Franchisors beware: Major Australian franchisor fined to the tune of $1.5 million

A record fine for contempt of court in a proceeding brought by the competition watchdog has been ordered against a franchisor by the Federal Court of Australia.

The case, brought by the Australian Competition and Consumer Commission (ACCC) against Ultra Tune, highlights the strict enforcement of Australian franchising regulations and the consequences of non-compliance with court orders.

What happened

In 2019, Ultra Tune, an Australian automotive servicing and roadside asset franchise, was found by the Federal Court to be in breach of the Franchising Code of Conduct (Code).¹  

Specifically, Ultra Tune had failed to provide sufficient information to franchisees concerning marketing expenditures, both in terms of missing statutory deadlines and lacking "meaningful information"².   For example, rather than breaking down and specifying where funds were directed, Ultra Tune only provided broad headings as to the breakdown in marketing expenditures such as "Promotion & Advertising – Television"  without providing further details³.  

This conduct led to a finding by the Court that Ultra Tune had breached its disclosure obligations under the Code.  Ultra Tune was ultimately ordered by the Federal Court to pay a total penalty of $2,014,000 and to adhere to a compliance program to reduce the risk of future breaches of the Code.⁴

After Ultra Tune failed to satisfy its obligations under the compliance program, the ACCC brought contempt of court proceedings against the franchisor in the Federal Court in 2022.  The ACCC alleged that Ultra Tune had failed to update disclosure documents on time, failed to prepare marketing fund statements on time and consistently failed to provide compliance reports as previously ordered by the Court.  

The Court found that Ultra Tune was in contempt of court for these failings and was scathing in its criticism of the franchisor, finding that this reflected "a corporate character which was insufficiently concerned with, and with effecting, compliance".⁵    

In light of the serious nature of the breaches that led to the order being made in the first place and Ultra Tune's subsequent failure to avoid breaches of a similar nature under the compliance program, a record fine of $1.5 million was imposed by the Court.

Franchisor's obligations

The regulatory environment franchisors must navigate in Australia is both complex and subject to various changes as a result of a series of inquiries, including the most recent review conducted by the former Deputy Chairman of the ACCC, Dr Michael Schaper in 2023.⁶

Since its introduction in 1998, the Code has been continually strengthened with respect to franchisor obligations, particularly as it pertains to mandatory disclosures concerning expected franchisee costs, existing franchised businesses, cooperative fund expenditures, and other information of interest to prospective and current franchisees.  These disclosures must be accurate, timely, and substantive and must not contain information that will, or is likely to, mislead or deceive.  In terms of content, disclosures must contain 'sufficient information' when it comes to marketing and other cooperative funds.  This entails inclusion of information that has "some explanatory force".⁷

As the Court noted in the Ultra Tune case, if a franchisor has information readily available to it, it is best "to err on the side of candour"⁸.   For example, if a franchisor used marketing expenditure for pay-television advertising, disclosure by the franchisor should not merely state the amount expended on such advertising, but should also include information relating to channels, timeslots, frequency of advertising, markets that were reached, and any other relevant information that a franchisor has available to it.

Takeaways for franchisors

Non-compliance with the strict obligations under the Code has serious repercussions for franchisors, both financially and reputationally.  The ACCC has indicated it will more actively regulate the franchising space and pursue those who contravene the Code.  This focus on the franchising space, coupled with the fact, that since 2015, the ACCC has been vested with the power to seek civil penalties against those in breach of the Code, means that franchisors should exercise caution when it comes to making disclosures to prospective and current franchisees.

The Ultra Tune decision also highlights the substantial risk associated with non-compliance with court orders and the need for franchisors to ensure that strong systems of compliance are in place.  Appropriate legal advice as to compliance with the Code, particularly in relation to disclosure and any other ongoing obligations, should be sought to avoid penalties being incurred.

If you would like advice about the Code, or franchising law in general, please contact a member of Thomson Geer's Intellectual Property, Technology & Regulatory team.

Footnotes

¹ Australian Competition and Consumer Commission (ACCC) v Ultra Tune Australia Pty [2019] FCA 12.

² Ibid at [97].

³ Ibid at [84].

⁴ Australian Competition and Consumer Commission (ACCC) v Ultra Tune Australia Pty Ltd [2019] FCAFC 164.

⁵ Australian Competition and Consumer Commission (ACCC) v Ultra Tune Australia Pty Ltd (No3) [2024] FCA 156 at [179].

⁶ Independent Review of the Franchising Code of Conduct, Dr Michael Schaper, December 2023.

⁷ Australian Competition and Consumer Commission (ACCC) v Ultra Tune Australia Pty [2019] FCA 12 at [86].

⁸ Ibid at [104].

Authors

Ben Coogan | Partner | +61 7 3338 7503 | bcoogan@tglaw.com.au

Georgia Campbell | Senior Associate | +61 7 3338 7541 | gecampbell@tglaw.com.au

Logan Donadelli | Law Graduate | ldonadelli@tglaw.com.au

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