What’s the difference between a Franchise and a Licence?

The response to this commonly asked question is somewhat complex; there is no single definitive factor which will render a business arrangement a licence instead of a franchise or vice versa.

To understand the response to this question, it is necessary to examine what is a licence at law, what the Franchising Code says a franchise agreement is, and the factors to be considered in determining the correct legal characterisation of a particular agreement.

What is a Licence?

At simplest, a licence is a right of use granted by one party to another. A driver’s licence is a right to use roads, to provide a simple example. In regards to intellectual property, a licence is a right to exploit that intellectual property within the terms of the IP Licence. A licence in most cases does not transfer or assign ownership of any property.

A franchise agreement will therefore contain licencing elements, where one party grants another the right to use their intellectual property and, likely, their processes and systems, but does not transfer ownership of that intellectual property, processes and systems.

How does the Franchising Code define a Franchise Agreement?

Clause 5 of the Franchising Code contains a definition of a Franchise Agreement. In summary, an agreement will be considered a franchise agreement if all the following criteria are satisfied:

  1. There is an agreement (regardless of whether that agreement is verbal, written, implied or a combination thereof);
  2. That agreement provides:
    1. that one party will grant another 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’;
    2. the business carried on pursuant to the Agreement is ‘substantially or materially associated with a trade mark, marketing or commercial symbol’; and
    3. there is to be payment of an amount by the grantee to the grantor, provided that amount is not for goods on a genuine wholesale basis, repayment of a loan or payments at market value for items required to start the business.

If all these criteria are satisfied, then the agreement in question is a Franchise Agreement, regardless of what the agreement is titled or what the parties thereto consider their relationship to be. Put another way, parties cannot ‘opt out’ of the application of the Franchising Code by calling their document something else (for example, a Licence Agreement or Distribution Agreement); if the criteria are satisfied, the agreement is a franchise agreement and the Franchising Code automatically applies. If only some of the criteria are satisfied, but not others, then the Franchising Code will not apply, where the use of the word ‘and’ in the clause means all the criteria must be satisfied.

What Factors are Considered?

Of the criteria above, by far the most contentious is the requirement at 2(a), being 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’.

Several court cases have considered this provision and its application to various agreements, from which cases we can extract relevant factors that will be considered in determining whether this statutory requirement is satisfied. Those factors include:

  1. the contents of relevant provisions in the agreement concerning marketing plans and promotional requirements, and whether they provide the grantor (franchisor) or grantee (franchisee) ultimately controls those plans or if the grantee must do what is required by the grantor, including if there are requirements to have promotional plans approved by the grantor before implementation;
  2. whether the agreement contains provisions imposing a requirement to comply with processes or systems, including clauses relating to specific requirements for accounting and bookkeeping, compliance with policies, audit rights of the grantor, approvals for supply chains, restrictions on selling other products/ services, and/ or the creation of sales or marketing territories.

Ultimately, the agreement as a whole will be considered in light of these requirements.

Does it matter if I operate as a licence albeit meet the statutory criteria of a franchise?

Yes, it does. Operating an agreement that meets the statutory definition of franchise agreement (regardless of what is called) but not complying with the Franchising Code is fraught with danger. If the criteria explored in this article are satisfied, then the grantor is a franchisor and has an obligation to comply with the Franchising Code, including, for example, providing a disclosure document, adhering to disclosure periods, and acting in good faith. Failure to do what is required pursuant to the Franchising Code could render the grantor liable for significant financial penalties. In addition, non-adherence to the Franchising Code could render the relevant agreement void, and give the grantee a claim for damages against the franchisor.

If you would like further advice as to whether an agreement is likely to be deemed a franchise, we would love to help. Please contact us here.

Disclaimer: This article contains general information only and does not constitute legal advice. Magnolia Legal disclaims any liability arising from reliance on this article. Our terms of use apply