FEDERAL COURT OF AUSTRALIA

Australian Competition and Consumer Commission v Smash Enterprises Pty Ltd [2011] FCA 375

THE COURT DECLARES THAT:

1.    Between 28 February 2009 and 17 September 2010, the Third Respondent contravened s 65C of the Trade Practices Act 1974 (Cth) (the TPA) by supplying, in trade or commerce, 4,384 bean bag covers to consumers by way of sale through stores owned and operated by it and 235 bean bag covers to franchisees that owned and operated Fantastic Furniture branded stores:

(a)    that were intended to be used, or were of a kind likely to be used, by a consumer; and

(b)    in respect of which there was a consumer safety standard prescribed by reg 11 of the Trade Practices (Consumer Product Safety Standards) Regulations 1979 (Cth) (Regulations),

in circumstances where the bean bag covers supplied did not comply with the Regulations in that the bean bag covers did not have fixed securely to, or stamped on, them a warning label or notice as required by regs 11(4) and 11(5) of the Regulations in the prescribed form.

2.    By engaging in the conduct described in paragraph 1 above, the Third Respondent breached cl 13(a) of its undertaking made to the Applicant under s 87B of the TPA dated 12 November 2008.

THE COURT ORDERS THAT:

3.    The Third Respondent be restrained, for a period of five years, whether by itself, its officers, servants, agents or howsoever otherwise, in trade or commerce in Australia from supplying bean bag covers which are intended to be used by, or of a kind likely to be used by, consumers that do not comply with the Regulations or such other prescribed safety standards as may from time to time be applicable at the time of the supply.

4.    The Third Respondent pay to the Commonwealth of Australia, within twenty eight (28) days of the making of this Order, a pecuniary penalty in the total amount of $300,000 in respect of the contraventions of s 65C of the TPA referred to in paragraph 1 above that occurred on or after 15 April 2010.

5.    The Third Respondent pay to the Applicant, within twenty eight (28) days of the making of this Order, a contribution towards its costs of and incidental to these proceedings in the total amount of $10,000.

REASONS FOR JUDGMENT

INTRODUCTION

1    On 17 December 2010, the Australian Competition and Consumer Commission (the ACCC) commenced proceedings in Fast Track alleging contraventions of s 65C(1)(a) of the Trade Practices Act 1974 (Cth) (TPA) by Smash Enterprises Pty Ltd (ACN 091 134 708) (Smash Enterprises), Spotlight Pty Ltd (ACN 005 180 861) (Spotlight) and Fantastic Furniture Pty Ltd (ACN 003 688 855) (Fantastic Furniture). Each was alleged to have supplied bean bag covers intended to be used or were of a kind likely to be used by a consumer in respect of which there was a prescribed consumer product safety standard and which did not comply with that standard.

2    The ACCC and each of the respondents has settled the proceedings. These reasons for decision concern Fantastic Furniture. In particular, agreement has been reached between the ACCC and Fantastic Furniture as to the relief (including as to penalty) that in the parties’ submissions ought to be granted. The parties expressly acknowledge that the question of relief remains in the ultimate discretion of the Court.

AGREED STATEMENT

3    On 30 March 2011, the ACCC and Fantastic Furniture filed an “Agreed Statement of Facts and Joint Submissions” (the Agreed Statement). That was not surprising. Fantastic Furniture’s Fast Track Response admitted many of the allegations pleaded against it by the ACCC. The Agreed Statement dealt with conduct agreed to have taken place between 28 February 2009 and 17 September 2010 (defined as the Relevant Period) in relation to the supply of bean bag covers intended to be used or were of a kind likely to be used by consumers but which did not comply with the applicable prescribed consumer product safety standard.

4    So far as is presently relevant, the Agreed Statement provided:

Fantastic Furniture

[3]    Fantastic Furniture is and was at all material times:

…

(b)    engaged in the business of selling furniture and other related goods to:

(i)    consumers through 69 retail outlets being stores owned and operated by Fantastic Furniture; and

(ii)    Bytenew Pty Ltd and L.W.J.W. Pty Ltd, which each operate a franchised store under a franchising agreement (the “Franchisees”);

(c)    part of the Fantastic Holdings Limited (“FHL”) group of companies which had total sales in the financial year ended 30 June 2010 of $419.1 million.

Description of Contravening Conduct

[4]    During the Relevant Period, Fantastic Furniture supplied in trade or commerce by way of sale:

(i)    a total of 4,384 bean bag covers to consumers through Fantastic Furniture Stores, 257 of which were supplied on or after 15 April 2010; and

(ii)    a total of 235 bean bag covers to Franchisees, all of which were supplied prior to 15 April 2010.

