Last month, the Federal Court handed down its penalty decision in the proceedings commenced by the Australian Competition and Consumer Commission (ACCC) against Reckitt Benckiser, the manufacturer of Nurofen-branded products. In ordering Reckitt Benckiser to pay a penalty of $1.7 million, the Court rejected the ACCC’s recommended penalty of $6 million due to the Court adopting a particular view on three key issues. Given the difference between the penalty sought and that which was granted, the ACCC will now need to give careful consideration to an appeal.

BACKGROUND

In December 2015, the Federal Court found Reckitt Benckiser’s conduct in promoting and selling different product ranges directed at different ailments using specific packaging (the Packaging Representations) and publishing a website with a table analysing each of the products and their suitability to treat the different ailments (the Website Representations) falsely represented that each product:

  • was specifically formulated to treat the particular type of pain specified on the packaging relevant to each product
  • solely or specifically treated the particular type of pain specified on the packaging relevant to each product.

Such conduct was found to be in breach of section 33 of the Australian Consumer Law (ACL), which prohibits conduct that is liable to mislead the public as to the nature, manufacturing process, characteristics, suitability for purpose or quantity of any goods. The ACL provides that the maximum civil pecuniary penalty for each contravention of that section by a company is $1.1 million.

LEGAL PRINCIPLES CONCERNING PECUNIARY PENALTIES

The Court noted that, in order to determine the appropriate penalty to impose on Reckitt Benckiser, it was required to have regard to all relevant matters, including:

  1. the nature, extent and circumstances of the conduct
  2. the deliberateness of the contraventions
  3. the extent to which Reckitt Benckiser cooperated with the ACCC
  4. whether Reckitt Benckiser made a profit from the contraventions (and the extent of any profit made).

It would then need to assess those factors in light of two fundamental principles (defined by the Court as ‘totality’ and ‘courses of conduct’), to determine a penalty sufficient to punish but not crush Reckitt Benckiser but also deter other companies from engaging in similar conduct. The likely penalty would also need to be assessed in light of penalties applied in previous comparable cases.

MAXIMUM PENALTY, TOTALITY AND COURSES OF CONDUCT

It was common ground between the parties that, as Reckitt Benckiser’s misleading conduct occurred on many occasions (including at least those 5.9 million consumers who bought the product and were likely to be misled), Reckitt Benckiser therefore breached the Act on numerous occasions and the possible statutory maximum penalty of $1.1 million per contravention was therefore, in the Court’s words, ‘many, many millions of dollars’. Despite this very high potential maximum penalty, the Court emphasised that it had to be considered in light of both the ‘totality’ principle (which is concerned with ensuring the penalty is proportionate to all the circumstances of the contravening conduct) as well as the ‘course of conduct’ principle (which seeks to avoid double punishment for a contravention where the legal and factual elements of two or more contraventions are so interrelated as to effectively be one contravention).

THE FACTORS RELEVANT TO PENALTY

In applying the totality principle, the Court analysed each of several factors relevant to determining penalty of which the following were the most interesting.

Nature, extent and circumstances of the contravening conduct

The Court noted that the Packaging Representations took place over a long period (almost five years) and that the Website Representations were made for a period of 17 months. In addition, the Packaging Representations were held by the Court to have been made at the point of sale; made as part of a general marketing approach designed to profit; and likely to have been considered by many consumers who purchased the product or visited the website. Similarly, the Website Representations were widespread having been associated with a strong brand; and published on that brand’s website that was accessible by all manner of consumers across Australia (noting that the Nurofen Specific Pain Range was available at 5,500 pharmacies and an additional 3,000 retail outlets).

Sales and profit from contravening conduct, and potential losses to consumers and competitors

While the ACCC sought to lead a large amount of evidence to establish that Nurofen profited handsomely from sales of the Nurofen Product Range, it was unable to establish that the sales would have been different in the absence of Reckitt Benckiser’s misleading conduct. The Court was also not convinced that the financial information tendered by the ACCC (without the benefit of an expert) was helpful. Ultimately, the Court rejected Reckitt Benckiser’s submission that there was no evidence of any additional profits, finding that Reckitt’s Benckiser intended to profit from the misleading conduct and therefore it was unnecessary to determine the precise actual profit generated by that conduct. The Court also found the total revenue from sales of the Nurofen Specific Pain Range from 2011 to 2015 was $45 million.

