Clause 4(1)(b)
27 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:
· 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.
· The entry by Kyloe and NICC into the Sub-Distribution Agreements in 2004.
· The terms of each Sub-Distribution Agreement which are set out above at [13].
· 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.
· 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.
· 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.
· The entry by Impact and each Sub-Distributor into the Machine Agreements in 2004.
· The terms of each machine agreement set out above at [16].
· 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.
· 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.
30 The ACCC pleaded that each Sub-Distribution Agreement and each related Machine Agreement, when read together, created a system or marketing plan determined, controlled and/or suggested by Kyloe which required each Sub-Distributor to do or refrain from doing certain things in relation to the marketing of Polar Krush products. Those things were:
· As a condition precedent of entry into the Machine Agreement, to enter into the Sub-Distribution Agreement.
· To place Polar Krush machines with third parties referred to as the Sub-Distributor's Customers (as that term is defined in the Sub-Distribution Agreement) only where the Sub-Distributor had first obtained from a Customer a written agreement in the form of the Customer Agreement comprising the Third Schedule to the Sub-Distribution Agreement.
· Pursuant to the Customer Agreement, to supply the Polar Krush machines to the Customer free of charge and to supply the Polar Krush Products to the Customer for use by the Customer with the Polar Krush machines at the list price or other price determined by the Sub-Distributor.
· To cause each of its Customers to display advertising material and other signs provided by Kyloe.
· Not to solicit Customers from sites where a Polar Krush machine has already been placed by another Sub-Distributor.
· To place orders with Kyloe for Polar Krush Products in respect of a minimum quantity each year.
· To promote the Polar Krush Products using only materials and promotional literature made available by Kyloe.
· To observe all directions and instructions given to it by Kyloe in relation to promotion of the Polar Krush Products and not to make any written statement as to the quality of manufacture of the products without the prior written approval of Kyloe.
· Not to resell individual Polar Krush machines to third parties.
· Not to advertise or promote the sale of its Sub-Distributorship without first having obtained from Kyloe its approval of the method, form, style and content of the advertising from Kyloe.
· To accept Kyloe's stipulations as to the method, form, style and content of advertising by the Sub-Distributor for the sale of its Sub-Distributorship.
· To sell the Polar Krush Products under the Trade Marks as defined in the Sub-Distribution Agreement.
· Not to, without the prior written consent of Kyloe, alter or make any addition to the labelling or packaging of the Polar Krush Products displaying the Trade Marks.
· Not to alter, deface or remove in any manner any reference to the Trade Marks, any references to the ultimate Supplier or any other name attached or affixed to the Polar Krush Products or their packaging or labelling.
· Not to negotiate for the placement of Polar Krush machines or the supply of products, nor engage in marketing or promotion of the Polar Krush machines or products until they received the training provided by Kyloe.
31 In the case of Impact, 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:
· The entry into the October 2003 Agreement between Kyloe and Impact under which Kyloe granted Impact the exclusive right to buy the Polar Krush machines for resale.
· The entry by Impact and each Sub-Distributor into the Machine Agreement in 2004.
· The terms of each Machine Agreement set out above at [16].
· 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.
· Various terms of each Machine Agreement and related Sub-Distributor Agreement, which, when read together, provided for the granting of rights by Impact to the Sub-Distributors in respect of the Polar Krush machines and Polar Krush products.
32 The ACCC pleads that each Machine Agreement created a system or marketing plan determined and/or suggested by Impact which required each Sub-Distributor to do or refrain from doing certain things in relation to the marketing of Polar Krush products. Those things were:
· To acknowledge the conditions of use of the Polar Krush machines are governed by the Sub-Distribution Agreement.
· To purchase no less than six Polar Krush machines.
· To agree to pay every six calendar months the Machine Fee.
· As a condition precedent of entry into the Machine Agreement, enter into the Sub-Distribution Agreement.
· To place Polar Krush machines with third parties referred to as the Sub-Distributor's Customer (as that term is defined in the Sub-Distribution Agreement) only where the Sub-Distributor had first obtained from the Customer a written agreement in the form of the Customer Agreement comprising the third Schedule to the Sub-Distribution Agreement.
