Franchisors beware: ACCC report highlights actions taken against franchisors
The ACCC has recently published its biannual “Small Business in Focus” report (“the Report”) which describes the work it has undertaken concerning small business, franchising and agriculture over the first six months of this year.
Part of the Report highlights the enforcement actions it has taken against franchisors for alleged breaches of the Franchising Code of Conduct (“the Code”) – the mandatory industry code which prescribes rights and obligations for franchisees and franchisors in franchise arrangements.
The Report is a timely reminder that where the ACCC suspects there has been a breach of the Code, it has powers to bring legal action against the defaulting party which may result in financial penalties and other remedies being ordered.
The Report highlights that the ACCC has commenced proceedings against a national motor vehicle repair franchisor, for a number of alleged failures to comply with the Code including:
- failure to act in good faith in its dealing with a prospective franchisee; and
- failure to provide a prospective franchisee with documents the Code specifides must be provided before accepting a non-refundable payment.
It also alleges that the franchisor made false or misleading representations about the franchise site, in breach of the Australian Consumer Law.
According to the ACCC’s website, the case is the first time the ACCC has taken action for alleged breaches of the “good faith” provisions, which were introduced into the Code in January 2015 (and require franchisors and franchisees to act in good faith in their dealings with each other).
The ACCC is seeking a refund of the prospective franchisee’s payment and declarations, injunctions, pecuniary penalties, compliance and adverse publicity orders against the franchisor. The case is ongoing.
The Report also highlights that leave of the court is being sought to commence enforcement action against a national car wash franchisor.
If leave is granted the ACCC has indicated that the proceedings will allege that this franchisor made false or misleading representations and engaged in unconscionable conduct in breach of the Australian Consumer Law, and also failed to comply with the good faith obligation contained in the Code.
In particular, the ACCC will allege that from at least November 2015 to May 2016, the franchisor made false or misleading representations on its website that:
- prospective franchisees could make revenues of $70,216 and estimates profits of $30,439 in an average 28-day period, in circumstances where it did not have reasonable grounds for making those representations; and
- the franchisor has a commercial relationship or affiliation with various companies such as Nissan, Kia, Renault, Audi, Emirates, Shell, Hertz, Holden, Ikea and Thrifty, when (in fact) it did not.
The ACCC also indicated that it will allege that the franchisor directed a substantial portion of franchisee funds for purposes not permitted under the franchise agreement and not disclosed to franchisees, including payment of commissions to the franchisor’s director and National Franchising Manager. The ACCC has indicated that as well as seeking financial penalties against the franchisor it will also seek orders disqualifying the franchisor’s director and National Franchising Manager from managing corporations for a period of five years.
The Report also highlights that the ACCC issued two infringement notices to a national fast food chain for failing to provide an audited marketing fund statement and an auditor’s report to franchisees as required by the Code, resulting in penalties of $18,000.
The key learnings franchisors should take from the ACCC’s Report is that there has never been a more important time for franchisors to understand their obligations under the Franchising Code of Conduct. Significant portions of the Code deal with what information and documents must be provided to franchisees (and prospective franchisees) and at what times. The enforcement action taken by the ACCC highlighted in the Report makes clear that failure to comply with these obligations may expose franchisors to legal action.
Similarly, the Report highlights that the duty to act in “good faith” is not something merely aspirational or a “nice to have”. It is a legal duty and failure to comply with it, can expose organisations to penalties.
Finally, franchisors need to remember that at every point in their franchising journey they need to have reasonable grounds for any public statements or representations they make. A misleading statement to a prospective franchisee in an effort to “get them on board” may result in exposure to legal proceedings if there was no proper basis for making the representation.