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ACCC v Chaste - resale price maintenance

Summary

On 2 September 2005, Lander J of the Federal Court handed down his decision in ACCC v Chaste Corporation Pty Ltd (in liq)1. His Honour imposed record penalties of more than $1 million for resale price maintenance against Chaste Corporation and four individuals who were knowingly concerned in the contravention.

The decision in ACCC v Chaste provides clear guidance as to the seriousness with which the courts will view deliberate conduct by corporations and their senior management which is found to contravene the TPA. It also emphasises the importance of developing and enforcing a culture of TPA compliance within organisations.

Resale price maintenance

Section 48 of the TPA states that: "A corporation or other person shall not engage in the practice of resale price maintenance."

Resale price maintenance occurs when a corporation specifies a minimum price below which its goods may not be resold by third parties. The prohibition against resale price maintenance applies regardless of its effect on competition.

Background facts

From 5 October 1999 until 3 December 2001, Chaste manufactured a weight loss tablet called TRIMit. Chaste entered into agreements for the supply of TRIMit to third parties referred to below as area managers, for resale to retailers.

Chaste provided a document titled "We Answer Your Questions" to area managers which included the following:

"15. Who determines the price at which I sell my stock?"

The company will set the recommended retail price and wholesale price that must be adhered to by all Area Managers. There must be no discounting or price cutting without the written permission of the company. This ensures everyone is protected from unnecessary price wars.'

The Chaste Area Management Proposal also contained the following statement:

"It is most important that a regulated price policy be adhered to in the interest of all parties involved.

We have therefore established the following as the costing structure to be applied in all markets…"

Decision

Lander J declared that Chaste engaged in resale price maintenance by:

  • including a term in its agreements with area managers for the supply of TRIMit, which restricted area managers from selling TRIMit below a price specified by Chaste, and
  • using statements about prices that were likely to be understood by area managers as the prices below which goods were not to be sold.

Chaste was also found to have:

  • made various misleading statements to area managers and retailers in breach of the TPA, and
  • contravened the Franchising Code of Conduct in breach of section 51AD of the TPA.

Penalties imposed

Lander J considered the following factors relevant to the assessment of the appropriate penalty:

  • the nature and extent of the contravening conduct - Chaste entered into resale price maintenance arrangements with 74 area managers over a two year period
  • the amount of loss or damage caused - Chaste's conduct had the effect of artificially inflating the price of TRIMit at $49.95, well above the wholesale price of $19.95
  • the circumstances in which the conduct took place - Chaste's ultimate purpose was to distribute to the individuals controlling the company the maximum possible gross income, without regard for the long term viability of the company
  • the size of the contravening company and its market power - Chaste only sold TRIMit and between December 1999 and November 2001, Chaste's revenue was approximately $3.9 million
  • the deliberateness of the contravention and the period over which it extended - Chaste's conduct was deliberate and persisted for two years
  • whether the contravention arose out of the conduct of senior management or at a lower level and whether the company had a corporate culture conducive to compliance with the TPA - Chaste's senior management devised and implemented the resale price maintenance arrangements, and
  • whether the company cooperated with the authorities responsible for the enforcement of the TPA in relation to the contravention - Chaste's sole director and its consultant did not cooperate with the ACCC or acknowledge their contraventions.

Lander J imposed a number of injunctions and the following record penalties for resale price maintenance:

  • Chaste was penalised $600,000 for its contraventions of section 48 of the TPA (despite being in liquidation) to show the Court's disapproval of the conduct and to deter others
  • Penalties of $150,000 each were imposed on the sole director and the consultant to Chaste for being knowingly concerned in the resale price maintenance
  • The legal advisor and one-time Chief Executive Officer for Chaste was penalised $100,000 for also being knowingly concerned in Chaste's conduct, and
  • A penalty of $30,000 was imposed on Chaste's director of sales for aiding and abetting Chaste in its conduct.

If you would like more information about resale price maintenance, please contact one of our Competition group specialists listed.

Footnote

1 [2005] FCA 1212

This publication is only a general outline. It is not legal advice. You should seek professional advice before taking any action based on its contents.