Woolworths' unconscionable conduct case kicks off in Federal Court

It was a scheme allegedly cooked up by desperate Woolworths senior managers to plug a $50 million shortfall in the retailer's 2014 gross profits. 

But instead of boosting earnings, a program dubbed Mind the Gap may end up costing Woolworths more than $20 million if the Federal Court upholds claims that Woolworths acted unconscionably by trying to force more than 820 suppliers to pay over $60 million in extra payments.

Woolworths' new loyalty program has yet to gain traction.
Woolworths' new loyalty program has yet to gain traction.  Photo: Peter Braig

The Australian Competition and Consumer Commission launched the proceedings in mid-December after 12 months of investigations.

The case kicks off on Monday, with a first directions hearing before Justice David Yates in the Federal Court in Sydney.

Woolworths has defended the payment demands, saying its conduct was consistent with Australian and international industry practice to engage regularly with suppliers over performance.

However, the retailer has not yet filed its defence and is expected to be given another two weeks to do so before hearings commence later this year.

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The case will hinge on whether Woolworths' conduct was consistent with industry practice, as the retailer claims, or whether Woolworths acted unconscionably by demanding payments it was not entitled to, taking advantage of its superior market power.

Competition law experts said that to prove unconscionable conduct the ACCC had to prove that Woolworths' behaviour went beyond industry norms.

"Retailers are retailers," said one lawyer, asking not to be named. "It's got to be beyond the pale and behaviour that can't be condoned."

Smoking gun

Lawyers say the "smoking gun" may be the ACCC's claim that Woolworths did not keep accurate written records of which suppliers were approached, which suppliers agreed to make the payments, and how much they agreed to pay.

The ACCC alleges that Woolworths did not keep records because it knew suppliers were not getting anything in return for the extra payments.

"Woolworths did not intend that the Mind the Gap scheme would operate so that if a targeted Tier B supplier agreed to make a Mind the Gap payment, Woolworths would take that into account for the future benefit of the supplier,"  the ACCC said in its statement of claim.

"The only purpose of the Mind the Gap scheme was to obtain money from the targeted Tier B suppliers before December 31, 2014 to reduce Woolworths' expected significant profit shortfall," the ACCC said.

"There could be something untowards in that," one lawyer said. "Or it could be just poor record keeping."

"That's an important part of the case," said another source. "There were no records."

In 2014, when the ACCC accused Coles of unconscionable behaviour for  demanding extra payments from small- and medium-sized suppliers, the regulator's statement of claim included detailed allegations based on dozens of emails and phone calls between Coles' managers and suppliers.

The ACCC's statement of claim against Woolworths has no such details, prompting some to question whether the regulator has a sufficiently strong case.

The ACCC's statement of claim against Woolworths is only nine pages, whereas the ACCC's statement of claim in the Coles unconscionable conduct case ran to 68 pages.

Legal sources said the ACCC's concise statement of claim likely reflects new court protocols rather than a lack of evidence.

"The Federal Court has a desire to make these things more simple,"  said one lawyer.

 "The old style was to have a long form and you would put everything in there. In the shorter form you restrict it to the bare bones  and the court requests further details when required," he said.

Coles initially denied the ACCC's allegations, saying demands for extra payments were in line with industry practice.

But, in a major mea culpa, Coles settled the case in late 2014 – just as the ACCC was getting wind of  Woolworths'  behaviour – and agreed to pay more than $10 million in fines and refund more than $12 million to suppliers.

Lawyers said if the ACCCs allegations were proved  Woolworths faced similar-sized penalties and would also have to refund the $18.1 million it managed to squeeze out of suppliers through the ill-fated scheme.

The ACCC case caps off a horror year for Woolworths, which has downgraded profits three times in the last 12 months, lost its chief executive, its chairman and a string of senior executives, and has been forced to pull the plug on its loss-making home improvement venture.

The unconscionable conduct case is yet another distraction for chairman Gordon Cairns and the retailer's new  supermarkets team.