ACCC v Jurlique International Pty Ltd

Justice Spender

Reasons for judgment

After setting out the conduct (admitted) and the relevant provisions, his Honour continued:

[54] The contravening conduct is in connection with premium skin care products. Approximately three quarters of the Jurlique Products sold in Australia by value of retail sales are skin care products. The remaining quarter of Jurlique Products sales by retail value relate to hair care, essential oils, and tincture products. Skin care products were the subject of the decision Australian Competition and Consumer Commission v Dermologica Pty Ltd [2005] FCA 152; (2005) 215 ALR 482 (‘Dermologica’), and it is right to note that the Commission considers the objective of general deterrence to be of particular importance in relation to the skin care product industry.

[55] However, it is also relevant to note that Jurlique Products comprise a small proportion of total skin care product sales in Australia, but their share of premium skin care products is larger.

[56] The majority of the contraventions by the Jurlique Companies involve specialist retailers, including the company outlets, franchise outlets, and the Jin Hsing Company. The contravening conduct concerning price lists also involves pharmacies and salons.

[57] The joint submissions of the parties acknowledge that the Jurlique brand is particularly attractive to consumers who are looking for products that they consider are natural, Australian made, and luxurious; and that Jurlique Companies offer Jurlique products at relatively expensive prices.

[58] The parties acknowledge at par 88 of the joint submissions:

‘The Jurlique Companies’ brand value has been enhanced by preserving the qualities identified. The Jurlique Companies considered that discounting undermined the Jurlique brand and the brand value was maximised if Retailer Outlets and Jurlique Franchises did not discount Jurlique Products. Consistent with this view, the Jurlique Companies at the time of the conduct considered the maintenance of resale prices contributed to the growth in the Jurlique brand.’

[59] This factor raises starkly the question of the appropriate penalty for resale price maintenance in the context of ‘prestige goods’.

[60] The fact of the matter is that the attraction of many products to consumers lies in the fact that they are expensive, and have an aura of exclusivity about them. That attraction is enhanced if the product outwardly displays the signs of its expensive exclusivity, as in the well-known pattern of a product, or by the name that is displayed on the product itself, as on the arms of sunglasses, or on a label of a shirt.

[61] There is a respectable view among economists, particularly those belonging to the so-called ‘Chicago School of Economics’, that vertical price restraints such as retail price maintenance are not anti-competitive. Such economists would argue that there is absolutely no basis on which such practices should be illegal per se, even if there is room for the view that they should be subject to a ‘rule of reason’.

[62] The ‘rule of reason’ is described by Robert W Hahn in the book, Antitrust Policy and Vertical Restraints, at p 8:

‘Under the rule of reason, a practice is viewed with an open mind until proven anticompetitive, with the details of the case at hand determining whether the specific actions taken were on balance more harmful than beneficial.’

[63] For a detailed discussion of the application of the rule of reason to vertical price restraints, see Robert H Bork, ‘The Rule of Reason and the Per Se Concept: Price Fixing and Market Division’ (1966) 75 The Yale Law Journal 373.

[64] The Chicago School of academics supports vertical price restraints such as resale price maintenance, presuming them to be pro competitive and producing significant economic benefits, by facilitating the distribution of products to consumers: see Alan J Meese, ‘Property Rights and Intrabrand Restraints’ 89 (2003 – 2004) Cornell Law Review 553; Keith M Hylton, Antitrust Law: Economic Theory And Common Law Evolution (2003) Cambridge University Press, ch 13; Robert W Hahn (ed) Antitrust Policy and Vertical Restraints (2006) AEL-Brookings Joint Center for Regulatory Studies, particularly ch 1; James Cooper et al, ‘Vertical antitrust policy as a problem of inference’ 23 (2005) International Journal of Industrial Organization 639.

[65] Resale price maintenance is said to enable a supplier to maintain the reseller’s profit level, and therefore the incentive the reseller has to distribute the goods. For examples of how resale price maintenance may assist new products entering the market and increase competition, see Julie Brebner ‘Resale Price Maintenance – The Need for Further Reform’ (2001) 9 Trade Practices Law Journal 19.

