Australia's New Franchise Amendments
In looking at Australia changing its federal franchise law last week, I think a question has to be posed. How do you efficiently deal with situations of clear franchisor abuse, without trampling on the operations of those who competently follow the rules? Trying to analyze the significance of the recent changes to Australia’s Franchising Code of Conduct, we from the U.S. must be careful not to superficially impose our view of franchising to the situation in this other country.
My perception has been that the Australian Competition and Consumer Commission has been much more active in that country than the Federal Trade Commission has been in ours. I perceive that the ACCC has been more aggressive in reviewing cases that are brought to its attention, and has probably brought a higher number of cases (proportionately speaking Australia is about 7% the size of the U.S. in population) than the FTC. I also suspect that the mandatory mediation provisions in the Australian Code have reduced the number of cases that have gone to litigation, although I have not seen any statistics to that effect. I have heard it mentioned that in Australia, 80% of cases that do go to mediation have been resolved as a result of those proceedings, and the figures I have seen reported in the U.S. are in the same neighborhood.
Australia’s basic dilemma, however, appears to be similar to the one faced in the United States: how do you efficiently deal with those situations of clear abuse, without trampling on the operations of those franchisors who competently follow the rules?
When I was in college, a European History professor at Michigan quoted King Karl XII of Sweden as saying, “Better that the innocent suffer than the guilty survive.” I have never looked to see if Sweden even had a King Karl XII—much less Kings Karl I through XI—and even it did, I have no authority to show that he actually spoke or wrote these words. But the philosophy in this statement is disturbing. If there has been a clear, demonstrated and widespread pattern of abuse (as, for example, in the area of environmental preservation), then regulate it; if not, leave it alone and try to find a more rifle-like approach in dealing with the limited number of egregious situations that exist.
I perceive that franchising is generally doing well in Australia, as it is here. But, in both countries, there are occasions of abuse, and it is difficult for a franchisee whose business is failing to fight a franchisor in litigation. Litigation is a lousy way to resolve disputes, and arbitration is, in my opinion, not much better. We can try to give meaning to phrases like “good faith” and “unconscionability,” but in the end all we accomplish is to create more legal battle fields on which the parties can feud.
I think it was former Justice Potter Stewart who wrote in a Supreme Court decision, dealing with hard-core pornography, something like, “I know it when I see it.” The same principle holds true in franchising when dealing with abusive conduct. But that, too, is not a good approach to giving certainty to the conduct franchisors should follow. In the U.S. at the federal level, we have chosen disclosure as the method of limiting abuse; Australia has also relied heavily on disclosure as a way to reduce abusive conduct. The new amendments to the Code on Conduct give the ACCC the power to shame and humiliate, and allows the imposition of substantial fines when unconscionable conduct, whatever that may mean, occurs.
It will be interesting to see how both of these powers are applied in the upcoming years.
About the author: Attorney Rupert Barkoff is a partner in the Atlanta law office of Kilpatrick Stockton’s, where he heads his firm’s franchise practice. Having practiced franchise and distribution law for 36 years, he is recognized as one of the country’s leading franchise attorneys by The Best Lawyers in America, published by Woodward/White. He spends his time nowadays split between his native home of Atlanta and Australia.
- Franchise topic:
In my opinion, pre purchase disclosure does little to curb the possibility of franchisor opportunism during the term of the franchise agreement. Pre purchase disclosure does not to rein in the inappropriate use of discretionary power granted under the franchise agreement. If pre purchase disclosure was effective, then nobody would buy a franchise precisely because they would worry about the inappropriate use of discretionary power in the franchise agreement.
The ACCC is likely to be even less helpful.
There are a number of ways to manage the franchise relationship which respect the various economic roles, incentives of the franchisor as supplier and the franchisees as restricted buyers, and if Mr. Barkoff is suggesting that litigation has a minimal role in managing the franchise relationship, I would agree with that observation.
But, I would also hasten to add that during the ABA Franchising Forum held in Toronto recently, I did hear or see a lot of support for a theory of franchise relationship management that was not steeped in litigation or arbitration.
