I am often asked of the distinction between a “Franchise Agreement” and a “Licence Agreement” (Franchising and Licensing).
What is a Franchise Agreement?
The key distinction can be found in the definition of “Franchise Agreement” in the Franchising Code of Conduct (“the Code”). It states that an Agreement will be a “Franchise Agreement” if all of the following criteria are satisfied:
- The Agreement takes a form that is in whole or part written, oral or implied;
- The Agreement grants to a person the right to carry on the business of offering, supplying, or distributing goods or services in Australia under a system or marketing plan that is substantially determined, controlled or suggested by the granting party;
- The business is to be substantially or materially associated with a Trademark, advertising or a commercial symbol owned, used, licensed or specified by the granting party; and
- Before starting or continuing the Business, the grantee party is required to pay or agrees to pay to the grantor party, a fee in their conduct of the Business.
But what if I call it a Licence Agreement?
It has been well established by case law that simply because an agreement calls itself a “Licence Agreement” does not mean it is not a Franchise Agreement. If a licence agreement meets the definition provided in the Code, it will be deemed a Franchise Agreement and must comply with the provisions of the Code.
Quite often both licence agreements and franchise agreements will satisfy points 1, 3, and 4 above. The key consideration as to whether the agreement does in fact constitute a franchise agreement will come down to a Court’s interpretation of a ‘system or marketing plan’ that is substantially determined, controlled or suggested by the granting party.
What is a ‘System or Marketing Plan’?
The Code has no definition for a ‘system or marketing plan’ and does not explicitly state when it is necessary to consider if such a system or plan is present. The case of ACCC v Kyloe Pty Ltd  FCA 1522 provided a useful list of relevant factors to these issues. They include:
- Detailed compensation and bonus structures for selling products.
- Centralised bookkeeping and record-keeping computer operations.
- Assistance conducting ‘opportunity’ meetings.
- Comprehensive advertising and promotional programs.
- Schemes for appointment of distributors, direct distributors, district directors, regional directors or zone directors.
- Rights to screen and approve promotional materials.
- Prohibitions on repackaging of products.
- Suggestions for retail prices charged for products.
- Division of states into marketing areas.
- Establishment of sales quotas.
- Rights to approve sales personnel employed by the sub-distributor.
- Mandatory sales training regimes.
- Provision of quotation sheets to the sub-distributor’s employees or prescribed invoices and other sales forms.
- Requirement that the sub-distributor gather information from customers for the head distributor.
- Restrictions on sub-distributor selling products without consulting the head distributor.
If any of the above criteria are met, the agreement could be determined to be a franchise agreement, irrespective as to whether the parties intended it to be so. It is for this reason that you should obtain accurate and timely legal advice from a specialist in this complex area of law before entering into an agreement of this nature.
Please contact me should you have any questions or queries in relation to the above.