Latest actions and enforcement priorities of the ACCC

Speakers: 
Mr Mick Keogh, Deputy Chair
Conference: 
National Franchise Convention
20 October 2019

ACCC Deputy Chair Mick Keogh addresses the National Franchise Convention on the Gold Coast about franchising and the ACCC's latest actions and enforcement priorities.

Transcript: 

Check against delivery.

There is no doubt that franchising can work as a business model. There are plenty of examples of long standing, well-functioning operations that have been mutually rewarding for franchisors and franchisees.

But the golden rule is a successful franchise system relies, first and foremost, on the success of its franchisees.

This means, among other things, that selling a franchise to someone who is not suited to, or doesn’t understand franchising risks, is setting them up for failure and further undermines public confidence in franchising.

For a long time, the franchising system has attracted more than its fair share of exploitative operators and even outright fraudsters. As the Franchising Inquiry report says, 'Too many franchisors are abusing the power imbalance between themselves and their franchises.'[1]

Given recent history, there is a very real risk franchising will be subject to significant additional regulatory controls in the future, unless the sector can convince policymakers and the wider community it 'has its house in order'.

Arguing it’s just 'a few bad apples' that are to blame will not be sufficient.

As the peak competition and consumer protection agency, the ACCC has responsibility for the Franchising Code of Conduct, which was last revised in 2015 but has been around in some form much longer.

Let me start by saying that I am aware of criticism the ACCC is not doing enough, that we should be intervening more in the franchise sector in response to reports from franchisees.

The fact is the majority of reports the ACCC receives are about individual disputes between franchisee and franchisor. As an economy wide regulator, we don’t have the time, expertise or resources to become the referee for all of these disputes.

And we often find that a litigated outcome is not what franchisees are actually seeking, because of course penalising a franchisor can also have a major negative impact on franchisees.

Our focus has been to take strategic enforcement action aimed at addressing systemic behaviour resulting in repeated abuse and widespread harm.

Today I will talk about what the ACCC is doing. I want to focus on:

  • our enforcement actions
  • our compliance work in relation to the Code
  • business to business unfair contract terms, and
  • penalties.

Our enforcement actions

The ACCC uses a variety of tools to encourage compliance and prevent breaches of the Competition and Consumer Act, and its prescribed codes of conduct. This includes seeking to resolve matters administratively, or through more formal means such as a court enforceable undertaking or otherwise through the courts.

Geowash

A recent example of the ACCC’s commitment to pursuing franchisors who disregard their obligations was our prosecution of Geowash — a former hand car wash and detailing franchise.

Earlier this year, the Federal Court found Geowash, as a franchisor, made false or misleading representations in relation to the revenues and profits that franchisees could expect to earn, and about commercial relationships or affiliations between the franchisor and major corporate entities.

The Federal Court also found that Geowash had acted unconscionably towards franchisees through its charging practices for the establishment and fit-out of franchise sites. Geowash’s director and Franchising Manager were found to be knowingly involved in aspects of the company’s conduct.

The hearing date to determine penalties and other orders sought by the ACCC is yet to be fixed.

This case again highlights the seriousness with which the Court contemplates failure to comply with the Code and the consumer law, and the ACCC’s commitment to pursuing franchisors who systematically disregard their obligations.

RFG

In the course of the Parliamentary Franchising Inquiry, the ACCC confirmed it had already commenced investigations into the Retail Food Group.

The Retail Food Group was the subject of a significant number of submissions to the Inquiry,[2] and scrutinised by the Parliamentary Committee for conduct considered illustrative of many franchising issues occurring Australia wide.

The Franchising Inquiry’s Report noted serious problems with the sustainability of the franchise model operated by RFG, and had concern their business model allowed shareholders and senior executives to profit at the expense of franchisees.[3]

Particularly, the Committee was concerned about the implications of RFG’s listing on the stock market, and its subsequent pursuit of an ‘aggregator model’ growth strategy. The Committee considered the company’s duty to maximise shareholder value can come at the expense of franchisees’ financial wellbeing.[4]

The ACCC’s investigation into RFG is ongoing.

