Franchisor Edition

2015 Franchisor Edition Sarah Bartholomeusz CEO – You Legal www.youlegal.com.au 01/01/2015

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.: Credits :. to David Bartholomeusz Page | 3

What’s the Difference Between a Franchise Agreement and a Licence? · Written by Sarah Bartholomeusz · Published on : March 31 2015 · Category : Agreement, Franchise, Legal, Licence, System This week we would like to return to an important topic that is normally at the heart of every business deal—contracts. Specifically, this week we will discuss the difference between a Franchise Agreement and a Licence. Some of our readers will recall that we talked about the changes to the Australian Franchising Code of Conduct (‘The Code’) in one of our past blogs. Franchising has been a growing type of business around the world. It is a convenient way of doing business which allows newcomers to benefit from the reputation of an existing and successful business. Franchise Agreement It is not enough to merely title a document a ‘Franchise Agreement’ for it to serve the purpose of a franchise agreement. Franchise Agreements are governed by the Code. The Code requires the following four points to be satisfied: 1. The Agreement must be in writing, oral or implied in whole or in part; 2. The Agreement will grant to a person the right to carry on the business of offering, supplying, or distributing goods or services in Australia under a system or marketing plan that is largely determined, controlled or suggested by the granting party; 3. The business must be substantially or materially associated with a Trademark, advertising or a commercial symbol owned, used, licensed or specified by the granting party; and 4. Before starting or continuing the business, the grantee party is required to pay or agrees to pay to the grantor party, a fee in their conduct of the Business. Licence Agreement In an arrangement involving a licence, the licensor uses a monopoly right such as a Patent, a Trade Mark, a design or a copyright as an exclusive right. This prevents others from commercially exploiting and profiting from the idea, design, name or logo. The licence allows its holder to use, make and sell, the product or name for a fee. It is true that often both franchise agreements and license agreements will meet the requirements outlined in the Code. Normally, the determining factors are: · Whether the substance of the agreement itself is interpreted to be a ‘system or marketing plan’ and; Page | 4

· Whether there is substantial control by the granting party. “System or Marketing Plan”: What is it? The case of ACCC v Kyloe Pty Ltd [2007] FCA 1522 provided a list of factors which can help to determine whether something is a ‘system’ or a ‘marketing plan’. The presence of any of the following suggest the agreement could be a Franchise Agreement: · Detailed compensation and bonus structures for selling products; · Centralised bookkeeping and record-keeping computer operations; · Assistance conducting ‘opportunity’ meetings; · Comprehensive advertising and promotional programs; · Schemes for appointment of distributors, direct distributors, district directors, regional directors or zone directors; · Rights to screen and approve promotional materials; · Prohibitions on repackaging of products; · Suggestions for retail prices charged for products; · Division of states into marketing areas; · Establishment of sales quotas; · Rights to approve sales personnel employed by the sub-distributor; · Mandatory sales training regimes; · Provision of quotation sheets to the sub-distributor’s employees or prescribed invoices and other sales forms; · Requirement that the sub-distributor gather information from customers for the head distributor; and/or · Restrictions on sub-distributor selling products without consulting the head distributor. Again, the intention of the parties becomes irrelevant. We advise our readers to consult with us if you are in doubt of the wording in your agreements. We look forward to helping with any of your other concerns regarding franchising and licensing, and any other issues that may arise. What Should I Do Next? Contact us if you would like further legal advice on Franchising Agreements. Our lawyers at You Legal will be happy to assist you in whatever way we can. * This blog is for general guidance only. Legal advice should be sought before taking action in relation to any specific issues. Page | 5

Complying with the new Franchising Code of Conduct · Written by Sarah Bartholomeusz · Published on : November 24 2014 · Posted In : Agreement, Franchise, Legal A franchise is an exciting and interesting form of business which gives an opportunity to be part of something great. It allows you to run your own business, while still reaping the benefits of the excellent reputation of a long standing franchise. Some of the changes which will come into effect on January 1, 2015 call for new and strengthened requirements, especially when it comes to the transparency of the administration of marketing funds and the ability to force a franchisee to incur a significant capital expenditure. However, franchisors will be pleased to find the removal of some disclosure document requirements, as well as deletion of the daunting administrative obligation to cross reference agreement clauses in the disclosure document. Key Changes and the New Franchising Code of Conduct The somewhat convoluted old disclosure process has been changed which means that franchisors now have the task of drafting and distributing a new document in the event of transferring, renewing or extending the scope of an agreement entered into prior to 1 January 2015 or in the case of all new franchise agreements entered into post 1 January 2015. This new document is an Information Statement. You can find the guide in the Annexure 2 of the amended Code. Good news – you are no longer required to cross-reference agreement clauses in the disclosure document. Now is the time to make sure that all old formats are done away with and you are working with new documents conforming to the new guidelines of the Code. In a welcome move, master franchisors receive somewhat of a special treatment. You now only have to provide on set of disclosure as the master franchisor and removes the current situation of ‘double disclosure’ compliance for multi-layered franchise systems. The added benefit of this is that franchisees will only need to review one disclosure document. But it isn’t all smooth sailing. Even though it is only the master franchisor who must provide disclosure, more and more specific details are expected to be released, discussing the disclosure arrangement. Sales conducted online, end of term arrangements and master franchise arrangements (mentioned above) will face new disclosure obligations. There is now the condition that operation of marketing funds must be conducted through a separately established bank account and all marketing contributions are to be made to this specific account. Page | 6

Take Notice While the Code comes into effect on the 1 January 2015, it will apply to all new and renewed franchise agreements which were executed after 1 October 1998 in the event that they are being transferred, renewed or extended or until the existing code is repealed (currently expected to be 1 April 2019). This means that all of these agreements should be reviewed to ensure that they comply with the new Code. The Code also won’t have the same impact on all the franchise agreements and you should consult the Code for a better understanding on how exactly the Code will have an effect on your business specifically. Our lawyers are always available to answer any questions you might have in connection with these new changes. Do I need to change my existing franchise agreement? One of the topics we discussed previously in our blogs is relevant in this issue as well, the matter of good faith. The new Code now requires acting in good faith when it comes to any issues coming from the agreement and the Code. We strongly advise that you take a careful look at your standing agreements to remove anything that might be considered to be unfair or unreasonable or any provision which might be construed as giving a party power to make a decision or take an action that may be deemed to be ‘arbitrary’ in the circumstances. Next Steps Remember, it is never too early to start rolling out these changes even before the new Code comes into effect! We strongly advise that you take action now and conduct a thorough review of your existing agreements and we can assist you to create a plan to ensure that your practices and agreements will be compliant. What Should I Do Next? Contact us if you would like further legal advice on complying with the new Franchising Code of Conduct. Our lawyers at You Legal will be happy to assist you in whatever way we can. * This blog is for general guidance only. Legal advice should be sought before taking action in relation to any specific issues. Page | 7

About Sarah Bartholomeusz Sarah is the founder of You Legal. She has an active practice in corporate and commercial law, giving peace of mind to growing businesses at all stages of their lifecycle. She has over 10 years of experience as a lawyer including providing complex, high level legal & corporate governance support to ASX listed companies. Page | 8