· Pursuant to the Customer Agreement, to supply the Polar Krush Machines to the Customer free of charge.
· To cause each of its Customers to display advertising materials and other signs provided by Kyloe.
· Not to negotiate for the placement of Polar Krush machines or the supply of products, nor engage in marketing or promotion of the Polar Krush machines or products until they received the training provided by Kyloe.
· Not to solicit customers from sites where a Polar Krush machine had already been placed by another Sub-Distributor.
33 Both Kyloe and Impact deny that they granted the Sub-Distributors the right to carry on the business of offering, supplying and/or distributing Polar Krush products and machines in Australia.
34 The only agreement between Kyloe and the Sub-Distributors was the Sub-Distribution Agreement. Kyloe submits that it did not grant the Sub-Distributors the right to carry on a business: the agreement did not impinge on their capacity to develop their own business plans relating to matters such as the selection of sites for the placing of machines, the terms of contractual arrangements with customers, the price at which concentrate, straws and cups were to be sold, the number of employees to be engaged in the Sub-Distributors' business and the amount of time which the Sub-Distributors were to devote to the Polar Krush business.
35 I do not accept Kyloe's submissions on this point. The Sub-Distribution Agreement expressly appointed the Sub-Distributors as non-exclusive suppliers of Polar Krush products within Australia. This activity was a "business" within the meaning of Clause 4(1)(b) of the Code. The matters to which Kyloe referred and on which the Sub-Distribution Agreements were silent (at least in part) were matters going to the conduct of the various Sub-Distribution businesses rather than the granting of the right to carry on those businesses.
36 Impact was not a party to the Sub-Distribution Agreements. It was a party to the Impact Agreement and the Machine Agreement. Impact submits that neither of the relevant agreements to which it was a party conferred any right on any Sub-Distributor to carry on a business. It objects to the ACCC's reliance on the Sub-Distribution Agreements in conjunction with the Machine Agreements in an attempt to satisfy this requirement of Clause 4(1)(b).
37 I agree with Impact's submissions. The Machine Agreements provided for the sale, by Impact, to the Sub-Distributors of the machines which dispensed Polar Krush products. The character of the Machine Agreements is not relevantly altered by the provisions which made it a condition precedent that the Sub-Distributors enter into the Sub-Distribution Agreements or the acknowledgments that the conditions of use of the machines were to be governed and the intellectual property rights attaching to them protected by the Sub-Distribution Agreements. These provisions did not, in terms, or by implication incorporate the contents of the Sub-Distribution Agreements in the Machine Agreements.
38 The same is true of the Impact Agreement. Even had the Impact Agreement been incorporated it would not have had the necessary effect: it did not confer any rights on Sub-Distributors much less the right to carry on a business. Moreover the Sub-Distributor parties to the Machine Agreement acknowledged that the terms of the Sub-Distribution Agreement were separate to and independent from the terms of the Machine Agreement.
39 The next component of Clause 4(1)(b) which must be satisfied is that any right conferred by a franchisor to carry on business must be granted under a system or marketing plan. Both Kyloe and Impact deny the existence of any such plan.
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:
· the provision by the franchisor of a detailed compensation and bonus structure for distributors selling its products;
· a centralised bookkeeping and record keeping computer operation provided by the franchisor for distributors;
· a scheme prescribed by the franchisor under which a person could become a distributor, direct distributor, district director, regional director, or zone director;
· the reservation by the alleged franchisor of the right to screen and approve all promotional materials used by distributors;
· a prohibition on re-packaging of products by distributors;
· the provision of assistance by the alleged franchisor to its distributors in conducting "opportunity meetings";
· suggestion by the franchisor of the retail prices to be charged for products; and
· 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:
· the division of a state into marketing areas;
· the establishment of sales quotas;
· the franchisor having approval rights of any sales personnel whom the franchisee might seek to employ;
· a mandatory sales training regime;
· the provision of quotation sheets to the franchisee's employees;
· provision by the franchisor of prescribed invoices and other sales forms;
· a requirement that franchisees elicit certain information from their customers and provide that information to the franchisor; and
· 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.
