Commerce Commission v O'Neill [2007] NZCA 466; (2008) 8 NZBLC 102,086; (2007) 12 TCLR 1 (26 October 2007)

Last Updated: 30 December 2011

IN THE COURT OF APPEAL OF NEW ZEALAND

CA118/07 [2007] NZCA 466

BETWEEN COMMERCE COMMISSION
Appellant

AND DENNIS JOHNSTON O'NEIL
First Respondent

AND MARTINI LIMITED
Second Respondent

Hearing: 10 October 2007

Court: Chambers, O'Regan and Ellen France JJ

Counsel: J C L Dixon and N H Malarao for Appellant
A S Ross and J K Hudson for Respondents

Judgment: 26 October 2007 at 2.30 pm

JUDGMENT OF THE COURT

A The appeal is allowed in part.

2. The orders made under s 43 of the Fair Trading Act 1986 in the District Court on 8 November 2005 are restored.

100. The fines imposed on the respondents in the High Court on 24 November 2006 stand.

4. No order as to costs in this court.
   

REASONS OF THE COURT

(Given by Chambers J)

Celluslim – a new brand of snake oil

[1] In April 2002, Dennis O’Neil, the first respondent, received brochures from a company based in Singapore, promoting a product called Celluslim. The brochures claimed the product would remove cellulite and fat from the body and boasted a 100% success rate. Mr O’Neil had the brochures copied, with only the contact and payment details changed. He also instructed a local company to manufacture Celluslim, based on the list of ingredients on the brochures received from Singapore. Mr O’Neil did not know the proportions of the ingredients; he accepts that his Celluslim capsules were not the same as the capsules promoted by the Singaporean company.
[2] Mr O’Neil, through his company, Martini Limited, the second respondent, marketed his Celluslim product. After a time, he ran out of his version of Celluslim. He then started supplying other capsules under the “Celluslim” name. Those capsules simply contained extracts of honey, garlic, and apple cider vinegar.
[3] Some purchasers of the product were dissatisfied with it. On not getting the refund promised in the brochures to those not completely satisfied, they complained to the Commerce Commission. The Commission, the appellant on this appeal, subsequently commenced criminal proceedings against Mr O’Neil and Martini alleging breaches of the Fair Trading Act 1986. Shortly before trial, Mr O’Neil and Martini pleaded guilty to some of the charges, the rest being withdrawn. They accepted that in 2002 they had made false or misleading representations as to the composition of Celluslim, and as to its performance characteristics. They also accepted they had misled consumers about the product having been tested and approved by experts in Europe and America, when that was not the case, and as to the product having originated from Switzerland, when it had not. Finally, they admitted that they had misled consumers in promising a full refund for dissatisfied customers, when in fact full refunds were not given.
[4] Mr O’Neil and Martini came up for sentence before Judge Wilson QC. For the purpose of sentencing, the Commission and the defendants agreed that the defendants had received $175,972.98 from the sales of Celluslim. It was also common ground that the profit was $68,000. The Commission sought orders under s 43(2)(c) of the Act requiring the defendants to refund in full the approximately 1,250 customers who had bought Celluslim. But there was a problem: it was impossible from Martini’s records to produce a complete list of purchasers. The Commission thought there would need to be nationwide advertising about a refund scheme, inviting those who had purchased to make a claim. The Commission did not trust Mr O’Neil to run that scheme and considered it did not have the resources itself to administer it. So, prior to sentencing, it called for tenders, in anticipation that the court would be prepared to sanction such a scheme. Ferrier Hodgson, an Auckland firm of chartered accountants, tendered lowest, at $19,968.
[5] Judge Wilson accepted that a refund order was appropriate and that the Commission’s refund scheme, the details of which were spelt out in draft orders, should be approved. Under those orders, Ferrier Hodgson were appointed to administer the refund scheme, effectively as the court’s agents. They were to work out who were entitled to refunds and then to pay them. The judge approved Ferrier Hodgson’s tender of $19,968. He ordered the defendants to meet that fee.
[6] In addition, Judge Wilson, under s 40 of the Act, convicted and fined Mr O’Neil $34,000 and Martini $25,000.
[7] Mr O’Neil and Martini appealed. Clifford J allowed the appeal in part. He held the Distinct Court did not have jurisdiction to order Mr O’Neil and Martini to pay Ferrier Hodgson’s fee of $19,968. He also reduced the fines payable by Mr O’Neil and Martini. Mr O’Neil’s fine was reduced to $7,500 and Martini’s to $15,000.
[8] The Commission subsequently sought leave to appeal to this court. Clifford J granted leave on two questions of law. We shall set out the precise questions later in these reasons.

