The ACCC has secured a second scalp for good faith breaches under the franchising code, successfully prosecuting car wash franchisor Geowash in the Federal Court.
Less than a month after Ultra Tune copped a $2.6 million fine for breaching good faith provisions under the industry code, Geowash has been pulled up on a myriad of business practices.
The ACCC alleged, following a 2015 investigation, that Geowash suggested prospective franchisees could make a gross average profit of $30,439 a month and $70,216 in revenue while having no basis for that claim.
The code regulator also alleged Geowash claimed a false commercial relationship or affiliation with car giants like Nissan, Kia, Audi and Holden.
Get daily business news.
The latest stories, funding information, and expert advice. Free to sign up.
The Court found Geowash acted unconscionably by charging what franchisees were willing to pay for fit-out and establishment costs rather than the actual likely cost of establishing those sites.
Geowash was also found to have created a “false impression” that franchisee charges would go directly to fitting out car-wash sites, when a “large proportion” went to commission payments for Geowash employees.
The Court ruled this practice likely starved the sites of funds, resulting in an inferior service to customers.
Penalties for Geowash will be determined in a separate court hearing.
“The Court’s decision sends a strong warning to franchisors about the serious consequences of failing to comply with their obligations under the Franchising Code and Australian Consumer Law,” ACCC deputy chair Mick Keogh said of the ruling in a statement.
Geowash not the first to be spotlighted
The Geowash prosecution follows a significant fine levied against Ultra Tune last month, which was the first time the ACCC had brought action against a franchisor under good faith obligations within the franchising code.
Experts say the regulator is taking a harder view on franchisor misconduct following a myriad of damaging media reports in 2018.
Park and garden business Hasqvarna Australia and eyewear retailer Luxottica have also copped enforcement action in the last six months relating to transparency for franchisees.
Food franchisors on notice
Franchisors in the cafe, restaurant and takeaway industry more broadly are on notice, following an ACCC announcement last week it will be undertaking a round of franchising code compliance checks over the next few months.
The watchdog warned franchisors it will be pursuing enforcement action where it identifies breaches of the franchising code, with compliance with disclosure obligations to be spotlighted.
It comes within a week of the expected release of a Senate report into the effectiveness of the Franchising Code of Conduct, which the ACCC regulates.
Keogh said in a statement last week cafe, restaurant and takeaway food franchisees were complaining about their franchisors more than in any other sector.
Large networks such as Retail Food Group (RFG) and Domino’s have been dragged over the coals in the last 12 months over allegations they strong-armed prospective franchisees.
Meanwhile, a quarter of all ACCC franchising code reports related to inadequate disclosure, a topic which has been discussed at length in Senate hearings over the last six months.
There is a broad-based concern in the industry that franchisors are preying on uninformed franchisees, selling them businesses without providing adequate information about operational viability.
“In the last six months, almost a quarter of reports we received about the Franchising Code related to inadequate disclosure. This highlights the need for improved disclosure to prospective franchisees,” Keogh said.
“This information is vital as it allows them to make better-informed decisions, and a lack of disclosure may result in substantial harm to the franchisee.”
ACCC focus on disclosure ahead of Senate report
The ACCC will be auditing documents franchisors are providing to potential franchisees to check whether they are “clearly and accurately” disclosing information crucial to consider before contracts are signed.
Disclosure of setup costs, withstanding supplier agreements and rebates, site history, cooling-off costs and even contact details will be perused by the regulator as part of the compliance checks.
Jenny Buchan, a UNSW Business School professor and franchise law expert, tells SmartCompany the compliance action is a welcome sign the ACCC is stepping up its efforts to police the franchising sector.
“A lot of submissions to the inquiry talked about problems with disclosure, so it’s not surprising they have decided to target it,” she says.
However, Buchan notes disclosure is just one part of the franchising puzzle, and while a significant issue for many, there are many other problems the ACCC must regulate.
“Franchisees want to see the ACCC as the cop on the beat.”
The cop on the beat
The banking royal commission raised questions about the role of regulators in entrenching misconduct in the financial services sector, but Buchan rejected a parallel with the ACCC’s regulation of the franchising code.
“They’ve been making incremental significant improvements, like being able to levy penalties for breaches,” she says.
“Until they could do that they were not really in a very strong position.”
The Senate inquiry into the effectiveness of the code, set up last year after a string of media reports levied allegations of strong business practices by some of Australia’s largest franchise networks, is due to file its recommendations on February 14.
It is expected disclosure will play a central role in the committee’s findings, while franchisee advocates want the ACCC to set up a public database for franchise disclosure documents.
More broadly, the report is expected to put a line under years of poor behaviour in the sector, with the hope of triggering a step change in the franchisee-franchisor relationship.
SmartCompany contacted Geowash for comment but did not receive a response prior to publication.