ACCC v Dermalogica Pty Ltd
Federal Court of Australia
[2005] FCA 152; (2005) 215 ALR 482; [2005] ATPR 42-046
(2 March 2005)
Justice Goldberg
Claim
Resale price maintenance
Catchwords
TRADE PRACTICES – resale price maintenance – supply of beauty products – whether conduct involved the respondent ‘making it known’ that it would not supply products unless the second person agreed not to discount the product – admission of conduct falling within s 96(3)(b) and (f) Trade Practices Act 1974 (Cth) – consideration of appropriate penalty to impose in the circumstances – application for injunction pursuant to s 80 of the Act – whether injunction appropriate remedy in the circumstances.
Parties
Applicant
Australian Competition and Consumer Commission
Respondent
Dermalogica Pty Ltd (ACN 067 065 105)
Case number
V794 of 2002 (Victorian District Registry)
Overview
The ACCC alleged Dermalogica contravened s 48 (RPM) by engaging in RPM conduct as defined in s 96(3) and it sought pecuniary penalties pursuant to s 76(1).
Dermalogica admitted RPM conduct within s 96(3)(b) and (f) but denied RPM conduct as defined in s 96(3)(a) had occurred. These provisions provide as follows:
(a) the supplier making it known to a second person that the supplier will not supply goods to the second person unless the second person agrees not to sell those goods at a price less than a price specified by the supplier;
(b) the supplier inducing, or attempting to induce, a second person not to sell, at a price less than a price specified by the supplier, goods supplied to the second person by the supplier or by a third person who, directly or indirectly, has obtained the goods from the supplier;
(f) the supplier using, in relation to any goods supplied, or that may be supplied, by the supplier to a second person, a statement of a price that is likely to be understood by that person as the price below which the goods are not to be sold."
Dermalogica is a wholesaler of skin care products; there were over 700 retailers of their products in Australia at the relevant time. The Court noted that Dermalogica ‘sees its products as a “premium” brand’, pitched at the higher end of the market - this ‘image of its products ia a principal element of Dermalogica’s marketing strategy’ (para 4).
Two Dermalogica retailers, Cafe Beauty and Fatal Attraction, offered Dermalogica products for sale on their websites at less than the recommended retail price. The ACCC alleged that, in response, Dermalogica made it known that it would no longer supply them with Dermalogica products unless they agreed not to sell them at discounted prices.
Fatal Attraction
Mr Caccamo, a director of Fatal Attraction, gave uncontested evidence that it met with representatives of Dermalogica (including Mr Mayne) in July 2002 and the following conversation took place (at para 14; emphasis added in judgment):
"She said: ‘We have a problem with you discounting the product.’
I said: ‘We are competitive’.
She said ‘Where we position the product we don’t like the idea of it being discounted. It is a professional product. It needs to be recommended by professional people and salons.’
I said ‘How do you know we aren’t doing that?’
She kept repeating what she had already said.
I said ‘I can email you other sites that are discounting’.
She said ‘No that’s impossible’.
The conversation paused for a short time and then she continued.
She said ‘That’s fine, if you could email me those sites. Look Georgio, I would hate to see this problem cause Dermalogica to cancel your account’.
When Andrea made this last comment ... I realised the seriousness of the conversation.
I said ‘If it went that far I think Dermalogica would have a serious problem, I am not just some little therapist who will get scared or back off.’
Dermalogica denied that the statements had ‘the effect that Dermalogica would withhold the supply of products if Fatal Attraction did not agree to sell at specified prices’ (para 15)
Fatal Attraction was also provided with a printout of Dermalogica’s parent company policies which included the following statements (para 16):
Deviating from current Suggested Retail Prices is strongly discouraged.
A violation of this policy can result in account termination and legal action.
In order to maintain Dermalogica’s premium brand image and consistent pricing strategy, we strongly discourage the selling of Dermalogica products for more or less than their suggested retail prices. ...
Violating any of these provisions will result in retraction of web approval and/or account termination.
The Court rejected Dermalogica’s argument that the statements were those of the parent corporation and ‘they were not adopted on the initiative of Dermalogica’s Australian management’ (para 17).
