Jim’s Group Pty Ltd has found itself in the cross hairs of the Australian Competition and Consumer Commissions (the ‘ACCC’) after being issued two infringement notices and $24,420.00 in penalties.
Jim’s Group is one of the largest franchise systems in Australia, with more than 4,300 franchisees across forty-five (45) divisions. The franchisor division in question, Jim’s Dog Wash (the ‘Franchisor’), was issued the infringement notices and penalties by the ACCC for alleged contraventions of:
- the Franchising Code of Conduct for improper disclosure; and
- the Australian Consumer Law for making misrepresentations to prospective franchisees.
Disclosure Requirements
The first infringement issued by the ACCC related to the Franchisor significantly understating the number of former franchisees within the Dog Wash division and failing to provide contact details of those former franchisees within its disclosure document.
Under the Franchising Code of Conduct, franchisors must provide prospective franchisees a compliant disclosure document to assist them in making an informed decision before buying into the franchise system. The requirement for franchisors to provide the number of former franchisees and their contact details is crucial in a prospective franchisee’s due diligence process as it:
- gives a good indication on franchisee satisfaction within the franchise system - a large number of exiting franchisees raises red flags as it is a good indication of poor franchisee satisfaction; and
- allows prospective franchisees to contact the former franchisees to ask questions on how long they were in the business, why they left and what advice they would give.
There is an exception for franchisors providing contact details of former franchisees and that is if the former franchisee requests for its details not to be disclosed. However, a franchisor must not engage in conduct with the intention of influencing a former franchisee to make, or not to make, such a request.
Misrepresentations
The second infringement issued by the ACCC related to misrepresentations purportedly made to franchisees that the cooling off period ended fourteen (14) days after entering into the franchise agreement or the making of a payment to the franchisor, whichever occurred first.
Under the Franchising Code of Conduct, franchisees have a cooling off period to terminate the franchise agreement and get their money back, save as to ‘reasonable expenses’. The cooling off period the franchisee can change its mind and end the agreement is within fourteen (14) days after:
- entering into the franchise agreement with the franchisor; or
- receiving leasing information, if the franchisee is leasing or occupying the premises from the franchisor or its associate.
The ACCC Deputy Chair Mick Keogh commented on the misrepresentations stating that the Franchisor “may have discouraged Jim’s Dog Wash franchisees from exercising their cooling off rights where they paid a deposit some time before they entered into a franchise agreement”.
Key Takeaway
Mr Keogh warned franchisors by stating that "the ACCC will not hesitate to take enforcement action against franchisors who are failing to meet their obligations under the Code or are misleading prospective franchisees about their rights under the Code."
This action by the ACCC is an important reminder to all franchisors to ensure that their disclosure documents are code compliant. As we have entered into a new ‘franchising year’, it is important that all franchisors have now updated their disclosure document to reflect the 2021 – 2022 financial year. If you are a franchisor and not sure if your disclosure document is compliant, or if you are a franchisee looking to enter into a franchise system, please feel free to contact IP Partnership on 07 5591 2522 and ask to speak to one of our experienced franchising solicitors.
