It is important to consider first if a License Agreement is a better fit than a Franchise Agreement
A license is a far less expensive relationship to establish and maintain with another business than the establishment of a franchise. At its most fundamental characteristic, a license is where a licensor gives use or access to their property for a period of time to a licensee for a return of payment.
A license is typically used to protect a brand name and gives rights to the use of Trade Mark, Designs and/or certain other Intellectual Property (IP) for the brand for use in a specified region of use for an agreed compensation. A franchise agreement will also be an agreement about the use of IP, however, it will have other more complex aspects as described below.
Why choose a license?
A license has lower initial and ongoing costs and compliance obligations.
A typical license agreement may cost as little as $3,300. This is a significant difference to the cost of setting up a franchise as a new franchise may cost as much as $32,000 (depending on the complexity and time spent on the franchise establishment and drafting) to establish.
A franchise must comply with the Franchise Act and Regulations in the agreement and disclosure statements as well as have ongoing disclosure and reporting requirements whereas a license agreement is a business contract with a potentially wide scope and without that oversight.
Examples of License agreements:
- Fashion labels – IE Polo by Ralph Lauren® to a clothing manufacturer;
- Fitness centers to owners;
- Giving rights to a book to be made in to a movie;
- A food manufacturer giving rights to its name as a component – IE Tom’s Meat Pie containing real Tabasco®;
- A medical practise renting a room to a doctor within their larger practise; or
- A cartoon character to a toy manufacturer.
A case of a license (licensor) that was a franchise (franchisor)
In Rafferty v Madgwicks  FCAFC 37 the Federal Court found that an ostensible license agreement with a licensor and licensee relationship was actually a franchise. The Court describes their test for determining if the contract in this case was a license or a franchise in the published decision of this case. For the most part, it deals with the Degree of Control in the relationship.
Degree of control
As the degree of control is the key to the decision of whether or not to utilise a Franchise Agreement, examination of what what a Federal Court Judge had to say about control at paragraph 173 of the decision in Rafferty v Madgwicks:
‘In the ordinary course, whether a system or marketing plan is “substantially determined, controlled or suggested by the franchisor” is closely related to whether there is a scheme or marketing plan at all. Matters relevant to determination, control or suggestion may include: the extent to which the franchisee’s business involves the sale of the franchisor’s goods and services; the degree to which the franchisor assumes responsibility for some centralised management and for uniform standards regarding quality; whether or not the franchisor places the franchisee under an obligation with respect to advertising and promotional campaigns; and the extent to which the franchisor controls the franchisee’s business, having regard to advertising and financial support, auditing of books, inspection of premises, hiring of staff, sales quotas, management training and the like.’
The judge continues from this to discuss the factors that were upheld as elements that truly describe a franchise exists and not a license:
- Specific requirements for accounting and record keeping;
- Right to audit the financial records of the licensee;
- Inability of the licensee to supply goods or services to customers without the licensor’s approval;
- Stipulation of retail pricing structures, sales structures;
- Requirements for merchandising and employment of sales staff;
- Creation of marketing and sales territories;
- Restriction on the franchisee selling competing products; and
- Requirement to comply with the licensor’s policies and procedures.
In the end, it is really the level of control that you, as the owner of the IP wish to have that will dictate if the relationship is a franchise or a license.
Contact Cogent Legal’s Lawyers to discuss your business idea and how to best implement it.