[66] The prevention of a ‘free ride’ by discounting retailers is one justification for resale price maintenance: see the classic article by Lester G Telser, ‘Why Should Manufacturers Want Fair Trade’ (1960) 3 Journal of Law and Economics 86; Keith M Hylton, (2003) Antitrust Law: Economic Theory And Common Law Evolution Cambridge University Press, particularly at pp 252 – 261.

[67] The concept of a ‘free ride’ is described by Yuankuo Wang and Mark J Davison in the article ‘Resale Price Maintenance: is the Per Se Prohibition Justified? (1992) 14 Adelaide Law Review at pp 45 – 46:

‘Provision of services by one retailer may increase the sales of others. It is said that at least some consumers will consume the service and then go to buy the relevant item at another shop which does not provide the service and therefore can price the item lower than the retailer which does provide the service. This free-ride process, if not prevented, can ultimately discourage any retailer from providing services sufficient to maxim wise joint profits.

By setting a fixed floor price, the manufacturer can eliminate, or at least reduce, price competition among retailers. Thus, in order to increase their sales, they will have to compete in non-price aspects such as providing services. This in turn can benefit the manufacturer attracting greater demand than otherwise...’

[68] The use of resale price maintenance to prevent retailers taking a free ride is particularly important for prestige goods, where a manufacturer substantially invests in creating an image based on quality and prestige to increase demand for its product.

[69] There is a strong case for the argument that by employing a minimum resale price, and preventing the undercutting of prices by discount retailers, the image and status of a product is protected; that is, the high price is a mechanism through which a manufacturer can certify to its customers consumer that the products they are purchasing are of a high quality: see Alan J Meese, ‘Property Rights and Intrabrand Restraints’ supra at p 565.

[70] The certification of a product’s quality through the maintenance of a resale price is described by Wang and Davison at pp 47 – 48:

‘The reputations of prestigious retailers are valuable to manufacturers so long as consumers regard these retailers as having superior abilities to screen and certify the characteristics of branded products. But other retailers can take a free-ride on this certification process. They can sell the same brand at a lower price and get the benefit of the high quality certified by the prestigious, high-priced stores which presumably have incurred cost in screening products. By using rpm to protect quality certifiers from free-riding, a manufacturer can attract more demand for its product. Such certification, it is said, need not be limited only to quality, but can also extend to style and fashion trends of apparel.’

(Emphasis added.)

[71] It is beyond a doubt that non price factors influence the demand of a product, particularly for higher end products. The benefits of maintaining a price for goods in the prestige market was discussed by Geoff Edwards, in the article, ‘When Should Resale Price Maintenance be Authorised? Guidelines for Use in Authorisation Decisions’ (1996) 4 Trade Practices Law Journal 161 at p 170. Edwards says in relation to ‘so-called prestige goods’:

‘Unlike conventional price-quality theory, for some goods a higher price can be associated with an increase in demand. Products targeted at upscale customers may sell better at high prices since low prices may cause those customers to question the exclusivity of the product. The basis of the argument here is that when consumers buy a prestige product, they are buying more than just its practical usefulness; they are also buying the ability to show off the purchase, that is, to demonstrate to others that they can afford prestige. Consumer welfare is enhanced since it must be assumed that consumers do derive genuine benefit from the purchase of this non-tangible prestige. It is argued that to assume otherwise would be to second guess those consumers and suggest they do not know what is in their own best interests. However it is also arguable that consumers are being fooled into paying too much for a product of only the same quality as cheaper alternatives and that to facilitate the continued existence of expensive prestige goods is not in society’s interest.’

(Emphasis added.)

