FEDERAL COURT OF AUSTRALIA

Australian Competition & Consumer Commission v Fila Sport Oceania Pty Ltd (Administrators Appointed) [2004] FCA 376

TRADE PRACTICES – penalty – wholesale supply of AFL apparel – misuse of market power and exclusive dealing – relevant factors to consider in determining appropriate penalty under s76 of Trade Practices Act (1974) Cth – company defied warnings that conduct may contravene the Act – conduct continued over substantial period of time – whether fact that company part of multinational group relevant consideration – deterrence

Trade Practices Act 1974 (Cth) ss 40, 46, 47, 76

Mathers v Commonwealth of Australia [2004] FCA 217

Schneider Electric (Australia) Pty Ltd v Australian Competition and Consumer Commission  [2003] 196 ALR 611 at [8], [49]

Australian Competition and Consumer Commission v The Vales Wine Company Pty Ltd (1996) ATPR 41-528 at 42,776

Australian Competition and Consumer Commission v SIP Australia Pty Ltd (2003) ATPR 41-937 at [59]

Australian Competition and Consumer Commission v GIO Pty Ltd [2002] FCA 1298

Universal Music v ACCC (2003) 201 ALR 636 at [309]

AUSTRALIAN COMPETITION AND CONSUMER COMMISSION V FILA SPORT OCEANIA PTY LTD AND DAVID ROBERT CARNEY AND CRAIG JAMES REIDY

N 926 OF 2002

HEEREY J

2 APRIL 2004

SYDNEY (HEARD IN MELBOURNE)

THE COURT ORDERS THAT:

1. The applicant have leave to proceed against the first respondent.
2. The first respondent pay to the Commonwealth a pecuniary penalty of $3 million.
3. The question of injunctions and declarations be adjourned pending determination of the proceeding against the second respondent
4. The first respondent pay to the applicant its costs of the proceeding against the first respondent.

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

REASONS FOR JUDGMENT

1                     The applicant Australian Competition and Consumer (ACCC) seeks the imposition of penalties against the first respondent FILA Sport Oceania Pty Ltd (Administrators Appointed) (FILA) for contravention of ss 46 and 47 of the Trade Practices Act 1974 (Cth) (the Act). The contravening conduct was engaged in by FILA in the course of its activity as a wholesaler of apparel merchandise under license from the Australian Football League (AFL) between September 1999 and June 2001.

2                     The proceeding was commenced on 5 September 2002 and continued as a defended matter until 27 November 2003 when by consent FILA was given leave to withdraw its defence.  In substance FILA then admitted liability.  The third respondent Mr Craig James Reidy was released but the proceeding is continuing against the second respondent Mr David Robert Carney who was the Managing Director of FILA at the relevant time.

3                     Section 46 of the Act provides that a corporation that has a substantial degree of power in a market shall not take advantage of that power for the purpose of, amongst other things, deterring or preventing a person from engaging in competitive conduct in that or any other market.  Section 47 prohibits the practice of “exclusive dealing” which relevantly for present purposes includes a corporation supplying or offering to supply goods on the condition that the person to whom the corporation offers to supply will not acquire goods of a particular kind from a competitor of the corporation.

4                     The maximum pecuniary penalty for contravention of these sections is $10 million, that maximum having been increased from $250,000 as from January 1993.  Section 76 directs the Court to determine a penalty which is appropriate

“having regard to all relevant matters including the nature and extent of the act or omission and of any loss or damage suffered as a result of the act or omission, the circumstances in which the act or omission took place and whether the person has previously been found by the Court in proceedings under [Pt IV] to have engaged in any similar conduct.”

AFL licensed apparel

5                     The AFL conducts the peak Australian Rules football competition, consisting of sixteen teams.  Australian Rules is the most popular football code in Australia except for New South Wales and Queensland.  Nevertheless two teams in the AFL competition come from those States and there are many supporters there.  The AFL competition commands high levels of corporate sponsorship, extensive media coverage for twelve months of the year and very large attendance at matches.

