Commentary

General principles

In Trade Practices Commission v CSR Ltd [1990] FCA 521; (1991) ATPR 41-076 Justice French set out the general principles surrounding pecuniary penalties in s 76. These have been frequently approved in subsequent cases.

Pecuniary Penalties - General Principles

[para 38] The provisions of Pt. IV of the Trade Practices Act 1974 are directed to procuring and maintaining competition in trade and commerce ... They are of a regulatory rather than penal character. Proceedings for their enforcement by recovery of pecuniary penalties are not classed as criminal prosecutions. ... Unlike many kinds of criminal prosecution, therefore, it is not necessary to measure the contravening conduct against some general communal morality in which the law is embedded. Aspects of some commercial behaviour, such as ruthlessness and expansionary ambition, are not elements of the classes of conduct prohibited by Pt. IV nor even aggravating factors. For those same attributes may be found in vigorous and lawful competition.

[para 39] characterisation of contravening conduct in terms of a morality larger than that which is defined by the legislative purpose is misplaced. ...

[para 40] Punishment for breaches of the criminal law traditionally involves three elements: deterrence, both general and individual, retribution and rehabilitation. Neither retribution nor rehabilitation, within the sense of the Old and New Testament moralities that imbue much of our criminal law, have any part to play in economic regulation of the kind contemplated by Pt. IV. Nor, if it be necessary to say so, is there any compensatory element in the penalty fixing process ... The principal, and I think probably the only, object of the penalties imposed by s.76 is to attempt to put a price on contravention that is sufficiently high to deter repetition by the contravenor and by others who might be tempted to contravene the Act.

[para 41] There has been a significant number of decisions of the Court which have considered the operation of s.76 ... The primacy of the deterrent purpose in the imposition of penalty was identified at an early stage

[para 42] The assessment of a penalty of appropriate deterrent value will have regard to a number of factors which have been canvassed in the cases. These include the following:

1. The nature and extent of the contravening conduct.

2. The amount of loss or damage caused.

3. The circumstances in which the conduct took place.

4. The size of the contravening company.

5. The degree of power it has, as evidenced by its market share and ease of entry into the market.

6. The deliberateness of the contravention and the period over which it extended.

7. Whether the contravention arose out of the conduct of senior management or at a lower level.

8. Whether the company has a corporate culture conducive to compliance with the Act, as evidenced by educational programs and disciplinary or other corrective measures in response to an acknowledged contravention.

9. Whether the company has shown a disposition to co-operate with the authorities responsible for the enforcement of the Act in relation to the contravention.

The first three factors are all expressly mentioned in s.76. They can be regarded as measures of the scope and impact of the conduct and it is conducive to deterrence that the greater the significance of these elements, the heavier the penalty should be. ... The need for commercial realism in fixing penalties has been mentioned in more than one decision of the Court. In Trade Practices Commission v. Stihl Chain Saws (Aust) Pty Ltd (1978) ATPR 40-091, Smithers J. at 17,896 said:

"The penalty should constitute a real punishment proportionate to the deliberation with which the defendant contravened the provisions of the Act. It should be sufficiently high to have a deterrent quality, and it should be kept in mind that the Act operates in a commercial environment where deterrence of those minded to contravene its provisions is not likely to be achieved by penalties which are not realistic. It should reflect the will of Parliament that the commercial standards laid down in the Act must be observed, but not be so high as to be oppressive."

In ACCC v Visy Industries Holdings Pty Ltd (No 3) [2007] FCA 1617 (2 November 2007) Justice Heerey noted the factors to be taken into account by s 76(1) when determining penalties. He also noted other factors that outght to be taken into account. Collectively, the factors to consider are:

(i) the nature and extent of the act or omission constituting the contravening conduct; (para 302; reflecting s 76(1))

(ii) the nature and extent of any loss or damage suffered as a result of the contravening conduct; (para 302; reflecting s 76(1))

(iii) the circumstances in which the act or omission took place; and (para 302; reflecting s 76(1))

(iv) whether the contravenor has previously been found by the Court to have engaged in similar conduct. (para 302; reflecting s 76(1))

(v) the size of the contravening company; (para 303)

(vi) the degree of its power, evidenced by its market share and the ease of entry into the market; (para 303)

(vii) the deliberateness of the contravention and the period over which it extended; (para 303)

(viii) whether the contravention arose out of the conduct of senior management or at a lower level; (para 303)

(ix) whether the company had a corporate culture conducive to compliance with the Act, as evidenced by educational programs and disciplinary or other corrective measures in response to an acknowledged contravention; (para 303)

(x) whether the contravenor has shown a disposition to co-operate with the authorities responsible for the enforcement of the Act in relation to the contravention; (para 303)

(xi) similar conduct in the past; (para 303)

(xii) financial position; (para 303)

(xiii) deterrent effect. (para 303)

In ACCC v ABB Transmission and Distribution Limited (No 2) [2002] FCA 559, Justice Finkelstein rejected the optimal penalty theory' in the context of s 76.

