INSIGHT

Ultra Tune's small victory in Franchising Code case

By Edward Thien
Industrials Intellectual Property Patents & Trade Marks

In brief 3 min read

Earlier this year, InIP reported on a case brought by the ACCC alleging various breaches of the Competition and Consumer (Industry Codes – Franchising) Regulation 2014 (Franchising Code). Ultra Tune Australia Pty Ltd (Ultra Tune) was found to have committed numerous breaches of the Franchising Code. Ultra Tune appealed this decision and was unsuccessful in overturning the finding it had breached the Franchising Code, but did manage to reduce its penalty. We break down its arguments on appeal.

Background – penalties to the Ultra Tune of $2.6 million

The Federal Court found Ultra Tune to have breached the Franchising Code for conduct including failing to prepare and disclose required information, pressuring prospective franchisees to sign up, misrepresenting the profitability of the business and failing to refund refundable deposits. In total, Ultra Tune was penalised $2,604,000. Ultra Tune appealed to the Full Federal Court.

Ultra Tune's arguments on appeal

Disclosure obligations

Ultra Tune had previously admitted it failed to prepare statements and audit reports and provide details of receipts and expenses regarding a marketing fund on time. The primary judge also found that the information it had provided was not satisfactory as it did not provide 'sufficient detail… so as to give meaningful information' as required by clause 15(1) of the Franchising Code.

The primary judge held that franchisors should 'err on the side of candour' when it comes to their disclosure obligations. Ultra Tune appealed this on the grounds that any ambiguity as to what is required to be disclosed should be resolved in its favour given this obligation contained a penalty provision. On appeal, the primary judge's findings were upheld by the Full Court, who noted that requiring an evaluative exercise or judgment call does not make an obligation ambiguous or uncertain.

Number of contraventions

Ultra Tune argued that the disclosure obligations it breached (each of which were contained in clause 15(1) of the Franchising Code) amounted to a single obligation so could only attract a single penalty. The ACCC disagreed and argued that even if it were a single obligation, it applied to each franchisee, so still constituted hundreds of breaches. The Full Court held that clause 15(1) created a single obligation as it provides for a 'cascading series of obligations' which all culminate in providing the franchisee with a statement containing various information. In other words, clause 15(1) creates one obligation that may be breached in various ways.

Nature of contraventions

Ultra Tune appealed the trial judge's finding that it had acted stubbornly and with a cavalier approach. It argued its breaches were sometimes due to inadvertence, rather than being deliberate, so did not warrant the most serious penalty available. Further, Ultra Tune argued that while it was often late in meeting its disclosure obligations, that is still better than not meeting them at all. On appeal, it was accepted that its behaviour did not fall within the worst category of contraventions. However, the Full Court considered that the contraventions were serious nevertheless due to the lengths of the delay, and the importance of the documents withheld was upheld on appeal.

Weighing up all of the above, the Full Court held that the total penalty against Ultra Tune should be reduced to $2,014,000.