Australian Competition and Consumer Commission v Retail Food Group Limited

Introduction 1 In this proceeding the Australian Competition and Consumer Commission (Commission) alleges that six corporations in the same corporate group engaged in an unconscionable system of conduct or pattern of behaviour in relation to the sale or licence and franchise of 47 "loss making stores" (corporate stores). The Commission claims that over a four year period, from 2015 to 2019, five of the corporations (the second to sixth respondents) sold or licensed the corporate stores knowing that the stores had been operating at a loss without disclosing the fact or extent of the losses, made false and/or misleading representations to incoming franchisees that the stores were viable or profitable, and exploited "the information asymmetry" between the vendor/franchisor and purchaser/franchisee (corporate store claims). Discrete claims are also made in relation to five individuals who purchased six of the corporate stores (individual store claims). The Commission also alleges that the respondents made improper payments from marketing fund accounts and failed to properly disclose marketing expenditures to franchisees (marketing fund claims). 2 The Commission claims that by engaging in this conduct and by making the relevant representations the respondents contravened multiple provisions of the Australian Consumer Law (ACL) and in breach of cl 6 of the Franchising Code of Conduct (Franchising Code), being Schedule 1 to the Competition and Consumer Act 2010 (Industry Code - Franchising) Regulation 2014 (Cth), which parties to a franchise agreement to act in good faith and therefore in contravention of s 51ACB of the Competition and Consumer Act 2010 (Cth). It seeks a multitude of remedies including declaratory and injunctive relief and orders for pecuniary penalties, adverse publicity, the establishment of a compliance program, and redress or compensation for the non-party consumers. 3 After a two and a half year investigation, proceedings were commenced in December 2020 with the filing of an originating application and concise statement. Orders were later made for the filing of pleadings and evidence, among other things. By mid-November 2021 the Commission had filed its lay evidence in chief. The respondents have filed only some of theirs. 4 The respondents were, and remain, concerned that the Commission's case, particularly the claim relating to the sale or licence of the 47 corporate stores, is likely to generate "an enormous volume of lay and documentary evidence". For this reason, they proposed that a representative sample of the 47 corporate stores be selected for a preliminary trial on liability, which would inform the future conduct of the balance of the proceedings. The Commission opposed their proposal. After a case management conference in February 2022, I made a number of orders, including that: 1. The question of the liability of the respondents be heard and determined separately from any question of relief. 2. By 4 March 2022, the respondents serve a draft statement of agreed facts and issues, by reference to facts alleged in the pleadings. 3. By 25 March 2022, the applicant serve its response to the respondents' draft statement of agreed facts and issues. 4. By 8 April 2022, the parties file a joint statement setting out the facts and issues on which the parties agree, and the facts and issues that continue to be in dispute. 5. The matter be referred to a Registrar to confer with the parties as soon as practicable after 8 April 2022 with a view to assisting them to preside over a conference with the parties on a date to be fixed to assist the parties in discussions to reach agreement on the future conduct of the proceedings which best promotes the overarching purpose of the civil practice and procedure provisions of the Federal Court of Australia Act 1976 (Cth) and the Federal Court Rules 2011 (Cth), including making recommendations to the parties during the conference about the future conduct of the proceeding (Conference). 6. The Registrar may conduct the Conference in any way she or he sees fit, including by conferring over more than one day. 7. If agreement cannot be reached at the Conference or shortly thereafter, then: a. the Registrar provide a report to the Court setting out her or his recommendations; b. within two weeks of the Conference concluding, the respondents file and serve any application as to the future conduct of the proceeding, including any further affidavit material and submissions; c. two weeks after the respondents file any such application, the applicant file and serve any affidavits and submissions in response; and d. any such application be set down for hearing on the first available date thereafter, on an estimate of half a day. (Emphasis in original.) 5 The parties were unable to reach agreement at the conference with the Registrar and on 27 April 2022 the respondents filed an interlocutory application in accordance with these orders. In that application the respondents applied for the following orders: 1. Pursuant to r 30.01 of the Federal Court Rules 2011 (Cth), the matter be listed for a separate trial on liability, in which the Court determines questions of liability in relation to: a. the six stores the subject of Parts F to I and K of the Amended Statement of Claim filed on 30 November 2021 (ASOC); b. the marketing fund allegations in Part L of the ASOC; c. a sample of 10 of the 47 stores in issue in Parts C and D of the ASOC, which sample would be treated as representative of the 47 stores which are the subject of Parts C and D of the ASOC. 2. Costs be reserved. 6 Since an order has already been made for a separate trial on liability, what the respondents proposed, in effect, was a variation of that order. 7 The interlocutory application was supported by two affidavits affirmed by Mr Madirossian. 8 The application was opposed. The Commission relied on an affidavit sworn by Andrew Christopher, the solicitor on the record for the Commission. 