Overview of Australian Franchise Regulation
Franchising in Australia is primarily regulated by the Franchising Code of Conduct (the Code), which forms a schedule to the Trade Practices (Industry Codes—Franchising) Regulations 1998 (Cth). The Code is administered and enforced by the Australian Competition and Consumer Commission (ACCC), which investigates alleged breaches of the Code and takes enforcement action in appropriate circumstances.
The Code contains mandatory disclosure obligations for franchisors. Franchisors must provide a comprehensive disclosure document to all prospective franchisees, renewing franchisees, and, upon request, existing franchisees. The Code sets out the specific information that a franchisor must provide to franchisees, including extensive details of the franchise business and its operating history.
There are two prescribed forms of Australian disclosure document—a long form disclosure document (Annexure 1) and a short form disclosure document (Annexure 2). (While the required disclosures for each form are set forth in the Code, the recommended format of each is included in the Franchising Code of Conduct Compliance Manual.) If the franchised business has annual expected sales at any time during the term of A$50,000 or more, the franchisor must provide the long form disclosure document; otherwise, the franchisor must provide the short form disclosure document. Because both vary substantially from the form of franchise disclosure document prescribed by the Federal Trade Commission Rule, U.S. franchisors cannot simply tweak their domestic disclosures to achieve compliance with the Code.
Regardless of the required form of disclosure document, franchisors must strictly adhere to certain initial and ongoing disclosure requirements, including:
- The disclosure document must be provided to the prospective or renewing franchisee at least 14 days before the franchisee signs the Franchise Agreement.
- The disclosure document must be accompanied by a copy of the Franchise Agreement in the form in which it is to be executed—not the template form of agreement as in the U.S.
- Before the franchisor may sign the Franchise Agreement, the franchisor must receive an executed receipt from the franchisee, stating that the franchisee has received, read and had the opportunity to understand the disclosure document before signing the agreement.
- The disclosure document must be updated annually within four months after the end of the franchisor’s fiscal year.
- The franchisor must provide an existing franchisee a current disclosure document within 14 days after the franchisee’s written request. (This request may only be made once every 12 months.) Consequently, even if the franchisor is no longer offering franchises in Australia, it will have to update its Australian disclosure document if an existing Australian franchisee requests a copy.
- Within 14 days of a change in any materially relevant fact, including a change of ownership or control of the franchisor or the initiation of any legal proceedings involving the franchisor, the franchisor must notify franchisees (both prospective and existing) of the material change.
In addition to disclosure obligations, the Code sets out certain requirements relating to Franchise Agreements, including:
- A franchisee may terminate the Franchise Agreement within seven days after the earlier of entering into the agreement or making any payment under the agreement; however, these cooling-off rights do not apply to renewals, extensions or transfers.
- A Franchise Agreement may not contain or require a franchisee to sign a general release.
- If the franchisees are required to contribute to an advertising fund, the fund must be audited annually unless 75% of Australian franchisees agree to waive that requirement.
Proposed Changes to the Code
Recently, the Australian government conducted a review of the Code, resulting in 18 proposed modifications to the Code. There is some indication that these changes will become law in the middle of 2014.
The recommendations include:
- Assessing civil penalties up to a maximum of A$50,000 for breaches of the Code.
- Authorizing the ACCC to issue infringement notices for breaches of the Code and conduct random audits of franchisor documents and procedures to ensure Code compliance.
- Expanding the legal bases to disqualify a person from managing a corporation to include breaches of the Code.
- Authorizing courts to grant franchise-specific orders, including requiring a franchisor to contribute to the marketing fund or grant royalty abatements for a limited period of time.
- Permitting a foreign franchisor granting a single master franchise to provide a short form disclosure document to the master franchisee and a long form disclosure document to franchisees (not acting as master franchisees). Master franchisees would be required to provide the short form disclosure document to sub-franchisees.
As can be seen with the proposed changes to the Code, the ACCC is taking a more aggressive enforcement stance of late, investigating companies and pursuing them for breaches of competition and consumer law, including breaches of the Code. In fact, according to the Australian press, the ACCC has spent so much of its budget in connection with its investigative activity that it recently sought and obtained additional funding.
In Australia, in the event of an inadvertent breach of the Code, organizations that have a compliance plan and training in place may argue that penalties should be minimized. As stated above, if the proposed changes to the Code are enacted, penalties for breach thereof may be up to A$50,000. Further, other breaches of competition or consumer law can result in fines of up to (and potentially greater than) A$10 million per offense for the corporation and up to A$500,000 for individuals.
It appears that the Australian government supports the ACCC’s efforts. Consequently, the Commission’s zealous enforcement activity and resultant slew of legal proceedings will likely continue. U.S. franchisors in Australia or that are thinking about expanding to Australia should stay tuned.
Warren Scott is a partner and national head of the franchising team with the Australian law firm, Mills Oakley Lawyers. Warren acts for many established and growing Australian franchise systems, as well as many international franchisors and regularly advises about international expansion to Australia.