The Australian Competition and Consumer Commission (ACCC) has powers to conduct audits to monitor compliance with industry codes of conduct prescribed under the Competition and Consumer Act 2010 (CCA), including the Franchising Code of Conduct.
This power arises under section 51ADD of the CCA, which enables the ACCC to require a corporation to provide information or produce documents that it is required to keep, generate or publish under an applicable industry code (Investigation Power).
The ACCC states that although the Investigation Power allows it to randomly carry out compliance checks, it will usually target traders that have either a history of complaints or non-compliance or that operate in an industry that generates a disproportionate number of complaintsi.
In the 12 month period from 1 October 2017 to 30 September 2018, the ACCC issued 29 notices to produce documents under section 51ADD (Investigation Notice). The writers of this article assisted several franchisors with their response to the ACCC.
This article contains some practical tips for franchisors responding to an Investigation Notice.
1. Be proactive by ensuring records are maintained before receiving an Investigation Notice
Examples of documents which the ACCC may request under an Investigation Notice include disclosure document templates, disclosure documents actually issued to franchisees and prospective franchisees, franchise agreement templates, franchise agreements actually issued, signed franchise agreements, marketing fund statements, breach notices, termination notices, earnings information and acknowledgments required to be collected from franchisees prior to entering into franchise agreements.
From 1 January 2015, a franchisor is required to keep all documents that the Franchising Code of Conduct requires, or allows, a franchisee or prospective franchisee to give to it in writing. This means that the ACCC may also request copies of documents issued by franchisees to the franchisor, such as dispute notices or requests that their contact details not be disclosed in the franchisor’s disclosure document.
Ideally, all communications, correspondence and documents exchanged between the franchisor and franchisees (including prospective franchisees which do not end up joining the franchise system) should be stored on a central database, not only for the franchisor’s own record keeping purposes but to ensure that the franchisor can comply with an Investigation Notice.
2. Promptly review the Investigation Notice and seek clarification or an extension from the ACCC if required
Typically, the Investigation Notice will give the franchisor 21 days to produce the documents requested. Under section 51ADE of the CCA, the franchisor may, at any time during the 21 day period, apply in writing to the ACCC for an extension of the period for complying with the Investigation Notice.
However, extensions are not granted automatically and reasons must be given for the extension request. As such, any application for an extension should be made promptly to give the ACCC enough time to consider the request and to give the franchisor certainty about the deadline within which its must gather the information requested.
The Investigation Notice will list the documents to be produced as well as the provision of the industry code which requires that document to be kept, generated or published. Franchisors are recommended to refer to the provisions of the Franchising Code of Conduct to assist them in ascertaining the documentation that should be provided. For example, an Investigation Notice may request copies of termination notices given by the franchisor in the 12 months prior to the notice. However, the request may only relate to a specific provision of the Franchising Code of Conduct which limits the type of termination notices to be provided, such as termination notices issued due to a breach by the franchisee, as opposed to termination notices issued when there hasn’t been a breach.
In addition, some requests relate to “documents issued” while others relate to “documents received”. Close attention should be paid to the particular wording of the request as this indicates whether the franchisor should be providing the blank documents originally issued or documents which have been completed by the parties and signed.
If there is any confusion about the information or documentation to be provided, the franchisor should seek legal advice. A franchising lawyer can also assist a franchisor to seek clarification from the ACCC about the documents to be provided.
3. Remember the prohibition against giving false or misleading information
Section 51ADG provides that a corporation must not, in compliance with an Investigation Notice, give to the ACCC false or misleading information or produce to the ACCC documents that contain false or misleading information. This prohibition must always be kept front of mind when compiling the documents and information to be provided to the ACCC.
It is often helpful for a franchisor to prepare a cover letter accompanying the documentation provided to the ACCC under the Investigation Notice. Where documents or information may mislead or deceive the ACCC, the appropriate clarification or explanation could be included in the cover letter. If there are discrepancies in the documentation that may indicate non-compliance with the Franchising Code of Conduct but can be explained, including an explanation at the time of responding to the Investigation Notice may prevent further inquiries being made. Similarly, if there are missing documents or errors in the documents identified as part of responding to the Investigation Notice, in many cases it can be favourable to proactively address this in the response.
Where the recipient of an Investigation Notice is a corporation, the knowledge and information of the corporation will be the knowledge and information of its directors and officers. As such, the directors and officers of the franchisor should maintain appropriate oversight and/or involvement in the process of responding to the Investigation Notice.
Franchisors should keep records on the methodology they follow for complying with an Investigation Notice. For example, if the franchisor does not have an accurate database of records and documentation, it may need to collate statements and/or documents from various areas of the business (such as area managers or the finance department) as well as external advisors (such as lawyers and accountants). Keeping records may assist in demonstrating that the franchisor took steps to ensure that documents were not misleading or could not have known that documents were misleading, at the time of providing them.
It may also help to itemise the documents being provided and provide explanations about how the documents have been compiled. For example, the Investigation Notice may request copies of franchise agreements issued in the 12 months prior to the notice and separately, request copies of disclosure documents issued in the same period. If the franchisor is providing a combined document in response to several categories of documents requested, it may help to bring the ACCC’s attention to the appropriate sections of the combined document.
Once a franchisor has complied with an Investigation Notice, the ACCC will review the documents and typically communicate the outcome to the franchisor. Depending on the findings, the ACCC may seek to resolve the matter administratively or take enforcement action such as issuing infringement notices, seeking enforceable undertakings or instituting legal proceedings.
There is no question that the franchising industry has faced heavy scrutiny of late, including the Parliamentary Inquiry into the Operation and Effectiveness of the Franchising Code of Conduct taking place throughout 2018, negative media coverage, the ACCC’s focus on marketing fund compliance and the ACCC’s call for stronger penalties for breach of the Franchising Code of Conductii. It is incumbent upon franchisors, particularly national franchisors, to ensure their systems are compliant – for the sake of the sustainability of the franchise network, the franchise system’s reputation and so that any ACCC Investigation Notice can be received with confidence, rather than anxiety.
This article was written by Tony Garrisson, Partner and Marian Ngo, Senior Associate.
ihttps://www.accc.gov.au/business/industry-codes/industry-code-compliance-checks
iihttps://www.accc.gov.au/media-release/stronger-penalties-required-for-franchising-codes-and-uct-laws-0
P: +61 3 8644 3542
E: tgarrisson@hwle.com.au