FEDERAL COURT OF AUSTRALIA

ACCC v Cotton On Kids Pty Ltd [2012] FCA 1428

THE COURT DECLARES THAT:

1.    Between 2 September 2010 and 4 December 2010, the First Respondent contravened section 65C(1)(a) of the Trade Practices Act 1974 (Cth) (“the TPA”) by supplying, in trade or commerce, 1105 units of children’s nightdresses labelled "Nicki Ss Nightie White/Petal Spot" (Nicki nightdresses):

1.1    which were intended to be used, or were of a kind likely to be used, by a consumer; and

1.2    to which the standard AS/NZS 1249:2003 entitled “Children’s nightwear and limited daywear having reduced fire hazard” published by Standards Australia on 29 December 2003 subject to certain variations (the Standard) prescribed as a consumer product safety standard by the Trade Practices (Consumer Product Safety Standards) (Children’s Nightwear and Paper Patterns for Children’s Nightwear) Regulations 2007 (Cth) applied,

1.3    in circumstances where the Nicki nightdresses did not comply with sections 1, 2, 3 or 4 of the Standard by reason that:

1.3.1    for the purpose of section 1 of the Standard, the burning behaviour of the fabric exceeded the flame spread time prescribed under clause 1.2(a);

1.3.2    for the purpose of section 2 of the Standard, the dimensions of the Nicki nightdresses did not comply with the limits prescribed under clause 2.4;

1.3.3    section 3 of the Standard did not apply to the Nicki nightdresses because it was not an “all-in-one style garment”; and

1.3.4    for the purpose of section 4 of the Standard, the mass of the fabric exceeded the limit prescribed by clause 4.3(a) and the Nicki nightdresses did not have attached a fire hazard information label that complied with clause 4.6.

2.    Between 13 October 2010 and 31 December 2010, the First Respondent contravened s 65C(1)(a) of the TPA by supplying, in trade or commerce, 1311 units of children’s pyjamas labelled "Girls ss burst ss pj Pea Green" (Girls ss burst pyjamas):

2.1    which were intended to be used, or were of a kind likely to be used, by a consumer; and

2.2    to which the Standard applied,

in circumstances where the Girls ss burst pyjamas did not comply with sections 1, 2, 3 or 4 of the Standard by reason that:

2.3    for the purpose of section 1 of the Standard, the burning behaviour of the fabric exceeded the flame spread time prescribed under clause 1.2(a) and an appliqué attached to the top of the pyjamas had a loose portion that was wider than prescribed under clause 1.3(c);

2.4    for the purpose of section 2 of the Standard, an appliqué attached to the top of the Girls ss burst pyjamas had a loose portion that was wider than prescribed under clause 2.5;

2.5    section 3 of the Standard did not apply to the Girls ss burst pyjamas because it was not an “all-in-one style garment”; and

2.6    for the purpose of section 4 of the Standard, the mass of the fabric exceeded the limit prescribed by clause 4.3(a) and the Girls ss burst pyjamas did not have attached a fire hazard information label that complied with clause 4.6.

3.    Between 17 October 2010 and 31 December 2010, the Second Respondent contravened s 65C(1)(a) of the TPA by supplying, in trade or commerce, 16 units of Nicki nightdresses:

3.1    which were intended to be used, or were of a kind likely to be used, by a consumer; and

3.2    to which the Standard applied,

in circumstances where the Nicki nightdresses did not comply with the Standard in the same respects as that described in paragraph 1 above.

4.    Between 13 October 2010 and 31 December 2010, the Second Respondent contravened s 65C(1)(a) of the TPA by supplying, in trade or commerce, 44 units of Girls ss burst pyjamas:

4.1    which were intended to be used, or were of a kind likely to be used, by a consumer; and

4.2    to which the Standard applied,

in circumstances where the Girls ss burst pyjamas did not comply with the Standard in the same respects as that described in paragraph 2 above.

5.    Between 2 September 2010 and 31 December 2010, the First Respondent, in connection with the supply or offer to supply, in trade or commerce, of 1121 units of Nicki nightdresses with labels attached stating "Low Fire Danger" represented that:

5.1    the Nicki nightdresses were made from fabric of a low fire danger type or otherwise styled to reduce fire danger;

when in fact they were not and thereby:

5.2    engaged in conduct that was misleading or deceptive or likely to mislead or deceive in contravention of s 52(1) of the TPA;

5.3    falsely represented that the goods were of a particular standard, quality, value, grade, composition or style in contravention of s 53(a) of the TPA;

5.4    falsely represented that the goods had performance characteristics or benefits in contravention of s 53(c) of the TPA; and

5.5    engaged in conduct that was liable to mislead the public as to the characteristics of the goods in contravention of s 55 of the TPA.

6.    Between 13 October 2010 and 31 December 2010, the First Respondent, in connection with the supply or offer to supply, in trade or commerce, of 1355 units of Girls ss burst pyjamas with labels attached stating "Low Fire Danger" represented that:

6.1    the Girls ss burst pyjamas were made from fabric of a low fire danger type or otherwise styled to reduce fire danger;

when in fact they were not and thereby:

6.2    engaged in conduct that was misleading or deceptive or likely to mislead or deceive in contravention of s 52(1) of the TPA;

6.3    falsely represented that the goods were of a particular standard, quality, value, grade, composition or style in contravention of s 53(a) of the TPA;

6.4    falsely represented that the goods had performance characteristics or benefits in contravention of s 53(c) of the TPA; and

6.5    engaged in conduct that was liable to mislead the public as to the characteristics of the goods in contravention of to s 55 of the TPA.

7.    Between 17 October 2010 and 31 December 2010, the Second Respondent, in connection with the supply or offer to supply, in trade or commerce, of 16 units of Nicki nightdresses with labels attached stating "Low Fire Danger" represented that:

7.1    the Nicki nightdresses were made from fabric of a low fire danger type or otherwise styled to reduce fire danger;

when in fact they were not and thereby:

7.2    engaged in conduct that was misleading or deceptive or likely to mislead or deceive in contravention of s 52(1) of the TPA;

7.3    falsely represented that the goods were of a particular standard, quality, value, grade, composition or style in contravention of s 53(a) of the TPA;

7.4    falsely represented that the goods had performance characteristics or benefits in contravention of s 53(c) of the TPA; and

7.5    engaged in conduct that was liable to mislead the public as to the characteristics of the goods in contravention of s 55 of the TPA.

