Franchising Focus – Spring 2016 edition

Welcome to the Spring 2016 edition of Franchising Focus.

While 2016 quickly draws to an end, some of the key issues facing franchising this year continue to burn strong. Of particular note is the ongoing issue of workplace relations reform. While this issue is considered in more detail in our article, What is the franchisor role in franchisee compliance?, as we have previously anticipated, this particular issue continues to be one of the main issues facing franchising at the moment. We are aware of the importance of this issue – and getting a good outcome for our clients – and are working proactively with Fair Work Australia and the Federal Government to determine a way forward that addresses the issue, while not placing unfair burdens on franchise networks, simply because they are franchise networks.

Those of our clients in the fuel industry will be aware that the review of the Oilcode has now been completed. Possibly surprisingly, the recommendations made as a consequence of the review were brief – the review recommended retaining the Oilcode, with only minor amendments to fix issues such as outdated referencing. While this position contrasts to the position we have seen in reviews of the Franchising Code of Conduct, it does offer considerable comfort to those in the fuel industry.

On a more casual note, in October Norton Rose Fulbright fielded a strong presence at the FCA’s National Franchise Conference (NFC). The conference provided a good opportunity to catch up with clients and friends and learn about different aspects of franchising. It also provided some of us with the chance to rub shoulders with a politician or two and get an insight into the world of the ACCC with various contributions from Dr Michael Schaper, ACCC Deputy Chair. One of the most interesting points raised by Dr Schaper was the ACCC’s plan to introduce a “name and shame” list, providing details of the franchise networks for which the ACCC has received complaints. Based on Dr Schaper’s comments, the list certainly does not sound as concerning as similar lists issued by various State agencies, but is certainly something to be aware of.

From our perspective, Norton Rose Fulbright was very well represented at the NFC, having 4 presenters (the most of any firm) at the Legal Symposium, and senior team members from Melbourne, Sydney and Brisbane attending all functions. We are incredibly proud of the significant franchising team that we have throughout Australia and had a very rewarding time catching up with clients and seeing a few of them take home honours at the Gala Dinner.

In this edition of Franchising Focus we:

• consider the hottest topic in franchising – the potential changes to workplace relations laws that may see franchisors liable for acts (or omissions) of their franchisees and consider steps that franchisors can take now to address these potential risks;
• look at cartel conduct. While the consequences of engaging in such behaviour are potentially significant, many companies do not understand what cartel conduct is or what the consequences for engaging in such conduct are. We briefly consider cartel conduct and look at recent a recent ACCC action in this space; and
• provide an update on the changes to Australia’s mandatory data breach notification laws. What do the changes to the proposed law look like and how will they impact on you?

Enjoy!

Best regards
Norton Rose Fulbright Franchising Team

Until recently most franchisors would have responded to this question with a fairly definite answer that essentially distanced the franchisor from any significant role or responsibility. That is not an unreasonable response – it is in fact exactly how the law currently views the situation. But the wind is changing, and it is likely that franchisors will soon be expected to take an enhanced role in ensuring workplace law compliance in franchise networks.

As the law currently stands all responsibility for workplace law compliance rests with the employer. In the context of the typical franchise relationship that will be the franchisee. A franchisor will only have responsibility if the franchisor chooses to involve itself in workplace matters. The Fair Work Act 2009 (Cth) (the Act) currently contains a provision¹ that an individual who has aided, abetted, counselled, procured, induced, conspired with others or been in any way knowingly concerned in the contravention is held responsible for the contravention. The bolded word, “knowingly”, will protect a franchisor unless they have been specifically involved in the breach.

However recent statements from the Fair Work Ombudsman (FWO) and others point to a changing landscape, particularly in the context of proposals by the Government, the Opposition and the Greens for legislation to make franchisors liable in specific circumstances. The Australian Financial Review recently published an article based on a speech to the Franchise Council of Australia (FCA) NSW Chapter by Steve Ronson from the FWO entitled Franchise CEOs give Fair Work Ombudsman the cold shoulder². This quite aggressive approach was unexpected, as the FCA had been collaborating with the FWO, but had told FWO that they felt the compliance deeds they were wanting franchisors to sign went too far.

In the speech³ Ronson said he was “disappointed” with franchisor cooperation, and expected franchisors to change their attitude “about the investment required into ensuring compliance.” He also went on to say that because a franchisor benefits from the labour of the franchisee’s employees the franchisor has “a moral and ethical obligation to ensure a worker’s entitlements are met”, and “legally and morally a franchisor cannot hide behind or outsource its responsibility to ensure lawful remuneration.”

