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Brief Counsel

Commerce Commission v The Warehouse Limited

06 March 2009

A recent decision of the Auckland District Court shows the courts' increasing willingness to impose large penalties for breaches of the Fair Trading Act in cases where the defendant is a large corporate, and there is a perceived need to deter future breaches. In this case total fines of more than $200,000 were imposed in respect of a number of unrelated charges concerning misleading advertising/labelling of consumer products.

Facts

On 5 February 2009 the Warehouse pleaded guilty to a number of charges laid by the Commerce Commission for breaches of the Fair Trading Act 1986. The sentencing decision was released on Friday last week.

The charges were split into two proceedings.

  • The first proceeding considered charges of false and misleading conduct, relating to various advertising material that:
    • understated the price of DVDs
    • stated that toys were on "on sale for a limited time only", when some of the toys were available at the same price prior to the sale period
    • incorrectly stated that the Warehouse had exclusive rights to sell certain toys and computer products, and
    • advertised products at a special price, but failed to supply the products in quantities that were reasonable – an allegation of 'bait advertising'.
  • The second proceeding involved duvet inners that were labelled as containing particular proportions of goose and duck feathers, when in fact the proportions differed materially. The Warehouse had been advised of the mislabelling, and had discovered from its own testing that the down proportions were not those described on the label. However, the Warehouse continued selling the duvets with misleading packaging, albeit at lower prices. The Warehouse distributed corrective advertising, but this was described by the Judge as "too little too late".

Sentencing considerations

The factors relevant to sentencing under the Fair Trading Act remain those set out in Commerce Commission v LD Nathan. Key factors are: the objectives of the Act, the gravity of the breach, prejudice to consumers, and the need for deterrence.

In addition, a sentencing court must consider the generic principles contained in the Sentencing Act. Particularly relevant in this case were:

  • the financial circumstances of the offender;
  • the guilty plea; and
  • the previous record of the offender.

Application to the facts: emphasis on deterrence

Within these factors the sentencing court has a great deal of discretion. Having discussed the gravity and circumstances of the various breaches, Judge Harvey emphasised the need for deterring retailers from deliberately or carelessly "giving it a go" – particularly when the retailer is a large entity conducting nationwide advertising campaigns, and has previous convictions for breaches of the Fair Trading Act.

After discounting $20,000 for guilty pleas in each of the two proceedings, the Judge imposed:

  • $110,000 for the 16 breaches considered in the first proceeding – penalties on individual charges ranging from $5,000 to $7,500; and
  • $99,600 for the four breaches considered in the second proceeding – $16,600 per charge.

The Judge considered various precedent penalties including:

  • Kathmandu – total penalty of $28,000 ($4,000 per charge) for advertising goods as being "on sale", when the goods were in fact being sold at a recent (non-sale) price;
  • GlaxoSmithKline – total penalty of $70,000 ($7,000 per charge) for an advertising campaign that might have led consumers to think that Ribena drink contained more vitamin C than was the case; and
  • Air New Zealand – total penalty of $600,000 (around $9,000 per charge) for a series of misleading advertisements over a two-year period: these advertisements failed to properly disclose a fuel surcharge.

All of these sentences concerned breaches of the Act that occured after 2003, when the maximum penalty under the Fair Trading Act was doubled to $200,000 per charge.

We think that the Air New Zealand case may be distinguishable from the Warehouse facts given the more prolonged offending in the Air New Zealand case, and that Court's desire to 'send a message' to the airline industry about widespread inadequate disclosure of surcharges.

Fair Trading Act penalties gain weight?

It is often difficult to take guidance from sentencing decisions of this sort in which:

  • the proceedings concern a number of charges of differing natures; and
  • the penalties may be distorted by the manner in which multiple breaches are combined into single charges both by the Commission when it brings the charges, and later by the courts' application of the 'totality principle'.

However, when compared with applicable precedents, this case discloses an increased willingness by the courts to impose significant penalties on large corporate entities, particularly where the defendant has previous convictions for similar conduct.

Footnotes

  1. Unreported, Auckland District Court CRNs 2008-004-11407/2007-004-14313, 27 February 2009.
  2. [1990] 2 NZLR 160,165.
  3. Unreported, District Court Auckland, CRI 06004500110, 19 June 2006, Judge Kiernan.
  4. Unreported, District Court Auckland, CRN 60004503913, Judge Gittos. Note that the total penalties in this case were $227,500, but only the advertising campaing breaches were considered relevant in the Warehouse case.
  5. Unreported, District Court Auckland, CRN 400450058, 16 June 2006, Judge Thorburn.