‘Agreed’ penalty manifestly inadequate

Volkswagen Aktiengesellschaft v Australian Competition and Consumer Commission [2021] FCAFC 49

Summary

In 2019, the ACCC commenced a civil penalty proceeding against Volkswagen and its Australian subsidiary. The conduct in question involved Volkswagen deceiving both the Australian Government and customers about the exhaust emissions of certain vehicles which were imported into Australia for sale between January 2011 and October 2015. The proceedings were settled between the parties, and Volkswagen accepted that its actions contravened s 29(1)(a) of the Australian Consumer Law, being Schedule 2 to the Competition and Consumer Act 2010 (Cth) (ACL) on 473 occasions. That section deals with the making of false or misleading representations about goods.

As part of the settlement, the parties jointly proposed a pecuniary penalty of $75 million. However, at first instance the Federal Court of Australia found that the jointly-proposed penalty was not appropriate within the meaning of s 224(1) of the ACL and was manifestly inadequate: Australian Competition and Consumer Commission v Volkswagen Aktiengesellschaft [2019] FCA 2166 [274] (Foster J) (Judgment).

The Court ordered a pecuniary penalty of $125 million, which was upheld by the Full Court: [6] and [213]. On 12 November 2021, the High Court refused to grant the ACCC special leave to appeal.

Two mode software

Volkswagen’s overseas engineers had developed software known as ‘two mode software’. It was designed, created and implemented for the purpose of evading and defeating emissions standards tests: [15], [16]. The software caused the exhaust systems in certain engines to operate in two modes. The first mode minimised emissions of nitrogen oxides (NOx), whilst the second mode resulted in higher NOx emissions. The software caused the engines to operate in the second mode at all times, other than when the vehicles were subjected to emissions tests: [17]. If the vehicles had been tested while operating in the second mode, they would have exceeded the NOx limits in the applicable Standard set out in the Australian Design Rule 79: [18]. Senior employees below board management level acting within their apparent authority were responsible for developing and installing the two-mode software: [19]. Six supervisors in charge of certain departments at Volkswagen were involved in, or knew about, the design and installation of the software: [19].

Breach of ACL

Volkswagen’s conduct contravened the ACL in two ways.

First, a false representation was made to the delegate of the Minister for Infrastructure and Regional Development when the vehicles were being imported into Australia. This is because the documents and information completed as part of importing the vehicles represented that they complied with Design Rule 79, when this was false: [21]-[22].

Second, when Volkswagen voluntarily applied for certain Volkswagen-branded vehicles to be published on the Green Vehicle Guide website, it made false representations. As a result of these false representations, Volkswagen-branded vehicles on the Green Vehicle Guide website were given better ratings than they should have been: [30].

At first instance, Justice Foster held that the admitted contraventions constituted “corporate conduct of the worst possible kind”, involving as it did “a dishonest scheme deliberately concocted and put into effect which was designed to deceive”: Judgment [234].

Penalty

On appeal, Wigney, Beach and O’Bryan JJ summarised the particular features that had led Justice Foster to conclude that the agreed penalty was “not sufficient to meet the overriding objects of specific deterrence and general deterrence” and was “manifestly inadequate”, namely:

• the “egregious nature of the consumer fraud”;
• the “fraud” was “calculated” and “perpetrated by senior management”;
• it involved a “very serious deception of Australian government regulatory authorities”;
• the “impact on consumers was very significant”;
• “excessive emissions of NOx are harmful to humans and to the environment”;
• Volkswagen had shown no contrition;
• Volkswagen had “conducted the litigation by taking every point possibly available to it” and had “only adopted a different stance under the pressure of the imminent commencement of the Stage 2 Hearing”; and
• Volkswagen was “more than capable of paying a much larger penalty, given its size and wealth”: [82] referring to Judgment [273]

The Full Court held at [167] that the agreed penalty of $75 million, was “insufficient to secure or provide general and specific deterrence and was outside the range of permissible penalties for all the reasons given by the primary judge [and] was not an appropriate penalty having regard to the objective seriousness of the contravening conduct and Volkswagen’s circumstances.”

Comment

This case is one in a series of cases which demonstrate that civil penalties have been increasing in size over recent times. Since this case, the High Court’s decision in Australian Building and Construction Commission v Pattinson (2022) 388 ALR 599 at [9] also confirmed that the primary object of an award of a civil penalty is deterrence. Considering an appropriate penalty with a sole focus on deterrence, rather than proportionality in terms of the seriousness of the conduct, is likely to result in a higher civil penalty.

Finally, the significant difference between the proposed agreed penalty and the penalty that the Court ultimately ordered in the Volkswagen case demonstrates the significant challenges in advising corporate respondents as to the parameters of a likely court-ordered penalty. The process is highly subjective and impressionistic. This is because courts determine an appropriate pecuniary penalty by applying the ‘instinctive synthesis’ process, which involves forming an evaluative view having regard to a range of relevant factors. This appears to be an issue in the ongoing Federal Court case of ACCC v Uber, in which preliminary indications by the Judge at the penalty hearing this year were that the agreed pecuniary penalty of $26 million seemed excessive. The decision in that case has yet to be handed down.