Competition & Market Regulation Update March 2010

Goodbye Trade Practices Act, hello Competition and Consumer Act

On 17 March 2010, Federal Parliament passed the Trade Practices Amendment (Australian Consumer Law) Bill 2009 (Cth) (ACL). This legislation introduces important changes dealing with unfair contracts and institutes new penalties and consumer redress options. Linked to the changes, the Australian Competition and Consumer Commission (ACCC) and the Australian Securities and Investments Commission (ASIC) will have expanded enforcement and investigative powers. The name of the Trade Practices Act 1974 (Cth) (TPA)¹ will change to the Competition and Consumer Act 2010 once phase 2 of the new consumer legislation is enacted (see below). The ASIC Act² will not be renamed.

This new Australian consumer law is the most important piece of consumer protection legislation since the introduction of the TPA in 1974. The true national nature of the ACL will provide consistency throughout the land. Companies will need to ensure that their compliance programs are up to date to cater for these new laws. The start date for the ACL will be no earlier than 1 July 2010 (for the unfair contract provisions) and 1 January 2011 for the remainder of the ACL. However, these dates are still to be confirmed.

Freehills have previously commented on the amendments in relation to the unfair contract regime,³ which will prevent, amongst other things, companies from using standard-form contracts to onerously burden consumers with terms ‘tucked away in the fine print.’⁴

Of more immediate interest are the new enforcement powers to be vested in Australia’s consumer regulators, the ACCC and ASIC, which will allow them to:

• seek a declaration from a court that a term of a consumer contract is an unfair term or a prohibited term
• issue substantiation notices relating to consumer protection in certain circumstances. This is intended as an investigative tool where the information sought can assist the regulator in deciding whether to take further action
• seek orders that would redress, wholly or in part, loss or damage to non-party consumers arising out of contraventions of certain consumer protection provisions of the TPA or ASIC Act or who are disadvantaged by a term in a consumer contract which has been declared an unfair term or a prohibited term
• issue an infringement notice containing financial penalties for suspected contraventions of various provisions, including the unconscionable conduct provisions under the TPA. ASIC already possesses this power in relation to minor contraventions of the continuous disclosure provisions of the Corporations Act.⁵ In practical terms, the use of this notice reverses the onus of proof in relation to these provisions—a most unfortunate further development in the use of this reversal of proof process in modern regulatory legislation, and
• issue a public warning notice in respect of suspected breaches of certain provisions of the TPA or ASIC Act or for a failure to respond to a substantiation notice (provided certain conditions are satisfied). Being able to ‘name and shame’ companies publicly is a strong penalty for suspected breaches, as reputations are on the line.⁶

Part IVA of the TPA, which contains the TPA’s unconscionable conduct provisions, will form part of the ACL. These provisions will become more significant with the introduction of civil penalties of up to $1.1 million for corporations and $220,000 for individuals who engage in unconscionable conduct. Regulators will also be able to seek orders disqualifying individuals who engage in unconscionable conduct from managing corporations.

Phase two of the ACL

On the same day, phase two of the ACL, the Trade Practices Amendment (Australian Consumer Law) Bill (No.2) 2010, was tabled in Federal Parliament. The Bill has been referred to the Senate Economics Committee for inquiry and to report on by 21 May 2010. When passed, the law will:

• incorporate fair trading and consumer protection provisions of the TPA into the ACL, including unfair contract terms and provisions implementing enhanced enforcement powers, penalties and redress options
• enable the ACCC to impose infringement notices for specified civil contraventions of the ACL
• implement a national approach to product safety, and
• introduce a new system of statutory consumer guarantees.

We will provide a more detailed commentary on phase two of the ACL in due course.

Cartels and other things

Whilst there has yet to be a criminal cartel prosecution brought by the ACCC, there is much interest in the potential for such action following the enactment of the Trade Practices Amendment (Cartel Conduct and Other Measures) Act 2009 (Cth)⁷ (cartel legislation). As readers will be aware, penalties for breaching the cartel legislation are significant. Heavy fines can be imposed on individuals and companies, and individuals face a potential 10-year imprisonment (amongst the longest sentences in the western world).

At the recent American Bar Association/International Bar Association Cartel Workshop in Paris in February, ACCC Chairman Graeme Samuel and Justice Middleton of the Federal Court were key note speakers. Mr Samuel advised how the ACCC is working with the Director of Public Prosecutions to try and secure a criminal prosecution against a company involved in cartel conduct. Justice Middleton explained how the Federal Court will handle cartel cases (via jury trials), but would not be drawn into providing specifics of penalties he envisaged might be considered appropriate.

At the conference, the following additional key observations were made:

1. the ACCC treats any new investigation involving conduct (by contract, arrangement or understanding) which may contain elements of cartel behaviour as potentially criminal. Although most of these matters will not lead to criminal prosecution under the cartel legislation, it highlights the emphasis the ACCC places on detection and eventual prosecution. This point was also made by Mr Samuel at the recent American Bar Association International Law Conference⁸ held in Sydney.
   
