This update replicates a legal update provided to the Franchise Council of Australia’s February breakfast at Kooyong Lawn Tennis Club.
The update covers:
the ACCC December report on Unfair Contract Terms which is a 2024 enforcement priority for the ACCC;
a case update and
a summary of the key findings and recommendations of the Franchise Review undertaken by Dr Michael Schaper.
ACCC report – December 2023
Unfair Contract terms in franchise agreements
Not sufficient to negotiate on these terms to get outside unfair contract term (UCT) regime:
location of site
whether mobile or site based franchise
minimum term of franchise agreement
corporate structure of franchisee
UCTs are an enforcement priority for the ACCC in 2024.
Unilateral Variation clauses
Variation of Ops Manual: terms which place no constraints on when, how or why the franchisor may unilaterally vary go beyond what is reasonably necessary to protect legitimate interests. Likely to be unfair especially where the franchisees have no right to exit the franchise (without penalty or financial harm) if they do not agree, or are unable to implement the changes.
Changing approved product lists and approved supplier lists: likely to be unfair if they do not limit the circumstances in which franchisor can make changes, do not require the franchisor to give prior reasonable notice of changes; prevent franchisees from selling products already purchased from earlier approved products/supplier lists.
Need to minimise the financial impact on franchisees, specify the circumstances where can review or make changes, provide reasonable notice, if appropriate give right to negotiates changes or when will take effect, provide reasonable opportunity to reduce losses and sell or use goods pre-purchased.
Withholding or setting off payments
Consider whether limitations need to be set to ensure does not go beyond what is reasonably necessary to protect legitimate interests; provide reasonable notice of intention to set-off or withhold; specify in franchise agreement circumstances where it will be appropriate to set-off or withhold; specify method by which franchisee can dispute or seek a review of the decision.
Auditing the franchisee
Not inherently unfair but likely to be where interest is required to be paid at higher than a default interest rate in ordinary course of business, cover all fees and expenses related to the audit without limitation and with no obligation to keep the costs reasonable.
Restraint of Trade
If a restraint is included consider the definition of restricted conduct, restraint period and restraint area to limit to what is reasonably necessary to protect legitimate interests; e.g. all of Australia for 100 years likely to be unfair, avoid right to buy out of restraint for excessive amounts e.g. Back in Motion enforceable undertaking.
Termination clauses
Ensure clauses are in plain English, presented clearly and not hidden in the contract. Have appropriate counter-balancing terms for franchisees. Provide franchisees with reasonable opportunity to remedy potential breaches.
Case Update
ACCC v Honda Australia Pty Ltd [2023] FCA 1602
Honda undertook a business restructure to change form franchise dealer model to an agency dealer model. Some dealers were not offered the opportunity to participate as agents. 3 exiting dealers operated independent service centres following termination.
Honda sent email and text messages to customers of the 3 dealers in connection with the servicing of their vehicles that represented that the dealers would close or had closed and would no longer service or were no longer servicing Honda vehicles.
Honda admitted some of the conduct as well as the call centre staff representations.
This decision was in respect of penalty to be imposed which was a penalty of $6 million dollars in total.
AHG WA (2015) Pty Ltd T/A Mercedes-Benz Perth & Westpoint Star Mercedes-Benz & Ors v Mercedes-Benz Australia/Pacific Pty Ltd [2023] FCA 1022
Dealers lost and Mercedes won – now appealed to Full Federal Court. Watch this space for the appeal verdict on the class action brought by dealers in respect of a cessation of a franchise offering and its replacement with an agency model by Mercedes-Benz.
McD Asia Pacific LLC v Hungry Jack’s Pty Ltd [2023] FCA 1412
This case was about competing alleged misleading and deceptive conduct and trademark infringement of hamburgers.
McDonalds alleged Hungry Jack’s had infringed its BIG MAC, MEGA MAC trademarks, was not using registered trademarks and as such those should be removed from the register and had misrepresented to consumers that its BIG JACK hamburger contains 25% more Aussie Beef than BIG MAC hamburger.
