Franchise giant Retail Food Group (RFG) breached Australian Consumer Law (ACL) by misleading two Michel’s Patisserie franchisees about a Townsville store in 2012, a Queensland court has ruled.
After a lengthy legal battle, RFG has become the third franchisor to be prosecuted for ACL breaches this year, but this time, it wasn’t the ACCC spearheading the case.
Former franchisees Frederick and Karen Guirguis pursued RFG through the courts, claiming they were left hundreds of thousands of dollars out of pocket by unsatisfactory supply arrangements and poor-quality products.
The Guirguis’ claimed RFG representatives misled them about a supply line to a Townsville outlet from Brisbane prior to their signing of a franchise agreement in 2012.
They alleged RFG reassured them about their ability to supply high-quality products from 1,400km away, but shortly before they opened the Brisbane supplier went bust, meaning products had to be driven up from Sydney, which is over 2,000km away.
In a complaint sent to RFG via email in July 2012, Mrs Guirguis said products were arriving in such bad condition they could not be sold.
“Our large cakes take way too long to get to our store, we can’t have icing sugar, cream or photos on the cakes,” she explained in the email.
“They arrive thawed out and most (I have all the photos to prove this) of the cakes small and large arrive in a poor state so bad that most can NOT be sold. Also as I have stated before some of your products are just too dry and we get a lot left on the plate or returned.”
The Guirguis’ sent several more complaints to RFG via email over the proceeding months regarding poor stock quality, and by August 2012, were trying to sell the business.
Frustrated with the ongoing supply and quality issues, the Guirguis’ stopped paying franchise service fees and marketing levies to RFG in October 2012.
Midway through 2013, the couple abandoned the outlet, having racked up $37,631 in trading losses.
An RFG representative had previously told the franchisees they could make $12,000 a week from the store, dismissing their original concerns about the outlet’s supply chain arrangements before their franchise agreements.
In its defence, RFG argued representations made to the franchisees before they signed on were “mere puffery”.
In legal terms, puffery relates to marketing speak that’s not supposed to be seriously considered and is not able to be proved correct or incorrect.
But Brisbane District Court judge Rosengren didn’t agree it applied in this case.
“I do not accept that any of the established representations can be characterised as mere puffery in the various contexts in which they were made,” she said.
“They were as to the kinds of products to be supplied to a potential franchisee for retail sale by it, the reliability and frequency of that supply from Brisbane and the quality of those products upon their receipt in Townsville. They were significant definitive statements.”
In a counterclaim, RFG attempted to recover $650,552 from the couple, claiming it had suffered a financial loss as a result of unpaid franchise fees and other costs associated with the store being abandoned.
But Judge Rosengren dismissed the counterclaim, finding in favour of the Guirguis’ and agreeing to hear submissions from both parties before making formal orders on costs and interest.
“The plaintiffs’ claims have been successful and the defendants are liable. RFG cannot recover damages or other relief for loss and damage caused by misleading and deceptive conduct of the plaintiffs, where the loss or damage is liability in damages to the plaintiffs for misleading or deceptive conduct under the ACL,” she said.
The franchisees spent $72,000 on franchise fees, $216,993 on fit-out and equipment, and incurred $3,900 in transaction costs setting up the business. In addition, $42,237 in borrowing costs were also incurred.
Lost wages, including super, amounted to a combined $105,000, with Mr Guirguis leaving a $250,000-a-year role at engineering business Laing O’Rourke to operate the franchise.
In total, the couple is out of pocket over $400,000, not including legal fees.
The case is the latest cog in the wheel for RFG, which has come under repeated criticism in recent years over its dealings with franchisees.
In a statement, an RFG spokesperson said the company was considering its legal options.
“The matter concerns events that occurred in 2012, which we consider are unique to the case. It was initially tried in the District Court in 2016, where the Franchisor was successful in its defence,” the spokesperson said.
“We are disappointed with the District Court’s most recent decision, and are engaging with our legal advisors regarding those options which may be available to the Franchisor.”