ACCC Investigatory Insights - Part 3

Section 155 Notices

Introduction

Receiving a section 155 notice from the Australian Competition and Consumer Commission (ACCC) can be an alarming and intimidating event. The entire process can become even more disquieting if you do not understand the correct way to respond to the section 155 notice.

Is the notice expected or unexpected?

The first issue to work out is what type of section 155 notice is it. By this I do not mean whether the notice is for the production of information or documents or the provision of oral evidence but whether the section 155 notice was expected or unexpected.

If your company has been the subject of an ACCC investigation for some time, then it is likely to have already provided considerable amounts of information and documents to the ACCC on a voluntary basis. If your company receives a section 155 notice after a lengthy investigation it probably means that either: 

• the ACCC is contemplating litigation and it needs to obtain specific evidence in admissible form for use in court proceedings; or 

• the ACCC's investigation has reached an impasse and that it is hoping to overcome this impasse by issuing a section 155 notice to obtain some crucial investigatory leads. 

If the section 155 notice is drafted quite narrowly in terms of seeking specific information and documents, it is likely that the ACCC is preparing a case for litigation.

If on the other hand, the notice is drawn broadly and seeks general information such as details of customer complaints and the names of former employees, the chances are the ACCC is trying to break through in their investigation.

Regardless of where the ACCC is coming from, it is important to contact the ACCC officer immediately once you receive the section 155 notice to organise a meeting to discuss the ACCC’s investigation. Often when companies receive a section 155 notice, they decide to avoid all contact with the ACCC. This is a mistake, as the company may miss an opportunity to bring the entire matter to head at an early stage, and thus avoid considerable expense.

The more serious situation is where the receipt of a section 155 notice is the first step in the ACCC investigation. It is very rare for the ACCC to commence the overt stage of an investigation by issuing a section 155 notice, particularly in consumer protection matters.

If your company receives a section 155 notice in these circumstances you can assume that the ACCC has some detailed information about your company’s alleged illegal conduct, most probably from a former employee. It may also be the case that the ACCC has been informed by one of your former employees of the existence of a number of allegedly “smoking gun” type documents.

Another reason why the ACCC may decide to commence the overt phase of their investigation by issuing a section 155 notice on your company is because they have been told by some person that your company is unlikely to be cooperative or truthful if asked to provide information and documents on a voluntary basis.

If your company receives a section 155 notice unexpectedly it should immediately do two things. First, it should immediately commence an internal investigation into the subject matter of the notice, with a particular focus on any former employees who may have had some reason for approaching the ACCC. Second, it should contact the ACCC to organise a meeting to discuss the allegations contained in the section 155 notice. It is very unlikely that the ACCC officers will refuse to meet with you. Furthermore, in any meeting with the ACCC you are likely to gain some insights about the basis for the ACCC’s interest in your company.

What type of notice?

The next issue to consider is what type of notice or notices have been issued to your company. The ACCC can use three types of section 155 notice.

Section 155(1)(a) notices are used to obtain information, section 155(1)(b) notices are used to obtain documents and section 155(1)(c) notices are used to obtain oral evidence at an examination.

It is common to get both section 155(1)(a) and (b) notices at the same time. The ACCC will usually ask specific questions about the alleged conduct with a section 155(1)(a) notice and then demand the documents which evidence those answers, through a section 155(1)(b) notice.

Section 155(1)(a) is also often used to obtain admissions from a company. These admissions can then be admitted as evidence in court proceedings. Admissions by the company can only be used against the company and not against individuals. However, admissions by an individual can be used against the company if the requirements of section 86 of the CCA are met.

It is very rare for a company to be issued with a section 155(1)(c) notice at the same time as section 155(1)(a) and (b) notices. This is because the ACCC will usually want to put relevant documents to examinees in an examination. Therefore, it will use section 155(1)(b) to get documents and then issue a section 155(1)(c) notice to a person in order to ask them about the documents which it has obtained.

Analysing the notice

On receiving a notice you should analyse the document to determine what it means. This might sounds obvious but many companies fail to examine the notice critically to understand precisely what it means.

The section 155 Notice will contain a section entitled “Matters which Constitute or May Constitute a Contravention of the CCA”. This is effectively the allegation against your company.

The questions you should ask yourself after reading this section are: 

• What does the ACCC believe our company has done? 

• What sections of the CCA does the ACCC think our company has breached? 

