Woolworths and Children's Safety

Introduction

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

Recent ACCC settlement

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

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

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

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

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

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

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

Woolworths also agreed to take other remedial steps such as:

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

• auditing their compliance with the Action Plan; and 

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

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

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

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

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

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

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

First time offender?

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

Unfortunately, Woolworths is not a first time offender.

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

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

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

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

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

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

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

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

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

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

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

Two time loser

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

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

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

• conduct refresher training for its staff; and 

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

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

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

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

Conclusions

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

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

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

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

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

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

Introduction

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

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

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

The Australian Consumer Law changes

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

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

• introduction of unfair contract terms legislation; 

• a new product safety system; and 

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

The new enforcement powers which the ACCC has gained are:

• substantiation notices; 

• public warning powers; and 

• infringement notices. 

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

• civil pecuniary penalties; 

• disqualification orders; and 

• non-party redress. 

Substantiation Notices

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

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

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

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

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

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

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

Public warning powers

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

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

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

The Commission may issue to the public a written notice containing a warning about the conduct of a corporation if:

a. the Commission has reasonable grounds to suspect that the conduct may constitute acontravention of a provision of Part IVA, V or VC; and 

b. the Commission is satisfied that one or more persons has suffered, or is likely to suffer, detriment as a result of the conduct; and

c. the Commission is satisfied that it is in the public interest to issue the notice.

Therefore the elements of the public warning power are:

• the ACCC must have reasonable grounds to suspect that conduct being engaged in may constitute a breach of the TPA; and 

• one or more persons are likely to suffer detriment as a result of the conduct; and 

• the ACCC is satisfied that it is in the public interest to issue the notice. 

The first element of the new public warning power is that the ACCC must have reasonable grounds to suspect that conduct is in breach of the TPA. It seems that the test of whether the ACCC has "reasonable grounds to suspect" a breach of the TPA is an objective test. In practice, it will not be very difficult for the ACCC to satisfy this element because of the use of the word "suspect" in the legislation.

The second element is that one or more persons are likely to suffer detriment because of the conduct. The legislation does not specify that the consumer must actually suffer detriment, but rather that it be likely that the consumer will suffer detriment. This approach is appropriate given that the entire rationale for the new power is to prevent consumers from suffering financial detriment.

The third element of the legislation is the most onerous aspect in terms of the ACCC utilising its public warning power. This element requires that the ACCC be satisfied that it is in the public interest to issue a public warning. This will require that the ACCC balance up the utility of issuing a public warning notice with other strategies such as commencing rapid court action or seeking ex parte injunctions. In applying the public interest test, it may also be incumbent on the ACCC to consider the negative impact which issuing a public warning notice may have on a business's ability to continue trading.

Finally, the legislation provides that the ACCC can issue a notice where a business has failed to respond to a substantiation notice. In these circumstances, the ACCC must also believe it is in the public interest to issue a notice.

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

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

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

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

Infringement notices

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

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

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

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

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

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

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

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

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

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

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

Pecuniary penalties

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

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

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

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

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

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

Disqualification orders

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

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

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

• the disqualification is justified.

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

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

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

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

Non-party redress

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

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

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

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

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

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

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

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

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

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

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

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

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

• declaring a contract to be void;

• varying the terms of a contract; or 

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

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

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

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

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

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

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

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

Summary

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

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

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

ENDNOTES

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

Restrictive supermarket leases: going, going...gone?

Introduction

In September 2009, Mr Graeme Samuel, the Chairman of the Australian Competition and Consumer Commission (ACCC), announced a “major breakthrough for grocery competition in Australia”.[1] The “breakthrough” referred to a deal brokered by the ACCC which saw Coles Myer and Woolworths agreeing not to enforce restrictive provisions in over 700 of their leases with supermarket landlords around Australia (Settlement). Dr Craig Emerson, the relevant Minister also described the Settlement as “pro-competitive”.[2]

The Settlement has many pro-competitive benefits. It also raises a number of questions, including: 

• Why were some existing restrictive provisions preserved for up to five years under the Settlement? 

• Why were Coles and Woolworths not prosecuted by the ACCC for what appears to be quite blatant anticompetitive conduct? 

