Monday, 25 February 2013

Submission to 2013 Review of the Franchising Code of Conduct


I recently lodged a submission with the 2013 Review of the Franchising Code of Conduct (Review).  

The reason for lodging a submission was due to my concern that various industry and professional groups were making submissions to the Review stating that the Australian Competition and Consumer Commission's (ACCC) had a good record in enforcing the Franchising Code of Conduct (Code).

I do not believe that this is an accurate statement about the ACCC's record in enforcing the Code, particularly over the last two years.  In my view, the failure to include enforcement of the Code in the ACCC's Compliance and Enforcement Priorities over the last two years has resulted in significant under-enforcement of the provisions of the Code.

Here is my submission:
                                                                   
22 February 2013 

Franchising Code Review Secretariat

Department of industry, Innovation, Science, Research and Tertiary Education
Small Business Division
GPO Box 9839
Canberra  ACT  2601

Via email: franchisingcodereview@innovation.gov.au


Dear Mr Wein 


Submission to 2013 Review of Franchising Code of Conduct from Terceiro Legal Consulting 

Terceiro Legal Consulting (TLC) is a boutique law firm, which specialises in competition and consumer law (trade practices law). TLC has been operating since 2008 and has represented numerous companies and businesses in Australian Competition and Consumer Commission (ACCC) matters. 

Michael Terceiro, the principal of TLC, formerly worked at the ACCC for 15 years in a variety of positions, including as a Director of Enforcement. In this role, he was responsible for running investigations and litigation into alleged breaches of the Trade Practices Act 1974 and the Franchising Code of Conduct. 

Enforcement of the Franchising Code 

Introduction
In this submission, I will only be focusing on Part Six of your Discussion Paper: Review of the Franchising Code of Conduct which discusses enforcement of the Franchising Code.   

In this Part, you list four discussion questions as follows:

1. Is the current enforcement framework adequate to deal with the conduct in the franchising industry?

2. How can compliance with the Franchising Code be improved?

3. What additional enforcement options, if any, should be considered in response to breaches of the Franchising Code?

4. What options are available to address breaches of the Franchising Code, or any other adverse conduct in the franchising industry?

Background
Before responding to these questions, it is necessary to consider the ACCC’s record in enforcing the Franchising Code.  While a number of submissions to your Review have claimed that the ACCC is effective in enforcing the Franchising Code, the ACCC’s own statistics concerning court cases and investigations into Franchising Code breaches tells a very different story.

A number of years ago the ACCC decided to create a page on its website entitled “Franchising Code complaints, investigations and outcomes” – located at http://www.accc.gov.au/content/index.phtml/itemId/816437

On this page, the ACCC listed the “Matters the ACCC has pursued” in relation to Franchising Code breaches.

The ACCC made it clear that the list was not intended to list every Franchise Code investigation.  However, I believe that this list is likely to represent most, if not all, of the noteworthy Franchising Code investigations and litigation undertaken by the ACCC since 2004. 

An analysis of the list shows the following level of enforcement activity by the ACCC in the franchise sector since 2004:

Table 1: Noteworthy ACCC Franchising Code cases and investigations 2004 – 2012

Year
No. of cases
and investigations

2004
2
2005
4
2006
5
2007
2
2008
1
2009
4
2010
5
2011
1
2012
0
Total
24

In other words, in the last nine years, the ACCC has taken a total of 24 noteworthy cases and investigations in relation to the Franchising Code, which is less than three cases and investigations a year. 

Furthermore, there appears to have been a significant decline in the ACCC’s enforcement activity in relation to Franchising Code matters over the last two years with only one noteworthy Franchising Code case being commenced by the ACCC in that period.

Unfortunately, the above figures are somewhat misleading. While the title of the relevant page from the ACCC’s website states that it is a list of the ACCC’s “Franchising Code complaints, investigations and outcomes”, on closer examination it turns out that a number of the so-called Franchising Code investigations and outcomes did not in fact allege or establish any Franchising Code breaches. 

Rather, a number of the cases and investigations included on the ACCC list involved a franchisor engaging in other conduct in breach of the Trade Practices Act 1974 or the Competition and Consumer Act 2010, but not, as claimed, in any breaches of the Franchising Code.

For example, the ACCC’s Sensaslim case does not appear to allege any contraventions of the Franchising Code. Rather, the focus of that case is on false representations and misleading and deceptive conduct.  The Refund Home Loans case also did not allege any breaches of the Franchising Code. The Photo Shop matter (which I ran whilst employed at the ACCC) did not result in any findings of a breach of the Franchising Code.

