Australian courts and the regulator have generally given a very broad interpretation of the definition of “franchise agreement” in the Australian Franchising Code of Conduct 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 Australian Franchising Code of Conduct[i]. These types of agreements are generally not considered to be franchise agreements in other countries.

In the recent case of Freedom Foods Pty Ltd v Blue Diamond Growers [2021] FCAFC 86,  the Full Federal Court of Australia took a narrower approach[ii] in its interpretation of the definition of a “franchise agreement” in the Franchising Code of Conduct and held that the Licence Agreement was not a franchise agreement and accordingly the dispute between the parties could be arbitrated outside Australia. The decision brings Australia back into line with the international position that Trade Mark and IP Licence Agreements are generally considered not to be franchise agreements.

Why Does This Matter?

Whether an agreement is a franchise agreement for the purpose of the Australian Franchising Code of Conduct (‘Franchising Code’) is complex. A business can be exposed to significant penalties under the Franchising Code where incorrect assumptions have been made as to whether or not existing or proposed agreements and arrangements with licensees, dealers, distributors, re-sellers and after sale service centres are franchise agreements for the purpose of the Franchising Code.

New Franchise Disclosure Register

With the establishment of the Franchise Disclosure Register, hosted and administered by the Australian Government’s Department of Treasury, franchisors and Master Franchisors in a master franchise system with 2 or more sub-franchisees, are required by the 14 November 2022 to create a franchise profile and publish the mandated disclosure information on the Register which will be accessible to the public as from the 15 November 2022. The franchise profile and disclosure information published on the Register must be kept up to date.  Penalties apply for failing to comply with the mandatory requirement for registration[iii].

New and Increased Penalties for Breach of the Franchising Code

As from 15 April 2022, existing penalties for breach of the Franchising Code increased from 300 penalty units to a maximum of 600 penalty units ($133,200.00) and significant new penalties were also introduced.

Corporations face penalties of the greater of:

  1.   $10 million,
  2.   3 times the value of the benefit received by the corporation as a result of the breach, if the court can determine the benefit; or
  3.   10% of the annual turnover, where the court cannot determine the value of the benefit obtained from the breach;

where the corporation has not complied with provisions in the Franchising Code relating to:

  1.   The disclosure of materially relevant facts to prospective franchisees or franchisees (clauses 17(1) and (2))
  2.   The restrictions on the franchisor from engaging in conduct that restricts or impairs the freedom of association of prospective or existing franchisees (clause 33)
  3.   The terms of new vehicle dealership agreements (clauses 46A(1), (2) and (3) and 46B)

Where the above provisions of the Franchising Code are contravened by an individual, the civil penalty is $500,000[iv].

When are  Distribution  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[v]. 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”[vi] and the word “system” refers to a “method of operation under which the business is to be conducted”[vii]. The system or marketing plan does not have to be detailed or spelt out in the agreement.[viii] 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[ix]. 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[x].  Indicators that courts have relied upon to find that parties intended that the business be operated under a system or marketing plan include[xi]:

  • 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 of whether the system or marketing plan is substantially determined, controlled or suggested by the franchisor or associate of the franchisor is to be determined by practical and commercial considerations having regard to[xii]:

  • 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[xiii];
  • Whether approval or consent is required from a party (franchisor) for marketing and promotional material or activities of the other party[xiv];
  • 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.

The Case of Freedom Foods Pty Ltd v Blue Diamond Growers [2021] FCAFC 86.

The parties in this case had entered into a licence agreement (the ‘Licence Agreement’) in 2011 (which was automatically renewed in 2016) whereby Blue Diamond Growers (‘Blue Diamond’), a company incorporated in California, licensed Freedom Foods Pty Ltd (‘Freedom Foods’), an Australian company, to manufacture and sell almond milk products under the name ‘Almond Breeze’ and associated trade marks.  The Licence Agreement included a clause providing for arbitration of any controversy between parties in respect of the Licence Agreement be in Sacramento, California and, in accordance with that clause, Blue Diamond had commenced an arbitration in California.

The action arose when Freedom Foods disputed whether Blue Diamond could commence the arbitration in California.  Freedom Foods argued that the Licence Agreement was in fact a franchise agreement’ for the purposes of the Franchising Code of Conduct  (‘the Code’) and was therefore subject to the requirements of the Code which provides that a franchise agreement must not contain a clause that requires a party to the agreement to bring an action or proceedings in relation to a dispute under the agreement in any jurisdiction outside Australia.[xv]

The Honourable Chief Justice Allsop and Justices Colvin and Anastassiou decided unanimously that in this case the terms of the Licence Agreement, when considered as a whole[xvi],  did not meet the requirement in Clause 5(1)(b) of the definition of a ‘franchise agreement’ under the Code because the Licence Agreement did not provide that Freedom Foods carry on the licensed business activities under[xvii] a system or marketing plan which was substantially determined, controlled or suggested by Blue Diamond[xviii].  As a result, Blue Diamond was entitled to proceed with the arbitration in California.

