Ultra Tune Penalty – A Massive Warning For All Franchisors

By Philip Colman, Principal MST Lawyers

In the lead up to the last lot of changes to the Franchising Code of Conduct (Franchising Code)which took effect from 1 January 2015, there was a lot said about the pros and cons of introducing civil penalties for contraventions of certain parts of the new Code.  Maximum penalties were introduced (currently $63,000) and the Australian Competition and Consumer Commission (ACCC) stated that only contraventions at the higher end would result in it instigating penalty proceedings in the Federal Court.

At this time all the focus was on the changes to the Code, and there was little publicity (certainly in franchising circles) about the Australian Consumer Law (ACL) penalty regime for contraventions of many of its provisions, including those relating to misleading and deceptive conduct.

After four years, the impact of these penalty provisions in the Code and the ACL has come home to roost, particularly for Ultra Tune Australia Pty Ltd (Ultra Tune).  We referred to this case in our Lessons from 2017 article, published in February 2018.

Last week the Federal Court, in a proceeding brought by the ACCC, imposed a $2,604,000 penalty against Ultra Tune for contravening the Code and the ACL.

Justice Bromwich found that Ultra Tune, in its dealings with a prospective franchisee, had:

• failed to act in good faith in breach of the Code;
• made false or misleading representations in breach of the ACL relating to the price of the franchise, the ongoing rent of the premises and the age of the franchise and by telling the prospective franchisee that a $33,000 deposit was refundable when it was not;
• failed to prepare marketing fund statements within the required time frames specified in the Code;
• failed to provide these statements and audit reports to franchisees; and
• failed to include sufficient detail in these statements.

Justice Bromwich was also not impressed with Ultra Tune’s attempts (in its dealings with the ACCC and during the trial) to rely on documents purportedly sent to the prospective franchisee.  His Honour said:

“The cover-up that Ultra Tune attempted reflects a significantly heightened need for deterrence, in relation to conduct that was already a most serious and fundamental breach of the Franchising Code in taking the deposit in the first place, reflecting as it does Ultra Tune’s attitude in relation to its contravening conduct.”

“There must be no tolerance for manufacturing evidence to deceive a regulator, and even less when the deception is maintained in this Court.”

These are the first proceedings that the ACCC has brought against a franchisor alleging a breach of the Franchising Code obligation to act in “good faith” in business dealings with franchisees.

In addition to imposing the penalty, the Court ordered Ultra Tune to:

• repay to the prospective franchisee his $33,000 deposit together with interest; and
• pay the ACCC’s costs on an indemnity basis.

The ACCC is holding up this decision as a significant warning to franchisors to ensure compliance with the Franchising Code and the ACL and the need for franchisor’s to meet their disclosure obligations or face serious consequences.

It should be noted that the maximum penalty for a breach of the ACL 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. The increased maximum penalty did not apply to the Ultra Tune case, which preceded the change.  One must wonder whether these changes would have resulted in an even higher penalty for Ultra Tune.

MST Lawyers’ Franchising team is highly qualified to advise franchisors in relation to Code and ACL compliance and its Dispute Resolutions and Litigation team can provide support in the event of an ACCC investigation or penalty proceeding.

At the time of publication, the full text of Justice Bromwich’s judgement has yet to be released. Once the judgement becomes available, our lawyers will carefully examine it to provide guidance to our clients, particularly concerning Code and ACL compliance. We will provide a further update in a future newsletter.

If you would like to speak to us about your franchising needs, you can email our Franchise team or call +61 3 8540 0200.