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Friday, September 30, 2016

ACCC launches first action under the revised Franchising Code of Conduct

By Kaelah Ford, Associate

The Australian Competition and Consumer Commission (ACCC) has commenced proceedings in the Federal Court of Australia against a franchisor for an alleged breach of the Franchising Code of Conduct (the Code). This marks the first time the ACCC has sought to exercise its enforcement powers under the Code since significant revisions to the Code took effect on 1 January 2015.

The proceedings were commenced against Morild Pty Ltd (Morild), the franchisor of the 'Pastacup' chain of restaurants in Western Australia, as well as the co-founder of Pastacup, Stuart Bernstein. The ACCC alleges that as franchisor, Morild had a mandatory obligation to disclose to prospective franchisees that Mr Bernstein had previously been a director of two Pastacup franchisors that became insolvent. The ACCC also alleges that Mr Bernstein was knowingly concerned in Morild's conduct. The ACCC is seeking declarations, injunctions, penalties, findings of fact and costs.

The ACCC has stated that ensuring compliance with the Code is an enforcement priority – meaning that understanding your rights and obligations under the Code should be a priority for all franchisors and franchisees. In this post we provide an overview of the disclosure obligations that currently have Pastacup in hot water. For a more detailed look at the entire Code, take a look at our Focus.

The Code 


The Code is a mandatory industry code that applies to all parties to a franchise agreement (entered into, renewed, extended or transferred on or after 1 October 1998). On 1 January 2015, a number of significant changes were made to the Code, including:

  • New obligations for parties to act in good faith;
  • Revisions to franchisor's disclosure obligations; and
  • New financial penalties and infringement notices for serious breaches.

Pre-entry disclosure obligations


Relevant to the ACCC's current action are the mandatory disclosure requirements under the Code. Franchisors must provide a disclosure document, franchise agreement and a copy of the Code to a prospective franchisee (or existing franchisees seeking to renew or extend) at least 14 days before they enter into a franchise agreement, or pay any non-refundable money or other valuable consideration in connection with a franchise agreement.

The purpose of a disclosure document is to give the prospective or existing franchisee information to help them make a reasonably informed decision about the franchise. The information required to be disclosed to franchisees in the disclosure document includes:

  • contact details of current and former franchisees (unless the former franchisee has requested that those details not be disclosed);
  • the franchisee's costs to start operating the business;
  • details of what will happen when the franchise agreement comes to an end;
  • the business experience of all officers of the franchisor (i.e. Mr Bernstein's past director positions); and
  • other materially relevant facts.

'Materially relevant facts' include a change in majority ownership or control of the franchisor, legal proceedings against the franchisor, and a change in the ownership or control of intellectual property that is material to the franchise.

Penalties


Civil penalties apply in respect of all disclosure obligations. If the ACCC is successful in its allegations against the franchisor in this case, civil pecuniary penalties of up to $54,000 (300 penalty units) will apply for each serious breach of the Code found. Infringement notices of up to $9,000 (50 penalty units) for each serious breach can also be issued by the ACCC as an alternative to the civil penalty.

Other breaches for which a franchisor may be liable for a penalty or infringement notice include:

  • Certain disclosure-related obligations;
  • Breaches of good faith requirements;
  • Wrongful termination;
  • Restricting or impairing franchisees from forming an association.

Disclose or pay


While the proceedings against Morild are at a very early stage, the action nonetheless serves as a timely reminder for franchising parties to ensure they are across the mandatory disclosure requirements under the Code. If you are uncertain as to whether a particular piece of information is required to be disclosed to a prospective or existing franchisee, it is best to err on the side of disclosure, or, seek legal advice.






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