Recent events – Young Lawyer’s Continuing Legal Education Seminar

I was recently invited by the Young Lawyers International Law Committee to present a CLE Seminar on the topic of “Corporate Legal Responsibility: Green Claims and s52”.

My talk was based on 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 see – http://www.lawsociety.com.au/page.asp?partID=16

Recent events - Inaugural Thomson Reuters Competition and Trade Practices Summit

I was recently invited by Thomson Reuters to present a paper at the Inaugural Thomson Reuters Competition and Trade Practices Summit held at the Marriott Hotel in Sydney on 12 and 13 March 2009.

I was asked to present on the topic of Strategies for Effective Interaction with the Australian Competition and Consumer Commission. My talk was based on the article entitled “The ten biggest mistakes companies make when dealing with the Australian Competition and Consumer Commission” which I wrote for the December 2008 edition of Keeping good companies, the Journal of the Chartered Secretaries Association – see blog post Wednesday, 3 December 2008.

I was also asked to Chair the Summit on Friday, 13 March 2009.

For more information about the Summit see –
http://www.iir.com.au/conferences/contracts-legal/thomson-reuters-inaugural-competition-trade-practices-summit/agenda

Clarifying the Publishers’ Defence – Bond v Barry [2007] FCA 1484

Issues:

The issues in this case were whether the publishers defence under section 65A of the Trade Practices Act 1974 (TPA) could be invoked by the freelance journalist who wrote and the media organisation which published an article about Alan Bond in The Sunday Telegraph and whether a news organisation could liable as an accessory for publishing a news article purchased from a freelance journalist.

Context:

Paul Barry, a freelance journalist, wrote an article for The Sunday Telegraph, concerning Mr Alan Bond’s involvement in the Lesotho Diamond Corporation plc. In his article, Mr Barry alleged amongst other things that Mr Bond was effectively running the company, maintaining a lavish London office at the company’s expense, and had forced a number of senior executives to leave the company. Mr Barry also reported on claims by various shareholders that Mr Bond was paying himself massive fees, trying to sell “dud” assets to the company and using shareholder’s money for personal advantage.

Mr Bond took action against Mr Barry and News Limited, as the publisher of The Sunday Telegraph, for misleading and deceptive conduct under section 52 of the TPA. Mr Barry and News responded by seeking to have Mr Bond’s claim struck out as having no reasonable prospects of success due to the likelihood that a defence under section 65A of the TPA would succeed.

Decision:

The decision of Justice French (prior to his elevation to Chief Justice of the High Court of Australia) was that the publishers defence was likely to apply. Accordingly, he dismissed Mr Bond’s action.

In his decision, Justice French reviewed the legislative history of the publishers defence. He noted that the publishers defence was enacted in 1984 as a response to concerns that news media could be liable for incorrect news reports under the misleading and deceptive conduct provisions of the TPA.

The first question was whether News could take advantage of the publishers defence. As Mr Barry was a freelance reporter who sold his story to The Sunday Telegraph, Mr Bond argued that News was not able to take advantage of the defence in section 65A, as it was not the primary contravener, but rather an accessory to Mr Barry’s conduct. Section 65A provides no exemption for a media organisation which is an accessory to a contravention not covered by section 65A. In other words, a news organisation may be liable as an accessory due to the operation of section 75B of the TPA for publishing a genuine news story if it aided, abetted or induced another party to engage in misleading and deceptive conduct and that party was unable to avail itself of the publishers defence in section 65A.

Justice French adopted a purposive approach to interpreting section 65A of the TPA –

The publications which are protected by s65A include the transmission of information or articles by freelance journalists to media organisations. Absent such coverage media organisations could be exposed to liability as accessories for publishing articles prepared for publication by freelance journalists in contravention of s 52...It would be a major and unintended gap in the coverage of the exemption and completely at odds with its purpose.The second question was whether Mr Barry could invoke the publishers defence. Mr Bond argued that as Mr Barry had a contract to provide articles to News, the article was “in connexion” with the supply of journalistic services which was excluded from the scope of the defence.

Justice French rejected this argument. Justice French decided that the scope of the defence also extended to the communication of information or articles by freelance organisations to media organisations. In this regard he stated –

The purpose of s65A was clearly stated in the Second Reading Speech. To exclude from the exemption the supply of information by freelance journalists to media organisations is to partially defeat that purpose. The communication of news articles to media organisations by freelance journalists is so plainly within the intended purpose of the section that a construction covering it should be adopted provided that construction is open. In my opinion, as stated above, such communication is within the natural and ordinary meaning of publication as publication to the world at large.

Significance:

The significance of Bond v Barry is that it clarifies the scope of the publishers defence in section 65A of the TPA. There has been considerable concern as to whether news organisations could be liable as an accessory for publishing news articles obtained from freelance journalists or other news agencies. As section 65A does not provide a defence to an accessory, news organisations could be liable for news articles simply because they were publishing articles which they had obtained from external sources rather than in-house journalists.

This case makes effectively closes this “loophole” in the operation of section 65A. As stated by Justice French, to apply section 65A in any other way would constitute a major and unintended gap in coverage of section 65A.

More importantly, this decision ensures that Part V of the TPA and its mirror provisions in state Fair Trading Acts are not used as a means of preventing or restricting the publication of genuine news stories by news organisations or the preparation of genuine news stories by freelance journalists.

When green wash won’t wash: Avoiding misleading environmental claims

This article first appeared in the Law Society Journal (November 2008), Vol 46, No 10, pp. 50-54.

Introduction

Businesses are increasingly keen to present an environmentally friendly or "green" image to their customers. Both large and small businesses realise that it makes good business sense to offer environmentally conscious consumers the option of a green product or service. Customers are often willing to pay a significant price premium for a green product.

Unfortunately, many businesses, including large businesses, have made fundamental mistakes in their green marketing. Instead of getting positive publicity for offering a green alternative, these companies have received negative publicity for their “green wash”. In some cases, these companies have had to grapple with unwanted attention from the ACCC.

This article explores some of the green marketing mistakes that businesses have made in trying to sell their green credentials and proposes some guidelines that practitioners can use to help their clients to avoid these kinds of mistakes.

Relevant law

The Trade Practice Act 1974 (TPA) contains two main civil provisions which can be used to attack false or misleading green claims. 

