On 1 May 2015, the Full Federal Court handed down a decision that will markedly affect the way regulatory enforcement matters may be "settled" by agreeing to a penalty with the regulator.

The decision is likely to have significant implications for prosecutions brought by regulators including the ACCC, ASIC, the ATO and industrial and workplace regulators such as the Fair Work Ombudsman Fair Work Building Industry Inspectorate.

In Director, Fair Work Building Industry Inspectorate v Construction Forestry, Mining and Energy Union [2015] FCAFC 59 (CFMEU decision), the Full Court held that the usual practice of making an application to the Court for the imposition of a penalty that has been agreed between the parties and supported by an agreed statement of facts and joint submission, was not permissible.

In this eBulletin we discuss the consequences of the decision for regulators and respondents and explore what might happen next.

The decision

In the CFMEU decision, a specially convened Full Court of the Federal Court was asked to make declaratory orders and impose a pecuniary penalty against the CFMEU for contraventions of the Building and Construction Industry Improvement Act 2005. The application was supported by a statement of agreed facts and a joint submission.

The Full Court held that the common practice of hearing joint submissions from the parties about appropriate penalties, was impermissible. 

In reaching this conclusion, the Full Court conducted a detailed review of the authorities, which it then attempted to reconcile with the High Court's decision in Barbaro v The Queen (2014) 305 ALR 323. Barbaro is authority for the proposition that it is not permissible for the prosecution in a criminal proceeding to make submissions to the Court at sentencing regarding the penalty or range of penalties that would be appropriate for the Court to impose.  Until this week's judgment in the CFMEU decision, Barbaro had not been considered applicable to civil penalty matters.

Following CFMEU, the position in both civil and criminal penalty proceedings is that a joint submission on an agreed penalty is neither evidence nor a submission on the law.  It is no more than an opinion expressed by counsel, making it generally inadmissible and irrelevant to the court's determination of the appropriate penalty to be imposed.

Civil penalties and common practice

The CFMEU decision effectively outlaws a practice that has been a common feature of regulatory enforcement proceedings in fields including:

  • competition and consumer law;
  • corporations law;
  • industrial and work place regulation; and
  • financial services (including superannuation).

In approximately 70% of civil penalty cases brought by the ACCC since 1 January 2010, civil penalties were agreed between the parties.  Understandably, the decision has huge consequences for the ACCC, as well as those who are prosecuted by it.

It is likely to have similar implications for other regulators such as:

  • Fair Work Ombudsman, for which at least 75% of cases involved agreed civil penalties;
  • Australian Tax Office, for which 25% of cases involved agreed civil penalties; and
  • ASIC, for which approximately 20% of cases involved agreed civil penalties.

The court has always been required to consider whether the material in a statement of agreed facts is sufficient to find a contravention, and whether the penalties proposed by the parties are within the range that the court considers appropriate and commensurate with the seriousness of the contraventions. Under the now prohibited practice of making a joint submission as to the "appropriate" penalty, parties had a reasonable degree of comfort that the findings made and penalties imposed would be largely consistent with what was agreed.

Indeed, the ACCC uses this comfort to encourage respondents to cooperate and negotiate an agreed outcome, prior to trial.  For instance, in its 'Immunity and Cooperation Policy for Cartel Conduct' (September 2014), the ACCC said that for parties who were not eligible for 'first-in' immunity, if  they nonetheless cooperated with the ACCC, the ACCC could recommend penalty discounts to the court.

Short­term uncertainty

In the short term, the CFMEU decision is likely to bring uncertainty to regulators and litigants while the courts and parties grapple with its implications.

As discussed above, the process of reaching agreement with regulators about a statement of agreed facts (which remains permissible) and the quantum of a proposed penalty (which is now in doubt)  historically gave litigants some comfort that the court was unlikely to impose a penalty greatly inconsistent with what had been agreed. Whilst the Full Court's ruling will undoubtedly impact what the parties can say to the court by way of joint submission, it may not entirely erode the relative certainty of outcome that a negotiated resolution can bring.

Nevertheless, for those who have already reached a settlement arrangement with a regulator, but are waiting to appear before a court, as well as those in the midst of settlement negotiations, the decision will not sit well.

In particular, the CFMEU decision is likely to increase the costs to respondents, as they adjust to this new regime.  This is unfortunate for those who have already negotiated outcomes, as whether or not to agree to a civil penalty is often the result of an assessment of the costs of litigation that a negotiated settlement may avoid.

The decision also casts doubt on the precedential value of previous decisions where "agreed" penalties were imposed.  A probable outcome is that penalties will, at least initially, be higher than those that have been agreed between regulator and respondent in the past.

In its extreme, the decision could deter respondents from entering into settlement arrangements in the first place and potentially have the undesired effect of encouraging respondents to go to trial and 'fight it out'.

Looking ahead

While the full impact of the decision is yet to be determined, it will greatly affect the way in which regulators and respondents go-about settlement negotiations.

It may be that regulators and litigants still find ways to communicate the appropriateness of a penalty-range to the court, albeit through a different procedure.  For instance, the quantum of penalty might be the subject of evidence, in the context of what amount would achieve the objects of the underlying legislation. The High Court in Barbaro did say that parties are entitled to make submissions as to the relative seriousness of the contraventions, explain the relevant principles and refer to comparable decisions, a comment which was noted by the Full Federal Court in the CFMEU decision.  Whether or not such practices are permissible will no doubt be the subject of further judicial consideration.

In the short term however, a period of relative uncertainty is likely to continue, particularly having regard to the fact that it is almost certain that the CFMEU decision will be appealed.  Given the gravity of the decision for regulators, it may be that the Commonwealth government is the one to initiate an appeal.  The Commonwealth intervened in the proceeding before the Federal Court and was represented by the Australian Government Solicitor (AGS).  It is believed the ACCC also took an active role in instructing the AGS and is therefore well alive to these issues.

Whilst we will need to wait until the outcome of any such appeal before the new landscape of civil penalty proceedings becomes clear, one cannot help but wonder, given the regulators' significant reliance upon negotiated outcomes to reduce the costs of such prosecutions, whether an unsuccessful judicial appeal might not be followed by calls for further legislative change to at least partially reinstate the status quo.