The Franchising Code of Conduct uses 4 criteria to decide whether a business is a franchise.
The existence of a system or marketing plan which the Franchisor creates and controls. It is likely that there is a system or marketing plan if some or all of the following apply:
- There are suggestions for retail prices to be charged for products or services, there are products that must be produced, there are recipes that must be followed, there are specific methods for providing services, there are detailed advertising programs, there are restrictions on the sale of products.
- The existence of a brand image or trademark associated with the goods or services being provided. One of the main rights that a franchisee is given by the franchisor is the right to use the Franchisor’s brand, name and logo. The existence of an agreement between the parties which sets out each parties obligations. The agreement does not have to be in writing – it may be a verbal or partly verbal agreement or it may be implied.
- The payment of a fee by the franchisee to the franchisor.
- Fees include: royalty payments, up front licence fees, advertising payments, commissions, training fees and payment for goods.
If a business system or structure has these four criteria it is likely to be a franchise arrangement.
Compliance with the Franchising Code of Conduct cannot be avoided by referring to a franchise agreement as a distribution or licence agreement.
The ACCC is taking a much tougher stance towards franchisors who breach the Code and the Trade Practices Act. Case Study – ACCC v Kyloe Kyloe was involved in the distribution of ice-drink machines as well as the re-sale of various items used in conjunction with the machines including cups, straws and frozen drink concentrate. These were all branded goods originating from the one company. The ACCC claimed that the agreement between Kyloe and their sub distributors was a franchise agreement, and Kyloe had contravened the Franchising Code of Conduct by failing to provide disclosure documents to the sub-distributors prior to the signing of the franchise agreement.
In this case the Federal Court said that a ‘franchise agreement’ may be defined by four elements: an agreement that is written, oral or implied in whole or in part, a grant by the franchisor to the franchisee of a right to carry on a business of offering, supplying or distributing goods or services in Australia, under a system or marketing plan substantially determined, controlled or suggested by the franchisor, the franchisee’s business operation is substantially or materially associated with a trade mark, advertising or commercial symbol that is either owned, used, specified or licensed by the franchisor, the franchisee makes particular payments to the franchisor.
How the business chooses to describe their model is immaterial. The court held that if all four criteria are satisfied and there are no exceptions to the criteria, then the arrangement, contract or agreement is considered by the courts to be a franchise agreement and the Code applies.
During the trial the court looked at the Capital Networks case for what the court called “helpful indicators” as to the presence of a franchise agreement: the provision by the franchisor of a detailed compensation and bonus structure for distributors selling its products, a centralised bookkeeping and record keeping computer operation provided by the franchisor for distributors, a scheme prescribed by the franchisor under which a person could become a distributor, direct distributor, district director, regional director, or zone director, the reservation by the alleged franchisor of the right to screen and approve all promotional materials used by distributors, the prohibition on re-packaging of products by distributors, the provision of assistance by the alleged franchisor to its distributors in conducting ‘opportunity meetings’, suggestion by the franchisor of the retail prices to be charged for products, a comprehensive advertising and promotional program developed by the alleged franchisor.
There were also several other issues considered that came from the Master Abrasives case: the division of a state into marketing areas, the establishment of sales quotas, the franchisor having approval rights of any sales personnel whom the franchisee might seek to employ, a mandatory sales training regime, the provision of quotation sheets to the franchisee’s employees, provision by the franchisor of prescribed invoices and other sales forms, a requirement that franchisees elicit certain information from their customers and provide that information to the franchisor, a restriction on the franchisee selling any of the franchisor’s products without first consulting the franchisor.
The court stressed that this list is not complete and none of the factors by themselves would lead the court to assume the presence of a franchise agreement. The court did not find that Kyloe was a franchise, as there didn’t appear to be enough control exercised by the distributor, and there was a lack of any system or marketing plan.
Case Study – Australian Loans Management Pty Ltd
In early 2009 Australian Loans Management Pty Ltd (ALM) published a “Licence Agreement” that contained the terms upon which ALM granted and proposed to grant licences to operate the systems, facilities and branding of ALM in designated areas. The “Licence Agreement” contained a specific clause which stated “This is not a franchise agreement. You hold an exclusive license to operate the systems, facilities and branding of Active Money in your designated area which is renewable each five years”. Following a letter by the ACCC expressing concern that the Licence Agreement may constitute a franchise agreement ALM sought legal advice and later acknowledged that the Licence Agreement was a franchise agreement.
If you are concerned that you may be running a franchise and you are not complying with the provisions of the Code we can help by looking at your business structure and advising you whether it is a franchise, helping you with compliance issues if you are operating a franchise system.
