Does the Exclusionary Rule Apply?
57 The characterisation of a statute, or of legal proceedings, is a matter on which judicial minds may differ. Palmer J concluded that the FTC Act and these proceedings should be characterised as proceedings to secure a "governmental interest". I have come to a different conclusion.
58 The issue before this Court is whether, as a matter of substance, the receiver is seeking to enforce, outside the territory of the United States, the governmental interests of that nation in the sense of the exercise of powers peculiar to government. Is this a governmental claim?
59 It is, of course, significant, as his Honour said, that the only person capable of instituting proceedings under the Act is a public body. That is indicative of a public purpose, but is not necessarily determinative of the character of the proceedings for the purposes of the exclusionary rule. To so treat the identity of the plaintiff or initiator would be, in my opinion, to prefer form over substance.
60 It is also significant to identify, as his Honour did, the public interest to be served by the particular provision of the statutory scheme which is being enforced, directly or indirectly, in the proceedings. But once it is recognised that not all public interests served by a statute or by its enforcement fall within the exclusionary rule, further analysis is required.
61 In his proposition (c), quoted in par [55] above, his Honour spoke of the characterisation of an action as one seeking to enforce either "a foreign public law" or "a foreign private right". A similar distinction was made by Purchas LJ in Inkley at 265 in his proposition (3). It is not consistent with the authorities, as I understand them, to characterise legislation as either "public" or "private", as if that was the only relevant distinction.
62 Statutes can be classified as a "public law" even though they do not constitute the assertion of the "governmental interests of a foreign State", (as contained in Palmer J's proposition (e) based on the Spycatcher case) or "the enforcement of a sanction, power or right at the instance of the state in its sovereign capacity" (in Purchas LJ's proposition (4) at 265, which appears to be derived from a statement of Lord Keith of Avonholm in Government of India v Taylor at 591 which I have quoted above at par [41]).
63 Once it is accepted that not every matter capable of a classification as a "public law" gives rise to the exclusionary rule, it becomes necessary to analyse the substance of the interests sought to be protected and to determine whether these constitute a "governmental claim" or "governmental interest", in the sense of the "exercise of a power peculiar to government".
64 As noted above, Palmer J concluded that there was a close factual resemblance between this case and Schemmer v Property Resources Limited. In that case the Securities and Exchange Commission of the United States, acting pursuant to the Securities Exchange Act 1934, had alleged in a District Court of the United States that certain persons were involved in fraudulent practices. A judge of the Court appointed a receiver to take possession of certain assets of companies controlled directly or indirectly by those persons. That receiver sought to have himself appointed receiver of the assets of some of those companies, which assets were located in the United Kingdom. He also sought injunctions against banks in London, which held money on behalf of one of those companies, restraining them from transferring monies otherwise than to himself as receiver.
65 Under the legislative scheme before Goulding J in Schemmer there was no express provision for the appointment of a receiver. The nature and purpose of such an appointment was, however, in a narrow compass. His Honour held:
"Counsel have … informed me that the federal courts possess a general equitable jurisdiction in fields within their competence, and under that jurisdiction appoint receivers when appropriate. If I understand the matter correctly, such an appointment at the suit of the commission under the Act of 1934 is purely conservative and directed to prevent the dissipation of assets by practices in violation of the Act of 1934. It does not effect any expropriation or involve the court or the commission in any execution of trusts or general administration of assets."
66 Specifically, as Mr A S Martin SC noted in his submissions, the particular provisions of the 1934 Act under which the proceedings had been brought in the United States in which a receiver had been appointed were limited to proceedings seeking injunctive relief of a negative or positive character. There was no statutory provision relied upon in those proceedings capable of leading to compensatory orders. No doubt the assets would be preserved for the purposes of proceedings by individuals who may have suffered as a result of conduct found to be in contravention of the Act, but that was not a purpose for which the receiver had been appointed. Mr Martin SC submitted that that was an important distinguishing factor between Schemmer and the present proceedings.
67 In Schemmer the regulation which had been contravened was the prohibition of false and misleading conduct that had been promulgated by the Commission pursuant to a power which, as Goulding J emphasised at 283G, appeared in a number of sections of the 1934 Act, and was confined to regulations "necessary or appropriate in the public interest or for the protection of investors".
