Australia: Franchising Focus: The best of 2013 and 2014 predictions

Introduction

2013 certainly was an "exciting" year for franchising and consumer markets. As we kick off the new year, now is the perfect time to review franchising developments from 2013 and to consider the trends and predications that we are likely to see this year.

In 2013, franchising faced a comprehensive franchise legislation review, a change in government creating ongoing regulatory uncertainty and the Australian Competition and Consumer Commission's increased focus on the franchise sector and franchisee initiated litigation with some unexpected twists. This year, the industry is set to face the consequences of the introduction of a number of far reaching laws, as well as continued scrutiny from regulatory bodies seeking to ensure regulatory compliance.

Wein Report: Review of the Franchising Code of Conduct

On January 14, 2013, the Federal Government announced that a review of the Franchising Code of Conduct would be conducted by lawyer, mediator and franchising expert Alan Wein. Following a comprehensive review process, on 30 April 2013, Mr Wein presented his Review of the Franchising Code of Conduct (The Wein Report) to the Government.

The Wein Report made 18 recommendations, including the following:

• Requiring the franchisor to disclose the rights of the franchisor and franchisee to conduct and benefit from online sales.
• Strengthening the requirements for administration of marketing funds.
• Requiring the franchisor to provide prospective franchisees with a short summary of the key risks and matters they should be aware of when going into franchising.
• Inserting an express obligation to act in good faith.
• Amending the Competition and Consumer Act 2010 (Cth) to provide for civil pecuniary penalties for breach of the Code and increase the investigative and enforcement powers of the ACCC.
• Rendering restraint of trade clauses unenforceable where the franchisor refuses to renew the franchise agreement on substantially the same terms, in certain circumstances and subject to requirements regarding confidential information and intellectual property.

The Wein Report was presented to the Government in April, and in June the former Government welcomed the recommendations and announced a consultation process with key stakeholders to assess the regulatory impact of the proposed amendments to the Code. The recommendations are generally supported by the ACCC and the peak industry body, the Franchise Council of Australia. The new Minister for Small Business, Minister Bruce Billson, also signalled his "in principle" support for the Wein Report recommendations, although he noted that he would need to consider further changes (subject to further industry consultation) including legislation to prohibit unfair contractual provisions in standard form "business-to-business" agreements.

A revised version of the Code was submitted early this year for consideration by the relevant Government Department, which broadly adopts Mr Wein's recommendations. There is still work to be done to consider the regulatory impact of the changes, but it is estimated that a revised version of the Code may come into effect around 1 July 2015.

Other legislation: snapshot for franchisors

2013 saw the introduction of a wide range of Federal and State legislation which impacts the franchise sector. Some of the important new laws are discussed below.

South Australia

The South Australian State Government has not yet confirmed whether it will abandon its stated intent of enacting State based legislation governing franchising, although the inclusion of the good faith duty and enhanced penalties for the ACCC should make it hard for that State to justify further legislation.

Workplace Health and Safety - Bullying

A new federal anti-bullying jurisdiction commenced on 1 January 2014 to complement the state-based work health and safety laws and, in doing so, establish a strong anti-bullying regime. "Bullying" has attracted significant attention in the past few years. However, this is not because the laws that govern bullying have substantively changed the rules of workplace conduct, rather Australian culture no longer tolerates workplace bullying. The "new" federal anti-bullying laws have been created by a recent amendment to the Fair Work Act 2009 (Cth) and mean that a worker can make a 'Stop Bullying Application' to the Fair Work Commission if they reasonably believe they are being bullied at work. A worker is bullied (while at work) if an individual or a group of individuals repeatedly behaves unreasonably towards the worker, or group of workers and, further, that behaviour creates a risk to health and safety. The Fair Work Commission can make a non-pecuniary Stop Bullying Order to prevent the worker from being bullied further, which may include an order preventing an employee from being dismissed.

In addition to these new laws, on 27 November 2013 Safe Work Australia released the Guide for preventing and responding to workplace bullying providing practical guidance on how to manage the risks of workplace bullying. Franchisors and franchisees should ensure that their anti-bullying systems and policies are up-to-date and take into account the new federal anti-bullying jurisdiction and the Safe Work Australia guide. Anti-bullying systems should make clear to those with legal responsibilities, the actions they are required to take and those they are prohibited from taking. Anti-bullying systems should also make clear how your business will respond to bullying complaints and any incidents of bullying that it becomes aware of through means other than a complaint.