8.    Between 13 October 2010 and 31 December 2010, the Second Respondent, in connection with the supply or offer to supply, in trade or commerce, of 44 units of Girls ss burst pyjamas with labels attached stating "Low Fire Danger" represented that:

8.1    the Girls ss burst pyjamas were made from fabric of a low fire danger type or otherwise styled to reduce fire danger;

when in fact they were not and thereby:

8.2    engaged in conduct that was misleading or deceptive or likely to mislead or deceive in contravention of s 52(1) of the TPA;

8.3    falsely represented that the goods were of a particular standard, quality, value, grade, composition or style in contravention of s 53(a) of the TPA;

8.4    falsely represented that the goods had performance characteristics or benefits in contravention of s 53(c) of the TPA; and

8.4    engaged in conduct that was liable to mislead the public as to the characteristics of the goods in contravention of s 55 of the TPA.

AND THE COURT ORDERS BY CONSENT THAT:

Injunctions

9.    The First Respondent be restrained, for a period of four years from the date of this order, whether by itself, its officers, servants, agents or howsoever otherwise, in trade or commerce in Australia from supplying or offering to supply a children’s nightwear garment which is subject to a safety standard for the purposes of Division 1 of Part 3-3 of the Australian Consumer Law (“the ACL”) which constitutes Schedule 2 to the Competition and Consumer Act 2010 (Cth) (‘the CCA”) in force at the time of supply or offering to supply, unless the First Respondent has first obtained written evidence from a person with accreditation from an accreditation body to test children’s nightwear for compliance with the safety standard, that that person has tested a garment that is of the same style and fabric composition as that garment for compliance with the safety standard and found that it complied with the safety standard.

10.    The Second Respondent be restrained, for a period of four years from the date of this order, whether by itself, its officers, servants, agents or howsoever otherwise, in trade or commerce in Australia from supplying or offering to supply a children’s nightwear garment which is subject to a safety standard for the purposes of Division 1 of Part 3-3 of the ACL which constitutes Schedule 2 to the CCA in force at the time of supply or offering to supply, unless the Second Respondent has first obtained written evidence from a person with accreditation from an accreditation body to test children’s nightwear for compliance with the safety standard, that that person has tested a garment that is of the same style and fabric composition as that garment for compliance with the safety standard and found that it complied with the safety standard.

Trade Practices Compliance

11.    The First Respondent and the Second Respondent each:

11.1    establish a compliance program in accordance with the program set out in Annexure A:

11.1.1    for the employees or other persons involved in its business, being a program designed to ensure their awareness of the responsibilities and obligations in relation to the conduct declared by the Court in this proceeding to be in contravention of the TPA and any similar or related conduct; and

11.1.2    revising the internal operations of its business which led to it engaging in the conduct declared by the Court in this proceeding to be a contravention of the TPA;

11.2    maintain and administer, at its own expense, the compliance program set out in Annexure A for a period of three years from the date of this order; and

11.3    provide, at its own expense, a copy of any documents to be provided to the Applicant pursuant to the compliance program set out in Annexure A.

PENAL NOTICE TO RESPONDENTS:

IF YOU

(A)    REFUSE OR NEGLECT TO DO ANY ACT WITHIN THE TIME SPECIFIED IN THIS ORDER FOR THE DOING OF THE ACT; OR

(B)    DISOBEY THE ORDER BY DOING AN ACT WHICH THE ORDER REQUIRES YOU TO ABSTAIN FROM DOING,

YOU WILL BE LIABLE TO IMPRISONMENT, SEQUESTRATION OF PROPERTY OR OTHER PUNISHMENT.

ANY OTHER PERSON WHO KNOWS OF THIS ORDER AND DOES ANYTHING WHICH HELPS OR PERMITS YOU TO BREACH THE TERMS OF THIS ORDER MAY BE SIMILARLY PUNISHED.

12.    The First Respondent pay to the Commonwealth of Australia a pecuniary penalty in the total amount of $1,000,000 in respect of the contraventions of ss 65C, 53(a), 53(c) and 55 of the TPA referred to in paragraphs 1, 2, 5 and 6 of these Orders.

13.    The First Respondent is to pay the Commonwealth of Australia the total amount of $1,000,000 in the following five equal instalments:

13.1    $200,000 within 30 days of the date of the making of this order by the Court;

13.2    $200,000 within four months of the date of the making of this order by the Court;

13.3    $200,000 within seven months of the date of the making of this order by the Court;

13.4    $200,000 within 11 months of the date of the making of this order by the Court;

13.5    $200,000 within 15 months of the date of the making of this order by the Court.

14.    In the event that there is a default in the making of any of the instalment payments referred to in paragraph 13 above and that default continues for 14 days, the whole of the outstanding amount is due and payable by the First Respondent.

15.    The First Respondent pay to the Applicant, within 30 days of the making of this order by the Court, a contribution towards the costs of and incidental to these proceedings in the total amount of $5,000.

16.    There be no order made against the Second Respondent as to penalty and costs.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011

ANNEXURE A

TRADE PRACTICES COMPLIANCE AND EDUCATION / TRAINING PROGRAM

Interpretation

1.    In this Annexure:

(a)    “ACCC” means the Australian Competition and Consumer Commission;

(b)    “Act” means the Competition and Consumer Act 2010 (Cth);

(c)    “Compliance Advisor” means the person defined in paragraph 6 below;

(d)    “Compliance Officer” means the person appointed under paragraph 2 or 3 below;

(e)    “Compliance Policy” means the policy defined in paragraph 8 below;

(f)    “Compliance Program” means the Trade Practices Compliance and Education / Training Program in this Annexure;

(g)    “Compliance Program Review Report” is the report defined in paragraph 20 below;

(h)    “Compliance Trainer” is defined in paragraph 14 below;

