The Australian Competition and Consumer Commission (ACCC) has recently stepped up its scrutiny of the franchising sector, having been examining the small business sector for many years, and has most recently turned its attention to enforcement of the Franchising Code of Conduct. In addition, the Parliamentary Joint Committee on Corporations and Financial Services' Fairness in Franchising report handed down in March 2019 was overwhelmingly critical of the existing regulatory framework for the franchise industry and proposed substantial reforms.
In February 2020 the ACCC identified franchising as one of its 2020 Compliance and Enforcement Priorities. ACCC Chair Rod Sims noted that the ACCC is particularly concerned many franchisees cannot freely operate their business because of the prevalence of some questionable industry practices. Mr Sims made it clear that the ACCC will be taking strong enforcement action for significant breaches of the small business protection provisions of the Competition and Consumer Act 2010 (Cth) (CCA) and the Franchising Code in particular.
Since February 2020, the ACCC has done just that and franchisors and franchisees should be aware that this is likely to continue.
The ACCC has taken the following actions, specifically in respect of the Franchising Code:
- In April 2020, the ACCC accepted a court enforceable undertaking from Bob Jane Corporation Pty ltd to comply with its obligations under the Franchising Code.
- In May 2020, following an ACCC investigation, General Motors Holden Australia NSC Pty Ltd committed to negotiating, in good faith, compensation for Holden's withdrawal from the Australian market. The ACCC announced it was preparing for court action in the event that Holden did not provide that commitment.
However, the ACCC has not limited its investigations of the franchising sector to the Franchising Code itself.
This week, the ACCC instituted proceedings in the Federal Court against franchisor Megasave Couriers Australia Pty Ltd and Megasave's sole director, Mr Gary Bourne, for contraventions of the Australian Consumer Law. Megasave Couriers operates a national parcel courier delivery service and claims to have more than 50 franchises across Australia. The ACCC's case follows complaints from numerous franchisees.
The ACCC contends that Megasave misled prospective franchisees with false or misleading promises of guaranteed minimum weekly payments and annual income if they purchased a Megasave courier franchise.
Specifically, the ACCC alleges that Megasave represented to prospective franchisees in online ads, on its website and in documents provided to potential franchisees:
- from at least June 2019 to July 2020, that they would receive guaranteed minimum weekly payments (in most cases $2000 per week) for a period of time; and
- from at least June 2019 to April 2020, that they would be guaranteed a minimum annual income, which in most cases was $91,000.
In addition, the ACCC alleges that, from late December 2019, Megasave imposed a condition on the payment of minimum weekly payments which had not been disclosed to franchisees before they purchased their franchises.
The ACCC contends that Mr Gary Bourne was knowingly involved in the contraventions as he knew that Megasave was making the representations, caused Megasave to make the representations, and personally made the representations to a number of potential franchisees.
The significance of the ACCC bringing proceedings against a franchisor for false and misleading representations, and not limiting its enforcement actions in the sector to breaches of the disclosure and other obligations in the Franchising Code itself, lies in the penalties that can be imposed. Breaches of the Franchising Code can result in penalties of up to $66,000. However, the maximum penalties for breaches of section 29 of the Australian Consumer Law are, for corporations, the greater of $10 million, three times the value of the benefit received or 10% of annual turnover in the preceding 12 months if the court cannot determine benefit obtained, and, for individuals, $500,000.
In the Megasave case, the ACCC is seeking pecuniary penalties, injunctions, compensation for franchisees who have suffered significant financial hardship and stress and disqualification orders against Mr Bourne.
With the ACCC ramping up its enforcement actions in respect of Franchising Code compliance and small business protection matters, and the Government having recently amended the Franchising Code as it applies to motor vehicle dealerships and flagging further reforms more broadly, franchisors must ensure that they have appropriate compliance systems in place and are cognisant of their Franchising Code obligations in all of their dealings with their franchise networks.