Michael Webster, a franchisee attorney in Toronto, Ontario, publishes a website on business opportunities and franchises called "The BizOp News"
I agree here, the idea that giving an already inefficient, underfunded governmenet agency more power is ludicrus, All they are doing is making a great deal of noise and luring prospective franchisees into feeling secure that there is a regulator who will enforce the rules that the government tells them too. It is not until you find a blatant breach of the act that you discover they do nothing to help, while allowing the franchisor to continue. When people ask me about my worst fracnhise experience and I tell them they always say "there should be a law against that" I have to say yes there is a law against it I just cant afford to uphold the law and the regulators do nothing.
Mr. Barkoff,
I appreciate your observations on the ACCC.
This year, I understand, a couple Ontario Superior Court decisions stated that the relevant, current franchise law was passed by the legislature to primarily protect franchisees. It's been my experience that dispute resolution happens when the franchisee can no longer afford the legal costs.
I was wondering, in your opinion:
under s.51A of the Trade Practices Act (which deals with representations as to 'future matters').
If a representation as to a future matter has been made, the onus shifts to the person who made the statement to show that it was made on reasonable grounds. This section, together with s.52 (conduct that is misleading or deceptive or capable of being misleading or deceptive) are the cornerstones of just about every franchise litigation.
I agree with Mr. Barkoff that litigation is a lousy way to deal with franchising disputes generally but, as a franchising mediator, I am not satisfied that the high percentage of franchise resolution that is reported actually repesents a fair summary of the system - yes many mediations result in a resolution but the actual number of disputes that proceed to mediation is not high, meaning that probably a maximum of around 30% of disputes go to "compulsory" mediation and of these about 75% are resolved.
I was involved in a meeting with the ACCC earlier this week and while they generally welcome the increase to their preventative powers there remains the problem of resourcing. The ACCC did not really need their powers to be expanded (as they have plenty already), but rather their resources to process complaints and investigations. This has not as yet occurred and is still the single biggest criticism of the proposed changes.
It does nothing to assist a franchisee/franchisor in solving their own problems either.
I am also concerned about the as yet undefined term "rogue franchisor" and how this will be applied in real terms.
what powers do they ever excercise.
when a franchisor is so abusive to their franchisees and the accc can see it, they still wont do anything. they do not even determine what is a breach do they? they reflect back over a big book of codes and umm and arhh and say maybe it looks like it is, but before we can tell you it needs to go before the courts, its not for us to interperet what a breach of the code is, only that it warrants further investiagtion. They talk about "jim speak" well I think there is also "accc speak" so faced with the prospect of thousands on each case to determine a breach, they need to cull the yep look like it could be a breach and you definately have cival action, even the blatanly obvious goes by unattended and the zees are left penniless and churned. the business onsold by franchiors and the accc will not do a dam thing. and mediation I have read a case where the franchisor manges to terminate and exclude the fracnhisee from mediation in a single communication.
So I dont understand how the government expects the ACCC to go and do random audits to ensure people comply, when faced with evidence of a non compliant zor they do nothing now. Its just another group of words to make people feel they are protected by law and a regulator. it is a false sense of security
Simon,
I agree that the word "rogue" is an undefinable and, I would argue, a dangerously misleading term.
The defining characteristic of franchising in commercial relationships is the separation of ownership and control of assets. This schism enables franchisor opportunism to strip value from the sunk cost investments.
Gilian Hadfield's testimony (2/3 down the document at Opportunism Test) might be useful in a very practical way:
Instruct the ACCC, mediators and the Courts to adhere to this test: Would the franchisor have made this decision if THEY owned the outlet?.
Simple, eh?
of some description (and I know this can be a wildly hilarious assumption in some cases) then I don't think that the opportunism test should have to be applied; the franchisor should have already - through its systems and procedures - indicated what it would do with its own outlet.
I do agree that such a test would be useful in a number of circumstances but as Richard points out - and I think correctly - that the standard is too high. It is exactly because that control has been separated that a standard equivalent to a fiduciary relationship should not be applied.
