Seal-A-Fridge's Fate Sealed

This was a case where the ACCC finally flexed some muscle. But for all the wrong reasons.  This was a political stunt when the ACCC and Minister Emerson were being blasted from every corner of Australia for ignoring rogue franchisor behaviour. They found the little guy franchisor, who admits he blew it, and were prepared to destroy him with a team of 'legal eagles' he could not compete against. But it was all done to protect the sham that is franchising regulation in Australia. This is from Michael Rooney, SAF franchisor; it's long;

On Friday, 4th June, 2010 In the Federal Court in Brisbane Justice Logan made his orders in respect to the test case of the Australian Competition and Consumer Commission (ACCC) and Seal-A-Fridge Pty Ltd.  (SAF) The ACCC had alleged that SAF engaged in unconscionable conduct in increasing fees by $25.00 per week (from $50.00 - $75.00)  in 2001 in association with the SAF National Telephone Number and disconnecting  some Franchisees to procure agreement to the increased fees.

Fees for some Franchisees were raised from $75.00 - $100.00 in 2004 and no phones were disconnected but the ACCC alleged this was also unconscionable conduct. Deeds of Variation were put in place in 2004 and Franchisees were given benefits with the $25.00 per week increase. One Franchisee’s term of renewal was increased from 15 – 45 years. No increases had occurred since the 2004 increase other than CPI.

Two Franchisees went to court in regards to the $25.00 per week increase. They stated that they charge $170.00 to reseal an average two-door fridge. The Franchisor stated in its defense submission that the cost to make a fridge seal is around $10.00.

Case law surrounding Unconscionable Conduct is still building and in the past it was held that the threshold for the conduct was so high in respect to Franchising that it only concerned a very narrow group who had actually terminated Franchisees; cases such as ACCC v Simply No –Knead (Franchising) Pty Ltd (2000). However the bar has now been dramatically lowered.

To obtain a declaration for unconscionable conduct in 2001, which was out of the statutory time limits of six years to bring an action. The ACCC Counsel Mr K Dorney QC argued that the “ACCC as a regulator should not be bound by Statue time limits to bring an action because the ACCC was a regulatory authority which brings proceedings in the public interest, which serve to educate the public.” The authority used was the case of ACCC v Eurong Beach Resort Ltd (2005)

With new amendments to Section 51AC of the Trade Practices Act which governs Unconscionable Conduct now in place, which include million dollar fines and criminal charges. It now seems that the ACCC will be able to go out of the statutory time limits to obtain a conviction of unconscionable conduct because it is in the public interest.

In a speech given by the ACCC Chairman, Mr Graeme Samuel on 3rd July, 2007, he stated that … we are changing our focus to take a much more aggressive attitude to pursuing unconscionable conduct and this means pushing to get more matters before the courts. By doing so we will not only test the law, we will firm up a better definition of what constitutes unconscionable conduct thereby providing more guidance of businesses.’

In 2008, the Senate Standing Committee on Economics held an enquiry into “Unconscionable Conduct and the Trade Practices Act.”

At 5.40 of their report  the Committee “recommend that the ACCC pursue targeted investigation andfunding of test cases.”

On the 5th November, 2009, the Commonwealth Government response to the Senate Standing Committee Report was:

“….the Government accepts this recommendation in principle.”

In the recently released report in February, 2010 by the Hon. Dr. Craig Emerson MP Minister for Small Business titled: “Strengthening Statutory Unconscionable Conduct and the Franchising Code of Conduct.” Two cases which were at the time “current litigation” the first is ACCC v  Seal-A-Fridge Pty Ltd and the second is: ACCC v Allphones Retail Pty Ltd & Ors

However in the matter of Allphones the ACCC did not test the law because it settled the action by consent thereby not building on case law. After allegedly taking 12 million from its franchisees Allphones only paid back 3 million in damages.

 It was revealed in the Federal Court on Friday to Justice Logan that the ACCC and SAF had negotiations prior to their trial in October, 2009. Due to the financial limitations of SAF it had agreed to all the ACCC charges with the exception to costs that the ACCC had indicated was around $250,000. The Agreement reached was that SAF would agree albeit reluctantly to unconscionable conduct in respect to the rise of $25.00 per week of the National Phone Number and also to withholding consent of the Transfer of the Franchises. SAF had offered a payment of $7500.00 in respect to costs of the ACCC. This was also rejected by the ACCC so Mr Rooney decided to defend himself against the army of legal eagles that the ACCC had whilst hoping that justice would prevail.

In his judgment Justice Logan found that SAF had not acted unconscionable in respect to the withholding of consent of the Franchise transfers. Justice Logan was told by the Barrister representing SAF Mr Jeremy Sweeney that “The ACCC had been offered more than what they ultimately had won in court at a great expense to SAF.”

On the day of the trial the ACCC abandoned about a third of its case against SAF.

It seems clearly unbalanced to have a test case where The Senate Standing Committee on Economics and the Commonwealth Government both agree that the ACCC should pursue targetedinvestigationand funding of test cases and then the ACCC does not fund both sides of a test case against a little Company that cannot afford to have legal representation during a trial. Clearly in the world of litigation you stand a better chance of winning if your opposition is not on a level playing field.

It is interesting that the ACCC turned its back on Bakers Delight, Kleenmaid, Midas, Lenards Chicken and numerous other big business rorts against its Franchisees to concentrate on a $25.00 issue that was out of the Statute of Limitations.

Clearly there will be no public benefit for SAF and its Franchisees they will just become collateral damage to benefit the Australian community and the ACCC can slap itself on the back for using financial intimidation and heavy handedness to gain a verdict while big business and those with the money continue to fly under the ACCC’s radar.

as it may seem (or indeed as it has been touted).

It is primarily based on contractual principles and Oldsword was quite correct in picking up the issue that if the franchise agreement had allowed the increase, then no case would have been sustainable.

It is not a large leap of logic to categorise an increase in fees without any contractual right to do so as being 'unconscionable'.

What is more interesting is what the ACCC did not achieve and the comments from the Judge about the conduct of the matter by the ACCC.

This decision does not open the floodgates for franchisees who claim to be victims of unconscionable conduct (who still cannot afford to take their complaint to Court anyway) and to the extent that it clarifies the case law on statutory unconscionability, it is an incremental improvement at best.

Oldsword says - "Again, as some here decry "The Nanny State", as long as franchisors can contract in fraudulent behavior, there is no other way for franchisees to be protected from "unconscionable conduct" without government stepping in."

Alternatively, prospective franchisees could read franchise agreements before signing them and avoid franchises that have unfavorable business terms in favor of franchises that meet their requirements.