Australian Competition and Consumer Commission v South East Melbourne Cleaning Pty Ltd

Coverall's contraventions 4 The Court made the following declarations of contravention in relation to Coverall's conduct: 1. The First Respondent (Coverall) in trade or commerce: (a) engaged in conduct that was misleading or likely to mislead and thereby contravened section 18 of the ACL; and (b) made representations that were false or misleading in a material particular and concerned the profitability, risk or other material aspect of a business activity that Coverall invited other persons to engage or participate in, or to apply to engage or participate in, and that required the performance of work by other persons, or the investment of money by other persons and the performance by them of work associated with that investment, and thereby contravened section 37(2) of the ACL, by: (c) representing to Mr Salah Eliaser (Mr Eliaser) that if he purchased a franchise for a cost of $28,150, Coverall would provide him with work that would allow him to generate a minimum of $4,000 in revenue each month, when in fact Coverall did not have reasonable grounds for making this representation; (d) further representing to Mr Eliaser that regardless of whether in fact Coverall provided him with sufficient work to earn him the minimum revenue each month, Coverall was obliged to and would pay him $4,000 each month, when in fact Coverall was not obliged to do so under its franchise agreement with him and Coverall did not have reasonable grounds for making this representation; and (e) representing to Mr Hirenkumar Patel (Mr Patel) that if he purchased a franchise for a cost of $24,000, Coverall would provide him with work that would allow him to generate a minimum of $3,000 in revenue each month after 150 days, $4,000 in revenue each month after 180 days, and $5,000 in revenue each month after 210 days, and thereafter $5,000 in revenue every month until 24 months had elapsed, when in fact Coverall did not have reasonable grounds for making this representation; and (f) further representing to Mr Patel that regardless of whether in fact Coverall provided him with sufficient work to earn him the minimum revenue each month, Coverall was obliged to and would pay him $3,000 each month after 150 days, $4,000 each month after 180 days, and $5,000 each month after 210 days, and thereafter $5,000 every month until 24 months had elapsed, when in fact Coverall was not obliged to do so under its franchise agreement with him and Coverall did not have reasonable grounds for making this representation. 2. Coverall contravened the Trade Practices (Industry Codes - Franchising) Regulations 1998 (Franchising Code), and thereby contravened section 51AD of the CCA, by: (a) providing Mr Eliaser and Mr Patel with earnings information that was a projection or forecast when: (i) the earnings information was not based on reasonable grounds; and (ii) it failed to disclose the matters required to be disclosed by the Franchising Code; and (b) entering into a franchise agreement with Mr Eliaser without first obtaining a signed statement, as required by the Franchising Code, that he had either been given advice about the agreement by an independent legal adviser, business adviser or accountant, or had been told that such advice should be sought but had decided not to seek it. 3. Coverall engaged in conduct in connection with the supply of rights associated with the operation of the Coverall Cleaning Concepts System franchise that was, in all the circumstances, unconscionable within the meaning of section 21 of the ACL, in relation to Mr Eliaser, by: (a) failing to pay monies owed to Mr Eliaser when: (i) Coverall was paid by the customers whom Mr Eliaser had serviced and retained the benefit of Mr Eliaser's labour, causing him to suffer loss in breach of his franchise agreement; (ii) Coverall knew that in order to service clients in Noble Park, Donvale and Camberwell, Mr Eliaser had to travel long distances from his home in Morwell and incurred costs in relation to this travel; (b) charging Mr Eliaser a "sales and marketing fee" of $3,383.15 when: (i) he had received no payment for work he had undertaken for the three months prior; and (ii) the franchise agreement only allowed Coverall to charge this fee if Coverall had provided him with a gross volume of billings which amounted to $4,000 per month which Coverall had not done; in circumstances in which