The Full Federal Court has confirmed important franchisor obligations, while upholding aspects of an appeal by Ultra Tune Australia Pty Ltd (Ultra Tune). The Court’s decision affirms a previous decision by the Federal Court that Ultra Tune had breached the Franchising Code of Conduct, but reduces the total penalties imposed against Ultra Tune from $2.6 million to $2 million.
Ultra Tune had appealed from the trial judge’s finding in January 2019 that Ultra Tune had failed to ensure its marketing fund statements contained sufficient detail to provide meaningful information to franchisees about its expenditures, in breach of the Franchising Code of Conduct.
The Full Federal Court found that there was insufficient detail in Ultra Tune’s marketing fund statements. The Court held that “there is no meaningful information" in simply stating that funds had been spent on television advertising, and that there were obvious details including where ads had aired that should have been provided to franchisees.
The Court further advised that: “A franchisor would be well advised to err on the side of candour” in preparing their marketing fund statements.
This decision is the first consideration by the Full Federal Court of the ‘sufficient detail’ requirement in the Franchising Code.
“The Full Federal Court’s decision confirms that franchisors must provide meaningful information to franchisees about marketing fund expenditure,” ACCC Deputy Chair Mick Keogh said.
“Franchisors almost always have stronger bargaining power than their franchisees, which is why the Franchising Code of Conduct mandates franchisees must be given sufficient details about how the marketing fund they are contributing to, is managed and used.”
The Full Federal Court also disagreed with the way the trial judge calculated the penalty he imposed. Further, it disagreed with the trial judge’s conclusion that Ultra Tune’s breaches of the marketing fund statement and disclosure document requirements of the Code were in the “worst category of case”.
In reducing the total penalty imposed on Ultra Tune to $2.014 million, the Court found that Ultra Tune’s breach of the sufficient detail requirement was not “deliberate”, but resulted from “egregious inadvertence” to its obligations.
“The penalty in this case is still significant, and serves as a reminder to all franchisors about the importance of compliance with the Franchising Code,” Mr Keogh said.
In addition to imposing penalties, in January 2019 the trial judge also ordered that Ultra Tune refund a prospective franchisee’s deposit with interest, publish corrective advertising, and implement a compliance program. Other orders include injunctions, declarations, and to pay ACCC’s costs.
Ultra Tune is Australia’s second largest motor vehicle repair and maintenance provider. Ultra Tune operates in every mainland state and territory, and has over 270 centres across Australia.
In January 2019, the Court found that Ultra Tune breached the Code and the Australian Consumer Law in its dealings with a prospective franchisee, including by making false and misleading representations. Ultra Tune did not appeal this aspect of the judgment.
The maximum penalty for a breach of the Franchising Code is $63,000.
The maximum penalty for a breach of the Australian Consumer Law was recently increased to the greater of $10 million, or three times the value of the benefit obtained, or 10 per cent of annual turnover in the preceding 12 months if the value of the benefit cannot be determined. This increased maximum penalty did not apply to the Ultra Tune case, which preceded the change.