Re Trade Practices Commission v Orlane Australia Pty Limited [1984] FCA 5; 51 ALR 767 / 1 FCR 157 (3 February 1984)

FEDERAL COURT OF AUSTRALIA

Re: TRADE PRACTICES COMMISSION
And: ORLANE AUSTRALIA PTY. LIMITED
No. TG3 of 1982
Trade Practices
(1984) ATPR para 40-437 / [1984] FCA 5; 51 ALR 767 / 1 FCR 157

COURT

IN THE FEDERAL COURT OF AUSTRALIA TASMANIA DISTRICT REGISTRY
GENERAL DIVISION
Smithers(1), Morling(2) and Beaumont(3) JJ.

CATCHWORDS

Trade Practices - resale price maintenance - 'loss leader' defence - definition of 'cost' in s.98(2) - penalty

Trade Practices Act 1974 (Cth), ss.4(1), 48, 76, 77, 96(3), 96(3)(d), 98(1), 98(2)

Resale Prices Act 1976 (U.K.), s.13(2)

Acts Interpretation Act 1901 (Cth), s.23(b)

Trade Practices - Resale price maintenance - Alleged breaches of s. 48 of Trade Practices Act 1974 (Cth) - Statutory defence of "loss-leadering" - Proceedings seeking imposition of pecuniary penalties - Whether conduct constituted the practice of resale price maintenance - Appeal to Full Court against decision of single judge - Meaning of "cost" in s. 98(2) of Trade Practices Act 1974 (Cth) - Whether question of penalty should be remitted to learned trial judge - Meaning of "loss" in context of "loss-leader" selling - History of trade practices legislation - Comparative experience with resale price maintenance - Trade Practices Act 1974 (Cth), ss 4(1), 48, 76, 77, 96(1), 96(2), 96(3)(d), 98(1), 98(2) - Acts Interpretation Act 1901 (Cth), s. 23 (b) - Federal Proceedings (Costs) Act 1981 (Cth), s. 6 - Resale Prices Act 1976 (U.K.), s. 13(2). Section 98(2) of the Trade Practices Act 1974 (Cth), so far as relevant, provides that:

"Paragraph 96(3)(d) does not apply in relation to the withholding by
the supplier of the supply of goods to another person who, within the preceding year, has sold goods obtained, directly or indirectly, from the supplier at less than their cost to that other person -

(a) for the purpose of attracting to the establishment at which the goods
were sold persons likely to purchase other goods;
or
(b) otherwise for the purpose of promoting the business of that
person. . . ."

Pursuant to ss 76 and 77 of the Trade Practices Act 1974 (Cth), (the Act),

the Trade Practices Commission (the Commission) brought proceedings against Orlane Australia Pty Ltd (Orlane), which was the Australian distributor of a range of cosmetic products. The Commission sought the imposition of pecuniary penalties upon Orlane in respect of alleged breaches of s. 48 of the Act which prohibited the practice of resale price maintenance.

Northrop J. made declarations giving effect to the following findings:
(i) In June 1980, Orlane induced Mr Hutchison, the proprietor of a pharmacy

in Launceston, Tasmania, not to sell cosmetic products supplied to him by Orlane at prices less than prices which Orlane had specified.
(ii) Orlane's conduct constituted engaging in the practice of resale price maintenance.
(iii) Orlane would be ordered to pay to the Commonwealth a penalty of $15,000.
(iv) In November 1980, Orlane withheld the supply of cosmetic products to Hutchison for the reason that he had sold or was likely to sell cosmetic products supplied to him by Orlane at prices below which the products were not to be sold.
(v) The conduct referred to in par. iv would have constituted engaging by the respondent in the practice of resale price maintenance contrary to s. 48 of the Act were it not for the defence of "loss-leadering" provided in s. 98(2) of the Act.
(vi) Section 96(3)(d) of the Act did not apply in relation to the conduct which occurred in November 1980.
The Commission appealed to the Full Court of the Federal Court of Australia against the finding in par. vi and sought the imposition of a penalty upon Orlane in respect of that conduct.

Orlane cross-appealed seeking a variation of the order for costs made against it. It was submitted on behalf of the Commission that, inter alia, "cost", where used in s. 98(2) of the Act, meant the net acquisition cost of the goods; there was a distinction between the cost of goods to a reseller and their price to him; and that "net acquisition cost" was intended to refer to "landed" or "delivered" cost and comprised the price of goods together with freight and insurance in transit, if any.

