Several big players in the Australian franchising sector are facing court proceedings this year. These proceedings are mostly ongoing in the Federal Court of Australia. Further, they serve as an important reminder to franchisors that non-compliance with legal obligations will attract consequences. This article provides some further insights into four current franchising court cases in Australia.
Case 1: McDonald’s
The Golden Arches is currently facing a claim for non-compliance with modern awards. The claim, bought by an employee group (via relevant union representatives), is against the franchisor and a group of 323 franchisees. In this court case, they are seeking $250 million in damages for the franchise group’s alleged failure to provide its team members with uninterrupted 10-minute breaks, which they are entitled to under the applicable Modern Award.
McDonald’s commitment to systems and processes appears to be working against the company for this claim. A representative of the applicants alleges that McDonald’s is focused on:
- systemising every aspect of the franchised businesses operation; and
- perhaps more importantly, enforcing those systems amongst the network.
Therefore, the company must have known about the widespread practice of not giving junior employees these breaks.
Lessons for Franchisors
The claim is a timely reminder that franchisors should ensure their network complies with workplace laws.
As a franchisor, you may also be liable for damages due to the vulnerable workers’ provisions in the Fair Work Act. It is good practice for franchisors to provide their network with Fair Work Act guidance and information pertaining to applicable awards and how to adhere to them. Franchisors should also undertake regular audits across the network to ensure compliance with workplace laws.
Case 2: Ultra Tune
In the landmark 2019 Ultra Tune decision, it was determined that the Ultra Tune franchisor:
- failed to comply with the mandatory disclosure requirements;
- failed to adhere to its obligation of good faith; and
- made false and misleading representations to franchisees.
The case is back in court, with the ACCC alleging the franchisor is in contempt of court for failing to abide by the undertakings which formed part of the 2019 decision. These undertakings included Ultra Tune entering a compliance program and providing quarterly reports. The franchisor allegedly failed to provide these between April and December 2021. If a finding of contempt eventuates, UltraTune could face even more significant penalties.
Lessons for Franchisors
The ACCC again shows that it does not take non-compliance lightly. Additionally, it is willing and able to prosecute franchisors it considers to be not meeting their legal requirements.
Continue reading this article below the formCase 3: Hog’s Breath Cafe
A group of Hog’s Breath Cafe franchisees has lodged a collective action against their franchisor. They allege that the franchisor did not meet the operational requirements of its network-wide Marketing Fund, including annual disclosure obligations as set out in the Franchise Code of Conduct.
Applying the standards prescribed by the Ultra Tune decision, the franchisees allege that the failure caused a downturn in their business. Therefore, they are entitled to monetary damages to compensate for their losses. Further, they claim the franchisor did not contribute to the fund, despite its corporate sites reaping the benefit of the fund’s expenditure, and that payments to certain personnel were not at arm’s length.
The case is currently, in effect, on hold while the Court has ordered security for costs.
Lessons for Franchisors
This is likely the first time a franchisee group claimed damages by applying the findings of the Ultra Tune decision and the Code’s requirements for marketing fund operation.
Case 4: Mercedes-Benz
Luxury car brand Mercedes-Benz is also facing an action bought by the majority of its Australian franchisees in the Australian Federal Court. The company is facing claims of breach of Good Faith and Unconscionable Conduct following its introduction of a new sales model. In this model, franchisees must act in a ‘sales agent’ capacity. Essentially, they sell the vehicles as the agent of the franchisor and for a price determined by the franchisor, as opposed to purchasing the vehicles and on-selling them at prices they determine).
Lessons for Franchisors
The franchisees are claiming the new sales model will cause a significant profit downturn and damage the value of their goodwill, and they are seeking a collective $650 million in damages. The case should remind franchisors that if they are planning a significant change in sales model or similar, it should only occur after:
- thorough and genuine franchisee consultation;
- accurate modelling; and
- having proper regard for the franchisees’ commercial interests.
Unliterally changing the key commercial terms of a franchise agreement mid-term (i.e. before the franchise agreement’s expiration) is a drastic step that should be avoided – a lesson that Mercedes is learning the hard way.
As a franchisor, you must not engage in misleading and deceptive conduct. We explain what it is and how to avoid it.
Key Takeaways
The recent court cases involving big players in the Australian franchising sector set some valuable lessons for franchisors. As a franchisor, it is vital that you:
- ensure your network complies with workplace laws and regulations;
- properly comply with any applicable Court orders or undertaking entered into;
- meet operational requirements under the Franchise Code of Conduct, including in relation to marketing funds; and
- consult with franchisees before making significant changes to their franchise agreement.
If you need help with your franchise network, our experienced franchise lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
All businesses must comply with the Fair Work Act, including your franchise. As demonstrated by McDonald’s ongoing court proceeding, a franchisor’s failure to ensure its network complies with workplace laws can lead to legal consequences. Essentially, a Franchisor must take reasonable steps to promote their network’s compliance with applicable workplace laws.
If you fail your legal duties as a franchisor, you risk exposing yourself to a class action or group lawsuit. For example, car retailer Mercedes-Benz is defending proceedings against the majority of its Australian franchisees for breach of Good Faith and Unconscionable Conduct. Therefore, to avoid legal claims, always consult with your franchisees and genuinely consider their commercial interests.
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