• Over what time period does the ACCC believe our company has engaged in this alleged conduct? 

• Who are the most likely sources of the information on which the ACCC has relied to issue the notice/s? 

• Are there any parts of the “Matters which Constitute or May Constitute a Contravention of the CCA” which seem a bit vague? 

A close reading of this part of the section 155 notice can disclose a great deal about the ACCC’s investigation and its likely sources of information.

It is also possible that this section has not been drafted correctly. For example, the description of the conduct may not fit squarely within the relevant provisions of the CCA. If this is the case the Notice may be invalid on its face.

Some legal advisers will recommend to their client to challenge section 155 notices which are not drafted correctly. However, this is often not a sensible idea as it usually quite easy for the ACCC to redraft the notice to make it valid. Having said this, it is still appropriate to point out any potential problems with the Notice to the ACCC.

The ACCC usually spends a considerable amount of time making sure it gets the section 155 correct. The ACCC’s internal lawyers will carefully check the section 155 notices to make sure they are correct.

You should also check the scope of the section 155 notice in terms of the time frame. Sometimes the section 155 notice will allege conduct which spans a particular period, but then the notice will demand information and documents which go beyond that period. If this occurs, you should ask the ACCC to explain why the notice seeks information and documents in relation to conduct which precedes the alleged contraventions.

It is also likely that the time frame for your company to provide information and documents will be inadequate. You must recognise that often the ACCC does not have a good idea just how much information and how many documents their notice is likely to catch. Nor does the ACCC have a good understanding of what your company’s file management system is like.

Accordingly, it is entirely appropriate for you to raise your concerns with the ACCC about the inadequacy of the time frames for compliance. However, you should endeavour to raise these concerns as soon as possible and not a day or two prior to the date for compliance. Often companies leave their complaints about time frames until shortly before the date for compliance. This generates considerable suspicion within the ACCC that you may be trying to delay the investigation.

If you need more time to comply, you should approach the ACCC with a proposal for the staged delivery of information and documents, rather than simply making a blanket request for an additional period of time to provide all the information and documents. What you have to realise is that the ACCC’s primary goal is to ensure that its investigation is not unduly impeded by a delay in a company responding to section 155 notices. The ACCC does not want to put its investigation on hold for 4 -6 weeks while it awaits full production.

You should propose to the ACCC that your company produce the most readily accessible information and documents by the due date and that other material will be provided shortly thereafter. The ACCC will usually agree to staged delivery unless the time frames are too long.

Variations

If you come to an agreement with the ACCC for staged delivery, it is important to insist that the ACCC vary the initial notice to reflect any extensions which have been granted. This is usually done by varying the date for compliance to state the different dates that information and documents are due.

It is important to insist on a variation as you do not want to risk the possibility that the ACCC may later allege that your company failed to comply with the notice by the due date. Failure to comply with a notice by the due date is a criminal offence punishable by a criminal penalty of $2200 or 12 months imprisonment.

Responding to a notice for information and/or documents

Make sure that you are fully involved in the process of complying with the section 155 notice. Do not outsource this task entirely to your legal advisers. The risk is that some legal advisers tend to take an overly restrictive interpretation of the notice and exclude a significant number of arguably relevant documents from production. However, in the event that the ACCC disagrees with this narrow interpretation it will be the company and its officeholders who will be prosecuted for non-compliance with the section 155 notices rather than the company’s legal advisers.

It is important for your company to check all the information and documents provided to the ACCC before it is produced. Often due to the short time frames involved in complying with a notice, companies either do not check the material they are providing or rush the checking process.

While there is no privilege against self-incrimination when complying with a section 155 notice, you are permitted to make a claim of legal professional privilege in relation to documents. Therefore, it is important to take the time to carefully check whether you can make any claims of legal professional privilege in relation to relevant documents.

In addition, you must ensure that you check all documents for any references in the text of those documents to the existence of other documents. It is inevitable that the ACCC will request copies of any of documents which are referred to in a document which has been produced.

Make sure your legal adviser does not make legal submissions in your response to the notice/s. Your response to any section 155 notices should be strictly factual. While legal submissions can be made, they should be made separately in a covering letter.

If your legal adviser decides to remove any documents from the bundle of documents which you have identified as relevant under the section 155 notices, make sure you are aware of which documents have been removed and the reasons why such documents have been removed. Ultimately, it is the company and its office holders who will be liable for any failure to properly comply with the section 155 notices, so do not take any chances by letting your legal adviser remove documents which you believe are relevant.

