June 2005
FRANCHISING LAW UPDATE
This newsletter reviews recent news and legal developments relevant to franchisors and franchisees.
IN THIS ISSUE - A SYNOPSIS
ACCC Receives Undertakings from "You Can Bake It Franchising"
On 18 January 2005, the ACCC accepted court enforceable undertakings from You Can Bake It Franchising Pty Ltd in relation to conduct that was allegedly misleading and in breach of section 52 of the Trade Practices Act 1974 (Cth) (" TPA"). [1]
This matter emphasises the importance of ensuring that franchisor disclosure documents include all the information required by the Franchising Code of Conduct, [2] and that in reading a disclosure document a franchisee or potential franchisee would not be misled by the information provided.
Resale Price Maintenance: The Westminster Case
Franchisors need to be aware that the TPA prohibits franchisors from specifying minimum prices for the resale of goods by franchisees. The ACCC is currently bringing an action in the Federal Court of Australia against a franchisor, Westminster Retail Pty Ltd, alleging breach of the TPA by engaging in resale price maintenance. [3]
Disclaimers: Lenard's Case
In The Silver Fox Company Pty Ltd as Trustee for the Baker Family Trust v Lenard's Pty Ltd, [4] the Federal Court of Australia held that disclaimers contained in a Disclosure Document will not prevent a franchisor from being liable for misrepresentations contained within the document if upholding the disclaimers would undermine the purpose of providing the Disclosure Document.
Trade Practices Legislation Amendment Bill (No. 1) 2005: Changes to third line forcing
The current law with respect to third line forcing prohibits a corporation from requiring or prohibiting a franchisee from acquiring goods from a specified third party. This prohibition currently applies to franchisors unless authorisation is granted under the TPA . Recognising that third line forcing is often not anti-competitive, the Federal Government has introduced a new Bill to amend the Trade Practices Act so that it only prohibits third line forcing if it creates a substantial lessening of competition. [5] The proposed legislation is currently before the Senate.
DETAILED REPORTS:
ACCC Receives Undertakings from "You Can Bake It Franchising"
On 18 January 2005, the ACCC accepted court enforceable undertakings from You Can Bake It Franchising Pty Ltd in relation to conduct that was allegedly misleading and in breach of section 52 of the TPA. [6]
The You Can Bake It group own and operate retail stores selling home baking goods in Australia. Since 1999, You Can Bake It Franchising Pty Ltd have offered You Can Bake It franchises for retail stores.
In February 2004, the ACCC raised concerns with You Can Bake It Franchising Pty Ltd in relation to the Disclosure Document provided to its franchisees. The ACCC believed that information in this document relating to the gross profit of franchisor run stores, training provided to franchisees and identification of terminated agreements, along with a lack of figures relating to the operating costs, net profits and returns of franchisee run stores may have been misleading to existing and prospective franchisees, and therefore in breach of section 52 of the TPA.
In response to the ACCC's concerns, You Can Bake It Franchising Pty Ltd provided the following undertakings:
- Before entering into a franchise agreement with a prospective franchisee, it will ensure that it receives the signed statements required under the Franchising Code of Conduct;
- It will clearly set out in its disclosure documents details of training to be provided to franchisees;
- It will disclose in its disclosure documents that these undertakings have been made; and
- It will establish, maintain and audit a Trade Practices Compliance Program.
This matter emphasises the importance of ensuring that disclosure documents include all the information required by the Franchising Code of Conduct, [7] and that in reading the disclosure document a franchisee or potential franchisee would not be misled by the information provided.
Resale Price Maintenance: The Westminster Case
Section 48 of the TPA prohibits resale price maintenance. A company will breach this section if it attempts to prevent a reseller from advertising or selling products below a specified price.
In August 2004, the ACCC instituted proceedings against Westminster Retail Pty Ltd ("Westminster"), alleging that Westminster, a franchisor, had engaged in resale price maintenance by specifying retail prices to its franchisees, and also by entering into franchise agreements containing terms that stated that franchisees would not advertise or sell goods supplied by Westminster at a price less than its specified price.
