Ultra Tune Appeal Decision
By Esther Gutnick, Senior Associate, MST Lawyers
On 20 September 2019, the Full Federal Court handed down its decision in the case of Ultra Tune Australia Pty Ltd v Australian Competition and Consumer Commission [2019] FCAFC 164, an appeal from the original Ultra Tune case which was reported on in our earlier articles, accessible here:
https://www.mst.com.au/ultra-tune-penalty-a-massive-warning-for-all-franchisors/
https://www.mst.com.au/the-ultra-tune-penalties-implications-for-franchisors/
The much-anticipated decision permitted certain aspects of Ultra Tune’s appeal, reducing the number of contraventions levied, which in turn resulted in a $590,000 decrease in the quantum of penalties imposed against Ultra Tune (from $2,604,000 to $2,014,000).
The Full Federal Court disagreed with the trial judge’s statements that Ultra Tune’s disclosure contraventions were “a consequence of deliberate actions or omissions” and that its breaches were in the “worst category of case”. Instead it was found that, although the contraventions were “objectively serious”, Ultra Tune’s conduct “did not involve a wilful failure…to do what was required of it”.
However, the appellate judges did agree that Ultra Tune had, in fact, failed to provide sufficient detail, and so failed to provide meaningful information to its franchisees about the expenditure of its marketing fund. Accordingly, the primary judge’s finding that Ultra Tune had contravened clause 15(1) of the Franchising Code of Conduct was upheld.
The Court determined that Ultra Tune’s failure to disclose sufficient detail was not intentional but rather that it resulted from ‘egregious inadvertence’ to its obligations. Further comment supported the primary judge’s caution that “a franchisor would be well advised to err on the side of candour” in preparing marketing fund statements.
This case marks the first time that the Full Federal Court has specifically considered the requirement to provide “sufficient detail…so as to give meaningful information” as mandated by clause 15(1)(b) of the Franchising Code. Furthermore, the Court’s decision reaffirms that, in preparing marketing fund statements, franchisors must take care to provide sufficiently meaningful details about how a marketing fund is managed and used.
Despite being reduced on appeal, the final penalties awarded against Ultra Tune are nevertheless substantial, and likely to serve, as the trial judge intended, as a “significant deterrent penalty, to encourage future and ongoing compliance by Ultra Tune, as well as franchisors more generally who might otherwise be tempted to skimp on the information provided to their franchisees…”. In the words of ACCC Deputy Chair Mick Keogh, the result of this case should serve “as a reminder to all franchisors about the importance of compliance with the Franchising Code”.
Since the introduction of the revised Franchising Code in January 2015, the value of a penalty unit prescribed under the Crimes Act 1914 has increased from $180 to $210. In real terms, this means that the maximum penalty for each breach of the Franchising Code is currently $63,000 (previously $54,000).
Franchisors should also bear in mind that, since the Ultra Tune case, the maximum penalty for a violation of the Australian Consumer Law has been 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.
It is apparent from the Ultra Tune case and other recent actions that the ACCC has not been hesitant to exercise its increased powers to enforce compliance with the Franchising Code.
Accordingly, any failure to comply with the Franchising Code, whether deliberate or inadvertent, could prove to be a very costly error. Franchisors would be well advised to keep this in mind at all times, but in particular at this time of year, when annual Disclosure Document updates are in the process of being completed.
For more information about this case or if you require assistance with any franchising matter, email our Franchise team or call +61 3 8540 0200.
