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Resources Franchisor penalties to the tune of $2M

  • Posted by Insight by Redchip Lawyers
  • Published Current as at 3 October 2019
  • Category Insights

What Ultra Tune’s bump in the road means for you

The ACCC has had mixed results in its recent push for more transparency in franchisor use of marketing funds, with penalties against Ultra Tune Australia Pty Ltd (Ultra Tune) reduced by half a million dollars on appeal.

The auto repair franchisor still walked away with penalties in excess of $2 million for breaches of the Franchising Code of Conduct (the Code) and Australian Consumer Law – a significant decision that sets a guide for other franchisors in their obligations under the Code.

Ultra Tune marketing fund statements in need of repair

In January 2019, the Federal Court ruled that Ultra Tune had failed to:

  • prepare marketing fund statements within required time frames;
  • provide these statements and audit reports to franchisees; and
  • provide meaningful information to franchisees about marketing expenditure in the statements.

These failures were found to be in breach of the Code, which requires franchisors to provide sufficient detail of the fund’s receipts and expenses so as to give meaningful information about how marketing funds are being managed and used. While basic accounting statements were provided, they lacked explanatory detail required by franchisees to assess whether the expenditure was legitimate.

In addition, Ultra Tune was found in breach of the Code and Australian Consumer Law for false and misleading interactions with a prospective franchisee – this breach made up the larger portion of the penalties imposed. These aspects of the judgement were not appealed.

In September 2019 it was upheld by the appeal Court that Ultra Tune’s marketing fund statements were insufficient for Code purposes, although a difference in interpretation of various factors of the case led to a significant reduction in the penalties handed down.

Penalties take a turn on appeal

Although aspects of the appeal were upheld, the Court disagreed with the categorisation of some of the breaches. While the trial judge had deemed the breaches as the “worst category of case”, the appeal judges disagreed. They claimed that Ultra Tune’s breach of the sufficient detail requirement was not a deliberate failure to do what was required, but rather resulted from an “egregious inadvertence” to its obligations.

The penalty figures were adjusted accordingly, with Ultra Tune successfully reducing their overall penalties from $2.6 million to $2.01 million.

ACCC drive for transparency

The pursuit of Ultra Tune comes on the back of a big push by the ACCC in recent years to drive more transparency regarding franchisor use of marketing funds. The consumer watchdog has made numerous statements emphasising the need for greater transparency in marketing funds, and the issue has been a feature of the last three Franchising Code reviews.

In 2018, an ACCC investigation into Luxottica Franchising Australia, the franchisor for eyewear retailers OPSM and Laubman & Pank, led to the franchisor committing to becoming more transparent with franchisees about the allocation of its marketing funds.

What does this mean for other franchisors?

The Ultra Tune case marks the first time the Full Federal Court has considered the requirements in the Code for franchisors to provide “sufficient detail” regarding marketing fund allocation. The results of the initial trial and appeal clarify a strict interpretation of the Code’s clauses relating to the preparation and distribution of marketing fund financial statements. This is consistent with the expectations set by the ACCC over the last few years.

What you should do

The decision is a reminder to all franchisors on the importance of compliance with the Code. In particular, franchisors should:

  • err on the side of candour in preparing marketing fund statements and ensure statements are detailed enough to provide meaningful information to franchisees; and
  • ensure that marketing fund statements are prepared and distributed within the required timeframes.

As marketing fund statements must be prepared within four months of the end of the financial year, that means that 31 October was the deadline to complete these audits and update disclosure documents. Statements must then be distributed within 30 days of their preparation.

We have a team of experienced franchising professionals who are well versed in franchisor obligations under the Code. If you require any assistance, please contact us for an obligation-free discussion.