What’s the difference between Franchising and Licensing?

I am often asked of the distinction between a “Franchise Agreement” and a “Licence Agreement” (Franchising and Licensing).

What is a Franchise Agreement?

The key distinction can be found in the definition of “Franchise Agreement” in the Franchising Code of Conduct (“the Code”). It states that an Agreement will be a “Franchise Agreement” if all of the following criteria are satisfied:

1. The Agreement takes a form that is in whole or part written, oral or implied;
2. The Agreement grants to a person the right to carry on the business 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;
3. The business is to be substantially or materially associated with a Trademark, advertising or a commercial symbol owned, used, licensed or specified by the granting party; and
4. Before starting or continuing the Business, the grantee party is required to pay or agrees to pay to the grantor party, a fee in their conduct of the Business.

But what if I call it a Licence Agreement?

It has been well established by case law that simply because an agreement calls itself a “Licence Agreement” does not mean it is not a Franchise Agreement. If a licence agreement meets the definition provided in the Code, it will be deemed a Franchise Agreement and must comply with the provisions of the Code.

Quite often both licence agreements and franchise agreements will satisfy points 1, 3, and 4 above. The key consideration as to whether the agreement does in fact constitute a franchise agreement will come down to a Court’s interpretation of a ‘system or marketing plan’ that is substantially determined, controlled or suggested by the granting party.

What is a ‘System or Marketing Plan’?

The Code has no definition for a ‘system or marketing plan’ and does not explicitly state when it is necessary to consider if such a system or plan is present. The case of ACCC v Kyloe Pty Ltd [2007] FCA 1522 provided a useful list of relevant factors to these issues. They include:

1. Detailed compensation and bonus structures for selling products.
2. Centralised bookkeeping and record-keeping computer operations.
3. Assistance conducting ‘opportunity’ meetings.
4. Comprehensive advertising and promotional programs.
5. Schemes for appointment of distributors, direct distributors, district directors, regional directors or zone directors.
6. Rights to screen and approve promotional materials.
7. Prohibitions on repackaging of products.
8. Suggestions for retail prices charged for products.
9. Division of states into marketing areas.
10. Establishment of sales quotas.
11. Rights to approve sales personnel employed by the sub-distributor.
12. Mandatory sales training regimes.
13. Provision of quotation sheets to the sub-distributor’s employees or prescribed invoices and other sales forms.
14. Requirement that the sub-distributor gather information from customers for the head distributor.
15. Restrictions on sub-distributor selling products without consulting the head distributor.

If any of the above criteria are met, the agreement could be determined to be a franchise agreement, irrespective as to whether the parties intended it to be so. It is for this reason that you should obtain accurate and timely legal advice from a specialist in this complex area of law before entering into an agreement of this nature.

Want to know more about franchising and licensing?

Please contact me should you have any questions or queries in relation to franchising and licensing.