Issues on the appeal

[9] This appeal comes to us pursuant to s 144 of the Summary Proceedings Act 1957. Clifford J set forth two questions of law which in his view were worthy of this court’s consideration. Neither side was particularly happy with how one of the questions was expressed. While, therefore, we shall later set out Clifford J’s precise questions, it may be better if we set out the issues on this appeal in our own words, reflecting the argument advanced before us.
[10] The first issue could be expressed thus: did the District Court have power to order the defendants to pay for the cost of an agent administering the refunds payable to victims?
[11] The second issue, put broadly, was: was the High Court justified in reducing the level of fines?
[12] We shall consider the issues in turn.

Did the District Court have power to order the defendants to pay for the cost of an agent administering the refunds payable to victims?

[13] In the District Court, the Commission considered the primary response to the defendants’ offending should be refunds to those who had bought the worthless products. The Commission wanted a full refund to everyone. There was much dispute about that in the District Court. Judge Wilson accepted the Commission’s submission. That aspect is not in dispute before us.
[14] During the course of sentencing submissions, Judge Wilson suggested to the defendants that they should “make refunds voluntarily”. But they did not take up that suggestion: Judge Wilson’s sentencing notes, DC NSD 8 November 2005 at [32]. In light of that failure or refusal on the defendants’ part, the judge appointed Ferrier Hodgson, effectively as the court’s agent, “to administer the distribution of refunds to eligible consumers”. The methodology Ferrier Hodgson were to employ was set out in the court’s order. Essentially the defendants were to pay to Ferrier Hodgson $175,972.98 (the agreed sum they had received from buyers of Celluslim), plus $19,968 (Ferrier Hodgson’s fee). Ferrier Hodgson were to do their best to reimburse purchasers who could be located. The balance (which there was bound to be, because some customers would inevitably not be located) would then be paid back to the defendants.
[15] On appeal to the High Court, Mr O’Neil and Martini challenged the appropriateness of an order to refund all purchasers the full purchase price. Clifford J considered but rejected that challenge: (2006) 11 TCLR 884 at [66]-[71]. There is no appeal from that finding. He went on to consider, however, whether the District Court had jurisdiction to order the defendants to pay Ferrier Hodgson’s costs.
[16] The Commission argued in the High Court that there were two bases upon which the District Court had jurisdiction. The first basis was inherent power derived from the s 43 jurisdiction. The Commission referred to what Somers J had said in McMenamin v Attorney-General [1985] 2 NZLR 274 at 276 (CA), to the effect that the District Court has power to “do what is necessary to enable it to exercise the functions, powers and duties conferred on it by statute”. The second basis identified by the Commission was the civil jurisdiction of the District Court, conferred by ss 29 and 30 of the District Courts Act 1947, together with the power the District Court has to order costs, as recognised by r 45 of the District Courts Rules 1992.
[17] Clifford J found neither argument persuasive. He held that “the jurisdiction under s 43 is a specific one and in the context of s 43(2)(c) is ... limited to orders to refund money or return property”: at [84]. He did not think the Commission could require Mr O’Neil and Martini to pay an additional amount to administer the refund scheme. He concluded (at [84]):

My essential reason for reaching this view is that the costs of administering the scheme are, in my view, to be regarded as costs which fall upon the [Commission] by virtue of its general functions, and are not properly to be regarded as costs of litigation which are subject to the powers of the District Court under r 45.

[18] On appeal, Mr Dixon, for the Commission, relied on only the first basis for conferring jurisdiction. He referred again to what Somers J had said in McMenamin, a dictum in accordance with, he submitted, what had been said in the House of Lords in Connelly v Director of Public Prosecutions [1964] AC 1254 at 1301:

There can be no doubt that a court which is endowed with a particular jurisdiction has powers which are necessary to enable it to act effectively within such jurisdiction. I would regard them as powers which are inherent in its jurisdiction. A court must enjoy such powers in order to enforce its rules of practice and to suppress any abuses of its process and to defeat any attempted thwarting of its process.

