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?

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?

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):

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);

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.

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)

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:

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

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

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

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

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

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

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

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

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)

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

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

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

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

Overview France

There are no legal provisions specific and exclusive to

franchise.

Franchise is governed by French Civil and Commercial

Codes

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….

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);

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

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

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.

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

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

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)

Overview France

Franchise businesses shall comply with larger rules such

as :

competition law,

consumer regulations,

data privacy regulations,

public heath regulations,

employment Law…

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:

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.

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.

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).

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.

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.

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.

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.

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.

Overview Mexico

Other legal features / business contractual relationships

that are alike to franchise agreements.

Agency agreement

Concession Agreement

Distribution Agreement

Overview Mexico Mercantile Commission (article 273 of the Commerce

Code)

Supplier Agreement

Territorial Agreement

Any of them may trigger disclosure requirements under

the IPL.

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)

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

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”

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

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

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

Accidental Franchises?

Examples of relationships that may or may not be

accidental franchises…

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

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

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

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

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”?

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

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

Accidental Franchises?

Industries regulated differently by country…

Are motor vehicle and/or equipment dealers franchises?

Are insurance brokers or agents franchises?

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.”

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

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

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

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

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

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

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)?