Regulation and enforcement of the retail and franchising sector remained a focal point throughout 2022 for the Federal Government and the ACCC. Further changes to the Franchising Code of Conduct (Franchising Code) brought stronger obligations owed by the franchisor to prospective and current franchisees and potentially greater penalties in the event of a breach of the Code.

The ACCC’s relevant enforcement priority was to ensure that small businesses received the protections of Australia’s competition and consumer laws and industry codes of conduct. The ACCC’s 2021-22 Annual Report reflected some of their key achievements – notably, from a purely litigious perspective, the ACCC instituted 11 Federal Court proceedings relevant to the sector, including against Lorna Jane, Meta and Fuji Xerox Australia. See our sections on unfair contract terms and consumer protections of this report for further information on these proceedings.

Increase transparency for the franchise sector

Perhaps the most significant development in franchise regulation in 2022, involved the Australian Government establishing the Franchise Disclosure Register (Register), which followed extensive changes to the Franchising Code in 2021. The most recent Amending Regulations to the Franchising Code require franchisors to create a publicly accessible franchise profile on the Register. Franchisors must also maintain their profiles and update disclosure information within 14 days following their annual update of their respective disclosure documents.

Treasury administers the Register, and the ACCC is responsible for enforcing franchisor compliance in this area. Treasury has noted that the Register is intended to facilitate franchisor transparency and enable prospective franchisees to make informed decisions before entering a franchise agreement.

“The introduction of a public Franchise Disclosure Register (the Register) will facilitate free and easy access by prospective franchisees to pertinent information about franchised businesses in Australia.

– Explanatory Statement to the Competition and Consumer (Industry Codes—Franchising) Amendment (Franchise Disclosure Register) Regulations 2022

The Register went live on 15 November 2022, meaning the general public can now view franchisor-specific information, including an estimate of the franchise establishment costs, ongoing payments by the franchisee to the franchisor and whether any goodwill attaches to the franchised business.

The establishment of the Register is a significant development for the sector. We believe franchisors should pay particular attention to how much, if any, leeway the ACCC will give them before they begin enforcing strict compliance in line with the obligations prescribed under the Franchising Code.

Harsher penalties for franchisors

In a bolstered attempt to deter misconduct and improve overall Franchising Code compliance, the Federal Government also introduced new civil penalty provisions and increased the penalties available for contraventions of the Franchising Code. The maximum liability for breaches of the following obligations increased from $66,600 to $10 million or three times the benefit (for body corporates) and $500,000 (for individuals):

• the obligation for a franchisor to disclose certain facts before a prospective franchisee enters into a franchise agreement (or within a reasonable timeframe after the franchisor becomes aware of them)
• the obligation for a franchisor not to restrict or impair the freedom of franchisees or prospective franchisee’s freedom to form an association or associate with other franchisees or prospective franchisees for a lawful purpose
• for new vehicle dealership agreements, the obligation to provide:
  • compensation to a franchisee if the agreement is terminated early in prescribed circumstances; and
  • the franchisee with a reasonable opportunity to make a return under the agreement.

The maximum financial penalties for breaches of all other pre-existing obligations doubled from 300 penalty units (representing fines of $66,600) to 600 penalty units (representing fines of $133,200).

Significantly, the provisions that apply to vehicle dealership agreements mean that dealers and dealer councils will now be placed in a stronger position to organise themselves, operate as dealer representative bodies and negotiate changes to franchise agreements or operating procedures. We are also very interested to see how the Courts interpret and apply the obligation to provide the franchisee with a reasonable opportunity to make a return under the agreement.

Key enforcement activity

Retail Food Group

Low-key end to long-running case

The ACCC has accepted a court-enforceable undertaking from Retail Food Group Ltd (RFG) as part of the settlement of these long-running Court proceedings. Before the settlement was reached, the ACCC alleged RFG had acted unconscionably and engaged in false, misleading and deceptive conduct when it sold or licensed 42 loss-making corporate stores to incoming franchisees between 2015 and 2019. The ACCC’s case also alleged that RFG improperly used marketing funds paid for unapproved purposes.

