Australian Competition & Consumer Commission v Top Snack Foods Pty Ltd

Parties 3 Top Snack during the period 1994 to 1997 carried on business as a franchisor and was involved in the promotion, marketing and overseeing of the distribution arrangement mentioned above. The second respondent, George Manera, at all material times, was a director and manager of Top Snack and acted as its agent. Nicholas Kritharas was also a director and manager of that corporation and was actively concerned in marketing of the franchises on its behalf. Selena Manera is the daughter of George Manera and was engaged at various times in relation to arranging suitable sites for placement of the boxes and giving some assistance to the distribution agents. The fifth and sixth respondents are two corporations under the direction and control respectively of the George Manera family interests and the Nicholas Kritharas family interests.

The franchisees 4 The claimants carried on business pursuant to five separate but substantially similar distribution agreements. The claimants and the areas operated by them are outlined below. 5 Steven and Jennifer Besnard initially entered into a franchise distribution agreement with Top Snack on 28 March 1995 in respect of a run in the Bankstown area. They commenced to operate on 26 April 1995. Later, in June 1995 they took over another run. This run included Wetherill Park. They ceased operation of the franchise in March 1996 due its being unsuccessful. 6 Louise and John Stevens entered into a distribution agreement with Top Snack on 19 January 1996 in relation to a franchise area which included Sutherland and Alexandria. They ceased to operate their franchise business in April 1996 because the operation was unsuccessful. 7 On 7 November 1994, Peter Sarcasmo signed a distribution agreement with Top Snack for the right to operate in the Alexandria area of Sydney. He commenced operations there about mid-November 1994. On 14 February 1996 he advised Top Snack of his intention to cease operations and two days later signed a confirmation of surrender of his distribution areas. The business proved to be unprofitable. 8 John and Allison Horler were distribution agents in the Central Coast area. They signed a distribution agreement on 16 May 1995 with Top Snack. They commenced to operate the franchise on 18 July 1995, and on 26 February 1996, after indicating that they wished to cease dealing with Top Snack, they received a letter of termination from Top Snack. 9 Frederick and Colleen Crawford signed a distribution agreement with Top Snack on 16 June 1995 in respect of an area which included Camden, Liverpool and Huxton Park in Sydney's west. They subsequently entered into further distribution agreements in respect of two other areas including the Bankstown area in the west. They first commenced operation in relation to the Camden area franchise on 27 June 1995. In June 1996 they advised Top Snack that they also wished to dispose of their franchise. 10 The evidence is that the claimants, for the most part, had previously been engaged in comparatively small scale entrepreneurial businesses. They evinced a preference for self-employment and flexible working hours for a variety of reasons. The distribution franchises were seen to provide these advantages. In some instances, they borrowed moneys to invest in the business. In all cases they experienced disappointing results. Some of the claimants sought to improve their position by working exceptionally long hours and taking on other areas or trying out additional franchises. Some, for example, signed on for an additional franchise involving the supply of drinks to premises. This proceeding is, however, only concerned with the confectionery distribution arrangements.

