In the wake of the Financial Services Royal Commission and increasing litigation from Australia’s corporate regulators, Volkswagen Aktiengesellschaft v Australian Competition and Consumer Commission  FCAFC 49 (VW v ACCC) is the latest instalment in a shift in judicial decision making surrounding corporate misconduct.
Historically, where an entity has admitted contraventions of a regulatory regime, the entity and a regulator may agree on what they think is an appropriate pecuniary penalty and submit that penalty to the court for consideration. Although courts are not bound by the parties’ agreed penalty, they have often approved such agreements: see Trade Practices Commission v Allied Mills Industries Pty Ltd (No 5) (1981) 60 FLR 38 at 41.
VW v ACCC indicates that in cases involving ‘egregious’ breaches of Australian law, courts may be increasingly prepared to reject an agreement between the parties and impose a higher penalty if it is appropriate in all the circumstances to do so. In light of VW v ACCC, regulators should carefully assess the basis on which they submit a proposed penalty to the court to ensure that the penalty is consistent with the underlying factual matrix and the magnitude of the contravening conduct.
The decision in VW v ACCC – conduct of the ‘worst kind imaginable’
In October 2015 it came to light that that by using prohibited engine control software, Volkswagen was able to falsify its vehicles’ emissions ratings and pass pollution tests. Volkswagen had been doing so in a course of conduct stretching over more than four years.
The Australian Competition and Consumer Commission (ACCC) commenced proceedings alleging that Volkswagen had contravened s 29(1)(a) of the Australian Consumer Law: Australian Competition and Consumer Commission v Volkswagen Aktiengesellschaft  FCA 2166. At the relevant time, the maximum penalty payable for each contravention of s 29(1)(a) by a body corporate was $1.1 million. Volkswagen ultimately admitted 473 contraventions of the Australian Consumer Law. The ACCC and Volkswagen jointly submitted to the Federal Court that a pecuniary penalty of $75 million was appropriate.
The primary judge determined that a penalty of $75 million would be ‘manifestly inadequate’ and its acceptance by the ACCC reflected an ‘overly pragmatic approach’ on its part. His Honour concluded (primary judgment at ):
It seems to me that all that can be said about the $75 million agreed penalty propounded by the parties is that it is the amount which [Volkswagen] is prepared to pay and which the ACCC is prepared to accept in order to settle both of the regulatory proceedings.
The primary judge instead imposed a penalty of $125 million. In doing so, the primary judge reasoned as follows:
- Volkswagen had ‘never shown any contrition for its outrageous contraventions’ of the Australian Consumer Law and had not co-operated with the ACCC’s investigations into its conduct (at  and );
- the size and profitability of Volkswagen’s business warranted a penalty sufficient to achieve both specific and general deterrence; and
- Volkswagen’s management personnel were involved in the contravening conduct, magnifying the deliberate nature of the contraventions and adding to the fact that they were systematic, covert, and occurred over a number of years (at ).
Volkswagen appealed to the Full Federal Court. The Full Court dismissed Volkswagen’s appeal, and concluded that the primary judge’s exercise of discretion did not miscarry in any material way and that ‘the penalty imposed was not excessive, let alone manifestly excessive’ (appeal judgment at ). The higher penalty of $125 million stood.
What does VW v ACCC mean for you?
VW v ACCC re-affirms that the determination of the appropriate pecuniary penalty for an admitted contravention of a regulatory regime is a matter for the court’s discretion. In formulating an appropriate penalty, regulators should assess the gravity of contravening conduct and the particular characteristics of the contravenor against the factors summarised in Australian Competition and Consumer Commission v Australia and New Zealand Banking Group Ltd  FCA 1516 at - which go to the objective seriousness of the contravention and the circumstances in which the conduct was undertaken. In VW v ACCC, it was relevant that Volkswagen was a large global company that had engaged in ‘systematic, deliberate and covert’ deception of Australian consumers (and Australian regulators) for nearly five years.
If a regulator and a contravening entity make submissions jointly proposing an agreed penalty, and if the court is persuaded that the agreed penalty is appropriate, it may be ‘highly desirable in practice’ for the court to accept the agreement: Australian Competition and Consumer Commission v Lorna Jane Pty Ltd  FCA 852 at . However, the legitimate regulatory goal of promoting consistency in outcomes should not cloud the reality that the Federal Court is unlikely to rubber-stamp an ‘overly pragmatic’ agreement. As the Full Court observed in VW v ACCC (at ), the public interest in ‘predictability of outcomes cannot override the statutory directive’ for the court to impose a penalty which it considers to be proportionate to the gravity and circumstances of the wrongdoing.
Specific to the consumer law context it is worth noting that the civil penalty provisions of the Australian Consumer Law have been amended since VW v ACCC, to increase significantly the maximum penalty for unfair practices. If the same conduct were engaged in today, the applicable penalty for each contravention would be the greater of $10 million or 10% of Australian-connected turnover of the relevant corporate group per contravention (see s 224(3A) of the Australian Consumer Law). If an entity with an Australian-connected turnover comparable to Volkswagen admitted hundreds of contraventions following these amendments, it could potentially mean billions of dollars in aggregate maximum penalties.
This article was written by Michael Palfrey, Partner, Will Sharpe, Partner and Neil Cuthbert, Senior Associate. The authors would like to thank Joe Casey for assistance in preparing this article.