   Graeme Samuel has continually stated that it will be some time before a criminal case alleging cartel conduct will be brought before a court. He has expressed that ‘the ACCC will be advocating for the penalty regime to be used to its maximum effect.’⁹
2. in a number of observations, Mr Samuel has compared the civil penalty regime in the USA pursued by the Department of Justice to the regime operating in Australia, where courts have imposed relatively low monetary civil penalties. He noted there is ‘growing international momentum to raise the stakes in anti-trust enforcement’.¹⁰
   
   Mr Samuel has suggested that our courts should be encouraged to impose harsher penalties. Financial penalties for cartel conduct can now be the higher of $10 million, three times the total value of benefit from operating the cartel or 10% of the annual company turnover. Mr Samuel asserted that some companies under the former penalty regime viewed ‘cartel conduct [as] fairly good business’.¹¹

Ongoing ACCC cartel cases (civil)

ACCC investigations into price-fixing and cartel behaviour by cargo airline carriers have continued with Korean Air Lines Co. Ltd being investigated recently.¹² The ACCC alleges that between 2001 and 2006, the airline entered into arrangements or understandings with various cargo airlines that had the purpose or effect of fixing the price of a fuel and other surcharges and fees.¹³

The courts have imposed a total of $41 million in penalties against respondent airlines as a result of alleged fuel surcharge price fixing. Proceedings against Singapore Airlines Cargo Pte Ltd, Cathay Pacific Airways Ltd, Emirates, PT Garuda Indonesia Ltd and Thai Airways International Public Company Limited continue.

Other recent penalties for cartel behaviour include:

• an order by consent from the Federal Court for American based DRS C3 Systems to, amongst other things, pay $1 million for cartel behaviour in the military defence training systems industry,¹⁴ and
• an order by the Federal Court for APRIL Fine Paper Trading Pte Ltd and the related APRIL International Marketing Services Australia Pty Ltd to pay $4 million for breaching price fixing provisions in relation to copy paper and uncoated woodfree folio paper supplied to Australian customers,

the penalties in both cases were discounted by the court for cooperative behaviour. It should be noted that court imposed penalties are generally a result of an agreement reached between the parties and the ACCC.¹⁵

Unconscionable conduct under the TPA

Unconscionable conduct is prohibited in trade or commerce in both consumer (section 51AB) and commercial transaction (section 51AC) under Part IVA of the TPA. As readers will be aware,¹⁶ continuing criticism of the reach and scope of these unconscionable conduct provisions resulted in the appointment of an expert panel (Prof. Bryan Horrigan, Mr David Lieberman, Mr Ray Steinwall) (Expert Panel) to review the statutory unconscionable conduct provisions. The Expert Panel released a report in February which concluded that:

• a list of examples of unconscionable conduct would not improve the TPA’s unconscionable conduct regime, as it may create a false sense of expectation whilst not achieving certainty, and
• interpretative principles should be added to the TPA.

Dr Emerson, Minister for Competition Policy and Consumer Affairs, announced that the Federal Government will implement the Expert Panel’s recommendations, which indicated that the following principles would assist the courts in interpreting the unconscionable conduct provisions and improve stakeholders in understanding and regulators in enforcing them:

1. statutory unconscionable conduct, within the meaning of section 51AC (and arguably section 51AB) should not be limited to the scope of the equitable and common law doctrines of unconscionability
2. courts may examine the terms and progress of a contract in determining whether conduct is unconscionable for the purposes of section 51AB and section 51AC. This is in line with the amendment to section 51AC that the government has already announced, and recognises that there may be ‘substantive unconscionability’ as well as ‘procedural unconscionability’
3. the TPA’s unconscionable conduct provisions may apply to systematic conduct or patterns of behaviour, and not be limited to examinations of particular transactions,¹⁷ and
4. the identification of a special disadvantage not being necessary to attract the application of section 51AB or section 51AC.¹⁸

The Expert Panel also recommended that more test cases be brought and guidance be provided from the regulators about the practical nature of unconscionable conduct and consideration be given to harmonising sections 51AB and 51AC.

Franchising Code of Conduct amendments

The Expert Panel also provided recommendation for reforms to the Franchising Code of Conduct which the government plans to adopt, namely adopting a statement of principles as to what constitutes inappropriate behaviour by franchisors.¹⁹

An interesting recent case dealing with statutory unconscionable conduct

A recent example of a successful civil unconscionable conduct case is Goodridge v Macquarie Bank Limited.²⁰ In this decision of the Federal Court, Justice Rares held that Macquarie Bank (Macq) and Leveraged Equities (LE) engaged in conduct that was unconscionable. The facts of the case concerned margin calls that LE made against Mr Goodridge that led to Goodridge’s units in a Macq trust being forcibly sold at a loss.

