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When is a distribution agreement not a franchise?

The regulation of franchise agreements in Australia is vastly more restrictive than for licence or distribution agreements. There are dire consequences if an agreement unintentionally crosses the line to become a franchise in the eyes of the law.

Until now there's been little common law to distinguish franchise agreements from other similar arrangements. We now have a case, the Federal Court decision of ACCC v Kyloe Pty Ltd [2007] FCA 1522 decided on 18 October 2007. It turns on its facts. It's not an extended thesis on the distinction. The takeaway is obtain advice to stay on the right side of the line.

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The applicant in the case was the Australian Competition and Consumer Commission (ACCC). The ACCC claimed a franchise existed associated with a sub-distributorship agreement and a machine agreement. They were both used in connection with the Polar Krush Ice-drink machines and products business.

As is usual with both franchise and distribution agreements, the Polar Krush agreements defined the intellectual property in the business.

Combining this fact with other evidence, the ACCC said Polar Krush had "created a system or marketing plan". This is one of the elements that characterises a franchise under Australian law. In mid-2006 the ACCC started proceedings against parties connected with Polar Krush. The ACCC website claimed:

"Polar Krush Ice drink franchise:

  • polar_crush_machinefailed to provide franchisees with a disclosure document

  • provided earnings information that was not based on reasonable grounds

  • failed to provide franchisees with a 7 day-cooling off period

  • prevented prospective sub-distributors from associating with and contacting other franchisees

  • failed to request written statements from prospective franchisees that they had/had not received independent advice, and

  • failed to provide an internal complaint handling procedure in agreements."

In the Federal Court, Justice Tracey considered the evidence and formed views on such topics as the existence or otherwise of a Polar Krush sales training regime, recommended sales techniques, and sales territories. The court also considered whether or not there was any system or marketing plan substantially determined, controlled or suggested by the alleged franchisor.

The Federal Court rejected the ACCC's claim and awarded costs against it. It regarded the sub-distributorship and machine agreements as part of a distribution arrangement, not a franchise.


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