Federal Court Of Australia Rejects The ACCC's 'dieselgate' Settlement And Imposes A Record $125 Million Fine On Volkswagen For Breaches Of The ACL.

Legal News & Analysis - Asia Pacific - Australia - Competition & Antitrust

28 February, 2020

 

Australian Competition and Consumer Commission v Volkswagen Aktiengesellschaft [2019] FCA 2166

 

What you need to know

 

  • The Court imposed a penalty amount $50 million higher than had been agreed between the parties, bucking the recent trend of the Court reducing penalties proposed by the ACCC.
  • The $125 million penalty was calculated under the old ACL penalty regime where the maximum penalty was $1.1 million per breach.
  • Now that the penalties available under the ACL have increased substantially - the higher of $10 million, three times the benefit obtained or, if this cannot be determined, 10% of the annual turnover of the body corporate – this decision will likely embolden the ACCC to seek considerably higher penalties in contested matters and negotiated settlements moving forward.

 

Background 

 

In Federal Court proceedings brought by the ACCC, Volkswagen Aktiengesellschaft (Volkswagen) admitted it made false representations to Australian regulators about the compliance of its vehicles with Australian diesel emissions standards in breach of the Australian Consumer Law (ACL).  The Court ordered Volkswagen to pay a pecuniary penalty of $125 million for the breaches – an amount $50 million higher than had been agreed between the parties, and the highest penalty order ever made by the Court for contraventions of the ACL.  Volkswagen was also ordered to pay the ACCC's costs in the agreed amount of $4 million.

 

At the centrepiece of the global scandal known as "dieselgate" was Volkswagen's "Two Mode" software that operated to deliberately conceal the true nature of nitrogen oxide (NOx) emissions from Volkswagen's diesel vehicles. 'Mode 1' of the software operated under testing conditions to produce NOx emissions that were compliant with the limits prescribed under the relevant Australian emission standards. However, when driven on the road, the vehicles switched to ‘Mode 2’ which produced substantially higher NOx emissions that exceeded emissions standards.

 

Volkswagen consented to the Court making declarations that Volkswagen breached section 29(1)(a) of the ACL which relevantly prohibits false or misleading representations that goods are of a particular standard, quality, value, grade or composition.  The Court declared that Volkswagen had made false representations to Australian regulators on 473 separate occasions about its compliance with Australian emissions standards in respect of 57,082 Volkswagen-branded diesel vehicles when it sought approval to import the vehicles into Australia, and when it sought to obtain "Green Vehicle" ratings for the vehicles.

 

Justice Foster's uncompromising approach to penalties

 

The ACCC and Volkswagen had jointly sought the Court's approval for the imposition of a $75 million pecuniary penalty on Volkswagen. However, the parties' agreed penalty was rejected by Justice Foster  as "manifestly inadequate" in the circumstances and was insufficient to meet the overriding objects of specific deterrence and general deterrence. In particular, Justice Foster was critical of the ACCC for "not support[ing] the agreed penalty with any reasoning, let alone reasoning which encapsulated or reflected views within its expertise as the regulator charged with enforcing the consumer protection provisions in the ACL."

 

At the time of Volkswagen's conduct, the maximum penalty available for each breach of section 29(1)(a) of the ACL was $1.1 million. Accordingly, Justice Foster found that the maximum penalty which could have been imposed on Volkswagen was $520.3 million (being $1.1 million x 473 contraventions). 

 

Justice Foster applied the "instinctive synthesis" approach to determining the appropriate penalty to be imposed which involved transparently weighing all relevant factors rather than starting from a predetermined figure and making incremental additions or subtractions.  Justice Foster made the following pertinent observations regarding the relevant factors:

 

  • at the heart of Volkswagen's conduct was a "dishonest scheme deliberately concocted" that was "designed to deceive" Australian regulators and consumers – this conduct is properly characterised as "an egregious breach of Australian consumer law of the worst kind imaginable" and is "at the most serious end of the spectrum" with respect to admitted contraventions of the ACL;
  • the contravening conduct was deliberately perpetrated by senior management personnel of Volkswagen – Justice Foster was sceptical of, but ultimately accepted, Volkswagen's submission that its governing organs were unaware of the scheme, noting that this reflected a "serious governance problem"; 
  • Volkswagen has not shown any contrition with respect to its "outrageous contraventions" and strenuously defended the proceedings for three years before admitting contraventions of the ACL at a very late stage; 
  • the objective of the emissions standards is to reduce harm to humans and to the environment – Justice Foster considered the harmful nature of excessive NOx emissions and criticised the "temerity" of the parties' joint submission that there was no evidence of actual harm, and in particular, commented that he "cannot fathom why the ACCC joined in such a submission"; and 
  • Volkswagen is capable of paying a very large penalty given its size and wealth – the company had generated gross worldwide revenue of between €159.3 billion and €213.3  billion during the relevant period from 2011 to 2015.

 

Ultimately, Justice Foster ordered a penalty of $125 million to be imposed on Volkswagen, noting the application of the course of conduct principle (making allowances for the similarities and possible points of overlap in the contravening conduct) and the totality principle (a "final check" to ensure the penalty is just and appropriate) in reducing the potential penalties from the maximum. 

Justice Foster stated that this case was "unique" and that he did not “consider it helpful or relevant” to be told by the parties that the previous highest penalty under the ACL was $26.5 million.  Justice Foster also did not consider the substantial fines imposed on Volkswagen overseas to be relevant in circumstances where those penalties did not relate to the conduct perpetrated in Australia.

 

Substantially higher penalties expected moving forward

 

Although the record $125 million penalty ordered against Volkswagen is the highest total penalty order ever imposed by the Court for contraventions of the ACL, and was considerably higher than the previous highest penalty of $26.5 million imposed on Empower Institute for unconscionable conduct, the penalty was determined in accordance with the old ACL penalties regime.  

 

Under the current regime introduced in 2018, maximum penalties for contraventions of the ACL are now considerably higher – the greater of $10 million, three times the benefit obtained or, if this cannot be determined, 10% of the annual turnover of the body corporate.  If the current penalty regime had applied in this case, the penalty imposed on Volkswagen would likely have been exponentially higher in circumstances where the lowest maximum penalty that would have been available to the Court would be $4.73 billion (being $10 million x 473 contraventions).  

 

Justice Foster's approach is a reminder that the Court is not merely a "rubber stamp"; the responsibility to determine the appropriate pecuniary penalty remains solely with the Court at all times.

This case also represents a shift in the Court's recent trend of reducing the penalties proposed by the ACCC at a time where the application of the new ACL penalty regime is in its infancy.  It is likely that the ACCC will seek to deploy Justice Foster's uncompromising approach to penalties moving forward to seek considerably higher penalties and negotiated settlements for serious corporate misconduct that contravenes the ACL.  

 

The time for Volkswagen to appeal the judgment has not yet expired and Volkswagen is reportedly considering its options.

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For further information, please contact:

 

Peter Armitage, Partner, Ashurst

peter.armitage@ashurst.com