the ramifications of being an “accidental franchise” – is
TRANSCRIPT
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Moderator: Frank RobinsonSpeakers: Rebecca Bedford, Pablo Hooper, Julien Rivet and
Will K. Woods
The ramifications of being an “Accidental Franchise” – Is your IP license, distribution, dealership, agency or other
similar agreement really a franchise?
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Outline of Workshop1. Overview of franchise law regimes in Australia, Canada, France, Mexico
and the United States (5 minutes per country).
Definition of a franchise
Obligations if a relationship is a franchise
Ramifications of non compliance
2. Review real life fact situations and whether they are franchises under the
laws of these countries – Accidental Franchises, or not?
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Overview - Australia
There is a mandatory Commonwealth Franchising Code
of Conduct in Australia which was first introduced in
1998
Penalties apply for a breach of the Franchising Code
An agreement will be a ‘franchise agreement’ where 4
elements are satisfied (unless exceptions apply):
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Overview - Australia1. the existence of an agreement (written, oral or implied)
(Element 1);
2. under which a franchisor grants the right to carry on a
business of selling goods or services under a system or
marketing plan substantially determined, controlled or
suggested by the franchisor (Element 2);
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Overview - Australia3. where the business operated under the agreement will be
substantially or materially associated with a trade mark,
advertising or commercial symbol of the franchisor
(Element 3); and
4. where, under the agreement, the franchisee must pay a
fee or amount to the franchisor (or its associate) including
an initial capital investment fee, a royalty or training fee.
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Overview - AustraliaThere are 4 identified exceptions:
a) the payment is for goods or services supplied on a genuine wholesale
basis;
b) repayment by the franchisee of a loan;
c) payment of the usual wholesale price for goods taken on consignment; or
d) payment of the market value for purchase or lease of real property,
fixtures, equipment or supplies needed to start business or to continue
business under the franchise agreement
(Element 4)
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Overview - Australia• A motor vehicle dealership agreement is deemed to be a
‘franchise agreement’
• Most cases centre on Element 3 (system/marketing plan)
• The Franchising Code imposes on the franchisors:
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Overview - Australia obligations pre-entry into a franchise agreement:
- a requirement to provide franchisee with an updated
disclosure document which is in a prescribed form –at least
14 days before franchise agreement is signed or non-
refundable deposit taken
- a requirement to obtain advice certificates from franchisees
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Overview - Australia Restrictions on a franchisor’s right to terminate a
franchise agreement
Obligations in relation to compulsory disputes handling
procedure, requests to transfer, restraints of trade
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Overview - Australia The Franchising Code imposes an obligation on both
franchisors and franchisees to act in good faith
Not automatic right to rescind franchise agreement if
franchisor does not comply but it is open to franchisee to
seek
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Overview - Australia Penalties - since 1 January 2015, civil penalties (of up to $51,000
per breach for companies) apply for certain breaches of the
Franchising Code and the regulator can also issue infringement
notices
The most common type of franchise disputes are misleading and
deceptive conduct claims in relation to alleged pre-contractual
representations as to expected revenue, as well as unlawful
termination claims
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Overview Canada Canada has a federal system, with allocation of jurisdiction,
and private contractual matters are left to the provinces
6 out of 10 Canadian provinces now have a franchise law
Alberta – 1995 (in current form); Ontario - 2001; Prince
Edward Island - 2007; New Brunswick – 2011; and Manitoba
– 2012
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Overview Canada
British Columbia – November 2015 (but not yet in force)
Other provinces (Quebec, Saskatchewan, Nova Scotia
and Newfoundland) – No franchise laws, and no
discussion of such laws
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Overview Canada
Definition of a Franchise is broad
Traditional “business format” franchise only requires that
the 4 following tests all be met:
1. the grant of rights to carry on a business
2. that payments be made
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Overview Canada
3. use or association with a trademark
4. significant control or assistance by the licensor in
franchisee’s methods of operation
A second part of the test that covers “Business
Opportunities
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Overview Canada Main features of each Canadian franchise law
Pre-sale Disclosure by franchisor to prospective franchisee using
a franchise disclosure document
Statutory Duty of Fair Dealing
Franchisees Right to Associate
Relationship Provisions (i.e. governing law and venue, and non-
waiver provisions)
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Overview Canada
Formalities of Disclosure
Must deliver the complete FDD not less than 14 days
before earlier of:
Signing any agreement; and/or
Taking any money
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Overview Canada Complete Failure to Disclose
Franchisee has right to rescind within 2 years of signing franchise agreement
Improper Disclosure
Franchisee has 60 days to rescind after receipt of disclosure document if not provided in time or no material change statement provided or deficient
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Overview Canada Case law has been favourable to franchisee claims
In either case franchisee has absolute right to a refund of monies paid, franchisor must buy equipment and inventory, etc., and compensate for losses
Also, right to sue for misrepresentation in FDD, or for failure to comply
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Overview France No legal definition of a franchise under French law.
