FEDERAL COURT OF AUSTRALIA Australian Competition and Consumer Commission v Cornerstone Investment Aust Pty Ltd (No 2) [2017] FCA 393 File number: NSD 1610 of 2015 Judge: GLEESON J Date of judgment: 18 April 2017 Catchwords: DISCOVERY – discovery of documents – relevance of requested discovery – whether categories unclear – whether requested discovery oppressive – whether requested discovery is a "fishing expedition" – application for interrogatories in lieu of discovery – whether documents requested relevant – whether interrogatories oppressive – whether appropriate to proceed by way of interrogatories as opposed to discovery – application granted in part Legislation: Australian Consumer Law Federal Court of Australia Act 1976 (Cth) Federal Court Rules 2011 Cases cited: Alliance Craton Explorer Pty Ltd v Quasar Resources Pty Ltd (No 4) [2013] FCA 1044 Aspar Autobarn Co-Operative Society v Dovala Pty Ltd (1987) 16 FCR 284 Austal Ships Pty Ltd v Incat Australia Pty Ltd (No 3) [2010] FCA 795; (2010) 272 ALR 177 Bailey v Beagle Management Pty Ltd [2001] FCA 60; (2001) 105 FCR 136 Bertran v Vanstone [1999] FCA 1753 Caltex Refining Co Pty Ltd v AMWU [1990] FCA 483 Construction, Forestry, Mining & Energy Union v Rio Tinto Coal Australia Pty Ltd [2014] FCA 462 Dorajay Pty Limited v Aristocrat Leisure Limited [2005] FCA 588 Gloucester Shire Council v Fitch Ratings, Inc [2016] FCA 587 Grant v Downs [1976] HCA 63; (1976) 135 CLR 674 Trade Practices Commission v CC (New South Wales) Pty Ltd (No 4) [1995] FCA 556; (1995) 58 FCR 426 WA Pines Pty Ltd v Bannerman [1980] FCA 79; (1980) 30 ALR 559; (1980) 41 FLR 175 Date of hearing: 24 March 2017 Registry: New South Wales Division: General Division National Practice Area: Commercial and Corporations Sub-area: Regulator and Consumer Protection Category: Catchwords Number of paragraphs: 48 Counsel for the Applicants: Mr N O'Bryan SC with Mr D Tynan Solicitor for the Applicants: Australian Government Solicitor Counsel for the Respondent: Mr G Sirtes SC Solicitor for the Respondent: Whittens & McKeough Pty Ltd ORDERS NSD 1610 of 2015 BETWEEN: AUSTRALIAN COMPETITION AND CONSUMER COMMISSION First Applicant COMMONWEALTH OF AUSTRALIA Second Applicant AND: CORNERSTONE INVESTMENT AUST PTY LTD ACN 082 383 640 Respondent AND BETWEEN: CORNERSTONE INVESTMENTS AUST PTY LTD ACN 082 383 640 Cross-Claimant AND: AMITY EDUCATION PTY LTD ACN 168 846 286 (and another named in the Schedule) First Cross-Respondent JUDGE: GLEESON J DATE OF ORDER: 18 APril 2017 THE COURT ORDERS THAT: 1. By 9 May 2017, the respondent give discovery of the following: (a) The respondent's: (i) monthly financial reports; (ii) monthly statement of cash flows; (iii) bank statements; (iv) quarterly accounts; and (v) annual accounts, for the financial years ended 30 June 2014 and 30 June 2015; (b) all documents evidencing or recording the number or amount of "inducements" offered by the respondent to consumers to enrol in a course, including cash payments and laptop computers, to consumers between 1 March 2014 and 30 June 2015 ("Relevant Period"). 2. The applicants have leave to administer the following interrogatories, which the respondent must answer by 9 May 2017: (a) For each student Enrolled in any of the Empower Courses between 1 March 2014 and 30 June 2015, state the: (i) name of the employee of the respondent or the recruiter involved in marketing and enrolling that student in the Empower course; (ii) number of times the student had logged into the respondent's online learning platforms (being Moodle eZone or FinPa), where: (iii) "Enrolled" means where a person has been admitted to a course and did not notify the respondent in writing by the census date for the first unit of study that they sought to cancel their enrolment in the course. (iv) "Empower Course(s)" means any iteration of a diploma of management, a diploma of early childhood education and care; or a diploma of business offered by the respondent to consumers. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. REASONS FOR JUDGMENT GLEESON J: 1 The parties have substantially agreed on discovery to be provided by the respondent ("Empower"). However, the applicants ("ACCC") seek discovery of two disputed categories of documents and to administer interrogatories. Principles governing application Discovery 2 Rule 20.11 of the Federal Court Rules 2011 ("Rules") provides that a party must not apply for an order for discovery unless the making of the order sought will facilitate the just resolution of the proceeding as quickly, inexpensively and efficiently as possible. 