Part 3: Pecuniary penalties, disqualification orders
and non-party redress
Pecuniary penalties
Introduction
The most significant change to the remedies available to the Australian Competition and Consumer Commission (ACCC) has been the introduction of civil pecuniary penalties for contraventions of the consumer protection laws, including unconscionable conduct and product safety laws.
Previously, when the ACCC took civil proceedings for breaches of consumer protection laws, the only remedies it could seek were injunctions, declarations, non-punitive orders and compensation. If the ACCC wished to obtain a fine for a breach of consumer protection laws, its only option was to refer a criminal prosecution to the Commonwealth Director of Public Prosecutions, who would then take over the case.
The government recognised that the inability of the ACCC, state and territory fair trading regulators to seek civil pecuniary penalties for breaches of consumer laws was a "significant gap in the range of enforcement options available to consumer regulators".[1]
The report into the introduction of the ACL stated that the main reason for the introduction of pecuniary penalties was the greater deterrent effect that access to such civil penalties would have on businesses which may be tempted to breach the consumer protection law provisions.[2]
Legislation
Section 224 of the ACL establishes civil pecuniary penalties for unconscionable conduct, consumer protection (except breaches of s.52) and product safety breaches. The penalty for contravening these provisions is $1.1 million for a corporation and $220,000 for an individual per contravention.
Section 224(2) sets out the various factors which the court must have regard, in determining the relevant civil pecuniary penalty:
(a) the nature and extent of the act or omission and of any loss or damage suffered as a result of the act or omission; andThe ACL makes it clear that corporations and individuals cannot be fined twice in separate civil and criminal cases for the same conduct – s.225.
(b) the circumstances in which the act or omission took place; and
(c) whether the person has previously been found by a court in proceedings under Ch 4 or this Part to have engaged in any similar conduct.
Section 226 provides a defence to the imposition of civil pecuniary penalties. This section states that a person can be wholly or partly relieved from liability to pay a pecuniary penalty “if the person acted honestly and reasonably and, having regard to all the circumstances of the case, ought fairly to be excused.” Accordingly, the Court has broad discretion either to impose no civil pecuniary penalty or to reduce any civil pecuniary penalty being sought by the ACCC.
ACCC cases
Since civil pecuniary penalties became available to the ACCC for consumer protection breaches in April 2010, the ACCC has obtained such penalties in 14 cases resulting in total penalties of almost $13 million.[3]
The following table lists the various cases in which the ACCC has obtained pecuniary penalties showing the amount of the penalty imposed by the Court in each case:
Table: Civil pecuniary penalties imposed in ACCC cases - April 2010 to December 2011[4]
Unfortunately, on the above table, it is not possible to identify any general principles about the way in which the court has gone about the task of determining the appropriate penalty. For example, in the Dimmey’s case the court imposed a total penalty of $400,000 for various breaches of mandatory consumer product safety standard for children’s nightwear, while in the Sontax case, the court only imposed $40,000 for a breach of the product safety standard for luggage straps.
Optus case
Justice Perram’s judgment in the Optus case is the most instructive in terms of explaining how the court will generally approach the task of calculating the appropriate civil penalty to impose in a consumer protection case under the ACL.[5]
By way of background, Optus was found by the court to have contravened the Trade Practices Act 1974 (TPA) in relation to its “Think Bigger” and “Supersonic” broadband internet plans. Optus had not sufficiently disclosed that the broadband service in relation to these plans would be speed limited to 64kbps at all times once a consumer exceeded their peak data allowance. The consequence was that any unused off-peak data would no longer be available at a broadband speed.[6]
Accordingly, Justice Perram decided to impose a total penalty of $5.26 million for Optus’ contraventions, which consisted of 11 separate contraventions.
Justice Perram stated that in calculating the appropriate civil pecuniary penalty the court must first consider the mandatory factors set out in 224(2) of the CCA (formerly 76E(2) of the TPA)[7], listed above.
Justice Perram also found that the principles relevant to the imposition of a civil penalty in relation to the former section 76 of the TPA (which related to breaches of the restrictive trade practices provisions) were applicable to the imposition of civil pecuniary penalties for consumer protection matters.[8] These factors include:
1. the size of the contravening company;
2. the deliberateness of the contravention and the period over which it extended;
3. whether the contravention arose out of the conduct of senior management of the contravener or at some lower level;
4. whether the contravener has a corporate culture conducive to compliance with the Act (or the new Australian Competition and Consumer Law) as evidenced by educational programmes and disciplinary or other corrective measures in response to an acknowledged contravention;
5. whether the contravener has shown a disposition to co-operate with the authorities responsible for the enforcement of the Act in relation to the contravention;
6. whether the contravener has engaged in similar conduct in the past;
7. the financial position of the contravener;
8. whether the contravening conduct was systematic, deliberate or covert.
