Business in jeopardy - over $25 a week

"There's no winners here. I wasn't required to pay any money back to franchisees. The brand is degraded. My franchisees will also lose, only the ACCC benefits."…"It is interesting that the ACCC has turned its back on complaints against much bigger franchisors to concentrate on a $25 a week issue. I don't see any public benefit here, and we've just become collateral damage."

http://www.smh.com.au/small
July 15, 2010

Business in jeopardy - over $25 a week
Chalpat Sonti

Sealafridge.jpg

Seal-A-Fridge franchisor Nigel Rooney says he could go bankrupt after the ACCC successfully pursued him over a $25 a week fee increase.

The future of Australia's largest fridge seal replacement franchise is in jeopardy after a court ruling that it acted unconscionably in charging its franchisees an extra $25 a week nine years ago.

The ruling, in the Federal Court at Brisbane, has left the franchise's owner reeling with an expected legal bill for hundreds of thousands of dollars in a case brought by the Australian Competition and Consumer Commission.

While Nigel Rooney admits he did wrong, he has questioned why he must pay for a court case that the watchdog dropped large parts of at the last minute after two years of litigation.

Mr Rooney claims the ruling is likely to send him bankrupt, for a case he offered to settle - including admitting guilt for claims the ACCC later failed to prove - before it went to trial.

Justice John Logan found that Seal-A-Fridge, a national franchise which replaces fridge and freezer seals, acted unconscionably when it twice hiked fees for its franchisees - in 2001 and 2004 - by $25 a week.

Seal-A-Fridge has 34 franchisees nationally, including two in WA. It is the largest such business in Australia.

The fee hikes were for access to Seal-A-Fridge's national telephone number, and in 2001, it disconnected franchisees who did not pay the increase from access to the phone number.

Three years later, it required franchisees to agree to vary their franchise agreements to provide for the fee increase. Justice Logan described the offending as a "unilateral profit gouge".

He found that Seal-A-Fridge's excuse in 2001 - that Telstra had increased its charges - was false, and was evidence of a lack of good faith. It had abused the position of strength it held over franchisees.

The company also failed to include necessary information in its disclosure documents.

Justice Logan ordered Seal-A-Fridge implement a proper complaint handling system for three years, while Mr Rooney, its Gold coast-based owner, is also required to undergo Trade Practices Act compliance training.

However, Justice Logan is yet to rule on costs.

"The parties need to be given an opportunity to make submissions as to costs having regard not only to the belated narrowing of the ACCC’s case but also to the fact that it did not succeed on all issues in that narrowed case," he said.

Justice Logan found that Seal-A-Fridge had not acted unconscionably when withholding consent for the transfer of a franchise.

ACCC chairman Graeme Samuel said the court 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".

"Only a small number of unconscionable conduct cases have been decided by the courts," he said.

"This case provides a further example of what amounts to unconscionable conduct in the particular circumstances found by the court."

But Mr Rooney said the court case could put his entire operation in jeopardy.

While he admitted wrongdoing - "I have to take my medicine and be a good corporate citizen" - he questioned why he would have to bear the ACCC's costs.

"I originally agreed to settle on all of the terms they wanted, but that we'd each pay our own costs," he said.

"They indicated their costs would be around $250,000 and there's no way I could go to court to fight risking having to pay that. Then they didn't actually win all of the case, so they would have got more than they did in the end.

"I told (the ACCC) that would bankrupt me. How that will help the franchisees I don't know."

Mr Rooney said the ACCC should have taken action against him as a test case where it funded the proceedings, as many, including the Senate standing committee on economics, have called on it to do.

"They went after me for a $25 a week rise in 2001, so it was outside the statute of limitations," he said.

"They argued it was in the public interest to bring these proceedings so the statue should not apply. Yet they gave up a lot of their case and I could be left with the bill.

"There's no winners here. I wasn't required to pay any money back to franchisees. The brand is degraded. My franchisees will also lose, only the ACCC benefits."

The ongoing cost to his business meant Mr Rooney eventually could no long afford legal representation and represented himself in the Federal Court trial.

"We've spent the last two years fighting this, during the global financial recession, when I could have been helping franchisees. But I had to put all my money into this. And only two franchisees were part of this action.

"Over time I fixed up all the others or they sold their franchises."

Fee increases since 2004 had been in line with the consumer price index, and though variations were made to franchise agreements in 2004, this including extending the term of renewal for one franchisee from 15 years to 45 years.

"It is interesting that the ACCC has turned its back on complaints against much bigger franchisors to concentrate on a $25 a week issue. I don't see any public benefit here, and we've just become collateral damage."

Mr Samuel said franchisors needed to be aware of their obligations under the franchising code of conduct.

"The code… has the force of law, and as such, must be complied with," he said.

Source: watoday.com.au

http://www.smh.com.au/small-business/franchising/business-in-jeopardy--over-25-a-week-20100714-10awg.html


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