Australian Competition and Consumer Commission v Volkswagen Aktiengesellschaft
[2019] FCA 2166
•20 December 2019
FEDERAL COURT OF AUSTRALIA
Australian Competition and Consumer Commission v Volkswagen Aktiengesellschaft [2019] FCA 2166
File numbers: NSD 1462 of 2016
NSD 322 of 2017Judge: FOSTER J Date of judgment: 20 December 2019 Catchwords: CONSUMER LAW – Volkswagen and Audi dieselgate scandal – admitted contraventions of s 29(1)(a) of the Australian Consumer Law (ACL) by Volkswagen Aktiengesellschaft – two regulatory proceedings settled as between the regulator, Australian Competition and Consumer Commission, and Volkswagen, its subsidiaries and affiliates – whether the agreed pecuniary penalty is appropriate within the meaning of s 224(1) of the ACL and having regard to all relevant circumstances – consideration of relevant matters in determining the amount of the requisite pecuniary penalty – agreed penalty held to be manifestly inadequate and not appropriate – higher penalty imposed – whether declarations substantially in accordance with the parties’ settlement should be made – whether agreed costs order should be made Legislation: Australian Consumer Law, Pt 3.3 and ss 18(1), 29(1)(a), 29(1)(g), 33, 106, 224 and 246
Competition and Consumer Act 2010 (Cth), Sch 2
Evidence Act 1995 (Cth), s 191
Federal Court of Australia Act 1976 (Cth), s 20(1A)
Motor Vehicle Standards Act 1989 (Cth), ss 5, 7, 10A, 14 and 18
Petroleum Retail Marketing Sites Act 1980 (Cth)
Trade Practices Act 1974 (Cth), ss 45, 45A and 76
Australian Design Rule 79—Emission Control for Light Vehicles)
United Nations Economic Commission for Europe Regulation 83, Uniform Provisions Concerning the Approval of Vehicles with Regard to the Emission of Pollutants According to Engine Fuel Requirements
18 U.S.C. §371
18 U.S.C. §542
18 U.S.C. §1343
18 U.S.C. §1512(c)
42 U.S.C. §7413(c)(2)(A)
Cases cited: Attorney-General (SA) v Tichy (1982) 30 SASR 84
Australian Competition and Consumer Commission v Australia and New Zealand Banking Group Ltd (2016) 118 ACSR 124
Australian Competition and Consumer Commission v Cement Australia Pty Ltd [2017] FCAFC 159
Australian Competition and Consumer Commission v Coles Supermarkets Australia Pty Ltd (2015) 327 ALR 540
Australian Competition and Consumer Commission v Cornerstone Investment Aust Pty Ltd (In Liq) (No 5) [2019] FCA 1544
Australian Competition and Consumer Commission v FFE Building Services Limited (2003) ATPR ¶41-969
Australian Competition and Consumer Commission v Hillside (Australia New Media) Pty Ltd (t/as Bet365) (No 2) [2016] FCA 698
Australian Competition and Consumer Commission v Qantas Airways Ltd (2008) 253 ALR 89
Australian Competition and Consumer Commission v Reckitt Benckiser (Australia) Pty Ltd (2016) 340 ALR 25
Australian Competition & Consumer Commission v Roche VitaminsAustralia Pty Ltd [2001] FCA 150
Australian Competition and Consumer Commission v Woolworths Limited [2016] FCA 44
Australian Competition and Consumer Commission v Yazaki Corporation (2018) 357 ALR 55
Barbaro v The Queen (2014) 253 CLR 58
Chief Executive Officer of Customs v Labrador Liquor Wholesale Pty Ltd (2003) 216 CLR 161
Clean Energy Regulator v MT Solar Pty Ltd [2013] FCA 205
Commonwealth of Australia v Director, Fair Work Building Industry Inspectorate (2015) 258 CLR 482
Construction, Forestry, Mining and Energy Union v Cahill (2010) 269 ALR 1
Director, Fair Work Building Industry Inspectorate, v Construction, Forestry, Mining and Energy Union (2015) 229 FCR 331
Johnson v The Queen (2004) 205 ALR 346
Markarian v The Queen (2005) 228 CLR 357
Mill v The Queen (1988) 166 CLR 59
Minister for Sustainability, Environment, Water, Population and Communities v Woodley [2012] FCA 957
Minister for Industry, Tourism & Resources v Mobil Oil Australia Pty Ltd (2004) ATPR ¶41-993
Mornington Inn Pty Ltd v Jordan (2008) 168 FCR 383
NW Frozen Foods Pty Ltd v Australian Competition and Consumer Commission (1996) 71 FCR 285
Pearce v The Queen (1998) 194 CLR 610
R v MacNeil-Brown (2008) 20 VR 677
Singtel Optus Pty Ltd v Australian Competition and Consumer Commission (2012) 287 ALR 249
Trade Practices Commission v Allied Mills Industries Pty Ltd (No 5) (1981) 60 FLR 38
Trade Practices Commission v CSR Limited (1991) ATPR ¶41-076
Ultra Tune Australia Pty Ltd v Australian Competition and Consumer Commission [2019] FCAFC 164
Wong v The Queen (2001) 207 CLR 584
Date of hearing:
16 October 2019 and 13 November 2019
Registry:
New South Wales
Division:
General Division
National Practice Area:
Commercial and Corporations
Sub-area:
Regulator and Consumer Protection
Category:
Catchwords
Number of paragraphs:
278
Counsel for the Applicant:
Dr JK Kirk SC and Ms NL Sharpe SC
Solicitor for the Applicant:
Australian Government Solicitor
Counsel for the Respondents:
Mr GK Rich SC, Mr IJM Ahmed and Ms E Bathurst
Solicitor for the Respondents: Clayton Utz
Table of Corrections 29 January 2020 In paragraph 272, replace the third last word (“conducted”) with the word “conduct”. 29 January 2020
In the second sentence of paragraph 273, replace the word “various” where it appears before the words “serious deception” with the word “very”.
ORDERS
NSD 1462 of 2016 BETWEEN: AUSTRALIAN COMPETITION AND CONSUMER COMMISSION
Applicant
AND: VOLKSWAGEN AKTIENGESELLSCHAFT
First Respondent
VOLKSWAGEN GROUP AUSTRALIA PTY LIMITED (ACN 093 117 876)
Second Respondent
JUDGE:
FOSTER J
DATE OF ORDER:
20 december 2019
UPON the basis of the matters set out in the Statement of Agreed Facts dated 15 October 2019 (Ex C in the penalty hearing) (SOAF) and upon the basis of other material admitted into evidence at the penalty hearing and having considered the Joint Written Submissions of the parties dated 15 October 2019 and filed herein and the oral submissions made by the parties on 16 October 2019 and on 13 November 2019
THE COURT DECLARES THAT:
1.On 171 separate occasions in the period from 1 January 2011 to 3 October 2015 (Sales Period), in respect of 57,082 Volkswagen-branded motor vehicles more particularly described in Schedule 1 hereto (Relevant Vehicles), the first respondent (VWAG) submitted to the Delegate (delegate) of the Minister for Infrastructure and Regional Development the documents more particularly described in Schedule 2 hereto (approval applications) in order to obtain approvals under s 10A of the Motor Vehicle Standards Act 1989 (Cth) (MVSA) so that motor vehicles covered by the said approvals might be lawfully imported into Australia and supplied for use as road vehicles in Australia.
2.On each of the 171 occasions referred to in Declaration 1 above, by submitting the approval applications to the delegate, in all the circumstances and in the regulatory context in which such submissions were made, VWAG impliedly represented to the delegate that each of the Relevant Vehicles would, when imported into Australia and when supplied in Australia, comply with Australian Design Rule 79 (which is delegated legislation under the MVSA) (ADR 79) as in force from time to time during the Sales Period.
3.VWAG was granted identification plate approvals in respect of all of the Relevant Vehicles upon the basis of the information provided by it in or with the approval applications submitted to the delegate.
4.Each of the implied representations specified in Declaration 2 above was false because, in the events which happened, the Relevant Vehicles did not comply with ADR 79 when imported into Australia and when supplied in Australia in that:
(a)Each of the Relevant Vehicles was fitted with the Two Mode software more particularly described in Schedule 3 hereto (the contravening software); and
(b)If the Relevant Vehicles had been subjected to a New European Drive Cycle (NEDC) Type 1 test while operating in Mode 2, thereby substantially replicating the mode that would have been activated when the vehicles were driven on the road, the Relevant Vehicles would have exceeded the NOx emission limits prescribed by ADR 79,
with the consequence that, on each of the 171 occasions referred to in Declarations 1 and 2 above, in trade or commerce, in connection with the supply or possible supply of goods, namely, the Relevant Vehicles, VWAG made a false representation as to the composition, standard or grade of the vehicles the subject of the approval application in each case and thereby, on each such occasion, contravened s 29(1)(a) of the Australian Consumer Law (ACL), being Sch 2 to the Competition and Consumer Act 2010 (Cth).
5.By making the applications specified in Schedule 4 hereto from time to time in the Sales Period through the online administration portal on the GVG Website administered by the Department of Infrastructure and Regional Development (DIRD), VWAG falsely represented to DIRD on at least 162 occasions in respect of the Volkswagen-branded vehicles identified in Annexures 4 and 5 to the SOAF that the motor vehicles the subject of each such application complied with ADR 79 as in force at the relevant time when, in fact, those vehicles did not so comply because:
(a)The engine in each of the said vehicles was fitted with the contravening software; and
(b)If the said vehicles had been subjected to an NEDC Type 1 test while operating in Mode 2, thereby substantially replicating the mode that would have been activated when the vehicles were driven on the road, the said vehicles would have exceeded the NOx emission limits prescribed by ADR 79,
resulting in the said vehicles obtaining ratings on the GVG Website which they would not have obtained had the said false representations not been made with the consequence that, on each of the 162 occasions referred to above, in trade or commerce, in connection with the supply or possible supply of goods, namely the Relevant Vehicles, or in connection with the promotion of the supply or use of the said goods, VWAG made a false representation as to the composition, standard or grade of the said vehicles the subject of the listing application in each case and thereby, on each such occasion, contravened s 29(1)(a) of the ACL.
6.By making the additional applications specified in Schedule 5 hereto from time to time in the Sales Period, through the online administration portal on the GVG Website, VWAG falsely represented to DIRD on at least 140 occasions in respect of the Volkswagen-branded vehicles identified in Annexure 5 to the SOAF that the motor vehicles the subject of each such application complied with a later, more stringent version of ADR 79 than was applicable to the vehicles at the relevant time when, in fact, those vehicles did not so comply with that more stringent version because:
(a)The engine in each of the said vehicles was fitted with the contravening software; and
(b)If the said vehicles had been subjected to an NEDC Type 1 test while operating in Mode 2, thereby substantially replicating the mode that would have been activated when the vehicles were driven on the road, the said vehicles would have exceeded the NOx emission limits prescribed by ADR 79,
resulting in the said vehicles obtaining higher air pollution ratings on the GVG Website than they would have obtained had the said false representations not been made with the consequence that, on each of the 140 occasions referred to above, in trade or commerce, in connection with the supply or possible supply of goods, namely the Relevant Vehicles, or in connection with the promotion of the supply or use of the said goods, VWAG made a false representation as to the composition, standard or grade of the said vehicles the subject of the listing application in each case and thereby, on each such occasion, contravened s 29(1)(a) of the ACL.
AND THE COURT ORDERS THAT:
7.Pursuant to s 224(1) of the ACL, within twenty-eight (28) days of the making of this Order, VWAG pay to the Commonwealth of Australia a pecuniary penalty of $125,000,000 (One Hundred and Twenty-Five Million Dollars) in respect of the contraventions of the ACL declared at Declarations 4, 5 and 6 above.
8.Within twenty-eight (28) days of the making of this Order, VWAG pay the applicant’s costs of and incidental to this proceeding agreed in the amount of $4,000,000 (Four Million Dollars).