9 The day before the hearing of the interlocutory application, the respondents submitted an amended application substituting for the first order an order in the following terms: Pursuant to s 37P of the Federal Court of Australia Act 1976 (Cth), the Court determine questions of liability in relation to a sample of 10 of the 47 stores in issue in Parts C and D of the ASOC, or such other sample as the Court determines, which sample would be treated as representative of the 47 stores which are the subject of Parts C and D of the ASOC. 10 On the face of things this proposal left open the question of what was to happen with the other parts of the Commission's case. At the hearing, however, senior counsel for the respondents, Mr De Young QC made it clear that this was not the respondents' intention. Rather, the order it now sought was that the corporate stores claim (pleaded in Parts C and D of the amended statement of claim (ASOC) be determined on the basis of a sample of the 47 stores which would be treated - for all purposes - as representative of the whole. 11 Despite the general way in which the sampling order is expressed, in both in the interlocutory application and the amended interlocutory application, the respondents' proposal envisaged that the sample would comprise the six individual stores and four corporate stores of the respondents' choosing. At the same time the respondents indicated that they would have no objection to the Commission selecting an additional four corporate stores. 12 It appears that the Commission bristled at the notion that the respondents would have any say in the selection of the stores. 13 During the course of the hearing a number of options were explored and the respondents made an open offer that the sample consist of the six individual stores and ten additional stores selected at random by a Registrar. That offer was not accepted. Indeed, none of the options was acceptable to the Commission. The Commission remained intransigent. 14 There was no dispute that the Court had the power to make an order of the kind proposed by the respondents. The dispute was concerned with whether the power should be exercised. 15 Section 37P(2) of the Federal Court Act 1976 (Cth) (FCA Act) relevantly enables the Court or a judge to give directions about the practice and procedure to be followed in relation to a civil proceeding or any part of a civil proceeding. Orders about the procedure to be followed at a trial and in the determination of disputes between the parties are plainly matters of that kind: Fuge v Commonwealth Bank of Australia [2020] FCAFC 217 at [56] (Gleeson, Anastassiou and Jackson JJ). Section 37P(3) contains a non-exhaustive list of directions that may be made. Mr de Young referred to s 37P(3)(c) in particular, which allows a direction to be made limiting the number of witnesses who may be called to give evidence or the number of documents that may be tendered. But whether or not the order the respondents sought falls within s 37P(3) is beside the point. As is obvious from the terms of the subsection itself and from the context in which it appears, the powers of the Court are not limited to orders of that nature. 16 The starting point is surely s 5(2) and s 23. Section 5(2) relevantly provides that the Court is a superior court of record. Section 23 provides that "[t]he Court has power, in relation to matters in which it has jurisdiction, to make orders of such kinds, including interlocutory orders … as the Court thinks appropriate". As Kirby J explained in Cardile v LED Builders Pty Ltd (1999) 198 CLR 380 at [108], these sections confer on the Court both express and implied powers. Moreover: [W]hen regard is had to s 23 of the Act, its great breadth is immediately obvious. The power is granted "in relation to" matters. Those are words of the widest connection. The power is not confined to the making of orders "in" matters. It is sufficient that there be a relevant connection between the matter and the order in question. When the scope of the orders and their "kinds" are considered, it is left to the Federal Court to make orders of such "kinds" as it thinks "appropriate". The word "appropriate" has outer boundaries. It suggests a limitation derived from legal authority, principle and policy. However, the scope of those boundaries is not narrow. Its breadth is addressed not simply to the "orders" appropriate to the particular case but to the "kinds" of orders, ie the variety and classes of orders which the Court may devise. 17 It is unsurprising, then, that the powers expressly conferred on the Court by the Federal Court Rules 2011 (Cth) (Rules) are broad and generous. An order such as the one proposed by the respondents would be authorised by r 1.31, for example, which provides that "[t]he Court may in making any order in the proceeding have regard to the nature and complexity of the proceeding" and "may deal with the proceeding in a manner that is proportionate to the nature and complexity of that proceeding". If the Court were to form the view that such an order was "appropriate in the interests of justice", then r 1.32 gives the Court the power to make it. 18 Section 37P is part of a suite of provisions relating to case management in Pt VB of the FCA Act. The dominant provision is s 37M which describes "the overarching purpose" of all provisions of the Act and the Rules and any other provision made by, or under, any Act of Parliament relating to the practice and procedure of the Court ("the civil practice and procedure provisions"). The overarching purpose of those provisions is "to facilitate the just resolution of disputes: (a) according to law; and (b) as quickly, inexpensively and efficiently as possible". 19 Section 37M(2) provides: (2) Without limiting the generality of subsection (1), the overarching purpose includes the following objectives: (a) the just determination of all proceedings before the Court; (b) the efficient use of the judicial and administrative resources available for the purposes of the Court; (c) the efficient disposal of the Court's overall caseload; (d) the disposal of all proceedings in a timely manner; (e) the resolution of disputes at a cost that is proportionate to the importance and complexity of the matters in dispute. 20 The civil practice and procedure provisions must be interpreted and applied and any power conferred by them, must be exercised "in the way that best promotes the overarching purpose": s 37M(3). 21 Similarly, the parties to any civil proceeding in the Court have a duty to conduct the proceeding in a way that is consistent with the overarching purpose: s 37N(1). Lawyers for the parties are obliged to assist their clients to comply with it: s 37N(2). Non-compliance can have serious consequences: s 37N(4)-(5); see, too, s37P(5)-(6). The respondents' application is expressly motivated by this duty.

