Barely days after the High Court handed-down its decision in the Ketchell case, the franchise sector faces renewed political pressure for increased legislation from Federal Parliament itself. In a private member’s motion tendered in June and debated for the first time last week (Sept 1) eight MP’s spoke about problems in the sector they feel requires government intervention.

It may be premature for the franchise sector to congratulate itself on the outcome of the Ketchell case, where the High Court found that a minor technical breach of the Franchising Code of Conduct did not render a franchise agreement illegal. On the one hand, the decision closed a loophole that might potentially have seen franchisees lining up to prematurely exit their agreements, but on the other, was widely seen as a victory for franchisors over franchisees.

Randall’s motion, sourced from Hansard records, moved that Parliament:

(1) recognises the severe financial distress and hardship faced by a number of current and former franchisees throughout Australia as a direct result of franchisor conduct;

(2) acknowledges that franchisors must be held accountable for their unconscionable conduct, including non-disclosure, through a more stringent and determined application of existing Trade Practices legislation;

(3) notes that there are many franchisees that have no adequate or available means to redress their grievances without recourse or expensive and often unaffordable litigation; and

(4) considers the introduction of provisions, similar to those available in industrial relations legislation, for mediation, conciliation and arbitration, at no cost to the franchisee.

Speaking to support his motion, Randall stated that “improvements to existing franchising arrangements and regulations are now long overdue” and that the conduct of rogue franchisors caused distress and financial hardship in his, and other electorates. Randall alleges that unscrupulous franchisors are setting-up franchisees to fail so that they can profit from resuming and reselling their businesses (a concept known as churning), and that Parliament needs to intervene “to stamp out this growing epidemic”.

The motion has received bipartisan support, with Shane Neumann, the Labor member for the Queensland seat of Blair noting that “there is a certain degree of bullying and harassment in the (franchise) industry”. Neumann, who has experience of franchising through assessing matrimonial assets as a former family lawyer, expects that findings from the current federal inquiry, chaired by Bernie Ripoll from the neighbouring electorate of Oxley, will come down “very much on the side of franchisees”.

Neumann goes further and insists that good faith provisions need to be included in franchise legislation, a move that is likely to encounter strong resistance from many in the franchise sector. Only Neumann and one other of the eight MP’s who spoke to the motion did so without reference to the specific circumstances of a franchisee in their electorate, or to the conduct of several high-profile franchisors.

Several MP’s criticized the Australian Competition and Consumer Commission (ACCC) for failing to act quickly enough in relation to franchisee complaints, and for failing to secure prosecutions on complaints the MP’s themselves had referred to the ACCC. Federal Member for Gilmore Joanna Gash summarised this sentiment by concluding that the existing legislation is inadequate and needs tightening, or that the ACCC is not “applying the responsibilities given it with the degree of competence” needed. The alternative, she facetiously suggests, is that every franchisee who fails to succeed in a franchise is “commercially and uniformly incompetent” – a position she clearly doesn’t support.

Gash has previously raised the issue of franchising in Parliament, citing the case of former Baker’s Delight franchisee Deane Deleeuw. Referring again to Deleeuw’s situation, Gash quoted from email correspondence between Baker’s Delight and the ANZ Bank which she claimed was evidence of collusion in the “planned demise” of Deleeuw’s business, an allegation denied by Bakers Delight in a recent SmartCompany article.

Problems in the franchise sector are perceived by parliamentarians to be widespread, with one MP claiming that “each and every member of this parliament has had problems with people who have been caught up with a franchise”.

Federal Business Minister Craig Emmerson also came under fire for not acting to define and introduce a good faith provision into the Franchising Code of Conduct following a recommendation to this effect by a meeting of state business ministers in May.

At the time of writing this article, 15 submissions to the federal franchising inquiry had been noted as received on the inquiry website, with all but three available to view. Most submissions are from disaffected individual franchisees who outline in varying detail their own experiences. Some are well-articulated and contain well-reasoned recommendations for the franchise sector at large. Others concentrate only on the franchisee’s personal circumstances. Other submissions include one from Western Australian Business Minister Margaret Quirk, outlining key recommendations arising from the WA franchise inquiry held earlier this year, and one from the Western Australian Retailers Association.

However a common element missing from the submissions currently received by the franchise inquiry, and equally absent from the parliamentary discussion of Randall’s motion is any firm statistical data to indicate the causes and rate of franchisee failure. In the absence of solid data, discussion of an epidemic in the franchise sector is in itself problematic as it may or may not be as widespread as believed. Notwithstanding the obvious distress a business failure causes, research needs to be conducted to determine the extent of the problem.

The current franchise inquiry will most likely reveal more information about the dark side of franchising. Hopefully one of its recommendations will be to include a greater emphasis on research so that franchising problems can be better understood, and proactively managed via education and other initiatives that are not dependent on enforcing the law after a franchisee’s business has already failed.

Copyright © Jason Gehrke, 2008