9.The remaining claims for relief made by the applicant in this proceeding (including all claims for relief made in any Interlocutory Applications which have not been determined as at the date hereof) be dismissed.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
SCHEDULE 1
RELEVANT VOLKSWAGEN BRANDED VEHICLES
Model (type)
Years of manufacture
No of vehicles sold
Amarok (2.0L)
2010–2012 (Model Year (MY) 2011 – MY2012)
8,694
Caddy, including the maxi
Caddy (1.6L and 2.0L)2010–2015 (MY2010 – MY2016)
8,558
CC (2.0L)
2012–2015 (MY2012 – MY2016)
1,241
Eos (2.0L)
2008–2014 (MY2009 – MY2014)
845
Golf (1.6L and 2.0L)
2008–2012 (MY2009 – MY2013)
11,539
Jetta (1.6L and 2.0L)
2008–2015 (MY2009 – MY2016)
2,527
Passat (2.0L)
2008–2015 (MY2009 – MY2015)
10,863
Passat CC (2.0L)
2009–2012 (MY2009 – MY2012)
804
Polo (1.6L)
2010–2014 (MY2010 – MY2014)
2,618
Tiguan (2.0L)
2007–2015 (MY2008 – MY2016)
9,393
Total vehicles sold
57,082
SCHEDULE 2
Documents submitted to the Delegate of the Minister for Infrastructure and Regional Development in order to obtain approvals under s 10A of the Motor Vehicle Standards Act 1989 (Cth):
(i) Application for Compliance Approval Forms;
(ii) In some cases, Selection Test Fleet Forms; and
(iii) Summary of Evidence Forms.
SCHEDULE 3
The Two Mode Software
(a)The operation of the Two Mode Software is described in more detail in the Agreed Technical Document dated 17 February 2017 tendered and admitted into evidence in the Stage 1 hearing (CRT.500.001.0001). The text of the said Agreed Technical Document (excluding annexures and appendices) was admitted into evidence in the penalty hearing as Exhibit A.
(b)In summary, simplifying the description in that document:
(i)All of the Relevant Vehicles contained an exhaust gas recirculation system (EGR System).
(ii)In all Relevant Vehicles, the EGR System is controlled by the Engine Control Units (ECU).
(iii)All of the Relevant Vehicles contained software in their ECU which, subject to certain operating conditions, caused the EGR System to operate in one of two modes (Two Mode Software):
(A)Mode 1 was optimised for NOx and other pollutant emissions (primarily by specifying lower target air mass which would be expected to result in a higher Exhaust Gas Recirculation (EGR) Rate and compliance with applicable emissions limits).
(B)Mode 2 was the mode optimised for comfort including fuel economy, reliable regeneration of the particulate filter and noise, vibration and harshness (primarily by specifying a higher target air mass which would be expected to result in a lower EGR Rate), which would result in higher NOx emissions than in Mode 1.
(iv)The Two Mode Software caused Mode 1 to operate when the Relevant Vehicles were being driven after start-up according to the Type 1 emissions test (which used the NEDC), which is the primary legislated emissions test in Australia. At all other times, the Two Mode Software caused the Relevant Vehicles to operate in Mode 2.
SCHEDULE 4
Applications to have the Volkswagen-branded vehicles more particularly described in Annexures 4 and 5 to the SOAF included on the GVG Website.
SCHEDULE 5
Applications to have the vehicles more particularly described in Annexure 5 to the SOAF given a higher air pollution rating on the GVG Website.
ORDERS
NSD 322 of 2017 BETWEEN: AUSTRALIAN COMPETITION AND CONSUMER COMMISSION
Applicant
AND: AUDI AKTIENGESELLSCHAFT
First Respondent
AUDI AUSTRALIA PTY LIMITED (ACN 077 092 776)
Second RespondentVOLKSWAGEN AKTIENGESELLSCHAFT
Third Respondent
JUDGE:
FOSTER J
DATE OF ORDER:
20 december 2019
BY CONSENT, THE COURT ORDERS THAT:
1.The Originating Application be dismissed.
2.There be no orders as to the costs of this proceeding.
THE COURT NOTES THAT:
3.The above Consent Orders have been made at the request of all parties to this proceeding as part of the overall settlement reached among the parties to this proceeding and the parties to proceeding NSD 1462 of 2016 (two of whom, the Australian Competition and Consumer Commission and Volkswagen Aktiengesellschaft, are parties to both this proceeding and proceeding NSD 1462 of 2016) and notwithstanding the fact that all of the diesel engines installed in the Audi-branded vehicles the subject of this proceeding were equipped with the Two Mode Software described in Schedule 3 to the Orders made this day in proceeding NSD 1462 of 2016.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
REASONS FOR JUDGMENT
INTRODUCTION [1] THE HEARING OF THE JOINT SETTLEMENT APPLICATION [34] VW’S EA189 DIESEL ENGINE AND THE RELEVANT EMISSIONS STANDARDS [41] THE IDENTIFICATION PLATE SYSTEM IN AUSTRALIA [72] THE ACCC’S PLEADED CASES [75] THE ADMITTED CONTRAVENTIONS [85] THE US PLEA AGREEMENT [101] The Terms of the Plea Agreement [103] The USSOF [117] The US Plea Agreement and the Australian Position as Agreed in the SOAF [133] CONSIDERATION (PECUNIARY PENALTY) [138] The Relevant Legislative Provisions [138] The Relevant Authorities [147] The Correct Approach [147] The Significance of the Amount of the Maximum Penalty [197] Deterrence [198] Instinctive Synthesis [203] The Course of Conduct Principle [206] The Totality Principle [215] Parity [217] Decision [219] Some Preliminary Matters [219] The Nature and Extent of the Act or Omission and any Loss or Damage Suffered as a Result of the Act or Omission (s 224(2)(a)) [232] The Maximum Penalty [239] The Remedial Technical Measures [244] Harm to Public Health and the Environment [248] Harm to the Public and Competitors [251] Compensation to Consumers [253] The Circumstances in which the Act or Omission Took Place (s 224(2)(b) of the ACL) [254] The Appropriate Penalty [261] FOSTER J:
Introduction
There have been filed in the Court seven sets of proceedings which concern the global corporate scandal involving Volkswagen AG (VWAG), a German corporation which carries on a multinational business of designing, manufacturing and selling motor vehicles under the brands “Volkswagen”, “Audi” and “Skoda”, among others, and certain of its subsidiaries and affiliates, which has become known as “dieselgate” or “the VW global emissions scandal” or “the VW global emissions issue”. In these Reasons, I shall refer to that matter as “the emissions issue”. Approximately 10.7 million to 11.5 million vehicles were affected by the emissions issue worldwide, including almost 100,000 vehicles sold in Australia.
Although the litigation in this Court addresses most particularly the impact of the emissions issue on Australian consumers, it is necessary to pay some regard to events which took place outside Australia, especially in Europe and in the United States of America, in the period 2006–2015. The motor vehicles the subject of the Australian litigation were manufactured in the period 2007–2015.
The emissions issue was initially publicly revealed on 3 September 2015 when, according to a statement made on 8 October 2015 by Michael Horn, the then President and CEO of Volkswagen Group of America Inc (VW America) to a US Congressional Committee, representatives of VWAG disclosed at a meeting with representatives of the California Air Resources Board (CARB) and the US Environmental Protection Agency (EPA) that emissions software in certain four cylinder diesel engines manufactured by VWAG and its affiliates in the years 2009–2015 contained a “defeat device” in the form of hidden software which could recognise whether a vehicle was being operated in a test laboratory or on the road. The deployment of this software resulted in the motor vehicles fitted with the affected diesel engines emitting significantly higher levels of nitrogen oxides (NOx) when driven on the road than when tested in the laboratory. NOx is harmful to humans and to the environment. This is a generally accepted fact among scientists who work in the relevant fields and among many governmental authorities around the world charged with regulating emissions from motor vehicles. In many countries, including in Europe, the US and Australia, the emission of NOx into the atmosphere from motor vehicles is closely controlled.
Throughout the period 2006–2015, the installation of such a defeat device in vehicles to be sold in the US was prohibited under US law. That has remained the position at all times after 2015. By early September 2015, VWAG had acknowledged that it had installed a defeat device in the affected vehicles in the US and that, by so doing, it had broken US law.
On or about 7 October 2015, after suspending sales of affected vehicles in Australia, Volkswagen Group Australia Pty Ltd (VW Australia) announced that it had made available online a tool so that customers of VW and Skoda Auto a.s. (Skoda) who had purchased vehicles in Australia could check if their vehicles had been fitted with the affected diesel engines as part of VWAG’s action plan to respond to “the global emissions issue”. I infer that the reference to the “global emissions issue” in that announcement was a reference to the capacity of the software in the affected diesel engines to cause those engines to emit lower levels of NOx when being tested in the laboratory than would have been emitted when the same vehicles were driven on the road. No mention was made in that announcement that Audi-branded diesel vehicles were also affected by the emissions issue.
On 30 October 2015, Bannister Law, as solicitors on the record, commenced two class actions in this Court—Cantor v Audi Australia Pty Ltd (Audi Australia) (NSD 1307 of 2015) and Tolentino v VW Australia (NSD 1308 of 2015)—in which the applicant in each of those proceedings claimed relief in respect of the emissions issue.
On 20 November 2015, Maurice Blackburn, as solicitors on the record, commenced a class action in this Court—Dalton v VWAG and VW Australia (NSD 1459 of 2015). On 22 November 2015, Maurice Blackburn commenced two further class actions in this Court—Richardson v Audi AG, Audi Australia and VWAG (NSD 1472 of 2015) and Roe v Skoda, VW Australia and VWAG (NSD 1473 of 2015).
The claims made in the five class actions referred to at [6] and [7] above relate to approximately 100,000 motor vehicles. The five class actions cover Volkswagen, Audi and Skoda-branded vehicles.
On 1 September 2016, the Australian Competition and Consumer Commission (ACCC) commenced a proceeding against VWAG and VW Australia (NSD 1462 of 2016) in which it sought declaratory relief, pecuniary penalties, corrective advertising and other relief in respect of allegedly false and misleading conduct and false representations concerning 57,605 VW‑branded diesel vehicles sold in Australia in the period from 1 January 2011 to 3 October 2015. All of the vehicles the subject of this proceeding were powered by a version of Volkswagen’s EA189 diesel engine—either 1.6 L or 2.0 L. The allegations made in this proceeding all relate to the emissions issue. VW Australia is a wholly-owned subsidiary of VWAG. The number of vehicles the subject of proceeding NSD 1462 of 2016 was later revised downwards slightly to 57,082.
On 8 March 2017, the ACCC commenced a similar proceeding against VWAG, Audi AG and Audi Australia in respect of 12,368 Audi diesel vehicles sold in Australia in the period from 1 January 2011 to 3 October 2015 (NSD 322 of 2017) in which it claimed relief against those corporations in substantially the same terms as it had claimed against VWAG and VW Australia in proceeding NSD 1462 of 2016. All of the vehicles the subject of proceeding NSD 322 of 2017 were powered by a version of the EA189 diesel engine. All of the allegations made in this proceeding also relate to the emissions issue. Audi AG is a subsidiary of VWAG. VWAG holds more than 99% of the issued capital of Audi AG. Audi Australia is a wholly-owned subsidiary of Audi AG.
The total number of vehicles covered by the two proceedings brought by the ACCC to which I have referred at [9] and [10] above (the regulatory proceedings) is 69,450. The difference between that number of vehicles and the number of vehicles covered by the five class actions is explained by the fact that the class actions include Skoda vehicles whereas the regulatory proceedings do not and by the additional fact that the class actions cover vehicles manufactured and sold over a period which is longer than that pleaded in the regulatory proceedings.
In these Reasons, I shall refer to the 69,450 Volkswagen and Audi vehicles the subject of the regulatory proceedings as “the affected vehicles”. Schedule 2 to each of the pleadings filed in the regulatory proceedings contains particulars of the VW and Audi models in which the impugned software had been installed. In those schedules, the ACCC also specified the number of each model so affected.
