On 8 December 2016, the Federal Court handed down its decision in ACCC v Woolworths Limited: dismissing the ACCC’s case against Woolworths Limited (Woolworths) in which it alleged that the supermarket chain had engaged in unconscionable conduct in contravention of s21(1) of the Australian Consumer Law (ACL). In the proceedings, the ACCC alleged that Woolworths acted unconscionably in the design and implementation of a scheme to seek payments from suppliers to make up an expected shortfall in Woolworths’ profit (known internally as the ‘Mind the Gap’ scheme) (Scheme). Given the ACCC’s victory against Coles Supermarkets Australia Pty Ltd (Coles) in 2015, the case bears examination as to how two similar fact scenarios could lead to such different results.
1. Why did the ACCC win against Coles, but not Woolworths?
In 2014, the ACCC commenced two sets of proceedings against Coles alleging:
- in the first proceeding, Coles’ Active Retail Collaboration program was an unconscionable attempt to extract rebate payments from certain suppliers based on purported benefits to the suppliers that Coles asserted had resulted from changes Coles had made to its supply chain
- in the second proceeding, in 2011 Coles had demanded payments from specific suppliers, including payments for ‘profit gaps’, waste and fines or penalties for alleged short or late deliveries by those suppliers.
Critically, shortly after proceedings were commenced, Coles admitted the allegations and consented to judgement in both actions.
By contrast, in the ACCC’s action against Woolworths:
- the ACCC alleged that Woolworths acted unconscionably in the design and implementation of the Scheme, rather than in respect to its dealings with particular suppliers
- unlike Coles, Woolworths denied any wrongdoing and defended the matter through to trial
- the ACCC did not call any supplier affected by the Scheme and ran the case on the basis of documentary evidence.
In a practical sense, this decision by the ACCC as to how to present its case allowed Woolworths to control the narrative of the case and strongly advance its ‘business as usual defence’ (as outlined in our earlier article ‘Business as usual? Woolworths denies unconscionable dealings with suppliers’).
2. What were the key allegations made by the ACCC that the Scheme was unconscionable?
The ACCC advanced a number of arguments to supports its allegation that the Scheme was unconscionable. These arguments included:
- there was no legitimate basis for Woolworths to seek payments under the Scheme
- in asking for payment from suppliers, Woolworths was taking advantage of its stronger bargaining position and exerting undue pressure (including implicit threats
- the Scheme was speculative and designed to take advantage of vulnerable suppliers
- Woolworths conduct was inconsistent with prevailing norms in both the supermarket industry and the community generally
- the Scheme could not properly be considered ‘business as usual’ and was a last minute ‘grab for cash’
- the profit gap that Woolworths was trying to fill was not the fault of the suppliers
- the Scheme was retrospective in its application
- the Scheme was launched without being foreshadowed to suppliers
- Woolworths didn’t have any contractual entitlement to the money sought from the suppliers
- the amount sought from suppliers was arbitrary
- while couched as requests for payment (known in the industry (apparently) as ‘asks’), they were in truth demands for payment
- the financial calculations relied on by Woolworths to justify the payments were arbitrary and no attempt was made by Woolworths to check if the calculations were rational
- Woolworths made no allowance for its own responsibility for poor performance or the shortfall in profitability
- the significantly scaled back target implemented by Woolworths under the Scheme, revealed that the Scheme was a complete ‘try on’.
3. What was Woolworths defence and why did it succeed?
Woolworths successfully defended the ACCC’s allegation largely because it was able to show that such requests are part of the ordinary course of business in the supermarket market and in dealings between suppliers and retailers. In addition to convincing the Court that its conduct was ‘business as usual’, Woolworths was able to show that its approach to, and methodology for, the Scheme was reasonable and considered. Woolworths’ successful defence was based on arguments that:
- The ACCC did not truly understand the market (and therefore the context) in which the conduct took place. It argued that the ACCC’s case relied on a ‘simplified and mistaken characterisation of the commerce in question’.
- Woolworths regularly and routinely engages in ongoing and ad hoc discussions with suppliers about different levels of support that the suppliers can provide to Woolworths. This support can take many forms: being promotional support; pricing discounts; rebates; and, in some cases, direct payments to Woolworths – all of which ultimately impact of the cost of goods to Woolworths. The Scheme should be understood as being no more than a continuation of this conduct, which was common throughout the supermarket sector.
- The fact that only a small number of the 821 suppliers deemed to be underperforming were contacted under the Scheme meant that the requests made under the scheme were measured and justified. This is because suppliers were only contacted after both an objective review of the supplier’s performance and a subjective analysis had been conducted to determine whether it was reasonable to ask a particular supplier for a payment. In other words, the requests were made after some analysis and weren’t simply an attempted ‘cash grab’ from its suppliers.
- Responsibility for the subjective assessment of the position and performance of different suppliers was placed in the hands of those that knew the suppliers, and their circumstances, best – namely, buyers and category managers. In making requests, the buyers and category managers were given scripts that required them to at all times be ‘polite and courteous’ and not make unreasonable demands or threaten suppliers.
- The evidence led by Woolworths (and in the absence of evidence from the ACCC) did not support a finding that Woolworths held a superior bargaining position with respect to the suppliers or that the suppliers were in a vulnerable position in their negotiations with Woolworths.
These arguments were successful due to the detailed evidence led by Woolworths, which included evidence on the usual nature of conduct in the supermarket industry; the usual types of communications between suppliers and retailers; different types of support sought by retailers from suppliers (and vice versa); and the different types of financial data used by supermarkets to assess the performance of suppliers and the amount of supplier support that might be required to improve the performance of that suppliers products in store.
