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Domino’s “screw up” serves as a timely reminder of Franchisor’s Marketing Fund obligations

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By Esther Gutnick, Senior Associate, MST Lawyers

Pizza franchise Domino’s has recently come under media scrutiny for its alleged failure to comply with obligations relating to its marketing fund as mandated by the Franchising Code of Conduct (“Code”).  It was reported that the Australian Competition and Consumer Commission (“ACCC”) is looking at whether Domino’s actions breached the Code and the Competition and Consumer Act (“CCA”).  If found guilty, Domino’s could be issued with infringement notices and/or have penalties imposed against it.

The Domino’s example serves as a reminder to franchisors of the importance of ensuring compliance with the Code’s marketing fund requirements, which are as follows:

Clause 15 of the Code states that:

  1. If a franchise agreement provides that a franchisee must pay money to a marketing or other cooperative fund, the franchisor must
    1. within 4 months after the end of the last financial year, prepare an annual financial statement detailing all of the fund’s receipts and expenses for the last financial year; and
    2. ensure that the statement includes sufficient detail of the fund’s receipts and expenses so as to give meaningful information about:
      1. sources of income; and
      2. items of expenditure, particularly with respect to advertising and marketing expenditure; and
    3. have the statement audited by a registered company auditor within 4 months after the end of the financial year to which it relates; and
    4. give to the franchisee:
      1. a copy of the statement, within 30 days of preparing the statement; and 
      2. a copy of the auditor’s report, if such a report is required, within 30 days of preparing the report.
  2. A franchisor does not have to comply with paragraph (1)(c) in respect of a financial year if:
    1. 75% of the franchisor’s franchisees in Australia, who contribute to the fund, have voted to agree that the franchisor does not have to comply with the paragraph in respect of the financial year; and
    2. that agreement is made within 3 months after the end of the financial year.
  3. If a franchise agreement provides that a franchisee must pay money to a marketing or other cooperative fund, the reasonable costs of administering and auditing the fund must be paid from the fund.

A civil penalty of up to 300 penalty units applies for a breach of part (1) of this clause, which equates to a fine of up to $54,000 given the current commonwealth penalty unit rate.

 Clause 31 of the Code further provides that:

  1. A franchisor must maintain a separate bank account for marketing fees and advertising fees contributed by franchisees.
  2. If a franchisor operates one or more units of a franchised business, the franchisor must pay marketing fees and advertising fees on behalf of each unit on the same basis as other franchisees.
  3. Despite any terms of a franchise agreement, marketing fees or advertising fees may only be used to:
    1. meet expenses that:
      1. have been disclosed to franchisees under paragraph 15.1(f) of the disclosure document; or
      2. are legitimate marketing or advertising expenses; or
      3. have been agreed to by a majority of franchisees; or
    2. pay the reasonable costs of administering and auditing a marketing fund.

Item 15 of Annexure 1 of the Code prescribes the specific information required to be disclosed in relation to the marketing fund in the franchisor’s disclosure document.

The alleged breaches by Domino’s relate to the franchisor’s failure to provide the marketing fund’s annual financial statement and an audit report on time for 2016.  The fund reportedly received in excess of $40 million from Australian franchisees in 2016, however, the required statement detailing its operations was last issued to franchisees in December 2014. The 2016 report was released by Domino’s almost three months late, in early 2017, following inquiries by Fairfax media.

Domino’s representatives have put this failure down to a “screw up” and an “honest oversight”, responding to media criticism by stating that it acted in good faith and rectified the issue, in addition to pointing out that the audit had raised no issues about the administration of the fund. 

Inadvertent or otherwise, the potential breaches of the Code’s marketing fund provisions could prove costly for Domino’s.  In addition to penalties, notices and enforceable undertakings which may be levied as a result of the ACCC’s investigation, franchisees and other affected persons have the right to take their own actions against the franchisor under the CCA to recover damages for any loss incurred as a result of a contravention of the Code.

The media report also intimated that certain communications from a Domino’s senior executive to the franchisees of the network were intended to pressure franchisees into voting that the fund should not be independently audited.

Interestingly, the media report was published on the same day that the ACCC released its new Compliance & Enforcement Policy for 2017, confirming that one of its current priorities will remain “ensuring small business receives the protections of industry codes of conduct, including the Franchising Code”. The ACCC has also commented that it will prioritise enforcement action against larger companies, on the basis that conduct by big business has the potential for the greatest consumer detriment and influence on other market participants.

The media and ACCC attention focused on Domino’s, especially in light of the ACCC’s self-proclaimed enforcement priorities, should be taken by all franchisors as a warning to ensure they maintain compliance with all aspects of the Code.  In relation to marketing funds, in particular, franchisors must administer the fund correctly, including:

  • maintaining a separate account for marketing fund monies;
  • using the fund for only authorised expenses;
  • preparing the fund’s annual statement of receipts and expenses by no later than 4 months after the end of each financial year (in the case of most Australian franchisors this will be 31 October);
  • having the fund’s statement audited (if required) by a registered company auditor within 4 months of the end of the financial year;
  • providing franchisees with copies of the fund’s annual statement and the auditor’s report (if required) within 30 days of the preparation of the relevant document; and
  • if a vote is conducted, ensuring it is completed on time and in a manner which does not influence the franchisee’s responses and ensuring that the requisite majority is obtained in order to exempt the franchisor from the audit requirements.

Franchisors should also ensure that a competent franchise lawyer either drafts or reviews their disclosure document on an ongoing basis to confirm that it complies with the Code and that the relevant disclosures regarding the marketing fund are properly completed. Please contact our Franchising team by email franchise@mst.com.au or by telephone +61 8540 0200 for assistance or further information.