CATCHWORDS Trade Practices —- Resale price maintenance ~ Adm2zssion of breach by dofemdiant - s. 76. Assessment of pecuniary penalty TRADE PRACTICES COMMISSION v. MALLEYS LIMITED LOCKHART J. FRIDAY 13 JULY 1979 Per eee i oe ----5 -- - wwe ee oe re ene pe me Re ee eee ee IN THE FEDERAL COURT OF AUSTRALIA ) NEW_SOUTH WALES DISTRICT REGISTRY No. G 51 of 1978 GENERAL DIVISION IN THE MATTER OF the Trade Practices Act 1974 BETWEEN: TRADE PRACTICES COMMISSION Plaintiff Defendant ORDER JUDGE MAKING ORDER: LOCKHART J. DATE OF ORDER: FRIDAY 13 JULY 1979 ' WHERE MADE: SYDNEY UPON THE DEFENDANT by its counsel, undertaking toa the court that it will not by itself its servants or agenis engage in the practice of resale price maintenance in relation to "Whirlpool" appliances in contravention of the Trade Practices Act 1974, THE COURT ORDERS THAT: 1. The defendant pay to the Commonwealth of Australia by way of penalty in respect of the admitted contravention of the resale price maintenance provisions of the Trade Practices Act 1974 the sum of $10,000.00, 2. Pursuant to s. 77 of the Tradc Practices Act 1974 judgment be entered for the Trade Practices Commission on behaif of the Commonwealth of Australia for the sum of $10,000.00. 3. The defendant be ordered to pay the plaintiff's costs of and incidental to these proceedings. ere aes Se TE ree IE EE TET LR A, Fe TTR, EO AON RTM ET IT TRO SA ETE TTOT CEE STEED, IT 1" RTA . {oF IN TIE IEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY No. G 51 of 1978 GENERAL DIVISION IN THE MATTER of the Trade Practices Act 1974 TRADE PRACTICES COMMISSION BETWEEN: Plaintiff AND: MALLEYS LIMITED Defendant REASONS FOR JUDGMENT LOCKHART J. [3 fety 1979 4 ¢g This is a claim by the plaintiff, Trade Practices Commission ("the Commission") against the defendant Malleys Limited ("Malleys") for a pecuniary penalty and for an injunction restraining Malleys from engaging in the practice of resale price maintenance in relation to Whirlpool contrary to the provisions of s. 48 of the appliances, Malleys admais the Trade Practices Act 1974 ("the Act"). breaches. The facts are in a narrow compass. Malleys 1s a company incorporated in New South Wales, It carries on the business of manufacturing and supplying a large variety of goods including washing machines, dryers, refrigerators, freezers, 200/22 ranges and dishwashers under the trade or brand name of "Whirlpool", Clearly Malleys is a trading corporation. These goods are sometimes described as "white goods"; namely goods that are used in kitchens and laundries ag distinct from "brown goods", such as television sets, which are used in other rooms of the house. Malleys supplies approximately 20% of the "white goods" market in Australia. In about August 1977 Malleys was conscious of the severe competition that existed in the "white goods" market for consumer goods. Due to discounting, the profit margins of retatlers on Malleys! products was minimal. It caused Malleys considerable concern that the major retailers might cease to stock Malleys' products because of low profit margins In the interests of maintaining sufficient incentive for retailers, Malleys' marketing manager, Mr. Dunkerley, conceived a scheme ("the scheme") which would enable retailers to maintain sufficient profit levels and at the same time encourage them to actively and vigorously promote the sale of Malleys' products. The scheme which was due to commence on 1 January 1978, provided for retarlers to sell and advertise Malleys' products at not less than a specified price. Malleys would supply and invoice the retalers with the product at a price which only allowed the retailers a small mark-up. However, if the retailers sold and advertised the product at the price suggested by Malileys, they were able to maximise their profits as Maileys rewarded them with such incentives as co-operative advertising allowances; long-term incentive allowances; key product display allowances; bulk .»-/3 discount allowances and group performance bonuses. Of course, if the retailers sold below the price suggested by Malleys they would eat into their profit. Malleys wrote to some buying groups and those largor in November retailers, not being members of such groups, 1977 informing them of the scheme, Although the scheme was duc to commence on 1 January 1978 it only operated during part of that month, On 7 March 1978 Tts operation continued through February. Fry, an administrative acting on the advice of Mr. executive, sent telegrams to the regional sales managers of anforming them that Malleys and to various buying groups The scheme was completely Malleys, the scheme was suspended. . withdrawn on 10 March 1978. The circumstances surrounding the discovery of the admitted breach of the Act are not without significance. Mr. Fry gave evidence that it was his duty to administer control over credit, legal and general He is "admanistration and to service administration functions. aman who has no legal qualifications and has never had any His credibility as academic training in relation to the Act. a witness was never challenged and I accept him as a witness of truth. Mr. Fry gave evidence that on 1 December 1977 he He explained that, due to was sent a copy of the scheme, pressure of work, he gave the document merely a cursory @lance and that 1t was not until 1 March 1978 thal he Realising the implications, he studied it carefully. immediately took steps to have the scheme brought to an end. On 4 March 1978 he returm d from Perth where he had been rye nome ee arti ee -- ' for the preceding three days and arranged a meeting with senior execuliives of Malleys for 6 March 1978. Pursuant to that meeting, telegrams were sent to the various buying gnoups and retailers siating:- "Subject: Malleys 1978 Marketing Policy. There appears to be some doubt