Mr Eliaser had significantly weaker bargaining power than Coverall in that: (c) Coverall was an experienced franchisor; (d) Mr Eliaser was a first-time franchisee and was only twenty three years old with no business experience and limited ability to understand legal documents; (e) Coverall, and not Mr Eliaser, had the right under the franchise agreement to collect money from customers; (f) Coverall knew that Mr Eliaser had an incentive to continue to service Coverall's customers despite Coverall not paying him, or not paying him on time, because he had assumed a significant liability in the form of the franchise fee and related "loan" to Coverall; (g) Coverall knew that Mr Eliaser had not obtained independent legal, business or accounting advice; (h) Coverall had failed to comply with the requirements of the Franchising Code, as described in paragraph 4 above; and (i) Coverall had made the misrepresentations referred to in sub-paragraph 3(c) and 3(d) above which had the effect that Mr Eliaser was misled and misinformed about important matters concerning his rights under his franchise agreement. 4. Coverall engaged in conduct in connection with the supply of rights associated with the operation of Coverall Cleaning Concepts System franchise that was, in all the circumstances, unconscionable within the meaning of section 21 of the ACL, in relation to Mr Patel, by: (a) failing to pay monies owed to Mr Patel when Coverall was paid by customers Mr Patel had serviced and retained the benefit of his labour, causing him to suffer loss in breach of his franchise agreement; (b) telling Mr Patel that Coverall would demand payment of the 'loan' in respect of the balance of his franchise fee if he terminated his franchise with Coverall when Coverall was not entitled to that payment and when Coverall had failed to provide to him the benefit of the franchise agreement by failing to pay him and provide him with work as it was required to do; (c) offering to release Mr Patel from his franchise agreement on terms that he pay Coverall $6,500 and release Coverall from the obligation to pay the money owed to him when Coverall had failed to provide to him the benefit of the franchise agreement by failing to pay him and provide him with work as it was required to do; (d) engaging agents to demand payment of the 'loan' in respect of the outstanding balance of Mr Patel's franchise fee, when Coverall had failed to deliver Mr Patel the benefit of the franchise agreement; (e) insisting that if Mr Patel refused to accept work, the value of that work would be deducted from the value of the monthly amount of business that Coverall was obliged to provide to him, when Coverall had not paid him for work he had performed; and (f) seeking from Mr Patel, if he refused work, a release in favour of Coverall in respect of all obligations, liabilities and claims when that release was not required by the franchise agreement between Coverall and Mr Patel, in circumstances in which Mr Patel had significantly weaker bargaining power than Coverall in that: (g) Coverall was an experienced franchisor; (h) Mr Patel was a first-time franchisee; (i) Coverall, and not Mr Patel, had the right under the franchise agreement to collect money from customers; (j) Coverall knew that Mr Patel had an incentive to continue to service Coverall's customers despite Coverall not paying him, or not paying him on time, because: (i) he had assumed a significant liability in the form of the franchise fee and related 'loan' to Coverall which he had to service; and (ii) if he refused to accept work from Coverall, his franchise agreement allowed Coverall to deduct the value of this work from the value of the monthly amount of work that Coverall was obliged to provide to him; (k) Coverall knew that Mr Patel had not obtained independent legal, accounting or financial advice; (l) Coverall had not provided Mr Patel with any earnings information about the franchise which was based on reasonable grounds such that he was not properly informed when he decided to enter his franchise agreement; and (m) Coverall had made the misrepresentations referred to in sub-paragraph 3(e) and 3(f) above which had the effect that Mr Patel was misled and misinformed about important matters concerning his rights under his franchise agreement. 5. Each franchise agreement made between Coverall and: (a) Salah Eliaser; and (b) Hirenkumar Patel; is void from the date of this declaration.

