ACCC - Bakers Delight PDF

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ACCC does not consider Bakers Delight engaged in unconscionable conduct towards franchisees The Australian Competition and Consumer Commission announced today that it had concluded its investigations into allegations that Bakers Delight engaged in misleading and deceptive and unconscionable conduct towards franchisees in operating its franchise system. Having conducted an in-depth investigation, including analysing a large amount of documentary evidence and conducting a number of detailed interviews with various witnesses the ACCC has decided not to take any further action. This position has been informed by a number of conclusions:  

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the evidence assessed – in the ACCC's view – did not demonstrate that Bakers Delight had engaged in unconscionable conduct or breached the Franchising Code although there is no suggestion that the allegations made by the franchisees were made with any improper intent, in many cases, it was difficult to substantiate claims and in some cases information given was directly contradicted by documents and other evidence there were a few circumstances where franchisees alleged that Bakers Delight representatives had made misleading verbal representations which investigations have neither substantiated nor dismissed. However in each of these cases, the ACCC considers steps taken by Bakers Delight to remedy the alleged wrongdoing were reasonable or other factors led to the losses suffered by the franchisees there was no evidence produced to or obtained by the ACCC that – in its view – evidenced widespread or systematic problem of compliance within the Bakers Delight franchise system.

The ACCC does not ordinarily comment on individual complaints that it may or may not be investigating and tends to not to refer to outcomes that are not in the public arena. However, given the substantial publicity surrounding the investigation, the ACCC considers it appropriate to provide some high level general comments on the Bakers Delight investigation. "It should not be assumed that where there is smoke there is always fire," ACCC Chairman, Mr Graeme Samuel, said today. "The ACCC is experienced in testing matters raised with it and often its investigations lead it to the conclusion that those matters cannot be substantiated or should not be pursued further. "This said, given the bargaining disadvantage franchisees and other small businesses often find themselves in, where the ACCC forms the view that there is evidence supporting a claim that a franchisor has behaved unconscionably or in a systematic misleading manner it will take action." Notwithstanding the ACCC's decision to take no further action in this matter, the ACCC is in continuing discussions with Bakers Delight with a view to ensuring its trade practices law compliance procedures and complaint handling processes are best placed to deal with issues that might arise in the future. The ACCC notes that Bakers Delight cooperated with the ACCC throughout its investigation and met with a number of franchisees during the ACCC's investigation to try and reach a negotiated resolution to their complaints. Document: a5c5b1201c6d15e5855150b076badf3a.doc Author: Andrew Webster Save Date: 13/05/2015 Page 1 of 7

The ACCC appreciates the assistance and cooperation of franchisees and Bakers Delight in the provision of information and a willingness to meet throughout the investigation.

Background In April 2007 the ACCC commenced investigations in relation into alleged breaches of the unconscionable conduct provisions of the Trade Practices Act 1974 after receiving a number of complaints, predominantly from former Bakers Delight franchisees. Those franchisees alleged that in the entering and performance of franchise agreements Bakers Delight engaged in unconscionable conduct, misleading and deceptive conduct and/or conduct that contravened the Franchising Code of Conduct. The allegations were wide ranging and from a number of different franchisees. While the ACCC had received a number of complaints, this should be considered in the context of a large franchise operation with hundreds of franchisees. For the most part, the allegations generally related to separate issues and as such each case was investigated and assessed on its merits. However, the ACCC's conclusions in relation to two general allegations relating to Bakers Delight are set out below.

Allegation of 'churning' During the course of the investigation a number of the complainants alleged that Bakers Delight engaged in the practice commonly described as 'churning'. That is, selling a franchise site repeatedly in circumstances where the franchisor is aware that it will fail. The ACCC considered this churning allegation and concluded that there was no evidence of churning within the Bakers Delight system nor, and most importantly, in relation to those complaints that were subject to a detailed investigation. To the contrary, the evidence supports the view that Bakers Delight is generally reluctant to initiate termination and does not have a record of repeatedly selling franchise sites.