Contravening conduct alleged 11 The contravening conduct claimed by ACCC includes misrepresentations in relation both to existing facts and future matters. It is claimed that these misrepresentations were designed to and did, in fact, induce prospective agents to enter into the agreements with Top Snack, under which they agreed to pay a licence fee of $20,000 per franchise area together with other moneys in respect of set up charges and additional costs. Although the misrepresentations alleged vary to some extent in each individual case, the substance of the major misrepresentations raised are that: · gross profitability would be $300 per day per franchise area; · the distribution of the goods could be performed at a rate of 50 sites per "short" day namely a day of less than eight hours; · the packing of the confectionery boxes could be performed at a rate of 20 or more per hour; · loss of genuine customers would be no more than 10% in the first few weeks of operation and there would be no difficulty in obtaining new customers; · losses of money through dishonesty of customers at retail sites and other problems would not exceed 6%; · customers and sites made available by Top Snack were genuine; · the franchisees could not lose the moneys paid for the franchises because the return was fully guaranteed by Top Snack; and · the relevant achievable figures set out in a four weekly statement disclosed to the claimants were typical and achievable. Distribution agreement 12 Clause 1 of a typical distribution agreement sets out the following definitions: 1.5 "The Clients"- means third parties who have consented to display units being located at Sites in their Business Premises (owned or rented by them) to enable DA to conduct the Business. … 1.7 "The Area" - as bounded by the line and comprising the hatched area within such line as depicted upon the map being Annexure "C" hereto. … 1.23 "The TSF Guarantee" - means provided the Distribution Licence has operated for not less than 12 months and that DA has not committed any breach of this Agreement then TSF guarantees to DA (being a once only guarantee) that should the conduct of the Business by DA within the Area not give to DA a gross return on the Licence Fee of 100% within 12 months of the Commencement Date then TSF shall elect to do either of the following: 1.23.1 provide to DA within three (3) months of the conclusion of the period of twelve (12) months referred to in clause 1.23 and at no additional cost to DA sufficient additional sites to achieve a 100% gross return OR 1.23.2 pay to DA within three (3) months of the conclusion of the period of twelve (12) months referred to in clause 1.23, the difference between the gross profit achieved and the 100% gross return referred to. 13 "DA" as referred to in the agreements means the distribution agents. 14 Clause 8 provides that Top Snack gives to the DA the TSF guarantee. The clause records an agreement that if the agent makes no claim upon the guarantee within thirteen months of the commencement date, then all liability under the guarantee will lapse and the agent will not be able to make any other claim. 15 Clause 16 is concerned with sites and minimum active sites. Clause 16.1 and 16.4 are important. It provides: "16. SITES AND MINIMUM ACTIVE SITES 16.1 At the completion of the DA's siting training, the DA shall maintain and service during the Term the minimum of 90 Sites per week as per Item 13 of the Schedule, whereby each Site called upon is to average a turnover in excess of 15 items of stock sold per call, such sites may be Initial Sites provided by TSF or new and additional Sites to comply with this clause. ... 16.4 DA shall service all Clients in strict accordance with the Guidelines." 16 The schedule to the agreement, used as an example, sets out a number of items and provides that the licence fee payable to Top Snack is $20,000. Item 4 provides for a backup stock quantity of 4,400 items at 70 cents per item at a price of $3,080. That item deals with the initial set up costs which are stated to be $10,000. Item 7 is concerned with initial training which includes four hours training concerning correct packaging procedures. There is provision that on hand-over of the sites, Top Snack will provide a representative to the DA for the first day of operation within the area, giving training as to correct servicing, client relations, documentation and so forth. There is also a provision that within the first month of operations, Top Snack will provide the DA with a representative for eight hours of training as to correct further business development procedures. That training is to be conducted within the area the subject of the franchise agreement and it is said that it will result in the DA obtaining clients in respect of which the DA will be obliged to service, and that there will be no additional cost to the DA for any additional sites obtained by the representative during the training period. 17 Annexed to the agreement was a set of operational guidelines, referred to in Clause 16.4 as cited above, which dealt with the packing and product presentations, servicing the client and reporting, personal presentations, uniforms and the like. Nature of the franchise business 18 This franchise business arose from the perception of a need in the workplace for employees to have available snack foods and confectionery. Other methods of marketing in the workplace in the nature of, for example, vending machines, had proven inefficient and unsatisfactory. Top Snack, pursuant to a master distribution agreement with Top Snack Enterprises Pty Limited ("Enterprises"), acquired the right to operate the business of granting distribution rights to prospective agents. 19 The business operated in this way. Top Snack purchased wholesale confectionery and snack foods ("the goods") which it supplied to DAs for distribution to sites within specified distribution areas. These areas were in parts of the State where Top Snack considered there was enough demand to support a distribution run. DAs were required to pack the goods in small display boxes of 40 items bearing a logo and the title "Your Snack Pack". These boxes were then left at commercial and industrial sites. The items were initially bought by the DAs for an amount of 70 cents each. They were then resold to the consumers for an amount of $1. As from November 1995 the price per item to DAs was increased from 70 cents to 75 cents, and the retail price per item was increased to $1.10. 20 The sites for display were initially provided by Top Snack and some training was provided to the DAs for the obtaining of additional sites. Initially 110 sites were provided on the basis that there would be an expected fall off of about 10 sites over a period of time. This would then result in a standard run of about 100 sites, each selling in excess of 15 items per week. Any further fall-off in sites, it was said, could then be made good by the DA with some assistance from Top Snack. Under the distribution agreements, a DA was required to maintain and service at least 90 sites per week and to achieve a turnover of not less than 16 items per site per week. 21 It was envisaged that some sites would have a lower turnover and that these would only be serviced fortnightly. The nature of the service provided by the DA to the site was to re-stock the snack box each week or two week period. The new boxes were to be replenished with fresh items and the old boxes were to be removed. Payment for the items was to be made by purchasers in cash by placing money in a small money container which formed part of the box. The customers were employees or workers at the site. Payment was on an "honour" system. If a buyer did not have sufficient or ready cash, provision was made for payment by IOUs, which were available with the box at the site. Obviously such arrangements involved an exposure to losses in the form of possible non-payment, theft, spoilage and lack of custom. Losses were anticipated by Top Snack but it was said that they would not generally exceed 6%. 22 In payment for the right to conduct such a franchise, as referred to above, the DAs were required to pay a licence fee in the order of $20,000 per area, together with set-up costs in the order of $10,000 and other amounts in respect of the initial stock and other expenses. DAs had to comply with detailed operational requirements as to the conduct of the franchise and the making of reports together with the provision of detailed record sheets. 23 In addition to the time spent by claimants servicing the 100 or so sites, it was necessary for them to spend a considerable amount of time counting money, making out records, obtaining the products, packing boxes and collecting outstanding moneys. As the evidence later indicates the experience of the claimants was that the amount of time taken up in carrying out the duties of an agent were greatly in excess of those which they had initially anticipated.

Credit 24 I found the oral evidence of the claimants more convincing than that of Messrs Manera and Kritharas and of Ms Manera and I prefer their evidence where there is any important conflict. Although their recollections were not perfect, the claimant franchisees were frank in the way in which they gave evidence and their evidence was not materially shaken in cross-examinations. It was also consistent with commercial expectations. The evidence of the three respondent individuals on the other hand, was unsatisfactory in important material aspects. For example, Mr Kritharas was not prepared to acknowledge that the expression "clients" was used in some of the documents in the sense of "sites" rather than as referring to a buyer of the items, even when this was clearly so. Mr Manera, in relation to the necessary number of sites, retreated from his evidence when he realised the implications of earlier answers. Ms Manera made what in my view were clearly untenable statements as to the maximum number of sites which could be serviced in one day (76), and as to the number of sites which could readily be serviced in a normal day (60-65). The evidence of the respondents in relation to packing rates (20 per hour) was also, in my opinion, grossly exaggerated. 25 The failure to disclose the rate of site-slippage or loss by not furnishing details of the June trials, also reflects adversely on the credit of Messrs Manera and Kritharas because these figures are central to a fair appraisal of the worth and desirability of the franchise arrangements. In addition to the specific misrepresentations raised as the basis for the action, there was a broader contextual background of misleading statements which were not specifically in issue in the proceedings. In my view, important parts of the evidence of each of the respondents was significantly discredited in cross-examination.

