FEDERAL COURT OF AUSTRALIA

Australian Competition and Consumer Commission v Emerald Ocean Distributors Pty Ltd (ACN 074 316 304) [2001] FCA 982

TRADE PRACTICES – misleading or deceptive conduct – ACCC claim for declarations, injunctions, refunds and corrective advertising against promoters of body and muscle toning products – alleged misrepresentations about benefits of products – respondents Australian promoters of products allege representations based on representations from overseas company – respondents seek leave to file cross-claim for indemnity and damages – no cause of action accrued against proposed cross-respondent – leave to file cross-claim refused – leave to appeal against order granted – whether relief available in cross-claim under ss 82 and 87 of the Trade Practices Act – whether indemnity can be claimed as a procedural matter through O 5 r 1 – indemnity and contribution – common law and equity – leave to appeal granted.

PRACTICE AND PROCEDURE – leave to appeal – interlocutory decision – refusal to allow filing of cross-claim – whether sufficient doubt as to correctness of decision – whether injustice if decision wrong – leave granted.

Trade Practices Act 1974 (Cth) ss 82, 87

Federal Court Rules O5 r 1

Re La Rosa; Ex parte Norgard v Rodpat Nominees Pty Ltd (1991) 104 ALR 237 cited

Bialkower v Acohs Pty Ltd (1999) ATPR 41-685 cited

Lezam Pty Ltd v Seabridge Australia Pty Ltd (1992) 35 FCR 535 cited

Port of Melbourne Authority v Anshun Pty Ltd (1981) 147 CLR 589 cited

Johnson Tiles Pty Ltd v Esso Australia Pty Ltd (2001) 104 FCR 564 cited

Decor Corporation Pty Ltd v Dart Industries Inc (1991) 33 FCR 397 cited

Minogue v Williams [2000] FCA 125 cited

Ex parte Bucknell (1936) 56 CLR 221 cited

AUSTRALIAN COMPETITION AND CONSUMER COMMISSION v EMERALD OCEAN DISTRIBUTORS PTY LTD (ACN 074 316 304), SLENDERTONE HEALTH AND BEAUTY PTY LTD (ACN 059 362 542), SEAN O’DONOGHUE

W118 OF 2000

FRENCH J

25 JULY 2001

PERTH

THE COURT ORDERS THAT:

1.         The Respondents have leave to appeal against the judgment of the Hon RD Nicholson J given on 24 May 2001 refusing their motion for leave to file a cross-claim.

2.         The Respondents do within seven days file an amended notice of appeal.

3.         The hearing of the appeal be expedited.

4.         The costs of the respondents’ motion for leave to appeal be in the appeal.

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

REASONS FOR JUDGMENT

ON MOTION FOR LEAVE TO APPEAL

1                     By proceedings instituted on 19 July 2000, the Australian Competition and Consumer Commission (“ACCC”) sues Emerald Ocean Distributors Pty Ltd (“Emerald”) and Slendertone Health and Beauty Pty Ltd (“Slendertone) and their common director and secretary, Sean O’Donoghue.  The actual action arises out of the supply and promotion by Emerald and Slendertone of certain products described as “Slendertone Products”.  The products involve electronic muscle stimulation to tone and firm the body and abdominal muscles, reduce body measurements, remove cellulite and the like.  They are marketed under the names:

“Sequence 16”

“Supreme”

“Top Tone 12”

“Gymbody 8”

“Celluforme”

The ACCC alleges that advertising of various of these products in magazines called Women’s Health and Ultrafit in December 1999 and in March 2000 respectively, in Slendertone pamphlets and on a Slendertone web site in June 2000, involved false statements about the products in contravention of various provisions of the Trade Practices Act 1974 (Cth) and of the Fair Trading Acts of the various States and Territories.  Sean O’Donoghue is said to have been knowingly involved in the contraventions.  Relief claimed under the further amended application includes various declarations, injunctive relief, orders for corrective advertising and for Mr O’Donoghue to attend a Trade Practices Compliance Program seminar.  Orders for refunds of moneys paid by members of the public who believe that they may have been misled or deceived by the respondents are also sought. 

2                     Emerald denies that it did any of the things alleged against it.  Slendertone admits that it did various of the acts alleged but denies the implications of certain statements.  And so far as it is said that statements made were in contravention of the Trade Practices Act or the Fair Trading Act it is pleaded that the statements were ones which the respondents had reasonable grounds for making.  Their case is, in substance, that all of the statements in question were based upon information and literature provided to them by or on behalf of a company called Bio-Medical Research Ltd. 

3                     The proceedings have been in the docket of RD Nicholson J and subject to management by his Honour.  By a motion filed on 14 February 2001, the respondents sought leave to file a cross-claim against two companies, BMR Ltd and Bio-Medical Research Ltd, both registered in the Republic of Ireland.  They sought leave to serve it or, alternatively, notice of it on each of those companies out of the Commonwealth of Australia and in the Republic of Ireland.  By the time the motion came on for hearing, a minute of proposed amended cross-claim had been filed.  That sought relief only against Bio-Medical Research Ltd and not against BMR Ltd. 

