Are you an accidental franchisor?

By Sarah Stowe | 10 Dec 2018 View comments

Is your business a distribution or licensed model, or a franchise? Here are the top signs that tell you if the business is a franchise or not.

Picture this. You are a business owner and you have just signed someone up to your distribution agreement or IP licence. Both parties are happy with the arrangement, and the business starts generating profit. Then, you discover that at law, the agreement is actually a franchise agreement and you have become a franchisor.

The Franchising Code of Conduct 2015 (Code) contains a number of obligations that franchisors must comply with when dealing with franchises. There may be serious implications if you do not comply with such obligations, so this is why it is important to understand whether you have unwittingly created a franchise relationship.

When is it a franchise agreement?

If an agreement falls within the Code’s definition then it will be deemed to be a franchise agreement and it is irrelevant what the agreement is called or how the arrangement is documented.

Section 5(1) of the Code defines a franchise agreement as comprising of the following four elements:

  1. A written, oral or implied agreement;
  2. The franchisor grants the franchisee the right to carry on the business of offering, supplying or distributing goods or services under a system or marketing plan as determined by the franchisor;
  3. The franchisor will grant the use of the trade mark, advertising and commercial symbols under which the franchisees business will operate; and
  4. The franchisees are required to pay a fee of various types to the franchisor before and during the conduct of the business.

The element that is generally the hardest to assess is the presence of a system or marketing plan.

In ACCC v Kyloe Pty Ltd [2007], the Court revealed the signs for determining whether a system or marketing plan exists, which included:

  • the provision of assistance conducting ‘opportunity’ meetings;
  • comprehensive advertising and promotional programs;
  • rights to review, consider and approve promotional materials;
  • prohibitions on repackaging of franchisor products with unique designs;
  • suggestions for retail prices charged for products;
  • division of states into marketing areas; and
  • mandatory sales training regimes.

In this case, it was found that despite the title of the agreement, a distribution agreement or IP licence may still be considered a franchise agreement if the business model possesses the above signs.

In the case of Rafferty v Madgwicks [2012], the Court determined whether a Heads of Agreement and a Rights Agreement would be considered a franchise agreement.  In coming to its decision, the Court found that an agreement may be taken to be a franchise agreement if it grants the franchisor the ability to control whether the business will be governed under a system or marketing plan.

Could it be a deemed franchise?

A number of arrangements may be deemed a franchise, despite their name or whether the franchise requirements have been met.  For example, the Code expressly states that a motor vehicle dealership will be understood to be a franchise, and therefore subject to the Code requirements.

The ACCC recently accepted a court enforceable undertaking from Husqvarna Australia Pty Ltd after the outdoor power products subsidiary admitted it likely misled its franchisees when it stated that the Code did not apply to their contracts as they were considered dealership agreements.  It is assumed that a ride on mower was taken to be a motor vehicle pursuant to the Code, and therefore the Husqvarna dealers were deemed franchises.

Check your business structure

Business owners should consider whether they may have unintentionally created a franchise relationship.  It is always recommended that you seek legal advice prior to executing any agreements to determine whether your proposed arrangement is a franchise, and if so, the obligations you are required to comply with under the Code.

Authors: Warren Scott, partner, Cassandra Taylor, lawyer and Tom Hedditch, graduate lawyer