On 19 May 2017 the Australian Competition and Consumer Commission (ACCC) announced it commenced legal action against Ultra Tune Australia Pty Ltd (Ultra Tune) in the Federal Court for alleged breaches of the Franchising Code of Conduct (the Code) and for breaches of Australian Consumer Law.

Ultra Tune is the second largest motor repair organisation in Australia and runs a large network of franchise businesses in New South Wales, Queensland, Victoria and Western Australia.

Alleged breaches by Ultra Tune

In a media release dated 19 May 2017, the ACCC announced Ultra Tune did not act in ‘good faith’ in its dealings with a prospective franchisee and that it failed to provide required documents, including an updated disclosure document, before accepting a non-refundable payment from a prospective franchisee. It is a key requirement under section 6 of the Code that franchisors must act in good faith in their dealings with prospective and current franchisees.

It has also been alleged that Ultra Tune did not prepare, audit or provide marketing fund statements to its franchisees for three years. Under section 15 of the Code, if a marketing fund is established, a franchisor must prepare an annual financial statement to franchisees, disclosing the fund’s receipts and expenses. A copy of the financial statement must be given to franchisees no later than four months after the end of a financial year. The Code also requires the marketing fund to be audited (unless 75% of franchisees waive this requirement for the relevant year), and for the auditor’s report to be provided to franchisees within 30 days of the report being prepared.

As well as the alleged breaches of the Code, the ACCC has stated Ultra Tune breached Australian Consumer Law by making false or misleading statements to a prospective franchisee with regards to the site of a prospective franchise business.

ACCC Deputy Chair Dr Michael Schaper has said ‘franchising contributes significantly to the retail economy and all franchisors must comply with the Code to be transparent in dealings with franchisees. Ensuring that small businesses receive the protections of industry codes is a current ACCC compliance and enforcement priority’.

The ACCC is seeking pecuniary penalties from Ultra Tune, along with declarations, injunctions, compliance and other adverse publicity orders, including the repayment of a prospective franchisee’s deposit.

The first case management hearing will be held in the Federal Court in Sydney on 16 June 2017.

As reported in our article dated 24 February 2017, the ACCC’s enforcement priorities for 2017 include ensuring small businesses receive the protections of the Code. This action shows the ACCC is taking its 2017 enforcement priorities seriously and these proceedings may be the first of many instituted by the ACCC this year.

Anecdotally, there are many systems that have skeletons in the closet when it comes to Code compliance. Franchisor’s would be well advised to review their internal systems to ensure they are properly complying with the Code when it comes to the process of disclosure and accounting in respect of marketing funds.