Peters Ice Cream gets its just desserts

Published On 13/04/2022 | By Preetha Varadharajan | Enforcement, Litigation

This article was written by Preetha Varadharajan and James Keeves. 

Peters Ice Cream, one of the two largest suppliers of single serve ice cream products in Australia, has recently admitted to engaging in exclusive dealing in contravention of s 47 of the Competition and Consumer Act 2010 (Cth) (CCA) and agreed to the imposition of a $12 million pecuniary penalty, following enforcement action commenced by the Australian Competition and Consumer Commission (ACCC) in 2020.

The penalty imposed by the Federal Court is the largest for exclusive dealing since the $18 million penalty imposed on Visa in 2015 and the first since 2018.  In addition to confirming the ACCC’s continued focus on exclusive arrangements by firms with market power that impact competition, the decision of Moshinsky J is also a helpful reminder as to the principles the Court will consider when deciding whether to impose a pecuniary penalty agreed by the parties.

Background

Peters is a manufacturer and wholesaler of ice cream products, including single serve ice cream products (SSICP) and multipack ice cream products.  Peters’ SSICP brands include Connoisseur, Drumstick, Maxibon and Frosty Fruits.  Between November 2014 and December 2019, Peters acquired distribution services for its SSICPs from PFD Food Services Pty Ltd (PFD) pursuant to a distribution agreement (Distribution Agreement).  That Agreement relevantly included a clause to the effect that PFD would not, without the prior written consent of Peters, sell or distribute competing SSICPs in various geographic areas in Australia (Exclusivity Clause).

During the period in which the Distribution Agreement was in force, PFD was approached on four occasions by other SSICP manufacturers to distribute SSICPs to petrol and convenience store retailers.  PFD informed Peters on each occasion.   On one of those occasions, Peters advised PFD that it could not distribute the manufacturer’s products under the terms of the Distribution Agreement; on the other three occasions, Peters did not respond to PFD’s request and, as a result, PFD refused to distribute the manufacturers’ SSICPs.

Following an investigation, the ACCC commenced a proceeding in the Federal Court of Australia alleging that the Exclusivity Clause amounted to exclusive dealing in contravention of s 47(1) of the CCA.   In particular, the ACCC alleged that the exclusive dealing conduct engaged in by Peters had the purpose, effect or likely effect of substantially lessening competition in the market for the supply of SSICPs by manufacturers in Australia (Relevant Market), by hindering and/or preventing new entrants from entering or expanding in that market.

Despite initially disputing the ACCC’s allegations, Peters ultimately conceded that it had engaged in exclusive dealing conduct contrary to ss 47(1), 47(4)(a) and 47(4)(d) of the CCA by “acquiring distribution services from PFD on the condition that PFD would not, without the prior written consent of Peters, sell or distribute SSICP that competed with Peters SSICP in the various geographic areas throughout Australia specified in the Distribution Agreement”.  It also admitted that the exclusive dealing conduct had the likely effect (but not the purpose or effect) of substantially lessening competition in the Relevant Market.

In light of these admissions, the ACCC and Peters jointly proposed the following orders:

  • a declaration to the effect that Peters had engaged in exclusive dealing in contravention of ss 47(1), 47(4)(a) and 47(4)(d) of the CCA;
  • Peters pay a pecuniary penalty of $12 million;
  • Peters establish and maintain a compliance program for a period of three years; and
  • Peters contribute to the ACCC’s costs, in the amount of $250,000.

Decision of the Federal Court

It is well-established that when deciding whether to make orders to which the parties to a proceeding have consented, the Court must be satisfied that, among other matters, the orders are appropriate. In the present case, Moshinsky J gave consideration to the following questions:

  • Is there a sufficient factual foundation for making the declaration sought?
  • Is the proposed penalty appropriate in the circumstances?
  • Is the proposed compliance program appropriate?

Was there a sufficient factual foundation for the making of the declaration sought?

In answering this question, Moshinsky J had regard to the statement of agreed facts (SOAF) jointly prepared by the parties.  His Honour was satisfied that, on the basis of the facts and admissions set out in the SOAF, Peters had engaged in the practice of exclusive dealing within ss 47(4)(a) and (d) of the CCA, and had thereby contravened s 47(1) of the CCA in the manner alleged by the ACCC.