Privacy Law reform

Following a comprehensive review of Australian privacy laws, extensive amendments to the Privacy Act 1988 (Cth) were made by the Privacy (Enhancing Privacy Protection) Act 2012. The new privacy laws will come into force on 12 March 2014.

The key changes to the privacy laws which are introduced by this legislation include:

• APP Entities - Private and public organisations with an annual turnover of greater than AU$3 million will need to comply with the 13 new Australian Privacy Principles specifying how personal information should be collected, handled and disclosed, including changes to dealing with unsolicited personal information, direct marketing and cross-border disclosure of personal information. The APPs replace all existing privacy principles.
• Enhanced powers of the Privacy Commissioner - the Privacy Commissioner will have the power to conduct compliance audits, make a determination following the audit, accept enforceable undertakings and seek civil penalty orders of up to AU$1.7 million (for a company) and AU$340,000 (for an individual).
• New privacy codes and revised credit reporting framework.

The Privacy Commissioner has indicated that full compliance with the new laws will be expected from day one. As such, it is important that businesses act now to amend and update their privacy policy and privacy collection statements and, if they are conducting direct marketing, conduct a review of their marketing practices, including the availability of 'opt out' mechanisms.

We have developed a fixed price Privacy Compliance Package designed to get your organisation well on the way to complying with the new laws. The package contains detailed guides to the new APPs, compliance checklists, a sample privacy policy and an hour's privacy advice. Please contact us for further information about this package.

Motor Dealers and Repairers Bill 2013 (NSW)

The Motor Dealers and Repairers Act 2013 (NSW) came into effect on 27 November 2013 which reforms the regulation of motor dealers and motor vehicle repairers. One of the key aims of the Act is the protection of motor dealers through introduction of various measures such as:

• Prohibition on unfair contracts and unjust conduct - The Act introduces a new prohibition on 'unfair' provisions in all contracts for the supply of motor vehicles to a motor vehicle dealer by a manufacturer. This new provision is similar in concept to the unfair contracts provisions in the Australian Consumer Law (ACL), but the proposed provisions are arguably broader in their application to motor vehicle supply contracts as they do not appear to be subject to key carve-outs contained in the ACL, including that it applies only to "standard form contracts". The Act applies to all dealer supply contracts.
• Regulated dispute resolution procedure - The Act sets out a dispute resolution process for disputes between motor vehicle dealers and motor vehicle manufacturers, which includes involvement by the Small Business Commissioner and the Consumer, Trader and Tenancy Tribunal.
  As a result of the introduction of the Act, all contractual arrangements within dealer networks need to be reviewed to ensure that they do not fall foul of the new laws. Please contact us if you have any queries in relation to this Act or if you require assistance with a review of your current dealer agreements.

Retail Leases Act 1994 (NSW)

On 22 November, the NSW Small Business Commission released a discussion paper on the review of the NSW Retail Leases Act 1994 (NSW). The purpose of the review includes considering perceived inadequacies in the current Act, cutting 'red tape' for small businesses and whether changes in the retail sector mean that certain provisions of the Act are no longer appropriate.

Key areas to be considered in the review include the potential misuse of market power by lessors, negotiation of leases, issues relating to full disclosure of the terms and conditions of a lease and the introduction of a standard retail lease. The review will also consider how best to protect franchisees in the case of franchisor insolvency and whether it is appropriate for the franchisee to continue to operate its business at the premises by assuming the rights and obligations of the franchisor under the retail lease. Retail trading hours are not included in the scope of the Review.

Written submissions to the NSW Small Business Commissioner closed Friday, 7 February 2014. Further information is available at www.smallbusiness.nsw.gov.au/RLA-review-2013

The ACCC and the franchise sector

The ACCC, as usual, was very active in the franchising sector throughout 2013. As the key regulatory body for the sector for more than 15 years, 2013 saw a further evolution of the Commission's targeted approach. Set out below are some of the ACCC's key actions over the past 12 months, which set the scene for the question, 'where to this year'?

Statistics and education

In the 2013/2014 financial year, the ACCC received 854 complaints and enquires in relation to franchising. The 'hottest topics' for complaints to the ACCC were failure of franchisors to make proper disclosure; allegations of misleading conduct and unconscionable conduct by franchisors; and complaints about supply chain issues.