Legislative Framework and relevant principles 5 I set out the legislative framework and relevant principles concerning the imposition of pecuniary penalties in Coverall No 1 at [163]-[179]. They may be summarised as follows. 6 Section 224(1) of the ACL provides for the imposition of pecuniary penalties where the Court is satisfied that a person has contravened provisions of the ACL including ss 21 and 37(2). The maximum penalty under s 224(3) for a body corporate is $1.1 million in respect of each contravening act or omission.

The factors relevant to the quantification of a pecuniary penalty 7 Section 224(2) states that, in determining the appropriate pecuniary penalty the Court must have regard to all relevant matters including: (a) the nature and extent of the act or omission and of any loss or damage suffered as a result of the act or omission; and (b) the circumstances in which the act or omission took place; and (c) whether the person has previously been found by a court to have engaged in any similar conduct. 8 In addition to these prescribed factors a number of additional factors may be relevant to a corporate (as distinct from a personal) respondent including: (a) the size of the contravening company; (b) the deliberateness of the contravention and the period over which it extended; (c) whether the contravention arose out of the conduct of senior management of the contravener or at a lower level; (d) whether the contravener has a corporate culture conducive to compliance with the relevant legislation, as evidenced by educational programs and disciplinary or other corrective measures in response to an acknowledged contravention; (e) whether the contravener has shown a disposition to cooperate with the authorities; (f) the financial position of the contravener; (g) whether the contravening conduct was systematic, deliberate or covert; and (h) the contravener's position of influence and importance in its industry sector. See Trade Practices Commission v CSR Ltd [1991] ATPR 41-076 ("CSR") at 52,152-3 per French J; NW Frozen Foods Pty Ltd v Australian Competition and Consumer Commission (1996) 71 FCR 285 ("NW Frozen Foods") at 292; Australian Competition and Consumer Commission v TPG Internet Pty Ltd (No 2) [2012] FCA 629 ("TPG (No 2)") at [61]-[62]. 9 The significance of each factor to the appropriate penalty depends on the facts of the case. The Court must fix a penalty that is proportionate to the gravity of the contravening conduct in all the circumstances of the case: see, for example, Australian Competition and Consumer Commission v Renegade Gas Pty Ltd (trading as Supagas NSW) [2014] FCA 1135 at [83] per Gordon J.

The centrality of deterrence 10 Deterrence, both general and specific, are fundamental objectives of the civil penalty regime in the ACL: Australian Competition and Consumer Commission v TPG Internet Pty Ltd (2013) 250 CLR 640 at [65]-[66] per French CJ, Crennan, Bell and Keane JJ (Gageler J agreeing). In CSR at 52,152, French J explained that the principal objective of the civil penalty regime under the Trade Practices Act 1974 (Cth) was to: …put a price on contravention that is sufficiently high to deter repetition by the contravener and by others who might be tempted to contravene the Act. 11 Coverall is in liquidation. Any penalty imposed against it will not be provable in liquidation: Mathers and Another v Commonwealth of Australia (2004) 134 FCR 135 per Heerey J. The ACCC concedes that it has no expectation that Coverall will pay any penalty imposed. 12 This does not, however, preclude the Court from imposing a penalty and Coverall's inability to pay does not defeat the significant public interest in deterring others from similar conduct by fixing a penalty in the appropriate quantum. As the Full Court explained in Australian Competition and Consumer Commission v Dataline.Net.Au Pty Ltd (in liquidation) and Others (2007) 161 FCR 513 at [20]: … a court may impose a penalty on a company in liquidation if, to do so, would clearly and unambiguously signify to, for example, companies or traders in a discrete industry that a penalty of a particular magnitude was appropriate (and was of a magnitude which might be imposed in the future) if others in the industry sector engaged in the same or similar conduct. 13 I respectfully adopt Goldberg J's observation in Australian Competition and Consumer Commission v SIP Australia Pty Ltd [2003] FCA 336 at [59] where his Honour said: If general deterrence is to have any meaning, a company in liquidation which has contravened the Act must be ordered to pay an appropriate pecuniary penalty as a deterrent to others who might be tempted to engage in similar conduct.

Imposing pecuniary penalties for multiple contraventions 14 I set out the principles concerning the imposition of pecuniary penalties for multiple contraventions of the ACL in Coverall No 1 at [171]-[172] and I need not reiterate them.

Assessment of penalty 15 The Court will not adopt a mathematical approach to the assessment of the appropriate penalty. Assessment of the appropriate penalty must be a discretionary judgment synthesising all factors relevant to a particular case while paying due regard to the maximum penalty for each contravening act and the totality principle: TPG (No 2) at [140]; Singtel Optus Pty Ltd v Australian Competition and Consumer Commission (2012) 287 ALR 249 ("Singtel Optus") at [54] per Keane CJ, Finn and Gilmour JJ, citing ACCC v Telstra at [250]-[251].

The maximum penalty 16 Careful attention to the maximum penalties is required because they have been legislated for, they invite comparison between the worst possible case and the case before the court at the time, and they provide a yardstick to be taken and balanced with all of the other relevant factors: Markarian v The Queen (2005) 228 CLR 357 at [31] per Gleeson CJ, Gummow, Hayne and Callinan JJ.