Maybe it is just me, but I have a different understanding of what I would consider to be a "rogue" franchisor that would not be satisfied by the test. Just because a franchisor applied a diferent standard between their own store and a franchisee's store would not, to my mind, be conclusive of a rogue operation. A rogue may behave in this fashion but it may also catch out "reasonable" franchisors as well.
Simon,
You present a model of franchising that I have never had any experience with. To assume that a model is created, once, and does not change is insincere to anyone with any history in this industry.
Your flights of fantasy are not very helpful in the very serious matter of instructing practiciing politicians in protecting their constituents' life savings.
But being airborne is a more profitable exercise for some.
of my comments; any franchise must by definition include a system and of course that system will change and evolve over time Rogue franchisors will use changes to disadvantage their franchisees but reputable franchisors cannot be expected to have their system dictated by reference to the highest and best good of every franchisee in their system.
If you think that creating a fiduciary responsiblity for the franchisor is the answer to franchising problems then you are the one in fantasy-land.
duties where none are contemplated or bargained for. Francisors are not the parents of franchisees. Franchisees have to take responsibility for what they sign, and only the really outrageous should be treated with strict construction escape routes.
We will never get support for the propositio that franchisors have to be more responsible for the welfare of franchisees than the franchisees are responsible for themselves.
Franchise investors have to grow the hell up. Franchisees have to defend their own turf. Lose that and it is not business at all. No franchisor could have iimposed any of the awful regimes that we have seen if investors smartened up and franchisees took their destinies into their own hands early on.
Government/judicial wet nursing is not required or desired.
Richard Solomon, FranchiseRemedies.com, has over 45 years experience with franchise litigation and crisis management. He is a graduate of The Citadel and The University of Michigan Law School
Richard,
Arguing what it doable as a substitute for what is supported by facts is a very weak stance, as you know.
The fact that modern franchising (70% FranWhacks?) are an imminent danger to self and others' financial and physical health still stand, despite your name-calling. Growing up does not include strapping on someone else's blinders in the face of overwhelming evidence to the contrary..
Our primary roles as citizens is to hold government accountable and not let them be influenced by those whose interests are limited to self-interest. Some men and women, today, continue to pay a high price for maintaining democracy.
Some others block for the powerful.
Richard, I do believe that there is a texan bill, regarding a similar concept to good faith, referred to in the joint comittes report by Professor Pengilley:
"The franchisor and franchisee shall prior and subsequent to the execution of a binding franchise or other agreement have the mutual obligation to deal fairly, openly, honestly and in good faith and to exercise reasonable care and diligence in complying with all provisions of the franchise and other agreements between them."
(I have not quoted the bill, just the reference to the bill.)
Perhaps you can enlighten us to the way this bill is enacted and the repurcussions it has on the franchising sector in your state?
How does this engender a judicial nanny state and how do you reconcile the idea that just because logic and free market forces might support your claims of caveat emptor, that the majority of society does not understand ( nor agree sometimes) nor know how to apply such principles when considering a franchise?
I dont' want govt to hold my hand, but if someone breaks the law, and the result of them breaking the law leads to my inability to have the law executed properly then I have a problem. A big problem.
Whilst I can appreciate many of your arguments about responsibilty, I think you are fighting a losing battle in this regard.
THere are so few that can appreciate the complexities and repurcussions of franchising, the whole concept of franchising relies on the fact that if you were smart enough to run a business by yourself you would (probably but not always) do that and not rely on a franchise to teach you what you needed to know. Hence the number of uninformed "marks" that get themsleves involved in a fraudulent system.
It is all well and good to pontificate on how franchising should be, how if you didn't get expert advice in the beginning you have only yourself to blame etc etc etc......but one must consider culture, expectation, ingrained ( however misguided) expectations of the legal system?
.....and in australia, an unusual reliance on consumer and advertsing laws.....( as in "I didn't think the franchiosr could lie soooo much in the media.")
Its all well and good to say that the law intends differently to what you expected ( when a franchisee) but if the majority of the population expect something better than that ( rightly or wrongly) do we not need to cater for the masses as a democracy and address a generations propensity towards, as you put it, stupidity, and as I put it, a culturally and environmentally sustained belief (stupidity?) that the bad guys should get their just desserts and the to address loss that comes from inexperience with dealing with the legal system?
as boudica said, its all about the law, of course there will always be suckers out there with over inflated egos willing to hand good money after bad over and over again, then when they run out whine and whinge that somebody should have given them the work or whatever. they dont realize that in business if you dont chase the work, your family will starve.
