On 1 March 2021, the Federal Court declared that Megasave Couriers Australia Pty Ltd ("Megasave") breached the Australian Consumer Law ("ACL") by making false or misleading representations to potential franchisees as to the benefits of its franchises. Megasave admitted to misleading prospective franchisees by indicating that they would receive minimum weekly payments and a guaranteed annual income, in circumstances where Megasave did not have reasonable grounds for making the representations.
What you need to know – key takeaways
- Megasave and its sole director, Mr Gary Bourne, admitted to making false or misleading representations to prospective franchisees that they would receive minimum weekly payments and guaranteed annual income if they purchased a Megasave courier franchise.
- The proceedings were instituted by the Australian Competition and Consumer Commission ("ACCC") and reflect the regulator's heightened concern with compliance in the franchising sector. Last month, the ACCC announced franchising as a key enforcement and priority area for 2021.
- Franchisors should carefully consider whether they have a reasonable basis for making any representations about franchises, especially in relation to the earnings, profitability or risks of operating a franchise.
Background
Megasave is a franchised courier delivery business in Australia. Since April 2019, Megasave has advertised its courier franchises for sale via its own website and the Seek Business website.
Between September 2019 and July 2020, Megasave indicated to potential franchisees that they would receive guaranteed minimum weekly payments for an initial period of operating the franchise ("weekly payments representations"). In most cases, Megasave guaranteed AUD 2000 per week for the first six months.
Furthermore, between September 2019 and April 2020, Megasave also guaranteed a specified annual income to potential franchisees, which in most cases was AUD 91,000 per annum ("annual income representations").
These representations were made to potential franchisees on the Megasave and Seek Business websites, as well as to interested parties who enquired about franchising and received a "Franchisee earnings" document from Megasave.
Federal court proceedings
On 6 July 2020, the ACCC commenced proceedings against Megasave in the Federal Court alleging that Megasave breached the ACL by making false or misleading representations to prospective franchisees. In particular, the ACCC alleged Megasave had contravened:
- section 18: the general prohibition on misleading or deceptive conduct;
- section 29(1)(g): false or misleading representations as to benefits; and
- section 37(2): false or misleading representations about certain business activities.
The ACCC also alleged that Mr Bourne, as the sole director of Megasave, was knowingly concerned in this conduct.
The ACCC argued, and Megasave admitted, that Megasave did not pay all its franchisees in accordance with its weekly payments representations or its annual income representations. Megasave also did not have a reasonable basis for making these representations because:
- Megasave was not paying existing franchisees the promised minimum weekly payment and the weekly payments which were made were insufficient to cover the guaranteed annual income;
- Megasave did not have sufficient revenue to pay existing or potential franchisees in accordance with the weekly payments representations or the annual income representations; and
- Megasave did not have a reasonable basis to expect to receive a substantial increase in either its customers or the volume of parcels for delivery, such that it would have sufficient revenue to act in accordance with its representations.
The Court declared that Megasave made false or misleading representations in contravention of the ACL and Mr Bourne was knowingly concerned in, and party to, the contraventions.
By consent, the Court ordered injunctions to restrain Megasave and Mr Bourne from entering into further franchise agreements unless certain conditions were met. The Court also disqualified Mr Bourne from managing corporations for a period of five years.
A hearing is listed for 29 April 2021 to determine penalties and compensation for affected franchisees.
Comment
This case reflects the ACCC's increased focus on the franchising sector as an enforcement and priority area for 2021. With over 30 franchisees complaining to the ACCC about Megasave's conduct, the ACCC has indicated that it will continue to take enforcement action in the sector where franchisees are being treated unfairly.
Franchisors should carefully draft their advertising materials to ensure that all representations are accurate. In particular, representations as to the earnings, profitability or risk of operating a franchise should only be made where the franchisee has a sound and reasonable basis for making such claims.
With thanks to Judy Zhao and Kiana Hunter of Ashurst for their contributions.