[5]    The bean bag covers were goods of a kind that were intended to be used by a consumer and fell within the definition of bean bag covers in regulation 11 of the Trade Practices (Consumer Product Safety Standards) Regulations 1979 (Cth) (the “Regulations”).

[6]     Pursuant to the Regulations, a bean bag cover is required to:

(a)    have fixed securely to, or stamped on, it a label or notice in the following form (Reg 11(4));

“WARNING: Small Lightweight Beads Present a Severe Danger to Children if Swallowed or Inhaled.”

The warning label must:

(i)    bear the word “WARNING” in upper case red letters of not less than 5 millimetres in height on a white background (Reg 11 (5)(a));

(ii)    bear the remaining words in upper and lower case letters as shown, the upper case letters being of not less than 5 millimetres in height (Reg 11(5)(b)); and

(iii)    be conspicuously displayed (Reg 11(5)(c)); and

(b)    have a child-resistant slide fastener fitted to every opening through which bean bag filling can be inserted or removed (Reg 11(6)).

[7]    The bean bag covers supplied by Fantastic Furniture had a child-resistant slide fastener fitted to every opening in the bean bag cover as required by regulation 11(6) but the bean bags did not display a warning label as required by regulations 11(4) and 11(5).

Fantastic Furniture’s actions to withdraw the product from the market

[8]    Instances of supply of non-compliant bean bag covers were first detected during in-store inspection by the Queensland Office of Fair Trading (the “QOFT”) on 7 May 2010. Following contact from the QOFT on 7 May 2010, Fantastic Furniture withdrew the product from sale on 10 May 2010. However, a small number of sales occurred after this date, the last such sale occurring on 17 September 2010.

[9]    On 22 June 2010, Fantastic Furniture initiated a widely advertised product recall alerting customers to the labelling deficiency and requesting that they return the product for a full refund.

The 2008 ACCC undertaking

[10]    In 2008, the Commission investigated Fantastic Furniture for supplying bunk beds that did not comply with the prescribed consumer product safety standard. The investigation was finalised by the acceptance of a court enforceable undertaking pursuant to section 87B of the TPA (the “2008 Undertaking”). Clause 13(a) of the 2008 Undertaking, which came into effect on 12 November 2008, required Fantastic Furniture to:

“for a period of 3 years from the commencement of this Undertaking, ensure that goods supplied by Fantastic Furniture that are subject to a prescribed safety standard and/or information standards under the TPA comply with the relevant standard.”

Fantastic Furniture’s actions to prevent recurrences of contravening conduct

[11]    This matter came to the attention of Fantastic Furniture management on 7 May 2010 after notification by the QOFT. Since this matter came to the attention of management, Fantastic Furniture has taken measures to review and strengthen its compliance processes. Those measures include the following:

11.1    On 24 November 2010 Fantastic Furniture engaged HWL Ebsworth to conduct a comprehensive trade practices compliance risk assessment of all businesses within the Fantastic Holdings Limited (“FHL”) group;

11.2    FHL appointed a dedicated trade practices compliance manager on 24 November 2010 and on 24 November 2010 adopted a formal trade practices compliance policy. In accordance with its trade practices compliance policy, FHL has over the last 3 months issued statements to all employees of the FHL group confirming the group’s commitment to trade practices compliance;

11.3    FHL has commenced delivery of an extensive program of trade practices compliance training. This training is intended to be provided to all staff within the FHL group who have dealings with the public, are involved in preparing marketing materials or are involved in the procurement of stock. The training includes an emphasis on product safety and recalls;

11.4    Recall procedures throughout the FHL group have been reviewed and revised. It is intended that all staff responsible for implementation of any recall will be provided with specialised training. These staff have been provided with checklists and guidelines that they are required to follow;

11.5    FHL has reviewed all products supplied within the FHL group to ensure that they comply with relevant mandatory safety standards.

[12]    Many of the measures set out in paragraph 11 were included in an undertaking, dated 21 December 2010, provided to the Commission under s 87B of the TPA by Fantastic Furniture and its holding company, Fantastic Holdings Limited, following an unrelated investigation.

RELIEF SOUGHT BY CONSENT

5    The ACCC and Fantastic Furniture have jointly requested the Court:

1.    to make declarations of contraventions;

2.    to impose a pecuniary penalty pursuant to s 76E of the TPA in an amount of $300,000;

3.    to grant an injunction pursuant to s 232 of Sch 2 of the Competition and Consumer Act 2010 (Cth) (the CCA) restraining Fantastic Furniture from engaging in similar conduct for a period of five years; and

4.    to make an order that Fantastic Furniture pay costs of the ACCC fixed in the sum of $10,000.

