Federal Court of Australia
Chief Executive Medicare on behalf of Commonwealth of Australia v Healius Pathology Pty Ltd [2023] FCA 981
ORDERS
CHIEF EXECUTIVE MEDICARE ON BEHALF OF THE COMMONWEALTH OF AUSTRALIA Applicant | ||
AND: | HEALIUS PATHOLOGY PTY LTD (ACN 007 190 043) Respondent | |
DATE OF ORDER: |
BY CONSENT, THE COURT DECLARES THAT:
1. The respondent (SDS) contravened s 23DZZIL(1) of the Health Insurance Act 1973 (Cth) by entering into a lease (as tenant) (2015 Castle Hill Lease) with Aidy Pty Ltd, Choi Super Pty Ltd and Kalouche Investments Pty Ltd (as landlords) (together, the Castle Hill Landlords) on or around 10 February 2015 in respect of the Pathology Room located within the building located at the property known as Specialist Dermatology Services, 14 Kentwell Ave, Castle Hill, NSW, in circumstances where:
(a) SDS was a provider of pathology services within the meaning of s 23DZZIE(3) of the Act;
(b) under the 2015 Castle Hill Lease SDS agreed to pay rent of $150,000 plus GST per annum, and SDS thereby provided a benefit, within the meaning of s 23DZZID(1) of the Act, to the Castle Hill Landlords;
(c) the Castle Hill Landlords were connected to (within the meaning of s 23DZZIJ(1) of the Act) persons who were requesters of pathology services (within the meaning of s 23DZZIE(1) of the Act), being Dr Adrian Cheow Yang See (Dr See), Dr James Young Joon Choi (Dr Choi) and Dr Sam Kalouche (Dr Kalouche);
(d) the benefit SDS provided was related to the business of rendering pathology services; and
(e) the benefit SDS provided was not a permitted benefit within the meaning of s 23DZZIF(2) to (6) of the Act, as the benefit was substantially different from the market value of the property (within the meaning of s 23DZZIF(5)(b)).
2. SDS contravened s 23DZZIL(1) of the Act by entering into a lease (as tenant) (2015 Kingswood Lease) with SKC Property Investments Pty Ltd (as landlord) (SKC Property) on or around 10 February 2015 in respect of the Pathology Room located within the building located at the property known as Nepean Dermatology, 46 Derby Street, Kingswood, NSW, in circumstances where:
(a) SDS was a provider of pathology services within the meaning of s 23DZZIE(3) of the Act;
(b) under the 2015 Kingswood Lease SDS agreed to pay rent of $200,000 plus GST per annum, and SDS thereby provided a benefit, within the meaning of s 23DZZID(1) of the Act, to SKC Property;
(c) SKC Property was connected to (within the meaning of s 23DZZIJ(1) of the Act) persons who were requesters of pathology services (within the meaning of s 23DZZIE(1) of the Act), being Dr See, Dr Choi and Dr Kalouche;
(d) the benefit SDS provided was related to the business of rendering pathology services; and
(e) the benefit SDS provided was not a permitted benefit within the meaning of s 23DZZIF(2) to (6) of the Act, as the benefit was substantially different from the market value of the property (within the meaning of s 23DZZIF(5)(b)).
3. SDS contravened s 23DZZIL(1) of the Act by entering into a lease (as tenant) (2017 Castle Hill Lease) with the Castle Hill Landlords on or around 11 August 2017 in respect of the Pathology Room located within the building located at the property known as Specialist Dermatology Services, 14 Kentwell Ave, Castle Hill, NSW, in circumstances where:
(a) SDS was a provider of pathology services within the meaning of s 23DZZIE(3) of the Act;
(b) under the 2017 Castle Hill Lease SDS agreed to pay rent of $152,949.44 plus GST per annum, and SDS thereby provided a benefit, within the meaning of s 23DZZID(1) of the Act, to the Castle Hill Landlords;
(c) the Castle Hill Landlords were connected to (within the meaning of s 23DZZIJ(1) of the Act) persons who were requesters of pathology services (within the meaning of s 23DZZIE(1) of the Act), being Dr See, Dr Choi and Dr Kalouche;
(d) the benefit SDS provided was related to the business of rendering pathology services; and
(e) the benefit SDS provided was not a permitted benefit within the meaning of s 23DZZIF(2) to (6) of the Act, as the benefit was substantially different from the market value of the property (within the meaning of s 23DZZIF(5)(b)).
4. SDS contravened s 23DZZIL(1) of the Act by entering into a lease (as tenant) (2017 Kingswood Lease) with SKC Property on or around 11 August 2017 in respect of the Pathology Room located within the building located at the property known as Nepean Dermatology, 46 Derby Street, Kingswood, NSW, in circumstances where:
(a) SDS was a provider of pathology services within the meaning of s 23DZZIE(3) of the Act;
(b) under the 2017 Kingswood Lease SDS agreed to pay rent of $203,932.58 plus GST per annum, and SDS thereby provided a benefit, within the meaning of s 23DZZID(1) of the Act, to SKC Property;
(c) SKC Property was connected to (within the meaning of s 23DZZIJ(1) of the Act) persons who were requesters of pathology services (within the meaning of s 23DZZIE(1) of the Act), being Dr See, Dr Choi and Dr Kalouche;
(d) the benefit SDS provided was related to the business of rendering pathology services; and
(e) the benefit SDS provided was not a permitted benefit within the meaning of s 23DZZIF(2) to (6) of the Act, as the benefit was substantially different from the market value of the property (within the meaning of s 23DZZIF(5)(b)).