The pleaded case 22 The pleaded case conforms to the concise statement. The ASOC is extremely lengthy. A summary was annexed to the respondents' submissions. The Commission did not submit that the summary was wrong or misleading. As outlined in that summary, the Commission makes the following allegations in Parts A-D: A(i) ASOC, Parts A (Parties) and B (Stores) [1] The second to fifth respondents (Brand Entities) operated various franchise systems (Brand System), including Brumby's Bakery and Donut King. [2] Some Brand System stores were owned by the respondents (Corporate Stores), and others were owned and operated by franchisees (Franchised Stores). [3] Third party managers managed the Corporate Stores under management agreements with the Brand Entities (Third Party Management Agreements), and obtained certain financial relief which was not available to franchisees of Franchised Stores. A(ii) ASOC, Part C (Sale of Corporate Stores) [4] During the Relevant Period, 64 Corporate Stores were sold or licenced to franchisees. Of those, 47 had operated at a loss prior to the sale or licence (Loss-Making Corporate Stores). [5] At or shortly prior to the sale or licence, the sixth respondent (RFGM) (the principal operating entity) and/or the Brand Entities knew in respect of each Loss-Making Corporate Store: a. the profit and loss information; b. that they had operated a loss prior to sale and the extent of the loss; c. the terms of any applicable Third Party Management Agreement; d. other information sufficient to enable them to understand the true financial performance of the store (the Financial Performance Information). [6] Alternatively, RFGM and/or the Brand Entities ought to have known the profit and loss information for each Loss-Making Corporate Store. [7] Critically, for the purposes of Part D of the ASOC, it is then alleged that: a. the documents provided to prospective franchisees who ultimately purchased or licenced Loss-Making Corporate Stores (Prospective Franchisees) included: i. information in relation to the Relevant Corporate Store; ii. a statement to the effect that "[t]he Franchisor cannot estimate earnings for a particular franchisee" (the Express Statement); b. the respondents did not disclose to Prospective Franchisees the Financial Performance Information about the Loss-Making Corporate Stores; c. Prospective Franchisees were reasonably entitled to expect that they would have been provided such information if the respondents had that information. [8] Those allegations ground claims for misleading conduct, breach of good faith, and a system or pattern of unconscionability in respect of all 47 Loss-Making Corporate Stores. A(iii) ASOC, Part D (Alleged Corporate Store Contraventions) ASOC, Part D.1: Alleged Misleading conduct [9] The respondents engaged (directly, or as persons involved) in misleading conduct by reason of the following two representations said to be false: a. First, that the relevant Loss-Making Corporate Store was not, or had not been, operating at a loss in the YTD period and/or full financial year prior to the time of sale or licence (Not Loss-Making Representations). The particulars say the representation was "made in the course of communications or negotiations" and implied from the matters set out in [paragraph 7] above; b. Second, that they did not have information in their possession which would, if disclosed, enable the Prospective Franchisee to understand the true financial performance of the relevant Loss-Making Corporate Store (Limited Financials Representation). The particulars say the representation was express (relying on the Express Statement) and otherwise implied from the matters set out in [paragraph 7] above. ASOC, Part D.2: Alleged Breach of Good Faith and Contravention of Section 51AB [10] There was an obligation on the Brand Entities to act in good faith under cl 6 of the Franchising Code of Conduct (Code). The obligation was contravened because - in summary - the Brand Entities sold or licenced the 64 Corporate Stores knowing the true financial performance of the Loss-Making Corporate Stores, and not disclosing that matter to the Prospective Franchisees (i.e. the matters alleged in paragraphs [4-7.b] above). [11] RFGM was involved in the contravention. ASOC, Part D.3: Alleged Systemic Unconscionable Conduct [12] In the course of negotiating, and entering into sale or licence agreements, with Prospective Franchisees in respect of the Loss-Making Corporate Stores, the respondents: a. provided information about the stores and made the Express Statement; b. failed to disclose to Prospective Franchisees the Financial Performance Information of the relevant Loss-Making Corporate Store, (the Corporate Store Conduct) and this constituted a system of conduct or a pattern of behaviour within the meaning of s 21(4)(b) of the ACL (the System). [13] The Corporate Store Conduct gave rise to an Information Asymmetry, because: a. the respondents knew or ought to have known the Financial Performance Information for the Loss-Making Corporate Stores; b. Prospective Franchisees were reasonably entitled to expect that they would have been provided such information if the respondents had that information; c. the respondents knew or ought to have known the matters that they had not disclosed were or would be material information to Prospective Franchisees; d. Prospective Franchisees did not know the true financial position of the Loss-Making Corporate Stores at any time prior to purchasing or licencing the stores; e. Prospective Franchisees had no way of determining the true financial position of the relevant Loss-Making Corporate Stores absent disclosure by the respondents. [14] The Information Asymmetry placed Prospective Franchisees at a disadvantage, and/or a weaker bargaining position in negotiating the sale or licence, and thus a position of vulnerability vis-à-vis the respondents in that the Prospective Franchisees: a. had no way of determining the true financial position of the Loss-Making Corporate Stores and were dependant on the respondents for such information; b. had no way of knowing the respondents possessed such information; c. were thereby unable to assess the risk of purchasing or licencing a Loss-Making Corporate Store and entering into a franchise agreement in a reasonably informed way; d. were making a substantial financial and personal commitment. [15] Those matters were exploited by the respondents. [16] The Corporate Store Conduct was unconscionable because: a. the respondents held out that purchasing or licencing the Loss-Making Corporate Stores was an advantageous opportunity, by reason of the matters set out in paragraph 7.a above (i.e. the information provided to Prospective Franchisees); b. the purpose of the conduct was for the respondents to make a profit and/or reduce further losses by transferring the risk of such losses to Prospective Franchisees; c. the Brand Entities would derive ongoing fee revenue based on gross sales, not net profits (i.e. even on loss-making stores); d. the respondents exploited the Information Asymmetry; e. the making of the Not Loss-Making Representation and the Limited Financials Representation; f. the non-disclosure to Prospective Franchisees of the Financial Performance Information about the Loss-Making Corporate Stores; g. the breach of good faith; h. each Prospective Franchisee was investing significant capital, incurring significant debt and/or making a decision as to their future livelihood in purchasing or licencing the Loss-Making Corporate Stores, which was known or ought to have been known to the respondents; i. the Prospective Franchisees were unable to determine whether to enter into, and, if so to negotiate the terms of, a franchise agreement or contract for sale or licence in any reasonably informed way. 23 The Commission alleges in Part E that one George Metzakis was engaged by the respondents to act on their behalf in relation to the sale or licence of the Corporate Stores and therefore his conduct is attributable to the respondents. In Part M the Commission alleges that the knowledge and conduct of the sixth respondent (RFGA Management) is attributable to the first respondent (RFG Limited). 