What you need to know
- The ACCC has enjoyed considerable success in two recent enforcement actions brought in the Federal Court against franchisors that failed to comply with their statutory obligations.
- The ACCC has announced it will continue to take enforcement action against franchisors in 2019, particularly in the food services sector.
- An extensive parliamentary inquiry into the franchising industry has concluded that substantial reform is required to address systemic exploitative behaviour and poor conduct on the part of franchisors, including by significantly increasing penalties for non-compliance with the Franchising Code.
- As scrutiny on the franchising industry continues to intensify, there may be significant financial and reputational consequences for franchisors that fail to comply with their statutory obligations.
What you need to do
- Franchisors and franchisees should ensure they comply with their obligations in the Franchising Code, including the obligation to act in good faith and the obligations on franchisors to provide meaningful and sufficient disclosure to franchisees.
- Monitor any moves by the government to amend the Franchising Code in the near future, including any proposal to increase penalties for non-compliance with the Code.
ACCC lands significant blows against franchisors in the Federal Court
The ACCC has been successful in two recent enforcement actions brought in the Federal Court against franchisors for breaches of the Franchising Code of Conduct and the Australian Consumer Law (ACL).
The first of these cases was against Ultra Tune Pty Ltd, the second largest independent motor repair organisation in Australia. The Court found that Ultra Tune made false or misleading representations to a prospective franchisee in breach of the ACL (including in relation to the age of the franchise and the rent payable on the franchise site). It also determined that this course of conduct amounted to various breaches of the Franchising Code, including Ultra Tune's obligation to act in good faith towards the prospective franchisee. In doing so, the Court agreed with the ACCC that the good faith provisions require a franchisor not to use the powers and opportunities available to it to the detriment of the franchisee in the absence of any objective legitimate interest in doing so.
In addition, Ultra Tune was also found to have breached its disclosure obligations towards various other franchisees, including breaching its obligation to provide "meaningful information" about marketing expenditure to franchisees. The Court imposed a $2.604 million pecuniary penalty on Ultra Tune for the various breaches.
The manner in which Ultra Tune conducted its defence also resulted in the Court ordering that Ultra Tune pay the ACCC's costs on an indemnity basis. This was in part as a result of what the Court described as Ultra Tune's attempt to cover up the "deplorable conduct" of Ultra Tune towards the prospective franchisee which it noted was persevered with rather than abandoned at the hearing.
The ACCC also succeeded in establishing that former car wash franchisor Geowash Pty Ltd contravened the Franchising Code and the ACL in relation to its conduct across 31 franchise agreements entered into between 2013 and 2016. The Court found that Geowash had made false or misleading representations by representing on its website that:
- franchisees could make specified monthly average revenue and gross average profit, where these figures had no reasonable basis; and
- it had a commercial relationship in Australia with various car manufacturers and hire companies when, in fact, it had no domestic affiliation with any of these companies.
The Court also determined that Geowash had acted unconscionably towards franchisees in creating the false impression that money paid by franchisees was used for the fit-out of their franchise site when in fact most of that money went to Geowash for its expenses and commission payments. As in Ultra Tune, the Court found that the course of conduct engaged in by Geowash amounted to a breach of the good faith provisions in the Code. The penalties to be imposed on Geowash for all of these contraventions will be determined in a separate hearing later this year.
ACCC targeting franchisors in the food services sector in 2019
The successful prosecutions of Ultra Tune and Geowash will only increase the ACCC's appetite to take enforcement action against franchisors that may be contravening the Code or the ACL. The ACCC's key compliance and enforcement priorities for 2019 (as in 2018) included the protection of small business in the franchising industry. The ACCC has also recently announced that it will be particularly targeting franchisor disclosure obligations in the food services sector in 2019 as it receives more franchising related complaints in this sector than any other.
Ultra Tune and Geowash were also the first cases which the ACCC had alleged that a franchisor had breached the good faith provisions in the Franchising Code (which were introduced in 2015). Given the ACCC was successful in obtaining civil penalties in respect of these contraventions in both instances, it is likely that the ACCC will continue to rely on this aspect of the Franchising Code in parallel with any claim that the franchisor has otherwise contravened the Franchising Code or engaged in conduct that is misleading or deceptive or otherwise unconscionable.
Parliamentary report exposes systemic failures in the franchising sector
In March 2019, the Parliamentary Joint Committee on Corporations and Financial Services released its Report on Fairness in Franchising (Franchising Report). The bipartisan report strongly criticized the current state of franchising compliance in Australia.
The Franchising Report concluded that the current regulatory environment has failed to deter systemic exploitative behaviour and poor conduct on the part of franchisors. The Franchising Report recommended, amongst other things, significantly increasing the penalties available for breaches of the Code in line with those available under the ACL and giving greater enforcement powers to the ACCC to investigate misconduct. This would significantly increase the maximum penalties available from the current $63,000 per contravention to up to $10 million.
Given the damning nature of the Franchising Report, it is likely that the government will take steps to amend the Franchising Code and other applicable laws in the near future.
Authors: Ted Talas, Lawyer, Andrew McClenahan, Lawyer and Anita Cade, Partner.
