One of the country’s largest dairy processors has been penalized for various breaches of the industry code, including for featuring a mix of no-fault termination clauses in milk supply agreements.

In a federal court ruling, Lactalis Australia was ordered to pay AU$950,000/US$640,000 for committing numerous breaches of the Dairy Code of Conduct in relation to the 2020/21 milk season. This includes a penalty of AU$50,000 for one contravention of section 12; AU$150,000 for nine contraventions of section 13, and AU$750,000 for 384 contraventions of section 17.

Enforced by the Australian Competition and Consumer Commission (ACCC), the Dairy Code was introduced in 2020 to set minimum standards for business conduct between suppliers and processors, and to mitigate common market failures. This was the first time that the ACCC took enforcement action against a dairy processor for code breaches and the first time Lactalis Australia was found to have breached the code.

In a court filing dated July 23, 2021, the ACCC aimed several accusations at Lactalis Australia. The body alleged the dairy processor had failed to publish a standard for of milk supply agreements (MSAs) within the required timeline. The ACCC also argued that on nine occasions, standard form MSAs published by Lactalis contained clauses that would allow the processor to unilaterally terminate in cases that did not involve a material breach. An example of this was a non-disparagement clause prohibiting farmers from publicly criticizing processors, key customers or other stakeholders.

The ACCC also alleged that Lactalis entered in 384 MSAs that contained an ‘offending combination of clauses’, e.g. such that rendered non-exclusive supply agreements ‘inefficient and commercially unviable’ according to the ACCC.

The Commission argued that Lactalis should be fined over AU$1.3m for all breaches, while the processor submitted that the total amount should be AU$215,000.

‘A chilling effect on farmers’

In a judgement report dated July 25, 2023 and seen by DairyReporter, Lactalis Australia is called ‘a substantial employer’ that employs more than 2,500 people and contracted with 400 farmers in 2020, purchasing around 11% of the country’s total raw milk supply.

In determining the penalty, the court took as a benchmark Lactalis’ profits for 2020 and 2021, noting that the penalty should be ‘of such size as to have a general deterrent effect’. While Lactalis’ revenue came to around AU$1.9bn in 2020 and 2021, the processor spent around AU$1bn on acquiring milk, netting profits of around AU$33m and AU$44m respectively.

For contract entry contraventions which included 384 cases of Lactalis entering in agreements with ‘impermissible combination of terms’, the court concluded that ‘whilst it is beyond doubt that the MSAs were of great consequence to farmers, the contraventions in this case concerned aspects of the MSAs that were of relatively limited significance to the overall arrangements between Lactalis and dairy farmers in the relevant years’ and ordered a penalty of AU$750,000 in total, or around AU$1,950 per breach. The ACCC had argued for a penalty of AU$1m to be imposed.

“This will suffice to deter processors who might otherwise fail to ensure that the terms of their MSAs comply with the Dairy Code, regardless of whether they are larger or smaller than, or the same size as, Lactalis,” the presiding judge Derrington said.

The court also determined Lactalis should pay AU$150,000 for publishing nine MSAs that contained no-fault termination clauses (around AU$16,700 per breach) and imposed a penalty of AU$50,000 for the processor’s failure to publish standard form MSAs on its website.

The judge said: “There is no evidence of any harm actually being suffered by any farmer as a result of the inclusion of the offending clauses in the MSAs that were published. No farmer has come forward alleging that they did not asperse Lactalis or other industry participants because they were concerned that their MSA would be terminated. Indeed, there was no evidence from even one farmer that they noticed or were concerned about the public denigration clause or the consequences of breaching it.

“However,…, one cannot rule out the possibility that the existence of the clause had a chilling effect on the farmers who were subject to it, such that they did not speak up when they otherwise might have done so.”

Reacting to the ruling, the ACCC deputy chair Mick Keogh commented: “We took action because we considered Lactalis’ conduct would reduce transparency in the industry and served to perpetuate systemic bargaining power imbalances between processors and farmers.

“The Code was introduced to help dairy farmers make informed choices about where they sell their milk by ensuring there is transparency in pricing agreements and by allowing them to compare agreements from different processors in a timely fashion.

“These were the first contested proceedings under the Dairy Code and the outcome is an ongoing reminder that processors who fail to comply with the Code may face significant penalties.” – Mick Keogh, ACCC

“Ensuring that small businesses receive the protections they are entitled to under industry codes continues to be one of the ACCC’s enduring compliance and enforcement priorities.”