Deputy Chair Dr Michael Schaper provides an update on the ACCC's recent franchising activities. Dr Schaper also outlines the ACCC's approach to enforcement and discusses proposed changes to Franchising Code of Conduct including possible powers to issue infringement notices and seek penalties in the Federal Court.
Check against delivery
A new chapter of the Franchising Code of Conduct is set to begin on 1 January. For the first time, it is proposed that the ACCC will have powers to issue infringement notices of up to $8,500 and seek penalties up to $51,000 in the Federal Court for breaches of the Code.
The changes are likely to go unnoticed by franchisors and franchisees who do the right thing. However, the new powers are likely to play an important role in achieving compliance with the Code.
Infringement notices will allow us to move swiftly to deal with what we believe to be breaches of the Code, while the court penalties will provide more teeth in deterring rogue operators.
As part of the Franchising Review there was some trepidation about the scope of the powers and the way in which the ACCC may use them, should the government decide to introduce them. To allay some of those fears, today I will explain our approach to enforcement, and how it might be applied in the context of the Code.
In keeping with tradition, first, I will also provide an update on our recent franchising activities.
The ACCC is an independent statutory body responsible for promoting competition and fair trading.
Our role extends to ensuring franchising industry participants comply with their obligations under the Franchising Code of Conduct.
The Code is mandatory under the Competition and Consumer Act.
The ACCC investigates alleged breaches of the Code and the Act and we take enforcement action where appropriate.
Since the Code was introduced in 1998, we have taken court action against almost 30 franchisors.
Our most recent case involves a company called South East Melbourne Cleaning Pty Ltd (in liquidation) (formerly known as Coverall Cleaning Concepts South East Melbourne Pty Ptd).
As the name suggests, Coverall Melbourne was a master franchisor of a franchise system that provides professional cleaning services.
In making representations to two franchisees about the volume of work and earnings, the ACCC alleges Coverall Melbourne:
- engaged in unconscionable conduct in contravention of the Australian Consumer Law
- made false or misleading representations
- engaged in conduct that was misleading or likely to mislead, and
- contravened the Franchising Code.
We are seeking penalties, declarations and compensation for two affected franchisees.
There have also been developments in the SensaSlim case.
To quickly recap, SensaSlim supplied an oral spray that was claimed to cause weight loss.
It represented that the SensaSlim Solution was the subject of ‘a large worldwide clinical trial’.
The solution was distributed through franchisees to be on-sold to consumers through retail outlets.
Around 110 areas were sold to franchisees (area managers) for the cost of about $60,000 each.
In April, the Federal Court found SensaSlim engaged in misleading or deceptive conduct by failing to disclose Peter Foster’s involvement in the SensaSlim franchise system in its disclosure document.
The disclosure of Mr Foster’s involvement would have been important to potential franchisees.
It would have rung alarm bells as previous court orders prevented Mr Foster from promoting and being involved in businesses relating to weight loss, cosmetic or health industry products or services.
The court also found that SensaSlim engaged in misleading or deceptive conduct by making false representations about the ‘worldwide clinical trial’ and the earning potential of franchises.
As you know, people who decide to buy into a franchise system typically put their savings on the line.
In doing so, they should be able to make informed business decisions on the basis of full and accurate disclosure by the franchisor.
The case continues with further hearings on remedies taking place.
Since I spoke to you last, there has been an outcome in the Taxsmart case.
In May, the Federal Court ordered, by consent, that Taxsmart repay $260,400 in franchise fees to five former franchisees.
The Court found that Taxsmart engaged in misleading or deceptive conduct when it claimed that it was offering a graduate program and 12 months of employment to accounting graduates that would enable them to satisfy the requirements for registration as a tax agent.
In July this year, we started court action against A Whistle (1979) Pty Ltd, the franchisor of the Electrodry Carpet Cleaning business.
We are alleging the franchisor was involved in the posting of fake online testimonials.
We claim the testimonials were written and posted by people associated with, or contracted to, Electrodry, and not by its genuine customers.
The ACCC is seeking declarations, penalties, injunctions and corrective notices.
Harvey Norman Franchisees
It is not just franchisors who have to mindful of their obligations.
Our actions against a series of Harvey Norman franchisees show that franchisees need to operate within the Australian Consumer Law when dealing with customers.
In separate judgments, the court found nine individual franchisees made false or misleading representations to consumers about their consumer guarantee rights.
The allegations made by the ACCC against each of the franchisees differ.
