What are the limits to agreeing a civil penalty with a regulator?

DRESDEN, GERMANY - JUNE 08: The hood ornament of a Volkswagen electric car shines in a showroom at the "Gläserne Manufaktur" ("Glass Manufactory") production facility on June 08, 2021 in Dresden, Germany. The Dresden plant is currently churning out 35 ID.3 cars per day. The ID.3 and ID.4 cars are also produced at VW's Zwickau plat located in the same region. (Photo by Sean Gallup/Getty Images)

In 2015, news of one of the largest corporate scandals in recent history became public.

The Volkswagen emissions scandal – ‘Dieselgate’ as it came to be called – made headlines around the globe. Shortly thereafter, regulators began to circle the chastened German car manufacturer.

One of the regulators to take action against Volkswagen was the Australian Competition and Consumer Commission (ACCC). The ACCC and Volkswagen ultimately reached a settlement, and, in 2019, the Federal Court imposed a civil penalty of $125 million for admitted contraventions of the Australian Consumer Law.

This penalty was substantially larger than the $75 million sought by the ACCC, which had been agreed between the parties as part of the settlement.

In April this year, the Full Federal Court delivered its judgment in an appeal against that penalty (Volkswagen Aktiengesellschaft v Australian Competition and Consumer Commission [2021] FCAFC 49). Both the ACCC and Volkswagen argued that the primary judge had erred in failing to impose the agreed penalty (amongst other things). The Full Court unanimously dismissed the appeal.

In this article we summarise the course of the proceedings, and consider the implications of the Full Federal Court’s judgment for parties that are considering agreeing the amount of a civil penalty with a regulator as part of a settlement.

Factual background

The Dieselgate saga arose out of Volkswagen’s development and use of “two mode software” in certain diesel vehicles, which was done for the specific purpose of “evading and defeating emissions standards tests”.1

The software caused the vehicle to operate in one of two modes. The first mode was designed to minimise emissions. This mode was only triggered if the vehicle was being driven in accordance with a standardised test designed to measure emissions. The second mode, which would be used in all other circumstances (including ordinary driving), resulted in the vehicle producing substantially higher emissions that exceeded the lawful limits for Australian vehicles.2

In 2016 the ACCC instituted proceedings against Volkswagen in the Federal Court, alleging contraventions of s29(1)(a) of the Australian Consumer Law.3 That provision proscribes the making of a “false or misleading representation that goods are of a particular standard, quality, value or grade” in the course of trade or commerce.4

The particular representations were made when Volkswagen applied for approval to import the vehicles into Australia (that is, representations to the Commonwealth that the vehicles complied with the Motor Vehicles Standards Act 1989 (Cth), including emissions standards); and when Volkswagen applied to have the vehicles listed on the Commonwealth Government’s ‘Green Vehicle Guide’ website (that is, representations that the vehicles met certain air pollution ratings).5

The primary judgment

Volkswagen initially defended the proceeding, but then reached a settlement with the ACCC. The company admitted that it had breached s29(1)(a) of the Australian Consumer Law on 473 occasions.6 The question at first instance was on the civil penalty to be imposed. The parties jointly submitted that a penalty of $75 million was appropriate, being the amount agreed between them as part of the settlement.

In a judgment delivered in December 2019 (Australian Competition and Consumer Commission v Volkswagen Aktiengesellschaft [2019] FCA 2166), Foster J declined to impose the agreed penalty. His Honour considered that the agreed figure was “not sufficient to meet the overriding objects of specific deterrence and general deterrence” and was “manifestly inadequate”.7

His Honour criticised the “overly pragmatic approach” taken by the ACCC in seeking only the agreed penalty amount, and observed that it was “not supported by any reasoning … or any justification other than it was arrived at as a compromise as part of an overall settlement”.8

In imposing a penalty of $125 million instead, Foster J emphasised a number of considerations, including that Volkswagen’s contraventions involved “corporate conduct of the worst possible kind” and were part of a “dishonest scheme deliberately concocted … to deceive”.9 Other relevant considerations included that Volkswagen was a “very large and highly profitable company”, and that the contraventions had involved employees in senior management.10

The appeal judgment

Volkswagen alleged a number of errors had been made by the primary judge. Key amongst its appeal grounds was the allegation that the court had erred in failing to adopt the agreed penalty. On Volkswagen’s argument, because the $125 million penalty exceeded the profits earned on the sale of the relevant diesel vehicles in Australia, the primary judge had gone “beyond what was necessary to achieve deterrence and strayed into retribution”.11

