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Where's the penalty spot? High Court re-writes approach to FTA penalties

Home Insights Where's the penalty spot? High Court re-writes approach to FTA penalties

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Contributed by: Bradley Aburn, Louisa Blair and Troy Pilkington

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Published on: September 03, 2019

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Last month, the High Court reset the approach to tariffs under the Fair Trading Act 1986 (FTA) when it increased the already record fine that the District Court imposed on Steel & Tube Holdings Limited (Steel & Tube). This case is important as the new approach is likely to exacerbate the recent trend of ever-higher penalties under the FTA. It also highlights the importance of having an active compliance programme to mitigate potential penalties.

The District Court originally fined Steel & Tube $1,885,000 for 24 breaches of the FTA relating to false representations about compliance with New Zealand industry earthquake standards for its reinforcing steel as well as falsely claiming that its products were independently tested.1 The Commission appealed, claiming the penalty was manifestly inadequate, as the District Court had not taken into account Steel & Tube's technical manager's "intentional, knowing and deliberate departures from the Standard's requirements".2 Steel & Tube cross-appealed claiming that the record penalty was manifestly excessive.  

A new framework for determining the starting point for penalties

Given that the parties had agreed that Steel & Tube should be given a 35% discount for mitigating factors, the focus of the case was on what should be the appropriate starting point for penalties. It is generally accepted that the starting point should reflect the gravity of the offending.3 Justice Duffy considered that misrepresentations could be viewed along a spectrum – with inadvertent misrepresentations being the least culpable, and deliberate misrepresentations being the most culpable, with careless misrepresentations somewhere in between.4 Such a categorisation is not controversial; however, her Honour's next step of prescribing a minimum tariff for each category (as summarised in the table below) is without precedent. The table below sets out the recommended starting point for each category.5 Once the starting point is determined, further adjustment is required to take into account specific additional aggravating or mitigating factors.6   

Degree of culpability

Relevant starting point

Inadvertent misrepresentation

One third of maximum penalty

Careless misrepresentation

Between one & two thirds of maximum penalty

Deliberate misrepresentation

At least two thirds of maximum penalty

Whose state of mind is relevant when determining culpability?

The Commission's view was that the District Court's penalty was manifestly inadequately because it did not reflect the fact that Steel & Tube's technical manager deliberately departed from the applicable standard and knew that the representations were false.7 The Commission sought to use s 45 of the FTA to attribute the technical manager's state of mind to Steel & Tube, which would have resulted in Steel & Tube's culpability moving from careless to deliberate – substantially increasing the starting point of the fine. Section 45 attributes the state of mind of a company's directors/employees to the company where that individual is acting within his/her actual or apparent authority. 

The High Court agreed with the District Court that s 45 did not apply in this case as Steel & Tube had been charged with strict liability offences meaning there was no need for the Commission to prove any particular state of mind.8 In circumstances where s 45 did not apply to the substantive offence, the High Court held that it was equally of no relevance when the company was sentenced. In assessing the culpability of Steel & Tube, the only state of mind that was relevant was that of Steel & Tube's senior management or Board – not the technical manager.9 

This decision should provide comfort to companies that a company's level of penalty should not be significantly increased for the reckless or deliberate behaviour of a rogue employee, where, on the whole, the company itself had an appropriate culture of compliance.         

A new record fine

Having applied the new approach to starting point, the High Court held that the District Court penalty was "manifestly inadequate" and increased the final penalty to $2,009,280.10 

How do I best protect my company?

This case has confirmed that the trend of ever-increasing penalties for breaches of the FTA is likely to continue. It also highlights how important it is for senior management to ensure that companies have rigorous compliance programmes in place and that all employees are aware of their obligations. 

When it comes to strict liability offences, being able to demonstrate an active approach to FTA compliance is important for mitigating exposure to substantial penalties for the deliberate actions of a rogue employee.

If you have any questions or would like assistance in setting up or refreshing your company's FTA compliance programme, please contact Sarah Keene, Troy Pilkington or Joe Edwards who have extensive experience in setting up such programmes for companies. 

FOOTNOTES
  1. Commerce Commission v Steel & Tube Holdings Ltd [2018] NZDC 21579. See our previous alert on this here.
  2. At [54].
  3. R v Taueki [2005] 3 NZLR 372, cited at [91].
  4. At [92].
  5. At [92].
  6. At [92].
  7. At [59].
  8. At [63].
  9. At [67].
  10. At [132].
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