• Why didn’t the ACCC seek pecuniary penalties against Coles and Woolworths for these restrictive lease provisions, particularly in the light of the ACCC’s earlier case against Coles and Woolworths for broadly similar conduct in relation to restrictive liquor agreements? 

The Settlement

The Settlement is contained in two separate section 87B undertakings (Undertakings) from Coles and Woolworths.[3] These Undertakings are identical in their content. [4]

The Undertakings begin by setting out the relevant background. Reference is made to the ACCC inquiry into the competitiveness of the grocery market conducted in 2008. The Undertakings state that in the course of its inquiry, the ACCC identified the existence of a wide range of restrictive provisions in lease agreements which could prevent the entry of supermarket operators into shopping centres.

The Undertakings also refer to an ACCC’s industry-wide investigation into whether the restrictive provisions uncovered by the ACCC could have the purpose and/or effect of substantially lessening competition in a market. It appears that the ACCC’s investigation is continuing.

Clause 7 of the Undertakings describes a number of the restrictive provisions which the ACCC identified in Coles and Woolworths leases with shopping centre owners. For example, the ACCC identified provisions which:

• prohibit the lessor from granting a lease agreement to, or allow the entry of, another supermarket operator in the shopping centre in which the relevant (Coles or Woolworths) supermarket is located; 

• impose a penalty upon the lessor if the lessor grants a lease agreement to, or allows the entry of, another supermarket operator in the shopping centre in which the relevant (Coles or Woolworths) supermarket is located; 

• prohibit the lessor from granting a lease agreement to another supermarket operator, or to another supermarket operator over a certain floor size, in which the relevant (Coles or Woolworths) supermarket is located. 

The Undertakings then describe the ACCC’s concerns about the restrictive provisions. The Undertakings state that the ACCC had concerns that the making or giving effect to the lease agreements containing such restrictive provisions may have had the purpose, effect or likely effect of lessening competition in various retail grocery markets. In addition, the ACCC was concerned that the restrictive provisions may have had the effect of preventing and/or hindering other supermarket operators from entering and competing in various retail grocery markets.

Finally, the Undertakings set out what Woolworths and Coles have agreed not to do – namely not to:

a) give effect to, or threaten to give effect to, a restrictive provision contained in a lease agreement that is in operation as at the commencement of this Undertaking, after a period of five years from the date at which the relevant (Woolworths or Coles) supermarket commenced trading; or 

b) enter into a lease agreement that includes one or more restrictive provisions.

The number of leases with restrictive provisions is not stated in the Undertakings. However, an insight into the extent of Coles and Woolworths’ conduct can be gleaned from the Media Release issued about the Settlement by Minister Emerson on 18 September 2009. In his media release, he stated that:

This pro-competitive agreement means that out of 750 active restrictive leases involving Coles and Woolworths, 602 will cease immediately…the remaining 20 per cent will be gone within five years and no restrictive provisions will be allowed in new stores.[5]

Pro-competitive aspects of settlement

There are clearly a number of pro-competitive benefits arising from the Settlement.

First, Coles and Woolworths have agreed not to give effect or threaten to give effect to any of the existing restrictive provisions in the future (subject to one significant exception discussed below). This is a very important pro-competitive benefit of the Settlement, as it may facilitate the entry of other supermarket operators, such as Aldi, Foodworks and IGA, into shopping centres which were previously monopolised or dominated by Coles or Woolworths. Whether these companies actually end up opening supermarkets in shopping centres will depend on a range of factors, particularly whether there is available space within the existing shopping centre to set up a new supermarket. However, there is now at least a theoretical possibility that such companies will be able to set up competing supermarkets in shopping centres around Australia.

Second, Coles and Woolworths have undertaken not to enter into lease agreements that include “one or more restrictive provisions” in the future. There is no time frame on this future undertaking, which means that Coles and Woolworths will be prevented from entering into such restrictive provisions forever. This is also a very important pro-competitive aspect of the settlement as it provides shopping centre owners with certainty that Coles and Woolworths can no longer insist on the inclusion of restrictive provisions in their leases. However, it appears that the scope of this undertaking is limited to the types of restrictive provisions which are defined in clause 7 of the Undertakings. This means that while Coles and Woolworths are prevented from insisting on the inclusion of the restrictive provisions which are defined in clause 7, they are not prevented from insisting on different types of restrictive provisions.

