Running a legally compliant advertising campaign in a franchise network
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This article was first published on 18 February 2014 on www.internationallawoffice.com
Introduction
Ask the directors of any business whether brand image and brand recognition are fundamental to their success and the majority will agree. A franchise business is no different, except for franchisors the task of protecting their brand is more difficult, as they use advertising in a much more complex way than most businesses. Franchisors do not simply promote their own brand and the products or services that they offer. They typically also promote their franchise opportunity to recruit new franchisees, provide marketing material to their franchisees and approve franchisee marketing collateral before it is used. Moreover, franchisors frequently run marketing campaigns for the benefit of both their company-owned and franchise network.
The power of a successful advertising campaign is well documented – in terms of both attracting potential franchisees and gaining new customers or increased sales. However, a poorly conceived or executed campaign can not only reduce goodwill, but also prove costly to remedy. Therefore, it is important to ensure that marketing campaigns comply with relevant advertising laws and regulations.
Regulatory regime
The United Kingdom has a vast array of legislation that affects advertising and promotions. However, for the most part, advertising and promotions are controlled through established voluntary codes of practice designed to protect consumers. The Code of Non-broadcast Advertising, Sales Promotion and Direct Marketing regulates non-broadcast advertisements (including online), sales promotions and direct marketing communications. The Code of Broadcast Advertising governs advertisements on television channels and radio stations licensed by Ofcom. The principal aim of the codes is to ensure that advertising is legal, decent and honest, and that it is not misleading, harmful or offensive.
The Advertising Standards Authority (ASA) is the independent body set up by the advertising industry to ensure compliance with the codes.
Diversity of advertising campaigns
Brand integrity is crucial to any business, but even more so with a franchise, where uniformity is crucial. Franchisors cannot allow their franchisees to promote their businesses without any controls, for fear of the damage that a non-compliant campaign might bring to the franchisor's brand and reputation. Franchisors typically reserve rights of approval in the franchise agreement. Thus, it is important that franchisors take an active role in all advertising initiatives that relate to the franchise business as a whole.
Franchise opportunity
One of the most difficult aspects of franchising is attracting good potential franchisees and advertising plays a crucial role in this respect. Unfortunately, it is easy to overstep the mark and allow advertising to become misleading. The ASA frequently receives complaints that advertisements promoting franchise opportunities are misleading.
In addition, franchisors that are members of the British Franchise Association must comply with the requirement of its code of ethical conduct that advertising for recruitment of franchisees be free of ambiguity and misleading statements.
The complaints that the ASA upholds typically involve misleading claims. For example, one franchisor claimed that its franchise opportunity provided "a unique proposition with no competition", while another "guaranteed" a minimum number of customers; a third promised "the best value franchise in the industry". The ASA upheld all of these complaints on the grounds that the claims were not supported and were therefore misleading. Such misleading claims provide invaluable material for any franchisee looking to bring a misrepresentation claim.
Supplying and approving advertising material
As brand integrity is so important, franchisors should impose strict obligations on their franchisees to:
- use only pre-approved advertising materials;
- purchase such materials directly from the franchisor or its approved suppliers; or
- have programmes and materials screened and approved by the franchisor.
Although this protects the brand, it also imposes a contractual obligation on the franchisor to ensure that the materials which it provides to its network are compliant with applicable laws.
Operating national price campaigns
One of the benefits of being part of a wide franchise network is participation in national advertising campaigns and promotions. The franchisor is best placed to create and run brand awareness campaigns. However, national price promotions can be problematic. A recent adjudication by the ASA illustrates the difficulties faced by franchisors that conduct national price promotions on behalf of their franchise network.
By way of background, the franchisor ran a price campaign for a new 'family burger box' with a voiceover claiming that the box cost £14.99, representing savings of £5. Onscreen text clarified that if the individual items of the box were bought separately, the cost would be £20.51, hence the savings.
Like most franchisors, the franchisor in question was aware that it could not fix the prices charged by its franchisees and in its response to the ASA it explained that "the prices varied between stores as they were legally unable to fix the pricing within all the franchisee stores, and could only recommend pricing". For this reason, when running price promotions on behalf of their franchise estate, most franchisors typically include caveats such as "prices may vary" or "at participating outlets only" to encourage consumers to check whether the price promotion applies to the outlet that they visit. Such caveats are usually sufficient when promoting one price. However, in this case, the ASA decided that the advertisement was misleading because it referenced two different prices – the price of the box itself and the aggregate price of the individual items comprising the box if bought separately. The ASA determined that simply stating "prices may vary" was insufficient to clarify that both prices might differ from store to store. The fact that most stores (835 out of 850) did in fact charge the advertised prices made no difference to the ASA's decision. This decision underlines the care that should be taken when preparing advertising copy and, in particular, when using exclusions or limitations.
