Are you operating a franchise? A question for all dealer, distribution and licensed networks
The recent court enforceable undertaking provided by Husqvarna Australia Pty Ltd (Husqvarna Australia) to the Australian Competition and Consumer Commission (ACCC), highlights the importance for all manufacturers, suppliers and licensors to carefully assess their network agreements and address the possibility that their agreements may in substance be ‘franchise agreements’ falling within the scope of the mandatory Franchise Code regulation.
The Franchise Code definition for a ‘franchise agreement’ is very broad, capturing a wide range of agreements, contracts and terms. The undertaking provided by Husqvarna Australia, included an acceptance that Husqvarna Australia’s ‘trading terms and conditions’ for its dealer network, was a ‘franchise agreement’ within the Franchise Code – this was despite the fact that the trading terms included clauses which stated that the dealer arrangement was not a franchise.
Compliance with the Franchise Code is mandatory, and cannot be waived or excluded by terms of the agreement. The consequences for not complying with the Franchise Code can be substantial, including financial penalties. In addition, representations to the effect that the ‘agreement is not a franchise agreement’, are at risk of being false or misleading representations in contravention the Australia Consumer Law (ACL). Penalties for contraventions of the ACL were increased ten-fold in September, with ACL penalties now aligning with the substantial penalties for contraventions the competition law provisions.
Failure to comply with the Franchise Code can give rise to financial penalties of up to $63,000 per breach, as well as orders for corrective action. In addition, representations to the effect that ‘the agreement is not a franchise agreement’, are at risk of being false or misleading representations in contravention of sections 18 and 29(1)(m) of the ACL. Contraventions of section 29 of the ACL can give rise to substantial penalties. The penalties for contraventions of the ACL were increased ten-fold from 31 August 2018, with the penalties for corporations increasing from $1.1 million per breach to the greater of $10 million or three times the value of the benefit obtained from the contravention or offence (where the value can be calculated) and if the value of the benefit cannot be determined, 10 percent of the company's annual turnover in the preceding 12 months. For individuals (including managers and directors involved in the contravention), the penalties have increased from $220,000 to $500,000 per breach.
What is a ‘franchise agreement’?
The Competition and Consumer (Industry Codes – Franchising) Regulations 2014 (Cth) (the Franchise Code or Code) is the principal legislation regulating all franchise arrangements in Australia. The Code is a prescribed industry code. It has the force of law and is binding on franchisors and franchisees.
The Franchise Code applies to ‘franchise agreements’. The Code’s definition for what is a ‘franchise agreement’ is very wide. It captures a wide range of agreements, ranging from full business format franchise agreements, to more ‘unassuming’ supply agreements, brand licence agreements, even trading terms. Whether an agreement is a ‘franchise agreement’ is a question of substance, not form. The fact the agreement is called something other than a ‘franchise agreement’ will not mean the Code does not apply to that agreement. A franchisor cannot avoid the application of the Code by simply giving the agreement a different name. When determining whether an agreement is a ‘franchise agreement’, consideration must be given to not just the ‘paper form’ of the agreement, but also the substance of the arrangement between the parties.
The Franchise Code definition for a franchise agreement, has four crucial elements. They are:
- an agreement (written, verbal and implied)
- a person (the franchisor) grants another person (the franchisee) the right to carry on a business or offering, supplying or distributing goods or services in Australia under a system or marketing plan substantially determined or controlled by the franchisor (or an associate of the franchisor)
- the operation of the business is substantially or materially associated with a trade mark owned or specified by the franchisor (or an associate of the franchisor)
- the franchisee pays to the franchisor an amount (including without limitation) an initial capital investment fee, a payment for goods or services, a fee based on a percentage of income or a training fee).
For the agreement to be a ‘franchise agreement’ each of these elements must be satisfied.
In many cases the question as to whether the agreement is a ‘franchise agreement’ ultimately turns on whether there is a system or marketing plan. There is no definition for what is a 'system' or 'marketing plan' in the Code. Franchise case law provides some guidance, with 'system' being interpreted to mean 'a set of principles or procedures according to which the business is operated, or an organised scheme or method pursuant to which the business is operated', and 'marketing plan' being interpreted to mean a 'detailed proposal for achieving the promotion or advertising of the licensor's products'.
ACCC investigation of Husqvarna Australia
Husqvarna Australia is a subsidiary of the Swedish manufacturer Husqvarna Group, supplying outdoor power products and services predominantly on a wholesale basis to a network of over 300 independently owned and operated dealers across Australia.
In response to information received by the ACCC concerning potential issues with Husqvarna Australia’s arrangements with its dealers, the ACCC raised various concerns with Husqvarna Australia including:
- The dealer Trading Terms and Conditions were likely to constitute a franchise agreement between Husqvarna Australia and each dealer, and that Husqvarna Australia had not complied with the Franchise Code regarding the arrangements with its dealers.
- Representations made in the Trading Terms and Conditions that the agreement does not constitute a franchising agreement, and representations made to dealers that they were not franchisees, gave dealers the incorrect impression they were not entitled to protections under the Franchise Code. Such representations contravened sections 18 and 29(l)(m) of the ACL.
- Husqvarna Australia’s termination of certain dealers was in breach of the Franchise Code, including section 27 (Termination – breach by franchisee)
- The Trading Terms and Conditions were likely to be standard form small business contracts, and certain terms (specifically terms which prohibited the sale of leftover stock after termination) were considered to be unfair and thus void pursuant to section 23 of the ACL.
On 27 August 2018, the ACCC agreed to settle the matter after accepting a court enforceable undertaking from Husqvarna Australia, admitting it likely to have contravened sections 18 and 29(l)(m) of the ACL, the Franchise Code (including section 27) and in consequence section 51AC of the Competition and Consumer Act, as well as acknowledging that certain terms in its Trading Terms and Conditions were void as unfair contract terms pursuant to section 23 of the ACL.
As part of the court enforceable undertakings, Husqvarna Australia agreed to:
- offer any new dealers a new agreement that complies with the Franchise Code and does not contain unfair terms
- provide all existing dealers a written notification, in a form approved by the ACCC, that the Franchise Code applies to their current dealer agreement, as well as the opportunity to transition to the new agreement
- not enforce any of the unfair terms in the old agreement
- implement and maintain an ACL compliance program for a period of three years.
In a statement reported by Fairfax Media on the 29th August 2018, the ACCC deputy chair Mick Keogh said following the proceedings, 'If it looks and smells and appears to be a franchise agreement, it’s considered to be one, irrespective of what the franchisor says.'
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