The drowning of ‘JUMP! Swim Schools’: over $23 million in penalties ordered by the Federal Court

Further, the Court ordered that Mr Campbell – the founder, sole director and managing director of Jump Loops – pay a penalty of $400,000; pay $500,000 in compensation to affected franchisees; and be restrained for a period of 3 years from being in any way, directly or indirectly, involved in carrying on business as or of a franchisor.

Between March 2016 and February 2019, Jump Loops offered the Franchise to prospective franchisees on a ‘turn-key’ basis, promising to hand over a ready-to-operate business including premises, fit out services, training and associated rights pursuant to a standard form franchise agreement.  Jump Loops represented that franchisees would be provided with an operational swim school within 12 months of executing the franchise agreement (Representation).  Jump Loops entered into 174 franchise agreements, receiving payment from franchisees for the establishment of a JUMP! Swim School of between $150,000 and $175,000.  Of the 174 franchisees that signed up in that period, at least 152 never received an operational swim school.  Of those 152 franchisees, only 21 received a refund of monies paid to Jump Loops in full or in part.  Of the remaining 131 franchisees, at least 100 waited more than 12 months and never received a swim school and some 31 waited less than 12 months (to the date of liquidation of Jump Loops) and never received a swim school.

Jump Loops admitted that its conduct contravened the ACL.  The franchisor admitted that, by making the Representation, it engaged in conduct in trade or commerce which was misleading or deceptive, or likely to mislead or deceive, in contravention of s 18.  The Representation was with respect to a future matter and Jump Loops did not have reasonable grounds for making the Representation.  Jump Loops also contravened s 36(3) by accepting payment from franchisees where there were reasonable grounds, at the time the Representation was made, for believing that Jump Loops would not be able to supply an operational Jump Swim Schools franchise within 12 months of signing the franchise agreement or within a reasonable time, and it was aware, or ought reasonably to have been aware, of those grounds.  Lastly, Jump Loops contravened s 36(4) by accepting payment from franchisees for the supply of the Franchise but did not supply operational franchises within 12 months of signing the franchise agreement, or within a reasonable time.

In determining the appropriate penalty, the Court considered the recurring and systemic nature of the contraventions, as there were over 762 contravening acts.  Further, the loss suffered by franchisees as a result of Jump Loops’ contravening conduct was substantial – the franchisees impacted by Jump Loops’ conduct were generally small, unsophisticated businesses that made large payments to Jump Loops and received nothing in return.  The Court also held that although this was not a case involving fraudulent conduct, there was wilful blindness to the financial circumstances facing Jump Loops as it ought to have been apparent to the franchisor from an early stage that its business and financial model were flawed.  Similarly, Jump Loops was held to have displayed a reckless disregard for the consequences of its actions, as it knew that it was not delivering on the Representation, and despite that, it continued to sign up new franchisees and take payments from them.  There was also no evidence that Jump Loops had processes in place to ensure compliance with the ACL, and it showed no contrition for its conduct.

This is a particularly important decision for franchisors to be aware of, largely due to the significant penalties and consumer redress orders imposed by the Court.  Most notably, the Court ordered Mr Campbell to personally pay $900,000 in total, including a penalty and an order to redress loss to franchisees, and this amount would have been higher but for Mr Campbell’s financial circumstances.  The possibility of being held personally liable should alert directors and executives of franchisors to the risks of contravening consumer protection laws.  As regards the penalty against Jump Loops, ACCC Deputy Chair Mick Keogh stated that “Unfortunately, because [Jump Loops has] been put into liquidation, many franchisees are unlikely to be ever fully compensated for their loss, and the corporate penalties are unlikely to be paid.  However, we consider the penalties ordered by the Court send a strong deterrence message.”