Franchisors will be aware of the Franchising Code of Conduct (“Code”) but it is not uncommon for the marketing fund obligations under the Code to be less understood. Franchisors who operate a marketing fund should ensure they are aware of their obligations in respect of the marketing fund and must strictly comply with those obligations to avoid disputes and penalties down the road.
This article outlines steps to help franchisors comply with their obligations and briefly looks at the 2019 decision of Ultra Tune Australia Pty Ltd v Australian Competition and Consumer Commission (ACCC) (“Ultra Tune case”) which demonstrates the importance of complying with marketing fund obligations.
The 3 Steps
The ACCC recently issued a reminder to franchisors of the three key steps to remember to help to satisfy obligations contained in the Code in relation to marketing funds. Whilst these three steps are particularly important to assist franchisors to comply with their obligations with respect to marketing funds, franchisors should ensure that they understand and comply with all requirements under the Code. It is prudent for all franchisors to have an experienced franchise lawyer to review your Disclosure Document and marketing fund processes to ensure that you are complying with your obligations.
- Ensure financial statements are prepared and on time
If franchisees are contributing to a marketing or other cooperative fund, financial statements for the marketing fund must be prepared within four months of the end of the financial year. These statements must show:
- who contributes to the fund; and
- what the money has been spent on.
Statements must be audited by a registered company auditor within four months after the end of the financial year to which it relates, unless 75% of the franchisees vote that an audit is not required. Such a vote must occur within three months after the end of the financial year.
Franchisors must then provide a copy of the financial statement and a copy of the audit report to franchisees within 30 days of each document being prepared.
- Prepare meaningful statements
Under section 15(1)(b) of the Code, marketing fund financial statements must include ‘sufficient detail’ so as to give franchisees ‘meaningful information’ regarding the sources of income paid into the fund and how the money is spent.
Whilst some franchisors may provide simple descriptions of expenditure to franchisees such as ‘print advertising’ or ‘online promotion’, preparing financial statements with basic line items only is unlikely to be considered sufficient detail.
The obligation to provide meaningful information was highlighted in the Ultra Tune case. One example where Ultra Tune were found to have breached their obligations was in the New South Wales Metro marketing fund 2014-15 statement, where 76.65% of the total expenditure of the fund was attributed to “Promotion & Advertising – Television”. The court found that information about the item is required to be provided under the Code, not merely the item itself. This information could have and should have been included, so as to give meaningful information to the franchisees. For instance, in Ultra Tune’s case, the item could have been broken down into commercial and free to air television spend or the channels on which the advertising appeared.
Ultra Tunes case is a reminder to franchisors to provide as much meaningful information as possible in preparing their marketing fund financial statements.
- Ensure funds are only spent on what is allowed
Under section 31(3) of the Code, there are only four things that marketing funds can be spent on:
- expenses that have been disclosed to franchisees under Item 15 of the Disclosure Document;
- legitimate marketing or advertising expenses;
- expenses agreed to by a majority of franchisees; or
- expenses used to pay the reasonable costs of administering and auditing the marketing fund.
Franchisors must ensure that the funds are only spent on items that meet one of the four circumstances outlined above. Any expenditure which falls outside these items is a breach of the Code.
What if the statement is not properly prepared?
If a statement is prepared incorrectly (or not at all), the franchisor will be in breach of the Code and may also be in breach of the Australian Consumer Law.
The ACCC investigates alleged breaches of the Code and can take enforcement action as required. Under the Code, a civil penalty of up to $66,600 may apply for each failure to prepare and provide a marketing fund financial statement in accordance with Section 15(1) of the Code. In Ultra Tune’s case, the court levelled penalties of $510,000 against Ultra Tune for their various breaches in relation to disclosure documents and marketing fund statements.
It is therefore extremely important that franchisors comply with their obligations under the Code, not only generally, but also specifically in relation to marketing fund arrangements and the required statements.
If you require advice in relation to franchising matters, including the preparation of Disclosure Documents and ensuring compliance with the Franchising Code of Conduct, our experienced franchise team at Coulter Legal are here to assist.