Superannuation guarantee amnesty: one last chance to pay compulsory superannuation for non-complying employers who employ "contractors"

Employee versus contractor? Are you sure?

Over the past decade many Australian companies have retained the services of people who claim they are "contractors" not employees. Usually the "contractor" wants to be paid a gross fee/remuneration, stating that they will take care of income tax, superannuation and other payments. 

The attraction for the employer is a lower total cost of retaining the person as compared to bringing them on as an employee, as well as perceived flexibility in options for ending the relationship as compared to traditional employment (the thinking is that no redundancy or leave entitlements need to be paid and no notice period applies).

Such practices were common in the IT, marketing, construction and other industries, particularly so called “digital industries”. The “gig economy” has seen the practice gain pace.

The legal reality is that many "contractors" are actually employees, particularly where they turn up to work at the same place each day, take their instructions from "a boss" at the company, are paid by the hour rather than for delivering an end product, and don't have to redo their work at their cost if the deliverable is not done to the required standard.

In such cases, income tax and compulsory superannuation guarantee payments must be paid by the employer for "contractors" who are, legally, employees. If the payments are not made, significant penalties accrue over time and must be paid to the Australian Tax Office (ATO).

Often this superannuation liability only hits home when the employer tries to sell their company and the buyer's due diligence experts point out the problem. Significant superannuation shortfall payments and ATO penalties loom large for the seller, as well as a reduction in the sale price, or at least a significant escrow sum demanded by the buyer.

A superannuation guarantee amnesty is potentially available.

Legislation has been reintroduced to Parliament providing an amnesty for employers who have not paid superannuation guarantee (SG) payments. The proposed amnesty will allow fines to be avoided, provided the SG payments are made.

The Treasury Laws Amendment (Recovering Unpaid Superannuation) Bill 2019 (the Bill) was re-introduced into the House of Representatives on 18 September 2019. The Bill was then referred to the Economics Legislation Committee for further inquiry. The Committee released its report recently - available here.

The Bill provides employers who have previously failed to pay SG contributions and failed to disclose the shortfall to the ATO with a “second chance” to self-correct any historical non-compliance. 

This amnesty operates as a way for the ATO to encourage employers to disclose unpaid SG amounts for the period during which the amnesty applies - without fear that they will be liable for fines typically associated with non-compliance. 

What are my SG obligations generally?

The Superannuation Guarantee (Administration) Act 1992 (SGAA) requires that employers pay a certain percentage of an employee’s earning into the employee’s superannuation fund. A Superannuation Guarantee Charge (SGC) is imposed on employers who fail to pay the required SG amount i.e. the SGC is the shortfall plus interest and administration costs, and this is payable by the employer to the ATO each quarter. 

Employers can also be liable for penalties for failing or refusing to provide a statement or information as required under the SGAA, which can be up to 200% of the amount of the underlying SG amount (known as Part 7 Penalties). 

How will the proposed amnesty work?

The first step is disclosing unpaid SG to the ATO. An employer who discloses SG non-compliance and pays an employee’s full SG entitlements plus any interest (which may incude nominal interest and a general interest charge (GIC)) will be entitled to the amnesty, and will avoid liability for penalties normally associated with late payment and non-compliance.  

The employer with an outstanding SG liability can either: 

• pay the unpaid SG amounts, GIC and nominal interest directly to the ATO; or 
• pay the unpaid SG and the nominal interest to the employee's superannuation fund, and then elect to offset these amounts against their liability for SGC and GIC (if any).

However, if employers have an existing SGC assessment for a quarter, or are otherwise unable to contribute directly into their employee’s superannuation fund, they will be required to pay the SGC to the Commissioner directly.

If the employer makes a disclosure under the amnesty, the administration charge component of the SGC will be waived (see example 1.1 in the Explanatory Memorandum). 

The amnesty is proposed to extend to all reporting quarters from the quarter commencing 1 July 1992 to the quarter commencing 1 January 2018. 

The disclosure to the ATO must be made in the correct form, and the employer must pay the amount of the disclosed SG to the employee or the SGC to the ATO (see above) within the required period. Failure to pay will mean the employer will not be able to rely on the amnesty and will be subject to the normal penalties imposed. 

