Puffery pastry

Retail Food Group breached consumer law in $400,000-plus franchise bungle, Court finds Important case in relation to the obligations of franchisors to franchisees, particularly the representations about likely future financial performance. Still scratching my head at RFG's claim that its pre-contractual representations, including those about likely future financial performance, were mere puffery. It's almost likely saying no reasonable person could believe anything which RFG says about the likely performance of its stores, particularly Michel's Patisserie stores!

https://www.smartcompany.com.au/industries/retail/retail-food-group-breach-consumer-law/

Ultra Tune to pay $2.6 million penalty

While the full judgment is not out yet, it promises to be a very interesting read given these comments by Justice Bromwich, quoted in the ACCC Media Release: “The cover up that Ultra Tune attempted reflects a significantly heightened need for deterrence, in relation to conduct that was already a most serious and fundamental breach of the Franchising Code in taking the deposit in the first place, reflecting as it does Ultra Tune’s attitude in relation to its contravening conduct,” Justice Bromwich said. “There must be no tolerance for manufacturing evidence to deceive a regulator, and even less when the deception is maintained in this Court.” Justice Bromwich also ordered Ultra Tune to pay the ACCC's costs on an indemnity costs.

https://www.accc.gov.au/media-release/ultra-tune-to-pay-26-million-penalty

Changes afoot in Franchise Mediation

Mediation under the Franchising, Horticulture and Oil Codes has been moved to the Department of Jobs and Small Business, with support from the Australian Small Business and Family Enterprise Ombudsman "New contact details for the franchising Mediation Adviser Dear Michael, We would like to provide you with information about changes to the Mediation Adviser under the Franchising Code (the Code). The Mediation Adviser is now the responsibility of the Department of Jobs and Small Business, with support from the Australian Small Business and Family Enterprise Ombudsman (ASBFEO). The franchising Mediation Adviser is appointed under the Code and can assist in the resolution of franchising disputes by appointing a suitable mediator including where the parties cannot agree on what mediator to use. You can contact the Mediation Adviser on 1300 650 460 or by visiting the ASBFEO website. Visit the ACCC website for more information on resolving franchising disputes. Kind regards, Small Business team Australian Competition and Consumer Commission (ACCC)" https://lnkd.in/fmFHbvD

https://www.jobs.gov.au/franchising-oil-and-horticulture-code-disputes

RFG executives summoned to appear

Former Retail Food executives called to Canberra for grilling Apparently the Senate Committee looking into the effectiveness of the Franchising Code of Conduct has issued summonses to three former RFG executives to force them to appear before the Committee and give evidence. I will have to make a point of turning on the Parliament live feed for that evidence.

https://www.afr.com/business/retail/fmcg/former-retail-food-executives-called-to-canberra-for-grilling-20181021-h16woz

Parliamentary Enquiry backs SME Committee proposals

Parliamentary Enquiry into the Operation and Effectiveness of the Franchising Code of Conduct Good to see both the Senate Committee and the Australian Small Business and Family Enterprise Ombudsman seem keen on the SME Committee of the Law Council's idea of establishing a new Code Ombudsman with jurisdiction to both mediate and determine disputes under all existing Mandatory Codes at p.48 "ACTING CHAIR: You might want to have a look at the evidence that we received from the Law Council of Australia, but there was a suggestion in the course of evidence today that it might be beneficial to have an ombudsman who oversees the codes and to have some core elements across codes, because there are multiple codes emerging. The idea is that there would be a standard element of codes that would set the parameters for the whole business sector, I suppose. Dr Latham: This is a really good idea. Ms Scott: Absolutely. At the moment they are all very ad hoc, so I think that's a very, very good idea."

https://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id:%22committees/commjnt/d0d1b8c0-7a6a-41de-be35-078aa5800910/0000%22

