FEDERAL COURT OF AUSTRALIA

 

Australian Competition & Consumer Commission v Giraffe World Australia Pty Ltd (No 2) [1999] FCA 1161

 

TRADE PRACTICES – referral selling – pyramid selling scheme – construction of ss 57 and 61 of Trade Practices Act 1974 (Cth) – misleading or deceptive conduct – representations “with respect to future matters” – testimonial evidence that product sold as a therapeutic device had benefited human health – expert evidence suggesting otherwise – “placebo effect” – “autosuggestion” – accessory liability.

 

PRACTICE AND PROCEDURE – application to reconstitute a proceeding as a representative proceeding under Part IVA of the Federal Court of Australia Act 1976 (Cth) – power to make such an order – discretion as to whether order should be made.

 

DEFAMATION – allegation that Commission defamed applicant in media release reporting obtaining of ex parte injunction – defences – truth – public interest – fair report of court proceedings.

 

Trade Practices Act 1974 (Cth) ss 51A, 52, 57, 61, 75B, 80(1)(e)

AUSTRALIAN COMPETITION & CONSUMER COMMISSION v GIRAFFE WORLD AUSTRALIA PTY LIMITED & ORS

 

NG 421 OF 1998

 

 

GIRAFFE WORLD AUSTRALIA PTY LIMITED v AUSTRALIAN COMPETITION & CONSUMER COMMISSION

 

 

NG 711 OF 1998

 

 

 

LINDGREN J

26 AUGUST 1999

SYDNEY

 

 

 

 

 

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NG 421 OF 1998

 

BETWEEN:	AUSTRALIAN COMPETITION & CONSUMER COMMISSION Applicant
AND:	GIRAFFE WORLD AUSTRALIA PTY LIMITED [ACN 078 012 521] First Respondent   AKIHIKO MISUMA Second Respondent   ROBIN HAN Third Respondent   MARK SCOTTE Fourth Respondent   [Rui Hua Zhang (Aka Susan Zhang), removed as a party] Fifth Respondent   LUCILLE ORR Sixth Respondent   [Wei Wang, removed as a party] Seventh Respondent   [Yong Tang (Aka Tommy Tang), removed as a party] Eighth Respondent

 

JUDGE:	LINDGREN J
DATE:	26 AUGUST 1999
PLACE:	SYDNEY

THE COURT ORDERS THAT:

1.         The proceeding be stood over to 31 August 1999 at 9.00 am for the making of declarations and orders.

 

2.         The applicant supply to the Associate to Lindgren J by 4.00 pm on 30 August 1999 short minutes of the declarations and orders which it contends should be made.

 

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NG 711 OF 1998

 

BETWEEN:	GIRAFFE WORLD AUSTRALIA PTY LIMITED [ACN 078 012 521] Applicant
AND:	AUSTRALIAN COMPETITION & CONSUMER COMMISSION Respondent

 

 

JUDGE:	LINDGREN J
DATE:	26 AUGUST 1999
PLACE:	SYDNEY

THE COURT ORDERS THAT:

1.         The application be dismissed.

 

2.         The applicant pay the respondent’s costs.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NG 421 OF 1998

 

BETWEEN:	AUSTRALIAN COMPETITION & CONSUMER COMMISSION Applicant
AND:	GIRAFFE WORLD AUSTRALIA PTY LIMITED [ACN 078 012 521] First Respondent   AKIHIKO MISUMA Second Respondent   ROBIN HAN Third Respondent   MARK SCOTTE Fourth Respondent   [Rui Hua Zhang (Aka Susan Zhang), removed as a party] Fifth Respondent   LUCILLE ORR Sixth Respondent   [Wei Wang, removed as a party] Seventh Respondent   [Yong Tang (Aka Tommy Tang), removed as a party] Eighth Respondent

 

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NG 711 OF 1998

 

BETWEEN:	GIRAFFE WORLD AUSTRALIA PTY LIMITED Applicant
AND:	AUSTRALIAN COMPETITION & CONSUMER COMMISSION Respondent

 

JUDGE:	LINDGREN J
DATE:	26 AUGUST 1999
PLACE:	SYDNEY

REASONS FOR JUDGMENT (No 2)

 

INTRODUCTION

1                     I heard these two proceedings together, having ordered that the evidence in one be evidence in the other, subject to all proper exceptions.  The proceedings arise out of the marketing of an “ion mat” (“the Mat”) by the first respondent (“GW”).  The Mat is a mat or mattress on which one lies when it is connected to a source of electricity. 

2                     The applicant (“the ACCC”) alleges that in promoting the Mat, GW made misrepresentations in contravention of ss 52 and 53(c) of the Trade Practices Act 1974 (Cth) (“the TP Act”).  The misrepresentations can be broadly described as being to the effect that as a result of its emission of negative ions, the Mat benefits the health of persons who sleep on it.  I will call this part of the ACCC’s case the “misleading or deceptive conduct” part.

3                     The ACCC further alleges that in connection with the promotion and sale of the Mat, GW engaged in a practice of “referral selling” in contravention of s 57 of the TP Act, and promoted a scheme involving membership of a “Giraffe Club” (“GC”) and of a “Grow Rich System” (“GRS”) which constituted a “pyramid selling” scheme (“the Scheme”), in contravention of s 61 of that Act.

4                     The second respondent (“Mr Misuma”) founded GW and was at all material times a director of GW.  He also appears to have been its “Chairman”.  GW and Mr Misuma were represented by the same solicitors and counsel.

5                     The third respondent (“Mr Han”) was a shareholder in GW and, until November 1998, its President and Chief Executive Officer.  Initially, the solicitors and counsel for GW and Mr Misuma also represented Mr Han.  However, on the first day of the hearing, I was informed that the solicitors had had no contact with him for a considerable period of time and had been unsuccessful in attempts to take instructions from him.  They foreshadowed that they would cease to represent him.  There was evidence that Mr Han knew of the dates on which the hearing was to take place.  On the third day of the hearing, I granted the solicitors leave to file and serve a notice of change of solicitor in respect of Mr Han.  Accordingly, the solicitors and counsel afterwards represented only GW and Mr Misuma.

6                     The fourth respondent (“Mr Scotte”) and the sixth respondent (“Ms Orr”) gave “presentations” to persons who were potential buyers of the Mat and were participants in the Scheme.  They appeared in person.

7                     Pursuant to leave, the ACCC discontinued against the fifth, seventh and eighth respondents.

8                     Mr Scotte and Ms Orr adopted the submissions made by counsel for GW and Mr Misuma.  As well, they made submissions of their own.  For convenience, I shall use the expression, “the respondents”, to refer to GW, Mr Misuma, Mr Scotte and Ms Orr, and, in the context of submissions, the abbreviation “GW” to refer to the chief protagonist and to include a reference to Mr Misuma.

9                     In the second proceeding, GW sues the ACCC for damages for defamation.  The background to the defamation proceeding is found in certain events associated with the ACCC’s proceeding.  In the ACCC’s proceeding, on 6 May 1998 I granted the ACCC ex parte interlocutory injunctions restraining GW in certain respects in the carrying on of its business and by way of an asset preservation order.  The next day, 7 May 1998, the ACCC published a media release reporting on that interlocutory proceeding.  GW alleges that the media release carried imputations defamatory of it.  On 8 and 11 May 1998, GW obtained variations of the orders of 6 May.  It alleges that notwithstanding this, as of 13 May, the ACCC was still distributing and publishing the original media release.  GW further alleges that in mid-May 1998, in a telephone conversation between Geoffrey Williams of the ACCC and Malcolm Finger of the New South Wales Department of Fair Trading, the ACCC published certain matters of and concerning GW, and that the Department, in its electronic mail and in communications with members of the public, republished those matters, which carried imputations defamatory of GW.

10                  I find it convenient to postpone further discussion of the defamation proceeding until I have dealt with the ACCC’s proceeding.

11                  In relation to the misleading or deceptive conduct part of the case, the ACCC adduced expert evidence directed to establishing that the Mat did not emit negative ions and did not have the therapeutic effects represented.  It also led evidence from a small number of persons who bought the Mat and joined the GC and the GRS and who claimed that the Mat did not benefit their health as represented.  GW, on the other hand, has led evidence from some sixty “satisfied customers”.  Each of these users of the Mat has testified to its beneficial effects.  More accurately, each has described relevant aspects of his or her health, before and after using the Mat, the latter being an improvement on the former.  The ACCC submits that I should treat all that evidence as illustrative of “the Placebo effect” or “autosuggestion”.

12                  The time set aside for the hearing proved to be inadequate to allow for the making of submissions.  Accordingly, directions were given for the filing and service of written outlines of submissions to be followed by brief oral elaboration on a date to be fixed.  The ACCC provided its outline.  GW provided an outline in relation to the referral selling and pyramid selling parts of the case.  Prior to the furnishing of an outline in relation to the misleading or deceptive conduct part, however, GW appointed Steven John Sherman as administrator of the company and the solicitor for Mr Misuma (who had also appeared for GW down to the time of the appointment of the administrator) informed me that he had been instructed to incur no further costs, and sought leave for himself and counsel briefed by him to be excused from further attendance.  I granted that leave.  The administrator gave his written consent to the continuation of proceeding NG 421 of 1998, against GW for the purposes of s 440D(1)(a) of the Corporations Law, but indicated that he wished to play no further role in either proceeding.  In the result, in relation to the misleading or deceptive conduct part of the case and the defamation proceeding, I have had the assistance of submissions from the ACCC alone.

 

OUTLINE OF PLEADING AND FACTS IN RELATION TO REFERRAL SELLING AND PYRAMID SELLING

13                  There is little, if any, dispute about the facts relevant to the allegations of referral selling and pyramid selling. The respondents submit that as a matter of law the facts do not fall within the statutory prohibitions.  It is convenient to note at once that all of the relevant conduct of GW, a trading corporation, took place in trade or commerce.

14                  GW conducted “Happiness Circle” meetings (sometimes referred to simply as “Happiness Circles” or “HC’s” within GW, - I will speak of “HC meetings”).  At these meetings the health benefits of the Mat were extolled in on-stage “presentations” to prospective buyers in an audience.  It was by being invited to attend and attending a HC meeting that a person was introduced to GW, the Mat, the GC and the GRS.  Those attending were told that upon paying $2,900 for the Mat, $50 as a “membership application fee” and $300 as a “membership fee”, they could become members of the GC.  To become a member of the GC they had to sign an application form and their application had to be accepted by GW.  It was possible to buy the Mat without joining the GC, but this possibility was not emphasised if it was ever volunteered at all.  Persons in the audience were also told that if they joined the GC they were eligible to apply to join the GRS.  In order to join the GRS, they had to sign a separate form of application for membership and be accepted by GW.  It was also made clear that pre-conditions of their admission to membership of the GRS were that a person had to attend a “Business School” (often referred to within GW as “BS”), attend a two-day “Management Consultant Class” (often referred to within GW as “MCC”) and “pass an interview”.  (Mr Paul Hsu, the Chief Executive Officer of GW, deposed that in practice, attendance at the Management Consultant Class was a precondition, not of membership of the GRS, but of advancement from the rank of “Giraffe Member” to “Giraffe Leader” (see below), however nothing turns on the matter).  Membership of the GC gave the right to attend the Business School and the Management Consultant Class as well as to be interviewed with a view to acceptance as a member of the GRS.  No additional money beyond the $3,250, necessarily paid in order to attain membership of the GC, was payable for membership of the GRS.  Importantly, however, it was membership of the GRS that was the key to entitlement to earn “commissions” (I need not distinguish between “commissions” and “bonuses” and will refer only to “commissions”) in the manner referred to below.

15                  I need not describe every aspect of the GRS, and, therefore, of the Scheme of which the GRS was the most important part.  It suffices that I give an outline at this stage.  A member of the GRS was entitled to be paid commission by GW for successfully “introducing” newcomers.  The evidence is not clear as to what the notion of “introduction” meant.  Ultimately, nothing turns on the point, and I will assume in favour of GW and as it contends, that the commission earning event was the introduction of someone who bought a Mat, whether or not that person also joined the GC or the GRS or both. 

16                  The commissions earned were calculated according to a formula based on “Business Volume” measured by dollar amount.  Each successful introduction had a Business Value of $2,500.  There is ample evidence, and it is not and could not be disputed, that an introduction of a person who bought the Mat, joined the GC and joined the GRS, and therefore paid out $3,250, generated a Business Volume of $2,500.  There is also some evidence that an introduction of a person who only bought the Mat also did so.  But all the promotional activity by and on behalf of GW strongly emphasised the desirability of “going all the way” by joining the GC and the GRS, and does not seem to have drawn attention at all to the possibility of buying the Mat alone.  Nonetheless, as stated above, I proceed on the assumption that the introduction of a person who bought the Mat alone generated a Business Volume of $2,500 and that if the person also joined one or both of the GC or the GRS, this did not give rise to the crediting of additional Business Volume beyond the sum of $2,500.  Thus, member A of the GRS would earn a direct commission for introducing another person (B) to buy the Mat, and if B became a member of the GRS, A would earn indirect commissions as B introduced others to buy the Mat.

17                  In addition to being entitled to be paid commissions by GW in respect of purchases of the Mat by individuals introduced by him or her, a member of the GRS was also entitled to be paid further commissions by GW as his or her “downline agents” introduced further persons.  But a downline agent was necessarily himself or herself also a commission earner, that is, a member of the GRS.  In sum, a successful introduction generated the earning of commissions only for members of the GRS and it was in the interests of the immediate introducer as well as his or her “uplines”, that an “introducee” should not only buy the Mat, but also join the GC and the GRS. 

18                  Both in the GW literature and in oral statements, references were made to the earning of commissions by “introducing”.  It is clear that in many instances this non-specific term was being used to refer to the introduction of a person to buy the Mat and to join the GC and the GRS.  And it must be remembered that membership of the GRS predicated a purchase of a Mat and membership of the GC.  Accordingly, to speak of paying $3,250 to join the GRS was to speak of paying that sum to buy the Mat, join the GC and join the GRS.

19                  There were eight classes of membership of the GRS.  They were ranged in ascending order beginning with “Giraffe Member” or “GM”.  As with so much of GW’s business, acronyms were used to denote the various classes of membership. The higher one’s category of membership, the more “downline” agents one had and the more indirect commissions one could earn.  The progression of memberships was as follows:

Giraffe Member (GM)

Giraffe Leader (GL)

Giraffe Retail Assistant (GRA)

Giraffe Retail Manager (GRM)

GRM   3 Star

GRM   5 Star

GRM   7 Star

GRM   Super Star

20                  The system was pyramidal: each member of any particular class had more than one member of the class immediately below as a downline, that is, more than one “downline”, with GM at the base.  A member’s progress upwards depended on the “Business Volume” credited to the member, that is, on the number of successful introductions made by the member or, more significantly, by his or her downline agents.  For each successful introduction, the direct introducer was credited with a Business Volume of $2,500, while each upline agent of the introducer was credited with an amount determined by reference to his or her position in the pyramid in relation to the introducer.  It was in a member’s financial interests that his or her downlines should introduce new members.

21                  A person was able to buy the Mat for $2,900 without becoming a member of either the GC or the GRS, although, as noted earlier, it is clear to me that this possibility was not emphasised.  Apparently, as at 3 April 1999, 330 persons had bought the Mat alone.  Obviously it was not in the interests of uplines or even the longer term interests of the immediate introducer that a newcomer should merely buy the Mat and not join the GC or the GRS.

22                  Similarly, a person could pay the sum of $3,250 for the Mat and membership of the GC without joining the GRS.  No doubt this might happen because the GC member did not apply to join the GRS or did not attend the Business School or the Management Consultant Class or attend or pass the interview. Apparently, as at 3 April 1999, 1,196 persons had bought a Mat and become members of the GC, but had not become members of the GRS.  As indicated above, however, a person who did not join the GRS was not entitled to earn commissions.  And if such a person introduced others, he or she would not generate indirect commissions for members of the GRS.  Again, it was in the interests of the immediate introducer and of his or her upline agents that the introducee should join the GC and the GRS as well as buy the Mat.

23                  Apparently as at 3 April 1999, 4,656 persons had bought the Mat, joined the GC and joined the GRS.  Apparently of those 4,656 persons, 3,238 had each applied to join the GC and the GRS on the same date, while the remaining 1,418 had each applied to join them on different dates.

24                  Against the above background it is convenient now to note the relevant provisions of the TP Act.

THE STATUTORY PROHIBITIONS

25                  The ACCC relies on ss 51A, 52, 53(c), 57 and 61 of the TP Act which provide, relevantly, as follows (emphasis supplied):

“51A   (1)        For the purposes of this Division, where a corporation makes a representation with respect to any future matter (including the doing of, or the refusing to do, any act) and the corporation does not have reasonable grounds for making the representation, the representation shall be taken to be misleading.

(2)       For the purposes of the application of subsection (1) in relation to a proceeding concerning a representation made by a corporation with respect to any future matter, the corporation shall, unless it adduces evidence to the contrary, be deemed not to have had reasonable grounds for making the representation.

(3)       .................................................................................................................

52.       (1)        A corporation shall not, in trade or commerce engage in conduct that is misleading or deceptive or is likely to mislead or deceive.

            (2)        Nothing in the succeeding provisions of the Division shall be taken as limiting by implication the generality of subsection (1).

53.       A corporation shall not, in trade or commerce, in connexion with the supply or possible supply of goods ... or in connexion with the promotion by any means of the supply or use of goods ... :

(a)       ...

(aa)     ...

(b)       ...

(bb)     ...

(c)        represent that goods ... have ... approval performance characteristics, ...  uses or benefits they do not have; ...”

57.       A corporation shall not, in trade or commerce, induce a consumer to acquire goods or services by representing that the consumer will, after the contract for the acquisition of the goods or services is made, receive a rebate, commission or other benefit in return for giving the corporation the names of prospective customers or otherwise assisting the corporation to supply goods or services to other consumers, if receipt of the rebate, commission or other benefit is contingent on an event occurring after that contract is made.”

61 (1)  A corporation contravenes this section if:

(a)       the corporation is the promoter of, or (if there are more than one) one of the promoters of, or is a participant in, a trading scheme to which this section applies; and

(b)       a person who is a participant in that trading scheme, or has applied or been invited to become a participant in that trading scheme, makes any payment to or for the benefit of the corporation, being a payment that he or she is induced to make by reason that the prospect is held out to him or her of receiving payments or other benefits in respect of the introduction (whether by himself or herself or by another person) of other persons who become participants in that trading scheme.

