing such scheme and artifice, and attempting to do so, would and did transmit and cause to be transmitted by means of wire, radio or television communication in interstate or foreign commerce any writings, signs, signals, pictures or sounds, in violation of Title 18, United States Code, Section 1343.

In other words, the three defendants manipulated the competitive bidding process for investment products in order to defraud the issuers who had retained UBS as their broker, as well as both the US Treasury and the IRS.

The indictment provides specific details of how the three defendants went about defrauding both their clients and the government agencies:[7]

a. the FSC (read UBS) Defendants increased the number and profitability of investment agreements and other municipal finance contracts awarded to Financial Institution A and FSC (UBS) by telling co-conspirators at Financial Institution C and Financial Institution D what price or price level FSC (UBS) intended to bid, discussing in advance the price at which Financial Institution C or Financial Institution D would bid for an investment agreement or municipal finance contract, and agreeing that Financial Institution A and FSC would be allocated the investment agreement or municipal finance contract;

b. on at least one occasion, the FSC (UBS) Defendants agreed with a co-conspirator at Financial Institution D that Financial Institution D would not bid against Financial Institution A and FSC (UBS) in exchange for Financial Institution A and FSC (UBS) purchasing securities from Financial Institution D

c. from time to tie, the FSC (UBS) Defendants would and did submit intentionally losing bids for investment agreements or other municipal finance contracts for which Financial Institution C was competing, in order to create the appearance that Financial Institution A and FSC (UBS) were competing for agreements or contracts when, in fact, they were not;

d. the FSC (UBS)Defendants falsely certified and aided and abetted the false certification that the bids submitted by Financial Institution A and FSC (UBS) complied with relevant Treasury regulations or were otherwise competitive, and aided and abetted the submission of corresponding false certifications by co-conspirators at Financial Institution C that the bidding process was bona fide and complied with relevant Treasury regulations or was otherwise competitive;

e. the FSC (UBS) Defendants caused municipal issuers to award investment agreements and other municipal finance contracts to Financial Institution A and FSC (UBS), or to Financial Institution C, which agreements and contracts the municipal issuers would not have awarded to Financial Institution A and FSC (UBS), or Financial Institution C, if they had true and accurate information regarding the bidding process;

f. by manipulating the bidding for investment agreements and other municipal finance contracts, the FSC (UBS) Defendants caused municipalities not to file required reports with the IRS or to file inaccurate reports with the IRS, and to fail to give the IRS or the Treasury money to which it was entitled as a condition of the tax-exempt status of the underlying bonds. This conduct jeopardized the tax-exempt status of the underlying bonds.

Despite the obvious implication that the three defendants had in fact facilitated a cartel amongst three sellers of investment products (described above as Financial Institution A, Financial Institution C and Financial Institution D), the Antitrust Division of the US Department of Justice decided to prosecute the three defendants for wire fraud.

It is also apparent from the indictment that the defendants engaged in fraud by submitting inaccurate reports to both the IRS and the US Treasury about the bona fides of the competitive bidding process.

The Antitrust Division provided further details in the indictment about the defendant’s illegal conduct in colluding with another broker – namely, that they had engaged in wire fraud by:[8]

• discussing and agreeing with CDR (another broker) which of Financial Institution A's competitors should and should not be solicited to submit bids for a particular investment agreement or municipal finance contract; 

• obtaining from CDR information about the prices, price levels, rates, conditions or other information related to competing providers' bids, including, in some instances, the exact price, price level, or rate of competing providers' bids; 

• determining Financial Institution A and FSC's (UBS’s) bids after obtaining information from CDR about the prices, price levels, rates, conditions, or other information related to competing providers' bids; 

• submitting intentionally losing bids for certain investment agreements and other municipal finance contracts brokered by CDR to make it appear that Financial Institution A and FSC (UBS) had competed for those agreements or contracts when, in fact, they had not; 