Justice Moshinsky also accepted the admission by Peters that the exclusive dealing conduct had the likely effect of substantially lessening competition in the Relevant Market, contrary to s 47(10) of the CCA, having regard to, relevantly, the following matters:

  • Peters was one of the two largest suppliers of SSICPs in Australia who together had a 95% share of the route channel and a 62% share of the grocery channel;
  • Peters’ conduct had the likely effect of raising the existing barriers to entry to the Relevant Market;
  • the geographical and temporal scope of Peters’ conduct; and
  • absent the conduct, one or more potential competitors were likely to have entered or expanded in the Market, as demonstrated by the four occasions on which competitors of Peters, such as Bulla and Pure Pops, had approached PFD about potential distribution of their products to national petrol and convenience retailers but had been turned down by PFD due to the Exclusivity Clause.

Accordingly, his Honour was satisfied that it was appropriate to make a declaration of contravention in the terms proposed by the parties.

Was the proposed penalty appropriate in the circumstances?

The starting point for Moshinsky J’s assessment of the appropriateness of the proposed $12 million penalty was ascertaining the maximum penalty.  Like other contraventions of Part IV of the CCA, the maximum civil pecuniary penalty for a contravention of the exclusive dealing provisions by a corporation is the greater of:

  • $10 million;
  • three times the value of the benefit obtained by the corporation; or
  • 10% of the annual turnover of the corporation during the preceding 12 months.

The parties submitted, and Moshinsky J agreed, that while Peters did accrue commercial benefits (such as established market share) due to its conduct, the value of those benefits could not be determined.  Thus, his Honour accepted that the maximum penalty was $33.75 million, calculated by reference to Peters’ annual revenue.

Importantly, his Honour did not find it necessary to decide whether Peters’ conduct constituted a single contravention or multiple contraventions of the CCA.  However, his Honour acknowledged the difficulty of characterising the conduct as multiple contraventions as it was “not reasonably possible” to quantify the number of times the Exclusivity Clause had been exercised.

Despite acknowledging the seriousness, geographic and temporal scope of Peters’ conduct, the involvement of Peters’ management, and the fact that Peters had benefited from the conduct, Moshinsky J made reference to the following mitigating factors:

  • Peters’ lack of deliberateness in contravening the CCA;
  • Peters’ lack of previous corporate misconduct;
  • Peters’ improvement of its compliance and education program, including its agreement to incorporate the compliance program under the proposed orders (see below);
  • Peters’ removal of the Exclusivity Clause from distribution agreements from December 2019 onwards; and
  • Peters’ remorse for the conduct, evidenced by its admissions and continued cooperation with the ACCC.

These factors provide useful guidance as to what will be looked upon favourably by the Court for corporate respondents found to have contravened the CCA.

Ultimately, Moshinsky J concluded that it was appropriate to impose the proposed $12 million penalty and that it would operate both as specific and general deterrent in the future.

Was the proposed compliance program appropriate?

Justice Moshinsky further accepted the proposed compliance program to be established at Peters “secures an important purpose of the statutory regime”. Key obligations under that program include:

  • appointment of a Compliance Officer to ensure design, implementation and maintenance of the compliance program;
  • appointment of a Compliance Advisor to perform a risk assessment to determine competition law risks within Peters;
  • specific requirements including provision for whistle-blower protection, a complaints handling system and ongoing staff training;
  • appointment of an Independent Reviewer to conduct an annual review of the compliance program and prepare report on their findings; and
  • material failures to be reported to the ACCC

Key Takeaways

As well as being the ACCC’s first exclusive dealing enforcement action in over four years, and its fifth in ten years, the $12m penalty imposed on Peters is a timely reminder of the potential risks associated with exclusivity arrangements. Indeed, the ACCC has made clear that it will continue to target exclusive arrangements by firms with market power as one of its key enforcement priorities for 2022/23.

The decision of Moshinsky J also provides a helpful reminder of the matters to be taken into account when assessing the appropriateness of a pecuniary penalty and, in particular, mitigating factors on which a corporate respondent may rely.  The decision is also notable for its guidance as to the level of factual detail required to support admissions that conduct had the likely effect of substantially lessening competition in a market.

Image credit: Teddy’s – Famous For Ice Cream by infomatique / Flickr / CC By-SA 2.0 / Remixed to B&W and resized

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About The Author

Preetha Varadharajan is a graduate in the Competition Dispute Resolution team in the Sydney office of King & Wood Mallesons.

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