The Court found:
neither BIG JACK or MEGA JACK were deceptively similar to BIG MAC or MEGA MAC;
McDonalds’s failed in its attempt to have BIG JACK removed from the register for lack of use;
Hungry Jack’s failed it its attempt to have MEGA MAC removed from the register for lack of use; but
McDonald’s had proved the 25% more meat representation was misleading or deceptive.
Grill’d IP Pty Ltd v KFC THC V Ltd [2023] ATMO 192
This case was about KFC objecting to the registration of a trade mark by Grill’d Pty Ltd of HFC in respect of foodstuffs and beverages which was alleged to be substantially similar to the KFC trademarks.
The delegate of the Registrar of Trade marks determined that the marks were not substantially similar due to having sufficient visual and aural differences between them.
Franchising Review Report by Dr Michael Schaper
The key finding of the Franchise Review was that the:
Franchising Code of Conduct (Code) fit for purpose; and
Further investigation of a licensing system for franchises to be evaluated.
The table below provides a summary of the key recommendations and their accompanying implementation suggestions.
|
Key recommendations (23 in total) |
Implementation suggestions |
|
Code should be remade, largely in its current format |
When remaking the Code the technical and drafting issues in Appendix A should be considered |
|
Service and repair work conducted by motor vehicle dealerships should be explicitly captured by the Code |
The definition of motor vehicle dealership in the Code should be amended to clarify that it includes service and repair work |
|
Reviews of the Code should be captured in 5 year cycles |
|
|
Simplify and consolidate the pre-entry information given to prospective franchisees. |
Merge the disclosure document and the key facts sheet |
|
The requirement that all motor vehicle dealerships must provide a reasonable opportunity to make a return on investment be extended |
Amend clause 46B of the Code to apply to all franchise agreements |
|
The requirement that all motor vehicle dealerships must include provision for compensation in the event of early termination be extended |
Amend clause 46A of the Code to apply to all franchise agreements |
|
Enhance the public visibility and usage of the Franchise Disclosure Register (FDR) |
More actively promote the FDR’s existence Responsibility for the administration should sit with the ACCC |
|
Additional information should be included on the FDR website relating to dispute resolution and adverse actions brought by enforcement agencies |
The FDR should state whether or not a franchise system offers binding voluntary arbitration Consider including any sanctions or court action taken by the ACCC, ASIC, FWA or ATO against a franchise |
|
Franchise systems should be encouraged to consult franchisees regarding any major change to the business model during the term of the franchise agreement |
Best practice guidelines on how to manage change and support productive working relationships need to be developed |
|
Provisions relating to termination for serious breaches should be simplified. Charges made in 2021 relating to termination under clause 29 of the Code should be revisited |
Options could include strengthening the rights of franchisors to terminate immediately if appropriate compensation is paid to the franchisee |
|
Key recommendations (23 in total) |
Implementation suggestions |
|
Best practice guidelines should be provide to franchisees regarding franchisee- initiated exit to enhance effectiveness |
In the form of resources produced in consultation with the ACCC and ASBFEO regarding minimum standards and best practice for clause 26B of the Code |
|
Further work should be done to limit unreasonable restraints of trade in franchise agreements |
The ACCC should issue guidance on when a restraint of trade may constitute an UCT |
|
A comprehensive online government resource should be created, in the nature of ASIC’s MoneySmart website (FranchiseSmart website) |
Consideration should be given to making ASBFEO a designated complainant to the ACCC |
|
Australian government agencies should work to improve the standards of conduct in franchising by developing best practice guidance and education |
Developed by ASBFEO, ACCC or others Initial matters could include – change management, the operation of marketing funds, supporting franchisee who wish to exit and how to effectively participate in voluntary arbitration and multi-party dispute resolution |
|
ASBFEO should be given additional powers to name franchisors who have not participated meaningfully in alternative dispute resolution |
Code should be expanded to give adverse publicity powers similar to those under section 24 of the ASBFEO Act |
|
