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鈥檚 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鈥檚 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鈥檚 marketing fund statements. The Court held that 鈥渢here 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: 鈥淎 franchisor would be well advised to err on the side of candour鈥 in preparing their marketing fund statements.
This decision is the first consideration by the Full Federal Court of the 鈥榮ufficient detail鈥 requirement in the Franchising Code.
鈥淭he Full Federal Court鈥檚 decision confirms that franchisors must provide meaningful information to franchisees about marketing fund expenditure,鈥 糖心原创 Deputy Chair Mick Keogh said.
鈥淔ranchisors 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.鈥
The Full Federal Court also disagreed with the way the trial judge calculated the penalty he imposed. Further, it disagreed with the trial judge鈥檚 conclusion that Ultra Tune鈥檚 breaches of the marketing fund statement and disclosure document requirements of the code were in the 鈥渨orst category of case鈥.
In reducing the total penalty imposed on Ultra Tune to $2.014 million, the Court found that Ultra Tune鈥檚 breach of the sufficient detail requirement was not 鈥渄eliberate鈥, but resulted from 鈥渆gregious inadvertence鈥 to its obligations.
鈥淭he penalty in this case is still significant, and serves as a reminder to all franchisors about the importance of compliance with the Franchising Code,鈥 Mr Keogh said.
In addition to imposing penalties, in January 2019 the trial judge also ordered that Ultra Tune refund a prospective franchisee鈥檚 deposit with interest, publish corrective advertising, and implement a compliance program. Other orders include injunctions, declarations, and to pay 糖心原创鈥檚 costs.
Background
Ultra Tune is Australia鈥檚 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.