French jurisdictions may consider a franchise agreement, even if
named otherwise, an agreement granting:
the right to use a registered trademark;
access to a secret, identified and substantial know-how
with financial countertpart : entrance fee and/or royalties
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Overview France
There are no legal provisions specific and exclusive to
franchise.
Franchise is governed by French Civil and Commercial
Codes
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Overview France If an agreement is a franchise, franchisor shall comply with
precontractual disclosure duty set forth by Article L.330-3 and
R. 330-1 of French Commercial Code Agreements whereby one person grants the other a trade name, a trademark or sign, and requires an
exclusivity or quasi-exclusivity undertaking for the exercise of such other person’s activity must disclose pre-
contractual information.
Article L.330-3 and R. 330-1 apply to Franchise, Distribution,
Concession, Suppliers agreements….
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Overview France
Information to disclose in the FDD(not less than 20 days before signing):
Franchisor’s information (Cie name, registered office, form, capital, manager, registration number)
Trademark registration number
Franchisor’s banking information
Franchisor’s audited financial statements (the past 2 years);
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Overview France History and presentation of the company and of the network
General and local market “statements” (presentation) and
development prospects of the general and local market
List and nature of the undertakings of the network (franchise
agreement, subsidiaries, JVs, etc.)
Address of the network members in France, conclusion and
renewal dates of the related franchise contract
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Overview France
Number of franchisees which left the network the year
before, cause of their exit (expiry, cancellation or termination of the contract)
Nature and amount of expenses and investments necessary
The most important provisions of the contract: duration,
renewal, termination, assignment, exclusive rights…
Copy of the franchise agreement
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Overview France No specific government agency involved in the enforcement of
disclosure requirements
Any violation would be assessed by the courts that have material
and territorial jurisdiction
Non compliance with pre-contractual disclosure duty does not trigger
the automatic rescission of the franchise agreement.
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Overview France Franchisee shall demonstrate that the incomplete information /
absence of precontractual information has invalidated his consent
Rescission may entitle franchisee to:
reimbursement of the franchise fees
compensation for losses suffered during the exploitation of the franchise
Losses of margin
In case of termination for breach of disclosure duty, damages compensation may be awarded
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Overview France If an agreement qualifies as franchise, it is the franchisor’s
duty to:
Give access to an identified and secret know-how
Grant the right to use a valid and registered trademark
Supply assistance to replicate the franchise success
Courts may rule the termination of contract for breach of
duties
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Overview France Franchisors and franchisees are free to contract on a number of
issues as long as contractual provisions:
are the result of good faith negotiations
do not create a significant imbalance in the rights and obligations
“significant imbalance”: when a clause causes one party to bear a heavy
obligation or deprives it of a right (for example to indemnity or to act) without
reciprocity, consideration, or reasonable justification;
Control of French Directorate-General for Competition, Consumer Affairs and
Repression of Fraud (DGCCRF)
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Overview France
Franchise businesses shall comply with larger rules such
as :
competition law,
consumer regulations,
data privacy regulations,
public heath regulations,
employment Law…
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Overview Mexico
Mexico has a federal system.
The offer and sale of franchises are regulated in articles
142, 142 Bis 1, 142 Bis 2, 142 Bis 3 of the Industrial
Property Law (the “IPL”) and article 65 of its Regulations.
The definition of a franchise is provided in article 142 of
the IPL:
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Overview Mexico A franchise shall exist, when simultaneously with the license of a trademark,
granted in writing, technical knowledge is transferred or technical
assistance is provided to a person, in order for the latter to be able to
manufacture or sell goods, or to provide services in a uniform manner and with
the operational, commercial and administrative methods set forth by the holder of
the trademark, with the purpose of maintaining the quality, reputation and image
of the products or services distinguished by said trademark.
