Amendments To The Franchising Code Of Conduct

Franchise arrangements are strictly regulated in Australia under the Franchising Code of Conduct (Code). The Code, established under the Trade Practices Act 1974 (Cth), is mandatory. It requires franchisors to follow strict rules and disclose specific information to franchisees/potential franchisees.

Regulations amending the Code were made on 9 August 2007. These regulations are a result of the Franchising Code Review Committee’s report on the Review of the Disclosure Provisions of the Franchising Code of Conduct last year.

The regulations commence on 1 March 2008.

Overview of the amendments

The amendments can be divided into a number of broad categories as follows:

  • Provision to franchisees of additional documents.
  • Provision to franchisees of information, and timeframes for the provision of information.
  • Application of the Code to franchisors.
  • Foreign franchisors.
  • Other amendments.

Provision of additional documents

The Code currently requires a franchisor to provide a disclosure document including a summary of the franchise agreement and any requirements for the franchisee to enter into other agreements.

The amendments now require:

  • The franchise agreement (in the form intended to be signed) to be provided with the disclosure document.
  • Associated documents (such as leases, hire-purchase agreements, guarantees and confidentiality agreements) to be provided at least 14 days before the franchise agreement is signed (or, if not available at that time, when available).
  • A copy of the Code to be provided (there was previously an inconsistency in the Code leading to some doubt as to whether this was a requirement).

Provision of information

The Code currently requires franchisors to disclose whether they or an associate will receive a rebate or other financial benefit. The amendments now require that the names of persons from whom such rebates or other benefits are received must also be disclosed.

The Code currently requires financial information for a franchisor to be provided to franchisees. The amendments now provide that financial information of a consolidated entity to which a franchisor belongs must also be disclosed on request.

In relation to the management and application of marketing and other cooperative funds, franchisors can currently avoid providing financial information on such funds by seeking approval from 75% of their franchisees. The amendments now provide that such approval will last for three years (after which time it will need to be obtained again). Also franchisors will now be required to provide the financial statement and any auditors report (previously this was only on request).

The amendments require franchisors to disclose in the disclosure document the existence and content of an order or undertaking under section 87B of the Trade Practices Act 1974 (TPA) (previously only the date of such an order was required to be disclosed). Section 87B gives the ACCC power to accept written undertakings by companies and these undertakings can subsequently be enforced by the Federal Court. Such undertakings are usually given when the ACCC is concerned that a company may contravene the TPA. Franchisors will now also be required to disclose the matter (where not in the disclosure document) within 14 days (rather than the previous 60) after the making of an order or the giving of an undertaking.

In relation to a franchise history, the amendments require:

  • Franchisors to disclose not just the numbers but (subject to the ex-franchisee the subject of the disclosure requesting otherwise) also the names, locations and contact details of ex-franchisees whose franchises:
    • Were transferred.

    • Ceased to operate.

    • Were terminated by the franchisor or franchisee.

    • Were not renewed on expiry.

    • Were bought back by the franchisor.

    • Were terminated and the franchise business being acquired by the franchisor.

Franchisors will not be required to retain this information for more than three years or, as stated in the Explanatory Statement, update it.

  • The details and the history of the franchise site or territory to be supplied with the disclosure document (presently the Code allows the details to be made available for inspection at a time and place mentioned in the disclosure document).
  • Disclosure of business experience of each officer of the franchisor (presently the Code only requires such information for each director, secretary, ‘executive officer’ or partner of the franchisor who is likely to have management responsibilities). ‘Officer’ is defined by the Corporations Act 2001 (Cth) which includes directors, secretaries and persons who make decisions affecting the business of the company.
  • Disclosure by a director of a franchisor of proceedings, a judgment or an award relating to breach of a franchise agreement, the TPA, the Corporations Act 2001, unconscionable conduct, misconduct or dishonesty, and certain proceedings under employment legislation or by franchisees. Previously this information was limited to the franchisor.
  • Provision of information on request in relation to specific matters such as the business experience of each director, secretary or partner, payments to agents or information relating to existing franchises. A franchisor was previously able to opt out of providing this information if it was ‘reasonable to withhold’ it.

The timeframes within which information must be provided have also changed, so that franchisors:

  • Will now have an extra month (now four months):
    • After the end of each financial year within which to update their disclosure document.

