The Australian courts have given a very broad interpretation of the definition of “franchise agreement” in the Australian Franchising Code of Conduct resulting in many dealership or reseller agreements, distribution agreements, trade mark licenses and IP license agreements being franchise agreements in Australia and subject to compliance with the Australian Franchising Code of Conduct. These types of agreements are generally not considered to be franchise agreements in other countries and Australia is out of step with what is happening internationally.
Businesses should have their existing agreements and arrangements with dealers, distributors, resellers and after sale service centres assessed as to whether or not they constitute a franchise agreement for the purpose of the Franchising Code of Conduct.
Recent enforcement action taken by the Australian Competition and Consumer (ACCC) involving Husqvarna Australia Pty Ltd[i] (“Husqvarna”), a subsidiary of the Husqvarna Group, a global power tool manufacturer based in Sweden, with 343 dealers throughout Australia, shows that the regulator will take action where it believes conduct has or is likely to have a broad impact on a particular sector.
The ACCC had concerns about the representations made by Husqvarna to its dealers that the dealership agreements that they signed were not franchise agreements. The ACCC considered that the Husqvarna dealership agreements were franchise agreements and the dealers were entitled to protections contained in the Franchising Code of Conduct. The ACCC also considered that:
- Husqvarna’s representations that the dealership agreements did not constitute a franchise agreement were likely to be misleading in contravention of section 18 and 29(1)(m) of the Australian Consumer Law.
- Husqvarna is likely to have terminated one or more dealership agreements in contravention of various clauses of the Franchising Code of Conduct, and as a consequence had breached section 51 ACB of the Australian Competition and Consumer Act. Section 51 ACB prohibits a corporation from contravening mandatory industry codes, one of which is the Franchising Code of Conduct.
To address the ACCC concerns, Husqvarna provided the ACCC court enforceable undertaking from Husqvarna Australia Pty Ltd under section 87B of the Australian Competition and Consumer Act, which required Husqvarna to, amongst other things:
- Offer new dealers a new agreement which complies with the Franchising Code of Conduct and the Australian Consumer Law;
- Notify all existing dealers that the Franchising Code of Conduct applies to their existing dealership agreement and provide them with an option to transition to the new dealership agreement;
- Provide all existing and new dealers with a Disclosure Document in compliance with the Franchising Code of Conduct;
- Establish and implement an Australian Consumer Law and Franchising Code of Conduct compliance program including practical staff training and education to minimise risks of future breaches of the Australian Consumer Law and Franchising Code of Conduct and to ensure Husqvarna’s awareness of the responsibilities and obligations under these laws.
When are Dealership, Distribution, Re-seller and IP Licence Agreements franchise agreements for the purpose of the Australian Franchising Code of Conduct?
The question of whether an agreement is a franchise agreement for the purpose of the Franchising Code of Conduct requires consideration of whether each of the elements of the definition of “franchise agreement” in the Code are met[ii]. This involves looking at the relevant written, oral or implied agreement or arrangements between the parties including manuals and related documents and how parties transact business or deal with each other in connection with the supply or distribution of goods and/or services.
The elements required for a “franchise agreement” are:
1. An agreement that contains a grant of a right by a person (franchisor) to another person (franchisee) to carry on business of offering, supplying or distributing goods or services in Australia.
2. The right to carry on the business must be under a system or marketing plan.
In relation to the second element, the Australian courts have held that the expression “system or marketing plan” refers to a “co-ordinated method or procedure, or scheme whereby goods or services are sold”[iii] and the word “system” refers to a “method of operation under which the business is to be conducted”[iv]. The system or marketing plan does not have to be detailed or spelt out in the agreement.[v] As this element contemplates that the business will be carried out under a system or marketing plan, it is at least necessary that the agreement contains a provision for that to occur, even if the terms are not settled or prescribed by the agreement[vi]. However, there are differing views as to whether the second element is satisfied where the agreement only creates rights and obligations that would enable the franchisor substantially to determine, control or suggest that the business be conducted under a system or marketing plan[vii]. Indicators that courts have relied upon to find that parties intended that the business be operated under a system or marketing plan include[viii]:
- Requirements for the provision of business plans that extend beyond funding of the business and include considerations relating to the operation of the business and marketing plans.