BY CONSENT, THE COURT ORDERS THAT:
5. Pursuant to s 125A of the Act, SDS pay to the Commonwealth within 14 days:
(a) a pecuniary penalty in the amount of $375,000 in respect of its contravention of s 23DZZIL(1) of the Act declared in declaratory order 1 above;
(b) a pecuniary penalty in the amount of $375,000 in respect of its contravention of s 23DZZIL(1) of the Act declared in declaratory order 2 above;
(c) a pecuniary penalty in the amount of $450,000 in respect of its contravention of s 23DZZIL(1) of the Act declared in declaratory order 3 above; and
(d) a pecuniary penalty in the amount of $450,000 in respect of its contravention of s 23DZZIL(1) of the Act declared in declaratory order 4 above.
6. Order 3 of the orders of Stewart J dated 31 March 2022 regarding costs thrown away be vacated.
7. SDS pay the Commonwealth’s costs of the proceeding, fixed in the sum of $200,000.
8. The proceeding otherwise be dismissed.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
STEWART J:
Introduction
1 The Commonwealth of Australia, through Medicare, is a very substantial purchaser of pathology and diagnostic imaging services such as x-rays, ultrasound, computed tomography (CT) and magnetic resonance imaging (MRI) (together hereinafter referred to simply as pathology services) – more than $3.2 billion, representing approximately 30% of total Medicare outlays, in 2005-06 and no doubt having increased very substantially since then. However, the decisions to purchase such services and from whom to purchase them are not made by the Commonwealth; they are made by doctors and their patients. Moreover, there are only three dominant providers of such services in the market. Those factors lead to a very real public interest concern in ensuring that decisions to request such services and from whom are not improperly influenced.
2 The prohibition of inducements and similar activities by pathology service providers in relation to referrals for pathology services is a long-standing element of the legislative provisions relating to pathology services in the Health Insurance Act 1973 (Cth). The Explanatory Memorandum to the Bill which amended the Act by introducing Pt IIBA by way of the Health Insurance Amendment (Inappropriate and Prohibited Practices and Other Measures) Act 2007 (Cth) (Prohibited Practices Act), recognised the possibility that competition between pathology providers may have been skewed to favour those providers who were able to provide a benefit to pathology requesters, typically medical practitioners.
3 The Explanatory Memorandum recognised that consumers, being the patients, are unlikely to possess the necessary knowledge to assess appropriate use of pathology services; they are not generally equipped to identify over servicing or inappropriate ordering of services. Reliance on market mechanisms to regulate the ordering and provision of services was thus regarded as insufficient, and it was regarded as necessary to legislate against arrangements between pathology service providers and requesters that may amount to a form of inducement with regard to the ordering of services.
4 Part IIBA of the Act regulates the relationship between the providers of pathology services and requesters of such services, including medical practitioners. The objects of Pt IIBA, as set out in the absurdly and cumbersomely numbered s 23DZZIA(1), are:
(1) to prevent requesters of pathology services from (either directly or indirectly) asking for or accepting, or being offered or provided, any benefits (other than permitted benefits) in order to induce the requesters to request the services from providers of those services; and
(2) to protect requesters of pathology services from (either directly or indirectly) being threatened in order to induce the requesters to request the services from providers of those services.
5 This case concerns agreed penalties for admitted contraventions of prohibitions in Pt IIBA against providers of pathology services providing benefits (that are not permitted benefits) to requesters of pathology services that are related to the business of rendering pathology services. Those contraventions occurred between 10 February 2015 and 11 August 2017, which is referred to as the relevant period.
6 The applicant is the Chief Executive of Medicare, a statutory position established by s 4 of the Human Services (Medicare) Act 1973 (Cth), and is authorised by ss 5 and 6 of that Act to exercise the functions conferred on the applicant under the Act (ie, the Health Insurance Act).
7 The respondent is Healius Pathology Pty Ltd. Prior to 18 March 2021, and hence when this proceeding was commenced, it was named Specialist Diagnostic Services Pty Ltd. It is convenient to refer to it as SDS. During the relevant period, SDS was a wholly-owned subsidiary of Primary Health Care Ltd. On 3 December 2018, Primary Health Care changed its name to Healius Ltd. SDS is one of the three dominant market participants in the pathology services industry. One of the well-known names under which it traded during the relevant period is Laverty Pathology.
Statutory overview
8 As mentioned, Pt IIBA of the Act was inserted by the Prohibited Practices Act. The second reading speech to the Prohibited Practices Act identified three main legislative objects:
(1) to prohibit certain practices relating to the rendering of pathology services, including to prohibit inducements between requesters and providers of those services;
(2) to prevent payments for pathology services that do not benefit patients; and
(3) to encourage fair competition between providers of those services on the basis of quality of services provided and cost to patients.
9 To that end, Pt IIBA has the effect that any benefit a provider of pathology services offers or provides to a requester of pathology services must be a “permitted benefit” within the meaning of s 23DZZIF. If the benefit is not a “permitted benefit”, the benefit is a “prohibited benefit” and contravenes s 23DZZIL of the Act.
10 Part IIBA contemplates that a payment for property (which includes a lease) between a requester of pathology services (or a person connected with a requester) and a provider of pathology services can be a “permitted benefit”, but only if certain conditions are satisfied. Relevantly, a lease will not be a permitted benefit (and therefore will be a prohibited benefit) if the rent is substantially different from market value: s 23DZZIF(5)). In this context, “substantially different” means if the difference between the market value and the payment or consideration is more than 20% of the market value: s 23DZZIF(9) and Health Insurance Regulations 1975 (Cth), reg 20CA.
