Geowash Prosecuted By The ACCC – Yet Another Warning To Franchisors
By Esther Gutnick, Senior Associate, MST Lawyers
The Australian Competition and Consumer Commission (ACCC) has succeeded in its prosecution, initiated in May 2017, against Geowash Pty Ltd (operating under a Deed of Company Arrangement) (Geowash), a former car hand-washing and detailing franchise.
The ACCC’s action alleged that Geowash had, in the sale and marketing of its franchises, engaged in unconscionable conduct, made false or misleading representations and failed to act in good faith, thereby breaching the Franchising Code of Conduct (the Code) and the Australian Consumer Law at Schedule 2 to the Competition and Consumer Act 2010 (ACL).
These proceedings were the culmination of a lengthy investigation by the ACCC, which commenced in late 2015 after concerns regarding claims made on Geowash’s website. The website contained statements that prospective franchisees could generate a specified average revenue and profit and claims that Geowash had commercial relationships or affiliations with major motor vehicle dealers and other corporate entities including Nissan, Kia, Renault, Audi, Emirates, Shell, Hertz, Holden, Ikea and Thrifty.
In its judgment of 8 February 2019, the Federal Court found that:
- Geowash made false or misleading representations on its website, in that:
- it had no reasonable basis or evidence to support the claims regarding expected revenues and estimated profits of franchises; and
- the representations regarding corporate affiliations were untrue since Geowash did not, in fact, have commercial relationships or affiliations in place with the entities named;
- Geowash acted unconscionably towards franchisees in respect of its charging practices for the establishment and fit-out of franchised sites, by creating the false impression that the amounts charged would be directly applied towards the fit-out costs, when instead large amounts were actually applied to expenses such as commission payments to Geowash’s director and Franchising Manager. The Court found that the likely consequence of such conduct was that substantial sums of money paid by franchisees were not readily available when it came time to establish a franchised site, resulting in inferior or undelivered outlets;
- Geowash failed to act in good faith under the Code for conduct occurring after 1 January 2015 relating to the sale and marketing of its franchises; and
- Sanam Ali, director of Geowash, was knowingly involved in all of Geowash’s conduct, and Charles Cameron, Geowash’s Franchising Manager, was knowingly involved in the unconscionable conduct and failures to act in good faith.
The ACCC indicated that it intends to seek penalties, compensation for affected franchisees and to have the director and national franchise manager disqualified from managing corporations for five years.
A further hearing to determine penalties and the other orders sought by the ACCC is to be scheduled by the Court.
In response to the Federal Court judgment, ACCC deputy chair Mick Keogh commented that “the Court’s decision sends a strong warning to franchisors about the serious consequences of failing to comply with their obligations under the Franchising Code and Australian Consumer Law”.
Keogh further stated: “this is the second recent court action we’ve taken against a franchisor for a breach of the Franchising Code’s good faith obligations. The ACCC is committed to pursuing franchisors who disregard their obligations under the Code and the consumer law.”
This case comes hot on the heels of the ACCC’s successful prosecution in January 2019 of Ultra Tune Australia Pty Ltd, the country’s second-largest motor vehicle repair organisation. That prosecution was the first time the ACCC exercised its new powers to seek civil penalties against a franchisor under the revised Code for breaching the good faith provisions of the Code. The landmark Federal Court decision resulted in a record $2.6 million in penalties being awarded against the franchisor for breaches of the Code and the ACL.
The ACCC’s recent statements and actions indeed affirm the watchdog’s declared intention of enforcing compliance within the franchise sector.
Given these recent actions, it is critical that all franchisors revisit their documentation and practices, to ensure that they are not likely to commit any breaches of the Code and/or the ACL, exposing them to potential investigation or action by the ACCC.
In light of the ACCC’s latest media release of 7 February 2019, announcing that the focus for its next round of Code compliance checks will be directed at café, restaurant and take away food services industries, franchisors in those industries, in particular, should be vigilant regarding Code compliance.
MST Lawyers has an experienced team of franchising lawyers who can advise you about franchisors’ obligations under the Code, including disclosure requirements, misleading or deceptive representations and good faith. For more information, please contact our Franchising team by email or call +61 3 8540 0200.