Civil penalties can come at a premium - Civil Law

The recent Federal Court decision in Australian Competition and Consumer Commission v Trivago NV (No 2) (ACCC v Trivago) has confirmed courts will not shy away from ordering large civil penalties, where appropriate.

The Court was required to consider whether an appropriate marker of 'benefit' – a well-established penalty factor in civil penalty proceedings – was revenue or profit. Noting that both are relevant, the Court confirmed that it is not limited to a consideration of profit. Instead, it is able to (and should) look to the (often much larger) measure of revenue.

A refresher - how are civil penalties calculated?

In addition to setting out a framework to establish the maximum penalty, legislation often refers to the imposition of a pecuniary penalty that the Court considers is 'appropriate'.¹ The primary driver of appropriateness is general and specific deterrence; and promoting the public interest in compliance.² Penalties must be of such a magnitude so as to deter a wrongdoer "from the cynical calculation involved in weighing up the risk of penalty against the profits to made from contravention".³

Against the backdrop of deterrence, there are several other factors that courts must consider: the nature and extent of the conduct, circumstances in which it occurred, resulting loss and harm, and benefits accruing to contravenors from the conduct, among other things.⁴

ACCC v Trivago

The decision in ACCV v Trivago only concerns relief. The liability decision was handed down in February 2020, which itself was the subject of an unsuccessful appeal by Trivago during 2021.

The Court awarded a total of $44.7 million in pecuniary penalties for Trivago's contraventions of sections 29(1)(i) and 34 of the Australian Consumer Law (ACL).⁵ This makes it one of the highest penalties awarded for breaches of the ACL and certainly one of the highest following a contested hearing on liability and on relief. It follows from recent decisions in Australian Competition and Consumer Commission v Australian Institute of Professional Education Pty Ltd (In Liq) (No 5) (2021)⁶ (where $153 million was ordered, and the quantum of the penalty was not opposed by the liquidators), and Volkswagen Aktiengesellschaft v Australian Competition and Consumer Commission (2021)⁷ ($125 million, in circumstances where the parties had submitted a joint penalty of $75 million was appropriate, which the Court found to be manifestly inadequate).

The contraventions concerned Trivago's misleading advertising campaign and website presentation over more than a two-and-a-half year period. In short, Trivago's conduct concerned the use of misleading advertisements – that its website makes it easy for consumers to 'find the ideal hotel for the best price' – and misleading website design – including that consumers would consider that the 'Top Position Offer' on its website was the cheapest offer, among other contraventions. The Court was very critical of Trivago's contraventions, holding that its conduct was extremely serious.

In reaching its award of $44.7 million in civil penalties, the Court stated that "pecuniary penalties totalling this amount are appropriate in the circumstances of this case, and are necessary to achieve the purposes of specific and general deterrence", highlighting the importance of deterrence in the context of civil penalty proceedings.

When weighing relevant factors, the Court observed that under the ACL, the maximum penalty in accordance with the statutory framework amounted to hundreds of millions of dollars, if not more; referred to the substantial loss or damage of at least $30 million to consumers caused by Trivago's contraventions; noted that Trivago had derived substantial revenue from its contravening conduct, and referred to revenue when detailing Trivago's size and financial position.

In assessing Trivago's benefits from the contraventions, the Court observed that there had been a difference between the parties at trial as to whether 'revenue' or 'profit' was the appropriate marker of 'benefit'. The ACCC had focussed on revenue, and argued that there was no authority for the proposition that the only measure of benefit was profit (as put by Trivago).

It was a significant matter, as Trivago's total revenue for the 2017 to 2019 calendar years was between €839 million and €1.035 billion,⁸ whereas the global business operated with negative or very slim profit margins over the same periods. In terms of Australian generated revenue, Trivago made approximately $206.8 million between 2017 – 2019, with between 73% and 80% of that revenue spent on advertising over the same periods.

On the ACCC's view, Australian revenue was a relevant consideration going to benefit as well as Trivago's size (and supporting the ACCC's analysis that a penalty of at least $90 million was appropriate); whereas Trivago contended its low profit supported a much lower penalty (arguing for $15 million).

In the particular circumstances of this case, the primary expense reducing Trivago's Australian generated profit was advertising: the same advertising that the Court had found to be seriously misleading. In the ACCC's view, it would have been inappropriate to view Trivago's 'benefit' as accruing from profit only, when it had made the business decision to spend its revenue on a misleading advertising campaign.

Justice Moshinsky concluded that both revenue and profit were relevant, observing that "Insofar as Trivago submits that the revenue figures are not relevant for the purposes of assessing benefits, I do not accept that proposition".

His Honour considered it necessary to say more about the intersection between Trivago's revenue, profit and the penalties ordered. The judgement states:

"... the total of the above penalties is many multiples of Trivago's profit from the contravening conduct, and many multiples of its net income from its Australian operations for the 2017, 2018 and 2019 calendar years... However, in the circumstances of this case, I consider it necessary for the purposes of specific and general deterrence to fix penalties that are far greater than the profit Trivago earned from its contravening conduct. I consider that a total penalty of the order proposed by Trivago (up to $15 million) would not reflect the seriousness of the contraventions and would be seen as an "acceptable cost of doing business. I note that the penalty proposed by Trivago is only half of the estimated loss and damage suffered by consumers (approximately $30 million)".

Trivago's calculation of profit during the relevant period was not the subject of debate in this proceeding. However, profit figures can depend on business and accounting decisions made by the organisation the subject of regulatory review or intervention. Methods used to calculate profit and figures presented to the Court – and the importance of the overall context which should be considered when viewing profit – have been questioned in other Federal Court decisions.⁹

Where does this leave businesses?

Courts clearly continue to understand general and specific deterrence as a key factor when ordering a civil penalty. In the ACL context at least, ACCC v Trivago has confirmed that when considering the 'benefit' accruing to an entity as a result of contravening conduct, each of revenue and profit will be relevant to the Court's determination.

Where businesses with large revenue take business or accounting decisions which result in low reported profit figures or perhaps low reported Australian profit figures, this is unlikely to lead to a lower assessment of an appropriate civil penalty.

This leaves businesses with no doubt that large penalties will be sought by regulators and can be awarded by courts.

If your business is the subject of investigation and civil penalty proceedings by a regulator, you should be mindful of the regulator's ability to draw on your revenue (rather than profit) figure as a relevant factor when arguing for a particular penalty.

Footnotes

¹ See, for example, Schedule 2 to the Competition and Consumer Act 2010 (Cth), sections 76, 224.

² Commonwealth v Director, Fair Work Building Industry Inspectorate (2015) 252 CLR 482, [55]

³ Singtel Optus Pty Ltd v ACCC (2012) 287 ALR 24, [63], cited with approval by the High Court in ACCC v TPG Internet Pty Ltd (2013) 250 CLR 640, [64] – [66]

⁴ See, for example, the modified 'French factors' in Singtel Optus Pty Ltd v ACCC (2012) 287 ALR 24, [63]

⁵ Which is Schedule 2 to the Competition and Consumer Act 2010 (Cth).

⁶ 397 ALR 208

⁷ 284 FCR 24

⁸ before declining significantly during 2020, in large part due to the COVID pandemic

⁹ See, for example, Volkswagen at [147] – [166]

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.