Volkswagens $125m dieselgate penalty upheld on appeal – Litigation, Mediation & Arbitration – Australia – Mondaq News Alerts

Volkswagen Aktiengesellschaft v Australian Competition and
Consumer Commission [2021] 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.)

Appeal decision

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.

Key takeaways

The Court’s consideration of VW’s appeal grounds
illustrates the challenges in setting penalties and assessing their
appropriateness. As the Court observed:

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:

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:

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:

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.