National franchisor Seal-A-Fridge Pty Ltd had engaged in unconscionable conduct towards its franchisees and failed to comply with the Franchising Code of Conduct, the Federal Court, Brisbane has found.
The court also declared that sole director, Nigel Rooney, was a party to the contraventions.
The declarations followed an Australian Competition and Consumer Commission initiated action.
Seal-A-Fridge is the franchisor of a mobile refrigeration seal replacement business run by franchisees around Australia.
The court declared that in 2001 and 2004 Seal-A-Fridge engaged in unconscionable conduct towards certain franchisees by demanding, and ultimately obtaining, payment of increases of up to 50 per cent in the ongoing weekly fees for access to the national telephone number.
In 2001 Seal-A-Fridge disconnected these franchisees from the phone number for failing to pay the full amount of the fee increase. In 2004 Seal A Fridge required the franchisees to agree to vary their franchise agreements to provide for the fee increase.
The national phone number is used by franchisees to receive customer inquiries and work and is essential to their business.
The court found that Seal-A-Fridge had no contractual basis for the fee increases.
In his judgement, Justice Logan found that the overall conduct revealed: "misstatement, non-disclosure of information, threats and intimidation and the abuse of Seal-A-Fridge's position of strength in relation to being able to cut off the phone number."
Justice Logan also found that the conduct amounted to a "unilateral profit gouge". It was each of these elements in the overall factual matrix which established unconscionable conduct on the part of Seal-A-Fridge.
The court also declared that Seal-A-Fridge failed to provide adequate disclosure to a franchisee prior to them entering into a franchise agreement and on three occasions failed to provide current disclosure documents to franchisees after receiving written requests.
In its action, the ACCC had also alleged that Seal-A-Fridge had engaged in unconscionable conduct by unreasonably withholding consent to the transfer of a franchise. The court found that the basis upon which Seal-A-Fridge sought to exercise its discretion to withhold consent to the transfer was incorrect. Nonetheless, the conduct did not involve any moral turpitude and was therefore held not to be unconscionable.
The court ordered injunctions against Seal-A-Fridge and Mr Rooney, and that Seal A-Fridge implement and maintain a fully documented complaint handling system for three years. The records of the complaint handling system are to be made available to the ACCC upon request.
Mr Rooney was ordered to attend a trade practices law compliance seminar.
The court also ordered Seal-A-Fridge to write to each of its franchisees advising them of the orders made by the court.
The court ordered the respondents to make a substantial contribution to the ACCC's costs.
"This case sends a strong message to franchisors that they cannot abuse the position of strength that they have in relation to their franchisees in order to make unfair and unreasonable personal gains at the expense of franchisees," ACCC chairman Graeme Samuel said today.
"Only a small number of unconscionable conduct cases have been decided by the courts. This case provides a further example of what amounts to unconscionable conduct in the particular circumstances found by the court.
"Franchisors also need to be aware of their obligations under the Franchising Code of Conduct.
"The code exists to facilitate franchising relationships and protect the rights and interests of both franchisees and franchisors – it has the force of law and as such, must be complied with."
Separately, new amendments to the Franchising Code come into effect tomorrow (1 July ). These amendments require increased disclosure by franchisors to assist prospective franchisees to make informed decisions before entering a franchise. The new amendments also strengthen the dispute resolution procedure.
Further information about the new amendments to the code or the general compliance obligations under the Franchising Code of Conduct can be obtained by via the ACCC website www.accc.gov.au/franchising