    • To prepare an annual statement for marketing or other co-operative funds, and an extra month (now four months) to have it audited.

  • Will have to disclose materially relevant information within 14 days rather than the present 60 days.

Application of the Code

The Code currently provides that it does not apply to a franchise agreement where the franchisor is outside Australia and grants only one franchise or master franchise for operation in Australia. This exception will be removed. All other exceptions remain.

Foreign franchisors

There are amendments allowing foreign franchisors to use auditors in and accounting standards of their own jurisdiction for their foreign operations. Previously, franchisors were required to comply with Australian standards and audit requirements.

Other amendments

Other important amendments include:

  • The current prohibition on franchisors preventing franchisees associating with each other being extended to include prospective franchisees.
  • The introduction of a prohibition on the use of waivers of written representations in franchise agreements and other documents.

There were also a number of clarificatory amendments, as follows:

  • The recurring and isolated payments payable by a franchisee to an associate of the franchisor and disclosed by the franchisor will include real property related payments.
  • The requirement that a current disclosure document is required where a franchisor plans to ‘extend a franchise agreement’ will be clarified by stating that ‘extend’ relates to both ‘term’ and ‘scope’.
  • Whether a short form or long form disclosure document is required will be clarified. Currently, this depends on the expected annual turnover of the franchised business. It is now clear from the amendments that a short form disclosure document can be used when the expected annual turnover of the franchised business over the term of the franchise business is less than $50,000.
  • It will be clear that prospective franchisees who terminate within the ‘cooling off’ period may do so without cost if this is done within seven days after signing the agreement (subject to reasonable expenses or their method of calculation being set out in the franchise agreement).

Conclusion

The amendments to the Code are far reaching and are largely intended to promote greater transparency between the franchisor on the one hand, and potential franchisees and existing franchisees on the other. They remove much of the discretion afforded to franchisors to provide certain information and clear up a number of the discrepancies in the Code.

Franchisors should ensure that their:

  • disclosure document; and
  • business practices,

comply with the amendments prior to their commencement early next year.

Copyright in TV guides: Nine v IceTV

Justice Bennett (Federal Court of Australia) in Nine Network Australia Pty Limited v IceTV Pty Limited [2007] FCA 1172 considered the position of electronic program guides (EPGs), databases and copyright.

The Court considered whether IceTV’s ‘IceGuide’ (a subscription based EPG) infringed Nine’s copyright in its weekly programming information (Weekly Schedule) as a ‘compilation’ literary work within the meaning of the Copyright Act 1968.

The Weekly Schedule was made available to aggregators under licence, who aggregated the Weekly Schedule with information from other television networks. The aggregated guides were publicly available.

Nine asserted that IceTV infringed its copyright in the compilation by:

  • Reproducing the program time, title and date of broadcast information from the Weekly Schedule.
  • Appropriating the ‘skill and labour’ of Nine in compiling those Weekly Schedules.

IceTV accepted the subsistence of copyright in the Weekly Schedule. The Court held that, although Nine had copyright in the Weekly Schedule, the individual aggregators had copyright in the aggregated guides.

IceTV asserted that it did not reproduce the Weekly Schedule in creating and updating the IceGuide, which it asserted was a product of independent research and its predictive programming software. IceTV did not have access to the Weekly Schedule directly, but rather to the aggregated guides incorporating the Weekly Schedule information.

The process by which the IceGuide was created and updated, was found by the Court to be as follows:

  • Initially, the IceGuide was created through independent investigation of the ‘pattern’ of the commercial networks’ programming - with IceTV contending that it watched the broadcast programs and wrote down the title of each program and days and times of broadcast.
  • Each week:
    • A new IceGuide was created using the ‘predictive’ software.

    • IceTV then added its own synopses and extra information based on independent research (for example, information on movies was obtained from the internet and reference sources).

    • IceTV used the publicly available aggregated program guides to verify and amend the schedules before publishing them.

IceTV in establishing the above process deliberately set out to ensure that the IceGuide did not infringe copyright.

The Court found that the IceGuide was not an infringement of Nine’s copyright in the Weekly Schedule, holding that copyright subsisted in the Weekly Schedule as a whole compilation and not in its separate constituents. Accordingly, by reproducing slivers of information in the verifications of its guide, IceTV did not infringe Nine’s copyright as it did not reproduce a substantial part of the Weekly Schedule.

