The fine line between a franchise agreement and a trade mark licence

In a timely warning for IP lawyers to think beyond IP laws, the Full Federal Court has just confirmed that it doesn’t take much for a trade mark licence to also be a regulated “franchise agreement”. All you need is quality control, business plan/sales requirements, financial oversight and the potential to impose further policies and procedures.

In Australia, if a trade mark licence is also a franchise agreement, then you need to comply with disclosure requirements and contract restrictions in the Franchising Code of Conduct. If you don’t, then your trade mark licence may not be enforceable and you will be in breach of the Australian Consumer Law. Relevantly, the key elements of a “franchise agreement” are:

  • an agreement under 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; and 
  • under which 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.

In Rafferty v Madgwicks [2012] FCAFC 37, the licensor set up a business venture to sell Modular Accommodation Units in Australia under the brands “Time 2000” and “T2” using a Heads of Agreement (HOA); a Joint Venture and Shareholders Agreement (JVSA); and a Rights Agreement (RA). The court considered whether these agreements amounted to a franchise agreement. The court looked at what was the necessary “control” and thought these features were enough:

  • Franchisee held an exclusive right to “promote, market, sell and install” the products.
  • Franchisee had to comply with all reasonable directions as to quality control in marketing.
  • Franchisor had absolute discretion to scrutinise proposed sales and to approve any project.
  • Franchisee was required to meet specific sales targets.
  • Franchisee was required to maintain financial records on a management system approved by the franchisor, who could audit those records. 
  • Restriction on franchisee selling competing products. 
  • Requirement to comply with the franchisor’s policies and procedures as notified.

In general, the court thought it was important that the business of the franchisee was solely concerned with the franchisors product, the franchisor had a critical degree of control over key aspects of the franchisee’s business, the franchisor assumed responsibility for quality control and that the degree of control could have been augmented under the policy and procedure provisions.

The court also thought that it was not necessary for the details of the system or marketing plan to be set out in full in the agreement. It was enough that the agreement creates the 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.

So next time you’re drafting a trade mark licence which involves using a trade mark for a business, you should read this case and think about whether the quality control and other oversight provisions could go so far as to turn your agreement into a franchise agreement governed by the Code. If so, then start preparing a disclosure statement and check the contract restrictions!

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