24 The remaining aspects of the Commission's pleading concern its allegations in relation to the sale of the individual stores (Parts F to I and K) and the use of marketing levies for purposes not permitted by the Franchising Code (Part L). 25 Section 21 of the ACL relevantly provides: Unconscionable conduct in connection with goods or services (1) A person must not, in trade or commerce, in connection with: (a) the supply or possible supply of goods or services to a person; ... engage in conduct that is, in all the circumstances, unconscionable. (2) …. (3) For the purpose of determining whether a person has contravened subsection (1): (a) the court must not have regard to any circumstances that were not reasonably foreseeable at the time of the alleged contravention; and (b) the court may have regard to conduct engaged in, or circumstances existing, before the commencement of this section. (4) It is the intention of the Parliament that: (a) this section is not limited by the unwritten law relating to unconscionable conduct; and (b) this section is capable of applying to a system of conduct or pattern of behaviour, whether or not a particular individual is identified as having been disadvantaged by the conduct or behaviour; and (c) in considering whether conduct to which a contract relates is unconscionable, a court's consideration of the contract may include consideration of: (i) the terms of the contract; and (ii) the manner in which and the extent to which the contract is carried out; and is not limited to consideration of the circumstances relating to formation of the contract. (Emphasis added.) 26 The purpose of s 21(4)(b) is to ensure that the focus is on the conduct in question rather than the characteristics of a particular person or the effect of the impugned conduct on that person: see Explanatory Memorandum, Competition and Consumer Legislation Amendment Bill 2011 (Cth), at [2.24]; Australian Securities and Investments Commission v Kobelt (2019) 267 CLR 1 at [232] (Nettle and Gordon JJ). 27 Section 22(1) provides that: Without limiting the matters to which the court may have regard for the purpose of determining whether a person (the supplier) has contravened section 21 in connection with the supply or possible supply of goods or services to a person (the customer), the court may have regard to: (a) the relative strengths of the bargaining positions of the supplier and the customer; and (b) whether, as a result of conduct engaged in by the supplier, the customer was required to comply with conditions that were not reasonably necessary for the protection of the legitimate interests of the supplier; and (c) whether the customer was able to understand any documents relating to the supply or possible supply of the goods or services; and (d) whether any undue influence or pressure was exerted on, or any unfair tactics were used against, the customer or a person acting on behalf of the customer by the supplier or a person acting on behalf of the supplier in relation to the supply or possible supply of the goods or services; and (e) the amount for which, and the circumstances under which, the customer could have acquired identical or equivalent goods or services from a person other than the supplier; and (f) the extent to which the supplier's conduct towards the customer was consistent with the supplier's conduct in similar transactions between the supplier and other like customers; and (g) the requirements of any applicable industry code; and (h) the requirements of any other industry code, if the customer acted on the reasonable belief that the supplier would comply with that code; and (i) the extent to which the supplier unreasonably failed to disclose to the customer: (i) any intended conduct of the supplier that might affect the interests of the customer; and (ii) any risks to the customer arising from the supplier's intended conduct (being risks that the supplier should have foreseen would not be apparent to the customer); and (j) if there is a contract between the supplier and the customer for the supply of the goods or services: (i) the extent to which the supplier was willing to negotiate the terms and conditions of the contract with the customer; and (ii) the terms and conditions of the contract; and (iii) the conduct of the supplier and the customer in complying with the terms and conditions of the contract; and (iv) any conduct that the supplier or the customer engaged in, in connection with their commercial relationship, after they entered into the contract; and (k) without limiting paragraph (j), whether the supplier has a contractual right to vary unilaterally a term or condition of a contract between the supplier and the customer for the supply of the goods or services; and (l) the extent to which the supplier and the customer acted in good faith. 28 Section 18(1) of the ACL provides that a person must not in trade or commerce engage in misleading or deceptive conduct or conduct which is likely to mislead or deceive. 29 Section 29(1)(g) of the ACL relevantly prohibits a person in connection with the supply or possible supply of services from making a false or misleading representation in trade or commerce that "services have … performance characteristics … or benefits". 30 Section 37(2) provides that: A person must not, in trade or commerce, make a representation that: (a) is false or misleading in a material particular; and (b) concerns the profitability, risk or any other material aspect of any business activity: (i) that the person invites (whether by advertisement or otherwise) other persons to engage or participate in, or to offer or apply to engage or participate in; and (ii) that requires the performance of work by other persons, or the investment of money by other persons and the performance by them of work associated with the investment. Note: A pecuniary penalty may be imposed for a contravention of this subsection. 31 The Commission alleges that, whether or not each of the corporate stores was or was not operating at a loss at, or in the period immediately before, the time of sale or licence was "a performance characteristic or benefit of the franchise services provided to the franchisees within the meaning of s 29(2)(g) and a material particular within the meaning of s 37(2)(a)". 32 Clause 6 of the Franchising Code provides: Obligation to act in good faith Obligation to act in good faith (1) Each party to a franchise agreement must act towards another party with good faith, within the meaning of the unwritten law from time to time, in respect of any matter arising under or in relation to: (a) the agreement; and (b) this code. This is the obligation to act in good faith. Civil penalty: 600 penalty units. (Emphasis in original.)