(2)       A corporation also contravenes this section if:

(a)       the corporation is the promoter of, or (if there are more than one) one of the promoters of, is a participant in, or is otherwise acting in accordance with, a trading scheme to which this section applies; and

(b)       the corporation, by holding out to any person the prospect of receiving payments or other benefits in respect of the introduction (whether by himself or herself or by another person) of other persons who become participants in that trading scheme, attempts to induce that person:

           

(i)        if he or she is already a participant in that trading scheme, to make any payment to or for the benefit of the promoter or any of the promoters or to or for the benefit of a participant in that trading scheme; or

(ii)       if he or she is not already a participant in that trading scheme, to become such a participant and to make a payment of a kind mentioned in subparagraph (i).

            (2A)     A corporation also contravenes this section if the corporation promotes, or takes part in the promotion of, a scheme under which:

(a)       a payment is to be made by a person who participates, or who has applied or been invited to participate, in the scheme to or for the benefit of the corporation or another person who takes part in the promotion of the scheme or to or for the benefit of another person who participates in the scheme; and

(b)       the inducement for making the payment is the holding out to the person who makes or is to make the payment the prospect of receiving payments from other persons who may participate in the scheme.

(3)       For the purposes of subsection (1), (2) or (2A);

(a)       a prospect of a kind mentioned in that subsection shall be taken to be held out to a person whether it is held out so as to confer on him or her a legally enforceable right or not;

(b)       in determining whether an inducement or attempt to induce is made by holding out a prospect of a kind mentioned in that subsection, it is sufficient if a prospect of that kind constitutes or would constitute a substantial part of the inducement; and

(c)        ...

            (4)        For the purposes of this section, a scheme is a trading scheme to which this section applies if the scheme includes the following elements:

(a)       Goods or services, or both, are to be provided by the person promoting the scheme (in this section referred to as the “promoter”) ...;

            and

(b)       the goods or services so provided are to be supplied to or for other persons under transactions arranged or effected by persons who participate in the scheme (each of whom is in this section referred to as a ‘participant’), being persons not all of whom are promoters.

(5)       .............................................................................................................. ”

 

THE PROPER CONSTRUCTION OF s 57 (REFERRAL SELLING)

26                  With respect, I have some difficulty in understanding GW’s submission in relation to the construction of s 57.  I accept that under s 57 it is necessary to consider in the case of each consumer whether, by making a representation of the kind described in the section, GW in fact induced that consumer to acquire goods or services.  But the respondents submit that in the present case, at least typically, the commission was earned at the very time when the relevant contract was entered into, rather than later as contemplated by s 57.  According to the submission, the “relevant contract” for the purposes of s 57 is that by which the person introduced buys a Mat.  The respondents submit that at the time when that contract is entered into, there is no commission or other benefit yet to be earned contingently on the occurrence of a subsequent event.

27                  In amplification, GW submits that there are three contracts to be considered: first, a contract by which A becomes a member of the GC; second, a contract by which A becomes a member of the GRS; and third, a contract which is entered into between A and GW each time A sells a Mat to a consumer (who may or may not at the time of the purchase apply for membership of the GC or of the GRS).  Counsel submits that in the concluding words of s 57, “ ... if receipt of the ... commission or other benefit is contingent on an event occurring after that contract is made”, the words “that contract” refer to the third of these contracts.  He says that the words “that contract” should be construed as referring to the third contract because:

“1.       In terms of wording proximity, the closest referent contract is the contract under which the commission must arise.

  2.       If the intent were that ‘that contract’ mean the ‘Contract for the acquisition of goods or services’ (used earlier in the section), it would have been more usual or natural to expect the same formulation of words to be repeated.”

Counsel further submits that the result for which he contends is in accordance with “expectations of commercial reality”, since sales commissions are paid for selling, not for supplying the names of prospective customers, which may prove to be of no value.  Counsel’s submission continues:

“Thus, the suggested interpretation would not proscribe the offering of payment for mere provision of lists of ‘prospective’ customers, whether such lists were supplied before or after the consumer makes the original contract or acquisition of the goods.  What would be proscribed is the situation where the corporation offers a commission which becomes payable upon any sale made to one of the names of prospective customers which name had been previously provided.”

28                  I do not accept GW’s submission.  In my view the expression “that contract” refers to the contract by which the consumer acquires goods or services. 

29                  For the purposes of the TP Act, a person is a consumer in relation to the acquisition of particular goods or services in the circumstances described in s 4B(1) of that Act.  I need not set out the provision.  It is not, and could not be, disputed that persons who acquired the Mat and the rights conferred by membership of the GC and the GRS did so as “consumers” for the purposes of the TP Act.  (Later I will explain that the membership of each of the GC and the GRS involved the provision of “services” by GW to members.)  The cash price for the Mat was $2,900, and $300 was payable as a GC “membership fee” and $50 as a “membership application fee”.  (Some GW documents referred to the total sum of $3,250 as a “membership fee”, even in contexts in which the sum of $300 is also referred to as the membership fee.)  Even the total of $3,250 was well below the $40,000 level stipulated in s 4B.  The question which s 57 raises here is whether GW induced a consumer to acquire the Mat or the membership rights, or both, by representing that that consumer would afterwards receive commissions in return for assisting GW to supply the Mat or such membership rights to others, if receipt of the commissions was contingent on an event occurring after the consumer made his or her own contract. 

30                  The section is directed against the evil that a person might be induced to buy goods or services by an expectation that he or she will subsequently receive a rebate, commission or other benefit (after this, simply “commission”) for assisting the supplier to supply its goods or services to other consumers, when there is no assurance that the commission will in fact be received because receipt of it is subject to a contingency.  The contingency is something over and above the rendering of the assistance or the doing of any other act by the consumer alone. 

31                  An illustration given in s 57 itself is the giving to the supplier of the names of prospective customers.  If a commission were to become payable by reason of nothing more than the giving of the names, the section would not be contravened.  In such a case, the earning of the commission would not be contingent on the occurrence of an event which was both later than the acquisition by the consumer and distinct from the giving of the names itself.  But, as the respondents’ submissions correctly recognise, the typical arrangement would provide for receipt of the commission to be contingent on acquisition of goods or services by one or more of the prospective customers whose names had been supplied.

32                  In sum, the expression “that contract” in s 57 refers back to the “contract” expressly referred to in the section, that is, the contract for the acquisition of goods or services made by the original consumer.  There will be a contravention of s 57 by GW if GW induced a consumer to acquire any one or more of the Mat, the GC membership rights or the GRS membership rights, by representing that the consumer would, after that contract was made, receive commissions in return for assisting GW to sell any one or more of the Mat and those rights to other consumers, if receipt of the commission was contingent on those other consumers’ actually doing one or more of buying the Mat, joining the GC or joining the GRS. 

33                  GW finally submits that if I should reject its threshold submission (as I do), it remains a question in relation to each consumer whether GW in fact induced that consumer to acquire any one or more of the Mat or the membership rights by a representation of a kind described.  I accept the correctness of this submission.  Accordingly, it will be necessary for me later to turn to the factual issue of what it was that operated as an inducement on the minds of particular consumers.

THE PROPER CONSTRUCTION OF s 61 (PYRAMID SELLING)

34                  GW also makes a threshold submission that s 61 does not apply in the circumstances of the present case for the following reasons:

1.         Subsections 61(1) and (2) do not apply because:

·        there is no “trading scheme” within s 61(4); and

·        commission is earned by reason of the sale of Mats, not the introduction of persons who become participants in the Scheme;

2.         Subsection 61(2A) does not apply because at no stage do members of the GRS receive payments (commissions) from other members of the GRS.

I will address these issues in turn.

Is there a “trading scheme” as defined in s 61(4)?

35                  The terms of s 61(4) were set out earlier.

36                  GW draws attention to the elements of a trading scheme identified in s 61(4) as being, relevantly, that:

(a)        goods or services are to be “provided” by the promoter; and

(b)        the goods or services so provided are to be “supplied” to or for persons other than the promoter under transactions arranged or effected by persons who participate in the scheme (“participants”).

GW submits that there must be an original providing of the goods or services and a separate and subsequent supplying of the same goods or services to persons other than those to whom they were originally provided, that is, there must be an “on-supply”. GW refers to Heydon Trade Practices Law (The Law Book Company Ltd) vol 2, para 14-110, at 7014:

“In short, a trading scheme is one in which a promoter provides goods or services to participants who on-supply to a third group of persons.”

GW submits that there is no on-supply here because it is the only entity which ever either “provides” or “supplies” the goods or services.

37                  An independent reason why, according to GW, sub-ss 61(1) and (2) do not apply is that element (b) referred to earlier is not satisfied because, even if there is a trading scheme, the participant is not induced to make the payment by reason of a prospect held out to him or her of receiving payments in respect of the introduction of other persons who become participants.  Rather, GW says, the prospect of receiving payment that is held out is in respect of the introduction of persons to buy Mats.

38                  In reply, the ACCC submits that there can be a trading scheme notwithstanding that it is the promoter who supplies to the end-acquirer.  The ACCC submits that if Mr Heydon’s statement was intended to be an exhaustive statement of the nature of the scheme described by s 61(4), it is erroneous.  However, the ACCC suggests that Mr Heydon was giving only “a shorthand summary of one operation of the section as the opening words of the quotation made clear”.  The ACCC also submits that it has never been suggested in any of the authorities that the nature of a “trading scheme” as described in s 61(4) is restricted in the manner contended for by GW.  Finally, the ACCC submits that GW’s submission fails to address the fact that GW was supplying not only goods but also services in the form of the GC and GRS membership rights, including, in the case of the latter, the opportunity to earn money.

39                  With respect, I do not think that s 61(4) is limited to circumstances of “on-supply”.  In my opinion, para (a) of s 61(4) requires merely that the goods or services or both be “provided”, in a general sense, for the purposes of the trading scheme, rather than that they be provided by the promoter to any particular person.  That is, the word “provided” in para (a) of s 61(4) has the general meaning of “made available”.

40                  Paragraph (b) of s 61(4) leaves open the question of the identity of the supplier to or for the “other persons” referred to in the paragraph.  What the paragraph does insist upon is that the transactions under which the goods or services “provided” by the promoter are to be “supplied” to or for those other persons, be “arranged or effected by persons who participate in the scheme”.  Those participants must “arrange or effect” transactions with the “other persons”, but need not be the supplier of the goods or services to them.  While a situation in which the promoter provided goods to participants in a trading scheme for them to supply to other persons under transactions arranged or effected by the participants with those other persons would be caught, in my view that situation does not exhaust the definition in s 61(4).

 

Inducement

41                  GW’s remaining submission in relation to subss (1) and (2) of s 61 concerns the nature of the inducement to pay money.  The submission is that a person who is a participant in the Scheme or who has applied or been invited to become a participant, is not induced to pay money to GW by reason of the prospect held out to him or her of receiving payments or other benefits in respect of the introduction of other persons who become participants in the Scheme,but, rather, is in respect of the introduction of other persons who become buyers of Mats, whether or not they also become participants in the Scheme.  It should be noted that the present question is not whether the circumstance described in para (b) of s 61(1) or in para (b) of s 61(2) is an element of the trading scheme, but whether, on particular occasions and in relation to particular persons, the corporation acted in the manner described in those paragraphs.

42                  Under para (b) of s 61(1), as under s 57 discussed earlier, the question is as to actual inducement – under s 57 to acquire goods or services or both, and under s 61(1)(b) to pay money to GW.  Under s 57, the question is whether a representation of the kind described in the section was an operative inducement.  Under s 61(1)(b) the question is whether a holding out of a prospect of the kind there described was an operative inducement.  But s 61(2)(b) is of a different order.  It is concerned with attempts to induce, whether or not successful.  Accordingly, under s 61(2)(b) the question is whether GW attempted to induce a person to do the things stated by the holding out of a prospect of the kind there described.  Again, it becomes necessary to inquire into the facts as to the attempts to induce made on particular occasions.

Subsection (2A) of s 61

43                  GW submits that for subs (2A) to apply, the payment must be made by a participant, or by a person who has applied or been invited to become a participant, to or for the benefit of the promoter, another person who takes part in the promotion, or another participant, and the inducement for the making of the payment must be the holding out to the payer of “the prospect of receiving payments from other persons who may participate in the scheme”.  The submission is that in the present case the prospect held out is one of receiving payments from GW itself, not from “other persons who may participate in the scheme”.  The submission is further that GW is not, for present purposes, an “other perso[n] ...  who may participate in the scheme.”

44                  In reply, the ACCC submits that it is appropriate to construe para (b) of s 61(2A) as extending to the receipt of payments by participants “indirectly” from other persons who may participate in the Scheme, through GW as an intermediary.

45                  In my opinion, s 61(2A) does not apply in the circumstances of the present case.  In this respect, I accept GW’s submission and do not think that para (b) of s 61(2A) can properly be read in the manner suggested by the ACCC.  That is, I do not think that para (b) encompasses a situation in which the inducement is the holding out of the prospect of receipt of payments from the promoter, even if the occasion for the promoter’s making of those payments is the receipt by it of payments from persons upon their becoming participants in the trading scheme.  I also accept that the promoter is not an “other perso[n] ... who may participate in the scheme”.  A distinction between the “promoter” of a trading scheme and the “participants” in it is recognised throughout s 61.

46                  In the present case, other persons who might participate in the Scheme were never to make payments to existing participants; rather, they were to pay amounts to the promoter, GW, which was to pay amounts calculated in accordance with a formula to the introducing participant and to his or her “uplines”.  Accordingly, s 61(2A) has no scope for operation.

 

THE ALLEGATION OF CONTRAVENTION OF ss 52 AND 53(c) (THE MISLEADING OR DECEPTIVE CONDUCT CASE)

47                  I need not deal separately and specifically with the allegation of contravention of s 53(c) of the TP Act: if GW represented that the Mat had performance characteristics, uses or benefits it did not have, GW would have contravened s 52 as well as s 53(c).

48                  According to the further amended statement of claim, GW made the following representations to the public in connection with the promotion of the Scheme:

“(a)     Ion mats discharge negative ions which reduce stress and assist in reducing cancer causing cells;

  (b)     Negative ions promote health and reduce fatigue and stress thereby helping to prevent cancer causing cells;

  (c)      Negative ions help the circulation of the blood;

  (d)     The ion mat produces negative ions that help relieve stress, fatigue and promote better blood circulation;

  (e)      Negative ions can help preserve meat for 32 years, assist the involuntary nervous system and build up the immunity system;

  (f)      The ion mat has received approval from the Ministry of Health in Japan and was a proven therapeutic device;

  (g)     The ion mat reduces the need for sleep;

  (h)     The ion mat can cure skin problems;

  (i)      Persons using the ion mat will be stronger and healthier within 3 weeks of using it;

  (j)      The ion mat cures insomnia and neck pains;

  (k)     A person using the ion mat will increase in strength within 10-15 minutes of its use;

  (l)      The human body absorbs negative ions with [sic] are beneficial to the body;

  (m)    The ion mat will cure back problems;

  (n)     The ion mat will reduce the nicotine level in cigarettes;

  (o)     Negative ions will assist the immunity of the body;

  (p)     The ion mat if placed in a basin of water will produce a shock as it contains a negative 380 voltage;

  (q)     The ion mat will cure bad backs, stiff necks, sore shoulders in half a day of use;

  (r)      The ion mat when used by elderly people will enable them to arch their back and touch the floor with their hands when they were previously unable to do so;

  (s)      The ion mat enabled a woman to walk who for a period of 2 years had been confined to a wheelchair;

  (t)      The ion mat relieves chronic constipation;

  (u)     The ion mat relieves acute arthritis;

  (v)     The ion mat heals cuts and ulcers and helps growth of scar tissue;

  (w)     The ion mat has an anti-rheumatisis [sic] effect;

  (x)     The ion mat has a beneficial effect on nerve endings;

  (y)      The ion mat has a beneficial effect on intestines and the stomach;

  (za)    The ion mat acts as a blood purification system;

  (zb)    The ion mat assists in the treatment of heart murmur;

  (zc)    The ion mat alleviates the symptoms of heart trouble;

  (zd)    The ion mat will slow down the progress of AIDS and/or cure AIDS;

  (ze)    The ion mat improves people who have had a stroke;

  (zf)     The ion mat helps people who have suffered a heart attack recover quickly;

  (zg)    The ion mat improves a persons [sic] sex life;

  (zh)    That the First Respondent was close to finalising approval from the Australian Department of Health for the ion mat;

  (zi)     The ion mat has a health certificate in Japan and Taiwan;

  (zj)     The ion mat had been tested and used in Japanese hospitals for 15 years;

  (zk)    The ion mat is being used in nearly all Japanese hospitals;

  (zl)     The ion mat can cure asthma.

  (zm)   The ion mat emits negative ions.”

49                  Lengthy particulars of the making of these representations were given.  Many were alleged to have been made at HC meetings.  Some were alleged to be contained in a video which was screened during those meetings.  Representations (g), (h) and (i) were alleged to have been made by Mr Scotte during a HC meeting.  Some representations were alleged to have been made in the “ion mat product manual” which was supplied to persons who joined the GRS.  Ms Orr was alleged to have made representation (ze).  Several representations were alleged to have been made by a person known as “Rosalee K”.  Other representations were alleged to have been made by unidentified presenters at HC meetings.  Some representations were attributed to the third respondent (“Mr Han”) and others were attributed to a person called Qiao Jiao. 

50                  The HC meetings were held in an auditorium at premises on Level 15 of the Sydney Central Plaza building, 477 Pitt Street, Sydney.  There were ample indicia, referred to later, that GW carried on its business there.

51                  After the HC meetings at which the Mat, the GC and the GRS were promoted, those attending were ushered by their introducer to a “VIP lounge”, where, again, the Mat, the GC and the GRS were promoted, this time on a one-to-one basis.  It is not disputed, and could hardly have been disputed, that representations made by the “presenters” at the HC meetings about the nature and benefits of the Mat, the GC and the GRS were made by GW.  Objection was taken to the evidence of what was said by the individuals in the VIP lounge on the ground that they were not “linked up” to GW.  But in the light of the wearing of GW badges and the presence of GW signs and of the standard system in and according to which the Mat, the GC and the GRS were promoted in the VIP lounge following HC meetings, to which I refer later, I have no hesitation in inferring that those individuals who attempted to conclude transactions with newcomers in the VIP lounge were acting with the knowledge and authority of GW.

