The Franchise Memorandum

In November, the Australian government announced its response to a previously published parliamentary report evaluating franchise regulations in Australia. In doing so, the government announced changes that are intended to strengthen the Australia Franchising Code of Conduct (the “Code”) and the unconscionable conduct provisions of the Trade Practices Act (the “Act”). While the government stopped short of adding a general obligation of good faith and fair dealing (despite intense political pressure), the government will enact the following changes in an attempt to create more fairness between franchisors and franchisees:

• The government will increase certain regulatory powers of the Australia Competition and Consumer Commission (ACCC). Most importantly, the ACCC will have the power to conduct random audits of franchisors. In addition, the ACCC may issue public warnings specifically naming franchisors who are not complying with the Code. Finally, the ACCC may require a franchisor to provide information to the ACCC that substantiates claims made by a franchisor.
• In a change to the disclosure requirements, franchisors will need to disclose to prospective franchisees additional information concerning renewal terms and conditions. Franchisors also will be required to give franchisees notice of the franchisors’ intent to renew (or not renew) at least six months before expiration of a franchise agreement. These regulations will apply only to franchise agreements signed after the date the Code is amended.
• The “unconscionable conduct” provisions of the Act will be modified to clarify that the provisions not only apply to the negotiation and execution of an agreement, but also to the terms and conditions of the agreement. In addition, fines for unconscionable conduct will be modified and companies may be liable for fines of up to $1.1 million. Importantly, the government chose not to apply those fines to a breach of the Code.
• The government will establish a panel to determine whether to include in the Code a list of behaviors that are not acceptable in a franchise relationship, including unilateral contract variation and confidentiality agreements.

These changes will likely be enacted in early 2010. U.S. franchisors are reminded that there no longer exists any exemption for the sale of a single master franchise in Australia. As a result, these developments will impact all U.S. franchisors doing business in Australia, including franchisors with existing master or unit franchisees.