The case with respect to the corporate stores 33 The Commission's case with respect to the 47 corporate stores, as outlined in its submissions on the interlocutory application, is that: [T]he respondents engaged in the same or similar kinds of conduct in respect of each [of those stores], which will permit the Court to conclude that there was an unconscionable system or pattern of conduct, that misleading or deceptive conduct occurred or misrepresentations were made in respect of each, and that the Code was breached in respect of each. 34 The case rests on "common features among the 47 corporate stores and the conduct towards them" which, the Commission said, "can be seen in the largely documentary evidence [it] will lead in respect of each of them". Mr Christopher deposed that the pre-sale/licence documents upon which the Commission will rely are "largely uniform across the stores and Brand Systems". 35 Those features were described in paras 8-12 of the Concise Statement: 8. When the Brand Entities [the 2nd, 3rd, 4th and 5th respondents] sold or licensed a Corporate Store, most incoming franchisees were provided with: a. sales information for the individual store, generally comprising information as to weekly sales, customer count, rent and utilities for the store for a certain period; and b. franchisee disclosure documents for the relevant Brand System which provided average outgoings expressed as a percentage of sales, based on averages reported by various stores; c. some limited information in response to specific requests by the incoming franchisee, but were not provided with profit and loss information for the relevant Corporate Store, nor the terms of any applicable Management Agreement, nor other information which was sufficient to enable them to understand the true financial performance of the Corporate Store they were purchasing or licensing (Relevant Financial Information). 9. In relation to each of the [47] Corporate Stores, RFG, or alternatively each relevant Brand Entity with the knowing involvement of RFGL and RFGM, expressly stated in documents issued to all, or substantially all, incoming franchisees that they "cannot estimate earnings for a particular franchise". Contrary to this statement, RFG knew the earnings of each Corporate Store. 10. RFGL, RFGM and each relevant Brand Entity at all material times had direct knowledge of the Relevant Financial Information or the ability to ascertain the true financial performance of each Corporate Store, including the Managed Stores. Despite this, RFGL, RFGM and the relevant Brand Entity or in the alternative each relevant Brand Entity with the knowing involvement of RFGL and/or RFGM, failed to disclose the Relevant Financial Information to the incoming franchisees prior to entering into a contract for sale or licence and a franchise agreement in respect of the Corporate Stores and thereby: a) impliedly represented that the franchises were not operating at a loss and/or were at the time of sale, profitable or viable going concerns; b) impliedly represented that the information it provided to incoming franchisees was a sufficient basis on which prospective franchisees could assess the present performance of the Corporate Store, including by reference to its historical earnings; c) impliedly represented that the Corporate Stores under Management Agreements were not in receipt of Financial Relief. 11. Incoming franchisees had no way of knowing the true financial performance of the Corporate Stores other than through disclosure by RFG. The incoming franchisees had a legitimate expectation that if RFG had the Relevant Financial Information, it would have been disclosed. The failure to disclose that information placed the incoming franchisee in a position of significant disadvantage in determining whether and on what terms to make a substantial investment of money and/or time to acquire and operate one of these loss-making Corporate Stores by entering into an agreement to purchase or licence the store, and whether to enter into the franchise agreement. 12. By withholding the Relevant Financial Information and making the express and implied representations, RFG or, in the alternative, the Brand Entities with the participation and/or knowing involvement of RFGL and/or RFGM: a) made false or misleading representations in a material particular concerning the profitability, risk and other aspects of investing in the franchise of the Corporate Store and performing work associated with that investment; b) made false or misleading representations that the franchise services to be acquired by the incoming franchisee had particular performance characteristics or benefits; c) established an asymmetry of information between them and incoming franchisees, thereby placing the purchaser/franchisee in a position of significant disadvantage, and exploited this asymmetry. Further, where incoming franchisees sought further information, in order to preserve its advantage, RFG took steps to deter incoming franchisees from seeking relevant information/conducted negotiations with incoming franchisees.

The Commission's position 36 Despite the way in which it pleaded its case (and therefore intended to prove it), the Commission maintained that the Court could not determine the entirety of the claims by only considering a sub-set of the stores. This is its "central contention". 37 According to the Commission, the problem with the respondents' proposal can be illustrated in at least three different ways: first, if the Court were to arrive at a mixed result, there is no clear way to extrapolate from the result to findings and conclusions in respect of the stores outside the sample; second, the Court could not determine whether the Commission has established its case by considering only a sample because, even if it failed in those cases, that does not mean it could not succeed in relation to those outside the sample; and third, the respondents' application is internally incoherent. 38 The Commission submitted that, contrary to the respondents' stated purpose, dealing with the matter in the way the respondents proposed would produce an unacceptable risk of delay and costs. That is because, so it reasoned, if the sampling procedure did not dispose of the entirety of the Commission's case, evidence would be called in two tranches which will "necessarily degrade the Court's assessment of the evidence"; witnesses might have to be cross-examined twice; and there is a real possibility that the unsuccessful party would appeal, further fragmenting matters and extending the delay in achieving an outcome. 39 The Commission recognised that the respondents were proposing that the outcome with respect to the sample be treated as the outcome for all 47 corporate stores but submitted that there were many problems with this proposal. First, the Commission contended that the Court could not be satisfied that a subset of 10 stores would be "sufficiently representative". Second, the Commission claimed that the approach was unprincipled. Third, the Commission argued that the proposal was "fundamentally unfair". In correspondence with the respondents' lawyers after the conference with the Registrar, the Commission contended that limiting its evidence to a sample of stores would cause it prejudice. Fourth, it claimed that the authorities upon which the respondents relied do not assist them. 40 In any case, the Commission submitted that the burden arising from a hearing in which evidence relating to all 47 corporate stores was adduced would not be as great as Mr Mardirossian made out.