Until quite recently, the seven proceedings referred to at [6]–[10] above have been case managed together.
In addition to the above proceedings, Complete Taxi Management Pty Limited and others instituted a separate proceeding against VW Australia in the Supreme Court of Queensland involving some of the same issues as had been raised in the seven proceedings commenced in this Court. That proceeding was transferred to this Court on 7 March 2017 and became proceeding NSD 510 of 2017 in this Court. It was dismissed by consent on 15 September 2017.
In all of the class actions, the applicants allege that:
(a)The software in the EA189 diesel engines installed in the vehicles covered by those actions is a “defeat device” within the meaning of the Australian Design Rules applicable to those vehicles and within the meaning of the Australian Vehicle Emissions Standards; and
(b)The vehicles covered by those actions failed to comply with the requirements of the Australian Vehicle Emissions Standards, which prohibit the use of “defeat devices” to cause vehicles to operate an emission control system differently in the test environment from the way in which that system functions when operating in normal use on the road.
The applicants in all of the class actions allege that the respondents in those actions engaged in misleading and deceptive conduct and made false and misleading representations in respect of the vehicles covered by those actions by representing that those vehicles complied with the applicable Australian Vehicle Emissions Standards when, in truth, they did not comply with those Standards. They also allege that the vehicles were not of acceptable quality and did not comply with applicable safety standards.
The applicants in the three Maurice Blackburn class actions make additional allegations to the effect that the European and Australian companies named as respondents in those actions engaged in unconscionable conduct, deceit and general law misrepresentation and also failed to comply with an express warranty provided to their customers.
The applicants in the class actions seek, among other things, compensation on behalf of the owners of and interest holders in the vehicles covered by those actions for the alleged diminution in value of those vehicles which they contend has been caused by the respondents’ conduct.
The respondents in the class actions deny all of the above allegations on various grounds.
In February 2017, in an endeavour to hear and determine all of the above proceedings (except proceeding NSD 322 of 2017 which had not been commenced by then) expeditiously, efficiently and fairly, I ordered that eight important separate questions which arose in all of the first six proceedings be determined separately from and before all other questions in those proceedings. Those common questions were later amended and supplemented and proceeding NSD 322 of 2017 was included in this separate questions approach. Ultimately, twelve separate questions went to trial in all seven proceedings. These twelve separate questions are set out in Orders made by me on 10 November 2017. A question of central importance was whether the diesel engines installed in the vehicles covered by all seven proceedings had been fitted with a “defeat device” within the meaning of the relevant Australian Design Rules and Emissions Standards.
In addition, soon after the class actions were commenced, I took steps to require the parties to agree upon the terms of a detailed Technical Document in which the workings of the EA189 diesel engines would be explained. Particular emphasis was to be placed in that document upon the design and functionality of the software to which I have referred at [3] above.
In March and May 2018, I conducted a hearing of the twelve separate questions to which I have referred at [20] above (Stage 1 Hearing). At the conclusion of the Stage 1 Hearing, I reserved my judgment in respect of those questions. In light of the settlements to which I will shortly refer, the parties to all seven proceedings no longer require that judgment to be delivered. The need for the judgment has been overtaken by subsequent events.
Shortly before the commencement of the Stage 1 Hearing, the parties finalised the Agreed Technical Document. That document became Exhibit A in the Stage 1 Hearing and was given the following electronic exhibit number (CRT.500.001.0001) at that hearing. I shall refer to that document as “the ATD”. A copy of the main text of the ATD without appendices is annexed to these Reasons for Judgment and marked as “Attachment A”.
Throughout 2018 and 2019 (up to mid-September 2019), the parties prepared for a further joint hearing of most of the issues remaining in all seven proceedings. That further hearing was called “the Stage 2 Hearing”. The Stage 2 Hearing was fixed to commence on Monday 23 September 2019 with an estimate of six weeks. Further dates in December 2019 were also allocated to the Stage 2 Hearing.
The issues to be determined at the Stage 2 Hearing were, for the most part, again common to all seven proceedings.
It was envisaged by the Court and by the parties that there would be one final set of hearings after the Stage 2 Hearing which would most likely require the remaining issues in the five class actions to be dealt with separately from the remaining issues in the regulatory proceedings.
On 6 September 2019, my Associate was informed by the parties to the five class actions that those proceedings had settled in principle. Subsequently, the parties to the class actions have informed the Court that VWAG has agreed to pay group members a figure in a range between $87 million and $127.1 million, depending upon the number of members who register for the purposes of the settlement. The $87 million is a minimum payment and the $127.1 million is the maximum payment which VWAG will be liable to make. The payment of the class actions settlement amount is on a “without admissions” basis. VWAG has also agreed to pay the applicants’ costs.
On 16 September 2019, with the consent of all parties in all seven proceedings, I vacated the Stage 2 Hearing. As at that date, I had been informed that the ACCC and VWAG were still negotiating a settlement of the regulatory proceedings and that a settlement of those proceedings was likely to be reached in the near future.
Subsequently, on 23 September 2019, I was informed that the regulatory proceedings had also settled in principle. On the same day, I fixed 10.15 am on 3 October 2019 for the hearing of a joint application to be made by the parties to the regulatory proceedings for the making of declarations and the imposition of an appropriate pecuniary penalty in proceeding NSD 1462 of 2016. For reasons which I will explain below, on 27 September 2019, I vacated that date and re-fixed the hearing of that application at 10.15 am on 16 October 2019. That hearing proceeded on 16 October 2019. A further hearing took place on 13 November 2019.
Under the settlement of the regulatory proceedings, the ACCC and VWAG have agreed to the making of certain declarations, to the payment to the Commonwealth of a pecuniary penalty of $75 million and to the payment of the ACCC’s costs agreed between the ACCC and VWAG at $4 million. It has also been agreed between the ACCC and VWAG that these declarations and orders are all to be made in proceeding NSD 1462 of 2016. In effect, VWAG, as the parent corporation and as the entity where the misconduct mostly occurred, is to take sole responsibility for all VW obligations under the settlement. As part of the overall settlement, the ACCC, VWAG, Audi AG and Audi Australia have agreed that the Audi regulatory proceeding (NSD 322 of 2017) is to be dismissed with no order as to costs. This is so notwithstanding that the Audi vehicles the subject of that proceeding were all fitted with a variant of the EA189 diesel engine in which the software to which I have referred at [3] above had been installed. As I have already mentioned, Audi AG is a subsidiary of VWAG which is almost wholly-owned by VWAG.
At subsequent listings of the class actions, the Court has been informed that the settlement of those actions is proceeding. Arrangements have been made for the hearing of an application by the parties to those actions for orders approving that settlement, for orders approving the mechanisms for effecting that settlement and for other ancillary orders.
By these Reasons for Judgment, I determine the appropriate pecuniary penalty to be imposed upon VWAG in proceeding NSD 1462 of 2016, the appropriate declarations and other orders to be made against VWAG in that proceeding and the appropriate orders to be made in the proceeding brought by the ACCC against VWAG, Audi AG and Audi Australia (NSD 322 of 2017) in light of the relief granted in proceeding NSD 1462 of 2016 and in light of the settlement reached between the ACCC, VWAG, VW Australia, Audi AG and Audi Australia in respect of both of the regulatory proceedings.
I will address the settlement of the five class actions in a separate judgment in due course.
The Hearing of the Joint Settlement Application
At the hearing before me on 16 October 2019, the following materials were tendered and admitted into evidence on that occasion:
(a)The text of the ATD without the appendices thereto (Exhibit A).
(b)Rule 11 Plea Agreement dated 11 January 2017 filed in proceeding No 16-CR-20394 in the United States District Court, Eastern District of Michigan between the United States of America, as plaintiff, and VWAG, as defendant (the US plea agreement or the plea agreement) (Exhibit B).
(c)A Statement of Agreed Facts dated 15 October 2019 (SOAF) (Exhibit C). A complete copy of the SOAF (including all six Annexures thereto) with a small number of redactions for confidentiality is attached to these Reasons as “Attachment B”.
(d)Press release issued by VWAG in which reference is made to the imposition of a fine upon VWAG by the Braunschweig District Court, Germany, in 2018 (Exhibit D).
In the SOAF, VWAG has made a number of express admissions of contraventions of the Australian Consumer Law (ACL) and the parties have set out with particularity an agreement between the ACCC and VWAG as to certain relevant facts for the purposes of s 191 of the Evidence Act 1995 (Cth).
The SOAF is not signed by the ACCC or by VWAG or by the legal representatives of either of them. For this reason, s 191(3)(a) (which provides that the benefits specified in s 191(2) do not apply unless the agreed facts are stated in an agreement in writing signed by the parties or their lawyers) is not engaged. However, the SOAF was tendered by consent at the hearing before me on 16 October 2019 in circumstances which probably engage s 191 by reason of the operation of s 191(3)(b) which refers to facts being stated in open court with the agreement of all parties. In any event, both parties proceeded at that hearing upon the basis that I should treat the document as containing agreed facts having the status of s 191 “agreed facts” for the purposes of proceeding NSD 1462 of 2016. That is, the facts in the SOAF are to be regarded as facts which the parties have agreed are not, for the purposes of proceeding NSD 1462 of 2016, to be disputed. In addition, the parties have agreed that they are not required to adduce evidence to prove the existence of any of the agreed facts specified in the SOAF. They have also agreed that neither party is permitted to adduce evidence to contradict or qualify any of those agreed facts. I shall proceed in accordance with the parties’ agreement as to these matters.
In the SOAF, at pars 6, 42, 43 and 44 in particular, VWAG made clear that it accepts that it is liable in law for the conduct of its supervisors, employees and engineers more particularly described in the SOAF which constituted the contravening conduct the subject of the admissions as to liability specified in pars 3, 68, 69, 70 and 71 of the SOAF. That is the conduct which must now be the subject of appropriate relief.
Although the executives employed by VWAG who devised and implemented the installation of the Two Mode Software had a status or employment standing below the Board of Management of VWAG, they were nonetheless very senior employees. This is made clear by the description of the culprits set out at pars 7 to 13 of the Statement of Agreed Facts forming part of the US plea agreement to which I will refer in detail later in these Reasons. In particular, Supervisor A referred to in that plea agreement was a very senior employee with significant managerial responsibilities.
The evidence which I have described at [34] above was supplemented on 13 November 2019. On that occasion, VWAG was given leave to re-open its case and to read and rely upon an affidavit of Jens Heinemann sworn on 28 October 2019. The ACCC did not oppose VWAG being given leave to re-open its case for the purpose of reading and relying upon that affidavit. The ACCC did not object to any part of that affidavit. The ACCC did not seek to cross-examine Mr Heinemann. Mr Heinemann’s evidence was intended to provide to the Court evidence of the aggregate value in Australian dollars of the net profit earned by the relevant business units of VWAG from the sale in Australia of the Volkswagen-branded affected vehicles during the relevant period.
The parties also relied upon a Joint Written Submission dated 15 October 2019 and oral submissions made on 16 October 2019 and on 13 November 2019. That Joint Written Submissions document has been filed and, subject to several words and figures being redacted, is available for inspection.
VW’s EA189 Diesel Engine and the Relevant Emissions Standards
The evidence as to the design and operation of VW’s EA189 diesel engine is found in the text of the ATD (Attachment A to these Reasons), in pars 26 to 28 and 34 to 44 of the SOAF and in the US plea agreement which is referred to in detail later in these Reasons (at [101]–[132]). A version of this engine was installed in all of the vehicles sold in Australia which were affected by the emissions issue. This engine is the only engine with which the Australian litigation is concerned.
The description of VW’s EA189 diesel engine which follows in this section of these Reasons is taken from Attachment A. I have quoted from Attachment A from time to time, not for the sake of repetition but rather in order to ensure that important material from that Attachment is appropriately included in the text of these Reasons. That is not to say that the balance of Attachment A is not important. Attachment A should be carefully studied and considered by all those who read these Reasons as it contains a detailed (and agreed) exposition of the design and operation of VW’s EA189 diesel engine an understanding of which is a vital part of gaining an accurate and adequate appreciation of the Two Mode Software described in that document, in the SOAF and in these Reasons, and of the purpose for which that software was created and deployed in the engines installed in the affected vehicles.
