License Agreements v Franchise Agreements
License Agreements:
A License Agreement is a contract where the licensor gives the licensee permission to use something without the obligation of transferring ownership to use, in their own ventures. For instance, a business name, brand, logo or a trademark. These agreements can be specific, as to what property the licensee can use and how they may use it.
A licensee has the freedom of deciding their own marketing strategies and are given more freedom to develop their own running operation styles and systems for the business. Unlike a franchise agreement a licensee is not be obliged to comply with monitoring of performance. Generally, this is a more cost-efficient option as it involves less upfront fees and fewer running costs also.
When drafting license agreements, a number of things need to be considered, such as whether the rights are exclusive or non-exclusive, sole to the license, whether there are sub-licensing rights, the geographical restrictions, time limitations or expiry terms, payments and royalty rates.
Franchise Agreements:
Franchise Agreements are contracts between the franchisor and franchisee. They grant the right to carry on the offering, supply, or distribute goods or services. These agreements are also subject to the rules of the Franchising Code of Conduct, regulated by the Australian Competition and Consumer Commission (ACCC).
The key difference between a licensing and franchising agreement, is that the franchisor has the ability to exert more control over the running of the business or use of the intellectual property, logo or brand. Franchise agreements entail specific directions at to how the business must operate, as well as assert more control over marketing and advertising in the running of the business. Within a franchise there is a common marketing scheme leaving little room for a franchisee’s input.
With this set up, the franchisor is allowed to control and dictate the system and operation of the business such as uniforms, fit outs and location the franchisee operates from as well as the ability to monitor performance of the franchisee.
When arranging a franchise agreement, it is necessary to provide the franchisee with a disclosure statement, disclosing intentions and periods of renewal including financial, litigation, intellectual property and marketing information. Both parties are required to act in good faith in corresponding and disclosing information to the other.
Sometimes however, it may not be crystal clear whether your business arrangement is considered a franchise or license agreement, here you may run the risk of becoming an “accidental franchisor.” Where this is the case, you must comply with the Franchise Code, even though the obligations of a Franchise Agreement are not set out.
In the case Rafferty v Madgwicks [2012][1] the Federal Court established some ways to identify the existence of a franchise agreement.
These include:
- Specific requirements for accounting and record keeping;
- Franchisor’s right to conduct an audit of accounts, books and other records;
- Limitation of franchisee to supply goods or services without approval from franchisor;
- Signage, mechanising, promotional or advertising material to be approved by franchisor;
- Right of the franchisor to approve sales staff, bonus structures, reporting procedures and training for staff; and
- Franchisor’s right to establish retail prices and sales quotas.
Therefore, whether you are a party to either a licence or franchise agreement, it is always recommended you obtain some legal advice in advance, to determine your rights, obligations and whether the agreement you are executing is suitable for your business arrangements. You may be at risk where careful consideration is not taken.
Please note that this summarised information about licensing and franchising agreements and that your specific personal circumstances may differ. If you require any further information please feel free to contact us on (03) 9942 7790 or email our Principal Lawyer, Nick Karolidis at nick@karolidis.com.au.
[1] Rafferty v Madgwicks [2012] FCAFC 37.