When is a licence really a franchise?

Posted on July 07, 2021

If you plan on licensing your trade marks, brands, or other IP, it’s super important to consider whether the licence agreement is in reality a franchise agreement and caught by the Franchising Code.

The full Federal Court has recently pronounced on the definitional limits of what constitutes a ‘franchise agreement’. This is crucial because the legal, financial, and commercial consequences of a licence agreement being a franchise agreement (and therefore caught by the Franchising Code) are very significant (eg. potential criminal liability, and penalties). (See here for more details about the Code.)

Central was the Code’s definition of ‘franchise agreement’. The parties here had entered into a licence agreement under which the Australian licensee (Freedom Foods) manufactured and sold almond milk (ALMOND BREEZE) products. The licensor (Blue Diamond) was a California company, and the licence agreement provided for dispute resolution to take place by arbitration in California. Freedom Foods tried to argue that the licence was in reality a franchise agreement, and hence subject to the Code, which requires resolution of any disputes to be conducted in Australia.

The question was whether the licence granted rights to Freedom Foods to ‘carry on the business or offering, supplying or distributing’ certain products under a system or marketing plan which was ‘substantially determined, controlled or suggested’ by Blue Diamond. The Court found that this element was absent, and crucially, that the effect and scope of the Code should not be broadly construed, and its scope be limited to franchises as defined. Blue Diamond did not ‘substantially determine, control or suggest’ how the products might be distributed by licensee Freedom Foods, hence the agreement was not a franchise agreement.

This is an important decision. The line between franchise agreements and licence agreements can be grey, and the consequences of stepping over it can, for a licensor, be very serious.

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