Court finds Sensaslim misled franchisees about Peter Foster's involvement
The Federal Court has found SensaSlim Australia Pty Ltd (in liquidation) (SensaSlim) engaged in misleading or deceptive conduct by failing to disclose Peter Foster’s involvement in the SensaSlim franchise system in its franchise disclosure document.
The Court also found that SensaSlim engaged in misleading or deceptive conduct by making false representations about the role of SensaSlim’s officers, namely Peter O’Brien and Michael Boyle, the ‘worldwide clinical trial’ of the SensaSlim Solution and the earning potential of SensaSlim franchises.
Mr Foster, Mr O’Brien and Mr Boyle were found to be knowingly concerned in and party to some of SensaSlim’s contraventions.
In his judgment, Justice Yates found that, ‘the evidence presents a convincing picture of Mr Foster as the puppeteer who pulled all the strings [in SensaSlim]’ and ‘Mr Foster controlled and directed, in an executive capacity, the way in which the SensaSlim business was carried on.’ He said that ‘the failure to disclose Mr Foster in the Disclosure Document was deliberate.’
His Honour also found that ‘the clinical study of the SensaSlim Solution … is a fabrication, intended to lead prospective franchisees into the false belief that the efficacy of the SensaSlim product as weight loss product had been established scientifically’.
“This case was particularly significant because Mr Foster went to great lengths in order to hide his involvement in the SensaSlim business from franchisees and others. The disclosure of Mr Foster as an officer of SensaSlim would have been particularly important to any potential franchisee, given the court orders which prevented Mr Foster from being knowingly concerned in the promotion or conduct of any business relating to weight loss, cosmetic or health industry products or services.” ACCC Deputy Chair Dr Schaper said.
“Misleading representations about important aspects of a business opportunity such as the efficacy of the products and earning potential can cause significant harm to both small business investors and consumers.”
“People who decide to buy into a franchise system typically put much of their own savings on the line, and they must be able to make informed business decisions on the basis of full and accurate disclosures by the franchisor.” Dr Schaper said.
These proceedings are separate to the ACCC’s proceedings against Mr Foster for contempt of court (see MR241/13 and MR050/14) for breaching earlier court orders, which prevented him from being knowingly concerned in the promotion or conduct of any business relating to weight loss, cosmetic or health industry products or services, by his involvement in SensaSlim.
The ACCC instituted proceedings against SensaSlim, Peter Foster, Peter O’Brien, Adam Adams and Michael Boyle on 15 July 2011.
SensaSlim Australia Pty Ltd (in liquidation) supplied an oral spray (the SensaSlim Solution) that was claimed to cause weight loss, and represented that the SensaSlim Solution was the subject of ‘a large worldwide clinical trial’. The SensaSlim Solution was distributed through franchisees to be on-sold to consumers through retail outlets. Around 110 areas were sold to franchisees (area managers) for the cost of $59,950 each. SensaSlim earned approximately $6.4 million from the sale of these franchises.
The Court found that SensaSlim had:
- failed to disclose in the Disclosure Document Mr Foster’s involvement as an officer
- falsely represented that Peter O’Brien and Michael Boyle controlled, directed and were actively involved in the business of Sensaslim when that was not the case
- falsely represented that the Sensaslim Solution was the subject of a large worldwide clinical trial when in fact no such trial was conducted
- falsely represented that Sensaslim franchisees were already participating in, and profiting from, the Sensaslim franchise, that a Sensaslim franchise had a certain earning potential
- failed to disclose that Mr Boyle was intending to resign as Director immediately following the launch of Sensaslim.
There will be a separate hearing to determine the relief to be ordered by the court. The ACCC is seeking declarations, injunctions, penalties, compensation orders, disqualification orders and costs.