Australian Competition and Consumer Commission v Australian Communications Network Pty Ltd & Anor

[2006] HCATrans 265

[2006] HCATrans 265

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Adelaide  No A57 of 2005

B e t w e e n -

AUSTRALIAN COMPETITION AND CONSUMER COMMISSION

Applicant

and

AUSTRALIAN COMMUNICATIONS NETWORK PTY LTD

First Respondent

MARTIN PAECH

Second Respondent

Application for special leave to appeal

HAYNE J
CRENNAN J

TRANSCRIPT OF PROCEEDINGS

AT MELBOURNE ON FRIDAY, 2 JUNE 2006, AT 9.30 AM

Copyright in the High Court of Australia

MR J.W.K. BURNSIDE, QC:   May it please the Court, I appear with my learned friend, MR M.H. O’BRYAN, for the applicant.  (instructed by Australian Government Solicitor)

MR B.W. WALKER, SC:   May it please the Court, I appear with my friend, MS S.E. PRITCHARD, for the respondents.  (instructed by Gilbert & Tobin)

HAYNE J:   Yes, Mr Burnside.

MR BURNSIDE:   If the Court please, this application raises a short but interesting point under the Trade Practices Act.  The provisions of the Act that proscribe pyramid selling schemes contain one crucial feature in the definition and that is that new participants will be entitled to a payment in relation to the introduction to the scheme of further new participants.

HAYNE J:   Now, in that respect, page 81 of the application book, line 50, it is said:

If an IR does no more than recruit other IRs there is no entitlement to any payment.

MR BURNSIDE:   That is true.  Recruitment alone is not enough.  It is clear that downstream activity is a necessary precondition before upstream IRs receive payment.  But what is equally is clear is that customer acquisition bonuses and residual override commissions are payable when there is downstream activity but the level of payment increases depending on how many people have been recruited by the relevant independent representative ‑ ‑ ‑

HAYNE J:   In what sense?

MR BURNSIDE:   In the sense that the rate of return for any level of downstream activity increases according to the level which has been earned, that is to say whether you are a TT, ETT, a team co‑ordinator, regional vice‑president or senior vice‑president.  Each of those earned levels can be earned only by additional downstream recruitment and the higher the level on which ‑ ‑ ‑

HAYNE J:   You say downstream recruitment or the fact that in the past others have been recruited, that is the critical statutory phrase is “in relation to the introduction”.

MR BURNSIDE:   If it means in relation to the present introduction then we would fail.  If it means, however, that there is a sufficient relationship between the introduction of new participants and the recruitment payment, if that is satisfied by the fact that for any given level of activity the amount of recruitment beforehand will increase the payment, other things being equal, then, in our submission, that relationship satisfies the definition. 

The question is, did the Parliament intend a narrow approach to it so that payments were made in respect of each individual recruitment regardless of anything else or is it sufficient that there is a relationship between the level of recruitment overall and the amount of a payment other things being equal?

In our submission, in order to resolve that you look at the vice that the Act was concerned with and one aspect, a key aspect, we would say, of the vice associated with pyramid schemes is that endeavours are largely directed towards downstream recruitment rather than selling products. 

Now, it is true that this scheme does necessarily involve independent representatives making sales.  Equally though, it is clear that the average number of direct customers for each IR was estimated to be about 13 and with 13 customers a person would receive income of less than $400 a year; plainly, not enough to justify making the participation payment. 

However, if they recruit a very substantial group of independent representatives beneath them in the hierarchy which is described in the judgment below then they will derive income by the sales efforts of people below them and the amount of income they derive from those sales efforts will be dependent on the number of people they have recruited, not because of the volume of sales but because according to the level at which you are placed so your rewards increase.  In our submission, the relationship which is demonstrable on the figures is the sort of relationship to which the Act is directed and ‑ ‑ ‑

HAYNE J:   What do you understand or what do you say should be understood by the word “introduction” in this context?

MR BURNSIDE:   It is a way of identifying the notion of recruitment.  The introduction of a person by itself achieves nothing at all.  They have to be introduced and they have to be taken on in the scheme and that is the notion of recruitment.  But, as I say, your Honour, we accept plainly that if at the point of introduction – sorry.  If it is necessary for the right to a payment to accrue at the point of introduction by virtue of the introduction alone then we would fail. 

