Daniel Lo

It would be fair to say that most, if not all people, have some idea of what a franchise is, even if they do not know what the legal requirements are for one. Examples of franchises are everywhere – the most famous examples tend to involve fast food businesses (McDonald’s, Hungry Jacks, Subway, Domino’s Pizza, Red Rooster, 7-Eleven etc.), but a franchise can also operate effectively for non-food related businesses (Fitness First and Fernwood Women’s Health Clubs, the famous Jim’s franchise, offering mowing and other personal services, Dymocks’ bookstorest to name a few). The common characteristic of all these businesses is that they operate under strong and prominent brands, which can be an advantage if you are looking to start a business without putting significant resources into establishing your own brand.

Not surprisingly then, the definition of a franchise under the Trade Practices (Industry Codes - Franchising) Regulations 1998 (Cth) (also known as the Franchising Code of Conduct) makes reference to substantial or material use of a trade mark. However, this is not the key determinant of a franchise. Essentially, under the Franchising Code of Conduct, a franchise includes the rights, obligations and interests of parties in a franchise agreement, which is categorized as either a wholly or partially written, oral or implied agreement in which:

(a)    a person (the franchisor) grants to another person (the franchisee) the right to carry on the 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 or an associate of the franchisor;

(b)    the operation of the business will be substantially or materially associated with a trade mark, advertising or a commercial symbol:

(i)    owned, used or licensed by the franchisor or an associate of the franchisor; or

(ii)    specified by the franchisor or an associate or the franchisor; and

(c)    before starting business or continuing the business, the franchisee must pay or agree to pay to the franchisor some sort of franchise fee (including any training fee but excluding payments for goods or services at or below their usual wholesale price).

Certain relationships are prima facie excluded from being classified as franchise agreements. These include:

(a)    employer and employee relationships;

(b)    partnership relationships;

(c)    landlord and tenant relationships;

(d)    mortgagor and mortgagee relationships;

(e)    lender and borrower relationships; and

(f)    relationships between the members of a registered or incorporated cooperative.

The key determinant lies in the phrase “a system or marketing plan substantially determined, controlled or suggested by”, which, notwithstanding the exclusions provided for under the Franchising Code of Conduct, provides a fairly broad criterion on which to determine whether an agreement is classified as a franchise agreement. What, for example, constitutes a “system or marketing plan”? And what does it mean for one to be “determined, controlled or suggested by” a franchisor? Unfortunately, there has been little statutory or judicial guidance on such questions. For trade mark licensors, this presents a dilemma of sorts. On the one hand, a trade mark licensor needs to impose terms on the use of its trade mark in order to maintain a connection to the trade mark necessary for preserving the trade mark licensor’s rights. On the other hand, such terms (if too strict or imposes substantial obligations on a licensee to conduct its business in a certain manner) may constitute “a system or marketing plan substantially determined, controlled or suggested by” the licensor, and thus, turn the arrangement into a franchise agreement. (There is potentially a risk for parties to a distribution agreement, although a distribution agreement is usually one step further removed from a franchise agreement by virtue of a distributor’s business not usually being substantially or materially associated with a trade mark, advertising or commercial symbol.)

Needless to say, where an agreement falls under the definition of a franchise agreement, stricter regulations apply and some possibly onerous obligations will need to be met. A franchisor will need to constantly monitor, update and provide disclosure documents to its franchisees, for example. It therefore pays to consider, in circumstances where goods or services are being distributed by agreement, to consider whether the requirements of a franchise agreement are met. Ultimately, whether an agreement constitutes a franchise agreement or not will need to be determined by examination of the whole relationship between the parties to the agreement.