(i)    “Contravening Conduct” means the conduct declared by the Federal Court of Australia in these proceedings to be in contravention of sections 52, 53(a), 53(c), 55 and 65C of the Trade Practices Act 1974;

(j)    “the Respondent” means, where applicable, Cotton On Kids Pty Ltd (ACN 114 221 886) or Cotton On Clothing Pty Ltd (ACN 052 130 462);

(k)    “the Respondent’s Program” means the steps taken by the Respondent to comply with the Order of the Court in relation to the Compliance Program;

(l)    “External Reviews” means the reviews required by paragraph 19 below;

(m)    “Order of the Court” means the relevant order(s) of the Federal Court of Australia made in these proceedings;

(n)    “Relevant Provisions” means sections 18, 29(1)(a), 29 (1)(g), 33, 106 and 134 of the Australian Consumer Law which deals with similar or related conduct to the Contravening Conduct;

(o)    “Reviewer” is defined in paragraph 19(b) below;

(p)    “Risk Assessment” means the assessment required by paragraph 6 below;

(q)    “Risk Assessment Report” means the report required by paragraph 7 below;

(r)    “Training” means the training required by paragraph 13 below.

(s)    “Safety Standard” means a safety standard that is in force for the purposes of Division 1 of Part 3-3 of the Australian Consumer Law.

(t)    “Information Standard” means an information standard that is in force for the purposes of Part 3-4 of the Australian Consumer Law.

Compliance Officer

2.    The Respondent must, within one month of the date of the Order of the Court, appoint a senior employee with suitable qualifications or experience in corporate compliance as Compliance Officer with responsibility for ensuring that the Compliance Program is effectively established, maintained and administered in accordance with the Order of the Court.

3.    After the appointment of the Compliance Officer in accordance with paragraph 2, the Respondent must take all reasonable steps to ensure that, for the duration of the Order of the Court, there is a senior employee with suitable qualifications or experience in corporate compliance appointed as Compliance Officer with responsibility for ensuring that the Compliance Program is effectively established, maintained and administered in accordance with the Order of the Court.

4.    The Respondent must take all reasonable steps to ensure that for the duration of the Order of the Court the Compliance Officer discharges his or her responsibility of ensuring that the Compliance Program is effectively established, maintained and administered in accordance with the Order of the Court.

5.    The Respondent must take all reasonable steps to ensure that the Compliance Officer reports in writing to the Respondent ’s board of directors every six months with respect to the on-going maintenance and administration of the Compliance Program including, in particular, whether the Respondent’s Program is effectively:

a.    ensuring an awareness by the employees and other persons involved in the Respondent’s business of their responsibilities and obligations in relation to the Relevant Provisions; and

b.    revising the internal operations of the Respondent’s business which led to the Respondent engaging in the Contravening Conduct.

Risk Assessment

6.    The Respondent must, within one month of the date of the Order of the Court, appoint a qualified, internal or external, compliance professional with expertise in trade practices issues (Compliance Advisor) to conduct a risk assessment to:

a.    identify the areas of the Respondent’s business where it is at risk of contravening the Relevant Provisions;

b.    assess the likelihood of any such contravention occurring;

c.    identify where there are deficiencies in the Respondent’s procedures for managing any such risk;

d.    make findings concerning sub-paragraphs (a) to (c) above; and

e.    make recommendations for action having regard to sub-paragraphs (a) to (d) above (Risk Assessment).

7,    The Respondent must instruct the Compliance Advisor to set out, and must take all reasonable steps to ensure that the Compliance Advisor sets out, the findings and recommendations of the Risk Assessment in a written report (Risk Assessment Report), to be provided to the Respondent’s board of directors within two months of his or her appointment.

Compliance Policy

8.    The Respondent must, within one month of the date of the Order of the Court, establish a policy (Compliance Policy) which is communicated in writing to all employees and other persons involved in the Respondent’s business regarding compliance with the Act, which must include:

a.    a statement of commitment by the Respondent to comply with the Relevant Provisions;

b.    a direction to all employees or other persons involved in the Respondent’s business to report any compliance related issues and Act compliance concerns to the Compliance Officer;

c.    a statement guaranteeing that employees or other persons involved in the Respondent’s business making a complaint or report in relation to the Respondent’s compliance with the Relevant Provisions will not be prosecuted or disadvantaged in any way by reason of their complaint or report and that their complaint or report will be kept confidential and secure; and

d.    a statement that the Respondent will take disciplinary action against any persons who are knowingly or recklessly concerned in a contravention of the Relevant Provisions and will not indemnify them.

9.    The Respondent must take all reasonable steps to ensure that the Compliance Program is maintained and administered in a manner that is consistent with the Compliance Policy for the duration of the Order of the Court.

10.    The Respondent will provide a copy of the Compliance Policy to all new staff at the commencement of their employment with the Respondent.

Complaints Handling System

11.    The Respondent must establish, maintain and administer a trade practices complaints handling system.

12.    The Respondent must take all reasonable steps to ensure that the trade practices complaints handling system is in accordance with AS/ISO 10002:2006 Customer satisfaction - Guidelines for complaints handling in organizations, though tailored to its own circumstances (Complaints Handling System).

Training

13.    The Respondent must take all reasonable steps to ensure that all directors, officers, employees, representatives and agents of the Respondent, whose duties could result in them being concerned with conduct that may contravene the Relevant Provisions, receive practical training regarding the Act (Training) no less than once annually.

14.    The Training must be conducted by either a suitably qualified compliance professional or legal practitioner with expertise in the Act (the Compliance Trainer).

15.    The Respondent must instruct the Compliance Trainer to design the Training, and must take all reasonable steps to ensure that the Training is designed, to ensure that the persons at the Training are made aware of:

a.    the responsibilities and obligations in relation to the Relevant Provisions;

b.    the potential consequences of contravening the Relevant Provisions;

c.    the areas of the Respondent’s business where it is at risk of contravening the Relevant Provisions, as identified in the Risk Assessment Report; and

d.    the content of the Compliance Program.

16.    The Respondent must provide to the Compliance Trainer, for the purposes of conducting the Training, a copy of:

a.    the Order of the Court;

b.    the Compliance Policy;

c.    the Complaints Handling System; and

d.    the Risk Assessment Report.

