Regulatory Update 2016 Dr Michael Schaper ACCC Deputy Chair National Franchise Convention, Canberra Sunday 9th October 2016

Other Legal Developments Outline The ACCC: What We Do Codes of Conduct Industry Contact Unfair Contract Terms Other Legal Developments

1. The ACCC: Our Role National regulator: oversees laws on consumer protection, equitable competition, product safety, infrastructure access Also regulates some specific industries (such as energy, telecommunications), industry codes (franchising, horticulture) and price monitoring (airports, postage, stevedoring) An independent statutory agency within the Treasury portfolio Court-based enforcement of the law Dual educative and enforcement function Franchise Info Network includes 2,000+ subscribers & Griffith/ACCC Pre-Entry Course 10,000 participants since 2010 Enforcement agency…does not set policy

The Legal Framework Competition & Consumer Act (2010) General requirements for all trading businesses Includes the Australian Consumer Law Common franchising concerns includes misrepresentation about earnings Competition & Consumer Act (2010) Mandatory for all participants Specific requirements for franchise systems Franchising Code of Conduct (2014)

Franchising Code of Conduct New version of the Franchising Code of Conduct effective since 1 January 2015; mandatory under the Competition & Consumer Act. Binding on all industry participants, including overseas franchisors that have franchisees or master franchisees in Australia. Both the Code and the Act provide a range of protections for current and prospective franchisees in their dealings with franchisors. Around 1,160 franchise systems and 79,000 franchise units trading in Australia. Awaiting latest Griffith survey results. Infringement notices of $9,000 and court penalties of up to $54,000 apply for serious breaches of the Code. Source: http://www.accc.gov.au/business/industry-codes/franchising-code-of-conduct

2. Small Business Compliance & Enforcement Priorities in 2016 Priority area: Industry codes of conduct, including the Franchising Code, the Food and Grocery Code and the revised Horticulture Code Priority area: New legislative provisions extending unfair contract term protections to small businesses Decision factor: We prioritise enforcement action against larger companies ahead of smaller businesses Decision factor: We consider whether a trader has been willing to participate in mediation or dispute resolution

Source: http://www. accc. gov

A Snapshot of The Past Few Years… Franchisee Contacts To The ACCC Age of Firms Contacting The ACCC   2015 2014 2013 2012 Complaint   724   530   602   670 Enquiry   299   235   197   149 Total 1,023   765   799   819 Age Contacts 2012-2015 Under 2 years 97 (37%) 2-3 years 25 (9%) 3-5 years 38 (15%) 5-10 years 61 (23%) 10-15 years 18 (7%) Over 15 years 21 (8%) Total 260

ACCC Small Business/Franchising Referrals To Other Agencies Jan – Mar 2016 Apr - Jun 2016 Total small business contacts (complaints + enquiries) 2402 2244 Complaints 1399 1188 Referrals to SB Commissioners 621 418 Small Business & Family Enterprise Ombudsman 168 97 NSW Small Business Commissioner 186 122 Victorian Small Business Commissioner 170 116 South Australia Small Business Commissioner 48 35 Western Australia Small Business Commissioner 49

Audits The ACCC can compel a trader to provide any information or documents it is required to keep, generate or publish under the Code We have served notices to produce documents on 104 franchisors since 2011; about 10-15 per year Recent audits focused on compliance with marketing fund obligations. We will be conducting further audits before the end of the year

Exclusive Dealing Exclusive dealing involves one trader (franchisor) imposing restrictions on another's (franchisees) freedom to choose with whom, or in what, or where they deal. There is a public ‘notification’ process where franchisors can seek protection from legal action under the Competition and Consumer Act. In 2015–16, the ACCC assessed 495 exclusive dealing notification matters. Around 66 matters or 13% related to franchising arrangements.

ACCC Seeks Penalties Under Franchising Code For The First Time The ACCC has taken court action against the current Pastacup franchisor, Morild Pty Ltd, and its former director Stuart Bernstein The ACCC alleges Morild breached the Franchising Code by failing to disclose to prospective franchisees the relevant business experience of Mr Bernstein Mr Bernstein was a director and managed two previous franchisors of the Pastacup franchise. Both of these franchisors became insolvent. The ACCC alleges this was not disclosed in disclosure documents.