The ACCC and Westminster have agreed to proposed consent orders in the Federal Court of Australia. The parties have agreed to declarations, orders, and injunctions concerning alleged breaches of section 48 by Westminster and its directors.
Disclaimers: Lenard's Case
In The Silver Fox Company Pty Ltd as Trustee for the Baker Family Trust v Lenard's Pty Ltd [2004] FCA 1225, the court held that a franchisor can not exclude themselves from legal liability for misrepresentations by including a disclaimer in their Franchise Agreement and Disclosure Documents.
The Franchise Agreement in this case included terms which required the franchisees to acknowledge that no representations had been made to them, and that they entered into the Franchise Agreement based only on their own judgments. Similar terms were also included in their Disclosure Documents.
The Federal Court of Australia held that the purpose of the Disclosure Documents was to inform, and therefore to convey representations. The Court therefore held that the terms could not be used by the franchisor to exclude their liability for misrepresentations contained in the Disclosure Documents, as to do so would undermine the purpose of providing the Disclosure Documents.
Trade Practices Legislation Amendment Bill (No. 1) 2005: Changes to third line forcing
The Trade Practices Legislation Amendment Bill 2004 was introduced into parliament in June 2004, but lapsed in 2004 with the proroguing of parliament for the Federal election. This Bill was reintroduced with minor amendments as the Trade Practices Legislation Amendment Bill (No. 1) 2005 (the "Bill") in February 2005, was passed by the House of Representatives on 10 March 2005, and is currently before the Senate. The Bill proposes amendments to several parts of the TPA . One such area that is particularly relevant for franchising is third line forcing.
The current law with respect to third line forcing prohibits a corporation from requiring or prohibiting a franchisee from acquiring goods from a specified third party. This prohibition currently applies to franchisors unless authorisation is granted under the TPA. Recognising that third line forcing is often not anti-competitive, the Federal Government has introduced a new Bill to amend the Trade Practices Act so that it only prohibits third line forcing if it creates a substantial lessening of competition. [8]
© Stephens Lawyers & Consultants, June 2005
[1] See http://www.accc.gov.au/content/index.phtml/itemId/572769.
[2] Trade Practices (Industry Codes - Franchising) Regulations 1998 (Cth).
[3] See http://www.accc.gov.au/content/index.phtml/itemId/542150.
[5] Schedule 7, Trade Practices Legislation Amendment Bill (No. 1) 2005.
[5] See http://www.accc.gov.au/content/index.phtml/itemId/572769.
[5] Trade Practices (Industry Codes - Franchising) Regulations 1998 (Cth).
[5] Schedule 7, Trade Practices Legislation Amendment Bill (No. 1) 2005.
[6] See http://www.accc.gov.au/content/index.phtml/itemId/572769.
[7] Trade Practices (Industry Codes - Franchising) Regulations 1998 (Cth).
[8] Schedule 7, Trade Practices Legislation Amendment Bill (No. 1) 2005.
Stephens Lawyers and Consultants represent leading Australian franchisors with operations in over 20 countries.
Stephens Lawyers and Consultants are able to advise clients in the preparation of disclosure documentation and franchise agreements to ensure compliance with the Franchising Code of Conduct and the Trade Practices Act and State laws regulating business practices.
For further information on testing your franchising agreement before you breach the Code or the Trade Practices Act, please speak to Katarina Klaric.
The firm is also able to assist clients in the implementation of company-wide Trade Practices Compliance Programs to ensure staff are aware of the Trade Practices Act and are empowered to assist management in minimising the potential for breaches of the Act.
For further information on our Trade Practices Compliance Programs, please speak to Julian Stephens.
Stephens Lawyers and Consultants provide advice in all aspects of franchising and Trade Practices law.