17.    The Respondent must take all reasonable steps to ensure that an awareness of the Compliance Program forms part of the induction of all new directors, officers, employees, representatives and agents, whose duties could result in them being concerned with conduct that may contravene the Relevant Provisions.

Product Safety

18.    The Respondent will:

a.    maintain up-to-date copies, at its business premises, of all safety standards and information standards that relate to products that the Respondent supplies.

b.    design, implement and maintain procedures to ensure that products supplied or offered for supply by the Respondent that are subject to a safety and/or information standard comply with that standard.

c.    design, implement and maintain procedures to ensure that it will not supply or offer to supply any product that is subject to a safety standard (the subject product) unless it has received written evidence from a person with accreditation from an accreditation body to test that product for compliance with that safety standard, that the person has tested a product which is the same style/model and colour as the subject product for compliance with that safety standard and found that it complied with that safety standard.

d.    design, implement and maintain recall procedures that enable products supplied by the Respondent that do not comply with a safety and/or information standard to be efficiently and effectively withdrawn from the market and returned to the Respondent.

External Review

19.    The Respondent must take all reasonable steps to ensure that annual reviews of the Respondent’ compliance with the Order of the Court are carried out in accordance sub-paragraphs (a) to (d) below (External Reviews):

a.    Scope of the External Reviews – The External Reviews are to ascertain whether the Respondent Program:

(i)    has made the employees and other persons involved in the Respondent’s business aware of their responsibilities and obligations in relation to the Relevant Provisions;

(ii)    has revised the internal operations of the Respondent’s business in relation to the Relevant Provisions and the circumstances that led to the Contravening Conduct;

(iii)     is effectively maintaining and administering the Compliance Program.

b.    Independence of Reviewer – The Respondent must take all reasonable steps to ensure that all External Reviews are carried out by a suitably qualified, independent compliance professional with expertise in the Act (Reviewer). The Reviewer will qualify as independent on the basis that he or she:

(i)    is not a present or past director, employee or officer of the Respondent;

(ii)    has no significant shareholding or other interests in the Respondent;

(iii)    has not acted for or consulted to, and does not act for or consult to, the Respondent in any matters involving alleged contraventions of the Act;

(iv) has not acted for or consulted, and does not act for or consult to, the Respondent or provide other services in relation to this Compliance Program, other than as the Reviewer in a previous year; and

(v)    has no conflict of interest in carrying out the Reviews.

c.    Evidence – The Respondent must take all reasonable steps to ensure that in the conduct of the External Reviews the Reviewer has access to all relevant sources of information in the Respondent’s possession or control, including access to:

(i)    any officers, employees, representatives or agents of the Respondent;

(ii)    any relevant records of the Respondent, including its complaints register/reports and any documents relevant to the Training or its induction program; and

(iii) any documents created by the Respondent’s consultants or legal advisers for use in relation to the Respondent’s Program.

d.    Timing – The Respondent must take all reasonable steps to ensure that the first External Review is completed within one year of the date of the Order of the Court and that each subsequent External Review is completed within one year thereafter, save that all steps to be taken by the Respondent in relation to the final External Review are to be completed one month prior to the expiration of the Order of the Court.

20.    The Respondent must instruct the Reviewer to set out, and must take all reasonable steps to ensure that the Reviewer sets out, the findings of each of the External Reviews in a written report (Compliance Program Review Report) which addresses each of the following:

a.    details of the evidence gathered and examined during the External Review;

b.    the name and relevant qualifications/experience of the person appointed as the Compliance Officer;

c.    if, and to what extent, the Respondent’s Program includes all the elements and requirements of the Compliance Program;

d.    if, and to what extent, the Respondent’s Program covers the areas identified in the Risk Assessment; and

e.    recommendations that the Reviewer considers are reasonably necessary to ensure that the Respondent’s Program effectively maintains and administers the Compliance Program.

21.    The Respondent must instruct the Reviewer to complete and provide the Compliance Program Review Report to it, and must take all reasonable steps to ensure that the Compliance Program Review Report is completed and provided to it, within one month of each Review.

22.    The Respondent must retain each Compliance Program Review Report.

23.    Within 30 days of the receipt of each Compliance Program Review Report, the Respondent’s board of directors must hold a meeting to consider the matters described in paragraph 24 below.

24.    At the meeting referred to in paragraph 23 above, the Respondent’s board of directors must consider:

a.    the Compliance Program Review Report;

b.    whether to make any changes to the Respondent’s Program to more effectively implement the Compliance Program for the purposes of:

(i)    ensuring an awareness for the employees or other persons involved in the Respondent’s business of their responsibilities and obligations in relation to the Relevant Provisions; and

(ii)    revising the internal operations of the Respondent’s business in relation to the circumstances that led to the Contravening Conduct;

c.    any recommendations of the ACCC for the purposes of sub-paragraph (b) above.

25.    Within 14 days of holding the meeting referred to in paragraph 23 above, the Respondent must advise the ACCC in writing of:

a.    details of when the meeting was held and who was present;

b.    the outcome of the meeting, including:

(i)    what, if any, changes the Respondent decided to make to the Respondent’s Program to more effectively implement the Compliance Program and details of the proposed implementation of any changes; and

(ii)    the decisions made by the Respondent about each of the recommendations that had been made by the ACCC (if any).

26.    Within 14 days of holding a meeting referred to in paragraph 24 above at which the Respondent decides to make changes to the Respondent’s Program it must take all reasonable steps to communicate those changes to all employees or other persons involved in the Respondent’s business.

Supply of Documents to the ACCC

27.    The Respondent must within 14 months of the date of the Order of the Court, cause to be produced and provided to the ACCC copies of each of the following documents:

a.    documents evidencing the appointment of the Compliance Officer and Compliance Adviser;

b.    the Risk Assessment Report;

c.    the Compliance Policy and the documents evidencing its implementation; and

d.    documents evidencing the provision of Training, including all materials used in the Training.

28.    The Respondent must provide a copy of each Compliance Program Review Report to the ACCC within 14 days of its receipt from the Reviewer.

