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Woolworths victory over ACCC: Lessons learnt by SMEs

Published: 13 Dec 2016

By Joe Lederman (Managing Principal, FoodLegal) and John Thisgaard (FoodLegal Consultant)

© Lawmedia Pty Ltd, December 2016

On 8 December 2016, the ACCC’s high-profile action against Woolworths was thrown out by the Federal Court in a scathing judgment.  This article will explore what went wrong for the ACCC, and what this means for small businesses across Australia.

Small business representatives have expressed dismay with the Federal Court of Australia determination that Woolworths did not engage in unconscionable conduct with its suppliers in its ‘Mind the Gap’ program in 2014.

The Australian Competition and Consumer Commission (ACCChad initiated legal action against Woolworths in December 2015, alleging that Woolworths acted unconscionably in requesting financial contributions from suppliers to help meet Woolworths budgeted profit figures.

The scheme was implemented in November and December 2014 in order to raise funds, after Woolworths became aware that it was unlikely to meet its projected sales and profits targets. Suppliers who were deemed to be underperforming were contacted and asked to provide “support”.

Reasons why the ACCC lost

The Federal Court unambiguously found that the conduct of concern to the ACCC was not “unconscionable”. In doing so, Justice David Yates gave the following reasons:

  • Unconscionability is determined with reference to norms of the society in question:There was a normal business context. This was “the relationship that exists between supermarket businesses of the kind conducted by Woolworths and its key competitors, and suppliers to those businesses, in connection with the acquisition or possible acquisition of goods in trade or commerce”
  • The request for payment was not uncommon within this relationship: Suppliers were constantly monitored and those that were underperforming would be asked to make a financial contribution to work towards meeting the shortfall. This went against the conduct being unconscionable.
  • The price of goods was partially dependent on the amount spent by suppliers (for example, on promotional materials). This indicated that the requests by the supermarket group of a supplier were not particularly unusual in this industry.
  • The ACCC took a “big picture” approach, which focused on the generality of the conduct but did not appropriately reflect how a supermarket business operates. According to the Court, “it is simplistic to approach the trading relationship between a supermarket retailer and its suppliers as one where the retailer has complete and unilateral control over the gross margins it makes because of the retail prices it chooses to offer.”
  • The ACCC chose not to lead evidence from individual suppliers: This meant that it could not argue that particular requests were unconscionable.  This contrasts with earlier action against Coles where the ACCC (successfully) argued that particular dealings with suppliers, in which Coles was not entitled to payment and made threats towards the suppliers, were unconscionable.  In this earlier action, the ACCC focused instead on the circumstances that were relevant to each dealing.
  • The ACCC could not demonstrate any negative impact or retribution upon those suppliers who were unable to provide a contribution
  • It did not matter that the contributions were provided for by contract, since Woolworths was only requesting (and not demanding) payment.

Where does all this leave small businesses?

The unsuccessful case against Woolworths demonstrates that procedures that are ingrained into a business relationship are less likely to be unconscionable. This adds a layer of added legal protection for large businesses such as Woolworths despite their position of dominance in their particular industry sector.

Through superior bargaining power, these businesses have been able to make certain favourable transactional practices the norm. This is despite the front that in just about any other industry, it would be rare for a buyer to be able to request payments from its suppliers to fund its own promotional initiatives.

Since these practices are so deep-seated, in Australian oligopsonistic supermarket industry sector, it becomes more difficult for a court to suddenly turn around and say that they are unconscionable. This makes it more onerous for small businesses, such as suppliers, to take on an oligopsonistic supermarket group in Australia.

Quite unintentionally, any small business that decides to undertake similar conduct may be more likely to be acting unconscionably where the conduct is not a normal part of the transactional relationship.

Ultimately, the result represents an added barrier for small firms going up against large companies in Australia. The prohibition on unconscionable conduct is unable to capture entire industry practices that can be regarded as immoral or unfair, no matter what the ACCC had sought to achieve.

Small Business Council responds to ruling

Responding to the ruling, Peter Strong, Chief Executive Officer of the Council of Small Business Australia, said the decision was extremely disappointing.

“The decision suggests that the biggest businesses rule the landscape and will get what they want, when they want it, regardless of the cost to small and medium businesses,” Strong said.

The council also said a message the government that innovation in Australia cannot be rewarded while businesses like Woolworths exist.

How can we be agile and innovate when the biggest businesses Australia has ever seen can destroy innovative firms at their will due to their dominance and the lack of imagination of their boards?”, said Strong.

ACCC to carefully consider judgment

In responding to the Federal Court’s determiniation, ACCC Chairman, Rod Sims, said the ACCC will be carefully considering the judgment.

“Pursuing unconscionable conduct remains an important area for the ACCC and we will continue to take enforcement action where appropriate, particularly in relation to supply chain issues,” Sims said.