[72] The competitive merits of vertical restraints are considered by Mitchell G Landrigan in his article, ‘Vertical Price and Non-Price Restraints in Australia and the US: A Comparative Analysis’ (1997) 25 Australian Business Law Review 312 at p 318, who says:

‘If the manufacturer can profitably introduce the restraint, this indicates that consumers, on the whole, value the product more with the restraint than without it in which case the restraint does not cause any net welfare loss. If enough consumers (whether marginal or inframarginal [inframarginal consumers are those who place no value on extra services]) are dissatisfied with the product, the manufacturer will find it unprofitable to enforce it – dissatisfied consumers will substitute away to a more satisfactory product mix – and the manufacturer will be forced to either retract the offending product mix or introduce a superior alternative. Consequently, a profit-maximising manufacturer may only implement a vertical restraint if the restraint is welfare-enhancing.’

[73] The potential of a vertical price restraint to enhance the welfare of society, and promote competition, has long been debated by economists. Wang and Davison say at p 37:

‘At one extreme, rpm is regarded as a device facilitating either formal or tacit price collusion by retailers, or manufacturers or both. On the other extreme, it is argued that rpm is a part of an efficient overall distribution system which can overcome the problems resulting from market imperfections.’

[74] The effective use of mechanisms such as retail price maintenance by manufacturers and suppliers, particularly in the higher end of the market, and the utility of restraining manufacturers from employing such policies in relation to prices, will not doubt continue to be the subject of serious and genuine debate.

[75] In the present proceedings, the difficulty is that, notwithstanding the views outlined above, I am bound by the law, and, in particular, by the Trade Practices Act 1974 (Cth). Resale Price Maintenance is a per se contravention of s 48 of the Act. It is therefore somewhat of an indulgence to consider whether the law ought to be different from what it is presently is. The parties and this Court are bound by the provisions of the Act.

[76] Nonetheless, it is significant that the parties acknowledge in the joint submissions that ‘it is not possible to quantify the loss or damage caused by the conduct’. It is, in my view, unhelpful to attempt to assess any loss on the basis of an assumption that the effect of retail price maintenance was to maintain the retail price by 10% higher than it would be in the absence of such maintenance. That assumption is based on the simplistic view of competition by price, and at least in the context of prestige goods, competition by price is, it seems to me, not by any means the dominant consideration.

[77] There is much to be said for the view that the volume of sales, in a sense, depends on the prestige and goodwill associated with the knowledge that the products are highly priced. In short, there seems to be no evidence to support the view that if retailers were able to discount by 10%, the same volume of sales would occur, but at the reduced price. As the comments I made above make plain, it may very well be that if there were to be widespread discounting, then the volume of sales would decrease.

[78] Where, it is acknowledged, Jurlique Companies did not have significant market power in relation to premium skin care products, and where, it is acknowledged, the Jurlique Companies compete in the market of premium skin care products with competitors, including substantial international corporations, it is impossible to conclude that the maintenance of retail prices by the Jurlique Companies caused loss and damage to consumers.

[79] The logical difficulty associated with the contention that the maintenance of retail sale prices cause loss and damage to consumers and is anti-competitive, (where the maintainer lacks significant market power, and there are significant players in the market) is illustrated, ironically, by a submission in the joint submission by the parties:

‘Retail price maintenance behaviour assisted Jurlique Distribution in controlling the behaviour of their Jurlique Franchisees and Retailer Outlets in circumstances where the Jurlique Companies were expanding its distribution base quickly. The Jurlique Companies were spending significant advertising funding differentiating its product from its competitors and it gained what it considered to be an advantage in the promotion of its image and stocking of its product by maintaining undiscounted prices for its products. These two issues meant that through its contravening conduct, Jurlique Companies obtained advantages over competitors who complied with the law.’

(Emphasis added.)

[80] What this submission acknowledges, although perhaps unconsciously, is that the maintenance of an expensive retail price is part of the allure of prestige products, and confers a competitive advantage to those products over those which are variously seen as discounted.

[81] The parties and the Court have to take the law as it is, and the Act provides for penalties for a contravention of a corporation of up to $10 million, and up to half a million dollars in the case of a natural person.