11 SDS has admitted that, by agreeing to pay elevated rents under four leases, SDS provided a benefit within the meaning of s 23DZZIF, consisting of a payment for the use and occupation of the relevant premises, to requesters of pathology services. SDS has admitted that the rents agreed to be paid under the relevant leases (dealt with in further detail at [23]-[25] below) were “substantially different” from market value and, accordingly, were not “permitted benefits” and therefore constituted contraventions of s 23DZZIL(1) of the Act.
The relevant provisions
12 The provisions of the Act and regulations identified below are as they were during the relevant period.
13 Section 3 (headed “Interpretation”) relevantly provided:
approved pathology authority means a person in respect of whom there is in force an undertaking given by the person, and accepted by the Minister, under section 23DF.
medical practitioner means a person registered or licensed as a medical practitioner under a law of a State or Territory that provides for the registration or licensing of medical practitioners but does not include a person so registered or licensed:
(a) whose registration, or licence to practise, as a medical practitioner in any State or Territory has been suspended, or cancelled, following an inquiry relating to his or her conduct; and
(b) who has not, after that suspension or cancellation, again been authorised to register or practise as a medical practitioner in that State or Territory.
practitioner means a medical practitioner or a dental practitioner.
14 Section 23DZZID (headed “Definitions”) relevantly provided:
(1) In this Part:
benefit includes:
(a) money, property or services, or any other benefit asked for, accepted, offered or provided in any form; and
(b) an actual or a potential benefit.
15 Section 23DZZIE (headed “Meaning of requester and provider”) relevantly provided:
approved pathology authority means a person in respect of whom there is in force an undertaking given by the person, and accepted by the Minister, under section 23DF.
medical practitioner means a person registered or licensed as a medical practitioner under a law of a State or Territory that provides for the registration or licensing of medical practitioners but does not include a person so registered or licensed:
(a) whose registration, or licence to practise, as a medical practitioner in any State or Territory has been suspended, or cancelled, following an inquiry relating to his or her conduct; and
(b) who has not, after that suspension or cancellation, again been authorised to register or practise as a medical practitioner in that State or Territory.
practitioner means a medical practitioner or a dental practitioner.
16 Section 23DZZIF (headed “Meaning of permitted benefit”) relevantly provided:
(1) For the purposes of this Part, a benefit asked for or accepted by, or offered or provided to, a person (the beneficiary) who is, or is connected to, a requester is a permitted benefit if:
(a) both of the following apply:
(i) it is covered by subsection (2), (3), (4), (5) or (6);
(ii) it is not excluded by subsection (7); or
(b) it is covered by a determination by the Minister under section 23DZZIG.
…
Payments for other property, goods or services
(5) The benefit is a permitted benefit if:
(a) the benefit consists of a payment (whether or not made to the beneficiary) for property, goods or services that are not shared between the beneficiary and another person; and
(b) the amount of the benefit is not substantially different from the market value of the property, goods or services; and
(c) if the benefit is a payment for the use or occupation, by a provider of a kind of pathology service, of premises (including a part of premises) or a particular space in a building:
(i) an approved collection centre or an accredited pathology laboratory is established in the premises or space at the time, or within 60 days after, the arrangement for the use or occupation is entered into; or
(ii) the provider renders professional services in the premises or space;
and the premises or space are not used or occupied under the arrangement for any other purpose.
…
Market value
(9) For the purposes of paragraphs (5)(b) and (6)(b), the regulations may prescribe a method of working out whether the amount of a payment or of consideration is substantially different from the market value, or an amount determined by a method prescribed in the regulations to be the market value, of a specified class of property, goods or services.
17 Section 23DZZIJ (headed “Meaning of connected”) relevantly provided:
(1) For the purposes of this Part, a person (the first person) is connected to another person if:
…
(b) both of the following apply:
(i) the other person is a body corporate;
(ii) the other person is a director, secretary, chief executive officer or any other executive officer of that body corporate;
…
18 Section 23DZZIL(1) (headed “Provider civil penalty provisions – offering or providing prohibited benefits”) provided:
Provider offers or provides a prohibited benefit
(1) A person contravenes this subsection if:
(a) the person is a provider of one or more kinds of pathology services or diagnostic imaging services; and
(b) the provider offers or provides a benefit to a second person; and
(c) the second person is, or is connected to, a requester of any of those kinds of services; and
(d) the benefit:
(i) would be reasonably likely to induce a requester to request any of those kinds of services from a provider; or
(ii) is related to the business of rendering pathology services or diagnostic imaging services, as the case requires; and
(e) the benefit is not a permitted benefit.
Civil penalty:
(a) for an individual – 600 penalty units; and
(b) for a body corporate – 6,000 penalty units.
19 Regulation 20CA (headed “Method for determining substantial difference from market value”) of the Health Insurance Regulations 1975 (Cth) provided:
(1) For subsection 23DZZIF(9) of the Act, the method mentioned in subregulation (2) is prescribed for working out whether the amount of a payment or of consideration for property, goods or services is substantially different from the market value of the property, goods or services.
(2) The amount of the payment or consideration is substantially different from the market value, determined in accordance with regulation 20CB, if the difference between the market value and the payment or consideration is more than 20% of the market value.
