Court of Appeal reduces record fines imposed on Steel & Tube for FTA breaches
In a judgment released on 9 November 2020, the Court of Appeal has reduced the record fine of $2,009,280 previously imposed on Steel & Tube Holdings Limited (Steel & Tube) by the High Court in relation to 24 breaches of the Fair Trading Act 1986 (FTA).[1]
This is an important decision because:
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As noted in the decision, this is the first time the Court of Appeal has considered a sentencing appeal under the FTA; and
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the Court of Appeal effectively rejected the sentencing band framework utilised by Justice Duffy in the High Court. For more information on the High Court decision, please see our previous Alert here.
By way of background, the FTA breaches by Steel & Tube related to misleading conduct and false representations in connection with a reinforcing steel mesh product. Steel & Tube wrongly claimed the product complied with a New Zealand industry earthquake standard (Standard), and had undergone independent testing when this was not the case. Following a two and a half year investigation by the Commerce Commission (Commission), Steel & Tube ultimately plead guilty to 24 charges under the FTA for conduct that occurred between March 2012 and April 2016. Further background regarding the charges against Steel & Tube is discussed here.
In sentencing, the District Court awarded a penalty of $1,885,000. This was subsequently increased to $2,009,280 in the High Court.
The Appeal
Both the Commission and Steel & Tube appealed the sentence imposed by the High Court. Despite the fine imposed by the High Court being the highest imposed to date on a single entity under the Fair Trading Act, the Commission argued that it was 'manifestly inadequate', and that the High Court had erred in a number of respects. In particular, the Commission argued that the High Court Judge:
- wrongly held that the state of mind of a former senior Steel & Tube employee responsible for flawed testing of the steel mesh could not be attributed to Steel & Tube for sentencing purposes;
- gave too much of a discount for totality; and
- failed to take into account Steel & Tube's size, resources and financial gain.
On the other hand, Steel & Tube argued that the High Court's starting point of $3.8 million was without precedent or statutory support, was far in excess of any fine previously imposed on a single entity under the FTA, and was accordingly 'manifestly excessive'.
Attribution of employee's state of mind for sentencing purposes
One of the key issues before the Court of Appeal was whether, and to what extent, the state of mind of the former Steel & Tube employee ought to be attributed to Steel & Tube pursuant to s 45 of the FTA. Section 45 attributes the state of mind of a company's directors and employees to the company where that individual is acting within their actual or apparent authority.
Both the District and High Courts held that s 45 was irrelevant to Steel & Tube's substantive offending, as the particular offences were ones of strict liability, and this was therefore also irrelevant to sentencing.[2] The Court of Appeal disagreed, however, and found that state of mind was relevant to sentencing under the FTA for the following four reasons:[3]
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s 45(1) does not specify that attribution is limited to proof of liability. Rather, it applies whenever it is necessary to establish a body corporate's state of mind in respect of offending, which was the case here;
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at sentencing, a Court must consider applicable sentencing purposes, principles and factors set out in the Sentencing Act, which includes the state of mind of the defendant even in strict liability offences;
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state of mind, including whether conduct was inadvertent, careless or wilful, materially affects sentencing under the FTA; and
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necessity is a question of fact as well as law, and on the fact of this case, Steel & Tube's state of mind was a matter of real significance and controversy.
On this basis, Steel & Tube's liability for its former employee's state of mind or the state of mind of its senior management, who failed to adequately supervise or audit the work undertaken by the former employee, could not be excused. This was particularly so given the employee in question was a senior figure whose actual authority extended to production, testing and certification of the steel mesh.
Relevant sentencing considerations when imposing a penalty for FTA offending
The Court of Appeal held that the sentencing bands proposed by the High Court should not be used, nor was it the Court's role to establish such parameters for sentencing in cases such as this.[4] Sentencing should instead begin with the objectives of the FTA, including promoting fair conduct in trade and the safety of goods and services, as well as the prohibition of certain unfair conduct and practices.
With that in mind, the Court considered Steel & Tube's offending was serious insofar as the product it sold was put to an important use, compliance with the particular Standard was vital, Steel & Tube had no legitimate excuse or justification for the offending, and the offending was of a significant scale and spanned a number of years. However, the offending was not intentional or deliberately conducted by Steel & Tube for financial gain, it genuinely believed the steel mesh did comply with the relevant standard, and that its testing processes and procedures were adequate. Further, Steel & Tube immediately withdrew the steel mesh from the market once it became aware that its testing processes did not comply.
The Court accordingly adopted a global starting point of $1.5 million for representations made regarding compliance with the standard and $900,000 for the independent testing representations. The overall fine was reduced to $1.56 million following application of a 35% discount for Steel & Tube's early guilty plea, which was not disputed by either the Commission or Steel & Tube.
Considerations for businesses
The Court of Appeal's decision reinforces the need for companies to be aware that the level of potential penalty under the FTA may be significantly increased by reckless or deliberate behaviour of an employee or senior manager, particularly if it can be demonstrated that adequate monitoring or supervision by the company would have picked up on such behaviour earlier. It reiterates the need for senior management to ensure that companies have rigorous compliance processes in place and that employees are aware of their obligations.
Companies also need to take great care to ensure that representations made as to compliance by a product or service with a particular standard or accreditation must be accurate, able to be substantiated, and, if relevant, supported by independent testing or verification.
If you have any questions or would like assistance in setting up or refreshing your company's FTA compliance programme, please contact Joe Edwards or Troy Pilkington, who have extensive experience in setting up such programmes for companies.