- Requirements to use a prescribed system of processing or administering of sales.
- The provision of manuals for marketing and sales of products and services for the operation of the business.
- The requirement to use prescribed or approved marketing and promotional material.
- The provision of technical and financial guidelines for the operation of the business.
- Requirements to follow directions given for the operation of the business.
3. The system or marketing plan must be substantially determined, controlled or suggested by the franchisor or an associate of the franchisor.
In assessing whether a particular agreement satisfies the third element required for a franchise agreement, the courts have stated that the meaning of the words in the third element must be determined by reference to the object and purpose of the legislation. In the case of the Franchising Code of Conduct, the purpose of the code is the protection of a particular class of person, the franchisee. The question is to be determined by practical and commercial considerations having regard to[ix]:
- The terms of the agreement and the extent that a party (franchisor) has power in a practical sense to determine, control or suggest the system or marketing plan including business plan;
- Whether approval or consent is required from a party (franchisor) for marketing and promotional material or activities of the other party;
- Whether a party (franchisor) can refuse its consent to marketing and promotional material or activities of the other party;
- The extent to which the business operated under the agreement involves the sale of goods or services of one party (franchisor).
4. The operation of the business will be substantially or materially associated with a trade mark, advertising or a commercial symbol owned, used or licensed by the franchisor or an associate of the franchisor or specified by the franchisor or an associate of the franchisor.
5. Payment of fee(s) by the franchisee to the franchisor or an associate of the franchisor including, for example, initial capital investment fee, royalty, license fee, franchise fee or a training fee but excluding:
a) Payment for goods and services at or below their usual wholesale price;
b) Repayment by the franchisee of a loan from the franchisor;
c) Payment of the usual wholesale price of goods taken on consignment;
d) Payment of market value for the purchase or lease of real property, fixtures, equipment or supplies needed to start business or to continue business under the franchise agreement.
Case Example: Workplace Safety Australia Pty Ltd v Simple OHS Solutions Pty Ltd
The Workplace Safety Australia Pty Ltd v Simple OHS Solutions Pty Ltd decision illustrates the application of the above elements. In that case, the Appeal Court held that the Distribution Agreement for the marketing and sale of online subscription packages, accessible via Workplace Safety Australia’s website, was a franchise agreement under the Franchising Code of Conduct. The on-line subscription packages were designed to assist businesses to meet their obligations under the occupational health and safety legislation. The Appeal Court rejected Workplace Safety Australia’s contention that the agreement was simply a commercial arrangement where Workplace Safety Australia granted Simple OHS Solutions a licence to use the trade mark for the purpose of marketing and selling subscription packages.
Workplace Safety Australia contended that the first three elements of the definition of franchise agreement in the Code were not satisfied. There was no right granted to carry on business of offering, supplying or distributing goods or services in Australia, there was no business carried out under a system or marketing plan and there was no system or marketing plan substantially determined, controlled or suggested by Workplace Safety Australia. The Appeal court disagreed.
The Appeal Court found that the agreement created the right to carry on the business of offering services, being subscription packages. The Appeal Court did not give any weight to the fact that Simple OHS Solutions did not supply the subscription packages which could only be purchased and accessed via Workplace Safety Australia and that Workplace Safety Australia continued to own all the intellectual property of the packages[x].
The Appeal Court found that the Distribution Agreement did provide for the business to be carried on under a system or plan, because the agreement required Simple OHS Solutions to submit to Workplace Safety Australia a detailed business plan setting out how it intended to fund and operate the business, to process and administer all sales of subscription packages in accordance with the process advised and to use standard forms provided and to comply with the manual and directions provided. Under the Distribution Agreement, Workplace Safety Australia could refuse consent to Simple OHS Solutions’ marketing activities. The Appeal Court did not consider material the fact that the Distribution Agreement did not impose a business plan that had to be followed but only required Simple OHS Solutions to provide a business plan[xi].
