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Wednesday, May 10, 2017

ACCC goes in for a slice of the pie – Domino's first to pay penalties under Franchising Code of Conduct

By Julia Kovarsky, Associate

The Australian Competition and Consumer Commission (ACCC) has published a media release announcing that Domino’s Pizza Enterprises Ltd (Domino’s) is the first franchisor to have faced and paid penalties for an alleged contravention of the Franchising Code of Conduct (the Code). This reaffirms the ACCC's focus, as stated in its Compliance and Enforcement Policy for 2017, on ensuring small businesses receive the full scope of protection of the Code.

The Code was reviewed and reinvigorated in 2014, with the revised Code coming into force on 1 January 2015. Among other changes, civil pecuniary penalties were introduced for contraventions of certain provisions of the Code. This includes contraventions of the:

  • obligation to act in good faith (clause 6 of the Code);
  • various disclosure obligations (clauses 8, 9 and 13-17 of the Code); 
  • termination provisions (clauses 18 and 26-28 of the Code); and 
  • mediation provisions (clauses 39 and 41 of the Code). 

According to the Explanatory Statement, this change to the Code was intended to improve the enforcement options available to the ACCC for breaches of the Code, which in turn would "encourage compliance" and "improve standards of conduct within the sector". A contravention of a civil penalty provision exposes the contravener to a Court-imposed civil penalty or an infringement notice issued by the ACCC. The maximum civil penalty which can be imposed is 300 penalty units (currently $54,000). Infringement notices issued by the ACCC are fixed at 50 penalty units (currently $9,000) for a body corporate and 10 penalty units (currently $1,800) in all other circumstances.

Although the ACCC has had the power to issue infringement notices for breaches of the Code since January 2015, the first penalties under the new provisions have only been paid now. Domino's paid $18,000 in respect of two infringement notices issued by the ACCC. The ACCC's media release states that the notices were issued because the ACCC "believed that Domino’s had failed to comply with the requirement in the Franchising Code of Conduct to provide franchisees with both an annual marketing fund financial statement and an auditor’s report within the time limits prescribed under the Code". The reporting relating to marketing funds is one of the disclosure obligations imposed on a franchisor under clause 15 of the Code. That clause provides that if a franchisee is required to pay money into a marketing or other cooperative fund, the franchisor must prepare an annual financial statement detailing all of the fund's receipts and expenses and have it audited (unless 75 per cent of franchisees agree that the franchisor does not need to comply with the auditing requirement for the relevant financial year) within four months after the end of the financial year. The statement and the auditor's report must be provided to franchisees within 30 days of being prepared. Domino's administers a marketing fund, but confirmed to the ACCC that the financial statement and auditor's report for the 2015-2016 financial year was only provided to its franchisees in late February 2017. This means the financial statement and auditor's report were not provided to franchisees within the timeframes mandated under the Code. As a result, Domino's paid the price for its two alleged contraventions.

As many organisations head toward the end of the financial year on 30 June, this is a timely reminder that franchisors should remain vigilant in providing the disclosure materials required under the Code within the prescribed timeframes.

To assist, Allens is offering its franchising clients a helpful free reminder system, which monitors such Code-specific timelines.Contact us to find out more.

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