INSIGHT

Your jointly proposed pecuniary penalty may not be appropriate

By Christopher Kerrigan, Felicity McMahon, Alexandra McCaughan, William Georgiou
ACCC ASIC Dispute Resolution

In brief 6 min read

The decision of the Full Federal Court in the appeal of Volkswagen v ACCC1 (Volkswagenis an important reminder of the court's supervisory role in approving pecuniary penalties jointly proposed by parties to a proceeding.

It also reinforces an identifiable increase in the value of pecuniary penalties sought and obtained by the Australian regulators in enforcement proceedings since 2015.

We examine the decision and set out the range of principles and matters you should consider when engaging with regulators and drafting joint penalty submissions.

Key takeaways

  • The decision is an important reminder that the court will actively assess whether a penalty jointly proposed by the parties is appropriate in all of the circumstances, and may exercise its discretion to significantly increase the amount where it is not satisfied that is the case. In Volkswagen, it increased the amount by $50 million, from $75m to $125m.
  • The decision will likely further embolden the ACCC as well as Australia's financial services regulators to continue to push for higher penalties. We have observed an upward trend since 2015 in the value of pecuniary penalties sought in regulatory enforcement proceedings. As discussed in previous Insights, that upward trend is expected to continue, particularly in the case of the ACCC and ASIC given recent significant increases in the maximum penalties now available for contraventions of the Australian Consumer Law (ACL), the Corporations Act 2001 (Cth) and certain other financial services laws.
  • We have also identified increasing emphasis by regulators during their investigations on matters relevant to penalty as well as liability. We expect this trend to continue.

Decision at first instance

In 2016 the ACCC commenced civil penalty proceedings against Volkswagen and its Australian subsidiary in respect of alleged contraventions of the ACL. The contraventions concerned what the ACCC characterised as deception about the exhaust emissions of certain Volkswagen-branded vehicles imported into Australia for sale.

Volkswagen initially defended the proceedings, but ultimately reached a settlement with the ACCC and entered into a Statement of Agreed Facts in which Volkswagen agreed to pay a $75 million penalty.

The Primary Judge, His Honour Justice Foster, rejected the parties' penalty submissions and ordered Volkswagen to pay $125 million. His Honour described the proposed penalty amount as 'manifestly inadequate' and was not persuaded that it was sufficient 'to meet the overriding objects of specific deterrence and general deterrence…'.

In imposing a penalty of $125 million His Honour had regard to the following matters (among other things):

  • The size of contravening entity, with Volkswagen's gross sales revenue for 2011-2015 being between €159.3 billion and €213.3 billion.2
  • The failure of the parties to provide reasons for the penalty with reference to those matters the court was required to consider.3 His Honour characterised the proposal as simply reflecting an amount that Volkswagen '… is prepared to pay and which the ACCC is prepared to accept in order to settle…'4
  • Senior management involvement, covert nature and deliberateness of conduct.5
  • The lack of contrition and co-operation by Volkswagen.6

Decision on appeal

Volkswagen appealed Justice Foster's decision. The central issue on appeal was whether His Honour's exercise of discretion in imposing a penalty of $125 million was, among other things, manifestly excessive. The Full Federal Court dismissed the appeal and found that the penalty 'was not excessive, let alone manifestly excessive.'7 The court was not persuaded that any penalty less than the $125 million would be appropriate.

What does this mean for you?

