We receive approximately 1000 complaints each year from consumers and businesses about franchising. The ACCC investigates all claims that fall under its jurisdiction and will take strong action where necessary. However, many of the complaints we receive fall outside our jurisdiction, are of a private contractual nature or there is insufficient evidence to substantiate a breach of the code or the Act.
When we receive a complaint about the code, we will usually recommend mediation as the first and best option. However, if a party has failed to comply with the code or is using its superior bargaining power to disadvantage another party, we may decide to take action.
The ACCC’s investigation process for franchising matters
If the complaint involves a potential breach of the code and/or the Act, a three-stage investigation process will commence.
A preliminary assessment of the complaint is made, which may include an initial interview with the complainant to verify general information (e.g. contact details and the name of the trader). If the complaint is assessed as substantive, it is progressed to the next stage. However, in some instances the matter may be best addressed through dispute resolution.
We will generally recommend mediation as a first step in franchising disputes where this process might reasonably facilitate an outcome acceptable to both parties.
The matter is escalated to an ACCC enforcement officer and further information and substantiation of the allegations are sought from both parties. This may be through conducting interviews, obtaining and examining documents pertaining to the alleged conduct and careful application of the law to the known facts.
Additional evidence is collected and the matter is reviewed and analysed by senior enforcement staff. If the allegations can be substantiated by reliable evidence, the matter will generally be referred to the ACCC’s Enforcement Committee for consideration.
The committee is responsible for deciding on the most appropriate course of action, having regard to the impact that the action may have on the ongoing business relationship, the national market, relief available to affected persons and the value of precedent. The committee may elect to pursue the matter through litigation or resolve it by an administrative settlement.
Where the investigation of a matter has indicated serious breaches of the code and/or the Act and the matter is able to be substantiated with sufficient evidence, the ACCC can and does take decisive action.
Recent matters pursued by the ACCC (within the last three years) are listed below.
The ACCC alleged that the franchisor of the system made misleading representations to franchisees and potential franchisees regarding the profitability of the system, its operational and trading record, and specific details of its business operation (such as its menu and the costs involved in operating the business).
Following a thorough ACCC investigation, the promoters offered court enforceable undertakings to the ACCC. During the negotiation process, the promoters of the system indicated that its financial state was such that it would not be able to meet further claims for loss or damage from franchisees. The franchisor and the ACCC negotiated a refund, via an independent third party, based on the franchisees' level of involvement in the system, that at least comprised a refund of the franchise fee.
Concerns were raised by a number of existing franchisees regarding the disclosure document provided by You Can Bake-It Franchising. The ACCC was concerned that sections of the provided disclosure document were ambiguous and potentially misleading.
The company cooperated with the ACCC, providing undertakings that it would remedy the issues so they did not recur in the future.
JV Mobile promoted and advertised its business network as a franchise, and sought (and/or received) payments to operate as a franchised retail business.
Despite operating and marketing itself as a franchise, JV Mobile failed to provide its retailers (franchisees) with all of the safeguards available under the Franchising Code of Conduct, including the upfront provision of a disclosure document.
The company provided court enforceable undertakings to prevent the conduct from recurring.
Conduct: breaches of the Franchising Code, unconscionable conduct
Outcome: court enforceable undertakings
Date: November 2006
Scotty’s Premium Pet Foods issued some of its franchisees with notices claiming they had breached their franchise agreements. These notices required that they remedy the alleged breaches within 14 days or the franchise would be terminated.
The ACCC considered that this timeframe was unreasonable and that the notices did not sufficiently describe the alleged breaches or the remedy required.
Scotty’s also attempted to directly supply products to a business customer of one of their franchisees within their ‘exclusive’ territory.
The company provided court enforceable undertakings to prevent the conduct from recurring.
Matter/Company: Photo Safe Australia P/L, Data Vault Services P/L, i.e. Networks P/L
Conduct: misleading and deceptive conduct
Outcome: declarations by consent
Date: April 2006
The managing director and sales manager of Photo Safe and Data Vault misled and deceived 37 small business investors who paid over $3 million in total to be a part of Photo Safe, Data Vault or i.e. Networks.
