How to avoid misrepresenting your franchise offer

By Sarah Stowe | 18 May 2016 View comments

Check what you can do as a franchisor to avoid misrepresenting your business to a franchise buyer. Image: elbsuae.comRemember that song of the 70’s by Stylus “Living in a world of make believe” which I have at home on vinyl?  Well that sort of conduct is now no longer acceptable in the corporate world due to our consumer laws and various regulatory codes.

We are living in a world of disclosure and consumer protection whether selling a house, entering into a consumer contract or engaging professional advisors such as lawyers, accountants or financial advisors.

Disclosure can take the form of a product disclosure statement (PDS), a vendor’s statement or a cost and engagement letter.

Companies now can walk a fine line between the need to market and promote their business and the risks of failing to properly disclose or mislead consumers.

In the franchise sector there have been many claims by franchisees alleging misleading and deceptive conduct by a franchisor.

Misrepresentation can include information that is provided or in incomplete or inaccurate information, or the omission of relevant information.

To mislead someone is generally defined to mean “to lead into error”. It does not matter whether the false or misleading statements were intentional.

Section 18 (1) of the Australian Consumer Law (ACL) prohibits anyone engaged in trade or commerce engaging in misleading or conceptive conduct, or conduct that is likely to mislead or deceive.

The ACL has been developed through the case law  and does not define what behaviours constitute misleading or deceptive conduct..

The Courts look at all of the facts in each individual case and the surrounding context to determine whether a misrepresentation is seen to be misleading or deceptive conduct.

How the ACCC is involved

The Australian Competition and Consumer Commission (ACCC) has power to impose fines and penalties including for breaches of the Franchising Code of Conduct.

The ACCC uses a range of tools to encourage and police compliance, which includes:

  • Administrative resolution –  the party in breach agrees to stop the conduct and compensate those affected.
  • Court enforceable undertakings.
  • Infringement notices (under the Code now $9,000 per breach for a corporation and $1,800 per breach for an individual) and additionally with the Courts power to impose financial penalties of up to $54,000 per breach.
  • A court may also make orders by way of compensation or damages and injunctions to stop the conduct, and disqualify directors from managing corporations.
  • Companies are also listed on the public register on the ACCC website.

In the first six months of this year approximately 15 companies have been listed on the public register for various breaches.

Disclosure issues for franchisors

The obligations of disclosure under the Franchising Code of Conduct are well established and the most common areas franchisors should carefully consider are as follows:

1. Providing financial information as to likely revenue and/or profit in a franchise system that can be independently verified and supported.

2. Providing realistic estimates in respect of fit out, initial stock and working capital requirements. We often find that these costs and expenses are underestimated resulting in a franchisee having to fund a far greater amount to establish the business placing them under financial pressure.

3. Inadequate provision of working capital for the franchisee to operate within the first six to eight months which can also lead to financial distress.

4. Sales/earning information: it is often debated among franchise lawyers whether the franchisor should provide any sales, earnings or financial information to a prospective franchisee as it exposes the franchisor to risk.

This should be weighed against the need for a franchisor to promote and offer their system in a competitive market.

If the franchisor does not provide any financial information the franchise offer may be less attractive. The franchisor can provide financial information provided that it is not misleading, can be substantiated and the financials and/or projections of earnings have been modified to the particular site or territory.

This lesson was learned by the franchisor in the Billy Baxter case where the Court stated that where financial information was provided in respect to the potential franchise site the information should be tailored to the particular site offered. In that case a greenfield site was offered to the franchisee, however the franchisor supplied financial information from an existing franchisee site.

Advertising and marketing guidelines

Information in marketing and promotional material or on a website and in any other medium including disclosure documentation should be accurate and able to be substantiated.

The following are rules  what NOT to do:

  • Do not make assumptions and statements that cannot be substantiated.
  • Do not omit relevant information;
  • Do not make promises you cannot keep;
  • Do not offer goods or services without a reasonable basis for believing that you can deliver them;
  • Do not make ambiguous or contradictory statements

Contract terms and conditions should be in legible form and in minimum font size of no less than 10 points.

Statements should not create a false impression whether about the quality, value, price or benefit of goods or services including any associated guarantee or warranty.

Do not use false testimonials.

Any qualifications in advertising should be clear and prominent so consumers are aware of the offer.

The practice of bait advertising is illegal where a specific price (usually sale prices) are advertised on goods that are not available or only in very limited quantities.

If the overall impression left by a franchisor’s advertising promotion or representation creates a “misleading impression” their behaviour is likely to breach thelLaw. 

However, puffery or wildly exaggerated or vague claims about a product or service that  no-one could possibly treat seriously or find misleading are not considered misleading, such as “the best steak house in Australia”.

Social media risks

The areas of risk for franchisors also extend to social media through channels such as Facebook, Twitter and YouTube.

The same principles apply in relation to these media. The franchisor should ensure they do not make any false or misleading claims as part of their marketing and promotional activities.

Companies need to monitor their social media pages to minimise the risk and respond to false, misleading or deceptive comments instead of simply removing them.

The franchisor may be held responsible for posts or comments made by others for example franchisees, or other parties which are false or likely to mislead or deceive consumers.

A company may be held responsible for fan posts and testimonials on social media knowing they were false and not removing them.

Simply removing a post of itself may not be adequate to counter a false impression made by the original comments. Customers affected by a false or misleading statement should be offered a refund.  

5 steps to avoid misrepresentation

  1. Use common sense and put yourself in the shoes on the consumer or franchisee.
  2. Ensure the information you are supplying is clear, accurate and can be supported.
  3. Do not create false expectations by over promising results or services.  and under deliver as this and when not met it can end poorly.
  4. Regular compliance checks  and training for all staff in your organisation will help limit and manage the risk.
  5. Remember documents are your friend. Emails, file notes and minutes of meetings are your means of limiting risk and can be relied upon as evidence in the event a claim is made or an investigation by a regulator is conducted.