Australian Competition and Consumer Commission v 1Cellnet LLC

SCHEDULE 1 The Australian Competition and Consumer Commission (ACCC) commenced proceedings in the Perth Registry of the Federal Court of Australia against 1Cellnet LLC, a company incorporated in Delaware USA (the company 1Cellnet LLC) and other respondents on 16 August 2004 in relation to their alleged participation in an alleged pyramid selling scheme in contravention of section 65AAC of the Trade Practices Act 1974 (the proceedings). At Federal Court directions hearing on 5 November 2004 and 25 February 2005, the Honourable Justice Nicholson ordered the company 1Cellnet LLC to provide discovery by particular dates. The company 1Cellnet LLC failed to comply with those court orders. At a further directions hearing on 7 April 2005, the company 1Cellnet LLC was ordered to provide discovery by 15 April 2005, failing which its defence would be struck out. The company 1 Cellnet LLC failed to comply with this order. Following this default, on 23 June 2005, the Honourable Justice Nicholson made the following orders against the company 1Cellnet LLC: 1. An injunction pursuant to section 80 of the Act restraining the company 1Cellnet LLC by itself, its servants or agents (but not including the other respondents to the proceedings), and by any means whatsoever including by utilising the Internet, from:

(a) establishing, promoting, taking part in or otherwise participating in; or

(b) including or attempting to induce any person to establish, promote, take part in or otherwise participate in;

the 1Cellnet Scheme, or any scheme identically structured under whatever name in which:

(c) to take part in the scheme some or all new participants must make a payment (a 'participating payment') to another participant or participants in the scheme; and

(d) the participation payments are entirely or substantially induced by the prospect held out to new participants that they will be entitled to a payment in relation to the introduction to the scheme of further new participants.

2. An order pursuant to section 86C of the Act requiring the company 1Cellnet LLC to cause to be published and maintained for a period of six months, a notice on the Internet at any website which is owned, operated or maintained by the company 1Cellnet LLC setting out the Court's orders of 23 June 2005.

3. An order pursuant to section 86C of the Act requiring the company 1Cellnet LLC to cause to be published an advertisement, in nominated Australian newspapers setting out the Court's orders of 23 June 2005.

The Court also made a costs order against the company 1Cellnet LLC.

The other respondents are continuing to contest the proceedings.

Further information about the order can be found on the Federal Court website at http://www.fedcourt.gov.au.