In a subsequent conversation Ms Mayne (of Dermalogica) said to Mr Caccamo that the real problem is ‘we have had a few complaints from a few salons about the 10% discount you offer’ (para 18) and a subsequent letter to three stockists, including Fatal Attraction and Café Beauty, included reference to the emphasis placed on brand image, the fact that they had advertised for less than RRP and the following statement:
I would ask you therefore to please adjust your prices for online retailing with immediate effect.
Cafe Beauty
A sales representative from Dermalogic liaised with the proprietor and director of Cafe Beauty following the discounting. He was reminded of the need for Cafe Beauty to be registered and approved by the parent company if it wished to advertise on the website, was referred to the web policies (as above) and said (para 23 (emphasis appears in judgment)):
She said: ‘Why are you selling so cheap? You’re tarnishing the image of the brand. We do not have a cheap brand.’
I said: ‘I’ll do something about it....give me some time.’...
Of a second conversation Mr Sleiman from Cafe Beauty said (para 24)
"When she said this I recalled from my studies something about unconscionable conduct and restrictions on companies seeking to control prices.
I said: ‘Pam, I’m not sure about the legalities of what you’re doing to me. Can you control price?’
She said: ‘Yeah. We can even cut off supply and close your account.’
Pamela was speaking in a very firm and serious manner. She was also being short with me ... At this point [I] decided that I wanted to maintain Café Beauty’s web presence. Although I cannot recall the exact words used our discussion was along the following lines:
I said: ‘Well what is the cheapest I can sell on-line?’
She said: ‘The recommended retail price.’
I said: ‘Well what about 10% less than the recommended retail price.’
She said: ‘Alright. But no-one is making money from people selling Dermalogica at a cheaper price’
I said: ‘Pam, I always pay my bills. Do not try and run my business.’..." [Emphasis added]
Findings of fact
Noted the website statements alone were not sufficient to ‘make it known’ under s 96(3)(a) but provide context, were not made lightly and were ‘likely to be seen as serious and true statements of Dermalogica’s intentions … [the] threat [to cut off supply] is plainly apparent’ (para 30)
[para 34] There is no doubt that Ms Mayne’s conduct during the 23 July meeting suggested that Dermalogica wanted Fatal Attraction to stop advertising the discounting of Dermalogica’s products. Ms Mayne’s conduct during that meeting must be examined and interpreted against the background of Dermalogica’s web policies. It matters not whether the persons to whom Ms Mayne was speaking had read or were otherwise aware of those policies. If they were aware, then it was clear that violating the provision against discounting would result in account termination as set out in those policies. If they were not aware of the specific terms of the web policy I am nevertheless satisfied that Ms Mayne was seeking to implement the web policy of retraction of web approval and account termination by her observation "Look Georgio, I would hate to see this problem cause Dermalogica to cancel your account." Mr Caccamo heard that observation in which Ms Mayne used a serious tone of voice. In any event the receipt of the 16 September letter puts it beyond doubt.
[para 35] I do not consider the conversation between Ms Mayne and Mr Caccamo that followed the 23 July meeting adds weight to the allegations of resale price maintenance under s 96(3)(a). It is really only a bare assertion that Dermalogica had received complaints from other stockists.
[para 36] Turning to Café Beauty, I am satisfied that the substance and effect of Ms Mitchell’s conversations with Mr Sleiman was that Dermalogica was complaining about the selling of its products cheaply, at a discount and not at its recommended prices and that Dermalogica wished to encourage strongly Café Beauty to sell at the recommended prices, including by asserting that the consequence may be the cessation of supply.
…
[para 38] In both cases the content of the policy or attitude which Dermalogica adopted in relation to the salon proprietors’ discounted Internet sales of Dermalogica products was therefore clearly and intentionally communicated to the salon proprietors. That policy or attitude included the assertion that it was likely that account cancellation would result if the salon proprietors did not ‘toe the line’ and cease engaging in this conduct which was seen as potentially tarnishing Dermalogica’s premium-brand image.
[para 39] However, in response to Mr Sleiman’s query whether he could sell online at 10% less than the recommended retail price, Ms Mitchell told him that he could do so. The consequence was that Dermalogica’s policy of cancellation still applied but the discounting which it required Mr Sleiman to cease was discounting beyond 10% of the recommended retail price.