The Australian government should assist franchisees to access low cost legal advice prior to formal ADR |
ASBFEO’s Small Business Tax Concierge Service could be renamed and expanded to allow franchisees to access low-cost advice on their case prior to entering formal mediation |
|
Franchisees should be able to seek ‘no adverse costs’ orders when bringing a matter against a franchisor for a breach of the Code or the Australian Consumer Law |
Subsection 82(3) of the CCA could be amended to provide that applications for no adverse costs orders can be made in relation to contraventions of Part IVB and the ACL. |
|
The scope of penalties under the Code and associated investigation powers and infringement notice regime in Part IVB of the CCA be increased |
All substantive obligations placed on parties under the Code and in Division 5 of Part IV B od the CCA should be penalty provisions Infringement notices should impose a penalty equivalent to the upper limit of infringement notices issue under the ACL (60 penalty units for a body corporate) |
|
The Australian government should investigate the feasibility of introducing a licensing regime to better regulate most aspects of the franchisee-franchisor relationship |
Representatives of franchisees, franchisors and relevant government agencies including the ACCC should play a key role in examining the issue. |
Other key findings
The franchise sector has not kept pace with the rate of growth in the broader business population. This trend suggests a downturn in the use of the franchise model over the past decade.
There is significant misunderstanding, especially among franchisees, about what the Code is meant to achieve. The original Explanatory Statement articulated the purpose of the Code as:
improving the sector in key aspects, rather than completely fixing or resolving issues;
to raise standards of conduct rather than to ensure high standards of conduct;
to reduce rather than eliminate risk, reduce costs of dispute resolution as opposed to ensuring there was no disputes; and
address power imbalances as opposed to eliminating.
The sector requires some respite from a constant process of review.
Mandating greater disclosure is likely to be counter-productive.
Certain disclosure and cooling off obligations in the Code create unnecessary regulatory burden when applied to renewal of an existing franchise relationship.
Impractical to mandate compulsory pre-entry education and advice, enhancements would be beneficial.
All franchise agreements ought to provide a reasonable opportunity to make a return on investment (including provision for compensation in the event of early termination).
Awareness and utilisation of the Franchise Register is low and greater enforcement of the listing requirements is likely to be needed.
Decisions by the courts are providing guidance on what is required to act in good faith. Such decisions should be used by the regulators to develop education as to the limitations of good faith in a grievance.
Change management continues to be problematic for any franchise relationships.
Some franchisors are not employing best practice relating to the transparent and effective operation of marketing and co-operative funds.
Changes made in 2021 relating to delayed termination have made it unacceptably difficult for franchisors to act decisively in the context of serious breaches.
There needs to be more awareness and clarity regarding the process and circumstances in which a franchisee can negotiate an early exit from a franchise agreement Goodwill issues are driven by concerns relating to adequate compensation, uncertainty and the opportunity to make a return on investment.
Unreasonable – and unenforceable- restraints of trade are unduly limiting franchisee opportunities at the end of a franchise relationship.
Franchisees would benefit from greater access to early advice on the merits of their claim against a franchisor ASBFEO’s small business taxation concierge service provides a useful model as to how this might work.
Powers for ASBFEO to name franchisors who have not meaningfully participated in dispute resolution mechanisms can be a useful tool.
It would be beneficial to examine the merits and feasibility of an ex ante licensing regime prior to the next review of the Code
If anyone has any queries about the articles in this update please contact:
(Franchising enforcement, litigation and ACCC regulatory action)
Alicia Hill
Principal
T: +61 3 9611 0180 | M: +61 484 313 865
E: ahill@sladen.com.au
Inshani Ward
Senior Associate
T:+61 3 9611 0110 | M: +61 413 557 157
E: iward@sladen.com.au
(Intellectual Property)
Michelle Dowdle
Principal Lawyer
T +61 3 9611 0114 | M +61 408 674 256
E: mdowdle@sladen.com.au
(Employment, Industrial Relations)
Jasmine O’Brien
Principal
T +61 3 9611 0149
jobrien@sladen.com.au