Despite representations that the businesses would be successful, very few or no businesses were launched and no retail arrangements were reached.
The Federal Court ordered the managing director and sales manager to undergo trade practices compliance training and to pay costs.
Matter/Company: Archem Australia P/L and Maintenance Franchise Systems P/L
Conduct: misleading and/or deceptive conduct
Outcome: Federal Court declarations by consent, private settlement brokered by ACCC for 11 franchisees to receive compensation
Date: March 2006
Maintenance Franchise Systems was the franchisor for the domestic fertiliser spray services that used Archem fertiliser. The ACCC alleged that the company made representations, including that franchisees could earn high incomes without engaging in selling activities, that Archem had successfully run a similar business and that the products performed satisfactorily.
The Federal Court declared these representations breached the Act, by consent. In a separate deal brokered by the ACCC, 11 franchisees received compensation.
Conduct: breaches of the Franchising Code, misleading and/or deceptive conduct
Outcome:Federal Court declarations and orders
Date: February 2006
ContactPlus sold licences to use its software and marketing database to run recruitment/employment businesses.
The ACCC believed this license system was actually a franchise business and, as such, ContactPlus breached the code by not providing the franchisees with the mandatory documentation and rights prescribed under the code.
It was also alleged that ContactPlus and its director made false, misleading and/or deceptive claims, including their right to payment of a lump sum licensee fee.
The court declared that the ContactPlus was a franchise system and found its claims were misleading. The court also imposed injunctions.
Matter/Company: Office Support Services International P/L
Conduct: breaches of the Franchising Code, misleading or deceptive conduct
Outcome: orders by consent
Date: May 2005
The ACCC alleged that OSSI Pty Ltd provided incomplete and insufficient disclosure documents to franchisees, failed to provide disclosure documents to some prospective franchisees and made false or misleading representations about the businesses operations and profitability.
The court agreed, and found that the company breached the Act.
The company agreed to consent orders, including declarations that they breached the code. On top of the declarations and costs, injunctions were granted and the director was ordered to attend trade practices compliance training at his own expense.
Conduct: breaches of the Franchising Code and misleading and deceptive conduct
Outcome: court enforceable undertakings, Federal Court injunctions
Date: February 2005
Following ACCC action, Mr Bon Levi, who promoted a range of systems under the Little Joe and Joey's brands, was found to have engaged in misleading and deceptive conduct as well as breaches of the code by declaration in the Federal Court.
It was found that Mr Levi and his business partner had made numerous misleading statements regarding future profitability and planned advertising campaigns, as well as failing to abide by the Franchising Code of Conduct.
Lawson’s Trading sold licence and supply agreements to be a part of its business.
The ACCC alleged that the arrangement was actually a franchise system, and that Lawson’s Trading had breached the code in several ways, including by failing to provide disclosure documents and a dispute resolution process.
Lawson’s provided a court enforceable undertaking to stop engaging in similar conduct, to create and distribute an appropriate disclosure document, to refund money to affected franchisees and to implement a rigorous trade practices compliance program.
Conduct: breaches of the Franchising Code and general misleading representations
Outcome: declarations by consent
Date: January 2004
Synergy in Business Pty Ltd promoted and sold small business training and development programs under licence agreements, and specifically tried to avoid the code by including a clause in its contract claiming that the system was actually a licence agreement.
Synergy then failed to provide franchisees with disclosure information and did not provide a cooling-off period.
The court found the system to be a franchise and thereby subject to the code. It also found Synergy’s directors misled and deceived franchisees by making unreasonable representations as to future profit.
What are some other topical matters relevant to the ACCC and franchising?
From time to time, there is public commentary of alleged breaches of the Franchising Code of Conduct and/or the Trade Practices Act by franchisees and their representatives about certain franchise systems. While the ACCC does not generally offer views on such matters, the following information is provided to address the potential misconceptions that might otherwise arise.
The information provided within this section does not indicate in any way an indictment or endorsement by the ACCC of these franchise systems. The ACCC simply considers that there is a public benefit in providing such information, but has strictly limited comment to those issues that have already been raised in the public domain.