[82] In Trade Practices Commission v Stihl Chain Saws (Aust) Pty Ltd (1978) ATPR 40-091 at 17,896, Smithers J made plain so long ago as 1978, ‘the principal object of the imposition of a penalty under s 76 is deterrence’.

[83] In Trade Practices Commission v CSR Ltd (1991) ATPR 41-076 at 52,152, French J said:

‘The principal, and I think probably the only object of the penalties imposed by s 76, is to attempt to put a price on contravention that is sufficiently high to deter repetition by the contravenor and by others who might be tempted to contravene the Act.’

[84] As the Full Court of Burchett, Carr and Kiefel JJ in NW Frozen Foods Pty Ltd v Australian Competition and Consumer Commission [1996] FCA 1134; (1996) 71 FCR 285 at pp 294-295:

‘The Court should not leave room for any impression of weakness in its resolve to impose penalties sufficient to ensure the deterrence, not only of the parties actually before it, but also of others who might be tempted to think that a contravention would pay, and detection lead merely to a compliance program for the future.’

[85] Concerning general deterrence, Pincus J, as long ago as 1990, commented in Trade Practices Commission v Sony (Aust) Pty Ltd & Ors (1990) ATPR 41-053 at 51,691:

‘When one finds deliberate breaches of the price maintenance provisions of the Trade Practices Act ... after years of attempts to enforce compliance with these provisions, one can only suspect that the penalties have not been taken very seriously. Their deterrent effect has been insufficient.’

[86] More recently, in 2001, Finkelstein J said in Australian Competition and Consumer Commission v ABB Transmission and Distribution Limited [2001] FCA 383; (2001) ATPR 41-815 at par 13:

‘If general deterrence is the principal object of imposing a penalty, the number of cases that still come before the court, and the seriousness of the conduct that is involved in some of them, suggests that past penalties are not achieving that object. For a penalty to have the desired effect, it must be imposed at a meaningful level. Most antitrust violations are profitable. Accordingly, the penalty must be at a level that a potentially-offending corporation will see as eliminating any prospect of gain.’

[87] In relation to general deterrence in the context of price fixing (where there is a clear and demonstrable nexus between the contravening conduct and the infliction of loss or damage on consumers), Selway J in Australian Competition and Consumer Commission v McMahon Services Pty Ltd [2004] FCA 1425; (2004) ATPR 42-031 at par 15 said:

‘Once it is understood that deterrence, and particularly general deterrence, is the primary principle in the imposition of penalty for price fixing, then at least two conclusions flow from that. First, it means that penalties for collusive price fixing will need to be substantial and significant. This is, of course, reflected in the size of the maximum penalty upon corporations of $10 million. However, it also follows logically from the principle. Collusive price fixing, particularly between tenderers is difficult to detect. Public enforcement often only occurs with "a tip from an affected party or an insider" (See Marshall & Meurer, "Bidder Collusion and Antitrust Law: Refining the Analysis of Price Fixing to Account for the Special Features of Auction Markets" (2004) 72 AntiTrust Law Journal 83 at 101). Given these difficulties and the potential for large profits from such practices there is a chance that those in the market place might be prepared to factor the risk of a low penalty into its pricing structure as a ‘business cost’. That would be inimical to the statutory purpose of ensuring that the practices do not occur. The penalty must be sufficiently high that a business, acting rationally and in its own best interest, will not be prepared to treat the risk of such a penalty as a business cost.’

[88] Because the Act defines resale price maintenance as a per se contravention, the Act requires the Court to apply similar considerations to the conduct in the calculation and imposition of appropriate penalties for the resale price maintenance.

[89] There is, of course, a need to consider the capacity of a contravening party to pay in the calculation of the appropriate penalty, while also giving effect to the primary obligation of the Court to impose a penalty which satisfies the requirement of general deterrence.

[90] Goldberg J in Australian Competition & Consumer Commission v Leahy Petroleum Pty Ltd (No 3) [2005] FCA 265; (2005) 215 ALR 301 said at par 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. However, as specified deterrence is only one element and general deterrence must also be achieved, consideration of the party’s capacity to pay must be weighed against the need to impose a sum which members of the public will recognise as significant and proportionate to the seriousness of the contravention.’

