ACCC v Kyloe - [2007] FCA 1522

FEDERAL COURT OF AUSTRALIA
ACCC v Kyloe Pty Ltd [2007] FCA 1522
TRADE PRACTICES – Franchising industry code – Enforcement of industry codes of practice – Where respondents involved in distribution of Polar Krush ice-drink machines – Where respondents failed to provide disclosure statements to its Sub-Distributors – Where respondents failed to provide a copy of the Franchising Code to each Sub-Distributor at least 14 days prior to entering into the alleged franchise agreements – Whether agreements between parties constituted “franchising agreements” for the purposes of the code – Whether the respondents granted the purported franchisees the right to carry on a business under a “system or marketing plan”
Held – No franchise agreement made out – The agreements do not constitute the granting of a right to carry on a business under a system or marketing plan – Application dismissed
WORDS AND PHRASES – “franchising agreement” “system or marketing plan”
Trade Practices Act 1975 (Cth) ss 51AD, 51AE, 51ACA, 75, 80(1)
Trade Practices (Industry Codes – Franchising) Regulations 1998 (Cth)
Capital Networks Pty Ltd v .au Domain Administration Ltd [2004] FCA 808 discussed
Master Abrasives Corporation v Williams (1984) 469 NE 2d 1196 cited
AUSTRALIAN COMPETITION AND CONSUMER COMMISSION v KYLOE PTY LTD ACN 096 480 956, KEVIN JAMES MCCANN, IMPACT DESIGN ACCESSORIES PTY LTD ACN 061 408 544, ROBERT BRUCE MORPETH AND THERESE IRENE MORPETH
VID 837 OF 2006
TRACEY J
18 OCTOBER 2007
MELBOURNE

IN THE FEDERAL COURT OF AUSTRALIA

VICTORIA DISTRICT REGISTRY

VID 837 OF 2006

BETWEEN:

AUSTRALIAN COMPETITION AND CONSUMER COMMISSION
Applicant

AND:

KYLOE PTY LTD ACN 096 480 956
First Respondent

KEVIN JAMES MCCANN
Second Respondent

IMPACT DESIGN ACCESSORIES PTY LTD ACN 061 408 544
Third Respondent

ROBERT BRUCE MORPETH
Fourth Respondent

THERESE IRENE MORPETH
Fifth Respondent

JUDGE:

TRACEY J

DATE OF ORDER:

18 OCTOBER 2007

WHERE MADE:

MELBOURNE

THE COURT ORDERS THAT:
1.The application be dismissed with costs.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA

VICTORIA DISTRICT REGISTRY

VID 837 OF 2006

BETWEEN:

AUSTRALIAN COMPETITION AND CONSUMER COMMISSION
Applicant

AND:

KYLOE PTY LTD ACN 096 480 956
First Respondent

KEVIN JAMES MCCANN
Second Respondent

IMPACT DESIGN ACCESSORIES PTY LTD ACN 061 408 544
Third Respondent

ROBERT BRUCE MORPETH
Fourth Respondent

THERESE IRENE MORPETH
Fifth Respondent

JUDGE:

TRACEY J

DATE:

18 OCTOBER 2007

PLACE:

MELBOURNE

REASONS FOR JUDGMENT
INTRODUCTION

The applicant, the Australian Competition and Consumer Commission (“the ACCC”), alleges that the respondents have contravened or have been involved in contravention of the Trade Practices Act 1975 (Cth) (“the Act”). It is alleged that the respondents breached an applicable industry code. The respondents are: Kyloe Pty Ltd (“Kyloe”), its sole director Kevin McCann (“McCann”), Impact Design Accessories Pty Ltd (“Impact”) and its two directors, Robert Morpeth and Therese Morpeth (“Morpeths”). The Morpeths have not entered an appearance in this proceeding.
The respondents are or were involved in the business of distributing Polar Krush ice-drink machines and the resale…

Grounds of appeal

[14] The appellant contends that the primary judge erred in finding that the respondent had discharged the onus of establishing the matters required under the relevant provision.

[15] It was submitted that his Honour failed to give adequate weight to the evidence of the second witness, and that the findings of fact were not reasonably open on the material before the Court.

[16] The respondent, for its part, submits that no error is disclosed, and that the conclusions reached were well within the range of outcomes available to the primary judge.

Consideration

[17] It is convenient to deal first with the question of construction, as the resolution of that issue informs the remaining grounds advanced by the appellant.

[18] For the reasons that follow, we are of the view that the appeal should be allowed in part and the matter remitted for further determination.

