FEDERAL COURT OF AUSTRALIA Australian Competition & Consumer Commission v Ewing [2004] FCA 5 Australian Competition And Consumer Commission V Helen Ewing & Ors S174 OF 2002 STONE J 28 JANUARY 2004 SYDNEY IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY S 174 OF 2002 BETWEEN: AUSTRALIAN COMPETITION AND CONSUMER COMMISSION APPLICANT AND: HELEN EWING FIRST RESPONDENT CHRIS HUDMAN SECOND RESPONDENT SYNERGY IN BUSINESS PTY LTD (IN LIQUIDATION) ACN 071 563 454 THIRD RESPONDENT JUDGE: STONE J DATE OF ORDER: 28 JANUARY 2004 WHERE MADE: SYDNEY THE COURT DECLARES BY CONSENT THAT: 1. The agreements entitled 'Licence Deed' entered into by the Third Respondent, Synergy in Business Pty. Ltd. ACN 071 563 454 (previously known as Synergy E.P.P. Pty Ltd) (Synergy) with the following individuals are 'franchise agreements' as that term is defined in clause 4 of the Franchising Code of Conduct (the Code): Licence Deed with Michael Rayner dated 31 July 1999; Licence Deed with Russel Green dated 1 August 1999; Licence Deed with Angela Petrolo dated 12 August 1999; Licence Deed with Stephen Whitehead dated 12 August 1999; Licence Deed with Judy McNaughton dated 31 August 1999; Licence Deed with Kim Graeme Looke dated 11 September 1999; Licence Deed with Nick Wolski dated 15 September 1999; Licence Deed with John Bernard Collins dated 19 September 1999; Licence Deed with Jane Elizabeth Edwards dated 26 November 1999; Licence Deed with Barry Heggie dated 8 December 1999; Licence Deed with Jennifer Stewart-Richardson dated 16 December 1999; Licence Deed with Julie-Ann Townsend dated 21 December 1999; Licence Deeds with Kerryn Ann Mayer and Vicki Cameron-Smith dated 8 March 2000; Licence Deed with Maria Macindoe dated 25 May 2000; Licence Deed with James Fougere dated 16 June 2000; Licence Deed with Julie Ann French dated 1 August 2000; Licence Deed with Craig Hawke dated 2 August 2000; Licence Deed with Elizabeth Swane dated 8 August 2000; Licence Deed with Marise Riddell dated 8 August 2000; Licence Deed with Amanda Susan Gaskell dated 17 August 2000; Licence Deed with Greg Murray Licence Deed with David Corbett Licence Deed with Graham Blair Licence Deed with Robert McKay and Ian Rees dated 9 October 2000; Licence Deed with Paul Carberry dated 20 November 2000; Licence Deed with Neil Taylor dated 23 November 2000; Licence Deed with Susan Johnson dated 28 November 2000; Licence Deed with Christine Mercer. Licence Deed with Dennis Rider dated 15 March 2001; Licence Deed with Ian Phillip Davies dated 9 August 2001; Licence Deed with Marie Kathleen Forrester 2. Synergy contravened the Code in respect of each of the individuals listed in paragraph 1 (the franchisees) by: 2.1 failing to provide the franchisees with a disclosure document prior to them entering into the franchise agreements with Synergy, contrary to clause 6 of the Code; 2.2 failing to provide the franchisees with a copy of the Code prior to them entering into the franchise agreements with Synergy, contrary to clause 10 of the Code; 2.3 failing to receive a written statement from each of the franchisees that they had received, read and had a reasonable opportunity to understand the disclosure document and the Code prior to entering into the franchise agreements, contrary to sub-clause 11(1) of the Code; 2.4 failing to receive a signed statement from each of the franchisees that they had received independent advice about the franchise agreements prior to entering into the franchise agreements, contrary to sub-clause 11(2) of the Code; 2.5 failing to provide the franchisees with a 'cooling off' period subsequent to their entering the franchise agreements with Synergy, contrary to clause 13 of the Code; and 2.6 requiring the franchisees to sign a general release of Synergy from liability under the franchise agreements, contrary to sub-clause 16(1) of the Code. 3. By contravening the Code, as set out in paragraph 2 above, Synergy contravened section 51AD of the Trade Practices Act 1974 (the Act). 4. By engaging in the conduct set out in paragraphs 4(a) to 4(g) below, Synergy engaged in conduct that was misleading or deceptive or was likely to mislead or deceive contrary to section 52 of the Act, and made a representation that was false or misleading in a material particular contrary to sub-section 59(2) of the Act, in that Synergy made the following representations to one or more of the franchisees: 4.1 that through an extensive training course Synergy could teach the franchisees Synergy's proven system and provide them with the skills to become an accredited Business Development Specialist commanding fees of $100 per hour; 4.2 that as Business Development Specialists who utilised Synergy's Best Practice Program the franchisees would have the benefit of above average income potential and potential income of $100,000 plus per annum; 4.3 that Ann Cummings was a Business Development Specialist who utilised Synergy's Best Practice Program and who had generated a six figure annual income despite not having done any previous consulting and without any relevant background and therefore inferred that any franchisee could earn a six figure annual income; 4.4 that start up costs were low; 4.5 that in conducting Best Practice Program workshops the franchisees would be able to charge out their time to customers at approximately the rate of $100 per hour in the first year and that figure may rise to $180 in the second year; 4.6 that the costs of running a Best Practice Program workshop would be 10% of the gross revenue; 4.7 that the average rule of thumb was that 20 to 25 prospecting letters would result in four or five first time appointments and achieve one or two sales; Whereas: 4.8 the training course