An incorrect analysis of this question can bring significant adverse consequences to the 'deemed' franchisor. 

In October 2007, the Federal Court examined this issue in an application by the Australian Competition and Consumer Commission (“ACCC”) against Kyloe Pty Ltd ("Kyloe"). Kyloe was involved in a business distributing Polar Krush ice-drink machines and the re-sale of Polar Krush products through sub-distributors. The ACCC claimed that Kyloe contravened the Code by failing to provide disclosure documents to its sub-distributors. Kyloe submitted that the relationships were dealership or distribution agreements and not franchises. 

Elements of franchise

Clause 4 of the Code provides that a franchise is created by an agreement (written, oral or implied), in which a person (the franchisor) grants to another person (the franchisee):

• 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 or an associate of the franchisor; and
• under which the operation of the business will be substantially or materially associated with a trade mark, advertising or a commercial symbol;
  
  • owned, used or licensed by the franchisor or an associate of the franchisor; or
  • specified by the franchisor or an associate of the franchisor; and
  • under which, before starting or continuing the business, the franchisee must pay or agree to pay to the franchisor or an associate of the franchisor an amount including, for example:
    
    • an initial capital investment fee;
    • a payment for goods or services;
    • a fee based on a percentage of gross or net income whether or not called a royalty or franchise service fee; or
    • a training fee.

The Court’s decision

The court paid particular attention to the following issues:

1. Whether Kyloe had granted the distributors the right to carry on the business of offering, supplying or distributing goods or services in Australia;
2. Whether that right was granted under a system or marketing plan; and
3. Whether that system or plan was substantially determined, controlled or suggested by Kyloe.

Regarding the first of the three sub-elements above, Kyloe argued that the agreements did not constitute the 'granting of a right to carry on a business' as they did not impinge on the sub-distributors’ capacity to develop their own business plans, terms of contractual relations with customers, the price at which to sell the products, the number of employees to be engaged and the time that the sub-distributors were to devote to the business. The court did not accept these arguments and found that the appointment of non-exclusive suppliers constituted a 'business'. 

In determining whether there was a system or marketing plan, the court considered a number of factors, including the presence or lack of:

• a sales training regime;
• assistance in conducting prospective client meetings (by providing scripts);
• recommended retail prices;
• restriction on the sale of products;
• recommended sales techniques;
• advertising and promotion program.

The court found that, even though Kyloe required the sub-distributors to undertake certain tasks and refrain from doing certain things, they did not establish or suggest a system or marketing plan for the purpose of the Code. 

Conclusion

Although Kyloe was ultimately successful in defending the ACCC's action, the case highlights the need to be extremely careful in establishing and documenting distribution arrangements in circumstances where the creation of a franchise relationship is not intended. 

This requires an understanding of the legal distinction between franchises and other business relationships.