6                     The AFL grants licenses for the use of trademarks, names, logos and other intellectual property associated with the teams.  Wholesale sales of apparel pursuant to such licences amounted to $20.6 million in 1999.

7                     Apparel sold under licence from the AFL falls into two distinct categories, “On Field” and “Team Spirit”.  On Field apparel consisted of products identical to those worn by the players when playing or training and other selected items worn and used by players and officials such as jackets, caps and sports bags.  “Team Spirit” apparel is not identical to that worn by players but features the colours as well as other designs or logos of each of the AFL teams.  It includes products such as T-shirts, polo shirts, jackets, casual jumpers, scarves and beanies.  An item of apparel in the Team Spirit category is generally speaking of lesser quality than a comparable item in the On Field category and retails at a cheaper price, in some instances as much as forty per cent less.

8                     FILA and other suppliers of sporting apparel such as Nike and Adidas had exclusive licences to supply On Field apparel to AFL teams.  Each of such suppliers would be a sponsor of a team which it supplied and its logo would appear on the team’s On Field apparel.  By 1 November 2000 FILA had licences to supply On Field apparel to the Western Bulldogs, Geelong, Essendon, Melbourne and Adelaide teams.

9                     However, in the case of Team Spirit apparel manufacturers were licensed to produce apparel for all sixteen AFL teams.  The main competing Team Spirit apparel manufacturers were, for jerseys, Burley Sekem Sports and Leisure Pty Ltd (Burley Sekem) and, for general supporter wear, Vivid Australia Pty Ltd (Vivid), Davenport Industries Pty Ltd, Heatly Pty Ltd and Illustrated Sports Clothing Pty Ltd.  FILA and the other suppliers of On Field apparel also competed with these firms to supply Team Spirit apparel. 

10                  At retail level AFL licensed apparel was sold by specialist sporting retailers such as Rebel Sports, AMART and Market Sports, as well as general retailers such as Myer and KMart.   There were also specialist AFL apparel retailers, including stores run by the clubs themselves. 

11                  In late 1999 the AFL commenced a major restructure of its licensing system.  It determined that from 2002 the only AFL apparel licensees for both On Field and Team Spirit apparel would be On Field sponsors and some existing category specialists.  As a result of this policy, from late 1999 most Team Spirit licenses were not renewed upon expiry.  Some Team Spirit licenses were renewed, but generally speaking this was only in relation to products where the On Field sponsor such as FILA did not have a competing product. 

FILA’s conduct

12                  FILA is the Australian subsidiary of an Italian-based clothing manufacturer Fila Holdings Spa, one of the largest sportswear suppliers in the world with operations in over twenty countries and worldwide sales of approximately 1 billion Euro.  It is seventy-six per cent owned by the Fiat Group.  In 1999/2000 FILA was the third highest seller of sporting apparel in Australia, ranking behind Nike and Adidas.

13                  In the context of the AFL license restructuring, FILA from September 1999 until June 2001 implemented what it called a Selective Distribution Policy (SDP).  This was encapsulated in a confidential memorandum sent by Mr Carney on 13 January 2000 to FILA personnel.  The essence of the SDP was that FILA would not supply its apparel to any retailer that stocked or planned to stock apparel for any FILA-sponsored team from a competing Team Spirit apparel licensee, and that FILA supplied its apparel to retailers on condition that the retailer would not acquire or stock AFL licensed apparel from a competing Team Spirit licensee.   The memorandum included the following statements:

(a)       “FILA as a brand will not legitimise ‘non brands’, chain store brands or other AFL or NRL licensees selling licensed product of clubs in which we invest considerable dollars, by having FILA products in the same retail environment”;

(b)             “FILA has not supplied licensed product to a number of retailers as the retailers have a preference for the other licensees”;

(c)             “One matter that is most important is that you cannot, and must not, advise any retailer FILA will only supply on certain conditions.  This is not the case.  In simple terms, FILA will not legitimise other licensees by placing FILA products in the same retail store”;

