FEDERAL COURT OF AUSTRALIA PRACTICE AND PROCEDURE - whether the respondents have failed to comply with the orders of the Court so as to justify final orders against them - whether the cause of action is established - whether the respondents have breached s 61 of the Trade Practices Act 1974. TRADE PRACTICES - whether the respondents have been involved in a "trading scheme" in breach of s 61 of the Trade Practices Act. Trade Practices Act 1974 AUSTRALIAN COMPETITION AND CONSUMER COMMISSION v DESTINY TELECOM INTERNATIONAL INCORPORATED and others NG 143 of 1997 LEHANE J SYDNEY 17 September 1997 IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY NG 143 of 1997 BETWEEN: AUSTRALIAN COMPETITION AND CONSUMER COMMISSION Applicant AND: DESTINY TELECOM INTERNATIONAL INCORPORATED and OTHERS Respondent JUDGE(S): LEHANE J DATE OF ORDER: 17 SEPTEMBER 1997 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. The first respondent, whether by itself its servants or agents or howsoever be restrained from promoting, advertising, holding out or participating in the scheme or any similar scheme known as "Destiny Telecom International's Binary Marketing Program" being the scheme described in the document marked "A" and annexed to the application. 2. The first and fourth respondents, whether by themselves, their servants or agents or howsoever otherwise be restrained from: (a) publishing, distributing or disseminating any promotional or advertising material in respect of the scheme or any similar scheme; (b) inducing by any means whatsoever persons to participate in the scheme or any similar scheme; (c) disposing, transferring, disbursing, removing from the jurisdiction or otherwise parting with possession of money or other consideration received from persons for the purpose of participating in the scheme. 3. The first respondent repay any person an amount of money equivalent to that which the person paid to it, its servants or agents by reason of that person having participated in the scheme or any similar scheme. 4. The fourth respondent be restrained from promoting, advertising, holding out or participating in the scheme or any similar scheme. 5. The fourth respondent be restrained from being in any way, directly or indirectly, knowingly concerned in or a party to the first respondent's promotion of or involvement in the scheme or any similar scheme and from being in any way involved in the promotion or, or the involvement in, any similar scheme by any other corporation. 6. The first and fourth respondents pay the commission's costs of the proceedings so far as they relate to those respondents. THE COURT DECLARES THAT: 1. The first respondent engaged in conduct in contravention of s 61 of the Trade Practices Act 1974. 2. The fourth respondent is a person who was knowingly concerned in or a party to a contravention of s 61 of the Trade Practices Act 1974. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY NG 143 of 1997 BETWEEN: AUSTRALIAN COMPETITION AND CONSUMER COMMISSION Applicant AND: DESTINY TELECOM INTERNATIONAL INCORPORATED and OTHERS Respondent JUDGE(S): LEHANE J DATE: 17 SEPTEMBER 1997 PLACE: SYDNEY EXTEMPORE REASONS FOR JUDGMENT HIS HONOUR: The applicant, the Australian Competition and Consumer Commission (the Commission), seeks, by motion under O 10 r 7 of the Federal Court Rules, final orders against the first, third and fourth respondents. It does so on the footing that those respondents are in default in complying with orders of the court directing the taking of steps in the proceeding and on the basis of evidence which, the Commission submits, establishes that they have infringed, or have been concerned in an infringement of, s 61 of the Trade Practices Act 1974 in circumstances justifying the injunctive and declaratory relief which the Commission claims. There is no doubt that the first and fourth respondents have failed in serious respects to comply with orders of the court. The orders concerned are principally a series of orders made commencing in March 1997 for the giving of discovery and for making discovered documents available for inspection in Australia. A series of extensions of time in relation to discovery obligations was granted; nevertheless, although an uncertified but apparently verified list of documents was on 28 August 1997 forwarded to the Commission by the solicitors who had acted for the first and fourth respondents (apparently a list relating to the first respondent) discovery is incomplete and documents have not been made available for inspection: a specific order made on 11 July 1997 production of documents in Australia by 25 July 1997 was not complied with, nor have documents yet been made available. The first and fourth respondents were represented before me on some occasions by counsel and on other occasions by their solicitor when the orders as to discovery and inspection were made. Indeed, on 20 June 1997 the length of the extension of time was fixed having regard to submissions by counsel then appearing for those respondents as to the time necessary to ensure that documents required to be discovered and made available for inspection were in fact made available in Australia. None of the respondents was present or represented on the hearing of the motion. The solicitor who had acted for the first and fourth respondents on 11 and 13 August 1997 lodged notices stating that he had ceased to act for the first and fourth respondents completely. But the notices did not comply with O 45. A further notice, relating to both the first and fourth respondents, was filed on 5 September. Service of the present motion was served on the first and fourth respondents, by delivery to the solicitor's office, on about 15 August 