3 The Court will not order discovery as a matter of course unless discovery is necessary for the determination of issues in the proceeding: Alliance Craton Explorer Pty Ltd v Quasar Resources Pty Ltd (No 4) [2013] FCA 1044 at [33]; Construction, Forestry, Mining & Energy Union v Rio Tinto Coal Australia Pty Ltd [2014] FCA 462 at [94]. 4 In Trade Practices Commission v CC (New South Wales) Pty Ltd (No 4) [1995] FCA 556; (1995) 58 FCR 426 at 436-437, Lindgren J considered the meaning of the word "necessary" in the context of O 15 r 15 of the former Federal Court Rules. Although the requirement of "necessity" is not explicitly retained in the current Rules, the citations above make plain that the concept has continued relevance in justifying an application for discovery. In particular, it directs attention to the potential evidentiary difficulties of a party, taking into account the interests of the party to whom the order is to be directed. Lindgren J concluded that, where one party and not the other was likely to have documents relating to a matter in question, it was prima facie "necessary" that discovery be ordered. 5 This conclusion was subject to the qualification that the Court will not grant an application for discovery where to do so would permit "fishing", that is, to seek evidence to support a claim which is essentially speculative in nature. In Dorajay Pty Limited v Aristocrat Leisure Limited [2005] FCA 588, Stone J described "fishing" by reference to the concept of "legitimate forensic purpose": it would be fishing where "documents are sought in order to discover if there is a case [and] not to support a case that has already been articulated". Her Honour referred to the observation of a Full Court in Bailey v Beagle Management Pty Ltd [2001] FCA 60; (2001) 105 FCR 136 at [27], 143, that the concept of fishing had undergone "substantial rethinking" in recent years. The Full Court referred to the comment of the majority of the High Court in Grant v Downs [1976] HCA 63; (1976) 135 CLR 674 at 685 to the effect that the public interest requires that in the interests of a fair trial "all relevant documentary evidence" should be available. The Full Court commented at 143: The applicants' suggested rule imposes a requirement that, to avoid the stigma of fishing, a party must already be in possession of some evidence before issuing a notice to produce (or, presumably, any other compulsive interlocutory process). But historically the concept of fishing was not concerned with the prior possession of evidence but rather that there was a prior pleading which raised issues for which the evidence sought by the process would be relevant. 6 The Full Court explained that the historical principle was that the right to discovery is limited to supporting a pleaded case. At 144, the Full Court gave the following example: This principle underlies the common practice whereby a plaintiff who has no recollection of the accident issues a statement of claim alleging negligence by reason of excessive speed, failure to keep a proper lookout etc. The plaintiff then interrogates the defendant as to factual circumstances of the accident. The plaintiff may have no other evidence, and is plainly seeking to make out a case, but such interrogatories are not considered objectionable on the ground of fishing. 7 Generally, a fishing objection should not be permitted to succeed to the extent that it prevents a party from obtaining the material that is necessary for a fair trial: cf Bertran v Vanstone [1999] FCA 1753 at [22]; Caltex Refining Co Pty Ltd v AMWU [1990] FCA 483. 8 An application that is oppressive may also be described as fishing: cf. Gloucester Shire Council v Fitch Ratings, Inc [2016] FCA 587 at [24]. Interrogatories 9 Interrogatories are a form of discovery. By r 21.02 of the Rules, the ordinary position is that a party would not be ordered to answer interrogatories until after discovery. However, the rules should not be applied inflexibly: see Central Practice Note: National Court Framework and Case Management at [7.3]. 10 Relevantly, an object of interrogatories is to obtain admissions as to facts which will support the case of the interrogating party: WA Pines Pty Ltd v Bannerman [1980] FCA 79; (1980) 30 ALR 559 ("WA Pines") at 574; (1980) 41 FLR 175 at 190. 