ACCC obtains extra court constraints following misleading profit claims by franchisor

Misleading claims in the franchising industry continue to be targeted by the Australian Competition and Consumer Commission, ACCC Chairman, Mr Graeme Samuel, said today.

The comments follow declarations by Justice Lander in the Federal Court, Adelaide that Office Support Services International franchise and its director, Mr Ian Lesley Scarffe, had breached the Trade Practices Act 1974. OSSI offered and supplied franchises in cleaning services for computer and electronic equipment.

OSSI and Scarffe agreed to consent orders, including declarations, that in 2003 they breached the Franchising Code of Conduct and also engaged in conduct that was misleading or deceptive, or was likely to mislead or deceive, in contravention of section 52 of the Act, in their dealings with three prospective franchisees.

The ACCC alleged that although OSSI had provided documents to the franchisees that purported to be disclosure documents of the kind required by the code, it had breached the code because they were incomplete and deficient concerning such details as prior litigation, business experience, and potential earnings.

The court also found that OSSI engaged in misleading and deceptive conduct by representing to the franchisees by way of its company profile and disclosure documents, in summary, that:

• OSSI had conducted business since 1992 and had offered franchises since 1997, whereas it only commenced trading in 2001
• OSSI franchisees serviced 6,000 customers every 12 weeks, whereas this was not the case
• Mr Scarffe had not been subject to final judgment in civil proceedings within the preceding five years, whereas he was subject to final judgment in proceedings for misleading or deceptive conduct on 31 August 2000
• Mr Scarffe had not been involved in an insolvency or under administration within the preceding 10 years, whereas he was sole director of Mobile Computer Cleaning, which was wound up in insolvency on 21 January 2003
• the ACCC's past dealings with Mr Scarffe's previous business, MCC, were the result of MCC failing to receive 'receipts' from franchisees in the appropriate sequence, whereas they were the result of MCC not providing a potential franchisee with a disclosure document and a copy of the code as required and were finalised by the entering of a court enforceable undertaking by MCC with the ACCC
• the annual earnings of an OSSI franchisee would be $85,140 for a 30 hour week, $99,330 for a 35 hour week and $127,710 for a 45 hour week, and net profits would be $52,809 for a 30 hour week, $64,278 for a 35 hour week and $87,328 for a 45 hour week, in circumstances where there was insufficient work available to work 30 hours a week or more.

Justice Lander declared, with Mr Scarffe's consent, that Mr Scarffe had aided and abetted and was directly or indirectly knowingly concerned in the contraventions by reason that he was responsible for the content and distribution of the company profile and disclosure documents and he entered into the franchise agreements for and on behalf of OSSI.

In addition to ongoing injunctions restraining OSSI and Scarffe from engaging in the conduct declared by the Federal Court to be unlawful, injunctions were granted that require Mr Scarffe, in specified circumstances, to provide people to whom he promotes or sells any future business opportunity with:

• a copy of the orders made by the Federal Court, by way of disclosure, for a period of two years, and
• certification from a CPA that any financial details or projections are true and correct or based on reasonable grounds, for a period of three years.
  

The court further ordered Mr Scarffe to attend at his own expense trade practices compliance training.

Mr Scarffe and OSSI are jointly and severally required to pay costs to the ACCC as agreed or taxed.

"The ACCC remains particularly concerned about the advertising of income and profit projections or predictions to franchisees where there are no reasonable grounds for franchisors to make those representations", Mr Samuel said. "Projections need to be capable of substantiation by consistent past trading records. Where outright predictions are made, all the underlying facts and assumptions, including lack thereof, must be made clearly known to the prospective franchisee.

"These are statutory disclosure obligations and franchisors who fail to meet them should not be surprised when the ACCC seeks additional constraints upon their future conduct, such as injunctions which require financial details or projections to be certified by a Certified Practising Accountant as being true and correct or based on reasonable grounds", he said.