Competition and Consumer ACT 2010

6    Before turning to consider the question of relief, it is necessary to set out the relevant statutory provisions.

7    Section 76E was added to the TPA by the Trade Practices Amendment (Australian Consumer Law) Act (No 1) 2010 (Cth) (No 44, 2010) (Amendment Act No 1), by provisions commencing on 15 April 2010: items 1 and 18 of Sch 2 to Amendment Act No 1 and s 2(1) table item 3 of Amendment Act No 1. The CCA commenced on 1 January 2011. Section 76E of the TPA was repealed. However, s 76E in its form prior to 1 January 2011, continues to apply to conduct after 15 April 2010 up to and including 31 December 2010: see cll 6 and 7 of Sch 7 of the Trade Practices Amendment (Australian Consumer Law) Act (No 2) 2010 (Cth) (Amendment Act No 2).

8    In relation to injunctions, pursuant to cl 7(2) of the Amendment Act No 2, as of 1 January 2011, the power of the Court to grant an injunction in relation to conduct in contravention of what was Pt V of the TPA is provided for under s 232 of Sch 2 of the Act (s 232 of the Australian Consumer Law) rather than s 80 of the TPA.

Orders By Consent: Applicable Principles?

9    The principles are well established. The Court must be satisfied that it has the power to make the orders proposed and that the orders are appropriate: Australian Competition and Consumer Commission v Real Estate Institute of Western Australia (1999) 161 ALR 79 and Australian Competition and Consumer Commission v Virgin Mobile Australia Pty Ltd (No 2) [2002] FCA 1548 at [1]. Once satisfied of those matters, the Court should be slow to impede final settlement of proceedings especially where the orders may have been different had it been the Court’s task to draft them: Australian Competition and Consumer Commission v Target [2001] FCA 1326 at [24]. Next, in deciding whether consent orders conform with legal principle, the Court is entitled to treat a respondent’s consent as involving an admission of all facts necessary or appropriate to the granting of the relief sought: Thomson Australian Holdings Proprietary Limited v Trade Practices Commission (1981) 148 CLR 150 at 164.

Declarations

10    The declaration sought by consent is to the effect that Fantastic Furniture contravened s 65C of the TPA by supplying 4,876 bean bag covers that were non-compliant with a consumer safety standard prescribed by reg 11 of the Regulations.

11    The Court has a wide discretionary power to make declarations under s 21 of the Federal Court of Australia Act 1976 (Cth) (the FCA). The pre-requisites to the making of a declaration are threefold: (1) the question must be real and not a hypothetical or theoretical one, (2) the applicant must have a real interest in raising it and (3) there must be a proper contradictor: Forster v Jododex Australia Pty Ltd (1972) 127 CLR 421 at 437-438. Each of those requirements is satisfied in the present case.

12    As a general principle, a Court does not make declarations on matters relating to public rights by consent or on admissions, unless it is satisfied by evidence: Australian Competition and Consumer Commission v Allergy Pathway Pty Ltd [2009] FCA 960 at [18] – [19]; Australian Competition and Consumer Commission v Skins Compression Garments Pty Ltd [2009] FCA 710 at [13]; Australian Securities & Investment Commission v Rich (No 2) (2004) 50 ACSR 500 at [10]; Williams v Powell [1894] WN (Eng) 141; Gramophone Co Ltd v Magazine Holder Co (1911) 28 RPC 221 at 225-227; Termijtelen v Van Arkel [1974] 1 NSWLR 525; Wallersteiner v Moir [1974] 3 All ER 217; Metzger v Department of Health and Social Security [1977] 3 All ER 444 at 451; BMI Ltd v Federated Clerks Union of Australia (NSW) Branch (1983) 51 ALR 401; Young P W, Declaratory Orders (2nd ed, 1984) [601]. In the present case, that is not an issue. Fantastic Furniture has signed the Agreed Statement: see [3] and [4] above. That statement, to which s 191 of the Evidence Act 1995 (Cth) applies, is evidence.

13    Finally, I consider that the declarations are appropriate: Tobacco Institute of Australia Ltd v Australian Federation of Consumer Organics Inc (No 2) (1993) 41 FCR 89 at 100 and Australian Competition and Consumer Commission v Midland Brick Co Pty Ltd (2004) 207 ALR 329 at [21] – [22]; Australian Competition and Consumer Commission v LG Electronics Australia Pty Ltd [2006] FCA 1118 at [8] – [9] and Australian Competition and Consumer Commission v The Construction, Forestry, Mining and Energy Union (2007) ATPR 42-140 at [6]. They are an appropriate vehicle to record the Court’s disapproval of the contravening conduct. They may deter other corporations from contravening the CCA. There is, however, in the circumstances of this case, a further reason for granting the declarations. In the absence of them, the contravening conduct would not otherwise be clearly identified and there is at least some public benefit in that contravening conduct being clearly identified.

