Franchising cases update

Franchising Developents:

Recent Cases

Peter McLaughlinredchip lawyers

Overview

• A quick refresher on whether an agreement is a franchise agreement under the Franchising Code -- Rafferty v Time 2000 West Pty Ltd [2010] FCA 725; Alpha Centauri v Mortgage House

• Review of recent cases concerning termination and post termination obligations – Murray Pest Management

• Consequences of breaching the Franchising Code – Pampered Paws v Pets Paradise Franchising

Rafferty v Time 2000 West Pty Ltd (No.4) [2010] FCA 725

• The question of whether a particular agreement is a franchise agreement within the Franchising Code is to be determined by reference to the definitions in the Code and not by reference to any preconceived notions of other agreements which are not ordinarily understood to be franchise agreements at [219]

Rafferty v Time 2000 West Pty Ltd (No.4)

• Issue: Whether a particular agreement was a franchise agreement for the purposes of the code– Whether there was a franchising agreement

within the second limb of the definition concerning the imposition of ‘a system or marketing plan’


Elements which help to identify the presence of a marketing plan centralised bookkeeping and recordkeeping computer operation

a comprehensive advertising and promotional program by the franchisor

reservation to the franchisor of the right to screen and approve promotions

the division of a state into marketing areas

prohibition of repackaging of products

the establishment of sales quotas

suggested retail prices by the franchisor

the restriction on the sale of products without the franchisor’s consent


• Held: – Many of the aforementioned elements were present– Court was satisfied that a business system or

marketing plan existed and accordingly the agreement fell within the definition of franchise agreement under the Code

– Court also satisfied the applicant would not have entered into the agreement if the Code had been complied with

Alpha Centauri Enterprises Pty Ltd v Mortgage House Australia Pty Ltd [2010] NSWCA 188

• An agreement between parties can be a ‘franchise agreement’ for the purposes of the code regardless of the name given to the agreement

• The court will look at the substance of the rights and obligations provided in the agreement

Alpha Centauri Enterprises Pty Ltd v Mortgage House Australia Pty Ltd

• The issue was whether the element of the payment for goods and services, or payment of fees from franchisee to franchisor existed so as to bring the agreement within the ambit of the Code

• The obligation to purchase stationery, pay a transfer fee and a ‘loan application fee’ (which the court regarded more as a franchise service fee) satisfied this requirement.

Issues related to termination

• Murray Pest Management Pty Ltd v A&J Bilske [2012] NTSC 5

• A pest control franchise was operated by the franchisee for five years. Franchisee did not renew.

• Franchisee set up a new entity and continued to operate a competing business

• Detailed discussion about who owned the goodwill of the business and enforceability of restraints

Murray Pest Management Pty Ltd v A&J Bilske

• Franchise agreements may stipulate that goodwill arises from the use of the franchise system (including IP) and belongs to the franchisor:– Court will look at the nature of the

franchisor/franchisee relationship and how the business is operated

– Court may determine that the franchisee has business goodwill also


• Franchise agreements may outline restraints of trade provisions post termination in order to prevent the franchisee establishing itself as a competitor – To enforce the restraint of trade provisions,

franchisor must ensure they are reasonable in the circumstances

– Ensure the provisions are necessary to protect franchisor’s legitimate business interests


• The court found the new business did not use the franchisor’s intellectual property or confidential information

• After expiry of the agreement the franchisee retained its business goodwill, separate from the franchisor’s goodwill

• The restraint area was far too broad to be enforceable

Little Images Pty Ltd v Fresh View Venture Pty Ltd [2011] QSC 402

• A breach of contract alone will not be sufficient to establish repudiation such as to entitle the other party to terminate the contract

• The franchisor’s breaches of the agreement did not go to the “root of the contract” and therefore the franchisee was not entitled to terminate

Consequences for Breaching the Franchising Code

• Pampered Paws Connection Pty Ltd v Pets Paradise Franchising Pty Ltd [2012] FCA 25

• The franchisee brought an action for misleading and deceptive conduct, exclusive dealing and breaches of the Franchising Code

• The franchisee promoted a thesis that the franchise system was sham to enable a product tying arrangement

Pampered Paws Connection Pty Ltd v Pets Paradise Franchising Pty Ltd

The franchisee’s allegations regarding misleading and deceptive conduct included:

• the capability of the IT system, • whether or not there was an exclusive right to

sell certain products• The failure to disclose a requirement to enter

into a product supply agreement with Global


• The court considered a range of documents and external evidence (not just the franchise agreement and disclosure document in isolation)

• The court was not satisfied that the allegations were proved


• The franchisee also alleged supply arrangements constituted exclusive dealing (third line forcing)

• The court found the franchisor did breach the exclusive dealing provisions of the TPA (as they existed at that time)

• The court wanted to hear further submissions as to what the consequence of that would be for the franchisee


• In relation to breaches of the Franchising Code, the court found a series of “technical breaches”

• However as the franchisee did not suffer loss from those breaches no remedy was provided

• The court took a very commercial and practical approach, and looked at the circumstances as a whole

Franchising cases update

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