WESTERN AUSTRALIA DISTRICT REGISTRY WAD 196 OF 2004

BETWEEN: AUSTRALIAN COMPETITION AND CONSUMER COMMISSION

REASONS FOR JUDGMENT 1 On 16 September 2004, I gave reasons in this proceeding in respect of service outside the jurisdiction on the first respondent: Australian Competition and Consumer Commission v 1Cellnet LLC [2004] FCA 1210. 2 On 7 April 2005, I made, relevantly, an order reading: 'The first respondent provide discovery of documents on oath by 15 April 2005, failing which, pursuant to Order 35A r 3(2)(e) of the Federal Court Rules, the defence of the first respondent be struck out.' It is not necessary to trace here the orders which led to the making of that order. 3 On 23 May 2005, the applicant moved the Court for orders consequent upon the failure of the first respondent to comply with the order for discovery dated 7 April 2005. The form of orders proposed to the Court had been to some degree adjusted to accommodate filing of written submissions on behalf of the respondents. In the course of oral submissions, it was further amended to meet the concerns of the second, third and fourth respondents. These reasons are why I make the orders in the form in which they appear. 4 The first order provides for injunctive relief restraining the first respondent 'by itself, its servants or agents or otherwise howsoever…' from doing certain acts. It specifically excludes the second, third and fourth respondents against whom it is alleged that they were the servants or agents of the first respondent. 5 The order also applies not only in respect of the 1Cellnet Scheme described in Schedule A to the application but also to any 'identically structured scheme under whatever name'. The reference to an 'identically structured scheme' is necessitated by evidence that a person attempting to log on to the website of the first respondent would be redirected to the website of Cell Wireless Corporation. That corporation promotes the Cell Wireless Scheme, which the applicant alleges is substantially similar to the 1Cellnet Scheme. To remove any doubt and to make it apparent to any reader of the order what it is directed to, as to what is meant by 'identically structured' the orders will have annexed to them Sch A to the application. 6 The second order is directed to the first respondent pursuant to s 86C of the Trade Practices Act 1974 (Cth) ('the Act'), requiring that respondent to publish certain things on the Internet at any website which is owned, operated or maintained by or on behalf of it. There is prima facie evidence that the first respondent operated or operates such a website. There is further evidence that an attempt to log on to that website results in redirection to www.cellwireless.com. The evidence does not explain whether the latter is in any way owned, operated or maintained by or on behalf of the first respondent. In my opinion the evidence is such as to support the making of the order and to support the breadth of reference to the ownership and operation of the site in the terms to which I have referred. 7 Order 3, also made pursuant to s 86C of the Act, will require the first respondent to undertake certain advertising. There is evidence that the number of Australian consumers affected by the Scheme in issue numbers in the thousands and those consumers are spread over all Australian States and Territories. In my view, those circumstances support the making of the order in the terms which it has been sought by the applicant. 8 The fifth order is designed to preserve the liberty to the applicant in respect of the making of further orders by way of declaratory relief against the first respondent subsequent to the resolution of the application in respect of the second, third and fourth respondents. 9 The parties were given an opportunity to confer and to settle the form of the notice. However, they were unable to agree in three aspects. First, the naming of the second, third and fourth respondents in the notice. Second, use of the term 'scheme' in the notice. Third, addition of a paragraph stating the reason for order against the first respondent and that there has been no finding of merits. The parties were invited to file submissions together with proposed forms of the notice for consideration. 10 As for the naming of the second, third and fourth respondents, I do not consider that it is necessary. The main purpose of the notice is to inform the public of the fact that a proceeding has been brought by the applicant for alleged breaches of the Act and that have been orders made against the first respondent. To name the other respondents could have prejudicial effect on them by association. 11 As for the use of the term 'scheme', although there has not been any declaratory orders made in relation to the nature of the activities of the first respondent such orders (as against the first respondent) will follow upon the conclusion of the proceeding against the other respondents. In the context of the allegations and prima facie case established by the statement of claim, it is appropriate for such activities to be described as '1Cellnet Scheme'. In addition, if the other respondents' names were removed, there would be no detriment to them. 12 As for the proposed second last paragraph by the second, third and fourth respondents, I do not think that it would be accurate to state that there has been no finding on the merits of the case. The order against the first respondent was made on the basis of the prima facie case set out in the statement of claim. Other statements made in the proposed paragraph are not necessary because they repeat what are already set out in the preceding paragraphs. Therefore, I consider that it would suffice to say, 'The other respondents are continuing to contest the proceedings'. 13 The making of the orders occurs in reliance on O 35A of the Federal Court Rules ('FCR'). The effect of O 35A r 2(2)(d) is that the first respondent is in default because it has not satisfied the applicant's claim and has failed to comply with an order of the Court in the proceeding. 14 Pursuant to O 35A r 3(2)(c), where a respondent is in default the Court may (the proceeding having been commenced by application supported by a statement of claim) give judgment against the respondent for relief. There are two conditions to that. The first is that the applicant appears to be entitled to that relief on the statement of claim. This rule does not require proof by way of evidence of the applicant's claim; rather it requires that on the face of the statement of claim there is a claim for the relief sought and that the Court has jurisdiction to grant that relief: Arthur v Vaupotic Investments Pty Ltd [2005] FCA 433 at [3] per Heerey J. The second is that the Court is satisfied it has power to grant the relief. The reasons which I gave on 16 September 2004 found that there was evidence showing a prima facie case against the first respondent. That case has not been answered. Therefore, the applicant appears to be entitled to its claim against the first respondent on the statement of claim. Furthermore, the orders sought are orders which would be within the Court's jurisdiction under the Act. I am satisfied the Court has power to grant the relief which I have described above. 15 So far as there may be any doubts as to the present status of the first respondent or the present scope of its activities particularly in terms of the ownership, operation or maintenance of an Internet website, the applicant relies upon the provisions of FCR O 37 r 3. That order provides that where an order requires a person bound to do an act and the person does not do the act, the Court may direct that the act be done by a person appointed by the Court: e.g. Australian Competition and Consumer Commission v Purple Harmony Plates Pty Ltd (No 3) (2002) 196 ALR 576. In addition to the circumstances I have mentioned as justifying each of the orders which I make, this is an additional circumstance negating any contention of futility in the making of such orders. 16 Additionally, there is evidence in the form of an affidavit of Mr Cromwell, sworn 18 May 2005, showing that the Federal Trade Commission in the United States can assist with the enforcement of orders obtained by the applicant and that there are provisions similar to s 601AH of the Corporations Act 2001 (Cth) in the law of Delaware which may be called in aid to enforce any orders as against the first respondent: see 8 Del. C. 1953, s 278; 56 Del. Laws, c. 50; 66 Del. Laws, c. 136, s 36. 17 It should also be recorded that although the solicitor on the record for the first respondent appeared by telephone, he did so on the basis that he was uninstructed. 18 For these reasons, I made the orders as on the record. I certify that the preceding eighteen (18) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Nicholson.

Counsel for the Applicant: SK Dharmananda

Solicitor for the Applicant: Corrs Chambers Westgarth

Counsel for the First Respondent: J Lambie

Solicitor for the First Respondent: Home Wilkinson Lowry

Counsel for the Second, Third and Fourth Respondents: MN Solomon and SL Brown

Solicitor for the Second, Third and Fourth Respondent: Gadens Lawyers

Date of Hearing: 23 May 2005

Date of Last Written Submissions: 3 June 2005

Date of Judgment: 23 June 2005