The Federal Court has called for guides for higher penalties to discourage ‘cost of doing business’ contraventions of the Australian Consumer Law.
The regulators have supported this call. In its Final Report issued on 19 April 2017, Consumer Affairs Australia and New Zealand (CAANZ) has proposed that penalties for companies which contravene the Australian Consumer Law (ACL) be increased to align with penalties for contraventions of the Competition Law.
The Nurofen decision highlights why the current penalty guides are deficient
In Australian Competition and Consumer Commission v Reckitt Benckiser (Australia) Pty Ltd [2016] FCAFC 181 (the Nurofen civil penalty decision) the Full Federal Court of Australia (Jagot, Yates and Bromwich JJ, jointly) increased the civil penalty imposed by the trial judge on Reckitt Benckiser from $1.7 million to $6 million for conduct liable to mislead the public as to the nature, characteristics or suitability for purpose of pain killers known as the Nurofen specific pain range. This decision is final, now that leave to appeal to the High Court of Australia has been refused.
The Court commented upon the limited utility of applying the current guides, namely a maximum penalty of $1.1 million per contravention, noting the absurdity of treating each of the 5.9 million sales of the misleading packets of Nurofen as a separate contravention:
In this case, the theoretical maximum was in the trillions of dollars (some 5.9 million contraventions at $1.1 million per contravention) … [The] penalty in … this case is best assessed by reference to other factors, as there is no meaningful overall maximum penalty given the very large number of contraventions over such a long period of time. (para 157)
In its media release (16 December 2016) the ACCC hailed the decision as ‘a great win for Australian consumers’, and advised that it had called for higher penalties:
“This is the highest corporate penalty awarded for misleading conduct under the Australian Consumer Law,” ACCC Chairman Rod Sims said.
The Full Court found that the initial penalty of $1.7 million was manifestly inadequate given the need for deterrence and the substantial consumer loss suffered.
“The ACCC welcomes this decision, having originally submitted that a penalty of $6 million or higher was appropriate given the longstanding and widespread nature of the conduct, and the substantial sales and profit that was made,” Mr Sims said.
“The ACCC has been advocating for increased penalties under the current review of the Australian Consumer Law”
The higher civil penalty guides proposed by CAANZ
The CAANZ Final Report contained Legislative Proposal 18 - Maximum Financial Penalties:
Increase maximum financial penalties available under the ACL by aligning them with the penalty regime under the competition provisions of the Competition and Consumer Act 2010 (CCA):
- for companies, the greater of:
- the maximum penalty (of $10 million), or
- three times the value of the benefit the company received from the act or omission, or
- if the benefit cannot be determined, 10 per cent of annual turnover in the preceding 12 months.
- for individuals, $500,000. (Report, p 87)
The CAANZ proposal contains not only an increase in the amount of the maximum penalty to $10 million, but also introduces two new alternatives to align the maximum penalty to the benefit the company has received from the contravention – one is a calculation of the financial ‘benefit’ gained from the sale of the product, the other is a calculation of based on turnover.
CAANZ outlined this reasoning behind its proposal:
Currently, maximum financial penalties available under the ACL ($1.1 million per offence for companies) are insufficient to deter future breaches, particularly where the non-compliant conduct may be highly profitable or the company is large. For example, the $10 million penalty imposed against Coles for unconscionable conduct in dealings with 200 of its suppliers was referred to by Justice Gordon as insufficient for a company with annual revenue in excess of $22 billion (ACCC v Coles Supermarkets Australia Pty Ltd [2014] FCA 1405 (Gordon J), at [106]). While maximum penalties under the ASIC Act are slightly higher ($1.7 million per offence for companies), they are also too low to act as an adequate deterrent.
This proposal is expected to significantly increase the deterrent effect of the ACL provisions. Higher penalties would put a higher price on contraventions to sufficiently deter repetition by traders and by others who might be tempted to contravene the ACL. (Report, p 87, 88)
Would applying the CAANZ proposal have increased the Nurofen civil penalty?
The Court made these findings in the Nurofen civil penalty decision –
- Total revenue from the sale of 5.9 million packets of Nurofen for the period 2011 to 2015 (the relevant contravening period) was determined at $45 million.
- The price of the Nurofen specific pain range was double the price of the standard product, and so the extra paid by consumers over the period was at least 50%, namely $22.5 million.
- The ACCC carried out its own calculations and estimated the extra paid was $26.25 million.
- The conduct of Reckitt Benckiser was not ‘innocent’ – it ‘courted the risk’ of contraventions, because it knew that others had considered the marketing to be misleading, and it knew why.
The Court stated:
The penalty of $1.7 million cannot be viewed as substantial (as Reckitt Benckiser would have it) or as achieving the primary deterrence object of a civil pecuniary penalty. To the contrary, we consider that the penalty would reinforce a view that the price to be paid for the contraventions was an acceptable business strategy, and was no more than a cost of doing business. (para 164)
The Court approached the assessment by setting an ‘appropriate penalty range’:
one useful guide to the appropriate penalty range is loss to consumers. In this case, this loss may be assessed by reference to the extra amount paid by consumers as against a product that did not suffer from any of the impugned representations, such as ordinary Nurofen. This best approximates the impact on consumers, and thus the potential gains to Reckitt Benckiser. This gives a starting point of around $25 million and, on any view, more than $20 million (the price of the impugned products being about double that of standard Nurofen and the total revenue being $45 million). (para 158)
Had the CAANZ proposal been applied, it would have most likely increased the civil penalty. This is because the ‘starting point’ for the Court would be the highest of –
- $10 million, or
- 3 times the ‘profit’ on sales of Nurofen of $20 million, being $60 million, or
- 10% of the annual revenue of the Reckitt Benckiser Group for the product sold in Australia, being $45 million divided by 5 (years).
The highest amount would therefore be $60 million, which is three times higher than the amount of $20 million that the Court set in the Nurofen civil penalty decision as being the ‘top of the range’ for the penalty.
This analysis demonstrates that the CAANZ proposal would have the desired impact of providing a better guide to the Court to set as a ‘starting point’ to assess civil penalties.
Conclusions
If the CAANZ proposal is legislated, it will result in a substantial increase in civil penalties awarded by the courts for contraventions of the ACL, by giving a better guide to setting the ‘top of the range’ than the current law provides.
While it is true, as ACCC Chairman Rod Sims said of the Nurofen civil penalty decision that “This is the highest corporate penalty awarded for misleading conduct under the Australian Consumer Law,” (media release), the Court’s reasons for decision indicates that the Court could have imposed a higher penalty, had the ACCC asked for it:
we are of the view that an appropriate penalty for the contraventions had to be not less than $6 million (and could have been many millions more [had] the ACCC’s figure of $6 million [been a higher instead of] being at the bottom of the appropriate range …). (para 166)
Therefore, regardless of the CAANZ proposal, the Court is willing to impose higher civil penalties in an appropriate case under the current law, should the ACCC request.
For more information on why the Nurofen marketing was misleading, click on my article Reckitt Benckiser must pay the penalty for using misleading labels in its Nurofen Specific Pain Range
Marketing observation by Michael Field, marketing consultant
Brand managers and product marketers are being put on notice by these events. ‘Sailing close to the wind’ with clever, but misleading marketing campaigns is no longer a commercially viable option as the penalties are increasingly likely to neutralise any profits made. This is before we count the cost of damage to the brand.
Michael Field is a partner in strategy consulting firm EvettField Partners