The rapidly changing Australian franchising sector: a legal update (Q1 2022)

In June 2021, we published an article which alerted franchisors to the various reforms to the Australian Franchising Code of Conduct that came into effect from 1 July 2021. These reforms had the overall impact of strengthening protection for franchisees.

The Australian Government is now doubling down on its commitment to the increased protection of franchisees in a sector that is already franchisee-friendly when compared with capitalist markets abroad.

Franchise Disclosure Register

Following the 2021-22 Federal Budget commitment of $4.3 million for a new Franchise Disclosure Register (Register), the Federal Government has released draft legislation providing for the amendment of the Franchising Code. The reforms relate to the development of the Register to be hosted and administered by the Secretary of the Treasury. The Register will increase transparency in the franchising sector and assist prospective franchisees to conduct due diligence and make informed decisions before entering into franchise agreements. The Register will be publicly available and free to access on the internet.

Under the proposed reforms, franchisors will be required to:

• create and maintain on an annual basis a profile for their franchise system through an online portal;
• provide identifying business information, including the name, locations, and industry type and sub-type (according to the Australia and New Zealand Industry Standard Industrial Classification system);
• upload a disclosure document as already required under the Franchising Code, to be updated on an annual basis; and
• update the Register as to any “material relevant facts” (for example, a change in majority ownership of the franchise, proceedings instituted against the franchisor, or judgments entered against the franchisor) within 14 days of the franchisor becoming aware of the matter.

Franchisors may also include a brief description of their business and information about how prospective franchisees can contact their organisation to discuss franchising opportunities.

Franchisors will be expected to self-manage their profiles on the Register and the Secretary of the Treasury will only be able to adjust the contents of the Register on an administrative basis, for example, to remove disclosure documents that are out of date. The Secretary will not monitor or assess the quality or completeness of the information contained in the Register. The ACCC will continue to be responsible for the enforcement of the Franchising Code.

If the draft legislation passes in its current form, the legislation will commence on 31 March 2022, and the obligations on franchisors under the reforms will commence from 1 July 2022. Franchisors will be required to have established a profile and uploaded the latest disclosure documentation by 31 October 2022 regardless of their financial year. Franchisors must then maintain their profile and publish updated disclosure documentations within 4 months of the end of their subsequent financial years. Any franchisors who are not required to update their disclosure documents as they are not expanding their franchise network under clauses 8(7) and 8(8) of the Franchising Code will still be required to confirm that no update is required. This will ensure that all franchisors retain a presence on the Register.

Failure to comply with the obligations (for example, by failing to provide or update the disclosure document within the timeframe) may result in pecuniary penalties, up to a maximum of 600 penalty units (equivalent to $133,200).

Franchisors should be prepared and watch for relevant updates.

Scope for increased maximum penalties for breaches of the Franchising Code

On 14 September 2021, the Treasury Laws Amendment (2021 Measures No. 6) Act 2021 (Cth) (Act) commenced in respect of provisions related to franchising, increasing the potential maximum civil penalties for breaches of the Franchising Code by both corporations and individuals.

Under the Act, which amended section 51AE of the Competition and Consumer Act 2010 (Cth), the Franchising Code may do the following:

(a) prescribe that the pecuniary penalty for a contravention of a civil penalty provision of the Franchising Code by a body corporate is the greatest of the following:

(i) $10,000,000;
(ii) if the Court can determine the value of the benefit that the body corporate, and any body corporate related to the body corporate, has obtained directly or indirectly and that is reasonably attributable to the contravention—3 times the value of that benefit;
(iii) if the Court cannot determine the value of that benefit—10% of the annual turnover of the body corporate during the period of 12 months ending at the end of the month in which the contravention occurred;

(b) prescribe that the pecuniary penalty for a contravention of a civil penalty provision of the Franchising Code by a person who is not a body corporate is $500,000;

(c) if the Franchising Code does not prescribe a pecuniary penalty mentioned in paragraph (a) or (b) for a contravention of a civil penalty provision of the Franchising Code—prescribe a pecuniary penalty not exceeding 600 penalty units (equivalent to $133,200) for the contravention.

As of the date of publication of this article, the Franchising Code has not been amended to incorporate these potential maximum penalties. If implemented, these increased maximum penalties will be a significant jump from the previous maximum penalties of 300 penalty units ($66,600). The amendments serve as a warning to all individual and corporate franchisors to understand and comply with their obligations under the Franchising Code.