[21] I wish to mention some criticisms that can be made of the optimal penalty theory to show why it should not be accepted here. The first and most important requires reference to the antitrust legislation. Typically, and this case is no exception, the legislation proscribes both the making of, and the giving effect to, an anti-competitive arrangement. If the optimal penalty theory were to be applied to a prosecution that is only concerned with the making of an anti-competitive arrangement, the penalty would be confined to the cost of detection and the cost of prosecution, for there would be no other social costs to recover, and the potential effect of the anti-competitive arrangement would have to be ignored. In such a case the penalty would be very small indeed, and would certainly be insufficient to have effect as a deterrent. In any event, s 76 of the Trade Practices Act requires the court to take into account a number of matters including the circumstances in which the contravention took place and whether the person has previously been found to have engaged in similar conduct. Those factors are ignored under the optimal penalty theory.

[22] The second criticism is that the optimal penalty theory assumes that the corporation is a rational actor and will choose from among all available options the course of action that would maximise its profits. This is not always so, and may be an unrealistic view of corporate behaviour. The decisions which guide corporations are made by individuals, and profit maximisation is not the only consideration taken into account. Sometimes individuals may be driven by a personal desire to succeed. Fines or other liabilities imposed against their corporation may have little effect on the agents who are responsible for the conduct in question.

[23] Thirdly, the model is far too rigid because in many cases it is impossible to calculate, or it may be far too costly to calculate, the damage that has been caused by the contravention. In addition, although it would be useful information to have, it may be impossible to calculate the cost of apprehension. Further, determining the factor to represent the probability that a violation will be detected will always be little more than an arbitrary exercise.

[24] A fourth criticism is that the effect of a fine imposed on a corporation will often be passed on to the consumer, rather than the individual actor who was responsible for the conduct. So the suggestion that the corporation alone and not its agents should bear the fine is not without its difficulties.

[25] Finally, optimal fines “depend only on the marginal harm and cost and not at all on the economic positions of the offenders”: G Becker, The Economic Approach to Human Behaviour at 65 (1976). According to this theory, large and small corporations alike would pay the same fine (or at least a fine that is proportionately the same) as it must be based on an objective determination of the social cost of their wrongdoing. The adoption of such a principle would undermine both the specific deterrence that a penalty may have and as its general deterrent effect. When sentencing with specific deterrence in mind, a large penalty is often imposed to ensure that future decisions whether to violate the law are not made on the same cost benefit analysis as past contraventions. For example, repeating or continuing the same offence should be met with an increased penalty, though its social cost remains constant. Optimal penalty theory pays no regard to general deterrence and may cause the penalty to be little more than a “licence fee” for engaging in the proscribed conduct.

Comparison with criminal fines

In CDPP v Nippon Yusen Kabushiki Kaisha [2017] FCA 876, the first case imposing criminal fines for cartel conduct pursuant to s 44ZZRG, Justice Wigney observed:

[215] ... Curiously, the maximum pecuniary penalty payable by a corporation for contravening s 44ZZRK is effectively the same as the maximum fine payable by a corporation which has been convicted of an offence against s 44ZZRG: see s 76(1) and (1A) of the C&C Act. It would seem that the only difference is that a criminal conviction attracts opprobrium and societal condemnation in a way that the imposition of a civil penalty cannot: Commonwealth of Australia, The Review of Competition Law Provisions of the Trade Practices Act (the “Dawson Inquiry”), Chapter 10: Penalties and other remedies, Canberra, April 2003.

Meaning of ‘annual turnover’ (s 76(5))

The meaning of annual turnover in 76(5) was examined in the Yazaki cartel case.

ACCC v Yazaki Corporation [2018] FCAFC 73
Re: value of supplies, the primary judge in Yazaki noted that under s 76(5) supplies made by Yazki that were not connected with Australia were excluded (para 171 appeal).

On whether the 'body corporate' included related bodies corporate, the full federal court found that it did:

[172] Before coming to s 76(5)(d), the primary judge considered, at [22] of the relief judgment, the submission by the ACCC that the annual turnover as defined of AAPL included all of its turnover and not only that turnover which related to AAPL’s supplies to TMCA. The primary judge said the difficulty with that submission was that it did not take account of the fact that s 76(5)(d) referred to “the body corporate” and did not include a reference to “any body corporate related to the body corporate”. ...