[19] Mr Dixon laid particular stress on what Chisholm J had said in Direen v Commerce Commission (1998) 8 TCLR 444. In that case, Chisholm J observed that, although the Fair Trading Act has not spelled out in detail the procedure to be followed in all cases when a court makes an order under s 43, it is the responsibility of the court to work out a practical interpretation that accords with the general purpose of the Fair Trading Act. In this regard, he said at 451:

The Fair Trading Act has not spelled out how compensation orders made under s 43 are to be enforced. An interpretation of that Act which accords best with the general intention of Parliament must accommodate compensation orders made in criminal proceedings (up to the ceiling specified in s 43(3)). As observed by the Judge, it was Parliament’s intention to provide victims with a relatively speedy and inexpensive mechanism for obtaining compensation. This purpose has been achieved by providing an alternative whereby compensation orders can be made within proceedings which are already on foot without a separate application being necessary.

[20] Counsel had submitted to Chisholm J that there would be difficulties with compensation issues under s 43 unless that issue was dealt with “within the civil structure of the District Court”: at 449. His Honour responded to that argument as follows (at 449):

In my opinion this argument is flawed. Inferior Courts have to do whatever is necessary to enable the Court to exercise the functions, powers and duties conferred by statute: see McMenamin v A-G [1985] 2 NZLR 274 (CA) at p 276. It follows that the Court has the power to impose whatever requirements may be necessary to achieve justice.

[21] We agree with Mr Dixon’s submissions. The court clearly had the power to order the defendants to make refunds. The costs of complying with such an order would normally fall on the defendant. In this case, as we have already noted, Judge Wilson offered the defendants the chance to make refunds voluntarily, but they did not take up the suggestion. So the court was compelled to appoint someone to effect the refund order – in a sense, on the defendants’ behalf. The defendants could not be permitted to thwart the court’s view that a refund order was appropriate by their refusal to co-operate. Nor is it right that the defendants should be able to shift the costs involved in making refunds from themselves to either the State or the defendants’ victims.
[22] The fact the judge made an offer to the defendants to make refunds voluntarily and they rejected it makes this a very strong case for visiting the administrative costs of the refund scheme on them. But we see no reason why a court would not be entitled to appoint an agent at a defendant’s cost to run a refund scheme in any case where the court considered it undesirable that responsibility for making refunds should be left to the defendant.
[23] The error in Clifford J’s reasoning was, in our respectful view, his assumption that “the costs of administering the scheme [were] ... to be regarded as costs which fall upon the [Commission] by virtue of its general functions”. These costs were in no sense the Commission's responsibility. The Commission, in arranging before sentencing for the possibility that an agent might administer the scheme, was merely assisting the court with a suggestion as to how a refund order could be made to work in circumstances where the defendants themselves could not be relied upon to effect refunds in a proper manner. But it was always envisaged, if this suggestion were taken up, that Ferrier Hodgson would be the court’s agent, not the Commission’s.
[24] The costs Mr O’Neil and Martini are being required to meet are no different in principle from costs they would have had to incur had the court been satisfied they could be relied on to co-operate with an order that they administer the refund scheme. They would have had to pay postage and cheque duty; they would have had to pay for the costs of advertising to find purchasers currently unidentified; they would have had to pay costs of verifying claims; and they would have had to pay costs associated with reporting to the court and satisfying it that all possible refunds had been made.
[25] The effect of Clifford J’s decision is that Mr O’Neil and Martini, by their non-co-operation, would have effectively shifted the costs they would have incurred in making full refunds from themselves to the victims. We say that because Clifford J accepted the scheme arrangement with Ferrier Hodgson was both within jurisdiction and sensible. He thought, however, that the cost of administering the scheme should come from the refund pot. The inevitable effect of that is that all victims would receive only a pro rata return, while the offenders escape scot-free from costs associated with effecting refunds.
[26] Clifford J did suggest another possibility for consideration (at [87]):

Alternatively, to the extent that the Commission does not currently possess payment details, applications could be sought prior to any refund orders being made. Once all applications had been received, payments could be made. In what would appear the likely event that not all purchasers of Celluslim for whom the Commission does not currently hold payment details make applications for refunds, there still exists the possibility that, notwithstanding the fund having to bear the cost of the scheme, full refunds may nevertheless be possible. This to me would appear to be the preferable approach.