Synergy provided the licensees did not provide them with the skills to become an accredited Business Development Specialist commanding fees of $100 per hour; 4.9 by utilising Synergy's Best Practice Program the licensees did not have the benefit of above average income potential and did not have a potential income of $100,000 plus per annum; 4.10 licensees who had done no previous consulting and without any relevant background were not able to generate a six figure annual income; 4.11 start up costs were not low; 4.12 in conducting Best Practice Program workshops the licensees were not able to charge out their time to customers in conducting Best Practice Program workshops at approximately the rate of $100 per hour in the first year or $180 in the second year; 4.13the costs of running a Best Practice Program workshop were more than 10% of gross revenue; and 4.1420 to 25 prospecting letters did not result in four or five first time appointments or achieve one or two sales. 5. The First and Second Respondents, being the persons by whom Synergy engaged in the conduct referred to in paragraphs 2, 3 and 4 above, were knowingly concerned in and party to the contraventions of the Act in paragraphs 3 and 4 above within the meaning of sub-section 75B(1) of the Act. The Court Orders by Consent: Injunctions 6. That Synergy, as a franchisor or potential franchisor, whether by itself, its servants, agents or otherwise howsoever for a period of three years, be restrained from: 6.1 failing to provide a potential franchisee with a disclosure document of the type referred to in clause 6 of the Code prior to entering into a franchise agreement with the potential franchisee; 6.2 failing to provide a potential franchisee with a copy of the Code prior to entering into a franchise agreement with the potential franchisee; 6.3 failing to receive a written statement from a potential franchisee that they have received, read and had a reasonable opportunity to understand the disclosure document and the Code prior to entering into the franchise agreement with the potential franchisee; 6.4 failing to receive a signed statement from a potential franchisee that they have received independent advice about the franchise agreement prior to entering into the franchise agreement with the potential franchisee; 6.5 failing to provide franchisees with a 'cooling off' period as required by clause 13 of the Code; and 6.6 requiring, as a condition of entering into a franchise agreement, a potential franchisee to sign a general release of liability. 7. That the First and Second respondents, whether by themselves, their servants, agents or otherwise howsoever, for a period of three years, be restrained from being knowingly concerned in or party to any corporation as a franchisor or potential franchisor: 7.1 failing to provide a potential franchisee with a disclosure document of the type referred to in clause 6 of the Code prior to entering into a franchise agreement with the potential franchisee; 7.2 failing to provide a potential franchisee with a copy of the Code prior to entering into a franchise agreement with the potential franchisee; 7.3 failing to receive a written statement from a potential franchisee that they have received, read and had a reasonable opportunity to understand the disclosure document and the Code prior to entering into the franchise agreement with the potential franchisee; 7.4 failing to receive a signed statement from a potential franchisee that they have received independent advice about the franchise agreement prior to entering into the franchise agreement with the potential franchisee; 7.5 failing to provide franchisees with a 'cooling off' period as required by clause 13 of the Code; and 7.6 requiring, as a condition of entering into a franchise agreement, a potential franchisee to sign a general release of liability. 8. The Respondents are restrained, by themselves, their servants, agents or otherwise howsoever, for a period of 3 years, from inducing or attempting to induce a person to enter a franchise agreement by making any representation which, to their knowledge, is untrue or which they do not have reasonable grounds to believe to be true. Orders 9. The First and Second Respondents shall provide each of the franchisees with a copy of this order within 21 days of the date the order is entered. 10. Synergy shall provide each of the franchisees with a 'cooling off' period of seven days from the date that they are notified of this order, during which period the franchisees may elect to terminate their franchise agreements with Synergy. 11. If any or all of the franchisees elect to terminate their franchise agreements with Synergy within the cooling off period, the First and Second Respondents shall, within 14 days of receipt of the franchisee's election to terminate the franchise agreement, return all payments made by the franchisees to Synergy under the franchise agreement. 12. The First and the Second Respondents shall not be in any way concerned in the sale or prospective sale of a franchise by a corporation within the next three years unless they ensure that the corporation discloses to any prospective purchaser before he or she signs the contract for purchase, or pays any money, the existence of these proceedings and these orders. 