Held: (1) The appeal would be allowed as the respondent had failed to establish the defence of loss-leadering as defined by s. 98(2) of the Trade Practices Act 1974.

(2) Declarations 4 and 5 made by Northrop J. on 14 July 1983 would be set aside.

(3) By the conduct referred to in par. 4 of the orders made by Northrop J. on 14 July 1983, the respondent had engaged in the practice of resale price maintenance contrary to s. 48 of the Trade Practices Act 1974 (Cth).

(4) In respect of the contravention of the Trade Practices Act 1974 referred to in par. 4 hereof it was appropriate to treat the conduct referred to as conduct arising from the same course of conduct referred to in par. 3 that the respondent would be required to pay to the Commonwealth a pecuniary penalty of $3,500, it being appropriate that the court should deal with the question of penalty instead of remitting it to the learned trial judge.

(5) Otherwise the declarations and orders made by Northrop J. would be affirmed and

(6) the cross-appeal would be dismissed.

Per curiam: The natural meaning of "their cost" in relation to goods in s. 98 (2) of the Trade Practices Act 1974 is the cost of the goods in the context of obtaining them from a supplier, which suggests that the cost referred to is the cost of obtaining or landing the goods, that is, "landed" or "delivered" cost or "net acquisition" cost.

Bendixen v. Coleman, Scott & Croft [1943] HCA 40; (1943) 68 CLR 401; Vardon v. The Commonwealth [1943] HCA 30; (1943) 67 CLR 434, referred to.

Observations concerning the history of trade practices legislation and comparative experience with resale price maintenance in Canada, the United States of America and other countries.

HEARING

Sydney, 1983, November 28, 30; 1984, February 3. 3:2:1984

APPEAL.

Appeal to the Full Court of the Federal Court of Australia from a decision

of a single judge (Northrop J.) in proceedings brought pursuant to ss 76 and 77 of the Trade Practices Act 1974 (Cth) by the appellant against the respondent for alleged breaches of s. 48 of that Act. The respondent cross-appealed seeking a variation of the order for costs made against it.

S. P. Charles Q.C. and F. H. Callaway, for the appellant.

D. M. Bennett Q.C. and J. S. Wheelhouse, for the respondent.
Cur. adv. vult.

Solicitors for the appellant: T. A. Sherman, Acting Commonwealth Crown

Solicitor.

Solicitors for the respondent: Allen, Allen & Hemsley. J. D. WHITEHEAD

ORDER

1. The appeal be allowed.

2. Declarations 4 and 5 made by Northrop J. on 14 July 1983 be set aside.

3. It is declared that by the conduct referred to in para. 3 of the orders made by Northrop J. on 14 July 1983 the respondent engaged in the practice of resale price maintenance contrary to s.48 of the Trade Practices Act 1974.

4. In respect of the contravention of the Trade Practices Act referred to in para. 3 hereof the respondent do pay to the Commonwealth a pecuniary penalty in the sum of $3,500.

5. Paragraph 7 of the orders made by Northrop J. is varied so as to delete therefrom the reference to $15,000 and to substitute therefor the sum of $18,500.

6. The order for costs made by Northrop J. in para. 8 of the said orders be set aside and in lieu thereof it be ordered that the respondent pay the appellant's costs of the proceedings.

7. Otherwise the declarations and orders made by Northrop J. are affirmed.

8. The cross-appeal is dismissed.

9. The respondent is to pay the appellant's costs of the appeal and cross-appeal.

10. The respondent be granted a certificate under the Federal Proceedings (Costs) Act Act 1981.

Orders and declarations accordingly.

DECISION

This is an appeal from a decision of a judge of the Court in proceedings brought by the Trade Practices Commission ("the Commission") against Orlane Australia Pty. Limited ("Orlane") which is the Australian distributor of a range of cosmetic products. The Commission brought the proceedings pursuant to ss. 76 and 77 of the Trade Practices Act 1974 ("the Act") seeking the imposition upon Orlane of pecuniary penalties in respect of alleged breaches of s.48 of the Act, which prohibits the practice of resale price maintenance. Injunctive relief was also sought.

2. The learned judge found that in June 1980 Orlane induced Richard Leslie Hutchison, the proprietor of a pharmacy in Launceston, not to sell cosmetic products supplied to him by Orlane at prices less than prices which Orlane had specified. He further found that Orlane's conduct constituted engagement in the practice of resale price maintenance and ordered Orlane to pay to the Commonwealth a penalty of $15,000.

