Both licence and franchise agreements bestow the right to use certain intellectual property (including trademarks, business systems, software etc). However, a franchise generally has a greater level of control than a licence arrangement. Additionally, franchises require a higher level of compliance with the laws regulating them.
What is a franchise?
There are certain distinct elements that a Franchise Agreement must possess, as set out in section 5 of the Franchising Code of Conduct (Code). A franchise agreement must be in place and contain the following elements:
- It must be written, oral or implied;
- It grants a person (the franchisor) the right to grant to another person (the franchisee) the right to carry on a business under a system or marketing plan substantially determined, controlled or suggested by the franchisor;
- It grants the franchisee the right to use a trade mark, advertising or commercial symbol that is owned, used, licensed or specified by the franchisor; and
- It provides that the franchisee must make certain payments to the franchisor.
What is a licence?
A licence is a business structure and method of distributing goods and services. There may not be the same restrictions as to trademarks and geographical exclusivity present in a franchise agreement.
When is a licence (or distribution agreement) a franchise agreement?
In the case of Rafferty v Madgwicks  FCAFC 37, the Full Court of the Federal Court of Australia held that a “Rights Agreement” granting a licence to use certain intellectual property was a franchise agreement for the purpose of the Code.
In essence, the Court looked at the substance of the systems and level of control which the relevant document established, as opposed to what the document was titled. In reaching its conclusion, the Court was of the view that a “system or marketing plan” was the indicator of a franchise in this case. While emphasising that “much depends on the circumstances of the case”, the Court stated that the following factors may be indicative of a “system or marketing plan”:
- specific requirements for accounting and record keeping;
- reservation by the franchisor of a right to audit the books of account and other records;
- inability of the franchisee to supply goods or services to customers without the franchisor’s approval;
- reservation by the franchisor of the right to approve promotional and advertising material;
- provision by the franchisor of bonus structures or equivalent for those selling its goods or services;
- provision by the franchisor of training for staff selling its goods or services;
- stipulation of retail pricing structures, sales structures, sales quotas and the like;
- creation of marketing and sales territories;
- reservation by the franchisor of the right to approve sales staff;
- reporting systems in relation to profit or turnover;
- restriction on the franchisee selling competing products;
- controls on the use of brand and trading names;
- requirements for signage and merchandising;
- management structure; and
- badging requirements (mandatory use of trading name, uniforms, stationery, etc).
Control is also a deciding factor as to whether an agreement is a franchise agreement or licence agreement. Factors that could be used to determine whether an alleged franchisor had the degree of control over the system or marketing plan can be:
- the extent to which the licensor’s business involves the sale of the licensor’s products – the smaller the percentage the less likely it will be that the necessary degree of control will be found to exist;
- whether or not the licensor requires each licensee to be operated with the appearance of some centralised management and with uniform standards, regulating the quality and price of goods sold;
- whether or not the licensor requires the licensee to advertise in a certain manner or have the licensee adhere to a marketing plan; and
- the extent to which the licensor controls the franchisee’s business, including the hours the licensee must be open, auditing of records, uniforms, sales quotas etc.
If you are a licensor, you must ensure that you comply with the Code if your business model can be considered a franchise. If you are a licensee and the business you are buying in to is actually a franchise rather than a licence, the Code will apply and you should ensure that all requirements of the Code are met. If you require further franchise or licence advice, please do not hesitate to get in contact with one of our franchising lawyers, call us on 1300 544 755 to discuss.