Following an 18 month investigation by the Australian Competition and Consumer Commission (ACCC), Australia's biggest telecommunications provider, Telstra, has admitted it breached the Australian Consumer Law (ACL) and acted unconscionably when sales staff at five licensed Telstra-branded stores signed up 108 Indigenous consumers to multiple post-paid mobile contracts which they did not understand and could not afford between January 2016 to August 2018.

The ACCC announced today that it is bringing proceedings against Telstra in the Federal Court and that Telstra has agreed to the filing of consent orders and joint submissions in support of penalties amounting to A$50 million. This would be the second-highest total penalty ever imposed under the ACL.

In addition to the remedies to be determined by the Federal Court, the ACCC has accepted a court-enforceable undertaking in which Telstra undertakes to provide remediation to affected consumers, improve its existing compliance program, review and expand its Indigenous telephone hotline and enhance its digital literacy program for consumers in certain remote areas.

The nature of the unconscionable conduct in this case, and the scale and (lack of) proportionality of the proposed penalties to the economic benefits derived from unconscionable conduct, highlight the need for companies doing business in Australia to carefully examine their business practices, policies and incentives, consider their customer base and proactively identify any weaknesses that could enable unconscionable conduct to arise or flourish at any level of their organisation.

Key take aways:

1. Scale and proportionality of the proposed penalties

If imposed by the Federal Court, a penalty amounting to A$50 million would exceed the ACCC's previous highest penalty for unconscionable conduct of A$26 million imposed against vocational training provider Empower Institute in 2019 for (among other things) targeting vulnerable consumers for enrolment in government-funded courses. In that case, Empower had received over A$56 million in Commonwealth funding to provide educational courses, perhaps conveying a sense of proportionality between the penalty and the economic benefit derived from the unconscionable conduct.

Notably, the proposed A$50 million penalty which Telstra has consented to does not appear to be proportionate to the economic benefit that may have been derived by Telstra from its unconscionable conduct. Rather, such a penalty would seem to exceed potential economic benefits that may have been derived by Telstra from the alleged unconscionable conduct by at least a factor of 50, given the ACCC reports that the penalty relates to 108 affected customers with an average debt of approximately A$7,400 per affected customer (amounting to just under A$800,000).

The A$50 million penalty amount does not factor in additional costs that will be incurred by Telstra in remediation to affected consumers and in improving its existing compliance program pursuant to the separate court-enforceable undertaking Telstra has provided to the ACCC.

This sends a clear signal to companies doing business in Australia that the ACCC will seek penalties that reflect the seriousness of unconscionable conduct and the ACCC's goal of deterring future conduct of a similar nature, rather than being satisfied with penalties that are merely proportionate to the financial benefits derived from the relevant conduct. Thus, a company's exposure for unconscionable conduct may be many times greater than any financial benefits derived from the conduct.

On this point, the maximum penalty for breach of a range of provisions in the ACL (including the prohibitions on unconscionable conduct) was increased to A$500,000 for individuals and, for corporations, the greater of: (a) A$10 million; (b) three times the benefit received from the contravention; or (c) if the benefit cannot be calculated, 10% of the annual turnover in the preceding 12 months. The penalty regime applies on a per contravention basis, with scope for the Court to determine that multiple contraventions have occurred, for example, in cases where multiple consumers have been affected by unconscionable conduct, or an organisation has engaged in a series of engagements with consumers that could each be considered to constitute unconscionable conduct. This flexibility means there is plenty of scope for the A$50 million proposed penalty to be upheld (or even increased) by the Federal Court and for large penalties to be upheld in similar cases of unconscionable conduct going forward.

2. Nature of the conduct

The Telstra case also reinforces the understanding that to be considered unconscionable, conduct must be more than simply unfair - in particular, Australian courts have found transactions or dealings to be "unconscionable" when they are deliberate, involve serious misconduct or involve conduct which is clearly unfair and unreasonable. 

According to the ACCC, Telstra's alleged unconscionable conduct was serious and wide-ranging and included:

  • staff using "unfair selling tactics" and taking advantage of a "substantially stronger bargaining position" when selling post-paid mobile products on behalf of Telstra;
  • staff exploiting "social, language, literacy and cultural vulnerabilities of… Indigenous consumers" including in dealing with consumers who "spoke English as a second or third language, had difficulties understanding Telstra’s written contracts";
  • staff not providing a "full and proper explanation of consumer’s financial exposure under… contracts" including in relation to consumers that "were unemployed and relied on government benefits or pensions as the primary source of their limited income";
  • staff "falsely representing that consumers were receiving products for 'free'"; and
  • staff manipulating credit assessments, "so consumers who otherwise may have failed its credit assessment could enter into post-paid mobile contracts".

It is interesting that Telstra has consented to a substantial penalty despite the ACCC conceding that Telstra's "board and senior executives were unaware of the improper sales practices when they occurred". This may indicate that a lack of actual knowledge or awareness of unconscionable conduct by senior management was not deemed to be a material mitigating factor by the ACCC in light of Telstra's acknowledgement that it "had no effective systems in place to detect or prevent this type of conduct". 

Another exacerbating factor to consider is that Telstra "became increasingly aware of elements of the improper practices by sales staff at Telstra licensed stores over time" but "failed to act quickly enough to stop it." According to the ACCC, "these practices continued and caused further, serious and avoidable financial hardship to Indigenous consumers".

These factors highlight important lessons for companies doing business in Australia when it comes to mitigation of risks and penalties associated with unconscionable conduct. In particular, organisations must:

  1. develop effective systems to detect or prevent unconscionable conduct from occurring in the first place; and
  2. act quickly when put on notice of actual or potential unconscionable conduct occurring at any level with the organisation.

The final ruling of the Federal Court on the adequacy of the proposed A$50 million penalty will likely provide further insights on the basis for assessing penalties for unconscionable conduct.

The legal backdrop:

The ACL contains provisions:

  • prohibiting unconscionable conduct within the meaning of the unwritten law (s. 20 ACL);
  • prohibiting unconscionable conduct in connection with goods or services (s. 21 ACL); and
  • setting out factors the court will consider when deciding whether conduct is unconscionable (s 22 ACL).

Section 20 relies on the interpretation of "unconscionable conduct" that has developed under case law, and applies when one party knowingly exploits the "special disadvantage" of another. Traditional factors that may give rise to a special disadvantage include illiteracy or lack of education, poverty or need, age, infirmity of body or mind and lack of explanation and assistance when necessary.

Section 22 of the ACL sets out a long list of factors that courts may consider in determining whether a contravention of section 21 has occurred, including:

  • the relative bargaining strength of the parties;
  • whether any conditions were imposed on the weaker party that were not reasonably necessary to protect the legitimate interests of the stronger party;
  • whether the weaker party could understand the documentation used; and
  • the use of undue influence, pressure or unfair tactics by the stronger party.

These provisions apply widely to trade or commerce activities, including debt collection activities.