Small Business & Franchising Consultative Committee ACCC Franchising Committee recently merged with Small Business Committee Small business and franchising issues often overlap Committee now includes 20+ members with a range of backgrounds Strong franchising representation on the Committee; about ⅓ of members

4. Unfair Contract Term Laws Unfair contract terms Protect both consumers and small businesses from unfair terms where they have little or no opportunity to negotiate New law applies to standard form small business contracts entered into or renewed from 12 November 2016 Some industries of focus: advertising, telcos, franchising, retail leases Applies to standard form contracts. Upfront price up to $300,000 ($1 million for contracts more than 12 months) One of the parties to contract has less than 20 employees

Why Do Small Businesses Need Protection? On average small businesses were offered about 8 standard form contracts in the past 12 months Small businesses less likely to thoroughly review the contract…too complicated and they lack legal expertise 30% of small businesses spend less than 9 minutes reviewing standard form contracts 60% of small businesses claimed to have experienced unfairness in terms and conditions 44% of small businesses reported experiencing some harm as a result of the unfair terms http://www.treasury.gov.au/~/media/Treasury/Consultations%20and%20Reviews/Consultations/2015/Extending%20unfair%20contract%20term%20protections%20to%20small%20businesses/Key%20Documents/PDF/Extending_UCTs_RIS.ashx Source: The Commonwealth Treasury, on behalf of CAANZ, undertook a survey from 23 May 2014 to 1 August 2014 on business contracting practices and unfair contract terms.

What’s An Unfair Contract Term? Standard form contracts cannot contain terms that: cause a significant imbalance are not reasonably necessary to protect the business’s interests, and cause any detriment to the consumer or small business A court or tribunal looks at transparency and the contract as a whole before deeming a term unfair. Unfair term is void (treated as though it never existed), however the rest of contract will continue to bind. Terms that set out the price are not covered by the UCT law. Source: IPA National Congress

Small Business Scenarios Contract for internet services Under a term of the contract, the internet service provider has the right to change its prices or services at any time without prior notice to the small business. The small business does not have the right to end the contract, even if the internet service provider increases the price significantly. Franchise agreement The franchise agreement contains a term allowing the franchisor to terminate the agreement at any time without cause (i.e. even if the franchisee hasn't breached the agreement). The agreement also states that if the agreement is terminated, the franchisee will not receive any compensation. Terms that may raise concern Right to unilaterally vary the contract Automatic rollover Limited liability Restraint of trade Liquidated damages Wide indemnity

UCT and Franchise Systems Problematic areas Right to unilaterally vary agreement or operations manual Broad restraints of trade Liquidated damages for franchisee breaches Examination of termination clauses has shown some surprising examples i.e Terminate if franchisee breaches four times i.e Terminate if franchisee’s store manager incapacitated i.e Terminate without cause Pricing usually not a problem

Employment Issues & Franchising Regulation Recommendations have been put forward suggesting changes to employment law and the Code Government considering new offence provisions that capture franchisors and parent companies who fail to deal with exploitation by their franchisees – no details yet ACCC continues to liaise regularly with Fair Work Ombudsman. FWO is responsible for employment law breaches

Complaints from Small Business COMING SOON The ACCC will publish the top complaints made by small businesses to raise awareness about harmful conduct and reduce money lost to errant traders As part of a pilot program for 12 months, the quarterly online list will outline key issues faced by small businesses as they are described to us. If traders are named on the list, it doesn’t mean the ACCC is investigating them and it doesn’t mean they’ve broken the law

5. Other Legal Developments Looking Forward Proposed changes to Competition and Consumer Act – misuse of market power & concerted practices Australian Consumer Law Review: examining product safety, consumer guarantees and other changes Other mandatory industry codes: Horticulture (under review), Food & Grocery (now 1 year old), Oilcode (under review)… Enforcing codes of conduct will continue to be a priority in 2017

ACCC Franchising Contacts & Online Training Small business helpline 1300 302 021 www.accc.gov.au/franchising Franchising Info Network Sign up at www.accc.gov.au Free Online Training Programs www.ccaeducationprograms.org