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Details

Case: [2007] FCA 1522
Decision Date: 18 October 2007

CaseChat Overview and Summary

The Australian Competition and Consumer Commission (ACCC) brought proceedings against Kyloe Pty Ltd and Impact Pty Ltd, seeking to have the defendants declared to be in breach of the Franchising Code of Conduct (the "Code"). The defendants argued that they were not franchisors and therefore not subject to the requirements of the Code. The primary dispute centered around whether the agreements between Kyloe, Impact, and the sub-distributors constituted a franchise agreement within the meaning of Clause 4 of the Code. If so, the defendants also faced allegations of contravening specific provisions of the Code, potentially leading to breaches of the Australian Consumer Law. Additionally, the directors of Kyloe and Impact were potentially liable under the Act for any contraventions.

The court had to determine if the agreements between the parties met the criteria for a franchise agreement as outlined in Clause 4 of the Code. The court also needed to decide if the defendants contravened the Code by failing to provide disclosure documents and copies of the Code to the sub-distributors. Finally, the court had to consider whether the directors of Kyloe and Impact incurred ancillary liability under the Act.

The court found that the agreements did not constitute a franchise agreement under the Code as they did not meet the requirements of Clause 4, particularly Clause 4(1)(b). Consequently, the defendants were not franchisors and were not obligated to comply with the Code. The court observed that even if a franchise agreement existed, the defendants would have contravened the Code by not providing disclosure documents and copies of the Code to the sub-distributors. However, since the court found that no franchise agreement existed, these contraventions were not relevant to the outcome. The court also concluded that ancillary liability issues did not arise due to the absence of a franchise agreement.

The court dismissed the application, ordering that the application be dismissed with costs. The court's decision hinged on the interpretation of the agreements and the application of the provisions of the Code, leading to the conclusion that the defendants were not franchisors and thus not subject to the requirements of the Code.

Orders

Orders of the court

1. The application be dismissed with costs.

Background

Background to the litigation

The issues which arise in the proceeding are:·Did Kyloe and/or Impact enter into a franchise agreement with the relevant Sub‑Distributors within the meaning of Clause 4 of the Code (the “Franchise Agreement Issue”)? If so:·Did Kyloe and/or Impact contravene certain provisions of the Code in respect of the franchise agreements, and thereby breach s 51AD of the Act (the “Contravention of Code Issue”)? If so:·Did the directors of Kyloe and/or Impact incur ancillary liability under s 75B of the Act (the “Ancillary Liability Issue”)?FACTS The facts are, largely, not in dispute. Affidavits were filed by representatives of each of the four corporate Sub-Distributors. Ms Ogrizovic also swore an affidavit. They were filed in support of the ACCC’s case. None of the deponents was required for cross-examination. McCann also swore an affidavit. On most points he was not challenged when cross-examined by senior counsel for the ACCC. NICC launched the Polar Krush ice drink in the United Kingdom in 1996. In April 2001 McCann purchased 32 Polar Krush dispensing machines, concentrate, straws and cups from NICC and imported them into Australia. McCann arranged for the placement of these machines at various sites in Queensland and New South Wales. The machines were placed free of charge. The retailers were obliged to purchase Polar Krush concentrate, straws and cups from a company controlled by McCann. In March 2003 McCann met the Morpeths. They decided to develop the Polar Krush business in Australia. This led to the making of what will be referred to in these reasons as “the Impact Agreement”. Other agreements involving other parties were subsequently made. For reasons which will become apparent it will be necessary to refer to a considerable number of the terms which are included in these agreements. In general terms the arrangement agreed to by McCann and the Morpeths involved:·McCann, through Kyloe, acting as head distributor for Australia of dispensing machines, concentrate, straws and cups, purchased from NICC.·The Morpeths assuming responsibility for the marketing of Polar Krush Ice Drinks in Australia.·The Morpeths purchasing dispensing machines from Kyloe.·The appointment of Sub-Distributors by NICC and Kyloe.·The sale, by Kyloe, of concentrate, straws and cups to the Sub-Distributors.·The sale, by the Morpeths (acting through Impact), of dispensing machines to the Sub-Distributors.·The Sub-Distributors undertaking responsibility for placing the dispensing machines in retail outlets and for selling concentrate, straws and cups to the retailers.·The provision, by McCann, to Sub-Distributors of instruction about the operation of the machines and, if requested, information as to how best to approach potential retailers and where machines might best be placed to ensure good returns.·The provision, by McCann, to Sub-Distributors of free point of sale material such as posters, mobiles, cup stands, labels and stickers.The Impact Agreement

Evidence

Evidence Before The Court

Full text does not contain this section.