• agreeing to pay and arranging for kickback payments to be made to CDR in the form of fees that were inflated, relative to the services performed, or unearned. These payments were made in exchange for CDR's assistance in controlling and manipulating the competitive bidding process and were not disclosed to the municipal issuers that hired CDR, or to the IRS… 

Finally, Heinz was also prosecuted for witness tampering:[9]

65. On or about November 24, 2006…GARY HEINZ, the defendant, unlawfully, willfully, and knowingly did attempt to corruptly persuade another person, with intent to influence the testimony of a person in an official proceeding, and to hinder, delay, or prevent the communication to a law enforcement officer information relating to the commission or possible commission of a Federal offense, to wit, HEINZ, after becoming aware of the grand jury investigation, directed cooperating witness one (CW1) to "forget that [brokered investment agreement] deal," and for CW1 to meet with cooperating witness two (CW2) so that they could get their story straight regarding a payment CW2 caused Financial Institution D to make to Financial Institution A and FSC (UBS) in exchange for FSC (UBS) steering an investment agreement to Financial Institution D.

It appears that the DOJ decided to pursue conspiracy to commit wire fraud and wire fraud charges against the three defendants, rather than Sherman Act offences, due to statute of limitations issues. The relevant conduct occurred between 2001 and 2006, however the statute of limitations for criminal conspiracies, including antitrust conspiracies is five years (18 U.S.C. § 3282).

While the statute of limitations for mail fraud and wire fraud prosecutions is also five years, this period is extended to 10 years for mail and wire fraud scheme which affects a financial institution (18 U.S.C § 3293).


Outcome

Each of Ghavami, Heinz and Welty were found guilty by the jury of conspiracy to commit wire fraud, as well as a number of substantive wire fraud charges. Heinz was found not guilty of the witness tampering offence.

The conspiracy wire fraud and substantive wire fraud charges each carry a maximum penalty per count of 30 years in prison and a $1 million fine.

Ghavami, Heinz and Welty will be sentenced in the New Year.


Analysis

Following the jury’s verdict Scott Hammond, the Deputy Assistant Attorney General of the Antitrust Division’s criminal enforcement program stated:[10]

For years, these executives corrupted the competitive bidding process and defrauded municipalities across the country out of money for important public works projects. Today’s convictions demonstrate that the division is committed to holding accountable those who seek to unfairly and illegally undermine competitive markets.

However, one has to ask the question why the DOJ decided to enter into a non-prosecution agreement with UBS given the extremely serious nature of the fraud which was carried out by three very senior UBS executives. One would have expected that the DOJ would have appreciated the importance of taking a criminal prosecution against both the corporate entity as well as the three senior executives.

Indeed, there appears to be a disturbing and growing trend amongst regulators around to the world to go soft on the major banks in relation to their criminal activities, by agreeing to non-prosecution agreements in return for very large dollar settlements.

It is clear that from an enforcement perspective these settlements are entirely inappropriate.

First, unless criminal prosecutions are taken against banks, the specific deterrence message will not get through. Banks will start to see such conduct as fraud, price fixing, and bid rigging as simply as a cost of doing business if they can simply pay a fine and move one. Indeed, there are signs that many of the major banks have already formed the view that they can avoid being held criminally liable for their actions if they simply offer the regulator enough money.

Second, by allowing banks to settle serious fraud and antitrust offences with the payment of a large fine, regulators will be failing to achieve another fundamental goal of any enforcement action – namely to achieve general deterrence. Other banks will not be deterred from engaging in illegal conduct because they will get the message from these financial settlements that the only sanction they will exposed to (if they are caught) is a large fine, which may or may not exceed the financial gains from the illegal conduct.

Third, there is a strong suspicion that the DOJ and other regulators are entering into such lenient settlements with banks for the sole reason that they are banks. There is strong support for the view that regulators have been reluctant to pursue criminal prosecutions against large banks because to do so may jeopardise their banking licences. If any of these banks were to lose their banking licence this would put them out of business, which would in turn have negative effects on the stability of financial markets.

