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Franchising is big business in Australia, with approximately 1,120 franchise systems and 79,000 franchise units operating nationally1. As franchising is a diverse sector with characteristics that are unique from other business models, franchises are governed by a mandatory Franchising Code of Conduct (Franchising Code).2

The Parliamentary Joint Committee on Corporations and Financial Services recently completed an inquiry into the operation and effectiveness of the Franchising Code and has released the Fairness in Franchising Report (Report).3 Some of the key findings and recommendations of the report are discussed below.

Franchising Taskforce

The Committee recommends that the Australian Government establish an inter-agency Franchising Taskforce with representatives from the Department of Jobs and Small Business, the Department of Treasury and the Australian Competition and Consumer Commission (ACCC).4 The role of the Taskforce would be to examine the implementation and workability of the other recommendations in the Report.5

Disclosure and Registration

Under the Franchising Code, franchisors must provide a disclosure statement to anyone who expresses an interest in purchasing, or formally applies to purchase, a franchise.6 It currently is not mandatory for franchisors to provide prospective franchisees with earnings information for existing franchised businesses.7 If a franchisor does choose to provide earnings information, it must be set out in a specific way in the disclosure document.8 If a franchisor chooses not to provide earnings information, this must be noted in the disclosure statement.9

The Committee received a broad range of submissions. Notably, a franchisee expressed concerns that franchisors were not putting earnings information in writing and instead using “general market data such as population or visitor numbers… and large amounts of marketing spin” to mislead new franchisees.10 This happened in a Victorian Supreme Court of Appeal case where a franchisor made misleading oral representations, namely that the projected turnover in the first year of operation was $1.3 million, which induced a franchisee to purchase a restaurant franchise.11 The Court found that the franchisor did not have reasonable grounds for making the representations.12

The Committee has recommended that the Franchising Code be amended so that franchisors selling to prospective franchisees, and vendor franchisees closing or selling back to the franchisor, must provide:13

  • the prior two years Business Activity Statements, profit and loss statements and balance sheets; and
  • an assessment of labour costs for the particular franchise business.

Unfair Contract Terms

In franchising, there is an inherent power imbalance between franchisors and franchisees.14 Despite unfair contract term laws contained within the Australian Consumer Law (ACL),15 franchisors have retained unfair terms within their franchise agreements without penalty and therefore there is little incentive to remove them.15 For example, the Federal Court held that Yum! Brands (the franchisor of Pizza Hut outlets) was permitted to reduce the resale prices of two pizza ranges from $9.95 to $4.95, and $11.95 to $8.50, without taking into account depreciation and the cost of capital.17

The Franchising Taskforce will be tasked with examining the appropriateness of making unfair contract terms illegal, such as unilateral changes to the business model and setting menu prices below cost. 16 Implementing such unfair contract terms may attract civil penalties in the future.

No Churning and Burning

Churning is “the repeated sale at a single site of a failed franchise to a new franchisee”.19 In contrast, burning is where a franchisor “continually opens new franchises (some of which are unlikely to be viable) to profit from upfront fees, while leaving existing franchises to struggle and close”.20

The Committee found that the current Franchising Code does not prevent companies from engaging in churning and burning. For example, between 2011 and 2018, Retail Food Group (RFG), a multi-brand franchise owner which operates in Australian and overseas, opened over 1,000 new franchises and closed over 1,100 franchises.21 This signifies that there are serious problems with the sustainability of the franchise model operated by RFG.22

The Committee recommends that:

  • the ACCC be given the power to prevent the marketing and sale of franchises where the franchisor shows a track record of churning and/or burning;23 and
  • the ACCC, the Australian Securities and Investments Commission and the Australian Tax Office conduct an investigation into RFG (and its former and current directors and associated trusts) relating to the ACL, the Franchising Code, insider trading and other matters.24

How we can help you

Slater and Gordon can help you by:

  • Helping you to understand a current or prospective franchise agreement
  • Providing you with advice about your rights and obligations as a franchisee in a company
  • Assisting you to negotiate a resolution regarding an existing franchising dispute
  • Representing you in any legal proceedings relating to a franchising dispute

You can learn more about our dispute resolution services here, or if you have an enquiry about a franchising dispute, you can submit an enquiry online.

References

[1] Franchise Council of Australia, Franchising Australia 2016 Report <https://s3-ap-southeast-2.amazonaws.com/wh1.thewebconsole.com/wh/1401/images/Franchising-report-2016.pdf>.
[2] Competition and Consumer (Industry Codes – Franchising) Regulation 2014 sch 1 (‘Franchising Code of Conduct’).
[3] See Commonwealth of Australia, The operation and effectiveness of the Franchising Code of Conduct, 14 March 2019, <https://www.aph.gov.au/Parliamentary_Business/Committees/Joint/Corporations_and_Financial_Services/Franchising/Report> (‘Fairness in Franchising Report’).
[4] Fairness in Franchising Report recommendation 1.1.
[5] Ibid.
[6] Franchising Code of Conduct s 9.
[7] Fairness in Franchising Report, [6.26].
[8] Franchising Code of Conduct annex 1 item 20.2.
[9] Ibid annex 1 item 20.3.
[10] Fairness in Franchising Report, [6.35].
[11] Trans-It Freighters Pty Ltd v Billy Baxters (Franchising) Pty Ltd [2012] VSCA 71, [8].
[12] Ibid [96]-[97].
[13] Fairness in Franchising Report, recommendation 6.3.
[14] Ibid, xiii.
[15] Competition and Consumer Act 2010 sch 2 s 23.
[16] Fairness in Franchising Report, xviii.
[17] Diab Pty Ltd v YUM! Restaurants Australia Pty Ltd [2016] FCA 43.
[18] Fairness in Franchising Report, xviii.
[19] Ibid, xx.
[20] Ibid.
[21] Ibid, [4.26].
[22] Ibid, [4.50].
[23] Ibid, recommendation 4.1.
[24] Ibid, recommendation 4.2.

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