You Are Not Alone: Australian Parliamentary Joint Committee Issues Blockbuster Report On Fairness In Franchising

ERIC H. KARP, ESQ., GENERAL COUNSEL TO NCASEF

On March 14, 2019 the Australian Joint Committee on Corporations and Financial Services issued a report entitled “Fairness in Franchising.” The 326 page report is an exhaustive study of the state of franchising in Australia, a $170 billion sector of its economy. You can read the entire report for yourself here: https://www.aph.gov.au/Parliamentary_Business/Committees/Joint/Corporations_and_Financial_Services/Franchising/Report

The Joint Committee conducted at least nine public hearings, and received 406 submissions of which 190 were treated as confidential, apparently from franchisees and others who did not want their identity disclosed. Among the presenters were representatives from the Australian 7-Eleven Franchisee Association. The Association itself submitted the 40-page report entitled “7-Eleven Franchisees Grievance Submission.” The National Coalition will post this report on its website, so that you can see how their complaints so closely resemble the problems that U.S. 7-Eleven franchisees experience on a day-to-day basis. Among their complaints is that the disclosure of store profitability understates the cost of payroll, that  franchise fees are too high, giving a false impression of the profitability of the business, and only the franchisor benefits from the business model.

In addition, submissions were received in response to written questions, including two submissions from 7-Eleven Stores Pty. Ltd., the Australian affiliate of 7-Eleven.

The complaints specific to the 7-Eleven Australian system that were submitted to the Joint Committee included the difficulty of obtaining financing because the franchisor controls the premises through its lease, the challenges associated with attempting to harvest goodwill in the event of a transfer, disclaimers regarding the reliability or accuracy of financial information in the disclosure document, and the exploitation of the franchise relationship by 7-Eleven. However, there were many other systemic issues and problems cited by a wide range of presenters that validated the concerns of 7-Eleven franchisees and others.

The Joint Committee identified “systemic exploitation of some franchisees by a subset of franchisors and a regulatory framework that does not provide adequate protection against such practices.” The Joint Committee further concluded that presale disclosure and transparency are important but are not adequate to protect franchisees from “abuse of contractual power by some franchisors” and that, “The current regulatory environment has manifestly failed to deter systemic poor conduct and exploitive behavior and has entrenched to the power imbalance.”

Does this sound familiar to you as a 7-Eleven franchisee?

On behalf of the National Coalition, I have written to the Chair and Deputy Chair of the Joint Committee in order to establish what we hope will become a working relationship and to help them identify many of the close parallels between experiences of 7-Eleven franchisees in Australia and in the United States. It is also my longer-range hope that the exhaustive record of franchise abuses created by this parliamentary committee in Australia will make the environment for franchisee protection legislation in the United States more hospitable.

The Joint Committee has recommended the creation of a task force to explore changes in the regulatory environment for franchising in Australia which will involve developing greater transparency and accountability, fairness and protection, as well as education and awareness.

Here is a summary of some of the dozens of conclusions and recommendations for change made by the Joint Committee:

1. Development of a strong national association of franchisees to provide effective representation of franchisee views on how to deal with an unbalanced regulatory framework.

2. That wage theft committed by franchisees be recognized as sometimes encouraged or acquiesced in by franchisors and often a function of the structural breakdown of the
business model and the imposition of cost controls.

3. That disclosure alone is insufficient as a response to power imbalances and exploitive behavior by powerful corporations.

4. Franchisor control of the supply chain constitutes an inherent conflict of interestincentives from suppliers, forcing franchisees to pay above market prices for goods and services.

5. Franchisees should be protected from franchisors who require them to order products they don’t want or need in excess of what they need to operate the business.

6. All rebates, commissions or other payments received by the franchisor on account of supply chain should be disclosed as a percentage of the full purchase price of each transaction, and that the franchisor also be required to disclose how they use those payments.

7. Whistleblower protection should be granted to franchisees and their employees, and regulatory authority should investigate all such claims.

8. It is unacceptable that franchisors are able to retain unfair contract terms without penalty and therefore have little incentive to remove such terms.

9. Franchisees should be entitled to a seven day cooling off period after signing the franchise agreement.

10. There should be greater transparency around the allocation of goodwill in the franchise agreement.

11. Franchisees should be empowered to undertake collective action such as joint negotiation, mediation and arbitration to resolve disputes and problems, in order to provide a mechanism to address the power imbalance between franchisees and franchisors, and intimidating behavior by franchisors.

12. A mediator or arbitrator should be allowed to undertake multi-franchisee resolutions when disputes relating to similar issues arise.

13. Regulatory intervention should be permitted in the event of churning of outlets, meaning the repeated sale at a single site of the same franchise business to successive new franchisees.

14. The Joint Committee was concerned with the detrimental consequences of irresponsible lending and borrowing in the franchise sector and suggested that the franchisor assisted lending risks, artificially inflating the value of a franchise business.

15. Franchisees should receive detailed financial statements of any advertising and marketing fund within 30 days following the end of each calendar quarter.

16. Disclosure should be made of any instance where a franchisee is required to sell a product below its cost, after considering all fees and fixed and variable costs in relation to the purchase and sale of the product.

17. Unfair contract terms should not be enforceable.

18. The franchisor should not be able to unilaterally amend the franchise agreement through the manual or any of the means, except with the agreement of a majority of franchisees within the system.

19. If a franchisee lodges a complaint with a mediator or arbitrator, any attempted termination by the franchisor should be suspended until the dispute is resolved.

20. It should be lawful for franchisees to collectively bargain with their franchisor, regardless of their size or other characteristics.

21. Where franchisees occupy the premises which are leased by the franchisor, they are entitled to see the head lease between the landlord and the franchisor or a written statement
of the terms and conditions tenancy.

22. Franchisees should be protected from having to make significant capital expenditures near the end of the term of the franchise agreement.

23. Appropriate constraints should be imposed on the building franchisor who mandates capital expenditures on franchisees, and that the franchisee would only have to make a pro rata portion of the capital expenditure that would allow for appropriate return on investment within the franchise term.

24. Investigate whether the franchise agreement involves sufficient co-investment and risk sharing.

As all of you know from our detailed written and Town Hall examinations of the 2019 franchise agreement, there could not be a greater contrast between the findings, goals and objectives of the Australian Joint Parliamentary Committee and both the letter and spirit of the take-it-or-leave-it 2019 franchise agreement. It is extremely gratifying that a government agency has taken a detailed and dispassionate look at franchising and identified deep, ingrained and longstanding unfair, exploitive and opportunistic behaviors by many franchisors, including your own.

That validation alone should be deeply satisfying to every 7-Eleven franchisee.