ACCC targeting rogue traders

Australian Competition and Consumer Commission (ACCC) chairman, Graeme Samuel, announced recently that the ACCC will continue to target what he described as “rogue operators in the franchise industry” This is part of the ACCC’s overall strategy to provide a fair and competitive environment for small businesses.

The following looks at the ACCC’s warning in light of some common issues that we have seen in acting for franchisors.

The ACCC’s message

Samuel warned: “The ACCC is taking a hard line against blatantly deceptive conduct.” He also announced that the ACCC is currently examining options available for taking criminal proceedings against “those people who are flagrantly in breach of the law”.

Breach of the Franchising Code of Conduct and Trade Practices Act 1974

A breach of the Code is a breach of the TPA (a failure to comply with a mandatory industry Code). A person (franchisee) who has suffered loss or damage resulting from the franchisor’s breach may recover damages from the franchisor and a court may declare that the franchise agreement is void. Regardless, there is currently no criminal sanction for a failure to comply with the Code. However, there are other provisions of the TPA, such as section 75AZC (false or misleading representations) and section 75AZM (misleading representations about certain business activities) in Part VC of the TPA. If contravened, these sections may attract criminal penalties. Maximum fines under these sections are $1.1 million for a corporation and $220,000 for individuals. It is clear from the ACCC warning that, if necessary, it may prosecute franchisors under these provisions.

Key areas of concern

Key areas of concern identified by Samuel are:

1. Non-compliance with the Code, including not admitting that an arrangement is a franchise agreement and failing to attend mediation.

2. Misrepresentations such as overstating the profit expectations, financial rewards and viability of a franchise.

3. Unconscionable conduct – described by Samuel to include “bullish and thuggish behaviour by franchisors to implement unnecessary and unreasonable changes on franchisees”.

Problem areas

In the course of acting for many franchisors since the Code was introduced in 1998, we have found that there are a number of areas where franchisors can inadvertently be at risk of breaching the Code and the TPA.

Disclosure document

A franchisor’s obligations with respect to disclosure documents do not end once the disclosure document is given to the franchisee and the franchise agreement is entered into. Under the Code:

A current disclosure document must also be given to a franchisee proposing to renew or extend a franchise agreement. This provision of the Code is often overlooked by franchisors. If a franchisor becomes aware of a materially relevant fact that is not contained in a disclosure document, it must advise a franchisee or prospective franchisee in writing within 60 days of becoming aware of that fact. The Code defines ‘materially relevant’ facts. One that is often overlooked is a change in the ownership or control of intellectual property that is material to the franchise system. A franchisor must give to a franchisee a current disclosure document within 14 days after a written request is made by a franchisee.

Franchisors must ensure that the information contained in a disclosure document (and the information made available to franchisees) is accurate and current. This is particularly so in relation to financial information, for example, anticipated earnings. For instance, from one year to the next, the number of franchisees may have increased or diminished. This may have an impact on the franchisee’s forecasted return or profitability from the franchise.

Manuals

Many franchise agreements refer to dealer operating (or operations) manuals and contain the following type of clause: The franchisor may publish from time to time material including but not limited to Operating Manuals. The Operating Manuals, as amended from time to time, are incorporated into and form part of this agreement to the extent that they are not inconsistent with the Agreement. A breach of the Operating Manuals will constitute, and will be treated as a breach of this Agreement. Operating manuals are often drafted (and amended) by franchisors internally, with little or no input from legal advisers. Franchisors need to be clear about the function of operating manuals. They should give effect to the express obligations of the franchisee as specified in the franchise agreement. They should do this by setting out the operational matters by which franchisees are to fulfil those obligations.

Although operating manuals are incorporated into and form part of the franchise agreement, they should not impose significant additional obligations on the franchisee that are not contained in the franchise agreement, or that are inconsistent with the franchise agreement.

Some franchisors have franchise agreements where content is kept to a minimum. They then set out substantial additional obligations in the operating manual which, under the franchise agreement, can be varied from time to time. This can be used by franchisors to compel franchisees to make changes to their franchise operations, even if they do not consent to these changes.

In effect, arrangements such as these give the franchisor the right to unilaterally vary the franchise agreement. Importantly, the ability of a franchisor to unilaterally vary a franchise agreement, whether through manuals or otherwise, may constitute unconscionable conduct and breach the TPA.

In March 2004, a Senate Economics Reference Committee was established to investigate matters relating to the effectiveness of the TPA. The Committee recommended that one of the factors a court should take into account in determining whether conduct was unconscionable and breached section 51AC of the TPA, was whether one party had a right to unilaterally vary an agreement. The Committee’s recommendations have been set out in a draft bill. In short, operating manuals (and the type of clause outlined above) should not be viewed by franchisors as giving them carte blanche to impose additional (or inconsistent) obligations on franchisees, which are not covered by the express provisions of the franchise agreement. Any amendments to operating manuals should relate only to ‘operational matters’. They should not seek to vary the existing provisions of the franchise agreement.

Conclusion

The ACCC’s message is clear: it is taking a tougher approach with franchisors in relation to their franchise agreements, their compliance with the Code and the TPA, as well as their dealings with franchisees. The ACCC has indicated its preparedness to seek criminal penalties under the TPA, if necessary. One way of minimising the risk of being in breach of the Code and the TPA is to adopt procedures and implement training within the organisation.

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