Franchising is one of the fastest growing business sectors in Australia. There are over 1120 franchise systems operating in Australia, with the number of franchisees estimated to be 79,000 [1].
The United States has had a strong influence on the development of Australia’s franchise industry with major U.S franchisors including KFC, McDonalds and Pizza Hut establishing operations in Australia in the late 60’s early 70’s. Australia continues to be one the major markets for international franchise expansion.
Successful expansion into the Australian market requires strategic planning combined with an understanding of the market and regulatory system. Franchisors considering expanding their operations into the Australian market have a number of different options available to them. They can:
- set a branch office or subsidiary company to develop and operate the franchise system
- grant an area development agreement or master franchise for Australia
- grant licenses or franchises direct to franchisees in Australia
- enter into joint venture agreements or partnerships with local companies
The vehicle ultimately chosen by the franchisor to expand its operations will be influenced by a number of factors, including:
- the franchisor’s financial resources and personnel levels
- the refinements required to the franchise system to suit the Australian market
- economic and financial incentives offered by the Australian government to foreign investors
- the taxation system
- the regulatory or legal system that regulates the industry and business practices
- the franchisor’s overall aims, goals and expectations with respect to the Australian market.
Whichever franchise structure is adopted, it will be necessary for the franchisor to ensure that its trade marks and other intellectual property rights are protected. These rights are the most valuable assets of a franchise system and their protection should be secured before any expansion plan is implemented.
In Australia, intellectual property rights are protected by statute and common law. Australia has trade mark, design and patent registration systems which are administered by IP Australia. Australia affords protection to both common law trade marks and registered trade marks based on first use in Australia. Prior to using or applying to register a trade mark in Australia, extensive searches should be undertaken of all relevant databases to avoid risks of unauthorised trade mark use claims at common law and trade mark infringement claims under the Australian Trade Marks Act.
Australia does not have a registration system for protection of copyright material, however the relevant work must be eligible for copyright protection under the Copyright Act. Whether foreign copyright works and other subject matter are eligible for copyright protection in Australia may be complex and will require consideration of a number of factors including:
- nature of the foreign work or other subject matter,
- when and where the foreign work or other subject matter was first made and published;
- whether the foreign country in which it was first made and published was a signatory to an international convention or treaty for the protection of relevant intellectual property rights.
- whether there is an agreement between Australia and the foreign country which provides for reciprocal rights and protection of works and other subject matter.
The Australian government has not adopted any specific foreign investment policies directed at franchising. However, to the extent that setting up a franchise operation in Australia involves the acquisition, takeover or control of Australian companies or businesses or the acquisition of interests in real estate, it will be subject to regulatory controls in that area. [2] Australia’s foreign investment regulatory scheme is complex and government policies vary according to industry sectors, such as banking, aviation, shipping, media, broadcasting, telecommunications and tourism. Generally foreign investment is encouraged in Australia if it is in the ‘national interest’.
The franchising industry in Australia has been regulated under a mandatory industry code, the Australian Franchising Code of Conduct, since 1 July 1998. During this time the code has been amended twice, with amendments commencing on 1 March 2008 [3] and 1 July 2010 [4] (“the Old Franchising Code”) and a new code came into effect on 1 January 2015 [5] (“the Franchising Code”).
The Franchising Code is a mandatory code prescribed under the Competition and Consumer Act 2010 (Cth). The Australian Competition and Consumer Commission is responsible for the administration and enforcement of the Franchising Code.
The Franchising Code sets out the rights and obligations of parties involved in a franchising relationship as defined in the Code. The Franchise Agreement must comply with the Franchising Code. The franchisor is also required to provide to franchisees or prospective franchisees a Disclosure Document in the form proscribed by the Franchising Code. The franchisor must also comply with other disclosure requirements set out in the Franchising Code. The Franchising Code applies nationally irrespective of which State or Territory of Australia, the franchisee operates the franchise business from.
The original disclosure requirements under the Old Franchising Code were based on the US Uniform Franchise Offering Circular (UFOC). The disclosure requirements under the Franchising Code are more extensive and include financial information in respect of the setup and operation of the franchise business.
Non-compliance with the Australian Franchising Code can result in the regulator, Australian Competition and Consumer Commission taking legal action against the franchisor. Franchisees can also take court proceedings against the franchisor for non-compliance with the Australian Franchising Code and contravention of the Australian Competition and Consumer Act.
Overseas franchisors considering entering the Australian market must comply with the Franchising Code.
In addition to compliance with the Franchising Code, franchisors also have to comply with other business, trade practices and consumer protection laws and competition laws.
Australian Courts have given a very broad interpretation of the definition of “franchise agreement” under the Franchising Code resulting in many dealership or re-seller agreements, distribution agreements, trade mark licences and IP licence agreements being franchise agreements in Australia and subject to compliance with the Franchising Code.
Franchisors proposing to expand their operations into the Australian market are advised to seek expert legal advice.
For further information contact:
Katarina Klaric
Principal
Stephens Lawyers & Consultants
Suite 205, 546 Collins Street, Melbourne 3000 Victoria Australia
Tel: +61 3 8636 9100 Fax + 61 3 8636 9199
Email: [email protected]
www.stephens.com.au
Stephens-Klaric Legal Pty Ltd (ACN 117 672 376) trading as Stephens Lawyers & Consultants
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Disclaimer: This article is not intended to be a substitute for obtaining legal advice.
© Stephens Lawyers & Consultants/Authored by Katarina Klaric 2007/Updated by Katarina Klaric October, 2018
[1] “Franchising Australia 2016”, Prof Lorelle Frazer, Assoc Prof Scott Weaven, Mr Anthony Grace, Prof Selva Selvanathan, Asia Pacific Centre for Franchising Excellence, Griffith University, Brisbane Australia 2016, at p 4.
[2] Foreign investment is regulated by the Foreign Acquisitions and Takeovers Act 1975 (Cth) and Australian Government policy set down by way of Ministerial statements and guidelines. The Treasurer is responsible for the administration of foreign investment regulations and policies and is assisted by the Foreign Investment Review Board. [https://firb.gov.au/]
[3] Trade Practices (Industry Codes — Franchising) Regulations 1998 (Cth), taking into account amendments up to SLI 2007 No. 240.
[4] Trade Practices (Industry Codes — Franchising) Regulations 1998 (Cth), taking into account amendments up to SLI 2010 No. 125.
[5] Competition and Consumer (Industry Codes – Franchising) Regulation 2014 (Cth)