68 It was in such a context that Goulding J concluded that the exclusionary rule applied. His Honour said at 288C-G:
"The Act of 1934 is, in my judgment, a penal law of the United States of America and, as such, unenforceable in our courts. I have read enough of it to show that it was passed for public ends and that its purpose is to prevent and punish specified acts and omissions which it declares to be unlawful. It was, of course, enacted not merely in the interest of the nation as an abstract or political entity, but to protect a class of the public. In that it resembles the greater part of the criminal law of any country. Like many other penal laws, the Act of 1934 also provides in some cases a private remedy available to the victims of the offences which it forbids, and it may possibly be that a private plaintiff who recovers a judgment in a federal court under the Act of 1934 can enforce it by action here. As Lord Watson said in Huntington v Attrill [1893] A.C. 150, 161:
'… a delict may give rise to a purely civil remedy, as well as to criminal punishment. Although a right of action is given to the party aggrieved, it does not follow that the law of nations must regard his action as a suit in favour of the state.'
Here, however, I have nothing of that sort. Mr Schemmer comes before this court, in effect, as a public officer charged to reduce the London funds into possession in order to prevent the commission or continuation of offences against federal law. In my judgment, and in the absence of specific legislation founded on treaties, preventive criminal justice is no more a proper subject of international enforcement than retributive criminal justice. …"
69 Of significance is his Honour's qualification that a private plaintiff who recovered compensation under the private remedies available to victims would be able to enforce any award by action in the United Kingdom. It was at the forefront of Mr Martin SC's submissions that, as a matter of substance, the receiver in the present proceedings was seeking to recover funds on behalf of the victims and that, accordingly, the exclusionary rule did not apply.
70 It does appear that in Schemmer the receiver was appointed for the purpose only of freezing the assets. Whether or not this constitutes a governmental interest in the sense of the exercise of a power peculiar to the government, the appropriate test for the purposes of Australian law, need not be decided. Schemmer is not a case in which a receiver, albeit one appointed by public agency, is seeking in large measure, if not exclusively, to acquire funds for a compensatory purpose. If that is the proper characterisation of the receiver's conduct in this case, as the Appellant contends, then the decision in Schemmer is distinguishable.
71 The basic structure of the FTC Act is, relevantly, twofold. First, a statutory prohibition of unfair practices in or affecting commerce (15 USC s45(a)). Secondly, pending proceedings culminating in orders by the FTC itself, the United States District Court may grant interlocutory injunctions (15 USC s53(b)).
72 As noted above, it was in a proceeding under s53(b) that the receiver, the Appellant in this Court, was appointed. This interlocutory proceeding occurred in a context in which final orders may be made either by the FTC or, on application by the FTC and only by the FTC, by a court.
73 When the court in California granted final injunctions, entered summary judgment, and assessed damages, in an amount calculated by the addition of the debits made to defrauded credit cards, it said it was acting under 15 USC s53(b). Such relief is available expressly only under s57(b). (See Blue AB Vol 1 at 114H, 174V, 175S.) Mr Bathurst QC suggested that the Court must have been relying on its ancillary powers as the above quoted reasons indicate. The Appellant did not suggest that anything turned on this.
74 The Californian Court relied on authorities to the effect that, where it would be impracticable to reimburse all of the injured consumers, the Court could, in its discretion, order the perpetrators to disgorge any unjust enrichment. Such an order was made in the present case. Accordingly, funds not paid to injured consumers will be paid to the United States Treasury.
75 The mechanism for distributing funds to injured consumers was established as a "consumer redress program". This program empowered the FTC to apply funds. However, the FTC has the discretion to determine the criteria for participation in the program. Any excess funds will be paid into the United States Treasury.
76 This is one aspect of the proceedings which does suggest a governmental, indeed even penal, element in the proceedings. The orders of the Californian Court contemplate a situation in which the funds recovered exceed those distributable. In such an eventuality, the surplus will be expropriated by the United States government.
77 In his submissions to this Court Mr T F Bathurst QC relied on this aspect of the order of the Californian Court. He submitted:
"Whether or not it was a feature of the receivership that the defrauded (or some of them) would obtain repayment of monies they lost, Palmer J correctly took into account another, more certain feature of the Receiver's role which was that the fraudsters would be required to disgorge what remained of their ill-gotten gains, whether or not it would be possible to use those funds to compensate the defrauded credit-card holders. That is a right the assertion of which is peculiar to a government. It is not a private right which could be asserted at the suit of the individual defrauded credit-card holders."