Totality 17 The totality principle requires the Court to conduct a final check to ensure that the aggregate penalty imposed for a course of conduct is not unjust or disproportionate to the circumstances of the case. If it is unjust or disproportionate, the penalty is to be moderated by determining the appropriate pecuniary penalty for each contravention and applying a discount to the aggregate amount: Australian Competition and Consumer Commission v Telstra Corporation Ltd (2010) 188 FCR 238 ("ACCC v Telstra") at [228]-[230] per Middleton J; Ponzio v B & P Caelli Constructions Pty Ltd and Others (2007) 158 FCR 543 at [145]-[147] per Jessup J.

The Penalties proposed by the ACCC 18 The ACCC submits that Coverall committed six contraventions of the ACL. 19 First, it contends that it engaged in four contraventions of s 37(2) by representing separately to each of Mr Eliaser and Mr Patel, without a reasonable basis for doing so, that their respective purchases of a Coverall franchise: (a) would result in Coverall providing each of them with a sufficient volume of work for them to earn specified monthly amounts; and (b) would result in Coverall paying each of them specified monthly amounts regardless of whether Coverall provided a sufficient volume of work. Second, it submits that Coverall committed two separate contraventions of s 21 of the ACL; one relating to its dealings with Mr Eliaser and the other for its dealings with Mr Patel. 20 On this basis the total penalty that could be awarded against Coverall under s 224 of the ACL is $6.6 million. However, the ACCC submits that a total pecuniary penalty of $600,000 is appropriate, made up of: (a) in respect of Coverall's contravening conduct towards Mr Eliaser, pecuniary penalties totalling $300,000 encompassing: (i) a pecuniary penalty of $200,000 for its contravention of s 21 of the ACL; and (ii) two pecuniary penalties of $50,000 for each of Coverall's two contraventions of s 37(2) of the ACL; (b) in respect of Coverall's contravening conduct towards Mr Patel pecuniary penalties totalling $300,000 encompassing: (i) a pecuniary penalty of $200,000 for its contravention of s 21 of the ACL; and (ii) two pecuniary penalties of $50,000 for each of Coverall's two contraventions of s 37(2) of the ACL. 21 In Barbaro v The Queen; Zirilli v The Queen (2014) 305 ALR 323 ("Barbaro") a majority of the High Court held that in criminal proceedings the prosecution should not be permitted to make submissions to a sentencing judge as to the specific penalty, or range of penalties, which would be appropriate. Their Honours stated that it was neither the role nor the duty of the prosecution to make submissions on the specific result which should be reached. 22 Although the question has not yet been settled by an appellate court, in my view the principle in Barbaro does not prevent the Court in a civil context from taking a regulator's submission on penalties into account: Australian Competition and Consumer Commission v Energy Australia Pty Ltd [2014] FCA 336 at [152] per Middleton J; Australian Securities and Investments Commission v Cash Store Pty Ltd (in liquidation) (No 2) [2015] FCA 93 at [2] per Davies J; Australian Competition and Consumer Commission v Origin Energy Limited [2015] FCA 55 at [31] per White J. In obiter, a majority of the Victorian Court of Appeal in Matthews v R; Vu v R; Hashmi v R [2014] VSCA 291 at [29] per Warren CJ, Nettle and Redlich JJA also confined the principle in Barbaro to sentencing in criminal proceedings. 23 While it is appropriate to take the ACCC's submissions on penalty into account, it is for the Court to determine the quantum of penalty to be imposed and the Court must satisfy itself that the penalties imposed are appropriate. As a specialist regulatory body I see the views of the ACCC as important in the Court's assessment: Australian Competition and Consumer Commission v Cabcharge Australia Ltd [2010] FCA 1261 at [42] per Finkelstein J.

Number of contraventions 24 I consider, as the ACCC submits, that Coverall committed six contraventions of the ACL comprising: (a) four contraventions of the prohibition on false and misleading representations in s 37(2) of the ACL, as described at [19] above; and (b) two contraventions of the prohibition on unconscionable conduct in s 21 of the ACL, one relating to its dealings with Mr Eliaser and the other to its dealings with Mr Patel.