11 An interrogatory may be objected to when it is too wide, fishing or immaterial, or if it is unfair or unreasonable in the sense that the burden of answering it far outweighs the likely benefit which may be adduced from the answer: Austal Ships Pty Ltd v Incat Australia Pty Ltd (No 3) ("Austal Ships") [2010] FCA 795; (2010) 272 ALR 177 at [6], 180-181. In Aspar Autobarn Co-Operative Society v Dovala Pty Ltd (1987) 16 FCR 284 (Woodward J) at 285: If the use of interrogatories is to be effective, the task must be approached responsibly on both sides. It should not be seen as a battle of wits, or indeed as any form of contest. It is an opportunity to assist the parties and the court to have the matter prepared for trial as quickly and as cheaply as possible. The chief obligations on the interrogator are to ask questions as clearly and concisely as possible, and to ask only those questions which really require an answer in the particular case — by way of providing information not already known or making a relevant and required admission — in order to advance the interrogator's case or help to meet the opposition's case. 12 It is unlikely that interrogatories will be permitted as a substitute for discovery of documents: Austal Ships at [7], 181. Interrogatories which are directed towards ascertaining the contents of documents may be an exercise in fishing and are not generally permissible: Austal Ships at [8], 181 citing WA Pines (1980) 41 FLR 175 at 181-182 and 190-191. Financial documents 13 The first disputed category of documents comprises Empower's: (1) monthly financial reports; (2) monthly statement of cash flows; (3) bank statements; (4) quarterly accounts; and (5) annual accounts, for the financial years ended 30 June 2014 and 30 June 2015 ("financial documents"). 14 Empower argued that the financial documents are not relevant to any issue in the proceeding. 15 The ACCC's contention that the documents are relevant is primarily based upon the issues raised by paras 5, 9 and 17 of its second further amended concise statement ("concise statement"). Those paragraphs are as follows: 5. From 1 March 2014 to 30 June 2015 (the Period), Empower sought to maximise the number of students in respect of whom Empower received VET FEE-HELP payments from the Commonwealth through a system of conduct consisting of the process for marketing and enrolling consumers in its courses (the marketing and enrolment process). Empower so acted in order to maximise its revenue from VET FEE-HELP payments and its distributable profits. … 9. Empower's marketing and enrolment process enabled, encouraged and incentivised the recruiters and its employees to maximise the number of students they recruited for Empower's courses so as to maximise the financial benefit derived by Empower in relation to students enrolled in its courses. … 17. The implementation of Empower's marketing and enrolment process, which enabled and encouraged the recruiters and employees to maximise the number of consumers they recruited for Empower's courses so as to maximise the financial benefit derived by Empower in relation to students enrolled in its courses, was in all of the circumstances referred to at paragraphs 1 to 12 above, unconscionable. (Emphasis in original.) 16 By its response, Empower states that it operated for profit and that the maximisation of student enrolments and/or profit does not in itself constitute unconscionable conduct. Empower otherwise denied paras 5, 9 and 17 of the concise statement. Mr O'Bryan SC, senior counsel for the ACCC, submitted that Empower's response to the ACCC's concise statement avoided entirely the "central core allegation" that Empower's business is focussed upon, dedicated to, and set up so as to achieve not fundamentally an educational purpose, but a purpose of maximising profits and distributing them. 17 Mr O'Bryan SC contended that the financial documents are directly relevant to the assessment of whether Empower's conduct was "in all the circumstances" unconscionable pursuant to s 21 of the Australian Consumer Law. The ACCC's written submissions identify the following factual matters that may be relevant to assessing Empower's conduct: (1) Empower's profit margin during the period from 1 March 2014 to 30 June 2015 ("Relevant Period"); (2) the relative growth of Empower's revenue and expenses; (3) the nature of Empower's expenses; (4) the amount or proportion of revenue expended on marketing and enrolment; and (5) amounts paid as commissions to employees and markets and amounts spent on inducements to consumers, as well as the frequency and mode of those payments and the identity of the persons or entities to whom those payments were made over the Relevant Period. 