[173] The primary judge concluded, at [22] of the relief judgment, that body corporate was restricted to Yazaki. ...

...

[191] In our opinion, it must be borne in mind that the purpose of the provision is to fix a maximum pecuniary penalty payable by the contravening corporation. It is not a related body corporate which is liable to the penalty and the provision does not deal with the penalty itself but with the maximum penalty.

[192] Next, in our opinion the words “the body corporate, and any body corporate related to the body corporate”, which appear in s 76 (1A)(b)(ii) are not incorporated in the language of subparagraph (iii) because of the quantity of language. It is left to s 76(5) to specify that which is the annual turnover of “the body corporate” which is the contravening corporation. The maximum pecuniary penalty is 10% of that annual turnover during the turnover period.

[193] We reject the respondents’ submission that s 76(1A)(b)(iii) should be construed by reference to a concept of proxy for s 76(1A)(b)(ii). Each of the two provisions is fixing a maximum pecuniary penalty payable by the contravening body corporate. Where the Court can determine the value of the benefit that the contravening body corporate and any body corporate related to the contravening body corporate have obtained directly or indirectly and that is reasonably attributable to the contravening act or omission, then the maximum pecuniary penalty is three times the value of that benefit. It cannot be said that 10% of the annual turnover of the contravening body corporate during the turnover period is to be considered a proxy. Rather, it is an alternative basis of calculation. This conclusion is strengthened by the consideration that the concept of proxy does not assist in the task of statutory construction. That task is in effect a constructional choice between 10% of the annual turnover of the contravening body corporate during the turnover period and 10% of the annual turnover being the sum of the values of all the supplies that the body corporate and its related bodies corporate have made or are likely to make during that period, subject to the specified exceptions. The former is no more or no less a proxy than the latter.

[194] We reject the respondents’ conceptually related submission that the purpose of the pecuniary penalty provision is to punish a contravening corporation for conduct sufficiently related to the contravening conduct. In our opinion, that is to treat s 76(1A)(b)(iii) as limited by the nature of s 76(1A)(b)(ii) when the true position is that s 76(1A)(b)(iii) applies when the Court cannot determine, and therefore cannot use, the value of the benefit in s 76(1A)(b)(ii). It is therefore not appropriate to construe s 76(1A)(b)(iii) as limiting the maximum penalty of the contravening corporation to the value of the benefit.

[195] There can be no doubt that “a body corporate” in s 76(5) is “the body corporate” referred to in s 76(1A)(b)(iii). It is that annual turnover which, for the purposes of s 76 “is the sum of the values of all the supplies that the body corporate and any body corporate related to the body corporate, have made, or are likely to make, during that period…” Paragraph (d) is an exception and applies to each of the bodies corporate referred to in the chapeau. It would be grammatically inapt to use the indefinite article in paragraph (d). The better construction is that “an enterprise that the body corporate carries on” applies distributively to each of the bodies corporate with which the subsection is concerned.

[196] It was necessary in s 76(5)(a) expressly to set out, by way of exception, “supplies made from any of those bodies corporate to any other of those bodies corporate” because that is a straightforward, if not necessary, way of excluding supplies made within the group of corporations, that is, the contravening corporation and any body corporate related to that body corporate.

[197] We do not accept the respondents’ submission founded on the literal repetition of the words “the body corporate” in paragraph (d) of the words “the body corporate” where they appeared in the chapeau. This is to rely on literalism at the expense of meaning. It follows that we also do not accept the respondents’ submission that had it been intended that one was to deduct supplies that were not made in connection with an enterprise that related bodies corporate carried on, one would expect to see that in paragraph (d) in order to be consistent with the way in which the legislature had framed the provision, both in the chapeau and in paragraph (a). As we have said, the alleged consistency operates only at the level of literalism.

[198] We also do not accept the respondents’ submission that the construction for which they contend is to be preferred by considering the position of a tiny subsidiary of a major Australian corporation, carrying on some very incidental and discrete part of the corporate group’s business, and engaging in cartel conduct, in circumstances where no other company in the corporate group had any knowledge of what was going on. If the consequence is that all of the values of the supplies made by every company in the corporate group were brought in, irrespective of their connection with the conduct of the contravening subsidiary corporation, we would not regard that as an absurd consequence, that is, a consequence obviously unintended by the Parliament. We repeat our earlier observation that the purpose of the provision is to identify the maximum penalty for the contravening corporation: it is not to fix the penalty itself. And, again, the submission depends to some extent on the proposition, which we have rejected, that s 76(1A)(b)(iii) is a proxy for s 76(1A)(b)(ii). In our opinion, if a rational connection needs to be seen between the purpose of the provision and the better construction of that provision, that connection exists: compare the decision of the Full Court in One.Tel Ltd v Australian Communications Authority [2001] FCA 54; 110 FCR 125.

