The Difference Between a License and a Franchise

We are often asked the difference between a license and a franchise agreement.

The answer is quite simple.

The Franchising Code of Conduct provides a definition of a franchise.  If an arrangement between parties meet all of the criteria then it is a franchise agreement, there is no contracting out of that.

If the arrangement between the parties does not meet all of the criteria contained in the definition of franchise agreement, then the arrangement may be a license agreement.

The Franchise Code of Conduct

The Franchising Code of Conduct definition of a franchise agreement is as follows:

(1) A franchise agreement is an agreement:

(a) that takes the form, in whole or part, of any of the following:
(i) a written agreement;
(ii) an oral agreement;
(iii) an implied agreement; and

(b) in 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 or an associate of the franchisor; and

(c) under which the operation of the business will be substantially or materially associated with a trade mark, advertising or a commercial symbol:
(i) owned, used or licensed by the franchisor or an associate of the franchisor; or
(ii) specified by the franchisor or an associate of the franchisor; and

(d) under which, before starting or continuing the business, the franchisee must pay or agree to pay to the franchisor or an associate of the franchisor an amount including, for example:
(i) an initial capital investment fee; or
(ii) a payment for goods or services; or
(iii) a fee based on a percentage of gross or net income whether or not called a royalty or franchise service fee; or
(iv) a training fee or training school fee;

but excluding:
(v) payment for goods and services supplied on a genuine wholesale basis; or
(vi) repayment by the franchisee of a loan from the franchisor or an associate of the franchisor; or
(vii) payment for goods taken on consignment and supplied on a genuine wholesale basis; or
(viii) payment of market value for purchase or lease of real property, fixtures, equipment or supplies needed to start business or to continue business under the franchise agreement.

(2) For subclause (1), each of the following is taken to be a franchise agreement:

(a) the transfer or renewal of a franchise agreement;

(b) the extension of the term or the scope of a franchise agreement;

(c) a motor vehicle dealership agreement.

(3) However, any of the following does not in itself constitute a franchise agreement:

(a) an employer and employee relationship;

(b) a partnership relationship;

(c) a landlord and tenant relationship;

(d) a mortgagor and mortgagee relationship;

(e) a lender and borrower relationship;

(f) the relationship between the members of a cooperative that is registered, incorporated or formed under any of the following laws:
(i) the Corporations Act 2001;
(ii) the Co operatives Act 1992 (NSW);
(iii) the Co operatives Act 1996 (Vic.);
(iv) the Cooperatives Act 1997 (Qld);
(v) the Co operatives Act 2009 (WA);
(vi) the Co operatives Act 1997 (SA);
(vii) the Cooperatives Act 1999 (Tas.);
(viii) the Cooperatives Act 2002 (ACT);
(ix) the Co operatives Act 1997 (NT).

Application

If we have a look at each provision it can be applied as follows:

(a) most agreements are going to be either written, oral or implied so it will be pretty easy to meet this criteria;

(b) this provision has to 2 arms:

      (i) has a right been granted to carry on a business in Australia?  if yes, you have probably met this criteria;

      (ii) is the system or marketing plan controlled or suggested by the franchisor?  This comes down to the element of control the "franchisor" will exercise.  Often if only a product is provided and the "franchisor" doesn't determine how it is sold or marketed then the arrangement between the parties may be one of a license or a distribution agreement;

(c) a trade mark identifies the business.  If the "franchisee" is hanging out the shingle with the brand and logo of the franchisor, then that may indicate the arrangement between the parties is that of a franchise agreement;

(d) the "franchisee" has to pay the "franchisor" money such as an initial fee for the grant of the right or an on-going fee but not including things such as products being provided at wholesale cost or the repayment of a loan or similar.  We are looking at ongoing royalties, initial franchise fees and other fees which are common (or sometimes unusal) in the operation of a franchised business.

Subclause (3) outlines some of the relationships which are deemed not to be a franchise relationship for example employee and employer, landlord and tenant and mortgagor and mortgagee.

Conclusion

Before making a decision that your arrangement does not fall within the definition of a franchise agreement you should seek legal advice. 

If you have entered into a franchise relationship and have failed to comply with the Franchising Code of Conduct, as a franchisor (whether you knew it or not) you could be subject to penalty, prosecution or civil action.  You will be infringing the provisions of the Competition and Consumer Act and the penalties can be very high.

This information is of a general nature only and is not to be relied upon as legal advice.  Each agreement, arrangement or relationship is unique and needs to be considered by a lawyer.  You should seek your own legal advice.