Injunctions

14    The parties seek an injunction. The terms are agreed. The effect of the injunction is to restrain Fantastic Furniture for a period of five years from supplying bean bag covers to consumers that do not comply with the Regulations or such other prescribed safety standard as may from time to time be applicable at the time of the supply.

15    Section 232 of the Australian Consumer Law is relevantly identical to s 80 of the TPA. The power of the Court to grant an injunction under s 232 is broad. It is, however, subject to at least three limitations:

1.    the power is confined by reference to the scope and purpose of the TPA. The relief should be designed to prevent a repetition of the conduct for which the relief is sought;

2.    because the jurisdiction to grant an injunction is enlivened by an alleged or actual contravention of Pt V of the TPA, there must be a sufficient nexus or relationship between the contravention and the injunction; and

3.    the Federal Court exercises judicial power under Ch III of the Constitution in respect of “matters” and therefore the injunction must relate to the case or controversy,

see Australian Competition and Consumer Commission v Z-Tek Computers Pty Ltd (1997) 78 FCR 197 at 203-4.

16    In the present case, the injunction proposed by the parties is appropriate. It satisfies the three limitations: it is directed at preventing the precise conduct the subject of the proceeding (supplying bean bag covers to consumers that do not comply with the Regulations or such other prescribed safety standard as may from time to time be applicable at the time of the supply). Moreover, the injunction is capable of being readily obeyed and does not require ongoing Court supervision: Real Estate Institute of Western Australia Inc at [26].

Penalties

17    The ACCC seeks, and Fantastic Furniture consents, to the Court imposing on Fantastic Furniture a pecuniary penalty of $300,000 pursuant to s 76E(1) of the TPA.

18    Section 76(1) empowers the Court, in respect of a contravention of Pt V of the TPA, to order the contravener to pay “such pecuniary penalty, in respect of each act or omission … as the Court determines to be appropriate”. Section 76(3) of the TPA provides that the Court may impose a maximum penalty of 10,000 penalty units (or $1.1 million) for each act or omission.

19    The parties acknowledge that each supply of a non-compliant bean bag covers on or after 15 April 2010 may constitute a separate contravention of s 65C of the TPA. However, the parties submit it is appropriate to treat Fantastic Furniture’s supply of non-compliant bean bag covers as a single course of conduct attracting one penalty: Australian Competition and Consumer Commission v ABB Transmission and Distribution Ltd (No 2) (2002) 190 ALR 169 at [38]; Australian Competition and Consumer Commission v Rural Press Ltd [2002] FCA 1065 at [19] and Australian Competition and Consumer Commission v CI & Co Pty Ltd [2010] FCA 1511 at [27].

20    Section 76E(2) provides that in determining the appropriate pecuniary penalty, the Court is required to have regard to all relevant matters including:

1.    the nature and extent of the act or omission and of any loss or damage suffered as a result of the act or omission;

2.    the circumstances in which the act or omission took place; and

3.    whether the contravener has previously been found by the Court in proceedings under Pt V or Pt VI to have engaged in similar conduct.

21    As noted above (see [7]), s 76E came into force on 15 April 2010. It has been the subject of recent consideration: see Australian Competition and Consumer Commission v Yellow Page Marketing BV (No 2) [2011] FCA 352 at [81] to [100]. As explained in those reasons for decision, the principles applied by the Court in considering penalties under s 76 of the TPA are of considerable assistance in assessing the issue of pecuniary penalties under s 76E. The underlying contraventions of the TPA dealt with by ss 76 and 76E are of a different nature but the general principles applied by the Court in determining penalties under s 76 can and should be relied upon to the extent relevant in setting a penalty under s 76E of the TPA. Such a conclusion is not surprising. Sections 76 and 76E are drafted in similar terms and the matters to which the Court must have regard under s 76E(2) are the same mandatory considerations under s 76(1) of the TPA.

