Still a laid-back and easygoing land? How things are changing down under
Illustration by Jonathan Hankin
U.S. franchise lawyers have long ago become accustomed, while traveling and working on franchise matters abroad, to being bombarded with none-too-friendly observations about the legal and legislative atmosphere in the United States.
You’ve heard it all: A country overrun with lawyers … can’t turn around without finding you’re the target of a lawsuit, or even a class-action … every aspect of the franchising process in the U.S. is the subject of some piece of state or federal law.
And the diatribe goes on, undeterred by protestations that it is grossly exaggerated, and that franchise legislation and litigation in other countries is rapidly catching up in this race that no country wants to win.
Over the years, nowhere were the sniffs to be heard more loudly than in Australia. You know, land of the rugged individualist. I’ll stay out of your business, you stay out of mine, is the credo. Those days, apparently, are long gone. Let’s very quickly review what’s happened in the Land Down Under.
In their right mind?
When I first traveled to Australia more than 30 years ago, a large U.S. franchisor told me he had received an inquiry from a prospective master licensee there. He showed me a map of the continent, and asked me pointedly, “How could any franchisor in their right mind consider going to the other end of the world, to a country the same size as the United States but with only 7 percent of its population, and with stretches of thousands of miles with no signs of life?”
Granted, he exaggerated a bit, but his description wasn’t that far off. Things have certainly changed. Today, Australia may be the most franchised country on earth. But with that change has come an exponential growth in regulatory activity, perhaps as much as in many other countries of the world combined. Consider some factors:
There are many actions in Australian states within the framework of consumer legislation, or federally under the Trade Practices Act.
Franchise-specific legislation was adopted in 1998, “to regulate the conduct of participants in franchising towards other participants in franchising,” giving the Australian Competition and Consumer Commission a larger role and addressing noncompliance with the Franchising Code of Conduct.
In 2008, exemption from the code was repealed, which had greatly benefited foreign franchisors who granted only one master franchise for the entire country.
In 2010, categories of disclosure were added to include the following:
• continued refinements of the regulatory pattern, addressing disclosures, the consequences of bankruptcy of the franchisor, obligations at renewal, etc.
• a mandated duty of good faith, and increasing focus on “unconscionable conduct.”
• a stunning series of national and state-level inquiries leading to changes in the law, including 2010, 2013 and 2015.
Wouldn’t you think they would be exhausted by now? Well, apparently not.
In late March 2018 a “parliamentary inquiry” was proposed, and passed unopposed in the senate, with the aim of producing a report by October 2018.
The scope of the inquiry, quite clearly, will be broad, judging by a few of its statements. It aims to “take a good look at the industry’s contractual underpinnings,” and examine claims of unfair business models.
It will examine claims of unfair business models and determine whether franchisees are given enough information to make fully informed decisions. Further, it will look into whether the information franchisees receive includes “likely performance” and “worst case.”
It will look into the adequacy and operation of termination provisions (including post-termination restraints) under the code of conduct, and consider the effectiveness of dispute resolution under the code of conduct.
It will examine competition by the franchisor itself and make an inquiry into “lax regulation” as a whole.
Media attention assured
Since it is has been made clear that this inquiry will include calling to testify “major companies whose franchising models have come under fire,” it is obvious these plans will virtually ensure wide media attention.
As sobering as the range and depth of the inquiry itself is, the commentary by those on the scene is more so. Consider the terms being used to describe franchising itself, and I quote—embattled, scandal-ridden, embroiled, power imbalance, too many sad stories to ignore, clean out the bad operators, oppressive, brutal and toxic.
And consider this ominous summary: “Many small business owners are being driven to financial ruin while franchisors make considerable profits.”
The early days of submissions to the parliamentary inquiry have added a surreal note. No franchisees have made comments. The explanation offered by some franchisees for their silence: We find ourselves “in trouble for … even making a submission or talking” to the media. The member of parliament who initiated the inquiry has even referred to “stories of people going broke and committing suicide as a result.”
Coming on the heels of the report by the Australian Competition and Consumer Commission that 5,000 small businesses filed complaints with the ACC in 2017, franchisees prominent among them, it is now clear that franchising will continue to be the source of unwelcome attention and potential legislative and regulatory action. The commission stated that in 2018 it would have a particular focus on issues “involving large or national franchisors.”
Who would ever have thought the day would come when Australian franchisors would be looking longingly at the United States market as, relatively speaking, a safe haven?
Philip Zeidman is a partner in DLA Piper’s Washington, D.C., office. Reach him at 202.799.4272 or email@example.com.