One can take legitimate issue with Ronson’s opinion about moral and ethical responsibility, and his statements about the existing legal responsibility of franchisors are clearly wrong. But they do indicate that the regulator has a very firm stance on these matters, and is likely to make those views known to Government in the context of the proposed legislation to extend the existing accessorial liability provisions of the Act.

What is an industry solution likely to contain?

If the FCA, the FWO and other stakeholders reach a consensus on reform requirements, it may be possible to avoid prescriptive legislation, although legislation to enact penalties and enhance the investigative powers of FWO will still be required.

Frandata Australia has produced a draft Workplace Transparency Standard which is based on the compliance deeds advocated for by the FWO, but without the mandatory reporting and audit requirements. It has strong industry support, but to date the FWO has been reluctant to embrace this initiative, and has continued to persist with its compliance deeds. However recent meetings between FWO and the FCA seem more encouraging.

Unfortunately there does not seem to be a good understanding of the various different types of franchise models, with politicians and regulators assuming that in all cases the franchisor has strong controls over franchisees, and has the resources to monitor and manage franchisee compliance. It is also a source of frustration for franchise systems that they are being targeted, when they know their compliance levels will be higher than their non-franchised competitors.

Any industry solution must be consistent with the Government’s public statements, which is likely to mean providing more clarity to the legislative changes. The Government has said legislation will be aimed at “franchisors and parent companies that fail to deal with exploitation by the franchisees”, so there is no direct plan to make franchisors specifically or jointly liable as employers. The policy statement⁴ notes that the Act will be amended to make franchisors and parent companies liable for breaches of the Act by their franchisees and subsidiaries in situations where they should reasonably have been aware of the breaches and could reasonably have taken action to prevent them from occurring.

However the policy statement goes on to say that “franchisors who have taken reasonable steps to educate their franchisees, who are separate and independent businesses, about their workplace obligations and have assurance processes in place, will not be captured by these new provisions.”

Applying logic to these various positions an industry solution should probably focus on designing an industry standard assurance program. Looking at parallels with the Competition and Consumer Act 2010 (Cth) (CCA), CCA compliance programs are designed having regard to the industry standard concerning compliance programs, AS-3806. It would seem this standard provides a useful framework for an “assurance program”.

We think an industry solution constructed around AS-3806 as a comprehensive compliance program could well end up either as an industry solution, or as an industry response to amending legislation. In other words if a franchisor has in place a compliance program that satisfies AS-3806, it satisfies the requirement for an appropriate “assurance program” as articulated in the Government’s policy statement. Further detail as to franchisor obligations would need to be provided, perhaps by a document such as the Frandata Workplace Transparency Standard.

What should franchisors do in the meantime?

There are some specific indicators of matters that merit consideration and examination based on our experience and FWO expectations. A checklist for franchisors is set out below:

1. Review the franchise business model to ensure it is financially viable at franchisee level, and no argument can be raised about franchisees having no alternative but to break the law. After internal review, consider having an external firm validate the findings so public reference can be made to an independent review by a franchise industry expert.

2. Assess what representations may have been made to franchisees about revenue, expenses, profitability etc:

1. check disclosure document to see what, if anything, the franchisor has been saying about revenue, costs and workplace wages;
2. review any financial models provided to prospective franchisees; and
3. speak to field mangers to confirm what, if anything, they say/have said to franchisees in relation to these matters.

3. Review the franchise network for “warning signs” such as:

1. Excess of costs over revenue. This requires calculation of the average costs per hour of labour on an optimised roster, then staff numbers per shift, to yield average weekly operating costs.
2. Assess the total costs of a typical franchisee, including labour cost. Then check whether there are franchisees not earning sufficient gross revenue to cover these costs.
3. Are there “ghost employees” – relatives of the franchisee listed on rosters who never seem to be seen in the business?
4. How many employees are international students?
5. Does the extent of any “unpaid training” appear excessive?

4. Be seen to be working collaboratively with franchisees, not deserting them. The FWO and media do not like to see franchisors trying to make scapegoats of franchisees. Have an alternative program to termination or exit for franchisees who seem disinclined to do the right thing in future. Simply seeking to terminate franchisees that have breached their obligations is high risk in terms of adverse publicity and reputational damage to the franchise brand.

5. Be aware of terminating for fraud or without providing an opportunity to remedy, or in circumstances of financial distress. In such circumstances, there may be additional risks such as:

1. Unconscionable conduct;
2. Lack of good faith;
3. Misleading or deceptive conduct;
4. Aiding and abetting breaches;

Issuing a notice of breach reduces these risks, gives time to remedy and facilitates more creative remedial solutions.