29.    If requested in writing by the ACCC, the Respondent must, at its own expense, provide copies of documents and information constituting or evidencing compliance or non-compliance with the Order of the Court.

REASONS FOR JUDGMENT

1    There has been an understandable and long standing concern to protect children from injury caused by fire. To this end, safety standards have been developed for garments including nightwear. The object of the standards is to reduce the risk that such garments will catch fire if children come into contact with naked flames or hot objects. This case is concerned with admitted contraventions of the standards.

2    The two respondents (“Cotton On Kids” and “Cotton On Clothing”) carry on the business of retailing clothing and operate a large number of stores throughout Australia.

3    The Australian Competition and Consumer Commission (“the ACCC”) has brought this proceeding under the Trade Practices Act 1974 (Cth) (“the Act”). It alleges that the respondents have contravened the Act by representing to consumers that nightdresses and pyjamas, which were manufactured by Cotton On Kids and marketed by both respondents, were made from a fabric which presented a low fire danger or otherwise was styled to reduce fire danger when in fact this was not the case.

4    The ACCC seeks the imposition of pecuniary penalties, the making of injunctions and declarations and certain other orders.

5    Before trial the parties filed an agreed statement of facts, agreed submissions both as to liability and penalty and proposed orders.

6    For the reasons which follow I have determined that the orders sought should be made.

CONTRAVENING CONDUCT

7    The parties submitted that, on various occasions between September and December 2010, Cotton On Kids and Cotton On Clothing sold 2476 units of nightdresses and pyjamas for infants and young girls in contravention of the Act.

8    The nightwear and pyjamas in question were in the size ranges between 00 and 8 and were labelled:

(a)    Nicki Ss Nightie White/Petal Spot (“Nicki nightdresses”); and

(b)    Girls ss burst pj Pea Green (“Burst Pyjamas”).

9    Between 2 September and 4 December 2010, Cotton On Kids supplied, and offered to supply to customers, 1105 units of Nicki nightdresses in its retail stores across Australia. Between 17 October and 31 December 2010, Cotton On Clothing supplied and offered to supply to consumers, 16 units of Nicki nightdresses at its retail stores across Australia.

10    Between 13 October and 31 December 2010, Cotton On Clothing and Cotton On Kids supplied and offered to supply to consumers 44 and 1311 units respectively of Burst Pyjamas at retail stores across Australia.

11    Each of the Nicki nightdresses:

(a)    had words marked inside the back neck stating “cotton on kids”;

(b)    had a swing tag attached to it which stated “COTTON ON KIDS”;

(c)    had a care instructions label attached which had printed on it “COTTON ON KIDS”; and

(d)    had a label attached inside the back of the neck which stated “LOW FIRE DANGER”.

12    Each of the Burst pyjamas:

(a)    had words marked inside the back neck and inside the waist stating “cotton on kids”;

(b)    had a care instructions label attached to the top and pants which had printed on it “COTTON ON KIDS”;

(c)    had “cotton on kids” printed at least four times around the waist of the pants;

(d)    had a label inside the back neck and at the waist which stated “LOW FIRE DANGER”; and

(e)    had a swing tag attached to the pants and top which stated “COTTON ON”.

13    The Nicki nightdresses and the Burst pyjamas failed to comply with ss 1 – 4 of the AS/NZS 1249:2003 “Children’s nightwear and limited daywear having reduced fire hazard” published by Standards Australia on 29 December 2003 (“the Standard”), which was prescribed for the purposes of section 65C(2) of the Act by the Trade Practices (Consumer Product Safety Standards) (Children’s Nightwear and Paper Patterns for Children’s Nightwear) Regulations 2007 (“the Regulations”) as the applicable product safety standard. The Standards cover safety and labelling requirements for children’s nightwear and paper patterns for making children’s nightwear. The respondents admit that, by reason of this failure, they each contravened s 65C(1)(a) of the Act.

14    By supplying, or offering to supply, to consumers the Nicki nightdresses and Burst pyjamas with the labels attached stating “LOW FIRE DANGER”, the respondents represented that the Nicki nightdresses and the Burst pyjamas were made from fabric of a low fire danger or that they were otherwise styled to reduce fire danger when in fact they were not.

15    The respondents admit that, by reason of this conduct, they each:

(a)    engaged in conduct that was misleading or deceptive or likely to mislead or deceive in contravention of s 52(1) of the Act;

(b)    falsely represented that the goods were of a particular standard, quality, value, grade, composition or style in contravention of s 53(a) of the Act;

(c)    falsely represented that the goods had performance characteristics or benefits in contravention of s 53(c) of the Act; and

(d)    engaged in conduct that was liable to mislead the public as to characteristics of the goods contrary to s 55 of the Act.

THE LEGISLATION

16    Section 52 of the Act relevantly provided:

“(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 this Division shall be taken as limiting by implication the generality of subsection (1).”

17    Section 53 of the Act relevantly provided:

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

(a)    falsely represent that goods are of a particular standard, quality, value, grade, composition, style or model or have had a particular history or particular previous use;”

…

(c)    represent that goods or services have sponsorship, approval, performance characteristics, accessories, uses or benefits they do not have;

18    Section 55 of the Act relevantly provided:

“A person shall not, in trade or commerce, engage in conduct that is liable to mislead the public as to the nature, the manufacturing process, the characteristics, the suitability for their purpose or the quantity of any goods.”

19    Section 65C of the Act relevantly provided:

“(1)    A corporation shall not, in trade or commerce, supply goods that are intended to be used, or are of a kind likely to be used, by a consumer if the goods are of a kind:

(a)    in respect of which there is a prescribed consumer product safety standard and which do not comply with that standard;

…

(2)    The regulations may, in respect of goods of a particular kind, prescribe a consumer product safety standard consisting of such requirements as to:

(a)     performance, composition, contents, methods of manufacture or processing, design, construction, finish or packaging of the goods;

(b)     testing of the goods during, or after the completion of, manufacture or processing; and

(c)     the form and content of markings, warnings or instructions to accompany the goods;

as are reasonably necessary to prevent or reduce risk of injury to any person.”