18 Mr O'Bryan SC foreshadowed the following arguments by which a purpose of maximising profits may be relevant to whether Empower's conduct was unconscionable: (1) Empower, while presenting itself as an educational business, had "much more to do with maximising the wealth of its owners as opposed to engaging in an ordinary business of educating Australians through the VET FEE-HELP process"; (2) Empower was "not truly about teaching people who signed up for these courses … [t]he business was principally engaged in raising as much revenue as possible in the shortest possible time and minimising the cost of doing business so as to maximise the distributable profits for its owners"; and (3) if it could be shown that the business was not truly an educational business but simply a money making venture, that would be relevant to the question of whether the conduct of that business as a whole was unconscionable in all the circumstances. 19 Senior counsel for Empower, Mr Sirtes SC, disputed that "central core allegation" identified by Mr O'Bryan SC is reflected in the concise statement. Mr Sirtes SC also disputed that the purpose of maximising profits, without more, could be relevant to whether the alleged conduct is unconscionable within the meaning of the Australian Consumer Law. 20 Mr Sirtes SC argued that discovery of the financial documents was sought to be justified by reference to a case that is not referrable to the concise statement. Mr Sirtes SC described that case as a "shopfront argument", that is, that Empower was operating some kind of shopfront or sham, rather than a genuine educational institution. Mr Sirtes SC contended that the ACCC has presented no evidence to date that might cast doubt upon whether Empower was operating a proper educational institution, or about material differences between Empower and an "ordinary" educational institution. He submitted that the case articulated at the interlocutory hearing is less concerned with maximising profits (which is an ordinary incident of conducting a business) and more about whether Empower wrongly minimised its costs. Mr Sirtes SC submitted that such a case is not reflected in the concise statement and discovery should not be ordered in the absence of its articulation in the concise statement. 21 In reply, Mr O'Bryan SC disavowed the "shopfront" argument described by Mr Sirtes SC. Mr O'Bryan confirmed that the ACCC's case falls within the four corners of the concise statement. 22 Mr O'Bryan SC noted that an important aspect of the ACCC's case is that Empower recruited students who were not capable of undertaking or completing the courses in which they were enrolled (see, for example, paras 7(h) and (i) of the concise statement),and it failed to take steps to ensure that it did not enrol such students. The case includes allegations that Empower was aware, or ought to have been aware of low completion rates, and the low levels of participation and engagement of students enrolled in its courses. 23 Mr O'Bryan SC submitted that the ACCC will seek to prove that part of Empower's modus operandi was to sign up people who were most unlikely to engage in any educational activity with Empower, and that Empower's business model did not contemplate that it would actually need to provide educational services to more than a handful of students, or at least to all the people who were signed up. 24 The concise statement does not expressly contend that Empower's business was not to achieve an educational purpose. At one point Mr O'Bryan SC suggested that this proposition was the other side of the same coin (being the obverse of the proposition that Empower's business purpose was to maximise profits) but I do not agree: the provision of education typically involves elements of quality although there may come a point at which the service provided is so deficient as to entirely fail to provide education of the requisite kind. 25 Although I have some doubts about how the purpose of maximising profits as identified in the concise statement, without more, could be a circumstance relevant to a conclusion that conduct is unconscionable, that is a question to be determined at a final hearing: I am not satisfied that it could never be a relevant circumstance. In particular, as I understood Mr O'Bryan SC, the ACCC's case includes, relevantly, that enrolling unsuitable students to obtain revenue or failing to incur costs that would be associated with educating the students who were enrolled might be indicative of unconscionability. Conduct of each kind could tend to maximise profits. 