It is expected that employers will be given from 24 May 2018 to 6 months after the date the Bill receives Royal Assent to make disclosure and pay the shortfall and interest (the Amnesty Period).  

In summary, in order to benefit from the amnesty the unpaid SGC must: 

• Not have been previously disclosed to the ATO; 
• Have been incurred between 1 July 1992 and 31 March 2018; and 
• Not be under examination by the ATO previously.

The employer must also:

• disclose the shortfall to the ATO within the Amnesty Period; and
• pay the shortfall plus interest within the Amnesty Period. 

If the employer does the above things for eligible SG shortfalls, they will not be liable for Part 7 Penalties. SG amounts paid during the Amnesty Period will be tax deductable. 

If the Bill is passed, employers who have failed to comply with their SG obligations in the past should take advantage of this opportunity to avoid liability for such penalties.

Employers who fail to disclose during the Amnesty Period 

Employers who do not disclose and pay unpaid SG and interest within the Amnesty Period will be subject to higher penalties. Generally, the Commissioner has discretion to remit Part 7 Penalties. However, from the day after the Amnesty Period ends the Commissioner’s ability to remit Part 7 Penalties will be limited. According to the Explanatory Memorandum, the Commissioner will not be able to remit penalties below 100% of the amount of SGC owing by the employer for a quarter covered by the amnesty. The penalty will include interest and an administration fee. 

What does this mean for my business?

The amnesty is a one-off second chance for employers to reduce their exposure to penalites for unpaid SG. Employers who are aware that they have failed to comply with their SGC obligations, or are unsure whether they have fully complied since 1 July 1992, should ensure that they keep informed of the progress of the Bill. 

In particular, employers who have utilised the services of “contractors” who look-and-feel like employees should consider taking advice on whether the persons involved were legally employees for the purposes of tax, superannuation and other legislation.

If you would like further information regarding the new laws or any other issue please contact Damian Quail or Cassandra Bailey.

This article is general information only, at the date it is posted.  It is not, and should not be relied upon as, legal advice.  This article might not be updated over time and therefore may not reflect changes to the law.  Please feel free to contact us for legal advice that is specific to your situation.

Disclose the full upfront price or risk breaking the law: new upfront pricing laws apply

It is not uncommon for businesses to advertise a headline price for goods and services to their customers, and to only disclose optional costs in the fine print or in a manner that is not necessarily clear to customers. This is no longer permitted. Some businessess will need to change their pricing practices, particularly businesses selling goods online.

The Treasury Laws Amendment (Australian Consumer Law Review) Bill 2018 amends the Australian Consumer Law contained within the Competition and Consumer Act 2010, and imposes an obligation on businesses operating in Australia to ensure transparent pricing for consumers. As of 26 October 2019, businesses must display the total price for the goods and services including all pre-selected optional items. In other words, if optional components are pre-selected or automatically applied by the seller, these options must be included in the headline price. The customer then has the option to remove the pre-selected options selected in order to pay a lower price.

These new laws will especially affect businesses who sell goods and services online. The Explanatory Memorandum to the new legislation provides some helpful examples in relation to airlines. For example, if an airline fare is $500 and a website pre-selects an optional carbon offset fee of $5, then the headline price must be $505, not $500. However, if the carbon offset fee is not pre-selected or automatically applied, then the ticket can be advertised at $500.  

The same approach is applicable for promotions which display only a portion of the total price. Businesses must ensure that the total price is displayed just as clearly as the fractional price. Essentially, the new laws aim to avoid the situation where headline prices are advertised initially, but once the customer clicks through the website the price is increased to include pre-selected options and charges. 

Businesses should ensure that their pricing strategies conform with the new laws. 

If you would like further information regarding the new laws please contact Damian Quail. 
 

This article is general information only, at the date it is posted.  It is not, and should not be relied upon as, legal advice.  This article might not be updated over time and therefore may not reflect changes to the law.  Please feel free to contact us for legal advice that is specific to your situation.

Modern slavery legislation: the clock is ticking for Australian companies to prepare their first Modern Slavery Statement

Modern slavery legislation has been enacted in Australia. Many larger companies are now legally obliged to prepare Modern Slavery Statements and submit these statements to the Australian Federal Government. The Statements will be published on a publicly accessible register.