Regulators have to start realising that their approach to bank settlements is seriously flawed. They should not be taking a more lenient approach to criminal conduct by the major banks because they are concerned about the potential effects on the financial system of a bank failing because it has lost its banking licence. Rather, regulators should be treating banks in the same way they would treat any other company which had engaged in blatant price fixing and big rigging behaviour.

Interestingly, the DOJ’s recent practice in relation to bank settlements seems completely out of step with its own statements about the value of establishing corporate criminal liability. As stated by Mr Gregory Werden, Scott Hammond and Belinda Barnett of the Antitrust Division in a recent speech to the National Institute on White Collar Crime:[11]

In our view, eliminating corporate criminal liability would significantly undermine cartel deterrence in several distinct ways. First, corporate criminal liability has a deterrent effect independent of that from monetary sanctions because a criminal conviction stigmatizes a corporation. Second, the deterrent effect of monetary sanctions imposed through civil damages actions would be greatly diminished without assistance from criminal enforcement. As elaborated below, criminal enforcement against corporations detects the cartels, establishes the liability of the defendants, and provides valuable evidence for proving damages. Third, corporate criminal liability and substantial fines are essential in the operation of the Antitrust Division’s leniency program.

Conclusion

There is still time for regulators such as the Antitrust Division to start taking principled and appropriate enforcement responses to banking malfeasance. For example, the remaining LIBOR settlements appear to offer the Antitrust Division numerous opportunities to pursue criminal prosecutions in relation to the serious and highly detrimental collusive activity which was engaged in by a number of the major banks. As only two of the likely 16 LIBOR settlements with major banks have as yet been finalised, the Antitrust Division appears to have at least 14 opportunities to do the right thing from an enforcement perspective and pursue criminal prosecutions.

Unfortunately, from an enforcement perspective even a criminal prosecution may not be sufficient to achieve specific and general deterrence in the banking sector. Rather, what may be necessary is for one of the major banks to actually lose their banking licence following a successful criminal prosecution. It is probably the case that the major banks will only start to take due notice of the deep-seated and institutionalised culture of corruption in their organisations if one of their number pays the ultimate price for its criminal activities by losing its banking licence. Only through such an extreme outcome will banks start realising that they cannot continue behaving badly on the assumption that they will be able to buy their way out of the consequences of their actions.

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[1] HSBC Holdings Plc. and HSBC Bank USA N.A. Admit to Anti-Money Laundering and Sanctions Violations, Forfeit $1.256 Billion in Deferred Prosecution Agreement, Department of Justice News, 11 December 2012 – at http://www.justice.gov/opa/pr/2012/December/12-crm-1478.html

[2] UBS Securities Japan Co. Ltd. to Plead Guilty to Felony Wire Fraud for Long-running Manipulation of LIBOR Benchmark Interest Rates, Department of Justice News, 19 December 2012 - http://www.justice.gov/opa/pr/2012/December/12-ag-1522.html

[3] Three Former UBS Executives Convicted for Frauds Involving Contracts Related to the Investment of Municipal Bond Proceeds, Department of Justice News, 31 August 2012 - http://www.justice.gov/opa/pr/2012/August/10-at-1071.html

[4] See Indictment in USA v Peter Ghavami (aka Peter Ghavamilahidi), Gary Heinz and Michael Welty at http://www.justice.gov/atr/cases/f265300/265389.htm

[5] Non-Prosecution Agreement between US Department of Justice and UBS AG, dated 5 April 2011 – at http://www.justice.gov/atr/public/press_releases/2011/270720a.pdf

[6] Indictment, op. cit., pp. 9-10.

[7] Ibid, pp. 10-11.

[8] Ibid, pp. 19-20.

[9] Ibid., p. 38.

[10]  DOJ News, op.cit., footnote 3.

[11]  Gregory Werden, Scott Hammond and Belinda Barnett, Deterrence and Detection of Cartels: Using all the Tools and Sanctions, The 26^th Annual National Institute on White Collar Crime, 1 March 2012, p. 9 - http://www.justice.gov/atr/public/speeches/283738.pdf