ACCC Franchising Try On

Stronger penalties required for franchising codes and UCT laws The ACCC is making a very strong play for increased penalties for contraventions of the Franchising Code of Conduct. I must admit I don't quite understand the ACCC's reasoning. Is the ACCC claiming they need bigger penalties because they have been taking lots of franchising cases to court and securing very small penalties which are failing to achieve general deterrence? Recent ACCC outcomes do not support this view: Fastway - $9000 paid pursuant to infringement notice Pastacup - $100,000 paid by consent Domino's - $18,000 pursuant to two infringement notices Ultratune and Geowash - still before the courts The more significant issue is that the ACCC has only pursued 26 franchising cases over the last 15 years, despite receiving 12,640 franchising complaints over the same period. The ACCC needs to ramp up the number of enforcement actions it is taking in the franchising sector and also to make sure that it is taking action against larger, national franchisors with high brand recognition. Having said that, I guess having access to bigger penalties may incentivise the ACCC to pick up its game in the area of Franchising Code enforcement.

https://www.accc.gov.au/media-release/stronger-penalties-required-for-franchising-codes-and-uct-laws-0

Operation and Effectiveness of the Franchising Code of Conduct

Our SME Committee has been invited to appear at a public hearing into the Operation and Effectiveness of the Franchising Code of Conduct which is being conducted by the Parliamentary Joint Committee on Corporations and Financial Services.

Hank Spier, a longstanding member of our Committee, will be appearing on behalf of our Committee on 21 September 2018.

Dodging a bullet!

Franchisee rights denied in Husqvarna code breach

I was a bit puzzled by the ACCC's settlement against Husqvarna Australia (which is part of the Swedish Husqvarna Group with annual revenues of $6 billion).

Husqvarna's Australian subsidiary has been claiming for well over 10 years that its agreements with 343 dealers are not franchise agreements, when that has not been the case. Furthermore, Husqvarna has terminated dealers without complying with the Franchising Code of Conduct (Code).

Husqvarna also has not reviewed its "franchise" agreements to identify potentially unfair contract terms, despite the law changing two years ago.

Finally, the company didn't even have a compliance program in place.

Despite all of this conduct, the ACCC decided not take any legal action against Husqvarna but rather to settle this raft of contraventions with a s87B undertaking.

On the other hand, the ACCC takes legal action against much smaller franchisors, with little brand recognition, that have been engaging in relatively minor contraventions of the Code for very short periods of time.

Such inconsistency in terms of the ACCC's enforcement approaches makes our job as lawyers particularly difficult. How do I explained the Husqvarna settlement to the next small business client who gets taken to court by the ACCC?

https://www.accc.gov.au/media-release/franchisee-rights-denied-in-husqvarna-code-breach

ACCC Essentials – understanding the Australian Competition and Consumer Commission’s 2018 Compliance and Enforcement Priorities

Introduction

It is vitally important for all Australian businesses to have a thorough understanding of the way in which the ACCC prioritises its enforcement activities, given the highly interventionist and aggressive approach which the ACCC takes to both competition law and consumer protection matters.  Indeed, the ACCC is one of the most aggressive enforcers of the competition law provisions in the world.

Furthermore, the ACCC has been successful in its calls for significant increases to the maximum financial penalties for contraventions of the Australian Consumer Law 2010 (ACL), with the proposed changes likely to be in effect by 1 July 2018.   

It is also important to recognise the strong reputation which the ACCC has amongst consumers as an active and effective regulator. One of the implications of the ACCC’s strong reputation is that any business pursued by the ACCC is usually judged very harshly by the Australian public, the media and their customers.  As a result, businesses which become the subject of an ACCC investigation or legal proceedings brought by the ACCC often suffer significant and long-lasting reputational and brand damage.

This paper will outline the Australian Competition and Consumer Commission’s (ACCC) approach to enforcement and identify the key enforcement and compliance priorities.

Why does the ACCC have priorities?

The main explanation for having priorities is that it provides greater transparency in the way the ACCC will be using its resources. However, there are also important practical reasons for having priorities.

As explained by ACCC in its most recent Annual Report it received 405,382 contacts in the 2016-2017 financial year, of which 234,913 were recorded on the ACCC database.[1]

The following table shows a rough breakdown of how those contact and complaints are processed by the ACCC:

As is apparent, there is no way that the ACCC could pursue all of these complaints. Rather, the only way the ACCC could pursue any of these complaints effectively is by establishing clear and specific enforcement priorities.

While the ACCC received 405,282 contacts last year it was only able to conduct initial investigations into 259 of those complaints. An initial investigation generally involves the ACCC writing a letter to the business which has been complained about, to ask for an explanation of their conduct. This number is significantly lower than in the previous year where the ACCC conducted 427 initial investigations. One explanation for the reduction is that the ACCC is becoming much more selective in the matters it is deciding to pursue.