In order to reduce the number of complaints and franchisee grievances, the ACCC undertook a number of education campaigns in 2013, including the following:

• The ACCC released a fact sheet focussing specifically on its role in supply chain regulation ( http://www.accc.gov.au/system/files/Competition%20issues%20in%20franchising%20supply%20arrangements.pdf). Reassuringly for franchisors:
• • The ACCC acknowledged that a franchisor's tight control over a franchise supply network is often central to the success and operation of the system.
  • Whilst rigid supply arrangements may be a cause of frustration for, and a source of complaints by, franchisees, the ACCC's role was to assess the benefits and detriments of the supply chain restrictions in respect of the whole community, and not just individual franchisees.
  • The ACCC confirmed that whether a franchisor received rebates from a supply arrangement may be relevant to its consideration of supply chain issues, but there is nothing illegal about franchisors receiving such benefits (provided that they are properly disclosed in the Franchising Disclosure Document).
• The ACCC is in the process of drafting guidance material regarding claims made by franchisors on future earnings, which is an area that continues to generate the majority of misleading and deceptive complaints made by franchisees.
• The ACCC will continue funding a pre-entry education program for franchisees, designed to encourage them to make informed decisions, based on an understanding of the risks inherent in franchising. In the past 3 years, 5,000 people have enrolled in this program.

Enforcement

Federal Court actions taken by the ACCC against franchisors are relatively few and far between. This is largely due to issues being resolved prior to proceedings being commenced through the use of the ACCC's infringement notice powers, administrative settlements or court enforceable undertakings. In 2013, the most relevant litigation to the sector was the ACCC's initiation of proceedings against 11 Harvey Norman franchisees for alleged misrepresentations regarding consumers' rights under the consumer guarantee provisions of The Australian Consumer Law. The significance of the ACCC pursuing a number of franchisees operating under the same brand is a reminder to franchisors that whilst they may not be responsible for the individual actions of franchisees, allegations of non-compliance by multiple franchisees can have high profile ramifications for the franchisor's brand.

Where to this year?

In 2013, under its powers to require the production of documents, the ACCC conducted 63 audits of franchise networks. The majority of systems received favourable outcomes from those audits. However, the ACCC has stated that it intends to use its audit powers this year to target businesses that are the subject of complaints and also to focus on industries that generate a disproportionate number of complaints (in particular, take-away-food and health and fitness).

The Commission can be expected to continue to focus on franchisor misrepresentations regarding, the (relatively) new statutory consumer guarantee regime and any failure by businesses to comply with that regime. A new area of focus will be false testimonials from consumers, particularly those published on review websites.

Franchisors in the courts

From home cleaning services and cool room care to supermarkets, franchisees were busy litigating in 2013 bringing both 'run of the mill' type claims and some allegations with unexpected twists: here are the 2013 franchising litigation highlights and lowlights.

Misleading conduct

Misleading conduct is still the undisputed 'king' of claims by franchisees against franchisors, particularly concerning statements by the franchisor of the future financial performance of the new franchise. In one example, Mr Robert James (director of the James Home Services (JHS) franchise network) was sued by a master franchisee on the basis that he misled the prospective master franchisee prior to it entering into master franchise agreements with JHS.1, . Specifically, the master franchisee alleged that Mr James made representations to it as to the level of sales of sub-franchises over a 5 year period that were stated by him as being "achievable" or "easily achievable". The Court held that the franchisee had failed to prove that the representations arose due to deficiencies in the evidence. Importantly, the Court also held that had the representations been proved, then the master franchisee would still not have succeeded as the franchisee had failed to prove that the sales were unachievable over time with the right approach and sales skills. For this reason, the Court held that representations (even if made) would not have been misleading.

Another example of allegations of misleading or deceptive conduct involving future financial performance arose due to statements allegedly made in media advertising and also at an initial meeting between the prospective franchisee and the franchisor.2 Mr and Mrs Henderson, the prospective franchisees claimed that those statements gave rise to implied representations about the average financial performance of a franchisee at that time and also their likely financial performance if they acquired a franchise. Sensibly, the Court found that the implied representations did not arise as the statements as to financial performance (when taken in context) were largely in the nature of aspirational goals rather than assurances as to any guaranteed level of financial performance. Once again, the Court considered the position if the representations were actionable and found that they were either true or based on reasonable grounds due to evidence led by the franchisor as to the average sales of customers and based on his many years of experience.

