A dual first for the ACCC: Federal Court imposes penalties for breach of compulsory recall notice after finding no benefit from the conduct

On 8 September 2022, the Federal Court of Australia in ACCC v Mercedes-Benz Australia/Pacific Pty Ltd [2022] FCA 1059 delivered its reasons for its determination of the first ever penalty for non-compliance with a compulsory recall notice, in contravention of s 127(1) of the Australian Consumer Law (ACL). The case related to statements made by Mercedes-Benz Australia/Pacific Pty Ltd (Mercedes) to its customers in respect of defective airbag inflators produced by the Takata group (Takata airbags), which did not give the necessary sense of urgency in relation to the recall. The $12.5 million penalty was agreed between the Australian Competition and Consumer Commission (ACCC) and Mercedes on the basis of facts admitted by Mercedes and Mercedes was also ordered to contribute $100,000 to the ACCC’s costs.

This is the first proceeding where the Court has determined the maximum penalty on the basis of there being no benefit from the conduct. In finding that there was no benefit from the conduct, the Court determined that the maximum penalty per contravention was $10 million.

The background

On 27 February 2018, the Assistant Minister to the Treasurer issued a compulsory recall notice for vehicles fitted with affected Takata airbag inflators (Notice). The Notice followed voluntary recalls by suppliers, an ACCC investigation and a safety warning notice pursuant to s 129 of the ACL warning the public about the possible risks involved in the use of vehicles containing Takata airbags.

The Notice required suppliers (including Mercedes) to develop and implement a Communication and Engagement Plan (CEP) for communicating with their customers in order to maximise rates of replacements of Takata airbags. The Notice also specifically required suppliers not to include information or phrases that would likely minimise or mitigate a customer’s perception of risk, such as ‘we are only conducting this recall as a precaution’.

The contravening conduct

In accordance with the Notice, Mercedes developed two CEPs (one for Mercedes cars and Mercedes vans) which were approved by the ACCC in June 2018 and August 2018, respectively. In the CEP Mercedes acknowledged that it would ‘use attention-capturing, high-impact language in all general and direct communications to consumers in order to try and avoid consumers ignoring notices’.

In the proceedings the subject of the penalty hearing, the ACCC alleged that, on 27 occasions between July 2018 and March 2020, 5 Mercedes call centre staff made statements to consumers to the effect that:

• Mercedes was undertaking the recall as a precaution (Precaution Statements); and
• there had been no faults, accidents, injuries or deaths caused by the airbag inflators in other manufacturer’s vehicles (No Incident Statements).

The Court found that these statements did not comply with the requirement in Mercedes’ CEPs to use ‘attention-capturing’ or ‘high-impact language’ when communicating with customers about the recall.[1] By failing to comply with the CEP in that way, Mercedes failed to comply with the terms of the Notice and therefore contravened s 127(1) of the ACL (a civil penalty provision that requires compliance with recall notices).

Assessing maximum penalty for conduct with no benefit

Mercedes’ contravening conduct took place over a period where the maximum penalty of ACL contraventions changed. Prior to 1 September 2018, the maximum penalty for a contravention by a company of s 127(1) of the ACL was $1.1 million (Former Penalty Regime). Accordingly, the Court decided that a maximum penalty of $6.6 million was available for the 6 contraventions which took place during this period.

On 1 September 2018, the maximum penalty for corporate contraventions of the ACL increased to the greater of:

1. $10 million (First Limb);
2. 3 times the value of the benefit obtained by way of the conduct (Second Limb); or
3. if the Court cannot determine the value of that benefit, 10% of the annual turnover of the body corporate in the 12 month period preceding the contravention (Third Limb).

For the 21 contravening statements made by Mercedes in the period after 1 September 2018, the Court found that Mercedes made no benefit from the contravening conduct. Having determined that there was a measurable benefit (albeit of no value), the Court could not progress to the Third Limb, and therefore the maximum penalty available for each contravention was $10 million under the First Limb of the new penalty regime.[2] Accordingly, the total maximum penalty for the 21 contraventions that took place during this period was $210 million.

This penalty assessment is significant because it represents the first time the Court has:

• made a positive finding as to the value of the benefit obtained by conduct which contravened the ACL or CCA;
• made a positive finding that there was no benefit to the respondent from the conduct. In contrast, in many other ACCC pecuniary penalty proceedings, the Court has determined that a benefit did follow from the conduct, but that it was incalculable, or the Court has proceeded on the basis of an agreed maximum penalty having regard to the First or Third Limbs; and
• imposed a penalty for a contravention of s 127 of the ACL for non-compliance with mandatory recall notices.