Section 52 prohibits corporations from engaging in conduct which is misleading or deceptive, or is likely to mislead or deceive, while s.53 prohibits corporations from falsely representing:

that goods are of a particular standard, quality, composition or have had a particular history; or that goods have performance characteristics or benefits they do not have.

These provisions are mirrored under state fair trading legislation which applies to corporations, individuals and unincorporated entities.

The remedies available for a contravention of ss.52 and 53 include injunctions, declarations, damages, corrective advertising and non-punitive orders.

Practitioners should be aware criminal penalties of up to $1.1 million per contravention[1] may be available to punish more serious misrepresentations about environmental benefits.

One important aspect of the civil liability regime under the TPA is that it establishes a reverse onus of proof for representations about future matters.[2] Therefore, if your client makes a representation about the future environmental benefits of their product, it may bear the onus of demonstrating that it had reasonable basis for such representations.

Getting caught out

There are many groups monitoring the green claims made by business and there is a high likelihood of getting caught out if you make false green claims. First, the Australian Competition and Consumer Commission (ACCC) appears to have made green claims an enforcement priority. The ACCC has been very active in this area, having taken an increasing number of green representation cases in the last 12 months.

Second, there are a large number of vigilant and sophisticated non-government organisations constantly on the lookout for green claims that are misleading. For example, a complaint by the Total Environment Centre prompted the ACCC to investigate EnergyAustralia (discussed below). These organisations can also initiate their own private actions of breaches of the relevant civil provisions of the TPA.

The final major risk is posed by competing businesses. Competitors will be very keen to complain to the ACCC about a green claim which does not stack up.

ACCC enforcementThe ACCC is increasingly active in the area of green marketing claims. In the last 12 months it has concluded eight investigations into green claims.

The first notable series of environmental investigations taken by the ACCC relate to claims made by the Australian air-conditioning industry that its products were “environmentally friendly”. The first case was taken against Sanyo Airconditioning Manufacturing Singapore Pte Ltd,[3] which claimed that its Eco Multi Series air conditioners had "environmentally-friendly HFC 'R407C' Added" and were "for a new ozone era - keeping the world green".

A problem with this representation is that R407C is considered to be a potent greenhouse gas and as such is hardly “environmentally friendly”. Another gas used in the Eco Multi Series was R22, an ozone depleting hydrochloroflurocarbon, is clearly not beneficial to the ozone layer.

Two important issues arise from this case (which was settled by consent).

First, the ACCC seems to have taken the view that “environmentally friendly” is a representation that a product will have a neutral effect, as opposed to a beneficial effect, on the environment. Therefore a product that does not harm the environment could arguably be described as environmentally friendly.

Second, the ACCC took action against Sanyo Airconditioning for both the text used in its marketing materials as well as the images of trees, the sea and the moon. The ACCC formed the view that such images conveyed a strong environmental message to consumers.

Following this case, there were two further notable investigations into Daikin[4] and Dimplex[5] for making similar representations. In each of these cases the companies entered into s.87B undertakings to cease making the green representations and carry out a range of corrective remedies, including publishing corrective notices on their websites and industry magazines and writing corrective letters to customers and distributors.

Another area of ACCC activity relates to green representations made in relation to motor vehicles.

Recently, the Federal Court declared by consent that representations made by GM Holden Ltd about the environmental benefits of Saab motor vehicles were misleading.[6] In particular, GMH made the claim that “Every Saab is green. With carbon emissions neutral across the entire Saab range”. The basis for this claim was that GMH would plant 17 native trees per vehicle to offset the emissions generated during the life of each motor vehicle. In actual fact, the 17 trees would have only offset the carbon emissions for one year of motor vehicle’s operation.

GMH was ordered to refrain from making such representations in the future and to retrain its marketing staff. However, the largest cost to GMH (apart from the damage to its credibility as a seller of “green” products) was its offer to plant an additional 12,500 trees to offset the carbon emissions from the motor vehicles which it did sell during the Saab "Grrrrrreen" advertising campaign.

Another recent ACCC matter involved green representations by V8 Supercars as part of its ‘Racing Green Program’.[7] V8 Supercars claimed that planting 10,000 native trees would offset the carbon emissions from the V8 Championship Series as well as all associated transport emissions of the racing teams travelling to events. The ACCC was concerned that consumers would understand that the 10,000 trees would absorb the carbon emissions in a short period of time, when in actual fact the emissions from one year of racing would only be absorbed by these trees over several decades.

The final matter involved representations made by Goodyear about its Eagle LS2000 range of tyres.[8] Goodyear said that this tyre range was environmentally friendly, designed for minimal environmental impact, and that its production processes resulted in reduced carbon dioxide emissions. Goodyear settled this matter with the ACCC by providing a s.87B undertaking in which it admitted that these environmental benefits could not be substantiated.

The ACCC has also looked at green claims made by energy companies. It investigated EnergyAustralia’s representations about its CleanAir and GreenFuture non-accredited electricity products.[9] EnergyAustralia claimed that consumers who signed up would get “100% green electricity at no extra cost” and that “for every kilowatt hour of electricity you buy, the same amount of electricity will be generated from 100% renewable sources, and that’s guaranteed”.

The ACCC was concerned that consumers would conclude that they were supporting new sources of renewable energy rather than simply offsetting their electricity against existing sources. While EnergyAustralia did not admit that its representations were misleading, it did acknowledge that customers may have been confused by the representations. EnergyAustralia agreed to a range of remedies including compensation, corrective letters to customers and a contribution of $100,000 to an educational brochure to explain the difference accredited and non-accredited products.

Lessons

The main lessons to come out of this review of ACCC investigations are: 

• don’t let your client make a green representation unless it has the scientific evidence to back up the claim; 

• be careful how your client uses images in green marketing material as the ACCC will be looking carefully at any images used, and not just the text; 

• don’t let your client overstate the environmental benefits of a green initiative; 

• make sure your client’s green representations are not too confusing for consumers; and 

• recognise that some environmental benefits are simply too complex to translate into a short and sharp marketing message. 

Resources

There are three key resources for practitioners who are advising clients in the area of green marketing claims:

• “Green marketing and the Trade Practices Act”.[10]

• “Carbon claims and the Trade Practices Act”.[11]

• “Environmental labels and declarations – Self-declared environmental claims”.[12]

“Green marketing and the Trade Practices Act”

This guide was released by the ACCC in 2008. It explains the specific sections of the TPA that may apply to green marketing claims.

