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24 Oct 2013

Prepare to be audited: ACCC puts the spotlight on franchisors

by Matthew Battersby, Bruce Lloyd

The ACCC's focus on the conduct of franchisors and the information provided to franchisees serves as a timely reminder for franchisors to review their compliance with the Franchising Code.

The ACCC has turned its attention to the Franchising Code as part of its focus on protecting consumers and small businesses. Franchisors can expect to receive compulsory information requests from the ACCC as part of an audit examining compliance with the Franchising Code.

On 20 October 2013, the ACCC announced that it will undertake an audit of franchisors to check whether they are complying with the Franchising Code of Conduct. Particular attention will be paid to franchisors in the take-away food and health and fitness industries.

The ACCC has the power to require franchisors to produce documents or information which they are required to keep, generate or publish under the Franchising Code. This includes disclosure documents, franchise agreements and marketing fund statements.

The ACCC will use the audit to identify franchisors who are not complying with the Franchising Code. In addition to consequences for non-compliance with the Franchising Code, franchisors face pecuniary penalties under the Australian Consumer Law (ACL) of up to $1.1 million per contravention if they have made false or misleading representations to franchisees (eg. in disclosure documents) or engage in unconscionable conduct.

Why the focus on franchisors?

Consumer protection and fair trading are current priorities of the ACCC. Enforcement action in the past year has reflected these priorities.The ACCC considers that consumers can "include small businesses who are buying from larger businesses", a situation which often arises under a franchise agreement. The ACCC's audit of franchisors' compliance with the Franchising Code is consistent with its current focus on protecting consumers and small businesses.

ACCC Deputy Chairman, Dr Michael Schaper, said that in the last financial year the ACCC received 740 complaints about or from people involved in franchising. The most common complaints related to:

  • failure of franchisors to provide a disclosure document;
  • inadequate or incomplete disclosure documents; 
  • false or misleading representations by franchisors, particularly in relation to potential earnings; and
  • unconscionable conduct and unfair termination by franchisors.

The ACCC's audit will target "industries that are generating a disproportionate number of complaints" with a particular focus on franchises in the take-away food and health and fitness industries.

ACCC's audit powers

The Franchising Code of Conduct is a mandatory industry code under Part IVB of the Competition and Consumer Act 2010 (CCA). The ACCC has an information gathering power under section 51ADD of the CCA and can require franchisors to produce documents or information which they are required to keep, generate or publish under the Franchising Code.

The ACCC can exercise its information gathering power at any time and does not need to suspect a breach of the Franchising Code, (which is a prerequisite for the use of its more commonly exercised information gathering powers under section 155 of the CCA). Since 1 January 2011, the ACCC has used this information gathering power to conduct audits of 49 franchisors.

Timing of the audit of franchisors

The ACCC's decision to audit franchisors using its information gathering powers under the CCA is interesting for reasons other than its focus on consumer protection and small business.

First, the incoming Coalition Government promised to undertake a "root and branch review of competition laws and policy" after the election. The Small Business Minister, The Hon. Bruce Billson MP, championed this review prior to the election and it is possible that the Industry Code provisions of the CCA may be included in the terms of reference to determine if enhanced protections for small business are warranted.

Second, the ACCC has argued for greater deterrence measures for breaches of the Franchising Code, including infringement notices and pecuniary penalties. The recent Franchising Code Review commissioned by the previous Government made this recommendation. It is unclear how the current Government will approach the recommendations of the Franchising Code Review but it is likely that the ACCC will continue to advocate for greater deterrence measures. The results of its proposed audit may be deployed during this debate.

Third, the Full Federal Court's decision in ACCC v Lux Distributors Pty Ltd [2013] FCAFC 90 has widened the scope of the statutory unconscionability under the ACL, which the ACCC may be inclined to deploy to protect franchisees in a wider range of business to business circumstances than was previously thought viable, potentially using the audit to gather evidence for use in such enforcement actions.

Finally, the ACCC embarked on a similar project concerning unfair contract terms earlier in the year. The ACCC produced a report of its findings in March 2013 and shortly after commenced court proceedings against ByteCard Pty Ltd alleging contraventions of the unfair contract terms provisions of the ACL. It is possible that the ACCC could take a similar approach to its audit of franchisors.

The ACCC's focus on the conduct of franchisors and the information provided to franchisees serves as a timely reminder for franchisors to review their compliance with the Franchising Code.

 

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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.