[91] Next, it is important to note that the resale price maintenance conduct occurred over a long period of time. The first instance in the pleadings was in 1991, with the last conduct, the subject of these proceedings, being in 2003. The majority of the conduct the subject of the contraventions occurred during 1999, 2001 and 2002. These proceedings were filed on 14 August 2006. Within the six year time frame prior to the institution of these proceedings there are more than 30 resale price maintenance contraventions of the Act. That conduct affected Jurlique franchisees and retailer outlets throughout Australia and also involved international customers, both within Australia and overseas.

[92] Dr Klein, during the period of the relevant contraventions for penalty, was the most senior executive and owner of the Jurlique Companies. He set the policy on discounting, was directly involved in aspects of the drafting of Jurlique Franchise Agreements, in negotiating the schedules and terms with franchisees, and he had direct contact with the stores. He was involved in all aspects of the contravening conduct. The other contraventions did not involve ongoing conduct.

[93] While some aspects of the financial position of the respondent companies are confidential, it is relevant to record that over the four financial years from 2000/2001 to 2003/2004, the total wholesale sales of Jurlique International and Jurlique Distribution rose from slightly over $10 million to about $21 million, and the domestic retail sales of J & J Franchising Direct Sales and Treatments rose from nearly $8 million to about $11 million. While it is not appropriate to give precise details of the financial size of the contravening companies, in circumstances where confidentiality has been claimed over particular aspects of the accounts before the Court, it is appropriate to acknowledge that the consolidated position of the group discloses substantial assets and significant profits.

[94] The profit of the group is substantial against revenue. It is indicative of the group’s financial position to have regard to the consolidated results for the 2002/2003 financial year, where the net assets of the group was more than $90 million, revenue more than $46 million, and the profit from ordinary activities before income tax was a little more than $11 million.

[95] As an indication, for Jurlique International in that 2002/2003 financial year, sales were slightly more than $28 million with profit before tax of a little more than $10.5 million. For that same financial year, Jurlique Distribution recorded sales of slightly more than $15 million, and profit before tax a little over $9 million.

[96] For J & J Franchising, for that year, the sales were nearly $8.5 million and the profit before tax was nearly $25 million.

[97] Jurlique Spa had limited trading activity during the period of the conduct. It received little income and profit during the period, had negligible net assets, and did not distribute any dividends in the relevant period.

[98] The consequence is that the financial information before the Court indicates that the Jurlique Companies have the financial resources to meet penalties which are recommended by the parties as appropriate for the Court to impose.

[99] It is relevant in this context to refer to Dermologica. The report indicates that Dermologica, in the financial year 2001/2002, had sales of nearly $15 million and profit before income tax in the order of $1.2 million. In the present case, in the 2003/2004 financial year, the Jurlique Companies’ revenue was four times larger than Dermologica’s income in 2001/2002, and the Jurlique Companies’ profit before tax was considerably higher than Dermologica’s.

[100] As to the degree of market power of the Jurlique companies, I have already referred to the lack of market power of Jurlique in the market of premium skin care products. The joint submissions of the parties acknowledge at par 119:

‘Jurlique is not alleged to have market power against its competitors. Jurlique’s share of sales is low in the skin care product industry however Jurlique Products are highly differentiated and offers one of only a few ranges of products claiming to have natural ingredients and to be made in Australia. Customers’ perception of a brand’s image, which is expensive to create and maintain through advertising and marketing, differentiates Jurlique Products from many competitors’ products. Accordingly, some customers are willing to pay more for particular skin care products based on their perception of image.’

[101] However, it is also relevant to note the submission at par 120 that:

‘The Jurlique Companies engaged in resale price maintenance conduct against Jurlique Franchisees in circumstances where the threat to remove stock from their stores would have destroyed their investment in a franchise store. Because Jurlique Franchisees made a substantial investment in each franchise store, Jurlique Companies had significant power in respect of its Jurlique Franchisees.’