The ACCC agreed with Volkswagen on this appeal ground. It also supported the related argument that the primary judge had failed to take into account or give material weight to the “important public policy involved in promoting the predictability of outcome in civil penalty proceedings”.12

The ACCC submitted that the fact that the proposed penalty had been “struck as part of a negotiated settlement” was neither novel nor inappropriate.13 On its submission, the agreed penalty was a figure within the “acceptable range”, and for that reason should have been imposed.14

The Full Federal Court (Wigney, Beach and O’Bryan JJ) unanimously rejected these arguments. Their Honours observed that, irrespective of any settlement, the relevant legislation required imposition of a penalty “as the court determines to be appropriate”.15

Accordingly, it is “always a matter for the court to determine the appropriate penalty, having regard to all relevant matters”.16

While the desirability of encouraging predictable outcomes was a relevant consideration – because it “encourages corporations to acknowledge contraventions” and thereby avoid litigation – that was only one of many considerations relevant to the task. It could not “override the statutory directive” to impose an appropriate penalty.17

Importantly, the Full Court agreed with the primary judge that the jointly proposed penalty amount was “manifestly inadequate to secure specific and general deterrence”.18

As their Honours noted, the achievement of deterrence must play a “primary role” in determining a penalty, because the purpose of a civil penalty lies in “promoting the public interest in compliance” (see Commonwealth v Director, Fair Work Building Industry Inspectorate (2015) 258 CLR 482, [55]).19

Implications for parties that may wish to settle civil penalty proceedings brought by regulators

In Commonwealth v Director, the High Court emphasised the deterrent function of civil penalties, and considered that “there is nothing odd or exceptionable” about a court approving an agreed settlement of a civil penalty proceeding.20

However, any penalty must be appropriate, and a court will decline to impose an agreed penalty that will not achieve the requisite deterrent function of a civil penalty.21

Consistent with those principles, the Volkswagen proceedings highlight a risk in the settlement of civil penalty proceedings where the parties agree upon a penalty. Practitioners must be aware that striking a deal with a regulator is no guarantee that a court will impose the agreed penalty. Once a dispute is within the court’s jurisdiction and it is asked to make an order, it is ultimately the court that must decide on a penalty that is appropriate.

For parties that wish to settle regulatory proceedings, but minimise the risk of uncertainty as to the amount for which they may be liable, a couple of avenues are potentially open:

  • First, parties may make offers without prejudice to settle civil penalty proceedings without any order of the court. For instance, a party may agree to pay certain amounts in remediation, and agree to make a public admission of wrongdoing, in return for the regulator discontinuing the proceedings. Such amounts would not be ordered as a civil penalty by a court (where the decision as to the amount would be outside the control of the parties), but the agreement to pay them could be made enforceable by being given as part of an ‘enforceable undertaking’ with the regulator (see, for example, s87B of the Competition and Consumer Act 2010 (Cth)).
  • Second, in circumstances where parties are unwilling or unable to end the civil penalty proceedings, parties must convince the court that the agreed penalty is appropriate; in particular, because it will achieve the statutory objective of deterrence. The amount should not simply be presented as an amount agreed in exchange for admissions, but should be supported by cogent reasoning and relevant evidence.

The overriding lesson for practitioners is that clients should enter negotiations with regulators with their eyes open as to what regulators can, and cannot, actually promise them.

The parties cannot agree what penalty will ultimately be ordered by a court. That uncertainty should factor into the consideration given by regulators and regulated entities as to whether to enter into a settlement agreement, and to the quantum of any penalty that is proposed to the court.

William Isdale is a Senior Legal Officer at the Australian Law Reform Commission. Samuel Walpole is a Barrister at Level 16 Quay Central and an Adjunct Fellow at the University of Queensland. The views of the authors are their own and not those of any organisation that they are affiliated with.

Footnotes
1 [2021] FCAFC 49, [16].
2 Ibid [16]-[18].
3 Ibid [2], [45].
4 Ibid [24].
5 Ibid [20]-[32].
6 Ibid [3].
7 Australian Competition and Consumer Commission v Volkswagen Aktiengesellschaft [2019] FCA 2166 [273].
8 Ibid [273], [277].
9 Ibid [234].
10 Ibid [220]-[221], [260].
11 [2021] FCAFC 49, [92].
12 Ibid [95].
13 Ibid [97].
14 Ibid [120].
15 Ibid [123].
16 Ibid.
17 Ibid [126].
18 Ibid [158].
19 Ibid [147].
20 Commonwealth v Director, Fair Work Building Industry Inspectorate (2015) 258 CLR 482, [59].
21 Ibid.

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