The ACCC commences in-depth investigations in relation to a much small subset of the total complaints. These are investigations which the ACCC Commissioners have determined are important and need to be pursued in more depth.  These investigations would have been allocated an initial investigatory and/or legal budget and often result in litigation.  The number of in-depth investigations has also declined significantly, from 167 in the 2015-16 financial year to 79 in the last financial year.

Finally, the ACCC listed 24 litigation matters in its 2016-2017 Annual Report. However, if one considered all formal resolutions, such as section 87B undertakings and infringement notices, the total number of formal resolutions is likely to be much higher at around 50 formal resolutions in the 2016-2017 period.

What are the ACCC’s 2017 Enforcement and Compliance Priorities?

ACCC’s Goals

On 20 February 2018, the ACCC released its Compliance and Enforcement Priorities for 2018 (Priorities).[2]  These Priorities must be considered as a whole, as the ACCC takes a multifaceted approach to selecting the matters which it will pursue.

First, the ACCC will consider the overall goals of their legislation. Second, it will consider the outcomes which it is likely to achieve by pursuing a particular enforcement matter and the type of conduct which the relevant business is engaging in.  Finally, the ACCC will determine whether the conduct falls into the specific ACCC 2018 priorities or “hit list”.

As a guiding principle, the ACCC will not pursue any enforcement matter unless it is confident that:

(1)   it can achieve meaningful remedies; and

(2)   the conduct is of a type which has caused or may cause significant consumer detriment, including detriment to small business consumers.

There are many cases where the ACCC could achieve a meaningful outcome but decides not to pursue the matter because the complainant has the resources and motivation to achieve the same outcomes through private action.  Similarly, there are many matters that involve particularly egregious conduct, which the ACCC will not pursue because it will not be able to achieve worthwhile outcomes, for example in relation to some phoenix activity.

The ACCC’s enforcement activity is directed achieving the following three main goals:

·        promoting competition amongst businesses

·        promoting fair trading by business

·        protecting consumers in their dealings with business.

These goals reflect both the competition and consumer law functions of the ACCC, which is to fix market failure and to ensure that consumers have as near to perfect information as possible, so they can make rational purchasing decisions.

ACCC’s 2018 Hit-List

The ACCC has made some changes in the 2018 Priorities document to the way in which it outlined its Priorities in the past. In previous versions of the Priorities, the ACCC would set out the general priority factors before listing the specific priority areas or “Hit List”. 

However, in the 2018 Priorities the ACCC effectively started with its “2018 Hit-List” or the specific areas where the ACCC will be focusing a large proportion of its enforcement resources in the coming year.

The 2018 “Hit List” is as follows:

• consumer issues in new car retailing, including responses by retailers and manufacturers to consumer guarantee claims, and other matters identified in the ACCC’s 2017 New Car Retailing Industry Report

• consumer issues in the provision of broadband services, including addressing misleading speed claims and statements made during the transition to the NBN

• systemic issues involving large or national traders avoiding or misrepresenting consumer guarantee rights

• competition issues in the financial services sector

• competition and consumer issues in the provision of energy as an essential service, including matters identified in the ACCC’s retail electricity pricing inquiry report and the ACCC’s wholesale gas inquiry

• competition and consumer issues concerning the use of digital platforms, algorithms and consumer data, with a focus on emerging markets and matters identified by the ACCC’s digital platforms inquiry

• ensuring small business receives the protections of industry codes and the unfair contract terms law, with a focus on Franchising Code of Conduct issues involving large or national franchisors

• ensuring better product safety outcomes for consumers in the online marketplace

• issues arising from the Takata airbags recall

• conduct that may contravene the new misuse of market power provisions and concerted practice provisions of the Act

• competition and consumer issues in the agriculture sector, with a focus on the dairy inquiry, Horticultural Code of Conduct enforcement, and analysis of the viticulture industry

• competition issues in the commercial construction sector

The interesting aspect of the 2018 Priorities is that many of these Priority areas were identified as Priorities in 2017.   For example, new car retailing, agriculture, commercial construction, unfair contracts, franchising, product safety issues in relation online platforms and broadband speed and performance claims were all identified as Priorities in 2017. This suggests that the ACCC did not achieve everything it wished to achieve in relation to these areas in 2017.

