The ACCC’s ongoing proceedings against Woolworths paused for a short time last month, as the parties attended a mediation to attempt to settle the dispute. We thought we’d take this opportunity to provide an update on the current status of the proceedings, and attempt to predict the size of any penalty that the Federal Court may award against Woolworths should ACCC prove its case. Based on previous cases and the publically available information in the Woolworths proceedings, it is not outside the realms of possibility that Woolworths could be facing a penalty in the order of up to $30 million.

Background

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. The proceedings followed action taken by the ACCC against Coles Supermarkets for very similar conduct, in which the ACCC secured $10 million in penalties and Coles agreed to a ‘high profile’ refund scheme overseen by former Victorian Premier, Jeff Kennett.

Since proceedings were commenced, Woolworths has vigorously defended the allegations, contending that payment demands were not unconscionable, largely because:

  • Woolworths’ conduct was ‘business as usual’ and its approach and methodology was reasonable and considered
  • the conduct was an ordinary aspect of the trading relationship between suppliers and retailers
  • Woolworths doesn’t have any real power in its dealings with suppliers
  • some of the affected suppliers were listed and therefore did not fall under the operation of the Australian Consumer Law (ACL).

As noted in our previous articles ‘Power and Conscience – Woolworths and the ACCC’s claims of unconscionable conduct‘ and ‘Business as usual? Woolworths denies unconscionable dealings with suppliers‘, given the Court’s earlier disapproval of Coles’ conduct (due to its size and strength), we do not believe the ‘business as usual’ and ‘we don’t have power’ aspects of Woolworths’ defence will afford much weight with the Court. In our view, the Court is unlikely to be persuaded by an argument that Woolworths’ conduct was standard in the market (even if we accept that was the case), 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.

On 29 July 2016, the parties met in Sydney to attend a mediation. On 22 July 2016, while the parties were no doubt busy preparing for the mediation, ACCC Chairman Rod Sims commented to the Sydney Morning Herald that “Coles, I think, learned a lesson…I don’t think we’ve seen that from Woolworths based on the anecdotal stuff we hear”. Clearly, the ACCC still has serious concerns about Woolworths’ conduct in dealing with its suppliers.

Potential penalties – comparison with Coles

Assuming the matter doesn’t settle at mediation, but proceeds to trial and the ACCC proves all of its case, the Court will need to determine an appropriate penalty. It will do so having regard to the maximum penalty under the ACL for this type of conduct (being $1.1 million for each contravention) through the prism of factors set out in section 76 of the Competition and Consumer Act and by (then) Justice French in a 1991 Federal Court decision involving the Trade Practice Commission and CSR Ltd. We also think it likely that the Court will be highly influenced by the findings in the Coles proceedings, where 15 contraventions of the ACL were identified by the Court and a fine of $10 million imposed on Coles.

Coles – Court’s findings Woolworths – potential findings based on current allegations Comparison (assuming that the ACCC proves its case)
1. Nature and extent of the contravening conduct
Between April 2011 and December 2011, Coles sought payments from 220 suppliers who were significantly smaller than Coles; were highly dependent on Coles for ongoing viability of their businesses; and were pressured with ‘commercial consequences’ if they did not agree to make the payments. Coles falsely stated that the rebate the supplier was being asked to pay was based on Coles’ own data, assumptions and calculations and made no effort to verify or check that information with the supplier. Suppliers had two days to respond to Coles’ payment demands to avoid the request being ‘escalated’. Over an intense four day period in December 2014, Woolworths systematically sought to obtain payments from a group of 821 ‘Tier B’ suppliers to its supermarket business. Requests for payment were made without regard to whether Woolworths had any other legitimate basis to seek the amounts. Woolworths has 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’ suppliers were told that if they made a payment they would be seen to be ‘supporting’ Woolworths and that if they did not agree to do so, then the opposite would be the case. Arguably, on the currently public information, this conduct is somewhat less serious than that engaged in by Coles. Both supermarkets:
  • designed and adopted a strategy to reduce their respective anticipated profit gaps by seeking payments from their suppliers
  • requested payments where there was no pre-existing legal entitlement to the rebates or payments under existing contracts
  • used scripts for staff to contact suppliers asking for the payments of rebates (in the case of Coles) and simply for payments (in the case of Woolworths).

In both cases, the conduct was difficult for the ACCC to detect due to the reluctance of smaller suppliers to report complaints.

Although there are some differences between Coles’ conduct and the allegations made against Woolworths (including the shorter period of time over which the conduct occurred and the lack of false representations or real ‘pressure’ placed on suppliers), the nature of the conduct was very similar to Coles, where the Court ultimately found that Coles demands were ‘deliberate, orchestrated and relentless’.

