Franchise First

23 Jun 2009

Franchising regulation in New Zealand – not broken, no need to fix it

After a ten month hiatus, the issue of franchise regulation has again hit the headlines in New Zealand. It appears it will be a fleeting visit only. The Minister of Commerce, Simon Power, has just released a cabinet paper which concludes that there is not a case for franchise specific regulation in New Zealand. 

We agree with the Minister of Commerce's conclusion, which affirms our August 2008 franchising feature - Review of Franchising Regulation in New Zealand - If it ain't broke, don't fix it?

Background to the Review

Franchising in New Zealand is subject to a range of generic business laws such as contract law, intellectual property law and consumer protection law. Voluntary self-regulation of the sector is also achieved through the Franchise Association of New Zealand (FANZ). The combination of generic business laws and self regulation is the approach taken in many countries such as the UK, Singapore and Hong Kong. Conversely, Australia, the USA, Canada, Malaysia and China have all adopted franchise specific laws to varying degrees. 

Calls for franchise regulation are nothing new, and have occurred on and off since Australia adopted specific franchise laws in the late 1990s. The impetus for the current review was fraud allegations levelled against (now former) master franchisee Keith Lapham in connection with the sale of non-existent Green Acres' ironing franchises. While these allegations were being investigated by the Serious Fraud Office (SFO) (he now faces three fraud charges), the Ministry of Economic Development (MED) took the opportunity to issue a discussion document in August 2008 calling for a review of whether there is a need for franchise specific regulation in New Zealand. This led to a range of industry submissions to the MED at the end of last year and, ultimately, the release of the Minister of Commerce's cabinet paper. 

Outcomes of the Review

In concluding that franchise specific regulation is unnecessary, the Minister of Commerce highlighted a number of points including:

1. There is insufficient data to determine whether the disputes that have arisen in franchising relationships (such as those between Mr Lapham and his franchisees) are widespread or symptomatic of systemic issues in the sector. These types of disputes do not seem to be unique to franchising and are in fact likely to be common in the wider small to medium sized enterprises sectors.
2. It is unclear whether franchise specific regulation would be adequate to address many of the perceived problems, such as those arising from a lack of understanding among franchisees or failures to carry out appropriate due diligence before entering a franchise contract. It is difficult to legislate to remedy this.
3. It is likely that the risks and costs of regulation would outweigh the possible benefits of franchise specific regulation. These include the small size of the franchise sector in New Zealand (which would suffer from potentially high compliance costs) and the difficulty in defining a 'franchise'. Legal definitions of a 'franchise' in countries that have introduced franchise specific regulation have been criticised for being too narrow, allowing people to structure their business to avoid regulation, or too wide, capturing businesses which are not franchises.

Our View

We agree that there is no need for franchise specific regulation in New Zealand. 

The critical background to this review is that the recent call for regulation resulted from allegations of fraud levelled against a rogue individual. This issue is being dealt with by the SFO within the framework of current laws and is not evidence of any widespread problem in New Zealand's franchising sector. 

Put simply, there is no evidence that franchise deals are going 'seriously wrong' and there is no compelling reason to single out franchising for specific regulation. The status quo system of regulation through New Zealand's existing business laws and voluntary compliance with FANZ codes adequately protects New Zealand's franchising sector.

Authors

Earl Gray

Partner - Intellectual Property

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Richard Watts

Partner - Intellectual Property

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Alex Campbell

Senior Associate - Corporate & Commercial

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Lisa Carbines

Senior Associate - Corporate & Commercial

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Sarah Chapman

Senior Associate - Intellectual Property

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Sonya Hill

Senior Associate - Corporate & Commercial

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Andrew Tetzlaff

Senior Associate - Corporate & Commercial

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