A new record: Federal Court orders A$26.5m penalty against company for breaches of the Australian Consumer Law

An upward trend in penalties being ordered by courts for breaches of the Australian Consumer Law seems to be emerging, following the Federal Court of Australia’s recent order for a record $26.5 million penalty against vocational training provider, Empower. 

The decision in Australian Competition and Consumer Commission v Cornerstone Investment Aust Pty Ltd (in liq) (No 5) [2019] FCA 1544 (Empower decision) confirms that if they did before, companies can no longer consider penalties for consumer law breaches the cost of doing business.

Since increases to the maximum penalties for breaches of the Australian Consumer Law (ACL) came into effect in September 2018, the approach taken by the Federal Court to penalty awards has been watched closely. The increases followed sentiment amongst the public, Australian regulators and the legal community that penalties needed to be high enough to impact a company financially, relative to its size, and ensure that penalties were not simply seen as the ‘cost of doing business’.

In late 2018, we saw the Federal Court make the largest pecuniary penalty order against an individual and separately, against a corporation, for breaches of the ACL, at that time. Less than 12 months on, the Empower decision marks a new record, with a penalty order made against the company of more than double the previous high water mark. 

Background of the case 

The Australian Competition and Consumer Commission (ACCC) brought proceedings in the Federal Court of Australia against vocational training provider Cornerstone Investment Aust Pty Ltd (in liq) trading as Empower (Empower). 

The ACCC alleged that Empower had contravened the ACL (being Schedule 2 to the Competition and Consumer Act 2010 (Cth) (CCA)) in respect of their recruitment and enrolment practices for their online vocational education and training (VET) courses. Only 42 of the over 4,000 consumers enrolled in its VET courses completed their course. The ACCC argued that Empower:

• took advantage of its superior bargaining position relative to students, including vulnerable consumers;
• used undue influence and unfair tactics to encourage students to enrol in Empower’s VET courses, including offering inducements such as laptops;
• failed to adequately disclose information to students about the nature of Empower’s courses, including that all study was to be undertaken by way of an online learning platform;
• failed to adequately disclose to students the nature of their obligations if they received governmental VET FEE-HELP assistance, including that they would incur a debt to the Commonwealth;
• enrolled students in courses that were not suitable for them having regard to their limited formal education and limited reading, writing and computer skills; and
• enrolled students in courses for financial gain in circumstances in which the consumers incurred a debt regardless of whether they were capable of undertaking or completing the course.

The ACCC alleged that Empower’s conduct was unconscionable in contravention of s 21 of the ACL, and that it had made false or misleading representations in breach of ss 29(1)(g) and 29(1)(i) of the ACL. The ACCC also claimed that Empower had breached the provisions of the ACL relating to unsolicited consumer agreements (namely ss 74, 75, 76, 78 and 79). The ACCC sought declarations, pecuniary penalties, a consumer redress order, compensatory orders and costs.

Had Empower contravened the ACL?

On 19 September 2018, the Court determined that Empower had contravened the provisions of the ACL alleged by the ACCC (see Australian Competition and Consumer Commission v Cornerstone Investment Aust Pty Ltd (in liq) (No 4) [2018] FCA 1408). 

The Court found that Empower was ‘callously indifferent’ to consumer protection considerations, and that its system:

• generated very large enrolments in its VET courses (by ‘duping consumers’ into enrolling) and consequently very large revenues in the form of Commonwealth VET FEE-HELP payments;
• was directed to enrolling students eligible for VET FEE-HELP funding who were vulnerable to trickery and inducements, including consumers who were financially and educationally disadvantaged; and
• meant it was a ‘matter of luck whether a consumer would enrol with an adequate understanding of the services acquired and the debts that would be incurred’.

The penalty order

Given Empower was in liquidation, the Court doubted there was utility in imposing penalties. Nevertheless, the Court found that considerations of general deterrence and an acknowledgement of the egregious nature of the conduct warranted a penalty order.

Pursuant to s 224(1)(a)(i), (ii) and (iv) of the ACL, the Court ordered that Empower pay pecuniary penalties totalling A$26.5 million. This comprised a penalty of A$25 million in relation to its system of unconscionable conduct, and A$100,000 for each instance of unconscionable conduct in respect of individual consumers (with none ‘any less disgraceful’ than the other).

Why was the penalty higher than previous cases?

In short, the Court found that Empower’s systemic unconscionable conduct was demeaning, predatory, and very serious, warranting the imposition of a very significant penalty. The Court had ‘no hesitation’ in accepting that a significant penalty was required to ensure an appropriate deterrent effect against ‘this and similar rorts’.