  • The decision reflects the increasing willingness of the Federal Court to test, and where appropriate reject or amend, pecuniary penalties jointly proposed by parties to a proceeding.8
  • The decision is a reminder that a guiding principle in calculating an appropriate civil pecuniary penalty will be the need for specific and general deterrence. As articulated by the Honourable Justice French, as he then was, in the seminal decision of TPC v CSR Ltd [1991] ATPR 41-076, the penalty should be fixed at an amount that it is a measurable and effective deterrent, and not merely viewed as a 'cost of doing business'.
  • In addition to the general principle deterrence, the court will have regard to a range of principles and matters including the 'French Factors' identified in TPC v CSR Ltd. In your conversations with regulators, and when drafting any joint penalty submissions, you should have specific regard to those factors and record clear and persuasive reasons as to why the proposed penalty is appropriate.
  • In calculating penalty, the following matters, in particular, may be considered aggravating factors that justify a higher penalty amount:
    • an entity's significant size and global turnover;
    • senior management knowledge of, and involvement in, the contravening conduct;
    • deliberateness of conduct;
    • attempts to cover up conduct; and
    • lack of contrition and co-operation by the contravening entity.
  • The factors which may decrease a penalty amount include the extent to which you can demonstrate steps to pro-actively address and respond to non-compliance, eg acting quickly to investigate, implement customer remediation and self-report. As discussed in our Insight in May 2020, Bupa was ordered to pay a discounted pecuniary penalty due to its early cooperation and willingness to implement a comprehensive compliance program. There was no equivalent mitigating conduct in Volkswagen's case.
  • Increased regulatory risk as regulators are emboldened to seek higher penalties. There has been an identifiable increase in the value of pecuniary penalties sought and obtained by AUSTRAC, ASIC and the ACCC in regulatory enforcement proceedings since 2015. AUSTRAC holds the record for the two most significant pecuniary penalties issued by Australian regulators, with the Volkswagen decision closely behind, representing the high watermark in respect of ACL contraventions. Consistent with ASIC's 'why not litigate' discipline, comparing the 2018 and 2020 calendar years, there has been a 64% increase in the number of civil penalty proceedings commenced, and the largest pecuniary penalty for a single ASIC enforcement action was handed in down in October 2020 with AGM Markets Pty Ltd and two of its authorised representatives ordered to pay $75 million for systemic unconscionable conduct.9
Table 1: Regulatory enforcement penalties July 2015 – present10

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We expect that this trend will continue. In 2017, following a string of cases in which courts commented on proposed penalties being low, ACCC Chair Rod Sims conceded: 'We may have been too cautious [on penalties] in the past,'. Following subsequent amendments to the ACL penalty regime, since September 2018 the ACCC has been in a position to seek higher penalties for consumer law breaches (see Insight), and it is likely that, post-2018, conduct comparable to Volkswagen's would attract higher penalties today. Similarly, where penalties are not jointly proposed by the parties, the ACCC has had past success in appealing and seeking increases in fines, as happened in the Nurofen cases in 2016/2017, in which the penalty was increased from $1.7 million to $6 million on appeal to the Full Federal Court (which Allens covered here).

Since March 2019, ASIC has also had access to a similarly strengthened civil and criminal penalty regime for a wide range of misconduct under financial services laws, and has made plain its intention to take advantage of these powers (see Insight). In its 2020-24 Corporate Plan, ASIC stated that its priorities include …'taking high deterrence-based enforcement action, using ASIC's powers or provisions that carry new or higher penalties'.11 In September 2020, Daniel Crennan, then ASIC Deputy Chairman, signposted that once the COVID-19 economic emergency is over: 'the penalties will get higher and higher …. they should deter institutions from ignoring ongoing and systemic misconduct'.

Footnotes

  1. Volkswagen v Australian Competition and Consumer Commission [2021] FCAFC 49 (Volkswagen Appeal).

  2. Australian Competition and Consumer Commission v Volkswagen Aktiengesellschaft [2019] FCA 2166 [220].
  3. Ibid, see especially [238].

  4. Ibid [238].

  5. Ibid [234].

  6. Ibid [263].

  7. Volkswagen Appeal [6].

  8. See for example: Australian Competition and Consumer Commission v Admiral Mechanical Services Pty Ltd [2007] FCA 1085; Australian Competition and Consumer Commission v Australian Abalone Pty Ltd [2007] FCA 1834; Australian Competition and Consumer Commission v Ferndale Recyclers Pty Limited [2004] FCA 1597; Australian Competition and Consumer Commission v FFE Building Services Ltd [2003] FCA 1542.

  9. ASIC Media Release, '20-246MR Federal Court imposes $75 million penalty on OTC derivative issuer AGM Markets and former authorised representatives OT Markets and Ozifin' (19 October 2020) available here.

  10. Estimates only, based on significant criminal and civil pecuniary penalties for period 1 July 2015 – 1 April 2021.

  11. ASIC, 'ASIC Corporate Plan 2020-24: Focus 2020-21' (August 2020) available here, 20.