A diesel engine is a combustion engine powered by the combustion of diesel fuel.
With the combustion of the fuel in the combustion chamber of the engine, gases are created. These combustion gases are appropriately described as combustion gases until there is a material change in their chemical composition such as the change produced by an after-treatment device. Combustion gases are primarily nitrogen, carbon dioxide, water and oxygen with small amounts of pollutants such as NOx, carbon monoxide, hydrocarbons and particulate matter (combustion gases).
NOx is the collective term for the sum of the chemical compounds, nitric oxide (NO) and nitrogen dioxide (NO2). NOx is created in the combustion chamber of the engine by the reaction of nitrogen with surplus oxygen at high pressure and high temperature.
Particulates (fine dust or soot) are also created during the combustion process.
Once created, combustion gases and particulates must exit the combustion chamber.
The engine control unit (ECU) in vehicles fitted with the EA189 diesel engine is a computer that controls the vehicle’s engine and exhaust function.
One system that can be adjusted by the ECU is the exhaust gas recirculation system (EGR system). Exhaust gas recirculation (EGR) involves recirculating combustion gases produced in an engine during the combustion process back into the combustion chamber.
VWAG has consistently used EGR systems in its turbo charged direct injection (TDI) diesel engines to prevent or impede the creation of NOx. The EGR system deployed in the engines installed in the affected vehicles is one variant of such EGR systems.
The EGR system in the Australian affected vehicles is the same as the EGR system in the corresponding European vehicles manufactured by VWAG.
There is an EGR cooler in the EGR system. That hardware component in the engine reduces the temperature of the recirculated gas with the use of a heat exchanger.
The software component of the EGR system is contained in the ECU and affects the functioning of the EGR system. The ECU also controls other aspects of the engine’s operations, for example, the common rail diesel injection system which regulates the air-fuel mixture formation in the combustion chamber by controlling the fuel rail pressure, the timing of fuel injection and the number of fuel injection events per stroke (injection characteristics).
NOx forms when a mixture of nitrogen and oxygen is subjected to high temperature. The lower combustion temperature caused by EGR cooling reduces the amount of NOx created during combustion. As a result of the temperature drop, a greater mass of combustion gas can be fed back into the combustion process. This allows the combustion temperatures and consequently the creation of NOx during the engine warm-up phase to be reduced further. This leads to the same volume of combustion gas but more mass.
The “EGR Rate” is used as a means of quantifying the extent to which the EGR system is used by the engine. However, it is not a value that is measured by the engine or in vehicle testing at any point in time. Rather, it is a theoretical target value that, in its most general terms, refers to the amount of recirculated gases in place of fresh air in the combustion chamber. A high EGR Rate indicates that there is more recirculated gas and less fresh air being used by the EGR system at any given point in time and a low EGR Rate indicates that there is less recirculated gas and more fresh air at any given point in time.
The EGR Rate is controlled according to various engine operating maps in the ECU.
The software of the EGR system is part of the ECU and consists of input values (mainly RRP/revolutions per minute, torque, intake air temperature, coolant temperature, boost pressure, atmospheric temperature and current air mass) and output values (the EGR vent position).
The EGR Rate, together with the fuel injection timing, charge air pressure (and other engine variables) affects the amount of combustion gases and particulates created in the combustion chamber.
A higher EGR Rate reduces the temperature of the combustion zone. At lower temperatures, less NOx is created in the combustion chamber but more particulates are created.
On the other hand, a lower EGR Rate, or no EGR, results in a higher temperature in the combustion zone. At higher temperatures, more NOx is created in the combustion chamber but fewer particulates are created. This is illustrated in the following diagram:
Within the ECU, key quantities for emissions are fuel quantity injected per stroke, RPM and target fresh air mass. Calibration data include maps of target fresh air mass, injection timing, injection characteristic, injection pressure and intake port flap actuation. There are corrections to target air mass for ambient pressure, engine temperature and the charge air temperature (T22).
The diesel particulate filter (DPF) regeneration cycle is determined by two different means:
(a)A soot model using variables including injection quantity and air mass. The soot model is calibrated using experimental data, primarily from Mode 2 operation; and
(b)Input from the DPF delta pressure sensor.
The two mode operation of the EGR system is addressed in detail at pars 91 to 108 of the ATD. The effect of those paragraphs is summarised at pars 26 to 28 of the SOAF which are in the following terms:
26.The operation of the Two Mode Software was described in more detail in the Agreed Technical Document dated 17 February 2017 tendered and admitted into evidence in the stage 1 hearing (CRT.500.001.0001).
27. In summary, simplifying the description in that document:
27.1.All of the Relevant Vehicles contained an exhaust gas recirculation system (EGR System).
27.2.In all Relevant Vehicles, the EGR System was controlled by the Engine Control Units (ECU).
27.3.All of the Relevant Vehicles contained software in their ECU which, subject to certain operating conditions, caused the EGR System to operate in one of two modes (Two Mode Software):
27.3.1.Mode 1 was optimised for NOx and other pollutant emissions (primarily by specifying a lower target air mass which would be expected to result in a higher Exhaust Gas Recirculation (EGR) Rate than in Mode 2 and compliance with applicable emissions limits).
27.3.2.Mode 2 was the mode optimised for comfort including fuel economy, reliable regeneration of the particulate filter and noise, vibration and harshness (primarily by specifying a higher target air mass which would be expected to result in a lower EGR Rate and thus higher NOx emissions than in Mode 1).
27.4.The Two Mode Software caused Mode 1 to operate when the Relevant Vehicles were being driven after start-up according to the Type 1 emissions test (which used the NEDC), which is the primary legislated emissions test in Australia. At all other times, the Two Mode Software caused the Relevant Vehicles to operate in Mode 2.
28.During the Sales Period, if the Relevant Vehicles were subjected to an NEDC Type 1 Test, while operating in Mode 2, thereby substantially replicating the mode that would be activated when the vehicles were driven on the road outside of the operating conditions of the NEDC, they would have exceeded the NOx emissions limits prescribed by ADR 79.
The presence of this Two Mode software in the ECU of the relevant engines was consciously and deliberately concealed by VWAG from the relevant Australian regulatory authorities, from the public and from Australian consumers.
I shall refer to this concealed software as the “Two Mode Software”.
To the above summary, the following may be added:
(a)Generally, the EGR Rate is higher in Mode 1 than in Mode 2 (see par 100 of the ATD);
(b)Because the EGR Rate influences the level of NOx and the level of particulates produced in the engine:
(i)When the EGR Rate is higher, as in Mode 1, less NOx is produced in the engine but more particulates are produced in the engine; and
(ii)Correlatively, when the EGR rate is lower, as in Mode 2 (the mode engaged for normal driving conditions on the road), more NOx is produced in the engine and fewer particulates are produced in the engine;
(see par 101 of the ATD);
(c)The EGR System for Australian Affected Vehicles (as defined in the ATD) operates in Mode 1 when the vehicles are driven in a manner that accords with the prescribed emissions testing framework, including the New European Drive Cycle (NEDC) Type 1 test distance-time corridor, cold start, and ambient pressure requirements (see par 103 of the ATD);
(d)The NEDC Type 1 test is a distance-time-corridor. This means that it measures vehicles over a certain distance across a certain time. Vehicles that travel a specified distance over a certain time will fall within the distance-time-corridor. In other words, they will be operating in the prescribed NEDC Type 1 test “test conditions” (see par 104 of the ATD);
(e)The Australian Affected Vehicles start in Mode 1, and continue to operate in Mode 1 as long as they are driven in a manner which accords with the NEDC Type 1 test (that is, as long as they stay within the NEDC distance-time-corridor) (see par 105 of the ATD); and
(f)If the vehicles are driven in a manner that is not in accordance with the NEDC Type 1 test (that is, they do not stay within the NEDC distance-time-corridor), the mapping (programming) in the ECU directs the EGR System to operate in Mode 2 (see par 106 of the ATD).
The parties addressed the applicable emissions standards for NOx at pars 122 to 149 of the ATD.
At pars 129 and 130 of the ATD, the parties set out a summary of the maximum permitted levels of exhaust emissions for the affected vehicles when driven in Australia.
Throughout the relevant period, the approval of vehicles imported into Australia by VWAG and its associated companies for sale and use in Australia generally occurred via “ECE Approval”. That is, for the purposes of the Australian market, the Australian authorities recognised the authorised use of such vehicles in Europe (see par 131 of the ATD).
At pars 132 to 134 of the ATD, the parties described the relevance of European test results to the Australian testing requirements in the following terms:
132.For each vehicle and engine gearbox variant there is a separate ECE approval with all relevant exhaust emission values.
133.Testing determines whether a vehicle meets the Standards. The vehicle runs with a defined speed curve while the exhaust emission values are measured. Compliance with the numerical emission limits is a necessary, but not sufficient, condition for type approval.
134.If a model fulfils the required specifications during its testing type, then every vehicle in the series is certified for the relevant emission standard.
At pars 135 to 149 of the ATD, the parties described in some detail the NEDC Type 1 test environment and its relationship to the way in which motor vehicles will generally behave in ordinary driving conditions or conditions of normal use. Those paragraphs are in the following terms:
NEDC emissions testing, “ordinary driving conditions” and “normal use”
135. [Deleted]
136.The prescribed testing environment for ECE approval is the NEDC, described in paragraphs 103 to 107 above. The NEDC is a driving cycle, where vehicle speed is specified as a function of time (also known as a distance-time-corridor). It measures vehicle performance over a certain distance over a certain time. This is so regardless of whether or not the vehicles are in a laboratory, on a dynamometer, in ‘test conditions’, or on the road.
137.Individual vehicles of identical models do not exhibit uniform test results, including exhaust emissions test results, even when operating in the NEDC test.
138.The Standards prescribe requirements for how a vehicle must be operated during testing. By way of example, this includes:
(a)requirements for how the vehicle is placed on the chassis dynamometer;
(b)detailed descriptions and provisions for the test procedure for exhaust emissions on the dynamometer, for example, test cell temperature, humidity and atmospheric pressure, dilution and sampling system temperatures, exhaust dilution system and a large number of other ambient and test conditions;
(c)a requirement to drive in accordance with the NEDC. The NEDC is a vehicle based test that is performed in a purpose built vehicle emissions laboratory. The laboratory consists of a chassis dynamometer (also known as a “roller bench”). The vehicle is secured onto the dynamometer which provides a controlled load onto the driven wheels. The vehicle is then driven over a defined distance-time-corridor which is known as the NEDC. All exhaust emissions are collected and analysed to give a cycle result of grams per kilometre for a range of pollutants, including NOx. The driver must drive in accordance with a synthetic driving cycle with a running time of 19.66 minutes (where Part 1 is 4 x 195 seconds and Part 2 is 1 x 400 seconds).
(i)Part 1 of the NEDC involves 15 elementary urban cycles (idling, acceleration, steady speed and deceleration). They consist of four identical operating curves with a duration of 195 seconds, each of which must be driven four times in a row with a specified pause in between. For each operating curve there are then three separate operating curves with precisely specified time and speed: the first up to 15 km/h, the second up to 40 km/h, the third up to 50 km/h and, with decreasing speed, some seconds at 35 km/h. The distance covered is 4.052 kilometres, the maximum speed is 50 km/h and the total running time is 13 minutes.
(ii)Part 2 of the NEDC involves 13 extra-urban cycles (idling, acceleration, steady speed and deceleration). First, the driver accelerates to 70 km/h and continues at that speed for a specified number of seconds. Then the driver reduces the speed according to the driving line displayed on the monitor to 50 km/h and continues at that speed for a period again specified to the second. The driver then accelerates again to 70 km/h, remains at the line displayed on the monitor for 42 seconds, then further accelerates to 100 km/h and, after a short time, to 120 km/h, and then rapidly reduces speed to 0 km/h. The distance covered is 6.955 kilometres, the maximum speed is 120 km/h and the total running time is 6.66 minutes.