Jump Swim

In June, we announced that we had instituted proceedings against franchisor Jump Loops Pty Ltd and its parent company, Swim Loops Holdings Pty Ltd (together, Jump Swim) in the Federal Court, alleging it made false, misleading or deceptive statements about Jump Swim School franchises.

The ACCC alleges that Jump Swim made representations via its promotional material, without reasonable grounds, that a prospective Jump Swim School franchisee would have an operational swim school within 12 months of signing a franchise agreement.

We allege over 90 Jump Swim franchisees did not receive an operational swim school within 12 months of signing. This number includes some franchisees who did not receive a swim school at all.

The ACCC is also alleging the franchisor wrongly accepted payment from franchisees where it failed to supply an operational franchise within the 12 month period specified, or alternatively, within a reasonable time.

Ultra Tune

In September, in response to an appeal by Ultra Tune against initial court findings, the Full Federal Court affirmed the Federal Court’s decision that Ultra Tune had breached the Franchising Code of Conduct by failing to ensure its marketing fund statements contained sufficient detail to provide ‘meaningful information’ to franchisees about how the fund was spent.

The decision is the first consideration by the Full Federal Court of the ‘sufficient detail’ requirement of the Franchising Code.

The Full Federal Court reduced the penalties imposed against Ultra Tune — from $2.6 million to $2 million — after finding that Ultra Tune’s breach was a result of ‘egregious inadvertence’ rather than deliberate conduct.

Still, the significant penalty levied on the franchisor highlights the importance of compliance with the Franchising Code and the Consumer Law.

This case preceded the increase in maximum penalty for a breach of the Australian Consumer Law.

Under the new regime, franchisors who are found to have breached the Consumer Law are liable to higher penalties than ever before, up to $10 million.

A common thread

There is a common thread in many of these cases: as a last resort franchisees come to the ACCC looking for some resolution, and by that stage any resolution can harm both parties.

The ACCC doesn’t have a role in dispute resolution, and I can’t help thinking that many of these cases could have been resolved at a much earlier stage through an effective franchisor-franchisee dispute resolution process.

Given it is the significant imbalance of power between franchisors and franchisees that often leads to disputes, we think it is important franchisors have effective dispute resolution procedures in place. This will go a long way to ensuring disputes are resolved quickly, early and with a lot less expense for all parties.

Many disputes can be resolved early with effective and fair internal dispute resolution procedures, or by using mediation and other dispute resolution alternatives provided by ASBFEO and the Small Business commissioners if available in each State.

Too often the option of litigation is expensive and too late, as the harm has already occurred.

That is why we place considerable focus on engaging with franchisors through compliance checks and educating all in the sector – especially those thinking of becoming franchisees for the first time.

Compliance checks

As you would know, the ACCC has the power to request certain documents from franchisors. We use this power to run a program of compliance checks.

In 2019 we took a different approach to our compliance checks by releasing a public report of the outcome of a program of checks, where we found there were consistent poor practices across a number of traders.

The report — Disclosure practices in food franchising — presented our key findings from targeted compliance checks over one year in the food services sector, which includes cafes, restaurants and takeaway food industries.

Twelve franchisors were selected based on reports to the ACCC about the industry and/or the franchisor, and intelligence from industry stakeholders.

Inadequate information disclosure by franchisors is consistently one of the top two Franchising Code issues reported to the ACCC.

When completing the compliance checks we strongly considered the purpose of a disclosure document. Franchisors need to:

  • provide information to help potential franchisees make a reasonably informed decision about the business
  • provide a potential franchisee current information that is material to the running of the business.

What did we find in our report?

We commonly found significant barriers limiting potential franchisees from contacting former franchisees.

As everyone knows, email is now the primary way business communicates in writing, internally and externally. So we were very concerned that our compliance checks revealed only 4 of the 12 franchisors consistently supplied emails or mobile numbers for former franchisees.

To state the obvious, any barrier preventing franchisees from obtaining as much information as possible about their potential future business is problematic.

'To help the prospective franchisee make a reasonably informed decision about the franchise', as set out in the Code, franchisors need to provide details that actually facilitate contact with the former franchisees, within 14 days.

