For years, the Federal Court has said that civil penalties should be a significant deterrence – not an acceptable cost of doing business, for contravening the Australian Consumer Law (ACL).

In Singtel Optus Pty Ltd v ACCC [2012] FCAFC 20 (the Full Court) said:

Generally speaking, those engaged in trade and commerce must be deterred from the cynical calculation involved in weighing up the risk of penalty against the profits to be made from contravention. (at p 62)

Now, in the Federal Court of Australia decision of Australian Competition and Consumer Commission v Coles Supermarkets Australia Pty Limited [2015] FCA 330, Chief Justice Allsop has provided much needed clarity by measuring the penalty of $2.5 million imposed on Coles against the yardstick that it represented one third of the profit Coles made on selling par-baked bread / bread products.

The conduct which contravened the ACL

In the liability judgment ([2014] FCA 634), the Court found that  Coles had contravened the ACL by displaying the bread and bakery products which had been partially baked off-site, snap frozen and then baked to completion for sale at a Coles Supermarket as “freshly baked”.

There were four courses of conduct which contravened the ACL, namely:

  1. the packaging stating “Baked Today, Sold Today”;
  2. the packaging stating “Freshly Baked In-Store”;
  3. the packaging stating both “Baked Today, Sold Today” and “Freshly Banked In-Store”;
  4. the signage stating “Freshly Baked” and “Baked Fresh”.

The packaging and signage were: misleading or deceptive conduct (Section 18(1)); false or misleading representations as to the history of the goods (Section 29(1)(a); and misleading conduct as to the nature, the manufacturing process and the characteristics of the goods (Section 33).

For more see – https://www.lexology.com/library/detail.aspx?g=1e295ea5-0d5d-458b-9d32-cd4a33f20e4c

The declarations and orders made

 Subsequently, the Court made these declarations and orders against Coles ([2014] FCA 1022]:

  1. Declaration that the representations on the packaging ((a) & (c) above) contravened the ACL because only ‘some baking of ... products ... in that packaging had taken place on the day’ of sale;
  2. Declaration that the packaging and signage contravened the ACL because some of the bread products that ‘were offered for sale ... [were] frozen par-baked product, not fresh dough’;
  3. Order to restrain making these representation for 3 years;
  4. Order to display corrective notices in its stores and on its website.

For more see – https://www.lexology.com/library/detail.aspx?g=47123671-aae2-471f-8a43-48bf85ce20a7

The Penalty Principles

The Court has a discretion when determining the penalty under s. 224 of the ACL. The parties accepted that deterrence (both general and specific) was a primary concern of the Court in setting the penalty in this case.

The ACCC submitted that there were multiple offences, in fact ‘some 85 million contraventions’, one each time a par-baked product was sold, each having a nominal maximum penalty of $1.1 million.

The Court preferred Coles’ submission that there be a single penalty in respect of all contraventions bearing in mind that the four courses of conduct formed part of a single marketing strategy. Therefore, the court adopted $4.4 million as a notional maximum penalty.

The Court said that It is important that sellers in the market recognise that consumers are entitled to reliable, truthful and accurate information. Coles was wrong to use the “freshly baked” phrases:

The contravening conduct ... is substantial and serious. ... it is clear that the significant potential to mislead or deceive and thus to damage competitors, the duration of the conduct, and the fact that the goods in relation to which the impugned phrases were used were “consumer staples” indicate that the objective seriousness of the offending conduct was considerable. The sheer number of products (approximately 106 different product lines), the territorial reach of the campaign (637 supermarkets across all Australian States and Territories), the time over which the conduct occurred (about three years) and the EBIT derived from the par-baked products (in the order of $7.28 million) suggests that there is a strong case for ensuring that the ends of both specific and general deterrence are achieved by the penalty imposed. (at p 86)

The Court imposed a penalty of $2.5 million ‘taking into account all the matters’. This sum equates to approximately 3¢ per loaf of par-baked bread or bakery product sold as “freshly baked” by Coles.

The Court cross checks the penalty

The Court cross checked the penalty, in two ways:

One way of looking at this [penalty] is that the offending [conduct] was above the mid-range for four courses of conduct with a notional maximum penalty of $4.4 million.

Another way of looking at it is that it is a sum which ... strips Coles of over one third of its EBIT of the par-baked products... (at p 103)

The rationale for imposition of a penalty based on profit derived from the conduct is explained:

Specific deterrence demands that a penalty be imposed that bears a real relationship with the profit earned – even if it is difficult to identify a causal proportionate contribution to EBIT by the impugned phrases. (at p 100)

In this case, the Court was concerned to ensure that a penalty of $2.5 million was set high enough, at one third of EBIT (Earnings Before Interest and Tax), for Coles and the market to understand that it will not profit by conduct contravening the ACL:

[if the penalty were too low] given Coles’ size, the extent of sales and usage of the impugned phrases, the revenue captured and the period of time over which the contraventions took place, there was a risk that the penalty could simply be seen as part of the cost of doing business by Coles. (at p 45)

[And] the Court will seek to ensure that any penalty imposed in these cases will be adequate to ensure that conduct that is liable to mislead or deceive consumers will not be profitable: that penalties are not just a cost of doing business. (at p 100)

In other words, the penalty of $2.5 million was high enough to discourage others from considering it to be an acceptable cost of doing business.

Comment

In the Coles decision, the Federal Court has introduced a ‘useful check’ by measuring the penalty for a contravention of the ACL by the yardstick of the profit derived by the business from the offending conduct.

The decision provides a general warning to businesses to think carefully about using marketing slogans with ambiguous meanings.

According to the ACCC media release of 10 April 2015 “companies … should not use broad phrases in promotions that are deliberately chosen to sell products to consumers but which are likely to mislead consumers.”