In section 2 the guide sets out a range of principles that businesses should consider prior to making environmental claims. One important principle is that when a business makes a green claim it should consider the whole life cycle of the product. Even if a product is not environmentally detrimental during its useful life, if it has significant environmental impacts when discarded, a business should avoid making broad unqualified environmental claims about it.

In section 4 there is a useful “Checklist for marketers”. This checklist provides a list of the types of questions practitioners should be asking their clients about their products before signing off on any environmental marketing campaign or advertisement.

"Carbon claims and the Trade Practices Act"

This guide was also issued in 2008. It provides a useful guide to how businesses can make carbon claims that will stand up to scrutiny. There are three main types of claim: 

• a claim that a business has acquired carbon offsets for their product (as in the Saab and V8 racing examples); 

• that a product is carbon neutral; and 

• that the product’s carbon footprint has been reduced, for example, through the use of new technology (as in the Goodyear example). 

Section 2 deals with carbon offsets. The section defines relevant terms and provides an insight into some of the issues to be aware of – for example:

• additionality – the benefits of the carbon reduction should be “in addition” to those that would have happened anyway; 

• double-counted offsets – defined as when an offset is not “retired” and two or more businesses claim the same emission reduction; and 

• low-quality offsets – not all offsets have equal value so it is important to ensure that the offsets purchased will match the level of emissions a company is claiming to reduce. 

Section 3 deals with carbon neutral and low carbon claims. Reference is made to the generally accepted means of understanding and quantifying greenhouse gas emissions under the Greenhouse Gas Protocol.[13] This protocol uses the term “scopes” to describe emission sources as either: 

• scope 1 – direct emissions; 

• scope 2 – indirect energy emissions; or 

• scope 3 – other indirect emissions. 

The ACCC encourages businesses to use these concepts when making carbon neutrality claims. This is helpful advice as a business is likely to breach the TPA if it claims that a product is carbon neutral on the basis of scope 1 – direct emissions, but fails to consider scopes 2 and 3. Any marketing claim should be qualified to clearly explain the extent of the carbon neutrality.

The ACCC also provides some practical advice on how to assess a business’s carbon footprint by use of a footprint calculator. Like any such calculation, the end result is only as good as the information fed into it. Businesses need to be very careful to ensure that they have reliable and detailed information before trying to work out their carbon footprint.

The guide also talks about the risks of making low carbon claims. The ACCC is of the view that if a business fails to explain the appropriate context for such claims, they will usually be too vague to be properly understood by consumers.

Finally, in section 4 the ACCC provides a checklist for businesses which are intending to make a carbon claim.

“Environmental labels and declarations – Self-declared environmental claims”

This Australian and New Zealand Standard has been in existence since 2000. While it is still not a mandatory standard, given the interest in green marketing claims in the community, it is only a matter of time before a mandatory standard is introduced. Accordingly, it is worthwhile to consider the main aspects of this standard as it provides some good insights on how to ensure green marketing claims are not misleading or deceptive.

The objective of this standard is described as “to harmonize the various national guidelines on environmental claims used in product labels and in marketing generally, in order to facilitate trade in the global marketplace and to give consumers confidence in environmental claims”.

The object of giving consumers confidence in environmental claims is particularly important in the green marketing area. Consumers do not have the time to fully research the scientific evidence which bears on a green claim. Accordingly, consumers are more reliant on the accuracy of the green marketing material when making their purchasing decision.

The specific objects of the standard are listed in clause 4 and include such objectives as:

• ensuring that companies make accurate and verifiable environmental claims that are not misleading; 

• the prevention or minimisation of unwarranted claims; and 

• the reduction of marketplace confusion. 

Clause 5.3 states that “An environmental claim that is vague or non-specific or which broadly implies that a product is environmentally beneficial or environmentally benign shall not be used. Therefore, environmental claims such as ‘environmentally safe’, ‘environmentally friendly’, ‘earth friendly’, ‘non-polluting’, ‘green’, ‘nature’s friend’, and ‘ozone friendly’ shall not be used.”

Clause 5.4 states that claims that a product is “free” of an environmentally damaging substance should also not be used. The reason being that such claims cannot generally be demonstrated to be literally true owing to the presence of trace contaminants.

Clause 5.5 prohibits the making of sustainability claims as there are no definitive methods of “measuring sustainability or measuring its accomplishment”.

Clause 5.7 provides a checklist of specific requirements that every environmental claim should meet in order to satisfy the standard. For example there is a requirement that environmental claims be accurate and not misleading, and that they can be substantiated and verified. There are also requirements to ensure that consideration is given to the entire life cycle of the product and that any comparative claims are clear and accurate.

Conclusion

Green marketing claims are becoming an increasingly important area for businesses. Businesses risk breaching the TPA if they make sloppy, vague or unresearched green representations.

However, if businesses and their practitioners carefully consider the key resources identified in this article, namely the green marketing and carbon claims guides issued by the ACCC and the current Australian Standard on self-declared environmental claims, they will minimise this risk.

Practitioners should recognise that one implication of following these guides is that sometimes a proposed environmental claim will simply be too qualified or complex to be used in any marketing campaign. However, it is much better to abandon the use of a claim at an early stage than to be the subject of an ACCC investigation, with the resultant negative publicity, if an oversimplified or otherwise misleading green claim is caught short.

