In the dying days of 2015, the Australian Competition and Consumer Commission (ACCC) commenced Federal Court proceedings against Woolworths Ltd, 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, ACCC Chairman, described the alleged conduct as being “at the high end of egregious behaviour,” and that he was extremely “surprised and disappointed” that Woolworths would engage in such behaviour at the very same time that its arch rival Coles was in court defending similar allegations. Woolworths responded to the proceedings by observing that it believes its conduct was consistent with Australian and international industry practice and that it believes in working cooperatively with its suppliers.
In the ACCC proceedings brought against Coles Supermarkets, the ACCC secured $10 million in penalties and Coles agreed to a ‘high profile’ refund scheme administered by former Victorian Premier Jeff Kennett. At first glance, these two Court actions appear very similar and, consequently, the likely outcome appears obvious. However, a closer examination of publically available information suggests that the two cases might have some key differences. Unless the ACCC is holding back information that addresses these differences (in the form of witness statements and documents), then the apparent differences between the two actions may be enough to encourage Woolworths to press on with its defense.
SIMILARITY WITH THE COLES PROCEEDING
Coles admitted to the following matters, which are also (in the author’s view) likely to be present in the Woolworths proceeding, assuming that the ACCC is able to prove its case:
- The existence of power – Coles was (at the time) the second largest retailer of grocery products in Australia and in a position to dictate the terms, and the fact of, supply. Not surprisingly, the ACCC has made similar allegations against Woolworths and it seems unlikely that the ACCC will have difficulties with this aspect of its case.
- Supplier vulnerability – Coles sought rebates from 220 lower level suppliers for whom Coles represented a ‘very significant part’ of their business. Woolworths’ conduct is alleged to have applied to 821 ‘Tier B’ suppliers.
- Deliberateness of the conduct – Coles’ misconduct was serious, deliberate and repeated. We already know that Mr. Sims regards Woolworths’ alleged conduct to be at the upper end of seriousness and that it potentially applies to significantly more suppliers.
- Motive – Coles had clear profit targets, which were not being met and its rebate strategy was designed to achieve these targets and close a ‘profit gap’ for the preceding year. The ACCC alleges that in December 2014, Woolworths developed a strategy (which it called ‘Mind the Gap’) to urgently reduce (by 31 December) its expected half year gross profit shortfall which it believed would be significant.
In addition, there are some alleged similarities between the manner in which the supermarket giants went about trying to bridge their anticipated shortfall in profits, namely:
- Both supermarkets designed and adopted a strategy to reduce their respective anticipated profit gaps by seeking payments from their suppliers.
- Scripts were designed 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). Those scripts and the strategy are said to have been signed off by senior management.
- There was no pre-existing legal entitlement to the rebates or payments under existing contracts.
- Suppliers had two days to respond to the demand made by Coles to avoid it being ‘escalated’. Woolworth’s suppliers are alleged to have had four days to consider its request.
- Some suppliers to Coles paid the rebates despite the fact that they did not, at the time, consider that there was a proper basis for the payment. In the case of Woolworths, we know that it raised over $18 million in payments by suppliers and that at least some of these gave rise to complaints to the ACCC.
- Coles’ conduct was regarded as serious because the conduct was difficult for the ACCC to detect, due to the reluctance of smaller suppliers to report complaints. This isn’t mentioned in any of the ACCC’s public statements, but it’s not a huge stretch to assume that it will also be alleged in the Woolworths proceedings.
- Likewise, Coles’ actions showed a failure of its internal compliance systems and processes and this will also likely be the case if the ACCC is successful in its claim against Woolworths.
POSSIBLE KEY DIFFERENCES FROM THE COLES PROCEEDING
Significantly, in its press release, the ACCC did not assert that Woolworths had expressly (or even implicitly) threatened its suppliers with some form of commercial consequence or retaliation. At best (or worst), Woolworth’s 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.
This conduct is to be contrasted with the ACCC’s initial press release in its claim against Coles, which specifically stated that where the supplier refused to pay the rebate, the Coles strategy was to escalate the matter and to ‘threaten commercial consequences if the supplier did not agree’. Ultimately, the Court held that the payment of a rebate was not optional and the demands for payment were ‘deliberate, orchestrated and relentless’.
Another key difference between the two actions is that Coles admitted it used the unfair tactic of falsely stating the rebate the supplier was being asked to pay was based on Coles’ own data, assumptions and calculations, which were not verified or checked with the supplier. Another of the rebates related to ‘profit gaps’ caused by Coles’ own acts and omissions and matters that were largely or entirely outside the control of suppliers. A further rebate sought related to ‘penalties’ for late delivery without any calculation of the likely cost to Coles of any late delivery. In some instances, Coles refused to respond to requests to verify the data on which it relied or to engage in discussions with suppliers about the accuracy of that information.
In the current Woolworth’s matter, we don’t know the basis on which rebates were calculated or explained to suppliers (if at all). We only know that initially Woolworths was seeking $60 million from its suppliers and only collected about $18 million. We also know that contributions ranges from $4,291 to $1.4 million.
POSSIBLE IMPACTS ON WOOLWORTH’S RESPONSE
Of course, Woolworths will know the full extent of its ‘Mind the Gap’ strategy and whether or not these two missing elements are in fact ‘missing’. Without these key elements, we are left with an allegation that Woolworths asked its suppliers to voluntarily pay for rebates they were not legally obliged to pay. In that case, the Court will then need to determine whether such conduct is unconscionable or, as Woolworths asserts, simply a normal part of the commercial relationship between supplier and retailer.
Even against the background of a lower standard for unconscionable conduct (following the decision of the Full Federal Court in ACCC v Lux) there is a possibility that this conduct does not amount to ‘conduct against conscience by reference to the norms of society that is in question understood and applied in the context in which the circumstances arise’. If that is the case, then when the matter returns to Court in early February for directions, we may see Woolworths elect to proceed with the matter in the hope of avoiding what will likely be a substantial penalty and a refund scheme all in the tens of millions.