Licensing v Franchising

In a recent court enforceable undertaking, the Australian Competition and Consumer Commission (ACCC) has indicated that it is cracking down on businesses who seek to avoid complying with the Franchising Code of Conduct by claiming that their agreements are licenses and not franchise agreements.

The undertaking was given by Australian Loans Management Pty Ltd (ALM) and Active Money (Aust) Pty Ltd (AM) to the ACCC. The undertaking has shown that if a company promotes a license agreement which specifically attempts to exclude or breach the requirements of the Franchising Code, its directors, servants, agents or associates will be held liable for breaching the Trade Practices Act (ss 52, 53(g) and 51AD). Additionally, a company that fails to provide disclosure documents, which are a key feature of the Code, will be held to be undertaking unlawful conduct. Put simply, franchisors cannot circumvent the Code by simply claiming that an agreement is not a franchise agreement because it is a license agreement.

Background

ALM was established in 1997 as a finance broking company. In January 2009, ALM expanded its business to include the appointment of ‘introducers’ who would be granted licenses to operate ALM systems. The licenses would also provide access to ALM facilities and product branding.   In early 2009, ALM produced a document entitled ‘License Agreement’ which contained all the terms on which ALM granted licenses to prospective franchisees in designated areas. They also produced a supporting ‘Information Document’ which explicitly stated that the agreement was not a franchise agreement.

In May 2009, the ACCC wrote to ALM expressing concern that the License Agreement constituted a franchise agreement and sought confirmation that ALM had complied with Franchising Code of Conduct (the Code).  Additionally, the ACCC claimed that ALM failed to provide prospective franchisees with a copy of the Code, a disclosure document and a copy of the franchise agreement 14 days before entering the agreement or making a non-refundable payment. ALM also neglected to provide franchisees with a 7 day cooling off period, and had not obtained statements from the franchisees (prior to them signing their agreements) that they had been given independent legal, accounting or business advice or had been told by ALM to obtain such advice but they chose not to do so.

Undertakings

In response to the ACCC, ALM admitted it had misled franchisees by stating that the license agreement was not a franchise agreement. ALM acknowledged that this potentially misled franchisees into believing that they were not entitled to the rights and remedies afforded by the Franchising Code. As part of the undertakings given to the ACCC, ALM and AM have agreed to implement measures to ensure future compliance with the Franchising Code.  These measures include ALM having to:

• provide a copy of the ACCC letter and undertakings to each existing franchisee
• ensuring legal training is undertaken by all employees
• updating disclosure documents
• implementing a trade practice compliance program
• an assurance that the company will regularly review its Franchising Code compliance.

Additionally, ALM and AM have been required to provide all existing franchisees with the opportunity to withdraw from their current license agreement and obtain a full refund of any and all monies paid to ALM.

For further details or information please contact one of our Franchising team lawyers.

Author:  Susan Reece Jones