41 The ACCC submits that the evidence establishes the existence of a system or marketing plan under which Kyloe and Impact, as franchisors, distributed Polar Krush products within Australia. It relies on some contractual provisions and on some of the evidence given by McCann and the Sub-Distributors relating to interaction between the Sub-Distributors on the one hand and McCann and the Morpeths on the other. Some of the evidence relied on can be related to two or more of the relevant indicia. It will be convenient to deal separately with the principal indicators to which the ACCC referred in its submissions.
42 Sales training regime. The Sub-Distribution Agreement (cl 7.1.3) imposed an obligation on Kyloe to provide training to the Sub-Distributors in the demonstration of the concentrate, cups and straws, the use of the machines and in the provision of proper after sales service. Until such training was received Sub-Distributors could not negotiate with potential customers for the placement of machines, supply Polar Krush products or engage in marketing or promotion of those products (cl 6.19). The Morpeths told potential Sub-Distributors about these obligations and restrictions, that McCann would provide the training and that a training fee would be payable. Once Sub-Distributors were appointed McCann visited them at their homes. He provided them with instructions about to how to clean and operate the machines and to dilute the concentrate. He provided the Sub-Distributors with one "point of sale pack" per machine. These packs included a poster, a mobile, a cup holder and flavour labels. A "point of sale checklist" was also provided. He gave the Sub-Distributors a CD which contained information about promotion and marketing of Polar Krush products. He also told Sub-Distributors about locations where he had successfully placed machines. The training, in each case, took place over a period of between two and three hours.
43 Assistance in conducting "opportunity meetings". Under this head the ACCC directs attention to certain statements made by McCann and the Morpeths to Sub-Distributors. In particular, the Sub-Distributors were advised that the best locations for the machines were in schools. Reference was also made to scripts which might be used when approaching potential customers and the promotional and marketing material provided by McCann to which reference has already been made. None of these activities relate to the conduct of "opportunity meetings" of the kind referred to in the American authorities.
44 Use of recommended retail prices. The ACCC does not allege that either Kyloe or Impact suggested to Sub-Distributors the retail prices which should be charged for Polar Krush products. It notes, however, that, part of the promotional and marketing material provided by McCann to the Sub-Distributors during the training sessions was what was described as an "example only" profit profile which could be provided by the Sub-Distributors to potential customers. It contained recommended selling prices which, if adopted, would yield projected profit margins.
45 Restrictions on the sale of products. Under the Sub-Distribution Agreement (cl 3.1) all Sub-Distributors had the right to distribute Polar Krush machines, concentrate, straws and cups anywhere in Australia. The only restriction that was placed on them embarking on the placement of machines and distribution of product was the requirement that they first undertake the training which was provided by McCann. They were advised by the Morpeths of this restriction.
46 Recommended sales techniques. The evidence does not support the existence of any mandatory sales training regime imposed by Kyloe or Impact. The ACCC directs attention to the evidence from McCann that he provided Sub-Distributors, as part of the training sessions conducted by him, with some material to assist them in dealing with potential customers. There was also evidence that the Morpeths had recommended that schools provided the best locations for placement of the machines and recommended a script for use when approaching potential customers. A copy of "script ideas" which amounted to a sales pitch was provided to prospective Sub-Distributors.
47 Sales quotas. No sales quotas were prescribed by Kyloe or Impact. The ACCC does, however, draw attention to Clauses 8.5 and 11 of the Sub-Distribution Agreement which required Sub-Distributors to order and purchase a minimum quantity of concentrate, straws and cups each year.
48 Eliciting information from customers. Neither Kyloe or Impact required Sub-Distributors to obtain information from customers and then pass it on to them. The ACCC does, however, direct attention to the requirement contained in Clause 6.3 of the Sub-Distribution agreement that Sub-Distributors were to provide Kyloe with written reports at regular intervals on matters such as the details of sales, service, stock and outstanding customer orders. The material provided by McCann to Sub-Distributors at the training sessions included a monthly distributor report and a reporting spreadsheet. As the respondents correctly note none of the information covered by Clause 6.3 was to be elicited from customers: it was to come from the records maintained by the Sub-Distributors. Moreover, the reporting obligation was not enforced.