In comparison, the ACCC relied only on documents (including emails between Woolworths and its suppliers) and did not adduce oral evidence from suppliers affected by Woolworths’ actions or its own industry experts. This reliance on only documents was regarded by the trial Judge as presenting an incomplete record of communications between the parties and didn’t allow him to determine why a supplier was prepared to make a payment. The ‘why’ was regarded Justice Yates as being of critical importance given the requirement of the legislation that the conduct be assessed ‘in all of the circumstances’. Accordingly, in challenging Woolworths’ evidence, the ACCC was left to try to score concessions from Woolworths’ witnesses, which it failed to do.
4. Does the decision change the law on unconscionable conduct?
Unsurprisingly, the decision is very heavy on the facts and doesn’t have much to say on the law. However, there is some analysis of the law of unconscionable conduct and, in particular, the relevance of ‘moral obloquy’ (as well the slight suggestion of a new standard of ‘commercial morality’) when determining whether or not conduct is unconscionable. In assessing the standard against which Woolworths’ conduct was to be measured His Honour Justice Yates made a number of statements that are not free from controversy.
- In arriving at the ‘norms of society’ (as required following the decision of the Full Federal Court in ACCC v Lux), his Honour adopted a narrower interpretation of the norms as they exist between supplier and retailer, rather than the broader community. This then allowed him to find that as Woolworths’ methodology and conduct was widespread in that sector, it wasn’t unconscionable. With respect, this is a curious standard against which to measure conduct – it suggests that if an industry regularly engages in conduct that the wider community might find to be aggressive, oppressive or otherwise unacceptable, then conduct in that industry is less likely to be unconscionable. This is potentially a significant curtailing of the law of unconscionable conduct and one that the ACCC is unlikely to accept.
- In briefly examining earlier decisions that considered the concept of unconscionable conduct, his Honour appears to have reasserted the significance of the reasoning of (then) Chief Justice Spigelman and the test of unconscionable conduct as requiring ‘a high level of moral obloquy’ despite the Full Court’s reasoning in ACCC v Lux. In doing so, his Honour placed significant emphasis on not capturing (and in doing so, proscribe) conduct in trade and commerce that is merely unfair or unjust. The general impression is that his Honour was keen to lift the bar for unconscionable conduct to a much higher level than was argued for the ACCC.
- While acknowledging the broad parallels between this case and the successful prosecutions against Coles, his Honour distinguished the parties’ conduct on the basis of the manner in which the two cases were pleaded in that the allegations against Woolworths concerned the design and implementation of the Scheme and not the treatment of individual suppliers. The trial Judge’s approach does lead to the curious result that Coles’ treatment of individual suppliers is unconscionable, but the Scheme (which delivered similar outcomes and treatment) is not unconscionable. This outcome may curtail the application of s21(4)(b) of the ACL, which was inserted by Parliament to clarify that a system of conduct or pattern of behaviour is capable of amounting to unconscionable conduct and how the ACCC is meant to prosecute such matters – a key plank of the ACCC’s case.
5. Does this make it lawful for supermarkets to seek payments from suppliers outside of contract arrangements?
The short answer is ‘yes, sometimes’. It’s clear from Justice Yates’ reasons that there is nothing wrong with a supermarket approaching suppliers to re-open discussions about price or other types of supplier contributions that can influence, and are therefore a factor of, a price set under that concluded contract. However, any such approach cannot contain within it any express or implicit threat of retribution and the supermarket must have some legitimate and rational basis for making the request and determining the amount claimed. Even so, where the supplier is vulnerable, in the sense that the supermarket is its major customer and on whom it is significantly reliant, then the supermarket must be on alert that it doesn’t stray from ordinary commercial dealings carried out in the supermarket industry and into threats, unfair pressure or unfair tactics.
6. Is the ACCC likely to appeal?
There is no doubt that the ACCC are not going to be happy with this result. The public reaction from suppliers to the outcome has not been favourable; and they have been unfairly criticised by Woolworths for the time and expense ‘wasted’ by the proceedings. And while the ACCC must shoulder some of the responsibility for the result given the way the matter was run, on the whole there are aspects of the judgement that deserve examination and that may justify an appeal. In particular:
- The apparent raising of the bar for unconscionable conduct matters and the references to moral obloquy.
- The use by the trial Judge of the standard of behaviour in the supermarket sector as the norm against which the conduct was to be judged (rather than the standards of the broader community).
- His Honour’s analysis of ‘normal’ commercial negotiations and discussions between suppliers and Woolworths, none of which appear to have the same characteristics as the Scheme. In particular, the fact that in the three example negotiations cited by the trial Judge, Woolworths invited the suppliers to have conversations with it about poor levels of product performance and then different types of product support that might be provided to improve the performance of a product. These critical elements do not appear to have been present in the Scheme.
- His Honour’s willingness to accept the Scheme as ‘business as usual’ despite its unusual characteristics, such as:
o Woolworths apparent motivation for seeking the payments
o requests for support being limited to a cash contribution
o payments from suppliers not being linked to any plan to improve the future performance of the product in question
o the shorter time frames available to the suppliers to decide whether or not to agree to the request.
- The lack of any real analysis of and comparison to the conduct in the two Coles matters.
- The finding that the ACCC had not established that Woolworths was in a superior bargaining position or that suppliers were vulnerable.
- The approach of his Honour to the evidence places in doubt the import and effect of s21(4)(b) of the ACL, which was inserted by Parliament to clarify that a system of conduct or pattern of behaviour is capable of amounting to unconscionable conduct and how the ACCC is meant to prosecute such matters.
The ACCC has until mid January 2017 to decide whether it wishes to appeal.