Perhaps the most interesting aspect of this decision, however, was that the franchisor appeared not to have made use of the price campaign exemption that is referenced in the guidelines to the EU Block Exemption Regulation (330/2010) for vertical agreements. Although the regulation contains a strict prohibition against price fixing, the guidelines reference a possible exemption where franchisors may fix their franchisees' resale prices, provided that it is done as part of a coordinated short-term low price campaign across the network for the benefit of consumers; 'short term' is generally regarded as being anywhere between two and six weeks. Although most franchisors are aware of the general prohibition against price fixing, many are still unaware of this useful exemption – either because it is still relatively recent, they do not have the contractual right to require their franchisees' participation or they are simply unsure how to structure their price promotion so as to fall within the exemption.
Consequences of code breaches
When it comes to complaints against an advertisement, there is no requirement of materiality. The ASA needs to receive only one complaint to prompt an investigation into an advertisement and anyone can make a complaint, including consumers, competitors and pressure groups. Some 10% of complaints each year are known to derive from competitors or pressure groups (although in practice, the percentage is likely to be far higher, given the difficulty in identifying the source of a complaint if the complainant seeks to hide his or her true connection to a competitor). Such complaints are dealt with in the same way as consumer complaints, except that the competitors must first try to resolve the dispute before approaching the ASA and must provide compelling grounds for the challenge. Competitors will be named in the report, whereas consumers making a complaint remain anonymous.
If the ASA considers that a franchisor's campaign is in breach of the codes, it may:
- 'name and shame' the franchisor by publishing the adverse adjudication on its website, which is often then picked up by the press, thus ensuring maximum publicity for any wrongdoers;
- require the immediate amendment or withdrawal of the advertisement, resulting in wasted creative and media buying costs for the franchisor; and
- refer the franchisor to other bodies, such as Ofcom (for broadcast advertisers) and the Office of Fair Trading (in the case of non-broadcast advertisers), in respect of serious or repeat offences.
What can a franchisor do to aid compliance?
Clearance Franchisors should ensure that advertising copy complies with all relevant laws and regulations and is legally cleared at both the concept stage and all significant change stages as it evolves to final copy. Primary responsibility for ensuring the legality of an advertisement rests with the company placing the advertisement, not its agencies. Therefore, franchisors should ensure that they have robust agreements in place with their creative agencies that clarify who has responsibility for legal clearance.
When making claims or using testimonials, franchisors must maintain a file containing the testimonials, written consents and evidence substantiating the claims made. This material is essential if the ASA investigates a complaint, as the evidence must be held at the time that the advertisement is published, rather than simply being collected if the ASA investigates. Fact-based evidence of the truth of what is being stated is also one of the best ways of fending off claims for misrepresentation by franchisees.
Use of third-party intellectual property Third-party copyright works, trade marks and registered designs are all commonly used in advertisements and franchisors must ensure that they have all necessary rights, licences and permissions to use them.
Copyright Be aware that where an agency creates material (eg, photographs), the agency will own the copyright in the material, subject to a written agreement to the contrary. The franchisor will be able to use the material for the purpose for which it was commissioned, but will struggle to use it for other purposes. Ideally, the franchisor should ensure that its agency transfers copyright to the franchisor, allowing the franchisor to use it for any and all purposes.
Where third-party music is used in television or radio advertisements, the consent of the copyright owner (usually the publisher) is required, as well as the consent of the owner of the recording which is used (usually the issuing record company).
Trade marks and designs Use of third-party products or services in an advertisement without consent may infringe the third party's trade marks or registered designs. It may also imply an endorsement or business connection between these products or services and those being advertised which, if not authorised, may be misleading and damaging to the goodwill and reputation of the third-party product or service.
Distinctive new brand names, advertising slogans and packaging shapes should be considered for trademark registration. New and original advertising jingles can also be registered as trade marks.
Comparative advertising Comparative advertising (and use of a third party's trademark in this context) is permissible in the United Kingdom, provided that:
- the compared product or service is not denigrated. Pointing out a shortcoming in a fair and accurate manner is acceptable, but stating or implying that the product or service is inferior as a result is not acceptable;
- the comparison is fair, on a like-for-like basis and not misleading. Regardless of whether the comparison is of a technical, physical or performance feature, the basis of the comparison must be similar; and
- there is no unfair exploitation of the goodwill attached to the trademark of the compared product or service.
Internet and social media It is a myth that advertising on the Internet is not policed; the ASA's remit covers all marketing communications on a franchisor's own websites and in other third-party space under its control, such as its Facebook pages and Twitter accounts. All content in these spaces must adhere to the non-broadcast advertising rules set out in the codes. In brief, such copy must be legal, decent and honest, and franchisors must hold supporting evidence to substantiate any claims that they make.
However, areas that remain outside the ASA's remit include editorial and journalistic content – such as pages detailing a franchisor's corporate structure and (genuine) press releases. User-generated content that is published on corporate websites or social network sites is also outside the ASA's remit, provided that the franchisor does not adopt and use it in its own marketing communications (eg, a company using a customer's comment as part of its own marketing materials).
Corporate websites often contain material that would never be used in broadcast or printed media. Website copy should now be subject to the same internal compliance systems as those used for print and broadcast advertisements.
For further information on this topic please contact David Bond or Chris Wormald at Field Fisher Waterhouse LLP.