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The well-known Franchisor, Retail Food Group (RFG), will pay franchisees $13 million and waive nearly $2 million in franchising fees in response to allegations of unconscionable conduct made by the Australian Competition and Consumer Commission (ACCC). Additionally, the ACCC has accepted a court-enforceable undertaking.
This article will discuss RFG’s recent experience and why maintaining a legally compliant recruitment and marketing process is crucial.
Background
Retail Food Group operates as one of Australia’s largest multi-brand franchise operations. Indeed, they are responsible for brands such as Michel’s Patisserie and Donut King.
RFG is receiving regulator and public scrutiny after an investigation by Nine Newspapers in 2017. The study revealed that many franchisees were suffering financially under RFG.
In December 2020, the ACCC commenced legal action against RFG and its various companies, including:
- Michel’s Patisserie;
- Brumby’s Bakery;
- Donut King; and
- Gloria Jean’s Coffee.
Furthermore, the ACCC alleged RFG engaged in unconscionable conduct and made false or misleading representations in its dealings with franchisees.
According to the ACCC, between 1 January 2015 and 31 December 2018, RFG sold or licensed several corporate stores to franchisees, with the knowledge that these stores were operating at a loss. However, RFG did not disclose this information to the purchasers before the sale.
Moreover, the ACCC alleged that certain payments had been made from Michel’s Patisserie’s marketing fund for ‘not legitimate marketing expenses’. But, again, RFG did not disclose this information to franchisees or seek their agreement before doing so.
The Decision
Since the decision, RFG has acknowledged the dismissed proceedings. However, they have not admitted to the ACCC’s allegations and will not pay the penalty or be subject to any injunction or adverse publicity order.
Additionally, RFG has agreed to make payments to some affected franchisees, according to the purchase price paid for their franchise, minus any outstanding vendor finance loans. Specifically, RFG will pay $8 million to franchisees who acquired the corporate stores in question and will waive $1.82 million in franchise debts as part of the undertaking.
Furthermore, RFG will pay $5 million to Michel’s Patisserie stores franchisees, who paid levies into that franchise’s marketing fund between 1 July 2012 and 30 June 2017. This figure represents an agreed percentage of the marketing fees they contributed to the fund.
In short, these payments will avoid ongoing and costly legal proceedings being pursued by the ACCC and the aggrieved franchisees.
In the future, RFG must regularly report to the ACCC about the actions and payments they make under the undertaking. RFG will also implement a compliance program regarding the Australian Consumer Law and the Franchising Code of Conduct and contribute to the ACCC’s legal costs.
As a franchisor, you must not engage in misleading and deceptive conduct. We explain what it is and how to avoid it.
Key Takeaways
This investigation against Retail Food Group by the ACCC is an excellent reminder to franchisors about the franchisee recruitment process and the use of marketing funds.
Therefore, if you are a franchisor, you should:
- ensure that you provide clear disclosure of relevant information to incoming franchisees;
- provide financial information that reflects a true and accurate position of the business’ finances;
- avoid misleading prospective franchisees with incorrect data about currently operating stores; and
- ensure all expenditure in your marketing fund complies with the obligations in the Franchising Code of Conduct, including:
- holding funds in a separate bank account;
- disclosing expenses and uses of the fund to franchisees and prospective franchisees; and
- spending the funds only on legitimate marketing expenses.
If you have any questions regarding your obligations as a franchisor, our experienced franchise lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
This fund is used to pay for marketing and advertising of the franchise network. Franchisees contribute to a marketing fund by paying marketing fees. These fees are additional to royalty fees.
Unconscionable conduct can include exploiting bargaining positions, using undue influence, not disclosing relevant facts and information and including unfair contract terms within a contract. Note that unconscionable conduct is forbidden under the Australian Consumer Law.
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