Last week, Woolworths Limited (Woolworths) filed its defence in the proceedings commenced against it by the Australian Competition and Consumer Commission (ACCC) regarding alleged unconscionable conduct relating to payments sought from its suppliers. Woolworths has defended the allegation, contending that payment demands were not unconscionable, largely because such demands are part of the ordinary course of business in the market for dealings between suppliers and retailers.

In our view, the case will turn on whether or not the Court finds that Woolworths’ attempts to seek payments from suppliers carried with it (whether expressly or by implication) a promise that supportive suppliers would benefit at a later date or a threat that unsupportive suppliers would suffer in some manner. The Court is unlikely to be persuaded by an argument that Woolworths’ conduct was not unconscionable due to it being an ordinary aspect of similar trading relationships, as the case law requires the Judge to have regard to the much broader notion of ‘community standards’, rather than those that may occur in the wholesale grocery sector.

ACCC’s allegations

In late 2015, the ACCC commenced Federal Court proceedings against Woolworths, alleging that the supermarket chain had engaged in unconscionable conduct in seeking payments from certain suppliers to bolster Woolworths’ profits. At the time, Rod Sims, the ACCC Chairman, described the alleged conduct as being “at the high end of egregious behavior” – A full analysis of the background to the case can be found in our previous article “Power and Conscience – Woolworths and the ACCC’s claims of unconscionable conduct”.

Woolworths’ admissions

Unsurprisingly, given the ACCC’s coercive investigative powers and the number of suppliers that the ACCC was able to interview, Woolworths does admit to key aspects of the ACCC’s case. Woolworths admits that in early October 2014 it forecasted that it would suffer a profit shortfall for the second half of the 2014 calendar year and that its Price and Trade Investment team (PTI team) was instructed by senior management to identify ways in which Woolworths could mitigate this risk. Woolworths admits that the ‘Mind The Gap’ program was the name given to the program developed (not “designed”) by Woolworths, by which:

  • The PTI team analysed the trading performance of 1,948 of its suppliers using four financial metrics (called ‘lenses’).
  • Woolworths identified underperforming suppliers for further review by Woolworths’ category managers or buyers (Buyers) to consider whether it was reasonable to approach those suppliers to discuss their contribution to Woolworths.
  • The Buyers contacted suppliers to explain the basis on which Woolworths considered that the supplier was not contributing satisfactorily to Woolworth’s financial performance.
  • The Buyers requested that the supplier consider making a payment to Woolworths to contribute further to the supplier’s trading relationship with Woolworths.

Further, Woolworths admits that it had an internal target to acquire $11 million from suppliers as part of the ‘Mind the Gap’ program, that it had no pre-existing contractual right to request the payments (though its contracts allowed for such requests to be made) and that it did not keep a separate record of payments made by suppliers as part of the ‘Mind the Gap’ program.

Woolworths’ denials

Despite these admissions, Woolworths has attempted to redefine its conduct so that it presents in a manner much more favourably than that asserted by the ACCC. It does so through denying many (if not most) of the ACCC’s specific allegations (even those that appear largely innocuous) and then re-casting them using Woolworth’s preferred language. While this is not unusual, it does appear to have been deployed to an unusual level in this instance, which may in part be due to a desire to blunt the force of the ACCC’s simple and elegantly pleaded case.

Woolworths’ primary defensive strategy, however, rests on three different bases:

  1. This was ‘business as usual’ and, even so, Woolworths’ approach and methodology was reasonable and considered.
  2. The conduct was an ordinary aspect of the trading relationship between suppliers and retailers.
  3. Woolworths doesn’t have any real power in its dealings with suppliers.