Third, the Settlement will have the effect of opening shopping centres up to greater competition much more quickly than would have been the case if the ACCC had been forced to litigate the matter. Even if the ACCC litigated this matter successfully, it would have taken a long time, perhaps years, for the ACCC to obtain orders declaring the restrictive provisions to be illegal and void.

Negative aspects of the Settlement

Despite the pro-competitive benefits of the Settlement discussed above, the Settlement also has a significant number of negative aspects.

Preservation of restrictive provisions

The most obvious concern about the Settlement is the fact that it does not apply to restrictive provisions in leases which have been in operation for less than 5 years from the date that the relevant Coles or Woolworths supermarket commenced trading. In other words, the ACCC has effectively permitted Coles and Woolworths to enjoy the benefits of a large number of restrictive provisions for a period of up to five years. As stated in Dr Emerson’s media release, this “carve out” applies to 148 separate leases throughout Australia.

It is not clear why the ACCC acquiesced to this exception. Either the restrictive provisions in the lease agreements are illegal and should be prohibited or they are not – there is no middle ground. The Undertakings contain no justification for this "carve out” and the ACCC, Coles or Woolworths have been quite silent on the reasons for this significant exclusion. It would be helpful if the ACCC were to provide some public explanation of why it agreed to this particular condition.

This condition to exempt some restrictive provisions for up to five years is even more puzzling when one considers the clear statement made by the ACCC in the Undertakings about the potentially anticompetitive effects of the restrictive provisions. In the Undertakings, the ACCC stated that it was concerned that the restrictive provisions: 

• may have substantially lessened competition in retail grocery markets; and 

• may have prevented and hindered other supermarkets from entering retail grocery markets. 

 An effect of the conduct described in the Undertakings is that it was likely to lead to higher prices for consumers. It is basic economic theory that companies seek to exclude competitors from markets so that they can enjoy greater pricing power in those markets. 

Accordingly, given the ACCC’s serious concerns about the restrictive provisions, it is difficult to understand why it agreed to allow Coles and Woolworths to continue conduct for a period of up to five years in 148 different locations throughout Australia which may have the effect of (1) substantially lessening competition, (2) excluding competitors from markets and (3) leading to higher grocery prices for consumers.

De-facto authorisation?

A related concern is whether the Undertakings constitute a de-facto authorisation by the ACCC of the restrictive provisions in the 148 leases. By carving out these 148 lease agreements, the ACCC has effectively indicated that Coles and Woolworths’ conduct can continue without any fear of legal action from the ACCC.

This raises the question of whether it is appropriate for the competition regulator to effectively authorise conduct (about which it has serious concerns) without following the established legislative process for authorisation set out in the TPA.[6]

There are three significant differences between the approach which the ACCC took to negotiating the Settlement and the way it would have had to approach the matter had Coles and Woolworths lodged an authorisation application.

First, under the Settlement the ACCC was able to negotiate the terms of the Undertaking with each of Coles and Woolworths behind closed doors, with no public scrutiny. The proposed Undertakings were not issued for public comment prior to them being executed by the parties. However, in an authorisation the entire process is conducted in public with interested parties being given ample time to comment on both the proposed conduct as well as any proposed undertakings.

Second, in the Settlement there is no reference to the net public benefit arising from permitting 148 lease agreements to continue for up to five years. However, in an authorisation, Coles and Woolworths would have had to demonstrate that preservation of these 148 leases was likely to result in a public benefit which outweighed the likely public detriment constituted by any lessening of competition. There is a very strong argument that Coles and Woolworths would not have been able to satisfy this onus in relation to the 148 leases. In fact, there dos not appear to be any public benefit arising from the preservation of these restrictive provisions.

Finally, under the Settlement there does not appear to be any right for potentially disaffected parties such as Aldi, Foodworks or IGA Supermarkets to challenge the ACCC’s decision. However, disaffected parties are able to appeal an authorisation decision to the Australian Competition Tribunal.

Accountability
A further concern with the Settlement is that the ACCC does not appear to have made any attempt to hold either Coles or Woolworths accountable for the anti-competitive harm which their conduct may have caused. It is logical to assume that by excluding competitors from up to 750 markets around Australia, Coles and Woolworths have reaped significant commercial benefits from this absence of competition. It also makes sense that by not having to compete with a variety of competitors in particular markets, Coles or Woolworths have been able to maintain higher prices to consumers than would otherwise have been the case.