[1] Part VC TPA – Section 75AZC(1)(a), (b), (e).[2] Section 51A, TPA.[3] ACCC institutes court action against Sanyo Airconditioners Manufacturing Singapore Pte Ltd: http://www.accc.gov.au/content/index.phtml/itemId/365424/fromItemId/621575.
Federal Court finds "Green" claims to be misleading: http://www.accc.gov.au/content/index.phtml/itemId/398527/fromItemId/621575.
(The author ran this investigation and litigation at the ACCC.)[4] Warning to air conditioning industry after Daikin 'green' claims challenged by ACCC: http://www.accc.gov.au/content/index.phtml/itemId/596776/fromItemId/621575.
(The author ran this investigation at the ACCC.)[5] Dimplex chills out on "environmentally friendly" claims: http://www.accc.gov.au/content/index.phtml/itemId/770506/fromItemId/621575.
(The author ran this investigation at the ACCC.)[6] ACCC takes action against GM Holden Ltd over Saab 'green' claims: http://www.accc.gov.au/content/index.phtml/itemId/808355/fromItemId/621575.
Saab 'Grrrrrreen' claims declared misleading by Federal Court: http://www.accc.gov.au/content/index.phtml/itemId/843395.[7] V8 Supercars corrects carbon emissions claims: http://www.accc.gov.au/content/index.phtml/itemId/843360.[8] Goodyear Tyres apologises, offers compensation for unsubstantiated environmental claims: http://www.accc.gov.au/content/index.phtml?itemId=833219.[9] EnergyAustralia clears air about green electricity claims: http://www.accc.gov.au/content/index.phtml/itemId/806650/fromItemId/621575.
(The author ran this investigation at the ACCC.)[10] Green marketing and the Trade Practices Act, ACCC, 2008 – electronic version available for free download at http://www.accc.gov.au/content/index.phtml/itemId/815763.[11] Carbon claims and the Trade Practices Act, ACCC, 2008 – electronic version available for free download at http://www.accc.gov.au/content/index.phtml/itemId/833279.[12] Environmental labels and declarations – Self-declared environmental claims, AS/NZS ISO 14021: 2000, available for purchase at http://www.saiglobal.com/.[13] http://www.ghgprotocol.org/.

The ten biggest mistakes companies make when dealing with the ACCC

This article first appeared in Keeping good companies, Journal of Chartered Secretaries Australia Ltd, December 2008, Volume 60 No. 11, pp. 681-684

Introduction

Even if you educate your staff regularly on compliance with the Trade Practices Act 1974 (TPA) and have lawyers review all your communications rigorously, that’s no guarantee that your company will never be the subject of a complaint to the Australian Competition and Consumer Commission (ACCC). When that happens, some companies make fundamental mistakes. Other mistakes raise more subtle issues. So, if you are investigated by the ACCC, what should you do? Or, to look at it another way, what should you not do?

1. Being needlessly aggressive

Be firm in your dealings with the ACCC, but needless aggression is not helpful. Rather than intimidating an ACCC investigator into backing off, it is more likely to push them to ask more questions and request additional information.

Investigators have two universal traits: suspiciousness and stubbornness. (I say this as a former ACCC investigator). If you are needlessly aggressive, you will simply arouse the investigator’s suspicions that your company is hiding something. If an investigator forms this opinion, it may take a long time for them to change their mind.

2. Attacking the credibility of the complainant

Whether the identity of the complainant is known or just suspected, companies often devote considerable effort to explaining how a complainant has a score to settle and is unreliable or dishonest. This is a waste of time. The ACCC receives a significant portion of its evidence from disgruntled former employees who have a score to settle with their former employer and is used to assessing their credibility.

Unless you can provide some fairly hard evidence about their lack of reliability, it is doubly useless. ACCC investigators have to determine the honesty and likely reliability of prospective witness in court. Be wary of making such claims because they are more likely to increase an investigator’s suspicions that your company has something to hide.

3. Not properly responding to ACCC information requests

It is surprising how often companies do not respond properly to the ACCC’s information requests. Often companies don’t respond fully to questions or do not respond to some questions at all.

Possibly, the company does not understand the ACCC’s questions or it rushed its response. However, an investigator may interpret this failure as a sign that the company has something to hide or is not taking the issue seriously.

If you do not fully understand the ACCC’s questions, call the ACCC contact officer to discuss them. The questions might not have been clearly expressed. It is also important that the person from your company who will prepare the information speaks directly to the ACCC contact officer (in the presence of your legal adviser if need be) so nothing is lost in translation.

You should never feel pressured to provide information voluntarily to the ACCC before it is ready. Sometimes inadequate responses to ACCC questions stem from the company rushing to collect and provide information. If your company is struggling to collect all the requested information by the due date, you should call the ACCC and propose a staged delivery of information. The ACCC investigator’s main concern is to ensure that they have enough information to keep the investigation moving forward. An investigator would prefer to get some information quickly, rather than waiting months for complete production.

Finally, be careful to ensure the accuracy and completeness of the information provided voluntarily to the ACCC. It is a criminal offence to provide false, misleading or incomplete information to the ACCC. This offence carries a maximum penalty of 12 months imprisonment (s 137.1 of the Criminal Code).

4. Arguing few customer complaints in mitigation

Many companies argue that the complaints received by the ACCC comprise a very small proportion of their total number of customer inquiries and sales. This is a bad strategy for a number of reasons.

First, in consumer protection circles it is often argued that an absence of complaints can be good evidence that a deception is effective. Customers do not complain about a misleading representation if they do not know it is misleading. A good example is a representation that your company offers the lowest prices. Customers will not complain unless they have compared prices and subsequently realised that your company is not offering the lowest prices. Obviously there are other types of misrepresentations which will be discovered quickly by the consumer, such as bogus free offers.

Second, many consumers often do not complain even if they are misled. Either they never get around to complaining or they blame themselves for having been taken in. In addition, the fact that a customer does not complain to the ACCC does not mean that they have not complained to their family and friends.

Finally, a claim that only a few customers have complained sends the wrong message to the ACCC. It suggests that your company does not value the concerns of a section of its customer base, however small. It also suggests that your company may be taking a cost/benefit approach to dealing with customer complaints.

Instead of dismissing complaints as a minority of customers, carefully investigate each of the complaints and explain to the ACCC the reason for each complaint. The main focus of your internal investigation is to satisfy the ACCC that the complaints are not symptomatic of a wider problem within the organisation, but represent isolated incidents.

5. Being too reactive in dealing with the ACCC about its media release

Many companies neglect the issue of the ACCC media release until the very end of the investigation. Then they seek a range of concessions from the ACCC such as the right to agree the content of the media release, the right to edit the media release or the opportunity to provide comments on the media release before it is issued. However, the ACCC will rarely compromise the integrity of its media release.

Consider other ways to influence both the content of the ACCC media release and its impact. The way your company responds to the ACCC during the investigation will have a bearing on the content of the media release. Obviously if your company has not cooperated with the investigation, it can hardly expect praise. But if your company cooperates in a timely way it is entitled to have that acknowledged.