At its broadest, the term "modern slavery" refers to any situations of exploitation where a person cannot refuse or leave work because of threats, violence, coercion, abuse of power or deception. It encompasses slavery, servitude, deprivation of liberty, the worst forms of child labour, forced labour, human trafficking, debt bondage, slavery like practices, forced marriage and deceptive recruiting for labour or services. Indicators of modern slavery practices may incude unlawful withholding of wages and identity/travel documents through to excessive work hours and restrictions on movement. Other indicators include recruitment agencies deducting excessive fees from worker remuneration, loans to workers with astronomical interest, and similar practices. 

The Walk Free Foundation, which publishes the annual Global Slavery Index, estimates that 30.4 million people are victims of modern slavery in the Asia Pacific region, including within Australia (Walk Free Foundation, Global Slavery Index 2016, www.globalslaveryindex.org). Many Australian companies source workers, products and services from the Asia Pacific region. 

For many of these larger companies, reports will need to be lodged between 1 July 2020 and 31 December 2020. It is crucial that affected companies begin reviewing their internal processes and supply chains and begin collecting data to comply with the new reporting obligations.

What does the Federal legislation require?

The Federal legislation is the Modern Slavery Act 2018 (Cth). It commenced on 1 January 2019.

Key aspects of the Federal legislation are as follows:

• companies incorporated in or operating in Australia are required to submit a report - a Modern Slavery Statement - to the Federal Government if the business in Australia (of the company and its subsidiaries) has a minimum annual consolidated revenue of $100 million. Other entities may report voluntarily.
• Modern Slavery Statements must be lodged with the Home Affairs Minister (currently Peter Dutton).
• the Modern Slavery Statement must report on the risks of modern slavery in the company's operations and supply chains, and actions the company has taken to address those risks. Part 2 of the Commonwealth Act sets out in detail mandatory criteria that Modern Slavery Statements must address. It includes:
  1. the company's structure, operations and supply chains
  2. modern slavery risks in those operations and supply chains
  3. actions taken by the company to assess and address those modern slavery risks, including due diligence and remediation processes
  4. how the company assesses the effectiveness of actions taken
  5. the process of consultation with its subsidiaries in preparing the Modern Slavery Statement
  6. any other relevant information.
• the Act defines modern slavery to incorporate conduct that would constitute an offence under existing human trafficking, slavery and slavery-like offence provisions set out in Divisions 270 and 271 of the Commonwealth Criminal Code, as well as conduct covered under international conventions dealing with child labour and other slavery like practices. The definition encompasses slavery, servitude, deprivation of liberty, the worst forms of child labour, forced labour, human trafficking, debt bondage, slavery like practices, forced marriage and deceptive recruiting for labour or services.
• the first reporting period will be FY2019-2020, and the first report will be due within 6 months of the company's financial year end. For most Australian companies this means that the first Modern Slavery Statement must be given to the Home Affairs Minister between 1 July 2020 and 31 December 2020. Companies with an international financial year may have to report earlier, depending upon the timing of their end of financial year. For example, companies with a 31 March 2020 end of financial year will need to report by 30 September 2020.
• Modern Slavery Statements will be published on a freely accessible public register on the internet - the Modern Slavery Statements Register.
• Joint Modern Slavery Statements are permitted for corporate groups. 
• Modern Slavery Statements must be approved by the Board of Directors of a company. This ensures senior level accountability, leadership and responsibility for modern slavery.
• If a company fails to comply with a reporting requirement, the Minister may seek an explanation from the company and require the company to undertake remedial action in relation to that requirement. If a company fails to comply with the Minister’s request, the Minister may publish information regarding the company’s failure to comply, including the company's name i.e. this failure will become public knowledge. 

No penalties exist in the legislation for not complying with the Act. However, the Government has indicated that if compliance rates are low, the need for penalties will be considered as part of a three year review of the legislation.

Many prominent Australian companies such as Wesfarmers, South 32, Qantas and Fortescue Metals have already published Modern Slavery Statements.

What does the New South Wales legislation require?

The NSW legislation - the Modern Slavery Act 2018 (NSW) - is not yet in force.  It was assented to on 27 June 2018, but it has not yet commenced operation. On 6 August 2019 the NSW Legislative Council Standing Committee on Social Issues announced an inquiry into the NSW Act. The Committee's recommendations are due on 14 February 2020.

