Steel & Tube – sentencing under the Fair Trading Act

A Court of Appeal decision from early November has been sitting in my reading list for some time until I was alerted to the actions of a property developer telling lies to elderly neighbours in an effort to bully them into agreeing to (drainage) concessions for the benefit of the development.

The judgment is important because of the manner in which it dealt with the penalties for misleading and deceptive conduct under the Fair Trading Act 1986.

However, the issue that caught my eye was the attribution of the state of mind of an employee to their employer.  This issue was highlighted in a case summary provide by the ‘Judgments of Public Interest’ website.

It should come as no surprise that acts or omissions of an employee can be attributed to their employer.  But what about those where the relevant offence requires the prosecution to prove state of mind?  The relevant provisions of the Fair Trading Act are “strict liability” offences.  That is, the prosecution did not need prove state of mind in order to establish guilt – but knowledge was relevant for sentencing.

Consequently, the Court of Appeal decision is important from a compliance / governance viewpoint, because it (graphically) demonstrates the point that poor compliance processes and cultures (and poor governance) of employees who undertake misleading and deceptive conduct can lead to large fines.

Background

Steel & Tube pleaded guilty to 24 representative charges of misleading conduct and false representations in connection with its “seismic grade” steel mesh, known as SE62 mesh.  It represented that the mesh, which is used to reinforce concrete structures, was 500E grade, meaning that it had been tested and complied with the relevant building standard, AS/NZS 4671:2001 (the Standard), and that it had been tested independently.  In the District Court the company pleaded guilty and was fined a total of $1,885m.  Both Steel & Tube and the Commerce Commission appealed to the High Court, where the fines were increased to a total of $2,009m.

On appeal, Steel & Tube argued that the sentence was manifestly excessive.  The Commerce Commission argued that the High Court Judge was wrong to hold that the state of mind of the employee responsible for flawed testing processes could not be attributed to the company for sentencing purposes, and that a number of knock-on points led to a sentence that was manifestly inadequate.

As its “seismic” label denotes, the steel mesh was sold on the basis that it was “earthquake grade” – for use in reinforcing concrete.  Steel & Tube the steel mesh had been tested by an independent agency for compliance with the Standard.  Neither of these representations was true, specifically the steel mesh:

• had not been tested in the manner prescribed to meet the Standard; and
• had only been tested internally by Steel & Tube.

A senior employee of Steel & Tube (who had retired before the issues came to light) had overseen the testing procedures and had intentionally chosen to adopt a different testing method from those prescribed – on the basis, it appeared, that he knew best and thought that his methods were better than those prescribed by the Standard.  This was without the knowledge of the senior management or the Board – and had occurred (and persisted over time) because the former employee was not supervised and his work was not audited.

It should also be noted that while the steel mesh was non-compliant, there was no evidence that it caused any harm.

Sentencing – general approach

Generally, the approach of the Courts to sentencing under consumer protection legislation such as the Fair Trading Act is to use the maximum fine that can be imposed as a starting point and then apply any aggravating and mitigating factors involved in the offending – using a sort of checklist approach.  For example, the importance of the untrue statement (in this case about seismic capability), the extent of its untruthfulness, how widely it had been dissemination, and (of course) the extent of any harm.  (There are also complications where there are multiple charges, and making sure that the total sentence is not out of proportion to the nature and scale of the offending).

Attribution of employee state of mind to their employer

Here, the Court of Appeal responded with a resounding, Yes.  The Fair Trading Act is consumer protection legislation that applies to parties in trade (businesses).  It creates special rules of attribution.  Attribution of a state of mind (addressed by section 45) provides that, where the relevant conduct is that of a company, it is sufficient to show that a director, employee or agent, acting within the scope of that person’s actual or apparent authority, had the relevant state of mind.

In this case, the Court was satisfied that it is necessary to establish the company’s state of mind for sentencing purposes – and state of mind is an orthodox consideration for strict liability offences.  State of mind may affect the Court’s assessment of the gravity and culpability of the offending.  Here, the company’s state of mind was a matter of real significance (and controversy).  And, if it was necessary to do so, the Court would hold that the employee’s state of mind should be attributed to the company (on ordinary rules of attribution) – and the state of mind of the former employee was a central issue to this case.

How far is attribution to extend for sentencing purposes?

Because, in this case the culpability of an employee and senior management differed, it was “sufficient” to show a relevant [employee] had a given state of mind.  The state of mind of the director, employee or agent whose misleading conduct is the subject of the charge is sufficient for sentencing purposes.  But that person may not be the only person whose conduct and state of mind may influence sentencing.   State of mind may matter at two points in time:

• at the time of offending:  senior management’s complicity in, or ignorance of, an employee’s actions may aggravate or mitigate blame – depending on the circumstances.
• at sentencing:  when senior management typically speak for the company, the Court is interested in co-operation with the authorities, assumption of responsibility, and commitment to future compliance. 

The relevant sentencing considerations for penalties under the Fair Trading Act

The Commerce Commission had argued for a higher fine on the basis that the former employee’s state of mind (to disregard the requirements of the Standard) could be treated as that of the company.  The District Court and High Court had both disagreed – holding that senior management had been careless (negligent) by failing to supervise the former employee, but that the former employee’s state of mind could not be attributed to the company.

The Court of Appeal disagreed with the approach of the lower Courts and held that, because the Fair Trading Act is consumer protection legislation, it is appropriate for the state of mind of employees (in this case a former employee) to be attributed to the company for sentencing purposes.  This was so even if, as here, the employee was not part of the senior management team.

Therefore, whilst the offender’s state of mind is only one factor which is relevant to blameworthiness, if a rogue employee intentionally makes false or misleading statements about a company’s products – that may be an aggravating factor that leads to a higher fine.

Sentence imposed

Ultimately, the Court of Appeal found that the High Court sentence was manifestly excessive. 

Steel & Tube’s compliance offending (i.e. misrepresenting compliance with the Standard) was serious because the product was put to an important use, so compliance with the Standard was vital.  Steel & Tube lacked an adequate excuse, and the offending was large scale and of a long duration.

However, the misrepresentations were not intended to mislead or deceive.  Steel & Tube believed the mesh did comply and that its testing processes were equivalent or superior to those of the Standard.  The company did not mislead for gain, and the Court was not able to estimate what gain it actually made.  And it responded by withdrawing the mesh from the market as soon as it was put on notice that its testing processes did not comply.

The independent testing misrepresentations were “somewhat less significant” than the compliance representations, but they were clearly made and widely disseminated.  The offending was held to be deliberate – but not as culpable as some comparable cases.

As a result, the overall fine was reduced to $1,560m.

Takeaways

The saga of the steel mesh, ending in the Court of Appeal decision, again underlines the importance of good regulatory compliance processes (and cultures). 

I suggest that a risk weighted approach should be taken, with a focus on those areas where misrepresentations attributable to the company, can be seen to carry the greatest. 

I also suggest that even when a business has appropriate policies in place, a false or misleading statement about something as important as seismic strength or where public safety is at risk, means that the business (and its directors and senior management) may not be able to claim a lack of knowledge as a mitigating factor in relation to sentencing for such “strict liability” offences.

Further information

Please contact me should you have any queries concerning the information to be provided.