Decision

Reasons for decision

TRACEY J

I need not resolve this dispute. There is, however, force in the respondents’ submission that the fee charged by Impact for the provision of training by McCann fell within the exception provided for in Clause 4(1)(d)(v). McCann incurred out of pocket expenses of $20,826.33 in providing training to the Sub-Distributors. He received $19,863.57 by way of reimbursement from Impact. The reason for the shortfall was not explained. Nonetheless, it does indicate that neither Kyloe nor Impact sought to obtain a profit from training activities. McCann’s services were provided to the Sub-Distributors at below cost to him. The time he spent travelling and providing training was not charged for. Whatever the “usual” price of providing such services might have been, no attempt was made to ascertain that figure or to impose it as a cost on Sub-Distributors.Conclusion As noted at the outset of this analysis, the elements of Clause 4(1) of the Code are cumulative. Given that the requirements of Clause 4(1)(b), at least, have not been satisfied, I do not consider that a “Franchise Agreement” existed within the meaning of the Code.Other Issues There can be no doubt that, had a franchise agreement existed, to which the Code applied, both Kyloe and Impact contravened the Code by, at least, failing to give a current disclosure document to each prospective Sub-Distributor (see Clause 6B) and failing to give a copy of the Code to each Sub-Distributor at least 14 days prior to the entering into of the relevant franchise agreement (see Clause 10). These obligations, however, fall on a “franchisor”. As neither Kyloe nor Impact was a franchisor they were not required to observe the requirements of the Code and did not, therefore, contravene the Code. In view of my earlier findings ancillary liability issues do not arise.DISPOSITION The application should be dismissed with costs.

Ratio Decidendi

Legal Principle Established

Established by: TRACEY J

Guidance concerning the operation/management of franchise. Some limited guidance, of which mention has already been made, was provided by McCann during the training sessions. Under this head the ACCC also seeks to rely on the provisions of the Sub-Distribution Agreements which required the submission of written reports to Kyloe and the purchasing, by Sub-Distributors of minimum quantities of product. Sales territories. As Clause 3.1 of the Sub-Distribution Agreement made clear, there were no territorial divisions established within Australia. All Sub-Distributors were free to distribute Polar Krush products and machines anywhere in the country. The respondents submit that the evidence on which the ACCC relies falls well short of establishing the existence of a system or marketing plan. They rely on the absence, in the commercial arrangements between Kyloe and Impact and the Sub-Distributors of most of the features identified by Bennett J in Capital Networks. They emphasised:·The absence of any exclusive or divided territory within which Sub-Distributors might operate.·The fact that neither Kyloe nor Impact had any right to inspect the financial records of the Sub-Distributors, to conduct audits or to inspect premises at which machines had been installed.·The fact that the Sub-Distributors were under no obligation to produce a business plan.·That, subject to minor restrictions imposed by the Sub-Distribution Agreements in relation to the use of advertising materials and the need for Sub-Distributors to receive instruction about the operation of the machines, the Sub-Distributors were free to run their businesses as they pleased.·The two continuous positive obligations imposed on Sub-Distributors by the Sub-Distribution Agreements, namely the requirements to submit written reports and order minimum quantities of product, were requirements that could not be and were not enforced. I accept most of the respondents’ submissions on this point. Although both Kyloe and Impact, through their separate contractual arrangements with the Sub-Distributors, required the Sub-Distributors to undertake a limited number of relatively minor tasks and to refrain from doing certain things, they did not seek to establish a system or marketing plan under which the Polar Krush products were to be marketed by the Sub-Distributors. The Morpeths, acting on behalf of Impact, did little more than advise potential Sub-Distributors about the essential terms of the proposed contractual arrangements and to offer encouragement. If a Sub-Distributor entered into the agreements, they were provided with two to three hours of training by McCann, acting on behalf of Kyloe. The training concentrated on the operation of the machines and the handling of the Polar Krush products. There was also some general encouragement and advice and the provision of a limited quantity of advertising and other promotional material. These activities, on the part of Kyloe and Impact, even if considered cumulatively, in my opinion, fall well short of a system or marketing plan.

IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY	VID 837 OF 2006

JUDGE:	TRACEY J
DATE OF ORDER:	18 OCTOBER 2007
WHERE MADE:	MELBOURNE

IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY	VID 837 OF 2006

JUDGE:	TRACEY J
DATE:	18 OCTOBER 2007
PLACE:	MELBOURNE