20    All of these provisions have subsequently been repealed and replaced by other, similarly worded provisions in the Australian Consumer Law (“ACL”) with effect from 1 January 2011, which appears as Schedule 2 to the Competition and Consumer Act 2010 (Cth). The transitional provisions in each case provided that the former provisions continued to apply to conduct which occurred prior to the commencement of the new legislation. It will, therefore, be convenient, in these reasons, to continue to refer to the superseded legislation.

RELIEF

21    The parties have agreed that the Court should grant declaratory and probation orders, and impose injunctions and a pecuniary penalty.

Declarations

22    The respondents have consented to the making of the declaration which is set out in the orders which are the subject of these reasons.

23    The Court has the power to make declarations under s 21 of the Federal Court of Australia Act 1976 (Cth). Any declaratory order made in the exercise of this power must be directed to quelling legal controversy between parties. The applicant must have a real interest in obtaining the relief sought: see Ainsworth v Criminal Justice Commission (1992) 175 CLR 564 at 581-2. There must also be a proper contradictor: see Forster v Jododex Australia Pty Ltd (1972) 127 CLR 421 at 437-8.

24    Each of these requirements is satisfied in the present proceeding. A dispute has existed between the parties as to whether or not the respondents has engaged in contraventions of ss 52, 53(a), 53(c), 55 and 65C of the Act. The ACCC is a public body which had power under the Act to bring enforcement proceedings. Declaratory proceedings of the kind proposed serve the public interest by making it plain that conduct such as that admitted by the respondents contravenes the Act and the ACL: see ACCC v Midland Brick Company Pty Ltd (2004) 207 ALR 329 at 333; Rural Press Limited v ACCC (2003) 216 CLR 53 at 91.

25    In Forster Gibbs J (with whom McTiernan, Stephen and Mason JJ agreed) adopted Lord Dunedin’s description of a proper contradictor (in Russian Commercial and Industrial Bank v British Bank for Foreign Trade Limited [1921] 2 AC 438 at 448) as “one presently existing who has a true interest to oppose the declaration sought”: see at 438. In ACCC v MSY Technology Pty Ltd (No 2) (2011) 279 ALR 609 Perram J added a requirement that the proper contradictor must not only be a party but must argue against the granting of relief: see at 617 [32]. This added requirement would mean that a respondent, such as Cotton On Clothing or Cotton On Kids, which reaches agreement with the ACCC as to the relevant facts and appropriate orders, could not be treated as a proper contradictor in respect of any declaratory relief on which the parties had agreed.

26    In ACCC v Sampson [2011] FCA 1165 at [13]-[18] I explained my reasons for concluding that a respondent who consents to the making of declarations may, nevertheless, be a proper contradictor in the sense described in Forster and why it is appropriate that the Court should be prepared to act on statements of agreed fact which meet the requirements of s 191 of the Evidence Act 1995 (Cth) (“the Evidence Act”). I adhere to the views which I there expressed.

27    In the present case the respondents are proper contradictors because they have a genuine interest in resisting the grant of relief. The respondents’ interest is to be distinguished from their willingness, as litigants, to compromise the proceeding. A party may well have an interest in avoiding the making of an order by a Court but be prepared to consent to the making of that order in order to avoid the possibility that, if a trial were to proceed, the Court might be persuaded by the applicant to make findings and orders that would fall more onerously on the respondent.

28    The statement of agreed facts, in the present proceeding, when considered in the light of s 191 of the Evidence Act, provides a sufficient basis for the making of the declaration sought by the ACCC. The agreed statement clearly identifies the impugned conduct and the reasons that that conduct contravened the Act. In addition to the agreed statement of facts submitted by the parties, evidence was tendered as to the Standards and expert test results of the respondents’ garments that breached the Act.

29    Declaratory orders will serve the public interest in defining and publicising the type of conduct that constitutes a contravention of the Act, thereby serving the purposes of deterrence and informing consumers of the contravening conduct. They record the Court’s disapproval of the conduct engaged in by the respondents in contravention of the Act, and set out clearly the foundation upon which the consequential orders are made.

30    The proposed declarations accurately describe the contravening conduct and should be made.

Injunctions

31    The Court is empowered to grant injunctions pursuant to s 80 of the Act. The Court has such power whether or not the conduct is likely to be repeated. The granting of an injunction is, however, appropriate to deter a repetition of the contraventions by attaching the sanctions available for contempt of court to any repetition of the contraventions: see ICI Australia Pty Ltd v Trade Practices Commission (1992) 38 FCR 248, 268.

32    The parties are agreed as to the terms of the injunctions. They would enjoin the respondents from supplying or offering to supply a children’s nightwear garment which is subject to a safety standard for the purposes of Division 1 of Part 3-3 of the ACL unless written evidence from a person with accreditation to test children’s nightwear for compliance with the safety standard is obtained and that evidence demonstrates that that person has tested the relevant garment for compliance with the safety standard and found that it was compliant. The injunction is to operate for four years from the date of the order.

33    There should be no recurrence of such contraventions. The injunctions sought by the parties have been carefully framed in order to prevent such a recurrence in the next four years. It is appropriate that they should be made.

Probation Order

34    The parties consented to a probation order compliance program under s 86C(2)(b) of the Act. The proposed compliance program requires the respondents, at their own expense, to put in place a number of measures including the appointment of a compliance officer, the conduct of a risk assessment and the implementation of a compliance policy and complaints handling system. It requires that the respondents implement procedures as to product safety, carry out annual external compliance reviews and require all employees to undergo training. The respondents must also supply certain documents to the ACCC, within 14 months of the order being made, certifying that the compliance program has been put in place.

35    Probation orders of this kind have been made by the Court in cases involving contraventions of Part V of the Act: see ACCC v Dimmeys Stores Pty Ltd [2011] FCA 372 at [18]-[19]; ACCC v Monza Imports Pty Ltd (2001) ATPR 41-843 at 43,439 [19]. In ACCC v Danoz Direct Pty Ltd (2003) IPR 296 at 351 [267], Dowsett J observed that “ … a compliance program should focus on education and prevention. Such a focus provides a basis for developing objective guidelines as to performance.” His Honour further stated, (at 352 [268]), that:

“Corporate culture cannot be changed overnight nor, in my view, can it be changed in a 12 month period. The period necessary to design, implement and enforce an appropriate program to establish a culture of compliance is probably not much less than 3 years … ”

36    As French J, as his Honour then was, stated in ACCC v Real Estate Institute of Western Australia Inc (1999) 95 FCR 114 at 134 [51]:

“The development of that culture [of compliance] is not going to happen overnight. There will plainly be a need to build up appropriate infrastructure, supporting internal practices and procedures, which over a period of time will bring about the necessary changes.”

