Code Complacency – Jim’s Franchise Group (Dog Wash Division)
By Raynia Theodore, Principal and Angela Wang, Law Clerk
Introduction
Jim’s Group Pty Ltd, the franchisor of the Jim’s Dog Wash Franchise (‘Jim’s’), has been issued with two infringement notices by the Australian Competition and Consumer Commission (‘ACCC’) for an alleged breach of the Franchising Code of Conduct (‘The Code’) as well as a contravention of the Australian Consumer Law (‘ACL’).
As a result, Jim’s Group has paid out $24,420 in penalties. It is important to note that payment of this penalty does not constitute an admission of contravention. The ACCC holds significant powers to investigate and issue an infringement notice if and when it has reasonable grounds to believe that the Code and ACL have been contravened.
‘Significant understatement’ of former franchisees and failure to disclose franchisee details
The first infringement notice was issued as a result of Jim’s failure to disclose relevant contact details of former franchisees in their Disclosure Document. Further, it is alleged that Jim’s provided a ‘significant understatement’ of the number of former franchisees to exist within the Franchise System.
Importantly, item 6.5 of the Disclosure Document must set out the name, location and contact details of each and every former franchise. This is to ensure that prospective franchisees are given the opportunity to speak to former franchisees in relation to the attractiveness of the franchise, its profitability prospects and ask general questions to make an informed decision prior to entering into a franchise agreement. It should be noted that the only exception which applies here, is if a former franchisee requests, in writing, that their details not be disclosed.[1]
Additionally, the ‘Model Disclosure Document’ template provided by the ACCC highlights that all ‘sufficient’ contact information – such as email addresses and phone numbers of former franchisees (which are not former business addresses or phone numbers) should be provided in the Disclosure Documents to ensure proper and detailed compliance.[2]
Therefore, the failure of Jim’s to accurately complete the relevant information as required by their obligations as franchisor and the under-representation of the number of former franchisees, constituted did not comply with the Code.
Misrepresentation of cooling off rights under the Code
The second infringement notice was issued in relation to a false and misleading representation. The ACCC alleged that Jim’s misrepresented to a franchisee that their cooling off rights ended the earlier of 14 days after entering into the franchise agreement or the making of a payment to Jim’s. This is an outdated reflection of the Code prior to amendments which were made on 1 July 2021.
As the current version of the Code stands, clause 26(1) of the Code gives franchisees the right to terminate a franchise agreement within 14 days after entering into the franchise agreement, regardless of whether a deposit has been paid. In circumstances where monies have been paid, Jim’s must repay this back to the franchisee in accordance with clause 26(3) of the Code.
The ACCC found that Jim’s Group failed to stay updated with Code changes, which resulted in a misleading representation. Importantly, this ‘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 the franchise agreement’.
Takeaways
It is imperative that the information in the Disclosure Document regarding current and former franchisees is complete and accurate. Franchisees often refer to this information in conducting their own due diligence and often rely on the details in these sections in deciding whether or not to purchase a franchise.
The infringement notices and penalties paid by Jim’s serve as an important reminder for all franchisors that the ACCC are actively checking and strictly enforcing compliance with the Code and in particular changes to the Code which came into effect in July 2021. The ACCC Deputy Chair Mick Keogh reinforces 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’.
In addition to enforcement action by the ACCC for non-compliance with the Code there are other consequences for the franchisor of the information being inaccurate, the franchisee may allege misleading or deceptive conduct on the part of the franchisor and separately seek to withdraw from the Franchise Agreement and damages (i.e. a refund of all moneys paid by the Franchisee for the franchise).
Reminder
Clause 8(6) of the Code provides that franchisor’s must update their Disclosure Documents (and the Key Facts Sheet) within 4 months after the end of each financial year. As it is nearing that vital time of year for franchisors with a financial year ended 30 June, with the deadline being 31 October 2022, timely compliance is required to avoid penalties.
For more information about the update of the Disclosure Document and Key Facts Sheet, see: https://www.mst.com.au/disclosure-document-update-season-3/.
If you have any further questions or require assistance in updating your Disclosure Documents, please contact a member of our Franchising Team on +613 8540 0200 or as follows:
Raynia Theodore: raynia.theodore@mst.com.au
Esther Gutnick: esther.gutnick@mst.com.au
[1] Competition and Consumer (Industry Codes – Franchising) Regulations 2014, Clause 32.
[2] https://www.accc.gov.au/publications/franchising-model-disclosure-document
