Author: Sean Steindl

by Sean Steindl

Inquiry report into the operation and effectiveness of the Franchising Code of Conduct released

On 14 March 2019, the Parliamentary Joint Committee on Corporations and Financial Services (Committee) released its 369-page report detailing its findings into the franchising sector, with regards to the franchising code of conduct .

The Committee has stated that comprehensive and broad reform is required to resolve issues within the sector which are systemic. They have also noted that the current regulatory framework is not addressing the power disparity between franchisors and franchisees. To address the issues identified and rebalance the power disparity the Committee has made 71 recommendations most of which are to be referred for further investigation by a Franchising Taskforce (Taskforce). The major recommendations are provided below:

Franchising code of conduct major recommendations

The Committee has recommended that the Taskforce be formed to further investigate potential regulatory amendments including:

1. the implementation of a public franchise register to be updated annually, with updated disclosure documents and template franchise agreements, by franchisors;

2. a requirement that the franchisor (and master franchisor) make disclosure to franchisees regarding the purchase of products below cost pricing, the margin on products and the rebates the franchisor receives for the purchase of such products;

3. investigating the conflict of interests associated with supplier rebates and third line forcing and whether the ACCC should be investigating these issues;

4. whether the Australian Consumer Law should be amended to expressly extend the unfair contract terms regime to franchises by deeming franchise agreements to be standard form documents and making breaches of this regime subject to civil penalties;

5. whether the Franchising Code of Conduct (Code) should be amended to prevent unilateral variations in documents such as manuals and policies unless the majority of franchisees (or their representatives) agree to the variation;

6. an amendment to the Code requiring rental amounts paid to the franchisor under a head lease to be held on trust solely for the purpose of paying rent to the landlord;

7. whether amendments are required to deal with franchisees’ rights in relation to goodwill when the franchise agreement ends or is transferred as part of a sale contract; and

8. whether the extent to which franchise systems involve sufficient co-investment and risk sharing such that they should be regulated similarly to financial products.

Additional recommendations to the franchising code of conduct

In addition to those matters to be referred to the Taskforce, the Committee has recommended that:

1. unilateral variations of franchise agreements be prohibited unless the majority of franchisees (or their representatives) agree to the variation;

2. mandatory quarterly reporting on marketing funds be required and civil penalties be introduced for failing to adhere to the reporting requirements. An additional recommendation is that legislation is amended to clarify how marketing funds are to be distributed in the event a franchisor is wound up;

3. extensive additional disclosure be required including:

a. provision of disclosures in both hard copy and digital copy formats;

b. for existing sites – the disclosure of financial information in the context of sales, including the previous 2 years’ Business Activity Statements;

c. for greenfield sites – the disclosure of financial information in the context of sales including the previous 2 years’ Business Activity Statements for a comparable franchise site;

d. provision of a copy of mandatory guidance on employment matters and overseas workforce issues as prepared by the Fair Work Ombudsman;

e. the disclosure of all rebates, commissions or other payments in relation to the supply of goods and services to franchisees as a percentage of the full purchase price on each transaction;

f. the disclosure of the reasonable personal workload to be undertaken in running and operating the franchise business; and

g. provision of a copy of the ACCC’s Franchisee Manual as part of disclosure.

4. existing whistle-blower protections be extended to cover franchisees reporting franchisors who are breaching the Code;

5. numerous changes to the cooling off provisions be made, including:

a. that the cooling off period commence on the later date of:

i. the franchise agreement being executed;

ii. an upfront payment being made to the franchisor;

iii. the disclosure documents being received by the franchisee;

iv. a copy of the lease being received by the franchisee.

b. clarification that the 14-day disclosure period must commence 14 days before the franchise agreement is executed; and

c. making the cooling off period applicable to transfers, renewals and extensions of the franchise agreement;

6. franchisees be able to terminate franchise agreements in circumstances where:

a. they are suffering hardship;

b. they are being exploited by the franchisor; or

c. the business has failed;

7. franchisor rights of immediate termination be limited to special circumstances such as fraud and public health and safety and require 7 days’ notice to be given to franchisees during which period the franchisee can lodge a dispute which causes suspension of the termination process until the dispute is resolved;

8. a class exemption be created to make it lawful for franchisees to collectively bargain with their franchisor;

9. arbitration be provided as an option if mediation is unsuccessful and multiple franchisees be able to take part in mediation or arbitration with Franchisors;

10. the ACCC be given power to identify and act on instances of systemic churning and burning (i.e., the repeated sale of a franchise site that is known to perform poorly or fail in order to make money from franchisees paying franchise fees).
Whilst the Committee’s recommendations are numerous and substantive, the report is part of a greater legislative process which will involve:
• the Government considering which recommendations to implement; and
• the formation of the Taskforce to provide further recommendations,
before Parliament will consider any legislative changes proposed by the Government.

Additionally given the recent joint media release by the Hon Stuart Robert, MP and the Hon Michaelia Cash which confirmed the Government is looking at strengthening the unfair contract terms regime, it is expected that the amendments proposed by the Committee will be considered as part of the Government’s review of the unfair contract terms regime.