26 On this basis, whether or not the case depends on a conclusion that Empower had the purpose of maximising profits, I accept that Empower's business model, as disclosed by the financial documents, may be relevant to an assessment of whether its conduct identified in the concise statement was, in all the circumstances, unconscionable. In my view, the period for which financial documents are sought is reasonably referable to the issues in the proceeding and therefore reasonably likely to be relevant to those issues. Documents evidencing "inducements" 27 The second disputed category is: All documents evidencing or recording the number or amount of "inducements" offered by Empower to consumers to enrol in a course, including cash payments and laptop computers, to consumers during the Relevant Period. 28 Empower has agreed to provide discovery limited to the incentives specifically identified in the ACCC's concise statement, namely cash payments, laptop computers and $100 gift vouchers. It contends that the ACCC is engaged in impermissible "fishing" by seeking discovery of unpleaded inducements. 29 Empower also argued that the language of the disputed category and, in particular, the word "inducements" is unclear. 30 The ACCC's concise statement alleges, relevantly that: 7(a) In the period from 1 March 2014 to 31 March 2015, Empower offered inducements to consumers to enrol in a course, including cash payments and laptop computers. (See the particulars at rows 3 and 8 of Annexure A of the Second Further Amended Concise Statement.) In the period from 1 March 2014 to 31 March 2015, Empower offered inducements to consumers in the form of a $100 gift voucher for referring a friend to enrol in an Empower course. 31 Empower does not suggest that the ACCC does not have a proper basis for bringing a case based on the allegation that Empower offered inducements to consumers to enrol in a course. Accepting that the ACCC does not presently know whether Empower offered other forms of inducement apart from the three set out above, in my view, it has identified sufficiently a case that Empower offered inducements to warrant discovery relating to any form of inducement offered. This discovery is not for the purpose of ascertaining whether a case exists, but rather for the purpose of compelling production that will reveal fully the range of inducements offered. 32 I am not satisfied that the meaning of "inducements" is relevantly unclear. Mr Sirtes SC did not give any example to illustrate any lack of clarity, such as a class of thing that Empower offered to consumers which might not be an inducement. The Macquarie Dictionary defines the word as "something that induces or persuades; an incentive". It is a matter within Empower's knowledge whether any particular thing offered to consumers was offered as an incentive to enrolment. Interrogatories 33 The interrogatories that the applicants seek to administer are: 1. For each student Enrolled in any of the Empower Courses in the Relevant Period, state the: a. name of the Empower employee or the recruiter involved in marketing and enrolling that student in the Empower Course; b. number of times the student had logged in to Empower's online learning platforms (being Moodle eZone or FinPa); c. date on which the student submitted an assignment or assessment through Empower's online learning platforms and the name of the assignment or assessment. 2. For each 6 month period during the Relevant Period, the student-trainer ratios for Empower Courses. ACCC's submissions 34 As to interrogatory 1(a), the ACCC argued that the identity of the recruiters is relevant to the attribution of the recruiters' conduct to Empower. Orally, Mr O'Bryan SC submitted that this information is relevant to the pattern of behaviour or system which Empower had in place to market or recruit students into its courses. 35 Interrogatories 1(b) and (c) are said to be directed to the extent of students' engagement with Empower as an educational institution. 36 Interrogatory 2 is said to concern the extent of the resources available to Empower to educate its students. Mr O'Bryan submitted that the information sought would support an inference that the ratio was "so disproportionate that the institution was not in truth or could not in truth be considered to be in the business of education either at all or with any substance". 37 The ACCC seeks answers to the interrogatories instead of, and not in addition to, seeking the same information from documents to be produced on discovery. The ACCC submitted that obtaining the answers by way of interrogatories is likely to be more efficient than seeking the information by way of discovery. 