Therefore, if one removes the cases and investigations from the above list which did not allege or establish a breach of the Franchising Code, the table would show the following results:

Table 2: Actual noteworthy ACCC Franchising Code cases
and investigations 2004 – 2012

Year
No. of cases
and investigations

2004
2
2005
4
2006
3
2007
1
2008
1
2009
2
2010
4
2011
0
2012
0
Total
17

The above table shows that once one removes the matters where a breach of the Franchising Code was not in fact alleged or established by the ACCC, that the ACCC has only pursued 17 noteworthy Franchising Code cases and investigations over the last nine years, which is less than two Franchising Code cases and investigations a year.

Furthermore, the ACCC has not pursued any noteworthy Franchising Code cases or investigations over the last two years.

Responses to questions

1. Is the current enforcement framework adequate to deal with the conduct in the franchising industry?

The ACCC has an adequate range of powers to investigate alleged breaches of the Franchising Code.  Unfortunately, the ACCC does not appear to be using these powers effectively in relation to the franchising sector.

The ACCC only has access to a limited range of remedies in relation to breaches of the Franchising Code.  I believe that if the ACCC had access to civil pecuniary penalties for Franchising Code breaches, its ability and willingness to enforce the Franchising Code would be significantly enhanced.

2. How can compliance with the Franchising Code be improved?

Compliance with the Franchising Code can be improved by the ACCC pursuing more cases and investigations in the sector, particularly in relation to rogue franchisors.  I believe that successful ACCC cases and investigations and the imposition of civil pecuniary penalties would be very effective in achieving general deterrence in the franchise sector.  It is likely that the ACCC will pursue more cases and investigations if it can seek civil pecuniary penalties in relation to breaches of the Franchising Code.

3. What additional enforcement options, if any, should be considered in response to breaches of the Franchising Code?

On 20 February 2013, the ACCC issued its new Compliance and Enforcement Policy for 2013.  It is clear from this document that enforcement of the Franchising Code is not a current enforcement priority for the ACCC.  Indeed, the Franchising Code is not mentioned once in the entire document.

The ACCC should consider including enforcement of the Franchising Code as a priority enforcement area in future Compliance and Enforcement Policy documents.

4.  What options are available to address breaches of the Franchising Code, or any other adverse conduct in the franchising industry?

The ACCC must make enforcement of the Franchising Code a priority, particularly in relation to rogue franchisors.  It is clear on the figures quoted above, that the ACCC has all but ignored enforcement of the Franchising Code in terms of cases and investigations over the last two years. The omission of enforcement of the Franchising Code from the ACCC’s current Compliance and Enforcement Policy suggests that this trend is likely to continue.

The introduction of civil pecuniary penalties for breaches of the Franchising Code is likely to encourage the ACCC to pursue more enforcement actions in relation to breaches of the Franchising Code in the future.

Finally, the ACCC should give some thought to establishing a dedicated team to investigate alleged breaches of the Franchising Code. I understand from first hand experience that such investigations are both difficult to run and resource intensive. 
Therefore, a dedicated team would be able, over time, to develop the necessary expertise and focus to pursue a larger number of significant Franchising Code cases and investigations successfully each year.  This approach would be preferable to the hit-and-miss approach which the ACCC appears to be taking in relation to enforcement of the Franchising Code at the current time.

Conclusions
The ACCC’s record in enforcing the Franchising Code over the last nine years has been poor. Despite its efforts, particularly during the term of previous ACCC Chairman, to argue that it was enforcing the Franchising Code effectively, there is simply no objective evidence to back up this claim.  The ACCC’s own numbers show a very low level of enforcement activity, which unfortunately appears to be on a downward trend.

The simplest way to increase the ACCC’s level of enforcement in this sector is to provide the ACCC will access to civil pecuniary penalties for contraventions of the Franchising Code. 

However, the introduction of civil pecuniary penalties alone will not reverse the trend of under-enforcement in this area.  Rather this important change must also be complemented by two other important changes (1) the ACCC issuing a clear statement that enforcement of the Franchising Code is in fact a priority area and (2) the ACCC making internal structural changes to the way in which the ACCC investigates alleged breaches of the Franchising Code.

Only by implementing these changes will the ACCC be able to adopt a more effective, focused and ultimately successful approach to ensuring compliance with the Franchising Code.