Section 96(3)(a)
His Honour went on to consider the construction of s 96(3)(a), noting the civil standard of proof (balance of probabilities) applied. He posed the question for determination as follows:
[para 42] In order for the conduct to constitute resale price maintenance under s 96(3)(a), it must be established on the balance of probabilities that Dermalogica made it known to each of the salons that Dermalogica would not supply its products unless the salons agreed to stop discounting the prices of Dermalogica products on their websites. It is clear that Dermalogica asked the salons not to discount and that they posited that the likely consequence of the salons discounting was that Dermalogica could cease supply. But does the evidence suggest that Dermalogica made it known that the salons would cease supply. The principal question is, what is the necessary degree of certainty that must be apparent to the second person in relation to the withholding of supply consequential on the second person’s failure to agree to maintain the supplier’s specified resale price?
His Honour noted that Dermalogica argued that the words ‘known’ and ‘will’ in s 96(3)(a) demonstrate need for absolute certainty of supply being withheld unless the other party agreed to sell at the specified price. His Honour disagreed that this level of certainty was required (my emphasis):
[para 44] The words ‘known’ and ‘will’ cannot be focused upon without considering the substance of the provision and of the conduct which it proscribes. It is precisely because the proscribed conduct involves indicating one’s intention in relation to some future action, that it will almost never be absolutely certain that a particular threat will materialise. The outcome of the threat therefore can never be certain. This also follows as a consequence of the structure of s 96(3), which, in conjunction with subs (1), clearly makes the conduct described in s 96(3)(a) an independent instance of resale price maintenance, alongside any actual withholding of supply.
[para 45] The threat itself, however, should convey an unequivocal intention to cease supply. It is not necessary that the supplier or the second person have supernatural foresight in order for the provision to be satisfied, but the threat must unequivocally indicate that withholding of supply is either certain or at least a likely consequence of the second person failing to maintain the specified resale price.
[para 46] It is necessary to show that the second person appreciated the supplier’s statement of their intentions. The second person must have understood the supplier’s threat to be serious, that is that the supplier’s withholding of goods would be the actual or likely outcome if the second person did not agree to sell those goods at the specified price. This is really where the element of likelihood discussed above becomes relevant, because the ‘knowledge’ or ‘awareness’ is in the mind of the person being threatened. The supplier must bring about in the mind of the second person a clear apprehension that the threatened action is at least likely.
[para 47] The breadth of the language ‘making it known’ indicates that it need not be shown that the supplier communicated its intention in strong language or in any particular mandatory form of words. For example, it is not necessary that words be used such as ‘If you entertain the idea of discounting the product, I would find a million and one ways of stopping supply’ (see The Heating Centre Pty Ltd v Trade Practices Commission (supra) at 156). Indeed, in many cases in a commercial setting, a sense of politeness or grace may cause a person to use more oblique language and a more mild tone.
[para 48] Further, although it is necessary to show that the supplier intended to use the threat of withholding goods to cause the second person to maintain the specified resale price, it is not necessary to show that the supplier actually intended to carry through on its threat. The supplier might make the threat even though it well knew that it was impossible or highly unlikely that it would act upon the threat. The legislation indicates, by proscribing such conduct, that the "making it known" can be sufficient in itself to ensure that the specified resale price is maintained.
[49] It is also necessary to address the notion of ‘agreement’ in s 96(3)(a). In The Heating Centre Pty Ltd v Trade Practices Commission (supra) (per Lockhart and Wilcox JJ at 155 and per Pincus J at 164, 165-166), the members of the Court stated that there is a difference between a supplier making it known that goods will not be supplied if the second person sells goods at a price other than the price specified, which does not fall within s 96(3)(a), and what is covered by the paragraph, namely that a supplier makes it known that goods will not be supplied unless the second person agrees that they will not sell goods at a price other than the price specified.