Examples of the misrepresentations made by in-store sales representatives or store managers include:
- the franchisee had no obligation to provide a remedy while the relevant product was still covered by the manufacturer’s warranty;
- the franchisee had no obligation to provide consumers with a choice of remedy if the relevant product was supplied more than three months ago; and
- the consumer would have to pay a postage and handling fee before the relevant product could be returned from the manufacturer.
The proceedings brought by the ACCC against nine Harvey Norman franchisees have led to penalties totaling $234,000.
Griffith pre-entry franchising program
On one hand we have enforcement; on the other we have education.
The two work in tandem. They are both equally important in bringing about compliance with the Code.
We believe disputes can be reduced if prospective franchisees know their rights and obligations under the Code before they enter into a franchise agreement.
Since 2010, the ACCC has funded a free online pre-entry education program run by Griffith University.
The course has proven successful with more than 6,700 participants enrolled in the program.
Feedback to the franchising sector
Providing feedback to industry is another important plank of what we do.
We discuss issues with our Franchising Consultative Committee and we receive feedback about emerging concerns.
We also publish Small Business in Focus. The twice-yearly report provides a summary of our activities in the small business and franchising sectors.
It also provides a breakdown of franchising complaints and inquiries.
For the 2013/14 financial year, the ACCC received 591 franchising complaints and 227 enquiries.
While the total contacts recorded by the ACCC's Infocentre has remained stable in comparison to previous years, one trend which stands out is the significant increase in the number of franchising enquiries. Compared to the previous financial year, the number of enquiries has almost doubled.
While this is no doubt due to many different factors, I see it as a clear indication that the sector is increasingly looking to the ACCC for guidance on the Code, and the rights and responsibilities contained within it.
I should say there are limits in what we can do with complaints. For example, some business-to-business disputes are more effectively dealt with by mediation.
Where this is the case, the ACCC will refer the complainant to the Office of the Franchising Mediation Adviser or the relevant Small Business Commissioner.
Use of audit power
Since 2011, the ACCC has used its audit power to quickly determine whether franchisors are complying with the Franchising Code.
How does the audit work? We can compel a trader to provide any information or documents it is required to keep, generate or publish under a relevant prescribed code.
For franchisors, this includes disclosure documents, marketing fund statements and franchise agreements.
The ACCC has served audit notices on 77 traders across Australia (62 franchisors and 15 horticulture traders) since 2011.
Last year, I mentioned we would be testing compliance within the fast-food and fitness franchise systems.
Since last year’s announcement, the ACCC has audited six fast food franchisors and six fitness franchisors. While all the traders were largely compliant, some minor issues were identified.
Overall, we have found most franchisors to be compliant with the Franchising Code, although a number of audits have raised concerns.
These concerns have been resolved administratively.
Common concerns raised during the audit process include:
- failure to disclose information about existing and former franchisees, such as their contact details
- other omissions in the disclosure document
- failure to audit the marketing fund statement or to have the audited statement prepared within four months after the end of the financial year.
From 1 January 2015, it is proposed the scope of the audit power may be increased to cover a wider range of documents.
For example, the ACCC will have the power to issue a notice for any documents that support claims made in a disclosure document.
Approach to enforcement and compliance
Next, I would like to talk about the ACCC’s approach to enforcement and compliance.
At a high-level we take action to;
- stop unlawful conduct
- deter future offending conduct
- obtain remedies that will undo the harm caused
- encourage effective compliance systems, and
- where warranted – obtain court orders which punish the wrongdoer and deter others.
The process often starts with a complaint.
Each year we receive roughly 160,000 complaints and enquiries.
From this pool we have to make a call on which matters merit investigation.
While all complaints are carefully considered, we cannot pursue every one.
We focus on circumstances that will harm the competitive process or result in widespread consumer or small business detriment.
As outlined in our Compliance and enforcement policy, we consider a range of factors such as whether there is:
- significant public interest or concern
- substantial consumer or small business detriment
- unconscionable conduct, particularly involving large national companies or traders which impacts on consumers and small businesses
- a blatant disregard for the law
- an issue of national or international significance
- conduct detrimentally affecting disadvantaged or vulnerable consumers
- conduct in concentrated markets which impacts on small firms or suppliers
- a new or emerging market issue
- conduct that is industry-wide or is likely to become widespread if the ACCC does not intervene
- likely to be a worthwhile educative or deterrent effect, and/or
- a history of previous contraventions by the person or business.
When looking at complaints, we also assess them against our compliance and enforcement priorities.
The priorities are set as part of our annual strategic review.
As part of the process we consult with the franchising industry and many others, to take stock of our priorities and look to new areas of focus.
