The Australian Competition and Consumer Commission (ACCC) is a government body that monitors compliance with the Competition and Consumer Act 2010 (the Act). The Franchising Code of Conduct (the Code) and Australian Consumer Law (ACL) form part of the Act. The ACCC’s role is to monitor compliance with these laws and to take action where businesses fail to comply. For example, the ACCC will often bring proceedings against franchisors where the ACCC has formed the view that a franchisor has breached some aspect of the Act. This article explains why franchisors should be mindful of their responsibilities under the Code, the ACL and the Act. Further, it explores why franchisors should be aware of the ACCC’s role in enforcing these laws, as well as the very serious and far-ranging consequences that can arise in the event of legal non-compliance.
If a franchisor has (or potentially has) breached an aspect of these laws, the ACCC may take action in one of several ways. This will depend on their assessment of the alleged breach, both in terms of its seriousness and the severity of the consequences suffered.
This generally involves the ACCC requesting that a party:
- agree to stop the conduct subject of the complaint,
- take any other measures to prevent the relevant conduct from happening again as deemed appropriate by the ACCC; and
- compensate those that were harmed.
The ACCC may simply seek this agreement in various forms, such as a commitment from a business over correspondence. Alternatively, they may require the party alleged to have breached the Act to sign a written agreement.
Where more formal action than administrative resolution is considered appropriate by the ACCC, they may issue a formal infringement notice. They will use this approach if they believe the matter may be capable of resolution without going to court.
An enforceable undertaking is a court enforceable statement, made publicly by a business where they have not complied with the law. These are often provided in response to an infringement notice. If there is harm caused by the alleged breach, the ACCC may require the breaching party to:
- publicly accept responsibility;
- agree to fix or compensate others for the harm; and/or
- establish a compliance monitoring process for the future.
The ACCC may determine that they will deal with a matter through the court process. This decision is often in light of the severity of the issue or given the size of the business failing to comply with the laws. Generally, these proceedings commence in the Federal Court of Australia and are public in nature. The outcome of a court process varies. However, a party found by the Court to have breached the Act may:
- be ordered to pay penalties or fines;
- have a director or individual convicted of criminal conduct, including the imposing of prison sentences;
- have orders disqualifying an individual from being a director or manager of a business;
- be required to publish corrective notices; and/or
- be restrained from current or future conduct in regard to the business.
ACCC Audit and Investigation Process
The ACCC may believe that a business may not be complying with its obligations pursuant to the Act. In that case, they may use a range of tools to investigate the relevant conduct in more detail and to monitor the business’ ongoing legal compliance.
This generally involves one of these investigation tools:
- The ACCC performs a general compliance check and requires the relevant business to provide information and documentation within 21 days. As a franchisor, for example, this may include providing the ACCC with franchise agreements, marketing fund statements, disclosure documents, or even documents provided to franchisees. You should read the ACCC’s compliance check flowchart.
- The ACCC uses its power under the Act to obtain specified documentation. The ACCC generally uses this if they believe a business may not be complying with the law. Here, they can ask for any documentation, information or evidence that they think is important to their investigation, which the relevant business is legally required to produce.
- The ACCC provides a substantiation notice which requires that a business substantiate a claim or representation it has made. An example may be that the ACCC asks a franchisor to elaborate and substantiate a claim made to a franchisee, prior to bringing them into the franchise network, as to the average turnover of franchisees in the network.
Other Options of the ACCC
At the ACCC’s discretion, they may take a range of other options, including:
- placing a party on notice about the ACCC’s concerns;
- dealing with the matter informally;
- pausing an investigation with the intention to re-open it at another time; or
- drawing the issue to the relevant parties’ attention and providing a warning.
Consequences of Failing to Comply With the Code
If a franchisor fails to comply with the Code, they may be subject to enforcement action by the ACCC. The ACCC has a substantial list of powers under the Act, set out above. However, the most common consequences a franchisor can expect are:
- infringement notices; or
- court action.
A penalty may mean that a franchisor is required to:
- pay money (damages) to an affected party (for example, a franchisee);
- terminate a franchise agreement; or
- pay a monetary penalty (civil penalty) which ranges in value depending on what law has been broken.
The Code contains a number of civil penalties for contraventions of the Code, which are described as ‘penalty units’. Every breach of the Code is worth 300 penalty units, which, as of 1 July 2020, equates to a maximum of $66,600.00 per breach of the Code. Where there are numerous concurrent breaches or a number of parties impacted by the relevant breach/s, the quantum of Civil Penalties a franchisor may be ordered to pay can be quite substantial and into the millions of dollars.
In order for penalties to be paid, the ACCC must have a court determine that a breach of the law has occurred. The ACCC may take a matter to court if it believes it is the best course of action to resolve the dispute or if it feels the case will have a deterrent effect for other franchisors. This can be costly and time consuming for franchisors.
The ACCC may contact a franchisor in an attempt to have them rectify a breach of the Code. If the franchisor does not take action in response to such communication from the ACCC, then the next step may be an infringement notice.
Infringement notices per breach range in value, depending on:
- the nature of the contravention; and
- whether the franchisor is a corporation or an individual.
Infringement notices are usually issued when the facts of a matter are not in dispute and the relevant non-compliance is an isolated occurrence. If payment of the infringement notice is not made, the ACCC may take the matter a step further and bring it to court.
The fines and penalties imposed will vary depending on the specific statutory provision, as contained in the Act the ACCC alleges there has been a breach of.
Penalty for Individuals
Penalty for Corporations
The maximum penalty per breach of the ACL is:
The greater of:
? 3 x the value of the benefit received; or
? 10% of the corporation’s annual turnover in the preceding 12 months.
If the franchisor is issued with an infringement notice, the cost will vary but in most cases are:
$13,320 or $133,200 for publicly listed companies.
If a franchisor is served with a substantiation notice and fails to comply with it, they may be required to pay (in addition to any further action being taken at the ACCC’s election):
If a franchisor provides false or misleading information under a substantiation notice, they may be required to pay (in addition to any further action being taken at the ACCC’s election):
The Code provides civil penalties for breaches of specific provisions. There are a number of provisions of the Code which contain penalties.
These penalties are:
- $66,600 per breach of a provision of the Code. This means that if a party breaches multiple provisions, they may be up for up to $66,600 per provision that has been breached; and
- for an infringement notice relating to the Code:
- for individuals or other entity $2,200; or
- for Corporations $11,100.
The ACCC is provided with a lot of power to investigate the conduct of businesses that do not comply with the law. Franchisors should always ensure they are complying with the provisions of the Act, the Code and the ACL. Be mindful that the ACCC has many avenues available to investigate conduct and to take appropriate action. Non-compliance may result in substantial penalties, court action, criminal convictions and reputational damage to a franchise brand and can be simply disastrous for a franchisor. If you would like more information regarding your responsibilities as a franchisor under the Code, the ACL and the Act, contact LegalVision’s franchise lawyers on 1800 532 904 or fill out the form on this page.