ACCC looking to clean up franchisor behaviour

By Adrian Kuti, Simon Ellis
07 Mar 2019
Recent enforcement of good faith obligations under the Franchising Code, parliamentary inquiries into the effectiveness of the existing Code provisions and the identification of small business protection and Franchising Code compliance in the ACCC's 2019 enforcement priorities point clearly to greater franchising regulation and scrutiny of franchisor conduct by the ACCC.

Having been put on notice of the ACCC's intention at the start of 2018 to focus on small business protections under the Franchising Code and other provisions of the Competition and Consumer Act, any doubts held by the franchising and motor vehicle industries about the ACCC's conviction in this regard have well and truly been laid to rest, with two recent successful proceedings brought against franchisors by the ACCC in the Federal Court, and the ACCC's confirmation that enforcement of the Franchising Code remains one of the ACCC's top enforcement priorities for 2019.

In his speech on 26 February outlining the ACCC's enforcement priorities for 2019, Rod Sims, Chairman of the ACCC, indicated that franchising is still very much on the enforcement agenda, and cited the recent Federal Court successes against Ultra Tune and Geowash as examples of behaviour likely to continue to be targeted.

Of particular interest from these recent judgments of the Federal Court is that they are the first in which the ACCC has argued a franchisor breached the good faith obligations imposed on franchisors by the Franchising Code in their business dealings with franchisees – successfully on both occasions. The most recent decision against car wash franchisor Geowash further expands on the court's interpretation of "good faith", and provides further insight into how the ACCC may frame future claims in this area.

Good faith principles have been on the agenda for some time

The obligation on franchisors and franchisees to act in good faith in their business dealings with each other was introduced into the Franchising Code in 2015, in response to recommendations made by the Wein Review in 2013. At the time, the Government noted that it wanted to "promote growth in the sector, reduce red tape and make sure that all participants in the industry follow best practice principles". These new obligations were accompanied by new penalties for breaches of certain provisions of the Code.

However, it is only recently that the ACCC has begun to ramp up enforcement action across the franchising sector, with ACCC Chairman Rod Sims saying last year that "ensuring small business receives the protections of industry codes, with a focus on Franchising Code of Conduct issues involving large or national franchisors, will also remain a priority in 2018".

Geowash: The ACCC may treat the good faith obligation as an add-on

The Federal Court held that Geowash acted unconscionably by charging franchisees an amount that did not reflect the likely cost of establishing a franchise, but rather an amount based on that the franchisee was willing to pay. It also held that Geowash made false or misleading representations on its website in relation to the average monthly revenue and profit prospective franchisees could make (without any reasonable basis) and that it held commercial relationships or affiliations with vehicle suppliers, when this was not the case.

So far, so conventional. It was what the ACCC did next that is somewhat novel.

It was on the basis of these allegations that the ACCC added on a breach of the good faith obligations. The Federal Court found that Geowash breached its obligation of good faith under the Code by creating the impression that the amounts paid by franchisees would go towards the fit out of the Geowash car wash facility, when those payments in fact contributed to other Geowash expenses, including the payment of commission to Geowash's director and Franchising Manager.

What can we learn from this? It seems likely that the ACCC will treat a breach of the good faith obligation under the Code as a corollary of any other alleged breach of the ACL. In doing so, the ACCC intends to send a message to franchisors about their conduct and behaviour towards franchisees.

This is important, in particular to franchisors that typically have the balance of power during negotiations of a franchise agreement, as breaching the good faith obligation could expose the contravening party to a civil penalty of up to 300 penalty units (which is currently $63,000). This is, of course, in addition to any liability under the ACL, the penalties for which have recently escalated to a maximum fine of $10 million. In the same speech outlining the 2019 enforcement priorities, Mr Sims reiterated that the ACCC will do everything it can to seek high penalties as the most effective deterrent of unacceptable behaviour.

It is difficult to envisage a circumstance in which the ACCC will not consider there to be a potential breach of the good faith obligation, where it alleges there is a breach of the ACL.

Good faith and beyond

The enforcement of the good faith obligations should be seen as a part of a general trend to revamp of the Code, and scrutiny over franchising conduct and arrangements is far from complete.

In the motor vehicle sector, for example, the Department of Industry, Innovation and Science has recently received submissions in relation to franchise relationships between distributors and new car dealers. The investigation comes as a response to concerns raised by new car dealers about the fairness of the franchise arrangements with their car manufacturer (or deemed manufacturer), suggesting that the Code is insufficient.

There is also currently a Parliamentary Inquiry to more broadly assess the Code's operation and effectiveness. The Senate Report date for the inquiry has been extended until 14 March 2019. In its submissions to the inquiry, the ACCC submitted that the Code is not as effective as it could be and recognised "the vulnerability of franchisees due to the significant personal and financial investment they commonly make, paired with the imbalance of power that can exist between franchisee and franchisor."

The ACCC has launched enforcement action in respect of a number of franchises including Domino's Pizza, Fastway Couriers (Perth) and Husqvarna and has submitted to the inquiry that it has "material investigations underway into several others".

Given this activity, there is likely to be some bolstering of the provisions within the Code to further protect franchisees and we should expect franchisors to continue to be the subject of vigorous enforcement activities by the ACCC.

Get in touch

Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.