The Australian Competition & Consumer Commission 'ACCC' has yet again 'promoted competition, fair trading and regulating national infrastructure for the benefits of all Australians' as per their mandate. In this particular instance, the ACCC are enforcing the Franchising Code of Conduct and as Franchise Lawyers we find these decisions fascinating. For those of you not aware of the laws governing franchising in Australia, the Franchising Code is found within the Competition and Consumer Act 2010 titled the Competition and Consumer (Industry Codes-Franchising) Regulation 2014. Here at IP Partnership, it is one of our Bibles.
Back in Motion Physiotherapy Pty Ltd was founded by Jason and Paulina Smith in 1999. Starting with a home office, they have now expanded to one of Australia's largest physiotherapy franchises. Back In Motion were recently in the ACCC spotlight as a result of Restraint of Trade Clauses in their Franchise Agreements.
It is standard for Franchise Agreements to contain restraint of trade provisions (sometimes referred to as non-compete clauses). A restraint of trade clause essentially prevents someone from operating a similar business (or dealing with clients of the business) during a specified term within a specified area. The area of the restraint and the term of the restraint will vary from contract to contract there is really no such thing as a 'usual restraint clause'.
In terms of contract drafting, often lawyers will use what is referred to as "cascading clauses" for Restraint provisions. This is to ensure if a court deems a restraint of trade clause to be unreasonable, there are numerous other clauses for a party to rely on. For example, the period of restraint may be set out in a number of subclauses; starting at 5 years, and the next subclause being 4 years and so on and so on. In this way, if the Restraint is tested by the Courts and clauses are struck out because they are deemed 'unreasonable' it permits to the Franchisor to rely on Clauses the Courts have not struck out of the contract.
In terms of the Back in Motion Franchise System. The ACCC alleged concerns that the restraint of trade clauses in their Franchise Agreement to be unfair. The restraint of trade provisions in the Franchise Agreements attempted to prevent a franchisee from operating a competing physiotherapy practice within 10 kilometres of any other Back in Motion franchisee for a period of 12 months after the end of the franchise agreement.
The issue for Back in Motion is that there are a number of Back In Motion Franchisees all over Australia. So for a physio who had decided to operate a business as a Back in Motion Franchisee, it would be extremely difficult to earn an income in Australia for 12 months after the expiration or termination of a Franchise Agreement as a physio.
In the Franchise Agreement, Back In Motion had included Clauses which permitted Franchisees to be released from the restraint of Trade clauses if the Franchisee paid a high fee to the Franchisor. The fee, according to the ACCC, was 'equal to four times a Franchisee's annual royalty fees'.
The ACCC suggested the Restraint provisions in the Back in Motion Franchise Agreements to be unfair pursuant to section 23 and 24 of the Australian Consumer Law.
The Clauses impacted exiting franchisees by 'unfairly restricting their ability to practice in their field of qualification and experience'.
Back in Motion 'admits that the ROT and BOF terms may be unfair within the meaning of sections 23 and 24 of the ACL' as per section 4.1(a) of the Undertaking. Back in Motion provided undertakings that they will not enforce the Restraint of Trade terms in current franchise agreements and future franchise agreements will not contain unfair terms. In our opinion it is a step in the right direction for the Franchise System in terms of finding the right balance between the interests of the franchisor, namely protecting the intellectual property and valuable business system and the interest of franchisees, being the ability to earn an income for themselves and their families as physios in the event the Franchise Agreement comes to an end.
This blog is not legal advice. If you have concerns about restraint of trade clauses or a franchise agreement generally, please contact our office and speak with one our solicitors. IP Partnership is a boutique commercial law firm that focuses on Intellectual Property Law and Franchise law. We have reviewed hundreds of Franchise Agreements for Franchise Systems varying from physiotherapy Franchise systems to sandwich shops and real estate agencies.
It is exciting to start a new business and sign a Franchise Agreement however it is imperative to get independent legal advice from a firm that understands the commercial aspects of the industry prior to signing the Franchise Agreement.
(Current as at 10 December 2020)