1997. That, I think, was good service. It is clear enough that in mid-August, also, the solicitor received from the first respondent the list of documents to which I have referred, which he passed on. A search of records kept by the Australian Securities Commission, made this morning, indicates that the office of the solicitor is still the registered office of the fourth respondent. Having regard to the history of the matter, which it is unnecessary to recount in greater detail, I think there is force in a submission made to me by counsel for the Commission that the first and fourth respondents have evidenced little interest in seriously contesting the present proceeding. That brings me to the question whether the cause of action on which the Commission relies has been made out against each of those respondents. The decision of Drummond J in Australian Securities Commission v Macleod (1994) 130 ALR 717 reinforces the well established principle that final orders of the kind now sought ought to be made only where an applicant has established not merely a failure to comply with orders of the court but also, by admissible evidence, the cause of action relied upon, as to all its elements. As I have said, the Commission seeks relief in respect of what it claims to have been a breach of s 61 of the Trade Practices Act. It is said that the first respondent is the promoter of a trading scheme to which that section applies and that persons who participate in the scheme, or have applied or have been invited to participate, have made payments to or for the benefit of the first respondent: the payments being induced by a prospect of the receipt by those persons of payments in respect of the introduction of other persons who become participants in the scheme. It claims also that the scheme involves a contravention of s 61(2). For reasons which will become plain, it is unnecessary for me to examine sub s (2) in detail in order to come to a decision on this motion. Before passing to the evidence however, I should refer to s 61(4) which defines a trading scheme for the purposes of the section. A trading scheme is required to include various elements. They are these: goods or services or both are to be provided by the promoter and they are to be provided or supplied to other persons under transactions arranged or effected by persons who participate in the scheme, not all of those persons being promoters. As Mr Heydon points out in his commentary on s 61 (Trade Practice Law, 14.100), the section is unique, among those surrounding it, for its complexity. The complexity however appears to be both justified and required by the somewhat complex and in some cases elusive nature of the schemes which the provision is designed to attack. I have been referred to a number of documents in evidence before me, which clearly relate to a scheme "launched" in Australia of which the promoter was the first respondent. Affidavit evidence before me indicates that there was at least some promotion of it to members of the public. The documents, by the use of the name of the first respondent and what is apparently its logo (the name and the logo appear in the documents in association), clearly identify the first respondent with the scheme which the documents describe, as the originator and promoter of it. Perhaps the most useful of the documents, for the purpose of understanding the nature of the scheme, is one the front page of which is headed "Destiny Telecom International" and has at the foot the words "Australia Launch - the Phonecard Revolution" printed on it. A number of things seem to me clear from that document and they are reinforced by other documents in evidence. The scheme described is not in every respect easy to understand but there can be no doubt as to its essential elements. One is invited to participate in the scheme by paying an initial sum of US$100. It may be that a further payment is required for the acquisition of a "starter kit", but nothing in my view turns on the starter kit and it may be disregarded for the present purposes. The payment of $100 entitles the payer to two things. One is a telephone card (apparently a card which is imprinted or energised in some way so as to enable its holder to make telephone calls). The other is "commissions". The participant is introduced, having made the payment, to a scheme under which the participant is encouraged to invite others to join, numbering initially two, on the footing that those two will invite others and so on. By doing so, the initial participant becomes entitled to commissions. To an extent those commissions are applied in reinvestment in the scheme, that is in enabling the original participant to participate further, at higher levels or in further "phases". As to the balance, the commissions are to be paid in cash. The material makes two things very clear: one is that the principal benefit available to the participant, stressed by the documents, is the receipt of the commissions. It is the ability to make large sums of money which is quite plainly described as the principal attraction of participation. Undoubtedly the benefits of the card itself, and the various telephone services to which it will give access, are stressed also, but there is in my view no question that the principal benefit of participation in the scheme is said to be the receipt of money - indeed, the receipt of very large sums of money. Additionally, and this I think has some significance, it is made clear that there is particular benefit in early participation, and in participation as an initial participant rather than as somebody introduced by an initial participant because, it is said (and having regard to the nature of what is proposed, there