Evidence 26 Evidence was led by the ACCC in relation to the five distribution agreements in respect of which the claims are made. There was also evidence from two other DAs, namely Mrs Sally Mould, who was a distribution agent in Queensland, and Mr Corias, who was a master distributor for Top Snack in Queensland, as to their experience with the franchises. The evidence as to loss and damage for the applicant was led from Mr Cornell, a chartered accountant who specialises in litigation and loss claims. 27 The evidence referred to some instances of other franchisees being satisfied with the franchise arrangements which they had undertaken. However, this does not, in my view, provide any significant relevant support for the respondents' case in this proceeding. This is because the individual circumstances of particular franchisees, having regard to the nature of their runs and the problems which they face, differ significantly from those of other franchisees. Therefore the success of several franchisees does not indicate that the franchises of the claimants were viable or accorded with the representations because the evidence does not descend to the necessary particularity and detail with respect to the assertions by the successful franchisees. 28 I now turn to the specified misrepresentations. Packing time 29 Representations were made by the respondents in relation to packing time. The packing of the snack food boxes proved to be a very time consuming process, and according to the claimants it required much more time than they had been led to believe. Evidence was led from the claimants and other DAs called by the ACCC, as to the number of boxes which they were in fact able to pack in a one hour period. This is important because it goes to the amount of time that is required to be spent outside the actual delivery process in order to achieve the income level represented. The boxes were required to be packed with the snack foods in a particular way so as to achieve the display called for by the operational guidelines. In addition, it was often necessary to pack the items in a special way according to the needs of a particular site and this led to a substantial increase in the amount of time necessary to pack a box. 30 The amount of time required to be dedicated to the distribution process by agents, including time for packing, reporting and delivery, was an important incentive for a prospective buyer in deciding whether to enter into the franchise. 31 The evidence of the claimants was that the respondents represented that the product could easily be packed at a rate of in excess of 20 boxes per hour. The respondents deny that the alleged representations were made. However, they say that the representation "consistently made" was that Mr Kritharas or Mr Manera or an experienced agent could pack 20 boxes an hour. Furthermore, it was said that because the packing time representation related to a future matter it fell within s 51A of the TPA, and in the light of the trials carried out by Top Snack and the experience of Mr Manera in packing, there were reasonable grounds for making the representations. 32 Mr Besnard did not agree with Mr Kritharas's evidence that the representation was only that Mr Kritharas could pack 20 boxes per hour. I accept the evidence of Mr Besnard on that point. Mrs Stevens also gave evidence to the effect that Mr Kritharas did not make the statement which he is alleged to have made namely, that he could pack 20 boxes an hour. Mrs Stevens adhered to her evidence that Mr Kritharas said that Mrs Stevens could pack 20 to 30 boxes per hour. 33 I am satisfied on the evidence that the representation made to each of the claimants was that the product could be packed by a DA with some experience at a rate of in the order of 20 boxes per hour. 34 The evidence led by the applicant on the number of boxes that the claimants were in fact able to pack per hour was as follows. The evidence of Mr Besnard, which I accept, is that he could pack 8 to ten boxes per hour if he was "pushing it". Mrs Stevens gave evidence that she could comfortably pack 8 to ten boxes on average per hour and she would not accept that other people may have been able to pack 20 boxes an hour. Mr Stevens pointed out that it may be possible to pack 12 boxes in an hour if one were just packing normal boxes and not special orders. He does refer to one occasion on which 12 to 15 boxes per hour were achieved. Mr Sarcasmo said that on average he could pack 7 to 8 standard boxes an hour and special orders at the rate of 5 to 6 boxes per hour. Mr Horler said that he could pack 10 boxes, perhaps 12 boxes per hour if they were the simpler ones. Mr Crawford's evidence was that if the boxes were standard then he could pack about 8 per hour and in some cases it could be down to as low as 6 per hour. 35 The evidence of the claimants had the advantage that they actually performed the work over a continuous period of time and in my view the consistency of their evidence justifies the conclusion that a range of only 10 to 12 boxes per hour could reasonably be anticipated. I am not satisfied that any adequate trial was carried out or that the testimony of Mr Kritharas or Mr Manera should be accepted on this point. A shortfall of at least 8 boxes per hour in relation to a representation as to a rate of 20 boxes an hour is a significant short-fall and indicates that the figure of 20 boxes was not achievable. There is no documented evidence as to the rates of packing which they were able to achieve which gives any context as to the conditions and circumstances in which this was likely to be achieved. I am not satisfied that any evidence has been put before me which persuades me that there was reasonable ground to make any representation that an agent would easily pack in the order of 20 boxes per hour. Accordingly, I consider that this representation was false and that it constituted deceptive and misleading conduct. 36 Insofar as specific allegations are made in the pleadings to the effect of the representations as to packing time, I find that they have been made out. I am satisfied that the representations were made and relied on by the claimants except for Mr and Mrs Besnard in entering into the agreements. In the case of Mr and Mrs Besnard, I am satisfied that this misrepresentation was made to them but I am not satisfied that they relied on the misrepresentation.

Profitability 37 Although in the case of each claimant there are a number of representations alleged, for the purpose of this proceeding and in view of the conclusions I have reached below, it is not necessary to make findings on every allegation raised. It was conceded in submissions on behalf of the respondents that several important representations were in fact made by the respondents and their substance essentially is not in dispute. I now turn to consider these admitted representations. The first group relates to earnings as to income and profitability. They are to the effect that: 1. profit would be in the order of $600 per week, per 100 sites serviced; 2. earnings would average $6.19 for each snack box per week; and 3. the gross profit margin would be about 24%. 38 The respondents say that the representations made in respect of the three statements were made on the basis that there would be strict adherence by agents to the Top Snack system and operational guidelines. It is said these requirements were not met by the claimants. In addition, the respondents say that the statements are as to future matters, and in reliance on s 51A of the TPA, the respondents contend that there were reasonable grounds for making them. Those grounds are said to be the results achieved by Top Snack in its June to July 1994 trialling period and the experience there gathered in relation to what could be achieved. 39 As to the first of these submissions, my conclusion is that the evidence does not provide any basis for a finding that the failure of the franchises was caused by non-compliance with guidelines or other requirements of the system. I am not satisfied that any significant breach contributing to failure has been made out. 40 I now turn to the other issues.