The ACCC media release concerning GIO’s refund of GST payments on car leases is a good example of the ACCC acknowledging the cooperation of a company. GIO made sure it commenced the process of providing refunds prior to the issue of the media release so that it would get positive comments from the ACCC.[1]

Make sure you contact the ACCC in writing before the end of the investigation requesting that it mention in its media release the cooperation your company provided during the investigation. Emphasize the benefits to the ACCC of this approach. If the ACCC praises your company for constructively resolving a problem, this will provide an incentive for other companies to come forward to resolve their own problems (as happened following the GIO media release referred to above).

Your company should also ensure that it has a contact person available for reporters to call when an investigation is resolved and the ACCC media release is issued.[2] It would be very unfortunate to have a report in the newspapers the day after the ACCC media release along the lines that ‘the Managing Director of XYZ Pty Ltd was unavailable for comment.’ Your company should provide the ACCC investigator with the name, position and contact details of the relevant person and ask that this information be provided to the ACCC’s Media Unit. When reporters call the ACCC for further information about its media release, the Media Unit will be in a position to provide these details.

Finally, it is surprising how few companies issue media releases themselves following an ACCC media release. The ACCC announcement will rarely cover all issues which are important to your company. For example your media release could reassure customers that the TPA problems have been fixed and that they were not systemic but isolated.

If your company was particularly strategic you could issue your own media release before the ACCC issued its media release. By taking this approach, you will more or less guarantee that the ACCC media release does not get much coverage. However, be aware that if you adopt this approach, it may upset the ACCC.

6. Saying that everybody else is doing it

The effect of this statement on an investigator is clear. They immediately get much more excited about the investigation as they realise they are now dealing with a broad industry problem rather than an isolated incident. Also, the fact that many companies in an industry engage in the same conduct makes the investigation a much higher priority.

Clearly, if it’s true, your company should advise the ACCC as early as possible that the alleged conduct is common in the industry. However, you should try to turn this to your advantage. To do this, you need to be aware of some of the enforcement philosophies of regulators such as the ACCC. In taking enforcement action, a regulator will try to achieve both specific and general deterrence. As it cannot take on every case, it has to select the cases which will best achieve both goals.

Accordingly, there are three broad enforcement approaches. The ACCC may pursue a case against: 

• the market leader because a successful outcome will achieve general deterrence by getting smaller players to fall into line 

• the company which is engaging in the most blatant conduct in breach of the TPA, as the ACCC is likely to both win this case and get the most extensive remedies or 

• the company which has a history of similar conduct, as this may provide an opportunity to secure the most severe sanctions such as a criminal conviction. 

If the ACCC approaches your company about an issue which is a widespread industry problem, try to persuade the ACCC to pursue somebody else. For example, if you are the market leader, you may want to suggest to the ACCC that it focus its efforts on another company which is engaging in more blatant conduct or is a repeat offender. Alternatively, if you are a repeat offender you may try to focus the ACCC on a company which is engaging in more blatant conduct. However, if your company is engaging in the most blatant conduct, I suggest you give up as soon as possible.

7. Not using a lawyer who specialises in the Trade Practices Act

While it may come as a surprise, many companies use lawyers who have little or no knowledge or experience of the TPA or the ACCC. The TPA is a specialised area and companies should retain a specialist lawyer to represent them. The exception to this may be straightforward instances of misleading and deceptive conduct.

However, in all other matters, your company should ensure its lawyer has appropriate experience. Ask your lawyer for details of the trade practices matters they have managed and then check to see how successful they have been. You would probably want to know whether your lawyer had lost every trade practices case that they had run.

8. Being too reactive about remedies

Companies often err in being too reactive in terms of the remedies required to fix a contravention of the TPA. They often provide masses of information to the ACCC voluntarily, but may never suggest remedies to the ACCC to resolve the problem. Rather, they will wait for the ACCC to propose a remedies package which may contain all manner of elaborate remedies, many of which are not acceptable to the company. Then the company will spend weeks trying to whittle down the ACCC’s proposals to something it can live with.

Instead, try to get on the front foot by proposing a range of remedies to the ACCC at an early stage. By doing this, you will shift the onus to the ACCC to explain to your company why the remedies you have proposed are inadequate and why additional or more elaborate remedies are needed. You should try to set the agenda on appropriate remedies, rather than allow the ACCC to do it.

9. Not implementing remedies immediately

Many companies are willing to implement remedies from an early stage in the investigation, but don’t do so because they think it is better to wait for ACCC approval. By not implementing the remedies you are happy to implement immediately, your company runs the risk of the ACCC upping the ante and proposing additional and more elaborate remedies.

If you acknowledge that there is a need to take remedial steps, you should implement these steps immediately even if the investigation is still ongoing. There are a number of strategic benefits from taking this pre-emptive approach in dealing with the ACCC.

First, your company will show the ACCC that it responded positively to the concerns at the earliest possible stage. Second, this will reduce the likelihood that the ACCC will make demands for additional or more elaborate remedies. In other words, the ACCC will be in the position of having to explain why the measures you have already implemented did not fix the problem. Finally, if your company has already implemented a range of remedies, there is less likelihood that the ACCC will press for a court enforceable undertaking, as there will be few, if any, remedies left to implement.

10. Agreeing to a section 87B undertaking too readily

The biggest mistake a company can make is to agree to a s87B undertaking too readily. Section 87B is an administrative tool which permits the ACCC to accept undertakings from companies to settle investigations, including consumer protection, restrictive trade practices and merger investigations.[3] Though a s87B undertaking is not approved or otherwise brought to the attention of the Federal Court when it is executed, it can be enforced in the Federal Court if its terms are breached.

Many companies don’t understand that, when they sign a s87B undertaking, they are exposed to a range of broad and open-ended remedies if the undertaking is breached. The court can order the company in breach of the undertaking to:

• pay to the Commonwealth the amount of the financial benefit obtained directly or indirectly and reasonably attributable to the breach and / or 

• compensate any other person who has suffered loss or damage as a result of the breach. 

An order to pay the Commonwealth the amount of the financial benefit obtained could be a significant sum of money, for example, all the revenue that a misleading advertising campaign has generated.

In dealing with the ACCC, companies should seek to enter into a dialogue about the reasons why it is seeking a s87B undertaking. The ACCC usually tries to resolve investigations in one of three ways: an administrative undertaking, a s87B court enforceable undertaking, or through court action. 

The ACCC will generally take court action if:

• a company refuses to provide remedies to resolve a TPA problem 

• the contravention is considered to be particularly blatant or 

• the company is a repeat offender.