[27] We are not completely sure we understand what the judge envisaged by this suggestion. It seems to be a suggestion that Ferrier Hodgson’s fee could come from such of the $175,972.98 (the refund pot) as might not be claimed. Mr Dixon respectfully challenged the logic of this approach. He said: “Logic requires that the final outcome should not depend upon how many consumers come forward asking for refunds.” We respectfully agree with that submission. In addition, the judge’s suggestion appears to be a recognition that, at least in some circumstances, a defendant could legitimately be required to meet the costs of administering the scheme – but only by a side-wind. We prefer Judge Wilson’s approach, which is in a sense more transparent: Mr O’Neil and Martini will pay the costs of administering the scheme, but they will have returned to them any sums from “the refund pot” not actually required for refunds (because Ferrier Hodgson have been unable to trace all purchasers).
[28] Mr Ross, for Mr O’Neil and Martini, submitted that the Commission’s argument was contrary to principles of statutory interpretation. He submitted the Commission’s argument involved “filling gaps” in the legislation, which was not permitted. He also said there was a presumption against penalisation in property or other rights, except where there is clear lawful authority to do so. We do not accept that the Commission’s argument involves “filling gaps” in an illegitimate way. Rather, we are ensuring that a District Court decision to make an order that all victims be reimbursed in full cannot be thwarted by the absence of adequate records and the unco-operativeness or unreliability of the defendant. Nor does Judge Wilson’s order impose an additional “penalty” on the defendants: they had the option of making the refunds voluntarily, but chose not to co-operate.
[29] At the end of the day, Mr O’Neil and Martini sold worthless products to a value of $175,972. The court determined that all purchasers should be reimbursed. That that order was appropriate is no longer an issue. What the defendants seek is to shift what would normally be their responsibility to effect that order to either the Commission or the Ministry of Justice (if the court were to administer the scheme) or the victims (on a pro rata basis). We see no justification for that cost-shifting. In our view, there was jurisdiction for the District Court to require Mr O’Neil and Martini to meet the costs of Ferrier Hodgson as the court’s agent in implementation of the refund order.
[30] In this regard, we hold that the District Court did have power to order the defendants to pay for the cost of an agent administering the refunds payable to victims.
[31] Clifford J’s formal question with regard to this first issue was as follows:

Did I err in finding that there is no jurisdiction under s 43 of the Act to make an ancillary order directing the [respondents] to cover the cost of administering a refund scheme, and therefore was I wrong to overturn the District Court Judge’s decision to order the [respondents] to jointly and severally pay for Ferrier Hodgson & Co’s costs and disbursements for administering the refund scheme ordered by the District Court?

[32] We answer that question as follows: yes, Clifford J’s decision was in error in holding the District Court had no jurisdiction to order the respondents to pay Ferrier Hodgson’s costs and disbursements, and was accordingly wrong to overturn Judge Wilson’s decision in that respect.

Was the High Court justified in reducing the level of fines?

[33] The other question of law identified by Clifford J was expressed in these terms:

Did I err in taking into account the refund order issued under s 43 in reducing the level of fine imposed on the [respondents] under s 40 of the Act, and therefore was I wrong to reduce the fines as I did?

[34] As we have indicated, both sides had difficulty with the form of this question, which did not accurately capture the argument the Commission wanted to run in this court. The Commission accepted, as it had in the High Court, that a court, when fining a defendant under the Fair Trading Act, was entitled to take into account any refund order under s 43. The Commission’s true complaint was really as to the weight they said Clifford J had given to the fact that a full refund to all purchasers had been ordered.
[35] In order to deal with the Commission’s argument in this court, we need to set out first the respective approaches of Judge Wilson and Clifford J.
[36] According to Judge Wilson’s sentencing notes, the defendants’ then counsel had submitted that the starting point for any fines “should not be more than $68,000 but spread equally between the two defendants”: at [35]. That submission appears to have been made in a context where the defendants were arguing there should be no s 43 refund order. The figure of $68,000 reflected the agreed profit the defendants had made. Defence counsel had apparently submitted there should be discounts from the $68,000 starting point to reflect the following factors:

• (a) The guilty pleas;
• (b) Mr O’Neil’s “full interview given on tape at a very early stage”;
• (c) The delay before the charges were brought.