Despite the obvious potential for competitive harm to both competitors and consumers, the ACCC has apparently not taken any steps to hold Coles and Woolworths accountable for this potential harm. It appears that Coles and Woolworths are simply being permitted to retain the financial benefits they may have obtained from their anticompetitive conduct.

Antecedents – the Liquor case

Coles and Woolworths have sought to impose restrictive provisions on competitors and potential competitors in the past in not dissimilar circumstances.

In 2005, Liquorland (Australia) Pty Ltd, a fully owned subsidiary of the Coles Myer Group paid a penalty of $4.75 million after it admitted entering into illegal agreements with applicants for liquor licences in NSW.[7] In this case, Liquorland objected to liquor licence applications which had been lodged by new entrants and then proposed a series of restrictive provisions in return for Liquorland’s agreement to withdraw its objection. The purpose of these restrictive provisions was to ensure that the new entrant could not operate, or could not operate effectively, as a competitor in the relevant retail liquor market.

In 2006, the Federal Court found that Woolworths had also have entered into similarly anticompetitive agreements in various NSW retail liquor markets.[8] The court found that the Woolworths’ agreements contained restrictive provisions which had the purpose of substantially lessening competition in various retail liquor markets in NSW. The Federal Court ordered Woolworths to pay a pecuniary penalty of $7 million for entering into these illegal agreements.

Therefore, Coles and Woolworths have engaged in very similar conduct to that described in the Settlement in the past. Liquorland has admitted entering into illegal restrictive agreements which were aimed at excluding competitors from markets, while Woolworths has been found by the Federal Court to have entered into illegal restrictive agreements for the purpose of substantially lessening competition and excluding competitors from markets. Both companies were ordered to pay significant pecuniary penalties for their illegal conduct.

Despite this background, the ACCC has not sought to take legal proceedings against Coles and Woolworths for their conduct in imposing restrictive provisions to prevent competition in retail grocery markets.

It is very difficult to understand why the ACCC took such a different approach in these two matters.

Conclusion

The grocery settlement sets a poor precedent in terms of how the ACCC may choose to settle what appear to be very serious anticompetitive contraventions of the TPA in the future.

The Settlement is alarming if it points the way to how the ACCC will deal with serious contraventions of the TPA in the future. Will the ACCC continue to negotiate settlements in relation to potentially anticompetitive conduct rather than taking legal proceedings and seeking pecuniary penalties? Will the ACCC not pursue litigation and pecuniary penalties against major corporations which have been found by a court to have breached the same provisions of the TPA in the past?

However, of most concern is the fact that in the future companies may be able to obtain de-facto authorisation from the ACCC for some of their potentially illegal conduct without being required to apply formally for authorisation or indeed without having to provide any public interest justification for being granted such a generous dispensation by the ACCC.