Reasonable grounds: the trials and profitability 41 The principal response to the charge that misleading statements were made as to profitability is that the statements made by Top Snack were reasonably based on experience in the trial runs which it undertook during June and July 1994. Their case is that in order to estimate potential returns a series of trials were conducted and they relied on these results coupled with their general experience. 42 The background to the trials is that in late March 1994, Mr Kritharas developed a proposal for "trialling" the franchise concept which later found expression in the Top Snack franchise business. He and Mr Manera took steps to set up the structure for the business prior to June 1994. In so doing they said that they also looked at the business of a small localised independent operator engaged in a franchise operation and used this experience in forming their views. 43 By late May 1994, Messrs Manera and Kritharas had substantially progressed in setting up the proposed franchise business In particular, they had negotiated with a wholesale supplier "Millers"; they had arranged to register a trade mark and they had formulated a marketing strategy. Mr Manera gave evidence that by that time, he and Mr Kritharas had developed a display box of about 40 items. Mr Manera's daughter, Selina, was also involved in some of this preparatory work. By the end of May 1994, they say that they had established a prospective client list of approximately 150 to 200 sites. These prospective sites were to be the subject of weekly calls during June and July with a view to reassessing the operation at the end of the two month trial period. It was during those months that the figures upon which the respondents rely were generated. These figures are said to provide reasonable grounds for the predictions as to profitability. 44 Three sites were established in what were claimed to be representative areas, including commercial and industrial sites in Marrickville, Mascot/Alexandria and the Sydney CBD. In the Sydney CBD and Marrickville, about 50 to 60 "runs" were established of which 48 were set up with sites to be serviced weekly. Other sites required calls at two-weekly intervals. Selina Manera operated a run in the Taren Point area, which had approximately 120 sites. She usually serviced these sites on her own. During the trial period conducted by Mr Manera, he was sometimes accompanied by Mr Kritharas who drove the vehicle and made sure that there were no parking fines incurred or traffic infringements. This indicates that the figures were to some extent based on the combined efforts of two persons. Mr Kritharas said that he gained experience from these activities. After completion of the trials Messrs Kritharas and Manera considered the operations and analysed the results. Mr Kritharas says that between June and July the service was being used by over 1200 buyers at 103 sites. There was a lot of variation between sites. In some sites there were up to 120 buyers of the confectionery whereas at other sites there were only 5 or 6. Mr Manera said that based on his experience, he developed with Mr Kritharas the operational guidelines. These were provided to every DA and were annexed to the distribution agreement. 45 Mr Manera said that in late May 1994, he was servicing about 35 sites in the CBD and that he could complete the run in a day by about 1.00 pm. Mr Manera was also involved in the training of agents and he says that during the training days, which were slower than normal, he and the DAs were able to service approximately 25-30 sites by about 3.30 pm including a coffee break. 46 Selina Manera, who was largely concerned in obtaining sites, gave evidence that in May 1994 she had located about 100 sites in the Sutherland/Taren Point area and that she serviced them until they were sold in August 1995. She claims that on one occasion she had serviced 76 sites in a day beginning at 8.30 am and finishing at 4.00 pm. She claimed that normally she was able to service between 60 and 65 sites daily with a finishing time of 4.30 pm. She says that she "regularly" serviced 100 sites in two days on the basis of working between 8.30 am to 3.30 pm. 47 After the trials were completed and the research work had been carried out, Top Snack began advertising for franchisees. The first distribution licences were sold between August 1994 and December 1994. 48 In the light of the evidence as to the tasks involved in servicing sites and the subsequent experience of the claimants, which is outlined below, I do not accept these figures as representing normally achievable figures across the broad spectrum of areas, sites and operators covered by the scheme. They are so far out of step with the experience of the claimants over many months as to be of no reliability. I do not accept the evidence of Ms Manera that she could "comfortably" service anything like 50 sites per seven hour day and I consider that figures of between 65 to 76 sites could not be achieved on a long term continuous basis. This conclusion not only throws doubt on the figures set forth in the "typical" analysis presented to the claimants as detailed below, but also on the accuracy of represented achievable profits because those predictions are said to be based on the trials. 49 In addition, in many instances the sites assigned to claimants proved to be extremely tenuous in the sense they were not secured by any form of commitment or agreement from those in control of sites to permit continued access. As Ms Manera testified, access to the sites could be withdrawn at any time by the person in charge of the sites without any reason being given. Evidence was advanced that, on occasions, the placement of the boxes had been accepted and approved by junior employees, but later rejected when those in charge learned of the service. 50 Although results were obtained for the months of June and July 1994, it was only the July figures which were used to indicate the prospective profitability to the claimants. This omission is important because the complete picture was not presented in circumstances where it should have been disclosed. The document which was drawn up and provided to franchisees which purported to portray a typical four weekly turnover analysis reads as follows:

TYPICAL 4 WEEKLY TURNOVER ANALYSIS SUMBRCV5 WEEK 1 WEEK 2 WEEK 3 WEEK 4 TOTALS TOTAL CALLS MADE: 112 84 91 88 375 TOTAL INITIAL STOCK: 5033 4123 4447 4257 17860 TOTAL STOCK SOLD: 2956 2377 2616 2554 10503 TOTAL MONEY COLLECTED: 2686.25 2260.10 2373.45 2352.30 9672.10 TOTAL COST OF STOCK SOLD: 2069.20 1663.90 1831.20 1787.80 7352.10 TOTAL STOCK LOSS @ COST: 188.83 81.83 169.79 141.19 581.63 STOCK LOSS AS % OF T/OVER: 6.39% 3.44% 6.49% 5.53% 5.54% GROSS PROFIT %: 22.97% 26.38% 22.85% 24.00% 23.99% GROSS PROFIT $: 617.05 596.20 542.25 564.50 2320.00 AVERAGE T/OVER PER CLIENT: 26.39 28.30 28.75 29.02 28.01 AVERAGE $ NETT PER CLIENT: 5.51 7.10 5.96 6.41 6.19 AVERAGE % OF STOCK SOLD: 58.73% 57.65% 58.83% 60.00% 58.81% … Please Note:

1. This analysis is an actual analysis in respect of clients serviced by Top Snack Foods Pty Ltd. 2. It is put forward for the assistance of potential DA's on the basis that the Agreement System and Operational Guidelines are followed.
2. You should undertake your own careful assessment of the offer to purchase a TSF Distribution Agreement 51 The above table and notes are identical with results disclosed in Top Snack's four weekly turnover analysis for July 1994 but not for June. Although results on a trialling were prepared for the month of June 1994 as part of the overall trial process, the June results were not disclosed to prospective franchisees. It was only the July figures which were represented to be typical. The document which sets out the corresponding figures for the June part of the trial period is as follows:

4 WEEKLY TURNOVER ANALYSIS FOR JUNE 1994 SUM694V3 WEEK 1 WEEK 2 WEEK 3 WEEK 4 TOTALS TOTAL CALLS MADE: 160 105 112 95 449 TOTAL INITIAL STOCK: 5476 4416 4990 4585 19467 TOTAL STOCK SOLD: 2814 2671 3007 2685 11177 TOTAL MONEY COLLECTED: 2595.55 2412.35 2676.50 2393.55 10077.95 TOTAL COST OF STOCK SOLD 1969.80 1869.70 2104.90 1879.50 7823.90 TOTAL STOCK LOSS @ COST: 152.91 181.05 231.35 204.01 769.33 STOCK LOSS AS % OF T/OVER: 5.43% 6.78% 7.69% 7.60% 6.88% GROSS PROFIT %: 24.11% 22.49% 21.36% 21.48% 22.37% GROSS PROFIT $: 625.75 542.65 571.60 514.05 2254.05 AVERAGE T/OVER PER CLIENT: 17.59 25.44 26.85 28.26 24.89 AVERAGE $ NETT PER CLIENT: 3.91 5.17 5.10 5.41 5.02 AVERAGE % OF STOCK SOLD: 51.39% 60.48% 60.26% 58.56% 57.42% … Please Note: 1. This analysis is an actual analysis for the period stated in respect of clients serviced by Top Snack Foods Pty Ltd. 2. It is put forward for the assistance of potential DA's on the basis that the Agreement System and Operational Guidelines are followed. 3. You should undertake your own careful assessment of the Offer to purchase a TSF Distribution Agreement" 52 One of the principal submissions that the ACCC makes is that when read on its own the July typical analysis is misleading in a number of material respects so that it cannot be relied on to provide reasonable grounds for the assertions made as to future earnings and profitability within the parameters represented. I agree with this submission. 53 First it is pointed out that examination of the two monthly results when read together disclose a dramatic decline and volatility in the number of sites which were serviced. Looked at alone, the "typical" analysis, being the July analysis, indicates a decline of sites from 112 to 88 with some fluctuations. However, when read with the June 1994 analysis, the decline is from a commencing figure of 160. Evidence also establishes that for week 3 in June 1994, the correct number of sites should be 138 and not 112. This is of some importance because it lends further support to a submission that the site numbers were tenuous and volatile in the longer term. The rate of decline in the number of sites in the present case was of great importance to a buyer making a decision whether to enter into a distribution agreement, because ongoing profitability is dependent upon the sites continuing to be available. Mr Kritharas conceded in cross-examination that if the figures as to the decline shown to him by ACCC are correct, they provide no basis for the predicted profitability of a hard working DA, with respect to a run of 100 sites, over a period of time. In my view, the figures extracted by the ACCC in relation to this matter are correct. 54 Unfortunately, the prospective franchisees were not furnished with the full data from the trials and so could not be expected to appreciate the extent of the potential problem. In this respect the typical four weekly analysis is misleading and unreliable as a source of information for prospective agents. 55 In answer to the above considerations the respondents say that the June figures were not included in the "typical" analysis as represented to the claimants because June was considered to be a settling in period. They say that the June period is equivalent to the first three to four week period that an agent needs to qualify their clients. In that time it is recognised that there will be a drop-off in the numbers of clients and siting training is thereafter provided to find new clients. They say that the July figures looked at in the context of the entire trial process are therefore not misleading. Accordingly, so it is said, it is only appropriate to take into account the four week period following that training and appraisal period in order to gauge what is likely to be the predictable future pattern for the agent. I am not satisfied that this submission meets the objection raised. The non-disclosure of the dramatic decline in site tenure, which is central to the assessment of long term achievable profitability, made it impossible for a franchisee to appreciate the limited significance of the results. 56 Further, in relation to the trials and profitability, I am satisfied that having regard to the experiences of the applicants, the figures set out in the "typical" analysis in relation to stock losses are much too low. The stock loss percentage verbally represented to the claimants was 6%. In a system based on voluntary payment, and in the light of the more extensive ongoing experience of the claimants, the appropriate figure in respect of the stock loss should have been disclosed as between in the order of 9 to 12%. Having regard to the significant difference between the above figures and the limited number of sites trialed over the limited trial period, I find that the representations were false and were made without reasonable grounds. 57 Having regard to the misleading effect of the limited analysis presented to prospective franchisees, I find that the respondents had no reasonable grounds for making the assertions as to profitability which are agreed to have been made. Accordingly, I am satisfied that the respondents have engaged in misleading and deceptive conduct in relation to these matters in contravention of the Act. I am also satisfied that the representations as to profitability were made to each of the claimants, and that because the represented profitability was central to the attractiveness of the franchises, each of the claimant agents relied on the misleading conduct.

