The Ultra Tune case was the first court decision examining marketing fund statement requirements under the Franchising Code of Conduct. In ACCC v Ultra Tune Australia Pty Ltd [2019] FCA 12, the Federal Court made key findings on the need for “sufficient detail” and “meaningful information” in franchise marketing fund statements and what those words mean in the context of franchising. Justice Bromwich’s ruling clarified the level of detail that marketing fund statements must provide to franchisees. Here’s what you need to know about meeting these requirements.
What does the Code Say?
Clause 15 of the Code provides that, with respect to marketing fund reports, the fund administrator 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 marketing (however described); 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.
This clause is a civil penalty provision, meaning a franchisor who fails to abide by it could be liable for a maximum civil penalty of 600 penalty units.
What the Court Found
The Ultra Tune decision considered if that network’s marketing fund statement met the requirements of clause 15 of the Code, ultimately finding it did not, rendering the franchisor liable to penalty. Justice Bromwich in deciding the matter ruled that simply providing profit and loss statements with minimal information does not meet the Code’s requirements. Line items for expenditure are insufficient, notwithstanding this is quite a common way to report. The Court stressed that Franchisees need more than just an accountant’s understanding. They should be able to make an informed assessment of the income and expenses within the fund. Justice Bromwich stated that a simple accounting exercise, without adequate context, fails to provide meaningful information. Franchisees, not only accountants, should be able to understand where marketing fund money comes from and where it is going,.
Key Takeaways from the Decision
The Court outlined several key principles to help franchisors understand what constitutes meaningful information:
- Level of Detail Varies by Expenditure: Different expenses may require different levels of detail. For instance, significant expenses generally need more explanation. Franchisees have a right to know how major parts of the fund are spent.
- Greater Detail for Marketing and Advertising Costs: Marketing and advertising spending requires a high level of detail. For example, Ultra Tune’s vague description of “Promotion & Advertising – Television” was deemed insufficient. Justice Bromwich stated that such general terms do not give franchisees enough understanding of how these funds are allocated in fact. As a consequence of this decision, many franchisors started including precise campaign details in their reports, including the campaign dates, purpose, where it ran, and the expenditure.
- Descriptions Should Be Clear and Detailed: The Court found that general terms or bare descriptions don’t provide the needed clarity. Statements should allow franchisees to see to whom, when, and for what the money was spent. For instance, detailing the channels, locations, or precise vendors can help franchisees see how the fund is used.
- Understandable for Franchisees: Marketing fund statements should make sense to an ordinary reader—specifically, a franchisee. Complex financial jargon or overly technical terms should be avoided. The goal is for the average franchisee, not just an accountant, to grasp the fund’s allocations and decisions.
- Cannot Rely on Other Information Sources: The Court ruled that other resources, like in-house newsletters or samples of advertisements, do not replace the need for comprehensive details in the statements themselves. Franchisees need to see all relevant information in the financial statements, not pieced together from multiple sources.
What the Full Federal Court Confirmed
The case was later appealed, but the Full Federal Court upheld Justice Bromwich’s findings (Ultra Tune Australia Pty Ltd v ACCC [2019] FCAFC 164). This affirmation highlighted that these requirements are not optional. The ruling underscored that marketing fund statements should offer franchisees a clear, meaningful, and detailed understanding of how their contributions are managed.
Why This Matters for Franchisors
The Ultra Tune case serves as a warning to franchisors to ensure their marketing fund statements provide “sufficient detail” and “meaningful information.” Compliance is not just about listing numbers; it’s about transparency and clarity. Franchisees must feel confident that they can understand and evaluate how funds are allocated.
By following these guidelines, franchisors can avoid compliance issues, promote trust among franchisees, and ultimately strengthen their network.