49 Comprehensive advertising and promotional program. The evidence does not disclose the existence of any comprehensive advertising and promotional program undertaken by either Kyloe or Impact. The ACCC points to some things said by McCann and the Morpeths about matters such as the use of a script when approaching customers and the placement of advertising materials by Sub-Distributors. Reference was also made to some of the information provided by McCann during the training sessions relating to promotional activities by Sub-Distributors and his giving to them a limited amount of advertising material.
50 Sales and merchandising devices. Under this head the ACCC relies on the evidence, already referred to, as to what material was provided by McCann during the training sessions.
51 Approval rights over personnel to be engaged by sub-distributors. There is no evidence that either Kyloe or Impact reserved the right to oversee the choice of employees whom Sub-Distributors might wish to engage. The ACCC refers to some limited evidence given by one Sub-Distributor who was told by the Morpeths that it was their (the Morpeths) role to vet new distributors and asked her about her qualifications.
52 Guidance concerning the operation/management of franchise. Some limited guidance, of which mention has already been made, was provided by McCann during the training sessions. Under this head the ACCC also seeks to rely on the provisions of the Sub-Distribution Agreements which required the submission of written reports to Kyloe and the purchasing, by Sub-Distributors of minimum quantities of product.
53 Sales territories. As Clause 3.1 of the Sub-Distribution Agreement made clear, there were no territorial divisions established within Australia. All Sub-Distributors were free to distribute Polar Krush products and machines anywhere in the country.
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:
· The absence of any exclusive or divided territory within which Sub-Distributors might operate.
· 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.
· The fact that the Sub-Distributors were under no obligation to produce a business plan.
· 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.
· 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:
· 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;
· 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;
· whether or not the alleged franchisor placed the distributor under an obligation to advertise, to conduct promotions and to stock accessories; and
· 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.
61 The respondents have maintained that the marketing scheme for Polar Krush products involved the use of distributors rather than franchisees. There are important differences between distributorship and franchise arrangements. The distinction between such arrangements is described as Giles, Redfern and Terry, Franchising Law and Practice (Lexis Nexis) at 1.0420 as follows:
"A distributorship (or dealership) is an agreement between two legally independent parties, the vendor and purchaser. The purchaser only has a licence to stock the vendor's product and does not gain the benefits of the ongoing support of a franchise system. The purchaser will usually be required by the vendor to hold adequate stock and maintain the premises in a way that will reflect well on the vendor's product.
In the case of a distributorship, the main points of difference with a franchise are that the arrangement is generally much less formal, may not have the same degree of certainty of term, may or may not be exclusive, might tend to cover a larger geographic area, and would leave the marketing, merchandising and sale decisions largely to the distributor.
No royalties are payable to the supplier by the distributor. The suppliers' profit arises from the difference between the price at which they manufacture or which they pay for the goods and the price at which they are able to sell the goods to the distributor."
The contractual arrangements between Kyloe and the Sub-Distributors, as incorporated in the Sub-Distribution Agreement, bear the hallmarks of a distributorship. There was no ongoing support; no Sub-Distributor was confined to a particular territory; marketing, merchandising and sale decisions were, to a great extent up to the Sub-Distributors; and no royalties were payable to Kyloe.
62 Under the Machine Agreements, Impact sold the dispensing machines to the Sub-Distributors on normal commercial terms and conditions. The purchase of the machines, by the Sub-Distributors, was no more than a necessary adjunct to the distributorship arrangements with Kyloe.
63 Accordingly, I find that the ACCC has failed to establish that the requirements of Clause 4(1)(b) have been met. This finding is sufficient to render it unnecessary to determine whether the requirements of the two succeeding paragraphs have been satisfied. I will however, say something briefly about each.