20 Regulation 20CB (headed “Method for determining market value”) provided:
(1) For subsection 23DZZIF(9) of the Act, the market value of property, goods or services is the amount that a willing purchaser would have had to pay, at the time mentioned in subregulation (2), to a vendor who was willing, but not anxious, to sell.
(2) The time is:
(a) for an offence of asking for a benefit that is not a permitted benefit – when the person asked for the benefit; or
(b) for an offence of accepting a benefit that is not a permitted benefit – when the person accepted the benefit; or
(c) for an offence of offering a benefit that is not a permitted benefit – when the person offered the benefit; or
(d) for an offence of providing a benefit that is not a permitted benefit – when the person provided the benefit.
21 Section 125A (headed “Federal Court may order person to pay pecuniary penalty for contravening civil penalty provision”) of the Act relevantly provided:
Application for order
(1) Within 6 years of a person (the wrongdoer) contravening a civil penalty provision, the Chief Executive Medicare may apply on behalf of the Commonwealth to the Federal Court of Australia for an order that the wrongdoer pay the Commonwealth a pecuniary penalty.
Court may order wrongdoer to pay pecuniary penalty
(2) If the Court is satisfied that the wrongdoer has contravened a civil penalty provision, the Court may order the wrongdoer to pay to the Commonwealth for each contravention the pecuniary penalty that the Court determines is appropriate (but not more than the maximum amount specified in the provision).
Determining amount of pecuniary penalty
(3) In determining the pecuniary penalty, the Court must have regard to all relevant matters, including:
(a) the nature and extent of the contravention; and
(b) the nature and extent of any loss or damage suffered as a result of the contravention; and
(c) the circumstances in which the contravention took place; and
(d) whether the person has previously been found by the Court in proceedings under this Act to have engaged in any similar conduct.
Civil evidence and procedure rules apply
(4) The Court must apply the rules of evidence and procedure for civil matters when hearing and determining an application for an order under this section.
Note: The standard of proof in civil proceedings is the balance of probabilities (see section 140 of the Evidence Act 1995).
Contravention of more than one civil penalty provision
(5) If an act or omission constitutes a contravention of 2 or more civil penalty provisions, proceedings may be instituted under this Act against a person in relation to the contravention of any one or more of those provisions. However, the person is not liable to more than one pecuniary penalty under this section in respect of the same act or omission.
The relevant facts underlying the contraventions
Summary of the facts
22 The parties agreed a statement of facts from which what follows is extracted.
23 On or around 10 February 2015, Aidy Pty Ltd, Choi Super Pty Ltd and Kalouche Investments Pty Ltd granted a two-year lease to SDS in relation to a 4.76 m² pathology room within the Specialist Dermatology Services building in Castle Hill, NSW. The commencement rent was $150,000 per annum excluding GST. SDS operated an approved collection centre (ACC) from the rental premises.
24 On the same date, SKC Property Investments Pty Ltd as trustee for the SKC Property Investments Trust granted a two-year lease to SDS in relation to an 8.41 m² pathology room in the Nepean Dermatology building in Kingswood, NSW. The commencement rent was $200,000 per annum excluding GST. SDS operated an ACC from the rental premises.
25 On or around 11 August 2017, the Castle Hill landlords and SK Property granted new three-year leases to SDS in respect of each of the premises. The commencement rents were approximately $153,000 and $204,000 per annum excluding GST respectively.
26 Four expert valuation reports (two for each property) were filed by the Chief Executive. The market values expressed in those reports ($30,000 and $35,000 per annum on commencement of the Castle Hills leases and $75,000 and $82,500 per annum on commencement of the Kingswood leases) would have the result, if accepted, that the difference between the agreed lease amounts and the market values are between 100% and 470% greater than the market values. Those differences are obviously very significantly greater than the 20% differential given in the regulation defining “substantially different”.
27 However, SDS does not accept the expert valuations. Rather than have a contested hearing on that question, which may have involved some complexity and a significant cost, the parties agreed that when each lease was concluded the amount of the benefit to be paid was substantially different from the market value because the difference between the rental amount and the market value was “significantly more than 20% of the market value”. That is what the eye must take into account in considering the agreed penalties, although allowing for the possibility that the relevant difference may be very significantly more than 20%.
Contraventions of s 23DZZIL(1)
28 SDS admits that it contravened s 23DZZIL(1) on four occasions by entering into each of the four leases as:
(1) SDS was a provider of pathology services (s 23DZZIL(1)(a));
(2) SDS provided a benefit under each of the leases (s 23DZZIL(1)(b));
(3) the Castle Hill landlords and SKC Property were connected to requesters of pathology services and were beneficiaries within the meaning of s 23DZZIF(1) (s 23DZZIL(1)(c));
(4) the benefits SDS provided under each of the leases were related to the business of rendering pathology services (s 23DZZIL(1)(d)(ii)); and
(5) the benefits SDS provided under each of the leases were not permitted benefits as they were substantially different from market value (s 23DZZIL(1)(e), s 23DZZIF(5)).
29 I will consider of those elements in turn.
SDS was a provider of pathology services
30 During the relevant period, SDS was an approved pathology authority within the meaning of s 3(1) of the Act and a provider of pathology services within the meaning of s 23DZZIE(3).
Lessors were requesters and beneficiaries
31 The Castle Hill landlords were, at all material times, the registered proprietors, as tenants in common in equal shares, of the property in Castle Hill.
