Franchise churning – smoke and fire?

By Sarah Stowe | 29 Oct 2015 View comments

On 22 April 2008, the Australian Competition and Consumer Commission (ACCC) announced that it had concluded investigations into allegations against Bakers Delight. No evidence had been found that the company had engaged in misleading, deceptive and unconscionable conduct towards franchisees, or breached the Franchising Code.

The investigation began in April 2007 after the ACCC received a number of complaints, predominantly from former Bakers Delight franchisees, that the company engaged in the practice commonly described as ïchurningÍ _ selling a franchise site repeatedly in circumstances where the franchisor is aware that it will fail.

The ACCC found that there was no evidence of churning within the Bakers Delight system _ in fact, the report went so far as to say that the company is generally reluctant to initiate termination and does not have a record of repeatedly selling franchise sites.

ñIt should not be assumed that where there is smoke there is always fire,î said ACCC chairman, Graeme Samuel.

While no further action will be taken, the ACCC is continuing discussions with Bakers Delight with a view to ensuring that the company is best placed to deal with any issues that might arise in the future. Bakers Delight says it welcomes the opportunity to strengthen further its already well-developed trade practices compliance systems and franchisee dispute resolution procedures.

ñItÍs in our best interest to work with and support our franchisees _ itÍs pivotal to the success of the entire network,î says Richard Taylor, Bakers Delight company secretary. ñThe company has not grown to what it is today without a strong network of franchises. Their success is our success.î

The ACCC under the microscope

While the findings sound conclusive, there are some who question how well the ACCC is doing its job.

The ACCCÍs role is to monitor and enforce compliance with the Franchising Code of Conduct and the Trade Practices Act 1974 and there is a formalised process in place to investigate breaches of the Code and allegations of misconduct.

Detractors of the process point to the statistics. In the past 10 years the ACCC has undertaken just 175 in-depth investigations relating to franchising despite receiving 1,757 enquiries and 1916 complaints between June 2004 and December 2007 alone. Of the 175, a further 108 were not pursued because a breach of the TPA could not be substantiated _ since 1998, only 11 matters have reached litigation.

Graeme Samuel acknowledges that investigations often lead to the conclusion that matters cannot be substantiated or should not be pursued further.

ñThis said, given the bargaining disadvantage franchisees and other small businesses often find themselves in, where the ACCC forms the view that there is evidence supporting a claim that a franchisor has behaved unconscionably or in a systematic misleading manner it will take action.î

A report released within days of the Bakers Delight findings by the Government of Western Australia calls that action into question, finding that, in many cases, the ACCC has not been able to respond adequately to franchisee complaints in a timely manner.

The reportÍs recommendations include a review of funding by the Commonwealth Government in order to ensure adequate resourcing; a dedicated franchising enforcement unit within the ACCC; amendments to the Trade Practices Act itself in order to prescribe penalties for breaches of the Franchising Code of Conduct; and that the Commonwealth Government work with the judicial system and the franchising sector to introduce a more streamlined approach to accessing compensation and recovery of costs where a particular court decision impacts on a group of franchisees.

John Farrell, president of the National Federation of Independent Business (NFIB), is more forthright. He describes the ACCCÍs current franchise investigators as ïcommercial childrenÍ without the logical ability to correlate the franchisor bastardry with the relevant sections of the Trade Practices Act.

ñAs a direct consequence, the adequate trade practice law, introduced by the politicians, is not being implemented by those responsible,î he says.

Narelle Walter describes the outcome of the Bakers Delight investigations as extremely disappointing but not unexpected. As one of the complainants, she remains unwavering in her claim that the company deliberately sent her two profitable businesses to the wall so that they could steal her business.

ñThe ACCCÍs response to the mountain of evidence that was handed to them on a silver platter is appalling and lacks credibility,î she says. ñIn this country, as it presently stands, if a franchisor can establish or induce a breach of contract they can steal all of the franchiseeÍs assets and create absolute financial and emotional catastrophe. The current Trade Practices Act, if administered correctly and investigated competently, is enough to protect franchisees from predatory conduct, but both this and the Franchising Code of Conduct are continually breached without penalty. ThereÍs no reason for franchisors to take them seriously.î

A federal matter

On 15 May, Steve Irons, Federal Member for Swan, stepped into the debate after investigating requests for help from three MichelÍs Patisserie franchisees. He told Parliament that churning is a continuing problem across Australia.

ñI and three of my fellow parliamentary colleagues who have constituents with a similar problem will continue to highlight franchising in Australia until we can get a satisfactory result for the franchisees,î he said. ñI urge the new Minister for Small Business, the Honourable Dr Craig Emerson, to join us in this pursuit to assist Australian small business who are operating franchises and review current legislation on franchising and protection of franchisees.î

A spokesperson for the Minister says that, if the Member for Swan knows of further allegations of misconduct, he should refer them to the ACCC instead of making claims on the floor of Parliament.

ñThe Small Business Ministerial Council held in New Zealand [in May] noted that the Federal Government, consistent with its pre-election commitment, will consider the introduction of well-defined obligations for parties to bargain and negotiate in good faith as part of the franchising code of conduct.î

Deanne de Leeuw has been calling for a federal inquiry since October 2007. Another complainant, she claims that her relationship with Bakers Delight cost her three bakeries, her family home and investment properties, and left her with business debts of more than $1.4 million.

ñIt is my hope that new laws and protections will be introduced for franchisees on a federal level,î she says. ñOf course, this will not be retrospective and does not help those of us who have already been caught by franchisor opportunism, and so we will continue to fight on this front as well.

ñPersonally, my husband, Mark, and I will be continuing with our private litigation. This fight is far from over. We are not giving up.î n