Determination of penalty

Penalty factors and clarifications from the High Court in Pattinson

The Court summarised the principles relevant to assessing the appropriateness of the proposed penalty, distilled from the recent High Court case Australian Building and Construction Commissioner v Pattinson [2022] HCA 13 (Pattinson). Relevantly, these included that:

• the primary if not sole, purpose of a civil penalty is deterrence and promoting the public interest in compliance with the ACL;
• while the notion of ‘proportionality’ is not strictly relevant in assessing civil penalties, the penalty must not exceed what is reasonably necessary to deter future contraventions of a similar kind;
• the penalty must not be regarded as an acceptable cost of doing business;
• the court’s task is to determine an ‘appropriate’ penalty in the circumstances of the particular case, and while factors identified in earlier cases are possible relevant considerations, there is no ‘legal checklist’ for assessing penalty;
• the maximum penalty must be considered, but is to be balanced with all other relevant factors;
• the power to impose a penalty is to be exercised fairly and reasonably having regard to the subject matter, scope and purpose of the ACL; and
• concepts such as totality, parity and course of conduct may still assist in the assessment of penalty.

Applying the above principles, the Court agreed with the total $12.5 million penalty proposed by the parties, having regard to factors including:

• the importance of deterring non-compliance with compulsory recalls, given the public safety purposes of recalls, and the need to maintain consumer confidence in the recall process and product safety measures;
• the conduct was not deliberate, reckless, systematic or covert. In particular, the 27 contravening statements arose in the context of over 52,000 interactions between call centre staff and consumers;
• senior management of Mercedes were not involved in the contravening conduct;
• the size and financial position of Mercedes;
• the motor vehicle industry is large and recalls relating to motor vehicles have the potential to impact a large proportion of the Australian population, which warrants general deterrence;
• Mercedes’ conduct did not result in any financial or other loss to consumers. In fact, all relevant consumers had their vehicles recalled and airbags replaced before the recall notice deadline;
• Mercedes has not previously been found to have contravened the ACL;
• the conduct did not result in any financial or other form of benefit to Mercedes. Rather, Mercedes spent in excess of $100 million executing the recall over three years; and
• Mercedes cooperated with the ACCC, including providing a court-enforceable undertaking to the ACCC to implement specific compliance steps in relation to its recall obligations.

Calculation of penalty

The total maximum penalty to be considered in respect of Mercedes’ conduct was $216.6 million. As noted above, this comprised of:

• $6 million for 6 contraventions under the Former Penalty Regime; and
• $210 million for the remaining 21 contraventions under the current penalty regime.

The Court indicated that the maximum penalty of $216.6 million would be ‘oppressive’ and ‘well outside the appropriate range’. Instead, the Court determined that the agreed penalty of $12.5 million was within the appropriate range, having regard to all the factors outlined in the section immediately above.

Importantly, the Court applied the ‘course of conduct principle’, noting that where separate acts giving rise to separate contraventions are inextricably interrelated, they should be viewed as a single ‘course of conduct to avoid double punishment for overlapping conduct. The Court found that it was appropriate to group the contraventions into 2 courses of conduct: those involving the Precaution Statements and those involving the No Incidents Statements. On that basis, the $12.5 million penalty imposed by the Court was comprised of:

• $10.1 million for the Precaution Statements (comprising the 6 contraventions under the Former Penalty Regime, and 17 of the 21 contraventions under the current penalty regime); and
• $2.4 million for the No Incident Statements (being the remaining 4 contraventions under the current penalty regime).

Key takeaways

The Court’s decision provides a number of important reminders to business.

• The necessity to carefully consider, and thoroughly action, the terms of a mandatory recall notice and any enforceable undertaking to the ACCC.
• The real risk of exposure to significant penalties for breach of the ACL and/or CCA, even in circumstances where no benefit has been derived from the contravening conduct.
• The importance for corporations to implement appropriate compliance programs. The Court has clearly indicated that ‘Corporations should be left in no doubt that a strong internal compliance program, including proper training and supervision of management and staff, is not optional.’

With product safety being an enduring priority for the ACCC, this decision also indicates the seriousness with which the ACCC takes ACL contraventions relating to product safety, and an indication of the ACCC’s willingness to investigate and pursue wrongdoing of this kind.