However, the basis for an ACCC decision to seek a s87B undertaking is often far from clear. Some people see the s87B undertaking as constituting a greater punishment than an administrative undertaking. There are strong grounds for arguing that a s 87B undertaking should only be sought if the ACCC has genuine concerns that your company cannot be trusted to comply with the terms of an administrative undertaking.

The best way for you to reduce the likelihood of the ACCC requiring a s 87B undertaking is to start implementing corrective remedies prior to the settlement of the investigation. Your company will thus be able to counter any claims by the ACCC that a s87B undertaking is required because it cannot be trusted to implement the agreed remedies.

A further benefit of implementing remedies at an early stage is that you will remove much of the ACCC’s leverage in the settlement negotiations. The main leverage which the ACCC has in seeking a s87B undertaking is that it will commence legal proceedings unless your company agrees to the undertaking. However if some of the proposed remedies have already been implemented, there is very little justification for the ACCC to go to court to get the balance of the remedies it is seeking.

[1] ‘GIO provides 2,800 GST refunds on car leases’ ACCC media release MR 231/00, 24 August 2000 - http://www.accc.gov.au/content/index.phtml/itemId/87475/fromItemId/621406

[2] See also C Anderson ‘Managing communications and reputation’ Keeping good companies, Vol 60 No 9, pp. 565-568.[3] See also C Coops ‘Take it away! – approaching section 87B undertakings in a merger context’, Keeping good companies, Vol 60 No 8, pp. 481-483.

Largest ever fine of $2.7 billion imposed for glass cartel

Introduction

The European Commission has imposed the largest fine in the history of antitrust enforcement for illegal market sharing conduct by a number of manufacturers of car glass. The total fines imposed against the four companies involved in the cartel were 1.3 billion euros or 2.7 billion Australian dollars. The largest fine of 896 million euros or 1.7 billion Australian dollars was imposed on Saint-Gobain.

European car glass cartel

The EC alleged that between 1998 and 2003 Saint-Gobain, Pilkington, and Asashi discussed target prices and engaged in market sharing and customer allocation at meetings held at various locations. A fourth company, Soliver took part in some of these meetings –

http://europa.eu/rapid/pressReleasesAction.do?reference=IP/08/1685&format=HTML&aged=0&language=EN&guiLanguage=en

The EC alleged that the companies agreed to allocate car glass tenders to each company for new release cars, took steps to maintain stable market shares and exchanged commercially sensitive information.

The market for the supply of car glass in Europe is highly concentrated with Saint-Gobain, Pilkington and Asashi accounting for 90% of the market for car glass fitted in new cars and replacement glass fitted in second hand cars. This high degree of market concentration made it easier for the companies to form and maintain the cartel for 6 years.

The EC investigation was triggered by an anonymous tip-off. Based on this information, the EC conducted dawn raids on each of the companies. Shortly after the raids, Asashi lodged an application for leniency under the EC’s 2002 Leniency Notice. Asashi provided full cooperation and was rewarded with a 50% discount off its fine.

The size of the fines imposed against Saint-Gobain reflects the fact that the company is a repeat offender. Saint-Gobain had already been the subject of cartel actions by the EC in relation to the supply of flat glass in the Benelux countries in 1988 and in Italy in 1984. Because of Saint-Gobain’s previous record, its fines were increased by 60% under the EC’s 2006 Guidelines on Fines.

Antitrust fines for cartel conduct

This case demonstrates the global trend of antitrust penalty regimes towards larger fines. Most antitrust jurisdictions have moved away from a set maximum fine for cartel conduct preferring, instead to penalise a company by reference to either the financial gain that it derived from the cartel conduct or a percentage of its total sales turnover.

In most cases, the antitrust regulator has not been able to calculate the financial gain obtained from the cartel conduct. As a result, the default position has been to impose a fine or penalty based on the company’s sales turnover during the period of the cartel conduct.

A consequence of calculating the relevant fine by reference to the total sales turnover of a company is that total fines have increased significantly in both Europe and the United States and are likely to rise in Australia.

Australian cartel penalty regime

A similar approach has been taken in Australia to calculating the appropriate fine for cartel conduct. Relevantly, section 76(1A) of the Trade Practices Act 1974 (TPA) provides -

(ii) if the Court can determine the value of the benefit that the body corporate, and any body corporate related to the body corporate, have obtained directly or indirectly and that is reasonably attributable to the act or omission--3 times the value of that benefit; 

(iii) if the Court cannot determine the value of that benefit--10% of the annual turnover of the body corporate during the period (the turnover period ) of 12 months ending at the end of the month in which the act or omission occurred…Section 76(1A)(ii) establishes a formula whereby the financial gain over the entire life of the cartel is first calculated and then multiplied by 3.

However, antitrust authorities have found it virtually impossible to work out the financial benefits obtained by members of a cartel. Consequently, the percentage of sales turnover has been used by antitrust regulators in most cases.

An example of how significant the introduction of section 76(1A)(iii) would be in escalating the penalties for cartel conduct in Australia can be appreciated by looking at the penalties imposed against Woolworths in the liquor case.

In 2003, the ACCC commenced legal proceedings against Woolworths and Liquorland for entering into illegal agreements with small business competitors. In 2006, the Federal Court found that the conduct contravened section 45 of the TPA - http://www.accc.gov.au/content/index.phtml/itemId/773813/fromItemId/622289.

Justice Allsop ordered that Woolworths pay a pecuniary penalty of $7 million for its illegal conduct. However has the 10% sales turnover approach been applied in this case, the total penalty could have been as high as $3.8 billion based on a total sales turnover of Woolworths Limited in 2006 of $38 billion.

Conclusion

Over the next five years in Australia, pecuniary penalties for cartels and indeed all contraventions of the restrictive trade practices provisions of the TPA are going to increase dramatically. The application of the 10% sales turnover approach is going to increase corporate penalties in most cases from less than $10 million currently, to corporate penalties in the tens of millions of dollars.

Most trade practices practitioners have been focussing on the proposed introduction of criminal penalties including jail time for engaging in illegal cartel conduct. However, companies should not forget the very significant changes that have been made to civil penalty regime which raises the maximum penalties for a contravention of Part IV of the TPA to a new level.