The facts of the case were distinguished from Desktop Marketing Systems v Telstra (2002) (the leading compilation decision in Australia) in that:

  • It was not a ‘whole of universe’ case, where only one mode of arrangement of expression and arrangement of factual information was possible.
  • The IceGuide was a product of independent inquiry and compilation of publicly available information.

The Court observed that, had Nine been successful in establishing copyright infringement, it would have found IceTV guilty of copyright infringement as:

  • Having the text files of the Weekly Schedule in the software would have infringed Nine’s reproduction right.
  • Making the IceGuide available to the public and its users would have infringed Nine’s right to ‘communicate’ the Weekly Schedule to the public.

The decision importantly confirms the application of the principle set out in Desktop Marketing Systems v Telstra - that copyright will protect skill and labour - in the context of compilation works.

ACCC v Google

The Australian Competition and Consumer Commission (ACCC) has commenced proceedings in the Federal Court of Australia against Trading Post Australia and Google (both the Australian entity and two international entities) for misleading and deceptive conduct. This is said to be the first trade practices action against Google.

The background to the proceedings is that, in a search using Google’s website in 2005, the business names ‘Kloster Ford’ and ‘Charlestown Toyota’ appeared as links on a search results webpage (in the prominent ‘sponsored links’ section of the webpage). When clicked on, these sponsored links took users to the Trading Post website, a direct competitor of Kloster Ford and Charlestown Toyota in the automotive sales industry.

The ACCC alleges that the Trading Post engaged in misleading and deceptive conduct under section 52 of the Trade Practices Act 1974 (Cth) (TPA) and also under section 53 (d) of the TPA, by representing that it had an affiliation or approval that it did or does not have.

The allegations under section 52 are two-fold. Firstly, that Google caused specific sponsored links to be published on its website and, secondly, that Google did not and continues to not make an adequate distinction between commercial and sponsored links and those that are ‘organically’ located through searches on its website.

If the ACCC is successful in its claims against the Trading Post and Google, this case is likely to have implications for search engine operators and, potentially, other web based services that provide sponsored links, such as information aggregates and portals.

ACMA issues $149,600 fine for ‘missed call marketing’ under SPAM Act

The Australian Communications and Media Authority (ACMA) has issued its largest fine to date under the Spam Act 2003 (Cth) (Spam Act). The $149,600 fine against DC Marketing Europe Limited was in response to the ‘missed call marketing’ scheme conducted by the company.

DC Marketing Europe Limited’s ‘missed call marketing’ scheme involved calling mobile phone users for a short period and leaving a ‘missed call’. The scheme relied on the curiosity of users to return the call, where they would be taken to a recorded message informing them that they had won a prize. The user would then have to remain waiting on the phone in order to claim the prize, incurring significant costs on the premium mobile service.

The Spam Act regulates unsolicited commercial electronic messaging in Australia (excluding voice calls or faxes). A commercial electronic message includes emails, SMS/MMS messages and instant messages. The Spam Act stipulates that a commercial electronic message must not be sent without the consent of the recipient, accurately identify information about the sender and contain an ‘unsubscribe’ facility to enable the recipient to opt out from future messages.

The calls made under the ‘missed call marketing’ scheme (which were caught by the Act given there was no voice component to the calls) did not have the required features and accordingly were in breach of the SPAM Act.

This action by ACMA reflects its strong stance against spamming activity in Australia.

Works of artistic craftsmanship: Burge v Swarbrick

In Burge v Swarbrick [2007] HCA 17, the High Court considered the meaning of a ‘work of artistic craftsmanship’ and the interaction between copyright and design protection.

Swarbrick, the designer of a yacht, brought proceedings claiming infringement of the copyright in the ‘plug’ (from which a mould for the hull could be derived) and moulds for a yacht. The plug and moulds were not registered under the applicable designs legislation (which has since been replaced by the Designs Act 2003).

The Copyright Act 1968 provides protection for ‘artistic works’, which is defined in section 10 to include, amongst other things, ‘works of artistic craftsmanship’. The expression ‘work of artistic craftsmanship’ is not defined. The copyright owner has the exclusive right to reproduce an ‘artistic work’, including a ‘work of artistic craftsmanship’.