3. The trial judge also found that in November 1980 Orlane withheld the supply of cosmetic products to Mr Hutchison for the reason that he had sold or was likely to sell cosmetic products supplied to him by Orlane at prices below which the products were not to be sold. A finding was made that this conduct would have constituted engagement by the respondent in the practice of resale price maintenance contrary to s.48 of the Act were it not for the defence in sub-s.98(2) thereof. It was further found that paragraph 96(3)(d) of the Act did not apply in relation to the conduct which occurred in November 1980 because Mr Hutchison was a person who, within the preceding year, had sold cosmetic products obtained from Orlane at less than their cost to him for the purpose of attracting to his pharmacy persons likely to purchase other goods and otherwise for the purpose of promoting his business. Appropriate declarations were made giving effect to these findings.

4. The Commission has appealed against the finding that paragraph 96(3)(d) of the Act did not apply in relation to the conduct which occurred in November 1980 and seeks the imposition of a penalty upon Orlane in respect of that conduct. It does not press its claim for injunctive relief. Orlane has cross-appealed seeking a variation of the order for costs made against it. Counsel for Orlane submitted that if the Court came to the view that the appeal should be allowed, the Court itself should determine the question of further penalty, instead of remitting the matter to the trial judge for that purpose. We shall return to this matter later in these reasons.

5. Before referring to the facts which gave rise to the proceedings it is convenient to set out the relevant provisions of the Act. Sub-section 4(1) provides, inter alia, that unless the contrary intention appears, the practice of resale price maintenance means the practice of retail price maintenance referred to in Part VIII of the Act. Section 48 (which is in Part IV) provides:

"48. A corporation or other person
shall not engage in the practice of resale
price maintenance."

6. Sections 76 and 77 make provision for pecuniary penalties for contraventions of a provision of Part IV and for the institution by the Minister or the Commission of proceedings in the court for the recovery of such penalties.

7. Detailed provisions relating to resale price maintenance are contained in Part VIII of the Act. Section 96(1) provides that, subject to Part VIII, a corporation (in the section called "the supplier") engages in the practice of resale price maintenance if it does an act referred to in any of the paragraphs of sub-s.96(3). Sub-section 96(2) deals with acts of persons (not being corporations) constituting engaging in resale price maintenance. Sub-section 96(3) provides, in part, as follows:

"96. (3) The acts referred to in
sub-sections (1) and (2) are the following:

(a) ...

(b) the supplier inducing, or
attempting to induce, a second
person not to sell, at a price
less than a price specified by the
supplier, goods supplied to the
second person by the supplier or
by a third person who, directly or
indirectly, has obtained the goods
from the supplier;

(c) ...

(d) the supplier withholding the
supply of goods to a second person
for the reason that the second
person -

(i) ...

(ii) has sold, or is likely to
sell, goods supplied to him by
the supplier, or goods
supplied to him by a third
person who, directly or
indirectly, has obtained the
goods from the supplier, at a
price less than a price
specified by the supplier as
the price below which the
goods are not to be sold;"

Section 98 is in the following terms:

"98. (1) For the purposes of paragraph
96(3)(d) or (e), the supplier shall be
deemed to withhold the supply of goods to
another person if -

(a) the supplier refuses or fails to
supply those goods to, or as
requested by, the other person;

(b) the supplier refuses to supply
those goods except on terms that
are disadvantageous to the other
person;

(c) in supplying goods to the other
person, the supplier treats that
person less favourably, whether in
respect of time, method or place
of delivery or otherwise, than the
supplier treats other persons to
whom the supplier supplies the
same or similar goods; or

(d) the supplier causes or procures a
person to withhold the supply of
goods to the other person as
mentioned in paragraph (a), (b) or
(c) of this sub-section.

(2)Paragraph 96(3)(d) does not apply
in relation to the withholding by the
supplier of the supply of goods to another
person who, within the preceding year, has
sold goods obtained, directly or
indirectly, from the supplier at less than
their cost to that other person (emphasis
added) -

(a) for the purpose of attracting to
the establishment at which the
goods were sold persons likely to
purchase other goods; or

(b) otherwise for the purpose of
promoting the business of that
other person.

(3) For the purposes of sub-section
(2), there shall be disregarded -

(a) a genuine seasonal or clearance
sale of goods that were not
acquired for the purpose of being
sold at that sale; or

(b) a sale of goods that took place
with the consent of the supplier."