If you have any questions about this submission, please contact me on (02) 8086 2005.

Yours sincerely


Michael Terceiro
Competition and Consumer Lawyer
Terceiro Legal Consulting   

Thursday, 7 February 2013

10 Tips for Dealing with Zealous Regulators


The following is the text of a presentation I was to deliver [1] at the Franchise Council of Australia National Franchise Convention 2012 with Mark Brennan, the then Chairman of the Victorian Commission for Gaming and Liquor Regulation[2].

Introduction
Good afternoon.  Today Mark and I will be talking about two separate topics. The first topic is entitled “10 Tips for Dealing with Zealous Regulators”.  We will be seeking to provide franchisors and franchisees with 10 practical and common sense tips for dealing with Zealous Regulators.  This presentation focuses on such regulators as the Australian Competition and Consumer Commission (ACCC) and the Australian Securities and Investments Commission (ASIC) and state based consumer protection and fair trading regulators. The advice we provide may not be suitable for dealing with such regulators as the Australian Taxation Office which appears to operate quite differently.

The second Topic is entitled “and 5 tips for the Regulator Dealing with the Regulated”.  In the knowledge that there were likely to be a number of regulators present during this presentation, we couldn’t resist the temptation to provide them with some advice also.  Mark will be presenting this part of the presentation given his considerably greater eminence as a regulator.

Tip Number 1 – Don’t ignore correspondence
While this advice sounds pretty obvious it is surprising how often businesses don’t respond to a regulator’s letter in a timely manner or at all.   It is very rare for a regulator to send a letter to a business which does not require a response. Indeed, if your business receives a letter the likelihood is that the complaint against you has passed through the various screens used by regulators to identify and focus on high priority matters. 

If you have received a letter from a regulator the chances are you are already listed as a high priority investigation on the regulator’s regular internal management reports. Indeed your businesses' conduct may already have been the subject of an internal report by staff to the commissioners in charge of the regulator, so you are definitely on the radar.

If you ignore the regulator’s letter and fail to provide a response by the due date, you could find yourself in much more trouble. The regulator may be able to impose penalties on your business for not responding by the due date.  Alternatively, the regulator may have the power to compel your business to provide the requested information and documents through a statutory notice. If this happens, your compliance costs are likely to rise significantly.

A recent example of a company which appears not to have taken an ACCC letter as seriously as it should have was Apple in relation to its new iPad 4G claims.  I understand that Apple failed to provide a timely response to the ACCC’s initial letter.  I guess we all know what the ultimate outcome was for Apple – it was sued by the ACCC, fined $2.25 million (which was quite a lot of money for a first time loser) and most significantly it received a great deal of negative publicity.

Tip Number 2- Make sure you fully understand what the regulator is asking
Again this sounds like obvious advice, but it is remarkable the number of times when I was at the ACCC that I saw responses from businesses which did not answer the questions that we asked.  Businesses and their legal advisers seem very reluctant just to pick up the phone and speak to the regulator about their requests for information, preferring instead to make assumptions about what the regulator really wants. In most cases, you can gain a better understanding of what is required, by calling the contact officer listed on the letter and asking them to explain their request. 

 If you receive a letter from a regulator or even a statutory notice, make sure you understand what they want before you respond. You must avoid providing a non-responsive answer, as the regulator may wrongly interpret this as your business trying to be evasive or even dishonest.

Tip Number 3- Get specialist advice if necessary
You have to know what you don’t know.  Therefore, before sending any response to a regulator, ask yourself whether you fully understand the relevant area of law.  While the Competition and Consumer Act is not rocket science there are a few quite technical areas where you really should get some specialist advice.  For example, the new cartel provisions are ridiculously complex.

In some cases, the issues raised by a regulator will relate to very serious allegations of misconduct. For example, a letter may state that your business is at risk of having contravened particular legislation and that you may be potentially liable to pay a significant criminal or civil penalty or even be subject to imprisonment.  For example, the civil penalties for contraventions of the competition provisions of the Competition and Consumer Act 2010 are now the highest of either $10 million, three times the benefit of the illegal conduct or 10% of annual turnover of the business.

If you are not confident answering the regulator’s letter, you should get advice from somebody who specialises in the relevant area.  That may mean that you don’t use your usual commercial lawyer but rather a specialist trade practices or corporation lawyer.

