The Australian Competition and Consumer Commission’s (‘ACCC’) states as its core business ensuring compliance with the Trade Practices Act 1974 (‘TPA’) through the promotion of competition and informed markets, encouraging fair trading and protection of consumers. In 2009 the ACCC has again been busy ensuring franchisors complied with competition, fair trading and consumer protection laws. This update touches on a few cases that defined the style of ACCC intervention in 2009 as the ACCC emphasised that there is no room in the franchise relationship for misleading, deceptive or unconscionable conduct.
1. Australia Competition & Consumer Commission v Burnan Pty Ltd (ACN 008 984 834) WAD65/2009
Burnan Pty Ltd (Burnan), trading as Resume Service, promotes and supplies a resume writing business process involving the preparation of resumes and the marketing and operation of a resume writing service as a business operated from home offices. Burnan sell this process in Australia for $22,000 and published on their website, in newspaper advertisements and in the documents supplied to prospective operators that this process could earn franchisees between $43,000 and $96,000 per annum.
In April 2009 the ACCC brought proceedings in the Perth Federal Court against both Burnan and its director, Keith Rolston for alleged misleading and deceptive conduct in contravention of s52 of the TPA. The ACCC alleged that Burnan and Rolston made the representations regarding the income which could be earnt operating the business without reasonable grounds. The Court agreed and found that these representations were unfounded and misleading as Rolston and Burnan had no evidence to support this claim nor anything that suggested that anyone using this process had ever earned income in that range.
The Court went on to order that any representations made by Burnan and Rolston in the future regarding Resume Service’s expected earnings had to be support by ‘reasonable grounds’ as the potential profitability of a business is a material factor for those considering whether to purchase the business, particularly a franchised business. The Court observed that prospective franchisees seeking to work from home or in vulnerable financial positions rely on this disclosure information regarding their potential earning capacity.
The ACCC has accepted court enforceable undertakings from Burnan and Rolston that:
- Burnan and Rolston acknowledge the ACCC's concerns;
- Burnan will cease making representations that persons who purchase the business opportunity will commence earning a specified amount per day immediately after training is completed;
- Burnan will review its selling and advertising practices;
- Burnan will positively request that prospective purchasers of the business opportunities, prior to entering into any agreement to purchase a business opportunity, seek independent advice; and
- Burnan will implement a trade practices compliance program.
2. Australia Competition and Consumer Commission v Allphones Retail Pty Ltd [2009] FCA 17
In one of two cases involving Allphones Retail Pty Ltd (‘Allphones’) and the ACCC, on 19 January 2009 the Federal Court in Sydney ordered interim injunctions restraining Allphones from representing that it will give preferential treatment to franchisees who have signed new agreement and/or a deed of release in favour of Allphones until the final hearing of the ACCC’s allegations.
The ACCC had commenced proceedings against Allphones alleging breaches of s51AC and s52 of the TPA and applied for interlocutory injunctions under s80(2) of the TPA. The ACCC contended that Allphones unconscionably threatened to ration or withhold stock to franchisees who were yet to enter into a new franchise agreement in an attempt to pressure the remaining franchisees to do so. The Director of Allphones was purported to have sent an email to franchisees stating that they would allocate stock giving preference to franchisees on the new agreement with further employees of Allphones telling franchisees that stock would be restricted for stores not on the new agreement.
Allphones however claimed that it had not yet allocated stock on the basis of which franchise agreement applied and claimed that if there was a legitimate need to ration the stock this may entitle Allphones to make decisions favouring franchisees on the new agreement, thus precluding a finding that the conduct was unconscionable.
The court granted the application for an injunction finding that there was prima facie a case of unconscionable conduct as the respondent had threatened to allocate the stock on a basis not for legitimate commercial reasons but to pressure franchisees into new agreement. The balance of convenience and justice thus favoured granting injunctions as this was in the interests of franchisees and would cause no particular hardship to the respondent.
3. ACCC v Personalised Chocolates 4 U Pty Ltd & Troy Patching
The Federal Court declared that Personalised Chocolates 4U Pty Ltd (‘PC4U’) and its sole director, Troy Patching, misled franchisees and engaged in conduct in breach of the Franchising Code of Conduct (‘the Code’). False and misleading statements made by PC4U were designed to entice work-from-home entrepreneurs to buy a franchise in circumstances where PC4U was unable to provide franchisees with promised software, training and support.
The Court made orders, by consent, declaring that PC4U breached sections 52, 53(c), 53(g) and 58 of the TPA in relation to making false representations, and section 51AD of the TPA relating to their obligations under the Code. The Court also declared Mr Patching to be ‘knowingly concerned’ in all these breaches of the TPA and the Code.
The conduct declared to be in contravention of the Act included:
- making false representations to PC4U franchisees that they would be provided with functioning software necessary for the operation of the franchise
- making false representations to PC4U franchisees that they would be provided with a training manual for the operation of the franchise, at the time they became a franchisee;
- making false representations that a refund of franchise fees was available to franchisees when certain conditions were met, when it was impossible to meet some of those conditions and/or the time in which PC4U franchisees were able to seek a refund was not capable of being ascertained by PC4U franchisees;
- publishing statements on the PC4U website which represented that the persons giving testimonials had been franchisees of PC4U, when they had never been PC4U franchisees; and
- falsely representing that a business system being offered for sale by PC4U, which meets the definition of a franchise in the Franchising Code, is not a franchise.
Further, as part of the orders, the court has issued injunctions restraining PC4U and Mr Patching from engaging in similar conduct in the future.
In addition, PC4U has been ordered to:
4. ACCC v Mailpost Australia Ltd – 24 December 2009
The ACCC has instituted legal proceedings in the Federal Court in Sydney against Mailpost Australia Limited, its director Mr Peter Kritas and Mailpost Postie Network Sydney Pty Ltd (MPNS) for alleged contraventions of the TPA.
Mailpost is a print and distribution business for unaddressed promotional mail. Mailpost Australia is the Australian master franchisor and MPNS the sub-franchisor for New South Wales. The ACCC alleges that both Mailpost Australia and MPNS failed to comply with the Code in a number of respects, including not providing prospective franchisees with a disclosure document in contravention of s51AD of the TPA. The ACCC also alleges that Mailpost Australia made a number of false, misleading and deceptive representations to franchisees in contravention of s52, s53(g) and s59 of the TPA including that:
- the Mailpost Business was not a franchise and therefore franchisees did not have rights under the Code
- the business was ‘recession proof’ and had a number of corporate customers ‘on the way’
- Mr Kritas is alleged to have been knowingly concerned in the conduct of Mailpost Australia and MPNS.
The ACCC seeks orders including declarations that Mailpost Australia and MPNS engaged in conduct that contravened the TPA and that Mr Kritas was knowingly concerned in that conduct; injunctions; an order that Mailpost implement a trade practice compliance program; and costs.
This matter has been listed for a directions hearing on 3 February 2010.
Please contact for further information:
Derek Sutherland
Partner
Alicia Hill
Partner
The material contained in this publication is no more than general comment. Readers should not act on the basis of the material without taking professional advice relating to their particular circumstances.
© DibbsBarker 2009
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