Australian Competition & Consumer Commission v Chaste Corporation Pty Ltd

Federal Court of Australia|2004-04-06|Before: Spender J

THE COURT ORDERS THAT:

The 7th respondent pay to the Commonwealth of Australia, within 90 days of this order, a penalty of $25,000 in respect of his being knowingly concerned in the conduct of a corporation engaging in the practice of resale price maintenance in contravention of section 48 of the Trade Practices Act 1974 (Cth), as alleged in paragraphs 106 and 116(c) of the statement of claim. THE COURT ORDERS BY CONSENT OF THE APPLICANT AND 7TH RESPONDENT THAT:
The 7th respondent be restrained, for a period of 3 years, from being directly or indirectly knowingly concerned in or party to, or aiding, abetting, counselling or procuring, a corporation, which supplies to another person products said to have health, weight loss or cosmetic benefits: 2.1 inducing or attempting to induce that other person not to sell those products at a price less than a price specified by that corporation; or 2.2 using in relation to those products a statement of price likely to be understood by that other person as a price below which the products are not to be sold.
The 7th respondent be restrained, for a period of 3 years, from promoting or taking part in any business in relation to weight loss or health industry products or services with which he knows or believes the 4th respondent to be directly or indirectly involved, unless he discloses to any prospective customer or franchisee of the business with whom he deals in the course of or in promotion of the business, his knowledge or belief as to the fact of, and the nature of, the involvement of the fourth respondent.
The 7th respondent pay the applicant's costs of and incidental to these proceedings in the agreed amount of $8,000 within 21 days of the date of this order. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

AND: CHASTE CORPORATION PTY LTD (IN LIQUIDATION) (ACN 089 837 329)

REASONS FOR JUDGMENT 1 The District Registrar has forwarded to me, pursuant to O 35 r 10 of the Federal Court Rules, a written consent to the making of orders between the Australian Competition and Consumer Commission ("the ACCC") and the seventh respondent in these proceedings, Constantine Xenoudakis. Order 35 rule 10 provides: '(1) A written consent of the parties to a proceeding, or of their representatives on the record, to the making of an order in the proceeding may be filed in the Registry at the proper place.' Order 35 rule 10(2) provides, amongst other things: '(a) if a written consent is filed, unless paragraph (b) applies, the Registrar must bring the matter before a Judge who, without any other application being made, may: (i) make an order in accordance with rule 10A; or (ii) direct the Registrar, or an officer acting with the authority of the Registrar, to draw up, sign and affix the stamp of the Court to an order in accordance with the terms of the consent; …' 2 The orders to which the parties have indicated their consent are as follows: THE COURT ORDERS THAT:

The 7th respondent pay to the Commonwealth of Australia, within 90 days of this order, a penalty of $25,000 in respect of ancillary involvement in a corporation engaging in the practice of resale price maintenance in contravention of section 48 of the Trade Practices Act 1974 (Cth), as alleged in paragraphs 106 and 116(c) of the statement of claim. THE COURT ORDERS BY CONSENT OF THE APPLICANT AND 7TH RESPONDENT THAT:
The 7th respondent be restrained, for a period of 3 years, from being directly or indirectly knowingly concerned in or party to, or aiding, abetting, counselling or procuring, a corporation, which supplies to another person products said to have health, weight loss or cosmetic benefits: 2.1 inducing or attempting to induce that other person not to sell those products at a price less than a price specified by that corporation; or 2.2 using in relation to those products a statement of price likely to be understood by that other person as a price below which the products are not to be sold.
The 7th respondent be restrained, for a period of 3 years, from promoting or taking part in any business in relation to weight loss or health industry products or services with which he knows or believes the 4th respondent to be directly or indirectly involved, unless he discloses to any prospective customer or franchisee of the business with whom he deals in the course of or in promotion of the business, his knowledge or belief as to the fact of, and the nature of, the involvement of the fourth respondent.
The 7th respondent pay the applicant's costs of and incidental to these proceedings in the agreed amount of $8,000 within 21 days of the date of this order. 3 I do not think it proper to make orders pursuant to O 35 r 10. The parties have been informed that I propose to regard the joint submissions in support of the making of those orders as the submissions of the parties in relation to the proceedings between the ACCC and the seventh respondent, and to give judgment in the light of them. 4 The ACCC and the seventh respondent, in those written submissions, acknowledge that it is for the Court under s 76 of the Trade Practices Act 1974 (Cth) ("the Act") to determine whether the contraventions in relation to s 48 of the Act occurred, and the quantum of any pecuniary penalties and other relief that should be ordered. Thus, O 35 r 10 is not applicable, in my opinion. The applicant and the seventh respondent in the joint submission say: '… the applicant and the 7th respondent make these submissions to the Court in order to assist the Court in coming to its own assessment of the level of penalties to be imposed and any other orders that the Court sees fit to make.' 5 As those joint submissions acknowledge, litigation to establish contraventions of Part IV of the Act can be very complex, time-consuming and costly. It is in the public interests for litigation under Part IV of the Act, as with other litigation, to be concluded in the shortest timeframe that is consistent with justice being done between the parties, permitting the Court and the ACCC to allocate their resources to other matters. To that end, the Federal Court has looked with favour upon negotiated settlements, provided that their terms recognise that the ultimate responsibility for the terms and making of the orders that resolve the proceedings lies with the Court: see Trade Practices Commission v TNT Australia Pty Limited & Ors (1995) ATPR 41375, NW Frozen Foods Pty Ltd v Australian Competition and Consumer Commission (1997) 71 FCR 285 ("NW Frozen Foods"), and see particularly the judgment of the Full Court of the Federal Court in Minister for Industry, Tourism & Resources v Mobil Oil Australia Pty Ltd [2004] FCAFC 72. 6 As the Full Court in that case (Branson, Sackville and Gyles JJ) said at par 77: 'The position of the Court where prosecution and defence agree on the appropriate sentence, as laid down in R v Gallagher, has similarities to the position where regulator and contravenor jointly submit that a particular penalty should be imposed in a civil penalty case. Just as the criminal court will take into account the prosecution's views on the appropriate sentence, so the court in the civil penalty case, as NW Frozen Foods explained, will take account of the regulator's position. But in neither case is the court relieved from the responsibility of exercising its own judgment as to the appropriate sentence (in criminal cases), or whether the proposed penalty is within the appropriate range for the contravention (in civil penalty cases). In each case, the Court should be satisfied that it is being given accurate, reliable and complete information on critical questions.' 7 In the proceedings between the ACCC and the seventh respondent, the seventh respondent withdraws his defence filed 1 July 2003, and the material facts relied on by the applicant and the seventh respondent in respect of the imposition of penalties for contraventions of s 48 of the Act are set out in the joint submissions. The material facts as agreed to by the parties in relation to the operations of Chaste Corporation Pty Ltd (in liquidation) ("Chaste"), the role of the seventh respondent, and the nature of the resale price maintenance involved are as follows: 'Operations of Chaste
Between about January 2000 and December 2000 Chaste promoted the sale of exclusive distributorships for the product "TRIMit", which was to be marketed as a weight-loss pill.
In promoting the sale of distributorships to potential purchasers, Chaste made representations as to, inter alia, the nature of the arrangement which purchasers (Area Managers) would enter into with Chaste, the pricing policy to be applied to TRIMit, the potential revenue to be earned by Area Managers and the business opportunity afforded, the marketing and advertising support which would be provided to Area Managers by Chaste, the identity of the persons controlling Chaste's operations, and the origins and efficacy of TRIMit.
Between about August 2000 and December 2001 Chaste made representations to area managers in relation to, inter alia, the causes of delays to Chaste's promised public relations campaign and advertising schedule, and the availability of promised refunds to Area Managers who sought to terminate their agreement with Chaste.
Throughout its operations, Chaste concealed the involvement of the 4th respondent in the company.
The ACCC has alleged the conduct of and representations made by Chaste described above were misleading or deceptive, or likely to mislead or deceive, and that Chaste engaged in the practice of resale price maintenance in relation to the product TRIMit.
The relevant conduct as it involved the 7th respondent is specified below. Role of the 7th respondent
Mr Xenoudakis was engaged by Chaste from February 2000 until May 2001, in the following positions: 13.1 from February 2000 until August 2000, as Sales Representative; 13.2 from August 2000 until December 2000, as General Manager; 13.3 from December 2000 until May 2001, as International Sales Director.
Between February and August 2000, as a sales representative, the 7th respondent acting on behalf of Chaste recruited Area Managers to enter into exclusive distribution agreements with Chaste for the sale to retailers of TRIMit.
In recruiting Area Managers, the 7th respondent conducted interviews at which he: 15.1 showed the interviewees a video prepared by Chaste, the contents of which were known to him; 15.2 showed or gave to the interviewees documents prepared by Chaste, the contents of which were known to him; 15.3 followed a script which was prepared for him by Chaste.
The video, documents and script are described in the affidavit of the 7th respondent filed herewith. The video, documents and script contained representations which persuaded interviewees to enter into Area Management Agreements with Chaste. The applicant has alleged these representations contravened provisions of Part V of the Act.
The 7th respondent believed the contents of the video, documents and script to be true. He was however aware that this material did not disclose that the 4th respondent was involved with the company. He deliberately concealed the fact of the 4th respondent's involvement from Area Managers. He believed potential area managers would be less likely to buy a distributorship if they knew of the 4th respondent's involvement.
Between February and August 2000, 25 of the persons interviewed by the 7th respondent entered into Area Management Agreements with Chaste, for which he received commission of $3000. The seventh respondent received commissions of between $1000 and $3000 for a further six Area Management Agreements entered into between August 2000 and February 2001. The 7th respondent signed approximately 27 Area Management Agreements on behalf of Chaste. Resale price maintenance
The terms of the Area Management Agreements were set out in the documents entitled: 'Area Management Agreement', 'Area Management Proposal', and 'We Answer Your Questions'. A term of the Area Management Agreements was that Chaste would be responsible for fixing the price at which Area Managers sold TRIMit to retailers, and that there would be no discounting or price cutting without the written permission of Chaste. To the knowledge of Mr Xenoudakis, in entering into the agreements, each of the Area Managers and Chaste agreed that the respective Area Manager would not sell stock to retailers at less than the price specified by Chaste.
The Area Management Proposal contained statements of price that were likely to be understood by Area Managers as the prices below which the stock was not to be sold by them to retailers, namely: 20.1 "it is most important that a regulated price policy be adhered to in the interest of all parties involved"; [original emphasis] 20.2 "we have therefore established the following as the costing structure to be applied in all markets".

