A new era in Consumer Law penalties? Federal Court orders record amounts against director and corporation

The Federal Court recently ordered record penalties of $6 million against a director and $12 million against a corporation for breaches of the Australian Consumer Law (ACL). The decision imposed the largest pecuniary penalty order against an individual and separately, against a corporation, for breaches of the ACL, and may mark a new era of tougher penalties for ACL breaches.

About the case

The Australian Competition and Consumer Commission (ACCC) brought Federal Court proceedings against We Buy Houses Pty Ltd (WBH) and Richard Otton. The ACCC alleged that WBH and Mr Otton had:

• engaged in misleading and deceptive conduct;
• made false or misleading representations concerning testimonials and the uses or benefits of the respondents’ services;
• engaged in conduct liable to mislead the public as to the characteristics and suitability for purpose of the respondents’ services; and
• made false or misleading representations about the profitability, risk or other material aspects of a business activity.

This conduct was alleged to have contravened sections 18, 29(1)(f), 29(1)(g), 34 and 37 of the ACL (which is Schedule 2 of the Competition and Consumer Act 2010 (Cth) (CCA).

Mr Otton was the sole director and sole shareholder of WBH. WBH carried on business in Australia conducting seminars, courses, boot camps and mentoring programs and supplying training materials to consumers, purporting to enable consumers to "buy a house for $1”.

Between 1 January 2011 and 2 March 2015, Mr Otton and WBH made representations to consumers in Australia at free seminars, boot camps, on websites and in print and digital material, to the effect that consumers could:

• buy a house for $1;
• buy a house without needing a deposit, bank loan or real estate experience;
• buy a house using little or none of the consumer's own money, including by buying at a discount;
• create passive income streams through property and/or quit their jobs, including by turning negative gearing into positive cash flow;
• build property portfolios without their own money invested, without new bank loans or without real estate experience;
• start making profits immediately; and
• create or generate wealth.

Mr Otton and WBH also published testimonials containing representations that the relevant consumer had bought a house for $1 and represented that Mr Otton had been financially successful in implementing the strategies they promoted.

What did the Court decide?

The liability judgment

In a judgment dated 11 August 2017 (Australian Competition and Consumer Commission v We Buy Houses Pty Ltd [2017] FCA 915) (liability judgment), Gleeson J determined that these representations were false or misleading and that Mr Otton and WBH had contravened sections 18, 29(1)(f), 29(l)(g), 34 and 37 of the ACL.

The penalty judgment

On 15 November 2018 the Court handed down judgment in Australian Competition and Consumer Commission v We Buy Houses Pty Ltd (No 2) [2018] FCA 1748. This judgment (penalty judgment) concerned pecuniary penalties and other non-punitive orders flowing from the earlier findings of misleading and deceptive conduct and false and misleading representations.

On the basis of her Honour’s findings in the liability judgment, Gleeson J:

• made declarations in a form that reflected the findings in the liability judgment;
• permanently restrained WBH and Mr Otton from involvement in the supply or promotion of services or advice concerning real property transactions or investment;
• imposed pecuniary penalties of $12 million on WBH and $6 million on Mr Otton;
• disqualified Mr Otton from managing corporations for ten years;
• ordered the respondents to implement a compliance program;
• ordered the respondents to undertake corrective advertising, and to disclose the Court’s declarations and other orders to previous attendees of their events;
• ordered that the reasons for judgment, together with the Court’s orders be retained for the purposes of s 137H of the CCA;
• made orders for costs to follow the event.

The pecuniary penalties

The ACCC sought pecuniary penalties of $12 million against WBH and $8.6 million against Mr Otton, which the respondents contended were manifestly excessive. The ACCC argued that as the representations that contravened the ACL were made on possibly thousands of occasions, any penalty assessment must consider the overall extent and seriousness of the contravening conduct (ie the ‘totality’ and ‘course of conduct’ principles). The Court agreed, finding that the very large number of contraventions meant that the theoretical maximum penalty was vastly in excess of what was proper for the entirety of the contravening conduct.

Factors the Court considered

Section 224(2) of the ACL requires the Court to 'have regard to all relevant matters' when determining an appropriate financial penalty. These include:

1. the nature and extent of the offending person's act or omission and of any loss or damage suffered as a result;
2. the circumstances in which the act or omission took place; and
3. whether the person has previously been found by a court to have engaged in any similar conduct.

The Court also applied the well-established penalty principles set out in Australian Competition and Consumer Commission v Singtel Optus Pty Ltd (No 4) [2011] FCA 761 per Perram J.

The Court's findings

The Court found that:

• The offending representations were the primary promotional message conveyed by the respondents to entice consumers and potential consumers to attend “free seminars”, with a view to persuading them to enrol in “boot camps” and otherwise purchase training and materials offered for sale by WBH.
  
  
• The representations on the websites were made to the public at large, and there was a substantial effort to reach a wide audience for the ultimate purpose of gaining business from consumers.
  
  
• Approximately 3,400 consumers attended the 42 free seminars, and approximately 2,000 consumers attended the 16 boot camps at which the contravening representations were made.
  
