Full Court increases “manifestly inadequate” civil penalty for ACL breaches

Penalties for Australian Consumer Law (ACL) breaches may sharply increase, given the recent decision of the Full Court of the Federal Court in ACCC v Reckitt Benckiser (Australia) [2016] FCAFC 181 to impose $6 million in penalties for misleading claims about Nurofen products. The Court commented that $6 million was “at the bottom of the range” for contraventions of the kind found in the case.

For some time, Australian Competition and Consumer Commission (ACCC) Chairman, Rod Sims, has been pressing for ACL penalties to be set at the same level as for competition law breaches. For example, recently on ABC radio, Mr Sims commented:

"Penalties under the Australian Consumer Law generally should be at a higher level anyway. The maximum penalty under the Australian Consumer Law is $1.1 million per breach.

The maximum penalty under Competition Law is generally $10 million per breach, and it's a bit hard to understand why there's that significant difference. So we do have general concern about penalties under the Australian Consumer Law as not being adequate to give the right amount of deterrence."

The contrast in the maximum penalties available for competition and ACL breaches has also been noted in the unconscionable conduct context. Justice Gordon commented in ACCC v Coles Supermarkets Australia Pty Ltd:

"The ACL provides for significant penalties for these contraventions. It is a matter for the Parliament to review whether the maximum available penalty of $1.1 million for each contravention of Pt 2-2 of the ACL by a body corporate is sufficient when a corporation with annual revenue in excess of $22 billion acts unconscionably. The current maximum penalties are arguably inadequate for a corporation the size of Coles."

Misleading claims

Reckitt Benckiser sold about 5.9 million packets of the Nurofen Specific Pain range over a period of nearly five years, which carried various representations it admitted to be misleading. Each product in the range represented on its packaging and separately on a website that it had been formulated to treat a specific type of pain, namely “migraine pain”, “tension headache”, “period pain”, or “back pain”.

However, the products did not actually target different types of pain as each product contained the same dosage of ibuprofen and nothing more. Notwithstanding this, the Nurofen Specific Pain products were about double the price to consumers when compared to standard Nurofen.

The ACCC contended that the appropriate pecuniary penalty in the circumstances was in the order of $6 million. However, following a contested penalty hearing, the Federal Court ordered Reckitt Benckiser to pay a pecuniary penalty of $1.7 million for contravening section 33 of the ACL.

The Full Court increased the penalty to $6 million

The ACCC appealed to the Full Court of the Federal Court against the quantum of the pecuniary penalty imposed by the primary judge.

The Full Court revisited the primary objectives of pecuniary penalties, being general and specific deterrence:

"The objective of any penalty in this case must be to ensure that Reckitt Benckiser and other "would-be wrongdoers" think twice and decide not to act against the strong public interest in consumers being able to make decisions about buying non-prescription medicines free from representations that are liable to mislead and thereby distort their decision-making process.

All other things being equal, the greater the risk of consumers being misled and the greater the prospect of gain to the contravener, the greater the sanction required, so as to make the risk/benefit equation less palatable to a potential wrongdoer and the deterrence sufficiently effective in achieving voluntary compliance."

There were a number of aspects of the primary judge's reasoning which the Full Court considered to be erroneous, including:

• the primary judge ought to have found that a substantial proportion of the $25 million difference between the sales price of the Nurofen Specific Pain range products and the price of standard Nurofen represented the loss to consumers which was caused by the contraventions; 
• the conduct caused a serious distortion of genuine consumer choice; 
• Reckitt Benckiser’s conduct was not “innocent”  as it was objectively reckless in the circumstances; 
• Reckitt Benckiser's cooperation did not carry substantial weight as its admissions were very late and saved little, if any, court time; and 
• the penalty of $1.7 million could not be viewed as substantial or as achieving the primary deterrence objective of a pecuniary penalty.  

The Full Court considered the theoretical maximum penalty to be in the trillions of dollars (5.9 million packets sold at $1.1 million per contravention), and found that this not to represent a "meaningful" overall maximum penalty measure. Instead, the Full Court used the loss to consumers to be a useful guide to the appropriate penalty range, which led to a theoretical maximum penalty of $25m. 

Noting the pecuniary penalty of $1.7 million ordered by the primary judge, the Full Court said that imposition of pecuniary penalty of that quantum for the ACL breaches admitted:

"… would reinforce a view that the price to be paid for the contraventions was an acceptable business strategy, and was no more than a cost of doing business. The public interest in consumers being able to make decisions about buying non-prescription medicines free from representations that are liable to mislead and thus distort decision-making processes would thereby be undermined rather than supported by the penalty that was imposed."

The Full Court had regard to the $6 million pecuniary penalty sought by the ACCC. Despite describing this quantum as "modest", the Full Court ultimately found $6 million to be an appropriate penalty in the circumstances. However, an indication was given by the Full Court that it was open to the primary judge to impose a pecuniary penalty well in excess of $6 million:

"Sitting as trial judges, we would have been entitled to impose a considerably greater penalty, given the losses which we consider were occasioned by the conduct and that these were serious contraventions even within the spectrum of the liable to mislead category."

The primary judge’s pecuniary penalty of $1.7 million was set aside and the Full Court ordered Reckitt Benckiser to pay a penalty of $6 million.

A rethinking of pecuniary penalties for consumer law breaches

The decision in ACCC v Reckitt Benckiser certainly suggests that larger penalties may be awarded in future cases.

Where companies are negotiating with the ACCC towards an agreed penalty for ACL breaches, the approach in this case is expected to encourage the ACCC to set a higher starting point than previously was the case.