Woolworths’ ‘business as usual’ argument is based upon its assertions that:

  • The ‘Mind the Gap’ program drew upon previous discussions with suppliers, which occur on an ad hoc basis, together with previous department-based supplier performance ‘drives’.
  • Woolworths contacted suppliers following both an objective review of the supplier’s performance and a subjective analysis based on whether Woolworths thought it was fair and reasonable to ask that supplier for a payment. In other words, the requests were made after significant analysis and weren’t simply an attempted ‘cash grab’ from its suppliers.
  • Although 821 suppliers were deemed to be underperforming, Woolworths elected not to contact a large number of them, which shows that the program was conducted in a planned, orderly fashion.
  • While a script was used during the conversations, it was developed for use in a previous program and included the requirement that its representatives be ‘polite and courteous’ and not make unreasonable demands or threaten suppliers. No promises of support or threats of retaliation were made by the Buyers.
  • The amounts sought from suppliers were reasonable having regard to the trading relationship between Woolworths and the particular supplier.

Importantly, Woolworths denies the payment requests were threats and that a lack of separate written records of ‘Mind the Gap’ payments means that it had no intention of treating those suppliers who made payments more favourably in the future. On the contrary, Woolworths asserts that it does routinely record payments made by a supplier so that they can be considered in the course of any subsequent analysis of the supplier’s trading relationship with Woolworths.

Regarding the payment amounts, Woolworths denies the purpose of the program was to reduce profit shortfall or that its overall target was to obtain $100 million from suppliers during the program.  Instead, it had an ‘internal target’ of $11 million.

Finally, Woolworths denies that it was in a superior bargaining position with respect to the suppliers, and accordingly its behaviour cannot be characterised as unconscionable. It says that suppliers who supplied products to Woolworths also supplied products to other retailers and wholesalers (including other supermarkets, convenience stores, fruit and vegetable stores etc.) and customers were able to shop for grocery products at many competing retailers in Australia, including supermarkets and other stores.  For these reasons, Woolworths says that the suppliers were in a powerful negotiating position.

Observations and next steps

The ACCC’s success in these proceedings will be heavily dependent on the strength of the evidence given by its witnesses and its ability extract useful admissions from the Buyers (if they are called by Woolworths). If the ACCC can prove that the Buyers went off-script and made express or implied promises or threats to extract payments from the suppliers, then Woolworths’ conduct may still be unconscionable whether or not its conduct occurs elsewhere in the market. This is the case due to the lack of records, Woolworths’ practical inability to reward suppliers for specific ‘Mind the Gap’ payments and the Court’s likely disapproval of the use of a threat by a party with greater power to extract a payment for which there was no lawful entitlement.

Given the Court’s earlier disapproval of the conduct of Coles Supermarkets (given its size and strength), we don’t expect the ‘market conduct’ and ‘we don’t have power’ aspects of Woolworths’ defence will hold much weight. In our view, the Court is unlikely to be persuaded by an argument that its conduct was standard in the market, as the case law requires the Judge to have regard to the much broader notion of ‘community standards’, rather than those that may occur in the wholesale grocery sector.

In Woolworths’ favour, there appears to be uncertainty as to key aspects of the program.  Most notably, Woolworths had said that:

  • On the information available to it at the time of preparing its defence, “only approximately 250 of the 821 suppliers were contacted”.
  • Woolworths will rely on its ‘Rules of the Road’ document which expressly instructed the Buyers to act reasonably at all times in their dealings with suppliers. The ACCC hasn’t yet dealt with that document in the Statement of Claim.
  • Woolworths will likely lead evidence that there were many more layers to its program than asserted by the ACCC and that, at each layer, a standard of reasonableness was applied. Without documents to attack any witnesses giving this evidence, the ACCC will need to fall back on strong cross examination during trial, which always comes with an element of risk.

There is also always the possibility that Woolworths may try to paint the conduct of certain Buyers as being unauthorised by Woolworths and therefore something for which it should not be liable.  This strategy is not without risk, but is certainly open at the moment.

The ACCC is due to serve its reply to Woolworths’ defence by 7 March 2016, followed by its evidence on 24 March 2016. At the moment, it looks as though Woolworths has elected to vigorously defend the proceedings, in the hope of convincing the Court that its conduct was not unconscionable avoiding what will likely be a substantial penalty and a refund scheme all in the tens of millions.