October 2009

Recent Issues in Business and Franchise Law

In Brief

• Non-compliance with Franchising Code forces franchisor to refund franchisees: lending company Australian Loans Management failed to comply with the Franchising Code of Conduct and has agreed to refund franchisees, and/or release them from their agreements. The franchisor labelled the franchise agreements as "licences" and failed to provide franchisees with the appropriate disclosure documents in compliance with the Franchising Code of Conduct.full report
• Fair Trade Ombudsman investigates 7-Eleven Franchisees: the Fair Work Ombudsman, in conjunction with the 7-Eleven Franchisor, is preparing to audit 63 Victorian convenience store franchisees to determine whether employees have been paid properly. Fair work legislation came into effect on 1 July 2009 and the Ombudsman has the power to monitor and investigate compliance with the national workplace laws and businesses/franchisors need to ensure that they are compliant. full report
• ACCC class action on behalf of Allphones Franchisees: the ACCC has instituted class action proceedings against Allphones Retail Pty Ltd and its directors on behalf of 74 current and former Allphones franchisees, for alleged unconscionable conduct in breach of section 51AC [1] of the Trade Practices Act. [2]full report
• Criminalisation of Cartel Conduct & Franchising: It is common practice for stores within a franchise chain or buying group to collectively participate in the promotion of sale prices for goods or services, or to be involved in joint advertising (such as catalogues) of the price for the sale of goods or services. Under the new cartel legislation, which came into operation on 24 July 2009, this conduct may constitute price fixing, unless these agreements or arrangements come within the exceptions specified by the new cartel provisions in the Trade Practices Act or authorisation has been obtained from the ACCC. full report

Franchisor to refund franchisees after failing to comply with Franchising Code

Australian Loans Management Pty Ltd (' ALM') has agreed to release franchisees from their agreements and provide refunds, in light of its non-compliance with the Franchising Code of Conduct (' Franchising Code').

ALM promoted and sold 'licence agreements' for a finance broking firm Active Money (Aust) Pty Ltd (' AM'). ALM was investigated by the ACCC, who expressed concern that the company had breached the Trade Practices Act 1974, [3] by falsely claiming that the licences were not franchise agreements. [4] ALM breached the disclosure requirements of the Franchising Code, as it:

• failed to provide prospective franchisees with a copy of the Franchising Code, a disclosure document and a copy of the franchise agreement at least 14 days before entering into the agreement or making a non-refundable payment;
• failed to offer franchisees the required 7 day cooling off period; and
• had not obtained signed statements from franchisees, prior to entering into their franchise agreements, which indicated that the franchisee had obtained independent legal advice on the agreement.

The Franchising Code is a mandatory industry code which regulates the conduct of franchisors and franchisees by ensuring that prospective franchisees receive sufficient information about a franchise before entering into an agreement.

The ACCC has accepted enforceable undertakings from both ALM and AM, who agree to take measures to ensure compliance with Franchising Code, provide current franchisees with a copy of the Franchising Code and disclosure documents, and produce an agreement that complies with the Franchising Code. Franchisees can also cancel their current licences, and obtain a full refund of any payments made to ALM.

The Franchising Code of Conduct is available on the ACCC website, [5] and is currently under review by the Federal Government.

Fair Trade Ombudsman investigates 7-Eleven Franchisees

On 1 October 2009, the Fair Trade Ombudsman announced plans to audit 63 Victorian 7-Eleven franchisees to ensure that staff are receiving correct pay. [6] This action follows a series of random audits recently conducted in Melbourne and Sydney stores, which resulted in reimbursements totalling $162,000 to 168 underpaid workers. These initial investigations revealed that workers were not being fully paid for hours worked, non-payment of weekend and nightly penalty rates and non-compliance with record-keeping and payslip obligations.