9. the effect of the contravening conduct on a functioning market together with any other economic effects of the contravening conduct
10. the degree of market power of the contravener as evidenced by its market share and the ease of entry into the market.
Introduction
The ACL also introduces disqualification orders for individuals who have engaged in conduct in breach of consumer protection laws.[9]
The ACL report stated that these orders may "ban or restrict individuals from participating in specific activities for a period of time, including managing corporations or undertaking specific business conduct".[10]
Legislation
Section 248 of the ACL creates the power to make a disqualification order. This section states that the court may make an order disqualifying a person from managing a corporation for a period of time that the court considers appropriate if it is satisfied that the person has engaged in or has attempted to engage in a contravention of the relevant provisions of the ACL and “the disqualification is justified”.
The relevant provisions of the ACL for which an individual can be disqualified are the unconscionable conduct, consumer protection (except for s.52) and product safety provisions of the ACL.
The most notable feature of the new disqualification order is the width of the court's discretion to make such an order. The only guidance provided about how the discretion should be exercised is contained in s.248(2) which states that the court can consider "the person's conduct in relation to the management, business or property of any corporation".
There is no indication in the legislation that a disqualification order should only be made in circumstances where the individual has been shown to have engaged in similar breaches of the ACL or TPA in the past and is therefore a repeat offender. Further, the length of the disqualification order is not subject to any statutory maximum period, but rather is subject to the court's opinion as to the appropriate period of disqualification.
ACCC cases
Since the introduction of this provision until August 2011, the ACCC had sought disqualification orders in relation to six individuals:
- four individuals involved in Sensaslim Australia Pty Ltd, including Mr Peter Foster;
- Mr Jacov Vaisman, the Managing Director of Advanced Medical Institute, and
- Mr Lawrence Hann, the director of Halkalia, one of the recipients of the first public warning notice issued by the ACCC.
Unfortunately, the ACCC has not issued any guidance about the circumstances in which it will seek a disqualification order, nor the period of time it is asking the court to disqualify a person.
One would assume that a significant consideration for the ACCC in deciding to seek a disqualification order is evidence that the person is a repeat offender. For example, in the AMI proceedings the ACCC has sought a disqualification order against AMI’s Managing Director, Mr Jacov Vaisman. Prior to these ACCC legal proceedings, the ACCC had taken legal action personally against Mr Vaisman on at least two occasions.
In addition, the ACCC is seeking a disqualification order against Mr Foster, one of the respondents in the Sensaslim case. Mr Foster was previously a respondent in an ACCC case involving Chase Corporation in 2005.[11]
Non-party redress
Introduction
The ACL report described non-party redress as the power to seek an order from the court to "seek redress for persons who are not parties to the particular action".[12]
The ACL report specifically referred to the full Federal Court decision in Medibank Private Ltd v Cassidy where it was held that there was no power in the TPA to order a business to provide redress to non-parties to a proceeding. The High Court subsequently refused the ACCC’s special leave application.[13]
ACCC’s previous approach
In order to understand the significance of the new provisions concerning non-party redress, one needs to understand the powers which the ACCC previously had to obtain compensation for consumers under the TPA.
In the past, there were two ways that the ACCC could get financial redress for consumers for a contravention of the consumer protection provisions of the TPA – either the ACCC could:
However, in a class action, it is the class rather than the ACCC that controls the course of the legal proceedings. For example, the class is usually content to settle for financial compensation, and has no interest in obtaining injunctions or declarations. However, the ACCC views both injunctions and declarations to be important remedies in terms of achieving specific and general deterrence, respectively.
The ACCC's preferred approach in taking an action under s.87(1B) was to adopt “the two-step approach”. Under the two-step approach the ACCC commenced litigation against a business alleging various breaches of the consumer protection provisions seeking the usual remedies - ie injunctions, declarations, corrective orders, and the implementation of a trade practices compliance program.
However, the ACCC did not seek compensation in these initial proceedings; rather it would foreshadow that it was going to seek compensation for consumers under s.87(1B) in a follow-up legal action.