8. The following account of the facts is taken substantially from the judgment under appeal. At all material times Mr Hutchison was the proprietor of Kent's Centre Pharmacy ("Kent's") in Launceston. From June 1977 Kent's purchased products from Orlane for sale by retail. In November 1980 Orlane ceased supplying its products to Kent's. In the early part of 1980 Orlane products were sold by retail in Launceston through two outlets, being Kent's and another retail establishment called McKinlays. To assist in the sale of its products, Orlane from time to time assisted in promotions at retail stores. It was usual for a promotion to extend over a period of a week. Orlane and the retailer shared the cost of advertising and Orlane provided a beauty consultant to attend at the store to advise and assist customers on beauty needs and skin care and on the range and use of Orlane products. In addition, a limited range of products was advertised for sale at discount prices and complimentary products were given to customers. Other assistance was given by Orlane to retailers in the way of aids to the sale of Orlane products.

9. In 1980 Orlane appointed Mrs Hassett to be its representative for the distribution of its products in Victoria and Tasmania. Differences had by this time arisen between Kent's and Orlane. Kent's had returned a number of products to Orlane and had complained that Orlane's representatives had not been fulfilling their obligations. A complaint was further made that promotions at Kent's had tended to follow closely after promotions at McKinlays, thereby limiting the benefits to Kent's which would otherwise have flowed from promotions. At the same time, Kent's account with Orlane had fallen into arrears. Orlane had become concerned that, on occasions other than during promotions, Kent's had been advertising the sale of Orlane products at discounts up to 25% off the normal retail prices. The proprietor of McKinlays' store had complained to Orlane about these discounts. Orlane had refused to accept the products returned by Kent's but had written to Kent's suggesting another promotion of its products. Orlane advised that Mrs Hassett would be contacting Kent's to organise a promotion and that she would be instructed to help resolve the existing problems.

10. In June 1980 Mrs Hassett visited Launceston and met with Mr Hutchison. As a result of the meeting an arrangement was come to that Kent's would continue to sell Orlane products and that future promotions at Kent's would not be timed to conflict with promotions at other stores in Launceston. Other matters were agreed upon, including that, except during promotions, Kent's would not sell Orlane cosmetic products at discount prices.

11. Orlane and Kent's adhered to the arrangements made at the June meeting for some months thereafter. Sometime after June 1980 Orlane commenced to supply cosmetic products to Myer Launceston for sale by retail. Arrangements were made between Orlane and Kent's for a promotion at Kent's during the week commencing 24 November 1980. An advertisement for the promotion was arranged to be inserted in a newspaper circulating in the Launceston area. The cost of the advertisement was shared between Orlane and Kent's. The advertisement offered some Orlane products at discount prices.

12. During the week commencing 17 November 1980 Orlane was conducting a promotion at Myer Launceston, even though the promotion had been planned at Kent's. Kent's got in touch with Mrs Hassett who gave instructions for the newspaper advertisement to be varied so as to offer a 25% discount off the whole range of Orlane products when purchased from Kent's. It appears that McKinlays and Myers complained about the altered advertisement. They spoke to the general manager of Orlane, Mr Coburn. In due course he spoke to Mrs Hassett and told her to close Kent's account. He also told her Kent's account was out of order, although this was not the fact. Mrs Hassett rang Kent's and informed them that the promotion planned for the week commencing 24 November was cancelled and that Kent's account was closed. Mrs Hassett said that this action had been taken because of discounting by Kent's and because their account was out of order.

13. On these facts the trial judge made the findings and imposed the penalty to which we have already referred.

14. The question which arises in the appeal is one of the construction of sub-s.98(2) and, in particular, of the meaning to be attributed to the word "cost" where used in that provision. It is common ground that, whilst paras.(a) and (b) of sub-s.98(2) refer to the purposes therein described, the reference, in the sub-section, to "cost" is a reference to an historical fact which is not purposive (cf. s.13(2) of the Resale Prices Act, 1976 (U.K.)). The question for decision is one of definition of the term "cost" in its context, which is a sale by a reseller of goods obtained from a supplier "at less than their cost to (the reseller)".

