Recent developments in Trade Practices - January 2008

Recent high profile cases initiated by the Australian Competition and Consumer Commission (ACCC) have demonstrated the importance and value of businesses maintaining an effective Trade Practices compliance program. The case of Australian Competition and Consumer Commission v Visy Industries Holdings Pty Limited (No 3) [2007] FCA 1617 (2 November 2007) highlights the far reaching consequences of breaching competition law, both in pecuniary loss and damage to reputation. Businesses need to be aware of the requirements of competition law as well as conduct that would lead to a breach of the Trade Practices Act 1974 (Cth) (TPA). The promotion of a 'compliance culture' within the business is also essential for reducing the damage of a potential trade practices breach.

Recent cases involving the ACCC:

Cartel conduct and price fixing in contravention of section 45 of the Trade Practices Act

In the case of Australian Competition and Consumer Commission v Visy Industries Holdings Pty Limited (No 3) [2007] FCA 1617 (2 November 2007), Visy Industries Holdings Pty Ltd (Visy) was penalised by a record fine of $36 million, while two employees of Visy's, Harry Debney and Rod Carroll, were each personally fined $1.5 million and $500,000 respectively. The ACCC alleged that between 2000 and 2004 Visy and Amcor entered into market-sharing and price-fixing arrangements in relation to the supply of corrugated fibreboard packaging. An agreed statement of fact that was put to the court stated that Visy had knowingly breached section 45 of the TPA by colluding with its competitor Amcor in order to fix prices in the cardboard box supply industry. Justice Heerey found that this was the most "serious cartel case to come before the Court in the 30 plus years in which price fixing has been prohibited by statute" [1].

Section 45 of the TPA prohibits corporations "arriving at, or giving effect to, anti-competitive understandings as therein defined" [2]. Section 45A deals specifically with price fixing and provides "that a provision which has the purpose, or is likely to have the effect, of fixing, controlling or maintaining prices is deemed to have the purpose or effect of substantially lessening competition" [3]. This means that "once price fixing is established, the "substantial lessening of competition" test is satisfied, without any need for further evidence [4].

After the Court handed down its penalty orders against Visy and its employees, the ACCC noted that the maximum penalty for such cartel conduct can be "three times the benefit to the company attributable to the conduct or, if that cannot be determined, ten per cent of the corporate group's annual turnover" [5]. An amendment of section 76 of the TPA that came into effect on 1 January 2007 means that penalties for a corporation may now exceed 10 million dollars.

Since the Court handed down its decision in the case, ACCC Chairman Graeme Samuel has expressed concern about a subsequent class action that was launched by consumers against both Visy and Amcor. Mr Samuel believed that class actions threatened the ACCC's immunity policy for the party leaving a cartel, which in this case was Amcor. Mr Samuel reportedly stated in class action conference that, "[i]f those seeking protection are virtually assured of still being hit with massive class-action damages claims as a result of confessing, they are significantly less likely to come to us in the first place" [6]

Misleading and deceptive conduct in breach of section 52 of the Trade Practices Act

In March, GlaxoSmithKline (GSK) voluntarily reported to the ACCC that it may have breached s 52 by misleading consumers about the Vitamin-C content of its ready to drink Ribena products. On the basis of the information that GSK provided, the ACCC was concerned with the following conduct:

• representations on the nutrition information panel of Ribena Ready to Drink fruit drinks that claimed the products contained certain quantities of Vitamin-C, when in fact they had significantly less Vitamin C, and
• advertising and packaging representations that in Ribena fruit drinks: "the blackcurrants in Ribena contain four times the Vitamin-C of oranges" implied that Ribena fruit drinks contained four times the Vitamin-C of comparable orange juice products, when this was not correct [7].

GSK cooperated with the ACCC's enquiries and implemented a range of recommendations including corrective advertising and retracting the potentially misleading representations as well as reviewing its trade practices compliance program.

Resale Price Maintenance in breach of section 48 of the Trade Practices Act

In February, the Federal Court of Australia handed down its orders in Australian Competition and Consumer Commission v Jurlique International Pty Ltd [2007] FCA 79 (8 February 2007), following an agreed statement of facts by the parties. The cosmetics company Jurlique was fined $3.2 million and its founder Dr Jurgen Klein was fined $200,000 for breaching sections 45 and 48 of the TPA in relation to resale price maintenance. Dr Klein admitted that he deliberately implemented a policy whereby retailers were prevented from discounting the Jurlique products. The contravening conduct included:

• attempting to induce retailers not to sell the products at prices less than those specified by Jurlique;
• entering into agreements that included terms that specifically stated that the products were not to be sold for prices less than a price specified by Jurlique; and
• Jurlique withholding the supply of products where the retailer sold products below the retail prices specified by Jurlique [8].

The contravening conduct of Jurlique essentially related to the setting of minimum prices at which the products could be sold by the retailers. Companies are free to recommend an amount for which the product can be sold (also known as a RRP) or set a maximum price at which the products can be sold, but the retailers must be free to set their own price for the resale of products.