Appropriate penalty 25 There is no question that Coverall's contraventions call for the imposition of a pecuniary penalty. The issue is what quantum of penalty is to be imposed, having regard to the principles that I set out at [163]-[173] in Coverall No 1. 26 In my view the circumstances of Coverall's contraventions warrant a substantial penalty. 27 I say this, first, because Coverall's contraventions are serious. By making false and misleading representations to Mr Eliaser and Mr Patel which induced them to enter their franchise agreements, and then by engaging in unfair and exploitative conduct in the operation of the franchise which showed a blatant disregard for Mr Eliaser and Mr Patel's rights and interests, Coverall showed an intentional or reckless disregard for its legal obligations and employed unfair tactics so that it could preserve its own interests at the expense of their interests. 28 Second, Coverall's contravening conduct was deliberate and extended over a period of many months. As I said at [123] and [129] in Coverall No 1, it was in a significantly stronger bargaining position than Mr Eliaser and Mr Patel when they were negotiating their purchases of the franchises. Using its stronger position Coverall encouraged them to purchase a franchise, but it did not properly disclose the "earnings information" in relation to the franchise. It also misinformed them about the volume of cleaning work, the amount of monthly earnings they could expect, and the risks and profitability of the franchise, and it entered into franchise agreements with them when it knew those matters. It took no steps to make proper disclosure of the earnings information or to provide accurate information as to the risks and profitability of the franchise they were being encouraged to enter. 29 As the party allocating the cleaning work to them and the party to whom customers made payment for the cleaning services provided, Coverall was also in a much stronger position throughout the course of the franchises. At every step it sought to take advantage of its significantly stronger position and in my view its conduct was not just or fair. This can be seen in the fact that, despite it having been paid by its customers for the services rendered by Mr Eliaser and Mr Patel, despite their repeated requests for payment, and despite its obligation to pay them pursuant to the franchise agreements, it took advantage of their significantly weaker position and refused and/or failed to pay them. Coverall deliberately engaged in conduct that evinced an intentional or reckless disregard for appropriate norms or standards within society. 30 Third, Coverall's contravening conduct caused financial harm to Mr Eliaser and Mr Patel which, while not large in an overall commercial context was significant to them. Each paid a deposit which was sizeable for him and each took on a substantial loan in order to purchase a Coverall franchise. Then, Coverall failed or refused to pay them for their work over an extended period. I note that: (a) Mr Eliaser made an upfront payment of $8,000 to Coverall to purchase the franchise, by borrowing $5,000 through the Sudanese community and a further $3,000 from his mother. He entered a loan with Coverall for the balance of the $28,150 purchase price. Coverall withheld payments from him for cleaning services he provided to the value of $9,713.79. He suffered total losses of $17,713.79; and (b) Mr Patel made an upfront payment of $5,000 to Coverall and took out a loan from Coverall of $19,000 for the balance of the franchise purchase price. He suffered total losses of $11,934.42 31 On 24 July 2014 Coverall undertook to pay Mr Patel the amount of $6,239.77 being the amount it had withheld from him to that point, and Coverall did so. Then, on 23 October 2014, I ordered Mr Jones to pay compensation to Mr Eliaser and Mr Patel for the losses they suffered as a result of Coverall's contraventions of the ACL, but those payments are to be made over an extended time frame because of Mr Jones' financial difficulties. The compensation order, if met, will ameliorate the effect of Coverall's conduct on Mr Eliaser and Mr Patel to an extent, but it does not change the fact that Coverall caused their losses. There is, of course, also a risk that Mr Jones will prove unable to pay the amounts awarded. 32 Fourth, while I take into account that Coverall has not been found to have engaged in previous contraventions of the ACL, I see this as unsurprising given Coverall's relatively short life-span. It was established in January 2013 and went into liquidation in September 2014. Its contravening conduct commenced shortly after it was established and in assessing the appropriate penalty I give little weight to the absence of prior contraventions. 33 Fifth, Coverall displayed a cavalier attitude to the obligations of its franchisees and paid little or no regard to their interests which shows it had a corporate culture that was not conducive to compliance with the ACL. 34 Sixth, Coverall was part of a larger corporate group, and it was licensed to franchise and sub-license the use of the "Coverall System" for cleaning and related intellectual property in Victoria. It is likely that Coverall's contravening conduct would have become more widespread without the ACCC's intervention, and in my view the penalty should reflect that Coverall was able, and intended, to enter franchise agreements throughout Victoria. 