(d)             “There is only one authentic apparel sponsor of the clubs we sponsor and that is FILA.  At the end of the day, market forces will determine if our strategy is correct.  If we are correct, FILA sales will increase and sponsored clubs will increase. There will always be competition and there will always be other licensees.  Some retailers will stock the other licensees in preference to FILA and there are some retailers we do not wish to supply.  This is exactly the same circumstances with our generic FILA product.  Our challenge is to grow the FILA brand and business by focusing and concentrating upon FILA.”

14                  The result was that many AFL apparel retailers felt they had little choice but to comply with the SDP and change suppliers from their previous Team Spirit suppliers to FILA Team Spirit apparel for the five teams which FILA sponsored.  Retailers were compelled to do this to ensure that their supply of the FILA On Field product continued. 

Competition analysis

15                  Separate markets existed at both the wholesale and retail levels for the sale of licensed apparel for each AFL team.  In particular, apparel of one team would not be regarded as substitutable for apparel of another within the meaning of s 4E of the Act, a proposition which hardly needs the support of expert economic evidence.

16                  FILA’s power in each of the five AFL licensed apparel markets relied upon (the wholesale markets for Western Bulldogs, Geelong, Essendon, Melbourne and Adelaide licensed apparel) primarily arose from the intellectual property rights conferred upon it by the AFL after FILA entered into a sponsorship arrangement in relation to those teams.  In particular, the rights conferred on FILA included exclusive rights under the AFL licensing system to market, distribute and manufacture On Field apparel for each relevant team.  FILA had significant outlets for sporting apparel through its general apparel operations in Australia and was able to distribute licensed apparel to over four hundred retailers.  Its overall sales in Australia in 2001 were about $42 million, of which $2.5 to 3 million resulted from AFL apparel.

17                  FILA took advantage of that power by threatening to refuse supply to retailers who might otherwise have engaged in competitive conduct in other markets, that is to say the retail markets for AFL licensed apparel for the respective teams.  The competitive conduct, which FILA’s actions deterred or prevented, was for retailers to stock a range of brands of Team Spirit apparel for the relevant team at competitive prices.

18                  There can be no doubt that the relevant purpose existed, as exemplified particularly in the January 2000 memorandum.

19                  In terms of s 47, FILA supplied licensed apparel to retailers in each wholesale market on the condition that retailers would not acquire Team Spirit apparel from suppliers which were competitors of FILA.

FILA’s insolvency

20                  On 9 December 2003 the directors of FILA appointed Karen Maree Mathers and Adrian Stewart Duncan as joint and several administrators pursuant to s 436A of the Corporations Act 2001 (Cth).  A second meeting of creditors pursuant to s 439A is scheduled to take place on 5 April 2004.  No deed of company arrangement is presently anticipated.  In the absence of a proposal for such a deed the administrators will recommend to creditors that they resolve to wind the company up.  The administrators expect that the creditors will pass such a resolution.

21                  In an application filed on 4 March 2004 the administrators sought directions pursuant to s 447D(1) of the Corporations Act as to the standing of the Commonwealth as a creditor of FILA in respect of any penalty imposed for contraventions of Pt IV.  The matter came on for hearing before me.  On 12 March 2004 I gave judgment to the effect that such penalties were “penalties…imposed by a court in respect of an offence against a law” within the meaning of s 553B of the Corporations Act and thus would not be admissible to proof against FILA: Mathers v Commonwealth of Australia [2004] FCA 217.

22                  There was evidence tendered in Mathers that at the date of the administrators’ appointment FILA had assets of $770,000 and liabilities of almost $3 million.  I was told by counsel in the present case that the business and assets of FILA had been sold to a related entity before the company went into voluntary administration and that this matter is being investigated by the administrators. 