At the end of the process, we publicly disclose areas for attention, well ahead of action arising from investigations or other compliance activity.
We have a strong set of enduring priorities that includes cartel conduct, anti-competitive agreements, and misuse of market power.
This year we also listed credence claims, drip pricing, extended warranties and issues in the fuel and supermarket sector among our priorities.
The assessment process narrows our scope to about 500 initial investigations, around 140 of which are then conducted at an ‘in-depth’ level.
The most serious matters usually become in-depth investigations.
At this stage, you can expect the ACCC will be gathering information and evidence to establish whether a breach of the Act has occurred.
In some cases this may involve the use of the ACCC’s coercive investigative powers such as 155 notices.
The investigation team will regularly report to our Enforcement Committee which is chaired by Commissioner Sarah Court and includes the Chairman, myself and other members of the Commission.
At this weekly meeting, investigators will provide updates and ask for direction. Staff make recommendations about how the conduct should be dealt with.
We take around 35 cases to court each year, accept around 30 court enforceable undertakings and issue infringement notices in around 30 matters.
Commission decision making process
Decisions to take these actions are made by the full Commission.
The Commission decision-making takes place within a rigorous corporate governance structure.
We exercise our enforcement powers independently without fear, favour or bias.
The ACCC has a Chair, two Deputy Chairs and four Commissioners who meet regularly, usually weekly, to make formal decisions.
As a broad principle our enforcement response is proportionate to the conduct and resulting harm.
Litigation is a last resort reserved for the worst offenders. We are more likely to take court action when the conduct is particularly serious.
As a responsible regulator, many factors are weighed up before heading to court
We do not make private deals—every enforcement matter that is dealt with through litigation or formal resolution is made public.
Proposed Changes to the Franchising Code of Conduct
From 1 January 2015, based on the exposure draft of the new Code released in April 2014, it is likely that financial penalties and infringement notices will be available for serious breaches of the Code, including failure to:
- act in good faith
- provide a disclosure document
- attend mediation
- provide reasonable written notice of proposed termination for breach.
Infringement notices and court penalties may be new to the Franchising Code, but they are not new to the ACCC.
Since April 2010, we have had powers to issue infringement notices for certain breaches of the Australian Consumer Law.
During this time we have developed guidelines on how and when we use them.
Infringement notices are a timely and cost-effective way of resolving the ACCC's concerns and avoiding legal proceedings.
The ACCC will take into account a broad range of factors in considering whether to try resolving a matter through the issuing of an infringement notice.
Circumstances where the ACCC is more likely to consider the use of an infringement notice, as opposed to proceeding to court, include where:
- there have been isolated or non-systemic instances of non-compliance
- there have been relatively low levels of franchisee harm or detriment
- the facts are not in dispute.
Under the ACL, the ACCC received payment for 23 infringement notices from nine traders in 2013-14, with penalties totalling over $220,000.
Under the Franchising Code of Conduct, infringement notices will be set at $8,500 for a company and $1,700 for an individual.
There are set protocols in using infringement notices.
They can only be issued where the ACCC has reasonable grounds to believe a person has contravened certain provisions of the Code.
While an infringement notice cannot relate to more than one alleged breach of a penalty provision, we may, where appropriate, issue multiple infringement notices.
This can be done where we believe a party has engaged in multiple breaches of one or more penalty provisions.
For example, failure by a franchisor to provide disclosure documents to three prospective franchisees could result in the ACCC issuing three infringement notices.
When issued with a notice, we will provide information about the nature of the alleged contravention, the penalty to be paid and the period for payment to avoid court action.
If Infringement notices are introduced, they will allow us to move quickly to respond to possible breaches. Notices have to be issued within 12 months of the alleged contravention.
The period for payment of an infringement notice penalty is 28 days.
A franchisor or franchisee may choose not to pay an infringement notice penalty, in which case the ACCC may decide to take court action.
Once a notice is paid, the ACCC may not take court action in relation to the alleged contravention. Payment is not taken as an admission of liability for a contravention of the Act – only the court can make such rulings.
The infringement notice process is transparent, with the payment being made public via an online register and a media release.
Infringement notices will provide balance to our enforcement tool kit.
For example, the ACCC receives complaints from franchisees alleging that they received an inaccurate or incomplete disclosure document from their franchisor.
Court action may be excessive, but issuing an infringement notice may be appropriate in some circumstances.
Recently we have used an infringement notice under the Australian Consumer Law in dealing with a health insurance comparison service.
Compare The Market Pty Ltd paid an infringement notice of $10,200 in relation to advertising claims made about the scope of the service.