  
• The Court was not prepared to infer that the entirety of WBH’s $20 million turnover should be attributed to the contravening conduct as a measure of loss or damage, given “there may have been consumers who were determined to buy the respondents’ snake oil regardless of the respondents’ conduct”.
  
  
• The conduct occurred over a substantial period and formed part of a concerted marketing campaign for WBH’s services, which was more likely to deceive consumers.
  
  
• Neither respondent had previously been found by a Court to have engaged in similar conduct.
  
  
• The admitted turnover figure of over $20 million was an indication of the size of WBH, showing that the business that it operated in the relevant period was substantial, however, it was ‘far from clear’ that WBH had resources from which to pay a pecuniary penalty. As to Mr Otton, the Court did not accept the respondents’ argument that Mr Otton did not have significant financial resources available to him.
  
  
• It was manifestly not reasonable to accept that Mr Otton thought he could rely on the absence of relevant advice, as an indication of the legality of his conduct. Mr Otton had demonstrated that he was “profoundly uninterested” in compliance with the ACL by engaging in conduct similar to that which was the subject of an enforceable undertaking in 2013.
  
  
• The contraventions arose primarily out of the conduct of Mr Otton, who was the sole director and shareholder of WBH.
  
  
• The steps taken by Mr Otton and WBH following previous allegations by the ACCC in 2004 and 2014 demonstrated a “limited culture” of taking corrective action to address regulatory breaches when pursued by the ACCC. However, the corporate culture of WBH had not been conducive to compliance with the ACL, and the mere fact that refunds had been given to consumers and a solicitor had read a draft of the book in question was not, without more, indicative of compliance.
  
  
• Responding to a notice pursuant to s 155 of the ACL, a failure to hide documents or facts, and the cessation of free seminars and boot camps did not indicate a disposition by the respondents to cooperate, including because a failure to comply with a s 155 notice constitutes an offence and a decision to cease contravening conduct is not cooperation.
  
  
• The contravening conduct was not covert, but was deliberate, systematic (as the representations were calculated to entice consumers to purchase materials and services from WBH), and indeed was a critical component of the respondents' business operations.

The penalties imposed by the Court 

The Court ultimately imposed penalties of $12 million and $6 million against WBH and Mr Otton, respectively. In considering the appropriate penalties, the Court found:

• it was of great importance to deter Mr Otton personally from future similar contraventions, given his defence, evidence and oral testimony (in which he sought to reduce his culpability);
  
  
• WBH had ceased business and was unlikely to operate a business in the future, and so did not require deterrence;
  
  
• appropriate penalties in this case would have a significant general deterrent effect, to discourage similar conduct which may have been encouraged by the financial success of the respondents’ business model;
  
  
• much of the conduct involved Mr Otton acting as the directing mind and will of WBH, and accordingly there was a comparable degree of seriousness in the contraventions;
  
  
• the contraventions were very serious and the contravening conduct was a significant part of a marketing campaign by which WBH ‘effectively duped’ thousands of consumers;
  
  
• the contravening conduct was predatory, being designed to appeal to the gullible and to consumers who hoped to 'get rich quick';
  
  
• the respondents had not shown contrition or remorse for their conduct, except for the limited orders consented to (to which minimal weight should be attributed, given their inevitability);
  
  
• the penalty to be imposed on Mr Otton need not be reduced to take into account the fact that he might bear the penalty imposed on WBH (due to the structure of the business);
  
  
• Mr Otton and WBH presented Mr Otton as the 'human face of WBH';
  
  
• Mr Otton was critical to the presentation of WBH’s business and was integral to the contraventions of WBH;
  
  
• because he was knowingly concerned in, or a party to, each of WBH’s contraventions, a single penalty was appropriate for Mr Otton rather than separate penalties for Mr Otton’s individual contraventions;
  
  
• it was not appropriate to impose a penalty on Mr Otton exceeding 70% of the penalty to be imposed on WBH, in light of the maximum penalties for a single contravention and the fact that the maximum for an individual is 20% of the maximum for a corporation;
  
  
• the penalty ordered against Mr Otton was not excessive taking into account the disqualification order.

Looking ahead

Mr Otton, the second respondent, has appealed the decision. On application by the respondents, the Court’s orders in relation to corrective notices, disqualification and payment of penalties have been stayed until the first day of the case management hearing for the appeal.

ACCC Chair, Rod Sims has commented that “[t]his outcome also reflects a recent trend of higher penalties for Australian Consumer Law breaches. We can expect this to continue following recent law changes to increase maximum financial penalties under consumer law”.[1]

Although increased maximum penalties under the ACL[2] had not yet been introduced at the time this case was heard, it may be that, in any event, the Court imposing such substantial penalties is reflective of the sentiment behind the new maximums: that penalties should be sufficient enough to deter breaches of highly profitable conduct.

It will be interesting to see how the Federal Court approaches future penalty proceedings, and whether we truly have entered a new era where businesses can no longer view potential penalties as a ‘cost of doing business’.

Corrs acted for the applicants in this litigation. The views expressed in this article are the views of the authors and do not necessarily reflect the views of the applicants for which Corrs acted.