Consideration 41 I am unpersuaded by any of these submissions. 42 First, there is no realistic possibility of a mixed result. Either there was a system or pattern or there was not, albeit that, in the case of a pattern of behaviour, the pattern may be discerned in relation to only part of the behaviour (Australian Securities and Investments Commission v AGM Markets Pty Ltd (in liq) (No 3) (2020) 275 FCR 57 at [388]. Absent agreement about the constitution of the sample, random selection by a disinterested person like a Registrar of the Court would remove any possibility of unfairness. 43 Second, this is not an application for a split trial. There will be no fragmentation because there will only be one hearing on liability. 44 Third, there is no internal incoherence in the respondents' interlocutory application. 45 The foundation for the Commission's submission that there was internal incoherence in the application was that it was brought "on the avowed premise" that it is necessary for the respondents to examine all the unique circumstances of each of the 47 corporate stores and that "the more general features of each store … do not establish contraventions when viewed in the full individual context". 46 The Commission's submission reflects a misunderstanding of the respondents' position. As Mr De Young explained in oral argument, the respondents' approach will be to look at each corporate store not for the purpose of determining whether in each case the alleged conduct is unconscionable but in order to see whether it has the features the Commission contends are common to all 47 stores. Its application for a trial by a representative sample is perfectly aligned with this approach. If, as the Commission alleges, the respondents engaged in a system of conduct or a pattern of behaviour based on common features, that will be revealed by scrutinising their conduct or behaviour in a sample of cases as much as it will be revealed by scrutinising their conduct or behaviour in all of them. 47 Fourth, I am at a loss to understand how the Commission is disadvantaged by the use of a sample. If anything, it seems to me, the opposite is true. 48 The Commission drew attention to the following remarks in AGM at [387] where Beach J mused about how a pattern of behaviour, as distinct from a system of conduct, might be proved: How is a pattern of behaviour to be proved? Clearly, two or more instances of identical or similar behaviour may be sufficient to infer and discern a pattern. Moreover, the more the number of instances the stronger the induction, ceteris paribus [all other things being equal]. How many instances will support the induction of a pattern depends upon the context. Numerous like instances with no counter-examples would clearly be sufficient to display a pattern. By numerous, I am referring not just to the absolute number of instances but also that number relative to the total pool of external interactions with investors/members of the public. What if there are counter-examples? A pattern may still exist, notwithstanding the exceptions. But the greater the number of exceptions, the even greater the number of conforming instances that may be required if a conclusion of a pattern is to be supportable. What if there are no counter-examples, but only a small number of like instances referable to the total pool? … A judge may be prepared to so extrapolate based upon a small number of instances where the following two related conditions are satisfied. First, there is evidence that the instances are not anomalies but are natural and likely consequences of the respondent's conduct or system(s), that is, representative; of course the purity of random sampling may fortify this. Second, there is no evidence that the respondent's conduct or system(s) was designed not to produce but to avoid such instances. But it must be said that, ceteris paribus, the greater the individual differences of the instances, being differences that have real significance to the characterisation of unconscionability, the greater the number of instances that may be required to justify the extrapolation (Unique at [135], [136] and [153]). 49 It is self-evident that the greater the number of cases, the greater the room for variance. 50 In AGM Beach J was satisfied that "a relatively small pool [of 21 investors] compared to the total pool" was representative. I do not consider that his Honour's musings illustrate, as the Commission contended, that there are in-principle limitations with the respondents' or a similar proposal and certainly not if agreement can be reached that the sample is representative or if the sample is selected at random. 51 Fifth, it is difficult to see how a subset of 10 stores would not be "sufficiently representative" or what disadvantage the Commission would suffer if it were limited in this way. If 10 stores (21%) are insufficiently representative, how many would be sufficiently representative? Why would 14 (30%) not be representative? These were questions the Commission was either unable or unwilling to answer. Its approach smacks of a lack of confidence in its own case. 52 Regardless, if the parties were to agree that a certain number are be treated as representative, then the Court would not need to be independently satisfied. If the parties are unable to agree on a representative sample, then a random selection of a sample of 14, if not 10, would surely suffice. 53 In oral argument the Commission raised concerns about what the position would be if it succeeded in 7 out of the 10 cases. But if there is agreement that the sample is to be treated as representative of the total, then, as the respondents not merely accepted but contended, a finding in the Commission's favour in 7 out of the 10 cases (or 10 out of 14) would translate to success in 70% of the 47 cases. 54 The Commission relied on the following remarks of the Full Court (Allsop CJ, Middleton and Mortimer JJ) in Unique International College Pty Ltd v Australia Competition and Consumer Commission (2018) 266 FCR 631 at [162]: On the case as presented by the ACCC, it was erroneous for the primary judge to rely on the evidence from the individual consumer case as a significant part of the evidentiary basis for the system case … Where the nature of the system and the nature of unconscionability depends on the attributes of individual consumers, or the specifics of transactions with individual consumers, there will need to be evidence about either a material proportion of individual consumers; or evidence about how and why the individual consumers were chosen; or evidence about the representativeness of the individual consumers, or a combination of all three. These categories may well not exhaust the possible categories of evidence. On any view, what was presented by the ACCC to the primary judge fell into none of these categories. 55 In Unique, as in the present case, the Commission relevantly pleaded that the respondents engaged in a system of conduct or a pattern of behaviour which was unconscionable and that it also behaved in an unconscionable way with respect to six individual consumers. Otherwise, however, the cases are very different. In particular, the sample size in that case was proportionately miniscule whereas the sample size proposed in the present case is not. Moreover, there was no agreement in Unique that the sample would be representative and the six were not randomly selected. 