52                  In respect of all representations except (a), (b), (f), (l), (s), (zh), (zi), (zj), (zk) and (zm), the ACCC calls in aid s 51A of the TP Act, contending that the representations were made by GW “with respect to [a] future matter”.  The ACCC contends that GW did not have reasonable grounds for making the representations, with the result that s 51A requires that they be taken to have been misleading.  The ACCC also relies on s 51A(2) which provides that a corporation is deemed not to have had reasonable grounds for making a representation with respect to a future matter if the corporation does not adduce evidence to the contrary.

53                  It is convenient to conceive of the thirty-eight representations as falling into three categories: first, those which purport to explain how the Mat operates in relation to “negative ions”; second, those concerned with official or institutional approval or use of the Mat; and third, those, in substance, to the effect that use of the Mat in fact produces particular beneficial effects on health.  Some of the pleaded representations can be seen to fall into more than one category.

54                  The first category is made up of representations (a), (d) and (zm).  The respondents came to accept that these representations had been made and could not be supported.  The testimony of their own expert, Professor Blackburn, was to that effect.  The most that could be said was that existing research does not exclude the possibility that the Mat could have the effect of “reorganising” or “relocating” negative ions already present in the human body. 

55                  The second category comprises representations (f), (zh), (zi), (zj) and (zk).  These representations were directed to promoting confidence in the Mat on the basis that it already had, or was close to gaining, a form of official approval or certification or had the support of institutional use over a significant period.  In my view, as noted later, the making and falsity of these representations was also made out.

56                  The third and most voluminous category of the pleaded representations are those to the effect that the use of the Mat produced one or more of numerous specified health benefits.  The respondents read numerous affidavits directed to supporting the proposition that it does so.  Objection was taken to much of this testimony.  I excluded that which attributed to the Mat a perceived change in health, but I allowed testimony of a “before and after” kind.  Accordingly, if a deponent said that he or she had suffered from insomnia, acne or back pain and had ceased suffering from those health problems after using the Mat, I admitted that evidence, but I did not admit the person’s testimony that it was the use of the Mat that had cured or alleviated the condition. 

57                  Some of the “before and after” evidence led by the respondents went to an improvement in a person’s general sense of well-being while other testimony was directed to the cure or amelioration of, specific health problems.  The health conditions covered by the affidavits were varied and numerous.  They included the following (numbers in brackets indicate the approximate number of individuals testifying that the symptoms specified had gone or changed for the better after the Mat was used):

·        Insomnia (12)

·        Arm injuries sustained in a motor vehicle (1)

·        Curvature of the spine (1)

·        Rheumatoid arthritis (1)

·        Cold hands and feet (1)

·        Foot odour (1)

·        Back pain (13)

·        Indigestion (1)

·        Heel pain (2)

·        Snoring (3)

·        Arthritic pain (3)

·        Varicose veins (2)

·        An allergy sore (1)

·        Irregular sleeping patterns (4)

·        High Cholesterol (1)

·        Stomach pain (1)

·        Acne/skin conditions (5)

·        Low blood pressure (2)

·        High blood pressure (1)

·        Flu and hay fever (1)

·        Shoulder pains (3)

·        Constipation (6)

·        Incontinence (1)

·        Wrinkles (1)

·        Aged spots (3)

·        Ginigivitis (1)

·        Nose bleeds (2)

·        Asthma (1)

·        Hair loss (1)

·        Carpel Tunnel (2)

·        Diabetes (1)

·        Sinusitis (1)

·        Premenstrual tension (1)

·        Period pain (2)

·        Migraines (1)

·        Headaches (3)

58                  The “testimonial” affidavits read by the respondents numbered some sixty.  Senior counsel for the ACCC informed me early in the case that he had decided not to cross-examine all but a few of these deponents.  Needless to say, and with all respect to both him and them, this news was welcome.  He made clear that the ACCC did not dispute the sincerity of the deponents, that is to say, it did not dispute that they perceived that there had been a significant improvement in their health in the respect or respects identified in their affidavits, concurrently with their use of the Mat. Senior counsel for the ACCC submits simply that I should attribute all this evidence to what he described as “the Placebo effect” or “autosuggestion”.  No expert evidence was led, however, to support this submission.  For example, the ACCC did not lead evidence from a psychologist to the effect that having read an affidavit, he or she was of the opinion that the explanation suggested by senior counsel for the ACCC was a reasonably available explanation of the deponent’s perception.

59                  On the other hand, the respondents did not call medical or other expert evidence directed to supporting the evidence of users of the Mat that their health had improved.  Of course, in some instances, such as insomnia, the claimed improvement would not have been susceptible to proof by such evidence.

60                  It will be necessary to consider further both the evidence of users of the Mat and the ACCC’s submission.

THE ISSUES OF INDUCEMENT UNDER s 57 (REFERRAL SELLING) AND s 61 (PYRAMID SELLING) AND ATTEMPTED INDUCEMENT UNDER s 61 (PYRAMID SELLING)

 

Membership of the GC and the GRS – “services”

61                  The definition of “services” in s 4 of the TP Act is, relevantly, as follows:

“‘services’ includes any rights ( ... ), benefits, privileges or facilities that are, or are to be, provided, granted or conferred in trade or commerce, and without limiting the generality of the foregoing, includes the rights, benefits, privileges or facilities that are, or are to be, provided, granted or conferred under:

(a)       a contract for or in relation to:

            (i)         ... ;

(ii)        the provision of ... facilities for ... instruction; or

            (iii)       ... ”

62                  Paragraph 14 of the further amended statement of claim is as follows:

“14.     Further or in the alternative the First Respondent in trade or commerce induced persons to purchase goods or services by representing to those persons, prior to acquisition of the ion mat or membership of the Scheme that:

(a)       On payment of the sum of $3,250.00 to the First Respondent he or she was entitled to an ion mat and membership of the Giraffe Club;

(b)       That only members of the Giraffe Club were entitled to membership of the Grow Rich System;

(c)        That as a member of the Grow Rich System he or she was entitled to commission which was contingent upon, the person recruiting new members to the Giraffe Club (achievement bonus) and additional commission which was contingent upon the new members in turn recruiting other persons to the Giraffe Club (indirect bonus), or otherwise assisting the First Respondent to supply the ion mat to other persons or invite other persons to become members of the Scheme; ... ” (emphasis supplied)

63                  In my opinion it is clear that the contract of membership of each of the GC and the GRS was one by which the member acquired, and GW supplied, rights, benefits, privileges and facilities.  Although it does not matter, I also think that each of the two contracts of membership, that of the GC and that of the GRS, was one for or in relation to the provision of “facilities for instruction”.  A member was, in each case, therefore entitled to be provided with “services” by GW.

64                  There is ample evidence to support the conclusion just mentioned.  The form of application for membership of the GC commenced:

“By completing and executing this application form, you are applying for Membership of the Giraffe Club operated by Giraffe World Australia Pty Limited (‘Giraffe World’), thereby entitling you to enjoy the services, products and benefits of membership.” (emphasis supplied)

The form recorded that the applicant had “considered the benefits of the services and products of Giraffe World”.  Acceptance of the application was expressed to be at the discretion of GW.  The applicant acknowledged that if the application was accepted, the applicant would be bound by the “Rules of Membership” as applying from time to time.  Annexed to the form of application was a document headed “Rules of Membership – Terms and Conditions”.  The Rules provided that GW and the member agreed to be bound by them as varied from time to time and that for twelve months a member was “entitled to access the facilities and have the benefits of membership” of the GC, and, in particular:

“•        entitlement to attend Giraffe Club meetings;

  •        entitlement to attend motivational and personal development training seminars;

  •        entitlement to receive information about new Giraffe Club products.”

As well, and importantly, a member of the GC was entitled to apply for membership of the GRS.  The expression “Giraffe Club” was defined to mean:

“the membership association operated by Giraffe World and known as Giraffe Club, and includes reference to all entitlements and obligations of membership of that association, and all services, benefits and Products supplied by Giraffe World in consideration of such membership.” (emphasis supplied)

65                  The expression “Products” was defined to mean “Negative ion mattress – Giraffe World Ion mat.”

66                  A schedule to the Rules of Membership shows “membership fees” as follows:

“$3,250.00 comprising –

•          Product - $2900.00

•          Membership Application Fee - $50.00

•          Membership Fee - $300.00”

67                  On any view, a person joining the GC acquired both goods (the Mat) and services (the rights of membership).

68                  Membership of the GRS also clearly gave rise to an entitlement to be provided by GW with “services” for the purposes of the TP Act.  The form of application for membership of the GRS provided that membership gave the member a right to act as the authorised agent of GW subject to the Rules of Membership.  The “Rules of Membership” were the “Terms and Conditions” set out in a document annexed to the application form.  Clauses A2 and A3 were as follows:

“2.       Upon, but subject to, acceptance of the Member’s Application, and subject to these Terms and Conditions:-

(a)       the Member will be authorised, as the agent of Giraffe World, to seek out orders for the Products and for the services, benefits and other entitlements of membership of the Giraffe Club.

(b)       the Member will be entitled to receive higher level personal development training and sales technique training, including as described in the Manual.

(c)        the Member will receive additional training and information about the Products and about the Giraffe Club, including as described in the Manual.

(d)       the Member will receive information and training about new products and services of Giraffe World to be made available under the Grow Rich System.

 3.        The Member will be entitled to be paid commission which is calculated according to the commission system set out in the Manual or as varied from time to time by Giraffe World.”

The expression “Giraffe Club” was again defined in the terms noted earlier.  The “Manual” was defined to mean “the Grow Rich System Manual, as varied from time to time.”  The Rules provided that the Member must attend and complete a Business School and Management Consultant Class, as well as attend and pass an interview in order to obtain formal membership.  The document referred to the persons whom the Member was to solicit as “Customers”, and it defined “Customer” to mean:

“every person introduced by the Member acting under this Agreement, who agrees to purchase any Product or service from the Company, and also means every Customer of that Customer.” (emphasis supplied)

69                  The Manual set out the various levels of membership of the GRS and the basis of entitlement to commission.  As noted earlier, that basis was “Business Volume” measured in money, each introduction counting as $2,500 of business volume.  The Manual does not make clear, however, whether a sale of a Mat alone for $2,900 will give rise to a deemed business volume of $2,500 or whether the buyer must also join the GC (which would necessitate payment of $3,250 rather than $2,900) or even the GRS, for that business volume to be deemed to have been earned.

70                  In my opinion membership of the GRS, like that of the GC, gave a member rights, benefits, privileges or facilities, including, although it does not matter, a right to the provision of facilities for “instruction”.  Accordingly, membership gave rise to an entitlement to be provided by GW with “services” for the purposes of the TP Act.

Inducement - general

71                  I next turn to the evidence relevant to inducement.  I will not analyse the evidence in relation to each individual who entered into a transaction with GW or whom someone attempted to persuade to do so.  I will begin by describing the mode of selling that was followed.  Next I will describe in some detail GW’s attempt to sell to an officer of the ACCC.  Finally, I will refer to the inducements that caused certain persons to buy the mat, join the GC and join the GRS.

72                  An existing member (A) of the GRS would invite an acquaintance (B) to accompany A to a meeting, giving little information as to the nature of what was in store.  A would accompany B to the foyer of GW’s premises on the 15th floor of the Sydney Central Plaza building where GW personnel would record some details of B’s identity.  A would then accompany B to an auditorium there, where, with others, they would see and hear a “presentation” on the stage.  The “presenters” would hold out benefits for both the health and wealth of B as inducements to persuade B to buy the Mat, to join the GC and to join the GRS.  No doubt as between various individuals, the health benefits or wealth benefits may have been the more persuasive.  I will refer later to evidence that some individuals may have been induced to part with their money by the representations touching the Mat alone.  Indeed, as noted earlier, some individuals bought the Mat and did not become members of the GC, let alone of the GRS.  Others found the opportunity to “become an entrepreneur” and to earn commissions as members of the GRS a stronger inducement than the claimed health benefits.

73                  After the HC meeting was concluded, A would accompany B from the meeting room to a “VIP Lounge” where a more senior member of the GRS more closely associated with GW would promote the benefits of the Mat and membership of the GC and the GRS on a one-to-one basis.  Many people in the position of B, on this occasion in the VIP lounge, bought the Mat and signed forms of application for membership of both the GC and the GRS and paid over the sum of $3,250.  Others asked for more time for consideration.  But the GW representative emphasised the strong desirability of deciding and signing on the spot and the undesirability of delay or of discussing the matter with other people.

74                  While a case where the individual was not induced at all by the holding out of the prospect of earning commission would not be caught by s 57, I do not think that section requires that the representation described in it should be the sole or even the dominant inducement operating on the consumer’s mind.  In my view, it suffices that it be a “real” or “significant” inducement.  The section is intended to compel corporations to ensure that they do not encourage consumers to acquire goods or services for a certain price while thinking that the “true price” will ultimately prove to be less, because of commissions to be received, when there is no certainty that they will be received at all because their receipt is contingent on the occurrence of later events outside the consumer’s control.  It would be consonant with this objective to understand the notion of “induce” in the section in the manner that I have indicated, and it would be discordant with it to understand it as activated only where the prospect of receiving commissions was the sole or dominant inducement.

75                  In the case of s 61, para (b) of subs (3) provides expressly that it is sufficient for the prospect held out to a person to constitute a “substantial part of the inducement”.

Inducement – the evidence of Shane John Leslie Adams

76                  It is convenient now to give a somewhat detailed account first of the HC Meeting attended by Shane John Leslie Adams, an investigator with the ACCC, on 17 April 1998.  He was not to pay any money to GW but the attempt to induce him to do so is relevant to the alleged contravention of s 61(2).

77                  Mr Adams’ “introducer” was Catherine Neoh.  As arranged, the two met in the foyer of the Sydney Central Plaza building at 477 Pitt Street Sydney.  They proceeded to Level 15.  When they stepped out of the lift, Mr Adams saw a “Giraffe World” sign.  They turned right and approached an open glass doorway to a reception counter where two young women of Asian appearance stood behind the counter.  The sign “Giraffe World” was on the wall behind them.  A man was standing next to the counter.  Ms Neoh introduced Mr Adams to the man to whom she referred as “Jimmy”.  On the reception counter were several lists of names with “Giraffe World” as the heading.  Ms Neoh invited Mr Adams to sign his name and to write the number of his driver’s licence on the list.  He did so.  Ms Neoh gave him a “Giraffe World VIP tag” which he attached to his shirt pocket.  She attached to her jacket a GW badge which bore a photo identification and the letters “GM” in bold.  (It will be recalled that GM signified the “beginner’s” class of membership of the GRS).  She took Mr Adams to a seminar room.  On the way, they passed through lounge areas containing tables and chairs. Mr Adams saw on the walls pictures of buildings with GW logos below the pictures and GW notices.

78                  In the seminar room there were some 200 chairs.  About sixty people were already present and a further ten entered before the doors were shut.  The people appeared to be of various ethnic backgrounds. 

79                  After the doors were closed, the lights were dimmed and the stage area was illuminated, a man and a woman ran to the front of the stage from the back of the room amid applause from the audience.  After these “presenters” outlined a “puzzle” with the use of a whiteboard and gave the solution, they screened a video.  The video is in evidence, as is a transcript of its “voice over”, of which the following is an outline:

 

GW is a business based on the following six elements which together form a “circle of happiness”:

 

            “Company

              Industry

              Products

              Systems

              Training and

              You”

 

GW is:

“an international organisation utilising communications, information technology, satellite and multi-media communication.  With high-quality products manufactured using high-technology and its international and professional image, it has been recognised as an established organisation.” 

GW aims to foster friendships so that “everyone involved will become richer both spiritually and financially and thus produce more entrepreneurs and successful people.” To achieve this aim, GW has chosen the health industry, “one of the most stable and rapidly growing industries”, as its core business, and, in particular, the marketing of the negative ion treatment.  GW “has brought in one of the most noticeable and outstanding therapies in the Health Industry, the negative ion treatment.”  As modern society fosters unhealthy lifestyles and an unhealthy environment, it is in need of such preventative treatments.  (To demonstrate this a chlorine test is carried out whereby indicator is applied to a glass of tap water to show the high levels of chlorine to which humans are daily exposed and which are absorbed by the skin.  It is stated that over time, chlorine accumulates in the body and causes "skin cancer, bladder cancer, kidney cancer and other diseases.”)  Negative ions are stated to be able to assist human health and, by implication, combat such negative forces: 

“Studies have … proven that when there are more – ions in the air than + ones, it would affect the blood, heart, blood pressure, respiration, blood vessels and the skeletal system of human beings favourably. It is also able to relieve fatigue.  Studies also show that – ions also possess tremendous energy.  It can make meat last up to 34 years, and is also able to elevate the growth rate as well as reduce the death rate of chickens.”

 

The ion mat produces these negative ions: 

“The Giraffe World negative Ion Mat is the product which is capable of combining negative ions with life which is also presently the most outstanding and noticeable therapeutic product, which has a device which is capable of producing negative ions with a mat into one single apparatus.”

GW has developed a scheme to enable people to achieve their ideal lifestyle and to become entrepreneurs:

“Being an entrepreneur is not impossible.  Other jobs don’t allow you to realise your own dreams in the shortest possible time.  Undeniably, direct selling is the best choice.  …Giraffe World has created a whole new system which is totally different from other traditional direct selling systems.  Called Grow Rich System to meet the needs of those in pursuit of happiness.   Grow Rich System from Giraffe World is a business that does not require capital.  It utilises the expansion of network thus saving money for the entrepreneur.  And he need not sell products in order to achieve his goal.” (emphasis supplied)

 

 

GW organises training programs to facilitate the success of its entrepreneurs.  These include:

            “

·        1^st, H/C, The Happiness Circle.  This is the first meeting between new members and the company.  During this meeting, new friends get to further understand the company and to redefine their life.

 

·        Next is B/S, Business School.  Business School is where the basic lessons in business are learnt, together with techniques required for the operation of the business are learnt.

 

·        It is then followed by MCC, the Management Consultant Class.  This class is mainly conducted by the successful where they share the secrets of their success.  It motivates them to realise their own potential.

 

·        In order for entrepreneurs to develop their business in Giraffe World and in accordance with their capability, it has designed

 

LT, HMC & SMS courses for leadership training, management principles and self-motivation towards success so that each entrepreneur will be able to grow rapidly with proper training.”