13. The First and the Second Respondents shall not be in any way concerned with the business of promoting or selling franchises within the next 3 years unless they have, or the business promoting or selling franchises has, first implemented a trade practices corporate compliance program designed to ensure their awareness of their responsibilities and obligations in relation to the contravening conduct, similar and related conduct. The compliance program should address the provisions of sections 52, 59(2) and 51AD of the Act and the Franchising Code of Conduct and, to the First and Second Respondents' best endeavours, be consistent with Australian Standard AS-3806. The compliance program is to be implemented by an independent external professional or organisation, with trade practices law experience and who is acceptable to the Applicant, or otherwise approved by the Court. Costs 14. The First and Second Respondents are to pay the Applicant's costs in the amount of $35,000 which is due and payable 60 days from the date of this order. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY S 174 OF 2002 BETWEEN: AUSTRALIAN COMPETITION AND CONSUMER COMMISSION APPLICANT AND: HELEN EWING FIRST RESPONDENT CHRIS HUDMAN SECOND RESPONDENT SYNERGY IN BUSINESS PTY LTD (IN LIQUIDATION) ACN 071 563 454 THIRD RESPONDENT JUDGE: STONE J DATE: 28 JANUARY 2004 PLACE: SYDNEY REASONS FOR JUDGMENT 1 This proceeding was commenced on 22 July 2002 on the application of the Australian Competition and Consumer Commission ('the ACCC'). In its amended application filed on 21 November 2002, the ACCC alleged contraventions of a number of provisions of the Trade Practices Act 1974 (Cth) ('the Act'). These included contraventions of an applicable industry code in contravention of s 51AD of the Act, misleading or deceptive conduct in contravention of s 52 and misleading representations about certain business activities in contravention of s 59(2) of the Act. 2 In its amended statement of claim the ACCC referred to agreements entitled 'Licence Deeds' that the third respondent, Synergy in Business Pty Limited (in liquidation) had entered into with 31 named individuals. It was pleaded that these licence agreements were franchise agreements as defined in cl 4 of the Franchising Code of Conduct ('the Code') prescribed by the Trade Practices (Industry Codes – Franchising) Regulations 1998 ('Franchising Regulations'). Pursuant to s 51AE of the Act, the Franchising Regulations state that the Code is a mandatory industry code. Section 51AD of the Act provides that a corporation must not contravene an applicable industry code. 3 The ACCC alleged that in failing to comply with the Code, the third respondent contravened an applicable industry code and was thereby in contravention of s 51AD of the Act. The statement of claim also contained detailed allegations of the other contraventions alleged in the amended application. 4 The parties have agreed to settle the dispute that is the subject of this proceeding and to make orders by consent. They have provided an agreed statement of facts and a copy of the standard form licensing agreement that they agree was used in the agreements with each of the named individuals. A copy of the agreed statement of facts is annexed to these reasons. 5 Clause 4 of the Franchising Code of Conduct defines a 'franchise agreement' as an agreement: (a) that takes the form, in whole or part, of any of the following: (i) a written agreement; (ii) an oral agreement; (iii) an implied agreement; and (b) in which a person (the franchisor) grants to another person (the franchisee) the right to carry on the business of offering, supplying or distributing goods or services in Australia under a system or marketing plan substantially determined, controlled or suggested by the franchisor or an associate of the franchisor; and (c) under which the operation of the business will be substantially or materially associated with a trade mark, advertising or a commercial symbol: (i) owned, used or licensed by the franchisor or an associate of the franchisor; or (ii) specified by the franchisor or an associate or the franchisor; and (d) under which, before starting business or continuing the business, the franchisee must pay or agree to pay to the franchisor or an associate of the franchisor an amount including, for example: (i) an initial capital investment fee; or (ii) a payment for goods or services; or (iii) a fee based on a percentage of gross or net income whether or not called a royalty or franchise service fee; or (iv) a training fee or training school fee; but excluding: (v) payment for goods and services at or below their usual wholesale price; or (vi) repayment by the franchisee of a loan from the franchisor; or (vii) payment of the usual wholesale price for goods taken on consignment; or (viii) payment of market value for purchase or lease of real property, fixtures, equipment or supplies needed to start business or to continue business under the franchise agreement. The Franchising Regulations contain a number of exceptions to this definition, none of which is relevant here. 6 The subject of the licence deed is the 'property' and 'system' of a business management system developed by the third respondent known as the 'Best Practice Program'. Under the deed each licensee is granted a non-exclusive licence to use the property in the system in accordance with the terms of the deed. Having considered the terms of the licence deed and the agreed statement of facts provided by the parties, I am satisfied that the deeds created a franchising agreement within the definition in the Code. On the basis of the agreed statement of facts I am satisfied that the declarations I have been asked to make are appropriate for the reasons stated in those declarations and that I should make the orders requested. I certify that the preceding six (6) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Stone. Associate: Dated: 28 January 2004 Solicitor for the Applicant: Australian Government Solicitor Solicitor for the First and Second Respondent: Deacons Date of Judgment: 28 January 2004