Oral examinations

Attendance at a section 155 oral examination can be a very stressful experience. The process is very formal with the ACCC often using barristers to conduct the questioning. Having said that, section 155 examinations generally do not elicit a great deal of valuable evidence from examinees.

How to prepare for an examination 

The best way to prepare for a section 155 examination is to ensure that you review all relevant documents which have been produced to the ACCC which you have either written or have had access to, for example emails which you have been sent. The ACCC will generally put these documents to you in chronological order and ask you a series of questions about each document.

The ACCC should not ask you about documents which you have not written or had access to. Unfortunately, ACCC examiners will often ask examinees questions about documents about which they have no direct knowledge. If this happens, you should advise the examiner that you have never seen the document before.

Another important way of preparing yourself for an examination is to draft a detailed chronology of relevant events. This should assist you in placing events in their correct order when questioned, which should assist you in not mixing up your dates.

Conflict of interest issues

The ACCC will often raise concerns with examinees about conflict of interest issues. This usually arises when a lawyer or barrister appearing for an individual may also be acting for the company. The ACCC’s main concern is that the legal adviser may have a conflict of interest between the interests of the company and the interests of the individual.

For example, if a lawyer is acting for both a company and an employee, is the lawyer likely to advise the employee to give evidence against the company if it is in the employee’s best interests to give such evidence to avoid prosecution?

Even though this scenario raises a clear conflict of interest, it is really the individual who is facing a risk that they may get inappropriate legal advice. Accordingly, the most the ACCC can do is insist that the individual clearly understands the conflict of interest issue before the examination is commenced.

The likelihood of a legal adviser acting for both a company and an individual has been significantly reduced with the introduction of provisions to the CCA which make it illegal for a company to indemnify or pay the legal costs of any employees in relation to an ACCC investigation. As a result of these new provisions, the company and its employees usually retain separate lawyers.

The more legitimate ACCC concern relates to the possibility that a lawyer who acts for two potential examinees may divulge confidential information obtained in one examination to the other client prior to the examination. In these circumstances, the ACCC may have grounds for insisting that the legal adviser not act for both individuals.

Tips when being examined

There are a number of important tips to remember when being examined.

First, do not try to score points during the examination. The chances are that the person conducting the examination is either a barrister or an experienced investigator. They will usually have considerable experience in questioning examinees. The examiner may also have access to information and documents which you do not know they have. Accordingly, the examiner may use this information to catch you out in your examination.

Do not provide misleading or incomplete answers during the examination. There are criminal penalties for refusing to answer questions and for providing false or misleading evidence.

Do not try to answer a question which you do not full understand. If you do not understand the question, tell the examiner that you do not understand the question and ask them either to repeat the question or explain the question to you.

Do not claim that you cannot remember a fact or document if this is not true. Unfortunately, this appears to be a very common approach adopted by examinees in section 155 examinations. Examinees who claim not to remember virtually everything which is put to them do not come across as credible or believable witnesses.

The other risk is that examinees who start using this approach tend to use it quite indiscriminately, even in relation to facts which may assist their position. Unfortunately, once you have claimed not to recollect an event, it is very hard to reverse your position without looking dishonest.

Take your time to read any documents put before you before answering any questions about the document.

Do not speculate about facts you do not have direct knowledge about. While your legal adviser should probably object to questions which require you to speculate, it is also appropriate for you to respond to such questions with the phrase “I’d rather not speculate about that issue”.

If you are getting flustered, tired or losing your train of thought ask the Chair for a short adjournment. It is unlikely that the Chair will refuse such a request.

Objecting 

The legal adviser has a right to object to questions put to their client in a section 155 examination. However, this right should be exercised sparingly for a few reasons.

First, the Chair of the examination has the right to eject a legal adviser from the examination if they believe that the legal adviser is disrupting the examination. Continual objections could be seen by the Chair as disrupting the examination.

In addition, it is generally not a good idea to object to a poorly constructed question as that may simply result in the examiner asking a better question.

The clearest example of a poorly constructed question would be a question which contains a number of different propositions. For example:

Were you in the office on Wednesday when your manager was talking to his competitor about the price fixing agreement?