32 When SDS entered into the Castle Hill leases in 2015 and 2017:
(1) Dr Adrian Cheow Yang See was a director of Aidy Pty Ltd;
(2) Dr James Young Joon Choi was a director of Choi Super Pty Ltd;
(3) Dr Sam Kalouche was a director of Kalouche Investments Pty Ltd; and
(4) each of Dr See, Dr Choi and Dr Kalouche was a requester of pathology services within the meaning of s 23DZZIE(1) as each was a “practitioner” and “medical practitioner” within the meaning of s 3(1).
33 It follows that each of the Castle Hill landlords was “connected to” a “requester” within the meaning of s 23DZZIJ(1) and was therefore a “beneficiary” within the meaning of s 23DZZIF(1) of the Act.
34 SKC Property was, at all material times, the registered proprietor of the Kingswood property. When SDS entered into the Kingswood leases in 2015 and 2017, Dr See, Dr Choi and Dr Kalouche were each directors of SKC Property, and each was a “requester” of pathology services within the meaning of s 23DZZIE(1). Accordingly, SKC Property was “connected to” requesters within the meaning of s 23DZZIJ(1) and it was therefore a “beneficiary” within the meaning of s 23DZZIF(1).
35 When SDS entered into the Castle Hill leases:
(1) it provided a benefit to the Castle Hill landlords within the meaning of s 23DZZID(1);
(2) the benefit consisted of a payment to be made for property that was not shared between the Castle Hill landlords and another person (within the meaning of s 23DZZIF(5)(a));
(3) the benefit was a payment for the use and occupation by SDS of part of the premises, an ACC was established in the premises at the time or within 60 days and the part of the premises the subject of the Castle Hill leases was not used or occupied under the leases for any other purpose (within the meaning of s 23DZZIF(5)(c));
(4) the benefit was not related to the number, kind or value of requests for pathology services made by Dr See, Dr Choi and Dr Kalouche, nor did the benefit consist of the provision of staff or equipment at the premises of the Castle Hill landlords for the purpose of providing pathology services (within the meaning of s 23DZZIF(7));
(5) the amount of the benefit to be paid in respect of the 2015 Castle Hill lease was “substantially different from the market value” of the property (within the meaning of s 23DZZIF(5)(b)); and
(6) the amount of the benefit to be paid in respect of the 2017 Castle Hill lease was “substantially different from the market value” of the property (within the meaning of s 23DZZIF(5)(b)).
36 When SDS entered into the Kingswood leases:
(1) it provided a benefit to SKC Property within the meaning of s 23DZZID(1);
(2) the benefit consisted of a payment to be made for property that was not shared between SKC Property and another person (within the meaning of s 23DZZIF(5)(a));
(3) the benefit was a payment for the use and occupation by SDS of part of the premises, an ACC was established in the premises at the time or within 60 days and the part of the premises the subject of the Kingswood leases was not used or occupied under the lease for any other purpose (within the meaning of s 23DZZIF(5)(c)); and
(4) the benefit was not related to the number, kind or value of requests for pathology services made by Dr See, Dr Choi and Dr Kalouche, nor did the benefit consist of the provision of staff or equipment at the premises of SKC Property for the purpose of providing pathology services (within the meaning of s 23DZZIF(7));
(5) the amount of the benefit to be paid in respect of the 2015 Kingswood lease was “substantially different from the market value” of the property (within the meaning of s 23DZZIF(5)(b)); and
(6) the amount of the benefit to be paid in respect of the 2017 Kingswood lease was “substantially different from the market value” of the property (within the meaning of s 23DZZIF(5)(b)).
37 Each of the benefits SDS provided to the Castle Hill landlords under the Castle Hill leases and SKC Property under the Kingswood leases was a benefit that:
(1) was related to the business of rendering pathology services (within the meaning of s 23DZZIL(1)(d)(ii) of the Act), because the premises the subject of each lease included a pathology room, each lease was conditional upon SDS being granted approval to operate the premises as an ACC, and SDS did in fact obtain such approval in respect of both premises; and
(2) it was not a permitted benefit (within the meaning of s 23DZZIL(1)(e) of the Act) as each of the benefits was substantially different from the market value of the property (within the meaning of s 23DZZIF(5)(b)).
The agreed orders
38 The parties have agreed that the Court should make declarations of the admitted contraventions by SDS pursuant to s 21 of the Federal Court of Australia Act 1976 (Cth) (FCA Act);
39 The parties have also agreed payment by SDS of a total pecuniary penalty in the amount of $1,650,000 pursuant to s 125A of the Act, comprising:
(1) $375,000 in respect of the contravention of s 23DZZIL(1) arising from the 2015 Castle Hill lease;
(2) $375,000 in respect of the contravention of s 23DZZIL(1) arising from the 2015 Kingswood lease;
(3) $450,000 in respect of the contravention of s 23DZZIL(1) arising from the 2017 Castle Hill lease; and
(4) $450,000 in respect of the contravention of s 23DZZIL(1) arising from the 2017 Kingswood lease.
40 Finally, the parties have agreed the payment by SDS of the Chief Executive’s costs in the amount of $200,000 pursuant to s 43 of the FCA Act, and that an interlocutory costs order should be vacated.
Declaratory relief
41 The Court has a broad discretionary power to make declarations of right under s 21 of the FCA Act. The agreement of the parties to declaratory relief is insufficient; the Court must itself be satisfied that the making of the declaration is appropriate. It is well established that:
Declarations relating to contraventions of legislative provisions are likely to be appropriate where they serve to record the Court’s disapproval of the contravening conduct, vindicate the regulator’s claim that the respondent contravened the provisions, assist the regulator to carry out its duties, and deter other persons from contravening the provisions: Australian Competition and Consumer Commission v Construction, Forestry, Mining and Energy Union [2006] FCA 1730; (2007) ATPR 42-140 at [6] and the cases there cited; Rural Press Ltd v Australian Competition and Consumer Commission (2003) 216 CLR 53 at [95].