8 As the joint submissions indicate, the ACCC alleges, and Mr Xenoudakis admits, that Mr Xenoudakis was knowingly concerned in or party to, and aided or abetted breaches by Chaste of : (1) section 52 of the Act by, while representing to potential area managers that Chaste was a good business opportunity, deliberately concealing the involvement of Peter Foster from area managers and potential area managers, and thereby misrepresenting the risks associated with the Chaste business opportunity; and (2) the resale price maintenance provisions in ss 48 and 96 of the Act, by his role in recruiting Area Mangers to enter into Area Manager Agreements with Chaste between February 2000 and December 2000. 9 Section 76 of the Act sets out matters to which the Court should have regard in determining the an appropriate level of penalty. French J considered the principles relevant to the assessment of a pecuniary penalty under the Trade Practices Act in Trade Practices Commission v CSR Limited (1991) ATPR 41-076 at 52,152 - 52,153. The Full Court in NW Frozen Foods and J. McPhee & Son (Australia) Pty Ltd and Others v Australian Competition and Consumer Commission (2000) 172 ALR 532 referred to further factors. An important object of a penalty under s 76 of the Act is deterrence: Trade Practices Commission v Stihl Chain Saws (Aust) Pty Ltd (1978) ATPR 40-091 at 17,896. 10 The ACCC and the seventh respondent have reached agreement as to the pecuniary penalty to be submitted to the Court for its approval. They submit that a penalty of $25,000 is appropriate, and within the range of penalties a court would order in the circumstance on which the parties are agreed. Whether a court should accept a penalty that is agreed between the Commission and the respondent was considered by Sheppard J in Trade Practices Commission v Allied Mills Industries Pty Ltd and Others (No 4) (1981) 37 ALR 256, particularly at 259. The Full Court in NW Frozen Foods said at 298: 'The question is … simply whether, in the performance of the Court's duty under s 76, this particular penalty proposed with the consent of the corporation involved and of the Commission, is one that the Court should determine to be appropriate.' and at 291, having referred to the beneficial consequences of a negotiated resolution: 'would be jeopardised if corporations were to conclude that proper settlements were clouded by unpredictable risks. A proper figure is one within the permissible range in all the circumstances. The Court will not depart from an agreed figure merely because it might otherwise have been disposed to select some other figure, or except in a clear case.' 11 Gyles J stated a case for the Full Court in Minister for Industry, Tourism and Resources v Mobil Oil Australia Pty Ltd [2003] FCA 1454 which involves the question of whether the approach of the Full Court in NW Frozen Foods should be followed, and in what circumstances. That was heard by a Full Court on 19 February 2004 and judgment was delivered on 30 March 2004: [2004] FCAFC 72. As earlier indicated, the Full Court made it plain that Judges of the Federal Court, in making orders imposing penalties, do not simply rubber stamp agreements between the parties. 12 There are, of course, many cases where the Court has been prepared to make orders which the parties suggest are appropriate in the circumstances that they have agreed. 13 The joint submission by the parties says: 'In agreeing to recommend to the Court a penalty of $25,000 in respect of Mr Xenoudakis, the parties agreed that a 50% reduction in what otherwise would have been recommended, was appropriate given the high level of co-operation after proceedings were instituted.' 14 In a judgment delivered on 12 March 2003 in Australian Competition and Consumer Commission v Chaste Corporation Pty Ltd [2003] FCA 180, a case concerned with whether the Court had power to issue what might be termed a preservation of assets order so as the better to secure any pecuniary penalty that the Court might later impose, or in respect of better securing a possible future order for costs, I said at par 20: 'The ACCC referred to a number of cases where civil penalties had been imposed concerning retail price maintenance. The highest penalty imposed on an individual was $75,000 in ACCC v Hugo Boss (Australia) Pty Ltd (1996) ATPR 41-536.' 15 On all of the material before the Court, I am satisfied that the penalty that is recommended by the applicant and the seventh respondent, and the other orders to which they consent which are contained in the short minutes of order that accompany the joint submissions on penalty, are orders that are appropriate for the Court to make, except that I prefer to use the statutory description of the seventh respondent's conduct, rather than "ancillary involvement" as proposed by the parties in the short minutes of order. As so amended, I make those orders. I certify that the preceding fifteen (15) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Spender .

Associate: Dated: 6 April 2004 Solicitor for the Applicant: Australian Government Solicitor

Solicitor for the Respondent: N.R. Barbi, Solicitor

Trade Practices Act 1976(Cth)

Trade Practices Act 1974(Cth)ss 48, 76, Part

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