19 Jul 2006
When is a licence agreement a franchise agreement?
by Wayne Condon
The definition of "franchise agreement" in the Australian Franchising Code of Conduct is very broad and it can encapsulate many intellectual property licence agreements that a licensor may not contemplate as being a "franchise".
What is "franchising"?
The Franchising Code of Conduct is declared under the Trade Practices (Industry Codes-Franchising) Regulations 1998 to be a mandatory industry code for the purposes of the Trade Practices Act 1974.
Section 51AD of the Trade Practices Act prohibits a corporation from contravening a mandatory industry code.
The Code applies to a franchise agreement entered into on or after 1 October 1998. There is a lengthy definition of the term "franchise agreement" in the Code, the crucial aspects of which are, an agreement (which may be written, oral or implied) involving the grant of a right to carry on a business of offering goods and services under a system or marketing plan substantially determined, controlled or suggested by the person granting the rights and under which the operation of the business will be substantially or materially associated with a trade mark, advertising or other commercial symbol owned, used or licensed by the person granting the rights and under which, before starting or continuing the business, the recipient of the grant must pay or agree to pay to the grantor of the rights an amount of money or money's worth.
It will readily be seen that whether an agreement amounts to a "franchise agreement" for the purposes of the Code is not a question of form but one of substance.
In a case decided earlier this year the Australian Federal Court declared that certain "licence agreements" marketed by ContactPlus Group Pty Ltd (in liquidation) were, in fact, franchise agreements for the purposes of the Code. The declarations and orders ultimately made by the Court were not opposed by ContactPlus.
The licensing scheme
ContactPlus was a Melbourne-based business that promoted, marketed and sold "licences" nationally to use its intellectual property for the purpose of operating employment and recruitment services. The Australian Competition and Consumer Commission brought proceedings against ContactPlus in relation to a number of agreements entered into by ContactPlus with certain individuals.
The Federal Court made declarations that:
- the so called "licence agreements" entered into between ContactPlus and certain individuals were franchise agreements and hence covered by the Code;
- ContactPlus had failed to give the relevant individuals a disclosure document in the form provided for in the Code and had failed to receive from the individuals a written statement that they had received, read and had a reasonable opportunity to understand the disclosure document and the Code prior to entering into the franchise agreement;
- ContactPlus had given notice of termination of certain franchise agreements without reasonable notice and that it failed to provide for a complaint handling procedure as required by the Code;
with the consequence that ContactPlus had contravened section 51AD of the Trade Practices Act which prohibits a corporation from contravening an applicable industry code.
It was also found that ContactPlus had misrepresented the liability for lump sum licence fees to franchisees and that it had misrepresented, on its website, that, upon entering into a franchise agreement, ContactPlus would supply a franchisee with a right to an area that was exclusive to that franchisee when, in fact, ContactPlus had no such intention.
The Federal Court ordered that the $60,000 lump sum licence fee as disputed in the proceedings was not enforceable and imposed injunctions on both the company and its guiding mind (an individual by the name of Spencer) in relation to their future conduct for a period of three years. Further, Mr Spencer was ordered to provide to each person with whom ContactPlus had entered into "licence agreements" of the kind the subject of the proceedings and to any prospective franchisee with whom he deals in the next three years, with a copy of the orders made by the Federal Court.
The definition of "franchise agreement" in the Australian Franchising Code of Conduct is very broad and it can encapsulate many intellectual property licence agreements that a licensor may not contemplate as being a "franchise". Nevertheless, if the contractual arrangements fall within the definition of "franchise agreement" within the Code, then the Code will apply and any subsequent failure to comply with the Code will amount to a contravention of the Trade Practices Act for which a variety of serious remedies may flow.
An IP licence agreement will often involve the grant of a right to carry on a business of offering, supplying or distributing goods or services. Such a licence will only amount to a franchise if the business is to be conducted under a "system or marketing plan substantially determined, controlled or suggested" by the licensor. There is no definition of "system" or "marketing plan" in the Code. However, it has been held that a "system" "is a set of principles or procedures according to which the business is operated or an organised scheme or method pursuant to which the business is operated". A marketing plan is a "detailed proposal for achieving the promotion or advertising of the licensor's products" (Apple Computer Australia Pty Ltd v Mekrizis  NSWSC 126).
It is important to note that it is the proposed franchise agreement which must provide for:
- the grant of a right to carry on a business under the system or marketing plan. If, for example, the plan or system only arises during the subsequent course of the relationship between licensor and licensee then the licence agreement would not amount to a franchise agreement;
- the payment of a sum by the licensee before commencing business. In the absence of such an up-front obligation in the agreement the licence would, again, not amount to a franchise agreement for the purposes of the Code.
It is important for businesses involved with the licensing of intellectual property in Australia to therefore ensure that they are fully aware of the requirements of the Code, including the definition of what amounts to a "franchise agreement". If there is any doubt as to whether a contractual arrangement falls within the provisions of the Code, businesses should obtain advice from a qualified professional.
The section also prohibits a corporation from contravening a voluntary industry code where the corporation has bound itself to accepting the code.