 

GW invites the audience to become entrepreneurs:

“The Kingdom of Happiness from Giraffe World which gives you billions of dollars of business potential is inviting you to be an entrepreneur.”

80                  According to Mr Adams, after the video presentation, a third presenter, “Ernest”, explained how the GRS worked.  He said:

“Once you have reached GM level, you are already earning 15 to 25%.  All that you have to do to reach the next level, where you become a Giraffe Leader, is to introduce three more people either yourself, or through the members you have already introduced.  Then you will be earning 19 to 33%.

Introduce 3 more people and you move to the next stage where you will become Giraffe Retail Assistant.  And here the percentages start to get exciting, because here you receive 41% commission.  And from there if you introduce three other GRA’s, then you will become a Giraffe Retail Manager. Once you get to this level, you can receive 51% commission.  And the best part about this level is that you get a national income bonus level of 3%.”

 

81                  According to Mr Adams’ testimony, the fourth respondent, Mr Scotte, then came onto the stage and explained the GRS in more detail.  He told how, through the GRS, a person could become wealthy by earning commissions.  The following are some extracts from Mr Scotte’s presentation as related in Mr Adams’ affidavit:

“Hello everybody, welcome.  My name is Mark Scott[e].  Thankyou for taking time out of your busy schedules to attend.  I hope that you will find this a rewarding experience.  I know that I have.

Don’t be angry with the person who brought you here today.  I hope that you will realise like they have the opportunity that Giraffe World presents to you.

My position in the company is as a GRA member. I used to have a business in Canberra.  It used to cost me $12,000 a month just to open the doors.  Now that’s a lot of money to have to spend.  But here at Giraffe World, I don’t have to do anything.  There are no overheads, they do all the work for you.  They have company trainers like Ernie to help you.  And they also have associates to do all the paper work for you.  All you have to do is buy the product and they take care of the rest.  There is no selling, and no paperwork.  I hate paperwork, so the associates here do all the work.

Its [sic] amazing the potential at Giraffe World.  I know that I was amazed at the figures, but it is true.  I was so impressed that I closed down my business in Canberra to take this up full time.

When you become a GM, you can expect to earn about $2,000 to $3,000 a month.  Once you get five people under you you can earn $3,000 to $7000 at the GL level.  Move on to the GRA level and you will be earning around $12,000 to $15,000 per month, that’s where I am at the moment.  Then once you recruit 3 GRAs then you move to the GRM stage and this is where you can really start to see the potential of the grow rich scheme, because here you will start to earn between $30,000 to $70,000 a month.  This is where the 3% of the national income bonus really kicks in for your earnings.  Our president Mr Robyn [sic] Han is earning $120,000 a month as a GRM 3 Star.

Last month the company turned over $2 million and this month it looks like it will turn over about $3 million.  We have almost 6,000 members and by this time next year we hope to have 50,000 members.  When Giraffe World starts to bring in about $6 million to $8 million a month, then you can see where the additional 3% bonus really kicks in for those at the GRM level.

Now you may ask how long it takes to get to each stage.  Well, that really depends on you .

.............................................................................................................................

Unlike other direct selling companies that want you to recruit as many people as possible underneath you.  Giraffe World focuses on limiting the number of people directly below you to just three.  Imagine you had a family of 50 children.  There would just be to [sic] many kids to look after, and you wouldn’t be able to give them the attention they all needed.  Its [sic] the same with Giraffe World.  If you limit the three people below you to three, you have more of an opportunity to help them along, and help them to expand there [sic] own membership.  If you have too many people directly below you then you will not be able to look after them all and help them prosper.

.............................................................................................................................

I suppose that’s enough of the grow rich system.  It wouldn’t work without having a great product.  And the negative ion mat is a real innovation that will help you personally which you can then share with your friends.  I’ll give a demonstration now of what the mat can do for you.”

82                  Mr Scotte then focused on the ion mat and carried out a demonstration designed to show those present that the Mat was causing negative ions to flow through the body of a member of the audience who had volunteered for the experiment.  He concluded:

 “This is a great opportunity.  As I said, you are in a unique position because you have got the opportunity to get in early and become wealthy.  But you have to make a decision today.  It is human nature that we are terrible decision makers.  If you go away from here and say that you will think about it, you will go back to work and get back to the day to day things that you do and you will forget about it.  You have to decide today, yes or no.

Outside we have the members lounge where you can talk more about this with some of the company trainers and make up your mind.  I want to leave with the idea that you have a great opportunity to become apart of a great company.”

 

83                  After the doors were opened, Mr Adams proceeded with Ms Neoh to the lounge area.  She took him to a small round table and introduced him to a woman she described as her “up-line” called Alice.  Alice excused herself, saying that she had to speak with another person but that she would return.  After she had left, “Jimmy” came and sat at the table.  In response to a question by Mr Adams, Jimmy explained at length, and by writing on a piece of paper, how the GRS worked.  Among other things he said:

“So you get three people to join as a GM, and then if you help them introduce just two more people to make a total of five people then you go to GL, and then you can move to GRA and you will get 41 % and then you can get to GRM.  And that’s where you can earn all the money.  When you get to there you can be millionaire, because you will be getting 3 % bonus of the national income.

All you have to do is come along to the Business School and the Management Consultant Class and you have already been to the Happiness Circle today. ...”

Jimmy also referred to the fact that $3,000 was a good investment in health benefits. 

84                  Later there was a further conversation between Mr Adams and Jimmy.  Jimmy told him that the Mat cost $2,900, that there was a $50 application fee, and that “the courses” cost $300.  He also explained how, by means of introducing more people, Mr Adams would earn commissions.

85                  Later Ms Neoh brought “Alice” back to Mr Adams to explain how the GRS worked.  Alice did so.  She also spoke of the Mat’s health benefits.  She claimed that she had suffered from insomnia for fifteen years and from neck pain, both of which problems had disappeared since she had used the Mat.  She also referred to the case of a woman who had been in a wheelchair for two and one half years, had used the Mat, and could walk again without the wheelchair.  Alice claimed that GW had a “clearance” from the Department of Fair Trading and pointed to two certificates on the other side of the room.  These appeared to Mr Adams to be endorsed by that Department but he did not have the opportunity to study them.

86                  Shortly afterwards, Mr Adams and Ms Neoh departed.  After leaving her, Mr Adams proceeded back to the offices of the ACCC and made notes of his experiences.

87                  In cross-examination, Mr Scotte questioned Mr Adams’ attribution to him of statements as to the potential income to be earned at different levels in the GRS.  Mr Scotte also disputed ever having said that GW restricted members to recruiting only three people directly.  But the cross-examination failed to challenge the basic sequence of events at the HC meeting or the emphasis placed by Mr Scotte in that meeting on the financial benefits of the GRS.  Although Mr Adams did not make contemporaneous notes of the HC meeting while he was attending it, the notes he made shortly afterwards back at his office subsequently formed the basis of his affidavit.  I accept his evidence.  It shows, and I find, that GW attempted to induce those attending the HC meeting, including Mr Adams, to pay money to GW in order to buy a Mat, to join the GC and to join the GRS, by the prospect of earning the commissions that membership of the GRC would make possible as well as by the prospect of health benefits that the Mat would offer. 

88                  The evidence of Mr Adams establishes an attempt by GW to do things which, if he had succumbed, would have amounted to contraventions of s 57, and, subject to one issue to be discussed later, s 61(1) of the TP Act, and it establishes, subject to that issue, an actual contravention of s 61(2) of the TP Act.

Inducement – the evidence of others

89                  Mr Adams’ evidence is consistent with other witnesses’ recollection of HC meetings.  For example, Ms Lining Gong said that after the video, a presenter spoke for approximately twenty minutes on the GRS and outlined the percentage commissions which could be earned at different stages.  Ms Gong thought “it was a very good business and very easy to do because you just introduce 3 friends and because [she] only had to invest $3,200 and … could make some money”.  This evidence was not challenged in cross-examination.  Ms Gong’s overriding impression was not displaced by the fact that Mr Han, one of the presenters at the HC meeting she attended, stated:

“This mat is good for the health.  If you want good health buy this one.  Just buy the mat, you don’t have to join the grow rich system.”

90                  It is not disputed that Ms Gong bought the Mat, joined the GC and joined the GRS. I find that she was induced to do so and to pay money to GW accordingly, by the prospect of earning commissions as a member of the GRS.  Subject to discussion of the issue referred to earlier, I find on the basis of Ms Gong’s evidence that GW contravened ss 57, 61(1) and 61(2) of the TP Act. 

91                  Edward James Greenfield affirmed that at the HC meeting he attended on 28 April 1998, a presenter outlined the nature of the GRS and the potential commission which a member of it could earn.  His recollection was supported by notes he made during the meeting which were annexed to his affidavit.  (Mr Greenfield’s cross-examination went only to the correctness of his account of a conversation between himself and Mr Scotte in the VIP lounge after the meeting.)  However, Mr Greenfield did not buy the Mat.  On the basis of his evidence, I make the same findings as in the case of Mr Adams.

92                  Witnesses called by GW gave evidence of attending HC meetings and of having been persuaded by what the presenters said to join the GRS.

93                  Mr Chao Guang Dong, affirmed that he attended a HC meeting and was “so impressed by the seminar and the business opportunity the company offered that [he] became a member of [the] Giraffe World Grow Rich System”.  Wendy Lo said: “I became a member of the Giraffe World Grow Rich System as I thought it was a good business opportunity to earn some money.”  Frans Luhur deposed: “I became a member of Giraffe World Grow Rich System because it provides a good business opportunity.”  He continued by stating that he also believed there was therapeutic value in the Mat, but did not state that it was the Mat’s properties which persuaded him to buy the Mat and join the GRS.  Even if the Mat’s properties were influential, I am satisfied that the prospect of becoming a member of the GRS and earning commissions as such was a substantial inducement that operated on his mind.

94                  Other witnesses acknowledged that both the Mat and the prospect of earning commissions induced them to buy the Mat and to become members of the GC and the GRS.  Joseph Wibowo testified: “I was interested in the product as well as the business opportunity that Giraffe World provides”.

95                  Some of the respondents’ witnesses, such as Daniel Valentine-Greer and Joseph Wibowo, asserted that they were not misled or “induced in any way to join the Grow Rich Club”.  However, these witnesses appear to use the word “induced” as a synonym for “tricked”, “misled” or “deceived”.  That is, they were saying that they did not think that either the Mat, the GC or the GRS had been misrepresented to them.  It is not part of the ACCC’s case that the GC or the GRS was misrepresented.

96                  I will next relate in a little more detail, the evidence of five particular witnesses.  They all bought a Mat, joined the GC and the GRS.  I find, on the basis of the evidence discussed below, that all five were induced to buy the Mat and the rights conferred by membership of the GC and the GRS, and so to become participants in the Scheme, to a substantial extent by the prospect held out to them of earning commissions as members of the GRS.  Accordingly, subject only to resolution of the outstanding issue to which I have previously referred, in all five cases GW contravened ss 57, 61(1) and 61(2).

 

(i)         Bin Shi

97                  Bin Shi attended a HC Meeting on 22 May 1998, having been introduced by his friend Jian Yu.  At the meeting the presenter said:

“It is very easy to become a GL.  All you need to do is get three friends to join, then you are a GL.  Then if you help your friends to be a GL, you will then be a GRA.  If you are a GM you will get 18 to 25% commission.  If you become a GL, you will get 19-33% commission…” (emphasis supplied)

 

After the presentation Mr Shi agreed to join the GC.  As Mr Shi was completing the application form, Mr Yu said to him:

“This is the club member application.  If you join the club first then you can join the Grow Rich System”

98                  Mr Shi stated that he “believed that [he] could make money at Giraffe World by introducing other people.  [He] believed that the mat was overpriced because … the business value of the mat was used to pay the commissions”.  He believed that the “difference between the purchase price for the mat, $2900, and the business value of the mat, $2,500, i.e $400, [was] the cost of the mat.  [He] wanted to make money from being a member of Giraffe World.”

99                  Mr Shi’s statement that he believed he could earn money, that is commissions, by introducing others is to be read light in light of the representations made at the HC meeting.  At the meeting, the presenter said that he could earn commissions if he got friends to “join”.  Even though Mr Shi affirmed that “if [he] had known that the mat did not have the health benefits [held out to him] [he] would not have bought the mat or joined Giraffe World”, I conclude that the prospect of earning commissions was a substantial part of the inducement in his case.

 

(ii)        Hendra Tan

100               Mr Tan attended a HC meeting on 7 March 1998 on the introduction of his friend Jack Huynh.  At the meeting, the presenter said:

“…if you reach GRM you get 3% of our national revenue.  Once you reach GRM you will be earning a lot of money.”

The presenter continued:

“You need to aim to introduce 3 people to move from a GM to a GL.  To move from a GL to a GRA you need to help the three people you have introduced, introduce other people.  Similarly, to move from GRA to GRM you need to help people down the line introduce others.”

Accordingly, the GRS was held out as a pyramid, the apex of which, according to what was said, was the position of GRM, a position which carried with it sizeable financial rewards and which could be attained only through the introduction of new members to the GRS.

101               Mr Tan affirmed:

“I understood at the time I paid my deposit that I was paying for an investment in the Grow Rich Scheme.  I was induced to join the Giraffe Club and Grow Rich Scheme because of the prospect of earning significant commission by the introduction of others.  The ion mat and its purported benefits were not matters I considered at the time of joining.”

The prospect of earning commission as a member of the GRS was a substantial inducement in Mr Tan’s case.

 

(iii)       Jeremiah Tioaquen 

102               Mr Tioaquen attended a HC meeting in January 1998 on the introduction of his friend Mr Mario Bocasan.  During the meeting, a presenter drew circles on a board, pointed to one and said:

“If this is you, you get to introduce this business to three people, you will get a commission.” (emphasis supplied)

The presenter continued to draw circles and said:

“You could possibly earn $100,000 a year.  First of all you need to buy the mat.  The next step is to sign up for the business school.”

 

Mr Tiaoquen affirmed that he “believed that if [he] bought the mat [he] could introduce other people and make money”.

103               In Mr Tiaoquen’s case, the prospect of earning commissions as a member of the GRS was a substantial operative inducement.

(iv)       Rosabelle Purnama

104               Ms Purnama attended a HC meeting on the evening of 13 April 1998 on the introduction of her friend Alfred Triestento.  According to Ms Punama, at the meeting, a presenter described the GRS as follows:

“You need to meet 3 requirements before you become a Giraffe World member: purchase the mat, complete Business School and pass an interview.  As a Giraffe World member you are entitled to 15-25% commission.  When you become a Giraffe World leader you are entitled to 19-33% commission.  A Giraffe Retail Agent gets 41% commission, a GRM – Giraffe Retail Manager gets 51% commission plus a 3% bonus from national sales in Australia. A GRM 3 * (3 star) gets 51% commission as well as a 5.5% bonus, and if you reach GRM superstar level you’ll get 10% of national sales revenue.”

You can move from a Giraffe World member to leader in around one month.  It will take approximately 3 months to become a GRA.  Then, within 4 to 6 months, you could be a Giraffe World Manager.”

This presentation caused Ms Purnama to believe that if she joined the GRS she could be rich within six months.

105               In the VIP lounge, a man named “Richard” told Ms Purnama that with the money he had earned from the GRS he would be able to return to school and pay for his fees.  Another man called “Ronald” told her he had already introduced two people and needed only one more.

106               I find that GW induced Ms Purnama to pay over her $3,250 to join the GC and to join the GRS, at least to a substantial extent, by holding out to her the prospect of earning commissions as a member of the GRS.

 

(v)        Jerry Zhirui Zhang

107               Mr Zhang attended a HC meeting in Melbourne and affirmed:

“I was very impressed by the seminar.  I joined the company that day because I believed it would provide me with a good opportunity to make money.  I believed that the negative ion mat would be beneficial for a person’s health and I believed I would make money from the Grow Rich System by introducing others to that system with the expectation that they would also join.  I paid $3250 to join Giraffe World as a member.” (emphasis supplied)

 

Mr Zhang was also induced at least to a substantial extent, by the prospect of earning commissions previously mentioned, to buy the Mat and to join the GC and the GRS.

108               The presentations at HC meetings of the health benefits of the Mat and the wealth benefits of the GRS were intended to induce the newcomers present to buy the Mat, to join the GC and to join the GRS.  People joined after attending the HC meetings.  Quite apart from the direct evidence of operative inducement to which I have referred, I would infer a causal link in the absence of evidence to the contrary.  I note that very few witnesses said that they bought the Mat or joined the GRS only because of the Mat’s perceived health benefits.

109               To most people attending HC meetings, buying the Mat and joining the GC and the GRS were presented as a single package and were so perceived by them.  Therefore, it was common for individuals to buy the Mat, apply to join the GC and the GRS, be accepted as members of the GC, and even attend the Business School and be accepted as members of the GRS, all on the same day.

The outstanding issue

110               I have found GW attempted to induce, and did induce, consumers to pay over $3,250, to acquire the Mat, and to acquire the rights which membership of the GC gave its members, and the rights which membership of the GRS gave its members, by holding out the prospect of receiving payments of commission.

111               But payments of commission in respect of what?  This is the outstanding issue to which I referred earlier.  In the present case, under s 57 the commission must be in respect of successfully assisting GW to supply the Mat or the membership services, while under s 61 it must be in respect of the introduction of persons to become participants in the Scheme.

112               In my opinion, the ACCC has established contravention of s 57 since it suffices under that section that commissions be represented as being payable upon the acquisition by a person of any one or more of the Mat, the GC membership rights or the GRS membership rights.  But there will be a contravention of s 61 only if commission was held out as being payable upon the introduction of a person who became a member of the Scheme, that is, of both the GC and of the GRS.  Since the purchase of a Mat was a condition precedent to membership of the GC and only members of the GC could become members of the GRS, it can be seen that for a contravention of s 61 to be established in conformity with the pleading, the commission would have had to have been held out as becoming payable for the introduction of persons who became members of the GRS. 

113               The question is what was held out as the inducement.  This question is not necessarily answered by reference to what in fact gave rise to the entitlement to commission according to the contractual arrangement: if the introduction of someone to buy a Mat was the entitling event according to that arrangement, but what was held out as the entitling event was the introduction of someone to become a member of the GRS, there would be a contravention.