Inadequate disclosure

Inadequate disclosure was another big theme this year, with the courts clarifying (and some might argue expanding) the scope of disclosure required under the Code. In a second action against JHS,3 the franchisee alleged that Mr James failed to disclose to it information about sub-franchisees. Mr James argued that, as head franchisor, he was not a party to franchise agreements between master and sub-franchisees, and as such, had no obligation to disclose information regarding sub-franchisees. The Court rejected this argument and held that the Code is wide enough to require franchisors to disclose information regarding all enterprises operating in their franchise structure, including sub-franchisees.

In a second disclosure related case, the Court ruled on the long standing practice of franchisor's producing one Disclosure Document and relying on that as providing adequate disclosure under the Code.4 In this case, the franchisor, SPAR, provided the franchisee, MIS, with a disclosure document in July 2010, however, SPAR failed to update it and provide MIS with a further disclosure document prior to MIS entering into a franchise agreement in February 2011. In the intervening period, SPAR had suffered a significant deterioration in its financial position which it failed to disclose to MIS. The Court held that Disclosure Documents are designed to give current disclosure and that MIS should have been provided with the updated financial statements showing the change in SPAR's financial position.

Application of the Code

One, some would say 'surprising' development, arose when the Full Federal Court appeared to widen the scope of the Code to capture non-traditional franchise relationships.5 In this case, the Donovan and Rafferty parties entered into a Heads of Agreement and a Rights Agreement that contemplated a system and marketing plan and afforded the Donovans an element of control over key aspects of the relationship with the Raffertys. In particular, under those agreements, the Donavans were able to set sales targets, control marketing quality and direct the Raffertys on maintaining financial records on a system approved by them. The Court held that the licence arrangement was a franchise agreement (and an agreement to enter into a franchise agreement) caught by the Code. Time will tell how far this extended application of the Code will reach and whether agreements that simply create future rights and obligations of a franchising nature will fall within the ambit of the Code.

Major international trends

Class actions (Canada)

The law relating to group or class action litigation brought by franchisees against franchisors, particularly in Canada, continues to develop. Franchisees have attempted to proceed jointly, commencing proposed class proceedings against franchisors with a view to reducing legal expenses and increasing pressure on the franchisor. In Canada, these attempts have been met with mixed success. For example, in 2013 the Supreme Court of Canada rejected an application for leave to appeal from the dismissal of a claim by franchisees who sought to challenge significant changes to the Tim Horton's franchise system. The trial judge had found that the changes challenged were decisions made honestly and reasonably for legitimate business reasons and not actionable. (Citation 2012 ONSC 1252) The Ontario Court also however approved an $8.5 million settlement of a franchisee class action against Midas Canada in which it was alleged that changes to the Midas distribution system was contrary to the franchisor's duties of good faith and fair dealing. (Citation 2013 ONSC 5714) A number of other franchise class actions, including claims against General Motors, Sears and others continue to work their way through the Canadian court system and the intersection of class actions and franchise legislation will continue to be a trend in the coming years for franchise systems in this jurisdiction.

Franchisees as employees in USA

Traditionally, it has been accepted that, for the purposes of workplace relations laws, franchisees are not employees of their franchisors. However, recent cases in a number of states of the USA have called this traditional approach into question. In one recent case, franchisees of a commercial cleaning franchisor sought minimum wage and other traditional employee benefits from the franchisor. The Massachusetts District Court found in favour of the franchisees, ruling that they were employees of the franchisor. The key issue relied on by the Courts in these cases to find that the franchisees were employees was the high degree of control that the franchisor exerted over the franchisees and that the franchisor was responsible for contracting with and billing customers.

Franchisees and social media

With the ever-growing popularity of websites such as Twitter and Facebook, business owners are increasingly taking to these social media sites to promote their products and services. However, when franchisees operate accounts on these sites to promote their individual businesses, franchisors face significant risks to their brand and reputation, as well as potential liability for misleading and deceptive statements, as a result of their franchisees' conduct. Consequently, one of the most important issues facing franchisors at the moment is whether to allow franchisees to maintain these social media accounts, or to 'centralise' their social media presence. Franchisors who wish to give franchisees the freedom to market their individual franchises on social media need to consider whether to have a social media policy in their franchise agreement/operations manual or to run social media training for their franchisees. This issue also becomes important at the end of franchise relationships, as lists of 'followers' or 'likers' may constitute customer lists that the franchisor will want control over at end of term.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.