The ACCC’s recent Small Business in Focus report reveals the latest small business and franchising enquiries and complaints data. Of significance, the report highlights that misleading and deceptive representations remain the most frequently complained about area for small businesses, especially in respect of franchises. 

In light of this recent data, this month’s Franchising Update explores franchising case examples of misleading and deceptive conduct and provides some practical guidance to attempt to reduce allegations of misleading and deceptive conduct.

PROHIBITION FROM ENGAGING IN MISLEADING AND DECEPTIVE CONDUCT

Section 18 of Schedule 2 to the Competition and Consumer Act 2010 (Cth) (ACL) states that a person must not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive.

The common areas that have been the subject of misleading and deceptive complaints include representations about:

  1. Earnings / profitability / cash flow;
  2. Customers / repeat orders;
  3. Site suitability / tenure; and
  4. Assistance offered by the franchisor.

MISLEADING AND DECEPTIVE CONDUCT IN PRE-FRANCHISE NEGOTIATIONS

The majority of misleading and deceptive actions for franchises concern conduct during pre-contractual negotiations.

During the early stages of negotiations, franchisors or their representatives have given franchisees information about the franchise system, the disclosure required by the Franchising Code of Conduct and other information as requested by the potential franchisee to assist determining whether they should enter into a franchise agreement with the franchisor.

Any representation in pre-franchise negotiations is vulnerable to a claim it was misleading and deceptive.

The body of case law suggests that if a representation does not satisfy the following test, then it is in danger of being misleading:

  1. is it the truth; and
  2. does it create a truthful impression?[1]

There must also be a connection between the representation and any loss alleged to have been suffered, though the misleading conduct need not be the sole factor, but must be a significant one in inducing the entrance into the franchise agreement.

Case examples on matters which can constitute misleading and deceptive conduct during pre-franchise negotiations include:

ACCC V HILLSIDE (AUSTRALIA NEW MEDIA) PTY LTD TRADING AS BET365

Bet 365 offered via its website “$200 Free bets for New Customers”. Later it added an asterisk after those words stating *see Terms and Conditions below. The terms and conditions then appeared at the bottom of the page.

The issue was whether the terms and conditions had been sufficiently brought to the attention of customers or were relegated to obscurity such that the advertising was likely to mislead the prospective customers.

Justice Beach found that the advertising was misleading or deceptive as none of the key conditions to obtain the $200 free bets were displayed on the same page as the headline (prior to its alteration) and potential customers had to click through to investigate other pages to determine conditions.

After the asterisk and reference to terms and conditions was added, with those terms and conditions appearing on the same webpage (just at the bottom), Justice Beach found that there was no misleading and deceptive conduct.

ACCC V SOUTH EAST MELBOURNE CLEANING PTY LTD (IN LIQ) (FORMERLY KNOWN AS COVERALL CLEANING CONCEPTS SOUTH EAST MELBOURNE PTY LTD) (NO 2)

The franchisor, Coverall, and its sole director and owner, made representations to several franchisees in respect of the minimum monthly earnings and the anticipated volume of work, without a reasonable basis for doing so.

The Federal Court found the franchisor had engaged in misleading and deceptive conduct. Coverall was ordered to pay significant pecuniary penalties, compensation and costs. Declarations of contravention were made against the company and its sole director and owner.

ACCC V SENSASLIM AUSTRALIA PTY LTD (IN LIQ) (NO 5)

SensaSlim Australia Pty Ltd (SensaSlim) supplied an oral spray that was claimed to cause weight loss, and represented that the SensaSlim product was the subject of ‘a large worldwide clinical trial’.

An officer of Sensaslim, Mr Foster, had previously been prohibited from being knowingly concerned in the promotion or conduct of any business relating to weight loss, cosmetic or health industry products or services.[2]

The Federal Court found that SensaSlim had:

  • failed to disclose Peter Foster’s involvement as an officer in the Disclosure Document,
  • falsely represented that Peter O’Brien and Michael Boyle controlled, directed and were actively involved in the business of SensaSlim when that was not the case,
  • falsely represented that the SensaSlim product was the subject of a large worldwide clinical trial when in fact no such trial was conducted,
  • falsely represented that SensaSlim franchisees were already participating in, and profiting from, the SensaSlim franchise, that a SensaSlim franchise had a certain earning potential,
  • failed to disclose that Mr Boyle was intending to resign as Director immediately following the launch of SensaSlim.

In his judgment, Justice Yates said that ‘the failure to disclose Mr Foster in the Disclosure Document was deliberate’. The disclosure of Mr Foster as an officer of SensaSlim would have been particularly important to any potential franchisee, given the court orders which prevented Mr Foster from being knowingly concerned in the promotion or conduct of any business relating to weight loss, cosmetic or health industry products or services”.

CARAZI PTY LTD V BLOW DRY BAR FRANCHISING PTY LTD (IN LIQ) & ANOR (NO. 2)  

This case saw the NSW Supreme Court highlight the importance of having a reasonable basis for making claims regarding future matters, and the duty to correct representations after becoming aware of their falsity.

We reported on this in our April update this year which can be accessed here.

PRACTICAL ACTION TO REDUCE MISLEADING AND DECEPTIVE ALLEGATIONS 

FOR FRANCHISORS

  • When drafting advertising or engaging in marketing activity consider what is being said and whether these claims are supportable, require further information or clarification beyond what the advertising and marketing contains.
  • Implement an effective system of approval of advertising or marketing and then auditing in order to identify consumer law issues like misleading and deceptive conduct are identified and prevented.
  • Ensure adequate training of relevant staff members (sales teams, franchise development managers, head office staff handling enquiries) and regularly review practices and procedures to monitor compliance with internal protocols and procedures.
  • Consider undertaking a Trade Practice Compliance Program to help identify and reduce the risk of breaching the ACL.
  • Ensure compliance with disclosure obligations under the Code (though compliance with disclosure requirements is not a defence for an action of misleading and deceptive conduct).
  • Ensure if you are going to make representations all representations such as projections of profit, annual turnover, risk and site suitability are accurate and factually based, have any relevant matters affecting these mentioned and what is said is recorded properly when this information is provided.
  • Ensure financial figures disclosed to potential franchisees are accurate, for businesses of a similar nature and size to the one proposed or have clear information about the source, reliability and future likelihood of remaining the same.
  • Encourage potential franchisees to investigate potential earnings themselves, to prepare budgets, test market conditions and seek advice so that they can rely on their own enquiries.

FOR FRANCHISEES

  • Ask for figures to be in writing and keep records of those figures, who gave them and the date they were given.
  • Record any conversations of substance during the negotiation stage, documenting who gave any representations and the time and date they were given.
  • If possible, record minutes when meetings for negotiations commence.
  • Rather than relying on projected figures, request historical data from other franchises in similar areas or with similar sized franchise stores.
  • Prior representation deeds may also be helpful, as this will allow for clarification of all representations offered by the franchisor to the potential franchisee.

To view the latest report issued by the ACCC, click on this link: Small business in focus