Compare The Market said, “We now compare more health funds than any other website in Australia” and “Compare more health funds than anywhere else”.
In fact, there were two other websites that compared the policies of more health insurance funds, including the website operated by the Private Health Insurance Ombudsman.
The ACCC had reasonable grounds to believe a breach Section 29(1)(g) of the ACL had occurred. Section 29 sets out the types of claims or statements that may be false or misleading.
Like any rules, the consequences of breaching the Code must be sufficiently serious to deter non-compliance.
In the past, we have received complaints about businesses operating franchise systems under the guise of a licensing or distributorship arrangement in a deliberate attempt to bypass the Code. The lack of penalties meant there was little to deter these operators.
The game is set to change with proposed penalties of up to $51,000 per breach of the Code to be introduced soon.
The fact that we work through the courts is an important one.
In a contested matter, we must convince a court to rule in our favour on the basis of evidence that we put forward.
It is also up to a Federal Court judge to decide on the extent of the penalty.
This provides an important counter balance to our role as a regulator.
Penalties will apply to conduct from 1 January 2015.
We know that one of the biggest issues facing the sector is the likely introduction of an obligation of good faith.
While the final form of the Code has yet to be released, it is clear that the Government intends to introduce an obligation of good faith in the Code.
From the common law we know that good faith requires parties to exercise their powers reasonably and not arbitrarily or for some irrelevant purpose.
In addition, conduct may lack good faith if one party acts dishonestly, unreasonably or fails to have regard to the legitimate interests of the other party.
So what does this mean for franchisors and franchisees?
Fundamentally, good faith will require both parties to a franchise agreement to remain loyal to the contract they have entered into. Acting for an ulterior purpose, or in a way that undermines or denies the other party the benefits of the contract are examples of conduct that may qualify as bad faith.
Whether certain conduct will lack good faith will depend on the circumstances surrounding the conduct. When considering whether your conduct is in good faith, potential questions to ask include:
- Have you been honest with the other party?
- Have you considered the other party’s interests?
- Have you consulted with the other party regarding proposed changes?
- Are you imposing any conditions on the other party? Are those conditions necessary to protect your interests?
While good faith requires you to have regard to the rights and interests of the other party, it does not prevent you from acting in your own legitimate commercial interests. For example, while good faith will require parties to act honestly and cooperatively during the negotiation of a franchise agreement, it is unlikely to compel a franchisor to make requested additions or changes to an agreement.
Good faith can sometimes be a hard concept to ‘pin down’. There is likely to be some uncertainty around the meaning of good faith in the franchising context until it is clarified further through the courts.
When ushering in the proposed changes to the Code, while there will not be a moratorium period, we will apply our discretion in line with our Compliance and Enforcement Policy in deciding whether to take enforcement action
This policy reflects a common sense approach by the ACCC to the use of its regulatory powers.
The ACCC will focus its attention on particularly egregious conduct, including breaches of the ‘key pillars’ of the Code.
This is likely to include failure to act in good faith, failure to provide a disclosure document, refusal to attend mediation and unlawful termination of a franchise agreement.
ACCC guidance materials
With the new Code likely to take effect from 1 January 2015, the ACCC is conscious of the importance of ensuring the sector has clear and meaningful guidance as to what the new Code means for franchisors, franchisees and prospective franchisees.
To help franchising parties understand the new Code, we will be updating our franchising web page and releasing new guidance materials, including a manual for franchisors and franchisees.
Once it is released later this year, people looking for guidance on the Code will be able to find what they need by visiting our website at www.accc.gov.au/franchising.
We will also hold a free interactive webinar in December to help prepare the sector for the incoming changes.
As well as a general overview of all of the changes to the Code, the webinar will cover certain topics in some detail, including:
- the obligation of good faith
- the ACCC’s compliance and enforcement policy, including when the ACCC is likely to issue an infringement notice or go to court seeking penalties
- disclosure obligations.
Participants will also be able to ask the presenters questions.
We look forward to the new era of the Franchising Code of Conduct.
We’ve been administering the Code for 16 years now and during that time we've had the opportunity to reflect on its effectiveness.
While we regard the Code as an effective piece of regulation, the absence of financial penalties for a breach of the Code has been a clear gap, in our view.
The Government has agreed that stronger consequences will further deter parties from breaching the Code.
The proposed introduction of financial penalties and infringement notices are welcome additions to our enforcement tool kit.
They will provide us with flexibility and balance in dealing with breaches of the Code at both ends of the severity spectrum.
I look forward to providing updates on how we are using these tools to achieve compliance with the Code.