Servicing 50 sites per "short" day 58 Although the witnesses gave different versions of the number of sites which they were able to service on a single day, I find that taking the evidence on a basis most favourable to the respondents, it was not possible to achieve more than 30 to 35 sites per day on a continuing basis. I am satisfied that the evidence of the claimants accurately represents their experiences, and that this evidence should be preferred to the assertions made by the respondents to the effect that it was possible for an experienced agent to comfortably service 50 or more sites in a short day. 59 The expression "short day" must be taken, in my view, to mean a day of less than 8 hours. A day of between 7½ to 8 hours per day would be in common parlance described as a working day of normal duration. For calculation purposes I think that a period of about 7 hours or less would be appropriate for a short day. The experience of the claimants, which I accept, was to the effect that it was practically impossible to achieve 50 sites per day on a continuing longer term basis without a deal of additional assistance. The evidence of Mr Besnard, for example, was that on Mondays he could achieve up to 50 sites per day by working very long hours. He said that "normally" he would only be able to service 29 sites per day on an average 9 hour day without any break for lunch. This meant that he would only be able to service in the order of 3.5 sites per hour on an ongoing basis. I think this is too low and that a figure more in the order of 35 sites per day or 5 sites per hour would more accurately reflect what reasonably could be achieved. The represented 90 sites per 2 short days was, therefore, not achievable on the evidence. 60 Mr Kritharas gave evidence that 50 sites could easily be serviced in a day. However, he was unable to point to any records in the proceeding which showed a trial of any single run which was done continually for 100 sites. Mr Manera asserted that he was able to regularly service 100 sites in 2 days and that sometimes it was more. On being questioned about this latter statement he asserted that it was about 115 sites he serviced. He agreed that the records in the proceedings did not show any trial of any single run done continually for 100 sites and that there were no documents which he had seen recording it. He did indicate, however, that he thought that there was one document which showed that 48 sites had been serviced in a day. 61 The location of sites is of central importance because in some areas the sites serviced will be in close proximity and in others they may be some considerable distance apart. Mr Crawford gave evidence that he could on occasions visit 6 to 8 sites per hour depending on the location of the sites. The evidence of Mr Crawford as to what regularly occurred indicates a concern about the amount of time required to service the sites. His evidence was that in one week he was able to service 168 sites and he received a letter of congratulations from Top Snack in respect of this. However, he says that this result required the combined efforts of his wife and himself for a total period of 84 hours. This throws up the very low figure of 2 sites per hour. This was in relation of course to more than one group of sites. Nevertheless, it indicates that the rate at which servicing could reasonably be carried out varied considerably. It should also be borne in mind that on occasions additional assistance was received by Mr and Mrs Crawford from their daughter. 62 The evidence of Mr Horler, which I accept, was that he was reasonably able to service in the order of only 30 sites per day. Mr Sarcasmo's evidence was that he spent 28 hours per week servicing customers and that the average number of sites visited for any one day was in the order of 22. Mr and Mrs Stevens gave evidence that they spent about 55 hours per week visiting customer sites and that the average number of clients they would service per week was 114 clients. This indicates a rate of about 2.25 sites per hour which again is very low. 63 Mrs Sally Mould, who had been a distribution agent in Queensland and is not one of the claimants, gave evidence that she could only service in the order of 20 sites per day. 64 The ongoing experience of the six different agents as to the numbers of customer sites which could be serviced in an hour indicates a figure far below the 50 sites per day based on a short day of 7 hours. This experience was of course in a number of different areas and was over a period of up to 12 months. When this experience is considered in the light of the numerous duties required to be performed by the guidelines provided to the DAs in the course of servicing the sites, and the time necessary to park vehicles and carry out administrative functions, it is evident that the figures propounded by the respondents was outside any reasonable range of expectation. No acceptable material has been put before me to establish that such a result could be reasonably anticipated as achievable. I find that there were no reasonable grounds for this misrepresentation and that there was misleading conduct in its making. I also find that this misleading conduct occurred in relation to each of the claimant agents.

Loss of more than 10 customers 65 In submissions the respondents concede that, on balance, given the similarity of the representations, the representation actually made to each claimant was that there would be losses in the order of ten sites in the first few weeks. 66 In fact, the experience of the claimants was that there was a significantly greater fall-off than this. In the cases of the Besnards and Mr Sarcasmo there were 20 and 24 customers cancelled in the first week. The total loss of customers in the case of the Besnards was 211. In the case of the Stevens it was 90. As to the other three claimants, the losses ranged between 66 and 206 customers. 67 I am satisfied that this representation was made to each of the claimants, that it was false and that there were no reasonable grounds for making it. This is particularly so in view of the fact that it was conceded that in order to derive income from 100 sites per week, having regard to the fact that some sites were only to be serviced fortnightly, it was necessary to have in excess of 110 sites available. In evidence Mr Manera conceded that in some instances it may be necessary to have in the order of 150 to 200 sites in order to achieve an income from 100 sites. In the course of cross-examination he sought to resile by saying that he could not remember or that he did not know. However, the fact is that some sites would only warrant a fortnightly service. When this is taken into account with due regard to the experiences of the claimants, I am satisfied that the represented loss of only ten clients per week was not reasonably based. I am also satisfied that this misrepresentation was made to each of the claimants and that it has been shown to be false.

Other misleading conduct - context 68 In the present case when considering whether the conduct of the respondents was misleading and deceptive, I have viewed the ACCC allegations in the context of a number of other matters, which, although they are not asserted to be specific misrepresentations, have emerged in the evidence as being of a misleading nature. 69 In outline they are as follows. A number of the claimants testified that they relied on the existence of a "guarantee" of income when they entered into the agreements. In many typical situations this guarantee has been shown to be ineffective and quite illusory. For example, if one takes the typical figures provided in the "typical" analysis, it can be demonstrated that in some circumstances the guarantee will only help where the amount earned is less than that required to be earned, under clause 16 of the distribution agreement, for the guarantee to operate. That is to say that the guarantee is a top-up provision which provides for payment of a sum which adjusts the income upwards to $20,000 which was the amount of the licence fee. However, on the typical figures represented, before the guarantee could come into operation the DA would be in breach of the agreement so that the guarantee would not operate. This does not apply in all situations but an appreciation of this fact, which was not explained to agents, was in my view likely to mislead or deceive. 70 Also, in the background information contained in a brochure "Introducing Your Snack Pack", furnished to prospective agents, it is asserted that the system has been developed and tested in over 2,200 clients resulting in highly organised professional methods of operation. In my view, this information would convey to a reasonable reader the notion that over 2,200 sites had been established and tests had been conducted on those sites. This is supported by the material on the third page of the brochure where reference is made to having an initial 100 "clients" being provided by Top Snack. The acceptance that the expression "clients" means sites, is further supported by the distribution agreement. The respondents contended that the word "clients" means the number of snack food buyers at a site. Therefore, for example, if one has a site where 100 people are working then there are 100 "clients" on that site. In cross-examination, Mr Kritharas continued to claim that the reference to "client" was a reference to a potential customer at a site. Notwithstanding that he was pointed to clear examples where this was not the case, he insisted on this unsupportable conclusion. This approach bears significantly on the reliability of his evidence. 71 A third matter as part of the background is a Comparison Sheet whereby a comparison is made between real estate and the Snack Pack business as an alternative sources of income. In this Comparison Sheet there is a reference to an annual net income before tax of $31,631.60. This is a multiplication of 52 weeks by what is described as a total weekly profit of $608.30. The reference to annual "net" conveys annual net profit without taking into account losses from theft and in my view, this is also misleading and deceptive. 72 The above three matters are not specifically raised by way of misrepresentations alleged, but they are in my view relevant to take into account because the misrepresentations alleged were made in a context where there were a number of other misleading assertions. This fact gives colour to the conduct of the respondents in the promotion and operation of the franchise scheme.

