Franchising and Licensing Agreements
What is franchising?
Franchising is a business relationship where the franchisor (the owner of the business providing the product or service) assigns the right to market and distribute the franchisor’s goods and services, as well as the right to use the business name, to another person (the franchisee) for a fixed period of time.
If you are thinking of franchising your business, you need to be aware that the legal framework for franchising is a complex area of the law that is heavily regulated. In Australia, the Australian Competition and Consumer Commission (ACCC) regulates the Franchising Code of Conduct.
What is the Franchising Code of Conduct?
On 1 January 2015, the ACCC introduced a new Franchising Code of Conduct. If you are a franchisor, franchisee or potential franchisee, it is important that you understand your rights and responsibilities under the Code.
The new Code:
- introduces an obligation for parties to act in good faith in their dealings with one another
- introduces financial penalties and infringement notices for serious breaches of it
- requires franchisors to provide prospective franchisees with an information sheet outlining the risks and rewards of franchising
- requires franchisors to provide greater transparency in the use of accounting for money used for marketing and advertising, and to set up a separate marking fund for marketing and advertising fees
- requires additional disclosure about the ability of the franchisor and a franchisee to sell online
- prohibits franchisors from imposing significant capital expenditure except in limited circumstances.
The ACCC has the power to investigate breaches of the Franchising Code or the Competition and Consumer Act 2010 (Cth) and can take enforcement action where appropriate.
What is the difference between franchising and licensing?
In Australia, the difference between a franchise agreement and a licensing agreement is very simple. The Franchising Code of Conduct provides a definition of a franchise. If an arrangement between parties meet all the criteria, then it is a franchise agreement.
The criteria are as follows:
- The agreement takes a form that is in whole or part written, oral or implied.
- The agreement grants to a person the right to carry on the business or of offering, supplying or distributing goods or services in Australia under a system or marketing plan that is substantially determined, controlled or suggested by the granting party.
- The business is to be substantially or materially associated with a trademark, advertising or commercial symbol owned, used, licensed or specified by the granting party.
- Before starting or continuing the business, the grantee party is required to pay, or agrees to pay, the grantor party a fee in their conduct of the business.
It is important to understand that you cannot ensure a licence agreement is categorised as a licence agreement, rather than a franchise agreement, simply by calling it a ‘licence agreement’. The case law shows that if a licence agreement meets the definition provided in the Franchising Code of Conduct, it will be categorised as a franchise agreement and must comply with the Code.
Quite often, the key consideration in determining whether the agreement does constitute a franchise agreement or a licensing agreement will come down to the court’s interpretation of a ‘system or marketing plan that is substantially determined, controlled or suggested by the granting party’.
How does Monardo Solicitors approach franchising/licensing agreements?
At Monardo Solicitors, we believe that franchising can be an exciting and rewarding experience. However, you need to be aware of your rights and obligations under the Franchising Code of Conduct.
Are you thinking of franchising your business?
If you are thinking of franchising or licensing your business, you will need a lawyer who can draft a franchise or licensing agreement that will stand the test of time. It is particularly important that the agreement will protect a franchisor’s rights in the future. The agreement will also need to be flexible, so as to allow for changes in the franchise system.
In the case of a franchise, you will also need to make sure you comply with the strict requirement for disclosure under the Franchising Code of Conduct.
Are you thinking of buying a franchise?
If you are thinking of buying a franchise, you will need a lawyer who can review the franchise agreement, disclosure and other documents. Therefore, it is important that the lawyer has a detailed understanding of franchising.
At Monardo Solicitors, we have experience in franchising, having drafted the franchise agreements for Fletchers Fotographics and Oporto.
We can assist you with the following:
- advice on business structures (partnerships, companies, trusts and joint ventures)
- drafting disclosure documents and franchise agreements
- reviewing disclosure documents and franchising agreements
- due diligence
- advice on terms and conditions of sale or purchase
- advice on complying with the Competition and Consumer Act and the Franchising Code of Conduct
- trademark registration and other protection for your intellectual property
- negotiating leases and licences to occupy
- negotiating, mediating and resolving any disputes between franchisors and franchisees.
Are you thinking about franchising or licensing your business? Are you considering buying a franchise? Would you like to talk to a lawyer who is experienced in franchising? Call 02 8006 5244.