If the examinee answers “no” to this question, it will not be clear what part of the question he is actually answering – is the examinee saying that: 

• he was not in the office on Wednesday, or 

• he was in the office in Wednesday but was not in the room when his manager was talking to his competitor; or 

• he was in the office in Wednesday and was in the room when his manager was talking to his competitor, but his manager was not talking about the price fixing agreement; 

• or even, the conversation happened on Thursday rather than Wednesday. 

As you can appreciate, the answer “no” to this question is quite meaningless.

Your legal adviser should not object to double barrel or even triple barrel questions for the simple reason that the answer you give will be meaningless in an evidentiary sense.

However, your legal adviser should object to unfair questions. For example, questions which ask the examinee to comment on events which occurred before or after their period of employment or questions which ask the examinee to comment on documents which they have never seen before.

Your legal adviser should also object to bullying behaviour by either the ACCC’s legal adviser or by the Chair.

After the examination

It is likely that the ACCC will adjourn your examination rather than terminating it. This is to avoid having to issue a new notice to require you to return for further questioning. If your examination is adjourned the ACCC will advise you that you are under an obligation not to discuss your evidence with any other person until relieved of that obligation by the ACCC.

Transcript

Following the section 155 examination, you should ask for a copy of the transcript of the examination. You should check this transcript against your recollection of the examination as soon as possible.

You have an opportunity to check the transcript for any transcription errors. It is also an opportunity to reflect on whether you may have provided any answers during the examination which were either incorrect or incomplete. If you have made any mistakes in your evidence you should correct them as soon as possible.

Conclusions

The process of responding to a section 155 notice is likely to be costly, time consuming and quite stressful. It is important to remember the following simple rules about responding to a section 155 notice:

• When you get a section 155 notice, don’t be afraid to contact the ACCC investigator to discuss the notice – you can learn a great deal from speaking to the ACCC investigator about the notice. 

• If you are going to ask for more time, ask the ACCC for more time early and make sure you propose the staged production of information and documents. 

• Don’t entirely outsource compliance with a section 155 notice to your legal advisers – you are person who will be prosecuted for non-compliance. 

• Carefully check all information and documents before producing this material to the ACCC. 

• Make sure you ask for a transcript of your section 155 examination as soon as possible after the examination and check it for inaccuracies – immediately correct any incorrect or incomplete evidence you may have given.

ACCC Investigatory Insights – Part 2

The Investigatory Process

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

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

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

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

• pursue a proposed investigation 

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

• take a different approach to an investigation 

• settle litigation 

• close an investigation. 

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

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

Investigating consumer protection cases

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

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

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

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

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

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

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

Investigating restrictive trade practices cases

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

Covert and overt phases

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

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

Search Warrants and Dawn Raids

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

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

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

Next instalment

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

ACCC Investigatory Insights – Part 1

Introduction 

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

Case selection

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

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

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

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

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

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

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

• companies complaining about the conduct of one of their competitors 

• sophisticated consumers 

• government departments 

• non-government organisations, particularly in the environmental area 

• industry associations 

• politicians 

• companies which are self-reporting their conduct. 

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

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

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

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

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

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

• matters involving small local traders or unincorporated businesses

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

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

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

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

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

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

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

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

• cartels; 

• environmental misrepresentations; 

• health related misrepresentations; 

• two price advertising; 

• failure to state the full cash price; 

• misrepresentations in relation to telecommunications products and services; 

• misrepresentations about statutory warranties. 

Next instalment

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

No privilege for in-house counsel

Introduction

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

Background

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

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

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

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

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

The three documents at issue consisted of: 

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

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

European Court of Justice decision

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

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

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

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

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

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

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

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

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

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

• negatively, by the absence of any employment relationship. 

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

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

Conclusions 

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

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

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

An Introduction to Price signalling

Introduction

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

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

Background

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

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

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

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

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

District Court decision

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

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

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

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

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

Conclusion

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

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

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

Events – Environmental Defender's Office National Conference

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

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

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

Woolworths and Children's Safety

Introduction

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

Recent ACCC settlement

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

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

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

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

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

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

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

Woolworths also agreed to take other remedial steps such as:

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

• auditing their compliance with the Action Plan; and 

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

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

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

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

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

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

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

First time offender?

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

Unfortunately, Woolworths is not a first time offender.

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

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

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

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

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

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

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

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

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

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

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

Two time loser

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

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

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

• conduct refresher training for its staff; and 

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

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

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

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

Conclusions

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

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

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

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