The Court helpfully confirmed what has become the standard approach to sentencing in the lower courts, but also broke new ground on how the knowledge of employees involved in misleading and deceptive conduct should be attributed to the company. In particular, the Court's judgment highlights that a failure to adequately monitor employees who are responsible for misleading conduct can lead to higher fines.
The case concerned two sets of representations made by Steel and Tube over a four-year period from 2012–2016 in relation to a particular steel mesh that it manufactured and which was intended to be used for reinforcing concrete in earthquake-prone areas.
The company represented the mesh to be 500E grade (meaning it had been tested in compliance with a particular building standard) and that it had been tested for compliance by an independent agency. Neither set of representations was true: it had not been tested in the prescribed manner and had only been tested internally by Steel and Tube. A single employee of the company (who had since left the business) had oversight of the testing procedures, and (without the knowledge of the company's senior management) had intentionally chosen to adopt different testing methods from those prescribed in the belief that his methods were better than the prescribed standard.
While the mesh was non-compliant, it was very unlikely to cause any risk to life, and there was no evidence that it caused any harm to the owners of buildings that contained it.
The Commerce Commission charged Steel and Tube with 24 representative charges under the FTA: 12 for each set of representations. In the District Court, the company was fined NZ$1,885,000, which was increased on appeal to the High Court to NZ$2,009,280. Both parties then appealed to the Court of Appeal.
Approach to sentencing
Generally, the courts will adopt a two-step approach when sentencing a company to a fine under the FTA.
The first step is to set a starting point for the fine by reference to the maximum fine that can be imposed (NZ$600,000 per offence), previous case law on similar facts, and any aggravating and mitigating features of the offending (for example, the importance of the representation made, the degree of untruthfulness of the representation, the extent of its dissemination, and any harm to consumers).
In cases where there are multiple charges, courts may reach a starting point either by calculating each starting point for each charge individually, or on a “global basis" for all charges. The Court in this case confirmed that in the former, totality considerations (ensuring that the total sentence is not out of all proportion to the offending) are important, although a totality adjustment should not be necessary if the latter “global" approach is taken.
The second step is to adjust the starting point up or down by taking into account aggravating and mitigating factors relevant to the company itself (for example, whether the company has taken actions to correct the representations, co-operated with the investigation, and pleaded guilty).
The Court of Appeal confirmed this general approach, and focused on one factor relevant to sentencing in particular: the company's state of mind.
State of mind
The state of mind of the former employee had been a central issue in both the District Court and the High Court.
The Commission had argued for a higher fine on the basis that the employee's state of mind (being the intention to disregard the requirements of the standard) could be treated as the company's state of mind for sentencing purposes. The Commission was unsuccessful in the District Court and High Court, which both held that senior management had been grossly careless by failing to ensure that the employee was supervised, but that the employee's intention could not be attributed to the company.
The Court of Appeal disagreed. Given the FTA is a consumer protection statute, it is appropriate for the state of mind of employees to be attributed to a company for sentencing purposes even where those employees are not part of senior management. In other words, if a rogue employee intentionally makes false misrepresentations about products sold by the company that may be an aggravating factor that leads to a higher fine. However, the Court emphasised that an offender's state of mind is only one factor which is relevant to culpability.
The Court ultimately sentenced Steel and Tube to a fine of NZ$1,560,000, which was not distant from the fine originally imposed by the District Court. Although the offending was “serious", it was mitigated by the fact the 500E grade representations were not made with the intention to mislead or deceive for commercial gain (as the non-compliant testing had been adopted because the company had believed it was superior to those prescribed by the standard). Further, the company had taken steps to ensure future compliance and had co-operated with the Commission.
The Court of Appeal's judgment highlights the importance of businesses having a robust culture of regulatory compliance, from senior management right down the reporting line. Even where a business has appropriate policies in place, if a false statement is made, businesses and senior management may not be able to claim a lack of knowledge come sentencing time.
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Disclaimer: This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.