Conclusion on contravention 73 The documentary evidence furnished by the applicant satisfies me that at all material times Adway and N K Holdings were in partnership for the purpose of undertaking the Top Snack Foods business carried on, on behalf of the partnership, by Top Snack. Adway and N K Holdings each owned equally the units in a unit trust conducted by Top Snack and Enterprises. I am satisfied that the three respondent corporate entities engaged in misleading and deceptive conduct and that Messrs Kritharas and Manera were knowingly involved in such conduct within s 75B of the TPA, and that they were the agents through whom the corporate respondents at all times acted.

Reliance and causation 74 I am satisfied that in the case of each of the claimants, the misleading conduct was relied on and operated to influence them in a material way in entering into the distribution agreements and in continuing to carry on the franchise operations. 75 Some of the claimants had access to accounting, legal and commercial advice. However, I do not consider that the evidence supports a conclusion that any of the misleading conduct was not relied on or was not causative of loss because of the availability of such advice. There was no basis in the evidence for inferring that either the claimants or their advisers could have appreciated the underlying defects in the proposed franchise agreements which were glossed over and not disclosed to prospective franchisees. In the absence of reliable background information being available to the advisers, it is not possible for them to counsel against the proposal or to express any specific doubts as to the soundness of the venture. In addition, the evidence does not establish that it could reasonably be expected that the claimants had access to full and proper advice such that they should have been considered to have been fully aware of the true financial position in relation to the franchises. 76 In the case of Mr and Mrs Besnard, as noted earlier, it was not alleged that they relied on representations as to packing time, but as to all other misleading conduct which I have found I am satisfied that the misleading conduct was relied on by them and induced them to enter into and continue to operate the franchises. 77 I am satisfied that the misleading conduct referred to above caused each of the claimants to enter into the unsuccessful franchise agreements. As a consequence they operated the franchises which were of no value and in so doing they incurred the losses to which I refer to below. They were not aware of and did not appreciate until they had operated for some time, that they had been mislead, and it was reasonable for them to continue to operate the franchises in an attempt to trade out of their losses. Damages 78 The assessment of damages arising from misleading and deceptive conduct in contravention of s 52 of the TPA was recently considered by the High Court in Marks v GIO Australia Holding Limited (1998) 158 ALR 333. The principal judgment pointed out that the damages recoverable under ss 82 and 87 are not limited by analogy with contract, tort or equitable compensation, but that full effect must be given to the language of the section. The relevant question under s 82 is whether the person has suffered by the conduct of another, and if so whether such loss is recoverable according to the language of the section unconstrained by principles governing other specific heads of common law damages for common law breach of duty. Under s 87, the Court has a further power conferred in broad language to make remedial orders. In Marks the majority of the Judges, although dismissing the appeal, considered that the Court below had expressed the relevant principles as to recovery too narrowly and had taken an unduly restrictive approach to the principles expressed by the Court in Gates v City Mutual Life Assurance Limited (1986) 160 CLR 1. 79 The claim for damages as advanced in submissions for the ACCC falls under the following broad headings. 1. Capital moneys paid to Top Snack which were totally lost. 2. Unrewarded labour in the form of moneys which could have been earned but which were not as a result of involvement in the franchises. 3. Interest on earnings raised to finance the business. 4. Anxiety. 80 The ACCC led evidence from Mr Peter Cornell, an experienced financial adviser who is both an accountant and a solicitor employed by a leading firm of accountants. He swore affidavits in relation to each of the five franchises of the claimants. In relation to the claim for capital payments, he considered that the franchise businesses had no value and that therefore the capital investments were totally lost. 81 Mr Cornell prepared figures in respect of each of the claims along the lines set out hereunder in relation to the loss suffered Mr and Mrs Besnard. Similar claims were formulated in respect of each of the other claimants. "ACCC v TOP SNACK BESNARD Total Loss $ Initial capital injection 32,000 Trading losses (profits) (17,468) [adjusted at hearing to (18,091)] Unrewarded labour 57,858 Interest forgone - Sub-total 72,390 [adjusted at hearing to 71,767] Interest on borrowings 1,553 [incomplete information] From: 29-Mar-96 To: 11-Jul-96 Supreme Court Interest on Sub-total 10,498 From: 29-Mar-96 To: 30-Jun-96 Total Loss 84,444" 82 In relation to this claim I am satisfied that capital payments in an amount of $32,000 were made by Mr and Mrs Besnard. I am also satisfied that the business had no ongoing value and that these moneys have been totally lost by the claimants. This is because the franchise on the evidence before me proved to be worthless. The evidence showed that any reasonable businessman undertaking the franchise would not be able to achieve a profit if conducted on the lines and within the parameters represented and prescribed by the respondents. However, the claimants did in fact derive some income from the business and these must be offset against the funds injected and lost. It is not possible to calculate the "profits" earned with any precision on the evidence before me but a figure of $18,000 appears reasonable. 83 The major component in the claim is for unrewarded labour. There is nothing in the TPA which limits the meaning of the expression "loss arising" with respect to this head of claim. The Full Federal Court has held that a claim for uncompensated labour is recoverable: see Cut Price Deli v Jaques (1994) 49 FCR 397 at 405, (1994) 126 ALR 413 at 421. However, I am not satisfied that the amount claimed of in the order of $58,000 has been made out in its entirety. In particular, I think that the notional remuneration calculated by reference to the Commercial Travellers' Award only gives a rough guideline, given the inherent uncertainties as to whether the claimants would have sought and obtained employment, their prospects of obtaining such employment and whether they continued in employment over the period of the franchise. Such a guideline is a starting point and is preferable to speculation. In my view, allowing for the uncertainties, my best estimate is that a figure in the order of $38,000 would be appropriate under this head. I am satisfied that the interest on moneys borrowed to finance the business is recoverable in principle because the liability to make those payments was caused by the misleading conduct of the respondents, although, the information as to interest on borrowings appears to be incomplete. In the circumstances I am satisfied that the amount claimed of $1,553 is recoverable. 84 In principle, I am satisfied that it is appropriate to allow interest at Supreme Court rates for the period of each claim up to judgment but because of adjustments to the amounts claimed, I will require the parties to calculate the precise figure for interest when bringing in Short Minutes. 