56 Unique concerned conduct in connection with the supply of online vocational education courses to more than 3,600 students across more than 428 locations. The evidence was focused on what occurred at the locations where the six students were enrolled and primarily on the evidence of what occurred at three of those locations (see [55]). The six students represented 0.16% of the total enrolment. There was no evidence that the six were representative of the 3,600 odd enrolled students. Nor was there evidence about how the six had been selected. What is more, the Commission expressly declined to adduce such evidence. The primary judge expressly found that he could not rationally conclude that the six were in any way representative. Paradoxically, however, his Honour extrapolated from his findings in relation to the six students, three of whom came from the one family group and two from another, to make findings that Unique's conduct or behaviour with respect to all students was unconscionable. See Unique at [161]. These were the circumstances in which the Full Court made the remarks in [162]-[164]. 57 In the present case the Commission submitted that the Court "lacks the material" identified by the Full Court in Unique at [162], by which I understood it to mean that the Court lacks evidence that the proposed sample stores are representative of the total number. Even if it can be said of the present case that the nature of the system and the nature of the unconscionability depends on the attributes of individual consumers or the specifics of transactions with individual consumers, which is far from clear, the respondents' proposal involves adducing evidence about a material proportion of individual consumers. It could not possibly be said that 21%, let alone 30%, is not a material proportion of the corporate stores. In these circumstances and having regard to the way in which the Commission puts its case, it is difficult to see why such a selection would not be representative of all the corporate stores. In any case, it the parties can agree on a representative sample, the Court does not need independent evidence. 58 The Full Court in Unique did not rule out the possibility of using a sample of cases to prove a system of conduct or pattern of behaviour, even when the sample is small in comparison with the total number. To the contrary, the Full Court said that "[a] properly prepared representative sample could have been used" and observed that a larger cohort than six individual consumers and four locations could have been selected (at [170]). 59 Moreover, the Full Court approved of the sampling process used in the AMI case: Australian Competition and Consumer Commission v ACN 117 372 915 Pty Ltd (in liq) (formerly Advanced Medical Institute Pty Limited) [2015] FCA 368; ATPR 42-498 (Unique at [127]-[132]). In that case the Commission relied on the conduct of the respondent in 168 out of a total of 111,954 telephone consultations, which represented 1% of the total (at [114], [116]). The primary judge (North J) found that the Commission had proved its case of systemic unconscionable conduct from those 168 cases based on the fact that certain general features were present in most of those cases. That was enough to satisfy the Court that the unconscionable conduct was "sufficiently widespread" to justify granting the relief sought (at [939]-[942]). In Unique at [132] the Full Court said that his Honour was correct to do so. Further, the Full Court remarked that there is "no reason [in principle] why evidence about what happened in the circumstances of a number of individual consumers cannot also be adduced as evidence to prove a system". 60 The Full Court in Unique also spoke approvingly (at [107]-[109]) of the approach taken in Australian Competition and Consumer Commission v Excite Mobile Pty Ltd [2013] FCA 1267; ATPR 42-437, which concerned the marketing, sale and supply of mobile telephone services through a telemarketing company (Excite Mobile) based in India and other call centres in Asia: 107 In terms of the nature of the evidence, on the uncontested case, Mansfield J described it in the following terms at [16]: The ACCC provided 10 examples of telemarketing calls and / or mobile contracts that were selected as follows. The first and last customers of Excite Mobile were chosen. The remaining eight customers were selected by choosing the last customer of every second month in which there was a recording available. 108 His Honour also noted at [131]: … There was no submission that the documentary or electronic evidence was inaccurate or selective. In particular, the sampling of various telemarketer calls as random, and therefore representative, in general terms, was also not challenged. 109 Another aspect of the unconscionable conduct in this case was Excite's debt recovery process. In terms of the evidence relied upon, Mansfield J stated (at [48] and [49]) the ACCC submitted evidence of 136 recordings with 98 different customers involving one of Excite's employees, and three recordings involving another employee, and the evidence about which consumers succumbed to the debt recovery pressure related to the agreements of approximately 90 customers. (Emphasis added.) 61 The Full Court went on to say at [110]: There is no magic in these numbers: however, on any view, they demonstrate two matters. First, the selection of evidence of individual consumers through a random or representative process, with the process disclosed on the evidence. Second, the use of evidence about a reasonable number of individual consumers so that, even if intuitively, a Court could exclude hypotheses of coincidence or lack of representativeness, and could, because of the number of individual consumers about which evidence was led, safely perceive a "pattern". What happened with 80 consumers, even on a hypothetical sample of thousands (the estimated total number of consumers in Excite is not set out in the evidence), may well be sufficient evidence for a Court to decide whether or not there is a pattern. 62 At [111] the Full Court contrasted the circumstances in the case before it, asking rhetorically how conduct in relation to six consumers could establish a system or pattern of behaviour in a known class of more than 3,600 consumers, particularly in the absence of evidence to show how the six could be said to be representative of the 3,600. The present case is not in this class. 63 In the present case, the parties could agree on a representative sample and, if the parties are unable to agree, then a random selection will solve the problem. 64 Of particular relevance to the present case are the observations of the Full Court in Unique at [135]: Most critically, the nature of the allegations of unconscionable conduct will govern how probative the evidence of individual consumers will be. The more generic the alleged conduct, and the less the unconscionability depends on the attributes of consumers, the more probative evidence about what happened to a number of consumers may be. 65 A, if not the, real problem in Unique, as the Full Court remarked at [136], was that "the vulnerabilities of the consumers were very much dependent on their individual circumstances", such as their levels of education, literacy and numeracy, whether they had intellectual impairments, the explanations they were each given, their access to the internet, and their capacity to operate a computer. This case is very different. 