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Why Jump?  Why NOT!  Court Orders $23 million in Penalties and Director to pay $900,000

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By Louise Wolf, Senior Associate

Jump Swim Schools asked prospective franchisees to consider ‘Why Jump?’  The answer has landed Jump Swim Schools in hot water.  Federal Court has ordered Jump Swim Schools to pay penalties of $23 million.  Director and founder must personally pay $900,000.

In June 2019, ACCC commenced proceedings against Australian franchisor, Jump Loops Pty Ltd (now in liquidation) (Jump Swim Schools), claiming that Jump Swim Schools made false or misleading representations to prospective franchisees about the time it would take to establish an operating swim school.  In a brochure given to prospective franchisees between March 2016 and July 2019, under the heading ‘Why Jump?’, Jump Swim Schools prominently stated that it would take 12 months to set up an operating swim school.  ACCC alleged that the timing for completion was dependent on events that were outside Jump Swim School’s control, that there were no reasonable grounds for the representation, and by making the representations, Jump Swim Schools breached sections 18 and 29 of the Australian Consumer Law (ACL). 

The ACCC also alleged that Jump Swim Schools accepted payment from franchisees, even though there were reasonable grounds to believe that Jump Swim Schools would not be able to provide operational swim schools within 12 months, and Jump Swim Schools was, or ought reasonably have been aware that there were no such grounds.  Initial costs paid by prospective franchisees were between $150,000 to $175,000. 

Further, ACCC alleged that the founder and managing director of Jump Swim Schools, Ian Campbell, had actual knowledge of the facts, and thereby participated in and was involved in the contraventions of the ACL.

The Federal Court declared, by consent, that the false and misleading representations were made to 174 franchisees and payments were accepted from 127 franchisees when Jump Swim Schools knew, or ought to have known that there was no reasonable basis for believing swim schools would be operational within 12 months.   For most of the 174 franchisees, operational swim schools were never established.  

The Federal Court has ordered that Jump Swim Schools pay penalties of $23 million.  It has also ordered that Mr Campbell pay penalties of $400,000 and compensation to franchisees of $500,000.  Mr Campbell is restrained from carrying on a business as or of a franchisor for three years in Australia and from making representations about timeframes or wrongly accepting payment relating to a franchise for a period of 5 years.

ACCC noted that despite obtaining freezing orders over the assets of Jump Swim Schools, its associated companies and Mr Campbell shortly after becoming aware of the conduct, much of the money paid by franchisees had already been spent.  Because Jump Swim Schools is now in liquidation, it is unlikely that full compensation for franchisees and penalties will be paid.  However, the ACCC considers the size of the penalty will send a “strong deterrence message” to franchisors about making false and misleading representations to prospective franchisees.   

In offering franchises, franchisors must be vigilant when making representations about future matters, to ensure there are reasonable grounds for doing so. This includes representations about future significant capital expenditure, future earnings and the time it will take to become operational.  It applies to representations made inside and outside the Disclosure Document – even in promotional brochures.  If you are asking ‘Why Jump?’, ensure the answer is based on reasonable grounds, not shaky ones.   

For advice about false or misleading representations, MST Lawyers franchising team can assist.