The embattled franchisor behind QSR chains Donut King and Gloria Jeans Coffees has been dealt another blow this week, with a Queensland court ruling that Retail Food Group (RFG) had breached Australian Consumer Law (ACL).
The Brisbane District Court on Friday found that RFG had misled two Townsville-based Michel’s Patisserie franchisees back in 2012, relating to supplier agreements and quality concerns.
Guirguis Pty Ltd, operated by former franchisees Frederick and Karen Guirguis launched its case against RFG in 2013, claiming neglect had left the couple over $400,000 out of pocket.
The pair lost their initial claim against the franchise giant in May 2016, however the latest appeal has yielded more positive results, all in the face of a $650,000 counter-claim from RFG.
In the case, the Guirguises revealed that the products supplied by RFG were often late and of poor quality, despite assurances by the franchisor that stock would be delivered timely from the Brisbane-based supplier, Dyson Cakes.
According to Mr Guirguis, unbeknownst to the couple, Dyson Cakes went into liquidation shortly before the Townsville outlet was opened, forcing all Queensland-based franchisees to source stock from the Sydney supplier, more than 2000km away.
In an email dated July 7, 2012, Mr Guirguis expressed concerns over the quality of the frozen products supplied, claiming the sub-par experience was leaving a sour taste in his customer’s mouths.
“Our large cakes take way too long to get to our store, we can’t have icing sugar, cream or photos on the cakes,” the email read.
“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.”
By early August 2012, the Guirguises were looking to exit, listing the business for sale. In mid-October, after months of supply issues and quality concerns, Mr Guirguis made the decision to cancel his direct-debit arrangements for RFG’s franchise service fees and marketing levies.
The couple claimed that projections made by RFG agents were misleading, however RFG fought back, arguing the representations were ‘mere puffery’.
At the hearing on Friday, Judge Jennifer Rosengreen disagreed.
“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,” Judge Rosengreen told the court.
“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. “
Judge Rosengreen slammed RFG’s $650,000 counter-claim for unpaid franchisee fees, ruling in favour of the former franchisees.
“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,” Judge Rosengreen said.
Despite the win, the Guirguises are still feeling the burden.
After claiming trading losses of $37,631 and spending $72,000 on franchisee fees, $216,993 on fitout and equipment and $3900 on transaction costs, not to mention more than $100,000 in lost wages, the Guirguises are now down more than $400,000.
It’s poor timing for RFG, with the latest ruling coming just days before the release of the group’s half-yearly results and just weeks out from the release of the Senate’s findings on the inquiry into franchising, where the brand featured prominently.
Just last week, RFG opted to cull a vast number of its head office team in order to streamline support services for its franchisees, as the brand desperately tries to repair its damaged reputation.
A spokesperson for RFG told Inside Franchise Business that the franchise group was disappointed with the results but would be weighing up legal options moving forward.
“The matter concerns events that occurred in 2012, which we consider are unique to the case,” the spokesperson said.
“It was initially tried in the District Court in 2016, where the Franchisor was successful in its defence. Given this, 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.”