Under the Code amongst other things:
- franchisors must disclose certain information to a franchisee before a franchisee enters into a franchise agreement;
- there are restrictions on terms which can be included in a franchise agreement;
- there are restrictions on the franchisors ability to terminate the franchise agreement;
- there is an obligation on both parties to act in good faith;
- certain dispute resolution terms are required to be included in the franchise agreement.
Compliance with the Code cannot be avoided by referring to a franchise agreement as a distribution or licence agreement.
The following case studies are examples of where the ACCC alleged that an agreement (while referred to as a distribution or licence agreement) was a franchise agreement.
Case Study – ACCC v Kyloe Pty Ltd  FCA 1522
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 earlier case Capital Networks Pty Ltd v .auDomain Administration  FCA 808 for what the court called “helpful indicators” as to the presence of a franchise agreement. These indicators included:
- 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 earlier case of Master Abrasives Corporation v Williams (1984) 469 NE 2d 1196:
- 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.
However the case illustrates the complexities which may arise when determining whether an agreement is a franchise agreement or a licence agreement.
Contact us to review any licence or distribution agreement.