Ultra Tune Appeal Decision Upheld by Full Federal Court: What does this mean for Franchisors in Australia?
In January 2019, in proceedings brought by the Australian Competition and Consumer Commission (ACCC), the Federal Court found Ultra Tune Australia Pty Ltd, a major Australian franchise of automotive repairs and servicing, were in breach of the Franchising Code of Conduct (the Code) and the Australian Consumer Law (ACL). Clinch Long Woodbridge’s article on this case is available here
In the original decision, Ultra Tune were fined $2.6 million for their breaches of the Code and the ACL. The Federal Court findings included failure to adequately disclose certain financial obligations to Ultra Tune’s franchisees, and failure to disclose exactly where the contributions made to the company marketing fund were spent. For example, Ultra Tune disclosed to its franchisees that a large amount of the fund went to ‘TV advertisements’, but failed to be more specific, such as disclosing when or where the advertisements will be displayed. Further, the marketing fund financial statements were provided after the deadlines imposed by the Code.
Ultra Tune appealed this decision to the Full Federal Court in September 2019, on grounds including that the penalty was too severe and the severity of the breach being inaccurately high. Ultra Tune argued that their actions were not maliciously intended, instead being a result of ignorance to the standards of the law and their untimeliness being a consequence of the external auditors.
In the appeal brought by Ultra Tune, the Full Federal Court ordered that the lack of sufficient details and the lack of punctuality with the marketing fund financial statements were the result of “egregious inadvertence” to the law, not out of malice. As a result, the Full Court reduced the fine by $590,000 and reduced the severity of the breach of the marketing fund statement and disclosure document requirements contained in the Code from ‘worst category of case’. The ACCC were also ordered to cover 60 percent of Ultra Tune’s legal fees.
Importantly, the finding that Ultra Tune had breached the Code and the ACL was not overturned and Ultra Tune ultimately were liable for $2.014 million as a penalty.
The main points for franchisors to note as a result of the Full Federal Court’s consideration of the ‘sufficient detail’ disclosure requirement contained in the Code are:
- that the specificity of details disclosed must be of a high standard in accordance with the Code. General outlines do not amount to sufficient detail; and
- franchisors should also be aware that external parties such as auditors cannot be blamed for financial reports or any legally mandated information being provided late to franchise, as the onus is on the franchisor to provide the information to third parties earlier to ensure this does not occur.
The deputy chair of the ACCC, Mick Keogh, emphasised that the penalty, although reduced, is still very large and should alert other franchisor’s that breaches of the disclosure obligations contained in the Code should not be disregarded nor treated with inadvertence. Mr Keogh stated in a press release:
“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”.
Since the original decision the maximum penalty for a breach of the of the ACL has been increased from $63,000 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. This increased maximum penalty did not apply to the Ultra Tune case, which preceded the change.
Important Disclaimer: The content of this publication is general in nature and for reference purposes only. It is current at the date of publication. It does not constitute legal advice and should not be relied upon as such. Legal advice about your specific circumstances should always be obtained before taking any action based on this publication.