that our 1978 marketing policy complies with the requirements of the Trade Praciices Act and pending receipt of legal advice it is now suspended. Mallieys 1978" There followed letters to recipients of the telegrams stating inter alia:~ "This letter is to confirm and further explain our telegram of 7th March... There is absolutely no intention to specify such a price". On 20 March, Mr. Fry attended at the offices of the Commission in Canberra, knowing beforehand that the Commission had been making enquiries as to the scheme. Mr. Fry informed the Commission that he believed Malleys may have been in breach of the Act by introducing the scheme. Pursuant to a notice issued under s. 155 of the Act, Malleys made available to the Commission a considerable amount of ianformation which, the Commission concedes, went beyond thai required by the terms of the notice. Mr. Fry commenced investigations to determine whether any particular person had suffered damage by the implementation of the scheme. He ascertained that there was no such person; that no goods were withheld from any person or threatened to be withheld, and that no rebate had been withheld. He said that if any party had suffered it was Malleys itself having experienced substantial losses in the oe /5 Oar er months of March and April 1978. Both Mr. Fry and Mr. Dunkerley aid not escape the ancident unscathed. Mr. Fry said that he was severely reprimanded for his part in the affair. His excuse of pressure of work was dismissed as not acceptable. Mr. Dunkerley appeared to have suffered subsequently by being penalised in staff promotions. Although there were many other senior cxecutives of Malleys who were aware of the scheme, none appear to have been reprimanded for their failure to detect the breach of the Act. Although a somewhat curious feature of the case, I am satisfied with the explanation offered by Mr. Fry, that he was the person most conversant with Malleys'! obligations under the Act, having had lengthy discussions with Malleys! solicitors over two days at an earlier point of time. In Mr. Fry's opinion, it was he, and he alone, who was required to act upon matters that potentially involved the Act. Mr. Dunkerley was not called to give evidence, although a video cassette of an address given by him to sales staff, explaining the working of the scheme, was tendered in evidence. Mr. Fry said that Mr. Dunkerley was a man who had come up through the sales department with no tertiary qualifications and certainly no legal training, although he attended seminars on the Act. ..-/6 INT Bap re ee en rr te ee anidnade err The Commission seeks the 1mposition of a penalty for the breach by Malleys of s. 48 of the Act. Section 76 of the Act provides a maximum pecuniary penalty of $250,000.00 against a corporation in respect of a contravention of Part IV of the Act. The Commission alleges only one series of conduct and, therefore, one offence, In determining the pecuniary penalty to be imposed s. 76 requires the court to have:- "regard to all relevant matters including the nature and extent of the act or omission and of any loss or damage suffered as a result of the act or omission, the circumstances in which the act or omission took place and whether the person has previously been found by the court in proceedings under this Part to have engaged 4 in any similar conduct." Mr. Beaumont Q.C., who appeared for the respondents, submitted that this was not an appropriate case for the imposition of a substantial penalty. His submissions were based upon first, the nature and extent of the default and the circumstances in which it occurred; second, the absence of any loss or damage to consumers or the public; and third, the absence of prior relevant misconduct by Malleys. As to the first matter, the scheme was in operation for a short time only, namely part of January, February and the early part of March 1978. When the scheme was found to be in contravention of the Act, the officers of Malleys acted swiftly to correct the situation. Their actions are consistent with a genuine regret for Malleys! mistake, It 1s not disputed that the mistake was duc, at | least anitially, to Mr. Dunkerley's ignorance of the | alt Lect CERNE TENET eo aE PSAP ATT TREE TER AA BER A RT ET ET AAT ae pet St SRA ISS i mea -7- provisions of the Act. As to the second ground advanced by Mr. Beaumont, I accept that Mallecys did not wathhold goods from retailers, that there were no threats to do so, and that there were no allowances withheld. What I do not accept is Mr. Beaumont's submission that, because Malleys cannot quantify the damage, as between retailer and consumer, then so far as Malleys knows, there was no damage or loss. In my opinion, the inability of any party to quantify the damage under a breach of the retail price maintenance provisions of the Act is a consideration to' be given due weight; but I do place some reliance upon the economic philosophies under~ lying the Act which prima facie suggest that the actions of resale price maintenance lead to a distortion of the market mechanism and to economic waste. Australian case law in this field is in its infancy. One turns to the learning of the courts of other countries with care because of obvious differences in history, philosophy, market and legislation. However, the following passage from the opinion of the Supreme Court of the United States delivered by Mr. Justice White in Albrecht v. Herald 152-153 Co. 1968 390 U.S. 145/is not without relevance, albeit his Honour was talking essentially of maximum price fixing. His Honour said:~ "Maximum and minimum price fixing may have different consequences in many situations. But schemes to fix maximum prices, by substituting the perhaps erroneous judgment of a seller for the forces of the compeiitive market, may severely