Franchisors beware: pecuniary penalties wash Geowash clean

In brief 3 min read

In the recent Federal Court decision of ACCC v Geowash Pty Ltd (Subject to a Deed of Company Arrangement) (No 4) [2020] FCA 23, Justice Colvin imposed significant pecuniary penalties on a franchisor as well as its sole director and national franchising manager for unfair dealings with franchisees. The penalties were sizeable principally because the contraventions constituted more than a single 'act or omission' for which the court could theoretically impose the maximum penalty. This case might influence how the ACCC litigates in the future.

Key takeaways

• Franchisors who engage in unfair dealings with their franchisees may face significantly higher penalties if the court considers the specific dealings with each franchisee.
• You should consider a particular respondent's degree of culpability for a particular contravention, rather than the statutory maximum penalty, when predicting the quantum of any penalty for a franchisor and its representatives.

Who in your organisation needs to know about this?

Persons involved in litigation and persons involved in negotiating and implementing franchise agreements.

Large pecuniary penalties clean up Geowash and its representatives

Background

In an earlier judgment, Justice Colvin found that Geowash Pty Ltd (Geowash), its sole director (Ms Ali) and its national franchising manager (Mr Cameron) contravened the Australian Consumer Law (ACL) and Competition and Consumer Act (CCA). Relevantly, Geowash entered into franchise agreements for hand car wash and detailing businesses with its franchisees in a way that was unconscionable and lacked good faith. For example, Geowash treated the purchase price payments that were received from the franchisees as general funds to pay significant commissions (upwards of $3 million) to Ms Ali and Mr Cameron, who had key roles in negotiating the agreements on behalf of Geowash. Other misrepresentations also contravened the ACL. Namely, false and misleading information was published about the revenue and profits that might be earned by Geowash franchisees, as well as about the affiliations between Geowash and various brands. In this judgment, the court ordered pecuniary penalties against Geowash ($2.5 million), Ms Ali ($1,045,000) and Mr Cameron ($656,000).

Multiple contraventions signal larger pecuniary penalties

Importantly, the court ordered large pecuniary penalties because of the way the ACCC advanced its case against the respondents.

There is a maximum penalty in respect of 'each act or omission' which constitutes unconscionable conduct under the ACL and a lack of good faith under the CCA.

In this case, this statutory restriction would have applied more significantly if the ACCC framed its case in a way that confined the contravening act to the conception and the implementation of a scheme as to how to engage with all franchisees. However, the ACCC framed its case in a way that had regard to the fees, meetings and correspondence that were specific to each franchisee. This meant there were separate contraventions for each dealing with a franchisee that resulted in a franchise agreement (even though the respondents implemented the same approach in dealing with different franchisees). Theoretically then, the court could impose a maximum penalty for each of the multiple franchise agreements.

We expect the ACCC to litigate in the future by reference to the particular circumstances of each franchise agreement.

Pecuniary penalties are relative but not in the way you think

Like many statutes, the ACL and CCA impose a higher maximum penalty on corporations than individuals. This case is an example of when pecuniary penalties will not reflect the relativity which is contemplated by the statutory maximum penalties.

Here, Justice Colvin ordered Ms Ali and Mr Cameron to pay a pecuniary penalty that was closer to the maximum penalty for contraventions by individuals and ordered Geowash to pay a pecuniary penalty that was further away from the maximum penalty for contraventions by corporations. This reflected the higher culpability of Ms Ali and Mr Cameron (as the controlling minds of Geowash who benefited from the conduct).

Therefore, this case provides the following reminder to respondents who are trying to predict the quantum of any pecuniary penalty: consider the relative degree of your culpability for the contravening conduct.