Franchising versus Licensing
What is a Licence ?
A licence is a right granted by one person (the Licensor) in favour of another person (a Licensee), allowing the Licensee to do certain things. For example, it could be to:
(a) use the Licensor’s intellectual property. Eg. access to a trade mark; or
(b) sell the Licensor’s products,
within a certain territory.
A software developer could license its software to other users.
A right granted by a Licensor to exclusively distribute the Licensor’s products (eg. ABC Widgets) in say Queensland through a Distribution Agreement, would be a form of licensing arrangement.
Licensing is generally quite limited in its scope compared to a franchise.
Licence of Franchise – Which is it?
Licensing arrangements are perceived to be less complex and a cheaper alternative to franchising due in part to franchising in Australia being a regulated industry. There is more expense and red tape associated with franchising than licensing.
Just because a document or arrangement is called a licence or viewed by the parties as a licence does not mean that the document or arrangement will not be deemed a Franchise Agreement, in which case the Franchising Code of Conduct ("Code") would then apply.
Getting this distinction wrong can be very costly. Generally;
if the Licensor possesses control over the Licensee's methods of operation (eg. restrictions on how the Licensee can market itself/restrictions on using other products/what prices the Licensee can charge for services it performs/whether the Licensee is subject to any forms of minimum performance; and/or
the Licensor provides a level of support; and/or
the Licensor provides training; and/or
the Licensor receives an ongoing royalty from the Licensee; and/or
the Licensee has to wear a uniform;
then ALL these are signs the arrangement might be more than just a licence. A Licensor should proceed with caution and check if the arrangement might constitute a franchise and be caught by the Code.
If there is doubt as to whether an arrangement is a licence or franchise, it is best to lean on the side of caution and structure the arrangement as a franchise from the outset.
The key issue is the amount of "control' one party has over what the other party does:
with a Licence - a Licensor has little control over how the Licensee operates;
whereas, with a Franchise - the Franchisor has much greater control in regards to what Franchisees can do, eg. over branding/products/prices/etc.
The more control a party has, the more likely the arrangement is a franchise.
If as part of the arrangement there is a system or marketing plan substantially determined, controlled or suggested by one party, that is a key indicator a franchise exists.
The Franchising Code of Conduct does not define what is a "system or marketing plan" nor does the Code state when it is necessary to consider if such a system or plan is present.
However, the Courts have set out certain factors which may indicate the presence of a “system or marketing plan”, in which case the Code would apply (not a licence). For example:
compensation structures for selling goods or services;
centralised record keeping;
centralised computer operations;
suggestions as to the retail prices to be charged for products or services;
requirement that only certain products must be produced or sold;
specifying certain methods for providing goods or services, which must be followed;
detailed advertising or promotional programs to be adopted;
right to screen or approve promotional material;
setting sales quotas;
right to approve who is employed;
mandatory training programs;
customer information to be gathered and provided;
restrictions on what other products can be sold.
These are just examples of some of the factors and are not exhaustive.
If the business that the other party is to operate is substantially or materially associated with a brand, name or logo - then that may indicate a franchise (not a licence).
If certain fees are to be paid, such as the below, that would tend to indicate a franchise (not a licence):
It is important to understand the difference between a licence and franchise.
Getting this wrong can have adverse effects on the rights and obligations of the parties to the agreement.
For all your franchise law requirements, contact Greyson Legal | Franchise Lawyers.