139.There are tolerances in the Standards that relate to how a vehicle must be operated during testing. For example, the Standards stipulate that:
A tolerance of plus or minus 2 km/hr shall be allowed between the indicated speed and the theoretical speed during acceleration, during steady speed, and during deceleration when the vehicle’s brakes are used…speed tolerances greater than those prescribed shall be accepted during phase changes provided that the tolerances are never exceeded for more than 0.5 s on any one occasion.
140.The Standards also contain tolerances relating to the test conditions (including factors such as ambient temperature and humidity) and test equipment (including factors such as measurement accuracy of laboratory equipment).
141.Conducting the NEDC in a laboratory has two principle [sic] advantages: repeatability and comparability of results. Laboratory conditions mean that various sources of variability, such as temperature and air pressure can be controlled. This means that the results of the NEDC are highly reproducible and, because the NEDC is consistent, the exhaust emissions values of one vehicle are directly comparable to the exhaust emissions values of every other vehicle under test conditions.
142.[Deleted]
143.On the road, if the same vehicle is driven in the same manner, over the same distance-time-corridor, and the conditions are the same as those under which it is tested in the laboratory, the exhaust emissions, including engine NOx emissions, will be similar. However, because you cannot control every variable affecting engine performance and emissions, the results of any two tests will never be identical.
144.Given the highly specific nature of the NEDC requirements, it is unlikely that a vehicle driven in normal use will be driven at the same speeds, for the same time and in the same conditions as the conditions specified by the Standards.
145.Relevant factors that may influence fuel consumption and exhaust emissions are:
(a)related to the driver: the driver’s fitness on the day, acceleration behaviour, switching point/gear-shifting speed and driving dynamics.
(b)related to traffic: amount of traffic/traffic jams, traffic light stops (quantity, duration), speed profile, and acceleration profile.
(c)related to external conditions: temperature, wind, rain and road conditions (wet, dry etc.); and
(d)related to the vehicle condition: correction of quantity of fuel injection according to software update (new training), DPF regeneration in a cycle, use of heating/air condition, and consumer comforts (fan, windscreen wipers etc.).
146. [Deleted]
147. [Deleted]
148.The difference between vehicle emissions under normal driving conditions and laboratory conditions is attributable to 4 main factors:
(a)the NEDC testing procedures were first developed in the 1970s and were designed to represent typical driving conditions of busy European cities at that time. The NEDC was last updated in 1990 to try to better represent more demanding, high speed driving modes. There is currently an initiative to further update the testing procedures. In 2007, a working group of the United Nations Economic Commission for Europe (UN/ECE) began to develop a worldwide harmonized test procedure for light vehicles that has become known as the “Worldwide Harmonized Light Vehicles Test Procedure” (the WLTP). The WLTP includes a new test cycle that is designed to be more representative of average modern-day driving behaviour and limits the tolerances in and related to the NEDC. It is expected that the WLTP will replace in the NEDC in 2017;
(b)there are tolerances in the current procedures regarding the assessment of vehicles before they are tested under the NEDC. Before a vehicle can be tested under the NEDC, and in order to simulate normal driving conditions, the level of resistance of the dynamometer must be set to simulate the level of resistance the vehicle would experience if driven on the road. This resistance setting, known as the “road load” is adjusted for each specific vehicle that is tested and can be determined using different methods;
(c)there are tolerances in the current procedures regarding the testing of vehicles under the NEDC. This may include things such as the reference mass of the vehicle, the choice of wheels and tyres, how the laboratory instruments are calibrated, the temperature of the test cell, use of higher gears and the driving technique of the individual driver; and
(d)factors relating to vehicle operation. This includes the use of on-board electrical equipment, such as air conditioning and entertainment systems as well as other external factors such as driving style, fuel quality, weather conditions and road surface.
149.For example, a diesel engine vehicle operating in the NEDC distance-time-corridor must be operated in an environment with a temperature between 20 and 30 degrees Celsius. If the same vehicle is operated in a 10 degrees centigrade environment, even if it otherwise remains within the parameters of the NEDC test, its exhaust emissions will be different
The Identification Plate System in Australia
New motor vehicles can only be supplied in or imported into Australia if those vehicles comply with the vehicle standards made under s 7 of the Motor Vehicle Standards Act 1989 (Cth) (MVSA), which is legislation administered by the Department of Infrastructure and Regional Development (as that Department was called at all relevant times) (DIRD). Section 5 of the MVSA defines these vehicle standards as “national standards”. Where new vehicles of a particular type comply with the national standards, the Minister must, under s 10A of the MVSA, give written approval for identification plates to be placed on the relevant vehicles. In order for a motor vehicle to be lawfully imported into and supplied in Australia, it must be the subject of an approval to affix an identification plate pursuant to s 10A.
At all material times during the relevant period between 1 January 2011 and 3 October 2015, it was an offence to supply a new vehicle to the market that was either “nonstandard” (by which is meant that the vehicle did not comply with national standards) or which did not have an identification plate affixed to it (see s 14 of the MVSA). Section 18 of the MVSA similarly made it an offence to import a road vehicle into Australia that was either “nonstandard” or which did not have an identification plate affixed to it.
Vehicle Standard (Australian Design Rule 79—Emission Control for Light Vehicles) (ADR 79) is and was at all material times a vehicle standard made under s 7 of the MVSA and was therefore a “national standard” as defined in s 5 of the MVSA. ADR 79 prescribed at all material times a maximum emissions of NOx that vehicles could emit while undergoing a standardised testing procedure, namely the NEDC Type 1 test.
The ACCC’s Pleaded Cases
In the current iteration of its Originating Application in proceeding NSD 1462 of 2016 viz the Further Amended Originating Application filed on 18 September 2017, the ACCC claims seven specific declarations that VWAG and VW Australia in a number of particular ways contravened ss 18(1), 29(1)(a), 29(1)(g), 33 and 106 of the ACL. It also claims orders for pecuniary penalties pursuant to s 224 of the ACL, corrective advertising pursuant to s 246 of the ACL and other relief.
In the current iteration of its Statement of Claim in proceeding NSD 1462 of 2016 viz the Second Further Amended Statement of Claim filed on 15 March 2019, the ACCC alleges that engines in the VW-branded affected vehicles had been fitted with software (the Two Mode Software) which constituted a “defeat device” within the meaning of the various applicable versions of ADR 79, which is delegated legislation under the MVSA; that VWAG engaged in misleading and deceptive conduct by concealing the existence of that defeat device from the Commonwealth of Australia and its various regulatory emanations, the public and consumers; that it made false and misleading representations in relation to ADR 79 and the applicable motor vehicle emissions limits; and that, by supplying, manufacturing or possessing the VW‑branded affected vehicles, it contravened a safety standard as defined in Pt 3.3 of the ACL. Substantially the same allegations were made against VWAG, Audi AG and Audi Australia in proceeding NSD 322 of 2017.
In all relevant versions of ADR 79, the use of a defeat device in a motor vehicle is prohibited. In cl 2.16 of Appendix A to all relevant versions of ADR 79, “defeat device” is defined as follows:
2.16“Defeat device” means any element of design which senses temperature, vehicle speed, engine rotational speed, transmission gear, manifold vacuum or any other parameter for the purpose of activating, modulating, delaying or deactivating the operation of any part of the emission control system, that reduces the effectiveness of the emission control system under conditions which may reasonably be expected to be encountered in normal vehicle operation and use. Such an element of design may not be considered a defeat device if:
2.16.1.The need for the device is justified in terms of protecting the engine against damage or accident and for safe operation of the vehicle; or
2.16.2.The device does not function beyond the requirements of engine starting; or
2.16.3.Conditions are substantially included in the Type I or Type VI test procedures.
The definition of “defeat device” in ADR 79 reproduces the definition of “defeat device” found in UNECE Reg 83. In that instrument, the use of a “defeat device” in a motor vehicle is also prohibited.
The full title of UNECE Reg 83 is United Nations Economic Commission for Europe Regulation 83, Uniform Provisions Concerning the Approval of Vehicles with Regard to the Emission of Pollutants According to Engine Fuel Requirements, which is an international instrument given legal effect in Australia through ADR 79.
In both regulatory proceedings, in addition to claiming that the Two Mode Software constituted a defeat device, the ACCC also alleges that:
(a)The affected vehicles did not comply with the applicable NOx limits set by par 5.3.1.4 of Appendix A to ADR 79 and UNECE Reg 83 (and s 5.3.1.4 of Annex 1 to Euro 4 and Art 10 and Table 1 of Annex 1 to Euro 5), except by reason of the use of a “defeat device”, which was prohibited by par 5.1.2.1 of Appendix A to ADR 79 and UNECE Reg 83 (and s 5.1.1 of Annex 1 of Euro 4 and Art 5(2) of Euro 5);
(b)The components of the affected vehicles liable to affect the emission of pollutants from those vehicles were not so designed, constructed and assembled as to enable them, in normal use, to comply with the provisions of ADR 79 as required by par 5.1.1 of Appendix 1 to ADR 79, and to comply with Euro 5, as required by Art 5(1) of Euro 5; and
(c)In the alternative, the Two Mode Software constituted a defeat device equivalent which defeated the objectives of ADR 79 and UNECE Reg 83.
Euro 4 and Euro 5 are particular European regulatory instruments prescribing limits for the emission of pollutants from motor vehicles when driven in certain specific parts of Europe.
The particular allegations pleaded against VWAG, VW Australia, Audi AG and Audi Australia in the regulatory proceedings were adequately and accurately summarised by the ACCC at pars 27 to 31 of its Closing Written Submissions filed and relied upon by it at the Stage 1 Hearing in the following terms (footnotes omitted):
It is also alleged that from 2008 to 2015, VWAG and Audi AG sought inclusion of the Vehicles in the Green Vehicle Guide at the time of seeking Identification Plate Approval. During that period, the GVG rating system scored a higher rating out of 10 (being a rating of 6 out of 10) to vehicles that complied with Euro 5 emission limits, including NOx emissions limits. Under the GVG rating system, the applicant [here VWAG and/or VW Australia, Audi AG and/or Audi Australia] was required to report results from the Type 1 Test showing compliance with Euro 5 emission limits. VWAG and Audi AG sought this rating and submitted Type 1 test results to the Commonwealth, which were Euro 5 type approvals. It is alleged that VWAG and Audi AG submitted these results stating that the Vehicles met the Euro 5 NOx emissions limits even though the results were obtained by reason of the Defeat Software.
So far as VWAG is concerned, six categories of conduct are alleged against it:
(a)Prior to and during the Sales Period, VWAG deliberately concealed from the Commonwealth and the public certain matters, including the existence and effect of the Defeat Software, and that the Vehicles failed to comply with applicable legal requirements for road vehicles (including ADR 79), giving rise to contraventions of ss.18 and 33 of the ACL.
(b)VWAG represented to the Commonwealth in respect of each Vehicle type that all Vehicles of that type (i) had been properly approved in accordance with the requirements of UNECE Reg 83 (“VWAG UNECE Approval Representation”); (ii) complied with ADR 79 (“VWAG ADR 79 Representation”); and/or (iii) had not been modified to operate in a different mode from that used in normal driving conditions when undergoing testing for compliance with emissions standards (“VWAG Non-Modification Representation”); and further/alternatively, (iv) complied with NOx emissions limits in Euro 5 (“VWAG Euro 5 Representation”), all of which were not the case, giving rise to contraventions of s.18(1), s.29(1)(a) (goods were of a particular standard, quality, grade or composition), and s.29(1)(g) of the ACL (goods had approval, performance characteristics, uses or benefits which they did not have).