114               In my opinion, GW did hold out, at least in several cases, the introduction of persons to become members of the GRS as the commission-earning event.  Evidence above supports this finding.  I refer, in particular, to the parts of the evidence of Bin Shi, Jeremiah Tioaquen and Jerry Zhirui Zhang shown in bold typeface above.

 

Whether the interview was bona fide

115               The respondents submit that membership of the GRS is “different to and separate from” membership of the GC and the purchase of the Mat. They rely on the following conditions precedent to membership to the GRS:  the completion of a separate application form, attendance at the Business School, attendance at the Management Consultant Class, and the passing of an interview.  They submit that the necessity of passing the interview has the effect that s 61 is not contravened.  The ACCC, on the other hand, submits that the interview process was not bona fide.

116               But even on the assumption that acceptance into membership of the GRS was a real barrier rather than a mere formality, I think that the terms of s 61 are satisfied.  The fact that it was a term of the Scheme that not everyone would necessarily become entitled to enjoy the commission-earning potential that membership of the GRS gave, does not establish that that potential was not held out as, and did not operate as, “a substantial part of the inducement.”

117               But since submissions were addressed to the issue of the bona fides of the interview process, I will say something of it.  The interview seems to have been designed to do no more than to ensure that the applicant had friends or acquaintances whom he or she would invite to HC meetings.  GW’s own evidence is that as at 3 April 1999, of the 4,656 persons who, it says, had become GRS members down to that time, each of 3,238 had applied to become members of the GC and of the GRS on the same day.

118               Mr Hsu, the Chief Executive Officer of GW, agreed in cross-examination that it was in GW’s interests (through increased sales of the Mat) that members pass the interview and join the GRS.  Mr Tan’s affidavit account of his interview illustrates that in order to pass, interviewees merely had to persuade the interviewer that they were determined to introduce many people and earn substantial amounts of money.  He gave this account:

Interviewer:                  “How long are you planning to take to reach Super Seven?  How many people are you going to bring in each week?

 

Mr Tan:                        I am going to be a Super 7 in one week.

 

Interviewer:                  [H]ow are you going to do that?

 

Mr Tan:                        Well I have lots of friends, I can bring 2 people in each day.”

On this basis he passed the interview and became a member of the GRS.

119               The perfunctory nature of the interview is also illustrated by Mr Tioaquen’s evidence.  His interview was to the following effect:

Interviewer:      “I am going to ask you a couple of questions.  What’s the first thing you need to do to start the business?”

 

Mr Tioaquen:    “Make a list”

 

Interviewer:      “Who are you going to invite first?”

 

Mr Tioaquen:    “People who trust me”

The interviewer then looked through Mr Tioaquen’s forms and told Mr Tioaquen he had passed. 

120               Mr Yu Ning Zhen gave similar evidence.

121               GW produced on discovery a document entitled “Failed Interviews”.  However, the evidence showed that at least some of those individuals listed as having failed the interview were in fact treated as members of the Scheme and were earning commissions accordingly.

122               In my opinion, the interview was not an obstacle to joining the GRS at all for anyone who wanted to join the GRS in order to become wealthy by introducing newcomers.

THE CASE OF MISLEADING OR DECEPTIVE CONDUCT

The evidence relevant to the misleading or deceptive conduct case

123               I am satisfied that all thirty-eight pleaded representations were made by GW.  The ACCC particularised the making of all of them by reference to the evidence.  Needless to say, the particulars were lengthy.  I do not propose to give an account of the evidence.  The respondents have not submitted that any of the representations were not made.

124               Most of the representations were, at least in part, with respect to future matters.  In particular, those that related to the health benefits produced by the Mat were of that kind.  In my opinion, all thirty-eight representations except representations (f), (s), (zh), (zi), (zj), (zk) and (zm) are properly so described.  GW was not merely representing matters of past or present fact: it was representing that the Mat would repeat its performance for the benefit of readers or listeners, as the case might be, if they would only buy it.  By reason of the evidence to which I shall shortly refer, GW has not discharged the onus imposed on it by        s 51A of the TP Act of showing that it had reasonable grounds for making the representations.

125               But as will appear, in so far as the representations were representations of present fact, the evidence to which I shall refer establishes that they were misleading in any event.

126               The ACCC adduced a considerable body of expert evidence.  This was of two broad kinds, both directed to falsifying two of the three classes of representation mentioned earlier.  First, there was evidence concerning the operation of the Mat, directed to showing that it does not emit negative ions or generate an increase in the presence of negative ions in the body of a person lying on the Mat.  Second, there was evidence directed to establishing that there is no credible body of research supporting the proposition that the Mat would cure or relieve any particular ailment or health condition or promote good health.  (It will be recalled that the third class of representation mentioned earlier was that the Mat had been approved or was used by official or authoritative bodies – a class of representation not properly the subject of expert evidence.)

 

The expert evidence led by the respondents

127               I will refer to the expert evidence led by the ACCC below, but it is convenient, first, to note certain expert evidence led by the respondents.  An affidavit of Rodney Brennan, a naturopath was read.  Mr Brennan had graduated with a Bachelor of Science (Honours) Degree and held a Naturopathic Diploma which had been awarded to him in 1979.  He is “the College Principal of Nature Care” and has practiced as a naturopath in the health food industry for twenty-five years.  During that time he was the managing director of the world-wide health product company, Blackmores Limited, in the United Kingdom, from 1987 to 1991.  Mr Brennan said that he was aware of the reliance placed on controlled studies for the assessment of the efficacy of health-related products by the pharmaceutical industry and the regulators of that industry.  He said:

“5.       From my observation, most of the remedies and strategies used by natural therapists have not been scientifically assessed, yet remain supported by the consuming public who are generally satisfied with the results achieved.  In particular, herbal medicine and homoeopathy enjoy sustained and growing support in the absence of formal double blind crossover trials, ...

  6.       I also realise that many doctors are now using alternate health remedies including naturopathy in diagnosing their patients.

  7.       Naturopathy is gradually being recognised by the public as offering effective alternate health remedies.  There are some 6,000 trained naturopaths in Australia and the level of training available to naturopaths has now reached the degree level.  I believe, given the level of usage, it is likely that registration will be required for Naturopaths in the near future.”

128               Accordingly, Mr Brennan’s testimony was a general plea for the acceptance of alternative medicine.  Evidence of that kind does not assist me in relation to any issue I have to decide.  If it was intended to persuade me that any claim made by GW for the Mat should be regarded as not susceptible to being found to be misleading or deceptive, it has failed to do so.

129               The respondents sought to read an affidavit of a chiropractor, Wayne Minter, which was objected to in its entirety.  After some debate, I disallowed the evidence but noted the ACCC’s concession:

“That it is not in dispute that manipulative therapy of the kind administered by a Chiropractor can alleviate the sufferings of patients regardless of the fact that randomised double blinded control clinical studies demonstrating the efficacy of the manipulation does [sic] not yet exist.”

130               The remaining expert witness called by the respondents was Dr T R Blackburn, Associate Professor in the School of Electrical Engineering of the University of New South Wales.  He examined the Mat and analysed its technical features then compared them with the features described in a paper written by Emeritus Professor Oda of Seitoku University, Japan, entitled “Electrostatic Potential Load”, which was published in the Electric Potential Therapy Research Society Journal (Nos 10-11) in December 1990.   The English translation of Professor Oda’s paper concluded with the following summary:

“4.       Summary

            As above, we have gone through the number of different methods for the electric potential loading.  However, the actual potential of the human body itself is relative and dose [sic] not have a significant meaning.  Rather, the condition of the charge induced inside the body is important for the electric potential therapy.

            The condition of the charge inside the body can be classified as; (1) The type where the whole charge of the body dose [sic] not change but the charge is polarised into positive and negative charge and (2) The type where the net charge of the body is changed by the adding or removal of the charge.  Currently, the type (2) is mainly used for an electrostatic potential therapy. An important issues [sic] for this type of the electric potential therapy to be researched is the statical approach to see what kind of an electrical exchange reaction occurs where the skin and the conductor is in contact, and the effect of the change by the boundary reaction to the cells and tissues inside the body through the extracellular sap as a conductor.”

131               Dr Blackburn made it clear that his report did not attempt to address the question of the therapeutic benefit of negative ion interaction within the human body.  He expressed the following conclusions:

“The Giraffe World Ion Mat has an electrical configuration which is identical to one of three described in the paper by Prof Oda.  From the details given in his paper, that configuration is a commonly used one for therapeutic applications.

The electrical characteristics of the Giraffe World Ion Mat are such that it would envelope a person laying on it in a negative electrostatic field and this would cause a polarization effect in the body which could cause some induced electric current flow in the body.  As the current flow in many parts of the body is supported partly by negative ions, the characteristics of the mat would thus aid in the generation of negative ions in the body.” (emphasis supplied)

132               Dr Blackburn also gave evidence in reply to affidavits sworn by Professors Hibbert and Kirkup called by the ACCC to which I refer below.  As a result of the elaboration of his position found in his reply to those affidavits as well in as his oral evidence in cross-examination, Dr Blackburn’s position was that he did not support the proposition that the Mat emitted negative ions or caused the creation of negative ions in the body of a person lying on it.  He said:

“ ... in my report, I was indicating not the creation of individual negative ions by the Ion Mat, but rather the generation and movement of negative ion concentrations by the application of a polarised AC electric field.  Such concentrations of negative ions and their movement in response to the AC plus DC electric field will result from the induced currents generated in the body by the electric field of the Ion Mat.

That such induced currents do occur in the body from the effect of electric fields is well known and has been the subject of research for many years because of their application in the effects of fields from overhead power lines on personnel. ... “

133               Dr Blackburn’s final position was, in effect, that the Mat did nothing more than any other electrical apparatus in close proximity to the body – a position not dissimilar from that established by the expert evidence led by the ACCC.  I will turn to that evidence next.

The expert electrical evidence led by the ACCC

134               The expert opinion evidence adduced by the ACCC can be conveniently classified as electrical and medical.  I will address the electrical first.

135               Ian John Monro, electrical engineer and principal consultant with Testing and Certification Australia, a Division of Energy Australia, has been employed for twenty-six years with Energy Australia and is currently responsible for management of the Consulting Group which provides technical services and advice on a commercial basis to the electrical supply and manufacturing industry.  He examined the Mat.  His purpose was:

·        to determine if negative ions are produced outside the sample mattress;

·        to identify the quantity of such ions;

·        the inspection of the product and analysis.

After conducting tests of the Mat, Mr Monro stated as follows:

“A body lying on the mat would be subjected to an electric field with both direct and alternating components.  There is no magnetic field generated by the mattress.  Similar electric fields, generated by electrical appliances may be found in the average domestic environment for example, an electric blanket, household wiring or an electric toaster.”

136               He thought that “electric field” and not “ionisation” was the more likely explanation of responses evident on a hand-held electrician’s test indicator.  The lamp of the indicator illuminated not only on the Mat, but also on the general purpose outlet in the region of the switch and on the energised power cord of the Mat.

137               Dr Leslie Kirkup, Associate Professor, Department of Applied Physics in the University of Technology, Sydney provided a report describing tests of the Mat which he conducted.  He stated as follows:

“SUMMARY AND CONCLUSIONS

 

1.         The power supply and mattress perform in all meaningful respects to the specification provided in the specification leaflet.

2.         There was no experimental evidence of the generation or accumulation of negative charge due to negative ions or electrons on or close to the mattress above background levels i.e. levels that exist in the absence mattress [sic] connected to, and being supplied by voltage, from the power supply.

3.         The examination of the power supply and the mattress showed no evidence that it has been designed to inject a large quantity of free electrons into surrounding air using any of the established processes.  The electric field strengths associated with the power supply and mattress are small and there appears to be no provision for delivery of thermal, photon or particle energy to assist in electron production.  Without an increased supply of free electrons, the rate of formation of negative ions is not expected to be significantly enhanced by the operation of this product.”

138               Dr Kirkup also responded to Professor Oda’s paper and Dr Blackburn’s report on it.  He stated that in the configuration to which the Mat conforms, there would be no net charge appearing on the human body lying on the Mat but only  a “charge redistribution”.  In relation to Dr Blackburn’s paper, he stated:

“The paper by Blackburn ... discusses the paper by Oda but goes beyond Oda in two important ways.

Firstly, Blackburn suggests that the polarisation that occurs when a conductor is brought close to (but not touching) a human body will in turn cause an electric field within the body and this in turn would cause current flow.  I assert that upon polarisation there would be no electric field within the human body (taking, as in Oda’s paper, the human body to be conducting) and hence no current flow.

Secondly, Blackburn suggests that the current flow in the body would generate charge carriers, such as positive and negative ions.  I assert that in a situation in which an electric field is set up in a conducting material, a current flow would occur due to mobile charge carriers but it does not follow that current flow will generate charge carriers as implied by Blackburn.”

139               Professor David Brynn Hibbert is a Professor of Analytical Chemistry at the University of New South Wales.  He expressed the opinion that in consideration of likely earthed wires near where the ion Mat might be used, the electrical field would lie substantially between the Mat and the floor and therefore would not affect a person lying on the Mat.  He also expressed the following opinions in relation to the following statements made in respect of the Mat by GW:

“Statement	Opinion
The negative ion mat ‘changes the distribution of position and negative ions in the human body through an electric field in the human body’	I note that Mr Monro estimated a field of 30,000 Volts per metre for a ground electrode 2 cm away from the Ion Mat electrode, and concluded this was a relatively low field.  In my opinion the actual field experienced by a person lying on the Ion Mat would be considerably less.
‘With this product you may adjust the distribution of the electric field in your body at any time and in any place, and naturally supplement the negative ions needed in the body’	If there is a negligible field produced by this device it follows that it cannot substantially affect ions in the body.  It could not have any effect of ‘supplementing the negative ions needed in the body’.  Taking the definition of ‘natural’ as that in the Macquarie Dictionary (2nd revised edition) in my opinion the alleged operation of the Ion Mat could not be described as ‘natural’.
‘The Giraffe World Ion Mat increases negative ions in our body.    The company’s mat ‘does not generate negative ions.  However it does help the body to generate and increase negative ions in the body’	In my opinion the Ion Mat could not directly generate ions in the body because of the negligible electrical fields experienced by a person lying on the Ion Mat.  In my opinion there are no electrochemical mechanisms operating in the body that could generate negative ions under the influence of the field generated by the Ion Mat.
‘The quantity of positive ions is reduced and that of negative ions increased’	It is impossible that a difference in the numbers of positive and negative ions can be sustained in the body.  No known processes in the body produce an imbalance in the numbers of positive and negative ions.”

140               Professor Hibbert also responded to Dr Blackburn’s comment on Professor Oda’s article.  He expressed the opinion that electric fields of the magnitude generated by the Mat would not penetrate to the “internal conducting parts of the body”.  He also stated that the “polarisation effect” to which Dr Blackburn referred would be negligible and that “single movement of ions in an electrical field will not generate more ions”.  Professor Hibbert’s general conclusions encompass the following:

“In my opinion, there should be no argument about the existence of an electrical field associated with the Ion Mat.  Any electrical device has such a field.  What is in contention is whether the magnitude of the field emanating from the Ion Mat could cause ‘generation of negative ions’ in a person lying on the mat.  In my opinion, this is impossible.

The configuration of mat and body that Associate Professor Blackburn states to be that of the Ion Mat, is expressly one that Professor Oda says does not generate ions in the body, and is not one used mainly for electrostatic potential therapy.”

            On the evidence before me, to the extent to which the opinions of Dr Kirkup and Professor Hibbert may be in conflict with those of Dr Blackburn, I prefer those of Dr Kirkup and Professor Hibbert.

The expert medical evidence led by the ACCC

141               I turn next to the expert medical evidence led by the ACCC directed to showing that there was no credible research to support the claims that use of the Mat benefited human health.

142               Dr Deborah Claire Saltman, the Head of the General Practice Professorial Unit of the Department of General Practice at the University of Sydney, gave evidence along the following lines.  A review of the literature reveals that very little work has been conducted on negative ions and that most of the work done consists of small scale studies with subject numbers under twenty which makes any interpretation of statistical significance impossible.  She stated:

“No studies could be found which actually show a statistically significant improvement in health effects using negative ions in patients with the range of conditions mentioned in the Ion Mat literature.”

143               Dr Saltman referred to certain small size studies that review negative ions and their effect on human physiology, but she identified methodological problems in them and could not recommend any of them “as a significant contribution even to the debate, let alone to the support of negative ions”.  She also referred to the “mixture of fact and fiction” in GW’s written material.

144               Dr David Alexander Bromley Richards, a Consultant Cardiologist at Westmead Hospital, addressed particular claims made for the Mat to the effect that it would:

·        help with heart murmurs and heart trouble;

·        help stroke patients, and

·        help heart attack patients to recover quickly.

He expressed the opinion that no body of scientific evidence supports the proposition that negative ions produce these health benefits.  He stated:

“Potentially therapeutic interventions in cardiology are assessed by prospective randomised double blind clinical trials.  I am unaware of any such trial being conducted amongst patients with cardiovascular disease generally, or in particular amongst those with structural or valvular heart disease (heart murmurs and heart trouble), or amongst those with cerebral vascular disease or those with stroke (stroke patients) or amongst those with ischaemic heart disease or myocardial infarction (heart attack).”

145               Dr Edward Maxwell Nicholls, Honorary Visiting Fellow, Department of Safety Science at the University of New South Wales, whose medical background included fourteen years as a general practitioner, thirty-four years as a recognised Medical Geneticist, and, concurrently with the later years of the latter, fifteen years of involvement in occupational health and disease as a lecturer and consultant, provided a detailed report on claims made for the Mat in GW’s “Product Manual”.  He commenced his report as follows:

“At first I felt that the way to criticise these claims would be to carry out computer searches of world literature to find support or denial for the claims.  However a limited attempt to identify reference to the claims in standard medical sources eg: miscellaneous textbooks, computerised searches, etc, has been fruitless.  The claims are mostly diffuse and in some cases totally nonsensical at first reading.  However, I will quote various identifiable claims from the text and then give my opinion of them based on nearly 50 years of intense academic and practical experience.”

The Product Manual is a book which was provided by GW to persons who joined the GRS.  It makes many claims as to health benefits to be gained from use of the Mat.  These are presented in the Manual as if they have the backing of scientific research.  The Manual commences:

“Our product the Giraffe Negative Ion Mat has a negative ion producing device which produces 380 volts of negative charge.  This voltage is proven to be the safest and most ideal for the human body.  The Ion Mat with its super ceramics AZ-P surface has multiple functions of killing bacteria together with anti-bacterial effects and deodorisation, repelling insects, pain relief and heat preservation.”