If franchisors continue to provide past addresses, or old store details or disconnected landline numbers to prospective franchisees, we will continue with our message to prospective franchisees: 'If you can’t easily get in contact with former franchisees — walk away from the offer'. You won’t get a realistic picture of the business without talking to former franchisees as well as current franchisees.

Some other findings from our recent compliance checks included:

  • most franchisors did not adequately disclose what essential business inputs were subject to supply restrictions
  • almost all franchisors had supply restrictions, did not share rebate benefits directly with franchisees, and could set maximum retail prices. While these provisions are generally legal, they can limit a franchisee’s ability to make a profit
  • some franchisors did not sufficiently disclose key unavoidable ongoing costs that should have been known to, or reasonably foreseeable by the franchisor, such as wages, rent or inventory
  • 40 per cent of prospective franchisees did not seek any independent advice.

We are concerned that the poor disclosure practices uncovered in this targeted compliance check may be indicative of practices not just within the food services sector but also across the broader franchise industry.

We are also concerned that many of these disclosure documents were issued after the findings were handed down from the recent parliamentary inquiry.

It is obvious some franchisors in the industry continue to think disclosure is a tick the box exercise.

It is not only in the franchisor’s interests to be honest and transparent with a potential franchisee, it is their legal responsibility to provide correct and sufficient detail in their disclosure document to assist potential franchisees to make reasonably informed decisions.

The reason for the release of our report was to highlight the need for franchisors to increase the transparency and the quality of information provided to prospective franchisees.

We strongly encourage all participants in franchising to use the findings to review and improve their disclosure practices.

We also recommend that franchisors make use of the resources available from the ACCC including the recently revised ‘Model Disclosure Document’. This provides more detailed and specific guidance to assist franchisors to comply with disclosure requirements.

Education

A key finding of the ACCC compliance report confirms what many in this room will know already: 40 per cent of franchisees don’t seek independent advice before signing agreements.

While advice remains optional, seeking advice is an important reality check for a prospective franchisee. This is a key message we deliver to prospective franchisees through our education resources and activities.

Education continues to be a vital part of our broader compliance and engagement strategy in the sector.

We have already started to promote some of the key messages that emerged from our targeted compliance checks, including:

  • explaining supply restrictions
  • raising awareness about costs
  • highlighting the importance of undertaking appropriate due diligence
  • getting independent advice, and
  • being aware of risks associated with franchising.

In June and August this year, our education campaign was extended to include a digital advertising campaign aimed at prospective franchisees.

This campaign promoted new and updated online resources, including resources translated into Cantonese, Mandarin and Hindi.

Translation of messaging into languages spoken by franchisees and potential franchisees was integral to the campaign. You will all know that many migrants and people from non-English speaking backgrounds choose franchising as a business venture.

We want to ensure they understand that franchising is a unique business model that needs to be properly understood before signing up.

The key messages of the campaign are that franchising, like any other business, comes with risks, and that prospective franchisees need to obtain advice and consider all relevant information before signing on.

We will continue to work with the industry to spread these messages to prospective franchisees.

Business to business unfair contract terms

Too often, the ACCC is contacted by franchisees after a franchise agreement has been signed, and after problems have arisen.

This can be too late for some franchisees, as a regulator can’t easily help someone who has willingly signed up to a bad deal.

However, where a bad deal is an unfair deal — we do have a role to play.

From the ACCC’s compliance and enforcement experience to date, unfair contract terms are causing real detriment to small businesses.

This is particularly so in concentrated industries, where small business — suppliers or acquirers — need to maintain an ongoing supply relationship with a large business to remain viable.

This can be the case in franchising, as franchise agreements are often standard form contracts, and the power balance is very much tipped in favour of the franchisor.

Already this year, the ACCC has undertaken a number of in-depth investigations and taken action to ensure that small businesses receive the protection of the business-to-business unfair contract terms law.

Uber Eats

For example, in July 2019, following an investigation by the ACCC, Uber Eats committed to changing its contracts with restaurants.

From at least 2016, Uber Eats’ contract terms gave it the right to refund consumers and deduct that amount from the restaurant, even when the problem with the meal may not have been the fault of the restaurant.

