Monday, 5 February 2018

Franchising versus Licensing


What is a Licence ?

A licence is a right granted by one person (the licensor) in favour of another person (a licensee), allowing the licensee to do certain things. For example, it could be to:

  • use the licensor’s intellectual property. Eg. access to a trade mark; or
  • sell the licensor’s products,
within a certain territory.

A right granted by a licensor to exclusively distribute the licensor’s products (eg. ABC Widgets) in say Queensland through a Distribution Agreement, would be a form of licensing arrangement.

Licensing is generally quite limited in its scope compared to a franchise.

Licence of Franchise – Which is it ?

Licensing arrangements are perceived to be less complex and a cheaper alternative to franchising due in part to franchising being a regulated industry. Just because a document or arrangement is called a licence or viewed by the parties as a licence does not mean that the document or arrangement will not be deemed a Franchise Agreement and the Code then apply.

Getting this distinction wrong can be very costly. Generally:
  • If you possess a degree of control over another party’s methods of operation; or 
  • You agree to provide support in respect of the other party’s operations; and 
  • You receive a fee as a condition to the other party commencing and continuing its operations, 
then you should proceed with caution and check if the arrangement might constitute a franchise and be caught by the Code.

If there is doubt as to whether an arrangement is a licence or franchise, it is best to lean on the side of caution and structure the arrangement as a franchise from the outset.

Franchising Code of Conduct

In Australia, Franchising is regulated under the Franchising Code of Conduct, which is a mandatory industry code prescribed under section 51AD of the Competition and Consumer Act 2010 (CCA).

When is a particular business model a Franchise ?

The Code sets out what falls within the definition of a Franchise Agreement. The Code provides as follows:

Element One

A franchise agreement is one:
  • which can be in writing, oral or implied; and 
  • where a person (the franchisor) grants to another person (the franchisee), 
Element Two
  • the right to carry on the business; 
  • of supplying or distributing goods or services; 
  • under a system or marketing plan, 
substantially determined, controlled or suggested by the franchisor; and

Element Three
  • under which the operation of the business will be substantially or materially associated with:
    • a trade mark; or
    • advertising or a commercial symbol;
  • owned, used, licensed or specified by the franchisor or an associate of the franchisor; and
Element Four
  • under which, before starting or continuing the business, the franchisee must pay or agree to pay to the franchisor or an associate of the franchisor an amount including, for example: 
    • an initial capital investment fee; or
    • a payment for goods or services; or
    • a fee based on a percentage of gross or net income whether or not called a royalty or franchise service fee; 
    • a training fee or training school fee.
In determining whether a franchise applies to a particular business model, it is necessary to check the model against the above elements.

The more that these elements apply to a business model, the more likely it is that the business model is a franchise, in which case the Code would apply.

System or Marketing Plan

The Code does not define what is a system or marketing plan nor does the Code state when it is necessary to consider if such a system or plan is present.

However, the courts have set out certain factors which may indicate the presence of a “system or marketing plan”, in which case the Code would apply (not a licence). For example:
  • compensation structures for selling goods or services;
  • centralised bookkeeping;
  • centralised record keeping;
  • centralised computer operations;
  • suggestions as to the retail prices to be charged for products or services;
  • requirement that only certain products must be produced or sold;
  • specifying certain methods for providing goods or services, which must be followed;
  • detailed advertising or promotional programs to be adopted;
  • right to screen or approve promotional material;
  • setting sales quotas;
  • right to approve who is employed;
  • mandatory training programs;
  • customer information to be gathered and provided;
  • restrictions on what other products can be sold.
These are just examples of some of the factors and are not exhaustive.

Substantially determined, controlled or suggested by the Franchisor

The Code also does not specify when a system or marketing plan is substantially determined, controlled or suggested by the franchisor.

There is some overlap of these two concepts. The courts have said that there a number of factors to assess in determining this question, such as:
  • the extent to which the arrangement between the parties incorporates the sale of an alleged franchisor’s products;
  • the appearance of some centralised management;
  • presence of uniform standards as regards the quality and price of goods or services sold;
  • whether or not there is an obligation (imposed by the franchisor) to advertise or to conduct promotions;
  • the extent to which the alleged franchisor controls the franchisee’s business having regard to matters such as:
    • prescribing the hours and days of operation;
    • providing advertising and support;
    • auditing of books;
    • inspection of premises;
    • control over employee uniforms;
    • setting prices;
    • setting sales quotas;
    • management support; and
    • training.
Trade Mark/Brand

If the business that the other party is to operate is substantially or materially associated with a brand, name or logo, then that may indicate a franchise (not a licence). It would be a matter of checking the extent to which the other elements may apply.

Fees

If certain fees are to be paid, such as the below, that would tend to indicate a franchise (not a licence):
  • royalty payments; 
  • up-front fees; 
  • advertising payments; 
  • commissions; 
  • training fees. 
It would be a matter of checking the extent to which the other elements may apply.

Avoiding being captured by the Code

Some businesses seek to avoid being captured by the Code by:
  • not providing a system or marketing plan; or 
  • not providing the other party access to a trade mark, brand or logo. 
That is, they seek to avoid carrying on a business model that satisfies all 4 elements (as per above).

Conclusion

It is important to understand the difference between a licence, distribution agreement, dealership agreement and franchise.

Getting this wrong can have adverse effects on the rights and obligations of the parties to the agreement.

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Disclaimer

The material provided in this document is for general information only and is not to be relied upon as advice. No responsibility is accepted for any loss, damage or injury, financial or otherwise, suffered by any person or organisation acting or relying on this information or anything omitted from it.

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