intrude upon the ability of buyers to compete and survive in that market. Competition, even in a single product, is not cast in a single mold. Maximum prices may be fixed too low for the dealer to furnish ---/8 Foren ren in errr gn erin ne TR we mets fee one > Sl eenensenadenesnetaiateaenntea siesta dceahdal ie aterenientn eat iieneenenataneameieaeeets et services essential to the value which goods have for the consumer or to furnish services and conveniences which consumers desire and for which they are willing to pay. Maximum price fixing may channel distribution through a few large or specifically advantaged dcalcrs who otherwise would be subject Lo significant non price competition. Moreover, if the actual price charged under a maximum price scheme is nearly always the fixed maximum price, which is ancreasingly likely as the maximum price approaches the actual cost of the dealer, the scheme tends to acquire all the attribuies of an arrangement fixing minimum prices." Mr. Porter Q.C. submitted, on behalf of the Commission, that where a party seeks to rely upon a defence of "accident" the onus 1s upon that party to establish that it took all reasonable precautions, yet nevertheless the accident still occurred. He submitted that in the circumstance. of this case Malleys' precautions were inadequate. Undoubtedly there were inadequacics 1n the system of control and in the educational instruction given to the marketing personnel and senior executives of Malleys in an area so basic as ,resale price maintenance. No evidence has been adduced as to the improved systems, 1f any, and improve- ments 1n the control of the marketing department of Malleys or other relevant department, that would provide guidance for future conduct. I have taken the circumstances which I have referred to earlier into account in considering the question of penalty and, in particular, the following:- (a) the fact that Malleys control some 20% of the "white goods" market in Australia; and therefore the implementation of the scheme, although for a short period of (b) (c) (c) (f) ner en een cere time, had the potential for substantially affecting the market in the area of retail price matntenance; I am not prepared to accept that the losses which Mr. Fry said were ancurred by Malleys in the months of March and April 1978, which he attributed to the implementation of the scheme, were causally related to the scheme. The sophistication of modern business as far too complex to enable me to accept that the requisite causal relationship has been established; although I accept that Mr. Fry genuinely believed this to be so}; The prompt action of Mr. Fry,once he discovered the breach of the Act, and the steps taken soon thereafter to bring the scheme to an end; The full and frank disclosure made by Malleys to the Commission in Canberra on 20 March 1978 and in response to the s. 155 notice; The conduct of the litigation, in particular the decision by Malleys not to file a defence aun the circumstances; The undertaking offered to the Commission in .+-/10 i en er ee tet rene remce erete — ASIA ME ere re Fr? -10- May 1978, which 1s still offered, not to engage in the practice of resale price maintenance in relation to "Whirlpool" applicances in contravention of the Aci; (g) The absence of any previous conviction of Malleys for contravention of the Act; (h) That, notwithstanding the good intentions on the part of Malleys, there is no evidence as to improved systems and control of the marketing department and other sections of Malleys to provide guidance for future conduct and to ensure that future breaches of the Act do not occur. In the circumstances in my opinion an appropriate pecuniary penalty is payment by Malleys to the Commonwealth of the sum of $10,000.00, As to the claim by the Commission for an injunction, s. 80 of the Act provides that the court may grant an injunction, whether or not it appears that the defendant antends to engage again, or to continue to engage, 1n conduct of the same kind. Mr. Porter Q.C. submitted that the remedy of injunction is an additional sanction to the imposition of a pecuniary penalty, and that 1t 1s an amportant feature of the Act which oee/11 ~ e. Pear ee Sey ae em re Re ee ae emer eerep, mute ee ee Tre ere ee ee ee -11- has as its corner stone the protection of the public. He relies upon the fact that there is no evidence as to improved systems or controls within Malleys that would be likely to prevent a recurrence of similar conduct in the future, notwithstanding the proffer by Mr. Beaumont Q.C., on behalf of Malleys, of the undertaking to which I have referred. Malleys has co-operated with the Commission in all reasonable respects. It has expressed contrition for the commission of the offence. As an undertaking in appropriate terms has been proffered by Mr. Beaumont Q.C. on behalf of Malleys, breach of which has the same consequence as breach of an injunction, I see no reason for not accepting it. Upon the defendant, by its counsel, undertaking to the court that it will not by itself its servants or agents engage in the practice of resale price maintenance in relation to "Whirlpool" applirances in contravention of the Trade Practices Act 1974, I make the following orders:- 1. That the defendant pay to the Commonwealth of Australia by way of penalty in respect of the admitted contravention of the resale price Maintenance provisions of the Trade Practices Act 1974 the sum of $10,000.00. 2. Pursuant to s. 77 of the Trade Practices x : Hy ? } re rere rr meas eine ee -~12- Act 1974 judgment be entered for the Trade Practices Commission on behalf of the Commonwealth of Australia for the sum of $10,000.00. 3. That the defendant be ordered to pay the plaintiff's costs of and incidental to these proceedings. ' i a Oats OS i OE oles 2 RL | | "+ — —