[199] In our view, the primary judge erred in construing s 76(5)(d) as limited to Yazaki.

[200] The maximum penalty is $87,411,359.30.

[201] The extrinsic material supports our preferred construction.

[202] The provision was introduced by item 7 of Sch 9 to the Trade Practices Legislation Amendment Act (No. 1) 2006 (Cth). The Minister in his second reading speech made in the House of Representatives on 17 February 2005 said:

The government has adopted recommendations made by the Dawson review which provide that the maximum pecuniary penalty for corporations be raised to be the greater of $10 million or three times the gain from the contravention or, where gain cannot be readily ascertained, 10 per cent of the turnover of the body corporate and all of its interconnected bodies corporate, if any.

[203] The Dawson Report in 2003 recommended, with reference to s 80 of the Commerce Act 1986 (New Zealand):

It is generally accepted that an effective sanction for cartel activity should take into account the expected gains from the cartel. In a recent study in Norway it was remarked that:

‘The most important principle for levying fines is the expected loss for violating the law should exceed the gain.’

A similar study in New Zealand drew the same conclusion. Accordingly, the New Zealand Act now provides for an increased pecuniary penalty for breaches of the equivalent of Part IV of our Act. It is, in the case of a corporation, the greater of – (I) NZ$10 million; or (II) either – (A) if it can be readily ascertained and if the Court is satisfied that the contravention occurred in the course of producing a commercial gain, three times the gain resulting from the contravention; or (B) if the commercial gain cannot be readily ascertained, 10 per cent of the turnover of the body corporate and all of its interconnected bodies corporate (if any). The Committee considers this to be a desirable provision and for that reason, and because it is in the interests of closer economic relations between the two countries, is of the view that the Australian Act should be amended along the same lines.

(Citations omitted.)

[204] The New Zealand Commerce Act contains the following provision in s 80:

(2B) The amount of any pecuniary penalty must not, in respect of each act or omission, exceed,—

(a) in the case of an individual, $500,000; or

(b) in any other case, the greater of the following:

(i) $10 million:

(ii) either,—

(A) if it can be readily ascertained and if the court is satisfied that the contravention occurred in the course of producing a commercial gain, 3 times the value of any commercial gain resulting from the contravention; or

(B) if the commercial gain cannot readily be ascertained, 10% of the turnover of the person and all its interconnected bodies corporate (if any) in each accounting period in which the contravention occurred.

[205] It also contains a definition of “interconnected” and “interconnected bodies corporate” in s 2 as follows:

(7) For the purposes of this Act, any 2 bodies corporate are to be treated as interconnected if—

(a) one of them is a body corporate of which the other is a subsidiary (within the meaning of section 5 of the Companies Act 1993); or

(b) both of them are subsidiaries (within the meaning of that section) of the same body corporate; or

(ba) both of them are entities referred to by any of the paragraphs (other than paragraph (e)) of the definition of transferor in section 2(1) of the Health Sector (Transfers) Act 1993; or

(c) both of them are interconnected with bodies corporate that, in accordance with paragraph (a) or paragraph (b), are interconnected,—

and interconnected bodies corporate has a corresponding meaning.

[206] We should also express our views on whether, as held by the primary judge at [29] of the relief judgment, the word “enterprise” means business rather than, as submitted by the ACCC, doing no more than drawing a broad distinction between commercial activities on the one hand and private activities on the other. It was because the primary judge considered the most natural meaning of the word “enterprise” was business that he concluded that Yazaki was not carrying on AAPL’s business of making supplies to Holden and Mitsubishi. The primary judge said that even if “enterprise” meant commercial activity, he did not consider the Yazaki was carrying on AAPL’s commercial activity of making supplies to Holden and Mitsubishi.

[207] In our opinion, consistently with our conclusion that s 76(5)(d) applies distributively to each of the bodies corporate, that is the contravening body corporate and any body corporate related to the contravening body corporate, what is excluded is supplies that are not made in connection with an enterprise carried on by any of those bodies corporate. It then follows that the concept of an enterprise in s 9-20 of the GST Act would be applied to see first whether the activity, or series of activities, was done in the form of a business or in the form of an adventure or concern in the nature of trade and then to exclude, for example, an activity or series of activities done as a private recreational pursuit or hobby. We do not accept the submission that, if paragraph (d) is limited to the contravening corporation, all supplies made by a related body corporate are made in connection with the enterprise carried on by the contravening corporation.

[emphasis added throughout]

Reading

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