11 September 2016 - Franchising, Legal Updates Franchisor fined $3.55 million for misleading and deceiving franchisees

The franchisor, SensaSlim Australia Pty Ltd (in Liquidation) (SensaSlim) was in the business of selling an oral spray, that it claimed was a weight loss tool, via its network of franchisees. Upon entering into a SensaSlim franchise agreement, franchisees were required to pay SensaSlim an establishment fee of $59,950. SensaSlim earned approximately $6.4 million from the sale of these franchises.

SensaSlim advertised its franchise network predominantly via newspaper advertisements describing a business opportunity where franchisees could earn over $4,000 per week. In subsequent meetings, the potential franchisees were shown a SensaSlim DVD, which claimed that the SensaSlim product had been ‘trialled, tested and proven’ in the ‘world’s largest weight loss trial’. Prospective franchisees were given a franchise disclosure document which stated that Peter O’Brien and Michael Boyle were the only active directors and officers of SensaSlim.

The ACCC brought Federal Court proceedings against SensaSlim alleging misleading and deceptive conduct. In April 2014, the Federal Court found that SensaSlim, its directors and officeholders had engaged in misleading or deceptive conduct and made false representations about the SensaSlim business to franchisees and consumers.

Key Issues

The Federal Court found three main areas of contravention – SensaSlim:

1. failed to disclose the true identities and level of involvement of its directors and officeholders in its disclosure document.
2. falsely represented that the SensaSlim product was the subject of a large worldwide clinical trial.
3. falsely represented that a SensaSlim franchise had a certain earning potential.

Despite the obligation imposed on SensaSlim to disclose certain information about the people involved in the business in its disclosure document, SensaSlim failed to identify an officer of the company who the Federal Court considered was the ‘controlling mind’. SensaSlim deliberately concealed Mr Foster’s involvement due to his poor reputation. By doing so, SensaSlim engaged in misleading conduct to its franchisees and was in breach of the Franchising Code of Conduct.

SensaSlim’s claim that its product had been tested in the ‘world’s largest trial’ was false. This claim led franchisees to incorrectly believe that the product’s ability to cause weight loss was scientifically proven. As a result, the Federal Court determined that the statement deliberately and fraudulently induced prospective franchisees to enter into a franchise agreement and pay for the right to operate such franchise. In addition, the Federal Court found that SensaSlim’s claim that a franchisee could earn $4,000 per week was without reasonable grounds and therefore misleading and deceptive.

Findings

The total penalty imposed by the Federal Court on SensaSlim amounted to $3.55 million. In addition, for their involvement in misleading and deceiving prospective franchisees and consumers, the directors and officers were personally fined as follows:

• Mr Foster was fined $660,000 and disqualified permanently from managing corporations
• Mr O’Brien was fined $55,000 and disqualified for 10 years from managing corporations
• Mr Boyle was fined $75,000 and disqualified for 3 years from managing corporations

Lessons for Franchisors

• Franchisors should ensure all their documentation complies with the Franchising Code of Conduct.

CIE Legal can advise franchisors on all aspects of their business and the franchise process. We can also assist by reviewing your disclosure document, franchise agreement and related documents to ensure compliance with the Franchising Code of Conduct. Please contact us for assistance.