is obvious logic in it) by participating at the top and early one is likely to make more money than if one were to participate further down or later. It is said that even participants introduced later may make a satisfactory return from participation. The outline I have just given is by no means a complete description of the scheme. The principal "launch" document is a quite closely printed and by no means altogether lucid document of 13 pages. It is, however, an accurate description of the important elements of the scheme, particularly those elements which are relevant to answering the question whether the promoter of the scheme has infringed s 61. It is clear that the elements of a "trading scheme" as that expression is defined in s 61(4) are met by the scheme as I have described it. The question then is whether the scheme is one falling within s 61(1). The material before me leaves me in no serious doubt that the first respondent is the promoter of the scheme to which I have referred. The aspects of the scheme which I have described mark it, in my view, as one where a person who is, or applies to become or is invited to become, a participant in it makes a payment (the initial $100) to or for the benefit of the promoter; and that person is induced to make the payment by reason of the prospect held out that payments or other benefits (payments because some of the commissions will be received in cash, other benefits because of the re-investment) will be received in respect of the introduction of other persons who become participants (it is by introducing two participants and by their introducing two more participants each and so on that the original participant earns the money which is clearly held out as the principal attraction and benefit of the scheme). I have said enough, I think, to indicate why it is in my view adequately established that the first respondent has infringed s 61. As for the fourth respondent, the material before me says little as to its actual participation in the scheme. The material does, however, sufficiently establish that the fourth respondent was established as a subsidiary of the first respondent for purposes associated with its operations in Australia. Those operations were the promotion of the scheme. In the absence of a defence on the part of the fourth respondent that puts any relevant matter seriously in issue, the evidence in my view justifies the conclusion that the fourth respondent is a person knowingly concerned in or a party to the contravention by the first respondent of s 61. In my view accordingly, the Commission has sufficiently made out the cause of action on which it relies against each of the first and fourth respondents. In those circumstances I see no reason why as a matter of discretion I should not grant the declaratory relief sought, nor why in the circumstances I should decline to grant injunctive relief. There is, I think, nothing in the form of the orders sought by the Commission which in relation to the first and fourth respondents requires any particular discussion. The orders are in a form which is familiar and which has not caused substantial controversy when applied in these proceedings to interlocutory relief of a similar nature. One order which, of course, was not sought on an interlocutory basis was an order that the first respondent refund payments it has received under the scheme. Such an order is among those which are sought, and I think it is appropriate to make it. Accordingly, in my view the appropriate course is to grant the orders sought in relation to the first and fourth respondents on the footing of breach of s 61. In consequence the orders which will be made, in relation to the first respondent, are orders 1, 2, 3, and 8 of those sought in the application and, in relation to the fourth respondent, the orders numbered in the application 4, 5, 6 and 10. The first and fourth respondents should pay the Commission's costs of the proceedings so far as they relate to those respondents. It remains to consider the position of the third respondent. Similar orders are sought against him to those made against the fourth respondent, on the basis that he was involved in the contravention of s 61 by the first respondent. The third respondent has been unrepresented throughout these proceedings. There has been correspondence between him and both the Commission and the Court; some documents in irregular form have been irregularly filed by him and have been received also by the applicant. He has not attended any directions hearings. He has complied late and irregularly with orders that he file a defence. It should be said that the form and sequence of the interlocutory directions made (not ideal, in retrospect) did not make the task of drawing a proper defence an easy one. In the circumstances I think the court ought not be satisfied that his non-compliance is sufficient to justify the orders sought against him, nor do I think the material presently before me sufficiently establishes contravention on his part. I think the appropriate course in relation to the third respondent is neither to make the orders sought in the motion nor to dismiss it but to stand it over so as to allow the Commission some little time to consider the position and to make submissions as to appropriate directions and orders when the matter is next before me. I shall stand the motion over for that purpose. I certify that this and the preceding six (6) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Lehane Associate: Dated: 17 September 1997 Counsel for the Applicant: Mr S White Solicitor for the Applicant: Australian Government Solicitor Date of Hearing: 17 September 1997 Date of Judgment: 17 September 1997