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International Franchise Law: Australian Courts Weigh-In On What Is A Franchise

MELBOURNE, Australia (Blue MauMau) - In today’s judgment in ACCC v Kyloe Pty Ltd [2007] FCA 1522, the Federal Court in Australia examined a drink machine distribution arrangement and concluded it did not fall within the definition of ‘franchise agreement’ in clause 4 of the Australian Franchising Code of Conduct (the Code). Clause 4 (below) provides a cumulative set of criteria that must be met before an agreement may be caught under the Code.

4 Meaning of franchise agreement
(1) A franchise agreement is an agreement:
(a) that takes the form, in whole or part, of any of the following:
(i) a written agreement;
(ii) an oral agreement;
(iii) an implied agreement; and

(b) in which a person (the franchisor) grants to another person (the franchisee) the right to carry on the business of offering, supplying or distributing goods or services in Australia under a system or marketing plan substantially determined, controlled or suggested by the franchisor or an associate of the franchisor; and

(c) under which the operation of the business will be substantially or materially associated with a trade mark, advertising or a commercial symbol:

(i) owned, used or licensed by the franchisor or an associate of the franchisor; or
(ii) specified by the franchisor or an associate or the franchisor; and

(d) under which, before starting business or continuing the business, the franchisee must pay or agree to pay to the franchisor or an associate of the franchisor an amount including, for example:

(i) an initial capital investment fee; or
(ii) a payment for goods or services; or
(iii) a fee based on a percentage of gross or net income whether or not called a royalty or franchise service fee; or
(iv) a training fee or training school fee;

but excluding:

(v) payment for goods and services at or below their usual wholesale price; or
(vi) repayment by the franchisee of a loan from the franchisor; or
(vii) payment of the usual wholesale price for goods taken on consignment; or
(viii) payment of market value for purchase or lease of real property, fixtures, equipment or supplies needed to start business or to continue business under the franchise (remainder of cl 4 omitted)

The court decided that the criteria in clause 4(1)(b) were not met as there was no ‘system of marketing’ in place. As the phrase ‘system of marketing’ is not defined in the Code, the Court turned to one Australian and one US case for guidance in identification of 'systems of marketing'.

The Court accepted that the requirements of clause 4(1)(c) were met. Although it was not necessary for the Court to rule on whether the requirements of clause 4(1)(d) were met (because the requirements of Clause 4 must all be met for a franchise agreement to exist), it was opined that they were not as the Respondent distributor had conducted the training on a cost recovery basis and not for profit.

The case may be interesting to franchise lawyers for the lists of factors it includes (paragraphs 40, 54 and 58 of the judgment) which assisted the Court in determining whether the required degree of control over the system or marketing plan was exercised by the alleged franchisor. In my experience, quite a number of the factors on the list are equally consistent with a franchise or a distributorship. It would be interesting to hear what others think the distinguishing characteristics of a franchise are.