[1] Supermarket agreement opens way for more competition, ACCC News Release, dated 18 September 2009 - http://www.accc.gov.au/content/index.phtml/itemId/893478
[2] Competition barriers to major supermarkets being torn down, Media Release by The Hon Dr Craig Emerson, Minister for Innovation, Industry, Science and Research, dated 18 September 2009 - http://minister.innovation.gov.au/Emerson/Pages/COMPETITIONBARRIERSTOMAJORSUPERMARKETSBEINGTORNDOWN.aspx
[3] Section 87B is an administrative tool which permits the ACCC to accept undertakings from businesses to settle investigations, including consumer protection, restrictive trade practices and merger investigations. Though s87B undertakings are not approved or otherwise brought to the attention of the Federal Court when they are executed, they can be enforced in the Federal Court in the event that its terms are breached.
[4] Undertaking to the ACCC given for the purposes of section 87B by Coles Group Limited, dated 17 September 2009 - http://www.accc.gov.au/content/item.phtml?itemId=893471&nodeId=a2da716b9168b7809f0d8eb136328eb9&fn=Undertaking.PDF and Undertaking to the ACCC given for the purposes of section 87B by Woolworths Limited, dated 17 September 2009 - http://www.accc.gov.au/content/item.phtml?itemId=893470&nodeId=09c305f68e7f97f331d7f32a15c7a31e&fn=Undertaking.PDF.
[5] See footnote 2 above.
[6] The Trade Practices Act 1974 provides a process whereby business can apply to the ACCC to have potentially illegal conduct authorised. This regime only applies to the restrictive trade practices provisions of the TPA, including mergers, but excluding misuse of market power. The ACCC can only authorise conduct if it is satisfied, after a period of public consultation that the conduct delivers a net public benefit. The relevant test for agreements which may breach section 45 of the TPA is that the conduct is likely to result in a public benefit which outweighs the likely public detriment constituted by any lessening of competition. See Authorisations and Notifications: A Summary, ACCC, January 2007 - http://www.accc.gov.au/content/item.phtml?itemId=776052&nodeId=6a570b34b0d37c0545766f52476ca354&fn=Authorisations%20and%20notifications:%20A%20summary.pdf
[7] See Federal Court penalised Liquorland $4.75 million for anticompetitive liquor deals, ACCC News Release dated 31 May 2005 - http://www.accc.gov.au/content/index.phtml/itemId/687035/fromItemId/2332. See also ACCC v Liquorland (Australia) Pty Ltd [2005] FCA 683 - http://www.austlii.edu.au/cgi-bin/sinodisp/au/cases/cth/FCA/2005/683.html?query=^liquorland%20%20%20competition.
The author was responsible for running this particular investigation and litigation while employed as a Director at the ACCC.
[8] See Woolworths penalised $7 million for anticompetitive liquor deals, ACCC News Release, dated 22 December 2007 - http://www.accc.gov.au/content/index.phtml/itemId/773813/fromItemId/622289. See ACCC v Liquorland and Anor [2006] FCA 826 - http://www.austlii.edu.au/cgi-bin/sinodisp/au/cases/cth/FCA/2006/826.html?query=^liquorland%20%20%20competition.
The author was responsible for running this particular investigation and litigation while employed as a Director at the ACCC.

Does the ACCC need Public Warning Powers?

This is an edited version of a presentation I gave at the Trade Practices Workshop of the Business Law Section, Law Council of Australia on 15 August 2009 at The Sebel Heritage, in the Yarra Valley, Victoria.

Introduction

The proposed introduction of public warning powers to the Trade Practices Act 1974 (TPA) has raised considerable concern among business groups.[1] The main concern which has been expressed is that the ACCC may use the power to “name and shame” reputable companies, rather than fly by night operators.[2] Some groups have also complained that the introduction of this power is contrary to the right of individuals to be considered innocent until proven guilty.

In this article I will outline the new public warning powers and then discuss how these powers could be implemented by the ACCC in particular circumstances to improve consumer protection outcomes. To illustrate the benefits of a public warning power to the ACCC, I will be referring to two particular ACCC investigations in which such a power would have provided considerable benefit had it been available at the relevant time.[3] I conclude that much of the concern about the introduction of the public warning power is misplaced, as the ACCC is likely to use this power only in the most blatant cases of false and misleading conduct.

Background

In the Australian Consumer Law discussion paper the public warning power was described as a “name and shame power”.[4] The paper stated that public warnings would typically be issued to inform the public of potentially harmful conduct taking place in the very short term. Such warnings would usually be directed to ‘fly by night’ operators, itinerant traders and financial, investment and property spruikers and advisors who often move across state and territory borders.[5]

Implicit in the above discussion of the public warning power was a view that the ACCC requires effective powers to respond more quickly to blatant contraventions of the consumer protection laws. In other words, there is a need to warn consumers about the conduct of dishonest traders at an earlier stage, and well before the commencement of litigation against that trader.

The discussion paper also identifies that a number of existing state and territory fair trading laws contain public warning powers. Therefore, the discussion paper argues that, in the interests of consistency, such a power should be introduced into the TPA.

Proposed legislation

The following is the text of proposed public warning power:

86DA Commission may issue a public warning notice

(1) The Commission may issue to the public a written notice containing a warning about the conduct of a corporation if: 

(a) the Commission has reasonable grounds to suspect that the conduct may constitute a contravention of a provision of Part IVA, V or VC; and

(b) the Commission is satisfied that one or more persons has suffered, or is likely to suffer, detriment as a result of the conduct; and

(c) the Commission is satisfied that it is in the public interest to issue the notice.