[37] Judge Wilson’s response to these submissions was contained in two brief paragraphs:

[37] It is a significant mitigating factor that there were pleas of guilty in this case even though somewhat delayed and certainly not at the first opportunity. The figure of $68,000.00 is the apparent profit from the sales that have occurred.

[38] Bearing in mind the impact of the s 43 orders, it seems to me that even taking into account the formal pleas of guilty that have been entered, that the fines should be significant.

[38] Without further explanation, the judge then imposed the fines already referred to.
[39] By the time of the High Court hearing, Mr O’Neil and Martini were represented by their current counsel, Mr Ross and Ms Hudson. It would appear that they presented much fuller argument on the appropriate level of fines than previous counsel had done in the District Court.
[40] Clifford J considered the fines manifestly excessive for two reasons. The primary reason was that the fines seemed out of line with those imposed in three District Court cases, which his Honour discussed in detail. Secondly, Clifford J noted that, under the s 43 order, Mr O’Neil and Martini would be paying a minimum of $121,000. That was the total of those purchases made by consumers in respect of whom sufficient detail was already available to enable refunds to be made. Given the agreed profit level of $68,000, Clifford J reasoned that the refund order in itself imposed an economic penalty on Mr O’Neil and Martini of at least $53,000. While that was not a reason not to make the refund order, his Honour considered that relevant “as regards the level of fine to be imposed”: at [63].
[41] Mr Malarao, who argued this part of the appeal on the Commission’s behalf, submitted there were a number of errors in the High Court’s approach. The alleged errors differ significantly from the alleged error referred to in the second question: see [33] above. Notwithstanding that, we deal with Mr Malarao’s arguments.
[42] First, Mr Malarao submitted that Clifford J appeared “to have equated the refund order to a reparation order in the relationship that it should have with the level of fine imposed”. He submitted a refund order under the Fair Trading Act was different from a reparation order under the Sentencing Act 2002. He set out reasons – to which we shall come – as to why the two orders should not be equated.
[43] We do not accept this submission. It is not at all clear to us that Clifford J did equate a refund order to a reparation order, but, even if he did, the analogy is appropriate. Each is designed to provide monetary compensation (in whole or in part) to the victim of the offending. Each is appropriately taken into account by a sentencing judge when determining other penalties.
[44] Mr Malarao submitted that a refund order, unlike a reparation order, “relates to monies or property that has been provided to a person for a breach of the Fair Trading Act”. So it does - but so what? The reason a reparation order is taken into account when fixing the level of fines for general offending is that the victim is receiving compensation for the harm done, at the defendant’s expense. The same reasoning applies when the harm to victims results from breaches of the Fair Trading Act.
[45] Next, Mr Malarao submitted that s 43 orders are a civil remedy, “imposed with no reference to a person’s ability to pay”. Reparation orders, on the other hand, he submitted, were imposed with reference to a person’s ability to pay: s 12 of the Sentencing Act. We do not accept, at least in the criminal context, that whether s 43 orders should be imposed and their extent is necessarily determined “with no reference to a person’s ability to pay”. But we need not take this issue further as, at least in this case, there is no issue about Mr O’Neil’s and Martini’s ability to pay.
[46] Mr Malarao next submitted that “a reparation (or refund) order should not be seen to be a means by which persons can escape otherwise appropriate sanction”. We agree; but Clifford J did not say anything to the contrary. He accepted that, “given the conduct involved a not insignificant fine [was] appropriate”: at [64].
[47] Finally, on this first point, Mr Malarao submitted that Mr O’Neil and Martini “were not and are not prepared voluntarily to make refunds”. We agree that is relevant to the overall penalty, but there is nothing in Clifford J’s reasons for judgment to indicate that he too did not accept that proposition. The fact that Mr O’Neil and Martini may not have been willing to make refunds does not mean the refund orders become irrelevant to the quantum of the fines.
[48] Mr Malarao’s next submission was that Clifford J had wrongly applied the totality principle. Mr Malarao submitted that the totality principle would have been relevant only if there was some evidence of financial incapacity. He submitted that that proposition was “demonstrated by the scheme of the Sentencing Act”, and he cited in that regard ss 14(1) and 40(1).
[49] We do not accept this submission either. Clifford J said at [50] that “the Court should, as regards the amount of the fine, take account of the total effect of the refund ordered, together with any possible fine, on the offender (the totality principle)”. The expression “totality principle”, in the sentencing context, is normally used in reference to sentencing for multiple offending. Although this was multiple offending, Clifford J was using the expression slightly differently here: he was emphasising that, in fixing the total amount of money Mr O’Neil and Martini would have to pay, regard should be had to the level of refund ordered when fixing the fine component of the total. There was nothing wrong with that: indeed, in so far as the analogy is pertinent, the approach was completely in line with that mandated by s 40(4) of the Sentencing Act:

If a court imposes a fine in addition to a sentence of reparation, it must, in fixing the amount of the fine, take into account the amount payable under the sentence of reparation.

[50] Mr Malarao’s submission is wrong when it suggests that the totality principle only “comes into play when there is some evidence of financial incapacity”. It would always be relevant when fixing a fine under the Fair Trading Act to take into account any refund order, just as it is always relevant under the Sentencing Act, in fixing the amount of a fine, to take into account the amount payable under a sentence of reparation. That proposition applies regardless of the defendant’s financial capacity.
[51] Mr Malarao did not engage with the two reasons Clifford J gave for holding the fines manifestly excessive: see [40] above. He suggested Clifford J was wrong when he said the fines in this case were out of line with three District Court cases, but Mr Malarao did not give us copies of those cases or take us through them. It was not demonstrated to us, therefore, that the judge was wrong in saying the level of fines was inconsistent with them. As to Clifford J’s second reason, it is surely indisputable that it was relevant that the refund order in itself contained a significant economic penalty on Mr O’Neil and Martini.
[52] We see no basis therefore for interfering with the fines imposed by Clifford J. There has been no direct attack on his Honour’s reasoning. The indirect attack is misconceived for the reasons given above.
[53] Having said that, may we be permitted one quibble? Neither Judge Wilson nor Clifford J clearly identified a starting point, as would be conventional. Neither identified a specific discount for the guilty pleas nor a separate discount reflecting the amount being paid under the refund order. That would have made the sentence more transparent and useful as a precedent.
[54] That leads on to our final point. This judgment will have no precedential effect as to the level of fines appropriate on Fair Trading Act prosecutions. This is for two reasons. First, as just explained, the District Court precedents on which the High Court sentence was based have not been the subject of submissions to us. Secondly, the maximum fines have been significantly increased since the offending in this case by s 8 of the Fair Trading Amendment Act 2003.
[55] The Commission therefore has not shown that Clifford J was not justified in reducing the level of fines. The formal answer to the question posed – set out at [33] above – is: no.

Result

[56] The net result is that the appeal is allowed in part.
[57] Judge Wilson’s orders under s 43 of the Fair Trading Act are restored. Mr O’Neil and Martini will be responsible for meeting Ferrier Hodgson’s fee. The parties recognised that some of Judge Wilson’s s 43 orders would now require amendment. For example, Mr O’Neil and Martini were ordered to pay $195,940.98 to Ferrier Hodgson’s bank account “on or before 31 January 2006”. That was not done, apparently because of the appeals. Further, it is not known whether Ferrier Hodgson are still prepared to administer the refund scheme at their tendered price. The parties did not seek to have us amend the orders in the event that the Commission’s appeal on the s 43 point was successful. It is likely they will be able to agree appropriate amendments. If they cannot, the Commission can return to the District Court for further orders, pursuant to the leave reserved to apply for further orders: see order 9.
[58] For the reasons given in the previous section of this opinion, the fines imposed by Clifford J stand. They were in substitution for the higher fines originally imposed by Judge Wilson.
[59] Each side has had some success on this further appeal. Because honours are shared, there should be no order as to costs in this court.

Solicitors:
Meredith Connell, Auckland, for Appellant
Chapman Tripp, Auckland, for Respondents