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.[1]

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.[2]

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.[3]

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.[4]

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.

[1] See:

[2] See: https://​www​.accc​.gov​.au/​m​e​d​i​a​-​r​e​l​e​a​s​e​/​a​c​c​c​-​t​a​k​e​s​-​a​c​t​i​o​n​-​a​g​a​i​n​s​t​-​u​l​t​r​a​-​t​u​n​e​-​u​n​d​e​r​-​f​r​a​n​c​h​i​s​i​n​g​-code

[3] See: https://​www​.accc​.gov​.au/​m​e​d​i​a​-​r​e​l​e​a​s​e​/​a​c​c​c​-​t​a​k​e​s​-​a​c​t​i​o​n​-​a​g​a​i​n​s​t​-​g​e​o​w​a​s​h​-​c​a​r​-​w​a​s​h​-​f​r​a​n​c​hisor

[4] See: