To begin 2014, we remind franchisors of the Government's response to the changes to the Franchising Code recommended last year. On 6 January 2014, Small Business Minister Bruce Billson advised that the Coalition advocated penalties to help enforcement of the Franchising Code of Conduct (Franchising Code). We look forward to seeing how the new government will deal with other recommendations made by the 2013 Wein Report.
Enclosed is an interesting discussion regarding whether a franchisee's outlet licence is, legally, a retail premises lease as well as looking at important changes to the Google AdWords Trade Mark Policy.
This edition will help you navigate through the guidelines published by the Australian Competition and Consumer Commission (ACCC) on its use of infringement notices and sets out an update from the ACCC regarding their focus on supply arrangements.
In February 2014, changes to the franchising laws in South Korea will take effect, we have also included a summary of these changes.
Summary of Government Response to Franchising Code Changes
Previous Government's Position
Disclosure on notice of intention to renew
Accepted in principle
Short form disclosure for single-grant foreign franchisors
Disclosure of online sales
Removal of Annexure 2 disclosure
Provision of risk statement to potential franchisees
Termination of franchise agreement in the event of franchisor insolvency
Franchisees recognised as creditors in the event of franchisor insolvency
Prohibition on franchisors imposing unreasonable unforeseen capital expenditure
Prescription of marketing funds to be held in trust, audited, co-owned outlets to contribute, etc.
Accepted in part
Inclusion of an express obligation of good faith in the Code
Prohibiting franchisors from forcing franchisees to opt out of ex-franchisee contact list
Franchisor consent to resale subject to all information being supplied by franchisee
Removing enforceability of restraint of trade clauses under certain conditions
Recognition of alternative dispute resolution in addition to Office of Franchising Mediation Advisor
Prohibition of franchisor dispute resolutions costs imposed on franchisees and litigation in jurisdiction where franchisee operates
Civil pecuniary penalties for breaches of the Code
* Accepted in principle by the current Government
ACCC to issue infringement notices for Code breaches
Wider random audit powers for the ACCC
Disqualification as company director for serious breach of the Code
Court-ordered royalty holidays or payments to marketing funds
Analysis of minimum terms for motor vehicle dealerships
No more reviews of the Code for minimum five years
Improve clarity of policy intent in the Code, and adopt minor technical changes
Is a Franchisee's Outlet Licence a Retail Premises Lease?
This article was written by Sam Hopper, Barrister. You can follow Sam's blog at http://samhopperbarrister.com/.
In a recent decision from the Supreme Court of Victoria, Croft J held that an arbitration clause in a retail lease does not oust the Tribunal’s jurisdiction.
A detailed discussion of this issue can be found on Robert Hay’s blog here and here.
The Court also referred to a finding at first instance that the franchisee’s outlet licence is in fact a sublease. This creates an interesting issue for practitioners acting for franchisees, franchisors and their landlords.
A common arrangement for a franchise in Victoria involves the franchisor:
In these arrangements, the franchisee is ordinarily not treated as a tenant of a retail premises lease.
However, it is well established that an agreement in substance creating a lease will be treated by the courts as a lease, even though the parties choose to call it a licence.
This was considered by the Tribunal in Ireland v Subway Systems Australia Pty Ltd & Anor Retail Tenancies  VCAT 1061 (Subway), in which Senior Member Riegler quoted the colourful words of Lord Templeton in Street v Mountford:
"The manufacture of a five pronged implement for manual digging results in a fork even if the manufacturer, unfamiliar with the English language, insists that he intended to make and has made a spade."
After considering the text of the agreement, the surrounding circumstances and other relevant authorities, the Tribunal concluded that the outlet licence in fact granted exclusive possession to the franchisee and was a sublease.
If, as the Tribunal’s decision suggests, a franchisee’s outlet licence can be regarded as, in substance, a sublease, the consequences could be significant.
What happens if the terms of the franchise agreement are inconsistent provisions of the RLA?
In the Subway case, Croft J refers to this problem and to the fact that the franchise agreement in that case was with another entity within the franchisor's group of companies. However, while expressing a view that the RLA may render specific provisions of a franchise agreement void if those provisions were inconsistent with specific provisions of the RLA, His Honour did not need to finally resolve this question.
The point for practitioners to note at this stage is that a franchisee's outlet licence may well be characterised as a sublease, which could give to the franchisee significant leverage when the franchise agreement comes to an end. The extent of that leverage will, as always, depend on the circumstances.
The Tribunal’s determination that the outlet licence was in fact a sublease was not appealed and Croft J expressly left the question open.
Google AdWords Trade Mark Policy – Important Changes
Google has revised its AdWords trade mark policy which is currently in place in Australia, Hong Kong, China, Macau, Taiwan, New Zealand, South Korea and Brazil. These changes will come into effect on 23 April 2013. From this date, Google will no longer remove third party advertisements which are triggered by keywords purchased for a competitor's trade mark, unless the trade mark appears in the text of the resulting advertisement.
Google AdWords are key words which are available for purchase through Google. When a person conducts a Google search using a keyword which has been purchased by a trader, then the trader's website and a small advertisement will appear in the sponsored link section on the search results page.
Under the current Google AdWords complaint procedure, if a competitor is using your trade mark without your approval as a keyword as part of its Google AdWords program then you can file a complaint with Google to have the advertisement removed. For instance, to take a hypothetical example, if Hugo Boss was to purchase 'Gucci' as a key word so that a sponsored link for Hugo Boss appeared when a consumer conducted a Google search using the search term 'Gucci', Gucci could have the sponsored link removed through the Google AdWords complaint procedure. This is the case whether or not the word 'Gucci' appears in the advertisement within the sponsored link section of the search results or not.
From 23 April 2013, Google will no longer accept complaints on this basis. The effect of this change is that a company can purchase a competitor's trade mark as a keyword to have its advertisements displayed as a sponsored link where a consumer searches using this keyword as long as the competitor's trade mark does not appear in the advertisement itself. Any investigations acted on by Google prior to 23 April 2013 will no longer apply to the relevant keywords after this date.
It is important to note that Google will still continue to monitor companies using a competitor's trade mark as part of the advertisement displayed as a sponsored link. Therefore, if you find that a competitor is using your trade mark as part of an advertisement displayed as a sponsored link, then you can continue to use the Google AdWords complaint procedure to have these advertisements removed.
If you want more information about the changes to the Google AdWords policy, or if you have any queries about how these changes will affect you, then please contact us.
This article was written by Jonathan Feder, Partner, and Caroline Cossio, Senior Associate, both of the Melbourne office.
ACCC Publishes Guidelines on its Use of Infringement Notices
The Australian Competition and Consumer Commission (ACCC) has published much needed guidance on its use of infringement notices issued under the Competition and Consumer Act 2010 (Cth) (Act).
This guidance is timely because:
A copy of the Guidelines, titled Guidelines on the Use of Infringement Notices (Guidelines), can be found here.
What are Infringement Notices? The ACCC has stated that infringement notices are designed to provide "a timely, cost efficient enforcement outcome in relation to relatively minor contraventions of the Act".
The ACCC is empowered to issue infringement notices where it has 'reasonable grounds to believe' that a person has contravened certain consumer protection provisions, including:
The ACCC may also issue an infringement notice to a person in relation to:
What are the Infringement Notice Penalties?The penalty amount in each infringement notice will vary depending on the alleged contravention, but in most cases is fixed for each individual contravention at:
Different penalties apply in connection with substantiation notices.
Infringement notice penalties are calculated by reference to the value of penalty units set by the Crimes Act 1914. In 28 December 2012, the value of a penalty unit increased from AUD110 to AUD170. Therefore, the infringement notices relating to conduct prior to 28 December 2012 attracted lower penalties than what will now be recovered.
How Active Have the ACCC Been in Issuing Infringement Notices?Since April 2010, the ACCC has issued approximately 95 infringement notices and received approximately AUD620,000 in penalties.
Examples of infringement notices issued by the ACCC include:
When Will the ACCC Likely Issue an Infringement Notice?Issuing an infringement notice signifies that the ACCC considers a contravention of the Act has occurred that requires a more formal sanction than an administrative resolution (eg resolution of issue by agreement), but also believes the matter may be resolved without legal proceedings.
However, an infringement notice is only likely to be issued in circumstances where the ACCC would be willing to commence legal proceedings if the recipient of the notice elected not to pay the infringement notice penalty.
The Guidelines indicate that the ACCC is more likely to consider the use of an infringement notice in place of legal proceedings in the following circumstances:
What Are the Implications for Businesses?
Substantial Monetary PenaltiesDespite criticism, the ACCC may continue its practice of issuing multiple infringement notices where it considers it is appropriate to do so. This may occur where the ACCC believes there have been multiple contraventions, where the contraventions have occurred in multiple states or territories, where contraventions have involved different types of media, or where it is considered desirable to deter similar conduct by the specific business involved or the broader industry. The payment of multiple infringement notice penalties may result in payment of a substantial amount of money (especially given the increase in penalty unit rates in December 2012).
Court Proceedings and Additional RemediesThere is no legal obligation on a recipient to pay an infringement notice. However, nonpayment of infringement notice penalties will expose the recipient to the prospect of proceedings arising from the ACCC's concerns. Infringement notice penalties are lower than the maximum penalty a court could impose should the recipient be found to have contravened the Act. In fact, should the ACCC be successful, the business may be liable to pay a penalty of up to AUD1.1 million for each contravention in addition to legal costs.
