The Federal Court in Brisbane has found national franchisor, Seal-A-Fridge Pty Ltd, guilty of engaging in “unconscionable conduct towards its franchisees”, for demanding and obtaining payment increases of up to 50 per cent in ongoing weekly fees for access to its national telephone number.
The national phone number is used by franchisees to receive customer inquiries, and is essential to their business.
The court also said the company had failed to comply with the Franchising Code of Conduct, and declared that sole director, Nigel Rooney, was a party to the contraventions.
The declarations followed an Australian Competition and Consumer Commission (ACCC) initiated action.
Seal-A-Fridge is the franchisor of a mobile refrigeration seal replacement business run by franchisees around Australia. In 2001, the company disconnected franchisees from the phone number for failing to pay the full amount of the fee increase. In 2004, it had also required the franchisees to agree to vary their franchise agreements to provide for the fee increase.
The court found that Seal-A-Fridge had no contractual basis for the fee increases. In his judgment, 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”. Justice Logan also found that the conduct amounted to a “unilateral profit gouge”.
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.
“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. “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.”
In a separate move, the ACCC has amended its Franchising Code, which now requires 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