[para 50] I do not consider that the notion of ‘agreement’ in the context of s 96(3)(a) should be confined to something resembling a negotiated compact or the explicit provision of an assurance. It can extend to acquiescence or submission by the second person to a unilateral demand by the supplier. Indeed, Lockhart and Wilcox JJ in The Heating Centre at 157-158 acknowledged as much. …
[para 51] There is no need for evidence that a formal agreement is sought. All that must be shown is that the supplier made it known that agreement by the second person not to discount is required to maintain supply; it need not be shown that the supplier was even seeking acknowledgment that it had been made known, let alone any indication of the second person’s intended course of conduct in response to the making-known. The provision requires only communication from the supplier to the second person, and it does not require anything in the nature of a response, nor does it require that the communication from the supplier sought a response. The second person may acquiesce or submit and may do so in complete silence.
Finding on liability in relation to s 96(3)(a)
His Honour found as follows in relation to the contested liability under s 96(3)(a) (my emphasis added)
[para 52] Resale price maintenance is prohibited irrespective of motive, and irrespective of how the supplier’s customers respond to one another’s conduct. It is no excuse for a breach of s 48 that the supplier was persuaded or coerced into doing so by one of its customers because, for example, that customer was unhappy with his or her competitors offering the goods for sale at a lower price. Rather, the supplier is itself placed in a position of having to remain competitive within the marketplace for supply of goods. I reject any suggestion that Dermalogica’s conduct was justified or excused because it was acting upon the complaints it had received from its other stockists.
[para 53] I am satisfied that Dermalogica ‘strongly discouraged’ each of Fatal Attraction and Café Beauty from offering discounts on the recommended resale prices of Dermalogica products and that this discouragement was given force by the threat of withholding supply of goods. I am further satisfied that Dermalogica communicated that discouragement to Fatal Attraction with the requisite degree of certainty. That is I consider that the communication indicated that it was likely that supply of goods was seriously threatened if the salon did not comply with Dermalogica’s wishes. In the case of Café Beauty Ms Mitchell was prepared to allow Mr Sleiman to sell at 10% less than the recommended retail price but at no lower price.
There was a contravention of s 96(3)(a).
Pecuniary penalties
His Honour then considered penalties under s 76(1). The parties had not submitted an agreed figure for consideration; the ACCC sought at least $150,000 for each contravention and Dermalogica submitted the penalty should be no more than $20,000 for each.
His Honour went through the (classic) relevant factors from CSR and NW Frozen Foods (para 60).
Notably:
his Honour rejected Dermalogica’s submission that the object of general deterrence was satisfied by the existence of statutory maximum penalties (para’s 66-67) noting that the ‘general deterrent objective is dependent upon enforcement to be effective’ (para 67)
his Honour observed that it is ‘a vexed question whether any notions of punishment and morality are relevant to fixing the appropriate penalty for a contravention of the Act’ (para 68). He noted
‘I have previously stated that where there has been a flagrant and wilful contravention, a court might take the view that a severe penalty was warranted having regard to the deliberateness and wilfulness of the contravention: Australian Competition and Consumer Commission v Australian Safeway Stores Pty Ltd (supra) at 43,810-43,811. However, since the present case falls closer to the lower end of the scale of blameworthiness than would many other cases, any question of punishment is of marginal (if any) relevance.’
His Honour then discussed the relevant factors in some detail. He noted that concessions with respect to s 96(3)(b) and (f) ‘were properly and helpfully conceded’, saving time and expense (para 1010), but expressed some curiosity about why the applicability of s 96(3)(a) was litigated (para 102), noting that Dermalogica ‘would not have been liable for distinct additional penalties simply because an additional paragraph of s 96(3) was satisfied’ (para 102). … ‘just as it would hardly have affected Dermalogica’s penalty if the Commission had dropped the pleading of s 96(3)(a) so would the penalty hardly have been affected if liability under s 96(3)(a) had been conceded.’ (para 103)
His Honour concluded that the appropriate penalty in relation to each of the two breaches was $125,000. This would have been higher but for cooperation. A total penalty of $250,000 was the result.
Injunction
The ACCC also sought an injunction (s 80) in relation to future acts of RPM. His Honour refused to grant the injunction, noting it was highly unlikely Dermalogica would engage in further prescribed acts of RPM (para 111).
Further resources
See ACCC media release: Dermalogica Pty Ltd penalised $250,000 for resale price maintenance