On 11 May 2016, Justice Yates of the Federal Court ordered SensaSlim Australia Pty Ltd (in liquidation) (SensaSlim) to pay a penalty of $3.55 million for engaging in misleading and deceptive conduct and making false representations to both franchisees and the public.[1] His Honour also ordered lengthy disqualification periods and imposed pecuniary penalties on each of SensaSlim’s officers for their role in the contraventions.

While the conduct in this case was particularly egregious, the decision does highlight the importance of ensuring that claims made in franchise documents (including the disclosure document) are accurate, do not misrepresent any material facts and fully disclose the matters required to be disclosed.

BACKGROUND

SensaSlim’s business involved selling an oral spray through franchisees that it claimed could cause weight loss. SensaSlim franchises were sold for $59,950 each and SensaSlim had earned around $6.4 million from the sale of these franchises.

In 2011 the Australian Competition and Consumer Commission (ACCC) initiated proceedings against SensaSlim and its officers. The proceedings alleged that SensaSlim engaged in misleading and deceptive conduct and made false representations in its franchise disclosure documents and in its proposals to prospective franchisees.

The “controlling mind” of SensaSlim’s business was Peter Foster. Evidence was presented by the ACCC on Mr Foster’s poor reputation, including in relation to the sale of weight loss drugs in the past. The Court found that, because of Mr Foster’s reputation, SensaSlim deliberately concealed his involvement in the business, and represented that only Peter O’Brien and Michael Boyle played active roles in the management of the business.

In April 2014, Justice Yates of the Federal Court declared that SensaSlim and its directors had engaged in misleading or deceptive conduct and made false representations about the business.[2] In May 2016, his Honour imposed pecuniary penalties on SensaSlim and personally on Mr Foster, Mr O’Brien and Mr Boyle. All three officers were also disqualified from managing corporations for lengthy periods.

IMPLICATIONS

This case highlights two important points for franchisors:

  1. it is important to carefully prepare disclosure documents and franchise proposals. These documents must not misrepresent any material facts which would influence a person’s decision to become a franchisee; and
  2. there are severe consequences for the failure to comply with the disclosure requirements. Courts may impose pecuniary penalties on businesses and any individuals who are knowingly concerned or a party to the contraventions. Courts may also disqualify certain individuals from managing corporations for lengthy periods if they are knowingly involved in making the misrepresentations.

REPRESENTATIONS IN DISCLOSURE DOCUMENTS AND FRANCHISE PROPOSALS

A franchisor must provide a disclosure document to prospective franchisees under the Franchising Code of Conduct 2014 (Cth) (the Code).[3] The disclosure document must contain considerable information about the franchisor and the franchise, as prescribed by the Code. One important piece of information it must contain is information about the persons who are directors, officers and partners of the franchisor.

Justice Yates found that, even if Mr Foster was not a director of SensaSlim, he was an “officer” (as that term is defined in section 9 of the Corporations Act 2001 (Cth)) of the company given his involvement in decision making on behalf of the company. Accordingly, the disclosure document ought to have identified him as an officer of SensaSlim and provided the other information about him required to be disclosed in accordance with the Code.

Justice Yates found that the deliberate concealment of Mr Foster’s involvement with SensaSlim from the disclosure documents was misleading because its intention was to “create a façade of respectability for the business” and to mislead persons to become franchisees. The Court found that Mr Foster went to great lengths to hide his involvement in the business from franchisees and others. The Federal Court imposed the maximum penalty of $1.1 million for this highly “fraudulent and covert” contravention.

Justice Yates found that SensaSlim made two misrepresentations in its franchise proposals. The first was SensaSlim’s claim that its oral spray was the subject of ‘a large worldwide clinical trial’. This claim was false. Justice Yates found that this misrepresentation constituted two courses of conduct: deliberately and fraudulently inducing prospective franchisees to pay for the business; and misleading prospective franchisees and consumers as to the scientifically proven effectiveness of the product. His Honour ordered SensaSlim to pay a pecuniary penalty of $1.1 million for each contravention.

The second contravention was SensaSlim’s claim about what a franchisee could earn. This representation was made without reasonable grounds and was therefore misleading and deceptive. SensaSlim was ordered to pay a pecuniary penalty of $250,000 for this breach.

The total pecuniary penalty for SensaSlim’s misrepresentations in its disclosure documents and franchise proposals was $3.35 million.

PERSONAL LIABILITY AND DISQUALIFICATION OF INDIVIDUALS

In addition to the orders made against SensaSlim, Justice Yates also imposed a pecuniary penalty on each of the officers who were knowingly concerned in and party to some of the contraventions. All three were also disqualified from managing corporations for lengthy periods of time.

Mr Foster was personally ordered to pay $660,000 (the maximum penalty for his conduct) in concealing his involvement in the SensaSlim business, and misleading both consumers and prospective franchisees about the oral spray’s clinical trial status. Mr Foster was also permanently disqualified from managing corporations. Justice Yates found that this penalty was appropriate given Mr Forster’s history of non-compliance with the Australian Consumer Law and his deliberate, covert and systematic conduct to deceive franchisees.

Mr O’Brien and Mr Boyle were each ordered to pay penalties of $55,000 and $75,000 for their involvement, and were both disqualified from managing corporations for ten years and three years respectively.

CONCLUSION

The Federal Court’s decision in ACCC v SensaSlim Australia Pty Ltd (No 7) confirms the importance of ensuring the accuracy and completeness of information contained in disclosure documents and franchise proposals. Failure to comply with these requirements may lead to the imposition of pecuniary penalties on both the business and the individuals involved in any misrepresentation. In certain circumstances, individuals also risk disqualification from managing corporations.

Franchisors should ensure that all disclosure documents and franchise proposals are carefully prepared. The documents must be accurate and allow a prospective franchisee to make an informed business decision to become a franchisee.