Licensing v Franchises in Australia

Australia is one of the most heavily regulated countries in the world, when it comes to offering licensing or similar rights and companies need to be careful to comply with the mandatory laws or face hefty penalties and fines by the ACCC, not to mention damage to their brand and action by the licensees.

You may still be caught by the Franchise Code as it is a matter of fact, the degree of control in the agreement and rights granted in it, that will determine if it is caught as a franchise arrangement.

There are many license and distribution models that are clearly not a franchise, then there are some models that may fall into the “grey zone” and be at risk.

This requires specialist knowledge and advice to determine whether the license or right granted to avoid being in breach of the Franchise Code.

The test of whether a right whether your agreement and the rights you offer may be a franchise largely comes down to the “degree of control” by the party granting the rights.

As the ACCC deputy chair Mick Keogh said, “If it looks and smells and appears to be a franchise agreement, it is likely to be one, irrespective of what the franchisor says”.

A Franchise is in fact a license, that is a contractual right given to a party to sell or distribute a service or product under the Licensors name and system. An IP license may fall short of being a franchise and for example a right to sell and distribute a product as an independent business is not a franchise as the Licensee will continue to operate under their own business name.

The Licensee is independent and determines its own marketing plan, how they operate the business and channels to market. The Licensor will rely on the Licensees local knowledge to market and promote the products.

The more “proscriptive” the agreement, that is, the more control the Licensor has over their Licensee the more it “swings” towards a possible franchise arrangement.

Where the rights require the licensee to operate under the Licensors brand and system “substantially determined or controlled by the Licensor” and pay an upfront fee and ongoing fees or royalties it is likely a franchise arrangement.

A “franchise agreement” under the Franchising Code can be oral, written or implied between the parties and exist partly in writing, for example, if there was only an operations manual and no other formal agreement the franchisee was required to follow it may be as a matter of fact that there is a franchise arrangement in place.

Key indicators identified by the Courts of a “system or marketing plan” and therefore a franchise model existing is where the Licensor:

• Marketing/Business plan – the Licensor provides the Licensee a business plan (cash flows) with a marketing plan.
• Access to Systems – the Licensee has access to a system to process sales.
• Operations Manual -the License is required to follow the operations manual.
• Training and support – the Licensees are given training and technical support.
• Reporting and performance criteria – the Licensee must account and report to the Licensor on sales performance.

The three key elements for an agreement to be deemed a “franchise agreement” under the Franchise Code are:

1. A system or marketing plan
   A person (franchisor) grants another (franchisee) the right to carry on a business in Australia supplying goods or services under a specific system or marketing plan substantially determined, controlled or suggested by the franchisor or its associate.
2.  Association with a Brand or Mark
   The business is associated with a particular trademark, advertising or a commercial symbol owned, used, licensed or specified by the franchisor or its associate. The key here is if the license or franchise requires the Licensee to operate under the franchisors brand (unlike a distributor who just buys goods and then resupplies them under their own business name).
3. Payment of fees
   The franchisee is required to pay or agrees to pay an amount to the franchisor or its associate before starting or continuing the business which includes an initial capital investment fee, a royalty, licence fee, franchise fee or a training fee. This excludes payment for goods and services at or below their usual wholesale price even if on consignment so buying goods or services as a wholesaler for resale is not paying a franchise fee. It also excludes repayment of a loan to the franchisor and payment at market value for purchase or lease of real property, fixtures, equipment or supplies needed to start business or to continue business under the franchise agreement.

To determine if this third element is met, the Court looks at the terms of the agreement and obligations on the Licensee for example, does the Licensee have autonomy in its marketing and sales activities or do they need to obtain the Licensors approval and the extent the business involves the sale of goods or services of the Licensor.

Many dealership and distribution agreements and even trademark licence and IP licence agreements may be deemed a franchise arrangement and therefore require compliance with the Franchising Code.

Media
We recently acted for a media company and reviewed their “Member Agreement” and found it was in fact a franchise arrangement, which required them to provide disclosure documents and comply with the 14 day disclosure and cooling off periods under the Code.

Husqvarna Australia

• This was a high-profile case where the Swedish company (tool manufacturer) in 2018 was found by the ACCC to have breached the Franchise Code as their “dealer agreements” were considered to be a franchise. The ACCC considered they had engaged in misleading conduct under Section 18 of the Australian Consumer Law as they advised dealers their agreements were not franchise agreements
• Husqvarna provided the ACCC a court enforceable undertaking under S 87B of the Australian Competition and Consumer Act, which required it to offer new dealers a Franchise Code compliant agreement, provide all dealers a disclosure document and the
  option to existing dealers to transition to the new agreement.

Freedom Foods P/L v Blue Diamond Growers

• A recent Full Federal Court case in 2021 however determines a license granted was not a franchise arrangement as the Court in this case took a narrower approach in relation to the definition of a “franchise agreement” under the Code and held “on the facts of this case” the Licence Agreement was not a franchise, and therefore the dispute between the parties could be arbitrated outside of the Code and Australia.
• This brings Australia back into line with the international position that IP Licence Agreements are generally considered not to be franchise agreements, but it does depend on the facts and the terms in the agreement and then applying the test under the Code. The key issue in Blue Diamond was that the agreement did not require Freedom Foods to carry on their business activities “under a system or marketing plan substantially determined, controlled or suggested by them” and the absence of that obligation took it away from being a franchise.
• This highlights that the more “control” a Licensor has over the Licensees activities, for example how they must run their business, account to the licensor, how to market, or meet minimum performance criteria and adhere to operating procedures, the more likely it will be deemed a franchise.
• The definition of “franchise agreement” under the Franchise Code in Australia has (likely inadvertently) captured many dealership, re-seller and distribution agreements, and even IP licence agreements, contrary to how many overseas countries distinguish licenses from franchise arrangements.

Why does it matter?

The penalties for breach of the Franchising Code are now 600 penalty units ($198,000). The ACCC can issue infringement notices with penalties up to $19,800 for companies and $3,960 for individuals.

There are greater penalties of up to $500,000 for an individual and the greater of $10 million, or 3 times the value of the benefit received by the Company as a result of the breach, if the court can determine the benefit; or 30% of the annual turnover of the Company where the court cannot determine the value of the benefit obtained from the breach.

Where does that leave us?

The devil is in the detail, so if there is any “doubt” it may be preferable for the Licensor to assume it may be caught by the Code and comply with the mandatory disclosure regime under the Franchise Code.

Sanicki Lawyers act for Franchisors, Master Franchisees, Licensors and Distributors and can assist you to identify the issues and ensure you are Franchise Code and ACCC compliant.

CONTACT:
Sanicki Lawyers
Robert Toth | Special Counsel | Accredited Commercial Law and Franchise Specialist |
Head Franchise Licensing and Distribution Group
robert@sanickilawyers.com.au | Mobile: 0412 673 757