66 Here, the allegations are generic. The Commission's case with respect to the corporate stores is based on the information given to the prospective purchasers and franchisees and the information that was withheld or not disclosed. The features of the respondents' conduct alleged to give rise to "information asymmetry" are also generic. The Commission's case does not appear to depend on any specific attributes of individual purchasers or franchisees. Nor is it alleged to differ according to brand identity, location or personnel. Certainly the Commission did not suggest it did. In correspondence with the respondents the Commission itself said that the corporate store claims "are not focussed on specific dealings with individual purchasers of the 47 stores beyond the conduct affecting all [of] 47 stores" and that the corporate stores claims "do[ ] not require consideration of additional facts particular to individual stores". If, as Mr De Young put it in argument, the Commission's case runs into difficulties, the difficulties will not have been caused by the use of a sample, but by the way in which the Commission chose to frame its case. 67 Sixth, I accept that it is possible that the respondents have overestimated the extent of the burdens they face if they have to respond to the Commission's case on the corporate stores by examining and responding to evidence concerning all the stores. In my experience, however, lawyers and clients tend to underestimate both the amount of work involved in preparing a case and the time a case will take to run. Nothing about the history of this proceeding, the evidence adduced on the interlocutory application or the arguments advanced by the parties suggests to me that this case is likely to be any different. 68 In his first affidavit Mr Mardirossian deposed that, given the amount of evidence he felt would need to be adduced in his clients' defence, the Commission's trial estimate of six weeks was "vastly understated". He set out in some detail the steps that would have to be undertaken and the time it would take if the respondents were required to respond to the Commission's evidence in relation to 47 corporate stores. In his third affidavit Mr Mardirossian deposed that the respondents had "progressed" the preparation of their lay evidence on the individual corporate stores and, based on the time expended on the preparation thus far, he was of the view that the estimate he had given in his first affidavit was conservative. I am not surprised. Some detail was provided in the affidavit which it is unnecessary to recite here. 69 I was informed at the hearing that the respondents have filed their lay evidence with respect to the six individual stores (consisting of 10 affidavits and, with exhibits, amounting to almost 3,000 pages) but have not yet undertaken the work necessary to prepare its defence to the corporate stores claim. 70 Mr Mardirossian is an experienced lawyer. He has been a partner at Arnold Bloch Leibler for over 20 years and is the head of the firm's competition practice. During that time he has been responsible for several large commercial and competition disputes in this Court and the Supreme Court. True it is that Mr Christopher took issue with some of Mr Mardirossian's opinions and some of his points were no doubt well made. It may be possible, for example, for the parties to narrow the issues. One would certainly hope so. Before that could be done, however, unless a sampling order is made, the respondents and their lawyers would need to read and review all the documents relating to the sale or licence of all 47 corporate stores and interview all potential witnesses involved in the transactions. One would expect Mr Mardirossian to have a much better insight than Mr Christopher into the nature and extent of the work that will require. There is no good reason why I should not accept his evidence.

Conclusion 71 I am satisfied that it is in the interests of justice, efficiency and economy that the corporate stores claim be heard and determined by the use of a representative sample. Indeed, I consider it to be the best way of promoting the overarching purpose of the civil practice and procedure provisions. The determination of the corporate stores claim by reference to a sample would at least reduce inefficiencies and contain costs. I am not persuaded that it would disadvantage the Commission. 72 The remaining questions are how large the sample should be and how it should be selected. 73 With respect to the first question - the size of the sample - I propose that the sample consist of 14 rather than 10 corporate stores. This was the recommendation of the Senior National Judicial Registrar who conducted the conference with the parties. As she put it, representing as it does some 30% of the total cohort, it would strike a balance between the interest of the Commission in having a sufficient sample to enable it to prove the existence of a system or pattern and the costs and efficiency issues raised by the respondents. A sample of that size is sufficiently large to exclude "coincidence or lack of representativeness" (Unique at [110]). In circumstances in which the respondents have made it clear that they are prepared to accept that a sample derived by agreement or random selection would be representative, regardless of the outcome, much of the Commission's concern necessarily falls away. The orders I will make will reflect this. 74 With respect to the second question - the manner of selection - it will be recalled that the respondents proposed the inclusion of the six individual stores since the evidence about those stores will have to be elicited in any event. There is wisdom in that approach. But the Commission opposed it. Mr Christopher deposed that the Commission does not allege that the six individual stores are representative of the 47 corporate stores. That may be literally true but it is at odds with the Commission's concise statement. As Mr Mardirossian pointed out in his third affidavit, in the concise statement the Commission alleges that the conduct in which the respondents engaged in relation to the franchisees the subject of the individual corporate store claims "are each individual instances of unconscionable conduct and examples of [the respondents]' pattern of unconscionable conduct" (my emphasis). In these circumstances, I struggle to see why they should not be part of the sample. Including them would certainly save time and money both in the preparation of the case and at the hearing. 75 Be that as it may, I believe that the best way to proceed is for the Commission to nominate 14 stores for inclusion in the sample. Ideally, that would include the six individual stores but I will not insist upon that. In the event that the parties are unable to agree upon the stores for inclusion in the sample, the sample should be selected at random by a Registrar of the Court. I will make orders to facilitate this course. At the same time I will make other orders, including extending the time for the filing of the agreed statement of facts and issues and varying the time for the respondents to file their lay evidence. I certify that the preceding seventy-five (75) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Katzmann.

SCHEDULE OF PARTIES NSD 1333 of 2020 Respondents Fourth Respondent: DONUT KING SYSTEM PTY LTD (ACN 097 339 645) Fifth Respondent: JIREH INTERNATIONAL PTY LTD (ACN 071 676 66) Sixth Respondent: RFGA MANAGEMENT PTY LTD (ACN 071 765 609)