Record penalties for resale price maintenance* of more than $1 million have been imposed today by the Federal Court against weight-loss venture Chaste Corporation and three individuals.
Chaste Corporation was penalised $600,000 for its contraventions of resale price maintenance provisions of the Trade Practices Act 1974. The Australian Competition and Consumer Commission had alleged that Chaste Corporation had entered in to 70 Area Management agreements Australia-wide which contained resale price maintenance provisions which prevented area mangers from selling the weight-loss TRIMit product at a discount. The ACCC also alleged that Chaste had misled area managers about TRIMit and support they would receive from Chaste in their businesses. It further alleged breaches of the franchising code of conduct in the way the TRIMit business was promoted to potential area managers.
A $150,000 personal penalty was imposed on Chaste controller, Mr Peter Foster, for being knowingly concerned in Chaste's resale price maintenance. This is twice the penalty previously imposed on a person in connection with resale price maintenance under the Act.
Mr Braddon Webb, the sole director of Chaste, was also penalised $150,000 for being knowingly concerned in the resale price maintenance engaged in by Chaste.
Both Mr Foster and Mr Webb were also found to be knowingly concerned in Chaste's misleading and deceptive representations about TRIMit; the business opportunity that TRIMit represented for area managers; and that the area managerships were not franchises.
Mr Sean Cousins, barrister, legal advisor and one-time Chief Executive Officer for Chaste, who admitted to the court that he knew the conduct was unlawful, has been penalised $100,000 for being knowingly concerned in Chaste's resale price maintenance conduct.
Mr Kevin McMullan was penalised $30,000 for aiding and abetting Chaste in its resale price maintenance contravention of the Act, in his role as director of sales.
Professor Stephen D'Alton was ordered to refrain from misleading and deceptive conduct in response to representations he made about research about TRIMit.
The court also imposed wide ranging injunctions against Mr Foster including restraining him for a period of five years from:
- being directly or indirectly knowingly concerned in the promotion or conduct of any business relating to weight loss, cosmetic or health industry products or services of any kind
- being knowingly concerned in a corporation making representations as to the nature, quality, fitness for any purpose, testing, history, composition, standard, approval by any person, performance characteristics, uses or benefits of any good or service unless, prior to making the representation:
- he believes the representation to be true
- the corporation informs the representee in writing of all information of which he is aware that refutes, qualifies or contradicts part of the representation, and
- the corporation provides the representee with the court orders (in this case) or informs the representee of the existence of these orders and gives the representee the address of the Federal Court website where a copy of these orders can be found.
In his judgment, Justice Bruce Lander said: "It is clear that the business opportunity presented by Chaste was not genuine. Chaste was established for the purpose of inducing persons to pay approximately $40,000 in two instalments to become area managers. Chaste distributed the area managers' capital contributions to Mr Foster and Mr Webb and entities associated with them for their use".
Justice Lander also found that Mr Foster, together with Mr Webb, controlled and directed the company's operations.
He further noted: "Mr Foster had convictions in relation to the unlawful sale and promotion of weight-loss products, and a reputation as the instigator of dubious and failed schemes for profit for the conduct of businesses promoting and selling weight loss products. When area managers and creditors enquired as to the personnel involved in Chaste, Messrs Webb, Cousins, McMullan and office personnel, instructed by Mr Webb and Mr Foster, answered in a manner which was clearly calculated to conceal the presence of Mr Foster as the key controller of the Chaste system.
"I find from its inception Chaste's business was conducted by Mr Foster and Mr Webb for the purpose of extracting the maximum possible revenue from unsuspecting area managers who had hoped to participate in a genuine business opportunity in selling a researched and effective weight loss aid to retailers. I find that Chaste never retained adequate funds to enable it to provide future expenditure for the benefit of the business or area managers as it represented it would".
ACCC Chairman, Mr Graeme Samuel, said the preparation of the case against Mr Foster had been difficult as his name did not appear on the company documents.
"Mr Foster was in gaol in Brisbane when the Chaste business was set up. He was in Fiji and Vanuatu during most of the company's short history. Even given these circumstances he was the effective controller of the scheme.
"This judgment has a number of important messages:
- that resale price maintenance is a very serious contravention of the law and it will result in very severe monetary penalties
- that people in positions of trust in the community, like legal professionals and academics, must be prudent in giving their professional endorsement to business schemes, thereby giving people greater confidence in the venture than they otherwise would have had, and
- that the ACCC will investigate matters of this nature to establish the full extent of the conduct and the range of individuals who are responsible for contraventions of the law.
"The high penalties are both appropriate as a punishment for this conduct and as a deterrent for others who may consider this form of price control.
"The ACCC also welcomes the court orders against Mr Cousins, Professor D'Alton, Mr Webb, Mr McMullan and Mr Cooper for not informing the public and area managers of Mr Foster's involvement in the scheme in circumstances where, if they did know of Mr Foster's involvement, they would be unlikely to buy Chaste's weight loss products or remain its distributors. Mr Cousins, a barrister, allowed himself to be held out as a credible figure head in the Chaste operations".
In an earlier judgment, Mr Con Xenoudakis, was ordered to pay a penalty of $25,000 for his involvement in the resale price maintenance in the scheme.
The court also ordered that the ACCC's costs be paid costs by the respondents.
Full copies of the orders made and the judgment can be obtained from the Federal Court's website: www.fedcourt.gov.au.