Key aspects of the proposed NSW Act are as follows:

• it will apply to companies that have employees in NSW that supply goods and services and have a total annual turnover of not less than $50 million
• financial penalties may be imposed under the Act for failure to comply with the Act. A maximum penalty of $1.1 million is proposed to apply where a company fails to prepare a Modern Slavery Statement, fails to make its Modern Slavery Statement public or provides false or misleading information.
• appointment of an Anti-Slavery Commissioner. The Commissioner’s role will be focused on public awareness, advocacy and advice.

It is not yet certain whether the NSW legislation will operate in addition to the Federal legislation, or whether it will only operate when the Federal legislation does not apply to a particular company.  The proposed NSW Act states that the reporting requirements under the NSW Act will not apply if the organisation is subject to obligations under a law of the Commonwealth or another State or a Territory. So, a possilbe outcome is that companies that file a Modern Slavery Statement under the Federal legislation will not need to report under the NSW Act as well.  However, companies operating in NSW with revenue between $50 and $100 million may need to comply with the NSW Act once it commences operation, as they will be caught by the NSW Act but not the Federal Act.

What does the Western Australian legislation require?

Nothing yet- Western Australia has not yet enacted its own Modern Slavery legislation. However, it seems inevitable that Western Australian legislation will arrive at some point. 

Next steps

It is crucial that companies required to report under the Modern Slavery Legislation begin reviewing their internal processes and supply chains and begin collecting data to comply with the new reporting obligations. This could include: 

• mapping supply chains and undertaking a risk based assessment of where modern slavery risks may arise in those supply chains
• identifying potential modern slavery risks in their internal operations
• reviewing policies and procedures in relation to modern slavery, including supplier codes of conduct and human rights policies
• revise procurement terms and conditions to cover the new obligations
• revise employee codes of conduct and policies to address modern slavery issues
• train employees on modern slavery risks and compliance requirements
• implement procedures to monitor modern slavery risks internally and within supply chains, as well as procedures to look for indicators of potential modern slavery
• make sure supply chain participants are aware of the new obligations
• appointing a senior internal person to take ownership and responsibility for compliance.

For further information on managing your risk and compliance obligations, please contact Damian Quail.  

This article is general information only, at the date it is posted.  It is not, and should not be relied upon as, legal advice.  This article might not be updated over time and therefore may not reflect changes to the law.  Please feel free to contact us for legal advice that is specific to your situation.

Vying for social media engagement: More risk than reward?

The recent Court decision in Voller v Nationwide News Pty Ltd [2019] NSWSC 766 (the Voller case) highlights a danger inherent in using social media - social media publications invite comments from a wide variety of users, with a very real risk that some of those comments may convey a defamatory meaning. Following the decision in Voller, businesses are at risk of being held liable for defamatory comments posted by third party users who engage with social media content.  

Background

In Voller, the Supreme Court of New South Wales (NSWSC) considered a defamation claim commenced by Dylan Voller, a former detainee at the Don Dale Youth Detention Centre. Mr Voller alleged that Fairfax Media Publications Pty Ltd, Nationwide News Pty Ltd and Australian News Channel Pty Ltd (the publishers of the Sydney Morning Herald, The Australian and Sky News Australia/The Bolt Report, respectively) (the Defendants) were responsible for defamatory comments posted by third-party Facebook users on stories published by those Defendants to their Facebook pages.

Liability for Defamation and the issue of “Publication” 

Under Australian law, a person is liable for defamation if the material is published to one or more third parties, the material identifies a person and the material conveys a defamatory meaning.

The NSWSC was principally concerned as to whether the Defendants were the "publishers" of third party comments in response to the Defendant's news stories. 

Decision

The NSWSC found that the Defendants were not mere conduits of the Facebook comments, but rather had encouraged Facebook users to make comments in order to further the Defendant's own commercial interests.  The first time each defamatory comment was published in comprehensible form was as a comment attached to each Defendant’s relevant news story.  Given that the publication carrying the defamatory meaning (being the Facebook comment) was viewed by the public in relation to that news publication, it was the Defendants that were the first and primary publishers of the defamatory comment. 