Justice Rares ruled that LE’s conduct was unconscionable. This decision appears to enliven the statutory remedies and extend their operation beyond common law contractual breach of contract.²¹ In effect, Goodridge was only provided one day’s notice by LE, where a contractual term stipulated that he should be provided with three.²² Justice Rares ruled that LE had threatened and sold his units without a legitimate interest. Accordingly, the court held that LE used its power of sale unconscientiously.²³

If the decision stands, and is not appealed,²⁴ it will reinforce the need to be attuned to possible allegations of breach of contract when considering whether to exercise contractual powers that could have a significant detrimental impact on the other party to the contract. Getting it wrong could enliven statutory remedies for unconscionable conduct in addition to common law remedies for breach of contract.

Chinese internet search engine provider cleared of abuse of dominance allegations

A Chinese court has declined to rule that Chinese internet search engine provider, Baidu Inc. (Baidu) abused its dominance, in a private action instigated by Tangshan Renren Information Service Company (TRISC). The case was brought under Article 50 of China’s Anti Monopoly Law (AML). TRISC alleged that Baidu had, without justification, altered its search ranking so that TRISC’s website received significantly less hits. Baidu admitted making the change but argued that its actions were justified and in accordance with its listing policy.

The court held that, in the absence of economic analysis or justification of the market figures provided by TRISC in support of its claim, it could not conclude that Baidu held a dominant position in the relevant market (China’s search engine market). The court was satisfied that Baidu’s action was justified, taking into consideration that:

1. TRISC’s website contained a large number of ‘junk links’ which artificially inflated their search ranking
2. Baidu had acted in accordance with its listing policy which was available on Baidu’s website and had been brought to TRISC’s attention, and
3. Baidu had not discriminated against TRISC as Baidu’s enforcement policy applied equally to all websites.

This decision provides important insight to the way Chinese courts interpret the still relatively new AML. Corporations doing business in China can take comfort from this decision as it suggests that Chinese courts will be open to considering any practical business justifications offered for allegedly abusive conduct.

Endnotes

1. Trade Practices Act 1974 (Cth).
2. Australian Securities And Investments Commission Act 2001 (Cth).
3. Freehills, 'Unfair contract terms: Update on the Trade Practices Amendment (Australian Consumer Law) Bill 2009', 11 November 2009; CMR Update September 2009.
4. Media release by Dr Craig Emerson, 17 March 2010.
5. Corporations Act 2001 (Cth).
6. Note that most states and territories have public warning provisions in relation to consumer protection matters, but there was no such federal law.
7. The legislation came into force on 24 July 2009.
8. Cross-Border Collaboration, Convergence and Conflict: The Internationalization of Domestic Law and Its Consequences.
9. The Australian, ‘Prison for price-fixing: ACCC’, 26 February, 2010.
10. ACCC media release, ‘ACCC: Breaching the Trade Practices Act has never been more costly’, 25 February 2010.
11. Ibid.
12. Twelfth air cargo carrier.
13. The alleged arrangements or understandings were said to have been conducted off shore – in Korea, Indonesia and Hong Kong.
14. DRS agreed with another company to withdraw from a proposed procurement of an air combat manoeuvring instrumentation system by the Commonwealth of Australia.
15. For example, the penalties imposed in the cardboard box cartel against Visy and various officers of Visy were agreed penalties and not penalties imposed by Justice Heerey as a result of the trial.
16. CMR Update January 2010.
17. This recommendation stemmed from 2009 enforcement action taken by the ACCC against Craftmatic, where the ACCC alleged Craftmatic used unfair pressure tactics to sell therapeutic beds to vulnerable elderly consumers. It uncovered specific instances where the conduct of Craftmatic could be said to be unconscionable, but the subject of the enforcement action was the business system that Craftmatic had put in place. Craftmatic consented to declarations and injunctions made against it during Federal Court proceedings, and gave a section 87B undertaking to the ACCC.
18. The concept of a special disadvantage was drawn from Amadio and preceding cases, but the panel felt that neither section 51AB nor section 51AC rely on that identification.
19. Stephen Kerr, Freehills, 'Unconscionability and franchising – the expert’s report', 17 March 2010.
20. [2010] FCA 67.
21. Under section 12CB of the ASIC Act (analogous with section 51AB of the TPA).
22. The facts were also complicated by the fact that Macquarie Bank attempted to novate and/or assign 18,500 margin loans (including Goodridge’s) to Leveraged Equities before February 2009 via another trust.
23. at [207].
24. It is difficult to see how this conduct had the requisite degree of ‘moral obloquy’ or moral disgrace required by Spigelman CJ in Attorney-General v World Best Holdings Ltd (2005) 63 NSWLR 557.

More information

For more information regarding possible implications for your business, contact a member of the Competition & Market Regulation team.