How to avoid a PR disaster and getting sued.

Legal disputes can result in potential or actual litigation which is never the desired outcome. Even minor disputes can damage relationships, tarnish brands, incur significant costs, as well as impact resources. Whilst most franchisors are now aware that class actions and ACCC crackdowns are becoming increasingly common, informed franchisors recognise that it is avoidable.

Understanding your obligations and seeking up-to-date legal advice is essential in reducing your exposure to liability and to minimise your chances of a dispute. In this article, we examine some of the most recent examples where things have gone “wrong” for franchisors and how you can avoid making the same mistakes.

ACCC Crackdowns for Non-compliance – How to Avoid Being a Test Case

Compliance with the Franchising Code of Conduct (Code) and the Australian Consumer Law (ACL) is now more important than ever. With the 2022 reforms to the Code imposing additional obligations on franchisors, the ACCC has greater enforcement powers and there are increased penalties for non-compliance of the Code.

The consequences of non-compliance of the ACCC’s Code include:

(a) expensive litigation; and, more importantly

(b) damage to your brand and a subsequent decline in attracting new franchisees.

Let’s look at some of the common pitfalls to avoid:

The Ultra Tune Decision – Meeting Code Disclosure Obligations

In 2019 Ultra Tune received a penalty in excess of $2 million dollars for Code non-compliance and misleading and deceptive conduct. Despite this costly mistake, the ACCC is once again pursuing Ultra Tune for failure to make timely and adequate disclosures to its franchisees.

Lessons

The outcome of this case highlights the strict disclosure requirements and timeframes that the ACCC will enforce. It should serve as a warning to Franchisors of the hefty penalties for failure to meet Code obligations.

How can you avoid litigation and penalties?

• obtain up to date legal advice on your disclosure obligations under the Code
• ensure all your disclosures are accurate and complete
• ensure you meet your obligations within the prescribed timeframe.

The 7-Eleven Case – Misleading and Deceptive Conduct (pre-franchise obligations)

In the preliminary discussions and subsequent documents provided to a 7-Eleven franchisee, the franchise term was noted as 10 years. However, an accompanying explanatory note in the Franchise Agreement contradicted this, permitting the franchisor to end the franchise term on expiry of the lease, which essentially reduced the franchise term to 6-years.

The Court found the franchisor’s representation of a 10-year franchise term, despite the explanatory note, was misleading and deceptive conduct. The explanatory note was deemed insufficient as it was in small text with an asterisk and the words ‘Lease Term’, but, more importantly, was not brought to the attention of the franchisee. The Court emphasised the importance of highlighting disclaimers, especially when they may impact a franchisee’s rights.

Lessons

Failure to adequately and clearly highlight a disclaimer which limits a franchisee’s or prospective franchisee’s rights under the Franchise Agreement, can result in a claim of misleading and deceptive conduct, as in the 7-Eleven case.

How to avoid Misleading and Deceptive Conduct:

• ensure that any disclaimers or statements which can impact a franchisee’s rights are highlighted to franchisees as part of your standard practice
• avoid creating confusing and vague disclaimers
• ensure all franchise information including marketing materials and franchise grant documents (Franchise Agreement and Disclosure Document) are consistent and not contradictory.

Minimising your liability for Franchisee Conduct

All businesses, including franchises, are required to comply with the Fair Work Act 2009. Failure to ensure your franchisees are complying with employment laws may result in a claim against you by the Fair Work Ombudsman. Headlines of “wage theft”, “underpayment” and “employee exploitation” can tarnish the most trusted brands.

Here are some examples of recent lawsuits against major franchisors.

McDonalds – Dragged into franchisee employment class action

Failure by McDonalds’ franchisees to provide 10-minute breaks to their employees has resulted in a $250 million class action against the fast-food giant.

85 Degrees – Liable for underpayment to employees by its franchisees

The Fair Work Ombudsman commenced action against the café franchisor “85 Degrees” for failing to prevent the underpayment of staff and ineffective record-keeping by their franchisees. This may result in 85 Degrees being liable for the underpayments and penalties of every franchisee breach. An update on the outcome of this case will be provided in due course.

Lessons

Failure to take steps to ensure that your franchise network complies with workplace legislation may result in you being liable for the conduct of your franchisees.

How to minimise your liability?

• provide franchisees with up-to-date information regarding their employment law requirements
• actively work with franchisees to ensure that they do not breach workplace laws
• regularly audit your franchisees to ensure their compliance with workplace legislation.

Conclusion

Each of these situations are characteristic of the legal challenges that franchisors constantly face. As the franchising industry becomes increasingly more regulated and scrutinised by enforcement agencies, getting the right legal advice is vital. At PCL Lawyers, we understand the significance of legal compliance in maintaining a franchisor’s brand and reputation. Our franchising lawyers are experts in advising franchisors on their rights and responsibilities, with a view to minimising their liability and preventing litigation. To ensure that your franchise system is meeting its legal requirements, contact PCL Lawyers’ franchise team.

About The Author - Chris Karatselios

Chris is an Accredited Commercial Law Specialist and a Partner at PCL Lawyers. Chris has approximately 30 years’ experience in commercial and property law. Chris has extensive expertise in complex...