Case: Capital Networks Pty Ltd v .au Domain Administration Ltd [2004] FCA 808
Outcome: discussed
As Bennett J noted, in Capital Networks Pty Ltd v .au Domain Administration Ltd [2004] FCA 808 at [97] , Clause 4(1)(b) has a number of components. They are: "(a) A person (referred to as a franchisor) grants to another person (referred to as a franchisee) the right to carry on the business of offering, supplying or distributing goods or services in Australia; (b) The right to carry on business is granted under a system or marketing plan; (c) The system or marketing plan must be determined, controlled or suggested by the franchisor." 28 The ACCC contends that, Kyloe and Impact, as franchisors, were empowered to do and did the various things which were necessary to bring them within the terms of Clause 4(1)(b). It does not submit that Kyloe or Impact were associates for the purposes of this provision. 29 In the case of Kyloe, the ACCC relies on the following matters to support the allegation that it granted each Sub-Distributor the right to carry on the business of offering, supplying and/or distributing Polar Krush products and machines in Australia: &#8226; The entry into the agreement, in October 2003, between Kyloe and Impact and their respective servants and agents under which Kyloe granted Impact the exclusive right to buy the Polar Krush machines for resale. &#8226; The entry by Kyloe and NICC into the Sub-Distribution Agreements in 2004. &#8226; The terms of each Sub-Distribution Agreement which are set out above at [13]. &#8226; An alleged implied term in each Sub-Distribution Agreement that the Sub-Distributor had the right to offer, supply, place or distribute the Polar Krush machines in Australia subject to the terms and conditions of the Sub-Distribution Agreement. &#8226; An alleged implied term in each Sub-Distribution Agreement to the effect that Kyloe could charge the Sub-Distributor a fee for the training referred to in Clause 7.1.3. &#8226; The obligation allegedly imposed by each of the sub-distribution agreements and Customer Agreements that each Sub-Distributor and customer would use Kyloe's marketing and promotional material. &#8226; The entry by Impact and each Sub-Distributor into the Machine Agreements in 2004. &#8226; The terms of each machine agreement set out above at [16]. &#8226; An alleged implied term in each of the Machine Agreements pursuant to which each Sub-Distributor had the right to buy the Polar Krush machines from Impact for offer, supply and/or distribution in Australia for use with the Polar Krush products covered by the Sub-Distribution Agreement. &#8226; Various terms of each Sub-Distributor Agreement and related Machine Agreement which, when read together, provided for the granting of rights by Kyloe to the Sub-Distributors in respect of the Polar Krush machines and Polar Krush products. 40 The phrase a "system or marketing plan" is not defined in the Code. In seeking to give meaning to this concept Australian courts have had resort to American case law which deals with equivalent but not identical legislation. In the course of a review of American texts and decisions which she undertook in Capital Networks at [103] to [110] Bennett J identified the following factors as being "helpful indicators" of the presence of such a plan: &#8226; the provision by the franchisor of a detailed compensation and bonus structure for distributors selling its products; &#8226; a centralised bookkeeping and record keeping computer operation provided by the franchisor for distributors; &#8226; a scheme prescribed by the franchisor under which a person could become a distributor, direct distributor, district director, regional director, or zone director; &#8226; the reservation by the alleged franchisor of the right to screen and approve all promotional materials used by distributors; &#8226; a prohibition on re-packaging of products by distributors; &#8226; the provision of assistance by the alleged franchisor to its distributors in conducting "opportunity meetings"; &#8226; suggestion by the franchisor of the retail prices to be charged for products; and &#8226; a comprehensive advertising and promotional program by the alleged franchisor. Her Honour also had regard to some further indicators which were treated as relevant by the Court of Appeals of Indiana in Master Abrasives Corporation v Williams (1984) 469 NE 2d 1196: &#8226; the division of a state into marketing areas; &#8226; the establishment of sales quotas; &#8226; the franchisor having approval rights of any sales personnel whom the franchisee might seek to employ; &#8226; a mandatory sales training regime; &#8226; the provision of quotation sheets to the franchisee's employees; &#8226; provision by the franchisor of prescribed invoices and other sales forms; &#8226; a requirement that franchisees elicit certain information from their customers and provide that information to the franchisor; and &#8226; a restriction on the franchisee selling any of the franchisor's products without first consulting the franchisor. This is not intended to be an exhaustive list of relevant considerations but it does serve to focus attention on the type of matters which will inform a judgment on whether the necessary "system or marketing plan" exists in a particular case. 54 The respondents submit that the evidence on which the ACCC relies falls well short of establishing the existence of a system or marketing plan. They rely on the absence, in the commercial arrangements between Kyloe and Impact and the Sub-Distributors of most of the features identified by Bennett J in Capital Networks . They emphasised: &#8226; The absence of any exclusive or divided territory within