Allegation of collusion with banks Some franchisees alleged that Bakers Delight colluded with banks, including that they shared information about the franchisee which led to losses being suffered. This allegation was made against more than one bank. The ACCC investigation revealed that terms and conditions of the Bakers Delight franchise agreement and banking loan agreements allowed for the sharing of information in certain circumstances. In some circumstances franchisees had signed an additional confidentiality waiver. The ACCC did not find any evidence that there was inappropriate sharing of information or any wrongdoing on behalf of any of the banks or Bakers Delight in this regard.

Recent ACCC small business and franchising enforcement action Examples of recent ACCC enforcement action in the small business sector include: 

On 18 March 2008 the Federal Court held that Mama's Pizza & Ribs misled its small business customers about the contracts by which they obtained the ovens and the terms under which their finance contracts could be cancelled [Small Business Sting: Federal Court Document: a5c5b1201c6d15e5855150b076badf3a.doc Author: Andrew Webster Save Date: 13/05/2015 Page 2 of 7

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Declares That Original Mama's Pizza & Ribs, Principals Misled Small Business Owners – News release 077/08]* On 26 March 2008 the ACCC commenced proceedings against Allphones and others alleging unconscionable conduct, misleading and deceptive conduct and breaches of the Franchising Code of Conduct in the operation of the Allphones franchise [ACCC Begins Proceedings Against Allphones Retail NR 084/08] On 27 March 2008 the Federal Court held by consent that Duco Magic (Australia) Pty Ltd and its director, Mr Warwick Lindsay, misled prospective purchasers as to the profitability and demand for Duco Magic business opportunities and services [ACCC Obtains Court Orders Against Duco Magic for Misleading and Deceptive Conduct NR 090/08], and On 2 April 2008 the Federal Court held by consent that Imagine Essential Services Limited and Mr Richard Evans misled small businesses as to the profitability of its licensing arrangements [Federal Court Declares that Imagine Essential Services Limited, Richard Evans Misled Small Businesses NR 059/08]

Document: a5c5b1201c6d15e5855150b076badf3a.doc Author: Andrew Webster Save Date: 13/05/2015 Page 3 of 7

ACCC obtains franchise fee refund for Quizno's franchisees The former Australian master franchisee for the Quizno's Sub chain of quick service restaurants has given court-enforceable undertakings after the Australian Competition and Consumer Commission raised concerns that Quizno's conduct may have breached the Trade Practices Act 1974 and adversely affected its franchisees. As a result, franchisees who lodged complaints with the ACCC are being offered an amount depending on the level of their involvement in the Quiznos franchise. This amount comprises at least a full refund of the standard franchise fee. In 2001 the US based Quizno's Franchise Company granted Quizno's Australia Pty Ltd the right to function as the franchisor in Australia and New Zealand. Quizno's Sub retailed fast food in the form of toasted bread rolls with various fillings. From about 2002 to 2006 Quiznos promoted and sold franchise territories in New South Wales, Victoria, Queensland and South Australia. The ACCC alleges that during this time Quiznos made various representations to franchisees and potential franchisees, including that:       

the Quizno's Sub franchise system was a 'proven' operating system, when the franchise had no track record in Australia the Quizno's Sub franchise system had been trialled and tested for two years in Australia, when it had not the American menu had been 'Australianised', when it had not the stores operated by Quiznos had been trading very well and operating profitably when they had not turnover would be at least a certain amount, when information then available to Quiznos indicated that such turnover was likely to be unachievable labour and food costs would be certain percentages of turnover, when information then available to Quiznos indicated that such percentages were unachievable, and capital costs would fall between certain amounts, when information then available to Quiznos indicated that capital costs would exceed that range.

The ACCC considered the representations were misleading and deceptive or likely to mislead or deceive franchisees and potential franchisees in breach of section 52 of the Trade Practices Act 1974 and may have caused loss or damage to these franchisees. Quiznos, now named ACN 098 540 633 Pty Ltd, has informed the ACCC that it has ceased trading, is no longer involved in selling franchises and that its financial position is such that it would be unable to meet any claims for loss or damage by former franchisees. The ACCC and Quiznos have agreed to resolve the matter by means of an undertaking under which payments will be procured by Quiznos from a party independent to both Quiznos and the Quizno's Sub franchise system and offered in accordance with terms of the undertaking. The undertaking has been entered into on the basis that Quiznos makes no admission or acknowledgement of liability.

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"The offer is worthy of consideration by the complainants, particularly in view of the financial state of the company," ACCC Chairman, Mr Graeme Samuel, said today. "The giving of the enforceable undertaking marks the end of a very thorough ACCC investigation relating to the promotion and sale of franchise territories by Quiznos. "The franchisor in this case was careful to ensure that all prospective franchisees sought legal, financial, and business advice before signing up. However, this case illustrates that franchisors must nevertheless ensure that the information they provide to franchisees is accurate and that they have evidence to support it."

Document: a5c5b1201c6d15e5855150b076badf3a.doc Author: Andrew Webster Save Date: 13/05/2015 Page 5 of 7

ACCC takes class action on behalf of Allphones franchisees The Australian Competition and Consumer Commission has instituted class action proceedings against Allphones Retail Pty Ltd and three individuals seeking damages on behalf of 74 eligible current and former Allphones franchisees. The individual respondents are Allphones' director and chief executive officer, Matthew Donnellan; director and chief operating officer, Tony Baker; and former national franchising manager, Ian Harkin, for allegedly being knowingly concerned in or party to the contravening conduct. The action was begun under the Trade Practices Act 1974 for alleged breaches of section 51 AC of the Act, which prohibits unconscionable conduct. It is based, in part, on existing ACCC Federal Court proceedings against the same parties. Under the class action, the ACCC alleges that Allphones: 

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received commission or bonus payments from telecommunication networks which were not paid to franchisees in accordance with their franchise agreements, and which were not disclosed to franchisees received rebates from mobile phone handset and other product suppliers which were not paid to franchisees in accordance with their franchise agreements, and which were not disclosed to franchisees, and made unilateral deductions from commission payments payable to franchisees which were not permitted by their franchise agreements

in circumstances which, in the context of Allphones' relationship with its franchisees, was unconscionable. Under the class action, the ACCC is seeking damages for losses sustained by the represented franchisees which the ACCC alleges flowed from this alleged unconscionable conduct. Previously in March 2008, the ACCC had began proceedings against Allphones Retail Pty Limited and others alleging contraventions of the Act. Allphones and the other respondents are defending those proceedings which are set down for hearing from March 23 2010. The ACCC began further proceedings in October 2008 against Allphones which resulted in Allphones giving interim undertakings to the court and the court ordering injunctions restraining Allphones from engaging in conduct in negotiations with its existing franchisees which the ACCC alleges contravened the Act. The court has not yet set a date for these October proceedings to be heard on a final basis. Both these earlier proceedings include allegations of contraventions of sections 51AC, 51AD, 52 and 59 of the Act against Allphones. These sections deal with unconscionable conduct, contravention of an industry code, misleading conduct and misleading representations about certain business activities. To ensure the best prospects of an efficient and effective outcome for the franchisees who are a party to the class action, the ACCC is not seeking damages on behalf of franchisees for these

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additional alleged contraventions. However, it will continue to pursue declarations, injunctions, compliance programs and costs. Proceedings for the class action is set for directions hearing on September 8 2009 before Justice Foster. Under s87(1B) of the Act the ACCC can make an application on behalf of one or more persons who have suffered or are likely to suffer loss or damage by conduct of another person who was engaged in contravention of certain parts of the Act. The ACCC requires the consent of the affected persons to take action on their behalf.

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