Tip Number 4 – Don’t rush your response
If you don’t believe you have enough time to respond to a regulator’s request for information and documents, ask for more time.  Regulators will often be willing to allow your business more time to provide a response as long as you agree to give them information in a staged manner.  The regulator’s overriding concern in an investigation is to ensure that their investigation isn’t stalled by a lack of relevant information. If they can keep moving forward with their investigation, they will usually agreed to getting information in regular tranches.

The risk of rushing your response is that you may fail to provide some relevant information or documents. If the regulator subsequently finds out you have failed to provide relevant information or documents, they may suspect that you did this on purpose rather than by accident. There are serious criminal penalties for providing misleading and incorrect information to a regulator.

Also don’t wait for the day before the information is due to ask for a two-month extension.  If you think you need an extension ask for one as quickly as possible. If you don’t, the regulator may brand you as recalcitrant and decide to compel you to produce information and documents. Obviously, this will increase your compliance costs dramatically.

Tip Number 5 – Always try speak to the regulator on a without prejudice basis
If the regulator has contacted your business in relation to a potential breach of legislation, for example a claim by the ACCC that you have misrepresented the effect of the carbon tax, make sure you try to speak to the regulator on a without prejudice basis. By speaking only on a without prejudice basis you may be able to ensure that any admissions which you may inadvertently make, either in correspondence or orally during meetings or over the telephone, will not be able to be used against you in subsequent legal proceedings. 

What you have to remember is that the regulator is trying to make a case against your business, so if they can get an admission from you in a meeting or over the telephone they will be tempted to use it against you.

The practical way of doing this in correspondence is by placing the words “Without Prejudice” at the top of all correspondence to the regulator. 

In relation to meetings with the regulator, you should make it clear at the beginning of every meeting that you will only speak to them on a without prejudice basis. 

You must also try to ensure that all telephone conversations with the regulator are on a without prejudice basis.   While you may initially call the regulator with the intention of simply asking a question about process, before you know it you will be discussing substantive issues. Accordingly, it is safest to begin all conversations with a quick disclaimer along he lines of: “I am speaking to you on without prejudice basis”.

If the regulator refuses to speak to you on a without prejudice basis, you should immediately retain a lawyer.

Tip Number 6 – Don’t be too aggressive or too passive
It may sound like a difficult balancing act but when you deal with regulators you have to try to avoid being either too aggressive or too passive.

If you take an aggressive approach, you are likely to antagonise the regulator. When I worked at the ACCC it was very common for lawyers to be unnecessarily aggressive towards the ACCC.  Like in human relationships, regulators will tend to respond to aggression with aggression. Furthermore, if you are very aggressive the regulator may suspect that you may have something to hide. 

Similarly, don’t be too passive. You must avoid just agreeing with every proposition put to you by the regulator.  Don’t admit things to the regulator simply because you believe that by being agreeable, the regulator may decide to let you off.  In reality, most regulators will be seeking to use any concessions or admissions which you make to bolster their case.

When I started at the I ACCC as a not so fresh faced graduate, I was accused of being overly aggressive towards the businesses I was investigating. Fortunately for me a brilliant and very wise ACCC lawyer, took me aside and gave me some very valuable advice – he said I had to avoid being either too aggressive or too passive when dealing with businesses – rather I had to attempt to be polite but firm. Polite in the way I communicated with businesses while at the same time firmly asserting the ACCC’s legal position.

I think that this is excellent advice for businesses when dealing with regulators  – you must aim to be polite in the way you communicate with the regulator while at the same time firmly asserting your legal rights.

Tip Number 7 – Be aware that regulators have coercive powers
You must remember that regulators have a wide range of coercive powers, which they can use against your business.  

For example, the ACCC and ASIC can serve notices on individuals and corporations compelling them to provide information and documents in relation to suspected breaches of their legislation. 

These agencies can also issue notices forcing individuals to answer questions orally about suspected breaches of the law.  Furthermore, corporations and individuals cannot claim  the privilege against self-incrimination when answering questions in oral examinations of civil contraventions of the legislation.   The privilege against self-incrimination still applies in relation to criminal investigations.

Regulators also have the power to execute search warrants at a corporation’s premises or at an individual’s home.  While the ACCC and ASIC use their search warrant powers quite sparingly, business must know how to respond to a search warrant.

Both the ACCC and ASIC have the power to issue infringement notices to a corporation or an individual in relation to particular breaches of their legislation. Such notices are like parking fines in the sense that they can be paid without going to court.  The ACCC has shown a great liking for infringement notices having issued over 80 such notices in the first two and a half years since the law was introduced.

