In January this year, Ultra Tune was fined $2.604 million after it was found to have misled a prospective franchisee about the true set-up costs of one of its franchises, and that it then attempted a “cover-up” in court.
In doing so, the company was found to have breached its disclosure obligations to franchisees.
Yet Ultra Tune appealed both certain aspects of the verdict as well as the size of the penalties that were handed down.
But on Friday (20 September), the Federal Court dismissed the appeal about the initial judgment, although upheld some of its objections to the penalty.
In doing so, the court reduced the penalty from the original $2.604 million down to $2 million.
Disclosures must have ‘meaningful insights’ for franchisees
“We are not persuaded by Ultra Tune’s submissions that the primary judge erred in finding that it had contravened cl 15(1) [of the Franchising Code of Conduct] by not ensuring that the statements included sufficient detail of the fund’s receipts and expenses so as to give meaningful information about, relevantly, items of expenditure, particularly with respect to advertising and marketing expenditure,” the court ruled in hearing the appeal.
“The construction proposed by the ACCC and accepted by the primary judge at that the text of cl 15(1)(b) requires the financial statement to have ‘some explanatory force and permit meaningful insights to be gained by the franchisee’ is to be preferred. Ultra Tune did not propose any alternative construction.
“The inescapable fact is that cl 15(1) is not concerned with a mere financial statement. The words ‘sufficient detail… so as to give meaningful information about… items of expenditure’ must be given work to do.”
According to the court, it is not acceptable for franchise networks to simply list an item and the proportion of total costs allocated to it in the financial disclosure statements.
“Under the provision... there must be information ‘about’ the item,” it said.
The lower penalty related to a technicality of whether breaching this particular clause of the Franchising Code of Conduct amounts to a single incident for all franchisees in the group (as argued by Ultra Tune), or individual breaches for each one of the affected franchisees (the definition preferred by the ACCC).
It was this point on which Ultra Tune was successful in its appeal.
The court noted that Ultra Tune currently has around 200 franchisees across four states, but said on Friday that “we are persuaded that cl 15(1) creates a single contravention”.
“The text of cl 15(1) reflects that its purpose is directed to the provision of information to franchisees.”
As such, it revised down the size of the penalty in light of its new take on the actual number of breaches to have occurred.
“The penalties are not so low as to be capable of being seen as an acceptable cost of doing business, yet are not so high as to suggest a level of objective seriousness which we do not consider is warranted on the facts,” the court said.
It also recommended that, based on the outcome of the appeal, Ultra Tune was entitled to claim 60 per cent of its appeal costs from the ACCC, but said that both parties would be given the opportunity to put forward their considerations on any awarding of costs.
Information must be ‘meaningful’: ACCC
Commenting on the verdict, ACCC deputy chair Mick Keogh said in a public statement that “the Full Federal Court’s decision confirms that franchisors must provide meaningful information to franchisees about marketing fund expenditure”.
“Franchisors almost always have stronger bargaining power than their franchisees, which is why the Franchising Code of Conduct mandates franchisees must be given sufficient details about how the marketing fund they are contributing to is managed and used,” he said.
Mr Keogh added that the court had deemed Ultra Tune’s action not to be “deliberate” non-compliance with disclosure rules, but rather demonstrated “egregious inadvertence” to its obligations.
“The penalty in this case is still significant, and serves as a reminder to all franchisors about the importance of compliance with the Franchising Code,” Mr Keogh said.
He noted that in January 2019, the original trial judge had also ordered that Ultra Tune refund a prospective franchisee’s deposit with interest, publish corrective advertising and implement a compliance program.
Ultra Tune has been approached for comment. The company did not respond to a request for comment following January’s initial judgment against it.
The Federal Court’s full determination on the appeal can be found on its website.