Volkswagen Aktiengesellschaft v Australian Competition and Consumer Commission  FCA 2166
What you need to know
- The Full Federal Court has dismissed Volkswagen's (VW) appeal of a $125m civil penalty imposed by Justice Foster, which was $50m higher than the penalty agreed by VW and the ACCC in a negotiated settlement.
- The record $125m penalty dwarfs previous penalties for breaches of the Australian Consumer Law (ACL), but was "not excessive, let alone manifestly excessive".
- Corporations that breach the ACL face potentially massive penalties particularly now that maximum penalties per breach (the greater of $10m, three times the benefit obtained or, if that cannot be determined, 10% of annual turnover in Australia) are significantly higher than those applicable to VW's conduct ($1.1m per breach).
- Courts have discretion to determine penalties and, if appropriate, impose significantly higher penalties than those jointly proposed by parties.
- The adequacy of agreed penalties is likely to be more closely scrutinised by Courts going forward, notwithstanding public policy interests in promoting certainty of outcomes in civil enforcement proceedings.
What you need to do
- Ensure that you have an effective ACL compliance program. The "costs" of not complying with the ACL have never been greater. A robust compliance program can minimise the risk of breaches and result in lower penalties.
- Parties engaged in settlement negotiations with regulators, or considering that as an option, need to appreciate the risk of a Court rejecting an agreed penalty and substituting it with a significantly higher one. The risks and benefits of settling need to be carefully weighed up. A very aggressive negotiating strategy may be counterproductive.
The first instance decision
Foster J imposes a $125m penalty instead of the jointly proposed $75m penalty
We covered this decision in our article Federal Court of Australia rejects the ACCC's 'dieselgate' settlement and imposes a record $125 million fine on Volkswagen for breaches of the ACL. In brief:
- The ACCC brought proceedings against VW concerning the global scandal known as "dieselgate". In 2015, the Environmental Protection Agency in the United States uncovered that VW's engineers developed "Two Mode" software that operated to deliberately conceal the true nature of nitrogen oxide (NOx) emissions from VW's diesel vehicles. 'Mode 1' of the software operated under testing conditions to produce NOx emissions that were compliant with emissions limits in applicable standards. However, when driven on the road, the vehicles switched to 'Mode 2' which produced substantially higher NOx emissions that exceeded emissions standards.
- The ACCC brought proceedings against VW, alleging that VW made false representations to the Australian Government and Australian consumers about the exhaust emissions of certain VW-branded vehicles which were imported into Australia for sale, and their compliance with Australian diesel emissions standards, in breach of the ACL.
- VW initially defended the proceedings, but ultimately reached a settlement with the ACCC. As part of the settlement, VW admitted it breached section 29(1)(a) of the ACL on 473 separate occasions, in respect of 57,082 vehicles, when it sought approval to import the vehicles into Australia, and when it sought to obtain "Green Vehicle" ratings for the vehicles. VW and the ACCC jointly submitted that a penalty of $75 million was an appropriate penalty in respect of the breaches.
- The Court (per Foster J) found that the penalty proposed by VW and the ACCC was "manifestly inadequate", and instead imposed a penalty of $125 million. (The previous highest penalty for breaches of the ACL was $26.5 million, imposed on Empower Institute for unconscionable conduct.)
Full Federal Court dismisses VW's appeal, despite "minor error"
VW appealed the primary judge's decision on penalty on seven grounds, contending that it was manifestly excessive. The ACCC supported VW's appeal, although it did not agree with all of VW's contentions. The Court appointed an amicus curiae, as there was effectively no contradictor.
On 9 April 2021, the Full Federal Court (Wigney, Beach and O'Bryan JJ) dismissed the appeal. The Court found that the primary judge made a minor error in construing or applying section 224(2)(c) of the ACL (which requires regard to be had, in setting penalties, to whether the person previously engaged in similar conduct), but that the error did not warrant appellate intervention because it was unlikely to affect the result. VW did not make out any of its other appeal grounds.
The Court's consideration of VW's appeal grounds illustrates the challenges in setting penalties and assessing their appropriateness. As the Court observed:
"...there is no single or correct penalty and...the process involved in settling on an appropriate penalty is far from scientific or mathematical, but instead involves the weighing or balancing of many, often conflicting, features and considerations."
Some of the key factors at play in assessing penalties that are worth highlighting from the Court's decision are as below.
1. Whether the corporation has previously been found to have engaged in similar conduct, and is a "good corporate citizen"
VW contended that the primary judge erred in failing to have regard to the fact that VW had not previously been found to have engaged in any similar conduct, in circumstances where s224(2)(c) of the ACL required this to be taken into account.
The Court held that, for the purposes of assessing penalties, past conduct can be an aggravating factor (if the contravener had been found to have previously engaged in similar conduct) or a mitigating factor (if the contravener had not engaged in similar conduct in the past, indicating prior good character). The primary judge erred in not considering whether VW's absence of prior contraventions was capable of constituting a mitigating circumstance (leading to a lower penalty).