See Australian Building and Construction Commissioner v Construction, Forestry, Mining and Energy Union [2017] FCAFC 113; 254 FCR 68 at [90] and [93] per Dowsett, Greenwood and Wigney JJ.
42 Before the Court exercises its discretion in favour of making a declaration, three requirements should be satisfied: (1) the question in issue must be real and not theoretical or hypothetical; (2) the applicant must have a real interest in raising it; and (3) there must be a proper contradictor: Australian Competition and Consumer Commission v Coles Supermarkets Australia Pty Ltd [2014] FCA 1405 at [76] per Gordon J, citing Gibbs J in Forster v Jododex Australia Pty Ltd [1972] HCA 61; 127 CLR 421 at 437-8. Each of these three requirements is satisfied in the present case.
43 First, the proposed declarations determine what was a real controversy between the parties – namely, whether SDS contravened s 23DZZIL(1) of the Act.
44 Secondly, the Chief Executive, as a regulator under the Act, has a real interest in seeking the declaratory relief. Declaratory relief serves to record the Court’s disapproval of the contravening conduct, vindicate the Chief Executive’s claim that SDS contravened the relevant statutory provision, assist the Chief Executive to carry out their statutory functions, and deter other entities from contravening Pt IIBA of the Act.
45 Thirdly, as the entity declared to have contravened the law, SDS has an interest in opposing the relief, notwithstanding its admissions and agreement.
46 The declarations also serve the valuable purpose of identifying just what contraventions form the basis for the agreed penalties.
47 For those reasons, I am satisfied that the agreed declarations should be made.
Pecuniary penalties
Relevant principles
48 In Minister for the Environment v Northern Seafoods Pty Ltd [2022] FCA 656 at [47]-[49], I had occasion to identify the relevant principles where civil penalties are sought on an agreed basis. Not being aware of any material development in the law since then, I adopt that summary as being equally applicable in the present case:
47 The settled approach to be taken when civil regulatory orders are sought on an agreed basis is explained in Commonwealth v Director, Fair Work Building Industry Inspectorate [2015] HCA 46; 258 CLR 482 at [46]-[60]. The High Court there reaffirmed the desirability of the practice of acting upon agreed penalty submissions, as explained in earlier Full Federal Court decisions in NW Frozen Foods Pty Ltd v ACCC [1996] FCA 1134; 71 FCR 285 and Minister for Industry, Tourism and Resources v Mobil Oil Australia Pty Ltd [2004] FCAFC 72; ATPR ¶41-993.
48 The following principles relevant to the present matter can be extracted from the judgment of the plurality of French CJ, Kiefel, Bell, Nettle and Gordon JJ in Commonwealth v Director:
(1) There is an important public policy involved in promoting predictability of outcome in civil penalty proceedings, and the practice of receiving and, if appropriate, accepting agreed penalty submissions increases the predictability of outcome for regulators and wrongdoers: [46];
(2) Because fixing the quantum of a civil penalty is not an exact science, there is a permissible range in which “courts have acknowledged that a particular figure cannot necessarily be said to be more appropriate than another” (Mobil Oil at [51]) – it is only in that latter sense and only to that extent that the court will not depart from the submitted figure “merely because it might otherwise have been disposed to select some other figure” (NW Frozen Foods at 291): [47];
(3) The court is not bound by the figure suggested by the parties – it asks “whether their proposal can be accepted as fixing an appropriate amount” (NW Frozen Foods at 291) and for that purpose the court must satisfy itself that the submitted penalty is appropriate: [48];
(4) “[I]t is entirely consistent with the nature of civil proceedings for a court to make orders by consent and to approve a compromise of proceedings on terms proposed by the parties, provided the court is persuaded that what is proposed is appropriate”: [57];
(5) “Subject to the court being sufficiently persuaded of the accuracy of the parties’ agreement as to facts and consequences, and that the penalty which the parties propose is an appropriate remedy in the circumstances thus revealed, it is consistent with principle and … highly desirable in practice for the court to accept the parties’ proposal and therefore impose the proposed penalty”: [58]; and
(6) “[I]t is the function of the relevant regulator to regulate the industry in order to achieve compliance and, accordingly, it is to be expected that the regulator will be in a position to offer informed submissions as to the effects of contravention on the industry and the level of penalty necessary to achieve compliance”: [60].
