Coles misleading conduct penalty: how relevant is EBIT?

In Australian Competition and Consumer Commission v Coles Supermarkets Australia Pty Limited [2015] FCA 330 the Federal Court determined Coles should pay a $2.5 million penalty for engaging in misleading conduct arising from the use of the expressions “Baked Today, Sold Today”, “Freshly Baked”, “Baked Fresh” and “Freshly Baked In-Store” in advertising certain bread products which had in fact been partially baked off-site, snap frozen and then baked to completion at a Coles Supermarket.

The penalty was over one third of Coles’ earnings before interest and tax (EBIT) for the par-baked products.

Chief Justice Allsop identified a number of submissions relevant to assessing a penalty including:

  • As a corporate respondent, the maximum penalty that may be imposed on Coles for each contravention is $1.1 million. But if the sales of par-baked products were taken to be the yardstick by which the contraventions were measured, there would be some 85 million contraventions.
  • The ACCC submitted that it was appropriate to find that Coles’ contraventions entailed four courses of conduct based upon the four different combinations of the impugned phrases that could be used and the manner in which they were communicated to the public.
  • Coles’ approach was to argue that the use of the impugned phrases all formed part of a single marketing campaign, which should be characterised as a single course of conduct.
  • What was the impact of the course of conduct? The conduct in question took place over a period of about three years. Approximately 106 product lines were involved and a very significant quantity of those products were sold across 637 supermarkets in Australian States and Territories.
  • Coles gave evidence of the revenue derived from all par-baked products in the 2013 financial year ($104 million) and the first half of the 2014 financial year ($64 million). The EBIT figures for the par-baked products were also provided based on an extrapolation using the EBIT margins for the entire Coles Group. This indicated estimated EBIT of $4.46 million and $2.82 million (totalling $7.28 million) over the 2013 financial year and the first half of the 2014 financial year, respectively.
  • Coles submitted that its significant financial resources alone were not a reason for setting a higher penalty than might otherwise be imposed.

Allsop CJ observed:

I accept that a vast number of contraventions have occurred. The effect of this as a matter of law is to raise the potential aggregate maximum penalty to a number well beyond what this Court would ever impose. Nevertheless, it is helpful to identify the courses of conduct by which to evaluate a potential aggregate maximum penalty.

One can view the conduct as four contravening courses of conduct that have taken place:
(a) packaging stating “Baked Today, Sold Today”;
(b) packaging stating “Freshly Baked In-Store”;
(c) packaging stating both “Baked Today, Sold Today” and “Freshly Baked In-Store”; and
(d) signage stating “Freshly Baked” and “Baked Fresh”.

Yet in one sense it was one advertising campaign. Just as senior counsel for Coles accepted that this one course of conduct did not limit the maximum penalty to $1.1 million, so the segregation of the conduct into four courses does not limit the maximum penalty to $4.4 million. It does, however, assist the analysis.

I propose to identify a single penalty in respect of all contraventions in accordance with the totality principle, bearing in mind that what can be seen as four courses of conduct formed part of a single marketing strategy. This is appropriate to ensure that there is not double punishment.

The contravening conduct in this case is substantial and serious. Notwithstanding the absence of any specific evidence as to loss or damage by a consumer or a competitor, it is clear that the significant potential to mislead or deceive and thus to damage competitors, the duration of the conduct, and the fact that the goods in relation to which the impugned phrases were used were “consumer staples” indicate that the objective seriousness of the offending conduct was considerable. The sheer number of products (approximately 106 different product lines), the territorial reach of the campaign (637 supermarkets across all Australian States and Territories), the time over which the conduct occurred (about three years) and the EBIT derived from the par-baked products (in the order of $7.28 million) suggests that there is a strong case for ensuring that the ends of both specific and general deterrence are achieved by the penalty imposed.

Having taken into account the matters in s 224(2) and the other relevant factors identified by the parties, bearing in mind the capacity to assess the conduct as falling into four courses of conduct and taking into account all the matters to which I have referred, in particular revenue and EBIT for par-baked products over the period, I would impose a penalty of $2.5 million. One way of looking at this is that the offending was above the mid-range for four courses of conduct with a notional maximum penalty of $4.4 million. Another way of looking at it is that it is a sum which (ignoring the opportunity advantage of the use of the funds brought by the revenue, which may have been considerable) strips Coles of over one third of its EBIT of the par-baked products (recognising the imprecision of the calculation, and making a rough adjustment for the asserted higher costs of the bakery sections). Neither is a mechanical calculation. Both are useful checks. In my view, the sum is in all the circumstances the appropriate penalty.”

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