The Court found that Empower’s systemic conduct was ‘particularly serious’ for five reasons:

1. Empower engaged in the conduct for an extended period (six months), affecting thousands of consumers.
2. Empower’s conduct caused significant financial loss to consumers and the Commonwealth.
3. Consumers were at a significant disadvantage in terms of bargaining position, and were otherwise vulnerable to being misled or deceived.
4. Empower knew that its consumers may have come from disadvantaged sectors of the community, being its stated target demographic.
5. Empower’s conduct involved a reckless and callous indifference to consumer protection, including whether consumers were ‘duped’ into enrolling in online courses, and evidenced a widespread failure to implement adequate processes.

In assessing the appropriate penalty, the Court had regard to the usual considerations:

• the maximum penalties under s 224(3) of the ACL which, at the time the conduct occurred, were A$1.1 million (for contraventions of s 21 and s 29) and A$50,000 (for contraventions of ss 74 to 76, 78 and 79);
• the factors set out in s 224(2) of the ACL, including the nature and extent of the conduct and loss or damage which resulted, the circumstances in which the conduct occurred, and any prior similar contraventions;
• considerations of general and specific deterrence such that the penalty is not seen as ‘an acceptable cost of doing business’; and
• the non-mandatory considerations set out in Australian Competition and Consumer Commission v Singtel Optus Pty Ltd (No 4) [2011] FCA 761; (2011) 282 ALR 246 (Singtel) at [11] – namely: 
  • the size of the company;
  • the deliberateness or systematic nature of the conduct and the period over which it extended; 
  • the involvement of senior management; 
  • whether the company has a corporate culture conducive to ACL compliance;
  • the cooperation offered by the company to authorities;
  • any similar past conduct; and 
  • the financial position of the company.

The Court also considered the course of conduct and parity principles. Although the Court declined the ACCC’s invitation to undertake a detailed comparison of the two cases, it nevertheless noted that it was significant that the respondent company in Australian Competition and Consumer Commission v We Buy Houses Pty Ltd (No 2) [2018] FCA 1748 (We Buy Houses) was ordered to pay a penalty of A$12 million (the highest penalty award for a breach of the ACL until the present decision) where the benefit flowing from the conduct was A$24.2 million, but Empower had benefited to the order of A$55 million. 

After balancing the above factors, the Court concluded that:

• it was not helpful to calculate the maximum available penalty given there were a multitude of contraventions, a system of unconscionability which had impacted a large number of consumers, and multiple contraventions affected each individual consumer;
• Empower’s conduct was extensive, both in terms of the number of affected consumers and the monetary sums involved;
• Empower’s conduct was a critical component of its business operations which lead to ‘large consumer losses and huge revenues at the expense of Australian taxpayers’;
• Empower’s conduct was quantitatively (in terms of the amount of loss and damage caused) more harmful than the conduct by the respondent VET provider in Australian Competition and Consumer Commission v Get Qualified Australia Pty Ltd (in liquidation) (No 3) [2017] FCA 1018, in which an A$8 million penalty was ordered, though it was not useful to attempt a comparison as to whether it was qualitatively worse (in terms of the nature of the conduct);
• the amount of the benefit received by Empower (A$55 million) and the fact that they were government funds were matters of great significance;
• there was no evidence that Empower’s senior management made any effort to ensure that recruiters received ACL training or that unsolicited consumer agreements were made in compliance with the ACL;
• Empower did not have a culture of compliance with the ACL, rather, Empower was callously indifferent to the requirements of the ACL;
• no lesser penalty was warranted based on any cooperation by Empower with the ACCC, given it actively defended the proceedings; and
• there was no evidence of previous contraventions of the ACL by Empower.

Other relief

The Court also ordered:

• the respondent to pay compensation of over A$55 million to the Commonwealth, in relation to the over 4,000 students who did not complete a unit of study in the course in which they were enrolled (pursuant to s 237 of the ACL) – the order was directed at the Commonwealth because the Commonwealth had relieved the relevant students of their VET FEE-HELP debts; 
• that all contracts between Empower and particular identified consumers were void ab initio, and their liability to pay a VET tuition fee or VET FEE-HELP loan fee was annulled (pursuant to s 239 of the ACL); and
• Empower pay the Applicants’ costs.

What’s next?

The Empower decision illustrates that the ACL penalty regime will be utilised to its full force where conduct is sufficiently serious and companies demonstrate a routine disregard for their consumer law obligations.

With the Empower decision the new ‘high water mark’, it is possible we may see a continued upward trend in penalty orders for contraventions of the ACL.