Cartel Conduct. While such words bring to mind Mexican drug syndicates, it is important for all franchise networks to be aware of what “cartel conduct” is in the context of Australian law, so as to ensure that they are not engaging in any conduct that may constitute cartel conduct.

Cartel Conduct - What is it?

Cartel conduct is a category of anti-competitive behaviour that is prohibited under the Competition and Consumer Act 2010 (Cth) (the Act). Broadly speaking, cartel conduct:

1. involves a contract, arrangement or understanding. (Note that the arrangement does not have to be written. In fact, it often will not be - it could be as simple as a nod or a nudge);
2. between two or more competitors;
3. which:
   (a) fixes, controls or maintains prices (price fixing);
   (b) limits who you or your competitor deals with, or the areas or terms of dealing (market sharing); or
   (c) prevents or restricts or limits output or rigs bids (market sharing).

The definition of cartel conduct is broad and captures a range of behaviours that you might not automatically think constitute cartel conduct – for instance, you cannot agree with a competitor to split up a marketing territory or customers, even if such an agreement might result in efficiencies (and therefore benefits) for both of you.

It is also important to note that cartel conduct is prohibited, regardless of the effect that it has on competition. Therefore if you engage in cartel conduct, even if there is no, or only a minimal, effect, you will be acting in breach of the Act.

What are the penalties for engaging in cartel conduct?

The potential penalties for engaging in cartel conduct are significant.

For corporations, there are potential financial penalties equal to the greater of:

1. $10 million per contravention;
2. 3 times the value of the benefit obtained from the anti-competitive behaviour; or
3. if the value of the benefits cannot be determined, 10% of the annual turnover of the corporation.

Individuals can also be personally liable for financial penalties of up to $500,000 per contravention.

Criminal sanctions may also be imposed for engaging in cartel conduct – up to 10 years imprisonment and fines for individuals of up to $360,000 per offence.

In addition to the penalties prescribed under the Act, there are also less tangible consequences, such as the negative publicity that a brand will receive as a consequence of engaging in such conduct and the distraction for management in dealing with the issue.

How is this relevant to franchise networks?

Given the serious consequences that may arise from engaging in cartel conduct, it is important for all franchise networks, to have an understanding of what cartel conduct is and what needs to be done to minimise the likelihood of anyone in the network engaging in such conduct.

In the context of franchise networks, the concept of cartel conduct could be relevant:

1. between franchise networks (or any other competitor of a franchise network);
2. between a franchisor and its franchisees; and
3. potentially, between franchisees themselves.

For instance if you, as a franchisor, were approached by the franchisor of a competitive network, and that franchisor sought to (for instance) strike an agreement with you about where you would open new sites and where they would open new sites, you could potentially be engaging in cartel conduct.

In relation to franchisees, issues could potentially arise if franchisees in any way sought to set prices or divide up the territories or customers whom they were going to service. It is not difficult to imagine franchisees innocently holding such discussions between themselves, thinking that setting up such arrangements might benefit their respective businesses, but not realising that in doing so they may actually be breaking the law.

If you operate retail outlets or an online store that competes to some extent with your franchisees, putting controls around prices to be charged (or discounts to be offered) by franchisees can also potentially constitute cartel conduct in certain circumstances, even if the intent is just to promote consistency across the network.

These examples are some of the more obvious examples of cartel conduct, aimed at showing you that cartel conduct is a very real issue for franchise networks. If you have any dealings with competitors, it is important to be aware of the cartel conduct provisions to ensure that you are acting within the law.

The AECL case – A recent look at cartel conduct

A recent case, Australian Competition and Consumer Commission (ACCC) v Australian Egg Corporation Limited (AECL) [2016] FCA 69, considered whether certain companies and individuals had sought to induce participants in the egg industry to partake in cartel conduct in order to address a perceived oversupply of eggs in the egg industry. In the context of franchising, this case is quite relevant as, while it did not involve a franchise network, it did involve an organisation which had a board comprised of competitors. This could be analogous to, for instance, a franchise advisory council.

Background

The case related to conduct by the AECL and a number of egg producers and related individuals.

During the AECL board meeting in January 2012 the board members discussed the perceived oversupply of eggs in the Australian market noting, among other points, that it was “disturbing” that egg production and chick placement orders were at an all-time high.

At the board meeting, the directors noted that there was an oversupply of eggs and expressed a need to “tackle” the issue. The directors identified 3 solutions to address the oversupply problem:

“firstly, to discourage backyard egg production, secondly to set up promotion to increase demand, and most urgently to invite the top 25 egg producers to a meeting to encourage destocking and egg disposal”. [at 38]

Following the January board meeting, the AECL sent an email to 25 egg producers, inviting them to an “Egg oversupply (crisis) meeting” in February 2012 (the Summit) to discuss, among other things “how to resolve the current crisis for the betterment of the egg industry.”