However, where the design of an ‘artistic work’ is ‘industrially applied’ (that is, to more than 50 items), copyright protection ceases. This principal does not apply to a ‘work of artistic craftsmanship’. Accordingly, if an ‘artistic work’ has been ‘industrially applied’ and no design registration has been sought, it will only be protected by copyright if it is a ‘work of artistic craftsmanship’.

As Swarbrick had not registered a design, he argued that the ‘plug’ and moulds were ‘works of artistic craftsmanship’.

In relation to the ‘plug’, the Court held that it was not a ‘work of artistic craftsmanship’. This was primarily because the design of the yacht was constrained by function and utility concerns (as opposed to the freedom of design choice for a tapestry or jewellery). The Court stated that the more substantial the requirements to satisfy utilitarian considerations, the less artistic scope and, accordingly, the less likely it was a ‘work of artistic craftsmanship’.

In relation to the moulds, the Court held that they were ‘manifestations’ of the ‘plug’ and could not be treated as independent ‘works of artistic craftsmanship’.

The decision highlights the importance for designers of seeking protection under the Designs Act to ensure that they do not lose copyright protection on industrial application where their work does not constitute a ‘work of artistic craftsmanship’.

Crown copyright

In Copyright Agency Limited v State of NSW [2007] FCAFC 80, the full Federal Court considered the ‘Crown copyright’ provisions in Part VII of the Copyright Act 1968 (Cth) which operate to vest ownership of copyright in the Commonwealth or a state.

The full Federal Court decided in CAL v State of NSW that the 'Crown copyright' provisions:

  • Will not be construed broadly by the Court.
  • Should only be relied upon by the Commonwealth and the states as a last resort.

The ‘Crown copyright’ provisions in the Copyright Act:

  • Vest ownership of copyright in a work in the Commonwealth or a state if the work was made under its direction or control or first published by, or under the direction or control of, the Commonwealth or state (in the absence of an agreement to the contrary).
  • Provide that the Commonwealth or a state will not infringe copyright, if acts performed in respect of a work protected by copyright ‘are for the services’ of the Commonwealth or state. Remuneration for the use of the works is, however, still required to be paid.

The full Federal Court rejected a claim by the NSW government that it was the owner of copyright in survey plans drafted by surveyors as a result of the Crown copyright provisions.

The NSW government argued that the plans were produced to meet its requirements and had been first published by it and, accordingly, that it was the owner of the copyright in the plans.

The Court held that the NSW government would have obtained copyright in the plans if it had been in a position to compel the making of the plans. Instead, the NSW government was only in a position to determine if the plans, once drafted, met regulatory requirements for survey plans. The Court found that it was not Parliament’s intention to give copyright to the Crown ‘simply as a side effect’ of providing regulatory approval.

Although the NSW government did not own copyright in the plans, the Court held that the NSW government had an implied licence to use the plans for the purposes of the regulatory framework governing survey plans. This meant the NSW government was not infringing copyright by its use of the plans and did not need to rely on the Crown copyright provisions.

The decision highlights:

  • The difficulties in relying on Crown copyright.
  • The usefulness to the Crown of implied licences which may arise from the circumstances in which copyright material is provided.

New Zealand SPAM legislation

The Unsolicited Electronic Messages Act comes into force on 6 September 2007.

The Act:

  • Prohibits commercial electronic messages from being sent to a person in New Zealand without their consent.
  • Requires commercial electronic messages to include accurate information about the person who authorised the sending of the message and a functional unsubscribe facility.
  • Restricts the supply, acquisition and use of address harvesting software and any electronic address list produced using that software.

A fuller description of the Act was set out in TMC Bulletin - May 2007.

Performers’ moral rights

The WIPO Copyright Treaty and the WIPO Performances and Phonograms Treaty came into force in Australia on 26 July 2007.

Although Australia had already implemented most of the changes necessary to fulfil its obligations under the treaties, amendments relating to performers’ moral rights were dependent on the above treaties coming into force.

The amendments (which came into force on the same date as the above treaties) give a number of new moral rights to individual performers (including conductors), namely:

  • The right of attribution of performership.
  • The right not to have performership falsely attributed.
  • The right of integrity of performership (being the right not to have the performance subjected to derogatory treatment).

The above rights are only in respect of live performances (and sound recordings of live performances) made after the commencement of the amendments.

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