78 Mr A S Martin SC submitted that the Commission has stated that a consumer redress program is feasible and that there were likely to be no funds remaining after full implementation of the program. Mr Bathurst submitted that this was an irrelevant consideration. He submitted that Palmer J correctly turned his mind to the nature of the right asserted, rather than to the ultimate effect of the assertion of that right.
79 I would not accept the Respondent's submissions. They appear to me to be concerned with matters of form rather than of substance, contrary to the principles applicable in this area of the law.
80 The evidence which would enable the Court to assess the prospects of the contingency that some of the funds would not be able to be distributed is in a narrow compass. It would be better if the Court had had available to it more precise calculations, even in general terms, of what is likely to be recovered. Proceedings have been taken in Liechtenstein (Blue AB vol 9, 1787-1788) and it appears likely that an amount of US$9.8 million will be recovered from Eurobank in the Cayman Islands. (See Blue AB vol 13, 2783, Blue AB vol 1, 34-35.) This is considerably less than the amount defrauded.
81 The Court was not addressed on where the onus of proof of this matter lay. In my opinion, the onus lay on the party objecting to the exercise by this Court of its current jurisdiction. Be that as it may, I believe that this aspect of the scheme is not of such significance as to form the basis for characterising the proceedings.
82 The combined effect of the fact that what is involved in these proceedings is only a proportion of the total funds defrauded, the overwhelming probability that there will be leakages in the system and the costs involved in the enforcement processes, strongly suggests that the probability that there will be a surplus not able to be distributed so small as not to be of any relevant legal significance in determining whether the exclusionary rule should be applied.
83 The scheme does contemplate the possibility that some of the funds may not be able to be distributed to the consumers who were defrauded. In that contingency, provision is made for the payment of any surplus to the United States Treasury. With the benefit of hindsight it may appear that, as matters work themselves out, there was a penal element in the orders made. However, nothing in the materials before the Court suggests that this is anything other than an allowance for a contingency which is not expected to eventuate. In my opinion, it cannot be used to characterise the nature of the proceedings. As the High Court emphasised in the Spycatcher case, relying on earlier authorities, the issue is one of substance not of form. In my opinion, as a matter of substance, this is a proceeding designed to compensate persons who have been defrauded.
84 By legislation, the United States has established a standard of commercial behaviour, the breach of which can lead to a number of consequences. One of the consequences is the reimbursement to persons of the loss or damage suffered by reason of the breach of the standard. In the circumstances of this case, the application of the statutory standard would not relevantly differ, in this regard, from the common law right to the recovery of amounts of which the individual consumers were defrauded. Indeed, in any civilised system of law simple theft, of the character that occurred in this case, will give rise to a right to recover the monies stolen.
85 As is so often the case, particularly with conduct affecting persons in their capacity as consumers, the cost of litigation over small amounts is such that, in the absence of special measures, the individuals would not be able to recover their losses. The State has provided a mechanism which enables that to occur.
86 The FTC Act empowers the FTC to approach the Court for a range of relief, some of which would have the requisite governmental character. However, the aspect of the relief which is indirectly sought to be enforced in these proceedings is not of that character.
87 The substance of these proceedings is to recoup funds so that they can be placed in a pool of funds to be used for the purpose of reimbursing persons defrauded, in the manner hitherto described. The particular funds sought to be recouped in these proceedings will be placed in a pool. They will not be directly refunded to the particular individuals whose credit cards were the subject of the specific deductions which, assuming that it is practicable to do so, can be traced through various steps in the transmission of the funds to Sydney. However, the pool will include the recoupment of funds which will be made available to those particular credit card holders from other accounts into which monies from other credit card holders had found their way.
88 No doubt because the particular mechanism of fraud involved monthly deductions, the funds that happened to be taken from individual credit card holders went via different routes from time to time. Pooling the funds in the manner proposed for the purposes of the consumer redress program appears to be the sensible and, perhaps, the only practical, course. This aspect of the relief ought not be used to characterise the transaction as somehow constituting the exercise of a power to serve a governmental interest.
89 The recoupment of funds with a view to their return to persons deprived of those funds is a normal consequence of the application of the civil law. In my opinion, as a matter of substance, that is what is occurring in the present proceedings. There is nothing in this case of the character of a governmental interest in the sense in which that concept is applied in the Australian authorities, i.e. as the exercise of a power peculiar to government. In my opinion the particular proceedings before the Court should not be characterised in that manner. The exclusionary rule does not apply and this Court should not decline jurisdiction.