The ACCC has also identified a number of new Priority areas in 2018 - namely:

• financial services
• energy
• digital platforms, algorithms and consumer data
• Takata airbags recall
• misuse or market power and concerted practices.

That these specific areas would be Priority areas in 2018 was to be expected.  For example, it was anticipated that financial services would be a priority area given:

• that the government gave the ACCC additional resources in the 2017-2018 Budget to establish a dedicated Financial Services Unit; and

• the commencement of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry in February 2018

The ACCC has also been doing extensive work in the energy sector for some time, through market studies into the areas of gas and electricity.  The inclusion of energy in the 2018 Priorities may suggest that the ACCC will be looking at taking enforcement action in the energy sector in 2018.

Digital platforms, algorithms and consumer data is clearly a priority area in 2018 due to the commencement of the Digital Platforms Enquiry. In December 2017, the Government directed the ACCC to conduct an 18 months investigation into digital platforms, focusing on such companies as Google and Facebook amongst others. 

The ACCC has also had a long running involvement in the Takata airbag voluntary recall. However, the ACCC’s role was escalated significantly in February 2018 when the Assistant Minister to the Treasurer decided to issue a compulsory recall of the Takata airbags.

Finally, the ACCC will be focusing its attention in 2018 on the investigation and enforcement of conduct which is caught by the new changes to the Competition and Consumer Act 2010 (CCA), primarily the changes to the misuse of market power provisions and the introduction of the concerted practices provisions.

One interesting addition to the 2018 Priorities is the reference to “systemic issues involving large or national traders avoiding or misrepresenting consumer guarantee rights”.  It would appear specific area that this has been added to the 2018 Priorities due to a concern within the ACCC about large national traders are continuing to mislead their consumers about their consumer guarantee rights.[3]

There are also a number of industries which were on the 2017 Priority Hit List which can now breathe a collective sigh of relief as they did not make the cut in 2018 – namely:

• airlines in relation to their consumer guarantees;
• businesses involved in country of origin labelling;
• businesses involved in commission-based sales business models; and
• private health insurers.

Enduring priorities

The ACCC has also adopted a practice of identifying a number of enduring priorities defined as conduct which is so detrimental to consumer welfare and to the competitive process that the ACCC will always regard them as a priority. The enduring priority areas have not changed in 2018:

Cartel conduct

The ACCC will always prioritise cartel conduct causing detriment in Australia. When dealing with international cartels, the ACCC will focus on pursuing cartels that have a connection to, or cause detriment in Australia; that is, cartels that involve Australians, Australian businesses or entities carrying on business in Australia

Anti-competitive conduct 

The ACCC will always prioritise anti-competitive agreements and practices, and the misuse of market power.

Product safety

The ACCC will always prioritise product safety issues which have the potential to cause serious harm to consumers.

Vulnerable and disadvantaged consumers

The ACCC recognises that vulnerable and disadvantaged consumers can be disproportionately impacted by conduct in breach of the Act. The ACCC therefore prioritises conduct that impacts these consumers.

Conduct impacting Indigenous Australians

The ACCC acknowledges that certain conduct in breach of the Act has the potential to specifically impact on the welfare of Indigenous Australians. The ACCC also recognises that Indigenous consumers living in remote areas face particular challenges in relation to asserting their consumer rights. The ACCC will always prioritise its work in these areas while these challenges remain.

Priority factors

Finally, the ACCC outlines the general priority factors which it will weigh up when making a decision to pursue a “non-Priority area” matter. These general priority areas are:

• conduct that is of significant public interest or concern 

• conduct that results in substantial consumer or small business detriment 

• national conduct by large companies, recognising the potential for greater consumer detriment and the likelihood that conduct of large businesses can influence other market participants 

• conduct involving a significant new or emerging market issue or where our action is likely to have an educative or deterrent effect 

• where our action will assist to clarify aspects of the law, especially newer provisions of the Act.

The above factors largely duplicate the general priority factors set out in 2017.  Notably two factors which the ACCC will no longer take into consideration when deciding whether to pursue an enforcement action are the blatancy of the conduct and whether the relevant business is a serial offender – both of which appear to be surprising omissions.