15. It is submitted on behalf of the Commission that "cost", where used in sub-s.98(2), means the net acquisition cost of the goods. The reference to "net" cost is intended to pick up, for example, a rebate allowed to a reseller on the purchase price of goods. In this way, a distinction between the cost of goods to a reseller and their price to him is recognised (see Commissioner of Trade Practices v. Dalgety Australia Ltd. (1973) 22 FLR 62). On this argument, "net acquisition cost" is intended to refer to "landed" or "delivered" cost and comprises the price of goods together with freight and insurance in transit, if any. In this way also, the Commission contends, effect can be given to the reference, in sub-s.98(2), to the notion of cost to the reseller. What the provision is intending to pick up is the cost of the goods in each individual case: hence, the description "landed" or "delivered" cost which permits differences in freight and insurance in transit, if any, to be taken into account.

16. On the other hand, Orlane argues that "cost", where used in the provision, means the "marginal" cost of trading in the goods and thus embraces not only the net acquisition cost but also, as part of the reseller's trading operations, the costs of holding and reselling the goods. Examples of these costs were said to be Bankcard charges, interest and advertising expenses referable to the goods.

17. In our opinion, the construction of the provision contended for by the Commission is correct. When sub-s.98(2) speaks of "their cost" in relation to goods, it is referring to the cost of the goods in the context of obtaining them from a supplier. In our opinion, that context suggests that the cost referred to is the cost of obtaining or landing the goods: that is, "landed" or "delivered" cost or, as it is put, net acquisition cost.

18. Support for this approach may be found in the reasoning of the majority in Bendixen v. Coleman, Scott & Croft [1943] HCA 40; (1943) 68 CLR 401 in rejecting an argument that a prices regulation was void for uncertainty for the reason, so the argument ran, that it fixed the maximum price at which certain liquors could be sold by retail at "the cost ... thereof plus 25 per cent of that cost". Latham, C.J. said (at pp.417-8):

"In the present case the term 'cost' must be
read in relation to the subject matter to
which it is applied. The terms of clause 4
show that the order is dealing with sales
of liquor by retail. It provides that the
price is to be the cost of the liquor plus
twenty-five per cent of that cost. Is
there any difficulty in ascertaining the
cost of liquor to a retailer? In my
opinion there is no difficulty. The only
thing that has to be ascertained is what he
has paid, or is liable to pay, for the
liquor to the person from whom he buys it.
When he becomes the owner of the liquor he
may transport it to a hotel in one place or
to a hotel in another place. But the
expenses of transport are not, in my
opinion, part of the cost of the
liquor--they are costs incurred after he
has acquired the liquor and for the purpose
of carrying on a business. The costs of
carrying on the business, of handling the
liquor, selling it, and providing premises
in which to sell it, are not part of the
cost of the liquor to the retailer.
Accordingly, in my opinion, there is no
ambiguity in the word 'cost' where it is
used in this order. It simply means what
the retailer pays for the liquor to the
person from whom he buys it. He may buy it
delivered into his premises or at some
other place. In either case what he pays
for the liquor as the price of the liquor,
whatever elements that price contains, is
the cost of the liquor within the meaning
of the order." (Emphasis supplied)

Rich, J. was of the same opinion (at p.419):

"The main contention on the part of the
defendants was that 'cost' in clause 4 of
the order under review was too uncertain to
allow of a price being fixed and declared.
And reliance was placed on Vardon v. The
Commonwealth. But 'cost' in that case was
used with reference to the manufacture of
clothes and other articles for which
materials had to be supplied and services
rendered which made a complicated account
necessary before a definite conclusion
could be reached. In the present case
'cost' is used in relation to the sale of
liquor by publicans. And in this
connection it means the cost of the liquor
to the retailer as received by him at the
place where he sells it--including price,
insurance and all freights." (Emphasis
supplied)

McTiernan, J. agreed (at p.424):

"The contention was also made that the
fourth paragraph of the Prices Regulation
Order is uncertain because it does not
state what is meant by cost. Reliance is
placed on Vardon's Case to support this
contention. The meaning of the word 'cost'
may vary with the subject matter to which
it relates. The question is what does the
word mean in this context. In my opinion
it means the sum (including of course the
price) which it costs the hotelkeeper to
get the liquors described in the Prices
Regulation Order, including such liquors as
he may use as the ingredients of a drink,
into his hotel. That sum is a definite and
an ascertainable amount. The case is
therefore different from Vardon's Case.
This part of the Prices Regulation Order is
free from the vice which destroyed the
order in that case." (Emphasis supplied)

Williams, J. was of the same view (at p.425):

