Is that commercial contract really a franchise agreement? Emma Weedon – Senior Associate Intellectual Property Group McCullough Robertson Lawyers

2 A franchise by any other name Distribution agreement Manufacturing agreement Agency agreement Brand usage agreement Sponsorship agreement Dealership agreement

3 How do those arrangements get caught? Franchising Code of Conduct (Code). A mandatory industry code made under s51AE Trade Practices Act 1974 (Cth) (TPA) Offence to engage in conduct that would breach a provision of the Code (s51AD TPA) All agreements deemed to be franchise agreements by the Code, and franchisors deemed as such under the Code must comply

4 What is a franchise agreement? Definition of ‘franchise agreement’ under section 4 of the Code sets out 4 elements If your agreement satisfies each of the 4 elements, it is a franchise, regardless of its name

5 Franchise agreement definition – part 1 An agreement must be in place –Can be written, oral or implied, or a combination of all 3 –Can be a series of agreements or arrangements –Can even be an agreement between related parties (there is no exemption)

6 Franchise agreement definition – part 2 The operation of the business under the agreement is substantially or materially associated with a trade mark, advertising or commercial symbol –Mere trade mark licence is sufficient to satisfy this criteria

7 Franchise agreement definition – part 3 There must be a payment or an agreement to pay a fee –The fee is to be paid by the grantee of the right under the document to the grantor of the right –Can be an initial upfront fee, an ongoing fee or some kind of royalty or commission –Payment for goods at regular wholesale prices is not a relevant payment

8 Franchise agreement definition – part 4 The agreement contains a grant of a right to carry on a business under a system or marketing plan substantially controlled, determined or suggested by the grantor –This limb is always a trap –Courts have indicated it can catch mere advertising programs/requirement –Any agreement which contains an element of control, even over brand usage could be caught

9 The usual suspects Real estate agencies Fast food chains Petrol stations/convenience stores Cleaning/lawn mowing services Hair dresser/beauty bar services In general, these types of businesses are happy to present themselves as franchises, and are accepting of the relevant law, as they strive for uniformity of brand and appearance etc.

10 The not so usual suspects Providers of financial advice Product distributors/manufacturers/resellers Home builders Other service providers – for example educators/nursing homes Software as a service providers Often, clients with the above kind of arrangements are not expecting to be advised that they are conducting a franchise. Even one-off arrangements can be caught

11 How does this happen? System or marketing plan element –Not defined by the Code –Considered by the Courts on very few occasions and only in relation to specific queries (most recent ACCC v Kyloe & Orrs) –ACCC has issued little guidance –Can not attempt to contract out of the Code by including acknowledgements in agreements that there is no system or marketing plan

12 How does this happen? When drafting the terms of the agreement, consider the relationship between the parties: –Is the grantor of the right merely attempting to protect the way in which its brand is used; or –Is the grantor exercising some form of control (or making some suggestion) over how the broader business – associated with the brand – is to be operated? Finite distinction in some cases, but is important The drafting must reflect the reality – beware, ask lots of questions!

13 For example….. Stipulating where and when advertising campaigns may be carried out; Insisting on regular activity and financial reporting; Controlling the locations from which the business may be carried out (and limiting the numbers of locations); Suggesting store layouts or advice formats; Providing access to a computer network; Exercising control over product/supply quality, can all (either separately or together) indicate a business or marketing plan suggested or determined by a ‘franchisor’

14 The curly one All motor vehicle dealership agreements are deemed to be franchise agreements by the Code Even if there is no exercise of control over how the business is run, if you are authorised by an agreement to sell anything with a motor (including a boat) then you are a franchisee under a franchise agreement This can operate even where more than one brand is sold at the dealership

15 More of a culture shift Subject to some mandatory requirements of the Code (explanation to come), a deemed franchise agreement does not mean that the relationship between the parties must practically change It can still be called a ‘dealer agreement’ or a ‘distribution agreement’ Just make sure it complies Manage the cultural understanding of the parties with respect to franchises so they are fully aware of the situation they have found themselves in and can manage that to their advantage

16 Major requirements of the Code Preparation of disclosure document in the prescribed form. Must include: –Financial statements or audit report –Full copy of the franchise agreement to be entered into –Full disclosure of any relevant Court actions involving the franchisor –Summary of all expenditures to be expected by a franchisee Disclosure document to be provided to franchisee 14 days before signing of franchise agreement or payment of funds

17 Major requirements of the Code Franchise agreement must contain clauses addressing: –7 day cooling-off period –transfer of the franchise –reasonable notice prior to termination –mediation/dispute resolution Franchise agreements must not: –include general releases from liability –require the franchisee to waive pre-contractual representations

18 Major requirements of the Code The franchisor must: –Have a record that the franchisee received a copy of the disclosure document, the franchise agreement and the Code at least 14 days in advance of paying money or signing the document –Obtain a statement from the franchisee that they have read, and had an opportunity to understand the franchise agreement and the Code –Inform the franchisee that they should obtain independent legal, business and accounting advice, and obtain certificates to that effect (whether advice has been obtained or not) –Ensure that the marketing fund is audited, or at least 75% of franchisees agree that it is not to be audited (such agreement must be renewed every 2 years)

19 Failure to comply with the Code Breach of s51AD TPA – could render the agreement or the relevant provision illegal or unenforceable (Ketchell v Master Education Services Pty Ltd) Remedies available under Part VI TPA: –undertakings –orders –fines –compensation

20 Franchising Questions?

21 Contact details Presenter:Emma Weedon Direct line: