What's the Difference Between a Franchise Agreement and a Licence?
This week we would like to return to an important topic that is normally at the heart of every business deal—contracts. Specifically, this week we will discuss the difference between a Franchise Agreement and a Licence.
Some of our readers will recall that we talked about the changes to the Australian Franchising Code of Conduct (‘The Code’) in one of our past blogs. Franchising has been a growing type of business around the world. It is a convenient way of doing business which allows newcomers to benefit from the reputation of an existing and successful business.
Franchise Agreement
It is not enough to merely title a document a ‘Franchise Agreement’ for it to serve the purpose of a franchise agreement. Franchise Agreements are governed by the Code. The Code requires the following four points to be satisfied:
The Agreement must be in writing, oral or implied in whole or in part;
The Agreement will grant 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 largely determined, controlled or suggested by the granting party;
The business must 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.
Licence Agreement
In an arrangement involving a licence, the licensor uses a monopoly right such as a Patent, a Trade Mark, a design or a copyright as an exclusive right. This prevents others from commercially exploiting and profiting from the idea, design, name or logo. The licence allows its holder to use, make and sell, the product or name for a fee.
It is true that often both franchise agreements and license agreements will meet the requirements outlined in the Code. Normally, the determining factors are:
Whether the substance of the agreement itself is interpreted to be a ‘system or marketing plan’ and;
Whether there is substantial control by the granting party.
“System or Marketing Plan”: What is it?
The case of ACCC v Kyloe Pty Ltd[2007] FCA 1522 provided a list of factors which can help to determine whether something is a ‘system’ or a ‘marketing plan’. The presence of any of the following suggest the agreement could be a Franchise Agreement:
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; and/or
Restrictions on sub-distributor selling products without consulting the head distributor.
Again, the intention of the parties becomes irrelevant. We advise our readers to consult with us if you are in doubt of the wording in your agreements.
We look forward to helping with any of your other concerns regarding franchising and licensing, and any other issues that may arise.
What Should I Do Next?
Contact us if you would like further legal advice on Franchising Agreements. Our lawyers at You Legal will be happy to assist you in whatever way we can.
* This blog is for general guidance only. Legal advice should be sought before taking action in relation to any specific issues.