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Overview Mexico
The Mexican Institute of Industrial Property (Instituto
Mexicano de la Propiedad Industrial) is the government
agency with jurisdiction for enforcement of the IPL.
The franchise agreement shall be in writing and shall
contain several requirements.
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Overview Mexico If a relationship is a franchise, then disclosure requirements must be
meet by franchisor. Article 142 of the IPL provides that at least 30
days prior to the execution of the respective franchise agreement,
the person granting a franchise shall provide to the intended
grantee, the information relating to the status of the its enterprise, in
the terms set forth in the Regulations of this Law (10 items).
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Overview Mexico The IPL also regulates license agreement in articles
136, 139 and 140;
The owner of a registered or pending trademark may, by agreement,
license one or more persons to use the mark in relation to all or some of
the goods or services to which the said mark applies. The license shall
be registered with the Institute in order to be binding on third parties.
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Overview Mexico
Since there is a specific law, the franchise relationship is
not subject to be applicable into any other laws that
apply to commercial arrangements such as agency,
representation or distributorships.
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Overview Mexico
In Mexico, however, there are other laws that may have
application to franchises, depending on the type of
activity performed, such as the Commerce Code, the
Consumer Protection Law, the Economic Competition
Law, Telecommunications Law, the General Law of
Business Organizations and the Federal Civil Code.
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Overview Mexico Franchisors and Franchisees are free to contract on a number of
issues as a result of the principal of contractual freedom provided in
Article 78 of the Commerce Code, as long as the parties comply with
the provisions of the IPL on franchising matters, with the general
provisions of commercial contracts and do not agree on any
stipulations that violate public order law or moral standards.
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Overview Mexico Franchise agreements may include typical provisions, such as
termination rights, rescission rights, conventional penalties
(similar to the concept of liquidated damages under the laws
of the US) non-compete covenants, alternative dispute
resolutions mechanisms, joint obligations or parent company
guarantees.
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Overview Mexico
Other legal features / business contractual relationships
that are alike to franchise agreements.
Agency agreement
Concession Agreement
Distribution Agreement
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Overview Mexico Mercantile Commission (article 273 of the Commerce
Code)
Supplier Agreement
Territorial Agreement
Any of them may trigger disclosure requirements under
the IPL.
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Overview United States Franchise Sales Regulation
Federal (Federal Trade Commission Franchise Rule (FTC
Franchise Rule))
Pre-sale disclosure in the form of a Franchise Disclosure
Document (FDD) required in all 50 states and US territories
and protectorates (no registration required)
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Overview United States State
Approximately 14 states have some form of franchise
regulation
Franchisors are required to register the franchise
offering before offering or selling a franchise and
provide an FDD to prospective franchisees before sale
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Overview United States
Franchise Definition
Federal
Trademark license or association
Significant control over/assistance in franchisee’s
method of operation
Payment (or commitment to pay) a “required payment”
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Overview United States State
Generally consistent with FTC Franchise Rule definition
However, most state statutes replace “significant
control/assistance” element with a “marketing
plan/system” element or a “community of interest”
element
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Overview United States
Potential Consequences for Non-Compliance
No private right of action at federal level under FTC
Franchise Rule
FTC may take action in the form of requiring entering into
consent decrees, payment of civil penalties, etc.
Aggrieved franchisees can bring claims for
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Overview United States Fraudulent or deceptive franchise sales practices under
applicable state franchise registration laws
In some states, acts or omissions that constitute
violations of FTC Franchise Rule under state deceptive
trade practices (or “Little FTC Acts”).
Remedies vary but may include monetary damages,
injunctive relief, and rescission of franchise agreement
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Accidental Franchises?
Examples of relationships that may or may not be
accidental franchises…
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Accidental Franchises? Trademark Association
U.S. - Wright-Moore Corp. v. Ricoh Corp. – Dealer prohibited
from using Ricoh’s trademark as business name, but
“substantial association” with trademark arose from dealer’s
right to promote itself as “an authorized Ricoh distributorship”
and use of advertising material provided by Ricoh
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Accidental Franchises? Significant Control/Assistance or Marketing Plan (i.e., a
trademark license)
U.S. - FTC Informal Staff Opinion 98-4 – A “license
arrangement” for an environmental consulting business could
be a franchise given the significance of controls, including the
grant of exclusive sales territories
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Accidental Franchises? Significant Control/Assistance or Marketing Plan (i.e., a
trademark license)
Canada - Di Stefano v Energy Automated Systems Inc.-
2009 case with Tennessee based manufacturer - Distributor
of equipment not a franchisee as 5 days of training was not
enough assistance to qualify; other parts of test were met,
including payment, association with trademark
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Accidental Franchises? Payment and Inventory Purchases
What is a “payment” for the purposes of these laws?