The Summit

The Summit took place on 8 February 2012 and was attended by 22 people representing 19 egg producers. During the meeting, several options for addressing the perceived over-supply of eggs were discussed.

Of particular note, Mr James Kellaway, Managing Director of the AECL gave a presentation during which he presented a slide titled “Solutions”. In that slide he set out a number of solutions to address the “crisis”. The proposed solutions included:  “Dispose of eggs by either donating eggs to one or more charity groups or dumping/burying eggs” and “Reduce the number of laying hens by culling birds”.

During the Summit Mr  Kellaway made a number of contemporaneous notes, which included “Cull of birds”, “Egg donations”, “Growth above 4% then you need to cull!”, “Hens to be culled 6-8 weeks earlier!” and “Donation of eggs today to FoodBank!”.

Attempts to induce cartel conduct

The ACCC alleged, among other things, that the respondents had engaged in an attempt to induce cartel conduct, by taking steps to induce the  participants at the Summit to enter into a contract, arrangement or understanding to limit the production or supply of eggs.

In this particular case, the ACCC relied on section 76(1)(d) of the Act which allows a court to impose a penalty on a person if the court is satisfied that the person has “induced or attempted to induce, a person…to contravene such a [cartel] provision.”

As such, the Court did not have to consider if the respondents had actually engaged in cartel conduct themselves, but only whether their conduct sought to induce the participants at the Summit to engage in cartel conduct.

The Outcome

While the Court found that the ACCC’s case had “some force”, it ultimately found that the ACCC failed to establish that the respondents sought to induce the participants at the Summit to engage in cartel conduct.  In this regard, the Court noted that:

“The evidence does not warrant a finding that the respondents who participated in the trial had the intention of inducing a prescribed arrangement or that any conveyed to the Attendees the potential for such an arrangement or understanding” [at 380]

Essentially, while it was accepted that the various means by which egg production would be reduced were in fact discussed at the Summit, there was insufficient evidence to conclude that the options discussed amounted to a form of collective action - ie contravention of the cartel provision.

The ACCC subsequently appealed this decision. A decision on the appeal is yet to be made.

What does the result of the AECL case tell us?

The ACCC has taken a strong stance against cartel conduct, with Chairman Rod Sims stating that:

“Detecting and deterring cartel conduct continues to be a major focus for the ACCC. It is important that we seek clarity from the Full Court on issues of what will and will not constitute attempted cartel conduct, particularly in the context of conduct by a trade association interaction with its members”⁵

While the ACCC have not (to date) been successful in prosecuting the AECL for  inducing others to engage  in cartel conduct, it is important to be aware that the ACCC is proactively taking action against companies that they consider are involved in cartel conduct.

It is also important to consider the AECL case in the context of franchising. As noted above, this case involved an industry association comprised of competitors (amongst others). It is, arguably, analogous to a franchise advisory council which are often comprised of franchisees from the same network, who may, depending on the composition of the council, be competitors. While the ACCC may not have been successful in this instance, this case highlights the dangers of groups of competitors meeting and discussing matters such as supply issues. If your franchise network has a franchise advisory council in place, we strongly recommend that both you as franchisor and each of the members on the council have specific training about what cartel conduct is and how you can avoid engaging in such conduct.

Practical tips

All franchisors should put in place appropriate steps to minimise the likelihood of a breach of the Act by its franchisees and/or employees. For example, we recommend that franchisors:

1. provide specific training to staff about the Act. Such training may take the form of an online module or internal presentations by the company’s lawyer;
2. provide an information statement on competition laws;
3. implement a policy to provide guidance regarding franchisee compliance with competition law, including the Act;
4. implement a compliance program to stipulate a franchisee’s obligations under the Act, including setting out the notification and authorisation processes under the Act. Note that when there is a breach of the Act, the ACCC and the Court will have regard to any compliance program in place when assessing the appropriate enforcement action or penalty;
5. facilitate discussions with the franchisees in relation to their responsibilities under the Act, including taking a strong position against cartel conduct. Franchisors should actively discourage franchisees from having any discussions with competitors about pricing/market sharing. We suggest that franchisors facilitate this discussion in the context of issuing the information statement, or implementing/updating a compliance program; and
6. provide training to your operational employees to ensure that they understand the issues and are able to address any issues that might arise in discussions with franchisees; and
7. seek legal advice immediately, if you suspect that your business is or may be engaged in cartel conduct.

If you would like any further information or advice on the cartel conduct prohibitions under the Act, please contact Allison McLeod or Sally Floyd.