Without admission of fault, RFG has agreed to make payments to certain franchisees and waive the historical debts attached to the loss-making corporate stores owned or licensed by franchisees. RFG will also pay $5 million to Michel’s Patisserie franchisees – an amount representing an agreed proportion of the marketing fees contributed by those franchisees between 1 July 2012 and 30 June 2017. It also requires RFG to implement a compliance program tailored toward Franchising Code training for its directors, officers, employees and agents. The ACCC has said it will closely monitor RFG’s compliance with the agreed undertaking.

In announcing the settlement, Ms Cass-Gottlieb commented,

“This settlement, which consists of payments to franchisees and waivers of debt totalling approximately $10 million, provides a more certain and beneficial outcome for affected franchisees than would likely result from the continuation of the ACCC’s long-running legal proceedings,”

See our Consumer Protection section of this report for further information on these proceedings.

Ultra Tune Australia Pty Ltd

Rare contempt proceedings

Following their successful action against Ultra Tune Australia Pty Ltd (Ultra Tune) in 2019, the ACCC is back in the Federal Court alleging that Ultra Tune is not living up to its obligations under its mandatory compliance program and, therefore, is in contempt of court. In addition to this alleged breach, the ACCC claims that Ultra Tune has again failed to prepare its annual Disclosure Document and Marketing Fund Statement within the timeframe specified under the Franchising Code.

In bringing the Court proceedings, ACCC Commissioner Liza Carver commented that,

“We allege that Ultra Tune disregarded its obligations under the Franchising Code, which are designed to provide transparency to franchisees.”

Ultra Tune is defending this rare type of court proceeding, and the parties were due back in court on 3 February 2023 for a Case Management Hearing to programme the matter towards trial.

Sector awaits possible ACCC intervention in Hogs Breath class action

Initially commenced in April 2021, the class action proceedings remain on foot between a group of Hog’s Breath Café franchisees and the franchisor who has, amongst other things, allegedly misappropriated and misused funds from the consolidated marketing fund. While not currently a proceeding in which the ACCC has any direct involvement, the themes running through this case are similar to those in the Ultra Tune. Given the ACCC’s recent focus on the obligation of good faith and the misuse of marketing funds and the recent stay on the proceedings due to the Court ordering security for costs in an amount that the franchisees assert they cannot pay, the franchise sector is keenly watching how this matter develops. In short, it remains to be seen whether the ACCC will come to the rescue of the Hogs Breath franchisees by intervening in the Court action – a step it hasn’t taken since the Allphones litigation over 15 years ago.

AHG WA (2015) Pty Ltd and others v Mercedes-Benz Australia/Pacific Pty Ltd

Test case for business model changes

Judgment is expected to be handed down in early 2023 by Federal Court Judge, Jonathan Beach, in the proceedings brought by 38 of Mercedes-Benz’s Australian dealers against Mercedes-Benz Australia/Pacific Pty Ltd (MBAuP). The dealers allege that in transitioning from a ‘dealership model’ to an ‘agency model’, MBAuP engaged in (among other things) unconscionable conduct and breached their obligation to act in good faith under the Franchising Code. Justice Beach’s decisions will likely influence multiple areas of the franchisor-franchisee relationship dramatically and is an important case within the motor dealership sector. The judgement will assess the meaning and application of goodwill under a franchise agreement and consider the obligation of good faith under the Franchising Code regarding changes by the franchisor to the underlying business model.

Looking ahead, we expect that the franchising sector will continue to be a particular area of interest for the ACCC. Ms Cass-Gottlieb has specified that the ACCC will continue to prioritise the protection of the competition and consumer laws and industry codes of conduct, particularly in the agriculture and franchising sectors. We have already seen the ACCC take legal action in this area and adopt a hard-line approach to compliance. We don’t expect any drop-off in enforcement activity against franchisors; if anything, we think it will increase. Consequently, given the potential for significant financial consequences for a breach of competition and consumer laws, all retailers and franchisors need to be aware of their evolving duties and obligations and continually invest in their systems and processes to ensure they are operating in a compliant manner.