In its decision handed down last Friday, the Federal Court of Australia has ordered Coles Supermarkets Australia (Coles) to pay pecuniary penalties in the sum of $2.5million in an action brought against it by the Australian Competition and Consumer Commission.

The case is significant because, despite the fact that there was no evidence that consumers had suffered any significant harm, the penalty imposed by the Court was at the higher end of the scale. 

Background

This decision follows an earlier judgment in 2014[1] in which the Federal Court concluded that Coles had engaged in misleading and deceptive conduct and thereby contravened the Australian Consumer Law[2] (ACL). In the 2014 decision the Court found that the use of the expressions “Baked Today, Sold Today”, “Freshly Baked”, “Baked Fresh” and “Freshly Baked In-Store” found on packaging and signage advertising bread products was misleading because the bread products had in fact been partially baked off-site, frozen and then baked to completion at a Coles supermarket.

Having found that Coles’ advertisements misled the public as to the nature, the manufacturing process and the characteristics of the goods, the Court has now determined the penalty that should apply to Coles.

Relevant factors to determination of the Penalty

In considering the amount of the penalty that should be ordered, the Court had regard to a number of factors, including (but not limited to):

  1. the impact of the lack of evidence about loss and damage suffered by consumers as a result of Coles’ conduct;  
  2. whether Coles had previously engaged in similar conduct; and  
  3. the weight to be given to specific deterrence.

Loss and damage to consumers

The ACCC submitted that Coles’ contraventions were extensive and serious in that the representations were directed to the general public and they had the potential to mislead a wide range of consumers.

Coles opposed that argument and submitted that the conduct could not be characterised as serious meaning that the penalty should be at the lower end of the scale.  Coles submitted that the ACCC had not adduced any evidence of consumer complaints, of any link between the impugned phrases and the purchasing decisions of customers or any harm to consumers.  Additionally, Coles also argued that increased awareness of the fact that the products were par-baked rather than baked from scratch had not discouraged consumers from purchasing the products. It also asserted the fact that the products were of an ‘everyday nature’ and a low price meant that they did not represent a substantial investment by consumers.

The Court acknowledged that the precise or even global assessment of any loss to consumers or competitors is difficult, if not impossible, and was not prepared to assess the penalty on the basis that consumers were not in fact, misled by Coles’ conduct.

The Court instead considered the alternate loss or damage caused by Coles’ conduct, being damage to its competitors. The Court found that Coles engaged in the campaign with the clear purpose of improving its market share, even though any harm to competitors had not been quantified.

Previous similar conduct

Section 224(2)(c) of the ACL requires a Court to consider, in the course of determining an appropriate penalty, ‘whether a person has previously been found by a court in proceedings….to have engaged in any similar conduct’. The ACCC relied on, among other previous contraventions by Coles, another 2014 decision of the Federal Court of Australia where Coles was found to have engaged in unconscionable conduct in dealing with suppliers and was ordered to pay $10million in penalties.[3]  The Court found that the prior unconscionable conduct finding against Coles with respect to suppliers was of a qualitatively different nature to the present circumstances such that it did not invoke s224(2)(c) of the ACL, however, the fact that Coles had engaged in other contraventions of the ACL, irrespective of their similarity, is a relevant matter even if it is not a prescribed consideration under s224(2(c).

Deterrence

Deterrence (both general and specific) is one of the primary functions of a pecuniary penalty. In this case the need for specific deterrence was considered by the Court to be an important factor in determining the appropriate penalty. The Court accepted the ACCC’s submissions that Coles’ contravening conduct continued (in some form or another) until the Court had determined that Coles’ conduct amounted to misleading and deceptive conduct.

The Court considered the fact that Coles had previously agreed to an injunction restraining the use of the advertising over a 3 year period (such injunction having been ordered in 2014), however, the Court held that this agreement did not speak to whether or not Coles needs to be deterred from future similar conduct or that Coles had “seen the error of its ways and is unlikely to engaged in similar conduct again.”[4]

Conclusion

This decision is an important one. The case highlights the risk that advertisers face with campaigns that “sail close to the wind”.  In our view, the contravention was far from clear cut – even the ACCC conceded during submissions that that the finishing of bread in-store amounted to “baking” and there was no evidence that the par-baked bread was inferior to bread baked from scratch[5].   It demonstrates that even where there is no evidence that consumers have suffered loss and damage, a Court may still consider it appropriate to order high penalties if it considers that the conduct has a significant effect on market competitors. In this case, the Court considered that the fact that the conduct went on for such a long period of time and that the bread marketed using the misleading phrases reaped significant revenue for Coles, was relevant to its determination that the imposition of a high penalty.