                                                                               

Increased ACL penalties

Without doubt the most important development in 2018 will be the introduction of vastly higher penalties for contraventions of the ACL.

Currently, the maximum penalties for contravening the ACL are $1.1 million for corporations and $220,000 for individuals for each contravention.

However, in late 2017, Parliament released the draft amendment bill on ACL penalties.[4] If passed this bill will increase the maximum penalties for civil and criminal contraventions of the ACL to:

• $10 million; or
• if the court can determine the total value of the benefit obtained from the offence, three times the value of that benefit; or
• if the court cannot determine the value of the benefit, 10% of the corporation’s annual turnover in the preceding 12 months. 

The maximum penalties for individuals will increase to $500,000 per contravention.   

These changes are scheduled to take effect from 1 July 2018.

As is apparent, this amendment represents a quantum leap in terms of the size of penalties which may be awarded by the Court for contraventions of the ACL.  This change should be of particular concern for businesses with a history of previous contraventions of the ACL.  Courts are much more likely to impose multi-million-dollar penalties against companies which have engaged in multiple prior contraventions of the ACL.

Essentials

In order to minimise risks and avoid problems with the ACCC (and other State and territories regulators) it is important for businesses to conduct a detailed Competition and Consumer Law Risk Assessment of every aspect of their operation. This would start with an identification of all risks in the business both from a:

1. competition perspective – for example, the nature of all agreements with competitors, suppliers and service providers, and other third parties and

2. consumer law perspective – for example, the representations made to consumers in marketing and promotional materials, the fairness of standard form contract terms and how complaints handling procedures are managed

Once the business has conducted detailed Competition and Consumer Law Risk Assessment, businesses should take steps to implement a comprehensive and up-to-date Compliance Program, consisting of the following elements:

1. Compliance Policy

2. The appointment of a Compliance Officer

3. Other relevant policies such as a Complaints Handling Policy and a Whistle-blower Policy

4. The establishment of an effective Complaints Handling procedure and

5. Regular Competition and Consumer Law Compliance Training.

Taking steps to conduct a Risk Assessment and implement a Compliance Program will benefit the business by helping them to better identify and manage all competition and consumer law risks in the business. Taking these steps will also benefit the business in terms of mitigating the extent and severity of the much larger pecuniary penalties which the ACCC will be seeking from the Courts for ACL contraventions in second half of 2018.

---

[1] ACCC, ACCC – AER Annual Report 2016-2017, Commonwealth of Australia, p 143 at https://www.accc.gov.au/system/files/ACCC%20and%20AER%20Annual%20Report%202016-17_0.pdf

[2] ACCC, 2018 ACCC Compliance and Enforcement Policy, at https://www.accc.gov.au/about-us/australian-competition-consumer-commission/compliance-enforcement-policy-priorities

[3] Rod Sims, 2018 compliance & enforcement priorities, Speech presented at CEDA Sydney, 20 February 2018 at https://www.accc.gov.au/speech/2018-compliance-enforcement-priorities

[4] Treasury Laws Amendment (2018 Measures No.3) Bill 2018 (Cth).

SME Committee Annual Conference - 26 October 2018

The SME Committee of the Law Council of Australia is holding its annual conference in Melbourne this year on Friday, 26 October 2018. 

We have an excellent lineup of top quality speakers, including:
* Judy O'Connell, Victoria Small Business Commissioner; * Kate Carnell AO, ASBFE Ombudsman; * Mick Keogh, ACCC Deputy Chair and Small Business Commissioner and * Peter Strong, COSBOA CEO. So, if you want to hear from speakers who genuinely "get" small business, make sure you come along.

https://www.lawcouncil.asn.au/event/sme-conference-2018

Spotlight on the Franchising Industry...again!

I decided to lodge a personal submission to the Parliamentary Joint Committee on Corporations and Financial Services enquiry into the operation and effectiveness of the Franchising Code of Conduct.  A copy of my submission is below

11 May 2018

Committee Secretary

Parliamentary Joint Committee on Corporations and Financial Services

PO Box 6100                                                                                                                          
Parliament House

CANBERRA ACT 2600

By email: corporations.joint@aph.gov.au

Dear Committee Secretary

The operation and effectiveness of the Franchising Code of Conduct

Terceiro Legal Consulting (TLC) is an incorporated legal practice, which specialises in competition and consumer law (trade practices law). TLC has been operating since 2008 and has represented companies, businesses and individuals in Australian Competition and Consumer Commission (ACCC) matters.  TLC has also advised both franchisees and franchisors in relation to various franchise matters, including in relation to Breach Notices, marketing funds, terminations and restraint of trade provisions.