23                  It may be that where what would otherwise be an appropriate penalty may have the effect of putting a corporation out of business.  The potential effect of such a result on innocent parties such as employees and creditors, and indeed of the lessening of competition, might provide grounds for some reduction: Schneider Electric (Australia) Pty Ltd v Australian Competition and Consumer Commission [2003] 196 ALR 611 at [8].  However different considerations apply when it seems that when the practical reality is that the corporation is going out of business anyway.  In Australian Competition and Consumer Commission v The Vales Wine Company Pty Ltd (1996) ATPR 41-528 at 42,776, in dealing with a defendant company in liquidation with no assets, O’Loughlin J said:

“Even though (the penalties) may not be recovered, they will serve as a warning throughout the wine industry and elsewhere of the attitude of the Court to offences of this nature.”

24                  Goldberg J adopted that approach in Australian Competition and Consumer Commission v SIP Australia Pty Ltd (2003) ATPR 41-937 at [59] as did I in Australian Competition and Consumer Commission v GIO Pty Ltd [2002] FCA 1298.

25                  I therefore consider that in the circumstances of the present case the insolvency and likely winding-up of FILA are not relevant considerations. 

Suggested aggravating features

26                  Counsel for the ACCC rightly stressed that FILA’s conduct was deliberate and extended over a substantial period of time.  It was conceived and put into effect at the highest executive level of the company. 

27                  Further, there was a consciousness that the conduct might well infringe the Act.  In the memorandum of January 2000 Mr Carney stated

“I noted previously that there are a number of retailers and licensees who disagree with our strategy.  This is quite normal in any competitive business environment.  Please do not enter into discussions on our strategy.  If any retailer, other licensee or other party threatens legal action against FILA, or you personally, you must immediately advise that party that the discussion is terminated.  Note the details of your conversation and immediately advise me, together with a copy of your discussion notes.”

28                  On 28 July 2000 the AFL advised FILA that a licensee had expressed the view that the SDP may breach the Act.  The AFL reminded FILA that the manufacture sale and distribution of AFL licensed apparel by it was required to comply with the Act.

29                  On 14 November 2000 solicitors on behalf of Vivid wrote to Mr Carney and Mr Reidy raising concerns that the conduct of FILA in implementing its SDP may contravene the Act.  An undertaking to desist was requested, but declined by FILA.

30                  Notwithstanding these warnings, FILA’s conduct continued until 28 June 2001 when it ceased upon the direct intervention of the ACCC.

31                  Not only did the contravening conduct extend over a substantial period of time, but its effect was felt Australia-wide amongst the over four hundred retailers who stocked AFL licensed apparel.  In particular, it affected those specialist AFL apparel retailers who were compelled to agree to the SDP by the necessity to stock On Field apparel for the five FILA sponsored teams.  Retailers affected included Rebel Sports (thirty-seven stores across Australia), AMART (twenty-three stores in Queensland) and the AFL stores (seventeen stores in Victoria, South Australia, Western Australia and Tasmania).

32                  The contravening conduct had serious effects on FILA’s competitors.  The sales of Burley Sekem declined in 2000 for Essendon, Geelong, Bulldogs and Melbourne apparel. From 2000 to 2001 Vivid’s sales of apparel for FILA-sponsored teams declined by the following percentages:

Essendon    24%

Adelaide      36%

Geelong       42%

Melbourne    42%

Bulldogs       33%

Although there is no direct evidence as to this, it is reasonable to infer that FILA enjoyed a corresponding increase in business, which may explain why it persisted with its SDP in the face of clear warnings.

33                  Other suppliers and retailers also suffered losses as a result of their compliance with the SDP, as it reduced the range of stock available at various prices.  As examples, between 1999 and 2000 there was a fifty-seven per cent decrease in Burley’s sales to Rebel Sports and an eighty-three per cent decrease in Burley sales to AFL Club shops.

34                  In the ACCC’s submissions it was said that FILA was part of a large “multinational” group.  Counsel referred to Australian Competition and Consumer Commission v Universal Music Australia Pty Ltd (2003) 201 ALR 636 where the Full Court said at [304]:

“His Honour [the primary judge] disregarded the fact that each corporation was a wholly owned subsidiary of a substantial multinational company conducting significant overseas operations.  We doubt it was correct to do so.  But we say no more.  The matter was not argued.  It is enough to say that Universal and Warner were each substantial participants in a significant industry in Australia.”

35                  As is apparent, that observation did not form part of the ratio decidendi of the case.  Their Honours did not refer to the earlier Full Court decision in Schneider Electric (Australia) Pty Ltd v Australian Competition and Consumer Commissioner (2003) 196 ALR 611.  In that case Merkel J, with whom Black CJ and Sackville J agreed, dealt with an argument by Schneider that challenged the primary judge’s “reliance on it being a subsidiary of a large international public company”.  His Honour said at [49]:

“The size of a parent may be of relevance where, for example, the parent bore some responsibility for the subsidiary’s conduct or where it is relevant to the subsidiary’s capacity to meet a substantial pecuniary penalty.  However, I do not regard the size of Schneider’s parent company, or the group of which it forms a part, to be a relevant factor in the present case for three reasons.  First, it is not suggested that the parent had any involvement in Schneider’s contraventions.  Second, Schneider did not put in issue its capacity to pay any penalty that may be imposed.  Third, it is clear that Schneider operates a substantial business in Australia in its own right.”

36                  Of course the second of those factors mentioned by Merkel J is not present in the present case.  Nevertheless it is not suggested that FILA’s parent company played any part in the contraventions or has any legal, or indeed moral, obligation to contribute towards any penalty.  So if the bare fact that a particular corporation is a parent of a contravenor is not relevant, it is not easy to see why the circumstance that such a parent is a “multinational” should be taken into account.  To fix a more severe penalty simply because a contravener is a “multinational” would have echoes of autarky and be inconsistent with Act’s policy of promoting competition.

Suggested mitigating factors

37                  FILA asserted that it had co-operated with the ACCC at an early stage and agreed to suspend the SDP as soon as the ACCC raised concerns in June 2001.  But, as already mentioned, FILA had earlier warnings which it chose to ignore. 

38                  Moreover, although it ceased its unlawful conduct, FILA defended this proceeding for almost eighteen months, thereby putting the ACCC to substantial expense, including a complex seventy paragraph statement of claim and twenty two affidavits.  It seems likely that FILA’s withdrawal of its defence in November last year was due to its impending financial demise rather than any late onset of remorse.  While a party is not to be penalised for defending itself (other than by an award of costs), the present case is not one for allowing any discount for co-operation.

Conclusion

39                  I think this was a serious, blatant contravention extending over a substantial period of time which caused major damage to several businesses.  In particular, the fact that the conduct contravened s 47 would have been obvious to any reasonably competent business person.  Beneath the euphemism and jargon of Mr Carney’s memorandum the message is clear and brutal: FILA will not supply On Field apparel to retailers unless they agree not to stock competitors’ Team Spirit apparel. 

40                  Clear deterrence is called for.  The ACCC submitted that an appropriate range was $2.5 to $3 million.  Counsel for Fila did not contest that range.  I think $3 million is an appropriate penalty.  It is only the fact that the relevant conduct fell in the mid range of economic activity in terms of value that makes a significantly higher penalty not appropriate.

41                  The questions of injunctions and declarations are to be adjourned pending determination of the proceeding against Mr Carney.  While of course admissions made by FILA in this penalty phase of the proceeding do not bind him, it has become inevitable that I should make findings critical of FILA which necessarily reflect on Mr Carney.  In the circumstances it would not be fair for me to continue to sit on the proceeding against him.  I will make arrangements to have Bthe matter transferred to the docket of another judge.  There will be an order also for the ACCC to have leave to proceed against FILA pursuant to s 440D of the Corporations Act.

Associate:

Dated:              2 April 2004