(2) Subsection (1) does not apply to the supply or possible supply, or the promotion by any means of the supply or use, of services that are financial services. 

(3) Without limiting subsection (1), if

(a) a person refuses to respond to a substantiation notice given to the person, or fails to respond to the notice before the end of the substantiation notice compliance period for the notice; and

(b) the Commission is satisfied that it is in the public interest to issue a notice under this subsection;

the Commission may issue to the public a written notice containing a warning that the person has refused or failed to respond to the substantiation notice within that period, and specifying the matter to which the substantiation notice related.

The elements of the proposed public warning power are - 

• the ACCC must have reasonable gronds to suspect that conduct being engaged in may constitute a breach of the TPA and 

• one or more persons are likely to suffer detriment as a result of the conduct and the ACCC is satisfied that it is in the public interest to issue the notice. 

The first element of the new public warning power is that the ACCC must have reasonable grounds to suspect that conduct is in breach of the TPA. It would appear that the test of whether the ACCC has “reasonable grounds to suspect” a breach of the TPA is an objective test. In practice, it will not be very difficult for the ACCC to satisfy this first element due to the use of the word “suspect” rather than “believe” in the legislation.

The second element is that one or more persons are likely to suffer detriment as a result of the conduct. The draft legislation does not specify that the consumer must actually suffer detriment, but rather that it be likely that the consumer will suffer detriment. This approach is appropriate given that the entire rationale for the new power is to prevent consumers from suffering detriment.

The third element of the legislation is the most onerous aspect in terms the ACCC utilising the public warning power. This element requires that the ACCC be satisfied that it is in the public interest to issue a public warning. This will require that the ACCC balance up the utility of issuing a public warning notice with other litigation strategies such as commencing rapid court action or seeking ex parte injunctions.

In applying the public interest test, it may also be incumbent on the ACCC to consider the negative impact which issuing a public warning notice may have on a trader’s ability to continue trading. In some circumstances, a public warning notice may deter such a large number of prospective consumers from dealing with a trader that it can no longer continue to trade. While such a development may “protect” new customers from dealing with the trader, it could also disadvantage existing customers who have bought a good or service from that trader.

Finally, the legislation provides that the ACCC can issue a notice where a trader has failed to respond to a substantiation notice. In these circumstances, the ACCC must also believe it is in the public interest to issue a notice.

Case Study 1 – Phoenix firms

The first case study relates to an individual, Daniel Albert. Mr Albert set up number of companies which sold franchises in the period between 2002 and 2004. Unfortunately, after selling the franchises and obtaining large amounts of money from the franchisees, Mr Albert would move the money off shore and liquidate the companies.

The first company he set up was Photo Safe which was touted as a revolutionary new way of duplicating and storing photographs and negatives on compact disc and/or the internet. The second company was The Data Vault which allegedly provided a service to facilitate the secure storage of data from a person’s computer. The final business was ie Networks which provided internet access terminals and mobile download terminals by which consumers could access the internet, their email account, send text messages and download mobile phone ring tones.

Mr Albert promoted each of these franchisees in rapid succession and obtained between $60,000 and $160,000 from each unsuspecting franchisee. He made various representations to these franchisees, including that:

• there was a high level of demand in the market for the franchisee’s services; 

• the franchisees were likely to be very profitable; 

• a high level of support would be provided by the Albert companies to the franchisees, including expenditure on national advertising campaigns; and 

• the Albert companies had entered into agreements with major national retailers to place franchisee equipment in their stores. 

Unfortunately, all of the above representations (and many more representations) proved to be entirely false.

The difficulty the ACCC faced in this matter was that as soon as it had collected evidence about one Albert company, the company would be closed down by Albert. Shortly after, the ACCC would hear reports that Albert had set up a new company, which was engaging in quite similar conduct to the earlier company. The ACCC would then commence an investigation into the new conduct until that company was in turn closed down and a new company started up.

This was very frustrating situation for the ACCC as no sooner had it obtained evidence about one company, it would be closed down. The ACCC would then have to commence a new investigation into the new company to obtain evidence to prosecute the Albert’s most recent conduct.

The ACCC eventually commenced legal action against Albert in April 2005.[6] However, by this time, Albert had obtained approximately $3 million in franchise fees from various franchisees.

