Major developments and activities

Scrap the Code – ACCC urges regulatory overhaul to deal with ‘persistent harm’ in franchising

In September 2023, the ACCC published its submission to the Review and boldly asserted that in its view further amendments to the Code would not address or prevent ‘persistent harms’ that arise in franchising. The ACCC observed that many franchisees still do not understand the limited nature of their rights or the significant risks associated with the franchise model. It argued that franchisees expect collaboration in their relationship with franchisors, yet this is often not the reality of the relationship. It also noted that despite prohibitions on acting in bad faith and unconscionable conduct, franchisors are not compelled to meaningfully negotiate the terms of an agreement, avoid situational disadvantage or refrain from exercising contractual rights to the detriment of franchisees.

The ACCC further raised concerns about its ability to prevent harm in the sector. It noted that the current regime generally only enables it to respond to harm after it has occurred. It has limited ability to restrain franchisors from continuing to promote problematic franchises to prospective franchisees. Its role as a single national Code regulator also means that it has to filter and prioritise the matters that it pursues. This necessarily means that a significant volume of potentially poor franchising conduct goes unaddressed. Consequently, it recommended a more time-efficient and binding dispute resolution regime to enable quick intervention in private franchising disputes.

While it went on to make several specific recommendations for amendments to the Code (should it be retained beyond its sunset date in 2025), the ACCC’s overarching recommendation was to overhaul the sector by implementing a licensing framework for franchisors. This framework would, among other things, enable a regulator to quickly and cheaply suspend, cancel and impose conditions on a franchisor’s ability to promote and sell franchises. Alternatively, the ACCC recommended strengthening the Franchise Disclosure Register to achieve similar outcomes to its proposed licensing regime.

Franchising Unfair contract terms report

In its Franchising UCT Report, the ACCC identified five prevalent unfair contract terms issues in the franchise agreements that it reviewed. In particular, the ACCC was concerned with clauses that:

• permit unilateral variation of agreements with franchisees (including, via Operations Manuals);
• permit the franchisor to withhold or set off payments to franchisees;
• grant the franchisor the power to conduct audits of franchisee operations;
• create restraints of trade in favour of the franchisor once the franchise agreement ends; and
• authorise termination of the franchise agreement for minor breaches of the franchise agreement.

The ACCC provided recommended changes for each of the above clauses to reduce the risk that they are unreasonable and unfair.

ACCC v Jim's Group

Infringement notices: details in disclosure matter

The ACCC issued two infringement notices to Jim’s Group Pty Ltd in its capacity as franchisor of the Jim’s Dog Wash Franchise (Jim’s).

• The first infringement notice concerned Jim’s disclosure document, which the ACCC alleged significantly understated the number of former Jim’s franchisees. The ACCC was also concerned that the disclosure document omitted the contact details of listed former franchisees.

• The second infringement notice related to the ACCC’s allegation that Jim’s made false or misleading representations to prospective franchisees as to their cooling-off rights under the Code.

Jim’s was required to pay $24,240 in penalties for its infringements.

ACCC v Delicia Franchising Pty Ltd

Infringement notices: Franchising marketing funds remain in the spotlight

The ACCC issued an infringement notice to, and obtained an undertaking from, Delicia Franchising Pty Ltd (Delicia) which admitted to breaches of its Code obligations concerning its marketing fund. Delicia had failed to provide sufficient detail of its marketing fund’s receipts and expenses in its annual marketing fund financial statements from 2020 to 2022, and had not provided its statements to franchisees within 30 days. Delicia undertook to comply with the relevant requirements under the Code and to issue a corrective notice to its franchisees advising them of the ACCC’s investigation and findings. It was also required to pay a penalty of $11,100.

ACCC v Honda

Done deal(ership)

Honda Australia Pty Ltd (Honda) was ordered to pay penalties totalling $6m following a successful prosecution by the ACCC for false and misleading representations in the Federal Court that certain franchisee-operated dealerships would close or had closed and would no longer service Honda vehicles. Honda was found to have misled customers concerning the closure of three Honda dealerships that it said would no longer service Honda vehicles. The communications were made in the context of Honda’s restructuring of its Australian business, which resulted in some authorised dealers being terminated, and several of those dealerships continuing to operate independent service and repair centres for different types of vehicles, including Hondas.

Looking ahead

2024 is set to be a big year for retail and franchising. We anticipate that education and regulation of the sector will continue to be a focus area for the ACCC. The outcome of the Review could lead to significant reforms for franchising, particularly if the ACCC’s calls for a licensing framework are heeded. While this seems unlikely without broader support from the sector, the ACCC has at a minimum signposted its vision for the future.

We also forecast that there will continue to be a steady stream of enforcement activity within the sector by the ACCC. While the ACCC has been fairly quiet in the past year with a reduced enforcement profile (particularly in the consumer law space), we don’t see that continuing in 2024 – particularly, in connection with the enforcement of the amended unfair contract terms regime.