What are cooperative marketing funds?

Cooperative marketing funds allow franchisors to combine contributions from franchisees, to undertake advertising or promotional campaigns on behalf of the entire network.  This framework allows franchisors to implement marketing that would otherwise have been beyond reach financially.  However, it is important franchisors are aware of their obligations under the Competition and Consumer (Industry Codes – Franchising) Regulation 2014 (Franchising Code).

The law on cooperative marketing funds

Clause 15 of the Franchising Code provides:

“(1) If a franchise agreement provides that a franchisee must pay money to a marketing or other cooperative fund, the franchisor must:

(a) 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

(b)  ensure that the statement includes sufficient detail of the fund’s receipts and expenses so as to give meaningful information about:

(i)  sources of income; and

(ii)  items of expenditure, particularly with respect to advertising and marketing expenditure; and

(c)  have the statement audited by a registered company auditor within 4 months after the end of the financial year to which it relates; and

(d)  give to the franchisee:

(i)  a copy of the statement, within 30 days of preparing the statement; and

(ii)  a copy of the auditor’s report, if such a report is required, within 30 days of preparing the report.”

Clause 15(2) provides that a franchisor is not required to have the statement audited in accordance with subsection (1) if 75% of the franchisees who contribute to the fund have voted and agreed to allow the franchisor to avoid this obligation.  This recognises the diverse nature and structure of franchise systems and provides flexibility for voting to be conducted to suit the needs of the franchise system.

For completeness, Schedule 1 of the Franchising Code also provides:

“15.1  For each marketing or other cooperative fund, controlled or administered by or for the franchisor, to which the franchisee may be required to contribute, the following details:

(a) the kinds of persons who contribute to the fund (for example, franchisee, franchisor, outside supplier);

(b) how much the franchisee must contribute to the fund and whether other franchisees must contribute at a different rate;

(c) who controls or administers the fund;

(d) whether the fund is audited and, if so, by whom and when;

(e) how the fund’s financial statements can be inspected by franchisees;

(f)  the kinds of expense for which the fund may be used;

(g) the fund’s expenses for the last financial year, including the percentage spent on production, advertising, administration and other stated expenses;

(h) whether the franchisor or its associates supply goods or services for which the fund pays and, if so, details of the goods or services;

(i)  whether the franchisor must spend part of the fund on marketing, advertising or promoting the franchisee’s business.”[1]

Purpose of the provision

The provision arose after the Trade Practices (Industry Codes – Franchising) Regulations 1998 (1998 Code) was reviewed in 2013.[2]  Following the review, the Treasury released its The Future of Franchising statement, which supported the review’s findings.[3]  With respect to marketing funds, the Treasury acknowledged the importance of:

“Introducing greater transparency for the way in which marketing funds are used and accounted for.”

This will include:

  • requiring additional disclosure on the types of expenses marketing funds are being used for;
  • giving franchisees the option to vote for an annual audit of the marketing fund; and
  • requiring franchisors to keep marketing funds in a separate account to the rest of their monies.

The Code was therefore amended to include the marketing fund provisions and:

Ensure franchises owned by the franchisor contribute to the systems marketing and other cooperative funds. Currently, a franchisor’s own store or unit could be benefiting from outlays from a marketing fund even though they are not contributing on the same basis as other stores. This change will mean all stores will benefit equally from equivalent contributions to any marketing fund.”[4]

What can marketing funds be used for?

Pursuant to clause 31(3) of the Franchising Code, Franchisors can only spend marketing or advertising fees on expenses that:

  • have been disclosed to franchisees in the disclosure document; or
  • are legitimate marketing or advertising expenses; or
  • have been agreed to by a majority of franchisees; or
  • represent the reasonable costs of administering and auditing a marketing fund.

Case example

The Federal Court case of ACCC v Ultra Tune Australia [2019] FCA 12 is an example of marketing fund obligations under the Franchising Code and the penalties for noncompliance.  In this case, Ultra Tune Australia Pty Ltd ACN 065 214 708 (Ultra Tune) had five (5) marketing funds – one for each region.  Ultra Tune failed to prepare marketing fund statements within the required time frame of four (4) months after the end of the 2014-15 financial year.  Instead the statements were provided on 24 December 2015.

Additionally, the adequacy of the statements was in question.  The Australian Competition and Consumer Commission (ACCC) alleged the statements did not have “sufficient detail” as required by clause 15(1)(b) of the Franchising Code.  Specifically, Ultra Tune had included a single line item, described as “Promotion & Advertising – Television” which amounted to over 70% of the funds’ expenditure.

With respect to this, the Court said that the notion of “meaningful information” in clause 15 means that the statement must have some explanatory detail to provide insight to the franchisees.  The Court said:

“What is required to be provided is sufficiently detailed meaningful information, which is necessarily information that is useful and practical, not merely minimal accounting information.”

As a result, Ultra Tune was given a penalty of $2.6million.

Links and further references

Related articles

Marketing funds for franchisees
Changes to the Franchising Code of Conduct 2015

Government resources on franchising

“Fairness in Franchising” Report released on 14 March 2019 by the Parliamentary Joint Committee on Corporations and Financial Services.

The Future of Franchising, April 2014, https://treasury.gov.au/sites/default/files/2019-03/Future-of-Franchising.pdf

Legislation

Competition and Consumer (Industry Codes – Franchising) Regulation 2014

Cases

ACCC v Ultra Tune Australia [2019] FCA 12

Further information

If you need advice on your obligations under the Franchising Code, contact us for a confidential and obligation free and discussion:

Franchising lawyersMalcolm Burrows B.Bus.,MBA.,LL.B.,LL.M.,MQLS.
Legal Practice Director
Telephone: (07) 3221 0013
Mobile: 0419 726 535
e: mburrows@dundaslawyers.com.au

 

Disclaimer

This article contains general commentary only.  You should not rely on the commentary as legal advice.  Specific legal advice should be obtained to ascertain how the law applies to your particular circumstances.

[1] Competition and Consumer (Industry Codes – Franchising) Regulation 2014 Sch 1, Annex 1, Item 15.

[2] Review of the Franchising Code of Conduct, Mr Alan Wein, 30 April 2013.

[3] The Future of Franchising, April 2014, https://treasury.gov.au/sites/default/files/2019-03/Future-of-Franchising.pdf.

[4] Ibid page 5.

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