Reason for Decision

In reaching the decision, Justice Rothman took account of the ability of each Defendant’s Facebook administrator to forbid, filter or hide comments, thereby giving the Defendants the power to control the content of the articles and the comments being published.  The Court found that the administrators held the “final right of approval” before comments were made public. That element of control over the publication demonstrated that the Defendants participated in the broadcast of the defamatory material, in failing to exercise their administrative controls and filter the comments appearing under their publications.  His Honour held that by operating their Facebook pages for a commercial purpose, and inviting user participation without exercising the appropriate controls, the Defendants had promoted the defamatory material by ratifying its presence and publication.  For this reason, the defence of innocent dissemination could not apply.

His Honour also attached importance to the fact that the Defendants could delay publication of user comments and monitor whether any were defamatory before releasing them to the general public. This was considered more important than the counter argument that there was a significant time cost in doing so.  

It was considered irrelevant that social media is used to engage third party users and to invite comment and interaction with posts, rather that to simply disseminate information. It was also no defence that it would be difficult to monitor numerous comments being published by third party users over long periods of time (for example, third party users often comment on posts days after the initial post is published).

What does this mean for public publishers on social media? 

This decision highlights for administrators of public social media pages the implications of inviting public comment on their posts.

Media companies and other businesses that utilise social media to promote their commercial interests should pause to consider how they can limit their liability for third party defamatory comments.

Businesses should also consider implementing moderating procedures, such as reviewing comments for factual accuracy or malicious content before the comments are displayed as a comment under the primary publication.

If preventative strategies are to be implemented, the strategies should account for any content posted within the prior 12 months, given the Limitation Act 2005 (WA) permits a person to commence a defamation action within 12 months of publication of the defamatory material.

Reviewing third party comments on existing publications, as well as monitoring, hiding and blocking defamatory comments on future publications, will be necessary for any businesses with a social media presence, at least pending an appeal of the decision in Voller. 

For further information on defamation and managing your risk, please contract Damian Dinelli on 9481 2040 or at damian.dinelli@whlaw.com.au. 

This article is general information only, at the date it is posted.  It is not, and should not be relied upon as, legal advice.  This article might not be updated over time and therefore may not reflect changes to the law.  Please feel free to contact us for legal advice that is specific to your situation.

Franchising: Federal Court freezes assets of franchisor to protect franchisees who claim they were misled

Background

Jump Swim is an Australian-based franchisor that sells franchises to franchisees wishing to operate their own Jump Swim School to supply learn-to-swim services to children. According to its website Jump Swim has over 65 swim school locations in Australia, and has established operations in Brazil, New Zealand and Singapore.

ACCC secures freezing order against Jump Swim

On 7 June 2019 Justice O’Bryan of the Federal Court made orders freezing the assets of Jump Loops Pty Ltd (Jump Loops) and its parent company Swim Loops Holdings Pty Ltd (collectively Jump Swim), various associated entities of Jump Swim  and Jump Swim’s managing director, Ian Campbell.  His Honour also ordered that Jump Swim and the associated entities identify their liquid assets world-wide comprising cash securities and deposits of any kind held with a financial institution.

Why is the ACCC taking action?

The ACCC instituted proceedings against franchisor Jump Swim in the Federal Court, alleging that it made false, misleading or deceptive statements about Jump Swim School franchises, in breach of the Australian Consumer Law (the ACL). The freezing order was sought prior to commencing the misleading and deceptive conduct action, for reasons as explained below.

The ACCC is alleging that Jump Swim made representations in its promotional material that a prospective Jump Swim School franchisee would have an operational swim school within 12 months of signing a franchise agreement, when it did not have reasonable grounds for making that statement.

The ACCC claims that there are over 90 Jump Swim franchisees who did not receive an operational swim school within 12 months or at all. The initial costs of setting up a Jump Swim School generally ranged from approximately $150,000 to $175,000.

What is a freezing order?

A freezing order is a form of injunction restraining a party from parting or dealing with property prior to a final court judgment. 

The purpose of a freezing order is to prevent the frustration or inhibition of the Court’s process by seeking to avoid the danger that a judgment or prospective judgment of the Court will be wholly or partly unsatisfied because assets have been dissipated. 