which Sub-Distributors might operate. &#8226; The fact that neither Kyloe nor Impact had any right to inspect the financial records of the Sub-Distributors, to conduct audits or to inspect premises at which machines had been installed. &#8226; The fact that the Sub-Distributors were under no obligation to produce a business plan. &#8226; That, subject to minor restrictions imposed by the Sub-Distribution Agreements in relation to the use of advertising materials and the need for Sub-Distributors to receive instruction about the operation of the machines, the Sub-Distributors were free to run their businesses as they pleased. &#8226; The two continuous positive obligations imposed on Sub-Distributors by the Sub-Distribution Agreements, namely the requirements to submit written reports and order minimum quantities of product, were requirements that could not be and were not enforced. 55 I accept most of the respondents' submissions on this point. Although both Kyloe and Impact, through their separate contractual arrangements with the Sub-Distributors, required the Sub-Distributors to undertake a limited number of relatively minor tasks and to refrain from doing certain things, they did not seek to establish a system or marketing plan under which the Polar Krush products were to be marketed by the Sub-Distributors. The Morpeths, acting on behalf of Impact, did little more than advise potential Sub-Distributors about the essential terms of the proposed contractual arrangements and to offer encouragement. If a Sub-Distributor entered into the agreements, they were provided with two to three hours of training by McCann, acting on behalf of Kyloe. The training concentrated on the operation of the machines and the handling of the Polar Krush products. There was also some general encouragement and advice and the provision of a limited quantity of advertising and other promotional material. These activities, on the part of Kyloe and Impact, even if considered cumulatively, in my opinion, fall well short of a system or marketing plan. 56 In coming to this conclusion I do not have regard to the evidence that the contractual obligations, imposed on Sub-Distributors by the Sub-Distribution Agreements, relating to the submission of written reports to Kyloe and the ordering of minimum quantities of products were not, in fact, enforced. Nor do I accept that they could not have been enforced. I put these matters aside because, under the scheme which is incorporated in the Code, a franchisor must provide a copy of the prescribed disclosure document to a prospective franchisee at least 14 days before the franchisee enters into a franchise agreement: see Clause 10(a). The disclosure document must contain a summary of the conditions of the franchise agreement: see Clause 6(1); Annexure 1, para 17. The judgment as to whether a particular proposed agreement is a franchise agreement falls to be made before it becomes operative. That judgment must be made by reference to the terms of the proposed agreement. It cannot be known at that time whether or not the franchisor will choose to enforce them if and when the agreement is entered into and becomes operative. 57 Any system or marketing plan must, in any event, be "substantially determined, controlled or suggested" by the alleged franchisor. 58 In Capital Networks , Bennett J distilled from the American cases, a number of factors which assisted in determining whether the required degree of control over the system or marketing plan was exercised by the alleged franchisor: &#8226; the extent to which the distributor's business involved the sale of the alleged franchisor's products the smaller the percentage the less likely it will be that the necessary degree of control will be found to exist; &#8226; whether or not the alleged franchisor ostensibly assumed responsibility for product outlets by causing them to be operated with the appearance of some centralised management and with uniform standards as regards the quality and price of goods sold, services rendered and other material instances of the operation; &#8226; whether or not the alleged franchisor placed the distributor under an obligation to advertise, to conduct promotions and to stock accessories; and &#8226; the extent to which the alleged franchisor controls the franchisee's business having regard to matters such as prescription of the hours and days of operation, advertising, financial support, auditing of books, inspection of premises, control over lighting, employee uniform, prices, trading stamps, hiring, sales quotas and management training. 59 What I have already said in relation to the absence of a system or marketing plan also supports the conclusion that the necessary degree of control by Kyloe and/or Impact over the conduct of the Sub-Distributors' businesses was lacking. 60 Even if an alleged franchisor does not substantially control the system or marketing plan under which the franchisee's business is to be conducted, a franchise agreement may, nevertheless, be found to exist if the system or marketing plan is substantially suggested by the alleged franchisor. I have already held that no relevant system or marketing plan existed. Were it necessary to do so I would also hold that, in so far as the Morpeths and McCann, in their dealing with the Sub-Distributors, touched on matters which might relate to a system or marketing plan, they did not suggest that a particular system or plan should be adopted. The Sub-Distributors were left to determine their own business plans; the Morpeths and McCann did no more than make what they no doubt considered to be some helpful suggestions on a few aspects of what might be incorporated in such a plan.