ACCC sues for breach of Franchising Code of Conduct

ACCC sues for breach of Franchising Code of Conduct
  • The ACCC has launched its first proceedings in the Federal Court for breaches of disclosure requirements necessary under the upgraded Franchising Code of Conduct.
  • Financial penalties are being sought against the franchisor, as well as individually against the director of the Franchising Company, in respect to the alleged breach.
  • This action by the ACCC which many believe is needed as is a reminder to all Franchisors to ensure their disclosure documents provide comprehensive and accurate disclosure to prospective Franchisees.

A raft of changes were made to the Franchising Code of Conduct (“Code”) took effect in January 2015. These changes included the introduction of increased requirements for disclosure to prospective Franchisees before entering into a franchise agreement. In addition, it gave the the Australian Competition and Consumer Commission (“ACCC”) the ability to seek financial penalties for breaches of the Code against the Franchiser.

In this case, which is a first for the ACCC, the industry regulator is seeking penalties against both a Franchisor itself and director of the Franchisor company over their alleged breaches of their disclosure requirements under the Code.

The alleged Breach of the Code

Morild Pty Ltd (“Morild”) is the Franchisor of the Pastacup system, is a pasta franchise. It has stores in Western Australia and New South Wales. The ACCC alleges that Morild, and its director Mr Bernstein, breached the Code by failing to disclose in the Franchise Disclosure document that Mr Bernstein had been a director of two previous Pastacup franchisors, of which both became insolvent.

The Code requires that a Franchisor disclose whether the Franchisor, a director, an associate or a director of an associate of a Franchisor has been bankrupt, insolvent or externally-administered in Australia over the previous 10 years.

Along with financial penalties sought against both Morild and Mr Bernstein, the ACCC is seeking declarations, injunctions and costs.

The franchising Code

The upgraded Code applies to any Franchise Agreement which:

  • Commenced
  • was renewed
  • transferred
  • varied

in any way on or after 1 January 2015. In addition to strengthening the disclosure requirements, the Code:

  • introduced an obligation for parties to act in good faith in their dealings with one another
  • introduced financial penalties and infringement notices for serious breaches of the Code
  • requires Franchisors to:
    • provide prospective Franchisees with a short information sheet outlining the risks and rewards of franchising
    • to provide greater transparency in the use of and accounting for money used for marketing and advertising and to set up a separate marketing fund for marketing and advertising fees
    • requires additional disclosure about the ability of the Franchisor and a Franchisee to sell online
    • prohibits Franchisors from imposing significant capital expenditure except in limited circumstances

The ACCC can now seek fines of up to $54,000 for breaches of the penalty provisions of the Code through Court action. In addition, the ACCC has the power to issue infringement notices (in the industry called ‘speeding tickets’) in the amount of $9,000 for a company, and $1,800 for individuals and other entities for each breach without the need to go to court.

The Priority area for the ACCC

The ACCC’s action against Morild and Mr Bernstein serves as a reminder of the need for Franchisors to ensure their Disclosure documents provide full and accurate disclosure to prospective Franchisees. It is also critical for Franchisors to be aware of their other obligations under the Code, in addition to the competition laws in Australia.

For more information, please contact: Steven Morris, Partner

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