The rise of class or representative actions: practical avoidance tips
Franchise systems rely on open and clear communication and interaction between all participants, including franchisors, franchisees, franchisee advisory council’s and suppliers. The facilitation of this within systems brings together each of these parties which, where effective, can advance the common goals for the benefit of all, but, where ineffective, can result in escalation of issues, distraction from core business and adverse impact on the system.
One of the most brand and value destroying events can be where a group of disgruntled franchisees band together to agitate an issue or series of issues with the franchisor. The worst case scenarios being be a class action or representative action prosecuted by the ACCC on behalf of franchisees against the franchisor (collaborative litigation).
Each of these has a serious impact on a franchise system and emphasises the need to have in place systems to address issues as they arise to avoid the spectre, cost and damage caused as a result of collaborative litigation. We outline the types and changes to general collaborative litigation and tips to assist avoidance in franchise systems.
The rise of collaborative litigation
In circumstances where unequal relationships exist, due to the financial or legal position of one party or another, the ability to equalize such disparity through association or grouping of smaller parties to challenge the stronger party, can redress the balance.
Tools used in litigation to do this include class and representative actions. These tools while having similarities are different and are governed by differing sets of prescriptive rules. We discuss each in general terms below.
Class action
A class action can allow a group of franchisees to effectively bring an action against a franchisor, by combining their resources, financially and evidentiary to enhance their position to seek relief.
Franchise relationships are almost tailor made for class actions due to the accessibility of information and ability to communicate with others likely to be affected in a similar manner to particular conduct.
Under section 6 of the Franchising Code of Conduct (Code), franchisors must provide prospective franchisees with a disclosure statement and a draft franchise agreement. The disclosure statement must contain the contact details (other than those that have opted out) of all existing franchisees. This list provides franchisees with the necessary information to identify potential members of a class and communicate with them.
The disclosure statement In conjunction with annual conferences, training opportunities or group emails, ensures parties in a franchise system have the ability to quickly and with greater ease than others identify like minded individuals who may hold the same complaints and seek the same outcomes as an aggrieved party.
Franchisors are limited in their ability to discourage or prevent franchisee association at law, as well as in practice by systems that require collaboration and interaction for the success of the franchise system.
Recent decisions of the federal courts in overturning a case of Brookfield Multiplex have paved the way to make class actions more accessible going forward, which the Commonwealth government flagging will be drafted into regulations to entrench the courts view.
Class action example – financial redress
The most recent example in the headlines of use of the class action provisions as a tool to obtain relief against a party in a position of financial power is Financial Redress Pty Ltd, a wholly owned subsidiary of IMF Australia Limited ( a litigation funder), against numerous banks within Australia.
This action is seeking the repayment of exception fees deducted from bank customers who become members of the class over the past six years. The action is hoping to attract up to 100,000 bank customers to join in the class action against four of the big banks and eight others operating in Australia.
The continuing rise of class actions is a direct result of increased understanding of the leverage that can be gained by modifying the power dynamic that originally exists from a one-on-one scenario to a many-on-one scenario. It is governed by strict rules and processes set out in court rules and interpretative decisions of the courts.
Representative actions
Under section 87B of the Trade Practices Act (TPA), the ACCC has had the power to represent franchisees in a court action that the franchisees may not otherwise have the resources to run on their own.
This provision permits the regulator to utilize the information it has obtained from the franchisees, through exercise of its powers, or from other sources, cohesively in the one litigation action on behalf of the represented franchisees, who have an underlying mutual thread to their concerns.
The Trade Practices Amendment Bill (Australian Consumer Law) (No. 1) 2010 (Cth), expanded the scope of relief able to be obtained from the Courts by the ACCC, for representative actions.
Previously it was only those franchisees who the ACCC was representing that could have orders made in their favour against a franchisor found to be in breach of the TPA. Now a class of people affected in a like manner (i.e. franchisees) can have orders made to compensate them by a franchisor found to have breached the TPA.
Therefore a representative action by the ACCC on behalf of 3 franchisees, could seek compensation for all franchisees for a breach of the TPA, with it now being within the Courts power to make such orders. This potentially also expands the compensation amount or damages required to be paid by a franchisor who is found in breach of the TPA.
Representative action example - Allphones
The long-running representative action against Allphones was instituted by the ACCC alleging unconscionable conduct and the consequent breach of the TPA by Allphones.
The unconscionable conduct began in 2004, following the commencement of a national expansion plan which created a system giving Allphones control over the stock and income of franchisees.
The company allegedly made representations to its franchisees that it would use its bargaining power to their benefit and that all profits would be shared. Instead, Allphones negotiated commissions and bonuses with suppliers that were not disclosed to franchisees and altered documents from carriers to disguise charges. Allphones withheld income and stock, and engaged in bullying behaviour to pressure some franchises to sell, transfer or terminate their franchise licenses.
On 28 April 2010, the Federal Court made final orders declaring that Allphones and its executives were to pay $3 million in damages to 55 current and former franchisees who had been represented by the ACCC which had run the action through the Court.
Avoidance tips
Where classes of people join together to bring actions (whether this be in the form of representative actions or class actions), franchise systems are placed in an extremely vulnerable situation that can result in negative impacts.
Disagreement of any form within a franchise system is disruptive, takes the parties focus away from operation of the business and stymies the development of the working relationship to build the franchise system and brand.
It is uncontroversial that rogue franchisors need to be held accountable for their conduct for the protection of their franchisees and the sector as a whole. The recent amendments to the TPA with regards to representative actions further expose such rogue franchisors to detrimental consequences if they are found to be in breach of the legislation.
Prudent franchisors and franchisees though are aware that the investment in their franchise system is better served by resolving concerns and issues as soon as possible and have developed systems such as those that follow in an attempt to do so:
- informal coaching or catch ups; or
- franchise system mentors with clear policies around role and activities; or
- designated avenues for complaint or escalation of issues incorporated into the operations of the system; or
- internal dispute resolution mechanisms: review, mediation, group of peers discussion; or
- franchisee advisory council forums, where size permits; or
- designated complaints officer; or
- formal mediation through the Office of Mediation Adviser; or
- formal mediation under the Franchise agreement.
These systems are designed to foster an environment of confidence to express concerns and encourage dialogue on issues of contention. Whilst engaging a disgruntled party, capturing and responding to concerns or issues, understanding or reasoning for decisions may provide clarity and resolve or place the concern or issue in the appropriate context.
Lack of engagement and interaction promotes festering, grievance and comments in networks that are not productive of resolution of the concerns or issues.
For avoidance of collaboration in the form of class or representative action, utilisation of some or a combination of some of the mechanisms above will assist in reducing the need to resort to such actions for resolution of issues.
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The material contained in this publication is no more than general comment. Readers should not act on the basis of the material without taking professional advice relating to their particular circumstances.
© DibbsBarker 2009