If you would like us to prepare new franchise documents for you, review your existing franchising documents or would like to obtain further advice in respect of the Franchising Code of Conduct, please don’t hesitate to contact us.

by Sean Steindl

This one oversight concerning security interest can result in huge losses for your business

Here’s how to prevent it.

The way you handle a security interest can determine whether you record huge loss in your books or a healthy account of your business. One company Onesteel Manufacturing Pty Limited lost $23 million because of an over-sight in their security interest! While another, Psyche Holdings Pty Limited was able to avert the situation. Anything that potentially lose your business such huge amounts of money should be taken seriously. But what is a security interest?

Definition of a security interest

A security is “Enforceable claim or lien created by a security agreement, or by the operation of law, that secures the fulfillment of a pledge. A lender or obligee has a security interest in the collateral provided by a borrower or obligor to guaranty timely payment of a debt or performance of an obligation. See also perfected security interest.” Source: Business Dictionary

Security Interests- Why you should care?

Under s 166 of the Personal Property Securities Act 2009 (Cth) (PPSA), even if a security interest is registered correctly at the time of lodgement, there is an ongoing requirement to amend the registration within 5 business days of you acquiring actual or constructive knowledge of a defect in the registration. A failure to amend the registration within this time frame will result in the registration becoming defective. A defective registration can result in substantial losses such as was the case in OneSteel Manufacturing Pty Limited (administrators appointed) [2017] NSWSC 21, in which a registration incorrectly made reference to an ABN (where an ACN should have been used), effectively resulting in a $23 million loss.

Defects of the kind covered by s 166 of the PPSA can arise where security interests are registered in respect of:

(a) an individual who changes their name after registration of the security interest;

(b) patent, plant breeder’s right, trade mark or design applications using a reference to a serial number (e.g. a patent application number) which changes upon the registration of the patent, plant breeder’s right, trade mark, or design (e.g. a patent number);

(c) a trust where the trust does not initially have an ABN and subsequently obtains one; or

a trust which has an ABN (and the security interest is registered against that ABN) but subsequently cancels the ABN;

(d) partnerships where partners leave or have ABNs cancelled or new ABNs are issued;

(f) secured property which is transferred to another party by the Grantor subject to the security interest;

(g) body corporates which after registration obtain an ARSN or have their ARSN cancelled.

The above list is not exhaustive, and the exact details required to be recorded for a particular entity are prescribed in the Personal Property Securities Regulations 2010 (Cth) (PPS Regulations).

Issues that can rise after a security interest has been registered

A case has recently highlighted the issues that can arise where a trust obtains an ABN after a security interest has been registered. In the matter of Psyche Holdings Pty Limited [2018] NSWSC 1254:

(a) A general security deed was entered into between Ridgeway Finance Pty Ltd (Secured Party) and Psyche Holdings Pty Ltd as trustee for the LH Equity Trust (Grantor) in June 2013 relating to a loan between the two parties.

(b) Pursuant to the general security deed, a security interest was registered; however, at the time of registration the trust did not have an ABN and accordingly the ACN of the trustee was used in accordance with the registration requirements of the PPS Regulations.

(c) It is important to note that in relation to trusts, the PPS Regulations require that security interests are registered as follows:

1. If the trustee of the trust has been included on the transitional register, reference must be made to those details as recorded on the transitional register;
2. If not recorded on the transitional register and the trust has an ABN, reference must be made to that ABN;
3. If not recorded on the transitional register and if the trust does not have an ABN, then:

• If the trustee is a company, reference must be made to the company’s ACN; or
• If the trustee is an individual, the security interest must be registered against the individual.

(d) After registration of the security interest, the trust was assigned an ABN, the registration date of which was backdated to 20 June 2013.

(e) Over 5 years later a director of the Secured Party was advised of the ABN of the Grantor and became aware that the security interest would need to be updated to reference the Grantor using the Trust’s ABN.

(f) Unfortunately, the Secured Party did not amend the security interest to refer to the Grantor using the ABN within the 5 sdays provided for in s 166 of the PPSA resulting in the security interest becoming defective.

(g) Once the Secured Party realised their error, they registered a new security interest on 6 July 2018 using the Trust’s ABN details and then applied to the Court under section 588FM of the Corporations Act 2001 (Cth) (Act) to fix a later time for the registration of its interest. The basis for their application was that the failure to register the interest earlier was accidental or due to inadvertence.

(h) The Court action was necessitated due to s 588FL of the Act which would have the effect that should the Grantor become insolvent within 6 months of the date the second security interest was registered, the secured property would vest in the company for the benefit of creditors generally and the Secured Party would lose the benefit of the security interest unless the Court extended the date for registration under 588FM of the Act.

(i) Fortunately for the Secured Party, the Court was satisfied in this case, that such inadvertence had been established and granted the extension of time to register the security interest.

This case shows that secured parties need to be particularly diligent when dealing with trusts to ensure that their security interests are registered correctly and that, if it becomes aware of changes to the trust’s ABN status, amendments are made to correct the registration within the 5 days allowed for in s 166 of the PPSA. Doing so will avoid the costs incurred in lodging a new security interest and going to Court to obtain a similar order as granted in this case.

