Competition watchdog urges franchisors to ‘consult’ with franchisees wanting to exit

The competition regulator has warned franchisors of their legal obligations when dealing with franchisees wanting to exit an agreement now that reforms to the $180 billion sector have come into effect.

Speaking at the Franchise Council of Australia Legal Symposium yesterday, Australian Competition and Consumer Commission (ACCC) deputy chair Mick Keogh acknowledged the challenges facing franchisees over the past 18 months.

“We expect franchisors to clearly communicate and continuously consult with franchisees on any changes they propose to make,” Keogh said.

Keogh said where there is no longer any benefit for franchisees to stay in an agreement, they may want to exit early.

“Changes to the Franchising Code now give franchisees a right to request early termination from a franchisor,” he said.

“When this occurs, franchisors must respond in writing and engage with their franchisees in good faith.”

Reforms to the franchising sector came into effect in June, including changes to exiting agreements, capital expenditure rules, restraint of trade closes and disclosure obligations.

Franchisors who require franchisees to significantly invest in their business, known as capital expenditure requirements, must include more information in their disclosure documents.

To stop franchisors giving prospective franchisees false information about their potential earnings, the amended code also requires franchisors to meet stricter earnings disclosure requirements.

These June reforms to disclosure documents require franchisors to have their documents up to date by October 31.

“It is the legal responsibility of the franchisor to provide correct and sufficient detail in their disclosure document to assist potential franchisees to make reasonably informed decisions,” Keogh said.

Keogh told the symposium that the uneven bargaining power between franchisees and franchisors makes regulation of the sector essential.

“Franchisors often have the stronger bargaining position in their dealings with franchisees, which is why compliance with both the Franchising Code and the Australian Consumer Law is so important,” he said.

Keogh said the ACCC has a dual role in regulating the industry: educating industry players of their legal obligations and ensuring those who may be in breach of their obligations are held to account.

“But where franchisors are not complying with this law, and where non-compliance is prevalent across the sector, we can also litigate,” Keogh said.

In the last year, the ACCC brought successful proceedings in the Federal Court against the Jump Swim School and Megasave Couriers franchises for breaches of the Australian Consumer Law.

The Federal Court ordered Jump Swim School to pay penalties of $23 million for making false or misleading representations, while Megasave Couriers was ordered to pay $1.9 million in penalties.