ACCC Succeeds in Opening up Government Procurement

In August, the High Court of Australia handed down its decision in Australian Competition and Consumer Commission v Baxter Healthcare Pty Limited (2007) 237 ALR 512 (29 August 2007). In this case the ACCC had been successful in arguing that commercial parties, which contracted with the States, were not protected from the operation of the TPA.

Baxter Healthcare Pty Ltd (Baxter) is a medical products and services company, and from 1998 and 2001 the company provided Australian hospitals with between 80 per cent and 100 per cent of the their sterile fluids and peritoneal dialysis fluids needs. It was in this context that the Court found that Baxter had contravened section 46 of the TPA for misuse of market power. However, Baxter successfully argued in the Federal Court, on trial and appeal, that it was entitled to "derivative" Crown immunity because the State health authorities with which Baxter was dealing were entitled to Crown immunity. A consequence of this was that Baxter could use this "derivative" immunity to frustrate proceedings brought against it by the ACCC. The High Court noted that this understanding of "derivative" Crown immunity was based upon an earlier decision of the court, in Bradken Consolidated Ltd v Broken Hill Proprietary Co Ltd (1979) 145 CLR 107 ( Bradken).

The ACCC appealed against the findings in the Full Federal Court, and Baxter was joined as a respondent by the States of New South Wales, South Australia and Western Australia. The High Court rejected the argument advanced by Baxter, which relied upon the earlier decision of Bradken, as the court held that the TPA had undergone significant change since 1979 and therefore Bradken no longer accurately reflected the state of the law. Specifically, the majority in the High Court observed that Baxter was seeking to limit the TPA's:

"object of promoting competition and fair trading in the public interest, in the name of the protecting of the capacities of the Crown … [which is] a qualification strikingly at odds with the way the Act deals with governments when they themselves carry on a business" [9].

The Court accepted the case put by the ACCC that any kind of Crown immunity that a commercial party would use to protect itself from the TPA should not extend beyond the immunity provided to the Crown where it is not carrying on a business and should not extend to a parties business dealings with the States.

The consequence of this decision would appear to be that in the realm of government procurement, the ACCC can pursue actions against commercial parties for abuse of market power, anti-competitive behaviour or other breaches of the TPA. In relation to this case ACCC Chairman Graeme Samuel stated that "Government procurement comprises a significant part of the economy … [and the] decision of the High Court makes it clear that companies supplying government have the same rights and responsibilities that are applicable to companies supplying the private sector" [10].

Recent changes to the Trade Practices Act

Amendment to section 46 - Misuse of Market Power

Misuse of market power is when a company has a substantial degree of power in a market and takes advantage of that power to eliminate or damage the business of a competitor, prevent the entry of a person into that market, or deter or prevent a person from becoming a competitor in that market or any other market [11]. The misuse of market was considered particularly detrimental to small business, and was examined by the Senate Economics References Committee. The Committee tabled a report on this issue on 1 March 2004, entitled The effectiveness of the Trade Practices Act 1974 in protecting small business (2004), which led to amendments of the Trade Practices Act 1974 (Cth) this year.

The Trade Practices Legislation Amendment Act (No. 1) 2007 (Cth) inserted sections 46(1AA) and 46(1AB) into the TPA. The sections came into effect on 25 September 2007 and prohibit a corporation with a substantial degree of market power from engaging in predatory pricing. Predatory pricing is where a corporation supplies, or offers to supply, goods or services for a sustained period of time at a price that is less than the relevant cost to the company for the purposes of eliminating or damaging a competitor or preventing a person from entering or becoming a competitor in that market or any other market [12]. In order to determine whether the company has a "substantial share of the market", section 46(1AB) of the TPA states that the court may have regard to the number and size of the competitors of the company in the market. In related amendments the government introduced two new definitions of "unconscionable conduct in business transactions" to the Australian Securities and Investments Commission Act 2001 (Cth) [13].

New Zealand and Australian Co-operation

The Corporations (NZ Closer Economic Relations) and Other Legislation Amendment Act 2007 (Cth) amends section 155AA of the TPA and inserts 155AAA (Protection of certain information), so as to allow closer co-operation between the regulatory and securities agencies of Australia and New Zealand. Specifically, the federal government has introduced amendments so that in limited circumstances "protected information" may be disclosed by an ACCC official in relation to Ministers, Secretaries of Departments, Royal Commissions and others in Australia and New Zealand. These changes came into effect on 19 July 2007.