37    There must be a nexus between the terms of the compliance program and the contravening conduct – such orders must not extend beyond the areas of contravention: see ACCC v Z-Tech Computers Pty Ltd (1997) 78 FCR 197 at 205; ACCC v Dataline.net.au Pty Ltd (2006) 236 ALR 665 at 689-90 [96]. Any proposed compliance program, and the steps required to be undertaken, must be set out with sufficient clarity so that it is able to be performed. The proposed compliance program must also be in the public interest: ACCC v LG Electronics Australia Pty Ltd [2006] FCA 1118 at [14].

38    I consider that these requirements are satisfied in this case. The parties have agreed upon a detailed compliance program which is designed to ensure that there is a company-wide awareness of the respondents’ obligations and responsibilities under the provisions of the Act which they have been found to have contravened. The respondents employ a large number of staff and it is in the public interest that the compliance program be instituted so as to ensure on-going compliance with the ACL.

Pecuniary Penalty

39    The parties agreed upon the imposition of a pecuniary penalty on Cotton On Kids in respect of the various contraventions of the Act. The parties do not propose that any such penalty should be imposed on Cotton On Clothing because the nightwear which is the subject of the contraventions was supplied to Cotton On Clothing by Cotton On Kids. The contravening conduct of Cotton On Clothing consisted of the supply of only 60 units of the Nicki nightdresses and Burst pyjamas.

40    The Court has recognised that there is a public interest in the settlement of disputes under the Act and it will be reluctant to depart from an agreed settlement if it falls within a permissible range merely because the Court might otherwise have been disposed to select some other figure: see NW Frozen Foods Pty Ltd v ACCC (1996) 71 FCR 285 at 290-1; ACCC v Target (2001) ATPR 41-840 at 43,383 [24]; ACCC v Malaysia Airline System Berhad (No 2) [2012] FCA 767 at [23].

41    In deciding whether to make consent orders, however, the Court must be satisfied that it has the power to make the orders proposed and that the orders are appropriate: ACCC v Virgin Mobile Australia Pty Ltd (No 2) [2002] FCA 1548 at [1].

42    The penalties proposed total $1,000,000, comprising four component parts. Those parts are:

(a)    $400,000 for the supply of 1105 Nicki nightdresses in contravention of s 65C(1)(a) of the Act;

(b)    $400,000 for the supply of 1131 Burst pyjamas in contravention of s 65C(1)(a) of the Act;

(c)    $100,000 for the false and misleading representations made on the label of 1121 Nicki nightdresses in contravention of ss 53(a) and (c) and 55 of the Act; and

(d)    $100,000 for the false and misleading representations made on the label of 1355 Burst pyjamas in contravention of ss 53(a) and (c) and 55 of the Act.

43    Each of the above components of the penalty represents one course of conduct for which it is agreed Cotton On Kids should be penalised. The maximum pecuniary penalty available for each contravention is $1,100,000: see s 76E of the Act.

44    There are a number of considerations that must be taken into account in assessing whether a pecuniary penalty is appropriate, to which I will now turn.

Mandatory Considerations

45    Section 76E(2) of the Act stipulated that, in determining an appropriate penalty, the Court must have regard to all relevant matters including:

(a)    `the nature and extent of the act or omission and of any loss or damage suffered as a result of the act or omission; and

(b)    the circumstances in which the act or omission took place; and

(c)    whether the person has previously been found by a court to have engaged in any similar conduct.

Nature and extent of the act or omission and any loss or damage suffered

46    The parties agreed that all of the contraventions by the respondents were extremely serious in nature.

47    Children’s nightwear which does not comply with sections 1 – 4 of the Standards, as the Nicki nightdresses and Burst pyjamas did not, cannot legally be supplied to consumers. This restriction is imposed in order to protect children from injury. It was accepted that the contravening supply of the garments was exacerbated by the misrepresentation as to the level of fire danger posed by the garments. A total of 2476 units of the non-compliant garments was supplied over a three month period.

48    Although there is no evidence of actual loss or damage suffered as a result of the contraventions, I accept that the nature and extent of the contravening conduct was significant and serious. I consider that this is accurately reflected in the pecuniary penalty agreed to by the parties.

Circumstances in which the acts took place

49    I have already set out above (at [7]-[12]) the circumstances in which the contraventions occurred.

Previous contraventions

50    It was submitted by the parties that, although there are no relevant previous findings of the Court relating to the respondents, previous undertakings and/or representations of the respondents should be considered in the course of the Court’s assessment of penalties in this case.

51    The ACCC raised concerns with Cotton On Clothing in August 2007 in relation to sunglasses which it offered for sale and which did not comply with the relevant safety standard. Cotton On Clothing provided an undertaking to the ACCC that it would implement procedures to ensure that all sunglasses and any other stock in its retail stores complied with applicable standards and were labelled accordingly. Cotton On Clothing also undertook to implement a trade practices compliance program to ensure that its employees were aware of those responsibilities and obligations. Although Cotton On Clothing offered training relating to advertising, no effective compliance program was implemented by either respondent with regard to safety standards.

52    In August 2008, the ACCC conducted an investigation into the sale by Cotton On Clothing of boots labelled “lambskin”. It was discovered that the boots were made from wholly synthetic materials. On this occasion a further undertaking was given by Cotton On Clothing in relation to the implementation of a compliance program focusing upon ss 52 and 53 of the Act.

53    Finally, and perhaps most relevantly, in September 2008, the ACCC wrote to Cotton On Kids raising concerns in relation to a children’s dressing gown offered for sale which was not labelled with any fire hazard warning as required by the Standards. In response Cotton On Kids informed the ACCC that it would be introducing a trade practices compliance program that would take effect from October 2008.

