The Jump! Swim Schools franchise, and its founder and director Ian Campbell have found themselves in deep water. In a judgment handed down last month^[1], the Federal Court ordered Jump Loops Pty Ltd and its parent company Swim Loops Pty Ltd (collectively Jump!) pay $23 million and Mr Campbell pay $400,000.00 for making false or misleading representations to franchisees and wrongly accepting payments from franchisees.

Background

Jump! was an Australian franchisor which offered Jump! Swim School franchises. The initial start-up cost for a Jump! Swim School was between $150,000.00 and $175,000.00. Over 95 percent of revenue received by Jump! was generated from the sale of new franchises, with a total revenue of more than $16.1 million.

In June 2019, the Australian Competition and Consumer Commission (ACCC) instituted proceedings against Jump! alleging that it had made false, misleading or deceptive statements about Jump! Swim School franchises to franchisees and that it was in breach of the Australian Consumer Law.

The ACCC alleged that Jump! had made representations to 174 prospective franchisees in its promotional material. Jump! represented to prospective franchisees that it would be provided with an operational swim school within 12 months of signing a franchise agreement. Over 127 Jump! Swim Schools franchisees did not receive an operational swim school within 12 months or at all. The ACCC further alleged that Jump! was wrongful in accepting payment from the franchisees. ACCC Chair Mick Keogh stated that “Jump Swim continued to accept payments when it knew, or ought to have known at the time it accepted the payments, that the timing for its delivery of operational franchises was dependent on events that were outside its control ^[2] ”.  The ACCC also took action against Ian Campbell, due to his firsthand involvement in the alleged conduct.

Outcome

In its decision, the Federal Court declared that Jump! made false representations to 174 franchisees and accepted payments from 127 franchisees without reasonable basis, thereby breaching the Australian Consumer Law. The Court found that Jump! and Mr Campbell knew that it was impossible to accurately estimate the length of time it would take to open a franchise considering approval requirements relevant to each state and local council. Justice O’Bryan found that Jump’s! conduct was likely to have had a “very serious detrimental effect on the business and the livelihoods of those small business owners^[3]”.

The Court also made orders restraining Mr Campbell from being involved in carrying on a business or as a franchisor in Australia for three years and from making representations about timeframes or wrongly accepting payment relating to a franchise for a period of 5 years.

Further, the Court ordered that Mr Campbell pay $500,000.00 in compensation to franchisees in addition to the $400,000.00 penalty. The compensation order made against Mr Campbell means that 131 franchisees will be eligible for some partial compensation for the loss they suffered. However, unfortunately, many of the prospective Jump! franchisees who paid money to Jump! will be unlikely to be fully compensated for their loss, and the corporate penalties are unlikely to be paid. Nevertheless, as commented by Mr Keogh the “penalties ordered by the Court send a strong deterrence message” to franchisors^[4].

In June 2019, the Court ordered that Jump! be wound up and liquidated. The Jump! franchise rights was ultimately purchased by Belgravia Group, ending months of speculation and uncertainty for the beleaguered entity and its existing franchisees.

Key Lessons

The outcome of this case serves as a reminder for franchisors of their obligations under the Australian Consumer Law (and the Franchising Code of Conduct). Further this case highlights the ACCC’s willingness to take action against franchisors on behalf of franchisees for breaches of the Australian Consumer Law. As prompted by Mr Keogh, “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”.

The ACCC will attempt to contact all qualifying franchisees at their last known mail or email address, through the Australian Government Solicitor. Franchisees are not obliged to participate in the compensation scheme.

If you require any advice or assistance regarding your franchise, please do not hesitate to reach out to Coleman Greig’s Commercial Advice team, who would be more than happy to assist you.