ACCC signals strategic change in battle with supermarkets

The corporate regulator has gone after Coles for unconscionable conduct against smaller suppliers. AAP/Paul Miller

The corporate regulator’s ongoing battle with the major supermarket chains took an interesting twist on Monday when it alleged that Coles had engaged in unconscionable conduct against various small suppliers.

The case relates to Coles’ efforts to improve its efficiency via a major revamp of its supply chain. This led to the Active Retail Collaboration program, which – according to Coles – delivered benefits for large and small suppliers. There’s no such thing as a free lunch though: Coles wanted its suppliers to pay rebates in return for these benefits.

The Australian Competition and Consumer Commission’s (ACCC) case relates to the manner in which Coles sought the suppliers’ agreement to pay the rebates. It is based upon the evidence of 200 small suppliers who were allegedly given “a matter of days” to examine the proposals put forward by Coles. Refusals to pay the rebate were apparently “escalated” to senior Coles staff who threatened “commercial consequences” if the supplier didn’t comply.

On the face of the ACCC’s media statement, the facts upon which the case is based could have been framed as a misuse of market power. The ACCC, however, has made a strategic decision to pursue the claim as unconscionability.

A recent broadening of the law

There are several reasons why it may have done so. First, the ACCC had a significant victory last year when the Full Court found that Lux had engaged in unconscionable conduct when selling vacuum cleaners door-to-door. The unconscionable conduct provisions have been a moving feast ever since their introduction into what is now known as the Competition and Consumer Act. When first inserted, Parliament clearly indicated that the statutory prohibition was not the same as the equitable concept of unconscionability, which is extremely hard to prove.

But many early court decisions seemed to view the statutory prohibition within the framework of the old fashioned equitable approach. In response, Parliament kept amending the legislation, leading to several iterations of the prohibition. But this itself resulted in greater uncertainty about the interpretation of the law. With the Lux case, however, we have superior court interpretation of a provision that has not been amended for more than two years (in the life of statutory unconscionability, that’s practically a record).

While that decision is very fact specific, it clearly broadened the scope of the statutory prohibition, such that the ACCC may feel greater confidence in categorising Coles’ alleged conduct as unconscionability rather than as a misuse of market power.

Time and complexity

Market power cases are notoriously difficult to prosecute: they are long-running, expensive and extremely complex. The ACCC doesn’t have the best track record in relation to such cases and even success can turn out to be a Pyrrhic victory. One of the ACCC’s best misuse of market power success stories is the 2006 Safeway case, in which Safeway (now Woolworths) was fined $8.9 million for unfair conduct towards bread suppliers. That case took nine years from the time of filing to the handing down of final penalties: any benefit for Safeway’s victims had clearly dissipated in the meantime.

Unconscionable conduct cases are much more fact specific and do not involve the complexities of expert economic evidence. Lux for example took around 18 months from filing until the Full Court’s decision.

While the current case is much more complex than Lux (the sheer volume of witnesses will make a significant difference), a first instance decision could be expected by the end of next year. The first directions hearing (on June 6) will be before Justice Michelle Gordon; she runs a fearsomely efficient court room, so an earlier result (if the case stays on her docket) is quite likely.

What would success mean for the ACCC and suppliers?

By framing Coles’ conduct as unconscionable, the ACCC will lose out a little in relation to possible penalties. Maximum fines for misuse of market power are substantially higher - $10 million or more – as opposed to $1.1 million for unconscionability.

But this factor is unlikely to have weighed heavily on the ACCC. First, any such consideration is premised on victory and, as already discussed, unconscionable conduct looks easier to prove right now. In addition, penalties can be imposed per contravention – it’s unclear, at this stage, how many contraventions the ACCC is alleging and how they might be categorised. But it’s unlikely that there would be a maximum penalty of just $1.1 million available to the judge if the ACCC is successful.

In any case, the key outcomes will be damage to Coles’ reputation (which may well result even if the ACCC doesn’t win) and the closer scrutiny of its ongoing conduct. Suppliers, in particular, are likely to be more vocal in complaining about the conduct of Coles and Woolworths if they can see that the ACCC is able to take timely and effective action on their behalf.

To this end, it seems unlikely that Coles will punish the 200 or so suppliers who are caught up in the ACCC’s action. The ACCC has made very clear that much of its evidence was obtained by the use of compulsory powers: as such, it’s hard to tell whether a supplier is a “collaborator” or an unwilling participant.

In any case, Coles would be extremely foolish if it tried to punish suppliers for co-operating with the ACCC while under such a public spotlight. That would look a whole lot like unconscionable conduct.