There is a clear intent within Government to increase the punishment for illegal anticompetitive conduct, particularly cartels. Companies need to respond to this new environment by ensuring that they have an up-to-date, comprehensive and effective trade practices compliance program. Companies will also have to be increasingly vigilant in monitoring all contact between their employees and their competitor's employees to ensure that their company is not held liable for a multi-million dollar penalty due to their employee's actions.

ACCC to target tardy traders

Introduction

ACCC Chairman Graeme Samuel recently stated that the ACCC will target big businesses that unilaterally and arbitrarily delay payment to a small business supplier. The ACCC indicated that such conduct is likely to constitute unconscionable conduct under the Trade Practices Act 1974 (TPA) - http://www.smartcompany.com.au/Free-Articles/The-Briefing/20081027-ACCC-to-go-after-late-payers.html

Why is the ACCC interested in this area? What provisions can it use to challenge this conduct?

Background

The ACCC’s concern about big businesses delaying payment to small businesses is somewhat surprising. In the past, actions by big businesses to change trading terms unilaterally or to delay payment were usually seen by the ACCC as raising private contractual issues that did not require ACCC intervention. The ACCC left small traders to take their own legal action.

There were some exceptions. One particularly well known example a number of years ago involved a major grocery wholesaler that unilaterally extended its payment terms to small business suppliers from 30 to 120 days. To add insult to injury when this wholesaler did get around to paying their small business suppliers, they would automatically discount the invoice to give itself the benefit of the early payment discount!

Another well-known practice by the major grocery wholesalers and retailers, which was investigated by the ACCC, involved storage pallets. Storage pallets for grocery items are rented by the party that has use of them. The small business supplier pays the rental on the pallet from the time their goods are loaded onto the pallet until the time that the goods are delivered to the wholesaler or retailer. On delivery of the goods, property in the pallet passes from the small business supplier to the wholesaler or retailer which is then responsible for the rental payments.

Many of the major wholesalers and retailers decided some years ago to unilaterally change the terms on which they accepted pallets from small business suppliers. Instead of property in the pallet passing when the small business supplier delivered it to their wholesaler or retailer customer, the passing of property in the pallet was delayed for 30 days by imposition of a new contractual term by the wholesalers and retailers into their agreements with small business suppliers. As a result, the small business supplier remained liable for paying rental on the pallet for 30 days after it had come into the possession of the major wholesaler or retailer. The small business supplier also became legally responsible for any damage to the pallet which was caused by the wholesaler or retailer while it was in their possession.

This unilateral change resulted in most of the pallet rental costs of the major wholesalers and retailers being transferred to small business suppliers without their agreement.

Recent developments

The ACCC’s interest in policing tardy payments to small businesses follows a commitment made by Prime Minister Kevin Rudd at the small business summit in Brisbane on 24 October 2008. At this summit, Kevin Rudd announced that all Federal Government Departments would pay small business suppliers and contractors within 30 days as a way of helping them with their cash flow during these current difficult economic conditions. If a Department fails to pay within 30 days, the small business will have the right to charge penalty interest on the unpaid debt.

Kevin Rudd also called on big business to follow the Federal Government’s example and commit to paying small businesses within 30 days - http://www.news.com.au/business/story/0,27753,24553740-5017675,00.html

A few days later, on 27 October 2008, Graeme Samuel was reported as stating that the ACCC could take action against businesses that delayed paying their small business suppliers. For example, extending payment terms from 30 to 120 days could be seen as constituting unconscionable conduct - http://www.smartcompany.com.au/Free-Articles/The-Briefing/20081027-ACCC-to-go-after-late-payers.html

On 28 October 2008, there were further detailed reports about the ACCC stance on tardy payers. In one such report, the Chairman of the ACCC identified a number of factors that would be relevant to its assessment of whether a particular matter should be investigated as potentially unconscionable. It would be relevant that the conduct had been “unilateral”, “arbitrarily applied” “harsh and oppressive”, "imposed without consultation” and caused “extraordinary hardship” - http://www.smartcompany.com.au/Free-Articles/The-Briefing/20081027-ACCC-to-go-after-late-payers.html

The ACCC’s public stance on late payments to small businesses by big businesses was immediately praised by the Rudd Government - http://www.abc.net.au/news/stories/2008/10/28/2402841.htm?section=justin

Relevant legislation

There are two provisions in the TPA that could be used to target unconscionable conduct in the commercial context, sections 51AA and 51AC.

Section 51AA requires a finding that the small business suffered from a special disadvantage such as illiteracy, low levels of education, a significant lack of commercial sophistication. Therefore, section 51AA is unlikely to be the ACCC’s preferred approach to this issue.

Section 51AC is more likely to be used by the ACCC to target tardy traders.

Section 51AC provides –

(1) A corporation must not, in trade or commerce, in connection with:

(a) the supply or possible supply of goods or services to a person (other than a listed public company); or

(b) the acquisition or possible acquisition of goods or services from a person (other than a listed public company);

engage in conduct that is, in all the circumstances, unconscionable.

Section 51AC prohibits unconscionable conduct both in a supply and acquisition situation. In the context of taking action against big businesses for tardy payment, it is the acquisition situation that would be relevant. In other words –

(1) A big business must not, in trade or commerce, in connection with:

(b) the acquisition of goods or services from a small business (other than a listed public company);

engage in conduct that is, in all the circumstances, unconscionable.

In subsection 51AC(4) a range of non-exclusive factors are listed which the Courts are to consider in determining whether unconscionable conduct has occurred in an acquisition situation. In the following section, each factor in subsection 51AC(4) with be discussed in turn.

(4) Without in any way limiting the matters to which the Court may have regard for the purpose of determining whether a corporation or a person (the acquirer ) has contravened subsection (1) or (2) in connection with the acquisition or possible acquisition of goods or services from a person or corporation (the small business supplier), the Court may have regard to:

(a) the relative strengths of the bargaining positions of the acquirer and the small business supplier...

Factor (a) requires that there be a disparity in bargaining power between the big business acquirer and the small business supplier. This is not only a question purely of relative size but is likely to extend to an analysis of how dependant the small business is on the big business acquirer. For example, does the big business acquirer purchase a large proportion of the small business’s total sales or is there an exclusive supply arrangement?

This factor will be relatively easy to establish in the context of tardy payers, as the small business has already supplied the goods or services to the big business and is simply awaiting payment. It would not be feasible for the small business to take legal action against its customer to recover debts owing due to the cost of the proceedings and likely loss of that customer’s business.