Where appropriate, the ACCC may also seek additional remedies, including court enforceable undertakings.
ACCC Infringement Notice Register and Media ReleasesThe ACCC operates a public Infringement Notices Register of paid infringement notices on its website. Entries on the register ordinarily list the person or business that paid the notice, the date paid and the section of the relevant legislation. Additionally, the ACCC often issues a media release that confirms payment has been made and includes details of the alleged matters and the amount paid. Given the affect this may have on a businesses reputation, it is vital that all options are carefully considered prior to payment of the penalty.
What Should a Business Do if it Receives an Infringement Notice?When issued with an infringement notice, the recipient will be provided with information including the nature of the alleged contravention, the amount to be paid and the period for payment if the recipient wishes to avoid court action. On receipt of an infringement notice, it is advisable for the business to obtain legal advice as to the appropriate response.
There are a number of steps a recipient may take once they receive an infringement notice:
This article was written by Murray Deakin, Partner, and Joni Jacobs, Lawyer, of the Sydney office.
ACCC Releases Guide – What You Need to Know About: Competition Issues in Franchising Supplier Arrangements
The ACCC recently released a guide entitled What You Need to Know About: Competition Issues in Franchising Supplier Arrangements (Guide). A link to the full version of the Guide can be found here.
The Guide is aimed at assisting franchisors and franchisees to understand the ACCC's role in reviewing arrangements where franchisees are required to purchase goods or services from particular suppliers. It warns against third line forcing, which breaches the Competition and Consumer Act 2010 (Cth) (Act) even if the conduct does not harm competition.
Third Line ForcingThe Guide sets out a definition of third line forcing. It provides that third line forcing occurs where a supplier (eg a franchisor) supplies goods or services (eg franchising services or the right to become a franchisee) on the condition that the customer also acquires goods or services from another person or business (unrelated to the supplier).
The Guide acknowledges that franchisors:
Concerns arise under the Act with these kinds of arrangements only where the arrangement has the purpose or likely effect of substantially lessening competition. The ACCC has commented that competition is unlikely to be substantially affected where the franchisee's market and other suppliers' markets include a number of competing businesses. Specific legal advice should be sought regarding whether an arrangement has the purpose or likely effect of substantially lessening competition.
A notification should be lodged by franchisors:
The ACCC may remove the protection from legal action provided by a notification at any time if it is satisfied that the likely public benefits will not outweigh the likely public detriments from the conduct. This action is known as 'revoking' the notification and in relation to third line forcing notifications for franchising supplier arrangements, such action is rarely taken.
What Will the ACCC ConsiderThe guide outlines that the ACCC will consider the public benefits and public detriments including the impact of the conduct on the entire community and not just the impact on individual franchisees.
In considering the public benefits, the ACCC looks at factors such as:
In considering the public detriments, the ACCC looks at factors such as:
RebatesOften, franchisors receive a rebate from suppliers as a result of their supply arrangement.
The existence of the rebate, the ACCC has advised, does not automatically constitute a public detriment in the ACCC's assessment of a notification. In fact, the Guide provides that "there is no outright prohibition against rebate arrangements".
Under the Franchising Code of Conduct however, franchisors are obliged to disclose to franchisees:
Franchisors are not obliged to disclose the value of the financial benefit.
Franchisors are not obliged to distribute amongst franchisees the financial benefit they receive.
The ACCC may consider the matter of rebates as part of its broader assessment of public benefits and public detriments. The ACCC does not however, consider it to be their role to reach a conclusion regarding whether a supplier arrangement offers the best value for franchisees (that is a matter for franchisees to consider when conduct their due diligence in respect to the franchise system).
ConclusionIn the Guide, the ACCC encourages:
The Guide provides a useful summary of the law in relation to supplier arrangements in franchise systems, but franchisors should seek specific legal advice in relation to their particular supplier arrangement.
This article was written by Anna Trist, Senior Associate, of the Melbourne office.
International News: Changes to the Franchising Laws in South Korea
A Presidential Decree is expected to be issued shortly to provide further guidance regarding South Korea's amendment to the Fair Transactions in Franchise Business Act (South Korea's franchise legislation. The amendments will be effective from February 2014.
Generally speaking, the amendments address franchise relationship issues and require increased disclosure.
Key aspects of the amendments are:
South Korea's franchise legislation has not been amended since 2010 (after becoming law in 2002 and being amended in 2008). The amendments are a substantial shift in South Korea's legislation towards protecting franchisees and should be considered when seeking to open a franchise system in South Korea or in any existing operation of a franchise system in South Korea.
This publication/newsletter is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon in regard to any particular facts or circumstances without first consulting a lawyer. Any views expressed herein are those of the author(s) and not necessarily those of the law firm’s clients.