54    The respondents had been alerted to the relevant requirements of the Act not long before the present contraventions occurred. It should, as a result, have been exercising particular vigilance to ensure that its products complied with the Standards and other relevant statutory requirements and were appropriately labelled. The respondents failed to put in place the processes which were necessary in order to ensure that they complied with their statutory obligations.

Other considerations

Size, financial position and industry position

55    It was submitted that each of the respondents is a large and successful retailer with a well-recognised brand and is a part of the Cotton On group of companies which operates a total of 924 stores throughout Australia and employs 15,296 employees.

56    As Goldberg J observed in ACCC v Leahy Petroleum (No 3) (2005) 215 ALR 301 at 309 [39]:

“The penalty imposed must be substantial enough that the party realises the seriousness of its conduct and is not inclined to repeat such conduct. Obviously the sum required to achieve this object will be larger where the court is setting a penalty for a company with vast resources.”

57    I consider that the proposed penalty takes adequate account of the size and financial position of the respondents.

Deliberateness of the contravention

58    It was agreed that the contraventions were the product of inadequate compliance procedures and poor supervision rather than any deliberate attempt to supply children’s nightwear in breach of the Act.

59    It is relevant to consider the comments of Smithers J in Eva v Mazda Motors (Sales) Pty Ltd (1977) ATPR 40-020 at 17,309. In that case his Honour stated that:

“ … contraventions due to carelessness are not permissible and must be punished. Of course such contraventions are not in the same order of culpability as those involving an intention to deceive.”

60    Indeed, like many of the provisions of the Act, ss 53, 55 and 65C can be contravened without any intention to do so on the part of the contravening company. What I have said above at [54] is also relevant to this consideration.

61    I accept that the penalty proposed appropriately takes account of the fact that the contraventions arose from carelessness rather than knowing contraventions of the Act.

Level at which contravention occurred

62    Responsibility for ensuring compliance with relevant safety standards and the Act rested on senior managers of the respondents. They manifestly failed to perform this important aspect of their duties. The potential consequences were most serious. This is a factor which weighs in favour of a significant penalty.

Cooperation

63    It was common ground that the respondents both cooperated fully with the ACCC during the course of its investigation and in these proceedings. Upon being notified of the contravening conduct by the ACCC, the respondents voluntarily published recall notices.

64    It was submitted that the proposed penalties give real credit for the respondents’ early acknowledgement of liability, and the time and resources saved as a result of their cooperation. I accept the parties’ submissions on this issue.

Deterrence

65     It was submitted by the ACCC that the Court should give most weight to the factor of deterrence in assessing penalties in this case.

66    The garments in question were intended to be used by infants and children and would have been so used. As Gordon J observed in Dimmeys at [61]-[63], in relation to the sale of children’s nightwear:

“The primary object of s 65C(1) is the protection of consumers. In the present case, infants and children are a significantly vulnerable class of consumers. Standards were enacted to protect them. Standards that Dimmeys and other retailers are fully aware of … The risk of fire and burning is serious and dangerous. The goods which were the subject of the Standard were to be used by children. For those reasons, deterrence (specific and general) must be given significant weight.”

67    In ACCC v Robinson [2011] FCA 17, which involved baby sleeping bags which did not comply with the relevant standards in relation to fire hazard labelling, Besanko J observed at [66] that:

“[i]n the context of general deterrence, I take into account the fact that the risk of fire and burning is a very dangerous one and that the goods which were the subject of the Standard were goods to be used by infants.”

68    Although the respondents have consented to the compliance program discussed at [34]-[38] above, as the Full Court observed in NW Frozen Foods at 294-5, penalties for deterrence are important in order to dissuade others from thinking that “detection [of contraventions] will lead merely to a compliance program for the future”.

69    Further, the penalty imposed should operate so that it is not in the financial interest of the respondents or other companies to have ineffectual internal procedures for the purpose of ensuring compliance with relevant safety standards and the Act.

70    I am satisfied that the severity of the proposed penalties takes sufficient account of the need for general and specific deterrence in the circumstances.

Parity principle

71    The Court has, on several occasions, imposed penalties under s 76E of the Act for contraventions of s 65C(1)(a). In Dimmeys, the Court imposed penalties totalling $400,000 for two contraventions of s 65C(1) in relation to the supply of children’s dressing gowns which failed to comply with the relevant safety standards. In ACCC v Smash Enterprises Pty Ltd, Spotlight Pty Ltd & Fantastic Furniture Pty Ltd [2011] FCA 375, the Court imposed, by consent, a penalty of $300,000 for contravention of s 65C(1) by the supply of bean bag covers which were not affixed with the requisite choking hazard warning label. In ACCC v Sontax Australia (1988) Pty Ltd [2011] FCA 1202, the Court imposed a civil penalty of $40,000 in relation to a contravention of s 65C(1) by the supply of elastic luggage straps which were affixed with the incorrect warning label.

72    It was submitted that penalties imposed by the Court in these cases can only be of limited assistance in considering the imposition of penalties in this case. As the Full Court commented in Singtel Optus Pty Ltd v ACCC (2012) 287 ALR 249 at 264 [60], the Court may not be assisted by penalties imposed in other cases where “the combination of circumstances were different from the present”. The Court further noted that reference to such cases is not “apt to establish a ‘range’ of penalties appropriate” in the case at hand.

73    Indeed, the cases listed at [71] above dealt with contraventions relating to the failure to attach the correct, or any, label to the products in question. The present case is to be distinguished in circumstances where the garments themselves failed to comply with the Standards. This distinction is properly reflected in the severity of the proposed penalties in this case.

Appropriate penalty

74    For these reasons I consider that the proposed penalties fall within the available range. The penalties proposed by the parties should be imposed. There is no objection to the payment of the penalties being made in instalments.

COSTS

75    The parties also reached agreement on the issues of costs. Cotton On Kids should be ordered to pay the ACCC an amount of $5000 as a contribution to the ACCC’s costs of and incidental to this matter.

76    There will be no order as to costs made against Cotton On Clothing.

Associate:

Dated:    18 December 2012