Federal Court Finds Car Wash Franchisor Guilty of Misleading Conduct

Thursday 14 February 2019 @ 9.00 a.m. | Corporate & Regulatory | Legal Research | Trade & Commerce

In a media release, the Australian Competition and Consumer Commission (“ACCC”) has announced that it has successfully prosecuted a former hand car wash and detailing franchisor Geowash Pty Ltd (“Geowash”) in the recent case of ACCC v Geowash Pty Ltd (Subject to a Deed of Company Arrangement) (No 3) [2019] FCA 72 (8 February 2019).

Geowash was prosecuted for acting unconscionably, making false or misleading representations, and failing to act in good faith in breach of the Franchising Code of Conduct (the “Code”) (contained in Schedule 1 to the Competition and Consumer (Industry Codes—Franchising) Regulation 2014) in relation to the sale and marketing of its franchises.

Background

From February 2013 to October 2016, Geowash offered carwash franchises to interested parties in Australia. The franchises were for hand car wash and detailing businesses to be conducted at particular sites identified in accordance with Geowash's policy.

In late 2015, the ACCC began investigating Geowash and subsequently launched court proceedings. In a decision handed down on 8 February 2019, the Federal Court ("the Court") found that Geowash made false or misleading representations on its website by:

suggesting that prospective franchisees could make monthly average revenue of $70,216 and gross average profit of $30,439, when it had no reasonable basis for this claim; and
representing that it had a commercial relationship or affiliation with major corporate entities including Nissan, Kia, Renault, Audi, Emirates, Shell, Hertz, Holden, Ikea and Thrifty, when it did not.

Findings of the Court

The Court found the company acted unconscionably by charging what franchisees were willing to pay for fit-out and establishment costs rather than the actual likely cost of establishing those sites.

Geowash was also found to have created a “false impression” that franchisee charges would go directly to fitting out car-wash sites, when a “large proportion” went to commission payments for Geowash employees. Colvin J said at [para 682]:

“… It was a considered practice that involved creating the false impression that the money paid to Geowash by franchisees would go towards the costs of the fit out for their outlet when, in fact, Ms Ali and Mr Cameron intended to pay large amounts to themselves from those monies …”

It was noted that Geowash’s director, Ms Sanam Ali, was found to be knowingly involved in all of Geowash’s conduct and Mr Charles Cameron, Geowash’s Franchising Manager, was found to be knowingly involved in Geowash’s "unconscionable conduct and failures to act in good faith".

The Court found that the likely consequence of Geowash’s conduct was that the substantial amounts of money paid by franchisees were not available to establish Geowash car wash sites and as a result these sites could not be delivered or would be of an inferior standard.

It was also noted this practice likely starved the sites of funds, resulting in an inferior service to customers. His Honour commented at [para 12] of the judgment:

“…Ms Ali and Mr Cameron are both alleged to have been knowingly concerned in or a party to the various contraventions alleged against Geowash …”

Comment and Reaction from the Regulator

Mick Keogh, ACCC Deputy Chair said of this latest action:

“The Court’s decision sends a strong warning to franchisors about the serious consequences of failing to comply with their obligations under the Franchising Code and Australian Consumer Law. This is the second recent court action we’ve taken against a franchisor for a breach of the Franchising Code’s good faith obligations. The ACCC is committed to pursuing franchisors who disregard their obligations under the Code and the consumer law.”

According to FranchiseBusiness, a hearing to determine penalties and other orders sought by the ACCC will be scheduled for later in 2019.

Previous Legal Action by the ACCC

On 18 January 2019, the Federal Court handed down a penalty of $2.6m against Ultra Tune Australia (see ACCC v Ultra Tune Australia Pty Ltd [2019] FCA 12 (18 January 2019)) for breaching both the Franchising Code of Conduct and the Australian Consumer Law (ACL) (the ACL is contained in Sch 2 to the Competition and Consumer Act 2010 (Cth)).

In handing down his judgment, Bromwich J stated at [para 339]:

“…The cover up that Ultra Tune attempted reflects a significantly heightened need for deterrence, in relation to conduct that was already a most serious and fundamental breach of the Franchising Code in taking the deposit in the first place, reflecting as it does Ultra Tune’s attitude in relation to its contravening conduct. A condign sanction is required for the contravening conduct that was sought to be hidden, to dissuade both Ultra Tune and any other franchisor similarly tempted not just to engage in such transgressions, but also to hide them by fraudulent means in the future …”

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