Since about April 2007 the ACCC has been investigating complaints alleging that Bakers Delight Holdings Ltd engaged in conduct contravening the Trade Practices Act 1974.The ACCC does not ordinarily comment on individual complaints that it may or may not be investigating and tends not to refer to outcomes that are not in the public arena. However, given the substantial publicity surrounding the investigation, the ACCC considers it appropriate to provide some general comments on the Bakers Delight investigation.
During the course of its investigation the ACCC received a number of complaints from (mainly) former franchisees within the Bakers Delight system.The number of complaints received was small when compared with the size of the Bakers Delight franchising system. The complaints received by the ACCC alleged a wide variety of conduct, including that Bakers Delight:
Failed to provide adequate training and support for franchisees
Inappropriately breached and terminated franchisees
Failed to mediate
Provided or failed to provide information to franchisees about the sales of their businesses which meant they could not make properly informed decisions and
Inappropriately shared information with franchisees financial institutions.
Between April 2007 and September 2007 the ACCC undertook numerous communications with the complainants including face to face interviews with franchisees in Perth, Adelaide and Canberra and on the New South Wales South Coast.Following a review of the material provided during that process a number of complainants were advised in October 2007 that the ACCC would not be pursuing their complaints as the material did not reveal breaches of the Act.
Based on the information provided by the complainants, in October 2007 the ACCC issued an investigatory notice requiring Bakers Delight to provide information relating to their dealings with particular franchisees.The issuing of a notice such as this is a usual step in this type of investigation and should not be taken to indicate that Bakers Delight were not cooperating with the ACCC in its investigation.
During the period between December 2007 and February 2008 Bakers Delight provided approximately 11 boxes of documents to the ACCC in response to the investigatory notice.The material provided included communications between the complainants and Bakers Delight and internal documents relating to the dealings Bakers Delight had with the complainants.
In February 2008 the ACCC conducted further interviews with a number of complainants. As a result of these extensive enquiries and an analysis of the information provided the ACCC decided not to take any action in relation to any of the complaints received.
This position has been informed by a number of conclusions.
The evidence assessed did not demonstrate that Bakers Delight had engaged in unconscionable conduct or breached the Franchising Code.
Although there is no suggestion that the allegations made by the franchisees were made with any improper intent, in many cases, it was difficult to substantiate claims and in some cases information given was directly contradicted by other evidence.
There were a few circumstances where franchisees alleged that Bakers Delight representatives had made misleading verbal representations which investigations have neither been able to substantiate or dismiss. However in each of these cases, the ACCC considers steps taken by Bakers Delight were either sufficient to remedy the alleged wrongdoing or other factors led to the losses suffered by the franchisees.
There was no evidence produced to or obtained by the ACCC that evidenced widespread or systematic problem of compliance within the Bakers Delight franchise system.
Churning allegations
During the course of the investigation a number of the complainants alleged that Bakers Delight engaged in the practice commonly described as ‘churning’.That is, selling a franchise site repeatedly in circumstances where the franchisor is aware that it will fail.
The ACCC considered this churning allegation and concluded that there was no evidence of churning within the Bakers Delight system nor, and most importantly, in relation to those complaints that were subject to a detailed investigation.
To the contrary, the evidence supports the view that Bakers Delight is generally reluctant to initiate termination and does not have a record of repeatedly selling franchise sites.
Allegations of collusion with Banks
Some of the franchisees alleged that Bakers Delight colluded with banks, including that they shared information about the franchisee which led to losses being suffered.This allegation was made against more than one bank.
The ACCC investigation revealed that terms and conditions of the Bakers Delight franchise agreement and banking loan agreements allowed for the sharing of information in certain circumstances.In some circumstances franchisees had signed an additional confidentiality waiver.The ACCC did not find any evidence that there was any wrongdoing on behalf of any of the banks or Bakers Delight in this regard.
Notwithstanding the ACCC’s decision to take no further action in this matter, the ACCC is in ongoing discussions with Bakers Delight with a view to ensuring its trade practices compliance procedures and complaint handling processes are best placed to deal with issues that might arise in the future.