The principles for granting a freezing order are well established:

• the applicant must show that there is a reasonably arguable case
• the applicant must show that there is a risk of dissipation if the injunction is not granted
• the applicant must show that the balance of convenience favours granting the injunction. 

The Court’s judgement on the freezing order application

In regards to the first condition, Justice O’Bryan was satisfied that the evidence produced by the ACCC shows that there was at least a serious question to the tried whether the alleged conduct of Jump Swim amounted to contraventions of the ACL. This appeared to include conduct that the franchises were sold on a ‘turn-key’ basis, to be handed over and ready to operate and, a representation in the promotional material that there would be a “12 month turnaround from sign to open” of the franchise. The Court referred to the ACCC’s claim that representations made were false, misleading or deceptive and/or likely to mislead or deceive because some 90 franchisees were not provided with an operational franchise within 12 months. 

As to the second condition, His Honour was also satisfied that there was a reasonable apprehension that assets owned directly or indirectly by Jump Swim and Mr Campbell would be dissipated so as to frustrate the relief sought by the ACCC. This apprehension arose from the fact that Mr Campbell and Jump Swim were facing multiple proceedings in Australia, new corporate entities had been recently created to acquire and take over the franchise business and Mr Campbell had established similar business operations in America and New Zealand (and there was evidence of material financial transactions between the Jump Swim Group and the overseas entities).  

Lastly, in relation to the balance of convenience, Justice O’Bryan noted that the application was brought on an ex-parte basis to avoid risk of the dissipation of assets. An ex-parte application is a Court proceeding where only the party seeking the Court order appears before the Court. In those circumstances, His Honour ordered that the orders would continue until 12 June 2019, at which time the prospective respondents and associated entities would have an opportunity to be heard. On this basis, it was found that the prejudice to the prospective respondents and associated entities would be temporarily confined. The freezing orders have now been extended until the hearing and determination of the substantive proceedings.

The misleading and deceptive conduct proceedings in the Federal Court

After obtaining the freezing orders the ACCC instituted proceedings in the Federal Court against Jump Swim, alleging that it made false, misleading or deceptive statements about Jump Swim School franchises in contravention of the ACL, as described above. Mr Campbell is also a respondent in the proceedings. The ACCC claims that Mr Campbell was involved in the conduct.

According to the ACCC’s Concise Statement dated 17 June 2019, the ACCC claims that Jump Swim made false or misleading representations in its promotional material about the time it would take to set up an operating swim school business franchise in breach of sections 18 and 29 of the ACL, and that Jump Loops accepted payment from franchisees without providing operational franchises within the time specified or within a reasonable time, and in circumstances where it did not have reasonable grounds to believe it could do so in contravention of section 36 of the ACL. 

In a media release dated 18 June 2019 the ACCC says that many franchisees were not provided with an operational swim school within the represented time frame of 12 months or at all. The ACCC Chair Mick Keogh also said “Franchisors need to take their obligations under the Australian Consumer Law seriously. Purchasing a franchise is a big decision, and people looking to open a franchise business rely on the information from the franchisor being accurate…We allege this conduct caused substantial harm to franchisees who paid significant sums but did not receive an operational swim school within the time specified, or at all”.

The ACCC is seeking injunctions, declarations, pecuniary penalties, redress for franchisees, disqualification orders, and orders as to findings of fact, and costs.

What this means for Jump Swim franchisees 

Jump Swim franchisees should keep informed of the ACCC’s action as it proceeds, as the outcome may directly affect them. Should there be orders made against Jump Swim or if Jump Swim becomes insolvent, this could have immediate repercussions for them. 

Are you a franchisor or franchisee?

These proceedings act as a reminder to all potential franchisees to do their own due diligence before entering into a franchisee agreement and making payment. 

Franchisors also need to be very careful about what promises they make to prospective franchisees.

Williams + Hughes can assist you in several ways, including the following:

• drafting or reviewing franchise agreements
• advising in relation to exiting a franchise arrangement
• advising in relation to misleading and deceptive conduct by franchisors
• advising in relation to disputes concerning the franchise agreement, non-solicitation and restraint of trade of former franchisees, and claims relating to competition by the franchisor or other franchisees.