The Appeal Court concluded that the system and marketing plan was substantially controlled by Workplace Safety Australia, because under the Distribution Agreement it had power to give directions on how the business was operated and had absolute discretion to refuse consent to marketing and promotional material and activities which had to be submitted for approval. Further, the Distribution Agreement obligated standard forms to be used in the marketing and the selling of the subscription packages[xii].
How can Stephens Lawyers & Consultants assist:
Stephens Lawyers & Consultants can assist businesses with:
- Review of existing distribution agreements, dealership agreements, reseller agreements and trade mark and IP license agreements to assess whether they are franchise agreements for the purpose of the Australian Franchising Code of Conduct.
- Preparation of Area Development Agreements.
- Preparation of Franchise Agreements and Disclosure Documents in compliance with the Australian Franchising Code of Conduct.
- Structuring or restructuring channels of distributions for the supply of goods and services that are not franchises.
- Preparation of distribution agreements, dealership agreements, reseller agreements, trade mark and IP license agreements.
- Protection of trade marks and intellectual property rights.
- Compliance with the Australian Consumer Law including the Franchising Code of Conduct.
- Responding to the Australian Competition and Consumer Commission (“ACCC”) in respect of compliance issues under the Australian Competition and Consumer Act.
Authored by Katarina Klaric, Principal, Stephens Lawyers & Consultants; © Stephens Lawyers & Consultants. October 2018.
Disclaimer: This article is not intended to be a substitute for obtaining legal advice.
For more information contact:
Katarina Klaric | Principal
STEPHENS Lawyers & Consultants | Suite 205, 546 Collins Street, Melbourne VIC 3000 Australia
T + 61 3 8636 9100 | F + 61 3 8636 9199 | E [email protected]
PO Box 16010 Collins Street West VIC 8007 Australia W: www.stephens.com.au
Stephens-Klaric Legal Pty Ltd (ACN 117 672 376) trading as Stephens Lawyers & Consultants
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[i] ACCC public register – Husqvarna Australia Pty Ltd, s87B Undertaking: https://www.accc.gov.au/public-registers/undertakings-registers/husqvarna-australia-pty-ltd.
[ii] Clause 5(1), Competition and Consumer (Industry Codes – Franchising) Regulations 2014.
[iii] Rafferty v Madgwicks [2012] FCAFC 37 at [171]; Workplace Safety Australia v Simple OHS Solutions Pty Ltd [2015] NSWCA 84 at [91].
[iv] Workplace Safety Australia v Simple OHS Solutions Pty Ltd [2015] NSWCA 84 at [91].
[v] Rafferty v Madgwicks [2012] FCAFC 37 at [185]; Workplace Safety Australia v Simple OHS Solutions Pty Ltd [2015] NSWCA 84 at [92]-[93].
[vi] Workplace Safety Australia v Simple OHS Solutions Pty Ltd [2015] NSWCA 84 at [93].
[vii] Workplace Safety Australia v Simple OHS Solutions Pty Ltd [2015] NSWCA 84 at [93]; Compare with Rafferty v Madgwicks at [2012] FCAFC 37 at [185], where the Appeal Court stated that it is enough that the agreement creates rights and obligations that would enable the franchisor to substantially determine, control or suggest that the business is conducted under a system or marketing plan.
[viii] Workplace Safety Australia v Simple OHS Solutions Pty Ltd [2015] NSWCA 84 at [93]-[103] and at [63] referencing the indicia referred to in the Rafferty case.
[ix] Workplace Safety Australia v Simple OHS Solutions Pty Ltd [2015] NSWCA 84 at [106]-[107].
[x] Workplace Safety Australia v Simple OHS Solutions Pty Ltd [2015] NSWCA 84 at [85]-[89].
[xi] Workplace Safety Australia v Simple OHS Solutions Pty Ltd [2015] NSWCA 84 at [94]-[103].
[xii] Workplace Safety Australia v Simple OHS Solutions Pty Ltd [2015] NSWCA 84 at [105]-115].