Court of Appeal has its say on sentencing under the Fair Trading Act

Monday, November 23, 2020

The Court of Appeal has, for the first time, considered an appeal of a sentencing under the Fair Trading Act 1986 (FTA) in Commerce Commission v Steel & Tube Holdings Ltd [2020] NZCA 549.

The original charges related to false and misleading statements about Steel & Tube’s steel mesh product. Steel & Tube pleaded guilty to 24 representative charges covering two categories:

  • false representations that SE62 complied with the required standard, when in fact Steel & Tube did not comply with the testing procedures and therefore could not claim compliance; and
  • false representations that SE62 was independently tested and certified as complying with the required standard, when in fact the independent testing was only during the development of the product, and not to ensure ongoing compliance.

The lack of compliance with the testing procedures set out in the standard was due to a conscious decision of Steel & Tube’s then technical manager. He was an acknowledged expert in the area, and was a member of the committee tasked with drafting the standard.

The technical manager developed a view that some of the testing was unnecessary, and decided not to do it.

Attribution of employee’s conduct and state of mind to the company

Steel & Tube pleaded guilty to the charges, not disputing that their (now former) employee’s conduct could be attributed to them pursuant to section 45(2) of the FTA. There was no argument that the actions of the employee were beyond his actual or apparent authority.

The Court of Appeal confirmed that establishing the state of mind of Steel & Tube was a necessary part of the sentencing process, and not only relevant to liability. The Court noted that:

“The state of mind of the defendant is an orthodox sentencing consideration for strict liability offences. After all, strict liability is designed to encourage those in trade to meet the standards of care that legislation requires of them. A court is always interested in the reasons why those standards were not met. State of mind may inform the court’s assessment of the gravity and culpability of the offending.”

The Court of Appeal also noted that, when sentencing under the FTA, courts commonly categorise conduct as inadvertent, careless, or wilful. This categorisation rests on the defendant’s state of mind.

In this case, the employee’s state of mind could also be attributed to Steel & Tube, pursuant to section 45(1) of the FTA. However, that is not the only consideration. The Court said that:

“The state of mind of an agent whose misleading conduct is the subject of the charge suffices for sentencing purposes, but that person need not be the only agent whose conduct and state of mind may influence sentencing. The court may inquire further. State of mind may matter at two points in time; when the offence was committed and at sentencing. So far as the offence date is concerned, senior management’s complicity in, or ignorance of, an employee’s actions may aggravate or mitigate culpability, depending on the circumstances. At sentencing, where senior management invariably speaks for a corporate defendant, the court is interested in co-operation with the authorities, assumption of responsibility, and commitment to future compliance.”

Sentencing practice for FTA penalties

The Court declined to make a guideline judgment for sentencing, and recorded that the guideline proposed in the High Court (in Commerce Commission v Steel & Tube Holdings Ltd [2019] NZHC 2098) should not be followed. However, the Court did acknowledge that their judgment “will inevitably be looked to by sentencing judges”, and they therefore set out the factors that they would consider, and assessed the appropriate sentence.

The Court of Appeal considered the following factors when assessing the starting point for the sentencing:

  • nature and use of the product;
  • extent to which the false statements were misleading;
  • extent, duration, and systematic nature of the offending;
  • the company’s state of mind;
  • compliance culture and systems;
  • effect on consumers and other traders; and
  • extent of any commercial gain or benefit from the offending.

When assessing mitigating factors, the Court of Appeal also considered:

  • remedial action and commitment to the future;
  • guilty pleas and co-operation; and
  • financial resources.

The Court of Appeal adopted global starting points of $1.5 million for the compliance representations, and $900,000 for the independent testing representations, resulting in an overall starting point of $2.4 million. This was reduced to an overall fine of $1,560,000 after taking into account the mitigating factors and early guilty plea.

The Court also noted that a totality adjustment may be necessary in such a case if the court has calculated the sentence for each offence separately, but in cases like this, where the sentencing was conducted on a global basis, a totality assessment should not be necessary.

Comment

Although the Court of Appeal declined to make a guideline judgment, this decision provides some useful direction for future FTA sentencings.

A copy of the judgment is available here.

If you have any questions about how this decision may affect you, please contact a member of our litigation and dispute resolution team.

 

Disclaimer: the content of this article is general in nature and not intended as a substitute for specific professional advice on any matter and should not be relied upon for that purpose.

 

 

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