85 In some cases, a claim for interest forgone has been made in addition to the interest on borrowings. I consider this involves a "double" claim and accordingly where interest on borrowings is claimed, it is not, in my view, appropriate to claim interest forgone on the moneys which might have been otherwise invested. Adjustments should be made in each case in respect of these instances of "double dipping". See Netaf Pty Ltd v Bikane Pty Ltd (1990) 26 FCR 305, (1990) 92 ALR 490. 86 In reaching the above conclusions I have considered the criticisms levelled against these figures by Mr Cox, an experienced and expert accountant called for the respondents. Mr Cox, however, did not descend to detailed calculations in his report. He was not asked to do so, but chose to point out what he considered to be defects in the general approach of Mr Cornell. His report was therefore general and discursive, and because of lack of reference to specific information his evidence was somewhat speculative as to the appropriate amount of damages. Mr Cox stepped out of his role as an assessor of damages and appeared to be strongly influenced by his firm views as to what DAs should have done by way of taking precautions before entering into the distribution agreements. In particular, he indicated that certain of the representations made would put an experienced accountant on enquiry. The observations of Mr Cox largely turn on the assertion that each DA was "running his own business" and that therefore the loss was attributable to the conduct of the franchisee. I do not accept this assumption. The evidence does not warrant such a conclusion. Although somewhat sparse, given the limited records and inherent assumptions, I prefer the more specific evidence given by Mr Cornell, although his evidence in some respects called for significant adjustment. 87 In relation to the Crawford franchise arrangements, for substantially the same reasons as is the case for the Besnard claim, I have reached the following conclusions: Capital injection lost $31,500 Trading profits $28,000 Unrewarded labour claim $66,000 Interest on borrowings $345 88 In relation to the Horler franchise, I am satisfied that the following figures are appropriate on the evidence, having regard to the matters discussed above in relation to Mr and Mrs Besnard and bearing in mind the reservations there expressed: Capital injection lost $30,000 Trading losses $1,474 Unrewarded labour $16,400 Interest foregone Nil Interest on borrowings $643 89 In the case of Mr Sarcasmo, on similar reasoning, the appropriate figures are as follows: Capital injection lost $25,200 Trading profit $12,283 Unrewarded labour $37,500 Interest on borrowings $4,860 Interest foregone Nil 90 Finally, in the case of Mr and Mrs Stevens and for similar reasons, the appropriate figures are: Capital expenditure $50,000 Trading profits $1,597 Unrewarded labour $5,400 Interest foregone Nil Interest on borrowings $1,943 91 In relation to all the claims, Supreme Court interest must be calculated for the period on the prevailing Supreme Court rates on the figures as adjusted having regard to the above findings. Anxiety 92 In addition to the above figures the claimants seek an award for anxiety or disappointment occasioned by their exposure to the stress of being involved in the franchises. 93 The authorities indicate that in an appropriate case damages can be awarded for vexation or anxiety arising from losses suffered through misrepresentation: see Collings Construction Co Pty Ltd v Australian Competition and Consumer Commission (1998) 152 ALR 510 at 511, and Humphries v TWT Ltd (1993) 120 ALR 693. 94 I am satisfied in each of the matters that a small award should be made under this head. There is no specific evidence as to medically established anxiety but it would be quite unrealistic to proceed on the basis that substantial distress was not caused to the claimants as a consequence of the misrepresentations. The claimants and their families were committed to a losing venture over substantial periods involving far more work than they could have reasonably foreseen. In my view, it is self-evident that such situations produced a significant degree of distress and anxiety which would not have occurred if the claimants had not acted on the misleading conduct of the respondents. There is no way of calculating an appropriate figure, but I consider that in each case a figure of $2,500 in respect of each claim would reasonably recognise and compensate the DAs for the extra stress and anxiety occasioned. In awarding this figure, of course, I have treated it as compensatory in nature and not punitive. Fraud and system 95 The ACCC pleaded and submitted that a number of the misrepresentations were not only made with knowledge of their falsity but also formed part of a deliberate and systematic course of conduct. The alleged conduct which can be inferred from the evidence, it was submitted, was that prospective purchasers would be deliberately led into entering a losing business. They would then experience considerable disappointment and loss which would cause them to surrender the businesses to the respondents without compensation, or they would be sold back at a greatly reduced price. This would enable the respondents to trade in the franchises by reselling them to other prospective buyers. 96 These allegations are serious and their proof calls for an appropriate level of satisfaction. The evidence placed before me does not satisfy this threshold. Although I have formed the view that many of the many assertions were made by the respondents without reasonable grounds, it does not follow that there was deliberate fraud or that there was any intent to exploit franchisees by a systematic course of conduct of resale of the franchises. The individual respondents were not thorough or painstaking in their preliminary "trials". They failed by silence to disclose the true position and indeed expressly misrepresented the profitability of the franchise. This does not amount to fraud. I therefore reject the submission based on fraud or systematic exploitation of franchisees.

Injunctive relief 97 It is submitted that an injunction will now serve no useful purpose and also that as a matter of discretion, no restraint should be imposed. However, I consider that injunctive relief is appropriate because of the widespread advertising of the franchises and the serious adverse consequences which ensue from the recommendation of any such scheme. The grant of injunctive relief will serve the salutary purpose of focusing the attention of the respondents on the necessity to guard against misleading conduct, and to some extent it may discourage other similar franchisors from making unjustifiable representations and acting in an irresponsible way: see Trade Practices Commission v Optus Communications Pty Ltd (1996) ATPR 41-478 at 41,895. It is an important consideration that these proceedings are initiated by the ACCC not simply for the benefit of private interests but in vindication of the public interest.

Conclusion 98 I am satisfied that the ACCC has made good its primary case based on misleading conduct, and that the relief should be granted as set out in the above reasons. I direct the ACCC to bring in Short Minutes on 16 July 1999 at 9.30 am to give effect to the above reasons and I will hear the parties on costs. I certify that the preceding ninety-eight (98) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Tamberlin.

Associate: Dated: 4 June 1999 Counsel for the Applicant: I Faulkner P Renehan

Solicitor for the Applicant: Australian Government Solicitor

Date of Hearing: 15-18 and 22-26 March 1999