The reason the ACCC took this approach is because under s.87(1B) the ACCC is required to have the written consent of all the consumers on whose behalf the ACCC was seeking compensation before making an application for compensation. As can be appreciated, getting written consent from potentially hundreds of consumers prior to commencing legal proceedings was a time-consuming process which would have significantly delayed the initiation of legal proceedings.
By adopting the two-step approach, the ACCC could seek to prove liability in an initial action and then commence a follow-up action (once liability had been established) to seek compensation for affected consumers.
However, the two-step process had two significant problems.
The first problem was delay. Because the ACCC has to run and win its initial action before running a second proceeding for compensation, it could take a number of years before consumers received any compensation.
The second problem was utility. Often, by the time the initial action had been completed, the business which had been the subject of the ACCC’s legal action might have had no money left to pay any compensation, particularly after it had paid the ACCC's legal costs. Under the Financial Management and Accountability Act 1997, the ACCC has a statutory obligation to recover the costs of its legal action.
Accordingly, the ACCC could find itself in the absurd position of commencing litigation (with the ultimate goal of getting consumers compensation) and winning its case, only to see the pool of funds available to pay compensation to consumers being diminished or even extinguished by its own legal costs.
Legislation
Section 239 creates the power to order non-party redress. The power contained in section 239 is very broad requiring only that person has engaged in contravening conduct and that a non-party consumer has suffered or is likely to suffer loss or damage due to that contravening conduct.
Contravening conduct includes all the consumer protection and unconscionable conduct provisions of the ACL, but does not include either the product safety provisions (Pt 3-3 and Pt 3-4) or the provisions concerning liability of manufacturers for safety defects (Pt 3-5).
Section 239(3) states that the court must not make an order unless the order will:
Section 243 provides a list of the kinds of orders which the court can make to redress the loss or damage suffered by the non-party consumer, including an order:
The problems discussed above with the way in which the ACCC could previously pursue compensation for consumers, have been removed with the enactment of section 239. Under this section, the court can now make an order, including an award of damages, against a person who has engaged in contravening conduct, for the benefit of any non-party consumers. In other words, consumers who may have suffered loss or damage do not have to become parties to the ACCC’s legal proceedings in order to benefit from an order, including an order for the award of damages.
ACCC cases
The ACCC has obtained orders for non-party redress in one case – namely, Australian Competition and Consumer Commission v Yellow Page Marketing BV (No 2) [2011] FCA 352.[15] In this case, Gordon J made orders under section 87AAA(1) of the TPA (the precursor to section 239) that:[16]
The ACCC has sought non-party redress in two other cases – Edirect Pty and Sensaslim.[17]
Introduction
The ACL report described non-party redress as the power to seek an order from the court to "seek redress for persons who are not parties to the particular action".[12]
The ACL report specifically referred to the full Federal Court decision in Medibank Private Ltd v Cassidy where it was held that there was no power in the TPA to order a business to provide redress to non-parties to a proceeding. The High Court subsequently refused the ACCC’s special leave application.[13]
ACCC’s previous approach
In order to understand the significance of the new provisions concerning non-party redress, one needs to understand the powers which the ACCC previously had to obtain compensation for consumers under the TPA.
In the past, there were two ways that the ACCC could get financial redress for consumers for a contravention of the consumer protection provisions of the TPA – either the ACCC could:
- take an action under s.87(1B) of the TPA; or
- commence a class action under the Federal Court of Australia Act (1976).
However, in a class action, it is the class rather than the ACCC that controls the course of the legal proceedings. For example, the class is usually content to settle for financial compensation, and has no interest in obtaining injunctions or declarations. However, the ACCC views both injunctions and declarations to be important remedies in terms of achieving specific and general deterrence, respectively.
The ACCC's preferred approach in taking an action under s.87(1B) was to adopt “the two-step approach”. Under the two-step approach the ACCC commenced litigation against a business alleging various breaches of the consumer protection provisions seeking the usual remedies - ie injunctions, declarations, corrective orders, and the implementation of a trade practices compliance program.
However, the ACCC did not seek compensation in these initial proceedings; rather it would foreshadow that it was going to seek compensation for consumers under s.87(1B) in a follow-up legal action.
The reason the ACCC took this approach is because under s.87(1B) the ACCC is required to have the written consent of all the consumers on whose behalf the ACCC was seeking compensation before making an application for compensation. As can be appreciated, getting written consent from potentially hundreds of consumers prior to commencing legal proceedings was a time-consuming process which would have significantly delayed the initiation of legal proceedings.
By adopting the two-step approach, the ACCC could seek to prove liability in an initial action and then commence a follow-up action (once liability had been established) to seek compensation for affected consumers.
