By Philip Colman, Principal and Eleanor DeMarzi, Associate, MST Lawyers

Ultra Tune’s “stubborn”, “cavalier”, and “serious” breaches of the Franchising Code of Conduct (Franchising Code) and Australian Consumer Law (ACL) have resulted in a total fine of $2.604 million.  

One of the breaches found by Justice Bromwich in his 18 January 2019 decision in ACCC v Ultra Tune Australia Pty Ltd [2019] FCA 12 concerned Ultra Tune “skimping” on the level of detail contained in marketing fund statements provided to franchisees.

Clause 15 of the Franchising Code requires a franchisor to provide to its franchisees annual marketing fund financial statements which include sufficient detail and meaningful information about the fund’s receipts and expenses.  The Code imposes a maximum civil penalty of $63,000 for a contravention of this clause. 

Ultra Tune’s marketing fund statements took the form of an ordinary balance sheet, with a limited number of line items listed as either “income” or “expenses” together with dollar figures and percentages of overall expenditure.

In rejecting Ultra Tune’s submission that its marketing fund statements contained sufficient detail, Justice Bromwich said:

• What is required to be provided is sufficiently detailed meaningful information, which is useful and practical, not merely minimal accounting information.
• The franchisee should be 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.
• What is sufficient detail to give “meaningful information” on a fund’s income and expenditure will vary from case to case.  Similarly, what may be a sufficient level of detail for certain items or categories of expenditure may be insufficient for others.
• Generally, the more significant an expense is, the more important it will be to a franchisee, and therefore the greater the level of detail that will be required to facilitate an informed assessment by the franchisees concerned.  There may be cases in which more detail is needed for a lesser expenditure in order to understand why it is appropriate.   

  Justice Bromwich noted that:

• The purpose of the provision is to provide accountability and transparency in the use, and potential misuse, or even inappropriate or ineffectual use, of marketing funds.

• Franchisees are not to be taken, just because they are running a business, as having accounting expertise.  It is the ordinary franchisee, not their accountants, who must be placed in a position to understand how marketing funds are being deployed.   
• For a number of the minor items, such as “Accounting Fees”and “Bank Charges”, it is doubtful that further detail would bring any great explanatory force to the statement.  They may well be relatively fixed expenses with little room for reduction or change.

• The line item for “Customer Support” is more cryptic, and might well also be inadequate. 

Dealing with the real defect in the marketing fund statement, how the bulk of the expenditure (76.65%) was itemised simply as “Promotion & Advertising – Television”, Justice Bromwich stated:

• Where it is indicated that approximately 80% of a fund has been applied to something as non-specific as “Promotion & Advertising – Television”, the statement does little more than suggest, in a circular fashion, that Ultra Tune spent the majority of the marketing fund on marketing.  This is plainly inadequate for the purposes of the Code. To whom have the fees been paid?  What services were obtained, and when?   

• The information is not just lacking the quality of providing “meaningful information”; it has the active quality of providing largely meaningless information except as to raw quantum.

Justice Bromwich concluded that a separate contravention had occurred for every franchisee in the network that received or was entitled to receive the non-compliant marketing fund statement – 185 contraventions in total.  The manner in which Justice Bromwich calculated the total fine will be the subject of a further article to be published in the coming week.

What Does This Mean For Franchisors?

Some specific guidance was provided by Justice Bromwich where he said:

• A franchisor may be well advised to err on the side of candour, rather than secrecy, or take the risk of expensive adverse consequences and significant reputational harm. 

• Candour inevitably helps to build trust with franchisees, which in turn is likely to facilitate advancing their mutual interests. 

Franchisors must ask themselves:

1.    Does each line item in our marketing fund statements give enough detail to enable franchisees to make an informed assessment as to its appropriateness?

2.    Besides simple numbers, is it clear what the money was spent on and where, how and when it was spent?

3.    Does the information make sense to an ordinary reader (rather than an accountant)?

4.    Have we tailored the information to the circumstances, for both significant expenses and smaller expenses?  Using basic, accounting profit and loss forms and balance sheets is not sufficient.

If your franchisees are required to pay money into a marketing or other cooperative fund, please call us today for advice to ensure that your statements are Code compliant.  In the words of Justice Bromwich, do not downplay the significance of this issue and end up manifesting the “wrong kind of sorry” – that is, sorry that you have been caught.   

Our Franchise Law team can be contacted by email or by telephone on +61 3 8540 0200.