By Iain Irvine (Principal) and Jessica McNamara (Associate)
Federal Court gives further direction on required content of annual marketing fund statements
The Australian Competition and Consumer Commission’s recent investigations into the conduct of well known motor repairer, Ultra Tune, have resulted in the Federal Court ordering Ultra Tune to pay a penalty of $2,604,000 to the ACCC.
On 18 January 2019, the Federal Court handed down its decision which found Ultra Tune had breached the Franchising Code by failing to comply with requirements relating to its disclosure document and marketing fund financial statements. The Court also found that in its dealings with a prospective franchisee, Ultra Tune had breached its obligation to act in good faith under the Franchising Code and had made false or misleading representations contrary to the Australian Consumer Law. This is the first case to find a breach of good faith under the Franchising Code.
The ACCC’s investigations into Ultra Tune’s actions arose from a single complaint by a prospective franchisee. The case provides a crucial lesson to franchisors to ensure they are complying with the disclosure requirements under the Franchising Code and observing the requirements of the Australian Consumer Law when dealing with prospective franchisees.
The Court paid particular attention to Ultra Tune’s marketing fund financial statements and found not only had the franchisor not prepared the financial statements and provided them to franchisees with the required timeframes, they also did not ensure the statements included sufficient detail.
Obligations under the Franchising Code
Under the Franchising Code, franchisors must prepare financial statements for any marketing fund franchisees are required to contribute to, and have those statements audited (unless this audit requirement is waived by franchisees), within four months of the end of each financial year. An audit is not required if 75% of franchisees contributing to the fund waive this requirement within three months after the end of the financial year. Financial statements must then be provided, along with the auditor’s report (if applicable), to each franchisee within 30 days of preparation. In this case, Ultra Tune’s marketing fund financial statements were prepared almost 2 months late and were provided to most franchisees almost 6 months late.
Marketing fund financial statements must include sufficient detail of the fund’s receipts and expenses so as to give meaningful information about sources of income and items of expenditure, particularly with respect to advertising and marketing expenditure. Although Ultra Tune had financial statements for its marketing funds prepared in the form of ordinary profit and loss statements, the Court found the details provided in the statements were not sufficient.
Ultra Tune’s marketing fund statements included a large number of minor items (described as “Gift Vouchers”, “Printing & Stationary”, “Seminars and Meetings”, “Administration Fees”, “Fleet Administration”, “Customer Support” etc) that did not account for more than 20% of the total expenditure. The majority of the expenditure was constituted by a single item described as “Promotion & Advertising – Television”. The Court was most critical of the absence of detail provided in relation to this “lion’s share” of the marketing expenditure.
Marketing fund financial statements must put franchisees in a position to know what the income and expenses of the fund are for the purpose of making some meaningful assessment of whether that use is appropriate. This will differ from case to case. However, generally, the more significant an expense is, the more important it will be to a franchisee, and therefore the greater the level of detail required to be given. Particularly where a category of expense makes up a significant proportion of the fund’s expenditure. In finding the description “Promotion & Advertising – Television” was deficient the Court suggested franchisors should be considering disclosure of details such as the suppliers of the marketing goods/services, the nature of the goods/services obtained and when the goods/services were obtained.
The Court noted that franchisors should err on the side of candour, rather than secrecy, in preparing their marketing fund financial statements.
Geowash also in the spotlight
On 8 February 2019, the Federal Court also found a hand car wash and detailing franchisor, Geowash, had breached its obligations under the Franchising Code and acted unconscionably and made false or misleading representations contrary to the Australian Consumer Law. The decision also found that Geowash’s Director was knowingly involved in the franchisor’s conduct and that its Franchise Manager was knowingly involved in Geowash’s unconscionable conduct and failure to act in good faith. The Court will determine penalties against these parties at a later date.
Following the outcome of these cases, the ACCC has taken the opportunity to remind the franchising industry that it will continue to take enforcement action when serious breaches of the Code are identified and that serious consequences will follow. If you have any questions in relation to compliance with the Franchising Code, please do not hesitate to contact us.