Pub­li­ca­tions

ACCC report high­lights penal­ties for fran­chisors for fail­ing to meet dis­clo­sure obligations

The ACCC has recent­ly pub­lished its bi-annu­al Small busi­ness in focus report (the Report’) for the peri­od July to Decem­ber 2017, which includes insights into the work that the ACCC under­takes to pro­tect franchisees.

The Report includes sta­tis­tics about the num­ber of reports it receives about Fran­chis­ing Code relat­ed issues” that reveals that between July to Decem­ber 2017 it received 29 reports of inad­e­quate dis­clo­sure” under the Fran­chis­ing Code, 20 reports of not act­ing in good faith” and 11 reports of improp­er ter­mi­na­tion of a [fran­chise] agreement”.

With the most com­mon com­plaints to the ACCC relat­ing to dis­clo­sure oblig­a­tions, it is unsur­pris­ing that the Report reveals that both of the enforce­ment actions the ACCC took dur­ing this peri­od (in the field of fran­chis­ing law) relat­ed to alle­ga­tions of inad­e­quate disclosure.

We dis­cuss both actions below.

ACCC’s court action against Pas­tacup fran­chisor — summary

Appar­ent­ly in the first case where court ordered penal­ties have been imposed under the most recent iter­a­tion of the Fran­chis­ing Code of Con­duct (Code’) (which came into effect on 1 Jan­u­ary 2015), the Pas­tacup fran­chisor was fined $100,000 and its co-founder and for­mer direc­tor fined $50,000 for fail­ing to com­ply with dis­clo­sure obligations.

Back­ground

Under the Code, the fran­chisor was required to give to poten­tial fran­chisees a dis­clo­sure doc­u­ment that, amongst oth­er things, includ­ed: a sum­ma­ry of the rel­e­vant busi­ness expe­ri­ence for the last 10 years of each offi­cer of the fran­chisor (item 3.1); and whether an asso­ciate of the fran­chisor had been bank­rupt or insol­vent in the last ten years (item 4.2).

The case

The dis­clo­sure doc­u­ment devel­oped by the fran­chisor in 2014 includ­ed state­ments about its then direc­tor (Mr Bern­stein) and that his expe­ri­ence includ­ed set­ting up and oper­at­ing suc­cess­ful cafes, Pic­co­lo Mono and Caf­Bon­di” in Syd­ney, and that he holds a Bach­e­lor of Com­merce degree and is respon­si­ble for the Pas­tacup con­cept and became a direc­tor of Pas­tacup ear­ly in 2008”.

The dis­clo­sure doc­u­ment did not, how­ev­er, dis­close the insol­ven­cy of the two pre­de­ces­sor Pas­tacup fran­chisors or that Mr Bern­stein had been a direc­tor of those companies.

The court held that for this rea­son the fran­chisor (and Mr Bern­stein per­son­al­ly) had breached the Code.

Fur­ther iter­a­tions of the dis­clo­sure state­ment that were sub­se­quent­ly devel­oped and giv­en to poten­tial fran­chisees suf­fered from sim­i­lar deficiencies.

Some of the fac­tors the court had to con­sid­er in assess­ing the relief it would award were the loss or dam­age caused and the impact on inno­cent third parties.

Inter­est­ing­ly, the court found that loss” in this sense could mean loss of oppor­tu­ni­ty to make an informed deci­sion about the fran­chise, it did not mat­ter that there was no evi­dence of a fran­chisee being finan­cial­ly impact­ed by the defec­tive dis­clo­sure document.

The fol­low­ing pas­sage of the judg­ment is illustrative:

130. Decid­ing to take a fran­chise is usu­al­ly a sig­nif­i­cant deci­sion for the fran­chisees. A sig­nif­i­cant finan­cial com­mit­ment was and is required from Pas­tacup fran­chisees to set­up and oper­ate a Pas­tacup fran­chise.
131. Because of the sig­nif­i­cance of such deci­sions, the Fran­chis­ing Code requires that a fran­chisor cre­ate and give to prospec­tive fran­chisees a dis­clo­sure doc­u­ment that, amongst oth­er things, includes a sum­ma­ry of the rel­e­vant busi­ness expe­ri­ence of the fran­chisor and each of its offi­cers for the last 10 years. The pur­pose of the dis­clo­sure doc­u­ment is to help fran­chisees make a rea­son­ably informed deci­sion about the fran­chise.
132. In my view, Mr Bernstein’s involve­ment in two pre­de­ces­sor fran­chisor com­pa­nies which were wound up by rea­son of insol­ven­cy was busi­ness expe­ri­ence” that would be rel­e­vant as it would help fran­chisees make a rea­son­ably informed deci­sion about the fran­chise.
133. The respon­dents failed to dis­close this rel­e­vant busi­ness expe­ri­ence of Mr Bern­stein as a direc­tor of pre­de­ces­sor Pas­tacup fran­chisors in the draft­ing and pro­vi­sion of the 2014 Dis­clo­sure Doc­u­ment to the nine Prospec­tive Fran­chisees. The Prospec­tive Fran­chisees sub­se­quent­ly entered into fran­chisee agree­ments with Morild with­out ful­ly appre­ci­at­ing Mr Bernstein’s rel­e­vant busi­ness expe­ri­ence.
134. Loss or dam­age can be of a non-pecu­niary nature: ACCC v Coles Super­mar­kets Aus­tralia Pty Ltd (2015) 327 ALR 540. In Coles Super­mar­kets, All­sop CJ observed (at [57]) that the rel­e­vant loss or dam­age was the loss by con­sumers of an oppor­tu­ni­ty to make a dif­fer­ent pur­chas­ing choice had they been pro­vid­ed with accu­rate infor­ma­tion.
135.The Prospec­tive Fran­chisees in Pas­tacup lost an oppor­tu­ni­ty to make a ful­ly informed deci­sion based on all rel­e­vant busi­ness expe­ri­ence of Mr Bern­stein, which would have includ­ed accu­rate infor­ma­tion about the two pre­de­ces­sor fran­chisor com­pa­nies hav­ing been wound up by rea­son of insol­ven­cy.
136.The con­tra­ven­tions were rea­son­ably seri­ous because:
(a) they affect­ed the abil­i­ty of inno­cent third par­ties, specif­i­cal­ly the Prospec­tive Fran­chisees, to make a rea­son­ably informed deci­sion when they expend­ed sig­nif­i­cant time, mon­ey and resources required to set-up and oper­ate a Pas­tacup fran­chise;
(b) if Morild, like the two pre­de­ces­sor Pas­tacup fran­chisors before it, became insol­vent and Pas­tacup Inter­na­tion­al ter­mi­nat­ed its licence, then the fran­chisees could be left with­out the use of the Pas­tacup intel­lec­tu­al prop­er­ty and this would cause them loss;
(c) the con­tra­ven­ing con­duct was repeat­ed; and
(d) giv­en the pos­si­bil­i­ty that the fran­chisees could be left with­out Pastacup’s intel­lec­tu­al prop­er­ty if Morild became insol­vent, it was impor­tant for Morild to inform prospec­tive fran­chisees of the his­to­ry of insol­ven­cy in the respon­dents’ pre­de­ces­sor com­pa­nies and Mr Bernstein’s involve­ment with these companies. 

The court deter­mined it was appro­pri­ate to fine the fran­chisor $100,000 and Mr Bern­stein $50,000. It also grant­ed a series of injunc­tions which set out the word­ing that the fran­chisor must use in its dis­clo­sure state­ments for the next 10 years (!)

ACCC issues infringe­ment notice to couri­er company

The Report also states that the ACCC issued an infringe­ment notice of $9,000 to a couri­er com­pa­ny for alleged­ly breach­ing the Fran­chis­ing Code by pro­vid­ing an inad­e­quate dis­clo­sure doc­u­ment to prospec­tive fran­chisees. The alle­ga­tion was that the dis­clo­sure doc­u­ment failed to include details of for­mer fran­chisees that had ter­mi­nat­ed or trans­ferred their franchises.

The couri­er com­pa­ny also pro­vid­ed the ACCC with a court enforce­able under­tak­ing to address the ACCC’s con­cerns that it had made false or mis­lead­ing rep­re­sen­ta­tions regard­ing the future earn­ings of couri­er fran­chisees by adver­tis­ing an income guar­an­tee” of $1,500 per week for 30 weeks to prospec­tive franchisees.

The ACCC was con­cerned that prospec­tive fran­chisees would under­stand this rep­re­sen­ta­tion to be the like­ly income they could there­fore expect to earn at the end of the stip­u­lat­ed period.

The couri­er com­pa­ny has now under­tak­en to pro­vide actu­al earn­ings infor­ma­tion to prospec­tive fran­chisees, and not to describe the finan­cial sup­port pro­vid­ed to fran­chisees as an income guar­an­tee” in future mar­ket­ing of its couri­er franchises.

Key lessons for fran­chisors aris­ing from the ACCC’s enforce­ment actions

The above mat­ters high­light the ACCC’s deter­mi­na­tion to pur­sue fran­chisors, amongst oth­er things, for fail­ure to ade­quate­ly com­ply with Code dis­clo­sure require­ments and also its readi­ness to issue infringe­ment notices in appro­pri­ate circumstances.

The Pas­tacup deci­sion con­firms that the loss of oppor­tu­ni­ty to make a ful­ly informed pur­chas­ing choice (eg a deci­sion about whether to enter into the fran­chise agree­ment) due to a defi­cient dis­clo­sure doc­u­ment, is a rel­e­vant fac­tor which the court will take into account in deter­min­ing finan­cial penal­ties for franchisors. 

Fran­chisors should reg­u­lar­ly review their dis­clo­sure doc­u­ments to make sure that they are accu­rate and up to date. The greater the poten­tial for an omis­sion or mis­rep­re­sen­ta­tion to adverse­ly affect a poten­tial franchisee’s abil­i­ty to make an informed deci­sion about the fran­chise on offer, the greater the need for scrutiny.