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The tolling of a bell for franchising in Australia?


Philip Zeidman

Illustration by Jonathan Hankin

The parliamentary inquiry into franchising was just being started in Australia when I wrote about it almost a year ago (“Still a laid-back and easygoing land? How things are changing down under,” June/July 2018). More attention was then given to some of the highly charged language about franchising than to the sober government announcement itself: “scandal-ridden,” “oppressive,” “brutal,” “toxic,” with promises of stories of franchisees “driven to financial ruin.”  

Thus it was expected, or feared, that the report would take aim at a number of franchise systems and take steps toward far reaching change. In March, the report of the inquiry was made public, weighing in at 349 pages. Have those two expectations been borne out? The preliminary answers appear to be yes, and not quite (or, more accurately, not yet).

The work of the joint committee that undertook the inquiry was surely expansive, with nine sets of public hearings, some closed to the public.

More than 100 witnesses appeared. More than 400 submissions were received, more than 80 percent from franchisees (half submitted in confidence). The proceedings were punctuated by an unusual degree of scuffling about the process: fears of retaliation, reports of retribution, allegations of interference, misleading evidence and legal fights over the refusal to provide information. Those sideshows will, of course, only heighten the public interest in the deliberations and the findings.

In some respects, the nature of the recommendations will disappoint those who were hoping for bold, immediate action; and some commentators have expressed disappointment. That is due in part to the very nature of the process. The committee itself does not have the power to effectuate changes. Instead, it recommends the establishment of an interagency Franchising Task Force “to examine the feasibility and implementation of a number of the committee’s recommendations.”

If that sounds like a recipe for another well-intentioned but toothless document consigned to a place on a high, dusty shelf, there is a reason to believe that, this time, that will not necessarily be the case.

As to the substance of the recommendations themselves, many are of the type which in Australia might be called weak beer: expand the powers of the Australian Competition and Consumer Commission; examine how franchisee input to public policy decisions can be increased; study how the government can be provided with regular reports, etc. The disclosure process would be the subject of some changes which are hardly earthshaking: requiring disclosure documents to be made available both electronically and in hard copies; rejiggering what documents are provided and how, etc.

Proposed amendments to the Franchising Code of Conduct would make changes in information to be provided, provide for civil penalties, address various marketing fund and other issues, and “investigate options for a public franchise register.” A good deal of attention is given to various aspects of the supply of goods to franchisees, including pricing, rebates, unfair contract terms and standard form contracts.

But not all of the recommendations are mundane. The unusual amount of attention given to termination suggests that area will be the subject of scrutiny and perhaps governmental action.

It’s obvious the committee believes the role of franchisees should be enhanced: extending whistleblower protection to them, requiring that certain franchisor actions be dependent upon the agreement of a majority of franchisees, providing for collective bargaining and the like.

Over the longer term the most significant aspects of the report may lie not in any specific recommendations, but in the attitudes that are exposed. The comments studded throughout reflect disturbing views of franchisors, and of franchising. Some examples: Franchising exhibits “a substantial disparity of power;” and, contrary to relatively benign conclusions in earlier studies, “the problems, including exploitation in certain franchise systems, are systemic.”

Steps taken to improve the disclosure regime have not been adequate: “Disclosure has been almost the only protection for franchisees. Many franchisors would like to keep it that way.” But “the committee received a raft of evidence about the abuse of contractual power.”

Certain franchisors are clearly in the crosshairs. One is the target of an entire chapter and its franchisees described their lives as “indentured servitude” or “slavery.” And “the poor conduct of a large number of franchisors has been exposed … causing enormous reputational damage to the sector.”

Finally, the “peak body for Australia’s franchise sector,” the Franchise Council of Australia, fares badly. It “does not appear to provide a balanced representation” and is “captive to the interests of franchisors.” The committee “considers it important that franchisees develop a strong national association.”

The chief governmental figure calling for the study summarized, “it was worse than expected … strong medicine is needed.”

It is conceivable that relatively little may come of the report, and even that may take a long time. But the sour, almost disgusted, attitude toward franchising might well linger. And in a globalized world, what happens at the other end of that world may wash up quickly on our own shores.

As John Donne reminded us, “no man is an island … [ask] not … for whom the bell tolls. It tolls for thee.”

Philip Zeidman is a partner in DLA Piper’s Washington, D.C., office. Reach him at 202.799.4272 or philip.zeidman@dlapiper.com.

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