The first page also includes the following:

“The latest high tech research has shown that negative ion therapy can be effective in the following areas – blood circulation, rejuvenation of body cells, balancing of the involuntary nervous system and building immunity.  Negative ion therapy is now receiving increased attention from experts in the preventative medicine industry and research on this therapy is ongoing.

Our product has received approval from the Ministry of Health of Japan.  It has been proven to be an effective therapeutic device.”

146               The following introductory statement is also made:

“ABOUT THE PRODUCT

UNBEATABLE QUALITY

IF YOU ARE ONE WHO APPRECIATES THE FINER THINGS IN

LIFE,

YOU WILL FEEL PROUD TO HAVE CHOSEN GIRAFFE’S PRODUCT.

IT IS PRESENTED TO YOU AFTER AN EXHAUSTIVE SELECTION

PROCESS.

WE HOPE THAT YOU WILL ENJOY IT AND SHARE IT WITH ALL

YOUR FRIENDS.”

147               Dr Nicholls denounced the Product Manual’s numerous claims as having no foundation in science, and, in many cases, as being simply nonsense.

148               Dr Hugh Francis Molloy is a Consultant Dermatologist in private practice at Edgecliff.  He was asked to respond to claims made by GW that the use of the mat benefited the skin in certain respects.  Dr Molloy described the database searches he carried out, and concluded as follows:

“There would appear to be no easily retrievable scientific evidence confirming the efficacy of a Negative Ion Mattress to support the view that such an apparatus would be helpful in the treatment of skin disorders or injuries.  As for the idea that such an apparatus would assure one to maintain a better quality of skin health, my experience over the past forty years of medical practice would lead me to doubt this.”

149               Dr Molloy also responded to claims made by Mr Brennan and Mr Minter, GW’s expert witnesses referred to earlier, generally to the effect that:

“just because some idea or theory is not scientifically proven it cannot be said that that idea or theory will not be successful in a certain percentage of cases.”

Dr Molloy said:

“ ... in my opinion any idea of theory which allegedly impacts on the health or welfare of any person should be subject to some form of scientific assessment, if only to assure members of the public that such an idea or theory will not cause harm.”

            ..............................................................................................................................

In my opinion the problems which the Giraffe World Australia Pty Ltd negative ion mattress is alleged to improve are probably based on a basket of accumulated problems which would at least partially be resolved by changes in lifestyle and in no way related to the use of the ion mat.”

150               Dr Neil William McGill, a Consultant Rheumatologist at the Royal Prince Alfred Hospital, was asked to report on the question whether there is a body of learning to the effect that negative ions relieve acute arthritis and have an anti-rheumatic effect.  His conclusion was:

“ ... in summary, an extensive literature search has provided no suggestion that negative ions can be used to treat arthritis or that there is any data that could be reasonably extrapolated to suggest that negative ions might be of some help for arthritis.”

Dr McGill was subsequently asked to respond to the affidavits of Rodney Brennan and Wayne Minter.  He agreed with Mr Minter that chiropractic manipulation for the treatment of mechanical lesions of the spine has a role for some patients with mechanical spine problems and that such manipulation has been assessed by appropriate scientific studies and, for certain problems, has been demonstrated to be of benefit. 

151               Dr McGill stated as follows in response to Mr Brennan’s affidavit:

“Mr Brennan’s affidavit refers in general to ‘remedies and strategies used by natural therapists’ and more specifically to ‘herbal medicine and homoepathy [sic]’.  He points out the lack of scientific evidence of benefit for most therapies within that area.  The statement ‘most of the remedies and strategies used by natural therapists have not been scientifically assessed, yet remain supported by the consuming public who are generally satisfied with the results achieved’ I think does not provide any support for the effectiveness of such products.  The placebo effect is well recognised and understood, not only by the scientific community but by many of the general community as well.  Because of the placebo effect, it can be expected that a significant number of people will be satisfied with results achieved when taking substances that are completely inactive.  Similarly, the concept that ‘herbal medicine and homeopathy enjoys sustained and growing support in the absence of double blind cross over trials, relying instead of [sic] a wealth of imperical evidence that stands the test of time’ does not, in my opinion, offer any support for the validity of such therapy.  There are some treatments which are very difficult to study in a blinded fashion.  Herbal medicine and homeopathy do not fall into that category and, if they genuinely have a beneficial effect (as has been the case for many medicines which commenced as herbal therapies and have now evolved into purified accepted conventional drug treatments) then appropriate scientifically designed blinded controlled studies will demonstrate the benefit.

The fact that a therapy has not been proven to be of benefit by a blinded controlled study does not indicate that the therapy is not of value however, when a range of therapies which are amenable to appropriate control studies, are recommended and the person or body recommending such therapy indicates that they feel appropriate scientific assessment of whether the therapy works or not is not required seems to me to indicate that the body recommending the therapies has no confidence in the capacity of the therapy to do what is claimed.”

152               Dr John Stuart Marshall, Consultant Immunologist, who has been in medical practice for thirty-nine years and for the last twenty years in the consultant practice of allergies, clinical immunology and environment medicines, stated that he was aware of the interest in negative ion generators, particularly in the early eighties, but had never come across any literature or evidence suggesting that they had any capacity to alter human immune functions. 

153               Dr Julian Lee is a Senior Thoracic Physician at the Royal Prince Alfred Hospital.  He was asked to provide an opinion as to the claimed beneficial effect of negative ion generation in the management of bronchial asthma.  He said that in the course of his professional career as a Consultant Thoracic Physician for more than thirty years he had been aware of periodic claims made concerning the alleged beneficial effects of negative ion generators in the management of a variety of disorders, including bronchial asthma, but that such claims “remain speculative in the absence of reports in the peer reviewed medical literature providing scientific evidence of such an effect.”

154               Asked to comment on the evidence of Rodney Brennan and Wayne Minter, Dr Lee simply provided copies of two editorials of recent issues of the New England Journal of Medicine.  In general terms, they denounced alternative medicine.  The “tone” of the editorials can be gleaned from the following passage:

“It is time for the scientific community to stop giving alternative medicine a free ride.  There cannot be two kinds of medicine – conventional and alternative.  There is only medicine that has been adequately tested and  medicine that has not, medicine that works and medicine that may or may not work.  Once a treatment has been tested rigorously, it no longer matters whether it was considered alternative at the outset.  If it is found to be reasonably safe and effective, it will be accepted.  But assertions, speculation, and testimonials do not substitute for evidence.  Alternative treatments should be subjected to scientific testing no less rigorous than that required for conventional treatments.”

155               Despite references in the product Manual to “research findings” and “various doctors [sic] opinions” supporting the claimed health benefits of negative ions, GW led no evidence of substance to counter the strong body of expert medical evidence led by the ACCC.  GW did tender a sixty-three page translation of a book written in the Mandarin Chinese language entitled “Achieve Good Health While Sleeping - The King of Modern Health Therapy - Electric Potential Therapy”.  The book, which was exhibited to the affidavit of the translator, was “compiled” by a person called Shiao Han Li who did not give evidence before me, and does not appear, at least so far as the book reveals, to have any medical qualifications.  The book purports to be in “the nature of a home medicine guide” and contains a lengthy discussion about negative ions and numerous “testimonials” from people who claim they have been cured of a range of ailments by an “ion electric potential therapeutic mattress”.  While it does purport to refer to the “findings” of a number of doctors, I do not think that the book has any evidentiary value in the face of the expert medical evidence called by the ACCC.

The evidence as to the falsity of the representations as to official or authoritative approval and use of the Mat

156               Finally, GW represented, in substance, that official bodies supported the claims made by GW for the Mat as a therapeutic device. I refer to representations (f), (zh), (zi), (zj) and (zk).  As noted earlier, I find that these representations were made and it remains to address the issue of the falsity of them.  But because it is necessary to appreciate that they were intended to convey a message about the health benefits of the Mat, it is appropriate first, to say a little more about the making of them.

157               There was some evidence directed to a Department of Fair Trading certificate which was issued with respect to the Mat, but the ACCC does not plead a representation in relation to the grant or terms of such a certificate.  In cross-examination, Ms Ip, was shown a “Certificate of Suitability” which was taken from the box containing the power source, which together with the Mat, constituted an exhibit.  The Certificate (Certificate Number 7039) was issued by the Department of Fair Trading and stated:

 “This is to certify that articles of the same type as the article specified below and variations so specified are acceptable by the DEPARTMENT OF FAIR TRADING as suitable for connection to public electricity supply in NEW SOUTH WALES in accordance with the provisions of AS 3000 subject to the conditions stated.” (emphasis supplied)

The “article” was specified as:

“Ion Mat controller housed in a

thermoplastic enclosure

Trade Name ‘Giraffe’

240V 50Hz 3.2W

Class I”

Ms Ip could not confirm whether her Mat had come with an identical certificate, and was able to state only that “some certificate” had accompanied the Mat. 

The Product Manual states:

“The Giraffe World Ion Mat is certified by the [D]epartment of Fair Trading NSW Consumer Protection Agency as meeting electrical safety requirements, Certificate Number 7039.”

158               The Department had indeed certified that the Mat was appropriate to be connected to the electricity supply but this said nothing as to the effectiveness of the product as a therapeutic device.

159               It was alleged that GW represented that the “ion mat has received approval from the Ministry of Health in Japan and [is] a proven therapeutic device.” (representation (f)). 

160               In the video presentation shown at HC meetings, it was stated that:

“ … we can confirm that the – ion mat is helpful to the maintenance of human health.  In addition to that, the Giraffe World Negative Ion Mat has received approval from the Ministry of Health of Japan and Taiwan.  It is a best product in Japan.  It is now available in Australia, Taiwan, Malaysia and USA.  This high quality product will definitely receive recognition from those who are health conscious.”

Although not particularised by the ACCC, the “Product Manual” made a similar representation.  It stated, under the heading “Negative Ion Therapy”:

“Former professor of University Toho in Japan, Dr Takada Maki is a renowned negative ion research scientist.  His negative ion therapy (negative electrotherapy) involves charging the human body with negative electricity in order to improve the effectiveness of negative ions in the body.  It has a positive effect on the entire body through blood, the cells and the nerves, assisting in the cure of various diseases.  The innovative approach therapy will greatly improve human health and will play a significant role in the treatment of many illnesses.

The therapy may also help reinvigorate the body’s cells and tissues with no harmful side effect.  It can be used to improve our physical constitution.”

161               At the foot of the page, under the symbol of a pair of wings attached to a pole around which two snakes are coiled, suggesting some kind of association with the practice of medicine, it was stated:

“The Appr[o]val No. from the Department of Health in Japan as a medical equipment is 21000BZZ00252000.”

162               Martin Cowling, who at the time worked for the AIDS Council of NSW as its Human Resources Co-ordinator of Volunteer Services, visited GW on 10 March 1998 at the invitation of Rosalee K of the Australian Executive Women’s Network who also was a member of the GRS.  Although Ms K had extended the invitation to him under the auspices of the “Australian Executive Women’s Network”, subsequently, on Mr Cowling’s visiting the premises on 10 March, it became clear that she was connected with GW and had invited Mr Cowling to GW to inform him of its product and business.  She wore an identification badge with her name, her photograph and the GW logo.  During the course of the conversation, Ms K introduced Mr Cowling to Ms Orr and stated that Ms Orr had been “appointed [by GW] to bring [the] product to the non-Asian market”.  Mr Cowling affirmed that Ms K and Ms Orr told him that the Mat had the endorsement of the Japanese Health Ministry, and that Ms K also stated that the Mat was used in nearly all hospitals in the Japanese Health System (representation (zk)).  I accept Mr Cowling’s evidence.

163               Ms Michaela Watson, an investigator with the ACCC, affirmed that during a HC meeting that she attended, a female presenter called “Jennifer”, stated the Mat had been approved by the Japanese Health Ministry, and emitted negative ions which “promote good health”.  Ms Watson made notes of her experiences at GW during a taxi ride home from the meeting.  The following day she incorporated those notes into a draft affidavit.

164               In light of the above evidence, I have found that GW represented that the Mat had received the approval of the Japanese Ministry of Health and was a proven therapeutic device.  It is true that it was not explicitly stated that the Mat was a “proven therapeutic device”, however, several times references to the approval of the Japanese Health Ministry accompanied references to health benefits offered by the Mat in a manner which implied that the Mat was a proven therapeutic device.  For example, the HC video stated that GW could “confirm” that the Mat was beneficial to health, and that “in addition”, the Mat had received the approval of the Japanese Health Ministry.  This representation was misleading and deceptive: as noted in the next paragraph, although the Japanese Ministry of Heath had apparently issued an approval in respect of the Mat, it was only for its manufacture, and was silent on its effectiveness.

165               According to what purports to be a verified translation into English, the Mat was the subject of a certificate dated 9 April 1998 issued by the Japanese Minister of Health and Welfare entitled “Approval of manufacturing a medical equipment”.  The certificate stated:

“The application lodged by the applicant, dated 7 November 1997, to manufacture the medical equipment has been approved, in accordance with the Sub-section 1 of Section 14 of the Pharmaceutical Affairs Law (Law No. 145, 1960).”

According to that translation, the applicant for the certificate was the “Yamatomisaki Co. Limited”.  Apparently, however, the applicant’s name can also be translated as the “Daiwa Misaki Co Ltd”. 

166               The present is an illustration of much of GW’s manner of operation: GW takes a neutral fact of no particular significance and derives from it support from the world of science or officialdom for the benefits it claims for its product.

167               In relation, to representation (zh), Mr Cowling affirmed that during his visit to GW, Ms Orr stated:  “We are close to finalising approval from the Australian Health Department for the negative ion mat.”  Ms Orr asserted that the Mat was indeed with the Australian Department of Health awaiting approval, however, apart from this hearsay evidence, the respondents have led no evidence that GW had applied to any Department of Health for any approval in respect of the Mat, let alone evidence of the progress of the application within the Department.

168               The evidence pertaining to representations (zi) and (zj) is found in the evidence of  Mr Hendra Tan who affirmed that at a HC meeting, a presenter stated:

“The product has been tested in Japan.  It has got a health certificate in Japan which is the hardest in the world to get.  In Taiwan its got one.  The product has been tested  and used in Japanese hospitals for 15 years.”

 

In cross-examination, Mr Tan conceded that the presenter had qualified the representation by stating that the Mat was being used in certain types of hospitals, however, Mr Tan could not recall the exact type.  The substance of the representation was clearly made.

169               I have referred above to the Japanese language certificate in evidence.

170               I infer that representations (f), (zh), (zi), (zj) and (zk) were false.  The only evidence of approvals before me do not support them.  GW could be expected to have possessed evidence of their truth if that evidence existed, but did not lead such evidence or explain its absence, even though it knew that the allegation was being made and that the documents available would suggest that the representations were not supported; cf Jones v Dunkel (1959) 101 CLR 298.

Conclusions on the misleading or deceptive conduct case

171               GW represented that the Mat emitted negative ions or generated them within the body of a person lying on the Mat.  It does not.  GW should be restrained from making representations to that effect.

172               GW represented that there was scientific support for the proposition that the Mat, by means of negative ions, produced and would produce benefits for human health.  There is not.  GW should be restrained from making such representations.

173               GW represented that various official bodies supported its claims that the Mat offered the health benefits claimed for it.  They do not.  GW should be restrained from making representations to that effect.

174               It seems appropriate to caution against a potential misunderstanding.  No-one suggests that GW is not entitled to sell its Mat.  No doubt if A tells B that a particular therapeutic device, “health food”, pharmaceutical product or practice has benefited A’s health in a particular way, ordinarily the statement, if honestly made, is not “misleading or deceptive”, even if there is no scientific evidence to support a causal connection.  The reason is that A and B understand that A is purporting to recount only his or her perceptions.  Conversations of that kind in a non-commercial context are matters of daily occurrence.

175               An interesting question would have arisen if GW had been careful not to make claims for support in science or officialdom for the therapeutic effects of the Mat, but had merely provided the forum of HC meetings in which several As might make statements to an audience of several Bs about the Mat, of the kind just described, and GW had exploited the conversations by selling its Mat “on the back of them”.

176               There is a danger in discussing such hypothetical situations: in the real world, the facts would not, almost certainly, conform to the hypothetical model.  If, for example, the As in the illustration derived a financial benefit for recounting their experiences, the model of a private conversation between A and B is immediately betrayed.  But more importantly, even if the As did not derive financial benefit, GW would be using, and would be understood to be using, the As’ testimonials to promote the sale of the Mat.  It may well be that because of that context, GW would still be found to be representing without reasonable grounds that the Mat would, as a matter of objective fact as distinct from perception, produce for them the health benefits related by the As.  It is difficult to imagine how, given the context, GW would be able to make an effective disclaimer, that is, to achieve a situation in which it was selling its Mat on the basis of the testimony of the As, without itself being found to be engaging in misleading or deceptive conduct.  However, the above represents only my tentative views on the issue raised by me.

 

 

 

THE CASE OF ACCESSORY LIABILITY AGAINST MR MISUMA, MR HAN, MR SCOTTE AND MS ORR

 

The relevant claims for relief

177               The ACCC alleges in relation to each of Mr Misuma, Mr Han, Mr Scotte and Ms Orr that “by arranging, participating in and promoting the Scheme”, the individual respondent in question has been “directly or indirectly knowingly concerned in or a party to” GW’s contraventions of ss 52, 53(c), 57, 61(1) and 61(2) and 61(2A) of the TP Act.  I have already concluded that contravention of s 61(2A) by GW is not established and, accordingly, I need say no more of that provision.  Since there are thirty-eight pleaded contraventions of ss 52 and 53(c), it is truly remarkable that the ACCC alleges that each of the four individual respondents incurred accessory liability in respect of all contraventions by GW.

178               Against each of Mr Misuma, Mr Han, Mr Scotte and Ms Orr, the ACCC seeks declaratory and injunctive relief.  It seeks a declaration that each was “directly or indirectly knowingly concerned in or a party to” contravention of ss 52, 53(c), 57 and 61 of the TP Act and an injunction restraining each of them:

“from being in any way, directly or indirectly, knowingly concerned in or a party to [GW’s] promotion of or involvement in the [S]cheme or any similar scheme and from being in any way involved in the promotion of, or in the involvement in [sic], any similar scheme by any other corporation.”

