What´s The Deal? Federal Court Gives Some Clarification On The Meaning Of "Franchise Agreement"

The Federal Court of Australia has recently confirmed that it is all about understanding the "deal", to know whether or not you have a franchise system.

On 18 October 2007, the Court in ACCC v Kyloe Pty Ltd (Kyloe) gave guidance on the meaning of a "franchise agreement". The deal in this case - a distribution and licence arrangement - which the Court said was not a franchise agreement and therefore the many requirements of the Franchising Code of Conduct (Code) did not apply to the arrangements.

Kyloe Pty Ltd was a distributor of Polar Krush ice-drink machines and was involved in the resale of various related products, such as cups, straws, frozen drink concentrate, etc.

The Australian Competition and Consumer Commission (ACCC) alleged that Kyloe's business arrangements with its 22 sub-distributors was a franchise, and that it had breached the Code by not issuing proper disclosure documents and franchise agreements.

The central issue the Court ultimately answered depended on the question of what is a "franchise" and what was the "deal". That is, whether or not Kyloe granted another (or others) "the right to carry on the business of offering, suppling or distributing goods or services under a system or marketing plan which was determined, controlled or suggested by Kyloe". This expression is part of the definition of what is a "franchise" in the Code.

Requirements For A "System Or Marketing Plan"

The Court considered both American and Australian case law and looked at the following factors in deciding upon the requirements for a system or marketing plan, and whether or not they existed between Kyloe and its distributors:

• sales training regime

• assistance in conducting "opportunity meetings"

• use of recommended retail prices

• restrictions on the sale of products

• recommended sales techniques

• sales quotas

• eliciting information from customers and passing on to Kyloe

• comprehensive advertising and promotional program

• sales and merchandising devices

• guidance concerning the operation/management of franchise

• exclusive/divided sales territories.

Decision: No Franchise Agreement Existed Within The Meaning Of The Code

The Code defines a "franchise agreement" as having a number of elements that are set out in regulation 4 of the Code. In that definition, each element is essential to the meaning of a franchise and because the ACCC could not establish that a system or marketing plan existed in this case, the Court held that no franchise agreement existed. It was clear from the Court's decision that if a franchise system was held to exist, Kyloe would not have met the requirements of the Code and would have suffered severe penalties.

Given that the Code is changing and that there are new disclosure requirements that come into effect on 1 March 2008 that effect all franchises, franchisors should seek advice and ensure they comply with all requirements of the Code.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.