The conduct was not deliberate or covert

The Court noted that the ACCC had abandoned its attempts (very late in the day) to introduce fresh allegations that Reckitt Benckiser’s conduct was deliberate or covert in the sense that the contraventions were made knowing they were contrary to the ACL or that Reckitt Benckiser ‘courted the risk’ of contravention.  For further discussion of this issue, please see our previous article.

Cooperation with the ACCC

Reckitt Benckiser secured a discount for its cooperation with the ACCC, including:

  • responding to requests for documents and information
  • meeting with the ACCC
  • making offers to change its packaging
  • proposing and attending mediation
  • during the hearing of the matter, Reckitt Benckiser made admissions and consented to the orders made by the Court, including injunctions, corrective advertising, modification of its compliance program and costs
  • it subsequently agreed to an interim packaging arrangement with the ACCC and helped devise a statement of agreed facts for this penalty hearing.

Compliance programs and the involvement of senior management

While the Court accepted Reckitt Benckiser had in place one or more compliance programmes, it found that they failed at basic levels. Importantly, the Court held that the company should have been put on notice, and thereafter taken greater care, following a number of highly public developments concerning the Nurofen Specific Pain Range, including:

  • in 2010, respected consumer watch-dog group, Choice, awarded Reckitt Benckiser a ‘Shonky Award’ for ‘pain in the hip pocket’ for the Nurofen Specific Pain Range
  • in 2012, in response to two complaints, the Therapeutic Goods Association Complaints Resolution Panel made adverse findings concerning the product packaging for the Nurofen Specific Pain Range
  • in 2013, the ABC programme, ‘The Checkout’ criticised Reckitt Benckiser for selling products that claimed to work on specific pain at a higher price than other products.

Prior contraventions

The Court accepted that Court actions brought several years earlier by a competitor concerning Reckitt Benckiser’s product, ‘Mortein’ had some limited relevance to the penalty in that they demonstrated, to a limited extent, the need for stronger compliance measures to have been employed by Reckitt Benckiser.

‘COURSE OF CONDUCT’ PRINCIPLE

In applying the second of the two penalty principles, the Court rejected the ACCC’s characterisation of the contraventions as involving six courses of conduct (constituted by each of the four different types of product packaging and the two different Website Representations) and instead found there were only two courses of conduct, namely the Packaging Representations and the Website Representations. This finding by the Court significantly impacted the likely possible penalty and necessarily became a key consideration in the Court’s assessment of the overall appropriate penalty.

PENALTY IMPOSED

In balancing all of these factors, the Court imposed a total penalty considerably less than the $6 million sought by the ACCC: namely, $1.7 million (comprised of $1.2 million for the course of conduct involving the Packaging Representations and $500,000 for the course of conduct involving the Website Representations). In doing so, the Court stated the penalty would have been ‘far greater’ than that imposed were it not for three matters, being:

  • the absence of any pleading or submission the conduct involved an intentional or reckless contravention
  • the Court’s finding that the contraventions by Reckitt Benckiser involved only two separate courses of conduct (notwithstanding that the conduct concerning the packaging was not committed in identical circumstances and, further, the later contraventions occurred after events that should have alerted Reckitt Benckiser to these issues making them more serious than the earlier conduct)
  • the products were effective to treat the pain that they represented so the only potential effect of the conduct on consumers or competitors was monetary.

PENALTY ANALYSIS

In our view, the penalty imposed by the Court is very low, and, for a number of reasons, the ACCC will now need to give serious consideration to an appeal:

  1. A penalty of $1.7 million regarding products that earned Reckitt Benckiser revenue of $45 million is too low. There is a real risk that such a large differential between revenue and penalty is such that it would be regarded by Reckitt Benckiser, and the market generally, as ‘small change’. Such an outcome would arguably be contrary to previous authority that establishes that a penalty must be fixed with a view to ensuring it is not one that is merely regarded by the offender or others as an acceptable cost of doing business.
  2. When compared with the recent penalty imposed on Coles Supermarkets for misleading consumers on its ‘Baked Today, Sold Today’ bread products (which was $2.5 million), the penalty imposed on Reckitt Benckiser for its arguably more serious and prolonged conduct is very light.
  3. Arguably, the Court was wrong to find that Reckitt Benckiser’s conduct could be characterised as two courses of conduct, particularly given the Website Representations (found to be a single course of conduct) consisted of two very different representations in different parts of the Website and the Packaging Representation took place in the context of increasing ‘warnings’ to the company due to the activities of various consumer bodies.

The ACCC has until 13 May 2016 to lodge an Appeal.