 

179               The words “directly or indirectly, knowingly concerned in or a party to” are no doubt taken from s 80(1) of the TP Act.  That subsection provides that where, on the application of, inter alia, the ACCC, the Court is satisfied that a person has engaged, or is proposing to engage, in conduct that constitutes or would constitute:

“(e)     being in any way, directly or indirectly, knowingly concerned in, or  party to, the contravention by a person of [a provision of Part V of the TP Act]”,

the Court may grant an injunction in such terms as the Court determines to be appropriate.

180               When the ACCC’s proceeding was a proceeding under Part IVA of the Federal Court of Australia Act 1976 (Cth) (“the FCA Act”), the ACCC also sought an order that GW repay any money paid to it in respect of the Scheme and an order for payment of compensation for loss or damage suffered by persons as a result of participation in the Scheme.  It was not made clear whether that order was sought against Mr Misuma, Mr Han, Mr Scotte and Ms Orr.  Section 82 of the FCA Act provides that a person who suffers loss or damage by conduct of another person that was done in contravention of a provision of Part V of that Act may recover the amount of the loss or damage by action against that other person “or against any person involved in the contravention”.  Section 75B(1) of the TP Act provides, relevantly, that a reference in, inter alia, s 82 to a “person involved in a contravention of a provision of [Part V]” is to be read as a reference to a person who:

“(c)     has been in any way, directly or indirectly, knowingly concerned in, or party to, the contravention; ...”

181               It will be noted that para (c) of s 75B(1) is in substance identical to para (e) of s 80(1).  At present I am not concerned with ss 75B and 82, and am concerned only with s 80.

182               The ACCC seeks orders restraining Mr Misuma, Mr Han, Mr Scotte and Ms Orr from:

“4(iv)  promoting, advertising, holding out or participating in the [S]cheme or any similar scheme. 

   (v)    ...

(a)       publishing, distributing or disseminating any promotional or advertising material in respect of the [S]cheme or any similar scheme;

(b)       inducing by any means whatsoever persons to participate in the [S]cheme 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 participating in the [S]cheme.

(vi)      …being in any way, directly or indirectly, knowingly concerned in or a party to [GW’s] promotion of or involvement in the [S]cheme or any similar scheme and from being in any way involved in the promotion of, or in the involvement in, any similar scheme by any other corporation.”

183               Finally, the ACCC seeks an order pursuant to s 80A of the TP Act requiring GW, Mr Misuma, Mr Han, Mr Scotte and Ms Orr:

“at their own expense and in a manner and a time that the Court deems appropriate, to publish advertisements stating the respects in which [they] have been found to have engaged in conduct in contravention of Sections 52, 53(c), 57 and 61 of the Trade Practices Act, 1974 (Comm.) or to have been knowingly concerned in or a party to that conduct.”

Accessory liability under the TP Act

184               In Yorke v Lucas (1985) 158 CLR 661, in which the managing director of a vendor’s corporate agent was held not liable by reason of s 75B(1) for the vendor’s misrepresentation, Mason ACJ, Wilson Deane and Dawson JJ held in a joint judgment (at 670) that:

·        for a person to be “knowingly concerned in” a contravention, he or she must have “knowledge of the essential facts constituting the contravention”; 

·        The word “knowingly” in para (c) qualifies the expression “concerned in” and not “a party to”; and

·        “the proper construction of par (c) requires a party to a contravention to be an intentional participant, the necessary intent being based upon knowledge of the essential elements of the contravention.”

In the same case, Brennan J said that under s 75B, civil liability is imposed only on “those who engage in the conduct prescribed in s 75B with the state of mind … call[ed] mens rea” (at 673).

185               The judgments make it clear that one of the “essential elements” of which the accessory must have known is, in the case of a contravention of s 52 by misrepresentation, at least the facts that render the representation misleading or deceptive.  Their Honours were not dissuaded from this view by the fact that such knowledge is not an essential element of primary liability for a contravention of s 52 by the corporate contravener.

186               This approach to accessory liability under para (c) of s 75B(1) of the TP Act (as noted earlier, the same approach is applicable to para (e) of s 80(1)) has been taken in many cases; cf Crocodile Marketing Ltd v Griffith Vintners Pty Ltd (1989) 28 NSWLR 539 at 546 per Cole J; Butt v Tingey, (Davies, Neaves and Beazley JJ, 5 August 1993, unreported) at pp 5-6; Richardson & Wrench (Holdings) Pty Ltd v Ligon No 174 Pty Ltd (1994) 123 ALR 681 (FCA/Burchett J) at 692-695; Westbay Seafoods (Aust) Pty Ltd v Transpacific Standardbred Agency Pty Ltd (Burchett, Whitlam and Sundberg JJ, 6 June 1996, unreported) at p 5 (see also (1996) ATPR(Digest) 46-162); Compaq Computer Australia Pty Ltd v Merry (1998) 157 ALR 1 at 4-5.  It is not required that the accessory should have appreciated that the conduct was unlawful.

187               Unfortunately, the ACCC’s submissions in relation to the issue of accessory liability have not addressed the critical issue raised by the authorities of the state of mind of the supposed accessory in relation to particular pleaded contraventions.  In its submissions the ACCC has, at least generally, simply referred to the evidence of the positions and conduct of the respective alleged accessories without attempting to show that that evidence establishes the intention and knowledge as well as the “involvement” required in respect of any particular contravention.  The failure to do so is most obvious in relation to the pleaded contraventions of ss 52 and 53(c) of which, it will be recalled, there are no less than thirty- eight.  It is simply absurd to suggest that, for example, Ms Orr was knowingly concerned in, or party to, all thirty-eight pleaded contraventions of those sections, yet this is what is pleaded.

188               In the circumstances, I propose to do no more at present than to express provisional views and to allow the ACCC the opportunity to make supplementary submissions on accessory liability if it wishes to do so.

189               I will consider in turn the positions of the respective alleged accessories. Mr Misuma and Mr Han did not give evidence.  As noted earlier, Mr Misuma appeared through his solicitor and counsel while Mr Han did not appear.  Mr Scotte and Ms Orr appeared in person and gave affidavit and oral evidence.

Mr Misuma

190               Mr Misuma was the founder of GW and its business and remains a director of it.  His signature on behalf of GW appears on many of the forms of application for membership of the GC and invoices in respect of the sums of $3,250 and warranties in respect of the Mat.

191               Mr Hsu, GW’s Chief Executive Officer, testified that in that capacity he reported to Ms Pauline Chen in Japan who was Mr Misuma’s personal assistant.  Mr Misuma appears in a GW “Business School” video.  Mr Hsu last saw Mr Misuma on the Sydney premises of GW in November 1998.  It appears that since that time he has been living overseas, apparently in Japan.  A photograph of Mr Misuma and the suggestion that he was Chairman of GW appears in a GW “Career Manual” under the tab “Introduction to the Company”.  It seems clear that Mr Misuma made a sizeable amount of money from the Scheme.  He is a director of a number of companies which were the beneficiaries of large sums of money paid by GW.  He has not testified in answer to the claims made against him. 

192               I infer that Mr Misuma knew of all the elements of the conduct of GW which I have held constituted a contravention of ss 57, 61(1) and (2) of the TP Act.  He was active in promoting that conduct by GW. 

193               My preliminary view is that there should be declaratory and injunctive relief against Mr Misuma in respect of contravention of ss 57 and 61 but not of any of the pleaded contraventions of s 52.

 

Mr Han

194               In the GW Career Manual there appears a photograph of Mr Han and the suggestion that he is President of GW.  This material appears behind the tab “Introduction to the Company”.  As well, Mr Han’s GW business card, which states he is the President of GW, is in evidence.  He appears to be a shareholder in GW.  He was actively engaged in promoting GW and the Scheme in March 1998.  He achieved GRM 3 Star status in the GRS.  He spoke at a number of HC meetings promoting the Scheme.  He determined whether refunds would be made to customers.  He also gave presentations at the Business School seminar.

195               Mr Han selected presenters to be employed by GW and was closely involved in the promotion of the Scheme and in the Management Consultant Class.  It appears that he made substantial amounts of money from his membership of the GRS.

196               The fact that Mr Han failed to appear to respond to the claims made against him and the fact that no evidence was led on his behalf makes it easier for the Court to find that he was directly or indirectly knowingly concerned in or a party to GW’s contraventions of ss 57 and 61(1) and (2) of the TP Act.

197               Again, my preliminary view is that there should be declaratory and injunctive relief in respect of contravention of these provisions but not of s 52.

Mr Scotte

198               Mr Scotte promoted the Scheme in presentations at HC meetings.  That is, he attempted to induce people to join the GC and the GRS.  His cross-examination of various witnesses who testified as to things he had said did not suggest otherwise. 

199               Mr Scotte had a substantial interest in promoting the Scheme – in the ten months between March 1998 and January 1999 he made about $106,000 as a member of the GRS. 

200               I am not persuaded that Mr Scotte appreciated that unlawfulness was involved but knowledge in this respect is irrelevant.

201               My preliminary view is that there should be, at most, declaratory relief against Mr Scotte in respect of contraventions of ss 57 and 61.  There is no evidence of a likelihood of repetition: GW has appointed an administrator; it has ceased trading; and (I was informed) it is no longer in possession of the premises which it leased.  The case does not seem to be one for an injunction against Mr Scotte. 

202               The position in relation to s 52 calls for some discussion.  Mr Scotte’s presentations were part of GW’s attempt to induce people to buy the Mat, join the GC and join the GRS.  He made representations concerning the health benefits offered by the Mat as well as the financial benefits offered by membership of the GRS.

203               The ACCC alleges that Mr Scotte made the following representations relating to the Mat:

“(g)     The ion mat reduces the need for sleep;

  (h)     The ion mat can cure skin problems;

 

  (i)      Persons using the ion mat will be stronger and healthier within 3 weeks of using it.”

204               Mr Adams gave evidence that at the HC meeting which he attended, Mr Scotte invited an audience member to participate in a test involving the Mat.  The audience member was asked to lie down on the Mat.  Mr Scotte then proceeded to pass a “pen” over the man’s body.  Before the Mat was connected to the power source, the pen did not make a noise when being passed over the man’s body.  After that connection was made, it was suggested that the “pen” “beeped” and that this was because negative ions flowed through the volunteer’s body.

205               Mr Scotte then asked the volunteer to raise his leg and Mr Scotte pushed down on it while the volunteer, at Mr Scotte’s request, resisted.  The power to the Mat was turned on and Mr Scotte asserted that “the negative ion mat took the 240 volts from the power source and converted it into negative 380 volts”.  After several minutes, the “leg test” was again conducted and it was suggested to the audience that the volunteer was exhibiting increased strength.  According to Mr Adams, Mr Scotte then said:

“It does wonders for a lot of ailments.  I have had a problem with my face (acne marks…) for some 25 years.  But since I have been using the mat, my face is the best it has ever been.  I also find that I need less sleep than I use[d] to using this mat.”

206               According to Mr Adams, Mr Scotte also said:

“It would take about three weeks to really start to feel the effects of the mat.  We have only had it on here for a few minutes.”

207               In cross-examination of Mr Adams, Mr Scotte suggested to him that he (Mr Scotte) did not state that the pen beeped when negative ions flowed through the volunteer’s body, but that it made a noise showing that the product was operating.   Mr Adams did not agree.

208               Ms Kilsby, a witness called by GW, affirmed that after having made a presentation as to the financial benefits of the GRS, Mr Scotte stated:

“I have always had acne problems.  After a week of using the negative ion mat, my skin improved enormously.  More than it had ever improved before.  My skin is now the best it has ever been in a long time.”

Ms Kilsby’s evidence was not challenged in cross-examination and accords with that of another witness, Mr Hendra Tan.

209               My preliminary view in relation to s 52, is that there should be no relief against Mr Scotte in that respect.  In relation to his skin problem, he was making an honest statement of his perception.  In relation  to the “strength” and “pen” tests, it is not shown that Mr Scotte knew of facts that falsified the representations that arose from what he did.  In any event, there is no threat of repetition.

 

Ms Orr

210               The main evidence relied on by the ACCC against Ms Orr, is that of Mr Cowling who attended GW’s premises on 10 March 1998.

211               In March 1998, Ms Orr was engaged by GW as Vice-President of Public Relations and was paid a weekly retainer of $1,000.  She worked in that position until on or around 30 June 1998.  She is also the founder and President of the “Australian Executive Women’s Network”.  Her role in GW was to improve communication between GW’s non-English speaking management and its English-speaking Australian members.  Fiona Lawrence, an investigator with the ACCC, affirmed that during a telephone conversation, Ms Orr described her position in GW as “Vice-President of Public Relations” and stated:

“I’m responsible for all of Giraffe World’s communication with the media, the press and the public because you know it’s very difficult for them to communicate sometimes because they’re Taiwanese.”

 

During the conversation, Ms Orr praised GW and the Mat product.  She said to Ms Lawrence:

“ … [the] product is second to none.  It’s absolutely fabulous.  I can only talk from personal experience but I had arthritis in my hands and they used to get all swollen and sore and I used to get pins and needles at night.” (emphasis supplied)

She also said to Ms Lawrence:

“ ...  as soon as I used the ion mat it stopped straight away and all the swelling went down.  ...  It’s also cured my acidic blood.”

In cross-examination, Ms Lawrence maintained that she had used the word “cured”.

212               During Mr Cowling’s visit to GW on 10 March 1998, the circumstances of which were discussed earlier, there was a lengthy conversation between Ms Orr, Ms K and himself.  It included the following:

Ms Orr:            “I have heard of a person who had a stroke and lay on the mat and overnight they got up.  That’s why we want them all in hospitals and nursing homes.”

 

                        …

 

Ms Orr:            “Giraffe World is a Taiwanese company, a very well established company.  They are expanding into Australia.  We are close to finalising approval from the Australian Health Department for the negative ion mat.  Its [sic] also endorsed by the Japanese Health Ministry.   I am directly about to move into China.  I have a woman in America who is about to start selling it there.  I am just about to fly off to China and America.”

 

213               Ms Orr also made statements to Mr Cowling as to the financial benefits to be gained from the GRS, of which she was a member.  I will not set out all the evidence and the following statements by her to Mr Cowling will suffice:

“You then get a percentage of every mat they sell.  So you may decide to take the easy road.  All you do is send the people to a seminar.  We will sign them up as a GM, they get their mat and you get (a percentage which [Mr Cowling did] not recall).  Then if they sign up other people to become GM’s, they move up the ladder.  And because you have signed them up, you move up the ladder.”

…

“Let me put it this way Martin.  You could get half a dozen, lets say 6 people in the AIDS Council to become your sellers in the AIDS Council.  If you sold a mat to all of those people then you would get a percentage of the takings.  So you would actually be helping change people’s health and become very rich yourself.”

214               There was also a conversation between Mr Cowling and Ms Orr as follows:

Ms Orr:            What we will do today Martin is sign you up as a Giraffe Member.  You can take a mat home and see what it is like.”

 

Mr Cowling:     “How much is the mat?”

 

Ms Orr:            “$3000.”

 

Mr Cowling:     “Would I have to pay all of that today?”

 

Ms Orr:            “Well you see, all you have to do is sign up a couple of people at the AIDS council and will get (a percentage figure which [Mr Cowling did] not … recall) back and that will pay for your mat.”

215               Mr Cowling did not buy a Mat or, it follows, join the GC or the GRS.  My preliminary view is that Ms Orr was knowingly concerned in the contravention of s 61(2) of the TP Act, but not ss 57, 61(1) or 52.  As in the case of Mr Scotte, I am not persuaded that Ms Orr was aware of the unlawfulness that touched GW’s activities.  Her statements as to her own experiences of using the Mat were honest statements of her perceptions.  It is not shown that she knew facts which falsified her statements about the “Australian Health Department” or the “Japanese Health Ministry”.  There is no likelihood of repetition of her conduct for the reasons I gave in relation to Mr Scotte.  My preliminary view is that in her case as in his, there should be no more than a declaration in relation to accessory liability in respect of the contravention of s 61(2).

RELIEF

216               I will not at present make declarations or orders but will allow an opportunity for the ACCC to bring in short minutes of orders to be made in conformity with these Reasons for Judgment.  I note that on 23 April 1999, GW gave a written undertaking to the Court in the following terms:

“Without admission, the First Respondent undertakes to the Court that pending the delivery of the judgment of the Court in these proceedings and such further orders that this Court shall make, the First Respondent will not by itself or knowingly by its employees or members make the following representations concerning the Giraffe Ion Mat (‘the Mat’) that:

1.         The Mat generates or emits negative ions.

2.         The Mat generates or increases negative ions in the human body.

3.         The use of a Mat will cure any or any particular ailment or health condition.

4.         The use of the Mat will relieve any or any particular ailment or health condition.

5.         The use of the Mat will promote health.

6.         Any Australian or other Government approvals of the Mat provide endorsement for the capacity of the Mats to influence health.

The First Respondent further undertakes to the Court that the First Respondent will not distribute the Product Manual for the Mats, or show the ‘Happiness Circle Video’ (which the First Respondent has not used for more than six months).”

It may well be that in respect of the misleading and deceptive conduct part of the case, a conversion of these interlocutory injunctions into final ones would be an appropriate course.

THE ACCC’S APPLICATION TO RECONSTITUTE ITS PROCEEDING AS A REPRESENTATIVE PROCEEDING

217               The ACCC commenced proceeding NG 421 of 1998 on its own behalf and as a representative party pursuant to s 33C of the FCA Act.  Section 33C is in Part IVA of that Act.  Part IVA is headed “Representative Proceedings”.  On 24 July 1998, I made an order under s 33N of the FCA Act that the proceeding no longer continue under Part IVA.  On 7 October 1998, the ACCC filed a notice of motion seeking, inter alia, orders permitting it to file a further amended application and a further amended statement of claim for the purpose of “reconstituting” the proceeding as a representative proceeding.  I stood over that motion to the final hearing.

218               In my Reasons for Decision of 14 July 1998 (now reported at (1998) 156 ALR 273),  I noted my doubt that “on the existing evidence, there [were] even six other persons who [had] a claim against [GW] and Mr Han as required by s 33C (1)(a) of the [FCA] Act” (at 290).  I added (at 292-293):

“Even if it were possible to say that there were at least six such persons, it is not possible to say whether there were few or many loss sufferers at that time. … The uncertainty touching the issues to which I have referred is a factor which militates in favour of the making of an order under s 33N, in my opinion.” 

