Fitness brand Ultimate Fighting Championship has to pay three former franchisees $5 million after a court case found the franchisor had misled the franchisees.
The Ultimate Fighting Championship franchise in Australia is run under a master territory agreement.
The judge found the Australian directors, Maz Hagemrad and Samer Husseini, had engaged in misleading and deceptive conduct.
Federal Court Justice Thomas Thawley said the three franchise agreements and guarantees were worthless and should be declared null and void.
Judge rejected UFC claims of profitability
The three franchisees had relied on misleading information provided by UFC. The company had stated its franchise was a proven model in Australia and that the operating gyms were profitable. It also identified a breakeven point with the recruitment of 600 to 700 members.
Justice Thawley rejected these claims. He said while there were existing businesses, they were not all doing well. The claim that the gyms were profitable was misleading and deceptive, he said because two of the three – Balcatta and Blacktown – were at the time unprofitable.
He also found UFC had misled the franchisees about the expected gross income, the costs involved in setting up the gyms, and the projected growth of membership numbers.
The judge rejected UFC’s contention it was the franchisees’ misunderstanding that fit out and equipment costs were not extra but included in the set up figure.
The businesses had no value as a going concern
Justice Thawley was also scathing of the preferential arrangements UFC had said were in place to help franchisees.
Fitness equipment supplier Life Fitness offered the franchisor a discount of 10 per cent. However franchisees were expected to pay full price for the machinery.
“This was more in the nature of profiteering from franchisees than securing preferential agreements for them with suppliers,” Justice Thawley said.
The judge concluded the franchisees had invested in businesses which “did not and were unlikely ever to generate a profit”.
“The businesses had no value as a going concern,” he said. “The applicants incurred expenditure on setting up near valueless businesses.”
The judge ordered compensation of $1.4 million for the Castle Hill (NSW) franchisee and $1.9 million for the Blacktown (NSW) business owner. The franchisee of the Balcatta, Western Australia gym will receive $1.7 million in compensation.
This article has been amended to correct the abbreviation UFG to UFC.