[102] The conduct of the Jurlique Companies in the contraventions before the Court was deliberate. It was the result of a long-standing company policy that retail prices should not be discounted. The founder of the Jurlique Companies, Dr Klein, believed strongly in their quality and considered that the prestige image of the Jurlique products could only be maintained if it was not damaged by discounting behaviour. However defensible that view might be, it is no defence to a contravention of the Act, and as the quotations earlier referred to about general deterrence make plain, Parliament has decreed that conduct in contravention of the Act has to be deterred and to this end has provided for a maximum penalty in the case of a corporation of $10 million.

[103] The conduct occurred at the most senior level of the company, and flowed through the operations of the Jurlique Companies. Dr Klein and the Jurlique Companies initially denied that contraventions had occurred. The initial denials by Dr Klein continued after allegations were first raised in March 2003, and persisted at least until some ‘without prejudice’ admissions were made at the end of August and early September 2004.

[104] In November 2003, Dr Klein ceased as managing director; in December 2003, a new shareholder acquired 25% of Jurlique International. In 2004, that shareholder acquired a further 50% of Jurlique International, and the remaining 25% interest was sold by interests associated with Dr Klein in 2005. Since 25 July 2005, Dr Klein has not been involved in the management of the Jurlique Companies and is no longer a shareholder in that company; he has ceased to be a director.

[105] In April 2004, the Jurlique Companies arranged for their lawyers to provide its senior executives and sales managers with a training session specifically targeting resale price maintenance and price fixing. Trade practices training was also provided to Jurlique Companies’ sales staff who were located in Adelaide, Melbourne and Sydney in July 2005. No compliance training was delivered to staff until a year after the Commission raised its concerns about the Jurlique Companies’ conduct. Dr Klein himself had received no trade practices training.

[106] It is relevant to note that the Jurlique Companies have offered to provide a s 87B undertaking to the Commission to implement a compliance program with particular regard to Part IV of the Act. There have been no previous contraventions by any of the Jurlique Companies or Dr Klein relating to Part IV of the Act.

[107] It has to be also recognised that the Jurlique Companies and Dr Klein have saved the time of the Court and Commission by making the admissions constituted by the filing of the respective defences, and in reaching agreement with the Commission on the making of joint submissions to the Court as to the appropriate orders and penalties to be imposed. There has been a saving of some investigation costs, but any savings would have been much greater had there been a timely acknowledgement by the Jurlique Companies and Dr Klein about the Commission’s concerns regarding retail price maintenance, and had there not been a denial of any wrongdoing by Dr Klein over an extended period.

[108] It is in the context outlined above that the Commission and the respective respondents submit that penalties in the following amounts are appropriate, and are within the range of penalties that a Court would order, and recommends that the Court impose those recommended penalties:

[The penalties referred to in the orders, above, were set out]

[109] It is important in this context to note that the Commission and the respondents, each with their different interests to promote, have reached a consensus as to the penalties recommended to the Court as appropriate.

110 I give very great weight to that circumstance, and note the comments by the Full Court in NW Frozen Foods Pty Ltd v Australian Competition and Consumer Commission [1996] FCA 1134; (1996) 71 FCR 285 at p 291:

‘There is an important public policy involved. When corporations acknowledge contraventions, very lengthy and complex litigation is frequently avoided, freeing the courts to deal with other matters, and investigating officers of the Australian Competition and Consumer Commission to turn to other areas of the economy that await their attention. At the same time, a negotiated resolution in the instant case may be expected to include measures designed to promote, for the future, vigorous competition in the particular market concerned. These beneficial consequences would be jeopardised if corporations were to conclude that proper settlements were clouded by unpredictable risks. A proper figure is one within the permissible range in all the circumstances. The Court will not depart from an agreed figure merely because it might otherwise have been disposed to select some other figure, or except in a clear case.’

[111] In my judgment, this case is not a clear case where the Court should depart from the figures agreed by properly informed and legally assisted parties with different interests in the outcome of these proceedings.

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