4                     The proposed cross-claim refers to statements made by Slendertone in advertisements and on a web site and in its pamphlet, as particularised in the further amended statement of claim.  In par 9 it is said that Slendertone and O’Donoghue made the statements referred to in the statement of claim for the sole reason that they were made to Slendertone by Bio-Medical Research Ltd and that O’Donoghue was advised by that company to repeat the statements to members of the public of Australia in the course of carrying on the business of selling the Slendertone products.  The advice, it is said, was received at all times when O’Donoghue was in Australia.  Slendertone and O’Donoghue say, in the cross-claim, that they admit having made the statements referred to in the statement of claim and admit having made some but not all of the implied statements referred to.  They deny that all or any of the statements constitute misleading or deceptive conduct in trade or commerce as alleged by the ACCC or at all. 

5                     Paragraph 13 of the proposed amended cross-claim reads:

“13.     If, despite the matters pleaded in paragraphs 11 and 12, this Honourable Court finds:

            (a)        against the First Respondent that it made all or any of those statements; and/or

            (b)        against any or all of the Respondents that any or all of the statements which they admit having made constitute misleading or deceptive conduct in trade or commerce,

            (c)        That any or all of the Respondents made any or all of the statements referred to herein that the Respondents deny having made, and that all or any of those statements constitute misleading or deceptive conduct in trade or commerce

            and makes an order that the Applicant is entitled to all or any of the relief claimed by it the Respondents against whom such orders are made will suffer loss and damage for which they claim an indemnity against the Cross Respondents.

                                                               Particulars

            The costs of making refunds sought by the Applicant and the costs of running corrective advertising.”

6                     The proposed cross-claim then goes on to say that O’Donoghue began selling Slendertone products on his own account.  Before 1993 he had substantially ceased to carry on the business of selling the massage equipment and electro therapeutic goods in order to concentrate on the business of selling Slendertone products.  He did so in reliance on statements made by Bio-Medical Research Ltd to the effect that the entire range of products that he would be selling worked by stimulating the user’s muscles with electrical impulses and other statements about the benefits that could be derived by the use of Slendertone products.  He pleads that if the statements which he made in reliance on Bio-Medical Research are found to have constituted misleading or deceptive conduct, then to that extent those made by Bio-Medical Research to him also constituted misleading or deceptive conduct.  In the event, Slendertone and O’Donoghue will have suffered loss if they have to cease carrying on the business of selling Slendertone products and will also have lost the opportunity foregone in giving up the business of selling other massage equipment and electro therapeutic goods.  The relief claimed is by way of indemnity against liability to make any refund to customers for the purchase of Slendertone products, indemnity against the costs of producing and placing corrective advertisements, damages and costs.

7                     The indemnity claim was based entirely upon the alleged misleading or deceptive conduct of Bio-Medical Research.  That is to say, if Slendertone and O’Donoghue are found to have engaged in misleading or deceptive conduct and ordered to pay refunds and to provide corrective advertising their loss will be loss and damage giving rise to a cause of action against Bio-Medical Research.  Such loss or damage, it is said, would be recoverable under s 82 or s 87(1A) of the Trade Practices Act or its Fair Trading Act equivalents. 

8                     RD Nicholson J, in a judgment delivered on 24 May 2001, refused the motion to file the cross-claim. In the judgment his Honour referred to the pleadings  and to affidavit evidence filed on behalf of the respondents about telephone conversations between O’Donoghue and a representative of Bio-Medical Research, who was said to have offered him an exclusive distributorship of the Slendertone products in Australia and New Zealand.  O’Donoghue’s affidavit  also exhibited pamphlets and brochures sent to him by Bio-Medical Research. 

9                     His Honour dealt first with the principal contention for the ACCC that leave to file the cross-claim should not be granted because there was no cause of action to support the indemnity claimed.  His Honour referred to case law about s 87(1A) and the following propositions:

1.         The applicant for relief under s 87(1A) cannot be the person who commits the contravention – Re La Rosa; Ex parte Norgard v Rodpat Nominees Pty Ltd (1991) 104 ALR 237; Bialkower v Acohs Pty Ltd (1999) ATPR 41-685

2.         There can be no claim for indemnity or contribution by the respondents against the proposed cross-respondents pursuant to s 87(1A) or otherwise in relation to the claim made by the applicant unless the respondents engaged or were involved in the contravention.

3.         Section 87 of the Act confers no power on the Court to order contribution – Lezam Pty Ltd v Seabridge Australia Pty Ltd  (1992) 35 FCR 535.  Nor was there any common law or equitable basis by way of a co-ordinate liability that would give rise to a claim for contribution. 