Initial franchise fees
Royalties
Other examples of payments that qualify
Nominal or otherwise
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Accidental Franchises?
What if the only payment being made is the purchase
price for inventory sold by franchisor to franchisee?
What if the inventory being sold at “bona fide wholesale
prices”?
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Accidental Franchises? No “required payment” or franchise fee
U.S. - FTC Informal Staff Advisory Opinion 00-2 – A
working capital deposit, even though refundable the
end of the relationship less operating expenses, was a
franchise fee because the full amount was at risk
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Payment and Inventory Purchases Alpha Centauri Enterprises P/L v Mortgage House of Australia
P/L 2010 – Australian Federal Court found that because the
franchise agreement permitted the franchisor to charge a
retail price for stationary and there was a requirement to
repay part of the sale price on an assignment – this was a
payment captured by payment element under the Franchising
Code as no exceptions applied
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Accidental Franchises?
Industries regulated differently by country…
Are motor vehicle and/or equipment dealers franchises?
Are insurance brokers or agents franchises?
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Accidental Franchises?
Farm Equipment dealers?
Canada - Valley Equipment Ltd. v John Deere Ltd. – 2000 case
where farm equipment dealer not a franchise as the level of
control was not enough to be a franchise “…In the case of a business format franchise the franchiser exercises a great degree of control over the franchisee. For
example, in the case of a fast food restaurant, manuals are provided to the franchisee by the franchisor detailing the exact preparation of the product which the franchisee must follow to the letter. In the case of a manufacturer-dealer relationship there is supposed to be less control. The dealer is supposed to be independent.”
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Accidental Franchises?
Motor Vehicle dealers?
Canada - Butera v Mitsubishi Motors Corp. – 2012 case where
dealer sued under franchise law, and court held relationship was
not a franchise as there were no obligations to make payments
Canada - Trillium Motor World Ltd. v General Motors of Canada
Limited - 2014 case where GM found to be in a franchise
relationship with their dealers
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Accidental Franchises?
Motor Vehicle dealers?
Mexico – Unnamed case – car dealer is terminated by
manufacturer and counterclaims on basis that this was a
franchise and no compliance – case settled
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Motor Vehicles Dealers "Motor vehicle" is defined in the Code. In Hinterland Marine v
Maritime Global (2010), the Australian Federal court found
that a boat hull without an engine was a "motor vehicle" within
the meaning of that term set out in the Code because it was
intended to be connected to an engine
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Accidental Franchises?
What you call the agreement may not matter…
France – “G.I.P. vs Patrice Dallery”, CA Nimes, 14 February 2016, R.G N°03/04429
“Partnership agreement” (structured as a real estate broker agreement)
requalified as franchise agreement: Transfer of know-how
Right to use a trademark and signs of identification to a network
Entrance fee + Royalties
Rescission of the agreement: reimbursement of royalties & investments + compensation
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Accidental Franchises?
What you call the agreement may not matter…
Canada - Elliott v Trane Canada Inc. – 2008 case where Elliot
entered into a “franchise agreement” to sell Trane HVAC
equipment – despite label court found it was a sales agency
agreement and not a franchise
Canada - Ahmed v 3 for 1 Pizza & Wings (Canada) Ltd. – 2004
case where “Management Agreement” was found to be franchise
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What You Call the Agreement May not Matter Alpha Centauri Enterprises P/L v Mortgage House of Australia P/L –
Australian Federal court holds that a "Business Partner Agreement" was be
a franchise agreement Alpha Centauri Enterprises P/L v Mortgage House of
Australia P/L
Rafferty v Time (2010) – Australian Federal Court rules that a suite of
documents including a Heads of Agreement, a Joint Venture Agreement, a
Shareholders Agreement and Rights Agreement relating to a business
venture for the construction and sale of modular accommodation units was
found to be a franchise agreement
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Accidental Franchises? Entertainment and Sports Industries – Can these be franchises?
Television show formats (i.e.: British Idol, American Idol, and
Canadian Idol)
Television stations or networks (i.e.: Home Shopping Network)
Professional (major or minor league sports teams)?