"I am of the opinion that Prices Regulation
Order No. 896, so far as it is material to
pronounce upon its validity for the purpose
of disposing of any of the prosecution, is
valid. It is unfortunate that 'landed
cost' was not specified, as this cost is
defined in the National Security (Prices)
Regulations, but it is clear, to my mind,
that 'cost' in the order means landed cost,
that is, the cost to the publican, or in
other words the wholesale price of the
liquor plus the additional out-of-pocket
expenses, if any, incurred in causing it to
be transported to the licensed premises."
(Emphasis supplied)

19. In our opinion, this reasoning is squarely in point in the present case which also arises in a resale, rather than a manufacturing, context. It may be accepted that, in other areas, views may differ as what is properly to be taken into account in determining the cost of an item. Thus, in Vardon v. The Commonwealth [1943] HCA 30; (1943) 67 CLR 434, a case concerned with the "cost" of manufactured goods, Rich, J. said (at p.445):

"'Cost,' not being defined is an ambiguous
and uncertain term. 'The general idea of
cost covers a number of different meanings'
(p.35, Incidence of Overhead Costs,
Professor Maurice Clark). One finds in
Carter's Advanced Accounts such expressions
as flat cost, prime cost and total cost.
And Professor Van Sickle, Cost Accounting,
p.4, says that 'while cost accounting can
be defined, it is quite another thing to
endeavour to define cost.' These books on
accountancy illustrate the differing
opinions of accountants as to the proper
items of expense to include under the
heading of cost and the proper method of
allocating them to particular articles. In
Dawson's Accountant's Compendium it is
stated that 'the cost of the materials and
directly productive wages form the prime
cost of the commodity or work, and the
other expenditure, being indirect, is
called the on-cost, the two together making
the total cost of production.' In the
present case does 'cost' mean merely the
cost of the material used plus the amount
paid to the make-up tailor? Or does it
include an allowance for the time of the
plaintiff or his employees in showing the
customer the range of materials, measuring
him and sending the materials and
instructions to the make-up tailor? What
overhead costs does it include?"

20. Although Rich, J. there recognises the difficulties in establishing the cost of a manufactured article, that problem does not arise in the application of a provision such as sub-s.98(2) of the Act which is concerned only with the case of a reseller of goods. In the former type of case, marginal items may well be relevant. But in the latter type of case, we think that "cost" where employed in sub-s.98(2), should bear its ordinary and natural meaning in a resale context, that is, the net "landed" or "delivered" cost or, as it has been put, net acquisition cost. Further, the references in Bendixen which we have emphasised show that the reference, in sub-s.98(2) to the "cost" to the reseller confirms that the legislature was indicating no more than the cost to the reseller of getting the goods into his premises.

21. In our opinion, additional support for this construction may be found in the employment of the singular "cost" in sub-s.98(2) rather than the plural "costs" which may well more appropriately be used to describe the several items which need to be taken into account if a "marginal" approach is adopted. In this connection, the fact that a plurality of items is involved makes it more accurate to use the description "costs" rather than "cost" (cf. Acts Interpretation Act, 190l, s.23(b)). It is true that, in cases where expenses of the reseller in acquiring the costs such as freight or insurance in transit are involved, "landed" or "delivered" cost will include more than one item. Nonetheless, it is, we think, appropriate to speak of the "landed" or "delivered" cost in the singular because it may be said to represent the expense incurred in carrying out a single act or operation in the eyes of the law, namely the acquisition of the goods. On the other hand, if the Act were intended to refer to the expenses actually or notionally incurred in a "marginal" sense, the employment of the plural "costs" would have been more appropriate to describe the trading operations concerned, involving, as they do, the three distinct steps of acquiring, holding and reselling the goods. We would add that the form of the provision in question in which, as a matter of construction the expression "their costs" may properly be expanded to "the costs of obtaining those goods", is such as to justify comment similar to that of Latham, C.J. in Bendixen v. Coleman Scott & Croft (supra) which is set out above.

22. Reference was made during argument to the history of the legislation. In the second reading of the Trade Practices Bill 1971, (the 1971 Act was the precursor of this part of the 1974 Act ) the Attorney-General said (Australia, Parliamentary Debates, House of Representatives 29 April, 1971 at p.2248) that in concluding that the Bill should be introduced, the Government had taken into account the experience of other countries with resale price maintenance. He mentioned that the United Kingdom had enacted legislation for this purpose in 1964 and that Canada, Japan, South Africa, France, the Netherlands, Denmark, Sweden, Spain, Norway and Finland had also enacted legislation with respect to the practice in the previous ten to fifteen years; and that the United States of America had had such legislation at the federal level for many years.