With the support of the 7-Eleven franchisor, the Ombudsman will scrutinise employment records, including time-and-wage sheets to ascertain whether back-payments will need to be issued. The investigations will be conducted over the coming months, and will also assess compliance with workplace relation laws.

The Fair Trade Ombudsman is an independent statutory agency created under the Fair Work Act 2009, the new workplace relations system, which came into force on 1 July 2009. The Ombudsman promotes "harmonious, productive and cooperative workplace relations", and monitors and investigates compliance with national workplace laws. [7] Fair Trade Ombudsman Executive Director Michael Campbell has expressed concern that employees in retail convenience store franchises are being "underpaid and exploited because they are often not aware of their workplace rights or are reluctant to complain". [8] The agency will work with franchisees and franchise employees to raise awareness and provide education about workplace rights and issues.

Allphones targeted for unconscionable conduct

Background to litigation

The ACCC has been engaged in litigation with Allphones targeting the franchisor's unfair business practices since March 2008. Allphones operates a franchise system where it controls the distribution of all products and income to franchisees and negotiates agreements with third parties on behalf of franchisees.

In the March 2008 proceedings, the ACCC alleged that by failing to disclose or pay income to franchisees, threatening franchisees by engaging in harsh conduct, and implementing policies specifically targeting classes of franchisees, [9] Allphones had contravened sections 51AC, 51AD, [10] 52 [11] and 59 [12] of the Trade Practices Act. These sections deal with unconscionable conduct, contravention of an industry code ( The Franchising Code of Conduct), misleading conduct and misleading representations about certain business activities. These proceedings are set down for hearing from 23 March 2010.

Further litigation was commenced by the ACCC against Allphones in October 2008 where Allphones gave interim undertakings to the court, [13] and the Federal Court ordered injunctions to restrain Allphones from engaging in conduct in negotiations with its existing franchisees, [14] and to notify franchisees of its alleged misleading representations. [15] Whilst a final hearing date is yet to be set, the ACCC is seeking injunctions, compliance programs, further declarations and costs against Allphones in relation to both the March and October 2008 proceedings.

Class action proceedings

The ACCC instituted class actions proceedings in August 2009 against Allphones, and 3 Allphones executives for alleged breaches of section 51AC of the Trade Practices Act, which prohibits unconscionable conduct. The action has been brought on behalf of 74 current and former Allphones franchisees and is partly based on the existing litigation that ACCC is currently pursuing against Allphones in the Federal Court.

The ACCC is seeking damages, and alleges that Allphones:

• Withheld (and failed to disclose) commissions, rebates and bonus payments from franchisees, in breach of their franchise agreements; and
• Made unilateral deductions from commission payments payable to franchisees which were not permitted under their franchise agreements.

Under section 87(1B) [16] of the Trade Practices Act, the ACCC can make an application on behalf of one or more persons who have suffered (or are likely to suffer) loss or damage by conduct of another person, engage in contravention of the Act. [17]

New Criminalisation of Cartel Conduct: Implications for Franchises

Legislation Overview

The recently enacted trade practices criminal penalties for engaging in cartel conduct, which came into operation on 24 July 2009, may have serious implications for the franchise industry. [18] Cartels are anti-competitive arrangements between two or more competitors. Under the Trade Practices Act, individuals or businesses who are parties to an agreement which contains a "cartel provision" can face:

• a maximum sentence of 10 years' imprisonment and a fine of up to $200,000 per offence (for individuals); [19] or
• a fine amounting to the greater of: $10 million, three times the benefit obtained by the offence or 10% of the corporate group's annual turnover (for corporations). [20]

A "cartel provision" is defined as a provision that has the purpose or is likely to have the affect of:

• price fixing; [21] or
• restricting outputs in the production and supply chain; [22] or
• allocating customers, suppliers or territories; or
• bid-rigging. [23]

Parties can avoid penalties under these new provisions, if they can establish one of the various exceptions to cartel conduct listed in the Trade Practices Act.