However, the relationship between the payments, specifically the CABs and the residual override commissions is a relationship of a sort which in our submission the Act is concerned with, because what will

inevitably happen is that commercial self-interest will drive people to attempt to reach higher and higher earn levels.  That necessarily involves very widespread recruitment at the level immediately below them and the levels further and further below them because the more levels you have below you the higher your earned level is and by creating such a structure the vice ultimately is this, that the people most recently recruited will find it extremely difficult to recruit further recruits and thus put themselves in a position of being able to make anything like a worthwhile income. 

In fact, if all they got was their average of 13 individual customers they would not even make back the amount of their participation payment and so the whole system can only work as long as it continues to grow in a pyramid structure and eventually the market must necessarily be saturated before participants are to try and make an income.  That, in our submission, is part of the vice that the Act was directed against.  Unless there are any other aspects I can help with, those are our submissions.

HAYNE J:   Thank you, Mr Burnside.  Yes, Mr Walker.

MR WALKER:   May it please the Court.  Justice Hayne drew attention to the all important finding in the application book 81, paragraph 47 and the Full Court’s reasons.  It is of significance as well to note that my learned friend’s emphasis upon the so-called average experience is one of the factual matters which, in our submission, shows the inappropriateness of applying, as it were, a rule that if there is multi‑level organisation of remuneration by commission therefore there is satisfaction of the statutory relationship required between a recruitment payment and the inducement to pay a participation payment.

May I take your Honours to page 100 of the application book and in particular paragraph 5 at that point?  Your Honours see that the trial findings in fact, particularly those referred to – I will not take you to it – at line 55 on that page, in our submission, make it most unsafe to proceed on the basis that there can be any such rules as my learned friend is in fact suggesting should have been held by the Full Court.

In any event, it is clear from the material which one finds at application book page 101, footnote 6, it is clear that it is not and was not a lockstep arrangement whereby the depth of what I will call “multi-levels” was the way in which recruitment and introduction led to what the statute required by way of an entitlement.  In our submission, at the heart of the correct reasoning of the Full Court is an understanding of the way in which paragraph 65AAD(1)(b) is structured so as to require attention with respect to the all important question of inducement to the prospect held out of an entitlement. 

Now, true it is a prospect of an entitlement is not the same as an entitlement but it must be the prospect of an entitlement as opposed to the prospect of what I will call mere marketing success and the entitlement is to a payment in relation to the introduction, not a set of payments by earned commissions from the sales efforts by people who have, once they have been introduced, always the character of people who have been introduced.  That, in our submission, is the fallacy that was exposed by the Full Court’s reasoning and the trial judge’s approach and in particular in the approach taken by Justice Finn who did not have before him the precise issue let alone the factual background of this case. 

The critical thing is that the rule which seems to underlie the argument proposed by the Commission, to be considered by this Court, is one which says that in relation to the introduction has no effective difference in meaning from saying that the fact of introduction remains a continuing character of all payments that flow by reason of somebody once having been introduced. 

May it please the Court, those are the reasons why in our submission this is a case which does not raise either on the factual matters which base the findings in the Full Court, nor in relation to its prospect of success concerning a purposive interpretation of 65AAD an appropriate case for special leave.  There can be no suggestion, and we understand there is no suggestion by the Commissioner that multi‑level marketing schemes involving the payment of commission upstream is, to use my learned friend’s expression, “a vice” which is aimed at by the provisions in particular of paragraph 65AAD(1)(b).  Once that is established, in our submission, the reasoning of the Full Court was unimpeachably correct.  In any event, as your Honours have seen, there are matters of contention which show that the arguments to be raised by the Commission were they granted special leave would not be decisive in any event.  May it please the Court.

HAYNE J:   Yes, thank you, Mr Walker.  Yes, Mr Burnside.  What is the distinction between the construction you urge and a drafting which would read “in consequence of introduction”?

MR BURNSIDE:   They would have the same effect on these facts.  I do not try to analyse how they might play differently on different facts.  The interpretation our learned friend contends for is the same as would be achieved by saying “for” and the Parliament did not say “for”.  It looks to a relationship between the two things.  Second point, there was a notice of contention below in the event that leave was granted and in event that the appeal succeeded the contention should be returned to a Full Federal Court, in our submission.

HAYNE J:   Thank you.  An appeal, in our opinion, would enjoy insufficient prospects of success in this matter to warrant a grant of special leave.  Special leave accordingly is refused and must be refused with costs.

AT 9.42 AM THE MATTER WAS CONCLUDED