Data privacy is a growing area of concern for all companies who have an online presence, with a number of high profile retailers finding themselves the subject of data breaches in recent months. In franchise networks, there is the added complexity of dealing not just with the franchisor’s business, but also ensuring that franchisees are complying with any legal obligations that they may have in regard to data privacy. With this in mind, it is important that all franchisors stay abreast of Australia’s privacy laws and any changes to those laws.

Noting the above, franchisors should be aware that the legislation dealing with notifiable data breaches ( the Privacy Amendment (Notifiable Data Breaches) Bill 2016 (Cth) (Bill)) was finally introduced into the Senate on 19 October 2016.  

There have been some substantial changes made to the Bill since an exposure draft was published by the Attorney-General’s Department last year.  
Some of the key changes include:

• a change in terminology, with data breaches that are covered by the Bill, now being referred to as “eligible data breaches”, rather than “serious data breaches”;
• a change to the notification requirement threshold, with eligible data breaches only covering situations where there is a “likely risk of serious harm”, (rather than the previous “real risk of serious harm” wording in the exposure draft);
• the removal of a requirement to notify data breaches that an entity ought reasonably to have been aware of;
• the addition of a new exception to cover situations where remedial action is taken by the entity that suffers an eligible data breach, with the effect that data breaches will no longer be considered to be an eligible data breach (and therefore notification will not be required) if the remedial action would be considered by a reasonable person to mean that there is no longer a likely risk of serious harm;
• amendments to the factors that are stated in the Bill to be relevant to determining whether there is a likely risk of serious harm, including recognition of the use of security technologies in relation to that information; and
• clarification of when a notification must be given to affected individuals, (as opposed to publishing it on the entity’s website).  

While some of the more objectionable elements of the exposure draft have been removed or pared back, overall the substance of the Bill remains broadly similar.  Organisations will have an obligation to notify the Privacy Commissioner and affected or at risk individuals, if an eligible data breach occurs.  A failure to notify the Privacy Commissioner and affected individuals (including when the entity is directed to do so by the Privacy Commissioner) will be deemed to be an interference in the privacy of the individual(s).  

In addition to receiving and determining complaints regarding interferences with privacy, the Privacy Commissioner has the power to seek civil penalty orders for serious interferences with the privacy of individuals or repeated interferences in the privacy of individuals.  The maximum amount of the civil penalty that can be awarded by a Federal court is AU$360,000 for individuals or AU$1,800,000 for bodies corporate.  

What does this mean for me?

The provisions of the Bill will commence 12 months after the Bill receives royal assent (unless an earlier date for commencement is fixed by proclamation).  As the introduction of a mandatory data breach notification scheme has previously had the support of both Labor and the Greens, it is quite possible that the Bill could pass relatively quickly through the Parliament.  This would be consistent with the government’s previous commitment to introduce and pass the Bill by the end of this year.  This could mean that organisations, which are subject to the Privacy Act 1988 (Cth) (the Act), would be required to commence notifying any eligible data breaches by the end of 2017.

While this may seem some time away, organisations subject to the Act need to start preparing now.  If passed in its current form, the Bill will require organisations to be prepared to respond to a data breach, including the assessment of whether an eligible data breach has occurred and promptly complying with its notification obligations.  

I’m subject to the Act - What should I do?

If your organisation is subject to the Act, it is critical to have a data breach response plan setting out what to do if a data breach occurs.  For franchise networks, franchisors need their own plan. However franchisors should also consider if it is appropriate to develop a plan for broader use across the network, as such issues have the potential to have a significant impact on the whole network.

It is also important to educate your franchisees about cyber risks and steps that they can take to minimise the likelihood of any breaches occurring.

In regard to IT systems, in our experience,  many breaches arise from weaknesses in external service providers’ IT systems, rather than a company’s own systems.  It is therefore important to have a vendor cyber-risk management framework in place. Norton Rose Fulbright has substantial experience in developing and implementing such frameworks and we are happy to assist with the implementing such frameworks.

In addition, Norton Rose Fulbright offers a global 24/7 incident response service for cyber-incidents (including data breach and network interruption).  As ‘breach coach’, we work with you to provide a streamlined response by assessing the size and nature of the incident, taking steps to contain it, and co-ordinating our panel of carefully selected third party vendors of remedial and protective services, all the while managing stakeholders’ interests and advising on mitigation of potential loss.  

So while there is certainly a risk to franchisors and franchisor networks, there are various steps that you can take now to minimise the likelihood that you, and your brand, will be exposed.

Please contact Michael Park or Jamie Griffin if you would like any further information about the issues raised in this article.