38 For example, in relation to information as to the number of times each Empower student logged on to Empower's online learning platforms (para 1(b) of the interrogatories), the ACCC submitted that it does not know the methods by which, or format in which, Empower maintains such information. Therefore, a discovery category seeking documents "evidencing" the number of times each Empower student logged on would run the risk that there are no such documents in existence. That may be the case, the ACCC argued, if, say, the information sought exists within a database or computer system, but not in the form of a "document", in that some interrogation of the database or computer system would be required to generate a document "evidencing" the information. In light of this, if the ACCC were to attempt to obtain the information by way of discovery, it would need to take the cautious approach of seeking documents "relating to" the number of times each Empower student logged on. However, the ACCC noted that the use of the broad words "relating to" would potentially require discovery of documents that go beyond the particular information it seeks. 39 The ACCC contended that it has approached the issue of serving a limited number of interrogatories in a reasonable and considered manner in order to reduce the burden on Empower and in order to facilitate the disclosure of the information sought in the most efficient manner possible. The ACCC contended that ordering interrogatories at this stage of the proceedings promotes the overarching purpose of facilitating the quick, inexpensive and efficient resolution of the issues in dispute in s 37M(1)(b) of the Federal Court of Australia Act 1976 (Cth). 40 Accordingly, the ACCC argued that Empower should be ordered to answer the interrogatories, notwithstanding r 21.02 of the Rules. Interrogatory 1(a) 41 I accept that this is an appropriate interrogatory and that it is preferable to administer an interrogatory to elicit the information sought, rather than to require discovery. Contrary to Empower's submissions, this information will not simply identify the names of recruiters and brokers but the extent to which individual recruiters and brokers were responsible for the enrolment of Empower's students. 42 I do not consider it oppressive to require the interrogatory to be answered for the whole of the student population of Empower in order for the ACCC to establish the full extent to which various recruiters and brokers were responsible for the enrolment of Empower's students. 43 The interrogatory is not a fishing expedition: the ACCC is seeking to establish the extent of the conduct that it has identified in the concise statement and not simply whether it has a case of the kind identified. Interrogatory 1(b) 44 Empower accepted that this interrogatory is arguably relevant but oppressive. It submitted that an appropriately framed discovery category relating to its online learning platform login records would be suitable. 45 I accept that this is an appropriate interrogatory and that it is preferable to administer an interrogatory to elicit the information sought, rather than to require discovery which, in my view, is likely to be cumbersome. Empower did not identify an appropriately framed discovery category. Interrogatory 1(c) 46 I do not accept that this interrogatory seeks information that is sufficiently material to the ACCC's case, either as to when assignments were submitted or as to the names of submitted assignments. Interrogatory 2 47 This interrogatory is unclear, both in respect of the meaning of "student-trainer ratios" and in the meaning of a relevant ratio "for each 6 month period". In any event, I do not accept that the ACCC's case, as presently articulated, includes the case identified by Mr O'Bryan SC as supporting the interrogatory, namely, that Empower was not in the business of education "either at all or with any substance". To the extent that the interrogatory is directed towards the question of the costs (or lack of costs) incurred in connection with education, in my view, that is a matter that is more appropriately addressed by discovery, to the extent that it is not sufficiently addressed by discovery of the financial documents. To the extent that the interrogatory is directed towards the issue of the whether Empower's teaching resources were suitable for the students which it enrolled, in my view, that is also a matter more appropriately addressed by discovery. Conclusion 48 I will order that the respondent give discovery of the documents in the two disputed categories. I will give the ACCC leave to administer proposed interrogatories 1(a) and (b) but not 1(c) and 2. I certify that the preceding forty-eight (48) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gleeson. Associate: Dated: 18 April 2017 SCHEDULE OF PARTIES NSD 1610 of 2015 Cross-Respondents Second Cross-Respondent: R K HOLDINGS AUSTRALIA PTY LTD ACN 151 295 920