When is an agreement a franchise agreement? – Freedom Foods Pty Ltd v Blue Diamond Growers

By Alicia Hill, Principal and Harrison Breer, Law Clerk

In Freedom Foods Pty Ltd v Blue Diamond Growers [2021] FCA 172, the Federal Court of Australia was asked to ascertain if an agreement could be classified as “franchise agreement” and thus avoid the application of an arbitration dispute resolution clause and if a matter concerning Australian Law, namely claims of misleading and deceptive conduct and unconscionable conduct, was suitable to be heard through an arbitration in California.

This case illustrates the importance of understanding your rights in agreements in respect of dispute resolution and whether agreements not identified as relating to franchises can be classified as “franchising agreements”.

Background

Freedom Foods group (Freedom Foods), an Australian manufacturer of food and beverage products, entered into a Licence Agreement initially in October 2011 with Blue Diamond Growers (Blue Diamond), a company based in California, USA, which was a cooperative of nearly 3000 independent Californian almond growers.

Under this Agreement, Freedom Foods were to manufacture and sell almond milk products under the name “Almond Breeze” and they were granted exclusive rights to do so in the territory specified in the agreement. Initially this right was for a period of 5 years, then the agreement was automatically renewed in October 2016.

The Licence Agreement contained clauses:

  • which provided the agreement is governed by the law of California, USA; and
  • which referred identified disputes to arbitration which was to be heard in California.

Disputes began to arise when Freedom Foods began the manufacture and sale of MILKLAB almond milk and ‘private label’ almond milk.

On 25 September 2020, Blue Diamond lodged a demand for arbitration on the basis that Freedom Foods had breached its exclusivity provisions under the Agreement.

On the same day, Blue Diamond also commenced a proceeding against Freedom Foods in the US District Court of California. Blue Diamond argued that their market share had been undermined by Freedom Foods in their activity of using the purchased almond base to make competing products.

On 29 September 2020, Freedom Foods countered by commencing a proceeding against Blue Diamond in the Federal Court of Australia, seeking an injunction restraining Blue Diamond from prosecuting or taking any step in the arbitration. Freedom Foods sought declarations that:

  • Blue Diamond had engaged in misleading and deceptive conduct and unconscionable conduct;
  • That under the Licence Agreement, they are not required to obtain ‘almond base’ exclusively from Blue Diamond to manufacture MILKLAB and Private Label almond milk products;
  • That the Licence Agreement is a Franchise Agreement under the Franchising Code of Conduct (Franchising Code), and as such, by issuing a notice of breach on 31 July 2020, Blue Diamond had breached its obligation under cl 6(1) of the Franchising Code to act in good faith;
  • The arbitration clause in the Licence Agreement is of no effect.

Each party filed an interlocutory application against the other against the other.

Freedom Food’s claims

Freedom Foods’ claimed that:

  • prior to the launch of MILKLAB products, they notified Blue Diamond of its intention to do so and that Blue Diamond did not oppose the launch and ultimately supplied the almond base for the manufacture of the products. Freedom Food argued that Blue Diamond represented, in trade or commerce, it did not oppose the sale of MILKLAB almond milk;
  • with regards to Private Label almond milk, Freedom Food said that Blue Diamond was unable to supply Australian-sourced almond base ingredients. Given that food and beverage products are required to label the country of origin of their ingredients, according to Freedom Food, Blue Diamond allegedly stated they were free to source such ingredients from other suppliers. Freedom was asserting that by not allowing this to occur Blue Diamond was acting in an unconscionable manner;
  • finally, Freedom Foods alleged that the Licence Agreement was a “franchise agreement” as defined in clause 5 of the Franchising Code, and that Blue Diamond was not acting in good faith with the arbitration clause in the agreement having no effect.

Blue Diamond’s interlocutory application

Blue Diamond filed an interlocutory application on 15 December 2020 seeking for the proceeding to be stayed pursuant to section 7(2) if the International Arbitration Act 1974 (Cth) to allow the matter to be heard through arbitration in the US.