22    In the context of an agreed penalty, such as the present case, the following propositions are applicable:

1.    it is the responsibility of the Court to determine the appropriate penalty;

2.    determining the quantum of a penalty is not an exact science;

3.    the Courts have acknowledged that within a permissible range, a particular figure cannot necessarily be said to be more appropriate than another. Where the parties have jointly proposed a penalty, it is not useful to investigate whether the Court would have arrived at that precise figure. The figure will be appropriate if within the permissible range;

4.    there is a public interest in promoting settlement of litigation, particular, where it is likely to be lengthy;

5.    the view of the regulator, as a specialist body is relevant but not determinative. Its views on matters within its expertise will usually be given greater weight than its views on more “subjective” matters;

6.    the Court examines all circumstances of the case. Where the parties have advanced an agreed statement of facts, the Court may act on it if it is appropriate to do so,

see NW Frozen Foods Pty Ltd v Australian Competition and Consumer Commission (1996) 71 FCR 285 and Minister for Industry, Tourism and Resources v Mobil Oil Australia Pty Ltd [2004] FCAFC 72 at [51].

23    As a result, the essential question for the Court exercising power under s 76 (and s 76E) is whether the penalty agreed upon by the parties is “within the permissible range” in all the circumstances of the case? The Court addresses that question by considering first the proposed penalty and then determining whether it falls within the permissible range or by considering first the appropriate range and then determining whether the proposed penalty falls within that range: Mobil at [54].

APPLICATION OF PRINCIPLES TO PRESENT CASE

Nature of contravening conduct and circumstances in which it took place

24    The contravening conduct was serious. It involved the supply of non-compliant bean bag covers to consumers and Franchisees. The contravening conduct for the purposes of s 76E is limited to the supply by Fantastic Furniture of 257 non-compliant bean bag covers from 15 April 2010 to 17 September 2010: see [4] above.

25    With minor exceptions, the supply of bean bag covers ceased three working days after Fantastic Furniture was informed of the non-compliance by the Queensland Office of Fair Trading on 7 May 2010. Fantastic Furniture implemented a recall of all non-compliant bean bag covers on 22 June 2010. Each bean bag cover had a tamper resistant slide fastener which was a prescribed safety standard.

26    There is no evidence to suggest that the contravening conduct was deliberate or that any consumer has been harmed as a result of the conduct. However, the risk of possible harm to consumers from the use of a bean bag cover without the prescribed warning label is a factor to be taken into account in assessing penalty.

27    Finally, the evidence discloses that Fantastic Furniture has cooperated in the ACCC’s investigation. It responded to all notices and other enquiries by the ACCC. Since these proceedings were commenced, Fantastic Furniture has admitted the conduct alleged in the Fast Track Statement, fully cooperated with the ACCC, agreed to all forms of relief sought in the Fast Track Statement and thereby reduced the time and expense of the proceeding and saved public time and resources including those of the Court.

Whether Fantastic Furniture previously engaged and / or been found by the Court to have engaged in similar conduct

28    On 12 November 2008, Fantastic Furniture provided the ACCC with an undertaking pursuant to s 87B of the TPA in relation to the supply of bunk beds that did not comply with a prescribed consumer product safety standard. The contravening conduct breached that undertaking: see sub-paragraph [10] of [4] above.

Deliberateness of the Conduct

29    There is no evidence to suggest that the conduct was deliberate or undertaken covertly by officers of Fantastic Furniture. The fact that the bean bag covers were non-compliant was brought to the attention of Fantastic Furniture on 7 May 2010. Steps were taken shortly after 7 May 2010 to remove the bean bag covers from sale. However, Fantastic Furniture did not initiate a recall until 22 June 2010.

Whether the contravention arose out of conduct of senior management or at a lower level

30    Fantastic Furniture admitted that although the conduct was not deliberate, the contravening conduct arose out of a failure by its management to have systems in place to ensure that its staff were aware of and complied with the TPA. The evidence disclosed that Fantastic Furniture “had since taken steps to ensure that its staff [were] aware of the requirements of the TPA and the [CCA]”. The evidence did not disclose the steps taken or when those steps were taken.

Size and financial position of Fantastic Furniture

31    Fantastic Furniture is a member of the Fantastic Holdings Limited (FHL) Group of Companies which had total sales in the financial year ended 30 June 2010 of $419.1 million.

Whether Fantastic Furniture has a corporate culture conducive to compliance with the TPA

32    The evidence disclosed that since the matter came to the attention of Fantastic Furniture’s management on 7 May 2010, FHL and Fantastic Furniture took steps to review and strengthen their compliance processes.

Whether Fantastic Furniture has shown a disposition to cooperate with the ACCC in relation to the contraventions

33    Since the commencement of the proceedings, Fantastic Furniture cooperated fully with the ACCC. No evidence was adduced concerning the disposition of Fantastic Furniture before the proceedings were commenced.

CONCLUSION

34    In all the circumstances, I accept that a penalty of $300,000 falls within the permissible range that a Court, without any agreement between the parties, would consider appropriate.

Associate:

Dated:    14 April 2011