However, the two-step process had two significant problems.
The first problem was delay. Because the ACCC has to run and win its initial action before running a second proceeding for compensation, it could take a number of years before consumers received any compensation.
The second problem was utility. Often, by the time the initial action had been completed, the business which had been the subject of the ACCC’s legal action might have had no money left to pay any compensation, particularly after it had paid the ACCC's legal costs. Under the Financial Management and Accountability Act 1997, the ACCC has a statutory obligation to recover the costs of its legal action.
Accordingly, the ACCC could find itself in the absurd position of commencing litigation (with the ultimate goal of getting consumers compensation) and winning its case, only to see the pool of funds available to pay compensation to consumers being diminished or even extinguished by its own legal costs.
Legislation
Section 239 creates the power to order non-party redress. The power contained in section 239 is very broad requiring only that person has engaged in contravening conduct and that a non-party consumer has suffered or is likely to suffer loss or damage due to that contravening conduct.
Contravening conduct includes all the consumer protection and unconscionable conduct provisions of the ACL, but does not include either the product safety provisions (Pt 3-3 and Pt 3-4) or the provisions concerning liability of manufacturers for safety defects (Pt 3-5).
Section 239(3) states that the court must not make an order unless the order will:
(a) redress, in whole or in part, the loss or damage suffered by the non-party consumers in relation to the contravening conduct or declared term; orSection 241 provides that a non-party consumer is bound by an order made under s 239. This provision is aimed at finalising any claims for redress in the one proceeding and also preventing double recovery by consumers.
(b) prevent or reduce the loss or damage suffered, or likely to be suffered, by the non-party consumers in relation to the contravening conduct or declared term.[14]
Section 243 provides a list of the kinds of orders which the court can make to redress the loss or damage suffered by the non-party consumer, including an order:
- directing the respondent to pay the injured person the amount of their loss or damage; or
- declaring a contract to be void; or
- varying the terms of a contract; or
- directing a person to refund money or return property to the non-party consumer.
An application may be made under section 239(1)(that is for an order for non-party redress) even if an enforcement proceeding in relation to the contravening conduct has not been instituted.Therefore, it seems that the ACCC can seek an order for non-party redress even if it has not commenced legal proceedings in relation to contravening conduct.
The problems discussed above with the way in which the ACCC could previously pursue compensation for consumers, have been removed with the enactment of section 239. Under this section, the court can now make an order, including an award of damages, against a person who has engaged in contravening conduct, for the benefit of any non-party consumers. In other words, consumers who may have suffered loss or damage do not have to become parties to the ACCC’s legal proceedings in order to benefit from an order, including an order for the award of damages.
ACCC cases
The ACCC has obtained orders for non-party redress in one case – namely, Australian Competition and Consumer Commission v Yellow Page Marketing BV (No 2) [2011] FCA 352.[15] In this case, Gordon J made orders under section 87AAA(1) of the TPA (the precursor to section 239) that:[16]
- each contract made between YPL and the relevant consumer be declared void ab initio; and
- if a Contract is void ab initio, the respondent must refund all monies paid by the consumer under the contract and that no further amounts will be payable by the consumer under the contract.
The ACCC has sought non-party redress in two other cases – Edirect Pty and Sensaslim.[17]
Conclusions
The ACL introduces a quite remarkable suite of new enforcement powers and remedies to the ACL. With the power to issue substantiation notices, public warning notices and infringement notices, the ACCC now has unparalleled powers to take aggressive and pre-emptive enforcement action against businesses which it believes have contravened the consumer protection laws. The ACCC has also shown a great propensity to use its powers to issue infringement notices, with 61 notices being issued and paid within the first 18 months.
Since civil pecuniary penalties for consumer protection matters were introduced in April 2010, the ACCC has obtained pecuniary penalties of over $12 million in 14 cases. The level of pecuniary penalties imposed in these cases clearly demonstrates clearly that the court considers breaches of consumer protection laws to be serious matters which are deserving of significant penalties.
Less is known about the ACCC’s and the court’s approach to seeking and ordering disqualification orders and orders for non-party redress, respectively. It is likely that the AMI and Sensaslim cases will provide some much needed guidance about the how the court’s will approach the task of deciding when to disqualify individuals from being directors and managing corporations and also for how long.
Contrary to expectations, the ACCC does not appear to have been as active in seeking non-party redress for consumers in consumer protection litigation. This may be due in part to a belief that the ACCC’s primary role in litigation should be to simply establish the breach of the CCA or ACL and to leave it to plaintiff law firms to pursue compensation for consumers in follow on actions.
