Franchising: Federal Court freezes assets of franchisor to protect franchisees who claim they were misled

Background

Jump Swim is an Australian-based franchisor that sells franchises to franchisees wishing to operate their own Jump Swim School to supply learn-to-swim services to children. According to its website Jump Swim has over 65 swim school locations in Australia, and has established operations in Brazil, New Zealand and Singapore.

ACCC secures freezing order against Jump Swim

On 7 June 2019 Justice O’Bryan of the Federal Court made orders freezing the assets of Jump Loops Pty Ltd (Jump Loops) and its parent company Swim Loops Holdings Pty Ltd (collectively Jump Swim), various associated entities of Jump Swim  and Jump Swim’s managing director, Ian Campbell.  His Honour also ordered that Jump Swim and the associated entities identify their liquid assets world-wide comprising cash securities and deposits of any kind held with a financial institution.

Why is the ACCC taking action?

The ACCC instituted proceedings against franchisor Jump Swim in the Federal Court, alleging that it made false, misleading or deceptive statements about Jump Swim School franchises, in breach of the Australian Consumer Law (the ACL). The freezing order was sought prior to commencing the misleading and deceptive conduct action, for reasons as explained below.

The ACCC is alleging that Jump Swim made representations in its promotional material that a prospective Jump Swim School franchisee would have an operational swim school within 12 months of signing a franchise agreement, when it did not have reasonable grounds for making that statement.

The ACCC claims that there are over 90 Jump Swim franchisees who did not receive an operational swim school within 12 months or at all. The initial costs of setting up a Jump Swim School generally ranged from approximately $150,000 to $175,000.

What is a freezing order?

A freezing order is a form of injunction restraining a party from parting or dealing with property prior to a final court judgment. 

The purpose of a freezing order is to prevent the frustration or inhibition of the Court’s process by seeking to avoid the danger that a judgment or prospective judgment of the Court will be wholly or partly unsatisfied because assets have been dissipated. 

The principles for granting a freezing order are well established:

• the applicant must show that there is a reasonably arguable case
• the applicant must show that there is a risk of dissipation if the injunction is not granted
• the applicant must show that the balance of convenience favours granting the injunction. 

The Court’s judgement on the freezing order application

In regards to the first condition, Justice O’Bryan was satisfied that the evidence produced by the ACCC shows that there was at least a serious question to the tried whether the alleged conduct of Jump Swim amounted to contraventions of the ACL. This appeared to include conduct that the franchises were sold on a ‘turn-key’ basis, to be handed over and ready to operate and, a representation in the promotional material that there would be a “12 month turnaround from sign to open” of the franchise. The Court referred to the ACCC’s claim that representations made were false, misleading or deceptive and/or likely to mislead or deceive because some 90 franchisees were not provided with an operational franchise within 12 months. 

As to the second condition, His Honour was also satisfied that there was a reasonable apprehension that assets owned directly or indirectly by Jump Swim and Mr Campbell would be dissipated so as to frustrate the relief sought by the ACCC. This apprehension arose from the fact that Mr Campbell and Jump Swim were facing multiple proceedings in Australia, new corporate entities had been recently created to acquire and take over the franchise business and Mr Campbell had established similar business operations in America and New Zealand (and there was evidence of material financial transactions between the Jump Swim Group and the overseas entities).  

Lastly, in relation to the balance of convenience, Justice O’Bryan noted that the application was brought on an ex-parte basis to avoid risk of the dissipation of assets. An ex-parte application is a Court proceeding where only the party seeking the Court order appears before the Court. In those circumstances, His Honour ordered that the orders would continue until 12 June 2019, at which time the prospective respondents and associated entities would have an opportunity to be heard. On this basis, it was found that the prejudice to the prospective respondents and associated entities would be temporarily confined. The freezing orders have now been extended until the hearing and determination of the substantive proceedings.

The misleading and deceptive conduct proceedings in the Federal Court

After obtaining the freezing orders the ACCC instituted proceedings in the Federal Court against Jump Swim, alleging that it made false, misleading or deceptive statements about Jump Swim School franchises in contravention of the ACL, as described above. Mr Campbell is also a respondent in the proceedings. The ACCC claims that Mr Campbell was involved in the conduct.

According to the ACCC’s Concise Statement dated 17 June 2019, the ACCC claims that Jump Swim made false or misleading representations in its promotional material about the time it would take to set up an operating swim school business franchise in breach of sections 18 and 29 of the ACL, and that Jump Loops accepted payment from franchisees without providing operational franchises within the time specified or within a reasonable time, and in circumstances where it did not have reasonable grounds to believe it could do so in contravention of section 36 of the ACL. 

In a media release dated 18 June 2019 the ACCC says that many franchisees were not provided with an operational swim school within the represented time frame of 12 months or at all. The ACCC Chair Mick Keogh also said “Franchisors need to take their obligations under the Australian Consumer Law seriously. Purchasing a franchise is a big decision, and people looking to open a franchise business rely on the information from the franchisor being accurate…We allege this conduct caused substantial harm to franchisees who paid significant sums but did not receive an operational swim school within the time specified, or at all”.

The ACCC is seeking injunctions, declarations, pecuniary penalties, redress for franchisees, disqualification orders, and orders as to findings of fact, and costs.

What this means for Jump Swim franchisees 

Jump Swim franchisees should keep informed of the ACCC’s action as it proceeds, as the outcome may directly affect them. Should there be orders made against Jump Swim or if Jump Swim becomes insolvent, this could have immediate repercussions for them. 

Are you a franchisor or franchisee?

These proceedings act as a reminder to all potential franchisees to do their own due diligence before entering into a franchisee agreement and making payment. 

Franchisors also need to be very careful about what promises they make to prospective franchisees.

Williams + Hughes can assist you in several ways, including the following:

• drafting or reviewing franchise agreements
• advising in relation to exiting a franchise arrangement
• advising in relation to misleading and deceptive conduct by franchisors
• advising in relation to disputes concerning the franchise agreement, non-solicitation and restraint of trade of former franchisees, and claims relating to competition by the franchisor or other franchisees.

For further information on how we can assist please contact Leanne Allison or Damian Quail on +61 8 9481 2040 or leanne.allison@whlaw.com.au and damian.quail@whlaw.com.au.

This article is general information only, at the date it is posted.  It is not, and should not be relied upon as, legal advice.  This article might not be updated over time and therefore may not reflect changes to the law.  Please feel free to contact us for legal advice that is specific to your situation.