49 More recently, in Australian Building and Construction Commissioner v Pattinson [2022] HCA 13 [now reported at 274 CLR 450], the High Court came to reconsider the purpose of civil penalty provisions and the proper approach in arriving at an appropriate penalty. That was not a case of an agreed penalty, but what it states with regard to what is an appropriate penalty is relevant to the approval of an agreed penalty as being appropriate. The following principles appear from the majority judgment of Kiefel CJ, Gageler, Keane, Gordon, Steward and Gleeson JJ:
(1) The purpose of a civil penalty is primarily, if not solely, the promotion of the public interest in compliance with the provisions of the relevant statute by the deterrence of further contraventions of the statute: [9] and [15];
(2) “Insistence upon the deterrent quality of a penalty should be balanced by insistence that it ‘not be so high as to be oppressive’. Plainly, if deterrence is the object, the penalty should not be greater than is necessary to achieve this object; severity beyond that would be oppression” (citing NW Frozen Foods at 293): [40];
(3) It is incorrect to set a penalty with reference to what is proportionate to the seriousness of the conduct that constituted the contravention: [10];
(4) The penalty should be “proportionate” in the sense that it strikes a reasonable balance between deterrence and oppressive severity: [41];
(5) It is incorrect to view the maximum penalty as being reserved for only the most serious examples of offending conduct; what is required is that there be “some reasonable relationship between the theoretical maximum and the final penalty imposed” (citing ACCC v Reckitt Benckiser (Australia) Pty Ltd [2016] FCAFC 181; 340 ALR 25 at [156] per Jagot, Yates and Bromwich JJ): [10];
(6) The object of imposing a penalty is to attempt to put a price on contravention that is sufficiently high to deter repetition by the contravenor and by others who might be tempted to contravene the statute: [15];
(7) “Retribution, denunciation and rehabilitation have no part to play” (citing Construction, Forestry, Maritime, Mining and Energy Union v Australian Building and Construction Commissioner (The Non-Indemnification Personal Payment Case) [2018] FCAFC 97; 264 FCR 155 at [19] per Allsop CJ, White and O’Callaghan JJ): [16];
(8) A civil penalty “must be fixed with a view to ensuring that the penalty is not such as to be regarded by [the] offender or others as an acceptable cost of doing business” (citing Singtel Optus Pty Ltd v Australian Competition and Consumer Commission [2012] FCAFC 20; 287 ALR 249 at [62] per Keane CJ, Finn and Gilmour JJ): [17];
(9) Relevant factors in the assessment of a penalty of appropriate deterrent value include the following (citing, at [18], Trade Practices Commission v CSR Ltd [1990] FCA 762; (1991) ATPR ¶41–076 at [42] per French J):
(a) The nature and extent of the contravening conduct.
(b) The amount of loss or damage caused.
(c) The circumstances in which the conduct took place.
(d) The size of the contravening company.
(e) The degree of power it has, as evidenced by its market share and ease of entry into the market.
(f) The deliberateness of the contravention and the period over which it extended.
(g) Whether the contravention arose out of the conduct of senior management or at a lower level.
(h) Whether the company has a corporate culture conducive to compliance with the Act, as evidenced by educational programs and disciplinary or other corrective measures in response to an acknowledged contravention.
(i) Whether the company has shown a disposition to co‑operate with the authorities responsible for the enforcement of the Act in relation to the contravention.
49 There is nothing in the text, context or purpose of Pt IIBA and s 125A of the Act, under which penalties are imposed, that would make the principles in Pattinson inapplicable in the present case; s 125A is a relevantly analogous Commonwealth civil penalty provision. See Pattinson at [55].
50 Where two or more offences arise as a result of the same, or related, conduct, the Court may apply the “course of conduct” principle, rather than imposing separate penalties for each contravention, as explained in Construction, Forestry, Mining and Energy Union v Cahill [2010] FCAFC 39; 269 ALR 1 at [39] per Middleton and Gordon JJ. However given each of the leases was a distinct agreement, the course of conduct principle does not apply to the present case.
51 Where multiple penalties are to be imposed, it is appropriate for the Court to consider the totality principle which requires the Court to conduct a “final check” to ensure that the penalties imposed, considered as a whole, are “just and appropriate”: Mornington Inn Pty Ltd v Jordan [2008] FCAFC 70; 168 FCR 383 at [42]-[43] per Stone and Buchanan JJ.
52 Given this is the first occasion on which a penalty is sought to be imposed in respect of contraventions of the kind alleged, the parity principle has no application in the circumstances of this case.
Penalties in this case
53 In this section I will consider the different matters that I consider to be relevant to be taken into account for the assessment of appropriate penalties within a permissible range. They include the mandatory matters identified in s 125A(3).
Nature and extent of the contraventions and circumstances in which contravention took place
54 SDS admits that at the relevant time it was familiar with the requirements of the Act, in particular, the requirement that it only provide “permitted benefits” to requesters of pathology services. Each year during the relevant period, SDS, as a provider of pathology services and as an approved pathology provider within the meaning of s 3 of the Act, gave an undertaking under s 23DF of the Act (which the Minister accepted). A condition of each undertaking was that SDS would comply with the Act and the Regulations.
55 Despite this, SDS contravened s 23DZZIL(1) on four separate occasions, resulting in a benefit to entities that were connected to requesters of pathology services where the amount of that benefit was “substantially different (more than 20% greater)” than the market value, as agreed by the parties.
56 These are serious contraventions that are deserving of significant penalties, particularly in respect of general deterrence but also in respect of specific deterrence. The latter aspect is less significant because of other factors addressed shortly below.
Nature and extent of any loss or damage suffered as a result of the contravention
57 In providing prohibited benefits, SDS acted contrary to the policy of Pt IIBA of the Act, which is to reduce the risk that the making of pathology requests, funded by the public health system, could be affected by commercial arrangements. This includes the risk that requesters could be induced to request pathology services from particular providers of pathology services and that competition on the basis of quality of services and costs to patients would be reduced. The risks created by SDS’s conduct are precisely the risks that the Pt IIBA provisions seek to address. The pathology industry is significantly funded by the public health system via Medicare claims. SDS claimed over $700 million per year for each year of the relevant period from the publicly funded Medicare Benefits Scheme. However there is no evidence of any direct loss or detriment suffered by reason of the contraventions, ie, it is not proved in this case that the prohibited benefits had the effect of skewing the market.