Amendment to the Franchising Code of Conduct

The Trade Practices (Industry Codes - Franchising) Amendment Regulations 2007 (No. 1) 2007 (Cth) amends the Trade Practices (Industry Codes - Franchising) Regulations 1998 (Cth) also known as the Franchising Code of Conduct (the Code). The amendments, which come into effect on 1 March 2008, primarily deal with the disclosure requirements of the franchisor, the communication of this disclosure, the breakdown of franchise negotiations and to which franchisors the Code is applicable. The changes to the Code were partially based on the recommendations of Graeme Matthews' report to the federal government, Review of Disclosure Provisions of the Franchising Code of Conduct (October 2006).

The major change introduced by the amendments is that the Code is now applies to foreign franchisors operating in Australia. Numerous amendments have been made throughout the Code so that a reference to a franchisor also includes a reference to "a foreign franchisor".

In regards to disclosure requirements, the amendments of the code will require that franchisors provide disclosure documents to:

• prospective franchisees; and
• franchisees renewing or extending their agreements.

Prior to the amendment of clause 10 of the Code these documents consisted of a copy of the Code and a copy a disclosure document. The amendments will now require that, in addition, "a copy of the franchise agreement, in the form in which it is to be executed" is also provided.

In the context of the modification of the disclosure requirements, the decision of the New South Wales Court of Appeal in Ketchell v Master of Education Services Pty Ltd [2007] NSWCA 161 (19 July 2007) ( Ketchell) is of some interest. In Ketchell, the franchisor entered into a franchise agreement with the franchisee without receiving from the franchisee a written statement that the franchisee had received, read and had reasonable opportunity to understand the Disclosure Document and the Code, in accordance with clause 11 of the Code. The Court held that nothing in the TPA expressly or implicitly negated the application of the ordinary rule that a contract made illegally was not enforceable. On the facts of Ketchell, the Court ruled that the franchise agreement was unenforceable and therefore the money owed to the franchisor under the franchise agreement was irrecoverable. The decision will make it more difficult for franchisors to claim that a breach of the Code is no ground to invalidate the franchise agreement.

The new Code provides that if a "franchisee must pay money to a marketing or other cooperative fund, the franchisor must" [14] prepare financial reports for the fund within four months of the end of the financial year. This will be an increased amount of time compared with the current Code, which requires that these reports are prepared with three months.

The amendments to the Code also affect the relationship between the franchisor and franchisee. Thus, the franchisor must not:

• prevent franchisees from communicating with each other; and
• induce a franchisee not to form an association themselves, or from associating with other franchisees.

Before the amendment of clause 15 of the Code the above obligations only applied to current franchisees. The amendment will require that these obligations also extend to prospective franchisees. Further, an amendment to clause 16 of the Code will mean that a franchisor cannot require a franchisee to sign "a waiver of any verbal or written representation made by the franchisor" [15]. Finally, an amendment to Annexure 1 and 2 of the Code will mean that if an agreement is terminated by the prospective franchisee, franchisors can charge the person for "reasonable expenses" incurred "if the expenses or their method of calculation have been set out in the agreement".

Stephens Lawyers & Consultants have a high level of expertise in trade practice law. Our trade practices lawyers represent leading companies in both litigious and commercial matters.

For further information contact:

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© Stephens Lawyers & Consultants. January 2008.

[1] Australian Competition and Consumer Commission v Visy Industries Holdings Pty Limited (No 3) [2007] FCA 1617 (2 November 2007): Heerey J: 320.

[2] Trade Practices Act 1974(Cth) s 45.

[3] Australian Competition and Consumer Commission v Visy Industries Holdings Pty Limited (No 3) [2007] FCA 1617 (2 November 2007): Heerey J: 290.

[4] Ibid.

[5] 'ACCC welcomes record penalties against Visy: Calls for stronger cartel law' ACCC Media Release 302/07. Issued: 2 ^nd November 2007.

[6] Elisabeth Sexton, 'Class actions weaken whistleblower policy, says watchdog chief', The Age (26 October 2007).

[7] 'Ribena Vitamin C claims 'may have misled consumers''. ACCC Media Release 075/07. Issued: 21st March 2007.

[8] 'Highest ever penalty for resale price maintenance against skincare, cosmetics company Jurlique: $3.4 million'. ACCC Media Release 029/07. Issued: 8 ^th February 2007.

[9] Australian Competition and Consumer Commission v Baxter Healthcare Pty Limited (2007) 237 ALR 512 (29 August 2007): Gleeson CJ, Gummow, Hayne, Heydon and Crennan JJ: 536.

[10] 'High Court opens government procurement to competition law' ACCC Media Release 236/07. Issued 29 ^th August 2007. (2007) 237 ALR 512

[11] Trade Practices Act 1974(Cth) s 46.

[12] Trade Practices Act 1974(Cth) s 46(1AA).

[13] Australian Securities and Investments Commission Act 2001 (Cth) s 12CC.

[14] Trade Practices (Industry Codes - Franchising) Regulations 1998 (Cth) Schedule, para. 17(1)(a).

[15] Trade Practices (Industry Codes - Franchising) Amendment Regulations 2007 (No. 1) 2007 (Cth) Schedule, sub-clause 16(1).