As soon as the ACCC commenced legal proceedings, Albert and Greg Zimbulis, a sales manager indicated their willingness to consent to all of the ACCC’s orders which including extensive declarations and injunctions. The main aim of the ACCC in commencing legal proceedings had been to obtain extensive injunctions, which would prevent Albert from engaging in similar conduct in the future. Unfortunately, the Federal Court refused to grant any injunctions at all – as a result, the ACCC obtained over 100 declarations against Albert of serious contraventions of the TPA but not even one injunction.[7]

This would have been an ideal case for the ACCC to use a public warning power (had such a power been available). The ACCC would have been able to issue a public waning power when Albert liquidated his first company and set up his second company. At this particular time, the ACCC held a great deal of evidence demonstrating that Albert was making blatant misrepresentations about his business operations. Therefore, the ACCC would have been quite confident to issue a public warning notice at this time as it clearly would have met the public interest test in the legislation.

In addition, had the ACCC been able to issue a public warning at an early stage, it could have prevented many franchisees from subsequently signing up with Albert and losing their money. This is because the public warning notice could have been issued up to 12 months before the date on which the ACCC did ultimately issue a type of “public warning” – namely a media release announcing that the ACCC had commence legal action against Albert.

This case demonstrates the fact that the ACCC often has a considerable amount of evidence in relation to a trader’s illegal conduct well before it is in a position to commence legal proceedings. In many cases, the ACCC is faced with a dilemma of whether it should commence legal proceedings against historical conduct by a trader about which it has obtained evidence, or rather, whether it should focus its efforts investigating new conduct by the same trader with a view to preventing that conduct.

Access to a public warning power would allow the ACCC to take both approaches – that is, to issue a public warning concerning a trader that is engaging in a new scam, while at the same time, focusing its efforts and resources on commencing legal proceedings against that same trader for their past dishonest conduct.

Case Study 2 – the elaborate hoax

The second case study relates to a company called L&L Supply Pty Ltd which operated in Australia between 2003 and 2005. L&L Supply was a small company based in Newcastle about which the ACCC had a handful of complaints. The company had never come to the ACCC’s attention until a former disgruntled employee called the ACCC to explain the conduct which L&L Supply was engaging in.

This whistleblower explained to the ACCC that the Newcastle business was simply a front for a much larger scam – ie it was responsible for despatched packing tape to customers and processing payments. However, the heart of the operation was based in Florida in the US where an elaborate hoax was being perpetrated against Australian businesses.

The L&L Supply scam operated as follows. A person from the L&L Supply call centre would call a procurement manager of an Australian business and claim to be the daughter of the recently deceased owner of L&L Supply. She would claim that her father had recently passed away and that she had been forced to take over the business of L&L Supply. She would then explain that as she was not interested in continuing her father’s business (ostensibly because she was a qualified medical doctor), she was proposing to liquidate the stock at bargain basement prices.

TheL&L Supply caller also claimed to the procurement manager that her father had been a very good friend of CEO/MD/Chairman of the company she was calling. She would then claim that she had spoken to the CEO/MD/Chairman of the company who had put her through to the procurement manager with a promise that the company would “help her out” by placing an order.

In many cases, the procurement officer would accept the story of the person from L&L Supply and place an order. The procurement officer would not check if the story was true as they were reluctant to call the CEO/MD/Chairman of the company and question them about the alleged conversation.

The truth of the matter was quite different:

• the owner of L&L Supply was not deceased;

• the person calling the Australian business was not the daughter of the deceased owner; 

• the deceased owner did not know the CEO/MD/Chairman of the relevant company; 
• the daughter of the deceased owner had not spoken to the CEO/MD/Chairman of the company; 

• the CEO/MD/Chairman of the company had not agreed to help L&L Supply out by placing an order; and 

• the packing tape was not being sold at bargain basement prices. 

The whistleblower advised the ACCC that L&L Supply were banking between $30,000 and $40,000 a week in tape sales. At $2000 a sale, that meant that between 15 and 20 companies were falling for the L&L Supply hoax each week. In addition, over the course of L&L Supply’s operations had grossed sales of over $1 million, most of which had been transferred overseas.

