In our February edition of Franchising Update we discussed the history of the Franchising Code of Conduct (Code) review process, as well as the agenda for the 2013 review. Specifically, we addressed issues such as enforcement, implied obligations of good faith and end of agreement rights being areas on which the review will focus.

As part of the review process, industry bodies, businesses and individuals were invited to make submissions addressing these and other potential issues. Recently, the Australia Competition and Consumer Commission (ACCC), the Code’s peak enforcement body, publically released its submission to the review.

The ACCC’s submission

General Summary

The ACCC’s submissions address the substantive limitations facing the operation of the Code from the perspective of enforcement. To better achieve compliance to the Code, the ACCC in its submission has recommended that:

  1. pecuniary penalties and infringement notices be made available as remedies for breaches of the Code; and
  2. the audit power be broadened to allow for in-depth ACCC investigation.

The ACCC also made submissions addressing incidental and practical issues related to the operation of the Code which it considered had arisen and could be corrected. These include:

  • a requirement of a short summary document to accompany disclosure documents;
  • an obligation to disclose a franchisor’s ability to compete against the franchisee online;
  • an obligation to disclose the existence of franchisor infringement notices; and
  • an obligation for written requests by franchisees (and ex-franchisees) to not have their details exposed in disclosure statements be franchisee initiated (rather than by requirement of the franchisors).

Pecuniary penalties and infringement notices

The introduction of civil pecuniary penalties and the wider use of infringement notices is arguably the most substantive recommendation the ACCC submission makes. The ACCC in its submission argues for the need for greater deterrence in terms of compliance breaches.

The introduction of pecuniary penalties would affect franchisors who fail to follow the administrative requirements laid down by the Code such as failure to provide relevant documents or incomplete or inaccurate disclosure documents.

The ACCC submits that such penalties would not only act as an effective deterrent for the contravening franchisor, but as an industry wide deterrent against such conduct.

Audit Power

The ACCC presently has the power to audit certain parties for compliance with the Code. In doing so, the ACCC has the power to require the production of documents which parties are legally obliged to maintain records of under the Code.

However, the ACCC is limited in that the audit power does not provide the ability to investigate related documents and agreements for their consistency with the examinable documents. For example, if a franchisor notes that they have not terminated any franchise agreements in the last three years, the ACCC lacks the power to validate this claim and look at associated records.

The ACCC seeks broader powers in relation to auditing.

If implemented, this recommendation may impose an increased burden on franchisors to supply relevant documents and increase the scope of the ACCC’s subject material for which infringement notices for breaches of the Code could be issued.

Summary disclosure statement and online sales

The ACCC also identified a number of areas which have potential to be considered in the review. For example, the ACCC has recommended that franchisors be required to provide a summary disclosure document in addition to regular disclosure documents. The idea of this document would be to set out specific elements of the franchise agreement which appear to be frequently misunderstood by franchisees such as the renewal clause, the franchisor’s entitlement to terminate upon breach of the franchise agreement, the consequences for the franchisee if the franchisor fails and the obligation to purchase from specific suppliers.

Further to this, the ACCC proposes that franchisors should disclose whether they can compete online against franchisees. The ACCC highlights that as over 40% of franchisors engage in online sales with a further 32% planning to in the future, there is scope for systemic issues to develop as franchisors compete with franchisees online.

Unconscionable end of term conduct & resale of failing franchise

In a supplementary submission sent to the Review, the ACCC also commented on the application of the Australian Consumer Law (ACL) to end-of-term conduct and the re-sale of continually failing franchises.

In its submissions the ACCC outlines some examples of non-renewal of franchise agreements by franchisors which may amount to unconscionable conduct under the ACL. The examples provided consider the ability of the franchise to recoup its investment in the original term, verbal representations by the franchisor regarding the renewal, the period of the notice given to the franchisee and other financial obligations on the franchisees, such as refits, at the towards the end of the term.

The ACCC also commented on the re-selling of a franchise that keeps failing, and sets out examples of conduct which it says may amount to unconscionable conduct under the ACL, such as circumstances where the reason for the exit of the previous franchisee is misrepresented and/or the franchisor does not reduce the price of the franchise following the repeated failure.

Other parties’ submissions

While the ACCC’s submission will play a substantial role in informing the review process due to the Commission’s unique position, the recommendations put forward in their submissions do not go uncontested.

In particular, other submissions made to the review fervently advocate against the introduction of pecuniary penalties. Various submissions by other parties suggest that the ACCC should not be given further power to issue pecuniary penalties and/or infringement notices.

The debate is divided on the basis of franchisees advocating for tougher franchisor restrictions and penalties for breach and franchisors submitting that present measures are sufficient, however, the majority of submissions do support enforcement changes in some form.

Although the present review will most likely remain limited to those issues which the 2007 and 2010 amendments addressed, there is potential that the current review process will uncover the need to undertake further, broader reform. Issues surrounding international franchising, online competition and the adequacy of disclosure provisions will possibly be noted as needing to be addressed in the future.

What next?

On 30 April 2013 the review panel submitted its findings to Government.

Once the Government has considered the report, it is likely they will issue a response which may include publication of the report itself.