The Australian chapter of “Dieselgate” comes to a close

Published On 24/12/2019 | By Matthew Harris | Consumer protection, Enforcement, Litigation

On 20 December 2019, Australian consumer law history was made when the Federal Court imposed the highest-ever penalty for breach of the Australian Consumer Law (ACL).  Volkswagen AG (VW) was ordered to pay $125 million for breaches of s 29(1)(a) of the ACL relating to VW’s failure to disclose the true nature of its car emission outputs to the Australian Government when seeking importation approval for more than 57,000 vehicles. The Australian proceedings are only one part of the global emissions scandal (know as “Deiselgate”) involving the car manufacturer.

Key Take-Aways

  • The penalty proceedings brought by the ACCC against VW were conducted by consent, with VW and the ACCC jointly submitting that a $75 million penalty was appropriate in the circumstances.
  • However, the Federal Court ruled that the agreed penalty amount was “manifestly inadequate” and was not sufficient to meet the overriding objects of imposing a penalty – specific deterrence and general deterrence. The court ultimately imposed a penalty amount $50 million higher than had been agreed by the parties.
  • The $125 million penalty imposed on VW is almost five times higher than the previous highest ACL penalty, which was imposed on Empower Institute for unconscionable conduct in September of this year.
  • Despite this being the largest ever penalty imposed under the ACL, penalties in Australia are still significantly smaller than those imposed overseas. Proceedings have also been brought against VW in other jurisdictions around the globe – including in Germany where VW was fined €1 billion (AU$1.6 billion) by German authorities.  This year alone VW has paid more than AU$42 billion in fines, recall costs and settlements.
  • This penalty comes in the wake of Rod Sims calling for “financial pain” for contravening parties, such that “when the penalty is announced, the share price takes a dip”.

Background

In September 2015, the US Environmental Protection Agency (EPA) reported that VW had installed illegal “defeat devices” in hundreds of thousands of engines in the United States over a six year period. This software would recognise whether the vehicle was being tested for emissions in a laboratory.  The effect of this software was that, during laboratory testing, the engines would temporarily emit lower levels of nitrogen oxides.  Unaware of this hidden software, local governments approved the vehicles without knowledge that they were producing higher levels of nitrogen oxides when out on the road.  In the wake of the EPA report, VW made admissions that 11 million vehicles across the globe had been installed with these illegal “defeat devices”.

In 2017 VW pled guilty to criminal charges in the United States relating to this conduct.  The VW group has also been subject to proceedings and investigations across Europe, including in Germany, Poland, Italy and France.  In the initial fall-out following the discovery of the software, VW CEO Martin Winterkorn stepped down. Criminal charges have also been laid against certain VW employee and executives relating this conduct (including Mr Winterkorn in Germany and the United States).

In September of 2016, the ACCC commenced proceedings against VW for the conduct which occurred in Australia. The ACCC alleged misleading or deceptive conduct and false representations in relation to Volkswagen’s claims about its diesel emissions, as well as failures to comply with requisite safety standards. At the time, the ACCC Chairman Rod Sims said that “[t]hese allegations involve extraordinary conduct of a serious and deliberate nature by a global corporation and its Australian subsidiary misleading consumers and the Australian public. We expect higher standards of behaviour from all companies that supply to Australian consumers”.

$75 million agreed penalty not accepted by the court

VW ultimately agreed to declarations being made that it had breached s 29(1)(a) of the ACL by making false representations about compliance with Australian diesel emissions standards.  Section 29(1)(a) of the ACL prohibits the making of false or misleading representations that goods are of a particular standard, quality, value, grade, competition, style or model or have a particular history or previous use.  Volkswagen and the ACCC sought orders by consent for the imposition of a $75 million penalty.  However, Foster J criticised both the ACCC and VW for the level of their agreed penalty.  Justice Foster ordered an additional $50 million be added to the agreed penalty, taking the penalty total to $150 million.  His Honour reasoned that the proposed penalty was “manifestly inadequate” given the “egregious” and “calculated” nature of the consumer fraud perpetuated by VW, and the fact that the agreed penalty was not supported by any reasoning from both parties. His Honour J identified that VW was “more than capable of paying a much larger penalty, given its size and wealth”.

His Honour found that, in this case, the maximum penalty which could have been imposed was $520.3 million (being $1.1 million x the 473 separate contraventions of section 29 in the Statement of Agreed Facts). In reaching the $125 million figure, Foster J emphasised the principle object of civil penalty provisions being to ensure deterrence. His Honour cited Markarian v The Queen (2005) 228 CLR 35 and ACCC v Coles Supermarkets Australia Pty Ltd (2015) 327 ALR 540 in reasoning that, when endeavouring to determine an appropriate penalty pursuant to s 224 of the ACL, the Court should apply the process commonly called “instinctive synthesis”; a process focused on weighing all of the relevant factors.  In relation to the issue of parity as against earlier-in-time penalties, Foster J stated that “things are rarely equal in ACL cases and comparison may be difficult and of limited utility”.  He went on to observe that he did not “consider it helpful or relevant” to be told that the previous highest penalty under the ACL was $26.5 million, as the circumstances of this case were “unique”.

Initially, Volkswagen Australia, Audi Australia and Audi AG were also prosecuted. However, as part of the terms of settlement between VW and the ACCC, VW (as the parent corporation and entity where the misconduct mostly occurred) agreed to take sole responsibility for all obligations under the arrangement. As a result, that proceedings insofar as they related to Volkswagen Australia and Audi were dismissed with no order as to costs.

His Honour’s judgment is a valuable reminder that courts ultimately have the discretion to impose a significantly higher penalty than any that may be agreed between the parties. In coming to his decision, Foster J had to determine whether the agreed pecuniary penalty was appropriate within the meaning of s 224(1) of the ACL having regard to all relevant circumstances.  In a statement responding to the judgment, VW has said that it firmly believes that the amount agreed was fair and is carefully reviewing the Court’s reasoning.

New ACL penalties regime

Parliament recently increased significantly the penalties available to Courts for breaches of the ACL. See our previous blog post on the penalty reforms here. The $125 million penalty imposed on VW was calculated under the old penalties regime where companies could be penalised up to $1.1 million for each breach.  Now, the ACCC can seek penalties of up to the greater of $10 million per breach, three times the profit or benefit obtained or, if this cannot be accurately determined, 10% of turnover.  As such, Foster J’s judgment not only raises the prospect of much larger penalties under the old regime, but also sets a precedent for significant ACL breaches for conduct going forward.

By Grayson Gay and Matthew Harris with Peta Stevenson, Simon Cooke and Helena Kanton

Image Credit: Old Main Building of Car Manufacturer VW (Volkswagen) / Wikimedia Commons – Hannes Grobe / CC BY 3.0 License Remixed to B&W and Resized

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