The Federal Court decision of Australian Competition and Consumer Commission (ACCC) v Ultra Tune Australia Pty Ltd [2019] FCA 12 sent shockwaves through the franchise sector after imposing a $2.604 million penalty against national franchisor Ultra Tune for serious breaches of the Franchising Code of Conduct and the Australian Consumer Law.

Background

In early 2015, a prospective franchisee of Ultra Tune, Mr Ahmed, agreed to purchase an Ultra Tune franchise in Parramatta. Between May 2015 and August 2015, Mr Ahmed had several meetings with Ultra Tune’s NSW State Manager, Mr Tatsis, during which Mr Tatsis made a number of representations to Mr Ahmed about the franchise, including representations about franchise fees, rent for the premises, provision of equipment by the franchisor and the refundability of any deposit paid by the prospective franchisee.

In September 2015, Mr Ahmed paid a $33,000 deposit to Ultra Tune. He understood that the deposit was refundable if the deal did not complete. While attending a training course in Melbourne for new franchisees a few weeks later, Mr Ahmed received a number of documents concerning the Parramatta franchise, which appeared to be inconsistent with what Mr Tatsis had previously represented to him.

As he grew concerned with Ultra Tune’s representations about the Parramatta franchise, Mr Ahmed decided to exit the agreement and therefore demanded a refund of his deposit (less $3,000 for the cost of the training course). Ultra Tune refused to refund him and in late November 2015, Mr Ahmed lodged a complaint with the Australian Competition and Consumer (ACCC).

The ACCC subsequently launched an extensive investigation examining Ultra Tune’s conduct towards Mr Ahmed, as well as its conduct generally, under the Competition and Consumer (Industry Codes – Franchising) Regulation 2014 (Cth) (Franchising Code), the Trade Practices (Industry Code – Franchising) Regulations 1998 (Cth) (Old Franchising Code) and the Australian Consumer Law.

In 2017, the ACCC commenced proceedings against Ultra Tune in the Federal Court, seeking:

  1. pecuniary penalties with respect to Ultra Tune’s alleged breaches of the Franchising Code, the Old Franchising Code, and the Australian Consumer Law;
  2. an order for refund of fees paid by Mr Ahmed; and
  3. a number of orders for non-pecuniary relief.

Franchise-wide disclosure contraventions

In the course of its investigations, the ACCC discovered that Ultra Tune had failed to comply with its disclosure obligations under the Franchising Code towards 185 franchisees in the 2014-2015 financial year. Ultra Tune admitted to a number of breaches of the Franchising Code, including failures to:

  • maintain and update each of its four disclosure documents within four months of the 2014-15 financial year (clause 8(6));
  • prepare five different financial statements concerning its five different marketing funds within four months of the 2014-15 financial year (clause 15(1)(a));
  • provide franchisees with the financial statements concerning its different marketing funds within four months of the 2014-15 financial year (clause 15(1)(d)); and
  • provide a disclosure statement when requested by a franchisee (clause 16(1)).

In relation to the financial statements for the marketing funds, Ultra Tune denied it breached clause 15(1) of the Franchising Code by failing to provide “sufficient detail” in order to give “meaningful information” in the financial statements concerning its marketing funds. The meaning of “sufficient detail” posed some uncertainty as the term had not yet been tested by the courts.

Ultra Tune contended that it complied with the requirement to provide “sufficient detail” through its profit and loss statements for each of its five regions, as clause 15(1)(b) requires franchisors to only undertake “an accounting, not a bookkeeping, exercise”.

The Court disagreed with Ultra Tune’s submission. Instead, the Court found that the requirement for a financial statement to provide “meaningful information” means that the detail “must have some explanatory force and permit meaningful insights to be gained by the franchisee” to adequately disclose its primary sources of income and expenses and to achieve the policy objectives of the provision of accountability and transparency.

Unlawful conduct with a prospective franchisee

The Court found that Ultra Tune’s conduct towards Mr Ahmed breached the Franchising Code and the Australian Consumer Law by:

  • failing to uphold its duty of good faith (clause 6(1));
  • failing to provide disclosure documents to Mr Ahmed when requested (clause 9(1));
  • making misleading or deceptive representations to Mr Ahmed (section 18 of the ACL); and
  • making false or misleading representations to Mr Ahmed (sections 29(1)(b), (1)(i) or (1)(m) of the ACL).

Ultra Tune’s attempts to cover-up evidence

The extent of Ultra Tune’s serious misconduct was discovered when it became apparent during the proceedings that it had fabricated documents provided to Mr Ahmed to cover up its representations concerning the refundability of the deposit. The serious misconduct prompted the Court to call for a “significantly heightened need for deterrence” when issuing its penalties in what was a clear attempt to deceive the ACCC and ultimately, the Court. The Court classed Ultra Tune’s failure to act in good faith when it had refused to refund the deposit as the “most serious and fundamental breach of the Franchising Code”.

Calculating the penalty

As there was breach in respect of separate disclosure statements concerning each of the four States and separate marketing statements for each of the five regions, the pecuniary penalty for Ultra Tune’s general breaches of the Franchising Code in relation to the disclosure contraventions totalled $1.1 million. This amount equated to an amount up to the maximum pecuniary penalty of $54,000 (which is indexed bi-annually from the 2014-15 financial year) multiplied by the number of contraventions. The Court made totality adjustments when calculating the penalty for some of the contraventions to avoid the penalties from being disproportionate and excessive.

On top of that, the Court ordered a total penalty of $1.504 million for Ultra Tune’s contraventions concerning Mr Ahmed. Unsurprisingly, the bulk of the penalty, that is, the sum of $1 million was imposed for the franchisor’s false or misleading representation about the refundability of the deposit.

A lesson for Australian franchisors

  1. Franchisors must ensure that they comply with the Franchising Code.
  2. Franchisors that attempt to cover up any misconduct on their part will face significant fines.
  3. Franchisors must consider the level of information that they are required to provide in their disclosure statements in order to pass the “sufficient detail” test. In doing so, they should be mindful of the policy objectives of accountability and transparency.
  4. As was the case with Mr Ahmed, a single complaint by a prospective or actual franchisee to the ACCC can lead to a franchise-wide investigation by the ACCC.
  5. Just a few months ago, the Chairman of the ACCC, Rod Sims warned the franchise sector about the number of serious allegations the ACCC have received concerning misconduct in the sector. As such, the ACCC has expressed an increased appetite for investigating misconduct in the franchising sector. Unless franchisors clean up their act, expect to see more successful prosecutions by the ACCC.