Marketing fund disclosure: landmark judgment confirms that franchisors must take ultimate responsibility for compliance with the Australian Franchising Code of Conduct

By Lynne Lewis, Kellie O'Flynn

09-2019

In a judgment that bolsters recent announcements by the ACCC pressing franchisors to comply with their obligations, the Full Federal Court has confirmed a January 2019 Federal Court finding that a franchisor contravened several aspects of the Franchising Code of Conduct (Franchising Code) and the Australian Consumer Law (ACL), most particularly in relation to certain disclosure obligations owed to its franchisees. 

The ruling was handed down against Ultra Tune Australia Pty Ltd (Ultra Tune) in its appeal against both the finding itself and the penalty imposed. The appeal focused on two main aspects which remained in controversy between the parties: 

  • whether Ultra Tune had failed to disclose "sufficient detail" in financial statements for its marketing funds contrary to clause 15(1)(b) of the Franchising Code; and

  • the quantum of the penalty imposed by the Federal Court. 

In its first opportunity to consider the Franchising Code's ‘sufficient detail’ requirement, the Full Federal Court confirmed that Ultra Tune's marketing fund statements did not give franchisees enough information for franchisees to make a meaningful assessment as to whether the type of expenditure was appropriate. 

The Court held that simply stating that funds had been spent on television advertising was not sufficient and would not assist in ascertaining whether the money was expended on “legitimate marketing or advertising expenses”: details such as where and when the ads had aired and whom the fees were paid to should have been provided to franchisees.

However, the Court disagreed with the Federal Court on both the level of penalty imposed and its conclusion that Ultra Tune’s breaches of the marketing fund statement and disclosure document requirements were in the “worst category” of the offences set out in the Franchising Code.

Ultra Tune, a large independent car repair company with franchises in all mainland states and territories in Australia, succeeded in getting the penalty initially imposed reduced from AUD$2.6 million down to just over AUD$2 million.

The reduction was provided on the basis that Ultra Tune's breach of the sufficient detail requirement resulted from “egregious inadvertence” to its obligations as opposed to “deliberate” acts or omissions. 

The revised calculation reflected the fact that two separate registered auditors had signed off on the financial statements which the trial judge considered "manifestly inadequate". The Court also confirmed however that it is ultimately the franchisor's responsibility to ensure compliance with the Franchising Code. 

The penalty and repercussions for Ultra Tune remain significant - in addition to imposing penalties, January's judgment also ordered that Ultra Tune refund a prospective franchisee’s deposit with interest, publish corrective advertising, implement a compliance program and pay the ACCC’s costs. The findings are indicative of the fact that the Courts will take into the account a range of factors including a history of non-compliance, delays in disclosure, the number of franchisees affected and the bargaining position held by franchisors in their dealings with franchisees. You can find a copy of the judgment here

Avoiding penalties 

Key takeaways from this case for franchisors include the following:  

  1. Financial statements should provide sufficient information to enable franchisees to ascertain whether actual expenditure matches the kind of expenditure prospectively disclosed in disclosure documents.

  2. Take compliance seriously! Franchisors should either ensure that their in-house team is aware of the relevant obligations under the Franchising Code and the ACL, or take external advice.

  3. Professional advice does not absolve you from responsibility. Franchisors must take ultimate accountability for their compliance and will not be able to escape liability on the basis of a knowledge gap within the organisation.  

The team at Bird & Bird in Sydney are well equipped to advise franchisors on compliance with the Franchising Code and the ACL. Should you have any questions, please contact Lynne Lewis and Kellie O'Flynn.