For further information on how we can assist please contact Leanne Allison or Damian Quail on +61 8 9481 2040 or leanne.allison@whlaw.com.au and damian.quail@whlaw.com.au.

This article is general information only, at the date it is posted.  It is not, and should not be relied upon as, legal advice.  This article might not be updated over time and therefore may not reflect changes to the law.  Please feel free to contact us for legal advice that is specific to your situation.

Peanut Butter Battle of Jars and Trade Marks

Peanut butter is big business in Australia.  In 2017 the Australian peanut butter market was worth $110 million in annual sales. A brand recognisable to many Australians - Kraft peanut butter - has been available for purchase in Australia since 1935.

The Federal Court recently handed down judgment in a dispute between Bega Cheese Limited and Kraft Foods Group over the appearance of product packaging (trade dress, also known as “get up”) and copyright in a “peanut butter jar with a yellow lid and a yellow label with a blue or red peanut device” (Kraft Foods Group Brands LLC v Bega Cheese Limited (No 8) [2019] FCA 593).

The background to the dispute is complicated and involved various restructurings, licence agreements and assignments between the parties. In 2017 Bega bought the peanut butter business and associated assets and goodwill from Mondelez Australia (Foods) Ltd, a subsidiary within the global Kraft Foods group. After the sale was concluded Kraft temporarily exited the peanut butter market in Australia. Subsequently Kraft returned and wanted to continue to use the distinctive colours and get up previously used for Kraft branded peanut butter products, as depicted below.

However, after closing off the deal between Bega and Mondelez, Bega had commenced selling Bega branded peanut butter products using a trade dress that Kraft claimed constituted misleading and deceptive conduct, breach of contract, passing off and trade mark infringement. Bega countersued and alleged that Kraft had infringed their intellectual property rights and engaged in misleading and deceptive conduct. Bega claimed that as part of the deal with Mondelez, Bega had bought the right to use the distinctive trade dress, including the goodwill associated with it. Bega’s peanut butter jars are shown below.
 

                                                                                                   
On 1 May 2019 the Federal Court ruled in favour of Bega, finding that it had the right to use the distinctive peanut butter trade dress. The Court confirmed that the sale or licensing of unregistered trade marks is not possible without assigning the underlying goodwill of the business. It came to the conclusion that Bega had acquired all rights to the peanut butter trade dress, including the underlying goodwill, and could continue using it in relation to its peanut butter. The Court also awarded damages against Kraft/Heinz for infringing Bega’s intellectual property.

A key factor in the Court’s decision was the fact that the trade dress previously owned by Kraft could have been protected as a registered trade mark but it had never in fact been registered. The Court fight between Bega and Kraft could likely have been avoided if a registered trade mark had been obtained. Instead, both sides had to go to Court to try prove that they had exclusive rights to the use of the unregistered trade mark.

Benefit of registering trade marks

The case is a timely reminder of the value of a registered trade mark.  If Kraft had registered the distinctive Kraft peanut butter trade dress as a trade mark it would have been in a much stronger position to retain rights in its intellectual property.

In addition to trade dress, trade marks can also be a shape (the Coca Cola bottle), a colour (purple for Cadbury chocolates or the orange colour of Veuve Clicquot’s champagne), a sound (the Nokia ring tone) and even a scent (eucalyptus scented golf tees).

Colour, shape, lids, jars and trade dress are important features and should be protected as registered trade marks.

The best protection by far is to register the trade mark under the Trade Marks Act 1995 (Cth). This solution is low cost, and results in an Australia-wide, potentially perpetual, statutory monopoly in the brand. Also, once a mark is registered, enforcement is relatively simple as you don’t need to prove title.

A search of the trade mark register shows that Bega has now filed two trade mark applications to protect the trade dress in the smooth and crunchy versions of the peanut butter.

                                                                                                                      
  
For further information on how these changes may impact on your business please contact Madeleen Rousseau, Special Counsel, on +61 8 9481 2040 or madeleen.rousseau@whlaw.com.au.

This article is general information only, at the date it is posted.  It is not, and should not be relied upon as, legal advice.  This article might not be updated over time and therefore may not reflect changes to the law.  Please feel free to contact us for legal advice that is specific to your situation.