His Honour discussed whether s 87 could support a claim for indemnity and applied La Rosa to negative that proposition.  He applied Lezam and Bialkower to negative the proposition that contribution could be claimed under s 87.  On these bases, his Honour concluded that neither s 87(1A) nor the common law or equity could support the proposed cross-claim.  His Honour did not proceed to consider discretionary matters of costs and delay raised by the ACCC as the case did not reach the threshold where they became relevant.

10                  It may be seen therefore that his Honour disposed of the application to file the cross-claim entirely on considerations going to its viability rather than the discretionary considerations.

11                  The respondents have argued, in support of their motion for leave to appeal against his Honour’s decision, that the liability of the cross-claimant does not depend on the availability of indemnity or contribution under s 87 or at common law or equity.  What they say is that they have an inchoate cause of action for damages under s 82 and/or s 87 which will accrue if and when they are found liable for misleading or deceptive conduct and ordered to make refunds and engage in corrective advertising.  To this extent they say that their entitlement to claim an indemnity is procedural and derived from the Rules of Court and, in particular, O 5 r 1.  Order 5 provides in the relevant parts:

1(1)  A respondent may cross-claim against an applicant for any relief to which the respondent would be entitled against the applicant if the applicant were a respondent in a separate proceeding commenced in the Court by the respondent for that purpose.

1(2)  A respondent may cross-claim against any person whether another party or a third party for any relief which is related to or connected with the subject of the proceeding.

1(3) Without prejudice to the generality of sub-rule (2), a respondent may cross claim for contribution or indemnity.”

12                  Reference was made to the joint judgment of Gibbs CJ, Mason and Aicken JJ in Port of Melbourne Authority v Anshun Pty Ltd (1981) 147 CLR 589 where it was said:

“Although the right to an indemnity arises on payment of the liability to which it relates and not before, this is not a bar to the litigation as between a defendant and a third party, or as between defendants, of a claim based on an indemnity in respect of a liability in negligence asserted by the plaintiff in his action.  It is accepted that under so-called “third party procedures” of the kind provided by O 16A, the claim to an indemnity may be litigated in the plaintiff’s action, notwithstanding that the payment creating the right of indemnity is not made until after the amount of the plaintiff’s verdict is ascertained in that action.  It has been repeatedly affirmed that one of the peculiarities of third party procedure is that it enables litigation on the indemnity to take place before there is any liability Hordern-Richmond Ltd v Duncan ([1947] 1 KB 545 at 552); Bitumen and Oil Refineries (Australia) Ltd v Commissioner for Government Transport ((1955) 92 CLR 200) ….”

A reading of the respondents’ written submissions before his Honour indicate that the approach now taken is broadly consistent with the approach taken at first instance.

13                  There is no doubt that the decision made by his Honour is interlocutory in character and that leave is required from a judge or the Full Court before it can be the subject of an appeal.  The criteria for leave to appeal were recently considered by the Full Court in Johnson Tiles Pty Ltd v Esso Australia Ltd (2001) 104 FCR 564.  The policy which underlies the leave requirement is that the time of the Court and the parties should not lightly be taken up with appeals about decisions in connection with proceedings which do not finally determine the rights of parties.  Necessary conditions of the grant of leave are that the decision at first instance be attended with sufficient doubt to want its reconsideration on appeal.  The second is, that substantial injustice would result if leave were refused – Decor Corporation Pty Ltd v Dart Industries Inc (1991) 33 FCR 397; Minogue v Williams [2000] FCA 125.

14                  The nature of the interlocutory order in respect of which leave is sought will affect the thresholds of doubt and potential injustice that may have to be surmounted to obtain leave.  So an order concerned solely with the mechanics of the pre-trial process will have a high threshold.  An order which has the practical operation of disposing of the rights of the parties may have a lower threshold.  In such a case it has been said:

“A prima facie case exists for granting leave to appeal.”  - Ex parte Bucknell (1936) 56 CLR 221 at 225; Decor Corporation Pty Ltd  at 400; Minogue at par [18].

15                  His Honour’s decision in this case did not turn upon practical considerations of case management.  It turned entirely upon the viability of the relief claimed.  It was  analogous in character to a strike out decision although it left open the possibility that the respondents could institute separate proceedings.

16                  I am persuaded, without expressing any concluded view on the matter, that there is an arguable case that his Honour may have erred in his assessment of the viability of the cross-claim.  Even if the so-called “indemnity” is not available in the component of the damages claimed there is a claim for damages in the cross-claim.  Its availability was not addressed in his Honour’s judgment.  In my opinion there is a degree of doubt about the correctness of the decision.  There are also potentially procedural economies which would be denied to the respondents if they are required to pursue a separate action against the proposed cross-respondent.  The discretionary considerations and whether service should be permitted out of the jurisdiction were not considered.  In my opinion this is a proper case in which leave to appeal should be granted.   In so doing, I will direct the lodgment of an amended notice of appeal which may provide a more defined set of grounds.  The principal ground would appear to be Ground 3, although it might be extended to cover a cross-claim for relief by way of indemnity and/or damages.

Associate:

Dated:              25 July 2001