58 These considerations also point to the contraventions being serious. The public health system in Australia is a valuable national asset that the Act seeks to protect by prohibiting the payment of such benefits.
Size and financial position of SDS
59 SDS is a substantial enterprise. In the six financial years (FY14/15 to FY19/20) covering the five years of the four leases in question (February 2015 to February 2020), SDS received payments from the Commonwealth in respect of pathology claims under the Medical Benefits Scheme of amounts ranging from $710 to $885 million dollars per annum. In each year that amounted to nearly 30% of the total of the pathology claims made on the Medical Benefits Scheme. The total amount paid to SDS by the Commonwealth in that six year period amounted to nearly $5 billion.
60 The evidence of SDS’s profitability is inconclusive. Nevertheless, given its obvious size, which is also considered further below, it can and should bear significant penalties.
Nature of market and SDS’s participation in market
61 SDS is one of three dominant market participants in the pathology services industry. It is familiar with the requirements of the Act and, in particular, the requirement that it only provide “permitted benefits” to requesters of pathology services.
62 SDS currently operates approximately 680 ACCs in New South Wales, many of which are operated in leased premises. SDS is aware of the amount of rent it pays in respect of its leased premises. The market for ACC sites is competitive, especially for sites co-located within a medical practice, and for sites co-located within particular types of medical practices. SDS is not generally aware of the amount of rent its competitors pay for their leased premises; participants in the leasing market for ACC sites consider the amount of rent paid to be confidential and commercially sensitive. Indicative of that, both of SDS’s main competitors, Sonic Healthcare Ltd and Clinical Laboratories Pty Ltd, filed applications pursuant to s 37AF of the FCA Act in these proceedings to prevent SDS from obtaining information about their ACC leases.
63 As one of the three dominant market participants, SDS had the capability to assess the market value of the leases that are the subject of the agreed contraventions. Despite this, SDS paid rental amounts which were substantially different from the market values.
64 I am satisfied that SDS’s significant position in the pathology market, its large size and financial position warrants a significant penalty to serve as an important general deterrent to other participants in the pathology industry from contravening Pt IIBA of the Act.
No previous similar conduct
65 SDS has not previously been found by a court to have engaged in any similar conduct or to have contravened Pt IIBA of the Act. This consideration weighs in SDS’s favour in considering an appropriate range of penalties.
Senior management involvement
66 Senior management of SDS and Healius was aware of and approved SDS’s entry into the relevant leases:
(1) The 2015 leases were signed by SDS’s National Operating Officer and approved by both the relevant Business Unit CEO and the General Manager.
(2) The 2017 leases were signed by Primary Health Care’s (now, Healius’s) Group Executive of Pathology.
67 That level of involvement of senior management weighs against SDS. However, it is significant that SDS acknowledges the seriousness of the contraventions including that:
(1) the contraventions relate to four different leases across two different sites;
(2) SDS had, throughout the relevant period, undertaken to the Minister that it would comply with the Act and the Regulations and was aware of its obligations under the Act and associated Regulations, including in respect of compliance with Pt IIBA;
(3) senior management of SDS and Healius was aware of and approved SDS’s entry into the relevant leases;
(4) despite being one of the three dominant market participants and having the capability to assess the market value of the leases, SDS paid rental amounts which were substantially different from the market values;
(5) the contraventions in relation to the 2017 leases were the second contraventions in respect of each of the premises; and
(6) in relation to each lease, the difference between the rental amount and the market value was significantly more than 20% of the market value.
Level of cooperation with the Chief Executive
68 I am satisfied that SDS has conducted the proceedings in a cooperative manner. The conduct of the proceedings has generally proceeded by way of consent, with the Court making orders by consent on numerous occasions. Through its concise statement in response filed on 6 April 2021 and its agreement to the statement of agreed facts filed relatively early in the proceedings on 11 June 2021, SDS took steps to narrow the issues in dispute and has co-operated with the Chief Executive, assisting with the efficient and cost-effective resolution of the proceedings. That includes agreeing that the rental amount in respect of each lease was substantially different from the market value within the meaning of the relevant provision.
69 SDS’s cooperation with the Chief Executive and its acceptance of the contraventions and penalties redound to its credit.
Maximum penalty
70 The maximum pecuniary penalty for each contravention of s 23DZZIL(1) is as follows:
(1) in respect of the 2015 Castle Hill lease, $1,020,000;
(2) in respect of the 2015 Kingswood lease, $1,020,000;
(3) in respect of the 2017 Castle Hill lease, $1,260,000; and
(4) in respect of the 2017 Kingswood lease, $1,260,000.
71 Those maximum penalties are calculated by reference to the definition of “penalty unit” as it stood at the time of the contraventions. The total maximum penalty for the four contraventions is accordingly $4.56 million.
72 It can be seen that the agreed penalties amount to more than a third of the maximum penalty in each case. In all the circumstances, I am satisfied that the agreed penalties are significant, but that they are not oppressive.
73 I have also considered the totality of the penalties. I am satisfied, as a final check, that when considered as a whole they are just and appropriate.
Conclusion on penalties
74 Taking all those matters into consideration including that the penalties are agreed and are regarded by the relevant regulator as appropriate, and seeking to undertake an instinctive synthesis of them giving each its relative significance, I am satisfied that the agreed penalties are within an appropriate and permissible range. I am accordingly satisfied that they should be ordered to be paid.
75 For those reasons, I am satisfied that the orders agreed by the parties should be made, subject to some minor formatting and language changes.
I certify that the preceding seventy-five (75) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Stewart. |