If the Court finds that Woolworths sought payments from 821 suppliers (almost four times as many as Coles), this could result in a penalty significantly higher than the one paid by Coles.

2. Amount of loss and damage suffered
Difficult to quantify with precision the financial impact on each supplier of Coles’ conduct. Demands for payments were often leveraged against each other and the exact quantum of amounts paid or rebates withheld is complicated or unknown (however, according to later media reports was about $12 million). Woolworths raised over $18 million dollars in payments. Financial impact on each supplier is currently unknown. It is currently unclear what impact Woolworths’ conduct had on the supplier and what weight the Court will give to the $18 million raised by Woolworths, though the penalty would logically be adjusted upwards due to the higher amount collected.
3. Circumstances in which the conduct took place
Coles’ conduct did not have a legitimate commercial basis, was inconsistent with acceptable business practice and took place in circumstances where Coles had substantial bargaining power and, by its conduct, took advantage of that bargaining position. There was no pre-existing legal entitlement to the rebates or payments under existing contracts. Woolworths’ suppliers are alleged to have had just 4 days to consider its request. In our view, the Court is likely to make similar findings with respect of the Woolworths conduct, as it did in the Coles matter.
4. Size of the contravening company and degree of power the company has
Coles was the second largest supplier of retail grocery products to customers in Australia supplying approximately 30 percent of the grocery products supplied for retail sale to customers in Australia. Woolworths was (at the time) Australia’s largest supplier of grocery products. Arguably, Woolworths, at the relevant time, had more power than Coles and was a larger company. This will likely increase any potential penalty.
5. Deliberateness of the contravention and the period over which it extended
Coles’ conduct occurred over eight months and involved the intentional use of unfair tactics and undue pressure in dealings with suppliers in relation to whom it knew that it had substantial bargaining power. Woolworths’ conduct occurred in a one month period. The extent to which Woolworths engaged in unfair tactics will be a matter for evidence. Currently, there are no allegations that Woolworths made false representations or exerted real pressure on the suppliers to make the payments. On the information currently available, Coles’ conduct occurred over a longer period and involved arguably more serious, deliberate conduct. However, we note that comments made by the ACCC at the time painted the conduct as more serious than that of Coles. If that is the case, this will likely lead to further increases in the penalty.
6. Whether the contravention arose out of the conduct of senior management or at a lower level
Coles’ Senior Managers were aware of, and encouraged, the practice of seeking money from suppliers to meet profit targets and were aware of, and either encouraged, or did not discourage, the contravening conduct. The ‘Mind the Gap’ Strategy was approved by Senior Managers. The Court is likely to make similar findings with respect to the approval of the conduct by Woolworths’ senior management.
7. Whether the company has a corporate culture conducive to compliance with the Act
At the time of the contravening conduct, Coles had trade practices compliance policies in place. They did not prevent the conduct occurring. Coles’ conduct indicates that the programs were inadequate. Unclear at this stage. The Court will likely find that the contraventions showed a failure of Woolworths’ internal compliance systems and processes, which had the potential to impact a number of suppliers with whom representatives of Woolworths had dealings.
8. Whether the company has shown a disposition to cooperate with the ACCC
Coles cooperated with the ACCC during the course of its investigation and regarding the resolution of the proceeding. Unclear based on the current publically available information. Woolworths is currently vigorously defending the proceedings, but has agreed to a mediation, the result of which is still unknown. In Woolworths’ case, this will be a matter for the Court to consider based on Woolworths’ conduct up to an including the conduct of the trial. At the moment, the lack of cooperation and the refusal to accept any wrongdoing is likely to lead to further increases in the penalty.

Conclusion on potential penalty

Woolworths has already admitted to contacting approximately 250 suppliers. If this conduct is found to be unconscionable, then this potentially gives rise to 250 separate breaches of the ACL, and therefore a total penalty of over $250 million. While a penalty of that magnitude would be vastly disproportionate to previous penalties for similar conduct, we can certainly foresee a situation where the Court finds that Woolworths’ conduct was more serious than Coles. In that regard:

  • factors tending to support this view include the number of suppliers contacted; the amount of money raised; Woolworths position (at the time) as Australia’s largest grocery product supplier; and Woolworths continued denial of any wrongdoing
  • factors tending against a higher penalty are the (current) lack of allegations false representations made to Woolworths’ suppliers, lack of real ‘pressure’ being placed on the suppliers and the shorter period of time over which the conduct occurred.

Weighing up all of these matters, it is not unforeseeable that Woolworths is facing possible penalties of between $20 to $30 million, plus orders to refund the suppliers impacted by the conduct. We will be closely monitoring the outcome of the mediation and will provide further updates as more information becomes available.