23. He later (at p.2249) dealt with the precursor of sub-s.98(2):

"A reseller engages in loss leadering if he
sells particular goods at a loss to attract
custom or to promote his business in some
way. The result of his so doing may well
be to give the public an impression that
the goods in question are of inferior
quality, and this could be detrimental to
the marketing prospects of the supplier.
It is only fair that a supplier whose goods
are being sold in this manner should be
able to defend himself by withholding
supplies from the reseller in question, and
the provisions to which I have referred
make it clear that the supplier has this
right." (emphasis added)

24. Prior to the enactment in 1960 of the Canadian legislation, the Canadian Restrictive Trade Practices Commission issued a Report on an Inquiry into Loss-Leader Selling (Department of Justice, Ottowa, 1955). In its comments on the definition of the term "loss-leader", the Commission said (at p.17):

"In seeking to understand the nature and
extent of loss-leaders the Commission has
faced one of its most difficult tasks in
trying to find a basis for deciding what
meaning should be given to the term 'loss'
in the context of loss-leader selling. The
simplest and most obvious meaning of that
expression is a selling price that is below
the delivered cost to the seller. Any sale
on such a basis is clearly a sale at a
loss. But, in most of the suggested
definitions of loss-leaders that were
proposed to the Commission, such a meaning
was regarded as being too narrow. No
dealer can operate without expense. It
costs him something to handle and sell even
the smallest article. Consequently a
retail price which merely returns to the
dealer the amount that he paid for the
article necessarily results in some loss to
him. The difficulty is to find any
reliable rule for determining in any
particular case how much the dealer
requires above the delivered cost to him in
order to avoid an actual loss on the sale."
(emphasis added)

25. The Commission then described various rules which had been suggested to it for determining the price (above delivered dealer cost) below which a sale should be regarded as being at a loss. These included (amongst others) a sale below "the established price" for the product; and a price that was less than delivered cost plus (a) a fixed percentage markup; (b) the average cost of doing business in the particular trade; (c) the particular dealer's average cost of doing business; (e) a full normal markup. But in the end, the Commission reached the conclusion "that there are so many variables and qualifications expressed or implied in all the descriptions of loss-leaders which have been submitted in the inquiry that no one description could be abstracted which would be valid, even in theory, and that in any event such a definition would prove impractical if applied."

26. Difficulties of definition of the term "loss-leadering" in terms of marginal cost have also been encountered in the United States of America (see Janich Bros Inc. v. The American Distilling Co. [1978] USCA9 235; 570 F2d. 848 at p 858 (1977); William Inglis & Sons Baking Co. v. ITT Continental Baking Company Inc. 461 F Supp 410 (1978)) as well as in the Canadian courts (see Regina v. William E. Coutts Co. Ltd. (1968) 67 DLR (2d.) 87; Regina v. Consumers Glass Company Ltd. and Portion Packaging (1981) 60 CCC (2d.) 481 at pp 500-2). Indeed, the United States experience is instructive for present purposes. In that country, "marginal cost", judicially defined as "the increment to total cost that results from producing an additional increment of output", (a definition formulated by Professors Areeda and Turner), has proved impractical of application because a firm's marginal costs cannot be ascertained from conventional accounting records. In the result, the prophecy of the Canadian Commission of the impracticality of application of such a test has been fulfilled and the American courts have been forced to resort to a different test of "average variable cost" as evidence of "marginal cost" (see, e.g., Janich Bros, supra, at pp.847-8; Regina v. Consumers Glass Co. Ltd., supra, at pp 500 et seq.).

27. The comparative experience in this area in other countries only reinforces the wisdom of the observations made by the Canadian Commission in 1960. We agree with the Commission that, in the context of loss-leader selling, the "simplest and most obvious meaning" of the expression "loss" is a selling price that is below the delivered cost to the seller. We also agree with the Commission's remark that any departure from the acquisition cost test is fraught with difficulties of application. So far, therefore, as regard may be had to the second reading speech for the purpose of interpreting the statute (see TCN Channel Nine Pty. Ltd. v. Australian Mutual Provident Society [1982] FCA 169; (1982) 42 ALR 496), there is every reason to think that the Attorney-General shared the Commission's views first, that the simplest and most obvious method of defining when a "loss" occurred in loss-leadering was by reference to a sale below "delivered" cost to the seller; and secondly, that the alternative methods of definition, involving as they did, so many variables and qualifications, should be rejected as impractical of application in a statutory context, penal as it is, where there is every reason to suppose that the legislature intended that a measure of certainty be achieved in the meaning and application of the concept of loss-leadering.