These exceptions relate to:

• Conduct subject to a collective bargaining notice: if there is a collective bargaining notice in place, businesses will be exempt from both civil and criminal penalties if the conduct relates to: price fixing, restricting outputs and allocating customers, suppliers or territories, but not bid-rigging. [24]
• Conduct subject to authorisation: penalties will not apply if the contract, arrangement or understanding contains a condition that the cartel provision will not come into force until the party is granted an authorisation to act. This exception applies where the authorisation relates to: price fixing, restricting outputs, allocating customers, suppliers or territories and bid rigging. [25]
• Joint ventures: in some circumstances, cartel provisions between joint venture partners will be exempt from penalties. The party claiming the exception must establish that:
  • the cartel provision is within a contract, or an arrangement or understanding intended to be a contract;
  • the cartel provision is for the purposes of the joint venture; and
  • the joint venture relates to the joint production or supply of goods or services. [26]
• Agreements between related bodies corporate: agreements exclusively between related corporate bodies will not attract penalties under the cartel provisions. [27]
• Collective acquisition of goods or services: criminal offences and civil prohibitions in relation to price fixing do not apply if the agreement relates to the price of goods or services which are to be acquired jointly by competitors, or to the joint advertising of the re-supply price of jointly-acquired goods. [28]

The ACCC offers immunity from ACCC-initiated civil proceedings and penalties to the first eligible cartel participant to report its involvement and cooperate with ACCC investigations. Applications from criminal immunity are received by the ACCC, and assessed by the Commonwealth Director of Public Prosecution. [29]

Implications for Franchise Industry and Buying Groups

It is common practice for stores within a franchise chain or buying group to collectively participate in the promotion of sale prices for goods or services, or to be involved in joint advertising (such as catalogues) of the price for the sale of goods or services. Under the new cartel legislation, this conduct may constitute price fixing, unless these agreements or arrangements come within the exceptions specified by the new cartel provisions in the Trade Practices Act or authorisation has been obtained from the ACCC.

Under the previous regime, many franchise chains or buying groups had utilised a price fixing exception under the now repealed section 45A of the Trade Practices Act. The exception permitted the operation of price fixing agreements so long as they related to "the price of goods or services to be collectively acquired, whether directly or indirectly, by parties to the contract, arrangement or understanding or by proposed parties to the proposed contract, arrangement or understanding, or for the joint advertising of the price for the re-supply of goods or services acquired". [30] The Parliamentary Explanatory Memorandum to the amending Bill states that the newly inserted section 44ZZRV is intended to reflect the type protection offered under the old provisions. [31]

Before entering into any agreement or arrangement which involves joint buying, selling or advertising of prices, businesses/franchise operators need to consider whether any such proposed arrangements have anti-competitive effects and whether the activity falls outside the exemptions under the Trade Practices Act and requires authorisation from the ACCC.

Seeking authorisation from the ACCC [32] remains an effective tool for avoiding contravention of the Trade Practices Act, and may have increased importance in light of the substantial penalties which now attach to cartel conduct, such as price fixing. For example, authorisation was sought and obtained by Franklins Ltd in relation to joint marketing agreement with Pick 'n Pay and Foodland for the promotion of food and grocery products under the Franklins banner. [33]

Stephens Lawyers & Consultants have a high level of expertise in trade practice and franchise law.

Our lawyers represent leading companies in both litigious and commercial matters, and have significant experience in writing submissions to government on behalf of clients.

For further information contact:

Stephens Lawyers & Consultants

Level 3, 530 Lonsdale Street

Melbourne VIC 3000

Phone: (03) 8636 9100

Fax: (03) 8636 9199

Email: stephens@stephens.com.au

Website: www.stephens.com.au

All Correspondence to:

PO Box 13286

Melbourne Law Courts

Melbourne VIC 8010

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© Stephens Lawyers & Consultants October 2009

Researched and written by Colette Downie, edited by Katarina Klaric.

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