Undoubtedly, the most unfortunate aspect of the introduction of these new powers and remedies is the failure by the ACCC to provide any meaningful guidance to business and the legal community about on how it will be using its new powers and when it will pursuing the new remedies. Given that more than 18 months has now elapsed since the new powers and remedies were introduced, one would have expected that the ACCC would have released some substantive guidelines, particularly concerning:
The ACL introduces a quite remarkable suite of new enforcement powers and remedies to the ACL. With the power to issue substantiation notices, public warning notices and infringement notices, the ACCC now has unparalleled powers to take aggressive and pre-emptive enforcement action against businesses which it believes have contravened the consumer protection laws. The ACCC has also shown a great propensity to use its powers to issue infringement notices, with 61 notices being issued and paid within the first 18 months.
Since civil pecuniary penalties for consumer protection matters were introduced in April 2010, the ACCC has obtained pecuniary penalties of over $12 million in 14 cases. The level of pecuniary penalties imposed in these cases clearly demonstrates clearly that the court considers breaches of consumer protection laws to be serious matters which are deserving of significant penalties.
Less is known about the ACCC’s and the court’s approach to seeking and ordering disqualification orders and orders for non-party redress, respectively. It is likely that the AMI and Sensaslim cases will provide some much needed guidance about the how the court’s will approach the task of deciding when to disqualify individuals from being directors and managing corporations and also for how long.
Contrary to expectations, the ACCC does not appear to have been as active in seeking non-party redress for consumers in consumer protection litigation. This may be due in part to a belief that the ACCC’s primary role in litigation should be to simply establish the breach of the CCA or ACL and to leave it to plaintiff law firms to pursue compensation for consumers in follow on actions.
Undoubtedly, the most unfortunate aspect of the introduction of these new powers and remedies is the failure by the ACCC to provide any meaningful guidance to business and the legal community about on how it will be using its new powers and when it will pursuing the new remedies. Given that more than 18 months has now elapsed since the new powers and remedies were introduced, one would have expected that the ACCC would have released some substantive guidelines, particularly concerning:
- the ACCC’s use of infringement notices and public warning notices; and
- the circumstances in which the ACCC will be seeking disqualification orders against directors and managers.
[1] An Australian Consumer Law: Fair Markets - Confident Consumers, 17 February 2009, available at www.treasury.gov.au/contentitem.asp?NavId=037&ContentID=1482 (ACL: Fair Markets), at pp. 44-45.
[2] Ibid., p. 45.
[3] From April 2010 until December 2011.
[4] ACCC News Releases - http://www.accc.gov.au/content/index.phtml/itemId/2332
[5] Australian Competition and Consumer Commission v Singtel Optus Pty Ltd (No 4) [2011] FCA 761 - http://www.austlii.edu.au/au/cases/cth/FCA/2011/761.html
[6] Australian Competition and Consumer Commission v Singtel Optus Pty Ltd [2010] FCA 1177 - http://www.austlii.edu.au/au/cases/cth/FCA/2010/1177.html
[7] Optus (No. 4), op. cit., at para. 9.
[8] Ibid., para. 10.
[9] Disqualification orders are already available for contraventions of the restrictive trade practices provisions of the CCA (Part IV).
[10] ACL Report, op. cit., p. 45.
[11] Australian Competition and Consumer Commission v Chaste Corporation Pty Ltd with corrigendum dated 12 Sep) [2005] FCA 1212 - http://www.austlii.edu.au/cgi-bin/sinodisp/au/cases/cth/FCA/2005/1212.html?stem=0&synonyms=0&query=title(\Chaste%20Corporation%20Pty%20Ltd%20)
[12] ACL Report, op. cit., p. 52
[13] [2002] FCAFC 290.
[14] The reference to “declared term” in this section relates to the unfair contract terms provisions contained in Part 2-3 of the ACL.
[15] http://www.austlii.edu.au/cgi bin/sinodisp/au/cases/cth/FCA/2011/352.html?stem=0&synonyms=0&query=title(Yellow%20Page%20Marketing%20BV%20)
[16] Ibid., see para’s. 121-133.
[17] ACCC alleges EDirect sold mobile contracts to consumers in areas without network coverage - http://www.accc.gov.au/content/index.phtml/itemId/981470/fromItemId/966100 and ACCC takes court action against Sensaslim for alleged misleading claims -http://www.accc.gov.au/content/index.phtml?itemId=998494
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