28. In the result, if anything, the history of the legislation and the comparative experience elsewhere only serve to reinforce the conclusion at which we had arrived independently of such material, that, as a matter of construction of the term in its statutory context, "cost" means "landed" or "delivered" cost.

29. It follows in our view, that the respondent has failed to establish the defence of loss-leadering as defined by sub-s.98(2). The appeal should be allowed. The orders and declarations of the learned Judge made in paragraphs 4 and 5 of the orders and declarations appealed from, namely that by the conduct referred to in paragraph 3 of the said orders and declarations, the respondent would have engaged in the practice of resale price maintenance contrary to s.48 of the Act were it not for the defence of sub-s.98(2) thereof and that para.96(3)(d) of the Act did not apply in relation to the said conduct because Richard Leslie Hutchison was a person who, within the preceding year, had sold cosmetic products obtained from the respondent at less than their cost to him -

(a) for the purpose of attracting to the establishment at which the products were sold persons likely to purchase other goods; and
(b) otherwise for the purpose of promoting his business within the meaning of sub-s.98(2) of the Act
should be set aside.

30. In lieu thereof, it should be declared that, by the conduct referred to in paragraph 3 of the said orders and declarations, the respondent engaged in the practice of resale price maintenance contrary to s.48 of the Act. The order for costs made by the learned Judge in paragraph 8 of the said orders and declarations should also be set aside and in lieu thereof it should be ordered that the respondent pay the appellant's costs of the proceedings. The respondent must also pay the costs of the appeal but should have a certificate under the Federal Proceedings (Costs) Act, 1981. The respondent cross-appealed against the order for costs made by the learned Judge and sought an order that the appellant pay one-quarter of the respondent's costs. It follows from what we have already said that the cross-appeal must be dismissed.

31. We turn now to the question of the penalty to be imposed in respect of the contravention now found against the respondent.

32. It was urged by counsel for Orlane that if the appeal were allowed this Court should itself determine whether any and what penalty should be imposed. But the appellant contended that the question of penalty, if it arose, should be remitted to the trial Judge.

33. The conduct of the respondent which, by virtue of the decision of the trial Judge and of this Court, has been found to contravene the provisions of the Act comprised an episode in June 1980 and an episode in November 1980. The relationship between the two episodes is of importance. The first arose out of the respondent's concern that the retailer, Kent, was selling in Launceston goods supplied by it at prices less than prices specified by it. Apart from other considerations, this practice was causing concern to another substantial retailer of the respondent's goods who traded in Launceston.

34. It can be perceived from the facts, as stated earlier in these reasons, that the episode of June involved action by the respondent whereby it stipulated and the retailer, Kent, was induced to undertake, that it would refrain from selling the respondent's goods at prices below those specified by it. This undertaking was given as part of an arrangement between Kent and Orlane in which various other issues causing unrest between the parties were adjusted. But the inference is that discount selling by Kent was quite unacceptable to the respondent.

35. The provisions of the arrangement provided a modus vivendi between the respondent and Kent in which observance by Kent of his undertaking not to trade at discount prices in future was regarded by the respondent as critical. When, therefore, in November 1980 Kent advertised goods supplied by the respondent for sale by him at a discount and the respondent brought their trading relationships to an end, that action was in a real sense a re-assertion of the improper trading requirement which it had specified in June. The action it took then was the final implementation of the policy instituted in June. The gravamen of the respondent's misconduct, from its inception, was its assertion, as between itself and Kent, that continuance of trading between them was conditional on Kent continuing to trade at the respondent's specified prices.

36. It is reasonable, therefore, to regard the first assertion, namely that of June 1980 as the primary and essential guilty act of the respondent, and that in November as consequential to the attitude then adopted. For the purposes of assessing a penalty for the second manifestation of this attitude, that misconduct may properly be treated as arising from the same course of conduct.

37. The respondent was subjected by the learned Judge to a substantial penalty reflecting the essential impropriety of the contravention of June 1980. Having regard to the foregoing it is, we think, unnecessary to reassert by way of penalty for the misconduct in November, that aspect of the matter.

38. In all the circumstances, therefore, we have concluded that it is appropriate that we should deal with the question of penalty and that the penalty should be $3,500.