(c)VWAG represented to consumers that the Vehicles (i) complied with all applicable legal requirements for road vehicles, including ADR 79; (ii) had properly been given Identification Plate Approvals; and (iii) did not contain a Defeat Device or Defeat Device Equivalent, when this was not the case (“VWAG Compliance Conduct”), giving rise to contraventions of ss.18(1), 29(1)(a), 29(1)(g) and 33.
(d)VWAG represented to consumers that the Vehicles (i) complied with the NOx emissions limits specified by Euro 5; (ii) in normal use, or when driving in normal driving conditions, would produce NOx emissions at levels at or below the limits specified in Euro 5; and/or (iii) did not contain a Defeat Device or Defeat Device Equivalent (“VWAG GVG Conduct”), giving rise to contraventions of ss.18(1), 29(1)(a), 29(1)(g) and 33 of the ACL.
(e)VWAG contravened s.106 of the ACL during the Sales Period by supplying, offering to supply, manufacturing, possessing and controlling the Vehicles when those Vehicles did not comply with a safety standard (being ADR 79).
(f)VWAG was knowingly concerned in VWA’s [referring to VW Australia] contraventions.
So far as VWA [VW Australia] is concerned, four categories of conduct are pleaded against it:
(a)VWA represented to consumers that the Vehicles (i) complied with all applicable legal requirements for road vehicles, including ADR 79; (ii) had properly been given Identification Plate Approvals; and (iii) did not contain a Defeat Device or Defeat Device Equivalent, when this was not the case (“VWA Compliance Conduct”), giving rise to contraventions of ss.18(1), 29(1)(a), 29(1)(g) and 33 of the ACL.
(b)Through advertising material VWA represented to consumers that the Vehicles were (i) environmentally friendly, environmentally responsible or sustainable; (ii) had clean burning diesel engines; (iii) produced low emissions; (iv) complied with Euro 4 or Euro 5; and/or (v) in normal use, or when driven in normal driving conditions, would produce NOx emissions at levels at or below the limits specified by Euro 4 and/or Euro 5, when these matters were false and/or were misleading in view of the non-disclosure of the existence of the Defeat Software and related matters (“VWA Advertising Representations”), giving rise to contraventions of ACL ss.18(1), 29(1)(a), 29(1)(g) and 33.
(c)VWA represented to consumers that the Vehicles (i) complied with the NOx emissions limits specified by Euro 5; (ii) in normal use, or when driving in normal driving conditions, would produce NOx emissions at levels at or below the limits specified in Euro 5; and/or did not contain a Defeat Device or Defeat Device Equivalent (“VWA GVG Conduct”), which gave rise to contraventions of ss.18(1), 29(1)(a), 29(1)(g) and 33 of the ACL.
(d)VWA contravened s.106 of the ACL during the Sales Period by supplying, offering to supply, possessing and controlling the Vehicles when those Vehicles did not comply with a safety standard (being ADR 79).
The contraventions are alleged to have occurred during the “Sales Period”, which is defined as the period 1 January 2011 to 3 October 2015. In this period, VWA’s authorised dealers sold 57,605 Vehicles in Australia, and additionally, second-hand Vehicles were bought and sold. The position for Audi Australia is the same save that Audi Australia’s authorised dealers sold 12,368 vehicles during the Sales Period.
Contraventions essentially paralleling those against VWAG and VWA are alleged in proceedings NSD332/2017 against Audi AG and Audi Australia respectively, and in addition the Audi proceedings concern the SCR as another form of defeat device.
VWAG is also alleged to have been knowingly involved in the contraventions pleaded against VW Australia, Audi AG and Audi Australia.
All of the main allegations made by the ACCC against VWAG and VW Australia in proceeding NSD 1462 of 2016 were denied in those companies’ Defence, the latest version of which being the Further Amended Defence filed on 15 April 2019. VWAG, Audi AG and Audi Australia similarly denied all of the main allegations made against them in proceeding NSD 322 of 2017.
The Admitted Contraventions
At par 3 of the SOAF, VWAG admitted for the purposes of proceeding NSD 1462 of 2016 only, that:
3.1.On 171 separate occasions in the period from 1 January 2011 to 3 October 2015 (Sales Period), in respect of the 57,082 Volkswagen-branded motor vehicles more particularly described in Annexure 1 hereto (Relevant Vehicles), it submitted to the delegate of the Minister for Infrastructure and Regional Development (Delegate) the documents more particularly described in pars 18, 19 and 21 below (approval applications) in order to obtain approvals under s 10A of the Motor Vehicle Standards Act 1989 (Cth) (MVSA) so that motor vehicles covered by the said approvals might be lawfully imported and supplied for use as road vehicles in Australia;
3.2.On each of the 171 occasions referred to in subparagraph 3.1 above, by submitting the approval applications to the Delegate, in all the circumstances and in the regulatory context in which such submissions were made, it impliedly represented to the Delegate that each of the Relevant Vehicles would, when imported and supplied in Australia, comply with Australian Design Rule 79 (which is delegated legislation under the MVSA) (ADR 79) as in force from time to time during the Sales Period, where that representation was in substance made with respect to each of the 57,082 Relevant Vehicles supplied in Australia;
3.3.It was granted identification plate approvals in respect of the Relevant Vehicles as specified in pars 20 and 22 below upon the basis of the information provided by it in or with the approval applications submitted to the Delegate; and
3.4.Each of the implied representations specified at subparagraph 3.2 above was false because, in the events which happened, the Relevant Vehicles did not comply with ADR 79 when imported and supplied in Australia in that:
3.4.1.Each of the Relevant Vehicles was fitted with the Two Mode software described in pars 27 and 28 below; and
3.4.2.If the Relevant Vehicles were subjected to a New European Drive Cycle (NEDC) Type 1 test while operating in Mode 2, thereby substantially replicating the mode that would be activated when the vehicles were driven on the road outside of the operating conditions of the NEDC, the Relevant Vehicles would have exceeded the NOx emission limits prescribed by ADR 79,
with the consequence that, on each of the 171 occasions referred to in subpar 3.1 above, VWAG made a false representation as to the composition, standard or grade of the vehicles the subject of the approval application in each case and thereby, on each such occasion, contravened s 29(1)(a) of the Australian Consumer Law (ACL), being Schedule 2 to the Competition and Consumer Act 2010 (Cth) (CCA).
In addition to the above admissions, the parties agreed at par 29 of the SOAF that:
VWAG did not disclose at any time prior to or during the Sales Period to the Delegate:
29.1.the existence of the Two Mode Software; or
29.2.that if the Relevant Vehicles were subjected to an NEDC Type 1 Test, while operating in Mode 2, thereby substantially replicating the mode that would be activated when the vehicles were driven on the road outside of the operating conditions of the NEDC, they would have exceeded the NOx emissions limits prescribed by ADR 79.
The context in which the above admissions are made is further explained at pars 7 to 25 of the SOAF. At pars 18 to 25 of the SOAF, the parties stated:
18.VWAG submitted the following information to the Delegate from time to time in the ordinary course of business in accordance with the procedure established by the Minister under s 10 of the MVSA:
18.1.an Application for Compliance Approval form
18.2.for some ADRs, including ADR 79, a Selection of Test Fleet form
18.3.a Summary of Evidence form for each ADR applicable to the vehicle type
in order to obtain approvals under s 10A for identification plates to be placed on VW branded vehicles of various types.
19.In submitting the forms set out at paragraph 18 above, VWAG submitted UNECE approval numbers as evidence of compliance with ADR 79.
20.On the basis of the information submitted to the Delegate identified in paragraphs 18 and 19 above VWAG was granted identification plate approvals under s 10A in respect of the Relevant Vehicles imported into and sold in Australia in the Sales Period.
21.From time to time, VWAG submitted further Summary of Evidence and Selection of Test Fleet Forms with UNECE approval numbers to the Delegate to amend the identification plate approvals, including to make them referable to a newer ADR 79 standard.
22.On the basis of the information submitted to the Delegate identified in paragraph 21 above VWAG was granted amended identification plate approvals under s 10A in respect of certain of the Relevant Vehicles imported into and sold in Australia in the Sales Period.
23.There were 171 relevant submissions by VWAG of the information which is referred to in paragraphs 18, 19 and 21 above. Representative examples of each of a Summary of Evidence form and Selection of Test Fleet form are Annexure 2 and Annexure 3.
24.The Commonwealth, through DIRD, published the identification plate approvals issued under s 10A in respect of the Relevant Vehicles on the publically available RVCS website along with certain other information about the Relevant Vehicles, including their vehicle specifications.
25.During the Sales Period, each identification plate approval issued to VWAG in respect of the Relevant Vehicles came with conditions that included:
The Licensee must not place Identification Plates on vehicles which do not comply with all of the Australian Design Rules specified in Schedule 4.
The Licensee shall not without the prior approval of the Administrator affix the Identification Plate to a vehicle that is in any way different from the vehicle described in the final form of the application for this Approval. The application includes reports and other documents relating to the application.
The Licensee shall by detailed quality control and test ensure continuing compliance with such of the Australian Design Rules specified in Schedule 4.
VWAG also admitted that, by making applications to have many of its diesel powered vehicles included in the Commonwealth’s Green Vehicle Guide (GVG) website, it made additional false representations to the Department of Infrastructure and Regional Development (Commonwealth) (DIRD) in the terms of the admissions set out at pars 68 to 71 of the SOAF as follows:
68.During the Sales Period, VWAG applied:
68.1.on at least 162 occasions, for certain Volkswagen branded vehicles identified in the spreadsheets at Annexures 4 and 5 to be published on the GVG Website; and
68.2.on at least 140 occasions, for certain Volkswagen branded vehicles identified in the spreadsheet at Annexure 5 to be published on the GVG Website with a higher air pollution rating.
and in so doing, provided information regarding the Relevant Vehicles to DIRD for publication on the GVG Website.
69.During the Sales Period, the GVG Website was accessed by approximately 500,000 distinct users (noting that such access was not necessarily directed at obtaining information pertaining to the Relevant Vehicles).
70.By making the applications specified in paragraph 68.1 above through the online administration portal on the GVG Website administered by DIRD, VWAG falsely represented to DIRD on at least 162 occasions in respect of the Volkswagen-branded vehicles identified in Annexures 4 and 5 to this Statement of Agreed Facts that the motor vehicles the subject of each such application complied with ADR 79 as in force at the relevant time when those vehicles did not so comply because:
70.1.Each of the said vehicles was fitted with the Two Mode software described above; and
70.2.If the said vehicles were subjected to an NEDC Type 1 test while operating in Mode 2, thereby substantially replicating the mode that would be activated when the vehicles were driven on the road outside of the operating conditions of the NEDC, the said vehicles would have exceeded the NOx emission limits prescribed by ADR 79
resulting in the said vehicles obtaining ratings on the GVG Website which they would not have obtained had the said false representations not been made with the consequence that, on each of the 162 occasions referred to above, VWAG made a false representation as to the composition, standard or grade of the said vehicles the subject of the listing application in each case and thereby, on each such occasion, contravened s 29(1)(a) of the ACL.
71.By making the additional applications specified in paragraph 68.2 above through the online administration portal on the GVG Website, VWAG falsely represented to DIRD on at least 140 occasions in respect of the Volkswagen-branded vehicles identified in Annexure 5 to this Statement of Agreed Facts that the motor vehicles the subject of each such application complied with a later, more stringent version of ADR 79 than was applicable to the vehicles at the relevant time when those vehicles did not so comply with that more stringent version because:
71.1.Each of the said vehicles was fitted with the Two Mode software described above; and
71.2.If the said vehicles were subjected to an NEDC Type 1 test while operating in Mode 2, thereby substantially replicating the mode that would be activated when the vehicles were driven on the road outside of the operating conditions of the NEDC, the said vehicles would have exceeded the NOx emission limits prescribed by ADR 79
resulting in the said vehicles obtaining higher air pollution ratings on the GVG Website than they would have obtained had the said false representations not been made with the consequence that, on each of the 140 occasions referred to above, VWAG made a false representation as to the composition, standard or grade of the said vehicles the subject of the listing application in each case and thereby, on each such occasion, contravened s 29(1)(a) of the ACL.