How Stephens Lawyers & Consultants can assist:

Stephens Lawyers & Consultants can assist businesses with:

  • Review of existing distribution agreements, dealership agreements, reseller agreements and trade mark and IP licence 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 licence agreements.
  • Protection of trade marks and intellectual property rights.

* This article is an update of the article entitled ‘Information Sheet: Dealership, Distribution, Re-seller and IP Licence Agreements & the Australian Franchising Code of Conduct (October 2018)’, also authored by Katarina Klaric, Principal, Stephens Lawyers & Consultants. The contribution of Rochina Iannella, Lawyer, in writing the case analysis in this article (in April 2022) is acknowledged.

This update is not intended to be a substitute for obtaining legal advice.

© Stephens Lawyers & Consultants. April 2022.

For further information contact:

Katarina Klaric
Principal
Stephens Lawyers & Consultants

Suite 205, 546 Collins Street
Melbourne VIC 3000
Phone: (03) 8636 9100
Fax: (03) 8636 9199
Email: [email protected]
Website: www.stephens.com.au

All Correspondence to:
PO Box 16010
Collins Street West
Melbourne VIC 8007


[i]Rafferty v Madgwicks [2012] FCAFC 37; Workplace Safety Australia v Simple OHS Solutions Pty Ltd [2015] NSWCA 84;  ACCC public register – Husqvarna Australia Pty Ltd, s87B Undertaking: https://www.accc.gov.au/public-registers/undertakings-registers/husqvarna-australia-pty-ltd.

[ii] Freedom Foods Pty Ltd v Blue Diamond Growers [2021] FCAFC 86 at pars.  32, 33 per His Honour Chief Justice Allsop “It is not the case that there is a manifest intention that the definition of franchise agreement should be construed broadly.  Quite the contrary.  A decision has been taken to confine the protections afforded by the Code to franchisees as defined.  No purpose can be discerned to the effect that the scope of the Code (as distinct from its provisions insofar as they operate with respect to franchisees) should be construed broadly.

[iii] Competition and Consumer (Industry Codes-Franchising) Amendment (Franchise Disclosure Register) Regulations 2022.

[iv] Competition and Consumer (Industry Codes-Franchising) Amendment (Penalties and Other Matters) Regulations 2022.

[v] Clause 5(1), Competition and Consumer (Industry Codes – Franchising) Regulations 2014 (Cth).

[vi]  Rafferty v Madgwicks [2012] FCAFC 37 at [171]; Workplace Safety Australia v Simple OHS Solutions Pty Ltd [2015] NSWCA 84 at [91].

[vii] Workplace Safety Australia v Simple OHS Solutions Pty Ltd [2015] NSWCA 84 at [91].

[viii] Rafferty v Madgwicks [2012] FCAFC 37 at [185]; Workplace Safety Australia v Simple OHS Solutions Pty Ltd [2015] NSWCA 84 at [92]-[93].

[ix] Workplace Safety Australia v Simple OHS Solutions Pty Ltd [2015] NSWCA 84 at [93].

[x] 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. However refer the narrower approach taken by the Full Federal Court of Australia on this requirement in the recent case of Freedom Foods Pty Ltd v Blue Diamond Growers [2021] FCAFC 86 at par. 56 per His Honour Chief Justice Allsop. 

[xi] 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.

[xii] Workplace Safety Australia v Simple OHS Solutions Pty Ltd [2015] NSWCA 84 at [106]-[107].

[xiii] Refer narrower approach taken by the Full Federal Court of Australia on this aspect in the recent case of Freedom Foods Pty Ltd v Blue Diamond Growers [2021] FCAFC 86 at par. 56 per His Honour Chief Justice Allsop.

[xiv] Ibid.

[xv] Clause 21 (2), Competition and Consumer (Industry Codes – Franchising) Regulation 2014 (Cth) Schedule 1 (Franchising Code of Conduct)

[xvi] Freedom Foods Pty Ltd v Blue Diamond Growers [2021] FCAFC 86 at par.  57

[xvii] Freedom Foods Pty Ltd v Blue Diamond Growers [2021] FCAFC 86 at pars.  74, 75

[xviii] Freedom Foods Pty Ltd v Blue Diamond Growers [2021] FCAFC 86 at par. 56 per His Honour Chief Justice AllsopThe provision by which Blue Diamond may review the promotional plans before they are implemented and may call on Freedom Foods to meet and discuss the plan does not mean that Blue Diamond determines, controls or suggests the marketing plan.  An ability to comment on a plan the content of which originates entirely with Freedom Foods unguided by any requirement of the licence agreement or any overall structure or form imposed or suggested by Blue Diamond is not a marketing plan with the requisite statutory character”.