Franchise relationship defined by court

The embattled ACCC, criticised for its soft approach toward franchisors, has lost its case on behalf of a group of ice drink licensees because it failed to establish that their distributor was a franchisor.

The Federal Court case has set a precedent for what amounts to a franchise agreement, as defined by the mandatory Franchising Code.

Justice Richard Tracey dismissed the ACCC application against Kyloe, Impact Design Accessories in July 2006 for alleged contraventions of the Franchising Code of Conduct and section 51 AD of the Trade Practices Act 1974.

The ACCC had argued that Kyloe and Impact had a franchise agreement with their sub-distributors and therefore had to comply with the disclosure provisions and cooling off period under the Franchise Code.

If the ACCC had been successful, the disgruntled licensees who maintained that they had bought the licences on the strength of unrealistic profit expectations, would have been able to take advantage of the cooling-off period – giving them a chance to terminate their contracts and be reimbursed for the ice drink machines.

Some could have used the court’s findings to run compensation cases of their own.

But the Federal Court decided that the drink machine distribution arrangement and trade mark licence was not a “franchise agreement” as defined in the code – because it did not incorporate the “system or marketing plan determined, controlled or suggested by the franchisor” that is necessary for a franchise agreement.

Allens Arthur Robinson lawyers, in a newsletter to clients, says there are three lessons from the case:

• Distributors or trade mark licensors who do not want their commercial arrangements with their Australian sub-distributors or licensees to be franchises (regulated by the Franchising Code of Conduct) need to check whether their agreements include the relevant factors for a system or marketing plan. If so, legal advice should be sought as to whether the Franchising Code of Conduct applies to the arrangement.

• To avoid the application of the Franchising Code of Conduct, distribution agreements or trade mark licences must be structured appropriately before they are finalised.

• If you suspect your existing Australian trade mark licence or a distribution agreement is in fact a franchise agreement, then you should note that you cannot avoid the application of the Franchising Code of Conduct to the arrangement by simply not enforcing certain provisions of the agreement – a modified agreement will be needed to avoid the code. Legal advice should be sought as to any amendment process.