However, VW did not submit to the primary judge that absence of prior contraventions was a mitigating factor in the particular circumstances of the case; neither did the ACCC – submissions were silent on that issue. The mere fact that VW had not engaged in similar conduct in the past did not mean that it ought to be penalised on the basis that it was a good corporate citizen at the time of the contraventions.
The Court observed:
"[The fact that VW had not previously been found to have contravened the ACL] was scarcely a weighty or material consideration in all the circumstances. It did not provide a sound basis for finding that, prior to its contravening conduct, VW had been a good corporate citizen, or had an acceptable corporate culture of compliance, or that it was unlikely to be a repeat offender. The objective circumstances of the contravening conduct and aspects of VW's subjective circumstances, including the absence of any contrition, suggested otherwise."
It's clear that to benefit from this mitigating factor, corporations need to be able to evidence their culture of compliance (including, for example, having a compliance program, regular training for staff on ACL compliance and a complaints handling system).
2. Whether the penalty is appropriate and sufficient to meet the statutory objectives of specific and general deterrence
VW submitted that the primary judge "went well beyond what was necessary to achieve deterrence, and strayed into retribution". In particular, the proposed $75 million penalty exceeded, by millions of dollars, the estimated aggregate profit derived from the sale of the relevant VW vehicles in Australia.
The Court held that there is no principle that the appropriate penalty is "tethered to or limited by the amount of profits" derived from the contravention, and "no principle that the penalty should only exceed the profits derived by a certain amount". This is too simplistic; contraveners who have displayed no contrition or remorse and large companies with vast resources ought to expect higher penalties. Additionally, where the contravening conduct is concealed and not easily detected, a penalty that is "many multiples of the profits" from the conduct may be appropriate to ensure deterrence.
Observing that VW is one of the largest corporations in the world (in the period during which the contravening conduct occurred, VW generated gross sales of between € 159.3-213.3 billion), the Court held that it was open to the primary judge to conclude that the agreed penalty was manifestly inadequate to secure both specific and general deterrence:
"Virtually every objective feature of Volkswagen's conduct suggested that a very significant penalty was required, irrespective of the estimated profit derived from the contravening conduct. Volkswagen's conduct was deliberate, calculated, systematic and covert, continued over an extended period of time and was known about, and engaged in, by senior management. It involved the deception of the Australian government and, ultimately, consumers about a highly significant matter: harmful NOx emissions generated by relevant VW-branded vehicles. As for its subjective circumstances, in addition to having vast resources, VW was found to have shown no contrition, to have provided no assistance to the Commission in its investigations and to have taken a combative rather than cooperative approach to the relevant litigation...."
3. Penalties imposed in previous cases are "of little to no relevance" because those cases turn on their own facts and circumstances
The Court considered that "the egregious and deliberately deceptive nature of VW's conduct in this case was of an unprecedented kind and scale", concluding that, in circumstances where the potential maximum aggregate penalty was at least $500 million, a penalty of $125 million could not be said to be manifestly excessive.
This is notwithstanding that the primary judge had characterised the 473 contraventions as having been committed in two courses of conduct.
4. Penalties imposed in other jurisdictions are of limited weight, even if there is some overlap in the contravening conduct
The Court held that the primary judge was right to conclude that fines of US$2.8 billion and €1 billion, which had been imposed on VW in the US and Germany, respectively, did not warrant a smaller penalty in Australia.
5. The Court can take into account consumer harm, even if there is no admission or evidence before the Court of any loss to consumers, and such loss is not compensable or quantifiable
The Court held that it was open to the primary judge to infer from the agreed facts and circumstances (and take into account in setting the penalty) that VW's contravening conduct had resulted in harm to consumers and the environment, even if that harm was not necessarily quantifiable or monetary in nature.
Implications for settlement of civil penalty proceedings
The Full Federal Court's decision may be seen as increasing uncertainty in respect of settlement of civil penalty proceedings. This could disincentivise parties from engaging in settlement discussions with the ACCC.
While it has long been the position that the agreement of the parties cannot bind the Court to impose a penalty which it does not consider to be appropriate, and that Courts will not simply "rubber stamp" agreed penalties, the Full Federal Court's decision does pave the way for closer scrutiny of whether agreed penalties are high enough.
In particular, the Full Federal Court encourages scepticism about compromise on the part of the regulator in agreeing to the penalty:
"The regulator's submissions, or joint submissions, must be assessed on their merits, and the Court must be wary of the possibility that the agreed penalty may be the product of the regulator having been too pragmatic in reaching the settlement".
Parties should carefully consider their negotiating strategy. An aggressively negotiated low agreed penalty is more likely to be rejected by the Court, and replaced with a potentially significantly higher penalty.
Parties should also ensure that joint submissions on penalties comprehensively address each of the penalty factors and how they impact on the proposed penalty.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.