Franchisees suffer setback in class action against Hog’s Breath Cafe

Franchisees in one of Australia’s best-known steak restaurant chains have suffered a setback in their legal action against the Queensland company and it could impact other class actions.

Franchisees have suffered a set back in their class action against Hog's Breath Cafe group.

A class-action lawsuit seeking damages for alleged “unconscionable conduct’’ by one of Australia’s best-known steak restaurant chains has suffered a potentially fatal setback.

Franchisees in the embattled Hog’s Breath Café group have been ordered to pay nearly $2m in security to cover the legal costs of the Queensland-based management group and some of their key executives defending the case.

The money would be held in trust and only dispensed in the event that the class action is unsuccessful.

Hog's Breath Cafe was established in 1989.

Philip Argy, a solicitor acting for the franchisees, said Wednesday that his clients would seek leave to appeal the costs order this week as he acknowledged that proceedings before the NSW Federal Court will almost certainly collapse if the funds cannot be sourced.

He also warned that the ruling handed down this month has “huge significance’’ for future class actions nationwide since participants are typically cash-strapped.

“If this isn’t overturned, it’s going to sound the death knell of nearly all class actions in Australia,’’ he said.

Solicitor Philip Argy

Mr Argy had previously told the court that the lead plaintiffs, who have operated a Hog’s outlet in western Sydney since 2011, could pay at most $20,000 over three to six months. Their bank has declined to make further loans and litigation funders have also rejected a request to back the case.

If the move to overturn the costs order fails, Mr Argy said a fundraising appeal may be made to more than 100 companies and individuals who make up the class action, which was filed in April last year on behalf of all franchisees who were in operation between mid-2014 and late 2020.

Mr Argy also noted that he has previously discussed the matter with the Australian Competition and Consumer Commission, which might consider separate legal action.

 In her ruling handed down February 4, Justice Brigitte Markovic said that “the applicants have a bona fide case with reasonable prospects of success’’.

 “However, I am unable to and would decline to make any findings about the strength of their case given the nascent stage of the litigation and the limited evidence before me which might inform such findings,’’ she wrote.

Former Hog's Breath CEO Ross Worth. Picture: Annette Dew

The first Hog’s Breath Café was launched in Airlie Beach in 1989 by entrepreneurs Don Algie and Ginger White, who returned to oversee the group in late 2020 after a tumultuous few years.

At its peak, there were about 90 outlets across Australia, New Zealand, Singapore and Thailand.

But that number has now fallen to just 45 today, with more than a dozen franchisees going bankrupt over the past five years or so amid allegations of mismanagement from the head office.

Longtime chief executive Ross Worth rebutted those claims at the time, blaming a weak economy and slowdown in the restaurant sector long before the severe impact of the pandemic.

Mr Worth stepped down as CEO in early 2020 to make way for Steven Spurgin, who ditched the ill-fated 2016 rebranding of the restaurants under the banner of Hog’s Australia’s Steakhouse

Both men are among the respondents in the class action that alleges wrongdoing by franchisor HBCA Pty Ltd, which changed its name to HBC Management Pty Ltd in late 2020.

Franchising agreements with HBCA were terminated at that time and assigned to HBC Management, which is jointly controlled by the restaurant’s original founders, Mr Algie and Ms White.

The class action alleges that four key executives at HBCA— Mr Worth and Mr Spurgin, as well as Alfred Dryland and Matthew Jesse--“were persons knowingly concerned in or party to…breaches of its duty of good faith and unconscionable conduct’’.

 Specifically, it claims that HBCA improperly established competing food businesses, cut menu items and reduced prices as part of the rebranding to Hog’s Australia’s Steakhouse.

It also alleges that HBCA failed to “implement any advertising, public relations and promotional campaign for the benefit of the franchisees’’ even though the restaurant operators made monthly payments for precisely this service.

Instead, the lawsuit claims, advertising fund moneys were used “for things that were not legitimate marketing or advertising expenses’’. The company also failed to provide financial statements or audit reports that would have provided evidence the money had been spent as intended, the franchisees allege.

Hog's Breath Cafe meal

Four months before the class action was lodged, HBCA sued 11 franchisees and their guarantors in state courts in NSW, the ACT and Queensland to recover alleged unpaid royalties.

After defences and cross-claims were filed in those cases, the court moved to have the issues decided under a single class action. If the class action collapses, the state court matters are expected to resume.

In a statement released last week, HBC Management directors and Mr Spurgin said they “have always strenuously defended any allegations of involvement with claims made within the class action”.

“The claims relate to dealings prior to October 2020 which is when the original owners of Hog’s Breath Cafe, Don Algie and Ginger White, bought back the Hogs Breath Café franchise system from HBCA, who the class action was filed against.

“Current management doesn‘t take pleasure in any step of a class action process which is beyond their control, including the latest ruling, but will continue to defend the allegations made against them.”

While HBC Management is named as a respondent in the case, Mr Algie and Ms White are not singled out as such.

Originally published as Franchisees suffer setback in class action against Hog’s Breath Cafe