I also noted that the ACCC had available to it the procedure provided by s 87 (1A) and (1B) of the TP Act (at 295). 

219               The ACCC submits that circumstances have changed since 24 July 1998 and that it is appropriate now that the proceeding be again a representative proceeding under Part IVA of the FCA Act.

220               In my opinion, I do not have power to make the order sought.  There is no provision in the FCA Act expressly permitting me to do so.  Part IVA contemplates only the commencement of proceedings as representative proceedings: cf ss 33A (definitions of “group member”, “representative party” and “representative proceeding”), 33C, 33D, 33G, 33H and 33K.  In particular, s 33A defines “representative proceeding” as “a proceeding commenced under section 33C”.  Of course, proceeding NG 421 of 1998 satisfies the literal terms of that definition.  But in my view, the order under s 33N made on 24 July 1998, unless and until set aside, has the effect that the proceeding can no longer be regarded as being within the definition.  An order achieving the result now sought by the ACCC would be inconsistent with my order of 24 July 1998.

221               Section 33P of the FCA Act provides as follows:

“33P  Consequences of order that proceeding not continue under this Part

Where the Court makes an order under section 33L, 33M or 33N that a proceeding no longer continue under this Part:

(a)       the proceeding may be continued as a proceeding by the representative party on his or her own behalf against the respondent; and

(b)               on the application of a person who was a group member for the purposes of the proceeding, the Court may order that the person be joined as an applicant in the proceeding.”

This section contemplates as the only relevant “consequences of [an] order that [a] proceeding not continue under [Part IVA]”, that if the proceeding is to continue at all, it is to continue otherwise than under Part IVA.

222               In any event, even if I had power to make an order having the effect of “reconstituting” the proceeding as one under Part IVA, I would not, as a matter of discretion,  make such an order.  The following are my reasons. 

223               It must be remembered that of the numerous persons who have given affidavit evidence in the ACCC’s proceeding, the vast majority were “satisfied customers” and testified in support of GW.  I appreciate that their positions may have changed or may yet change in the light of (a) the fact that GW has now appointed an administrator and no longer carries on its business; (b) the expert evidence led by the ACCC on the issue of the capacity of the Mat to benefit human health; and (c) the content of these Reasons for Judgment generally.  But all this serves to emphasise that if there is now a substantial number of individuals who feel aggrieved, it is only in the light of recent events that they do so.  Down to recent times, at least, the proceeding has had the odd feature that the ACCC has sought to protect the interests of numerous individuals who, on the evidence, have not wanted its assistance and have been opposed to its interference.

224               The consequence of what I have said earlier in these Reasons for Judgment is that persons who bought the Mat and joined the GC and GRS may be entitled to compensation on the basis that they were misled as to the properties of the Mat, or that, contrary to the assurances given to them, they do not have a lawful opportunity to earn commissions.  Those who have such a claim could commence separate proceedings, but, as I noted in my Reasons for Decision of 14 July 1998, “the policy of Pt IVA is that respondents should not benefit from the fact that individual claims are relatively small and that many group members might not consider it worth their while to litigate them on their own initiative” (at 293). 

225               Subsections (1A) and (1B) of s 87 of the TP Act are as follows:

“(1A) Without limiting the generality of section 80, the Court may, on the application of a person who has suffered, or is likely to suffer, loss or damage by conduct of another person that was engaged in (whether before or after the commencement of this sub-section) in contravention of a provision of Part IVA or V or on the application of the Commission in accordance with sub-section  (1B) on behalf of such a person or 2 or more such persons, make such order or orders as the Court thinks appropriate against the person who engaged in the conduct or a person who was involved in the contravention (including all or any of the orders mentioned in sub-section  (2)) if the Court considers that the order or orders concerned will compensate the person who made the application, or the person or any of the persons on whose behalf the application was made, in whole or in part for the loss or damage, or will prevent or reduce the loss or damage suffered, or likely to be suffered, by such a person.

(1B) Where, in a proceeding instituted for an offence against section 79 or instituted by the Commission or the Minister under section 80, a person is found to have engaged (whether before or after the commencement of this sub-section) in conduct in contravention of a provision of Part IVA or V, the Commission may make an application under sub-section  (1A) on behalf of one or more persons identified in the application who have suffered, or are likely to suffer, loss or damage by the conduct, but the Commission shall not make such an application except with the consent in writing given before the application is made by the person, or by each of the persons, on whose behalf the application is made.”

226               In proceeding NG 421 of 1998, instituted by the Commission under s 80 of the TP Act, I have found that GW engaged in conduct in contravention of ss 52, 57 and 61, which are provisions of Part V, of that Act.  Therefore, the ACCC is entitled to make an application under s 87 (1A) on behalf of any person who has suffered, or is likely to suffer, loss or damage by reason of that contravention, provided that that person gives the ACCC written consent to do so before the ACCC so applies.  In these circumstances, the only significant difference now remaining in this case between this procedure and that provided for in Part IVA of the FCA Act is that the former is an “opt-in” procedure whereas the latter is an “opt-out” procedure (see s 33J of the FCA Act). 

227               Although, no doubt, some administrative inconvenience and cost will be involved, the ACCC should have no great difficulty in advising all the potential claimants against GW of their potential entitlement to compensation and obtaining written consent from those who wish to give it.  It is clear from the evidence adduced by the ACCC that some members do believe that they have been misled by GW and will want to opt in.  On the other hand, on the basis of their affidavits, many buyers of the Mat may still not wish to do so.  Moreover, as I noted in my Reasons for Decision of 14 July 1998, it may be that some GRS members have earned commission exceeding the amount paid by them to GW and have therefore suffered no loss.  Finally, no doubt it will be desirable for the ACCC to inform individuals of what has happened since it commenced the proceeding in order that they will be able to take an informed decision whether or not to consent. 

228               For the above reasons, I think that in the unusual circumstances obtaining the opt-in procedure provided in s 87 (1A) and (1B) of the TP Act is more appropriate than the opt-out representative procedure provided in Part IVA of the FCA Act.  The ACCC’s motion will be dismissed.

 

GW’s DEFAMATION CASE

229               As noted earlier, in the defamation proceeding GW complains about a media release issued by the ACCC on Thursday 7 May (“the Media Release”) relating to the ex parte relief granted in proceeding NG 421 of 1998 on the preceding day (a copy of the Media Release is Schedule A to the application) and a Department of Fair Trading memorandum on the same subject distributed, apparently among members of that Department, on 19 May (a copy is Schedule B to the application).

230               Schedule A is as follows:

“Ex parte injunctions against pyramid selling scheme

Ex parte injunctions have been granted against Giraffe World Australia, its directors and other individuals over an alleged pyramid selling scheme after Australian Competition and Consumer Commission Federal Court action.

The ACCC alleged that Giraffe World’s conduct contravened the referral selling and pyramid provisions of the Trade Practices Act 1974. The ACCC also alleged Giraffe World made false representations about its negative ion mats.

‘The ACCC sought the interlocutory orders after a number of complaints from consumers about the scheme’ ACCC Chairman, Professor Allan Fels, said today, ‘It is understood more than 5,000 consumers were recruited, with more expected as Giraffe World opened Melbourne and Brisbane premises.

‘The scheme is believed to have been operating since July 1997. It involves purchasing a device, an ‘ion-mat’ for $2,900. For an additional $350 consumers can join a Grow Rich scheme where they get a commission for recruiting new members.  The commission increases according to the customers introduced.

‘The ACCC plans representative proceedings in behalf of consumers who suffered loss after taking part in the Giraffe World scheme.’

In the Federal Court, Sydney yesterday Justice Kevin Lindgren ordered:

 

·        that the other respondents be restrained from inducing any persons to participate in the Giraffe World Grow Rich scheme or any similar scheme;

·        that the respondents be restrained from promoting, advertising, holding out or participating in the Giraffe World Grow Rich scheme or any similar scheme; and

·        that the respondents be restrained from removing from the jurisdiction disposing of, mortgaging, assigning, charging or otherwise dealing with their assets other than for specific living business and legal expenses.

A directions hearing will be held at the Federal Court, Sydney on 8 May at 9.30 am.

For further information about this media release:

Professor Allan Fels, Chairman, …

Ms Lin Enright, Director, Public Relations …

MR 83/98

7 May 1998”.

231               Apparently the form of the Media Release was amended, at least by 29 October 1998, by the following addition at the foot of the page:

“* The ex parte injunctions have been lifted. Giraffe World is continuing to carry on business. The case is proceeding on an injunction basis and no longer as a representative action. The next directions hearing is set down for 13 October 1998.”

Schedule B is as follows:

“CSD CONSUMER/MARKET PLACE CIRCULAR – MC 98/0/039

SUBJECT – GIRAFFE WORLD AUSTRALIA

Recently the Australian Competition and Consumer Commission (ACCC) was successful in gaining an ex parte injunction in the Federal Court against Giraffe World Australia, its directors and other individuals.  Among other things, the injunction restrained the respondents from promoting the scheme or similar schemes and effectively froze the company’s assets.

The ACCC alleged that Giraffe World’s conduct contravened the referral selling and pyramid selling provisions of the Trade Practices Act 1974.  The ACCC also alleged that Giraffe World made false representations about its negative ion mats that are sold as part of the scheme.

The scheme involved purchasing the negative ion mats for $2,900.  For an extra $350 consumers can join a Grow Rich scheme where they get a commission for recruiting new members.  The latter aspect identifies the scheme as an illegal pyramid scheme.

The matter returned to the Federal Court on 8 May 1998 and the respondents were successful in having the injunction … [according to evidence led by the ACCC the word “lifted” appears here in the original] upon giving undertakings to quarantine all monies taken by the business during the Court process.  The respondents have also lodged proceedings with the Court, on technical grounds, against ACCC’s action.

INSTRUCTIONS

At the ACCC’s request, all consumer complaints and enquiries relating to Giraffe World are to be forwarded immediately to Shane Adams on 9230 9120 or Geoff Williams on 9239 9128 of the ACCC.

ACCC fax number for urgent referral is 9223 1092.

Saroj Chand

Communications Unit

For further information regarding this circular please contact Bob Laughton, Fair Trading Investigations on telephone: …

This information will be available in CAS.”

232               I have the benefit of submissions from the ACCC alone, not from GW, in the defamation proceeding.  In its written submissions, the ACCC suggests that the following issues arise:

“Meanings

(a)       does the Release (Schedule ‘A’ to the Amended Statement of Claim (‘ASC’)) convey the imputations pleaded in ASC paragraph 23?

(b)       were such imputations as are conveyed defamatory of Giraffe World?

Truth defence

(c)        were such imputations as are found to be conveyed and defamatory matters of substantial truth?

(d)       did such imputations relate to matters of public interest?

Qualified privilege

(e)        was the Release published on an occasion of qualified privilege?

Protected report

(f)        did the Release comprise a fair protected report of proceedings in public of a court?  This question comes down to the question whether the Release accurately stated what occurred in the ex parte hearing on 6 May 1998.

The same issues arise in relation to the second matter complained of, the NSW Department of Fair Trading internal email.  In addition, however, there are the following issues which logically precede the remaining issues on this alleged publication:

(a)       did Mr Williams publish the matter in question during a conversation with Mr Finger of the Department of Fair Trading (ASC paras 21 and 25, Defence paras 10 and 16).

(b)       is the ACCC liable for the NSW Department’s publication?”

233               In relation to the Department’s internal e-mail, the ACCC submits that GW’s pleading is defective because it pleads no basis on which the ACCC could be liable for the Department’s subsequent publication. 

234               It is admitted that on 7 May 1998, the ACCC published the Media Release of and concerning GW.  GW pleads that the words of the Media Release carried the following imputations defamatory of GW:

“i)       the Applicant had engaged in a pyramid selling scheme contrary to the Trade Practices Act.

ii)         the Applicant was reasonably suspected of having engaged in a pyramid selling scheme contrary to the provisions of the Trade Practices Act.

iii)        the conduct of the Applicant was such as to warrant proceedings being brought against it for having engaged in a pyramid selling scheme contrary to the provisions of the Trade Practices Act.

iv)        the Applicant had engaged in a referral selling scheme contrary to the Trade Practices Act.

v)         the Applicant was reasonably suspected of having engaged in a referral selling scheme contrary to the provisions of the Trade Practices Act.

vi)        the conduct of the Applicant was such as to warrant proceedings being brought against it for having engaged in a referral selling scheme contrary to the provisions of the Trade Practices Act.

vii)       the Applicant made false representations about its negative ion mats.

viii)      the Applicant had induced persons to pay money for a worthless ion mat.

ix)        the Applicant had induced persons to their financial detriment to participate in the Giraffe World Grow Rich Scheme.

x)         the Applicant by obtaining moneys from more that [sic – than] 5,000 consumers had thereby cheated the Australian public of approximately 15 million dollars.

xi)        the Applicant had been found by the Federal Court to have engaged in a pyramid selling scheme contrary to the provisions of the Trade Practices Act.

xii)       the Applicant had been found by the Federal Court to have engaged in a referral selling scheme contrary to the provisions of the Trade Practices Act.

xiii)      the Applicant had been found by the Federal Court to have made false representations about its negative ion mats.

xiv)      the Applicant had been found by the Federal Court to have induced persons to pay money for a worthless ion mat.

xv)       the Applicant had been found by the Federal Court to have induced persons to their financial detriment to participate in the Giraffe World Grow Rich Scheme.

xvi)      the Applicant had been found by the Federal Court to have obtained moneys from more than 5,000 consumers and thereby cheated the Australian public of approximately 15 million dollars.

xvii)     the Applicant has been found by the Federal Court to have disposed of or been in the process of disposing of proceeds of moneys obtained pursuant to its business scheme and false representations.”

235               As can be seen at a glance, the imputations divide themselves into categories.  The first three relate to pyramid selling, the next three to referral selling, the next four are of a general nature, and numbers (xi) to (xvii) allege “findings” by this Court (this last group was added by amendment).  The ACCC contends that representations (i), (iv), (vii), (viii), (x) and (xi) to (xvii) are not conveyed by the Media Release.  It concedes that the remaining imputations pleaded, that is numbers  (ii), (iii), (v), (vi) and (ix), are so conveyed. 

236               The conclusions which I have reached earlier in these Reasons in relation to the ACCC’s own proceeding make it unnecessary for me to address most of the ACCC’s submissions. 

237               Even if the pleaded imputations (i) to (vii) were conveyed by the materials complained of, they were all true.  They were also undoubtedly matters of public interest.  GW was making misleading statements in connection with the sale of the Mat to the public and was attempting to induce members of the public to become participants in what I have held to be an illegal pyramid selling scheme.  The ACCC has therefore established the defence provided for in s 15 of the Defamation Act 1974 (NSW). 

238               Pleaded imputations (xi), (xii) and (xiii) are similar to imputations (i) to (vii) except that (xi), (xii) and (xiii) inject the element that the Court had found contraventions of the TP Act.  While that is now true, it was not true at the time of the publications.  The ACCC submits that the “temporal element” is irrelevant.  I am not sure that this is correct.  However, in my view, s 16 of the Defamation Act 1974 is applicable. That section provides as follows:

“16      Truth: contextual imputations

(1)       Where an imputation complained of is made by the publication of any report, article, letter, note, picture, oral utterance or other thing and another imputation is made by the same publication, the latter imputation is, for the purposes of this section, contextual to the imputation complained of.

(2)       It is a defence to any imputation complained of that:

(a)       the imputation relates to a matter of public interest or is published under qualified privilege,

(b)       one or more imputations contextual to the imputation complained of:

(i)        relate to a matter of public interest or are published under qualified privilege, and

(ii)        are matters of substantial truth, and

(c)               by reason that those contextual imputations are matters of substantial truth, the imputation complained of does not further injure the reputation of the plaintiff.”

239               Pleaded imputations (xi), (xii) and (xiii) related to matters of public interest.  Pleaded imputations (i) to (vii) were contextual to them.  Pleaded imputations (i) to (vii) related to matters of public interest and were matters of substantial truth.  In my view, pleaded imputations (xi), (xii) and (xiii) did not further injure the reputation of GW: an imputation that this Court had made a finding that GW had contravened the TP Act, if it arose, was no more injurious than an imputation that GW had in fact contravened that Act.

240               The remaining imputations, (viii), (ix), (x), (xiv), (xv), (xvi) and (xvii), do not so clearly fall within the protection provided by ss 15 and 16 of the Defamation Act 1974.  However, even if those imputations were conveyed by the matters complained of (which I do not decide), those matters were published in the course of the giving of a fair and accurate report of court proceedings and are therefore protected by s 24 of that Act which provides as follows:

“24      Protected report

(1)   In this section, protected report means a report of proceedings specified in clause 2 of Schedule 2 as proceedings for the purposes of this definition.

(2)      There is a defence for the publication of a fair protected report.”

241               Clause 2 of Schedule 2 specifies, inter alia, “proceedings in public of a court”.

242               GW did not make any submissions on its defamation claim and has therefore not identified any respect in which the matters complained of are not a “fair” report of the proceeding to which it refers.  In my view, they are “fair” reports and are protected by s 24.  This defence would also, of course, operate to defeat GW’s claim in respect of the other imputations which I have held to be true. 

243               For the above reasons if for no others, GW’s application in the defamation proceeding should be dismissed with costs.

CONCLUSION

244               There will be orders and injunctive relief in accordance with my Reasons for Judgment.  I direct the ACCC to bring in short minutes on 31 August 1999 at 9.00 am.

I certify that the preceding two hundred and forty-four (244) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Lindgren.

Associate:

Dated:              26 August 1999

Proceeding NG 421 of 1998

Counsel for the applicant:	Mr B R McClintock SC and Mr S T White
Solicitors for the applicant:	Australian Government Solicitor
Counsel for the first and second respondents:	Mr J G Duncan
Solicitors for the first and second respondents:	Blessington Judd
The fourth and sixth respondents appeared in person Proceeding NG 711 of 1998
Counsel for the applicant:	Mr J G Duncan
Solicitors for the applicant:	Blessington Judd
Counsel for the respondent:	Mr B R McClintock SC and Mr S T White
Solicitors for the respondent:	Australian Government Solicitor
Date last submission received	28 June 1999
Dates of Hearing:	8, 9, 12, 13, 14, 19, 20, 21, 22, 23, 29 April, 8, 10, 15, 18, 22, 29 June, 14 July 1999
Date of Judgment:	26 August 1999