The ACCC commenced legal action against L&L supply in March 2005.[8] It sought ex-parte orders freezing L&L Supply’s bank account and other urgent interlocutory orders. L&L Supply did not contest the ACCC’s case.[9]

This case demonstrates that access to a public warning power would have made a significant difference in reducing consumer detriment from this scam.

Even though the evidence from the whistleblower was very strong, the ACCC was not able to commence legal proceedings immediately. The ACCC first needed witness statements from both the procurement officers whom the L&L Supply person had spoken to as well as the various CEO/MD/Chairman who had allegedly authorised the order. Obtaining these statements took some time, particularly as the ACCC had to obtain statements from approximately 15 different companies to demonstrate that L&L Supply was engaging in a pattern of dishonest conduct.

During the time that the ACCC was obtaining this evidence, L&L Supply were continuing their activities and regularly transferring funds to overseas bank accounts from its Australian bank account.

In this case, the period from the initial evidence from the whistleblower to commencing legal proceedings was approximately three months. Had the ACCC had a public warning power, it could have warned the public about L&L Supply’s conduct at a much earlier stage than when it issued a media release announcing the commencement of legal proceedings. This would have prevented a many Australian businesses from falling foul of L&L Supply’s scam.

Conclusions

Public warning powers are needed by the ACCC to combat both phoenix operations and blatant scams. In the cases described above, the ACCC had very strong evidence at an early stage to prove that the trader was engaging in illegal conduct. However, the period between obtaining this initial evidence and being in a position to commence legal proceedings was between 3 and 12 months. During this period, each of the traders was able to mislead many consumers, obtain significant sums of money from these consumers and move most of this money overseas.

The concern expressed by some businesses that the public warning powers may be used against “reputable firms” is not a valid concern. The ACCC must look at the conduct of the company in deciding to use its public warning power and not the identity of the company. The ACCC should use its public warning powers against any company which is engaging in blatant false and misleading conduct, whether it is a Top 100 company or a fly by night operator. In reality, “reputable” companies are very unlikely to engage in the type of blatant false and misleading conduct against which the ACCC will be seeking to use its public warning powers.

I believe that there is an argument for establishing a mechanism to allow companies which have been inappropriately “named and shamed” through a public warning notice to seek redress. Such redress should only apply where it can be demonstrated that the ACCC issued a public warning for an improper purpose or in bad faith or alternatively in circumstances where the public interest did not support the issuing of the public warning notice.

The ACCC should not be held liable for issuing a public warning which proved in hindsight not to have been justified, when all the objective factors on which the ACCC relied when it issued the public warning pointed the other way. Redress should take the form of an apology and/or financial damages. Such a regime would ensure that the ACCC uses its new power to issue public warnings wisely.

The public warning power is a valuable addition to the ACCC’s investigatory powers. It will allow the ACCC to be more proactive in warning consumers not to deal with particular traders. As a result, the level of consumer detriment caused by disreputable traders will be significantly reduced. However, this will only occur if the ACCC takes a robust and consumer focused approach to using its new power.

[1] See http://www.treasury.gov.au/contentitem.asp?ContentID=1501&NavID for copies of submissions lodged concerning The Australian Consumer Law.
[2] See submission of Law Council of Australia - http://www.treasury.gov.au/documents/1501/PDF/LCA-Trade_Practices_Committee.pdf, page 14.
[3] I was the ACCC Director in charge of each of these investigations at the relevant time.
[4] See An Australian Consumer Law - Fair Markets – Confident Consumers, 17 February 2009 - http://www.treasury.gov.au/documents/1484/PDF/An_Australian_Consumer_Law.pdf
[5] Ibid., p. 55.
[6] See ACCC media release entitled “ACCC acts over alleged $3 million franchising scams” - http://www.accc.gov.au/content/index.phtml/itemId/679001/fromItemId/2332
[7] See ACCC v Albert [2005] FCA 1311 - http://www.austlii.edu.au/cgi-bin/sinodisp/au/cases/cth/FCA/2005/1311.html?query=^albert%20%20%20accc
[8] See ACCC media release entitled “ACCC freezes bank account of alleged international office supply scam” - http://www.accc.gov.au/content/index.phtml/itemId/663197/fromItemId/2332
[9] See ACCC media release entitled “International packing tape scam mislead customers” - http://www.accc.gov.au/content/index.phtml/itemId/721100