(b) whether, as a result of conduct engaged in by the acquirer, the small business supplier was required to comply with conditions that were not reasonably necessary for the protection of the legitimate interests of the acquirer...

Factor (b) relates to whether the conditions imposed by the big business acquirer were reasonably necessary for the protection of its legitimate business interests. It is hard to see how the unilateral decision of the big business acquirer to delay payment or change other terms of the contract could be seen as protecting a legitimate interest. Rather such conduct is likely to be seen as opportunistic and illegitimate.

(c) whether the small business supplier was able to understand any documents relating to the acquisition or possible acquisition of the goods or services...

Factor (c) is not likely to be relevant to the issue of late payers.

(d) whether any undue influence or pressure was exerted on, or any unfair tactics were used against, the small business supplier or a person acting on behalf of the small business supplier by the acquirer or a person acting on behalf of the acquirer in relation to the acquisition or possible acquisition of the goods or services...

Factor (d) is likely to be one of the most important factor in establishing that late payment is unconscionable. It is likely that the very act of unilaterally changing trading terms would be seen as by the Court as an unfair tactic. There may be instances where a big business withheld payment in an attempt to extract some other concession. For example, where a big business withheld payment to a small business for the purpose of extracting some favourable trading terms such as larger volume rebates or stocking payments. In such circumstances, the big business may be seen as using unfair pressure on the small busines

(e) the amount for which, and the circumstances in which, the small business supplier could have supplied identical or equivalent goods or services to a person other than the acquirer...

Factor (e) is not relevant to an investigation into tardy payment. Rather this factor arises when a big business tries to push down the selling prices of a supplier below the prices charged by that supplier’s competitors.

(f) the extent to which the acquirer's conduct towards the small business supplier was consistent with the acquirer's conduct in similar transactions between the acquirer and other like small business suppliers...

Factor (f) is quite similar in its focus to factor (e). This focus is on determining whether the big business acquirer is treating the same types of suppliers in a different or discriminatory manner. This factor asks whether the big business’s conduct towards a small business supplier is consistent with their conduct towards other similar kinds of suppliers in like transactions.

Indeed factors (e) and (f) could be seen as encapsulating the essence of unconscionable conduct – namely the singling out a particular small business operator for discriminatory and unfair treatment usually to achieve some ulterior purpose.

(g) the requirements of any applicable industry code...

(h) the requirements of any other industry code, if the small business supplier acted on the reasonable belief that the acquirer would comply with that code

Factors (g) and (h) will not be relevant to the majority of situations of tardy payments as there are no general industry codes of conduct. The Franchise Code of Conduct is unlikely to apply as it is usually the franchisee that owes money to the franchisor. The Horticulture Code and Oil Code could be relevant to small businesses in those particular industries.

(i) the extent to which the acquirer unreasonably failed to disclose to the small business supplier:

(i) any intended conduct of the acquirer that might affect the interests of the small business supplier; and

(ii) any risks to the small business supplier arising from the acquirer's intended conduct (being risks that the acquirer should have foreseen would not be apparent to the small business supplier); and

Factors (i) is unlikely to be relevant as the act of delaying payment or otherwise unilaterally altering trading terms would appear to be opportunistic conduct rather than planned. Tardy payment is a change to the ordinary trading relations between a big and small business rather than an intended, but undisclosed, future plan of action.

(j) the extent to which the acquirer was willing to negotiate the terms and conditions of any contract for the acquisition of the goods and services with the small business supplier; and

(ja) whether the acquirer has a contractual right to vary unilaterally a term or condition of a contract between the acquirer and the small business supplier for the acquisition of the goods or services; and

Factors (j) and (ja) would have to be satisfied for any action against a tardy payer to be successful. Factor (j) refers to the willingness of the big business acquirer to negotiate terms and conditions. Clearly if the big business acquirer was willing to discuss terms and conditions with the small business, it would be very difficult to establish unconscionable conduct. For such an action to be successful, the big business acquirer would have to be acting unilaterally.

Factor (ja) asks whether the acquirer has a contractual right to unilaterally vary a term or condition of a contract with a small business supplier. If there is such a right to vary terms unilaterally then any action for tardy payment would not succeed. Indeed, satisfaction of this factor would appear to be a necessary precondition to running any successful action against a big business for tardy payment.

(k) the extent to which the acquirer and the small business supplier acted in good faith.

Finally, factor (k) inquires into the extent to which both parties acted in good faith. It is arguable that the unilateral alteration of a long standing trading arrangement without notice to the small business would not be considered to be acting in good faith.

Conclusions

On an impressionistic level, section 51AC would appear to give the ACCC adequate power to take action against big business acquirers that unilaterally delayed payments or otherwise sought to change pre-existing trading terms. A number of the relevant factors under subsection 51AC(4) could be satisfied in most cases of tardy payment. It also appears that factors (j) and (ja) would necessarily have to be satisfied for any action for tardy payment to be successful.

However, as stated above, the essence of commercial unconscionable conduct is the singling out a particular small business for discriminatory and unfair treatment usually to achieve some ulterior purpose. The problem with using section 51AC to challenge tardy payers is that their conduct may not be discriminatory in its application. Rather, the big business acquirer is more likely to unilaterally delay payment or change trading terms for all its small business suppliers across the board. Furthermore, the big business acquirer is unlikely to have any ulterior purpose in delaying payment or changing trading terms other than to improve their cash flow position.

Ultimately, it is unlikely that a Court is going to find that even the tardiest payers have engaged in unconscionable conduct. Courts are much more likely to decide that late payments and other unilateral changes to trading terms should properly be characterised as a breach of contract sounding in damages, rather than as some new species of unconscionable conduct.

This does not mean that large companies should be blasé about this issue. Even though the ACCC is unlikely to be ultimately successful in such cases, this does not mean that the ACCC will not vigorously pursue a handful of investigations into such conduct. Big businesses should appreciate that being the subject of such an ACCC investigation, particularly an unconscionable conduct investigation, is likely to be a very costly exercise that would be best avoided.

The best way to avoid unwanted ACCC attention in this area is to make sure that big businesses discuss any proposed changes to payment terms and other contractual terms with their small business suppliers in an effort to reach a mutually acceptable position.