While a licence agreement and a franchise agreement are two different arrangements, if not documented correctly, a licence agreement can be deemed to be a franchise agreement. Figuring out which arrangement is best for your business, as well as how to document the arrangement properly, is vital from both a legal and commercial perspective.
REFLECTION OF THE RULES
A licensing arrangement involves a licensor selling the rights to their business and brand to a licensee, without transferring complete ownership to the licensee. The licensee is then able to, amongst other things, utilise the intellectual property of the brand to produce goods or services with the brand’s logo. Under this arrangement, the licensee usually has significant discretion on how to use the licensor’s business and brand.
A franchising arrangement is similar to a licensing arrangement in that it involves a franchisor granting to a franchisee the right to conduct the business of the franchisor, however, the franchisee is only able to supply or distribute the goods or services in line with an arrangement substantially controlled by the franchisor. This means the franchisee has significantly less discretion on how to supply or distribute goods under a franchise agreement when compared to a licensee under a licence agreement. It is important to note that the franchisor-franchisee relationship is heavily regulated by the Franchising Code of Conduct (Code), due to the franchisor having power over the franchisee. The Code is therefore aimed at regulating and ensuring balance in this relationship.
WHICH MIRROR TO LOOK INTO?
Whether your business should be reflected as a licence or franchise arrangement will depend on a number of features. If you feel as though you need a high-level of control over your brand and goods or services, and you have concerns that a licensee may damage the brand you have cultivated, you will be provided with far more control in a franchise arrangement. Further, if you are concerned that a licensee may attempt to compete with your business by creating a more profitable business marketing your goods and services, a more regulated business relationship under a franchise agreement may be a better option.
While entering into a franchise agreement means the relationship is largely controlled by the franchisor, the Code will, in turn, control the discretion of the franchisor. The Code imposes obligations on the franchisor, such as needing to act in good faith by disclosing supply arrangements and earnings, being obligated to pay legal costs and execute franchise documents, needing to comply with more lenient termination avenues for franchisees, and having financial penalties imposed by the ACCC for non-compliance with the Code. Due to the extensive rules contained within the Code, creating and operating a franchise arrangement is a costly undertaking.
BE WARY OF THE HALL OF MIRRORS…
The key aspects of any franchise agreement include:
- Being in written or oral form;
- Allowing the franchisor to grant the franchisee the right to carry on the business under a marketing plan controlled by the franchisor or its associate;
- Use of branding including trademarks, slogans and designs; and
- A requirement that the franchisee to pay the franchisor an amount for goods or services, or related aspects.
While these characteristics will define a franchising arrangement, it is important to note that if a licensing agreement ‘looks and feels’ like a franchising agreement, it will be deemed as such. While it may be tempting to create a detailed marketing plan and control how a licensee is able to use your goods and services, if these controls venture into how a franchisor would regulate its relationship with a franchisee, the arrangement will then be subject to the restrictions contained in the Code, as well as the costs in complying with the Code.
If you are concerned as to whether your agreement is a licensing or franchising arrangement, or want to ensure your franchise agreement complies with the Code, please do not hesitate to contact us.
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