Michael Terceiro, the principal of TLC, formerly worked at the ACCC for 15 years in a variety of positions, including as a Director of Enforcement and the Director in charge of the Sydney Mergers and Asset Sales Branch. In these roles, he was responsible for running investigations and litigation into alleged breaches of the competition and consumer laws and the Franchising Code of Conduct.  Michael has a great deal of ACCC enforcement experience, having ran more than than 600 investigations, including more than 100 merger clearances, and 30 court cases during his time at the ACCC.

Terms of reference

 (a) the operation and effectiveness of the Franchising Code of Conduct, including the disclosure document and information statement, and the Oil Code of Conduct, in ensuring full disclosure to potential franchisees of all information necessary to make a fully-informed decision when assessing whether to enter a franchise agreement, including information on:

(i) likely financial performance of a franchise and worse-case scenarios,

Based on my experience, it is very rare for a franchisor to provide a prospective franchisee with any meaningful information about the likely financial performance of a franchisee business.  I suspect that the reason for this is due to a tendency amongst advisors to provide particularly cautious legal advice to franchisors which encourages them not to take any chances in relation to the disclosure of financial information.

Rather franchisees are encouraged by the franchisor to speak to as many other franchisees who are already within the system to gain some indication of the likely financial performance of their prospective franchise business.  It is arguable that existing franchisees who assist prospective franchisees in this way may have unwittingly exposed themselves to legal liability in relation to the accuracy of the financial information which they have gratuitously provided to the prospective franchisee.

(ii) the contractual rights and obligations of all parties, including termination rights and geographical exclusivity

I have come across one particular franchise system which has a large number of evergreen / perpetual franchise agreements.  Given the fact that these franchise agreements are evergreen / perpetual, the franchisor is under no legal obligation to amend those agreements to ensure that they are consistent with the particular provisions of the Code which were introduced to protect franchisees, such as the prohibition contained in clause 22 of the Code:

22  Costs of settling disputes

A franchise agreement must not contain a clause that requires the franchisee to pay to the franchisor costs incurred by the franchisor in relation to settling a dispute under the agreement, and if it does, the clause is of no effect.

I believe that some franchisors sometimes use the dispute recovery cost clauses in their evergreen / perpetual franchise agreements as a means of pressuring franchisees to resolve legitimate disputes as quickly as possible and in a manner which is highly advantageous to the franchisor. In effect, franchisees are concerned that if they decide to challenge the franchisor about an issue, such as a Breach Notice, they will be liable not only for their own legal costs, but also for the franchisor’s legal and other costs incurred in resolving the dispute.

Indeed, I had the unfortunate experience of dealing with an advisor for a national franchisor in a franchise dispute involving a franchise agreement which contained just such a dispute cost recovery clause.  Throughout the dispute the advisor for the national franchisor appeared intent on generating as much correspondence as possible in relation to the dispute (sometimes sending two letters in a single day), whilst at the same time continually pointing out to me the financial effects that the dispute cost recovery clause would have on my client. 

Furthermore, franchisors with evergreen / perpetual franchise agreements are not required to update those agreements to ensure that they are consistent with the new Unfair Contract Term laws introduced in November 2016.

(iii) the leasing arrangements and any limitations of the franchisee’s ability to enforce tenants’ rights, and

No comments.

(iv) the expected running costs, including cost of goods required to be purchased through prescribed suppliers;

I have come across a situation where a franchisor has apparently sought to control the retail margins of franchisees so as to prevent them from purchasing goods from outside of the franchise system, which was permitted under the franchise agreement. 

By way of example, assume that the franchisor supplies particular products through its preferred suppliers at a wholesale price of $100 each and that each of these products are resold at the retail level for $150, at a gross profit margin of $50.  However, the franchisee can also buy these same products from an outside supplier at a wholesale price of $75, which would net the franchisee a net profit margin of $75, based on the same retail price of $150.