How to avoid a loss: security interests

One solution to above problem is for a secured party to register multiple security interests against both the trustee and the trust to attempt to ensure that there is at least one security interest which is valid at any point in time. Another benefit to this approach is that, if Parliament ever legislates the recommendation contained in the Whittaker Report (published in 2015) that security interests granted by trusts should always be registered against the trustee, the Secured Party will not have to amend any of its security interests. The main risk with registering multiple security interests, however, is that such registrations are potentially unjustified and may expose the secured party to civil penalties under section 151(1) of the PPSA. It is for this reason that we recommend that a clause is included in the relevant agreement providing that the trustee is acting in its own right and as trustee in order to justify the lodgement of the security interests.

If you are looking for further legal advice in respect of registering security interests, obtaining security or searching the Personal Property and Securities Register please contact us.

by Sean Steindl

4 steps to applying for a trade mark

When starting a business many people simply register a business name and domain but fail to realise that this does not grant them the exclusive use of that name in Australia or protect any design they use in their business.

To obtain such protection you must register a trade mark with IP Australia. The four steps to registering a trade mark are:

• Conduct preliminary research and choose your trade mark
• Structure ownership and use of your trade mark
• Determine which class of goods and services apply to your trade mark
• Apply to register your trade mark

1. Conduct preliminary research, choose and design your trade mark

It is vital from the outset that you ensure the name or logo is chosen with a view to trade marking it. Often we find that businesses within an industry tend to use common names, descriptive words or identifiers which by themselves can adversely affect the ability of the business to trade mark its intellectual property. In deciding on a business name and logo we recommend that you:

• engage in preliminary research and conduct Google searches on similar businesses;
• Whois domain name searches to identify available urls; and
• Australian trade mark database searches,
• avoid using where possible common names used for the products or services you sell;
• descriptive words and phrases by themselves;
• geographical names;
• words which sound similar to another business;
• logos which are similar to other businesses;
• common phrases, acronyms, single letters, and numerals;
• common surnames;
• liaise with both your logo designers (if applicable) and lawyers to ensure that the logo and name you choose is unique and capable of distinguishing itself from your competitors.

Rostron Carlyle Rojas Lawyers can assist you in this process by advising you on the likelihood of potential names and logos being registered as a trade mark and whether there are any potential conflicting trade marks or issues.

2. Structure ownership and use of your trade mark

Just as important as choosing the right name and logo is structuring the ownership and use of your trade mark. Unless the person or entity named in the trade mark application as the owner is the entity which will ultimately use the trade mark, it is important to ensure that documentation is put in place providing the user with a legal right of use.

Recent case law[1] has resulted in a trade mark owned by a director of a company being successfully opposed on the basis that whilst the trade mark was used by the company, the director as the owner did not use the trade mark. Importantly in that case there was no written licence agreement between the director and the company by which the company had a legal right of use of the trade mark, or even evidence of an intention on behalf of the director to enter into such an arrangement.

Rostron Carlyle Rojas generally advises having a trade mark and other valuable intellectual property owned by a separate holding company which then licenses that intellectual property for use by your trading entity or third parties, and is experienced in establishing and documenting such arrangements.

3. Determine which class of goods and services apply to your trade mark

The next step is to determine which class of goods or services apply to your trade mark. IP Australia uses a classification system which categorises goods and services into 45 different classes and it is important to note:

• you must actually use or intend to use the trade mark in relation to the goods and services you specify;
• IP Australia bases its fees on the number of classes claimed and these fees increase with every class you add;
• whilst a wide description of the goods and services offers greater protection a wide description also increases the risks of the trade mark conflicting with pre-existing trade marks or being challenged on the basis of non-use;
• whilst it is possible to narrow the description of the class of goods and services after a trade mark is registered it is not possible to widen that description; and
• careful drafting of the description of the class of goods and services can avoid potential conflicts with other trade marks, costly objections by third parties and increase the likelihood of a trade mark being registered.

4. Apply to Register Your Trade Mark

Once the above steps are completed the application for the trade mark can be lodged with IP Australia. Generally, your trade mark application will be examined within 3-4 months after which IP Australia will either issue an acceptance notice or an adverse report. If accepted, the trade mark will be advertised to allow third parties to view the trade mark application and make objections. If there are no objections the trade mark will be registered at the earliest 7 ½ months after the application for the trade mark was lodged. It is possible that during the application process IP Australia may issue an adverse report or a third party may oppose the trade mark application. In both cases it is important that professional advice is obtained to determine your options and to ensure that the relevant deadlines are met in a timely fashion.

Rostron Carlyle Rojas Lawyers have successfully dealt with many issues that have arisen during the trade mark application process and can advise you of your options going forward.

If you need advice or assistance in respect of trade marking or protecting your intellectual property please contact us.

[1] Pham Global Pty Ltd v Insight Clinical Imaging Pty Ltd [2017] FCAFC 83.