Blue Diamond:

  • conceded that insofar as the Competition and Consumer Act prohibits certain conduct, that Act is a mandatory law that the arbitrator would have to apply, and as such, if the matter was referred to arbitration in California, the arbitrator will apply Australian law.
  • argued that the Franchising Code should not be given overriding effect, and instead to view the issue through section 7 of the International Arbitration Act, whereby the phrases “null and void” and “inoperative” are limited to internationally-recognised vitiating factors such as duress, mistake, fraud or fundamental policies.

Outcome

Moshinsky J found that an arbitration agreement existed in the Licence Agreement, satisfying section 7(1)(a) of the International Arbitration Act. As such, His Honour found that there was no issue an arbitration being convened in California, as it is a convention country.

His Honour then had to determine whether section 7(2)(b) applied, where the matters in question “in pursuance of the agreement, [are] capable of settlement by arbitration”.

Moshinsky J found that the Freedom Food’s claims (for example, the claim that none of the applicants had breached the Licence Agreement by manufacturing and selling MILKLAB almond milk and private label milk) gave rise to controversies. There was also the issue of the claims raised under the Australian Consumer Law. Agreeing with the expert report provided by Mr Celniker, Moshinsky J found that those claims under the Competition and Consumer Act can be heard and determined in a Californian arbitration and that Australian law would be applied in determining these claims, and there was case law to cement this view.

Therefore, His Honour found that the claims of Freedom Foods under the Australian Consumer Law can be heard and determined in the arbitration and that Australian law would be applied, and that all four applicants (whom make up Freedom Foods) were to be treated as parties to the arbitration for the purposes of section 7(2).

His Honour then turned to the claim that the arbitration agreement was invalid as it was a “franchising agreement”, and so had no effect by virtue of clause 21 of the Franchising Code.

Moshinsky J had to determine whether this was a matter for the court or for arbitration to decide. His Honour found that it be more practical, efficient and just for the Court to determine the validity issue at the current time.

Firstly, Moshinsky J had to determine whether the Licence Agreement was a “franchising agreement”, with the definition being set out in clause 5 of the Franchising Code.

Paragraph (b) of clause 5 was in relation to 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”. His Honour found that the Licence Agreement was an agreement in which Blue Diamond granted Freedom Foods the right to carry on the business of offering, suppling or distributing goods in Australia.

However, there was no requirement for Freedom Foods to operate “under” a marketing plan, despite mention of a “marketing plan” in the clause. The clause does not impose ways in which Freedom Foods was to carry on the business activities, and therefore there was no sufficient relationship between the marketing plan and the right to carry on the business.

Whilst there was still scope to argue that promotions were to be implemented “under” the promotional plans, His Honour found that there was not enough to establish that the promotional plan in place is “substantially determined, controlled or suggested” by Blue Diamond.

His Honour ultimately found that the Licence Agreement did not satisfy paragraph (b) of clause 5(1), and as such, the Licence Agreement is not a “franchise agreement” for the purposes of the Franchising Code.

As such, Freedom Foods could not rely on clause 21 of the Franchising Code, and their argument that the arbitration agreement is invalid or of no effect was rejected.

Take-aways

Choosing how parties will attempt to resolve disputes between themselves can effect where and how this occurs.

Although this agreement was found not to be a franchise agreement its dispute resolution clause was upheld resulting in the parties being committed to resolve the matter between themselves through arbitration to be conducted in California, in the USA where the arbitrator would be applying Australian law as well as United States law to determine the competing claims of the parties.

It is important for companies to have considered and incorporated specific provisions for dispute resolution into their franchise agreements and be aware of how these will interact with the provisions of the Franchising Code of conduct.

Whilst mediation is mandatory under the Franchising Code of Conduct there is nothing that prevents arbitration to be incorporated as a secondary dispute resolution option for all or some disputes that may arise if the parties are unable to resolve a dispute through mediation. 

Care needs to be taken though prior to incorporating such a clause to consider to what type of disputes an arbitration clause might best apply, the procedural rules that would best apply and who might be selected as an arbitrator to determine these types of disputes. All of these factors can be controlled through careful drafting of a dispute resolution clause and then add a more sophistication to resolving disputes that may arise.

If you have any questions about franchising agreements, please contact Alicia Hill on (03) 8540 0292 or alicia.hill@mst.com.au.