35 Seventh, and most importantly, a primary consideration in fixing the penalty is the central importance of achieving general deterrence. The structurally unequal relationship between franchisees and franchisors which the legislation seeks to address through the Franchising Code of Conduct ("Franchising Code") provides fertile ground for unconscionable conduct as franchisors may be tempted to exploit their significantly stronger position for their own advantage. 36 There is a strong requirement to deter other franchisors from: (a) making false or misleading representations as to the profitability, risk and other material aspects of the franchise business into which they invite prospective franchisees, particularly in failing to properly inform prospective franchisees about the earnings they might expect to achieve and the associated risks, and thereby failing to comply with the Franchising Code; and (b) acting unfairly and unconscionably both in the information provided to prospective franchisees and in their operation of the franchise once franchise agreements are entered into. 37 There is a need to impose a penalty which is sufficiently high to deter other franchisors (including other members of the Coverall Group and/or parties operating the Coverall System) from engaging in similar conduct. I note in passing that specific deterrence is not relevant because Coverall will not pay the penalty imposed. The penalty must be such that a business, acting rationally and in its own best interest, will not be prepared to treat the risk of such a penalty as a business cost. It must send the message that the contravening conduct is serious and that "the game is not worth the candle": Australian Securities and Investments Commission v Vizard (2005) 145 FCR 57 at [48] per Finkelstein J; Australian Competition and Consumer Commission v McMahon Services Pty Ltd [2004] ATPR 42-031 at [15] per Selway J. As the Full Court said in Singtel Optus at [63]: …those engaged in trade and commerce must be deterred from the cynical calculation involved in weighing up the risk of penalty against the profits to be made from contravention. 38 Of course, a penalty must not be so high as to be oppressive (Trade Practices Commission v Stihl Chainsaws (Aust) Pty Ltd (1978) ATPR 40-091 at 17,896 per Smithers J; NW Frozen Foods at 293) but this is not a consideration in the present case because Coverall will not pay any penalty that the Court orders. Even so, the penalty must be proportionate to Coverall's contravening conduct. In the circumstances of this matter the penalty should be no greater than is necessary to achieve its deterrent objective: see Australian Securities Commission v Donovan and Another (1998) 28 ACSR 583 at 608 per Cooper J; NW Frozen Foods at 293. 39 The ACCC submits that a total pecuniary penalty of $600,000 is appropriate. I accept that amount is within the range of appropriate penalties but I have taken a somewhat different view. I have fixed a total penalty of $500,000 because in my view this amount better reflects Coverall's contravening conduct, the circumstances in which these contraventions took place and the losses that they caused. There are a number of mitigating factors, including that: (a) Coverall was a small company in a relatively weak financial position, and it did not have a position of power and influence in the sector; (b) the sums of money involved are relatively small in an overall commercial context; (c) the victims of its misconduct have been, or are likely to be, compensated for their losses in full; and (d) although doing so belatedly and without any expression of contrition, Coverall's sole director cooperated with the ACCC in an appropriate resolution of the case. In my view, while $500,000 is well short of the maximum available penalty, a penalty anywhere approaching the maximum would be manifestly excessive. 40 I consider that a penalty of $500,000 is sufficient to achieve general deterrence. That is, it puts a price on contravention which is likely to deter other franchisors, including franchisors in the Coverall group, from similar conduct. 41 The total penalty of $500,000 comprises: (1) pecuniary penalties totalling $250,000 in respect of Coverall's contravening conduct towards Mr Eliaser, encompassing: (a) a pecuniary penalty of $150,000 for its contravention of s 21 of the ACL; and (b) two pecuniary penalties of $50,000 for each of Coverall's two contraventions of s 37(2) of the ACL; (2) pecuniary penalties totalling $250,000 in respect of Coverall's contravening conduct towards Mr Patel, encompassing: (a) a pecuniary penalty of $150,000 for its contravention of s 21 of the ACL; and (b) two pecuniary penalties of $50,000 for each of Coverall's two contraventions of s 37(2) of the ACL. 42 In accordance with the totality principle I have conducted a final check on the aggregate penalty and I am satisfied that the penalties imposed for each contravention and for the contravening conduct overall is just and appropriate in all the circumstances. 43 For these reasons I have made the attached orders. I certify that the preceding forty-three (43) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Murphy.