However, franchisors are able to discourage this practice (in order to safeguard their own preferred supplier arrangements) by forcing the franchisees to sell outside purchases at low retail margins. Using the above example, a franchisor may decide to set a maximum retail margin of 20% on the outside purchases meaning that the franchisee would only be able to sell the outside purchase which they had purchased at a wholesale price of $75 for $90 retail, with a $15 gross profit margin.  The effect of the franchisor’s conduct in this situation would be to make the outside purchases uneconomic for the franchisee and to force the franchisee to only make sales through preferred suppliers.

 (b) the effectiveness of dispute resolution under the Franchising Code of Conduct and the Oil Code of Conduct;

I understand that there are a number of differences in terminology between the Code and the Oil Code.  It is important to address these differences to reduce the level of confusion which can arise.

 (c) the impact of the Australian consumer law unfair contract provisions on new, renewed and terminated franchise agreements entered into since 12 November 2016, including whether changes to standard franchise agreements have resulted;

As stated above, franchisors with evergreen / perpetual franchise agreement have no legal obligation to update their agreements to ensure that they are consistent with the new Unfair Contract Terms legislation introduced on 12 November 2016.

(d) whether the provisions of other mandatory industry codes of conduct, such as the Oil Code, contain advantages or disadvantages relevant to franchising relationships in comparison with terms of the Franchising Code of Conduct;

No comments.

(e) the adequacy and operation of termination provisions in the Franchising Code of Conduct and the Oil Code of Conduct;

I have come across situations where franchisors have incorrectly alleged that a franchisee has engaged in fraudulent conduct in a Notice of Breach. When asked to advise on these Notices of Breach it has been clear to me that whilst the franchisee may have engaging is false or misleading conduct, the alleged conduct did not satisfy the elements of fraud.

In order to address this particular problem, it make be worthwhile for the Code to be amended to include some further guidance at to the legal meaning of the words “act fraudulently” in clause 29(1)(g) of the Code.

(f) the imposition of restraints of trade on former franchisees following the termination of a franchise agreement;

No comments.

(g) the enforcement of breaches of the Franchising Code of Conduct and the Oil Code of Conduct and other applicable laws, such as the Competition and Consumer Act 2010, and franchisors; and

ACCC’s enforcement of the Code

An issue which will no doubt be front and centre of the enquiry is the effectiveness of the Australian Competition and Consumer Commission (ACCC) as an enforcer of the provisions of the Franchising Code of Conduct. Unfortunately, in my view, the ACCC’s enforcement of the Code has not been effective.

The following table outlines the ACCC’s record in terms of enforcing the provisions of the Code. This table is based on information currently available on the ACCC’s website and the ACCC Annual Reports.

Table 1: ACCC Franchising Code litigation and undertakings 2004 – 2018

Year	ACCC investigations litigation	Matters
2004	2	Synergy, Chaste
2005	3	Bon Levi, Office Support Services, You Can Bake It
2006	4	Archem, Contact Plus, Scotty’s Premium Pet Foods, Photo Safe/Data Vault/ie Networks
2007	3	JV Mobile, Kyloe (dismissed), Quizno’s
2008	2	Duco Magic, Awesome Water
2009	1	ALM/Active Money
2010	5	Allphones, Ray White, Seal-a-Fridge, Mailpost, Refund Home Loans
2011	0
2012	0
2013	0
2014	2	Express Mobile, Taxsmart
2015	2	Coverall, Electrodry
2016	1	Sensaslim
2017	5	Fastway, Pastacup, Geowash, Domino’s, UltraTune
2018	0
Total	30

In other words, over the last fifteen years, the ACCC has pursued 30 formal outcomes in relation to the Franchising Code. The ACCC has been successful in 29 of these cases, with only the Kyloe case having been dismissed as not disclosing a breach of the Code.

The above figures are somewhat misleading, as a number of these Franchising Code investigations and outcomes listed on the ACCC website as franchising outcomes did not in fact allege any Code breaches.  For example:

• the Chaste case did not allege any contraventions of the Franchising Code - rather, the focus of that case was on false representations, misleading and deceptive conduct and resale price maintenance. 

• the Archem and Refund Home Loans case also did not allege any breaches of the Franchising Code; and

• finally, the Electrodry case was focused solely on the making of false testimonials.