If my views are correct, there is a total of 473 separate contraventions of the ACL covered by the admissions made by VWAG in the SOAF. In that event, the total of the potential maximum pecuniary penalties that might be imposed in the present case is $520.3 million (being $1.1 million × 473).
If the number of contraventions is of the order submitted by the parties, then the total of the maximum penalties that might be imposed is “stratospheric”. In that event, there would be little point in the Court paying any regard at all to the total of the maximum penalties that might be imposed.
In their written and oral submissions, the parties identified and addressed the matters which they considered ought to be addressed in determining the appropriate pecuniary penalty for the admitted contraventions in the present case. In particular, these matters were addressed at pars 54 to 80 of the Joint Written Submissions dated 15 October 2019. In those submissions, the parties made no submission to the effect that the maximum penalties in this case had any role to play in the Court’s synthesising of the appropriate penalty. I will endeavour to summarise those Submissions in the paragraphs which immediately follow.
I shall now address those matters in turn.
The Remedial Technical Measures
After summarising the substance of the conduct comprising the admitted contraventions, the parties submitted that, as specified at pars 54 to 58 of the SOAF, during the course of 2016, VWAG and its affiliates made available to consumers who had purchased one or more of the relevant vehicles a software update which, when installed, had the effect of causing the software to operate in one mode at all times viz Mode 2. The Commonwealth has accepted that the relevant vehicles in which the software update has been installed, now conform to the requirements of ADR 79. More than half of the owners of the Volkswagen-branded affected vehicles have chosen to have the so-called technical measures applied to their vehicles while a much smaller percentage had expressly rejected the software update. The SOAF does not make clear the period over which the so-called technical measures were installed in customers’ vehicles.
When VWAG and the other respondents ultimately pleaded that the technical measures were effective to overcome the impact of the Two Mode Software and provided a complete or partial answer to the claims made by the applicants in the class actions and the ACCC in the regulatory proceedings, those parties responded by contending that, once the technical measures were installed in the engines of the relevant vehicles, those engines would degrade at a much faster rate than they would have done had those measures not been installed and that the performance of the relevant vehicles (including fuel consumption rates) was substantially negatively affected. These counter-contentions made by the applicants in the class actions and the ACCC have not been tested at a hearing and are not referred to in the SOAF.
For those reasons, I cannot take into account the substance of these contentions made by the applicants in the class actions and the ACCC.
The development and offering of the technical measures as a means of rendering the affected vehicles compliant with ADR 79 at the cost of VWAG and its affiliates is a factor to be taken into account in favour of VWAG in determining the appropriate penalty in the present case.
Harm to Public Health and the Environment
The parties accepted that the legislative objective of ADR 79 was and is to reduce emissions caused by motor vehicles in order to reduce the adverse effects of such emissions on urban air quality on human health in Australia, including, in particular, the adverse effects of NOx emissions. The parties referred me to the Regulation Impact Statement (ADR 79/00) being Attachment A to the Explanatory Statement for Vehicle Standard (Australian Design Rule 79/00 – Emission Control for Light Vehicles) 2005 (Cth) (ADR 79 RIS).
The parties also drew my attention to a statement on p 9 of the ADR 79 RIS in the following terms:
High levels of air pollutants have been shown to result in a wide range of adverse health and visual impacts on society. Increasing levels of pollution can have significant environmental and economic consequences. Health effects associated with air pollution include respiratory effects, ranging in severity from coughs, chest congestion, asthma, to chronic illness and possible premature death in susceptible people. Other effects of air pollutants include damage to vegetation, buildings and materials, and reduction in visibility. Reducing the contribution of motor vehicle emissions to air pollution is expected to have a positive impact on human health and the environment [ADR 79 RIS, p 9].
These submissions conveniently expose the rationale and objective of ADR 79.
Harm to the Public and Competitors
While acknowledging that the GVG Website was accessed by approximately 500,000 consumers during the relevant period, at par 62 of the Joint Written Submissions, the parties had the temerity to submit the following:
There is no evidence before the Court in these proceedings as to any actual harm to public health or the environment, or any loss suffered by Australian consumers or any competitors, having arisen specifically in connection with the Relevant Vehicles specified in Annexure 1 of the SoAF. All VW diesel vehicles which are the subject of these proceedings are the subject of five class actions currently at an advanced stage in the Federal Court and are likely to be resolved by agreement. Those cases will result in redress to the relevant Group Members.
I reject the contention in the first half of the first sentence of that submission. It is completely contradictory to the contents of the ADR 79 RIS and contrary to facts which are common ground in the present case concerning the harm to the environment and to human beings of the emission of NOx from motor vehicles. I cannot fathom why the ACCC joined in such a submission.
Compensation to Consumers
It is true that VWAG has now agreed to settle the five class actions upon terms satisfactory to the applicants in those actions (as to which see [27] above). While the fact that settlement has now been reached is a factor to be taken into account in favour of VWAG when considering the imposition of an appropriate pecuniary penalty in the present case, I am presently unable to judge whether that settlement truly provides reasonable compensation to consumers. The fact that it has come so late in the progress of the litigation is a countervailing factor to be weighed in the balance against VWAG.
The Circumstances in which the Act or Omission Took Place (s 224(2)(b) of the ACL)
At par 63 of the Joint Written Submissions, the parties submitted the following:
Provision of information to the Commonwealth which is false is a matter of grave seriousness. VWAG’s conduct undermined the integrity and functioning of the regulatory system, which has the legislative objective of protecting consumers, public health and safety [Motor Vehicle Standards Bill 1989, Explanatory Memorandum, page 1].
The above submission is obviously correct but does not tell the whole story.
The history of the emissions issue recounted in some detail (but not comprehensively) in the US plea agreement and in the SOAF demonstrates unequivocally that the contravening conduct which is to be the subject of a pecuniary penalty in the present case was deliberate, dishonest and calculated to deceive DIRD, the Minister and Australian consumers and was entirely actuated by greed because it also cannot be doubted that the only identifiable motivation for the contravening conduct was the generation of profit, and very substantial profit at that. This conduct was not undertaken merely to circumvent ADR 79 but was undertaken for the purpose of supporting VWAG’s promotional, marketing and advertising campaigns in which it suggested that it had mastered the art of manufacturing clean diesel engines thus providing a significant advantage to VWAG over its competitors.
The admitted contraventions constitute an egregious breach of Australian consumer law of the worst kind imaginable. As conceded by the parties in their Joint Written Submissions (at par 8), the supply of the relevant vehicles in the present case constituted an offence under s 14 and s 18 of the MVSA. This circumstance underscores the gravity of the deception.
VWAG’s conduct in committing the admitted contraventions is at the most serious end of the spectrum.
At pars 65 to 80 of their Joint Written Submissions, the parties proceeded to address those particular factors in the list of other considerations propounded by French J in TPC v CSR (the French factors) which the parties considered to be relevant in the present case.
The submissions that were made in this section of the Joint Written Submissions were based upon the SOAF and were factually correct. Thus, at pars 65 to 80 of the Joint Written Submissions, the parties said:
The size of the contravenor and its financial position
VWAG is a very large and highly profitable company which operates globally. For the fiscal year ended 31 December 2018, VWAG reported sales revenue of approximately €235 billion and operating profit of approximately €17 billion [SoAF, [69]]. During each of the years the contravening conduct occurred VWAG’s profit exceeded €11 billion [SoAF, [77]]. Given the size of VWAG, only a very substantial penalty, the highest awarded to date for contraventions of the ACL, will be sufficient to achieve specific and general deterrence.
The estimated aggregate profit earned by VWAG and VWA from sales of the Relevant Vehicles over the Sales Period was significant but less, by a material amount, than the amount of the penalty jointly submitted to the Court in paragraph 81 below as an appropriate penalty in all the circumstances [SoAF, Confidential Annexure 6, noting that the estimated aggregate profit earned by VWAG and VWA from sales of the Relevant Vehicles over the Sales Period has been calculated by VWA and is being reviewed and verified by VWAG. That review is incomplete as at the date of these submissions. The parties propose to update the Court, if necessary, once the review by VWAG has been completed]. The parties submit that the amount of the proposed penalty is appropriate to achieve effective deterrence.
Deliberateness of the conduct and the period over which it extended
The development and deployment of the Two Mode Software was systematic, deliberate and covert. The supply of the Relevant Vehicles occurred in Australia over a period of some 1737 days during the Sales Period – nearly 5 years.
VWAG employees designed the new EA 189 2.0 litre diesel engine for use in the US to be the cornerstone of a new project to sell passenger diesel vehicles in the US. This project became known within VWAG as the “US’07” project.
Some VWAG engineers believed that they could not design an engine that would both meet the stricter US NOx emissions standards that would become effective in 2007 and attract sufficient customer demand in the US market. VWAG employees therefore designed, created, and implemented a software function to detect, evade and defeat US emission standards (US switch logic).
The engine management software (which included the US switch logic) of the affected US vehicles was different in the various engine versions, vehicle types, and model years of EA189 engined vehicles that were supplied in the US over time.
The various EA 189 engine variants were developed by VWAG engineers in the engine development department based in Wolfsburg.
In about 2006, the VWAG employee who was [CONFIDENTIAL] authorised the use of the Two Mode Software in EA 189 engined vehicles, which were later supplied in Australia in the Relevant Vehicles, for the purpose of passing relevant emissions tests. VWAG employees calibrated and installed the Two Mode Software in the EA 189 engines installed in the Relevant Vehicles sold in Australia.
This gave rise to the identification plate approval false representations and the GVG Website false representations.
The identification plate approval false representations were for financial gain in the sense that the Relevant Vehicles could not have been imported into or supplied in Australia in the Sales Period without approval under s 10A of the MVSA, and false representations were made by VWAG in the course of obtaining those approvals. The GVG Website false representations were made for the purpose of promoting the Relevant Vehicles on the GVG Website and give rise to an inference that that the Relevant Vehicles would likely not have obtained the ratings that they did obtain for the purposes of the GVG.
Involvement of management
Six supervisors who were involved and/or knew of the design and installation of the Two Mode Software in the period 2006 to 2015 when the emissions issue became public were successively in charge of:
a. [CONFIDENTIAL] department or sub-departments; or
b. [CONFIDENTIAL] department.
The [CONFIDENTIAL] authorised the use of the Two Mode Software in the Relevant Vehicles in Australia.
Although these employees were below the level of the VWAG Management Board, they were management employees with supervisory duties.
Similar conduct in the past and corporate culture of compliance
As noted, VWAG has not previously been found to have engaged in contraventions of the ACL, the CCA or its predecessor, the Trade Practices Act 1974 (Cth). In relation to the presence or absence of any corporate culture of compliance, the matters identified under the two preceding sub-headings are relevant.
Co-operation and admission of culpability
VWAG has agreed to a resolution of the proceeding before the commencement of the second stage trial of the proceeding. The proceeding has been on foot for nearly three years.
A trial of certain separate questions took place in March 2018 and significant steps had been taken in preparing the proceeding for a subsequent second trial before the settlement was reached, including the preparation of lay and expert evidence. VWAG’s ultimate co-operation with the ACCC has saved the ACCC, the Court and the community the additional cost and burden of fully litigating the dispute. A discount for ultimate cooperation has been reflected in the proposed agreed penalty.
The Appropriate Penalty
Of the matters discussed at [219]–[260] above, the only matters which operate in favour of VWAG are the following:
(a)It has now admitted that it contravened s 29(1)(a) of the ACL in certain limited respects. The admissions are nonetheless of very serious contraventions of the ACL. But they have come very late in the progress of the litigation at a point in time which is just over three years since proceeding NSD 1462 of 2016 was commenced, after the Stage 1 Hearing had concluded and immediately before the commencement of the Stage 2 Hearing. At the Stage 2 Hearing, VWAG’s conduct was likely to be subjected to detailed public scrutiny in the courtroom. While some costs will be saved and much inconvenience will be avoided, it must not be forgotten that a great deal of cost, time and effort had already been expended by the parties in the last three years. The litigation has required the commitment of very significant resources by the Court in the form largely of my time and expertise. This litigation is extremely complex. This is evidenced by the fact that there have been 29 case management hearings held in the matters and 19 interlocutory disputes requiring resolution by the Court. I have made 90 sets of orders in the matter. The cases have been hard fought and VWAG has taken every point available to it. Taking into account all of the above matters in determining the appropriate penalty, I will give some but not much weight to the fact that VWAG has now made the admissions to which I have referred.
(b)It offered to all relevant customers to install modified software in their vehicles in order to render those vehicles compliant with ADR 79. The take-up rate has been greater than 50%.
(c)It has now settled the class actions albeit belatedly.
(d)Otherwise, all of the other factors discussed above are unfavourable to VWAG. In all cases, those factors, when weighed in the balance, suggest that there is a very strong need to impose a penalty in the present case which is large enough to deter VWAG and its subsidiaries and affiliates from engaging in similar conduct in the future. VWAG has admitted that certain senior managers orchestrated the scheme which has become known colloquially as dieselgate. It has not made any admissions as to the knowledge of the Board of Management or the Supervisory Board of VWAG. The implication conveyed by the terms of the SOAF is that the members of those two important governing organs of VWAG were unaware of the scheme. If that truly be the case, VWAG obviously has a very serious corporate governance problem. As must be obvious from the extent of the deception and its concealment over many years, the implementation of the scheme required the commitment of substantial funds and resources by VWAG. If the Management Board and the Supervisory Board knew nothing about the scheme, those funds and resources were devoted to illegal activity which was carried out over a period of almost ten years without detection. This serious corporate governance problem mandates that the Court focus most particularly on the need for specific deterrence in the circumstances of this case.
This much was accepted by Senior Counsel for VWAG at the penalty hearing in the following exchange between him and me (at Transcript, 16 October 2019, p 83 ll 4–37):
MR RICH: … Now, your Honour will appreciate that statutory provisions of the kind that we are here concerned with are directed at commercial organisations whose purpose is to make profit, in a – if I can put it in a general sense. If penalties are fixed at a level which not just but certainly wipes out commercial gain from the contravening conduct in this country and goes a bit further, that tells any rational corporation that that conduct is conduct that will not result in any financial gain and not serve its purposes and, as such, it will be deterred and others will be deterred from engaging in that sort of conduct in the future.
In other words, if your Honour were to fix a penalty at a level which more than eliminated the profit that had been generated from the sale of these vehicles in this country – 57,000 vehicles – your Honour would, in our submission, accept that no rational corporation would regard the contraventions as an acceptable cost of doing business because it’s not an acceptable cost for them to do business over five years, importing cars to another country, at a cost that is obviously deleterious to their purpose; it is contrary to their purpose. And your Honour would be sending a message that this sort activity is of – not only of no benefit to corporations in a profit sense but positively detrimental to their bottom line. And it’s not a – so in other words, your Honour is not simply clipping the ticket of an otherwise profitable endeavour but your Honour is indicating – the court is indicating that the conduct is regarded as so serious that thou shall not obtain any gain whatsoever. And this is obviously on the assumption that all of the profit - - -
HIS HONOUR: No. The message is that thou shall not do it again thyself and that another organisation as big, powerful and dishonest as yours will not get away with doing such a thing again.
MR RICH: Indeed.
HIS HONOUR: That’s the message that I need to send, isn’t it?
MR RICH: Yes, your Honour. And your Honour would send that message by imposing a penalty that exceeds, by a substantial margin, any financial benefit that was derived from the sale of the relevant vehicles in this country.
VWAG has not shown any contrition whatsoever in respect of its admitted contraventions of the ACL. It is true that, in September 2015, VWAG issued a number of press releases (as to which, see pars 46, 47 and 48 of the SOAF) in which it stated an intention to face up to the fact that it had broken the law and deceived the public. However, when it had the opportunity in Australia to conduct itself consistently with those stated intentions, it conspicuously failed to do so. It dealt with DIRD as required but, for a considerable time, not frankly. There is no evidence that it cooperated in any particular way with any investigations conducted by the ACCC into its conduct. It strenuously defended all of the class actions and both of the regulatory proceedings and raised every conceivable point that it considered was open to it in support of that defence. Its stance only changed in mid-September 2019.
Shortly after I was informed that the regulatory proceedings had settled, the parties forwarded to my Chambers a proposed Statement of Agreed Facts and proposed Joint Written Submissions. I read these documents carefully and then relisted the matter on 27 September 2019. On that occasion, I informed the parties that I was not satisfied that the admissions of contravention set out in the draft of the SOAF that had been forwarded to me constituted contraventions known to the law. The problem was that, instead of clearly admitting that the affected vehicles did not comply with ADR 79, VWAG wished to qualify its admission by seeking only to admit that those vehicles might not comply with ADR 79. On the same occasion, I made some suggestions as to ways in which the Statement of Agreed Facts then forwarded to me might be improved including by (inter alia) suggesting that VWAG might admit that the Two Mode Software was a “defeat device” within the meaning of ADR 79. As I mentioned earlier in these Reasons, I also made some suggestions as to ways in which the proposed orders might be improved. Although most of my suggestions were taken up, VWAG declined to admit that the Two Mode Software constituted a “defeat device”. It did, however, improve the quality of the admissions it was prepared to make but only as a result of the course of action which I took in relisting the matter for the purpose of informing the parties that I was not prepared to accept the admissions in the form in which they had then been drafted.
As I have already mentioned, VWAG has never shown any contrition for its outrageous contraventions of the ACL and neither party suggested that it had. Its lack of contrition is a factor justifying the imposition of a large pecuniary penalty.
In both their Joint Written Submissions and in oral submissions, the parties submitted that there were two courses of conduct in play in the present case. The first is said to be constituted by the making of applications for permission to affix identification plates to motor vehicles on 171 separate occasions and the second by the application to DIRD for GVG rating on the GVG website on 162 occasions. There is an argument that there is a third course of conduct being the application on 140 separate occasions for recognition that the Volkswagen-branded vehicles the subject of the applications were entitled to the benefit of a higher GVG rating on the GVG website. The facts are that the 140 occasions to which I have just referred related to some of the same vehicles that were the subject of the 162 applications that were made for a general GVG rating. I am prepared to proceed upon the basis that there were two courses of conduct in the present case within the course of conduct principle which I discussed at [206]–[214] above.
The parties also submitted that I should invoke the totality principle and I intend to do so.
The total of the maximum penalties that might be applied to each separate contravention upon the basis that there were 473 such contraventions is, as I have already said, a little over $520 million. Were I to adopt the parties’ submission as to the number of contraventions in the present case, the total of the maximum penalties would be vastly more than $520 million. I shall proceed upon the basis that the total of the maximum penalties that apply in the present case absent the application of the course of conduct principle and the totality principle is so large an amount as to be beyond the highest point of an appropriate range of penalties, whether that total is $520 million or some much larger figure.
In the SOAF, the parties have agreed that the estimated profit made by VWAG in respect of the affected vehicles during the relevant period was less than the amount agreed as an appropriate penalty (viz $75 million). The evidence of Mr Heinemann supported the same conclusion but brought forward entirely different figures from those which appear in the SOAF. I have serious reservations as to the worth of the agreed facts in this regard and of the evidence of Mr Heinemann. Whilst Mr Heinemann exposed some of his reasoning which led to the figures about which he gave evidence, it seems obvious to me that there is a great deal more that would need to be looked at before I could have any real confidence that his figures were correct. The ACCC provided no assistance whatsoever in relation to Mr Heinemann’s evidence and literally left it to me to do with it what I would.
Bearing in mind that Senior Counsel for VWAG accepted that an appropriate penalty in the present case would need to be greater than the profit earned by VWAG as a result of engaging in the contravening conduct and that it would need to be sufficiently above that figure in order to provide the necessary deterrence (as to which, see the exchange extracted at [262] above), I do not think it necessary to descend into the question of profit in any detail. I will take into account the estimates I was given but only as estimates and inconsistent estimates at that.
One final matter raised was based upon Exhibit D and a fleeting reference made by Senior Counsel for the ACCC to two cases decided by Lindgren J (Australian Competition and Consumer Commission v Qantas Airways Ltd (2008) 253 ALR 89 (ACCC v Qantas) and Australian Competition & Consumer Commission v Roche VitaminsAustralia Pty Ltd [2001] FCA 150 (Roche)). These cases were not referred to in the parties’ Joint Written Submissions and the proposition relied upon by the ACCC was not supported expressly by VWAG. Taken at their highest, these cases might support the proposition that, in an appropriate case, if the contravener has already been punished elsewhere for the same conduct, it might be relevant to take into account that punishment when fixing an appropriate pecuniary penalty in Australia. I do not think that the cases actually go that far. In any event, Senior Counsel for the ACCC merely submitted that I could take into account the overseas penalties of which I was aware but was not obliged to do so. He did not make any submission as to the way in which I might take those penalties into account in the present case.
Exhibit D is a press release issued by VWAG itself commenting on a fine of €100 million imposed upon it by the Braunschweig District Court in Germany. It does not provide sufficient detail to justify my considering whether or not the authorities referred to at [271] above have been engaged in the present case. The only other penalties that might be considered as relevant in this regard are those imposed in the US but it is quite clear that those penalties related only to conduct perpetrated in the US and did not cover in any sense whatsoever conduct in Australia.
Taking all of the above matters into account, I have come to the view that the $75 million agreed penalty is not sufficient to meet the overriding objects of specific deterrence and general deterrence required in matters such as this and is manifestly inadequate. In saying that, I have in mind, in particular, the egregious nature of the consumer fraud perpetrated by VWAG, the calculated nature of that fraud, the fact that it was perpetrated by senior management personnel, the fact that it involved a very serious deception of Australian government regulatory authorities, the circumstance that its impact on consumers was very significant, the fact that excessive emissions of NOx are harmful to humans and to the environment, the fact that it has shown no contrition, the fact that the agreed penalty is not supported by any reasoning (especially by the ACCC) or any justification other than it was arrived at as a compromise as part of an overall settlement, the fact that the potential maximum penalties (subject to the application of the course of conduct principle and the totality principle) is at least $520 million and possibly much more, the fact that VWAG has conducted the litigation by taking every point possibly available to it and the fact that it has only adopted a different stance under the pressure of the imminent commencement of the Stage 2 Hearing. VWAG is more than capable of paying a much larger penalty, given its size and wealth, and has, of course, done exactly that in the US and in Europe.
In all the circumstances and applying the requisite process of instinctive synthesis, I consider that a civil pecuniary penalty of $125 million is warranted in the present case and that is the penalty which I propose to impose.
I will make the declarations which I indicated at [100] above that I would make and I will also make the costs order sought by the parties.
I will also make the orders sought in proceeding NSD 322 of 2017 (the Audi proceeding). I do so because I have been told that orders in those terms are an integral part of an overall settlement package agreed between the parties. Being mindful of the High Court’s admonition that a regulator in the position of the ACCC might abandon some or all of its case, should it choose to do so, I do not propose to disrupt this settlement by refusing to make the agreed orders in that proceeding. However, I cannot leave the matter without reminding readers of this judgment of the fact that the Two Mode Software was installed in all 12,368 diesel-powered Audi vehicles the subject of that proceeding and that the diesel engines in those Audi vehicles are variants of the EA189 diesel engine. I think that it is regrettable that the ACCC has abandoned its entire case in the Audi proceeding. I also note that it has abandoned a very large part of its case in proceeding NSD 1462 of 2016.
It seems to me that the terms of settlement agreed between VWAG, Audi AG and the Australian emanations of those companies reflect an overly pragmatic approach on the part of the ACCC.
There will be orders and declarations accordingly.
I certify that the preceding two hundred and seventy-eight (278) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Foster. Associate:
Dated: 20 December 2019
Attachment A
Attachment B
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