The other important issue to remember in relation to statutory notices is that, while the privilege against self-incrimination has been removed in civil investigations, a business can still claim legal professional privilege over its legal documents. In other words, a corporation or an individual does not have to produce documents or answer questions which may disclose a privileged communication with their lawyer.  Furthermore, regulators cannot seize legally privileged documents during a search warrant.

The ACCC also has the power to ask the court for permission to use listening devices in relation to cartel conduct.

So remember if you business tries to play games, the regulator will not hesitate to use its coercive powers to get what it wants from your business.

Tip Number 8 – Protect your confidentiality
Make sure that you take steps to protect the confidentiality of any information you voluntarily provide to the regulator. It is important to take such steps, as all regulators are subject to freedom of information legislation. If you provide the regulator with commercially confidential information, there is a risk that one of your competitors or the media may obtain this information through a FOI request.

The simplest way to protect confidential information is to make sure that you place the words “Commercial in Confidence” on each page of every document that you wish to keep confidential. The reason you should place the words “Commercial in Confidence” on each page is to make sure every individual page can be easily identified as confidential if the page becomes separated from the rest of your document.

You may even wish to be more explicit about the confidentiality of the information which you are providing to the regulator by including the following words from section 47 of the Freedom of Information Act 1982 (Cth) on all your confidential documents:

This document and all attachments to this document have commercial value that would be, or could reasonably be expected to be, destroyed or diminished if the information were disclosed.

Tip Number 9 – Don’t be too reactive
A mistake that many businesses make regardless of whether they are a large company or a small business is being too reactive with regulators.  Companies will often respond diligently to every request for information and documents made by the regulator but never make any attempt to be proactive in challenging or seeking to resolve the regulator’s concerns. I think that this reactive approach is based on a misplaced view that the regulator may simply go away once they have been provided with all the relevant information by the business.

Being reactive is usually not the right approach to take.  If you simply respond to the regulator’s requests for information and documents, all you will be doing is assisting the regulator to build their case against you. What you should be trying to do is to demonstrate to the regulator that their concerns about your business are misplaced.

For example, you could point out to the regulator that there is a flaw in their case theory, which means that your business has not contravened the relevant legislation. Or you may argue that even if there has been a contravention, it is not worth the regulator’s time and effort to pursue a case against your business, because there has been limited consumer detriment. 

Another approach you could take is to try to fix any potential problems identified by the regulator, before being asked to do so by the regulator.  For example, if the ACCC were concerned that your company had published a misleading advertisement, you may decide to publish a corrective notice and offer refunds to customers, before being asked to do so by the ACCC.  The benefit of doing this is that you may take the momentum out of the regulator’s investigation. 

The biggest mistake which business can make in dealing with a regulator is deciding to give up too late. How many times have you seen a business respond defiantly to regulator on the commencement of legal proceedings, only to meekly settle the case a couple of months later after spending an enormous about of money on legal fees.   What you have to try to do is take preventative action to stop the regulator from commencing legal proceedings against your business in the first place. You can do this by fixing the problems early so that there is nothing left for the regulator to go after.

Tip Number 10 – Remember ignorance of the law is relevant
There is a well-known saying that ignorance of the law is no excuse for breaking the law. This statement is clearly correct as a matter of law. It is also the view which most regulators take in relation to liability – ie even if your business did not know that particular conduct was illegal, it will still be held liable. 

The classic example is Resale Price Maintenance which many small and medium sized businesses have never heard of and do not know is illegal.

However, ignorance of the law is a highly relevant consideration in relation to the appropriate punishment which should be imposed. In other words, while a claim that you were ignorant of the law is unlikely to get you off the hook with a regulator, it should have a significant effect on the size and severity of any penalties which the regulator is seeking to have imposed.

In the event that your business is found to have breached a law and your business was ignorant of that law, make sure that you emphasise this fact to the regulator when negotiating an appropriate punishment.

On that note, I will now hand over to Mark for the second part of the presentation “And 5 tips for the regulators dealing with the regulated”.

(The program for the Convention, including a link to the PowerPoint slides used during this talk can be found here)




[1] Unfortunately, due to a medical emergency I could not attend the Convention. Alicia Hill of McInnes Wilson Lawyers kindly stepped in at the last moment to deliver my part of the presentation.
[2] Mark Brennan has since been appointed the inaugural Commonwealth Small Business Commissioner