But then you have the others, they have checked out what they can they have either hired wolves or sheep in wolves clothing and things get missed or just cant be found, you have franchisors that take advantage of the lack of action in enforcing the laws or the undefinable terms and loop holes and use that to steal from good people.
what is the point of having a law that can not be enforced. If murder was technically punishable by life in prison or death but the law was never enforced becasue there was a buget to stick to, how do you think our world would end up like. what we are witnessing here are laws that on the surface look they are designed to protect peoples potential futures being murdered by rogues, but we have no one who is capable of enforcing those laws.
we do not want our government to hold our hands, we want them to uphold the laws so that the protecetion we feel going into a contract is warranted.
has held to the contrary in Crim vs Navistar - no good faith/fair dealing obligation implied in franchise agreements.
Richard Solomon, FranchiseRemedies.com, has over 45 years experience with franchise litigation and crisis management. He is a graduate of The Citadel and The University of Michigan Law School
Well I'm totally "navistarred out" having spent most of the morning reading about Crim vs Navistar.
I have learned some wonderful turns of phrase though....and discovered I can have the oral arguments presented sent to my phone as a ringtone???
can anybody tell me what was being referred to here? : ( Senate committe report Chpter 8)
Professor Warren Pengilley, Submission 27, p. 21, citing Texas Senate Bill s.18.06 (1971)
There is no implied good faith/fair dealing and the contracts tend to literally and plainly make you sign that you are aware of that...
But when the franchisor continues to accept royalties as consideration, purchases of equipment from which they profit, and various other forms of consideration...I think that changes the dynamic of the contracted relationship.
You must follow the system and provide consideration for its continued use beyond the franchise agreement, hence there is an implied covenant of good faith and fair dealing in the ongoing relationship - IN THEORY.
Why am I buying faulty supplies to provide a service or continued royalties on a faulty product where the faults were inherently known and not disclosed without remedy?
It is something I have never understood.
Richard,
We do not expect consumer purchasers or Class A mechanics that use brake pads to be experts in the clinical prevalence of mesothelioma or other asbestos-related negative externalities. (BTW: only 1/3 of equally normalized, exposed workers ever exhibit any pathology from the nastiest.)
These are not classically bargained-for agreements of equal strength parties in mom-and-pop investing.
respurces to avoid investing with rogue franchisors. Since people can now use good sense and protect themselves (unlike several years ago) the landscape has changed.
Fiduciary level responsibility is not necessary to achieve rational commercial balance in franchise transactions.
Richard Solomon, FranchiseRemedies.com, has over 45 years experience with franchise litigation and crisis management. He is a graduate of The Citadel and The University of Michigan Law School
Who's living in non-reality, Richard?
If that's the best policy solution a $1 trillion industry can come up with, well, my case rests.
let alone communists, fascists and despots.
Les franchising is not one thing it is many things with mostly small-to-medium sized businesses as franchisors. So when you say $100,000,000,000 industry what do you mean?
Franchisors and franchisees have freely entered into contractual relationships which you wish to make unique from all other commercial contracts.
Why do you think that there is fiducial relationship where none exists?
How do you align franchise contracts with 'other commercial contracts'? Franchising is a unique contractual relationship where one party to the contract can change the contract without the consent of the other. And that in an industry fraught with misrepresentation where one party is always in a position to abuse its more powerful contractual and financial power where the gullible are led to believe by the industry machine, including the efforts of government, that franchising is all roses.
It is one thing to educate people to exercise extreme caution and another to ignore the many thousands tied to assholes right now.
The more things change; the more they stay the same.
Borradale: "Franchising is a unique contractual relationship where one party to the contract can change the contract without the consent of the other."
You lost me on this. I've not heard of a franchisor changing the franchise agreement without the franchisee's signature.
The ability to ‘update’ the Operations Manual is necessary to the operation to all that is franchising. Unilateral and abusive ‘updates’ are typically the norm in rogue franchising. In those situations the response from the franchisor is ‘read your contract’.
