Federal Court dismisses ACCC unconscionable conduct case against Woolworths

What you need to know

• The Federal Court has found that Woolworths did not engage in "unconscionable conduct" under the Australian Consumer Law in designing and implementing its "Mind the Gap" initiative in 2014.
• It was not unconscionable for Woolworths to ask for payments from suppliers with a view to improving its profit position, where those requests were based on factual data about the performance of the supplier's products and made in the course of reasonable commercial negotiations.
• Conduct by a supermarket retailer toward its suppliers is not "unconscionable" if it is consistent with the norms of commercial behaviour that exist in trading relationships of that kind.    
• The decision also confirms that making requests for payments to which a company is not legally entitled does not, without more, amount to unconscionable conduct under the Australian Consumer Law.

Overview

On 8 December 2016, the Federal Court dismissed proceedings brought by the Australian Competition and Consumer Commission (ACCC) alleging that Woolworths had engaged in unconscionable conduct in the design and implementation of its "Mind the Gap" initiative in 2014.

The Australian Consumer Law (ACL) provides that a person must not, in connection with the acquisition of goods in trade or commerce, engage in conduct that is "in all the circumstances" unconscionable.  For conduct to be "unconscionable", it must be against conscience, by reference to social norms applicable to the trading relationships and activities in question - the Court was not satisfied that Woolworths had engaged in any conduct of this kind.

Background – Mind the Gap

"Mind the Gap" was one of a series of measures taken by Woolworths Supermarkets in late 2014 for the purpose of meeting profit targets in the period to 31 December 2014.  The initiative was designed and implemented in November and December 2014. 

Broadly speaking, Mind the Gap involved a co-ordinated approach to supermarket suppliers in which Woolworths' personnel were tasked with:

• conducting fact-based assessments of a large number of suppliers' trading performance with Woolworths from July to October 2014, measured against the same period in 2013.  A number of metrics were used to identify underperforming suppliers, including whether Woolworths' gross profit margin in respect of a supplier's products had declined in the 2014 half year; and

• using those facts to make "asks" (ie negotiate) for financial contributions or support from suppliers who had, in Woolworths' view, underperformed compared to the 2013 period.

The Court found that Woolworths Commercial Department issued guidance to its buyers responsible for implementing the scheme, which included instructions that:

• Woolworths' buyers were only to approach suppliers where they considered it to be reasonable, based on the data provided to them and their own judgement and experience;
• negotiations with suppliers must be based on the commercial facts provided to buyers and any information received from the supplier;
• they must be courteous, take account of the supplier's perspective and response to any "ask", and not make "any unreasonable claims".

Key features of the ACCC's case 

The conduct alleged by the ACCC to be unconscionable was the design and implementation of the Mind the Gap initiative itself.    

Importantly, the ACCC did not suggest that Woolworths acted unconscionably toward any particular supplier, nor did it call evidence from any supplier to Woolworths.  In this respect, the ACCC's case was very different to the various forms of unconscionable conduct that Coles admitted to engaging in, in the proceedings brought against Coles in 2011 and settled in 2014.

The absence of ACCC evidence from suppliers was significant.  It meant, according to Justice Yates, that it was in many cases "impossible" to consider properly "all the circumstances" to which the Court must have regard before making a finding of unconscionable conduct.  

Ordinary commercial negotiation

The Court rejected all of the factors that the ACCC alleged made the Mind the Gap initiative unconscionable.  

In doing so, the Court emphasised that it was essential to understand the nature of the complex trading relationships between supermarket retailers and their suppliers.  The Court accepted that suppliers to Woolworths (as well as across the grocery industry more generally) "are closely integrated into the strategies used by supermarket retailers to sell goods to customers" and that suppliers contribute, including through various forms of financial support, to the gross margin on products sold by retailers.  The Court found that Woolworths' endeavour to improve product margins by requesting contributions from the suppliers of those products was not unusual, let alone unconscionable.    

In the context of  the detailed evidence on the retailer-supplier trading relationship accepted by the Court, some of the Court's key findings included the following:

• Normal commercial behaviour: Woolworths' dealings with suppliers in implementing the initiative – including making "asks" with a view to negotiating and recovering a profit shortfall – formed part of the ordinary course of Woolworth's trading relationships with suppliers.  The experience for any particular supplier "would have been no different to any ordinary negotiation that the supplier might have had with Woolworths". 
• Fact-based requests: The "asks" were based on financial data relating to the actual trading relationship between Woolworths and the supplier.  Woolworths used metrics that were identical or similar to those it and other supermarkets had previously used for assessing supplier performance.  
• Legitimate profit-seeking: It was not unconscionable for Woolworths to seek to improve its profit by approaching suppliers who had underperformed against key financial metrics and proposing a remedy for that underperformance.  Nor, for that matter, was it unusual or improper to seek financial support in respect of a previous trading period (ie, a "retrospective" request).
• Reasonable commercial discussions: There was nothing untoward about the manner in which Woolworths communicated with suppliers.  The communications in evidence were civil and polite, and no more robust than would be expected in normal commercial negotiations.
• No "demands" or "threats":  The "asks" did not amount to "demands", nor was there any evidence that Woolworths had made "threats" to suppliers or that any supplier had felt threatened by the negotiations.
• Contractual right not required: It was not necessary for Woolworths to have had a contractual or legal right to request or receive the payments, and Woolworths did not assert that it had any such right.  There was nothing unconscionable, or even unusual, about seeking financial support from suppliers in respect of past transactions.
• No evidence of power imbalance:  The evidence did not demonstrate that there was a substantial bargaining imbalance between Woolworths and the suppliers (who differed greatly in size).  It was entirely possible that a particular supply relationship was as important to Woolworths as it was to a supplier.  The initiative was not, as the ACCC had contended, a "speculative scheme designed to take advantage of vulnerable suppliers". 

For these reasons and others, the Court found that neither Woolworths' design nor its implementation of the Mind the Gap initiative amounted to unconscionable conduct.  

Ashurst acted for Woolworths in the proceedings.