MARKET WATCH: Misuse of marketing funds by Retail Food Group.

 

Misuse of marketing funds by Retail Food Group.

The Australian Competition and Consumer Commission (ACCC) brought proceedings against Retail Food Group (RFG) in December 2020, alleging misuse of franchise marketing funds and failure to comply with disclosure obligations. Additionally, the ACCC chair Rod Sims alleges that RFG withheld information pertaining to profit and loss, and falsely represented that the loss-making stores were financially viable.

RFG is the holding company responsible for franchise systems including Michel’s Patisserie, Brumby’s Bakery, Donut King and Gloria Jeans. Note that some of these allegations relate to conduct that occurred as far back as 2013.

Allegations against RFG and Key Takeaways

Allegation #1
The ACCC alleges that RFG has misappropriated money from its marketing funds. RFG has been accused of spending $22 million from its marketing fund to cover the cost of implementing a new business model (Michel’s Patisserie’s switch from “fresh to frozen cakes”).

In order to defend this expenditure from the marketing funds, RFG will need to prove that the cost associated with changes in the business model fell within the definition of “marketing” in their franchise agreement and disclosure document.

Key Takeaways
The Franchising Code of Conduct (Code) makes it clear that marketing funds can only be used to cover legitimate marketing and advertising expenses, administration costs, expenses disclosed to franchisees or those agreed to by a majority of franchisees.

This is an important reminder for franchisors to clearly disclose, to franchisees, what activities they may finance with their marketing fund.

Franchisors should review their disclosure documents and other processes to ensure that franchisees are aware of exactly how the marketing funds will be spent. Full disclosure to franchisees provides franchisors the confidence to carry out marketing activities with the knowledge that these activities will be in compliance with the Code.
Franchisors should take extra care to ensure that they are dealing in good faith, or they may risk being subject to hefty penalties.

Allegation #2
The ACCC alleges that RFG made payments from the marketing funds to executives and employees:

• who were not performing marketing or advertising roles, or
• not in proportion to the time they had spent on marketing activities.

RFG claim that these payments were allocated according to the time that executives and employees spent on ‘marketing activities’ as defined in the franchise agreement and disclosure document. It will be interesting to see whether RFG can prove that the allocation of the marketing funds to executives and employees was done lawfully. It is a question for the Court whether the processes RFG had to verify the payments were sufficient.

Key Takeaways
If franchisors are using marketing funds to pay staff, it is important that they can verify the time and resources that staff have spent undertaking marketing activities.
This includes having appropriate processes in place to accurately determine the time and resources allocated to marketing activities, such as:

• timesheets,
• an accounting system, and
• other documents reasonably required to verify the marketing activities undertaken by staff.

The ACCC argues that RFG’s disclosure of what constituted marketing expenses did not give meaningful information to franchisees about items of expenditure from the marketing funds.

Allegation #3
RFG’s disclosure of what constituted marketing expenses did not give meaningful information to franchisees about items of expenditure from the marketing funds.

Key Takeaways
In September 2019, the Full Federal Court ruled that Ultra Tune had failed to ensure its marketing fund statements contained sufficient detail to provide meaningful information to franchisees about its expenditures, in breach of the Code. It was held that “there is no meaningful information” in simply stating that funds had been spent on television advertising and that there were obvious details including where ads had aired that should have been provided to franchisees.

Ultra Tune was fined $2.014 million.

This is an important reminder for franchisors to comply with the Code and provide franchisees with honest, truthful and accurate information during disclosure. The Court’s consideration of the Ultra Tune case when ruling on RFG’s disclosure will be particularly relevant to the franchise industry.

If you have any questions or concerns, please contact Baybridge Lawyers.

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