It is one of the beautiful things incoming franchisees learn about when it is way too late. It is why I harp on about the inability of prospective franchisees to interpret the behaviours of the franchisor. If anything at all indicates heavy-handed practices that install anything to profit the franchisor to the detriment of franchisees then franchisees should run e.g. ‘tie ins’.
Nothing I have ever read of in contracts comes close to the potential to abuse like that which is offered by the obligations to the often changing Ops Manual. And yet franchising does not exist without it.
That ability must stay but those who abuse it must be exposed before they are sent to hell.
The more things change; the more they stay the same.
Generally commercial contracts have similar altering mechanisms and differing rights to the parties.
bullsiht - expand on your opinion.
The more things change; the more they stay the same.
what other commercial contract has it so that only one party can changes the terms and conditions without notifying the other of the changes and then use those changes to cancel the contract without finacial loss the party that can change the terms and a big loss to the others. witjhout any reprecussions for their actions.
I know you can do in franchising but name me another coomercial contract where that can happen as easily as in franchising.
that permit unilateral changesd in terms upon stated events or conditions.
What differentiates them from franchise agreements is the fact that a franchise agreement is a license of a trade or service mark.
Under the Lanham Trademark Act, the owner of the mark must exercise supervisory control over its use or be deemed to ahve abandonned the mark.
Because of this, trade and service mark licenses in the franchise business have always provided for the owner of the markl to make such changes in the terms of use as they deem in their best interests.
The remedy against the consequences of such agreements is that, if you don't like it, you don't have to sign it. Once you agree to the terms, whining about their consequences will usually fall upon deaf ears.
It is not the franchisor's fault if ignnorant people sign contracts they don't understand because they failed to conduct competent due diligence on the contract and on the deal quality.
When you are too cheap or too stupid to buy competent pre investment help, that is no one's fault but your own.
Richard Solomon, FranchiseRemedies.com, has over 45 years experience with franchise litigation and crisis management. He is a graduate of The Citadel and The University of Michigan Law School
changes is protecting a mark. Yes I can see unilateral changes being made for the best interest, brand updates, corporate logos, systems being updated as times change. I love the motto if you are doing things in business the same way as you were 2 years ago then you are out of business. All of that I understand. But what I and proably many others are talking about here is unilateral changes that are made for the purpose of putting a franchisee out of business and an abusive use of power. Or even better breaching someone and then changeing the ops manual 6 month later.
or am I being led to believe by you that in any fracnhise contract the brand holder can make a change, not tell anyone about it and then claim the other party has repudiated the contract, becasue they were unaware of changes being made because they were not informed of any changes, even though the orginal contract states that any changes will be announced in writing. yeah I must be really f###n dumb becasue I think that is the stupidest law.
In my personal opinion if you, the law makers or the franchisor think that is protecting the brand, you lot are stupider than the people signing the contracts. is it any wonder you have so many people feel burned by their fracnhisors.
just staggering!
Great explanation Richard thank you.
If you take away the FDD in the US then you are left with a commercial contract.
My policy is to engage in reasonable conversations with known, identifiable individuals.
If those conditons are not present, what self-respecting person would cast pearls..?
and I certainly understand your inability to respond to my queries. It's hard when you lack a logical business case to back up your position.
It was an unintended consequence of my franchise agreement. My franchisor should have known better and they had a duty to protect me.
Why didn't they tell me to avoid asbestos and go to an approved brothel? Now I can't run my bagel and falafel shop!
Ari
all the time. Eat more fruit and nuts with honey - think Baklava.
As for your brothel tendencies, you failed to mention whether the brothel was franchised.
Richard Solomon, FranchiseRemedies.com, has over 45 years experience with franchise litigation and crisis management. He is a graduate of The Citadel and The University of Michigan Law School
Guest writes, "Why didn't they tell me to avoid asbestos..."
Almost right. The question should be, "Why didn't they tell me that they have asbestos? Now they are in big trouble...
Oh, and I just gave that buyer crabs. The dummy didn't ask. He'll find out in a few months.