Accordingly, the ACCC has actually had 25 successful outcomes in relation to Code breaches in the last 15 years.   In my view this is a very low level of enforcement activity given the size of the franchising sector in Australia and the number of franchising complaints received by the ACCC over that period.

Table 2: Franchising complaints

Year	Number of complaints
2003-2004	1557
2004-2005	1235
2005-2006	747
2006-2007	853
2007-2008	715
2008-2009	949
2009-2010	765
2010-2011	990*
2011-2012	861
2012-2013	802
2013-2014	818
2014-2015	809
2015-2016	931
2016-2017	608
Total	12640

            * estimate

While it is probable that the ACCC received multiple complaints about each of the franchisors against which it took enforcement action over the last fifteen years, even if we assume 15 complaints against each of those franchisors, that means that the ACCC took enforcement action in relation to 3.5% of all franchising complaints received – ie

• 30 x 15 = 450 divided by 12,640 x 100 = 3.56%.

In addition, many of the franchisors against which the ACCC has taken enforcement action are relatively small operators with both limited market share and low brand recognition.  Accordingly, one is left to question the effectiveness of these enforcement actions in terms of achieving general deterrence, particularly in the boardrooms of larger, national franchisors.

While the ACCC’s record in the enforcement of both the Competition and Consumer Act 2010 and the Australian Consumer Law 2010 has been nothing short of sensational in recent years, the ACCC continues to struggle in the franchising area.  Put simply I believe that there is a significant degree of serious non-compliance occurring in the franchising sector which the ACCC is simply not addressing.

(h) any related matter

Marketing funds

I believe that there are a number of large franchisors that are not complying with their obligations under the Code in relation to marketing and cooperative funds.  Not only are significant expenditures not being approved by the franchisees, but audit reports are not being sent to franchisees.

Franchise associations

Some franchisors actively discourage franchisees from establishing franchisee associations.  I am aware of a situation where a large national franchisor simply refused to meet with the duly elected representatives of a franchisee association for no good reason.

Fear of franchisor

Many franchisees are quite fearful of challenging the franchisor on any legitimate issues because of their concern about the possibility of reprisals and victimisation.  It is clear from my engagement in the franchising sector that some franchisors adopt a divide and conquer strategy when dealing with their franchisees.  Franchisees who are perceived to be trouble-makers are subject to additional scrutiny, including having to respond to questionable Breach Notices.

Small Business Code Authority

An idea which may be worth considering is the establishment of a specialist Small Business Code Authority (SBCA) modelled in the newly created Australian Financial Complaints Authority.

A significant issue for many small businesses, particularly franchisees which are engaged in a dispute with their franchisor, are the costs of pursuing their dispute through the courts, in the event that mandatory mediation does not result in a resolution.

Currently, small businesses have the option of commencing proceedings in the Federal Court or the Federal Circuit Court which is a very costly exercise.  A more cost-effective option may be to establish a specialist agency with jurisdiction to both mediate and adjudicate disputes arising under various Codes. 

The purpose of the new SBCA would be to mediate and adjudicate various small business disputes arising under various mandatory Codes, including the Franchising Code of Conduct, Oil Code and the Horticulture Code.  The jurisdiction of the SBCA could also be extended as new mandatory codes are introduced, for example the Grocery Code, if a decision is made to make that Code mandatory, and the recently proposed Dairy Code.

I acknowledge that the establishment of a new federal Authority to deal exclusively with small business code disputes, particularly franchise disputes, may appear to be a costly exercise for the government to consider. However, there are a number of arguments in favour of such an approach, particularly in relation to franchising:

1. franchising is a very large sector in Australia with approximately 1100 franchising systems, employing many hundreds of thousands of employees;
2. the costs of pursuing a legitimate grievance against a franchisor are currently cost prohibitive;
3. often franchisees have invested their entire savings in their business and as such risk losing everything unless the dispute is resolved in a quick and cost-effective manner; and
4. franchising is a complex area, best dealt with by specialists with expertise in franchising.

Many of the above arguments would also apply in relation to other mandatory Codes, particularly points (2), (3) and (4).

If you have any questions about this submission, please contact me on (02) 8086 2005.

Yours sincerely

Michael Terceiro

Competition and Consumer Lawyer

Terceiro Legal Consulting