The ACCC considers such terms arose due to a significant imbalance in bargaining power between restaurants and Uber Eats; they were not reasonably necessary to protect Uber Eats and could cause detriment to restaurants.

The unfair contract term laws can apply to a franchise agreement, where the contract is deemed a ‘small business contract’.

Franchisors should be aware of the unfair contract terms law, and review terms in their agreements that may cause imbalance between themselves and franchisees, and are not reasonably necessary to protect their legitimate interests.

Common terms in franchising agreements that might give rise to concerns under the unfair contract term laws include:

  • clauses allowing unilateral variation of terms of the contract or the Operations Manual
  • broad liability and indemnity clauses, in favour of the franchisor, and
  • unduly onerous restraint of trade clauses.

While the ACCC successfully obtained compliance in the Uber case and others, investigating and resolving business-to-business unfair contract issues requires a large amount of resources.

The act of including an unfair contract term in a standard form contract is not in itself necessarily a contravention of the ACL — s23 of the ACL currently allows parties to the contract, or an ACL regulator, to challenge a potential term in a court and have it declared void.

This means that the ACCC cannot seek civil pecuniary penalties when a term of a contract is declared unfair, and cannot issue infringement notices in relation to contract terms that are likely to be unfair.

This poses significant problems from the perspective of both business compliance and ACCC resourcing.

Litigation, or attempting to resolve unfair contract term matters before resorting to litigation, can often be a time consuming and resource intensive process for the ACCC.

And any positive outcomes are mostly limited to the particular business investigated by the ACCC.

The problem, in part, is the lack of penalties.

There is only a very weak incentive for business compliance with the unfair contract terms laws given the lack of penalties for non-compliance. The minimal deterrence to non-compliance undermines the purpose of extending the unfair contract terms regime to small businesses.

Small businesses, just like consumers, frequently lack the bargaining power, time and expertise to negotiate or assess all standard form contracts for potential unfair contract terms. Further, small businesses are less likely to be able to adopt robust risk management strategies to absorb unreasonable risk allocations under a contract.

The extension of the unfair contract term provisions to small business standard form contracts was intended to deter their inclusion in these contracts, and provide for more efficient contracting and risk allocation.

We are advocating for these changes in a number of forums, but primarily in response to the Government’s current Review of Unfair Contract Term Protections for Small Business.

Penalties

We have also been advocating for an increase in penalties for breaches of codes of conduct.

As early as the 2018 Inquiry we urged the introduction of higher penalties, as well as the increased availability of penalties for breaches of the Franchising Code, to strengthen the incentives to comply with the Code.

At present, not all provisions of the Franchising Code attract penalties – for example, the provisions relating to the use of marketing fees. The Oil Code has no penalties at all.

Where there are no penalties, there is no incentive for a franchisor to comply with the Codes. Where penalties exist but are too low, the boards and senior executives of franchisors are unlikely to consider them as a risk to the business.

If we seek a penalty for a breach of the Franchising Code, it can be up to $63 000. If we seek a penalty for a breach of the Australian Consumer Law it is significantly higher, with maximum penalties of $10 million, three times the value of the benefit obtained from the offence, or 10 per cent of the annual turnover of the business for a breach by a corporation.

Clearly there is a discrepancy. We feel that penalties need to be significant enough to be a real deterrent. The lack of consequences for breaching parts of the Code undermines our ability to ensure compliance with the Code, and means that there is little incentive for franchisors to comply with Code requirements.

In conclusion

It is in franchisors’ interests to be helpful and transparent in their dealings with people looking to buy a franchise.

Many of you in the audience have a deep expertise in advising the franchising sector. The current Government Taskforce review offers you another opportunity to consider what shape the Franchising Code and Oil Code should take going forward.

I hope my outline of the ACCC’s action has provided you with some food for thought.

 

[2] Of those who identified a particular franchise system, over 40 per cent of submissions related to Retail Food Group (RFG), Foodco, Domino's and Caltex. Fairness in Franchising Report, para 3.3 and Figure 3.2

[3] Fairness in Franchising Report, para 4.55

[4] Fairness in Franchising Report, para 4.54